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

Loan and lease receivables, including loans held for sale, consist of the following:



	December 31, 2015		December 31, 2014
	(In Thousands)
Commercial real estate
Commercial real estate — owner occupied	$	176,322	$	163,884
Commercial real estate — non-owner occupied	436,901		417,962
Construction and land development	160,404		121,160
Multi-family	80,254		72,578
1-4 family ⁽¹⁾	51,607		36,182
Total commercial real estate	905,488		811,766
Commercial and industrial ⁽²⁾	473,592		416,654
Direct financing leases, net	31,093		34,165
Consumer and other
Home equity and second mortgages	8,237		7,866
Other	16,319		11,341
Total consumer and other	24,556		19,207
Total gross loans and leases receivable	1,434,729		1,281,792
Less:
Allowance for loan and lease losses	16,316		14,329
Deferred loan fees	1,062		1,025
Loans and leases receivable, net	$	1,417,351	$	1,266,438


(1)	Includes residential real estate loans held for sale totaling $1.3 million, as of December 31, 2015 and $1.3 million as of December 31, 2014.


(2)	Includes guaranteed portion of SBA loans held for sale totaling $1.4 million as of December 31, 2015.

During the years ended December 31, 2015 and 2014, $128.2 million and $29.1 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 $128.2 million and $29.1 million during the years ended December 31, 2015 and 2014, 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, other than standard representations and warranties related to sold amounts, that would preclude the application of sale accounting treatment. Loan participations 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. Gain on sale of SBA loans was $4.0 million and $318,000 for the years ended December 31, 2015 and 2014. No gain on sale of SBA loans was recorded in 2013. The total amount of loan participations purchased on the Corporation’s Consolidated Balance Sheets as of December 31, 2015 and December 31, 2014 was $467,000 and $482,000, respectively.

The total amount of outstanding loans transferred to third parties as loan participations sold as of December 31, 2015 and December 31, 2014 was $169.2 million and $116.6 million, respectively, all of which were 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, 2015 and December 31, 2014, the total amount of the Corporation’s partial ownership of loans on the Corporation’s Consolidated Balance Sheets was $136.8 million and $96.4 million, respectively. As of December 31, 2015, $1.8 million of 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 year ended December 31, 2015 and 2014 was $32.6 million and $4.9 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the year ended December 31, 2015 and 2014 were derecognized when sold 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, other than standard representations and warranties related to the sold amount, that would preclude the application of sale accounting treatment. 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 December 31, 2015 and 2014:



	December 31, 2015		December 31, 2014
	(In Thousands)
Contractually required payments	$	5,291	$	6,874
Fair value of credit impaired loans acquired	$	3,250	$	4,025

The following table presents a rollforward of the accretable yield for the year ended December 31, 2015 and 2014.



	December 31, 2015			December 31, 2014
	(In Thousands)
Accretable yield, beginning of period	$	676		$	683
Accretion recognized in earnings	(50		)	(7		)
Reclassification to nonaccretable difference for loans with changing cash flows⁽¹⁾	(60		)	—
Changes in accretable yield for non-credit related changes in expected cash flows⁽²⁾	(152		)	—
Accretable yield, end of period	$	414		$	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.

Certain of the Corporation’s executive officers, directors and their related interests are loan clients of the Banks. As of December 31, 2015 and 2014, loans aggregating approximately $6.9 million and $4.4 million, respectively, were outstanding to such parties. New loans granted to such parties during the years ended December 31, 2015 and 2014 were approximately $3.9 million and $1.8 million and repayments on such loans were approximately $1.4 million and $392,000, 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, 2015 and 2014:



	Category
As of December 31, 2015	I			II			III			IV			Total
	(Dollars in Thousands)
Commercial real estate:
Commercial real estate — owner occupied	$	156,379		$	7,654		$	9,311		$	2,978		$	176,322
Commercial real estate — non-owner occupied	410,517			20,662			3,408			2,314			436,901
Construction and land development	151,508			3,092			874			4,930			160,404
Multi-family	79,368			884			—			2			80,254
1-4 family ⁽¹⁾	42,389			3,985			1,865			3,368			51,607
Total commercial real estate	840,161			36,277			15,458			13,592			905,488

Commercial and industrial ⁽²⁾	431,598			7,139			25,706			9,149			473,592

Direct financing leases, net	29,514			1,013			528			38			31,093

Consumer and other:
Home equity and second mortgages	7,497			—			141			599			8,237
Other	15,616			48			—			655			16,319
Total consumer and other	23,113			48			141			1,254			24,556

Total gross loans and leases receivable	$	1,324,386		$	44,477		$	41,833		$	24,033		$	1,434,729
Category as a % of total portfolio	92.30		%	3.10		%	2.92		%	1.68		%	100.00		%


(1)	Includes residential real estate loans held for sale totaling $1.3 million in Category I.


