SmartFinancial (SMBK) 8-K Cornerstone Bancshares, Inc. Reports Positive Earnings for Third Quarter of 2013

Cornerstone Bancshares, Inc. Reports Positive Earnings for Third Quarter of 2013

CHATTANOOGA, Tenn. -- October 21, 2013 -- (PR Newswire) Cornerstone Bancshares, Inc. (“Cornerstone”; OTC Bulletin Board: CSBQ; CSBQP), holding company of Cornerstone Community Bank (“Bank”), today announced net income of $429,000 for the third quarter of 2013. This marks the eleventh consecutive quarter of positive earnings for Cornerstone and an increase of 17.9 percent from net income of $364,000 for the same quarter of 2012. Net income for the year increased 23.9 percent from $1,031,000 in 2012 to $1,277,000 in 2013 at quarter-end.

Quarterly financial highlights year-over-year include:

· 17.9% increase in net income

· 9.2% increase in net interest income

· 3.8% increase in total loans

· 33.3% decrease in Other Real Estate Owned (OREO)

· 37.3% decrease in total nonperforming assets

“We continue to make steady, gradual progress in nearly all sectors of the Bank,” said Cornerstone's President and Chief Executive Officer Frank Hughes. “We are especially pleased with the significant reduction of OREO and related expenses,” he said. “The key to the Bank’s success is the disposition of our nonperforming assets.”

Based on positive earnings in preceding quarters, Cornerstone continued paying its quarterly Preferred Stock dividend. The most recent payment, made on August 22, 2013, marks the tenth consecutive quarterly dividend payment since the new security was issued in the third quarter of 2010. As of December 31, 2012, Cornerstone had sold all 600,000 shares of the convertible, preferred stock, successfully raising $15 million in new capital and refortifying its capital foundation for the future.

“Cornerstone is in a solid position to grow and thrive right along with the Chattanooga community,” said Cornerstone’s Chairman Miller Welborn. “We will continue to keep a laser-sharp focus on smart business fundamentals and taking care of our customers, employees and shareholders.”

Founded in 1996, Cornerstone is a single-bank holding company, with $430 million in assets, serving the Chattanooga, Tennessee MSA, with five full-service branch locations throughout Chattanooga. Locally owned and 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.

Contact: Frank Hughes, Cornerstone President & CEO, 423-385-3009

Cornerstone Bancshares, Inc. and Subsidiary

Third Quarter Financial Highlights

September 30, 2013 and 2012

(Unaudited)

(Amounts in thousands, except per common share data)	2013			2012			% Change
Balance Sheet Data at September 30
Total assets	$	429,681		$	425,179			1.1
Interest-earning assets		400,929			391,685			2.4
Loans		284,181			273,820			3.8
Foreclosed assets		14,924			22,376			(33.3	)
Deposits		340,756			328,963			3.6
Other interest-bearing liabilities		47,249			56,555			(16.5	)
Shareholders' equity		40,150			38,128			5.3
Loan to deposit ratio		83.40	%		83.24	%		0.2
Tier 1 leverage ratio (Bank, est)		8.45	%		8.30	%		1.8
Total risk-based capital ratio (Bank, est)		12.91	%		12.84	%		0.5
Outstanding common shares		6,547			6,500			0.7
Book value per common share	$	3.86		$	3.99			(3.3	)
Tangible book value per common share	$	3.86		$	3.99			(3.3	)
Market value per common share as of September 30	$	2.45		$	1.95			25.6
Loan Quality Data
Nonaccruing loans		4,095			7,971			(48.6	)
Loans past due 90 days – accruing		-			-			-
Net charge-offs YTD		3,282			2,220			47.8
Allowance for loan losses		3,159			5,280			(40.2	)
Allowance for loan losses to total loans		1.11	%		1.93	%
Nonperforming assets to total assets		4.43	%		7.14	%
Performance Data for the Year
Net income	$	1,277		$	1,031			23.8
Return on average assets		0.40	%		0.33	%
Return on average equity		4.17	%		3.77	%
Net interest margin		3.81	%		3.73	%
Per common share data:
Net income – basic	$	0.01		$	0.02
Net income – diluted	$	0.01		$	0.02
Common dividends	$	-		$	-
Preferred dividends & accretion per common	$	0.18		$	0.14
Average shares (000s):
Basic common stock		6,547			6,500
Diluted common stock		6,675			6,559
Preferred stock (actual)		600			494

