The accounting and reporting policies of Cornerstone Bancshares, Inc. and subsidiary (Cornerstone) conform with United States generally accepted accounting principles (U.S. 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 U.S. GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative U.S. 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.

 

Principles of consolidation:

 

The consolidated financial statements include the accounts of Cornerstone and the Bank. All material intercompany accounts and transactions have been eliminated in consolidation.

 

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, valuation of foreclosed assets, 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 55 percent and 54 percent of the loan portfolio at December 31, 2014 and 2013, respectively.

 

At December 31, 2014, there were no concentrations of deposits. At December 31, 2013, Cornerstone had a concentration in deposits of one customer totaling approximately $20,204,000. This balance accounted for approximately 6 percent of total deposits at December 31, 2013.

 

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 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. When applicable, 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.

 

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 losses inherent in the loan portfolio.  The model includes each of the five loan portfolio segments and utilizes the incurred losses over the last ten quarters to estimate inherent 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 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.  

 

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. Premises and equipment are carried at cost less accumulated depreciation computed on the straight-line and declining balance methods over the estimated useful lives of the assets or the expected terms of the leases, if shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in noninterest income.

 

 

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 income. 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 $19,409,506 at December 31, 2014, mature on a daily basis, and are secured by securities available for sale with a fair value of approximately $24,207,000.

 

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, foreclosed assets, 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 2011.

 

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 $112,864, $89,859 and $89,068 for the years ended December 31, 2014, 2013 and 2012, 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. 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, 2013, Cornerstone had an investment in Appalachian Fund for Growth II Partnership that qualified as an unconsolidated VIE. This equity investment was distributed to the owners in 2014.

 

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.

 

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.

 

 

 

 

  

At December 31, 2014 and 2013, the preferred stock dividends accumulated for each period, which were not declared, totaled $750,000 for each year.

 

The Bank is required to maintain balances on hand or with the Federal Reserve Bank based on a percentage of deposits. At December 31, 2014 and 2013, these reserve balances were approximately $672,000 and $724,000, respectively.

 

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, 2014 and 2013, are as follows:

 

		December 31, 2014
					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			Losses			Value
Debt securities available for sale:
U.S. Government agencies		$	560,183		$	2,840		$	-		$	563,023
State and municipal securities			7,028,388			302,697			-			7,331,085
Mortgage-backed securities:
Residential mortgage guaranteed by GNMA or FNMA			16,852,496			44,954			(9,179)			16,888,271
Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies			62,278,948			273,571			(141,989)			62,410,530
		$	86,720,015		$	624,062		$	(151,168)		$	87,192,909
Debt securities held to maturity:
Mortgage-backed securities:
Residential mortgage guaranteed by GNMA or FNMA		$	25,428		$	274		$	-		$	25,702

 

		December 31, 2013
					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			Losses			Value
Debt securities available for sale:
U.S. Government agencies		$	3,433,216		$	48,119		$	-		$	3,481,335
State and municipal securities			14,908,761			425,021			(84,544)			15,249,238
Mortgage-backed securities: Residential mortgage guaranteed by GNMA or FNMA			7,047,076			85,203			-			7,132,279
Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or sponsored agencies			66,408,975			205,025			(268,180)			66,345,820
		$	91,798,028		$	763,368		$	(352,724)		$	92,208,672
Debt securities held to maturity:
Mortgage-backed securities:
Residential mortgage guaranteed by GNMA or FNMA		$	34,165		$	862		$	-		$	35,027

 

U.S. Government sponsored agencies include entities such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association.

 

At December 31, 2014 and 2013, securities with a carrying value of approximately $12,612,000 and $14,385,000, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

 

At December 31, 2014 and 2013, the carrying amount of securities pledged to secure repurchase agreements was approximately $24,207,000 and $25,521,000, respectively.

 

At December 31, 2014 and 2013, securities with a carrying value of approximately $18,705,000 and $20,140,000, respectively, were pledged to the Federal Home Loan Bank as collateral for the Bank’s borrowings.

 

At December 31, 2014 and 2013, the Bank had pledged securities with a carrying amount of approximately $13,037,000 and $11,978,000, respectively, to other financial institutions as collateral for federal funds purchased.

The amortized cost and fair value of securities at December 31, 2014, 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		$	-		$	-		$	-		$	-
Due from one year to five years			898,930			934,341			-			-
Due from five years to ten years			2,831,489			2,931,593			-			-
Due after ten years			3,858,152			4,028,174			-			-
			7,588,571			7,894,108			-			-
Mortgage-backed securities			79,131,444			79,298,801			25,428			25,702
		$	86,720,015		$	87,192,909		$	25,428		$	25,702

 

For the year ended December 31, 2014, there were available for sale securities sold with proceeds totaling $12,240,478 which resulted in gross gains realized of $700,390. For the year ended December 31, 2013, there were available for sale securities sold with proceeds totaling $8,171,961 which resulted in gross gains realized of $652,421. For the year ended December 31, 2012, there were no securities sold.

