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| Note 1. | Summary of Significant Accounting Policies |
The accounting and reporting policies of Cornerstone Bancshares, Inc. and subsidiary (Cornerstone) conform with United States generally accepted accounting principles (GAAP) and practices within the banking industry. The Financial Accounting Standards Board (FASB) has adopted the FASB Accounting Standards Codification (ASC) as the single source of authoritative nongovernmental GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative GAAP for SEC registrants. The policies that materially affect financial position and results of operations are summarized as follows:
Nature of operations:
Cornerstone is a bank-holding company which owns all of the outstanding common stock of Cornerstone Community Bank (the Bank). The Bank provides a variety of financial services through five full service branch locations in Chattanooga, Tennessee and a loan production office in Dalton, Georgia. The Bank's primary deposit products are demand deposits, savings accounts, and certificates of deposit. Its primary lending products are commercial loans, real estate loans, and installment loans. The Bank owned and operated a subsidiary, Eagle Financial, Inc. (Eagle), a finance and factoring company. On December 1, 2011, the Bank elected to transfer the operations, assets and liabilities of Eagle into the Bank. At the time of the transfer, the assets of Eagle were approximately $3.7 million and liabilities were approximately $255 thousand. The transfer allowed the Bank to combine the operations of Eagle with the Bank’s asset based lending department. As a result, the Bank formed Eagle Financial, a division of Cornerstone Community Bank. The Bank still retains the subsidiary in legal form in an inactive status.
Principles of consolidation:
The consolidated financial statements include the accounts of Cornerstone, the Bank and Eagle. All material intercompany accounts and transactions have been eliminated in consolidation.
Goodwill:
Goodwill represents the excess of the cost of Cornerstone’s 1997 purchase of the net assets of the Bank of East Ridge over the underlying fair value of such net assets at the date of acquisition. Cornerstone applies the provisions of ASC Topic 350, “Intangibles-Goodwill and Other,” which requires that goodwill and other intangible assets deemed to have an indefinite life not be amortized. Goodwill is tested annually for impairment. If the carrying value of goodwill exceeds the fair value, a write-down is recorded. See Note 7 for further discussion regarding goodwill.
Use of estimates:
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, other-than-temporary impairments of securities, and the fair value of financial instruments.
Significant group concentrations of credit risk:
Most of Cornerstone’s activities are with customers located in middle and eastern Tennessee. The types of securities that Cornerstone invests in are included in Note 4. The types of lending Cornerstone engages in are included in Note 5. Cornerstone does not have any significant concentrations to any one industry or customer.
Commercial real estate, including commercial construction loans, represented 54 percent of the loan portfolio at December 31, 2011, and 52 percent of the loan portfolio at December 31, 2010.
Securities:
Debt securities are classified as held to maturity when the Bank has the intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity.
Debt securities not classified as held to maturity are classified as available for sale. Securities available for sale are carried at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Realized gains and losses on securities available for sale are included in other income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gains and losses on sales of securities are determined using the specific-identification method. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
The Bank conducts a regular assessment of its securities portfolio to determine whether any are other-than-temporarily impaired. In estimating other-than-temporary impairment losses, management considers, among other factors, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and the intent and ability of the Bank to retain its investment for a period of time sufficient to allow for any anticipated recovery. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.
Federal Home Loan Bank stock:
Cornerstone, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an investment in capital stock of the FHLB. Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. At its discretion, the FHLB may declare dividends on the stock. Management reviews for impairment based on the ultimate recoverability of the cost basis in the FHLB stock.
Loans:
Cornerstone grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by real estate loans secured by properties located in Chattanooga, Tennessee and surrounding areas. The ability of Cornerstone’s debtors to honor their contracts is somewhat dependent on the real estate and economic conditions in these areas.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan fees and costs. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate.
Interest income is accrued based on the unpaid principal balance. Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Credit card loans and other consumer loans are typically charged off no later than 120 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
Loans: (continued)
All interest accrued but not collected for loans that are charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
A troubled-debt restructuring (TDR) is a loan that the Bank has granted a concession to the borrower, which would not otherwise be considered due to the borrower experiencing financial difficulty. If a loan is in nonaccrual status before it is determined to be a TDR, then the loan remains in nonaccrual status. TDR loans in nonaccrual status may be returned to accrual status if there has been at least a six month sustained period of repayment performance by the borrower. When the Bank modifies the terms of an existing loan that is not considered a TDR, the Bank accounts for the loan modification as a new loan if the terms of the new loan resulting from the refinancing or restructuring are at least as favorable to the Bank as the terms for comparable loans to other customers with similar risk characteristics who are not undergoing a refinancing or restructuring and the modifications are more than minor.
Allowance for loan losses:
The allowance for loan losses is maintained at a level that management believes to be adequate to absorb probable losses in the loan portfolio. Loan losses are charged against the allowance when management believes that the full collectability of the loan is unlikely. As such, a loan may be partially charged-off after a "confirming event" has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely. Subsequent recoveries are credited to the allowance.
Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, volume, growth, composition of the loan portfolio, homogeneous pools of loans, risk ratings of specific loans, historical loan loss factors, loss experience of various loan segments, identified impaired loans, and other factors related to the portfolio. This evaluation is performed at least quarterly and is inherently subjective, as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on any impaired loans.
As part of management’s quarterly assessment of the allowance, management divides the loan portfolio into five segments: commercial real estate-mortgage (includes owner-occupied and all other), consumer real estate-mortgage, construction and land development, commercial and industrial, and consumer and other. Each segment is then analyzed such that a specific and general allocation of the allowance is estimated for each loan segment.
The general component involves the use of a historic loss model to estimate future losses. The model includes each of the five loan portfolio segments and utilizes the incurred losses over the last twelve months to estimate future losses. The historic loss percentages derived from this model are then applied to the outstanding non-impaired loan balance for each loan category. The amounts for each loan category are then summed to determine the amount of loan and lease loss allowance required.
The estimated general loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of probable losses for several environmental factors. The allocation for environmental factors is particularly subjective. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and is based upon quarterly trend assessments in delinquent and nonaccrual loans, unanticipated charge-offs, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies, or procedures and other influencing factors. These environmental factors are considered for each of the loan segments, and the general allowance allocation, as determined by the processes noted above for each component, is increased or decreased based on the incremental assessment of these various environmental factors.
Loans: (continued)
The Bank’s allowance for loan losses includes a specific allocation for loans classified as impaired. In assessing the adequacy of the allowance, Cornerstone considers the results of our ongoing independent loan review process. Cornerstone undertakes this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in the overall evaluation of the risk characteristics of the entire loan portfolio. Cornerstone’s loan review process includes the judgment of management, independent loan reviewers, and reviews that may have been conducted by third-party reviewers. Cornerstone incorporates relevant loan review results in the loan impairment determination. For each impaired loan, management determines the impaired amount and assigns a specific reserve. In addition, regulatory agencies, as an integral part of their examination process, will periodically review Cornerstone’s allowance for loan losses, and may require the company to record adjustments to the allowance based on their judgment about information available to them at the time of their examinations.
A loan is considered impaired when, based on current information and events, it is probable that Cornerstone will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, Cornerstone does not separately identify individual consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
Derivative loan commitments:
Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in derivative assets or derivative liabilities with changes in their fair values recorded in net gains on sales of loans.
Cornerstone records a zero value for the loan commitment at inception, when the commitment is issued to a borrower. Subsequent to inception, changes in the fair value of the loan commitment are recognized based on changes in the fair value of the underlying mortgage loan due to interest rate changes, changes in the probability the derivative loan commitment will be exercised, and the passage of time. In estimating fair value, Cornerstone assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded.
Premises and equipment:
Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation and amortization computed on the straight-line and declining balance methods over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations.
Investment in partnership:
Cornerstone’s investment in a partnership consists of an equity interest in a lending partnership for the purposes of investing in the New Market Tax Credit Program. This program permits taxpayers to claim a credit against federal income taxes for Qualified Equity Investments made to acquire stock or a capital interest in designated Community Development Entities (CDEs). These designated CDEs must use substantially all (defined as 85 percent) of these proceeds to make qualified low-income community investments.
Cornerstone uses the equity method when it owns an interest in a partnership and can exert significant influence over the partnership’s operations but cannot control the partnership’s operations. Under the equity method, Cornerstone’s ownership interest in the partnership’s capital is reported as an investment on its consolidated balance sheets and Cornerstone’s allocable share of the income or loss from the partnership is reported in noninterest income or expense in the consolidated statements of operations. Cornerstone ceases recording losses on an investment in partnership when the cumulative losses and distributions from the partnership exceed the carrying amount of the investment and any advances made by Cornerstone. After Cornerstone’s investment in such partnership reaches zero, cash distributions received from these investments are recorded as income.
Foreclosed assets:
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.
Securities sold under agreements to repurchase:
Cornerstone enters into sales of securities under agreements to repurchase identical securities the next day. Securities sold under agreements to repurchase amounted to $29,390,810 at December 31, 2011, mature on a daily basis and are secured by securities available for sale with a fair value of $28,408,818.
Income taxes:
Cornerstone accounts for income taxes in accordance with income tax accounting guidance in ASC Topic 740. The income tax accounting guidance results in two components of income tax expense – current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to taxable income or loss. Cornerstone determines deferred income taxes using the liability method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities. Cornerstone’s deferred taxes relate primarily to differences between the basis of the allowance for loan losses and accumulated depreciation. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Cornerstone files consolidated income tax returns with its subsidiary. With few exceptions, Cornerstone is no longer subject to tax examinations by tax authorities for years before 2008.
Cornerstone recognizes deferred tax assets if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. Cornerstone follows the statutory requirements for its income tax accounting and generally avoids risks associated with potentially problematic tax positions that may be challenged upon examination. Cornerstone recognizes interest and penalties on income taxes as a component of income tax expense.
Transfers of financial assets:
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over assets is deemed to be surrendered when (1) the assets have been isolated from Cornerstone, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) Cornerstone does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity, or the ability to unilaterally cause the holder to return specific assets.
Advertising costs:
Cornerstone expenses all advertising costs as incurred. Advertising expense was $78,097, $79,790, and $97,734, for the years ended December 31, 2011, 2010 and 2009, respectively.