Cornerstone Bancshares, Inc. and Subsidiary

Quarterly Earnings Summary

	(Unaudited)
	2013									2012						Q3-13 /
		Third			Second			First			Fourth			Third		Q3-12
(Amounts in thousands)		Quarter			Quarter			Quarter			Quarter			Quarter		% Chg
Interest income
Loans, including fees	$	4,294		$	4,079		$	4,142		$	4,718		$	4,242			1.2
Securities and interest-bearing deposits at other financial institutions		457			482			440			440			478			(4.4	)
Federal funds sold and other earning assets		10			15			21			16			15			(36.7	)
Total interest income		4,760			4,576			4,603			5,174			4,735			0.5
Interest expense
Deposits		563			587			603			673			756			(25.6	)
Short-term borrowings		21			17			18			17			22			(2.1	)
FHLB advances and other borrowing		285			316			341			391			394			(27.7	)
Total interest expense		869			920			962			1,081			1,172			(25.8	)
Net interest income		3,891			3,656			3,641			4,093			3,563			9.2
Provision for losses		-			-			300			330			100			(100.0	)
Net interest income after the provision for loan losses		3,891			3,656			3,341			3,763			3,463			12.4
Noninterest income
Customer service fees		218			202			188			201			198			10.3
Other noninterest income		13			19			18			13			12			4.2
Gain on sale of assets		39			477			149			27			48			(18.7	)
Total noninterest income		270			698			355			241			258			4.6
Noninterest expense
Salaries and employee benefits		1,619			1,623			1,597			1,600			1,566			3.4
Net occupancy and equipment		334			340			337			408			355			(6.0	)
Depository insurance		162			161			160			121			237			(31.7	)
Foreclosed asset expense (1)		382			798			129			156			314			21.6
Other operating expense		967			780			752			1,192			731			32.3
Total noninterest expense		3,464			3,702			2,975			3,477			3,203			8.1
Income before income taxes		698			652			721			527			518			34.7
Income tax expense		268			256			269			156			154			73.8
Net income	$	429		$	396		$	452		$	371		$	364			18.1
Preferred stock dividends & accretion on preferred stock discount		393			393			393			393			325			20.8
Net income available to common		36			3			59			(22	)		39			(6.6	)
Net income per common share:
Basic	$	0.01		$	0.00		$	0.01		$	-		$	0.01			-
Diluted	$	0.01		$	0.00		$	0.01		$	-		$	0.01			-
Average basic shares		6,547			6,547			6,547			6,500			6,500			0.7
Average common diluted shares		6,693			6,671			6,671			6,503			6,503			2.9
Performance Ratios
Return on average equity		4.25	%		4.22	%		4.40	%		3.81	%		3.88	%		9.7
Return on average assets		0.40	%		0.38	%		0.42	%		0.35	%		0.35	%		14.6
Net interest margin		3.89	%		3.70	%		3.79	%		4.21	%		3.70	%		5.2
Average equity		40,382			37,501			41,135			38,926			37,501			7.7
Average assets		431,068			418,443			426,827			420,608			418,443			3.0
Average interest-earning assets		400,539			389,458			395,921			391,197			389,458			2.8

