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Loans and Allowance for Loan Losses
 3 Months Ended
Mar. 31, 2013
Receivables [Abstract]  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 4. Loans and Allowance for Loan Losses

 

At March 31, 2013 and December 31, 2012, loans are summarized as follows (in thousands):

 

    March 31,     December 31,  
    2013     2012  
Commercial real estate-mortgage:                
Owner-occupied   $ 62,460     $ 58,425  
All other     64,483       66,747  
Consumer real estate-mortgage     70,260       71,195  
Construction and land development     33,220       38,557  
Commercial and industrial     40,302       40,140  
Consumer and other     1,825       1,927  
Total loans     272,550       276,991  
Less: Allowance for loan losses     (5,669 )     (6,141 )
                 
Loans, net   $ 266,881     $ 270,850  

 

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 loan status at March 31, 2013 and December 31, 2012, is summarized in the tables below (amounts in thousands):

 

March 31, 2013   Commercial     Consumer     Construction     Commercial              
    Real Estate-     Real Estate-     and Land     and     Consumer        
    Mortgage     Mortgage     Development     Industrial     and Other     Total  
Performing loans   $ 116,417     $ 66,790     $ 32,271     $ 37,513     $ 1,825     $ 254,816  
Impaired loans     10,526       3,470       949       2,789       -       17,734  
Total   $ 126,943     $ 70,260     $ 33,220     $ 40,302     $ 1,825     $ 272,550  

 

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  

 

 

The following tables show the allowance for loan losses allocation by loan classification for impaired and performing loans as of March 31, 2013 and December 31, 2012 (amounts in thousands):

 

March 31, 2013   Commercial     Consumer     Construction     Commercial              
    Real Estate-     Real Estate-     and Land     and     Consumer        
Allowance related to:   Mortgage     Mortgage     Development     Industrial     and Other     Total  
Performing loans   $ 872     $ 912     $ 222     $ 75     $ 10     $ 2,091  
Impaired loans     2,072       570       460       476       -       3,578  
Total   $ 2,944     $ 1,482     $ 682     $ 551     $ 10     $ 5,669  

 

 

December 31, 2012   Commercial     Consumer     Construction     Commercial              
    Real Estate-     Real Estate-     and Land     and     Consumer        
Allowance related to:   Mortgage     Mortgage     Development     Industrial     and Other     Total  
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  

 

The following tables detail the changes in the allowance for loan losses for the three month period ending March 31, 2013 and year ending December 31, 2012, by loan classification (amounts in thousands):

 

March 31, 2013   Commercial     Consumer     Construction     Commercial              
    Real Estate-     Real Estate-     and Land     and     Consumer        
    Mortgage     Mortgage     Development     Industrial     and Other     Total  
Beginning balance   $ 2,549     $ 1,528     $ 1,241     $ 809     $ 14     $ 6,141  
Charged-off loans     (227 )     (299 )     (155 )     (310 )     (13 )     (1,004 )
Recovery of charge-offs     51       157       9       14       1       232  
Provision for loan losses     571       96       (413 )     38       8       300  
Ending balance   $ 2,994     $ 1,482     $ 682     $ 551     $ 10     $ 5,669  

 

December 31, 2012   Commercial     Consumer     Construction     Commercial              
    Real Estate-     Real Estate-     and Land     and     Consumer        
    Mortgage     Mortgage     Development     Industrial     and Other     Total  
Beginning balance   $ 3,557     $ 2,518     $ 827     $ 482     $ 16     $ 7,400  
Charged-off loans     (958 )     (1,022 )     (782 )     (74 )     (33 )     (2,869 )
Recovery of charge-offs     838       36       145       144       17       1,180  
Provision for loan losses     (888 )     (4 )     1,051       257       14       430  
Ending balance   $ 2,549     $ 1,528     $ 1,241     $ 809     $ 14     $ 6,141  

 

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.

