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

|  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|--------|------------------------------------------------------------------------------------------|

|   | For transition period from __________  to  __________ |
|--------|---------------------------------------------------------------------------|

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

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| Item No.                                                                                                                        | Page No. |
|-------------------------------------------------------------------------------------------------------------------------------------------|---------------|
|                                                                                                                                      |          |
| PART I                                                                                                                               | 4             |
|                                                                                                                                      |          |
| ITEM 1.  BUSINESS                                                                                                          | 4             |
| ITEM 1A. RISK FACTORS                                                                                                                     | 10            |
| ITEM 1B. UNRESOLVED STAFF COMMENTS                                                                                                        | 16            |
| ITEM 2.  PROPERTIES                                                                                                             | 16            |
| ITEM 3.  LEGAL PROCEEDINGS                                                                                                      | 17            |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                               | 17            |
|                                                                                                                                      |          |
| PART II                                                                                                                                   | 17            |
|                                                                                                                                      |          |
| ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 17            |
| ITEM 6.  SELECTED FINANCIAL DATA                                                                                                     | 18            |
| ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                            | 20            |
| ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                            | 40            |
| ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                            | 42            |
| ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                              | 86            |
| ITEM 9A(T).  CONTROLS AND PROCEDURES                                                                                            | 86            |
| ITEM 9B. OTHER INFORMATION                                                                                                                | 86            |
|                                                                                                                                      |          |
| PART III                                                                                                                                  | 86            |
|                                                                                                                                      |          |
| ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                                | 86            |
| ITEM 11.EXECUTIVE COMPENSATION                                                                                                            | 87            |
| ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                                    | 87            |
| ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                                         | 87            |
| ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                                            | 87            |
| ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                                        | 88            |

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|   | § | 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 Bank Insurance Fund (now called the Deposit Insurance Fund); |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | 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 |
|--------|--------|--------------------------------------------------------|

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|   | § | 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. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Increased Capital Standards and Enhanced Supervision. The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies. These new standards will be no lower than current regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies. The Dodd-Frank Act also increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Federal Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for insured deposits and provides unlimited federal deposit insurance on non-interest bearing transaction accounts at all insured depository institutions until December 31, 2012. The Dodd-Frank Act also changes the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible equity, eliminates the ceiling on the size of the DIF and increases the floor of the size of the DIF. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The Consumer Financial Protection Bureau (“Bureau”). The Dodd-Frank Act centralizes responsibility for consumer financial protection by creating a new agency, the Bureau, responsible for implementing, examining and, for large financial institutions, enforcing compliance with federal consumer financial laws. Because the Bank has under $10 billion in total assets, however, the FDIC will still continue to examine it at the federal level for compliance with such laws. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Interest on Demand Deposit Accounts. The Dodd-Frank Act repeals the prohibition on the payment of interest on demand deposit accounts effective one year after the date of enactment, thereby permitting depository institutions to pay interest on business checking and other accounts. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Mortgage Reform. The Dodd-Frank Act provides for mortgage reform addressing a customer’s ability to repay, restricts variable-rate lending by requiring the ability to repay to be determined for variable rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and makes more loans subject to requirement for higher-cost loans, new disclosures and certain other restrictions. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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. |
|--------|--------|--------------------------------------------------|

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|   | Banking Branches | 4154 Ringgold Road, East Ridge, Tennessee (owned by the Bank) |
|--------|------------------|---------------------------------------------------------------|

|   | Loan Production Office | 202   West Crawford Street, Dalton, Georgia (leased by the Bank) |
|--------|------------------------|---------------------------------------------------------------------------------|

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| ITEM 5.   | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
|--------------------------|------------------------------------------------------------------------------------------------------------------------|

| High and Low Common Stock Share Price for Cornerstone |   | Cash Dividends                                                                     |   |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|
|                                                                                          |   |        Low        |   |   |        High        |   | Paid Per Share |   |
| 2011 Fiscal Year                                                                    |   |                                                                                    |   |   |   |   |   |   |
| First Quarter (through March 11, 2011)                                                        |   | $                                                                                       | 1.57   |   |   | $ | 1.90 |   |   | - |   |
|                                                                                          |   |                                                                                    |   |   |   |   |   |   |   |   |   |
| 2010 Fiscal Year                                                                              |   |                                                                                    |   |   |   |   |   |   |   |   |   |
| First Quarter                                                                                 |   | $                                                                                       | 2.10   |   |   | $ | 2.75 |   |   | - |   |
| Second Quarter                                                                                |   | $                                                                                       | 1.75   |   |   | $ | 4.75 |   |   | - |   |
| Third Quarter                                                                                 |   | $                                                                                       | 1.35   |   |   | $ | 3.00 |   |   | - |   |
| Fourth Quarter                                                                                |   | $                                                                                       | 1.58   |   |   | $ | 2.00 |   |   | - |   |
|                                                                                          |   |                                                                                    |   |   |   |   |   |   |   |   |   |
| 2009 Fiscal Year                                                                              |   |                                                                                    |   |   |   |   |   |   |   |   |   |
| First Quarter                                                                                 |   | $                                                                                       | 3.50   |   |   | $ | 6.00 |   | $ | 0.07 |   |
| Second Quarter                                                                                |   | $                                                                                       | 4.00   |   |   | $ | 6.00 |   | $ | 0.03 |   |
| Third Quarter                                                                                 |   | $                                                                                       | 2.65   |   |   | $ | 5.77 |   |   | - |   |
| Fourth Quarter                                                                                |   | $                                                                                       | 1.95   |   |   | $ | 3.71 |   |   | - |   |

----

|                                                                              |   | At and for the Fiscal Years Ended December 31, |    |
|-----------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|---------|
|                                                                              |   | 2010                                                                                   |    |   | 2009 |   |   | 2008 |   |   | 2007 |   |   | 2006 |   |
| Total interest income                                                             |   | $                                                                                      | 25,211  |   |   | $ | 26,308 |   |   | $ | 30,680 |   |   | $ | 34,784 |   |   | $ | 29,158 |   |
| Total interest expense                                                            |   |                                                                                   | 9,202   |   |   |   | 11,189 |   |   |   | 12,698 |   |   |   | 14,414 |   |   |   | 10,306 |   |
| Net interest income                                                               |   |                                                                                   | 16,009  |   |   |   | 15,119 |   |   |   | 17,982 |   |   |   | 20,370 |   |   |   | 18,852 |   |
| Provision for loan losses                                                         |   |                                                                                   | 7,291   |   |   |   | 14,899 |   |   |   | 3,498 |   |   |   | 10,409 |   |   |   | 1,106 |   |
| Net interest income after provision for loan losses                               |   |                                                                                   | 8,718   |   |   |   | 220 |   |   |   | 14,484 |   |   |   | 9,961 |   |   |   | 17,746 |   |
| Noninterest income                                                                |   |                                                                                   | 3,081   |   |   |   | 2,327 |   |   |   | 1,887 |   |   |   | 1,695 |   |   |   | 2,111 |   |
| Noninterest expense                                                               |   |                                                                                   | 18,042  |   |   |   | 16,062 |   |   |   | 12,563 |   |   |   | 10,926 |   |   |   | 10,718 |   |
| Income before income taxes                                                        |   |                                                                                   | (6,243  | ) |   |   | (13,515 | ) |   |   | 3,808 |   |   |   | 730 |   |   |   | 9,139 |   |
| Income tax (benefit) / expense                                                    |   |                                                                                   | (1,535  | ) |   |   | (5,336 | ) |   |   | 1,296 |   |   |   | (141 | ) |   |   | 3,328 |   |
| Net (loss) income                                                                 |   | $                                                                                      | (4,708  | ) |   | $ | (8,179 | ) |   | $ | 2,512 |   |   | $ | 871 |   |   | $ | 5,811 |   |
|                                                                              |   |                                                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Per Common Share Data:                                                            |   |                                                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss) / income, basic                                                        |   | $                                                                                      | (0.73   | ) |   | $ | (1.26 | ) |   | $ | 0.39 |   |   | $ | 0.13 |   |   | $ | 0.87 |   |
| Net (loss) / income, assuming dilution                                            |   | $                                                                                      | (0.73   | ) |   | $ | (1.26 | ) |   | $ | 0.38 |   |   | $ | 0.12 |   |   | $ | 0.83 |   |
| Cash dividends paid                                                               |   | $                                                                                      | — |   |   | $ | 0.10 |   |   | $ | 0.28 |   |   | $ | 0.22 |   |   | $ | 0.12 |   |
| Book value                                                                        |   | $                                                                                      | 3.55    |   |   | $ | 4.28 |   |   | $ | 5.78 |   |   | $ | 5.70 |   |   | $ | 5.86 |   |
| Tangible book value(1)                                                            |   | $                                                                                      | 3.55    |   |   | $ | 3.89 |   |   | $ | 5.24 |   |   | $ | 5.24 |   |   | $ | 5.40 |   |
|                                                                              |   |                                                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial Condition Data:                                                         |   |                                                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets                                                                            |   | $                                                                                      | 441,499 |   |   | $ | 532,404 |   |   | $ | 471,803 |   |   | $ | 444,421 |   |   | $ | 374,942 |   |
| Loans, net of unearned interest                                                   |   | $                                                                                      | 276,115 |   |   | $ | 330,787 |   |   | $ | 378,472 |   |   | $ | 369,883 |   |   | $ | 305,879 |   |
| Cash and investments                                                              |   | $                                                                                      | 133,651 |   |   | $ | 164,982 |   |   | $ | 57,286 |   |   | $ | 51,798 |   |   | $ | 51,577 |   |
| Federal funds sold                                                                |   | $                                                                                      | — |   |   | $ | — |   |   | $ | 11,025 |   |   | $ | — |   |   | $ | — |   |
| Deposits                                                                          |   | $                                                                                      | 335,447 |   |   | $ | 404,742 |   |   | $ | 326,583 |   |   | $ | 313,250 |   |   | $ | 275,816 |   |
| FHLB advances and other borrowings                                                |   | $                                                                                      | 54,715  |   |   | $ | 72,350 |   |   | $ | 71,250 |   |   | $ | 47,100 |   |   | $ | 39,500 |   |
| Federal funds purchased and repurchase agreements                                 |   | $                                                                                      | 24,325  |   |   | $ | 26,322 |   |   | $ | 35,790 |   |   | $ | 41,560 |   |   | $ | 19,249 |   |
| Shareholders’ equity                                                        |   | $                                                                                      | 25,819  |   |   | $ | 27,837 |   |   | $ | 36,502 |   |   | $ | 36,327 |   |   | $ | 38,183 |   |
| Tangible shareholders’ equity(1)                                            |   | $                                                                                      | 25,782  |   |   | $ | 25,258 |   |   | $ | 33,661 |   |   | $ | 33,386 |   |   | $ | 35,137 |   |
|                                                                              |   |                                                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selected Ratios:                                                                  |   |                                                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread                                                              |   |                                                                                   | 3.24    | % |   |   | 2.95 | % |   |   | 3.67 | % |   |   | 4.51 | % |   |   | 5.16 | % |
| Net interest margin(2)                                                            |   |                                                                                   | 3.43    | % |   |   | 3.27 | % |   |   | 4.16 | % |   |   | 5.22 | % |   |   | 5.80 | % |
| Return on average assets                                                          |   |                                                                                   | (0.94   | )% |   |   | (1.69 | )% |   |   | 0.55 | % |   |   | 0.21 | % |   |   | 1.69 | % |
| Return on average equity                                                          |   |                                                                                   | (15.79  | )% |   |   | (24.34 | )% |   |   | 6.71 | % |   |   | 2.14 | % |   |   | 16.27 | % |
| Return on average tangible equity(1)                                              |   |                                                                                   | (15.81  | )% |   |   | (26.36 | )% |   |   | 7.26 | % |   |   | 2.31 | % |   |   | 17.78 | % |
| Average equity to average assets                                                  |   |                                                                                   | 5.95    | % |   |   | 6.93 | % |   |   | 8.27 | % |   |   | 9.86 | % |   |   | 10.36 | % |
| Dividend payout ratio                                                             |   |                                                                                   | N/A     |   |   |   | N/A |   |   |   | 70.59 | % |   |   | 149.71 | % |   |   | 13.33 | % |
| Ratio of nonperforming assets to total assets                                     |   |                                                                                   | 5.99    | % |   |   | 3.36 | % |   |   | 1.48 | % |   |   | 0.40 | % |   |   | 0.40 | % |
| Ratio of allowance for loan losses to nonperforming loans                         |   |                                                                                   | 66.98   | % |   |   | 80.24 | % |   |   | 226.23 | % |   |   | 791.16 | % |   |   | 25.90 | % |
| Ratio of allowance for loan losses to total average loans, net of unearned income |   |                                                                                   | 2.93    | % |   |   | 1.63 | % |   |   | 2.49 | % |   |   | 3.88 | % |   |   | 1.50 | % |

| (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. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| • | “Tangible book value per share” is defined as total equity reduced by recorded preferred stock, 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 common 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. |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                         |   | At and for the Fiscal Years Ended December 31, |       |
|----------------------------------------------|--------|----------------------------------------------------------------------------------------|------------|
|                                         |   | 2010                                                                                   |       |   | 2009 |   |   | 2008 |   |   | 2007 |   |   | 2006 |   |
| Number of common shares outstanding          |   |                                                                                   | 6,500,396  |   |   |   | 6,500,396 |   |   |   | 6,319,718 |   |   |   | 6,369,718 |   |   |   | 6,511,848 |   |
|                                         |   |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total stockholders’ equity             |   | $                                                                                      | 25,819,153 |   |   | $ | 27,837,479 |   |   | $ | 36,501,509 |   |   | $ | 36,327,350 |   |   | $ | 38,183,265 |   |
| Less: preferred stock                        |   |                                                                                   | 2,727,424  |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Book value                                   |   |                                                                                   | 23,091,729 |   |   |   | 27,837,479 |   |   |   | 36,501,509 |   |   |   | 36,327,350 |   |   | $ | 38,183,265 |   |
| Book value per common share                  |   | $                                                                                      | 3.55       |   |   | $ | 4.28 |   |   | $ | 5.78 |   |   | $ | 5.70 |   |   | $ | 5.86 |   |
|                                         |   |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Book value                                   |   | $                                                                                      | 23,091,729 |   |   | $ | 27,837,479 |   |   | $ | 36,501,509 |   |   | $ | 36,327,350 |   |   | $ | 38,183,265 |   |
| Less: goodwill and other intangible assets   |   |                                                                                   | 37,317     |   |   |   | 2,579,211 |   |   |   | 2,840,773 |   |   |   | 2,941,798 |   |   |   | 3,046,287 |   |
| Tangible book value                          |   |                                                                                   | 23,054,412 |   |   |   | 25,258,268 |   |   |   | 33,660,736 |   |   |   | 33,385,552 |   |   |   | 35,136,978 |   |
| Effect of intangible assets per common share |   | $                                                                                      | -          |   |   | $ | 0.39 |   |   | $ | 0.45 |   |   | $ | 0.46 |   |   | $ | 0.46 |   |
|                                         |   |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tangible book value per common share         |   | $                                                                                      | 3.55       |   |   | $ | 3.89 |   |   | $ | 5.33 |   |   | $ | 5.24 |   |   | $ | 5.40 |   |
|                                         |   |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss) / income                          |   | $                                                                                      | (4,707,521 | ) |   | $ | (8,178,639 | ) |   | $ | 2,511,824 |   |   | $ | 871,152 |   |   | $ | 5,811,600 |   |
| Average equity                               |   |                                                                                   | 29,820,000 |   |   |   | 33,600,000 |   |   |   | 37,435,000 |   |   |   | 40,737,000 |   |   |   | 35,728,000 |   |
| Return on average equity                     |   |                                                                                   | (15.79     | )% |   |   | (24.34 | )% |   |   | 6.71 | % |   |   | 2.14 | % |   |   | 16.27 | % |
|                                         |   |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average equity                               |   | $                                                                                      | 29,820,000 |   |   | $ | 33,600,000 |   |   | $ | 37,435,000 |   |   | $ | 40,737,000 |   |   | $ | 35,728,000 |   |
| Less: goodwill and other intangible assets   |   |                                                                                   | 37,317     |   |   |   | 2,579,211 |   |   |   | 2,840,773 |   |   |   | 2,941,798 |   |   |   | 3,046,287 |   |
| Average tangible equity                      |   | $                                                                                      | 29,782,683 |   |   | $ | 31,020,789 |   |   | $ | 34,594,227 |   |   | $ | 37,795,202 |   |   | $ | 32,681,713 |   |
| Effect of intangible assets                  |   |                                                                                   | (0.02      | )% |   |   | (2.02 | )% |   |   | 0.55 | % |   |   | 0.17 | % |   |   | 1.51 | % |
| Return on average tangible equity            |   |                                                                                   | (15.81     | )% |   |   | (26.36 | )% |   |   | 7.26 | % |   |   | 2.31 | % |   |   | 17.78 | % |

----

| ITEM 7.  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|--------------------|---------------------------------------------------------------------------------------|

----

| Yields Earned on Average Earning Assets andRates Paid on Average Interest Bearing Liabilities |   |
|-----------------------------------------------------------------------------------------------|--------|
| Years Ended December 31,                                                                      |   |
|                                                                                          |   | 2010 |   |   | 2009 |   |   | 2008 |   |
| (In thousands)   ASSETS                                                        |   | AverageBalance |   |   | InterestIncome/Expense(1) |   |   | Yield/Rate |   |   | AverageBalance |   |   | InterestIncome/Expense(1) |   |   | Yield/Rate |   |   | AverageBalance |   |   | InterestIncome/Expense(1) |   |   | Yield/Rate |   |
| Interest-earning assets:                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                                                                   |   | $ | 311,407 |   |   | $ | 21,498 |   |   |   | 6.90 | % |   | $ | 363,146 |   |   | $ | 24,402 |   |   |   | 6.72 | % |   | $ | 385,957 |   |   | $ | 28,661 |   |   |   | 7.43 | % |
| Investment securities(3)                                                                      |   |   | 128,795 |   |   |   | 3,633 |   |   |   | 3.06 | % |   |   | 63,854 |   |   |   | 1,840 |   |   |   | 3.10 | % |   |   | 47,096 |   |   |   | 1,996 |   |   |   | 4.36 | % |
| Other earning assets                                                                          |   |   | 36,319 |   |   |   | 80 |   |   |   | 0.22 | % |   |   | 40,085 |   |   |   | 66 |   |   |   | 0.16 | % |   |   | 869 |   |   |   | 23 |   |   |   | 2.70 | % |
| Total interest-earning assets                                                                 |   |   | 476,521 |   |   |   | 25,211 |   |   |   | 5.36 | % |   |   | 467,085 |   |   |   | 26,308 |   |   |   | 5.66 | % |   |   | 433,922 |   |   |   | 30,680 |   |   |   | 7.08 | % |
| Allowance for loan losses                                                                     |   |   | (6,454 | ) |   |   |   |   |   |   |   |   |   |   | (8,088 | ) |   |   |   |   |   |   |   |   |   |   | (8,496 | ) |   |   |   |   |   |   |   |   |
| Cash and other assets                                                                         |   |   | 31,277 |   |   |   |   |   |   |   |   |   |   |   | 25,672 |   |   |   |   |   |   |   |   |   |   |   | 27,179 |   |   |   |   |   |   |   |   |   |
| Total assets                                                                                  |   | $ | 501,344 |   |   |   |   |   |   |   |   |   |   | $ | 484,669 |   |   |   |   |   |   |   |   |   |   | $ | 452,605 |   |   |   |   |   |   |   |   |   |
| TOTAL LIABILITIES AND EQUITY                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                                                                  |   | $ | 32,338 |   |   |   | 111 |   |   |   | 0.34 | % |   | $ | 27,864 |   |   | $ | 98 |   |   |   | 0.35 | % |   | $ | 30,106 |   |   | $ | 211 |   |   |   | 0.70 | % |
| Money market / savings                                                                        |   |   | 32,240 |   |   |   | 269 |   |   |   | 0.83 | % |   |   | 35,269 |   |   |   | 303 |   |   |   | 0.86 | % |   |   | 51,600 |   |   |   | 826 |   |   |   | 1.60 | % |
| Time deposits                                                                                 |   |   | 281,251 |   |   |   | 5,839 |   |   |   | 2.08 | % |   |   | 256,551 |   |   |   | 7,608 |   |   |   | 2.97 | % |   |   | 190,221 |   |   |   | 8,262 |   |   |   | 4.34 | % |
| Total interest-bearing deposits                                                               |   |   | 345,829 |   |   |   | 6,219 |   |   |   | 1.80 | % |   |   | 319,684 |   |   |   | 8,009 |   |   |   | 2.51 | % |   |   | 271,927 |   |   |   | 9,299 |   |   |   | 3.42 | % |
| Federal funds purchased                                                                       |   |   | 197 |   |   |   | 1 |   |   |   | 0.51 | % |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 12,952 |   |   |   | 339 |   |   |   | 2.62 | % |
| Securities sold under                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| agreement to repurchase                                                                       |   |   | 22,519 |   |   |   | 126 |   |   |   | 0.56 | % |   |   | 21,624 |   |   |   | 174 |   |   |   | 0.80 | % |   |   | 18,580 |   |   |   | 261 |   |   |   | 1.41 | % |
| Other borrowings                                                                              |   |   | 66,208 |   |   |   | 2,856 |   |   |   | 4.31 | % |   |   | 72,150 |   |   |   | 3,006 |   |   |   | 4.17 | % |   |   | 68,578 |   |   |   | 2,799 |   |   |   | 4.08 | % |
| Total interest-bearing                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities                                                                                   |   |   | 434,753 |   |   |   | 9,202 |   |   |   | 2.12 | % |   |   | 413,458 |   |   |   | 11,189 |   |   |   | 2.71 | % |   |   | 372,037 |   |   |   | 12,698 |   |   |   | 3.41 | % |
| Net interest spread                                                                           |   |   |   |   |   |   |   |   |   |   | 3.24 | % |   |   |   |   |   |   |   |   |   |   | 2.95 | % |   |   |   |   |   |   |   |   |   |   | 3.67 | % |
|                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other liabilities:                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                                               |   |   | 39,104 |   |   |   |   |   |   |   |   |   |   |   | 40,816 |   |   |   |   |   |   |   |   |   |   |   | 42,915 |   |   |   |   |   |   |   |   |   |
| Accrued interest payable and                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| other liabilities                                                                             |   |   | (2,333 | ) |   |   |   |   |   |   |   |   |   |   | (3,205 | ) |   |   |   |   |   |   |   |   |   |   | 218 |   |   |   |   |   |   |   |   |   |
| Stockholders' equity                                                                          |   |   | 29,820 |   |   |   |   |   |   |   |   |   |   |   | 33,600 |   |   |   |   |   |   |   |   |   |   |   | 37,435 |   |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders' equity                                                    |   | $ | 501,344 |   |   |   |   |   |   |   |   |   |   | $ | 484,669 |   |   |   |   |   |   |   |   |   |   | $ | 452,605 |   |   |   |   |   |   |   |   |   |
|                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest margin                                                                           |   |   |   |   |   | $ | 16,009 |   |   |   | 3.43 | % |   |   |   |   |   | $ | 15,119 |   |   |   | 3.27 | % |   |   |   |   |   | $ | 17,982 |   |   |   | 4.16 | % |

