Business Context and Reporting Period
The filing is an unaudited Form 10-Q for the quarter ended March 31, 2014. The source text identifies the registrant as Cornerstone Bancshares, Inc., not SmartFinancial Inc.; this company-name discrepancy should be verified. Cornerstone is a Tennessee bank holding company whose subsidiary, Cornerstone Community Bank, operates five full-service offices in Hamilton County, Tennessee, and a loan production office in Dalton, Georgia.
Key Financial Metrics
| Metric | Q1 2014 / March 31, 2014 | Comparable / Prior Period |
|---|---|---|
| Total assets | $429.0 million | $432.2 million at December 31, 2013 |
| Total loans | $293.0 million | $289.4 million at December 31, 2013 |
| Deposits | $341.7 million | $341.4 million at December 31, 2013 |
| Stockholders’ equity | $40.7 million | $40.1 million at December 31, 2013 |
| Net income | $412,151 | $452,128 in Q1 2013 |
| Net income available to common shareholders | $19,305 | $59,283 in Q1 2013 |
| Basic and diluted EPS | $0.00 | $0.01 in Q1 2013 |
| Net interest income before provision | $3.81 million | $3.64 million in Q1 2013 |
| Net interest margin, tax-equivalent basis | 3.90% | 3.79% in Q1 2013 |
| Net interest spread, tax-equivalent basis | 3.72% | 3.62% in Q1 2013 |
| Operating cash flow | $845,112 | $1.03 million in Q1 2013 |
| Ending cash and cash equivalents | $21.9 million | $35.9 million at March 31, 2013 |
Material Changes Versus Prior Comparable Period
- Net income declined 8.9% to $412,151, while income available to common shareholders declined approximately 67.4% because preferred dividend requirements and accretion consumed most earnings.
- Interest income declined 1.5% to $4.53 million, but interest expense fell 24.8% to $723,000. The resulting net interest income increased 4.6% to $3.81 million.
- The loan-loss provision declined 45.0% to $165,000, increasing net interest income after provision by 9.1% to $3.65 million.
- Noninterest income decreased 9.3% to approximately $322,000. Q1 2014 included a $102,272 gain on securities sales, while Q1 2013 included substantially higher gains from loan and other asset sales.
- Noninterest expense increased 10.9% to $3.30 million, driven by higher salaries and employee benefits and a 170.5% increase in foreclosed-asset expense.
- Loans increased $3.5 million from year-end 2013, primarily in commercial real estate, consumer real estate, and commercial and industrial lending. Construction and land-development loans declined $8.8 million.
- The allowance for loan losses declined to $3.01 million from $3.20 million, and the allowance-to-loans ratio declined to 1.03% from 1.11% at year-end 2013.
- Nonperforming assets increased to $17.34 million from $16.49 million at December 31, 2013, although they were down from $25.75 million at June 30, 2013. Foreclosed assets declined to $12.56 million from $12.93 million at year-end.
- Cash and cash equivalents decreased $2.9 million during the quarter, principally because of a $3.9 million use of cash in financing activities, including a $4.1 million reduction in repurchase agreement and federal-funds funding.
Debt, Liquidity, Capital, Outlook, and Risks
- Total borrowings included approximately $26.7 million of Federal Home Loan Bank advances and other borrowings on the balance sheet; management separately reports approximately $1.7 million of outstanding borrowings at March 31, 2014 in this category. The filing should be reviewed to reconcile these descriptions.
- Approximately $15 million of FHLB advances were scheduled to mature over the following 12 months. Management expected FHLB borrowings to remain approximately $20 million to $30 million and indicated that maturing advances could be replaced at lower interest cost.
- Capital ratios at March 31, 2014 were 8.87% Tier 1 leverage, 12.13% Tier 1 risk-based capital, and 13.11% total risk-based capital.
- Management expected continued downward pressure on loan yields from refinancing and market conditions, partially offset by loan growth. Management believed the net interest margin could improve through higher loan balances and reductions in FHLB advances.
- Management targeted a net reduction of approximately $5 million in foreclosed assets during the remainder of 2014 and budgeted approximately $1.2 million of foreclosed-asset expense and write-downs for 2014.
- Key risks include deterioration in asset quality, increased loan losses, additional foreclosures, the concentration of residential construction and land-development lending, interest-rate changes, local economic conditions, liquidity needs, competition, regulatory requirements, the ability to raise capital, and realization of deferred tax assets.
- Off-balance-sheet commitments totaled $27.7 million of commitments to extend credit and $374,000 of standby letters of credit. Management stated that pending legal claims were not expected to have a material effect.
- The company had a $1.74 million cash-secured promissory note due March 27, 2015, bearing interest at 2.00% annually. The note could become immediately due upon specified defaults, including a material adverse change or a change in ownership of 25% or more of common stock.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material change in market-risk assumptions or results was reported since December 31, 2013.
Most Important Facts to Verify
- Confirm the registrant identity: the supplied metadata states SmartFinancial Inc., while the filing text repeatedly identifies Cornerstone Bancshares, Inc. and Cornerstone Community Bank.
- Reconcile the reported $26.7 million balance-sheet amount for FHLB advances and other borrowings with management’s separate statement that outstanding borrowings were approximately $1.7 million.
- Assess the sustainability of earnings because preferred dividends of $375,000 reduced $412,151 of net income to only $19,305 available to common shareholders.
- Evaluate credit exposure, including $17.34 million of nonperforming assets, $12.56 million of foreclosed assets, $10.48 million of impaired loans, and the 1.03% allowance-to-loans ratio.
- Review the assumptions supporting the planned $1.2 million of 2014 foreclosed-asset expense and the targeted $5 million reduction in foreclosed assets.
- Confirm the maturity and refinancing plan for approximately $15 million of FHLB advances and the adequacy of $21.9 million in cash and cash equivalents.
- Review the effect of the $102,272 securities-sale gain and elevated foreclosed-asset costs on the quarter’s recurring profitability.