<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT of 1934
For the transition period from to
Commission file number: 0-25465
CORNERSTONE BANCORP, INC./CT
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
CONNECTICUT 06-1524044
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 Summer St., Stamford, Connecticut 06901
-------------------------------------------
(Address of principal executive offices)
(203) 356-0111
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the issuer's common stock as of October 31,
1999 was 1,129,451.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
<PAGE>
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements (Unaudited)
-----------------------------
PAGE
----
Consolidated Statements of Condition
September 30, 1999, December 31, 1998 and September 30, 1998... 1
Consolidated Statements of Income
Three Months Ended September 30, 1999 and September 30, 1998... 2
Consolidated Statements of Income
Nine Months Ended September 30, 1999 and September 30, 1998.... 3
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1999 and September 30, 1998.... 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and September 30, 1998.... 5
Notes to Consolidated Financial Statements..................... 6 - 7
Item 2. Management's Discussion and Analysis
- ----------------------------------------------
of Financial Condition and Results of Operations............... 7 - 17
------------------------------------------------
PART II - Other Information
Item 1. Legal Proceedings................................................ None
- -------------------------
Item 2. Changes in Securities and Use of Proceeds........................ None
- -------------------------------------------------
Item 3. Defaults upon Senior Securities.................................. None
- ---------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.............. None
- -----------------------------------------------------------
Item 5. Other Information................................................ None
- -------------------------
Item 6. Exhibits and Reports on Form 8-K................................. 17
- ----------------------------------------
Signatures............................................................... 18
- ----------
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
- ----------------------------
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
Assets 1999 1998 1998
------------- ------------ -------------
<S> <C> <C> <C>
Cash and due from banks $ 6,006 $ 4,768 $ 4,272
Federal funds sold 14,363 22,544 21,595
-------- -------- --------
Cash and cash equivalents 20,369 27,312 25,867
Available for sale securities, at
fair value 26,010 30,003 24,934
Held to maturity securities (fair
value of $18,050 at September 30,
1999, $9,744 at December 31, 1998
and $8,741 at September 30, 1998) 18,360 9,661 8,596
Loans, net of allowance for loan
losses of $1,728 at September 30,
1999, $1,733 at December 31, 1998
and $1,733 at September 30, 1998) 73,240 67,651 68,631
Bank premises and equipment, net 2,953 2,815 2,882
Accrued interest receivable 1,076 970 981
Other assets 1,759 1,321 1,390
-------- -------- --------
Total assets $143,767 $139,733 $133,281
======== ======== ========
Liabilities And Stockholders' Equity
Liabilities:
Deposits:
Demand (non-interest bearing) $ 24,997 $ 25,746 $ 24,470
Money market demand and NOW 23,271 18,941 15,787
Regular, club and money market
savings 29,307 24,700 26,354
Time 46,144 52,492 49,515
-------- -------- --------
Total deposits 123,719 121,879 116,126
Securities sold under repurchase
agreements 3,720 2,198 1,576
Accrued interest payable 128 166 157
Other liabilities 869 500 686
-------- -------- --------
Total liabilities 128,436 124,743 118,545
-------- -------- --------
Stockholders' equity:
Common stock, par value $0.01 per
share; authorized 5,000,000 shares;
issued and outstanding 1,126,680
shares at September 30, 1999,
1,119,336 shares at December 31,
1998 and 1,117,613 shares at
September 30, 1998 11 11 11
Additional paid-in capital 11,474 11,351 11,317
Retained earnings 4,102 3,497 3,154
Accumulated other comprehensive
(loss) income, net of taxes of $179
at September 30, 1999, $91 at
December 31, 1998 and $178 at
September 30, 1998 (256) 131 254
-------- -------- --------
Total stockholders' equity 15,331 14,990 14,736
-------- -------- --------
Total liabilities and stockholders'
equity $143,767 $139,733 $133,281
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended
September 30,
--------------------------
1999 1998
---- ----
Interest income:
Loans $ 1,641 $ 1,759
Securities 661 557
Federal funds sold
229 244
Total interest income ---------- ----------
2,531 2,560
---------- ----------
Interest expense:
Deposits 862 918
Other 19 15
---------- ----------
Total interest expense 881 933
---------- ----------
Net interest income 1,650 1,627
Provision (credit) for loan losses (11) 73
---------- ----------
Net interest income after provision (credit) for
loan losses 1,661 1,554
---------- ----------
Non-interest income:
Deposit service charges 118 105
Other 60 79
---------- ----------
Total non-interest income 178 184
---------- ----------
Non-interest expense:
Salaries and employee benefits 605 525
Occupancy 140 116
Furniture and equipment 116 104
Data processing 84 84
Professional fees 60 98
Other 221 142
---------- ----------
Total non-interest expense 1,226 1,069
---------- ----------
Income before income tax expense 613 669
Income tax expense 239 276
---------- ----------
Net income $ 374 $ 393
========== ==========
