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, 2010
-------------
-OR-
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
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CORNERSTONE FINANCIAL CORPORATION
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(Exact name of registrant, as specified in its charter)
New Jersey 80-0282551
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6000 Midlantic Drive, Suite 120 S, Mount Laurel, New Jersey 08054
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (856) 439-0300
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Securities registered pursuant to Section 12(b) of the Act:
NONE
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
--- ----
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation SD-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). YES X NO .
--- ----
Indicate by check mark whether the registrant is a large accelerated filer, an
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 12, 2010, there were 1,809,656 outstanding shares of the
registrant's Common Stock.
CORNERSTONE FINANCIAL CORPORATION
CONTENTS
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PAGES
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements..................................1
Consolidated Statements of Financial Condition at June 30,
2010 (unaudited) and December 31, 2009.................................1
Consolidated Statements of Operations (unaudited) for the three months
ended June 30, 2010 and 2009...........................................2
Consolidated Statements of Operations (unaudited) for the six months
ended June 30, 2010 and 2009...........................................3
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
for the six months ended June 30, 2010.................................4
Consolidated Statements of Cash Flows (unaudited) for the six months
ended June 30, 2010 and 2009...........................................5
Notes to Consolidated Financial Statements (unaudited.....................6
Item 2. Management's Discussion and Analysis or Plan of Operation.........14
Item 3. Quantitative and Qualitative Disclosures About Market Risk........24
Item 4. Controls and Procedures...........................................24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................24
Item 1A. Risk Factors......................................................25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......25
Item 3. Defaults upon Senior Securities...................................25
Item 4. Submission of Matters to a Vote of Security Holders...............25
Item 5. Other Information.................................................25
Item 6. Exhibits..........................................................25
Signatures ...................................................................26
Exhibit 31.1 .................................................................27
Exhibit 31.2 .................................................................28
Exhibit 32.1 .................................................................29
Exhibit 32.2 .................................................................30
PART I. FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, 2010 DECEMBER 31, 2009
------------- -----------------
ASSETS: (UNAUDITED)
Cash and due from banks $ 7,714 $ 4,742
Federal funds sold 25,000 -
--------- ---------
Cash and cash equivalents 32,714 4,742
--------- ---------
Investment securities:
Held to maturity (fair value 2010 -
$52,600; 2009 - $47,294) 51,955 48,059
Loans receivable 242,078 238,424
Less allowance for loan losses 3,429 3,432
--------- ---------
Loans receivable, net 238,649 234,992
--------- ---------
Federal Home Loan Bank stock 1,435 1,572
--------- ---------
Premises and equipment, net 7,799 7,871
Accrued interest receivable 1,454 1,484
Bank owned life insurance 4,603 4,521
Deferred taxes 1,097 1,154
Other assets 1,636 1,749
--------- ---------
Total Assets $ 341,342 $ 306,144
========= =========
LIABILITIES:
Non-interest bearing deposits $ 34,266 $ 37,500
Interest bearing deposits 128,402 99,132
Certificates of deposit 125,953 112,861
--------- ---------
Total deposits 288,621 249,493
--------- ---------
Advances from the Federal Home Loan Bank 25,000 29,883
Line of Credit 4,773 4,672
Subordinated debt 3,000 3,000
Other liabilities 1,139 1,283
--------- ---------
Total Liabilities 322,533 288,331
--------- ---------
Commitments and Contingencies (Note 4)
STOCKHOLDERS' EQUITY:
Preferred stock:
$0 par value; $1,000 per share stated
value, authorized 1,000,000 shares;
issued and outstanding 1,900 at
June 30, 2010 and December 31, 2009,
respectively Common stock: 1,900 1,900
$0 par value: authorized 10,000,000
shares; issued and outstanding
1,809,656 at June 30, 2010 and
December 31, 2009, respectively - -
Additional paid-in capital 16,656 16,623
Retained earnings (deficit) 253 (710)
--------- ---------
Total Shareholders' Equity 18,809 17,813
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 341,342 $ 306,144
========= =========
See accompanying notes to consolidated financial statements
1
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
--------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) JUNE 30, 2010 JUNE 30, 2009
--------------- -------------
INTEREST INCOME (UNAUDITED) (UNAUDITED)
Interest and fees on loans $ 3,415 $ 3,135
Interest on investment securities 641 480
Interest on federal funds 6 2
------------ ----------
TOTAL INTEREST INCOME 4,062 3,617
INTEREST EXPENSE
Interest on deposits 1,003 1,283
Interest on borrowings 168 322
------------ ----------
TOTAL INTEREST EXPENSE 1,171 1,605
------------ ----------
Net interest income 2,891 2,012
Provision for loan losses 38 1,879
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NET INTEREST INCOME AFTER LOAN LOSS PROVISION 2,853 133
------------ ----------
NON-INTEREST INCOME
Service charges on deposit accounts 49 54
Origination fees on mortgage loans sold - 7
Bank owned life insurance income 41 43
Miscellaneous fee income 30 24
------------ ----------
TOTAL NON-INTEREST INCOME 120 128
------------ ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,217 1,097
Net occupancy 306 288
Data processing and other service costs 137 122
Professional services 149 136
Advertising and promotion 47 45
Other real estate owned expense 5 8
FDIC expense 115 250
Other operating expenses 148 160
------------ ----------
TOTAL NON-INTEREST EXPENSE 2,124 2,106
------------ ----------
Income(loss) before income taxes 849 (1,845)
Income tax expense (benefit) 328 (749)
------------ ----------
NET INCOME(LOSS) 521 (1,096)
Preferred stock dividends 33 -
------------ ----------
Net income(loss) available to common shareholders $ 488 $ (1,096)
============ ==========
EARNINGS PER SHARE
Basic $ 0.27 $ (0.66)
Diluted $ 0.27 $ (0.66)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,810 1,660
Diluted 1,822 1,660
See accompanying notes to consolidated financial statements
2
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
-----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) JUNE 30, 2010 JUNE 30, 2009
--------------- --------------
INTEREST INCOME (UNAUDITED) (UNAUDITED)
Interest and fees on loans $ 6,788 $ 6,099
Interest on investment securities 1,188 864
Interest on federal funds 8 5
------------ ----------
TOTAL INTEREST INCOME 7,984 6,968
INTEREST EXPENSE
Interest on deposits 1,941 2,515
Interest on borrowings 352 617
------------ ----------
TOTAL INTEREST EXPENSE 2,293 3,132
------------ ----------
Net interest income 5,691 3,836
Provision for loan losses 147 2,220
------------ ----------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 5,544 1,616
------------ ----------
NON-INTEREST INCOME
Service charges on deposit accounts 98 81
Origination fees on mortgage loans sold - 11
Bank owned life insurance income 82 86
Gain on sale of Loan 39 -
Miscellaneous fee income 55 43
------------ ----------
TOTAL NON-INTEREST INCOME 274 221
------------ ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,417 2,161
Net occupancy 627 752
Data processing and other service costs 237 207
Professional services 287 219
Advertising and promotion 73 86
Other real estate owned expense 14 17
FDIC expense 224 304
Other operating expenses 315 283
------------ ----------
TOTAL NON-INTEREST EXPENSE 4,194 4,029
------------ ----------
Income(loss) before income taxes 1,624 (2,192)
Income tax expense (benefit) 628 (898)
------------ ----------
NET INCOME(LOSS) 996 (1,294)
Preferred stock dividends 66 -
------------ ----------
Net income(loss) available to common shareholders $ 930 $ (1,294)
============ ==========
Earnings per share
Basic $ 0.51 $ (0.78)
Diluted $ 0.51 $ (0.78)
Weighted average shares outstanding
Basic 1,810 1,658
Diluted 1,816 1,658
See accompanying notes to consolidated financial statements
3
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMPREHENSIVE PREFERRED ADDITIONAL
INCOME STOCK COMMON STOCK PAID-IN CAPITAL
------------- --------- ------------- ---------------
Balance at
December 31, 2009 $ 1,900 $ - $ 16,623
========= ========== ==========
Comprehensive income
Net Income $ 996 - - -
--------
Comprehensive income $ 996
Stock based compensation ======== - - 66
Preferred Stock Dividend
($35 per share) - - (33)
Balance at June 30, 2010 $ 1,900 $ - $ 16,656
========== ========== ==========
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
EARNINGS ACCUMULATED OTHER
(DEFICIT) COMPREHENSIVE INCOME TOTAL
----------- -------------------- --------
Balance at
December 31, 2009 $ (710) - $17,813
======== ========= =======
Comprehensive income
Net Income 996 - 996
Comprehensive income
Stock based compensation - - 66
Preferred Stock Dividend
($35 per share) (33) - (66)
-------- --------- -------
Balance at June 30, 2010 $ 253 $ - $18,809
======== ========= =======
See accompanying notes to consolidated financial statements.
