SMARTFINANCIAL INC. - FORM 8-K - EX-99.1 - EXHIBIT 99.1

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8-K - FORM 8-K - SMARTFINANCIAL INC.	v237719_8k.htm

Cornerstone Bancshares, Inc. Announces 3rd Quarter 2011 Financial Results

CHATTANOOGA, Tenn.—(PR Newswire)—October 20, 2011—Cornerstone Bancshares, Inc. (OTC Bulletin Board: CSBQ) today announced the following:

Cornerstone Bancshares, Inc. (“Cornerstone”) of Chattanooga, TN, parent company of Cornerstone Community Bank (the “Bank”), reported positive net income of $524,000 for the third quarter of 2011, an increase of 145 percent compared with $214,000 during the third quarter of 2010. This marks a third consecutive quarter of positive earnings for Cornerstone, bringing the company’s net income for the year to $917,000 or $0.09 per diluted Common share, an increase of 59 percent compared with $576,000 during the first nine months of 2010.

“I’m extremely pleased with the progress made thus far and where we stand today,” said Cornerstone’s President Frank Hughes. “At every level and in every department, our Cornerstone team has really pulled together and put forth the effort to help us regain our solid earnings footprint and return to greater profitability.”

Cornerstone’s increase in net income was driven by several factors: First, net interest income remained relatively stable quarter over previous year’s quarter, with only a four percent decrease in its net interest income. Second, Cornerstone’s loan portfolio asset quality stabilized, and only a minor loan loss provision was required. Third, the Bank saw a material reduction in non-interest expense that offset last year’s securities gains. Cornerstone’s nonperforming assets decreased slightly and show signs of significant improvement as a large percentage of the Bank’s non-accruing loans will finish the collection process in the next two quarters. Past-due loans remained below peer Bank levels and remain a positive indicator that the Bank’s general asset quality will improve over the next several quarters. Net charge-offs were $65,000 for the third quarter of 2011, compared to $1.4 million for the third quarter of 2010. Cornerstone’s allowance for loan losses was $6.9 million or 2.54 percent of total loans as of September 30, 2011, compared to $6.3 million or 2.15 percent as of September 30, 2010. 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.

To date, Cornerstone has been successful in raising more than $7.5 million in capital through a Preferred Stock Offering launched in the third quarter of 2010. Extended through December 31, 2011, the Offering features a new security with a 10 percent cumulative annual dividend, and is convertible into common stock after five years and a 50 percent increase in common stock value over the preferred stock’s strike price.

“We are proud of Cornerstone’s heritage and solid reputation in the local market,” said Cornerstone’s Chairman Miller Welborn. “With recent investments by Volkswagen, Amazon, Wacker and other major corporations in Chattanooga, prospects for the local economy are very bright indeed,” he said. “Given our improvement and continued strides in the right direction, I have every reason to be optimistic for the future of Cornerstone.”

Cornerstone is a single-bank holding company with $426 million in assets, serving the Chattanooga, Tennessee MSA. Locally owned and locally operated, Cornerstone Community Bank was founded in 1996, and is one of Chattanooga’s oldest and largest community banks. With five branches serving the Hamilton County area and one loan production office in Dalton, Georgia, Cornerstone Community Bank 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, 2011 and 2010

(Unaudited)



(Amounts in thousands, except per common share data)	2011			2010			% Change
Balance Sheet Data at September 30
Total assets	$	426,365		$	483,351			(11.8	)
Interest-earning assets		391,452			459,720			(14.9	)
Loans		270,401			292,046			(7.4	)
Foreclosed assets		18,255			13,427			36.0
Deposits		322,552			351,367			(8.2	)
Other interest-bearing liabilities		69,099			98,947			(30.2	)
Shareholders' equity		32,447			30,965			4.8
Loan to deposit ratio		83.83	%		83.12	%		0.9
Tier 1 leverage ratio (Bank)		6.65	%		6.20	%		7.3
Total risk-based capital ratio (Bank)		11.12	%		11.31	%		(1.7	)
Outstanding common shares (000s)		6,500			6,500			-
Book value per common share	$	3.87		$	4.76			(18.8	)
Tangible book value per common share	$	3.86		$	4.37			(11.5	)
Market value per common share as of September 30	$	1.03		$	1.55			(33.5	)

Loan Quality Data
Nonaccruing loans		8,559			10,491			(18.4	)
Loans past due 90 days – accruing		-			-			-
Net charge-offs YTD		2,413			2,795			(13.7	)
Allowance for loan losses		6,864			6,271			9.5
Allowance for loan losses to total loans		2.54	%		2.15	%
Nonperforming assets to total assets		6.29	%		4.95	%

