Reserve for Loan and Lease Losses

The reserve for loan and lease loss methodology has been consistently applied for several years, with enhancements instituted periodically. Reserve ratios are reviewed quarterly and revised periodically to reflect recent loss history and to incorporate current risks and trends which may not be recognized in historical data. As the historical charge-off analysis is updated, the Company reviews the look-back periods for each business loan portfolio. Furthermore, a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency is performed in order to review portfolio trends and other factors, including specific industry risks and economic conditions, which may have an impact on the reserves and reserve ratios applied to various portfolios. The Company adjusts the calculated historical based ratio as a result of the analysis of environmental factors, principally economic risk and concentration risk. Key economic factors affecting the portfolios are growth in gross domestic product, unemployment rates, housing market trends, commodity prices, inflation and global economic and political issues. Concentration risk is impacted primarily by geographic concentration in Northern Indiana and Southwestern Lower Michigan in the business banking and commercial real estate portfolios and by collateral concentration in the specialty finance portfolios and exposure to foreign markets by geographic risk.

The reserve for loan and lease losses is maintained at a level believed to be appropriate by the Company to absorb probable losses inherent in the loan and lease portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable loan and lease losses related to specifically identified impaired loans and leases as well as probable losses in the remainder of the various loan and lease portfolios. For purposes of determining the reserve, the Company has segmented loans and leases into classes based on the associated risk within these segments. The Company has determined that eight classes exist within the loan and lease portfolio. The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for impaired loans, formula reserves for each business lending division portfolio including percentage allocations for special attention loans and leases not deemed impaired, and reserves for pooled homogeneous loans and leases. The Company’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and will change.

The following table shows the changes in the reserve for loan and lease losses, segregated by class, for the three months ended March 31, 2014 and 2013.



(Dollars in thousands)	Commercial and agricultural loans			Auto and light truck			Medium and heavy duty truck			Aircraft financing			Construction equipment financing			Commercial real estate			Residential real estate			Consumer loans		Total
March 31, 2014
Reserve for loan and lease losses
Balance, beginning of period	$	11,515		$	9,657		$	4,212		$	34,037		$	5,972		$	12,406		$	4,093		$	1,613	$	83,505
Charge-offs	15			11			—			—			2			1			16			258		303
Recoveries	379			234			37			57			166			39			5			87		1,004
Net charge-offs (recoveries)	(364		)	(223		)	(37		)	(57		)	(164		)	(38		)	11			171		(701		)
Provision (recovery of provision)	(60		)	(224		)	162			415			178			165			(20		)	188		804
Balance, end of period	$	11,819		$	9,656		$	4,411		$	34,509		$	6,314		$	12,609		$	4,062		$	1,630	$	85,010

Ending balance, individually evaluated for impairment	$	—		$	—		$	—		$	57		$	9		$	—		$	160		$	—	$	226
Ending balance, collectively evaluated for impairment	11,819			9,656			4,411			34,452			6,305			12,609			3,902			1,630		84,784
Total reserve for loan and lease losses	$	11,819		$	9,656		$	4,411		$	34,509		$	6,314		$	12,609		$	4,062		$	1,630	$	85,010

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	11,146		$	266		$	—		$	4,147		$	1,129		$	12,789		$	377		$	—	$	29,854
Ending balance, collectively evaluated for impairment	687,100			388,399			237,906			726,656			351,667			575,840			455,301			124,845		3,547,714
Total recorded investment in loans	$	698,246		$	388,665		$	237,906		$	730,803		$	352,796		$	588,629		$	455,678		$	124,845	$	3,577,568

March 31, 2013
Reserve for loan and lease losses
Balance, beginning of period	$	12,326		$	8,864		$	3,721		$	34,205		$	5,390		$	13,778		$	3,652		$	1,375	$	83,311
Charge-offs	285			1			—			31			83			62			77			423		962
Recoveries	109			121			16			178			35			329			6			111		905
Net charge-offs (recoveries)	176			(120		)	(16		)	(147		)	48			(267		)	71			312		57
Provision (recovery of provision)	1,077			(288		)	(264		)	(520		)	383			(124		)	125			368		757
Balance, end of period	$	13,227		$	8,696		$	3,473		$	33,832		$	5,725		$	13,921		$	3,706		$	1,431	$	84,011

Ending balance, individually evaluated for impairment	$	434		$	—		$	—		$	1,639		$	—		$	—		$	—		$	—	$	2,073
Ending balance, collectively evaluated for impairment	12,793			8,696			3,473			32,193			5,725			13,921			3,706			1,431		81,938
Total reserve for loan and lease losses	$	13,227		$	8,696		$	3,473		$	33,832		$	5,725		$	13,921		$	3,706		$	1,431	$	84,011

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	7,072		$	—		$	464		$	14,762		$	4,154		$	20,203		$	—		$	—	$	46,655
Ending balance, collectively evaluated for impairment	640,589			412,569			203,203			684,479			281,762			546,152			445,160			112,649		3,326,563
Total recorded investment in loans	$	647,661		$	412,569		$	203,667		$	699,241		$	285,916		$	566,355		$	445,160		$	112,649	$	3,373,218