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, 2010
---------------
-OR-
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
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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 (I.R.S. Employer
incorporation 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 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 whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation SD-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). YES X NO .
--- ---
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 12, 2010, there were 1,809,656 outstanding shares of the registrant's
Common Stock.
CORNERSTONE FINANCIAL CORPORATION
CONTENTS
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PAGES
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements..............................................1
Consolidated Statements of Financial Condition at March 31, 2010 (unaudited)
and December 31, 2009..............................................................1
Consolidated Statements of Operations (unaudited) for the three months
ended March 31, 2010 and 2009......................................................2
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
for the three months ended March 31, 2010.........................................3
Consolidated Statements of Cash Flows (unaudited) for the three months
ended March 31, 2010 and 2009......................................................4
Notes to Consolidated Financial Statements (unaudited) ...............................5
Item 2. Management's Discussion and Analysis or Plan of Operation.....................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................21
Item 4. Controls and Procedures.......................................................21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................21
Item 1A. Risk Factors..................................................................21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................22
Item 3. Defaults upon Senior Securities...............................................22
Item 4. Submission of Matters to a Vote of Security Holders...........................22
Item 5. Other Information.............................................................22
Item 6. Exhibits......................................................................22
Signatures................................................................................23
Exhibit 31.1..............................................................................24
Exhibit 31.2..............................................................................25
Exhibit 32.1 .............................................................................26
Exhibit 32.2 .............................................................................27
PART I. FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA) MARCH 31, 2010 DECEMBER 31, 2009
-------------- -----------------
ASSETS: (unaudited)
Cash and due from banks $ 7,080 $ 4,742
Federal funds sold 12,000 -
------------ ------------
Cash and cash equivalents 19,080 4,742
------------ ------------
Investment securities:
Held to maturity (fair value 2010 -
$51,667; 2009 - $47,294) 51,858 48,059
Loans receivable 237,428 238,424
Less allowance for loan losses 3,541 3,432
------------ ------------
Loans receivable, net 233,887 234,992
------------ ------------
Federal Home Loan Bank stock 1,353 1,572
Premises and equipment, net 7,801 7,871
Accrued interest receivable 1,587 1,484
Bank owned life insurance 4,562 4,521
Deferred taxes 1,235 1,154
Other assets 1,650 1,749
------------ ------------
Total Assets $ 323,013 $ 306,144
============ ============
LIABILITIES:
Non-interest bearing deposits $ 32,946 $ 37,500
Interest bearing deposits 114,768 99,132
Certificates of deposit 122,073 112,861
------------ ------------
Total deposits 269,787 249,493
------------ ------------
Advances from the Federal Home Loan Bank 25,000 29,883
Line of Credit 4,722 4,672
Subordinated debt 3,000 3,000
Unsettled Securities payable 1,000 -
Other liabilities 1,216 1,283
------------ ------------
Total Liabilities 304,725 288,331
------------ ------------
Commitments and Contingencies (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock:
$0 par value; $1,000 per share stated value,
authorized 1,000,000 shares; issued and
outstanding 1,900 at March 31, 2010 and
December 31, 2009, respectively 1,900 1,900
Common stock:
$0 par value: authorized 10,000,000 shares;
issued and outstanding 1,809,656 at March 31,
2010 and December 31, 2009, respectively - -
Additional paid-in capital 16,623 16,623
Retained deficit (235) (710)
------------ ------------
Total Shareholders' Equity 18,288 17,813
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 323,013 $ 306,144
============ ============
See accompanying notes to consolidated financial statements
1
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
--------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31, 2010 MARCH 31, 2009
-------------- --------------
INTEREST INCOME (Unaudited) (Unaudited)
Interest and fees on loans $ 3,373 $ 2,964
Interest on investment securities 547 384
Interest on federal funds 2 3
------------ --------------
TOTAL INTEREST INCOME 3,922 3,351
INTEREST EXPENSE
Interest on deposits 938 1,232
Interest on borrowings 184 295
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TOTAL INTEREST EXPENSE 1,122 1,527
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Net interest income 2,800 1,824
Provision for loan losses 109 341
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NET INTEREST INCOME AFTER LOAN LOSS PROVISION 2,691 1,483
------------ --------------
NON-INTEREST INCOME
Service charges on deposit accounts 49 27
Origination fees on mortgage loans sold - 4
Bank owned life insurance income 41 43
Gain on sale of Loan 39 -
Miscellaneous fee income 25 19
------------ --------------
TOTAL NON-INTEREST INCOME 154 93
------------ --------------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,200 1,064
Net occupancy 321 464
Data processing and other service costs 100 85
Professional services 138 83
Advertising and promotion 26 41
Other real estate owned expense 9 9
FDIC expense 109 54
Other operating expenses 167 123
------------ --------------
TOTAL NON-INTEREST EXPENSE 2,070 1,923
------------ --------------
Income(loss) before income taxes 775 (347)
Income tax expense (benefit) 300 (149)
------------ --------------
NET INCOME(LOSS) 475 $ (198)
Preferred stock dividends 33 -
------------ --------------
Net income(loss) available to
common shareholders $ 442 $ (198)
============ ==============
EARNINGS PER SHARE
Basic $ 0.24 $ (0.12)
Diluted $ 0.24 $ (0.12)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,810 1,656
Diluted 1,810 1,656
See accompanying notes to consolidated financial statements
2
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
ACCUMULATED
ADDITIONAL ACCUMULATED OTHER
COMPREHENSIVE PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE
(DOLLARS IN THOUSANDS) INCOME STOCK STOCK CAPITAL (DEFICIT) INCOME TOTAL
------------- --------- --------- ---------- ----------- ------------- ---------
Balance at
December 31, 2009
Comprehensive income $ 1,900 $ - $ 16,623 $ (710) - $ 17,813
======== ========= ========== ======== ======== =========
Net Income $ 475 - - - 475 - 475
--------
Comprehensive income $ 475
========
Stock based compensation - - 33 - - 33
Preferred Stock
Dividend ($17.50
per share) - - (33) - - (33)
--------- --------- ---------- --------- --------- ---------
Balance at
March 31, 2010 $ 1,900 $ - $ 16,623 $ (235) $ - $ 18,288
========= ========= ========== ========= ========= =========
See accompanying notes to consolidated financial statements.
