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 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.

Changes in the reserve for loan and lease losses, segregated by class, for the three months ended June 30, 2013 and 2012 are shown below.

(Dollars in thousands)	Commercial and agricultural loans			Auto, light truck and environmental equipment			Medium and heavy duty truck			Aircraft financing			Construction equipment financing			Commercial real estate			Residential real estate		Consumer loans		Total
June 30, 2013
Reserve for loan and lease losses
Balance, beginning of period	$	13,227		$	9,330		$	2,839		$	33,832		$	5,725		$	13,921		$	3,706	$	1,431	$	84,011
Charge-offs	129			—			—			—			5			102			77		178		491
Recoveries	132			15			15			506			39			81			5		84		877
Net charge-offs (recoveries)	(3		)	(15		)	(15		)	(506		)	(34		)	21			72		94		(386		)
Provision (recovery of provision)	(1,028		)	2,544			324			(1,015		)	306			(371		)	261		272		1,293
Balance, end of period	$	12,202		$	11,889		$	3,178		$	33,323		$	6,065		$	13,529		$	3,895	$	1,609	$	85,690

Ending balance, individually evaluated for impairment	$	222		$	—		$	—		$	537		$	—		$	—		$	—	$	—	$	759
Ending balance, collectively evaluated for impairment	11,980			11,889			3,178			32,786			6,065			13,529			3,895		1,609		84,931
Total reserve for loan and lease losses	$	12,202		$	11,889		$	3,178		$	33,323		$	6,065		$	13,529		$	3,895	$	1,609	$	85,690

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	12,208		$	142		$	711		$	4,424		$	3,895		$	17,293		$	—	$	—	$	38,673
Ending balance, collectively evaluated for impairment	648,172			510,420			177,883			673,086			307,240			559,517			454,983		123,411		3,454,712
Total recorded investement in loans	$	660,380		$	510,562		$	178,594		$	677,510		$	311,135		$	576,810		$	454,983	$	123,411	$	3,493,385

June 30, 2012
Reserve for loan and lease losses
Balance, beginning of period	$	12,525		$	9,769		$	3,667		$	28,598		$	6,851		$	16,326		$	3,378	$	1,280	$	82,394
Charge-offs	126			867			—			—			—			109			32		539		1,673
Recoveries	68			75			1			196			50			45			2		86		523
Net charge-offs (recoveries)	58			792			(1		)	(196		)	(50		)	64			30		453		1,150
Provision (recovery of provision)	610			1,323			(50		)	1,077			(571		)	(1,090		)	173		583		2,055
Balance, end of period	$	13,077		$	10,300		$	3,618		$	29,871		$	6,330		$	15,172		$	3,521	$	1,410	$	83,299

Ending balance, individually evaluated for impairment	$	1,073		$	500		$	—		$	688		$	—		$	19		$	—	$	—	$	2,280
Ending balance, collectively evaluated for impairment	12,004			9,800			3,618			29,183			6,330			15,153			3,521		1,410		81,019
Total reserve for loan and lease losses	$	13,077		$	10,300		$	3,618		$	29,871		$	6,330		$	15,172		$	3,521	$	1,410	$	83,299

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	8,946		$	2,643		$	787		$	6,308		$	5,022		$	23,535		$	106	$	—	$	47,347
Ending balance, collectively evaluated for impairment	547,040			505,850			171,518			655,876			275,693			520,157			441,481		105,630		3,223,245
Total recorded investement in loans	$	555,986		$	508,493		$	172,305		$	662,184		$	280,715		$	543,692		$	441,587	$	105,630	$	3,270,592

Changes in the reserve for loan and lease losses, segregated by class, for the six months ended June 30, 2013 and 2012 are shown below.

(Dollars in thousands)	Commercial and agricultural loans		Auto, light truck and environmental equipment			Medium and heavy duty truck			Aircraft financing			Construction equipment financing		Commercial real estate			Residential real estate		Consumer loans		Total
June 30, 2013
Reserve for loan and lease losses
Balance, beginning of period	$	12,326	$	9,584		$	3,001		$	34,205		$	5,390	$	13,778		$	3,652	$	1,375	$	83,311
Charge-offs	414		1			—			31			88		164			154		601		1,453
Recoveries	241		138			29			684			74		410			11		195		1,782
Net charge-offs (recoveries)	173		(137		)	(29		)	(653		)	14		(246		)	143		406		(329		)
Provision (recovery of provision)	49		2,168			148			(1,535		)	689		(495		)	386		640		2,050
Balance, end of period	$	12,202	$	11,889		$	3,178		$	33,323		$	6,065	$	13,529		$	3,895	$	1,609	$	85,690

Ending balance, individually evaluated for impairment	$	222	$	—		$	—		$	537		$	—	$	—		$	—	$	—	$	759
Ending balance, collectively evaluated for impairment	11,980		11,889			3,178			32,786			6,065		13,529			3,895		1,609		84,931
Total reserve for loan and lease losses	$	12,202	$	11,889		$	3,178		$	33,323		$	6,065	$	13,529		$	3,895	$	1,609	$	85,690

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	12,208	$	142		$	711		$	4,424		$	3,895	$	17,293		$	—	$	—	$	38,673
Ending balance, collectively evaluated for impairment	648,172		510,420			177,883			673,086			307,240		559,517			454,983		123,411		3,454,712
Total recorded investement in loans	$	660,380	$	510,562		$	178,594		$	677,510		$	311,135	$	576,810		$	454,983	$	123,411	$	3,493,385

June 30, 2012
Reserve for loan and lease losses
Balance, beginning of period	$	13,091	$	8,469		$	3,742		$	28,626		$	6,295	$	16,772		$	3,362	$	1,287	$	81,644
Charge-offs	272		2,900			—			139			119		142			73		795		4,440
Recoveries	164		858			22			321			84		79			34		224		1,786
Net charge-offs (recoveries)	108		2,042			(22		)	(182		)	35		63			39		571		2,654
Provision (recovery of provision)	94		3,873			(146		)	1,063			70		(1,537		)	198		694		4,309
Balance, end of period	$	13,077	$	10,300		$	3,618		$	29,871		$	6,330	$	15,172		$	3,521	$	1,410	$	83,299

Ending balance, individually evaluated for impairment	$	1,073	$	500		$	—		$	688		$	—	$	19		$	—	$	—	$	2,280
Ending balance, collectively evaluated for impairment	12,004		9,800			3,618			29,183			6,330		15,153			3,521		1,410		81,019
Total reserve for loan and lease losses	$	13,077	$	10,300		$	3,618		$	29,871		$	6,330	$	15,172		$	3,521	$	1,410	$	83,299

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	8,946	$	2,643		$	787		$	6,308		$	5,022	$	23,535		$	106	$	—	$	47,347
Ending balance, collectively evaluated for impairment	547,040		505,850			171,518			655,876			275,693		520,157			441,481		105,630		3,223,245
Total recorded investement in loans	$	555,986	$	508,493		$	172,305		$	662,184		$	280,715	$	543,692		$	441,587	$	105,630	$	3,270,592