Two and a half years after fraudulent and soured loans put Cornerstone Community Bank under a regulatory consent order, bank regulators last week removed Cornerstone from its list of troubled banks.
Cornerstone Bancshares Inc., the parent company of one of Chattanooga's biggest community banks, was lifted from the increased regulatory oversight imposed in April 2010 after Cornerstone lost $14 million from a number of questionable loans made prior and during the Great Recession.
Over the past two years, Cornerstone has raised $12.5 million in new capital through a preferred stock offering. The Chattanooga bank also cut its loan portfolio by nearly 30 percent, closed its Knoxville loan production office and added additional oversight and risk assessment of bank lending activity.
"This is a huge benchmark for Cornerstone and underscores the changes we've made and the ongoing strength of the bank," said Miller Wellborn, the transportation consultant who was elected chairman of Cornerstone in early 2010 to help shore up the bank. "We had taken our eye off the ball and probably grown too fast (prior to 2010). We want to grow in the future, but in a controlled, measured way."
Cornerstone opened its first branch in 1996 and was growing nearly 20 percent a year before the housing slump hit in 2008 and a pair of fraudulent loans cost the bank $11 million. Other questionable loans added to the bank's fiscal woes.
Frank Hughes, the CEO of Cornerstone for the past three years, said Cornerstone has added credit and chief risk officers, separate from the bank's lending division, to better document and assess the risk of bank loans.
"But we have also been incredibly fortunate to be in Chattanooga," Hughes said. "There are still a lot of people who were hurt by the recession, but our economy is far better than in many other markets. As a community bank, our future is tied to Chattanooga."
Cornerstone tapped into that community support to recapitalize the bank by selling preferred stock with a 10 percent cumulative dividend, payable every three months if, and when, funds are sufficient. About 300 investors have bought the preferred stock since the initial offering in 2010.
Cornerstone has been profitable for six consecutive quarters and consistently paid the dividend on the preferred stock.
The convertible stock ultimately will be switched for common stock when shares reach $7.50 per share, which is still more than four times the price the stock has most recently in trading on the Over-The-Counter Bulletin Board under the ticker symbol CSBQ. The symbol for the preferred stock is CSBQP.
Cornerstone was among a half dozen area banks to be placed under consent orders by the Federal Deposit Insurance Corp. in the past three years. Covenant Bank & Trust in Rock Spring was ultimately shut down and its assets bought by Stearns Bank National Association and Bank of Ellijay was closed and its assets bought by Community & Southern Bank.
Other area banks, including FSG, Northwest Georgia and First Bank of Dalton, have raised or borrowed other capital and been subject to greater regulatory oversight because of similar consent orders.
"We have put real capital in our bank to ensure we have a lasting future," Hughes said.