3
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
------------------------------------
(IN THOUSANDS) MARCH 31, 2010 MARCH 31, 2009
-------------- --------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income(loss) $ 475 $ (198)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 109 341
Depreciation 94 405
Amortization of premiums and discounts, net 25 2
Stock Option expense 33 1
Deferred tax (benefit) (81) (151)
Decrease in other real estate owned - 67
Loans originated for sale - (1,368)
Proceeds from sales of loans held for sale - 1,118
Income on Bank Owned Life Insurance (41) (43)
Increase (decrease) in accrued interest receivable
and other assets (4) 101
Increase (decrease) in other liabilities (67) 105
--------- ----------
Net cash provided by operating activities 543 380
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity (5,652) (17,643)
Maturity and calls of investments held to maturity 2,828 8,659
Redemption of FHLB Stock 219 11
Net decrease (increase) in loans 996 (19,729)
Purchases of premises and equipment (24) (17)
--------- ----------
Net cash used in investing activities (1,633) (28,719)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 20,294 26,786
Proceeds from borrowings 242,650 23,300
Principal payments on borrowings (247,483) (19,065)
Cash dividend paid for preferred stock (33) -
--------- ----------
Net cash provided by financing activities 15,428 31,021
Net increase in cash and cash equivalents 14,338 2,682
Cash and cash equivalents at the beginning of the period 4,742 9,368
--------- ----------
Cash and cash equivalents at the end of the period $ 19,080 $ 12,050
========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,137 $ 1,452
Cash paid during the period for income taxes 126 -
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unsettled HTM investment security $ 1,000 $ -
See accompanying notes to 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, 2009 has been derived from
audited financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in Cornerstone Financial
Corporation's Annual Report on Form 10-K for the year ended December 31, 2009 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
The Company accounts for stock options in accordance with FASB Accounting
Standards Codification (ASC) Topic 718 "Stock Compensation." The Company
recognizes the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the statement of operations. The Company had
$369 thousand in unrecognized compensation costs relating to non-vested stock
based compensation awards at March 31, 2010.
5
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 common stock on the date of the grant.
On July 16, 2009, options to purchase a total of 45,000 shares of common stock
were granted with an exercise price of $5.00 per share. These options will
expire ten years from the date of the grant and vest on a one-third per year
basis beginning on July 16, 2010, with vesting accelerating in certain
circumstances such as change in control of the Company. The exercise price of
each option equals the market price of the common stock on the date of the
grant.
