SMARTFINANCIAL INC. - Quarter Report: 2009 March (Form 10-Q)

Unassociated Document

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2009

o	TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________to .

Commission File Number: 000-30497

(Exact name of small business issuer as specified in its charter)

Tennessee		62-1173944
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

835 Georgia Avenue Chattanooga, Tennessee		37402
(Address of principal executive offices)		(Zip Code)

423-385-3000		Not Applicable
(Registrant’s telephone number, including area code)		(Former name, former address and former fiscal year, if changes since last report)

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 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 whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

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

As of May 11, 2009 there were 6,319,718 shares of common stock, $1.00 par value per share, issued and outstanding.

TABLE OF CONTENTS

PART I –FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)		4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3. Quantitative and Qualitative Disclosures about Market Risk		21

Item 4T.Controls and Procedures		21

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		22

Item 1A. Risk Factors		22

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		22

Item 3. Defaults Upon Senior Securities		22

Item 4. Submission of Matters to a Vote of Security Holders		22

Item 5. Other Information		22

Item 6. Exhibits		22

FORWARD-LOOKING STATEMENTS

Cornerstone Bancshares, Inc. (“Cornerstone”) may from time to time make written or oral statements, including statements contained in this report which constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements are those not based on historical information, but rather related to future operations, strategies, financial results or other developments. Generally, the words “expect,” “anticipate,” “intend,” “consider,” “plan,” “believe,” “seek,” “should,” “estimate,” and similar expressions may be used to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements are 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 and speak only as of the date made. Cornerstone’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Such factors include, without limitation, those specifically described in Item 1A of Part II of this report and in Cornerstone’s Annual Report on Form 10-K for the year ended December 31, 2008, as well as the following: (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.

Cornerstone Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

	Unaudited
	March 31		December 31,
ASSETS	2009		2008

Cash and due from banks	$	34,911,511	$	10,872,390
Federal funds sold		-		11,025,000
Cash and cash equivalents		34,911,511		21,897,390

Securities available for sale		51,272,127		44,056,559
Securities held to maturity		162,298		169,284
Federal Home Loan Bank stock, at cost		2,229,200		2,187,500
Loans, net of allowance for loan losses of
$12,885,423 at March 31, 2009
and $9,618,265 at December 31, 2008		366,107,705		378,471,619
Bank premises and equipment, net		8,150,683		8,471,955
Accrued interest receivable		1,870,555		1,771,091
Goodwill and amortizable intangibles		2,811,756		2,840,773
Other assets		14,028,760		11,937,004
Total Assets	$	481,544,595	$	471,803,175


LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Noninterest-bearing demand deposits	$	48,649,591	$	40,077,977
Interest-bearing demand deposits		30,917,274		26,908,572
Savings deposits and money market accounts		47,578,979		35,847,667
Time deposits of $100,000 or more		60,212,647		59,056,590
Time deposits of less than $100,000		162,533,202		164,692,417
Total deposits		349,891,693		326,583,223
Federal funds purchased and securites sold under
agreements to repurchase		23,597,247		35,790,246
Federal Home Loan Bank advances and line of credit		72,350,000		71,250,000
Accrued interest payable		665,073		469,586
Other liabilities		1,333,509		1,208,611
Total Liabilities		447,837,522		435,301,666

Stockholders' Equity
Preferred stock - no par value; 2,000,000 shares
authorized; no shares issued		-		-
Common stock - $l.00 par value; 10,000,000 shares authorized;
6,522,718 issued in 2009 and 2008;
6,319,718 outstanding in 2009 and 2008		6,319,718		6,319,718
Additional paid-in capital		20,366,336		20,311,638
Retained earnings		6,702,797		10,056,680
Accumulated other comprehensive income		318,222		(186,527	)
Total Stockholders' Equity		33,707,073		36,501,509
Total Liabilities and Stockholders' Equity	$	481,544,595	$	471,803,175

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

Cornerstone Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

	Unaudited Three months ended March 31
	2009			2008
INTEREST INCOME
Loans, including fees	$	6,442,106		$	7,553,295
Investment securities		396,958			498,009
Federal funds sold		7,948			1,855
Other earning assets		17,103			6,905
Total interest income		6,864,115			8,060,064

INTEREST EXPENSE
Interest bearing demand accounts		26,213			66,819
Money market accounts		79,626			337,850
Savings accounts		9,764			15,816
Time deposits of less than $100,000		1,466,012			1,406,934
Time deposits of more than $100,000		529,176			827,745
Federal funds purchased and securities
sold under agreements to repurchase		54,049			173,800
Other borrowings		705,836			640,912
Total interest expense		2,870,676			3,469,876

Net interest income before provision for loan losses		3,993,439			4,590,188
Provision for loan losses		5,725,000			317,000
Net interest income / (loss) after the provision for loan losses		(1,731,561	)		4,273,188

NONINTEREST INCOME
Service charges		408,143			405,332
Net gains / (losses) from sale of loans and other assets		(173,203	)		(52,247	)
Other income		28,174			41,221
Total noninterest income		263,114			394,306

