SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
Commission file number (0-14346)
Cornerstone Financial Corporation
(Exact name of registrant as specified in its charter)
New Hampshire 02-0368172
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 East Broadway 03038
Derry, New Hampshire (Zip Code)
(Address of princiapl executive offices)
Registrant's telephone number, including area code:
(603) 432-9517
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. Yes [x] No [ ].
The aggregate market value of the voting stock held by non-affliates of
the registrant based on the average bid and asked price on June 30, 1995 was
$15,750,796.
As of June 30, 1995, 2,109,872 shares of the registrant's common stock
were issued and outstanding.
PART I
ITEM 1. BUSINESS
(a) General Development of Business
The Registrant, Cornerstone Financial Corporation (the "Company") is a
New Hampshire corporation chartered in May, 1982 for the purpose of becoming
the bank holding company parent of Derry Bank and Trust Company ("Derry"), a
New Hampshire state-chartered trust company with its principal place of
business in Derry, New Hampshire. Derry was incorporated under the laws of New
Hampshire in May, 1969. The Company formed Cornerstone Bank ("Cornerstone"), a
New Hampshire state-chartered savings bank, in 1987 for the purpose of
acquiring the Nashua, New Hampshire branch office of Amoskeag Bank.
Cornerstone completed the acquisition on September 18, 1987. On October 1,
1990, Cornerstone merged into Derry with the resulting bank operating as a
commercial bank under the name "Cornerstone Bank" (the "Bank"). Statistical
information presented in this Report for the Company includes information for
the Company and the Bank.
The Company also owns the stock of Birchwood Development Corporation, a
corporation which holds title to one of the Bank's branch offices and leases
such facilities to the Bank under noncancellable lease agreements.
Cornerstone issued 786,254 shares of its common stock and $2,000,000 of
8.75% Convertible Subordinated Debentures in a public offering completed in
October, 1985. The authorized common stock of the Company was increased from
1,500,000 to 8,000,000 shares pursuant to stockholder approval obtained at a
special meeting of stockholders held on January 19, 1987. The Company effected
a two-for-one stock split on January 21, 1987. The Company issued 575,000
shares of its common stock and $12,000,000 of 7% Convertible Subordinated
Debentures in a public offering completed in the first quarter of 1987. The
net proceeds to the Company from its public offerings in 1985 and 1987 were
approximately $7,869,000 and $18,400,000, respectively.
During 1990, the Company repurchased 15,500 shares of its common stock
and $971,000 of its 7.0% Convertible Debentures in open market transactions.
Under repurchase programs originally commenced in November 1987, the Company
has repurchased 146,502 shares of common stock, $60,000 of its 8.75%
convertible subordinated debentures due in 1997 and $7,812,000 of its 7.0%
convertible subordinated debentures due in 1999. On February 23, 1990, the
Company announced the completion of its program initiated in December 1988
under which it paid dividends in excess of current earnings. In connection
with the completion of this program, the Company's Board of Directors adopted
a policy of paying dividends based upon current earnings. The Company declared
a dividend of $.05 per share during the first quarter of 1990. Due to the
decline in the real estate market and the general economy in its market areas,
the Company's Board of Directors has voted to forego the declaration of a
dividend since the first quarter of 1990. Although general economic conditions
have recently improved, the declaration and amount of future dividends will
depend on the Company's earnings, financial condition and prospects and on
relevant legal, financial and regulatory considerations.
During 1990, Derry and Cornerstone merged their operations into one
commercial bank, Cornerstone Bank.
On March 23, 1995, the Company entered into a definitive Agreement and
Plan of Merger providing for the acquisition of all of the outstanding capital
stock of the Company by BayBanks, Inc., a bank holding company headquartered
in Boston, Massachusetts ("BayBanks"). Pursuant to the definitive agreement,
BayBanks will pay $8.80 per share in cash for all of the outstanding shares of
common stock of the Company, or an aggregate of approximately $18.5 million
(based on 2,107,017 shares outstanding as of March 23, 1995).
The proposed transaction is subject to regulatory approval and approval
by the shareholders of the Company and certain other conditions. The
transaction has been approved by the Boards of Directors of the Company and
BayBanks. At December 31, 1994, BayBanks had assets of approximately $10.8
billion and stockholders' equity of approximately $789 million.
(b) Financial Information About Industry Segments
Not applicable.
(c) Narrative Description of Business
General
The Company is a bank holding company whose primary asset is the stock
of the Bank. The Bank provides a full range of commercial and consumer banking
services through eleven banking offices located in southern New Hampshire. The
Bank has offices in East Hampstead, Candia, Chester, Windham, three offices in
Manchester, two offices in Nashua, and two offices in Derry, one of which is
the site of its main office.
Banking Services
Banking services offered to businesses and individuals include checking
and savings accounts, time deposits, NOW accounts and money market deposit
accounts, real estate, automobile, personal, commercial, home improvement,
home equity and other installment and term loans, traveler's checks, money
orders, safe deposit boxes, night depository facilities, credit cards and
other financial services. In February 1995, the Bank made brokerage services
available for its customers through an agreement with Invest, a firm that
specializes in working with Banks for its customer base.
The Bank attempts to develop customer loyalty by seeking to provide
superior service. This service orientation has encouraged a base of low-cost
deposits. The Company achieved net interest margins of 4.3%, 4.5% and 4.0% in
1994, 1993 and 1992, respectively. The Bank's fee structure is designed to
cover the cost of many of its banking services. Management has also attempted
to maximize income by maintaining an aggressive cash management program.
The Bank has loan servicing operations for mortgage loans sold in the
secondary mortgage market. As of December 31, 1994, approximately $65,700,000
in loans were being serviced on behalf of other institutions. Accordingly, the
Bank has recognized fee income for servicing operations, as well as loan
origination fees for loans serviced or processed by the Bank and subsequently
resold in the secondary markets.
The Bank serves a variety of businesses, ranging from small, family-
owned operations to medium size corporations. A full range of business credit
services is offered by the Bank, including lines of credit, term loans,
revolving loans, equipment and inventory financing (including automobile
dealer floor plan financing), lease financing and commercial mortgages.
Competition
The banking business in the Bank's market area has become increasingly
competitive over the past several years. The Bank's major competitors in
attracting deposits and lending funds consist primarily of other New
Hampshire-based commercial banks, savings banks and other thrift institutions,
credit unions and, to a lesser extent, nonbank financial institutions such as
money market mutual funds, stock brokerage firms and insurance companies. A
number of these competing institutions maintain branches in locations where
the Bank maintains offices. Several of these institutions have capital
resources and legal lending limits in excess of that of the Bank.
