As filed with the Securities and Exchange Commission on April 16, 2015.

Registration No. 333-      

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

Cornerstone Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Tennessee		6022		62-1173944
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Number)		(I.R.S. Employer Identification Number)

 

835 Georgia Avenue
Chattanooga, Tennessee 37402
(423) 385-3000

(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive offices)

 

Nathaniel F. Hughes
President and Chief Executive Officer
Cornerstone Bancshares, Inc.
835 Georgia Avenue
Chattanooga, Tennessee 37402
(423) 385-3000

(Name, address, including zip code, and telephone number,
including area code, of agent for service)

 

Frank M. Williams Miller & Martin PLLC Suite 1200, Volunteer Building 832 Georgia Avenue Chattanooga, Tennessee 37402-2289 (423) 756-6600		Elizabeth W. Sims Butler Snow LLP Suite 1600 The Pinnacle at Symphony Place 150 3 rd Avenue Nashville, Tennessee 37201 (615) 651-6733

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Approximate date of commencement of proposed sale to the public : As soon as practicable after the effective date of this Registration Statement.

If the securities being registered on this form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. o

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large acceleration filer o		Accelerated filer           o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company  x

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) o

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer). o

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CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered		Amount to be Registered				Proposed Maximum Aggregate Offering Price per share				Proposed Maximum Offering Price				Amount of Registration Fee
Common Stock, $1.00 par value per share			14,487,903	(1)			N/A			$	51,051,298	(2)		$	5,932.16	(5)
Preferred Stock, no par value			12,000	(3)		$	1,000	(4)		$	12,000,000	(4)		$	1,394.40	(5)
Total:

(1)

Represents the estimated maximum number of shares of common stock to be issued pursuant to the Agreement and Plan of Merger (“merger agreement”) dated as of December 5, 2014, by and among SmartBank, SmartFinancial, Inc., Cornerstone Bancshares, Inc. and Cornerstone Community Bank. Based upon the maximum number of common shares that the Registrant may be required to issue in the merger transaction, calculated as the product of (a) 3,449,412 (the maximum number of shares of SmartFinancial, Inc. common stock estimated to be outstanding at the time the merger transaction is consummated, including shares reserved for issuance under various plans), and (b) 4.20 (the number of common shares of the Registrant to be exchanged for each share of SmartFinancial, Inc. common stock), plus (c) 372 (the maximum number of shares issued in lieu of fractional shares based on the number of SmartFinancial shareholders and option holders as of the date of filing).

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933 on the basis of the book value of the shares of SmartFinancial, Inc. common stock to be cancelled in the merger transaction, computed, in accordance with Rule 457(f)(2), as the product of (i) $14.80 (the book value of a share of SmartFinancial, Inc. common stock as of December 31, 2014) and (ii) 3,449,412 (the maximum number of shares of SmartFinancial, Inc. common stock estimated to be outstanding at the time the merger transaction is consummated, including shares reserved for issuance under various plans).

(3)

Represents the estimated maximum number of shares of Cornerstone Bancshares, Inc. preferred stock to be issued pursuant to the merger agreement.

(4)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933 on the basis of the book value of the shares of SmartFinancial, Inc. preferred stock to be cancelled in the merger transaction, computed, in accordance with Rule 457(f)(2), as the product of (i) $1,000 (the book value of a share of SmartFinancial, Inc. preferred stock as of December 31, 2014) and (ii) 12,000 (the maximum number of shares of SmartFinancial, Inc. preferred stock estimated to be outstanding at the time the merger transaction is consummated).

(5)

Determined in accordance with Section 6(b) of the Securities Act and Rule 457(f)(2) thereunder at a rate equal to $116.20 per $1.0 million of the proposed aggregate offering price, or 0.00011620 multiplied by the proposed maximum aggregate offering price.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement becomes effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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The information in this joint proxy statement/prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement, filed with the Securities and Exchange Commission, is effective. This joint proxy statement/prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Preliminary — Subject to Completion, Dated [•], 2015.

MERGER PROPOSED — YOUR VOTE IS VERY IMPORTANT

On behalf of the boards of directors of SmartFinancial and Cornerstone, we are pleased to deliver our joint proxy statement/prospectus for the merger of SmartFinancial with and into Cornerstone. Following the completion of the merger, the surviving corporation will operate under the name “SmartFinancial, Inc.” and its headquarters will be relocated to Knoxville, Tennessee.

The merger agreement provides that each outstanding share of SmartFinancial common stock will be converted into the right to receive 4.20 shares of Cornerstone common stock (we refer to this number as the “exchange ratio”). The exchange ratio is subject to adjustment based on an anticipated reverse stock split of Cornerstone common stock at a 4-to-1 ratio. The merger agreement also provides that the U.S. Treasury, as holder of SmartFinancial Non-Cumulative Perpetual Preferred Stock, Series A (the “SmartFinancial SBLF stock”), will receive Cornerstone Non-Cumulative Perpetual Preferred Stock, Series B, with equivalent rights, preferences, privileges, and voting powers as the SmartFinancial SBLF stock (the “Cornerstone SBLF stock”). Additionally, if the merger is completed, each option to purchase a share of SmartFinancial common stock will be converted into an option to purchase a share of Cornerstone common stock multiplied by the exchange ratio, and the exercise price of such option will become the exercise price of the option immediately prior to the merger divided by the exchange ratio. Based on the number of shares of Smart Financial common stock and Smart Financial SBLF stock expected to be outstanding at the closing of the merger, we expect up to 14,487,903 shares of Cornerstone common stock and 12,000 shares of Cornerstone SBLF stock to be issued in connection with the merger.

Cornerstone’s common stock is currently quoted and traded on the Over-the-Counter Bulletin Board quotation system under the symbol “CSBQ.” In connection with the completion of the merger, the surviving corporation will file an application to list its common stock on The Nasdaq Capital Market, or “Nasdaq.” In order to increase the market price per share of the surviving corporation’s common stock and meet the minimum listing requirements of Nasdaq, holders of Cornerstone common stock will consider a proposal to approve a reverse stock split of the outstanding common stock at a 4-to-1 ratio, with such reverse stock split taking effect before the effective time of the merger. If the reverse stock split proposal is approved, the exchange ratio will be adjusted and each outstanding share of SmartFinancial common stock will be converted into the right to receive 1.05 shares of Cornerstone common stock.

To enhance the surviving corporation’s capital position and facilitate regulatory approval of the merger, Cornerstone has commenced a private offering of its common stock to institutional and accredited investors (the “financing transaction”). The exact number of shares of common stock that Cornerstone will issue in the merger will not be determined until the closing of the merger. After the merger is completed and assuming Cornerstone issues 4,000,000 shares of common stock in the private offering and assuming the completion of the anticipated reverse stock split of Cornerstone common stock at a 4-to-1 ratio, we expect that current SmartFinancial shareholders, as a group, will own approximately 56% of the outstanding common stock of the surviving corporation, shareholders of Cornerstone, as a group, will own approximately 28% of the outstanding shares of common stock of the surviving corporation, and investors in the financing transaction will own approximately 16% of the outstanding stock of the surviving corporation, on a fully diluted basis (that is, assuming all stock options are exercised).

You should read this entire joint proxy statement/prospectus carefully because it contains important information about the merger. In particular, you should read carefully the information under the section entitled “ Risk Factors.”

We enthusiastically support this combination of our companies and join with our boards in recommending that you vote “ FOR ” the approval of the merger agreement. We look forward to seeing you at the annual meetings and we appreciate your continued support.

Sincerely,

William Y. Carroll, Sr.		Wesley M. (Miller) Welborn
Chairman		Chairman
SmartFinancial, Inc.		Cornerstone Bancshares, Inc.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or completeness of this joint proxy statement/prospectus. Any representation to the contrary is a criminal offense. The securities to be issued in connection with the merger are not savings or deposit accounts or other obligations of any bank or nonbank subsidiary of any of the parties, and they are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

This joint proxy statement/prospectus is dated [ • ] , 2015,
and first mailed to shareholders of SmartFinancial and Cornerstone on or about [•], 2015.

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CORNERSTONE BANCSHARES, INC.

835 Georgia Avenue
Chattanooga, Tennessee 37402

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
 
TO BE HELD ON [•], 2015

 

You are invited to attend the annual meeting of shareholders of Cornerstone, which will be held at the EPB Building, 7 ^th Floor Auditorium, 10 W. Martin Luther King, Jr. Blvd., Chattanooga, Tennessee, on [•] , 2015, beginning at [•] p.m. local time, to consider and vote on the following proposals:

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Information regarding the matters to be acted upon at the annual meeting is contained in the proxy statement attached to this notice.

Only shareholders of record at the close of business on [•], 2015 are entitled to notice of, and to vote at, the annual meeting or any adjournment(s) thereof.

Holders of record and beneficial owners of Cornerstone common stock have the right to dissent from the merger and obtain payment of the fair value of their shares of common stock and holders of record and beneficial owners of Cornerstone’s Series A preferred stock have the right to dissent from the Series A redemption amendment proposal and receive the fair value of their shares. The right to dissent is summarized in the accompanying joint proxy statement/prospectus, and a copy of the pertinent state law is reprinted in full as Appendix B .

Shareholders may vote by fax, by email, by mail or in person at the annual shareholders’ meeting. To vote by fax, please dial (423) 385-3137. To vote by email, you may scan and email your vote to Ms. Becky Grudzinski at bgrudzinski@cscbank.com . If you do not vote by fax or by email, please complete, date, and sign the enclosed proxy card and promptly return it in the envelope provided, whether or not you plan to attend the annual shareholders’ meeting. If you attend the annual shareholders’ meeting, you may vote in person if you wish, even if you have previously returned your proxy card. Please vote by fax, e-mail, or mail by no later than [•], 2015. All shareholders, whether or not they expect to attend the annual meeting in person, are requested to complete, date, sign and return the enclosed proxy. The proxy may be revoked by the person executing the proxy at any time before it is exercised by filing with the President of Cornerstone an instrument of revocation or a duly executed proxy bearing a later date, or by electing to vote in person at the annual meeting.

BY ORDER OF THE BOARD OF DIRECTORS

Chattanooga, Tennessee            , 2015		W. Miller Welborn Chairman		Nathaniel F. Hughes President & CEO

CORNERSTONE’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE PROPOSALS SET FORTH ABOVE.

YOU ARE ENCOURAGED TO ATTEND THE ANNUAL MEETING IN PERSON. IF YOU ARE UNABLE TO ATTEND THE ANNUAL MEETING, THE BOARD OF DIRECTORS REQUESTS THAT YOU, AT YOUR EARLIEST CONVENIENCE, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING PROXY. IF YOU RESPOND BY MAIL, YOU MAY USE THE ENCLOSED REPLY ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES.

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SMARTFINANCIAL, INC.

5401 Kingston Pike, Suite 600
Knoxville, Tennessee 37919

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
 
TO BE HELD ON [•], 2015

 

You are cordially invited to attend the annual meeting of the shareholders of SmartFinancial on [•] , 2015, at [•] p.m., local time, at the campus of Walters State Community College, 1720 Old Newport Hwy, Sevierville, Tennessee 37876. At the annual meeting, holders of SmartFinancial common stock will consider the following proposals:

Only shareholders of record of SmartFinancial common stock at the close of business on [ • ] , 2015, will be entitled to notice of and to vote at the annual shareholders’ meeting and at any adjournment or postponement of the annual shareholders’ meeting.

SmartFinancial has concluded that holders of record of SmartFinancial common stock and the SmartFinancial SBLF stock have the right to dissent from the merger agreement and obtain payment of the fair value of their shares, in lieu of the merger consideration that holders of SmartFinancial stock would otherwise receive pursuant to the merger agreement. The right to dissent is summarized in the accompanying joint proxy statement/prospectus, and a copy of the pertinent state law is reprinted in full as Appendix B .

SMARTFINANCIAL’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF SMARTFINANCIAL COMMON STOCK VOTE “FOR” THE PROPOSALS SET FORTH ABOVE.

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Your vote is very important. Please complete, date, and sign the enclosed proxy card and promptly return it in the envelope provided, whether or not you plan to attend the annual shareholders’ meeting. If you attend the annual shareholders’ meeting, you may vote in person if you wish, even if you have previously returned your proxy card. Please return your proxy card by no later than [ • ] , 2015.

BY ORDER OF THE BOARD OF DIRECTORS
OF SMARTFINANCIAL, INC.