Earnings per common share:
Basic $ 0.33 $ 0.35
Diluted 0.32 0.33
Weighted average common shares:
Basic 1,126,618 1,117,581
Diluted 1,150,593 1,173,713
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in thousands, except per share data)
(unaudited)
Nine Months Ended
September 30,
-----------------
1999 1998
---- ----
Interest income:
Loans $ 4,812 $ 5,934
Securities 1,949 1,534
Federal funds sold 608 556
Total interest income ---------- ----------
7,369 8,024
---------- ----------
Interest expense:
Deposits 2,603 2,656
Other 56 49
---------- ----------
Total interest expense 2,659 2,705
---------- ----------
Net interest income 4,710 5,319
Provision (credit) for loan losses (23) 246
---------- ----------
Net interest income after provision (credit) for
loan losses 4,733 5,073
---------- ----------
Non-interest income:
Deposit service charges 342 297
Other 222 239
---------- ----------
Total non-interest income 564 536
---------- ----------
Non-interest expense:
Salaries and employee benefits 1,761 1,513
Occupancy 392 347
Furniture and equipment 338 309
Data processing 262 263
Professional fees 240 223
Other 610 462
---------- ----------
Total non-interest expense 3,603 3,117
---------- ----------
Income before income tax expense 1,694 2,492
Income tax expense 685 1,027
---------- ----------
Net income $ 1,009 $ 1,465
========== ==========
Earnings per common share:
Basic $ 0.90 $ 1.31
Diluted 0.87 1.25
Weighted average common shares:
Basic 1,124,532 1,116,308
Diluted 1,161,956 1,170,409
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders'
Stock Capital Earnings (Loss) Income Equity
------ ---------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $10 $ 9,050 $ 4,164 $ 86 $13,310
Comprehensive income:
Net income 1,465 1,465
Change in net unrealized gain on
available for sale securities,
net of taxes 168 168
-------------
Total comprehensive income 1,633
Cash dividends (290) (290)
Stock dividend 1 2,184 (2,185) --
Shares issued in connection with:
Directors Compensation Plan 6 6
Dividend Reinvestment Plan 73 73
Stock Option Plan 4 4
--- ------- -------- ------------- -------------
BALANCE, SEPTEMBER 30, 1998 $11 $11,317 $ 3,154 $ 254 $14,736
=== ======= ======== ============= =============
BALANCE, JANUARY 1, 1999 $11 $11,351 $ 3,497 $ 131 $14,990
Comprehensive income:
Net income 1,009 1,009
Change in net unrealized gain (loss)
on available for sale securities,
net of taxes (387) (387)
-------------
Total comprehensive income 622
Cash dividends (404) (404)
Shares issued in connection with:
Directors Compensation Plan 5 5
Dividend Reinvestment Plan 118 118
--- ------- -------- ------------- -------------
BALANCE, SEPTEMBER 30, 1999 $11 $11,474 $ 4,102 $(256) $15,331
=== ======= ======== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
Operating activities: 1999 1998
---- ----
<S> <C> <C>
Net income $ 1,009 $ 1,465
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision (credit) for loan losses (23) 246
Depreciation and amortization 299 291
Common stock issued under compensation
agreements 5 6
Increase in accrued interest
receivable (106) (131)
Increase in deferred loan costs (18) (2)
(Increase) decrease in other assets (168) 28
Decrease in accrued interest payable (38) (24)
Increase in other liabilities 369 183
-------- --------
Net cash provided by operating
activities 1,329 2,062
-------- --------
Investing activities:
Proceeds from maturities of
available-for-sale securities 7,249 10,593
Proceeds from maturities of
held-to-maturity securities 3,060 491
Purchases of available-for-sale
securities (3,919) (12,637)
Purchases of held-to-maturity
securities (11,788) (4,543)
Net (disbursements) receipts for loan
repayments and originations (5,548) 8,554
Purchases of bank premises and equipment (402) (170)
-------- --------
Net cash (used in) provided by
investing activities (11,348) 2,288
-------- --------
Financing activities:
Net increase in demand, money market
and savings deposits 8,188 3,567
Net (decrease) increase in time
deposits (6,348) 3,655
Net increase (decrease) in securities
sold under repurchase agreements 1,522 (934)
Proceeds from issuance of common stock 118 77
Dividends paid on common stock (404) (290)
-------- --------
Net cash provided by financing
activities 3,076 6,075
-------- --------
(Decrease) increase in cash and cash
equivalents (6,943) 10,425
Cash and cash equivalents - beginning of
period 27,312 15,442
-------- --------
Cash and cash equivalents - end of period $ 20,369 $ 25,867
======== ========
Supplemental information:
Interest paid $ 2,697 $ 2,729
Income taxes paid 715 895
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
- ----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
- --------------------------------------------------------
(dollars in thousands)
NOTE A - BASIS OF PRESENTATION
On March 1, 1999, Cornerstone Bank (the "Bank") completed a reorganization
whereby the Bank became a wholly-owned subsidiary of Cornerstone Bancorp, Inc.
(the "Bancorp"), a newly-formed holding company incorporated by the Bank for
that purpose. This reorganization was accounted for in a manner similar to a
pooling of interests and, accordingly, it had no effect on the Bank's financial
statements. The Bancorp's principal activity is its ownership of the Bank's
stock and, prior to the reorganization, it had no operations other than those of
an organizational nature. Accordingly, all financial and other information for
periods prior to the reorganization refers to the Bank. Collectively, the
Bancorp and the Bank are referred to herein as the "Company."
