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 June 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 (I.R.S. Employer
incorporation 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 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 August 13, 2009, there were 1,738,227 outstanding shares of the
registrant's Common Stock.
CORNERSTONE FINANCIAL CORPORATION
Contents
PART I - FINANCIAL INFORMATION Pages
-------
Item 1. Consolidated Financial Statements..............................................1
Consolidated Statements of Financial Condition at June 30, 2009 (unaudited)
and December 31, 2008..............................................................1
Consolidated Statements of Operations (unaudited) for the three months
ended June 30, 2009 and 2008.......................................................2
Consolidated Statements of Operations (unaudited) for the six months
ended June 30, 2009 and 2008.......................................................3
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
for the six months ended June 30, 2009............................................4
Consolidated Statements of Cash Flows (unaudited) for the six months
ended June 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....................21
Item 4. Controls and Procedures.......................................................22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................22
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...........................23
Item 5. Other Information.............................................................24
Item 6. Exhibits......................................................................24
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) June 30, 2009 December 31, 2008
------------ -----------------
(Unaudited)
Assets:
Cash and due from banks $ 6,777 $ 5,033
Federal funds sold - 4,335
----------- ----------
Cash and cash equivalents 6,777 9,368
----------- ----------
Investment securities:
Held to maturity (fair value 2009 - $48,431; 2008 - $28,487) 48,895 28,398
Loans receivable 225,573 194,104
Less allowance for loan losses 3,352 1,133
----------- ----------
Loans receivable, net 222,221 192,971
----------- ----------
Federal Home Loan Bank Stock 1,804 1,377
Premises and equipment, net 8,017 8,469
Accrued interest receivable 1,436 1,217
Bank owned life insurance 4,434 4,348
Deferred taxes 1,369 462
Other Real Estate Owned 205 281
Other assets 672 644
----------- ----------
Total Assets $ 295,830 $ 247,535
=========== ==========
Liabilities:
Non-interest bearing deposits 29,708 21,187
Interest bearing deposits 93,431 89,450
Certificates of deposit 112,216 91,393
----------- ----------
Total deposits 235,355 202,030
----------- ----------
Advances from the Federal Home Loan Bank 26,257
35,025
Subordinated debt 3,000 3,000
Line of credit 4,572 -
Unsettled securities payable 2,050 -
Other liabilities 1,165 870
----------- ----------
Total Liabilities 281,167 232,157
----------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $0 par value:
$0 par value: authorized 10,000,000 shares; issued and
outstanding 1,738,227 at June 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
16,102 7,244
Retained deficit (1,439) (145)
----------- ----------
Total Stockholders' Equity 14,663 15,378
----------- ----------
Total Liabilities and Stockholders' Equity $ 295,830 $ 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) June 30, 2009 June 30, 2008
------------- -------------
Interest Income (Unaudited) (Unaudited)
Interest and fees on loans $ 3,135 $ 2,462
Interest on investment securities 480 431
Interest on federal funds 2 38
---------- ----------
Total interest income 3,617 2,931
Interest Expense
Interest on deposits 1,283 1,058
Interest on borrowings 322 245
---------- ----------
Total interest expense 1,605 1,303
---------- ----------
Net interest income 2,012 1,628
Provision for loan losses 1,879 294
---------- ----------
Net interest income after loan loss provision 133 1,334
---------- ----------
Non-Interest Income
Service charges on deposit accounts 54 21
Origination fees on mortgage loans sold 7 1
Bank owned life insurance income 43 40
Miscellaneous fee income 24 19
---------- ----------
Total non-interest income 128 81
---------- ----------
Non-Interest Expense
Salaries and employee benefits 1,097 1,020
Net occupancy 288 332
Data processing and other service costs 122 78
Professional services 136 88
Advertising and promotion 45 26
Other real estate owned expense 8 40
Impairment loss on other real estate owned - 155
FDIC expense 250 68
Other operating expenses 160 142
---------- ----------
Total non-interest expense 2,106 1,949
---------- ----------
Loss before income taxes (1,845) (534)
Income tax benefit (749) (230)
---------- ----------
Net loss $ (1,096) $ (304)
========== ==========
Earnings per share
Basic $ (0.66) $ (0.18)
Diluted $ (0.66) $ (0.18)
Weighted average shares outstanding
Basic 1,660 1,656
Diluted 1,660 1,656
See accompanying notes to unaudited consolidated financial statements
2
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
-------------------------------------------
(In thousands, except per share data) June 30, 2009 June 30, 2008
------------- -------------
Interest Income (Unaudited) (Unaudited)
Interest and fees on loans $ 6,099 $ 4,995
Interest on investment securities 864 875
Interest on federal funds 5 93
---------- ----------
Total interest income 6,968 5,963
Interest Expense
Interest on deposits 2,515 2,346
Interest on borrowings 617 481
---------- ----------
Total interest expense 3,132 2,827
---------- ----------
Net interest income 3,836 3,136
Provision for loan losses 2,220 317
---------- ----------
Net interest income after loan loss provision 1,616 2,819
---------- ----------
Non-Interest Income
Service charges on deposit accounts 81 47
Origination fees on mortgage loans sold 11 2
Bank owned life insurance income 86 78
Gain on sale of fixed assets - 57
Miscellaneous fee income 43 39
---------- ----------
Total non-interest income 221 223
---------- ----------
Non-Interest Expense
Salaries and employee benefits 2,161 1,948
Net occupancy 752 616
Data processing and other service costs 207 155
Professional services 219 173
Advertising and promotion 86 51
Other real estate owned expense 17 40
Impairment loss on other real estate owned - 155
FDIC expense 304 98
Other operating expenses 283 268
---------- ----------
Total non-interest expense 4,029 3,504
---------- ----------
Loss before income taxes (2,192) (462)
Income tax benefit (898) (216)
---------- ----------
Net loss $ (1,294) $ (246)
========== ==========
Earnings per share
Basic $ (0.78) $ (0.15)
Diluted $ (0.78) $ (0.15)
Weighted average shares outstanding
Basic 1,658 1,656
Diluted 1,658 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
December 31, 2008 $ 8,279 $ 7,244 $ (145) $ - $ 15,378
Comprehensive loss:
Net loss and
comprehensive loss $ (1,294) - - (1,294) - (1,294)
==========
Stock based
compensation - 2 - - 2
Issuance of Stock 577 577
Creation of Holding
Company (8,279) 8,279 - - -
--------- -------- ----------- ------- --------
Balance at
June 30, 2009 $ - $ 16,102 $ (1,439) $ - $ 14,663
========= ======== ========= ======= ========
See accompanying notes to unaudited consolidated financial statements.