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		Page
WHERE YOU CAN FIND MORE INFORMATION			i
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SHAREHOLDERS’ MEETINGS			1
SUMMARY			6
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF CORNERSTONE			14
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF SMARTFINANCIAL			16
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION			18
RISK FACTORS			32
FORWARD-LOOKING STATEMENTS			44
THE CORNERSTONE ANNUAL MEETING			46
THE SMARTFINANCIAL ANNUAL MEETING			49
CORNERSTONE AND SMARTFINANCIAL PROPOSAL NO. 1 — THE MERGER			52
General			52
Transaction Structure			52
SmartFinancial Proposal			52
Cornerstone Proposal			52
Background of the Merger			52
SmartFinancial’s Reasons for the Merger; Recommendation of the SmartFinancial Board of Directors			55
Opinion of SmartFinancial’s Financial Advisor			57
Cornerstone’s Reasons for the Merger; Recommendation of the Cornerstone Board of Directors			66
Opinion of Cornerstone’s Financial Advisor			67
Merger Consideration and Fractional Shares			72
Treatment of SmartFinancial Stock Options			73
Closing and Effective Time of the Merger			73
Exchange of Certificates			73
Resale of Cornerstone Common Stock			74
Regulatory Matters			74
Information Regarding Director Appointees			74
Information Regarding Executive Officers			78
Important United States Federal Income Tax Consequences of the Merger			79
Directors of the Surviving Corporation and Subsidiary Banks after the Merger			83
Interests of Employees and Directors of SmartFinancial in the Merger			86
Interests of Employees and Directors of Cornerstone in the Merger			88
Conditions to Consummation of the Merger			88
Termination of the Merger Agreement			90
Representations and Warranties Made by Cornerstone, Cornerstone Community Bank, SmartFinancial, and SmartBank in the Merger Agreement			92

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		Page
Amendment, Waiver, and Termination			94
Effect of Termination			94
Covenants and Agreements			96
Other Acquisition Proposals			98
Expenses and Fees			103
Governing Law			103
Accounting Treatment			103
Cornerstone Financing Transaction			104
The Private Placement			104
Holding Company Loan			104
Dissenters’ Rights			104
Summary of Chapter 23 of the Tennessee Business Corporation Act — Dissenters’ Rights			105
COMPARATIVE RIGHTS OF CORNERSTONE AND SMARTFINANCIAL SHAREHOLDERS			109
CORNERSTONE PROPOSAL NO. 2 — AUTHORIZED STOCK AMENDMENT PROPOSAL			125
CORNERSTONE PROPOSAL NO. 3 — REVERSE STOCK SPLIT AMENDMENT PROPOSAL			127
CORNERSTONE PROPOSAL NO. 4 — AMENDMENT AND RESTATEMENT PROPOSAL			128
CORNERSTONE PROPOSAL NO. 5 — STOCK PLAN PROPOSAL			130
CORNERSTONE PROPOSAL NO. 6 — ELECTION OF DIRECTORS			133
CORNERSTONE PROPOSAL NO. 7 — COMPENSATION PROPOSAL			144
CORNERSTONE PROPOSAL NO. 8 — RATIFICATION OF INDEPENDENT ACCOUNTING FIRM			147
CORNERSTONE PROPOSAL NO. 9 — ADJOURNMENT			148
CORNERSTONE PROPOSAL NO. 10 — SERIES A REDEMPTION AMENDMENT PROPOSAL			149
SMARTFINANCIAL PROPOSAL NO. 2 — ELECTION OF DIRECTORS			151
SMARTFINANCIAL PROPOSAL NO. 3 — RATIFICATION OF INDEPENDENT AUDITING FIRM			152
SMARTFINANCIAL PROPOSAL NO. 4 — AUTHORIZATION TO ADJOURN			153
CORNERSTONE OTHER MATTERS			153
SMARTFINANCIAL OTHER MATTERS			153
FUTURE SHAREHOLDER PROPOSALS			154
INFORMATION ABOUT SMARTFINANCIAL AND SMARTBANK			163
General			163
Certain Other Related Transactions			163
Legal Proceedings			164
Market for SmartFinancial’s Common Stock and Related Shareholder Matters			164
Security Ownership of Certain Beneficial Owners and Management of SmartFinancial			164

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		Page
SMARTFINANCIAL’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			165
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013			166
Non-Interest Expense			169
Income Taxes			170
Overview			171
Loans			171
Allowance for Loan Losses			172
Nonperforming Assets			174
Investment Securities and Other Earning Assets			175
Premises and Equipment			176
Deposits			176
Market and Liquidity Risk Management			176
Capital			178
Effects of Inflation and Changing Prices			179
Contractual Obligations			180
Off Balance Sheet Arrangements			180
INFORMATION ABOUT CORNERSTONE AND CORNERSTONE COMMUNITY BANK			181
Overview			181
Security Ownership of Certain Beneficial Owners and Management			183
CORNERSTONE’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			186
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			212
DESCRIPTION OF CORNERSTONE COMMON STOCK AND PREFERRED STOCK			214
Common Stock			214
Transfer Agent and Registrar			215
Preferred Stock			215
Anti-Takeover Provisions in the Tennessee Business Corporation Act applicable to Cornerstone.			216
MARKET FOR CORNERSTONE’S COMMON AND PREFERRED STOCK AND DIVIDENDS			218
LEGAL MATTERS			219
EXPERTS			219
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS			F-1
APPENDIX A MERGER AGREEMENT			A-1
APPENDIX B CHAPTER 23 OF THE TENNESSEE BUSINESS CORPORATION ACT			B-1
APPENDIX C OPINION OF HOVDE GROUP, LLC			C-1
APPENDIX D OPINION OF RAYMOND JAMES & ASSOCIATES, INC.			D-1
APPENDIX E CORNERSTONE AUTHORIZED STOCK AMENDMENT			E-1
APPENDIX FF CORNERSTONE REVERSE STOCK SPLIT AMENDMENT			FF-1

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		Page
APPENDIX G CORNERSTONE SECOND AMENDED AND RESTATED CHARTER			G-1
APPENDIX H CORNERSTONE 2015 STOCK INCENTIVE PLAN			H-1
APPENDIX I CORNERSTONE SERIES A REDEMPTION AMENDMENT			I-1

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SmartFinancial board of directors, which directors will serve until the next annual meeting or until the merger is complete whereupon all seven members will become directors of the surviving corporation, (iii) the ratification of the selection of Mauldin & Jenkins, LLC as SmartFinancial’s independent accounting firm for the fiscal year ending December 31, 2015; and (iv) the adjournment of the annual meeting, if necessary or appropriate, to solicit additional proxies in favor of these proposals.

Holder of SmartFinancial SBLF stock:   U.S. Treasury, as the holder of the SmartFinancial SBLF stock, is also required to consent to the merger. SmartFinancial will seek the written consent of the holder of the SmartFinancial SBLF stock for the merger. As a result, SmartFinancial does not expect the holder of the SmartFinancial SBLF stock to attend the SmartFinancial annual meeting.

SmartFinancial :  The merger agreement must be approved by the affirmative vote of the holders of a majority of the outstanding shares of SmartFinancial common stock and the holder of the SmartFinancial SBLF stock. Accordingly, if you fail to vote on the merger agreement, it will have the same effect as a vote against the merger agreement. The SmartFinancial directors will be elected by a plurality of the votes cast by holders of shares at the annual meeting, which means that the seven nominees receiving the largest number of affirmative votes will be elected to SmartFinancial’s board of directors. Ratification of the selection of Mauldin & Jenkins, LLC as SmartFinancial’s independent accounting firm for 2015 will require the affirmative vote of the holders of a majority of shares of common stock present in person or by proxy. The proposal to authorize adjournment must be approved by the affirmative vote of a majority of shares of SmartFinancial common stock present in person or by proxy.

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Each outstanding share of Cornerstone common stock, after the anticipated reverse stock split, will remain outstanding after the merger. If the reverse stock split is approved, the exchange ratio will be adjusted and each outstanding share of SmartFinancial common stock will be converted into the right to receive 1.05 shares of Cornerstone common stock.

If the amendment to Cornerstone’s current amended and restated charter to allow for earlier redemption of Cornerstone’s Series A preferred stock is approved, holders of Cornerstone Series A preferred stock will receive cash equal to $26.25 per share, which is equal to the original issue price per share of Series A preferred stock, plus any accumulated and unpaid dividends (regardless of whether any dividends are actually declared) through July 30, 2015.

Cornerstone will not issue fractional shares of Cornerstone common stock in connection with the merger. A holder of SmartFinancial common stock who would otherwise be entitled to receive a fraction of a share of Cornerstone common stock will instead receive the number of shares of Cornerstone common stock issuable to such holder rounded up to the next whole share.

Cornerstone’s common stock is quoted on the Over-the-Counter Bulletin Board quotation system under the symbol “CSBQ” but is not listed on a national securities exchange. The purpose of the reverse stock split amendment proposal is to increase the probability that per share trading price of the common stock will be sufficient to list the common stock on the Nasdaq Capital Market. The surviving corporation intends to apply for its common stock to be listed on the Nasdaq Capital Market in connection with the completion of the merger.

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The purpose of the amendment and restatement proposal is to consolidate the foregoing amendments into a single instrument, as appropriate; change the name of the surviving corporation to “SmartFinancial, Inc.”; change the principal address of the surviving corporation to 5401 Kingston Pike, Suite 600, Knoxville, Tennessee 37919; and determine the preferences, limitations and relative rights of the Cornerstone SBLF stock exchanged for the SmartFinancial SBLF stock in connection with the merger agreement.

The purpose of the Series A redemption amendment proposal is to allow Cornerstone to redeem the Series A preferred stock before the anticipated date of closing the merger, because redemption is required under the merger agreement to allow the exchange of the Cornerstone SBLF stock for the SmartFinancial SBLF stock in connection with the merger agreement.

Cornerstone intends to raise capital through a private placement of Cornerstone common stock for up to $15 million and by obtaining a holding company loan of up to $8 million from a correspondent bank lender. There is a risk either of these may not come to fruition. If Cornerstone is not able to obtain necessary capital, it or SmartFinancial would likely terminate the merger agreement due to failure to satisfy a closing condition and the inability to obtain regulatory approval. See “ Proposal No. 1 — The Merger — Cornerstone Financing Transaction .”

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SmartFinancial shareholders:

Jennifer Andrews
SmartFinancial, Inc.
PO Box 1910,
Pigeon Forge, Tennessee 37868
(865) 453-2650

Cornerstone shareholders:

Nathaniel F. Hughes
Cornerstone Bancshares, Inc.
835 Georgia Avenue
Chattanooga, Tennessee 37402
(423) 385-3000.

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merger will be replaced by the second amended and restated charter of the surviving corporation, including the proposed amendments to the Cornerstone charter before the holders of Cornerstone common stock and Series A preferred stock at the annual meeting.

What SmartFinancial shareholders will receive in the merger (page [•])

The merger agreement provides that each outstanding share of SmartFinancial common stock will be converted into the right to receive 4.20 shares of Cornerstone common stock (we refer to this number as the “exchange ratio”). The exchange ratio is subject to adjustment based on an anticipated reverse stock split of Cornerstone common stock at a 4-to-1 ratio, which will adjust the exchange ratio to 1.05 shares of Cornerstone common stock. The merger agreement also provides that the holder of the SmartFinancial SBLF stock will receive Cornerstone SBLF stock with equivalent rights, preferences, privileges, and voting powers as the SmartFinancial SBLF stock. Additionally, if the merger is completed, each option to purchase a share of SmartFinancial common stock will be converted into an option to purchase a share of Cornerstone common stock multiplied by the exchange ratio, and the exercise price of such option will become the exercise price of the option immediately prior to the merger divided by the exchange ratio. Cornerstone will not issue fractional shares of Cornerstone common stock in connection with the merger. A holder of SmartFinancial common stock who would otherwise be entitled to receive a fraction of a share of Cornerstone common stock will instead receive the number of shares of Cornerstone common stock issuable to such holder rounded up to the next whole share.

Cornerstone annual meeting of shareholders (page [•])

Cornerstone will hold its annual meeting at the EPB Building, 7 ^th Floor Auditorium, 10 W. Martin Luther King, Jr. Blvd, Chattanooga, Tennessee, on [ • ] , 2015, beginning at [ • ] p.m. local time.

SmartFinancial annual meeting of shareholders (page [•])

SmartFinancial will hold its the annual meeting of shareholders on [ • ] , 2015, at [ • ] p.m., local time, at the campus of Walters State Community College, 1720 Old Newport Hwy, Sevierville, Tennessee 37876.

Cornerstone’s board of directors unanimously recommends that Cornerstone shareholders vote “FOR” the merger proposal and the other proposals presented at the Cornerstone annual meeting (page [•])

Cornerstone’s board of directors has determined that the merger proposal is advisable and in the best interests of Cornerstone and its shareholders and has unanimously approved the merger agreement. Cornerstone’s board of directors unanimously recommends that Cornerstone common shareholders vote “ FOR ” the approval of the merger proposal; “ FOR ” the approval of the authorized stock amendment proposal; “ FOR ” the approval of the reverse stock split amendment proposal; “ FOR ” the approval of the amendment and restatement proposal; “ FOR ” the approval of the stock plan proposal; “ FOR ” the approval of the compensation proposal; “ FOR ” the election of the individuals nominated to serve as members of the board of directors; “ FOR ” the ratification of the appointment of Mauldin & Jenkins, LLC by the audit committee to serve as Cornerstone’s independent accounting firm for the fiscal year ending December 31, 2015; “ FOR ” the proposal to authorize Cornerstone’s board of directors to adjourn the annual meeting to allow time for further solicitation of proxies in the event there are insufficient votes to approve the merger agreement; and, with respect to holders of Cornerstone’s Series A preferred stock, “ FOR ” the Series A redemption amendment proposal.