Performance Data for the Year
Net income	$	917		$	576			59.2
Return on average assets		0.28	%		0.15	%
Return on average equity		4.27	%		2.61	%
Net interest margin		3.51	%		3.45	%
Per common share data:
Net income – basic	$	0.09		$	0.09
Net income – diluted	$	0.09		$	0.09
Common dividends	$	-		$	-
Preferred dividends	$	1.25		$	-
Average shares (000s):
Basic common stock		6,500			6,500
Diluted common stock		6,500			6,500
Preferred stock (actual shares outstanding)		300			115

Cornerstone Bancshares, Inc. and Subsidiary

Loan Loss Allowance and Asset Quality Review

	2011									2010
	Third			Second			First			Fourth			Third
(Amounts in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter

Allowance for loan losses
Balance at beginning of period	$	6,814		$	7,914		$	9,132		$	6,271		$	6,967
Provision for loan losses		115			15			15			4,130			681
Net charge-offs		(65	)		(1,115	)		(1,233	)		(1,269	)		(1,377	)
Balance at end of period	$	6,864		$	6,814		$	7,914		$	9,132		$	6,271

As a % of loans		2.54	%		2.52	%		2.89	%		3.20	%		2.15	%
As a % of nonperforming loans		80.20	%		94.21	%		126.20	%		66.99	%		61.26	%
As a % of nonperforming assets		25.60	%		24.97	%		29.60	%		34.54	%		26.50	%

Net charge-offs as a % of loans (a)		0.10	%		1.65	%		1.80	%		1.78	%		1.89	%

Risk element assets
Accruing troubled debt restructured	$	2,535		$	1,750		$	1,650		$	848		$	5,853
Loans past due 30-89 days	$	2,048		$	1,957		$	8,434		$	2,306		$	1,500

Nonaccruing loans	$	8,559		$	7,233		$	6,271		$	13,633		$	10,237
Loans past due 90 days – accruing		-			-			-			-			-
Total nonperforming loans	$	8,559		$	7,233		$	6,271		$	13,633		$	10,237
Repossessed assets		-			-			-			150			285
Other real estate owned (b)(c)(d)	$	18,255		$	20,058		$	20,464		$	12,659		$	13,142
Total nonperforming assets	$	26,814		$	27,291		$	26,735		$	26,442		$	23,664

Nonperforming loans as a % of loans		3.17	%		2.68	%		2.29	%		4.78	%		3.51	%
Nonperforming assets as a % of loans and other real estate owned		9.29	%		9.40	%		9.09	%		8.88	%		7.75	%

Total loans		270,401			270,171			273,750			285,247			292,046

(a) Annualized
(b) Properties sold since quarter-end	$	1,470
(c) Properties rented	$	8,724
(d) Properties under contract to sell	$	292

Cornerstone Bancshares, Inc. and Subsidiary

Net Interest Margin Analysis

Taxable Equivalent Basis

	Three months ended
	September 30
	2011								2010
	Average			Income/		Yield/			Average			Income/		Yield/
(Amounts in thousands)	Balance			Expense		Rate			Balance			Expense		Rate
Assets
Earning assets:
Loans, net of unearned income	$	269,715		$	4,531		6.67	%	$	305,743		$	5,160		6.70	%
Investment securities		108,963			574		2.40	%		116,930			754		2.82	%
Other earning assets		18,193			9		0.20	%		35,540			19		0.22	%
Total earning assets		396,872		$	5,114		5.20	%		458,213		$	5,933		5.20	%
Allowance for loan losses		(6,792	)							(6,655	)
Cash and other assets		33,120								37,213
TOTAL ASSETS	$	423,200							$	488,771

Liabilities and Shareholders' Equity

Interest-bearing liabilities:
Interest-bearing demand deposits	$	24,197		$	20		0.33	%	$	31,858		$	25		0.31	%
Savings deposits		9,772			13		0.51	%		9,547			12		0.50	%
MMDA's		30,975			79		1.01	%		22,961			56		0.97	%
Time deposits		218,622			900		1.63	%		270,204			1,386		2.04	%
Federal funds purchased and securities sold under agreements to repurchase		23,250			33		0.57	%		23,256			32		0.55	%
Federal Home Loan Bank and other borrowings		43,078			465		4.29	%		62,612			665		4.21	%
Total interest-bearing liabilities		349,894			1,510		1.71	%		420,438			2,176		2.05	%
Net interest spread				$	3,604		3.49	%				$	3,757		3.15	%
Noninterest-bearing demand deposits		41,800								36,875
Accrued expenses and other liabilities		(64	)							1,103
Shareholders' equity		31,569								30,355
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	423,200							$	488,771
Net yield on earning assets							3.69	%							3.32	%

