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

Loan and lease receivables consist of the following:



	September 30, 2015		December 31, 2014
	(In Thousands)
Commercial real estate
Commercial real estate — owner occupied	$	170,195	$	163,884
Commercial real estate — non-owner occupied ⁽¹⁾	416,421		417,962
Construction and land development	157,651		121,160
Multi-family	90,514		72,578
1-4 family ⁽²⁾	44,476		36,182
Total commercial real estate	879,257		811,766
Commercial and industrial ⁽³⁾	450,307		416,654
Direct financing leases, net	28,958		34,165
Consumer and other
Home equity and second mortgages	8,908		7,866
Other	13,809		11,341
Total consumer and other	22,717		19,207
Total gross loans and leases receivable	1,381,239		1,281,792
Less:
Allowance for loan and lease losses	15,359		14,329
Deferred loan fees	1,157		1,025
Loans and leases receivable, net	$	1,364,723	$	1,266,438


(1)	Includes guaranteed portion of SBA loans held for sale totaling $1.5 million as of September 30, 2015.


(2)	Includes residential real estate loans held for sale totaling $307,000 as of September 30, 2015 and $1.3 million as of December 31, 2014.


(3)	Includes guaranteed portion of SBA loans held for sale totaling $1.1 million as of September 30, 2015.

Loans transferred to third parties consist of the guaranteed portion of SBA loans as well as participation interests in other originated loans. The total principal amount of loans transferred during the three months ended September 30, 2015 and 2014 was $28.7 million and $5.5 million, respectively. For the nine months ended September 30, 2015 and 2014, $74.0 million and $16.1 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 all of the loans transferred during the three and nine months ended September 30, 2015 and September 30, 2014 have been derecognized in the unaudited Consolidated Financial Statements. The Corporation has a continuing involvement in each of the agreements 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 guaranteed portion of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements. No gain or loss was recognized on participation interests in other originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total amount of loan participations purchased on the Corporation’s Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 was $471,000 and $482,000, respectively.

The total amount of outstanding loans transferred to third parties as loan participations sold at September 30, 2015 and December 31, 2014 was $148.8 million and $116.6 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 September 30, 2015 and December 31, 2014, the total amount of the Corporation’s partial ownership of loans on the Corporation’s Consolidated Balance Sheets was $105.6 million and $96.4 million, respectively. As of September 30, 2015, $1.7 million loans in this participation sold portfolio were considered impaired as compared to $1.2 million as of December 31, 2014. The Corporation does not share in the participant’s portion of the charge-offs.

The Corporation sells residential real estate loans, servicing released, in the secondary market. The total principal amount of residential real estate loans sold during the three and nine months ended September 30, 2015 was $9.0 million and $28.6 million, respectively. No residential real estate loans were originated or sold during the three and nine months ended September 30, 2014. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and nine months ended September 30, 2015 have been derecognized in the unaudited Consolidated Financial Statements. The Corporation has a continuing involvement in each of the transactions by way of relationship management; however, there are no further obligations of the Corporation in the event of a borrower’s default, other than standard representations and warranties related to the sold amount. The loans were transferred at their fair value and the related gain was recognized as non-interest income upon the transfer in the unaudited Consolidated Financial Statements.

ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, applies to purchased loans with evidence of deterioration in credit quality since origination for which it is probable at acquisition that the Corporation will be unable to collect all contractually required payments are considered to be credit impaired. Purchased credit-impaired loans are initially recorded at fair value, which is estimated by discounting the cash flows expected to be collected at the acquisition date. Because the estimate of expected cash flows reflects an estimate of future credit losses expected to be incurred over the life of the loans, an allowance for credit losses is not recorded at the acquisition date. The excess of cash flows expected at acquisition over the estimated fair value, referred to as the accretable yield, is recognized in interest income over the remaining life of the loan on a level-yield basis, contingent on the subsequent evaluation of future expected cash flows. The difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. A subsequent decrease in the estimate of cash flows expected to be received on purchased credit-impaired loans generally results in the recognition of an allowance for credit losses. Subsequent increases in cash flows result in reversal of any nonaccretable difference (or allowance for loan and lease losses to the extent any has been recorded) with a positive impact on interest income recognized. The measurement of cash flows involves assumptions and judgments for interest rates, prepayments, default rates, loss severity, and collateral values. All of these factors are inherently subjective and significant changes in the cash flow estimates over the life of the loan can result.