4
CORNERSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
--------------------------------
(IN THOUSANDS) JUNE 30, 2010 JUNE 30, 2009
------------- -------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income(loss) $ 996 $ (1,294)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 147 2,220
Depreciation 192 502
Amortization of premiums and discounts, net 39 3
Stock option expense 66 2
Deferred tax expense (benefit) 57 (907)
Decrease in other real estate owned - 76
Loans originated for sale - (2,488)
Proceeds from sales of loans held for sale - 2,488
Income on Bank Owned Life Insurance (82) (83)
Decrease (increase) in accrued interest receivable
and other assets 143 (247)
(Decrease) increase in other liabilities (144) 295
------------ -------------
Net cash provided by operating activities 1,414 564
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity (25,797) (42,235)
Maturity and calls of investments held to maturity 21,862 23,785
Redemption (purchase) of FHLB Stock 137 (427)
Net increase in loans (3,804) (31,470)
Purchases of premises and equipment (120) (50)
------------ -------------
Net cash used in investing activities (7,722) (50,397)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 39,128 33,325
Proceeds from borrowings 242,701 125,772
Principal payments on borrowings (247,483) (112,432)
Net Proceeds from issuance of stock - 577
Cash dividend paid for preferred stock (66) -
------------ -------------
Net cash provided by financing activities 34,280 47,242
Net increase in cash and cash equivalents 27,972 (2,591)
Cash and cash equivalents at the beginning of the period 4,742 9,368
------------ -------------
Cash and cash equivalents at the end of the period $ 32,714 $ 6,777
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 2,325 $ 3,135
Cash paid during the period for income taxes 710 90
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unsettled HTM investment security $ - $ 2,050
See accompanying notes to 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, 2009 has been derived from
audited financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in Cornerstone Financial
Corporation's Annual Report on Form 10-K for the year ended December 31, 2009 as
filed with the United States Securities and Exchange Commission.
NOTE 2 - USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the near-term relate
to the allowance for loan losses and the evaluation of deferred taxes.
NOTE 3 - RECENT LEGISLATIVE DEVELOPMENTS
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT
---------------------------------------------------------
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
"Act") was signed into law on July 21, 2010. Generally, the Act is effective the
day after it was signed into law, but different effective dates apply to
specific sections of the law, many of which will not become effective until
various Federal regulatory agencies have promulgated rules implementing the
statutory provisions. Uncertainty remains as to the ultimate impact of the Act,
which could have a material adverse impact on the financial services industry.
The Act, among other things:
o Directs the Federal Reserve to issue rules which are expected to limit
debit-card interchange fees;
o Provides for an increase in the FDIC assessment for depository
institutions with assets of $10 billion or more, increases in the minimum
reserve ratio for the deposit insurance fund from 1.15% to 1.35% and
changes the basis for determining FDIC premiums from deposits to assets;
o Permanently increases the deposit insurance coverage to $250 thousand
and allows depository institutions to pay interest on checking accounts;
6
o Creates a new consumer financial protection bureau that will have
rulemaking authority for a wide range of consumer protection laws that
would apply to all banks and would have broad powers to supervise and
enforce consumer protection laws;
o Provides for new disclosure and other requirements relating to executive
compensation and corporate governance;
o Changes standards for Federal preemption of state laws related to
federally chartered institutions and their subsidiaries;
o Provides mortgage reform provisions regarding a customer's ability to
repay, restricting variable-rate lending by requiring the ability to repay
to be determined for variable-rate loans by using the maximum rate that
will apply during the first five years of a variable-rate loan term, and
making more loans subject to provisions for higher cost loans, new
disclosures, and certain other revisions; and
o Creates a financial stability oversight council that will recommend to
the Federal Reserve increasingly strict rules for capital, leverage,
liquidity, risk management and other requirements as companies grow in
size and complexity.
NOTE 4 - 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 5 - 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 6 - STOCK OPTIONS
The Company accounts for stock options in accordance with FASB Accounting
Standards Codification (ASC) Topic 718 STOCK COMPENSATION. The Company
recognizes the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the statement of operations. The Company had
$334 thousand in unrecognized compensation costs relating to non-vested stock
based compensation awards at June 30, 2010.
On July 16, 2009, options to purchase a total of 45,000 shares of common stock
were granted with an exercise price of $5.00 per share. These options will
expire ten years from the date of the grant and vest on a one-third per year
basis beginning on July 16, 2010, with vesting accelerating in certain
circumstances such as change in control of the Company. The exercise price of
each option equals the market price of the common stock on the date of the
grant.
On January 16, 2010, options to purchase a total of 111,000 shares of common
stock were granted with an exercise price of $4.50 per share. These options will
expire ten years from the date of the grant and vest on a one-third per year
basis beginning on January 21, 2011, with vesting accelerating in certain
circumstances such as change in control of the Company. The exercise price of
each option equals the market price of the common stock on the date of the
grant.
7
NOTE 7 - INVESTMENT SECURITIES
A comparison of amortized cost and approximate fair value of investment
securities held to maturity at June 30, 2010 and December 31, 2009 is as follows
(in thousands):
JUNE 30, 2010
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ----------- ------------- -----------
INVESTMENTS HELD TO MATURITY:
Government agency obligations $43,873 $ 380 $ - $ 44,253
Mortgage backed securities 8,082 265 - 8,347
------- ----------- ----------- ----------
Total $51,955 $ 645 $ - $ 52,600
======= =========== =========== ==========
DECEMBER 31, 2009
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ----------- ----------
INVESTMENTS HELD TO MATURITY:
Government agency obligations $39,019 $ 42 $ (721) $ 38,340
Mortgage backed securities 9,040 46 (132) 8,954
------- ----------- ---------- ----------
Total $48,059 $ 88 $ (853) $ 47,294
======= =========== ========== ==========
The following table sets forth information regarding the fair value and
unrealized losses on the Company's temporarily impaired investment securities at
June 30, 2010 and December 31, 2009 for the time periods shown (in thousands):
JUNE 30, 2010
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------------ ------------------------ -----------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
---------- ---------- ---------- ---------- ---------- -----------
INVESTMENTS HELD TO MATURITY:
Government Agency Obligations $ - $ - $ - $ - $ - $ -
Mortgage Backed Securities - - - - - -
---------- --------- -------- -------- --------- -------
$ - $ - $ - $ - $ - $ -
========== ========= ======== ======== ========= =======
DECEMBER 31, 2009
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------------ ---------------------- ----------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
---------- ---------- ---------- ---------- ---------- -----------
INVESTMENTS HELD TO MATURITY:
Government Agency Obligations $ 33,940 $ 721 $ - $ - $ 33,940 $ 721
Mortgage Backed Securities $ 4,715 $ 132 $ - $ - $ 4,715 $ 132
---------- --------- -------- -------- -------- --------
Total temporary impaired
investment securities $ 38,655 $ 853 $ - $ - $ 38,655 $ 853
========== ========= ======== ======== ======== ========
Management has taken into consideration the following information in reaching
the conclusion that the impairment of the securities listed in the table above
are not other than temporary. The unrealized losses disclosed above are the
result of fluctuations in market interest rates currently offered on like
securities and do not reflect a deterioration or downgrade of the investment
issuer's credit-worthiness or ability to meet its cash flow requirements. The
Company
8
believes that it is probable that it will receive all future contractual cash
flows and does not intend to sell and will not be required to sell these
investment securities until recovery or maturity. The U.S. Government agency
sponsored securities which are listed have call provisions priced at par if
called prior to their respective maturity dates.
