SMARTFINANCIAL INC. - Annual Report: 2007 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the fiscal year ended December 31, 2007

OR

o	TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For transition period from __________ to __________

Commission file number 000-30497

(Exact Name of Registrant as Specified in its Charter)

Tennessee	62-1173944
(State of Incorporation)	(I.R.S. Employer Identification No .)

835 Georgia Avenue,

Chattanooga, TN 37402

(Address of principal executive offices)(Zip Code)

(423) 385-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $1.00 Par Value

Indicate by check mark if Registrant is a well known seasoned issuer, as defined in Rule 405 of the of the Securities Act.

Yes o No x

Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes o No x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o No x

The aggregate market value of the common stock held by non-affiliates of the Registrant on June 30, 2007 was $78 million. The market value calculation was determined using the closing sale price of the Registrant’s common stock on June 30, 2007, as reported on the Over the Counter (“OTC”) Bulletin Board. For purposes of this calculation, the term “affiliate” refers to all directors, executive officers and 10% shareholders of the Registrant. As of the close of business on December 31, 2007 there were 6,369,718 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following lists the documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated:

1. Portions of Proxy Statement for the 2008 Annual Meeting of Shareholders. (Part III)

TABLE OF CONTENTS

Item No.		Page No.
	PART I
1.	Description of Business	1

1A.	Risk Factors	6

1B.	Unresolved Staff Comments	9

2.	Description of Property	9

3.	Legal Proceedings	10

4.	Submission of Matters to a Vote of Security Holders	10

	PART II

5.	Market for Common Equity, Related Stockholders Matters and Issuer Purchases of
	Equity Securities	10

6.	Selected Financial Data	11

7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13

8.	Financial Statements	31

9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	68

9A.	Controls and Procedures	68

	PART III

10.	Directors and Executive Officers of the Registrant	68

11.	Executive Compensation	69

12.	Security Ownership of Certain Beneficial Owners and Management and related
	Stockholder Matters	69

13.	Certain Relationships and Related Transactions	69

14.	Principal Accountant Fees and Services	69

15.	Exhibits and Reports on Form 8-K	69

FORWARD-LOOKING STATEMENTS

Cornerstone Bancshares, Inc. (“Cornerstone”) may from time to time make written or oral statements, including statements contained in this report which may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The words “expect,” “anticipate,” “intend,” “consider,” “plan,” “believe,” “seek,” “should,” “estimate,” and similar expressions are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements should be considered subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Cornerstone’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Such factors are described below and in Cornerstone’s Form 10-K, as updated by Item 1A of part II of this Form 10-Q and include, without limitation, (i) unanticipated deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses, (ii) increased competition with other financial institutions, (iii) lack of sustained growth in the economy in the Chattanooga, Tennessee area, (iv) rapid fluctuations or unanticipated changes in interest rates, (v) the inability of our bank subsidiary, Cornerstone Community Bank, to satisfy regulatory requirements for its expansion plans, (vi) the inability of Cornerstone to achieve its targeted expansion goals in the Knoxville, Tennessee and Dalton, Georgia markets, (vii) the inability of Cornerstone to grow its loan portfolio at historic or planned rates and (viii) changes in the legislative and regulatory environment, including compliance with the various provisions of the Sarbanes-Oxley Act of 2002. Many of such factors are beyond Cornerstone’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Cornerstone does not intend to update or reissue any forward-looking statements contained in this report as a result of new information or other circumstances that may become known to Cornerstone.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

Cornerstone was incorporated on September 19, 1983 under the laws of the State of Tennessee and is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and was formerly known as East Ridge Bancshares, Inc. It has two wholly-owned subsidiaries: Cornerstone Community Bank, a Tennessee banking corporation (the “Bank”), resulted from the merger of The Bank of East Ridge and Cornerstone Community Bank effective October 15, 1997, and Eagle Financial Inc., a Tennessee corporation (“Eagle”), created December 1, 2005 with the assets acquired from Eagle Financial, LLC, a Tennessee limited liability company, and Eagle Funding, LLC, a Nevada limited liability company.

Cornerstone

The primary activity of Cornerstone currently is, and is expected to remain for the foreseeable future, the ownership and operation of the Bank. As a bank holding company, Cornerstone intends to facilitate the Bank's ability to serve its customers' requirements for financial services. The holding company structure also provides flexibility for expansion through the possible acquisition of other financial institutions and the provision of additional banking-related services, as well as certain non-banking services, which a traditional commercial bank may not provide under present laws. The holding company structure also affords additional flexibility in terms of capital formation and financing opportunities.

While Cornerstone may seek in the future to acquire additional banks or bank holding companies or to engage in other activities appropriate for bank holding companies under appropriate circumstances as permitted by law, Cornerstone currently has no plans, understandings or agreements concerning any other activities other than as described below. The results of operations and financial condition of Cornerstone for the foreseeable future, therefore, will be determined primarily by the results of operations and financial condition of the Bank.

The Bank

The Bank is a Tennessee-chartered commercial bank established in 1985 which has its principal executive offices in Chattanooga, Tennessee. The principal business of the Bank consists of attracting deposits from the general public and investing those funds, together with funds generated from operations and from principal and interest payments on loans, primarily in commercial loans, commercial and residential real estate loans, consumer loans and residential and commercial construction loans. Funds not invested in the loan portfolio are invested by the Bank primarily in obligations of the U.S. Government, U.S. Government agencies, various states and their political subdivisions. In addition to deposits, sources of funds for the Bank loans and other investments include amortization and prepayment of loans, sales of loans or participations in loans, sales of its investment securities and borrowings from other financial institutions. The principal sources of income for the Bank are interest and fees collected on loans, fees collected on deposit accounts and interest and dividends collected on other investments. The principal expenses of the Bank are interest paid on deposits, employee compensation and benefits, office expenses and other overhead expenses.

At December 31, 2007, the Bank had 5 full-service banking offices located in Hamilton County, Tennessee.

During 2007, the Bank established two loan production offices (“LPO”). The first LPO opened by the Bank is located in Dalton, Georgia. The new office which is located in Whitfield County, Georgia expanded the Bank’s presence in North Georgia and represents the Bank’s first effort to service North West Georgia. The second LPO is located in Knoxville, Tennessee. The Knoxville LPO offers a new market for the Bank to compete for loans.

Eagle

Eagle’s business concentrates on the purchase of account receivables from small businesses and commercial loan placement on a conduit basis. The principal sources of Eagle’s income are fees derived from the collection of accounts receivable and fees generated from the placement of loans with conduit financial institutions. Eagle’s principal expenses are interest paid on borrowings, employee compensation and benefits, office expenses and other overhead expenses

Employees

As of December 31, 2007, Cornerstone had 116 full-time equivalent employees. The employees are not represented by a collective bargaining unit. Cornerstone believes that its relationships with its employees are good.

Competition

All phases of the Bank’s banking activities are highly competitive. The Bank competes actively with twenty-four commercial banks, as well as finance companies, credit unions, and other financial institutions located in its service area, which includes Hamilton County, Tennessee.

The Bank’s deposits totaled approximately $313 million as of December 31, 2007. The deposit base represents approximately 4% of the deposit base in the Chattanooga, Tennessee-Georgia Metropolitan Statistical Area (“Chattanooga MSA”). Three major regional banks represent approximately 58% of the deposits in the Chattanooga MSA. These larger financial institutions have greater resources, higher lending limits than the Bank, and each of the three institutions has over 20 branches in the Chattanooga MSA. There are also several credit unions located in Hamilton County. Credit unions are not subject to the same income tax structure as commercial banks. This advantage enables credit unions to offer competitive rates to potential customers. The Bank also faces competition in certain areas of its business from mortgage banking companies, consumer finance companies, insurance companies, money market mutual funds and investment banking firms, some of which are not subject to the same degree of regulation as the Bank.

The Bank competes for deposits principally by offering depositors a variety of deposit programs with competitive interest rates, quality service and convenient locations and hours. The Bank will focus its resources to seek out and attract small business relationships and take advantage of the Bank’s ability to provide flexible service that meets the needs of this customer class. Management feels this market niche is the most promising business area for the future growth of the Bank.

Supervision and Regulation

Cornerstone is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “Act”) and is registered with and regulated by the Board of Governors of the Federal Reserve System (the “Board”). Cornerstone is required to file with the Board annual reports and such additional information as the Board may require pursuant to the Act. The Board may also make examinations of Cornerstone and its subsidiaries. Cornerstone is also required to comply with the rules and regulations of the Securities and Exchange Commission (the “Commission”) under federal securities laws.

The Bank is a Tennessee-chartered commercial bank and is subject to the supervision and regulation of the Tennessee Department of Financial Institutions (the “TDFI”). In addition, the Bank’s deposit accounts are insured up to applicable limits by the Bank Insurance Fund (the “BIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) and consequently, the Bank is also subject to regulation and supervision by the FDIC. The Bank is not a member of the Federal Reserve System.

Federal and state banking laws and regulations govern all areas of the operation of Cornerstone and the Bank, including reserves, loans, mortgages, capital, issuance of securities, payment of dividends and establishment of branches. Federal and state banking agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an unsafe or unsound banking practice. The TDFI, FDIC and Board have the authority to impose penalties, initiate civil and administrative actions and take other steps intended to prevent banks from engaging in unsafe or unsound practices.

FDIC Insurance of Deposit Accounts

Deposits of the Bank are insured by the FDIC to a maximum of $100,000 for each insured depositor (higher limits apply to certain retirement plans) through the BIF, one of the two deposit insurance funds established by federal law. As an insurer, the FDIC issues regulations, conducts examinations and generally supervises the operations of its insured institutions (institutions insured by the FDIC hereinafter are referred to as "insured institutions"). Any insured institution which does not operate in accordance with or conform to FDIC regulations, policies and directives, may be sanctioned for non-compliance. For example, proceedings may be instituted against an insured institution if the institution or any director, officer or employee thereof engages in unsafe and unsound practices, is operating in an unsafe or unsound condition, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. If insurance of accounts is terminated by the FDIC, the deposits in the institution will continue to be insured by the FDIC for a period of two years following the date of termination. The FDIC recommends an annual audit by independent accountants and also periodically makes its own examinations of the Bank. The FDIC may revalue assets of an institution, based upon appraisals, and require establishment of specific reserves in amounts equal to the difference between such reevaluation and the book value of the assets.

On September 15, 1992, the FDIC approved final regulations adopting a risk-related deposit insurance system. The risk-related regulations, which became effective January 1, 1993, resulted in a significant spread between the highest and lowest deposit insurance premiums. Under the risk-related insurance regulations, each insured depository institution is assigned to one of three risk classifications: "well capitalized," "adequately capitalized," or "under capitalized." Within each risk classification, there are three subgroups. Each insured depository institution is assigned to one of these subgroups within its risk classification based upon supervisory evaluations submitted to the FDIC by the institution’s primary federal regulator. The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Subsequent to the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), the FDIC issued risk-based bank capital guidelines which went into effect in stages through 1992. In accordance with the FDIC's risk-based standards, an institution's assets and off-balance sheet activities are categorized into one of four risk categories, with either a 0%, 20%, 50%, or 100% amount of capital to be held against these assets. In addition, the guidelines divide capital instruments into Tier 1 (core) capital and Tier 2 (supplementary) capital. The risk-based capital adequacy guidelines require that (i) Tier 1 capital equal or exceed 4% of risk-weighted assets; (ii) Tier 2 capital may not exceed 100% of Tier 1 capital, although certain Tier 2 capital elements are subject to additional limitations; (iii) assets and off-balance sheet items must be weighted according to risk; and (iv) the total capital to risk-weighted assets ratio must be at least 8.0%. The FDIC's current leverage capital requirement requires banks receiving the highest regulatory rating based upon the FDIC's routine examination process, to maintain Tier 1 capital equal to 3.0% of the bank's total assets. Banks receiving lower regulatory ratings are required to maintain Tier 1 capital in an amount that is at least 100 to 200 basis points higher than 3.0% of total assets.

Certain provisions of the Federal Reserve Act, made applicable to the Bank by Section 18(j) of the Federal Deposit Insurance Act (“FDIA”) (12 U.S.C. §1828(j)) and administered with respect to the Bank by the FDIC, establish standards for the terms of, limit the amount of, and establish collateral requirements with respect to any loans or extensions of credit to, and investments in, affiliates by the Bank as well as set arms-length criteria for such transactions and for certain other transactions (including payment by the Bank for services) between the Bank and its affiliates. In addition, related provisions of the Federal Reserve Act and the Federal Reserve regulations (also administered with respect to the Bank by the FDIC) limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Bank and to related interests of such persons.

The FDIC may impose sanctions on any insured bank that does not operate in accordance with FDIC regulations, policies and directives. Proceedings may be instituted against any insured bank or any director, officer or employee of the bank that is believed by the FDIC to be engaged in unsafe or unsound practices, including violation of applicable laws and regulations. The FDIC is also empowered to assess civil penalties against companies or individuals who violate certain federal statutes, orders or regulations. In addition, the FDIC has the authority to terminate insurance of accounts, after notice and hearing, upon a finding by the FDIC that the insured institution is or has engaged in any unsafe or unsound practice that has not been corrected, or is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule or order of, or condition imposed by, the FDIC. Neither Cornerstone nor the Bank knows of any past or current practice, condition or violation that might lead to termination of its deposit insurance.

Although the Bank is not a member of the Federal Reserve System, it is subject to Board regulations that require it to maintain reserves against its transaction accounts (primarily checking accounts). Because reserves generally must be maintained in cash or in non-interest bearing accounts, the effect of the reserve requirements is to increase the Bank's cost of funds. The Board regulations currently require that average daily reserves be maintained against transaction accounts in the amount of 3% of the aggregate of such net transaction accounts up to $52.6 million, plus 10% of the total in excess of $52.6 million.

State of Tennessee Supervision and Regulation

As a State of Tennessee-chartered commercial bank, the Bank is subject to various state laws and regulations which limit the amount that can be loaned to a single borrower, the types of permissible investments, and geographic and new product expansion, among other things. The Bank must submit an application to, and receive the approval of, the TDFI before opening a new branch office or merging with another financial institution. The Commissioner of the TDFI has the authority to enforce state laws and regulations by ordering a director, officer or employee of the Bank to cease and desist from violating a law or regulation or from engaging in unsafe or unsound banking practices.

Tennessee law contains limitations on the interest rates that may be charged on various types of loans and restrictions on the nature and amount of loans that may be granted and on the type of investments which may be made. The operations of banks are also affected by various consumer laws and regulations, including those relating to equal credit opportunity and regulation of consumer lending practices. All Tennessee banks, including the Bank, must become and remain insured under the FDIA.

State banks are subject to regulation by the TDFI with regard to capital requirements and the payment of dividends. Tennessee has adopted the provisions of the Board’s Regulation O with respect to restrictions on loans and other extensions of credit to bank “insiders”. Further, under Tennessee law, state banks are prohibited from lending to any one person, firm or corporation amounts more than fifteen percent (15%) of the Bank equity capital accounts, except (i) in the case of certain loans secured by negotiable title documents covering readily marketable nonperishable staples, or (ii) with the prior approval of the Bank’s board of directors or finance committee (however titled), the Bank may make a loan to any person, firm or corporation of up to twenty-five percent (25%) of its equity capital accounts. Tennessee law requires that dividends be paid only from retained earnings (or undivided profits) except that dividends may be paid from capital surplus with the prior, written consent of the TDFI. Tennessee laws regulating banks require certain charges against and transfers from an institution’s undivided profits account before undivided profits can be made available for the payment of dividends.

Federal Supervision and Regulation

Cornerstone is regularly examined by the Board, and the Bank is supervised and examined by the FDIC. Cornerstone is required to file with the Board annual reports and other information regarding its business operations and the business operations of its subsidiaries. Approval of the Board is required before Cornerstone may acquire, directly or indirectly, ownership or control of the voting shares of any bank, if, after such acquisition, Cornerstone would own or control, directly or indirectly, more than 5% of the voting stock of the bank. In addition, pursuant to the provisions of the Act and the regulations promulgated thereunder, Cornerstone may only engage in, or own or control companies that engage in, activities deemed by the Board to be so closely related to banking as to be a proper incident thereto.

The Bank and Cornerstone are “affiliated” within the meaning of the Act. Certain provisions of the Act establish standards for the terms of, limit the amount of, and establish collateral requirements with respect to, any loans or extensions of credit to, and investments in, affiliates by the Bank, as well as set arms-length criteria for such transactions and for certain other transactions (including payment by the Bank for services under any contract) between the Bank and its affiliates. In addition, related provisions of the Act and the regulations promulgated under the Act limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors, and principal shareholders of the Bank, Cornerstone and any other subsidiary of the Cornerstone, and to related interests of such persons.

