Note 4. Loans

Geographic distributions of loans were as follows:

	December 31, 2012
	Illinois		Florida		Indiana		Total
	(dollars in thousands)

Commercial	$	399,300	$	10,861	$	23,527	$	433,688
Commercial real estate	777,752		138,170		65,210		981,132
Real estate construction	67,152		15,972		2,977		86,101
Retail real estate	435,911		112,052		11,873		559,836
Retail other	11,831		409		113		12,353
Total	$	1,691,946	$	277,464	$	103,700	$	2,073,110

Less held for sale(1)							40,003
							$	2,033,107

Less allowance for loan losses							48,012

Net loans							$	1,985,095

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

	December 31, 2011
	Illinois		Florida		Indiana		Total
	(dollars in thousands)

Commercial	$	375,238	$	10,830	$	21,787	$	407,855
Commercial real estate	793,769		135,360		51,087		980,216
Real estate construction	72,569		16,186		16,110		104,865
Retail real estate	410,844		120,190		9,112		540,146
Retail other	17,547		581		134		18,262
Total	$	1,669,967	$	283,147	$	98,230	$	2,051,344

Less held for sale(1)							15,249
							$	2,036,095

Less allowance for loan losses							58,506

Net loans							$	1,977,589

(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 and $0.7 million as of December 31, 2012 and 2011, respectively.

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 designed to focus lending efforts on the types, locations and duration of loans most appropriate for its 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 its lending offices. The Company attempts to utilize government assisted lending programs, such as the Small Business Administration 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 primarily 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 the Company’s allowance for loan losses and reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. The Company’s 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 a minimum, an active deposit banking relationship in addition to the lending relationship. The integrity and character of the borrower are significant factors in the Company’s 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, a sound and profitable cash flow basis 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, including direct and indirect debt, are generally limited to $20 million, which is significantly less than the Company’s regulatory lending limit. Borrowing relationships exceeding $20 million are reviewed by the Company’s board of directors at least annually and more frequently by management. At no time is a borrower’s total borrowing relationship permitted to exceed the Company’s 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 the Company’s board of directors at least annually.

The Company maintains an independent loan review department that reviews the loans for compliance with the Company’s loan policy on a periodic basis. In addition to compliance with this policy, the loan review process reviews the risk assessments made by the Company’s 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 loans, retail real estate loans, and other retail loans. 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.

Commercial Loans

Commercial loans typically comprise working capital loans or business expansion loans, including loans for asset purchases and other business loans. Commercial loans will generally be guaranteed in full or a significant amount by the primary owners of the business. Commercial loans are made based primarily on the historical and projected cash flow of the underlying borrower and secondarily on the underlying assets pledged as collateral by the borrower. The cash flows of the underlying borrower, however, may not perform consistently with historical or projected information. Further, the collateral securing loans may fluctuate in value due to individual economic or other factors. The Company has established minimum standards and underwriting guidelines for all commercial loan types.

Commercial Real Estate Loans

The Company is primarily located in markets with significant academic presence. The academic presence in addition to the commercial environment provides for the majority of our commercial lending opportunities to be commercial real estate related, including multi-unit housing. As the majority of our loan portfolio is within the commercial real estate class, our goal is to maintain a high quality, geographically diverse portfolio of commercial real estate loans. Commercial real estate loans are subject to underwriting standards and guidelines similar to commercial loans. Commercial real estate loans will generally be guaranteed in full or a significant amount by the primary owners of the business. The repayment of these loans is primarily dependent on the cash flows of the underlying property. However, the commercial real estate loan generally must be supported by an adequate underlying collateral value. The performance and the value of the underlying property may be adversely affected by economic factors or geographical and/or industry specific factors. These loans are subject to other industry guidelines that are closely monitored by the Company.

Real Estate Construction Loans

Real estate construction loans are typically commercial in nature. The loan proceeds are controlled by the Company and distributed for the improvement of real estate in which the Company holds a mortgage. Real estate construction loans will generally be guaranteed in full or a significant amount by the developer or primary owners of the business. These loans are subject to underwriting standards and guidelines similar to commercial loans. The loan generally must be supported by an adequate “as completed” value of the underlying project. In addition to the underlying project, the financial history of the developer and business owners weighs significantly in determining approval. The repayment of these loans is typically through permanent financing following completion of the construction. Real estate construction loans are inherently more risky than loans on completed properties as the unimproved nature and the financial risks of construction significantly enhance the risks of commercial real estate loans. These loans are closely monitored and subject to other industry guidelines.

