SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT FOR
THE TRANSITION PERIOD FROM _______________ TO _________________.
Commission File Number 333-79543
CORNERSTONE BANCORP
(Exact name of small business issuer as specified in the charter)
South Carolina 57-1077978
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1670 East Main Street, Easley, South Carolina 29640
(Address of principal executive offices)
(864) 306-1444
(Registrant's telephone number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock - No Par Value
800,000 Shares Outstanding on August 1, 2000
Transitional Small Business Issuer Disclosure Format: [ ] Yes [ X ] No
1
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PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
$ amounts in thousands
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited) (Audited)
----------- ---------
ASSETS
<S> <C> <C>
Cash and due from banks .................................................................... $ 754,273 $ 711,239
Federal funds sold ......................................................................... 2,470,000 1,910,000
Investment securities ...................................................................... 8,894,715 9,388,957
Loans ...................................................................................... 13,727,058 6,736,232
Less allowance for loan losses .......................................................... (140,000) (105,000)
------------ ------------
13,587,058 6,631,232
Premises and equipment ..................................................................... 1,008,860 871,704
Accrued interest receivable ................................................................ 266,517 189,394
Deferred income taxes ...................................................................... 98,597 86,792
Other assets ............................................................................... 10,938 9,376
------------ ------------
Total assets ........................................................................ $ 27,090,958 $ 19,798,694
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing ................................................................... $ 3,250,263 $ 2,067,449
Interest bearing ...................................................................... 12,648,371 7,853,887
------------ ------------
Total deposits ...................................................................... 15,898,634 9,921,336
Federal funds purchased and securities sold under agreements to repurchase .............. 3,542,717 2,289,278
Other liabilities ....................................................................... 58,428 11,586
------------ ------------
Total liabilities ................................................................... 19,499,779 12,222,200
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares authorized,
800,000 shares issued and outstanding in 2000 and 1999 ................................ 7,985,000 7,985,000
Retained deficit ........................................................................ (380,964) (399,843)
Accumulated other comprehensive loss .................................................... (12,857) (8,663)
------------ ------------
Total shareholders' equity .......................................................... 7,591,179 7,576,494
------------ ------------
Total liabilities and shareholders' equity .......................................... $ 27,090,958 $ 19,798,694
============ ============
</TABLE>
See notes to consolidated financial statements.
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CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans ................................. $ 274,444 N/A $ 480,353 N/A
Investment securities
Interest - U.S. Treasury and U.S. ........................
Government Agencies .................................... 144,729 264,659
Federal funds sold ......................................... 53,653 87,702
--------- --- --------- ---
Total interest income ................................ 472,826 N/A 832,714 N/A
--------- --- --------- ---
INTEREST EXPENSE
Deposits
Certificates of deposit of $100,000 or more .............. 31,870 58,377
Other .................................................... 107,936 180,511
--------- --- --------- ---
Total deposits ....................................... 139,806 238,888
Federal funds purchased .................................... 36,999 58,875
--------- --- --------- ---
Total interest expense ............................... 176,805 N/A 297,763 N/A
--------- --- --------- ---
Net interest income ....................................... 296,021 534,951
Provision for loan losses .................................. 35,000 35,000
--------- --- --------- ---
Net interest income after provision
for loan losses .................................... 261,021 N/A 499,951 N/A
--------- --- --------- ---
Noninterest income
Service charges on deposit accounts ...................... 14,488 23,334
Other .................................................... 5,863 8,490
--------- --- --------- ---
Total noninterest income ............................. 20,351 N/A 31,824 N/A
--------- --- --------- ---
Noninterest expense
Salaries and employee benefits ........................... 137,462 276,592
Premises and equipment ................................... 18,380 35,383
Data processing .......................................... 18,425 34,224
Depreciation ............................................. 17,776 35,497
Other .................................................... 76,507 131,200
--------- --- --------- ---
Total noninterest expense ............................ 268,550 N/A 512,896 N/A
--------- --- --------- ---
Net income before taxes .............................. 12,822 18,879
PROVISION FOR INCOME TAXES .................................... (4,920) 0
--------- --- --------- ---
Net income after taxes ............................... 17,742 N/A 18,879 N/A
--------- --- --------- ---
BASIC EARNINGS PER COMMON SHARE
Weighted average shares outstanding ........................ 800,000 N/A 800,000 N/A
========= === ========= ===
Net income per common share ................................ $ .021 N/A $ .024 N/A
========= === ========= ===
DILUTED EARNINGS PER COMMON SHARE
Weighted average shares outstanding ........................ 800,000 N/A 800,000 N/A
========= === ========= ===
Net income per common share ............................... $ .021 N/A $ .024 N/A
========= === ========= ===
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Acumulated
other Total
Common stock Retained comprehensive shareholders'
Shares Amount deficit loss equity
------ ------ ------- ---- ------
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1999 ................................. 800,000 $ 7,985,000 $ (399,843) $ (8,663) $ 7,576,494
Net income ............................................. - 18,879 18,879
