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Loans

6 Months Ended

Jun. 30, 2011

Note 4: Loans

Geographic distributions of loans were as follows:

	June 30, 2011
	Illinois		Florida		Indiana		Total
	(dollars in thousands)

Commercial	$	379,665	$	11,848	$	24,485	$	415,998
Commercial real estate	818,173		142,170		40,071		1,000,414
Real estate construction	93,464		16,937		21,940		132,341
Retail real estate	446,630		131,554		9,352		587,536
Retail other	30,804		995		152		31,951
Total	$	1,768,736	$	303,504	$	96,000	$	2,168,240

Less held for sale(1)							24,880
							$	2,143,360

Less allowance for loan losses							69,329

Net loans							$	2,074,031

(1)Loans held for sale are included in retail real estate.

	December 31, 2010
	Illinois		Florida		Indiana		Total
	(dollars in thousands)

Commercial	$	395,629	$	17,523	$	26,241	$	439,393
Commercial real estate	887,601		140,734		44,482		1,072,817
Real estate construction	108,050		20,104		26,257		154,411
Retail real estate	501,871		141,914		13,311		657,096
Retail other	43,944		958		158		45,060
Total	$	1,937,095	$	321,233	$	110,449	$	2,368,777

Less held for sale(1)							49,684
							$	2,319,093

Less allowance for loan losses							76,038

Net loans							$	2,243,055

(1) Loans held for sale are included in retail real estate.

Net deferred loan origination costs included in the tables above were $0.8 million as of June 30, 2011 and December 31, 2010.

The Company believes that sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its stockholders, depositors, and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures in place designed to focus our lending efforts on the types, locations and duration of loans most appropriate for our business model and markets. While not specifically limited, the Company attempts to focus its lending on short to intermediate-term (0-7 years) loans in geographies within 125 miles of our lending offices. We make attempts to utilize government assisted lending programs, such as the Small Business Administration lending programs and United States Department of Agriculture lending programs, where prudent. Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals. The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

Management reviews and approves the Company’s lending policies and procedures on a routine basis. Management routinely (at least quarterly) reviews our allowance for loan losses and reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Our underwriting standards are designed to encourage relationship banking rather than transactional banking. Relationship banking implies a primary banking relationship with the borrower that includes, at minimum, an active deposit banking relationship in addition to the lending relationship. The integrity and character of the borrower are significant factors in our loan underwriting. As a part of underwriting, tangible positive or negative evidence of the borrower’s integrity and character are sought out. Additional significant underwriting factors beyond location, duration, the sound and profitable cash flow basis underlying the loan and the borrower’s character are the quality of the borrower’s financial history, the liquidity of the underlying collateral and the reliability of the valuation of the underlying collateral.

Total borrowing relationships, which include direct and indirect debt, are generally limited to $20 million, which is significantly less than our regulatory limit. Borrowing relationships exceeding $20 million are reviewed by our board of directors at least annually and more frequently by management. At no time is a borrower’s total borrowing relationship to exceed our regulatory lending limit. Loans to related parties, including executive officers and the Company’s various directorates, are reviewed for compliance with regulatory guidelines and by our board of directors at least annually.

The Company maintains an independent loan review department that reviews and validates the loans against the Company’s loan policy on a periodic basis. In addition to compliance with our policy, the loan review process reviews the risk assessments made by our credit department, lenders and loan committees. Results of these reviews are presented to management and the audit committee, at least quarterly.

The Company’s lending can be summarized into five primary areas; commercial loans, commercial real estate loans, real estate construction, retail real estate loans, and other retail loans. A description of each of the lending areas can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The significant majority of the lending activity occurs in the Company’s Illinois and Indiana markets, with the remainder in the Florida market. Due to the small scale of the Indiana loan portfolio and its geographical proximity to the Illinois portfolio, the Company believes that quantitative or qualitative segregation between Illinois and Indiana is not material or warranted.