Statements of cash flows:
Cornerstone considers all cash and amounts due from depository institutions, interest-bearing deposits at other financial institutions, and federal funds sold to be cash equivalents for purposes of the statements of cash flows.
Stock option plan:
Cornerstone recognizes compensation cost relating to share-based payment transactions in accordance with ASC Topic 718. Compensation cost has been measured based on the grant date fair value of the equity or liability instruments issued. Compensation cost is calculated and recognized over the employee service period, generally defined as the vesting period. Cornerstone uses a stock option pricing model to determine the fair value of the award on the grant date.
Segment reporting:
ASC Topic 280, “Segment Reporting,” provides for the identification of reportable segments on the basis of distinct business units and their financial information to the extent such units are reviewed by an entity’s chief decision maker (which can be an individual or group of management persons). ASC Topic 280 permits aggregation or combination of segments that have similar characteristics. In Cornerstone’s operations, each bank branch is viewed by management as being a separately identifiable business or segment from the perspective of monitoring performance and allocation of financial resources. Although the branches operate independently and are managed and monitored separately, each is substantially similar in terms of business focus, type of customers, products and services. Further, the results of Eagle for 2011, 2010 and 2009 were not significant for separate disclosure. Accordingly, Cornerstone’s consolidated financial statements reflect the presentation of segment information on an aggregated basis in one reportable segment.
Earnings per common share:
Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by Cornerstone relate solely to outstanding stock options, and are determined using the treasury stock method.
Variable interest entities:
An entity is referred to as a variable interest entity (VIE) if it meets the criteria outlined in ASC Topic 810, which are: (1) the entity has equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) the entity has equity investors that cannot make significant decisions about the entity’s operations or that do not absorb the expected losses or receive the expected returns of the entity. A VIE must be consolidated by Cornerstone if it is deemed to be the primary beneficiary of the VIE, which is the party involved with the VIE that has a majority of the expected losses, expected residual returns, or both. At December 31, 2011, Cornerstone has an investment in Appalachian Fund for Growth II Partnership that qualifies as an unconsolidated VIE.
Comprehensive income:
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains on securities available for sale, and unrealized losses related to factors other than credit losses on debt securities.
Reclassifications:
Certain amounts in the prior consolidated financial statements have been reclassified to conform to the current year presentation. The reclassifications had no effect on net income or stockholders’ equity as previously reported.
Off-balance sheet credit related financial instruments:
In the ordinary course of business, Cornerstone has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
Subsequent events:
Cornerstone has evaluated subsequent events for potential recognition and/or disclosures in the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K.
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| Note 2. | Preferred Stock |
| During 2010, Cornerstone initiated a preferred stock offering. The offering period was scheduled to end on June 30, 2011. During December 2011, Cornerstone elected to extend the offering until June 30, 2012, in an effort to obtain its stated goal of $15 million in preferred stock sales. Specifics of the preferred stock offering are as follows: |
| · | Issuance of up to 600,000 shares of Series A Convertible Preferred Stock at a price of $25.00 per share. |
| · | The annual cash dividend on each share of Series A Preferred Stock is $2.50, which is equal to 10% of the original issue price of $25.00 per share, and is payable quarterly in arrears, if, as and when declared on the 15th day of February, May, August and November that immediately follows the end of the dividend period to which such dividends relate. Any dividend payable on shares of Series A Preferred Stock that is not declared by our board of directors or paid will accumulate. |
| · | Each share of Series A Preferred Stock will be convertible at the shareholder’s option at any time into five (5) shares of our common stock reflecting an initial conversion price of $5.00 per share of common stock. The shares of Series A Preferred Stock are also convertible at Cornerstone’s option, in whole or in part, into shares of Cornerstone’s common stock at the conversion rate, at any time on or after July 31, 2015 if the closing price of Cornerstone’s common stock equals or exceeds 150% of the conversion price on each of the thirty (30) consecutive trading days immediately preceding the date Cornerstone gives notice of its election to so convert. |
At December 31, 2011, preferred stock, as presented in the consolidated statements of changes in stockholders’ equity, includes 56,440 shares or $1,399,665 in irrevocable stock subscriptions received in December 2011 which were subsequently paid during January 2012.
At December 31, 2011 and 2010, preferred stock dividends accumulated for each period, which were not declared, totaled $440,031 and $92,324, respectively.
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| Note 3. | Restrictions on Cash and Due From Banks |
The Bank is required to maintain balances on hand or with the Federal Reserve Bank based on a percentage of deposits. At December 31, 2011 and 2010, these reserve balances were approximately $1,230,000 and $632,000, respectively.
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| Note 4. | Securities |
Securities have been classified in the balance sheet according to management’s intent as either securities held to maturity or securities available for sale. The amortized cost and approximate fair value of securities at December 31, 2011 and 2010 are as follows:
| December 31, 2011 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Debt securities available for sale: | ||||||||||||||||
| U.S. Government agencies | $ | 4,176,301 | $ | 13,978 | $ | - | $ | 4,190,279 | ||||||||
| State and municipal securities | 22,902,892 | 1,584,284 | (50,919 | ) | 24,436,257 | |||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Residential mortgage guaranteed by GNMA | 11,723,499 | 150,767 | (3,096 | ) | 11,871,170 | |||||||||||
| Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies | 45,431,456 | 131,215 | (2,940 | ) | 45,559,731 | |||||||||||
| $ | 84,234,148 | $ | 1,880,244 | $ | (56,955 | ) | $ | 86,057,437 | ||||||||
| Debt securities held to maturity: | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Residential mortgage guaranteed by GNMA | $ | 68,643 | $ | 1,841 | $ | - | $ | 70,484 | ||||||||
| December 31, 2010 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Debt securities available for sale: | ||||||||||||||||
| U.S. Government agencies | $ | 4,571,444 | $ | 15,635 | $ | - | $ | 4,587,079 | ||||||||
| State and municipal securities | 20,868,771 | 191,429 | (323,988 | ) | 20,736,212 | |||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Residential mortgage guaranteed by GNMA | 18,747,272 | 130,609 | (24,856 | ) | 18,853,025 | |||||||||||
| Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies | 64,575,092 | 135,479 | (636,453 | ) | 64,074,118 | |||||||||||
| $ | 108,762,579 | $ | 473,152 | $ | (985,297 | ) | $ | 108,250,434 | ||||||||
| Debt securities held to maturity: | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Residential mortgage guaranteed by GNMA | $ | 95,702 | $ | 2,686 | $ | - | $ | 98,388 | ||||||||
U.S. Government sponsored agencies include entities such as Federal National Mortgage Association and Federal Home Loan Mortgage Corporation.
At December 31, 2011 and 2010, securities with a carrying value of approximately $18,182,000 and $17,262,000, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
At December 31, 2011 and 2010, the carrying amount of securities pledged to secure repurchase agreements was approximately $28,409,000 and $28,067,000, respectively.
At December 31, 2011 and 2010, securities with a carrying value of approximately $27,897,000 and $50,317,000, respectively, were pledged to the Federal Home Loan Bank as collateral for the Bank’s borrowings.
At December 31, 2011 and 2010, the Bank had pledged securities with a carrying amount of approximately $9,048,000 and $4,191,000, respectively, to other financial institutions as collateral for federal funds purchased.
The amortized cost and fair value of securities at December 31, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Securities Available for Sale | Securities Held to Maturity | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| Due in one year or less | $ | 299,927 | $ | 300,795 | $ | - | $ | - | ||||||||
| Due from one year to five years | 1,174,270 | 1,280,710 | - | - | ||||||||||||
| Due from five years to ten years | 4,403,089 | 4,821,488 | - | - | ||||||||||||
| Due after ten years | 21,201,907 | 22,223,543 | - | - | ||||||||||||
| 27,079,193 | 28,626,536 | - | - | |||||||||||||
| Mortgage-backed securities | 57,154,955 | 57,430,901 | 68,643 | 70,484 | ||||||||||||
| $ | 84,234,148 | $ | 86,057,437 | $ | 68,643 | $ | 70,484 | |||||||||
For the year ended December 31, 2011, there were available for sale securities sold with proceeds totaling $18,954,410 which resulted in gross gains realized of $107,413. For the year ended December 31, 2010, there were available for sale securities sold with proceeds totaling $85,186,273 which resulted in gross gains and losses realized of $1,699,276 and $1,140, respectively. For the year ended December 31, 2009, there were available for sale securities sold with proceeds totaling $18,951,608 which resulted in gross gains and losses realized of $414,193 and $14,439, respectively.
The following tables present gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities available for sale have been in a continuous unrealized loss position, at December 31, 2011 and 2010:
| As of December 31, 2011 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| Debt securities available for sale: | ||||||||||||||||||||||||
| State and municipal securities | $ | 1,735,771 | $ | (50,919 | ) | $ | - | $ | - | $ | 1,735,771 | $ | (50,919 | ) | ||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||
| Residential mortgage guaranteed by GNMA | - | - | 3,133,826 | (3,096 | ) | 3,133,826 | (3,096 | ) | ||||||||||||||||
| Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies | - | - | 6,954,999 | (2,940 | ) | 6,954,999 | (2,940 | ) | ||||||||||||||||
| $ | 1,735,771 | $ | (50,919 | ) | $ | 10,088,825 | $ | (6,036 | ) | $ | 11,824,596 | $ | (56,955 | ) | ||||||||||
| As of December 31, 2010 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| Debt securities available for sale: | ||||||||||||||||||||||||
| State and municipal securities | $ | 6,110,458 | $ | (154,802 | ) | $ | 6,440,892 | $ | (169,186 | ) | $ | 12,551,350 | $ | (323,988 | ) | |||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||
| Residential mortgage guaranteed by GNMA | 5,647,347 | (24,856 | ) | - | - | 5,647,347 | (24,856 | ) | ||||||||||||||||
| Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies | 34,694,782 | (636,453 | ) | - | - | 34,694,782 | (636,453 | ) | ||||||||||||||||
| $ | 46,452,587 | $ | (816,111 | ) | $ | 6,440,892 | $ | (169,186 | ) | $ | 52,893,479 | $ | (985,297 | ) | ||||||||||
Upon acquisition of a security, Cornerstone determines the appropriate impairment model that is applicable. If the security is a beneficial interest in securitized financial assets, Cornerstone uses the beneficial interests in securitized financial assets impairment model. If the security is not a beneficial interest in securitized financial assets, Cornerstone uses the debt and equity securities impairment model. Cornerstone conducts periodic reviews to evaluate each security to determine whether an other-than-temporary impairment has occurred. Cornerstone does not have any securities that have been classified as other-than-temporarily-impaired at December 31, 2011.
