SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 File Number 333-79543
CORNERSTONE BANCORP
(Name of Small Business Issuer in its Charter)
South Carolina 57-1077978
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
1670 East Main Street, Easley, South Carolina 29640
(Address of Principal Executive Office, Zip Code)
Issuer's Telephone Number, Including Area Code: (864) 306-1444
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
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
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 [
]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year were $283,293.36.
The aggregate market value of the Common Stock held by non-affiliates
on March 1, 2000, was approximately $5,121,000. As of March 1, 2000, there were
800,000 shares of the Registrant's Common Stock, no par value, outstanding. For
purposes of the foregoing calculation only, all directors and executive officers
of the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
PART I
Item 1. Description of Business.
General
Cornerstone Bancorp (the "Company") is a South Carolina corporation
incorporated in 1999. The Company is a bank holding company with no operations
other than those carried on by its wholly-owned subsidiary, Cornerstone National
Bank (the "Bank"). The Bank conducts a general banking business under a national
bank charter granted by the Office of the Comptroller of the Currency of the
United States (the "OCC") pursuant to the National Bank Act. The Bank was
organized in 1999. The Bank conducts its activities from its main office opened
in 1999, located in Easley, South Carolina.
The Bank's primary market area is the Town of Easley, South Carolina
and the immediately surrounding areas of Pickens County. Pickens County and four
neighboring counties make up the Greenville-Spartanburg-Anderson, South Carolina
Metropolitan Statistical Area (the "Greenville MSA"). The population of the
Greenville MSA is over 900,000 with approximately 470,000 employed in 1997. Over
90% of those employed were in non-agricultural employment with over 50% of those
employed in manufacturing and trades, in roughly equal numbers.
The Bank's business primarily consists of accepting deposits and making
loans. The Bank seeks deposit accounts from households and businesses in its
primary market areas by offering a full range of savings accounts, retirement
accounts (including Individual Retirement Accounts), checking accounts, money
market accounts, and time certificates of deposit. It also makes primarily
commercial, real estate and installment loans, primarily on a secured basis, to
borrowers in and around Easley, South Carolina and makes other authorized
investments. Residential mortgage loans are primarily maintained in-house with
conventional mortgage financing arranged through a correspondent mortgage
company. As of December 31, 1999, the Bank employed 12 persons.
Competition
South Carolina law permits statewide branching by banks and savings and
loan associations. Consequently, many financial institutions have branches
located in several communities. Currently, in addition to the Bank, 8 commercial
banks and 2 savings institutions operate branches in Pickens County.
Approximately $862 million in deposits are maintained in these branches. Six of
the institutions have branches in Easley with an aggregate of $358,036,000 in
deposits at June 30, 1999. The principal areas and methods of competition in the
banking industry are the services offered, pricing of those services, the
convenience and availability of the services, and the degree of expertise and
personal manner with which those services are offered.
The Bank encounters strong competition from most of the financial
institutions in its extended market area. In the conduct of certain areas of its
business, the Bank also competes with credit unions, insurance companies, money
market mutual funds and other financial institutions, some of which are not
subject to the same degree of regulation and restrictions as the Bank. Most of
these competitors have substantially greater resources and lending abilities
than the Bank and offer certain services, such as international banking,
investment banking, and trust services, that the Bank does not presently
provide.
SERVICES OF THE BANK
Deposits
The Bank offers the full range of deposit services typically available
in most banks and savings and loan associations, including checking accounts,
NOW accounts, and savings and other time deposits of various types, ranging from
daily money market accounts to longer-term certificates of deposit. The
transaction accounts and time certificates are tailored to the principal market
area at rates competitive with those offered in the area. In addition,
retirement accounts such as IRA's (Individual Retirement Accounts) are offered.
All deposit accounts are insured by the FDIC up to the maximum amount permitted
by law. The Bank solicits these accounts from individuals, businesses,
associations and organizations, and government authorities. Although the Bank
intends to be competitive in its efforts to attract deposit accounts, it does
not aggressively seek jumbo certificates of deposit (certificates in amounts
greater than $100,000) and does not accept brokered deposit accounts.
<PAGE>
Lending Activities
The Bank emphasizes a range of lending services, including real estate,
commercial and consumer loans. Consumer loans include both installment and term
loans, and include loans for automobiles, household goods, education, boats and
general personal expenses.
To address the risks inherent in making loans, management maintains an
allowance for loan losses based on, among other things, an evaluation of the
Bank's loan loss experience, management's experience at other financial
institutions in the market area, the amount of past due and nonperforming loans,
current and anticipated economic changes and the values of certain loan
collateral. Based upon such factors, management makes various assumptions and
judgments about the ultimate collectibility of the loan portfolio and provides
an allowance for potential loan losses based upon a percentage of the
outstanding balances and specific loans. However, because there are certain
risks that cannot be precisely quantified, management's judgment of the
allowance is necessarily approximate and imprecise. The adequacy and methodology
of the allowance for loan losses is subject to regulatory examination and
compared to a peer group of financial institutions identified by the regulators.
Real Estate Loans
One of the primary components of the Bank's loan portfolio is loans
secured by first or second mortgages on residential and commercial real estate.
These loans generally consist of commercial real estate loans, construction and
development loans and residential real estate loans (including home equity and
second mortgage loans). Interest rates may be fixed or adjustable and the Bank
generally charges an origination fee. The Bank seeks to manage credit risk in
the commercial real estate portfolio by emphasizing loans on owner-occupied
office and retail buildings where the loan-to-value ratio, established by
independent appraisals, does not exceed 80%. The loan-to-value ratio for first
and second mortgage loans and for construction loans generally does not exceed
80%. In addition, the Bank may require personal guarantees of the principal
owners of the property. The Bank also originates mortgage loans for other
institutions, earning a fee, but avoiding the interest rate risk of holding
long-term, fixed-rate loans.
The principal economic risk associated with all loans, including real
estate loans, is the creditworthiness of the Bank's borrowers. The ability of a
borrower to repay a real estate loan depends upon a number of economic factors,
including employment levels and fluctuations in the value of real estate. In the
case of a real estate construction loan, there is generally no income from the
underlying property during the construction period, and the developer's personal
obligations under the loan are typically limited. Each of these factors
increases the risk of nonpayment by the borrower. In the case of a real estate
purchase loan, the borrower may be unable to repay the loan at the end of the
loan term and may thus be forced to refinance the loan at a higher interest
rate, or, in certain cases, the borrower may default as a result of its
inability to refinance the loan. In either case, the risk of nonpayment by the
borrower is increased.
The Bank also faces additional credit risks to the extent that it
engages in making adjustable rate mortgage loans ("ARMs"). In the case of an
ARM, as interest rates increase, the borrower's required payments increase, thus
increasing the potential for default. The marketability of all real estate
loans, including ARMs, is also generally affected by the prevailing level of
interest rates.
Commercial Loans
The Bank makes loans for commercial purposes in various lines of
business. Commercial loans include both secured and unsecured loans for working
capital (including inventory and receivables), loans for business expansion
(including acquisition of real estate and improvements), and loans for purchases
of equipment and machinery. Equipment loans are typically made for a term of
five years or less at either fixed or variable rates, with the loan fully
amortized over the term and secured by the financed equipment. Working capital
loans typically have terms not exceeding one year and are usually secured by
accounts receivable, inventory or personal guarantees of the principals of the
business. Commercial loans vary greatly depending upon the circumstances and
loan terms are structured on a case-by-case basis to better serve customer
needs.
2
<PAGE>
The risks associated with commercial loans vary with many economic
factors, including the economy in the Easley/Pickens County area. The
well-established banks in the Easley/Pickens County area make proportionately
more loans to medium- to large-sized businesses than the Bank. Many of the
Bank's commercial loans are made to small- to medium-sized businesses, which are
typically smaller, have shorter operating histories, and less sophisticated
record keeping systems than larger entities. As a result, these smaller entities
may be less able to withstand adverse competitive, economic and financial
conditions than larger borrowers. In addition, because payments on loans secured
by commercial property generally depend to a large degree on the results of
operations and management of the properties, repayment of such loans may be
subject, to a greater extent than other loans, to adverse conditions in the real
estate market or the economy.
Consumer Loans
The Bank makes a variety of loans to individuals for personal and
household purposes, including secured and unsecured installment and term loans,
home equity loans and lines of credit and unsecured revolving lines of credit
such as credit cards. The secured installment and term loans to consumers
generally consist of loans to purchase automobiles, boats, recreational
vehicles, mobile homes and household furnishings, with the collateral for each
loan being the purchased property. The underwriting criteria for home equity
loans and lines of credit are generally the same as applied by the Bank when
making a first mortgage loan, as described above, and home equity lines of
credit typically expire 15 years or less after origination, unless renewed or
extended.
Consumer loans generally involve more credit risks than other loans
because of the type and nature of the underlying collateral or because of the
absence of any collateral. Consumer loan repayments are dependent on the
borrower's continuing financial stability and are likely to be adversely
affected by job loss, divorce and illness. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans in
the case of default. In most cases, any repossessed collateral will not provide
an adequate source of repayment of the outstanding loan balance. Although the
underwriting process for consumer loans includes a comparison of the value of
the security, if any, to the proposed loan amount, the Bank cannot predict the
extent to which the borrower's ability to pay, and the value of the security,
will be affected by prevailing economic and other conditions.
Other Services
The Bank participates in a regional network of automated teller
machines that may be used by Bank customers in major cities throughout the
Southeast. The Bank offers both VISA and MasterCard brands of bank cards
together with related lines of credit. The lines of credit may be used for
overdraft protection as well as pre-authorized credit for personal purchases and
expenses. The Bank also provides travelers checks, direct deposit of payroll and
social security checks, and automatic drafts for various accounts, but will not
provide international or trust banking services in the near future. The Bank
will soon release an internet banking product accessible via the Bank's custom
website. The service will include an electronic bill payment service which will
allow customers to make scheduled and/or irregular bill payments electronically.
Asset and Liability Management
The primary earning assets of the Bank consist of the loan portfolio
and investment portfolio. Efforts are made generally to match maturities and
rates of loans and the investment portfolio with those of deposits, although
exact matching is not possible. The majority of the Bank's securities
investments are in marketable obligations of the United States government,
federal agencies and state and municipal governments, generally with varied
maturities.