----

|  | The net interest margin increased 16 basis points from 3.27% as of December 31, 2009 to 3.43% as of December 31, 2010.  The increase in net interest margin can be attributed primarily to a change in the yield earned on the Bank’s loan portfolio and a decrease in interest expense paid on certificates of deposit.  The yield on the Bank’s loan portfolio increased from 6.72% as of December 31, 2009 to 6.90% as of December 31, 2010.  While the yield on loans actually increased, the total amount of interest income on loans was negatively affected by a reduction of the average loans outstanding for 2010.   This decrease was partially offset by an increase in interest income realized on the Bank’s security portfolio.  Next, the Bank experienced a decrease in the interest rates on certificates of deposit accounts.  This decrease is seen in the decline in rate from 2.97% as of December 31, 2009 compared to 2.08% as of December 31, 2010. |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | As of December 31, 2010, the Bank’s investment portfolio resulted in a yield of 3.06% compared to 3.10% as of December 31, 2009.  The Bank’s investment portfolio is used primarily for pledging purposes with the State of Tennessee Collateral Pool, Federal Reserve Bank discount window, to secure repurchase agreements and to provide additional collateral to the Federal Home Loan Bank to secure the Bank’s fixed rate term advances.  As of December 31, 2010, the Bank’s securities portfolio was invested approximately 77% in Government National Mortgage Association (GNMA) securities, approximately 19% in municipal general obligation securities and 4% in agency-backed securities. |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | The Bank’s primary source of funding during 2010 came from certificates of deposit of which approximately 40% came from Internet deposits that allowed the Bank to have longer term maturities at a lower cost than the Chattanooga, TN market could provide.  The rates of certificates of deposit decreased sharply in 2010 to 2.08% compared to 2.97% in 2009. |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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. |
|-------|------------------------------------------------------------------------|

----

| INTEREST INCOME AND EXPENSE ANALYSIS |   |
|----------------------------------------------------------|--------|
|                                                     |   |   |   |
|                                                     |   | Year Ended December 31, |   |
|                                                     |   | 2010 Compared to 2009 |   |
| (In Thousands)                                           |   | Volume |   |   | Rate |   |   | Mix |   |   | NetChange |   |
| Interest income:                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans (1)(2)                                             |   | $ | (3,570 | ) |   | $ | 561 |   |   | $ | 105 |   |   | $ | (2,904 | ) |
| Investment securities                                    |   |   | 1,987 |   |   |   | (52 | ) |   |   | (142 | ) |   |   | 1,793 |   |
| Other earning assets                                     |   |   | (8 | ) |   |   | 22 |   |   |   | 0 |   |   |   | 14 |   |
| Total interest income                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,097 | ) |
|                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense:                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                             |   |   | 15 |   |   |   | (3 | ) |   |   | 1 |   |   |   | 13 |   |
| Money market and savings accounts                        |   |   | (26 | ) |   |   | - |   |   |   | (8 | ) |   |   | (34 | ) |
| Time deposits                                            |   |   | 514 |   |   |   | (2,503 | ) |   |   | 220 |   |   |   | (1,769 | ) |
| Other borrowings                                         |   |   | (256 | ) |   |   | 93 |   |   |   | 13 |   |   |   | (150 | ) |
| Federal funds purchased                                  |   |   | (1 | ) |   |   | - |   |   |   | 2 |   |   |   | 1 |   |
| Securities sold under agreement to repurchase            |   |   | 7 |   |   |   | (54 | ) |   |   | (1 | ) |   |   | (48 | ) |
| Total interest expense                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,987 | ) |
| Change in net interest income (expense)                  |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 890 |   |

|                                          |   | Year Ended December 31, |   |
|-----------------------------------------------|--------|----------------------------------------|--------|
|                                          |   | 2009 Compared to 2008   |   |
| (In Thousands)                           |   | Volume                                 |   |   | Rate |   |   | Mix |   |   | NetChange |   |
| Interest income:                              |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Loans (1)(2)                                  |   | $                                      | (1,533 | ) |   | $ | (2,578 | ) |   | $ | (148 | ) |   | $ | (4,259 | ) |
| Investment securities                         |   |                                   | 520    |   |   |   | (805 | ) |   |   | 129 |   |   |   | (156 | ) |
| Other earning assets                          |   |                                   | 63     |   |   |   | (1,018 | ) |   |   | 998 |   |   |   | 43 |   |
| Total interest income                         |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   | (4,372 | ) |
|                                          |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense:                             |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                  |   |                                   | (8     | ) |   |   | (98 | ) |   |   | (7 | ) |   |   | (113 | ) |
| Money market and savings accounts             |   |                                   | (140   | ) |   |   | (261 | ) |   |   | (122 | ) |   |   | (523 | ) |
| Time deposits, $100,000 and over              |   |                                   | 73     |   |   |   | (911 | ) |   |   | 516 |   |   |   | (322 | ) |
| Time deposits, less than $100,000             |   |                                   | 1,897  |   |   |   | (2,594 | ) |   |   | 365 |   |   |   | (332 | ) |
| Other borrowings                              |   |                                   | 146    |   |   |   | 14 |   |   |   | 47 |   |   |   | 207 |   |
| Federal funds purchased                       |   |                                   | -      |   |   |   | - |   |   |   | (339 | ) |   |   | (339 | ) |
| Securities sold under agreement to repurchase |   |                                   | 32     |   |   |   | (80 | ) |   |   | (39 | ) |   |   | (87 | ) |
| Total interest expense                        |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   | (1,509 | ) |
| Change in net interest income (expense)       |   |                                   |   |   |   |   |   |   |   |   |   |   |   | $ | (2,863 | ) |

----

|  | Cornerstone’s provision for loan losses during 2010, was needed to address multiple credits that continued to deteriorate as a result of the prolonged economic downturn.  The large provision for the fourth quarter of 2010 was primarily designated for unimpaired credits in the Bank’s loan portfolio.  During the fourth quarter of 2010, management changed its methodology for estimating the allowance for loan and lease losses.  First, the Bank revised several specific loan impairments to account for appraisals that were older than one year.  The second change in methodology was a reduction in the number of years included in the Bank’s historical loss look-back period.  These changes in methodology resulted in an additional $3.2 million in provision expense during the fourth quarter of 2010.  Management believes that these changes in estimate are appropriate and consistent with generally accepted accounting principles and interagency policy statements published by the Bank’s regulatory agencies. |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | To address the problem credits within the Bank’s loan portfolio a Special Asset Committee was created during 2008.  This committee has instructed the Bank’s loan review department to identify potential problem loans as quickly as possible.  This committee is also responsible for developing and reviewing action plans that identify possible strategies to minimize the Bank’s losses.  The early detection and proactive resolution process serves to assist customers with the severe economic environment while potentially minimizing losses.  During 2010, the Bank dedicated additional human resources to the Special Asset department to assist in the collection and recovery process. |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                           |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Customer service fees                          |   | $      | 1,273  |   |   | $      | 1,630  |   |   | $ | 1,727 |   |
| Other noninterest income                       |   |   | 90     |   |   |   | 97     |   |   |   | 102 |   |
| Net gain from sale of securities               |   |   | 1,698  |   |   |   | 400    |   |   |   | - |   |
| Net gain from sale of loans & other assets |   |   | 20     |   |   |   | 200    |   |   |   | 58 |   |
| Total noninterest income                       |   | $      | 3,081  |   |   | $      | 2,327  |   |   | $ | 1,887 |   |

|  | The Bank experienced a material decrease in its customer service fees from 2009 to 2010.  The primary reason for this decrease was the decision by management and the board of directors to exit the payroll processor Automated Clearing House payments (“ACH”) line of business.  The Bank elected to exit this line of business to reduce its risk profile and reduce the strain on the Bank’s liquidity due to the high amount of cash balances that the Bank was required to maintain at the Federal Reserve Bank of Atlanta.  Exiting the line of business resulted in a significant reduction in the Bank’s commercial analysis fee income and ACH income.  However, management believes this decision was appropriate given its current asset quality and liquidity needs. |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  |   The Bank realized approximately $1.7 million of security gains during 2010 as management elected to restructure its investment portfolio.  The goal of the restructure was to maintain high credit quality investments while enabling the Bank to decrease its interest rate risk.  To accomplish this goal, management selected several fixed rate GNMA mortgage-backed securities to sell.  Once the sale transaction was complete, the Bank’s investment committee purchased LIBOR based floating rate GNMA collateralized mortgage obligations.  Management also believes that the restructuring was needed due to the acceleration of prepayment speeds, during 2010, associated with the fixed rate GNMA securities. |
|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|-------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Salaries and employee benefits      |   | $      | 6,195  |   |   | $      | 6,970  |   |   | $ | 7,140 |   |
| Net occupancy and equipment expense |   |   | 1,501  |   |   |   | 1,548  |   |   |   | 1,520 |   |
| Depository insurance                |   |   | 1,288  |   |   |   | 1,199  |   |   |   | 321 |   |
| Impairment of goodwill              |   |   | 2,541  |   |   |   | -      |   |   |   | - |   |
| Foreclosed assets, net              |   |   | 2,790  |   |   |   | 2,571  |   |   |   | 219 |   |
| Other operating expenses            |   |   | 3,727  |   |   |   | 3,774  |   |   |   | 3,362 |   |
| Total noninterest expense           |   | $      | 18,042 |   |   | $      | 16,062 |   |   | $ | 12,563 |   |

|  | Salary expense decreased 11.1% from 2009 to 2010.  The reduction is resulted from the Bank’s reduced employee benefits, management’s election not to replace certain staff positions if an employee decided to leave the Bank and the conclusion of payments owed to Gregory B. Jones in May of 2010. |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | The Bank experienced an increase in regulatory insurance cost during 2010 as its average deposits increased over 2009 average amounts.  Management anticipates regulatory insurance to decrease slightly in 2011 as average deposits decline. |
|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | Cornerstone’s goodwill was determined to be completely impaired due to the company’s substandard performance and the decline in value of community banks, particularly in the Southeastern portion of the United States.  The write-off of the holding company’s goodwill is a one time expense to earnings.  However, the write-off of goodwill will not negatively affect Cornerstone’s capital ratios since the calculation of capital ratios requires that any goodwill be excluded before the calculation is performed. |
|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | The Bank continued to see elevated foreclosed asset expenses as the amount of other real estate owned increased during 2010. Examples of expenses associated with foreclosed assets include property taxes, property maintenance and insurance.  However, the foreclosed asset expense was slightly offset by rental income generated from the properties.  These expenses were higher in 2010 than in 2009 due to an increase in the number of properties.  Additionally, net losses from the sale of foreclosed assets are reflected in foreclosed assets expense.  Management anticipates a decrease in its foreclosed asset expenses as more of the Bank’s properties become income producing and as the general economy stabilizes. |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

| Investment Portfolio                     |   |
|-----------------------------------------------|--------|
| Years Ended December 31,       |   |
|                                          |   | 2010 |   |   | 2009 |   |   | 2008 |   |
| Securities available for sale: |   |   |   |   |   |   |   |   |   |
| U.S. Government agency obligations            |   | $ | 4,587 |   |   | $ | 4,774 |   |   | $ | 8,252 |   |
| Mortgage-backed securities                    |   |   | 82,927 |   |   |   | 102,885 |   |   |   | 31,182 |   |
| State & political subdivisions tax-exempt |   |   | 20,736 |   |   |   | 16,756 |   |   |   | 4,623 |   |
| Totals                                        |   | $ | 108,250 |   |   | $ | 124,415 |   |   | $ | 44,057 |   |
|                                          |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities held to maturity:                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities                    |   | $ | 96 |   |   | $ | 135 |   |   | $ | 169 |   |
| Totals                                        |   | $ | 96 |   |   | $ | 135 |   |   | $ | 169 |   |
|                                          |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal Home Loan Bank stock, at cost         |   |   | 2,323 |   |   |   | 2,229 |   |   |   | 2,188 |   |
|                                          |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investments                             |   | $ | 110,669 |   |   | $ | 126,779 |   |   | $ | 46,414 |   |

|  | During 2010, the Bank’s Asset-Liability Committee elected to decrease the amount of fixed rate GNMA mortgage backed securities and increase its GNMA LIBOR based collateralized mortgage obligations.  The change was made in order to reduce the Bank’s overall interest rate risk profile.  The change did not reduce the portfolio’s high credit quality, which is needed to provide collateral for the Bank’s funding purposes.   The Bank also increased its municipal security holdings to take advantage of the large credit risk spread over U.S. Treasury securities.  Management anticipates the general level of security holdings to decrease during 2011 as the Bank’s collateral requirements decrease. |
|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | A second objective of the security portfolio is to provide adequate collateral to satisfy pledging requirements with the State of Tennessee collateral pool, repurchase agreements, correspondent banks and the Federal Reserve discount window.  As of December 31, 2010, the Bank’s borrowing capacity with the Federal Reserve discount window was approximately $10 million.  The Bank also secured availability with a correspondent bank of approximately $4 million as of December 31, 2010. |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | During 2009, the Federal Home Loan Bank (“FHLB”) notified the Bank that as a result of the decline in the Bank’s loan asset quality, additional collateral was required to secure the Bank’s fixed rate term advances.  As of December 31, 2010, the Bank had pledged securities with a market value of approximately $50 million to the FHLB. |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Weighted Average Yields on the Available For Sale Investments |   |
|-------------------------------------------------------------------------------------------------------|--------|
| Periods of Maturity from December 31, 2010                              |   |
|                                                                                                  |   | Less than 1 year |   |   | 1 to 5 years |   |   | 5 to 10 years |   |   | Over 10 years |   |
| Securities available for sale:                                                         |   | Amount |   |   | WeightedAvg.Yield (1) |   |   | Amount |   |   | WeightedAvg.Yield (1) |   |   | Amount |   |   | WeightedAvg.Yield (1) |   |   | Amount |   |   | WeightedAvg.Yield (1) |   |
| U.S. Government agencies                                                                              |   | $ | - |   |   |   | - |   |   | $ | - |   |   |   | - |   |   | $ | - |   |   |   | - |   |   | $ | 4,571 |   |   |   | 1.08 | % |
| Mortgage-backed securities (2)                                                                        |   |   | 4,932 |   |   |   | 1.45 | % |   |   | 3 |   |   |   | 6.94 | % |   |   | 30 |   |   |   | 5.42 | % |   |   | 78,358 |   |   |   | 1.53 | % |
| Tax-exempt municipal bonds                                                                            |   |   | - |   |   |   | - |   |   |   | 599 |   |   |   | 6.31 | % |   |   | 4,456 |   |   |   | 5.30 | % |   |   | 15,814 |   |   |   | 5.58 | % |
| Totals                                                                                                |   | $ | 4,932 |   |   |   | 1.45 | % |   | $ | 602 |   |   |   | 6.31 | % |   | $ | 4,486 |   |   |   | 5.30 | % |   | $ | 98,743 |   |   |   | 2.16 | % |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Securities Available for Sale                                                                   |   | $ | 108,763 |   |   |   | 2.28 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |

| Weighted Average Yields on the Held to Maturity Investments |   |
|-----------------------------------------------------------------------------------------------------|--------|
| Periods of Maturity from December 31, 2010                            |   |
|                                                                                                |   | Less than 1 year |   |   | 1 to 5 years |   |   | 5 to 10 years |   |   | Over 10 years |   |
| Securities held to maturity:                                                         |   | Amount |   |   | WeightedAvg.Yield (1) |   |   | Amount |   |   | WeightedAvg. Yield (1) |   |   | Amount |   |   | WeightedAvg. Yield (1) |   |   | Amount |   |   | WeightedAvg. Yield (1) |   |
| Mortgage-backed securities (2)                                                                      |   | $ | - |   |   |   | - |   |   | $ | - |   |   |   | - |   |   | $ | 20 |   |   |   | 2.53 | % |   | $ | 75 |   |   |   | 3.57 | % |
| Totals                                                                                              |   | $ | - |   |   |   | - |   |   | $ | - |   |   |   | - |   |   | $ | 20 |   |   |   | 2.53 | % |   | $ | 75 |   |   |   | 3.57 | % |
|                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Securities Held to Maturity                                                                   |   | $ | 95 |   |   |   | 3.35 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal Home Loan Bank stock, at cost                                                               |   | $ | 2,323 |   |   |   | 4.35 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investments                                                                                   |   | $ | 111,181 |   |   |   | 2.32 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| Weighted Average Yields on the Available For Sale Investments |   |
|-------------------------------------------------------------------------------------------------------|--------|
| Periods of Maturity from December 31, 2009                              |   |
|                                                                                                  |   | Less than 1 year |   |   | 1 to 5 years |   |   | 5 to 10 years |   |   | Over 10 years |   |
| Securities available for sale:                                                         |   | Amount |   |   | WeightedAvg.Yield (1) |   |   | Amount |   |   | WeightedAvg.Yield (1) |   |   | Amount |   |   | WeightedAvg.Yield (1) |   |   | Amount |   |   | WeightedAvg.Yield (1) |   |
| U.S. Government agencies                                                                              |   | $ | - |   |   |   | - |   |   | $ | - |   |   |   | - |   |   | $ | - |   |   |   | - |   |   | $ | 4,772 |   |   |   | 1.15 | % |
| Mortgage-backed securities (2)                                                                        |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 39 |   |   |   | 5.68 | % |   |   | 103,329 |   |   |   | 3.01 | % |
| Tax-exempt municipal bonds                                                                            |   |   | - |   |   |   | - |   |   |   | 599 |   |   |   | 6.31 | % |   |   | 2,468 |   |   |   | 5.62 | % |   |   | 13,594 |   |   |   | 5.77 | % |
| Totals                                                                                                |   | $ | - |   |   |   | - |   |   | $ | 599 |   |   |   | 6.31 | % |   | $ | 2,507 |   |   |   | 5.62 | % |   | $ | 121,695 |   |   |   | 3.25 | % |
|                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Securities Available for Sale                                                                   |   | $ | 124,801 |   |   |   | 3.31 | % |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |

----

| Weighted Average Yields on the Held to Maturity Investments |   |
|-----------------------------------------------------------------------------------------------------|--------|
| Periods of Maturity from December 31, 2009                            |   |
|                                                                                                |   | Less than 1 year |   |   | 1 to 5 years |   |   | 5 to 10 years |   |   | Over 10 years |   |
| Securities held to maturity:                                                         |   | Amount |   |   | WeightedAvg.Yield (1) |   |   | Amount |   |   | WeightedAvg. Yield (1) |   |   | Amount |   |   | WeightedAvg.Yield (1) |   |   | Amount |   |   | WeightedAvg.Yield (1) |   |
| Mortgage-backed securities (2)                                                                      |   | $ | 1 |   |   |   | 6.43 | % |   | $ | - |   |   |   | - |   |   | $ | 23 |   |   |   | 3.45 | % |   | $ | 111 |   |   |   | 4.47 | % |
| Totals                                                                                              |   | $ | 1 |   |   |   | 6.43 | % |   | $ | - |   |   |   | - |   |   | $ | 23 |   |   |   | 3.45 | % |   | $ | 111 |   |   |   | 4.47 | % |
|                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Securities Held to Maturity                                                                   |   | $ | 135 |   |   |   | 4.31 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal Home Loan Bank stock, at cost                                                               |   | $ | 2,229 |   |   |   | 4.58 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investments                                                                                   |   | $ | 127,165 |   |   |   | 3.33 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| Loan Portfolio Composition    |   |
|-----------------------------------------|--------|
| Years Ended December 31, |   |
|                                    |   | 2010 |   |   | 2009 |   |   | 2008 |   |   | 2007 |   |   | 2006 |   |
| (In thousands)                          |   | Amount |   |   | Percent |   |   | Amount |   |   | Percent |   |   | Amount |   |   | Percent |   |   | Amount |   |   | Percent |   |   | Amount |   |   | Percent |   |
| Commercial, financial and agricultural  |   | $ | 51,160 |   |   |   | 17.94 | % |   | $ | 60,560 |   |   |   | 17.99 | % |   | $ | 83,140 |   |   |   | 21.42 | % |   | $ | 98,065 |   |   |   | 25.57 | % |   | $ | 98,542 |   |   |   | 31.77 | % |
| Real estate – construction        |   |   | 29,848 |   |   |   | 10.46 | % |   |   | 47,651 |   |   |   | 14.15 | % |   |   | 70,456 |   |   |   | 18.15 | % |   |   | 76,832 |   |   |   | 20.03 | % |   |   | 57,606 |   |   |   | 18.57 | % |
| Real estate – mortgage            |   |   | 71,878 |   |   |   | 25.20 | % |   |   | 70,976 |   |   |   | 21.08 | % |   |   | 72,737 |   |   |   | 18.74 | % |   |   | 64,585 |   |   |   | 16.84 | % |   |   | 48,700 |   |   |   | 15.70 | % |
| Real estate – commercial          |   |   | 129,031 |   |   |   | 45.23 | % |   |   | 153,310 |   |   |   | 45.53 | % |   |   | 155,728 |   |   |   | 40.13 | % |   |   | 138,074 |   |   |   | 35.99 | % |   |   | 99,197 |   |   |   | 31.98 | % |
| Consumer loans                          |   |   | 3,330 |   |   |   | 1.17 | % |   |   | 4,195 |   |   |   | 1.25 | % |   |   | 6,029 |   |   |   | 1.56 | % |   |   | 6,037 |   |   |   | 1.57 | % |   |   | 6,092 |   |   |   | 1.98 | % |
| Total loans                             |   | $ | 285,247 |   |   |   | 100.00 | % |   | $ | 336,692 |   |   |   | 100.00 | % |   | $ | 388,090 |   |   |   | 100.00 | % |   | $ | 383,593 |   |   |   | 100.00 | % |   | $ | 310,137 |   |   |   | 100.00 | % |

|  | During 2010, the Bank’s total loans outstanding decreased by 15.4%.  The decrease occurred primarily in three loan categories.  First, the real estate construction category decreased by 37.4% followed by real estate commercial which decreased by 15.8% and finally the commercial, financial and agricultural category decreased by 15.5%.  The Bank anticipates that the amount of total loans outstanding will stabilize during 2011.  The Bank’s primary focus for new loan growth is concentrated in attracting owner-occupied commercial and residential loans and commercial and industrial loans. |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Loans MaturingYear-end balance as of December 31, 2010 |   |
|-------------------------------------------------------------------------------------------|--------|
| (In thousands)                                                                       |   | Less thanOne Year |   |   | 1 to 5Years |   |   | Over 5Years |   |   | Total |   |
| Commercial, financial and agricultural                                                    |   | $ | 28,323 |   |   | $ | 20,589 |   |   | $ | 2,248 |   |   | $ | 51,160 |   |
| Real estate – construction                                                          |   |   | 21,084 |   |   |   | 7,711 |   |   |   | 1,053 |   |   |   | 29,848 |   |
| Real estate – mortgage                                                              |   |   | 21,121 |   |   |   | 34,041 |   |   |   | 16,716 |   |   |   | 71,878 |   |
| Real estate – commercial                                                            |   |   | 41,606 |   |   |   | 63,115 |   |   |   | 24,310 |   |   |   | 129,031 |   |
| Consumer                                                                                  |   |   | 1,185 |   |   |   | 2,145 |   |   |   | - |   |   |   | 3,330 |   |
| Total Loans                                                                               |   | $ | 113,319 |   |   | $ | 127,601 |   |   | $ | 44,327 |   |   | $ | 285,247 |   |

|  | 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. |
|--|--------------------------------------------------------------------------------------------------------------------|

