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 June 30, 2015 and 2014.



(Dollars in thousands)	Commercial and agricultural			Auto and light truck			Medium and heavy duty truck			Aircraft financing			Construction equipment financing			Commercial real estate			Residential real estate			Consumer			Total
June 30, 2015
Reserve for loan and lease losses
Balance, beginning of period	$	11,620		$	10,793		$	4,364		$	31,301		$	7,740		$	13,186		$	4,115		$	1,979		$	85,098
Charge-offs	22			—			—			—			—			—			25			173			220
Recoveries	86			191			2			398			123			38			5			56			899
Net charge-offs (recoveries)	(64		)	(191		)	(2		)	(398		)	(123		)	(38		)	20			117			(679		)
Provision (recovery of provision)	181			461			(33		)	1,141			(56		)	2			(651		)	(234		)	811
Balance, end of period	$	11,865		$	11,445		$	4,333		$	32,840		$	7,807		$	13,226		$	3,444		$	1,628		$	86,588

Ending balance, individually evaluated for impairment	$	112		$	—		$	—		$	501		$	—		$	38		$	152		$	—		$	803
Ending balance, collectively evaluated for impairment	11,753			11,445			4,333			32,339			7,807			13,188			3,292			1,628			85,785
Total reserve for loan and lease losses	$	11,865		$	11,445		$	4,333		$	32,840		$	7,807		$	13,226		$	3,444		$	1,628		$	86,588

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	2,038		$	—		$	—		$	7,174		$	728		$	9,933		$	369		$	—		$	20,242
Ending balance, collectively evaluated for impairment	717,934			446,731			250,045			744,491			444,751			631,272			454,361			142,872			3,832,457
Total recorded investment in loans	$	719,972		$	446,731		$	250,045		$	751,665		$	445,479		$	641,205		$	454,730		$	142,872		$	3,852,699

June 30, 2014
Reserve for loan and lease losses
Balance, beginning of period	$	11,819		$	9,656		$	4,411		$	34,509		$	6,314		$	12,609		$	4,062		$	1,630		$	85,010
Charge-offs	213			8			—			—			—			—			27			131			379
Recoveries	307			823			99			54			59			116			65			79			1,602
Net charge-offs (recoveries)	(94		)	(815		)	(99		)	(54		)	(59		)	(116		)	(38		)	52			(1,223		)
Provision (recovery of provision)	4,853			(44		)	(229		)	(1,476		)	(55		)	(372		)	(166		)	32			2,543
Balance, end of period	$	16,766		$	10,427		$	4,281		$	33,087		$	6,318		$	12,353		$	3,934		$	1,610		$	88,776

Ending balance, individually evaluated for impairment	$	4,769		$	—		$	—		$	—		$	—		$	—		$	159		$	—		$	4,928
Ending balance, collectively evaluated for impairment	11,997			10,427			4,281			33,087			6,318			12,353			3,775			1,610			83,848
Total reserve for loan and lease losses	$	16,766		$	10,427		$	4,281		$	33,087		$	6,318		$	12,353		$	3,934		$	1,610		$	88,776

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	22,533		$	—		$	—		$	1,120		$	1,105		$	12,699		$	376		$	—		$	37,833
Ending balance, collectively evaluated for impairment	697,693			471,080			243,358			732,074			368,650			589,622			454,469			128,756			3,685,702
Total recorded investment in loans	$	720,226		$	471,080		$	243,358		$	733,194		$	369,755		$	602,321		$	454,845		$	128,756		$	3,723,535

The following table shows the changes in the reserve for loan and lease losses, segregated by class, for the six months ended June 30, 2015 and 2014.




(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
June 30, 2015
Reserve for loan and lease losses
Balance, beginning of period	$	11,760		$	10,326		$	4,500		$	32,234		$	7,008		$	13,270		$	4,102		$	1,868		$	85,068
Charge-offs	965			22			—			49			—			—			65			320			1,421
Recoveries	564			251			5			442			245			135			7			124			1,773
Net charge-offs (recoveries)	401			(229		)	(5		)	(393		)	(245		)	(135		)	58			196			(352		)
Provision (recovery of provision)	506			890			(172		)	213			554			(179		)	(600		)	(44		)	1,168
Balance, end of period	$	11,865		$	11,445		$	4,333		$	32,840		$	7,807		$	13,226		$	3,444		$	1,628		$	86,588

Ending balance, individually evaluated for impairment	$	112		$	—		$	—		$	501		$	—		$	38		$	152		$	—		$	803
Ending balance, collectively evaluated for impairment	11,753			11,445			4,333			32,339			7,807			13,188			3,292			1,628			85,785
Total reserve for loan and lease losses	$	11,865		$	11,445		$	4,333		$	32,840		$	7,807		$	13,226		$	3,444		$	1,628		$	86,588

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	2,038		$	—		$	—		$	7,174		$	728		$	9,933		$	369		$	—		$	20,242
Ending balance, collectively evaluated for impairment	717,934			446,731			250,045			744,491			444,751			631,272			454,361			142,872			3,832,457
Total recorded investment in loans	$	719,972		$	446,731		$	250,045		$	751,665		$	445,479		$	641,205		$	454,730		$	142,872		$	3,852,699

June 30, 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	228			19			—			—			2			1			43			389			682
Recoveries	686			1,055			136			112			225			155			70			167			2,606
Net charge-offs (recoveries)	(458		)	(1,036		)	(136		)	(112		)	(223		)	(154		)	(27		)	222			(1,924		)
Provision (recovery of provision)	4,793			(266		)	(67		)	(1,062		)	123			(207		)	(186		)	219			3,347
Balance, end of period	$	16,766		$	10,427		$	4,281		$	33,087		$	6,318		$	12,353		$	3,934		$	1,610		$	88,776

Ending balance, individually evaluated for impairment	$	4,769		$	—		$	—		$	—		$	—		$	—		$	159		$	—		$	4,928
Ending balance, collectively evaluated for impairment	11,997			10,427			4,281			33,087			6,318			12,353			3,775			1,610			83,848
Total reserve for loan and lease losses	$	16,766		$	10,427		$	4,281		$	33,087		$	6,318		$	12,353		$	3,934		$	1,610		$	88,776

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	22,533		$	—		$	—		$	1,120		$	1,105		$	12,699		$	376		$	—		$	37,833
Ending balance, collectively evaluated for impairment	697,693			471,080			243,358			732,074			368,650			589,622			454,469			128,756			3,685,702
Total recorded investment in loans	$	720,226		$	471,080		$	243,358		$	733,194		$	369,755		$	602,321		$	454,845		$	128,756		$	3,723,535