SMARTFINANCIAL INC. — 2013 Third-Quarter Form 10-Q Summary
Source discrepancy: The supplied filing text identifies the registrant as Cornerstone Bancshares, Inc., not SmartFinancial Inc. The summary below reflects the supplied filing. The report covers the unaudited quarter and nine months ended September 30, 2013, with comparisons to September 30, 2012 and December 31, 2012.
Business Context and Reporting Period
Cornerstone Bancshares is a Tennessee bank holding company whose wholly owned subsidiary, Cornerstone Community Bank, provides commercial, real estate, consumer and construction lending, deposit services and related banking products primarily in Chattanooga, Tennessee, with a loan production office in Dalton, Georgia. The Bank operated five full-service offices in Hamilton County, Tennessee. The filing was signed November 14, 2013, and reported 6,547,074 common shares outstanding as of November 7, 2013.
Financial Performance and Condition
| Metric | Three Months Ended September 30, 2013 | Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2013 | Nine Months Ended September 30, 2012 |
|---|---|---|---|---|
| Total interest income | $4.760 million | $4.735 million | $13.940 million | $14.179 million |
| Net interest income before provision | $3.891 million | $3.563 million | $11.189 million | $10.475 million |
| Provision for loan losses | $0 | $0.100 million | $0.300 million | $0.100 million |
| Noninterest income | $0.270 million | $0.259 million | $1.323 million | $0.778 million |
| Noninterest expense | $3.465 million | $3.203 million | $10.142 million | $9.701 million |
| Net income | $0.429 million | $0.364 million | $1.277 million | $1.031 million |
| Net income available to common shareholders | $0.036 million | $0.039 million | $0.098 million | $0.130 million |
| Basic and diluted EPS | $0.01 | $0.01 | $0.01 | $0.02 |
- Net income increased 17.9% year over year in the third quarter and 23.9% for the first nine months.
- Net interest income before loan-loss provision increased 9.2% in the quarter and 6.8% year to date, primarily because of lower funding costs.
- Tax-equivalent net interest margin increased to 3.89% from 3.70% in the quarter and to 3.81% from 3.73% year to date. The tax-equivalent interest-rate spread was 3.73% versus 3.53% in the quarter.
- Quarterly net income available to common shareholders was limited by $375,000 of preferred dividends and $17,845 of preferred-stock discount accretion.
| Balance-Sheet Metric | September 30, 2013 | December 31, 2012 |
|---|---|---|
| Total assets | $429.7 million | $443.4 million |
| Total loans | $284.2 million | $277.0 million |
| Loans, net | $281.0 million | $270.9 million |
| Securities available for sale | $95.3 million | $76.1 million |
| Total deposits | $340.8 million | $344.9 million |
| FHLB advances and other borrowings | $26.7 million | $37.2 million |
| Total liabilities | $389.5 million | $402.6 million |
| Stockholders’ equity | $40.1 million | $40.9 million |
| Cash and cash equivalents | $21.3 million | $59.4 million |
The allowance for loan losses declined to $3.2 million from $6.1 million, or 1.11% of total loans versus 2.22% at year-end. The Bank recorded $4.5 million of charge-offs and $1.2 million of recoveries during the first nine months.
Cash Flow, Liquidity and Capital
- Operating activities provided $2.8 million of cash in the first nine months, compared with $4.0 million in the prior-year period.
- Investing activities used $26.3 million, principally reflecting $49.7 million of purchases of available-for-sale securities and $11.8 million of net loan originations and collections, partially offset by securities proceeds and $6.1 million from sales of other real estate and other assets.
- Financing activities used $14.6 million, including $10.4 million of FHLB repayment, $4.1 million of net deposit reduction and $1.1 million of preferred dividends.
- Cash and cash equivalents decreased $38.1 million to $21.3 million.
- Reported Bank capital ratios were 8.45% Tier 1 leverage, 11.72% Tier 1 risk-based capital and 12.75% total risk-based capital.
- Core funding represented 65.15% of total funding, compared with 64.4% at year-end. Management reported reduced reliance on non-core funding and was evaluating funding alternatives for future loan growth and liquidity.
Material Changes Versus Comparable Periods
- Interest expense fell 25.9% in the quarter and 25.7% year to date, reflecting lower deposit and borrowing costs and a shift toward transactional, savings and money-market accounts.
- Noninterest income increased 70.1% year to date, largely because of a $425,000 gain on the sale of securities; there was no comparable gain in 2012.
- Noninterest expense increased 8.2% in the quarter and 4.6% year to date. Foreclosed-asset expense increased 38.5% year to date to $1.3 million, while FDIC insurance expense declined 29.3%.
- Loans increased 2.6% from year-end, while deposits declined 1.2% and total assets declined 3.1%.
- Accumulated other comprehensive income declined from $1.5 million to $0.3 million, primarily because of lower unrealized securities gains and the sale of securities.
Asset Quality, Outlook and Risks
- Nonperforming assets declined to $19.0 million from $26.3 million at December 31, 2012. Nonaccrual loans declined to $4.1 million from $6.0 million, and foreclosed assets declined to $14.9 million from $20.3 million.
- The nonperforming-loan ratio was 1.44%, compared with 2.17% at year-end. Management reported approximately $1.2 million of foreclosed assets under contract for sale.
- Management recorded no third-quarter loan-loss provision, but stated that additional provisions could be required as problem assets move through the collection cycle.
- Management expected loan pricing and portfolio yields to remain under pressure in a competitive market, while pursuing loan growth and lower-cost deposit funding.
- The Bank had $34.1 million of commitments to extend credit and $392,200 of standby letters of credit at September 30, 2013.
- Management had requested Federal Reserve approval to pay a scheduled June 30, 2013 Series A preferred dividend of $0.625 per share and was awaiting a final decision. The filing also reports approximately $1.1 million of preferred dividends paid during 2013.
- Key risks include credit and asset-quality deterioration, construction and land-development exposure, foreclosed-asset values, liquidity needs, interest-rate changes, competition, regulatory requirements, access to capital, potential dilution, deferred-tax-asset realization and dependence on key personnel.
- Management stated that pending legal claims were not expected to have a material effect. Disclosure controls were deemed effective, with no material changes to internal control over financial reporting.
Investor Verification Checklist
- Confirm the registrant identity: the supplied text is a Cornerstone Bancshares, Inc. filing, despite the request identifying SmartFinancial Inc.
- Verify the status and amount of the pending Federal Reserve approval for the Series A preferred dividend.
- Assess whether the lower allowance coverage, $4.5 million of charge-offs and $19.0 million of nonperforming assets adequately reflect credit risk.
- Review the sustainability of earnings excluding the $425,000 year-to-date securities gain and the benefit from lower funding costs.
- Evaluate liquidity after the $38.1 million reduction in cash and cash equivalents and the Bank’s planned funding for loan growth.
- Review the valuation and disposition strategy for $14.9 million of foreclosed assets and the $34.1 million of unfunded credit commitments.