8-K

UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549





FORM 8-K

CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) August 4, 2010

CORNERSTONE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Tennessee	000-30497	62-1175427
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

835 Georgia Avenue, Chattanooga, Tennessee	37343
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (423) 385-3000

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

[  ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[  ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[  ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[  ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition

On August 4, 2010, the Registrant issued a press release reporting earnings results for the fiscal quarter ended June 30, 2010.

Item 9.01 Financial Statements and Exhibits.

(c)	Exhibits
99.1	Press release dated August 4, 2010 reporting earnings results for the fiscal quarter ended June 30, 2010.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	CORNERSTONE BANCSHARES, INC.
	(Registrant)
Date:   August 4, 2010
	By:	/s/ Nathaniel F. Hughes
	Nathaniel F. Hughes,
	President and Chief Executive Officer

EX-99.1

Exhibit 99.1

Cornerstone Bancshares, Inc. Announces 2^nd Quarter 2010 Financial Results

CHATTANOOGA, Tenn.--(BUSINESS WIRE)--August 4, 2010--Cornerstone Bancshares, Inc. (OTC Bulletin Board: CSBQ) today announced the following:

Cornerstone Bancshares, Inc. (“Cornerstone”) reported positive net income for the second consecutive quarter of 2010, with a net income for 2010 of $362 thousand or $.06 per diluted share. This represents an increase of 110 percent compared to the first six months of 2009’s loss of $(3.5) million or $(0.54) per share. Cornerstone made a profit of $18,000 in net income for the second quarter of 2010, compared to a loss of $603 thousand for the same quarter of 2009. Cornerstone saw a 1.6 percent increase in its net interest margin driven by top-line interest revenue growth and lower interest expense.

Net charge-offs were $1.4 million for the second quarter of 2010, compared to $7.1 million for the second quarter of 2009. Cornerstone’s allowance for loan losses was $7.0 million or 2.2 percent of total loans as of June 30, 2010, compared to $5.9 million or 1.75 percent as of December 31, 2009. Nonperforming assets were $23.3 million or 4.4 percent of total assets at June 30, 2010, compared to $17.9 million or 3.4 percent at December 31, 2009. Since the end of the second quarter, the Bank has recovered with no loss $1.2 million from one of its non-accrual loans and expects to close the sale of a non-accrual loan in the amount of $1.5 million with no loss. The Bank has seen an increased interest in its OREO holdings and currently has $2 million under contract to close during the third quarter.

“Cornerstone continues to follow its strategic plan of reducing its risk profile by shrinking its loan portfolio, improving its loan mix and reducing its commercial real estate (CRE) concentrations,” said Cornerstone’s President and CEO Frank Hughes. “The bank has aggressively moved sub-standard CRE loans through the collection process and has ordered appraisals on these loans to accurately reflect their fair market value. This step places the Bank in a positive position to move forward once the capital campaign is completed.”

Cornerstone, in order to thrive in the new banking paradigm, has prepared a preferred stock offering in the amount of $15 million. The security will feature a 10 percent coupon, will be convertible into common stock and will have 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.

“Serving our customers, our community and all of our Cornerstone stakeholders remains our top priority,” said Cornerstone Chairman Miller Welborn. “Our Board and management team are fully committed to this charge. And we’re confident that, as the economy continues to improve, Cornerstone will continue to strengthen and move forward in a more profitable direction for the future.”

In recognition of Cornerstone’s accomplishments, Hughes, who had been serving as interim Chief Executive Officer since November of 2009, was officially appointed Chief Executive Officer in addition to his role as President, at the July Board meeting.