Taxable equivalent adjustment:
Loans					0								0
Investment securities					85								77
Total adjustment					85								77

Cornerstone Bancshares, Inc. and Subsidiary

Net Interest Margin Analysis

Taxable Equivalent Basis

	Nine months ended
	September 30
	2011								2010
	Average			Income/		Yield/			Average			Income/		Yield/
(Amounts in thousands)	Balance			Expense		Rate			Balance			Expense		Rate
Assets
Earning assets:
Loans, net of unearned income	$	275,267		$	13,692		6.65	%	$	318,985		$	16,602		6.96	%
Investment securities		112,850			1,763		2.38	%		134,262			3,099		3.32	%
Other earning assets		22,496			38		0.22	%		39,634			65		0.22	%
Total earning assets		410,613		$	15,493		5.12	%		492,881		$	19,766		5.42	%
Allowance for loan losses		(7,707	)							(6,484	)
Cash and other assets		32,538								31,015
TOTAL ASSETS	$	435,444							$	517,412

Liabilities and Shareholders' Equity

Interest-bearing liabilities:
Interest-bearing demand deposits	$	26,717		$	65		0.33	%	$	34,125		$	91		0.36	%
Savings deposits		9,737			37		0.51	%		9,124			35		0.51	%
MMDA's		27,137			202		1.00	%		22,875			164		0.96	%
Time deposits		233,079			2,964		1.70	%		292,184			4,689		2.15	%
Federal funds purchased and securities sold under agreements to repurchase		23,391			98		0.56	%		23,565			99		0.56	%
Federal Home Loan Bank and other borrowings		49,329			1,590		4.31	%		68,215			2,205		4.32	%
Total interest-bearing liabilities		369,390			4,957		1.79	%		450,088			7,283		2.16	%
Net interest spread				$	10,536		3.33	%				$	12,483		3.26	%
Noninterest-bearing demand deposits		37,463								41,341
Accrued expenses and other liabilities		(81	)							(3,399	)
Shareholders' equity		28,672								29,382
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	435,444							$	517,412
Net yield on earning assets							3.51	%							3.45	%

Taxable equivalent adjustment:
Loans					0								0
Investment securities					246								232
Total adjustment					246								232

Cornerstone Bancshares, Inc. and Subsidiary

Quarterly Earnings Summary

				(Unaudited)
				2011						2010						Q3-11 /
	Third			Second			First			Fourth			Third			Q3-10
(Amounts in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter			% Chg
Interest income
Loans, including fees	$	4,531		$	4,521		$	4,639		$	4,896		$	5,160			(12.2	)
Investment securities		574			621			568			534			754			(23.9	)
Other earning assets		9			17			11			15			19			(51.9	)
Total interest income		5,114			5,159			5,218			5,445			5,933			(13.8	)
Interest expense
Deposits		1,012			1,112			1,145			1,239			1,478			(31.5	)
Short-term borrowings		33			34			31			28			32			4.5
FHLB advances and other borrowings		465			545			580			651			666			(30.2	)
Total interest expense		1,510			1,691			1,756			1,918			2,176			(30.6	)
Net interest income		3,604			3,468			3,462			3,527			3,757			(4.1	)
Provision for loan losses		115			15			15			4,130			681			(83.1	)
Net interest income after the provision for loan losses		3,489			3,453			3,447			(603	)		3,076			13.4
Noninterest income
Customer service fees		216			225			215			280			309			(30.0	)
Other noninterest income		15			22			20			63			34			(55.8	)
Gain / (loss) on sale of assets		92			69			34			(681	)		544			(83.1	)
Total noninterest income		323			316			269			(338	)		887			(63.6	)
Noninterest expense
Salaries and employee benefits		1,459			1,502			1,542			1,515			1,525			(4.3	)
Net occupancy and equipment		362			350			406			380			397			(8.8	)
Depository insurance		234			241			322			350			386			(39.4	)
Goodwill impairment		-			-			-			2,541			-			-
Foreclosed asset expense (1)		306			716			-			-			-			N/A
Other operating expense		715			847			1,145			1,255			1,372			(47.9	)
Total noninterest expense		3,076			3,656			3,415			6,041			3,680			(16.4	)
Income (loss) before income taxes		736			113			301			(6,982	)		283			160.3
Income tax (benefit) expense		212			(28	)		49			(1,699	)		69			206.1
Net income (loss)	$	524		$	141		$	252		$	(5,283	)	$	214			145.5