At December 31, 2011, the significant categories of temporarily impaired securities, and management’s evaluation of those securities are as follows:
State and municipal securities: At December 31, 2011, three investments in obligations of state and municipal securities had unrealized losses. Cornerstone believes the unrealized losses on those investments were caused by the interest rate environment and does not relate to the underlying credit quality of the issuers. Because the Company has the intent and ability to hold those investments for a time necessary to recover their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2011.
Mortgage-backed securities: At December 31, 2011, five investments in residential mortgage-backed securities had unrealized losses. This impairment is believed to be caused by the current interest rate environment. The contractual cash flows of those investments are guaranteed or issued by an agency of the U.S. Government. Because the decline in market value is attributable to the current interest rate environment and not credit quality, and because Cornerstone does not intend to sell the investments and it is not more likely than not that Cornerstone will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Cornerstone does not deem those investments to be other-than-temporarily impaired at December 31, 2011.
|
|||
| Note 5. | Loans and Allowance for Loan Losses |
At December 31, 2011 and 2010, the Bank's loans consist of the following (in thousands):
| 2011 | 2010 | |||||||
| Commercial real estate-mortgage: | ||||||||
| Owner-occupied | $ | 62,999 | $ | 64,971 | ||||
| All other | 63,058 | 64,060 | ||||||
| Consumer real estate-mortgage | 70,543 | 71,878 | ||||||
| Construction and land development | 31,031 | 29,848 | ||||||
| Commercial and industrial | 37,458 | 51,160 | ||||||
| Consumer and other | 2,676 | 3,330 | ||||||
| Total loans | 267,765 | 285,247 | ||||||
| Less: Allowance for loan losses | (7,400 | ) | (9,132 | ) | ||||
| Loans, net | $ | 260,365 | $ | 276,115 | ||||
| 2011 | 2010 | 2009 | ||||||||||
| An analysis of the allowance for loan losses follows: | ||||||||||||
| Balance, beginning of year | $ | 9,132,171 | $ | 5,905,054 | $ | 9,618,265 | ||||||
| Provision for loan losses | 445,000 | 7,291,000 | 14,898,898 | |||||||||
| Charge-offs | (3,148,314 | ) | (4,688,054 | ) | (19,095,793 | ) | ||||||
| Recoveries | 971,192 | 624,171 | 483,684 | |||||||||
| Balance, end of year | $ | 7,400,049 | $ | 9,132,171 | $ | 5,905,054 | ||||||
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, 2011 and 2010, is summarized in the tables below (in thousands):
As of 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 | ||||||||||||
As of December 31, 2010:
| Commercial | Consumer | Construction | Commercial | |||||||||||||||||||||
| Real Estate- | Real Estate- | and Land | and | Consumer | ||||||||||||||||||||
| Mortgage | Mortgage | Development | Industrial | and Other | Total | |||||||||||||||||||
| Performing loans | $ | 119,084 | $ | 61,455 | $ | 27,774 | $ | 50,492 | $ | 3,279 | $ | 262,084 | ||||||||||||
| Impaired loans | 9,947 | 10,423 | 2,074 | 668 | 51 | 23,163 | ||||||||||||||||||
| Total | $ | 129,031 | $ | 71,878 | $ | 29,848 | $ | 51,160 | $ | 3,330 | $ | 285,247 | ||||||||||||
The following tables show the allowance for loan losses allocation by loan classification for impaired and performing loans as of December 31, 2011 and 2010 (in thousands):
As of December 31, 2011:
| Commercial | Consumer | Construction | Commercial | |||||||||||||||||||||
| Real Estate- | Real Estate- | and Land | and | Consumer | ||||||||||||||||||||
| Mortgage | Mortgage | Development | Industrial | and Other | Total | |||||||||||||||||||
| Allowance related to: | ||||||||||||||||||||||||
| 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 | ||||||||||||
As of December 31, 2010:
| Commercial | Consumer | Construction | Commercial | |||||||||||||||||||||
| Real Estate- | Real Estate- | and Land | and | Consumer | ||||||||||||||||||||
| Mortgage | Mortgage | Development | Industrial | and Other | Total | |||||||||||||||||||
| Allowance related to: | ||||||||||||||||||||||||
| Performing loans | $ | 887 | $ | 691 | $ | 3,178 | $ | 588 | $ | 48 | $ | 5,392 | ||||||||||||
| Impaired loans | 906 | 2,420 | 60 | 337 | 17 | 3,740 | ||||||||||||||||||
| Total | $ | 1,793 | $ | 3,111 | $ | 3,238 | $ | 925 | $ | 65 | $ | 9,132 | ||||||||||||
The following tables detail the changes in the allowance for loan losses during December 31, 2011 and 2010 by loan classification (in thousands):
As of December 31, 2011:
| Commercial | Consumer | Construction | Commercial | |||||||||||||||||||||
| Real Estate- | Real Estate- | and Land | and | Consumer | ||||||||||||||||||||
| Mortgage | Mortgage | Development | Industrial | and Other | Total | |||||||||||||||||||
| Balance, beginning of year | $ | 1,793 | $ | 3,111 | $ | 3,238 | $ | 925 | $ | 65 | $ | 9,132 | ||||||||||||
| Provision for loan losses | 2,743 | 955 | (2,711 | ) | (501 | ) | (41 | ) | 445 | |||||||||||||||
| Charge-offs | (1,238 | ) | (1,613 | ) | (232 | ) | (36 | ) | (29 | ) | (3,148 | ) | ||||||||||||
| Recoveries | 259 | 65 | 532 | 94 | 21 | 971 | ||||||||||||||||||
| Balance, end of year | $ | 3,557 | $ | 2,518 | $ | 827 | $ | 482 | $ | 16 | $ | 7,400 | ||||||||||||
As of December 31, 2010:
| Commercial | Consumer | Construction | Commercial | |||||||||||||||||||||
| Real Estate- | Real Estate- | and Land | and | Consumer | ||||||||||||||||||||
| Mortgage | Mortgage | Development | Industrial | and Other | Total | |||||||||||||||||||
| Balance, beginning of year | $ | 1,189 | $ | 719 | $ | 3,179 | $ | 786 | $ | 32 | $ | 5,905 | ||||||||||||
| Provision for loan losses | 2,700 | 2,900 | 1,300 | 300 | 91 | 7,291 | ||||||||||||||||||
| Charge-offs | (2,309 | ) | (562 | ) | (1,260 | ) | (443 | ) | (114 | ) | (4,688 | ) | ||||||||||||
| Recoveries | 213 | 54 | 19 | 282 | 56 | 624 | ||||||||||||||||||
| Balance, end of year | $ | 1,793 | $ | 3,111 | $ | 3,238 | $ | 925 | $ | 65 | $ | 9,132 | ||||||||||||
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, 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 December 31, 2011 and 2010 (in thousands):
As of 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 | |||||||||||||
As of December 31, 2010:
| Commercial | Consumer | Construction | Commercial | |||||||||||||||||||||
| Real Estate- | Real Estate- | and Land | and | Consumer | ||||||||||||||||||||
| Mortgage | Mortgage | Development | Industrial | and Other | Total | |||||||||||||||||||
| Pass | $ | 97,692 | $ | 49,974 | $ | 24,401 | $ | 41,963 | $ | 3,215 | $ | 217,245 | ||||||||||||
| Special mention | 19,289 | 3,786 | 2,121 | 7,405 | 54 | 32,655 | ||||||||||||||||||
| Substandard | 2,103 | 7,695 | 1,252 | 1,124 | 10 | 12,184 | ||||||||||||||||||
| Substandard-impaired | 9,947 | 10,423 | 2,074 | 668 | 51 | 23,163 | ||||||||||||||||||
| $ | 129,031 | $ | 71,878 | $ | 29,848 | $ | 51,160 | $ | 3,330 | $ | 285,247 | |||||||||||||
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, 2011 and 2010 (in thousands):
| 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 | ||||||||||
| For the Year Ended | ||||||||||||||||||||
| At December 31, 2010 | December 31, 2010 | |||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
| Impaired loans without a valuation allowance: | ||||||||||||||||||||
| Commercial real estate – mortgage | $ | 1,663 | $ | 1,750 | $ | - | $ | 2,747 | $ | 58 | ||||||||||
| Consumer real estate – mortgage | 998 | 1,042 | - | 776 | 25 | |||||||||||||||
| Construction and land development | 1,793 | 2,171 | - | 1,526 | 132 | |||||||||||||||
| Commercial and industrial | 70 | 599 | - | 782 | 17 | |||||||||||||||
| Consumer and other | 2 | 2 | - | 1 | 10 | |||||||||||||||
| Total | 4,526 | 5,564 | - | 5,832 | 242 | |||||||||||||||
| Impaired loans with a valuation allowance: | ||||||||||||||||||||
| Commercial real estate – mortgage | 8,284 | 9,081 | 906 | 8,494 | 342 | |||||||||||||||
| Consumer real estate – mortgage | 9,425 | 9,668 | 2,420 | 8,968 | 369 | |||||||||||||||
| Construction and land development | 281 | 281 | 60 | 2,674 | 21 | |||||||||||||||
| Commercial and industrial | 598 | 598 | 337 | 1,060 | 76 | |||||||||||||||
| Consumer and other | 49 | 50 | 17 | 178 | 4 | |||||||||||||||
| Total | 18,637 | 19,678 | 3,740 | 21,374 | 812 | |||||||||||||||
| Total impaired loans | $ | 23,163 | $ | 25,242 | $ | 3,740 | $ | 27,206 | $ | 1,054 | ||||||||||
Interest income recognized on impaired loans for the year ended December 31, 2009, was approximately $1,601,000.
