FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1995
Commission File Number 01-14346
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, DERRY, NEW HAMPSHIRE 03038
(Address of principal executive offices and zip code)
(603) 432-9517
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter 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 the number of shares outstanding of each of the issuer's classes of
common stock as of latest practicable date. November 1, 1995 - 2,109,872
shares
CORNERSTONE FINANCIAL CORPORATION
INDEX
Page Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition
September 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Income
three and nine months ended September 30, 1995 and 4
September 30, 1994
Condensed Consolidated Statements of Cash Flows
nine months ended September 30, 1995 and
September 30, 1994 5
Notes to Condensed Consolidated Financial
Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 10-14
Part II. Other Information 15
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Other information - Yield Analysis 17
Exhibit 11 - Computation of Primary and Fully 18
Diluted Earnings Per Share
Signatures 19
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
(Unaudited)
CORNERSTONE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,700 $ 7,176
Interest-bearing deposits in other banks 1,542 1,051
Federal funds sold 8,610 3,890
Investment securities held to maturity
(market value of $18,543 in 1995 and
$22,655 in 1994 Note 2) 18,680 23,666
Investment securities available for sale
(Note 2) 39,757 39,765
Net loans (Note 3) 53,341 53,540
Premises and equipment, net 5,599 5,940
Other real estate owned (Note 4) 1,618 1,532
Other assets 5,376 6,331
-------- --------
Total assets $141,223 $142,891
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 5) $124,501 $123,299
Short-term borrowings 0 5,000
Other borrowings 3,508 3,508
Other liabilities 2,168 2,163
-------- --------
Total liabilities 130,177 133,970
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, no par; authorized,
8,000,000 shares; issued, 2,256,374
and 2,253,519, outstanding 2,109,872
and 2,107,017 1,410 1,408
Capital surplus 15,452 15,449
Retained deficit (4,245) (4,980)
-------- --------
12,617 11,877
Treasury stock, at cost, 146,502 shares
in 1995 and 1994 (1,381) (1,381)
Net unrealized (loss) on securities
available for sale (Note 2)(net of tax) (190) (1,575)
-------- --------
Total stockholders' equity $ 11,046 $ 8,921
-------- --------
Total liabilities and stockholders' equity $141,223 $142,891
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
CORNERSTONE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT 30, NINE MONTHS ENDED SEPT 30,
--------------------------- --------------------------
1995 1994 1995 1994
--------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 1,354 $ 1,161 $ 3,969 $ 3,501
Interest on investment securities 851 935 2,684 2,666
Interest on federal funds sold 92 5 171 42
--------- --------- --------- ---------
Total interest income 2,297 2,101 6,824 6,209
--------- --------- --------- ---------
Interest expense:
Interest on deposits 787 639 2,188 1,899
Other interest 81 62 324 188
--------- --------- --------- ---------
Total interest expense 868 701 2,512 2,087
--------- --------- --------- ---------
Net interest income 1,429 1,400 4,312 4,122
Provision for loan losses 0 (15) 0 (45)
--------- --------- --------- ---------
Net interest income after provision
for loan losses 1,429 1,385 4,312 4,077
Gain on security transactions, net 0 22 0 46
Other operating income 464 508 1,611 1,624
Loss on other real estate owned (71) (7) (46) (160)
Other operating expenses (1,508) (1,459) (4,521) (4,503)
--------- --------- --------- ---------
Income before income taxes 314 449 1,356 1,084
Provision for income taxes 222 0 621 0
--------- --------- --------- ---------
Net income $ 92 $ 449 $ 735 $ 1,084
========= ========= ========= =========
Earnings per share:
Net income $ .04 $ .21 $ .34 $ .50
Cash dividends declared per share 0 0 0 0
Weighted average shares outstanding 2,185,000 2,171,000 2,182,000 2,166,000
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
CORNERSTONE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
Sept. 30, 1995 Sept. 30,1994
-------------- -------------
(Dollars in Thousands)
<S> <C> <C>
Cash flow from operating activities:
Net income $ 735 $ 1,084
Adjustments to reconcile net income to net
cash provided by operating activities-
Gain on security transactions, net - (46)
Depreciation and amortization 261 275
Provision for loan losses - 45
Other real estate owned valuation adjustments - 92