----

----

----

| Internal Watchlist Composition-Doubtful |   |
|---------------------------------------------------|--------|
|                                              |   | December 31, 2010 |   |   | December 31, 2009 |   |
| (In thousands)                               |   | Amount |   |   | Impairment |   |   | Amount |   |   | Impairment |   |
| Commercial and industrial                         |   | $ |  - |   |   | $ | - |   |   | $ |  1,350 |   |   | $ | - |   |
| Construction and development                      |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Single family real estate                         |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Multi-family real estate                          |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Owner occupied commercial real estate             |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Non-owner occupied commercial real estate         |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Consumer                                          |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Totals                                            |   | $ | - |   |   | $ | - |   |   | $ | 1,350 |   |   | $ | - |   |

----

| Internal Watchlist Composition-Substandard |   |
|------------------------------------------------------|--------|
|                                                 |   | December 31, 2010 |   |   | December 31, 2009 |   |
| (In thousands)                                  |   | Amount |   |   | Impairment |   |   | Amount |   |   | Impairment |   |
| Commercial and industrial                            |   | $ | 1,792 |   |   | $ | 337 |   |   | $ | 2,578 |   |   | $ | 216 |   |
| Construction and development                         |   |   | 3,326 |   |   |   | 60 |   |   |   | 13,727 |   |   |   | 93 |   |
| Single family real estate                            |   |   | 10,896 |   |   |   | 1,020 |   |   |   | 6,498 |   |   |   | 689 |   |
| Multi-family real estate                             |   |   | 7,222 |   |   |   | 1,400 |   |   |   | 2,820 |   |   |   | 52 |   |
| Owner occupied commercial real estate                |   |   | 6,016 |   |   |   | 741 |   |   |   | 6,038 |   |   |   | 131 |   |
| Non-owner occupied commercial real estate            |   |   | 6,034 |   |   |   | 165 |   |   |   | 6,150 |   |   |   | 159 |   |
| Consumer                                             |   |   | 61 |   |   |   | 17 |   |   |   | 100 |   |   |   | 6 |   |
| Totals                                               |   | $ | 35,347 |   |   | $ | 3,740 |   |   | $ | 37,911 |   |   | $ | 1,346 |   |

|  | The information listed in tables 16 and 17 reflect the amount of the Bank’s loans net of any partial charge-off amount that has been previously recorded. |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | The Bank has seen an improvement in its asset quality as substandard loans have decreased by approximately 6.8%.  The decrease in construction and development loans from approximately $14 million as of December 31, 2009 to approximately $3 million as of December 31, 2010 is primarily from the Bank recognizing the properties into other real estate owned.  Currently, the Bank is in the process of trying to sell individual lots or large tracts of real estate to reduce the other real estate owned inventory.  Management believes the Bank is well positioned for continued improvement in asset quality.  The Bank’s impairment amount of $3.7 million as of December 31, 2010 compared to $1.4 million as of December 31, 2009 is primarily the result of management adjusting the specific impairment on several large loans as reliable cash flow information has been obtained or more recent appraisals have been received. |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  |   During the fourth quarter of 2010, the Bank revised its appraisal policy to require all loans graded substandard or worse to have annual appraisals on all real estate pledged as collateral with a value of $250,000 or greater.  These appraisals are used by management to determine appropriate real estate values and access if any impairment exists. |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Allowance for Loan Losses                                                |   |
|-----------------------------------------------------------------------------------------|--------|
| Years Ended December 31,                                                 |   |
|                                                                                    |   | 2010 |   |   | 2009 |   |   | 2008 |   |
| (In thousands)Balance at end of period applicable to |   |  Amount |   |   | Percentof loansbycategoryto totalloans |   |   |  Amount |   |   | Percentof loansbycategoryto totalloans |   |   |  Amount |   |   | Percentof loansbycategoryto totalloans |   |
| Commercial, financial and agricultural                                                  |   | $ | 925 |   |   |   | 17.94 | % |   | $ | 1,607 |   |   |   | 17.99 | % |   | $ | 4,955 |   |   |   | 21.42 | % |
| Real estate – construction                                                        |   |   | 3,238 |   |   |   | 10.46 | % |   |   | 595 |   |   |   | 14.15 | % |   |   | 1,433 |   |   |   | 18.15 | % |
| Real estate – mortgage                                                            |   |   | 3,111 |   |   |   | 25.20 | % |   |   | 1,861 |   |   |   | 21.08 | % |   |   | 1,532 |   |   |   | 18.74 | % |
| Real estate – commercial                                                          |   |   | 1,793 |   |   |   | 45.23 | % |   |   | 1,768 |   |   |   | 45.53 | % |   |   | 1,376 |   |   |   | 40.13 | % |
| Consumer                                                                                |   |   | 65 |   |   |   | 1.17 | % |   |   | 74 |   |   |   | 1.25 | % |   |   | 322 |   |   |   | 1.56 | % |
| Totals                                                                                  |   | $ | 9,132 |   |   |   | 100.00 | % |   | $ | 5,905 |   |   |   | 100.00 | % |   | $ | 9,618 |   |   |   | 100.00 | % |

----

|                                                                                             |   | 2007   |   |   | 2006                                             |   |
|--------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------------------------------------------------|--------|
| (In thousands)Balance at end of period applicable to          |   | Amount |   |   | Percentof loansbycategoryto totalloans |   |   | Amount |   |   | Percentof loansbycategoryto totalloans |   |
| Commercial, financial and agricultural                                                           |   | $      | 9,482  |   |                                             |   | 25.57 | % |   | $ | 1,686 |   |   |   | 31.77 | % |
| Real estate – construction                                                                 |   |   | 2,447  |   |                                             |   | 20.03 | % |   |   | 1,581 |   |   |   | 18.57 | % |
| Real estate – mortgage                                                                     |   |   | 101    |   |                                             |   | 16.84 | % |   |   | 77 |   |   |   | 15.70 | % |
| Real estate – commercial                                                                   |   |   | 1,434  |   |                                             |   | 35.99 | % |   |   | 703 |   |   |   | 31.98 | % |
| Consumer                                                                                         |   |   | 246    |   |                                             |   | 1.57 | % |   |   | 211 |   |   |   | 1.98 | % |
|                Totals |   | $      | 13,710 |   |                                             |   | 100.00 | % |   | $ | 4,258 |   |   |   | 100.00 | % |

|  | In recent years, Cornerstone has refined its allowance for loan and leases losses (“ALLL”) to include measurements such as environmental factors for growth, environmental factors for real estate values, historical metrics and specific loan products with increased levels of risk, such as asset based lending.  During the fourth quarter of 2010, management elected to further revise its ALLL estimate.  Specifically, two material changes to this estimation process were incorporated.  First, the Bank revised several specific loan impairments to account for appraisals that were older than one year.  Second, the Bank changed its historical loss look-back period from five years to one year.  Management believes these changes are consistent with generally accepted accounting principles and interagency policy statements published by the Bank’s regulatory agencies.  These changes resulted in a higher ALLL calculation and required an additional $3.2 million in provision expense during the fourth quarter of 2010 bringing the total ALLL balance as of December 31, 2010 to $9.1 million. |
|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | The Bank’s $9.1 million ALLL is comprised of two components. The first component is derived from a review of the Bank’s loan portfolio with a risk grade of substandard or worse.  These loans are reviewed to determine if the loan is impaired and what amount of impairment, if any, exists.  The second component involves a general reserve for all other loans in the Bank’s portfolio to address possible losses that have not been identified in the Bank’s loan review process.  As of December 31, 2010, the Bank has assigned approximately $3.7 million to address specific impairments for loans the Bank has identified as substandard or worse.  The remaining $5.4 million is allocated to the remaining loan portfolio. |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Delinquent and Non-Performing Assets          |   |
|--------------------------------------------------------------|--------|
| Actual for Years Ended December 31, |   |
| (In thousands)                                               |   | 2010 |   |   | 2009 |   |
| 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 |   |
| Real estate – commercial                               |   |   | 0 |   |   |   | 0 |   |
| Consumer                                                     |   |   | 0 |   |   |   | 0 |   |
| Total Loans                                                  |   | $ | 0 |   |   | $ | 0 |   |
|                                                         |   |   |   |   |   |   |   |   |
| Non-accruing loans 90-days or more:                          |   |   |   |   |   |   |   |   |
|                                                         |   |   |   |   |   |   |   |   |
| Commercial, financial and agricultural                       |   | $ | 75 |   |   | $ | 1,498 |   |
| Real estate – construction                             |   |   | - |   |   |   | 2,770 |   |
| Real estate – mortgage                                 |   |   | 5,114 |   |   |   | 842 |   |
| Real estate – commercial                               |   |   | 8,426 |   |   |   | 2,250 |   |
| Consumer                                                     |   |   | 18 |   |   |   | 0 |   |
| Total Loans                                                  |   | $ | 13,633 |   |   | $ | 7,360 |   |
|                                                         |   |   |   |   |   |   |   |   |
| Total Foreclosed Assets                                      |   | $ | 12,809 |   |   | $ | 10,544 |   |
|                                                         |   |   |   |   |   |   |   |   |
| Total Loans                                                  |   | $ | 285,247 |   |   | $ | 336,692 |   |
|                                                         |   |   |   |   |   |   |   |   |
| Ratio of non-performing assets to total loans                |   |   | 9.27 | % |   |   | 5.32 | % |
| Ratio of delinquent (30-days or more) but accruing loans to: |   |   |   |   |   |   |   |   |
| Total loans                                                  |   |   | 0.81 | % |   |   | 1.80 | % |
| Total assets                                                 |   |   | 0.52 | % |   |   | 1.20 | % |

----

|  | As the United States enters the third year of the current economic downturn the Bank’s problem loans have evolved from construction and development loans to income producing commercial and residential properties.  Typically, the construction and development loans resulted in a high loss percentage due to the completion status or marketability of the real estate project.  Management believes the income producing commercial and residential properties that comprise the majority of the Bank’s non-accrual loans will experience smaller losses as a percentage of the total loan. |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | The Bank has seen a significant decline in the level of past due loans as of December 31, 2010.  As a result, management believes that the Bank will see a general decline in the non-accrual balances during 2011 as the present non-accruals transition to other real estate and are either sold or turned into income producing properties. |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | The Bank has developed an internal loan watchlist that identifies classified loans and assists management to monitor their potential risk to Bank earnings.  As of December 31, 2010, the Bank had no loans graded as doubtful, approximately $35 million in loans graded substandard and approximately $33 million graded as special mention. |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Loan Loss Reserve Analysis                                                 |   |
|-------------------------------------------------------------------------------------------|--------|
| Years Ending December 31,                                                  |   |
| (in thousands)                                                                       |   | 2010 |   |   | 2009 |   |   | 2008 |   |   | 2007 |   |   | 2006 |   |
| Average loans                                                                        |   | $ | 311,407 |   |   | $ | 363,146 |   |   | $ | 385,957 |   |   | $ | 353,278 |   |   | $ | 284,105 |   |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for possible loan losses,                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Beginning of the period                                                                   |   | $ | 5,905 |   |   | $ | 9,618 |   |   | $ | 13,710 |   |   | $ | 4,258 |   |   | $ | 3,545 |   |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Charge-offs for the period:                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and agricultural                                                    |   |   | 433 |   |   |   | 10,811 |   |   |   | 6,991 |   |   |   | 737 |   |   |   | 307 |   |
| Real estate – construction                                                          |   |   | 1,260 |   |   |   | 6,005 |   |   |   | 434 |   |   |   | 84 |   |   |   | 0 |   |
| Real estate – mortgage                                                              |   |   | 562 |   |   |   | 692 |   |   |   | 193 |   |   |   | 0 |   |   |   | 104 |   |
| Real estate – commercial                                                            |   |   | 2,309 |   |   |   | 1,248 |   |   |   | 210 |   |   |   | 180 |   |   |   | 0 |   |
| Consumer                                                                                  |   |   | 114 |   |   |   | 340 |   |   |   | 151 |   |   |   | 74 |   |   |   | 70 |   |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total charge-offs                                                                         |   |   | 4,688 |   |   |   | 19,096 |   |   |   | 7,979 |   |   |   | 1,075 |   |   |   | 481 |   |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Recoveries for the period:                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and agricultural                                                    |   |   | 282 |   |   |   | 358 |   |   |   | 362 |   |   |   | 114 |   |   |   | 66 |   |
| Real estate – construction                                                          |   |   | 19 |   |   |   | 4 |   |   |   | 14 |   |   |   | 0 |   |   |   | 0 |   |
| Real estate – mortgage                                                              |   |   | 54 |   |   |   | 64 |   |   |   | 1 |   |   |   | 4 |   |   |   | 7 |   |
| Real estate – commercial                                                            |   |   | 213 |   |   |   | 43 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
| Consumer                                                                                  |   |   | 56 |   |   |   | 15 |   |   |   | 12 |   |   |   | 0 |   |   |   | 15 |   |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total recoveries                                                                          |   |   | 624 |   |   |   | 484 |   |   |   | 389 |   |   |   | 118 |   |   |   | 88 |   |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net charge-offs for the period                                                            |   |   | 4,064 |   |   |   | 18,612 |   |   |   | 7,590 |   |   |   | 957 |   |   |   | 393 |   |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for loan losses                                                                 |   |   | 7,291 |   |   |   | 14,899 |   |   |   | 3,498 |   |   |   | 10,409 |   |   |   | 1,106 |   |
| Adjustments                                                                               |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for possible loan losses, end of period                                         |   | $ | 9,132 |   |   | $ | 5,905 |   |   | $ | 9,618 |   |   | $ | 13,710 |   |   | $ | 4,258 |   |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ratio of allowance for loan losses to total average loans outstanding                     |   |   | 2.93 | % |   |   | 1.63 | % |   |   | 2.49 | % |   |   | 3.88 | % |   |   | 1.50 | % |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ratio of net charge-offs during the period to average loans outstanding during the period |   |   | 1.31 | % |   |   | 5.13 | % |   |   | 1.97 | % |   |   | 0.27 | % |   |   | 0.14 | % |

----

| Core and Non-Core Funding       |   |
|------------------------------------------------|--------|
|                                           |   | December 31, 2010 |   |   | December 31, 2009 |   |
| (In thousands)                       |   | Amount |   |   | Percent |   |   | Amount |   |   | Percent |   |
| Core funding:                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing demand deposits            |   | $ | 28,980 |   |   |   | 7.1 | % |   | $ | 41,972 |   |   |   | 8.4 | % |
| Interest-bearing demand deposits               |   |   | 24,834 |   |   |   | 6.1 | % |   |   | 26,533 |   |   |   | 5.3 | % |
| Savings & money market accounts            |   |   | 34,042 |   |   |   | 8.3 | % |   |   | 31,030 |   |   |   | 6.2 | % |
| Time deposits under $100,000                   |   |   | 133,626 |   |   |   | 32.6 | % |   |   | 214,143 |   |   |   | 43.0 | % |
| Total core funding                             |   |   | 221,482 |   |   |   | 54.1 | % |   |   | 313,678 |   |   |   | 62.9 | % |
|                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-core funding:                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Brokered deposits                              |   |   | - |   |   |   | 0.0 | % |   |   | 5,852 |   |   |   | 1.2 | % |
| Time deposits greater than $100,000            |   |   | 113,965 |   |   |   | 27.8 | % |   |   | 85,212 |   |   |   | 17.1 | % |
| Securities sold under agreements to repurchase |   |   | 24,325 |   |   |   | 5.9 | % |   |   | 26,322 |   |   |   | 5.3 | % |
| Federal Home Loan Bank advances                |   |   | 50,000 |   |   |   | 12.2 | % |   |   | 67,000 |   |   |   | 13.5 | % |
| Total non-core funding                         |   |   | 188,290 |   |   |   | 45.9 | % |   |   | 184,386 |   |   |   | 37.1 | % |
|                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                          |   | $ | 409,772 |   |   |   | 100.0 | % |   | $ | 498,064 |   |   |   | 100.0 | % |

----

|  | During 2010, the Bank’s total funding decreased from $498 million as of December 31, 2009 to $410 million as of December 31, 2010.  First, the decrease in the Bank’s time deposits was a result of the decline in outstanding loans.  Second, the decline in noninterest-bearing demand deposits resulted from the Bank exiting the payroll processor ACH line of business as previously discussed.  Finally, the Bank reduced its Federal Home Loan Bank advances by $17 million during 2010 as the advances matured.  The Bank is contractually obligated to pay off $10 million of Federal Home Loan Bank advances in 2011. |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Deposit Composition                 |   |
|-------------------------------------|--------|
| Years Ended December 31,            |   |
| (In thousands)                      |   | 2010 |   |   | 2009 |   |   | 2008 |   |
| Demand deposits                     |   | $ | 28,980 |   |   | $ | 41,972 |   |   | $ | 40,078 |   |
| NOW deposits                        |   |   | 24,834 |   |   |   | 26,533 |   |   |   | 26,909 |   |
| Savings & money market deposits |   |   | 34,042 |   |   |   | 31,030 |   |   |   | 35,848 |   |
| Time deposits $100,000 and over     |   |   | 113,965 |   |   |   | 91,064 |   |   |   | 59,057 |   |
| Time deposits under $100,000        |   |   | 133,626 |   |   |   | 214,143 |   |   |   | 164,692 |   |
| Total Deposits                      |   | $ | 335,447 |   |   | $ | 404,742 |   |   | $ | 326,584 |   |

|  | On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) became law.  The EESA enabled the FDIC to temporarily increase the amount of FDIC deposit insurance coverage from $100,000 to $250,000 per qualified depositor through December 31, 2013.  Also during the fourth quarter of 2008, the FDIC’s Temporary Liquidity Guarantee Program (“TLGP”) extended unlimited deposit insurance coverage for noninterest-bearing transaction accounts at participating FDIC insured banks.  The FDIC also offered coverage regarding debt obligation coverage.  These services were offered by the FDIC with a fee structure for each product.  The Bank chose to accept the unlimited transaction account coverage but refused the debt obligation coverage.  The TLGP currently has an expiration date of December 31, 2011. |
|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | Time deposits annual percentage yields decreased materially throughout 2010, which allowed the Bank to increase its deposit base at a lower cost of funds than incurred in 2009.  In November 2009, the FDIC downgraded the Bank to “adequately capitalized” status, thereby restricting the interest rates payable by the Bank for time deposits.  However, as of March 2011, the restriction has not impacted the Bank’s liquidity. |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Average Amount and Average Rate Paid on Deposits |   |
|--------------------------------------------------|--------|
| Years Ending December 31,                        |   |
|                                             |   | 2010 |   |   | 2009 |   |   | 2008 |   |
| (In thousands)                                   |   | Amount |   |   | Rate |   |   | Amount |   |   | Rate |   |   | Amount |   |   | Rate |   |
| Demand deposits                                  |   | $ | 39,104 |   |   |   |   |   | $ | 40,816 |   |   |   |   |   | $ | 42,915 |   |   |   |   |
| NOW deposits                                     |   |   | 32,338 |   |   |   | 0.34 | % |   |   | 27,864 |   |   |   | 0.35 | % |   |   | 30,106 |   |   |   | 0.70 | % |
| Savings & money market deposits              |   |   | 32,240 |   |   |   | 0.83 | % |   |   | 35,269 |   |   |   | 0.86 | % |   |   | 51,600 |   |   |   | 1.60 | % |
| Time deposits                                    |   |   | 281,251 |   |   |   | 2.08 | % |   |   | 256,551 |   |   |   | 2.97 | % |   |   | 190,221 |   |   |   | 4.34 | % |
| Total Deposits                                   |   | $ | 384,933 |   |   |   | 1.80 | % |   | $ | 360,500 |   |   |   | 2.51 | % |   | $ | 314,842 |   |   |   | 3.42 | % |

----

| 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 |   |

----

| Tier 1 leverage ratio           |   |   | 5.75  | % |
|---------------------------------|--------|--------|-------|---|
| Tier 1 risk-based capital ratio |   |   | 8.80  | % |
| Total risk-based capital ratio  |   |   | 10.06 | % |

|                              |   | December 31, 2010 |   |   | December 31, 2009 |   |
|-----------------------------------|--------|-----------------------------|--------|--------|-----------------------------|--------|
| Average loans to average deposits |   |                        | 80.90  | %      |                        |   | 100.73 | % |

----

|  | Earnings at Risk Model |
|--|------------------------|

|  | Economic Value of Equity |
|--|--------------------------|

|  | Liquidity Analysis |
|--|--------------------|

|  | Leverage Analysis |
|--|-------------------|

|  | Balance Sheet Analytics |
|--|-------------------------|

----

|  | The majority of the Bank’s loans are indexed to the Prime rate as published in The Wall Street Journal.  These variable rate loans contain a provision stating that an interest rate floor ranging from 4.0% to 7.5% exists.  Almost all of the Bank’s variable rate loans have repriced to the interest rate floors.  The Bank’s interest rate model estimates the most likely rate adjustment scenario. |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                 |   | Page No. |
|--------------------------------------------------------------------------------------|--------|----------|
| Management’s Report on Internal Control over Financial Reporting               |   | 43       |
| Report of Independent Registered Public Accounting Firm – Financial Statements |   | 44       |
| Consolidated Financial Statements                                                    |   |     |
| Consolidated balance sheets                                                          |   | 45       |
| Consolidated statements of operations                                                |   | 46       |
| Consolidated statements of changes in stockholders’ equity                     |   | 47       |
| Consolidated statements of cash flows                                                |   | 49       |
| Notes to consolidated financial statements                                           |   | 50       |

