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Loans and Allowance for Loan Losses
 3 Months Ended
Mar. 31, 2015
Receivables [Abstract]  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]
Note 4. Loans and Allowance for Loan Losses
 
At March 31, 2015 and December 31, 2014, loans are summarized as follows (in thousands):
 
 
 
March 31,
 
December 31,
 
 
 
2015
 
2014
 
Commercial real estate-mortgage:
 
 
 
 
 
 
 
Owner-occupied
 
$
70,879
 
$
68,581
 
All other
 
 
73,891
 
 
74,587
 
Consumer real estate-mortgage
 
 
76,255
 
 
76,907
 
Construction and land development
 
 
35,376
 
 
34,449
 
Commercial and industrial
 
 
36,813
 
 
37,863
 
Consumer and other
 
 
2,820
 
 
2,977
 
Total loans
 
 
296,034
 
 
295,364
 
Less: Allowance for loan losses
 
 
(3,657)
 
 
(3,495)
 
 
 
 
 
 
 
 
 
Loans, net
 
$
292,377
 
$
291,869
 
 
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, 2015 and
December 31, 2014, is summarized in the tables below (amounts in thousands):
 
March 31, 2015
 
Commercial
 
Consumer
 
Construction
 
Commercial
 
 
 
 
 
 
 
Real Estate-
 
Real Estate-
 
and Land
 
and
 
Consumer
 
 
 
 
 
Mortgage
 
Mortgage
 
Development
 
Industrial
 
and Other
 
Total
 
Performing loans
 
$
141,949
 
$
74,741
 
$
35,145
 
$
35,591
 
$
2,820
 
$
290,246
 
Impaired loans
 
 
2,821
 
 
1,514
 
 
231
 
 
1,222
 
 
-
 
 
5,788
 
Total
 
$
144,770
 
$
76,255
 
$
35,376
 
$
36,813
 
$
2,820
 
$
296,034
 
 
December 31, 2014
 
Commercial
 
Consumer
 
Construction
 
Commercial
 
 
 
 
 
 
 
Real Estate-
 
Real Estate-
 
and Land
 
and
 
Consumer
 
 
 
 
 
Mortgage
 
Mortgage
 
Development
 
Industrial
 
and Other
 
Total
 
Performing loans
 
$
138,711
 
$
74,828
 
$
33,696
 
$
36,314
 
$
2,977
 
$
286,526
 
Impaired loans
 
 
4,457
 
 
2,079
 
 
753
 
 
1,549
 
 
           -
 
 
8,838
 
Total
 
$
143,168
 
$
76,907
 
$
34,449
 
$
37,863
 
$
2,977
 
$
295,364
 
The following tables show the allowance for loan losses allocation by loan classification for impaired and performing loans as of March 31, 2015 and December 31, 2014 (amounts in thousands):
 
March 31, 2015
 
Commercial
 
Consumer
 
Construction
 
Commercial
 
 
 
 
 
 
 
Real Estate-
 
Real Estate-
 
and Land
 
and
 
Consumer
 
 
 
 
 
Mortgage
 
Mortgage
 
Development
 
Industrial
 
and Other
 
Total
 
Allowance related to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans
 
$
1,470
 
$
1,154
 
$
236
 
$
445
 
$
88
 
$
3,393
 
Impaired loans
 
 
51
 
 
-
 
 
-
 
 
213
 
 
-
 
 
264
 
Total
 
$
1,521
 
$
1,154
 
$
236
 
$
658
 
$
88
 
$
3,657
 
 
December 31, 2014
 
Commercial
 
Consumer
 
Construction
 
Commercial
 
 
 
 
 
 
 
Real Estate-
 
Real Estate-
 
and Land
 
and
 
Consumer
 
 
 
 
 
Mortgage
 
Mortgage
 
Development
 
Industrial
 
and Other
 
Total
 
Allowance related to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans
 
$
1,191
 
$
1,082
 
$
130
 
$
361
 
$
35
 
$
2,799
 
Impaired loans
 
 
404
 
 
15
 
 
-
 
 
277
 
 
-
 
 
696
 
Total
 
$
1,595
 
$
1,097
 
$
130
 
$
638
 
$
35
 
$
3,495
 
 
The following tables detail the changes in the allowance for loan losses for the three month period ended March 31, 2015 and year ended December 31, 2014, by loan classification (amounts in thousands):
 
