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 September 30, 2013 and 2012 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, 2013
Reserve for loan and lease losses
Balance, beginning of period	$	12,202		$	11,889		$	3,178		$	33,323	$	6,065		$	13,529		$	3,895	$	1,609	$	85,690
Charge-offs	49			50			—			1,277		—			—			76		219		1,671
Recoveries	114			98			308			98		64			150			1		74		907
Net charge-offs (recoveries)	(65		)	(48		)	(308		)	1,179		(64		)	(150		)	75		145		764
Provision (recovery of provision)	(255		)	(1,588		)	(83		)	1,670		448			(801		)	70		120		(419		)
Balance, end of period	$	12,012		$	10,349		$	3,403		$	33,814	$	6,577		$	12,878		$	3,890	$	1,584	$	84,507

Ending balance, individually evaluated for impairment	$	49		$	—		$	—		$	1,491	$	—		$	—		$	—	$	—	$	1,540
Ending balance, collectively evaluated for impairment	11,963			10,349			3,403			32,323		6,577			12,878			3,890		1,584		82,967
Total reserve for loan and lease losses	$	12,012		$	10,349		$	3,403		$	33,814	$	6,577		$	12,878		$	3,890	$	1,584	$	84,507

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	11,659		$	—		$	594		$	11,433	$	1,214		$	15,339		$	—	$	—	$	40,239
Ending balance, collectively evaluated for impairment	640,521			452,405			192,380			692,639		314,132			558,940			455,327		121,535		3,427,879
Total recorded investement in loans	$	652,180		$	452,405		$	192,974		$	704,072	$	315,346		$	574,279		$	455,327	$	121,535	$	3,468,118

September 30, 2012
Reserve for loan and lease losses
Balance, beginning of period	$	13,077		$	10,300		$	3,618		$	29,871	$	6,330		$	15,172		$	3,521	$	1,410	$	83,299
Charge-offs	214			210			—			461		1			132			159		311		1,488
Recoveries	60			356			125			163		149			91			4		90		1,038
Net charge-offs (recoveries)	154			(146		)	(125		)	298		(148		)	41			155		221		450
Provision (recovery of provision)	433			(496		)	(377		)	1,427		(585		)	(99		)	74		273		650
Balance, end of period	$	13,356		$	9,950		$	3,366		$	31,000	$	5,893		$	15,032		$	3,440	$	1,462	$	83,499

Ending balance, individually evaluated for impairment	$	878		$	500		$	—		$	886	$	—		$	49		$	—	$	—	$	2,313
Ending balance, collectively evaluated for impairment	12,478			9,450			3,366			30,114		5,893			14,983			3,440		1,462		81,186
Total reserve for loan and lease losses	$	13,356		$	9,950		$	3,366		$	31,000	$	5,893		$	15,032		$	3,440	$	1,462	$	83,499

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	9,148		$	2,233		$	322		$	5,734	$	4,355		$	22,524		$	103	$	—	$	44,419
Ending balance, collectively evaluated for impairment	575,848			454,432			167,387			680,066		271,915			526,397			436,806		111,143		3,223,994
Total recorded investement in loans	$	584,996		$	456,665		$	167,709		$	685,800	$	276,270		$	548,921		$	436,909	$	111,143	$	3,268,413

Changes in the reserve for loan and lease losses, segregated by class, for the nine months ended September 30, 2013 and 2012 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, 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	463			51			—			1,308		88			164			230		820		3,124
Recoveries	355			236			337			782		138			560			12		269		2,689
Net charge-offs (recoveries)	108			(185		)	(337		)	526		(50		)	(396		)	218		551		435
Provision (recovery of provision)	(206		)	580			65			135		1,137			(1,296		)	456		760		1,631
Balance, end of period	$	12,012		$	10,349		$	3,403		$	33,814	$	6,577		$	12,878		$	3,890	$	1,584	$	84,507

Ending balance, individually evaluated for impairment	$	49		$	—		$	—		$	1,491	$	—		$	—		$	—	$	—	$	1,540
Ending balance, collectively evaluated for impairment	11,963			10,349			3,403			32,323		6,577			12,878			3,890		1,584		82,967
Total reserve for loan and lease losses	$	12,012		$	10,349		$	3,403		$	33,814	$	6,577		$	12,878		$	3,890	$	1,584	$	84,507

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	11,659		$	—		$	594		$	11,433	$	1,214		$	15,339		$	—	$	—	$	40,239
Ending balance, collectively evaluated for impairment	640,521			452,405			192,380			692,639		314,132			558,940			455,327		121,535		3,427,879
Total recorded investement in loans	$	652,180		$	452,405		$	192,974		$	704,072	$	315,346		$	574,279		$	455,327	$	121,535	$	3,468,118

September 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	486			3,110			—			600		120			274			232		1,106		5,928
Recoveries	224			1,214			147			484		233			170			38		314		2,824
Net charge-offs (recoveries)	262			1,896			(147		)	116		(113		)	104			194		792		3,104
Provision (recovery of provision)	527			3,377			(523		)	2,490		(515		)	(1,636		)	272		967		4,959
Balance, end of period	$	13,356		$	9,950		$	3,366		$	31,000	$	5,893		$	15,032		$	3,440	$	1,462	$	83,499

Ending balance, individually evaluated for impairment	$	878		$	500		$	—		$	886	$	—		$	49		$	—	$	—	$	2,313
Ending balance, collectively evaluated for impairment	12,478			9,450			3,366			30,114		5,893			14,983			3,440		1,462		81,186
Total reserve for loan and lease losses	$	13,356		$	9,950		$	3,366		$	31,000	$	5,893		$	15,032		$	3,440	$	1,462	$	83,499

Recorded investment in loans
Ending balance, individually evaluated for impairment	$	9,148		$	2,233		$	322		$	5,734	$	4,355		$	22,524		$	103	$	—	$	44,419
Ending balance, collectively evaluated for impairment	575,848			454,432			167,387			680,066		271,915			526,397			436,806		111,143		3,223,994
Total recorded investement in loans	$	584,996		$	456,665		$	167,709		$	685,800	$	276,270		$	548,921		$	436,909	$	111,143	$	3,268,413