Cornerstone is a single-bank holding company, with $520 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.
Second Quarter Financial Highlights
June 30, 2010 and 2009
(Unaudited)
(Amounts in thousands, except per share data)	2010			2009			% Change
Balance Sheet Data at June 30
Total assets	$	523,426		$	464,499		12.7
Interest-earning assets		492,537			440,505		11.8
Loans		318,796			360,615		(11.6	)
OREO and other foreclosed assets		10,212			4,964		105.7
Deposits		400,648			337,040		18.9
Interest-bearing liabilities		91,355			92,877		(1.6	)
Shareholders' equity		29,425			32,699		(10.0	)
Loan to deposit ratio		79.57	%		106.99	%	(25.6	)
Tier 1 Leverage Ratio (Bank)		5.78	%		7.56	%	(23.5	)
Total Risk-Based Capital Ratio (Bank)		10.48	%		10.50	%	(0.2	)
Outstanding shares (000s)		6,500			6,500		0.0
Book value per share	$	4.53		$	5.03		(10.0	)
Tangible book value per share	$	4.13		$	4.64		(11.0	)
Market value per share as of June 30	$	2.15		$	5.75		(62.6	)
Loan Quality Data
Nonaccruing loans		13,084		$	13,397		(2.3	)
Loans past due 90 days – accruing		-			-		-
Net charge-offs YTD		1,418			9,594		(85.2	)
Allowance for loan losses		6,967			7,383		(5.6	)
Allowance for loan losses to total loans		2.19	%		2.05	%
Nonperforming assets to total assets		4.45	%		3.95	%
Performance Data for the First Six Months
Net income		362			(3,514	)	110.3
Return on average assets		0.27	%		-3.06	%
Return on average equity		4.98	%		-41.52	%
Net interest margin		3.52	%		3.48	%
Per share data:
Net income – basic	$	0.06		$	(0.54	)
Net income – diluted	$	0.06		$	(0.54	)
Dividends	$	-		$	0.10
Average shares (000s):
Basic		6,500			6,500
Diluted		6,500			6,500

Cornerstone Bancshares, Inc.
Loan Loss Allowance and Asset Quality Review
	2010						2009
	Second			First			Fourth			Third			Second
(Amounts in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter
Allowance for loan losses
Balance at beginning of period	$	6,760		$	5,905		$	7,398		$	7,383		$	12,885
Provision for loan losses		1,465			1,015			4,150			3,390			1,634
Net charge-offs	$	(1,258	)	$	(160	)	$	(5,643	)	$	(3,375	)	$	(7,136	)
Balance at end of period	$	6,967		$	6,760		$	5,905		$	7,398		$	7,383
As a % of loans		2.19	%		2.07	%		1.75	%		2.12	%		2.05	%
As a % of nonperforming loans		53.25	%		79.83	%		80.24	%		90.90	%		55.11	%
As a % of nonperforming assets		29.91	%		39.34	%		32.98	%		46.44	%		40.21	%
Net charge-offs as a % of loans (a)		1.58	%		0.20	%		6.70	%		3.87	%		7.92	%
Risk element assets
Nonaccruing loans	$	13,084		$	8,468		$	7,360		$	8,139		$	13,397
Loans past due 90 days – accruing		-			-			-			-			-
Total nonperforming loans		13,084			8,468			7,360			8,139			13,397
Repossessed assets		350			473			217			98			181
Other real estate owned		9,862			8,241			10,327			7,695			4,783
Total nonperforming assets	$	23,296		$	17,183		$	17,904		$	15,932		$	18,361
Loans past due 30-89 days	$	6,655		$	6,588		$	5,027		$	19,062		$	9,636
Nonperforming loans as a % of loans		4.10	%		2.60	%		2.19	%		2.33	%		3.71	%
Nonperforming assets as a % of loans and other real estate owned		7.09	%		5.14	%		5.16	%		4.47	%		5.02	%
Total Loans		318,796			325,948			336,692			349,050			360,615
(a) Annualized

Cornerstone Bancshares Inc.
Net Interest Margin Analysis
Taxable Equivalent Basis
	Three months ended
	June 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	$	321,455		$	5,494	6.86	%	$	370,524		$	6,035	6.53	%
Investment securities		151,220			1,216	3.44	%		56,849			386	2.91	%
Other earning assets		33,957			22	0.26	%		11,089			7	0.24	%
Total earning assets		506,631		$	6,732	5.39	%		438,461		$	6,428	5.90	%
Allowance for loan losses		(6,797	)						(9,326	)
Cash and other assets		29,821							30,509
TOTAL ASSETS	$	529,655						$	459,645
Liabilities and Shareholder's Equity
Interest bearing liabilities:
Interest bearing demand deposits	$	42,565		$	36	0.34	%	$	31,702		$	30	0.38	%
Savings deposits		9,090			12	0.51	%		8,101			10	0.51	%
MMDA's		21,952			52	0.95	%		28,754			70	0.97	%
Time deposits of $100,000 or more		89,648			468	2.10	%		57,502			481	3.36	%
Time deposits of $100,000 or less		210,072			1,151	2.20	%		165,234			1,388	3.37	%
Federal funds purchased and securities sold under agreements to repurchase		23,807			32	0.54	%		22,479			44	0.78	%
Other borrowings		69,833			760	4.36	%		72,454			768	4.25	%
Total interest bearing liabilities		466,968			2,511	2.16	%		386,226			2,791	2.90	%
Net interest spread				$	4,221	3.24	%				$	3,637	3.01	%
Noninterest bearing demand deposits		39,061							42,752
Accrued expenses and other liabilities		(5,480	)						(3,190	)
Shareholders' equity		29,105							33,857
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	529,655						$	459,645
Net yield on earning assets						3.41	%						3.35	%
Taxable equivalent adjustment:
Loans					0							0
Investment securities					81							26
Total adjustment					81							26