NOTE 8 - LOANS RECEIVABLE
Loans receivable consist of the following (in thousands):
June 30, 2010 December 31, 2009
------------- -----------------
Commercial $ 93,324 $ 91,717
Real estate - commercial 109,053 105,702
Real estate - residential 17,120 19,137
Construction 13,468 12,104
Consumer loans 9,277 9,875
Net deferred loan fees (164) (111)
---------- ---------
242,078 238,424
---------- ---------
Allowance for loan losses (3,429) (3,432)
---------- ---------
Loans receivable, net $ 238,649 $ 234,992
========== =========
Under New Jersey banking laws, the Bank is subject to a loans-to-one-borrower
limitation of 15% of capital funds. At June 30, 2010, the loans-to-one-borrower
limitation was approximately $4.4 million; this excludes an additional 10% of
capital funds, or approximately $2.9 million which may be loaned if
collateralized by readily marketable securities. At June 30, 2010, there were no
loans outstanding or committed to any one borrower which individually or in the
aggregate exceeded the Bank's loans-to-one-borrower limitation of 15% of capital
funds.
Non-performing assets include non-accrual loans, which are loans on which the
accrual of interest has ceased, and impaired loans. Loans are generally placed
on non-accrual status if, in the opinion of management, collection is doubtful,
or when principal or interest is past due 90 days or more unless the collateral
is considered sufficient to cover principal and interest and the loan is in the
process of collection. The Company recognized $193 thousand in interest income
on non-accrual loans during the six month period ended June 30, 2010 and $32
thousand for the six month period ended June 30, 2009.
Impaired loans are measured based on the present value of expected future
discounted cash flows, the fair value of the loan or the fair value of the
underlying collateral if the loan is collateral dependent. The recognition of
interest income on impaired loans is the same as for non-accrual loans discussed
above. At June 30, 2010 the Company had $6.5 million in non-accrual loans
compared to $8.1 million in non-accrual loans at December 31, 2009. At June 30,
2010, the Company had eleven impaired loan relationships totaling $10.1 million
(included within the non-accrual loans discussed above) in which $8.3 million
was sufficiently collateralized and a specific reserve of $1.8 million has been
recorded for the remaining balance. The average balance of impaired loans
totaled $11.1 million as of June 30, 2010, and interest income recorded on
impaired loans during the six months ended June 30, 2010 totaled $193 thousand,
as compared to $32 thousand for the six months ended June 30, 2009.
Included in the balance of the loans past due 90 days or more is a principal
balance of $634 thousand dollars representing the Bank's participation interest
in two loans originated by another New Jersey based institution. Although the
borrowers have ceased making payments on these loans, we have received a legal
opinion from our legal counsel that the Bank has valid claims against the
lead/originating bank for violations of the participation agreements, and we
have filed suit asserting these claims. In the event the lead bank is unable to
collect from the borrowers, we believe, based on said legal opinion that we may
collect our principal and interest from the
9
lead/originating bank. However, in that case our ability to collect on these
loans will depend upon the outcome of our legal action against the
lead/originating bank.
The following table provides information regarding risk elements in the loan
portfolio as of June 30, 2010 and December 31, 2009
(In thousands) JUNE 30, 2010 DECEMBER 31, 2009
------------- -----------------
Loans past due 90 days or more and accruing
Commercial $ 634 $ 634
Commercial real estate 2,645 1,765
Residential real estate 244 -
--------- --------
Total loans past due 90 days or more and accruing $ 3,523 $ 2,399
========= ========
(In thousands) JUNE 30, 2010 DECEMBER 31, 2009
------------- -----------------
Non-performing assets:
Non-accrual loans:
Commercial $ 1,237 $ 1,401
Commercial real estate 5,307 3,722
Residential real estate - 3,020
--------- --------
Total 6,544 8,143
Restructured loans - -
--------- --------
Total non-performing loans 6,544 8,143
Real estate owned - -
--------- --------
Total non-performing assets $ 6,544 $ 8,143
========= ========
Non-performing loans as a percentage of loans 2.70% 3.41%
========= ========
Non-performing assets as a percentage of loans and real
estate owned 2.70% 3.41%
========= ========
Non-performing assets as a percentage of total assets 1.92% 2.66%
========= ========
The following table sets forth with respect to the Bank's allowance for losses
on loans:
(In thousands) JUNE 30, 2010 JUNE 30, 2009
------------- -------------
Balance at beginning of year $ 3,432 $ 1,133
Provision:
Commercial 101 1,149
Commercial real estate 95 1,003
Residential real estate (31) -
Consumer (18) 68
-------- --------
Total Provision 147 2,220
Charge-offs:
Commercial 150 -
Recoveries - -
Total Net Charge-offs 150 -
======== ========
Balance at end of period $ 3,429 $ 3,352
======== ========
Period-end loans outstanding $242,078 $225,573
======== ========
Average loans outstanding $239,642 $224,284
======== ========
Allowance as a percentage of period-end loans 1.42% 1.49%
Net charge-offs as a percentage of average loans 0.06% 0.00%
10
NOTE 9 - BANK OWNED LIFE INSURANCE
Bank Owned Life Insurance ("BOLI") is carried at its aggregate cash surrender
value less surrender charges and totaled $4.6 million at June 30, 2010. Income
of $82 thousand was recognized on the BOLI during the six month period ended
June 30, 2010 as compared to $86 thousand for the six month period ended June
30, 2009. The Bank is the sole owner and beneficiary of the BOLI.
NOTE 10 - DEFERRED COMPENSATION PLANS
Effective January 1, 2006, the Bank adopted a Nonqualified Deferred Compensation
Plan (The "Executive Plan") and the Directors' Fee Deferral and Death Benefit
Plan (the "Directors' Plan"). Both plans provide for payments of deferred
compensation to participants. The Company recorded $85 thousand in deferred
compensation expense during the six month period ended June 30, 2010 as compared
to $70 thousand for the six month period ended June 30, 2009.
NOTE 11 - INCOME TAXES
The Company accounts for uncertainties in income taxes in accordance with
Financial ASC Topic 740, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES. ASC Topic
740 prescribes a threshold and measurement process for recognizing in the
financial statements a tax position taken or expected to be taken in a tax
return. ASC Topic 740 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The Company has determined that there are no significant uncertain
tax positions requiring recognition in its financial statements. Federal tax
years 2006 through 2009 remain subject to examination as of June 30, 2010, while
tax years 2005 through 2009 remain subject to examination by state taxing
jurisdictions. In the event the Company is assessed for interest and/or
penalties by taxing authorities, such assessed amounts will be classified in the
financial statements as income tax expense.
