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

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8-K - FORM 8-K - SMARTFINANCIAL INC.	v326500_8k.htm

Cornerstone Posts Profit for Third Quarter of 2012

CHATTANOOGA, Tenn. — October 24, 2012 — (PR Newswire) Cornerstone Bancshares, Inc., (“Cornerstone”; OTC Bulletin Board: CSBQ; CSBQP), holding company of Cornerstone Community Bank (“Bank”), today announced net income of $364,000 for the third quarter of 2012. This marks the seventh consecutive quarter of positive earnings for Cornerstone and an increase from net income of $356,000 for the first quarter of 2012, and $311,000 for the second quarter of 2012.

Year-over-year, total net income for Cornerstone increased 12.4 percent at the end of the third quarter, from $917,000 in 2011 to $1,031,000 in 2012. Non-accruing loans decreased from $8.56 million in 2011 to $7.97 million in 2012. Net interest margin increased for the year from 3.51 percent in 2011 to 3.73 percent in 2012. In addition, the Bank’s total risk-based capital ratio increased 20.8 percent year-over-year at the end of the third quarter, from 11.12 percent in 2011 to an estimated 13.43 percent in 2012.

"We continue to make steady progress in the right direction," said Cornerstone's President and Chief Executive Officer Frank Hughes. “While we still have a ways to go, it’s nice that the regulators have also recognized our efforts and improvements made across the board.”

On August 27, 2012, Cornerstone announced that the FDIC and Tennessee Department of Financial Institutions had officially terminated the Consent Order and Written Agreement entered into with the Bank on April 2, 2010, after loan losses sustained during the ‘Great Recession.” The regulatory agreement provided guidelines for the Bank to improve its capital ratios, loan portfolio and earnings. The release of the Consent Order and Written Agreement were major benchmarks for Cornerstone’s success in aggressively tackling its asset quality issues, cleaning up the balance sheet and raising in excess of $12 million in capital through a Preferred Stock Offering in the local market.

"Our customers, shareholders and members of the Chattanooga community have faithfully stood by Cornerstone and are truly vested in our success,” said Cornerstone's Chairman Miller Welborn. "We will continue to work diligently to serve the Chattanooga market as a premier community bank, and to deliver the greatest return on investment for all our shareholders.”

Founded in 1996, Cornerstone is a single-bank holding company, with $425 million in assets, serving the Chattanooga, Tennessee MSA, with five full-service branch locations throughout Chattanooga and one loan production office in Dalton, Georgia. Locally owned and locally operated, Cornerstone specializes in providing a comprehensive range of customized financial solutions for businesses and individuals.

Certain of the statements made in this release may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements, including statements regarding the intent, belief or current expectations of Cornerstone and its management regarding the company’s strategic directions, prospects and future results, involve certain risks and uncertainties. Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including economic and other conditions in the markets in which Cornerstone operates, governmental regulations, the company’s competitive environment, cyclical and seasonal fluctuations in its operating results, and other risks.

Contact: Frank Hughes, Cornerstone President & CEO, 423-385-3009

Cornerstone Bancshares, Inc. and Subsidiary

Third Quarter Financial Highlights

September 30, 2012 and 2011

(Unaudited)

(Amounts in thousands, except per common share data)	2012			2011			% Change
Balance Sheet Data at September 30
Total assets	$	425,179		$	426,365			(0.3	)
Interest-earning assets		391,685			398,316			(1.7	)
Loans		273,820			270,401			1.3
Foreclosed assets		22,376			18,255			22.6
Deposits		328,963			322,552			2.0
Other interest-bearing liabilities		56,555			69,099			(18.2	)
Shareholders' equity		38,128			32,447			17.5
Loan to deposit ratio		83.24	%		83.83	%		(0.7	)
Tier 1 leverage ratio (Bank, est)		8.30	%		6.65	%		24.8
Total risk-based capital ratio (Bank, est)		13.43	%		11.12	%		20.8
Outstanding common shares		6,500			6,500			-
Book value per common share	$	3.99		$	3.87			3.2
Tangible book value per common share	$	3.99		$	3.86			3.3
Market value per common share as of September 30	$	1.95		$	1.03			89.3

Loan Quality Data
Nonaccruing loans		7,968			8,560			(6.9	)
Loans past due 90 days – accruing		-			-			-
Net charge-offs YTD		2,220			2,413			(8.0	)
Allowance for loan losses		5,280			6,864			(23.1	)
Allowance for loan losses to total loans		1.93	%		2.54	%
Nonperforming assets to total assets		7.14	%		6.29	%

