<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 June 30, 2000
-------------
[_] 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 July 31,
2000 was 1,138,750.
Transitional Small Business Disclosure Format (check one): Yes___ No X
---
<PAGE>
TABLE OF CONTENTS
PART I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited)
-----------------------------
PAGE
----
<S> <C>
Consolidated Statements of Condition
June 30, 2000 and December 31, 1999............................................................. 1
Consolidated Statements of Income
Three Months Ended June 30, 2000 and June 30, 1999.............................................. 2
Consolidated Statements of Income
Six Months Ended June 30, 2000 and June 30, 1999................................................ 3
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 2000 and June 30, 1999................................................ 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and June 30, 1999................................................ 5
Notes to Consolidated Financial Statements...................................................... 6
Item 2. Management's Discussion and Analysis
---------------------------------------------
of Financial Condition and Results of Operations............................................ 7- 16
------------------------------------------------
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...................................... 16
-----------------------------------------------------------
Item 5. Other Information........................................................................ None
-------------------------
Item 6. Exhibits and Reports on Form 8-K.......................................................... 17
----------------------------------------
Signatures........................................................................................ 18
</TABLE>
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
----------------------------
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks $ 8,759 $ 11,928
Federal funds sold 7,196 --
-------- --------
Cash and cash equivalents 15,955 11,928
Available for sale securities, at fair value 24,322 25,357
Held to maturity securities (fair value of $15,321 at June 30, 2000
and $17,385 at December 31, 1999) 15,727 17,812
Loans, net of allowance for loan losses of $1,800 at June 30, 2000
and $1,626 at December 31, 1999 91,529 78,038
Accrued interest receivable 1,142 1,097
Federal Home Loan Bank stock, at cost 419 419
Bank premises and equipment, net 2,808 2,961
Other assets 1,891 1,795
-------- --------
Total assets $153,793 $139,407
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand (non-interest bearing) $ 32,013 $ 25,177
Money market demand and NOW 25,668 21,058
Regular, club and money market savings 26,577 28,187
Time 43,303 44,860
-------- --------
Total deposits 127,561 119,282
Securities sold under repurchase agreements 5,079 3,768
Federal Home Loan Bank borrowings 5,000 --
Accrued interest payable 124 135
Other liabilities 624 646
-------- --------
Total liabilities 138,388 123,831
-------- --------
Stockholders' equity:
Common stock, par value $0.01 per share; authorized
5,000,000 shares; issued 1,136,012 shares at June 30, 2000
and 1,129,599 shares at December 31, 1999 11 11
Additional paid-in capital 11,581 11,510
Retained earnings 5,082 4,452
Treasury stock, at cost (74,265 shares at June 30, 2000) (852) --
Accumulated other comprehensive loss, net of taxes of $282
at June 30, 2000 and $270 at December 31, 1999 (417) (397)
-------- --------
Total stockholders' equity 15,405 15,576
-------- --------
Total liabilities and stockholders' equity $153,793 $139,407
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Interest income:
Loans $ 2,070 $ 1,632
Securities 623 672
Federal funds sold 102 165
---------- ----------
Total interest income 2,795 2,469
---------- ----------
Interest expense:
Deposits 790 862
Federal Home Loan Bank borrowings 88 --
Other 32 19
---------- ----------
Total interest expense 910 881
---------- ----------
Net interest income 1,885 1,588
Provision for loan losses 102 5
---------- ----------
Net interest income after provision for loan losses 1,783 1,583
---------- ----------
Non-interest income:
Deposit service charges 112 108
Loss on sales of securities (14) --
Other 82 106
---------- ----------
Total non-interest income 180 214
---------- ----------
Non-interest expense:
Salaries and employee benefits 613 591
Occupancy 141 132
Furniture and equipment 109 113
Data processing 81 91
Professional fees 50 55
Other 237 281
---------- ----------
Total non-interest expense 1,231 1,263
---------- ----------
Income before income tax expense 732 534
Income tax expense 294 221
---------- ----------
Net income $ 438 $ 313
========== ==========
Earnings per common share:
Basic $ 0.41 $ 0.28
Diluted 0.40 0.27
Weighted average common shares:
Basic 1,074,074 1,124,904