The primary factors in competing for deposits are convenient office
locations, flexible hours, interest rates and service, while those relating to
loans are interest rates, the range of lending services offered and lending
fees. However, the Bank believes that several additional factors enable it to
compete successfully in the southern New Hampshire market area. Principal
among these is the location and character of the Bank's business and its
"community bank" management philosophy, which emphasizes decentralized
decision-making at the local banking level. In addition, the Bank also
benefits from having many long-time residents of its market area on its Board
of Directors and from having management personnel with long lengths of
service.
Employees
The Company does not currently have any employees. At December 31, 1994,
the Bank had 82 full-time and 34 part-time employees. Relations between the
Bank's management and employees are considered good.
Supervision and Regulation
General
The Bank and the Company are subject to extensive supervision and
regulation. As a New Hampshire-chartered, FDIC-insured bank, the Bank is
subject to regulation and supervision by the New Hampshire Banking Department
and the Federal Deposit Insurance Corporation (the "FDIC").
The Company, as a bank holding company, is subject to regulation,
examination and supervision by the Federal Reserve Board under the Bank
Holding Company Act of 1956 (the "Bank Holding Company Act"). The following
references to applicable statutes and regulations are brief summaries thereof
and do not purport to be complete.
Federal Deposit Insurance Corporation
The Bank's deposits are insured by the FDIC up to a maximum of $100,000
per depositor. The FDIC issues regulations, conducts periodic examinations,
imposes minimum capital requirements, requires the filing of reports and
generally supervises the operations of its insured banks. The approval of the
FDIC is required prior to any merger or consolidation, or the establishment or
relocation of an office. This supervision and regulation is intended primarily
for the protection of depositors.
Any insured bank which does not operate in accordance with or conform to
FDIC regulations, policies and directives may be sanctioned for non-
compliance. For example, proceedings may be instituted against any insured
bank or any director, officer or employee of such bank who engages in unsafe
and unsound practices, including the violation of applicable laws and
regulations. The FDIC has the authority to terminate insurance of deposits
pursuant to procedures established for that purpose.
Under the new FDIC regulations, the Bank is required to pay annual
insurance premiums generally equal to 0.23% of the dollar amount of the Bank's
deposits based on the Bank's rating by the FDIC for the year 1994. The FDIC
has the authority to assess additional premiums to cover its losses and
expenses.
New Hampshire Banking Department
As a state-chartered bank, the Bank is subject to the applicable
provisions of New Hampshire banking law. The Bank derives its lending and
investment powers from these laws and is subject to periodic examination and
reporting requirements by the New Hampshire Bank Commissioner (the
"Commissioner"), who also has specific statutory jurisdiction over certain
banking activities such as mergers and the creation of new powers. Conversion
from mutual to stock form and the establishment of branches are subject to
approval of the New Hampshire Board of Trust Company Incorporation.
Federal Reserve Board
The Federal Reserve Board requires the Bank to maintain reserves against
its transaction accounts and nonpersonal time deposits based on the amount of
the Bank's deposits.
The Company is a "bank holding company" within the meaning of the Bank
Holding Company Act. Under the Bank Holding Company Act, a bank holding
company is required to file annually with the Federal Reserve Board a report
of its operations and, with its subsidiaries, is subject to examination by the
Federal Reserve Board. The Bank Holding Company Act prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of
any bank, without prior approval of the Federal Reserve Board. No approval
under the Act is required, however, for a bank holding company already owning
or controlling over 50% of the voting shares of a bank to acquire additional
shares of such bank.
The Bank Holding Company Act further precludes a bank holding company,
with certain exceptions, from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any non-banking entity engaged
in any activities other than those which the Federal Reserve Bank has
determined to be closely related to banking or managing and controlling banks
and so as to be a proper incident thereto. The Federal Reserve Board has
determined that certain activities, including, but not limited to, mortgage
banking, operating small loan companies, discount brokerage activities,
factoring, certain data processing operations, providing investment and
financial advice and leasing personal property on a full payout basis are
closely related, and a proper incident, to banking. A bank holding company and
its subsidiaries also are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or lease or sale of
property or furnishing of services.
Interstate Banking
The Bank Holding Company Act currently prohibits a bank holding company
from acquiring any bank located outside of the state in which the existing
banking subsidiaries of the bank holding company are located unless
specifically authorized by applicable state law.
Interstate banking legislation has been enacted in New Hampshire which
permits out-of-state banks and bank holding companies to establish new banks
or to affiliate with existing banks and bank holding companies in New
Hampshire. The legislation establishes the procedures for the creation of new
banks in New Hampshire and the acquisition of five percent or more of a New
Hampshire bank or bank holding company. Application for an affiliation
certificate must be made to the Board of Trust Company Incorporation ("BTCI")
and the Commissioner is charged with promulgating the rules relating to the
application procedure and the standards to be applied to the application by
the BTCI. The Commissioner has the further responsibility of monitoring
certificate holders, new banks and bank holding companies affiliated under the
law and of adopting rules to carry out this responsibility. Violation of the
legislation may result in the imposition of a fine of up to $5,000 per day for
each day the violation continues and the divestiture of any prohibited
affiliation.
Under the legislation, no bank holding company may acquire ownership or
control of the voting stock of any bank if upon such acquisition (1) the bank
holding company would have more than 12 affiliates in New Hampshire; or (2)
the dollar volume of the total deposits of the bank holding company and all
its affiliates in New Hampshire would exceed 20 percent of the dollar volume
of total deposits in New Hampshire of all state and federal banks. This 20
percent deposit concentration limitation is subject to waiver by the
Commissioner in cases involving certain troubled institutions.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("Riegle-Neal"), effective September 29, 1995 existing restrictions under
the Bank Holding Company Act which prevent the acquisition by a bank holding
company of banks located outside the bank holding company's home state unless
authorized by the state law of the target bank will be eliminated. State law
restrictions regarding deposit concentrations will continue to apply, provided
that such restrictions do not discriminate against out-of-state bank holding
companies. The New Hampshire 20 percent deposit concentration limitation
applies to acquisitions by both in-state and out-of-state bank holding
companies. Such acquisitions will be subject to approval by the Federal
Reserve Board.
Under Riegle-Neal, effective June 1, 1997, (unless the New Hampshire
Legislature enacts a statute "opting out" of interstate branching) out-of-
state banks will be authorized to merge with New Hampshire banks and to
establish branches in New Hampshire. Such mergers and the establishment of
branches will continue to be subject to state deposit concentration
restrictions and coditions that may be imposed by New Hampshire regulatory
authorities, provided that such restrictions and conditions do not
discriminate against out-of-state banks. The resulting New Hampshire banks and
branches will continue to be subject to regulation by New Hampshire regulatory
authorities provided that such regulations do not discriminate against out-of-
state banks.
Securities and Exchange Commission
The Company has registered its common stock with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as
amended. As a result of such registration, the proxy and tender offer rules,
periodic reporting requirements, and insider trading restrictions and
reporting requirements, as well as certain other requirements, of such Act are
applicable to the Company.
