UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[ ] Quarterly report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the quarterly period ended SEPTEMBER 30, 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
------------------------------------------------------
(Exact name of registrant, as specified in its charter)
NEW JERSEY 80-0282551
--------------------------------------------- -------------------
(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
--------------------------------------------------------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (856) 439-0300
--------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
----------------
(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 November 12, 2009, there were 1,809,656 outstanding shares of the
registrant's Common Stock.
CORNERSTONE FINANCIAL CORPORATION
CONTENTS
PAGES
PART I - FINANCIAL INFORMATION -----
Item 1. Consolidated Financial Statements....................................................1
Consolidated Statements of Financial Condition at September 30, 2009 (unaudited)
and December 31, 2008....................................................................1
Consolidated Statements of Operations (unaudited) for the three months
ended September, 2009 and 2008...........................................................2
Consolidated Statements of Operations (unaudited) for the nine months
ended September 30, 2009 and 2008........................................................3
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
for the nine months ended September 30, 2009.............................................4
Consolidated Statements of Cash Flows (unaudited) for the nine months
ended September 30, 2009 and 2008........................................................5
Notes to Consolidated Financial Statements (unaudited) .....................................6
Item 2. Management's Discussion and Analysis or Plan of Operation...........................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................22
Item 4. Controls and Procedures.............................................................22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................22
Item 1A. Risk Factors........................................................................23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........................23
Item 3. Defaults upon Senior Securities.....................................................23
Item 4. Submission of Matters to a Vote of Security Holders.................................23
Item 5. Other Information...................................................................23
Item 6. Exhibits............................................................................23
Signatures......................................................................................25
Exhibit 31.1....................................................................................26
Exhibit 31.2....................................................................................27
Exhibit 32.1 ...................................................................................28
Exhibit 32.2 ...................................................................................29
PART I. FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data) SEPTEMBER 30, 2009 DECEMBER 31, 2008
----------------- -----------------
(Unaudited)
ASSETS:
Cash and due from banks $ 7,514 $ 5,033
Federal funds sold - 4,335
---------- ---------
Cash and cash equivalents 7,514 9,368
---------- ---------
Investment securities:
Held to maturity (fair value 2009 - $46,277; 2008 - $28,487) 46,308 28,398
Loans receivable 235,081 194,104
Less allowance for loan losses 3,484 1,133
---------- ----------
Loans receivable, net 231,597 192,971
---------- ----------
Federal Home Loan Bank Stock 1,576 1,377
Premises and equipment, net 7,949 8,469
Accrued interest receivable 1,546 1,217
Bank owned life insurance 4,478 4,348
Deferred taxes 1,299 462
Other Real Estate Owned 198 281
Other assets 566 644
---------- ----------
TOTAL ASSETS $ 303,031 $ 247,535
========== ==========
LIABILITIES:
Non-interest bearing deposits 31,713 21,187
Interest bearing deposits 113,210 89,450
Certificates of deposit 103,897 91,393
---------- ----------
Total deposits 248,820 202,030
---------- ----------
Advances from the Federal Home Loan Bank 29,955 26,257
Subordinated debt 3,000 3,000
Line of credit 4,621 -
Other liabilities 1,187 870
---------- ----------
TOTAL LIABILITIES 287,583 232,157
---------- ----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Common stock, $0 par value:
$0 par value: authorized 10,000,000 shares; issued and
outstanding 1,809,656 at September 30, 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
16,618 7,244
Retained deficit (1,170) (145)
---------- ----------
Total Stockholders' Equity 15,448 15,378
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 303,031 $ 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) September 30, 2009 September 30, 2008
------------------ ------------------
(Unaudited) (Unaudited)
INTEREST INCOME
Interest and fees on loans $ 3,303 $ 2,723
Interest on investment securities 569 457
Interest on federal funds 1 12
-------- --------
TOTAL INTEREST INCOME 3,873 3,192
INTEREST EXPENSE
Interest on deposits 1,185 1,045
Interest on borrowings 317 298
-------- --------
TOTAL INTEREST EXPENSE 1,502 1,343
-------- --------
Net interest income 2,371 1,849
Provision for loan losses -
131
-------- --------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 2,240 1,849