Diluted 1,090,725 1,157,030
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Interest income:
Loans $ 3,942 $ 3,170
Securities 1,266 1,289
Federal funds sold 179 379
---------- ----------
Total interest income 5,387 4,838
---------- ----------
Interest expense:
Deposits 1,572 1,741
Federal Home Loan Bank borrowings 116 --
Other 55 37
---------- ----------
Total interest expense 1,743 1,778
---------- ----------
Net interest income 3,644 3,060
Provision for loan losses 143 (12)
---------- ----------
Net interest income after provision for loan losses 3,501 3,072
---------- ----------
Non-interest income:
Deposit service charges 231 225
Loss on sales of securities (14) --
Other 135 161
---------- ----------
Total non-interest income 352 386
---------- ----------
Non-interest expense:
Salaries and employee benefits 1,245 1,156
Occupancy 287 252
Furniture and equipment 211 221
Data processing 163 178
Professional fees 116 123
Other 435 447
---------- ----------
Total non-interest expense 2,457 2,377
---------- ----------
Income before income tax expense 1,396 1,081
Income tax expense 563 446
---------- ----------
Net income $ 833 $ 635
========== ==========
Earnings per common share:
Basic $ 0.76 $ 0.57
Diluted 0.75 0.54
Weighted average common shares:
Basic 1,094,961 1,123,490
Diluted 1,108,697 1,167,550
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock Income (Loss) Equity
----- ------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 $ 11 $11,351 $ 3,497 $ -- $ 131 $14,990
Net income 635 635
Change in net unrealized gain (loss)
on available for sale securities,
net of taxes (289) (289)
-------
Total comprehensive income 346
Cash dividends ($0.30 per share) (336) (336)
Shares issued in connection with:
Directors Compensation Plan 3 3
Dividend Reinvestment Plan 96 96
----- ------- ------- ------- ---------- -------
BALANCE, JUNE 30, 1999 $ 11 $11,450 $ 3,796 $ -- $ (158) $15,099
===== ======= ======= ======= ========== =======
BALANCE, JANUARY 1, 2000 $ 11 $11,510 $ 4,452 $ -- $ (397) $15,576
Net income 833 833
Change in net unrealized gain (loss)
on available for sale securities,
net of taxes (20) (20)
-------
Total comprehensive income 813
Cash dividends ($0.19 per share) (203) (203)
Purchases of treasury stock (74,265 shares) (852) (852)
Shares issued in connection with:
Directors Compensation Plan 6 6
Dividend Reinvestment Plan 65 65
----- ------- ------- ------- ---------- -------
BALANCE, JUNE 30, 2000 $ 11 $11,581 $ 5,082 $ (852) $ (417) $15,405
===== ======= ======= ======= ========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
Operating activities: 2000 1999
---- ----
<S> <C> <C>
Net income $ 833 $ 635
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 143 (12)
Depreciation and amortization 196 192
Common stock issued under compensation agreements 6 3
Increase in accrued interest receivable (45) (103)
Increase in deferred loan costs -- (7)
Increase in other assets (84) (345)
Decrease in accrued interest payable (11) (18)
Increase(decrease) in other liabilities (26) 40
Loss on sale of securities (14) --
-------- --------
Net cash provided by operating activities 998 385
-------- --------
Investing activities:
Proceeds from sales of available for sale securities 1,014 --
Proceeds from maturities of available for sale securities -- 6,245
Proceeds from maturities of held to maturity securities 2,070 2,000
Purchases of available for sale securities -- (3,500)
Purchases of held to maturity securities -- (11,788)
Disbursements for loan originations less principal repayments (13,634) (572)
Purchases of bank premises and equipment (25) (350)
-------- --------
Net cash used in investing activities (10,575) (7,965)
-------- --------
Financing activities:
Net increase in demand, money market and savings deposits 9,836 7,092
Net decrease in time deposits (1,557) (3,153)
Net increase in securities sold under repurchase agreements 1,311 1,311
Proceeds from Federal Home Loan Bank borrowings 5,000 --
Proceeds from issuance of common stock 65 96
Purchases of treasury stock (852) --
Dividends paid on common stock (199) (336)
-------- --------
Net cash provided by financing activities 13,604 5,010
-------- --------
Net increase (decrease) in cash and cash equivalents 4,027 (2,570)
Cash and cash equivalents at beginning of period 11,928 27,312
-------- --------
Cash and cash equivalents at end of period $ 15,955 $ 24,742
======== ========
Supplemental information:
Interest paid $ 1,754 $ 1,796
Income taxes paid 637 565
======== ========
</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
The accompanying unaudited interim consolidated financial statements
include the accounts of Cornerstone Bancorp, Inc. and Cornerstone Bank (the
"Bank"), collectively the "Company". The 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. A material estimate that is
particularly susceptible to near-term change is the allowance for loan losses.
