Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses

Loan and lease receivables consist of the following:



	December 31, 2013		December 31, 2012
	(In Thousands)
Commercial real estate
Commercial real estate — owner occupied	$	141,164	$	144,988
Commercial real estate — non-owner occupied	341,695		323,660
Construction and land development	68,708		64,966
Multi-family	62,758		58,454
1-4 family	30,786		31,943
Total commercial real estate	645,111		624,011
Commercial and industrial	293,552		256,458
Direct financing leases, net	26,065		15,926
Consumer and other
Home equity and second mortgages	5,272		4,642
Other	11,972		11,671
Total consumer and other	17,244		16,313
Total gross loans and leases receivable	981,972		912,708
Less:
Allowance for loan and lease losses	13,901		15,400
Deferred loan fees	1,021		748
Loans and leases receivable, net	$	967,050	$	896,560

During the years ended December 31, 2013 and 2012, $46.2 million and $58.3 million of loans were transferred to third parties, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, including the requirements specific to loan participations, and therefore $46.2 million and $58.3 million during the years ended December 31, 2013 and 2012, respectively, have been derecognized in the audited Consolidated Financial Statements. The Corporation has a continuing involvement in each of the loans by way of relationship management and servicing the loans; however, there are no further obligations to the third-party participant required of the Corporation in the event of a borrower’s default, other than standard representations and warranties related to sold amounts. The loans were transferred at their fair value and no gain or loss was recognized upon the transfer, as the participation interest was transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represent adequate compensation. The total amount of loan participations purchased on the Corporation’s Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012 was $498,000 and $765,000, respectively.

The total amount of outstanding loans transferred to third parties as loan participations sold as of December 31, 2013 and December 31, 2012 was $52.1 million and $50.1 million, respectively, all of which was treated as a sale and derecognized under the applicable accounting guidance in effect at the time of the transfers of the financial assets. The Corporation’s continuing involvement with these loans is by way of partial ownership, relationship management and all servicing responsibilities. As of December 31, 2013 and December 31, 2012, the total amount of the Corporation’s partial ownership of loans on the Corporation’s Consolidated Balance Sheets was $77.2 million and $71.9 million, respectively. As of December 31, 2013, no loans in this participation sold portfolio were considered impaired as compared to $3.2 million as of December 31, 2012. This decline was due to the fact that the impaired loan in this portfolio was repurchased and thus removed from this portfolio as described further below. From December 2010 through May 2013, the Corporation recognized a total of $2.7 million in charge-offs associated with specific credits within the retained portion of this portfolio of loans in accordance with the Corporation’s allowance for loan and lease loss measurement process and policies. The Corporation does not share in the participant’s portion of the charge-offs.

In May 2013, the Corporation repurchased, from the original participating entity, a portion of one loan which was previously and appropriately accounted for as a transfer (sale) under a participation agreement. This repurchase was not a condition of the original participation agreement and was undertaken to provide the Corporation with the ability to directly and effectively manage the workout process of this loan. As agreed to with the original participating entity and consistent with the transaction agreement, such participated portion of the loan with aggregate principal balance of $3.2 million was repurchased with cash at fair value, or a discounted price of $1.5 million.

The $1.4 million carrying amount of this portion of the loan is recorded on the Consolidated Balance Sheets within loans and leases receivable, net at December 31, 2013 along with Corporation’s previously retained portion of this loan. This loan is classified as a nonperforming troubled debt restructuring because the Corporation cannot reasonably estimate the timing of the cash flows expected to be collected and therefore the discount will not be accreted to earnings until the carrying amount is fully paid.

During the year ended December 31, 2013, there were no changes to the allowance for loan and lease losses relating to this loan, as it is a collateral dependent loan and was deemed to have sufficient collateral value as of December 31, 2013 to support the carrying value.

