Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2014

Receivables [Abstract]

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

Note 4. Loans and Allowance for Loan Losses

At March 31, 2014 and December 31, 2013, loans are summarized as follows (in thousands):

	March 31,		December 31,
	2014		2013
Commercial real estate-mortgage:
Owner-occupied	$	68,653	$	65,747
All other		70,089		64,052
Consumer real estate-mortgage		77,767		76,315
Construction and land development		32,752		41,597
Commercial and industrial		41,122		38,999
Consumer and other		2,569		2,730
Total loans		292,952		289,440
Less: Allowance for loan losses		(3,011)		(3,203)
Loans, net	$	289,941	$	286,237

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.

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, 2014 and December 31, 2013, is summarized in the tables below (amounts in thousands):

March 31, 2014	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total
Performing loans	$	133,425	$	74,712	$	32,386	$	39,383	$	2,569	$	282,475
Impaired loans		5,317		3,055		366		1,739		-		10,477
Total	$	138,742	$	77,767	$	32,752	$	41,122	$	2,569	$	292,952

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

The following tables show the allowance for loan losses allocation by loan classification for impaired and performing loans as of March 31, 2014 and December 31, 2013 (amounts in thousands):

March 31, 2014	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
Allowance related to:	Mortgage		Mortgage		Development		Industrial		and Other		Total
Performing loans	$	1,163	$	832	$	241	$	297	$	40	$	2,573
Impaired loans		70		266		-		102		-		438
Total	$	1,233	$	1,098	$	241	$	399	$	40	$	3,011

December 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	$	1,051	$	927	$	319	$	297	$	45	$	2,639
Impaired loans		498		11		-		55		-		564
Total	$	1,549	$	938	$	319	$	352	$	45	$	3,203

The following tables detail the changes in the allowance for loan losses for the three month period ending March 31, 2014 and year ending December 31, 2013, by loan classification (amounts in thousands):

March 31, 2014	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total
Beginning balance	$	1,549	$	938	$	319	$	352	$	45	$	3,203
Charged-off loans		(397)		(10)		(7)		(36)		(36)		(486)
Recovery of charge-offs		39		29		25		17		19		129
Provision for (reallocation of) loan losses		42		141		(96)		66		12		165
Ending balance	$	1,233	$	1,098	$	241	$	399	$	40	$	3,011

December 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		(1,879)		(842)		(1,193)		(699)		(96)		(4,709)
Recovery of charge-offs		68		241		1,058		99		5		1,471
Provision for (reallocation of) loan losses		811		11		(787)		143		122		300
Ending balance	$	1,549	$	938	$	319	$	352	$	45	$	3,203

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.

⋅ 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, 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, 2014 and December 31, 2013 (amounts in thousands):

March 31, 2014	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total
Pass	$	131,020	$	69,570	$	31,770	$	39,031	$	2,569	$	273,960
Special mention		3,424		3,095		318		185		-		7,022
Substandard		4,298		5,102		664		1,906		-		11,970
	$	138,742	$	77,767	$	32,752	$	41,122	$	2,569	$	292,952

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

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, 2014 and December 31, 2013 (in thousands):

							For the quarter ended
	At March  31, 2014						March 31, 2014
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Commercial real estate – mortgage	$	5,180	$	5,670	$	-	$	5,483	$	74
Consumer real estate – mortgage		2,021		2,035		-		2,100		24
Construction and land development		366		379		-		368		5
Commercial and industrial		1,357		1,417		-		1,460		13
Total	$	8,924	$	9,501	$	-	$	9,411	$	116
Impaired loans with a valuation allowance:
Commercial real estate – mortgage	$	137	$	147	$	70	$	1,167	$	5
Consumer real estate – mortgage		1,034		1,044		266		1,152		19
Construction and land development		-		-		-		-		-
Commercial and industrial		382		382		102		406		11
Total	$	1,553	$	1,573	$	438	$	2,725	$	35
Total impaired loans	$	10,477	$	11,074	$	438	$	12,136	$	151

							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
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
Total	$	3,895	$	3,996	$	564	$	6,996	$	261
Total impaired loans	$	13,790	$	14,056	$	564	$	16,537	$	780

The following tables present an aged analysis of past due loans as of March 31, 2014 and December 31, 2013 (amounts in thousands):

March 31, 2014	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	$	438	$	-	$	292	$	730	$	67,923	$	68,653
All other		173		-		524		697		69,392		70,089
Consumer real estate-mortgage		1,044		-		2,473		3,517		74,250		77,767
Construction and land development		-		-		46		46		32,706		32,752
Commercial and industrial		537		-		1,444		1,981		39,141		41,122
Consumer and other		1		-		-		1		2,568		2,569
Total	$	2,193	$	-	$	4,779	$	6,972	$	285,980	$	292,952

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

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, 2014 and December 31, 2013, the Bank has loans of approximately $5,137,000 and $5,753,000, 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.

There were no loans that were modified as troubled debt restructurings during the three month period ending March 31, 2014.

The following table presents a summary of loans that were modified as troubled debt restructurings during the three month period ending March 31, 2013 (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

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.