SmartFinancial’s board of directors unanimously recommends that holders of SmartFinancial common stock and SmartFinancial SBLF stock vote “FOR” the merger and that holders of SmartFinancial common stock vote “FOR” the other proposals presented at the SmartFinancial annual meeting (page [•])

SmartFinancial’s board of directors has determined that the merger and the merger agreement are advisable and in the best interests of SmartFinancial and its shareholders and has adopted the merger agreement. SmartFinancial’s board of directors recommends that SmartFinancial shareholders vote “ FOR ” the approval of the merger agreement; “ FOR ” the election of the seven individuals nominated to the board of directors; “ FOR ” the ratification of the appointment of Mauldin & Jenkins, LLC by the audit committee to serve as SmartFinancial’s independent accounting firm for the fiscal year ending December 31, 2015; and

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“ FOR ” the proposal to authorize SmartFinancial’s board of directors to adjourn the annual meeting to allow time for further solicitation of proxies in the event there are insufficient votes to approve the merger agreement. SmartFinancial will seek the written consent of the holder of the SmartFinancial SBLF stock for the merger. As a result, SmartFinancial does not expect the holder of the SmartFinancial SBLF stock to attend the SmartFinancial annual meeting.

Opinion of Cornerstone’s Financial Advisor (page 67 )

In connection with Cornerstone’s proposed merger with SmartFinancial, at the December 5, 2014 meeting of Cornerstone’s board of directors, representatives of Raymond James & Associates, Inc. (“Raymond James”) rendered Raymond James’s written opinion to the board as to the fairness, as of the date of the opinion, from a financial point of view, to the holders of Cornerstone’s outstanding common stock of the exchange ratio, based upon and subject to the qualifications, assumptions and other matters considered in connection with the preparation of the opinion.

The full text of the opinion of Raymond James, dated December 5, 2014, sets forth, among other things, the various qualifications, assumptions and limitations on the scope of the review undertaken, is attached to this joint proxy statement/prospectus as Appendix D . Raymond James provided the opinion for the information and assistance of the board (solely in its capacity as such) in connection with, and for purposes of, its consideration of the merger and its opinion only addresses whether the exchange ratio was fair, from a financial point of view, to the holders of Cornerstone’s outstanding common stock. The opinion of Raymond James did not address any other term or aspect of the merger agreement or the merger contemplated thereby. The Raymond James opinion does not constitute a recommendation to the board or any holder of Cornerstone’s common stock as to how the board, such shareholder or any other person should vote or otherwise act with respect to the merger or any other matter.

Opinion of SmartFinancial’s financial adviser (page [•])

In connection with its consideration of the merger, on December 5, 2014, the SmartFinancial board of directors received from Hovde Group LLC (“Hovde”), SmartFinancial’s financial advisor, its oral opinion, which opinion was confirmed by delivery of a written opinion, dated December 5, 2014, to the effect that, as of such date and based upon and subject to the various factors, assumptions and limitations set forth in its opinion, the merger consideration in the merger was fair, from a financial point of view, to the holders of SmartFinancial common stock. The full text of Hovde’s written opinion is attached as Appendix C to this joint proxy statement/prospectus. You should read the entire opinion for a discussion of, among other things, the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Hovde in rendering its opinion. Hovde’s written opinion is addressed to the SmartFinancial board of directors, is directed only to the merger consideration in the merger and does not constitute a recommendation to any SmartFinancial shareholder as to how such shareholder should vote with respect to the merger or any other matter.

The receipt by SmartFinancial shareholders of Cornerstone common stock in the merger will be tax-free. (page [•])

The merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and it is a condition to the respective obligations of SmartFinancial and Cornerstone to complete the merger that each of SmartFinancial and Cornerstone receives a legal opinion to that effect. Accordingly, a SmartFinancial shareholder generally will not recognize any gain or loss on the exchange of their shares of SmartFinancial common stock for shares of Cornerstone common stock. However, if any Cornerstone or SmartFinancial shareholder receives cash for dissenting shares such exchange generally will be treated as a taxable transaction causing such Cornerstone or SmartFinancial shareholder to recognize gain or loss on the exchange.

The Merger Will Be Tax-Free to Holders of Cornerstone Common Stock (page [•])

The merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code and it is a condition to the respective obligations of Cornerstone and SmartFinancial to complete the merger that each of them receives a legal opinion to that effect.

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The U.S. federal income tax consequences described above may not apply to all holders of Cornerstone or SmartFinancial common stock. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your independent tax advisor for a full understanding of the particular tax consequences of the merger to you.

Interests of SmartFinancial’s directors and executive officers in the merger (page [•])

SmartFinancial shareholders should be aware that some of SmartFinancial’s directors and executive officers have interests in the merger and have arrangements that are different from, or in addition to, those of SmartFinancial shareholders generally. SmartFinancial’s board of directors was aware of these interests and considered these interests, among other matters, when making its decision to adopt the merger agreement, and in recommending that SmartFinancial shareholders vote in favor of approving the merger agreement.

These interests include the following:

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Interests of Cornerstone’s directors and executive officers in the merger (page [•])

Cornerstone shareholders should be aware that some of Cornerstone’s directors and executive officers have interests in the merger and have arrangements that are different from, or in addition to, those of Cornerstone shareholders generally. Cornerstone’s board of directors was aware of these interests and considered these interests, among other matters, when making its decision to adopt the merger agreement, and in recommending that Cornerstone shareholders vote in favor of approving the merger agreement.

These interests include the following:

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Shareholders who do not vote in favor of the merger agreement or the Series A redemption amendment proposal may be entitled to assert dissenters’ rights (page [•])

Under Tennessee law, holders of SmartFinancial common stock, Cornerstone common stock and the holder of the SmartFinancial SBLF stock will be entitled to dissent from the merger, and holders of Cornerstone Series A preferred stock will be able to dissent from the Series A redemption amendment proposal. Set forth below is a summary of the procedures that must be followed by the shareholders to exercise their dissenters’ rights with respect to a transaction giving rise to dissenters’ rights (a “transaction”). This summary is qualified in its entirety by reference to the text of the applicable Tennessee statutes, a copy of which are attached to this joint proxy statement/prospectus as Appendix B .

A shareholder who wishes to assert dissenters’ rights (a “dissenting shareholder”) (i) must deliver to Cornerstone or SmartFinancial, as applicable, before the vote on the transaction is taken, written notice of his or her intent to demand payment for his or her shares if the transaction is effectuated and (ii) must not vote his or her shares in favor of the transaction. Item (ii) does not require a shareholder to vote against a transaction.

If a transaction is approved, Cornerstone or SmartFinancial, as applicable, will deliver, no later than 10 days after the date that the transaction is completed, a written dissenters’ notice to all dissenting shareholders who satisfied the two requirements set forth above. The written dissenters’ notice will state where the payment demand must be sent and where and when stock certificates must be deposited and will set a date by which Cornerstone or SmartFinancial, as applicable, must receive the payment demand, which date will not be less than one nor more than two months after the written dissenters’ notice is delivered. A dissenting shareholder who does not demand payment or deposit his or her share certificate as required by the dissenters’ notice will not be entitled to payment for his or her shares.

Within 10 days of the later of the date of the transaction or receipt of a payment demand, Cornerstone or SmartFinancial, as applicable, will, by written notice, offer to pay to each dissenting shareholder who properly demanded payment the amount Cornerstone or SmartFinancial, as applicable, estimates to be the fair value of his or her shares, plus accrued interest. If the shareholder believes that the amount offered is less than the fair value of his shares or that the interest is incorrectly calculated, the shareholder may notify Cornerstone or SmartFinancial, as applicable, in writing of his own estimate of the fair value of his shares and the amount of interest due and demand payment of his estimate. If a demand for payment remains unsettled, Cornerstone or SmartFinancial, as applicable, will commence a court proceeding to determine the fair value of the shares and the accrued interest.

Exercise of dissenters’ rights will result in the recognition of gain or loss, as the case may be, for federal income tax purposes.

Conditions that Must Be Satisfied or Waived for the Merger to Occur (page [•])

Currently, SmartFinancial and Cornerstone expect to complete the merger by the end of the second quarter of 2015. As more fully described in this joint proxy statement/prospectus and in the merger agreement, the completion of the merger depends on a number of conditions being satisfied or, where legally permissible, waived. These conditions include (i) approval of the merger by SmartFinancial’s shareholders and approval of the merger proposal and the other proposals subject to this proxy statement by Cornerstone’s shareholders, (ii) the completion of the financing transaction, (iii) the receipt of required regulatory approvals, (iv) the effectiveness of the registration statement of which this joint proxy statement/prospectus is a part, (v) the absence of any order, injunction or other legal restraint preventing the completion of the merger or making the completion of the merger illegal, (vi) subject to the materiality standards provided in the merger agreement, the accuracy of the representations and warranties of Cornerstone and SmartFinancial, (vii) performance in all material respects by each of Cornerstone and SmartFinancial of its obligations under the merger agreement and (viii) receipt by each of Cornerstone and SmartFinancial of an opinion from its counsel as to certain tax matters. The merger is also subject to the consent of the U.S. Treasury, as holder of the SmartFinancial SBLF stock.

Neither SmartFinancial nor Cornerstone can be certain when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed.

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Termination of the Merger Agreement (page [•])

The merger agreement may be terminated at any time before the effective time of the merger for several reasons, including the following:

Termination Fee (page [•])

If the merger agreement is terminated under certain circumstances related to other acquisition proposals, SmartFinancial or Cornerstone may be required to pay to the other party a termination fee equal to $1.2 million. These termination fees could discourage other companies from seeking to acquire or merge with SmartFinancial or Cornerstone.

Authorized Stock Amendment Proposal (page [•])

In connection with the merger, Cornerstone’s amended and restated charter will be amended prior to the effectiveness of the merger to increase the number of authorized shares of common stock from 20,000,000 to 40,000,000, which is necessary for Cornerstone to have enough authorized shares to issue the merger consideration pursuant to the merger agreement, among other reasons.

Reverse Stock Split Amendment Proposal (page [•])

In connection with the merger, the Cornerstone amended and restated charter will be further amended to provide that each four shares of common stock issued and outstanding shall be automatically reclassified and changed into one fully paid and non-assessable share of common stock, which is intended to increase the probability that Cornerstone’s share price will meet the listing requirements of the Nasdaq Capital Market.

Amendment and Restatement Proposal (page [•])

In connection with the merger, Cornerstone’s amended and restated charter will be further amended and restated to, among other things:

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Stock Plan Proposal (page [•])

In connection with the merger, Cornerstone will adopt a 2015 Stock Incentive Plan to grant incentive stock options within the meaning of the Code to key employees and officers and non-qualified options to non-employee directors, consultants, and others for the purchase of shares of common stock, which is necessary to consummate the merger pursuant to the merger agreement.

Series A Redemption Amendment Proposal (page [•])

In connection with the merger, the Cornerstone amended and restated charter will be further amended to provide that Cornerstone, at its option, may redeem, in whole or in part, at any time after March 31, 2015, the outstanding shares of Series A preferred stock at a redemption price equal to the sum of the original issue price per share of the Series A preferred stock, plus any accumulated and unpaid dividends (regardless of whether any dividends are actually declared) through July 30, 2015, which is necessary so that Cornerstone may exchange the Cornerstone SBLF stock for the SmartFinancial SBLF stock pursuant to the merger agreement.

Regulatory approvals required for the merger (page [•])

In connection with the merger, SmartFinancial and Cornerstone have agreed to cooperate with one another and use their reasonable best efforts to prepare all documents, to effect all filings, and to obtain all permits, consents, approvals, waivers, and authorizations of governmental authorities and other third parties (including the Federal Reserve and the Tennessee Department of Financial Institutions) necessary to consummate the merger. Additionally, each party has agreed to furnish the other parties with all information concerning itself and its subsidiaries, directors, officers, and shareholders as may be necessary in connection with any filing, notice, or application made or given with or to any governmental authority or other third party.

In order to consummate the merger, we must obtain approval from the Federal Reserve and the Tennessee Department of Financial Institutions. We anticipate filing regulatory applications with the Federal Reserve and with the Tennessee Department of Financial Institutions shortly after the date of this joint proxy statement/prospectus. As of the date of this joint proxy statement/prospectus, neither the Federal Reserve nor the Tennessee Department of Financial Institutions had granted its approval. Federal Reserve approval or possible approval of the combination: (i) reflects only the view that the transaction does not contravene applicable competitive standards imposed by law and is consistent with regulatory policies relating to safety and soundness; (ii) is not an opinion that the proposed combination is financially favorable to the shareholders or that the Federal Reserve has considered the adequacy of the terms of the transaction; and (iii) is not an endorsement of, or recommendation for, the combination.