On January 16, 2010, options to purchase a total of 111,000 shares of common
stock were granted with an exercise price of $4.50 per share. These options will
expire ten years from the date of the grant and vest on a one-third per year
basis beginning on January 21, 2011, with vesting accelerating in certain
circumstances such as change in control of the Company. The exercise price of
each option equals the market price of the 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, 2009 is as
follows (in thousands):
MARCH 31, 2010
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- -------------- ---------- ---------
INVESTMENTS HELD TO MATURITY:
Government agency obligations $ 43,376 $ 102 $ (289) $ 43,189
Mortgage backed securities 8,482 83 (87) 8,478
--------- ------ ------- ---------
Total $ 51,858 $ 185 $ (376) $ 51,667
========= ====== ======= =========
DECEMBER 31, 2009
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- -------------- ---------- ---------
INVESTMENTS HELD TO MATURITY:
Government agency obligations $ 39,019 $ 42 $ (721) $ 38,340
Mortgage backed securities 9,040 46 (132) 8,954
--------- ------ ------- ---------
Total $ 48,059 $ 88 $ (853) $ 47,294
========= ====== ======= =========
The following table sets forth information regarding the fair value and
unrealized losses on the Company's temporarily impaired investment securities at
March 31, 2010 and December 31, 2009 for the time periods shown (in thousands):
MARCH 31, 2010
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------------ ----------------------- -----------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
----------- ---------- ---------- --------- ---------- --------
INVESTMENTS HELD TO MATURITY:
Government Agency Obligations $ 2 ,864 $ 41 $ 17,714 $ 248 $ 20,578 $ 289
Mortgage Backed Securities 4,740 87 - - 4,740 87
--------- ------ -------- ------- -------- -------
Total temporarily
impaired investment
securities $ 7,604 $ 128 $ 17,714 $ 248 $ 25,318 $ 376
========= ====== ======== ======= ======== =======
6
DECEMBER 31, 2009
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------------ ----------------------- ------------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
----------- ---------- ---------- --------- ---------- --------
INVESTMENTS HELD TO MATURITY:
Government Agency Obligations $ 33,940 $ 721 - - $ 33,940 $ 721
Mortgage Backed Securities 4,715 132 - - 4,715 132
--------- ------ -------- ------- -------- -------
Total temporarily
impaired investment
securities $ 38,655 $ 853 $ - $ - $ 38,655 $ 853
========= ====== ======== ======= ======== =======
Management has taken into consideration the following information in reaching
the conclusion that the impairment of the securities listed in the table above
are not other than temporary. The unrealized losses disclosed above are the
result of fluctuations in market interest rates currently offered on like
securities and do not reflect 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 does not intend to sell and will not be required to sell 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 - LOANS RECEIVABLE
Loans receivable consist of the following (in thousands):
MARCH 31, 2010 DECEMBER 31, 2009
-------------- -----------------
Commercial $ 92,023 $ 91,717
Real estate - commercial 106,420 105,702
Real estate - residential 17,204 19,137
Construction 12,298 12,104
Consumer loans 9,604 9,875
Net deferred loan fees (121) (111)
---------- ----------
237,428 238,424
Allowance for loan losses (3,541) (3,432)
---------- ----------
Loans receivable, net $ 233,887 $ 234,992
========== ==========
Under New Jersey banking laws, the Bank is subject to a loans-to-one-borrower
limitation of 15% of capital funds. At March 31, 2010, the loans-to-one-borrower
limitation was approximately $4.3 million; this excludes an additional 10% of
capital funds, or approximately $2.9 million which may be loaned if
collateralized by readily marketable securities. At March 31, 2010, 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 Company recognized $17 thousand in interest income on
non-accrual loans during the three month period ended March 31, 2010 and $32
thousand for 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, 2010 the Company had $6.7 million in non-accrual loans
compared to $8.1 million in non-accrual loans at December 31, 2009. At March 31,
7
2010, the Company had eight impaired loan relationships totaling $7.5 million
(included within the non-accrual loans discussed above) in which $6.0 million
was sufficiently collateralized and a specific reserve of $1.5 million has been
recorded for the remaining balance. The average balance of impaired loans
totaled $8.4 million as of March 31, 2010, and interest income recorded on
impaired loans during the three months ended March 31, 2010 totaled $30
thousand, as compared to $32 thousand for the three months ended March 31, 2009.
Included in the balance of the loans past due 90 days or more is a principal
balance of $634 thousand dollars representing the Bank's participation interest
in two loans originated by another New Jersey based institution. Although the
borrowers have ceased making payments on these loans, we have received a legal
opinion from our legal counsel that the Bank has valid claims against the
lead/originating bank for violations of the participation agreements, and we
have filed suit asserting these claims. In the event the lead bank is unable to
collect from the borrowers, we believe, based on said legal opinion that our
ability to collect on these loans will depend upon the outcome of our legal
action against the lead/originating bank.
The following table provides information regarding risk elements in the loan
portfolio as of March 31, 2010 and December 31, 2009
(DOLLARS IN THOUSANDS) MARCH 31, 2010 DECEMBER 31, 2009
-------------- -----------------
Loans past due 90 days or more and accruing
Commercial $ 634 $ 634
Commercial real estate 165 1,765
------- -------
Total loans past due 90 days or more and accruing 799 2,399
======= =======
(DOLLARS IN THOUSANDS) MARCH 31, 2010 DECEMBER 31, 2009
-------------- -----------------
Non-performing assets:
Non-accrual loans:
Commercial $ 1,398 1,401
Commercial real estate 5,315 3,722
Residential real estate - 3,020
------- -------
Total 6,713 8,143
Restructured loans - -
------- -------
Total non-performing loans
6,713 8,143
Real estate owned - -
------- -------
Total non-performing assets $ 6,713 -
======= =======
Non-performing loans as a percentage of loans 2.83% 3.41%
======= =======
Non-performing assets as a percentage of loans
and real estate owned 2.83% 3.41%
======= =======
Non-performing assets as a percentage of total assets 2.08% 2.66%
======= =======
8
The following table sets forth with respect to the Bank's allowance for losses
on loans
(dollars in thousands) MARCH 31, 2010 MARCH 31, 2009
-------------- --------------
Balance at beginning of year $ 3,432 $ 1,133
Provision:
Commercial 109 341
-------- --------
Total Provision 3,541 1,474
Charge-offs (net of recoveries) - -
Consumer - -
-------- --------
Total Charge-offs - -
-------- --------
Net charge-offs - -
======== ========
Balance at end of period $ 3,541 $ 1,474
======== ========
Period-end loans outstanding $237,428 $213,833
======== ========
Average loans outstanding $235,172 $203,056
======== ========
Allowance as a percentage of period-end loans 1.51% 0.73%
Net charge-offs as a percentage of average loans 0.00% 0.00%
NOTE 8 - BANK OWNED LIFE INSURANCE
Bank Owned Life Insurance ("BOLI") is carried at its aggregate cash surrender
value less surrender charges and totaled $4.6 million at March 31, 2010. Income
of $41 thousand was recognized on the BOLI during the three month period ended
March 31, 2010 as compared to $43 thousand for the three month period ended
March 31, 2009. The Bank is the sole owner and beneficiary of the BOLI.