4
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
-------------------------------------
(In thousands) June 30, 2009 June 30, 2008
------------- --------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (1,294) $ (246)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 2,220 317
Gain on sale of fixed assets - (57)
Depreciation 502 192
Amortization of premiums and discounts, net 3 11
Stock Option expense 2 3
Deferred tax benefit (907) (141)
Decrease in other real estate owned 76 -
Impairment loss on other real estate owned - 155
Loans originated for sale (2,488) (958)
Proceeds from sales of loans held for sale 2,488 958
Income on Bank Owned Life Insurance (86) (78)
Increase in accrued interest receivable
and other assets (247) (388)
Increase (decrease) in other liabilities 295 (179)
---------- --------
Net cash provided (used) by operating activities 564 (411)
Cash flows from investing activities:
Purchases of investments held to maturity (42,235) (27,713)
Maturity and calls of investments held to maturity 23,785 31,188
Call of Investment available for sale - 1,000
Purchase of FHLB Stock (427) (680)
Proceeds from sale of fixed assets - 582
Insurance proceeds from other real estate owned - 30
Net increase in loans (31,470) (23,238)
Purchases of premises and equipment (50) (1,604)
---------- --------
Net cash used in investing activities (50,397) (20,435)
Cash flows from financing activities:
Net increase in deposits 33,325 488
Proceeds from borrowings 125,772 103,990
Principal payments on borrowings (112,432) (86,500)
Net proceeds from issuance of stock 577 -
Cash paid in lieu of fractional share on stock
dividend - (3)
---------- --------
Net cash provided by financing activities 47,242 17,975
Net decrease in cash and cash equivalents (2,591) (2,871)
Cash and cash equivalents at the beginning of the period 9,368 14,084
---------- --------
Cash and cash equivalents at the end of the period $ 6,777 $ 11,213
========== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 3,135 $ 2,883
Cash paid during the period for income taxes 90 10
Net change in unrealized gain on securities
available for sale, net of tax - (3)
Distribution of 7.5% Common Stock Dividend - 576
Supplemental non-cash investing and financing activities:
Unsettled HTM investment securities $ 2,050 $ -
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 Statement of Financial Accounting Standards
No.123R, "Share-based Payment (SFAS No. 123R)." This Statement establishes the
standards for accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for equity instruments of the
enterprise or liabilities that are based on the fair value of the enterprise's
equity instruments or that may be settled by the issuance of such equity
instruments. SFAS No. 123R requires an entity to recognize the grant-date
fair-value of stock options and other equity-based compensation issued to
employees in the statement of operations. The Statement generally
6
requires that an entity account for those transactions using the fair-value
method and eliminates an entity's ability to account for share-based
compensation transactions using the intrinsic value method of accounting
provided in APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
which was permitted under Statement No. 123, as originally issued. The Bank had
$2,600 in unrecognized compensation costs relating to non-vested stock based
compensation awards at June 30, 2009.
On March 1, 2008, options to purchase a total of 1,750 shares of common stock
were granted with an exercise price of $7.49 per share. These options will
expire ten years from the date of the grant and vest on a one-third per year
basis, with one-third being immediately vested. The exercise price of each
option equals the market price of the Bank's common stock on the date of the
grant.