The following tables present an aged analysis of past due loans as of December 31, 2011 and 2010 (in thousands):
As of 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 | ||||||||||||
As of December 31, 2010:
| 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 | $ | 985 | $ | - | $ | 618 | $ | 1,603 | $ | 63,368 | $ | 64,971 | ||||||||||||
| All other | 203 | - | 7,808 | 8,011 | 56,049 | 64,060 | ||||||||||||||||||
| Consumer real estate-mortgage | 631 | - | 5,114 | 5,745 | 66,133 | 71,878 | ||||||||||||||||||
| Construction and land development | 317 | - | - | 317 | 29,531 | 29,848 | ||||||||||||||||||
| Commercial and industrial | 116 | - | 75 | 191 | 50,969 | 51,160 | ||||||||||||||||||
| Consumer and other | 54 | - | 18 | 72 | 3,258 | 3,330 | ||||||||||||||||||
| Total | $ | 2,306 | $ | - | $ | 13,633 | $ | 15,939 | $ | 269,308 | $ | 285,247 | ||||||||||||
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 December 31, 2011 and 2010, the Bank has loans of approximately $5,026,000 and $7,006,000, 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 table presents a summary of loans that were modified as troubled debt restructurings during the year ended December 31, 2011 (in thousands):
| 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 following table presents a summary of loans that were modified as troubled debt restructurings during the year ended December 31, 2011, and for which there was a payment default during the year (amounts in thousands):
| Number of | Recorded | |||||||
| Contracts | Investment | |||||||
| Consumer real estate-mortgage | 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:
| 2011 | 2010 | |||||||
| Beginning balance | $ | 666,336 | $ | 190,041 | ||||
| New loans | 1,957,088 | 540,444 | ||||||
| Repayments | (1,108,516 | ) | (64,149 | ) | ||||
| Ending balance | $ | 1,514,908 | $ | 666,336 | ||||
|
|||
| Note 6. | Bank Premises and Equipment |
A summary of bank premises and equipment at December 31, 2011 and 2010, is as follows:
| 2011 | 2010 | |||||||
| Land | $ | 2,145,003 | $ | 3,711,003 | ||||
| Buildings and improvements | 4,302,862 | 4,806,209 | ||||||
| Furniture, fixtures and equipment | 3,735,576 | 3,653,710 | ||||||
| 10,183,441 | 12,170,922 | |||||||
| Accumulated depreciation | (4,471,438 | ) | (4,123,552 | ) | ||||
| $ | 5,712,003 | $ | 8,047,370 | |||||
Depreciation expense for the years ended December 31, 2011, 2010 and 2009, amounted to $475,938, $513,468, and $670,054, respectively.
Certain bank facilities and equipment are leased under various operating leases. Total rent expense on these leases for the years ended December 31, 2011, 2010 and 2009, was $392,114, $423,580, and $426,938, respectively.
Future minimum rental commitments under non-cancelable leases are as follows:
| 2012 | $ | 351,689 | |||
| 2013 | 348,455 | ||||
| 2014 | 348,455 | ||||
| 2015 | 237,384 | ||||
| 2016 | 132,331 | ||||
| Total | $ | 1,418,314 |
|
|||
| Note 7. | Goodwill |
There was no change in the carrying amount of goodwill for the year ended December 31, 2011. The change in the carrying amount of goodwill for the year ended December 31, 2010, is as follows:
| Balance, beginning of year | $ | 2,541,476 | ||
| Goodwill acquired | - | |||
| Goodwill impairment | 2,541,476 | |||
| Balance, end of year | $ | - |
Cornerstone’s policy is to assess goodwill for impairment on an annual basis or between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying amount as required by authoritative accounting guidance. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The impairment testing is a two-step process. Step one compares the fair value of the reporting unit to the carrying value. If the fair value is below the carrying value, step two is performed. Step two involves a process similar to business combination accounting in which fair value is assigned to all assets, liabilities and other (non-goodwill) intangibles. The result of step two is the implied fair value of goodwill. If the implied fair value of goodwill is below the recorded goodwill amount, an impairment charge is recorded for the difference.
Cornerstone performed its annual impairment analysis in December 2010. ASC Topic 350, “Intangibles-Goodwill and Other,” states that the fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. Quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement, if available. Cornerstone obtained published information on the market price to book value and market price to tangible book value for other financial institutions located in Tennessee and Georgia, financial institutions in the southeastern region of the United States, and recently completed merger and acquisition transactions. This information was compared to Cornerstone’s market price to book value and market price to tangible book value. Based on this testing, step two analysis was required.
The results from the impairment analysis led management and the board of directors to conclude that Cornerstone’s goodwill was fully impaired as of December 31, 2010. The impairment amount of $2,541,476 was recorded in noninterest expenses in the Consolidated Statements of Operations. The impairment was primarily a result of the continuing economic downturn and its implications on entity valuations. Cornerstone’s goodwill was originally recorded as a non-taxable stock purchase. Therefore, the $2,541,476 goodwill impairment is not deductible for taxes and thus no tax benefit was recognized.
|
|||
| Note 8. | Time and Related-Party Deposits |
At December 31, 2011, the scheduled maturities of time deposits are as follows (in thousands):
| 2012 | $ | 146,310 | |||
| 2013 | 30,393 | ||||
| 2014 | 12,872 | ||||
| 2015 | 5,873 | ||||
| 2016 | 5,313 | ||||
| Thereafter | 80 | ||||
| Total | $ | 200,841 |
Deposits from related parties held by the Bank at December 31, 2011 and 2010, amounted to approximately $709,000 and $792,000, respectively.
As of December 31, 2011 and 2010, certificates of deposit equal to or greater than $100,000 amounted to approximately $102,107,000 and $113,965,000, respectively.
|
|||
| Note 9. | Income Taxes |
Cornerstone files consolidated income tax returns with its subsidiary. Under the terms of a tax-sharing agreement, the subsidiary’s allocated portion of the consolidated tax liability is computed as if they were reporting income and expenses to the Internal Revenue Service as a separate entity.
Income tax expense in the consolidated statements of operations for the years ended December 31, 2011, 2010 and 2009, consists of the following:
| 2011 | 2010 | 2009 | ||||||||||
| Current tax expense (benefit) | $ | 77,279 | $ | (522,382 | ) | $ | (6,637,188 | ) | ||||
| Deferred tax expense (benefit) related to: | ||||||||||||
| Allowance for loan losses | 509,358 | (1,030,423 | ) | 1,241,231 | ||||||||
| Other | (398,437 | ) | 17,508 | 59,917 | ||||||||
| Income tax expense (benefit) | $ | 188,200 | $ | (1,535,297 | ) | $ | (5,336,040 | ) | ||||
The income tax expense is different from the expected tax expense computed by multiplying income before income tax expense by the statutory federal income tax rates. These differences are reconciled as follows:
| 2011 | 2010 | 2009 | ||||||||||
| Expected tax at statutory rates | $ | 414,206 | $ | (2,122,558 | ) | $ | (4,594,991 | ) | ||||
| Increase (decrease) resulting from tax effect of: | ||||||||||||
| State income taxes, net of federal tax benefit | 52,263 | (267,817 | ) | (579,780 | ) | |||||||
| New market tax credits | (277,500 | ) | (112,500 | ) | (150,000 | ) | ||||||
| Impairment of goodwill | - | 973,131 | - | |||||||||
| Other | (769 | ) | (5,553 | ) | (11,269 | ) | ||||||
| Income tax expense (benefit) | $ | 188,200 | $ | (1,535,297 | ) | $ | (5,336,040 | ) | ||||
The components of the net deferred tax asset, included in other assets, are as follows:
| 2011 | 2010 | |||||||
| Deferred tax assets: | ||||||||
| Deferred compensation | $ | 110,724 | $ | 115,296 | ||||
| Deferred loan fees | 38,370 | 23,364 | ||||||
| Allowance for loan losses | 1,215,767 | 1,725,125 | ||||||
| Foreclosed assets | 1,711,688 | 1,361,629 | ||||||
| Net unrealized loss on securities available for sale | - | 183,311 | ||||||
| 3,076,549 | 3,408,725 | |||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | 90,269 | 130,145 | ||||||
| Life insurance | 204,386 | 204,386 | ||||||
| Net unrealized gain on securities available for sale | 704,153 | - | ||||||
| Other | 6,284 | 4,352 | ||||||
| 1,005,092 | 338,883 | |||||||
| Net deferred tax asset | $ | 2,071,457 | $ | 3,069,842 | ||||
ASC Topic 740, “Income Taxes,” clarifies the accounting for uncertainty in tax positions. ASC Topic 740 requires that Cornerstone recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Cornerstone recognized no interest and penalties assessed by taxing authorities on any underpayment of income tax for 2011, 2010 or 2009.
|
|||
| Note 10. | Federal Home Loan Bank Advances and Other Borrowings |
The Bank has agreements with the Federal Home Loan Bank of Cincinnati (FHLB) that can provide advances to the Bank in an amount up to approximately $40,500,000. All of the Bank’s loans secured by first mortgages on 1-4 family residential, multi-family properties and commercial properties are pledged as collateral for these advances. Additionally, the Bank has pledged securities with a carrying amount of approximately $27,897,000 as of December 31, 2011.
