Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2011

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 5. Loans and Allowance for Loan Losses

At December 31, 2011 and 2010, the Bank's loans consist of the following (in thousands):

	2011			2010
Commercial real estate-mortgage:
Owner-occupied	$	62,999		$	64,971
All other		63,058			64,060
Consumer real estate-mortgage		70,543			71,878
Construction and land development		31,031			29,848
Commercial and industrial		37,458			51,160
Consumer and other		2,676			3,330
Total loans		267,765			285,247
Less: Allowance for loan losses		(7,400	)		(9,132	)
Loans, net	$	260,365		$	276,115

	2011			2010			2009
An analysis of the allowance for loan losses follows:
Balance, beginning of year	$	9,132,171		$	5,905,054		$	9,618,265
Provision for loan losses		445,000			7,291,000			14,898,898
Charge-offs		(3,148,314	)		(4,688,054	)		(19,095,793	)
Recoveries		971,192			624,171			483,684
Balance, end of year	$	7,400,049		$	9,132,171		$	5,905,054

Cornerstone follows the loan impairment accounting guidance in ASC Topic 310. A loan is considered impaired when, based on current information and events, it is probable that Cornerstone will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans and loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in interest rates, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collections.

The composition of loans by loan classification for impaired and performing loans at December 31, 2011 and 2010, is summarized in the tables below (in thousands):

As of December 31, 2011:

	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total
Performing loans	$	112,064	$	64,026	$	29,323	$	34,259	$	2,676	$	242,348
Impaired loans		13,993		6,517		1,708		3,199		-		25,417
Total	$	126,057	$	70,543	$	31,031	$	37,458	$	2,676	$	267,765

As of December 31, 2010:

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

The following tables show the allowance for loan losses allocation by loan classification for impaired and performing loans as of December 31, 2011 and 2010 (in thousands):

As of December 31, 2011:

	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total
Allowance related to:
Performing loans	$	952	$	1,264	$	174	$	18	$	16	$	2,424
Impaired loans		2,605		1,254		653		464		-		4,976
Total	$	3,557	$	2,518	$	827	$	482	$	16	$	7,400

As of December 31, 2010:

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

The following tables detail the changes in the allowance for loan losses during December 31, 2011 and 2010 by loan classification (in thousands):

As of December 31, 2011:

	Commercial			Consumer			Construction			Commercial
	Real Estate-			Real Estate-			and Land			and			Consumer
	Mortgage			Mortgage			Development			Industrial			and Other			Total
Balance, beginning of year	$	1,793		$	3,111		$	3,238		$	925		$	65		$	9,132
Provision for loan losses		2,743			955			(2,711	)		(501	)		(41	)		445
Charge-offs		(1,238	)		(1,613	)		(232	)		(36	)		(29	)		(3,148	)
Recoveries		259			65			532			94			21			971
Balance, end of year	$	3,557		$	2,518		$	827		$	482		$	16		$	7,400

As of December 31, 2010:

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

Credit quality indicators:

Federal regulations require the Bank to review and classify its assets on a regular basis. To fulfill this requirement, the Bank systematically reviews its loan portfolio to ensure the Bank’s large loan relationships are being maintained within its loan policy guidelines, remain properly underwritten and are properly classified by loan grade. This review process is performed by the Bank's management, loan review, internal auditors, and state and federal regulators.

The Bank’s loan grading process is as follows:

§ All loans are assigned a loan grade at the time of origination by the relationship manager. Typically, a loan is assigned a loan grade of “pass” at origination.

§ Loans greater than or equal to $500 thousand are reviewed by the Bank’s internal loan review department within 90 days of origination.

§ Loan relationships greater than or equal to $1 million are reviewed annually by the internal loan review department.

§ The Bank’s internal loan review department samples approximately 25 percent of all other loans less than $1 million on an annual basis for review.

§ If a loan is delinquent 60 days or more or a pattern of delinquency exists the loan will be selected for review.

§ Generally, all loans on the Bank’s internal watchlist are reviewed annually by internal loan review.

§ The Bank also contracts with an independent third party to perform loan reviews. This external party reviews approximately 40 percent of the Bank’s loan portfolio annually.

If a loan is classified as a problem asset, it will be assigned one of the following loan grades: substandard, substandard-impaired, doubtful, and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving close attention. When the Bank classifies an asset as substandard or doubtful, a specific allowance for loan losses may be established.

