Cornerstone Bancshares, Inc. Announces 3rd Quarter 2010 Financial Results

CHATTANOOGA, Tenn.--(BUSINESS WIRE)--Cornerstone Bancshares, Inc. (OTC Bulletin Board: CSBQ) today announced the following:

“I’m pleased with the progress we’ve made this year, given the aggressive steps we’ve taken to improve asset quality and clean up the balance sheet”

Cornerstone Bancshares, Inc. (“Cornerstone”) reported positive net income of $214,000 for the third quarter of 2010, compared to a loss of $(1.7) million for the same quarter of 2009. This brings Cornerstone’s net income for the year to $576,000 or $0.09 per diluted share, an increase of 111 percent compared to the loss of $(5.2) million or $(0.80) per share during the first nine months of 2009.

Cornerstone saw a 3.2 percent increase in its net interest income for the three months ended September 30, 2010, driven by the reduction of interest expense. Past-due loans decreased to $1.5 million at the end of the third quarter 2010, the lowest level in more than two years, which is a leading indicator of asset quality improvement. Net charge-offs were $1.4 million for the third quarter of 2010, compared to $3.4 million for the third quarter of 2009. Cornerstone’s allowance for loan losses was $6.3 million or 2.2 percent of total loans as of September 30, 2010, compared to $5.9 million or 1.75 percent as of December 31, 2009. Nonperforming assets were $23.7 million or 4.9 percent of total assets at September 30, 2010, compared to $17.9 million or 3.4 percent at December 31, 2009. Since the end of the third quarter, Cornerstone Community Bank (“the Bank”) has sold, with no loss, $1.3 million in other real estate owned. The Bank is aggressively acting to originate loans, in order to support its strategic plan of reducing its risk profile and improving its loan stratification. These steps place the Bank in a positive position to move forward as the capital campaign progresses.

Cornerstone launched a Preferred Stock Offering in the amount of $15 million in the third quarter of 2010. The security features a 10 percent coupon, is convertible into common stock and has a cumulative dividend. The preferred stock will not be converted until five years and a 50 percent increase in common stock value over the preferred stock’s strike price.

“I’m pleased with the progress we’ve made this year, given the aggressive steps we’ve taken to improve asset quality and clean up the balance sheet,” said Cornerstone’s Miller Welborn, who took the helm as Chairman of the Board in November of 2009. “If two quarters make a trend, then a third straight quarter of positive earnings certainly suggests we’re making strides in the right direction.”

Cornerstone is a single-bank holding company, with $480 million in assets, serving the Chattanooga, Tennessee MSA, with five branches throughout Chattanooga and one loan production office in Dalton, Georgia. Locally owned and locally operated, Cornerstone specializes in providing a comprehensive range of customized financial solutions for businesses and individuals.

Certain of the statements made in this release may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements, including statements regarding the intent, belief or current expectations of Cornerstone and its management regarding the company’s strategic directions, prospects and future results, involve certain risks and uncertainties. Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including economic and other conditions in the markets in which Cornerstone operates, governmental regulations, the company’s competitive environment, cyclical and seasonal fluctuations in its operating results, and other risks discussed in Cornerstone’s Form 10-K and other filings with the Securities and Exchange Commission.

Cornerstone Bancshares, Inc. and Subsidiary
Third Quarter Financial Highlights
September 30, 2010 and 2009
(Unaudited)
(Amounts in thousands, except per share data)	2010			2009			% Change
Balance Sheet Data at September 30
Total assets	$	483,351		$	509,499		(5.1	)
Interest-earning assets		459,720			483,843		(5.0	)
Loans		292,046			349,050		(16.3	)
Foreclosed assets		13,427			7,793		72.3
Deposits		351,367			386,088		(9.0	)
Interest-bearing liabilities		98,947			90,486		9.3
Shareholders' equity		30,965			31,304		(1.1	)
Loan to deposit ratio		83.12	%		90.41	%	(8.1	)
Tier 1 Leverage Ratio (Bank)		6.20	%		7.56	%	(18.0	)
Total Risk-Based Capital Ratio (Bank)		11.32	%		10.50	%	7.8
Outstanding shares (000s)		6,500			6,500		0.0
Book value per share	$	4.76		$	4.82		(1.1	)
Tangible book value per share	$	4.37		$	4.42		(1.3	)
Market value per share as of September 30	$	1.55		$	2.65		(41.5	)
Loan Quality Data
Nonaccruing loans		10,491		$	8,139		28.9
Loans past due 90 days – accruing		-			-		-
Net charge-offs YTD		2,795			12,969		(78.4	)
Allowance for loan losses		6,271			7,398		(15.2	)
Allowance for loan losses to total loans		2.15	%		2.12	%
Nonperforming assets to total assets		4.95	%		3.13	%
Performance Data for the First Nine Months
Net income		576			(5,214	)	111.0
Return on average assets		0.15	%		-1.47	%
Return on average equity		2.61	%		-20.14	%
Net interest margin		3.45	%		3.44	%
Per share data:
Net income – basic	$	0.09		$	(0.80	)
Net income – diluted	$	0.09		$	(0.80	)
Dividends	$	-		$	0.10
Average shares (000s):
Basic		6,500			6,500
Diluted		6,500			6,500