Gain on sale of loans (15) (56)
Disbursements for mortgage loans held for sale (1,814) (6,080)
Receipts from mortgage loans held for sale 2,050 5,330
Amortization of premiums on investment securities, net 115 174
Increase (decrease) in interest payable 95 (42)
(Increase) decrease in interest receivable 222 (199)
Deferred compensation expense 131 126
Gain on sale of other assets (184) -
Other, net 259 (43)
------- -------
Net cash provided by operating activities 1,855 660
------- -------
Cash flow from investing activities:
Proceeds from sales of securities
available for sale - 9,627
Proceeds from maturities and paydowns of securities
available for sale 2,073 6,131
Purchases of securities available for sale - (13,278)
Purchases of securities held to maturity (718) (14,393)
Proceeds from maturities, redemptions or principal
payments on securities held to maturity 5,622 1,804
Proceeds from sale of other real estate owned 200 526
Net loan principal advances (467) (99)
Purchase of premises and equipment (37) (48)
------- -------
Net cash (used) provided by investing activities 6,673 (9,730)
------- -------
Cash flow from financing activities:
Proceeds from exercise of stock options 5 6
Increase (decrease) in short term borrowings (5,000) 53
Net increase in deposits 1,202 2,498
------- -------
Net cash provided (used) by financing activities (3,793) 2,557
------- -------
Net increase (decrease) cash & cash equivalents 4,735 (6,513)
------- -------
Cash and cash equivalents, beginning of year 12,117 14,788
------- -------
Cash and cash equivalents, end of quarter $16,852 $ 8,275
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
CORNERSTONE FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Interim Financial Data
- -------------------------------
Interim financial data is unaudited. In the opinion of management, the
accompanying condensed consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results for the interim periods. Certain amounts
in prior periods have been reclassified to conform to the current
presentation.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan" which was subsequently amended by SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" in October 1994. The Company adopted these statements
effective January 1, 1995. SFAS 114 modifies the accounting for impaired
loans, defined as those loans where, based on current information and
events, it is probable that a creditor will be unable to collect all amounts
due, both interest and principal, according to the contractual terms of the
loan agreement. Specifically, SFAS 114 requires that the allowance for loan
losses related to impared loans be determined based on the present value of
the expected future cash flows discounted at the loan's effective rate, or,
as a practical expedient, the loan's observable market price or the fair
value of the loan's underlying collateral if the loan is collateral
dependent. For the most part, the Company uses an estimate of the fair
value of the loan's underlying collateral to determine the allowance for
loan losses related to impaired loans, as most loans to which SFAS 114
applies are collateral dependent. The Company has classified collateral
dependent loans with significant shortfalls as impaired and has placed some
of those impaired loans on nonaccrual status on the basis of repayment
histories in which the borrowers have moved into past due status (i.e., when
the loans are greater than 90 days past due) or when in management's
judgement, the ultimate collectibility of principal or interest is doubtful.
In addition, SFAS No. 114 modified the accounting for in-substance
foreclosures (ISF). A collateralized loan is considered an ISF and
reclassified to Other Real Estate Owned when the Company has received
physical possession of the collateral regardless of whether formal
foreclosure proceedings have taken place. The adoption of these statements
did not have a material impact on the Company's financial position or
results of operations. Instead, it resulted only in a reallocation of the
existing allowance for loan losses.
SFAS No. 114, as amended by SFAS No. 118, permits a creditor to use existing
methods for recognizing interest income on impaired loans. Generally,
interest income received on an impaired loan either continues to be applied
by the Company against principal or is realized as interest income,
according the management's judgment as to the collectibility of principal.
Prior to the adoption of SFAS 114, the Company accounted for troubled debt
restructurings in accordance with SFAS 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings."