----

|   | · | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of Cornerstone’s assets; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that Cornerstone’s receipts and expenditures are being made only in accordance with authorizations of Cornerstone’s management and directors; and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Cornerstone’s assets that could have a material effect on the financial statements. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| /s/HAZLETT, LEWIS & BIETER, PLLC |
|--------------------------------------|
|                                 |
| Chattanooga, Tennessee               |
| March 30, 2011                       |

----

| CORNERSTONE  BANCSHARES,  INC.  AND  SUBSIDIARY |
|-----------------------------------------------------------------------------------------|
|                                                                                    |
| CONSOLIDATED  BALANCE  SHEETS                                       |
| December 31, 2010 and 2009                                                              |
|                                                                                    |

|                                                                                                                                                                                                   |   | 2010   |        |   | 2009   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|--------|
|                                                                                                                                                                                                   |   |   |        |   |   |   |
| ASSETS                                                                                                                                                                                                 |   |   |        |   |   |   |
|                                                                                                                                                                                                   |   |   |        |   |   |   |
| Cash and due from banks                                                                                                                                                                                |   | $      | 1,490,030   |   |   | $      | 1,420,502 |   |
| Interest-bearing deposits at other financial institutions                                                                                                                                              |   |   | 21,491,922  |   |   |   | 36,781,703 |   |
|                                                                                                                                                                                                   |   |   |        |   |   |   |   |   |
| Total cash and cash equivalents                                                                                                                                                                        |   |   | 22,981,952  |   |   |   | 38,202,205 |   |
|                                                                                                                                                                                                   |   |   |        |   |   |   |   |   |
| Securities available for sale                                                                                                                                                                          |   |   | 108,250,434 |   |   |   | 124,415,318 |   |
| Securities held to maturity (fair value approximates $98,388 at 2010 and $136,062 at 2009)                                                                                                             |   |   | 95,702      |   |   |   | 135,246 |   |
| Federal Home Loan Bank stock, at cost                                                                                                                                                                  |   |   | 2,322,900   |   |   |   | 2,229,200 |   |
| Loans, net of allowance for loan losses of $9,132,171 in 2010 and $5,905,054 in 2009                                                                                                                   |   |   | 276,114,617 |   |   |   | 330,787,382 |   |
| Bank premises and equipment, net                                                                                                                                                                       |   |   | 8,047,370   |   |   |   | 8,098,059 |   |
| Accrued interest receivable                                                                                                                                                                            |   |   | 1,326,480   |   |   |   | 1,520,699 |   |
| Goodwill                                                                                                                                                                                               |   |   | -           |   |   |   | 2,541,476 |   |
| Foreclosed assets                                                                                                                                                                                      |   |   | 12,808,838  |   |   |   | 10,327,297 |   |
| Other assets                                                                                                                                                                                           |   |   | 9,551,121   |   |   |   | 14,147,504 |   |
|                                                                                                                                                                                                   |   |   |        |   |   |   |   |   |
| Total assets                                                                                                                                                                                           |   | $      | 441,499,414 |   |   | $      | 532,404,386 |   |
|                                                                                                                                                                                                   |   |   |        |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                   |   |   |        |   |   |   |   |   |
|                                                                                                                                                                                                   |   |   |        |   |   |   |   |   |
| Deposits:                                                                                                                                                                                              |   |   |        |   |   |   |   |   |
| Noninterest-bearing demand deposits                                                                                                                                                                    |   | $      | 28,980,043  |   |   | $      | 41,971,956 |   |
| Interest-bearing demand deposits                                                                                                                                                                       |   |   | 24,834,214  |   |   |   | 26,533,329 |   |
| Savings deposits and money market accounts                                                                                                                                                             |   |   | 34,041,672  |   |   |   | 31,029,587 |   |
| Time deposits                                                                                                                                                                                          |   |   | 247,591,161 |   |   |   | 305,207,241 |   |
|                                                                                                                                                                                                   |   |   |        |   |   |   |   |   |
| Total deposits                                                                                                                                                                                         |   |   | 335,447,090 |   |   |   | 404,742,113 |   |
|                                                                                                                                                                                                   |   |   |        |   |   |   |   |   |
| Accrued interest payable                                                                                                                                                                               |   |   | 176,761     |   |   |   | 351,360 |   |
| Federal funds purchased and securities sold under agreements to repurchase                                                                                                                             |   |   | 24,325,372  |   |   |   | 26,321,885 |   |
| Federal Home Loan Bank advances and other borrowings                                                                                                                                                   |   |   | 54,715,000  |   |   |   | 72,350,000 |   |
| Other liabilities                                                                                                                                                                                      |   |   | 1,016,038   |   |   |   | 801,549 |   |
|                                                                                                                                                                                                   |   |   |        |   |   |   |   |   |
| Total liabilities                                                                                                                                                                                      |   |   | 415,680,261 |   |   |   | 504,566,907 |   |
|                                                                                                                                                                                                   |   |   |        |   |   |   |   |   |
| Stockholders' equity:                                                                                                                                                                                  |   |   |        |   |   |   |   |   |
| Preferred stock - no par value; 2,000,000 shares authorized; 114,540 shares issued and outstanding in 2010                                                                                             |   |   | 2,727,424   |   |   |   | - |   |
| Common stock - $1.00 par value; 20,000,000 shares authorized in 2010 and 10,000,000 shares authorized in 2009; 6,709,199 shares issued in 2010 and 2009; 6,500,396 shares outstanding in 2010 and 2009 |   |   | 6,500,396   |   |   |   | 6,500,396 |   |
| Additional paid-in capital                                                                                                                                                                             |   |   | 21,237,298  |   |   |   | 21,162,686 |   |
| Retained (deficit) earnings                                                                                                                                                                            |   |   | (4,317,130  | )      |   |   | 424,854 |   |
| Accumulated other comprehensive income                                                                                                                                                                 |   |   | (328,835    | )      |   |   | (250,457 | ) |
|                                                                                                                                                                                                   |   |   |        |   |   |   |   |   |
| Total stockholders' equity                                                                                                                                                                             |   |   | 25,819,153  |   |   |   | 27,837,479 |   |
|                                                                                                                                                                                                   |   |   |        |   |   |   |   |   |
| Total liabilities and stockholders' equity                                                                                                                                                             |   | $      | 441,499,414 |   |   | $      | 532,404,386 |   |

----

| CORNERSTONE  BANCSHARES,  INC.  AND  SUBSIDIARY |
|-----------------------------------------------------------------------------------------|
|                                                                                    |
| CONSOLIDATED  STATEMENTS  OF  OPERATIONS                  |
| Years Ended December 31, 2010, 2009 and 2008                                            |
|                                                                                    |

|                                                                       |   | 2010   |       |   | 2009   |   |        | 2008   |   |
|----------------------------------------------------------------------------|--------|--------|------------|--------|--------|--------|-------------|--------|--------|
|                                                                       |   |   |       |   |   |   |        |   |   |
| INTEREST INCOME                                                            |   |   |       |   |   |   |        |   |   |
| Loans, including fees                                                      |   | $      | 21,498,120 |   |   | $      | 24,402,101  |   |   | $ | 28,660,491 |   |
| Securities and interest-bearing deposits at other financial institutions   |   |   | 3,633,367  |   |   |   | 1,895,228   |   |   |   | 1,996,228 |   |
| Federal funds sold                                                         |   |   | 79,941     |   |   |   | 11,098      |   |   |   | 23,455 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| Total interest income                                                      |   |   | 25,211,428 |   |   |   | 26,308,427  |   |   |   | 30,680,174 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| INTEREST EXPENSE                                                           |   |   |       |   |   |   |        |   |   |   |   |   |
| Time deposits                                                              |   |   | 5,838,571  |   |   |   | 7,608,747   |   |   |   | 8,262,157 |   |
| Other deposits                                                             |   |   | 379,810    |   |   |   | 400,395     |   |   |   | 1,037,191 |   |
| Federal funds purchased and securities sold under agreements to repurchase |   |   | 127,308    |   |   |   | 173,648     |   |   |   | 600,163 |   |
| Federal Home Loan Bank advances and other borrowings                       |   |   | 2,856,125  |   |   |   | 3,006,593   |   |   |   | 2,798,563 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| Total interest expense                                                     |   |   | 9,201,814  |   |   |   | 11,189,383  |   |   |   | 12,698,074 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| Net interest income before provision for loan losses                       |   |   | 16,009,614 |   |   |   | 15,119,044  |   |   |   | 17,982,100 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| Provision for loan losses                                                  |   |   | 7,291,000  |   |   |   | 14,898,898  |   |   |   | 3,498,000 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| Net interest income after provision for loan losses                        |   |   | 8,718,614  |   |   |   | 220,146     |   |   |   | 14,484,100 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| NONINTEREST INCOME                                                         |   |   |       |   |   |   |        |   |   |   |   |   |
| Customer service fees                                                      |   |   | 1,272,893  |   |   |   | 1,630,387   |   |   |   | 1,726,681 |   |
| Other noninterest income                                                   |   |   | 90,268     |   |   |   | 96,839      |   |   |   | 102,455 |   |
| Net gains (losses) from sale of securities                                 |   |   | 1,698,136  |   |   |   | 399,754     |   |   |   | - |   |
| Net gains (losses) from sale of loans and other assets                     |   |   | 19,632     |   |   |   | 200,082     |   |   |   | 57,828 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| Total noninterest income                                                   |   |   | 3,080,929  |   |   |   | 2,327,062   |   |   |   | 1,886,964 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| NONINTEREST EXPENSES                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| Salaries and employee benefits                                             |   |   | 6,194,504  |   |   |   | 6,970,282   |   |   |   | 7,139,594 |   |
| Net occupancy and equipment expense                                        |   |   | 1,501,504  |   |   |   | 1,547,630   |   |   |   | 1,520,378 |   |
| Depository insurance                                                       |   |   | 1,287,676  |   |   |   | 1,198,937   |   |   |   | 321,164 |   |
| Impairment of goodwill                                                     |   |   | 2,541,476  |   |   |   | -           |   |   |   | - |   |
| Foreclosed assets, net                                                     |   |   | 2,789,708  |   |   |   | 2,570,584   |   |   |   | 219,135 |   |
| Other operating expenses                                                   |   |   | 3,727,493  |   |   |   | 3,774,454   |   |   |   | 3,362,427 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| Total noninterest expenses                                                 |   |   | 18,042,361 |   |   |   | 16,061,887  |   |   |   | 12,562,698 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| (Loss) income before income tax expense (benefit)                          |   |   | (6,242,818 | )      |   |   | (13,514,679 | )      |   |   | 3,808,366 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| Income tax (benefit) expense                                               |   |   | (1,535,297 | )      |   |   | (5,336,040  | )      |   |   | 1,296,542 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| Net (loss) income                                                          |   |   | (4,707,521 | )      |   |   | (8,178,639  | )      |   |   | 2,511,824 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| Preferred stock dividends                                                  |   |   | 34,463     |   |   |   | -           |   |   |   | - |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| Net (loss) income available to common stockholders                         |   | $      | (4,741,984 | )      |   | $      | (8,178,639  | )      |   | $ | 2,511,824 |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
|                                                                       |   |   |       |   |   |   |        |   |   |   |   |   |
| EARNINGS (LOSS) PER COMMON SHARE                                           |   |   |       |   |   |   |        |   |   |   |   |   |
| Basic                                                                      |   | $      | (0.73      | )      |   | $      | (1.26       | )      |   | $ | 0.39 |   |
| Diluted                                                                    |   |   | (0.73      | )      |   |   | (1.26       | )      |   |   | 0.38 |   |

----

| CORNERSTONE  BANCSHARES,  INC.  AND  SUBSIDIARY                                      |
|------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                         |
| CONSOLIDATED  STATEMENTS  OF  CHANGES  IN  STOCKHOLDERS'  EQUITY |
| Years Ended December 31, 2010, 2009 and 2008                                                                                 |
|                                                                                                                         |

|                                                                                                   |   |          |       |   |   |      |      | Additional |   |       |       |   |   | AccumulatedOther |       |   | Total         |    |
|--------------------------------------------------------------------------------------------------------|--------|---------------|------------|--------|--------|-----------|-----------|------------|--------|------------|------------|--------|--------|------------------|------------|--------|---------------|---------|
|                                                                                                   |   | Comprehensive |       |   | Common |      |      | Paid-in    |   |       | Retained   |   |   | Comprehensive    |       |   | Stockholders' |    |
|                                                                                                   |   | Income        |       |   | Stock  |      |      | Capital    |   |       | Earnings   |   |   | Income           |       |   | Equity        |    |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |
| BALANCE, December 31, 2007                                                                             |   |          |       |   | $      | 6,369,718 |      |       | $      | 20,532,787 |       |   | $      | 9,317,878        |       |   | $             | 106,967 |   |   | $ | 36,327,350 |   |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |
| Issuance of common stock                                                                               |   |          |       |   |   | 22,000    |      |       |   | 60,500     |       |   |   | -                |       |   |          | -       |   |   |   | 82,500 |   |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |
| Stock compensation expense                                                                             |   |          |       |   |   | -         |      |       |   | 279,400    |       |   |   | -                |       |   |          | -       |   |   |   | 279,400 |   |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |
| Dividends - $0.28 per common share                                                                     |   |          |       |   |   | -         |      |       |   | -          |       |   |   | (1,773,022       | )          |   |          | -       |   |   |   | (1,773,022 | ) |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |
| Repurchase of common stock                                                                             |   |          |       |   |   | (72,000   | )         |       |   | (561,049   | )          |   |   | -                |       |   |          | -       |   |   |   | (633,049 | ) |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |
| Comprehensive income:                                                                                  |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |
| Net income                                                                                             |   | $             | 2,511,824  |   |   |      | -         |       |   |       | -          |   |   |             | 2,511,824  |   |          |    | - |   |   |   | 2,511,824 |   |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| Other comprehensive income, net of tax:                                                                |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| Unrealized holding gains (losses) on securities available for sale, net of reclassification adjustment |   |          | (293,494   | )      |   |      | -         |       |   |       | -          |   |   |             | -          |   |          |    | (293,494 | ) |   |   | (293,494 | ) |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| Total comprehensive income                                                                             |   | $             | 2,218,330  |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| BALANCE, December 31, 2008                                                                             |   |          |       |   |   |      | 6,319,718 |       |   |       | 20,311,638 |   |   |             | 10,056,680 |   |          |    | (186,527 | ) |   |   | 36,501,509 |   |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| Stock compensation expense                                                                             |   |          |       |   |   |      | -         |       |   |       | 216,600    |   |   |             | -          |   |          |    | - |   |   |   | 216,600 |   |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| Dividends - $0.10 per common share                                                                     |   |          |       |   |   |      | -         |       |   |       | -          |   |   |             | (638,061   | )      |          |    | - |   |   |   | (638,061 | ) |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| Common stock dividends                                                                                 |   |          |       |   |   |      | 180,678   |       |   |       | 634,448    |   |   |             | (815,126   | )      |          |    | - |   |   |   | - |   |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| Comprehensive loss:                                                                                    |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| Net loss                                                                                               |   | $             | (8,178,639 | )      |   |      | -         |       |   |       | -          |   |   |             | (8,178,639 | )      |          |    | - |   |   |   | (8,178,639 | ) |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| Other comprehensive income, net of tax:                                                                |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| Unrealized holding gains (losses) on securities available for sale, net of reclassification adjustment |   |          | (63,930    | )      |   |      | -         |       |   |       | -          |   |   |             | -          |   |          |    | (63,930 | ) |   |   | (63,930 | ) |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| Total comprehensive loss                                                                               |   | $             | (8,242,569 | )      |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
|                                                                                                   |   |          |       |   |   |      |      |       |   |       |       |   |   |             |       |   |          |    |   |   |   |   |   |   |
| BALANCE, December 31, 2009                                                                             |   |          |       |   |   | $         | 6,500,396 |       |   | $          | 21,162,686 |   |   | $                | 424,854    |   |          | $       | (250,457 | ) |   | $ | 27,837,479 |   |

----

| CORNERSTONE  BANCSHARES,  INC.  AND  SUBSIDIARY                                      |
|------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                         |
| CONSOLIDATED  STATEMENTS  OF  CHANGES  IN  STOCKHOLDERS'  EQUITY |
| Years Ended December 31, 2010, 2009 and 2008                                                                                 |
|                                                                                                                         |

|                                                                                                   |   |          |       |   |      |      |      |   |   |      |       |   |   |               |       |   | Accumulated   |    |       |          |   |
|--------------------------------------------------------------------------------------------------------|--------|---------------|------------|--------|-----------|-----------|-----------|--------|--------|-----------|------------|--------|--------|--------------------|------------|--------|---------------|---------|------------|---------------|--------|
|                                                                                                   |   |          |       |   |      |      |      |   |   |      | Additional |   |   |               |       |   | Other         |    |       | Total         |   |
|                                                                                                   |   | Comprehensive |       |   | Preferred |      |      | Common |   |      | Paid-in    |   |   | Retained           |       |   | Comprehensive |    |       | Stockholders' |   |
|                                                                                                   |   | Income        |       |   | Stock     |      |      | Stock  |   |      | Capital    |   |   | Earnings (Deficit) |       |   | Income        |    |       | Equity        |   |
|                                                                                                   |   |          |       |   |      |      |      |   |   |      |       |   |   |               |       |   |          |    |       |          |   |
| BALANCE, December 31, 2009                                                                             |   |          |       |   | $         | -         |      |   | $      | 6,500,396 |       |   | $      | 21,162,686         |       |   | $             | 424,854 |       |          | $      | (250,457 | ) |   | $ | 27,837,479 |   |
|                                                                                                   |   |          |       |   |      |      |      |   |   |      |       |   |   |               |       |   |          |    |       |          |   |   |   |   |   |   |   |
| Stock compensation expense                                                                             |   |          |       |   |      | -         |      |   |   | -         |       |   |   | 74,612             |       |   |          | -       |       |          |   | - |   |   |   | 74,612 |   |
|                                                                                                   |   |          |       |   |      |      |      |   |   |      |       |   |   |               |       |   |          |    |       |          |   |   |   |   |   |   |   |
| Issuance of Series A Convertible Preferred Stock                                                       |   |          |       |   |      | 2,727,424 |      |   |   | -         |       |   |   | -                  |       |   |          | -       |       |          |   | - |   |   |   | 2,727,424 |   |
|                                                                                                   |   |          |       |   |      |      |      |   |   |      |       |   |   |               |       |   |          |    |       |          |   |   |   |   |   |   |   |
| Preferred stock dividends paid                                                                         |   |          |       |   |      | -         |      |   |   | -         |       |   |   | -                  |       |   |          | (34,463 | )          |          |   | - |   |   |   | (34,463 | ) |
|                                                                                                   |   |          |       |   |      |      |      |   |   |      |       |   |   |               |       |   |          |    |       |          |   |   |   |   |   |   |   |
| Comprehensive loss:                                                                                    |   |          |       |   |      |      |      |   |   |      |       |   |   |               |       |   |          |    |       |          |   |   |   |   |   |   |   |
| Net loss                                                                                               |   | $             | (4,707,521 | )      |      |      | -         |   |   |      | -          |   |   |               | -          |   |          |    | (4,707,521 | )             |   |   | - |   |   |   | (4,707,521 | ) |
|                                                                                                   |   |          |       |   |      |      |      |   |   |      |       |   |   |               |       |   |          |    |       |          |   |   |   |   |   |   |   |   |
| Other comprehensive income, net of tax:                                                                |   |          |       |   |      |      |      |   |   |      |       |   |   |               |       |   |          |    |       |          |   |   |   |   |   |   |   |   |
| Unrealized holding gains (losses) on securities available for sale, net of reclassification adjustment |   |          | (78,378    | )      |      |      | -         |   |   |      | -          |   |   |               | -          |   |          |    | -          |          |   |   | (78,378 | ) |   |   | (78,378 | ) |
|                                                                                                   |   |          |       |   |      |      |      |   |   |      |       |   |   |               |       |   |          |    |       |          |   |   |   |   |   |   |   |   |
| Total comprehensive loss                                                                               |   | $             | (4,785,899 | )      |      |      |      |   |   |      |       |   |   |               |       |   |          |    |       |          |   |   |   |   |   |   |   |   |
|                                                                                                   |   |          |       |   |      |      |      |   |   |      |       |   |   |               |       |   |          |    |       |          |   |   |   |   |   |   |   |   |
| BALANCE, December 31, 2010                                                                             |   |          |       |   |      | $         | 2,727,424 |   |   | $         | 6,500,396  |   |   | $                  | 21,237,298 |   |          | $       | (4,317,130 | )             |   | $ | (328,835 | ) |   | $ | 25,819,153 |   |