The interim results of operations for the first six months of 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000.
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
consolidated financial statements and notes included in the Form 10-KSB for the
year ended December 31, 1999.
NOTE B - EARNINGS PER SHARE
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 would occur if securities or other contracts to issue common stock
were exercised or converted into common stock, or otherwise resulted in the
issuance of common stock that then shared in the earnings of the entity. For the
three and six month periods ended June 30, 2000 and 1999, 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 these periods.
NOTE C - SEGMENT INFORMATION
Public companies are required 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.
-6-
<PAGE>
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 that 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 and other financial and business matters. 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, and the extent and timing of legislative and
regulatory actions and reforms.
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
General
Total assets increased from $139,407 at December 31, 1999 to $153,793 at
June 30, 2000, an increase of $14,386 (or 10%). The increase reflects loan
growth of $13,491 and an increase of $4,027 in cash and cash equivalents,
partially offset by decreases of $2,085 in securities held to maturity and
$1,035 in securities available for sale. The asset growth was funded principally
from an increase of $8,279 in deposits, Federal Home Loan Bank ("FHLB")
borrowings of $5,000 and repurchase agreement borrowings of $1,311. A portion of
this funding ($852) was also used to purchase 74,265 treasury shares under the
Company's program, announced in December 1999, to repurchase up to 100,000
common shares.
Loans
The net loan portfolio increased from $78,038 at December 31, 1999 to
$91,529 at June 30, 2000, an increase of $13,491 (or 17%). The increase in the
loan portfolio in the first six months of 2000 primarily reflects increases in
non-residential, residential and commercial loans, which were partially offset
by a decrease in construction loans. Non-residential loans increased from
$25,470 at December 31, 1999 to $35,354 at June 30, 2000, an increase of $9,884
(or 39%). Residential loans increased from $35,501 at December 31, 1999 to
$38,634 at June 30, 2000, an increase of $3,133 (or 9%). Commercial loans
increased from $9,604 at December 31, 1999 to $11,342 at June 30, 2000, an
increase of $1,738 (or 18%). Loan originations in the second quarter of 2000
continued to reflect an upswing in loan demand and consequently volume that
began in the third quarter of 1999 for all loan types (except construction
loans). Construction loans decreased from $6,022 at December 31, 1999 to $4,848
at June 30, 2000,
-7-
<PAGE>
a decrease of $1,174 (or 19%)due to the payoff of two construction loans
totaling $1,400 during the six months ended June 30, 2000.
Major classifications of loans at June 30, 2000 and December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------- ------------------
<S> <C> <C>
Loans secured by real estate:
Residential $38,634 $35,501
Non-residential 35,354 25,470
Construction 4,848 6,022
Commercial loans 11,342 9,604
Consumer and other loans 3,110 3,026
------- -------
Total loans 93,288 79,623
Allowance for loan losses (1,800) (1,626)
Deferred loan costs, net 41 41
------- -------
Total loans, net $91,529 $78,038
======= =======
</TABLE>
Non-performing Loans and the Allowance for Loan Losses
It is the Bank's policy to manage its loan portfolio to facilitate
recognition of problem loans at an early point. The Bank commences internal
collection efforts once a loan payment is more than 15 days past due. The Bank's
data processing system generates delinquency reports on all of the Bank's loans
weekly and management reviews the loan portfolio on a weekly basis to determine
if past due loans should be placed on non-accrual status. Unless the customer is
working with the Bank toward repayment, once a loan payment is 90 days past due,
the Bank generally initiates appropriate collection action.
The following table sets forth information with respect to non-performing loans
at the dates indicated.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Loans on nonaccrual status:
Loans secured by real estate $ 371 $ 388
Commercial loans 460 -
------ ------
831 388
------ ------
Loans on accrual status:
Loans secured by real estate 4 50
Commercial loans -- 9
Consumer and other loans - 13
------ ------
4 72
------ ------
Total loans past due 90 days or more 835 460
Real estate secured loans current or past due
less than 90 days, for which interest payments
were being applied to reduce principal balances 319 846
------ ------
Total non-performing loans $1,154 $1,306
====== ======
</TABLE>
-8-
<PAGE>
The decline in real estate secured loans for which interest payments were
being applied to principal (from $846 at December 31, 1999 to $319 at June 30,
2000) was primarily due to management's decision in the second quarter to return
loans amounting to $471 to accrual status due to the borrowers' continuing
payment performance. The increase in nonaccrual commercial loans of $460
primarily represents loans to one borrower placed on nonaccrual status during
the second quarter of 2000.
