UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 2009
--------------
-OR-
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to _____________.
CORNERSTONE FINANCIAL CORPORATION
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(Exact name of registrant, as specified in its charter)
New Jersey 80-0282551
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
6000 Midlantic Drive, Suite 120 S, Mount Laurel, New Jersey 08054
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (856) 439-0300
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Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
YES NO X
--- ----
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act [ ]
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 past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K (229.405 of this chapter) 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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, am
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer", and "smaller
reporting company" in rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) YES NO X
--- ---
As of May 13, 2009, there were 1,655,767 outstanding shares of the registrant's
Common Stock.
CORNERSTONE FINANCIAL CORPORATION
CONTENTS
PAGES
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements................................................1
Consolidated Statements of Financial Condition at March 31, 2009 (unaudited)
and December 31, 2008................................................................1
Consolidated Statements of Operations (unaudited) for the three months
ended March 31, 2009 and 2008........................................................2
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
for the three months ended March 31, 2009...........................................3
Consolidated Statements of Cash Flows (unaudited) for the three months
ended March 31, 2009 and 2008........................................................4
Notes to Consolidated Financial Statements (unaudited) .................................5
Item 2. Management's Discussion and Analysis or Plan of Operation.......................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................19
Item 4. Controls and Procedures.........................................................19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................................19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.....................19
Item 3. Defaults upon Senior Securities.................................................19
Item 4. Submission of Matters to a Vote of Security Holders.............................19
Item 5. Other Information...............................................................19
Item 6. Exhibits........................................................................19
Signatures..................................................................................20
Exhibit 31.1................................................................................21
Exhibit 31.2................................................................................22
Exhibit 32.1 ...............................................................................23
Exhibit 32.2 ...............................................................................24
PART I. FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data) March 31, 2009 December 31, 2008
-------------- -----------------
(Unaudited)
ASSETS:
Cash and due from banks $ 6,550 $ 5,033
Federal funds sold 5,500 4,335
--------------------- ---------------------
Cash and cash equivalents 12,050 9,368
--------------------- ---------------------
Investment securities:
Held to maturity (fair value 2009 - $37,259; 2008 - $28,487) 37,380 28,398
Loans held for sale 250 -
Loans receivable 213,833 194,104
Less allowance for loan losses 1,474 1,133
--------------------- ---------------------
Loans receivable, net 212,359 192,971
--------------------- ---------------------
Federal Home Loan Bank Stock 1,366 1,377
Premises and equipment, net 8,081 8,469
Accrued interest receivable 1,251 1,217
Bank owned life insurance 4,391 4,348
Deferred taxes 613 462
Other Real Estate Owned 214 281
Other assets 509 644
--------------------- ---------------------
TOTAL ASSETS $ 278,464 $ 247,535
===================== =====================
LIABILITIES:
Non-interest bearing deposits
26,699 21,187
Interest bearing deposits 90,810 89,450
Certificates of deposit 111,307 91,393
--------------------- ---------------------
Total deposits 228,816 202,030
--------------------- ---------------------
Advances from the Federal Home Loan Bank 25,992 26,257
Subordinated debt 3,000 3,000
Line of credit 4,500 -
Other liabilities 975 870
--------------------- ---------------------
TOTAL LIABILITIES 263,283 232,157
--------------------- ---------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Common stock, $0 par value:
$0 par value: authorized 10,000,000 shares; issued and
outstanding 1,655,767 at March 31, 2009
$5 par value: authorized 7,000,000 shares; issued and
outstanding 1,655,767 At December 31, 2008 - 8,279
Additional paid-in capital 15,524 7,244
Retained deficit (343) (145)
--------------------- ---------------------
Total Stockholders' Equity 15,181 15,378
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 278,464 $ 247,535
===================== =====================
See accompanying notes to unaudited consolidated financial statements.
1
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
-------------------------------------------------------
(In thousands, except per share data) March 31, 2009 March 31, 2008
------------------------- -------------------------
INTEREST INCOME (Unaudited) (Unaudited)
Interest and fees on loans $ 2,964 $ 2,533
Interest on investment securities 384 444
Interest on federal funds 3 55
------------------------- -------------------------
TOTAL INTEREST INCOME 3,351 3,032
INTEREST EXPENSE
Interest on deposits 1,232 1,288
Interest on borrowings 295 236
------------------------- -------------------------
TOTAL INTEREST EXPENSE 1,527 1,524
------------------------- -------------------------
Net interest income 1,824 1,508
Provision for loan losses 341 23
------------------------- -------------------------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 1,483 1,485
------------------------- -------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 27 26
Origination fees on mortgage loans sold 4 1
Bank owned life insurance income 43 38
Gain on sale of fixed assets - 57
Miscellaneous fee income 19 20
------------------------- -------------------------
TOTAL NON-INTEREST INCOME 93 142
------------------------- -------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,064 928
Net occupancy 464 284
Data processing and other service costs 85 77
Professional services 83 85
Advertising and promotion 41 25
Other real estate owned expense 9 -
FDIC expense 54 30
Other operating expenses 123 126
------------------------- -------------------------
TOTAL NON-INTEREST EXPENSE 1,923 1,555
------------------------- -------------------------
Income (loss) before income taxes (347) 72
Income tax (benefit) expense (149) 14
------------------------- -------------------------
NET (LOSS) INCOME $ (198) $ 58
========================= =========================
EARNINGS PER SHARE
Basic $ (0.12) $ 0.04
Diluted $ (0.12) $ 0.04
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,656 1,656
Diluted 1,656 1,656
See accompanying notes to unaudited consolidated financial statements.
