4. Loans

Loans segregated by class at December 31, 2011 and 2010 are as follows:


	2011			2010
	(in thousands)
Portfolio Loans:
Commercial and industrial	$	1,426,221		$	1,351,862
Commercial real estate secured		1,037,976			1,120,361
Residential construction and land		64,824			104,036
Commercial construction and land		99,021			106,423
Consumer		300,257			152,657

Gross loans		2,928,299			2,835,339
Less: Unearned discount		—			(1	)

Total loans		2,928,299			2,835,338
Less: Allowance for loan losses		(103,744	)		(124,568	)

Portfolio loans, net	$	2,824,555		$	2,710,770


Loans Held for Sale	$	185,984		$	259,020

The total amount of loans transferred to third parties as loan participations at December 31, 2011 was $245.4 million, all of which has been recognized as a sale under the applicable accounting guidance in effect at the time of the transfer. The Company continues to have involvement with these loans through relationship management and servicing responsibilities.

At December 31, 2011, loans held for sale included $186.0 million of residential mortgage loans originated by Cole Taylor Mortgage. The Company has elected to account for these loans under the fair value option in accordance with ASC 825—Financial Instruments. The unpaid principal balance associated with these loans was $179.3 million at December 31, 2011. An unrealized gain on these loans of $6.7 million was included in mortgage banking revenues in noninterest income on the Consolidated Statements of Operations for the year ended December 31, 2011. None of these loans are 90 days or more past due or on a nonaccrual status. Interest income on these loans is included in interest income and is not considered part of the change in fair value.

Nonperforming loans include nonaccrual loans and interest-accruing loans contractually past due 90 days or more. Loans are placed on a nonaccrual basis for recognition of interest income when sufficient doubt exists as to the full collection of principal and interest. Generally, loans are to be placed on nonaccrual when principal and interest is contractually past due 90 days, unless the loan is adequately secured and in the process of collection.

The following table presents the aging of loans by class as of December 31, 2011 and December 31, 2010:


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
	(in thousands)
December 31, 2011
Commercial and industrial	$	129	$	—	$	42,909	$	43,038	$	1,383,183	$	1,426,221
Commercial real estate secured		—		—		35,159		35,159		1,002,817		1,037,976
Residential construction and land		—		—		7,810		7,810		57,014		64,824
Commercial construction and land		—		—		5,279		5,279		93,742		99,021
Consumer		5,589		1,691		11,904		19,184		467,057		486,241

Total loans	$	5,718	$	1,691	$	103,061	$	110,470	$	3,003,813	$	3,114,283

December 31, 2010
Commercial and industrial	$	782	$	278	$	71,438	$	72,498	$	1,279,364	$	1,351,862
Commercial real estate secured		4,242		1,010		42,221		47,473		1,072,888		1,120,361
Residential construction and land		—		—		20,660		20,660		83,376		104,036
Commercial construction and land		—		—		12,734		12,734		93,689		106,423
Consumer		3,476		2,160		12,687		18,323		393,353		411,676

Total loans	$	8,500	$	3,448	$	159,740	$	171,688	$	2,922,670	$	3,094,358

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company uses the following definitions for risk ratings:

Pass. Loans in this category range from loans that are virtually risk free to those with borderline risk where the borrower has unstable operating history containing losses or adverse trends have weakened its financial condition that have not currently impacted repayment ability but may in the future if not corrected.

Special Mention. Loans in this category have potential weaknesses which currently weaken the asset or inadequately protect the Bank's credit position and if not immediately corrected will diminish repayment prospects.

Substandard. Loans in this category relate to borrowers with deteriorating financial conditions and exhibit a number of well-defined weaknesses which currently inhibit normal repayment through normal operations. These loans require constant monitoring and supervision by Bank management.

Nonaccrual. Loans in this category exhibit the same weaknesses as substandard loans, however, the weaknesses are more pronounced and these loans are no longer accruing interest.