Long-term loans are priced primarily to be interest-rate sensitive with
only a small portion of the Bank's portfolio of long-term loans at fixed rates.
In the near term, such fixed-rate loans will not have maturities longer than
fifteen years, except in exceptional cases.
Deposit accounts represent the majority of the liabilities of the Bank.
These include transaction accounts, time deposits and certificates of deposit.
The maturities of the majority of interest-sensitive accounts are 12 months or
less.
3
<PAGE>
Financial Aspects of Business
The following information describes various financial aspects of the
Bank's business. The reader should bear in mind that the Bank was only open for
business for slightly more than one quarter in 1999. Accordingly, the
information provided below will not necessarily provide much information about
the future condition or results of operations of the Bank. This information
should be read in conjunction with the financial statements of the Company which
appear elsewhere in this document. References in the discussion below to the
"period ended December 31, 1999" mean the period from September 15, 1999 (the
opening of the Bank) to December 31, 1999.
The table, "Average Balances, Yields and Rates", provides a detailed
analysis of the effective yields and rates on the categories of interest earning
assets and interest bearing liabilities for the period ended December 31, 1999.
Average Balances, Yields and Rates
<TABLE>
<CAPTION>
Period Ended December 31, 1999
------------------------------
Interest
Average Income/ Yields/
Balances(1) Expense Rates(2)
----------- ------- --------
Assets
<S> <C> <C> <C>
Securities .................................................. $ 6,149,556 $106,881 5.87%
Federal Funds Sold .......................................... 5,481,852 85,953 5.30%
Loans(3) .................................................... 2,928,831 82,459 9.52%
----------- -------- -----
Total interest earning assets ....................... 14,560,239 275,293 6.39%
Cash and due from banks ..................................... 661,227
Allowance for loan losses ................................... (45,692)
Premises and equipment ...................................... 790,593
Other assets ................................................ 80,101
-----------
Total assets ........................................ $16,046,468
===========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ............... $ 2,697,786 32,619 4.09%
Savings ............................................. 993,202 10,052 3.42%
Time deposits $100M and over ........................ 1,461,197 19,893 4.60%
Other time deposits ................................. 1,132,701 16,267 4.85%
----------- -------- -----
Total interest bearing deposits ................. 6,284,886 $ 78,831 4.24%
Noninterest bearing demand deposits ......................... 3,049,829
Federal Funds purchased & repurchase agreements ............. 698,668 10,531 5.09%
Other liabilities ........................................... 12,458
Shareholders' equity ........................................ 6,000,627
-----------
Total liabilities and shareholders' equity .......... $16,046,468
===========
Interest rate spread(4) 2.15%
Net interest income and net yield on earning assets(5) ...... $196,462 4.56%
Interest free funds supporting earning assets(6) ............ $ 8,275,353
</TABLE>
- ---------------------------------------------------------------------
(1) Average balances calculated based on a daily basis.
(2) Calculated based on the number of days in the year that each type of asset
or liability was in existence.
(3) Nonaccruing loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
(4) Total interest bearing assets yield less the total interest bearing
liabilities rate.
(5) Net interest income divided by total interest earning assets.
(6) Total interest earning assets less total interest bearing liabilities.
4
<PAGE>
Interest Rate Sensitivity
Interest rate sensitivity measures the timing and magnitude of the
repricing of assets compared with the repricing of liabilities and is an
important part of asset/liability management. The objective of interest rate
sensitivity management is to generate stable growth in net interest income, and
to control the risks associated with interest rate movements. Management
constantly reviews interest rate risk exposure and the expected interest rate
environment so that adjustments in interest rate sensitivity can be timely made.
The table, "Interest Sensitivity Analysis", indicates that, on a
cumulative basis, rate sensitive assets exceeded rate sensitive liabilities,
resulting in an asset sensitive position at the end of 1999 of $7,892,000, for a
cumulative gap ratio of 1.78. When interest sensitive liabilities exceed
interest sensitive assets for a specific repricing "horizon", a negative
interest sensitivity gap results. The gap is positive when interest sensitive
assets exceed interest sensitive liabilities, as was the case at the end of 1999
with respect to the one year time horizon. For a bank with a positive gap,
rising interest rates would be expected to have a positive effect on net
interest income and falling rates would be expected to have the opposite effect.
The table below reflects the balances of interest earning assets and
interest bearing liabilities at the earlier of their repricing or maturity
dates. Amounts of fixed rate loans are reflected at the loans' final maturity
dates. Variable rate loans are reflected at the earlier of their contractual
maturity date or the date at which the loan may be repriced contractually.
Deposits in other banks and debt securities are reflected at the earlier of each
instrument's repricing date for variable rate instruments or the ultimate
maturity date for fixed rate instruments. Overnight federal funds sold are
reflected in the earliest repricing interval due to the immediately available
nature of these funds. Interest bearing liabilities with no contractual
maturity, such as interest bearing transaction accounts and savings deposits are
reflected in the earliest repricing interval due to contractual arrangements
which give management the opportunity to vary the rates paid on these deposits
within a thirty-day or shorter period. However, the Bank is under no obligation
to vary the rates paid on those deposits within any given period. Fixed rate
time deposits, principally certificates of deposit, are reflected at their
contractual maturity dates. Federal funds purchased and long-term debt are
presented in the earliest repricing interval because their rates are adjustable
immediately by the lenders.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1999
-----------------
1-3 3-12 1-3 3-5 5-15 > 15
Immediate Months Months Years Years Years Years Total
--------- ------ ------ ----- ----- ----- ----- -----
(Dollars in thousands)
Interest earning assets
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities $3,073 $1,773 $3,874 $489 $180 $9,389
Federal funds sold $1,910 1,910
Loans(1) 2,987 573 1,527 602 393 654 6,736
------ ------ ------ ------ ---- ---- ---- -------
Total interest earning assets $4,897 $3,646 $3,300 $4,476 $882 $654 $180 $18,035
====== ====== ====== ====== ==== ==== ==== =======
Interest bearing deposits
Interest bearing transaction accounts $397 $3,577 $3,974
Savings 81 898 979
Time deposits $100M and over 1,056 857 1,913
Other time deposits 289 529 113 57 988
Federal funds purchased and securities
sold under agreements to repurchase 2,289 2,289
------ -------
Total interest bearing liabilities $2,289 $1,823 $1,386 $4,588 $57 $10,143
====== ====== ====== ====== === =======
Interest sensitivity gap $2,608 $1,823 $1,914 ($112) $ 825 $ 654 $ 180 $7,892
Cumulative interest sensitivity gap 2,608 4,431 6,345 6,233 7,058 7,712 7,892 7,892
Gap ratio 2.14 2.00 2.38 0.98 15.47 1.78
Cumulative gap ratio 2.14 2.08 2.15 1.62 1.70 1.76 1.78 1.78
</TABLE>
(1) There were no nonaccruing loans or unamortized deferred loan fees, both of
which would normally be subtracted from loans for purposes of this table.
5
<PAGE>
Provision for Loan Losses
The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio and general
economic conditions. Provisions for loan losses were $105,000 for the period
ended December 31, 1999. There were no charge-offs in 1999. In addition, there
were no non-accrual, past due and other unfavorable performance-characteristic
loans. See "Impaired Loans" and "Allowance for Loan Losses" for a discussion of
the factors management considers in its review of the adequacy of the allowance
and provision for loan losses.
Securities
The following table summarizes the carrying amounts of securities held
by the Bank at December 31, 1999.
Securities Portfolio Composition
December 31, 1999
-----------------
Available for sale
------------------
(Dollars in thousands)
U.S. Government Agencies $9,209
FHLB Stock 180
------
Total $9,389
Available-for-sale securities are stated at estimated fair value.
The following table presents maturities and weighted average yields of
securities at December 31, 1999.
Securities Portfolio Maturities and Yields
December 31, 1999
-----------------
Available-for-sale Yield
------------------ -----
(Dollars in thousands)
U.S. Government Agencies
After one through five years ............. $4,846 5.73%
After five through ten years ............. 4,363 6.51%
------ -----
9,209 6.10%
------ -----
FHLB Stock (No Maturity) ....................... 180 5.92%
Total
Within one year .......................... 4,846 5.73%
After one through five years ............. 4,363 6.51%
After five through ten years ............. 0 -%
No Maturity .............................. 180 5.92%
------ -----
Total .................................... $9,389 6.10%
Management assigns securities upon purchase into one of the categories
(trading, available-for-sale and held-to-maturity) designated by Statement of
Financial Accounting Standards ("SFAS") No. 115 based on intent, taking into
consideration other factors including expectations for changes in market rates
of interest, liquidity needs, asset/liability management strategies, and capital
requirements. The Bank has never held securities for trading purposes.
6
<PAGE>
Loan Portfolio
Management believes the loan portfolio is adequately diversified. There
are no significant concentrations of loans in any particular individuals or
industry or group of related individuals or industries, and there are no foreign
loans.
The amount of loans outstanding at December 31, 1999 is shown in the
following table according to type of loan:
Loan Portfolio Composition
December 31, 1999
-----------------
% of
Amount Loans
------ -----
(Dollars in thousands)
Commercial and industrial $2,793 41.5%
Real Estate - construction 130 1.9%
Real Estate - mortgage
Farmland -
1-4 family residential 1,971 29.2%
Nonfarm, nonresidential 293 4.4%
Multifamily (5 or more) residential -
Consumer installment 1,549 23.0%
----- -----
Total loans 6,736 100.0%
Less allowance for loan losses (105)
----
Net loans $6,631
======
Maturity Distribution of Loans
The following table sets forth the maturity distribution of the Bank's
loans, by type, as of December 31, 1999, as well as the type of interest
requirement on such loans.