NOTE 2. Investment Securities
- ------------------------------
A summary of the amortized cost and market value of the securities available
for sale portfolio at September 30, 1995 and December 31, 1994 is as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
September 30, 1995 Cost Gains Losses Value
- ------------------ --------- ---------- ---------- ------
(In thousands)
<S> <C> <C> <C> <C>
U.S.Govt. & Fed. Agency Obl. $40,224 $ 40 $ (552) $39,712
Mortgage backed securities 47 0 (2) 45
------- ------ ------- -------
Total Securities Available
for sale $40,271 $ 40 $ (554) $39,757
======= ====== ======= =======
<CAPTION>
December 31, 1994
- -----------------
(In thousands)
<S> <C> <C> <C> <C>
U.S.Govt. & Fed. Agency Obl. $42,311 $ 0 $(2,611) $39,700
Mortgage backed securities 66 0 (1) 65
------- ------ ------- -------
Total Securities Available
for sale $42,377 $ 0 $(2,612) $39,765
======= ====== ======= =======
</TABLE>
A summary of the amortized cost and market value of securities held to
maturity at September 30, 1995 and December 31, 1994 is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
September 30, 1995 Cost Gains Losses Value
- ------------------ --------- ---------- ---------- ------
(In thousands)
<S> <C> <C> <C> <C>
U.S.Govt. & Fed. Agency Obl. $ 5,855 $ 25 $ (14) $ 5,866
Collateralized Mtg. Obgl. 1,051 0 (40) 1,011
Mortgage-backed securities 4,752 2 (61) 4,693
Corporate bonds 5,588 4 (53) 5,539
------- ------ ------- -------
Total debt securities 17,246 31 (168) 17,109
Federal Home Loan Bank stock 1,434 0 0 1,434
------- ------ ------- -------
Total securities held to
maturity $18,680 $ 31 $ (168) $18,543
======= ====== ======= =======
<CAPTION>
December 31, 1994
- -----------------
(In thousands)
<S> <C> <C> <C> <C>
U.S.Govt. & Fed. Agency Obl. $ 7,863 $ 0 $ (193) $ 7,670
Collateralized Mtg. Obgl. 1,604 0 (86) 1,518
Mortgage-backed securities 5,200 0 (409) 4,791
Corporate bonds 7,697 0 (323) 7,374
------- ------ ------- -------
Total debt securities 22,364 0 (1,011) 21,353
Federal Home Loan Bank stock 1,302 0 0 1,302
------- ------ ------- -------
Total securities held to
maturity $23,666 $ 0 $(1,011) $22,655
======= ====== ======= =======
</TABLE>
NOTE 3. Net Loans and Allowance for Loan Losses
- ------------------------------------------------
Net loans at September 30, 1995 and December 31, 1994 were as follows:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
Real estate mortgage loans $ 9,846 $10,082
Commercial and other loans 41,355 40,786
Consumer loans 4,191 4,686
------- -------
Total loans 55,392 55,554
Less:
Allowance for loan losses (2,051) (2,014)
------- -------
Net loans $53,341 $53,540
======= =======
</TABLE>
Activity related to the allowance for loan losses for the nine months ended
September 30, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
Allowance for Loan Losses at: 1995 1994
- ----------------------------- ---- ----
(Dollars in Thousands)
<S> <C> <C>
Balance, January 1 $ 2,014 $ 2,118
Provision for loan losses 0 45
Recoveries of loans previously charged off 61 59
Loans charged off (24) (97)
------- -------
Balance, September 30 $ 2,051 $ 2,125
======= =======
</TABLE>
At September 30, 1995, the recorded investment in loans that are considered
impaired under SFAS No. 114 was $4,811,000. Included in this amount is
$2,795,000 of impaired loans for which the related SFAS No. 114 allowance
for loan losses is $773,000 and $2,016,000 of impaired loans that do not
have a related SFAS No. 114 allowance for loan losses. During the third
quarter and nine months ended September 30, 1995, on loans that are
considered impaired under SFAS 114, the Company recognized $95,000 and
$283,000 of interest income for the respective three and nine month periods.
