Note 5.

Loans and Allowance for Loan Losses

At December 31, 2013 and 2012, the Bank's loans consist of the following (in thousands):

	2013			2012
Commercial real estate-mortgage:
Owner-occupied	$	65,747		$	58,425
All other		64,052			66,747
Consumer real estate-mortgage		76,315			71,195
Construction and land development		41,597			38,557
Commercial and industrial		38,999			40,140
Consumer and other		2,730			1,927

Total loans		289,440			276,991
Less: Allowance for loan losses		(3,203	)		(6,141	)

Loans, net	$	286,237		$	270,850

The following describe risk characteristics relevant to each of the portfolio segments:

Real estate:

As discussed below, Cornerstone offers various types of real estate loan products. All loans within this portfolio segment are particularly sensitive to the valuation of real estate:

Commercial real estate-mortgage loans include owner-occupied commercial real estate loans and other commercial real estate loans. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. Other commercial real estate loans are generally secured by income producing properties.

Consumer real estate-mortgage loans include loans secured by 1-4 family and multifamily residential properties. These loans are repaid by various means such as a borrower’s income, sale of the property, or rental income derived from the property.

Construction and land development loans include extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral. These loans are repaid through cash flow related to the operations, sale, or refinance of the underlying property. This portfolio segment also includes owner-occupied construction loans for commercial businesses for the development of land or construction of a building. These loans are repaid by cash flow generated from the business operation. Real estate loans for income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers are repaid from rent income derived from the properties.

Commercial and industrial:

The commercial and industrial loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the customers’ business operations.

Consumer and other:

The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans, and educational loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.

An analysis of the allowance for loan losses follows:

	2013			2012			2011

Balance, beginning of year	$	6,141,281		$	7,400,049		$	9,132,171

Provision for loan losses		300,000			430,000			445,000
Charge-offs		(4,708,605	)		(2,868,576	)		(3,148,314	)
Recoveries		1,470,482			1,179,808			971,192

Balance, end of year	$	3,203,158		$	6,141,281		$	7,400,049

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, 2013 and 2012, is summarized in the tables below (in thousands):

As of December 31, 2013:

	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total

Performing loans	$	121,817	$	72,868	$	41,228	$	37,007	$	2,730	$	275,650
Impaired loans		7,982		3,447		369		1,992		-		13,790

Total	$	129,799	$	76,315	$	41,597	$	38,999	$	2,730	$	289,440

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

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

As of December 31, 2013:

	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total
Allowance related to:
Performing loans	$	1,051	$	927	$	319	$	297	$	45	$	2,639
Impaired loans		498		11		-		55		-		564

Total	$	1,549	$	938	$	319	$	352	$	45	$	3,203

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

The following tables detail the changes in the allowance for loan losses during December 31, 2013 and 2012, by loan classification (in thousands):

As of December 31, 2013:

	Commercial			Consumer			Construction			Commercial
	Real Estate-			Real Estate-			and Land			and			Consumer
	Mortgage			Mortgage			Development			Industrial			and Other			Total

Balance, beginning of year	$	2,549		$	1,528		$	1,241		$	809		$	14		$	6,141
Provision for loan losses		811			11			(787	)		143			122			300
Charge-offs		(1,879	)		(842	)		(1,193	)		(699	)		(96	)		(4,709	)
Recoveries		68			241			1,058			99			5			1,471

Balance, end of year	$	1,549		$	938		$	319		$	352		$	45		$	3,203

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

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, 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, 2013 and 2012 (in thousands):

As of December 31, 2013:

	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total

Pass	$	119,398	$	67,444	$	40,850	$	33,394	$	2,730	$	263,816
Special mention		3,538		3,536		73		3,468		-		10,615
Substandard		6,863		5,335		674		2,137		-		15,009

	$	129,799	$	76,315	$	41,597	$	38,999	$	2,730	$	289,440

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		9,714		4,835		1,557		3,328		5		19,439

	$	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 December 31, 2013, 2012, and 2011 (in thousands):

							For the Year Ended
	At December 31, 2013						December 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	$	5,786	$	5,854	$	-	$	4,657	$	340
Consumer real estate – mortgage		2,177		2,202		-		2,669		96
Construction and land development		369		383		-		358		23
Commercial and industrial		1,563		1,621		-		1,857		60
Consumer and other		-		-		-		-		-

Total		9,895		10,060		-		9,541		519

Impaired loans with a valuation allowance:
Commercial real estate – mortgage		2,196		2,285		498		4,869		118
Consumer real estate – mortgage		1,270		1,281		11		1,353		90
Construction and land development		-		-		-		177		-
Commercial and industrial		429		430		55		597		53
Consumer and other		-		-		-		-		-

Total		3,895		3,996		564		6,996		261

Total impaired loans	$	13,790	$	14,056	$	564	$	16,537	$	780

							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, 2013 and 2012 (in thousands):

As of December 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	$	678	$	-	$	838	$	1,516	$	64,231	$	65,747
All other		867		-		44		911		63,141		64,052
Consumer real estate-mortgage		419		-		1,006		1,425		74,890		76,315
Construction and land development		50		-		47		97		41,500		41,597
Commercial and industrial		201		-		1,631		1,832		37,167		38,999
Consumer and other		35		-		-		35		2,695		2,730

Total	$	2,250	$	-	$	3,566	$	5,816	$	283,624	$	289,440

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

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, 2013 and 2012, the Bank has loans of approximately $5,753,000 and $9,403,000, 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, 2013, 2012, and 2011 (amounts in thousands):

During the year ended December 31, 2013:

		Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded
	Contracts	Investment		Investment

Commercial real estate-mortgage	2	$	2,073	$	2,073
Consumer real estate-mortgage	2		239		239
Construction and land development	3		728		728
Commercial and industrial	3		2,389		2,389

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

The Bank did not have any loans modified as troubled debt restructurings over the last twelve months that subsequently defaulted during the years ended December 31, 2013 and 2012. The following table presents those loans modified as a troubled debt restructuring over the last twelve months that subsequently defaulted during the year ended December 31, 2011 (amounts in thousands):

Consumer real estate-mortgage

Number of	Recorded
Contracts	Investment

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:

	2013			2012

Beginning balance	$	1,833,982		$	1,514,908
New loans		50,384			436,051
Repayments		(504,196	)		(116,977	)
Ending balance	$	1,380,170		$	1,833,982