Certain of the Corporation’s executive officers, directors and their related interests are loan clients of the Banks. As of December 31, 2013 and 2012, loans aggregating approximately $3.0 million and $11.4 million, respectively, were outstanding to such parties. New loans granted to such parties during the years ended December 31, 2013 and 2012 were approximately $1.6 million and $1.4 million and repayments on such loans were approximately $10.0 million and $1.2 million, respectively. These loans were made in the ordinary course of business and on substantially the same terms as those prevailing at the time for comparable loans not related to the lender. None of these loans were considered impaired.

The following information illustrates ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of receivable, and considering certain credit quality indicators as of December 31, 2013 and 2012:



	Category
As of December 31, 2013	I			II			III			IV			Total
	(Dollars in Thousands)
Commercial real estate:
Commercial real estate — owner occupied	$	118,764		$	11,259		$	10,802		$	339		$	141,164
Commercial real estate — non-owner occupied	290,865			29,444			21,103			283			341,695
Construction and land development	53,493			1,972			7,754			5,489			68,708
Multi-family	57,049			5,678			—			31			62,758
1-4 family	19,197			7,611			3,312			666			30,786
Total commercial real estate	539,368			55,964			42,971			6,808			645,111

Commercial and industrial	268,109			11,688			5,712			8,043			293,552

Direct financing leases, net	23,171			2,421			473			—			26,065

Consumer and other:
Home equity and second mortgages	4,408			134			150			580			5,272
Other	11,177			—			—			795			11,972
Total consumer and other	15,585			134			150			1,375			17,244

Total gross loans and leases receivable	$	846,233		$	70,207		$	49,306		$	16,226		$	981,972
Category as a % of total portfolio	86.18		%	7.15		%	5.02		%	1.65		%	100.00		%



	Category
As of December 31, 2012	I			II			III			IV			Total
	(Dollars in Thousands)
Commercial real estate:
Commercial real estate — owner occupied	$	117,180		$	9,688		$	17,351		$	769		$	144,988
Commercial real estate — non-owner occupied	267,884			29,553			22,992			3,231			323,660
Construction and land development	49,134			2,037			8,384			5,411			64,966
Multi-family	50,808			6,810			790			46			58,454
1-4 family	18,255			4,657			7,873			1,158			31,943
Total commercial real estate	503,261			52,745			57,390			10,615			624,011

Commercial and industrial	233,524			9,922			10,170			2,842			256,458

Direct financing leases, net	10,486			3,897			1,543			—			15,926

Consumer and other:
Home equity and second mortgages	3,525			157			220			740			4,642
Other	10,641			—			—			1,030			11,671
Total consumer and other	14,166			157			220			1,770			16,313

Total gross loans and leases receivable	$	761,437		$	66,721		$	69,323		$	15,227		$	912,708
Category as a % of total portfolio	83.43		%	7.31		%	7.60		%	1.67		%	100.00		%

Credit underwriting through a committee process is a key component of the Corporation’s operating philosophy. Business development officers have relatively low individual lending authority limits, and thus a significant portion of the Corporation’s new credit extensions require approval from a loan approval committee regardless of the type of loan or lease, asset quality grade of the credit, amount of the credit, or the related complexities of each proposal. In addition, the Corporation makes every effort to ensure that there is appropriate collateral at the time of origination to protect the Corporation’s interest in the related loan or lease.

Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon receipt and evaluation of updated financial information from the Corporation’s borrowers, or as other circumstances dictate. The Corporation uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases. The risk rating grades follow a consistent definition, and are then applied to specific loan types based on the nature of the loan. Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating. In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management.

Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral, financial stability of the borrower, integrity or strength of the borrower’s management team or the industry in which the borrower operates. Loans and leases in this category are not subject to additional monitoring procedures above and beyond what is required at the origination or renewal of the loan or lease. The Corporation monitors Category I loans and leases through payment performance, continued maintenance of its personal relationships with such borrowers and continued review of such borrowers’ compliance with the terms of their respective agreements.

Category II — Loans and leases in this category are beginning to show signs of deterioration in one or more of the Corporation’s core underwriting criteria such as financial stability, management strength, industry trends and collateral values. Management will place credits in this category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further deterioration or risk of loss to the Corporation. Category II loans are considered performing but are monitored frequently by the assigned business development officer and by subcommittees of the Banks’ loan committees.

