Allowance for Loan Losses

The Company maintains an allowance for loan losses at a level management believes is appropriate in relation to the estimated risk inherent in the loan portfolio. The allowance for loan losses represents the Company’s estimate of probable incurred losses in our loan portfolio at each statement of condition date and is based on the review of available and relevant information.

The first component of the allowance for loan losses contains allocations for probable incurred losses that we have identified relating to impaired loans pursuant to ASC 310-10, Receivables. The Company individually evaluates for impairment all loans classified substandard and over $750,000. For all portfolio segments, loans are considered impaired when, based on current information and events, it is probable that the borrower will not be able to fulfill its obligation according to the contractual terms of the loan agreement. The impairment loss, if any, is generally measured based on the present value of expected cash flows discounted at the loan’s effective interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price, or the fair value of the collateral, if the loan is collateral-dependent. A loan is considered collateral-dependent when the repayment of the loan will be provided solely by the underlying collateral and there are no other available and reliable sources of repayment. If management determines a loan is collateral-dependent, management will charge-off any identified collateral shortfall against the allowance for loan losses.

If foreclosure is probable, the Company is required to measure the impairment based on the fair value of the collateral. The fair value of the collateral is generally obtained from appraisals or estimated using an appraisal-like methodology. When current appraisals are not available, management estimates the fair value of the collateral giving consideration to several factors including the price at which individual unit(s) could be sold in the current market, the period of time over which the unit(s) could be sold, the estimated cost to complete the unit(s), the risks associated with completing and selling the unit(s), the required return on the investment a potential acquirer may have, and the current market interest rates. The analysis of each loan involves a high degree of judgment in estimating the amount of the loss associated with the loan, including the estimation of the amount and timing of future cash flows and collateral values.

The second component of the Company’s allowance for loan losses contains allocations for probable incurred losses within various pools of loans with similar characteristics pursuant to ASC 450-10, Contingencies. This component is based in part on certain loss factors applied to various stratified loan pools excluding loans evaluated individually for impairment. In determining the appropriate loss factors for all portfolio segments, management considers historical charge-offs and recoveries; levels of and trends in delinquencies, impaired loans, and other classified loans; concentrations of credit within the commercial loan portfolios; volume and type of lending; and current and anticipated economic conditions.

Loan losses for all portfolio segments are charged-off against the allowance when the loan balance or a portion of the loan balance is no longer covered by the repayment capacity of the borrower based on an evaluation of available and projected cash resources and collateral value, while recoveries of amounts previously charged-off are credited to the allowance. The Company assesses the appropriateness of the allowance for loan losses on a quarterly basis and adjusts the allowance for loan losses by recording a provision for loan losses in an amount sufficient to maintain the allowance at a level deemed appropriate by management. The evaluation of the appropriateness of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as additional information becomes available or as future events occur. To the extent that actual outcomes differ from management’s estimates, an additional provision for loan losses could be required which could adversely affect earnings or the Company’s financial position in future periods.

The risk characteristics of each loan portfolio segment are as follows:

Commercial and Industrial Loans (C&I)

C&I loans are primarily based on the identified historic and/or the projected cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, do fluctuate based on changes in the company’s internal and external environment including management, human and capital resources, economic conditions, competition, regulation, and product innovation/obsolescence. The collateral securing these loans may also fluctuate in value and generally has advance rates between 50-80% of the collateral value. Most C&I loans are secured by business assets being financed such as equipment, accounts receivable, and/or inventory and generally incorporate a secured or unsecured personal guarantee. Occasionally, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable and/or inventory, the collateral securing the advances is generally monitored through a Borrowing Base Certificate submitted by the borrower which may identify deterioration in collateral value. The ability of the borrower to collect amounts due from its customers may be affected by its customers’ economic and financial condition. The availability of funds for the repayment of these loans may be substantially dependent on each of the factors described above.

