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

CHATTANOOGA, Tenn.—(PR Newswire) – July 29, 2013 -- Cornerstone Bancshares, Inc. (OTC Bulletin Board: CSBQ; CSBQP) today announced the following:

Cornerstone Bancshares, Inc. (“Cornerstone”), parent company of Cornerstone Community Bank (“Bank”), reported continued positive earnings for the second quarter of 2013, with a net income of approximately $396,000 for the quarter ended June 30, 2013. This marks the tenth consecutive quarter of positive earnings for Cornerstone and represents a 27.5 percent increase in net income year-over-year.

Average assets grew 4.3 percent and the return on average assets increased 22 percent for the quarter, compared with the same quarter the previous year. Average equity increased 12.7 percent, and the return on average equity increased 16.3 percent. Market value per common share was $2.01 as of June 30, 2013, a 14.9 percent increase in value over the previous year.

Other improvements year-over-year at quarter’s end include:

· Increase in total assets

· Increase in total loans

· Increase in total deposits

· Increase in net interest margin

“We definitely have some positive momentum, and things are continuing to trend in the right direction,” said Cornerstone’s President Frank Hughes. “Our main priorities for the immediate future are focusing on core Chattanooga relationships and loan growth.”

Founded in 1996, Cornerstone is a single-bank holding company, with $435 million in assets, serving the Chattanooga, Tennessee MSA, with five full-service branch locations 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.

Contact:

N. Frank Hughes

President & CEO

423-385-3009

Cornerstone Bancshares, Inc. and Subsidiary

Second Quarter Financial Highlights

June 30, 2013 and 2012

(Unaudited)

(Amounts in thousands, except per common share data)	2013			2012			% Change
Balance Sheet Data at June 30
Total assets	$	435,334		$	420,874			3.4
Interest-earning assets		403,917			387,995			4.1
Loans		276,062			263,749			4.7
Foreclosed assets		18,867			22,144			(14.8	)
Deposits		339,199			321,740			5.4
Other interest-bearing liabilities		54,647			60,909			(10.3	)
Shareholders' equity		40,234			36,759			9.5
Loan to deposit ratio		81.39	%		81.98	%		(0.7	)
Tier 1 leverage ratio (Bank, est)		8.36	%		8.24	%		1.5
Total risk-based capital ratio (Bank, est)		13.05	%		13.11	%		(0.5	)
Outstanding common shares		6,547			6,500			0.7
Book value per common share	$	3.88		$	3.96			(2.1	)
Tangible book value per common share	$	3.88		$	3.96			(2.1	)
Market value per common share as of June 30	$	2.01		$	1.75			14.9
Loan Quality Data
Nonaccruing loans		5,864			7,124			(17.7	)
Loans past due 90 days – accruing		-			-			-
Net charge-offs YTD		1,346			1,371			(1.8	)
Allowance for loan losses		5,095			6,029			(15.5	)
Allowance for loan losses to total loans		1.85	%		2.29	%
Nonperforming assets to total assets		5.68	%		6.95	%
Performance Data for the Year
Net income	$	848		$	667			27.1
Return on average assets		0.39	%		0.32	%
Return on average equity		4.22	%		3.63	%
Net interest margin		3.79	%		3.73	%
Per common share data:
Net income – basic	$	0.01		$	0.01
Net income – diluted	$	0.01		$	0.01
Common dividends	$	-		$	-
Preferred dividends & accretion	$	786		$	576
Average shares (000s):
Basic common stock		6,547			6,500
Diluted common stock		6,665			6,581
Preferred stock (actual)		600			448