The following table sets forth changes in the allowance for loan losses for
the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $1,626 $1,733 $1,674 $1,725
Provision for loan losses 143 (12) 102 5
Charge-offs (10) (27) (10) (27)
Recoveries 41 15 34 6
------ ------ ------ ------
Balance at end of period $1,800 $1,709 $1,800 $1,709
====== ====== ====== ======
</TABLE>
Securities
Total securities decreased from $43,169 at December 31, 1999 to $40,049 at
June 30, 2000, a decrease of $3,120 (or 7%). The decrease in the securities
portfolio was primarily due to maturities of securities held to maturity and
sales of securities available for sale which were used to meet short term cash
needs and fund a portion of the loan growth.
The following table sets forth the amortized cost and estimated fair value of
the securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------ ------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Available for sale
------------------
U.S. Agency securities $25,021 $24,322 $26,024 $25,357
======= ======= ======= =======
Held to maturity
----------------
U.S. Agency securities $14,652 $14,247 $14,735 $14,313
U.S. Treasury securities 1,000 999 3,002 2,997
Other 75 75 75 75
------- ------- ------- -------
Total $15,727 $15,321 $17,812 $17,385
======= ======= ======= =======
</TABLE>
Pledged securities amounted to $10,051 and $10,461 at December 31, 1999 and
June 30, 2000, respectively.
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.
-9-
<PAGE>
The following table indicates the composition of deposits at the dates
indicated.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Demand deposits (non-interest bearing) $ 32,013 $ 25,177
Money market demand and NOW accounts 25,668 21,058
Regular, club and money market savings 26,577 28,187
Time deposits 43,303 44,860
-------- --------
Total $127,561 $119,282
======== ========
</TABLE>
Total deposits increased from $119,282 at December 31, 1999 to $127,561 at
June 30, 2000, an increase of $8,279 (or 7%). Demand deposits increased from
$25,177 at December 31, 1999 to $32,013 at June 30, 2000, an increase of
$6,836 (or 27%). Money market demand and NOW accounts increased from $21,058 at
December 31, 1999 to $25,668 at June 30, 2000, an increase of $4,610 (or 22%).
The increase in demand deposits at June 30, 2000 was attributable to the Bank's
focus on lower cost demand deposits, as well as funding to cover incoming
cashier's checks. The increase in money market, demand and NOW accounts was
attributable to activity associated with attorney/trustee accounts. These
increases were partially offset by a decrease in regular, club and money market
savings from $28,187 at December 31, 1999 to $26,577 at June 30, 2000, a
decrease of $1,610 (or 6%) as well as a decrease in time deposits from $44,860
at December 31, 1999 to $43,303 at June 30, 2000, a decrease of $1,557 (or 3%).
Approximately $1.5 million of the decrease in time deposits was attributable to
maturities and withdrawals of accounts opened during the last three quarters of
1995 in connection with a promotion. The decrease in regular, club and money
market savings was attributable to normal customer activity. Certificates of
deposit in denominations of $100 or more were $9,820 at December 31, 1999
compared to $10,336 at June 30, 2000, an increase of $516.
Liquidity and Capital Resources
At June 30, 2000, total short term investments, which are made up of
federal funds sold, available for sale securities and held to maturity
securities maturing in three months or less, totaled $32,517. The liquidity of
the Company is measured by the ratio of net cash, short term investments, and
marketable assets to net deposits and short term liabilities. The liquidity
ratio at June 30, 2000 was 34%, primarily due to the large available for sale
portfolio. The Company's guideline is to maintain a liquidity ratio of 20% or
more.
Net cash provided by operating activities was $1,012 for the six months
ended June 30, 2000 as compared to $385 for the six months ended June 30, 1999.
Compared to the first half of 1999, cash used in investing activities increased
$2,610 primarily due to increased net disbursements for loan originations in
2000, partially offset by 1999 purchases of held to maturity securities. The
increase in net cash provided by financing activities of $8,594 primarily
resulted from higher borrowings and deposit inflows in the current year. Cash
and cash equivalents increased $4,027 for the six months ended June 30, 2000.
At June 30, 2000, the Company had outstanding loan commitments under unused
lines of credit approximating $13,654 and outstanding letters of credit
approximating $147.