Cornerstone Bancshares, Inc. and Subsidiary
Loan Loss Allowance and Asset Quality Review
	2010									2009
	Third			Second			First			Fourth			Third			Second
(Amounts in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter			Quarter
Allowance for loan losses
Balance at beginning of period	$	6,967		$	6,760		$	5,905		$	7,398		$	7,383		$	12,885
Provision for loan losses		681			1,465			1,015			4,150			3,390			1,634
Net charge-offs	$	(1,377	)	$	(1,258	)	$	(160	)	$	(5,643	)	$	(3,375	)	$	(7,136	)
Balance at end of period	$	6,271		$	6,967		$	6,760		$	5,905		$	7,398		$	7,383
As a % of loans		2.15	%		2.19	%		2.07	%		1.75	%		2.12	%		2.05	%
As a % of nonperforming loans		61.26	%		53.47	%		79.83	%		80.24	%		90.90	%		55.11	%
As a % of nonperforming assets		26.50	%		29.98	%		39.34	%		32.98	%		46.44	%		40.21	%
Net charge-offs as a % of loans (a)		1.89	%		1.58	%		0.20	%		6.70	%		3.87	%		7.92	%
Risk element assets
Nonaccruing loans	$	10,237		$	13,030		$	8,468		$	7,360		$	8,139		$	13,397
Loans past due 90 days – accruing		-			-			-			-			-			-
Total nonperforming loans		10,237			13,030			8,468			7,360			8,139			13,397
Repossessed assets		285			350			473			217			98			181
Other real estate owned (b)(c)(d)		13,142			9,862			8,241			10,327			7,695			4,783
Total nonperforming assets	$	23,664		$	23,242		$	17,182		$	17,904		$	15,932		$	18,361
Loans past due 30-89 days	$	1,500		$	6,655		$	6,588		$	5,027		$	19,062		$	9,636
Nonperforming loans as a % of loans		3.51	%		4.09	%		2.60	%		2.19	%		2.33	%		3.71	%
Nonperforming assets as a % of loans and other real estate owned		7.75	%		7.07	%		5.14	%		5.16	%		4.47	%		5.02	%
Total Loans		292,046			318,796			325,948			336,692			349,050			360,615
(a) Annualized
(b) Properties sold since quarter-end	$	1,250
(c) Properties rented	$	2,400
(d) Properties under contract to sell	$	1,300

Cornerstone Bancshares Inc. and Subsidiary
Net Interest Margin Analysis
Taxable Equivalent Basis
	Three months ended
	September 30
(Amounts in thousands)
Assets	2010							2009
	Average			Income/		Yield/		Average			Income/		Yield/
Earning assets:	Balance			Expense		Rate		Balance			Expense		Rate
Loans, net of unearned income	$	305,743		$	5,160	6.70	%		354,246		$	6,018	6.74	%
Investment securities		116,930			754	2.82	%		54,335			358	2.83	%
Other earning assets		35,540			19	0.22	%		45,477			31	0.25	%
Total earning assets		458,213		$	5,933	5.20	%		454,058		$	6,407	5.62	%
Allowance for loan losses		(6,655	)						(6,703	)
Cash and other assets		37,213							41,515
TOTAL ASSETS	$	488,771						$	488,870
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits	$	31,858		$	25	0.31	%	$	25,236		$	20	0.31	%
Savings deposits		9,547			12	0.50	%		8,317			10	0.48	%
MMDA's		22,961			56	0.97	%		23,246			56	0.96	%
Time deposits of $100,000 or more		86,697			539	2.47	%		64,511			477	2.93	%
Time deposits of $100,000 or less		183,507			847	1.83	%		207,530			1,408	2.69	%
Federal funds purchased and securities sold under agreements to repurchase		23,256			32	0.55	%		18,897			37	0.78	%
Other borrowings		62,612			665	4.21	%		72,350			758	4.16	%
Total interest bearing liabilities		420,438			2,176	2.05	%		420,087			2,766	2.61	%
Net interest spread				$	3,757	3.15	%				$	3,641	3.01	%
Noninterest bearing demand deposits		36,875							39,490
Accrued expenses and other liabilities		1,103							(3,544	)
Shareholders' equity		30,355							32,838
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY	$	488,771						$	488,871
Net yield on earning assets						3.36	%						3.21	%
Taxable equivalent adjustment:
Loans					0							0
Investment securities					77							29
Total adjustment					77							29