Other comprehensive income, net of taxes
Change in unrealized loss on investment securities ... - (4,194) (4,194)
-----------
Comprehensive income ................................... 14,685
------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 2000 .................................... 800,000 $ 7,985,000 $ (380,964) $ (12,857) $ 7,591,179
======= =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six For the six
months ended months ended
June 30, June 30,
2000 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income ........................................................................... $ 18,879 N/A
Adjustments to reconcile net income to net cash used for
operating activities
Depreciation and amortization ...................................................... 35,497 N/A
Deferred income taxes .............................................................. (11,805) N/A
Provision for possible loan losses ................................................. 35,000 N/A
Changes in operating assets and liabilities
Increase in interest receivable .................................................... (77,123) N/A
Increase in other assets ........................................................... (1,562) N/A
Increase in other liabilities ...................................................... 46,842 N/A
----------- ---
Net cash provided by operating activities ........................................ 45,728 N/A
----------- ---
INVESTING ACTIVITIES
Net increase in federal funds sold ................................................... (560,000) N/A
Proceeds from maturities of available for sale securities ............................ 490,047 N/A
Purchase of property and equipment ................................................... (172,652) N/A
Net increase in loans to customers ................................................... (6,990,826) N/A
----------- ---
Net cash used for investing activities ........................................... (7,233,431) N/A
----------- ---
FINANCING ACTIVITIES
Net increase in demand, savings and time deposits .................................... 5,977,298 N/A
Net decrease in federal funds purchased and securities
sold under agreements to repurchase ................................................ 1,253,439 N/A
----------- ---
Net cash provided by financing activities ........................................ 7,230,737 N/A
----------- ---
Net increase in cash and cash equivalents ........................................ 43,034 N/A
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......................................... 711,239 N/A
----------- ---
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................ $ 754,273 N/A
=========== ===
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Principles
A summary of significant accounting policies is included in the 1999
Annual Report of Cornerstone Bancorp to the Shareholders, which also contains
the Company's audited financial statements for 1999 and is incorporated in the
Form 10-KSB for the year ended December 31, 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of
Cornerstone Bancorp, the parent company, and Cornerstone National Bank, its
wholly owned subsidiary. All significant intercompany items have been eliminated
in the consolidated statements.
Management Opinion
The interim financial statements in this report are unaudited. In the
opinion of management, all the adjustments necessary to present a fair statement
of the results for the interim period have been made. Such adjustments are of a
normal and recurring nature.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for an entire year. These interim
financial statements should be read in conjunction with the annual financial
statements and notes thereto contained in the 1999 Annual Report.
No information is presented for the quarter ended June 30, 1999,
because the Company was in organization and had no operations during that
period. The Company's operations did not begin until September 15, 1999.
6
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and related notes appearing in the Form 10-KSB for
the year ended December 31, 1999 of Cornerstone Bancorp. It will concentrate on
the operations ending June 30, 2000. The Company commenced operations with the
opening of its subsidiary bank on September 15, 1999. Results of operations for
the period ending June 30, 2000 are not necessarily indicative of the results to
be attained for any other period. The following information may contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. For comparison purposes the three months ended June
30, 2000 have been compared to the three months ended March 31, 2000, because
the Company had no second quarter 1999 operating results.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on earning
assets and the interest paid for funds acquired to support those assets. Net
interest income, the principal source of the Company's earnings, was $296,021
for the three months ended June 30, 2000 compared to $238,930 for the three
months ended March 31, 2000.
Changes that affect net interest income are changes in the average rate earned
on interest earning assets, changes in the average rate paid on interest bearing
liabilities, and changes in the volume of interest earning assets and interest
bearing liabilities.
Average earning assets for the quarter ending June 30, 2000 increased to
$24,116,916 or 24.66% percent from the $19,345,768 reported for the quarter
ending March 31, 2000. The increase was mainly attributable to the increase in
loans supported by a $2,677,272 increase in interest bearing liabilities which
resulted from favorable economic conditions in the Easley, South Carolina market
and the Company's marketing efforts.
For the three months ended June 30, 2000 the average yield on earning assets
amounted to 7.84 percent, while the average cost of interest-bearing liabilities
was 2.93 percent. For the three months ended March 31, 2000 the average yield on
earning assets was 7.44 percent and the average cost of interest-bearing
liabilities was 2.50 percent. The increase in the yield on earning assets is
attributable to the increased volume of loans, which gives the Company a greater
return than the other types of earning assets. The net interest margin is
computed by subtracting interest expense from interest income and dividing the
resulting figure by average interest-earning assets. The net interest margin for
the three months ended June 30, 2000 was 4.91 percent compared to 4.94 percent
for the three months ended March 31, 2000. The slight decrease in the
net-interest margin is attributable to an increase in the average rate on
interest bearing liabilities. The cost of total liabilities was 2.93 percent for
the three months ended June 30, 2000 compared to 2.50 percent for the three
months ended March 31, 2000.