Cornerstone Bancshares, Inc.
Net Interest Margin Analysis
Taxable Equivalent Basis
	Six months ended
	June 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	$	325,715		$	11,442	7.08	%	$	377,095		$	12,477	6.67	%
Investment securities		143,072			2,346	3.52	%		54,976			800	3.12	%
Other earning assets		39,927			45	0.23	%		12,517			15	0.24	%
Total earning assets		508,714		$	13,833	5.55	%		444,588		$	13,292	6.05	%
Allowance for loan losses		(6,397	)						(9,232	)
Cash and other assets		29,653							29,469
TOTAL ASSETS	$	531,970						$	464,825
Liabilities and Shareholder's Equity
Interest bearing liabilities:
Interest bearing demand deposits	$	35,277		$	66	0.38	%	$	30,270		$	56	0.37	%
Savings deposits		8,910			23	0.51	%		7,960			20	0.51	%
MMDA's		22,830			109	0.96	%		30,893			149	0.97	%
Time deposits of $100,000 or more		84,708			895	2.13	%		58,559			1,010	3.48	%
Time deposits of $100,000 or less		218,649			2,408	2.22	%		165,425			2,854	3.48	%
Federal funds purchased and securities sold under agreements to repurchase		23,723			68	0.57	%		23,509			98	0.84	%
Other borrowings		71,063			1,539	4.37	%		71,946			1,474	4.13	%
Total interest bearing liabilities		465,160			5,107	2.21	%		388,562			5,661	2.94	%
Net interest spread				$	8,726	3.33	%				$	7,631	3.11	%
Noninterest bearing demand deposits		43,610							42,907
Accrued expenses and other liabilities		(5,688	)						(2,028	)
Shareholders' equity		28,888							35,384
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	531,970						$	464,825
Net yield on earning assets						3.52	%						3.48	%
Taxable equivalent adjustment:
Loans					0							0
Investment securities					155							50
Total adjustment					155							50