Maturity Distribution on Loans
<TABLE>
<CAPTION>
December 31, 1999
-----------------
1 Year 1-5 5 Years
or Less Years or More Total
------- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and industrial ................................. $2,217 $ 397 $ 179 $2,793
Real Estate-construction .................................. 130 0 0 130
Real Estate-mortgage ...................................... 695 429 1,140 2,264
Consumer installment ...................................... 1,232 317 0 1,549
------ ------ ------ ------
Total ............................................... $4,274 $1,143 $1,319 $6,736
====== ====== ====== ======
Predetermined rate, maturity greater than one year ........ $1,143 $1,319 $2,462
====== ====== ======
Variable rate or maturity within one year ................. $4,274 $ - $ - $4,274
====== ====== ====== ======
</TABLE>
7
<PAGE>
Impaired Loans
Because the Bank had only been open for slightly over one quarter at
December 31, 1999, it had not yet experienced any nonaccrual loans or loans 90
days or more past due. The following is a discussion of the Bank's policy with
respect to such loans when incurred.
A loan will be considered to be impaired when, in management's judgment
based on current information and events, it is probable that the loan's
principal or interest will not be collectible in accordance with the terms of
the original loan agreement. Impaired loans, when not material, will be carried
in the balance sheet at a value not to exceed their observable market price or
the fair value of the collateral if the repayment of the loan is expected to be
provided solely by the underlying collateral. The carrying values of any
material impaired loans will be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, which is the
contractual interest rate adjusted for any deferred loan fees or costs, premium
or discount existing at the inception or acquisition of the loan.
Loans which management identifies as impaired generally will be
nonperforming loans. Nonperforming loans include nonaccrual loans or loans which
are 90 days or more delinquent as to principal or interest payments.
Generally, the accrual of interest will be discontinued on impaired
loans and any previously accrued interest on such loans will be reversed against
current income. Any subsequent interest income will be recognized on a cash
basis when received unless collectibility of a significant amount of principal
is in serious doubt. In such cases, collections are credited first to the
remaining principal balance on a cost recovery basis. An impaired loan will not
be returned to accrual status unless principal and interest are current and the
borrower has demonstrated the ability to continue making payments as agreed.
At December 31, 1999, the Bank had identified no potential problem
loans.
Allowance for Loan Losses
Because the Bank had only been open for slightly over one quarter at
December 31, 1999, it is only beginning to establish its allowance for loan
losses. The following is a discussion of the Bank's policy with respect to the
allowance as the loan portfolio matures and begins to experience losses.
The allowance for loan losses is increased by direct charges to
operating expense. Losses on loans will be charged against the allowance in the
period in which management determines that it is more likely than not such loans
have become uncollectible. Recoveries of previously charged off loans will be
credited to the allowance. The table, "Summary of Loan Loss Experience",
summarizes loan balances at the end of each period indicated, averages for each
period, changes in the allowance arising from charge-offs and recoveries by loan
category (of which there had been none at December 31, 1999), and additions to
the allowance which have been charged to expense. In reviewing the adequacy of
the allowance for loan losses at each year end, management will take into
consideration the historical loan losses experienced by the bank, current
economic conditions affecting the borrowers' ability to repay, the volume of
loans, and the trends in delinquent, nonaccruing, and any potential problem
loans, and the quality of collateral securing nonperforming and problem loans.
Management considers the allowance for loan losses adequate to cover its
estimate of possible future loan losses inherent in the loan portfolio as of
December 31, 1999.
In calculating the amount required in the allowance for loan losses,
management applies a consistent methodology that is updated quarterly. The
methodology utilizes a loan risk grading system and detailed loan reviews to
assess credit risks and the overall quality of the loan portfolio, as well as
considering other off-balance-sheet credit risks such as loan commitments and
standby letters of credit. Also, the calculation provides for management's
assessment of trends in national and local economic conditions that might affect
the general quality of the loan portfolio.
8
<PAGE>
Summary of Loan Loss Experience
Period Ended
December 31, 1999
-----------------
(Dollars in thousands)
Total loans outstanding at end of period,
net of deferred net loan fees ........................... $6,736
Average amount of loans outstanding ........................... $2,929
Balance of allowance for loan losses-beginning ................ $ 0
------
Loans charged off
Commercial and industrial ............................... $ 0
Consumer installment .................................... $ 0
------
Total charge offs ....................................... $ 0
Recoveries of loans previously charged-off
Commercial and industrial ............................... $ 0
Consumer installment .................................... $ 0
------
Total recoveries ........................................ $ 0
Net charge-offs (recoveries) .................................. $ 0
------
Additions to allowance charged to expense ..................... $ 105
------
Balance of allowance for loan losses-ending ................... $ 105
------
Ratios
Net charge-offs to average loans outstanding ............ 0.0%
Net charge-offs to loans at end of period ............... 0.0%
Allowance for loan losses to average loans .............. 3.6%
Allowance for loan losses to loans at end of period ..... 1.6%
Net charge-offs to allowance for loan losses ............ 0.0%
Net charge-offs to provision for loan losses ............ 0.0%
The following table presents the allocation of the allowance for loan
losses at the end of the period ended December 31, 1999, compared with the
percent of loans in the applicable categories to total loans.
Allocation of Allowance for Loan Losses
Period Ended
December 31, 1999
-----------------
% of
Amount Loans
------ -----
(Dollars in thousands)
Commercial and industrial ................... $ 44 41.5%
Real Estate - construction .................. 3 1.9%
Real Estate - mortgage ...................... 35 33.6%
Consumer installment ........................ 24 23.0%
---- ------
Total ................................. $105 100.0%
Deposits
The average amounts and percentage composition of deposits held by the
Bank for the period ended December 31, 1999, are summarized below:
9
<PAGE>
Average Deposits
Period Ended
December 31, 1999
-----------------
Amount %
------ ----
(Dollars in thousands)
Noninterest bearing demand $3,050 32.7%
Interest bearing transaction accounts 2,698 28.9%
Savings 993 10.6%
Time deposits $100M and over 1,461 15.7%
Other time 1,133 12.1%
------ ------
Total $9,335 100.0%
====== ======
As of December 31, 1999, the Bank held $1,912,977 in time deposits of
$100,000 or more with approximately $1,056,154 maturing within three months,
$200,410 maturing over three through six months, $656,412 maturing over six
through twelve months, and $0.00 maturing over twelve months. Average time
deposits $100,000 and over comprised approximately 15.7% of total average
deposits during 1999. The vast majority of time deposits $100,000 and over are
acquired from customers within the Bank's service area in the ordinary course of
business. The Bank does not purchase brokered deposits. While most of the large
time deposits are acquired from customers with standing relationships with the
Bank, it is a common industry practice not to consider these types of deposits
as core deposits because their retention can be expected to be heavily
influenced by rates offered, and therefore such deposits may have the
characteristics of shorter-term purchased funds. Time deposits of $100,000 and
over involve the maintenance of an appropriate matching of maturity distribution
and a diversification of sources to achieve an appropriate level of liquidity.
Return on Equity and Assets
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for the period ended December 31, 1999.
Period Ended
December 31,
------------
1999
----
Return on assets ...................................... (5.05%)
Return on equity ...................................... (2.39%)
Dividend payout ratio ................................. 0.00%
Equity to assets ratio ................................ 28.47%
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Company and the
Bank.
General
As a bank holding company under the Bank Holding Company Act ("BHCA"),
the Company obtained the approval of the Board of Governors of the Federal
Reserve System (the "Federal Reserve") to acquire the Bank and is subject to the
regulations of the Federal Reserve. Under the BHCA, the Company's activities and
those of its subsidiaries are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries or engaging
in any other activity which the Federal Reserve determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. The Company may engage in a broader range of activities if it becomes a
10
<PAGE>
"financial holding company" pursuant to the Gramm-Leach-Bliley Act, which is
described below under the caption "Recent Legislation." The BHCA prohibits the
Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or from
merging or consolidating with another bank holding company without prior
approval of the Federal Reserve. Additionally, the BHCA prohibits the Company
from engaging in or from acquiring ownership or control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal Reserve to be so closely related to
banking as to be properly incident thereto. The BHCA generally does not place
territorial restrictions on the activities of such non-banking related
activities.
The Company is also subject to limited regulation and supervision by
the South Carolina State Board of Financial Institutions.
Obligations of the Company to its Subsidiary Bank
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision would give depositors a preference over general and subordinated
creditors and shareholders in the event a receiver is appointed to distribute
the assets of the Bank.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Capital Adequacy Guidelines for Bank Holding Companies and National Banks
The various federal bank regulators, including the Federal Reserve and
the OCC have adopted risk-based and leverage capital adequacy guidelines for
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off-balance sheet exposures, as adjusted for credit risks. In
addition, the OCC may establish individual minimum capital requirements for a
national bank that are different from the general requirements.
11
<PAGE>
Failure to meet capital requirements could subject the Bank to a
variety of enforcement remedies, including the termination of deposit insurance
by the FDIC and a prohibition on the taking of brokered deposits.
The risk-based capital standards of both the Federal Reserve Board and
the OCC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates should be considered by the agencies as
a factor in evaluating a bank's capital adequacy. The Federal Reserve also has
recently issued additional capital guidelines for bank holding companies that
engage in certain trading activities.
The Company and the Bank exceeded all applicable capital requirements
by a wide margin at December 31, 1999.
Certain Transactions by the Company with its Affiliates
Federal law regulates transactions among the Company and its
affiliates, including the amount of bank loans to or investments in nonbank
affiliates and the amount of advances to third parties collateralized by
securities of an affiliate. Further, a bank holding company and its affiliates
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
FDIC Insurance Assessments
Because the Bank's deposits are insured by the BIF, the Bank is subject
to insurance assessments imposed by the FDIC. Currently, the assessments imposed
on all FDIC deposits for deposit insurance have an effective rate ranging from 0
to 27 basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. However, because legislation
enacted in 1996 requires that insured deposits pay a pro rata portion of the
interest due on the obligations issued by the Financing Corporation ("FICO"),
the FDIC is currently assessing BIF-insured deposits an additional 1.26 basis
points per $100 of deposits, and SAIF-insured deposits an additional 6.30 basis
points per $100 of deposits, to cover those obligations. The FICO assessment
will continue to be adjusted quarterly to reflect changes in the assessment
bases of the respective funds based on quarterly Call Report and Thrift
Financial Report submissions.