NOTE 6 - INVESTMENT SECURITIES
A comparison of amortized cost and approximate fair value of investment
securities held to maturity at June 30, 2009 and December 31, 2008 is as follows
(in thousands):
June 30, 2009
-------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
--------- -------------- ---------- ---------
Investments held to maturity:
Government agency obligations $ 44,836 $ 46 $ (513) $ 44,369
Mortgage backed securities 4,059 17 (14) 4,062
---------- ---------- --------- ---------
Total $ 48,895 $ 63 $ (527) $ 48,431
========= ========== ========= =========
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
June 30, 2009 and December 31, 2008 for the time periods shown (in thousands):
June 30, 2009
------------------------
Less than 12 months 12 months or longer Total
-------------------------- ------------------------- ----------------------
Unrealized Unrealized Fair Unrealized
Fair Value Losses Fair Value Losses Value Losses
---------- ---------- ---------- ---------- ------- ----------
Investments held to maturity:
Government Agency Obligations $30,978 $ 500 $ 3,875 $ 13 $ 34,853 $ 513
Mortgage Backed Securities 500 14 500 14
-------- -------- ------- -------- ------- -------
Total temporarily
impaired investment
securities $ 31,478 $ 514 $ 3,875 $ 13 $35,353 $ 527
======== ======== ======= ======== ======= =======
7
December 31, 2008
------------------------
Less than 12 months 12 months or longer Total
-------------------------- ------------------------- ----------------------
Unrealized Unrealized Fair Unrealized
Fair Value Losses Fair Value Losses Value Losses
---------- ---------- ---------- ---------- ------- ----------
Investments held to maturity:
Mortgage Backed Securities - - 1,726 19 1,726 19
-------- -------- ------- -------- -------- -------
Total temporarily
impaired investment
securities $ - $ - $ 1,726 $ 19 $ 1,726 $ 19
======== ======== ======= ======== ======== =======
Management has taken into consideration the following information in reaching
the conclusion that the impairment of the securities listed in the table above
is not other than temporary. The unrealized losses disclosed above are the
result of fluctuations in market interest rates currently offered on like
securities and not a deterioration or downgrade of the investment issuer's
credit worthiness or ability to meet its cash flow requirements. The Company
expects to recover the amortized cost basis for all investments in an unrealized
loss position as of June 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, are as follows for the three and six
month periods ended June 30, 2009 and 2008 (in thousands)
Three Months Ended Three Months Ended
June 30, 2009, net of tax June 30, 2008, net of tax
------------------------- -------------------------
Net Loss $ (1,096) $ (304)
Other Comprehensive Income (loss)
Unrealized holding losses arising during period - (16)
------------- ------------
Total Comprehensive Loss $ (1,096) $ (320)
============= ============
Six Months Ended Six Months Ended
June 30, 2009, net of tax June 30, 2008, net of tax
------------------------- -------------------------
Net Loss $ (1,294) $ (246)
Other Comprehensive Income (loss)
Unrealized holding losses arising during period - (3)
------------- ------------
Total Comprehensive Loss $ (1,294) $ (249)
============= ============
The change in other comprehensive income components and related tax benefits are
as follows for the six month periods ended June 30, 2009 and 2008 (in
thousands):
June 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
June 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 $ (5) $ 2 $ (3)
-------------- -------------- ---------------
Other comprehensive income $ (5) $ 2 $ (3)
============== ============== ===============
NOTE 8 - LOANS RECEIVABLE
Loans receivable consist of the following (in thousands):
June 30, 2009 December 31, 2008
------------- ---------------
Commercial $ 77,914 $ 60,646
Real estate - commercial 106,010 91,105
Real estate - residential 19,487 19,346
Construction 12,093 12,323
Consumer loans 10,183 10,721
Net deferred loan fees (114) (37)
------------- -------------
225,573 194,104
Allowance for loan losses (3,352) (1,133)
------------- -------------
Loans receivable, net $ 222,221 $ 192,971
============= =============
Under New Jersey banking laws, the Bank is subject to a loans-to-one-borrower
limitation of 15% of capital funds. At June 30, 2009, the loans-to-one-borrower
limitation was approximately $3,833,000; this excludes an additional 10% of
adjusted capital funds, or approximately $2,555,000, which may be loaned if
collateralized by readily marketable securities. At June 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 Bank recognized no interest income on non-accrual
loans during the six month periods ended June 30, 2009 and June 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 June 30, 2009 the Company had four non accrual loan relationships
which total $5,890,000 compared to no non-accrual loans at December 31, 2008. At
June 30, 2009, the Company had four impaired loan relationships totaling
$5,890,000 in which $4,054,000 was sufficiently collateralized and a specific
reserve of $1,836,000 has been recorded for the remaining balance. The average
balance of impaired loans totaled $5,909,900 for 2009, and interest income
recorded on impaired loans during the six months ended June 30, 2009, totaled
$32,000.
NOTE 9 - Bank Owned Life Insurance
Bank Owned Life Insurance ("BOLI") is carried at its aggregate cash surrender
value less surrender charges and totaled $4,434,000 at June 30, 2009. Income of
$86,000 was recognized on the BOLI during the six month period ended June 30,
2009 as compared to $78,000 for the six month period ended June 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 $70,000 in deferred
compensation expense during the six month period ended June 30, 2009 as compared
to $47,000 for the six month period ended June 30, 2008.
NOTE 11 - Income Taxes
The Bank adopted the provisions of Financial Accounting Standards Board ("FASB")
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109" ("FIN 48"), on January 1, 2007. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes". FIN 48 prescribes a threshold and a measurement
process for recognizing in the financial statements a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company has determined that there are no
significant uncertain tax positions requiring recognition in its financial
statements.
Federal tax years 2005 through 2008 remain subject to examination as of June 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 the deferred tax assets will be realized.
As such, no valuation allowance was established for the deferred tax asset as of
June 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 SFAS No. 157, "Fair Value Measurements"
(SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in U.S. generally accepted accounting principles, and
expands disclosure requirements for fair value measurements. Statement 157 does
not require any new fair value measurements. The adoption of SFAS No. 157 did
not have a material impact on the Bank's consolidated financial statements.