NONINTEREST EXPENSE
Salaries and employee benefits		1,856,560			1,841,033
Occupancy and equipment expense		406,700			379,881
Other operating expense		1,029,483			875,714
Total noninterest expense		3,292,743			3,096,628

Income / (loss) before provision for income taxes		(4,761,190	)		1,570,866
Provision for income taxes		(1,849,687	)		556,007

NET INCOME / (LOSS)	$	(2,911,503	)	$	1,014,859

EARNINGS / (LOSS) PER COMMON SHARE
Basic net income / ( loss) per common share	$	(0.46	)	$	0.16
Diluted net income / (loss) per common share	$	(0.46	)	$	0.15

DIVIDENDS DECLARED PER COMMON SHARE	$	0.07		$	0.07

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

Cornerstone Bancshares, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders' Equity - Unaudited

For the three months ended March 31, 2009

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

BALANCE, December 31, 2008				$	6,319,718	$	20,311,638	$	10,056,680		$	(186,527	)	$	36,501,509

Issuance of common stock under Director's compensation option plan					-		-		-			-			-

Issuance of common stock under employee compensation option plan					-		-		-			-			-

Employee compensation stock					-		54,698		-			-			54,698
option expense

Dividend - $0.07 per share					-		-		(442,380	)		-			(442,380	)

Purchase of common stock					-		-		-			-			-

Comprehensive income / (loss):
Net income / (loss)	$	(2,911,503	)		-		-		(2,911,503	)		-			(2,911,503	)

Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities available for sale, net of reclassification adjustment		504,749			-		-		-			504,749			504,749

Total comprehensive income / (loss)	$	(2,406,754	)

BALANCE, March 31, 2009				$	6,319,718	$	20,366,336	$	6,702,797		$	318,222		$	33,707,073

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

Cornerstone Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

	Unaudited
	Three months ended March 31,
	2009			2008

CASH FLOWS FROM OPERATING ACTIVITIES
Net income / (loss)	$	(2,911,503	)	$	1,014,859
Adjustments to reconcile net income / (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization		161,338			156,054
Provision for loan losses		5,725,000			317,000
Stock compensation expense		54,698			70,000
Net losses on sales of loans and other assets		173,203			52,247
Deferred income taxes		500,857			2,994,108
Changes in other operating assets and liabilities:
Net change in loans held for sale		(756,250	)		327,750
Accrued interest receivable		(99,464	)		332,213
Accrued interest payable		195,487			213,460
Other assets and liabilities		(2,945,769	)		(7,238,441	)
Net cash provided by (used in) operating activities		97,597			(1,760,750	)


CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from security transactions:
Securities available for sale		3,082,889			5,489,515
Securities held to maturity		6,866			6,497
Purchase of securities available for sale		(9,532,841	)		(12,767,252	)
Purchase of Federal Home Loan Bank stock		(41,700	)		(107,600	)
Loan originations and principal collections, net		7,402,822			(5,100,818	)
Purchase of bank premises and equipment		(48,261	)		(137,172	)
Proceeds from sale of other real estate and other assets		273,658			-
Net cash provided by (used in) investing activities		1,143,433			(12,616,830	)


CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		23,308,470			1,632,602
(Decrease) in federal funds purchased and
securities sold under agreements to repurchase		(12,192,999	)		(3,186,985	)
Net proceeds from Federal Home Loan Bank advances and other borrowings		1,100,000			14,000,000
Purchase of common stock		-			(503,006	)
Payment of dividends		(442,380	)		(445,882	)
Net cash provided by financing activities		11,773,091			11,496,729

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		13,014,121			(2,880,851	)

CASH AND CASH EQUIVALENTS, beginning of period		21,897,390			14,933,349
CASH AND CASH EQUIVALENETS, end of period	$	34,911,511		$	12,052,498


SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for interest	$	2,675,189		$	3,256,416
Cash paid during the period for taxes		-			122,500

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

CORNERSTONE BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Nature of Business-Cornerstone Bancshares, Inc. (“Cornerstone”) is a bank holding company whose primary business is performed by its wholly-owned subsidiaries, Cornerstone Community Bank (“Bank”) and Eagle Financial, Inc. (“Eagle”). The Bank provides a full range of banking services to the Chattanooga, Tennessee market. The Bank has also established a loan production office (“LPO”) in Dalton, Georgia and an LPO in Knoxville, Tennessee to further enhance the Bank’s lending markets. The Bank specializes in asset based lending, commercial lending and payment processing. Eagle is a commercial factoring company that provides financing to businesses that are relatively new or experiencing significant growth.

Interim Financial Information (Unaudited)-The financial information in this report for March 31, 2009 and March 31, 2008 has not been audited. The information included herein should be read in conjunction with the annual consolidated financial statements and footnotes thereto included in the 2008 Annual Report to Shareholders which was furnished to each shareholder of Cornerstone in March of 2009. The consolidated financial statements presented herein conform to generally accepted accounting principles and to general industry practices. In the opinion of Cornerstone’s management, the accompanying interim financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial condition, the results of operations, and cash flows for the interim period. Results for interim periods are not necessarily indicative of the results to be expected for a full year.