Cornerstone Bancshares, Inc. and Subsidiary
Net Interest Margin Analysis
Taxable Equivalent Basis
	Nine months ended
	September 30
(Amounts in thousands)
Assets	2010							2009
	Average			Income/		Yield/		Average			Income/		Yield/
Earning assets:	Balance			Expense		Rate		Balance			Expense		Rate
Loans, net of unearned income	$	318,985		$	16,602	6.96	%	$	369,394		$	18,496	6.69	%
Investment securities		134,262			3,099	3.09	%		54,757			1,158	3.02	%
Other earning assets		39,634			65	0.22	%		17,169			45	0.27	%
Total earning assets		492,881		$	19,766	5.42	%		441,320		$	19,699	5.99	%
Allowance for loan losses		(6,484	)						(8,379	)
Cash and other assets		31,015							39,984
TOTAL ASSETS	$	517,412						$	472,925
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits	$	34,125		$	91	0.36	%	$	28,574		$	77	0.36	%
Savings deposits		9,124			35	0.51	%		8,080			31	0.51	%
MMDA's		22,875			164	0.96	%		28,316			205	0.97	%
Time deposits of $100,000 or more		85,378			1,673	2.62	%		60,565			1,534	3.39	%
Time deposits of $100,000 or less		206,806			3,016	1.95	%		179,614			4,214	3.14	%
Federal funds purchased and securities sold under agreements to repurchase		23,565			99	0.56	%		21,955			135	0.82	%
Other borrowings		68,215			2,205	4.32	%		72,082			2,232	4.14	%
Total interest bearing liabilities		450,088			7,283	2.16	%		399,186			8,428	2.82	%
Net interest spread				$	12,483	3.26	%				$	11,271	3.17	%
Noninterest bearing demand deposits		41,341							41,756
Accrued expenses and other liabilities		(3,399	)						(2,539	)
Shareholders' equity		29,382							34,522
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY	$	517,412						$	472,925
Net yield on earning assets						3.45	%						3.44	%
Taxable equivalent adjustment:
Loans					0							0
Investment securities					232							80
Total adjustment					232							80

Cornerstone Bancshares Inc. and Subsidiary
Quarterly Earnings Summary
	(Unaudited)
	2010									2009						Q3-10 /
	Third			Second			First			Fourth			Third			Q3-09
(Amounts in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter			% Chg
Interest Income
Loans, including fees	$	5,160		$	5,494		$	5,948		$	5,907		$	6,018		(14.3	)
Investment securities		754			1,216			1,129			683			358		110.7
Other earning assets		19			22			24			20			31		(37.8	)
Total interest income		5,933			6,732			7,101			6,610			6,407		(7.4	)
Interest expense
Deposits		1,478			1,719			1,782			1,948			1,971		(25.0	)
Short-term borrowings		32			32			35			31			37		(14.6	)
FHLB advances and other borrowings		666			760			779			783			758		(12.1	)
Total interest expense		2,176			2,511			2,596			2,762			2,766		(21.3	)
Net interest income		3,757			4,221			4,505			3,848			3,641		3.2
Provision for loan losses		681			1,465			1,015			4,150			3,390		(79.9	)
Net interest income after the provision for loan losses		3,076			2,756			3,490			(302	)		251		1,124.9
Noninterest income
Customer Service Fees		309			342			342			370			417		(26.0	)
Other non-interest income		34			29			31			29			29		15.6
Gain / (Loss) on sale of assets		544			439			(53	)		(1,035	)		(262	)	(307.8	)
Total noninterest income		887			810			320			(636	)		184		381.3
Noninterest expense
Salaries and employee benefits		1,525			1,521			1,633			1,642			1,623		(6.0	)
Net Occupancy and equipment		397			369			355			371			383		3.7
Depository Insurance		386			237			247			606			159		(100.0	)
Other operating expense		1,372			1,476			1,081			1,312			1,114		23.2
Total noninterest expense		3,680			3,603			3,316			3,931			3,279		12.2
Income (loss) before income taxes		283			(37	)		494			(4,869	)		(2,844	)	NM
Income tax (benefit) expense		69			(55	)		150			(1,904	)		(1,144	)	NM
Net income (loss)	$	214		$	18		$	344		$	(2,965	)	$	(1,700	)	NM
Net income (loss) per share:
Basic	$	0.03		$	-		$	0.05		$	(0.46	)	$	(0.26	)	NM
Diluted	$	0.03		$	-		$	0.05		$	(0.46	)	$	(0.26	)	NM
Average basic shares (000s) (1)		6,500			6,500			6,500			6,500			6,500		NM
Average diluted shares (000s) (1)		6,500			6,500			6,500			6,500			6,500		NM
Performance Ratios
Return on average equity		2.81	%		0.25	%		4.80	%		-38.13	%		-20.70	%	NM
Return on average assets		0.17	%		0.01	%		0.26	%		-2.28	%		-1.39	%	NM
Net interest margin		3.36	%		3.41	%		3.64	%		3.24	%		3.18	%	NM
Average equity		30,355			29,105			28,668			31,104			32,838		(7.6	)
Average assets		488,771			529,655			534,312			519,520			488,870		(0.0	)
Average interest-earning assets		458,213			506,631			510,386			499,047			454,058		0.9
NM=Not Material
(1) The 2009 average number of common shares outstanding have been retroactively adjusted to reflect two stock dividends that occurred during 2009.