Restrictions on the Payment of Dividends
The New Hampshire Business Corporation Act previously permitted the
Company to pay dividends on its capital stock only from its unreserved and
unrestricted earned surplus or from its net profits for the current fiscal
year and the next preceding fiscal year taken as a single period. The Company
amended its Articles of Incorporation in 1990 to also permit distributions
from capital surplus. Effective January 1, 1993, the New Hampshire Business
Corporation Act has been revised. The Revised Act refers to purchases and
redemptions of a corporation's own shares as "distributions," along with
dividends and distributions in the classic sense. Accordingly, all of those
terms would be called "distributions". Under the Revised Act, a distribution
must be authorized by the Board of Directors and may not be paid if the
corporation, after the payment is made, would not be able to pay its debts as
they become due in the usual course of business, or the corporation's total
assets would be less than the sum of its total liabilities plus the amount
that would be needed, if the corporation were to be dissolved at the time of
the distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. Under New Hampshire law, the payment of dividends by the Bank to
the Company is restricted. Furthermore, the Federal Deposit Insurance Act
prohibits the Bank from paying dividends on its capital stock if it is in
default in the payment of any assessment to the FDIC.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank of Boston (the
"FHLB"), which is one of 12 regional Federal Home Loan Banks. The FHLB serves
as a reserve or central bank for its members. It is funded primarily from the
sale of consolidated obligations of the Federal Home Loan Bank System. As a
member of the FHLB, the Bank is required to purchase and hold stock in the
FHLB in an amount equal to the greater of 1% of the Bank's aggregate unpaid
residential mortgage loan balances at the beginning of the year or 1/20th of
FHLB advances outstanding. As of December 31, 1994, the Bank held stock in the
FHLB in the amount of $1,302,100.
Other Regulations
The policies of regulatory authorities, including the Federal Reserve
Board and the FDIC, have had a significant effect on the operating results of
financial institutions in the past and are expected to do so in the future. An
important function of the Federal Reserve Board is to regulate aggregate
national credit and money supply through such means as open market dealings in
securities, establishment of the discount rate on bank borrowings and changes
in reserve requirements against bank deposits. Policies of these agencies may
be influenced by many factors, including inflation, unemployment, short-term
and long-term changes in the international trade balance and fiscal policies
of the United States government. Supervision, regulation or examination of the
Company by these regulatory agencies is not intended for the protection of the
Company's shareholders.
The United States Congress periodically has considered and adopted
legislation which has resulted in and could result in further deregulation of
both banks and other financial institutions. Such legislation could relax or
eliminate geographic restrictions on banks and bank holding companies and
could place the Company in more direct competition with other financial
institutions, including mutual funds, securities brokerage firms and
investment banking firms. No assurance can be given as to whether any
additional legislation will be enacted or as to the effect of such legislation
on the business of the Company.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") was enacted on August 9, 1989. FIRREA was a major piece of
legislation which was intended to restore the public's confidence in the
savings and loan industry, ensure a safe and stable system of affordable
housing finance through major regulatory reforms and strengthen capital
standards and safeguards for the disposal of recoverable assets. Although the
Bank generally is not directly affected by FIRREA, the legislation is expected
to have a substantial impact on the nation's insured financial institutions.
FIRREA abolished the Federal Home Loan Bank Board and the position of
Chairman of the Bank Board as chief regulator of the thrift industry. The
Office of Thrift Supervision was created as an office in the Department of the
Treasury. The Director of the Office of Thrift Supervison is responsible for
the examination and supervision of all savings institutions. FIRREA abolished
the Federal Savings and Loan Insurance Corporation and gave the Federal
Deposit Insurance Corporation the duty of insuring the deposits of savings
associations as well as banks. The insurance funds are maintained separately
and were renamed. The Bank Insurance Fund generally serves banks, while the
Savings Association Insurance Fund serves thrift institutions.
Federal Deposit Insurance Corporation Improvement Act of 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"), provides for, among other things, increased funding for the Bank
Insurance Fund (the "BIF") of the FDIC and expanded regulation of depository
institutions and their affiliates, including parent holding companies. A
summary of certain provisions of FDICIA and its implementing regulations is
provided below.
Risk Based Deposit Insurance Assessments. A significant portion of the
additional funding to BIF is in the form of borrowings to be repaid by
insurance premiums assessed on BIF members. In addition, FDICIA provides for
an increase in the ratio of the reserves to insured deposits of the BIF to
1.25% by the end of the 15-year period that began with the semi-annual
assessment period ending December 31, 1991, also to be financed by insurance
premiums. The result of these provisions could be a significant increase in
the assessment rate on deposits of BIF members during the balance of this 15-
year period. FDICIA also provides authority for special assessments against
insured deposits and for the development of a general risk based assessment
system. The FDIC has set assessment rates for BIF-insured institutions ranging
from 0.23% to 0.31%, based on a risk assessment of the institution. Each
financial institution is assigned to one of three capital groups--"well
capitalized", "adequately capitalized" or "undercapitalized"--and further
assigned to one of three subgroups within each capital group, on the basis of
supervisory evaluations by the institution's primary federal and, if
applicable, state supervisors and other information relevant to the
institution's financial condition and the risk posed to the applicable
insurance fund. For purposes of the risk-based assessment system, a well-
capitalized institution is one that has a total risk-based capital ratio of
10% or more, a Tier 1 risk-based capital of 6% or more, and a leverage ratio
of 5% or more. An adequately capitalized institution has a total risk-based
capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more,
and a leverage ratio of 4% or more. An undercapitalized institution is one
that does not meet either of the foregoing definitions. The actual assessment
rate applicable to a particular institution, therefore, depends in part upon
the risk assessment classification so assigned to the institution by the FDIC.
Prompt Corrective Action. FDICIA also provides the federal banking
agencies with broad powers to take prompt corrective action to resolve
problems of insured depository institutions, depending upon a particular
institution's level of capital. FDICIA establishes five tiers of capital
measurement for regulatory purposes ranging from "well-capitalized" to
"critically undercapitalized." Under prompt corrective action regulations
adopted by the federal banking agencies in a depository institution is (a)
"well-capitalized" if it has a total risk-based capital ratio of 10% or more,
a Tier 1 risk-based ratio of 6% or more, a leverage ratio of 5% or more and is
not subject to any written agreement, order or capital directive or prompt
corrective action directive issued by its primary regulator to meet and
maintain a specific capital measure; (b) "adequately capitalized" if it has a
total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital
ratio of 4% or more and a leverage ratio of 4% or more (3% if the bank is
rated composite I under the CAMEL rating system in its most recent examination
and is not experiencing or anticipating significant growth) and does not
qualify as "well-capitalized"; (c) "undercapitalized" if it has a total risk
based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio
that is less than 4% or a leverage ratio that is less than 4% (3% if the bank
is rated composite I under the CAMEL rating system in its most recent
examination and is not experiencing or anticipating significant growth); (d)
"significantly undercapitalized" if the bank has a total risk-based capital
ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less
than 3% or a leverage ratio that is less than 3%; and (e) "critically
undercapitalized" if the depository institution has a ratio of tangible equity
to total assets that is equal to or less than 2% of total assets, or otherwise
fails to meet certain established critical capital levels. A depository
institution may be deemed to be in a capitalization category that is lower
than is indicated by its actual capital position under certain circumstances.