(1) Includes OREO adjustments to fair value

Cornerstone Bancshares, Inc. and Subsidiary

Loan Loss Allowance and Asset Quality Review

	2013									2012
		Third			Second			First			Fourth			Third
(Amounts in thousands)		Quarter			Quarter			Quarter			Quarter			Quarter
Allowance for loan losses
Balance at beginning of period	$	5,095		$	5,669		$	6,141		$	5,280		$	6,029
Provision for loan losses		-			-			300			330			100
Net charge-offs		(1,936	)		(574	)		(772	)		531			(849	)
Balance at end of period	$	3,159		$	5,095		$	5,669		$	6,141		$	5,280
As a % of loans		1.11	%		1.85	%		2.08	%		2.22	%		1.93	%
As a % of nonperforming loans		77.13	%		74.02	%		89.07	%		102.24	%		66.26	%
As a % of nonperforming assets		16.61	%		19.79	%		20.60	%		23.32	%		17.40	%
Net charge-offs as a % of  loans (a)		2.73	%		0.83	%		1.13	%		-0.77	%		1.24	%
Risk element assets
Accruing troubled debt restructured	$	3,121		$	3,465		$	5,442		$	5,316		$	5,328
Loans past due 30-89 days	$	1,659		$	5,111		$	4,032		$	6,594		$	3,819
Nonaccruing loans	$	4,095		$	5,864		$	6,364		$	6,005		$	7,971
Loans past due 90 days – accruing		-			-			-			-			-
Total nonperforming loans	$	4,095		$	6,883		$	6,364		$	6,005		$	7,971
Foreclosed assets (b)©	$	14,924		$	18,867		$	21,159		$	20,300		$	22,376
Total nonperforming assets		19019.225			25750			27523.237			26337			30347
Nonperforming loans as a % of loans		1.44	%		2.49	%		2.33	%		2.17	%		2.91	%
Nonperforming assets as a % of loans
and other real estate owned		6.36	%		8.73	%		9.37	%		8.86	%		10.25	%
Total loans		284,181			276,062			272,550			276,992			273,820

(a) Annualized
(b) Properties sold during 3rd Q 2013	$	3,753
(c) Properties under contract to sell	$	1,196

Cornerstone Bancshares, Inc. and Subsidiary

Net Interest Margin Analysis

Taxable Equivalent Basis

	Three months ended
	September 30
(Amounts in thousands)
Assets	2013								2012
	Average			Income/		Yield/			Average			Income/		Yield/
Earning assets:	Balance			Expense		Rate			Balance			Expense		Rate
Loans, net of unearned income	$	281,341		$	4,294		6.05	%	$	270,109		$	4,241		6.23	%
Investment securities		104,261			457		1.89	%		91,889			478		2.36	%
Other earning assets		14,937			9		0.24	%		27,460			16		0.23	%
Total earning assets		400,539		$	4,760		4.75	%		389,458		$	4,735		4.89	%
Allowance for loan losses		(3,933	)							(5,892	)
Cash and other assets		34,462								34,878
TOTAL ASSETS	$	431,068							$	418,443
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	25,388		$	10		0.16	%	$	26,357		$	21		0.32	%
Savings deposits		12,858			7		0.22	%		10,702			10		0.36	%
MMDA's		78,715			100		0.50	%		56,761			114		0.79	%
Time deposits		166,401			445		1.06	%		189,882			612		1.28	%
Federal funds purchased and securities sold under agreements to repurchase		25,102			22		0.34	%		19,471			22		0.45	%
Federal Home Loan Bank and other borrowings		29,012			285		3.90	%		37,336			394		4.19	%
Total interest-bearing liabilities		337,476			869		1.02	%		340,509			1,173		1.37	%
Net interest spread				$	3,891		3.73	%				$	3,562		3.53	%
Noninterest-bearing demand deposits		51,727								40,722
Accrued expenses and other liabilities		1,483								(288	)
Shareholders' equity		40,382								37,501
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	431,068							$	418,443
Net yield on earning assets							3.89	%							3.70	%
Taxable equivalent adjustment:
Loans					0								0
Investment securities					39								69
Total adjustment					39								69

Cornerstone Bancshares, Inc. and Subsidiary

Net Interest Margin Analysis

Taxable Equivalent Basis

	Nine months ended
	September 30
(Amounts in thousands)
Assets	2013								2012
	Average			Income/		Yield/			Average			Income/		Yield/
Earning assets:	Balance			Expense		Rate			Balance			Expense		Rate
Loans, net of unearned income	$	276,606		$	12,515		6.05	%	$	266,187		$	12,571		6.31	%
Investment securities		97,786			1,379		2.10	%		91,827			1,563		2.58	%
Other earning assets		23,232			45		0.26	%		25,535			44		0.23	%
Total earning assets		397,624		$	13,939		4.74	%		383,549		$	14,179		5.02	%
Allowance for loan losses		(5,053	)							(6,345	)
Cash and other assets		36,808								35,968
TOTAL ASSETS	$	429,379							$	413,172
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	26,477		$	46		0.23	%	$	26,526		$	65		0.33	%
Savings deposits		12,235			22		0.24	%		10,317			29		0.37	%
MMDA's		76,729			319		0.56	%		47,625			305		0.86	%
Time deposits		167,406			1,366		1.09	%		191,378			1,946		1.36	%
Federal funds purchased and securities sold under agreements to repurchase		22,330			56		0.34	%		22,309			77		0.46	%
Federal Home Loan Bank and other borrowings		31,142			941		4.04	%		39,990			1,281		4.28	%
Total interest-bearing liabilities		336,319			2,750		1.09	%		338,145			3,703		1.46	%
Net interest spread				$	11,189		3.65	%				$	10,475		3.55	%
Noninterest-bearing demand deposits		50,338								38,684
Accrued expenses and other liabilities		1,865								(163	)
Shareholders' equity		40,857								36,507
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	429,379							$	413,172
Net yield on earning assets							3.81	%							3.73	%
Taxable equivalent adjustment:
Loans					0								0
Investment securities					156								212
Total adjustment					156								212