Regulation of the Bank
The Bank is subject to the limitations of the National Bank Act and the
regulations of the OCC as well as to examination by the OCC. The Bank is also
subject to various other state and federal laws and regulations, including state
usury laws, laws relating to fiduciaries, consumer credit and laws relating to
branch banking. The Bank's loan operations are subject to certain federal
consumer credit laws and regulations promulgated thereunder, including, but not
limited to: the federal Truth-In-Lending Act, governing disclosures of credit
terms to consumer borrowers; the Home Mortgage Disclosure Act, requiring
financial institutions to provide certain information concerning their mortgage
lending; the Equal Credit Opportunity Act and the Fair Housing Act, prohibiting
discrimination on the basis of certain prohibited factors in extending credit;
the Fair Credit Reporting Act, governing the use and provision of information to
credit reporting agencies; the Bank Secrecy Act, dealing with, among other
things, the reporting of certain currency transactions; and the Fair Debt
Collection Act, governing the manner in which consumer debts may be collected by
collection agencies. The deposit operations of the Bank are subject to the Truth
in Savings Act, requiring certain disclosures about rates paid on savings
accounts; the Expedited Funds Availability Act, which deals with disclosure of
the availability of funds deposited in accounts and the collection and return of
checks by banks; the Right to Financial Privacy Act, which imposes a duty to
maintain certain confidentiality of consumer financial records, and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
12
<PAGE>
The Bank is also subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
A bank that is "undercapitalized" becomes subject to provisions of the
FDIA: restricting payment of capital distributions and management fees;
requiring the FDIC to monitor the condition of the bank; requiring submission by
the bank of a capital restoration plan; restricting the growth of the bank's
assets and requiring prior approval of certain expansion proposals. A bank that
is "significantly undercapitalized" is also subject to restrictions on
compensation paid to senior management of the bank, and a bank that is
"critically undercapitalized" is further subject to restrictions on the
activities of the bank and restrictions on payments of subordinated debt of the
bank. The purpose of these provisions is to require banks with less than
adequate capital to act quickly to restore their capital and to have the FDIC
move promptly to take over banks that are unwilling or unable to take such
steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payment of rates), while "undercapitalized" banks may
not accept brokered deposits.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 the Company and any other adequately capitalized bank holding company
located in South Carolina can acquire a bank located in any other state, and a
bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentage and
other restrictions. Unless prohibited by state law, adequately capitalized and
managed bank holding companies are permitted to consolidate their multistate
bank operations into a single bank subsidiary and to branch interstate through
acquisitions. De novo branching by an out-of-state bank is permitted only if the
laws of the host state expressly permit it. The authority of a bank to establish
and operate branches within a state continue to be subject to applicable state
branching laws. South Carolina law was amended, effective July 1, 1996, to
permit such interstate branching but not de novo branching by an out-of-state
bank.
Recent Legislation
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act,
which makes it easier for affiliations between banks, securities firms and
insurance companies to take place. The Act removes Depression-era barriers that
had separated banks and securities firms, and seeks to protect the privacy of
consumers' financial information. Most of the provisions of the Act require the
applicable regulators to adopt regulations in order to implement these
provisions.
13
<PAGE>
Under provisions of the new legislation, which are effective March 11,
2000, banks, securities firms and insurance companies are able to structure new
affiliations through a holding company structure or through a financial
subsidiary. The legislation creates a new type of bank holding company called a
"financial holding company" which has powers much more extensive than those of
standard holding companies. These expanded powers include authority to engage in
"financial activities," which are activities that are (1) financial in nature;
(2) incidental to activities that are financial in nature; or (3) complimentary
to a financial activity and that do not impose a safety and soundness risk.
Significantly, the permitted financial activities for financial holding
companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
so that each type of activity is supervised by a regulator with corresponding
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
Although the Act reaffirms that states are the regulators for insurance
activities of all persons, including federally-chartered banks, the Act
prohibits states from preventing depository institutions and their affiliates
from conducting insurance activities.
The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions. The privacy provisions of the Act will not go
into effect until after adoption of implementing regulations by various federal
agencies.
The Company anticipates that the Act and the regulations which are to
be adopted pursuant to the Act will be likely to create new opportunities for it
to offer expanded services to customers in the future, though the Company has
not yet determined what the nature of the expanded services might be or when the
Company might find it feasible to offer them. The Company further expects that
the Act will increase competition from larger financial institutions that are
currently more capable than the Company of taking advantage of the opportunity
to provide a broader range of services. However, the Company continues to
believe that its commitment to providing high quality, personalized service to
customers will permit it to remain competitive in its market area.
14
<PAGE>
Legislative Proposals
New proposed legislation, which could significantly affect the business
of banking, has been introduced or may be introduced in Congress from time to
time. Management of the Company cannot predict the future course of such
legislative proposals or their impact on the Company and the Bank should they be
adopted.
Fiscal and Monetary Policy
Banking is a business which depends largely on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of the Company and the Bank are subject
to the influence of economic conditions generally, both domestic and foreign,
and also to the monetary and fiscal policies of the United States and its
agencies, particularly the Federal Reserve. The Federal Reserve regulates the
supply of money through various means, including open-market dealings in United
States government securities, the discount rate at which banks may borrow from
the Federal Reserve, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their impact on the Company and the
Bank cannot be predicted.
Item 2. Description of Property.
The Company owns 1.83 acres of land at 1670 East Main Street in Easley,
South Carolina. The Company has a temporary office facility on the property and
plans to build a permanent facility on the property. The property is considered
to be well suited for the Company's purposes.
Item 3. Legal Proceedings.
The Company may from time to time be a party to various legal
proceedings arising in the ordinary course of business, but management of the
Company is not aware of any pending or threatened litigation or unasserted
claims or assessments that are expected to result in losses, if any, that would
be material to the Company's business and operations.
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
15
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Although the common stock of the Company may be traded from time to
time on an individual basis, no established trading market has developed and
none is expected to develop in the foreseeable future. The common stock is not
listed on any exchange nor is it traded on the NASDAQ National Market System,
nor are there any market makers known to management. During 1999, the Company
sold 800,000 shares of its common stock in a public offering for $10.00 per
share. In 1999, management was aware of a few transactions in which the
Company's common stock traded for about $10.00 per share. However, management
has not ascertained that these transactions are the result of arm's length
negotiations between the parties, and because of the limited number of shares
involved, these prices may not be indicative of the market value of the common
stock.
As of February 28, 2000, there were approximately 475 holders of record
of the Company's common stock, excluding individual participants in security
position listings.
The Company has never paid any cash dividends, and to maintain its
capital, does not expect to pay cash dividends in the near future. The dividend
policy of the Company is subject to the discretion of the Board of Directors and
depends upon a number of factors, including earnings, financial conditions, cash
needs and general business conditions, as well as applicable regulatory
considerations. Because the Company has no operations other than those of the
Bank and only has limited income of its own, the Company would rely on dividends
from the Bank as its principal source of cash to pay dividends.
Each national banking association is required by federal law to obtain
the prior approval of the OCC for the payment of dividends if the total of all
dividends declared by the board of directors of such bank in any year will
exceed the total of (i) such bank's net profits (as defined and interpreted by
regulation) for that year plus (ii) the retained net profits (as defined and
interpreted by regulation) for the preceding two years, less any required
transfers to surplus. In addition, national banks can only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed bad debts (as defined by regulation).
The payment of dividends by the Company and the Bank may also be
affected or limited by other factors, such as the requirements to maintain
adequate capital above regulatory guidelines. In addition, if, in the opinion of
the applicable regulatory authority, a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which, depending on the
financial condition of the Bank, could include the payment of dividends), such
authority may require, after notice and hearing, that such bank cease and desist
from such practice. The OCC has indicated that paying dividends that deplete a
national bank's capital base to an inadequate level would be an unsafe and
unsound banking practice. The Federal Reserve, the OCC and the FDIC have issued
policy statements which provide that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The Company is a bank holding company and has no operations other than
those carried on by its wholly owned subsidiary, Cornerstone National Bank. The
Bank commenced business on September 15, 1999. It conducts a general banking
business in Easley, South Carolina, out of one office.
For the Year 2000 the Bank's plan of operation is to seek to attract
new deposit and loan customers. Deposit accounts will be sought from individuals
and businesses in the Easley, South Carolina area. The Bank will offer
competitive rates for such accounts and may seek new accounts by offering rates
slightly above those prevailing in the market. Loan business will be sought by
offering competitive rates and terms to credit worthy customers. Management will
emphasize personal service and accessibility as reasons for customers to do
business with the Bank. Personal contacts by management as well as advertising
and competitive prices and services will be the Bank's principal marketing
tools.
16
<PAGE>
The Company sold $8 million of common stock in the third quarter of
1999. At December 31, 1999, shareholders' equity had declined to $7,572,030 as a
result of operating losses. However, the Company had over $1,900,000 million in
cash and liquid assets at December 31, 1999. These funds are expected to be more
than sufficient to absorb operating losses in 2000. Accordingly, the Company
does not expect to have to raise additional funds in 2000.
In 1999, the Bank purchased a 1.83 acre tract of land for its office
site. A modular office facility was located on a portion of the site to serve as
the Bank's office until permanent quarters could be built on the site. In early
2000 the Bank engaged an architect to design a permanent office building. The
Bank expects to complete the plans for the building, let a contract and commence
construction in 2000. It is estimated that the cost of the building together
with furnishings and equipment will be approximately $1,500,000.
The Company does not expect there will be significant changes in the
number of employees in 2000 although 2 or 3 additional employees may be hired.
Item 7. Financial Statements.
Included herewith are the following financial statements:
Consolidated Balance Sheet at December 31, 1999
Consolidated Statement of Operations for the period from January 11,
1999 (inception) to December 31, 1999
Consolidated Statement of Changes in Shareholders' Equity for the
period from January 11, 1999 (inception) to December 31, 1999
Consolidated Statement of Cash Flows for the period from January 11,
1999 (inception) to December 31, 1999
Notes to Financial Statements
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Cornerstone Bancorp and Subsidiary
Easley, South Carolina
We have audited the accompanying consolidated balance sheet of
Cornerstone Bancorp and Subsidiary (the "Company") as of December 31, 1999 and
the related consolidated statements of operations, shareholders' equity and cash
flows for the period from January 11, 1999 (inception) through December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Cornerstone Bancorp and Subsidiary at December 31, 1999 and the results of their
operations and cash flows for the period from January 11, 1999 (inception)
through December 31, 1999, in conformity with generally accepted accounting
principles.
