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

Loan and lease receivables consist of the following:



	June 30, 2016		December 31, 2015
	(In Thousands)
Commercial real estate
Commercial real estate — owner occupied	$	167,936	$	176,322
Commercial real estate — non-owner occupied	502,378		436,901
Land development	60,599		59,779
Construction	88,339		100,625
Multi-family	73,239		80,254
1-4 family	47,289		50,304
Total commercial real estate	939,780		904,185
Commercial and industrial	456,297		472,193
Direct financing leases, net	30,698		31,093
Consumer and other
Home equity and second mortgages	7,372		8,237
Other	18,743		16,319
Total consumer and other	26,115		24,556
Total gross loans and leases receivable	1,452,890		1,432,027
Less:
Allowance for loan and lease losses	18,154		16,316
Deferred loan fees	1,075		1,062
Loans and leases receivable, net	$	1,433,661	$	1,414,649

Loans transferred to third parties consist of the guaranteed portion of Small Business Administration (“SBA”) loans as well as participation interests in other originated loans. The total principal amount of the guaranteed portion of SBA loans sold during the three months ended June 30, 2016 and 2015 was $18.6 million and $7.2 million, respectively. For the six months ended June 30, 2016 and 2015, $31.0 million and $10.1 million of the guaranteed portion of SBA loans were sold to third parties, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the six months ended June 30, 2016 and 2015 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, servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program; 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. 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. The total outstanding balance of sold SBA loans at June 30, 2016 and December 31, 2015 was $97.3 million and $73.4 million, respectively. As of June 30, 2016 and December 31, 2015, the total amount of the Corporation’s partial ownership of sold SBA loans on the Corporation’s Consolidated Balance Sheets was $30.6 million and $24.6 million, respectively. As of June 30, 2016, $2.4 million of loans in this portfolio were considered impaired as compared to $1.8 million as of December 31, 2015.

The total principal amount of transferred participation interests in other originated loans during the three months ended June 30, 2016 and 2015 was $9.7 million and $24.8 million, respectively. For the six months ended June 30, 2016 and 2015, $15.4 million and $36.5 million of these participation interests were transferred to third parties, respectively, all of which was treated as a sale and derecognized under the applicable accounting guidance at the time of transfer. The Corporation’s continuing involvement with these loans is by way of partial ownership, relationship management and all servicing responsibilities; however, there are no further obligations of the Corporation, other than standard representations and warranties to the sold amount, that would preclude the application of sale accounting treatment. 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 outstanding balance of transferred loans at June 30, 2016 and December 31, 2015 was $103.3 million and $95.8 million, respectively. As of June 30, 2016 and December 31, 2015, the total amount of the Corporation’s partial ownership of these transferred loans on the Corporation’s Consolidated Balance Sheets was $106.8 million and $112.2 million, respectively. No loans in this participation portfolio were considered impaired as of June 30, 2016 and December 31, 2015. The Corporation does not share in the participant’s portion of any potential charge-offs. The total amount of loan participations purchased on the Corporation’s Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 was $459,000 and $467,000, respectively.

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 months ended June 30, 2016 and 2015 was $8.0 million and $10.3 million, respectively. For the six months ended June 30, 2016 and 2015 the total principal amount of residential real estate loans sold was $15.2 million and $19.5 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 six months ended June 30, 2016 and 2015 have been derecognized in the unaudited Consolidated Financial Statements. The Corporation has a continuing involvement in each of the transactions, including by way of relationship management and standard representations and warranties related to the sold amount; however, there are no further obligations of the Corporation that would 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.

According to ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, purchased credit-impaired loans exhibit 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. 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 June 30, 2016 and December 31, 2015:



	June 30, 2016		December 31, 2015
	(In Thousands)
Contractually required payments	$	4,123	$	5,291
Fair value of purchased credit impaired loans	$	2,263	$	3,250

The following table presents a rollforward of the Corporation’s accretable yield as of June 30, 2016 and December 31, 2015:



	As of and for the Six Months Ended June 30, 2016			As of and for Year Ended December 31, 2015
	(In Thousands)
Accretable yield, beginning of period	$	414		$	676
Accretion recognized in earnings	(87		)	(50		)
Reclassification to nonaccretable difference for loans with changing cash flows⁽¹⁾	(204		)	(60		)
Changes in accretable yield for non-credit related changes in expected cash flows⁽²⁾	69			(152		)
Accretable yield, end of period	$	192		$	414


(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 June 30, 2016 and December 31, 2015:



	Category
As of June 30, 2016	I			II			III			IV			Total
	(Dollars in Thousands)
Commercial real estate:
Commercial real estate — owner occupied	$	136,996		$	14,018		$	13,061		$	3,861		$	167,936
Commercial real estate — non-owner occupied	473,644			24,218			2,546			1,970			502,378
Land development	55,275			839			656			3,829			60,599
Construction	78,088			5,745			4,227			279			88,339
Multi-family	72,726			513			—			—			73,239
1-4 family	40,279			2,517			1,624			2,869			47,289
Total commercial real estate	857,008			47,850			22,114			12,808			939,780

Commercial and industrial	376,286			35,026			35,118			9,867			456,297

Direct financing leases, net	29,529			783			386			—			30,698

Consumer and other:
Home equity and second mortgages	6,407			570			137			258			7,372
Other	18,145			63			—			535			18,743
Total consumer and other	24,552			633			137			793			26,115

Total gross loans and leases receivable	$	1,287,375		$	84,292		$	57,755		$	23,468		$	1,452,890
Category as a % of total portfolio	88.60		%	5.80		%	3.98		%	1.62		%	100.00		%



	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
Land development	52,817			2,241			309			4,412			59,779
Construction	98,693			851			564			517			100,625
Multi-family	79,368			884			—			2			80,254
1-4 family	41,086			3,985			1,865			3,368			50,304
Total commercial real estate	838,860			36,277			15,457			13,591			904,185

Commercial and industrial	430,199			7,139			25,706			9,149			472,193

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	$	1,321,686		$	44,477		$	41,832		$	24,032		$	1,432,027
Category as a % of total portfolio	92.29		%	3.11		%	2.92		%	1.68		%	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.

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 contractual 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 contractual 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 $25.7 million and $26.8 million of loans and leases as Substandard as of June 30, 2016 and December 31, 2015, respectively. No loans were considered Special Mention, Doubtful or Loss as of either June 30, 2016 or December 31, 2015. 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 June 30, 2016 and December 31, 2015 is as follows:



As of June 30, 2016	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	$	997		$	—		$	—		$	997		$	163,145		$	164,142
Non-owner occupied	319			2,000			—			2,319			498,089			500,408
Land development	—			—			—			—			56,785			56,785
Construction	—			—			—			—			88,033			88,033
Multi-family	—			—			—			—			73,239			73,239
1-4 family	77			—			—			77			45,027			45,104
Commercial and industrial	—			—			—			—			446,430			446,430
Direct financing leases, net	—			—			—			—			30,698			30,698
Consumer and other:
Home equity and second mortgages	—			—			—			—			7,163			7,163
Other	—			—			—			—			18,208			18,208
Total	1,393			2,000			—			3,393			1,426,817			1,430,210
Non-accruing loans and leases
Commercial real estate:
Owner occupied	$	1,537		$	—		$	—		$	1,537		$	2,257		$	3,794
Non-owner occupied	—			—			1,714			1,714			256			1,970
Land development	—			—			—			—			3,814			3,814
Construction	—			—			191			191			115			306
Multi-family	—			—			—			—			—			—
1-4 family	—			—			1,331			1,331			854			2,185
Commercial and industrial	374			514			263			1,151			8,716			9,867
Direct financing leases, net	—			—			—			—			—			—
Consumer and other:
Home equity and second mortgages	—			—			—			—			209			209
Other	—			—			535			535			—			535
Total	1,911			514			4,034			6,459			16,221			22,680
Total loans and leases
Commercial real estate:
Owner occupied	$	2,534		$	—		$	—		$	2,534		$	165,402		$	167,936
Non-owner occupied	319			2,000			1,714			4,033			498,345			502,378
Land development	—			—			—			—			60,599			60,599
Construction	—			—			191			191			88,148			88,339
Multi-family	—			—			—			—			73,239			73,239
1-4 family	77			—			1,331			1,408			45,881			47,289
Commercial and industrial	374			514			263			1,151			455,146			456,297
Direct financing leases, net	—			—			—			—			30,698			30,698
Consumer and other:
Home equity and second mortgages	—			—			—			—			7,372			7,372
Other	—			—			535			535			18,208			18,743
Total	$	3,304		$	2,514		$	4,034		$	9,852		$	1,443,038		$	1,452,890
Percent of portfolio	0.23		%	0.17		%	0.27		%	0.67		%	99.33		%	100.00		%