This amount was recognized on an accrual basis which did not vary
significantly from a cash basis. The average impaired loan balances for the
respective three and nine month periods were $4,842,000 and $4,977,000.
At September 30, 1994, the Company had $2,143,000 in restructured loans.
For the third quarter and nine months ended September 30, 1994 the aggregate
amount of interest income recorded on these restructured loans was $37,000
and $112,000, respectively, and the amount of income that would have been
recorded had the restructured loans been current in their original terms was
approximately $45,000 and $136,000, respectively.
Note 4. Other Real Estate
- --------------------------
Other real estate owned is net of a valuation allowance of $253,000 at
September 30, 1995. An analysis of the allowance for the valuation reserve
for the nine month period ended September 30, 1995 is as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Balance, January 1, 1995 $253
Additions to valuation reserves 0
----
Balance, September 30, 1995 $253
====
</TABLE>
NOTE 5. Deposits
- -----------------
Deposits at September 30, 1995 and December 31, 1994 were as follows:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
Demand $ 14,590 $ 13,511
NOW, money market 39,996 43,404
Passbook savings 34,652 35,219
Certificates of Deposit of $100,000 or more 2,795 2,615
Other time 32,468 28,550
-------- --------
Total $124,501 $123,299
======== ========
</TABLE>
Item #2 - Management Discussion and Analysis of Financial Condition
and Results of Operation.
On March 23, 1995, Cornerstone entered into a merger agreement pursuant to
which Cornerstone Financial Corporation will become a subsidiary of
BayBanks, Inc. a Massachusetts bank holding company, and Cornerstone
shareholders will receive $8.80 per share in cash. The merger is subject to
regulatory approval. On August 22, 1995, the merger was approved by
Cornerstone shareholders.
The following table summarizes key financial operating data for the periods
indicated.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1995 1994 1995 1994
------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net interest income $ 1,429 $ 1,400 $ 4,312 $ 4,122
Provision for loan losses 0 (15) 0 (45)
Income(loss) on other real estate (71) (7) (46) (160)
Gain on securities
transactions, net 0 22 0 46
Other operating income 464 508 1,611 1,624
Other operating expenses (1,508) (1,459) (4,521) (4,503)
Provision for income taxes (222) 0 (621) 0
------- ------- ------- -------
Net income $ 92 $ 449 $ 735 $ 1,084
======= ======= ======= =======
</TABLE>
The Company had net income of $92,000 for the third quarter ended
September 30, 1995, compared to net income of $449,000 for the third
quarter 1994.
Total interest income for the third quarter ended September 30, 1995
increased by $196,000, or 9.3%, when compared to the third quarter of 1994.
The increase was primarily due to an increase in loan interest income of
$193,000, or 16.6%, that was primarily attributable to increased loan
balances outstanding, on average, in 1995 compared to 1994 and higher
interest rates earned on these loan balances.
Investment interest income decreased by $84,000, or 8.9%, due to decreased
average investment balances outstanding offset somewhat by higher interest
rates earned on these balances.
Interest income from federal funds sold increased by $87,000 in the third
quarter 1995 versus the third quarter 1994. The higher federal funds
balances were due to maturing investments remaining in federal funds to earn
interest rates higher than two year Treasury securities.
Total interest expense for the third quarter ended September 30, 1995
increased by $167,000, or 23.8% from the corresponding quarter in 1994. The
increase was primarily attributable to higher rates paid on interest bearing
deposits as well as increased average balances of interest bearing
liabilities.
Net interest income during the third quarter of 1995 increased by $29,000,
or 2.1%, from the third quarter of 1994 due to the factors discussed
previously.