Cornerstone Bancshares, Inc. and Subsidiary
Loan Stratification
	2010			2009
(Amounts in thousands)	Third		% of	Third		% of	% Dollar
	Quarter		Total	Quarter		Total	Change
Non-residential real estate
Owner occupied	$	68,998	23.6	$	78,895	22.6	(12.5	)
Non-owner occupied		65,091	22.3		76,883	22.0	(15.3	)
Multi-family real estate		12,871	4.4		12,839	3.7	0.2
1-4 family construction		4,320	1.5		7,203	2.1	(40.0	)
Commercial land and lot development		22,162	7.6		49,264	14.1	(55.0	)
Total non-residential real estate		173,442	59.4		225,084	64.5	(22.9	)
Residential real estate
First Mortgage – 1-4 family		41,753	14.3		43,123	12.4	(3.2	)
Second Mortgage - 1-4 family		4,709	1.6		3,302	0.9	42.6
Home equity lines		10,113	3.5		11,469	3.3	(11.8	)
Total residential real estate		56,575	19.4		57,894	16.6	(2.3	)
Total real estate loans		230,017	78.8		282,978	81.1	(18.7	)
Commercial		50,127	17.2		59,293	17.0	(15.5	)
Agricultural & other		8,581	2.9		2,447	0.7	250.7
Consumer		3,321	1.1		4,332	1.2	(23.3	)
Total loans, net of unearned fees	$	292,046	100.0	$	349,050	100.0	(16.3	)

Cornerstone Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
	Unaudited
	September 30,		December 31,
ASSETS	2010		2009
Cash and due from banks	$	53,220,651	$	38,202,205
Securities available for sale		108,790,555		124,415,318
Securities held to maturity		101,340		135,246
Federal Home Loan Bank stock, at cost		2,322,900		2,229,200
Loans, net of allowance for loan losses of $6,271,114 at September 30, 2010 and $5,905,054 at December 31, 2009		285,774,624		330,787,382
Bank premises and equipment, net		8,235,095		8,098,059
Accrued interest receivable		1,456,314		1,520,699
Goodwill and amortizable intangibles		2,582,994		2,579,211
Foreclosed assets		13,427,436		10,327,297
Other assets		7,439,529		14,109,769
Total Assets	$	483,351,438	$	532,404,386
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits	$	38,609,397	$	41,971,956
Interest-bearing demand deposits		25,102,235		26,533,329
Savings deposits and money market accounts		32,158,476		31,029,587
Time deposits of $100,000 or more		105,575,691		91,064,094
Time deposits of less than $100,000		149,921,029		214,143,147
Total deposits		351,366,828		404,742,113
Federal funds purchased and securities sold under agreements to repurchase		37,181,597		26,321,885
Federal Home Loan Bank advances and other borrowing		61,765,000		72,350,000
Accrued interest payable		370,922		351,360
Other liabilities		1,702,461		801,549
Total Liabilities		452,386,808		504,566,907
Stockholders' Equity
Preferred stock - no par value; 2,000,000 shares authorized; 61,740 shares issued and outstanding in 2010		1,424,173		-
Common stock - $l.00 par value; 20,000,000 shares authorized; 6,709,199 issued in 2010 and 2009; 6,500,396 outstanding in 2010 and 2009		6,500,396		6,500,396
Additional paid-in capital		21,218,645		21,162,686
Retained earnings		1,000,461		424,854
Accumulated other comprehensive income		820,955		(250,457	)
Total Stockholders' Equity		30,964,630		27,837,479
Total Liabilities and Stockholders' Equity	$	483,351,438	$	532,404,386

