SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM _______________ TO -----------------.
Commission File Number 333-79543
CORNERSTONE BANCORP
(Exact name of small business issuer as specified in its charter)
South Carolina
(State or other jurisdiction of 57-1077978
incorporation or organization) (I.R.S. Employer Identification Number)
1670 East Main Street, Easley, South Carolina 29640
(Address of principal executive offices)
(864) 306-1444
(Registrant's telephone number, including Area Code)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock - No Par Value
800,000 Shares Outstanding on October 23, 2000
Transitional Small Business Issuer Disclosure Format: [ ] Yes [X] No
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
$ amounts in thousands
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Unaudited) (Audited)
-
ASSETS
<S> <C> <C>
Cash and due from banks .................................................................... $ 968,689 $ 711,239
Certificate of Deposit ..................................................................... 100,000 0
Federal funds sold ......................................................................... 6,310,000 1,910,000
Investment securities ...................................................................... 7,963,479 9,388,957
Loans ...................................................................................... 15,385,035 6,736,232
Less allowance for loan losses .......................................................... (187,000) (105,000)
------------ ------------
15,198,035 6,631,232
Premises and equipment ..................................................................... 1,554,492 871,704
Accrued interest receivable ................................................................ 249,699 189,394
Deferred income taxes ...................................................................... 79,013 86,792
Other assets ............................................................................... 23,708 9,376
------------ ------------
Total assets ........................................................................ $ 32,447,115 $ 19,798,694
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing ................................................................... $ 4,412,165 $ 2,067,449
Interest bearing ...................................................................... 17,066,666 7,853,887
------------ ------------
Total deposits ...................................................................... 21,478,831 9,921,336
Federal funds purchased and securities sold under agreements to repurchase .............. 3,272,657 2,289,278
Other liabilities ....................................................................... 73,299 11,586
------------ ------------
Total liabilities ................................................................... 24,824,787 12,222,200
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares authorized,
800,000 shares issued and outstanding in 2000 and 1999 ................................ 7,985,000 7,985,000
Retained deficit ........................................................................ (356,419) (399,843)
Accumulated other comprehensive loss .................................................... (6,253) (8,663)
------------ ------------
Total shareholders' equity .......................................................... 7,622,328 7,576,494
------------ ------------
Total liabilities and shareholders' equity .......................................... $ 32,447,115 $ 19,798,694
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans .................................... $ 354,364 N/A $ 834,717 N/A
Investment securities
Interest - U.S. Treasury and U.S. ...........................
Government Agencies ....................................... 139,465 404,124
Federal funds sold ............................................ 75,808 163,510
---------- --- ---------- ---
Total interest income ................................... 569,637 N/A 1,402,351 N/A
---------- --- ---------- ---
INTEREST EXPENSE
Deposits
Certificates of deposit of $100,000 or more ................. 45,039 103,415
Other ....................................................... 147,097 327,608
---------- --- ---------- ---
Total deposits .......................................... 192,136 431,023
Federal funds purchased ....................................... 44,348 103,223
---------- --- ---------- ---
Total interest expense .................................. 236,484 N/A 534,247 N/A
---------- --- ---------- ---
Net interest income ........................................... 333,153 868,104
Provision for loan losses ..................................... 47,000 82,000
---------- --- ---------- ---
Net interest income after provision
for loan losses ....................................... 286,153 N/A 786,104 N/A
---------- --- ---------- ---
Noninterest income
Service charges on deposit accounts ......................... 12,857 36,191
Other ....................................................... 5,478 13,968
---------- --- ---------- ---
Total noninterest income ................................ 18,335 N/A 50,159 N/A
---------- --- ---------- ---
Noninterest expense
Salaries and employee benefits .............................. 139,883 416,475
Premises and equipment ...................................... 14,704 50,087
Data processing ............................................. 17,818 52,042
Depreciation ................................................ 17,809 53,306
Other ....................................................... 78,729 209,929
---------- --- ---------- ---
Total noninterest expense ............................... 268,943 N/A 781,839 /A
---------- --- ---------- ---
Net income before taxes ................................. 35,545 54,424
PROVISION FOR INCOME TAXES ....................................... 11,000 11,000
---------- --- ---------- ---
Net income after taxes .................................. 24,545 N/A 43,424 N/A
---------- --- ---------- ---
BASIC EARNINGS PER COMMON SHARE
Weighted average shares outstanding ........................... 800,000 N/A 800,000 N/A
========== === ========== ===
Net income per common share ................................... $ .03 N/A $ .05 N/A
========== === ========== ===
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the nine months ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common stock other Total
----------------- Retained comprehensive shareholders'
Shares Amount deficit loss equity
------ ------ ------- ---- ------
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1999 ....................................... 800,000 $7,985,000 $ (399,843) $ (8,663) $7,576,494
Net income ................................................... - 43,424 43,424
Other comprehensive income, net of taxes
Change in unrealized loss on investment securities ......... - 2,410 2,410
----------
Comprehensive income ......................................... 45,834