The following table presents the risk categories of loans by class at December 31, 2011 and December 31, 2010:


	Commercial and Industrial		CRE Secured		Residential Construction and Land		Commercial Construction and Land		Consumer		Total
	(in thousands)
December 31, 2011
Pass	$	1,358,261	$	963,909	$	51,332	$	71,970	$	474,337	$	2,919,809
Special Mention		6,458		30,557		5,682		—		—		42,697
Substandard		18,593		8,351		—		21,772		—		48,716
Nonaccrual		42,909		35,159		7,810		5,279		11,904		103,061

Total Loans	$	1,426,221	$	1,037,976	$	64,824	$	99,021	$	486,241	$	3,114,283

December 31, 2010
Pass	$	1,241,720	$	988,072	$	76,897	$	72,070	$	399,044	$	2,777,803
Special Mention		18,461		40,235		2,948		20,107		—		81,751
Substandard		20,243		49,833		3,531		1,512		—		75,119
Nonaccrual		71,438		42,221		20,660		12,734		12,632		159,685

Total Loans	$	1,351,862	$	1,120,361	$	104,036	$	106,423	$	411,676	$	3,094,358

The following table sets forth information about our nonaccrual loans, performing restructured loans (TDRs that are not past due or in a nonaccrual status) and impaired loans. The amounts of nonperforming loans at December 31, 2011, 2010 and 2009 and the related interest on nonaccrual loans for the years then ended are shown below:


	2011		2010		2009
	(in thousands)
Recorded balance of loans contractually past due 90 days or more but still accruing interest, at end of year	$	—	$	55	$	59
Recorded balance of nonaccrual loans, at end of year		103,061		159,685		141,403

Total nonperforming loans	$	103,061	$	159,740	$	141,462

Performing restructured loans	$	14,176	$	29,786	$	1,196
Interest on nonaccrual loans recognized in income		1,063		4,992		2,984
Interest on nonaccrual loans which would have been recognized under the original terms of the loans		7,649		15,194		16,850

Impaired loans include all nonaccrual loans as well as certain accruing loans judged to have higher risk of noncompliance with the present contractual repayment schedule for both interest and principal. Unless modified in a trouble debt restructuring, certain homogenous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment and are, therefore, excluded from impaired loans. The Company's policy is to charge-off a loan when a loss is highly probable and clearly identified. For consumer loans, the Company follows the guidelines issued by its primary regulator which specifies the number of days of delinquency to charge-off a consumer loan by type of credit. Except for unsecured commercial loans that are generally charged-off when a loan is 90 days past due, the Company does not have a policy to automatically charge-off a commercial loan when it reaches a certain status of delinquency. If a commercial loan is determined to have impairment, the Company will either establish a specific valuation allowance or, if management deems a loss to be highly probable and clearly identified, reduce the recorded investment in that loan by taking a full or partial charge-off. In making the determination that loss is highly probable and clearly identified, management evaluates the type, marketability and availability of the collateral along with any credit enhancements supporting the loan. In determining when to fully or partially charge-off a loan, management considers the prospects for collection of assets, likely time frame for repayment, solvency status of the borrower, the existence of practical or reasonable collection programs, the existence of shortfalls after attempts to improve collateral position, prospects for near-term improvements in collateral valuations and other considerations identified in its internal loan review and workout processes.

The Company had $3.1 million of letters of credit outstanding related to nonaccrual and impaired loans as of December 31, 2011. The Company had $396,000 in commitments to lend on impaired loans as of December 31, 2011, with $329,000 of that amount committed to loans that are classified as TDRs. At December 31, 2011, the Company had $14.2 million of loans classified as performing restructured loans which included commercial loans of $9.4 million and consumer loans of $4.8 million.

Information about the Company's impaired loans at or for the years ended December 31, 2011, 2010, and 2009 is as follows:


	2011		2010		2009
	(in thousands)
Recorded balance of impaired loans, at end of year:
With related allowance for loan loss	$	71,512	$	136,404	$	95,936
With no related allowance for loan loss		37,023		44,677		45,761

Total recorded balance of impaired loans	$	108,535	$	181,081	$	141,697

Allowance for loan losses related to impaired loans, at end of year	$	32,044	$	59,857	$	33,640
Average balance of impaired loans for the year		146,985		151,370		180,166
Interest income recognized on impaired loans for the year		689		1,881		600

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2011 and December 31, 2010:


	Unpaid Principal Balance		Recorded Balance		Allowance for Loan Losses Allocated		YTD Average Balance		Interest Income Recognized for the Year Ended Dec. 31
December 31, 2011
With no related allowance recorded:
Commercial and industrial	$	16,810	$	13,241	$	—	$	11,302	$	186
Commercial real estate secured		19,152		8,386		—		18,496		37
Residential construction and land		3,161		3,086		—		5,754		—
Commercial construction and land		7,952		6,672		—		4,755		8
Consumer		5,722		5,638		—		3,070		77

Subtotal		52,797		37,023		—		43,377		308

With an allowance recorded:
Commercial and industrial		56,533		35,654		23,292		53,656		49
Commercial real estate secured		38,769		31,012		7,540		37,643		250
Residential construction and land		17,530		4,727		1,181		8,820		51
Commercial construction and land		220		119		31		3,489		31
Consumer		—		—		—		—		—

Subtotal		113,052		71,512		32,044		103,608		381

Total impaired loans	$	165,849	$	108,535	$	32,044	$	146,985	$	689

December 31, 2010
With no related allowance recorded:
Commercial and industrial	$	28,807	$	12,841	$	—	$	10,128
Commercial real estate secured		37,914		22,848		—		10,026
Residential construction and land		36,913		7,466		—		16,371
Commercial construction and land		—		—		—		2,475
Consumer		1,522		1,522		—		1,304

Subtotal		105,156		44,677		—		40,304

With an allowance recorded:
Commercial and industrial		70,725		65,963		35,258		28,298
Commercial real estate secured		48,897		40,983		10,940		45,602
Residential construction and land		16,768		16,724		5,189		27,988
Commercial construction and land		13,950		12,734		8,470		9,178
Consumer		—		—		—		—

Subtotal		150,340		136,404		59,857		111,066

Total impaired loans	$	255,496	$	181,081	$	59,857	$	151,370	$	1,881

The Company provides several types of loans to its customers, including residential, construction, commercial, and consumer loans. Lending activities are conducted with customers in a wide variety of industries as well as with individuals with a wide variety of credit requirements. Credit risks tend to be geographically concentrated in that the majority of the Company's customer base lies within the Chicago area. Furthermore, 46% of the Company's loan portfolio involves loans that are to some degree secured by real estate properties located primarily within the Chicago area as of December 31, 2011, compared to 52% as of December 31, 2010.

Activity in the allowance for loan losses for the years ended December 31, 2011, 2010, and 2009 consisted of the following:


	2011			2010			2009
	(in thousands)
Allowance for loan losses:
Allowance at beginning of year	$	124,568		$	106,185		$	128,548
Provision for loan losses		49,258			143,127			89,611
Loans charged-off		(79,281	)		(128,895	)		(116,160	)
Recoveries of loans previously charged-off		9,199			4,151			4,186

Net charge-offs		(70,082	)		(124,744	)		(111,974	)

Allowance at end of year	$	103,744		$	124,568		$	106,185

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by class and based on impairment method as of December 31, 2011 and December 31, 2010:


	Commercial & Industrial			Commercial Real Estate Secured			Residential Construction & Land			Commercial Construction & Land			Consumer			Total
	(in thousands)
ALLOWANCE FOR LOAN LOSSES:
Beginning balance at December 31, 2009	$	37,995		$	21,190		$	40,193		$	2,040		$	4,767		$	106,185
Provision		46,489			48,798			33,343			10,615			3,882			143,127
Charge-offs		(24,765	)		(38,854	)		(59,355	)		(1,284	)		(4,637	)		(128,895	)
Recoveries		1,780			287			1,065			51			968			4,151

Ending balance at December 31, 2010	$	61,499		$	31,421		$	15,246		$	11,422		$	4,980		$	124,568

Ending balance individually evaluated for impairment	$	35,258		$	10,940		$	5,189		$	8,470		$	—		$	59,857
Ending balance collectively evaluated for impairment		26,241			20,481			10,057			2,952			4,980			64,711

LOANS:
Ending balance individually evaluated for impairment	$	78,804		$	63,831		$	24,190		$	12,734		$	1,522		$	181,081
Ending balance collectively evaluated for impairment		1,273,058			1,056,530			79,846			93,689			410,154			2,913,277

Ending balance at December 31, 2010	$	1,351,862		$	1,120,361		$	104,036		$	106,423		$	411,676		$	3,094,358