Cornerstone Bancshares, Inc. and Subsidiary

Quarterly Earnings Summary

	(Unaudited)
	2013						2012									Q2-13 /
		Second			First			Fourth			Third			Second			Q2-12
(Amounts in thousands)		Quarter			Quarter			Quarter			Quarter			Quarter			% Chg
Interest income
Loans, including fees	$	4,079		$	4,142		$	4,718		$	4,242		$	4,186			(2.5	)
Securities and interest-bearing deposits at other financial institutions		482			440			440			478			618			(22.0	)
Federal funds sold and other earning assets		15			21			16			15			13			9.3
Total interest income		4,576			4,603			5,174			4,735			4,817			(5.0	)
Interest expense
Deposits		587			603			673			756			768			(23.6	)
Short-term borrowings		17			18			17			22			23			(27.4	)
FHLB advances and other borrowing		316			341			391			394			426			(25.8	)
Total interest expense		920			962			1,081			1,172			1,217			(24.5	)
Net interest income		3,656			3,641			4,093			3,563			3,600			1.6
Provision for loan losses		-			300			330			100			-			N/A
Net interest income after the
provision for loan losses		3,656			3,341			3,763			3,463			3,600			1.6
Noninterest income
Customer service fees		201			188			201			198			207			(2.8	)
Other noninterest income		19			18			13			12			19			0.2
Gain on sale of assets		477			149			27			48			26			1,718.8
Total noninterest income		697			355			241			258			252			176.7
Noninterest expense
Salaries and employee benefits		1,623			1,597			1,600			1,566			1,570			3.4
Net occupancy and equipment		340			337			408			355			348			(2.4	)
Depository insurance		161			160			121			237			207			(22.1	)
Foreclosed asset expense (1)		798			129			156			314			481			66.1
Other operating expense		780			752			1,192			731			817			(4.5	)
Total noninterest expense		3,702			2,975			3,477			3,203			3,423			8.1
Income before income taxes		652			721			527			518			429			52.0
Income tax expense		256			269			156			154			118			116.9
Net income	$	396		$	452		$	371		$	364		$	311			27.3
Preferred stock dividends & accretion on preferred stock discount		393			393			393			325			296			32.8
Net income / (loss) available to common		3			59			(22	)		39			15			(79.8	)
Net income / (loss) per common share:
Basic	$	0.00		$	0.01		$	-		$	0.01		$	-			-
Diluted	$	0.00		$	0.01		$	-		$	0.01		$	-			-
Average basic shares		6,547			6,547			6,500			6,500			6,500			0.7
Average common diluted shares		6,671			6,671			6,503			6,503			6,581			1.4
Performance Ratios
Return on average equity		3.86	%		4.40	%		3.81	%		3.88	%		3.42	%		12.9
Return on average assets		0.37	%		0.42	%		0.35	%		0.35	%		0.30	%		22.0
Net interest margin		3.77	%		3.79	%		4.21	%		3.70	%		3.87	%		(2.6	)
Average equity		41,065			41,135			38,926			37,501			36,423			12.7
Average assets		430,196			426,827			420,608			418,443			412,305			4.3
Average interest-earning assets		395,517			395,921			391,197			389,458			380,631			3.9