Category III — Loans and leases in this category are identified by the Corporation’s business development officers and senior management as warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Banks. Category III loans and leases generally exhibit undesirable characteristics such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry, or evidence of adverse public filings and may exhibit collateral shortfall positions. Management continues to believe that it will collect all required principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore Category III loans are considered performing with no specific reserves established for this category. Category III loans are monitored by management and loan committees of the Banks on a monthly basis and the Banks’ Boards of Directors at each of their regularly scheduled meetings.

Category IV — Loans and leases in this category are considered to be impaired. Impaired loans and leases have been placed on non-accrual as management has determined that it is unlikely that the Banks will receive the required principal and interest in accordance with the contractual terms of the agreement. Impaired loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs. When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually for impaired loans and leases. External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals. To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded to reflect the magnitude of the impairment. Loans and leases in this category are monitored by management and loan committees of the Banks on a monthly basis and the Banks’ Boards of Directors at each of their regularly scheduled meetings.

Utilizing regulatory classification terminology, the Corporation identified $22.8 million and $22.0 million of loans and leases as Substandard as of December 31, 2013 and 2012, respectively. No loans were considered Special Mention, Doubtful or Loss as of either December 31, 2013 and 2012. The population of Substandard loans are a subset of Category III and Category IV loans.

The delinquency aging of the loan and lease portfolio by class of receivable as of December 31, 2013 and 2012 were as follows:



As of December 31, 2013	30-59 days past due			60-89 days past due			Greater than 90 days past due			Total past due			Current			Total loans
	(Dollars in Thousands)
Accruing loans and leases
Commercial real estate:
Owner occupied	$	—		$	—		$	—		$	—		$	140,825		$	140,825
Non-owner occupied	—			—			—			—			341,412			341,412
Construction and land development	—			—			—			—			63,286			63,286
Multi-family	—			—			—			—			62,727			62,727
1-4 family	—			—			—			—			30,265			30,265
Commercial & industrial	—			—			—			—			285,541			285,541
Direct financing leases, net	—			—			—			—			26,065			26,065
Consumer and other:
Home equity and second mortgages	—			—			—			—			4,819			4,819
Other	—			—			—			—			11,177			11,177
Total	$	—		$	—		$	—		$	—		$	966,117		$	966,117
Non-accruing loans and leases
Commercial real estate:
Owner occupied	$	—		$	—		$	254		$	254		$	85		$	339
Non-owner occupied	—			—			—			—			283			283
Construction and land development	—			—			—			—			5,422			5,422
Multi-family	—			—			—			—			31			31
1-4 family	—			180			123			303			218			521
Commercial & industrial	1,944			1,407			53			3,404			4,607			8,011
Direct financing leases, net	—			—			—			—			—			—
Consumer and other:
Home equity and second mortgages	—			—			85			85			368			453
Other	—			—			795			795			—			795
Total	$	1,944		$	1,587		$	1,310		$	4,841		$	11,014		$	15,855
Total loans and leases
Commercial real estate:
Owner occupied	$	—		$	—		$	254		$	254		$	140,910		$	141,164
Non-owner occupied	—			—			—			—			341,695			341,695
Construction and land development	—			—			—			—			68,708			68,708
Multi-family	—			—			—			—			62,758			62,758
1-4 family	—			180			123			303			30,483			30,786
Commercial & industrial	1,944			1,407			53			3,404			290,148			293,552
Direct financing leases, net	—			—			—			—			26,065			26,065
Consumer and other:
Home equity and second mortgages	—			—			85			85			5,187			5,272
Other	—			—			795			795			11,177			11,972
Total	$	1,944		$	1,587		$	1,310		$	4,841		$	977,131		$	981,972
Percent of portfolio	0.20		%	0.16		%	0.13		%	0.49		%	99.51		%	100.00		%