At December 31, 1999 and June 30, 2000, the Company's consolidated
leverage capital ratio was 11.1% and 10.7%, respectively. At December 31, 1999
and June 30, 2000, the Company's consolidated Tier 1 risk-based capital ratio
was 18.4% and 15.4%, respectively. The Company's consolidated total risk-based
capital ratio at December 31, 1999 and June 30, 2000 was 19.6% and 16.6%,
respectively. These ratios exceeded the stated minimum regulatory requirements.
The lower capital ratios at June 30, 2000 reflect the growth in the loan
portfolio and the stock repurchase program in 2000, as well as an increase in
total risk-weighted caused by a reduction in cash and cash reserves at the
Federal Reserve Bank of New York which were unusually high at the end of 1999
due to year 2000 concerns. The Bank's
-10-
<PAGE>
regulatory capital ratios at June 30, 2000 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 June 30,
2000 versus June 30, 1999
NET INCOME. Net income was $313 for the three months ended June 30, 1999
compared to $438 for the three months ended June 30, 2000, an increase of $125
(or 40%). Diluted earnings per share were $0.27 for the three months ended June
30, 1999 and $0.40 for the three months ended June 30, 2000 based on weighted
average shares of 1,157,030 and 1,090,725, respectively. The annualized return
on average common stockholders' equity (R.O.E) was 8.29% and 11.30% for the
three months ended June 30, 1999 and June 30, 2000, respectively. The annualized
return on average assets was 0.89% for the three months ended June 30, 1999 and
1.18% for the three months ended June 30, 2000.
Higher net income for the three months ended June 30, 2000 was principally
due to increased net interest income which was partially offset by increases in
the provision for loan losses and income tax expense.
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 $1,588 for the three months ended June 30, 1999
compared to $1,885 for the three months ended June 30, 2000, an increase of $297
(or 19%). Higher loan volume resulted in increased interest income while the
rolloff of higher priced certificates of deposit resulted in decreased interest
expense on deposits. This decrease was partially offset by interest expense on
FHLB borrowings and an increase in other interest expense. The average yield on
interest-earning assets increased 58 basis points for the three months ended
June 30, 2000 compared to June 30, 1999, while the average rate paid on
interest-bearing liabilities remained unchanged. These changes resulted in a 63
basis point increase in the net interest margin for the three months ended June
30, 2000 compared to June 30, 1999. The higher asset yields reflect increased
loan volume as well as increases in market interest rates. The stable funding
costs reflect the maturity or withdrawal of higher priced deposit accounts,
partially offset by the effect of the increased volume of borrowed funds during
the second quarter of 2000.
Interest Income. Average earning assets for the three months ended June 30, 1999
were $131,125 compared to $137,840 for the three months ended June 30, 2000, an
increase of $6,715 (or 5%). Total interest income, which is a function of the
volume of interest-earning assets and their related rates, was $2,469 for the
three months ended June 30, 1999 and $2,795 for the three months ended June 30,
2000, representing an increase of $326 (or 13%).
Loans represent the largest component of interest-earning assets. Average
loans outstanding in the three months ended June 30, 1999 were $70,936 compared
to $89,680 during the three months ended June 30, 2000, an increase of $18,744
(or 26%). Interest on loans was $1,632 for the three months ended June 30, 1999
compared to $2,070 for the three months ended June 30, 2000, an increase of $438
(or 27%). The increase in loan income reflects the increase in loan volume for
the three months ended June 30, 2000 compared to June 30, 1999.
-11-
<PAGE>
Average investments in securities and federal funds sold were $60,189 for
the three months ended June 30, 1999 compared to $48,160 for the three months
ended June 30, 2000, a decrease of $12,029 (or 20%). Related income decreased
from $837 for the three months ended June 30, 1999 to $725 for the three months
ended June 30, 2000, a decrease of $112 (or 13%). Average investments in
securities, not including federal funds, decreased by $4,388 (or 10%) during the
three months ended June 30, 2000, while average federal funds sold decreased by
$7,641 (or 54%). The decrease in income from securities and federal funds sold
was primarily due to the reduced volume in both categories, partially offset by
increasing rates of interest earned on federal funds sold.
Interest Expense. Interest expense was $881 for the three months ended June 30,
1999 compared to $910 for the three months ended June 30, 2000, a 3% increase.