-------- --------
NON-INTEREST INCOME
Service charges on deposit accounts 67 25
Origination fees on mortgage loans sold 7 1
Bank owned life insurance income 44 42
Miscellaneous fee income 19 28
-------- --------
TOTAL NON-INTEREST INCOME 137 96
-------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,121 1,004
Net occupancy 291 319
Data processing and other service costs 96 89
Professional services 93 138
Advertising and promotion 50 36
Other real estate owned expense 7 22
FDIC expense 118 50
Other operating expenses 179 128
-------- --------
TOTAL NON-INTEREST EXPENSE 1,955 1,786
-------- --------
Income before income taxes 422 159
Income tax expense 153 38
-------- --------
NET INCOME $ 269 $ 121
======== ========
EARNINGS PER SHARE
Basic $ 0.15 $ 0.07
Diluted $ 0.15 $ 0.07
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,741 1,656
Diluted 1,741 1,656
See accompanying notes to unaudited consolidated financial statements
2
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
------------------------------------------------
(In thousands, except per share data) September 30, 2009 September 30, 2008
------------------ ------------------
(Unaudited) (Unaudited)
INTEREST INCOME
Interest and fees on loans $ 9,402 $ 7,718
Interest on investment securities 1,433 1,332
Interest on federal funds 6 105
---------- ----------
TOTAL INTEREST INCOME 10,841 9,155
INTEREST EXPENSE
Interest on deposits 3,700 3,391
Interest on borrowings 934 779
---------- ----------
TOTAL INTEREST EXPENSE 4,634 4,170
---------- ----------
Net interest income 6,207 4,985
Provision for loan losses 2,351 317
---------- ----------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 3,856 4,668
---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts 148 72
Origination fees on mortgage loans sold 18 3
Bank owned life insurance income 130 120
Gain on sale of fixed assets - 57
Miscellaneous fee income 62 67
---------- ----------
TOTAL NON-INTEREST INCOME 358 319
---------- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,282 2,952
Net occupancy 1,043 935
Data processing and other service costs 303 244
Professional services 312 311
Advertising and promotion 136 87
Other real estate owned expense 24 62
Impairment loss on other real estate owned - 155
FDIC expense 422 148
Other operating expenses 462 396
---------- ----------
TOTAL NON-INTEREST EXPENSE 5,984 5,290
---------- ----------
Loss before income taxes (1,770) (303)
Income tax benefit (745) (178)
---------- ----------
NET LOSS $ (1,025) $ (125)
========== ===========
EARNINGS PER SHARE
Basic $ (0.61) $ (0.08)
Diluted $ (0.61) $ (0.08)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,686 1,656
Diluted 1,686 1,656
See accompanying notes to unaudited consolidated financial statements.
3
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 and
comprehensive loss $ (1,025) - - (1,025) - (1,025)
==========
Stock based
compensation - 18 - - 18
Issuance of Stock 1,077 1,077
Creation of Holding
Company (8,279) 8,279 - - -
-------- --------- ---------- -------- -----------
Balance at
September 30, 2009 $ - $ 16,618 $ (1,170) $ - $ 15,448
========= ========= ========== ======== ===========
See accompanying notes to unaudited consolidated financial statements.
4
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
-----------------------------------------------
(In thousands) September 30, 2009 September 30, 2008
------------------ ------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,025) $ (125)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 2,351 317
Gain on sale of fixed assets - (57)
Depreciation 600 305
Amortization of premiums and discounts, net 25 17
Stock Option expense 18 7
Deferred tax benefit (837) (225)
Decrease in other real estate owned 83 -
Insurance proceeds from other real estate owned - 30
Impairment loss on other real estate owned - 155
Loans originated for sale (6,399) (1,728)
Proceeds from sales of loans held for sale 6,399 1,728
Income on Bank Owned Life Insurance (130) (120)
Increase in accrued interest receivable
and other assets (251) (272)
Increase (decrease) in other liabilities 317 (65)
------------ --------
Net cash provided (used) by operating activities 1,151 (33)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity (45,285) (27,713)
Maturity and calls of investments held to maturity 27,350 31,303
Call of Investment available for sale - 1,000
Purchase of FHLB Stock (199) (1,325)
Purchase of Bank owned life insurance - (401)
Proceeds from sale of fixed assets - 582
Net increase in loans (40,977) (32,725)
Purchases of premises and equipment (80) (2,027)
------------ --------
Net cash used in investing activities (59,191) (31,306)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 46,790 (2,313)
Proceeds from borrowings 651,420 577,890
Principal payments on borrowings (643,101) (549,060)
Net proceeds from issuance of stock 1,077 -
Cash paid in lieu of fractional share on stock
dividend - (3)
------------ --------
Net cash provided by financing activities 56,186 26,514
Net decrease in cash and cash equivalents (1,854) (4,825)
Cash and cash equivalents at the beginning of the period 9,368 14,084
------------ --------
Cash and cash equivalents at the end of the period $ 7,514 $ 9,259
============ =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 4,651 $ 4,218
Cash paid during the period for income taxes 90 10
Net change in unrealized gain on securities
available for sale, net of tax - 8
Distribution of 7.5% Common Stock Dividend - 576
See accompanying notes to unaudited consolidated financial statements.