February 4, 2000
Elliott, Davis & Company, LLP
Greenville, South Carolina
18
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
CASH AND DUE FROM BANKS ..................................... $ 711,239
FEDERAL FUNDS SOLD .......................................... 1,910,000
INVESTMENT SECURITIES ....................................... 9,388,957
LOANS, NET .................................................. 6,631,232
PROPERTY AND EQUIPMENT, NET ................................. 871,704
OTHER ASSETS ................................................ 285,562
------------
Total assets ......................................... $ 19,798,694
============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing .................................... $ 2,067,449
Interest bearing ....................................... 7,853,887
------------
Total deposits ....................................... 9,921,336
Securities sold under repurchase agreements .............. 2,289,278
Other liabilities ........................................ 11,586
------------
Total liabilities .................................... 12,222,200
COMMITMENTS AND CONTINGENCIES - Notes 9 and 13
SHAREHOLDERS' EQUITY
Preferred stock, 10,000 shares authorized,
no shares issued
Common stock, no par value, 20,000,000 shares
authorized, 800,000 shares issued ...................... 7,985,000
Retained deficit ......................................... (399,843)
Accumulated other comprehensive loss ..................... (8,663)
------------
Total shareholders' equity ........................... 7,576,494
------------
Total liabilities and shareholders' equity ........... $ 19,798,694
============
The accompanying notes are an integral part of this financial
statement.
19
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For the period from January 11, 1999 (inception)
through December 31, 1999
INTEREST INCOME
Loans and fees on loans ..................................... $ 82,459
Investment securities ....................................... 192,834
Escrow account .............................................. 34,612
---------
Total interest income ................................... 309,905
INTEREST EXPENSE
Deposits and borrowings ..................................... 88,993
---------
Net interest income ..................................... 220,912
PROVISION FOR POSSIBLE LOAN LOSSES ............................. 105,000
---------
Net interest income after provision for possible
loan losses ........................................... 115,912
NONINTEREST INCOME
Service fees on deposit accounts ............................ 8,000
NONINTEREST EXPENSES
Salaries and benefits ....................................... 154,327
Advertising ................................................. 21,016
Supplies .................................................... 31,041
Data processing ............................................. 20,073
Occupancy and equipment ..................................... 53,806
Organizational and pre-opening expenses ..................... 249,678
Other operating ............................................. 80,607
---------
Total noninterest expenses .............................. 610,548
---------
Loss before income taxes ................................ (486,636)
INCOME TAX BENEFIT ............................................. 86,793
---------
Net loss ................................................ $(399,843)
=========
NET LOSS PER COMMON SHARE ...................................... $ (.50)
=========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ................................... 800,000
=========
The accompanying notes are an integral part of this financial statement.
20
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the period from January 11, 1999 (inception) through December 31, 1999
<TABLE>
<CAPTION>
Accumulated
Common stock Other Total
------------ Retained Comprehensive Shareholders'
Shares Amount Deficit loss equity
------ ------ ------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 11, 1999 (inception) ................ - $ - $ - $ - $ -
Net loss .......................................... - - (399,843) - (399,848)
Other comprehensive loss, net of taxes
Unrealized loss on investment securities ........ - - - (8,663) (8,663)
-----------
Comprehensive loss ................................ (408,506)
Sale of stock (net of offering
expenses of 15,000) ............................. 800,000 7,985,000 - - 7,985,000
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 ........................... 800,000 $ 7,985,000 $ (399,843) $ (8,663) $ 7,576,494
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
21
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period from January 11, 1999 (inception)
through December 31, 1999
OPERATING ACTIVITIES
Net loss .................................................. $ (399,843)
Adjustments to reconcile net loss to net cash used in
operating activities
Deferred income tax benefit ............................. (86,793)
Provision for possible loan losses ...................... 105,000
Depreciation and amortization ........................... 20,296
Increase in other assets ................................ (194,306)
Increase in other liabilities ........................... 11,585
------------
Net cash used in operating activities ............... (544,061)
------------
INVESTING ACTIVITIES
Increase in federal funds sold ............................ (1,910,000)
Purchase of investment securities ......................... (9,402,083)
Increase in loans, net .................................... (6,736,232)
Purchase of property and equipment ........................ (892,000)
------------
Net cash used in investing activities ............... (18,940,315)
------------
FINANCING ACTIVITIES
Sale of stock, net ........................................ 7,985,000
Net increase in deposits .................................. 12,210,615
------------
Net cash provided by financing activities ........... 20,195,615
------------
Net increase in cash and cash equivalents ........... 711,239
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ................................................. -
------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD .................................................... $ 711,239
============
CASH PAID FOR
Interest .................................................. $ 77,993
============
Income taxes ..............................................$ -
============
The accompanying notes are an integral part of this financial statement.
22
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
Cornerstone Bancorp, (the "Company") was incorporated under the laws of
the State of South Carolina for the purpose of operating as a bank holding
company with respect to a then proposed de novo bank, Cornerstone National Bank
(the "Bank"). The Company offered its common stock for sale to the public under
an initial public offering price of $10 per share and raised approximately $8
million in capital, net of offering expenses. The Company obtained regulatory
approval to operate a national bank and opened the Bank for business on
September 15, 1999, with a total capitalization of $6 million. The Bank provides
full commercial banking services to customers and is subject to regulation by
the Office of the Controller of the Currency (OCC) and the Federal Deposit
Insurance Corporation. The Company is subject to the regulation of the Federal
Reserve Board.
Prior to September 15, 1999, the Company devoted all of its efforts to
establishing the Bank and accordingly operated as a development stage enterprise
as defined by Statement of Financial Accounting Standard (SFAS) No. 7,
"Accounting and Reporting by Development Stage Enterprises".
Basis of presentation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank. The Company operates
as one business segment. All significant intercompany balances and
transactions have been eliminated. The accounting and reporting
policies conform to generally accepted accounting principles and to
general practices in the banking industry. The Company uses the accrual
basis of accounting.
Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the
reported amount of income and expenses during the reporting
periods. Actual results could differ from those estimates.
Concentrations of credit risk
The Company makes loans to individuals and businesses in and
around Upstate South Carolina for various personal and commercial
purposes. The Bank has a diversified loan portfolio and the
borrowers' ability to repay their loans is not dependent upon any
specific economic sector.
Investment securities
The Company accounts for investment securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The statement requires investments in equity
and debt securities to be classified into three categories:
1. Available for sale securities: These are securities which
are not classified as either held to maturity or as trading
securities. These securities are reported at fair market
value. Unrealized gains and losses are reported, net of
income taxes, as separate components of shareholders' equity
(accumulated other comprehensive loss).
23
<PAGE>
2. Held to maturity securities: These are investment securities
which the Company has the ability and intent to hold until
maturity. These securities are stated at cost, adjusted for
amortization of premiums and the accretion of discounts. The
Company has no held to maturity securities.
3. Trading securities: These are securities which are bought
and held principally for the purpose of selling in the near
future. Trading securities are reported at fair market
value, and related unrealized gains and losses are
recognized in the income statement. The Company has no
trading securities.
Gains or losses on dispositions of investment securities are based
on the differences between the net proceeds and the adjusted
carrying amount of the securities sold, using the specific
identification method.
Loans, interest and fee income on loans
Loans are stated at the principal balance outstanding. Unearned
discount, unamortized loan fees and the allowance for possible loan
losses are deducted from total loans in the balance sheet. Interest
income is recognized over the term of the loan based on the principal
amount outstanding. Points on real estate loans are taken into income
to the extent they represent the direct cost of initiating a loan. The
amount in excess of direct costs is deferred and amortized over the
expected life of the loan.
Loans are generally placed on non-accrual status when principal or
interest becomes ninety days past due, or when payment in full is not
anticipated. When a loan is placed on non-accrual status, interest
accrued but not received is generally reversed against interest income.
If collectibility is in doubt, cash receipts on non-accrual loans are
not recorded as interest income, but are used to reduce principal.
Allowance for possible loan losses
The provision for possible loan losses charged to operating expenses
reflects the amount deemed appropriate by management to establish an
adequate reserve to meet the present and foreseeable risk
characteristics of the current loan portfolio. Management's judgement
is based on periodic and regular evaluation of individual loans, the
overall risk characteristics of the various portfolio segments, past
experience with losses and prevailing and anticipated economic
conditions. Loans which are determined to be uncollectible are charged
against the allowance. Provisions for possible loan losses and
recoveries on loans previously charged off are added to the allowance.
The Bank accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This standard
requires that all lenders value loans at the loan's fair value if it
is probable that the lender will be unable to collect all amounts due
according to the terms of the loan agreement. Fair value may be
determined based upon the present value of expected cash flows, market
price of the loan, if available, or value of the underlying
collateral. Expected cash flows are required to be discounted at the
loan's effective interest rate.
Under SFAS No. 114 when the ultimate collectibility of an impaired
loan's principal is in doubt, wholly or partially, all cash receipts
are applied to principal. When this doubt does not exist, cash
receipts are applied under the contractual terms of the loan agreement
first to principal then to interest income. Once the reported
principal balance has been reduced to zero, future cash receipts are
applied to interest income, to the extent that any interest has been
foregone. Further cash receipts are recorded as recoveries of any
amounts previously charged off.
24
<PAGE>
A loan is also considered impaired if its terms are modified in a
troubled debt restructuring. For these accruing impaired loans, cash
receipts are typically applied to principal and interest receivable in
accordance with the terms of the restructured loan agreement. Interest
income is recognized on these loans using the accrual method of
accounting. As of December 31, 1999, the Bank had no impaired loans.
Non-performing assets
Non-performing assets include real estate acquired through foreclosure
or deed taken in lieu of foreclosure, and loans on non-accrual status.
Loans are placed on non-accrual status when, in the opinion of
management, the collection of additional interest is questionable.
Thereafter no interest is taken into income unless received in cash or
until such time as the borrower demonstrates the ability to pay
principal and interest. At December 31, 1999, the Bank had no
non-performing assets.
Property and equipment
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets.
Maintenance and repairs are charged to operations, while major
improvements are capitalized. Upon retirement, sale or other
disposition of property and equipment, the cost and accumulated
depreciation are eliminated from the accounts, and gain or loss is
included in income from operations.