2
CORNERSTONE FINACIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
Additional Accumulated Other
Comprehensive Common Paid-in Accumulated Comprehensive
loss Stock Capital Deficit Income Total
-------------- ---------- ----------- ------------- ------------------ -------------
Balance at $ 8,279 $ 7,244 $ (145) $ - $ 15,378
December 31, 2008
Comprehensive loss:
Net loss $ (198) - - (198) - (198)
Unrealized gain
on securities
available for
sale, net of tax - - - - - -
-----------
Comprehensive loss $ (198)
===========
Stock based - 1 - - 1
compensation
Creation of Holding
Company (8,279) 8,279 - -
--------- ---------- ------------ ------------ ------------
Balance at
March 31, 2009 $ - $ 15,524 $ (343) $ - $ 15,181
========= ========== ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
3
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
-------------------------------------------------
(In thousands) March 31, 2009 March 31, 2008
----------------------- ------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (198) $ 58
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 341 23
Gain on sale of fixed assets - (57)
Depreciation 405 81
Amortization of premiums and discounts, net 2 12
Stock Option expense 1 1
Deferred tax (benefit) expense (151) 1
Decrease in other real estate owned 67 -
Loans originated for sale (1,368) (657)
Proceeds from sales of loans held for sale 1,118 657
Income on Bank Owned Life Insurance (43) (38)
Decrease in accrued interest receivable
and other assets 101 36
Increase (decrease) in other liabilities 105 (52)
-------------------------- ------------------------
Net cash provided by operating activities 380 65
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity ( 17,643) (14,987)
Maturity and calls of investments held to maturity 8,659 26,232
Redemption (purchase) of FHLB Stock 11 (663)
Proceeds from sale of fixed assets - 582
Net increase in loans (19,729) (5,964)
Purchases of premises and equipment (17) ( 463)
-------------------------- ------------------------
Net cash (used in) provided by investing
activities (28,719) 4,737
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) increase in deposits 26,786 (16,684)
Proceeds from borrowings 23,300 100,990
Principal payments on borrowings (19,065) (86,244)
-------------------------- ------------------------
Net cash provided by (used in) financing activities 31,021 (1,938)
Net increase in cash and cash equivalents 2,682 2,864
Cash and cash equivalents at the beginning of the period 9,368 14,084
-------------------------- ------------------------
Cash and cash equivalents at the end of the period $ 12,050 $ 16,948
========================== ========================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,452 $ 1,541
Net change in unrealized gain on securities
available for sale, net of tax - 13
Distribution of 7.5% Common Stock Dividend - 576
See accompanying notes to unaudited consolidated financial statements.
4
CORNERSTONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cornerstone
Financial Corporation and its wholly owned subsidiary, Cornerstone Bank.
(together, the "Company"). These interim statements, which are unaudited, were
prepared in accordance with instructions for Form 10-Q. In the opinion of
management, all adjustments, consisting of normal recurring accruals, necessary
for fair presentation of the interim financial statements have been included.
Cornerstone Financial Corporation was formed in 2008 at the direction of the
Board of Directors of Cornerstone Bank to serve as a holding company for the
Bank. The holding company reorganization was completed in January 2009. The
statement of financial condition as of December 31, 2008 has been derived from
audited financial statements. As Cornerstone Financial Corporation did not have
any operations in 2008, the results of operations, the statement of financial
condition, and the related financial data for period prior to 2009 are those of
the Bank on a stand alone basis For further information, refer to the financial
statements and footnotes thereto included in Cornerstone Financial Corporation's
Annual Report on Form 10-K for the year ended December 31, 2008 as filed with
the United States Securities and Exchange Commission.
NOTE 2 - USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the near-term relate
to the allowance for loan losses and the evaluation of deferred taxes.
NOTE 3 - CONTINGENCIES
The Company, from time to time, is a party to routine litigation that arises in
the normal course of business. Management does not believe the resolution of
this litigation would have a material adverse effect on the Company's financial
condition or results of operations. However, the ultimate outcome of any such
matter, as with litigation generally, is inherently uncertain and it is possible
that some of these matters may be resolved materially adverse to the Company.
NOTE 4 - EARNINGS PER SHARE
Basic earnings per share is calculated on the basis of net income divided by the
weighted average number of shares outstanding. Diluted earnings per share
includes dilutive potential common shares as computed under the treasury stock
method using average common stock prices.
NOTE 5 - STOCK OPTIONS
On January 1, 2006, the Bank adopted Statement of Financial Accounting Standards
No.123R, "Share-based Payment (SFAS No. 123R)." This Statement establishes the
standards for accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for equity instruments of the
enterprise or liabilities that are based on the fair value of the enterprise's
equity instruments or that may be settled by the issuance of such equity
instruments. SFAS No. 123R requires an entity to recognize the grant-date
fair-value of stock options and other equity-based compensation issued to
employees in the statement of operations. The Statement generally requires that
an entity account for those transactions using the fair-value method and
eliminates an entity's ability to
5
account for share-based compensation transactions using the intrinsic value
method of accounting provided in APB Opinion No. 25, "Accounting for Stock
Issued to Employees," which was permitted under Statement No. 123, as originally
issued. The Bank had $3,700 in unrecognized compensation costs relating to
non-vested stock based compensation awards at March 31, 2009.
On March 1, 2008, options to purchase a total of 1,750 shares of common stock
were granted with an exercise price of $7.49 per share. These options will
expire ten years from the date of the grant and vest on a one-third per year
basis, with one-third being immediately vested. The exercise price of each
option equals the market price of the Bank's common stock on the date of the
grant.
NOTE 6 - INVESTMENT SECURITIES
A comparison of amortized cost and approximate fair value of investment
securities held to maturity at March 31, 2009 and December 31, 2008 is as
follows (in thousands):
March 31, 2009
--------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ---------------
INVESTMENTS HELD TO MATURITY:
Government agency obligations $ 35,805 $ 73 $ (198) $ 35,680
Mortgage backed securities 1,575 6 (2) 1,579
--------------- -------------- -------------- ---------------
Total $ 37,380 $ 79 $ (200) $ 37,259
=============== ============== ============== ===============
December 31, 2008
-----------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ---------------
INVESTMENTS HELD TO MATURITY:
Government agency obligations $ 26,653 $ 108 $ - $ 26,761
Mortgage backed securities 1,745 - (19) 1,726
--------------- -------------- -------------- ---------------
Total $ 28,398 $ 108 $ (19) $ 28,487
=============== ============== ============== ===============
The following table sets forth information regarding the fair value and
unrealized losses on the Company's temporarily impaired investment securities at
March 31, 2009 and December 31, 2008 for the time periods shown (in thousands):
March 31, 2009
--------------
Less than 12 months 12 months or longer Total
------------------------ ------------------------- -------------------------
Unrealized Unrealized Fair Unrealized
Fair Value Losses Fair Value Losses Value Losses
----------- ----------- ------------ ------------- ----------- ----------
INVESTMENTS HELD TO MATURITY:
Government Agency Obligations $ 19,036 $ 198 $ - $ - $19,036 $198
Mortgage Backed Securities - - 442 2 442 2
----------- ----------- ------------ ------------- ----------- ------------
Total temporarily
impaired investment
securities $ 19,036 $ 198 $ 442 $ 2 $19,478 $ 200
=========== =========== ============ ============= =========== ============
6
December 31, 2008
-------------------------
Less than 12 months 12 months or longer Total
------------------------ ------------------------- -------------------------
Unrealized Unrealized Fair Unrealized
Fair Value Losses Fair Value Losses Value Losses
----------- ----------- ------------ ------------- ----------- ------------
INVESTMENTS HELD TO MATURITY:
Mortgage Backed Securities - - 1,726 19 1,726 19
----------- ----------- ------------ ------------- ----------- ------------
Total temporarily
impaired investment
securities $ - $ - $1,726 $ 19 $ 1,726 $ 19
=========== =========== ============ ============= =========== ============
Management has taken into consideration the following information in reaching
the conclusion that the impairment of the securities listed in the table above
is not other than temporary. The unrealized losses disclosed above are the
result of fluctuations in market interest rates currently offered on like
securities and not a deterioration or downgrade of the investment issuer's
credit worthiness or ability to meet its cash flow requirements. The Company
believes that it is probable that it will receive all future contractual cash
flows and has the ability and intent to hold these investment securities until
recovery or maturity. The U.S. Government agency sponsored securities which are
listed have call provisions priced at par if called prior to their respective
maturity dates.