Use of Estimates-The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses.

Consolidation-The accompanying consolidated financial statements include the accounts of Cornerstone and its subsidiaries Bank and Eagle. Substantially all intercompany transactions, profits and balances have been eliminated.

Reclassification-Certain amounts in the prior consolidated financial statements have been reclassified to conform to the current period presentation. The reclassifications had no effect on net income or stockholder’s equity as previously reported.

Accounting Policies-During interim periods, Cornerstone follows the accounting policies set forth in its Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission. Since December 31, 2008, there have been no significant changes in any accounting principles or practices, or in the method of applying any such principles or practices.

Earnings per Common Share- Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders (numerator) by the weighted average number of common shares outstanding during the period (denominator). Diluted EPS is computed by dividing income available to common shareholders (numerator) by the adjusted weighted average number of shares outstanding (denominator). The adjusted weighted average number of shares outstanding reflects the potential dilution occurring if securities or other contracts to issue common stock were exercised or converted into common stock resulting in the issuance of common stock that share in the earnings of the entity.

CORNERSTONE BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following is a summary of the basic and diluted earnings per share for the three month periods ended March 31, 2009 and 2008.

	Three Months Ended March 31,
Basic earnings / (loss) per share calculation:	2009			2008
Numerator: Net income / (loss) available to common shareholders	$	(2,911,503	)	$	1,014,859
Denominator: Weighted avg. common shares outstanding		6,319,718			6,336,751
Effect of dilutive stock options		-			220,753
Diluted shares		6,319,718			6,557,504

Basic earnings / (loss) per share	$	(0.46	)	$	0.16
Diluted earnings / (loss) per share	$	( 0.46	)	$	0.15

Note 2. Stock Based Compensation

Accounting Policies- Cornerstone, as required by FASB, applies the fair value recognition provisions of SFAS No. 123(R) Share-Based Payment. As a result, for the three month period ended March 31, 2009, the compensation cost charged to earnings related to the vested incentive stock options was approximately $55,000, which reduced basic earnings per share by $0.01 per share.

Officer and Employee Plans-Cornerstone has two stock option plans under which officers and employees can be granted incentive stock options or non-qualified stock options to purchase a total of up to 1,420,000 shares of Cornerstone’s common stock. The option price for incentive stock options shall be not less than 100 percent of the fair market value of the common stock on the date of the grant. The exercise price of the non-qualified stock options may be equal to or more or less than the fair market value of the common stock on the date of the grant. The stock options vest at 30 percent on the second and third anniversaries of the grant date and 40 percent on the fourth anniversary. The options expire ten years from the grant date. At March 31, 2009, the total remaining compensation cost to be recognized on non-vested options is approximately $622,000. A summary of the status of these stock option plans is presented in the following table:

					Weighted-
					Average
			Weighted		Contractual
			Average		Remaining	Aggregate
			Exercisable		Term	Intrinsic
	Number		Price		(in years)	Value
Outstanding at December 31, 2008		755,425	$	6.63	5.0 Years	$	1,634,022
Granted		115,850		3.60
Exercised		-		-
Forfeited		-		-
Outstanding at March 31, 2009		871,275	$	6.22	5.4 Years	$	550,170
Options exercisable at March 31, 2009		618,978	$	5.46

The weighted average grant-date fair value of stock options granted during the three months ended March 31, 2009 was $1.13. This was determined using the Black-Scholes option pricing model with the following weighted –average assumptions: Dividend Yield-2.97%, Expected Life-7.0 years, Expected Volatility-38.74%, Risk-free Interest Rate- 2.69%.

CORNERSTONE BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Board of Directors Plan-Cornerstone has a stock option plan under which members of the Board of Directors, at the formation of the Bank, were granted options to purchase a total of up to 600,000 shares of the Bank's common stock. On October 15, 1997, the Bank stock options were converted to Cornerstone stock options. Only non-qualified stock options may be granted under the Plan. The exercise price of each option equals the market price of Cornerstone’s stock on the date of grant and the option’s maximum term is ten years. Vesting for options granted during 2009, are 50% on the first and second anniversary of the grant date. At March 31, 2009, the total remaining compensation cost to be recognized on non-vested options is approximately $59,000. A summary of the status of this stock option plan is presented in the following table:

					Weighted-
					Average
			Weighted		Contractual
			Average		Remaining	Aggregate
			Exercisable		Term	Intrinsic
	Number		Price		(in years)	Value
Outstanding at December 31, 2008		81,800	$	10.73	7.9 Years	$	29,608
Granted		20,500		3.60
Exercised		-		-
Forfeited		-		-
Outstanding at March 31, 2009		102,300	$	9.30	8.1 Years	$	23,138
Options exercisable at March 31, 2009		75,400	$	10.96

The weighted average grant-date fair value of stock options granted during the three months ended March 31, 2009 was $1.13. This was determined using the Black-Scholes option pricing model with the following weighted –average assumption: Dividend Yield-2.97%, Expected Life-7.0 years, Expected Volatility-38.74%, Risk-free Interest Rate- 2.69%.