Commercial Real Estate – Owner Occupied, Non-Owner Occupied, and Multifamily

These types of commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent upon the cash flows from the successful operation of the property securing the loan or the cash flows from the owner occupied business conducted on the property securing the loan. A borrower’s business and/or the property securing the loan may be adversely affected by business conditions generally, and fluctuations in the real estate markets or in the general economy, which if adverse, can negatively affect the borrowers’ ability to repay the loan. The value and cash flow of the property can be influenced by changes in market rental rates, changes in interest rates or investors’ required rates of return, the condition of the property, zoning, or environmental issues. The properties securing the commercial real estate portfolio are diverse in terms of type and are generally located in the Chicagoland/Northwest Indiana market. Owner occupied loans are generally a borrower purchased building where the borrower occupies at least 51% of the space with the primary source of repayment dependent on sources other than the underlying collateral. Non-owner occupied and single tenant properties may have higher risk than owner occupied loans since the primary source of repayment is dependent upon the ability to lease out the collateral as well as the financial stability of the businesses occupying the collateral. Multifamily loans can also be impacted by vacancy/collection losses and tenant turnover due to generally shorter term leases or even month-to-month leases. Management monitors and evaluates commercial real estate loan portfolio concentrations based upon cash flow, collateral, geography, and risk grade criteria. As a general rule, management avoids financing single purpose projects unless other underwriting factors mitigate the credit risk to an acceptable level. The Company’s loan policy generally requires lower loan-to-value ratios against these types of properties.

Commercial Construction and Land Development Loans

Construction loans are underwritten utilizing feasibility studies, independent appraisals, sensitivity analysis of absorption and lease rates, presale or prelease/Letters of Intent analysis, and financial analysis of the developers and property owners. Construction loans are generally based on the estimated cost to construct and cash flows associated with the completed project or stabilized value. These estimates are subjective in nature and if erroneous, may preclude the borrower from being able to repay the loan. Construction loans often involve the disbursement of substantial funds with repayment dependent on the success of the completed project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, the ability to sell the property, and the availability of long-term financing.

Commercial Participation Loans

Participation loans generally have larger principal balances, portions of which are sold to multiple participant banks in order to spread credit risk. The collateral securing these loans is often real estate and is often located outside of the Company’s geographic footprint. Loans outside of the Company’s geographical footprint pose additional risk due to the lack of knowledge of general economic conditions where the project is located along with various project specific risks regarding buyer demand and project specific risks regarding project competition risks. The participant banks are required to underwrite these credits utilizing their own internal analysis techniques

and their own credit standards. However, the participant banks are reliant upon the information about the borrowers and the collateral provided by the lead bank. These loans carry higher levels of risk due to the participant banks being dependent on the lead bank for monitoring and managing the credit relationship, including the workout and/or foreclosure process should the borrower default.

Retail Loans

The Company’s retail loans include one-to-four family residential mortgage loans, home equity loans and lines of credit, retail construction, and other consumer loans. Management has established a maximum loan-to-value ratio (LTV) of 80% for one-to-four family residential mortgages and home equity loans and lines of credit that are secured by a first or second mortgage on owner and non-owner occupied residences. Loan applications exceeding 80% LTV require private mortgage insurance (PMI) from a mortgage insurance company deemed acceptable by management. Residential construction loans are underwritten to the same standards and generally require an end loan financing commitment either from the Company or another financial institution acceptable to the Company. Other consumer loans are generally small dollar auto and personal loans based on the credit score and income of the applicant. These loans are very homogenous in nature and are rated in pools based on similar characteristics.

The following table presents the activity in the allowance for loan losses for the three months ended March 31, 2012 and 2011.



				Commercial Real Estate
	Commercial and Industrial			Owner Occupied			Non-Owner Occupied			Multifamily			Construction and Land Development			Commercial Participations			One-to-four Family Residential			HELOC			Retail Construction		Other			Total
	(Dollars in thousands)
Three months ended March 31, 2012
Balance, at beginning of quarter	$	1,236		$	2,129		$	3,935		$	370		$	1,198		$	1,467		$	1,521		$	442		$	3	$	123		$	12,424
Provision for loan losses	(67		)	67			818			608			115			(516		)	44			(17		)	1		(3		)	1,050
Loans charged-off:
Current year charge-offs	(119		)	—			(361		)	(378		)	—			—			(114		)	(52		)	—		(17		)	(1,041		)
Previously established specific reserves	—			—			(718		)	—			—			—			—			—			—		—			(718		)
Total loans charged-off	(119		)	—			(1,079		)	(378		)	—			—			(114		)	(52		)	—		(17		)	(1,759		)
Recoveries	13			—			23			—			—			—			8			1			—		8			53
Balance, at end of quarter	$	1,063		$	2,196		$	3,697		$	600		$	1,313		$	951		$	1,459		$	374		$	4	$	111		$	11,768