The ability to realize deferred tax assets is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities, and tax
planning strategies. Based upon these and other factors, the Company determined
that it is more likely than not that its deferred tax asset will be realized. As
such, no valuation allowance was established for the deferred tax asset as of
June 30, 2010 or December 31, 2009. The Company will continue to reassess the
realizability of the deferred tax asset in future periods. If, in the future, it
is determined that the Company's deferred tax asset is not realizable, a
valuation allowance may be established against the deferred tax asset, which may
have a material impact on the Company's net income in the period in which it is
recorded.
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC Topic 820 FAIR VALUE MEASUREMENTS AND DISCLOSURES establishes a framework
for measuring fair value in U.S. generally accepted accounting principles, and
expands disclosure requirements for fair value measurements. ASC Topic 820 does
not require any new fair value measurements. The adoption of ASC Topic 820 did
not have a material impact on the Company's consolidated financial statements.
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:
11
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 June 30, 2010 and December 31, 2009, the Company did not have any assets
or liabilities measured at fair value on a recurring basis.
ASSETS AND LIABILITIES MEASURED ON A NON-RECURRING BASIS
---------------------------------------------------------------
Assets and liabilities measured at fair value on a non-recurring basis are
summarized below:
FAIR VALUE MEASUREMENTS FAIR VALUE MEASUREMENTS
AT JUNE 30, 2010 AT DECEMBER 31, 2009
------------------------------------------- ---------------------------------------------
QUOTED PRICES QUOTED PRICES
IN ACTIVE SIGNIFICANT SIGNIFICANT IN ACTIVE SIGNIFICANT SIGNIFICANT
MARKETS OTHER OTHER MARKETS OTHER OTHER
FOR IDENTICAL OBSERVABLE UNOBSERVABLE FOR IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS ASSETS INPUTS INPUTS
(LEVEL 1) (LEVEL 2) (LEVEL 3) (LEVEL 1) (LEVEL 2) (LEVEL 3)
----------- ----------- ------------ ------------- ---------- ------------
(IN THOUSANDS) (IN THOUSANDS)
Assets:
Impaired loans $ - $1,460 $ - $ - $2,611 $ -
Other real estate owned - - - - - -
------- ------ ------- ------- ------ ------
Total assets
measured on a
non-recurring basis
at fair value $ - $1,460 $ - $ - $2,611 $ -
------- ------ ------- ------- ------ ------
The fair value of impaired loans with specific allocations of the allowance for
loan losses is generally based on recent real estate appraisals. These
appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach.
The following required disclosure of the estimated fair value of financial
instruments has been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop the estimates of fair
value. Accordingly, the use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
12
As required by ASC topic 825-10-65, the estimated fair value of financial
instruments at June 30, 2010 and December 31, 2009 was as follows:
JUNE 30, 2010 DECEMBER 31, 2009
----------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(in thousands) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Financial assets:
Cash and cash equivalents $ 32,714 $ 32,714 $ 4,742 $ 4,742
Investments held to maturity
Federal Agency Securities 43,873 44,253 39,019 38,340
Mortgage-backed Securities 8,082 8,347 9,040 8,954
Loans receivable 242,078 269,986 238,424 266,399
FHLB stock 1,435 1,435 1,572 1,572
Bank Owned Life Insurance 4,603 4,603 4,521 4,521
Accrued interest receivable 1,454 1,454 1,484 1,484
-------- -------- -------- --------
Total financial assets $334,239 $362,792 $298,802 $326,012
======== ======== ======== ========
Financial Liabilities:
Checking Accounts $ 51,559 $ 51,559 $ 56,783 $ 56,783
Statement savings accounts 3,224 3,224 3,430 3,430
Money market accounts 19,965 19,965 19,658 19,658
Index Accounts 87,920 87,920 56,761 56,761
Certificates of deposit 125,953 124,790 112,861 111,908
FHLB advances 25,000 25,000 29,883 29,883
Line of Credit 4,773 4,773 4,672 4,672
Subordinated Debt 3,000 3,000 3,000 3,000
Accrued interest payable 190 190 222 222
-------- -------- -------- --------
Total financial liabilities $321,584 $320,421 $287,270 $286,317
======== ======== ======== ========
CONTRACT ESTIMATED CONTRACT ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- --------- ----------
Off-balance sheet instruments:
Commitments to extend credit $ 53,598 $ - $ 45,684 $ -
======== ======== ======== ========
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.
In January 2010, the Financial Accounting Standards Board (FASB) issued an
Accounting Standard Codification Update for improving disclosures about fair
value measurements. This update requires companies to disclose, and provide the
reasons for, all transfers of assets and liabilities between the Level 1 and 2
fair value categories. It also clarifies that companies should provide fair
value measurement disclosures for classes of assets and liabilities which are
subsets of line items within the balance sheet, if necessary. In addition, the
update clarifies that companies provide disclosures about the fair value
techniques and inputs for assets and liabilities classified within Level 2 or 3
categories. The disclosure requirements prescribed by this update are effective
for fiscal years beginning after December 31, 2009, and for interim periods
within those fiscal years, or March 31, 2010 for the Corporation. This update
also requires companies to reconcile changes in Level 3 assets and liabilities
by separately providing information about Level 3 purchases, sales, issuances
and settlements on a gross basis. This provision of this update is effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years, or
13
March 31, 2011 for the Corporation. The adoption of this update did not
materially impact the Corporation's current fair value measurement disclosures.
NOTE 14 - PRIVATE PLACEMENT COMMON STOCK OFFERING AND PREFERRED STOCK ISSUANCE
In June 2009, the Board of Directors of the Company approved a private placement
common stock offering to accredited investors. In connection with this offering,
the Board of Directors approved the issuance of common stock purchase warrants.
As part of the offering, one warrant was issued for each share of Company common
stock, no par, sold in the stock offering. Each warrant issued under the
offering will allow the holder of the warrant to purchase one share of Company
common stock, $0 par, for a price of $9.00 per share through June 26, 2013. For
the year ended December 31, 2009, the Company sold 153,889 shares under this
offering and issued 153,889 common stock warrants. The $1.1 million proceeds
received from the common stock offering were recorded as additional paid in
capital.
In December 2009, the Company authorized the establishment of 2,000 shares of $0
par, $1,000 stated value, Perpetual Non-Cumulative Convertible Preferred Stock.
The preferred stock is entitled to receive, as and when declared by the
Company's Board of Directors, non-cumulative cash dividends at the annual rate
equal to 7% of the stated value. In December 2009, the Company sold 1,900
preferred shares. The preferred stock is redeemable at the Company's option at
any time after six months from the issue date at the stated value plus any
dividends declared but unpaid. The preferred shares have priority of dividends
such that, no dividends or distributions shall be declared or paid to common
shareholders unless full dividends on all outstanding preferred shares have been
declared and paid for the most recently completed calendar quarter.
NOTE 15 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the filing date of this
report, and determined that there were no recognized or nonrecognized subsequent
events to report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
Cornerstone Financial Corporation (the "Company") may from time to time make
written or oral "forward-looking statements," including statements contained in
the Company's filings with the Securities and Exchange Commission (including
this Quarterly Report on Form 10-Q and the exhibits hereto), in its reports to
shareholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions that are subject to change based on various important factors (many
of which are beyond the Company's control). Forward-looking statements may be
identified by the use of words such as "expects," "subject," "believe," "will,"
"intends," "will be," or "would." The factors which could cause the Company's
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements include those items listed under "Item 1A-Risk Factors" in our Annual
Report on Form 10-K for the year ended December 31, 2009 and the following
factors, among others: the strength of the United States economy in general and
the strength of the local economies in which the Company conducts operations;
the effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System ("Federal Reserve"); inflation; interest rates; market and
monetary fluctuations; the timely development of new products and services by
the Company and the perceived overall value of these products and services by
users, including the features, pricing and quality compared to competitors'
products and services; the success of the Company in gaining regulatory approval
of its products,
14
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; the Company's ability to access the capital markets to maintain
its regulatory capital standing: 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.