Note 3. Stockholder’s Equity

During 2009, Cornerstone’s Board of Directors declared the following dividends:

Dividend Rate	Declaration Date	Record Date	Payment Date
(per share)
$0.07	February 25, 2009	March 13, 2009	April 3, 2009

Any determinations relating to future dividends will be made at the discretion of Cornerstone’s Board of Directors and will depend on a number of factors, including our earnings, capital requirements, financial conditions, future prospects, regulatory restrictions and other factors that Cornerstone’s Board of Directors may deem relevant.

CORNERSTONE BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4. Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at March 31, 2009 and December 31, 2008 are summarized as follows:

	March 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Market
Securities Available-for-Sale:	Cost		Gains		Losses			Value
U.S. Government Securities	$	11,072,992	$	347,518	$	-		$	11,420,510

State and municipal securities		5,886,670		134,858		(48,319	)		5,973,209

Mortgage-backed securities		33,830,309		242,539		(194,440	)		33,878,408

	$	50,789,971	$	724,915	$	(242,759	)	$	51,272,127
Securities Held-to-Maturity:
Mortgage-backed securities	$	162,298	$	1,173	$	(327	)	$	163,144

	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Market
Securities Available-for-Sale:	Cost		Gains		Losses			Value
U.S. Government Securities	$	7,976,040	$	275,731	$	-		$	8,251,771

State and municipal securities		4,609,632		82,013		(68,830	)		4,622,815

Mortgage-backed securities		31,753,504		160,387		(731,918	)		31,181,973

	$	44,339,176	$	518,131	$	(800,748	)	$	44,056,559
Securities Held-to-Maturity:
Mortgage-backed securities	$	169,284	$	1,158	$	(683	)	$	169,759

At March 31, 2009 approximately $51 million of Cornerstone’s investment portfolio was pledged to secure public funds, securities sold under agreements to repurchase and serve as collateral for borrowings at the Federal Reserve Discount Window.

CORNERSTONE BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 5. Loans and Allowance for Loan Losses

At March 31, 2009 and December 31, 2008, loans are summarized as follows (in thousands):

	March 31, 2009					December 31, 2008
	Amount		Percent			Amount		Percent
Commercial, financial and agricultural	$	78,868		20.8	%	$	83,140		21.4	%
Real estate-construction		68,538		18.1	%		70,456		18.2	%
Real estate-mortgage		73,978		19.5	%		72,737		18.7	%
Real estate-commercial		152,181		40.2	%		155,728		40.1	%
Consumer loans		5,428		1.4	%		6,029		1.6	%
Total loans	$	378,993		100.0	%	$	388,090		100.0	%

A summary of transactions in the allowance for loan losses for the three months ended March 31, 2009 and year ended December 31, 2008 is as follows:

	March 31,			December 31,
	2009			2008
Balance, beginning of period	$	9,618		$	13,710
Loans charged-off		(2,522	)		(7,979	)
Recoveries of loans previously charged-off		64			389
Provision for loan losses		5,725			3,498
Balance, end of period	$	12,885		$	9,618

Note 6. Commitments and Contingent Liabilities

In the normal course of business, the Bank has entered into off-balance sheet financial instruments which include commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Standby letters of credit are generally issued on behalf of an applicant (our customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from the Bank under certain prescribed circumstances. Subsequently, the Bank would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

The Bank follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.

The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, the Bank’s maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.

A summary of the Bank’s total contractual amount for all off-balance sheet commitments at March 31, 2009 is as follows:

Commitments to extend credit	$ 60.6 million
Standby letters of credit	$ 3.6 million

Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of claims outstanding at March 31, 2009 will not have a material effect on Cornerstone’s consolidated financial statements.

CORNERSTONE BANCSHARES, INC.

CONSOLIDATED AVERAGE BALANCE

INTEREST INCOME/EXPENSE AND YIELD/RATES

Taxable Equivalent Basis	Three months ended
(in thousands)	March 31

Assets	2009						2008
	Average			Income/		Yield/	Average			Income/		Yield/
Earning assets:	Balance			Expense		Rate	Balance			Expense		Rate
Loans, net of unearned income	$	383,739		$	6,442	6.81%	$	386,056		$	7,553	7.85%
Investment securities		53,082			414	3.62%		42,261			505	5.14%
Other earning assets		13,960			8	0.23%		195			2	3.81%
Total earning assets		450,781		$	6,864	6.23%		428,512		$	8,060	7.58%
Allowance for loan losses		(9,138	)					(11,271	)
Cash and other assets		28,419						29,232
TOTAL ASSETS	$	470,062					$	446,473