 

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, 2014 and 2013:

 

		As of December 31, 2014
		Less than 12 Months						12 Months or Greater						Total
					Gross						Gross						Gross
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
		Value			Losses			Value			Losses			Value			Losses
Mortgage-backed securities:
Residential mortgage guaranteed by GNMA or FNMA		$	7,018,137		$	(9,179)		$	-		$	-		$	7,018,137		$	(9,179)
Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or  sponsored agencies			9,504,525			(52,831)			17,546,169			(89,158)			27,050,694			(141,989)
		$	16,522,662		$	(62,010)		$	17,546,169		$	(89,158)		$	34,068,831		$	(151,168)

 

		As of December 31, 2013
		Less than 12 Months						12 Months or Greater						Total
					Gross						Gross						Gross
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
		Value			Losses			Value			Losses			Value			Losses
State and municipal securities		$	3,025,250		$	(84,544)		$	-		$	-		$	3,025,250		$	(84,544)
Mortgage-backed securities:
Collateralized mortgage obligations issued or guaranteed by U.S. Government agencies or  sponsored agencies			27,782,942			(221,827)			8,761,049			(46,353)			36,543,991			(268,180)
		$	30,808,192		$	(306,371)		$	8,761,049		$	(46,353)		$	39,569,241		$	(352,724)

 

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, 2014.

 

At December 31, 2014, the significant categories of temporarily impaired securities, and management’s evaluation of those securities are as follows:

 

Mortgage-backed securities: At December 31, 2014, twelve 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, 2014.

 

At December 31, 2014 and 2013, the Bank's loans consist of the following (in thousands):

 

		2014			2013
Commercial real estate-mortgage:
Owner-occupied		$	68,581		$	65,747
All other			74,587			64,052
Consumer real estate-mortgage			76,907			76,315
Construction and land development			34,449			41,597
Commercial and industrial			37,863			38,999
Consumer and other			2,977			2,730
Total loans			295,364			289,440
Less: Allowance for loan losses			(3,495)			(3,203)
Loans, net		$	291,869		$	286,237

   

The following describe risk characteristics relevant to each of the portfolio segments:

 

Real estate:

 

As discussed below, Cornerstone offers various types of real estate loan products. All loans within this portfolio segment are particularly sensitive to the valuation of real estate:

 

 

 

 

Commercial and industrial:

 

The commercial and industrial loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the customers’ business operations.

 

Consumer and other:

 

The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans, and educational loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.

		2014			2013			2012
An analysis of the allowance for loan losses follows:
Balance, beginning of year		$	3,203,158		$	6,141,281		$	7,400,049
Provision for loan losses			515,000			300,000			430,000
Charge-offs			(1,581,992)			(4,708,605)			(2,868,576)
Recoveries			1,358,963			1,470,482			1,179,808
Balance, end of year		$	3,495,129		$	3,203,158		$	6,141,281

  

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

 

 

		Commercial			Consumer			Construction			Commercial
		Real Estate-			Real Estate-			and Land			and			Consumer
		Mortgage			Mortgage			Development			Industrial			and Other			Total
Performing loans		$	138,711		$	74,828		$	33,696		$	36,314		$	2,977		$	286,526
Impaired loans			4,457			2,079			753			1,549			-			8,838
Total		$	143,168		$	76,907		$	34,449		$	37,863		$	2,977		$	295,364

 

 

		Commercial			Consumer			Construction			Commercial
		Real Estate-			Real Estate-			and Land			and			Consumer
		Mortgage			Mortgage			Development			Industrial			and Other			Total
Performing loans		$	121,817		$	72,868		$	41,228		$	37,007		$	2,730		$	275,650
Impaired loans			7,982			3,447			369			1,992			-			13,790
Total		$	129,799		$	76,315		$	41,597		$	38,999		$	2,730		$	289,440

 

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

 

 

		Commercial			Consumer			Construction			Commercial
		Real Estate-			Real Estate-			and Land			and			Consumer
		Mortgage			Mortgage			Development			Industrial			and Other			Total
Allowance related to:
Performing loans		$	1,191		$	1,082		$	130		$	361		$	35		$	2,799
Impaired loans			404			15			-			277			-			696
Total		$	1,595		$	1,097		$	130		$	638		$	35		$	3,495

 

 

		Commercial			Consumer			Construction			Commercial
		Real Estate-			Real Estate-			and Land			and			Consumer
		Mortgage			Mortgage			Development			Industrial			and Other			Total
Allowance related to:
Performing loans		$	1,051		$	927		$	319		$	297		$	45		$	2,639
Impaired loans			498			11			-			55			-			564
Total		$	1,549		$	938		$	319		$	352		$	45		$	3,203

The following tables detail the changes in the allowance for loan losses during December 31, 2014 and 2013, by loan classification (in thousands):

 

As of December 31, 2014:

 

		Commercial			Consumer			Construction			Commercial
		Real Estate-			Real Estate-			and Land			and			Consumer
		Mortgage			Mortgage			Development			Industrial			and Other			Total
Balance, beginning of year		$	1,549		$	938		$	319		$	352		$	45		$	3,203
Provision for loan losses			360			731			(902)			336			(10)			515
Charge-offs			(470)			(896)			(58)			(108)			(50)			(1,582)
Recoveries			156			324			771			58			50			1,359
Balance, end of year		$	1,595		$	1,097		$	130		$	638		$	35		$	3,495

 

As of December 31, 2013:

 

		Commercial			Consumer			Construction			Commercial
		Real Estate-			Real Estate-			and Land			and			Consumer
		Mortgage			Mortgage			Development			Industrial			and Other			Total
Balance, beginning of year		$	2,549		$	1,528		$	1,241		$	809		$	14		$	6,141
Provision for loan losses			811			11			(787)			143			122			300
Charge-offs			(1,879)			(842)			(1,193)			(699)			(96)			(4,709)
Recoveries			68			241			1,058			99			5			1,471
Balance, end of year		$	1,549		$	938		$	319		$	352		$	45		$	3,203