At December 31, 1994, the Bank was classified as "well-capitalized" under the
prompt corrective action regulations described above.
Any depository institution that is undercapitalized and which fails to
meet regulatory capital requirements specified in FDICIA must submit a capital
restoration plan guaranteed by the bank holding company controlling such
institution, and the regulatory agencies may place limits on the asset growth
and restrict activities of the institution (including transactions with
affiliates), require the institution to raise additional capital, dispose of
subsidiaries or assets or be acquired and, ultimately, require the appointment
of a receiver. The guarantee of a controlling bank holding company under
FDICIA of performance of a capital restoration plan is limited to the lower of
5% of an under capitalized banking subsidiary's assets or the amount required
for the bank to be classified as adequately capitalized. Federal banking
agencies may not accept a capital restoration plan without determining, among
other things, that the plan is based on realistic assumptions and is likely to
succeed in restoring the depository institution's capital. If a depository
institution fails to submit an acceptable plan within the time required
(generally 45 days after receiving notice that the institution is
undercapitalized, significantly undercapitalized or critically
undercapitalized), it is treated as if it were significantly undercapitalized.
If the controlling bank holding company fails to fulfill its guaranty
obligations under FDICIA and files (or has filed against it) a petition under
the Federal Bankruptcy Code, the applicable regulatory agency would have a
claim as a general creditor of the bank holding company and, if the capital
restoration plan were deemed to be a commitment to maintain capital under the
Federal Bankruptcy Code, the claim would be entitled to a priority in such
bankruptcy proceeding over unsecured third party creditors of the bank holding
company.
In addition to the requirement of mandatory submission of a capital
restoration plan, under FDICIA, an undercapitalized institution may not pay
management fees to any person having control of the institution nor may an
institution, except under certain circumstances and with prior regulatory
approval, make any capital distribution if, after making such payment or
distribution, the institution would be undercapitalized. Further,
undercapitalized depository institutions are subject to restrictions on
borrowing from the Federal Reserve System.
Undercapitalized and significantly undercapitalized depository
institutions may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cessation of receipt of
deposits from correspondent banks. In addition, significantly undercapitalized
depository institutions also are prohibited from awarding bonuses or
increasing compensation of senior executive officers until approval of a
capital restoration plan. Critically undercapitalized depository institutions
are subject to appointment of a receiver or conservator.
Brokered Deposits and Pass-Through Deposit Insurance Limitation. Under
FDICIA, a depository institution that is not well-capitalized is generally
prohibited from accepting brokered deposits and offering interest rates on
deposits "significantly higher" than the prevailing rate in its market. A
depository institution that is adequately capitalized may accept brokered
deposits if it obtains the prior approval of the FDIC. In addition,
"passthrough" insurance coverage may not be available for certain employee
benefit accounts. In the Company's opinon, these limitations do not have
material effect on the Company.
Safety and Soundness Standards. The Federal Deposit Insurance Act, as
amended by FDICIA and as further amended by the Riegle Community Development
and Regulatory Improvement Act of 1994, directs each federal banking agency to
prescribe standards for insured depository institutions relating to asset
quality, earnings and stock valuation. The ultimate cumulative effect of these
standards cannot currently be forecast.
FDICIA also contains a variety of other provisions that may affect the
Company's operation, including new reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, and the
requirement that a depository institution give 90 days' prior notice to
customers and regulatory authorities before closing any branch. Many of the
provisions in FDICIA have recently been or will be implemented through the
adoption of regulations by the various federal banking agencies and,
therefore, the precise impact on the Company cannot be assessed at this time.
Capital Guidelines. The Federal Reserve Board and the FDIC have issued
risk-based capital guidelines for bank holding companies, state-chartered
member banks and state-chartered non-member banks. Under these guidelines, the
minumum ratio of total capital to risk-adjusted assets (including certain off-
balance sheet items, such as standby letters of credit) is 8%. At least half
of the total capital is to be comprised of common equity, retained earnings,
minority interests in the equity accounts of consolidated subsidiaries and a
limited amount of perpetual preferred stock, less goodwill ("Tier 1 capital").
The remainder may consist of perpetual debt, mandatorily convertible debt
securities, a limited amount of subordinated debt, other preferred stock and
limited amount of loan loss reserves (supplementary capital). In addition, the
Federal Reserve Board and the FDIC have adopted a leverage ratio (Tier 1
capital to total assets, net of goodwill) of 3% for bank holding companies and
banks that meet certain specified criteria, including that they have the
highest regulatory rating. The rule indicates that the minimum leverage ratio
should be 1% to 2% higher for holding companies and banks undertaking major
expansion programs or that do not have the highest regulatory rating.
As of December 31, 1994, the capital ratios of the Company and the Bank
on a historical basis exceeded all minimum regulatory capital requirements.
Under FIRREA and FDICIA, failure to meet the minimum regulatory capital
requirements could subject a banking institution to a variety of enforcement
remedies available to federal regulatory authorities, including the
termination of deposit insurance by the FDIC and seizure of the institution.
Under the policies of the Federal Reserve Board, the Company is expected
to act as a source of financial strength to each subsidiary bank and to commit
resources to support such subsidiary bank in circumstances where it might not
do so absent such policy. In addition, any subordinated loans by the Company
to any of the subsidiary banks would also be subordinate in right of payment
to deposits and obligations to general creditors of such subsidiary bank.
Regulatory Matters
The Bank's Board of Directors consented to the issuance of an Order to
Cease and Desist (the "Order") by the FDIC and the Commissioner resulting from
the FDIC's June 30, 1991 examination of the Bank. The Order became effective
on February 1, 1992. The Order required that the Bank meet or exceed an
increasingly stringent minimum Tier 1 leverage capital ratio requirement,
submit a capital and management plan to the FDIC and the Commissioner, reduce
classified assets and concentrations of credit, and retain qualified
management, among other items. The Company and the Bank took a number of steps
to meet these requirements. During the third quarter of 1993, the Federal
Reserve completed a visitation of the Company. As a result of this visitation
the Company is required by the Federal Reserve to develop a liquidity plan for
the parent company and not to undertake any actions which will reduce the
parent company's ability to act as a source of strength to its subsidiary
bank, without 30 day's prior notification to the Federal Reserve Bank. These
actions include repurchases of Company stock or debut and dividend payments.