Accounting Treatment (page [•])

For accounting purposes, SmartFinancial is considered to be acquiring Cornerstone in this transaction. As a result, the historical financial statements of the surviving corporation will be the historical financial statements of SmartFinancial following the completion of the merger. The merger will be effected by the issuance of shares of Cornerstone stock to SmartFinancial shareholders. The assets and liabilities of Cornerstone as of the effective date of the merger will be recorded at their respective estimated fair values and added to those of SmartFinancial. Any excess of purchase price over the net estimated fair values of the acquired assets and liabilities of Cornerstone will be allocated to all identifiable intangible assets. Any remaining excess will then be allocated to goodwill, the goodwill resulting from the merger will not be amortized to expense, but instead will be reviewed for impairment at least annually. To the extent goodwill is impaired, its carrying value would be written down to its implied fair value and a charge would be made to earnings. Customer related intangibles and other intangibles with definite useful lives will be amortized to expense over their estimated useful lives. If, however, the purchase price is less than the net estimated fair values of the acquired assets and liabilities, the difference will result in a bargain purchase gain.

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF CORNERSTONE

The table below presents selected financial data for the periods indicated (amounts in thousands, except per share data).

		2014				2013				2012				2011				2010
Total interest income		$	18,137			$	18,453			$	19,353			$	20,494			$	25,211
Total interest expense			2,789				3,523				4,785				6,362				9,202
Net interest income			15,348				14,930				14,568				14,132				16,009
Provision for loan losses			515				300				430				445				7,291
Net interest income after provision for loan losses			14,833				14,630				14,138				13,687				8,718
Noninterest income			1,819				1,940				1,019				1,183				3,081
Noninterest expense			14,000				13,846				13,178				13,652				18,042
Income before income taxes			2,652				2,724				1,979				1,218				(6,243	)
Income tax expense/(benefit)			1,014				1,043				577				188				(1,535	)
Net income (loss)		$	1,638			$	1,681			$	1,402			$	1,030			$	(4,708	)
Per Common Share Data:
Net income/(loss), basic		$	0.01			$	0.02			$	0.02			$	0.05			$	(0.73	)
Net income/(loss), assuming dilution			0.01				0.02				0.02				0.05				(0.73	)
Cash dividends paid			—				—				—				—				—
Book value			3.88				3.86				4.01				3.89				3.55
Tangible book value (1)			3.88				3.85				4.01				3.89				3.55
Financial Condition Data:
Assets		$	415,740			$	432,223			$	443,446			$	422,655			$	441,499
Loans, net of unearned interest and allowance			291,869				286,237				270,850				260,365				276,115
Cash and investments			105,069				119,417				137,860				127,332				133,651
Federal funds sold			—				—				—				—				—
Deposits			308,654				341,414				344,881				314,042				355,447
FHLB advances and other borrowings			36,000				26,740				37,175				43,045				54,715
Federal funds purchased and repurchase agreements			29,410				22,974				19,587				29,391				24,325
Shareholders’ equity			40,662				40,134				40,889				35,208				25,819
Tangible shareholders’ equity (1)			40,662				40,131				40,878				35,186				25,782
Selected Ratios:
Interest rate spread			3.73	%			3.64	%			3.67	%			3.36	%			3.24	%
Net interest margin (2)			3.90	%			3.80	%			3.85	%			3.55	%			3.43	%
Return on average assets			0.39	%			0.39	%			0.34	%			0.24	%			(0.94	)%
Return on average equity			4.04	%			4.12	%			3.78	%			3.46	%			(15.79	)%
Return on average tangible equity (1)			4.04	%			4.12	%			3.78	%			3.47	%			(15.81	)%
Average equity to average assets			9.65	%			9.51	%			8.94	%			6.91	%			5.95	%
Common stock dividend payout ratio			N/A				N/A				N/A				N/A				N/A
Ratio of nonperforming assets to total assets			2.61	%			3.82	%			5.94	%			6.26	%			5.99	%
Ratio of allowance for loan losses to nonperforming loans			121.99	%			89.83	%			102.26	%			93.90	%			66.98	%
Ratio of allowance for loan losses to total average loans, net of unearned income			1.19	%			1.15	%			2.28	%			2.71	%			2.93	%

(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.

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GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Certain financial information included in Cornerstone’s summary of consolidated financial data is determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). These non-GAAP financial measures are “tangible book value per common share,” “tangible shareholders’ equity,” and “return on average tangible equity.” Management uses these non-GAAP measures in its analysis of Cornerstone’s financial performance.

“Tangible book value per common 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.

These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures which may be presented by other companies. The following table presents a reconciliation to provide a more detailed analysis of these non-GAAP performance measures:

		At and for the Fiscal Years Ended December 31,
		2014				2013				2012				2011				2010
Number of common shares outstanding			6,627,398				6,547,074				6,500,396				6,500,396				6,500,396
Total stockholders’ equity		$	40,662,105			$	40,133,728			$	40,886,836			$	35,208,305			$	25,819,153
Less: preferred stock			14,964,309				14,892,927				14,821,546				9,899,544				2,727,424
Book value of common shares		$	25,697,796			$	25,240,801			$	26,065,290			$	25,308,761			$	23,091,729
Book value per common share		$	3.88			$	3.86			$	4.01			$	3.89			$	3.55
Book value of common shares		$	25,697,796			$	25,240,801			$	26,065,290			$	25,308,761			$	23,091,729
Less: goodwill and other intangible assets			—				2,427				10,530				22,487				37,317
Tangible book value of common shares		$	25,697,796			$	25,238,374			$	26,054,760			$	25,286,274			$	23,054,412
Effect of intangible assets per common share		$	—			$	0.01			$	—			$	—			$	—
Tangible book value per common share		$	3.88			$	3.85			$	4.01			$	3.89			$	3.55
Net income/(loss)		$	1,638,282			$	1,680,809			$	1,402,063			$	1,030,052			$	(4,707,521	)
Average equity			40,567,000				40,764,000				37,115,000				29,740,000				29,820,000
Return on average equity			4.04	%			4.12	%			3.78	%			3.46	%			(15.79	)%
Average equity		$	40,567,000			$	40,764,000			$	37,115,000			$	29,740,000			$	29,820,000
Less: goodwill and other intangible assets			—				2,427				10,530				22,487				37,317
Average tangible equity		$	40,567,000			$	40,761,573			$	37,104,470			$	29,717,513			$	29,782,683
Effect of intangible assets			0.00	%			0.00	%			0.00	%			(0.01	)%			(0.02	)%
Return on average tangible equity			4.04	%			4.12	%			3.78	%			3.47	%			(15.81	)%

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF SMARTFINANCIAL

The following selected historical consolidated financial data as of and for the years ended December 31, 2014 and 2013 is derived from the audited consolidated financial statements of the company.

(amounts are in thousands, except ratios, per share data, banking locations and FTEs)

		Years Ended December 31,
		2014				2013
SUMMARY OF OPERATIONS
Total interest income		$	20,753			$	20,160
Total interest expense			2,037				2,299
Net interest income			18,717				17,861
Provision for loan losses			432				582
Net interest income after provision for loan losses			18,285				17,279
Non-interest income			1,734				1,957
Non-interest expense			17,068				14,900
Income before income taxes			2,950				4,335
Income tax expense			1,118				1,663
Consolidated net income			1,833				2,673
SHARE AND PER COMMON SHARE DATA:
Basic earnings per share		$	0.58			$	0.86
Diluted earnings per share			0.52				0.77
Common equity per common share outstanding			14.80				13.78
Tangible book value per share			14.71				13.64
Dividends per common share			—				—
Preferred shares outstanding			12				12
Actual common shares outstanding			2,966				2,963
Weighted average common shares outstanding			2,964				2,963
Diluted weighted average common shares outstanding			3,293				3,298
BALANCE SHEET DATA:
Assets		$	533,714			$	507,702
Mortgage loans held for sale
Gross Loans, net of deferred loan fees			363,403				315,079
Allowance for loan losses			3,880				4,136
Total securities			98,876				93,016
Total deposits			454,807				446,564
Federal Home Loan Bank advances			—				—
Other borrowed funds			21,758				7,616
Preferred shareholders’ equity			12,000				12,000
Common shareholders’ equity			43,888				40,830
Total shareholders’ equity			55,888				52,830
Average total assets			504,046				465,341
Average gross loans, net of deferred loan fees			346,732				314,808
Average interest-earning assets			455,465				428,231
Average deposits			451,548				413,856
Average interest-bearing deposits			388,033				346,930
Average interest-bearing liabilities			399,881				353,268
Average total shareholders’ equity			53,960				51,313

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		Years Ended December 31,
		2014				2013
SELECTED FINANCIAL RATIOS:
Return on average assets			0.36	%			0.57	%
Return on average equity			3.41	%			5.21	%
Average equity to average total assets			10.65	%			11.03	%
Efficiency ratio			82.51	%			74.44	%
Net interest margin			4.11	%			4.17	%
Net interest spread			4.04	%			4.03	%
CAPITAL RATIOS:
Tier 1 leverage ratio			10.83	%			10.67	%
Tier 1 risk-based capital			13.83	%			15.64	%
Total risk-based capital			14.73	%			16.86	%
ASSET QUALITY RATIOS:
Net charge-offs to average loans			0.20	%			0.04	%
Allowance to period end loans			1.07	%			1.31	%
Allowance for loan losses to non-performing loans			76.57	%			513.03	%
Non-performing assets to total assets			1.88	%			1.18	%
OTHER DATA:
Banking locations			7				7
Loan production offices			1				1
Full-time equivalent employees			114				113

Table Assumptions  — SmartFinancial’s efficiency ratio is calculated as non-interest expense divided by the sum of net interest income on a fully tax equivalent basis plus non-interest income excluding gains and losses on the sale of securities and real estate. Net interest margin is the result of net interest income calculated on a tax-equivalent basis divided by average interest earning assets for the period. Net interest spread is calculated as the yields realized on interest-bearing assets less the rates paid on interest-bearing liabilities.

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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION

The following unaudited pro forma combined consolidated financial information and accompanying notes show the impact on the historical financial conditions and results of operations of Cornerstone and SmartFinancial and have been prepared to illustrate the effects of the merger under the acquisition method of accounting. See “ Proposal No. 1 — The Merger. ”

The unaudited pro forma combined consolidated balance sheet as of December 31, 2014 is presented as if the merger had occurred on December 31, 2014. The unaudited pro forma combined consolidated income statements for the year ended December 31, 2014 are presented as if the merger had occurred on January 1, 2014. The historical consolidated financial information has been adjusted to reflect factually supportable items that are directly attributable to the merger and, with respect to the income statements only, expected to have a continuing impact on consolidated results of operations.

The selected unaudited pro forma combined consolidated financial statements are provided for informational purposes only. The unaudited pro forma combined consolidated financial statements are not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the merger been completed as of the dates indicated or that may be achieved in the future. The preparation of the unaudited pro forma combined consolidated financial statements and related adjustments required management to make certain assumptions and estimates. The unaudited pro forma combined consolidated financial statements should be read together with:

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Unaudited Pro Forma Combined Consolidated Balance Sheet
December 31, 2014
(in thousands)

		SmartFinancial As Reported				Cornerstone As Reported				Pro Forma Adjustments, Net								Pro Forma Combined
Assets:
Cash and cash equivalents		$	46,739			$	15,528			$	5,936				g,j			$	68,203
Investment securities available-for-sale, fair value			98,876				87,193				—								186,069
Investment securities held-to-maturity, amortized cost			—				25				—								25
Loans, net of deferred fees			363,403				295,364				(7,506	)			a,c				651,261
Allowance for loan losses			(3,880	)			(3,495	)			3,495				c				(3,880	)
Net loans			359,523				291,869				(4,011	)			a				647,381
Premises and equipment, net			15,939				4,828				1,850				d				22,617
Other real estate owned			4,983				8,000				(1,237	)			e				11,746
Deferred tax asset, net			2,797				1,801				957				b				5,555
Bank owned life insurance			—				1,258				—								1,258
Core deposit intangibles			258				—				2,483				a				2,741
Other assets			4,599				5,238				—								9,837
Total Assets		$	533,714			$	415,740			$	5,978							$	955,432
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits – noninterest-bearing		$	53,640			$	57,035			$	—							$	110,675
Deposits – interest-bearing			401,167				251,620				1,029				a				653,816
Total deposits			454,807				308,655				1,029								764,491
Securities sold under repurchase agreements			9,758				29,410				—								39,168
Other borrowings			12,000				36,000				8,582				a,j				58,582
Other liabilities			1,261				1,013				—								2,274
Total liabilities			477,826				375,078				9,611								862,215
Shareholders’ Equity:
Preferred Stock			12				14,964				(14,964	)			j				12
Common Stock			2,966				6,627				13,491				h,i,j				23,084
Additional paid in capital			42,508				21,821				(4,384	)			h,i,j				59,945
Retained earnings (deficit)			10,705				(3,032	)			2,506				f,g,h				10,179
Accumulated other comprehensive income (loss)			(303	)			282				(282	)			h				(303	)
Total shareholders’ equity			55,888				40,662				(3,633	)							92,917
Total Liabilities and Shareholders’ Equity		$	533,714			$	415,740			$	5,978							$	955,432

 
 
See accompanying notes to Unaudited Pro Forma Combined Consolidated Financial Information.