Organizational costs
In accordance with Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities," the Company expenses all
organizational and pre-opening costs as incurred.
Income taxes
The financial statements have been prepared on the accrual basis.
When income and expenses are recognized in different periods for
financial reporting purposes versus for purposes of computing
income taxes currently payable, deferred taxes are provided on
such temporary differences. The Company accounts for income taxes
in accordance with SFAS No. 109, "Accounting for Income Taxes".
Under SFAS 109, deferred tax assets and liabilities are recognized
for the expected future tax consequences of events that have been
recognized in the consolidated financial statements or tax return.
Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be realized or
settled.
Advertising and public relations expense
Advertising, promotional and other business development costs are
generally expensed as incurred. External costs incurred in
producing media advertising are expensed the first time the
advertising takes place. External costs relating to direct mailing
costs are expensed in the period in which the direct mailings are
sent.
Basic net loss per common share
Basic net loss per common share is computed on the basis of the
weighted average number of common shares outstanding in accordance with
SFAS No. 128, "Earnings per Share". For purposes of calculating net
loss per share, the calculation assumed the stock was outstanding all
of 1999. The treasury stock method is used to compute the effect of
stock options on the weighted average number of common shares
outstanding for the diluted method. No dilution occurs under the
treasury stock method as the exercise price of stock options equals or
exceeds the market value of the stock.
25
<PAGE>
Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents
are defined as those amounts included in the balance sheet caption
"Cash and Due From Banks". Cash and cash equivalents have an
original maturity of three months or less.
Fair values of financial instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," as
amended by SFAS No. 119, requires disclosure of fair value information for
financial instruments, whether or not recognized in the balance sheet,
when it is practicable to estimate the fair value. SFAS No. 107 defines a
financial instrument as cash, evidence of an ownership interest in an
entity or contractual obligations which require the exchange of cash or
other financial instruments. Certain items are specifically excluded from
the disclosure requirements, including the Company's common stock. In
addition, other nonfinancial instruments such as premises and equipment
and other assets and liabilities are not subject to the disclosure
requirements.
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed herein:
Cash and due from banks - The carrying amounts of cash and due from
banks (cash on hand and due from banks) approximate their fair value.
Federal funds sold - The carrying amounts of federal funds sold
approximate their fair value.
Investment securities held to maturity and available for sale - Fair
values for investment securities are based on quoted market prices.
Loans - For variable rate loans that reprice frequently and for loans
that mature within one year, fair values are based on carrying values.
Fair values for all other loans are estimated using discounted cash
flow analyses, with interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. Fair values
for impaired loans are estimated using discounted cash flow analyses
or underlying collateral values, where applicable.
Deposits - The fair values disclosed for demand deposits are, by
definition, equal to their carrying amounts. The carrying amounts of
variable rate, fixed-term money market accounts and short-term
certificates of deposit approximate their fair values at the reporting
date. Fair values for long-term fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities.
Securities sold under repurchase agreements - The carrying amounts of
securities sold under repurchase agreements approximate their fair
value.
Off balance sheet instruments - Fair values of off balance sheet
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." All
derivatives are to be measured at fair value and recognized in the balance
sheet as assets or liabilities. This statement's effective date was
delayed by the issuance of SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
SFAS 133," and is effective for fiscal years and quarters beginning after
June 15, 2000. The Company does not expect that the adoption of SFAS 133
will have a material impact on the presentation of the Company's financial
results or financial position.
26
<PAGE>
Risks and Uncertainties
In the normal course of its business the Company encounters two
significant types of risks: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk and market
risk. The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different speeds, or on
different bases, than its interest-earning assets. Credit risk is the risk
of default on the Company's loan portfolio that results from borrower's
inability or unwillingness to make contractually required payments. Market
risk reflects changes in the value of collateral underlying loans
receivable and the valuation of real estate held by the Company.
The Company is subject to the regulations of various governmental
agencies. These regulations can and do change significantly from period to
period. The Company also undergoes periodic examinations by the regulatory
agencies, which may subject it to further changes with respect to asset
valuations, amounts of required loss allowances and operating restrictions
from the regulators' judgments based on information available to them at
the time of their examination.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances, computed by
applying prescribed percentages to its various types of deposits, either at the
bank or on deposit with the Federal Reserve Bank. At December 31, 1999 these
required reserves were met by vault cash.
NOTE 3 - FEDERAL FUNDS SOLD
When the Bank's cash reserves (Note 2) are in excess of the required
amount, it may lend excess to other banks on a daily basis. As of December 31,
1999 federal funds sold amounted to $1,910,000.
NOTE 4 - INVESTMENT SECURITIES
The amortized costs and fair value of investment securities available
for sale are as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Gross unrealized
Amortized ---------------- Fair
cost Gains Losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Federal agencies ......................................... $ 9,222,083 $ - $ 13,126 $ 9,208,957
Federal Reserve Bank stock - restricted .................. 180,000 - - 180,000
------------- --------- ---------- ---------------
Total investment securities ....................... $ 9,402,083 $ - $ 13,126 $ 9,388,957
============= ========= ========== ===============
</TABLE>
The amortized costs and fair values of securities available for sale at
December 31, 1999, by contractual maturity, are shown in the following chart.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
27
<PAGE>
NOTE 4 - INVESTMENT SECURITIES, Continued
Amortized
cost Fair value
---- ----------
Within one year .................................. $4,848,975 $4,845,630
Due after one through five years ................. 4,373,108 4,363,327
Federal Reserve Bank stock (no maturity) ......... 180,000 180,000
---------- ----------
Total investment securities .................. $9,402,083 $9,388,957
========== ==========
At December 31, 1999, $902,192 in securities were pledged to
collateralize public deposits.
NOTE 5 - LOANS
The composition of net loans by major loan category as of December 31,
1999 is presented below:
Commercial ................................................. $2,793,000
Real estate - construction ................................. 130,000
Real estate - mortgage ..................................... 2,264,000
Consumer ................................................... 1,549,232
----------
Loans, gross ............................................... 6,736,232
Less allowance for possible loan losses .................... 105,000
----------
Loans, net ................................................. $6,631,232
==========
At December 31, 1999 there were no nonaccruing or impaired loans.
During the period ended December 31, 1999 there were no loans charged off and no
recoveries on loans previously charged off.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Components of property and equipment included in the balance sheet
as of December 31, 1999 are as follows:
Land and improvements ...................................... $570,981
Furniture and equipment .................................... 295,754
Vehicles ................................................... 25,265
--------
892,000
Accumulated depreciation ................................... 20,296
--------
Total property and equipment ........................... $871,704
========
Depreciation expense for the period ended December 31, 1999 amounted to
$20,296. Depreciation is charged to operations over the estimated useful lives
of the assets. The estimated useful lives and methods of depreciation for the
principal items follow:
Type of Asset Life in Years Depreciation Method
------------- ------------- -------------------
Software 3 Straight-line
Furniture and equipment 5 to 7 Straight-line
Improvements 5 to 40 Straight-line
Vehicles 3 Straight-line
28
<PAGE>
NOTE 7 - DEPOSITS
The following is a detail of the deposit accounts as of December 31,
1999:
Noninterest bearing ..................................... $2,067,449
Interest bearing:
NOW accounts .......................................... 3,973,730
Money market accounts ................................. 627,321
Savings ............................................... 352,411
Time, less than $100,000 .............................. 987,448
Time, $100,000 and over ............................... 1,912,977
----------
Total deposits .......................................... $9,921,336
==========
Interest expense on time deposits greater than $100,000 was $19,983 in
1999.
At December 31, 1999 the scheduled maturities of certificates of
deposit are as follows:
2000 $2,730,404
2001 91,717
2002 21,278
2003 57,026
----------
$2,900,425
NOTE 8 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements consist of the following
as of December 31, 1999:
U. S. Government securities with an amortized
cost of $2,799,029($2,783,852 fair value) are
used as collateral for the agreements ...................... $2,289,278
==========
The Bank enters into sales of securities under agreements to repurchase. These
obligations to repurchase securities sold are reflected as liabilities in the
balance sheets. The dollar amount of securities underlying the agreements are
book entry securities maintained by a safekeeping agent. The weighted-average
interest rate of these agreements was 4.5 percent at December 31, 1999. The
maximum amount outstanding at any month-end was $2,289,278 during 1999.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Bank may become party to litigation and claims arising in the
normal course of business. As of December 31, 1999, there is no litigation
pending.
The Company has a five year contract with a data processing service.
Monthly costs are approximately $4,500.
The Company purchased and is the beneficiary of life insurance for its
chief executive officer and chief financial officer.
Refer to Note 13 concerning financial instruments with off balance
sheet risk.
NOTE 10 - UNUSED LINES OF CREDIT
At December 31, 1999, the Bank had an unused line of credit to purchase
federal funds totaling $1,500,000 from an unrelated bank. This line of credit is
available on a one to seven day basis for general corporate purposes of the
Bank. The lender has reserved the right to withdraw the line at their option.
29
<PAGE>
NOTE 11 - INCOME TAXES
The income tax benefit of $86,793 recorded in 1999 reflects the value
of net operating losses available for offset against future taxable income and
are available through 2014.
NOTE 12 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies with which they are
affiliated, are customers of and have banking transactions with the Bank in the
ordinary course of business. These loans were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable arms-length transactions.
A summary of loan transactions with directors, including their
affiliates, and executive officers as of December 31, 1999 are as follows:
Balance, beginning of period ............................. $ -
New loans ................................................ 1,857,067
Less loan payments ....................................... 18,733
----------
Balance, end of period ................................... $1,838,334
==========
Deposits by directors and their related interests, at December 31, 1999
approximated $2,365,042.
For a portion of 1999, the Company leased temporary office space from
one of the directors. Rent expense charged to operations was $4,500.
The Company purchased the land for its main office from a director at a
cost of $450,000 which was less than the appraised value.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
In the ordinary course of business, and to meet the financing needs of
its customers, the Bank is a party to various financial instruments with off
balance sheet risk. These financial instruments, which include commitments to
extend credit and standby letters of credit, involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the balance sheet. The contract amount of those instruments reflects the extent
of involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amounts of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any material condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require the payment of a fee. At December 31, 1999, unfunded
commitments to extend credit were $1,310,429 and outstanding letters of credit
were $233,000. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the borrower. Collateral varies but may include accounts receivable, inventory,
property, plant and equipment, commercial and residential real estate.