(2)	Includes guaranteed portion of SBA loans held for sale totaling $1.4 million in Category I.



	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 ⁽¹⁾	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		%


(1)	Includes residential real estate loans held for sale totaling $1.3 million in Category I.

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 or a government guarantee 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 the Banks’ credit 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. However, management continues to believe that it will collect all contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category. Therefore Category III loans are considered performing with no specific reserves established for this category. Category III loans are monitored by management and credit 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 include those which have been placed on non-accrual as management has determined that it is unlikely that the Banks will receive the contractual principal and interest in accordance with the contractual terms of the agreement and loans and leases considered performing troubled debt restructurings. 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, or more frequently as circumstances warrant, for impaired loans and leases that are primarily secured by real estate or equipment. 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 $26.8 million and $27.1 million of loans and leases as Substandard as of December 31, 2015 and 2014, respectively. No loans were considered Special Mention, Doubtful or Loss as of either December 31, 2015 and 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 December 31, 2015 and 2014 were as follows:



As of December 31, 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	$	—		$	—		$	—		$	—		$	173,416		$	173,416
Non-owner occupied	—			—			—			—			435,222			435,222
Construction and land development	—			—			—			—			155,675			155,675
Multi-family	—			—			—			—			80,252			80,252
1-4 family ⁽¹⁾	78			—			—			78			48,918			48,996
Commercial & industrial ⁽²⁾	—			—			—			—			464,456			464,456
Direct financing leases, net	—			—			—			—			31,055			31,055
Consumer and other:
Home equity and second mortgages	—			—			—			—			7,695			7,695
Other	—			—			—			—			15,664			15,664
Total	$	78		$	—		$	—		$	78		$	1,412,353		$	1,412,431
Non-accruing loans and leases
Commercial real estate:
Owner occupied	$	—		$	473		$	—		$	473		$	2,434		$	2,907
Non-owner occupied	—			—			—			—			1,678			1,678
Construction and land development	397			—			—			397			4,332			4,729
Multi-family	—			—			—			—			2			2
1-4 family	430			34			895			1,359			1,252			2,611
Commercial & industrial	2,077			—			564			2,641			6,495			9,136
Direct financing leases, net	—			—			—			—			38			38
Consumer and other:
Home equity and second mortgages	—			—			250			250			292			542
Other	—			—			655			655			—			655
Total	$	2,904		$	507		$	2,364		$	5,775		$	16,523		$	22,298
Total loans and leases
Commercial real estate:
Owner occupied	$	—		$	473		$	—		$	473		$	175,850		$	176,323
Non-owner occupied	—			—			—			—			436,900			436,900
Construction and land development	397			—			—			397			160,007			160,404
Multi-family	—			—			—			—			80,254			80,254
1-4 family	508			34			895			1,437			50,170			51,607
Commercial & industrial	2,077			—			564			2,641			470,951			473,592
Direct financing leases, net	—			—			—			—			31,093			31,093
Consumer and other:
Home equity and second mortgages	—			—			250			250			7,987			8,237
Other	—			—			655			655			15,664			16,319
Total	$	2,982		$	507		$	2,364		$	5,853		$	1,428,876		$	1,434,729
Percent of portfolio	0.21		%	0.04		%	0.16		%	0.41		%	99.59		%	100.00		%


(1)	Includes residential real estate loans held for sale totaling $1.3 million.


(2)	Includes guaranteed portion of SBA loans held for sale totaling $1.4 million.



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 ⁽¹⁾	—			—			—			—			35,492			35,492
Commercial & 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 & 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 & 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		%


(1)	Includes residential real estate loans held for sale totaling $1.3 million.