NOTE 9 - 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 $ 43 thousand in deferred
compensation expense during the three month period ended March 31, 2010 as
compared to $35 thousand for the three month period ended March 31, 2009.
NOTE 10 - INCOME TAXES
The Company accounts for uncertainties in income taxes in accordance with
Financial ASC Topic 740 "Accounting for Uncertainty in Income Taxes." ASC Topic
740 prescribes a threshold and measurement process for recognizing in the
financial statements a tax position taken or expected to be taken in a tax
return. ASC Topic 740 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 2006 through 2009 remain subject to examination as of March
31, 2010, while tax years 2005 through 2009 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.
The ability to realize deferred tax assets is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities, and tax
planning strategies. Based upon these and other factors, the Company determined
that it is more likely then not that its deferred tax asset will be realized. As
such, no valuation allowance was established for the deferred tax asset as of
March 31, 2010 or December 31, 2009. The Company will continue to reassess the
realizability of the deferred tax asset in future periods. If, in the future, it
is determined that the Company's deferred tax asset is not realizable, a
valuation allowance may be established against the deferred tax asset, which may
have a material impact on the Company's net income in the period in which it is
recorded.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC Topic 820 "Fair Value Measurements and Disclosures" establishes a framework
for measuring fair value in U.S. generally accepted accounting principles, and
expands disclosure requirements for fair value measurements. ASC Topic 820 does
not require any new fair value measurements. The adoption of ASC Topic 820 did
not have a material impact on the Company's consolidated financial statements.
9
ASC Topic 820 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.
As of March 31, 2010 and December 31, 2009, the Company did not have any assets
or liabilities measured at fair value on a recurring or nonrecurring basis.
As required by ASC topic 825-10-65, the estimated fair value of financial
instruments at March 31, 2010 and December 31, 2009 was as follows:
MARCH 31, 2010 DECEMBER 31, 2009
--------------------------------- ---------------------------------
ESTIMATED ESTIMATED
(IN THOUSANDS) CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
Financial assets:
Cash and cash equivalents $ 19,080 $ 19,080 $ 4,742 $ 4,742
Investments held to maturity
Federal Agency Securities 43,376 43,189 39,019 38,340
Mortgage-backed Securities 8,482 8,478 9,040 8,954
Loans receivable 237,428 264,616 238,424 266,399
FHLB stock 1,353 1,353 1,572 1,572
Bank Owned Life Insurance 4,562 4,562 4,521 4,521
Accrued interest receivable 1,587 1,587 1,484 1,484
--------- --------- --------- ---------
Total financial assets $ 315,868 $ 342,865 $ 298,802 $ 326,012
========= ========= ========= =========
Financial Liabilities:
Checking Accounts $ 52,388 $ 52,388 $ 56,783 $ 56,783
Statement savings accounts 3,255 3,255 3,430 3,430
Money market accounts 27,115 27,115 19,658 19,658
Index Accounts 64,956 64,956 56,761 56,761
Certificates of deposit 122,073 121,083 112,861 111,908
FHLB advances 25,000 25,000 29,883 29,883
Line of Credit 4,722 4,722 4,672 4,672
Subordinated Debt 3,000 3,000 3,000 3,000
Accrued interest payable 207 207 222 222
--------- --------- --------- ---------
Total financial liabilities $ 302,716 $ 301,726 $ 287,270 $ 286,317
========= ========= ========= =========
CONTRACT ESTIMATED CONTRACT ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------- --------- --------- ---------
Off-balance sheet instruments:
Commitments to extend credit $ 49,176 $ - $ 45,684 $ -
========= ========= ========= =========
10
NOTE 12 - RECENT ACCOUNTING PRONOUNCEMENTS
Below is a discussion of recent accounting pronouncements. Recent pronouncements
not discussed below were deemed to not be applicable to the Company.
ASC TOPIC 820-10-65, 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 guidance regarding identifying circumstances that
indicate a transaction is not orderly and guidance on estimating fair value when
the volume and level of activity for the asset or liability have significantly
decreased. The guidance 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 guidance was adopted by the Company for the interim
period beginning April 1, 2009 and did not have a material effect on the
Company's financial position or results of operations.
ASC TOPIC 320-10-65, RECOGNITION AND PRESENTATION OF OTHER-THAN-TEMPORARY
IMPAIRMENTS
In April 2009, the FASB issued guidance regarding the recognition and
presentation of other-than-temporary impairments on debt and equity securities
in the financial statements. This guidance modified the presentation of OTTI
losses and expands existing disclosure requirements about OTTI. The guidance was
adopted by the Company for the interim period beginning April 1, 2009, and did
not have a material effect on the Company's financial position or results of
operations.