The Company utilizes a loan grading scale to assign a risk grade to all of its loans. Loans are graded on a scale of 1 through 10 with grades 2,4 & 5 unused. A description of the general characteristics of the codes is as follows:

· Grades 1,3,6 — These grades include loans which are all considered strong credits with grade 1 being investment or near investment grade. A grade 3 loan is comprised of borrowers that exhibit credit fundamentals that exceed industry standards and loan policy guidelines. A grade 6 loan is comprised of borrowers that exhibit acceptable credit fundamentals.

· Grade 7- This grade includes loans on management’s “watch list” and is intended to be utilized on a temporary basis for a pass grade borrower where a significant risk-modifying action is anticipated in the near future.

· Grade 8- This grade is for “Other Assets Especially Mentioned” loans that have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the bank’s credit position at some future date.

· Grade 9- This grade includes “Substandard” loans, in accordance with regulatory guidelines, for which the accrual of interest has not been stopped. Assets so classified must have well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

· Grade 10- This grade includes “Doubtful” loans that have all the characteristics of a substandard loan with additional factors that make collection in full highly questionable and improbable. Such loans are placed on non-accrual status and may be dependent on collateral having a value that is difficult to determine.

All loans are graded at inception of the loan. All commercial and commercial real estate loans above $0.5 million with a grading of seven are reviewed annually and grade changes are made as necessary. All real estate construction loans above $0.5 million, regardless of the grade, are reviewed annually and grade changes are made as necessary. Interim grade reviews may take place if circumstances of the borrower warrant a more timely review. Further, loans graded eight or below are reviewed at least quarterly.

The following table presents weighted average risk grades segregated by class of loans (excluding held-for-sale, non posted and clearings):

	June 30, 2011
	Weighted Avg. Risk Grade	Grades 1,3,6		Grade 7		Grade 8		Grade 9		Grade 10
	(dollars in thousands)
Illinois/Indiana
Commercial	5.15	$	295,342	$	43,073	$	31,507	$	26,051	$	8,177
Commercial real estate	5.95	574,193		122,751		77,718		71,285		12,297
Real estate construction	7.48	31,219		14,349		43,467		20,111		6,258
Retail real estate	3.72	405,736		8,758		3,891		5,182		6,319
Retail other	3.32	27,011		2,566		463		887		29
Total Illinois/Indiana		$	1,333,501	$	191,497	$	157,046	$	123,516	$	33,080

Florida
Commercial	6.78	$	5,807	$	3,544	$	647	$	317	$	1,533
Commercial real estate	6.64	71,241		10,874		32,891		18,399		8,765
Real estate construction	8.13	798		597		12,641		827		2,074
Retail real estate	4.26	95,791		3,824		20,430		3,292		7,001
Retail other	2.67	988		4		—		—		3
Total Florida		$	174,625	$	18,843	$	66,609	$	22,835	$	19,376
Total		$	1,508,126	$	210,340	$	223,655	$	146,351	$	52,456

	December 31, 2010
	Weighted Avg. Risk Grade	Grades 1,3,6		Grade 7		Grade 8		Grade 9		Grade 10
	(dollars in thousands)
Illinois/Indiana
Commercial	5.20	$	292,027	$	52,761	$	26,526	$	34,233	$	16,323
Commercial real estate	5.86	660,520		109,553		76,311		72,831		12,868
Real estate construction	7.41	33,489		24,582		49,353		20,026		6,857
Retail real estate	3.72	433,371		12,288		6,781		3,860		5,615
Retail other	4.00	35,989		2,720		4,740		653		—
Total Illinois/Indiana		$	1,455,396	$	201,904	$	163,711	$	131,603	$	41,663

Florida
Commercial	6.45	$	12,777	$	257	$	913	$	302	$	3,274
Commercial real estate	6.65	69,758		10,270		34,881		14,905		10,920
Real estate construction	8.22	525		927		12,874		3,321		2,457
Retail real estate	4.21	106,974		3,840		21,985		932		7,162
Retail other	3.42	805		16		127		—		10
Total Florida		$	190,839	$	15,310	$	70,780	$	19,460	$	23,823
Total		$	1,646,235	$	217,214	$	234,491	$	151,063	$	65,486