The following tables outline the amount of each loan classification and the amount categorized into each risk rating as of December 31, 2011 and 2010 (in thousands):

As of December 31, 2011:

	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total
Pass	$	101,161	$	55,160	$	27,207	$	31,426	$	2,648	$	217,602
Special mention		9,805		5,122		804		2,620		7		18,358
Substandard		1,098		3,744		1,312		213		21		6,388
Substandard-impaired		11,493		6,517		1,708		3,199		-		22,917
Doubtful		2,500		-		-		-		-		2,500
	$	126,057	$	70,543	$	31,031	$	37,458	$	2,676	$	267,765

As of December 31, 2010:

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

After the Bank’s independent loan review department completes the loan grade assignment, a loan impairment analysis is performed on loans graded substandard or worse. The following tables present summary information pertaining to impaired loans by loan classification as of December 31, 2011 and 2010 (in thousands):

							For the Year Ended
	At December 31, 2011						December 31, 2011
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Commercial real estate – mortgage	$	4,354	$	4,354	$	-	$	5,378	$	330
Consumer real estate – mortgage		322		322		-		3,589		21
Construction and land development		829		1,023		-		1,099		59
Commercial and industrial		2,691		2,691		-		1,207		165
Consumer and other		-		-		-		-		-
Total		8,196		8,390		-		11,273		575
Impaired loans with a valuation allowance:
Commercial real estate – mortgage		9,639		9,694		2,605		5,912		645
Consumer real estate – mortgage		6,195		6,257		1,254		5,333		294
Construction and land development		879		879		653		294		62
Commercial and industrial		508		508		464		784		65
Consumer and other		-		-		-		-		-
Total		17,221		17,338		4,976		12,323		1,066
Total impaired loans	$	25,417	$	25,728	$	4,976	$	23,596	$	1,641

							For the Year Ended
	At December 31, 2010						December 31, 2010
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Commercial real estate – mortgage	$	1,663	$	1,750	$	-	$	2,747	$	58
Consumer real estate – mortgage		998		1,042		-		776		25
Construction and land development		1,793		2,171		-		1,526		132
Commercial and industrial		70		599		-		782		17
Consumer and other		2		2		-		1		10
Total		4,526		5,564		-		5,832		242
Impaired loans with a valuation allowance:
Commercial real estate – mortgage		8,284		9,081		906		8,494		342
Consumer real estate – mortgage		9,425		9,668		2,420		8,968		369
Construction and land development		281		281		60		2,674		21
Commercial and industrial		598		598		337		1,060		76
Consumer and other		49		50		17		178		4
Total		18,637		19,678		3,740		21,374		812
Total impaired loans	$	23,163	$	25,242	$	3,740	$	27,206	$	1,054

Interest income recognized on impaired loans for the year ended December 31, 2009, was approximately $1,601,000.

The following tables present an aged analysis of past due loans as of December 31, 2011 and 2010 (in thousands):

As of December 31, 2011:

	30-89 Days		Past Due 90
	Past Due and		Days or More				Total		Current		Total
	Accruing		and Accruing		Nonaccrual		Past Due		Loans		Loans
Commercial real estate-mortgage:
Owner-occupied	$	4,791	$	-	$	63	$	4,854	$	58,145	$	62,999
All other		497		-		2,500		2,997		60,061		63,058
Consumer real estate-mortgage		1,163		-		3,641		4,804		65,739		70,543
Construction and land development		103		-		1,622		1,725		29,306		31,031
Commercial and industrial		1,578		-		42		1,620		35,838		37,458
Consumer and other		26		-		14		40		2,636		2,676
Total	$	8,158	$	-	$	7,882	$	16,040	$	251,725	$	267,765

As of December 31, 2010:

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

Impaired loans also include loans that the Bank has elected to formally restructure when, due to the weakening credit status of a borrower, the restructuring may facilitate a repayment plan that seeks to minimize the potential losses that the Bank may have to otherwise incur. If on nonaccruing status as of the date of restructuring, the loans are included in nonperforming loans and are classified as impaired loans. Loans that have been restructured that were performing as of the restructure date are reported as troubled debt restructurings. At December 31, 2011 and 2010, the Bank has loans of approximately $5,026,000 and $7,006,000, respectively, that were modified in troubled debt restructurings. Troubled commercial loans are restructured by specialists within our Special Asset department and all restructurings are approved by committees and credit officers separate and apart from the normal loan approval process. These specialists are trained to reduce the Bank’s overall risk and exposure to loss in the event of a restructuring through obtaining either or all of the following: improved documentation, additional guaranties, increase in curtailments, reduction in collateral terms, additional collateral or other similar strategies.

The following table presents a summary of loans that were modified as troubled debt restructurings during the year ended December 31, 2011 (in thousands):

			Pre-Modification		Post-Modification
	Number of		Outstanding Recorded		Outstanding Recorded
	Contracts		Investment		Investment
Consumer real estate-mortgage		5	$	3,573	$	3,573
Construction and land development		2		778		778
Commercial and industrial		1		20		20

The following table presents a summary of loans that were modified as troubled debt restructurings during the year ended December 31, 2011, and for which there was a payment default during the year (amounts in thousands):

	Number of		Recorded
	Contracts		Investment
Consumer real estate-mortgage		2	$	90

In the ordinary course of business, the Bank has granted loans to principal officers and directors and their affiliates. Annual activity of these related party loans were as follows:

	2011			2010
Beginning balance	$	666,336		$	190,041
New loans		1,957,088			540,444
Repayments		(1,108,516	)		(64,149	)
Ending balance	$	1,514,908		$	666,336