Interest income on loans for the nine month period ending September 30, 1995
increased by $468,000, or 13.4%, when compared to the corresponding nine
month period in 1994. Interest income on investments increased by $18,000,
or 0.7%, for the nine months ended September 30, 1995 versus the nine months
ended September 30, 1994. Interest income from federal funds sold for the
nine month period ended September 30, 1995 increased by $129,000 as compared
to the corresponding period in 1994. The increases in the interest income
categories above were primarily attributable to higher rates earned on
interest earning assets and increased average balances outstanding on these
interest earning assets.
Total interest expense for the nine month period ended September 30, 1995
increased by $425,000, or 20.4%, when compared to the corresponding nine
month period in 1994. The factors contributing to the increase in total
interest expense were consistent with those cited earlier for the third
quarter 1995 versus 1994.
Net interest income for the nine month period 1995 increased by $190,000, or
4.6%, from the corresponding period in 1994 due to the factors discussed
previously.
For the three quarters of 1995 the provision for loan losses was $0 as
compared to a provision for $15,000 and $45,000 in the respective third
quarter and nine month period of 1994. Management continues to monitor and
review its loan portfolio and the adequacy of loan loss reserves. In the
first nine months of 1995 the loan charge-offs of $24,000 were offset by
recoveries of loans of $61,000 resulting in a net increase in the reserve
for loan losses of $37,000 from year end 1994.
The following table summarizes the changes in the allowance for loan losses
for the periods indicated:
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1995 1994
------ ------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $2,014 $2,118
Provision for loan losses 0 45
Recoveries of loans previously charged off 61 59
Loans charged off (24) (97)
------ ------
Balance at end of period $2,051 $2,125
====== ======
Allowance as a percent of period end loans 3.70% 3.78%
====== ======
Allowance as a percent of nonaccrual loans 214.50% 153.32%
====== ======
</TABLE>
The allowance for loan losses of $2,051,000, or 215% of nonaccrual loans and
3.7% of outstanding loans at September 30, 1995 was at a level considered
necessary by management to reflect the level of risk in the loan portfolio.
The following table summarizes nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate $ 0 $ 0
Commercial, financial, and other 956 1,088
Consumer loans to individuals 0 1
------- -------
Total nonaccrual loans 956 1,089
------- -------
Other real estate 1,618 1,532
------- -------
Total nonperforming assets $ 2,574 $ 2,621
======= =======
</TABLE>
Nonperforming loans did not cause any reduction in interest income for the
three and nine months ended September 30, 1995 as compared to $29,000 and
$50,000, respectively for the comparable periods ending September 30, 1994,
from that which would have been recorded had such loans remained current in
accordance with their original terms. There were no loans more than 90 days
past due. At September 30, 1995, the recorded investment in loans that are
considered impaired under SFAS No. 114 was $4,811,000 which includes
$956,000 of loans accounted for on a nonaccrual basis to a single borrower.
At December 31, 1994, the Company had $2,481,000 of troubled debt
restructurings involving a modification of terms. In accordance with FAS
114, for the third quarter of 1995, these same loans were evaluated for
impairment based on their modified terms and, as a result, their current
balances were included in the balance of impaired loans at September 30, 1995.
During the third quarter of 1995 losses on other real estate owned were
$71,000. For the nine months ended September 30, 1995 losses on OREO were
$46,000. Losses on other real estate owned were $7,000 and $160,000,
respectively, for the three and nine months ended and September 30, 1994.
Net gains on sales of investment securities were $0 and $22,000,
respectively, for the third quarters of 1995 and 1994 and $0 and $46,000,
respectively, for the nine month period ending September 30, 1995 and 1994.
In the third quarter of 1994 total gains were $22,000 while total losses
were $0. For the nine month period in 1994 gains on the sale of securities
were $79,000 and losses on securities sales were $33,000. At September 30,
1995 the Company's available for sale investment portfolio had a net
unrealized loss of $514,000 ($190,000, net of tax) and the held to maturity
investment portfolio had a net unrealized loss of $137,000.