(1) Includes OREO adjustments to fair value

Cornerstone Bancshares, Inc. and Subsidiary

Loan Loss Allowance and Asset Quality Review

	2013						2012
		Second			First			Fourth			Third			Second
(Amounts in thousands)		Quarter			Quarter			Quarter			Quarter			Quarter
Allowance for loan losses
Balance at beginning of period	$	5,669		$	6,141		$	5,280		$	6,029		$	6,024
Provision for loan losses		-			300			330			100			-
Net charge-offs		(574	)		(772	)		531			(849	)		5
Balance at end of period	$	5,095		$	5,669		$	6,141		$	5,280		$	6,029
As a % of loans		1.85	%		2.08	%		2.22	%		1.93	%		2.29	%
As a % of nonperforming loans		86.88	%		89.38	%		102.24	%		66.26	%		84.63	%
As a % of nonperforming assets		20.60	%		20.61	%		23.32	%		17.40	%		20.60	%
Net charge-offs as a % of  loans (a)		0.83	%		1.13	%		-0.77	%		1.24	%		-0.01	%
Risk element assets
Accruing troubled debt restructured	$	3,465		$	5,442		$	5,316		$	5,328		$	2,775
Loans past due 30-89 days	$	4,867		$	4,732		$	6,534		$	3,685		$	2,495
Nonaccruing loans	$	5,864		$	6,342		$	6,006		$	7,968		$	7,124
Loans past due 90 days – accruing		-			-			-			-			-
Total nonperforming loans	$	5,864		$	6,342		$	6,006		$	7,968		$	7,124
Repossessed assets		-			-			32			39			83
Other real estate owned (b)(c)	$	18,867		$	21,159		$	20,300		$	22,337		$	22,061
Total nonperforming assets	$	24,731		$	27,501		$	26,338		$	30,344		$	29,268
Nonperforming loans as a % of loans		2.12	%		2.33	%		2.17	%		2.91	%		2.70	%
Nonperforming assets as a % of loans
and other real estate owned		8.39	%		9.36	%		8.86	%		10.25	%		10.24	%
Total loans		276,062			272,550			276,992			273,820			263,749

(a) Annualized
(b) Properties sold during 2nd Q 2013	$	2,438
(c) Properties under contract to sell	$	2,907

Cornerstone Bancshares, Inc. and Subsidiary

Net Interest Margin Analysis

Taxable Equivalent Basis

	Three months ended
	June 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	$	272,718		$	4,079		6.00	%	$	262,598		$	4,186		6.39	%
Investment securities		102,164			482		2.13	%		94,949			618		2.91	%
Other earning assets		20,635			15		0.28	%		23,084			13		0.23	%
Total earning assets		395,517		$	4,576		4.70	%		380,631		$	4,817		5.15	%
Allowance for loan losses		(5,315	)							(6,028	)
Cash and other assets		39,994								37,702
TOTAL ASSETS	$	430,196							$	412,305
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	25,640		$	16		0.24	%	$	28,332		$	23		0.33	%
Savings deposits		12,214			8		0.25	%		10,387			9		0.36	%
MMDA's		77,206			108		0.56	%		46,639			101		0.87	%
Time deposits		167,078			455		1.09	%		189,169			635		1.35	%
Federal funds purchased and securities
sold under agreements to repurchase		20,752			17		0.32	%		21,198			23		0.44	%
Federal Home Loan Bank and other borrowings		31,740			316		3.99	%		40,028			426		4.27	%
Total interest-bearing liabilities		334,630			920		1.10	%		335,751			1,217		1.45	%
Net interest spread				$	3,657		3.60	%				$	3,600		3.70	%
Noninterest-bearing demand deposits		52,401								40,829
Accrued expenses and other liabilities		2,100								(698	)
Shareholders' equity		41,065								36,423
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY	$	430,196							$	412,305
Net yield on earning assets							3.77	%							3.87	%
Taxable equivalent adjustment:
Loans					0								0
Investment securities					60								71
Total adjustment					60								71