Three months ended March 31, 2011
Balance, at beginning of quarter	$	1,279		$	1,090		$	6,906		$	350		$	188		$	4,559		$	1,356		$	1,309		$	7	$	135		$	17,179
Provision for loan losses	(13		)	(78		)	(197		)	315			(30		)	863			(11		)	65			2		(13		)	903
Loans charged-off:
Current year charge-offs	—			—			—			(204		)	(4		)	(703		)	(23		)	(52		)	—		(28		)	(1,014		)
Previously established specific reserves	—			—			—			—			—			—			—			—			—		—			—
Total loans charged-off	—			—			—			(204		)	(4		)	(703		)	(23		)	(52		)	—		(28		)	(1,014		)
Recoveries	2			—			8			—			—			—			1			5			—		11			27
Balance, at end of quarter	$	1,268		$	1,012		$	6,717		$	461		$	154		$	4,719		$	1,323		$	1,327		$	9	$	105		$	17,095

The following tables provide other information regarding the allowance for loan and lease losses and balances by portfolio segment and impairment method at the dates indicated.



	At March 31, 2012
			Commercial Real Estate
	Commercial and Industrial		Owner Occupied		Non-Owner Occupied		Multifamily		Construction and Land Development		Commercial Participations		One-to-four Family Residential		HELOC		Retail Construction		Other		Total
	(Dollars in thousands)
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment	1,063		2,196		3,697		600		1,313		951		1,459		374		4		111		11,768
Total evaluated for impairment	$	1,063	$	2,196	$	3,697	$	600	$	1,313	$	951	$	1,459	$	374	$	4	$	111	$	11,768

Loans receivable:
Individually evaluated for impairment	$	1,694	$	11,546	$	24,562	$	2,021	$	2,781	$	2,082	$	—	$	—	$	—	$	—	$	44,686
Collectively evaluated for impairment	85,113		83,564		160,508		73,843		19,910		5,007		179,980		50,496		1,282		2,942		662,645
Total loans receivable	$	86,807	$	95,110	$	185,070	$	75,864	$	22,691	$	7,089	$	179,980	$	50,496	$	1,282	$	2,942	$	707,331



	At December 31, 2011
			Commercial Real Estate
	Commercial and Industrial		Owner Occupied		Non-Owner Occupied		Multifamily		Construction and Land Development		Commercial Participations		One-to-four Family Residential		HELOC		Retail Construction		Other		Total
	(Dollars in thousands)
Ending allowance balance:
Individually evaluated for impairment	$	—	$	—	$	718	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	718
Collectively evaluated for impairment	1,236		2,129		3,217		370		1,198		1,467		1,521		442		3		123		11,706
Total evaluated for impairment	$	1,236	$	2,129	$	3,935	$	370	$	1,198	$	1,467	$	1,521	$	442	$	3	$	123	$	12,424

Loans receivable:
Individually evaluated for impairment	$	2,479	$	11,203	$	25,518	$	673	$	2,781	$	2,355	$	—	$	—	$	—	$	—	$	45,009
Collectively evaluated for impairment	82,681		82,630		162,775		71,203		19,264		9,698		181,698		52,873		1,022		2,771		666,615
Total loans receivable	$	85,160	$	93,833	$	188,293	$	71,876	$	22,045	$	12,053	$	181,698	$	52,873	$	1,022	$	2,771	$	711,624

The Company, as a matter of good risk management practices, utilizes objective loan grading matrices to assign risk ratings to all commercial loans. The risk rating criteria is clearly supported by core credit attributes that emphasize debt service coverage, operating trends, collateral, and guarantor liquidity, and further removes subjective criteria and bias from the analysis. Retail loans are rated pass until they become 90 days or more delinquent, put on non-accrual status, and generally rated substandard. The Company uses the following definitions for risk ratings:


•	Pass. Loans that meet the conservative underwriting guidelines that include core credit attributes noted above as measured by the loan grading matrices at levels that are in excess of the minimum amounts required to adequately service the loans.

•

Pass Watch. Loans which are performing per their contractual terms and are not necessarily demonstrating signs of credit or operational weakness, including but not limited to delinquency. Loans in this category are monitored by management for timely payments. Current financial information may be pending or, based upon the most recent analysis of the loan, possess credit attributes that are sufficient to adequately service the loan, but are less than the parameters required for a pass risk rating. This rating is considered transitional because management does not have current financial information to determine the appropriate risk grade or the quality of the loan appears to be changing. Loans may be graded as pass watch when a single event may have occurred that could be indicative of an emerging issue or indicate trending that would warrant a change in the risk rating.