In conjunction with the adoption of SFAS No. 157, the Bank also adopted FASB
Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157" (FSP
FAS 157-2) on January 1, 2008. FSP FAS 157-2 amends SFAS No. 157 to defer its
effective date for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis, to fiscal years beginning after November 15,
2008, or January 1, 2009 for the Company.
SFAS No.157 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels, as
described below:
o Level 1. Level 1 inputs are unadjusted quoted prices in active markets for
identical assets or liabilities.
10
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 June 30, 2009 and December 31, 2008, the Bank did not have any assets or
liabilities measured at fair value on a recurring or nonrecurring basis.
As required by FSP FAS 107-1 and APB 28-1, the estimated fair value of financial
instruments at June 30, 2009 and December 31, 2008 was as follows:
June 30, 2009 December 31, 2008
------------------------------- ------------------------------
(in thousands) Carrying Estimated Carrying Estimated
amount fair value amount fair value
----------- ----------- ----------- -----------
Financial assets:
Cash and cash equivalents $ 6,777 $ 6,777 $ 9,368 $ 9,368
Investments held to maturity 48,895 48,431 28,398 28,487
Loans receivable 225,573 254,598 194,104 193,861
FHLB stock 1,804 1,804 1,377 1,377
Accrued interest receivable 1,436 1,436 1,217 1,217
----------- ----------- ----------- -----------
Total financial assets $ 284,485 $ 315,637 $ 234,464 $ 234,310
=========== =========== =========== ===========
Financial Liabilities:
Checking Accounts $ 46,725 $ 46,725 $ 48,032 $ 48,032
Statement savings accounts 3,348 3,348 3,401 3,401
Money market accounts 27,102 27,102 9,110 9,110
Index Accounts 45,964 45,964 50,094 50,094
Certificates of deposit 112,216 112,225 91,393 91,674
FHLB advances 35,025 35,025 26,257 26,257
Line of Credit 4,572 4,572 - -
Subordinated Debt 3,000 3,000 3,000 3,000
Accrued interest payable 275 275 278 278
----------- ----------- ----------- -----------
Total financial liabilities $ 278,227 $ 278,236 $ 231,565 $ 231,846
=========== =========== =========== ===========
Contract Estimated Contract Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
Off-balance sheet instruments:
Commitments to extend credit $ 51,999 $ - $ 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.
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly
In April 2009, the FASB issued FASB Staff Position FAS 157-4, "Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP
FAS 157-4). This FSP provides guidance on identifying
11
circumstances that indicate a transaction is not orderly and guidance on
estimating fair value in accordance with SFAS 157 when the volume and level of
activity for the asset or liability have significantly decreased. FSP FAS 157-4
emphasizes that fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date under current market conditions. This FSP
requires additional disclosures for instruments within the scope of SFAS 157.
FSP FAS 157-4 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.
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments
In April 2009, the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2,
"Recognition and Presentation of Other-Than-Temporary Impairments" (FSP FAS
115-2 and FAS 124-2). This FSP amends the other-than-temporary ("OTTI")
impairment guidance in U.S. GAAP for debt securities to make the guidance more
operational and improve the presentation and disclosure of other-than- temporary
impairments on debt and equity securities in the financial statements. The FSP
modifies the presentation of OTTI losses and expands existing disclosure
requirements about OTTI. FSP FAS 115-2 and FAS 124-2 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.
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Instruments
In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1,
"Interim Disclosures about Fair Value of Instruments" (FSP FAS 107-1 and APB
28-1). This FSP requires publicly traded companies to disclosure the fair value
of financial instruments within the scope of FAS 107 in interim financial
statements. FSP FAS 107-2 and APB 28-1 was adopted by the Company for the
interim period beginning April 1, 2009 and the required disclosures are included
in Footnote 12.
FASB Statement No. 165, Subsequent Events
In May 2009, the FASB issued FASB Statement No. 165, "Subsequent Events" (SFAS
No. 165). SFAS No. 165 provides additional guidance on the evaluation of
subsequent events and requires the disclosure of the date through which
subsequent events have been evaluated. SFAS No. 165 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
12
the Company. SFAS No. 168 is effective for the Company for the interim period
ending September 30, 2009 and effective for the Form 10-Q for the period ending
September 30, 2009, 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 warrants, such that one warrant would be issued for each share of
Cornerstone Financial Corporation common stock, $0 par, sold under the stock
offering. The Company authorized the issuance of 857,142 warrants under this
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, all of which were outstanding and exercisable as
of June 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 August 14, 2009, the filing
date of this report, and determined that there were no recognized or
nonrecognized subsequent events to report under SFAS No. 165.
Item 2. Management's Discussion and Analysis or Plan of Operation
Forward-Looking Statements
Cornerstone Financial Corporation (the "Company") may from time to time
make written or oral "forward-looking statements," including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this Quarterly Report on Form 10-Q and the exhibits hereto), in its
reports to shareholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions that are subject to change based on various important factors (many
of which are beyond the Company's control). Forward-looking statements may be
identified by the use of words such as "expects," "subject," "believe," "will,"
"intends," "will be," or "would." The factors which could cause the Company's
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements include those items listed under "Item 1A-Risk Factors" in our Annual
Report on Form 10-K for the year ended December 31, 2008 and the following
factors, among others: the strength of the United States economy in general and
the strength of the local economies in which the Company conducts operations;
the effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System ("Federal Reserve"); inflation; interest rates; market and
monetary fluctuations; the timely development of new products and services by
the Company and the perceived overall value of these products and services by
users, including the features, pricing and quality compared to competitors'
products and services; the success of the Company in gaining regulatory approval
of its products, services, dividends and of new branches, when required; the
impact of changes in financial services laws and regulations (including laws
concerning taxes, banking, securities and insurance); technological changes;
acquisitions; the ability to continue to effectively manage costs, including the
costs incurred in connection with the opening of new branches; changes in
consumer spending and saving habits; and the success of the Company at managing
the risks resulting from these factors.