Cornerstone Bancshares Inc.
Quarterly Earnings Summary
	(Unaudited)
	2010						2009									Q2-10 /
	Second			First			Fourth			Third			Second			Q2-09
	Quarter			Quarter			Quarter			Quarter			Quarter			% Chg
Interest Income
Loans, including fees	$	5,494		$	5,948		$	5,907		$	6,018		$	6,035		(9.0	)
Investment securities		1,216			1,129			683			358			386		215.1
Other earning assets		22			24			20			30			7		210.5
Total interest income		6,732			7,101			6,610			6,406			6,428		4.7
Interest expense
Deposits		1,719			1,782			1,948			1,971			1,979		(13.1	)
Short-term borrowings		32			35			31			37			44		(27.0	)
FHLB advances and other borrowings		760			779			783			758			768		(1.1	)
Total interest expense		2,511			2,596			2,762			2,766			2,791		(10.0	)
Net interest income		4,221			4,505			3,848			3,640			3,637		16.1
Provision for loan losses		1,465			1,015			4,150			3,390			1,634		(10.3	)
Net interest income after the provision for loan losses		2,756			3,490			(302	)		250			2,003		37.6
Noninterest income
Customer Service Fees		342			342			370			417			435		(21.3	)
Other non-interest income		29			31			28			29			148		(80.4	)
Gain / (Loss) on sale of assets		439			(53	)		(1,035	)		(262	)		147		198.6
Total noninterest income		810			320			(636	)		184			730		11.0
Noninterest expense
Salaries and employee benefits		1,521			1,633			1,642			1,623			1,848		(17.7	)
Net Occupancy and equipment		369			355			371			383			388		(5.0	)
Depository Insurance		237			247			606			159			280		(100.0	)
Other operating expense		1,476			1,081			1,313			1,114			1,257		17.4
Total noninterest expense		3,603			3,317			3,931			3,279			3,773		(4.5	)
Income (loss) before income taxes		(37	)		493			(4,869	)		(2,844	)		(1,041	)	NM
Income tax (benefit) expense		(55	)		150			(1,904	)		(1,145	)		(437	)	NM
Net income (loss)	$	18		$	344		$	(2,965	)	$	(1,700	)	$	(603	)	NM
Net income (loss) per share:
Basic	$	0.00		$	0.05		$	(0.46	)	$	(0.26	)	$	(0.09	)	NM
Diluted	$	0.00		$	0.05		$	(0.46	)	$	(0.26	)	$	(0.09	)	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		0.25	%		4.80	%		-38.13	%		-20.70	%		-7.13	%	NM
Return on average assets		0.01	%		0.26	%		-2.28	%		-1.39	%		-0.52	%	NM
Net interest margin		3.41	%		3.64	%		3.24	%		3.18	%		3.35	%	NM
Average equity		29,105			28,668			31,104			32,838			33,857		(14.0	)
Average assets		529,655			534,312			519,520			488,870			459,645		15.2
Average interest-earning assets		506,631			510,386			499,047			454,058			438,461		15.5
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.
Loan Stratification
	2010			2009
	Second		% of	Second		% of	% Dollar
(Amounts in thousands)	Quarter		Total	Quarter		Total	Change
Non-residential real estate
Owner occupied	$	73,124	22.9	$	84,902	23.5	(13.9	)
Non-owner occupied		71,767	22.5		70,246	19.5	2.2
Multi-family real estate		12,957	4.1		13,479	3.7	(3.9	)
1-4 family Construction		5,671	1.8		10,894	3.0	(47.9	)
Commercial land and lot development		27,604	8.7		50,026	13.9	(44.8	)
Total non-residential real estate		191,123	60.0		229,547	63.7	(16.7	)
Residential real estate
First Mortgage – 1-4 family		41,511	13.0		42,015	11.7	(1.2	)
Second Mortgage - 1-4 family		5,165	1.6		3,570	1.0	44.7
Home equity lines		11,012	3.5		13,077	3.6	(15.8	)
Total residential real estate		57,688	18.1		58,662	16.3	(1.7	)
Total real estate loans		248,811	78.0		288,209	79.9	(13.7	)
Commercial		57,790	18.1		65,328	18.1	(11.5	)
Agricultural & other		8,522	2.7		2,387	0.7	257.0
Consumer		3,673	1.2		4,691	1.3	(21.7	)
Total loans, net of unearned fees	$	318,796	100.0	$	360,615	100.0	(11.6	)

Cornerstone Bancshares, Inc.
Consolidated Balance Sheets
		Unaudited
		June 30,		December 31,
ASSETS		2010		2009
Cash and due from banks		$	43,690,546	$	38,202,205
Securities available for sale			129,610,261		124,415,318
Securities held to maturity			114,705		135,246
Federal Home Loan Bank stock, at cost			2,322,900		2,229,200
Loans, net of allowance for loan losses of $6,967,292 at June 30, 2010 and $5,905,054 at December 31, 2009			311,828,256		330,787,382
Bank premises and equipment, net			7,659,025		8,098,059
Accrued interest receivable			1,662,436		1,520,699
Goodwill and amortizable intangibles			2,587,316		2,579,211
Foreclosed assets			10,212,411		10,327,297
Other assets			13,738,466		14,109,769
	Total Assets	$	523,426,322	$	532,404,386
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits		$	47,663,569	$	41,971,956
Interest-bearing demand deposits			36,802,797		26,533,329
Savings deposits and money market accounts			31,893,781		31,029,587
Time deposits of $100,000 or more			109,225,781		91,064,094
Time deposits of less than $100,000			175,062,529		214,143,147
Total deposits			400,648,457		404,742,113
Federal funds purchased and securities sold under agreements to repurchase			24,105,165		26,321,885
Federal Home Loan Bank advances and other borrowing			67,250,000		72,350,000
Accrued interest payable			374,582		351,360
Other liabilities			1,623,449		801,549
	Total Liabilities		494,001,653		504,566,907
Stockholders' Equity
Preferred stock - no par value; 2,000,000 shares authorized; no shares issued			-		-
Common stock - $l.00 par value; 10,000,000 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			21,199,992		21,162,686
Retained earnings			786,787		424,854
Accumulated other comprehensive income			937,494		(250,457	)
	Total Stockholders' Equity		29,424,669		27,837,479
	Total Liabilities and Stockholders' Equity	$	523,426,322	$	532,404,386