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Unaudited Pro Forma Combined Consolidated Statement of Income
For the Year Ended December 31, 2014
(in thousands, except per share data)

		SmartFinancial As Reported				Cornerstone As Reported				Pro Forma Adjustments				Pro Forma Combined
Interest income:
Loans, including fees		$	18,808			$	16,690			$	935			$	36,433
Investment securities			1,798				1,416				—				3,214
Federal funds sold and other			147				31				—				178
Total interest income			20,753				18,137				935				39,825
Interest expense:
Deposits			2,026				1,741				(882	)			2,885
Other borrowings			11				1,049				11				1,070
Total interest expense			2,037				2,790				(871	)			3,955
Net interest income			18,716				15,347				1,806				35,869
Provision for loan losses			432				515				—				947
Net interest income after loan loss provision			18,284				14,832				1,806				34,922
Non-interest income:
Service charges on deposit accounts and other fees			513				850				—				1,363
Secondary market loan origination fees			177				235				—				412
Gain on sale of investment securities, net			116				700				—				816
Other non-interest income			928				34				974				1,936
Total non-interest income			1,734				1,819				974				4,527
Non-interest expense:
Salaries and employee benefits			9,195				7,054				—				16,249
Occupancy and equipment			2,176				1,230				74				3,480
Other non-interest expense			5,697				5,715				166				11,578
Total non-interest expense			17,068				13,999				240				31,307
Income before income tax expense			2,950				2,652				2,540				8,142
Income tax expense			1,117				1,014				973				3,104
Net income			1,833				1,638				1,567				5,038
Preferred dividends			120				1,500				—				1,620
Accretion of preferred stock discount			—				71				—				71
Net income available to common shareholders		$	1,713			$	67			$	1,567			$	3,347
Basic earnings available to common shareholders per share		$	0.58			$	0.01							$	0.15
Diluted earnings available to common shareholders per share		$	0.52			$	0.01							$	0.14
Weighted average common shares outstanding:
Basic			2,963,589				6,614,414								23,070,703
Diluted			3,293,487				6,836,787								24,678,647

 
 
See accompanying notes to Unaudited Pro Forma Combined Consolidated Financial Information.

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(all amounts are in thousands, except per share data, unless otherwise indicated)

Note 1 — Basis of Pro Forma Presentation

The unaudited pro forma combined balance sheet as of December 31, 2014 and the unaudited pro forma combined income statements for the year ended December 31, 2014 are based on the historical financial statements of Cornerstone and SmartFinancial after giving effect to the completion of the merger and the assumptions and adjustments are described in the accompanying notes. Such financial statements do not reflect cost savings or operating synergies expected to result from the merger, or the costs to achieve these cost savings or operating synergies, any anticipated disposition of assets that may result from the integration of the operations of the two companies or any additional costs that may be incurred as a result of being a registered company. Certain historical financial information has been reclassified to conform to the current presentation.

The transaction will be accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). In business combination transactions in which the consideration given is not in the form of cash (that is, in the form of non-cash assets, liabilities incurred, or equity interests issued), measurement of the acquisition consideration is based on the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable.

Under ASC 805, all of the assets acquired and liabilities assumed in a business combination are recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense. Subsequent to the completion of the merger, Cornerstone and SmartFinancial will finalize an integration plan, which may affect how the assets acquired, including intangible assets, will be utilized by the surviving corporation. For those assets in the surviving corporation that will be phased out or will no longer be used, additional amortization, depreciation and possibly impairment charges will be recorded after management completes the integration plan.

The unaudited pro forma information is presented solely for informational purposes and is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the surviving corporation.

Note 2 — Preliminary Estimated Acquisition Consideration

Under the terms of the merger agreement, SmartFinancial shareholders will be entitled to receive 4.20 shares of Cornerstone common stock for each common share of SmartFinancial. The exchange ratio is subject to adjustment based on an anticipated reverse stock split of Cornerstone common stock at a 4-to-1 ratio. Cash will be paid only to the extent of any SmartFinancial shareholders that properly dissent from the merger. Accordingly, we do not expect that any significant cash will be paid to SmartFinancial shareholders as a result of the merger. Even though SmartFinancial shareholders will receive Cornerstone shares, for accounting purposes, SmartFinancial has been treated as the acquirer of Cornerstone.

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(all amounts are in thousands, except per share data, unless otherwise indicated)

Note 2 — Preliminary Estimated Acquisition Consideration  – (continued)

The pro forma stock ownership related to the acquisition is as follows:

		SmartFinancial				Cornerstone				Financing Transaction				Total
Shares issued and outstanding as of December 31, 2014 (1)			2,965,783				6,627,398				4,000,000	(2)
Smart conversion Ratio			4.20				—				—
Pro forma shares of Cornerstone stock			12,456,289				6,627,398				4,000,000				23,083,687
Pro forma ownership percentages			53.96	%			28.71	%			17.33	%			100	%
Potential effect of exercise of stock options			1.77				(0.55	)			(1.22	)			—
Pro forma ownership percentages on a fully diluted basis			55.73	%			28.17	%			16.11	%			100	%

Measurement of the acquisition consideration was based on the estimated fair value of Cornerstone common stock, which was more clearly evident than the fair value of the net assets acquired. Based on the estimate of value of the shares of Cornerstone common stock outstanding as of December 31, 2014, the preliminary estimated acquisition consideration is as follows:

		Acquisition Price
Common Shares outstanding			6,627,398
Multiplied by Cornerstone common stock market price on December 31, 2014		$	3.31
Estimated fair value of Cornerstone common stock issued			21,936,687
Preliminary fair value estimate of Cornerstone stock options			1,218,440
Total Preliminary Estimated Acquisition Consideration		$	23,155,127

Under the acquisition method of accounting, the total acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of Cornerstone based on their estimated fair values as of the closing of the merger. The excess of the acquisition consideration over the fair value of the acquired assets and liabilities assumed, if any, is allocated to goodwill.

The allocation of the estimated acquisition consideration is preliminary because the proposed merger has not yet been completed. The preliminary allocation is based on estimates, assumptions, valuations, and other studies which have not progressed to a stage where there is sufficient information to make a definitive allocation. Accordingly, the acquisition consideration allocation unaudited pro forma adjustments will remain preliminary until SmartFinancial management determines the final acquisition consideration and the fair values of assets acquired and liabilities assumed. The final determination of the acquisition consideration allocation is anticipated to be completed as soon as practicable after the completion of the merger and will be based on the value of the Cornerstone common stock at the closing of the merger. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the unaudited pro forma combined consolidated financial statements.

The total preliminary acquisition consideration has been allocated to Cornerstone’s tangible and intangible assets and liabilities as of December 31, 2014, based on their preliminary estimated fair values as follows:

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(all amounts are in thousands, except per share data, unless otherwise indicated)

Note 2 — Preliminary Estimated Acquisition Consideration  – (continued)

		(In Thousands)
Total preliminary estimated acquisition consideration						$	23,155
Fair value of assets assumed
Cash and cash equivalents		$	15,528
Investment securities available for sale			87,193
Loans			287,858
Bank premises and equipment			6,678
Bank owned life insurance			1,258
Other real estate owned			6,763
Deferred tax asset			2,758
Other assets			5,263
Core deposits intangibles			2,483
Total fair value of assets acquired			415,782
Fair value of liabilities assumed
Deposits			(309,684	)
FHLB advances and other borrowings			(36,582	)
Payables and other liabilities			(30,423	)
Total fair value of liabilities assumed			(376,689	)
Preferred Stock			(14,964	)
Net assets acquired			24,129				24,129
Deficiency of cost less fair value of net assets acquired — bargain purchase gain						$	(974	)

Identifiable intangible assets.   The preliminary fair values of intangible assets were determined based on the provisions of ASC 805, which defines fair value in accordance with ASC Topic 820 , Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Intangible assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. The preliminary allocation to intangible assets is an allocation to core deposit intangibles. Based upon an independent study, an asset of $2,483 was allocated to the core deposit intangible.

Goodwill.   Goodwill represents the excess of the preliminary estimated acquisition consideration over the preliminary fair value of the underlying net tangible and intangible assets. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets are the skill sets, operations, customer base, and organizational cultures that can be leveraged to enable the surviving corporation to build an enterprise greater than the sum of its parts. In accordance with ASC Topic 350, Intangible — Goodwill and Other, goodwill will not be amortized, but instead will be tested for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment. In the event management determines that the value of goodwill has become impaired, the surviving corporation will incur an accounting charge for the amount of the impairment during the period in which the determination is made.

Bargain purchase gain.   Bargain purchase gain represents the deficiency of the preliminary estimated acquisition consideration less the preliminary fair value of the underlying net tangible and intangible assets.

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(all amounts are in thousands, except per share data, unless otherwise indicated)

Note 3 — Preliminary Unaudited Pro Forma and Acquisition Accounting Adjustments

The unaudited pro forma financial information is not necessarily indicative of what the financial position actually would have been had the merger been completed at the date indicated. Such information includes adjustments which are preliminary and may be revised. Such revisions may result in material changes. The financial position shown herein is not necessarily indicative of what the past financial position of the combined companies would have been, nor necessarily indicative of the financial position of the post-merger periods. The unaudited pro forma financial information does not give consideration to the impact of possible cost savings, expense efficiencies, synergies, strategy modifications, asset dispositions, or other actions that may result from the merger.

The following unaudited pro forma adjustments will result from accounting for the merger, including the determination of fair value of the assets, liabilities, and commitments which SmartFinancial, as the acquirer, will acquire from Cornerstone. The descriptions related to these preliminary adjustments are as follows.

Balance Sheet — the explanations and descriptions below are referenced to the December 31, 2014,
Unaudited Pro Forma Combined Consolidated Balance Sheet.

PRO FORMA ADJUSTING ENTRIES (BALANCE SHEET):		Debit				Credit
a. Loans – fair value adjustment and credit mark		$	—				4,011
a. Core deposit premium			2,483				—
a. Deposits – interest-bearing			—				1,029
a. FHLB – fair value adjustment			—				582
b. Deferred tax assets			—				1,801
b. Deferred tax assets			2,758				—
c. Allowance for loan losses			3,495				—
c. Loans			—				3,495
d. Premises and equipment			1,850				—
e. Other real estate owned			—				1,237
f. Bargain purchase gain			—				974
g. Cash			—				1,500
g. Retained earnings			1,500				—
h. Retained earnings			—				3,032
h. Common stock			6,627				—
h. Additional paid in capital			21,821				—
h. Accumulated other comprehensive income			282				—
i. Common stock			—				16,118
i. Additional paid in capital			—				7,037
j. Common stock			—				4,000
j. Additional paid in capital			—				10,400
j. Cash			7,436				—
j. Series A preferred stock			14,964				—
j. Other Borrowings			—				8,000
		$	63,216			$	63,216

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(all amounts are in thousands, except per share data, unless otherwise indicated)

Note 3 — Preliminary Unaudited Pro Forma and Acquisition Accounting Adjustments  – (continued)

Adjustment to intangibles for a core deposit premium of $2,483.
Adjustment to loans of ($7,506) which includes a fair value component and a credit component. The estimated fair value adjustment is ($917) and the credit adjustment is estimated to be ($6,589). Adjustment to time deposits of $1,029.
Adjustment to other borrowings of $582.

		(In Thousands) Temporary Differences				(In Thousands) Deferred Tax Asset (Liability)				Estimated Amortization Period
Loans – credit mark		$	6,589			$	2,523				5 years
Loans – fair value adjustment			917				351				5 years
Bank – premises and equipment			(1,850	)			(708	)			25 years
Deferred gain on sale of other real estate			1,237				474				1 year
Core deposit intangible			(2,483	)			(499	)			15 years
Deposits – fair value adjustment			1,029				394				14 months
FHLB advances – fair value adjustment			582				223				20 months
Deferred tax asset						$	2,758

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(all amounts are in thousands, except per share data, unless otherwise indicated)

Note 3 — Preliminary Unaudited Pro Forma and Acquisition Accounting Adjustments  – (continued)

Income Statements — the explanations and descriptions below are referenced to the
Unaudited Pro Forma Combined Consolidated Statements of Income
for the year ended December 31, 2014.
Income Statements — reclassifications
Income Statements — Pro Forma Adjustments

Pro Forma Adjusting Entries (Income Statements)
a. Amortization expense of core deposit intangible		$	(166	)
b. Preliminary estimate of loan interest accretion			935
c. Preliminary estimate of buildings and equipment fair value adjustment depreciation			(74	)
d. Preliminary estimate of time deposits fair value adjustment amortization			882
e. Amortization of adjustment to FHLB advances			349
f. Preliminary estimate of other borrowings interest expense			(360	)
g. Bargain purchase gain			974
h. Income tax expense of pro-forma adjustments			973

Note 4 — Earnings per Common Share

Unaudited pro forma earnings per common share for the year ended December 31, 2014 have been calculated using Cornerstone’s historic weighted average common shares outstanding plus the common shares assumed to be issued to SmartFinancial shareholders in the merger plus shares to be issued as part of the private offering component of the financing transaction.