•	Special Mention. Loans that have a potential weakness that will be closely monitored by management. A credit graded special mention does not expose the Company to elevated risk that would warrant an adverse classification.


•	Substandard. Loans that are inadequately protected by the current net worth and paying capacity of the borrower, guarantor, or the collateral pledged. Loans classified as substandard have a well-defined weakness or weaknesses, characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.


•	Doubtful. Loans that have the same weaknesses as those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The Company’s loans receivable portfolio is summarized by risk rating category as follows:



	Risk Rating at March 31, 2012
	Pass		Pass Watch		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	72,926	$	11,702	$	1,635	$	544	$	—	$	86,807
Commercial real estate:
Owner occupied	71,384		10,631		1,532		11,563		—		95,110
Non-owner occupied	146,037		9,356		6,901		22,776		—		185,070
Multifamily	70,539		2,872		600		1,853		—		75,864
Commercial construction and land development	17,070		793		1,450		3,378		—		22,691
Commercial participations	4,400		—		—		2,689		—		7,089
Total commercial loans	382,356		35,354		12,118		42,803		—		472,631

Retail loans:
One-to-four family residential	174,875		—		—		5,105		—		179,980
Home equity lines of credit	50,082		—		—		414		—		50,496
Retail construction	1,113		—		—		169		—		1,282
Other	2,942		—		—		—		—		2,942
Total retail loans	229,012		—		—		5,688		—		234,700
Total loans	$	611,368	$	35,354	$	12,118	$	48,491	$	—	$	707,331



	Pass		Pass Watch		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Current	$	605,105	$	32,006	$	10,168	$	9,274	$	—	$	656,553
Delinquent:
30-59 days	5,142		2,651		1,646		281		—		9,720
60-89 days	1,121		697		223		1,284		—		3,325
90 days or more	—		—		81		37,652		—		37,733
Total loans	$	611,368	$	35,354	$	12,118	$	48,491	$	—	$	707,331



	Risk Rating at December 31, 2011
	Pass		Pass Watch		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	76,554	$	6,534	$	1,476	$	596	$	—	$	85,160
Commercial real estate:
Owner occupied	69,029		12,036		1,540		11,228		—		93,833
Non-owner occupied	147,678		9,219		7,347		24,049		—		188,293
Multifamily	65,920		3,119		2,331		506		—		71,876
Commercial construction and land development	16,412		805		1,450		3,378		—		22,045
Commercial participations	9,698		—		—		2,355		—		12,053
Total commercial loans	385,291		31,713		14,144		42,112		—		473,260

Retail loans:
One-to-four family residential	176,763		—		—		4,935		—		181,698
Home equity lines of credit	52,332		—		—		541		—		52,873
Retail construction	853		—		—		169		—		1,022
Other	2,771		—		—		—		—		2,771
Total retail loans	232,719		—		—		5,645		—		238,364
Total loans	$	618,010	$	31,713	$	14,144	$	47,757	$	—	$	711,624



	Pass		Pass Watch		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Current	$	610,129	$	29,528	$	11,670	$	9,310	$	—	$	660,637
Delinquent:
30-59 days	6,082		1,285		93		1,445		—		8,905
60-89 days	1,799		900		2,381		4,372		—		9,452
90 days or more	—		—		—		32,630		—		32,630
Total loans	$	618,010	$	31,713	$	14,144	$	47,757	$	—	$	711,624

For all loan categories, past due status is based on the contractual terms of the loan. Interest income is generally not accrued on loans which are delinquent 90 days or more, or for loans which management believes, after giving consideration to a number of factors, including economic and business conditions and collection efforts, collection of interest is doubtful. In all cases, loans are placed on non-accrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest subsequently received on non-accrual loans is accounted for using the cost-recovery basis for commercial loans and the cash-basis for retail loans until qualifying for return to accrual status.

Commercial loans are generally placed on non-accrual once they become 90 days past due. Management reviews all current financial information of the borrower and guarantor(s) and action plans to bring the loan current before determining if the loan should be placed on non-accrual. Management requires appropriate justification to maintain a commercial loan on accrual status once 90 days past due. Occasionally commercial loans are placed on non-accrual status before the loan becomes significantly past due if current information indicates that future repayment of principal and interest may be doubtful.