5
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 FASB Accounting Standards Codification
(ASC) Topic 718 "Stock Compensation". The Bank recognizes the grant-date
fair-value of stock options and other equity-based compensation issued to
employees in the statement of operations. The Bank had $207 thousand in
unrecognized compensation costs relating to non-vested stock based compensation
awards at September 30, 2009.
6
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.
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 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 September 30, 2009 and December 31, 2008 is as
follows (in thousands):
September 30, 2009
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- ---------- ---------
INVESTMENTS HELD TO MATURITY:
Government agency obligations $ 42,742 $ 128 $ (185) $ 42,685
Mortgage backed securities 3,566 33 (7) 3,592
--------- --------- ------- ---------
Total $ 46,308 $ 161 $ (192) $ 46,277
========= ========= ======= =========
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
September 30, 2009 and December 31, 2008 for the time periods shown (in
thousands):
September 30, 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 $ 18,433 $ 184 $499 $ 1 $18,932 $ 185
Mortgage Backed Securities 506 7 - - 506 7
-------- ----- ---- ----- ------- ------
Total temporarily
impaired investment
securities $ 18,939 $ 191 $499 $ 1 $19,438 $ 192
======== ===== ==== ===== ======= ======
7
December 31, 2008
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:
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
expects to recover the amortized cost basis for all investments in an unrealized
loss position as of September 30, 2009. 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 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), net of tax, is as follows for the three and nine
month periods ended September 30, 2009 and 2008 (in thousands)
Three Months Ended Three Months Ended
September 30, 2009, net September 30, 2008, net
of tax of tax
----------------------- ----------------------
NET INCOME
Other Comprehensive Income $ 269 $ 121
Unrealized holding losses arising during period - 11
---------- --------
TOTAL COMPREHENSIVE INCOME $ 269 $ 132
========== ========
Nine Months Ended Nine Months Ended
September 30, 2009, net September 30, 2008, net
of tax of tax
----------------------- ----------------------
NET LOSS
Other Comprehensive Income (loss) $ (1,025) $ (125)
Unrealized holding losses arising during period - 8
---------- --------
TOTAL COMPREHENSIVE LOSS $ (1,025) $ (117)
========= ========
The change in other comprehensive income components and related tax benefits are
as follows for the nine month periods ended September 30, 2009 and 2008 (in
thousands):
September
30, 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 $ - $ - $ -
======= ======= ======
8
September
30, 2008
-------------------------------------------------
Before-Tax Net-of-Tax
Amount Tax Expense Amount
----------- ----------- ----------
UNREALIZED GAINS ON SECURITIES AVAILABLE FOR SALE:
Unrealized holding gains (losses) arising during the
period $ 14 $ (6) $ 8
------- ------- ------
Other comprehensive income $ 14 $ (6) $ 8
======= ======= ======
NOTE 8 - LOANS RECEIVABLE
Loans receivable consist of the following (in thousands):
September 30, 2009 December 31, 2008
------------------ -----------------
Commercial $ 87,277 $ 60,646
Real estate - commercial 105,808 91,105
Real estate - residential 19,214 19,346
Construction 12,989 12,323
Consumer loans 9,944 10,721
Net deferred loan fees (151) (37)
----------- ----------
235,081 194,104
Allowance for loan losses (3,484) (1,133)
----------- ----------
Loans receivable, net $ 231,597 $ 192,971
=========== ==========
Under New Jersey banking laws, the Bank is subject to a loans-to-one-borrower
limitation of 15% of capital funds. At September 30, 2009, the
loans-to-one-borrower limitation was approximately $3,979,000; this excludes an
additional 10% of capital funds, or approximately $2,653,000, which may be
loaned if collateralized by readily marketable securities. At September 30,
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 Company recognized no interest income on non-accrual
loans during the nine month periods ended September 30, 2009 and September 30,
2008.