OVERVIEW
CORNERSTONE FINANCIAL CORPORATION
The Company was formed in 2008 at the direction of the Board of Directors of
Cornerstone Bank (the "Bank") to serve as a holding company for the Bank. The
Board believed that establishing a holding company would provide greater
flexibility in raising capital and conducting the Bank's business. The holding
company reorganization was completed in January 2009.
We have adopted a strategy of continued growth. At June 30, 2010, we had total
assets of $341.3 million, total deposits of $288.6 million and total loans, net
of $238.6 million compared to total assets of $306.1 million, total deposits of
$249.5 million and total loans, net of $235.0 million at December 31, 2009. Our
growth in assets and deposits reflects our commitment to provide outstanding
customer service and a broad array of banking products driven by our customers'
needs. We believe our strategy provides us with a competitive advantage over
other financial institutions by developing lasting customer relationships that
will enable us to continue to attract core deposits and loans within our market
area.
INTEREST RATE RISK
Our primary objective in managing interest rate risk is to minimize the adverse
impact of changes in interest rates on our net interest income while creating an
asset/liability structure that maximizes earnings. Our Asset Liability
Management Committee actively monitors and manages our interest rate exposure
using gap analysis and interest rate simulation models.
Gap analysis measures the difference between volumes of rate-sensitive assets
and liabilities and quantifies these repricing differences for various time
intervals. Static gap analysis describes interest rate sensitivity at a point in
time. However, gap analysis alone does not accurately measure the potential
magnitude of changes in net interest income since changes in interest rates do
not affect assets and liabilities at the same rate, to the same extent, or on
the same basis. Furthermore, static gap analysis does not consider future growth
or changes in the asset mix.
A positive gap (asset sensitive) indicates that more assets reprice during a
given period compared to liabilities, while a negative gap (liability sensitive)
indicates that more liabilities reprice during a given period compared to
assets.
Generally, during a period of falling interest rates, a positive gap would tend
to adversely affect net interest income, while a negative gap would tend to
result in an increase in net interest income. During a period of rising interest
rates, in general, a positive gap would tend to result in an increase in net
interest income while a negative gap would tend to affect net interest income
adversely. However, certain assets and liabilities may react differently to
changes in interest rates even though they reprice or mature in the same or
similar time periods. The interest rates on certain assets and liabilities may
change at different times than changes in market interest rates, with some
changing in advance of changes in market rates and some lagging behind changes
in market rates. Also, certain assets (e.g., adjustable rate mortgages) often
have provisions that may limit changes both each time the interest rate changes
and on a cumulative basis over the life of the loan. Additionally, the actual
prepayments and withdrawals in the event of
15
a change in interest rates may differ significantly from those assumed in the
calculations shown in the table below. Finally, the ability of borrowers to
service their debt may decrease in the event of an interest rate increase.
Consequently, any model used to analyze interest rate sensitivity will be
vulnerable to the assumptions made with respect to the foregoing factors.
We use a computer-based simulation model to assess the impact of changes in
interest rates on net interest income. The model incorporates management's
business plan assumptions and related asset and liability yields/costs, deposit
sensitivity and the size, composition and maturity or repricing characteristics
of our assets and liabilities. The assumptions are based on what management
believes at that time to be the most likely interest rate environment. Actual
results may differ from simulated results due to the various factors discussed
above.
The following table sets forth the amount of our interest-earning assets and
interest-bearing liabilities at June 30, 2010, which are expected to mature or
reprice in each of the time periods shown:
NON-RATE
SENSITIVE
ONE YEAR ONE-FIVE OVER ASSETS/
(DOLLARS IN THOUSANDS) OR LESS YEARS FIVE YEARS LIABILITIES TOTAL
--------- --------- ---------- ----------- --------
INTEREST-EARNING ASSETS:
------------------------
Short term investments $ 25,000 $ - $ - $ - $ 25,000
Investment securities held to maturity - - 51,955 - 51,955
Loans receivable 114,271 74,033 53,774 - 242,078
-------- --------- -------- -------- --------
Total interest-earning assets 139,271 74,033 105,729 - 319,033
-------- --------- -------- -------- --------
NON-RATE SENSITIVE ASSETS:
Other assets - - - 22,309 22,309
-------- --------- -------- -------- --------
Total assets $139,271 $ 74,033 $105,729 $ 22,309 $341,342
======== ========= ======== ======== ========
INTEREST-BEARING LIABILITIES:
-----------------------------
Interest-bearing demand $ 17,293 $ - $ - $ - $ 17,293
Statement savings 3,224 - - - 3,224
Money market 107,885 - - - 107,885
Certificates of deposit 83,971 41,982 - - 125,953
Subordinated debt 3,000 - - - 3,000
Borrowings - 29,773 - - 29,773
-------- --------- -------- -------- --------
Total interest-bearing liabilities 215,373 71,155 - - 287,128
-------- --------- -------- -------- --------
NON-RATE SENSITIVE LIABILITIES:
Non-interest bearing deposits - - - 34,266 34,266
Other liabilities - - - 1,139 1,139
Capital - - - 18,809 18,809
-------- --------- -------- -------- --------
Total liabilities and capital $215,373 $ 71,755 $ - $ 54,214 $341,342
======== ========= ======== ======== ========
Period GAP $(76,102) $ 2,278 $105,729 $(31,905)
Cumulative interest-earning assets $139,271 $213,304 $319,033
Cumulative interest-bearing liabilities $215,373 $287,128 $287,128
Cumulative GAP $(76,102) $(73,824) $ 31,905
Cumulative RSA/RSL (1) 64.67% 74.29% 111.11%
(1) Cumulative rate sensitive (interest-earning) assets divided by cumulative
rate sensitive (interest-bearing) liabilities.
At June 30, 2010, 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,
16
or earliest repricing opportunity. Interest-bearing demand deposits, statement
savings and money market accounts do not have a stated maturity or repricing
term and can be withdrawn or repriced at any time. This may impact our net
interest income if more expensive alternative sources of deposits are required
to fund loan growth or deposit runoff. Management projects the repricing
characteristics of these accounts based on historical performance and
assumptions that it believes reflect their rate sensitivity.
The following discussion focuses on the major components of our operations and
presents an overview of the significant changes in our financial condition at
June 30, 2010 as compared to December 31, 2009 and our results of operations for
the three and six month periods ended June 30, 2010 as compared to the same
period in 2009.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2010 AND DECEMBER 31, 2009
Total assets at June 30, 2010 were $341.3 million, an increase of $35.2 million
or 11.5% over December 31, 2009. This change was primarily due to increases in
cash and cash equivalents of $28.0 million, bank owned life insurance of $82
thousand, investments held to maturity of $3.9 million, and loans receivable,
net, of $3.6 million, partially offset by decreases in accrued interest
receivable of $30 thousand, deferred taxes of $57 thousand, Federal Home Loan
Bank ("FHLB") stock of $137 thousand, other assets of $113 thousand and premise
and equipment of $72 thousand.