Performance Data for the Year
Net income	$	1,031		$	917			12.5
Return on average assets		0.33	%		0.28	%
Return on average equity		3.77	%		4.27	%
Net interest margin		3.73	%		3.51	%
Per common share data:
Net income – basic	$	0.02		$	0.07
Net income – diluted	$	0.02		$	0.07
Common dividends	$	-		$	-
Preferred dividends & accretion	$	1.88		$	1.88
Average shares (000s):
Basic common stock		6,500			6,500
Diluted common stock		6,559			6,500
Preferred stock (actual)		494			300

Cornerstone Bancshares, Inc. and Subsidiary

Quarterly Earnings Summary

	(Unaudited)
	2012									2011						Q3-12 /
	Third			Second			First			Fourth			Third			Q3-11
(Amounts in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter			% Chg
Interest income
Loans, including fees	$	4,242		$	4,186		$	4,144		$	4,437		$	4,531			(6.4	)
Investment securities		478			618			467			548			574			(16.6	)
Other earning assets		15			13			15			16			9			61.8
Total interest income		4,735			4,817			4,626			5,001			5,114			(7.4	)
Interest expense
Deposits		756			768			820			924			1,012			(25.3	)
Short-term borrowings		22			23			32			28			33			(33.9	)
FHLB advances and other borrowing		394			426			462			454			465			(15.3	)
Total interest expense		1,172			1,217			1,314			1,406			1,510			(22.4	)
Net interest income		3,563			3,600			3,312			3,595			3,604			(1.1	)
Provision for loan losses		100			-			-			300			115			(13.0	)
Net interest income after the provision for loan losses		3,463			3,600			3,312			3,295			3,489			(0.8	)
Noninterest income
Customer service fees		198			207			197			212			216			(8.4	)
Other noninterest income		12			19			20			15			15			(21.3	)
Gain on sale of assets		48			26			50			47			92			(47.6	)
Total noninterest income		258			252			267			274			323			(20.2	)
Noninterest expense
Salaries and employee benefits		1,566			1,570			1,591			1,614			1,459			7.3
Net occupancy and equipment		355			348			336			314			362			(1.8	)
Depository insurance		237			207			203			255			234			1.5
Foreclosed asset expense (1)		314			481			150			538			306			2.5
Other operating expense		731			817			794			779			715			2.2
Total noninterest expense		3,203			3,423			3,074			3,500			3,076			4.1
Income before income taxes		518			429			505			69			736			(29.6	)
Income tax (benefit) expense		154			118			149			(44	)		212			(27.3	)
Net income	$	364		$	311		$	356		$	113		$	524			(30.6	)

Preferred stock dividends & accretion on preferred stock discount		325			296			280			267			201			61.8

Net income / (loss) available to common		38			15			76			(154	)		323			(88.1	)

Net income / (loss) per common share:
Basic	$	0.01		$	0.01		$	0.01		$	(0.02	)	$	0.05			(88.2	)
Diluted	$	0.01		$	0.01		$	0.01		$	(0.02	)	$	0.05			(88.2	)
Average basic shares		6,500			6,500			6,500			6,500			6,500			-
Average common diluted shares		6,503			6,581			6,586			6,500			6,500			0.0
Performance Ratios
Return on average equity		3.88	%		3.42	%		4.01	%		1.37	%		6.64	%		(41.5	)
Return on average assets		0.35	%		0.30	%		0.35	%		0.11	%		0.49	%		(29.8	)
Net interest margin		3.70	%		3.87	%		3.59	%		3.72	%		3.69	%		0.3
Average equity		37,501			36,423			35,587			32,912			31,569			18.8
Average assets		418,443			412,305			408,711			416,562			423,200			(1.1	)
Average interest-earning assets		389,458			380,631			378,335			390,756			396,872			(1.9	)

(1) Includes OREO adjustments to fair value

Cornerstone Bancshares, Inc. and Subsidiary

Loan Loss Allowance and Asset Quality Review

	2012									2011
	Third			Second			First			Fourth			Third
(Amounts in thousands)	Quarter			Quarter			Quarter			Quarter			Quarter

Allowance for loan losses
Balance at beginning of period	$	6,029		$	6,024		$	7,400		$	6,864		$	6,814
Provision for loan losses		100			-			-			300			115
Net charge-offs		(849	)		5			(1,376	)		236			(65	)
Balance at end of period	$	5,280		$	6,029		$	6,024		$	7,400		$	6,864