At December 31, 2011 and 2010, FHLB advances consist of the following:
| 2011 | 2010 | |||||||
| Long-term advance dated February 9, 2005, requiring monthly interest payments, fixed at 3.86%, convertible on February 2010, principal due in February 2015 | $ | 5,000,000 | $ | 5,000,000 | ||||
| Long-term advance dated July 2, 2008, requiring monthly interest payments, fixed at 3.85%, until maturity, principal due in July 2011 | - | 5,000,000 | ||||||
| Long-term advance dated January 22, 2008, requiring monthly interest payments, fixed at 3.59%, until maturity, principal due in January 2013 | 5,000,000 | 5,000,000 | ||||||
| Long-term advance dated May 11, 2007, requiring monthly interest payments, fixed at 4.66%, with a put option exercisable in February 2008 and then quarterly thereafter, principal due in May 2011 | - | 5,000,000 | ||||||
| Long-term advance dated May 15, 2007, requiring monthly interest payments, fixed at 4.58%, with a put option exercisable in May 2008 and then quarterly thereafter, principal due in May 2012 | 5,000,000 | 5,000,000 | ||||||
| Long-term advance dated August 1, 2007, requiring monthly interest payments, fixed at 4.50%, with a put option exercisable in July 2008 and then quarterly thereafter, principal due in August 2013 | 5,000,000 | 5,000,000 | ||||||
| Long-term advance dated August 13, 2007, requiring monthly interest payments, fixed at 4.43%, with a put option exercisable in February 2009 and then quarterly thereafter, principal due in August 2014 | 5,000,000 | 5,000,000 | ||||||
| Long-term advance dated January 7, 2008, requiring monthly interest payments, fixed at 3.52%, with a put option exercisable in January 2011 and then quarterly thereafter, principal due in January 2015 | 5,000,000 | 5,000,000 | ||||||
| Long-term advance dated January 20, 2006, requiring monthly interest payments, fixed at 4.18%, with a put option exercisable in January 2009 and then quarterly thereafter, principal due in January 2016 | 5,000,000 | 5,000,000 | ||||||
| Long-term advance dated January 10, 2007, requiring monthly interest payments, fixed at 4.25%, with a put option exercisable in January 2008 and then quarterly thereafter, principal due in January 2017 | 5,000,000 | 5,000,000 | ||||||
| $ | 40,000,000 | $ | 50,000,000 | |||||
During the fixed rate term, the advances may be prepaid subject to a prepayment penalty as defined in the agreements. On convertible agreements, the FHLB has the right to convert the fixed rate on the above advances at the end of the initial fixed rate period and on a quarterly basis thereafter. If the conversion option is exercised, the advances will bear interest at the three-month London Interbank Offered Rate (LIBOR) adjusted quarterly at a spread of zero basis points to the LIBOR index. Subsequent to any conversion, the Bank has the option to prepay the advances, in full or in part, without penalty on the conversion date or any subsequent quarterly repricing date. On agreements with put options, the FHLB has the right, at its discretion, to terminate only the entire advance prior to the stated maturity date. The termination option may only be exercised on the expiration date of the predetermined lockout period and on a quarterly basis thereafter.
Cornerstone had an $8,500,000 line of credit with Silverton Bank (subsequently known as Silverton Bridge Bank, N.A.) that was secured by 100% of the Bank’s common stock. During March 2009, the line of credit matured and was reworked into two loans, a $4,350,000 amortizing term loan and a $1,000,000 revolving line of credit. These loans continue to be secured by 100% of the Bank’s common stock and bear interest at the greater of Prime plus 3% or 6.50%. The first loan requires semi-annual principal payments of $435,000 beginning July 2010, quarterly interest payments beginning April 2010, and final payment of outstanding principal and accrued interest due July 2014. The second loan required quarterly payments of $50,000 plus accrued interest beginning January 2010, and was paid in full on April 1, 2011. Borrowings outstanding under the remaining agreement as of December 31, 2011, totaled $3,045,000. Borrowings outstanding on these agreements totaled $4,715,000 at December 31, 2010.
During 2010, Midland Loan Services began servicing these loans for the Federal Deposit Insurance Corporation (FDIC). These loans contain certain compliance covenants which include stated minimum or maximum target amounts for Cornerstone’s capital levels, the Bank’s capital levels, nonperforming asset levels at the Bank and the ability of Cornerstone to meet the required debt service coverage ratio, which is computed on the four most recent consecutive fiscal quarters. Due to the level of nonperforming assets of the Bank and not currently meeting the required debt service coverage ratio, Cornerstone was not in compliance with these two covenants at December 31, 2011. However, Cornerstone had previously obtained waivers through December 31, 2011. During March 2012, Cornerstone obtained from the FDIC a waiver of the covenant compliance requirements through December 31, 2012, granted that all payments are made in accordance with the aforementioned repayment schedule.
The primary source of liquidity for Cornerstone is the payment of dividends from the Bank. As of December 31, 2011, the Bank was under a dividend restriction that requires regulatory approval prior to the payment of a dividend from the Bank to Cornerstone.
At December 31, 2011, scheduled maturities of the Federal Home Loan Bank advances and other borrowings are as follows:
| 2012 | $ | 5,870,000 | |||
| 2013 | 10,870,000 | ||||
| 2014 | 6,305,000 | ||||
| 2015 | 10,000,000 | ||||
| 2016 | 5,000,000 | ||||
| Thereafter | 5,000,000 | ||||
| Total | $ | 43,045,000 |
|
|||
| Note 11. | Employee Benefit Plans |
401(k) plan:
Cornerstone has a 401(k) employee benefit plan covering substantially all employees that have completed at least 30 days of service and met minimum age requirements. Cornerstone’s contribution to the plan is discretionary. Cornerstone elected not to make a contribution to the plan for 2011, 2010 or 2009.
Employee Stock Ownership Plan:
Cornerstone has a non-leveraged employee stock ownership plan (ESOP) to which Cornerstone makes 100% of the contributions for purchasing Cornerstone’s common stock, and allocates the contributions among the participants based on regulatory guidelines. Cornerstone’s contribution is discretionary, as determined by the Compensation Committee. Employer contributions are available to all employees after 1,000 hours of service. There are certain age and years-of-service requirements before contributions can be made for the benefit of the employee. The ESOP plan also provides for a three year 100% vesting requirement; therefore, employees terminating employment before their third anniversary date will forfeit their accrued benefit under the ESOP. The forfeiture will be re-allocated among the remaining ESOP participants. No contributions were made to the ESOP in 2011, 2010 or 2009.
|
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| Note 12. | Financial Instruments With Off-Balance-Sheet Risk |
In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet. At December 31, 2011 and 2010, undisbursed loan commitments aggregated approximately $24,972,000 and $28,774,000, respectively. In addition, there were outstanding standby letters of credit totaling approximately $2,598,000 and $3,539,000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
The Bank incurred insignificant losses on its commitments during 2011, 2010 and 2009.
|
|||
| Note 13. | Fair Value Disclosures |
Cornerstone uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with ASC Topic 820, “Fair Value Measurements and Disclosures,” the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
ASC Topic 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
ASC Topic 820 also establishes a three-tier fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value, as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that Cornerstone has the ability to access.
Level 2 - Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There have been no changes in the methodologies used at December 31, 2011 and 2010.
The following methods and assumptions were used by Cornerstone in estimating fair value disclosures for financial instruments:
Cash and cash equivalents:
The carrying amounts of cash and cash equivalents approximate fair values based on the short-term nature of the assets.
Securities:
Fair values are estimated using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs.
The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.
Loans:
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate loans are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, “Accounting by Creditors for Impairment of a Loan”. The fair value of impaired loans is estimated using several methods including collateral value, liquidation value and discounted cash flows.
Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2011 and 2010, substantially all of the total impaired loans were evaluated based on the fair value of collateral. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, Cornerstone records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, Cornerstone records the impaired loan as nonrecurring Level 3.
Cash surrender value of life insurance:
The carrying amounts of cash surrender value of life insurance approximate their fair value. The carrying amount is based on information received from the insurance carriers indicating the financial performance of the policies and the amount Cornerstone would receive should the policies be surrendered. Cornerstone reflects these assets within Level 2 of the valuation hierarchy.
Foreclosed assets:
Foreclosed assets, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustment to the fair value are recorded as a component of foreclosed assets, net expense. Foreclosed assets are included in Level 2 of the valuation hierarchy.
Deposits:
The fair value of deposits with no stated maturity, such as noninterest-bearing and interest-bearing demand deposits, savings deposits, and money market accounts, is equal to the amount payable on demand at the reporting date. The carrying amounts of variable-rate, fixed-term certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.
Securities sold under agreements to repurchase:
The carrying amount of these liabilities approximates their estimated fair value.
Federal Home Loan Bank advances and other borrowings:
The carrying amounts of FHLB advances and other borrowings approximate their fair value.
Accrued interest:
The carrying amounts of accrued interest approximate fair value.
Commitments to extend credit, letters of credit and lines of credit:
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.
| Quoted Prices in | Significant | Significant | ||||||||||||||
| Active Markets | Other | Other | ||||||||||||||
| Balance as of | for Identical | Observable | Unobservable | |||||||||||||
| December 31, | Assets | Inputs | Inputs | |||||||||||||
| 2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Debt securities available for sale: | ||||||||||||||||
| U.S. Government agencies | $ | 4,190,279 | $ | - | $ | 4,190,279 | $ | - | ||||||||
| State and municipal securities | 24,436,257 | - | 24,436,257 | - | ||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Residential mortgage guaranteed by GNMA | 11,871,170 | - | 11,871,170 | - | ||||||||||||
| Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies | 45,559,731 | - | 45,559,731 | - | ||||||||||||
| Total securities available for sale | $ | 86,057,437 | $ | - | $ | 86,057,437 | $ | - | ||||||||
| Cash surrender value of life insurance | $ | 1,166,774 | $ | - | $ | 1,166,774 | $ | - | ||||||||
| Quoted Prices in | Significant | Significant | ||||||||||||||
| Active Markets | Other | Other | ||||||||||||||
| Balance as of | for Identical | Observable | Unobservable | |||||||||||||
| December 31, | Assets | Inputs | Inputs | |||||||||||||
| 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Debt securities available for sale: | ||||||||||||||||
| U.S. Government agencies | $ | 4,587,079 | $ | - | $ | 4,587,079 | $ | - | ||||||||
| State and municipal securities | 20,736,212 | - | 20,736,212 | - | ||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| Residential mortgage guaranteed by GNMA | 18,853,025 | - | 18,853,025 | - | ||||||||||||
| Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies | 64,074,118 | - | 64,074,118 | - | ||||||||||||
| Total securities available for sale | $ | 108,250,434 | $ | - | $ | 108,250,434 | $ | - | ||||||||
| Cash surrender value of life insurance | $ | 1,113,824 | $ | - | $ | 1,113,824 | $ | - | ||||||||
Cornerstone has no assets or liabilities whose fair values are measured on a recurring basis using Level 3 inputs.