NOTE 7 - OTHER COMPREHENSIVE INCOME
The change in other comprehensive income components and related tax benefits are
as follows for the three- month periods ended March 31, 2009 and 2008 (in
thousands):
March 31,
2009
-------------- -------------------------------------
Before-Tax Net-of-Tax
Amount Tax Expense Amount
-------------- -------------- ---------------
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period $ - - $ -
-------------- -------------- ---------------
Other comprehensive income $ - - $ -
============== ============== ===============
March 31,
2008
----------------------------------------------------
Before-Tax Net-of-Tax
Amount Tax Expense Amount
-------------- -------------- ---------------
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period $ 23 (10) $ 13
-------------- -------------- ---------------
Other comprehensive income $ 23 $ (10) $ 13
============== ============== ===============
NOTE 8 - LOANS RECEIVABLE
Loans receivable consist of the following (in thousands):
March 31, 2009 December 31, 2008
----------------------- -----------------------
Commercial $ 71,199 $ 60,646
Real estate - commercial 102,325 91,105
Real estate - residential 17,781 19,346
Construction 12,057 12,323
Consumer loans 10,456 10,721
Net deferred loan costs (fees) 15 (37)
----------------------- -----------------------
213,833 194,104
Allowance for loan losses (1,474) (1,133)
----------------------- -----------------------
Loans receivable, net $ 212,359 $ 192,971
======================= =======================
7
Under New Jersey banking laws, the Bank is subject to a loans-to-one-borrower
limitation of 15% of capital funds. At March 31, 2009, the loans-to-one-borrower
limitation was approximately $3,610,886; this excludes an additional 10% of
adjusted capital funds, or approximately $2,407,000, which may be loaned if
collateralized by readily marketable securities. At March 31, 2009, there were
no loans outstanding or committed to any one borrower which individually or in
the aggregate exceeded the Bank's loans-to-one-borrower limitation of 15% of
capital funds.
Non-performing assets include non-accrual loans, which are loans on which the
accrual of interest has ceased, and impaired loans. Loans are generally placed
on non-accrual status if, in the opinion of management, collection is doubtful,
or when principal or interest is past due 90 days or more unless the collateral
is considered sufficient to cover principal and interest and the loan is in the
process of collection. The Bank recognized no interest income on non-accrual
loans during the three month period ended March 31, 2009.
Impaired loans are measured based on the present value of expected future
discounted cash flows, the fair value of the loan or the fair value of the
underlying collateral if the loan is collateral dependent. The recognition of
interest income on impaired loans is the same as for non-accrual loans discussed
above. At March 31, 2009 and December 31, 2008, the Company did not have any
non-accrual loans. At March 31, 2009, the Company had one impaired loan totaling
$1,850,500 which is sufficiently collateralized; and therefore, no specific
reserve has been recorded against it. The average balance of impaired loans
totaled $1,850,500 for 2009, and interest income recorded on impaired loans
during the three months ended March 31, 2009, totaled $32,000.
NOTE 9 - BANK OWNED LIFE INSURANCE
Bank Owned Life Insurance ("BOLI") is carried at its aggregate cash surrender
value less surrender charges and totaled $4,391,000 at March 31, 2009. Income of
$43,000 was recognized on the BOLI during the three-month period ended March 31,
2009 as compared to $38,000 for the three month period ended March 31, 2008. The
Bank is the sole owner and beneficiary of the BOLI.
NOTE 10 - DEFERRED COMPENSATION PLANS
Effective January 1, 2006, the Bank adopted a Nonqualified Deferred Compensation
Plan (The "Executive Plan") and the Directors' Fee Deferral and Death Benefit
Plan (the "Directors' Plan"). Both plans provide for payments of deferred
compensation to participants. The Company recorded $35,000 in deferred
compensation expense during the three-month period ended March 31, 2009 as
compared to $24,000 for the three- month period ended March 31, 2008.
NOTE 11 - INCOME TAXES
The Bank adopted the provisions of Financial Accounting Standards Board ("FASB")
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109" ("FIN 48"), on January 1, 2007. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes". FIN 48 prescribes a threshold and a measurement
process for recognizing in the financial statements a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company has determined that there are no
significant uncertain tax positions requiring recognition in its financial
statements.
Federal tax years 2005 through 2008 remain subject to examination as of March
31, 2009, while tax years 2005 through 2008 remain subject to examination by
state taxing jurisdictions. In the event the Company is assessed for interest
and/or penalties by taxing authorities, such assessed amounts will be classified
in the financial statements as income tax expense.
8
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
On January 1, 2008, the Bank adopted SFAS No. 157, "Fair Value Measurements"
(Statement 157). Statement 157 defines fair value, establishes a framework for
measuring fair value in U.S. generally accepted accounting principles, and
expands disclosure requirements for fair value measurements. Statement 157 does
not require any new fair value measurements. The adoption of Statement 157 did
not have a material impact on the Bank's consolidated financial statements.