NOTE 14 - EMPLOYEE BENEFIT PLAN
On September 27, 1999, the Company adopted a Simple IRA Plan for the
benefit of all eligible employees. The Bank contributes up to 3 percent of the
employee's compensation. Employer contributions made to the Plan in 1999
amounted to $7,230.
30
<PAGE>
NOTE 15 - STOCK OPTION PLAN
During 1999, the Board of Directors adopted a stock option plan for the
benefit of the directors. The Board granted 40,000 options at an option price of
$10 per share. All options vest 33 percent each year for three years and expire
10 years from the grant date. The Bank has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation". Accordingly, no compensation cost has been
recognized for the stock option plan. Had compensation cost been determined
based on the fair value at the grant date for the above stock option awards
consistent with the provisions of SFAS 123, the Bank's net loss and net loss per
common share would have been increased to the pro forma amounts indicated below:
For the period ended
December 31, 1999
-----------------
Net loss - as reported .................................... $(399,843)
Net loss - pro forma ...................................... (417,043)
Net loss per common share - as reported ................... (.50)
Net loss per share - pro forma ........................... (.52)
The fair value of the option grant is estimated on the date of grant
using the Black-Scholes option pricing model and the minimum value method
allowed by SFAS 123. The risk free interest rate used was 5.89 percent, the
expected option life was 3 years and the assumed dividend rate was zero.
A summary of the status of the plan as of December 31, 1999 and changes
during the year ending on that date is presented below:
Weighted average
Shares exercise price
------ --------------
Outstanding at beginning of period -
Granted 40,000 $ 10.00
Exercised -
Forfeited or expired -
------
Outstanding at end of period 40,000
======
Options exercisable at December 31, 1999 None
Shares available for grant None
NOTE 16 - DIVIDENDS
There are no current plans to initiate payment of cash dividends and
future dividend policy will depend on the Company's earnings, capital
requirements, financial condition and other factors considered relevant by the
Company's Board of Directors. Federal banking regulations restrict the amount of
dividends that the Bank can pay to the Company. At December 31, 1999 the Bank
has no retained earnings from which to pay dividends.
NOTE 17 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
31
<PAGE>
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average assets. Management believes, as of December 31, 1999,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification of the banking
regulators categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the institution's
category. The Bank's actual capital amounts and ratios and minimum regulatory
amounts and ratios are presented as follows:
<TABLE>
<CAPTION>
To be well capitalized
For capital Under prompt corrective
Adequacy purposes Action provisions
----------------- -----------------
Actual Minimum Minimum
------ ------- -------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(amounts in thousands)
As of December 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk weighted assets) ............ $5,741 59.9% $ 767 8.0% $ 958 10.0%
Tier 1 Capital (to risk weighted assets) ........... 5,636 58.8 225 4.0 575 6.0
Tier 1 Capital (to average assets) ................. 5,636 33.3 383 4.0 847 5.0
</TABLE>
NOTE 18 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were
as follows at December 31, 1999:
Carrying Fair
amount value
------ -----
FINANCIAL ASSETS
Cash and due from banks ........................ $ 711,239 $ 711,239
Federal funds sold ............................. 1,910,000 1,910,000
Investment securities .......................... 9,388,957 9,388,957
Loans .......................................... 6,631,232 6,504,192
FINANCIAL LIABILITIES
Deposits ....................................... 9,921,336 9,779,696
Securities sold under repurchase agreements .... 2,289,278 2,289,278
OFF BALANCE SHEET INSTRUMENTS
Commitments to extend credit ................... 1,310,429 1,310,429
Standby letters of credit ...................... 233,000 233,000
NOTE 19 - PARENT COMPANY INFORMATION
Following is condensed financial information of Cornerstone Bancorp
(parent company only):
CONDENSED BALANCE SHEET
1999
----
ASSETS
Cash ................................................. $1,936,312
Investment in subsidiary ............................. 5,640,182
----------
$7,576,494
STOCKHOLDERS' EQUITY ..................................... $7,576,494
==========
32
<PAGE>
CONDENSED STATEMENT OF OPERATIONS
For the period
January 11, 1999
(inception)
through
December 31, 1999
-----------------
INCOME
Escrow accounts ........................................ $ 34,613
EXPENSES
Sundry ................................................. 83,301
---------
Loss before equity in undistributed net loss
of bank subsidiary .............................. (48,688)
EQUITY IN UNDISTRIBUTED NET LOSS OF
SUBSIDIARY ............................................. (351,155)
---------
Net loss ............................................ $(399,843)
=========
CONDENSED STATEMENT OF CASH FLOWS
For the period
January 11, 1999
(inception)
through
December 31, 1999
-----------------
OPERATING ACTIVITIES
Net loss .................................................. $ (399,843)
Adjustments to reconcile net loss to net cash
used for operating activities
Equity in undistributed net loss of bank subsidiary ... 351,155
-----------
Net cash used for operating activities ............. (48,688)
INVESTING ACTIVITIES
Investment in bank subsidiary ............................. (6,000,000)
FINANCING ACTIVITIES
Proceeds from sale of stock, net .......................... 7,985,000
-----------
Net increase in cash ............................... 1,936,312
CASH, BEGINNING OF PERIOD ..................................... -
-----------
CASH, END OF PERIOD ........................................... $ 1,936,312
===========
33
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Directors
The table shows, as to each director, his name, age, positions held
with the Company and principal occupation for the past five years and the period
during which he served as a director of the Company. Directors of the Company
serve until the first annual meeting of shareholders in 2000 or until their
successors are elected and qualify.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ---- --- -------------------- --------------
<S> <C> <C> <C>
J. Rodger Anthony 54 President and Chief Executive Officer of the 1999
Company, since 1999; Chief Executive Officer,
First National Bank of Pickens County, Easley, SC,
1979 to 1998
Walter L. Brooks 72 President, G&B Enterprises, Liberty, SC (egg 1999
production)
T. Edward Childress, III 53 Pharmacist 1999
Nicholas S. Clark 32 Vice President, Secretary, Treasurer and Chief 1999
Financial Officer of the Company, since 1999;
Chief Financial Officer, First National Bank of
Pickens County, Easley, SC, 1993 to 1998
J. Bruce Gaston 42 Certified Public Accountant 1999
S. Ervin Hendricks, Jr. 56 President, Nu-Life Environmental, Inc., Easley, SC 1999
Joe E. Hooper 60 President, Pride Mechanical & Fabrication Company, 1999
Inc.
Robert R. Spearman 59 Owner, Spearman Surveying Company, Easley, SC 1999
John M. Warren, Jr., M.D. 48 Physician, Easley Ob-Gyn Associates, P.A., 1999
Easley, SC
George I. Wike, Jr. 54 Investor 1999
</TABLE>
Neither the principal executive officers nor any director nominees are
related by blood, marriage or adoption in the degree of first cousin or closer.
Executive Officers
The names and positions with the Company of each executive officer of
the Company are as follows:
J. Rodger Anthony President and Chief Executive Officer
Nicholas S. Clark Vice President and Chief Financial Officer
The age and business experience of Messrs. Anthony and Clark are set
forth above under "-Directors." Neither the principal executive officers nor any
directors are related by blood, marriage or adoption in the degree of first
cousin or closer.
34
<PAGE>
Item 10. Executive Compensation.
The following table sets forth the remuneration paid during the year
ended December 31, 1999 to the Chief Executive Officer. No other principal
officer of the Company was paid remuneration in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Number of
Securities
Annual Compensation(1) Underlying
---------------------- Options All Other
Name and Principal Position Year Salary Bonus Awarded Compensation(2)
- --------------------------- ---- ------ ----- ------- ---------------
<S> <C> <C> <C> <C> <C>
J. Rodger Anthony 1999 $100,000 -0- 4,000 $2,520
President and Chief
Executive Officer
- ---------------------
</TABLE>
(1) Perquisites and personal benefits did not exceed the lesser of $50,000 or
10% of Mr. Anthony's salary plus bonus payments.
(2) Contributions by the Company to the Company's Simple IRA Plan on behalf of
Mr. Anthony in the amount of $2,520 in fiscal year 1999.
ORGANIZERS' STOCK OPTIONS
On December 14, 1999, the Board of Directors of the Company, in
consideration of the time and efforts of the directors of the Company in
organizing the Company and its subsidiary bank and each director's personally
guaranteeing a portion of the organizational expenses, granted options to each
director to purchase up to 4,000 shares of the common stock of the Company for a
purchase price of $10.00 per share, which was the price at which the common
stock was sold to the public in 1999. The options become exercisable for each
director one-third each year beginning on December 14, 2000 and expire on
December 14, 2009 unless they terminate sooner as the result of the director's
ceasing to be a director of the Company, in which case the options expire six
months after the holder ceases to be a director.
OPTION GRANTS IN LAST FISCAL YEAR
The following table presents information about options held by the
person named in the Summary Compensation Table at December 31, 1999. No options
were exercised by Mr. Anthony during the year ended December 31, 1999
<TABLE>
<CAPTION>
Individual Grants
-----------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price Expiration
Name Granted(1) in 1999 (per share) Date
---- ---------- ------- ----------- ----
<S> <C> <C> <C> <C>
J. Rodger Anthony 4,000 50% $10.00 12/14/09
</TABLE>
(1) Such options become exercisable in one-third increments on each of December
14, 2000, 2001, and 2002.
35
<PAGE>
OPTION EXERCISES AND YEAR END OPTIONS OUTSTANDING AND VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Acquired Value Options 12/31/99 Options 12/31/99(1)
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Rodger Anthony 0 0 0 4,000 $0.00 $0.00
</TABLE>
- ---------------
(1) Based on exercise prices of $10.00 per share and assuming that the fair
market value of the Company's common stock on December 31, 1999 was $10.00 per
share.
Compensation of Directors
In 1999, each director was granted options to purchase 4,000 shares of
common stock. The exercise price of the options is $10.00 per share, which was
the fair market value of the options on the date of grant. The options become
exercisable one-third annually beginning December 14, 2000 and expire December
14, 2009.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The number of shares owned and the percentage of outstanding common stock
such number represents at March 1, 2000, for all directors and executive
officers of the Company and for all persons who are currently beneficial owners
of 5% or more of the Company's common stock is set forth below.
