SEC Form 10-Q Summary
Filing identity: The supplied filing is for Cornerstone Bancshares, Inc., not SMARTFINANCIAL INC. It covers the unaudited quarter and six months ended June 30, 2011, and was filed August 8, 2011. 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. Its business focuses on small-business, commercial, real-estate, consumer and construction lending; Eagle Financial, Inc. provides accounts-receivable financing and factoring.
Financial Condition and Results
| Metric | Three months ended June 30 | Six months ended June 30 | Change versus 2010 |
|---|---|---|---|
| Interest income | $5.160 million | $10.378 million | Down 23.4% and 25.0% |
| Net interest income before provision | $3.469 million | $6.932 million | Down 17.8% and 20.6% |
| Provision for loan losses | $15 thousand | $30 thousand | Down $1.450 million and $2.450 million |
| Noninterest income | $316 thousand | $586 thousand | Down 71.0% and 60.8% |
| Noninterest expense | $3.657 million | $7.074 million | Down 5.8% and 2.9% |
| Net income | $141 thousand | $394 thousand | Up 683.3%; down 8.8% |
| Net income available to common shareholders | $39 thousand | $199 thousand | Compared with $18 thousand and $362 thousand |
| Basic and diluted EPS | $0.01 | $0.03 | Compared with $0.00 and $0.06 |
At June 30, 2011, total assets were $441.2 million, total loans were $270.2 million, securities were $109.4 million, deposits were $334.9 million, total liabilities were $412.4 million and stockholders’ equity was $28.9 million. Cash and cash equivalents were $29.9 million.
The tax-equivalent net interest margin was 3.42% for the quarter and 3.44% for the six months, compared with 3.41% and 3.52% in the comparable 2010 periods. The quarterly interest-rate spread was 3.25%, versus 3.24%; the six-month spread was 3.27%, versus 3.33%.
Loans declined from $285.2 million at December 31, 2010 and approximately $318.8 million at June 30, 2010 to $270.2 million at June 30, 2011. The allowance for loan losses declined to $6.8 million from $9.1 million at year-end, while the allowance ratio declined to 2.52% from 3.20%. Net charge-offs for the six months were $2.348 million, consisting of $2.707 million of charge-offs and $359 thousand of recoveries.
Six-month operating cash flow was $2.0 million, compared with $2.3 million in 2010. Investing activities provided $7.3 million, while financing activities used $2.4 million. Cash and cash equivalents increased $6.9 million from year-end. Financing included $6.2 million of FHLB repayment, $1.8 million from preferred-stock issuance and $92 thousand of preferred dividends.
Material Changes and Unusual Items
- Average earning assets fell approximately $90 million, or 17.8%, in the second quarter, primarily because of the smaller loan portfolio. Management reduced higher-cost funding to preserve the net interest margin.
- Noninterest income declined substantially because of lower deposit-service charges, reduced gains on securities sales and lower gains on loan and other-asset sales. The 2010 comparison benefited from approximately $640 thousand of securities-sale gains, versus approximately $48 thousand in 2011.
- Foreclosed assets increased to $20.1 million from $12.8 million at December 31, 2010. The company recorded approximately $850 thousand of write-downs through June 30, including approximately $800 thousand related to other real estate; additional write-downs were anticipated.
- Nonperforming assets were $27.3 million, or 2.68% of loans, comprising $7.2 million of nonaccrual loans and $20.1 million of foreclosed assets. Two borrower relationships represented approximately 76% of nonaccrual loans.
- Core funding increased to $232.2 million, or 57.1% of funding, from $221.5 million, or 54.1%, at year-end. Non-core funding declined to $174.7 million, including $45.0 million of FHLB advances.
- Stockholders’ equity increased approximately $3.0 million, reflecting six-month earnings, $1.8 million of preferred-stock issuance and $896 thousand of after-tax unrealized securities gains. The bank reported a 6.09% Tier 1 leverage ratio, 9.39% Tier 1 risk-based capital ratio and 10.65% total risk-based capital ratio.
Outlook, Risks and Contingencies
Management expected to increase the loan portfolio during the remainder of 2011 and planned to originate and sell SBA-qualified loans during the third and fourth quarters. It also expected continued reductions in certificates of deposit and FHLB borrowings as assets contracted. Approximately $1.3 million of foreclosed assets were under contract for sale in the third quarter, with additional sales anticipated.
Key risks include further deterioration in borrower or real-estate values, additional loan-loss provisions, continued competition and economic weakness, interest-rate volatility, liquidity and funding pressures, and the ability to restructure the loan portfolio. Management stated that additional allowance provisions and other-real-estate write-downs could be required.
Cornerstone remained subject to an FDIC consent order dated April 2, 2010 and a Tennessee Department of Financial Institutions written agreement dated April 8, 2010. The filing identifies the ability to comply with these action plans and to raise capital needed to retire holding-company loans and maintain elevated bank capital levels as material uncertainties. The company also had approximately $3.5 million of borrowings with the FDIC as receiver for Silverton Bank, N.A.
The company requested Federal Reserve authorization to pay a scheduled $0.625-per-share Series A convertible preferred-stock dividend and was awaiting a final decision. Off-balance-sheet commitments totaled $26.1 million to extend credit and $3.1 million of standby letters of credit. Management did not expect pending legal claims to have a material effect. Disclosure controls were reported effective, with no material changes in internal control over financial reporting.
Investor Verification Priorities
- Confirm the correct issuer: the supplied filing names Cornerstone Bancshares, Inc., while the request metadata names SMARTFINANCIAL INC.
- Review compliance with the FDIC consent order and Tennessee regulatory agreement, including required capital levels and any Federal Reserve restrictions.
- Track nonperforming assets, foreclosed-property balances, collateral values and additional write-down or loan-loss exposure.
- Assess whether loan growth and planned SBA loan sales can offset declining earning assets and materially lower interest income.
- Verify the status of the requested preferred dividend, the approximately $3.5 million FDIC-related borrowing and future funding reductions.
- Evaluate the sustainability of earnings, given the sharp decline in noninterest income and the significant preferred-stock dividend requirements.