Gross loans receivable at June 30, 2010, totaled $242.0 million, an increase of
$3.6 million or 1.5% from December 31, 2009. This increase was attributable to
increases in commercial loans of $1.6 million, commercial real estate loans of
$3.3 million and construction loans of $1.3 million, partially offset by
decreases in real estate loans secured by residential properties of $2.0 million
and consumer loans of $598 thousand. The reduction in residential real estate
loans reflects the payoff of a non-accrual loan relationship totaling $1.8
million. See Footnote 8 to our Consolidated Financial Statements for a breakdown
of the components of our loan portfolio.
Non-performing assets include non-accrual loans, which are loans on which the
accrual of interest has ceased, impaired loans, restructured loans and real
estate owned. Loans are generally placed on non-accrual status if, in the
opinion of management, collection is doubtful, or when principal or interest is
past due 90 days or more unless the collateral is considered sufficient to cover
principal and interest and the loan is in the process of collection. Impaired
loans are measured based on the present value of expected future discounted cash
flows, the market price of the loan or the fair value of the underlying
collateral if the loan is collateral dependent. At June 30, 2010, we had a total
of $6.5 million in non accrual loans as compared to $8.1 million in non-accrual
loans at December 31, 2009. At June 30, 2010, we had eleven impaired loan
relationships totaling $10.1 million (included in the non-accrual loans set
forth above) as compared to ten loan relationships at December 31, 2009 totaling
$10.5 million. At June 30, 2010 a specific reserve of $1.8 million has been
recorded against these loans. The average balance of impaired loans totaled
$11.1 million for the six months ended June 30, 2010 as compared to $5.9 million
at June 30, 2009, and interest income recorded on impaired loans during the six
months ended June 30, 2010, totaled $193 thousand as compared to $32 thousand
for the six month period ended June 30, 2009.
Included in the balance of the loans past due 90 days or more is a principal
balance of $634 thousand dollars representing the Bank's participation interest
in two loans originated by another New Jersey based institution. Although the
borrowers have ceased making payments on these loans, we have received a legal
opinion from our legal counsel that the Bank has valid claims against the
lead/originating bank for violations of the participation agreements, and we
have filed suit asserting these claims. In the event the lead bank is unable to
collect from the borrowers, we believe, based on said legal opinion that we will
collect our investment from the lead/originating bank. However, in that case our
ability to collect on these loans will depend upon the outcome of our legal
action against the lead/originating bank. Real estate acquired by foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. At June 30, 2010 and December 31, 2009 we had no real estate owned.
17
All of our investment securities are classified as held to maturity. Our
investment securities portfolio increased by $3.9 million or 8.1% to $52.0
million at June 30, 2010, from $48.1 million at December 31, 2009. The held to
maturity investment purchases were concentrated in United State Government
agency securities. See Footnote 7 to our Consolidated Financial statements for
more information regarding our investment securities portfolio. The increase in
investment securities reflects management's efforts to further diversify its
growing balance sheet and to more prudently manage its capital base by investing
in lower risk weighted assets.
Our cash and cash equivalents increased by $28.0 million to $32.7 million at
June 30, 2010 from $4.7 million at year end 2009. The increase reflects cash
inflows from an increase in deposits, calls and repayments of higher yielding
investment securities in a lower rate environment and loan re- and prepayments
exceeding current loan funding demands. The increase in deposits reflects, in
part, the Bank benefiting from merger activity involving competing institutions
and resulting customer dislocation. Management has elected to keep excess cash
flow in short term, liquid assets to fund anticipated loan demand over the next
several quarters.
Total liabilities at June 30, 2010 amounted to $322.5 million, an increase of
$34.2 million or 11.8% from December 31, 2009. This change was primarily due to
increases in total deposits of $39.1 million and line of credit borrowings from
Atlantic Central Bankers Bank (ACBB) of $101 thousand, offset by a decrease of
$4.9 million in advances from Federal Home Loan Bank and a $144 thousand
decrease in other liabilities.
Total deposits at June 30, 2010 were $288.6 million, an increase of $39.1
million or 15.7% from December 31, 2009. The change in total deposits was
related to a significant increase of $29.2 million in interest bearing core
deposits (i.e. all interest bearing deposit accounts other then certificate of
deposit accounts), coupled with an increase of $13.1 million in certificates of
deposit, partially offset by a decrease in non-interest bearing accounts of $3.2
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, 2010, we had advances from the FHLB in the amount of $25.0 million,
a decrease of $4.9 million or 16.3 % from December 31, 2009. The weighted
average interest rate on these borrowings from the FHLB was 1.49% at March 30,
2010 as compared to 2.03% at December 31, 2009.
On October 31, 2008, the Bank issued a hybrid capital instrument in the
aggregate amount of $3.0 million in the form of subordinated debt. A portion of
this instrument qualifies as Tier II capital. The term of the debt is for a six
year period with a maturity date of November 1, 2014. The initial interest rate
was 5.00% fixed for the first year then adjusted to a variable rate equal to
prime rate for the remaining five years. The debt security is redeemable, at the
Bank's option, at par on any April 30th or October 31st through the maturity
date. For the quarter ended June 30, 2010, the interest rate on this instrument
was 3.25%.
On February 17, 2009, the Company entered into a non-revolving line of credit
loan agreement with ACBB in an amount up to $5.0 million. The term of the debt
is for a three year period with a maturity date of February 17, 2012. The
interest rate adjusts at a variable rate equal to prime rate plus 25 basis
points with a floor of 4.25%. The Company has an outstanding balance on the line
of credit of $4.8 million and has contributed $4.4 million as additional capital
to the Bank. For the quarter ended June 30, 2010, the interest rate on this
borrowing was 4.25%.
Stockholders' equity at June 30, 2010 amounted to $18.8 million, an increase of
$996 thousand or 5.6% over December 31, 2009. This increase reflects net income
of $996 thousand and stock based compensation expense of $66 thousand partially
offset by $66 thousand in cash paid for the declaration of dividends on
preferred stock for the six month period ended June 30, 2010.
18
RESULTS OF OPERATIONS
NET INCOME. We recorded net income for the three month period ended June 30,
2010 of $521 thousand or $0.27 per common share (after preferred stock dividend)
as compared to a net loss of $1.1 million or $0.66 per share for the same period
in 2009. The change in net income for the three-month period compared to the
prior period was attributable to increases of $879 thousand in net interest
income and a decrease of $1.8 million in provision for loan losses and $135
thousand in FDIC insurance premium expense, partially offset by an increases of
$120 thousand in employee salaries and benefits expense and an increase of $33
thousand in other non interest expenses. The net interest margin for the
three-month period ended June 30, 2010 increased by 52 basis points to 3.79% as
compared to 3.27% for the same period in 2009.
We recorded net income for the six month period ended June 30, 2010 of $996
thousand or $0.51 per common share (after preferred stock dividend) as compared
to a net loss of $1.3 million or $0.78 per share for the same period in 2009.
The change in net income for the six-month period compared to the prior period
was attributable to increases of $1.8 million in net interest income and $53
thousand in non-interest income coupled with a decrease of $2.1 million in
provision for loan losses, $80 thousand in FDIC insurance premium expense, and
$125 thousand in net occupancy cost. In addition, employee salaries and benefits
increased by $256 thousand and other non interest expenses increased by $114
thousand. The decrease in net occupancy costs was the result of costs associated
with the closing of the Moorestown Route 38 Branch during the first quarter of
2009. The net interest margin for the six-month period ended June 30, 2010
increased by 67 basis points to 3.85% as compared to 3.18% for the same period
in 2009.