ASC TOPIC 825-10-50, INTERIM DISCLOSURES ABOUT FAIR VALUE OF INSTRUMENTS
In April 2009, the FASB issued guidance which requires publicly traded companies
to disclose the fair value of financial instruments in interim financial
statements. This guidance was adopted by the Company for the interim period
beginning April 1, 2009 and the required disclosures are included in Footnote
11.
FASB STATEMENT NO. 168, THE FASB ACCOUNTING STANDARDS CODIFICATION AND THE
HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
In June 2009, the FASB issued FASB Statement No. 168 "The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No. 162" (SFAS No. 168). SFAS No.
168 established the FASB Accounting Standards Codification. The Codification
will become the exclusive authoritative reference for nongovernmental U.S. GAAP
for use in financial statements issued for interim and annual periods ending
after September 15, 2009, except for SEC rules and interpretive releases, which
are also authoritative GAAP for SEC registrants. The contents of the
Codification will carry the same level of authority, eliminating the four-level
GAAP hierarchy previously set forth in Statement 162, which has been superseded
by Statement 168. All authoritative GAAP issued by the FASB after this Statement
will be referred to as Accounting Standards Updates. Accounting Standards
Updates will not be considered authoritative in their own right, rather they
will only serve to update the Codification, provide background information about
the guidance, and provide basis for conclusions on changes in the Codification.
The Codification retains existing GAAP without changing it except in one
instance related to software revenue recognition, which does not impact the
Company. SFAS No. 168 is effective for the Company for the interim period ending
September 30, 2009 and effective for this Form 10-Q. All references to
authoritative literature are required to cite the Codification as opposed to
legacy accounting pronouncements.
11
NOTE 13 - PRIVATE PLACEMENT COMMON STOCK OFFERING AND PREFERRED STOCK ISSUANCE
In June 2009, the Board of Directors of the Company approved a private placement
common stock offering to accredited investors. In connection with this offering,
the Board of Directors approved the issuance of common stock purchase warrants.
As part of the offering, one warrant was issued for each share of Company common
stock, no par, sold in the stock offering. Each warrant issued under the
offering will allow the holder of the warrant to purchase one share of Company
common stock, $0 par, for a price of $9.00 per share through June 26, 2013. For
the year ended December 31, 2009, the Company sold 153,889 shares under this
offering and issued 153,889 common stock warrants. The $1.1 million proceeds
received from the common stock offering were recorded as additional paid in
capital.
In December 2009, the Company authorized the establishment of 2,000 shares of $0
par, $1,000 stated value, Perpetual Non-Cumulative Convertible Preferred Stock.
The preferred stock is entitled to receive, as and when declared by the
Company's Board of Directors, non-cumulative cash dividends at the annual rate
equal to 7% of the stated value. In December 2009, the Company sold 1,900
preferred shares. The preferred stock is redeemable at the Company's option at
any time after six months from the issue date at the stated value plus any
dividends declared but unpaid. The preferred shares have priority of dividends
such that, no dividends or distributions shall be declared or paid to common
shareholders unless full dividends on all outstanding preferred shares have been
declared and paid for the most recently completed calendar quarter.
NOTE 14 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the filing date of this
report, and determined that there were no recognized or nonrecognized subsequent
events to report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 2009 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.
12
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.
We have adopted a strategy of continued growth. At March 31, 2010, we had total
assets of $323.0 million, total deposits of $269.8 million and total loans, net
of $233.9 million compared to total assets of $306.1 million, total deposits of
$249.5 million and total loans, net of $235.0 million at December 31, 2009. Our
growth in assets and deposits reflects our commitment to provide outstanding
customer service and a broad array of banking products driven by our customers
needs. We believe our strategy provides us with a competitive advantage over
other financial institutions by developing lasting customer relationships that
will enable us to continue to attract core deposits and loans within our market
area.
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 both 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.
13
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 our interest-earning assets and
interest-bearing liabilities at March 31, 2010, which are expected to mature or
reprice in each of the time periods shown:
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 $ 12,000 $ - $ - $ - $ 12,000
Investment securities held to
maturity - - 51,858 - 51,858
Loans receivable 110,331 75,234 51,863 - 237,428
--------- -------- -------- -------- --------
Total interest-earning assets 122,331 75,234 103,721 - 301,286
--------- -------- -------- -------- --------
NON-RATE SENSITIVE ASSETS:
Other assets - - - 21,727 21,727
--------- -------- -------- -------- --------
Total assets $ 122,331 $ 75,234 $103,721 $ 21,727 $ 323,013
========= ======== ======== ======== =========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand $ 19,442 $ - $ - $ - $ 19,442
Statement savings 3,255 - - - 3,255
Money market 92,071 - - - 92,071
Certificates of deposit 82,794 39,279 - - 122,073
Subordinated debt 3,000 - - - 3,000
Borrowings - 29,722 - - 29,722
--------- -------- -------- -------- --------
Total interest-bearing
liabilities 200,562 69,001 - - 269,563
--------- -------- -------- -------- --------
NON-RATE SENSITIVE LIABILITIES:
Non-interest bearing deposits - - - 32,946 32,946
Other liabilities - - - 2,216 2,216
Capital - - - 18,288 18,288
--------- -------- -------- -------- --------
Total liabilities and capital $ 200,562 $ 69,001 $ - $ 53,510 $ 323,013
========= ======== ======== ======== =========
Period GAP $ (78,231) $ 6,233 $103,721 $(31,723)
Cumulative interest-earning assets $ 122,331 $197,565 $301,286
Cumulative interest-bearing liabilities $ 200,562 $269,563 $269,563
Cumulative GAP $ (78,231) $(71,998) $ 31,723
Cumulative RSA/RSL (1) 60.99% 73.29% 111.77%
(1) Cumulative rate sensitive (interest-earning) assets divided by cumulative
rate sensitive (interest-bearing) liabilities.