In addition to the banking regulations imposed on Cornerstone, the securities of Cornerstone are not exempt from the federal and state securities laws as are the securities of the Bank. Accordingly, an offering of Cornerstone’s securities must be registered under both the Securities Act of 1933 (the “Securities Act”) and state securities laws or qualify for exemptions from registration.

Under Section 106(b) of the 1970 Amendments to the Act (12 U.S.C. § 1972), the Bank is prohibited from extending credit, selling or leasing property or furnishing any service to any customer on the condition or requirement that the customer (i) obtain any additional property, service or credit from the Company, the Bank (other than a loan, discount, deposit, or trust service) or any other subsidiary of the Company; (ii) refrain from obtaining any property, credit or service from any competitor of Cornerstone, the Bank or any subsidiary of Cornerstone; or (iii) provide any credit, property or service to Cornerstone, the Bank (other than those related to and usually provided in connection with a loan, discount, deposit or trust service) or any subsidiary of Cornerstone.

Most bank holding companies are required to give the Board prior written notice of any purchase or redemption of their outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the bank holding company's consolidated net worth. The Board may disapprove such a purchase or redemption if it determines that the proposal constitutes an unsafe or unsound practice that would violate any law, regulation, Board order or directive or any condition imposed by, or written agreement with, the Board. The prior notice requirement does not apply to certain "well-capitalized" bank holding companies that meet specified criteria.

In November 1985, the Board adopted its Policy Statement on Cash Dividends Not Fully Covered by Earnings. The Policy Statement sets forth various guidelines that the Board believes that a bank holding company should follow in establishing its dividend policy. In general, the Board stated that bank holding companies should not pay dividends except out of current earnings and unless the prospective rate of earnings retention by the holding company appears consistent with its capital needs, asset quality and overall financial condition.

Legislation Affecting Cornerstone and the Bank

The following information describes certain statutory and regulatory provisions and is qualified in its entirety by reference to such statutory and regulatory provisions.

Far-reaching legislation, including FIRREA and the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) have for years impacted the business of banking. FIRREA primarily affected the regulation of savings institutions rather than the regulation of state banks and bank holding companies like the Bank and Cornerstone, but did include provisions affecting deposit insurance premiums, acquisitions of thrifts by banks and bank holding companies, liability of commonly controlled depository institutions, receivership and conservatorship rights and procedures and substantially increased penalties for violations of banking statutes, regulations and orders.

FDICIA resulted in extensive changes to the federal banking laws. The primary purpose of FDICIA was to authorize additional borrowings by the FDIC in order to assist in the resolution of failed and failing financial institutions. However, the law also instituted certain changes to the supervisory process and contained various provisions affecting the operations of banks and bank holding companies.

The additional supervisory powers and regulations mandated by FDICIA, include a "prompt corrective action" program based upon five regulatory zones for banks, in which all banks are placed largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank's financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank's capital leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital. The FDIC has adopted regulations implementing the prompt corrective action provisions of the FDICIA, which place financial institutions in the following five categories based upon capitalization ratios: (1) a "well capitalized" institution has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at least 6% and a leverage ratio of at least 5%; (2) an "adequately capitalized" institution has a total risk-based ratio of at least 8%, a Tier 1 risk-based ratio of at least 4% and a leverage ratio of at least 4%; (3) an "undercapitalized" institution has a total risk-based capital ratio of under 8%, a Tier 1 risk-based capital ratio of under 4% or a leverage ratio of under 4%; (4) a "significantly undercapitalized" institution has a total risk-based capital ratio of under 6%, a Tier 1 risk-based ratio of under 3% or a leverage ratio of under 3%; and (5) a "critically undercapitalized" institution has a leverage ratio of 2% or less. Institutions in any of the three undercapitalized categories would be prohibited from declaring dividends or making capital distributions. The proposed regulations also establish procedures for "downgrading" an institution to a lower capital category based on supervisory factors other than capital. Various other sections of the FDICIA impose substantial audit and reporting requirements and increase the role of independent accountants and outside directors. Set forth below is a list containing certain significant provisions of the FDICIA:

annual on-site examinations by regulators (except for smaller, well-capitalized banks with high management ratings, which must be examined every 18 months);

mandated annual independent audits by independent public accountants and an independent audit committee of outside directors for institutions with more than $500,000,000 in assets;

new uniform disclosure requirements for interest rates and terms of deposit accounts;

a requirement that the FDIC establish a risk-based deposit insurance assessment system;

authorization for the FDIC to impose one or more special assessments on its insured banks to recapitalize the BIF;

a requirement that each institution submit to its primary regulators an annual report on its financial condition and management, which report will be available to the public;

a ban on the acceptance of brokered deposits except by well capitalized institutions and by adequately capitalized institutions with the permission of the FDIC and the regulation of the brokered deposit market by the FDIC;

restrictions on the activities engaged in by state banks and their subsidiaries as principal, including insurance underwriting, to the same activities permissible for national banks and their subsidiaries unless the state bank is well capitalized and a determination is made by the FDIC that the activities do not pose a significant risk to the insurance fund;

a review by each regulatory agency of accounting principles applicable to reports or statements required to be filed with federal banking agencies and a mandate to devise uniform requirements for all such filings;

the institution by each regulatory agency of noncapital safety and soundness standards for each institution it regulates which cover (1) internal controls, (2) loan documentation, (3) credit underwriting, (4) interest rate exposure, (5) asset growth, (6) compensation, fees and benefits paid to employees, officers and directors, (7) operational and managerial standards, and (8) asset quality, earnings and stock valuation standards for preserving a minimum ratio of market value to book value for publicly traded shares (if feasible);

uniform regulations regarding real estate lending; and

a review by each regulatory agency of the risk-based capital rules to ensure they take into account adequate interest rate risk, concentration of credit risk, and the risks of non-traditional activities.

The activities permissible to Cornerstone and the Bank were substantially expanded by the Gramm-Leach-Bliley Act (the “Gramm Act”). The Gramm Act repeals the anti-affiliation provisions of the Glass-Steagall Act to permit the common ownership of commercial banks, investment banks and insurance companies. The Gramm Act amended the Act to permit a financial holding company to engage in any activity and acquire and retain any company that the Board determines to be (i) financial in nature or incidental to such financial activity, or (ii) complementary to a financial activity and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Gramm Act also modifies current law relating to financial privacy and community reinvestment. The new financial privacy provisions generally prohibit financial institutions, including the Bank and Cornerstone, from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to “opt out” of the disclosure.

Bills are regularly introduced in both the United States Congress and the Tennessee General Assembly that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation’s financial institutions. It cannot be predicted whether or what form any proposed legislation will be adopted or the extent to which the business of Cornerstone or the Bank may be affected thereby.

ITEM 1A. RISK FACTORS

Investing in our common stock involves various risks which are particular to Cornerstone, its industry and its market area. Several risk factors regarding investing in our common stock are discussed below. This listing should not be considered as all-inclusive. If any of the following risks were to occur, we may not be able to conduct our business as currently planned and our financial condition or operating results could be negatively impacted. These matters could cause the trading price of our common stock to decline in future periods.

Cornerstone’s business strategy includes expansion into new markets and the development of new products.

Cornerstone intends to continue pursuing a growth strategy for its business through acquisitions and de novo branch openings. Cornerstone’s prospects must be considered in light of the risks, expenses and difficulties occasionally encountered by financial services companies in growth stages, which may include the following:

Maintaining loan quality;

Maintaining adequate management personnel and information systems to oversee such growth; and

Maintaining adequate internal control and compliance functions.

Cornerstone may face risks with respect to future expansion.

From time to time Cornerstone may engage in additional de novo branch expansion as well as the acquisition of other financial institutions or parts of those institutions. Cornerstone may also consider and enter into new lines of business or offer new products or services. In addition, Cornerstone may receive future inquiries and have discussions regarding acquisition. Acquisitions and mergers involve a number of risks, including:

the time and costs associated with identifying and evaluating potential acquisitions and merger partners;

inaccuracies in the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution;

the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

Cornerstone’s ability to finance an acquisition and possible dilution to its existing shareholders;

the diversion of Cornerstone’s management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses;

entry into new markets where Cornerstone lacks experience;

the introduction of new products and services into Cornerstone’s business;

the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on Cornerstone’s results of operations; and

the risk of loss of key employees and customers.

Cornerstone may incur substantial costs to expand. There can be no assurance that integration efforts for any future mergers or acquisitions will be successful. Also, Cornerstone may issue equity securities, including common stock and securities convertible into shares of Cornerstone’s common stock in connection with future acquisitions, which could cause ownership and economic dilution to Cornerstone’s shareholders. There is no assurance that, following any future mergers or acquisitions, Cornerstone’s integration efforts will be successful or after giving effect to the acquisition, will achieve profits comparable to or better than its historical experience.

Cornerstone is subject to the success of the local economies where it operates.

With the exception of the Bank’s loan production office in Knoxville, Tennessee substantially all of our loan and deposit customers live, work and bank in the Chattanooga MSA. Cornerstone’s success depends upon a sound local economy to provide opportunities for new business ventures, increased loan demand and the need for deposit services. Cornerstone’s profit is impacted by these local factors as well as general economic conditions and interest rates. For example, Cornerstone’s earnings could be impacted by changes in population, income levels, deposits and housing starts. Adverse economic conditions in specific market areas could reduce Cornerstone’s growth rate and affect the ability of its customers to repay their loans. Secondly, adverse market conditions could affect the market value of the real estate or other collateral securing Cornerstone’s loan portfolio. Sustained periods of increased payment delinquencies, foreclosures or losses in the State of Tennessee or the State of Georgia could adversely affect the value of the collateral and potentially affect Cornerstone’s assets, revenues, results of operations and financial condition.

Cornerstone is subject to Federal and State regulations that impact the company’s operations and financial performance.

Cornerstone is subject to examinations and supervision from both federal and state regulatory agencies. These agencies require compliance with numerous banking regulations. These regulations increase costs and require human and information technology resources to comply. Certain activities of Cornerstone such as the payment of dividends, investments, acquisitions, and branching are impacted by these regulations.

The laws and regulations applicable to the banking industry are subject to change at any time. Cornerstone cannot predict the events that will result in regulatory changes nor their impact on the banking industry and Cornerstone’s earnings.

Cornerstone operates in a highly regulated industry and is subject to examination, supervision, and comprehensive regulation by various federal and state agencies including the Board of Governors of the FRB, the FDIC and the Tennessee Department of Financial Institutions. Cornerstone’s regulatory compliance is costly and restricts and regulates certain of its activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. Cornerstone is also subject to capitalization guidelines established by its regulators, which require it to maintain adequate capital to support its growth.

The laws and regulations applicable to the banking industry could change at any time, and Cornerstone cannot predict the effects of these changes on its business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, Cornerstone’s cost of compliance could adversely affect its ability to operate profitably.

The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission and Nasdaq, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. As a result, Cornerstone has experienced, and may continue to experience, greater compliance costs.

Cornerstone could experience declines or losses in earnings if asset quality declines.

Cornerstone’s assets are primarily comprised of loans. If the Bank’s loan customers fail to repay their loans in accordance with the terms of the loan agreement, the Bank’s earnings would be negatively impacted. To minimize the likelihood of a substandard loan portfolio the Bank assesses the credit worthiness of a customer as well as performing collateral valuations. An allowance for loan losses is also maintained in an attempt to address the various risks involved with lending. In determining the amount of the allowance, Cornerstone relies on an analysis of the loan portfolio based on volume and types of loans, internal loan classifications, delinquency trends, local and economic conditions and other pertinent information. Negative changes in these valuation methods would result in a decline in asset quality. Any increase in Cornerstone’s allowance for loan losses would have a negative impact on earnings.

Liquidity needs could adversely affect Cornerstone’s results of operations and financial condition.

Cornerstone relies on dividends from the Bank as its primary source of funds. The majority of the Bank’s funds are comprised of customer deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The repayment of loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. Accordingly, Cornerstone may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Alternative sources include advances from the Federal Home Loan Bank and federal funds lines of credit from correspondent banks. While Cornerstone believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands. Cornerstone may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets if these alternative sources are not adequate.

Competition from financial institutions and other financial service providers may adversely affect Cornerstone’s profitability.

The banking business is highly competitive and Cornerstone experiences competition in each of its markets from many other financial institutions. Cornerstone competes with other commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other community banks and super-regional and national financial institutions that operate offices in Cornerstone’s primary market areas and elsewhere.

Additionally, Cornerstone faces competition from de novo community banks, including those with senior management who were previously affiliated with other local or regional banks or those controlled by investor groups with strong local business and community ties. These de novo community banks may offer higher deposit rates or lower cost loans in an effort to attract Cornerstone’s customers, and may attempt to hire Cornerstone’s management and employees.

Cornerstone competes with these other financial institutions both in attracting deposits and in making loans. In addition, Cornerstone has to attract its customer base from other existing financial institutions and from new residents. Cornerstone expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry.

Changes in interest rates could adversely affect Cornerstone’s results of operations and financial condition.

Changes in interest rates may affect Cornerstone’s level of interest income, the primary component of its gross revenue, as well as the level of its interest expense. Interest rates are highly sensitive to many factors that are beyond Cornerstone’s control, including general economic conditions and the policies of various governmental and regulatory authorities. Accordingly, changes in interest rates could decrease Cornerstone’s net interest income. Changes in the level of interest rates also may negatively affect Cornerstone’s ability to originate real estate loans, the value of its assets and the ability to realize gains from the sale of its assets, all of which ultimately affects earnings.

Cornerstone relies heavily on the services of key personnel.

Cornerstone relies on the strategies and management services of Gregory B. Jones, its Chairman of the Board and Chief Executive Officer. Although Cornerstone has entered into an employment agreement with Mr. Jones, the loss of his services could have a material adverse effect on Cornerstone’s business, results of operations and financial condition. Cornerstone is also dependent on certain other key officers who have important customer relationships or are instrumental to its lending and depository operations. Changes in key personnel and their responsibilities may be disruptive to operations and could have a material adverse effect on Cornerstone’s financial condition and earnings. Cornerstone believes that its future results will also depend upon its ability to attract and retain highly skilled and qualified personnel, particularly in those areas where Cornerstone may open new branches.

Cornerstone’s recent results may not be indicative of its future results.

Cornerstone may not be able to sustain its historical rate of growth or could experience very limited or no increase in assets at all. In the future, Cornerstone may not have the benefit of several recently favorable factors, such as a generally stable economic environment or the ability to find suitable expansion opportunities. Various factors, such as interest rate environment, regulatory and legislative considerations and competition, may also impede or prohibit the Company’s ability to expand its market presence.

Cornerstone is subject to Tennessee’s anti-takeover statutes and certain charter provisions which could decrease its chances of being acquired even if the acquisition is in the best interest of Cornerstone’s shareholders.

As a Tennessee corporation, Cornerstone is subject to various legislative acts which impose restrictions on and require compliance with procedures designed to protect shareholders against unfair or coercive mergers and acquisitions. These statutes may delay or prevent offers to acquire Cornerstone and increase the difficulty of consummating any such offers, even if the acquisition would be in its shareholders’ best interests. Cornerstone’s amended and restated charter also contains provisions which may make it difficult for another entity to acquire it without the approval of a majority of the disinterested directors on its board of directors. Secondly, the amount of common stock owned by, and other compensation arrangements with, Cornerstone’s officers and directors may make it more difficult to obtain shareholder approval of potential takeovers that they oppose. As of February 19, 2008, directors and executive officers beneficially owned approximately 17.60% of Cornerstone’s common stock. Agreements with Cornerstone’s senior management also provide for significant payments under certain circumstances following a change in control. These compensation arrangements, together with the common stock and option ownership of Cornerstone’s board of directors and management, could make it difficult or expensive to obtain majority support for shareholder proposals or potential acquisition proposals that the board of directors and officers oppose.

The success and growth of Cornerstone’s operations will depend on its ability to adapt to technological changes.

The banking industry and the ability to deliver financial services is becoming more dependent on technological advancement, such as the ability to process loan applications over the Internet, accept electronic signatures, provide process status updates instantly, reliable on-line banking capabilities and other customer expected conveniences that are cost efficient to Cornerstone’s business processes. As these technologies are improved in the future, Cornerstone may, in order to remain competitive, be required to make significant capital expenditures.

Even though Cornerstone’s common stock is currently traded on the OTC Bulletin Board, the trading volume in its common stock has been limited. Secondly, the sale of substantial amounts of Cornerstone’s common stock in the public market could depress the price.