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 September 30, 2009 the Company had four non-accrual loan relationships
which total $5,876,000 compared to no non-accrual loans at December 31, 2008. At
September 30, 2009, the Company had four impaired loan relationships totaling
$5,876,000 (included within the non-accrual loans discussed above) in which
$3,998,000 was sufficiently collateralized and a specific reserve of $1,878,000
has been recorded for the remaining balance. The average balance of impaired
loans totaled $5,904,000 for 2009, and interest income recorded on impaired
loans during the nine months ended September 30, 2009, totaled $32 thousand.
NOTE 9 - BANK OWNED LIFE INSURANCE
Bank Owned Life Insurance ("BOLI") is carried at its aggregate cash surrender
value less surrender charges and totaled $4,478,000 at September 30, 2009.
Income of $130 thousand was recognized on the BOLI during the nine month period
ended September 30, 2009 as compared to $120 thousand for the nine month period
ended September 30, 2008. The Bank is the sole owner and beneficiary of the
BOLI.
9
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 $95 thousand in deferred
compensation expense during the nine month period ended September 30, 2009 as
compared to $56 thousand for the nine month period ended September 30, 2008.
NOTE 11 - INCOME TAXES
The Bank adopted the provisions of Financial ASC Topic 740 "Accounting for
Uncertainty in Income Taxes" on January 1, 2007. 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 2008 remain subject to examination as of
September 30, 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.
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
September 30, 2009 or December 31, 2008. 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 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
On January 1, 2008, the Bank adopted ASC Topic 820 "Fair Value Measurements and
Disclosures". ASC Topic 820 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. 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 Bank's consolidated financial statements.
In conjunction with the adoption of ASC Topic 820, the Bank also adopted the
guidance from ASC paragraphs 820-10-50-8A, 55-23A, and 55-23B on January 1,
2008. This guidance defers the effective date of ASC Topic 820 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.
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:
10
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 September 30, 2009 and December 31, 2008, 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 September 30, 2009 and December 31, 2008 was as follows:
SEPTEMBER 30, 2009 DECEMBER 31, 2008
------------------------------- ------------------------------
(in thousands) CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
Financial assets:
Cash and cash equivalents $ 7,514 $ 7,514 $ 9,368 $ 9,368
Investments held to maturity 46,308 46,277 28,398 28,487
Loans receivable 235,081 264,185 194,104 193,861
FHLB stock 1,576 1,576 1,377 1,377
Accrued interest receivable 1,546 1,546 1,217 1,217
----------- ----------- ----------- -----------
Total financial assets $ 292,025 $ 321,098 $ 234,464 $ 234,310
=========== =========== =========== ===========
Financial Liabilities:
Checking Accounts $ 48,758 $ 48,758 $ 48,032 $ 48,032
Statement savings accounts 3,368 3,368 3,401 3,401
Money market accounts 41,612 41,612 9,110 9,110
Index Accounts 51,185 51,185 50,094 50,094
Certificates of deposit 103,897 103,595 91,393 91,674
FHLB advances 29,955 29,955 26,257 26,257
Line of Credit 4,621 4,621 - -
Subordinated Debt 3,000 3,000 3,000 3,000
Accrued interest payable 260 260 278 278
----------- ----------- ----------- -----------
Total financial liabilities $ 286,656 $ 286,354 $ 231,565 $ 231,846
=========== =========== =========== ===========
CONTRACT ESTIMATED CONTRACT ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----------- ----------- -----------
Off-balance sheet instruments:
Commitments to extend credit $ 47,831 $ - $ 42,514 $ -
=========== =========== =========== ===========
NOTE 13 - 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
11
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 were 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 disclosure 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
12.
ASC TOPIC 855, SUBSEQUENT EVENTS
In May 2009, the FASB issued additional guidance on the evaluation of subsequent
events and requires the disclosure of the date through which subsequent events
have been evaluated. This guidance was adopted by the Company for the interim
period ending June 30, 2009 and the required disclosures are included in
Footnote 14.
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.