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



	December 31, 2015		December 31, 2014
	(Dollars in Thousands)
Non-accrual loans and leases
Commercial real estate:
Commercial real estate — owner occupied	$	2,907	$	500
Commercial real estate — non-owner occupied	1,678		286
Construction and land development	4,729		4,932
Multi-family	2		17
1-4 family	2,611		690
Total non-accrual commercial real estate	11,927		6,425
Commercial and industrial	9,136		2,318
Direct financing leases, net	38		—
Consumer and other:
Home equity and second mortgages	542		329
Other	655		720
Total non-accrual consumer and other loans	1,197		1,049
Total non-accrual loans and leases	22,298		9,792
Foreclosed properties, net	1,677		1,693
Total non-performing assets	23,975		11,485
Performing troubled debt restructurings	1,735		2,003
Total impaired assets	$	25,710	$	13,488



	December 31, 2015		December 31, 2014
Total non-accrual loans and leases to gross loans and leases	1.55	%	0.76	%
Total non-performing assets to total gross loans and leases plus foreclosed properties, net	1.67		0.89
Total non-performing assets to total assets	1.34		0.70
Allowance for loan and lease losses to gross loans and leases	1.14		1.12
Allowance for loan and lease losses to non-accrual loans and leases	73.17		146.33

As of December 31, 2015 and December 31, 2014, $16.2 million and $7.4 million of the non-accrual loans were considered troubled debt restructurings, respectively. As of December 31, 2015, there were no unfunded commitments associated with troubled debt restructured loans and leases.



	As of December 31, 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	3	$	1,209	$	1,188	2	$	624	$	577
Commercial real estate — non-owner occupied	5	1,150		904		5	1,095		970
Construction and land development	3	6,034		4,593		4	6,260		5,157
Multi-family	1	184		2		1	184		17
1-4 family	15	2,035		1,869		16	2,119		1,368
Commercial and industrial	10	7,572		8,330		4	361		155
Consumer and other:
Home equity and second mortgage	4	461		349		6	772		431
Other	1	2,076		655		2	2,080		721
Total	42	$	20,721	$	17,890	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 December 31, 2015 and 2014, our troubled debt restructurings grouped by type of concession were as follows:



	As of December 31, 2015			As of December 31, 2014
	Number of Loans	Post-Modification Recorded Investment		Number of Loans	Post-Modification Recorded Investment
	(Dollars in Thousands)
Commercial real estate
Extension of term	1	$	24	1	$	39
Interest rate concession	1	55		1	65
Combination of extension and interest rate concession	25	8,477		26	7,984
Commercial and industrial
Combination of extension and interest rate concession	10	8,330		4	155
Consumer and other
Extension of term	1	655		3	753
Combination of extension and interest rate concession	4	349		5	400
Total	42	$	17,890	40	$	9,396

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, 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	$	2,164	$	2,164	$	—	$	712	$	53	$	12	$	41
Non-owner occupied	2,314		2,355		—		962		25		—		25
Construction and land development	4,533		7,203		—		4,807		133		—		133
Multi-family	2		369		—		10		27		—		27
1-4 family	2,423		2,486		—		1,604		82		4		78
Commercial and industrial	2,546		2,590		—		544		172		6		166
Direct financing leases, net	38		38		—		4		—		—		—
Consumer and other:
Home equity and second mortgages	500		500		—		390		23		63		(40		)
Other	655		1,321		—		688		82		—		82
Total	$	15,175	$	19,026	$	—	$	9,721	$	597	$	85	$	512
With impairment reserve recorded:
Commercial real estate:
Owner occupied	$	814	$	814	$	20	$	215	$	7	$	2	$	5
Non-owner occupied	—		—		—		—		—		—		—
Construction and land development	397		397		48		34		—		—		—
Multi-family	—		—		—		—		—		—		—
1-4 family	945		950		173		605		34		—		34
Commercial and industrial	6,603		6,603		847		810		102		—		102
Direct financing leases, net	—		—		—		—		—		—		—
Consumer and other:
Home equity and second mortgages	99		99		25		58		10		—		10
Other	—		—		—		—		—		—		—
Total	$	8,858	$	8,863	$	1,113	$	1,722	$	153	$	2	$	151
Total:
Commercial real estate:
Owner occupied	$	2,978	$	2,978	$	20	$	927	$	60	$	14	$	46
Non-owner occupied	2,314		2,355		—		962		25		—		25
Construction and land development	4,930		7,600		48		4,841		133		—		133
Multi-family	2		369		—		10		27		—		27
1-4 family	3,368		3,436		173		2,209		116		4		112
Commercial and industrial	9,149		9,193		847		1,354		274		6		268
Direct financing leases, net	38		38		—		4		—		—		—
Consumer and other:
Home equity and second mortgages	599		599		25		448		33		63		(30		)
Other	655		1,321		—		688		82		—		82
Grand total	$	24,033	$	27,889	$	1,113	$	11,443	$	750	$	87	$	663


(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.



