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Loans and Allowance for Loan Losses
 12 Months Ended
Dec. 31, 2012
Receivables [Abstract]  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]
Note 5.Loans and Allowance for Loan Losses

 

At December 31, 2012 and 2011, the Bank's loans consist of the following (in thousands):

 

  2012  2011 
Commercial real estate-mortgage:        
Owner-occupied $58,425  $62,999 
All other  66,747   63,058 
Consumer real estate-mortgage  71,195   70,543 
Construction and land development  38,557   31,031 
Commercial and industrial  40,140   37,458 
Consumer and other  1,927   2,676 
         
Total loans  276,991   267,765 
Less: Allowance for loan losses  (6,141)  (7,400)
         
Loans, net $270,850  $260,365 

 

  2012  2011  2010 
          
An analysis of the allowance for loan losses follows:            
             
Balance, beginning of year $7,400,049  $9,132,171  $5,905,054 
             
Provision for loan losses  430,000   445,000   7,291,000 
Charge-offs  (2,868,576)  (3,148,314)  (4,688,054)
Recoveries  1,179,808   971,192   624,171 
             
Balance, end of year $6,141,281  $7,400,049  $9,132,171 

 

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, 2012 and 2011, is summarized in the tables below (in thousands):

 

As of December 31, 2012:

 

  Commercial  Consumer  Construction  Commercial       
  Real Estate-  Real Estate-  and Land  and  Consumer    
  Mortgage  Mortgage  Development  Industrial  and Other  Total 
                   
Performing loans $115,959  $69,329  $37,607  $36,980  $1,927  $261,802 
Impaired loans  9,213   1,866   950   3,160   -   15,189 
                         
Total $125,172  $71,195  $38,557  $40,140  $1,927  $276,991 

 

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 

 

The following tables show the allowance for loan losses allocation by loan classification for impaired and performing loans as of December 31, 2012 and 2011 (in thousands):

 

As of December 31, 2012:

 

  Commercial  Consumer  Construction  Commercial       
  Real Estate-  Real Estate-  and Land  and  Consumer    
  Mortgage  Mortgage  Development  Industrial  and Other  Total 
Allowance related to:                        
Performing loans $319  $952  $781  $29  $14  $2,095 
Impaired loans  2,230   576   460   780   -   4,046 
                         
Total $2,549  $1,528  $1,241  $809  $14  $6,141 

 

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 

 

The following tables detail the changes in the allowance for loan losses during December 31, 2012 and 2011, by loan classification (in thousands):

 

As of December 31, 2012:

 

  Commercial  Consumer  Construction  Commercial       
  Real Estate-  Real Estate-  and Land  and  Consumer    
  Mortgage  Mortgage  Development  Industrial  and Other  Total 
                   
Balance, beginning of year $3,557  $2,518  $827  $482  $16  $7,400 
Provision for loan losses  (888)  (4)  1,051   257   14   430 
Charge-offs  (958)  (1,022)  (782)  (74)  (33)  (2,869)
Recoveries  838   36   145   144   17   1,180 
                         
Balance, end of year $2,549  $1,528  $1,241  $809  $14  $6,141 

 

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 

 

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, internal and external 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 relationships greater than or equal to $500 thousand are reviewed by the Bank’s external loan review provider on an annual basis.

 

§Additionally, the Bank's external loan review provider samples other loan relationships between $100 thousand and $500 thousand with an emphasis on commercial and commercial real estate loans and insider loans.

 

§The Bank’s internal loan review department samples approximately 33 percent of all loan relationships less than $500 thousand 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 or external loan review providers.

 

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, 2012 and 2011 (in thousands):

 

As of December 31, 2012:

 

  Commercial  Consumer  Construction  Commercial       
  Real Estate-  Real Estate-  and Land  and  Consumer    
  Mortgage  Mortgage  Development  Industrial  and Other  Total 
                   
Pass $111,313  $57,959  $36,802  $36,482  $1,904  $244,460 
Special mention  4,145   8,401   198   330   18   13,092 
Substandard  501   2,969   607   168   5   4,250 
Substandard-impaired  9,213   1,866   950   3,160   -   15,189 
  $125,172  $71,195  $38,557  $40,140  $1,927  $276,991 

 

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 

 

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, 2012 and 2011 (in thousands):

 

           For the Year Ended 
  At December 31, 2012  December 31, 2012 
     Unpaid     Average  Interest 
  Recorded  Principal  Related  Recorded  Income 
  Investment  Balance  Allowance  Investment  Recognized 
                
Impaired loans without a valuation allowance:                    
Commercial real estate – mortgage $3,406  $3,453  $-  $4,389  $180 
Consumer real estate – mortgage  513   540   -   1,538   52 
Construction and land development  244   251   -   358   19 
Commercial and industrial  2,111   2,155   -   2,277   55 
Consumer and other  -   -   -   -   - 
                     
Total  6,274   6,399   -   8,562   306 
                     
Impaired loans with a valuation allowance:                    
Commercial real estate – mortgage  5,807   5,848   2,230   6,616   215 
Consumer real estate – mortgage  1,353   1,353   576   2,606   61 
Construction and land development  706   706   460   642   49 
Commercial and industrial  1,049   1,049   780   700   132 
Consumer and other  -   -   -   -   - 
                     
Total  8,915   8,956   4,046   10,564   457 
                     
Total impaired loans $15,189  $15,355  $4,046  $19,126  $763 

 

           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 

 

The following tables present an aged analysis of past due loans as of December 31, 2012 and 2011 (in thousands):

 

As of December 31, 2012:

 

  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 $2,738  $-  $956  $3,694  $54,731  $58,425 
All other  636   -   1,913   2,549   64,198   66,747 
Consumer real estate-mortgage  1,858   -   616   2,474   68,721   71,195 
Construction and land development  100   -   53   153   38,404   38,557 
Commercial and industrial  1,227   -   2,467   3,694   36,446   40,140 
Consumer and other  35   -   -   35   1,892   1,927 
                         
Total $6,594  $-  $6,005  $12,599  $264,392  $276,991 

 

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 

 

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. At December 31, 2012 and 2011, the Bank has loans of approximately $9,403,000 and $5,026,000, 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 tables present a summary of loans that were modified as troubled debt restructurings during the years ended December 31, 2012 and 2011 (amounts in thousands):

 

During the year ended December 31, 2012:

 

   Pre-Modification  Post-Modification 
  Number of Outstanding Recorded  Outstanding Recorded 
  Contracts Investment  Investment 
         
Commercial real estate-mortgage 5 $5,971  $5,971 
Consumer real estate-mortgage 1  65   65 
Construction and land development 3  1,178   1,178 
Commercial and industrial 5  2,432   2,432 

 

During the year ended December 31, 2011:

 

    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 

 

There were no loans that were modified as troubled debt restructurings during the year ended December 31, 2012, for which there was a payment default during the year. 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 subsequent 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:

 

  2012  2011 
       
Beginning balance $1,514,908  $666,336 
         
New loans  436,051   1,957,088 
Repayments  (116,977)  (1,108,516)
         
Ending balance $1,833,982  $1,514,908