Cornerstone Financial Corp

The Company has certain cash requirements that are independent of the Bank, such as paying certain operating expenses and dividends on outstanding preferred stock. Historically, the Company has obtained funds through dividends paid by the Bank. At March 31, 2012, the Company had unconsolidated assets of $112 thousand (exclusive of its investment in the Bank), consisting of $101 thousand in cash and $11 thousand in prepaid assets.  If the Bank is unable to pay dividends to the Company, this may result in the Company’s inability to meet certain of its cash obligations.

At March 31, 2012, we had total assets of $383.2 million, total loans, gross of $234.3 million, total investment securities of $86.6 million and total deposits of $341.9 million compared to total assets of $383.8 million, total loans, gross of $241.9 million, total investment securities of $83.7 million and total deposits of $330.3 million at December 31, 2011. During the past two years, many of our borrowers have been adversely affected by the recession of 2008 and the subsequent slow economic recovery. As a result, we have experienced elevated levels of nonperforming assets, which have continued to increase through the first quarter of 2012. Our primary focus has turned toward managing our credit quality and capital levels while continuing to meet the credit needs of the communities served by our branches. We expect that we will not continue our historical rate of growth until the economy strengthens and our non-performing assets have returned to more normalized levels. Because of the growth in our non-performing assets, it is possible that our Federal and state regulators may decide to take a formal or informal enforcement action against the Bank. In the event of any such action, our growth may be further limited, and we may incur substantial expense in complying with any such action.

Impaired loans are measured based on the present value of expected future discounted cash flows, the fair value of the loan or the fair value of the underlying collateral if the loan is collateral dependent.  The recognition of interest income on impaired loans is the same as for non-accrual loans discussed above.

At March 31, 2012 the Company had thirty seven loan relationships totaling $23.9 million on non-accrual status compared to twenty one relationships totaling $8.9 million on non-accrual status at December 31, 2011. During the three month period ended March 31, 2012 the Company experienced a $15.0 million increase in non-accrual loans. This change reflects the downgrade of seventeen credit relationships to non-accrual status totaling $15.9 million partially offset by total charge offs of two credit relationships in the amount of $1 thousand, principal reductions on non-accrual loans of $6 thousand and one loan relationship taken into other real estate owned for $800 thousand during the three month period ended March 31, 2012. The downgraded loans consisted of eight commercial loan relationships totaling $3.3 million, four commercial real estate relationships totaling $2.6 million, six construction loan relationships totaling $9.9 million and one consumer loan relationship totaling $80 thousand. These downgrades reflect further evidence that our borrowers continue to be adversely affected by the recession of 2008 and the subsequent slow economic recovery.   

The Company has certain cash requirements that are independent of the Bank, such as paying certain operating expenses and dividends on outstanding preferred stock. Historically, the Company has obtained funds through dividends paid by the Bank. At March 31, 2012, the Company had unconsolidated assets of $112 thousand (exclusive of its investment in the Bank), consisting of $101 thousand in cash and $11 thousand in prepaid assets. Due to its recent losses and elevated levels of classified and non-performing assets, the Bank may not currently pay dividends to the Company without the prior approval of its regulators. If the Bank is unable to pay dividends to the Company, this may result in the Company’s inability to meet certain of its cash obligations. 

Our level of non-performing assets has continued to increase through the first quarter of 2012. At March 31, 2012 our non-performing assets totaled $35.4 million, or 9.25% of our total assets. As a result, we have incurred losses for 2011 and the first quarter of 2012.  This deterioration in our operations and financial condition may result in our regulators taking a formal or informal enforcement action against the Bank. Any such action may restrict our ability to grow, and result in our incurring significant additional expense to comply with the requirements of such an action. In addition, the Bank has been informed that it may not pay dividends to the Company, nor engage in transactions that would materially change the composition of the Bank’s balance sheet (including increasing assets by 5% or more), without in each case the prior approval of the Bank’s regulators. Any additional regulatory actions may adversely effect our future results of operations.