Effective April 26, 1994, the Order to Cease and Desist was terminated by the
FDIC and the Bank Commissioner. On September 1, 1994 the Federal Reserve
removed the restrictions it had imposed on the Company.
Average Balance Sheets
The following tables present the average balance of assets, liabilities
and stockholders' equity for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1993
-------------------- --------------------
Percent Percent
Amount of Total Amount of Total
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 6,563 4.7% $ 6,164 4.5%
Interest bearing deposits 1,110 0.8 721 0.5
Federal funds sold 2,230 1.6 2,000 1.5
Investment securities 65,161 46.5 60,088 43.8
Total loans 55,306 39.5 58,481 42.6
Less: Allowance for loan losses (2,092) (1.5) (2,268) (1.6)
Net loans 53,214 38.0 56,213 41.0
Premises and equipment, net 6,105 4.4 6,400 4.7
Other real estate 1,702 1.2 2,754 2.0
Other assets 3,978 2.8 2,811 2.0
Total assets $140,063 100.0% $137,151 100.0%
Liabilities and Stockholders' Equity:
Deposits:
Demand $ 13,623 9.7% $ 12,932 9.4%
Savings 36,157 25.8 33,269 24.3
NOW and money market 42,275 30.2 41,918 30.6
Certificates and other time 32,592 23.3 36,428 26.5
Total deposits 124,647 89.0 124,547 90.8
Other borrowed funds 4,334 3.1 4,038 2.9
Other liabilities 1,835 1.3 1,625 1.2
Total liabilities 130,816 93.4 130,210 94.9
Stockholders' equity:
Common stock 1,408 1.0 1,403 1.0
Capital surplus 15,448 11.1 15,446 11.3
Deficit (6,228) (4.4) (8,527) (6.2)
10,628 7.6 8,322 6.1
Treasury stock (1,381) (1.0) (1,381) (0.9)
Total stockholders' equity 9,247 6.6 6,941 5.1
Total liabilities and stockholders' equity $140,063 100.0% $137,151 100.0%
</TABLE>
Investment Portfolio
Book Value of Investments
The following table sets forth the classification of the combined
investment portfolios by type of investment security based on book value at
the dates indicated:
<TABLE>
<CAPTION>
At December 31,
1994 1993
(In thousands)
<S> <C> <C>
U.S. Treasury and agency securities $50,172 $50,491
Other investment securities 15,870 7,164
Total $66,042 $57,655
</TABLE>
Maturities of Investments(1)
<TABLE>
<CAPTION>
Securities Available For Sale Securities Held to Maturity
----------------------------- ----------------------------
Amortized Market Amortized Market
December 31, 1994 Cost Value Yield Cost Value Yield
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 0 $ 0 -- $ 1,054 $ 1,043 5.0%
Due after one year through five years 40,317 37,962 5.3% 14,505 14,001 6.0
Due after five years through ten years 1,993 1,738 5.8 0 0 --
Total $42,310 $39,700 5.3% $15,559 $15,044 5.9%
Collateralized mortgage obligations 0 0 -- $ 1,604 $ 1,518 5.6%
Mortgage-backed and other asset-backed
securities 66 65 8.4% 5,201 4,791 7.2%
Total $42,376 $39,765 5.3% $22,364 $21,353 6.3%
<FN>
<F1> It is the Company's policy generally not to purchase any corporate debt
which has a rating of less than BAA at the time of purchase.
</FN>
</TABLE>
Loan Portfolio
Types of Loans
The following tables set forth the composition of the Company's total
loan portfolio in dollar amounts and percentages of gross loans:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------
1994 1993
---------------------- ---------------------
Percentage Percentage
of Total of Total
Amount Loans Amount Loans
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Construction $ 642 1.2% $ 372 .7%
Mortgage 10,082 18.1 10,400 18.7
Commercial, financial and agricultural 40,144 72.3 40,059 72.1
Consumer loans 4,686 8.4 4,733 8.5
Total loans $55,554 100.0% $55,564 100.0%
Less:
Allowance for loan losses (2,014) (2,118)
Net loans $53,540 $53,446
</TABLE>
Loan Originations
The following table shows the Company's loan originations during the
periods indicated. Loans originated include loans which were refinanced.
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1994 1993
(Dollars in thousands)
<S> <C> <C>
Consumer loans $ 1,563 $ 1,255
Time and demand loans 3,954 3,418
Residential first mortgage loans:
Retained by the Company 1,728 2,219
Sold in secondary market 6,503 21,703
Commercial mortgage loans 8,402 6,347
$22,150 $34,942
</TABLE>
Maturities and Sensitivity to Changes in Interest Rates
The following schedule reflects the book value, before allowance for
loan losses of the Company's loans, segregated according to maturities and the
interest rate sensitivity of loans due after one year as of December 31, 1994:
<TABLE>
<CAPTION>
At December 31, 1994
--------------------------------------
1 Year 1--5 Over 5
or Less Years Years Total
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Construction $ 642 $ -- $ -- $ 642
Mortgage 125 68 9,889 10,082
Commercial, financial and agricultural 4,126 5,281 30,737 40,144
Consumer loans 463 4,223 -- 4,686
Total $5,356 $9,572 $40,626 $55,554
Loans due after 1 year with:
Predetermined interest rates $24,069
Floating interest rates 26,129
Total $50,198
</TABLE>
Deposits
Average Balances and Rates Paid
The following tables present the average amount of, and rates paid on,
deposits by major classifications for the years indicated:
<TABLE>
<CAPTION>
Percentage of Weighted
Total Average Average
Amounts Deposits Rate
--------------------- ----------------- -------------
Year Ended December 31,
-------------------------------------------------------
1994 1993 1994 1993 1994 1993
(Dollars in thousands)
<S> <C> <C> <C> <C> <S> <S>
Demand $ 13,623 $ 12,932 10.9% 10.4% -- --
Savings 36,157 33,269 29.0 26.7 2.0% 2.0%
NOW and money market 42,275 41,918 33.9 33.7 1.5 1.6
Certificates and other time 32,592 36,428 26.2 29.2 3.7 4.1
$124,647 $124,547 100.0% 100.0% 2.1% 2.3%
</TABLE>
The majority of the Bank's deposits come from its primary market in
southern New Hampshire. It does not solicit deposits outside New Hampshire or
use brokers to obtain deposits. The Bank has sought to control its overall
costs of funds by generally paying no more than competitive rates on deposits.
The Bank's ability to attract low cost deposits historically has been material
to its profitability.