Under the terms of the merger agreement, SmartFinancial shareholders will be entitled to receive 4.20 shares of Cornerstone common stock for each common share of SmartFinancial. The exchange ratio is

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(all amounts are in thousands, except per share data, unless otherwise indicated)

Note 4 — Earnings per Common Share  – (continued)

subject to adjustment based on an anticipated reverse stock split of Cornerstone common stock at a 4-to-1 ratio. Cash will be paid only to the extent of any SmartFinancial shareholders that properly dissent from the merger. Accordingly, we do not expect that any significant cash will be paid to SmartFinancial shareholders as a result of the merger.

Each option to purchase a share of SmartFinancial common stock will be converted into an option to purchase a share of Cornerstone common stock multiplied by the exchange ratio and the exercise price will become the exercise price of such option divided by the exchange ratio. If the reverse stock split is approved, the exchange ratio will be adjusted and each outstanding share of SmartFinancial common stock will be converted into the right to receive 1.05 shares of Cornerstone common stock.

The following table sets forth the calculation of basic and diluted unaudited pro forma earnings per common share for the year ended December 31, 2014.

		Year Ended December 31, 2014
		Basic				Diluted
Pro forma net income available to common shareholders		$	3,347			$	3,347
Weighted average common shares outstanding:
Cornerstone			6,614,414				6,836,787
Common shares issued to SmartFinancial shareholders			12,456,289				12,456,289
Dilutive effect of SmartFinancial stock option conversion (1)			—				1,385,572
Common shares issued in financing transaction (2)			4,000,000				4,000,000
Pro forma (3)			23,070,703				24,678,647
Pro forma net income per common share		$	0.15			$	0.14

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(all amounts are in thousands, except per share data, unless otherwise indicated)

Note 5 — Preliminary Unaudited Pro Form Regulatory Capital Ratios

The unaudited pro forma regulatory capital ratios shown below are not necessarily indicative of what the financial capital ratios actually would have been had the merger been completed at the date indicated. Such information includes adjustments which are preliminary and may be revised. Such revisions may result in material changes. The capital ratios shown herein are estimates and are not necessarily indicative of what the past capital ratios of the combined companies would have been, nor necessarily indicative of the capital ratios of the post-merger periods.

Average assets and risk weighted assets, for purposes of calculating regulatory capital ratios, have been estimated by using those averages and risk weighted assets as filed on each of SmartBank’s and Cornerstone Community Bank’s regulatory reports for the fourth quarter of 2014, adjusted by the pro forma adjustments. Any of those adjustments that are disallowed have been reflected in average assets, risk weighted assets, and total capital accordingly. The following information reflects the unaudited adjusted pro forma balances used for calculating pro forma regulatory capital ratios as of December 31, 2014.

		Risk Weighted Assets				Average Assets				Proforma Capital
SmartBank		$	401,062			$	511,885
Cornerstone Community Bank			309,805				407,172
Combined balances as of December 31, 2014			710,867				919,057				92,917
Pro forma adjustments affecting assets (% included with asset description denotes the risk weighted category applied):
Cash (0%)			—				5,936
Core Deposit Intangible (0%)			—				2,483
Loans, fair value adjustment (100%)			(4,011	)			(4,011	)
Bank premises and equipment, fair value adjustment (100%)			1,850				1,850
Other Real Estate, fair value adjustment (100%)			(1,237	)			(1,237	)
Deferred Tax Asset, fair value adjustment (100%)			957				957
Total adjusted pro forma assets		$	708,426			$	925,035
Pro forma adjustments affecting pro forma capital:
Disallowed goodwill adjustment											—
Disallowed core deposit intangible, net											(2,741	)
Accumulated other comprehensive loss											(303	)
Adjusted pro forma tier 1 capital											89,873
Pro forma tier 2 capital – allowed portion of allowance for loan and lease losses (limited to 1.25% of risk weighted assets plus allowable adjustments)											3,880
Adjusted pro forma total risk-based capital										$	93,753

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(all amounts are in thousands, except per share data, unless otherwise indicated)

Note 5 — Preliminary Unaudited Pro Form Regulatory Capital Ratios  – (continued)

The following information reflects the estimated unaudited pro forma regulatory capital ratios as of December 31, 2014 and compares those ratios with the regulatory capital ratios of SmartBank and Cornerstone that were reported as of December 31, 2014.

		Pro forma				SmartBank				Cornerstone Community Bank
Tier I Leverage Capital Ratio:
Adjusted pro forma tier 1 capital		$	89,873
Total adjusted pro forma average assets			925,035
Pro forma tier 1 leverage ratio			9.72	%			10.83	%			9.38	%
Tier 1 Risk-Based Capital Ratio:
Adjusted pro forma tier 1 capital		$	89,873
Estimated pro forma risk-weighted assets			708,426
Pro forma tier 1 risk-based capital ratio			12.69	%			13.83	%			12.32	%
Total Risk-Based Capital Ratio:
Adjusted pro forma total risk-based capital		$	93,753
Estimated pro forma risk-weighted assets			708,426
Pro forma total risk based capital ratio			13.23	%			14.73	%			13.45	%

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UNAUDITED COMPARATIVE PER SHARE DATA

The following summary presents per share information from SmartFinancial and Cornerstone on a historical, unaudited pro forma combined per share basis as of and for and for the year ended December 31, 2014. The information presented below should be read together with: (i) SmartFinancial’s audited consolidated financial statements and accompanying notes for year ended December 31, 2014, which is included elsewhere in this joint proxy statement/prospectus; and (ii) Cornerstone’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2014, which is included elsewhere in this joint proxy statement/prospectus.

The unaudited pro forma adjustments are based upon available information and certain assumptions that Cornerstone’s and SmartFinancial’s management believe are reasonable. The unaudited pro forma data, while helpful in illustrating the financial characteristics of the surviving corporation under one set of assumptions, do not reflect the impact of factors that may result as a consequence of the merger or consider any potential impacts of current market conditions of the merger on revenues, expense efficiencies, or asset dispositions, among other factors. As a result, unaudited pro forma data are presented for illustrative purposes only and do not represent an attempt to predict or suggest future results. Upon completion of the merger, the operating results of Cornerstone will be reflected in the consolidated financial statements of SmartFinancial on a prospective basis.

Unaudited Pro Forma Comparative Per Share Data
For the Year Ended December 31, 2014

		As of and for the Year Ended December 31, 2014
		SmartFinancial Historical				Cornerstone Historical				Pro Forma Combined
Earnings per common share:
Basic		$	0.58			$	0.01			$	0.15
Diluted			0.52				0.01				0.14
Cash dividends per common share			—				—				—
Common equity per common share			14.80				3.88				3.49
Tangible common equity per share			14.71				3.88				3.37

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MARKET VALUE OF COMMON STOCK AS OF
DECEMBER 5, 2014, THE LAST TRADING DAY PRIOR TO THE PUBLIC
ANNOUNCEMENT OF THE MERGER AGREEMENT

The following table presents the closing sale price of Cornerstone common stock on December 5, 2014, the last trading day before the date of the public announcement of the merger agreement. The table also presents the equivalent value of the merger consideration per share of SmartFinancial common stock on that date, calculated by multiplying the closing sale price of Cornerstone common stock on those dates by 4.20.

		As of December 5, 2014				Equivalent SmartFinancial per share value
Cornerstone common stock		$	3.00	(1)		$	12.60

There is no established public trading market for SmartFinancial’s common stock. SmartFinancial’s shares are thinly traded in private transactions. A SmartFinancial shareholder who desires to sell his or her common stock must privately locate one or more willing buyers, and may ultimately be motivated to sell for reasons that are different from a seller of shares with an established public market. Accordingly, recent trades of SmartFinancial’s common stock are not necessarily indicative of the potential value of SmartFinancial’s common stock if it were actually traded in a public market. Furthermore, the price per share for trades among SmartFinancial’s shareholders are not necessarily reported to SmartFinancial’s management, and trades known to SmartFinancial management are not necessarily the only trades of SmartFinancial’s common stock. To the best knowledge of SmartFinancial’s management, the trade between shareholders occurring most closely in time to the announcement of the merger for which the price was known to SmartFinancial management was a trade of 1,400 shares at a price of $15.00 per share which occurred on or around May 2014.

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Because the market price of Cornerstone common stock will fluctuate, the value of the merger consideration to be received by SmartFinancial common shareholders is uncertain.

Upon completion of the merger, each share of SmartFinancial common stock (except for any dissenting shares and subject to the 4-to-1 reverse stock split) will be converted into 4.20 shares of Cornerstone common stock. The market value of the shares of Cornerstone common stock to be received as part of the merger consideration will vary from the closing price of Cornerstone common stock on the date Cornerstone and SmartFinancial announced the merger, on the date that this joint proxy statement/prospectus is mailed to SmartFinancial shareholders, on the date of the annual meetings of the SmartFinancial and the Cornerstone shareholders, and on the date the merger is completed and thereafter. Any change in the market price of Cornerstone common stock prior to the completion of the merger will affect the market value of the merger consideration that SmartFinancial shareholders will receive upon completion of the merger, and there will be no adjustment to the merger consideration for changes in the market price of either shares of Cornerstone common stock or shares of SmartFinancial common stock. Stock price changes may result from a variety of factors that are beyond the control of Cornerstone and SmartFinancial, including, but not limited to, general market and economic conditions, changes in our respective businesses, operations and prospects and regulatory considerations. Therefore, at the time of the SmartFinancial and the Cornerstone annual meetings you will not know the precise market value of the consideration SmartFinancial shareholders will receive at the effective time of the merger. You should obtain current market quotations for shares of Cornerstone common stock.

The market price of Cornerstone common stock after the merger may be affected by factors different from those affecting the shares of SmartFinancial or Cornerstone currently.

Upon completion of the merger, holders of SmartFinancial common stock will become holders of Cornerstone common stock. Cornerstone’s business differs in some respects from that of SmartFinancial, and, accordingly, the results of operations of the surviving corporation and the market price of the surviving corporation’s common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations of each of Cornerstone and SmartFinancial.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the surviving corporation following the merger.

Before the merger may be completed, Cornerstone and SmartFinancial must obtain approvals from the Federal Reserve Board and the Tennessee Department of Financial Institutions. Other approvals, waivers or consents from regulators may also be required. In determining whether to grant these approvals the regulators consider a variety of factors, including the regulatory standing of each party. An adverse development in either party’s regulatory standing or these factors could result in an inability to obtain approval or delay its receipt. The regulators may impose conditions on the completion of the merger or require changes to the terms of the merger. Such conditions or changes could have the effect of delaying or preventing completion of the merger or imposing additional costs on or limiting the revenues of the surviving corporation following the merger, any of which might have an adverse effect on the surviving corporation following the merger. See “ Proposal No. 1 — The Merger — Regulatory Matters .”

Combining the two companies may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the merger may not be realized.

The success of the merger, including anticipated benefits, will depend, in part, on management’s ability to successfully combine and integrate the businesses of Cornerstone and SmartFinancial in a manner that permits growth opportunities and does not materially disrupt the existing customer relations nor result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the surviving corporation’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. The loss of key employees could adversely affect Cornerstone’s ability to successfully conduct its business, which could have an adverse effect on Cornerstone’s financial results and the value of its common stock. If Cornerstone

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experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause Cornerstone and/or SmartFinancial to lose customers or cause customers to remove their accounts from Cornerstone and/or a SmartFinancial and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of Cornerstone and SmartFinancial during this transition period and for an undetermined period after completion of the merger on the surviving corporation.

The fairness opinions obtained by Cornerstone and SmartFinancial from their respective financial advisors will not reflect changes in circumstances between the date of the signing of the merger agreement and the completion of the merger.

Cornerstone has obtained a fairness opinion dated December 5, 2014 from Raymond James and SmartFinancial has obtained a fairness opinion dated December 5, 2014 from Hovde, and such opinions have not been updated as of the date of this document and will not be updated at the time of the completion of the merger. Changes in the operations and prospects of Cornerstone or SmartFinancial, general market and economic conditions and other factors that may be beyond the control of Cornerstone and SmartFinancial, and on which the fairness opinions were based, may alter the value of Cornerstone or SmartFinancial or the prices of shares of Cornerstone common stock or SmartFinancial common stock by the time the merger is completed. The fairness opinions do not address the fairness of the merger consideration, from a financial point of view, at the time the merger is completed or as of any other date than the date of the opinions. The fairness opinions that SmartFinancial and Cornerstone received from their respective financial advisors are attached as Appendix C and Appendix D to this joint proxy statement/prospectus. For a description of the opinions, see “ Proposal No. 1 — The Merger — Opinion of Cornerstone’s Financial Advisor” and “ Proposal No. 1 — The Merger — Opinion of SmartFinancial’s Financial Advisor .” For a description of the other factors considered by Cornerstone’s board of directors in determining to approve the merger, see “ Proposal No. 1 — The Merger — Cornerstone’s Reasons for the Merger; Recommendation of Cornerstone’s Board of Directors .” For a description of the other factors considered by SmartFinancial’s board of directors in determining to approve the merger, see “ Proposal No. 1 — The Merger — SmartFinancial’s Reasons for the Merger; Recommendation of SmartFinancial’s Board of Directors .”

Certain of SmartFinancial’s directors and executive officers have interests in the merger that differ from the interests of SmartFinancial’s shareholders.