NOTE 14 - PRIVATE PLACEMENT COMMON STOCK OFFERING
In June 2009, the Board of Directors of Cornerstone Financial Corporation
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 Cornerstone
12
Financial Corporation 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 Cornerstone Financial Corporation common stock, $0 par,
for a price of $9.00 per share through June 26, 2013. During the second quarter
2009, the Company sold 82,460 shares under this offering and issued 82,460
common stock warrants. During the third quarter 2009, the Company sold 71,429
shares under this offering and issued 71,429 common stock warrants, all of which
were outstanding and exercisable as of September 30, 2009. The proceeds received
from the common stock offering were recorded as additional paid in capital.
NOTE 15 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through November 12, 2009, 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, 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.
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.
13
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 nine months ended September 30,
2008 presented herein, are those of the Bank on a stand alone basis.
We have adopted a strategy of continued growth. At September 30, 2009, we
had total assets of $303.0 million, total deposits of $248.8 million and total
loans, net of $231.6 million compared to total assets of $247.5 million, total
deposits of $202.0 million and total loans, net of $193.0 million at December
31, 2008. Our growth reflects our committment to provide outstanding customer
service and a broad array of banking products driven by our customer's 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.
14
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 September 30, 2009, 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 $ - $ - $ - $ - $ -
Investment securities held to
maturity - 1,993 44,315 - 46,308
Loans receivable 102,318 77,486 55,277 - 235,081
--------- --------- -------- -------- --------
Total interest-earning assets 102,318 79,479 99,592 - 281,389
--------- --------- -------- -------- --------
NON-RATE SENSITIVE ASSETS:
Other assets - - - 21,642 21,642
--------- --------- -------- -------- --------
Total assets $ 102,318 $ 79,479 $ 99,592 $ 21,642 $303,031
========= ========= ======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand $ 17,046 $ - $ - $ - $ 17,046
Statement savings 3,368 - - - 3,368
Money market 92,796 - - - 92,796
Certificates of deposit 84,429 19,468 - - 103,897
Subordinated debt 3,000 - - - 3,000
Borrowings 19,955 14,621 - - 34,576
--------- --------- -------- -------- --------
Total interest-bearing
liabilities 220,594 34,089 - - 254,683
--------- --------- -------- -------- --------
NON-RATE SENSITIVE LIABILITIES:
Non-interest bearing deposits - - - 31,713 31,713
Other liabilities - - - 1,187 1,187
Capital - - - 15,448 15,448
--------- --------- -------- -------- --------
Total liabilities and capital $ 220,594 $ 34,089 $ - $ 48,348 $303,031
========= ========= ======== ======== ========
Period GAP $(118,276) $ 45,390 $ 99,562 $(26,706)
Cumulative interest-earning assets $ 102,318 $ 181,797 $281,389
Cumulative interest-bearing
liabilities $ 220,594 $ 254,683 $254,683
Cumulative GAP $(118,276) $ (72,886) $ 26,706
Cumulative RSA/RSL (1) 46.38% 71.38% 110.49%
(1) Cumulative rate sensitive (interest-earning) assets divided by cumulative
rate sensitive (interest-bearing) liabilities.
At September 30, 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.
15
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
September 30, 2009 as compared to December 31, 2008 and our results of
operations for the three and nine month periods ended September 30, 2009 as
compared to the same period in 2008.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
Total assets at September 30, 2009 were $303.0 million, an increase of $55.5
million or 22.4% over December 31, 2008. This change was primarily due to
increases in loans receivable, net, of $38.6 million, accrued interest
receivable of $329 thousand, deferred taxes of $837 thousand, investments held
to maturity of $17.9 million, bank owned life insurance of $130 thousand, and
Federal Home Loan Bank ("FHLB") stock of $199 thousand, partially offset by
decreases in cash and cash equivalents of $1.9 million, other real estate owned
of $83 thousand, other assets of $78 thousand and premise and equipment of $520
thousand. The increases in assets were funded by a $46.8 million increase in
deposits, a $4.6 million increase in debt, a $3.7 million increase in Federal
Home Loan Bank advances and by a $1.1 million increase in common equity through
the issuance of common stock.