Cornerstone cannot say with any certainty when a more active and liquid trading market for its common stock will develop or be sustained. Because of this, Cornerstone’s shareholders may not be able to sell their shares at the volumes, prices, or times that they desire. Cornerstone cannot predict the effect, if any, that future sales or the availability of common stock will have on the market price. Cornerstone, therefore, can give no assurance that sales of substantial amounts of its common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of its common stock to decline or impair its ability to raise capital through sales of its common stock.

Cornerstone may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing shareholders.

In order to maintain capital at desired or required regulatory levels, Cornerstone’s board of directors may decide from time to time to issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of its common stock. The sale of these shares may significantly dilute the book value per share of its common stock. New investors in the future may also have rights, preferences and privileges senior to its current shareholders which may adversely impact its current shareholders.

Cornerstone’s ability to declare and pay dividends is limited by law and it may be unable to pay future dividends.

Cornerstone derives the majority of its income from dividends on the shares of common stock of the Bank and Eagle. The ability of the Bank and Eagle to declare and pay dividends is limited by its obligations to maintain sufficient capital and by other general restrictions on its dividends that are applicable to banks that are regulated by the FDIC and the Department of Financial Institutions. In addition, the FRB may impose restrictions on Cornerstone’s ability to pay dividends on its common stock. As a result, Cornerstone cannot assure its shareholders that it will declare or pay dividends on shares of its common stock in the future.

ITEM 1B. UNRESOLVED STAFF COMMENTS

There are no written comments from the Commission staff regarding our periodic or current reports under the Act which remain unresolved.

ITEM 2. DESCRIPTION OF PROPERTY

As of December 31, 2007, the principal offices of Cornerstone are located at 835 Georgia Avenue, Chattanooga, Tennessee 37402. In addition, the Bank operates five full-service branches and two loan production offices that are located at:

Branches		4154 Ringgold Road, East Ridge, Tennessee 5319 Highway 153, Hixson, Tennessee 2280 Gunbarrel Road, Chattanooga, Tennessee 8966 Old Lee Highway, Ooltewah, Tennessee 835 Georgia Avenue, Chattanooga, Tennessee

Loan Production Offices		202 West Crawford Street, Dalton, Georgia
		9724 Kingston Pike Suite 305B Knoxville, Tennessee

The Georgia Avenue facility located in downtown Chattanooga, Tennessee serves as a branch location for the Bank’s customers as well as Cornerstone’s Executive offices. The Bank owns the properties located at 2280 Gunbarrel Road, 4154 Ringgold Road, 5319 Highway 153 and 8966 Old Lee Highway. Cornerstone operates a service center to facilitate all of its non-customer contact functions located at 6401 Lee Corners, Suite B, Chattanooga, Tennessee.

ITEM 3. LEGAL PROCEEDINGS

As of the end of 2007, neither Cornerstone, the Bank nor Eagle was involved in any material litigation. The Bank is periodically involved as a plaintiff or defendant in various legal actions in the ordinary course of its business. Management believes that any claims pending against Cornerstone or its subsidiaries are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Bank’s or Eagle’s financial condition or Cornerstone’s consolidated financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of 2007 to a vote of security holders of Cornerstone through a solicitation of proxies or otherwise.

PART II

ITEM 5. MARKET FOR THE COMMON EQUITY: RELATED STOCKHOLDER MATTERS AND ISSURER PURCHASES OF EQUITY SECURITIES

On February 9, 2008, the Company had 6,369,718 shares of common stock outstanding. Cornerstone’s common stock is quoted on the OTC Bulletin Board but is not listed on a national securities exchange. Morgan Keegan, a subsidiary of Regions Bank, is the principal market maker for Cornerstone’s stock. There are nine other market makers who assist in providing a market.

There were approximately 558 holders of record of the common stock as of December 31, 2007. This number does not include shareholders with shares in nominee name held by DTC. As of the end of 2007, there were 3,607,162 shares held in nominee name by DTC. Cornerstone paid quarterly cash dividends in 2007 in the amount of $0.05 per share. Cornerstone announced, in December 2007, a first quarter 2008 dividend of $0.07, which was paid January 4, 2008. Cornerstone’s board of directors will continue to evaluate the amount of future dividends, if any, after capital needs required for expected growth of assets are reviewed. The payment of dividends is solely within the discretion of the board of directors, considering Cornerstone’s expenses, the maintenance of reasonable capital and risk reserves, and appropriate capitalization requirements for state banks.

Table 1 presents the high and low closing prices of Cornerstone’s common stock for the periods indicated, as reported by published sources. The prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

TABLE 1

High and Low Common Stock Share Price for the Company					Dividends paid
2008 Fiscal Year	Low		High		Per Share
First Quarter (through Feb. 29, 2008)	$	7.99	$	10.90	$	.07

2007 Fiscal Year
First Quarter	$	14.25	$	16.50	$	0.05
Second Quarter	$	14.30	$	15.30	$	0.05
Third Quarter	$	10.95	$	14.50	$	0.05
Fourth Quarter	$	10.05	$	12.40	$	0.05

2006 Fiscal Year
First Quarter	$	11.63	$	13.63	$	0.03
Second Quarter	$	11.70	$	12.88	$	0.03
Third Quarter	$	11.70	$	13.39	$	0.03
Fourth Quarter	$	13.05	$	17.00	$	0.03

2005 Fiscal Year
First Quarter	$	7.87	$	9.25	$	0.05
Second Quarter	$	8.38	$	9.25	$	0.00
Third Quarter	$	8.80	$	10.25	$	0.04
Fourth Quarter	$	9.75	$	12.50	$	0.00

Table 2 presents the number of shares and average share price for Cornerstone’s Equity Compensation Plans.

TABLE 2

Equity Compensation Plan
Year Ended December 31, 2007

Plan category	Number of securities to be issued upon exercise of outstanding options		Weighted average exercise price of outstanding options		Number of securities remaining available for future issuance
Equity compensation plans approved by security holders:		784,075	$	6.92		647,675
Equity compensation plans not approved by security holders:		-		-		80,000
Total		784,075	$	6.92		727,675

ITEM 6. SELECTED FINANCIAL DATA.

Table 3 presents selected financial data for the periods indicated.

TABLE 3

	At and for the Fiscal Years Ended December 31,
	2007			2006		2005		2004		2003
	(Dollars in Thousands)

Total interest income	$	34,784		$	29,158	$	20,672	$	14,058	$	11,326
Total interest expense		14,414			10,306		6,077		3,575		3,210
Net interest income		20,370			18,852		14,594		10,483		8,115
Provision for loan losses		10,409			1,106		1,401		840		545
Net interest income after provision for loan losses		9,961			17,746		13,193		9,643		7,570
Noninterest income:
Investment securities gains		—			—		—		—		—
Other income		1,695			2,111		1,904		1,405		1,241
Noninterest expense		10,926			10,718		8,216		6,885		5,740
Income before income taxes		730			9,139		6,881		4,163		3,071
Income tax expense / (benefit)	$	(141	)	$	3,328	$	2,556	$	1,592	$	1,189
Net income	$	871		$	5,811	$	4,325	$	2,571	$	1,881

Per Share Data:
Net income, basic	$	0.14		$	0.90	$	0.71	$	0.52	$	0.38
Net income, assuming dilution	$	0.13		$	0.85	$	0.66	$	0.46	$	0.36
Dividends paid	$	0.20		$	0.12	$	0.09	$	0.03	$	0.00
Book value	$	5.70		$	5.86	$	5.07	$	4.32	$	3.40
Tangible book value(1)	$	5.24		$	5.40	$	4.54	$	3.88	$	2.89

Financial Condition Data:
Assets	$	444,421		$	374,942	$	323,611	$	248,614	$	200,996
Loans, net of unearned interest	$	369,883		$	305,879	$	262,008	$	202,555	$	155,278
Cash and investments	$	51,798		$	51,557	$	46,074	$	34,614	$	33,118
Federal funds sold	$	—		$	—		—		—	$	3,060
Deposits	$	313,250		$	275,816	$	252,435	$	187,832	$	159,352
FHLB advances and line of credit	$	47,100		$	39,500	$	30,000	$	27,000	$	17,400
Subordinated debentures	$	—		$	—		—		—		—
Federal funds purchased and repurchase agreements	$	41,560		$	19,249	$	4,790	$	7,409	$	6,084
Shareholders’ equity	$	36,327		$	38,183	$	32,466	$	24,807	$	16,903
Tangible shareholders’ equity(1)	$	33,386		$	35,137	$	29,089	$	22,266	$	14,362

Selected Ratios:
Interest rate spread	4.51	%	5.16	%	4.93	%	4.70	%	4.54	%
Net interest margin(2)	5.22	%	5.80	%	5.43	%	5.02	%	4.87	%
Return on average assets	0.21	%	1.69	%	1.51	%	1.15	%	1.06	%
Return on average equity	2.14	%	16.27	%	14.98	%	13.83	%	7.38	%
Return on average tangible equity(1)	2.31	%	17.78	%	16.96	%	16.02	%	8.76	%
Average equity to average assets	9.86	%	10.36	%	10.09	%	8.30	%	9.04	%
Dividend payout ratio	149.71	%	13.33	%	12.17	%	4.84	%	0.00	%
Ratio of nonperforming assets to total assets	0.40	%	0.40	%	0.47	%	0.08	%	0.07	%
Ratio of allowance for loan losses to nonperforming loans	791.16	%	25.90	%	20.70	%	5.33	%	0.00	%
Ratio of allowance for loan losses to total average loans, net of unearned income	3.88	%	1.50	%	1.50	%	1.47	%	1.42	%

(1)	Tangible shareholders’ equity is shareholders’ equity less goodwill and intangible assets.

(2)	Net interest margin is the net yield on interest earning assets and is the difference between the interest yield earned on interest-earning assets less the interest rate paid on interest bearing liabilities.

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Certain financial information included in our summary consolidated financial data is determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). These non-GAAP financial measures are “tangible book value per share,” “tangible shareholders’ equity,” and “return on average tangible equity.” Cornerstone’s management uses these non-GAAP measures in its analysis of Cornerstone’s financial performance.

“Tangible book value per share” is defined as total equity reduced by recorded goodwill and other intangible assets divided by total common shares outstanding. This measure is important to investors interested in changes from period-to-period in book value per share exclusive of changes in intangible assets. Goodwill, an intangible asset that is recorded in a purchase business combination, has the effect of increasing total book value while not increasing the tangible assets of a company. For companies such as Cornerstone that have engaged in business combinations, purchase accounting can result in the recording of significant amounts of goodwill related to such transactions.

·	“Tangible shareholders’ equity” is shareholders’ equity less goodwill and other intangible assets.

·	“Return on average tangible equity” is defined as earnings for the period divided by average equity reduced by average goodwill and other intangible assets.

These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures which may be presented by other companies. Table 4 presents a reconciliation to provide a more detailed analysis of these non-GAAP performance measures:

TABLE 4

	At and for the Fiscal Years Ended December 31,
	2007			2006			2005			2004			2003
Book value per share	$	5.70		$	5.86		$	5.07		$	4.32		$	3.40
Effect of intangible assets per share	$	0.46		$	0.47		$	0.53		$	0.44		$	0.51
Tangible book value per share	$	5.24		$	5.40		$	4.54		$	3.88		$	2.89
Return on average equity		2.14	%		16.27	%		14.98	%		13.83	%		7.38	%
Effect of intangible assets		0.17	%		1.51	%		1.98	%		2.19	%		1.38	%
Return on average tangible equity		2.31	%		17.78	%		16.96	%		16.02	%		8.76	%

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Forward-Looking Statements

Management’s discussion and analysis of Cornerstone’s operations, prospects, and other matters, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of applicable federal and state securities laws. Although Cornerstone believes that the assumptions underlying such forward-looking statements contained in this report are reasonable, any of the assumptions could be inaccurate and, accordingly, there can be no assurance that the forward-looking statements included herein will prove to be accurate. The use of such words as “expect,” “anticipate,” “forecast,” and comparable terms should be understood by the reader to indicate that the statement is “forward-looking” and thus subject to change in a manner that can be unpredictable. Factors that could cause actual results to differ from the results anticipated, but not guaranteed, in this report, include (without limitation) economic and social conditions, competition for loans, mortgages, and other financial services and products, changes in interest rates, unforeseen changes in liquidity, results of operations, and financial conditions affecting Cornerstone’s customers, and other risks that cannot be accurately quantified or completely identified. Many factors affecting Cornerstone’s financial condition and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition from other providers of financial services simply cannot be predicted. These factors are unpredictable and beyond Cornerstone’s control. Earnings may fluctuate from period to period. The purpose of this type of information is to provide readers with information relevant to understanding and assessing the financial condition and results of operations of the Company, and not to predict the future or to guarantee results. Cornerstone is unable to predict the types of circumstances, conditions and factors that can cause anticipated results to change. Cornerstone undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of changes or unanticipated events, circumstances, or results.

Management's Discussion And Analysis Or Plan Of Operation

Cornerstone Bancshares, Inc. (“Cornerstone”) is a bank holding company and the parent of Cornerstone Community Bank, (the “Bank”) a Tennessee banking corporation, and Eagle Financial, Inc., (“Eagle”), an accounts receivable financing company that operate primarily in and around Hamilton County, Tennessee. The Bank has also established loan production offices in Knoxville, Tennessee and Dalton, Georgia. The Bank’s business consists primarily of attracting deposits from the general public and, with these and other funds, originating real estate loans, consumer loans, business loans, and residential and commercial construction loans. The principal sources of income for the Bank are interest and fees collected on loans, fees collected on deposit accounts, and interest and dividends collected on other investments. The principal expenses of the Bank are interest paid on deposits, employee compensation and benefits, office expenses, and other overhead expenses. Eagle’s principal source of income is revenue received from the purchase of receivables. Expenses are related to employee compensation and benefits, office and overhead expenses.

The following is a discussion of our financial condition at December 31, 2007 and December 31, 2006 and our results of operations for each of the three-years ended December 31, 2007, 2006 and 2005. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein.

Review of Financial Performance

As of December 31, 2007 Cornerstone had total consolidated assets of approximately $444 million, total loans of approximately $384 million, total deposits of approximately $313 million and stockholders equity of approximately $36 million. Cornerstone’s net income decreased to $871 thousand for 2007 compared to $5.8 million 2006 and $4.3 million for 2005.

Results of Operations

Net Interest Income-Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest bearing liabilities. Net Interest income is also the most significant component of our earnings. For the year ended December 31, 2007, Cornerstone recorded net interest income of approximately $20,370,000, which resulted in a net interest margin of 5.22%. For the year ended December 31, 2006, Cornerstone recorded net interest income of approximately $18,853,000, which resulted in a net interest margin of 5.80%. For the year ended December 31, 2005, Cornerstone recorded net interest income of approximately $14,594,000, which resulted in a net interest margin of 5.43%.

Table 5 presents information with respect to interest income from average interest-earning assets, expressed both in dollars and yields, and interest expense on average interest-bearing liabilities, expressed both in dollars and rates, for the periods indicated. The table includes loan yields, which reflect the amortization of deferred loan origination and commitment fees. Interest income from investment securities includes the accretion of discounts and amortization of premiums.

