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Loans and Allowance for Loan Losses
 6 Months Ended
Jun. 30, 2012
Receivables [Abstract]  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 4. Loans and Allowance for Loan Losses

 

At June 30, 2012 and December 31, 2011, loans are summarized as follows (in thousands):

 

    June 30,     December 31,  
    2012     2011  
Commercial real estate-mortgage:                
Owner-occupied   $ 60,068     $ 62,999  
All other     61,671       63,058  
Consumer real estate-mortgage     72,044       70,543  
Construction and land development     29,310       31,031  
Commercial and industrial     38,644       37,458  
Consumer and other     2,012       2,676  
Total loans     263,749       267,765  
Less: Allowance for loan losses     (6,029 )     (7,400 )
                 
Loans, net   $ 257,720     $ 260,365  

 

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 June 30, 2012 and December 31, 2011, is summarized in the tables below (amounts in thousands):

 

June 30, 2012   Commercial     Consumer     Construction     Commercial              
    Real Estate-     Real Estate-     and Land     and     Consumer        
    Mortgage     Mortgage     Development     Industrial     and Other     Total  
Performing loans   $ 111,306     $ 66,525     $ 28,347     $ 35,817     $ 2,012     $ 244,007  
Impaired loans     10,433       5,519       963       2,827        -       19,742  
Total   $ 121,739     $ 72,044     $ 29,310     $ 38,644     $ 2,012     $ 263,749  

 

December 31, 2011   Commercial     Consumer     Construction     Commercial              
    Real Estate-     Real Estate-     and Land     and     Consumer        
    Mortgage     Mortgage     Development     Industrial     and Other     Total  
Performing loans   $ 112,064     $ 64,026     $ 29,323     $ 34,259     $ 2,676     $ 242,348  
Impaired loans     13,993       6,517       1,708       3,199        -       25,417  
Total   $ 126,057     $ 70,543     $ 31,031     $ 37,458     $ 2,676     $ 267,765  

 

The following tables show the allowance for loan losses allocation by loan classification for impaired and performing loans as of June 30, 2012 and December 31, 2011 (amounts in thousands):

 

June 30, 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   $ 871     $ 1,271     $ 409     $ 111     $ 10     $ 2,672  
Impaired loans     1,932       781       459       185        -       3,357  
Total   $ 2,803     $ 2,052     $ 868     $ 296     $ 10     $ 6,029  

 

December 31, 2011   Commercial     Consumer     Construction     Commercial              
    Real Estate-     Real Estate-     and Land     and     Consumer        
Allowance related to:   Mortgage     Mortgage     Development     Industrial     and Other     Total  
Performing loans   $ 952     $ 1,264     $ 174     $ 18     $ 16     $ 2,424  
Impaired loans     2,605       1,254       653       464        -       4,976  
Total   $ 3,557     $ 2,518     $ 827     $ 482     $ 16     $ 7,400  

 

The following tables detail the changes in the allowance for loan losses for the six month period ending June 30, 2012 and year ending December 31, 2011, by loan classification (amounts in thousands):

 

June 30, 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     (597 )     (214 )     (698 )     (57 )     (16 )     (1,582 )
Recovery of charge-offs     43       13       85       59       11       211  
Provision for loan losses     (200 )     (265 )     654       (188 )     (1 )      -  
Ending balance   $ 2,803     $ 2,052     $ 868     $ 296     $ 10     $ 6,029  

 

December 31, 2011   Commercial     Consumer     Construction     Commercial              
    Real Estate-     Real Estate-     and Land     And     Consumer        
    Mortgage     Mortgage     Development     Industrial     and Other     Total  
Beginning balance   $ 1,793     $ 3,111     $ 3,238     $ 925     $ 65     $ 9,132  
Charged-off loans     (1,238 )     (1,613 )     (232 )     (56 )     (29 )     (3,148 )
Recovery of charge-offs     259       65       532       94       21       971  
Provision for loan losses     2,743       955       (2,711 )     (501 )     (41 )     445  
Ending balance   $ 3,557     $ 2,518     $ 827     $ 482     $ 16     $ 7,400  

  

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, remains properly underwritten and is 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.

 

§ Loans greater than or equal to $500 thousand are reviewed by the Bank’s internal loan review department within 90 days of origination.

 

§ Loan relationships greater than or equal to $1 million are reviewed annually by the internal loan review department.

 

§ The Bank’s internal loan review department samples approximately 25 percent of all other loans less than $1 million 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.

 

§ The Bank also contracts with an independent third party to perform loan reviews. This external party reviews approximately 40 percent of the Bank’s loan portfolio annually.