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
Land development	—			—			—			—			55,386			55,386
Construction	—			—			—			—			100,228			100,228
Multi-family	—			—			—			—			80,252			80,252
1-4 family	78			—			—			78			47,676			47,754
Commercial and industrial	—			—			—			—			463,057			463,057
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			1,409,651			1,409,729
Non-accruing loans and leases
Commercial real estate:
Owner occupied	$	—		$	473		$	—		$	473		$	2,433		$	2,906
Non-owner occupied	—			—			—			—			1,679			1,679
Land development	—			—			—			—			4,393			4,393
Construction	397			—			—			397			—			397
Multi-family	—			—			—			—			2			2
1-4 family	430			34			895			1,359			1,191			2,550
Commercial and 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		$	175,849		$	176,322
Non-owner occupied	—			—			—			—			436,901			436,901
Land development	—			—			—			—			59,779			59,779
Construction	397			—			—			397			100,228			100,625
Multi-family	—			—			—			—			80,254			80,254
1-4 family	508			34			895			1,437			48,867			50,304
Commercial and industrial	2,077			—			564			2,641			469,552			472,193
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		$	1,426,174		$	1,432,027
Percent of portfolio	0.21		%	0.04		%	0.16		%	0.41		%	99.59		%	100.00		%

The Corporation’s total impaired assets consisted of the following at June 30, 2016 and December 31, 2015, respectively.



	June 30, 2016		December 31, 2015
	(Dollars in Thousands)
Non-accrual loans and leases
Commercial real estate:
Commercial real estate — owner occupied	$	3,794	$	2,907
Commercial real estate — non-owner occupied	1,970		1,678
Land development	3,814		4,393
Construction	306		397
Multi-family	—		2
1-4 family	2,185		2,550
Total non-accrual commercial real estate	12,069		11,927
Commercial and industrial	9,867		9,136
Direct financing leases, net	—		38
Consumer and other:
Home equity and second mortgages	209		542
Other	535		655
Total non-accrual consumer and other loans	744		1,197
Total non-accrual loans and leases	22,680		22,298
Foreclosed properties, net	1,548		1,677
Total non-performing assets	24,228		23,975
Performing troubled debt restructurings	788		1,735
Total impaired assets	$	25,016	$	25,710



	June 30, 2016		December 31, 2015
Total non-accrual loans and leases to gross loans and leases	1.56	%	1.56	%
Total non-performing assets to total gross loans and leases plus foreclosed properties, net	1.67		1.67
Total non-performing assets to total assets	1.33		1.35
Allowance for loan and lease losses to gross loans and leases	1.25		1.14
Allowance for loan and lease losses to non-accrual loans and leases	80.04		73.17

As of June 30, 2016 and December 31, 2015, $13.2 million and $16.2 million of the non-accrual loans were considered troubled debt restructurings, respectively. As of June 30, 2016, there were no unfunded commitments associated with troubled debt restructured loans and leases.



	As of June 30, 2016					As of December 31, 2015
	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	$	1,208	$	1,143	3	$	1,209	$	1,188
Commercial real estate — non-owner occupied	4	445		256		5	1,150		904
Land development	2	5,834		3,828		2	5,853		4,393
Construction	1	201		184		1	181		200
Multi-family	—	—		—		1	184		2
1-4 family	14	1,795		1,607		15	2,035		1,869
Commercial and industrial	9	7,782		6,195		10	7,572		8,330
Consumer and other:
Home equity and second mortgages	4	461		257		4	461		349
Other	1	2,076		535		1	2,076		655
Total	38	$	19,802	$	14,005	42	$	20,721	$	17,890

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 June 30, 2016 and December 31, 2015, the Corporation’s troubled debt restructurings grouped by type of concession were as follows:



	As of June 30, 2016			As of December 31, 2015
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(Dollars in Thousands)
Commercial real estate
Extension of term	1	$	16	1	$	24
Interest rate concession	1	53		1	55
Combination of extension of term and interest rate concession	22	6,949		25	8,477
Commercial and industrial
Combination of extension of term and interest rate concession	9	6,195		10	8,330
Consumer and other
Extension of term	1	535		1	655
Combination of extension of term and interest rate concession	4	257		4	349
Total	38	$	14,005	42	$	17,890

During the six months ended June 30, 2016, two commercial and industrial loans defaulted, both of which had been modified in a troubled debt restructuring during the previous twelve months. The total recorded investment of the loans was $5.7 million.