TABLE 5

Yields Earned on Average Earning Assets and

Rates Paid on Average Interest Bearing Liabilities

Years Ended December 31,

	2007								2006								2005
(In thousands)	Average Balance			Interest Income/ Expense(1)		Yield/ Rate			Average Balance			Interest Income/ Expense(1)		Yield/ Rate			Average Balance			Interest Income/ Expense(1)		Yield/ Rate
ASSETS
Interest-earning assets:
Loans(1)(2)	$	353,278		$	32,981		9.34	%	$	284,105		$	27,317		9.61	%	$	236,265		$	19,354		8.19	%
Investment securities(3)		37,673			1,750		4.80	%		36,218			1,584		4.48	%		29,705			1,217		4.24	%
Federal funds sold		760			52		6.86	%		4,686			258		5.51	%		2,976			101		3.39	%
Total interest-earning assets		391,711			34,783		8.89	%		325,009			29,159		8.98	%		268,946			20,672		7.68	%
Allowance for loan losses		(5,009	)							(4,104	)							(3,025	)
Cash and other assets		26,341								23,836								20,288
Total assets	$	413,043							$	344,741							$	286,209
TOTAL LIABILITIES AND EQUITY
Interest-bearing liabilities:
Deposits:
NOW accounts	$	36,327			802		2.21	%	$	34,701			427		1.23	%	$	33,943			329		0.97	%
Money market / Savings		55,808			2,018		3.61	%		58,477			2,225		3.80	%		45,232			1,107		2.45	%
Time deposits, $100m and
Over		61,172			3,134		5.12	%		43,692			1,993		4.56	%		32,611			1,145		3.51	%
Time deposits, under $100m		107,498			5,387		5.01	%		88,773			3,899		4.39	%		70,167			2,240		3.19	%
Total interest-bearing deposits		260,805			11,341		4.35	%		225,643			8,544		3.78	%		181,953			4,821		2.65	%
Federal funds purchased		11,374			613		5.39	%		4,570			232		5.07	%		4,269			143		3.35	%
Securities sold under agreement to repurchase		8,103			244		3.01	%		4,020			116		2.88	%		3,501			60		1.71	%
Other borrowings		48,282			2,216		4.59	%		35,429			1,414		3.98	%		30,973			1054		3.40	%
Total interest-bearing
Liabilities		328,564			14,414		4.39	%		269,662			10,306		3.82	%		220,696			6,078		2.75	%
Net interest spread							4.51	%							5.16	%							4.93	%

Other liabilities:
Demand deposits		41,503								37,056								34,730

Accrued interest payable and other liabilities		2,240								2,295								1,909
Stockholders' equity		40,737								35,728								28,874
Total liabilities
And stockholders' equity	$	413,043							$	344,741							$	286,209

Net interest margin				$	20,369		5.22	%				$	18,853		5.80	%				$	14,594		5.43	%

(1) Interest income on loans includes amortization of deferred loan fees and other discounts of $302 thousand, $288 thousand, and $262 thousand for the fiscal years ended December 31, 2007, 2006, and 2005, respectively.

(2) Nonperforming loans are included in the computation of average loan balances, and interest income on such loans is recognized on a cash basis.

(3) Yields on securities are calculated on a fully tax equivalent basis.

Other matters related to the changes in net interest income, net interest yields and rates, and net interest margin are presented below:

During 2007 the Bank continued to increase its loan portfolio with an emphasis in commercial loans. During 2007 the Bank hired 5 additional relationship managers to attract new loan and deposit customers.

As of December 31, 2007, the Bank’s investment portfolio resulted in a yield of 4.80% compared to 4.48% for the same time period in 2006. The Bank’s investment portfolio is used primarily for pledging purposes with the State of Tennessee Collateral Pool, Federal Reserve discount window and to secure repurchase agreements.

The Bank expects continued pressure on the net interest margin due to market conditions such as increased competition in Cornerstone’s primary deposit market. Therefore, the Bank has elected to grow its funding base with a variety of solutions including local market CD specials, brokered deposits and borrowings from the Federal Home Loan Bank (the “FHLB”). As of December 31, 2007 borrowings from the FHLB totaled $47 million with an interest cost of 4.37%.

During 2007 the Bank offered several certificate of deposit (“CD”) promotions to attract deposits from customers in the Chattanooga Tennessee MSA. The Bank also obtained approximately $13 million in brokered CDs to provide additional funding. Management believes that the brokered CD market provides a convenient source of funds and will continue to obtain brokered CDs to offset higher interest rates demanded by other funding sources.

During the fourth quarter the Bank settled an interest contract dispute in the amount of $316 thousand. The additional expense reduced the net interest margin by 30 basis points for the quarter and 8 basis points for 2007. Without this one time charge the net interest margin would have been 4.94% for the quarter and 5.30% year to date. This expense reduced the 4th quarter and annual earnings by approximately $200 thousand after taxes.

Starting in September 2007 the Federal Reserve Bank initiated a series of interest rate cuts that as of January 30, 2008 resulted in the Federal Funds Target rate of 3.00%. This 225 basis point reduction has placed downward pressure on the banking industry’s net interest margins. Cornerstone also experienced a reduction in its net interest margin to 4.64%for the 4^th quarter 2007.

Tables 6 and 7 present the changes in interest income and interest expense that are attributable to three factors:

(i) A change in volume or amount of an asset or liability.

(ii) A change in interest rates.

(iii) A change caused by the combination of changes in asset or deposit mix.

The tables describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected Cornerstone’s interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided as to changes attributable to change in volume (change in volume multiplied by current rate) and change in rates (change in rate multiplied by current volume). The remaining difference has been allocated to mix.

TABLE 6

INTEREST INCOME AND EXPENSE ANALYSIS

	Year Ended December 31,
	2007 Compared to 2006
(In Thousands)	Volume			Rate			Mix			Net Change
Interest income:
Loans (1)(2)	$	6,461			($954	)	$	157		$	5,664
Investment securities		69			105			(8	)		166
Federal funds sold		(204	)		(8	)		6			(206	)
Other earning assets		0			0			0			0
Total interest income											5,624

Interest expense:
NOW accounts		36			356			(16	)		376
Money market and savings accounts		(96	)		(103	)		(8	)		(207	)
Time deposits, $100,000 and over		895			343			(98	)		1,140
Time deposits, less than $100,000		938			666			(116	)		1,488
Other borrowings		590			294			(82	)		802
Federal funds purchased		367			36			(22	)		381
Securities sold under agreement to repurchase		123			11			(7	)		127
Total interest expense											4,107
Change in net interest income (expense)										$	1,517

TABLE 7

INTEREST INCOME AND EXPENSE ANALYSIS

	Year Ended December 31,
	2006 Compared to 2005
(In Thousands)	Volume		Rate		Mix			Net Change
Interest income:
Loans (1)(2)	$	4,597	$	4,034		($668	)	$	7,963
Investment securities		292		87		(12	)		367
Federal funds sold		106		113		(62	)		157
Other earning assets		0		0		0			0
Total interest income									8,487

Interest expense:
NOW accounts		9		90		(1	)		98
Money market and savings accounts		503		789		(174	)		1,118
Time deposits, $100,000 and over		596		459		(207	)		848
Time deposits, less than $100,000		817		1,065		(223	)		1,659
Other borrowings		177		209		(23	)		363
Federal funds purchased		15		74		(3	)		86
Securities sold under agreement to repurchase		15		51		(10	)		56
Total interest expense									4,228
Change in net interest income (expense)								$	4,259

(1) Loan amounts include non-accruing loans.

(2) Interest income includes the portion of loan fees recognized in the respective periods.

Provision for Loan Losses-The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, should be adequate to provide coverage for the inherent losses on outstanding loans. The provision for loan losses amounted to $10.4 million for the year ended December 31, 2007. Other matters relating to the changes in provision for loan losses are presented below:

During the second quarter of 2007, the Bank identified a customer relationship in its asset based lending program totaling $5.5 million in which management detected a suspected customer fraud. The company responsible for this problem loan is still operating under a forbearance agreement with the bank and is current on all credit obligations. The problem arose out of a suspected fraud and the company’s operations are still considered a source of repayment and if properly managed may be able to satisfy the debt obligations. During 2007 in accordance with FAS 114, management assigned $2.8 million to the loan loss allowance for this specific credit and anticipates that the amount will adequately provide for any probable shortfalls of collateral if the company were to discontinue operations.

On February 13, 2008 Cornerstone revised its previously announced fiscal year-ended 2007 financial results due to an apparent customer fraud. The apparent fraud was discovered as a result of additional risk controls being implemented as a result of the above mentioned credit. This customer was determined to have submitted apparently fraudulent financial statements that were reviewed by a certified public accountant during 2007. The customer’s relationship with the Bank totaled approximately $7.6 million which included a $6 million commercial line of credit secured by accounts receivable, inventory and all other business assets and $1.6 million secured by commercial real estate. The company has ceased operations and moved to a liquidation status. The Bank provided $6.5 million to the loan loss allowance for the credit and charged off $6 million during the month of March 2008. Management has determined that the remaining $1.1 million is adequately secured and does not expect a shortfall during liquidation.

Non Interest Income-Items reported as non interest income include service charges on checking accounts, insufficient funds charges, automated clearing house (“ACH”) processing fees and the Bank’s secondary mortgage department earnings. Increases in income derived from service charges and ACH fees are primarily a function of the Bank’s growth while fees from the origination of mortgage loans will often reflect market conditions and fluctuate from period to period.

Table 8 presents the components of non interest income for the years ended December 31, 2007, 2006 and 2005 (in thousands).

TABLE 8

	2007		2006		2005
Customer service fees	$	1,426	$	1,298	$	984
Other noninterest income		165		91		68
Operating lease income		-		301		540
Net gain from sale of loans & other assets		104		421		313
Total noninterest income	$	1,695	$	2,111	$	1,905

Significant matters relating to the changes to non interest income are presented below:

Service charges on deposits primarily increased as a result of the growth in demand deposits and interest demand deposits.

The Bank created a new line of business in 2007. A major service provider for the payroll processor industry recently terminated most of its processors in order to pursue its core bank lines of business. Cornerstone recognized this as an opportunity and has built the program and infrastructure to service this sector of ACH processing. Currently, the Bank has seven payroll processors processing ACH transactions and expects to add approximately five to ten additional payroll processors in 2008. This line of business has the ability to produce a material amount of non-interest income with a relatively low amount of credit and transaction risk.

One of the major components in other fee income in prior years was the Bank’s lease income. The Bank had entered into an operating lease agreement with one of its customers that resulted in monthly lease income to the Bank. The lease has been terminated with the customer, which has purchased the assets. Currently, the Bank has no income from operating lease agreements.

Non Interest Expense-Items reported as non interest expense include salaries and employee benefits, occupancy and equipment expense and other operating expense.

Table 9 presents the components of non interest expense for the years ended December 31, 2007, 2006 and 2005 (in thousands).

TABLE 9

	2007		2006		2005
Salaries and employee benefits	$	6,609	$	6,018	$	4,503
Net occupancy and equipment expense		1,355		1,075		859
Depreciation on leased assets		-		245		379
Other operating expenses		2,962		3,380		2,475
Total noninterest income	$	10,926	$	10,718	$	8,216

Significant matters relating to the changes to non interest expense are presented below:

As of December 2006 Cornerstone had 98 full time equivalent employees. By December 2007, the number of full time equivalent employees had increased to 116. The positions filled by these employees included 5 additional relationship managers and two additional employees in the Bank’s ACH processing department. The addition of these employees as well as the additional staff hired should have a positive impact on the Bank’s growth and performance during 2008.

Occupancy and equipment expense has increased from prior periods in part due to the relocation of the Bank’s downtown branch and Cornerstone’s corporate headquarters. While the relocation has increased expenses, the Bank’s presence in downtown Chattanooga, Tennessee, provides existing bank customers with greater access to the Bank’s services as well as potential new customers. The Bank also opened two loan production offices during 2007; one in Knoxville, Tennessee, and one in Dalton, Georgia.

Income Tax Expense

The difference between Cornerstone’s expected income tax expense, computed by multiplying income before income taxes by statutory income tax rates, is primarily attributable to new market tax credits for federal and state purposes, tax exempt loans and tax exempt securities.

Financial Condition

Overview-Cornerstone’s consolidated balance sheet reflects significant growth since December 31, 2006. Total assets increased approximately $69 million or 18.5% from $375 million as of December 31, 2006 to $444 million as of December 31, 2007. The primary component of the growth continues to be the Bank’s loan portfolio. Total loans increased $73 million or 23.7% from approximately $310 million as of December 31, 2006 to approximately $384 million as of December 31, 2007.

Investments-The Bank’s investment portfolio totaled $36.9 million or 8.3% of total assets as of the year end 2007 compared to a total of $33.9 million or 9.0% of total assets as of year end 2006. The portfolio is accounted for in two classifications: “Held to Maturity” and “Available for Sale”. The Bank also has an investment in Federal Home Loan Bank Stock. The objective of the Bank’s investment policy is to invest funds not otherwise needed to meet the loan demand of the Bank’s market area and to meet the following five objectives: Gap Management, Liquidity, Pledging, Return, and Local Community Support. In doing so, the Bank uses the portfolio to provide structure and liquidity that the loan portfolio cannot. The management investment committee balances the market and credit risks against the potential investment return, ensures investments are compatible with the pledge requirements of the Bank’s deposit of public funds, maintains compliance with regulatory investment requirements, and assists various public entities with their financing needs. The management investment committee is authorized to execute security transactions for the investment portfolio based on the decisions of the Board of Directors Asset Liability Committee (“ALCO”). All the investment transactions occurring since the previous ALCO meeting are reviewed by the ALCO at its next monthly meeting, in addition to the entire portfolio. The investment policy allows portfolio holdings to include short-term securities purchased to provide the Bank’s needed liquidity and longer-term securities purchased to generate stable income for the Bank during periods of interest rate fluctuations.

Table 10 presents the carrying value of the Bank's investments at the dates indicated. Available for sale securities are carried at fair market value and securities held to maturity are held at their book value (amounts in thousands).

TABLE 10

Investment Portfolio

Years Ending December 31,

	2007		2006		2005
Securities available for sale:
U.S. Government and agency obligations	$	27,414	$	26,470	$	22,349
Mortgage-backed and other securities		3,836		2,634		4,000
State & political subdivisions tax-exempt		3,503		3,249		3,285
Corporate debt		0		0		494
Totals	$	34,753	$	32,353	$	30,128

Securities held to maturity:
U.S. Government and agency obligations	$	0	$	0	$	0
Mortgage-backed and other securities		200		236		322
State & political subdivisions tax-exempt		0		0		0
Corporate debt		0		0		0
Totals	$	200	$	236	$	322

Federal Home Loan Bank stock, at cost		1,912		1,332		1,034

Total Investments	$	36,865	$	33,921	$	31,484

For December 31, 2007 tables 11 and 12 present the book value of the Bank's investments, the weighted average yields on the Bank's investments and the periods to maturity of the Bank's investments for the “Securities Available for Sale” and the “Securities Held to Maturity,” respectively. Available for Sale and Held to Maturity information relating to December 31, 2006 is presented in tables 13 and 14.

TABLE 11

Weighted Average Yields on the Available For Sale Investments

Periods of Maturity from December 31, 2007

	Less than 1 year					1 to 5 years					5 to 10 years					Over 10 years
	Amount		Weighted Avg. Yield (1)			Amount		Weighted Avg. Yield (1)			Amount		Weighted Avg. Yield (1)			Amount		Weighted Avg. Yield (1)
Securities available for sale:
U.S. Treasuries	$	0		0.00	%	$	0		0.00	%	$	0		0.00	%	$	0		0.00	%
U.S. Government agencies		8,491		4.43	%		16,848		4.57	%		0		0.00	%		2,075		6.12	%
Mortgage-backed securities (2)		0		0.00	%		2		6.30	%		13		7.01	%		3,821		5.17	%
Tax-exempt municipal bonds		126		5.14	%		739		4.29	%		1,233		4.28	%		1,405		4.09	%
Other bonds, notes, debentures and securities		0		0.00	%		0		0.00	%		0		0.00	%		0		0.00	%
Totals	$	8,617		4.44	%	$	17,589		4.56	%	$	1,246		4.31	%	$	7,301		5.32	%

Total Securities Available for Sale	$	34,753		4.76	%

TABLE 12

Weighted Average Yields on the Held To Maturity Investments

Periods of Maturity from December 31, 2007

	Less than 1 year					1 to 5 years					5 to 10 years					Over 10 years
	Amount		Weighted Avg. Yield (1)			Amount		Weighted Avg. Yield (1)			Amount		Weighted Avg. Yield (1)			Amount		Weighted Avg. Yield (1)
Securities available for sale:
U.S. Treasuries	$	0		0.00	%	$	0		0.00	%	$	0		0.00	%	$	0		0.00	%
U.S. Government agencies		0		0.00	%		0		0.00	%		0		0.00	%		0		0.00	%
Mortgage-backed securities (2)		0		0.00	%		13		6.72	%		13		5.20	%		174		6.36	%
Tax-exempt municipal bonds		0		0.00	%		0		0.00	%		0		0.00	%		0		0.00	%
Other bonds, notes, debentures and securities		0		0.00	%		0		0.00	%		0		0.00	%		0		0.00	%
Totals	$	0		0.00	%	$	13		6.72	%	$	13		5.20	%	$	174		6.36	%

Total Securities held to maturity	$	200		6.31	%

Federal Home Loan Bank stock, at cost	$	1,912		5.52	%

Total Investments	$	36,865		4.80	%

(1) The weighted average yields on tax-exempt securities have been computed on a tax-equivalent basis.