Commercial loans are returned to accrual status only when the loan has been paid as agreed for a minimum of six months. A detailed analysis of the borrower and guarantor’s ability to service the loan is completed and must meet the Company’s underwriting standards and conform to Company policy before the loan can be returned to accrual status.

Retail loans are returned to accrual status primarily based on the payment status of the loan. A retail loan is automatically placed on non-accrual status immediately upon becoming 90 days past due. The loan remains on non-accrual status, with interest income recognized on a cash basis when a payment is made, until the loan is paid current. Once current, the loan is automatically returned to accrual status. If management identifies other information to indicate that future repayment of the loan balance may still be questionable, the loan may be manually moved to non-accrual status until management determines otherwise.

The Company’s loan portfolio delinquency status is summarized as follows:



	Delinquency at March 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans > 90 Days And Accruing
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	125	$	48	$	82	$	255	$	86,552	$	86,807	$	—
Commercial real estate:
Owner occupied	2,290		—		10,700		12,990		82,120		95,110		—
Non-owner occupied	2,111		2,390		15,251		19,752		165,318		185,070		81
Multifamily	1,591		—		1,440		3,031		72,833		75,864		—
Commercial construction and land development	407		—		3,378		3,785		18,906		22,691		—
Commercial participations	—		—		2,689		2,689		4,400		7,089		—
Total commercial loans	6,524		2,438		33,540		42,502		430,129		472,631		81

Retail loans:
One-to-four family residential	2,791		617		3,674		7,082		172,898		179,980		—
Home equity lines of credit	405		270		350		1,025		49,471		50,496		—
Retail construction	—		—		169		169		1,113		1,282		—
Other	—		—		—		—		2,942		2,942		—
Total retail loans	3,196		887		4,193		8,276		226,424		234,700		—
Total loans receivable	$	9,720	$	3,325	$	37,733	$	50,778	$	656,553	$	707,331	$	81



	Delinquency at December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans > 90 Days And Accruing
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	615	$	24	$	88	$	727	$	84,433	$	85,160	$	—
Commercial real estate:
Owner occupied	551		297		10,362		11,210		82,623		93,833		—
Non-owner occupied	1,622		5,197		12,153		18,972		169,321		188,293		5
Multifamily	1,856		1,732		91		3,679		68,197		71,876		—
Commercial construction and land development	—		502		3,378		3,880		18,165		22,045		—
Commercial participations	—		—		2,355		2,355		9,698		12,053		—
Total commercial loans	4,644		7,752		28,427		40,823		432,437		473,260		5

Retail loans:
One-to-four family residential	3,890		1,501		3,743		9,134		172,564		181,698		—
Home equity lines of credit	371		199		291		861		52,012		52,873		—
Retail construction	—		—		169		169		853		1,022		—
Other	—		—		—		—		2,771		2,771		—
Total retail loans	4,261		1,700		4,203		10,164		228,200		238,364		—
Total loans receivable	$	8,905	$	9,452	$	32,630	$	50,987	$	660,637	$	711,624	$	5

Non-accrual loans are summarized as follows:



	March 31, 2012		December 31, 2011
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	544	$	596
Commercial real estate:
Owner occupied	11,258		11,228
Non-owner occupied	21,278		22,294
Multifamily	1,440		91
Commercial construction and land development	3,378		3,378
Commercial participations	2,689		2,355
Total commercial loans	40,587		39,942

Retail loans:
One-to-four family residential	5,105		4,935
Home equity lines of credit	414		541
Retail construction	169		169
Total retail loans	5,688		5,645
Total non-accrual loans	$	46,275	$	45,587

The Company’s impaired loans are summarized as follows with the majority of the interest income recognized on a cash basis at the time the payment is received. The below tables include impaired loans that are individually reviewed for impairment as well as impaired loans that are below management’s scope for individual reviews due to immateriality.