----

| CORNERSTONE  BANCSHARES,  INC.  AND  SUBSIDIARY |
|-----------------------------------------------------------------------------------------|
|                                                                                    |
| CONSOLIDATED  STATEMENTS  OF  CASH  FLOWS       |
| Years Ended December 31, 2010, 2009 and 2008                                            |
|                                                                                    |

|                                                                                     |   | 2010   |         |   | 2009   |   |         | 2008   |   |
|------------------------------------------------------------------------------------------|--------|--------|--------------|--------|--------|--------|--------------|--------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES                                                     |   |   |         |   |   |   |         |   |   |
| Net (loss) income                                                                        |   | $      | (4,707,521   | )      |   | $      | (8,178,639   | )      |   | $ | 2,511,824 |   |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: |   |   |         |   |   |   |         |   |   |   |   |   |
| Depreciation and amortization                                                            |   |   | 555,235      |   |   |   | 958,438      |   |   |   | 694,499 |   |
| Impairment of goodwill                                                                   |   |   | 2,541,476    |   |   |   | -            |   |   |   | - |   |
| Provision for loan losses                                                                |   |   | 7,291,000    |   |   |   | 14,898,898   |   |   |   | 3,498,000 |   |
| Stock compensation expense                                                               |   |   | 74,612       |   |   |   | 216,600      |   |   |   | 279,400 |   |
| Gain on sales of securities                                                              |   |   | (1,698,136   | )      |   |   | (399,754     | )      |   |   | - |   |
| Loss (gain) on sales of foreclosed assets, loans, and other assets                       |   |   | 1,448,508    |   |   |   | 1,627,168    |   |   |   | (57,828 | ) |
| Deferred income taxes                                                                    |   |   | (1,012,915   | )      |   |   | 1,301,148    |   |   |   | 3,302,186 |   |
| Changes in other operating assets and liabilities:                                       |   |   |         |   |   |   |         |   |   |   |   |   |
| Net change in loans held for sale                                                        |   |   | (43,500      | )      |   |   | 582,000      |   |   |   | (112,000 | ) |
| Accrued interest receivable                                                              |   |   | 194,219      |   |   |   | 250,392      |   |   |   | 636,886 |   |
| Accrued interest payable                                                                 |   |   | (174,599     | )      |   |   | (118,226     | )      |   |   | 253,500 |   |
| Other assets and liabilities                                                             |   |   | 5,641,354    |   |   |   | (5,089,681   | )      |   |   | (7,509,166 | ) |
|                                                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| Net cash provided by operating activities                                                |   |   | 10,109,733   |   |   |   | 6,048,344    |   |   |   | 3,497,301 |   |
|                                                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| Proceeds from security transactions:                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| Securities available for sale                                                            |   |   | 127,818,220  |   |   |   | 36,851,917   |   |   |   | 23,596,577 |   |
| Securities held to maturity                                                              |   |   | 40,111       |   |   |   | 33,532       |   |   |   | 30,594 |   |
| Purchase of securities available for sale                                                |   |   | (110,123,951 | )      |   |   | (117,340,105 | )      |   |   | (33,350,455 | ) |
| Purchase of Federal Home Loan Bank stock                                                 |   |   | (93,700      | )      |   |   | (41,700      | )      |   |   | (275,900 | ) |
| Loan originations and principal collections, net                                         |   |   | 37,003,774   |   |   |   | 18,247,178   |   |   |   | (14,691,368 | ) |
| Purchase of bank premises and equipment                                                  |   |   | (835,007     | )      |   |   | (310,113     | )      |   |   | (2,589,553 | ) |
| Proceeds from sale of other real estate and other assets                                 |   |   | 7,094,142    |   |   |   | 4,119,884    |   |   |   | 1,357,027 |   |
|                                                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| Net cash provided by (used in) investing activities                                      |   |   | 60,903,589   |   |   |   | (58,439,407  | )      |   |   | (25,923,078 | ) |
|                                                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| Net (decrease) increase in deposits                                                      |   |   | (69,295,023  | )      |   |   | 78,158,890   |   |   |   | 13,333,498 |   |
| Decrease in federal funds purchased and securities sold under agreements to repurchase   |   |   | (1,996,513   | )      |   |   | (9,468,361   | )      |   |   | (5,770,109 | ) |
| Proceeds from Federal Home Loan Bank advances                                            |   |   | -            |   |   |   | -            |   |   |   | 20,000,000 |   |
| Repayment of Federal Home Loan Bank advances                                             |   |   | (17,000,000  | )      |   |   | -            |   |   |   | - |   |
| Net (repayments) borrowings of other borrowings                                          |   |   | (635,000     | )      |   |   | 1,100,000    |   |   |   | 4,150,000 |   |
| Purchase of common stock                                                                 |   |   | -            |   |   |   | -            |   |   |   | (633,049 | ) |
| Payment of dividends                                                                     |   |   | (34,463      | )      |   |   | (1,094,651   | )      |   |   | (1,773,022 | ) |
| Issuance of preferred stock                                                              |   |   | 2,727,424    |   |   |   | -            |   |   |   | - |   |
| Issuance of common stock                                                                 |   |   | -            |   |   |   | -            |   |   |   | 82,500 |   |
|                                                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| Net cash (used in) provided by financing activities                                      |   |   | (86,233,575  | )      |   |   | 68,695,878   |   |   |   | 29,389,818 |   |
|                                                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                     |   |   | (15,220,253  | )      |   |   | 16,304,815   |   |   |   | 6,964,041 |   |
|                                                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS, beginning of year                                             |   |   | 38,202,205   |   |   |   | 21,897,390   |   |   |   | 14,933,349 |   |
|                                                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS, end of year                                                   |   | $      | 22,981,952   |   |   | $      | 38,202,205   |   |   | $ | 21,897,390 |   |
|                                                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
|                                                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                        |   |   |         |   |   |   |         |   |   |   |   |   |
| Cash paid during the period for interest                                                 |   | $      | 9,376,413    |   |   | $      | 11,307,609   |   |   | $ | 12,444,574 |   |
| Cash paid during the period for taxes                                                    |   |   | 500,000      |   |   |   | 180,350      |   |   |   | 738,886 |   |
|                                                                                     |   |   |         |   |   |   |         |   |   |   |   |   |
| NONCASH INVESTING AND FINANCING ACTIVITIES                                               |   |   |         |   |   |   |         |   |   |   |   |   |
| Acquisition of real estate through foreclosure                                           |   | $      | 10,645,773   |   |   | $      | 14,156,244   |   |   | $ | 2,915,414 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 1. | Summary of Significant Accounting Policies |
|---------|--------------------------------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 1. | Summary of Significant Accounting Policies (continued) |
|---------|--------------------------------------------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 1. | Summary of Significant Accounting Policies (continued) |
|---------|--------------------------------------------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 1. | Summary of Significant Accounting Policies (continued) |
|---------|--------------------------------------------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 1. | Summary of Significant Accounting Policies (continued) |
|---------|--------------------------------------------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 1. | Summary of Significant Accounting Policies (continued) |
|---------|--------------------------------------------------------|

| Note 2. | Preferred Stock |
|---------|-----------------|

|   | During 2010, Cornerstone initiated a preferred stock offering. The offering period is scheduled to end on June 30, 2011. Specifics of the preferred stock offering are as follows: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Issuance of up to 600,000 shares of Series A Convertible Preferred Stock at a price of $25.00 per share. |
|--------|--------|----------------------------------------------------------------------------------------------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 2. | Preferred Stock (continued) |
|---------|-----------------------------|

|   | · | The annual cash dividend on each share of Series A Preferred Stock is $2.50, which is equal to 10% of the original issue price of $25.00 per share, and is payable quarterly in arrears, if, as and when declared on the 15th day of February, May, August and November that immediately follows the end of the dividend period to which such dividends relate. Any dividend payable on shares of Series A Preferred Stock that is not declared by our board of directors or paid will accumulate. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Each share of Series A Preferred Stock will be convertible at the shareholder’s option at any time into five (5) shares of our common stock reflecting an initial conversion price of $5.00 per share of common stock. The shares of Series A Preferred Stock are also convertible at Cornerstone’s option, in whole or in part, into shares of Cornerstone’s common stock at the conversion rate, at any time on or after July 31, 2015 if the closing price of Cornerstone’s common stock equals or exceeds 150% of the conversion price on each of the thirty (30) consecutive trading days immediately preceding the date Cornerstone gives notice of its election to so convert. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Note 3. | Restrictions on Cash and Due From Banks |
|---------|-----------------------------------------|

| Note 4. | Securities |
|---------|------------|

|                                                                                                       |   | December 31, 2010 |        |
|------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                       |   |                        |        |   | Gross |   |   | Gross |   |   |   |   |
|                                                                                                       |   | Amortized                   |        |   | Unrealized |   |   | Unrealized |   |   | Fair |   |
|                                                                                                       |   | Cost                        |        |   | Gains |   |   | Loss |   |   | Value |   |
| Debt securities available for sale:                                                                        |   |                        |        |   |   |   |   |   |   |   |   |   |
| U.S. Government agencies                                                                                   |   | $                           | 4,571,444   |   |   | $ | 15,635 |   |   | $ | - |   |   | $ | 4,587,079 |   |
|                                                                                                       |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State and municipal securities                                                                             |   |                        | 20,868,771  |   |   |   | 191,429 |   |   |   | (323,988 | ) |   |   | 20,736,212 |   |
|                                                                                                       |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:                                                                                |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage guaranteed by GNMA                                                                    |   |                        | 18,747,272  |   |   |   | 130,609 |   |   |   | (24,856 | ) |   |   | 18,853,025 |   |
|                                                                                                       |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies |   |                        | 64,575,092  |   |   |   | 135,479 |   |   |   | (636,453 | ) |   |   | 64,074,118 |   |
|                                                                                                       |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                       |   | $                           | 108,762,579 |   |   | $ | 473,152 |   |   | $ | (985,297 | ) |   | $ | 108,250,434 |   |
|                                                                                                       |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt securities held to maturity:                                                                          |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:                                                                                |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage guaranteed by GNMA                                                                    |   | $                           | 95,702      |   |   | $ | 2,686 |   |   | $ | - |   |   | $ | 98,388 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 4. | Securities (continued) |
|---------|------------------------|

|                                                                                                            |   | December 31, 2009 |        |
|-----------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                            |   |                        |        |   | Gross |   |   | Gross |   |   |   |   |
|                                                                                                            |   | Amortized                   |        |   | Unrealized |   |   | Unrealized |   |   | Fair |   |
|                                                                                                            |   | Cost                        |        |   | Gains |   |   | Loss |   |   | Value |   |
|                                                                                                            |   |                        |        |   |   |   |   |   |   |   |   |   |
| Debt securities available for sale:                                                                             |   |                        |        |   |   |   |   |   |   |   |   |   |
| U.S. Government agencies                                                                                        |   | $                           | 4,772,461   |   |   | $ | 4,703 |   |   | $ | (3,144 | ) |   | $ | 4,774,020 |   |
|                                                                                                            |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State and municipal securities                                                                                  |   |                        | 16,660,518  |   |   |   | 268,343 |   |   |   | (173,221 | ) |   |   | 16,755,640 |   |
|                                                                                                            |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:                                                                                     |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage guaranteed by GNMA                                                                         |   |                        | 53,207,225  |   |   |   | 217,897 |   |   |   | (698,355 | ) |   |   | 52,726,767 |   |
|                                                                                                            |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies |   |                        | 49,956,882  |   |   |   | 77,852 |   |   |   | (74,286 | ) |   |   | 49,960,448 |   |
|                                                                                                            |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                                                                                                           |   |                        | 203,961     |   |   |   | - |   |   |   | (5,518 | ) |   |   | 198,443 |   |
|                                                                                                            |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   | $                           | 124,801,047 |   |   | $ | 568,795 |   |   | $ | (954,524 | ) |   | $ | 124,415,318 |   |
|                                                                                                            |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt securities held to maturity:                                                                               |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:                                                                                     |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage guaranteed by GNMA                                                                         |   | $                           | 135,246     |   |   | $ | 1,193 |   |   | $ | (377 | ) |   | $ | 136,062 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 4. | Securities (continued) |
|---------|------------------------|

|                             |   | Securities Available for Sale |        |   | Securities Held to Maturity |   |
|----------------------------------|--------|----------------------------------------------|-------------|--------|--------------------------------------------|--------|
|                             |   | Amortized                                    |        |   | Fair                                       |   |   | Amortized |   |   | Fair |   |
|                             |   | Cost                                         |        |   | Value                                      |   |   | Cost |   |   | Value |   |
|                             |   |                                         |        |   |                                       |   |   |   |   |   |   |   |
| Due in one year or less          |   | $                                            | -           |   |                                       | $      | - |   |   | $ | - |   |   | $ | - |   |
| Due from one year to five years  |   |                                         | 599,399     |   |                                       |   | 609,291 |   |   |   | - |   |   |   | - |   |
| Due from five years to ten years |   |                                         | 4,455,540   |   |                                       |   | 4,569,681 |   |   |   | - |   |   |   | - |   |
| Due after ten years              |   |                                         | 20,385,276  |   |                                       |   | 20,144,319 |   |   |   | - |   |   |   | - |   |
|                             |   |                                         |        |   |                                       |   |   |   |   |   |   |   |   |   |   |   |
|                             |   |                                         | 25,440,215  |   |                                       |   | 25,323,291 |   |   |   | - |   |   |   | - |   |
|                             |   |                                         |        |   |                                       |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities       |   |                                         | 83,322,364  |   |                                       |   | 82,927,143 |   |   |   | 95,702 |   |   |   | 98,388 |   |
|                             |   |                                         |        |   |                                       |   |   |   |   |   |   |   |   |   |   |   |
|                             |   | $                                            | 108,762,579 |   |                                       | $      | 108,250,434 |   |   | $ | 95,702 |   |   | $ | 98,388 |   |

|                                                                                                       |   | As of December 31, 2010 |       |
|------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                                                       |   | Less than 12 Months     |       |   | 12 Months or Greater |   |   | Total |   |
|                                                                                                       |   |                    |       |   | Gross |   |   |   |   |   | Gross |   |   |   |   |   | Gross |   |
|                                                                                                       |   | Fair                    |       |   | Unrealized |   |   | Fair |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |
|                                                                                                       |   | Value                   |       |   | Losses |   |   | Value |   |   | Losses |   |   | Value |   |   | Losses |   |
|                                                                                                       |   |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt securities available for sale:                                                                        |   |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State and municipal securities                                                                             |   | $                       | 6,110,458  |   |   | $ | (154,802 | ) |   | $ | 6,440,892 |   |   | $ | (169,186 | ) |   | $ | 12,551,350 |   |   | $ | (323,988 | ) |
|                                                                                                       |   |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:                                                                                |   |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage guaranteed by GNMA                                                                    |   |                    | 5,647,347  |   |   |   | (24,856 | ) |   |   | - |   |   |   | - |   |   |   | 5,647,347 |   |   |   | (24,856 | ) |
|                                                                                                       |   |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies |   |                    | 34,694,782 |   |   |   | (636,453 | ) |   |   | - |   |   |   | - |   |   |   | 34,694,782 |   |   |   | (636,453 | ) |
|                                                                                                       |   |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                       |   | $                       | 46,452,587 |   |   | $ | (816,111 | ) |   | $ | 6,440,892 |   |   | $ | (169,186 | ) |   | $ | 52,893,479 |   |   | $ | (985,297 | ) |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 4. | Securities (continued) |
|---------|------------------------|

|                                                                                                       |   | As of December 31, 2009 |       |
|------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|------------|
|                                                                                                       |   | Less than 12 Months          |       |   | 12 Months or Greater |   |   | Total |   |
|                                                                                                       |   |                                        |       |   | Gross |   |   |   |   |   | Gross |   |   |   |   |   | Gross |   |
|                                                                                                       |   | Fair                                        |       |   | Unrealized |   |   | Fair |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |
|                                                                                                       |   | Value                                       |       |   | Losses |   |   | Value |   |   | Losses |   |   | Value |   |   | Losses |   |
|                                                                                                       |   |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt securities available for sale:                                                                        |   |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Governmental agencies                                                                                 |   | $                                           | 971,400    |   |   | $ | (3,144 | ) |   | $ | - |   |   | $ | - |   |   | $ | 971,400 |   |   | $ | (3,144 | ) |
|                                                                                                       |   |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State and municipal securities                                                                             |   |                                        | 8,222,297  |   |   |   | (159,907 | ) |   |   | 734,848 |   |   |   | (13,314 | ) |   |   | 8,957,145 |   |   |   | (173,221 | ) |
|                                                                                                       |   |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:                                                                                |   |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage guaranteed by GNMA                                                                    |   |                                        | 40,492,722 |   |   |   | (698,343 | ) |   |   | 5,516 |   |   |   | (12 | ) |   |   | 40,498,238 |   |   |   | (698,355 | ) |
|                                                                                                       |   |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies |   |                                        | 22,538,122 |   |   |   | (74,286 | ) |   |   | - |   |   |   | - |   |   |   | 22,538,122 |   |   |   | (74,286 | ) |
|                                                                                                       |   |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                                                                                                      |   |                                        | -          |   |   |   | - |   |   |   | 198,443 |   |   |   | (5,518 | ) |   |   | 198,443 |   |   |   | (5,518 | ) |
|                                                                                                       |   |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                       |   | $                                           | 72,224,541 |   |   | $ | (935,680 | ) |   | $ | 938,807 |   |   | $ | (18,844 | ) |   | $ | 73,163,348 |   |   | $ | (954,524 | ) |
|                                                                                                       |   |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt securities held to maturity:                                                                          |   |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:                                                                                |   |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage guaranteed by GNMA                                                                    |   | $                                           | 48,767     |   |   | $ | (70 | ) |   | $ | 25,594 |   |   | $ | (307 | ) |   | $ | 74,361 |   |   | $ | (377 | ) |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 4. | Securities (continued) |
|---------|------------------------|

| Note 5. | Loans and Allowance for Loan Losses |
|---------|-------------------------------------|

|                              |   | 2010   |    |   | 2009   |   |
|-----------------------------------|--------|--------|---------|--------|--------|--------|
| Commercial real estate-mortgage:  |   |   |    |   |   |   |
| Owner-occupied                    |   | $      | 64,971  |   |   | $      | 77,350 |   |
| All other                         |   |   | 64,060  |   |   |   | 75,960 |   |
| Consumer real estate-mortgage     |   |   | 71,878  |   |   |   | 70,976 |   |
| Construction and land development |   |   | 29,848  |   |   |   | 47,651 |   |
| Commercial and industrial         |   |   | 51,160  |   |   |   | 60,560 |   |
| Consumer and other                |   |   | 3,330   |   |   |   | 4,195 |   |
| Total loans                       |   |   | 285,247 |   |   |   | 336,692 |   |
| Less: Allowance for loan losses   |   |   | (9,132  | )      |   |   | (5,905 | ) |
|                              |   |   |    |   |   |   |   |   |
| Loans, net                        |   | $      | 276,115 |   |   | $      | 330,787 |   |

|                                                  |   | 2010   |       |   | 2009   |   |        | 2008   |   |
|-------------------------------------------------------|--------|--------|------------|--------|--------|--------|-------------|--------|--------|
|                                                  |   |   |       |   |   |   |        |   |   |
| An analysis of the allowance for loan losses follows: |   |   |       |   |   |   |        |   |   |
|                                                  |   |   |       |   |   |   |        |   |   |
| Balance, beginning of year                            |   | $      | 5,905,054  |   |   | $      | 9,618,265   |   |   | $ | 13,710,109 |   |
|                                                  |   |   |       |   |   |   |        |   |   |   |   |   |
| Provision charged to operations                       |   |   | 7,291,000  |   |   |   | 14,898,898  |   |   |   | 3,498,000 |   |
| Charge-offs                                           |   |   | (4,688,054 | )      |   |   | (19,095,793 | )      |   |   | (7,978,767 | ) |
| Recoveries                                            |   |   | 624,171    |   |   |   | 483,684     |   |   |   | 388,923 |   |
|                                                  |   |   |       |   |   |   |        |   |   |   |   |   |
| Balance, end of year                                  |   | $      | 9,132,171  |   |   | $      | 5,905,054   |   |   | $ | 9,618,265 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 5. | Loans and Allowance for Loan Losses (continued) |
|---------|-------------------------------------------------|

|             |   | Commercial        |    |   | Consumer          |   |   | Construction  |   |   | Commercial |   |   |           |   |   |   |   |
|------------------|--------|-------------------|---------|--------|-------------------|--------|--------|---------------|--------|--------|------------|--------|--------|----------------|--------|--------|--------|--------|
|             |   | Real Estate- |    |   | Real Estate- |   |   | and Land |   |   | and        |   |   | Consumer       |   |   |   |   |
|             |   | Mortgage          |    |   | Mortgage          |   |   | Development   |   |   | Industrial |   |   | and Other |   |   | Total  |   |
| Performing loans |   | $                 | 119,084 |   |              | $      | 61,455 |          |   | $      | 27,774     |   |   | $              | 50,492 |   |   | $      | 3,279 |   |   | $ | 262,084 |   |
| Impaired loans   |   |              | 9,947   |   |              |   | 10,423 |          |   |   | 2,074      |   |   |           | 668    |   |   |   | 51 |   |   |   | 23,163 |   |
| Total            |   | $                 | 129,031 |   |              | $      | 71,878 |          |   | $      | 29,848     |   |   | $              | 51,160 |   |   | $      | 3,330 |   |   | $ | 285,247 |   |

|                  |   | Commercial        |   |   | Consumer          |   |   | Construction  |   |   | Commercial |   |   |           |   |   |   |   |
|-----------------------|--------|-------------------|--------|--------|-------------------|--------|--------|---------------|--------|--------|------------|--------|--------|----------------|--------|--------|--------|--------|
|                  |   | Real Estate- |   |   | Real Estate- |   |   | and Land |   |   | and        |   |   | Consumer       |   |   |   |   |
|                  |   | Mortgage          |   |   | Mortgage          |   |   | Development   |   |   | Industrial |   |   | and Other |   |   | Total  |   |
| Allowance related to: |   |              |   |   |              |   |   |          |   |   |       |   |   |           |   |   |   |   |
| Performing loans      |   | $                 | 887    |   |              | $      | 691    |          |   | $      | 3,178      |   |   | $              | 588    |   |   | $      | 48 |   |   | $ | 5,392 |   |
| Impaired loans        |   |              | 906    |   |              |   | 2,420  |          |   |   | 60         |   |   |           | 337    |   |   |   | 17 |   |   |   | 3,740 |   |
| Total                 |   | $                 | 1,793  |   |              | $      | 3,111  |          |   | $      | 3,238      |   |   | $              | 925    |   |   | $      | 65 |   |   | $ | 9,132 |   |

|                            |   | Commercial        |   |   | Consumer          |   |   | Construction  |   |   | Commercial |   |   |           |   |   |   |   |
|---------------------------------|--------|-------------------|--------|--------|-------------------|--------|--------|---------------|--------|--------|------------|--------|--------|----------------|--------|--------|--------|--------|
|                            |   | Real Estate- |   |   | Real Estate- |   |   | and Land |   |   | and        |   |   | Consumer       |   |   |   |   |
|                            |   | Mortgage          |   |   | Mortgage          |   |   | Development   |   |   | Industrial |   |   | and Other |   |   | Total  |   |
| Balance, beginning of year      |   | $                 | 1,189  |   |              | $      | 719    |          |   | $      | 3,179      |   |   | $              | 786    |   |   | $      | 32 |   |   | $ | 5,905 |   |
| Charge-offs                     |   |              | (2,309 | )      |              |   | (562   | )             |   |   | (1,260     | )      |   |           | (443   | )      |   |   | (114 | ) |   |   | (4,688 | ) |
| Recoveries                      |   |              | 213    |   |              |   | 54     |          |   |   | 19         |   |   |           | 282    |   |   |   | 56 |   |   |   | 624 |   |
| Provision charged to operations |   |              | 2,700  |   |              |   | 2,900  |          |   |   | 1,300      |   |   |           | 300    |   |   |   | 91 |   |   |   | 7,291 |   |
| Balance, end of year            |   | $                 | 1,793  |   |              | $      | 3,111  |          |   | $      | 3,238      |   |   | $              | 925    |   |   | $      | 65 |   |   | $ | 9,132 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 5. | Loans and Allowance for Loan Losses (continued) |
|---------|-------------------------------------------------|