Gross loans receivable at September 30, 2009, totaled $235.1 million, an
increase of $41.0 million or 21.1% from December 31, 2008. This increase was
attributable to increases in commercial loans of $26.6 million, commercial real
estate loans of $14.7 million and construction loans of $666 thousand, partially
offset by decreases in consumer loans of $ 777 thousand, and real estate loans
secured by residential properties of $132 thousand. 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 our continued
focus of our growth strategy, 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 our 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 September 30, 2009, we had a
total of $5.9 million in non accrual loans as compared to no non-accrual loans
at December 31, 2008. At September 30, 2009, we had four impaired loan
relationships totaling $5.9 million as compared to three loans at December 31,
2008 totaling $2.4 million. At September 30, 2009 a specific reserve of $1.9
million has been recorded against these loans. The average balance of impaired
loans totaled $5.9 million for the first nine months of 2009 as compared to $2.4
million for the comparable period of 2008, and interest income recorded on
impaired loans during the nine months ended September 30,2009 was $32 thousand
as compared to $69 thousand for the twelve month period 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 September 30, 2009, we had
$198 thousand in real estate owned compared to $281 thousand in real estate
owned at December 31, 2008. The change reflects adjustments made to the carrying
value of the property due to cash recoveries received by the bank during 2009.
16
All of our investment securities are classified as held to maturity. Our
investment security portfolio increased by $17.9 million or 63.1% to $46.3
million at September 30, 2009, from $28.4 million at December 31, 2008. The held
to maturity investment purchases were concentrated in United State Government
agency securities. See Note 6 to our 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 September 30, 2009 amounted to $287.6 million, an increase
of $55.4 million or 23.9% from December 31, 2008. This change was primarily due
to increases in total deposits of $46.8 million, line of credit borrowings from
Atlantic Central Bankers Bank (ACBB) of $4.6 million, other liabilities of $317
thousand and an increase of $3.7 million in advances from Federal Home Loan
Bank.
Total deposits at September 30, 2009 were $248.8 million, an increase of $46.8
million or 23.2% from December 31, 2008. The increase in total deposits was
spread amongst non-interest bearing deposits with an increase of $10.5 million,
certificates of deposit with an increase of $12.5 million, and a significant
increase in interest bearing core deposits (i.e. all interest bearing deposit
accounts other then certificate of deposit accounts) of $23.8 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 September 30, 2009, we had advances from the FHLB in the amount of $29.6
million, an increase of $3.7 million or 14.1 % from December 31, 2008. The
weighted average interest rate on these borrowings from the FHLB was 2.07% at
September 30, 2009 as compared to 3.26% at December 31, 2008.
Stockholders' equity at September 30, 2009 amounted to $15.4 million, an
increase of $70 thousand or 0.5% over December 31, 2008. This increase was due
to the proceeds from issuance of common stock of $1.1 million and stock based
compensation of $18 thousand, partially offset by a net loss of $1.0 million for
the nine month period ended September 30, 2009.
RESULTS OF OPERATIONS
NET INCOME. We recorded net income for the three month period ended September
30, 2009 of $269 thousand or $0.15 per share as compared to a net income of $121
thousand or $0.07 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 increases of $522 thousand in net interest income and $41 thousand in
non-interest income, partially offset by increases of $131 thousand in provision
for loan losses, $68 thousand in FDIC insurance premium expense, and $117
thousand in increased employee salaries and benefits expense. The net interest
margin for the three-month period ended September 30, 2009 increased by 4 basis
points to 3.49% as compared to 3.45% for the same period in 2008.
We recorded a net loss for the nine-month period ended September 30, 2009 of
$1.0 million or $0.61 per share as compared to a net loss of $125 thousand or $
0.08 per share for the same period in 2008. The increased loss during 2009
reflects an increase of $1.2 million in net interest income, offset by increases
of $2.0 million in provision for loan losses, $274 thousand in special
assessment and regular FDIC insurance premium expense and $420 thousand in
increased salary and benefit cost, net occupancy costs and other operating
expenses incurred in connection with the Bank's expansion coupled with operating
costs relating to the Bank's Main Street branch which opened in June 2008. The
net interest margin for the nine-month period ended September 30, 2009 decreased
by 1 basis point to 3.28% as compared to 3.29% for the same period in 2008.
17
INTEREST INCOME. Total interest income amounted to $3.9 million for the
three-month period ended September 30, 2009, an increase of $681 thousand or
21.3% when compared to the same period in 2008. The increase in interest income
was due to volume increases in our interest-earning asset balances, partially
offset by a reduction in the average yield.. The average yield on our
interest-earning assets was 5.50% for the three month period ended September 30,
2009 compared to 5.96% during the same period in 2008.