In conjunction with the adoption of Statement 157, the Bank also adopted FASB
Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157" (FSP
FAS 157-2) on January 1, 2008. FSP FAS 157-2 amends Statement 157 to defer its
effective date for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis, to fiscal years beginning after November 15,
2008, or January 1, 2009 for the Company.
Statement 157 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels, as
described below:
o Level 1. Level 1 inputs are unadjusted quoted prices in active markets
for identical assets or liabilities.
o Level 2. Level 2 inputs are inputs other than quoted prices
included in Level 1 that are observable, either directly or
indirectly. Level 2 inputs include quoted prices for similar
assets, quoted prices in markets that are not considered to be
active, and observable inputs other than quoted prices such as
interest rates.
o Level 3. Level 3 inputs are unobservable inputs.
A financial instrument's level within the fair value hierarchy is based upon the
lowest level of any input significant to the fair value measurement.
LOANS HELD FOR SALE
On a non recurring basis the Company originates and sells residential mortgage
loans (without recourse) to the secondary market. The activity enables the
Company to fulfill the credit needs of the community while reducing its overall
exposure to interest rate and credit risk. The Company values loans held for
sale using observable inputs other than quoted prices for identical assets, and
therefore classify them as level 2 within the fair value hierarchy. These loans
are reported at the lower of their cost or fair market value.
NOTE 13 - RECENT ACCOUNTING PRONOUNCEMENTS
FSP FAS 157-4, DETERMINING FAIR VALUE WHEN THE VOLUME AND LEVEL OF ACTIVITY FOR
THE ASSET OR LIABILITY HAVE SIGNIFICANTLY DECREASED AND IDENTIFYING TRANSACTIONS
THAT ARE NOT ORDERLY
In April 2009, the FASB issued FASB Staff Position FAS 157-4, "Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP
FAS 157-4). This FSP provides guidance on identifying circumstances that
indicate a transaction is not orderly and guidance on estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased. FSP FAS 157-4 emphasizes that fair value
is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date under current market conditions. This FSP requires additional
disclosures for instruments within the scope of SFAS 157. FSP FAS 157-4 is
effective for interim and annual
9
reporting periods ending after June 15, 2009,
or the interim period ending June 30, 2009 for the Company, and is not expected
to have a material effect on the Company's financial position or results of
operations
FSP FAS 115-2 AND FAS 124-2, RECOGNITION AND PRESENTATION OF
OTHER-THAN-TEMPORARY IMPAIRMENTS
In April 2009, the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2,
"Recognition and Presentation of Other-Than-Temporary Impairments" (FSP FAS
115-2 and FAS 124-2). This FSP amends the other-than-temporary ("OTTI")
impairment guidance in U.S. GAAP for debt securities to make the guidance more
operational and improve the presentation and disclosure of other-than- temporary
impairments on debt and equity securities in the financial statements. The FSP
modifies the presentation of OTTI losses and expands existing disclosure
requirements about OTTI. FSP FAS 115-2 and FAS 124-2 is effective for interim
and annual reporting periods ending after June 15, 2009, or the interim period
ending June 30, 2009 for the Company, and is not expected to have a material
effect on the Company's financial position or results of operations.
FSP FAS 107-1 AND APB 28-1, INTERIM DISCLOSURES ABOUT FAIR VALUE OF INSTRUMENTS
In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1,
"Interim Disclosures about Fair Value of Instruments" (FSP FAS 107-1 and APB
28-1). This FSP requires publicly traded companies to disclosure the fair value
of financial instruments within the scope of FAS 107 in interim financial
statements. FSP FAS 107-2 and APB 28-1 is effective for interim and annual
reporting periods ending after June 15, 2009, or the interim period ending June
30, 2009 for the Company, and is not expected to have a material effect on the
Company's financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
Cornerstone Financial Corporation (the "Company") may from time to time
make written or oral "forward-looking statements," including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this quarterly report on Form 10-Q and the exhibits hereto), in its
reports to shareholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions that are subject to change based on various important factors (many
of which are beyond the Company's control). Forward-looking statements may be
identified by the use of words such as "expects," "subject," "believe," "will,"
"intends," "will be," or "would." The factors which could cause the Company's
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements include those items listed under Item 1A-Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2008 and the following
factors, among others,: the strength of the United States economy in general and
the strength of the local economies in which the Company conducts operations;
the effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System ("Federal Reserve"); inflation; interest rates; market and
monetary fluctuations; the timely development of new products and services by
the Company and the perceived overall value of these products and services by
users, including the features, pricing and quality compared to competitors'
products and services; the success of the Company in gaining regulatory approval
of its products, services, dividends and of new branches, when required; the
impact of changes in financial services laws and regulations (including laws
concerning taxes, banking, securities and insurance); technological changes;
acquisitions; the ability to continue to effectively manage costs, including the
costs incurred in connection with the opening of new branches; changes in
consumer spending and saving habits; and the success of the Company at managing
the risks resulting from these factors.
10
The Company cautions that the above listed factors are not exclusive.
The Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
OVERVIEW
CORNERSTONE FINANCIAL CORPORATION
The Company was formed in 2008 at the direction of the Board of
Directors of Cornerstone Bank (the "Bank") to serve as a holding company for the
Bank. The Board believed that establishing a holding company would provide
greater flexibility in raising capital and conducting the Bank's business. The
holding company reorganization was completed in January, 2009. As such, the
Company did not have any operations in 2008, other than obtaining regulatory
approval for the holding company reorganization, and the results of operations,
and all financial data at December 31, 2008 and for the three months ended March
31, 2008 presented herein, are those of the Bank on a stand alone basis.
CORNERSTONE BANK
The Bank is a New Jersey state chartered commercial bank headquartered
in Moorestown, New Jersey. The Bank commenced operations on October 4, 1999, and
conducts business from its main office in Moorestown and from five additional
branch offices located in Medford, Burlington, Cherry Hill, Voorhees, and Mount
Laurel, New Jersey. The Bank provides a broad range of lending, deposit and
financial products. The Bank emphasizes commercial real estate and commercial
lending to small businesses and professionals. At March 31, 2009, the Bank had
total assets of $278.5 million, total deposits of $228.8 million and
shareholders' equity of $15.2 million compared to at December 31, 2008 total
assets of $247.5 million, total deposits of $202.0 million and total
shareholders equity of $15.4 million.