	At March 31, 2012								Three Months Ended March 31, 2012
	Recorded Investment		Unpaid Principal Balance		Partial Charge-offs to Date		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Loans without a specific valuation allowance:
Commercial loans:
Commercial and industrial	$	1,694	$	2,126	$	420	$	—	$	2,106	$	31
Commercial real estate:
Owner occupied	11,546		15,221		2,977		—		11,469		11
Non-owner occupied	24,562		31,233		5,724		—		25,643		82
Multifamily	2,021		2,402		378		—		2,395		13
Commercial construction and land development	2,781		2,781		—		—		2,781		—
Commercial participations	2,082		5,777		3,553		—		1,972		—
Retail loans:
One-to-four family residential	6,887		7,108		221		—		6,889		46
Home equity lines of credit	503		593		89		—		503		3
Retail construction	169		169		—		—		169		—
Total	$	52,245	$	67,410	$	13,362	$	—	$	53,927	$	186

Total impaired loans:
Commercial	$	44,686	$	59,540	$	13,052	$	—	$	46,366	$	137
Retail	7,559		7,870		310		—		7,561		49
Total	$	52,245	$	67,410	$	13,362	$	—	$	53,927	$	186



	At December 31, 2011								Three Months Ended March 31, 2011
	Recorded Investment		Unpaid Principal Balance		Partial Charge-offs to Date		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Loans without a specific valuation allowance:
Commercial loans:
Commercial and industrial	$	2,479	$	2,700	$	216	$	—	$	3,697	$	—
Commercial real estate:
Owner occupied	11,203		14,557		2,694		—		9,641		—
Non-owner occupied	20,532		34,130		10,553		—		7,393		41
Multifamily	673		673		—		—		264		3
Commercial construction and land development	2,781		2,781		—		—		11,498		—
Commercial participations	2,355		1,796		1,189		—		7,881		—
Retail loans:
One-to-four family residential	7,202		7,504		302		—		6,887		48
Home equity lines of credit	540		630		89		—		610		2
Retail construction	169		169		—		—		169		—
Other	—		—		—		—		4		—
Total	$	47,934	$	64,940	$	15,043	$	—	$	48,044	$	94

Loans with a specific valuation allowance:
Owner occupied	$	—	$	—	$	—	$	—	$	2,778	$	—
Non-owner occupied	4,986		4,986		—		718		17,243		—
Commercial participations	—		—		—		—		5,443		—
Total	$	4,986	$	4,986	$	—	$	718	$	25,464	$	—

Total impaired loans:
Commercial	$	45,009	$	61,623	$	14,652	$	718	$	65,838	$	44
Retail	7,911		8,303		391		—		7,670		50
Total	$	52,920	$	69,926	$	15,043	$	718	$	73,508	$	94

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting in a modified loan which is then identified as a troubled debt restructuring (TDR). The Company may modify loans through rate reductions, short-term extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.

The Company identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.

For one-to-four family residential and home equity lines of credit, a restructure often occurs with past due loans and may be offered as an alternative to foreclosure. There are other situations where borrowers, who are not past due, experience a sudden job loss, become over-extended with credit obligations, or other problems, have indicated that they will be unable to make the required monthly payment and request payment relief.

When considering a loan restructure, management will determine if: (i) the financial distress is short or long term; (ii) loan concessions are necessary; and (iii) the restructure is a viable solution.

When a loan is restructured, the new terms often require a reduced monthly debt service payment. For commercial loans, management completes an analysis of the operating entity’s ability to repay the debt. If the operating entity is capable of servicing the new debt service requirements and the underlying collateral value is believed to be sufficient to repay the debt in the event of a future default, the new loan is generally placed on accrual status. To date, there have been no commercial loans restructured and immediately placed on accrual status after the execution of the TDR.

For retail loans, an analysis of the individual’s ability to service the new required payments is performed. If the borrower is capable of servicing the newly restructured debt and the underlying collateral value is believed to be sufficient to repay the debt in the event of a future default, the new loan is generally placed on accrual status. The reason for the TDR is also considered, such as paying past due real estate taxes or payments caused by a temporary job loss, when determining whether a retail TDR loan could be returned to accrual status. Retail TDRs remain on non-accrual status until sufficient payments have been made to bring the past due principal and interest current at which point the loan would be transferred to accrual status.