The following table reflects the contractually required payments receivable and fair value of the Corporation’s purchased credit impaired loans as of September 30, 2015 and December 31, 2014:



	September 30, 2015		December 31, 2014
	(In Thousands)
Contractually required payments	$	5,714	$	6,874
Fair value of purchased credit impaired loans	$	3,578	$	4,025

The following table presents a rollforward of the Corporation’s accretable yield as of September 30, 2015 and December 31, 2014:



	As of and for the Nine Months Ended September 30, 2015			As of and for the Year Ended December 31, 2014
	(In Thousands)
Accretable yield, beginning of period	$	676		$	683
Accretion recognized in earnings	(22		)	(7		)
Reclassification to nonaccretable difference for loans with changing cash flows⁽¹⁾	(22		)	—
Changes in accretable yield for non-credit related changes in expected cash flows⁽²⁾	(163		)	—
Accretable yield, end of period	$	469		$	676


(1)	Represents changes in accretable yield for those loans that are driven primarily by credit performance.


(2)	Represents changes in accretable yield for those loans that are driven primarily by changes in actual and estimated payments.

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 September 30, 2015 and December 31, 2014:



	Category
As of September 30, 2015	I			II			III			IV			Total
	(Dollars in Thousands)
Commercial real estate:
Commercial real estate — owner occupied	$	146,041		$	11,945		$	10,983		$	1,226		$	170,195
Commercial real estate — non-owner occupied	392,777			19,325			3,419			900			416,421
Construction and land development	146,334			2,466			4,285			4,566			157,651
Multi-family	90,143			365			—			6			90,514
1-4 family	34,626			4,904			2,667			2,279			44,476
Total commercial real estate	809,921			39,005			21,354			8,977			879,257

Commercial and industrial	407,976			9,078			25,772			7,481			450,307

Direct financing leases, net	27,121			1,199			638			—			28,958

Consumer and other:
Home equity and second mortgages	7,890			444			142			432			8,908
Other	13,136			3			—			670			13,809
Total consumer and other	21,026			447			142			1,102			22,717

Total gross loans and leases receivable	$	1,266,044		$	49,729		$	47,906		$	17,560		$	1,381,239
Category as a % of total portfolio	91.66		%	3.60		%	3.47		%	1.27		%	100.00		%



	Category
As of December 31, 2014	I			II			III			IV			Total
	(Dollars in Thousands)
Commercial real estate:
Commercial real estate — owner occupied	$	131,094		$	15,592		$	16,621		$	577		$	163,884
Commercial real estate — non-owner occupied	378,671			20,823			17,498			970			417,962
Construction and land development	100,934			8,193			6,876			5,157			121,160
Multi-family	70,897			751			913			17			72,578
1-4 family	25,997			5,278			3,336			1,571			36,182
Total commercial real estate	707,593			50,637			45,244			8,292			811,766

Commercial and industrial	383,755			18,524			12,026			2,349			416,654

Direct financing leases, net	32,756			1,120			289			—			34,165

Consumer and other:
Home equity and second mortgages	7,039			205			189			433			7,866
Other	10,570			50			—			721			11,341
Total consumer and other	17,609			255			189			1,154			19,207

Total gross loans and leases receivable	$	1,141,713		$	70,536		$	57,748		$	11,795		$	1,281,792
Category as a % of total portfolio	89.07		%	5.50		%	4.51		%	0.92		%	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 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 $11.1 million and $27.1 million of loans and leases as Substandard as of September 30, 2015 and December 31, 2014, respectively. No loans were considered Special Mention, Doubtful or Loss as of either September 30, 2015 or December 31, 2014. 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 September 30, 2015 and December 31, 2014 is as follows:



As of September 30, 2015	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	$	39		$	—		$	—		$	39		$	169,002		$	169,041
Non-owner occupied	—			—			—			—			416,148			416,148
Construction and land development	—			—			—			—			153,285			153,285
Multi-family	—			—			—			—			90,508			90,508
1-4 family	—			—			—			—			42,980			42,980
Commercial and industrial	—			—			—			—			448,906			448,906
Direct financing leases, net	—			—			—			—			28,958			28,958
Consumer and other:
Home equity and second mortgages	—			—			—			—			8,567			8,567
Other	—			—			—			—			13,139			13,139
Total	39			—			—			39			1,371,493			1,371,532
Non-accruing loans and leases
Commercial real estate:
Owner occupied	$	584		$	483		$	—		$	1,067		$	87		$	1,154
Non-owner occupied	—			—			—			—			273			273
Construction and land development	—			—			—			—			4,366			4,366
Multi-family	—			—			—			—			6			6
1-4 family	226			—			993			1,219			277			1,496
Commercial and industrial	491			35			832			1,358			43			1,401
Direct financing leases, net	—			—			—			—			—			—
Consumer and other:
Home equity and second mortgages	—			—			99			99			242			341
Other	—			—			670			670			—			670
Total	1,301			518			2,594			4,413			5,294			9,707
Total loans and leases
Commercial real estate:
Owner occupied	$	623		$	483		$	—		$	1,106		$	169,089		$	170,195
Non-owner occupied	—			—			—			—			416,421			416,421
Construction and land development	—			—			—			—			157,651			157,651
Multi-family	—			—			—			—			90,514			90,514
1-4 family	226			—			993			1,219			43,257			44,476
Commercial and industrial	491			35			832			1,358			448,949			450,307
Direct financing leases, net	—			—			—			—			28,958			28,958
Consumer and other:
Home equity and second mortgages	—			—			99			99			8,809			8,908
Other	—			—			670			670			13,139			13,809
Total	$	1,340		$	518		$	2,594		$	4,452		$	1,376,787		$	1,381,239
Percent of portfolio	0.10		%	0.04		%	0.18		%	0.32		%	99.68		%	100.00		%



As of December 31, 2014	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	$	—		$	—		$	—		$	—		$	163,384		$	163,384
Non-owner occupied	—			—			—			—			417,676			417,676
Construction and land development	—			—			—			—			116,228			116,228
Multi-family	—			—			—			—			72,561			72,561
1-4 family	—			—			—			—			35,492			35,492
Commercial and industrial	—			—			—			—			414,336			414,336
Direct financing leases, net	—			—			—			—			34,165			34,165
Consumer and other:
Home equity and second mortgages	—			—			—			—			7,537			7,537
Other	—			—			—			—			10,621			10,621
Total	—			—			—			—			1,272,000			1,272,000
Non-accruing loans and leases
Commercial real estate:
Owner occupied	$	—		$	—		$	—		$	—		$	500		$	500
Non-owner occupied	—			215			—			215			71			286
Construction and land development	—			193			—			193			4,739			4,932
Multi-family	—			—			—			—			17			17
1-4 family	—			106			306			412			278			690
Commercial and industrial	364			146			736			1,246			1,072			2,318
Direct financing leases, net	—			—			—			—			—			—
Consumer and other:
Home equity and second mortgages	—			—			—			—			329			329
Other	—			—			720			720			—			720
Total	364			660			1,762			2,786			7,006			9,792
Total loans and leases
Commercial real estate:
Owner occupied	$	—		$	—		$	—		$	—		$	163,884		$	163,884
Non-owner occupied	—			215			—			215			417,747			417,962
Construction and land development	—			193			—			193			120,967			121,160
Multi-family	—			—			—			—			72,578			72,578
1-4 family	—			106			306			412			35,770			36,182
Commercial and industrial	364			146			736			1,246			415,408			416,654
Direct financing leases, net	—			—			—			—			34,165			34,165
Consumer and other:
Home equity and second mortgages	—			—			—			—			7,866			7,866
Other	—			—			720			720			10,621			11,341
Total	$	364		$	660		$	1,762		$	2,786		$	1,279,006		$	1,281,792
Percent of portfolio	0.03		%	0.05		%	0.14		%	0.22		%	99.78		%	100.00		%

The Corporation’s total impaired assets consisted of the following at September 30, 2015 and December 31, 2014, respectively.



	September 30, 2015		December 31, 2014
	(Dollars in Thousands)
Non-accrual loans and leases
Commercial real estate:
Commercial real estate — owner occupied	$	1,154	$	500
Commercial real estate — non-owner occupied	273		286
Construction and land development	4,366		4,932
Multi-family	6		17
1-4 family	1,496		690
Total non-accrual commercial real estate	7,295		6,425
Commercial and industrial	1,401		2,318
Direct financing leases, net	—		—
Consumer and other:
Home equity and second mortgages	341		329
Other	670		720
Total non-accrual consumer and other loans	1,011		1,049
Total non-accrual loans and leases	9,707		9,792
Foreclosed properties, net	1,632		1,693
Total non-performing assets	11,339		11,485
Performing troubled debt restructurings	7,852		2,003
Total impaired assets	$	19,191	$	13,488



	September 30, 2015		December 31, 2014
Total non-accrual loans and leases to gross loans and leases	0.70	%	0.76	%
Total non-performing assets to total gross loans and leases plus foreclosed properties, net	0.82		0.89
Total non-performing assets to total assets	0.65		0.70
Allowance for loan and lease losses to gross loans and leases	1.11		1.12
Allowance for loan and lease losses to non-accrual loans and leases	158.22		146.33

As of September 30, 2015 and December 31, 2014, $6.8 million and $7.4 million of the non-accrual loans were considered troubled debt restructurings, respectively. As of September 30, 2015, there were no unfunded commitments associated with troubled debt restructured loans and leases.