The Bank offers a broad range of deposit and loan products and banking
services, including personal and business checking accounts, individual
retirement accounts, business money market accounts, certificates of deposit,
wire transfers, automated teller services, night depository and drive-through
banking. The Bank also offers a three-tiered form of personal demand account,
paying progressively higher rates of interest as account balances increase. The
Bank's deposit accounts are insured by the Federal Deposit Insurance Corporation
(the "FDIC") up to the legal maximum amount.
As an enhancement to its traditional banking services, the Bank also
provides and services a fully transactional website under the domain name
www.cornerstonebanknj.com. Customers have access to current rates and terms on
deposit and loan products, and may make balance inquiries, request stop
payments, reorder checks, pay bills and transfer funds between existing accounts
within the Bank. The information included on the Bank's website is not part of
this report.
CURRENT ECONOMIC AND MARKET CONDITIONS
The national and global economic downturn has recently resulted in unprecedented
levels of financial market volatility which may depress overall the market value
of financial institutions, limit access to capital, or have a material adverse
effect on the financial condition or results of operations of banking companies
in general. In addition, the possible duration and severity of the adverse
economic cycle is unknown and may increase the Company's exposure to credit
risk. Treasury and FDIC programs have been initiated to address economic
stabilization, yet the effectiveness of these programs in stabilizing the
economy and the banking system at large are uncertain.
11
MARKET AREA
The Company's market area is comprised of approximately 300 square miles in
western Burlington County and northern Camden County, New Jersey. We have chosen
this market because we believes it contains a stable, diversified economy.
Within this market area, we presently focus our activities in the suburban
communities of Moorestown, Mount Laurel, Medford, Burlington City, Cherry Hill,
Mount Holly, Maple Shade, Medford Lakes, Evesham, Gibbsboro and Voorhees, New
Jersey. Our deposit and loan activities are significantly affected by economic
conditions it its market area. We believe that our market area provides strong
opportunities in which to develop a banking franchise. Our strategy is to
selectively expand our present market into locations where we can build upon the
relationships the members of the Bank's Board of Directors and management team
have with community members to best utilize our community oriented approach to
our competitive advantage. The establishment of branches is subject to approval
by the New Jersey Department of Banking Institutions.
INTEREST RATE RISK
Our primary objective in managing interest rate risk is to minimize the adverse
impact of changes in interest rates on our net interest income while creating an
asset/liability structure that maximizes earnings. Our Asset Liability
Management Committee actively monitors and manages our interest rate exposure
using gap analysis and interest rate simulation models.
Gap analysis measures the difference between volumes of rate-sensitive assets
and liabilities and quantifies these repricing differences for various time
intervals. Static gap analysis describes interest rate sensitivity at a point in
time. However, gap analysis alone does not accurately measure the potential
magnitude of changes in net interest income since changes in interest rates do
not affect assets and liabilities at the same rate, to the same extent, or on
the same basis. Furthermore, static gap analysis does not consider future growth
or changes in the asset mix.
A positive gap (asset sensitive) indicates that more assets reprice during a
given period compared to liabilities, while a negative gap (liability sensitive)
indicates that more liabilities reprice during a given period compared to
assets.
Generally, during a period of falling interest rates, a positive gap would tend
to adversely affect net interest income, while a negative gap would tend to
result in an increase in net interest income. During a period of rising interest
rates, in general, a positive gap would tend to result in an increase in net
interest income while a negative gap would tend to affect net interest income
adversely. However, certain assets and liabilities may react differently to
changes in interest rates even though they reprice or mature in the same or
similar time periods. The interest rates on certain assets and liabilities may
change at different times than changes in market interest rates, with some
changing in advance of changes in market rates and some lagging behind changes
in market rates. Also, certain assets (e.g., adjustable rate mortgages) often
have provisions that may limit changes in interest rates each time the interest
rate changes and on a cumulative basis over the life of the loan. Additionally,
the actual prepayments and withdrawals in the event of a change in interest
rates may differ significantly from those assumed in the calculations shown in
the table below. Finally, the ability of borrowers to service their debt may
decrease in the event of an interest rate increase. Consequently, any model used
to analyze interest rate sensitivity will be vulnerable to the assumptions made
with respect to the foregoing factors.
We use a computer-based simulation model to assess the impact of changes in
interest rates on net interest income. The model incorporates management's
business plan assumptions and related asset and liability yields/costs, deposit
sensitivity and the size, composition and maturity or repricing characteristics
of our assets and liabilities. The assumptions are based on what management
believes at that time to be the most likely interest rate environment. Actual
results may differ from simulated results due to the various factors discussed
above.
The following table sets forth the amount of the our interest-earning assets and
interest-bearing liabilities at March 31, 2009, which are expected to mature or
reprice in each of the time periods shown:
12
Non-Rate
Sensitive
One Year One-Five Over Assets/
(Dollars in thousands) or Less Years Five Years Liabilities Total
-------- ----- ---------- ----------- -----
INTEREST-EARNING ASSETS:
Short term investments $ 5,500 $ - $ - $ - $5,500
Investment securities held to
maturity - 5,992 31,388 - 37,380
Loans held for sale 250 - - - 250
Loans receivable 83,933 75,261 54,639 - 213,833
--------- -------- --------- -------- ---------
Total interest-earning assets 89,683 81,253 86,027 - 256,963
--------- -------- --------- -------- ---------
NON-RATE SENSITIVE ASSETS:
Other assets - - - 21,501 21,501
--------- -------- --------- -------- ---------
Total assets $ 89,683 $ 81,253 $ 86,027 $ 21,501 $278,464
========= ======== ========= ======== =========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand $ 18,240 $ - $ - $ - $ 18,240
Statement savings 3,125 - - - 3,125
Money market 69,445 - - - 69,445
Certificates of deposit 95,849 15,458 - - 111,307
Subordinated debt 3,000 - - - 3,000
Borrowings 25,992 4,500 - - 30,492
--------- -------- --------- -------- ---------
Total interest-bearing
liabilities 215,651 19,958 - - 235,609
--------- -------- --------- -------- ---------
NON-RATE SENSITIVE LIABILITIES:
Non-interest bearing deposits - - - 26,699 26,699
Other liabilities - - - 975 975
Capital - - - 15,181 15,181
--------- -------- --------- -------- ---------
Total liabilities and capital $ 215,651 $ 19,958 $ - $ 42,855 $ 278,464
========= ======== ========= ======== =========
Period GAP $( 125,968) $ 61,295 $ 86,027 $(21,354)
Cumulative interest-earning assets $ 89,683 $ 170,936 $256,963
Cumulative interest-bearing $ 215,651 $ 235,609 $235,609
liabilities
Cumulative GAP $ (125,968) $ (64,673) $ 21,354
Cumulative RSA/RSL (1) 41.59% 72.55% 109.06%
(1) Cumulative rate sensitive (interest-earning) assets divided by cumulative
rate sensitive (interest-bearing) liabilities.