13
The Company cautions that the above listed factors are not exclusive.
The Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Overview
Cornerstone Financial Corporation
The Company was formed in 2008 at the direction of the Board of
Directors of Cornerstone Bank (the "Bank") to serve as a holding company for the
Bank. The Board believed that establishing a holding company would provide
greater flexibility in raising capital and conducting the Bank's business. The
holding company reorganization was completed in January 2009. As such, the
Company did not have any operations in 2008, other than obtaining regulatory
approval for the holding company reorganization, and the results of operations,
and all financial data at December 31, 2008 and for the six months ended June
30, 2008 presented herein, are those of the Bank on a stand alone basis.
We have adopted a strategy of continued growth. At June 30, 2009, we
had total assets of $295.8 million, total deposits of $235.4 million and
shareholders' equity of $14.7 million compared to at December 31, 2008 total
assets of $247.5 million, total deposits of $202.0 million and total
shareholders equity of $15.4 million.
Interest Rate Risk
Our primary objective in managing interest rate risk is to minimize the adverse
impact of changes in interest rates on our net interest income while creating an
asset/liability structure that maximizes earnings. Our Asset Liability
Management Committee actively monitors and manages our interest rate exposure
using gap analysis and interest rate simulation models.
Gap analysis measures the difference between volumes of rate-sensitive assets
and liabilities and quantifies these repricing differences for various time
intervals. Static gap analysis describes interest rate sensitivity at a point in
time. However, gap analysis alone does not accurately measure the potential
magnitude of changes in net interest income since changes in interest rates do
not affect assets and liabilities at the same rate, to the same extent, or on
the same basis. Furthermore, static gap analysis does not consider future growth
or changes in the asset mix.
A positive gap (asset sensitive) indicates that more assets reprice during a
given period compared to liabilities, while a negative gap (liability sensitive)
indicates that more liabilities reprice during a given period compared to
assets.
Generally, during a period of falling interest rates, a positive gap would tend
to adversely affect net interest income, while a negative gap would tend to
result in an increase in net interest income. During a period of rising interest
rates, in general, a positive gap would tend to result in an increase in net
interest income while a negative gap would tend to affect net interest income
adversely. However, certain assets and liabilities may react differently to
changes in interest rates even though they reprice or mature in the same or
similar time periods. The interest rates on certain assets and liabilities may
change at different times than changes in market interest rates, with some
changing in advance of changes in market rates and some lagging behind changes
in market rates. Also, certain assets (e.g., adjustable rate mortgages) often
have provisions that may limit changes in interest rates each time the interest
rate changes and on a cumulative basis over the life of the loan. Additionally,
the actual prepayments and withdrawals in the event of a change in interest
rates may differ significantly from those assumed in the calculations shown in
the table below. Finally, the ability of borrowers to service their debt may
decrease in the event of an interest rate increase. Consequently, any model used
to analyze interest rate sensitivity will be vulnerable to the assumptions made
with respect to the foregoing factors.
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 June 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 500 5,463 42,932 - 48,895
maturity
Loans receivable 93,034 77,012 55,527 - 225,573
--------- -------- --------- --------- ---------
Total interest-earning assets 93,534 82,475 98,459 - 274,468
--------- -------- --------- --------- ---------
Non-rate sensitive assets:
Other assets - - - 21,362 21,362
--------- -------- --------- --------- ---------
Total assets $ 93,534 $ 82,475 $ 98,459 $ 21,362 $ 295,830
========= ======== ========= ========= =========
Interest-bearing liabilities:
Interest-bearing demand $ 17,017 $ - $ - $ - $ 17,017
Statement savings 3,348 - - - 3,348
Money market 73,066 - - - 73,066
Certificates of deposit 95,895 16,321 - - 112,216
Subordinated debt 3,000 - - - 3,000
Borrowings 35,025 4,572 - - 39,597
--------- -------- --------- --------- ---------
Total interest-bearing 227,351 20,893 - - 248,244
--------- -------- --------- --------- ---------
liabilities
Non-rate sensitive liabilities:
Non-interest bearing deposits - - - 29,708 29,708
Other liabilities - - - 3,215 3,215
Capital - - - 14,663 14,663
--------- -------- --------- --------- ---------
Total liabilities and capital $ 227,351 $ 20,893 $ - $ 47,586 $ 295,830
========= ======== ========= ========= =========
Period GAP $(133,817) $ 61,582 $ 98,459 $ (26,224)
Cumulative interest-earning assets $ 93,534 $176,009 $ 274,468
Cumulative interest-bearing liabilities $ 227,351 $248,244 $ 248,244
Cumulative GAP $(133,817) $(72,235) $ 26,224
Cumulative RSA/RSL (1) 41.14% 70.90% 110.56%
(1) Cumulative rate sensitive (interest-earning) assets divided by cumulative
rate sensitive (interest-bearing) liabilities.
