Business Context and Reporting Period
The filing is an unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The source filing identifies the registrant as Cornerstone Bancshares, Inc., not SMARTFINANCIAL INC.; this discrepancy should be verified. Cornerstone is a bank holding company whose subsidiary operates five banking offices in Hamilton County, Tennessee, and a loan production office in Dalton, Georgia.
Financial Highlights
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net interest income before provision | $3.66 million vs. $3.60 million | $7.30 million vs. $6.91 million |
| Net income | $396 thousand vs. $311 thousand | $848 thousand vs. $667 thousand |
| Net income available to common shareholders | $3 thousand vs. $15 thousand | $62 thousand vs. $92 thousand |
| Basic and diluted EPS | $0.00 vs. $0.00 | $0.01 vs. $0.01 |
| Net interest margin, taxable-equivalent basis | 3.77% vs. 3.87% | 3.79% vs. 3.73% |
| Net cash provided by operating activities | Not presented for the quarter | $1.93 million vs. $2.90 million |
- Total assets were $435.3 million at June 30, 2013, down from $443.4 million at December 31, 2012.
- Total loans were $276.1 million, compared with $277.0 million at year-end; loans net of the allowance were $271.0 million.
- Securities available for sale increased to $99.8 million from $76.1 million.
- Total deposits were $339.2 million, compared with $344.9 million at December 31, 2012.
- Cash and cash equivalents declined to $28.7 million from $59.4 million at year-end.
- Stockholders’ equity was $40.2 million, compared with $40.9 million at December 31, 2012.
- Borrowings included $22.9 million of federal funds purchased and repurchase agreements and $31.7 million of Federal Home Loan Bank advances and other borrowings.
- Reported capital ratios were 8.42% Tier 1 leverage, 11.85% Tier 1 risk-based capital, and 13.10% total risk-based capital.
Material Changes Versus Prior Comparable Period
- Six-month net income increased 27.1% to $848 thousand, while second-quarter net income increased 27.3% to $396 thousand.
- Net interest income increased despite a 2.8% six-month decline in interest income, primarily because interest expense fell 25.7% as funding costs and time-deposit rates declined.
- Noninterest income more than doubled for the first six months to $1.05 million, including a $425 thousand gain on the sale of securities. The filing states that approximately $5 million of municipal securities were liquidated.
- Noninterest expense increased 2.8% for the six months. Foreclosed-asset expense increased 46.9% to $927 thousand for the six months and 65.9% to $798 thousand for the quarter.
- The allowance for loan losses decreased to $5.1 million from $6.1 million. The allowance-to-loans ratio declined to 1.85% from 2.22%.
- Nonperforming assets declined to $25.8 million from $26.3 million at year-end, but nonaccrual loans increased to $6.9 million from $6.0 million. Foreclosed assets declined to $18.9 million from $20.3 million.
- Accumulated other comprehensive income fell to $491 thousand from $1.45 million, reflecting securities-market losses and the reclassification of realized gains.
- Cash flow was pressured by $24.2 million of investing outflows, principally purchases of available-for-sale securities, and $8.4 million of financing outflows.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects loan yields to remain under pressure in a competitive market but expects the net interest margin to improve slightly as funding costs decline.
- Management expects foreclosed-asset expense to be slightly higher than in 2012 while the Bank disposes of foreclosed properties. Approximately $2.9 million of foreclosed assets were under contract for liquidation in the third or fourth quarter of 2013.
- Management stated that no second-quarter loan-loss provision was recorded because of recoveries on previously charged-off loans; however, additional provisions may be required as problem assets move through the collection process.
- Credit exposure remains concentrated in real estate, including $36.2 million of construction and land-development loans. Nonperforming loans were 2.49% of total loans, and nonperforming assets were approximately 5.05 times the allowance for loan losses.
- The Bank had $31.4 million of commitments to extend credit and $205 thousand of standby letters of credit at June 30, 2013.
- Cornerstone requested Federal Reserve approval to pay a scheduled March 31, 2013 Series A preferred-stock dividend of $0.625 per share and was awaiting a final decision. Preferred dividends and accretion substantially reduced income available to common shareholders.
- Management identifies risks related to asset quality, loan losses, foreclosures, liquidity, interest rates, competition, local economic conditions, regulatory approvals, capital availability and dilution, realization of deferred tax assets, and regulatory changes.
- Management reported that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Most Important Facts to Verify
- Confirm the registrant’s identity and ticker because the supplied metadata names SMARTFINANCIAL INC., while the filing text identifies Cornerstone Bancshares, Inc.
- Verify Federal Reserve approval and payment status for the scheduled Series A preferred-stock dividend.
- Monitor nonaccrual loans, impaired loans, foreclosed assets, charge-offs, recoveries, and future loan-loss provisions.
- Assess liquidity after the substantial decline in cash and cash equivalents and the continued use of repurchase agreements and FHLB advances.
- Evaluate whether the $425 thousand securities gain and other asset-sale gains are recurring or nonrecurring.
- Review the sustainability of earnings available to common shareholders, which were only $62 thousand for the first six months despite $848 thousand of consolidated net income.
- Confirm the status and closing of the approximately $2.9 million of foreclosed assets reportedly under contract for sale.