Liabilities and Shareholder's Equity

Interest bearing liabilities:
Interest bearing demand deposits	$	28,823		$	26	0.37%	$	32,202		$	67	0.83%
Savings deposits		7,818			10	0.51%		7,642			16	0.84%
MMDA's		33,056			80	0.98%		53,566			338	2.53%
Time deposits of $100,000 or less		165,618			1,466	3.59%		117,169			1,407	4.82%
Time deposits of $100,000 or more		59,628			529	3.60%		65,370			828	5.08%
Federal funds purchased and securities
sold under agreements to repurchase		24,550			54	0.89%		26,597			174	2.62%
Other borrowings		71,433			706	4.01%		60,046			641	4.28%
Total interest bearing liabilities		390,926			2,871	2.98%		362,592			3,470	3.84%
Net interest spread				$	3,993	3.25%				$	4,590	3.74%
Noninterest bearing demand deposits		43,064						44,503
Accrued expenses and other liabilities		(854	)					2,247
Shareholder's equity		36,926						37,131
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY	$	470,062					$	446,473
Net yield on earning assets						3.65%						4.33%

Taxable equivalent adjustment:
Loans					0						0
Investment securities					60						36
Total adjustment					60						36

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 March 31, 2009 and December 31, 2008 and our results of operations for the three months ended March 31, 2009 and 2008. 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 March 31, 2009, Cornerstone had total consolidated assets of $481.5 million, total loans of $379.0 million, total deposits of $349.9 million and stockholders’ equity of $33.7 million. Net loss for the three month period ended March 31, 2009 totaled ($2,911,503).

Results of Operations

Net loss for the three months ended March 31, 2009 was ($2,911,503) or ($0.46) basic earnings per share, compared to net income of $1,014,859 or $0.16 basic earnings per share, for the same period in 2008.

The following table presents our results for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 (amounts in thousands).

						2009-2008
	Three Months					Percent			Dollar
	Ended March 31,					Increase			Amount
	2009			2008		(Decrease)			Change
Interest income	$	6,864		$	8,060		(14.84	)%	$	(1,196	)
Interest expense		2,871			3,470		(17.26	)%		(599	)
Net interest income before provision for loan losses		3,993			4,590		(13.01	)%		(597	)

Provision for loan losses		5,725			317		1,705.99	%		5,408
Net interest income (loss) after provision for loan losses		(1,732	)		4,273		(140.53	)%		(6,005	)

Total noninterest income		263			394		(33.25	)%		(131	)
Total noninterest expense		3,293			3,096		6.36	%		197

Income / (loss) before provision for income taxes		(4,762	)		1,571		(403.12	)%		(6,333	)

Provision for income taxes		(1,850	)		556		(432.73	)%		(2,406	)

Net income / (loss)	$	(2,912	)	$	1,015		(386.90	)%	$	(3,927	)

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 three months ended March 31, 2009, net interest income before the provision for loan loss, decreased $597 thousand or (13.01)% over the same period of 2008. Cornerstone’s interest rate spread on a tax equivalent basis (which is the difference between the average yield on earning assets and the average rate paid on interest bearing liabilities) was 3.25% for the three month period ended March 31, 2009 compared to 3.74% for the same period in 2008. The net interest margin on a tax equivalent basis was 3.65% for the three month period ended March 31, 2009 compared to 4.33% for the same period in 2008. Significant items related to the changes in net interest income, net interest yields and rates, and net interest margin are presented below:

Future changes in the net interest margin will be impacted due to increased competition for funding. Presently, banks are paying premiums for overnight borrowing rates in order to retain transactional accounts. In addition, certificates of deposit continue to require a premium to investment instruments with similar maturities. Management anticipates that this condition will continue until interest rates rise to a more historic level.

The Bank’s loan portfolio yield has declined to 6.81% for the three months ended March 31, 2009 compared to 7.85% for the quarter ended March 31, 2008. The decrease in loan yields is due primarily to difficult economic conditions in Chattanooga, TN and the lack of interest floors in the loan agreements of approximately 5.5% of the Bank’s loan portfolio. Management believes the net interest margin is approaching the lowest level and expects the net interest margin to increase slightly for the remainder of 2009 due to the continued repricing of the Bank’s certificate of deposit portfolio during the next two quarters.

For the three month period ended March 31, 2009, the Bank’s investment portfolio resulted in a yield of 3.62% compared to 5.14% for the same time period in 2008. The decline in the investment portfolio yield from March 31, 2008 to March 31, 2009 is primarily attributable to the Bank’s portfolio composition which includes approximately 50% variable securities, indexed to the London Interbank Offered Rate or “LIBOR” to account for future increases in interest rates. Presently, the Bank is using a “bar-bell” investment strategy to optimize its interest rate yield relative to its interest rate risk. Under the bar-bell strategy, investments are comprised of securities with short and long term durations combined to create an overall mid-range duration with a higher rate of return. This strategy also incorporates an acquisition strategy of purchasing securities with historically high spreads relative to US Treasury such as twelve to twenty year tax free municipal bonds with rates of return higher than similar US Treasury bonds.

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 $5.7 million for the three months ended March 31, 2009.

Noninterest Income-Items reported as noninterest 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.

The following table presents the components of noninterest income for the three months ended March 31, 2009 and 2008 (dollars in thousands).