INTEREST INCOME. Total interest income amounted to $4.1 million for the
three-month period ended June 30, 2010, an increase of $445 thousand or 12.3%
when compared to the same period in 2009. The increase in interest income was
due to volume increases in our interest-bearing assets, partially offset by a
reduction in the average yield. The average yield on our interest-earning assets
was 5.28% for the three month period ended June 30, 2010 compared to 5.57%
during the same period in 2009. The reduction in yield in the quarterly period
reflects generally reduced market rates of interest, as the Federal Reserve has
maintained a low interest rate policy to help stimulate the U.S. economy.
Total interest income amounted to $7.9 million for the six-month period ended
June 30, 2010, an increase of $1.0 million or 14.6% when compared to the same
period in 2009. The increase in interest income was related to increases of
$23.7 million in average loans, $5.7 million in Fed Funds Sold and $16.9 million
in average investment securities, partially offset by a reduction in the average
yield. The average yield on our interest-earning assets was 5.35% for the six
month period ended June 30, 2010 compared to 5.54% during the same period in
2009. The reduction in yield in the quarterly period reflects generally reduced
market rates of interest, as the Federal Reserve has maintained a low interest
rate policy to help stimulate the U.S. economy.
INTEREST EXPENSE. Total interest expense amounted to $1.2 million for the
three-month period ended June 30, 2010, a decrease of $434 thousand or 27.0 %
when compared to the same period in 2009. The decrease in interest expense
resulted from lower rates paid on deposit and borrowing products when compared
to the same period in 2009. The average cost of interest-bearing liabilities was
1.65% for the three-month period ended June 30, 2010 compared to 2.61% during
the same period in 2009.
Total interest expense amounted to $2.3 million for the six-month period ended
June 30, 2010, a decrease of $839 thousand or 26.8 % when compared to the same
period in 2009. The decrease in interest expense resulted from a decrease of $98
thousand in average borrowed funds and lower rates paid on deposit and borrowing
products when compared to the same period in 2009, offsetting the growth in
average interest bearing deposits of $36.6 million. The average cost of
interest-bearing liabilities was 1.68% for the six-month period ended June 30,
2010 compared to 2.72% during the same period in 2009. The reduction in rates
paid on deposit liabilities and borrowings reflects the same factors, discussed
above, affecting the yield on our earning assets.
19
ALLOWANCE FOR LOAN LOSSES. During the second quarter of 2010, we recorded a
provision for loan losses of $38 thousand compared to a provision of $1.9
million for the same period in 2009.We recorded a provision for loan losses for
the six-month period ended June 30, 2010 of $147 thousand compared to a
provision of $2.2 million for the same period in 2009. A provision for loan
losses is charged to operations based on management's evaluation of the
estimated and inherent losses in our loan portfolio. While management has
increased its allowance for loan loss for the three-month and six-month periods
ended June 30, 2010, management believes the credit quality of our loan
portfolio has stabilized. On a linked quarterly basis, our non-performing assets
were stable from December 31, 2009, to June 30, 2010. We have not engaged in any
sub prime lending activities that have plagued the banking industry. At June 30,
2010, our allowance for loan losses represented 1.42% of total loans outstanding
and 52.4% of non-performing loans.
NON-INTEREST INCOME. For the three-months ended June 30, 2010, non-interest
income, which is comprised principally of service charges on deposit accounts,
origination fees on residential mortgage loans sold, bank owned life insurance
income, ATM fees and other miscellaneous fee income totaled $120 thousand, a
decrease of $8 thousand or 6.3% when compared to the same period in 2009. This
decrease resulted from decreases of $5 thousand on service charges on deposit
accounts, $7 thousand in origination fees on mortgage loans sold and a $2
thousand decrease in Bank owned life insurance, partially offset by an increase
in miscellaneous income of $6 thousand.
Non-interest income for the six-months ended June 30, 2010 totaled $274,000, an
increase of $53 thousand or 23.9% when compared to the same period in 2009. This
change is the result of increases in service charges on deposit accounts of $17
thousand, miscellaneous income of $12 thousand and the gain on sale of loans of
$39 thousand, offset by decreases of $11 thousand in origination fees on
mortgage loans sold and $4 thousand in Bank owned life insurance.
NON-INTEREST EXPENSE. Non-interest expense, which is comprised principally of
salaries and employee benefits, net occupancy costs, FDIC insurance premium
expense, advertising costs, data processing costs and professional services and
other operating costs, totaled $2.1 million for the three months ended June 30,
2010, an increase of $18 thousand or 0.85% when compared to the same period in
2009. The increase in non-interest expense was primarily the result of increased
salary and benefit costs of $120 thousand, net occupancy costs of $18 thousand,
data processing costs of $15 thousand, professional services of $13 thousand,
and advertising and promotion expenses of $2 thousand, partially offset by
decreases in other real estate owned expense of $3 thousand, FDIC deposit
insurance premium expense of $135 thousand, reflecting the cost of the FDIC's
special assessment in the second quarter of 2009, and other operating expenses
of $12 thousand.
Non-interest expense for the six months ended June 30, 2010 totaled $4.2
million, an increase of $165,000 or 4.1% when compared to the same period in
2009. The increase in non-interest expense was primarily the result of increases
in salary and benefit costs of $256 thousand, data processing costs of $30
thousand, professional services of $68 thousand and other operating expenses of
$32, partially offset by decreases in net occupancy costs of $125,000,
advertising and promotion expense of $13 thousand, other real estate owned
expense of $3 thousand and FDIC deposit insurance premium expense of $80
thousand. The decrease in occupancy costs is attributable to $135,000 associated
with the retirement of certain fixed assets in connection with the closing of
the Moorestown Route 38 branch on April 1, 2009.
INCOME TAXES. We recorded a federal and state income tax expense of $328
thousand during the three month period ended June 30, 2010 compared to an income
tax benefit of $749 thousand for the same period in 2009. The change in income
tax expense reflects the changes in the Company's results of operations and its
recognition of income for the three month period ended June 30, 2010. The
effective tax rate for the three month period ended June 30, 2010 was 38.6%
compared to 40.6% for the three month period ended June 30, 2009.
We recorded a federal and state income tax expense of $628 thousand during the
six month period ended June 30, 2010 compared to an income tax benefit of $898
thousand for the same period in 2009. The change in income tax
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expense reflects the changes in the Company's results of operations and its
recognition of income for the six month period ended June 30, 2010. The
effective tax rate for the six month period ended June 30, 2010 was 38.7%
compared to 41.0% for the six month period ended June 30, 2009.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity represents our ability to meet our normal cash flow
requirements for the funding of loans, repayment of deposits and payment of
operating costs. Our primary sources of liquidity include growth in deposits,
amortization and prepayment of loans, maturities of investment securities, and
our borrowing capability. Management monitors liquidity daily, and on a monthly
basis incorporates liquidity analysis into its asset/liability management
program.
In addition to using growth in deposits, loan repayments and the investment
portfolio as a source of liquidity, we also have access to unsecured, overnight
lines of credit aggregating $58.7 million, consisting of $3.0 million, on an
uncommitted basis, through ACBB and $55.7 million through the FHLB of New York.
The arrangements with ACBB are for the sale of federal funds to the Bank,
subject to the availability of such funds. Pursuant to a collateral agreement
with the FHLB, advances under this line of credit are secured by a blanket lien
on our residential mortgage loan portfolio. At June 30, 2010, we had no
outstanding balance against the overnight line of credit at ACBB. In addition,
the Company has a non revolving line of credit with ACBB for up to $5.0 million
and as of June 30, 2010 there is an outstanding balance of $4.8 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 $32.7 million at June 30, 2010 in the form
of cash and due from banks. At June 30, 2010, unused lines of credit available
to our customers, committed undisbursed loan proceeds and standby letters of
credit totaled $53.6 million. Certificates of deposit scheduled to mature in one
year or less totaled $83.9 million at June 30, 2010. We anticipate that we will
continue to have sufficient funds available to meet the needs of our customers
for deposit repayments and loan fundings.