(2) Mortgages are allocated by maturity and not amortized

TABLE 13

Weighted Average Yields on the Available For Sale Investments

Periods of Maturity from December 31, 2006

	Less than 1 year					1 to 5 years					5 to 10 years					Over 10 years
	Amount		Weighted Avg. Yield (1)			Amount		Weighted Avg. Yield (1)			Amount		Weighted Avg. Yield (1)			Amount		Weighted Avg. Yield (1)
Securities available for sale:
U.S. Treasuries	$	0		0.00	%	$	0		0.00	%	$	0		0.00	%	$	0		0.00	%
U.S. Government agencies		7,610		4.21	%		16,801		4.46	%		0		0.00	%		2,059		5.76	%
Mortgage-backed securities (2)		1		7.49	%		3		5.43	%		14		6.75	%		2,616		5.57	%
Tax-exempt municipal bonds		0		0.00	%		558		4.71	%		1,167		4.43	%		1,525		5.34	%
Other bonds, notes, debentures and securities		0		%			0		0.00	%		0		0.00	%		0		0.00	%
Totals	$	7,611		4.21	%	$	17,362		4.47	%	$	1,181		4.46	%	$	6,199		5.58	%

Total Securities Available for Sale	$	32,353		4.62	%

TABLE 14

Weighted Average Yields on the Held To Maturity Investments

Periods of Maturity from December 31, 2006

	Less than 1 year					1 to 5 years					5 to 10 years					Over 10 years
	Amount		Weighted Avg. Yield (1)			Amount		Weighted Avg. Yield (1)			Amount		Weighted Avg. Yield (1)			Amount		Weighted Avg. Yield (1)
Securities available for sale:
U.S. Treasuries	$	0		0.00	%	$	0		0.00	%	$	0		0.00	%	$	0		0.00	%
U.S. Government agencies		0		0.00	%		0		0.00	%		0		0.00	%		0		0.00	%
Mortgage-backed securities (2)		0		0.00	%		19		7.50	%		0		0.00	%		217		5.59	%
Tax-exempt municipal bonds		0		0.00	%		0		0.00	%		0		0.00	%		0		0.00	%
Other bonds, notes, debentures and securities		0		0.00	%		0		0.00	%		0		0.00	%		0		0.00	%
Totals	$	0		0.00	%	$	19		7.50	%	$	0		0.00	%	$	217		5.59	%

Total Securities held to maturity	$	236		5.75	%

Federal Home Loan Bank stock, at cost	$	1,332		5.82	%

Total Investments	$	33,921		4.66	%

(1) The weighted average yields on tax-exempt securities have been computed on a tax-equivalent basis.

(2) Mortgages are allocated by maturity and not amortized

Lending-All lending activities of the Bank are under the direct supervision and control of the Directors Loan Committee, which consists of the Chief Executive Officer, President, Senior Loan Administrator, and five outside directors. Also present at meetings of the committee are the loan review officer and other lending officers as required. All lending activities of Eagle are under the direct supervision and control of its Board of Directors which consist of the Chief Executive Officer, President, Treasurer, Secretary, Bank’s Senior Loan Administrator and four outside directors. These loan committees enforce loan authorizations for each officer, make lending decisions on loans exceeding such limits, review and oversee problem credits, and determine the allocation of funds for each lending category.

At December 31, 2007 and 2006, Cornerstone’s loan portfolio constituted approximately 83.2% and 81.6% of Cornerstone’s total assets, respectively.

Table 15 presents the composition of the Cornerstone’s loan portfolio at the indicated dates.

TABLE 15

Loan Portfolio Composition
Years Ending December 31,
	2007					2006					2005					2004		2003
(In thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Commercial, financial and agricultural	$	98,065		25.57	%	$	98,542		31.77	%	$	86,039		32.40	%	$	61,742		30.09	%	$	42,420		26.97	%
Real estate - construction		76,832		20.03	%		57,606		18.57	%		47,071		17.72	%		36,824		17.94	%		24,081		15.31	%
Real estate - mortgage		64,585		16.84	%		48,700		15.70	%		48,645		17.19	%		38,193		18.61	%		28,185		17.92	%
Real estate - commercial		138,074		35.99	%		99,197		31.98	%		79,608		29.98	%		61,860		30.14	%		56,527		35.94	%
Consumer loans		6,037		1.57	%		6,092		1.98	%		7,191		2.71	%		6,602		3.22	%		6,077		3.86	%
Total loans	$	383,593		100.00	%	$	310,137		100.00	%	$	265,554		100.00	%	$	205,221		100.00	%	$	157,290		100.00	%

Significant matters relating to the changes in the loan portfolio composition are presented below:

During 2007 the Bank increased its loan portfolio in commercial real estate loans from $99 million to $138 million by the end of the year. The primary reason for this growth was an increase in the number of Relationship Managers (RM) and the creation of two new loan production offices (LPO) during 2007. The LPO’s were opened in Knoxville, TN and Dalton, GA and were responsible for approximately $30 million in loan growth across multiple classifications. In the Chattanooga market the Bank hired four RM’s. The increased man power and expanded markets were the result of Cornerstone’s strategic plan to grow loans at a rapid pace to offset the expected contraction of the Bank’s net interest margin.

Table 16 presents the scheduled maturities of the loans in Cornerstone’s loan portfolio as of December 31, 2007 based on their contractual terms to maturity. Overdrafts are reported as due in less than one year. Loans unpaid at maturity are renegotiated based on current market rates and terms.

TABLE 16

Loans Maturing Year-end balance as of December 31, 2007
(In thousands)	Less than One Year		1 to 5 Years		Over 5 Years		Total
Commercial, financial and agricultural	$	84,288	$	13,354	$	423	$	98,065
Real estate - construction		68,632		7,845		355		76,832
Real estate - mortgage		30,688		29,389		4,508		64,585
Real estate - commercial		62,088		74,696		1,290		138,074
Consumer		3,164		2,831		42		6,037
Total Loans	$	248,860	$	128,115	$	6,618	$	383,593

Types of Loans

Commercial Loans-The Bank’s commercial loan portfolio is comprised of commercial, industrial, and non-farm non-residential loans, hereinafter referred to as commercial loans (excluding commercial construction loans). These installment loans and lines of credit are extended to individuals, partnerships and corporations for a variety of business purposes, such as accounts receivable and inventory financing, equipment financing, business expansion and working capital. The following is a list of terms impeded in the Bank’s commercial loan portfolio:

The terms of the Bank's commercial loans generally range from 90 days to a 15 year amortization with a five year balloon.

Commercial loans are generally tied to the prime index and adjust according with changes in the prime rate. The Bank also extends fixed interest rate loans when appropriate to match the borrower’s needs.

Loans secured by marketable equipment are required to be amortized over a period not to exceed 60 months.

Generally, loans secured by current assets such as inventory or accounts receivable are structured as revolving lines of credit with annual maturities.

Loans secured by chattel, mortgages and accounts receivable may not exceed 85% of their market value.

Loans secured by listed stocks, municipal bonds and mutual funds may not exceed 70% of their market value.

Unsecured short-term loans and lines of credit must meet criteria set by the Bank’s Loan Committee. Current financial statements support all commercial loans, and such financial statements are updated annually.

Substantially all of the Bank's commercial loans are secured and are guaranteed by the principals of the borrower.

Most of the Bank’s commercial loans are made with the intention of establishing a long-term relationship that fulfills the customer’s loan as well as deposit needs. This is the fastest growing area of the loan portfolio and is being staffed to continue this trend. The Bank believes this area has the best potential for future growth and has the highest barriers of entry to our competitors.

Real Estate: Construction Loans-The Bank makes residential construction loans to owner-occupants and to persons building residential properties for resale. The Bank has two main areas of construction loans: one is to residential real estate developers for speculative or custom single-family residential properties, and the other is to custom commercial construction projects with guaranteed takeout provisions. Construction loans are usually variable rate loans made for terms of one year or less, but extensions are permitted if construction has continued satisfactorily, the loan is current and other circumstances warrant the extension. Construction loans are limited to 80% of the appraised value of the lot and the completed value of the proposed structure.

Construction financing generally is considered to involve a higher degree of credit risk than permanent mortgage financing of residential properties, and this additional risk usually is reflected in higher interest rates. The higher risk of loss on construction loans is attributable in large part to the fact that loan funds are estimated and advanced upon the security of the project under construction, which is of uncertain value prior to the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, delays arising from labor problems, material shortages and other unpredictable contingencies, it is relatively difficult to accurately evaluate the total loan funds required to complete a project and to accurately evaluate the related loan-to-value ratios. If the estimates of construction costs and the saleability of the property upon completion of the project prove to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project with a value that is insufficient to assure full repayment.

The Bank's underwriting criteria are designed to evaluate and minimize the risk of each construction loan. Among other items, the Bank considers evidence of the availability of permanent financing or a take-out commitment to the borrower, the financial strength and reputation of the borrower, an independent appraisal and review of cost estimates, market conditions, and, if applicable, the amount of the borrower's equity in the project, pre-construction sale or leasing information and cash flow projections of the borrower.

Real Estate: Mortgage Loans-Real estate mortgage loans include all one to four family residential loans secured by real estate for purposes other than construction or acquisition and development. All real estate loans are held in the Bank’s loan portfolio except for loans that are designated as loans held for sale. The loans held for sale are FHLB or FNMA qualified and have been pre-approved by an underwriting specialist prior to closing. The remainder of the Bank’s mortgage loans are home equity loans and are made at fixed interest rates for terms of one to three years with balloon payment provisions and amortized over a 10 to 15 year period. The Bank's experience indicates that real estate loans normally remain outstanding for much shorter periods (seven years on average) than their stated maturity because the borrowers repay the loans in full either upon the sale of the secured property or upon the refinancing of the original loan.

In the case of owner occupied single-family residences, real estate loans are made for up to 95% of the value of the property securing the loan, based upon an appraisal if the loan amount is over $100,000. When the loan is secured by real estate containing a non-owner occupied dwelling of one to four family units, loans generally are made for up to 80% of the value, based upon an appraisal if the loan amount is over $100,000. The Bank also requires title insurance to insure the priority of the property lien on its real estate loans over $50,000 and requires fire and casualty insurance on all of its loans.

The real estate loans originated by the Bank contain a "due-on-sale" clause, which provides that the Bank may declare the unpaid balance of the loan immediately due and payable upon the sale of the mortgaged property. Such clauses are an important means of reducing the average loan life and increasing the yield on existing fixed-rate real estate loans, and it is the Bank's policy to enforce due-on-sale clauses.

Real Estate: Commercial-Commercial real estate mortgage loans include all one to four family residential loans secured by real estate for purposes other than construction or acquisition and development. All real estate loans are held in the Bank’s loan portfolio except for loans that have been participated to correspondent banks. The Bank will sell these participations if a loan exceeds the Bank’s legal lending limit or as is deemed appropriate by the Director’s Loan Committee. Commercial real estate mortgage loans are a combination of properties that are leased out or used for a primary place of a business the Bank has a relationship with. Most of the commercial real estate loans have fixed interest rates for terms of one to three years with balloon payment provisions and are amortized over a 10 to 15 year period, but whenever possible the Bank will seek a variable rate loan which would be tied to the New York prime rate and adjusted monthly. The Bank's experience indicates that real estate loans normally remain outstanding for much shorter periods (seven years on average) than their stated maturity because the borrowers repay the loans in full either upon the sale of the secured property or upon the refinancing of the original loan.

Commercial real estate loans are made for up to 85% of the value of the property securing the loan, based upon an appraisal if the loan amount is over $100,000. The Bank also requires title insurance to insure the priority of the property lien on its real estate loans over $50,000 and requires fire and casualty insurance on all of its loans.

Consumer Loans-These loans consist of consumer installment loans and consumer credit card balances. The Bank makes both secured and unsecured consumer loans for a variety of personal and household purposes. Most of the Bank's consumer loans are automobile loans, boat loans, property improvement loans and loans to depositors on the security of their certificates of deposit. These loans are generally made for terms of up to five years at fixed interest rates. The Bank considers consumer loans to involve a relatively high credit risk compared to real estate loans. Consumer loans, therefore, generally yield a relatively high return to the Bank and provide a relatively short maturity. The Bank believes that the generally higher yields and the shorter terms available on various types of consumer loans tend to offset the relatively higher risk associated with such loans, and contribute to a profitable spread between the Bank's average yield on earning assets and the Bank's cost of funds.

Lending Commitments-Commitments under standby letters of credit and undisbursed loan commitments increased from $68 million in 2006 to $77 million in 2007. This number includes all lines of credit that have not been fully drawn and loan commitments in the same status.

Origination, Purchase and Sale of Loans

The Bank originates the majority of its loans in Hamilton County, Tennessee. However, the Bank also originates loans in Marion, Sequatchie, Knox and Bradley Counties in Tennessee, and Dade, Walker, Whitfield and Catoosa Counties in Georgia, each of which is within 50 miles of Chattanooga, Tennessee. Loans are originated by 20 relationship managers who operate from the Bank's offices in Chattanooga, Tennessee and from the loan production offices in Dalton, Georgia and Knoxville, Tennessee. These relationship managers actively solicit loan applications from existing customers, local manufacturers and retailers, builders, real estate developers, real estate agents and others. The Bank also receives numerous loan applications as a result of customer referrals and walk-ins to its offices.

Upon receipt of a loan application and all required supporting information from a prospective borrower, the Bank obtains a credit report and verifies specific information relating to the loan applicant's employment, income and creditworthiness. For significant extensions of credit in which real estate will secure the proposed loan, a certified appraisal of the real estate is undertaken by an independent appraiser approved by the Bank. The Bank's relationship managers then analyze the credit worthiness of the borrower and the value of any collateral involved.

The Bank’s loan approval process is intended to be conservative but also responsive to customer needs. Loans are approved in accordance with the Bank's written loan policy, which provides for several tiers of approval authority, based on a borrower's aggregate debt with the Bank. The Bank’s legal lending limit is 25% of the Bank’s qualifying equity for secured loans and 15% for unsecured loans.

The Bank has in the past purchased and sold commercial loan participations with correspondent banks and will continue the practice when management feels the action would be in the best interest of shareholders. The purchase of loan participations allows the Bank to expand its loan portfolio and increase profitability while still maintaining the high credit standards, which are applied to all extensions of credit made by the Bank. The sale of loan participations allows the Bank to make larger loans and retain a servicing fee for its labor, which it otherwise would be unable to make due to capital or other funding considerations.

Loan Fee Income

In addition to interest earned on loans, the Bank receives origination fees for making loans, commitment fees for making certain loans, and other fees for miscellaneous loan-related services. Such fee income varies with the volume of loans made, prepaid or sold, and the rates of fees vary from time to time depending on the supply of funds and competitive conditions.

Commitment fees are charged by the Bank to the borrower for certain loans and are calculated as a percentage of the principal amount of the loan. These fees normally are deducted from the proceeds of the loan and generally range from 1/2% to 2% of the principal amount, depending on the type and volume of loans made and market conditions such as the demand for loans, the availability of money and general economic conditions. The Bank complies with FASB 91 and amortizes all significant loan fees over the life of the loan. The Bank also receives miscellaneous fee income from late payment charges, overdraft fees, property inspection fees, and miscellaneous services related to its existing loans.

Problem Loans and Allowance for Loan Losses

Problem Loans-In originating loans, Cornerstone recognizes that it will experience credit losses and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan. Cornerstone has instituted measures at the Bank and Eagle which are designed to reduce the risk of, and monitor exposure to, credit losses.

The Bank’s loan portfolio is systematically reviewed by the Bank's management, internal auditors, external auditors, and State and Federal regulators to ensure that the Bank’s larger loan relationships are being maintained within the loan policy guidelines, and remain properly underwritten. Input from all the above sources is used by the Bank to take corrective actions as necessary. As discussed below, each of the Bank's loans is assigned a rating in accordance with the Bank's internal loan rating system. All past due loans are reviewed by the Bank's senior lending officers and all past due loans over $25,000 are reviewed monthly by the Director’s Loan Committee. All loans classified as substandard or doubtful, as well as any "special mention" loans (defined in the following paragraph), are placed on the Bank’s watch list and reviewed at least monthly by the Director’s Loan Committee. In addition, all loans to a particular borrower are reviewed, regardless of classification, each time such borrower requests a renewal or extension of any loan or requests an additional loan. All lines of credit are reviewed annually prior to renewal. Such reviews include, but are not limited to, the ability of the borrower to repay the loan, a re-assessment of the borrower’s financial condition, the value of any collateral and the estimated potential loss to the Bank, if any.

The Bank's internal problem loan rating system establishes three classifications for problem assets: substandard, doubtful and loss. Additionally, in connection with regulatory examinations of the Bank, Federal and State examiners have authority to identify problem assets and, if appropriate, require the Bank to classify them. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the Bank is not warranted. Consequently, such assets are charged-off in the month they are classified as loss. Federal regulations also designate a "special mention" category, described as assets which do not currently expose the Bank to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention.