Cornerstone Bancshares, Inc. and Subsidiary

Net Interest Margin Analysis

Taxable Equivalent Basis

	Six months ended
	June 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	$	274,199		$	8,221		6.05	%	$	264,205		$	8,330		6.36	%
Investment securities		94,495			922		2.27	%		91,795			1,085		2.70	%
Other earning assets		26,668			36		0.27	%		24,913			28		0.23	%
Total earning assets		395,362		$	9,179		4.75	%		380,913		$	9,443		5.07	%
Allowance for loan losses		(5,622	)							(6,574	)
Cash and other assets		38,780								36,169
TOTAL ASSETS	$	428,521							$	410,508
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	27,031		$	35		0.26	%	$	26,611		$	44		0.33	%
Savings deposits		11,919			15		0.25	%		10,123			19		0.38	%
MMDA's		75,719			219		0.58	%		43,006			192		0.90	%
Time deposits		167,919			921		1.11	%		192,139			1,334		1.40	%
Federal funds purchased and securities
sold under agreements to repurchase		20,920			35		0.34	%		23,744			55		0.47	%
Federal Home Loan Bank and other borrowings		32,224			656		4.11	%		41,331			887		4.33	%
Total interest-bearing liabilities		335,732			1,881		1.13	%		336,954			2,532		1.52	%
Net interest spread				$	7,298		3.62	%				$	6,912		3.56	%
Noninterest-bearing demand deposits		49,632								37,654
Accrued expenses and other liabilities		2,058								(105	)
Shareholders' equity		41,099								36,005
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY	$	428,521							$	410,508
Net yield on earning assets							3.79	%							3.73	%
Taxable equivalent adjustment:
Loans					0								0
Investment securities					142								142
Total adjustment					142								142

Cornerstone Bancshares, Inc. and Subsidiary

Loan Stratification 

	2013				2012
	Second		% of		Second		% of		% Dollar
(Amounts in thousands)		Quarter	Total		Quarter		Total		Change
Non-residential real estate
Owner occupied	$	61,292		22.2	$	60,068		22.8		2.0
Non-owner occupied		67,240		24.4		61,671		23.4		9.0
Multi-family real estate		7,451		2.7		10,279		3.9		(27.5	)
1-4 family construction		8,269		3.0		5,477		2.1		51.0
Commercial land and lot development		21,332		7.7		17,210		6.5		24.0
Total non-residential real estate		165,584		60.0		154,705		58.7		7.0
Residential real estate
First mortgage - 1-4 family		43,282		15.7		42,333		16.1		2.2
Second mortgage - 1-4 family		2,129		0.8		3,252		1.2		(34.5	)
Home equity lines		14,483		5.2		16,180		6.1		(10.5	)
Total residential real estate		59,894		21.7		61,765		23.4		(3.0	)
Total real estate loans		225,478		81.7		216,470		82.1		4.2
Commercial		40,586		14.7		36,765		13.9		10.4
Agricultural & other		7,994		2.9		8,528		3.2		(6.3	)
Consumer		2,004		0.7		1,986		0.8		0.9
Total loans, net of unearned fees	$	276,062		100.0	$	263,749		100.0		4.7

