Business Context and Reporting Period
The provided filing is a Form 10-Q for the quarter ended September 30, 2014, filed November 14, 2014. The filing identifies the registrant as Cornerstone Bancshares, Inc., not SMARTFINANCIAL INC.; this entity mismatch should be verified. Cornerstone is a Tennessee bank holding company operating Cornerstone Community Bank, primarily serving Chattanooga, Tennessee, with a loan production office in Dalton, Georgia. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2014 | Comparable Period |
|---|---|---|---|
| Interest income | $4.502 million | $13.617 million | $4.760 million / $13.940 million |
| Net interest income before provision | $3.811 million | $11.477 million | $3.891 million / $11.189 million |
| Provision for loan losses | $0 | $515 thousand | $0 / $300 thousand |
| Noninterest income | $504 thousand | $1.361 million | $270 thousand / $1.323 million |
| Noninterest expense | $3.659 million | $10.335 million | $3.465 million / $10.142 million |
| Net income | $406 thousand | $1.227 million | $429 thousand / $1.277 million |
| Net income available to common shareholders | $13 thousand | $49 thousand | $36 thousand / $98 thousand |
| Basic and diluted EPS | $0.00 | $0.01 | $0.01 / $0.01 |
- Tax-equivalent net interest margin was 3.86% for the quarter and 3.89% year to date, compared with 3.89% and 3.81%, respectively, in the prior-year periods.
- At September 30, 2014, total assets were $413.4 million, gross loans were $298.4 million, securities were $78.3 million, deposits were $316.3 million, total liabilities were $373.0 million, and stockholders’ equity was $40.4 million.
- Cash and cash equivalents were $15.9 million, compared with $24.9 million at December 31, 2013.
- Federal funds purchased and securities sold under repurchase agreements totaled $27.3 million, and Federal Home Loan Bank advances and other borrowings totaled $28.0 million.
- Bank capital ratios at September 30, 2014 were 9.19% Tier 1 leverage, 12.10% Tier 1 risk-based capital, and 13.20% total risk-based capital.
- Net cash provided by operating activities was $3.1 million for the first nine months. Investing activities provided $8.3 million, while financing activities used $20.4 million, resulting in an $9.0 million decrease in cash and cash equivalents.
Material Changes Versus Prior Comparable Period
- Quarterly net income declined 5.4%, and nine-month net income declined 3.9%, primarily reflecting lower interest income and higher operating expenses.
- Quarterly interest income decreased 5.4%; year-to-date interest income decreased 2.3%. Lower loan and investment yields contributed to the decline.
- Interest expense decreased 20.4% for the quarter and 22.2% year to date, benefiting from lower deposit rates and reduced Federal Home Loan Bank funding costs.
- Net interest income before provision decreased 2.1% in the quarter but increased 2.6% year to date. The year-to-date net interest margin improved by eight basis points.
- Noninterest income increased 86.7% for the quarter, primarily because of $169 thousand of gains on securities sales. Year-to-date noninterest income increased 2.9%, including $572 thousand of securities-sale gains.
- Noninterest expense increased 5.6% for the quarter and 1.9% year to date. Salaries and benefits increased due to wage increases and stock-based compensation, while foreclosed-asset expense increased.
- Gross loans increased 3.1% from December 31, 2013 and approximately 4.9% from September 30, 2013. Construction and land-development loans declined, while commercial real estate and commercial and industrial loans increased.
- Total assets declined 4.4% from December 31, 2013, securities declined from $92.2 million to $78.3 million, and total deposits declined from $341.4 million to $316.3 million.
- Nonperforming assets declined to $14.6 million from $16.5 million at December 31, 2013 and $15.8 million at June 30, 2014. Foreclosed assets declined to $11.0 million from $12.9 million at year-end.
- The allowance for loan losses increased to $3.5 million, or 1.16% of loans, from $3.2 million, or 1.11%, at year-end. Net charge-offs were substantially lower year to date than in the prior-year period.
Outlook, Risks, Contingencies, and Unusual Items
- Management expected continued loan growth during the remainder of 2014 and anticipated continued improvement in net interest margin from loan growth and lower-cost or maturing FHLB funding.
- Management expected continued downward pressure on loan yields because of refinancing activity in a low-interest-rate environment.
- Management targeted a further reduction in foreclosed assets and anticipated approximately $1.9 million of 2014 foreclosed-asset expense, write-downs, and disposal losses.
- Over the following twelve months, approximately $18 million of FHLB advances were expected to mature. Management expected total FHLB borrowings to remain approximately $20 million to $35 million and stated that replacement funding could be obtained at lower interest cost.
- Core funding represented 60.0% of total funding at September 30, 2014, down from 66.8% at year-end; non-core funding increased to 40.0% from 33.2%. Net non-core funding dependency on time deposits of $250,000 or more was 12.83%, compared with 9.43% at year-end.
- Off-balance-sheet commitments included $46.7 million of commitments to extend credit and $305 thousand of standby letters of credit. The filing states that management did not expect pending legal claims to have a material effect.
- Key risks include deterioration in asset quality, additional loan losses, increased foreclosures, liquidity needs, reliance on non-core funding, interest-rate changes, local economic conditions, competition, regulatory requirements, the ability to realize deferred tax assets, and the need for additional capital.
- The filing states that no securities were considered other-than-temporarily impaired at September 30, 2014. However, available-for-sale securities included $345.8 thousand of gross unrealized losses, primarily attributed to interest-rate conditions.
- The Federal Reserve permitted payment of the scheduled June 30, 2014 Series A preferred-stock dividend. Preferred dividends and accretion materially reduced earnings available to common shareholders.
Facts Investors Should Verify
- Confirm the registrant identity, because the supplied metadata names SMARTFINANCIAL INC. while the filing text names Cornerstone Bancshares, Inc.
- Reconcile the very small earnings available to common shareholders with reported net income, including the $1.125 million of preferred dividends and $53.5 thousand of preferred-stock accretion for the first nine months.
- Assess liquidity in light of the $9.0 million year-to-date cash decline, the $25.1 million deposit decrease, and the 40.0% non-core funding mix.
- Monitor nonperforming assets, foreclosed-asset valuations, commercial real estate exposure, and the allowance for loan losses, particularly as management anticipated additional loan transitions and future provisions.
- Evaluate the sustainability of reported earnings excluding securities-sale gains and other asset-sale gains.
- Review the maturity and refinancing terms of FHLB advances and other borrowings, as well as the $46.7 million of unfunded credit commitments.
- Confirm capital adequacy and regulatory approval requirements for future preferred dividends or other capital actions.