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 MARCH 31, 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 May 1, 2000
Transitional Small Business Issuer Disclosure Format: [ ] Yes [ X ] No
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
$ amounts in thousands
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Cash and due from banks .................................................................... $ 1,791,929 $ 711,239
Federal funds sold ......................................................................... 4,280,000 1,910,000
Investment securities ...................................................................... 7,425,353 9,388,957
Loans ...................................................................................... 10,140,459 6,736,232
Less allowance for loan losses .......................................................... (105,000) (105,000)
------------ ------------
10,035,459 6,631,232
Premises and equipment ..................................................................... 853,984 871,704
Accrued interest receivable ................................................................ 189,380 189,394
Deferred income taxes ...................................................................... 96,907 86,792
Other assets ............................................................................... 13,561 9,376
------------ ------------
Total assets ........................................................................ $ 24,686,573 $ 19,798,694
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing ................................................................... $ 3,581,711 $ 2,067,449
Interest bearing ...................................................................... 10,745,542 7,853,887
------------ ------------
Total deposits ...................................................................... 14,327,253 9,921,336
Federal funds purchased and securities sold under agreements to repurchase .............. 2,768,274 2,289,278
Other liabilities ....................................................................... 23,880 11,586
------------ ------------
Total liabilities ................................................................... 17,119,407 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 ........................................................................ (398,706) (399,843)
Accumulated other comprehensive loss .................................................... (19,128) (8,663)
------------ ------------
Total shareholders' equity .......................................................... 7,567,166 7,576,494
------------ ------------
Total liabilities and shareholders' equity .......................................... $ 24,686,573 $ 19,798,694
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three
months ended
March 31,
2000
----
INTEREST AND DIVIDEND INCOME
<S> <C>
Interest and fees on loans ..................................... $205,909
Investment securities
Interest - U.S. Treasury and U.S. Government Agencies ........ 119,930
Federal funds sold ............................................. 34,049
--------
Total interest income .................................... 359,888
--------
INTEREST EXPENSE
Deposits
Certificates of deposit of $100,000 or more .................. 26,507
Other ........................................................ 72,575
--------
Total deposits ........................................... 99,082
Federal funds purchased ........................................ 21,876
--------
Total interest expense ................................... 120,958
--------
Net interest income ............................................ 238,930
Provision for loan losses ...................................... 0
--------
Net interest income after provision for loan losses ...... 238,930
--------
Noninterest income
Service charges on deposit accounts .......................... 8,846
Other ........................................................ 2,627
--------
Total noninterest income ................................. 11,473
--------
Noninterest expense
Salaries and employee benefits ............................... 139,130
Premises and equipment ....................................... 17,003
Data processing .............................................. 15,799
Depreciation ................................................. 17,721
Other ........................................................ 54,693
--------
Total noninterest expense ................................ 244,346
--------
Net income before taxes .................................. 6,057
PROVISION FOR INCOME TAXES ........................................ 4,920
--------
Net income after taxes ................................... 1,137
--------
BASIC EARNINGS PER COMMON SHARE ................................... $ .00
========
WEIGHTED AVERAGE SHARES OUTSTANDING ............................... $800,000
========
DILUTED EARNINGS PER COMMON SHARE
Weighted averages share outstanding ............................ 800,000
========
Net income per common share .................................... .00
========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common stock other Total
------------ 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 ........................................ - - 1,137 - 1,137
Other comprehensive loss, net of taxes
Unrealized loss on investment securities ........ - - - (10,465) (10,465)
-----------
Comprehensive loss ................................
------- ----------- ----------- ----------- -----------
BALANCE, MARCH 31, 2000 .............................. 800,000 $ 7,985,000 $ (398,706) $ (19,128) $ 7,567,166
======= =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three
months ended
March 31,
2000
----
OPERATING ACTIVITIES
<S> <C>
Net income .................................................. $ 1,137
Adjustments to reconcile net income to net cash used for
operating activities
Depreciation and amortization ............................. 17,721
Deferred income taxes ..................................... (10,115)
Changes in operating assets and liabilities
Decrease in interest receivable ........................... 14
Increase in other assets .................................. (4,185)
Increase in other liabilities ............................ 12,294
-----------
Net cash provided by operating activities ............... 16,866
-----------
INVESTING ACTIVITIES
Net increase in federal funds sold .......................... (2,370,000)
Proceeds from maturities of available for sale securities ... 1,953,138
Net increase in loans to customers .......................... (3,404,227)
-----------
Net cash used for investing activities .................. (3,821,089)
-----------
FINANCING ACTIVITIES
Net increase in demand, savings and time deposits ........... 4,405,917
Net decrease in federal funds purchased and securities
sold under agreements to repurchase ....................... 478,996
-----------
Net cash provided by financing activities ............... 4,884,913
-----------
Net increase in cash and cash equivalents ............... 1,080,690
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................. 711,239
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................... $ 1,791,929
===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
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 March 31, 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 three months of operations ending March 31, 2000. The Company commenced
operations with the opening of its subsidiary bank on September 15, 1999.