The reduction in yield in both the quarterly and the nine month periods 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.
Total interest income amounted to $10.8 million for the nine-month period ended
September 30, 2009, an increase of $1.7 million or 18.4% when compared to the
same period in 2008. This increase was due to the growth in average
interest-earning asset balances of $59.3 million, partially offset by a
reduction in the average yield from September 30, 2009 compared to the same
period in 2008. The average yield on interest-earning assets was 5.53 % for the
nine-month period ended September 30, 2009 compared to 6.04% during the same
period in 2008.
INTEREST EXPENSE. Total interest expense amounted to $1.5 million for the
three-month period ended September 30, 2009, an increase of $159 thousand or
11.8 % when compared to the same period in 2008. The increase in interest
expense was due to volume increases in interest bearing deposits and borrowing,
partially offset by lower rates paid on those products when compared to the same
period in 2008. The average cost of interest-bearing liabilities was 2.28% for
the three-month period ended September 30, 2009 compared to 2.83% during the
same period in 2008.
Total interest expense amounted to $4.6 million for the nine-month period ended
September 30, 2009, an increase of $464 thousand or 11.1% when compared to the
same period in 2008. This increase was due to an increase in interest bearing
deposit balances, offset by lower interest rates paid on these balances, and by
increases in borrowing balances of $8.3 million when compared to the same period
in 2008. The average cost of interest-bearing liabilities was 2.57% for the
nine-month period ended September 30, 2009 compared to 3.11% during the same
period in 2008.
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 third quarter of 2009, we recorded a
provision for loan losses of $131 thousand of which $50 thousand was related to
specific reserves on impaired loans compared to no provision for the same period
in 2008. We recorded a provision for loan losses for the nine-month period ended
September 30, 2009 of $2.4 million of which $1.8 million was related to three
specific credits, compared to a provision of $317 thousand 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
nine-month period ended September 30, 2009, management believes the credit
quality of our loan portfolio has stabilized. On a linked quarterly basis, our
non-performing assets were stable from June 30, to September 30, 2009.We have
not engaged in any sub prime lending activities that have plagued the banking
industry. At September 30, 2009, our allowance for loan losses represented 1.48%
of total loans outstanding and 59.3% of non-performing loans.
NON-INTEREST INCOME. For the three-months ended September 30, 2009, 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
$137 thousand, an increase of $41 thousand or 42.7% when compared to the same
period in 2008. This increase is the result of a $42 thousand increase on
service charges on deposit accounts.
Non-interest income for the nine-months ended September 30, 2009 totaled $358
thousand, an increase of $39 thousand or 12.2% when compared to the same period
in 2008. This change is the result of increases in bank owned life insurance
income, ATM fees, miscellaneous fee income, service charges on deposit accounts
and origination fees
18
on mortgage loans sold, offset by a $57 thousand decrease in gain on sale of
fixed assets. The decrease was the result of a gain in the sale of fixed assets
during the nine-month period ended September 30, 2008, for which there was no
comparable transaction in 2009.
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, for the three months ended September 30, 2009 totaled
$2.0 million for the three months ended September 30, 2009, an increase of $169
thousand or 9.5% 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 $117 thousand, data processing costs of $7 thousand, advertising and
promotion of $14 thousand, other operating expenses of $51 thousand and FDIC
insurance premium expense of $68 thousand, partially offset by decreases in
other real estate owned expense of $15 thousand, professional service expense of
$45 thousand and net occupancy of $28 thousand.
Non-interest expense for the nine months ended September 30, 2009 totaled $6.0
million, an increase of $694 thousand or 13.1% when compared to the same period
in 2008. The increase in non-interest expense was primarily the result of
increases in salary and benefit costs of $330 thousand, FDIC deposit insurance
premium expense of $274 thousand, and net occupancy expense of $108 thousand.
The increase in FDIC insurance premium expense reflects both a special
assessment levied on all insured depository institutions equal to 5 basis points
of an institution's total assets less its tier 1 capital and a general increase
in deposit insurance premium assessment rates. The special assessment was based
on assets at June 30, 2009 and was paid September 30, 2009. Our expense for the
special assessment was $140 thousand. The net increase in occupancy costs is
attributable to the one time costs of $135 thousand associated with the
retirement of certain fixed assets in connection with the closing of the
Moorestown Route 38 branch on April 1, 2009. These expenses were partially
offset by decreases in other real estate owned expense of $38 thousand and an
impairment loss on other real estate owned of $155 thousand which was incurred
during the nine months ended September 30, 2008. There were no similar expenses
in 2009.