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



	Impaired Loans and Leases
	As of and for the Six Months Ended June 30, 2016
	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	$	3,240	$	3,240		$	—	$	2,274		$	87		$	—	$	87
Non-owner occupied	1,970		2,010			—		728			36			—		36
Land development	3,829		6,499			—		4,146			57			—		57
Construction	122		122			—		293			4			—		4
Multi-family	—		—			—		—			1			134		(133		)
1-4 family	2,025		2,025			—		2,483			55			94		(39		)
Commercial and industrial	3,103		3,103			—		239			45			18		27
Direct financing leases, net	—		—			—		12			—			—		—
Consumer and other:
Home equity and second mortgages	258		258			—		447			8			—		8
Other	535		1,201			—		626			39			—		39
Total	15,082		18,458			—		11,248			332			246		86
With impairment reserve recorded:
Commercial real estate:
Owner occupied	$	621	$	621		$	9	$	629		$	18		$	—	$	18
Non-owner occupied	—		—			—		—			—			—		—
Land development	—		—		—	—		—		—	—		—	—		—
Construction	157		157		—	41		192		—	3		—	—		3
Multi-family	—		—			—		—			—			—		—
1-4 family	844		849			114		695			14			—		14
Commercial and industrial	6,764		6,764			2,884		6,731			302			—		302
Direct financing leases, net	—		—			—		—			—			—		—
Consumer and other:
Home equity and second mortgages	—		—			—		—			—			—		—
Other	—		—			—		—			—			—		—
Total	8,386		8,391			3,048		8,247			337			—		337
Total:
Commercial real estate:
Owner occupied	$	3,861	$	3,861		$	9	$	2,903		$	105		$	—	$	105
Non-owner occupied	1,970		2,010			—		728			36			—		36
Land development	3,829		6,499			—		4,146			57			—		57
Construction	279		279			41		485			7			—		7
Multi-family	—		—			—		—			1			134		(133		)
1-4 family	2,869		2,874			114		3,178			69			94		(25		)
Commercial and industrial	9,867		9,867			2,884		6,970			347			18		329
Direct financing leases, net	—		—			—		12			—			—		—
Consumer and other:
Home equity and second mortgages	258		258			—		447			8			—		8
Other	535		1,201			—		626			39			—		39
Grand total	$	23,468	$	26,849		$	3,048	$	19,495		$	669		$	246	$	423


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



	Impaired Loans and Leases
	As of and for 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
Land development	4,413		7,083			—			4,333			133			—		133
Construction	120		120		—	—		—	474		—	—		—	—		—
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	—		—			—			—			—			—		—
Land development	—		—		—	—		—	—		—	—		—	—		—
Construction	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
Land development	4,413		7,083			—			4,333			133			—		133
Construction	517		517			48			508			—			—		—
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.

The difference between the loans and leases recorded investment and the unpaid principal balance of $3.4 million and $3.9 million as of June 30, 2016 and December 31, 2015 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 $788,000 and $1.7 million of loans as of June 30, 2016 and December 31, 2015 that were performing troubled debt restructurings, and thus, although 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 such loan’s principal. Foregone interest represents the interest that was contractually due on the loan but not received or recorded. To the extent the amount of principal on a non-accrual loan 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 Six Months Ended June 30, 2016
	Commercial real estate			Commercial and industrial loans and leases			Consumer and other			Total
	(Dollars in Thousands)
Allowance for credit losses:
Beginning balance	$	11,220		$	4,387		$	709		$	16,316
Charge-offs	(935		)	(652		)	(7		)	(1,594		)
Recoveries	139			2			4			145
Provision	1,012			2,280			(5		)	3,287
Ending balance	$	11,436		$	6,017		$	701		$	18,154
Ending balance: individually evaluated for impairment	$	123		$	2,884		$	—		$	3,007
Ending balance: collectively evaluated for impairment	$	11,272		$	3,133		$	701		$	15,106
Ending balance: loans acquired with deteriorated credit quality	$	41		$	—		$	—		$	41
Loans and lease receivables:
Ending balance, gross	$	939,780		$	486,995		$	26,115		$	1,452,890
Ending balance: individually evaluated for impairment	$	11,083		$	9,698		$	604		$	21,385
Ending balance: collectively evaluated for impairment	$	926,972		$	477,128		$	25,322		$	1,429,422
Ending balance: loans acquired with deteriorated credit quality	$	1,725		$	169		$	189		$	2,083
Allowance as % of gross loans	1.22		%	1.24		%	2.68		%	1.25		%



	As of and for 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	$	904,185		$	503,286		$	24,556		$	1,432,027
Ending balance: individually evaluated for impairment	$	10,849		$	8,942		$	1,061		$	20,852
Ending balance: collectively evaluated for impairment	$	890,594		$	494,098		$	23,495		$	1,408,187
Ending balance: loans acquired with deteriorated credit quality	$	2,742		$	246		$	193		$	3,181
Allowance as % of gross loans	1.24		%	0.87		%	2.89		%	1.14		%