Cornerstone Bancshares, Inc. and Subsidiary
Consolidated Statements of Income
	Unaudited					Unaudited
	Three months ended					Nine months ended
	September 30					September 30
	2010		2009			2010			2009
INTEREST INCOME
Loans, including fees	$	5,159,963	$	6,018,409		$	16,602,155	$	18,495,619
Investment securities		753,783		357,677			3,099,362		1,157,803
Federal funds sold & other earning assets		19,289		30,439			64,682		45,085
Total interest income		5,933,035		6,406,525			19,766,199		19,698,507
INTEREST EXPENSE
Time deposits $100,000 or more		538,963		476,611			1,673,303		1,534,269
Other deposits		939,412		1,494,434			3,305,671		4,526,554
Federal funds purchased and securities sold under agreements to repurchase		31,649		37,227			99,206		135,157
FHLB advances and other borrowing		665,961		757,682			2,204,961		2,231,717
Total interest expense		2,175,985		2,765,954			7,283,141		8,427,697
Net interest income before provision for loan losses		3,757,050		3,640,571			12,483,058		11,270,810
Provision for loan losses		681,000		3,390,000			3,161,000		10,748,898
Net interest income after the provision for loan losses		3,076,050		250,571			9,322,058		521,912
NONINTEREST INCOME
Customer service fee		308,579		416,908			992,619		1,259,646
Other noninterest income		33,931		29,343			94,126		170,314
Net gains / (losses) from sale of loans and other assets		544,318		(262,019	)		930,513		(252,323	)
Total noninterest income		886,828		184,232			2,017,258		1,177,637
NONINTEREST EXPENSE
Salaries and employee benefits		1,525,311		1,622,766			4,679,871		5,331,916
Net occupancy and equipment expense		397,461		382,601			1,121,150		1,176,735
Depository insurance *		385,722		182,459			915,365		570,191
Other operating expense		1,371,409		1,091,130			3,883,420		3,266,214
Total noninterest expense		3,679,903		3,278,956			10,599,806		10,345,056
Income / (loss) before provision for income taxes		282,975		(2,844,153	)		739,510		(8,645,507	)
Provision / (benefit) for income taxes		69,301		(1,144,617	)		163,903		(3,431,673	)
NET INCOME / (LOSS)	$	213,674	$	(1,699,536	)	$	575,607	$	(5,213,834	)
EARNINGS / (LOSS) PER COMMON SHARE
Basic net income / ( loss) per common share	$	0.03	$	(0.26	)	$	0.09	$	(0.80	)
Diluted net income / (loss) per common share	$	0.03	$	(0.26	)	$	0.09	$	(0.80	)
DIVIDENDS DECLARED PER COMMON SHARE	$	-	$	-		$	-	$	0.10
* Includes Special one time Assessment on June 30, 2009 in the amount of $213,151

Cornerstone Bancshares, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity - Unaudited
For the nine months ended September 30, 2010
							Additional				Other			Total
	Comprehensive		Preferred		Common		Paid-in		Retained		Comprehensive			Stockholders'
	Income		Stock		Stock		Capital		Earnings		Income			Equity
BALANCE, December 31, 2009			$	-	$	6,500,396	$	21,162,686	$	424,854	$	(250,457	)	$	27,837,479
Employee compensation stock option expense						-		55,959		-		-			55,959
Issuance of Series A Convertible Preferred Stock				1,424,173				-		-		-			1,424,173
Comprehensive income:
Net income	$	575,607		-		-		-		575,607		-			575,607
Other comprehensive income, net of tax:
Unrealized holding gains on securities available for sale, net of reclassification adjustment		1,071,412		-		-		-		-		1,071,412			1,071,412
Total comprehensive income	$	1,647,019
BALANCE, September 30, 2010			$	1,424,173	$	6,500,396	$	21,218,645	$	1,000,461	$	820,955		$	30,964,630

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