At June 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
June 30, 2009 as compared to December 31, 2008 and our results of operations for
the three and six month periods ended June 30, 2009 as compared to the same
period in 2008.
Comparison of Financial Condition at June 30, 2009 and December 31, 2008
Total assets at June 30, 2009 were $295.8 million, an increase of $48.3 million
or 19.5% over December 31, 2008. This change was primarily due to increases in
loans receivable, net, of $29.3 million, accrued interest receivable of
$219,000, deferred taxes of $907,000, investments held to maturity of $20.5
million, bank owned life insurance of $86,000, other assets of $28,000, and
Federal Home Loan Bank ("FHLB) stock of $427,000, partially offset by decrease
in cash and cash equivalents of $2.6 million, other real estate owned of $76,000
and premise and equipment of $452,000. The increases in assets were funded by a
$33.3 million increase in deposits, a $4.6 million increase in debt and by an
$8.8 million increase in Federal Home Loan Bank advances.
Loans receivable, gross, at June 30, 2009, totaled $225.5 million, an increase
of $31.5 million or 16.2% from December 31, 2008. This increase was attributable
to increases in commercial loans of $17.3 million, commercial real estate loans
of $14.9 million and residential real estate loans of $141,000, partially offset
by decreases in consumer loans of $538,000, and construction loans of $230,000.
See Note 8 to our Financial Statements for a breakdown of the components of our
loan portfolio.
We believe the increase in loans receivable primarily reflects the
implementation 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 its team of lenders.
Non-performing assets include non-accrual loans, which are loans on which the
accrual of interest has ceased, impaired loans, restructured loans and real
estate owned. Loans are generally placed on non-accrual status if, in the
opinion of management, collection is doubtful, or when principal or interest is
past due 90 days or more unless the collateral is considered sufficient to cover
principal and interest and the loan is in the process of collection. Impaired
loans are measured based on the present value of expected future discounted cash
flows, the market price of the loan or the fair value of the underlying
collateral if the loan is collateral dependent. At June 30, 2009, we had a total
of $5,890,000 in non accrual loans as compared to no non-accrual loans at
December 31, 2008. At June 30, 2009, we had four impaired loan relationships
totaling $5,890,000 as compared to three loans at December 31, 2008 totaling
$2,375,000. At June 30, 2009 a specific reserve of $1,836,000 has been recorded
against these loans. The average balance of impaired loans totaled $5,909,900
for 2009 as compared to $2,383,000 for 2008, and interest income recorded on
impaired loans during the six months ended June 30, 2009 was $32,000 as compared
to $69,000 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 June 30, 2009, we had
$205,000 in real estate owned compared to $281,000 in real estate owned at
December 31, 2008. The change reflects adjustments made to the carrying value
during 2009.
All of our investment securities are classified as held to maturity. Our
investment security portfolio increased by $20.5 million or 72.2% to $48.9
million at June 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.
16
Total liabilities at June 30, 2009 amounted to $281.2 million, an increase of
$49.0 million or 21.1% from December 31, 2008. This change was primarily due to
increases in total deposits of $33.3 million, line of credit borrowings from
Atlantic Central Bankers Bank (ACBB) of $4.6 million, other liabilities of $2.3
million and an increase of $8.8 million in advances from Federal Home Loan Bank.
Total deposits at June 30, 2009 were $235.5 million, an increase of $33.3
million or 16.5% from December 31, 2008. The increase in total deposits was
spread amongst non-interest bearing deposits with an increase of $8.5 million,
certificates of deposit with an increase of $20.8 million, and interest bearing
core deposits with an increase of $4.0 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 June 30, 2009, the Bank had advances with the FHLB in the amount of $35.0
million, an increase of $8.8 million or 33.4 % from December 31, 2008. The
weighted average interest rate on the Bank's borrowings from FHLB was 2.77% at
June 30, 2009 as compared to 3.26% at December 31, 2008.
Stockholders' equity at June 30, 2009 amounted to $14.6 million, a decrease of
$715,000 or 4.6% over December 31, 2008. This decrease reflects a net loss of
$1.3 million for the six month period ended June 30, 2009 offset by the proceeds
from issuance of stock of $577,000.
Results of Operations
Net Income. We recorded a net loss for the three month period ended June 30,
2009 of $1.1 million or $0.66 per share as compared to a net loss of $304,000 or
$0.18 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
$1.6 million in provision for loan losses, $182,000 in FDIC insurance premium
expense relating to a special assessment levied by the FDIC on all insured
depository institutions and increased quarterly premiums , and $77,000 in
increased employee salaries and benefits expense, offset slightly by a $384,000
increase in net interest income. The net interest margin for the three-month
period ended June 30, 2009 increased by 3 basis points to 3.27% as compared to
3.23% for the same period in 2008.
We recorded a net loss for the six-month period ended June 30, 2009 of $1.3
million or $0.78 per share as compared to a net loss of $246,000 or $ 0.15 per
share for the same period in 2008. The change in net income for the six-month
period reflects increases of $1.9 million in provision for loan losses, $213,000
in salaries and employee benefits, $136,000 in net occupancy expense, and FDIC
insurance premium expense of $206,000, offset slightly by a $700,00 increase in
net interest income. The net interest margin for the six-month period ended June
30, 2009 decreased by 2 basis points to 3.18% as compared to 3.20% for the same
period in 2008.