Retail Real Estate Loans

Retail real estate loans are comprised of direct consumer loans that include residential real estate, residential real estate construction loans, home equity lines of credit and home equity loans. The Company sells substantially all of its long-term (over 5 years) retail real estate loans to secondary market purchasers. The Company does retain retail real estate loans having terms typically five years or less. As retail real estate loan underwriting is subject to specific regulations, the Company typically underwrites its retail real estate loans to conform to widely accepted standards. Several factors are considered in underwriting including the value of the underlying real estate and the debt to income and credit history of the borrower.

Retail Other Loans

Retail other loans consist of installment loans to individuals, primarily automotive loans. These loans are centrally underwritten utilizing the borrower’s financial history, including the Fair Isaac Corporation (“FICO”) credit scoring and information as to the underlying collateral. Repayment is expected from the cash flow of the borrower.

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 grades 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 Company’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 the distinct possibility that the Company 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 the inception of the loan. All commercial and commercial real estate loans above $0.5 million with a grading of 7 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. All loans above $0.5 million which are graded 8 are reviewed quarterly. Further, all loans graded 9 or 10 are reviewed at least quarterly.

Loans in the highest grades, represented by grades 1, 3, 6 and 7, totaled $1.8 billion at December 31, 2012 and grew by $116.9 million from $1.7 billion at December 31, 2011. Loans in the lowest grades, represented by grades 8, 9 and 10, totaled $228.1 million at December 31, 2012 and declined by $115.4 million from $343.5 million at December 31, 2011. The positive change in mix of loan grades indicates a declining level of overall risk in the total loan portfolio.

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

	December 31, 2012
	Weighted Avg. Risk Grade	Grades 1,3,6		Grade 7		Grade 8		Grade 9		Grade 10
	(dollars in thousands)
Illinois/Indiana
Commercial	4.68	$	346,536	$	46,201	$	12,374	$	15,677	$	2,039
Commercial real estate	5.53	644,695		110,012		50,305		28,655		9,295
Real estate construction	7.21	30,710		7,809		14,162		14,084		3,364
Retail real estate	3.62	385,949		6,729		7,806		5,874		2,855
Retail other	3.34	11,563		372		—		9		—
Total Illinois/Indiana		$	1,419,453	$	171,123	$	84,647	$	64,299	$	17,553

Florida
Commercial	5.91	$	6,359	$	3,544	$	162	$	796	$	—
Commercial real estate	6.36	80,232		20,667		13,238		19,279		4,754
Real estate construction	6.97	4,137		7,721		3,172		942		—
Retail real estate	3.98	83,578		6,369		13,225		3,265		2,797
Retail other	2.80	391		—		18		—		—
Total Florida		$	174,697	$	38,301	$	29,815	$	24,282	$	7,551
Total		$	1,594,150	$	209,424	$	114,462	$	88,581	$	25,104

	December 31, 2011
	Weighted Avg. Risk Grade	Grades 1,3,6		Grade 7		Grade 8		Grade 9		Grade 10
	(dollars in thousands)
Illinois/Indiana
Commercial	5.12	$	298,332	$	43,566	$	28,172	$	17,884	$	9,071
Commercial real estate	5.75	617,247		95,553		69,185		54,670		8,201
Real estate construction	7.65	22,002		7,998		34,374		18,841		5,464
Retail real estate	3.67	378,355		8,581		3,561		4,041		4,768
Retail other	3.17	16,506		676		—		428		71
Total Illinois/Indiana		$	1,332,442	$	156,374	$	135,292	$	95,864	$	27,575

Florida
Commercial	6.32	$	5,471	$	4,329	$	191	$	271	$	568
Commercial real estate	6.44	73,021		21,296		18,677		17,124		5,242
Real estate construction	7.97	1,417		341		12,352		840		1,236
Retail real estate	4.14	89,195		2,227		20,071		4,470		3,719
Retail other	2.41	580		—		1		—		—
Total Florida		$	169,684	$	28,193	$	51,292	$	22,705	$	10,765
Total		$	1,502,126	$	184,567	$	186,584	$	118,569	$	38,340