Maturities of Certificates Over $100,000
The following table summarizes the time remaining to maturity of
certificates of deposit greater than $100,000 at December 31, 1994:
<TABLE>
<CAPTION>
At December 31, 1994
(Dollars in thousands)
<C> <C>
3 months or less $ 1,263
3 through 6 months 506
6 through 12 months 506
Over 12 months 340
Total $ 2,615
</TABLE>
Return on Equity and Assets
Selected ratios, for the years indicated, are set forth below:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
1994 1993
<S> <C> <C>
Net income to:
Average total assets 1.35% 1.49%
Average stockholders' equity 20.51 29.36
Cash dividends declared to net income -- --
Average stockholders' equity to average total assets 6.6 5.06
</TABLE>
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Nominees and Continuing Directors
Listed below is certain information concerning the nominees for election
to the Board of Directors and the directors who will continue in office after
the 1995 Annual Meeting of stockholders.
<TABLE>
<CAPTION>
Positions with the Company
and Present Principal Director
Name and Age Occupation or Employment Since(1)
Nominees to serve for a term expiring in 1998
<S> <S> <C>
Robert E. Benoit Director, Vice President, Treasurer and 1990
Age 47 Chief Financial Officer; Director,
Vice President, Treasurer and Chief
Financial Officer of Cornerstone Bank
Edward D. Bureau Director and Secretary; 1969
Age 64 Grinnell & Bureau, Attorneys
John J. Zito Director; Retired, Former 1981
Age 67 Captain Delta Airlines, Inc.
Nominee to serve for a term expiring in 1997
Horace A. Holaday, Jr. Director; Retired, Former President of 1969
Age 80 Holmes and Wheeler Oil and Heating, Inc.
Directors whose terms expire in 1997
Edward E. Gage, Jr. Director, President, Fortin Gage, Ltd. 1991
Age 60
John M. Terravecchia Director, Chairman, President and Chief 1970
Age 59 Executive Officer; Chairman and Chief
Executive Officer of Cornerstone Bank
Directors whose terms expire in 1996
Howard S. Dearth (2) Director; Retired, Former Real Estate Broker 1973
Age 81
Paul T. Phillips (2) Director; President, Phillips Refrigeration, 1975
Age 81 Inc. (servicers of refrigeration equipment)
G. Robert Smith Director and Senior Vice President; 1977
Age 55 President and Chief Operating
Officer of Corner stone Bank
<FN>
<F1> Each of the above-named directors is a member of the Board of Directors
of Cornerstone Bank (the "Bank"), the Company's principal subsidiary.
Since the Company was not active until 1983, references to the years
directors have served prior to 1983 relate to service on the Bank's
Board.
<F2> Messers. Dearth and Phillips are brothers-in-law.
</FN>
</TABLE>
Executive Officers
Listed below is information concerning the executive officers of the
Company and the Bank.
<TABLE>
<CAPTION>
Name and Age Position with the Company Position with the Bank
<S> <S> <S>
John M. Terravecchia Director, Chairman, President and Director, Chairman and
Age 59 Chief Executive Officer Chief Executive Officer
Howard S. Dearth Director and First Vice Director and First Vice
Age 81 President President
Edward D. Bureau Director and Secretary Director and Secretary
Age 64
G. Robert Smith Director, Senior Vice President Director, President and
Age 55 and Assistant Secretary Chief Operating Officer
Robert E. Benoit Director, Vice President, Director, Vice President,
Age 47 Treasurer and Chief Financial Treasurer and Chief Financial
Officer Officer
Ronald E. Vincent -- Controller
Age 47
</TABLE>
Each of the foregoing directors and officers of the Company and the Bank
has been employed as set forth opposite his name above for at least the past
five years except Mr. Vincent. Mr. Vincent joined the Bank in July, 1992.
Prior to that time, he was Controller of Numerica Savings Bank, FSB in
Manchester, New Hampshire.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company' officers and
directors to file reports of ownership and changes of ownership with the
Securities and Exchange Commission (the "Commission"). Officers and directors
are required by regulations of the Commission to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Company and written representations that no additional forms were required,
the Company believes that, during the year ended December 31, 1994, the
Company's officers and directors complied with all Section 16(a) filing
requirements applicable to them.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. Since the formation of the Company in 1983,
none of its officers have received any compensation directly from the Company.
Compensation of the officers of the Company is paid by the Bank. The
following table sets forth cash compensation for the Company's three senior
executive officers for services rendered in all capacities to the Company and
its subsidiaries during the last three fiscal years; no other executive
officer of the Company received total compensation exceeding $100,000 during
such period.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------------- -----------
Securities
Underlying All Other
Name and Principal Position Year Salary($)(1) Bonus($)(2) Options(#) Compensation($)(3)
<S> <C> <C> <C> <C> <C>
John M. Terravecchia 1994 $121,038 $36,773 0 $20,754
President and Chief 1993 116,264 35,018 20,000 12,426
Executive Officer of the 1992 115,525 0 9,000 0
Company
G. Robert Smith 1994 91,214 27,467 0 20,400
Senior Vice President 1993 85,874 26,150 20,000 9,202
and Assistant Secretary 1992 86,281 0 9,010 0
Robert E. Benoit 1994 72,898 18,038 0 14,917
Vice President, 1993 68,816 17,175 12,000 7,264
Treasurer and Chief 1992 69,259 0 9,010 0
Financial Officer
<FN>
<F1> The amounts listed as Salary for 1994, include base salary plus
directors fees.
<F2> The amounts listed as the bonuses for 1993 were not approved and paid
until May 1994.
<F3> The values listed in this column include contributions made by the Bank
with respect to such officers under the Bank's Profit Sharing Plan.
</FN>
</TABLE>
Employment Agreements. The Company has entered into employment
agreements ("Employment Agreements") with certain members of management,
including John M Terravecchia, Chairman, President and Chief Executive Officer
of the Company and Chairman and Chief Executive Officer of the Bank, G. Robert
Smith, Senior Vice President of the Company and President and Chief Operating
Officer of the Bank, and Robert E. Benoit, Vice President, Treasurer and Chief
Financial Officer of the Company and the Bank (the "Executives").
Under the Employment Agreements, the Executives receive base salaries as
determined by the Board of Directors, and are entitled to receive salary
increases and formula bonuses to the extent that the Bank's return on average
assets exceed specified levels, as well as discretionary bonuses as determined
by the Board of Directors. The terms of the Employment Agreements provide for
Mr. Terravecchia and Mr. Smith to be employed through December 31, 1998 and
Mr. Benoit though December 31, 1997.
Under the Employment Agreements, if an Executive is terminated other
than for cause, the Executive is to receive a lump sum payment equal to the
present value of the Executive's current salary over the remaining term of the
respective Employment Agreement; provided, however, if such termination other
than for cause occurs in specified circumstances in connection with a change
in control of the Company or the Bank, the Executive is instead entitled to
receive a lump sum severance payment equal to three times the average annual
compensation for the Executive for the previous five years less one dollar.
The Employment Agreements include deferred compensation arrangements
which provide for fifteen annual payments of $89,600 to Mr. Terravecchia,
$65,600 to Mr. Smith, $52,800 to Mr. Benoit. Payments commence at the later
of age 62 or retirement, with thirty years of service being required for full
vesting of deferred compensation benefits. Full vesting also occurs in
certain events involving a change in the control of the Company and the Bank.