|                 |   | Commercial        |    |   | Consumer          |   |   | Construction  |   |   | Commercial |   |   |           |   |   |   |   |
|----------------------|--------|-------------------|---------|--------|-------------------|--------|--------|---------------|--------|--------|------------|--------|--------|----------------|--------|--------|--------|--------|
|                 |   | Real Estate- |    |   | Real Estate- |   |   | and Land |   |   | and        |   |   | Consumer       |   |   |   |   |
|                 |   | Mortgage          |    |   | Mortgage          |   |   | Development   |   |   | Industrial |   |   | and Other |   |   | Total  |   |
| Pass                 |   | $                 | 97,692  |   |              | $      | 49,974 |          |   | $      | 24,401     |   |   | $              | 41,963 |   |   | $      | 3,215 |   |   | $ | 217,245 |   |
| Special mention      |   |              | 19,289  |   |              |   | 3,786  |          |   |   | 2,121      |   |   |           | 7,405  |   |   |   | 54 |   |   |   | 32,655 |   |
| Substandard          |   |              | 2,103   |   |              |   | 7,695  |          |   |   | 1,252      |   |   |           | 1,124  |   |   |   | 10 |   |   |   | 12,184 |   |
| Substandard-impaired |   |              | 9,947   |   |              |   | 10,423 |          |   |   | 2,074      |   |   |           | 668    |   |   |   | 51 |   |   |   | 23,163 |   |
|                 |   | $                 | 129,031 |   |              | $      | 71,878 |          |   | $      | 29,848     |   |   | $              | 51,160 |   |   | $      | 3,330 |   |   | $ | 285,247 |   |

|                                          |   | Unpaid    |   |   |      |   |   |       |   |
|-----------------------------------------------|--------|-----------|--------|--------|-----------|--------|--------|------------|--------|
|                                          |   | Principal |   |   | Related   |   |   | Average    |   |
|                                          |   | Balance   |   |   | Allowance |   |   | Investment |   |
| Impaired loans without a valuation allowance: |   |      |   |   |      |   |   |       |   |
| Commercial real estate – mortgage       |   | $         | 1,663  |   |      | $      | -      |       |   | $ | 2,747 |   |
| Consumer real estate – mortgage         |   |      | 998    |   |      |   | -      |       |   |   | 776 |   |
| Construction and land development             |   |      | 1,793  |   |      |   | -      |       |   |   | 1,526 |   |
| Commercial and industrial                     |   |      | 70     |   |      |   | -      |       |   |   | 782 |   |
| Consumer and other                            |   |      | 2      |   |      |   | -      |       |   |   | 1 |   |
| Total                                         |   | $         | 4,526  |   |      | $      | -      |       |   | $ | 5,832 |   |
|                                          |   |      |   |   |      |   |   |       |   |   |   |   |
| Impaired loans with a valuation allowance:    |   |      |   |   |      |   |   |       |   |   |   |   |
| Commercial real estate – mortgage       |   | $         | 8,284  |   |      | $      | 906    |       |   | $ | 8,494 |   |
| Consumer real estate – mortgage         |   |      | 9,425  |   |      |   | 2,420  |       |   |   | 8,968 |   |
| Construction and land development             |   |      | 281    |   |      |   | 60     |       |   |   | 2,674 |   |
| Commercial and industrial                     |   |      | 598    |   |      |   | 337    |       |   |   | 1,060 |   |
| Consumer and other                            |   |      | 49     |   |      |   | 17     |       |   |   | 178 |   |
| Total                                         |   | $         | 18,637 |   |      | $      | 3,740  |       |   | $ | 21,374 |   |
|                                          |   |      |   |   |      |   |   |       |   |   |   |   |
| Total impaired loans                          |   | $         | 23,163 |   |      | $      | 3,740  |       |   | $ | 27,206 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 5. | Loans and Allowance for Loan Losses (continued) |
|---------|-------------------------------------------------|

|                                          |   | December 31, |   |
|-----------------------------------------------|--------|-------------------|--------|
|                                          |   | 2010              |   |   | 2009 |   |
|                                          |   |              |   |   |   |   |
| Impaired loans without a valuation allowance  |   | $                 | 4,526  |   |   | $ | 7,138 |   |
| Impaired loans with a valuation allowance     |   |              | 18,637 |   |   |   | 23,957 |   |
|                                          |   |              |   |   |   |   |   |   |
| Total impaired loans                          |   | $                 | 23,163 |   |   | $ | 31,095 |   |
|                                          |   |              |   |   |   |   |   |   |
| Valuation allowance related to impaired loans |   | $                 | 3,740  |   |   | $ | 2,145 |   |

|                                                         |   | Years Ended December 31, |   |
|--------------------------------------------------------------|--------|--------------------------|--------|
|                                                         |   | 2010                     |   |   | 2009 |   |   | 2008 |   |
|                                                         |   |                     |   |   |   |   |   |   |   |
| Average investment in impaired loans                         |   | $                        | 27,206 |   |   | $ | 28,555 |   |   | $ | 10,891 |   |
|                                                         |   |                     |   |   |   |   |   |   |   |   |   |   |
| Interest income recognized on impaired loans                 |   | $                        | 943    |   |   | $ | 1,601 |   |   | $ | 966 |   |
|                                                         |   |                     |   |   |   |   |   |   |   |   |   |   |
| Interest income recognized on a cash basis on impaired loans |   | $                        | -      |   |   | $ | - |   |   | $ | - |   |

|                              |   | 30-89 Days        |   |   | Past Due 90  |   |   |       |   |   |          |   |   |    |   |   |   |   |
|-----------------------------------|--------|------------------------|--------|--------|------------------------|--------|--------|------------|--------|--------|---------------|--------|--------|---------|--------|--------|--------|--------|
|                              |   | Past Due and |   |   | Days or More |   |   |       |   |   | Total         |   |   | Current |   |   | Total  |   |
|                              |   | Accruing               |   |   | and Accruing      |   |   | Nonaccrual |   |   | Past Due |   |   | Loans   |   |   | Loans  |   |
| Commercial real estate-mortgage:  |   |                   |   |   |                   |   |   |       |   |   |          |   |   |    |   |   |   |   |
| Owner-occupied                    |   | $                      | 985    |   |                   | $      | -      |       |   | $      | 618           |   |   | $       | 1,603  |   |   | $      | 63,368 |   |   | $ | 64,971 |   |
| All other                         |   |                   | 203    |   |                   |   | -      |       |   |   | 7,808         |   |   |    | 8,011  |   |   |   | 56,049 |   |   |   | 64,060 |   |
| Consumer real estate-mortgage     |   |                   | 631    |   |                   |   | -      |       |   |   | 5,114         |   |   |    | 5,745  |   |   |   | 66,133 |   |   |   | 71,878 |   |
| Construction and land development |   |                   | 317    |   |                   |   | -      |       |   |   | -             |   |   |    | 317    |   |   |   | 29,531 |   |   |   | 29,848 |   |
| Commercial and industrial         |   |                   | 116    |   |                   |   | -      |       |   |   | 75            |   |   |    | 191    |   |   |   | 50,969 |   |   |   | 51,160 |   |
| Consumer and other                |   |                   | 54     |   |                   |   | -      |       |   |   | 18            |   |   |    | 72     |   |   |   | 3,258 |   |   |   | 3,330 |   |
| Total                             |   | $                      | 2,306  |   |                   | $      | -      |       |   | $      | 13,633        |   |   | $       | 15,939 |   |   | $      | 269,308 |   |   | $ | 285,247 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 5. | Loans and Allowance for Loan Losses (continued) |
|---------|-------------------------------------------------|

| Loans past due over 90 days still on accrual |   | $      | -      |   |
|----------------------------------------------|--------|--------|--------|--------|
| Loans on nonaccrual                          |   |   | 7,360  |   |
|                                         |   |   |   |   |
| Total past due loans                         |   | $      | 7,360  |   |

|              |   | 2010   |    |   | 2009   |   |
|-------------------|--------|--------|---------|--------|--------|--------|
|              |   |   |    |   |   |   |
| Beginning balance |   | $      | 190,041 |   |   | $      | 189,673 |   |
|              |   |   |    |   |   |   |   |   |
| New loans         |   |   | 540,444 |   |   |   | 65,196 |   |
| Repayments        |   |   | (64,149 | )      |   |   | (64,828 | ) |
|              |   |   |    |   |   |   |   |   |
| Ending balance    |   | $      | 666,336 |   |   | $      | 190,041 |   |

| Note 6. | Bank Premises and Equipment |
|---------|-----------------------------|

|                              |   | 2010   |       |   | 2009   |   |
|-----------------------------------|--------|--------|------------|--------|--------|--------|
|                              |   |   |       |   |   |   |
| Land                              |   | $      | 3,711,003  |   |   | $      | 3,315,050 |   |
| Buildings and improvements        |   |   | 4,806,209  |   |   |   | 4,578,792 |   |
| Furniture, fixtures and equipment |   |   | 3,653,710  |   |   |   | 4,414,075 |   |
|                              |   |   |       |   |   |   |   |   |
|                              |   |   | 12,170,922 |   |   |   | 12,307,917 |   |
| Accumulated depreciation          |   |   | (4,123,552 | )      |   |   | (4,209,858 | ) |
|                              |   | $      | 8,047,370  |   |   | $      | 8,098,059 |   |

| 2011       |   | $      | 367,176   |   |
|------------|--------|--------|-----------|--------|
| 2012       |   |   | 345,317   |   |
| 2013       |   |   | 342,083   |   |
| 2014       |   |   | 342,083   |   |
| 2015       |   |   | 230,202   |   |
| Thereafter |   |   | 128,605   |   |
|       |   |   |      |   |
| Total      |   | $      | 1,755,466 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 7. | Goodwill |
|---------|----------|

|                       |   | 2010   |      |   | 2009   |   |
|----------------------------|--------|--------|-----------|--------|--------|--------|
| Balance, beginning of year |   | $      | 2,541,476 |   |   | $      | 2,541,476 |   |
|                       |   |   |      |   |   |   |   |   |
| Goodwill acquired          |   |   | -         |   |   |   | - |   |
| Goodwill impairment        |   |   | 2,541,476 |   |   |   | - |   |
|                       |   |   |      |   |   |   |   |   |
| Balance, end of year       |   | $      | -         |   |   | $      | 2,541,476 |   |

| Note 8. | Time and Related-Party Deposits |
|---------|---------------------------------|

| 2011       |   | $      | 143,613 |   |
|------------|--------|--------|---------|--------|
| 2012       |   |   | 85,965  |   |
| 2013       |   |   | 9,379   |   |
| 2014       |   |   | 2,897   |   |
| 2015       |   |   | 5,286   |   |
| Thereafter |   |   | 451     |   |
|       |   |   |    |   |
| Total      |   | $      | 247,591 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 9. | Income Taxes |
|---------|--------------|

|                                       |   | 2010   |       |   | 2009   |   |       | 2008   |   |
|--------------------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|--------|
|                                       |   |   |       |   |   |   |       |   |   |
| Current tax expense (benefit)              |   | $      | (522,382   | )      |   | $      | (6,637,188 | )      |   | $ | (2,005,644 | ) |
| Deferred tax expense (benefit) related to: |   |   |       |   |   |   |       |   |   |   |   |   |
| Allowance for loan losses                  |   |   | (1,030,423 | )      |   |   | 1,241,231  |   |   |   | 3,158,858 |   |
| Other                                      |   |   | 17,508     |   |   |   | 59,917     |   |   |   | 143,328 |   |
|                                       |   |   |       |   |   |   |       |   |   |   |   |   |
| Income tax expense (benefit)               |   | $      | (1,535,297 | )      |   | $      | (5,336,040 | )      |   | $ | 1,296,542 |   |

|                                              |   | 2010   |       |   | 2009   |   |       | 2008   |   |
|---------------------------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|--------|
|                                              |   |   |       |   |   |   |       |   |   |
| Expected tax at statutory rates                   |   | $      | (2,122,558 | )      |   | $      | (4,594,991 | )      |   | $ | 1,294,844 |   |
| (Decrease) increase resulting from tax effect of: |   |   |       |   |   |   |       |   |   |   |   |   |
| State income taxes, net of federal tax benefit    |   |   | (267,817   | )      |   |   | (579,780   | )      |   |   | 163,379 |   |
| New market tax credits                            |   |   | (112,500   | )      |   |   | (150,000   | )      |   |   | (150,000 | ) |
| Impairment of goodwill                            |   |   | 973,131    |   |   |   | -          |   |   |   | - |   |
| Other                                             |   |   | (5,553     | )      |   |   | (11,269    | )      |   |   | (11,681 | ) |
|                                              |   |   |       |   |   |   |       |   |   |   |   |   |
| Income tax expense (benefit)                      |   | $      | (1,535,297 | )      |   | $      | (5,336,040 | )      |   | $ | 1,296,542 |   |

|                                                 |   | 2010   |      |   | 2009   |   |
|------------------------------------------------------|--------|--------|-----------|--------|--------|--------|
| Deferred tax assets:                                 |   |   |      |   |   |   |
| Deferred compensation                                |   | $      | 115,296   |   |   | $      | 118,724 |   |
| Deferred loan fees                                   |   |   | 23,364    |   |   |   | 29,866 |   |
| Allowance for loan losses                            |   |   | 1,725,125 |   |   |   | 694,702 |   |
| Net unrealized loss on securities available for sale |   |   | 183,311   |   |   |   | 135,272 |   |
|                                                 |   |   |      |   |   |   |   |   |
|                                                 |   |   | 2,047,096 |   |   |   | 978,564 |   |
|                                                 |   |   |      |   |   |   |   |   |
| Deferred tax liabilities:                            |   |   |      |   |   |   |   |   |
| Depreciation                                         |   |   | 130,145   |   |   |   | 121,420 |   |
| Life insurance                                       |   |   | 204,386   |   |   |   | 199,077 |   |
| Other                                                |   |   | 4,352     |   |   |   | 10,808 |   |
|                                                 |   |   |      |   |   |   |   |   |
|                                                 |   |   | 338,883   |   |   |   | 331,305 |   |
|                                                 |   |   |      |   |   |   |   |   |
| Net deferred tax asset                               |   | $      | 1,708,213 |   |   | $      | 647,259 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 10. | Federal Home Loan Bank Advances and Other Borrowings |
|----------|------------------------------------------------------|

|                                                                                                                                                                                                |   | 2010   |      |   | 2009   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|--------|
|                                                                                                                                                                                                |   |   |      |   |   |   |
| 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 |   |
|                                                                                                                                                                                                |   |   |      |   |   |   |   |   |
| 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 June 26, 2008, requiring monthly interest payments, fixed at 3.64%, until maturity, principal due in July 2010                                                              |   |   | -         |   |   |   | 5,000,000 |   |
|                                                                                                                                                                                                |   |   |      |   |   |   |   |   |
| Long-term advance dated July 2, 2008, requiring monthly interest payments, fixed at 3.85%, until maturity, principal due in July 2011                                                               |   |   | 5,000,000 |   |   |   | 5,000,000 |   |
|                                                                                                                                                                                                |   |   |      |   |   |   |   |   |
| Long-term advance dated January 22, 2008, requiring monthly interest payments, fixed at 3.59%, until maturity, principal due in January 2013                                                        |   |   | 5,000,000 |   |   |   | 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 |   |   |   | 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 |   |   |   | 5,000,000 |   |
|                                                                                                                                                                                                |   |   |      |   |   |   |   |   |
| Long-term advance dated August 1, 2007, requiring monthly interest payments, fixed at 4.50%, with a put option exercisable in July 2008 and then quarterly thereafter, principal due in August 2013 |   |   | 5,000,000 |   |   |   | 5,000,000 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 10. | Federal Home Loan Bank Advances and Other Borrowings (continued) |
|----------|------------------------------------------------------------------|

|                                                                                                                                                                                                      |   | 2010   |       |   | 2009   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------|--------|
|                                                                                                                                                                                                      |   |   |       |   |   |   |
| Long-term advance dated August 13, 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  |   |   | $      | 5,000,000 |   |
|                                                                                                                                                                                                      |   |   |       |   |   |   |   |   |
| Long-term advance dated January 7, 2008, requiring monthly interest payments, fixed at 3.52% with a put option exercisable in January 2011 and then quarterly thereafter, principal due in January 2015   |   |   | 5,000,000  |   |   |   | 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  |   |   |   | 5,000,000 |   |
|                                                                                                                                                                                                      |   |   |       |   |   |   |   |   |
|                                                                                                                                                                                                      |   | $      | 50,000,000 |   |   | $      | 67,000,000 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 10. | Federal Home Loan Bank Advances and Other Borrowings (continued) |
|----------|------------------------------------------------------------------|

| 2011       |   | $      | 11,670,000 |   |
|------------|--------|--------|------------|--------|
| 2012       |   |   | 5,870,000  |   |
| 2013       |   |   | 10,870,000 |   |
| 2014       |   |   | 6,305,000  |   |
| 2015       |   |   | 10,000,000 |   |
| Thereafter |   |   | 10,000,000 |   |
|       |   |   |       |   |
| Total      |   | $      | 54,715,000 |   |

| Note 11. | Employee Benefit Plans |
|----------|------------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 12. | Financial Instruments With Off-Balance-Sheet Risk |
|----------|---------------------------------------------------|

| Note 13. | Fair Value Disclosures |
|----------|------------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 13. | Fair Value Disclosures (continued) |
|----------|------------------------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 13. | Fair Value Disclosures (continued) |
|----------|------------------------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 13. | Fair Value Disclosures (continued) |
|----------|------------------------------------|

|                                                                                                       |   |                    |        |   | Quoted Prices in |   |   | Significant    |   |   | Significant    |   |
|------------------------------------------------------------------------------------------------------------|--------|-------------------------|-------------|--------|----------------------------|--------|--------|----------------|--------|--------|----------------|--------|
|                                                                                                       |   |                    |        |   | Active Markets        |   |   | Other          |   |   | Other          |   |
|                                                                                                       |   | Balance as of |        |   | for Identical         |   |   | Observable     |   |   | Unobservable   |   |
|                                                                                                       |   | December 31,       |        |   | Assets                     |   |   | Inputs         |   |   | Inputs         |   |
|                                                                                                       |   | 2010                    |        |   | (Level 1)             |   |   | (Level 2) |   |   | (Level 3) |   |
|                                                                                                       |   |                    |        |   |                       |   |   |           |   |   |           |   |
| Debt securities available for sale:                                                                        |   |                    |        |   |                       |   |   |           |   |   |           |   |
|                                                                                                       |   |                    |        |   |                       |   |   |           |   |   |           |   |
| U.S. Government agencies                                                                                   |   | $                       | 4,587,079   |   |                       | $      | -      |           |   | $      | 4,587,079      |   |   | $ | - |   |
| State and municipal securities                                                                             |   |                    | 20,736,212  |   |                       |   | -      |           |   |   | 20,736,212     |   |   |   | - |   |
| Mortgage-backed securities:                                                                                |   |                    |        |   |                       |   |   |           |   |   |           |   |   |   |   |   |
| Residential mortgage guaranteed by GNMA                                                                    |   |                    | 18,853,025  |   |                       |   | -      |           |   |   | 18,853,025     |   |   |   | - |   |
| Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies |   |                    | 64,074,118  |   |                       |   | -      |           |   |   | 64,074,118     |   |   |   | - |   |
|                                                                                                       |   |                    |        |   |                       |   |   |           |   |   |           |   |   |   |   |   |
| Total securities available for sale                                                                        |   | $                       | 108,250,434 |   |                       | $      | -      |           |   | $      | 108,250,434    |   |   | $ | - |   |
|                                                                                                       |   |                    |        |   |                       |   |   |           |   |   |           |   |   |   |   |   |
| Cash surrender value of life insurance                                                                     |   | $                       | 1,113,824   |   |                       | $      | -      |           |   | $      | 1,113,824      |   |   | $ | - |   |

|                                                                                                       |   |                    |        |   | Quoted Prices in |   |   | Significant    |   |   | Significant    |   |
|------------------------------------------------------------------------------------------------------------|--------|-------------------------|-------------|--------|----------------------------|--------|--------|----------------|--------|--------|----------------|--------|
|                                                                                                       |   |                    |        |   | Active Markets        |   |   | Other          |   |   | Other          |   |
|                                                                                                       |   | Balance as of |        |   | for Identical         |   |   | Observable     |   |   | Unobservable   |   |
|                                                                                                       |   | December 31,       |        |   | Assets                     |   |   | Inputs         |   |   | Inputs         |   |
|                                                                                                       |   | 2009                    |        |   | (Level 1)             |   |   | (Level 2) |   |   | (Level 3) |   |
|                                                                                                       |   |                    |        |   |                       |   |   |           |   |   |           |   |
| Debt securities available for sale:                                                                        |   |                    |        |   |                       |   |   |           |   |   |           |   |
|                                                                                                       |   |                    |        |   |                       |   |   |           |   |   |           |   |
| U.S. Government agencies                                                                                   |   | $                       | 4,774,020   |   |                       | $      | -      |           |   | $      | 4,774,020      |   |   | $ | - |   |
| State and municipal securities                                                                             |   |                    | 16,755,640  |   |                       |   | -      |           |   |   | 16,755,640     |   |   |   | - |   |
| Mortgage-backed securities:                                                                                |   |                    |        |   |                       |   |   |           |   |   |           |   |   |   |   |   |
| Residential mortgage guaranteed by GNMA                                                                    |   |                    | 52,726,767  |   |                       |   | -      |           |   |   | 52,726,767     |   |   |   | - |   |
| Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies |   |                    | 49,960,448  |   |                       |   | -      |           |   |   | 49,960,448     |   |   |   | - |   |
| Other                                                                                                      |   |                    | 198,443     |   |                       |   | -      |           |   |   | 198,443        |   |   |   | - |   |
|                                                                                                       |   |                    |        |   |                       |   |   |           |   |   |           |   |   |   |   |   |
| Total securities available for sale                                                                        |   | $                       | 124,415,318 |   |                       | $      | -      |           |   | $      | 124,415,318    |   |   | $ | - |   |
|                                                                                                       |   |                    |        |   |                       |   |   |           |   |   |           |   |   |   |   |   |
| Cash surrender value of life insurance                                                                     |   | $                       | 1,100,874   |   |                       | $      | -      |           |   | $      | 1,100,874      |   |   | $ | - |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 13. | Fair Value Disclosures (continued) |
|----------|------------------------------------|