At March 31, 2010, our interest rate sensitivity gap was within Board approved
guidelines.
14
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, 2010 as compared to December 31, 2009 and our results of operations
for the three month periods ended March 31, 2010 as compared to the same period
in 2009.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2010 AND DECEMBER 31, 2009
Total assets at March 31, 2010 were $323.0 million, an increase of $16.9 million
or 5.5% over December 31, 2009. This change was primarily due to increases in
cash and cash equivalents of $14.3 million, accrued interest receivable of $103
thousand, deferred taxes of $81 thousand, investments held to maturity of $3.8
million, bank owned life insurance of $41 thousand, partially offset by
decreases in loans receivable, net, of $1.1 million, Federal Home Loan Bank
("FHLB") stock of $219 thousand, other assets of $99 thousand and premise and
equipment of $70 thousand.
Gross loans receivable at March 31, 2010, totaled $237.4 million, a decrease of
$996 thousand or 0.4% from December 31, 2009. This decrease was attributable to
decreases in real estate loans secured by residential properties of $1.9 million
and consumer loans of $ 271 thousand partially offset by increases in commercial
loans of $307 thousand, commercial real estate loans of $718 thousand and
construction loans of $194 thousand. The reduction in residential real estate
loans reflects the payoff of a non-accrual loan relationship totaling $1.8
million. See Footnote 7 to our Consolidated Financial Statements for a breakdown
of the components of our loan portfolio.
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, 2010, we had a
total of $6.7 million in non accrual loans as compared to $8.1 million in
non-accrual loans at December 31, 2009. At March 31, 2010, we had eight impaired
loan relationships totaling $7.5 million (included in the non-accrual loans set
forth above) as compared to ten loan relationships at December 31, 2009 totaling
$10.5 million. At March 31, 2010 a specific reserve of $1.5 million has been
recorded against these loans. The average balance of impaired loans totaled $8.4
million for the three months ended March 31, 2010 as compared to $1.8 million at
March 31, 2009, and interest income recorded on impaired loans during the three
months ended March 31, 2010, totaled $30 thousand as compared to $32 thousand
for the three month period ended March 31, 2009.
Included in the balance of the loans past due 90 days or more is a principal
balance of $634 thousand dollars representing the Bank's participation interest
in two loans originated by another New Jersey based institution. Although the
borrowers have ceased making payments on these loans, we have received a legal
opinion from our legal counsel that the Bank has valid claims against the
lead/originating bank for violations of the participation agreements, and we
have filed suit asserting these claims. In the event the lead bank is unable to
collect from the borrowers, we believe, based on said legal opinion that our
ability to collect on these loans will depend upon the outcome of our legal
action against the lead/originating bank.
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, 2010 and December
31, 2009 we had no real estate owned.
15
All of our investment securities are classified as held to maturity. Our
investment securities portfolio increased by $3.8 million or 7.9% to $51.8
million at March 31, 2010, from $48.1 million at December 31, 2009. The held to
maturity investment purchases were concentrated in United State Government
agency securities. See Footnote 6 to our Consolidated Financial statements for
more information regarding our investment securities portfolio. The increase in
investment securities reflects management's efforts to further diversify its
growing balance sheet and to more prudently manage its capital base by investing
in lower risk weighted assets.
Total liabilities at March 31, 2010 amounted to $304.7 million, an increase of
$16.4 million or 5.7% from December 31, 2009. This change was primarily due to
increases in total deposits of $20.3 million, line of credit borrowings from
Atlantic Central Bankers Bank (ACBB) of $50 thousand and other liabilities of
$933 thousand, offset by a decrease of $4.9 million in advances from Federal
Home Loan Bank.
Total deposits at March 31, 2010 were $269.8 million, an increase of $20.3
million or 8.1% from December 31, 2009. The change in total deposits was related
to a significant increase in interest bearing core deposits (i.e. all interest
bearing deposit accounts other then certificate of deposit accounts) of $15.6
million, coupled with an increase of $9.2 million in certificates of deposit,
partially offset by a decrease in non-interest bearing accounts of $4.5 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, 2010, we had advances from the FHLB in the amount of $25.0 million,
a decrease of $4.9 million or 16.3 % from December 31, 2009. The weighted
average interest rate on these borrowings from the FHLB was 1.49% at March 30,
2010 as compared to 2.03% at December 31, 2009.