In each case payments continue for a period of fifteen years. The Company
has created a trust to retain assets set aside for the payment of these
deferred compensation benefits.
Director Compensation. In 1994, and to the date hereof in 1995, each
outside director of the Company received $50 for each meeting of the Company's
Board attended. Each director of the Bank received $250 per meeting through
September 1994, and $350 per meeting thereafter, for each meeting of the Board
attended and $75 for each committee meeting attended.
Profit Sharing Plan. The Company, through the Bank, maintains a
qualified, noncontributory profit-sharing plan (the "Profit Sharing Plan").
Under the Profit Sharing Plan, an employee becomes a participant upon
satisfaction of three requirements: (1) attainment of age 21, (2) completion
of at least 1,000 hours during the preceding year, and (3) employment by the
Bank at year end. The Bank determines its contribution to the Profit Sharing
Plan based upon the Bank's profits. Any money deposited into the Profit
Sharing Plan goes to an investment fund managed by the Profit Sharing Plan
trustees. The trustees are Robert E. Benoit, G. Robert Smith and John M.
Terravecchia, all directors and executive officers of the Bank.
The Bank's contributions are divided proportionately among the
participants based on each participant's compensation. A participant who
terminates his employment prior to completion of seven years of service loses
some of the Bank's contributions to his account. At least four years of
service is required to receive any benefits under the Profit Sharing Plan. In
general, an employee is eligible to receive retirement benefits as of his 65th
birthday. The amount of an individual's retirement benefit depends upon how
much has been contributed for him by the Bank and the investment experience of
the investment fund.
The Bank may terminate or amend the Profit Sharing Plan at any time,
provided that it may not deprive a participant of vested benefits. Under
federal law, the sum of employer contributions, forfeitures from others, and
employee contributions in any year may not exceed the lesser of 25% of an
employee's compensation or $30,000, and the maximum total compensation
considered under the Profit Sharing Plan will be $150,000. The latter amount
will be adjusted to reflect cost-of-living increases. There was a
contribution for the year ended December 31, 1994 of $244,000.
Stock Option Plans
1984 Stock Option Plan. On May 29, 1984, the stockholders of the
Company ratified and approved the 1984 Stock Option Plan (the "1984 Option
Plan") adopted by the Board of Directors on April 26, 1984. The 1984 Option
Plan was amended on March 26, 1987 to make changes required by the Tax Reform
Act of 1986. Under the 1984 Option Plan, 150,000 shares of authorized but
unissued common stock of the Company were initially reserved for issuance
pursuant to the 1984 Option Plan.
Full-time "key employees" (as defined in the 1984 Option Plan) of the
Company or any subsidiary thereof, meaning those full-time employees of the
Company or any subsidiary considered to be especially important to the future
of the Company, are eligible for selection to participate in the 1984 Option
Plan. Directors who are not also full-time key employees are not eligible to
receive options. All options granted under the 1984 Option Plan are intended
to qualify as incentive stock options ("ISOs") as defined in Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").
The 1984 Option Plan is administered by a Stock Option Committee of the
Company's Board of Directors consisting of not less than three members
appointed by the Board, none of whom is eligible to receive ISOs under the
1984 Option Plan ("1984 Option Plan Committee"). The 1984 Option Plan
Committee selects the key employees who are to be granted ISOs, fixes the
number of shares to be optioned to such employees and determines the terms and
conditions of each grant. Final authority with respect to the 1984 Option
Plan rests in the Company's full Board of Directors. The current members of
the 1984 Option Plan Committee are Howard S. Dearth, Paul T. Phillips and
Horace A. Holaday, Jr. The 1984 Option Plan Committee held no meetings during
1994.
Under the 1984 Option Plan, no option may be granted after April 26,
1994, the 10th anniversary of the date of the plan's adoption by the Board of
Directors. In addition, the 1984 Option Plan provides that no option shall be
exercisable after the expiration of five years from the date of grant. The
market value of stock covered by incentive stock options (determined as of the
date of grant) first exercisable under incentive stock options is limited to
$100,000 per calendar year. An optionee will not be deemed to receive taxable
income upon grant or exercise of an incentive stock option, and any gain
realized at the time of sale of shares acquired upon exercise of an incentive
stock option will constitute capital gain to the optionee, provided that
certain employment and holding period requirements are met. No deduction will
be allowed to the Company as a result of the grant or exercise of qualifying
incentive stock options.
The option price per share is to be determined by the 1984 Option Plan
Committee at the time any ISO is granted and is not to be less than the fair
market value of one share of common stock of the Company on the date the
option is granted. Fair market value is to be determined by reference to
transactions in the Company's common stock on the over-the-counter market.
Payment for shares purchased under the 1984 Option Plan may be made either in
cash or by exchanging shares of common stock of the Company with a fair market
value equal to or less than the total option price plus cash for the
difference. In no event may an option be granted under the 1984 Option Plan
to any individual then owning stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or any
subsidiary.
ISOs for 39,275 shares were granted on January 21, 1992 with an exercise
price of $1.00 per share. ISOs for 52,000 shares were granted on June 24,
1993 with an exercise price of $2.75 per share. Options granted in prior
years have expired.
1987 Stock Option Plan. On May 26, 1987, the stockholders of the
Company ratified and approved the Cornerstone Financial Corporation 1987 Stock
Option Plan (the "1987 Option Plan") adopted by the Board of Directors on
March 26, 1987. The 1987 Option Plan is intended as a performance incentive
for the non-employee directors of the Company and its subsidiaries. A total
of 50,000 shares of unissued common stock of the Company were initially
reserved for issuance pursuant to nonqualified stock options granted under the
1987 Option Plan.
The 1987 Option Plan is administered by a second Stock Option Committee
consisting of members of the Company's Board of Directors who are not eligible
to receive options under the 1987 Option Plan ("1987 Option Plan Committee").
The Committee recommends to the Board of Directors the persons to whom
options will be granted, the number of shares, the types of options and other
terms and conditions of the options. The 1987 Option Plan does not specify
criteria to be used in determining the number of options to be issued and,
thus, the number of options granted is in the discretion of the 1987 Option
Plan Committee, of which the current members are John M. Terravecchia, G.
Robert Smith and Robert E. Benoit. The 1987 Option Plan Committee held no
meeting during 1994.
Under the 1987 Option Plan, nonqualified stock options may be granted to
non-employee directors. Directors must complete at least two years of service
prior to receiving any options under the 1987 Option Plan and the 1987 Option
Plan Committee may elect to establish a vesting schedule for the exercise of
options granted to any optionee. An optionee will be deemed to receive
taxable income at ordinary income rates upon exercise of a nonqualified stock
option in an amount equal to the difference between the exercise price and the
fair market value of the common stock on the date of exercise. Any gain
realized at the time of sale of shares acquired upon exercise of an option
will constitute capital gain to the optionee. The amount of such taxable
income will be a deductible expense to the Company.