As of December 31, 2012	30-59 days past due			60-89 days past due			Greater than 90 days past due			Total past due			Current			Total loans
	(Dollars in Thousands)
Accruing loans and leases
Commercial real estate:
Owner occupied	$	210		$	—		$	—		$	210		$	144,009		$	144,219
Non-owner occupied	—			—			—			—			320,789			320,789
Construction and land development	—			—			—			—			60,020			60,020
Multi-family	—			—			—			—			58,408			58,408
1-4 family	—			—			—			—			30,937			30,937
Commercial & industrial	—			—			—			—			253,616			253,616
Direct financing leases, net	—			—			—			—			15,926			15,926
Consumer and other:
Home equity and second mortgages	—			—			—			—			4,030			4,030
Other	—			—			—			—			10,641			10,641
Total	$	210		$	—		$	—		$	210		$	898,376		$	898,586
Non-accruing loans and leases
Commercial real estate:
Owner occupied	$	—		$	—		$	117		$	117		$	652		$	769
Non-owner occupied	2,415			—			444			2,859			12			2,871
Construction and land development	—			—			471			471			4,475			4,946
Multi-family	—			—			—			—			46			46
1-4 family	74			—			482			556			450			1,006
Commercial & industrial	57			—			560			617			2,225			2,842
Direct financing leases, net	—			—			—			—			—			—
Consumer and other:
Home equity and second mortgages	—			—			121			121			491			612
Other	—			—			1,030			1,030			—			1,030
Total	$	2,546		$	—		$	3,225		$	5,771		$	8,351		$	14,122
Total loans and leases
Commercial real estate:
Owner occupied	$	210		$	—		$	117		$	327		$	144,661		$	144,988
Non-owner occupied	2,415			—			444			2,859			320,801			323,660
Construction and land development	—			—			471			471			64,495			64,966
Multi-family	—			—			—			—			58,454			58,454
1-4 family	74			—			482			556			31,387			31,943
Commercial & industrial	57			—			560			617			255,841			256,458
Direct financing leases, net	—			—			—			—			15,926			15,926
Consumer and other:
Home equity and second mortgages	—			—			121			121			4,521			4,642
Other	—			—			1,030			1,030			10,641			11,671
Total	$	2,756		$	—		$	3,225		$	5,981		$	906,727		$	912,708
Percent of portfolio	0.30		%	—		%	0.36		%	0.66		%	99.34		%	100.00		%

The Corporation’s total impaired assets consisted of the following at December 31, 2013 and 2012, respectively.



	December 31, 2013		December 31, 2012
	(Dollars in Thousands)
Non-accrual loans and leases
Commercial real estate:
Commercial real estate — owner occupied	$	339	$	769
Commercial real estate — non-owner occupied	283		2,871
Construction and land development	5,422		4,946
Multi-family	31		46
1-4 family	521		1,006
Total non-accrual commercial real estate	6,596		9,638
Commercial and industrial	8,011		2,842
Direct financing leases, net	—		—
Consumer and other:
Home equity and second mortgages	453		612
Other	795		1,030
Total non-accrual consumer and other loans	1,248		1,642
Total non-accrual loans and leases	15,855		14,122
Foreclosed properties, net	333		1,574
Total non-performing assets	16,188		15,696
Performing troubled debt restructurings	371		1,105
Total impaired assets	$	16,559	$	16,801



	December 31, 2013		December 31, 2012
Total non-accrual loans and leases to gross loans and leases	1.61	%	1.55	%
Total non-performing assets to total gross loans and leases plus foreclosed properties, net	1.65		1.72
Total non-performing assets to total assets	1.28		1.28
Allowance for loan and lease losses to gross loans and leases	1.42		1.69
Allowance for loan and lease losses to non-accrual loans and leases	87.68		109.05

As of December 31, 2013 and December 31, 2012, $8.1 million and $8.8 million of the non-accrual loans were considered troubled debt restructurings, respectively. As of December 31, 2013, there were no unfunded commitments associated with troubled debt restructured loans and leases.



