Business Context and Reporting Period
The submitted filing is a quarterly Form 10-Q for the period ended September 30, 2011. The filing text identifies the registrant as Cornerstone Bancshares, Inc., not SMARTFINANCIAL INC.; this entity mismatch should be verified. Cornerstone is a Tennessee bank holding company whose principal subsidiary, Cornerstone Community Bank, serves the Chattanooga, Tennessee market and operates a loan production office in Dalton, Georgia. The Bank focuses on small-business and commercial lending, while its subsidiary Eagle Financial provides accounts receivable financing and factoring services. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 |
|---|---|---|
| Total interest income | $5.1 million | $15.5 million |
| Net interest income before provision | $3.6 million | $10.5 million |
| Provision for loan losses | $115 thousand | $145 thousand |
| Net interest income after provision | $3.5 million | $10.4 million |
| Noninterest income | $323 thousand | $909 thousand |
| Noninterest expense | $3.1 million | $10.2 million |
| Net income | $524 thousand | $917 thousand |
| Net income available to common shareholders | $392 thousand | $591 thousand |
| Basic and diluted EPS | $0.06 | $0.09 |
Tax-equivalent net interest margin was 3.69% for the third quarter and 3.51% for the nine-month period. The net interest spread was 3.49% and 3.33%, respectively. Total assets were $426.4 million at September 30, 2011, including $270.4 million of loans, $93.7 million of securities and $32.9 million of cash and cash equivalents. Total deposits were $322.6 million and stockholders’ equity was $32.4 million.
Borrowings included $26.1 million of federal funds purchased and repurchase agreements and $43.0 million of Federal Home Loan Bank advances and other borrowings. Cash provided by operating activities was $3.1 million, cash provided by investing activities was $25.4 million, and cash used in financing activities was $18.6 million. Cash and cash equivalents increased by $10.0 million to $32.9 million during the nine months.
Material Changes Versus Comparable Periods
- Third-quarter net income increased 145% to $524 thousand from $214 thousand; nine-month net income increased 59% to $917 thousand from $576 thousand.
- Interest income declined 14% in the quarter and 22% year to date, primarily reflecting reduced earning assets and loan balances.
- Interest expense declined 31% in the quarter and 32% year to date as the Bank reduced funding costs, time deposits and FHLB borrowings.
- Net interest income before provision decreased 4% in the quarter and 16% year to date, but the lower loan-loss provision improved net interest income after provision by 13% and 11%, respectively.
- Noninterest income declined 77% in the quarter and 69% year to date, primarily because 2010 included substantial securities-sale gains. Securities-sale gains were $60 thousand in the quarter and $107 thousand year to date, compared with $1.1 million and $1.7 million in the comparable 2010 periods.
- Noninterest expense declined 27% in the quarter and 12% year to date, reflecting lower salaries, foreclosed-asset expense, FDIC insurance and other operating costs.
- Total loans declined to $270.4 million from $285.2 million at December 31, 2010. The allowance for loan losses declined to $6.9 million from $9.1 million, and the allowance ratio declined to 2.54% from 3.20%.
- Nonperforming assets were $26.8 million, including $8.6 million of nonaccrual loans and $18.3 million of foreclosed assets, versus $26.4 million at year-end 2010. Nonperforming loans were 3.17% of total loans versus 4.78% at year-end.
- Stockholders’ equity increased $6.6 million, primarily from $4.6 million of preferred-stock issuance, $917 thousand of net income and a $1.4 million increase in unrealized securities gains.
Outlook, Regulatory Matters, Risks and Unusual Items
- The Bank remained subject to an FDIC consent order and a Tennessee Department of Financial Institutions written agreement. Management reported substantial compliance, but the plans require enhanced capital, liquidity, credit administration, asset-quality and reporting measures and remain effective until formally terminated.
- The Bank was also designated as being in “troubled condition” under a Federal Reserve letter. Federal Reserve approval is required for specified indebtedness, dividends, stock redemptions, capital reductions and certain management or directorship changes.
- Management’s strategic plan targeted reducing assets to approximately $405 million and loans to approximately $295 million by December 31, 2011 to improve regulatory capital ratios. Management also stated an intention to increase lending during the remainder of 2011 and in 2012, funded by cash and liquidation of floating-rate securities.
- The Bank had Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of 6.65%, 9.86% and 11.12%, respectively, at September 30, 2011.
- Management anticipated additional write-downs of foreclosed real estate during the remainder of 2011 and into 2012 because of declining real-estate values. Approximately $1.2 million of write-downs had been recorded through September 30, 2011.
- Management expected additional foreclosed-asset sales and reported approximately $500 thousand under contract for sale in the fourth quarter. Troubled debt restructurings performing at the restructuring date totaled $2.5 million at September 30, 2011, versus $948 thousand at year-end 2010.
- Off-balance-sheet exposure included $27.7 million of commitments to extend credit and $2.6 million of standby letters of credit.
- Key risks included borrower deterioration, real-estate values, loan losses, competition, economic conditions, interest-rate changes, liquidity, regulatory compliance, capital raising and the ability to restructure the loan portfolio.
- The company had approximately $3 million of outstanding borrowings with the FDIC as receiver for Silverton Bank, N.A. The filing states that pending legal claims were not expected to have a material effect.
Important Facts for Investors to Verify
- Registrant identity: Verify whether this filing belongs to SMARTFINANCIAL INC. because the source text consistently identifies Cornerstone Bancshares, Inc. and Cornerstone Community Bank.
- Regulatory status: Confirm current compliance with, and termination status of, the FDIC consent order, Tennessee written agreement and Federal Reserve restrictions.
- Capital adequacy: Reconcile the reported capital ratios with applicable regulatory minimums and any heightened requirements under the action plans.
- Credit quality: Monitor nonaccrual loans, impaired loans, troubled debt restructurings, foreclosed assets, charge-offs and the adequacy of the allowance for loan losses.
- Liquidity and funding: Review reliance on large time deposits, repurchase agreements and FHLB advances, as well as planned balance-sheet reductions.
- Preferred-stock obligations: Verify the amount outstanding, 10% annual dividend requirement, required regulatory approvals and its effect on earnings available to common shareholders.
- Outlook assumptions: Assess whether planned loan growth, foreclosed-asset sales, real-estate recoveries and additional capital raising were achieved after the reporting date.