Assets classified as substandard or doubtful require the Bank to establish general allowances for loan losses. If an asset or portion thereof is classified as loss, the Bank must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified as loss or charge off such amount. General loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included, up to certain limits, in determining the Bank's regulatory capital, while specific valuation allowances for loan losses do not qualify as regulatory capital.

The Bank's collection procedures provide that when a loan becomes between fifteen days and thirty days delinquent, the borrower is contacted by mail and payment is requested. If the delinquency continues, subsequent efforts are made to contact and request payment from the delinquent borrower. Most loan delinquencies are cured within 60 days and no legal action is required. In certain circumstances, the Bank, for a fee, may modify the loan, grant a limited moratorium on loan payments or revise the payment schedule to enable the borrower to restructure his or her financial affairs. Generally, the Bank stops accruing interest and any accrued non collected interest will be reversed in accordance with GAAP on delinquent loans when payment is in arrears for 90 days or when collection otherwise becomes doubtful. If the delinquency exceeds 120 days and is not cured through the Bank's normal collection procedures or through a restructuring, the Bank will institute measures to enforce its remedies resulting from the default, including commencing a foreclosure, repossession or collection action. In certain cases, the Bank will consider accepting a voluntary conveyance of collateral in lieu of foreclosure or repossession. Real property acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as "real estate owned" until it is sold and is carried at the lower of cost or fair value less estimated costs to dispose. Accounting standards define fair value as the amount that is expected to be received in a current sale between a willing buyer and seller other than in a forced or liquidation sale. Fair values at foreclosure are based on appraisals. Losses arising from the acquisition of foreclosed properties are charged against the allowance for loan losses. Subsequent write-downs are provided by a charge to income through losses on other real estate in the period in which the need arises.

Allowance for Loan Losses-The allowance or reserve for possible loan losses is a means of absorbing future losses, which could be incurred from the current loan portfolio. The Bank maintains an allowance for possible loan losses, and management adjusts the general allowances monthly by charges to income in response to changes to outstanding loan balances.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan or portion thereof is charged off against the general allowance when management has determined that losses on such loans are probable. Recoveries on any loans charged-off in prior fiscal periods are credited to the allowance. It is the opinion of the Bank's management that the balance in the general allowance for loan losses as of December 31, 2007 is adequate to absorb possible losses from loans currently in the portfolio.

Table 17 presents Cornerstone's allocation of the allowance for loan losses as of December 31, 2007, 2006, 2005, 2004 and 2003.

TABLE 17

Allowance for Loan Losses Years Ending December 31,
	2007					2006					2005
(In thousands) Balance at end of period applicable to	Amount		Percent of loans by category to total loans			Amount		Percent of loans by category to total loans			Amount		Percent of loans by category to total loans
Commercial, financial and agricultural	$	9,482		25.57	%	$	1,686		31.77	%	$	1,438		32.40	%
Real estate - construction		2,447		20.03	%		1,581		18.57	%		1,253		17.72	%
Real estate - mortgage		101		16.84	%		77		15.70	%		79		17.19	%
Real estate - commercial		1,434		35.99	%		703		31.98	%		535		29.98	%
Consumer		246		1.57	%		211		1.98	%		240		2.71	%
Totals	$	13,710		100.00	%	$	4,258		100.00	%	$	3,545		100.00	%

	2004					2003
(In thousands) Balance at end of period applicable to	Amount		Percent of loans by category to total loans			Amount		Percent of loans by category to total loans
Commercial, financial and agricultural	$	1,002		30.09	%	$	840		26.97	%
Real estate - construction		962		17.94	%		539		15.31	%
Real estate - mortgage		122		18.61	%		139		17.92	%
Real estate - commercial		361		30.14	%		352		35.94	%
Consumer		211		3.22	%		141		3.86	%
Totals	$	2,658		100.00	%	$	2,011		100.00	%

Table 18 presents Cornerstone's delinquent and non-performing assets as of December 31, 2007 and 2006.

TABLE 18

Delinquent and Non-performing Assets
Actual for Years Ending December 31,
(In thousands)	2007		2006
Accruing loans that are contractually
past due 90-days or more:

Commercial, financial and agricultural	$	0	$	0
Real estate - construction		0		0
Real estate - mortgage		0		0
Consumer		0		0
Total Loans	$	0	$	0
Non-accruing loans 90-days or more:

Commercial, financial and agricultural	$	124	$	127
Real estate - construction		341		186
Real estate - mortgage		220		789
Consumer		0		0
Total Loans	$	685	$	1,102

Real estate acquired through foreclosure	$	1,038		$	380
Property acquired through repossession		0			0
Total acquired		1,038			380
Total Loans	$	383,593		$	310,137

Ratio of non-performing assets to total loans		0.45	%		0.48	%
Ratio of delinquent (30-days or more) but accruing loans to:
Total loans		1.12	%		0.77	%
Total assets		0.97	%		0.63	%

In addition to the Bank's loan rating system for problem assets described above (see “Problem Loans,” above), the Bank has established a loan rating system for all categories of loans which assists management and the Board of Directors in determining the adequacy of the Bank's allowance for loan losses. Each loan in the Bank's portfolio is assigned a rating which is reviewed by management periodically to ensure its continued suitability. An exception is made in the case of (i) monthly installment loans which are grouped together by delinquency status such as over 10, 30, 60, or 90 days past due and (ii) problem assets which are rated as substandard, doubtful, or loss as discussed above. All other loans are assigned a rating of excellent, good, or average. The total amount of loans in each of these loan rating categories is weighted by a factor that management believes reasonably reflects losses that can be anticipated with respect to loans in each of these categories. Based on these weightings, the Bank’s management establishes an allowance for loan losses that is reviewed by its Board of Directors each month.

Table 19 presents Cornerstone’s loan loss experience for the periods indicated.

TABLE 19

Loan Loss Reserve Analysis
Years Ending December 31,
(in thousands)	2007			2006			2005			2004			2003
Average loans	$	353,278		$	284,105		$	236,265		$	181,335		$	141,586
Allowance for possible loan losses,
Beginning of the period	$	4,258		$	3,545		$	2,658		$	2,011		$	1,591

Charge-offs for the period:
Commercial, financial and agricultural		737			307			275			165			223
Real estate - construction		84			0			48			0			0
Real estate - mortgage		180			104			128			138			6
Consumer		74			70			111			69			106
Total charge-offs		1,075			481			562			372			335
Recoveries for the period:
Commercial, financial and agricultural		114			66			12			149			183
Real estate - construction		0			0			1			0			3
Real estate - mortgage		4			7			6			7			0
Consumer		0			15			28			23			24
Total recoveries		118			88			47			179			210
Net charge-offs for the period		957			393			515			193			125

Provision for loan losses		10,409			1,106			1,402			840			545
Adjustments		0			0			0			0			0
Allowance for possible loan losses, end of period	$	13,710		$	4,258		$	3,545		$	2,658		$	2,011
Ratio of allowance for loan losses to total average loans outstanding		3.88	%		1.50	%		1.50	%		1.47	%		1.42	%
Ratio of net charge-offs during the period to average loans outstanding during the period		0.27	%		0.14	%		0.22	%		0.10	%		0.09	%

Intangibles-During 2002, the Company adopted the provisions of Statement of Financial Statement No. 142 Goodwill and other Intangible Assets concerning the $2,541,476 goodwill created by the merger with the Bank of East Ridge. Goodwill is tested annually for impairment. If the carrying value of goodwill exceeds the fair value, a write-down is recorded. No impairment loss was recognized during 2007, 2006 or 2005. Also, in December, 2005, the Company completed the purchase of Eagle Financial, Inc. and recorded an intangible asset of $848,916. Amortization expense relating to this intangible for 2007, 2006 and 2005 was $108,000, $345,388 and $13,500, respectively.

Sources of Funds

Overview-Time, money market, savings and demand deposits are the major source of Cornerstone’s funds for lending and other investment purposes. All deposits are held by the Bank. In addition, Cornerstone obtains funds from loan principal repayments and proceeds from sales of loan participations and investment securities. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and sales of loan participations and investment securities are significantly influenced by prevailing interest rates, economic conditions and the Company's asset and liability management strategies. Borrowings are used on either a short-term basis to compensate for reductions in the availability of other sources of funds or on a longer-term basis to reduce interest rate risk.

Deposits-The Bank offers several types of deposit accounts, with the principal differences relating to the minimum balances required, the time period the funds must remain on deposit and the interest rate. Deposits are obtained primarily from the Bank's Chattanooga Metropolitan Statistical Area (MSA). The Bank does advertise for deposits outside of this area and has had moderate success attracting deposits from credit unions around the United States. The Bank does not rely upon any single person or group of related persons for a material portion of its deposits. However, the Bank has a large depositor related to its ACH business line that leaves a large amount of money for the Bank to use as it passes through the Bank to its final destination. A principal source of deposits for the Bank consists of short-term money market and other accounts, which are highly responsive to changes in market interest rates. Accordingly, the Bank, like all financial institutions, is subject to short-term fluctuations in deposits in response to customer actions due to changing short-term market interest rates. The ability of the Bank to attract and maintain deposits and the Bank's cost of funds has been and will continue to be significantly affected by money market conditions.

Table 20 presents the composition of deposits for the Bank, excluding accrued interest payable, by type for the years ended December 31, 2007, 2006 and 2005 (in thousands).

TABLE 20

Deposit Composition
Years Ending December 31,

(In thousands)	2007		2006		2005
Demand deposits	$	45,285	$	41,723	$	42,118
NOW deposits		31,985		38,160		33,080
Savings & money market deposits		49,970		56,913		55,411
Time deposits $100,000 and over		71,505		44,544		38,707
Time deposits under $100,000		114,505		94,476		83,119
Total Deposits	$	313,250	$	275,816	$	252,435

Table 21 presents a breakdown by category of the average amount of deposits and the average rate paid on deposits for the periods indicated:

TABLE 21

Average Amount and Average Rate Paid on Deposits

Years Ending December 31,

		2007				2006				2005
		Amount	Rate			Amount	Rate			Amount	Rate
Demand deposits	$	41,503			$	37,056			$	34,730
NOW deposits		36,327	2.21	%		34,701	1.23	%		33,943	0.97	%
Savings & money market deposits		55,808	3.61	%		58,477	3.80	%		45,232	2.45	%
Time deposits $100,000 and over		61,172	5.12	%		43,692	4.56	%		32,611	3.51	%
Time deposits under $100,000		107,498	5.01	%		88,773	4.39	%		70,167	3.19	%
Total Deposits	$	302,308	4.35	%	$	262,699	3.78	%	$	216,683	2.65	%

Borrowings-The Bank joined the Federal Home Loan Bank of Cincinnati in October of 2000. The Federal Home Loan Bank (the “FHLB”) allows the Bank to borrow funds on a contractual basis many times at rates lower than the costs of local certificates of deposit. In addition, the FHLB has the ability to provide structured advances that best reduce or leverage the interest rate risk of the Bank. The Bank as of the end of the year had $47 million outstanding with the FHLB. The FHLB offers multiple products to assist banks in their funding needs. During 2007 the Bank obtained funding by obtaining a daily revolving credit advance and fixed rate loans. The revolving credit advance has a minimum advance requirement of $15 million and is priced at a variable rate. As of December 31, 2007 the Bank had converted borrowings under the revolving credit advance to fixed rate loans with stated maturities ranging from two years to ten years. FHLB loans totaling $47 million as of December 31, 2007 are structured as an obligation with a fixed rate with the majority of loans incorporating an optional conversion to a floating rate after a stated period of time. The loans have maturities ranging from May 2010 to January 2017. As of December 31, 2007 the interest rates on these loans ranged from 3.87% to 5.00%. The Bank has several Federal Funds lines of credit available with correspondent banks with a total availability of $44 million as of the end of 2007. In addition, the Bank has the right to borrow from the Federal Reserve Bank if necessary to supplement its supply of funds available for lending and to meet deposit withdrawal requirements. As of December 31, 2007, Cornerstone had established a line of credit of $8.5 million priced at New York Prime Rate minus 150 basis points. The loan was established to insert capital infusions to the Bank to fund growth or retire treasury stock, if any, as needed. This line allows Cornerstone to act as a source of strength for the Bank without the expense or dilution of additional common stock. As of December 31, 2007, there was $100,000 borrowed on the line of credit and Cornerstone has the remaining balance available to inject capital into the Bank or fund other investments.

Capital

Capital Resources-Stockholder’s average equity for 2007 and 2006 totaled $40.7 million and $35.7 million, respectively. As of December 31, 2007, Cornerstone’s actual stockholder equity had decreased from $38.2 million in 2006 to $36.3. The decrease is primarily attributable to the increase in the Bank’s allowance for loan losses that was recognized in December 2007. The number of common shares outstanding decreased to 6,369,718 as of year end 2007 from 6,511,848 as of year end 2006. Changes in the number of common shares outstanding are the result of two transactions. The first transaction resulted in an increase in the number of shares outstanding by 10,870 as employees and a member of the board of directors exercised stock options during 2007. The second transaction resulted in the reduction of the number of shares outstanding by 153,000. The number of shares outstanding decreased primarily during the 3^rd and 4^th quarters of 2007 as a result of Cornerstone’s initiation of a stock repurchase program totaling 150,000 shares as announced in Cornerstone’s Form 8-K filing on October 19, 2007.

Capital Adequacy-Capital adequacy refers to the level of capital required to sustain asset growth and to absorb losses. The objective of Cornerstone’s management is to maintain a level of capitalization that is sufficient to take advantage of profitable growth opportunities while meeting regulatory requirements. This is achieved by improving profitability by effectively allocating resources to more profitable business, improving asset quality, strengthening service quality, and streamlining costs. The primary measures used by management to monitor the results of these efforts are the ratios of actual equity to average assets and actual equity to risk-adjusted assets.

The FDIC has adopted capital guidelines governing the activities of banks. These guidelines require the maintenance of an amount of capital based on risk-adjusted assets so that categories of assets with potentially higher credit risk will require more capital backing than assets with lower risk. In addition, banks are required to maintain capital to support, on a risk-adjusted basis, certain off-balance sheet activities such as loan commitments. The capital guidelines classify capital into two tiers, referred to as Tier I and Tier II. Under risk-based capital requirements, total capital consists of Tier I capital, which is generally common shareholder’s equity less goodwill, and Tier II, which is primarily Tier I capital plus a portion of the loan loss allowance. In determining risk-based capital requirements, assets are assigned risk-weights of 0% to 100%, depending primarily on the regulatory assigned levels of credit risk associated with such assets. Off-balance sheet items are considered in the calculation of risk-adjusted assets through conversion factors established by regulators. The framework for calculating risk-based capital requires banks to meet the regulatory minimums of 4% Tier I and 8% total risk based capital. In 1990 regulators added a leverage computation to the capital requirements, comparing Tier I capital to total average assets less goodwill.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established five capital categories for banks. Under the regulation defining these five capital categories, each bank is classified into one of the five categories based on its level of risk-based capital as measured by Tier I capital, total risk-based capital, and Tier I leverage ratios and its supervisory ratings. Table 22 lists the five categories of capital and each of the minimum requirements for the three risk-based ratios.

TABLE 22

Minimum Requirements for Risk-Based Capital Ratios

	Total Risk-Based Capital Ratio			Tier I Risk-Based Capital Ratio			Leverage Ratio
Well capitalized		10% or above			6% or above			5% or above
Adequately capitalized		8% or above			4% or above			4% or above
Under Capitalized		Less than 8	%		Less than 4	%		Less than 4	%
Significantly undercapitalized		Less than 6	%		Less than 3	%		Less than 3	%
Critically undercapitalized								2% or less

As of December 31, 2007, Cornerstone exceeded the regulatory minimums and qualified as an adequately-capitalized institution under the regulations. The Bank had Tier 1 capital of $31.6 or 7.4% of average assets as of December 31, 2007 compared to Tier 1 capital of $31.7 or 9.4% of average assets as of December 31, 2006. The Bank had total capital of $36.6 or 9.3% of risk weighted assets as of December 31, 2007 compared to total capital of $35.8 or 10.9% of risk weighted assets as of December 31, 2006. The Bank fell from a well capitalized capital position during 2006 to an adequately capitalized position in 2007 due to the $6.5 million loan loss provision provided to the Bank’s loan loss allowance after the actual close of 2007. This treatment was in accordance with Generally Accepted Accounting Principles as this loss pertained to 2007 and was identified before issuance of the financial statements.

Liquidity-of a primary importance to depositors, creditors and regulators is the ability to have readily available funds sufficient to repay fully maturing liabilities. Cornerstone’s liquidity, represented by cash and cash from banks, is a result of its operating, investing and financing activities. In order to ensure funds are available at all times, Cornerstone devotes resources to projecting on a monthly basis the amount of funds accessible. Liquidity requirements can also be met through short-term borrowing or the disposition of short-term assets, which are generally matched to correspond to the maturity of liabilities.