	As of December 31, 2013					As of December 31, 2012
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
	(Dollars in Thousands)
Troubled debt restructurings:
Commercial real estate
Commercial real estate — owner occupied	1	$	110	$	84	5	$	338	$	303
Commercial real estate — non-owner occupied	3	385		283		5	885		803
Construction and land development	3	6,060		5,489		4	8,044		4,953
Multi-family	1	184		31		1	184		47
1-4 family	10	911		666		13	1,674		1,132
Commercial and industrial	5	1,935		565		7	2,250		931
Consumer and other:
Home equity and second mortgage	6	752		580		7	865		726
Other	1	2,076		795		1	2,076		1,030
Total	30	$	12,413	$	8,493	43	$	16,316	$	9,925

All loans and leases modified as a troubled debt restructuring are evaluated for impairment. The nature and extent of the impairment of restructured loans, including those which have experienced a default, is considered in the determination of an appropriate level of the allowance for loan and lease losses.

As of December 31, 2013 and 2012, our troubled debt restructurings grouped by type of concession were as follows:



	As of December 31, 2013			As of December 31, 2012
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(Dollars in Thousands)
Commercial real estate
Extension of term	1	$	55	2	$	117
Combination of extension and interest rate concession	17	6,498		26	7,121
Commercial and industrial
Extension of term	1	49		3	241
Combination of extension and interest rate concession	4	516		4	689
Consumer and other
Extension of term	2	880		2	1,117
Combination of extension and interest rate concession	5	495		6	640
Total	30	$	8,493	43	$	9,925

There were no loans and leases modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the year ended December 31, 2013.

The following represents additional information regarding the Corporation’s impaired loans and leases by class:



	Impaired Loans and Leases
	As of and for the Year Ended December 31, 2013
	Recorded investment		Unpaid principal balance		Impairment reserve		Average recorded investment⁽¹⁾		Foregone interest income		Interest income recognized		Net foregone interest income
	(In Thousands)
With no impairment reserve recorded:
Commercial real estate:
Owner occupied	$	339	$	339	$	—	$	715	$	57	$	50	$	7
Non-owner occupied	229		229		—		1,586		198		17		181
Construction and land development	5,489		8,160		—		5,777		203		3		200
Multi-family	31		398		—		366		93		—		93
1-4 family	244		244		—		405		31		34		(3		)
Commercial and industrial	555		766		—		434		97		114		(17		)
Direct financing leases, net	—		—		—		6		—		—		—
Consumer and other:
Home equity and second mortgages	518		518		—		593		37		3		34
Other	795		1,461		—		942		100		—		100
Total	$	8,200	$	12,115	$	—	$	10,824	$	816	$	221	$	595
With impairment reserve recorded:
Commercial real estate:
Owner occupied	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Non-owner occupied	54		94		54		88		6		—		6
Construction and land development	—		—		—		—		—		—		—
Multi-family	—		—		—		—		—		—		—
1-4 family	422		422		155		437		18		—		18
Commercial and industrial	7,488		7,488		131		670		42		—		42
Direct financing leases, net	—		—		—		—		—		—		—
Consumer and other:
Home equity and second mortgages	62		62		62		65		5		—		5
Other	—		—		—		—		—		—		—
Total	$	8,026	$	8,066	$	402	$	1,260	$	71	$	—	$	71
Total:
Commercial real estate:
Owner occupied	$	339	$	339	$	—	$	715	$	57	$	50	$	7
Non-owner occupied	283		323		54		1,674		204		17		187
Construction and land development	5,489		8,160		—		5,777		203		3		200
Multi-family	31		398		—		366		93		—		93
1-4 family	666		666		155		842		49		34		15
Commercial and industrial	8,043		8,254		131		1,104		139		114		25
Direct financing leases, net	—		—		—		6		—		—		—
Consumer and other:
Home equity and second mortgages	580		580		62		658		42		3		39
Other	795		1,461		—		942		100		—		100
Grand total	$	16,226	$	20,181	$	402	$	12,084	$	887	$	221	$	666


(1)	Average recorded investment is calculated primarily using daily average balances.



