Loans

6 Months Ended

Jun. 30, 2012

Loans [Abstract]

Loans

NOTE 6 – LOANS

Loans and Loan Income: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances as adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

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. 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 placed on nonaccrual or 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.

Discounts and premiums on purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.

Allowance for Loan Losses: The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Company 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.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The Company has a geographic concentration of loan and deposit customers within the Chicago metropolitan area. Most of the loans are secured by specific items of collateral including commercial and residential real estate and other business and consumer assets. Commercial loans are expected to be repaid from cash flow from operations of businesses.

Loans consisted of the following at June 30, 2012 and December 31, 2011, respectively:

	June 30,			December 31,
	2012			2011
Real estate
Commercial	$	94,535		$	94,513
Construction		1,881			4,361
Residential		18,386			21,054
Home equity		56,502			59,176
Total real estate loans		171,304			179,104
Commercial		25,649			26,203
Consumer		1,326			1,392
Total loans		198,279			206,699
Deferred loan costs, net		224			265
Allowance for loan losses		(5,168	)		(8,854	)
Loans, net	$	193,335		$	198,110

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

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate

These 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 on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Construction

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. 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 and the availability of long-term financing.

Residential and Consumer, including Home Equity Lines of Credit (HELOC)

With respect to residential loans that are secured by one-to-four family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and may require private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one-to-four family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Policy for charging off loans:

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral.

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except one-to-four family residential loans and consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off one-to-four family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of one-to-four family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

Policy for determining delinquency:

The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

Period utilized for determining historical loss factors:

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years. Management believes the three year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed.

Policy for recognizing interest income on impaired loans:

Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

Policy for recognizing interest income on non-accrual loans:

Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

The Bank has entered into transactions, including the making of direct and indirect loans, with certain directors and their affiliates (related parties). Such transactions were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectibility or present other unfavorable features.

The aggregate amount of loans, as defined, to such related parties were as follows:

Balances, January 1, 2012	$	3,281
New loans including renewals		2,164
Payments, etc., including renewals		(3,082	)
Balances, June 30, 2012	$	2,363

The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the six months ended June 30, 2012:

	Commercial			Commercial Real Estate			Construction			Consumer			Residential			HELOC			Total
Balance at beginning of period	$	695		$	4,171		$	1,768		$	18		$	804		$	1,398		$	8,854
Provision for loan losses		243			732			—			4			(94	)		72			957
Charge-offs		(295	)		(1,857	)		(1,740	)		(4	)		(456	)		(325	)		(4,677	)
Recoveries		9			4			—			—			21			—			34
Balance at end of period	$	652		$	3,050		$	28		$	18		$	275		$	1,145		$	5,168
Ending balance: individually evaluated for impairment	$	—		$	1,743		$	—		$	—		$	25		$	838		$	2,606
Ending balance: collectively evaluated for impairment	$	652		$	1,307		$	28		$	18		$	250		$	307		$	2,562
Total Loans:
Ending balance	$	25,649		$	94,535		$	1,881		$	1,326		$	18,386		$	56,502		$	198,279
Ending balance: individually evaluated for impairment	$	—		$	6,232		$	—		$	—		$	840		$	2,661		$	9,733
Ending balance: collectively evaluated for impairment	$	25,649		$	88,303		$	1,881		$	1,326		$	17,546		$	53,841		$	188,546

The following table presents the changes in the allowance for loan losses for the three months ended June 30, 2012:

	Commercial			Commercial Real Estate			Construction			Consumer			Residential			HELOC			Unallocated		Total
Balance at beginning of period	$	694		$	3,139		$	34		$	20		$	367		$	1,441		$	—	$	5,695
Provision for loan losses		244			552			(6	)		2			(44	)		29			—		777
Charge-offs		(295	)		(644	)		—			(4	)		(55	)		(325	)		—		(1,323	)
Recoveries		9			4			—			—			6			—			—		19
Balance at end of period	$	652		$	3,051		$	28		$	18		$	274		$	1,145		$	—	$	5,168

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

	Commercial		Commercial Real Estate		Construction		Consumer		Residential		HELOC		Unallocated		Total
Ending balance: individually evaluated for impairment	$	39	$	3,002	$	1,740	$	—	$	451	$	977	$	—	$	6,209
Ending balance: collectively evaluated for impairment	$	656	$	1,214	$	28	$	19	$	352	$	376	$	—	$	2,645
Total Loans:
Ending balance	$	26,203	$	94,513	$	4,361	$	1,392	$	21,054	$	59,176	$	—	$	206,699
Ending balance: individually evaluated for impairment	$	39	$	6,671	$	2,175	$	—	$	3,709	$	2,659	$	—	$	15,253
Ending balance: collectively evaluated for impairment	$	26,164	$	87,842	$	2,186	$	1,392	$	17,345	$	56,517	$	—	$	191,446

The following table summarizes the Company’s nonaccrual loans by class at June 30, 2012 and December 31, 2011.