Interest expense is a function of the volume of interest-bearing liabilities and
their related rates. Average interest-bearing liabilities during the three
months ended June 30, 1999 were $99,886 compared to $103,108 during the three
months ended June 30, 2000, an increase of $3,222 (or 3%). Increased interest
expense was primarily due to the increased volume of non-maturity deposits, FHLB
borrowings and repurchase agreements which was partially offset by the declining
volume of time deposits.
Provision for Loan Losses. The periodic provision for loan losses represents the
amount necessary to adjust the allowance for loan losses to management's
estimate of probable credit losses inherent in the existing loan portfolio at
the reporting date. Management's determination of the allowance for loan losses
is based on the results of continuing reviews of individual loans and borrower
relationships, particularly in the commercial and commercial real estate loan
portfolios. A review of the quality of the loan portfolio is conducted
internally by management on a quarterly basis, using a consistently-applied
methodology, and the results are presented to the Board of Directors for
approval. The evaluation covers individual borrowers whose aggregate loans are
greater than $100, as well as all adversely-classified loans. Management also
considers factors such as the borrower's financial condition, historical and
expected ability to make loan payments, and underlying collateral values. The
determination of the allowance for loan losses also considers the level of past
due loans, the Bank's historical loan loss experience, changes in loan portfolio
mix, geographic and borrower concentrations, and current economic conditions.
The provision for loan losses was $5 for the three months ended June 30, 1999
and $102 for the three months ended June 30, 2000, primarily reflecting
continuing loan growth in 2000. As of June 30, 2000, the allowance for loan
losses was $1,800 or 1.93% of gross loans, compared to $1,626 or 2.04% of gross
loans at December 31, 1999.
At June 30, 2000, the Company had $1,154 of nonperforming loans, including
$831 of nonaccrual loans and $4 of accruing loans greater than 90 days past due.
Loans less than 90 days past due for which interest payments were being applied
to reduce principal balances, were $319 at June 30, 2000. At December 31, 1999,
the Company had $1,306 of nonperforming loans, including $388 of nonaccrual
loans and $72 of accruing loans greater than 90 days past due. Loans less than
90 days past due for which interest payments were being applied to reduce
principal balances, were $846 at December 31, 1999.
Non-interest Income. Non-interest income was $214 for the three months ended
June 30, 1999 compared to $180 for the three months ended June 30, 2000, a
decrease of $34 (or 16%). During the three months ended June 30, 2000, the Bank
sold one available for sale security at a loss of $14. The decline in other
non-interest income of $24 (or 23%) during the three months ended June 30, 2000
reflects one-time service charges on loans amounting to $25 which were collected
during the quarter ended June 30, 1999.
Non-interest Expense. Total non-interest expenses were $1,231 for the three
months ended June 30, 1999 and $1,263 for the three months ended June 30, 2000,
a decrease of $32 (or 3%).
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<PAGE>
A table summarizing the dollar amounts for each category, and the dollar
and percent changes, is as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30, 2000 vs 1999
------------------ -------------------
Category 2000 1999 $ Change % Change
---- ---- -------- --------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 613 $ 591 $ 22 4%
Occupancy 141 132 9 7
Furniture and equipment 109 113 (4) (4)
Other categories 368 427 (59) (14)
------ ------ ----
Total non-interest expense $1,231 $1,263 $(32) (3)%
====== ====== ==== ===
</TABLE>
The increase in salaries and employee benefits was due to the addition of
four employees and associated benefits. In May 1999, the Bank opened its fifth
branch which is located in Norwalk, Connecticut. The increase in occupancy
expense primarily resulted from additional rent and depreciation associated with
the Norwalk branch. The decrease in other non-interest expense categories
primarily relates to organization costs absorbed in 1999 relating to the
establishment of the bank holding company.
The following table summarizes dollar amounts for each category as a
percentage of total operating income (interest income plus non-interest income),
which increased by $292, (or 11%) in the second quarter of 2000 compared to the
same period in 1999:
Three Months Ended
June 30,
------------------
Category 2000 1999
---- ----
Salaries and employee benefits 20.61% 22.03%
Occupancy 4.74 4.92
Furniture and equipment 3.66 4.21
Other categories 12.36 15.91
----- -----
Total non-interest expense 41.37% 47.07%
===== =====
Income Taxes. The provision for income taxes increased from $221 for the three
months ended June 30, 1999 to $294 for the three months ended June 30, 2000, an
increase of $73 (or 33%). The increase in income taxes was due to the 33%
increase in pre-tax income.