	As of September 30, 2015					As of December 31, 2014
	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	2	$	625	$	555	2	$	624	$	577
Commercial real estate — non-owner occupied	5	1,151		900		5	1,095		970
Construction and land development	3	6,034		4,627		4	6,260		5,157
Multi-family	1	184		6		1	184		17
1-4 family	15	2,119		1,322		16	2,119		1,368
Commercial and industrial	6	6,411		6,209		4	361		155
Direct financing leases, net	—	—		—		—	—		—
Consumer and other:
Home equity and second mortgages	5	680		333		6	772		431
Other	1	2,077		670		2	2,080		721
Total	38	$	19,281	$	14,622	40	$	13,495	$	9,396

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 September 30, 2015 and December 31, 2014, the Corporation’s troubled debt restructurings grouped by type of concession were as follows:



	As of September 30, 2015			As of December 31, 2014
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(Dollars in Thousands)
Commercial real estate
Extension of term	1	$	28	1	$	39
Interest rate concession	1	55		1	65
Combination of extension and interest rate concession	24	7,327		26	7,984
Commercial and industrial
Combination of extension and interest rate concession	6	6,209		4	155
Consumer and other
Extension of term	2	702		3	753
Combination of extension and interest rate concession	4	301		5	400
Total	38	$	14,622	40	$	9,396

There were no loans and leases modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the nine months ended September 30, 2015.

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



	Impaired Loans and Leases
	As of and for the Nine Months Ended September 30, 2015
	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	$	642	$	642	$	—	$	566	$	21	$	—	$	21
Non-owner occupied	1,439		1,439		—		915		15		—		15
Construction and land development	4,566		7,236		—		4,916		102		—		102
Multi-family	6		373		—		12		25		—		25
1-4 family	1,291		1,365		—		1,509		46		2		44
Commercial and industrial	6,742		6,752		—		3,052		121		1		120
Direct financing leases, net	—		—		—		—		—		—		—
Consumer and other:
Home equity and second mortgages	301		301		—		366		16		9		7
Other	670		1,337		—		696		61		—		61
Total	15,657		19,445		—		12,032		407		12		395
With impairment reserve recorded:
Commercial real estate:
Owner occupied	$	—	$	—	$	—	$	17	$	—	$	—	$	—
Non-owner occupied	45		85		45		47		2		—		2
Construction and land development	—		—		—		—		—		—		—
Multi-family	—		—		—		—		—		—		—
1-4 family	988		993		213		560		25		—		25
Commercial and industrial	739		739		276		215		12		—		12
Direct financing leases, net	—		—		—		—		—		—		—
Consumer and other:
Home equity and second mortgages	131		131		26		76		7		—		7
Other	—		—		—		—		—		—		—
Total	1,903		1,948		560		915		46		—		46
Total:
Commercial real estate:
Owner occupied	$	642	$	642	$	—	$	583	$	21	$	—	$	21
Non-owner occupied	1,484		1,524		45		962		17		—		17
Construction and land development	4,566		7,236		—		4,916		102		—		102
Multi-family	6		373		—		12		25		—		25
1-4 family	2,279		2,358		213		2,069		71		2		69
Commercial and industrial	7,481		7,491		276		3,267		133		1		132
Direct financing leases, net	—		—		—		—		—		—		—
Consumer and other:
Home equity and second mortgages	432		432		26		442		23		9		14
Other	670		1,337		—		696		61		—		61
Grand total	$	17,560	$	21,393	$	560	$	12,947	$	453	$	12	$	441