 

§ Loan 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 other 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 March 31, 2013 and December 31, 2012 (amounts in thousands):

 

March 31, 2013   Commercial     Consumer     Construction     Commercial              
    Real Estate-     Real Estate-     and Land     and     Consumer        
    Mortgage     Mortgage     Development     Industrial     and Other     Total  
Pass   $ 113,593     $ 56,720     $ 31,700     $ 33,067     $ 1,825     $ 236,905  
Special mention     2,352       6,888       99       4,256       -       13,595  
Substandard     472       3,182       472       190       -       4,316  
Substandard-impaired     9,159       3,121       489       2,789       -       15,558  
Doubtful     1,367       349       460       -       -       2,176  
    $ 126,943     $ 70,260     $ 33,220     $ 40,302     $ 1,825     $ 272,550  

 

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  

  

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 March 31, 2013 and December 31, 2012 (in thousands):

 

                      For the quarter ended  
    At March  31, 2013     March 31, 2013  
          Unpaid           Average     Interest  
    Recorded     Principal     Related     Recorded     Income  
    Investment     Balance     Allowance     Investment     Recognized  
Impaired loans without a valuation allowance:                                        
Commercial real estate – mortgage   $ 5,427     $ 5,690     $ -     $ 4,416     $ 64  
Consumer real estate – mortgage     2,524       2,524       -       1,518       32  
Construction and land development     471       498       -       357       4  
Commercial and industrial     2,045       2,102       -       2,078       9  
Consumer and other     -       -       -       -       -  
Total   $ 10,467     $ 10,814     $ -     $ 8,369     $ 109  
                                         
Impaired loans with a valuation allowance:                                        
Commercial real estate – mortgage   $ 5,099     $ 5,764     $ 2,072     $ 5,453     $ 69  
Consumer real estate – mortgage     946       946       570       1,149       12  
Construction and land development     478       478       460       592       4  
Commercial and industrial     744       744       476       896       20  
Consumer and other     -       -       -       -       -  
Total   $ 7,267     $ 7,932     $ 3,578     $ 8,090     $ 105  
                                         
Total impaired loans   $ 17,734     $ 18,746     $ 3,578     $ 16,459     $ 214  

  

                      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  

 

The following tables present an aged analysis of past due loans as of March 31, 2013 and December 31, 2012 (in thousands):

 

March 31, 2013   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   $ 1,371     $ -     $ 360     $ 1,731     $ 60,729     $ 62,460  
All other     498       -       2,393       2,891       61,592       64,483  
Consumer real estate-mortgage     1,250       -       1,014       2,264       67,996       70,260  
Construction and land development     365       -       531       896       32,324       33,220  
Commercial and industrial     537       -       2,066       2,603       37,699       40,302  
Consumer and other     2       -       -       2       1,823       1,825  
Total   $ 4,023     $ -     $ 6,364     $ 10,387     $ 262,163     $ 272,550  

 

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  

  

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 March 31, 2013 and December 31, 2012, the bank has loans of approximately $8,695,000 and $9,403,000, respectively, that were modified for troubled debt restructuring. 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 three month period ending March 31, 2013 and 2012. (amounts in thousands):

 

        Pre-Modification     Post-Modification  
        Outstanding
Recorded		     Outstanding
Recorded		  
March 31, 2013   Number of Contracts   Investment     Investment  
                 
Commercial real estate-mortgage   6   $ 8,354     $ 8,354  
Consumer real estate-mortgage   3     270       270  
Construction and land development   1     459       459  
Commercial and industrial   5     2,432       2,432  

 

        Pre-Modification     Post-Modification  
        Outstanding
Recorded		     Outstanding
Recorded		  
March 31, 2012   Number of Contracts   Investment     Investment  
                 
Consumer real estate-mortgage   3   $ 2,893     $ 2,331  
Construction and land development   1     591       456  
Commercial and industrial   1     20       20  

 

There were no loans that were modified as troubled debt restructurings during the past twelve months and for which there was a subsequent payment default.