------- ---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 2000 ..................................... 800,000 $7,985,000 $ (356,419) $ (6,253) $7,622,328
======= ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended
September 30, September 30,
2000 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income ............................................................................ $ 43,424 N/A
Adjustments to reconcile net income to net cash used for
operating activities
Depreciation and amortization ....................................................... 53,306 N/A
Deferred income taxes ............................................................... 7,779 N/A
Provision for possible loan losses .................................................. 82,000 N/A
Changes in operating assets and liabilities
Increase in interest receivable ..................................................... (60,598) N/A
Increase in other assets ............................................................ (14,038) N/A
Increase in other liabilities ....................................................... 61,713 N/A
------------ ---
Net cash provided by operating activities ......................................... 173,586 N/A
------------ ---
INVESTING ACTIVITIES
Net increase in certificates of deposit ............................................... (100,000) N/A
Net increase in federal funds sold .................................................... (4,400,000) N/A
Proceeds from maturities of available for sale securities ............................. 1,427,889 N/A
Purchase of property and equipment .................................................... (736,094) N/A
Net increase in loans to customers .................................................... (8,648,803) N/A
------------ ---
Net cash used for investing activities ............................................ (12,457,008) N/A
------------ ---
FINANCING ACTIVITIES
Net increase in demand, savings and time deposits ..................................... 11,557,494 N/A
Net decrease in federal funds purchased and securities
sold under agreements to repurchase ................................................. 983,378 N/A
------------ ---
Net cash provided by financing activities ......................................... 12,540,872 N/A
------------ ---
Net increase in cash and cash equivalents ......................................... 257,450 N/A
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................................... 711,239 N/A
------------ ---
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................. $ 968,689 N/A
============ ===
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
CORNERSTONE BANCORP AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Principles
A summary of significant accounting policies is included in the 1999
Annual Report of Cornerstone Bancorp to the Shareholders, which also contains
the Company's audited financial statements for 1999 and is incorporated in the
Form 10-KSB for the year ended December 31, 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of
Cornerstone Bancorp, the parent company, and Cornerstone National Bank, its
wholly owned subsidiary. All significant intercompany items have been eliminated
in the consolidated statements.
Management Opinion
The interim financial statements in this report are unaudited. In the
opinion of management, all the adjustments necessary to present a fair statement
of the results for the interim period have been made. Such adjustments are of a
normal and recurring nature.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for an entire year. These interim
financial statements should be read in conjunction with the annual financial
statements and notes thereto contained in the 1999 Annual Report.
No information is presented for the quarter ended September 30, 1999,
because the Company was in organization and had minimal operations during that
period. The Company's operations began September 15, 1999, and the Company had
only minimal transactions for the fifteen days in the third quarter of 1999.
6
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and related notes appearing in the Form 10-KSB for
the year ended December 31, 1999 of Cornerstone Bancorp. This discussion will
concentrate on the operations ending September 30, 2000. The Company commenced
operations with the opening of its subsidiary bank on September 15, 1999.
Results of operations for the period ending September 30, 2000 are not
necessarily indicative of the results to be attained for any other period. The
following information may contain forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. For comparison purposes the
three months ended September 30, 2000 have been compared to the three months
ended June 30, 2000, because the Company had minimal third quarter 1999
operating results which would not have provided a meaningful comparison.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on earning
assets and the interest paid for funds acquired to support those assets. Net
interest income, the principal source of the Company's earnings, was $333,153
for the three months ended September 30, 2000 compared to $296,021 for the three
months ended June 30, 2000.
Changes that affect net interest income are changes in the average rate earned
on interest earning assets, changes in the average rate paid on interest bearing
liabilities, and changes in the volume of interest earning assets and interest
bearing liabilities.
Average earning assets for the quarter ended September 30, 2000 increased to
$27,864,178, or 15.54 percent from the $24,116,916 reported for the quarter
ended June 30, 2000. The increase was mainly attributable to an increase in
federal funds sold and loans, supported by a $3,716,435 increase in interest
bearing liabilities which resulted from favorable economic conditions in the
Easley, South Carolina market, and the Company's marketing efforts.
For the three months ended September 30, 2000 the average yield on earning
assets was 8.17 percent, while the average cost of interest-bearing liabilities
was 3.39 percent. For the three months ended June 30, 2000 the average yield on
earning assets was 7.84 percent and the average cost of interest-bearing
liabilities was 2.93 percent. The increase in the yield on earning assets is
attributable to the increased volume of loans, which gives the Company a greater
return than the other types of earning assets. The net interest margin is
computed by subtracting interest expense from interest income and dividing the
resulting figure by average interest-earning assets. The net interest margin for
the three months ended September 30, 2000 was 4.78 percent compared to 4.91
percent for the three months ended June 30, 2000. The decrease in the
net-interest margin is attributable to an increase in the average rate on
interest bearing liabilities. The cost of total liabilities was 3.39 percent for
the three months ended September 30, 2000 compared to 2.93 percent for the three
months ended June 30, 2000.