The accompanying unaudited interim consolidated financial statements have
been prepared in conformity with generally accepted accounting principles for
interim financial statements and the instructions to Form 10-QSB, and,
accordingly, do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary, consisting only of normal
recurring accruals, to present fairly the financial position, results of
operations, changes in stockholders' equity and cash flows at the dates and for
the periods presented. In preparing the interim consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the statement
of condition and revenues and expenses for the period. Actual results could
differ significantly from those estimates. The interim results of operations
for the first nine months of 1999 are not necessarily indicative of the results
to be expected for the year ending December 31, 1999.
While management believes that the disclosures presented are adequate so as
not to make the information misleading, it is suggested that these interim
consolidated financial statements be read in conjunction with the annual
financial statements and notes included in the Form 10-KSB for the year ended
December 31, 1998.
NOTE B - EARNINGS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. SFAS No. 128 requires the presentation of basic EPS and
diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity.
For the three and nine month periods ended September 30, 1999 and 1998, the
number of shares for diluted EPS exceeded the number of shares for basic EPS due
to the dilutive effect of outstanding stock options computed using the treasury
stock method. For purposes of computing basic EPS, net income applicable to
common stock equaled net income for each of these periods.
-6-
<PAGE>
NOTE C - SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", requires public companies to report certain financial information
about significant revenue-producing segments of the business for which
sufficient information is available and utilized by the chief operating decision
maker. Specific information to be reported for individual operating segments
includes a measure of profit and loss, certain revenue and expense items, and
total assets. As a community-oriented financial institution, substantially all
of the Bank's operations involve the delivery of loan and deposit products to
customers. Management makes operating decisions and assesses performance based
on an ongoing review of these banking operations, which constitute the Company's
only operating segment for financial reporting purposes under SFAS No. 131.
Item 2. Management's Discussion and Analysis of
- -----------------------------------------------
Financial Condition and Results of Operations
- ---------------------------------------------
(dollars in thousands)
FORWARD-LOOKING STATEMENTS
The statements contained in this report which are not historical are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Examples of such forward-looking statements include, without
limitation, statements by the Company regarding expectations for earnings,
credit quality, other financial and business matters, and efforts to achieve
Year 2000 compliance. In addition, when used in this report, the words
"anticipate," "plan," "believe," "estimate," "expect" and similar expressions as
they relate to the Company or its management are intended to identify forward-
looking statements. All forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those discussed in, or
implied by, the forward-looking statements as a result of certain factors,
including but not limited to, competitive pressures on loan and deposit product
pricing, other actions of competitors, changes in economic conditions, the
extent and timing of actions of the Federal Reserve Board, customer deposit
disintermediation, changes in customers' acceptance of the Company's products
and services, the extent and timing of legislative and regulatory actions and
reforms, and unanticipated internal and/or third party delays or failures in
achieving Year 2000 compliance.
The forward-looking statements contained in this report speak only as of
the date on which such statements are made. By making any forward-looking
statements, the Company assumes no duty to update them to reflect new, changing
or unanticipated events or circumstances.
FINANCIAL CONDITION
Total assets increased from $139,733 at December 31, 1998 to $143,767 at
September 30, 1999, an increase of $4,034 (or 3%). The net loan portfolio
increased from $67,651 at December 31, 1998 to $73,240 at September 30, 1999, an
increase of $5,589 (or 8%). (For purposes of this discussion, loan amounts are
referenced net of unearned income/deferred costs and allowance for loan losses.)
Loan growth is primarily attributable to the Bank's entrance into the Norwalk
market. The increase in the loan portfolio from December 31, 1998 to September
30, 1999 represents an increase in commercial mortgage loans, partially offset
by decreases in other loan categories. The commercial mortgage loan portfolio
increased from $38,728 at December 31, 1998 to $46,489 at September 30, 1999, an
increase of $7,761 (or 20%). Residential mortgage loans increased from $8,647
at December 31, 1998 to $8,849 at September 30, 1999, an increase of $202 (or
2%). Demand, time and term loans decreased from
-7-
<PAGE>
$18,046 at December 31, 1998 to $15,965 at September 30, 1999, a decrease of
$2,081 (or 12%). Aircraft loans decreased from $2,698 at December 31, 1998 to
$2,569 at September 30, 1999, a decrease of $129 (or 5%). Other loans decreased
from $588 at December 31, 1998 to $470 at September 30, 1999, a decrease of $118
(or 20%). Installment loans decreased from $662 at December 31, 1998 to $593 at
September 30, 1999, a decrease of $69 (or 10%).
Loans
Major classifications of loans at September 30, 1999 and December 31, 1998 were
as follows:
September 30, 1999 December 31, 1998
------------------- ------------------
Demand, time and term loans $15,965 $18,046
Commercial mortgages 46,489 38,728
Residential mortgages 8,849 8,647
Aircraft loans 2,569 2,698
Installment loans 593 662
Other loans 470 588
------- -------
Total loans 74,935 69,369
Allowance for loan losses (1,728) (1,733)
Deferred loan costs, net 33 15
------- -------
Total loans, net $73,240 $67,651
======= =======
Non-performing Assets and the Allowance for Loan Losses
Loans are classified as nonaccrual when, in the opinion of management,
collectibility of interest or principal becomes uncertain. Generally, loans are
placed on nonaccrual status when principal or interest is past due for a period
of 90 days, or for a lesser period if circumstances indicate collection of
interest or principal is doubtful. When a loan is placed on nonaccrual status,
previously accrued and uncollected interest is reversed against current period
interest income. Payments received on nonaccrual loans are applied to the
outstanding principal balance until a history of payments has been established
and management has reassessed collectibility of the loan. A nonaccrual loan is
restored to accrual status only when sustained performance has been demonstrated
and prospects for future payments of interest and principal are no longer in
doubt.