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of the principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

An age analysis of past due loans still accruing and non-accrual loans is as follows:

	June 30, 2011
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
	(dollars in thousands)
Illinois/Indiana
Commercial	$	1,537	$	115	$	50	$	8,177
Commercial real estate	2,439		669		711		12,297
Real estate construction	1,435		4,269		—		6,258
Retail real estate	4,719		1,624		403		6,319
Retail other	222		27		16		29
Total Illinois/Indiana	$	10,352	$	6,704	$	1,180	$	33,080

Florida
Commercial	$	—	$	—	$	—	$	1,533
Commercial real estate	—		—		—		8,765
Real estate construction	—		—		—		2,074
Retail real estate	—		—		134		7,001
Retail other	1		—		—		3
Total Florida	$	1	$	—	$	134	$	19,376
Total	$	10,353	$	6,704	$	1,314	$	52,456

	December 31, 2010
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
	(dollars in thousands)
Illinois/Indiana
Commercial	$	1,613	$	803	$	—	$	16,323
Commercial real estate	713		273		458		12,868
Real estate construction	—		620		—		6,857
Retail real estate	8,698		2,978		2,130		5,615
Retail other	2,226		653		30		—
Total Illinois/Indiana	$	13,250	$	5,327	$	2,618	$	41,663

Florida
Commercial	$	—	$	—	$	—	$	3,274
Commercial real estate	704		337		—		10,920
Real estate construction	175		—		—		2,457
Retail real estate	3,547		109		—		7,162
Retail other	28		—		—		10
Total Florida	$	4,454	$	446	$	—	$	23,823
Total	$	17,704	$	5,773	$	2,618	$	65,486

The gross interest income that would have been recorded in the three and six months ended June 30, 2011 if impaired loans had been current in accordance with their original terms was $0.9 million and $2.0 million, respectively. The amount of interest collected on those loans and recognized on a cash basis that was included in interest income was insignificant for the three and six months ended June 30, 2011.

A loan is impaired when, based on current information and events, it is probable the Company will be unable to collect scheduled payments of principal and interest payments when due according to the 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 loans 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. A loan is assessed for impairment by the Company if one of the following criteria is met: loans 60 days or more past due and over $0.25 million, loans graded eight over $0.5 million or loans graded nine or below.

Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures unless such loans are the subject of a restructuring agreement. Significant restructured loans are considered impaired in determining the adequacy of the allowance for loan loss.

The company will restructure loans for our customers who appear to be able to meet the terms of their loan over the long-term, but who may be unable to meet the terms of the loan in the near term due to individual circumstances. We consider the customer’s past performance, previous and current credit history, the individual circumstances surrounding the current difficulties and their plan to meet the terms of the loan in the future prior to restructuring the terms of the loan. Generally, loans are restructured through short-term interest-rate relief, short-term principal payment relief or short-term principal and interest payment relief. Once a restructured loan has gone 90+ days past due or is placed on non-accrual status, it is included in the non-performing loan totals above.

	June 30, 2011		December 31, 2010
	(dollars in thousands)
Restructured loans:
In compliance with modified terms	$	21,084	$	26,765
30 – 89 days past due	—		1,468
Included in non-performing loans	11,190		10,320
Total	$	32,274	$	38,553

All restructured loans are considered to be impaired for purposes of assessing the adequacy of the allowance for loan losses and for financial reporting purposes.

The following tables provide details of impaired loans, segregated by category, as of June 30, 2011 and December 31, 2010. The unpaid contractual principal balance represents the recorded balance prior to any partial charge-offs. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan. The average recorded investment is calculated using the most recent four quarters.