 

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 June 30, 2012 and December 31, 2011 (amounts in thousands):

  

June 30, 2012   Commercial     Consumer     Construction     Commercial              
    Real estate-     Real Estate-     and Land     and     Consumer        
    Mortgage     Mortgage     Development     Industrial     and Other     Total  
Pass   $ 103,611     $ 56,086     $ 24,562     $ 34,690     $ 1,987     $ 220,936  
Special mention     6,894       6,497       2,911       935       21       17,258  
Substandard     801       3,942       874       192       4       5,813  
Substandard-impaired     10,433       5,519       963       2,827       -       19,742  
    $ 121,739     $ 72,044     $ 29,310     $ 38,644     $ 2,012     $ 263,749  

 

December 31, 2011   Commercial     Consumer     Construction     Commercial              
    Real Estate-     Real Estate-     and Land     and     Consumer        
    Mortgage     Mortgage     Development     Industrial     and Other     Total  
Pass   $ 101,161     $ 55,160     $ 27,207     $ 31,426     $ 2,648     $ 217,602  
Special mention     9,805       5,122       804       2,620       7       18,358  
Substandard     1,098       3,744       1,312       213       21       6,388  
Substandard-impaired     11,493       6,517       1,708       3,199       -       22,917  
Doubtful     2,500       -       -       -       -       2,500  
    $ 126,057     $ 70,543     $ 31,031     $ 37,458     $ 2,676     $ 267,765  

  

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 June 30, 2012 and December 31, 2011 (in thousands):

 

                      For the quarter ended  
    At June 30, 2012     June 30, 2012  
          Unpaid           Average     Interest  
    Recorded     Principal     Related     Recorded     Income  
    Investment     Balance     Allowance     Investment     Recognized  
Impaired loans without a valuation allowance:                                        
Commercial real estate – mortgage   $ 2,675     $ 2,692     $ -     $ 4,314     $ 98  
Consumer real estate – mortgage     1,918       2,601       -       1,399       96  
Construction and land development     244       251       -       591       9  
Commercial and industrial     2,342       2,351       -       2,488       7  
Total   $ 7,179     $ 7,895     $ -     $ 8,792     $ 210  
                                         
Impaired loans with a valuation allowance:                                        
Commercial real estate – mortgage   $ 7,758     $ 7,770     $ 1,932     $ 8,034     $ 246  
Consumer real estate – mortgage     3,601       3,702       781       4,838       98  
Construction and land development     719       719       459       679       25  
Commercial and industrial     485       485       185       500       30  
Total   $ 12,563     $ 12,676     $ 3,357     $ 14,051     $ 399  
                                         
Total impaired loans   $ 19,742     $ 20,571     $ 3,357     $ 22,843     $ 609  

 

  

                      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  
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  
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 June 30, 2012 and December 31, 2011 (dollars in thousands):

 

June 30, 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   $ 1,195     $ -     $ 895     $ 2,090     $ 57,978     $ 60,068  
All other     253       -       919       1,172       60,499       61,671  
Consumer real estate-mortgage     821       -       2,745       3,566       68,478       72,044  
Construction and land development             -       174       174       29,136       29,310  
Commercial and industrial     205       -       2,391       2,596       36,048       38,644  
Consumer and other     22       -               22       1,990       2,012  
Total   $ 2,495     $ -     $ 7,124     $ 9,620     $ 254,129     $ 263,749  

  

December 31, 2011   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   $ 4,791     $ -     $ 63     $ 4,854     $ 58,145     $ 62,999  
All other     497       -       2,500       2,997       60,061       63,058  
Consumer real estate-mortgage     1,163       -       3,641       4,804       65,739       70,543  
Construction and land development     103       -       1,622       1,725       29,306       31,031  
Commercial and industrial     1,578       -       42       1,620       35,838       37,458  
Consumer and other     26       -       14       40       2,636       2,676  
Total   $ 8,158     $ -     $ 7,882     $ 16,040     $ 251,725     $ 267,765  

  

 

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. If on nonaccruing status as of the date of restructuring, the loans are included in nonperforming loans and are classified as impaired loans. Loans that have been restructured that were performing as of the restructure date are reported as troubled debt restructurings. At June 30, 2012 and December 31, 2011, the Bank has loans of approximately $7,329,000 and $5,026,000, 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 six month ending period June 30, 2012 (amounts in thousands):

 

          Pre-Modification     Post-Modification  
          Outstanding     Outstanding  
          Recorded     Recorded  
      Number of Contracts     Investment     Investment  
                     
Consumer real estate-mortgage     1     $ 65     $ 65  
Construction and land development     3       1,178       1,178  
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.