Business Context and Reporting Period
The filing is an unaudited Form 10-Q for the quarter ended March 31, 2013, filed May 15, 2013. The filing identifies the registrant as Cornerstone Bancshares, Inc., a Tennessee bank holding company, rather than SMARTFINANCIAL INC. Its wholly owned bank operated five full-service offices in the Chattanooga, Tennessee market and a loan production office in Dalton, Georgia.
The company provides commercial, real estate, consumer, construction and other banking services. The filing states that 6,547,074 common shares were outstanding as of May 1, 2013.
Financial Performance and Condition
| Metric | Q1 2013 / March 31, 2013 | Comparable / Prior Period |
|---|---|---|
| Total interest income | $4.60 million | $4.63 million in Q1 2012 |
| Net interest income before provision | $3.64 million | $3.31 million in Q1 2012 |
| Provision for loan losses | $300,000 | None in Q1 2012 |
| Total noninterest income | $355,000 | $267,000 in Q1 2012 |
| Total noninterest expense | $2.98 million | $3.07 million in Q1 2012 |
| Income before taxes | $721,000 | $506,000 in Q1 2012 |
| Net income | $452,000 | $357,000 in Q1 2012 |
| Net income available to common stockholders | $59,000 | $76,000 in Q1 2012 |
| Basic and diluted EPS | $0.01 | $0.01 in Q1 2012 |
| Net interest margin, taxable-equivalent basis | 3.79% | 3.59% in Q1 2012 |
| Net interest spread, taxable-equivalent basis | 3.62% | 3.43% in Q1 2012 |
| Net cash provided by operating activities | $770,000 | $1.40 million in Q1 2012 |
| Cash and cash equivalents | $35.90 million | $59.40 million at December 31, 2012 |
| Total assets | $431.71 million | $443.45 million at December 31, 2012 |
| Total loans | $272.55 million | $276.99 million at December 31, 2012 |
| Total deposits | $336.90 million | $344.88 million at December 31, 2012 |
| Stockholders' equity | $40.89 million | $40.89 million at December 31, 2012 |
Material Changes Versus Comparable Periods
- Net income increased 27.0% year over year, but common-stockholder earnings declined because preferred dividends and preferred-stock accretion increased to $392,845 from $280,324.
- Net interest income before the loan-loss provision increased 9.9%, primarily because interest expense declined 26.8% as Federal Home Loan Bank borrowings decreased and funding shifted from certificates of deposit toward transactional accounts.
- Interest income was broadly stable despite lower asset yields. Average earning assets increased by approximately $17 million, while the loan yield declined to 6.09% from 6.27%.
- Noninterest income increased 33.0%, primarily due to higher net gains on loan and other asset sales, including a $100,000 fee from the sale of an SBA 7(a) loan.
- Noninterest expense declined 3.2%, reflecting lower FDIC insurance, other operating expense and foreclosed-asset expense; salaries and occupancy costs were substantially stable.
- Total assets declined $11.7 million from year-end 2012. Cash and equivalents declined $23.5 million, while securities available for sale increased $15.0 million to $91.1 million.
- Total loans declined $4.4 million, and the allowance for loan losses declined to $5.67 million from $6.14 million after $1.00 million of charge-offs, $232,000 of recoveries and a $300,000 provision.
- Nonperforming assets increased to $27.52 million from $26.34 million at December 31, 2012, primarily because foreclosed assets increased to $21.16 million and nonaccrual loans increased to $6.36 million.
- Core funding represented 65.8% of total funding at March 31, 2013, compared with 64.4% at year-end 2012. Non-core funding declined to $132.8 million from $142.3 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected loan portfolio yields to continue declining but anticipated maintaining revenue by growing the loan portfolio. It expected the balance sheet to remain stable or increase slightly and cash to convert into loans.
- Management estimated approximately $250,000 of loan fees from future SBA 7(a) loan sales during 2013.
- Management anticipated approximately $1.2 million of foreclosed-asset expense and write-downs during 2013 and targeted a reduction of foreclosed assets of approximately $6 million during the remainder of the year.
- Management expected further reductions in Federal Home Loan Bank advances and anticipated lower FDIC insurance expense as regulatory status improved.
- Management expected nonaccrual loans to decline but also anticipated $2 million to $3 million of charge-offs related to several large impaired loans that were fully provided for in the allowance.
- Credit risks remain significant. The portfolio included $17.73 million of impaired loans, $8.70 million of troubled-debt restructurings and $21.16 million of foreclosed assets. Management stated that additional loan-loss provisions could be required as problem assets move through collection.
- Liquidity and funding risks include deposit outflows, reliance on short-term liabilities, interest-rate changes and the ability to access borrowings. Cash and equivalents declined materially during the quarter, and the company had $21.15 million of repurchase and federal-funds obligations plus $31.74 million of FHLB advances and other borrowings.
- The Bank reported capital ratios of 8.56% Tier 1 leverage, 12.07% Tier 1 risk-based capital and 13.32% total risk-based capital.
- Payment of a scheduled $0.625-per-share Series A preferred dividend required Federal Reserve approval, which remained pending at the filing date. No common dividends were declared.
- Off-balance-sheet commitments totaled $33.4 million of commitments to extend credit and $3.3 million of standby letters of credit.
- The company identified risks involving asset quality, construction and land-development lending, foreclosures, liquidity, competition, local economic conditions, interest rates, regulatory requirements, capital access, dilution, deferred-tax-asset realization and the effect of preferred stock on common earnings.
- Seven agency mortgage-backed securities had unrealized losses totaling $140,000. Management did not consider them other-than-temporarily impaired.
- Disclosure controls were assessed as effective, and management reported no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the registrant identity: the supplied filing is for Cornerstone Bancshares, Inc., not SMARTFINANCIAL INC.
- Assess whether the $452,000 of net income adequately supports preferred dividends and accretion, leaving only $59,000 available to common stockholders.
- Review trends in nonperforming assets, impaired loans, troubled-debt restructurings, foreclosed assets and the allowance coverage ratio.
- Evaluate the sustainability of earnings improvements driven by lower funding costs, securities activity and the SBA loan-sale fee.
- Reconcile the substantial quarterly decrease in cash and cash equivalents with securities purchases, debt repayments and deposit changes.
- Confirm the status of Federal Reserve approval for the Series A preferred dividend and any related dividend restrictions.
- Review the bank-level capital ratios, borrowing capacity, liquidity sources and the potential exposure from off-balance-sheet commitments.