The following table summarizes the loans that have been restructured as TDRs during the three months ended March 31, 2012:



	Three Months Ended March 31, 2012
	Count	Balance prior to TDR		Balance after TDR
	(Dollars in thousands)
Commercial loans:
Commercial real estate:
Owner occupied	2	$	259	$	305
Non-owner occupied	1	66		83
Total commercial loans	3	325		388

Retail loans – one-to-four family residential	6	486		517
Total loans	9	$	811	$	905

Default occurs when a TDR is 90 days or more past due, transferred to non-accrual status, or transferred to other real estate owned within twelve months of restructuring. The Company did not have any TDRs that defaulted during the three months ended March 31, 2012.

The tables below summarize the Company’s TDRs by loan category and accrual status:



	March 31, 2012						December 31, 2011
	Accruing		Non-accruing		Total		Accruing		Non-accruing		Total
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	1,392	$	250	$	1,642	$	2,167	$	259	$	2,426
Commercial real estate:
Owner occupied	671		2,253		2,924		369		2,272		2,641
Non-owner occupied	3,888		10,921		14,809		3,814		11,095		14,909
Multifamily	257		—		257		259		—		259
Commercial construction and land development	—		—		—		—		—		—
Commercial participations	—		2,083		2,083		—		1,748		1,748
Total commercial	6,208		15,507		21,715		6,609		15,374		21,983

Retail loans – one-to-four family residential	1,871		2,297		4,168		2,266		1,600		3,866
Total troubled debt restructurings	$	8,079	$	17,804	$	25,883	$	8,875	$	16,974	$	25,849

At March 31, 2012, TDRs totaled $25.9 million, of which $5.9 million were performing in accordance with their modified terms and accruing. The Company’s TDRs which are performing in accordance with their agreements and on non-accrual status totaled $11.4 million at March 31, 2012.

Management monitors the TDRs based on the type of modification or concession granted to the borrower. These types of modifications may include rate reductions, payment/term extensions, forgiveness of principal, forbearance, and other applicable actions. Of the various noted concessions, management predominantly utilizes rate reductions and lower monthly payments, either from a longer amortization period or interest only repayment schedule, because these concessions provide needed payment relief without risking the loss of principal. Management will also agree to a forbearance agreement when it is deemed appropriate to avoid foreclosure.

The following tables set forth the Company’s TDRs by portfolio segment to quantify the type of modification or concession provided:



	March 31, 2012
			Commercial Real Estate
	Commercial and Industrial		Owner Occupied		Non-Owner Occupied		Multifamily		Commercial Participations		One-to-four Family Residential		Total
	(Dollars in thousands)
Rate reduction	$	—	$	—	$	—	$	—	$	—	$	1,042	$	1,042
Payment extension	1,642		2,283		2,225		—		—		784		6,934
Rate reduction and payment extension	—		305		623		257		—		1,300		2,485
Rate reduction and interest only	—		—		3,041		—		—		1,042		4,083
Payment extension and interest only	—		289		—		—		—		—		289
Forbearance	—		—		2,956		—		2,083		—		5,039
Rate reduction, payment extension, interest only, and forbearance	—		46		—		—		—		—		46
A/B note structure	—		—		5,965		—		—		—		5,965
Total troubled debt restructurings	$	1,642	$	2,923	$	14,810	$	257	$	2,083	$	4,168	$	25,883



	December 31, 2011
			Commercial Real Estate
	Commercial and Industrial		Owner Occupied		Non-Owner Occupied		Multifamily		Commercial Participations		One-to-four Family Residential		Total
	(Dollars in thousands)
Rate reduction	$	—	$	—	$	—	$	—	$	—	$	805	$	805
Payment extension	2,426		2,297		2,210		—		—		948		7,881
Rate reduction and payment extension	—		—		542		259		—		1,858		2,659
Rate reduction and interest only	—		—		9,054		—		—		255		9,309
Payment extension and interest only	—		297		—		—		—		—		297
Forbearance	—		—		3,103		—		1,748		—		4,851
Rate reduction, payment extension, interest only, and forbearance	—		47		—		—		—		—		47
Total troubled debt restructurings	$	2,426	$	2,641	$	14,909	$	259	$	1,748	$	3,866	$	25,849

At March 31, 2012, TDRs were relatively stable at $25.9 million from $25.8 million at December 31, 2011. The activity related to the Company’s TDRs is presented in the following table:



	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands)
Beginning balance	$	25,849		$	39,581
Restructured loans identified as TDRs	872			1,307
Protective advances and miscellaneous	489			57
Repayments and payoffs	(1,327		)	(1,237		)
Ending balance	$	25,883		$	39,708