Comparative Analysis of Operating Results for the Six Months Ended June 30, 2000
versus June 30, 1999
Net Income. Net income was $635 for the six months ended June 30, 1999 compared
to $833 for the six months ended June 30, 2000, an increase of $198 (or 31%).
Diluted earnings per share were $0.54 for the six months ended June 30, 1999 and
$0.75 for the six months ended June 30, 2000 based on weighted average shares of
1,167,550 and 1,108,697, respectively. The annualized return on average common
stockholders' equity (R.O.E) was 8.49% and 11.29% for the six months ended June
30, 1999 and June 30, 2000, respectively. The annualized return on average
assets was 0.92% for the six months ended June 30, 1999 and 1.21% for the six
months ended June 30, 2000.
Higher net income for the six months ended June 30, 2000 was principally
due to increased net interest income (reflecting an increase in interest income
and a reduction in interest expense) which was partially offset by increases in
the provision for loan losses, non-interest expense and income tax expense.
-13-
<PAGE>
Net Interest Income. Net interest income was $3,060 for the six months ended
June 30, 1999 compared to $3,644 for the six months ended June 30, 2000, an
increase of $584 (or 19%). Higher loan volume resulted in increased interest
income while the rolloff of higher priced certificates of deposit resulted in
decreased interest expense on deposits. This reduction in interest expense was
partially offset by interest expense on FHLB borrowings and an increase in other
interest expense. The average yield on interest-earning assets increased 58
basis points for the six months ended June 30, 2000 compared to June 30, 1999,
while the average rate paid on interest-bearing liabilities decreased 11 basis
points. These changes resulted in a 72 basis point increase in the net interest
margin for the six months ended June 30, 2000 compared to June 30, 1999. The
higher asset yields reflect a shift in asset mix to higher yielding loans, as
well as recent increases in market interest rates. The lower average funding
cost reflects the maturity or withdrawal of higher priced deposit accounts,
partially offset by the effect of FHLB borrowings in the six months ended June
30, 2000.
Interest Income. Average earning assets for the six months ended June 30, 1999
were $130,262 compared to $134,680 for the six months ended June 30, 2000, an
increase of $4,418 (or 3%). Total interest income, which is a function of the
volume of interest-earning assets and their related rates, was $4,838 for the
six months ended June 30, 1999 and $5,387 for the six months ended June 30,
2000, representing an increase of $549 (or 11%).
Loans represent the largest component of interest-earning assets. Average
loans outstanding in the six months ended June 30, 1999 were $70,646 compared to
$86,297 during the six months ended June 30, 2000, an increase of $15,651 (or
22%). Interest on loans was $3,170 for the six months ended June 30, 1999
compared to $3,942 for the six months ended June 30, 2000, an increase of $772
(or 24%). The increase in loan income primarily reflects the increase in loan
volume for the six months ended June 30, 2000 compared to June 30, 1999.
Average investments in securities and federal funds sold were $59,616 for
the six months ended June 30, 1999 compared to $48,383 for the six months ended
June 30, 2000, a decrease of $11,233 (or 19%). Related income decreased from
$1,668 for the six months ended June 30, 1999 to $1,445 for the six months ended
June 30, 2000, a decrease of $223 (or 13%). Average investments in securities,
not including federal funds sold, decreased by $714 (or 2%) during the six
months ended June 30, 2000 while average federal funds sold decreased by $10,519
(or 64%). The decrease in income from securities and federal funds sold was
primarily due to the reduced volume in both categories which was partially
offset by increasing rates of interest earned on federal funds sold.
Interest Expense. Interest expense was $1,778 for the six months ended June 30,
1999 compared to $1,743 for the six months ended June 30, 2000, a 2% decrease.
Interest expense is a function of the volume of interest-bearing liabilities and
their related rates. Average interest-bearing liabilities during the six months
ended June 30, 1999 were $99,209 compared to $100,478 during the six months
ended June 30, 2000, an increase of $1,269 (or 1%). The increase in average
interest-bearing liabilities was primarily due to the increase in the volume of
non-maturity deposit accounts, FHLB borrowings, and repurchase agreements
partially offset by a decrease in average time deposits.
Provision for Loan Losses. The provision for loan losses was ($12) for the six
months ended June 30, 1999 and $143 for the six months ended June 30, 2000,
primarily reflecting the continuing loan growth in 2000. As of June 30, 2000,
the allowance for loan losses was $1,800 or 1.93% of gross loans, compared to
$1,626 or 2.04% of gross loans at December 31, 1999.