Other operating income decreased by $44,000, or 8.7% in the third quarter
1995 versus the third quarter of 1994. The primary reason for the decrease
were reduced deposit fees of $23,000, reduced lease financing income of
$12,000, and reductions in other fee income accounts totaling $9,000.
Other operating income decreased by $13,000, or 0.8% in the first nine
months of 1995 versus the first nine months of 1994. The primary reason for
the decrease was a gain from the sale of the assets in an employee trust of
$184,000 offset by reduced deposit fees of $92,000 and reduced gains on loan
sales of $40,000, reduced mortgage servicing income of $22,000, and lease
financing income of $18,000. The assets in the employee trust were
primarily equity securities which were sold to take advantage of existing
stock prices, and the sales proceeds were invested in U.S. Treasury
securities to eliminate the risk associated with investing in the stock
market.
Other operating expenses increased by $49,000, or 3.4%, in the third quarter
of 1995 versus the third quarter of 1994. Merger expenses were $226,000 in
the 1995 third quarter. These nonrecurring expenses were offset in part by
reduced salaries and benefits of $34,000, and reduced FDIC insurance of
$138,000 due to a change in the FDIC assessment rates on banks.
Other operating expenses increased by $18,000, or 0.3% in the first nine
months of 1995 versus the first nine months of 1994. The nonrecurring
merger expenses of $443,000 were offset in part by reduced salaries and
benefits of $100,000, reduced FDIC insurance of $87,000, reduced
professional fees of $77,000, reduced occupancy expenses of $121,000, and
several other reduced expenses totaling $40,000.
The Company recorded tax provisions of $222,000 and $621,000, respectively,
in the three and nine month periods ending September 30, 1995 while
recording no tax provisions in the comparable periods of 1994 primarily due
to the realization of deferred tax assets.
As a result of the factors discussed above, the Company reported net income
of $92,000 and $735,000 for the three month and nine month periods ended
September 30, 1995 as compared to net income of $449,000 and $1,084,000 for
the corresponding periods in 1994.
EARNINGS PER SHARE
- ------------------
Net income per share was $.04 and $.34 for the respective three and nine
months ended September 30, 1995 and $.21 and $.50 for the corresponding
periods in 1994.
FINANCIAL CONDITION AND CAPITAL RESERVES
- ----------------------------------------
Total assets at September 30, 1995 decreased by $1,668,000, or 1.2% from
December 1994. The total investment securities decreased by $4,994,000, or
7.9% while net loans decreased by $199,000, or 0.4% at September 30, 1995 as
compared to year end 1994.
Stockholders' equity at September 30, 1995 was $11,046,000, an increase of
$2,125,000 from December 31, 1994. The increase was a result of the
decrease in the unrealized loss on securities available for sale of
$1,385,000 (net of tax) and by net income of $735,000. The decrease in the
unrealized loss on securities available for sale included in equity is due
to the declining interest rate environment during the nine month period.
The Company and its banking subsidiary, Cornerstone Bank (the "Bank"), are
each required by regulation to maintain certain minimum capital ratios. The
following table summarizes the Company's and the Bank's capital ratios and
amounts at September 30, 1995.
<TABLE>
<CAPTION>
Capital Ratios Capital Amounts (in 000's)
---------------------------- ----------------------------
Risk Based Leverage Risk Based Leverage
---------------- -------- ---------------- --------
Tier I Tier 2 Tier 1 Tier 1 Tier 2 Tier 1
------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
The Company
Balance 16.49% 17.76% 7.79% $11,094 $11,952 $11,094
Requirement 4.00% 8.00% 4.00% 2,692 5,383 5,676
The Bank
Balance 20.47% 21.74% 9.72% 13,754 14,611 13,754
Requirement 4.00% 8.00% 4.00% 2,688 4,576 5,658
</TABLE>
The above capital ratios table does not include the net unrealized loss on
securities available for sale of $514,000.