On October 31, 2008, the Bank issued a hybrid capital instrument in the
aggregate amount of $3.0 million in the form of subordinated debt. A portion of
this instrument qualifies as Tier II capital. The term of the debt is for a six
year period with a maturity date of November 1, 2014. The initial interest rate
was 5.00% fixed for the first year then adjusted to a variable rate equal to
prime rate for the remaining five years. The debt security is redeemable, at the
Bank's option, at par on any April 30th or October 31st through the maturity
date.
On February 17, 2009, the Company entered into a non-revolving line of credit
loan agreement with ACBB in an amount up to $5.0 million. The term of the debt
is for a three year period with a maturity date of February 17, 2012. The
interest rate adjusts at a variable rate equal to prime rate plus 25 basis
points with a floor of 4.25%. The Company has an outstanding balance on the line
of credit of $4.7 million and has contributed $4.4 million as additional capital
to the Bank.
Stockholders' equity at March 31, 2010 amounted to $18.3 million, an increase of
$475 thousand or 2.7% over December 31, 2009. This increase reflects net income
of $475 thousand, stock based compensation expense of $33 thousand and $33
thousand in cash paid for the declaration of dividends on preferred stock for
the three month period ended March 31, 2010.
RESULTS OF OPERATIONS
NET INCOME. We recorded net income for the three month period ended March 31,
2010 of $475 thousand or $0.24 per common share (after preferred stock dividend)
as compared to a net loss of $198 thousand or $0.12 per share for the same
period in 2009. The change in net income for the three-month period compared to
the prior period was attributable to increases of $976 thousand in net interest
income, $61 thousand in non-interest income, a decrease of $232 thousand in
provision for loan losses and $140 thousand in net occupancy cost, offset by
increases of $55 thousand in FDIC insurance premium expense, $136 thousand in
increased employee salaries and benefits expense and an increase of $99 thousand
in other non interest expenses. The decrease in net occupancy costs was the
result of costs associated with the closing of the Moorestown Route 38 Branch
during the first quarter of 2009. The net interest margin for the three-month
period ended March 31, 2010 increased by 83 basis points to 3.93% as compared to
3.10% for the same period in 2009.
16
INTEREST INCOME. Total interest income amounted to $3.9 million for the
three-month period ended March 31, 2010, an increase of $571 thousand or 17.0%
when compared to the same period in 2009. The increase in interest income was
related to increases of $32.1 million in average loans and $16.7 million in
average investment securities, partially offset by a reduction in the average
yield. The average yield on our interest-earning assets was 5.45% for the three
month period ended March 31, 2010 compared to 5.62% during the same period in
2009. The reduction in yield in the quarterly period reflects generally reduced
market rates of interest, as the Federal Reserve has maintained a low interest
rate policy to help stimulate the U.S. economy.
INTEREST EXPENSE. Total interest expense amounted to $1.1 million for the
three-month period ended March 31, 2010, a decrease of $405 thousand or 26.5 %
when compared to the same period in 2009. The decrease in interest expense
resulted from a decrease of $2.5 million in average borrowed funds and lower
rates paid on deposit and borrowing products when compared to the same period in
2009, offsetting the growth in average interest bearing deposits of $35.4
million. The average cost of interest-bearing liabilities was 1.70% for the
three-month period ended March 31, 2010 compared to 2.80% during the same period
in 2009.
The reduction in rates paid on deposit liabilities and borrowings reflects the
same factors, discussed above, affecting the yield on our earning assets.
ALLOWANCE FOR LOAN LOSSES. During the first quarter of 2010, we recorded a
provision for loan losses of $109 thousand compared to a provision of $341
thousand for the same period in 2009. 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, 2010, management believes the
credit quality of our loan portfolio has stabilized. On a linked quarterly
basis, our non-performing assets were stable from December 31, 2009, to March
31, 2010. We have not engaged in any sub prime lending activities that have
plagued the banking industry. At March 31, 2010, our allowance for loan losses
represented 1.49% of total loans outstanding and 56.3% of non-performing loans.
NON-INTEREST INCOME. For the three-months ended March 31, 2010, 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 totaled
$154 thousand, an increase of $61 thousand or 65.6% when compared to the same
period in 2009. This increase is the result of a $22 thousand increase on
service charges on deposit accounts and a $39 thousand dollar gain from the sale
of a loan.
NON-INTEREST EXPENSE. Non-interest expense, which is comprised principally of
salaries and employee benefits, net occupancy costs, FDIC insurance premium
expense, advertising costs, data processing costs and professional services and
other operating costs, totaled $2.1 million for the three months ended March 31,
2010, an increase of $147 thousand or 7.6% when compared to the same period in
2009. The increase in non-interest expense was primarily the result of increased
salary and benefit costs of $136 thousand, data processing costs of $15
thousand, professional services of $55 thousand, FDIC expense of $55 thousand,
and other operating expenses of $44, partially offset by decreases in net
occupancy costs of $143 thousand and advertising and promotion of $15 thousand.