RESULTS OF OPERATIONS
The Company's net income for the three months ended September 30, 2000 was
$24,545, or $.03 per diluted share compared to a net income of $17,742, or $.02
per diluted share for the three months ended June 30, 2000. The amount of the
Company's provision for loan losses in the third quarter was $47,000 compared to
$35,000 in the second quarter of 2000. Since opening the bank in September,
1999, management has sought to have an allowance for loan losses adequate to
cover the level of loss management believed to be inherent in the portfolio as a
whole, taking into account the relative size of the allowance and the size of
the Company's largest loans.
Non-interest income for the three months ended September 30, 2000 was $18,335
compared to $20,351 for the three months ended June 30, 2000.
Non-interest expenses for the three months ended September 30, 2000 were
$268,943, of which $139,883 represents salaries and benefits. Total non-interest
expenses amounted to $268,550 for the three months ended June 30, 2000.
7
<PAGE>
LIQUIDITY
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of liabilities.
The Company manages both assets and liabilities to achieve appropriate levels of
liquidity. Cash and short-term investments are the Company's primary sources of
asset liquidity. These funds provide a cushion against short-term fluctuations
in cash flow from both deposits and loans. The investment portfolio is the
Company's principal source of secondary asset liquidity. However, the
availability of this source of funds is influenced by market conditions.
Individual and commercial deposits and borrowings are the Company's primary
source of funds for credit activities. The Company also has a $1,500,000 line of
credit with The Banker's Bank. Management believes that the Company's liquidity
sources are adequate to meet its operating needs.
The Company is constructing its main office, and costs are estimated at
$1,600,000. The Company is funding the construction with its available cash.
LOANS
Commercial financial and agricultural loans made up 37.90 percent of the total
loan portfolio as of September 30, 2000, totaling $5,831,299. Loans secured by
real estate for construction and land development totaled $1,820,071, or 11.83
percent of the total loan portfolio, while all other loans secured by real
estate totaled $5,455,995, or 35.46 percent of the total loan portfolio as of
September 30, 1999. Installment loans and other consumer loans to individuals
comprised $2,277,670 or 14.80 percent of the total loan portfolio. The allowance
for loan losses was 1.22 percent of loans as of September 30, 2000 compared to
1.02 percent as of June 30, 2000. In management's opinion, the allowance for
loan losses is adequate. At September 30, 2000, the Company had no loans that
were 90 days or more past due or non-accruing.
CAPITAL RESOURCES
The capital base for the Company increased by $45,834 for the first nine months
of 2000, due to net income earned and a slight decline in the unrealized losses
on investment securities for the quarter. The Company's equity to asset ratio
was 23.49 percent as of September 30, 2000 compared to 28.02 percent as of June
30, 2000.
The Federal Deposit Insurance Corporation has established guidelines for capital
requirements for banks. As of September 30, 2000, the bank exceeds the required
capital levels.
Capital Ratios
<TABLE>
<CAPTION>
Adequately
Well Capitalized Capitalized
Actual Requirement Requirement
------ ----------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets .............. $5,905 30.35% $1,945 10% $1,556 8%
Tier 1 capital to risk weighted assets ............. $5,718 29.39% $1,167 6% $ 778 4%
Tier 1 capital to average assets ................... $5,718 18.84% $1,518 5% $1,214 4%
</TABLE>
In the second quarter of 2000, the Company began construction of its permanent
office facility, which is expected to cost $1,600,000. As of September 30, 2000,
the Company had incurred $733,481 for building related expenses, which is
included in premises and equipment in the balance sheet. The main office
building is scheduled for completion in the first quarter of 2001.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company are primarily monetary in nature. Therefore,
interest rates have a more significant impact on the Company's performance than
do the effects of changes in the general rate of inflation and changes in
prices. In addition, interest rates do not necessarily move in the same
magnitude as the prices of goods and services. As discussed previously,
management seeks to manage the relationships between interest sensitive assets
and liabilities in order to protect against wide rate fluctuations, including
those resulting from inflation.
8
<PAGE>
Part II - Other Information
ITEM 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit No.
From Item 601 of
Regulation S-B Description
-------------- -----------
27 Financial Data Schedule
b) Reports on form 8-K. None.
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Cornerstone Bancorp
(Registrant)
By: /s/J. Rodger Anthony Date: November 13, 2000
--------------------------------------------
J. Rodger Anthony
President and Chief Executive Officer
By: /s/Nicholas S. Clark Date: November 13, 2000
--------------------------------------------
Nicholas S. Clark
Vice President and Chief
Financial Officer
(Principal financial officer)
10