March 31, 2015
 
Commercial
 
Consumer
 
Construction
 
Commercial
 
 
 
 
 
 
 
Real Estate-
 
Real Estate-
 
and Land
 
and
 
Consumer
 
 
 
 
 
Mortgage
 
Mortgage
 
Development
 
Industrial
 
and Other
 
Total
 
Beginning balance
 
$
1,595
 
$
1,097
 
$
130
 
$
638
 
$
35
 
$
3,495
 
Charged-off loans
 
 
(133)
 
 
(37)
 
 
(10)
 
 
(45)
 
 
(12)
 
 
(237)
 
Recovery of charge-offs
 
 
13
 
 
13
 
 
4
 
 
12
 
 
7
 
 
49
 
Provision for (reallocation of) loan losses
 
 
46
 
 
81
 
 
112
 
 
53
 
 
58
 
 
350
 
Ending balance
 
$
1,521
 
$
1,154
 
$
236
 
$
658
 
$
88
 
$
3,657
 
 
December 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
 
 
(470)
 
 
(896)
 
 
(58)
 
 
(108)
 
 
(50)
 
 
(1,582)
 
Recovery of charge-offs
 
 
156
 
 
324
 
 
771
 
 
58
 
 
50
 
 
1,359
 
Provision for (reallocation of) loan losses
 
 
360
 
 
731
 
 
(902)
 
 
336
 
 
(10)
 
 
515
 
Ending balance
 
$
1,595
 
$
1,097
 
$
130
 
$
638
 
$
35
 
$
3,495
 
 
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, 2015 and December 31, 2014 (amounts in thousands):
 
March 31, 2015
 
Commercial
 
Consumer
 
Construction
 
Commercial
 
 
 
 
 
 
 
Real Estate-
 
Real Estate-
 
and Land
 
and
 
Consumer
 
 
 
 
 
Mortgage
 
Mortgage
 
Development
 
Industrial
 
and Other
 
Total
 
Pass
 
$
139,054
 
$
73,256
 
$
34,870
 
$
32,749
 
$
2,820
 
$
282,749
 
Special mention
 
 
3,118
 
 
1,481
 
 
-
 
 
3,447
 
 
-
 
 
8,046
 
Substandard
 
 
2,598
 
 
1,518
 
 
506
 
 
617
 
 
-
 
 
5,239
 
 
 
$
144,770
 
$
76,255
 
$
35,376
 
$
36,813
 
$
2,820
 
$
296,034
 
 
December 31, 2014
 
Commercial
 
Consumer
 
Construction
 
Commercial
 
 
 
 
 
 
 
Real Estate-
 
Real Estate-
 
and Land
 
and
 
Consumer
 
 
 
 
 
Mortgage
 
Mortgage
 
Development
 
Industrial
 
and Other
 
Total
 
Pass
 
$
135,586
 
$
72,753
 
$
33,201
 
$
32,684
 
$
2,820
 
$
277,201
 
Special mention
 
 
3,096
 
 
1,452
 
 
17
 
 
3,187
 
 
-
 
 
7,752
 
Substandard
 
 
4,486
 
 
2,702
 
 
1,231
 
 
1,992
 
 
-
 
 
10,411
 
 
 
$
143,168
 
$
76,907
 
$
34,449
 
$
37,863
 
$
2,820
 
$
295,364
 
 
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, 2015 and December 31, 2014 (in thousands):
 
 
 
 
 
 
 
 
 
For the quarter ended
 
 
 
At March  31, 2015
 
March 31, 2015
 
 
 
 
 
Unpaid
 
 
 
Average
 
Interest
 
 
 
Recorded
 
Principal
 
Related
 
Recorded
 
Income
 
 
 
