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 September 30, 2017 and 2016.



(Dollars in thousands)	Commercial and agricultural			Auto and light truck			Medium and heavy duty truck			Aircraft		Construction equipment			Commercial real estate			Residential real estate and home equity		Consumer		Total
September 30, 2017
Balance, beginning of period	$	16,199		$	11,443		$	4,840		$	31,822	$	9,249		$	13,475		$	3,607	$	1,279	$	91,914
Charge-offs	434			88			—			115		48			342			29		238		1,294
Recoveries	64			13			—			12		243			733			2		65		1,132
Net charge-offs (recoveries)	370			75			—			103		(195		)	(391		)	27		173		162
Provision (recovery of provision)	(91		)	(405		)	(100		)	1,811		(193		)	400			28		170		1,620
Balance, end of period	$	15,738		$	10,963		$	4,740		$	33,530	$	9,251		$	14,266		$	3,608	$	1,276	$	93,372

September 30, 2016
Balance, beginning of period	$	14,835		$	11,667		$	4,350		$	34,661	$	7,512		$	13,462		$	3,616	$	1,355	$	91,458
Charge-offs	206			1			—			4,834		36			31			63		166		5,337
Recoveries	160			65			—			186		172			48			11		67		709
Net charge-offs (recoveries)	46			(64		)	—			4,648		(136		)	(17		)	52		99		4,628
Provision (recovery of provision)	90			(3,998		)	(72		)	5,148		286			460			94		59		2,067
Balance, end of period	$	14,879		$	7,733		$	4,278		$	35,161	$	7,934		$	13,939		$	3,658	$	1,315	$	88,897

The following table shows the changes in the reserve for loan and lease losses, segregated by class, for the nine months ended September 30, 2017 and 2016.



(Dollars in thousands)	Commercial and agricultural loans			Auto and light truck			Medium and heavy duty truck			Aircraft		Construction equipment			Commercial real estate			Residential real estate and home equity			Consumer loans		Total
September 30, 2017
Balance, beginning of period	$	14,668		$	8,064		$	4,740		$	34,352	$	8,207		$	13,677		$	3,550		$	1,285	$	88,543
Charge-offs	903			170			—			1,872		75			344			66			608		4,038
Recoveries	748			1,145			—			210		272			831			89			214		3,509
Net charge-offs (recoveries)	155			(975		)	—			1,662		(197		)	(487		)	(23		)	394		529
Provision (recovery of provision)	1,225			1,924			—			840		847			102			35			385		5,358
Balance, end of period	$	15,738		$	10,963		$	4,740		$	33,530	$	9,251		$	14,266		$	3,608		$	1,276	$	93,372

September 30, 2016
Balance, beginning of period	$	15,456		$	9,269		$	4,699		$	32,373	$	7,592		$	13,762		$	3,662		$	1,299	$	88,112
Charge-offs	422			4			—			4,834		128			32			192			620		6,232
Recoveries	360			191			10			412		320			388			28			217		1,926
Net charge-offs (recoveries)	62			(187		)	(10		)	4,422		(192		)	(356		)	164			403		4,306
Provision (recovery of provision)	(515		)	(1,723		)	(431		)	7,210		150			(179		)	160			419		5,091
Balance, end of period	$	14,879		$	7,733		$	4,278		$	35,161	$	7,934		$	13,939		$	3,658		$	1,315	$	88,897

The following table shows the reserve for loan and lease losses and recorded investment in loans and leases, segregated by class, separated between individually and collectively evaluated for impairment as of September 30, 2017 and December 31, 2016.



(Dollars in thousands)	Commercial and agricultural loans		Auto and light truck		Medium and heavy duty truck		Aircraft		Construction equipment		Commercial real estate		Residential real estate and home equity		Consumer loans		Total
September 30, 2017
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment	$	444	$	—	$	—	$	—	$	—	$	189	$	136	$	—	$	769
Ending balance, collectively evaluated for impairment	15,294		10,963		4,740		33,530		9,251		14,077		3,472		1,276		92,603
Total reserve for loan and lease losses	$	15,738	$	10,963	$	4,740	$	33,530	$	9,251	$	14,266	$	3,608	$	1,276	$	93,372

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	4,458	$	—	$	1,505	$	2,157	$	593	$	3,453	$	353	$	—	$	12,519
Ending balance, collectively evaluated for impairment	888,716		505,126		286,470		813,963		541,245		736,892		523,718		128,069		4,424,199
Total recorded investment in loans	$	893,174	$	505,126	$	287,975	$	816,120	$	541,838	$	740,345	$	524,071	$	128,069	$	4,436,718

December 31, 2016
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment	$	297	$	—	$	—	$	1,076	$	35	$	322	$	148	$	—	$	1,878
Ending balance, collectively evaluated for impairment	14,371		8,064		4,740		33,276		8,172		13,355		3,402		1,285		86,665
Total reserve for loan and lease losses	$	14,668	$	8,064	$	4,740	$	34,352	$	8,207	$	13,677	$	3,550	$	1,285	$	88,543

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	3,590	$	115	$	—	$	6,110	$	1,167	$	5,372	$	674	$	—	$	17,028
Ending balance, collectively evaluated for impairment	808,674		411,649		294,790		796,304		494,758		713,798		521,257		129,813		4,171,043
Total recorded investment in loans	$	812,264	$	411,764	$	294,790	$	802,414	$	495,925	$	719,170	$	521,931	$	129,813	$	4,188,071