Cornerstone selling stock

After reporting two consecutive quarters of profits so far this year, Cornerstone Bancshares Inc. in Chattanooga is launching a $15 million stock issue this week to shore up its balance sheet.

The Chattanooga bank, which lost $8.2 million last year because of heavy loan losses during the recession, is selling 600,000 shares of convertible preferred stock, initially priced at $25 per share. If fully subscribed, the issue should net $14.85 million for Cornerstone to pay off outstanding debt and boost its capital position.

The stock issue comes nearly nine months after examinations by the Federal Deposit Insurance Corp. and the Tennessee Department of Financial Institutions put Cornerstone under a consent order to limit its loan risks and to improve its capital position.

Cornerstone is among a half dozen banks in the Chattanooga region operating under such regulatory restrictions because of shortfalls in meeting capital targets.

Most area banks reported losses over the past two years because of loans losses from the drop in real estate values and business conditions and the increase in bankruptcies and foreclosures, according to the FDIC.

The biggest bank holding companies operating in Chattanooga, including SunTrust, Regions, First Tennessee, First Security Group, Bank of America and Synovus, got federal loans through the Troubled Asset Relief Program last year to improve their financial standing.

Cornerstone Bankissues new stockIssuer: Cornerstone Bancshares Inc.No. of shares: 600,000 of convertible preferred stockPrice: $25 per shareMinimum purchase: Minimum 400 shares per individual investor; maximum of 100,000 shares per personDividends: 10 percent annual dividends, paid quarters when declared. Dividends will accumulate at annual rate of 10 percent until declared payableConvertible: Preferred stock may be converted to common at a 5-to-1 rateMarket: Over-the-counter bulletin board (OTCBB) post initial tradingArea banks underregulatory ordersThe FDIC ordered sIx area banks to boost capital and limit the risk in their loan portfolio:* Covenant Bank & Trust, Rock Spring, Ga., consent order in April 2010* Cornerstone Bank, Chattanooga, consent order in March 2010* Northwest Georgia Bank, Ringgold, Ga., consent order in November 2009* First Bank of Dalton, Dalton, Ga., consent order issued November 2009* Bank of Ellijay, Ellijay, Ga., consent order issued November 2009* Appalachian Community Bank, Ellijay, Ga.,, consent order issued in April 2009Source: Federal Deposit Insurance Corp.

Most of those banks report that they either have or plan soon to repay the TARP loans.

lLAYING A NEW CORNERSTONE

Cornerstone President Frank Hughes said the preferred stock issue will initially carry a higher dividend payment - 10 percent a year, paid quarterly - than the interest charged on TARP loans. But he said the issue will give local employees and investors a chance to buy into the local bank and potentially convert their preferred stock into common stock over five years at an even bigger payoff.

"Cornerstone continues to follow its strategic plan of reducing its risk profile by shrinking its loan portfolio, improving its loan mix and reducing its commercial real estate concentrations," Hughes said.

Last year, Cornerstone closed its loan production offices in Knoxville and Dalton, Ga., suspended its dividend, trimmed its loan portfolio and named Hughes to replace former CEO Gregory Jones. The bank, which reported assets of $520 million at the end of the second quarter, continues to operate five offices in Hamilton County.

In the first half 2010, Cornerstone earned $362,000, or 6 cents per share. In the same period a year ago, Cornerstone lost $3.5 million, or 54 cents per share.

"We're confident that, as the economy continues to improve, Cornerstone will continue to strengthen and move forward in a more profitable direction for the future," said transportation consultant Miller Welborn, who was elected as chairman of the Cornerstone bank board last year.

BANKS LIMIT RISK

Welborn said Cornerstone "is going to operate as a conservative, home town bank focused on personal service."

That's a strategy other banks are pursuing in response to the worst economic downturn since the Great Depression.

In Georgia, 25 banks were put under consent orders this year and 39 banks were put under such orders in 2009.

"The FDIC is applying a very rigorous mark-to-market rule (requiring holdings to be marked down to current values), and in the down environment that is eating a lot of bank capital," said Trent Sanford, president and chief executive for Covenant Bank & Trust in Ringgold. "Fortunately, It looks like we've reached the bottom and our capital ratios have stabilized and are still adequate."

Sanford said Covenant plans to raise more capital after regulators conduct their next exam "to be able to give full disclosure to any potential investors."

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