Cornerstone Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

	Unaudited
	June 30,			December 31,
ASSETS	2013			2012
Cash and due from banks	$	1,600,127		$	3,222,139
Interest-bearing deposits at other financial institutions		27,100,735			56,173,099
Total cash and cash equivalents		28,700,862			59,395,238
Securities available for sale		99,777,449			76,096,646
Securities held to maturity (fair value approximates
$43,630 and $46,212 at June 30, 2013 and December 31, 2012, respectively)		40,014			45,086
Federal Home Loan Bank stock, at cost		2,322,900			2,322,900
Loans, net of allowance for loan losses of
$5,094,740 and $6,141,281 at June 30, 2013 and December 31, 2012 respectively		270,967,656			270,850,465
Bank premises and equipment, net		5,183,270			5,399,340
Accrued interest receivable		1,152,927			1,213,778
Foreclosed assets		18,866,526			20,332,313
Other assets		8,322,485			7,790,634
Total assets	$	435,334,089		$	443,446,400
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits	$	60,094,019		$	60,053,838
Interest-bearing demand deposits		24,613,914			30,178,624
Savings deposits and money market accounts		90,452,881			80,994,239
Time deposits		164,038,451			173,653,892
Total deposits		339,199,265			344,880,593
Accrued interest payable		93,464			120,558
Federal funds purchased and securities sold under
agreements to repurchase		22,907,064			19,587,387
Federal Home Loan Bank advances and other borrowings		31,740,000			37,175,000
Other liabilities		1,160,021			794,026
Total liabilities		395,099,814			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,		14,857,236			14,821,546
Common stock - $1.00 par value; 20,000,000 shares authorized and
6,709,199 shares issued in 2013 and 2012;
6,547,074 and 6,500,396 shares outstanding in 2013 and 2012, respectively		6,547,074			6,500,396
Additional paid-in capital		21,485,355			21,390,486
Retained deficit		(3,146,410	)		(3,274,986	)
Accumulated other comprehensive income		491,020			1,451,394
Total stockholders' equity		40,234,275			40,888,836
Total liabilities and stockholders' equity	$	435,334,089		$	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 Month Ended				Six Month Ended
	June 30,				June 30,
	2013		2012		2013		2012
INTEREST INCOME
Loans, including fees	$	4,079,369	$	4,185,757	$	8,221,105	$	8,329,701
Investment securities		482,117		618,255		922,023		1,085,261
Federal funds sold & other earning assets		14,533		13,341		36,005		28,428
Total interest income		4,576,019		4,817,353		9,179,133		9,443,390
INTEREST EXPENSE
Time deposits		455,340		634,961		920,596		1,334,055
Other deposits		131,534		133,459		269,464		254,702
Federal funds purchased and securities
sold under agreements to repurchase		16,743		23,074		34,823		55,304
FHLB advances and other borrowings		315,948		425,737		656,387		886,944
Total interest expense		919,565		1,217,231		1,881,270		2,531,005
Net interest income before provision for loan losses		3,656,454		3,600,122		7,297,863		6,912,385
Provision for loan losses		-		-		300,000		-
Net interest income after provision for loan losses		3,656,454		3,600,122		6,997,863		6,912,385
NONINTEREST INCOME
Customer service fee		201,302		207,164		389,783		404,598
Net gains from sale of securities		424,971		-		424,971		-
Net gains from sale of loans and other assets		52,382		26,246		201,582		75,910
Other noninterest income		18,650		18,612		36,468		38,900
Total noninterest income		697,305		252,022		1,052,804		519,408
NONINTEREST EXPENSE
Salaries and employee benefits		1,622,501		1,569,555		3,219,792		3,160,690
Net occupancy and equipment expense		339,606		347,928		677,485		683,741
Depository insurance		161,120		206,866		320,964		409,649
Foreclosed assets, net		798,456		480,755		927,148		631,075
Other operating expense		780,045		818,255		1,532,219		1,612,336
Total noninterest expense		3,701,728		3,423,359		6,677,608		6,497,491
Income before provision for income taxes		652,031		428,785		1,373,059		934,302
Provision for income taxes		256,000		118,200		524,900		267,200
Net income		396,031		310,585		848,159		667,102
Preferred stock dividend requirements		375,000		280,031		750,000		545,887
Accretion on preferred stock discount		17,845		15,241		35,690		29,709
Net income available to common shareholders	$	3,186	$	15,313	$	62,469	$	91,506
EARNINGS PER COMMON SHARE
Basic net income per common share	$	-	$	-	$	0.01	$	0.01
Diluted net income per common share	$	-	$	-	$	0.01	$	0.01
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 six months ended June 30, 2013

										Accumulated
					Additional					Other			Total
	Preferred		Common		Paid-in		Retained			Comprehensive			Stockholders'
	Stock		Stock		Capital		Earnings (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						64,528								64,528
Issuance of common stock		-		46,678		30,341		-			-			77,019
Preferred stock dividends		-		-		-		(683,893	)		-			(683,893	)
Accretion on preferred stock		35,690		-		-		(35,690	)		-			-
Net income		-		-		-		848,159			-			848,159
Unrealized holding gains (losses) on securities available for sale,
net of reclassification adjustment and taxes		-		-		-		-			(960,374	)		(960,374	)
BALANCE, June 30, 2013
	$	14,857,236	$	6,547,074	$	21,485,355	$	(3,146,410	)	$	491,020		$	40,234,275

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