Preferred stock dividends & accretion on preferred stock discount		131			102			92			34			-

Net income (loss) per common share:
Basic	$	0.06		$	0.01		$	0.02		$	(0.82	)	$	0.03			83.9
Diluted	$	0.06		$	0.01		$	0.02		$	(0.82	)	$	0.03			83.9
Average basic shares (000s)		6,500			6,500			6,500			6,500			6,500			-
Average common diluted shares (000s)		6,500			6,500			6,500			6,500			6,500			-
Performance Ratios
Return on average equity		6.64	%		2.04	%		3.78	%		-67.91	%		2.81	%		136.0
Return on average assets		0.50	%		0.13	%		0.23	%		-4.66	%		0.17	%		183.5
Net interest margin		3.69	%		3.42	%		3.44	%		3.36	%		3.36	%		9.8
Average equity		31,569			27,712			26,683			31,120			30,355			4.0
Average assets		423,200			445,472			437,821			453,665			488,771			(13.4	)
Average interest-earning assets		396,872			416,605			418,263			425,789			458,213			(13.4	)

(1) Includes OREO adjustments to fair value

Cornerstone Bancshares, Inc. and Subsidiary

Loan Stratification

	2011				2010
	Third		% of		Third		% of		% Dollar
(Amounts in thousands)	Quarter		Total		Quarter		Total		Change
Non-residential real estate
Owner occupied	$	63,405		23.4	$	68,998		23.6		(8.1	)
Non-owner occupied		62,009		22.9		65,091		22.3		(4.7	)
Multi-family real estate		10,692		4.0		12,871		4.4		(16.9	)
1-4 family construction		6,346		2.3		4,320		1.5		46.9
Commercial land and lot development		19,483		7.2		22,162		7.6		(12.1	)
Total non-residential real estate		161,935		59.9		173,442		59.4		(6.6	)
Residential real estate
First mortgage – 1-4 family		41,334		15.3		41,753		14.3		(1.0	)
Second mortgage - 1-4 family		4,225		1.6		4,709		1.6		(10.3	)
Home equity lines		12,215		4.5		10,113		3.5		20.8
Total residential real estate		57,774		21.4		56,575		19.4		2.1
Total real estate loans		219,709		81.3		230,017		78.8		(4.5	)

Commercial		38,955		14.4		50,127		17.2		(22.3	)
Agricultural & other		8,938		3.3		8,581		2.9		4.2
Consumer		2,799		1.0		3,321		1.1		(15.7	)
Total loans, net of unearned fees	$	270,401		100.0	$	292,046		100.0		(7.4	)

Cornerstone Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

	Unaudited
	September 30,			December 31,
	2011			2010

ASSETS

Cash and cash equivalents	$	32,934,352		$	22,981,952

Securities available for sale		93,666,153			108,250,434
Securities held to maturity		75,810			95,702
Federal Home Loan Bank stock, at cost		2,322,900			2,322,900
Loans, net of allowance for loan losses of $6,864,196 at September 30, 2011 and $9,132,171 at December 31, 2010		263,536,587			276,114,617
Bank premises and equipment, net		5,676,290			8,047,370
Accrued interest receivable		1,337,407			1,326,480
Foreclosed assets		18,254,741			12,808,838
Other assets		8,560,558			9,551,121
Total Assets	$	426,364,798		$	441,499,414

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Noninterest-bearing demand deposits	$	40,115,385		$	28,980,043
Interest-bearing demand deposits		22,773,718			24,834,214
Savings deposits and money market accounts		43,477,203			34,041,672
Time deposits		216,185,314			247,591,161
Total deposits		322,551,620			335,447,090
Federal funds purchased and securities sold under agreements to repurchase		26,053,577			24,325,372
Federal Home Loan Bank advances and other borrowing		43,045,000			54,715,000
Accrued interest payable		90,706			176,761
Other liabilities		2,176,468			1,016,038
Total Liabilities		393,917,371			415,680,261