Results of operations for the period ending March 31, 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 March 31, 2000 have been compared to the three months ended
December 31, 1999.
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 $238,930 or
the three months ended March 31, 2000. For the three months ended March 31, 2000
net interest income was $238,930 compared to $186,300 for the three months ended
December 31, 1999.
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 March 31, 2000 increased to
$19,345,768 or 25.46% percent from the $15,419,483 reported for the quarter
ending December 31, 1999. The increase was mainly attributable to the increase
in loans supported by a $4,884,913 million 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 March 31, 2000 the average yield on earning assets
amounts amounted to 7.44 percent, while the average cost of interest-bearing
liabilities was 2.50 percent. For the three months ended December 31, 1999 the
average yield on earning assets was 6.39 percent and the average cost of
interest-bearing liabilities was 2.15 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 March 31, 2000 was 4.94 percent
compared to 4.56 percent for the three months ended December 31, 1999. The
increase in the net-interest margin is attributable to the increase in loan
volume. Loans provide higher yields than other categories of earning assets held
by the Company. The cost of total liabilities was 2.5 percent for the three
months ended March 31, 2000 compared to 2.15 percent for the three months ended
December 31, 1999.
RESULTS OF OPERATIONS
The Company's net income for the three months ended March 31, 2000 was $1,137 or
$0.00 per share compared to a net loss of $152,105 or $.19 per share for the
three months ended December 31, 1999. The amount of the Company's provision for
loan losses in the first quarter was $0 compared to $105,000. 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.
7
<PAGE>
Non-interest income for the three months ended March 31, 2000 was $11,473
compared to $8,000 for the three months ended December 31, 1999.
Non-interest expenses for the three months ended March 31, 2000 were $244,346,
of this total $156,133 represents salaries and benefits, occupancy cost and
furniture and equipment expenses. Total non-interest expenses amounted to
$328,198 for the three months ended December 31, 1999
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 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 45.6 percent of the total
loan portfolio as of March 31, 2000, totaling $4,623,175. Loans secured by real
estate for construction and land development totaled $175,450 or 1.73 percent of
the total loan portfolio while all other loans secured by real estate totaled
$3,460,921 or 34.13 percent of the total loan portfolio as of March 31, 1999.
Installment loans and other consumer loans to individuals comprised $1,881,145
or 18.55 percent of the total loan portfolio. The allowance for loan losses was
1.04 percent of loans as of March 31, 2000 compared to 1.56 percent as of
December 31, 1999. In management's opinion, the allowance for loan losses is
adequate. At March 31, 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 decreased by $9,328 for the first three months
of 2000, due to unrealized losses on investment securities which were partly
offset by earnings for the quarter. The Company's equity to asset ratio was
30.65 percent as of March 31, 2000 compared to 38.3 percent as of December 31,
1999.
The Federal Deposit Insurance Corporation has established guidelines for capital
requirements for banks. As of March 31, 2000, the bank exceeds the capital
requirement levels that are to be maintained.
Capital Ratios
<TABLE>
<CAPTION>
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 5,764 45.0% 1,276 10.0% 1,022 8.0%
Tier 1 capital to risk weighted assets 5,659 44.0% 766 6.0% 511 4.0%
Tier 1 capital to average assets 5,659 26.5% 1,064 5.0% 852 4.0%
</TABLE>
8
<PAGE>
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.
9
<PAGE>
PART II
OTHER INFORMATION
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.
10
<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
(Registrant)
J. Rodger Anthony
By: -------------------------------------------- Date: May 15, 2000
President and Chief Executive Officer
Nicholas S. Clark
By: -------------------------------------------- Date: May 15, 2000
Vice President and Chief
Financial Officer
(Principal financial officer)
11
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited Consolidated Balance Sheet at March 31, 2000 and the unaudited
Consolidated Statement of Income for the three months ended March 31, 2000 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,792
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,280
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,425
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 10,140
<ALLOWANCE> 105
<TOTAL-ASSETS> 24,687
<DEPOSITS> 14,327
<SHORT-TERM> 2,768
<LIABILITIES-OTHER> 24
<LONG-TERM> 0
0
0
<COMMON> 7,985
<OTHER-SE> (399)
<TOTAL-LIABILITIES-AND-EQUITY> 24,687
<INTEREST-LOAN> 206
<INTEREST-INVEST> 120
<INTEREST-OTHER> 34
<INTEREST-TOTAL> 360
<INTEREST-DEPOSIT> 99
<INTEREST-EXPENSE> 121
<INTEREST-INCOME-NET> 239
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 244
<INCOME-PRETAX> 6
<INCOME-PRE-EXTRAORDINARY> 1
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.94
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 105
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 105
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 105
</TABLE>