							2009-2008
	Three months ended						Percent
	March 31,						Increase
	2009			2008			(Decrease)
Service charges on deposit accounts	$	408		$	405			0.74	%
Net gains / (losses) from sale of loans and other assets		(173	)		(52	)		231.12	%
Other income		28			41			(32.07	)%
Total noninterest income	$	263		$	394			(33.25	)%

Significant matters relating to the changes in noninterest income are presented below:

The Bank realized $181 thousand of loss relating to the disposal of other real estate and repossessed assets during the 1st quarter of 2009. This amount was slightly offset by gains resulting from the sale of secondary market mortgage loans. The Bank expects further losses relating to the disposal of other real estate and repossessed assets.

Noninterest Expense-Items reported as noninterest expense include salaries and employee benefits, occupancy and equipment expense and other operating expense.

The following table presents the components of noninterest expense for the three months ended March 31, 2009 and 2008 (dollars in thousands).

	Three months ended				2009-2008
	March 31,				Percent
	2009		2008		Increase
Salaries and employee benefits	$	1,857	$	1,841		0.87	%
Occupancy and equipment expense		407		380		7.11	%
Other operating expense		1,029		875		17.60	%
Total noninterest expense	$	3,293	$	3,096		6.36	%

Significant matters relating to the changes to noninterest expense are presented below:

During the 1st quarter of 2009, the Bank paid approximately $62,000 in insurance assessments to the Federal Deposit Insurance Corporation (“FDIC”). The amount paid represents an increase of 63.2% over the same time period in 2008.

During 2009, Cornerstone incurred additional expense related to other real estate. These expenses include legal, insurance, maintenance, and sales cost. Management expects these costs to continue throughout 2009.

Financial Condition

Overview-Cornerstone’s consolidated assets totaled $471.8 million as of December 31, 2008. As of March 31, 2009, total consolidated assets had increased $9.7 million or 2.06% to $481.5 million. The Bank’s loan portfolio totaled $379.0 million as of March 31, 2009. The Bank’s investment portfolio increased by approximately $7.2 million to a total of $51.4 million as of March 31, 2009 compared to a total of $44.2 million as of December 31, 2008. The increase in the security portfolio was needed to provide additional liquidity and for pledging requirements. Liabilities as of March 31, 2009 and December 31, 2008 totaled approximately $447.8 million and $435.3 million, respectively. The change in liabilities is primarily attributable to increases in the Bank’s noninterest-bearing and interest-bearing accounts. Stockholders’ equity as of March 31, 2009 and December 31, 2008 totaled approximately $33.7 million and $36.5 million, respectively.

Securities-The Bank’s investment portfolio, primarily consisting of Federal Agency, mortgage-backed securities and municipal securities, amounted to $51.4 million as of March 31, 2009 compared to $44.2 million as of December 31, 2008. The primary purpose of the Bank’s investment portfolio is to satisfy pledging requirements to collateralize the Bank’s repurchase accounts.

Loans-The composition of loans at March 31, 2009 and at December 31, 2008 and the percentage (%) of each classification to total loans are summarized in the following table (dollars in thousands):

	March 31, 2009					December 31, 2008
	Amount		Percent			Amount		Percent
Commercial, financial and agricultural	$	78,868		20.8	%	$	83,140		21.4	%
Real estate-construction		68,538		18.1	%		70,456		18.2	%
Real estate-mortgage		73,978		19.5	%		72,737		18.7	%
Real estate-commercial		152,181		40.2	%		155,728		40.1	%
Consumer loans		5,428		1.4	%		6,029		1.6	%
Total loans	$	378,993		100.0	%	$	388,090		100.0	%

Allowance for Loan Losses-The allowance for loan losses represents Cornerstone’s assessment of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provisions required to maintain a level considered adequate to absorb anticipated loan losses. The Bank uses a risk based approach to calculate the appropriate loan loss allowance in accordance with guidance issued by the Federal Financial Institutions Examination Council. Although the Bank performs prudent credit underwriting, no assurances can be given that adverse economic circumstances will not result in increased losses in the loan portfolio and require greater provisions for possible loan losses in the future.

During the 1st quarter of 2009, the Bank experienced continued loan quality deterioration. During the quarter, management deemed several large loans to be impaired which resulted in an increase in provision expense. Currently, the Bank believes that it has established an allowance for loan losses that adequately accounts for the Bank’s identified loan impairment. However, additional provision to the loan loss allowance may be needed in future quarters if the Bank’s loan portfolio continues to deteriorate.

The following is a summary of changes in the allowance for loan losses for the three months ended March 31, 2009 and for the year ended December 31, 2008 and the ratio of the allowance for loan losses to total loans as of the end of each period (dollars in thousands):

	March 31,			December 31,
	2009			2008
Balance, beginning of period	$	9,618		$	13,710
Loans charged-off		(2,522	)		(7,979	)
Recoveries of loans previously charged-off		64			389
Provision for loan losses		5,725			3,498
Balance, end of period	$	12,885		$	9,618

Total loans	$	378,993		$	388,090

Ratio of allowance for loan losses to loans
outstanding at the end of the period		3.40	%		2.48	%

Ratio of net charge-offs to total loans
outstanding for the period		0.65	%		1.96	%

Non-Performing Assets-The specific economic and credit risks associated with the Bank’s loan portfolio include, but are not limited to, a general downturn in the economy which could affect employment rates in our market area, general real estate market deterioration, interest rate fluctuations, deteriorated or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and violation of laws and regulations.