	June 30, 2012		December 31, 2011
Commercial	$	—	$	39
Consumer		—		—
Real estate loans:
Construction		—		2,175
Commercial		4,337		4,721
Residential		433		4,187
Home equity		2,661		2,677
Total	$	7,431	$	13,799

The following table presents impaired loans as of June 30, 2012:

	Recorded Balance		Unpaid Principal Balance		Specific Allowance
With no related allowance recorded:
Commercial real estate	$	1,895	$	1,895	$	—
Construction		—		—		—
Residential		407		407		—
HELOC		165		165		—
Subtotal		2,467		2,467		—
With an allowance recorded:
Commercial		—		—		—
Commercial real estate		4,337		4,337		1,744
Construction		—		—		—
Residential		434		434		24
HELOC		2,495		2,495		838
Subtotal		7,266		7,266		2,606
Total Impaired Loans	$	9,733	$	9,733	$	2,606

	Three Months Ended June 30,								Six Months Ended June 30,
	2012				2011				2012				2011
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	1,899	$	21	$	—	$	—	$	1,466	$	37	$	—	$	—
Construction		—		—		572		—		—		—		572		—
Residential		1,189		3		2,576		—		1,836		5		2,578		—
HELOC		165		—		526		—		165		—		523		1
Subtotal		3,253		24		3,674		—		3,467		42		3,673		1
With an allowance recorded:
Commercial		—		—		—		—		—		—		—		—
Commercial real estate		3,942		17		4,563		76		3,940		53		4,182		117
Construction		—		—		2,150		—		—		—		2,150		—
Residential		435		2		5,400		15		435		4		5,400		34
HELOC		2,505		3		1,254		4		2,505		—		1,256		4
Subtotal		6,882		22		13,367		95		6,880		57		12,988		155
Total Impaired Loans	$	10,135	$	46	$	17,041	$	95	$	10,347	$	99	$	16,661	$	156

The following table presents impaired loans as of December 31, 2011:

	Recorded Balance		Unpaid Principal Balance		Specific Allowance
With no related allowance recorded:
Construction	$	25	$	776	$	—
Residential		2,353		2,353		—
HELOC		510		510		—
Subtotal		2,888		3,639		—
With an allowance recorded:
Commercial		39		39		39
Commercial real estate		6,671		6,671		3,002
Construction		2,150		2,150		1,740
Residential		1,356		1,355		451
HELOC		2,149		2,149		977
Subtotal		12,365		12,364		6,209
Total Impaired Loans	$	15,253	$	16,003	$	6,209

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 and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed during the loan approval process and is updated as circumstances warrant. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date.

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

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

The following tables summarize credit quality of the Company at June 30, 2012 and December 31, 2011:

	June 30, 2012
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial	$	24,615	$	762	$	272	$	—	$	—	$	25,649
Real estate loans:
Construction		1,881		—		—		—		—		1,881
Commercial real estate		85,798		3,403		5,334		—		—		94,535
Residential		13,896		2,994		1,496		—		—		18,386
Home equity		52,731		611		3,160		—		—		56,502
Individuals loans for household and other personal expenditures		1,326		—		—		—		—		1,326
Total	$	180,247	$	7,770	$	10,262	$	—	$	—	$	198,279

	December 31, 2011
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial	$	24,582	$	910	$	711	$	—	$	—	$	26,203
Real estate loans:
Construction		1,144		—		3,217		—		—		4,361
Commercial real estate		84,492		3,351		6,670		—		—		94,513
Residential		12,042		3,804		5,208		—		—		21,054
Home equity		54,665		530		3,981		—		—		59,176
Individuals loans for household and other personal expenditures		1,392		—		—		—		—		1,392
Total	$	178,317	$	8,595	$	19,787	$	—	$	—	$	206,699

The following tables summarize past due aging of the Company’s loan portfolio at June 30, 2012 and December 31, 2011:

	June 30, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Loans > 90 Days and Accruing
Commercial	$	55	$	—	$	—	$	55	$	25,594	$	25,649	$	—
Real estate loans:
Construction		—		—		—		—		1,881		1,881		—
Commercial real estate		475		207		4,767		5,449		89,086		94,535		430
Residential		211		870		434		1,515		16,871		18,386		—
Home equity		687		—		2,661		3,348		53,154		56,502		—
Individuals loans for household and other personal expenditures		1		—		—		1		1,325		1,326		—
Total	$	1,429	$	1,077	$	7,862	$	10,368	$	187,911	$	198,279	$	430
	December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Loans > 90 Days and Accruing
Commercial	$	—	$	—	$	39	$	39	$	26,164	$	26,203	$	—
Real estate loans:
Construction		—		—		2,175		2,175		2,186		4,361		—
Commercial real estate		674		—		4,721		5,395		89,118		94,513		—
Residential		204		43		4,187		4,434		16,620		21,054		—
Home equity		60		463		2,677		3,200		55,976		59,176		—
Individuals loans for household and other personal expenditures		—		—		—		—		1,392		1,392		—
Total	$	938	$	506	$	13,799	$	15,243	$	191,456	$	206,699	$	—

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 interest 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 overextended 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. No TDRs that were on non-accrual status at the time the concessions were granted have been returned to accrual status. 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 default, the new loan is generally placed on accrual status.

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 and six months ended June 30, 2012:

	Three months ended June 30, 2012						Six months ended June 30, 2012
	Count		Balance  Prior to TDR		Balance after TDR		Count		Balance  Prior to TDR		Balance after TDR
Real estate loans:
Commercial real estate		2	$	997	$	997		2	$	997	$	997
Residential		1		229		229		2		636		636
Total		3	$	1,226	$	1,226		4	$	1,633	$	1,633

The following table sets forth the Company’s TDRs that had payment defaults during the six months ended June 30, 2012. 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.

			Default
	Count		Balance
Real estate loans:
Commercial real estate		3	$	4,337
Residential		2		584
Total		5	$	4,921