	Impaired Loans and Leases
	As of and for the Year Ended December 31, 2012
	Recorded investment		Unpaid principal balance		Impairment reserve		Average recorded investment⁽¹⁾		Foregone interest income		Interest income recognized		Net foregone Interest Income
	(In Thousands)
With no impairment reserve recorded:
Commercial real estate:
Owner occupied	$	741	$	741	$	—	$	1,482	$	142	$	2	$	140
Non-owner occupied	648		648		—		1,239		222		207		15
Construction and land development	4,946		8,537		—		5,834		246		24		222
Multi-family	47		414		—		313		69		60		9
1-4 family	544		677		—		2,213		151		—		151
Commercial and industrial	2,394		2,404		—		1,987		163		25		138
Direct financing leases, net	—		—		—		4		—		1		(1		)
Consumer and other:
Home equity and second mortgages	656		657		—		913		55		1		54
Other	1,030		1,620		—		1,150		113		1		112
Total	$	11,006	$	15,698	$	—	$	15,135	$	1,161	$	321	$	840
With impairment reserve recorded:
Commercial real estate:
Owner occupied	$	28	$	28	$	16	$	30	$	2	$	—	$	2
Non-owner occupied	2,582		2,582		829		162		33		—		33
Construction and land development	465		465		174		528		15		—		15
Multi-family	—		—		—		—		—		—		—
1-4 family	614		614		224		637		36		—		36
Commercial and industrial	447		3,137		187		1,350		178		—		178
Direct financing leases, net	—		—		—		—		—		—		—
Consumer and other:
Home equity and second mortgages	85		85		87		103		7		—		7
Other	—		—		—		—		—		—		—
Total	$	4,221	$	6,911	$	1,517	$	2,810	$	271	$	—	$	271
Total:
Commercial real estate:
Owner occupied	$	769	$	769	$	16	$	1,512	$	144	$	2	$	142
Non-owner occupied	3,230		3,230		829		1,401		255		207		48
Construction and land development	5,411		9,002		174		6,362		261		24		237
Multi-family	47		414		—		313		69		60		9
1-4 family	1,158		1,291		224		2,850		187		—		187
Commercial and industrial	2,841		5,541		187		3,337		341		25		316
Direct financing leases, net	—		—		—		4		—		1		(1		)
Consumer and other:
Home equity and second mortgages	741		742		87		1,016		62		1		61
Other	1,030		1,620		—		1,150		113		1		112
Grand total	$	15,227	$	22,609	$	1,517	$	17,945	$	1,432	$	321	$	1,111


(1)	Average recorded investment is calculated primarily using daily average balances.

The difference between the loans and leases recorded investment and the unpaid principal balance of $4.0 million and $7.4 million as of December 31, 2013 and 2012, respectively, represents partial charge-offs resulting from confirmed losses due to the value of the collateral securing the loans and leases being less than the carrying values of the loans and leases. Impaired loans and leases also included $371,000 and $1.1 million of loans that were performing troubled debt restructurings, and thus, while not on non-accrual, were reported as impaired, due to the concession in terms. When a loan is placed on non-accrual, interest accruals are discontinued and previously accrued but uncollected interest is deducted from interest income. If collectability of contractual principal and interest payments is in doubt, cash payments collected on non-accrual loans are first applied to principal. Foregone interest represents the interest that was contractually due on the note but not received or recorded. To the extent the amount of principal on a non-accrual note is fully collected and additional cash is received, the Corporation will recognize interest income.

To determine the level and composition of the allowance for loan and lease losses, the Corporation breaks out the loan and lease portfolio by segments and risk ratings. First, the Corporation evaluates loans and leases for potential impairment classification. The Corporation analyzes each loan and lease determined to be impaired on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows. The Corporation applies historical trends from established risk factors to each category of loans and leases that has not been individually evaluated for the purpose of establishing the general portion of the allowance.