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:

	December 31, 2012
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+ Days		loans
	(dollars in thousands)
Illinois/Indiana
Commercial	$	111	$	80	$	19	$	2,039
Commercial real estate	216		59		139		9,295
Real estate construction	—		—		—		3,364
Retail real estate	1,154		294		46		2,855
Retail other	2		2		—		—
Total Illinois/Indiana	$	1,483	$	435	$	204	$	17,553

Florida
Commercial	$	—	$	—	$	—	$	—
Commercial real estate	—		—		—		4,754
Real estate construction	—		—		—		—
Retail real estate	364		—		52		2,797
Retail other	—		3		—		—
Total Florida	$	364	$	3	$	52	$	7,551
Total	$	1,847	$	438	$	256	$	25,104

	December 31, 2011
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+ Days		loans
	(dollars in thousands)
Illinois/Indiana
Commercial	$	131	$	44	$	48	$	9,071
Commercial real estate	1,384		—		73		8,201
Real estate construction	—		—		—		5,464
Retail real estate	2,051		242		52		4,768
Retail other	23		2		—		71
Total Illinois/Indiana	$	3,589	$	288	$	173	$	27,575

Florida
Commercial	$	—	$	—	$	—	$	568
Commercial real estate	606		—		—		5,242
Real estate construction	—		—		—		1,236
Retail real estate	179		—		—		3,719
Retail other	—		50		—		—
Total Florida	$	785	$	50	$	—	$	10,765
Total	$	4,374	$	338	$	173	$	38,340

A loan is impaired when, based on current information and events, it is probable the Company will be unable to collect scheduled 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 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. The following loans are assessed for impairment by the Company: loans 60 days or more past due and over $0.25 million, loans graded 8 over $0.5 million and loans graded 9 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.

The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlement with the borrowers or guarantors, foreclosure of the underlying collateral, loan sales to outside parties or restructuring. During the years ended December 31, 2012 and 2011, the Company sold problem loans from its portfolio, net of charge-offs, of $22.1 million and $21.1 million, respectively.

The gross interest income that would have been recorded in the years ended December 31, 2012, 2011 and 2010 if impaired loans had been current in accordance with their original terms was $3.4 million, $6.0 million, and $9.2 million, respectively. The amount of interest collected on those loans and recognized on a cash basis that was included in interest income was insignificant in 2012 and $1.0 million and $1.6 million for the years ended December 31, 2011 and 2010, respectively.

The Company’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (“TDR”), where concessions have been granted to borrowers who have experienced financial difficulties. The Company will restructure loans for its 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.

The Company considers 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, all five primary areas of lending are restructured through short-term interest rate relief, short-term principal payment relief, short-term principal and interest payment relief, or forbearance (debt forgiveness). 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. A summary of restructured loans as of December 31, 2012 and December 31, 2011 is as follows:

	December 31, 2012		December 31, 2011
	(dollars in thousands)
Restructured loans:
In compliance with modified terms	$	22,023	$	32,380
30 – 89 days past due	28		1,257
Included in non-performing loans	6,458		12,601
Total	$	28,509	$	46,238

All TDRs are considered to be impaired for purposes of assessing the adequacy of the allowance for loan losses and for financial reporting purposes. When the Company modifies a loan in a TDR, it evaluates any possible impairment similar to other impaired loans based on 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. If the Company determines that the value of the TDR is less than the recorded investment in the loan, impairment is recognized through an allowance estimate in the period of the modification and in periods subsequent to the modification.