RESULTS OF OPERATIONS
The Company's net income for the three months ended June 30, 2000 was $17,742 or
$.021 per diluted share compared to a net income of $1,137 or $.00 per diluted
share for the three months ended March 31, 2000. The amount of the Company's
provision for loan losses in the second quarter was $35,000 compared to $0 in
the first quarter of 2000. Since opening the bank in September, 1999, management
has sought to have an allowance for loan losses that was adequate to cover the
level of loss that management believed to be inherent in the portfolio as a
whole taking into account the relative size of the allowance and the size of the
Company's largest loans.
Non-interest income for the three months ended June 30, 2000 was $20,351
compared to $11,473 for the three months ended March 31, 2000.
Non-interest expenses for the three months ended June 30, 2000 were $268,550, of
this total $155,842 represents salaries and benefits, occupancy cost and
furniture and equipment expenses. Total non-interest expenses amounted to
$244,346 for the three months ended March 31, 2000.
7
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LIQUIDITY
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of liabilities.
The Company manages both assets and liabilities to achieve appropriate levels of
liquidity. Cash and short-term investments are the Company's primary sources of
asset liquidity. These funds provide a cushion against short-term fluctuations
in cash flow from both deposits and loans. The investment portfolio is the
Company's principal source of secondary asset liquidity. However, the
availability of this source of funds is influenced by market conditions.
Individual and commercial deposits and borrowings are the Company's primary
source of funds for credit activities. The Company also has a $1,500,000 line of
credit with The Banker's Bank. Management believes that the Company's liquidity
sources are adequate to meet its operating needs.
LOANS
Commercial financial and agricultural loans made up 37.7 percent of the total
loan portfolio as of June 30, 2000, totaling $5,175,839. Loans secured by real
estate for construction and land development totaled $1,672,899 or 12.19 percent
of the total loan portfolio while all other loans secured by real estate totaled
$4,467,012 or 32.54 percent of the total loan portfolio as of June 30, 1999.
Installment loans and other consumer loans to individuals comprised $2,411,308
or 17.57 percent of the total loan portfolio. The allowance for loan losses was
1.02 percent of loans as of June 30, 2000 compared to 1.04 percent as of March
31, 2000. In management's opinion, the allowance for loan losses is adequate. At
June 30, 2000, the Company had no loans that were 90 days or more past due or
non-accruing.
CAPITAL RESOURCES
The capital base for the Company increased by $14,685 for the first six months
of 2000, due to net income earned which was partly offset by unrealized losses
on investment securities for the quarter. The Company's equity to asset ratio
was 28.02 percent as of June 30, 2000 compared to 30.65 percent as of March 31,
2000.
The Federal Deposit Insurance Corporation has established guidelines for capital
requirements for banks. As of June 30, 2000, the bank exceeds the capital
requirement levels that are to be maintained.
Capital Ratios
<TABLE>
<CAPTION>
Dollars in thousands Adequately
Well Capitalized Capitalized
Actual Requirement Requirement
------ ----------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets .............. $5,830 34.42% $1,694 10% $1,355 8%
Tier 1 capital to risk weighted assets ............. $5,690 33.59% $1,016 6% $678 4%
Tier 1 capital to average assets ................... $5,690 23.95% $1,188 5% $950 4%
</TABLE>
In the second quarter of 2000, the Company began construction on its permanent
office facility which is expected to cost $1,300,000.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company are primarily monetary in nature. Therefore,
interest rates have a more significant impact on the Company's performance than
do the effects of changes in the general rate of inflation and changes in
prices. In addition, interest rates do not necessarily move in the same
magnitude as the prices of goods and services. As discussed previously,
management seeks to manage the relationships between interest sensitive assets
and liabilities in order to protect against wide rate fluctuations, including
those resulting from inflation.
8
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Part II - Other Information
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of shareholders on April 20,
2000.
(b) and (c) The following persons were elected as directors of the
Company with the votes shown:
Name For Withhold
---- --- --------
J. Rodger Anthony 406,255 (51%) 830 (.10%)
Walter L. Brooks 406,255 (51%) 830 (.10%)
T. Edward Childress, III 406,255 (51%) 830 (.10%)
Nicholas S. Clark 406,255 (51%) 830 (.10%)
J. Bruce Gaston 406,255 (51%) 830 (.10%)
S. Ervin Hendricks, Jr. 406,255 (51%) 830 (.10%)
Joe E. Hooper 406,255 (51%) 830 (.10%)
Robert R. Spearman 406,255 (51%) 830 (.10%)
John M. Warren, Jr., MD 406,255 (51%) 830 (.10%)
George I. Wike, Jr. 406,255 (51%) 830 (.10%)
ITEM 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit No.
From Item 601 of
Regulation S-B Description
-------------- -----------
27 Financial Data Schedule
b) Reports on form 8-K. None.
9
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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
(Registrant)
By: s/J. Rodger Anthony Date: August 14, 2000
-------------------------
J. Rodger Anthony
President and Chief Executive Officer
By: s/Nicholas S. Clark Date: August 14, 2000
-------------------------
Nicholas S. Clark
Vice President and Chief
Financial Officer
(Principal financial officer)
10
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EXHIBIT INDEX
Exhibit No. Description Page
27 Financial Data Schedule
11