All options granted under the 1987 Option Plan are required to have an
exercise price per share equal to at least the fair market value of the share
of common stock on the date the option is granted. No option granted is
exercisable (i) after the date on which the optionee ceases to perform
services for the Bank (except in the event of retirement due to age or
disability or in the event of death, in which case options may be exercisable
for up to three months and one year thereafter, respectively), or (ii) 5 years
after the option is granted. Payment for shares purchased pursuant to an
option may be made in cash or by check or, if the option agreement permits, by
delivery and assignment to the Company shares of common stock of the Company
having a fair market value equal to the aggregate exercise price, or by any
combination of the foregoing.
Nonqualified options for 14,100 shares were granted on January 21, 1992
with an exercise price of $1.00 per share. Nonqualified options for 10,115
shares were granted on June 24, 1993 with an exercise price of $2.75 per
share. Options granted in prior years have expired.
No options were granted during 1994 under the Company's Stock Option
Plans. The following table sets forth certain information with respect to
outstanding stock options held by Messrs. Terravecchia, Smith and Benoit as of
December 31, 1994.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options in-the-money Options
at Fiscal Year-End at Fiscal Year-End
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
<S> <C> <C>
John M. Terravecchia 29,000/0 $110,000/0
G. Robert Smith 29,010/0 110,050/0
Robert E. Benoit 21,010/0 84,050/0
<FN>
<F1> Based on the difference between the closing price of the Common Stock on
December 30, 1994, which was $6.00, and the option exercise price for
each respective option.
</FN>
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Security Ownership of Management
The following table sets forth information as of June 30, 1995 with
respect to the shares of Company Common Stock beneficially owned by each
director and each executive officer and by all directors and executive
officers as a group.
<TABLE>
<CAPTION>
Shares of the
Company Owned
as of
June 30, 1995
(Percentage of
Outstanding Stock
in Parenthesis
Name and Age Positions with the Company Where Over 1%)(1)
<S> <S> <C>
Robert E. Benoit Director, Vice President, Treasurer and 26,210 (1.2%)(2)
Chief Financial Officer; Director,
Vice President, Treasurer and Chief
Financial Officer of Cornerstone Bank
Edward D. Bureau Director and Secretary 17,115 (3)
Howard S. Dearth Director 54,468 (2.5%)(4)
Edward E. Gage, Jr. Director 3,955 (5)
Horace A. Holaday, Jr. Director 18,355 (6)
Paul T. Phillips Director 15,374 (7)
G. Robert Smith Director and Senior Vice President; 53,898 (2.4%)(8)
President and Chief Operating Officer
of Cornerstone Bank
John M. Terravecchia Director, Chairman, President and Chief 100,638 (4.6%)(9)
Executive Officer; Chairman and Chief
Executive Officer of Cornerstone Bank
Ronald E. Vincent Controller of Cornerstone Bank 1,500 (10)
John J. Zito Director 32,407 (1.5%)(11)
All directors and
executive officers
of the Company as a
group (10 persons) 323,920 (14.7%)(12)
<FN>
<F1> Shares of the Company beneficially owned. A beneficial owner of a
security includes any person who, directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise, has
or shares the power to vote such security or the power to dispose of
such security. Included are shares owned by spouses and relatives
living in the same home as to which beneficial ownership may be
disclaimed and shares which may be obtained within 60 days under the
Company's Stock Option Plans or upon conversion of the Company's
convertible debentures.
<F2> Includes 21,010 shares subject to options.
<F3> Includes 14,200 shares owned with spouse and 60 shares owned by
children. Also, includes 2,855 shares subject to options.
<F4> Includes 51,613 shares owned with spouse and 2,855 shares subject to options.
<F5> Includes 1,100 shares owned with spouse and 2,855 shares subject to options.
<F6> Includes 15,500 shares owned with spouse and 2,855 shares subject to options.
<F7> Includes 12,519 shares owned with spouse and 2,855 shares subject to options.
<F8> Includes 3,000 shares owned with spouse and 29,010 shares subject to options.
<F9> Includes 24,250 shares owned by and with spouse and 29,000 shares
subject to options.
<F10> Includes 1,500 shares owned with spouse.
<F11> Includes 2,200 shares owned by spouse and 1,455 shares subject to options.
<F12> Includes 94,740 shares subject to options.
</FN>
</TABLE>
Security Ownership of Certain Beneficial Owners
The following table sets forth information with respect to persons known
by the Company as of June 30, 1995 to be the beneficial owners of more than
five percent of outstanding Company Common Stock.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address Beneficial Ownership(1) Stock Outstanding
<S> <C> <C>
BayBanks, Inc. 391,000(2) 16.3%
175 Federal Street
Boston, Massachusetts 02110
<FN>
<F1> See Note (1) above under "Security Ownership of Management"
<F2> As previously disclosed by the Company, the Company has entered into a
definitive Agreement and Plan of Merger (the "Acquisition Agreement")
providing for the acquisition of all of the outstanding capital stock of
the Company by a subsidiary of BayBanks, Inc. ("BayBanks"). Immediately
upon the execution of the Acquisition Agreement and as contemplated
therein, the Company and BayBanks entered into a stock option agreement
pursuant to which the Company granted to BayBanks an option to purchase
295,000 shares of newly issued Company Common Stock (the "Option"). The
Option is exercisable upon the occurrence of certain events that create
the potential for a third party to acquire the Company. Under
Commission rules, BayBanks is deemed for purposes of this table to be
the beneficial owner of the shares of Common Stock subject to the
Option.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management
Some of the directors and executive officers of the Company and the Bank
are at present, as they have been in the past, customers of the Bank and have
entered into transactions with the Bank in the ordinary course of business.
In addition, some of those persons are at present, as they have been in the
past, also directors or officers of corporations and business trusts or are
members of partnerships which are customers of the Bank and which have entered
into transactions, including loans, with the Bank in the ordinary course of
business. Such loans are on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others and do not involve more than the normal risk of
collectability or present other unfavorable features. The Bank
expects to continue to have banking transactions in the ordinary course of its
business with the executive officers and directors of the Company and the
Bank, and their associates, on substantially the same terms, including
interest rates and collateral on loans, as those then prevailing for
comparable transactions with others.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNERSTONE FINANCIAL CORPORATION
(Registrant)
DATE: July 13, 1995 /s/ JOHN M. TERRAVECCHIA
John M. Terravecchia
Chairman, President and
Chief Executive Officer
DATE: July 13, 1995 /s/ ROBERT E. BENOIT
Robert E. Benoit
Vice President/Treasurer and
Chief Financial Officer