Our ability to generate deposits depends on the success of our branches. Our
success is dependent on a number of factors, including our ability to establish
branches in favorable locations, our ability to meet the needs of our customers
through personalized services and a broad array of financial products, and the
general economic conditions of the market area in which they are located.
Unexpected changes in the national and local economy may also adversely affect
our ability to attract or retain deposits and foster new loan relationships.
CAPITAL RESOURCES. Capital adequacy is the ability to support growth while
protecting the interests of depositors and the deposit insurance fund. Bank
regulatory agencies have developed certain capital ratio requirements, which are
used to assist them in monitoring the safety and soundness of financial
institutions. Management continually monitors these capital requirements.
The Bank is subject to risk-based capital guidelines promulgated by the FDIC
that are designed to make regulatory capital requirements more sensitive to
differences in risk profile among banks, to account for off-balance sheet
exposure, and to minimize disincentives for holding liquid assets. Under the
guidelines, assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. The minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit) is 8%. At least 4% of total risk-weighted capital must consist of "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
21
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, 2010 the Bank maintained a Tier I leverage ratio
of 7.13%, a Tier I risk-based capital ratio of 8.62% and a total risk-based
capital ratio of 10.75%. The Bank's management believes that the Bank would be
categorized as well capitalized under applicable FDIC capital adequacy
regulations.
The Board of Governors of the Federal Reserve System has established similar
capital requirements for bank holding companies, on a consolidated basis.
However, these requirements only apply to bank holding companies with assets of
$500 million or more. As such, the Company is not subject to these requirements.
On October 31, 2008, the Bank issued a hybrid capital instrument in the
aggregate amount of $3.0 million in the form of subordinated debt. A portion of
this instrument qualifies as Tier II capital. The term of the debt is for a six
year period with a maturity date of November 1, 2014. The initial interest rate
was 5.00% fixed for the first year then adjusted to a variable rate equal to
prime rate for the remaining five years. The debt security is redeemable, at the
Bank's option, at par on any April 30th or October 31st through the maturity
date. For the quarter ended June 30, 2010, the rate on this instrument was
3.25%.
On February 17, 2009, the Company entered into a non-revolving line of credit
loan agreement with ACBB in an amount up to $5.0 million. The term of the debt
is for a three year period with a maturity date of February 17, 2012. The
interest rate adjusts at a variable rate equal to prime rate plus 25 basis
points with a floor of 4.25%. The Company has an outstanding balance on the line
of credit of $4.8 million and has contributed $4.4 million as additional capital
to the Bank. For the quarter ended June 30, 2010, the interest rate on this
borrowing was 4.25%.
In June 2009, the Board of Directors of the Company approved a private placement
common stock offering to accredited investors. In connection with this offering,
the Board of Directors approved the issuance of common stock purchase warrants.
As part of the offering, one warrant was issued for each share of common stock,
no par, sold in the stock offering. Each warrant issued under the offering will
allow the holder of the warrant to purchase one share of common stock, no par,
for a price of $9.00 per share through June 26, 2013. For the year ended
December 31, 2009, the Company sold 153,889 shares under this offering and
issued 153,889 common stock warrants. The $1.1 million proceeds received from
the common stock offering were recorded as additional paid in capital.
In December 2009, the Company authorized the establishment of 2,000 shares of $0
par, $1,000 stated value, Perpetual Non-Cumulative Convertible Preferred Stock.
The preferred stock is entitled to receive, as and when declared by the
Company's Board of Directors, non-cumulative cash dividends at the annual rate
equal to 7% of the stated value. In December 2009, the Company sold 1,900
preferred shares. The preferred stock is redeemable at the Company's option at
any time after six months from the issue date at the stated value plus any
dividends declared but unpaid. The preferred shares have priority of dividends
such that, no dividends or distributions shall be declared or paid to common
shareholders unless full dividends on all outstanding preferred shares have been
declared and paid for the most recently completed calendar quarter.
22
The Bank's capital ratios at June 30, 2010 and December 31, 2009 are presented
in the following table
JUNE 2010 DECEMBER 2009
--------- -------------
Shareholders' equity to total assets 5.5% 5.8%
Leverage ratio 7.1% 7.3%
Risk-based capital ratios:
Tier 1 8.6% 8.5%
Total Capital 10.8% 10.7%
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, 2010 were $53.6
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, 2010, our obligations under standby letters of credit
totaled $1.3 million.
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is based on management's ongoing evaluation of
the loan portfolio and reflects an amount considered by management to be its
best estimate of known and inherent losses in the loan portfolio. Management
considers a variety of factors when establishing the allowance, such as the
impact of current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of independent loan review and related
classifications. Our historic loss rates and the loss rates of peer financial
institutions are also considered. In addition, certain individual loans which
management has identified as problematic are specifically provided for, based
upon an evaluation of the borrower's perceived ability to pay, the estimated
adequacy of the underlying collateral and other relevant factors. Consideration
is also given to examinations performed by regulatory agencies. Although
provisions have been established and segmented by type of loan, based upon
management's assessment of their differing inherent loss characteristics, the
entire allowance for losses on loans is available to absorb loan losses in any
category.
Management uses significant estimates to determine the allowance for loan
losses. Since the allowance for loan losses is dependent, to a great extent, on
conditions that may be beyond our control, it is possible that management's
estimate of the allowance for loan losses and actual results could differ
materially in the near term.
In addition, regulatory authorities, as an integral part of their examinations,
periodically review the allowance for loan losses. They may require additions to
the allowance based upon their judgments about information available to them at
the time of examination.
23
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.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and the footnotes thereto,
presented elsewhere herein, have been prepared in accordance with the standards
of the Public Company Accounting Oversight Board (United States), which require
the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of our operations.
Unlike most industrial companies, nearly all of our assets and liabilities are
monetary. As a result, interest rates have a greater impact on our performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
The Registrant's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Registrant's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules13a-15(e)
and 15d-15(e)) as of the end of the period covered by this quarterly report,
have concluded that as of such date, the Registrant's disclosure controls and
procedures were effective to ensure at a reasonable assurance level that
material information relating to the Registrant is recorded, processed,
summarized and reported in a timely manner. There were no changes in the
Registrant's internal control over financial reporting that occurred during the
Registrant's second fiscal quarter of 2010 that have materially affected, or are
reasonably likely to materially affect, the Registrant's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, from time to time, is a party to routine litigation that arises in
the normal course of business. Management does not believe the resolution of
this litigation, if any, would have a material adverse effect on the Company's
financial condition or results of operations. However, the ultimate outcome of
any such matter, as with litigation generally, is inherently uncertain and it is
possible that some of these matters may be resolved adversely to the Company.
24
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. Reserved
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
(a) The following are filed as exhibits to this report:
31.1 Certification of Chief Executive Officer required under Section
302 of the Sarbanes - Oxley Act of 2002
31.2 Certification of Chief Financial Officer required under Section
302 of the Sarbanes - Oxley Act of 2002
32.1 Certification of Chief Executive Officer required under Section
906 of the Sarbanes - Oxley Act of 2002
32.2 Certification of Chief Financial Officer required under Section
906 of the Sarbanes - Oxley Act of 2002
25
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 12, 2010 By: /s/ George W. Matteo, Jr.
-------------------------------------
George W. Matteo, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 2010 By: /s/ Keith Winchester
-------------------------------------
Keith Winchester
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
26