As a % of loans		1.93	%		2.29	%		2.29	%		2.76	%		2.54	%
As a % of nonperforming loans		66.26	%		84.63	%		55.95	%		93.90	%		80.20	%
As a % of nonperforming assets		17.40	%		20.60	%		20.27	%		28.03	%		25.60	%

Net charge-offs as a % of loans (a)		1.24	%		-0.01	%		2.10	%		-0.35	%		0.10	%

Risk element assets
Accruing troubled debt restructured	$	5,328		$	2,775		$	2,418		$	2,750		$	2,535
Loans past due 30-89 days	$	3,685		$	2,495		$	5,040		$	8,158		$	2,088

Nonaccruing loans	$	7,968		$	7,124		$	10,767		$	7,882		$	8,560
Loans past due 90 days – accruing		-			-			-			-			-
Total nonperforming loans	$	7,968		$	7,124		$	10,767		$	7,882		$	8,560
Repossessed assets		39			83			-			-			-
Other real estate owned (b)(c)	$	22,337		$	22,061		$	18,957		$	18,524		$	18,255
Total nonperforming assets	$	30,344		$	29,268		$	29,724		$	26,406		$	26,815


Nonperforming loans as a % of loans		2.91	%		2.70	%		4.10	%		2.94	%		3.17	%
Nonperforming assets as a % of loans
and other real estate owned		10.25	%		10.24	%		10.55	%		9.22	%		9.29	%

Total loans		273,820			263,749			262,788			267,765			270,401

(a) Annualized
(b) Properties sold during 3rd Q 2012	$	804
(c) Properties under contract to sell	$	3,757

Cornerstone Bancshares, Inc. and Subsidiary

Net Interest Margin Analysis

Taxable Equivalent Basis

	Three months ended
	September 30
	2012								2011
	Average			Income/		Yield/			Average			Income/		Yield/
(Amounts in thousands)	Balance			Expense		Rate			Balance			Expense		Rate
Assets
Earning assets:
Loans, net of unearned income	$	270,109		$	4,241		6.23	%	$	269,715		$	4,531		6.67	%
Investment securities		91,889			478		2.36	%		108,963			574		2.40	%
Other earning assets		27,460			16		0.23	%		18,193			9		0.20	%
Total earning assets		389,458		$	4,735		4.89	%		396,872		$	5,114		5.20	%
Allowance for loan losses		(5,892	)							(6,792	)
Cash and other assets		34,878								33,120
TOTAL ASSETS	$	418,443							$	423,200

Liabilities and Shareholders' Equity

Interest-bearing liabilities:
Interest-bearing demand deposits	$	26,357		$	21		0.32	%	$	24,197		$	20		0.33	%
Savings deposits		10,702			10		0.36	%		9,772			13		0.51	%
MMDA's		56,761			114		0.79	%		30,975			79		1.01	%
Time deposits		189,882			612		1.28	%		218,622			900		1.63	%
Federal funds purchased and securities sold under agreements to repurchase		19,471			22		0.45	%		23,250			33		0.57	%
Federal Home Loan Bank and other borrowings		37,336			394		4.19	%		43,078			465		4.29	%
Total interest-bearing liabilities		340,509			1,173		1.37	%		349,894			1,510		1.71	%
Net interest spread				$	3,562		3.53	%				$	3,604		3.49	%
Noninterest-bearing demand deposits		40,722								41,800
Accrued expenses and other liabilities		(288	)							(64	)
Shareholders' equity		37,501								31,569
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	418,443							$	423,200
Net yield on earning assets							3.70	%							3.69	%

Taxable equivalent adjustment:
Loans					0								0
Investment securities					69								85
Total adjustment					69								85

Cornerstone Bancshares, Inc. and Subsidiary

Net Interest Margin Analysis

Taxable Equivalent Basis

	Nine months ended
	September 30
	2012								2011
	Average			Income/		Yield/			Average			Income/		Yield/
(Amounts in thousands)	Balance			Expense		Rate			Balance			Expense		Rate
Assets
Earning assets:
Loans, net of unearned income	$	266,187		$	12,571		6.31	%	$	275,267		$	13,692		6.65	%
Investment securities		91,827			1,563		2.58	%		112,850			1,763		2.38	%
Other earning assets		25,535			44		0.23	%		22,496			38		0.22	%
Total earning assets		383,549		$	14,179		5.02	%		410,613		$	15,493		5.12	%
Allowance for loan losses		(6,345	)							(7,707	)
Cash and other assets		35,968								32,538
TOTAL ASSETS	$	413,172							$	435,444