ALLOWANCE FOR LOAN LOSSES:
Beginning balance at December 31, 2010	$	61,499		$	31,421		$	15,246		$	11,422		$	4,980		$	124,568
Provision		13,884			26,483			(3,038	)		5,892			6,037			49,258
Charge-offs		(30,495	)		(29,653	)		(4,528	)		(10,388	)		(4,217	)		(79,281	)
Recoveries		6,501			2,068			403			52			175			9,199

Ending balance at December 31, 2011	$	51,389		$	30,319		$	8,083		$	6,978		$	6,975		$	103,744

Ending balance individually evaluated for impairment	$	23,292		$	7,540		$	1,181		$	31		$	—		$	32,044
Ending balance collectively evaluated for impairment		28,097			22,779			6,902			6,947			6,975			71,700

LOANS:
Ending balance individually evaluated for impairment	$	48,895		$	39,398		$	7,813		$	6,791		$	5,638		$	108,535
Ending balance collectively evaluated for impairment		1,377,326			998,578			57,011			92,230			480,603			3,005,748

Ending balance at December 31, 2011	$	1,426,221		$	1,037,976		$	64,824		$	99,021		$	486,241		$	3,114,283

A modified loan is considered a TDR when the borrower is experiencing documented financial difficulty and concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics at the outset of a new loan. The most common types of modifications include interest rate modifications, forbearance on principal and/or interest, partial charge-offs and changes in note structure. All loans modified in a TDR are evaluated for impairment in accordance with the Company's allowance for loan loss methodology.

For the commercial portfolio, loans modified in a TDR are separately evaluated for impairment at the time of restructuring and at each subsequent reporting date for as long as they are reported as TDRs. The impairment evaluation is generally measured by comparing the recorded investment in the loan to the fair value of the collateral net of estimated costs to sell if the loan is collateral dependent. The Company recognizes a specific valuation allowance equal to the amount of the measured impairment, if applicable.

Commercial and consumer loans modified in a TDR are classified as impaired loans for a minimum of one year. After one year, a loan is no longer included in the balance of impaired loans if the loan was modified to yield a market rate for loans of similar credit risk at the time of restructuring and the loan is performing based on the terms of the restructuring agreement, although the loan continues to be reported as a TDR.

Upon the Company's adoption of the recent changes to ASC 310—Receivables, loans modified from January 2011 through June 2011 were reanalyzed to determine if those modified loans would be considered a TDR. No additional loans were identified as TDRs and no changes were made to the allowance for loan losses as a result of this analysis.

The following table provides information on loans modified as a TDR during the year ended December 31, 2011. The Pre-Modification Outstanding Recorded Balance is equal to the outstanding balance immediately prior to modification. The Post-Modification Outstanding Recorded Balance is equal to the outstanding balance immediately after modification:


	For the year ended December 31, 2011
	Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
	(dollars in thousands)
Troubled Debt Restructurings:
Commercial and industrial		7	$	12,268	$	12,266
Commercial real estate secured		8		17,213		17,211
Residential construction and land		1		529		529
Commercial construction and land		1		1,512		1,512
Consumer		37		5,605		5,526

Total		54	$	37,127	$	37,044

The following table provides information on TDRs that defaulted for the first time during the period indicated and had been modified within the last twelve months.


	For the year ended December 31, 2011
	Number of Loans		Recorded Investment
	(dollars in thousands)
Troubled Debt Restructurings that defaulted in the period and were modified in the previous twelve months:
Commercial and industrial		2	$	8
Commercial real estate secured		4		5,869
Residential construction and land		1		529
Commercial construction and land		—		—
Consumer		7		2,317

Total		14	$	8,723

As of December 31, 2011 and 2010, the Company had extended loans to directors and executive officers of the Bank, the Company and their related interests as detailed in the table below:


	2011			2010
	(in thousands)
Beginning balance	$	53,647		$	20,062
New loans and advances		9,060			36,961
Payments		(2,942	)		(3,279	)
Adjustment for changes in directors and executive officers		—			(97	)

Loans, net	$	59,765		$	53,647

In the opinion of management, these loans were made in the normal course of business and on substantially the same terms for comparable transactions with other borrowers and do not involve more than a normal risk of collectability.