Investment
 
Balance
 
Allowance
 
Investment
 
Recognized
 
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate – mortgage
 
$
2,397
 
$
2,449
 
$
-
 
$
2,413
 
$
33
 
Consumer real estate – mortgage
 
 
1,513
 
 
1,528
 
 
-
 
 
1,625
 
 
24
 
Construction and land development
 
 
231
 
 
244
 
 
-
 
 
492
 
 
3
 
Commercial and industrial
 
 
996
 
 
1,039
 
 
-
 
 
1,015
 
 
9
 
Total
 
 
5,137
 
 
5,260
 
 
-
 
 
5,545
 
 
69
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate – mortgage
 
 
425
 
 
434
 
 
51
 
 
1,227
 
 
5
 
Consumer real estate – mortgage
 
 
-
 
 
-
 
 
-
 
 
171
 
 
-
 
Commercial and industrial
 
 
226
 
 
226
 
 
213
 
 
371
 
 
13
 
Total
 
 
651
 
 
660
 
 
264
 
 
1,769
 
 
18
 
Total impaired loans
 
$
5,788
 
$
5,920
 
$
264
 
$
7,314
 
$
87
 
 
 
 
 
 
For the year ended
 
 
 
At December 31, 2014
 
December 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
 
$
2,428
 
$
2,480
 
$
-
 
$
4,386
 
$
127
 
Consumer real estate – mortgage
 
 
1,738
 
 
1,742
 
 
-
 
 
1,880
 
 
114
 
Construction and land development
 
 
753
 
 
766
 
 
-
 
 
462
 
 
44
 
Commercial and industrial
 
 
1,033
 
 
1,085
 
 
-
 
 
1,186
 
 
41
 
Total
 
 
5,952
 
 
6,073
 
 
-
 
 
7,914
 
 
326
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate – mortgage
 
 
2,029
 
 
2,029
 
 
404
 
 
683
 
 
98
 
Consumer real estate – mortgage
 
 
341
 
 
476
 
 
15
 
 
676
 
 
24
 
Construction and land development
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
Commercial and industrial
 
 
516
 
 
516
 
 
277
 
 
401
 
 
52
 
Total
 
 
2,886
 
 
3,021
 
 
696
 
 
1,760
 
 
174
 
Total impaired loans
 
$
8,838
 
$
9,094
 
$
696
 
$
9,674
 
$
500
 
 
The following tables present an aged analysis of past due loans as of March 31, 2015 and December 31, 2014 (amounts in thousands):
 
March 31, 2015
 
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
 
$
46
 
$
-
 
$
500
 
$
546
 
$
70,333
 
$
70,879
 
All other
 
 
-
 
 
-
 
 
455
 
 
455
 
 
73,436
 
 
73,891
 
Consumer real estate-mortgage
 
 
28
 
 
-
 
 
264
 
 
292
 
 
75,963
 
 
76,255
 
Construction and land development
 
 
-
 
 
-
 
 
-
 
 
-
 
 
35,376
 
 
35,376
 
Commercial and industrial
 
 
28
 
 
-
 
 
231
 
 
259
 
 
36,554
 
 
36,813
 
Consumer and other
 
 
5
 
 
-
 
 
-
 
 
5
 
 
2,815
 
 
2,820
 
Total
 
$
107
 
$
-
 
$
1,450
 
$
1,557
 
$
294,477
 
$
296,034
 
  
December 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
 
$
664
 
$
-
 
$
496
 
$
1,160
 
$
67,421
 
$
68,581
 
All other
 
 
-
 
 
-
 
 
-
 
 
-
 
 
74,587
 
 
74,587
 
Consumer real estate-mortgage
 
 
419
 
 
-
 
 
1,134
 
 
1,553
 
 
75,354
 
 
76,907
 
Construction and land development
 
 
521
 
 
-
 
 
40
 
 
561
 
 
33,888
 
 
34,449
 
Commercial and industrial
 
 
54
 
 
-
 
 
1,195
 
 
1,249
 
 
36,614
 
 
37,863
 
Consumer and other
 
 
8
 
 
-
 
 
-
 
 
8
 
 
2,969
 
 
2,977
 
Total
 
$
1,666
 
$
-
 
$
2,865
 
$
4,531
 
$
290,833
 
$
295,364
 
 
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, 2015 and December 31, 2014, the Bank has loans of approximately $3,288,000 and $4,956,000, 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 periods ending March 31, 2015 and 2014.
 
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.