LIQUIDITY
- ---------
The primary source of liquidity consists of debt securities, federal funds
sold and short term investments. At September 30, 1995, approximately
$28,758,000, or 49.2%, of the investment portfolio matures or reprices in
two years or less. In addition, amortizing installment and mortgage loans,
along with short term or direct reduction commercial loans, provide
additional sources of funds for liquidity purposes.
Furthermore, management has designated $39,757,000 of investment securities
as available for sale. These investments are accordingly carried at market
value. At September 30, 1995, market value was below the cost of these
investments by $514,000.
Part II - Other Information
Item 1. - Legal proceedings - Not applicable
- ---------------------------------------------
Item 2. - Changes in securities - Not applicable
- -------------------------------------------------
Item 3. - Defaults upon senior securities - Not applicable
- -----------------------------------------------------------
Item 4. - Submission of matters to vote of security holders:
- -------------------------------------------------------------
The annual meeting of stockholders of Cornerstone Financial
Corporation was held at 9:00 AM, Tuesday, August 22, 1995 at the
Manchester country Club, South River Road, Bedford, New Hampshire.
The number of shares issued, outstanding, and eligible to vote as of
the record date, July 11, 1995 was 2,109,872. A quorum was present at
the meeting with 1,969,584 shares, or 93.3 percent, were present or
represented by proxy.
1. Approval of the Agreement and Plan of Merger, dated as of
March 23, 1995, among the Company, BayBanks, Inc., a
Massachusetts corporation, and BayBanks, Inc., a New Hampshire
corporation, a wholly owned subsidiary of BayBanks, pursuant to
which BayBanks New Hampshire will merge with and into the
Company and each of the common stock of the Company outstanding
immediately prior to consummation of the merger, other than
shares held by any stockholder who demands and receives payment
of the fair value of his shares pursuant to the applicable
provisions of the New Hampshire Business Corporation Act and
certain shares held by BayBanks, will be converted into and
represent the right to receive $8.80, as described in the Proxy
Statement and the Acquisition Agreement:
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C> <C>
For 1,772,635 (84.02%)
Against 35,948
Abstain 5,982
</TABLE>
2. Election of Directors to serve three year terms:
Number of Shares
----------------
Robert E. Benoit 1,897,837
Edward D. Bureau 1,904,820
John J. Zito 1,902,537
Election of Director to serve two year term:
Horace A. Holaday, Jr. 1,889,203
3. To ratify the appointment of Price Waterhouse LLP as auditors
for the calendar year 1995:
Number of Shares
----------------
For 1,951,261
After the vote was presented, a presentation was made regarding
BayBanks, Inc. by William M. Crozier, Jr., Chairman of the Board and
President of BayBanks, Inc. The meeting adjourned at 9:50 AM.
Item 5. - Other information - Not applicable
- ----------------------------------------------
Item 6. - Exhibits and reports on form 8-K
- -------------------------------------------
(a) Exhibit 27 - Financial data schedule (submitted only in
electronic format to the Securities and Exchange Commission)
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1995.
CORNERSTONE FINANCIAL CORPORATION
AVERAGE BALANCE, INTEREST INCOME AND EXPENSE AND EFFECTIVE RATES
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------
1995 1994
--------------------------------- ---------------------------------
Interest Avg. Interest Avg.
Average Income/ Yield/ Average Income/ Yield/
Balance(1) Expense(2) Rate(2) Balance(1) Expense(2) Rate(2)
---------- ---------- ------- ---------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Taxable investment securities $ 64,621 $ 2,684 5.5% $ 65,853 $ 2,666 5.4%
Loans(2)(3) 56,469 3,982 9.4% 55,378 3,515 8.5%
Federal funds sold 3,848 171 5.9% 1,646 42 3.4%
-------- ------- ---- -------- ------- ----
Total $124,938 $ 6,837 7.3% $122,877 $ 6,223 6.8%
======== ======= ==== ======== ======= ====
Interest paying liabilities:
Savings deposits $ 35,288 $ 548 2.1% $ 35,951 $ 536 2.0%
NOW and money market deposits 40,287 500 1.6% 41,734 436 1.4%
Time deposits 32,614 1,140 4.4% 33,123 927 3.7%
Other borrowed funds 6,416 324 6.6% 3,578 188 7.0%
-------- ------- ---- -------- ------- ----
Total $114,605 $ 2,512 2.9% $114,386 $ 2,087 2.4%
======== ======= ==== ======== ======= ====
Net interest income $ 4,325 $ 4,136
======= =======
Net interest margin 4.4% 4.4%
---- ----
Net yield on earning assets 4.6% 4.5%
---- ----
<FN>
<F1> Based on daily averages
<F2> On a fully taxable equivalent basis
(34% tax rate in 1995 and 1994)
<F3> Average balance includes non-accrual loans.