Cornerstone Bancshares, Inc.
Consolidated Statements of Income
	Unaudited							Unaudited
	Three months ended							Six months ended
	June 30							June 30
	2010			2009				2010		2009
INTEREST INCOME
Loans, including fees	$	5,493,946		$	6,035,104			$	11,442,192	$	12,477,209
Investment securities		1,216,300			386,065				2,345,579		800,126
Federal funds sold & other earning assets		21,732			6,697				45,393		14,646
Total interest income		6,731,978			6,427,866				13,833,164		13,291,981
INTEREST EXPENSE
Time deposits $100,000 or more		588,314			480,917				1,134,340		1,010,094
Other deposits		1,130,535			1,498,072				2,366,259		3,079,687
Federal funds purchased and securities sold under agreements to repurchase		32,142			43,880				67,557		97,929
FHLB advances and other borrowing		759,803			768,199				1,539,000		1,474,035
Total interest expense		2,510,794			2,791,068				5,107,156		5,661,745
Net interest income before provision for loan losses		4,221,184			3,636,798				8,726,008		7,630,236
Provision for loan losses		1,465,000			1,633,898				2,480,000		7,358,898
Net interest income after the provision for loan losses		2,756,184			2,002,900				6,246,008		271,338
NONINTEREST INCOME
Customer service fee		342,126			434,595				684,040		842,738
Other noninterest income		29,273			149,083				60,195		184,915
Net gains / (losses) from sale of loans and other assets		438,886			146,613				386,195		(34,248	)
Total noninterest income		810,285			730,291				1,130,430		993,405
NONINTEREST EXPENSE
Salaries and employee benefits		1,521,216			1,848,452				3,154,560		3,690,127
Net occupancy and equipment expense		368,506			387,897				723,689		796,836
Depository insurance		237,499			279,551		*		484,836		341,277		*
Other operating expense		1,476,201			1,257,459				2,556,818		2,237,861
Total noninterest expense		3,603,422			3,773,359				6,919,903		7,066,101
Income / (loss) before provision for income taxes		(36,953	)		(1,040,168	)			456,535		(5,801,358	)
Provision / (benefit) for income taxes		(55,099	)		(437,369	)			94,602		(2,287,056	)
NET INCOME / (LOSS)	$	18,146		$	(602,799	)		$	361,933	$	(3,514,302	)
EARNINGS / (LOSS) PER COMMON SHARE
Basic net income / (loss) per common share	$	-		$	(0.09	)		$	0.06	$	(0.54	)
Diluted net income / (loss) per common share	$	-		$	(0.09	)		$	0.06	$	(0.54	)
DIVIDENDS DECLARED PER COMMON SHARE	$	-		$	0.03			$	-	$	0.10
* Includes Special one time Assessment on June 30, 2009 in the amount of $213,151

Cornerstone Bancshares, Inc.
Consolidated Statement of Changes in Stockholders' Equity - Unaudited
For the three months ended June 30, 2010
					Additional				Other			Total
	Comprehensive		Common		Paid-in		Retained		Comprehensive			Stockholders'
	Income		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				-		37,306		-		-			37,306
Comprehensive income:
Net income	$	361,933		-		-		361,933		-			361,933
Other comprehensive income, net of tax:
Unrealized holding gains on securities available for sale, net of reclassification adjustment		1,187,951		-		-		-		1,187,951			1,187,951
Total comprehensive income	$	1,549,884
BALANCE, June 30, 2010			$	6,500,396	$	21,199,992	$	786,787	$	937,494		$	29,424,669

CONTACT:
Cornerstone Bancshares, Inc.
Frank Hughes, President and CEO, 423-385-3009