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, 2018 and 2017.



(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
March 31, 2018
Balance, beginning of period	$	16,228		$	10,103		$	4,844		$	34,619		$	9,343		$	14,792		$	3,666		$	1,288	$	94,883
Charge-offs	25			316			—			29			5			7			11			163		556
Recoveries	49			6			—			44			19			21			6			73		218
Net charge-offs (recoveries)	(24		)	310			—			(15		)	(14		)	(14		)	5			90		338
Provision (recovery of provision)	1,357			1,017			(351		)	202			1,560			(36		)	(96		)	133		3,786
Balance, end of period	$	17,609		$	10,810		$	4,493		$	34,836		$	10,917		$	14,770		$	3,565		$	1,331	$	98,331

March 31, 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	208			21			—			1,103			—			2			4			220		1,558
Recoveries	595			1,127			—			183			22			50			71			85		2,133
Net charge-offs (recoveries)	(387		)	(1,106		)	—			920			(22		)	(48		)	(67		)	135		(575		)
Provision (recovery of provision)	934			602			(64		)	(1,424		)	703			143			(25		)	131		1,000
Balance, end of period	$	15,989		$	9,772		$	4,676		$	32,008		$	8,932		$	13,868		$	3,592		$	1,281	$	90,118

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 March 31, 2018 and December 31, 2017.



(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
March 31, 2018
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment	$	—	$	360	$	—	$	431	$	101	$	173	$	132	$	—	$	1,197
Ending balance, collectively evaluated for impairment	17,609		10,450		4,493		34,405		10,816		14,597		3,433		1,331		97,134
Total reserve for loan and lease losses	$	17,609	$	10,810	$	4,493	$	34,836	$	10,917	$	14,770	$	3,565	$	1,331	$	98,331

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	3,013	$	8,885	$	337	$	5,752	$	945	$	3,809	$	350	$	—	$	23,091
Ending balance, collectively evaluated for impairment	1,008,687		502,166		279,673		862,667		618,274		745,117		517,780		133,642		4,668,006
Total recorded investment in loans	$	1,011,700	$	511,051	$	280,010	$	868,419	$	619,219	$	748,926	$	518,130	$	133,642	$	4,691,097

December 31, 2017
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment	$	—	$	243	$	—	$	—	$	108	$	181	$	134	$	—	$	666
Ending balance, collectively evaluated for impairment	16,228		9,860		4,844		34,619		9,235		14,611		3,532		1,288		94,217
Total reserve for loan and lease losses	$	16,228	$	10,103	$	4,844	$	34,619	$	9,343	$	14,792	$	3,666	$	1,288	$	94,883

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	2,439	$	7,780	$	371	$	1,901	$	928	$	3,346	$	352	$	—	$	17,117
Ending balance, collectively evaluated for impairment	927,558		489,036		296,564		842,756		562,509		738,222		525,770		128,146		4,510,561
Total recorded investment in loans	$	929,997	$	496,816	$	296,935	$	844,657	$	563,437	$	741,568	$	526,122	$	128,146	$	4,527,678