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Loans and Allowance for Loan Losses
 9 Months Ended
Sep. 30, 2014
Receivables [Abstract]  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]
Note 4. Loans and Allowance for Loan Losses
 
At September 30, 2014 and December 31, 2013, loans are summarized as follows (in thousands):
 
 
 
September 30,
 
December 31,
 
 
 
2014
 
2013
 
Commercial real estate-mortgage:
 
 
 
 
 
    Owner-occupied
 
$
71,986
 
$
65,747
 
All other
 
 
72,163
 
 
64,052
 
Consumer real estate-mortgage
 
 
75,651
 
 
76,315
 
Construction and land development
 
 
32,547
 
 
41,597
 
Commercial and industrial
 
 
43,253
 
 
38,999
 
Consumer and other
 
 
2,790
 
 
2,730
 
Total loans
 
 
298,390
 
 
289,440
 
Less: Allowance for loan losses
 
 
(3,474)
 
 
(3,203)
 
 
 
 
 
 
 
 
 
Loans, net
 
$
294,916
 
$
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 September 30, 2014 and December 31, 2013, is summarized in the tables below (amounts in thousands):
 
September 30, 2014
 
Commercial
 
Consumer
 
Construction
 
Commercial
 
 
 
 
 
 
 
Real Estate-
 
Real Estate-
 
and Land
 
and
 
Consumer
 
 
 
 
 
Mortgage
 
Mortgage
 
Development
 
Industrial
 
and Other
 
Total
 
Performing loans
 
$
138,921
 
$
73,195
 
$
32,184
 
$
41,805
 
$
2,790
 
$
288,895
 
Impaired loans
 
 
5,228
 
 
2,456
 
 
363
 
 
1,448
 
 
-
 
 
9,495
 
Total
 
$
144,149
 
$
75,651
 
$
32,547
 
$
43,253
 
$
2,790
 
$
298,390
 
 
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 September 30, 2014 and December 31, 2013 (amounts in thousands):
 
September 30, 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
 
$
1,258
 
$
1,302
 
$
27
 
$
425
 
$
73
 
$
3,085
 
Impaired loans
 
 
259
 
 
34
 
 
-
 
 
96
 
 
-
 
 
389
 
Total
 
$
1,517
 
$
1,336
 
$
27
 
$
521
 
$
73
 
$
3,474
 
 
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 nine month period ending September 30, 2014 and year ending December 31, 2013, by loan classification (amounts in thousands):
 
September 30, 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
 
 
(432)
 
 
(767)
 
 
(31)
 
 
(75)
 
 
(44)
 
 
(1,349)
 
   Recovery of charge-offs
 
 
138
 
 
307
 
 
576
 
 
45
 
 
39
 
 
1,105
 
Provision for (reallocation of) loan losses
 
 
262
 
 
858
 
 
(837)
 
 
199
 
 
33
 
 
515
 
Ending balance
 
$
1,517
 
$
1,336
 
$
27
 
$
521
 
$
73
 
$
3,474
 
 
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 September 30, 2014 and December 31, 2013 (amounts in thousands):
 
September 30, 2014
 
Commercial
 
Consumer
 
Construction
 
Commercial
 
 
 
 
 
 
 
Real Estate-
 
Real Estate-
 
and Land
 
and
 
Consumer
 
 
 
 
 
Mortgage
 
Mortgage
 
Development
 
Industrial
 
and Other
 
Total
 
Pass
 
$
135,399
 
$
70,489
 
$
31,840
 
$
38,333
 
$
2,790
 
$
278,851
 
Special mention
 
 
3,158
 
 
1,660
 
 
269
 
 
3,312
 
 
-
 
 
8,399
 
Substandard
 
 
5,592
 
 
3,502
 
 
438
 
 
1,608
 
 
-
 
 
11,140
 
 
 
$
144,149
 
$
75,651
 
$
32,547
 
$
43,253
 
$
2,790
 
$
298,390
 
 
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 September 30, 2014 and December 31, 2013 (amounts in thousands):
 
 
 
 
 
 
 
 
 
For the quarter ended
 
 
 
At September 30, 2014
 
September 30, 2014
 
 
 
 
 
Unpaid
 
 
 
Average
 
Interest
 
 
 
Recorded
 
Principal
 
Related
 
Recorded
 
Income
 
 
 
Investment
 
Balance
 
Allowance
 
Investment
 
Recognized
 
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate – mortgage
 
$
4,797
 
$
4,839
 
$
-
 
$
5,225
 
$
182
 
Consumer real estate – mortgage
 
 
1,806
 
 
1,821
 
 
-
 
 
1,991
 
 
89
 
Construction and land development
 
 
362
 
 
375
 
 
-
 
 
366
 
 
18
 
Commercial and industrial
 
 
1,104
 
 
1,147
 
 
-
 
 
1,318
 
 
32
 
Total
 
 
8,069
 
 
8,182
 
 
-
 
 
8,900
 
 
321
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate – mortgage
 
 
431
 
 
440
 
 
259
 
 
725
 
 
18
 
Consumer real estate – mortgage
 
 
650
 
 
831
 
 
34
 
 
908
 
 
32
 
Construction and land development
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
Commercial and industrial
 
 
345
 
 
345
 
 
96
 
 
379
 
 
33
 
Total
 
 
1,426
 
 
1,616
 
 
389
 
 
2,012
 
 
83
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total impaired loans
 
$
9,495
 
$
9,798
 
$
389
 
$
10,912
 
$
404
 
 
 
 
 
 
 
 
 
 
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 September 30, 2014 and December 31, 2013 (amounts in thousands):
 
September 30, 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
 
$
746
 
$
-
 
$
320
 
$
1,066
 
$
70,920
 
$
71,986
 
All other
 
 
30
 
 
-
 
 
-
 
 
30
 
 
72,133
 
 
72,163
 
Consumer real estate-mortgage
 
 
853
 
 
-
 
 
1,979
 
 
2,832
 
 
72,819
 
 
75,651
 
Construction and land development
 
 
407
 
 
-
 
 
42
 
 
449
 
 
32,098
 
 
32,547
 
Commercial and industrial
 
 
808
 
 
-
 
 
1,259
 
 
2,067
 
 
41,186
 
 
43,253
 
Consumer and other
 
 
2
 
 
-
 
 
-
 
 
2
 
 
2,788
 
 
2,790
 
Total
 
$
2,846
 
$
-
 
$
3,600
 
$
6,446
 
$
291,944
 
$
298,390
 
 
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 September 30, 2014 and December 31, 2013, the Bank has loans of approximately $4,802,000 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 was one commercial real estate-mortgage loan with a pre-modification and post-modification outstanding recorded investment of $480,000 that was modified as a troubled debt restructuring during the nine month period ended September 30, 2014.
 
The following table presents a summary of loans that were modified as troubled debt restructurings during the nine month period ended September 30, 2013 (amounts in thousands):
 
 
 
 
 
 
Pre-Modification 
 
Post-Modification
 
 
 
 
 
 
Outstanding
 
Outstanding
 
 
 
 
 
 
Recorded
 
Recorded
 
September 30, 2013
 
Number of Contracts
 
Investment
 
Investment
 
 
 
 
 
 
 
 
 
 
Commercial real estate-mortgage
 
 
2
 
$
2,073
 
$
2,073
 
Consumer real estate-mortgage
 
 
1
 
 
66
 
 
66
 
Construction and land development
 
 
3
 
 
898
 
 
898
 
Commercial and industrial
 
 
3
 
 
2,389
 
 
2,389
 
  
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.