Cornerstone Bancshares, Inc. and Subsidiary

Loan Stratification

	2013				2012
	Third		% of		Third		% of		% Dollar
(Amounts in thousands)	Quarter		Total		Quarter		Total			Change
Non-residential real estate
Owner occupied	$	66,143		23.3	$	61,229		22.4		8.0
Non-owner occupied		66,454		23.4		65,501		23.9		1.5
Multi-family real estate		8,295		2.9		8,626		3.2		(3.8	)
1-4 family construction		9,865		3.5		6,305		2.3		56.5
Commercial land and lot development		23,162		8.1		21,767		7.9		6.4
Total non-residential real estate		173,919		61.2		163,428		59.7		6.4
Residential real estate
First mortgage - 1-4 family		43,776		15.4		43,454		15.9		0.7
Second mortgage - 1-4 family		2,028		0.7		3,138		1.1		(35.4	)
Home equity lines		15,847		5.6		15,832		5.8		0.1
Total residential real estate		61,651		21.7		62,424		22.8		(1.2	)
Total real estate loans		235,570		82.9		225,852		82.5		4.3
Commercial		38,095		13.4		38,196		13.9		(0.3	)
Agricultural & other		8,381		2.9		7,533		2.8		11.3
Consumer		2,135		0.8		2,239		0.8		(4.6	)
Total loans, net of unearned fees	$	284,181		100.0	$	273,820		100.0		3.8

Cornerstone Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

	Unaudited
	September 30,			December 31,
ASSETS	2013			2012
Cash and due from banks	$	2,148,352		$	3,222,139
Interest-bearing deposits at other financial institutions		19,106,638			56,173,099
Total cash and cash equivalents		21,254,990			59,395,238
Securities available for sale		95,282,416			76,096,646
Securities held to maturity (fair value approximates
$37,589 and $46,212 at September 30, 2013 and December 31, 2012, respectively)		36,620			45,086
Federal Home Loan Bank stock, at cost		2,322,900			2,322,900
Loans, net of allowance for loan losses of
$3,158,766 and $6,141,281 at September 30, 2013 and December 31, 2012, respectively		281,021,767			270,850,465
Bank premises and equipment, net		5,094,668			5,399,340
Accrued interest receivable		1,221,841			1,213,778
Foreclosed assets		14,923,933			20,332,313
Other assets		8,522,148			7,790,634
Total assets	$	429,681,283		$	443,446,400
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits	$	54,452,293		$	60,053,838
Interest-bearing demand deposits		25,463,874			30,178,624
Savings deposits and money market accounts		90,665,979			80,994,239
Time deposits		170,174,142			173,653,892
Total deposits		340,756,288			344,880,593
Accrued interest payable		100,129			120,558
Federal funds purchased and securities sold under
agreements to repurchase		20,508,655			19,587,387
Federal Home Loan Bank advances and other borrowings		26,740,000			37,175,000
Other liabilities		1,426,357			794,026
Total liabilities		389,531,429			402,557,564
Stockholders' equity:
Preferred stock - no par value; 2,000,000 shares authorized;
600,000 shares issued and outstanding
in 2013 and 2012, respectively		14,875,081			14,821,546
Common stock - $1.00 par value; 20,000,000 shares authorized;
6,709,199 shares issued in 2013 and 2012;
6,547,074 and 6,500,396 shares outstanding in 2013 and 2012		6,547,074			6,500,396
Additional paid-in capital		21,517,620			21,390,486
Accumulated deficit		(3,110,707	)		(3,274,986	)
Accumulated other comprehensive income		320,786			1,451,394
Total stockholders' equity		40,149,854			40,888,836
Total liabilities and stockholders' equity	$	429,681,283		$	443,446,400

The Notes to Consolidated Financial Statements are an integral part of these statements.