	June 30, 2011
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment

Commercial	$	21,510	$	7,525	$	2,618	$	10,143	$	925	$	15,304
Commercial real estate	38,943		18,677		12,850		31,527		5,256		38,031
Real estate construction	18,440		12,080		1,127		13,207		360		22,407
Retail real estate	38,933		28,822		538		29,360		120		35,645
Retail other	53		48		—		48		—		80
Total	$	117,879	$	67,152	$	17,133	$	84,285	$	6,661	$	111,467

	December 31, 2010
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment

Commercial	$	29,387	$	13,103	$	6,751	$	19,854	$	3,125	$	15,155
Commercial real estate	44,538		29,358		7,407		36,765		3,464		40,120
Real estate construction	20,564		14,635		989		15,624		404		34,829
Retail real estate	46,443		28,967		7,801		36,768		3,806		38,773
Retail other	43		41		—		41		—		91
Total	$	140,975	$	86,104	$	22,948	$	109,052	$	10,799	$	128,968

Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

Allowance for Loan Losses

The allowance for loan losses represents a conservative estimate of the amount of losses believed inherent in our loan portfolio at the balance sheet date. The allowance calculation involves a high degree of estimation that management attempts to mitigate through the use of objective historical data where available. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Overall, we believe the allowance to be consistent with prior periods and adequate to cover the estimated losses in our loan portfolio at June 30, 2011 and December 31, 2010.

The allowance for loan losses is evaluated geographically, by class of loans. The significant majority of the lending activity occurs in the Company’s Illinois markets, with the remaining in the Florida and Indiana markets. Due to the small scale of the Indiana loan portfolio and its geographical proximity to the Illinois portfolio, the Company believes that quantitative or qualitative segregation between Illinois and Indiana is not material or warranted.

The general portion of the Company’s allowance contains two components: (i) a component for historical loss ratios, and (ii) a component for adversely graded loans. The historical loss ratio component is calculated using a sum-of-years digits weighted 20 quarter historical average, where the most recent four quarters are the most heavily weighted.

The Company’s component for adversely graded loans attempts to quantify the additional risk of loss inherent in the grade 8 and grade 9 portfolios. The grade 9 portfolio has an additional allocation placed on those loans determined by a one-year charge-off percentage for the respective loan type/geography. The minimum additional reserve on a grade 9 loan was 3.25% and 3% as of June 30, 2011 and December 31, 2010, respectively, which is an estimate of the additional loss inherent in these loan grades based upon a review of overall historical charge-offs.

Grade 8 loans have an additional allocation placed on them determined by the trend difference of the respective loan type/geography’s rolling 12 and 20 quarter historical loss trends, whereas if the rolling 12 quarter average is higher (more current information) than the rolling 20 quarter average, we add the additional amount to the allocation. The minimum additional amount for grade 8 loans is 1.25% based upon a review of the differences between the rolling 12 and 20 quarter historical loss averages by region.

The specific portion of the Company’s allowance relates to loans that are impaired, which includes non-performing loans, troubled debt restructurings and other loans determined to be impaired. The impaired loans are subtracted from the general loans and are allocated specific reserves as discussed above.

Impaired loans are reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Collateral values are estimated using a combination of observable inputs, including recent appraisals discounted for collateral specific changes and current market conditions and unobservable inputs based on customized discounting criteria. Due to the significant and rapid decline in real estate valuations in southwest Florida in recent years, valuations of collateral in this market are largely based upon current market conditions and unobservable inputs, which typically indicate a value less than appraised value.

The historical general quantitative allocation is adjusted for qualitative factors based on current general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) Management & Staff; (ii) Loan Underwriting, Policy and Procedures; (iii) Internal/External Audit & Loan Review; (iv) Valuation of Underlying Collateral; (v) Macro and Local Economic Factor; (vi) Impact of Competition, Legal & Regulatory issues; (vii) Nature and Volume of Loan Portfolio; (viii) Concentrations of Credit; (ix) Net Charge-Off Trend; and (x) Non-Accrual, Past Due and Classified Trend. Management evaluates the degree of risk that each one of these components has on quality of the loan portfolio on a quarterly basis. Based on each component’s risk factor, a qualitative adjustment to the reserve may be applied to the appropriate loan categories.

The following table details activity on the allowance for loan losses. Allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories.

