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Reserve for Loan and Lease Losses
9 Months Ended
Sep. 30, 2011
Reserve for Loan and Lease Losses 
Reserve for Loan and Lease Losses

Note 5.       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 we update our historical charge-off analysis, we review the look-back periods for each business loan portfolio.  Furthermore, we perform a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency 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.  We adjust the calculated historical based ratio as a result of our analysis of environmental factors, principally economic risk and concentration risk.  Key economic factors affecting our portfolios are growth in gross domestic product, unemployment rates, housing market trends, commodity prices, inflation, national and international economic volatility, global debt and capital markets and political stability or lack thereof.  Concentration risk is impacted primarily by geographic concentration in Northern Indiana and Southwestern Lower Michigan in our business banking and commercial real estate portfolios and by collateral concentration in our 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 adequate by management to absorb probable losses inherent in the loan and lease portfolio.  The determination of the reserve requires significant judgment reflecting management’s best estimate of probable loan and lease losses related to specifically identified loans and leases as well as probable losses in the remainder of the various loan and lease portfolios.  For purposes of determining the reserve, we have segmented our loans and leases into classes based on the associated risks within these segments.  We have determined that eight classes exist within our 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, percentage allocations for special attention loans and leases without specific reserves, formula reserves (calculated by applying loss factors based upon a review of historical loss experience and qualitative factors) for each business lending division portfolio, and reserves for pooled homogeneous loans and leases.  Management’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.

 

Changes in the reserve for loan and lease losses, segregated by class, for the three months ended September 30, 2011 and 2010 are shown below.

 

 

 

 

 

Auto, light truck

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

Commercial and

 

and environmental

 

Medium and

 

Aircraft

 

equipment

 

Commercial

 

Residential

 

Consumer

 

 

 

(Dollars in thousands) 

 

agricultural loans

 

equipment

 

heavy duty truck

 

financing

 

financing

 

real estate

 

real estate

 

loans

 

Total

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for loan and lease losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

16,814

 

$

9,041

 

$

4,584

 

$

28,561

 

$

6,802

 

$

15,400

 

$

2,657

 

$

1,151

 

$

85,010

 

Charge-offs

 

152

 

10

 

—

 

2,073

 

—

 

72

 

37

 

341

 

2,685

 

Recoveries

 

118

 

78

 

1

 

96

 

144

 

50

 

19

 

119

 

625

 

Net charge-offs (recoveries)

 

34

 

(68

)

(1

)

1,977

 

(144

)

22

 

18

 

222

 

2,060

 

Provision (recovery of provision)

 

(2,056

)

(908

)

(1,217

)

4,482

 

(691

)

1,397

 

44

 

209

 

1,260

 

Balance, end of period

 

$

14,724

 

$

8,201

 

$

3,368

 

$

31,066

 

$

6,255

 

$

16,775

 

$

2,683

 

$

1,138

 

$

84,210

 

Ending balance: individually evaluated for impairment

 

$

1,488

 

$

5

 

$

161

 

$

3,120

 

$

—

 

$

1,060

 

$

—

 

$

—

 

$

5,834

 

Ending balance: collectively evaluated for impairment

 

$

13,236

 

$

8,196

 

$

3,207

 

$

27,946

 

$

6,255

 

$

15,715

 

$

2,683

 

$

1,138

 

$

78,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

557,392

 

$

442,127

 

$

152,703

 

$

613,706

 

$

260,241

 

$

556,287

 

$

404,063

 

$

96,775

 

$

3,083,294

 

Ending balance: individually evaluated for impairment

 

$

10,491

 

$

1,109

 

$

3,584

 

$

13,241

 

$

3,780

 

$

23,814

 

$

—

 

$

—

 

$

56,019

 

Ending balance: collectively evaluated for impairment

 

$

546,901

 

$

441,018

 

$

149,119

 

$

600,465

 

$

256,461

 

$

532,473

 

$

404,063

 

$

96,775

 

$

3,027,275

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for loan and lease losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

19,680

 

$

9,340

 

$

7,683

 

$

24,936

 

$

9,178

 

$

12,750

 

$

984

 

$

3,463

 

$

88,014

 

Charge-offs

 

694

 

103

 

—

 

1,493

 

—

 

2,572

 

19

 

470

 

5,351

 

Recoveries

 

897

 

17

 

8

 

61

 

129

 

15

 

20

 

121

 

1,268

 

Net charge-offs (recoveries)

 

(203

)

86

 

(8

)

1,432

 

(129

)

2,557

 

(1

)

349

 

4,083

 

Provision (recovery of provision)

 

1,409

 

26

 

(648

)

4,291

 

(952

)

1,035

 

(7

)

424

 

5,578

 

Balance, end of period

 

$

21,292

 

$

9,280

 

$

7,043

 

$

27,795

 

$

8,355

 

$

11,228

 

$

978

 

$

3,538

 

$

89,509

 

Ending balance: individually evaluated for impairment

 

$

4,313

 

$

408

 

$

1,393

 

$

2,066

 

$

999

 

$

908

 

$

—

 

$

—

 

$

10,087

 

Ending balance: collectively evaluated for impairment

 

$

16,979

 

$

8,872

 

$

5,650

 

$

25,729

 

$

7,356

 

$

10,320

 