Interest Income. Total interest income amounted to $3.6 million for the
three-month period ended June 30, 2009, an increase of $686,000 or 23.4% when
compared to the same period in 2008. The increase in interest income was due to
volume increases in our interest-earning asset balances rather than rate
changes. The average yield on the Bank's interest-earning assets was 5.57% for
the three month period ended June 30, 2009 compared to 5.89% during the same
period in 2008.
Total interest income amounted to $7.0 million for the six-month period ended
June 30, 2009, an increase of $1.0 million or 16.9% when compared to the same
period in 2008. This increase was due to the growth in average interest-earning
asset balances of $56.1 million from June 30, 2009 compared to the same period
in 2008. The average yield on interest-earning assets was 5.54% for the
six-month period ended June 30, 2009 compared to 6.08% during the same period in
2008.
17
Interest Expense. Total interest expense amounted to $1.6 million for the
three-month period ended June 30, 2009, an increase of $302,000 when compared to
the same period in 2008. The increase in interest expense was due to volume
increases in interest bearing deposits and borrowing, offset slightly by lower
rates being paid on those products when compared to the same period in 2008. The
average cost of interest-bearing liabilities was 2.61% for the three-month
period ended June 30, 2009 compared to 2.91% during the same period in 2008.
Total interest expense amounted to $3.1 million for the six-month period ended
June 30, 2009, an increase of $305,000 or 10.8% when compared to the same period
in 2008. This increase was due to an increase in certificates of deposit
balances, offset slightly by lower interest rates being paid on these
certificates 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 2.72% for the six-month period ended June 30, 2009 compared to
3.26% during the same period in 2008.
Allowance for Loan Losses. During the second quarter of 2009, management
identified three specific credits that were measured for loan impairment that
resulted in our recording a provision for loan losses of $1.6 million on those
credits and $277,000 due to portfolio growth for the three-month period ended
June 30, 2009 compared to a provision of $294,000 for the same period in 2008.
We recorded a provision for loan losses for the six-month period ended June 30,
2009 of $2.2 million of which $1.8 million was related to three specific credits
and $384,000 was due to portfolio growth, compared to a provision of $317,000
for the same period in 2008. A provision for loan losses is charged to
operations based on management's evaluation of the estimated and inherent losses
in our loan portfolio. While management has increased its allowance for loan
loss for the six-month period ended June 30, 2009, management believes the
credit quality of the Bank's loan portfolio continues to remain strong during
this turbulent time in the market. We have not engaged in any sub prime lending
activities that have plagued the banking industry. At June 30, 2009, our
allowance for loan losses represented 1.49% of total loans outstanding and 56.9%
of non-performing loans.
Non-Interest Income. For the three-months ended June 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, for
the three-months ended June 30, 2009 totaled $128,000, an increase of $47,000 or
58.0% when compared to the same period in 2008. This increase is the result of a
$33,000 increase on service charges on deposit accounts, coupled with increases
in Bank owned life insurance income of $3,000, origination fees on mortgage
loans sold of $6,000 and miscellaneous income of $5,000.
Non-interest income for the six-months ended June 30, 2009 totaled $221,000, a
decrease of 2,000 or 0.9% when compared to the same period in 2008. This change
is the result of increases in bank owned life insurance income, loan prepayment
penalty income, ATM fees, miscellaneous fee income, service charges on deposit
accounts and origination fees on mortgage loans sold, offset by a $57,000
decrease in gain on sale of fixed assets. The decrease was the result of a gain
in the sale of fixed assets during the six-month period ended June 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, advertising costs, data
processing costs and professional services and other operating costs, for the
three months ended June 30, 2009 totaled $2.1 million, an increase of $157,000
or 8.1% 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
$77,000 and FDIC expense of $182,000, partially offset by decreases in other
real estate owned expense of $32,000. In addition, we incurred an impairment
loss on other real estate owned of $155,000 in 2008, while we had no such
charges in 2009. 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 is payable September 30,
2009. Our expense for the special assessment was $140,000.
18
Non-interest expense for the six months ended June 30, 2009 totaled $4.0
million, an increase of $525,000 or 14.9% 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 $213,000, FDIC deposit insurance premium expense
of $206,000, and net occupancy expense of $136,000. The net increase in
occupancy costs is attributable to the one time costs of $135,000 associated
with the retirement of certain fixed assets in connection with the closing of
the Moorestown Route 38 branch on April 1, 2009. These expenses were partially
offset by decreases in other real estate owned expense of $23,000 and an
impairment loss on other real estate owned of $155,000 which was incurred during
the six months ended June 30, 2008. There were no similar expenses in 2009.
Income Taxes. We recorded a federal and state income tax benefit of $749,000
during the three month period ended June 30, 2009 compared to an income tax
benefit of $230,000 for the same period in 2008. The change in income tax
expense reflects the changes in the Company's results of operations and its
recognition of a loss in the three month period ended June 30, 2009. The
effective tax rate for the three month period ended June 30, 2009 was 40.6%
compared to 43.1% for the three month period ended June 30, 2008.