	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.

The difference between the loans’ and leases’ recorded investment and the unpaid principal balance of $3.9 million, $4.4 million and $4.0 million as of December 31, 2015, 2014 and 2013, 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 $1.7 million, $2.0 million and $371,000 of loans and leases as of December 31, 2015, 2014 and 2013, respectively, 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.

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, 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	(793		)	(711		)	(9		)	(1,513		)
Recoveries	104			6			4			114
Provision	3,290			(400		)	496			3,386
Ending balance	$	11,220		$	4,387		$	709		$	16,316
Ending balance: individually evaluated for impairment	$	240		$	847		$	26		$	1,113
Ending balance: collectively evaluated for impairment	$	10,980		$	3,540		$	683		$	15,203
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—
Loans and lease receivables:
Ending balance, gross	$	905,488		$	504,685		$	24,556		$	1,434,729
Ending balance: individually evaluated for impairment	$	10,849		$	8,942		$	1,061		$	20,852
Ending balance: collectively evaluated for impairment	$	891,897		$	495,497		$	23,302		$	1,410,696
Ending balance: loans acquired with deteriorated credit quality	$	2,742		$	246		$	193		$	3,181
Allowance as % of gross loans and leases	1.24		%	0.87		%	2.89		%	1.14		%



	As of and for the Year Ended December 31, 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	(631		)	(600		)	(2		)	(1,233		)
Recoveries	44			369			12			425
Provision	151			1,150			(65		)	1,236
Ending balance	$	8,619		$	5,492		$	218		$	14,329
Ending balance: individually evaluated for impairment	$	204		$	33		$	53		$	290
Ending balance: collectively evaluated for impairment	$	8,414		$	5,368		$	165		$	13,947
Ending balance: loans acquired with deteriorated credit quality	$	1		$	91		$	—		$	92
Loans and lease receivables:
Ending balance, gross	$	811,766		$	450,819		$	19,207		$	1,281,792
Ending balance: individually evaluated for impairment	$	4,877		$	1,669		$	1,154		$	7,700
Ending balance: collectively evaluated for impairment	$	803,475		$	448,469		$	18,053		$	1,269,997
Ending balance: loans acquired with deteriorated credit quality	$	3,414		$	681		$	—		$	4,095
Allowance as % of gross loans and leases	1.06		%	1.22		%	1.14		%	1.12		%



	As of and for the Year Ended December 31, 2013
	Commercial real estate			Commercial and industrial loans and leases			Consumer and other			Total
	(Dollars in Thousands)
Allowance for credit losses:
Beginning balance	$	10,693		$	4,336		$	371		$	15,400
Charge-offs	(896		)	(14		)	(4		)	(914		)
Recoveries	353			16			5			374
Provision	(1,095		)	235			(99		)	(959		)
Ending balance	$	9,055		$	4,573		$	273		$	13,901
Ending balance: individually evaluated for impairment	$	209		$	131		$	62		$	402
Ending balance: collectively evaluated for impairment	$	8,846		$	4,442		$	211		$	13,499
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—
Loans and lease receivables:
Ending balance, gross	$	645,111		$	319,617		$	17,244		$	981,972
Ending balance: individually evaluated for impairment	$	5,379		$	8,043		$	1,375		$	14,797
Ending balance: collectively evaluated for impairment	$	638,303		$	311,574		$	15,869		$	965,746
Ending balance: loans acquired with deteriorated credit quality	$	1,429		$	—		$	—		$	1,429
Allowance as % of gross loans and leases	1.40		%	1.43		%	1.58		%	1.42		%

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



	As of December 31,
	2015			2014
	(In Thousands)
Minimum lease payments receivable	$	27,361		$	31,204
Estimated unguaranteed residual values in leased property	7,036			7,053
Initial direct costs	158			208
Unearned lease and residual income	(3,462		)	(4,300		)
Investment in commercial direct financing leases	$	31,093		$	34,165

There were no impairments of residual value of leased property during the years ended December 31, 2015, 2014 and 2013.

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,
2016	$	7,584
2017	6,636
2018	6,334
2019	3,787
2020	2,533
Thereafter	487
	$	27,361