The following table sets forth information with respect to non-performing assets
at the dates indicated.
September 30, 1999 December 31, 1998
------------------ -----------------
Loans on nonaccrual status:
Commercial and residential real
estate loans $1,119 $ 370
Commercial and industrial loans 163 154
------ -----
Total 1,282 524
Accruing loans past due 90 days or more 82 288
------ -----
Total nonperforming loans $1,364 $ 812
====== =====
Nonperforming loans as a
percentage of total loans 1.82% 1.17%
-8-
<PAGE>
The following table sets forth changes in the allowance for loan losses
for the periods indicated.
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Balance at beginning of
period $1,733 $1,529 $1,709 $1,760
Charge-offs (27) (111) -- (105)
Recoveries 45 69 30 5
Provision (credit) for
loan losses (23) 246 (11) 73
------ ------ ------ ------
Balance at end of period $1,728 $1,733 $1,728 $1,733
====== ====== ====== ======
Securities Portfolio
Total securities increased from $39,664 at December 31, 1998 to $44,370 at
September 30, 1999, an increase of $4,706 (or 12%). The increase in the
securities portfolio was primarily due to the influx of deposits and a reduction
in the federal funds portfolio.
The following table sets forth the amortized cost and estimated fair value of
the securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
--------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Held to maturity Cost Value Cost Value
- ----------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 3,504 $ 3,506 $ 5,003 $ 5,049
U.S. Government agency
securities 13,681 13,405 4,583 4,620
Mortgage-backed securities 1,100 1,064 -- --
Other 75 75 75 75
------- ------- ------- -------
Total $18,360 $18,050 $ 9,661 $ 9,744
======= ======= ======= =======
Available-for-sale
- ------------------
U.S. Treasury securities $ -- $ -- $ 501 $ 505
U.S. Government agency
securities 26,026 25,591 29,280 29,498
Equity securities 419 419 -- --
------- ------- ------- -------
Total $ 26,445 $26,010 $29,781 $30,003
======== ======= ======= =======
</TABLE>
Available for sale securities constituted 59% of the securities portfolio
as of September 30, 1999, down from 76% at December 31, 1998. Given the size of
the portfolio, high liquidity level and limited sales of securities in the past,
management has determined (with the approval of the Funds Management Committee)
that new purchases may be placed in the held to maturity portfolio. During the
nine months ended September 30, 1999, $11.8 million of security purchases were
classified as held to maturity and $3.9 million of security purchases were
classified as available for sale.
Pledged securities amounted to $2,701 and $6,183 at December 31, 1998 and
September 30, 1999, respectively.
-9-
<PAGE>
Deposits
Deposits are the primary source of funds for the Company. Deposits consist
of checking accounts, preferred savings accounts, regular savings deposits, NOW
accounts, money market accounts, and certificates of deposit (time deposits).
Deposits are obtained from individuals, partnerships, small and medium size
businesses and professionals in the Company's market area. The Company does not
accept brokered deposits.
The following table indicates the composition of deposits at the dates
indicated.
September 30, 1999 December 31, 1998
------------------ -----------------
Demand deposits (non-interest bearing) $ 24,997 $ 25,746
Money market demand and NOW accounts 23,271 18,941
Regular, club and money market savings 29,307 24,700
Time deposits 46,144 52,492
-------- --------
Total $123,719 $121,879
======== ========
Total deposits increased from $121,879 at December 31, 1998 to $123,719 at
September 30, 1999, an increase of $1,840 (or 2%). Regular, club and money
market savings increased from $24,700 at December 31, 1998 to $29,307 at
September 30, 1999, an increase of $4,607 (or 19%). The increase in regular,
club and money market savings was primarily related to a few large deposits made
during the quarter ended September 30, 1999. Money market demand and NOW
accounts increased from $18,941 at December 31, 1998 to $23,271 at September 30,
1999, an increase of $4,330 (or 23%). The increase in money market and NOW
accounts was primarily related to fluctuations in attorney/trustee accounts.
These increases were partially offset by a decrease in time deposits from
$52,492 at December 31, 1998 to $46,144 at September 30, 1999, a decrease of
$6,348 (or 12%). Certificates of deposit in denominations of $100 or more were
$10,490 at December 31, 1998 compared to $9,335 at September 30, 1999, a
decrease of $1,155 (or 11%). As strategically planned, in 1999 the Company has
let higher priced certificates of deposit rolloff at maturity, while focusing on
increasing lower cost interest-bearing deposits. Demand deposits decreased from
$25,746 at December 31, 1998 to $24,997 at September 30, 1999, a decrease of
$749 (or 3%).
Liquidity and Capital Resources
At September 30, 1999, total short term investments, which are made up of
federal funds sold, available for sale securities and securities maturing in one
year or less, totaled $43,877. The liquidity of the Company is measured by the
ratio of net cash, short term, and marketable assets to net deposits and short
term liabilities. The liquidity ratio at September 30, 1999 was 46.80% due to
the large available for sale portfolio and large federal funds position. The
Company's guideline is to maintain a liquidity ratio of 20% or more.