Cornerstone Bancshares, Inc. and Subsidiary

Consolidated Statements of Income

	Unaudited				Unaudited
	Three months ended				Nine months ended
	September 30,				September 30,
	2013		2012		2013		2012
INTEREST INCOME
Loans, including fees	$	4,293,583	$	4,241,492	$	12,514,688	$	12,571,193
Investment securities		457,299		478,172		1,379,322		1,563,433
Federal funds sold & other earning assets		9,510		15,647		45,515		44,075
Total interest income		4,760,392		4,735,311		13,939,525		14,178,701
INTEREST EXPENSE
Time deposits		445,397		612,286		1,365,993		1,946,341
Other deposits		117,327		144,157		386,791		398,859
Federal funds purchased and securities    sold under agreements to repurchase		21,435		21,889		56,258		77,193
Federal Home Loan Bank advances and other borrowings		284,882		394,066		941,269		1,281,010
Total interest expense		869,041		1,172,398		2,750,311		3,703,403
Net interest income before provision for loan losses		3,891,351		3,562,913		11,189,214		10,475,298
Provision for losses		-		100,000		300,000		100,000
Net interest income after provision for loan losses		3,891,351		3,462,913		10,889,214		10,375,298
NONINTEREST INCOME
Customer service fees		218,304		197,509		608,087		602,107
Net gains from sale of securities		-		-		424,971		-
Net gains from sale of loans and other assets		39,164		48,199		240,746		124,109
Other noninterest income		12,500		12,944		48,968		51,844
Total noninterest income		269,968		258,652		1,322,772		778,060
NONINTEREST EXPENSE
Salaries and employee benefits		1,619,030		1,566,359		4,838,822		4,727,049
Net occupancy and equipment expense		333,850		354,555		1,011,335		1,038,296
Depository insurance		161,956		236,927		482,920		682,830
Foreclosed assets, net		381,847		314,088		1,308,995		945,163
Other operating expenses		967,888		731,090		2,500,107		2,307,172
Total noninterest expenses		3,464,571		3,203,019		10,142,179		9,700,510
Income before provision for income taxes		696,748		518,546		2,069,807		1,452,848
Provision for income taxes		268,200		154,300		793,100		421,500
Net income		428,548		364,246		1,276,707		1,031,348
Preferred stock dividend requirements		375,000		308,893		1,125,000		854,780
Accretion on preferred stock discount		17,845		16,370		53,535		46,079
Net income available to common shareholders	$	35,703	$	38,983	$	98,172	$	130,489
EARNINGS PER COMMON SHARE
Basic	$	0.01	$	0.01	$	0.01	$	0.02
Diluted	$	0.01	$	0.01	$	0.01	$	0.02
DIVIDENDS DECLARED PER COMMON SHARE	$	-	$	-	$	-	$	-

The Notes to Consolidated Financial Statements are an integral part of these statements.

Cornerstone Bancshares, Inc. and Subsidiary

Consolidated Statement of Changes in Stockholders' Equity - Unaudited

For the nine months ended September 30, 2013

										Accumulated
					Additional					Other			Total
	Preferred		Common		Paid-in		Accumulated			Comprehensive			Stockholders'
	Stock		Stock		Capital		Deficit			Income			Equity
BALANCE, December 31, 2012	$	14,821,546	$	6,500,396	$	21,390,486	$	(3,274,986	)	$	1,451,394		$	40,888,836
Stock compensation expense		-		-		96,793		-			-		$	96,793
Issuance of common stock		-		46,678		30,341		-			-		$	77,019
Preferred stock dividends		-		-		-		(1,058,893	)		-		$	(1,058,893	)
Accretion on preferred stock		53,535		-		-		(53,535	)		-			-
Net income		-		-		-		1,276,707			-		$	1,276,707
Unrealized holding gains (losses) on securities available for sale, net of reclassification adjustment and taxes		-		-		-		-			(1,130,608	)	$	(1,130,608	)
BALANCE, September 30, 2013	$	14,875,081	$	6,547,074	$	21,517,620	$	(3,110,707	)	$	320,786		$	40,149,854

The Notes to Consolidated Financial Statements are an integral part of these statements.