Stockholders' Equity
Preferred stock - no par value; 2,000,000 shares authorized; 300,060 shares issued and outstanding in 2011 114,540 shares issued and outstanding in 2010		7,300,221			2,727,424
Common stock - $l.00 par value; 20,000,000 shares authorized; 6,709,199 shares issued in 2011 and 2010; 6,500,396 shares outstanding in 2011 and 2010		6,500,396			6,500,396
Additional paid-in capital		21,296,653			21,237,298
Retained deficit		(3,725,732	)		(4,317,130	)
Accumulated other comprehensive income		1,075,889			(328,835	)
Total Stockholders' Equity		32,447,427			25,819,153
Total Liabilities and Stockholders' Equity	$	426,364,798		$	441,499,414

Cornerstone Bancshares, Inc. and Subsidiary

Consolidated Statements of Income

	Unaudited				Unaudited
	Three months ended				Nine months ended
	September 30				September 30
	2011		2010		2011		2010
INTEREST INCOME
Loans, including fees	$	4,531,390	$	5,159,963	$	13,691,565	$	16,602,155
Securities		573,699		753,783		1,763,479		3,099,362
Federal funds sold & other earning assets		9,269		19,289		37,597		64,682
Total interest income		5,114,358		5,933,035		15,492,641		19,766,199

INTEREST EXPENSE
Time deposits		899,554		1,385,938		2,963,779		4,689,208
Other deposits		111,985		92,437		304,533		289,766
Federal funds purchased and securities sold under agreements to repurchase		33,135		31,649		97,850		99,206
FHLB advances and other borrowings		465,534		665,961		1,590,605		2,204,961
Total interest expense		1,510,208		2,175,985		4,956,767		7,283,141

Net interest income before provision for loan losses		3,604,150		3,757,050		10,535,874		12,483,058
Provision for loan losses		115,000		681,000		145,000		3,161,000
Net interest income after the provision for loan losses		3,489,150		3,076,050		10,390,874		9,322,058

NONINTEREST INCOME
Customer service fee		216,163		308,579		656,877		992,619
Other noninterest income		15,256		14,214		57,066		55,585
Net gains from sale of loans and other assets		91,993		1,093,212		195,279		1,862,685
Total noninterest income		323,412		1,416,005		909,222		2,910,889

NONINTEREST EXPENSE
Salaries and employee benefits		1,458,951		1,525,311		4,503,489		4,679,871
Net occupancy and equipment expense		361,513		397,461		1,118,127		1,121,150
Depository insurance		233,587		385,722		797,747		915,365
Foreclosed asset expense		306,860		905,504		1,384,935		1,898,022
Other operating expense		715,858		995,082		2,346,493		2,879,029
Total noninterest expense		3,076,769		4,209,080		10,150,791		11,493,437

Income before provision for income taxes		735,793		282,975		1,149,305		739,510
Provision for income taxes		212,125		69,301		232,075		163,903

NET INCOME	$	523,668	$	213,674	$	917,230	$	575,607

Preferred stock dividends		118,013		-		303,413		-
Accretion on preferred stock dividend		13,419		-		22,419		-

Net income available to common shareholders	$	392,236	$	213,674	$	591,398	$	575,607

EARNINGS PER COMMON SHARE
Basic net income per common share	$	0.06	$	0.03	$	0.09	$	0.09
Diluted net income per common share	$	0.06	$	0.03	$	0.09	$	0.09

DIVIDENDS DECLARED PER COMMON SHARE	$	-	$	-	$	-	$	-

Cornerstone Bancshares, Inc. and Subsidiary

Consolidated Statement of Changes in Stockholders' Equity - Unaudited

For the nine months ended September 30, 2011

												Accumulated
							Additional					Other			Total
	Comprehensive		Preferred		Common		Paid-in		Retained			Comprehensive			Stockholders'
	Income		Stock		Stock		Capital		Deficit			Income			Equity

BALANCE, December 31, 2010			$	2,727,424	$	6,500,396	$	21,237,298	$	(4,317,130	)	$	(328,835	)	$	25,819,153
Employee compensation stock option expense				-		-		59,355		-			-			59,355
Issuance of Series A Convertible Preferred Stock				4,550,378		-		-					-			4,550,378
Preferred stock dividend				-		-		-		(303,413	)		-			(303,413	)
Accretion on preferred stock				22,419		-		-		(22,419	)		-			-
Comprehensive income:
Net income	$	917,230		-		-		-		917,230			-			917,230
Other comprehensive income, net of tax:
Unrealized holding gains on securities available for sale, net of reclassification adjustment		1,404,724		-		-		-		-			1,404,724			1,404,724
Total comprehensive income	$	2,321,954

BALANCE, September 30, 2011			$	7,300,221	$	6,500,396	$	21,296,653	$	(3,725,732	)	$	1,075,889		$	32,447,427

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