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



	Impaired Loans and Leases
	As of and for the Year Ended December 31, 2014
	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	$	577	$	577	$	—	$	484	$	30	$	79	$	(49	)
Non-owner occupied	921		921		—		349		22		—		22
Construction and land development	5,157		7,828		—		5,285		155		—		155
Multi-family	17		384		—		24		53		—		53
1-4 family	1,181		1,218		—		380		15		12		3
Commercial and industrial	2,316		2,926		—		6,141		463		649		(186		)
Direct financing leases, net	—		—		—		—		—		—		—
Consumer and other:
Home equity and second mortgages	380		380		—		495		18		—		18
Other	721		1,389		—		768		87		—		87
Total	11,270		15,623		—		13,926		843		740		103
With impairment reserve recorded:
Commercial real estate:
Owner occupied	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Non-owner occupied	49		89		49		52		4		—		4
Construction and land development	—		—		—		—		—		—		—
Multi-family	—		—		—		—		—		—		—
1-4 family	390		390		155		405		18		—		18
Commercial and industrial	33		33		33		34		—		—		—
Direct financing leases, net	—		—		—		—		—		—		—
Consumer and other:
Home equity and second mortgages	53		53		53		57		5		—		5
Other	—		—		—		—		—		—		—
Total	525		565		290		548		27		—		27
Total:
Commercial real estate:
Owner occupied	$	577	$	577	$	—	$	484	$	30	$	79	$	(49	)
Non-owner occupied	970		1,010		49		401		26		—		26
Construction and land development	5,157		7,828		—		5,285		155		—		155
Multi-family	17		384		—		24		53		—		53
1-4 family	1,571		1,608		155		785		33		12		21
Commercial and industrial	2,349		2,959		33		6,175		463		649		(186		)
Direct financing leases, net	—		—		—		—		—		—		—
Consumer and other:
Home equity and second mortgages	433		433		53		552		23		—		23
Other	721		1,389		—		768		87		—		87
Grand total	$	11,795	$	16,188	$	290	$	14,474	$	870	$	740	$	130


(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 $3.8 million and $4.4 million as of September 30, 2015 and December 31, 2014 represents partial charge-offs resulting from confirmed losses due to the value of the collateral securing the loans and leases being below the carrying values of the loans and leases. Impaired loans and leases also included $7.9 million and $2.0 million of loans as of September 30, 2015 and December 31, 2014 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 accrual is discontinued and previously accrued but uncollected interest is deducted from interest income. 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 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.

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



	As of and for the Nine Months Ended September 30, 2015
	Commercial real estate			Commercial and industrial loans and leases			Consumer and other			Total
	(Dollars in Thousands)
Allowance for credit losses:
Beginning balance	$	8,619		$	5,492		$	218		$	14,329
Charge-offs	(94		)	(447		)	(5		)	(546		)
Recoveries	75			6			4			85
Provision	505			1,011			(25		)	1,491
Ending balance	$	9,105		$	6,062		$	192		$	15,359
Ending balance: individually evaluated for impairment	$	232		$	276		$	26		$	534
Ending balance: collectively evaluated for impairment	$	8,847		$	5,786		$	166		$	14,799
Ending balance: loans acquired with deteriorated credit quality	$	26		$	—		$	—		$	26
Loans and lease receivables:
Ending balance, gross	$	879,257		$	479,265		$	22,717		$	1,381,239
Ending balance: individually evaluated for impairment	$	6,178		$	6,960		$	874		$	14,012
Ending balance: collectively evaluated for impairment	$	870,280		$	471,785		$	21,615		$	1,363,680
Ending balance: loans acquired with deteriorated credit quality	$	2,799		$	520		$	228		$	3,547
Allowance as % of gross loans	1.04		%	1.26		%	0.85		%	1.11		%



	As of and for the Nine Months Ended September 30, 2014
	Commercial real estate			Commercial and industrial loans and leases			Consumer and other			Total
	(Dollars in Thousands)
Allowance for credit losses:
Beginning balance	$	9,055		$	4,573		$	273		$	13,901
Charge-offs	—			—			(2		)	(2		)
Recoveries	20			1			10			31
Provision	(387		)	417			(30		)	—
Ending balance	$	8,688		$	4,991		$	251		$	13,930
Ending balance: individually evaluated for impairment	$	321		$	34		$	56		$	411
Ending balance: collectively evaluated for impairment	$	8,367		$	4,957		$	195		$	13,519
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—
Loans and lease receivables:
Ending balance, gross	$	654,588		$	371,220		$	16,834		$	1,042,642
Ending balance: individually evaluated for impairment	$	5,198		$	8,780		$	1,096		$	15,074
Ending balance: collectively evaluated for impairment	$	648,071		$	362,440		$	15,738		$	1,026,249
Ending balance: loans acquired with deteriorated credit quality	$	1,319		$	—		$	—		$	1,319
Allowance as % of gross loans	1.33		%	1.34		%	1.49		%	1.34		%