|              |   |                    |       |   | Quoted Prices in |   |   | Significant    |   |   | Significant    |   |
|-------------------|--------|-------------------------|------------|--------|----------------------------|--------|--------|----------------|--------|--------|----------------|--------|
|              |   |                    |       |   | Active Markets        |   |   | Other          |   |   | Other          |   |
|              |   | Balance as of |       |   | for Identical         |   |   | Observable     |   |   | Unobservable   |   |
|              |   | December 31,       |       |   | Assets                     |   |   | Inputs         |   |   | Inputs         |   |
|              |   | 2010                    |       |   | (Level 1)             |   |   | (Level 2) |   |   | (Level 3) |   |
|              |   |                    |       |   |                       |   |   |           |   |   |           |   |
| Impaired loans    |   | $                       | 14,897,633 |   |                       | $      | -      |           |   | $      | 14,897,633     |   |   | $ | - |   |
| Foreclosed assets |   |                    | 12,808,838 |   |                       |   | -      |           |   |   | 12,808,838     |   |   |   | - |   |

|              |   |                    |       |   | Quoted Prices in |   |   | Significant    |   |   | Significant    |   |
|-------------------|--------|-------------------------|------------|--------|----------------------------|--------|--------|----------------|--------|--------|----------------|--------|
|              |   |                    |       |   | Active Markets        |   |   | Other          |   |   | Other          |   |
|              |   | Balance as of |       |   | for Identical         |   |   | Observable     |   |   | Unobservable   |   |
|              |   | December 31,       |       |   | Assets                     |   |   | Inputs         |   |   | Inputs         |   |
|              |   | 2009                    |       |   | (Level 1)             |   |   | (Level 2) |   |   | (Level 3) |   |
| Impaired loans    |   | $                       | 21,811,211 |   |                       | $      | -      |           |   | $      | 21,811,211     |   |   | $ | - |   |
| Foreclosed assets |   |                    | 10,327,297 |   |                       |   | -      |           |   |   | 10,327,297     |   |   |   | - |   |

|                                                                       |   | 2010     |    |   | 2009            |   |
|----------------------------------------------------------------------------|--------|----------|---------|--------|-----------------|--------|
|                                                                       |   | Carrying |    |   | Estimated       |   |   | Carrying |   |   | Estimated |   |
|                                                                       |   | Amount   |    |   | Fair Value |   |   | Amount |   |   | Fair Value |   |
| Assets:                                                                    |   |     |    |   |            |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                  |   | $        | 22,982  |   |            | $      | 22,982 |   |   | $ | 38,202 |   |   | $ | 38,202 |   |
| Securities                                                                 |   |     | 108,346 |   |            |   | 108,349 |   |   |   | 124,551 |   |   |   | 124,551 |   |
| Federal Home Loan Bank stock                                               |   |     | 2,323   |   |            |   | 2,323 |   |   |   | 2,229 |   |   |   | 2,229 |   |
| Loans, net                                                                 |   |     | 276,115 |   |            |   | 277,796 |   |   |   | 330,787 |   |   |   | 331,456 |   |
| Cash surrender value of life insurance                                     |   |     | 1,114   |   |            |   | 1,114 |   |   |   | 1,101 |   |   |   | 1,101 |   |
| Accrued interest receivable                                                |   |     | 1,326   |   |            |   | 1,326 |   |   |   | 1,521 |   |   |   | 1,521 |   |
|                                                                       |   |     |    |   |            |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                                               |   |     |    |   |            |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing demand deposits                                        |   |     | 28,980  |   |            |   | 28,980 |   |   |   | 41,972 |   |   |   | 41,972 |   |
| Interest-bearing demand deposits                                           |   |     | 24,834  |   |            |   | 24,834 |   |   |   | 26,533 |   |   |   | 26,533 |   |
| Savings deposits and money market accounts                                 |   |     | 34,042  |   |            |   | 34,042 |   |   |   | 31,030 |   |   |   | 31,030 |   |
| Time deposits                                                              |   |     | 247,591 |   |            |   | 249,990 |   |   |   | 305,207 |   |   |   | 307,596 |   |
| Federal funds purchased and securities sold under agreements to repurchase |   |     | 24,325  |   |            |   | 24,325 |   |   |   | 26,322 |   |   |   | 26,322 |   |
| Federal Home Loan Bank advances and other borrowings                       |   |     | 54,715  |   |            |   | 54,715 |   |   |   | 72,350 |   |   |   | 72,350 |   |
| Accrued interest payable                                                   |   |     | 177     |   |            |   | 177 |   |   |   | 351 |   |   |   | 351 |   |
|                                                                       |   |     |    |   |            |   |   |   |   |   |   |   |   |   |   |   |
| Unrecognized financial instruments (net of contract amount):               |   |     |    |   |            |   |   |   |   |   |   |   |   |   |   |   |
| Commitments to extend credit                                               |   |     | -       |   |            |   | - |   |   |   | - |   |   |   | - |   |
| Letters of credit                                                          |   |     | -       |   |            |   | - |   |   |   | - |   |   |   | - |   |
| Lines of credit                                                            |   |     | -       |   |            |   | - |   |   |   | - |   |   |   | - |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 14. | Contingencies |
|----------|---------------|

| Note 15. | Stock Option Plans |
|----------|--------------------|

|                    |   | Years Ended December 31, |   |
|-------------------------|--------|-----------------------------------------|--------|
|                    |   | 2009                                    |   |   | 2008 |   |
|                    |   |                                    |   |   |   |   |
| Dividend yield          |   |                                    | 2.97   | % |   |   | 1.47 | % |
| Expected life           |   | 7.0 years                               |   |   | 8.0 years |   |
| Expected volatility     |   |                                    | 38.74  | % |   |   | 20.27 | % |
| Risk-free interest rate |   |                                    | 2.69   | % |   |   | 4.22 | % |

|                                                           |   | Years Ended December 31, |    |
|----------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                           |   | 2010                                    |    |   | 2009 |   |   | 2008 |   |
|                                                           |   |                                    |    |   | Average |   |   | Aggregate |   |   |   |   |   | Average |   |   |   |   |   | Average |   |
|                                                           |   |                                    |    |   | Exercise |   |   | Intrinsic |   |   |   |   |   | Exercise |   |   |   |   |   | Exercise |   |
|                                                           |   | Shares                                  |    |   | Price |   |   | Value(1) |   |   | Shares |   |   | Price |   |   | Shares |   |   | Price |   |
|                                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of year                               |   |                                    | 100,250 |   |   | $ | 9.42 |   |   |   |   |   |   | 81,800 |   |   | $ | 10.73 |   |   |   | 69,000 |   |   | $ | 11.23 |   |
|                                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Granted                                                        |   |                                    | -       |   |   |   | - |   |   |   |   |   |   | 20,500 |   |   |   | 3.65 |   |   |   | 12,800 |   |   |   | 7.99 |   |
|                                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercised                                                      |   |                                    | -       |   |   |   | - |   |   |   |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
|                                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forfeited                                                      |   |                                    | -       |   |   |   | - |   |   |   |   |   |   | (2,050 | ) |   |   | 3.65 |   |   |   | - |   |   |   | - |   |
|                                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of year                                     |   |                                    | 100,250 |   |   | $ | 9.42 |   |   | $ | - |   |   |   | 100,250 |   |   | $ | 9.42 |   |   |   | 81,800 |   |   | $ | 10.73 |   |
|                                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Options exercisable at year-end                                |   |                                    | 91,025  |   |   | $ | 10.01 |   |   | $ | - |   |   |   | 75,400 |   |   | $ | 10.96 |   |   |   | 64,500 |   |   | $ | 10.95 |   |
|                                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted-average fair value of options granted during the year |   | $                                       | -       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 1.13 |   |   |   |   |   |   | $ | 2.23 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 15. | Stock Option Plans (continued) |
|----------|--------------------------------|

|   | (1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2010. This amount changes based on changes in the market value of Cornerstone's stock. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                       |   |   |        |    | 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                   |      | 3.2 Years |                     | $      | 5.44 |   |   |   | 16,000 |   |   | $ | 5.44 |   |
|                       | 9.23   |   |        |    | 8,000                    |      | 4.2 Years |                     |   | 9.23 |   |   |   | 8,000 |   |   |   | 9.23 |   |
|                       | 13.25  |   |        |    | 36,000                   |      | 5.2 Years |                     |   | 13.25 |   |   |   | 36,000 |   |   |   | 13.25 |   |
|                       | 15.25  |   |        |    | 9,000                    |      | 6.2 Years |                     |   | 15.25 |   |   |   | 9,000 |   |   |   | 15.25 |   |
|                       | 7.99   |   |        |    | 12,800                   |      | 7.2 Years |                     |   | 7.99 |   |   |   | 12,800 |   |   |   | 7.99 |   |
|                       | 3.65   |   |        |    | 18,450                   |      | 8.2 Years |                     |   | 3.65 |   |   |   | 9,225 |   |   |   | 3.65 |   |
|                       |   |   |        |    |                     |      |      |                     |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of year |   |   |        | 100,250 |                     | 5.7 Years |      | $                        | 9.42   |   |   |   | 91,025 |   |   | $ | 10.01 |   |

|                                  |   |           |    |   | Weighted Average |   |
|---------------------------------------|--------|----------------|---------|--------|-----------------------|--------|
|                                  |   | Number         |    |   | Grant Date       |   |
|                                  |   | of Shares |    |   | Fair Value       |   |
|                                  |   |           |    |   |                  |   |
| Non-vested options, December 31, 2009 |   |           | 24,850  |   |                  | $      | 4.77 |   |
| Granted                               |   |           | -       |   |                  |   | - |   |
| Vested                                |   |           | (15,625 | )      |                  |   | 5.09 |   |
| Forfeited                             |   |           | -       |   |                  |   | - |   |
|                                  |   |           |    |   |                  |   |   |   |
| Non-vested options, December 31, 2010 |   |           | 9,225   |   |                  | $      | 3.65 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 15. | Stock Option Plans (continued) |
|----------|--------------------------------|

|                                                           |   | Years Ended December 31, |     |
|----------------------------------------------------------------|--------|--------------------------|----------|
|                                                           |   | 2010                     |     |   | 2009 |   |   | 2008 |   |
|                                                           |   |                     |     |   | Average |   |   | Aggregate |   |   |   |   |   | Average |   |   |   |   |   | Average |   |
|                                                           |   |                     |     |   | Exercise |   |   | Intrinsic |   |   |   |   |   | Exercise |   |   |   |   |   | Exercise |   |
|                                                           |   | Shares                   |     |   | Price |   |   | Value(1) |   |   | Shares |   |   | Price |   |   | Shares |   |   | Price |   |
|                                                           |   |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of year                               |   |                     | 799,675  |   |   | $ | 6.18 |   |   |   |   |   |   | 755,425 |   |   | $ | 6.63 |   |   |   | 715,075 |   |   | $ | 6.52 |   |
|                                                           |   |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Granted                                                        |   |                     | -        |   |   |   | - |   |   |   |   |   |   | 115,850 |   |   |   | 3.65 |   |   |   | 71,500 |   |   |   | 7.99 |   |
|                                                           |   |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercised                                                      |   |                     | -        |   |   |   | - |   |   |   |   |   |   | - |   |   |   | - |   |   |   | (22,000 | ) |   |   | 3.75 |   |
|                                                           |   |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forfeited                                                      |   |                     | (278,775 | ) |   |   | 6.90 |   |   |   |   |   |   | (71,600 | ) |   |   | 6.77 |   |   |   | (9,150 | ) |   |   | 13.34 |   |
|                                                           |   |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of year                                     |   |                     | 520,900  |   |   | $ | 5.79 |   |   | $ | - |   |   |   | 799,675 |   |   | $ | 6.18 |   |   |   | 755,425 |   |   | $ | 6.63 |   |
|                                                           |   |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Options exercisable at year-end                                |   |                     | 385,270  |   |   | $ | 5.88 |   |   | $ | - |   |   |   | 592,648 |   |   | $ | 5.69 |   |   |   | 549,516 |   |   | $ | 4.87 |   |
|                                                           |   |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted-average fair value of options granted during the year |   | $                        | -        |   |   |   |   |   |   |   |   |   |   | $ | 1.13 |   |   |   |   |   |   | $ | 2.23 |   |   |   |   |   |

|   | (1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2010. This amount changes based on changes in the market value of Cornerstone's stock. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                       |         |   | Options Outstanding |    |      | Options Exercisable |      |
|----------------------------|--------------|--------|--------------------------|---------|-----------|--------------------------|-----------|
|                       |         |   |                     |    | Weighted  |                     | Weighted  |   |   |   |   |   | Weighted |   |
|                       |         |   |                     |    | Average   |                     | Average   |   |   |   |   |   | Average |   |
| Exercise                   |         |   | Number                   |    | Remaining |                     | Exercise  |   |   | Number |   |   | Exercise |   |
| Prices                     |         |   | Outstanding              |    | Life      |                     | Price     |   |   | Exercisable |   |   | Price |   |
|                       |         |   |                     |    |      |                     |      |   |   |   |   |   |   |   |
| $                          | 3.25 - $3.63 |   |                     |    | 182,600   |                     | 0.8 Years |   | $ | 3.48 |   |   |   | 182,600 |   |   | $ | 3.48 |   |
|                       | 5.44         |   |                     |    | 96,640    |                     | 3.2 Years |   |   | 5.44 |   |   |   | 96,640 |   |   |   | 5.44 |   |
|                       | 9.23         |   |                     |    | 57,910    |                     | 4.2 Years |   |   | 9.23 |   |   |   | 57,910 |   |   |   | 9.23 |   |
|                       | 13.25        |   |                     |    | 21,000    |                     | 5.2 Years |   |   | 13.25 |   |   |   | 21,000 |   |   |   | 13.25 |   |
|                       | 15.25        |   |                     |    | 14,450    |                     | 6.2 Years |   |   | 15.25 |   |   |   | 8,670 |   |   |   | 15.25 |   |
|                       | 15.20        |   |                     |    | 2,750     |                     | 6.3 Years |   |   | 15.20 |   |   |   | 1,650 |   |   |   | 15.20 |   |
|                       | 7.99         |   |                     |    | 56,000    |                     | 7.2 Years |   |   | 7.99 |   |   |   | 16,800 |   |   |   | 7.99 |   |
|                       | 3.65         |   |                     |    | 89,550    |                     | 8.2 Years |   |   | 3.65 |   |   |   | - |   |   |   | - |   |
|                       |         |   |                     |    |      |                     |      |   |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of year |         |   |                     | 520,900 |      | 4.0 Years                |      | $ | 5.79 |   |   |   | 385,270 |   |   | $ | 5.88 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 15. | Stock Option Plans (continued) |
|----------|--------------------------------|

|                                  |   |           |    |   | Weighted Average |   |
|---------------------------------------|--------|----------------|---------|--------|-----------------------|--------|
|                                  |   | Number         |    |   | Grant Date       |   |
|                                  |   | of Shares |    |   | Fair Value       |   |
|                                  |   |           |    |   |                  |   |
| Non-vested options, December 31, 2009 |   |           | 207,027 |   |                  | $      | 7.57 |   |
| Granted                               |   |           | -       |   |                  |   | - |   |
| Vested                                |   |           | (58,203 | )      |                  |   | 12.08 |   |
| Forfeited                             |   |           | (13,194 | )      |                  |   | 8.86 |   |
|                                  |   |           |    |   |                  |   |   |   |
| Non-vested options, December 31, 2010 |   |           | 135,630 |   |                  | $      | 5.49 |   |

| Note 16. | Liquidity and Capital Resources |
|----------|---------------------------------|

| Note 17. | Consent Order |
|----------|---------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 18. | Minimum Regulatory Capital Requirements |
|----------|-----------------------------------------|

|                                    |   |   |   |   | Minimum      |   |   | Minimum Capital       |   |
|-----------------------------------------|--------|--------|--------|--------|--------------|--------|--------|----------------------------|--------|
|                                    |   |   |   |   | Capital      |   |   | Requirements per      |   |
|                                    |   | Actual |   |   | Requirements |   |   | the Action Plans |   |
|                                    |   | Amount |   |   | Ratio        |   |   | Amount                     |   |   | Ratio |   |   | Amount |   |   | Ratio |   |
| As of December 31, 2010:                |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |
| Total capital to risk-weighted assets:  |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                            |   | $      | 27,477 |   |         |   | 9.3    | %                          |   | $ | 23,572 |   |   |   | 8.0 | % |   |   | N/A |   |   |   | N/A |   |
| Cornerstone Community Bank              |   |   | 29,592 |   |         |   | 10.1   | %                          |   |   | 23,534 |   |   |   | 8.0 | % |   |   | 35,301 |   |   |   | 12.0 | % |
|                                    |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 capital to risk-weighted assets: |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated                            |   |   | 23,727 |   |         |   | 8.1    | %                          |   |   | 11,786 |   |   |   | 4.0 | % |   |   | N/A |   |   |   | N/A |   |
| Cornerstone Community Bank              |   |   | 25,882 |   |         |   | 8.8    | %                          |   |   | 11,767 |   |   |   | 4.0 | % |   |   | 29,418 |   |   |   | 10.0 | % |
|                                    |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 capital to average assets:       |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated                            |   |   | 23,727 |   |         |   | 5.2    | %                          |   |   | 18,111 |   |   |   | 4.0 | % |   |   | N/A |   |   |   | N/A |   |
| Cornerstone Community Bank              |   |   | 25,882 |   |         |   | 5.8    | %                          |   |   | 17,995 |   |   |   | 4.0 | % |   |   | 35,990 |   |   |   | 8.0 | % |
|                                    |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| As of December 31, 2009:                |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital to risk-weighted assets:  |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated                            |   | $      | 29,472 |   |         |   | 8.3    | %                          |   | $ | 28,556 |   |   |   | 8.0 | % |   |   | N/A |   |   |   | N/A |   |
| Cornerstone Community Bank              |   |   | 33,963 |   |         |   | 9.5    | %                          |   |   | 28,532 |   |   |   | 8.0 | % |   |   | N/A |   |   |   | N/A |   |
|                                    |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 capital to risk-weighted assets: |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated                            |   |   | 24,992 |   |         |   | 7.0    | %                          |   |   | 14,278 |   |   |   | 4.0 | % |   |   | N/A |   |   |   | N/A |   |
| Cornerstone Community Bank              |   |   | 29,487 |   |         |   | 8.3    | %                          |   |   | 14,266 |   |   |   | 4.0 | % |   |   | N/A |   |   |   | N/A |   |
|                                    |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 capital to average assets:       |   |   |   |   |         |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated                            |   |   | 24,992 |   |         |   | 5.2    | %                          |   |   | 19,241 |   |   |   | 4.0 | % |   |   | N/A |   |   |   | N/A |   |
| Cornerstone Community Bank              |   |   | 29,487 |   |         |   | 6.1    | %                          |   |   | 19,216 |   |   |   | 4.0 | % |   |   | N/A |   |   |   | N/A |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 19. | Other Comprehensive Income |
|----------|----------------------------|

|                                                              |   |       |      |   | Tax       |   |     |       |   |
|-------------------------------------------------------------------|--------|------------|-----------|--------|-----------|--------|----------|------------|--------|
|                                                              |   | Before-Tax |      |   | (Expense) |   |     | Net-of-Tax |   |
|                                                              |   | Amount     |      |   | Benefit   |   |     | Amount     |   |
|                                                              |   |       |      |   |      |   |     |       |   |
| Year ended December 31, 2010:                                     |   |       |      |   |      |   |     |       |   |
| Unrealized holding gains and losses arising during the period     |   | $          | 1,571,720 |   |      | $      | (597,254 | )          |   | $ | 974,466 |   |
|                                                              |   |       |      |   |      |   |     |       |   |   |   |   |
| Less reclassification adjustment for gains realized in net income |   |       | 1,698,136 |   |      |   | (645,292 | )          |   |   | 1,052,844 |   |
|                                                              |   |       |      |   |      |   |     |       |   |   |   |   |
|                                                              |   | $          | (126,416  | )      |      | $      | 48,038   |       |   | $ | (78,378 | ) |
|                                                              |   |       |      |   |      |   |     |       |   |   |   |   |
| Year ended December 31, 2009:                                     |   |       |      |   |      |   |     |       |   |   |   |   |
| Unrealized holding gains and losses arising during the period     |   | $          | 296,642   |   |      | $      | (113,884 | )          |   | $ | 182,758 |   |
|                                                              |   |       |      |   |      |   |     |       |   |   |   |   |
| Less reclassification adjustment for gains realized in net income |   |       | 399,754   |   |      |   | (153,066 | )          |   |   | 246,688 |   |
|                                                              |   |       |      |   |      |   |     |       |   |   |   |   |
|                                                              |   | $          | (103,112  | )      |      | $      | 39,182   |       |   | $ | (63,930 | ) |
|                                                              |   |       |      |   |      |   |     |       |   |   |   |   |
| Year ended December 31, 2008:                                     |   |       |      |   |      |   |     |       |   |   |   |   |
| Unrealized holding gains and losses arising during the period     |   | $          | (444,690  | )      |      | $      | 151,196  |       |   | $ | (293,494 | ) |
|                                                              |   |       |      |   |      |   |     |       |   |   |   |   |
| Less reclassification adjustment for gains realized in net income |   |       | -         |   |      |   | -        |       |   |   | - |   |
|                                                              |   |       |      |   |      |   |     |       |   |   |   |   |
|                                                              |   | $          | (444,690  | )      |      | $      | 151,196  |       |   | $ | (293,494 | ) |

| Note 20. | Earnings (Loss) Per Common Share |
|----------|----------------------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 20. | Earnings (Loss) Per Common Share (continued) |
|----------|----------------------------------------------|

|                                                                                                   |   | 2010   |       |   | 2009   |   |       | 2008   |   |
|--------------------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|--------|
|                                                                                                   |   |   |       |   |   |   |       |   |   |
| Net (loss) income                                                                                      |   | $      | (4,707,521 | )      |   | $      | (8,178,639 | )      |   | $ | 2,511,824 |   |
| Less: Preferred stock dividends                                                                        |   |   | 34,463     |   |   |   | -          |   |   |   | - |   |
|                                                                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Net (loss) income applicable to common stock                                                           |   | $      | (4,741,984 | )      |   | $      | (8,178,639 | )      |   | $ | 2,511,824 |   |
|                                                                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Average number of common shares outstanding                                                            |   |   | 6,500,396  |   |   |   | 6,500,396  |   |   |   | 6,508,631 |   |
|                                                                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Effect of dilutive stock options                                                                       |   |   | -          |   |   |   | -          |   |   |   | 136,826 |   |
|                                                                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Average number of common shares outstanding used to calculate diluted (loss) earnings per common share |   |   | 6,500,396  |   |   |   | 6,500,396  |   |   |   | 6,645,457 |   |