At March 31, 2009, our interest rate sensitivity gap was within Board approved
guidelines.
Gap analysis and interest rate simulation models require assumptions about
certain categories of assets and deposits. For purposes of these analyses,
assets and liabilities are stated at their contractual maturity, estimated
likely call date, or earliest repricing opportunity. Interest-bearing demand
deposits, statement savings and money market accounts do not have a stated
maturity or repricing term and can be withdrawn or repriced at any time. This
may impact our net interest income if more expensive alternative sources of
deposits are required to fund loan growth or deposit runoff. Management projects
the repricing characteristics of these accounts based on historical performance
and assumptions that it believes reflect their rate sensitivity.
The following discussion focuses on the major components of our operations and
presents an overview of the significant changes in our financial condition at
March 31, 2009 as compared to December 31, 2008 and our results of operations
for the three month period ended March 31, 2009 as compared to the same period
in 2008.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2009 AND DECEMBER 31, 2008
Total assets at March 31, 2009 were $278.5 million, an increase of $30.9 million
or 12.5% over December 31, 2008.
13
This change was primarily due to increases in loans receivable, gross, of $19.4
million, loans held for sale of $250,000, accrued interest receivable of
$34,000, deferred taxes of $151,000, investments held to maturity of $8.9
million, cash and cash equivalents of $2.7 million, and bank owned life
insurance of $43,000, partially offset by decreases in Federal Home Loan Bank
("FHLB) stock of $11,000, other assets of $135,000, other real estate owned of
$67,000 and premise and equipment of $388,000. The increases in assets were
funded by a $26.8 million increase in deposits and a $4.5 million increase in
debt partially offset by a $265,000 reduction in Federal Home Loan Bank
advances.
Loans receivable, at March 31, 2009, totaled $213.8 million, an increase of
$19.7 million or 10.2% from December 31, 2008. This increase was attributable to
increases in commercial loans of $10.6 million and commercial real estate loans
of $11.2 million, partially offset by decreases in consumer loans of $265,000,
construction loans of $266,000 and residential real estate loans of $1.6
million. See Note 8 to our Financial Statements for a breakdown of the
components of our loan portfolio.
We believe the increase in loans receivable primarily reflects the competitive
pricing of our loan products and the continued development of relationships with
local small businesses, which management believes are attracted to the Company
by the high level of individualized service we provide through its team of
lenders.
Non-performing assets include non-accrual loans, which are loans on which the
accrual of interest has ceased, impaired loans, restructured loans and real
estate owned. Loans are generally placed on non-accrual status if, in the
opinion of management, collection is doubtful, or when principal or interest is
past due 90 days or more unless the collateral is considered sufficient to cover
principal and interest and the loan is in the process of collection. Impaired
loans are measured based on the present value of expected future discounted cash
flows, the market price of the loan or the fair value of the underlying
collateral if the loan is collateral dependent. At March 31, 2009 and December
31, 2008, the Bank did not have any non-accrual loans. At March 31, 2009, the
Bank had one impaired loan totaling $1,850,500 as compared to three loans at
December 31, 2008 totaling $2,375,000.00 all of which are sufficiently
collateralized and therefore no specific reserves have been recorded against it
them. The average balance of impaired loans totaled $1,850,500 for 2009 as
compared to $2,383,000 for 2008, and interest income recorded on impaired loans
during the three months ended March 31, 2009 was $32,000 as compared to $69,000
for the twelve months ended December 31, 2008.
Real estate acquired by foreclosure or by deed in lieu of foreclosure is
classified as real estate owned until it is sold. At March 31, 2009, the Bank
had $214,000 in real estate owned compared to $281,000 in real estate owned at
December 31, 2008. The change reflects adjustments made to the carrying value
during 2009.
Total liabilities at March 31, 2009 amounted to $263.3 million, an increase of
$31.1 million or 13.4% from December 31, 2008. This change was primarily due to
increases in total deposits of $26.8 million, line of credit borrowings from
Atlantic Central Bankers Bank (ACBB) of $4.5 million and other liabilities of
$105,000, partially offset by a decrease of $265,000 in advances from Federal
Home Loan Bank.
Total deposits at March 31, 2009 were $228.8 million, an increase of $ 26.8
million or 13.3% from December 31, 2008. The increase in total deposits was
spread amongst non-interest bearing deposits with an increase of $5.5 million,
certificates of deposit with an increase of $19.9 million, and interest bearing
core deposits with an increase of $1.4 million. The change in deposits was
primarily related to the competitive pricing of our deposit products coupled
with the continued development of relationships with local small businesses and
the high level of individualized service provided by our team of retail branch
managers. Consumer and commercial deposits are attracted principally from within
our primary market area. We do not obtain funds through brokers, nor do we
solicit funds outside the State of New Jersey, although we do accept deposits
from residents of other states.
At March 31, 2009, the Bank had advances with the FHLB in the amount of $26.0
million, a decrease of $265,000 or 1.01 % from December 31, 2008. The weighted
average interest rate on the Bank's borrowings from FHLB was 3.62% at March 31,
2009 and at December 31, 2008.
14
Stockholders' equity at March 31, 2009 amounted to $15.2 million, a decrease of
$197,000 or 1.28% over December 31, 2008. This decrease reflects a net loss of
$198,000 for the three month period ended March 31, 2009 offset by stock based
compensation expense of $1,000.
RESULTS OF OPERATIONS
NET INCOME. We recorded a net loss for the three month period ended March 31,
2009 of $198,000 or $0.12 per share as compared to a net income of $58,000 or
$0.04 per share for the same period in 2008. The change in net income for the
three-month period compared to the prior period was attributable to a higher net
interest income of $319,000 offset by a decrease of $49,000 in non-interest
income and increases of $136,000 in employee salaries and benefits expense,
$180,000 in net occupancy expense, and $24,000 in FDIC premium expense. The net
interest margin for the three-month period ended March 31, 2009 decreased by 5
basis points to 3.10% as compared to 3.15% for the same period in 2008.