	For the three months ended June 30, 2011
	Commercial		Commercial Real Estate			Real Estate Construction			Retail Real Estate		Retail Other		Unallocated		Total

Beginning balance	$	12,667	$	35,021		$	10,856		$	15,508	$	797	$	—	$	74,849
Provision for loan loss	2,432		(407		)	(225		)	2,003		1,197		—		5,000
Charged-off	3,639		4,572			832			3,794		148		—		12,985
Recoveries	334		92			217			771		1,051		—		2,465
Ending Balance	$	11,794	$	30,134		$	10,016		$	14,488	$	2,897	$	—	$	69,329

	For the three months ended June 30, 2010
	Commercial			Commercial Real Estate		Real Estate Construction		Retail Real Estate		Retail Other		Unallocated		Total

Beginning balance	$	21,996		$	35,611	$	20,806	$	12,661	$	3,855	$	—	$	94,929
Provision for loan loss	(3,576		)	2,002		4,501		2,179		2,394		—		7,500
Charged-off	1,092			5,102		5,888		4,307		699		—		17,088
Recoveries	27			55		5,399		1,226		81		—		6,788
Ending Balance	$	17,355		$	32,566	$	24,818	$	11,759	$	5,631	$	—	$	92,129

	As of and for the six months ended June 30, 2011
	Commercial		Commercial Real Estate		Real Estate Construction			Retail Real Estate		Retail Other			Unallocated		Total

Beginning balance	$	13,840	$	32,795	$	11,903		$	14,947	$	2,553		$	—	$	76,038
Provision for loan loss	4,093		2,558		(660		)	4,594		(585		)	—		10,000
Charged-off	7,620		5,423		2,316			6,029		299			—		21,687
Recoveries	1,481		204		1,089			976		1,228			—		4,978
Ending Balance	$	11,794	$	30,134	$	10,016		$	14,488	$	2,897		$	—	$	69,329

Amount allocated to:
Loans individually evaluated for impairment	$	925	$	5,256	$	360		$	120	$	—		$	—	$	6,661
Loans collectively evaluated for impairment	$	10,869	$	24,878	$	9,656		$	14,368	$	2,897		$	—	$	62,668
Ending Balance	$	11,794	$	30,134	$	10,016		$	14,488	$	2,897		$	—	$	69,329

Loans:
Loans individually evaluated for impairment	$	10,143	$	31,527	$	13,207		$	29,360	$	48		$	—	$	84,285
Loans collectively evaluated for impairment	$	405,855	$	968,887	$	119,134		$	558,176	$	31,903		$	—	$	2,083,955
Ending Balance	$	415,998	$	1,000,414	$	132,341		$	587,536	$	31,951		$	—	$	2,168,240

	As of and for the six months ended June 30, 2010
	Commercial		Commercial Real Estate		Real Estate Construction			Retail Real Estate		Retail Other		Unallocated		Total

Beginning balance	$	9,824	$	38,249	$	37,490		$	12,753	$	1,440	$	423	$	100,179
Provision for loan loss	10,852		4,999		(3,473		)	4,400		5,422		—		22,200
Charged-off	3,364		12,962		17,390			7,409		1,397		423		42,945
Recoveries	43		2,280		8,191			2,015		166		—		12,695
Ending Balance	$	17,355	$	32,566	$	24,818		$	11,759	$	5,631	$	—	$	92,129

Amount allocated to:
Loans individually evaluated for impairment	$	1,215	$	691	$	6,272		$	5,017	$	—	$	—	$	13,195
Loans collectively evaluated for impairment	$	16,140	$	31,875	$	18,546		$	6,742	$	5,631	$	—	$	78,934
Ending Balance	$	17,355	$	32,566	$	24,818		$	11,759	$	5,631	$	—	$	92,129

Loans:
Loans individually evaluated for impairment	$	10,215	$	49,178	$	37,918		$	43,111	$	272	$	—	$	140,694
Loans collectively evaluated for impairment	$	463,874	$	1,105,273	$	191,508		$	654,927	$	63,254	$	—	$	2,478,836
Ending Balance	$	474,089	$	1,154,451	$	229,426		$	698,038	$	63,526	$	—	$	2,619,530