Liabilities and Shareholders' Equity

Interest-bearing liabilities:
Interest-bearing demand deposits	$	26,526		$	65		0.33	%	$	26,717		$	65		0.33	%
Savings deposits		10,317			29		0.37	%		9,737			37		0.51	%
MMDA's		47,625			305		0.86	%		27,137			202		1.00	%
Time deposits		191,378			1,946		1.36	%		233,079			2,964		1.70	%
Federal funds purchased and securities sold under agreements to repurchase		22,309			77		0.46	%		23,391			98		0.56	%
Federal Home Loan Bank and other borrowings		39,990			1,281		4.28	%		49,329			1,590		4.31	%
Total interest-bearing liabilities		338,145			3,703		1.46	%		369,390			4,957		1.79	%
Net interest spread				$	10,475		3.55	%				$	10,536		3.33	%
Noninterest-bearing demand deposits		38,684								37,463
Accrued expenses and other liabilities		(163	)							(81	)
Shareholders' equity		36,507								28,672
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	413,172							$	435,444
Net yield on earning assets							3.73	%							3.51	%

Taxable equivalent adjustment:
Loans					0								0
Investment securities					212								246
Total adjustment					212								246

Cornerstone Bancshares, Inc. and Subsidiary

Loan Stratification

	2012				2011
	Third		% of		Third		% of		% Dollar
(Amounts in thousands)	Quarter		Total		Quarter		Total		Change
Non-residential real estate
Owner occupied	$	61,229		22.4	$	63,405		23.4		(3.4	)
Non-owner occupied		65,501		23.9		62,009		22.9		5.6
Multi-family real estate		8,626		3.2		10,692		4.0		(19.3	)
1-4 family construction		6,305		2.3		6,346		2.3		(0.6	)
Commercial land and lot development		21,767		7.9		19,483		7.2		11.7
Total non-residential real estate		163,428		59.7		161,935		59.9		0.9
Residential real estate
First mortgage - 1-4 family		43,454		15.9		41,334		15.3		5.1
Second mortgage - 1-4 family		3,138		1.1		4,225		1.6		(25.7	)
Home equity lines		15,832		5.8		12,215		4.5		29.6
Total residential real estate		62,424		22.8		57,774		21.4		8.0
Total real estate loans		225,853		82.5		219,709		81.3		2.8

Commercial		38,196		13.9		38,955		14.4		(1.9	)
Agricultural & other		7,533		2.8		8,938		3.3		(15.7	)
Consumer		2,239		0.8		2,798		1.0		(20.0	)
Total loans, net of unearned fees	$	273,820		100.0	$	270,401		100.0		1.3

Cornerstone Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

	Unaudited
	September 30,			December 31,
	2012			2011
ASSETS

Cash and due from banks	$	1,532,621		$	1,660,204
Interest-bearing deposits at other financial institutions		33,298,912			37,222,487
Total cash and cash equivalents		34,831,533			38,882,691

Securities available for sale		82,191,300			86,057,437
Securities held to maturity (fair value approximates $52,820 and $70,484 at September 30, 2012 and December 31, 2011, respectively)		51,385			68,643
Federal Home Loan Bank stock, at cost		2,322,900			2,322,900
Loans, net of allowance for loan losses of $5,279,676 at September 30, 2012 and $7,400,049 at December 31, 2011		268,540,559			260,364,569
Bank premises and equipment, net		5,465,004			5,712,003
Accrued interest receivable		1,351,479			1,327,458
Foreclosed assets		22,376,139			18,523,960
Other assets		8,049,182			9,395,721
Total Assets	$	425,179,481		$	422,655,382

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Noninterest-bearing demand deposits	$	43,212,796		$	43,989,943
Interest-bearing demand deposits		24,596,321			22,353,384
Savings deposits and money market accounts		72,958,526			46,857,118
Time deposits		188,195,355			200,841,499
Total deposits		328,962,998			314,041,944
Federal funds purchased and securities sold under agreements to repurchase		19,380,035			29,390,810
Federal Home Loan Bank advances and other borrowings		37,175,000			43,045,000
Accrued interest payable		136,081			110,703
Other liabilities		1,397,583			858,620
Total Liabilities		387,051,697			387,447,077