Certain assets and liabilities are measured at fair value on a nonrecurring basis, which means the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The tables below present information about assets and liabilities on the balance sheet at December 31, 2011 and 2010, for which a nonrecurring change in fair value was recorded.
| Quoted Prices in | Significant | Significant | |||||||||||||
| Active Markets | Other | Other | |||||||||||||
| Balance as of | for Identical | Observable | Unobservable | ||||||||||||
| December 31, | Assets | Inputs | Inputs | ||||||||||||
| 2011 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Impaired loans | $ | 12,245,260 | $ | - | $ | 12,245,260 | $ | - | |||||||
| Foreclosed assets | 18,523,960 | - | 18,523,960 | - | |||||||||||
| Quoted Prices in | Significant | Significant | |||||||||||||
| Active Markets | Other | Other | |||||||||||||
| Balance as of | for Identical | Observable | Unobservable | ||||||||||||
| December 31, | Assets | Inputs | Inputs | ||||||||||||
| 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Impaired loans | $ | 14,897,633 | $ | - | $ | 14,897,633 | $ | - | |||||||
| Foreclosed assets | 12,808,838 | - | 12,808,838 | - | |||||||||||
Loans include impaired loans held for investment for which an allowance for loan losses has been calculated based upon the fair value of the loans at December 31, 2011 and 2010. Losses derived from Level 2 inputs were calculated by models incorporating significant observable market data.
The carrying amount and estimated fair value of Cornerstone's financial instruments at December 31, 2011 and 2010, are as follows (in thousands):
| 2011 | 2010 | |||||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||||
| Amount | Fair Value | Amount | Fair Value | |||||||||||||
| Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 38,883 | $ | 38,883 | $ | 22,982 | $ | 22,982 | ||||||||
| Securities | 86,126 | 86,128 | 108,346 | 108,349 | ||||||||||||
| Federal Home Loan Bank stock | 2,323 | 2,323 | 2,323 | 2,323 | ||||||||||||
| Loans, net | 260,365 | 260,515 | 276,115 | 277,796 | ||||||||||||
| Cash surrender value of life insurance | 1,167 | 1,167 | 1,114 | 1,114 | ||||||||||||
| Accrued interest receivable | 1,327 | 1,327 | 1,326 | 1,326 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Noninterest-bearing demand deposits | 43,990 | 43,990 | 28,980 | 28,980 | ||||||||||||
| Interest-bearing demand deposits | 22,353 | 22,353 | 24,834 | 24,834 | ||||||||||||
| Savings deposits and money market accounts | 46,857 | 46,857 | 34,042 | 34,042 | ||||||||||||
| Time deposits | 200,841 | 203,453 | 247,591 | 249,990 | ||||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 29,391 | 29,391 | 24,325 | 24,325 | ||||||||||||
| Federal Home Loan Bank advances and other borrowings | 43,045 | 43,045 | 54,715 | 54,715 | ||||||||||||
| Accrued interest payable | 111 | 111 | 177 | 177 | ||||||||||||
| Unrecognized financial instruments (net of contract amount): | ||||||||||||||||
| Commitments to extend credit | - | - | - | - | ||||||||||||
| Letters of credit | - | - | - | - | ||||||||||||
| Lines of credit | - | - | - | - | ||||||||||||
|
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| Note 14. | Contingencies |
The Bank is involved in certain claims arising from normal business activities. Management believes that the impact of those claims are without merit and that the ultimate liability, if any, resulting from them will not materially affect the Bank’s financial condition or Cornerstone’s consolidated financial position, results of operations or cash flows.
|
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| Note 15. | Stock Option Plans |
Cornerstone has stock option plans which are more fully described below. For the years ended December 31, 2011, 2010 and 2009, Cornerstone recognized $79,140, $74,612 and $216,600, respectively, in compensation expense for all stock options.
No options were granted during 2010. For the years ended December 31, 2011 and 2009, the fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| Years Ended December 31, | ||||||||
| 2011 | 2009 | |||||||
| Dividend yield | 0.00 | % | 2.97 | % | ||||
| Expected life | 7.0 years | 7.0 years | ||||||
| Expected volatility | 43.11 | % | 38.74 | % | ||||
| Risk-free interest rate | 2.81 | % | 2.69 | % | ||||
The expected volatility is based upon historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on Cornerstone’s history and expectation of dividend payouts.
Board of Directors plan:
Cornerstone has a stock option plan under which members of the Board of Directors, at the formation of the Bank, were granted options to purchase a total of up to 600,000 shares of common stock. Only non-qualified stock options may be granted under the Plan. In addition, members of the Board of Directors can be issued options under the Cornerstone 2002 Long-Term Incentive Plan to purchase up to 1,200,000 shares of Cornerstone stock. The options available for issuance to Board members under the 2002 Long-Term Incentive Plan are shared with officers and employees of Cornerstone. The exercise price of each option equals the market price of Cornerstone’s stock on the date of grant and the option’s maximum term is ten years, at which point they expire. Vesting for options granted during 2009, are 50% on each of the first and second anniversary of the grant date with full vesting occurring at the second anniversary date. At December 31, 2011, there is no additional compensation cost to be recognized as all opinions are fully vested. An analysis of this stock option plan is presented in the following table:
| Years Ended December 31, | ||||||||||||||||||||||||||||
| 2011 | 2010 | 2009 | ||||||||||||||||||||||||||
| Average | Aggregate | Average | Average | |||||||||||||||||||||||||
| Exercise | Intrinsic | Exercise | Exercise | |||||||||||||||||||||||||
| Shares | Price | Value(1) | Shares | Price | Shares | Price | ||||||||||||||||||||||
| Outstanding at beginning of year | 100,250 | $ | 9.42 | 100,250 | $ | 9.42 | 81,800 | $ | 10.73 | |||||||||||||||||||
| Granted | - | - | - | - | 20,500 | 3.65 | ||||||||||||||||||||||
| Exercised | - | - | - | - | - | - | ||||||||||||||||||||||
| Forfeited | 45,000 | 13.65 | - | - | (2,050 | ) | 3.65 | |||||||||||||||||||||
| Outstanding at end of year | 55,250 | $ | 5.98 | $ | - | 100,250 | $ | 9.42 | 100,250 | $ | 9.42 | |||||||||||||||||
| Options exercisable at year-end | 55,250 | $ | 5.98 | $ | - | 91,025 | $ | 10.01 | 75,400 | $ | 10.96 | |||||||||||||||||
| Weighted-average fair value of options granted during the year | $ | - | $ | - | $ | 1.13 | ||||||||||||||||||||||
Board of Directors plan: (continued)
| (1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2011. This amount changes based on changes in the market value of Cornerstone's stock. |
Information pertaining to options outstanding at December 31, 2011, is as follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||
| Exercise | Number | Remaining | Exercise | Number | Exercise | |||||||||||||||
| Prices | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
| $ | 5.44 | 16,000 | 2.2 Years | $ | 5.44 | 16,000 | $ | 5.44 | ||||||||||||
| 9.23 | 8,000 | 3.2 Years | 9.23 | 8,000 | 9.23 | |||||||||||||||
| 7.99 | 12,800 | 6.2 Years | 7.99 | 12,800 | 7.99 | |||||||||||||||
| 3.65 | 18,450 | 7.2 Years | 3.65 | 18,450 | 3.65 | |||||||||||||||
| Outstanding at end of year | 55,250 | 4.9 Years | $ | 5.98 | 55,250 | $ | 5.98 | |||||||||||||
The total fair value of shares that vested during 2011, 2010 and 2009 was approximately $11,900, $34,000 and $45,000, respectively.
Officer and Employee Plans:
Cornerstone has two stock option plans, the 1996 Cornerstone Statutory and Non-statutory Option Plan and the Cornerstone 2002 Long-Term Incentive Plan, under which officers and employees can be granted incentive stock options or non-qualified stock options to purchase a total of up to 220,000 and 1,200,000 shares, respectively, of Cornerstone’s common stock. The option price for incentive stock options shall be not less than 100 percent of the fair market value of the common stock on the date of the grant. The non-qualified stock options may be equal to or more or less than the fair market value of the common stock on the date of the grant. The stock options vest at 30 percent on the second and third anniversaries of the grant date and 40 percent on the fourth anniversary of the grant date. These options expire ten years from the grant date. At December 31, 2011, the total remaining compensation cost to be recognized on non-vested options is approximately $321,000. An analysis of the activity for each of the years ending December 31, 2011, 2010 and 2009, for this stock option plan follows:
Officer and Employee Plans: (continued)
| Years Ended December 31, | ||||||||||||||||||||||||||||
| 2011 | 2010 | 2009 | ||||||||||||||||||||||||||
| Average | Aggregate | Average | Average | |||||||||||||||||||||||||
| Exercise | Intrinsic | Exercise | Exercise | |||||||||||||||||||||||||
| Shares | Price | Value(1) | Shares | Price | Shares | Price | ||||||||||||||||||||||
| Outstanding at beginning of year | 520,900 | $ | 5.79 | 799,675 | $ | 6.18 | 755,425 | $ | 6.63 | |||||||||||||||||||
| Granted | 221,000 | 1.67 | - | - | 115,850 | 3.65 | ||||||||||||||||||||||
| Exercised | - | - | - | - | - | - | ||||||||||||||||||||||
| Forfeited | (169,300 | ) | 4.31 | (278,775 | ) | $ | 6.90 | (71,600 | ) | 6.77 | ||||||||||||||||||
| Outstanding at end of year | 572,600 | $ | 4.63 | $ | - | 520,900 | $ | 5.79 | 799,675 | $ | 6.18 | |||||||||||||||||
| Options exercisable at year-end | 295,415 | $ | 6.67 | $ | - | 385,270 | $ | 5.88 | 592,648 | $ | 5.69 | |||||||||||||||||
| Weighted-average fair value of options granted during the year | $ | .95 | $ | - | $ | 1.13 | ||||||||||||||||||||||
| (1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2011. This amount changes based on changes in the market value of Cornerstone's stock. |
Information pertaining to options outstanding at December 31, 2011, is as follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||
| Exercise | Number | Remaining | Exercise | Number | Exercise | |||||||||||||||
| Price | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
| $ | 3.63 | 91,800 | 0.8 Years | $ | 3.63 | 91,800 | $ | 3.63 | ||||||||||||
| 5.44 | 70,640 | 2.2 Years | 5.44 | 70,640 | 5.44 | |||||||||||||||
| 9.23 | 43,910 | 3.2 Years | 9.23 | 43,910 | 9.23 | |||||||||||||||
| 13.25 | 21,000 | 4.2 Years | 13.25 | 21,000 | 13.25 | |||||||||||||||
| 15.25 | 14,450 | 5.2 Years | 15.25 | 14,450 | 15.25 | |||||||||||||||
| 15.20 | 2,750 | 5.3 Years | 15.20 | 2,750 | 15.20 | |||||||||||||||
| 7.99 | 47,500 | 6.2 Years | 7.99 | 28,500 | 7.99 | |||||||||||||||
| 3.60 | 74,550 | 7.2 Years | 3.60 | 22,365 | 3.60 | |||||||||||||||
| 1.70 | 193,000 | 9.3 Years | 1.70 | - | - | |||||||||||||||
| 1.55 | 3,000 | 9.3 Years | 1.55 | - | - | |||||||||||||||
| 1.10 | 5,000 | 9.7 Years | 1.10 | - | - | |||||||||||||||
| 1.02 | 5,000 | 9.9 Years | 1.02 | - | - | |||||||||||||||
| Outstanding at end of year | 572,600 | 5.7 Years | $ | 4.63 | 295,415 | $ | 6.67 | |||||||||||||
Officer and Employee Plans: (continued)
Information pertaining to non-vested options for the year ended December 31, 2011, is as follows:
| Weighted Average | ||||||||
| Number | Grant Date | |||||||
| of Shares | Fair Value | |||||||
| Non-vested options, December 31, 2010 | 135,630 | $ | 5.49 | |||||
| Granted | 221,000 | 1.67 | ||||||
| Vested | (43,495 | ) | 6.91 | |||||
| Forfeited | (35,950 | ) | 3.55 | |||||
| Non-vested options, December 31, 2011 | 277,185 | $ | 2.47 | |||||
The total fair value of shares that vested during 2011, 2010 and 2009 was approximately $56,000, $125,000 and $288,000, respectively.