INTEREST INCOME. Total interest income amounted to $3.4 million for the
three-month period ended March 31, 2009, an increase of $319,000 or 10.52% when
compared to the same period in 2009. The increase in interest income was due to
volume increases in our interest-earning asset balances rather than rate
changes. The average yield on the Bank's interest-earning assets was 5.62% for
the three month period ended March 31, 2009 compared to 6.33% during the same
period in 2008.
INTEREST EXPENSE. Total interest expense amounted to $1.5 million for the
three-month period ended March 31, 2009, an increase of $3,000 when compared to
the same period in 2008. The increase in interest expense was due to volume
increases in interest bearing deposits and FHLB advances coupled with lower
rates being paid on those products when compared to the same period in 2008. The
average cost of interest-bearing liabilities was 2.80% for the three-month
period ended March 31, 2009 compared to 3.61% during the same period in 2008.
ALLOWANCE FOR LOAN LOSSES. We recorded a provision for loan losses for the
three-month period ended March 31, 2009 of $341,000 compared to a provision of
$23,000 for the same period in 2008. A provision for loan losses is charged to
operations based on management's evaluation of the estimated and inherent losses
in our loan portfolio. While management has increased its allowance for loan
loss for the three month period ended March 31, 2009, management believes the
credit quality of the Bank's loan portfolio continues to remain strong during
this turbulent time in the market. We have not engaged in any sub prime lending
activities that have plagued the banking industry. At March 31, 2009, our
allowance for loan losses represented 0.69% of total loans outstanding and
79.64% of non-performing loans.
NON-INTEREST INCOME. Non-interest income, which is comprised principally of
service charges on deposit accounts, origination fees on residential mortgage
loans sold, loan syndication fees, bank owned life insurance income, ATM fees
and other miscellaneous fee income, for the three-months ended March 31, 2009
totaled $93,000, a decrease of $49,000 or 34.5% when compared to the same period
in 2008. This decrease is the result of a $57,000 gain on the sale of fixed
assets during the three months ended March 31, 2008. There was no comparable
transaction in 2009. This decrease was partially offset by increases in bank
owned life insurance and origination fees on mortgage loans sold.
NON-INTEREST EXPENSE. Non-interest expense, which is comprised principally of
salaries and employee benefits, net occupancy costs, advertising costs, data
processing costs and professional services and other operating costs, for the
three months ended March 31, 2009 totaled $1.9 million, an increase of $368,000
or 23.7% when compared to the same period in 2008. The increase in non-interest
expense was primarily the result of increased salary and benefit costs of
$136,000 and net occupancy costs of $180,000. The net increase in occupancy
costs is attributable to the one time costs of $135,000 associated with the
retirement of certain fixed assets in connection with the closing of the
Moorestown Route 38 branch on April 1, 2009.
INCOME TAXES. We recorded a federal and state income tax benefit of $149,000
during the three month period ended
15
March 31, 2009 compared to an income tax expense of $14,000 for the same period
in 2008. The change in income tax expense reflects the changes in the Company's
results of operations and its recognition of a loss in the first quarter of
2009. The effective tax rate for the three month period ended March 31, 2009 was
42.9% compared to 19.4% for the three month period ended March 31, 2008.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity represents our ability to meet our normal cash flow
requirements for the funding of loans, repayment of deposits and payment of
operating costs. Our primary sources of liquidity include growth in deposits,
amortization and prepayment of loans, maturities of investment securities, and
our borrowing capability. Management monitors liquidity daily, and on a monthly
basis incorporates liquidity analysis into its asset/liability management
program.
In addition to using growth in deposits, loan repayments and the investment
portfolio as a source of liquidity, we also have access to unsecured, overnight
lines of credit aggregating $44.0 million, consisting of $3.0 million, on an
uncommitted basis, through ACBB and $41.0 million through the FHLB of New York.
The arrangements with ACBB are for the sale of federal funds to the Bank,
subject to the availability of such funds. Pursuant to a collateral agreement
with the FHLB, advances under this line of credit are secured by a blanket lien
on our residential mortgage loan portfolio. At March 31, 2009, we had no
outstanding balance against the overnight line of credit at ACBB. The Company
has a non revolving line of credit with ACBB for up to $5,000,000 and as of
March 31, 2009 there is an outstanding balance of $4.5 million. In addition, the
Bank's membership in the FHLB provides the Bank with additional secured
borrowing capacity of up to a maximum of 25% of the Bank's total assets, subject
to certain conditions.
We had cash and cash equivalents of $12.1 million at March 31, 2009 in the form
of cash, due from banks and federal funds sold. At March 31, 2009, unused lines
of credit available to our customers, committed undisbursed loan proceeds and
standby letters of credit totaled $48.5 million. Certificates of deposit
scheduled to mature in one year or less totaled $95.8 million at March 31, 2009.
We anticipate that we will continue to have sufficient funds available to meet
the needs of our customers for deposit repayments and loan fundings.
Our ability to generate deposits depends on the success of our branches and the
continued expansion of our branch network. Our success is dependent on a number
of factors, including our ability to establish branches in favorable locations,
our ability to meet the needs of our customers through personalized services and
a broad array of financial products, and the general economic conditions of the
market area in which they are located. Unexpected changes in the national and
local economy may also adversely affect our ability to attract or retain
deposits and foster new loan relationships. In addition, because we will incur
start-up and operating costs associated with expansion, the opening of new
branches is expected to adversely affect future profitability in the short term.
CAPITAL RESOURCES. Capital adequacy is the ability of the Bank to support growth
while protecting the interests of depositors and the deposit insurance fund.