Stockholders' Equity:
Preferred stock - no par value; 2,000,000 shares authorized; 494,229 shares issued and outstanding in 2012		12,175,652			9,899,544
and 403,989 shares issued and outstanding in 2011
Common stock - $l.00 par value; 20,000,000 shares authorized;
6,709,199 issued in 2012 and 2011;
6,500,396 outstanding in 2012 and 2011		6,500,396			6,500,396
Additional paid-in capital		21,371,974			21,316,438
Retained deficit		(3,347,825	)		(3,627,208	)
Accumulated other comprehensive income		1,427,587			1,119,135
Total Stockholders' Equity		38,127,784			35,208,305
Total Liabilities and Stockholders' Equity	$	425,179,481		$	422,655,382

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

Cornerstone Bancshares, Inc. and Subsidiary

Consolidated Statements of Income

	Unaudited				Unaudited
	Three months ended				Nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
INTEREST INCOME
Loans, including fees	$	4,241,492	$	4,531,390	$	12,571,193	$	13,691,565
Investment securities		478,172		573,699		1,563,433		1,763,479
Federal funds sold & other earning assets		15,647		9,269		44,075		37,597
Total interest income		4,735,311		5,114,358		14,178,701		15,492,641

INTEREST EXPENSE
Time deposits		612,286		899,554		1,946,341		2,963,779
Other deposits		144,157		111,985		398,859		304,533
Federal funds purchased and securities sold under agreements to repurchase		21,889		33,135		77,193		97,850
Federal Home Loan Bank advances and other borrowings		394,066		465,534		1,281,010		1,590,605
Total interest expense		1,172,398		1,510,208		3,703,403		4,956,767

Net interest income before provision for loan losses		3,562,913		3,604,150		10,475,298		10,535,874
Provision for loan losses		100,000		115,000		100,000		145,000
Net interest income after provision for loan losses		3,462,913		3,489,150		10,375,298		10,390,874

NONINTEREST INCOME
Customer service fees		197,509		216,163		602,107		656,877
Net gains from sale of securities		-		59,671		-		107,413
Net gains from sale of loans and other assets		48,199		32,322		124,109		87,866
Other noninterest income		12,944		15,256		51,844		57,066
Total noninterest income		258,652		323,412		778,060		909,222

NONINTEREST EXPENSE
Salaries and employee benefits		1,566,359		1,458,951		4,727,049		4,503,489
Net occupancy and equipment expense		354,555		361,513		1,038,296		1,118,127
Depository insurance		236,927		233,587		682,830		797,747
Foreclosed assets, net		314,088		306,860		945,163		1,384,935
Other operating expenses		731,090		715,858		2,307,172		2,346,493
Total noninterest expenses		3,203,019		3,076,769		9,700,510		10,150,791

Income before provision for income taxes		518,546		735,793		1,452,848		1,149,305
Provision for income taxes		154,300		212,125		421,500		232,075

Net income		364,246		523,668		1,031,348		917,230

Preferred stock dividend requirements		308,893		187,538		854,780		398,626
Accretion on preferred stock discount		16,370		13,419		46,079		22,419

Net income available to common shareholders	$	38,983	$	322,711	$	130,489	$	496,185

EARNINGS PER COMMON SHARE
Basic	$	0.01	$	0.05	$	0.02	$	0.07
Diluted	$	0.01	$	0.05	$	0.02	$	0.07

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

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

Cornerstone Bancshares, Inc. and Subsidiary

Consolidated Statement of Changes in Stockholders' Equity - Unaudited

For the nine months ended September 30, 2012

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

BALANCE, December 31, 2011	$	9,899,544	$	6,500,396	$	21,316,438	$	(3,627,208	)	$	1,119,135	$	35,208,305
Employee compensation stock option expense		-		-		55,536		-			-		55,536
Issuance of Series A Convertible Preferred Stock		2,230,029		-		-		-			-		2,230,029
Preferred stock dividends paid		-		-		-		(705,886	)		-		(705,886	)
Accretion on preferred stock		46,079		-		-		(46,079	)		-		-
Net income		-		-		-		1,031,348			-		1,031,348
Other comprehensive income, net of tax		-		-		-		-			308,452		308,452

BALANCE, September 30, 2012	$	12,175,652	$	6,500,396	$	21,371,974	$	(3,347,825	)	$	1,427,587	$	38,127,784

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

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