We recorded a federal and state income tax benefit of $898,000 during the six
month period ended June 30, 2009 compared to an income tax benefit of $216,000
for the same period in 2008. The change in income tax expense reflects the
changes in the Company's results of operations and its recognition of a loss in
the second quarter of 2009. The effective tax rate for the six month period
ended June 30, 2009 was 41.0% compared to 46.8% for the six month period ended
June 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 loan portfolio. At June 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 June 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 $6.8 million at June 30, 2009 in the form of
cash and due from banks. At June 30, 2009, unused lines of credit available to
our customers, committed undisbursed loan proceeds and standby letters of credit
totaled $51.9 million. Certificates of deposit scheduled to mature in one year
or less totaled $95.9 million at June 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 and the
continued expansion of our branch network. Our success is dependent on a number
of factors, including our ability to establish branches in favorable locations,
our ability to meet the needs of our customers through personalized services and
a broad array of financial products, and the general economic conditions of the
market area in which they are located. Unexpected changes in
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the national and local economy may also adversely affect our ability to attract
or retain deposits and foster new loan relationships. In addition, because we
will incur start-up and operating costs associated with expansion, the opening
of new branches is expected to adversely affect future profitability in the
short term.
Capital Resources. Capital adequacy is the ability of the Bank to support growth
while protecting the interests of depositors and the deposit insurance fund.
Bank regulatory agencies have developed certain capital ratio requirements,
which are used to assist them in monitoring the safety and soundness of
financial institutions. Management continually monitors these capital
requirements.
The Bank is subject to risk-based capital guidelines promulgated by the FDIC
that are designed to make regulatory capital requirements more sensitive to
differences in risk profile among banks, to account for off-balance sheet
exposure, and to minimize disincentives for holding liquid assets. Under the
guidelines, assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. The minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit) is 8%. At least 4% of total risk-weighted assets is required to be "Tier
I Capital," consisting of common stockholders' equity and qualifying preferred
stock, less certain goodwill items and other intangible assets. The remainder
("Tier II Capital") may consist of (a) the allowance for loan losses of up to
1.25% of risk-weighted assets, (b) excess of qualifying preferred stock, (c)
hybrid capital instruments, (d) perpetual debt, (e) mandatory convertible
securities, and (f) 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 June 30, 2009 the Bank maintained a Tier I leverage
ratio of 6.78%, a Tier I risk-based capital ratio of 7.72% 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. The Company has drawn $4.6 million under the loan and has contributed
$4.5 million as additional equity to the Bank.
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 June 30,
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2009 were $51.9 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 June 30, 2009, our obligations under standby letters of credit
totaled $1.2 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. 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.
21
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 second 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 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 has
affected our results of operations.
To date, our non-performing assets have increased to $6.1 million, or
2.1% 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 $2.2 million in the provision for loan losses for the first six
(6) months of 2009 from $317 thousand for the first six (6) months of 2008. The
increase in non-performing assets reflects the general
22
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
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On May 20, 2009, the Registrant held its annual meeting of shareholders.
Shareholders were asked to elect members of the Company's Board of Directors
whose terms expired, to approve the Registrant's 2009 Equity Compensation Plan
and to approve certain amendments to the Registrant's certificate of
incorporation. The results were as follows:
Election of Directors:
Nominees: For Withold Authority
-------- --- -----------------
George W. Matteo, Jr. 1,263,716 48,552
J. Mark Baiada 1,265,070 47,198
J. Richard Carnall 1,264,506 47,762
Gaetano P. Giordano 1,265,070 47,198
Robert A. Kennedy, Jr. 1,263,446 48,822
Ronald S. Murphy 1,265,070 47,198
Bruce Paparone 1,271,841 40,427
Approval of the Registrant's 2009 Equity Compensation Plan:
For: 939,621 Against: 60,565 Abstain: 6,426 Broker's Non-Votes: 305,656
Approval of an Amendment to the Registrant's Certificate of Incorporation to
classify the Board of Directors into three classes and to prevent removal of the
Directors by shareholders without cause:
For: 912,211 Against: 92,401 Abstain: 2,000 Broker's Non-Votes: 305,656
An Amendment to the Registrant's Certificate of Incorporation to provide that
approval of any merger, consolidation or sale of substantially all of the assets
of the Registrant which has not been approved in advance by the Board of
Directors of the Registrant will require the affirmative vote of 75% of the
Registrant's outstanding shares of common stock and to further require an
affirmative vote of 75% of the outstanding common stock to amend this
super-majority voting provision
For: 931,641 Against: 73,546 Abstain: 1,425 Broker's Non-Votes: 305,656
23
An Amendment to the Registrant's Certificate of Incorporation to require that
any shareholder action taken by written consent rather than at a meeting be by
unanimous consent:
For: 935,879 Against: 64,324 Abstain: 2,139 Broker's Non-Votes: 309,926
An Amendment to the Registrant's Certificate of Incorporation to setting the
quorum for action by shareholders at a meeting at one-third (1/3rd) of the
issued and outstanding share:
For: 927,498 Against: 77,433 Abstain: 1,681 Broker's Non-Votes: 305,656
An Amendment to the Registrant's Certificate of Incorporation to provide for
1,000,000 shares of series preferred stock, the terms, conditions and
designations of which may be set by the Board of Directors at the time of
issuance:
For: 933,103 Against: 69,263 Abstain: 4,246 Broker's Non-Votes: 305,656
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
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: August 13, 2009 By: /s/ George W. Matteo, Jr.
-------------------------
George W. Matteo, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 2009 By: /s/ Keith Winchester
--------------------
Keith Winchester
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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