Certain of SmartFinancial’s and SmartBank’s executive officers and directors have financial and other interests in the merger that are in addition to, or different from, their interests as SmartFinancial shareholders generally. SmartFinancial’s board of directors was aware of these interests and considered them, among other matters, in approving and adopting the merger agreement. Certain of SmartFinancial’s and SmartBank’s executive officers have entered into new employment agreements in connection with the merger agreement. These interests may create potential conflicts of interest and cause some of these persons to view the proposed transaction differently than SmartFinancial shareholders may view it. See “ Proposal No. 1 — The Merger — Interests of Employees and Directors of SmartFinancial in the Merger ” for information about these financial and other interests.

Certain of Cornerstone’s directors and executive officers have interests in the merger that differ from the interests of Cornerstone’s shareholders.

Certain of Cornerstone’s and Cornerstone Community Bank’s executive officers and directors have financial and other interests in the merger that are in addition to, or different from, their interests as Cornerstone shareholders generally. Cornerstone’s board of directors was aware of these interests and considered them, among other matters, in approving and adopting the merger agreement. Certain of Cornerstone’s and Cornerstone Community Bank’s executive officers have entered into new employment agreements which were executed and effective simultaneous with the merger agreement. These interests may create potential conflicts of interest and cause some of these persons to view the proposed transaction

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differently than Cornerstone shareholders may view it. See “ Proposal No. 1 — The Merger — Interests of Employees and Directors of Cornerstone in the Merger ” for information about these and other financial interests.

Termination of the merger agreement could negatively impact Cornerstone or SmartFinancial.

If the merger agreement is terminated, there may be various consequences. For example, Cornerstone’s or SmartFinancial’s businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of Cornerstone’s or SmartFinancial’s common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be completed. If the merger agreement is terminated under certain circumstances, Cornerstone or SmartFinancial may be required to pay to the other party a termination fee of $1.2 million.

Cornerstone and SmartFinancial will be subject to business uncertainties and contractual restrictions on their respective operations while the merger is pending.

Both Cornerstone and SmartFinancial will be subject to business uncertainties and contractual restrictions on their respective operations while the merger is pending. For instance, uncertainty about the effect of the merger on employees and customers may have an adverse effect on Cornerstone or SmartFinancial. These uncertainties may impair Cornerstone’s or SmartFinancial’s ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with Cornerstone or SmartFinancial to seek to change existing business relationships with Cornerstone or SmartFinancial. Retention of certain employees by Cornerstone or SmartFinancial may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with Cornerstone or SmartFinancial. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Cornerstone or SmartFinancial, Cornerstone’s business or SmartFinancial’s business could be harmed. In addition, subject to certain exceptions, each of Cornerstone and SmartFinancial has agreed to operate its business in the ordinary course, and to comply with certain other operational restrictions, prior to closing. See “ Proposal No. 1 — The Merger Agreement — Covenants and Agreements ” for a description of the restrictive covenants applicable to Cornerstone and SmartFinancial.

The merger is subject to certain closing conditions that, if not satisfied or waived, will result in the merger not being completed, which may cause the price of Cornerstone common stock and the value of SmartFinancial common stock to decline.

The merger is subject to multiple conditions to closing, including the receipt of required regulatory approvals, the approval of Cornerstone shareholders of multiple amendments to the Cornerstone charter, the consent of the U.S. Treasury, as holder of the SmartFinancial SBLF stock, the completion by Cornerstone of the financing transaction, the redemption of Cornerstone’s Series A preferred stock, and the approval of the Cornerstone and SmartFinancial shareholders. If any condition to the merger is not satisfied or waived, to the extent permitted by law, the merger will not be completed or may be delayed. If Cornerstone and SmartFinancial do not complete the merger, the trading price of Cornerstone common stock may decline to the extent that the current prices reflect a market assumption that the merger will be completed. In addition, neither Cornerstone nor SmartFinancial would realize the expected benefits of having completed the merger and each of Cornerstone and SmartFinancial will have incurred substantial costs, but will lose some or all of the intended benefits of the merger . If the merger is not completed, additional risks could materialize, which could materially and adversely affect the business, financial condition and results of Cornerstone or SmartFinancial. For more information on closing conditions to the merger agreement, see “ Proposal No. 1 — The Merger — Conditions to Consummation of the Merger .”

If the merger is not completed, Cornerstone and SmartFinancial will have incurred substantial expenses without realizing the expected benefits of the merger.

Each of Cornerstone and SmartFinancial has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement, as well as the costs and expenses of filing, printing and mailing this joint proxy statement/prospectus and all filing and other

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fees paid to the SEC in connection with the merger. If the merger is not completed, Cornerstone and SmartFinancial would have to recognize these expenses without realizing the expected benefits of the merger.

The merger agreement limits Cornerstone’s and SmartFinancial’s ability to pursue acquisition proposals and requires each company to pay a termination fee of $1.2 million under certain circumstances relating to acquisition proposals. These and other provisions of the merger agreement, of Cornerstone’s and SmartFinancial’s charters and bylaws, and of Tennessee law may deter potential acquirers.

The merger agreement prohibits Cornerstone and SmartFinancial from soliciting, initiating, knowingly encouraging or knowingly facilitating certain third-party acquisition proposals. See “ Proposal No. 1 — The Merger Agreement — Agreement Not to Solicit Other Offers. ” The merger agreement also provides that Cornerstone or SmartFinancial must pay a termination fee in the amount of $1.2 million in the event that the merger agreement is terminated under certain circumstances, including, in certain circumstances, a termination resulting from such party’s failure to abide by certain obligations not to solicit acquisition proposals. See “ Proposal No. 1 — The Merger Agreement — Termination Fee .” Further, the merger agreement also prohibits each of Cornerstone and SmartFinancial from waiving confidentiality and standstill provisions in its favor in existing agreements with third parties. These provisions may discourage or prohibit, as applicable, a potential competing acquirer that might have an interest in acquiring all or a significant part of Cornerstone or SmartFinancial from considering or proposing such an acquisition. These provisions and agreements, and other provisions of Cornerstone’s or SmartFinancial’s charter or bylaws or of the Tennessee Business Corporation Act, could make it more difficult for a third-party to acquire control of Cornerstone or SmartFinancial or may discourage a potential competing acquirer.

Holders of Cornerstone and SmartFinancial common stock will have a reduced ownership and voting interest after the merger and will exercise less influence over management.

Holders of Cornerstone and SmartFinancial common stock currently have the right to vote in the election of the board of directors and on other matters affecting Cornerstone and SmartFinancial, respectively. Upon the completion of the merger, each SmartFinancial shareholder who receives shares of Cornerstone common stock will become a shareholder of the surviving corporation with a percentage ownership that is smaller than such shareholder’s percentage ownership of Cornerstone or SmartFinancial, as applicable. Assuming that the private offering component of the financing transaction is fully subscribed, it is currently expected that the former shareholders of SmartFinancial as a group will receive shares in the merger constituting approximately 56% of the outstanding shares of Cornerstone common stock immediately after the merger. As a result, current shareholders of Cornerstone as a group will own approximately 28% of the outstanding shares of Cornerstone common stock immediately after the merger and investors in the private offering component of the financing transaction will own approximately 16% of the outstanding shares of Cornerstone common stock. Because of this, SmartFinancial shareholders may have less influence on the management and policies of Cornerstone than they now have on the management and policies of SmartFinancial, and current Cornerstone shareholders may have less influence than they now have on the management and policies of Cornerstone.

An active trading market may not develop for the Cornerstone common stock after the merger.

Historically, there has been only limited trading activity in Cornerstone common stock. Cornerstone intends to apply for its common stock to be listed on the Nasdaq Capital Market in connection with the completion of the merger, but the listing application might not be successful. Even if the common stock is listed on the Nasdaq Capital Market, an active trading market might not develop. If an active market does not develop or is not sustained, the market price and liquidity of the common stock may be adversely affected.

Following the merger, the ability of the surviving corporation to pay dividends on its common and preferred stock will remain subject to restrictions.

Cornerstone paid cash dividends from December 2003 to June 2009 on its common stock. Beginning in 2010, Cornerstone has been restricted from paying dividends without permission from the Federal Reserve. There are a number of restrictions on its ability to pay dividends. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs

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and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries. If, following the merger, the surviving corporation fails to pay dividends on the Cornerstone SBLF stock, the surviving corporation will be prohibited from paying dividends on its common stock.

We expect that our principal source of funds to pay dividends on the surviving corporation’s common stock will be cash dividends received from bank subsidiaries, SmartBank and Cornerstone Community Bank. However, prior to the payment of dividends, Cornerstone must first obtain approval from the Federal Reserve. Cornerstone provides information to the Federal Reserve which includes an evaluation of asset quality, earnings quarter and year to date and liquidity.

The payment of dividends by the bank subsidiaries is subject to certain restrictions imposed by federal and state banking laws, regulations and authorities. The federal banking statutes prohibit federally insured banks from making any capital distributions (including a dividend payment) if, after making the distribution, the institution would be “under capitalized” as defined by statute. In addition, the relevant federal regulatory agencies have authority to prohibit an insured bank from engaging in an unsafe or unsound practice, as determined by the agency, in conducting an activity. The payment of dividends could be deemed to constitute such an unsafe or unsound practice, depending on the financial condition of the bank subsidiaries. Regulatory authorities could impose administratively stricter limitations on the ability of our bank subsidiaries to pay dividends to us if such limits were deemed appropriate to preserve certain capital adequacy requirements.

The terms of the Cornerstone SBLF stock will impose limits on the surviving corporation’s ability to pay dividends and repurchase shares of common stock. Under the terms of the Cornerstone SBLF stock, no repurchases may be effected, and no dividends may be declared or paid on preferred shares ranking pari passu with the Cornerstone SBLF stock, junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the Cornerstone SBLF stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.

Under the terms of the Cornerstone SBLF stock, the surviving corporation may only declare and pay a dividend on the surviving corporation’s common stock or other stock junior to the Cornerstone SBLF stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of the surviving corporation’s Tier 1 leverage ratio is at least 8%, excluding any subsequent net charge-offs and any redemption of the Cornerstone SBLF stock.

Failure to pay dividends on the Cornerstone SBLF stock may have negative consequences, including external involvement in our board of directors.

If full dividends have not been paid on the Cornerstone SBLF stock for five or more quarterly dividend periods, whether or not consecutive, the surviving corporation must invite a representative selected by the holder of the Cornerstone SBLF stock to attend all meetings of the surviving corporation’s board of directors in a nonvoting observer capacity. Any such representative would not be obligated to attend any board meeting to which he or she is invited, and this right will end when the surviving corporation has paid full dividends for at least four consecutive dividend periods.

The Cornerstone SBLF stock will impact net income available to our common shareholders and the surviving corporation’s earnings per share.

The dividends declared on the Cornerstone SBLF stock may reduce income available to common shareholders and the surviving corporation’s earnings per common share. The Cornerstone SBLF stock will also receive preferential treatment in the event of liquidation, dissolution or winding up of the surviving corporation. Furthermore, the dividend rate on the Cornerstone SBLF stock will increase from 1% to 9% in the first quarter of 2016.

Cornerstone has a significant deferred tax asset that might not be fully realized.

Cornerstone has net deferred tax assets of $1.8 million as of December 31, 2014. Cornerstone did not establish a valuation allowance against its net deferred tax assets as of December 31, 2013 or December 31,

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2014 because Cornerstone believes that it is more likely than not that all of these assets will be realized. In evaluating the need for a valuation allowance, Cornerstone estimated future taxable income based on management-prepared forecasts. This process required significant judgment by management about matters that are by nature uncertain. If future events differ significantly from Cornerstone’s current forecasts, Cornerstone may need to establish a valuation allowance, which could have a material adverse effect on Cornerstone’s results of operations and financial condition. For further discussion of deferred tax assets, see “ Note 8, Income Taxes ” in the notes to Cornerstone’s consolidated financial statements.

RISKS RELATED TO CORNERSTONE’S BUSINESS

If our asset quality were to decline or if we experienced greater loan losses than anticipated, our earnings and overall financial condition would be adversely affected.

Our assets are primarily comprised of loans. The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. While the risk of nonpayment of loans is inherent in banking, in recent years we have experienced higher nonpayment levels than anticipated, which has had a significant adverse effect on our earnings and overall financial condition. We have taken actions to prevent future problems, including the creation of a special asset committee to develop and review action plans for minimizing loan losses and the dedication of resources to assist in the collection and recovery process. Cornerstone Community Bank has also established a loan review committee comprised of a majority of non-employee directors to periodically review Cornerstone Community Bank’s loan portfolio and identify and categorize problem credits. To minimize the likelihood of a substandard loan portfolio, we assess the credit worthiness of customers and perform collateral valuations. Management also maintains an allowance for loan losses based upon, among other things, historical experience and an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and takes a charge against earnings with respect to specific loans when their ultimate collectability is considered questionable. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb losses, or if regulatory authorities require us to increase our allowance for loan losses as a part of their examination process, additional provision expense would be incurred and our earnings and capital could be significantly and adversely affected. Moreover, additions to the allowance may be necessary based on changes in economic and real estate market conditions, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of management’s control. These additions may require increased provision expense which would negatively impact our results of operations.