</TABLE>
CORNERSTONE FINANCIAL CORPORATION
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
------------------ -----------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Primary earnings per share:
Net income $ 92 $ 449 $ 735 $1,084
====== ====== ====== ======
Common and common equivalent shares:
Weighted average number of
common shares outstanding 2,110 2,107 2,109 2,106
Add: Share arising from
assumed exercise of stock
options (as determined
under the Treasury Stock
Method) 75 56 73 56
------ ------ ------ ------
Weighted average of common
and equivalent shares outstanding 2,185 2,171 2,182 2,166
====== ====== ====== ======
Primary earnings per share:
Net income $ .04 $ .21 $ .34 $ .50
====== ====== ====== ======
Fully diluted earnings per share:
Net income $ 133 $ 449 $ 858 $1,084
====== ====== ====== ======
Common shares-assuming full dilution: (1)
Weighted average of common shares
outstanding 2,110 2,107 2,109 2,106
Add: Shares arising from
assumed exercise of stock
options (as determined under
the Treasury Stock Method) 306 67 306 62
------ ------ ------ ------
Weighted average of common
and equivalent shares 2,416 2,174 2,415 2,168
====== ====== ====== ======
Fully diluted earnings per share:
Net income $ .06 $ .21 $ .37 $ .50
====== ====== ====== ======
<FN>
<F1> Note (1): Shares applicable to convertible subordinated debentures were
anti-dilutive during respective periods.
</TABLE>
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: November 6, 1995 /s/ JOHN M. TERRAVECCHIA
John M. Terravecchia
Chairman, President and
Chief Executive Officer
DATE: November 6, 1995 /s/ ROBERT E. BENOIT
Robert E. Benoit
Vice President/Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from SEC Form 10Q
for Nine Months Ended September 30, 1995 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 6,700,000
<INT-BEARING-DEPOSITS> 1,542,000
<FED-FUNDS-SOLD> 8,610,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,757,000
<INVESTMENTS-CARRYING> 18,680,000
<INVESTMENTS-MARKET> 18,543,000
<LOANS> 55,392,000
<ALLOWANCE> 2,051,000
<TOTAL-ASSETS> 141,223,000
<DEPOSITS> 124,501,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,168,000
<LONG-TERM> 3,508,000
<COMMON> 1,410,000
0
0
<OTHER-SE> 9,636,000
<TOTAL-LIABILITIES-AND-EQUITY> 141,223,000
<INTEREST-LOAN> 3,969,000
<INTEREST-INVEST> 2,684,000
<INTEREST-OTHER> 171,000
<INTEREST-TOTAL> 6,824,000
<INTEREST-DEPOSIT> 2,188,000
<INTEREST-EXPENSE> 2,512,000
<INTEREST-INCOME-NET> 4,312,000
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,567,000
<INCOME-PRETAX> 1,356,000
<INCOME-PRE-EXTRAORDINARY> 735,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 735,000
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 4.60
<LOANS-NON> 956,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,354,000
<LOANS-PROBLEM> 4,881,000
<ALLOWANCE-OPEN> 2,014,000
<CHARGE-OFFS> 24,000
<RECOVERIES> 61,000
<ALLOWANCE-CLOSE> 2,051,000
<ALLOWANCE-DOMESTIC> 2,051,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