The decrease in net cash provided by operating activities was primarily due
to the decrease in net income of $456 for the nine months ended September 30,
1999 as compared to the nine months ended September 30, 1998 as well as a
reduction in the provision for loan losses of $269. Net income for 1998 included
an additional $309 resulting from the resolution of two nonaccrual loans in May
1998. Net cash used in investing activities increased primarily due to increases
in purchases of held-to-maturity securities and net disbursements for loan
originations. The decrease in net cash provided by financing activities
primarily resulted from lower net deposit inflows, partially offset by an
increase in securities
-10-
<PAGE>
sold under repurchase agreements. Cash and cash equivalents decreased $6,943
for the nine months ended September 30, 1999.
At September 30, 1999, the Company had outstanding loan commitments under
unused lines of credit approximating $9,981 and outstanding letters of credit
approximating $189.
At December 31, 1998 and September 30, 1999, the Company's consolidated
leverage capital ratio was equal to 10.95% and 10.62%, respectively. At
December 31, 1998 and September 30, 1999, the Company's consolidated Tier 1
risk-based capital ratio was 18.54% and 18.51%, respectively. The Company's
consolidated total risk-based capital ratio at December 31, 1998 and September
30, 1999 was 19.80% and 19.77%, respectively. These ratios exceeded the stated
minimum regulatory requirements. The Bank's regulatory capital ratios at
September 30, 1999 were substantially the same as these consolidated ratios, and
the Bank was classified as a well-capitalized institution for regulatory
purposes.
RESULTS OF OPERATIONS
Comparative Analysis of Operating Results for the Three Months Ended September
30, 1999 versus September 30, 1998
Net Income. Net income was $393 for the three months ended September 30, 1998
compared to $374 for the three months ended September 30, 1999, a decrease of
$19 (or 5%). Diluted earnings per share were $0.33 for the three months ended
September 30, 1998 and $0.32 for the three months ended September 30, 1999 based
on weighted average shares of 1,173,713 and 1,150,593, respectively. The
annualized return on average common stockholders' equity (R.O.E) was 10.77% and
9.73% for the three months ended September 30, 1998 and September 30, 1999,
respectively. The annualized return on average assets was 1.17% for the three
months ended September 30, 1998 and 1.01% for the three months ended September
30, 1999.
Lower net income for the three months ended September 30, 1999 was
principally due to increased non-interest expense, partially offset by a
reduction in the provision for loan losses, reduced income taxes and an increase
in net interest income.
Net Interest Income. Net interest income is the difference between the interest
income the Company earns on its loans, securities, and other earning assets, and
the interest cost of deposits and other interest-bearing liabilities necessary
to fund these earning assets. It is the primary component of the Company's
earnings.
Net interest income was $1,627 for the three months ended September 30,
1998 compared to $1,650 for the three months ended September 30, 1999, an
increase of $23 (or 1%). Lower average yields on loans, federal funds and the
securities portfolio were offset by the increased volume in the securities
portfolio and reduced interest expense on interest-bearing liabilities. The
average yield on interest-earning assets decreased 81 basis points for the three
months ended September 30, 1999 compared to September 30, 1998, while the
average rate paid on interest-bearing liabilities decreased 60 basis points. The
resulting 21 basis point decrease in the net interest rate spread was partially
offset by an increase in average earning assets.
Interest Income. Average earning assets for the three months ended September
30, 1998 were $124,822 compared to $136,972 for the three months ended September
30, 1999, an increase of $12,150(or 10%). Total interest income, which is a
function of the volume of interest-earning assets and their related rates,
-11-
<PAGE>
was $2,560 for the three months ended September 30, 1998 and $2,531 for the
three months ended September 30, 1999, representing a decrease of $29 (or 1%).
Loans represent the largest component of interest-earning assets. Average
loans outstanding in the three months ended September 30, 1998 were $72,899
compared to $73,701 during the three months ended September 30, 1999, an
increase of $802 (or 1%). Interest on loans was $1,759 for the three months
ended September 30, 1998 compared to $1,641 for the three months ended September
30,1999, a decrease of $118 (or 7%). The decrease in loan income primarily
reflects the decrease in the average yield on loans of 74 basis points for the
three months ended September 30, 1999 compared to September 30, 1998.
Average investments in debt securities, federal funds sold and equity
securities were $51,923 for the three months ended September 30, 1998 compared
to $63,271 for the three months ended September 30, 1999, an increase of $11,348
(or 22%). Related income increased from $801 for the three months ended
September 30, 1998 to $890 for the three months ended September 30, 1999, an
increase of $89 (or 11%). Average investments in debt and equity securities, not
including federal funds, increased by $10,974 (or 32%) during the three months
ended September 30, 1999 while average federal funds sold increased by $374 (or
2%). The increase in income from securities primarily was due to the increased
volume of debt securities, partially offset by a decline in average yield.
Interest Expense. Interest expense was $933 for the three months ended September
30, 1998 compared to $881 for the three months ended September 30, 1999, a 6%
decrease. Interest expense is a function of interest-bearing liabilities and
their related rates. Average interest-bearing liabilities during the three
months ended September 30, 1998 were $94,505 compared to $105,217 during the
three months ended September 30, 1999, an increase of $10,712 (or 11%). The
growth in interest-bearing liabilities was primarily due to the growth in NOW
accounts. The increase in interest-bearing liabilities was more than offset by a
decline in the average interest rate paid on deposit products, thus resulting in
an overall decline in interest expense for the three months ended September 30,
1999 compared to September 30, 1998.