As of June 30, 2013, based on the results of the Corporation’s continuous risk assessment and monitoring process, the Corporation refined its methodology of establishing the general portion of the allowance for loan and lease losses attributable to the historical loss migration by shortening the historical loss period from five years to three years and increasing the historical loss factor applied to Category III loans. Both changes were implemented to more accurately reflect the estimate of incurred losses for the collectively evaluated loans as of the balance sheet date. The impact of the changes was not material individually or in the aggregate.

A summary of the activity in the allowance for loan and lease losses by portfolio segment is as follows:



	As of and for the Year Ended December 31, 2013
	Commercial real estate			Commercial and industrial			Consumer and other			Direct financing leases, net			Total
	(Dollars in Thousands)
Allowance for credit losses:
Beginning balance	$	10,693		$	4,129		$	371		$	207		$	15,400
Charge-offs	(896		)	(14		)	(4		)	—			(914		)
Recoveries	353			11			5			5			374
Provision	(1,095		)	109			(99		)	126			(959		)
Ending balance	$	9,055		$	4,235		$	273		$	338		$	13,901
Ending balance: individually evaluated for impairment	$	209		$	131		$	62		$	—		$	402
Ending balance: collectively evaluated for impairment	$	8,846		$	4,104		$	211		$	338		$	13,499
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—
Loans and lease receivables:
Ending balance, gross	$	645,111		$	293,552		$	17,244		$	26,065		$	981,972
Ending balance: individually evaluated for impairment	$	5,379		$	8,043		$	1,375		$	—		$	14,797
Ending balance: collectively evaluated for impairment	$	638,303		$	285,509		$	15,869		$	26,065		$	965,746
Ending balance: loans acquired with deteriorated credit quality	$	1,429		$	—		$	—		$	—		$	1,429
Allowance as % of gross loans	1.40		%	1.44		%	1.58		%	1.30		%	1.42		%



	As of and for the Year Ended December 31, 2012
	Commercial real estate			Commercial and industrial			Consumer and other			Direct financing leases, net			Total
	(Dollars in Thousands)
Allowance for credit losses:
Beginning balance	$	9,554		$	3,977		$	384		$	240		$	14,155
Charge-offs	(612		)	(2,739		)	(128		)	—			(3,479		)
Recoveries	375			66			40			—			481
Provision	1,376			2,825			75			(33		)	4,243
Ending balance	$	10,693		$	4,129		$	371		$	207		$	15,400
Ending balance: individually evaluated for impairment	$	1,244		$	186		$	87		$	—		$	1,517
Ending balance: collectively evaluated for impairment	$	9,449		$	3,943		$	284		$	207		$	13,883
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—
Loans and lease receivables:
Ending balance, gross	$	624,011		$	256,458		$	16,313		$	15,926		$	912,708
Ending balance: individually evaluated for impairment	$	10,614		$	2,842		$	1,771		$	—		$	15,227
Ending balance: collectively evaluated for impairment	$	613,397		$	253,616		$	14,542		$	15,926		$	897,481
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—
Allowance as % of gross loans	1.71		%	1.61		%	2.27		%	1.30		%	1.69		%

The Corporation’s net investment in direct financing leases consists of the following:



	As of December 31,
	2013			2012
	(In Thousands)
Minimum lease payments receivable	$	24,658		$	12,951
Estimated unguaranteed residual values in leased property	4,546			4,366
Initial direct costs	226			29
Less unearned lease and residual income	(3,365		)	(1,420		)
Investment in commercial direct financing leases	$	26,065		$	15,926

There were no impairments of residual value of leased property during the years ended December 31, 2013 and 2012.

The Corporation leases equipment under direct financing leases expiring in future years. Some of these leases provide for additional rents, based on use in excess of a stipulated minimum number of hours, and generally allow the lessees to purchase the equipment for fair value at the end of the lease term.

Future aggregate maturities of minimum lease payments to be received are as follows:



(In Thousands)
Maturities during year ended December 31,
2014	$	6,429
2015	5,332
2016	4,256
2017	3,214
2018	2,494
Thereafter	2,933
	$	24,658