Performing loans classified as TDRs during the periods indicated, segregated by class, are shown below:

	Three Months Ended December 31, 2012			Twelve Months Ended December 31, 2012
	Number of contracts	Recorded investment		Number of contracts	Recorded investment
	(dollars in thousands)			(dollars in thousands)
Illinois/Indiana
Commercial	1	$	752	4	$	2,032
Commercial real estate	1	600		2	2,669
Real estate construction	—	—		2	3,029
Retail real estate	—	—		9	1,476
Retail other	—	—		—	—
Total Illinois/Indiana	2	$	1,352	17	$	9,206

Florida
Commercial	—	$	—	—	$	—
Commercial real estate	1	571		1	571
Real estate construction	—	—		—	—
Retail real estate	1	178		3	880
Retail other	—	—		—	—
Total Florida	2	$	749	4	$	1,451
Total	4	$	2,101	21	$	10,657

	Three Months Ended December 31, 2011			Twelve Months Ended December 31, 2011
	Number of contracts	Recorded investment		Number of contracts	Recorded investment
	(dollars in thousands)			(dollars in thousands)
Illinois/Indiana
Commercial	7	$	4,859	7	$	4,859
Commercial real estate	3	1,559		4	6,996
Real estate construction	1	1,615		1	1,615
Retail real estate	3	837		3	838
Retail other	—	—		—	—
Total Illinois/Indiana	14	$	8,870	15	$	14,308

Florida
Commercial	—	$	—	—	$	—
Commercial real estate	1	221		2	1,284
Real estate construction	—	—		—	—
Retail real estate	2	1,039		6	1,640
Retail other	—	—		—	—
Total Florida	3	$	1,260	8	$	2,924
Total	17	$	10,130	23	$	17,232

The commercial TDRs for the three and twelve months ended December 31, 2012 were short-term principal payment relief. The commercial real estate TDRs for the three months ended December 31, 2012 consisted of two modifications for short-term principal payment relief. The commercial real estate TDRs for the twelve months ended December 31, 2012 consisted of one modification for short-term interest-rate relief totaling $2.0 million and two modifications for short-term principal payment relief totaling $1.2 million. The real estate construction TDRs for the twelve months ended December 31, 2012 were a short-term principal payment relief modification totaling $0.2 million and a modification for a forbearance agreement totaling $2.8 million. The retail real estate TDR for the three months ended December 31, 2012 consisted of a modification for short-term interest-rate relief. The retail real estate TDRs for the twelve months ended December 31, 2012 consisted of four modification for short-term interest-rate relief totaling $1.0 million and eight modifications for short-term principal payment relief totaling $1.4 million.

The seven commercial TDRs totaling $4.9 million for the three and twelve months ended December 31, 2011 were short-term principal payment relief. The commercial real estate TDRs for the three months ended December 31, 2011 consisted of two modifications for short-term principal payment relief totaling $0.5 million and two modifications of forbearance agreements totaling $1.3 million. The commercial real estate TDRs for the twelve months ended December 31, 2011 consisted of two modifications for short-term interest-rate relief totaling $6.5 million, two modifications for short-term principal payment relief totaling $0.5 million, and two modifications for forbearance agreements totaling $1.3 million. The real estate construction TDR for the three and twelve months ended December 31, 2011 was a short-term principal payment relief modification. The retail real estate TDRs for the three months ended December 31, 2011 consisted of one modification for short-term interest-rate relief totaling $0.1 million and four modifications for short-term principal payment relief totaling $1.8 million. The retail real estate TDRs for the twelve months ended December 31, 2011 consisted of five modification for short-term interest-rate relief totaling $0.7 million and four modifications for short-term principal payment relief totaling $1.8 million.

The gross interest income that would have been recorded in the three and twelve months ended December 31, 2012 and 2011 if performing TDRs had been in accordance with their original terms instead of modified terms was insignificant.

TDRs that were classified as non-performing and had payment defaults (a default occurs when a loan is 90 days or more past due or transferred to non-accrual), segregated by class, are shown below:

	Three Months Ended December 31, 2012			Twelve Months Ended December 31, 2012
	Number of contracts	Recorded investment		Number of contracts	Recorded investment
	(dollars in thousands)			(dollars in thousands)
Illinois/Indiana
Commercial	—	$	—	5	$	309
Commercial real estate	—	—		—	—
Real estate construction	—	—		—	—
Retail real estate	1	232		1	232
Retail other	—	—		—	—
Total Illinois/Indiana	1	$	232	6	$	541

Florida
Commercial	—	$	—	—	$	—
Commercial real estate	—	—		3	1,287
Real estate construction	—	—		—	—
Retail real estate	1	142		4	778
Retail other	—	—		—	—
Total Florida	1	$	142	7	$	2,065
Total	2	$	374	13	$	2,606