INCOME TAXES. We recorded a federal and state income tax expense of $153
thousand during the three month period ended September 30, 2009 compared to an
income tax expense of $38 thousand 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 income in the three month period ended September 30,
2009. The effective tax rate for the three month period ended September 30, 2009
was 36.3% compared to 23.9% for the three month period ended September 30, 2008.
We recorded a federal and state income tax benefit of $745 thousand during the
nine month period ended September 30, 2009 compared to an income tax benefit of
$178 thousand 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 second quarter of 2009. The effective tax rate for the nine
month period ended September 30, 2009 was 42.1% compared to 58.7% for the nine
month period ended September 30, 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
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loan portfolio. At September 30, 2009, 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 September 30, 2009
there is an outstanding balance of $4.6 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 $7.5 million at September 30, 2009 in the
form of cash and due from banks. At September 30, 2009, unused lines of credit
available to our customers, committed undisbursed loan proceeds and standby
letters of credit totaled $47.8 million. Certificates of deposit scheduled to
mature in one year or less totaled $84.4 million at September 30, 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. 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).
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 September 30, 2009 the Bank maintained a Tier I
leverage ratio of 6.74%, a Tier I risk-based capital ratio of 7.77% and a total
risk-based capital ratio of 10.18%. 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 $5.0
million. As of September 30, 2009, the Company has drawn $4.6 million under the
loan and has contributed $4.5 million as additional equity to the Bank.
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In June 2009, the Board of Directors of Cornerstone Financial Corporation
approved a private placement common stock offering to accredited investors. See
Note 14 to our financial statements for more information regarding our private
placement common stock offering.
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 September 30, 2009 were
$47.8 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 September 30, 2009, 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.
21
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 third fiscal quarter of 2009 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
22
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 1A. RISK FACTORS
OUR NON-PERFORMING ASSETS HAVE SUBSTANTIALLY INCREASED DURING 2009, AND THIS HAS
AFFECTED OUR RESULTS OF OPERATIONS.
To date, our non-performing assets have increased to $6.1 million, or 2.0%
of our total assets. At December 31, 2008, we had $281 thousand in other real
estate owned and no non-accrual loans. Four (4) non-accrual loan relationships
totaling $5.9 million increased non-performing assets resulting in an increase
of $2.3 million in the provision for loan losses for the first nine (9) months
of 2009 from $317 thousand for the first nine (9) months of 2008. The increase
in non-performing assets reflects the general economic slowdown in our
marketplace and its effect on certain borrowers. These non-accrual loan
relationships have negatively impacted our results of operations, through
additional provisions for loan losses and reduced interest income, and will
continue to impact our performance until these assets are resolved. There is
always the risk of an increase in non-performing assets therefore we can give
you no assurance that our non-performing assets will not increase further.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the second and third quarters of 2009, the Registrant undertook a
private placement of units consisting of one share of common stock and one
common stock purchase warrant. The units were offered at a price of $7.00 per
unit to currents shareholders who qualified as accredited investors. The
Registrant raised a total of $1.1 million in new capital in two separate
closings, $577 thousand on June 26, 2009 and another $500 thousand on September
28, 2009. All proceeds were contributed as equity to Cornerstone Bank, the
Registrant's banking subsidiary, to bolster its regulatory capital levels and
support its continued growth.
The units were placed directly by the Registrant, without the use of a
broker or placement agent. No commissions were paid by the Registrant. The units
were issued in accordance with SEC Regulation D.
The warrants issued as part of the units permit the holder to purchase one
share of the Registrant's common stock at a price of $9.00 per share for a term
of four years. The warrants also have customary anti-dilution provisions. The
Registrant issued 153,889 warrants as part of the offering.
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.
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ITEM 6. EXHIBITS
(a) The following are filed as exhibits to this report:
4.0 Warrant Agreement dated June 26, 2009 by and between the
Registrant and Registrar and Transfer Company as warrant agent.
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
24
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: November 12, 2009 By: /S/ GEORGE W. MATTEO, JR.
--------------------------------------
George W. Matteo, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2009 By: /S/ KEITH WINCHESTER
--------------------------------------
Keith Winchester
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)