Cornerstone’s liquidity target is measured by adding the Bank’s net cash, short term and marketable securities not pledged and dividing this number by total deposits and short-term liabilities not secured by assets pledged. The Bank’s liquidity ratio at year end 2007 was 4.8% compared to 8.4% at year end 2006. Cornerstone is not subject to any specific liquidity requirements imposed by regulatory orders. Cornerstone is subject however, to general FDIC guidelines, which do not require a minimum level of liquidity. Management believes its liquidity ratios meet or exceed these guidelines. Management does not know of any trends or demands, which are reasonably likely to result in liquidity increasing or decreasing in any material manner.

Table 23 presents the average loan to deposit ratios, a liquidity measure, for periods indicated:

TABLE 23

		December 31, 2007			December 31, 2006
Average loans to average deposits			116.86	%		108.15	%

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Cornerstone’s Asset/Liability Committee (“ALCO”) actively measures and manages interest rate risk using a process developed by the Bank. The ALCO is also responsible for approving Cornerstone’s asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing Cornerstones’s interest rate sensitivity position.

The primary tool that management uses to measure short-term interest rate risk is a net interest income simulation model prepared by an independent national consulting firm and reviewed by another separate and independent national consulting firm. These simulations estimate the impact that various changes in the overall level of interest rates over one- and two-year time horizons would have on net interest income. The results help Cornerstone develop strategies for managing exposure to interest rate risk.

Like any forecasting technique, interest rate simulation modeling is based on a large number of assumptions. In this case, the assumptions relate primarily to loan and deposit growth, asset and liability prepayments, interest rates and balance sheet management strategies. Management believes that both individually and in the aggregate the assumptions are reasonable. Nevertheless, the simulation modeling process produces only a sophisticated estimate, not a precise calculation of exposure.

Table 24 presents the re-pricing of Cornerstone’s interest earning assets and interest-bearing liabilities as of December 31, 2007. This interest sensitivity gap table is designed to monitor Cornerstone’s interest rate risk exposure within the designated time period. In order to control interest rate risk, management regularly monitors the volume of interest sensitive assets relative to interest sensitive liabilities over specific time intervals. Cornerstone’s interest rate management policy is to attempt to maintain a relatively stable net interest margin in periods of interest rate fluctuations. Cornerstone’s policy is to attempt to maintain a ratio of cumulative gap to total interest sensitive assets of negative 15.00% to positive 15.00% in the time period of one year or less. The information set forth below is based on the following assumptions of management: (i) savings and money market and NOW accounts will be less interest rate sensitive and the re-pricing on these accounts will be spread out over a five-year period; and (ii) securities other than mortgage-backed securities have been scheduled by maturity date while mortgages have been amortized over the life of the mortgage.

TABLE 24

Re-pricing of Interest Sensitive Assets and Liabilities Year-end balance as of December 31, 2007

(In thousands)	Less than One Year			1 to 5 Years (3)			Over 5 Years (3)			Total
Interest Sensitive Assets:
Federal funds sold	$	0		$	0		$	0		$	0
Investment securities
Taxable (1)		8,491			16,863			6,096			31,450
Tax-exempt (1)		126			739			2,638			3,503
Loans (2)
Fixed rate and adjustable rate 1-4 family mortgage		30,688			29,389			4,508			64,585
Scheduled payments		218,172			98,726			2,110			319,008
Total Interest Sensitive Assets	$	257,477		$	145,717		$	15,352		$	418,546

Interest Sensitive Liabilities:
NOW accounts	$	12,797		$	19,195		$	0		$	31,992
Money market and savings accounts		24,203			25,760			0			49,963
Time deposits		167,423			18,588			0			186,011
Other interest bearing liabilities		88,660			0			0			88,660
Total Interest Sensitive Liabilities	$	293,083		$	63,543		$	0		$	356,626

Interest Sensitive Gap		(35,606	)		82,174			15,352			61,920
Cumulative Interest Sensitive Gap		(35,606	)		46,568			61,920

Ratio of cumulative gap to total Interest Sensitive Assets		(8.51	)%		11.13	%		14.79	%

(1) All AFS securities are shown at the market value and HTM are shown at book value.

(2) Non-performing loans are included as interest-earning assets.

(3) All assets and liabilities in these categories are fixed rates.

During 2007 management made an effort to reduce the Bank’s sensitivity to interest sensitive assets by lengthening the maturities of its securities and loans while reducing the average maturities of its interest sensitive liabilities. This was undertaken due to the uncertainty in the economy and growing probability that interest rates would decline.

Impact of Inflation and Changing Price- The financial statements and related financial data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of the financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time and due to inflation. Management is primarily concerned with two inflationary factors; The first and the most common is the general impact of inflation on operations of Cornerstone and is reflected in increased operating costs. The other and more material to the Bank’s profitability are interest rate adjustments by the Federal Reserve and the general fixed income market in reaction to inflation. In other words, interest rate risk, unlike most industrial companies, substantially impacts Cornerstone because virtually all of the assets and liabilities of Cornerstone are monetary in nature. As a result, interest rates may have a more significant impact on Cornerstone’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services and each issue must be dealt with independently.

ITEM 8. FINANCIAL STATEMENTS

CORNERSTONE BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Financial Statements and Footnotes

Table of Contents
	Page No.
Management Report on Internal Control over Financial Reporting	32

Report of Independent Registered Public Accounting Firm - Internal Control over Financial Reporting	33

Report of Independent Registered Public Accounting Firm - Financial Statements	35

Consolidated Financial Statements

Consolidated balance sheets	36

Consolidated statements of income	37

Consolidated statements of changes in stockholders’ equity	38

Consolidated statements of cash flows	40

Notes to consolidated financial statements	41

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Cornerstone is responsible for establishing and maintaining adequate internal control over financial reporting. Cornerstone’s internal control system was designed to provide reasonable assurance to Cornerstone’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Cornerstone’s management has assessed the effectiveness of internal controls over financial reporting as of December 31, 2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on our assessment we believe that, as of December 31, 2007, Cornerstone’s internal control over financial reporting is effective based on those criteria.

Cornerstone’s independent registered public accounting firm has issued an audit report on Cornerstone’s internal control over financial reporting. This report appears in Item No. 8 of this Annual Report on Form 10-K.

Report of Independent Registered Public Accounting Firm

To the Stockholders and

Board of Directors

Cornerstone Bancshares, Inc.

Chattanooga, Tennessee

We have audited the internal control over financial reporting of Cornerstone Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2007, based on criteria established in “Internal Control— Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements as of and for the year ended December 31, 2007, of the Company and our report dated March 12, 2008, expressed an unqualified opinion on those financial statements.

/s/ HAZLETT, LEWIS & BIETER, PLLC

Chattanooga, Tennessee March 12, 2008

Report of Independent Registered Public Accounting Firm

To the Stockholders and

Board of Directors

Cornerstone Bancshares, Inc.

Chattanooga, Tennessee

We have audited the accompanying consolidated balance sheets of Cornerstone Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cornerstone Bancshares, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2008, expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ HAZLETT, LEWIS & BIETER, PLLC

Chattanooga, Tennessee

March 12, 2008

CORNERSTONE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006

	2007		2006


ASSETS
Cash and due from banks	$	14,933,349	$	17,635,956
Securities available for sale		34,751,985		32,353,380
Securities held to maturity (fair value approximates
$199,678 at 2007 and $236,189 at 2006)		200,037		236,169
Federal Home Loan Bank stock, at cost		1,911,600		1,332,100
Loans, net of allowance for loan losses of
$13,710,109 in 2007 and $4,258,352 in 2006		369,883,009		305,879,013
Bank premises and equipment, net		6,470,893		6,134,009
Accrued interest receivable		2,407,977		2,120,778
Goodwill and amortizable intangibles		2,941,798		3,046,287
Other assets		10,920,605		6,204,541

Total assets	$	444,421,253	$	374,942,233

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Noninterest-bearing demand deposits	$	45,284,518	$	41,722,570
Interest-bearing demand deposits		31,984,590		38,159,718
Savings deposits and money market accounts		49,970,489		56,913,225
Time deposits of $100,000 or more		71,505,272		44,544,335
Time deposits under $100,000		114,504,856		94,476,685

Total deposits		313,249,725		275,816,533

Accrued interest payable		216,086		308,392
Federal funds purchased and securities sold under
agreements to repurchase		41,560,355		19,249,701
Federal Home Loan Bank advances and line of credit		47,100,000		39,500,000
Other liabilities		5,967,737		1,884,342

Total liabilities		408,093,903		336,758,968

Stockholders' equity:
Preferred stock - no par value; 2,000,000 shares
authorized; no shares issued		-		-
Common stock - $1.00 par value; 10,000,000 shares authorized;
6,522,718 and 6,511,848 shares issued in 2007 and 2006;
6,369,718 and 6,511,848 outstanding in 2007 and 2006		6,369,718		6,511,848
Additional paid-in capital		20,532,787		21,849,006
Retained earnings		9,317,878		9,881,029
Accumulated other comprehensive income (expense)		106,967		(58,618	)

Total stockholders' equity		36,327,350		38,183,265

Total liabilities and stockholders' equity	$	444,421,253	$	374,942,233

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

CORNERSTONE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2007, 2006 and 2005

	2007			2006		2005
INTEREST INCOME
Loans, including fees	$	32,981,334		$	27,317,002	$	19,353,740
Securities and interest-bearing deposits in other banks		1,750,023			1,583,984		1,217,405
Federal funds sold		52,161			257,820		100,937

Total interest income		34,783,518			29,158,806		20,672,082

INTEREST EXPENSE
Time deposits of $100,000 or more		3,134,084			1,993,796		1,144,939
Other deposits		8,206,843			6,550,906		3,675,702
Federal funds purchased and securities
sold under agreements to repurchase		857,161			347,861		203,476
Federal Home Loan Bank advances and line of credit		2,215,517			1,413,546		1,053,675

Total interest expense		14,413,605			10,306,109		6,077,792

Net interest income before provision for loan losses		20,369,913			18,852,697		14,594,290

Provision for loan losses		10,409,365			1,106,600		1,401,600

Net interest income after provision for loan losses		9,960,548			17,746,097		13,192,690

NONINTEREST INCOME
Customer service fees		1,425,822			1,298,041		984,085
Other noninterest income		165,495			91,047		67,956
Operating lease income		-			300,932		539,756
Net gains from sale of loans and other assets		103,773			421,236		312,923

Total noninterest income		1,695,090			2,111,256		1,904,720

NONINTEREST EXPENSES
Salaries and employee benefits		6,608,808			6,018,619		4,502,910
Net occupancy and equipment expense		1,354,642			1,075,081		859,313
Depreciation on leased assets		-			244,580		379,053
Other operating expenses		2,962,151			3,379,950		2,474,999

Total noninterest expenses		10,925,601			10,718,230		8,216,275

Income before income tax expense		730,037			9,139,123		6,881,135

Income tax (benefit) expense		(141,115	)		3,327,523		2,556,616

Net income	$	871,152		$	5,811,600	$	4,324,519

EARNINGS PER COMMON SHARE
Basic	$	.14		$	.90	$	.71
Diluted		.13			.85		.66

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

CORNERSTONE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2007, 2006 and 2005

	Comprehensive Income			Common Stock			Common Stock Subscribed			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Stock Subscriptions Receivable			Total Stockholders' Equity

BALANCE, December 31, 2004				$	2,868,823		$	119,961		$	19,160,936		$	4,340,981		$	116,034		$	(1,799,415	)	$	24,807,320

Issuance of common stock					7,079			-			98,172			-			-			-			105,251

Issuance of common stock under Director's stock option plan					209,000			-			836,000			-			-			-			1,045,000

Tax benefit received from Director's stock option exercise					-			-			1,185,315			-			-			-			1,185,315

Dividends - $.07 per share					-			-			-			(435,948	)		-			-			(435,948	)

Stock subscriptions settled					119,961			(119,961	)		-			-			-			1,799,415			1,799,415

Repurchase of common stock					(4,000	)		-			(78,520	)		-			-			-			(82,520	)

Comprehensive income:
Net income	$	4,324,519			-			-			-			4,324,519			-			-			4,324,519

Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities available for sale, net of reclassification adjustment		(281,989	)		-			-			-			-			(281,989	)		-			(281,989	)

Total comprehensive income	$	4,042,530

BALANCE, December 31, 2005					3,200,863			-			21,201,903			8,229,552			(165,955	)		-			32,466,363

Issuance of common stock					15,526			-			246,333			-			-			-			261,859

Issuance of common stock under Director's stock option plan					51,500			-			249,940			-			-			-			301,440

Tax benefit received from Director's stock option exercise					-			-			202,012			-			-			-			202,012

Stock compensation expense					-			-			147,925			-			-			-			147,925

Dividends - $.14 per share					-			-			-			(908,464	)		-			-			(908,464	)

Split-up effected in the form of a dividend					3,251,659			-			-			(3,251,659	)		-			-			-

Repurchase of common stock					(7,700	)		-			(199,107	)		-			-			-			(206,807	)

Comprehensive income:
Net income	$	5,811,600			-			-			-			5,811,600			-			-			5,811,600

Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities available for sale, net of reclassification adjustment		107,337			-			-			-			-			107,337			-			107,337

Total comprehensive income	$	5,918,937

BALANCE, December 31, 2006				$	6,511,848		$	-		$	21,849,006		$	9,881,029		$	(58,618	)	$	-		$	38,183,265

(continued on next page)

CORNERSTONE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2007, 2006 and 2005

(continued from previous page)

		Comprehensive Income		Common Stock			Common Stock Subscribed		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Stock Subscriptions Receivable		Total Stockholders' Equity
BALANCE, December 31, 2006			$	6,511,848		$	-	$	21,849,006		$	9,881,029		$	(58,618	)	$	-	$	38,183,265

Issuance of common stock				5,870			-		20,446			-			-			-		26,316

Issuance of common stock under Director's stock option plan				5,000			-		41,610			-			-			-		46,610

Stock compensation expense				-			-		220,016			-			-			-		220,016

Dividends - $.22 per share				-			-		-			(1,434,303	)		-			-		(1,434,303	)

Repurchase of common stock				(153,000	)		-		(1,598,291	)		-			-			-		(1,751,291	)

Comprehensive income:
Net income	$	871,152		-			-		-			871,152			-			-		871,152

Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities available for sale, net of reclassification adjustment		165,585		-			-		-			-			165,585			-		165,585

Total comprehensive income	$	1,036,737

BALANCE, December 31, 2007			$	6,369,718		$	-	$	20,532,787		$	9,317,878		$	106,967		$	-	$	36,327,350

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

CORNERSTONE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	871,152		$	5,811,600		$	4,324,519
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		605,062			990,052			764,127
Provision for loan losses		10,409,365			1,106,600			1,401,600
Stock compensation expense		220,016			147,925			-
Gains on sales of loans and other assets		(103,773	)		(421,236	)		(312,923	)
Deferred income taxes		(3,478,707	)		(481,466	)		(460,452	)
Changes in other operating assets and liabilities:
Net change in loans held for sale		484,900			(97,752	)		(257,148	)
Accrued interest receivable		(287,199	)		(381,318	)		(554,982	)
Accrued interest payable		(92,306	)		65,528			151,269
Other assets and liabilities		3,154,062			(1,438,845	)		1,629,962

Net cash provided by operating activities		11,782,572			5,301,088			6,685,972

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from security transactions:
Securities available for sale		13,008,453			1,865,807			11,818,836
Securities held to maturity		36,467			85,400			69,067
Purchase of securities available for sale		(15,037,296	)		(3,975,324	)		(15,901,889	)
Purchase of Federal Home Loan Bank stock		(559,400	)		(247,700	)		(136,000	)
Loan originations and principal collections, net		(76,239,255	)		(43,432,372	)		(59,112,700	)
Purchase of bank premises and equipment		(840,644	)		(1,278,809	)		(1,978,538	)
Acquisition of business		-			-			(1,380,000	)
Purchase of equity investment		-			(3,000,000	)		-
Proceeds from sale of other real estate and other assets		784,592			806,406			300,464

Net cash used in investing activities		(78,847,083	)		(49,176,592	)		(66,320,760	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		37,433,192			23,380,643			64,602,988
Increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase		22,310,654			14,458,964			(2,618,425	)
Proceeds from Federal Home Loan Bank advances		35,000,000			20,000,000			5,000,000
Repayment of Federal Home Loan Bank advances		(27,000,000	)		(11,000,000	)		(2,000,000	)
Net borrowings (repayments) under line of credit		(400,000	)		500,000			-
Purchase of common stock		(1,751,291	)		(206,807	)		(82,520	)
Payment of dividends		(1,303,577	)		(775,138	)		(526,476	)
Issuance of common stock		72,926			563,299			2,949,666