|
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| Note 16. | Liquidity and Capital Resources |
Cornerstone’s primary source of funds with which to pay its future obligations is the receipt of dividends from its subsidiary Bank. Banking regulations provide that the Bank must maintain capital sufficient to enable it to operate as a viable institution and, as a result, has limited the amount of dividends the Bank may pay without prior approval.
|
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| Note 17. | Consent Order |
Following the issuance of a written report by the Federal Deposit Insurance Corporation (FDIC) and the Tennessee Department of Financial Institutions (TDFI) concerning their joint examination of the Bank in October 2009, the Bank entered into a consent order with the FDIC on April 2, 2010 and a written agreement with the TDFI on April 8, 2010, each concerning areas of the Bank’s operations identified in the report as warranting improvement and presenting substantially similar plans for making those improvements. The consent order and written agreement, which we collectively refer to as the “Action Plans”, convey specific actions needed to address certain findings from the joint examination and to address our current financial condition. The Action Plans contain a list of strict requirements ranging from a capital directive, which requires us to achieve and maintain minimum regulatory capital levels in excess of the statutory minimums to be well-capitalized, to developing a liquidity risk management and contingency funding plan, in connection with which we will be subject to limitations on the maximum interest rates we can pay on deposit accounts. The Action Plans also contain restrictions on future extensions of credit and requires the development of various programs and procedures to improve our asset quality as well as routine reporting on our progress toward compliance with the Action Plans to the Board of Directors, the FDIC and the TDFI. As of April 2, 2010, the date of the consent order, the Bank was deemed to be “adequately capitalized.” The adequately capitalized classification is the result of the Bank receiving a formal enforcement action which prohibits a Bank from being classified as “well-capitalized” regardless of its capital ratios. Therefore, the Bank can not be classified as “well capitalized” until the Action Plans are lifted by the FDIC and the TDFI.
|
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| Note 18. | Minimum Regulatory Capital Requirements |
Cornerstone (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the Tennessee Department of Financial Institutions and the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Cornerstone’s and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Cornerstone and the Bank must meet specific capital guidelines that involve quantitative measures of Cornerstone’s and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Cornerstone’s and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require Cornerstone and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).
As of December 31, 2011, the most recent notification from the Federal Deposit Insurance Corporation (FDIC) categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action.
Cornerstone’s and the Bank's actual capital amounts and ratios are also presented in the table. Dollar amounts are presented in thousands.
| Minimum | Minimum Capital | |||||||||||||||||||||||
| Capital | Requirements per | |||||||||||||||||||||||
| Actual | Requirements | the Action Plans | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| As of December 31, 2011: | ||||||||||||||||||||||||
| Total capital to risk-weighted assets: | ||||||||||||||||||||||||
| Consolidated | $ | 37,082 | 12.9 | % | $ | 23,043 | 8.0 | % | N/A | N/A | ||||||||||||||
| Cornerstone Community Bank | 37,158 | 13.0 | % | 22,876 | 8.0 | % | 34,313 | 12.0 | % | |||||||||||||||
| Tier I capital to risk-weighted assets: | ||||||||||||||||||||||||
| Consolidated | 33,435 | 11.6 | % | 11,521 | 4.0 | % | N/A | N/A | ||||||||||||||||
| Cornerstone Community Bank | 33,536 | 11.7 | % | 11,438 | 4.0 | % | 28,594 | 10.0 | % | |||||||||||||||
| Tier I capital to average assets: | ||||||||||||||||||||||||
| Consolidated | 33,435 | 8.0 | % | 16,713 | 4.0 | % | N/A | N/A | ||||||||||||||||
| Cornerstone Community Bank | 33,536 | 8.0 | % | 16,686 | 4.0 | % | 33,371 | 8.0 | % | |||||||||||||||
| As of December 31, 2010: | ||||||||||||||||||||||||
| Total capital to risk-weighted assets: | ||||||||||||||||||||||||
| Consolidated | $ | 27,477 | 9.3 | % | $ | 23,572 | 8.0 | % | N/A | N/A | ||||||||||||||
| Cornerstone Community Bank | 29,592 | 10.1 | % | 23,534 | 8.0 | % | 35,301 | 12.0 | % | |||||||||||||||
| Tier I capital to risk-weighted assets: | ||||||||||||||||||||||||
| Consolidated | 23,727 | 8.1 | % | 11,786 | 4.0 | % | N/A | N/A | ||||||||||||||||
| Cornerstone Community Bank | 25,882 | 8.8 | % | 11,767 | 4.0 | % | 29,418 | 10.0 | % | |||||||||||||||
| Tier I capital to average assets: | ||||||||||||||||||||||||
| Consolidated | 23,727 | 5.2 | % | 18,111 | 4.0 | % | N/A | N/A | ||||||||||||||||
| Cornerstone Community Bank | 25,882 | 5.8 | % | 17,995 | 4.0 | % | 35,990 | 8.0 | % | |||||||||||||||
Management of the Bank has determined it is in compliance with the Action Plans, discussed in Note 17, for total and Tier I capital to risk-weighted assets and Tier 1 capital to average assets requirements at December 31, 2011. The Bank’s board of directors must ensure that the Bank complies with the provisions of the Action Plans and that required quarterly written progress reports are furnished to the FDIC and TDFI.
|
|||
| Note 19. | Other Comprehensive Income |
Other comprehensive income consists of unrealized holding gains and losses on securities available for sale. A summary of other comprehensive income and the related tax effects for the years ended December 31, 2011, 2010 and 2009, is as follows:
| Tax | ||||||||||||
| Before-Tax | (Expense) | Net-of-Tax | ||||||||||
| Amount | Benefit | Amount | ||||||||||
| Year ended December 31, 2011: | ||||||||||||
| Unrealized holding gains and losses arising during the period | $ | 2,442,847 | $ | (928,281 | ) | $ | 1,514,566 | |||||
| Less reclassification adjustment for gains realized in net income | 107,413 | (40,817 | ) | 66,596 | ||||||||
| $ | 2,335,434 | $ | (887,464 | ) | $ | 1,447,970 | ||||||
| Year ended December 31, 2010: | ||||||||||||
| Unrealized holding gains and losses arising during the period | $ | 1,571,720 | $ | (597,254 | ) | $ | 974,466 | |||||
| Less reclassification adjustment for gains realized in net income | 1,698,136 | (645,292 | ) | 1,052,844 | ||||||||
| $ | (126,416 | ) | $ | 48,038 | $ | (78,378 | ) | |||||
| Year ended December 31, 2009: | ||||||||||||
| Unrealized holding gains and losses arising during the period | $ | 296,642 | $ | (113,884 | ) | $ | 182,758 | |||||
| Less reclassification adjustment for gains realized in net income | 399,754 | (153,066 | ) | 246,688 | ||||||||
| $ | (103,112 | ) | $ | 39,182 | $ | (63,930 | ) | |||||
|
|||
| Note 20. | Earnings (Loss) Per Common Share |
Basic earnings (loss) per share represents income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by Cornerstone relate to outstanding stock options, determined using the treasury stock method.
Earnings (loss) per common share have been computed based on the following:
| 2011 | 2010 | 2009 | ||||||||||
| Net income (loss) | $ | 1,030,052 | $ | (4,707,521 | ) | $ | (8,178,639 | ) | ||||
| Less: Preferred stock dividend requirements | 651,119 | 34,463 | - | |||||||||
| Less: Preferred stock accretion | 36,718 | - | - | |||||||||
| Net income (loss) applicable to common stock | $ | 342,215 | $ | (4,741,984 | ) | $ | (8,178,639 | ) | ||||
| Average number of common shares outstanding | 6,500,396 | 6,500,396 | 6,500,396 | |||||||||
| Effect of dilutive stock options | - | - | - | |||||||||
| Average number of common shares outstanding used to calculate diluted earnings (loss) per common share | 6,500,396 | 6,500,396 | 6,500,396 | |||||||||
The effects of outstanding antidilutive stock options are excluded from the computation of diluted earnings (loss) per common share. There were 672,850, 621,150 and 899,925 antidilutive stock options for 2011, 2010 and 2009, respectively.
|
|||
| Note 21. | Recent Accounting Pronouncements |
In January 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The FASB determined that certain provisions relating to troubled debt restructurings (TDRs) should be deferred until additional guidance and clarification on the definition of TDRs is issued.