Provision for Loan Losses. The provision for loan losses is based upon the size
of the loan portfolio and management's estimate of probable losses based upon an
evaluation of portfolio risk and economic factors. A review of the quality of
the loan portfolio is conducted internally by management on a quarterly basis
with the results presented to the Board of Directors for its approval. The
evaluation considers individual borrowers whose aggregate loans are greater than
$100, as well as all classified assets. Consideration is also given to several
factors including, but not limited to, economic conditions, delinquency, charge-
off history, growth and composition of the loan portfolio, and other relevant
factors. The provision (credit) for loan losses was $73 for the three months
ended September 30, 1998 and ($11) for the three months ended September 30,
1999 reflecting, in part, the $30 in net recoveries in the 1999 period compared
to the $101 in net charge-offs in the 1998 period. As of September 30, 1999,
the allowance for loan losses was $1,728 or 2.31% of gross loans, compared to
$1,733 or 2.50% of gross loans at December 31, 1998.
At September 30, 1999, the Company had $1,364 of nonperforming loans, of
which $1,282 were nonaccrual loans and $82 were accruing loans greater than 90
days past due. At December 31, 1998, the Company had $812 of nonperforming
loans, of which $524 were nonaccrual loans and $288 were accruing loans greater
than 90 days past due. Two loans totaling $435 were placed on nonaccrual status
during the quarter ended September 30, 1999. Both loans are secured by
collateral valued in excess of principal.
-12-
<PAGE>
Non-interest Income. Non-interest income was $184 for the three months ended
September 30, 1998 compared to $178 for the three months ended September 30,
1999, a decrease of $6 (or 3%). Deposit service charges increased $13 (or 12%)
primarily due to increased fees relating to overdrafts. Other non-interest
income decreased $19 (or 24%) due to the decline in the volume of service
charges on loans.
Non-interest Expense. Total non-interest expenses were $1,069 for the three
months ended September 30, 1998 and $1,226 for the three months ended September
30, 1999, an increase of $157 (or 15%).
A table summarizing the dollar amounts for each category, and the dollar
and percent changes, is as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1999 vs 1998
------------------ --------------------
Category 1999 1998 $ Change % Change
------- ------ --------- --------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 605 $ 525 $ 80 15%
Occupancy 140 116 24 21
Furniture and equipment 116 104 12 12
Other categories 365 324 41 13
------ ------ ----
Total non-interest expense $1,226 $1,069 $157 15%
====== ====== ==== ==
</TABLE>
The increase in salaries and employee benefits resulted from the addition
of six employees, salary increases and increased cost of benefits. On May 17,
1999, the Bank opened its fifth branch which is located in Norwalk, Connecticut.
The increase in occupancy expense primarily resulted from additional rent
expense. The increase in furniture and equipment expense primarily resulted
from increased depreciation expense associated with the new branch as well as
increased equipment service contract related expenses . The increase in other
non-interest expense categories primarily resulted from increased advertising
and donations expense which was partially offset by a reduction in legal and
miscellaneous external fees associated with the Bank's distribution of a 10%
stock dividend in August 1998.
The following table summarizes dollar amounts for each category as a
percentage of total operating income (interest income plus non-interest income):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------
Category 1999 1998
------ ------
<S> <C> <C>
Salaries and employee benefits 22.33% 19.13%
Occupancy 5.17 4.23
Furniture and equipment 4.28 3.79
Other categories 13.48 11.81
----- -----
Total non-interest expense 45.26% 38.96%
===== =====
</TABLE>
Income Taxes. The provision for income taxes decreased from $276 for the three
months ended September 30, 1998 to $239 for the three months ended September
30, 1999, a decrease of $37 (or 13%). The decrease in income taxes was
principally due to the decrease in pre-tax income.
Comparative Analysis of Operating Results for the Nine Months Ended September
30, 1999 versus September 30, 1998
Net Income. Net income was $1,465 for the nine months ended September 30,
1998 compared to $1,009 for the nine months ended September 30, 1999, a decrease
of $456 (or 31%). Diluted earnings
-13-
<PAGE>
per share were $1.25 for the nine months ended September 30, 1998 and $0.87 for
the nine months ended September 30, 1999 based on weighted average shares of
1,170,409 and 1,161,956, respectively. The annualized return on average common
stockholders' equity (R.O.E) was 14.01% and 8.94% for the nine months ended
September 30, 1998 and September 30, 1999, respectively. The annualized return
on average assets was 1.52% and 0.95% for the nine months ended September 30,
1998 and 1999, respectively.
The higher net income for the nine months ended September 30, 1998 was
principally due to the resolution of two nonperforming loans in May 1998 which
resulted in an additional $309 of net income (additional pretax loan income of
$509 less related income taxes of $200). Non-interest expense also increased in
the current year. These factors were partially offset by a reduction in the
provision for loan losses, increased non-interest income and a reduction in
income taxes.
Net Interest Income. Net interest income was $5,319 for the nine months ended
September 30, 1998 compared to $4,710 for the nine months ended September 30,
1999, a decrease of $609 (or 11%). The majority of this decrease is
attributable to the recovery of interest on the two nonperforming loans resolved
in the second quarter of 1998. The decreased net interest income in the nine
months ended September 30, 1999 was also due to a decline in size of the
average loan portfolio as well as lower average yields on loans, federal funds
and the securities portfolio. The effect of the decline in the average loan
portfolio and lower rates was partially offset by the growth in debt securities
and federal funds sold. The average yield on interest-earning assets decreased
146 basis points for the nine months ended September 30, 1999 compared to
September 30, 1998 (inclusive of the recovery of nonaccrual interest totaling
$509), while the average rate paid on interest-bearing liabilities decreased 40
basis points.