	Three Months Ended December 31, 2011			Twelve Months Ended December 31, 2011
	Number of contracts	Recorded investment		Number of contracts	Recorded investment
	(dollars in thousands)			(dollars in thousands)
Illinois/Indiana
Commercial	5	$	2,971	5	$	2,971
Commercial real estate	4	1,624		5	4,124
Real estate construction	1	438		1	438
Retail real estate	—	—		—	—
Retail other	—	—		—	—
Total Illinois/Indiana	10	$	5,033	11	$	7,533

Florida
Commercial	—	$	—	—	$	—
Commercial real estate	1	826		1	826
Real estate construction	—	—		1	271
Retail real estate	9	1,778		11	3,241
Retail other	—	—		—	—
Total Florida	10	$	2,604	13	$	4,338
Total	20	$	7,637	24	$	11,871

The following tables provide details of impaired loans, segregated by category. 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.

	December 31, 2012
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
	(dollars in thousands)
Illinois/Indiana
Commercial	$	11,557	$	7,214	$	265	$	7,479	$	265	$	10,109
Commercial real estate	17,656		12,020		1,288		13,308		634		14,607
Real estate construction	6,851		6,394		—		6,394		—		8,625
Retail real estate	6,251		4,666		530		5,196		140		5,206
Retail other	—		—		—		—		—		24
Total Illinois/Indiana	$	42,315	$	30,294	$	2,083	$	32,377	$	1,039	$	38,571

Florida
Commercial	$	—	$	—	$	—	$	—	$	—	$	271
Commercial real estate	9,533		5,988		585		6,573		235		6,506
Real estate construction	2,597		2,597		—		2,597		—		3,989
Retail real estate	16,518		12,673		1,373		14,046		483		15,254
Retail other	—		—		—		—		—		—
Total Florida	$	28,648	$	21,258	$	1,958	$	23,216	$	718	$	26,020
Total	$	70,963	$	51,552	$	4,041	$	55,593	$	1,757	$	64,591

	December 31, 2011
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
	(dollars in thousands)
Illinois/Indiana
Commercial	$	18,524	$	11,090	$	2,889	$	13,979	$	697	$	11,495
Commercial real estate	22,408		15,270		4,134		19,404		1,421		20,059
Real estate construction	7,746		7,079		—		7,079		—		6,552
Retail real estate	7,669		5,657		—		5,657		—		6,820
Retail other	71		71		—		71		—		37
Total Illinois/Indiana	$	56,418	$	39,167	$	7,023	$	46,190	$	2,118	$	44,963

Florida
Commercial	$	1,088	$	568	$	—	$	568	$	—	$	2,046
Commercial real estate	9,011		5,699		826		6,525		826		12,572
Real estate construction	7,994		5,238		—		5,238		—		6,758
Retail real estate	20,928		17,762		—		17,762		—		21,928
Retail other	—		—		—		—		—		4
Total Florida	$	39,021	$	29,267	$	826	$	30,093	$	826	$	43,308
Total	$	95,439	$	68,434	$	7,849	$	76,283	$	2,944	$	88,271

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 an estimate of the amount of losses believed inherent in the Company’s loan portfolio at the balance sheet date. The allowance for loan losses is evaluated geographically, by class of loans. 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, the Company believes the allowance methodology is consistent with prior periods and the balance is adequate to cover the estimated losses in the Company’s loan portfolio at December 31, 2012 and December 31, 2011.

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 an annualized loss rate calculated using a sum-of-years digits weighted 20 quarter historical average.

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 3.00% and 3.25% as of December 31, 2012 and December 31, 2011, respectively, which is an estimate of the additional loss inherent in these loan grades based upon a review of overall historical charge-offs. The minimum additional reserve on grade 9 loans was decreased to 3.00% from 3.25% at March 31, 2012. As of December 31, 2012, the Company believed this minimum reserve remained adequate.

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. If the rolling 12 quarter average is higher (more current information) than the rolling 20 quarter average, the Company adds the additional amount to the allocation. The minimum additional amount for grade 8 loans was 1.00% and 1.25% as of December 31, 2012 and December 31, 2011, respectively, based upon a review of the differences between the rolling 12 and 20 quarter historical loss averages by region. The Company decreased the minimum additional amount for grade 8 loans to 1.00% from 1.25% at March 31, 2012. As of December 31, 2012, the Company believed this minimum additional amount remained adequate.