The Bank attempts to reduce these economic and credit risks by adherence to a lending policy approved by the Bank’s board of directors. The Bank’s lending policy establishes loan to value limits, collateral perfection, credit underwriting criteria and other acceptable lending standards. The Bank classifies loans that are ninety (90) days past due and still accruing interest, renegotiated, non-accrual loans, foreclosures and repossessed property as non-performing assets. The Bank’s policy is to categorize a loan on non-accrual status when payment of principal or interest is contractually ninety (90) or more days past due. At the time the loan is categorized as non-accrual the interest previously accrued but not collected may be reversed and charged against current earnings.

The following is a summary of changes in Cornerstone’s impaired loans for the three months ended March 31, 2009 and for the year ended December 31, 2008 (dollars in thousands):

	March 31,		December 31,
	2009		2008
Impaired loans without a valuation allowance	$	6,124,018	$	2,543,320

Impaired loans with a valuation allowance	$	21,849,712	$	17,375,043

Total impaired loans	$	27,973,730	$	19,918,363

Valuation allowance related to impaired loans	$	9,484,086	$	5,872,373

Total non-accrual loans	$	7,948,655	$	4,252,791

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

	Quarter Ended		Year Ended
	March 31,		December 31,
	2009		2008
Average investment in impaired loans	$	21,761,020	$	10,891,357

Interest income recognized on impaired loans	$	507,289	$	966,011

The Bank’s loan portfolio has experienced a general deterioration in loan quality as the Chattanooga, TN MSA endures the current economic recession. The number and dollar amount of impaired loans increased during the 1st quarter of 2009 as the Bank continued to systematically review its loan portfolio to proactively identify possible impaired loans. Management anticipates that its loan asset quality will not improve until the economy recovers from the current economic recession.

The following table summarizes Cornerstone’s non-performing assets for the three months ended March 31, 2009 and for the year ended December 31, 2008 (dollars in thousands):

	March 31,			December 31,
	2009			2008
Non-accrual loans	$	8,620		$	4,252
Repossessed assets		256			257
Foreclosed properties		2,476			2,459
Total non-performing assets	$	11,352		$	6,968

Total loans outstanding	$	378,993		$	388,090

Allowance for loan losses		12,885			9,618

Ratio of nonperforming assets to total loans
outstanding at the end of the period		3.00	%		1.80	%

Ratio of nonperforming assets to total allowance
for loan losses at the end of the period		88.09	%		72.45	%

As of March 31, 2009, the Bank’s non accrual loans doubled in amount due primarily to loans extended to one real estate developer. Management expects the collateral associated with these loans to be in other real estate or disposed of by the 2nd quarter of 2009. Furthermore, management anticipates a minimal loss associated with the disposal of these assets. The Bank has also placed a high priority regarding the conversion of non accruing loans to disposable assets, which should result in non accrual loans decreasing in the future while other real estate increases are projected for the short term until the assets are sold.

Deposits and Other Borrowings-The Bank’s deposits consist of noninterest bearing demand deposits, interest bearing demand accounts, savings and money market accounts, and time deposits. The Bank has agreements with some customers to sell certain of its securities under agreements to repurchase the security the following day. The Bank has also obtained advances from the Federal Home Loan Bank.

The following table presents the Bank’s deposits and other borrowings as either core funding or non-core funding. Core funding consists of all deposits except for time deposits issued in denominations of $100,000 or greater. All other funding is classified as non-core.

	March 31, 2009					December 31, 2008
Core funding:	Amount		Percent			Amount		Percent
Noninterest bearing demand deposits	$	48,650		11.0	%	$	40,078		9.3	%
Interest bearing demand deposits		30,917		7.0	%		26,909		6.3	%
Savings & money market accounts		47,579		10.8	%		35,848		8.3	%
Time deposits under $100,000		162,533		36.9	%		164,692		38.4	%
Total core funding		289,679		65.7	%		267,527		62.3	%

Non-core funding:
Time deposit accounts greater than $100,000		60,213		13.7	%		59,057		13.8	%
Securities sold under agreements to repurchase		23,597		5.4	%		35,790		8.3	%
Federal Home Loan Bank advances		67,000		15.2	%		67,000		15.6	%
Total non-core funding		150,810		34.3	%		161,847		37.7	%

Total	$	440,489		100.0	%	$	429,374		100.0	%

Federal funds purchased are lines of credit established with other financial institutions that allow the Bank to meet short term funding requirements. These lines can be used as frequently as daily with large variations in balances depending upon the Bank’s immediate funding requirements. As of March 31, 2009, the Bank had established $40 million in available federal funds lines.