$

978

 

$

3,538

 

$

79,422

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

535,874

 

$

397,297

 

$

174,459

 

$

620,996

 

$

304,035

 

$

584,108

 

$

395,334

 

$

100,076

 

$

3,112,179

 

Ending balance: individually evaluated for impairment

 

$

21,875

 

$

3,149

 

$

6,348

 

$

14,623

 

$

11,713

 

$

29,371

 

$

—

 

$

—

 

$

87,079

 

Ending balance: collectively evaluated for impairment

 

$

513,999

 

$

394,148

 

$

168,111

 

$

606,373

 

$

292,322

 

$

554,737

 

$

395,334

 

$

100,076

 

$

3,025,100

 

 

Changes in the reserve for loan and lease losses, segregated by class, for the nine months ended September 30, 2011 and 2010 are shown below.

 

 

 

 

 

Auto, light truck

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

Commercial and

 

and environmental

 

Medium and

 

Aircraft

 

equipment

 

Commercial

 

Residential

 

Consumer

 

 

 

(Dollars in thousands)

 

agricultural loans

 

equipment

 

heavy duty truck

 

financing

 

financing

 

real estate

 

real estate

 

loans

 

Total

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for loan and lease losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

20,544

 

$

7,542

 

$

5,768

 

$

29,811

 

$

8,439

 

$

11,177

 

$

2,518

 

$

1,075

 

$

86,874

 

Charge-offs

 

1,109

 

335

 

—

 

3,701

 

853

 

2,537

 

191

 

1,193

 

9,919

 

Recoveries

 

1,734

 

148

 

2

 

860

 

242

 

336

 

53

 

355

 

3,730

 

Net charge-offs (recoveries)

 

(625

)

187

 

(2

)

2,841

 

611

 

2,201

 

138

 

838

 

6,189

 

Provision (recovery of provision)

 

(6,445

)

846

 

(2,402

)

4,096

 

(1,573

)

7,799

 

303

 

901

 

3,525

 

Balance, end of period

 

$

14,724

 

$

8,201

 

$

3,368

 

$

31,066

 

$

6,255

 

$

16,775

 

$

2,683

 

$

1,138

 

$

84,210

 

Ending balance: individually evaluated for impairment

 

$

1,488

 

$

5

 

$

161

 

$

3,120

 

$

—

 

$

1,060

 

$

—

 

$

—

 

$

5,834

 

Ending balance: collectively evaluated for impairment

 

$

13,236

 

$

8,196

 

$

3,207

 

$

27,946

 

$

6,255

 

$

15,715

 

$

2,683

 

$

1,138

 

$

78,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

557,392

 

$

442,127

 

$

152,703

 

$

613,706

 

$

260,241

 

$

556,287

 

$

404,063

 

$

96,775

 

$

3,083,294

 

Ending balance: individually evaluated for impairment

 

$

10,491

 

$

1,109

 

$

3,584

 

$

13,241

 

$

3,780

 

$

23,814

 

$

—

 

$

—

 

$

56,019

 

Ending balance: collectively evaluated for impairment

 

$

546,901

 

$

441,018

 

$

149,119

 

$

600,465

 

$

256,461

 

$

532,473

 

$

404,063

 

$

96,775

 

$

3,027,275

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for loan and lease losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

24,017

 

$

9,630

 

$

6,186

 

$

24,807

 

$

8,875

 

$

10,453

 

$

880

 

$

3,388

 

$

88,236

 

Charge-offs

 

1,584

 

907

 

1,879

 

4,268

 

1,648

 

5,112

 

379

 

1,279

 

17,056

 

Recoveries

 

1,461

 

60

 

47

 

224

 

273

 

38

 

44

 

418

 

2,565

 

Net charge-offs (recoveries)

 

123

 

847

 

1,832

 

4,044

 

1,375

 

5,074

 

335

 

861

 

14,491

 

Provision (recovery of provision)

 

(2,602

)

497

 

2,689

 

7,032

 

855

 

5,849

 

433

 

1,011

 

15,764

 

Balance, end of period

 

$

21,292

 

$

9,280

 

$

7,043

 

$

27,795

 

$

8,355

 

$

11,228

 

$

978

 

$

3,538

 

$

89,509

 

Ending balance: individually evaluated for impairment

 

$

4,313

 

$

408

 

$

1,393

 

$

2,066

 

$

999

 

$

908

 

$

—

 

$

—

 

$

10,087

 

Ending balance: collectively evaluated for impairment

 

$

16,979

 

$

8,872

 

$

5,650

 

$

25,729

 

$

7,356

 

$

10,320

 

$

978

 

$

3,538

 

$

79,422

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

535,874

 

$

397,297

 

$

174,459

 

$

620,996

 

$

304,035

 

$

584,108

 

$

395,334

 

$

100,076

 

$

3,112,179

 

Ending balance: individually evaluated for impairment

 

$

21,875

 

$

3,149

 

$

6,348

 

$

14,623

 

$

11,713

 

$

29,371

 

$

—

 

$

—

 

$

87,079

 

Ending balance: collectively evaluated for impairment

 

$

513,999

 

$

394,148

 

$

168,111

 

$

606,373

 

$

292,322

 

$

554,737

 

$

395,334

 

$

100,076

 

$

3,025,100