Bank regulatory agencies have developed certain capital ratio requirements,
which are used to assist them in monitoring the safety and soundness of
financial institutions. Management continually monitors these capital
requirements. The Bank is subject to risk-based capital guidelines promulgated
by the FDIC that are designed to make regulatory capital requirements more
sensitive to differences in risk profile among banks, to account for off-balance
sheet exposure, and to minimize disincentives for holding liquid assets. Under
the guidelines, assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. The minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit) is 8%. At least 4% of total risk-weighted assets is required to be "Tier
I Capital," consisting of common stockholders' equity and qualifying preferred
stock, less certain goodwill items and other intangible assets. The remainder
("Tier II Capital") may consist of (a) the allowance for loan losses of up to
1.25% of risk-weighted assets, (b) excess of qualifying preferred stock, (c)
hybrid capital instruments, (d) perpetual debt, (e) mandatory convertible
securities, and (f)
16
qualifying subordinated debt and intermediate-term preferred stock up to 50% of
Tier I capital. Total capital is the sum of Tier I and Tier II capital less
reciprocal holdings of other banking organizations, capital instruments,
investments in unconsolidated subsidiaries and any other deductions as
determined by the FDIC (determined on a case-by-case basis or as a matter of
policy after formal rule-making).
In addition to the risk-based capital guidelines, the FDIC has adopted a minimum
Tier I capital (leverage) ratio, under which banks must maintain a minimum level
of Tier I capital to average total consolidated assets of at least 3% in the
case of a bank that has the highest regulatory examination rating and is not
contemplating significant growth or expansion. All other banks are expected to
maintain a leverage ratio of at least 1% to 2% above the stated minimum.
The Bank was in compliance with all applicable minimum capital requirements for
all periods presented. At March 31, 2009 the Bank maintained a Tier I leverage
ratio of 7.53%, a Tier I risk-based capital ratio of 8.28% and a total
risk-based capital ratio of 10.16%. The Bank's management believes that the Bank
would be categorized as well capitalized under applicable FDIC capital adequacy
regulations.
On February 17, 2009, the Company entered into a non-revolving line of credit
loan agreement with Atlantic Central Bankers Bank for an amount up to
$5,000,000. The Company has drawn $4,500,000 under the loan and has contributed
$4,400,000 as additional equity to the Bank.
OFF-BALANCE SHEET ARRANGEMENTS. We are party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of our customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the statements of financial condition.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the agreement. Commitments
generally have fixed dates or other termination clauses and may require the
payment of a fee. Some of the commitments are expected to expire without being
drawn upon, and the total commitments do not necessarily represent future cash
requirements. Total commitments to extend credit at March 31, 2009 were $48.5
million. We evaluate each customer's creditworthiness on a case by case basis.
Collateral obtained, if deemed necessary, is based on management's credit
evaluation of the customer. Collateral varies but may include accounts
receivable, marketable securities, inventory, property, plant and equipment,
residential and commercial real estate.
Standby letters of credit are conditional commitments issued to a third party
for a customer. The credit risk involved in issuing standby letters of credit is
similar to that involved in extending credit to customers. We evaluate each
customer's creditworthiness on a case by case basis. Collateral obtained, if
deemed necessary, is based on management's credit evaluation of the customer.
Collateral varies, but may include accounts receivable, marketable securities,
inventory, property, plant and equipment, and residential and commercial real
estate. At March 31, 2009, our obligations under standby letters of credit
totaled $718,000.
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is based on management's ongoing evaluation of
the loan portfolio and reflects an amount considered by management to be its
best estimate of known and inherent losses in the loan portfolio. Management
considers a variety of factors when establishing the allowance, such as the
impact of current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of independent loan review and related
classifications. Our historic loss rates and the loss rates of peer financial
institutions are also considered. In addition, certain individual loans which
management has identified as problematic are specifically provided for, based
upon an evaluation of the borrower's perceived ability to pay, the estimated
adequacy of the underlying collateral and other relevant factors. Consideration
is also given to examinations performed by regulatory agencies. Although
provisions have been established and segmented by type of loan, based upon
management's assessment of their differing
17
inherent loss characteristics, the entire allowance for losses on loans is
available to absorb loan losses in any category. Management uses significant
estimates to determine the allowance for loan losses. Since the allowance for
loan losses is dependent, to a great extent, on conditions that may be beyond
our control, it is possible that management's estimate of the allowance for loan
losses and actual results could differ materially in the near term.
In addition, regulatory authorities, as an integral part of their examinations,
periodically review the allowance for loan losses. They may require additions to
the allowance based upon their judgments about information available to them at
the time of examination.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as operating loss carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is established against deferred tax assets
when, in the judgment of management, it is more likely than not that such
deferred tax assets will not become available. Because the judgment about the
level of future taxable income is dependent to a great extent on matters that
may, at least in part, be beyond the our control, it is at least reasonably
possible that management's judgment about the need for a valuation allowance for
deferred taxes could change in the near term.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 13 for discussion on Recent Accounting Pronouncements.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements of the Company and the notes thereto, presented
elsewhere herein, have been prepared in accordance with the standards of the
Public Company Accounting Oversight Board (United States), which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation.
The impact of inflation is reflected in the increased cost of our operations.
Unlike most industrial companies, nearly all of our assets and liabilities are
monetary. As a result, interest rates have a greater impact on our performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
The Registrant's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Registrant's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules13a-15(e)
and 15d-15(e)) as of the end of the period covered by this quarterly report,
have concluded that as of such date, the Registrant's disclosure controls and
procedures were effective to ensure at a reasonable assurance level that
material information relating to the Registrant is recorded, processed,
summarized and reported in a timely manner. There were no changes in the
Registrant's internal control over financial reporting that occurred during the
Registrant's first fiscal quarter of 2009 that have materially affected, or are
reasonably likely to materially affect, the Registrant's internal control over
financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, from time to time, is a party to routine litigation that arises in
the normal course of business. Management does not believe the resolution of
this litigation, if any, would have a material adverse effect on the Company's
financial condition or results of operations. However, the ultimate outcome of
any such matter, as with litigation generally, is inherently uncertain and it is
possible that some of these matters may be resolved adversely to the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
(a) The following are filed as exhibits to this report:
31.1 Certification of Chief Executive Officer required under
Section 302 of the Sarbanes - Oxley Act of 2002
31.2 Certification of Chief Financial Officer required under
Section 302 of the Sarbanes - Oxley Act of 2002
32.1 Certification of Chief Executive Officer required under
Section 906 of the Sarbanes - Oxley Act of 2002
32.2 Certification of Chief Financial Officer required under
Section 906 of the Sarbanes - Oxley Act of 2002
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CORNERSTONE FINANCIAL CORPORATION
Date: May 13, 2009 By: /s/ George W. Matteo, Jr.
-------------------------
George W. Matteo, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 2009 By: /s/ Keith Winchester
--------------------
Keith Winchester
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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