Federal Home Loan Bank of Cincinnati (the “FHLB”) borrowings are secured by certain qualifying residential mortgage loans and, pursuant to a blanket lien, all qualifying commercial mortgage loans. Management believes that FHLB borrowings provide an additional source of funding at lower interest rates than alternative sources. The borrowings are structured as either term loans with call and put options after a stated conversion date and an overnight borrowing arrangement. As of March 31, 2009, the Bank had borrowed a total of $67 million from the FHLB consisting of structured term loans.

Capital Resources-At March 31, 2009 and December 31, 2008, Cornerstone’s stockholders’ equity amounted to $33.7 million and $36.5 million, respectively.

Cornerstone’s stockholders’ equity decreased $2.8 million during the 1st quarter of 2009. Factors contributing to the reduction in capital include the payment of a 1st quarter 2009 dividend of $0.07 and Cornerstone’s 1st quarter 2009 operating loss of $2.9 million.

Cornerstone had total outstanding borrowings of $5.35 million from Silverton Bank as of March 31, 2009. The $5.35 million is comprised of a $4.35 million term loan amortizing over a five year period and $1.0 million under a revolving line of credit. The line of credit also includes a requirement that Cornerstone “clean out” the line quarterly. During May 2009 Silverton Bank was placed in receivership with the FDIC. The FDIC created a bridge bank to take over the operations of Silverton Bank. The result of this action does not create any apparent risk to Cornerstone’s operations. However, Cornerstone is actively seeking other correspondent relationships and anticipates moving the loan during 2009.

Cornerstone has applied for $12 million of funding under the US Treasury’s Capital Purchase Program and is currently waiting for approval.

Market and Liquidity Risk Management

Interest Rate Sensitivity

The Bank’s Asset Liability Management Committee (“ALCO”) is responsible for making decisions regarding liquidity and funding solutions based upon approved liquidity, loan, capital and investment policies. The ALCO committee must consider interest rate sensitivity and liquidity risk management when rendering a decision on funding solutions and loan pricing. The following is a brief discussion of one of the primary tools used by the ALCO committee to perform its responsibilities:

Gap analysis is a technique of asset-liability management that can be used to assess interest rate risk or liquidity risk. The Bank has developed a gap analysis to assist the ALCO committee in its decision making. The analysis provides the committee information regarding the interest rate-sensitivity of the Bank. The interest rate-sensitivity is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within a stated time period. The gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. Conversely, the gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. The gap position coupled with interest rate movements will result in either an increase or decrease in net interest income depending upon the Bank’s position and the nature of the movement.

The Bank has identified a material interest rate risk in the Bank’s balance sheet. The risk has been created by the activation of interest rate floors on the majority of the Bank’s variable rate loans. Given the present interest rate levels, the Bank could see its interest sensitive deposits increase 200 basis points without a corresponding movement in the majority of its variable rate loans. Management is exploring off-balance sheet solutions for this issue and anticipates implementing a mitigating strategy during the 2nd or 3rd quarter of 2009.

Liquidity Risk Management

Liquidity is measured by the Bank's ability to raise cash at a reasonable cost or with a minimum of loss. These funds are used primarily to fund loans and satisfy deposit withdrawals. Several factors must be considered by management when attempting to minimize liquidity risk. Examples include changes in interest rates, competition, loan demand, and general economic conditions. Minimizing liquidity risk is a responsibility of the ALCO committee and is reviewed by the Bank’s regulatory agencies on a regular basis.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

A comprehensive qualitative and quantitative analysis regarding market risk was disclosed in Cornerstone’s Form 10-K for the year ended December 31, 2008. No material changes in the assumptions used in preparing, or results obtained from, the model have occurred since December 31, 2008.

Item 4T. Controls and Procedures

Under the supervision and with the participation of management, including Cornerstone’s Chief Executive Officer, Cornerstone has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2009 (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, Cornerstone’s disclosure controls and procedures were effective in alerting them on a timely basis to material information relating to Cornerstone (including its consolidated subsidiaries) required to be included in Cornerstone’s periodic filings under the Exchange Act.

There were no changes in Cornerstone’s internal control over financial reporting during Cornerstone’s fiscal quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, Cornerstone’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are various claims and lawsuits in which the Bank is periodically involved incidental to the Bank’s business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.

Item 1A. Risk Factors

There have been no material changes to Cornerstone’s risk factors as previously disclosed in Part I, Item 1A of Cornerstone’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibit Number		Description
31		Certifications under Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certifications under Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Cornerstone Bancshares, Inc.

Date: May 13, 2009	By:	/s/ Gregory B. Jones
		Gregory B. Jones,
		Chairman and Chief Executive Officer
		(principal executive officer)

Date: May 13, 2009	By:	/s/ Nathaniel F. Hughes
		Nathaniel F. Hughes
		President and Treasurer
		(principal financial officer)

EXHIBIT INDEX

Exhibit Number		Description
31		Certifications under Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certifications under Section 906 of the Sarbanes-Oxley Act of 2002.