We have high levels of foreclosed assets, primarily as a result of foreclosures.

We have continued to resolve non-performing real estate loans and as a result we continue to have high levels of foreclosed assets. Foreclosed real estate expense consists of three types of charges: maintenance costs, valuation adjustments due to new appraisal values and gains or losses on disposition. Although levels of foreclosed assets have decreased in 2014 compared to recent years and local real estate values have improved, these charges will likely continue to negatively affect our results of operations.

Liquidity needs could adversely affect our results of operations and financial condition.

We rely on dividends from Cornerstone Community Bank as our primary source of funds. However, in November 2009, following the conclusion of a joint examination of Cornerstone Community Bank by the FDIC and the Tennessee Department of Financial Institutions, the FDIC placed restrictions on Cornerstone Community Bank’s ability to pay cash dividends, requiring that Cornerstone Community Bank first obtain a non-objection from the FDIC. Furthermore, the majority of Cornerstone Community Bank’s funds are comprised of customer deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The repayment of loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs,

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inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. Accordingly, we currently are, and may from time to time in the future be, required to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Alternative sources include advances from the Federal Home Loan Bank and federal funds lines of credit from correspondent banks. These sources might not be sufficient to meet future liquidity demands. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets if these alternative sources are not adequate.

A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers or other third parties, including as a result of cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses.

We rely heavily on communications and information systems to conduct our business. Information security risks for financial institutions have generally increased in recent years. Our operating systems and infrastructure must continue to be protected. Our operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors, including electrical or telecommunication outages; natural disasters such as earthquakes, tornadoes, and floods; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and cyber-attacks.

Our technologies, systems and networks, those of third parties with whom we do business, and our customers’ devices may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of confidential information. As threats of cyber-attacks continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities.

Any of these events could result in client attrition, regulatory fines, penalties or intervention, reputation damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could have a material effect on our results of operations or financial condition.

Competition from financial institutions and other financial service providers may adversely affect our profitability.

The banking business is highly competitive and we experience competition in each of our markets from many other financial institutions. We compete with other commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other community banks and super-regional and national financial institutions that operate offices in our primary market areas and elsewhere.

Additionally, we face competition from de novo community banks, including those with senior management who were previously affiliated with other local or regional banks or those controlled by investor groups with strong local business and community ties. These de novo community banks may offer higher deposit rates or lower cost loans in an effort to attract our customers, and may attempt to hire our management and employees.

We compete with these other financial institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry.

Our success depends significantly upon economic conditions in the local markets where we operate.

Substantially all of our loan and deposit customers live, work and bank in the Chattanooga, Tennessee metropolitan statistical area. As a result, our success depends upon a sound local economy to provide opportunities for new business ventures, increased loan demand and the need for deposit services. Our profitability is impacted by these local factors as well as general economic conditions and interest rates. For

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example, our earnings may be negatively impacted by increases in unemployment rates or reductions in population, income levels, deposits and housing starts and home prices. In recent years, adverse economic conditions have inhibited our growth and diminished the ability of some of our customers to service their loan obligations. If economic conditions in our local markets deteriorate again, we could experience any of the following consequences, each of which could further adversely affect our business:

A prolonged economic downturn could also negatively impact collateral values or cash flows of borrowing businesses, and as a result our primary source of repayment could be insufficient to service the debt. In addition, adverse consequences to us in the event of a prolonged economic downturn in our local markets could be compounded by the fact that many of our commercial and real estate loans are secured by real estate located in those market areas. Significant decline in real estate values in these market areas would mean that the collateral for many of our loans would provide less security. As a result, we would be more likely to suffer losses on defaulted loans because our ability to fully recover on defaulted loans by selling the real estate collateral would be diminished. Adverse economic conditions in our local markets, including sustained periods of increased payment delinquencies, foreclosures or losses in the State of Tennessee or the State of Georgia, could impair our ability to collect loans and could otherwise have a negative effect on our assets, revenues, results of operations and financial condition.

Cornerstone is required to obtain regulatory approval prior to the payment of dividends.

Cornerstone’s Series A preferred stock requires annual dividend payments that equal 10% of the original issue price of $25.00 per share. The dividends are scheduled to be paid at the end of each quarter. However, prior to the payment of the quarterly dividend Cornerstone must first obtain approval from the Federal Reserve. Cornerstone provides information to the Federal Reserve which includes an evaluation of asset quality, earnings quarter and year to date and liquidity. Prior approval would also be required before common stock dividends could be paid.

Negative developments in the financial services industry and U.S. and global capital and credit markets may lead to additional regulation and further deterioration of our results of operations and financial condition.

Negative developments in the capital and credit markets in recent years have resulted in uncertainty in the financial markets. Financial institutions across the United States, including Cornerstone Community Bank, have experienced deteriorating asset quality. Loan portfolios include impaired loans to businesses struggling to stay in operation or achieve adequate cash flow. Further, a decline in collateral values supporting these loans has also impacted the ability of a business or consumer to obtain loans or increased financial institutions’ losses in the event of foreclosure and liquidation. At the same time, financial institutions have become concerned about liquidity. This concern has increased the competition for deposits in our local market as well as wholesale funding options. These events have impacted our stock price, as well as the stock price of other bank holding companies. The potential impact of these events may be an expansion of existing or creation of new federal or state laws and regulations regarding lending and funding practices, liquidity standards and compliance issues. Continued negative developments below, as well as our ability to respond to these new operating and regulatory requirements, could further negatively impact our results of operations. The negative consequences could limit our ability to originate new loans or obtain adequate funding or increase costs associated with regulatory compliance. Ultimately, these changes could result in modifications to our existing or future strategic plans, capital requirements, compensation, financial performance and stock performance.

Recently enacted legislation might not stabilize the U.S. financial system.

The U.S. Congress enacted the Emergency Economic Stabilization Act of 2008 (“EESA”) in response to the impact of the volatility and disruption in the capital and credit markets on the financial sector. The Treasury and the federal banking regulators implemented a number of programs under this legislation to

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address these conditions and the asset quality, capital and liquidity issues they have caused for certain financial institutions and to improve the general availability of credit for consumers and businesses. In addition, the U.S. Congress enacted the American Recovery and Reinvestment Act of 2009 (“ARRA”) in an effort to save and create jobs, stimulate the U.S. economy and promote long-term growth and stability. The EESA and ARRA have been followed by numerous actions by the Federal Reserve, the U.S. Congress, the U.S. Treasury, the FDIC, the SEC and others to address the liquidity and credit crisis that followed the sub-prime meltdown. These measures include homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector. The purpose of these legislative and regulatory actions is to stabilize the U.S. financial system. The Temporary Liquidity Guarantee Program, the EESA, the ARRA and the other regulatory initiatives described above may not have their desired effects. If the volatility in the markets continues and economic conditions fail to improve or worsen, our business, financial condition, results of operations and/or access to credit, as well as the trading price of our common stock, could be materially and adversely affected.

Our loan portfolio includes residential construction and land development loans, which have a greater credit risk than residential mortgage loans.

We engage in residential construction and land development loans to developers. This type of lending is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful operation of the related real estate project. Consequently, these loans are more sensitive to the current adverse conditions in the real estate market and the general economy. These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline. Furthermore, during adverse general economic conditions, which were experienced in residential real estate construction nationwide, borrowers involved in the residential real estate construction and development business suffer above normal financial strain. As the residential real estate development and construction market in our markets previously deteriorated, our borrowers in this segment experienced difficulty repaying their obligations to us. If additional charge-offs or foreclosures relating to these loans are necessary in the future, our results of operations would be negatively impacted. Additionally, to the extent repayment is dependent upon the sale of newly constructed homes or lots, such sales are likely to be at lower prices or at a slower rate than was expected when the loan was made, which may result in such loans being placed on non-accrual status and subject to higher loss estimates even if the borrower keeps interest payments current. These adverse economic and real estate market conditions may lead to further increases in non-performing loans and other real estate owned, increased charge-offs from the disposition of non-performing assets, and increases in provision for loan losses, all of which would negatively impact our financial condition and results of operations.

Changes in interest rates could adversely affect our results of operations and financial condition.

Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. Accordingly, changes in interest rates could decrease our net interest income. Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and the ability to realize gains from the sale of our assets, all of which ultimately affects earnings. Economic events prompted the Federal Reserve, beginning in September 2007, to reduce its federal funds rate. Due to the rapid decline in interest rates, we were unable to recalibrate our liabilities at the same rate at which loan rates declined. As a result, the net interest margin was impacted negatively during 2009. If the Federal Reserve’s federal funds rate remains at extremely low levels or does not increase above our interest rate floors, our funding costs may increase which will negatively impact the net interest margin and our financial performance.

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We may require additional capital which may not be able to be obtained or, if obtained, may cause significant dilution to current shareholders.

We may require capital from sources other than earnings generation. Such other sources may include an offering of equity-based securities in the private offering component of the financing transaction, which could significantly dilute your investment. We may need to pursue additional sources of capital, which may include additional equity investments, additional offerings of equity-based securities, borrowed funds or any combination of these sources. Our ability to access these alternative capital sources may be limited to the condition of the capital markets. Therefore, we may have difficulty rebuilding Cornerstone Community Bank’s capital reserves and we may provide new investors in the future certain rights, preferences and privileges senior to our current shareholders which may adversely impact our current shareholders.

Recently enacted legislation could have a negative impact on our business.

The impact of the Dodd-Frank Act on the financial services industry will be broad, with enhanced regulatory oversight and compliance, including, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. In addition, the Dodd-Frank Act established a new framework for systemic risk and oversight in the industry which has resulted and will continue to result in sweeping changes in the regulation of financial institutions aimed at strengthening safety and soundness for the financial services sector.

We expect that many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

We are subject to federal and state regulations that may negatively impact our operations and financial performance.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies, including the Federal Reserve, the FDIC and the Tennessee Department of Financial Institutions. Many of the banking regulations we are governed by are intended to protect depositors, the public or the insurance funds maintained by the FDIC, not shareholders. Compliance with the numerous banking regulations is costly and requires investment in human and information technology resources. Certain of our activities, such as the payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices, are impacted by these regulations. We are also subject to capitalization guidelines established by banking authorities, which require us to maintain adequate capital to support our growth. To be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios.

The laws and regulations applicable to the banking industry are subject to change at any time. We cannot predict the events that will result in regulatory changes nor their impact on the banking industry in general and us in particular. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect our ability to operate profitably.

The Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated by the Commission have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. These regulations are applicable to us. We have experienced, and may continue to experience, increasing

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compliance costs as a result of the Sarbanes-Oxley Act. These necessary costs are proportionately higher for a company of our size and will affect our profitability more than that of some of our larger competitors.

U.S. banking agencies have finalized revisions to their risk-based and leverage capital requirements consistent with agreements reached by the Basel Committee on Banking Supervision (Basel III). The final rules establish tougher capital standards through more restrictive capital definitions, higher risk-weighted assets, additional capital buffers, and higher requirements for minimum capital ratios. These reforms could have a material negative impact on the profitability and returns on equity of U.S. banks, including Cornerstone Community Bank. For a further discussion of the regulatory risks applicable to Cornerstone Community Bank, see “ Regulatory Matters Applicable to Cornerstone and SmartFinancial . ”

We rely heavily on the services of key personnel and the unexpected loss of any of those personnel could adversely affect our operations.

We are dependent on certain key officers who have important customer relationships or are instrumental to our lending, depository and bank operations. We believe that our future results will also depend upon our ability to attract and retain highly skilled and qualified personnel.

We are subject to Tennessee’s anti-takeover statutes and certain charter provisions that could decrease our chances of being acquired even if the acquisition is in the best interest of our shareholders.

As a Tennessee corporation, we are subject to various legislative acts that impose restrictions on and require compliance with procedures designed to protect shareholders against unfair or coercive mergers and acquisitions. These statutes may delay or prevent offers to acquire us and increase the difficulty of consummating any such offers, even if the acquisition would be in our shareholders’ best interests. Our amended and restated charter also contains provisions which may make it difficult for another entity to acquire us without the approval of a majority of the disinterested directors on our board of directors. Secondly, the amount of common stock owned by, and other compensation arrangements with, certain of our officers and directors may make it more difficult to obtain shareholder approval of potential takeovers that they oppose. Agreements with our senior management also provide for significant payments under certain circumstances following a change in control or termination of employment. These compensation arrangements, together with the common stock and option ownership of our board of directors and management, could make it difficult or expensive to obtain majority support for shareholder proposals or potential acquisition proposals that the board of directors and officers oppose.

The success and growth of our operations will depend on our ability to adapt to technological changes.

The banking industry and the ability to deliver financial services is becoming more dependent on technological advancement, such as the ability to process loan applications over the internet, accept electronic signatures, provide process status updates instantly, reliable on-line banking capabilities and other customer expected conveniences that are cost efficient to our business processes. As these technologies are improved in the future, we may, in order to remain competitive, be required to make significant capital expenditures.

If we engage in business combination transactions, we may face risks associated with integration of operations or undiscovered losses or other problems.

Such negotiated acquisitions will be accompanied by the risks commonly encountered in acquisitions, including, among other things:

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