<TABLE>
<CAPTION>
Number of Shares % of Outstanding
Name (and Address of 5% Owners) Beneficially Owned Common Stock
- ------------------------------- ------------------ ------------
<S> <C> <C>
J. Rodger Anthony 30,000 3.80
Walter L. Brooks (1) 5,400 0.68
T. Edward Childress, III 75,000 9.40
2905 White Horse Road
Greenville, SC
Nicholas S. Clark 10,500 1.30
J. Bruce Gaston 15,000 1.90
S. Ervin Henricks, Jr. 28,500 3.63
Joe E. Hooper 35,000 4.38
Robert R. Spearman 3,000 0.38
John M. Warren, Jr., M.D. (2) 10,500 1.31
George I. Wike, Jr. 75,000 9.40
28 Mandarin Circle
Taylors, SC
All directors and executive _______ _____
officers as a group (10 persons) 287,900 36.00
</TABLE>
- --------------------
(1) Includes 5,000 shares owned by a partnership in which Mr. Brooks is a
partner.
(2) Includes 500 shares owned by a trust of which Dr. Warren is trustee as to
which Dr. Warren disclaims beneficial ownership.
36
<PAGE>
Except as otherwise indicated, to the knowledge of management, all shares are
owned directly with sole voting power.
Item 12. Certain Relationships and Related Transactions.
Purchase of Real Estate. In 1999 the Company purchased the land on
which its temporary office is located and on which it plans to build a permanent
office from S. Ervin Hendricks, Jr., a director of the Company. The land
purchased was 1.8 acres with 594 feet of frontage on 2 streets. The purchase
price of $450,000.00 was negotiated at arm's length by an ad hoc committee of
the Board and was less than the appraised value of the property determined by
two separate appraisers. The transaction resulted in a profit to Mr. Hendricks.
Extensions of Credit. The Company, in the ordinary course of its
business, makes loans to and has other transactions with directors, officers,
principal shareholders, and their associates. Loans are made on substantially
the same terms, including rates and collateral, as those prevailing at the time
for comparable transactions with other persons and do not involve more than the
normal risk of collectibility or present other unfavorable features. The Company
expects to continue to enter into transactions in the ordinary course of
business on similar terms with directors, officers, principal stockholders, and
their associates. The aggregate dollar amount of such loans outstanding at
December 31, 1999 was $1,838,334. During 1999, $1,857,067 new loans were made
and repayments totaled $18,733.
Organizers Options. See the discussion in Item 10 under the caption
"ORGANIZERS' OPTIONS."
37
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Description of Exhibits.
Exhibit No. Description
3.1 Articles of Incorporation of Registrant*
3.2 Bylaws of Registrant*
10.1 Form of Option Agreements
21 Subsidiaries of Registrant
27 Financial Data Schedule
______________
*Incorporated by reference to Registration statement on Form SB-2 (No.
333-79543).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1999.
38
<PAGE>
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements with respect to the
financial condition, results of operations, and business of the Company and the
Bank. These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) The Company and its subsidiary bank may not be able
to operate profitably; (2) Competitive pressure in the banking industry may
increase significantly; (3) Costs or difficulties related to operation of the
Bank may be greater than expected; (4) Changes in the interest rate environment
may reduce margins; (5) General economic conditions, either nationally or
regionally, may be less favorable than expected, resulting in, among other
things, a deterioration in credit demand and quality; (6) Changes may occur in
the regulatory environment; (7) Changes may occur in business conditions and/or
inflation; and (8) Changes may occur in the securities markets. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements
which are other than statements of historical facts. Such forward-looking
statements may be identified, without limitation, by the use of the words
"anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties, but there can be no assurance that
management's expectations, beliefs or projections will result or be achieved or
accomplished.
39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Cornerstone Bancorp
s/J. Rodger Anthony
March 27, 2000 By:------------------------------------------
J. Rodger Anthony
President and Chief Executive Officer
s/Nicholas S. Clark
By:------------------------------------------
Nicholas S. Clark
Vice President
(Principal Financial
and Principal Accounting Officer)
In accordance with the Exchange Act this Report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
s/J. Rodger Anthony
- -------------------------- Director President, Chief Executive Officer, March 27, 2000
J. Rodger Anthony
- -------------------------- Director March __, 2000
Walter L. Brooks
- -------------------------- Director March __, 2000
T. Edward Childress, III
s/Nicholas S. Clark
- -------------------------- Vice President, Chief Financial Officer, March 27, 2000
Nicholas S. Clark Principal Accounting Officer, Director
s/J. Bruce Gaston
- -------------------------- Director March 27, 2000
J. Bruce Gaston
s/S. Ervin Hendricks, Jr.
- -------------------------- Director March 27, 2000
S. Ervin Hendricks, Jr.
s/Joe E. Hooper
- -------------------------- Director March 27, 2000
Joe E. Hooper
s/Robert R. Spearman
- -------------------------- Director March 27, 2000
Robert R. Spearman
- -------------------------- Director March __, 2000
John M. Warren, Jr., M.D.
- -------------------------- Director March __, 2000
George I. Wike, Jr.
</TABLE>
40
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
The Registrant will furnish an annual report and proxy material to its
security holders after the filing of this report and furnish copies to the
Commission when they are sent to security holders.
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
3.1 Articles of Incorporation of Registrant*
3.2 Bylaws of Registrant*
10.1 Form of Option Agreements
21 Subsidiaries of Registrant
27 Financial Data Schedule
______________
*Incorporated by reference to Registration statement on Form SB-2 (No.
333-79543).
NOTICE: THIS AGREEMENT IS SUBJECT TO ARBITRATION PURSUANT TO THE SOUTH CAROLINA
UNIFORM ARBITRATION ACT
STOCK OPTION AGREEMENT
This Stock Option Agreement is entered into as of this 14th day of
December, 1999, by and between J. Rodger Anthony, ("Director") and Cornerstone
Bancorp, (the "Company").
1. For and in consideration of the Director's time and efforts in
organizing the Company and its subsidiary Bank and the Director's personal
guarantee of a portion of the organizational expense, the Company hereby grants
to Director the option to purchase 4,000 shares of the common stock of the
Company, subject to the terms and conditions hereof.
2. In the event of exercise of this option, unless the shares have been
registered under the Securities Act of 1933, as amended, the Director represents
and warrants to the Company that the shares subject to option will be acquired
for investment and not with a view to distribution thereof and the Director
acknowledges that the shares received will bear an appropriate restrictive
legend.
3. The exercise price of the options granted hereby shall be $10.00 per
share.
4. The options granted hereby may be exercised at any time after they
become exercisable and prior to their expiration by the tender of the exercise
price in cash for the shares to be purchased to the Chief Financial Officer of
the Company.
5. If the Director has continuously served as a director of the Company
until the first anniversary of this Agreement, then options for one-third of the
shares subject to option shall become exercisable after such anniversary. If the
Director has continuously served as a director of the Company until the second
anniversary of this Agreement, then options for two-thirds of the shares subject
to option shall be exercisable after such anniversary. If the Director has
continuously served as a director of the Company until the third anniversary of
this Agreement, then options for all of the shares subject to option shall be
exercisable after such anniversary.
6. Upon the removal, disqualification, resignation or other failure of
the Director to remain a director of the Company the options hereby shall expire
six months after the Director's departure from office. All options granted by
this Stock Option Agreement which have not previously expired or been exercised
shall expire on the tenth anniversary of the date first above written.
7. Nothing in this Stock Option Agreement shall give the Director any
rights of a shareholder of the Company prior to the exercise of the options
granted hereby.
8. This option is not transferrable, except that upon the death or
disability of the Director the option may be exercised by the Director's
personal representative or, in the case of disability, legal guardian.
9. The options granted hereby shall be treated as a number of options
to purchase one share of the common stock of the Company for the exercise price.
Options which are exercisable may be exercised in any combination designated by
the Director. Notwithstanding any other provision hereof, no option may be
exercised for a fractional share.
<PAGE>
10. If the outstanding shares of common stock of the Company then
subject to this Agreement are increased or decreased, or are changed into or
exchanged for a different number or kind of shares or securities, as a result of
one or more organizations, recapitalizations, stock splits, reverse stock
splits, stock dividends or the like, appropriate adjustments shall be made in
the number and/or kind of shares or securities for which options may thereafter
be exercised. Any such adjustment in outstanding options shall be made without
changing the aggregate exercise price applicable to the unexercised portions of
such options. Any such adjustment made by the Company shall be binding.
11. Any dispute arising under this Stock Option Agreement shall be
settled by binding arbitration conducted pursuant to the rules of the American
Arbitration Association then in effect.
In witness whereof, the parties have caused this Stock Option Agreement
to be executed and delivered as of the date first above written.
Cornerstone Bancorp
By:---------------------------------
Director
---------------------------------
J. Rodger Anthony
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Name Jurisdiction of Incorporation
- ---- -----------------------------
Cornerstone National Bank United States
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1999 and the Consolidated Statement
of Operations for the year ended December 31, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 711
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,910
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,389
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,736
<ALLOWANCE> 105
<TOTAL-ASSETS> 19,799
<DEPOSITS> 9,921
<SHORT-TERM> 2,289
<LIABILITIES-OTHER> 11
<LONG-TERM> 0
0
0
<COMMON> 7,985
<OTHER-SE> (400)
<TOTAL-LIABILITIES-AND-EQUITY> 19,799
<INTEREST-LOAN> 82
<INTEREST-INVEST> 193
<INTEREST-OTHER> 34
<INTEREST-TOTAL> 310
<INTEREST-DEPOSIT> 79
<INTEREST-EXPENSE> 10
<INTEREST-INCOME-NET> 221
<LOAN-LOSSES> 105
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 611
<INCOME-PRETAX> (487)
<INCOME-PRE-EXTRAORDINARY> (400)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (400)
<EPS-BASIC> (0.50)
<EPS-DILUTED> (0.50)
<YIELD-ACTUAL> 4.56
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 105
<ALLOWANCE-DOMESTIC> 105
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