Interest Income. Average earning assets for the nine months ended September 30,
1998 were $120,607 compared to $132,547 for the nine months ended September 30,
1999, an increase of $11,940 (or 10%). Total interest income was $8,024 in the
nine months ended September 30, 1998 and $7,369 in the nine months ended
September 30, 1999, representing a decrease of $655 (or 8%). The decrease in
interest income reflects reduced average loan volume, lower interest rates on
earning assets and, to a greater extent, the resolution of two nonperforming
loans which resulted in an additional $509 of pretax loan income in May 1998.
The decrease in loan income was partially offset by increased debt securities
and federal funds volume.
Loans represent the largest component of interest-earning assets. Average
loans outstanding in the nine months ended September 30, 1998 were $76,255
compared to $71,679 in the nine months ended September 30, 1999, a decrease of
$4,576 (or 6%). Interest on loans was $5,934 for the nine months ended
September 30, 1998 compared to $4,812 for the nine months ended September 30,
1999, a decrease of $1,122 (or 19%). The average yield for the loan portfolio
decreased to 8.97% for the nine months ended September 30, 1999 compared to
10.40% for the nine months ended September 30, 1998. The decrease in loan income
was due to the resolution of two nonperforming loans which resulted in an
additional $509 of pretax loan income in May 1998, as well as reduced average
loan volume.
Average investments in debt securities, federal funds sold and equity
securities were $44,352 for the nine months ended September 30, 1998 compared to
$60,868 for the nine months ended September 30, 1999, an increase of $16,516 (or
37%). Related income increased from $2,090 for the nine months ended September
30, 1998 to $2,557 for the nine months ended September 30, 1999, an increase of
$467 (or 22%). The increased income primarily resulted from the increased
average volume of debt securities and federal funds sold, partially offset by a
decline in average yield. Average investments in debt securities, not
including federal funds, increased by $13,090 (or 43%) in the nine months ended
September 30, 1999
-14-
<PAGE>
and average federal funds sold increased by $3,426 (or 25%).
Interest Expense. Interest expense was $2,705 for the nine months ended
September 30, 1998 compared to $2,659 for the nine months ended September 30,
1999, a decrease of $46 or (2%). Average interest-bearing liabilities for the
nine months ended September 30, 1998 were $92,442 compared to $101,243 for the
nine months ended September 30, 1999, an increase of $8,801 (or 10%). The
reduction in interest expense was primarily due to a decline in the average rate
paid on interest-bearing liabilities. The average rate paid on interest-bearing
liabilities decreased 40 basis points for the nine months ended September 30,
1999 compared to September 30, 1998.
Provision for Loan Losses. The provision (credit) for loan losses was $246 for
the nine months ended September 30, 1998 and ($23) for the nine months ended
September 30, 1999 reflecting, in part, the $18 in net recoveries in the 1999
period compared to the $42 in net charge-offs in the 1998 period. For the
nine months ended September 30, 1999, five loans totaling $960 were placed on
nonaccrual status and two loans totaling $167 were removed from nonaccrual
status. All five loans placed on nonaccrual status are secured by collateral
valued in excess of principal. As of September 30, 1999, the allowance for loan
losses was $1,728 or 2.31% of gross loans, compared to $1,733 or 2.50% of gross
loans at December 31, 1998.
Non-interest Income. Non-interest income was $536 for the nine months ended
September 30, 1998 compared to $564 for the nine months ended September 30,
1999, an increase of $28 (or 5%). Deposit service charges increased $45 (or
15%) primarily due to increased fees relating to overdrafts. Other non-
interest income decreased $17 (or 7%) due to a decline in late charges on loans
and reduced loan fee income.
Non-interest Expense. Total non-interest expenses were $3,117 for the nine
months ended September 30, 1998 and $3,603 for the nine months ended September
30, 1999, an increase of $486 (or 16%).
A table summarizing the dollar amounts for each category, and the dollar and
percent changes, is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999 vs 1998
--------------------- -------------------
Category 1999 1998 $ Change % Change
------ ------ -------- --------
<S> <C> <C> <C> <C>
Salaries and employee
benefits $1,761 $1,513 $248 16%
Occupancy 392 347 45 13
Furniture and equipment 338 309 29 9
Other categories 1,112 948 164 17
------ ------ ----
Total non-interest expense $3,603 $3,117 $486 16%
====== ====== ==== ==
</TABLE>
The increase in salaries and employee benefits resulted from the addition
of six employees (including the new Norwalk branch), salary increases and
increased cost of benefits. The increase in occupancy expense resulted from
additional rent expense and occupancy expenses associated with the new branch.
Increased furniture and equipment expense for the nine months ended September
30, 1999 primarily resulted from the increased cost of service contracts as well
as additional depreciation from equipment purchases for the new branch. The
increase in other non-interest expense categories primarily resulted from
increased advertising expense and donations, as well as additional accounting
and printing expense associated with the establishment of the bank holding
company.