| Note 21. | Recent Accounting Pronouncements |
|----------|----------------------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 21. | Recent Accounting Pronouncements (continued) |
|----------|----------------------------------------------|

| Note 22. | Equity Investment |
|----------|-------------------|

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 23. | Condensed Parent Information |
|----------|------------------------------|

| BALANCE SHEETS                              |   |         |       |   |         |   |
|--------------------------------------------------|--------|--------------|------------|--------|--------------|--------|
|                                             |   |         |       |   |         |   |
|                                             |   | December 31, |       |   | December 31, |   |
|                                             |   | 2010         |       |   | 2009         |   |
|                                             |   |         |       |   |         |   |
| ASSETS                                           |   |         |       |   |         |   |
| Cash                                             |   | $            | 2,261,775  |   |         | $      | 620,471 |   |
| Investment in subsidiary                         |   |         | 27,974,387 |   |         |   | 29,790,633 |   |
| Goodwill                                         |   |         | -          |   |         |   | 2,541,476 |   |
| Other assets                                     |   |         | 440,772    |   |         |   | 294,899 |   |
|                                             |   |         |       |   |         |   |   |   |
| Total assets                                     |   | $            | 30,676,934 |   |         | $      | 33,247,479 |   |
|                                             |   |         |       |   |         |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |   |         |       |   |         |   |   |   |
| Other liabilities                                |   | $            | 142,781    |   |         | $      | 60,000 |   |
| Other borrowings                                 |   |         | 4,715,000  |   |         |   | 5,350,000 |   |
|                                             |   |         |       |   |         |   |   |   |
| Total liabilities                                |   |         | 4,857,781  |   |         |   | 5,410,000 |   |
|                                             |   |         |       |   |         |   |   |   |
| Stockholders’ equity                       |   |         | 25,819,153 |   |         |   | 27,837,479 |   |
|                                             |   |         |       |   |         |   |   |   |
| Total liabilities and stockholders’ equity |   | $            | 30,676,934 |   |         | $      | 33,247,479 |   |

| STATEMENTS OF INCOME                                    |   |                                    |       |
|--------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                         |   |                                    |       |
|                                                         |   | Years Ended December 31, |       |
|                                                         |   | 2010                                    |       |   | 2009 |   |   | 2008 |   |
|                                                         |   |                                    |       |   |   |   |   |   |   |
| INCOME                                                       |   |                                    |       |   |   |   |   |   |   |
| Dividends                                                    |   | $                                       | -          |   |   | $ | 1,180,260 |   |   | $ | 1,475,325 |   |
| Interest income                                              |   |                                    | -          |   |   |   | 4,110 |   |   |   | 33,336 |   |
|                                                         |   |                                    |       |   |   |   |   |   |   |   |   |   |
|                                                         |   |                                    | -          |   |   |   | 1,184,370 |   |   |   | 1,508,611 |   |
|                                                         |   |                                    |       |   |   |   |   |   |   |   |   |   |
| EXPENSES                                                     |   |                                    |       |   |   |   |   |   |   |   |   |   |
| Interest expense                                             |   |                                    | 319,361    |   |   |   | 221,093 |   |   |   | 137,421 |   |
| Goodwill impairment                                          |   |                                    | 2,541,476  |   |   |   | - |   |   |   | - |   |
| Other operating expenses                                     |   |                                    | 384,813    |   |   |   | 802,084 |   |   |   | 1,225,402 |   |
|                                                         |   |                                    |       |   |   |   |   |   |   |   |   |   |
| (Loss) income before equity in undistributed (loss) earnings |   |                                    | (3,245,650 | ) |   |   | 161,193 |   |   |   | 145,838 |   |
|                                                         |   |                                    |       |   |   |   |   |   |   |   |   |   |
| Equity in undistributed (loss) earnings of subsidiary        |   |                                    | (1,737,868 | ) |   |   | (8,740,480 | ) |   |   | 1,830,862 |   |
|                                                         |   |                                    |       |   |   |   |   |   |   |   |   |   |
| Income tax benefit                                           |   |                                    | 275,997    |   |   |   | 400,648 |   |   |   | 535,124 |   |
|                                                         |   |                                    |       |   |   |   |   |   |   |   |   |   |
| Net (loss) income                                            |   |                                    | (4,707,521 | ) |   |   | (8,178,639 | ) |   |   | 2,511,824 |   |
|                                                         |   |                                    |       |   |   |   |   |   |   |   |   |   |
| Preferred stock dividends                                    |   |                                    | 34,463     |   |   |   | - |   |   |   | - |   |
|                                                         |   |                                    |       |   |   |   |   |   |   |   |   |   |
| Net (loss) income available to common shareholders           |   | $                                       | (4,741,984 | ) |   | $ | (8,178,639 | ) |   | $ | 2,511,824 |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|---------------------------------------------|
|                                        |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008            |
|                                   |
|                                        |

| Note 23. | Condensed Parent Information (continued) |
|----------|------------------------------------------|

|                                                                                     |   | 2010   |       |   | 2009   |   |       | 2008   |   |
|------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|--------|
|                                                                                     |   |   |       |   |   |   |       |   |   |
| STATEMENTS OF CASH FLOWS                                                            |   |   |       |   |   |   |       |   |   |
|                                                                                     |   |   |       |   |   |   |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                     |   |   |       |   |   |   |       |   |   |
|                                                                                     |   |   |       |   |   |   |       |   |   |
| Net (loss) income                                                                        |   | $      | (4,707,521 | )      |   | $      | (8,178,639 | )      |   | $ | 2,511,824 |   |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: |   |   |       |   |   |   |       |   |   |   |   |   |
| Stock compensation expense                                                               |   |   | 74,612     |   |   |   | 216,600    |   |   |   | 279,400 |   |
| Equity in undistributed loss (income) of subsidiary                                      |   |   | 1,737,868  |   |   |   | 8,740,480  |   |   |   | (1,830,862 | ) |
| Goodwill impairment                                                                      |   |   | 2,541,476  |   |   |   | -          |   |   |   | - |   |
| Other                                                                                    |   |   | (63,092    | )      |   |   | 247,241    |   |   |   | (534,415 | ) |
|                                                                                     |   |   |       |   |   |   |       |   |   |   |   |   |
| Net cash (used in) provided by operating activities                                      |   |   | (416,657   | )      |   |   | 1,025,682  |   |   |   | 425,947 |   |
|                                                                                     |   |   |       |   |   |   |       |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                     |   |   |       |   |   |   |       |   |   |   |   |   |
| Repayment from subsidiary                                                                |   |   | -          |   |   |   | 450,000    |   |   |   | 300,000 |   |
| Capital contribution to subsidiary                                                       |   |   | -          |   |   |   | (1,300,000 | )      |   |   | (2,500,000 | ) |
|                                                                                     |   |   |       |   |   |   |       |   |   |   |   |   |
| Net cash used in investing activities                                                    |   |   | -          |   |   |   | (850,000   | )      |   |   | (2,200,000 | ) |
|                                                                                     |   |   |       |   |   |   |       |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                     |   |   |       |   |   |   |       |   |   |   |   |   |
| Net (repayments) borrowings under other borrowings                                       |   |   | (635,000   | )      |   |   | 1,100,000  |   |   |   | 4,150,000 |   |
| Issuance of preferred stock                                                              |   |   | 2,727,424  |   |   |   | -          |   |   |   | - |   |
| Payment of preferred dividends                                                           |   |   | (34,463    | )      |   |   | -          |   |   |   | - |   |
| Purchase of common stock                                                                 |   |   | -          |   |   |   | -          |   |   |   | (633,049 | ) |
| Payment of common stock dividends                                                        |   |   | -          |   |   |   | (1,094,651 | )      |   |   | (1,773,022 | ) |
| Issuance of common stock                                                                 |   |   | -          |   |   |   | -          |   |   |   | 82,500 |   |
|                                                                                     |   |   |       |   |   |   |       |   |   |   |   |   |
| Net cash provided by financing activities                                                |   |   | 2,057,961  |   |   |   | 5,349      |   |   |   | 1,826,429 |   |
|                                                                                     |   |   |       |   |   |   |       |   |   |   |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                |   |   | 1,641,304  |   |   |   | 181,031    |   |   |   | 52,376 |   |
|                                                                                     |   |   |       |   |   |   |       |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS, beginning of year                                             |   |   | 620,471    |   |   |   | 439,440    |   |   |   | 387,064 |   |
|                                                                                     |   |   |       |   |   |   |       |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS, end of year                                                   |   | $      | 2,261,775  |   |   | $      | 620,471    |   |   | $ | 439,440 |   |
|                                                                                     |   |   |       |   |   |   |       |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                        |   |   |       |   |   |   |       |   |   |   |   |   |
| Cash paid during the year for:                                                           |   |   |       |   |   |   |       |   |   |   |   |   |
| Interest                                                                                 |   | $      | 319,361    |   |   | $      | 221,093    |   |   | $ | 137,421 |   |
| Income taxes                                                                             |   |   | -          |   |   |   | -          |   |   |   | - |   |

----

| CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY |
|-----------------------------------------------------------------|
|                                                            |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  |
| December 31, 2010, 2009 and 2008                                |
|                                                            |

| Note 24.  | Quarterly Data (unaudited) |
|----------------|----------------------------|

|                                                        |   | Years Ended December 31, |       |
|-------------------------------------------------------------|--------|--------------------------|------------|
|                                                        |   | 2010                     |       |   | 2009 |   |
|                                                        |   | Fourth                   |       |   | Third |   |   | Second |   |   | First |   |   | Fourth |   |   | Third |   |   | Second |   |   | First |   |
|                                                        |   | Quarter                  |       |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |
|                                                        |   |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                             |   | $                        | 5,445,229  |   |   | $ | 5,933,035 |   |   | $ | 6,731,978 |   |   | $ | 7,101,186 |   |   | $ | 6,609,921 |   |   | $ | 6,406,525 |   |   | $ | 6,427,866 |   |   | $ | 6,864,115 |   |
| Interest expense                                            |   |                     | 1,918,673  |   |   |   | 2,175,985 |   |   |   | 2,510,794 |   |   |   | 2,596,362 |   |   |   | 2,761,685 |   |   |   | 2,765,954 |   |   |   | 2,791,068 |   |   |   | 2,870,676 |   |
|                                                        |   |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income, before provision for loan losses       |   |                     | 3,526,556  |   |   |   | 3,757,050 |   |   |   | 4,221,184 |   |   |   | 4,504,824 |   |   |   | 3,848,236 |   |   |   | 3,640,571 |   |   |   | 3,636,798 |   |   |   | 3,993,439 |   |
|                                                        |   |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for loan losses                                   |   |                     | 4,130,000  |   |   |   | 681,000 |   |   |   | 1,465,000 |   |   |   | 1,015,000 |   |   |   | 4,150,000 |   |   |   | 3,390,000 |   |   |   | 1,633,898 |   |   |   | 5,725,000 |   |
|                                                        |   |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest (loss) income, after provision for loan losses |   |                     | (603,444   | ) |   |   | 3,076,050 |   |   |   | 2,756,184 |   |   |   | 3,489,824 |   |   |   | (301,764 | ) |   |   | 250,571 |   |   |   | 2,002,900 |   |   |   | (1,731,561 | ) |
|                                                        |   |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest income                                          |   |                     | 170,041    |   |   |   | 1,416,005 |   |   |   | 1,091,221 |   |   |   | 403,662 |   |   |   | 1,149,425 |   |   |   | 184,232 |   |   |   | 730,291 |   |   |   | 263,114 |   |
| Noninterest expenses                                        |   |                     | 6,548,924  |   |   |   | 4,209,080 |   |   |   | 3,884,359 |   |   |   | 3,399,998 |   |   |   | 5,716,829 |   |   |   | 3,278,956 |   |   |   | 3,773,359 |   |   |   | 3,292,743 |   |
|                                                        |   |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Loss) income before income taxes                           |   |                     | (6,982,327 | ) |   |   | 282,975 |   |   |   | (36,954 | ) |   |   | 493,488 |   |   |   | (4,869,168 | ) |   |   | (2,844,153 | ) |   |   | (1,040,168 | ) |   |   | (4,761,190 | ) |
| Income tax (benefit) expense                                |   |                     | (1,699,200 | ) |   |   | 69,301 |   |   |   | (55,099 | ) |   |   | 149,701 |   |   |   | (1,904,367 | ) |   |   | (1,144,617 | ) |   |   | (437,369 | ) |   |   | (1,849,687 | ) |
|                                                        |   |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income                                           |   |                     | (5,283,127 | ) |   |   | 213,674 |   |   |   | 18,145 |   |   |   | 343,787 |   |   |   | (2,964,801 | ) |   |   | (1,699,536 | ) |   |   | (602,799 | ) |   |   | (2,911,503 | ) |
| Preferred stock dividends                                   |   |                     | 34,463     |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Net (loss) income available to common stockholders          |   | $                        | (5,317,590 | ) |   | $ | 213,674 |   |   | $ | 18,145 |   |   | $ | 343,787 |   |   | $ | (2,964,801 | ) |   | $ | (1,699,536 | ) |   | $ | (602,799 | ) |   | $ | (2,911,503 | ) |
|                                                        |   |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss) per common share:                           |   |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                       |   | $                        | (0.81      | ) |   | $ | 0.03 |   |   | $ | - |   |   | $ | 0.05 |   |   | $ | (0.46 | ) |   | $ | (0.26 | ) |   | $ | (0.09 | ) |   | $ | (0.45 | ) |
| Diluted                                                     |   | $                        | (0.81      | ) |   | $ | 0.03 |   |   | $ | - |   |   | $ | 0.05 |   |   | $ | (0.46 | ) |   | $ | (0.26 | ) |   | $ | (0.09 | ) |   | $ | (0.45 | ) |

----

| ITEM 9.   | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
|--------------------------|--------------------------------------------------------------------------------------|

----

| ITEM 11. | EXECUTIVE COMPENSATION |
|----------|------------------------|

| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
|----------|------------------------------------------------------------------------------------------------|

| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
|----------|---------------------------------------------------------------------------|

| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
|----------|----------------------------------------|

----

| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
|----------|--------------------------------------------|

| (a)    | The following documents are filed as part of this report:                                                                                                                                                                              |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)    | Financial Statements                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                   |
|   | The following report and consolidated financial statements of Cornerstone and Subsidiaries are included in Item 8:                                                                                                                |
|   |                                                                                                                                                                                                                                   |
|   | Report of Independent Registered Public Accounting Firm                                                                                                                                                                                |
|   | Consolidated Balance Sheets as of December 31, 2010 and 2009                                                                                                                                                                           |
|   | Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008                                                                                                                                                 |
|   | Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2010, 2009 and 2008                                                                                                                   |
|   | Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008                                                                                                                                             |
|   | Notes to Consolidated Financial Statements                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                   |
| (2)    | Financial Statement Schedules:                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                   |
|   | Schedule II: Valuation and Qualifying Accounts                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                   |
|   | All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. |
|   |                                                                                                                                                                                                                                   |
| (3)    | The following documents are filed or incorporated by reference as exhibits to this report:                                                                                                                                             |

| Exhibit No. |   | Description                                                                                                               |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                      |
| 3.1         |   | Amended and Restated Charter 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 Bancshares, Inc. Statutory and Nonstatutory Stock Option Plan. (4)                                            |
| 10.2*       |   | Cornerstone Bancshares, Inc. 2002 Long-Term Incentive Plan. (5)                                                           |
| 10.3*       |   | Cornerstone Bancshares, Inc. 2004 Non-Employee Director Plan. (6)                                                         |
| 10.4*       |   | Cornerstone Community Bank Employee Stock Ownership Plan. (7)                                                             |
| 14          |   | Code of Ethics. (8)                                                                                                       |
| 21          |   | Subsidiaries of the registrant.                                                                                           |
| 31.1        |   | Certification of principal executive officer.                                                                             |
| 31.2        |   | Certification of principal financial officer.                                                                             |
| 32          |   | Section 906 certifications of chief executive officer and chief financial officer.                                        |

----

|   | * | This item is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(b) of this report. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (1) | Incorporated by reference to Exhibit 3.1 of the registrant’s Form 10-Q/A filed on May 5, 2010. |
|--------|-----|------------------------------------------------------------------------------------------------------|

|   | (2) | Incorporated by reference to Exhibit 3 of the registrant’s Form 10-K filed on June 29, 2010. |
|--------|-----|----------------------------------------------------------------------------------------------------|

|   | (3) | Incorporated by reference to Exhibit 3.2 of the registrant’s Form 10-KSB filed on March 24, 2004. |
|--------|-----|---------------------------------------------------------------------------------------------------------|

|   | (4) | Incorporated by reference to Exhibit 10.1 of the registrant’s Registration Statement on Form S-1 filed on February 4, 2000, as amended (File No. 333-96185). |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | Incorporated by reference to Exhibit 99.1 of the registrant’s Registration Statement on Form S-8 filed March 5, 2004 (File No. 333-113314). |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (6) | Incorporated by reference to Exhibit 99.3 of the registrant’s Registration Statement on Form S-8 filed March 5, 2004 (File No. 333-113314). |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (7) | Incorporated by reference to Exhibit 10.1 of the registrant’s Form 8-K filed on July 19, 2005. |
|--------|-----|------------------------------------------------------------------------------------------------------|

|   | (8) | Incorporated by reference to Exhibit 14 of the registrant’s Form 10-KSB filed on March 24, 2004. |
|--------|-----|--------------------------------------------------------------------------------------------------------|

----

|                 |   | CORNERSTONE BANCSHARES, INC.                         |   |
|----------------------|--------|------------------------------------------------------|--------|
|                 |   |                                                 |   |
| Date: March 30, 2011 | By:    |  /s/  Nathaniel F. Hughes             |   |
|                 |   | Nathaniel F. Hughes                                  |   |
|                 |   | President                                            |   |
|                 |   | (principal executive officer)                        |   |
|                 |   |                                                 |   |
|                 | By:    | /s/  Gary W. Petty, Jr.                    |   |
|                 |   | Gary W. Petty, Jr.                                   |   |
|                 |   | Senior Vice President and Chief Financial Officer    |   |
|                 |   | (principal financial officer and accounting officer) |   |

----

| Signature                          |   | Title  |
|------------------------------------|--------|--------|
|                               |   |   |   |
| /s/  W. Miller Welborn   |   |   | Chairman of the Board of Directors |
| W. Miller Welborn                  |   |   |   |
|                               |   |   |   |
| /s/  Nathaniel F. Hughes |   |   | President |
| Nathaniel F. Hughes                |   |   | (principal executive officer) and Director |
|                               |   |   |   |
| /s/  B. Kenneth Driver   |   |   | Director |
| B. Kenneth Driver                  |   |   |   |
|                               |   |   |   |
| /s/  Karl Fillauer       |   |   | Director |
| Karl Fillauer                      |   |   |   |
|                               |   |   |   |
| /s/  David Fussell       |   |   | Director |
| David Fussell                      |   |   |   |
|                               |   |   |   |
| /s/  Lawrence D. Levine  |   |   | Director |
| Lawrence D. Levine                 |   |   |   |
|                               |   |   |   |
| /s/ Frank S. McDonald              |   |   |  Director |
| Frank S. McDonald                  |   |   |   |
|                               |   |   |   |
| /s/  Doyce G. Payne      |   |   | Director |
| Doyce G. Payne                     |   |   |   |
|                               |   |   |   |
| /s/  Billy O. Wiggins    |   |   | Director |
| Billy O. Wiggins                   |   |   |   |
|                               |   |   |   |
| /s/  Marsha Yessick      |   |   | Director |
| Marsha Yessick                     |   |   |   |
|                               |   |   |   |
| /s/  Gary W. Petty, Jr.  |   |   | Senior Vice President and Chief Financial Officer |
| Gary W. Petty, Jr.                 |   |   | (principal financial officer and accounting officer) |

----

| Exhibit No. |   | Description                                                                                                               |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                      |
| 3.1              |   | Amended and Restated Charter 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 Bancshares, Inc. Statutory and Nonstatutory Stock Option Plan. (4)                                            |
| 10.2*            |   | Cornerstone Bancshares, Inc. 2002 Long-Term Incentive Plan. (5)                                                           |
| 10.3*            |   | Cornerstone Bancshares, Inc. 2004 Non-Employee Director Plan. (6)                                                         |
| 10.4*            |   | Cornerstone Community Bank Employee Stock Ownership Plan. (7)                                                             |
| 14               |   | Code of Ethics. (8)                                                                                                       |
| 21               |   | Subsidiaries of the registrant.                                                                                           |
| 31.1             |   | Certification of principal executive officer.                                                                             |
| 31.2             |   | Certification of principal financial officer.                                                                             |
| 32               |   | Section 906 certifications of chief executive officer and chief financial officer.                                        |

----

|   | * | This item is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(b) of this report. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (1) | Incorporated by reference to Exhibit 3.1 of the registrant’s Form 10-Q/A filed on May 5, 2010. |
|--------|-----|------------------------------------------------------------------------------------------------------|

|   | (2) | Incorporated by reference to Exhibit 3 of the registrant’s Form 8-K filed on June 29, 2010. |
|--------|-----|---------------------------------------------------------------------------------------------------|

|   | (3) | Incorporated by reference to Exhibit 3.2 of the registrant’s Form 10-KSB filed on March 24, 2004. |
|--------|-----|---------------------------------------------------------------------------------------------------------|

|   | (4) | Incorporated by reference to Exhibit 10.1 of the registrant’s Registration Statement on Form S-1 filed on February 4, 2000, as amended (File No. 333-96185). |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | Incorporated by reference to Exhibit 99.1 of the registrant’s Registration Statement on Form S-8 filed March 5, 2004 (File No. 333-113314). |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (6) | Incorporated by reference to Exhibit 99.3 of the registrant’s Registration Statement on Form S-8 filed March 5, 2004 (File No. 333-113314). |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (7) | Incorporated by reference to Exhibit 10.1 of the registrant’s Form 8-K filed on July 19, 2005. |
|--------|-----|------------------------------------------------------------------------------------------------------|

|   | (8) | Incorporated by reference to Exhibit 14 of the registrant’s Form 10-KSB filed on March 24, 2004. |
|--------|-----|--------------------------------------------------------------------------------------------------------|

----