The specific portion of the Company’s allowance relates to loans that are impaired, which includes non-performing loans, TDRs 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.

The general quantitative allocation based upon historical charge off rates 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 the 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.

During the first quarter of 2012, we adjusted Illinois/Indiana and Florida qualitative factors relating to Valuation of Underlying Collateral, Macro and Local Economic Factor, Impact of Competition, Legal & Regulatory Issues, Nature and Volume of Loan Portfolio, Net Charge-Off Trend and Non-Accrual, Past Due and Classified Trends. The adjustment of the qualitative factors decreased our allowance requirements by $4.4 million at March 31, 2012 compared to the method used for December 31, 2011. During the second quarter of 2012, the Company adjusted Illinois/Indiana and Florida qualitative factors relating to Management & Staff and Loan Underwriting, Policy and Procedures. In addition, it adjusted Illinois/Indiana qualitative factors relating to Impact of Competition, Legal & Regulatory Issues and Nature and Volume of Loan Portfolio. The adjustment of the qualitative factors decreased the allowance requirements by $2.6 million at June 30, 2012 compared to the method used for March 31, 2012. During the third and fourth quarters of 2012, the Company did not adjust any qualitative factors. The Company bases its assessment on several sources and will continue to monitor its qualitative factors on a quarterly basis.

Changes in the allowance for loan losses were as follows:

	Years Ended December 31,
	2012			2011			2010
	(dollars in thousands)

Balance, beginning of year	$	58,506		$	76,038		$	100,179
Provision for loan losses	16,500			20,000			42,000
Recoveries applicable to loan balances previously charged-off	3,069			7,881			14,902
Loan balances charged-off	(30,063		)	(45,413		)	(81,043		)

Balance, end of year	$	48,012		$	58,506		$	76,038

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 Twelve Months Ended December 31, 2012
	Commercial			Commercial Real Estate			Real Estate Construction			Retail Real Estate			Retail Other			Total
	(dollars in thousands)
Illinois/Indiana
Beginning balance	$	9,143		$	18,605		$	4,352		$	6,473		$	464		$	39,037
Provision for loan loss	1,428			10,058			(270		)	4,397			278			15,891
Charged-off	(4,176		)	(14,016		)	(1,883		)	(3,264		)	(636		)	(23,975		)
Recoveries	202			376			328			504			216			1,626
Ending Balance	$	6,597		$	15,023		$	2,527		$	8,110		$	322		$	32,579

Florida
Beginning balance	$	1,939		$	8,413		$	2,936		$	6,160		$	21		$	19,469
Provision for loan loss	(811		)	(619		)	(555		)	2,626			(32		)	609
Charged-off	(246		)	(1,858		)	(336		)	(3,646		)	(2		)	(6,088		)
Recoveries	555			126			270			474			18			1,443
Ending Balance	$	1,437		$	6,062		$	2,315		$	5,614		$	5		$	15,433

	For the Twelve Months Ended December 31, 2011
	Commercial			Commercial Real Estate			Real Estate Construction			Retail Real Estate			Retail Other			Total
	(dollars in thousands)
Illinois/Indiana
Beginning balance	$	11,827		$	19,504		$	7,186		$	5,199		$	2,473		$	46,189
Provision for loan loss	2,565			9,604			1,478			4,463			(2,743		)	15,367
Charged-off	(6,779		)	(10,643		)	(4,983		)	(3,973		)	(634		)	(27,012		)
Recoveries	1,530			140			671			784			1,368			4,493
Ending Balance	$	9,143		$	18,605		$	4,352		$	6,473		$	464		$	39,037

Florida
Beginning balance	$	2,013		$	13,291		$	4,717		$	9,748		$	80		$	29,849
Provision for loan loss	3,841			(2,130		)	195			2,773			(46		)	4,633
Charged-off	(3,947		)	(3,655		)	(2,573		)	(8,192		)	(34		)	(18,401		)
Recoveries	32			907			597			1,831			21			3,388
Ending Balance	$	1,939		$	8,413		$	2,936		$	6,160		$	21		$	19,469