In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”. ASU 2011-02 amends ASC Topic 310, “Receivables”, by clarifying guidance for creditors in determining whether a concession has been granted and whether a debtor is experiencing financial difficulties. The amendments are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. ASU 2011-02 also makes disclosure requirements deferred under ASU 2011-01 effective for interim and annual periods beginning on or after June 15, 2011. The adoption of ASU 2011-02 did not have a significant impact on Cornerstone’s consolidated financial statements.
In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements”, intended to improve financial reporting of repurchase agreements and refocus the assessment of effective control on a transferor’s contractual rights and obligations rather than practical ability to perform those rights and obligations. The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. Cornerstone is evaluating the effect, if any, the adoption of ASU 2011-03 will have on its consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU 2011-04 represents the converged guidance of the FASB and the International Accounting Standards Board (IASB) on fair value measurement. A variety of measures are included in the update intended to either clarify existing fair value measurement requirements, change particular principles requirements for measuring fair value or for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend to change the application of existing requirements under the ASC Topic 820, “Fair Value Measurements”. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and early application is not permitted. Cornerstone is evaluating the impact adoption of ASU 2011-04 will have on its financial statements.
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income”, intended to increase the prominence of items reported in other comprehensive income and to facilitate convergence of accounting guidance in this area with that of the IASB. The amendments require that all nonowner changes in stockholders’ equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. Amendments under ASU 2011-05 for public entities should be applied retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. Cornerstone is evaluating the impact adoption of ASU 2011-05 will have on its financial statements.
In September 2011, the FASB issued ASU 2011-08, “Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment”. ASU 2011-08 amends Topic 350, “Intangibles - Goodwill and Other”, to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and is not expected to have a significant impact on Cornerstone’s financial statements.
Other than disclosures contained within these statements, Cornerstone has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial statements or do not apply to its operations.
|
|||
| Note 22. | Equity Investment |
During 2006, Cornerstone invested $3,000,000 for a 25% share of the Appalachian Fund for Growth II Partnership (AFG), which is managed by the Southeast Local Development Corporation (General Partner). AFG is targeting high job creation and retention businesses and businesses providing important community services. The funds are being deployed to help: 1) attract new businesses to under-served service areas by offering creative financing; 2) supply creative financing for businesses to rehabilitate existing distressed properties to facilitate community development; and 3) leverage other private investment into its targeted communities. In return for its investment in AFG, Cornerstone and other investors will receive new market tax credits. For 2011, 2010 and 2009 Cornerstone received approximately $277,500, $112,500, and $150,000, respectively, in new market tax credits.
AFG meets the criteria of a VIE outlined in ASC Topic 810, “Consolidation”. AFG has not been consolidated by Cornerstone, as Cornerstone is not the primary beneficiary.
|
|||
| Note 23. | Condensed Parent Information |
BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
| ASSETS | ||||||||
| Cash | $ | 919,561 | $ | 2,261,775 | ||||
| Investment in subsidiary | 35,309,068 | 27,974,387 | ||||||
| Other assets | 2,067,839 | 440,772 | ||||||
| Total assets | $ | 38,296,468 | $ | 30,676,934 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Other liabilities | $ | 43,163 | $ | 142,781 | ||||
| Other borrowings | 3,045,000 | 4,715,000 | ||||||
| Total liabilities | 3,088,163 | 4,857,781 | ||||||
| Stockholders’ equity | 35,208,305 | 25,819,153 | ||||||
| Total liabilities and stockholders’ equity | $ | 38,296,468 | $ | 30,676,934 | ||||
STATEMENTS OF OPERATIONS
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| INCOME | ||||||||||||
| Dividends | $ | - | $ | - | $ | 1,180,260 | ||||||
| Interest income | - | - | 4,110 | |||||||||
| - | - | 1,184,370 | ||||||||||
| EXPENSES | ||||||||||||
| Interest expense | 219,250 | 319,361 | 221,093 | |||||||||
| Goodwill impairment | - | 2,541,476 | - | |||||||||
| Other operating expenses | 359,409 | 384,813 | 802,084 | |||||||||
| (Loss) income before equity in undistributed earnings (loss) | (578,659 | ) | (3,245,650 | ) | 161,193 | |||||||
| Equity in undistributed earnings (loss) of subsidiary | 1,386,711 | (1,737,868 | ) | (8,740,480 | ) | |||||||
| Income tax benefit | 222,000 | 275,997 | 400,648 | |||||||||
| Net income (loss) | 1,030,052 | (4,707,521 | ) | (8,178,639 | ) | |||||||
| Preferred stock dividend requirements | 651,119 | 34,463 | - | |||||||||
| Accretion on preferred stock discount | 36,718 | - | - | |||||||||
| Net income (loss) available to common shareholders | $ | 342,215 | $ | (4,741,984 | ) | $ | (8,178,639 | ) | ||||
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| STATEMENTS OF CASH FLOWS | ||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net income (loss) | $ | 1,030,052 | $ | (4,707,521 | ) | $ | (8,178,639 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||||||
| Stock compensation expense | 79,140 | 74,612 | 216,600 | |||||||||
| Equity in undistributed (income) loss of subsidiary | (1,386,711 | ) | 1,737,868 | 8,740,480 | ||||||||
| Goodwill impairment | - | 2,541,476 | - | |||||||||
| Other | (1,726,685 | ) | (63,092 | ) | 247,241 | |||||||
| Net cash (used in) provided by operating activities | (2,004,204 | ) | (416,657 | ) | 1,025,682 | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Repayment from subsidiary | - | - | 450,000 | |||||||||
| Capital contribution to subsidiary | (4,500,000 | ) | - | (1,300,000 | ) | |||||||
| Net cash used in investing activities | (4,500,000 | ) | - | (850,000 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Net (repayments) borrowings under other borrowings | (1,670,000 | ) | (635,000 | ) | 1,100,000 | |||||||
| Issuance of preferred stock | 7,135,402 | 2,727,424 | - | |||||||||
| Payment of preferred stock dividends | (303,412 | ) | (34,463 | ) | - | |||||||
| Payment of common stock dividends | - | - | (1,094,651 | ) | ||||||||
| Net cash provided by financing activities | 5,161,990 | 2,057,961 | 5,349 | |||||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (1,342,214 | ) | 1,641,304 | 181,031 | ||||||||
| CASH AND CASH EQUIVALENTS, beginning of year | 2,261,775 | 620,471 | 439,440 | |||||||||
| CASH AND CASH EQUIVALENTS, end of year | $ | 919,561 | $ | 2,261,775 | $ | 620,471 | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest | $ | 249,555 | $ | 319,361 | $ | 221,093 | ||||||
| Income taxes | - | - | - | |||||||||
|
|||
| Note 24. | Quarterly Data (unaudited) |
| Years Ended December 31, | ||||||||||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||||||||||
| Fourth | Third | Second | First | Fourth | Third | Second | First | |||||||||||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | |||||||||||||||||||||||||
| Interest income | $ | 5,001,095 | $ | 5,114,358 | $ | 5,159,803 | $ | 5,218,480 | $ | 5,445,229 | $ | 5,933,035 | $ | 6,731,978 | $ | 7,101,186 | ||||||||||||||||
| Interest expense | 1,405,101 | 1,510,208 | 1,690,837 | 1,755,722 | 1,918,673 | 2,175,985 | 2,510,794 | 2,596,362 | ||||||||||||||||||||||||
| Net interest income, before provision for loan losses | 3,595,994 | 3,604,150 | 3,468,966 | 3,462,758 | 3,526,556 | 3,757,050 | 4,221,184 | 4,504,824 | ||||||||||||||||||||||||
| Provision for loan losses | 300,000 | 115,000 | 15,000 | 15,000 | 4,130,000 | 681,000 | 1,465,000 | 1,015,000 | ||||||||||||||||||||||||
| Net interest income (loss), after provision for loan losses | 3,295,994 | 3,489,150 | 3,453,966 | 3,447,758 | (603,444 | ) | 3,076,050 | 2,756,184 | 3,489,824 | |||||||||||||||||||||||
| Noninterest income | 273,665 | 323,412 | 316,053 | 269,757 | 170,041 | 1,416,005 | 1,091,221 | 403,662 | ||||||||||||||||||||||||
| Noninterest expenses | 3,500,712 | 3,076,769 | 3,657,407 | 3,416,615 | 6,548,924 | 4,209,080 | 3,884,359 | 3,399,998 | ||||||||||||||||||||||||
| Income (loss) before income taxes | 68,947 | 735,793 | 112,612 | 300,900 | (6,982,327 | ) | 282,975 | (36,954 | ) | 493,488 | ||||||||||||||||||||||
| Income tax (benefit) expense | (43,875 | ) | 212,125 | (28,675 | ) | 48,625 | (1,699,200 | ) | 69,301 | (55,099 | ) | 149,701 | ||||||||||||||||||||
| Net income (loss) | 112,822 | 523,668 | 141,287 | 252,275 | (5,283,127 | ) | 213,674 | 18,145 | 343,787 | |||||||||||||||||||||||
| Preferred stock dividend requirements | 252,493 | 187,538 | 118,013 | 93,075 | 34,463 | - | - | - | ||||||||||||||||||||||||
| Accretion on preferred stock discount | 14,299 | 13,419 | 9,000 | - | - | - | - | - | ||||||||||||||||||||||||
| Net income (loss) available to common stockholders | $ | (153,970 | ) | $ | 322,711 | $ | 14,274 | $ | 159,200 | $ | (5,317,590 | ) | $ | 213,674 | $ | 18,145 | $ | 343,787 | ||||||||||||||
| Earnings (loss) per common share: | ||||||||||||||||||||||||||||||||
| Basic | $ | (0.02 | ) | $ | 0.05 | $ | - | $ | 0.02 | $ | (0.81 | ) | $ | 0.03 | $ | - | $ | 0.05 | ||||||||||||||
| Diluted | $ | (0.02 | ) | $ | 0.05 | $ | - | $ | 0.02 | $ | (0.81 | ) | $ | 0.03 | $ | - | $ | 0.05 | ||||||||||||||