INCOME TAXES. We recorded a federal and state income tax expense of $300
thousand during the three month period ended March 31, 2010 compared to an
income tax benefit of $149 thousand for the same period in 2009. The change in
income tax expense reflects the changes in the Company's results of operations
and its recognition of income for the three month period ended March 31, 2010.
The effective tax rate for the three month period ended March 31, 2010 was 38.7%
compared to 42.9% for the three month period ended March 31, 2009.
17
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 $58.7 million, consisting of $3.0 million, on an
uncommitted basis, through ACBB and $55.7 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, 2010, we had no
outstanding balance against the overnight line of credit at ACBB. In addition,
the Company has a non revolving line of credit with ACBB for up to $5.0 million
and as of March 31, 2010 there is an outstanding balance of $4.7 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 $19.1 million at March 31, 2010 in the form
of cash and due from banks. At March 31, 2010, unused lines of credit available
to our customers, committed undisbursed loan proceeds and standby letters of
credit totaled $49.2 million. Certificates of deposit scheduled to mature in one
year or less totaled $82.7 million at March 31, 2010. 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. 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.
CAPITAL RESOURCES. Capital adequacy is the ability 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 hybrid
instruments, 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 hybrid
instruments, (c) perpetual debt (d) mandatory convertible securities, and (e)
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).
18
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, 2010 the Bank maintained a Tier I leverage
ratio of 7.39%, a Tier I risk-based capital ratio of 8.64% and a total
risk-based capital ratio of 10.80%. The Bank's management believes that the Bank
would be categorized as well capitalized under applicable FDIC capital adequacy
regulations.
The Board of Governors of the Federal Reserve System has established similar
capital requirements for bank holding companies, on a consolidated basis.
However, these requirements only apply to bank holding companies with assets of
$500 million or more. As such, the Company is not subject to these requirements.
On October 31, 2008, the Bank issued a hybrid capital instrument in the
aggregate amount of $3.0 million in the form of subordinated debt. A portion of
this instrument qualifies as Tier II capital. The term of the debt is for a six
year period with a maturity date of November 1, 2014. The initial interest rate
was 5.00% fixed for the first year then adjusted to a variable rate equal to
prime rate for the remaining five years. The debt security is redeemable, at the
Bank's option, at par on any April 30th or October 31st through the maturity
date.
On February 17, 2009, the Company entered into a non-revolving line of credit
loan agreement with ACBB in an amount up to $5.0 million. The term of the debt
is for a three year period with a maturity date of February 17, 2012. The
interest rate adjusts at a variable rate equal to prime rate plus 25 basis
points with a floor of 4.25%. The Company has an outstanding balance on the line
of credit of $4.7 million and has contributed $4.4 million as additional capital
to the Bank.
In June 2009, the Board of Directors of the Company approved a private placement
common stock offering to accredited investors. In connection with this offering,
the Board of Directors approved the issuance of common stock purchase warrants.
As part of the offering, one warrant was issued for each share of common stock,
no par, sold in the stock offering. Each warrant issued under the offering will
allow the holder of the warrant to purchase one share of common stock, $0 par,
for a price of $9.00 per share through June 26, 2013. For the year ended
December 31, 2009, the Company sold 153,889 shares under this offering and
issued 153,889 common stock warrants. The $1.1 million proceeds received from
the common stock offering were recorded as additional paid in capital.
In December 2009, the Company authorized the establishment of 2,000 shares of $0
par, $1,000 stated value, Perpetual Non-Cumulative Convertible Preferred Stock.
The preferred stock is entitled to receive, as and when declared by the
Company's Board of Directors, non-cumulative cash dividends at the annual rate
equal to 7% of the stated value. In December 2009, the Company sold 1,900
preferred shares. The preferred stock is redeemable at the Company's option at
any time after six months from the issue date at the state value plus any
dividends declared but unpaid. The preferred shares have priority of dividends
such that, no dividends or distributions shall be declared or paid to common
shareholders unless full dividends on all outstanding preferred shares have been
declared and paid for the most recently completed calendar quarter.
The Bank's capital ratio's at March 31, 2010 and December 31, 2009 are presented
in the following table
MARCH DECEMBER
2010 2009
------ --------
Shareholders' equity to total assets 5.7% 5.8%
Leverage ratio 7.4% 7.3%
Risk-based capital ratios:
Tier 1 8.6% 8.5%
Total Capital 10.8% 10.7%
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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, 2010 were $49.2
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, 2010, our obligations under standby letters of credit
totaled $1.3 million.
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 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.
20
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 Footnote 13 to our Consolidated Financial Statements for discussion on
Recent Accounting Pronouncements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and the footnotes 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 2010 that have materially affected, or are
reasonably likely to materially affect, the Registrant's internal control over
financial reporting.
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.
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ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. Removed and Reserved
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 12, 2010 By: /S/ GEORGE W. MATTEO, JR.
-------------------------------------
George W. Matteo, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2010 By: /S/ KEITH WINCHESTER
-------------------------------------
Keith Winchester
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Of
23