	For the Twelve Months Ended December 31, 2010
	Commercial			Commercial Real Estate			Real Estate Construction			Retail Real Estate			Retail Other			Total
	(dollars in thousands)
Illinois/Indiana
Beginning balance	$	9,326		$	24,151		$	7,685		$	6,570		$	1,283		$	49,015
Provision for loan loss	8,306			17,384			10,720			2,262			1,125			39,797
Charged-off	(5,974		)	(23,012		)	(11,332		)	(3,908		)	(41		)	(44,267		)
Recoveries	169			981			113			275			106			1,644
Ending Balance	$	11,827		$	19,504		$	7,186		$	5,199		$	2,473		$	46,189

Florida
Beginning balance	$	498		$	14,098		$	29,805		$	6,606		$	157		$	51,164
Provision for loan loss	6,421			2,889			(19,280		)	12,170			3			2,203
Charged-off	(4,922		)	(5,564		)	(16,936		)	(9,266		)	(88		)	(36,776		)
Recoveries	16			1,868			11,128			238			8			13,258
Ending Balance	$	2,013		$	13,291		$	4,717		$	9,748		$	80		$	29,849

The following table presents the allowance for loan losses and recorded investments in loans by category:

	As of December 31, 2012
	Commercial		Commercial Real Estate		Real Estate Construction		Retail Real Estate		Retail Other		Total
	(dollars in thousands)
Illinois/Indiana
Amount allocated to:
Loans individually evaluated for impairment	$	265	$	634	$	—	$	140	$	—	$	1,039
Loans collectively evaluated for impairment	6,332		14,389		2,527		7,970		322		31,540
Ending Balance	$	6,597	$	15,023	$	2,527	$	8,110	$	322	$	32,579

Loans:
Loans individually evaluated for impairment	$	7,479	$	13,308	$	6,394	$	5,196	$	—	$	32,377
Loans collectively evaluated for impairment	415,348		829,654		63,735		404,867		11,944		1,725,548
Ending Balance	$	422,827	$	842,962	$	70,129	$	410,063	$	11,944	$	1,757,925

Florida
Amount allocated to:
Loans individually evaluated for impairment	$	—	$	235	$	—	$	483	$	—	$	718
Loans collectively evaluated for impairment	1,437		5,827		2,315		5,131		5		14,715
Ending Balance	$	1,437	$	6,062	$	2,315	$	5,614	$	5	$	15,433

Loans:
Loans individually evaluated for impairment	$	—	$	6,573	$	2,597	$	14,046	$	—	$	23,216
Loans collectively evaluated for impairment	10,861		131,597		13,375		95,724		409		251,966
Ending Balance	$	10,861	$	138,170	$	15,972	$	109,770	$	409	$	275,182

	As of December 31, 2011
	Commercial		Commercial Real Estate		Real Estate Construction		Retail Real Estate		Retail Other		Total
	(dollars in thousands)
Illinois/Indiana
Amount allocated to:
Loans individually evaluated for impairment	$	697	$	1,421	$	—	$	—	$	—	$	2,118
Loans collectively evaluated for impairment	8,446		17,184		4,352		6,473		464		36,919
Ending Balance	$	9,143	$	18,605	$	4,352	$	6,473	$	464	$	39,037

Loans:
Loans individually evaluated for impairment	$	13,979	$	19,404	$	7,079	$	5,657	$	71	$	46,190
Loans collectively evaluated for impairment	383,046		825,452		81,600		400,244		17,610		1,707,952
Ending Balance	$	397,025	$	844,856	$	88,679	$	405,901	$	17,681	$	1,754,142

Florida
Amount allocated to:
Loans individually evaluated for impairment	$	—	$	826	$	—	$	—	$	—	$	826
Loans collectively evaluated for impairment	1,939		7,587		2,936		6,160		21		18,643
Ending Balance	$	1,939	$	8,413	$	2,936	$	6,160	$	21	$	19,469

Loans:
Loans individually evaluated for impairment	$	568	$	6,525	$	5,238	$	17,762	$	—	$	30,093
Loans collectively evaluated for impairment	10,262		128,835		10,948		101,234		581		251,860
Ending Balance	$	10,830	$	135,360	$	16,186	$	118,996	$	581	$	281,953