Net cash provided by financing activities		64,361,904			46,920,961			67,325,233

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(2,702,607	)		3,045,457			7,690,445

CASH AND CASH EQUIVALENTS, beginning of year		17,635,956			14,590,499			6,900,054

CASH AND CASH EQUIVALENTS, end of year	$	14,933,349		$	17,635,956		$	14,590,499

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest	$	14,505,911		$	10,240,581		$	5,926,523
Cash paid during the period for taxes		4,092,910			3,259,073			1,910,850

NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of real estate through foreclosure	$	1,518,329		$	493,588		$	1,010,555
Loan extended in lieu of cash for sale of leased assets		-			1,950,435			-

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

	2007
					Gross			Gross
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value

Securities available for sale:
U.S. Government agencies	$	27,335,992	$	116,624	$	(38,942	)	$	27,413,674

State and municipal securities		3,436,399		66,369		(3	)		3,502,765

Mortgage-backed securities		3,817,522		20,427		(2,403	)		3,835,546

	$	34,589,913	$	203,420	$	(41,348	)	$	34,751,985

Securities held to maturity:
Mortgage-backed securities	$	200,037	$	424	$	(783	)	$	199,678

	2007			2006

Mortgage loans on real estate:
Residential 1-4 family	$	35,309		$	23,681
Residential multifamily (5 or more)		16,573			14,421
Held for sale		216			701
Commercial		138,074			98,904
Construction		76,832			57,606
Second mortgages		2,270			2,564
Equity lines of credit		10,214			7,333

		279,488			205,210

Commercial loans		97,896			97,933

Consumer installment loans:
Personal		5,652			6,490
Credit cards		557			504

		6,209			6,994

Total loans		383,593			310,137
Less: Allowance for loan losses		(13,710	)		(4,258	)

Loans, net	$	369,883		$	305,879


An analysis of the allowance for loan losses follows:

	2007			2006			2005

Balance, beginning of year	$	4,258,352		$	3,545,042		$	2,665,464

Provision charged to operations		10,409,365			1,106,600			1,401,600
Charge-offs		(1,075,670	)		(470,367	)		(557,227	)
Recoveries		118,062			77,077			35,205

Balance, end of year	$	13,710,109		$	4,258,352		$	3,545,042

	December 31,
	2007		2006

Impaired loans without a valuation allowance	$	17,075	$	3,545

Impaired loans with a valuation allowance		13,176,547		1,711,053

Total impaired loans	$	13,193,623	$	1,714,598

Valuation allowance related to impaired loans	$	9,789,748	$	216,948

Total non-accrual loans	$	684,903	$	1,102,833

Total loans past-due ninety days or more and still accruing	$	-	$	-

	2007			2006

Beginning balance	$	751,496		$	771,270

New loans		521,678			95,936
Repayments		(500,232	)		(115,710	)

Ending balance	$	772,942		$	751,496

	2007			2006

Land	$	1,658,625		$	1,625,567
Buildings and improvements		4,131,932			4,060,313
Furniture, fixtures and equipment		3,849,462			3,123,929

		9,640,019			8,809,809
Accumulated depreciation		(3,169,126	)		(2,675,800	)

	$	6,470,893		$	6,134,009

2008	$	342,006
2009		355,103
2010		340,343
2011		343,212
2012		341,003
Thereafter		1,040,543

Total	$	2,762,210

2008	$	167,422,593
2009		16,182,029
2010		2,203,110
2011		169,715
2012		32,681

Total	$	186,010,128

	2007		2006

Deferred tax assets:
Deferred compensation	$	133,011	$	140,954
Deferred loan fees		103,112		128,605
Allowance for loan losses		5,094,791		1,470,857
Net unrealized loss on securities available for sale		-		30,197
Other		68,351		177,170

		5,399,265		1,947,783

Deferred tax liabilities:
Depreciation		96,972		78,656
Life insurance		173,427		166,918
Net unrealized gain in securities available for sale		85,303		-
Other		13,545		35,398

		369,247		280,972

Net deferred tax asset	$	5,030,018	$	1,666,811

	2007		2006

Long-term advance dated December 27, 2000, requiring monthly interest payments, fixed at 5.00% until conversion option is exercised, principal due in December 2010	$	2,000,000	$	2,000,000

Long-term advance dated September 13, 2002, requiring monthly interest payments, fixed at 3.51%, convertible on September 2007, principal due in September 2012		-		2,000,000

Long-term advance dated January 23, 2004, requiring monthly interest payments, fixed at 2.50%, convertible on January 2007, principal due in January 2014		-		5,000,000

Long-term advance dated May 27, 2004, requiring monthly interest payments, fixed at 3.46%, convertible on May 2007, principal due in May 2014		-		5,000,000

Long-term advance dated February 9, 2005, requiring monthly interest payments, fixed at 3.86%, convertible on February 2010, principal due in February 2015		5,000,000		5,000,000

Long-term advance dated May 14, 2007, requiring monthly interest payments, fixed at 4.78%, with a put option exercisable in November 2007 and then quarterly thereafter, principal due in May 2010		5,000,000		-

Long-term advance dated December 6, 2007, requiring monthly interest payments, fixed at 3.87%, until maturity, principal due in December 2010		5,000,000		-

Long-term advance dated May 11, 2007, requiring monthly interest payments, fixed at 4.66%, with a put option exercisable in February 2008 and then quarterly thereafter, principal due in May 2011		5,000,000		-

Long-term advance dated May 15, 2007, requiring monthly interest payments, fixed at 4.58%, with a put option exercisable in May 2008 and then quarterly thereafter, principal due in May 2012		5,000,000		-

	2007		2006

Long-term advance dated July 31, 2007, requiring monthly interest payments, fixed at 4.50%, with a put option exercisable in July 2008 and then quarterly thereafter, principal due in July 2013	$	5,000,000	$	-

Long-term advance dated August 7, 2007, requiring monthly interest payments, fixed at 4.43%, with a put option exercisable in February 2009 and then quarterly thereafter, principal due in August 2014		5,000,000		-

Long-term advance dated January 20, 2006, requiring monthly interest payments, fixed at 4.18%, with a put option exercisable in January 2009 and then quarterly thereafter, principal due in January 2016		5,000,000		5,000,000

Long-term advance dated January 10, 2007, requiring monthly interest payments, fixed at 4.25%, with a put option exercisable in January 2008 and then quarterly thereafter, principal due in January 2017		5,000,000		-

Daily revolving credit advances under agreement dated May 18, 2006, rates are variable based on three-month LIBOR rate, requires monthly interest payments		-		15,000,000

	$	47,000,000	$	39,000,000

	2007				2006
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Assets:
Cash and due from banks	$	14,933	$	14,933	$	17,636	$	17,636
Securities		34,952		34,952		32,590		32,590
Federal Home Loan Bank stock		1,912		1,912		1,332		1,332
Loans, net		369,883		373,116		305,879		305,248
Liabilities:
Noninterest-bearing demand deposits	$	45,285	$	45,285	$	41,723	$	41,723
Interest-bearing demand deposits		31,985		31,985		38,160		38,160
Savings deposits and money market accounts		49,970		49,970		56,913		56,913
Time deposits		186,010		189,106		139,021		140,713
Federal funds purchased and securities
sold under agreements to repurchase		41,560		41,560		19,250		19,250
Federal Home Loan Bank advances
and line of credit		47,100		47,100		39,500		39,500
Unrecognized financial instruments
(net of contract amount):
Commitments to extend credit		-		-		-		-

	2005

Net income, as reported	$	4,324,519
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards,
net of the related tax effects		(61,402	)

Pro forma net income	$	4,263,117

Earnings per share:
Basic - as reported	$	0.71
Basic - pro forma	$	0.70

Diluted - as reported	$	0.66
Diluted - pro forma	$	0.65

	Options Outstanding						Options Exercisable
			Weighted		Weighted				Weighted
			Average		Average				Average
Exercise	Number		Remaining		Exercise		Number		Exercise
Prices	Outstanding		Life		Price		Exercisable		Price

$ 5.44		16,000		6.2 Years	$	5.44		16,000	$	5.44
9.23		8,000		7.2 Years		9.23		8,000		9.23
13.25		36,000		8.2 Years		13.25		18,000		13.25
15.25		9,000		9.2 Years		15.25		-		-

Outstanding at end of year		69,000		7.7 Years		11.23		42,000		9.51

				Weighted Average
	Number			Grant Date
	of Shares			Fair Value
Non-vested options, December 31, 2006		44,500		$	12.84
Granted		9,000			15.25
Vested		(24,500	)		12.51
Forfeited/expired		(2,000	)		13.25

Non-vested options, December 31, 2007		27,000			13.93

						For Capital
	Actual					Adequacy Purposes
	Amount		Ratio			Amount		Ratio

As of December 31, 2007:
Total capital to risk-weighted assets:
Consolidated	$	38,353		9.7	%	$	31,660		8.0	%
Cornerstone Community Bank		36,651		9.3	%		31,409		8.0	%

Tier I capital to risk-weighted assets:
Consolidated		33,297		8.4	%		15,830		4.0	%
Cornerstone Community Bank		31,635		8.1	%		15,704		4.0	%

Tier I capital to average assets:
Consolidated		33,297		7.7	%		17,282		4.0	%
Cornerstone Community Bank		31,635		7.4	%		17,187		4.0	%

As of December 31, 2006:
Total capital to risk-weighted assets:
Consolidated	$	39,311		12.0	%	$	26,243		8.0	%
Cornerstone Community Bank		35,770		10.9	%		26,164		8.0	%

Tier I capital to risk-weighted assets:
Consolidated		35,210		10.7	%		13,121		4.0	%
Cornerstone Community Bank		31,681		9.7	%		13,082		4.0	%

Tier I capital to average assets:
Consolidated		35,210		10.2	%		13,790		4.0	%
Cornerstone Community Bank		31,681		9.4	%		13,541		4.0	%

			Tax
	Before-Tax		(Expense)			Net-of-Tax
	Amount		Benefit			Amount

Year ended December 31, 2007:
Unrealized holding gains and losses
arising during the period	$	250,886	$	(85,301	)	$	165,585

Less reclassification adjustment for
gains realized in net income		-		-			-

	$	250,886	$	(85,301	)	$	165,585

CORNERSTONE BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005


BALANCE SHEETS	2007		2006
ASSETS
Cash	$	387,064	$	311,073
Investment in subsidiaries		33,257,674		33,320,259
Loan to subsidiary		750,000		2,869,500
Goodwill		2,541,476		2,541,476
Other assets		201,448		158,524
Total assets	$	37,137,662	$	39,200,832
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities	$	710,312	$	517,567
Line of credit		100,000		500,000
Total liabilities		810,312		1,017,567
Stockholders’ equity		36,327,350		38,183,265
Total liabilities and stockholders’ equity	$	37,137,662	$	39,200,832


STATEMENTS OF INCOME	2007			2006			2005
INCOME
Dividends	$	1,280,260		$	590,130		$	200,000
Interest income		158,039			139,935			10,000
		1,438,299			730,065			210,000

EXPENSES
Interest expense		24,882			1,632			-
Other operating expenses		623,405			914,786			263,824

Income (loss) before equity in undistributed earnings		790,012			(186,353	)		(53,824	)

Equity in undistributed earnings (loss) of subsidiary		(228,170	)		5,700,951			4,261,344

Income tax benefit		309,310			297,002			116,999
Net income	$	871,152		$	5,811,600		$	4,324,519


STATEMENTS OF CASH FLOWS	2007			2006			2005

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	871,152		$	5,811,600		$	4,324,519
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense		220,016			147,925			-
Equity in undistributed income of subsidiary		228,170			(5,700,951	)		(4,261,344	)
Other		19,095			895,292			20,818
Net cash provided by operating activities		1,338,433			1,153,866			83,993

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business		-			-			(1,380,000	)
Repayment from (loan to) subsidiary		2,119,500			(1,440,706	)		(1,428,794	)
Capital contribution to subsidiary		-			-			(1,775,000	)
Net cash provided by (used in) investing activities		2,119,500			(1,440,706	)		(4,583,794	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit		(400,000	)		500,000			-
Purchase of common stock		(1,751,291	)		(206,807	)		(82,520	)
Payment of dividends		(1,303,577	)		(775,138	)		(526,476	)
Issuance of common stock		72,926			563,299			2,949,666
Net cash (used in) provided by financing activities		(3,381,942	)		81,354			2,340,670

NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS		75,991			(205,486	)		(2,159,131	)

CASH AND CASH EQUIVALENTS, beginning of year		311,073			516,559			2,675,690

CASH AND CASH EQUIVALENTS, end of year	$	387,064		$	311,073		$	516,559

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest	$	24,882		$	1,632		$	-
Income taxes		3,592,300			2,944,000			1,190,850

Exhibit No.		Description
3.1		Amended and Restated Charters of Cornerstone Bancshares, Inc. (1)

3.2		First Amendment to Amended and Restated Charter of Cornerstone Bancshares, Inc. (2)

3.3		Amended and Restated Bylaws of Cornerstone Bancshares, Inc. (3)

4		The right of securities holders are defined in the Charter and Bylaws provided in exhibits 3.1, 3.2
		and 3.3 respectively.

10.1		Cornerstone Community Bank Employee Stock Ownership Plan (4)

14		Code of Ethics. (5)

21		Subsidiaries of the registrant.

31		Certifications of chief executive officer and chief financial officer.

32		Section 906 certifications of chief executive officer and chief financial officer.

(1)		Incorporated by reference from Exhibit 3.1 of the registrant’s Form 10-KSB filed on March 24, 2004
		(File No. 000-30497).
(2)		Incorporated by reference from Exhibit 3 of the registrant’s Form 10-QSB filed on
		May 14, 2004 (File No. 000-30497).
(3)		Incorporated by reference from Exhibit 3.2 of the registrant’s Form 10-KSB filed on March 24, 2004
		(File No. 000-30497).
(4)		Incorporated by reference from Exhibit 10.1 of the registrant’s Form 8-K filed on July 19, 2005
		(File No. 000-30497)
(5)		Incorporated by reference from Exhibit 14 of the registrant’s Form 10-KSB filed on March 24,
		2004 (File No. 000-30497).

(1)		Form 8-K filed on January 17, 2007 reporting earnings results for the fiscal quarter ended December 31, 2006.

(2)		Form 8-K filed on March 1, 2007 reporting the declaration of a cash dividend.

(3)		Form 8-K filed on April 16, 2007 reporting earnings results for the fiscal quarter ended March 31, 2007.

(4)		Form 8-K filed on May 29, 2007 reporting the declaration of a cash dividend.

(5)		Form 8-K filed on July 19, 2007 reporting earnings results for the fiscal quarter ended June 30, 2007.

(6)		Form 8-K filed on August 24, 2007 reporting the declaration of a cash dividend.

(7)		Form 8-K filed on October 19, 2007 reporting earnings results for the fiscal quarter ended September 30, 2007.

(8)		Form 8-K filed on October 19, 2007 reporting the registrants stock repurchase program of 150,000 shares.

(9)		Form 8-K filed on November 26, 2007 reporting the declaration of a cash dividend.


	CORNERSTONE BANCSHARES, INC.

Date: March 13, 2008	By:	/s/ Gregory B. Jones
		Gregory B. Jones Chairman and Chief Executive Officer (principal executive officer)



	By:	/s/ Nathaniel F. Hughes
		Nathaniel F. Hughes President and Treasurer (principal financial officer and accounting officer)

Signature		Title

/s/ Gregory B. Jones Gregory B. Jones		Chairman of the Board and Chief Executive Officer and Director (principal executive officer)


/s/ B. Kenneth Driver B. Kenneth Driver		Director


/s/ Karl Fillauer Karl Fillauer		Director


/s/ Nathaniel F. Hughes Nathaniel F. Hughes		President and Treasurer (principal financial officer and accounting officer) and Director


/s/ Jerry D. Lee Jerry D. Lee		Executive Vice President and Senior Lender and Director


/s/ Lawrence D. Levine Lawrence D. Levine		Director


/s/ Frank S. McDonald Frank S. McDonald		Director


/s/ Doyce G. Payne Doyce G. Payne		Director


/s/ W. Miller Welborn W. Miller Welborn		Director


/s/ Billy O. Wiggins Billy O. Wiggins		Director


/s/ Marsha Yessick Marsha Yessick		Director