Non-interest Income. Non-interest income was $386 for the six months ended June
30, 1999 compared to $352 for the six months ended June 30, 2000, a decline of
$34 (or 9%). During the six months ended
-14-
<PAGE>
June 30, 2000, the Bank sold one available for sale security at a loss of $14.
The decline in other non-interest income of $26 (or 16%) during the six months
ended June 30, 2000, reflects one-time service charges on loans amounting to $25
which were collected during the quarter ended June 30, 1999.
Non-interest Expense. Total non-interest expenses were $2,377 for the six
months ended June 30, 1999 and $2,457 for the six months ended June 30, 2000, an
increase of $80 (or 3%).
A table summarizing the dollar amounts for each category, and the dollar
and percent changes, is as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000 vs 1999
---------------------- ----------------------
Category 2000 1999 $ Change % Change
---- ---- -------- --------
<S> <C> <C> <C> <C>
Salaries and employee benefits $1,245 $1,156 $ 89 8%
Occupancy 287 252 35 14
Furniture and equipment 211 221 (10) (5)
Other categories 714 748 (34) (5)
------ ------ ----
Total non-interest expense $2,457 $2,377 $ 80 3%
====== ====== ==== ===
</TABLE>
The increase in salaries and employee benefits resulted from the addition
of four employees, salary increases and increased cost of benefits. The increase
in occupancy expense primarily resulted from additional rent and depreciation
associated with the Norwalk branch opened in May 1999. The decrease in other
non-interest expense primarily relates to organization costs absorbed in 1999
relating to the establishment of the bank holding company.
The following table summarizes dollar amounts for each category as a
percentage of total operating income (interest income plus non-interest income),
which increased by $515, (or 10%) in the first six months of 2000 compared to
the same period in 1999:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
Category 2000 1999
---- ----
<S> <C> <C>
Salaries and employee benefits 21.69% 22.13%
Occupancy 5.00 4.82
Furniture and equipment 3.68 4.23
Other categories 12.44 14.32
----- -----
Total non-interest expense 42.81% 45.50%
===== =====
</TABLE>
Income Taxes. The provision for income taxes increased from $446 for the six
months ended June 30, 1999 to $563 for the six months ended June 30, 2000, an
increase of $117 (or 26%). The increase in income taxes was primarily due to the
29% increase in pre-tax income.
YEAR 2000
The operating systems of the Company have been performing properly since
December 31, 1999 and there have been no interruptions in the Company's business
operations. The Company has had 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
is not currently aware of any Year 2000 issues that have adversely affected its
loan customers or the third parties relied upon by the Company for its daily
transaction processing and other technology needs. Management
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<PAGE>
recognizes, however, that the possibility exists that adverse effects of the
Year 2000 issue may come to light in the future and will continue to monitor
this issue accordingly.
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
The Annual Meeting of Shareholders of the Bancorp was held on May 17, 2000.
At the annual meeting, the shareholders elected Stanley Levine, Ronald Miller,
Martin Prince, Patrick Tisano and Joseph Waxberg to the Board of Directors of
the Bancorp. There were 745,335 votes for and 53,565 votes withheld for Mr.
Levine, 745,022 votes for and 53,878 votes withheld for Mr. Miller, 745,335
votes for and 53,565 votes withheld for Mr. Prince, 745,022 votes for and 53,878
votes withheld for Mr. Tisano and 744,775 votes for and 54,125 votes withheld
for Mr. Waxberg. All five were elected for terms which expire at the 2003
Annual Meeting of Shareholders. In addition, James P. Jakubek, Joseph A. Maida,
Melvin L. Maisel, Norman H. Reader and Paul H. Reader are currently serving
terms on the Board of Directors which expire at the 2001 Annual Meeting of
Shareholders and Joseph F. Field Jr., J. James Gordon, Courtney A. Nelthropp and
Donald Sappern are currently serving terms which expire at the 2002 Annual
Meeting of Shareholders.
The shareholders also ratified the appointment by the Board of Directors of
KPMG LLP as the Bancorp's independent auditors for the fiscal year ending
December 31, 2000. There were 765,781 votes for, 28,483 votes against and 4,635
abstentions with respect to such ratification.
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<PAGE>
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 quarter ended
June 30, 2000.
-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: August 7, 2000 /s/ Norman H. Reader
------------------------- ------------------------------------------
Norman H. Reader
President and Chief Executive Officer
DATE: August 7 , 2000 /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