-15-
<PAGE>
The following table summarizes dollar amounts for each category as a percentage
of total operating income:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
Category 1999 1998
------ ------
<S> <C> <C>
Salaries and employee benefits 22.20% 17.68%
Occupancy 4.94 4.05
Furniture and equipment 4.26 3.61
Other categories 14.02 11.07
----- -----
Total non-interest expense 45.42% 36.41%
===== =====
</TABLE>
Income Taxes. The provision for income taxes decreased from $1,027 in the nine
months ended September 30, 1998 to $685 in the nine months ended September 30,
1999, a decrease of $342 (or 33%). The decrease in income taxes was
principally due to the decrease in pre-tax income.
Year 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the Year 1900
rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, generate accurate
customer statements, or engage in similar normal business activities.
While the Company believes that most of its systems are already Year 2000
compliant, the Company has in place an action plan to identify, review and test
all of its operating systems. In addition, the FDIC monitors the Company's
preparedness for the Year 2000. The actions being taken by the Company in
response to the Year 2000 issue are consistent with the guidelines in policy
statements issued by the bank regulatory agencies.
Management has initiated a Company-wide program, consistent with guidelines
issued by the Federal Financial Institutions Examination Council, to prepare the
Company's computer systems and software applications for the Year 2000. The
program includes the following phases (current status is indicated for each
phase):
* Identification (Completed)
* Assessment (Completed)
* Remediation (Completed)
* Testing (Completed)
* Contingency Planning (Continuing)
The Company has tested its mission critical applications, which are those
comprising its "core" data processing system for loans, deposits and the general
ledger maintained by a third-party vendor. Testing of these applications was
completed by December 31, 1998. The overall testing of mission critical
applications is now complete. Additional testing of non-mission critical
applications is continuing.
The Company has initiated formal communications with all of its significant
vendors and has contacted certain of its customers to determine the extent to
which the Company is vulnerable to those third parties' failures to remediate
their own Year 2000 Issue. However, there can be no guarantee that the systems
of other entities on which the Company's systems rely will be timely converted,
or that a
-16-
<PAGE>
failure to convert by another entity, or a conversion that is incompatible with
the Company's systems, would not have a material adverse effect on the Company.
The Company has also initiated dialogue with its loan customers concerning
their Year 2000 preparedness and has incorporated the consideration of Year 2000
readiness into its loan review and credit underwriting processes.
The Company estimates that its total Year 2000 project costs, including costs
charged to expense, will not exceed $100. As of September 30, 1999, the Company
had incurred $72 in costs relating to Year 2000, the majority of which are
hardware and software related. The cost of the project and the date on which the
Company plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the availability of certain resources, third party modification
plans and other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that may cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and similar uncertainties.
Significant Year 2000 failures in the Company's systems, or in the systems of
third parties, a significant reduction in liquidity due to high levels of
withdrawals of customer deposits, could have a material adverse effect on the
Company's financial condition and results of operations. The Company believes
that its reasonably likely worst case scenario might include a material increase
in credit losses due to Year 2000 problems of borrowers, a significant reduction
in liquidity due to high levels of withdrawals of customer deposits, and a
disruption in financial markets generally. The magnitude of potential credit
losses, liquidity problems or a disruption in financial markets cannot be
determined at this time; however, the Company's Year 2000 program described
above is designed to address exposure to risks. The Company continues to update
its business resumption contingency plan to address the possibility of unplanned
system difficulties or third party failures. This plan will entail some type of
manual record-keeping and reporting procedures in critical operating areas.
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended September 30, 1999.
-17-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized
CORNERSTONE BANCORP, INC.
-------------------------
(Registrant)
DATE: November 8, 1999 /s/ Norman H. Reader
-------------------- -------------------------------
Norman H. Reader
President and Chief Executive Officer
DATE: November 8, 1999 /s/ Leigh A. Hardisty
-------------------- ---------------------------------
Leigh A. Hardisty
Vice President and Chief Financial Officer
-18-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule (1)
(1) Filed herewith
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,006
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,363
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,010
<INVESTMENTS-CARRYING> 18,360
<INVESTMENTS-MARKET> 18,050
<LOANS> 74,968
<ALLOWANCE> 1,728
<TOTAL-ASSETS> 143,767
<DEPOSITS> 123,719
<SHORT-TERM> 3,720
<LIABILITIES-OTHER> 997
<LONG-TERM> 0
0
0
<COMMON> 11
<OTHER-SE> 15,320
<TOTAL-LIABILITIES-AND-EQUITY> 143,767
<INTEREST-LOAN> 4,812
<INTEREST-INVEST> 1,949
<INTEREST-OTHER> 608
<INTEREST-TOTAL> 7,369
<INTEREST-DEPOSIT> 2,603
<INTEREST-EXPENSE> 2,659
<INTEREST-INCOME-NET> 4,710
<LOAN-LOSSES> (23)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,603
<INCOME-PRETAX> 1,694
<INCOME-PRE-EXTRAORDINARY> 1,009
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,009
<EPS-BASIC> 0.90
<EPS-DILUTED> 0.87
<YIELD-ACTUAL> 4.75
<LOANS-NON> 1,282
<LOANS-PAST> 82
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,733
<CHARGE-OFFS> 27
<RECOVERIES> 45
<ALLOWANCE-CLOSE> 1,728
<ALLOWANCE-DOMESTIC> 1,728
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
