FIRST BUSINESS FINANCIAL SERVICES, INC. - 10-K filing on 2017-03-10

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

12 Months Ended

Dec. 31, 2016

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

Loan and lease receivables consist of the following:



	December 31, 2016		December 31, 2015
	(In Thousands)
Commercial real estate:
Commercial real estate — owner occupied	$	176,459	$	176,322
Commercial real estate — non-owner occupied	473,158		436,901
Land development	56,638		59,779
Construction	101,206		100,625
Multi-family	92,762		80,254
1-4 family	45,651		50,304
Total commercial real estate	945,874		904,185
Commercial and industrial	450,298		472,193
Direct financing leases, net	30,951		31,093
Consumer and other:
Home equity and second mortgages	8,412		8,237
Other	16,329		16,319
Total consumer and other	24,741		24,556
Total gross loans and leases receivable	1,451,864		1,432,027
Less:
Allowance for loan and lease losses	20,912		16,316
Deferred loan fees	1,189		1,062
Loans and leases receivable, net	$	1,429,763	$	1,414,649

As of December 31, 2016 and 2015, the total amount of the Corporation’s ownership of SBA loans on the Consolidated Balance Sheets was $62.1 million and $53.2 million, respectively. As of December 31, 2016 and 2015, $5.5 million and $1.1 million of loans in this portfolio were considered impaired, respectively.

Loans transferred to third parties consist of the guaranteed portion of SBA loans which the Corporation sold in the secondary market, as well as participation interests in other originated loans. The total principal amount of the guaranteed portion of SBA loans sold during the year ended December 31, 2016 and 2015 was $41.2 million and $40.2 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, 2016 and 2015 have been derecognized in the Consolidated Financial Statements. 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 Consolidated Financial Statements. The total outstanding balance of sold SBA loans at December 31, 2016 and 2015 was $105.1 million and $78.2 million, respectively, while the retained, unguaranteed portion of sold SBA loans on the Corporation’s Consolidated Balance Sheets was $32.2 million and $26.2 million as of December 31, 2016 and 2015, respectively.

The total principal amount of transferred participation interests in other originated commercial loans during the year ended December 31, 2016 and 2015 was $17.6 million and $26.8 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. 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 these transferred loans at December 31, 2016 and 2015 was $102.7 million and $91.0 million, respectively. As of December 31, 2016 and 2015, the total amount of the Corporation’s partial ownership of these transferred loans on the Consolidated Balance Sheets was $106.1 million and $110.6 million, respectively. No loans in this participation portfolio were considered impaired as of December 31, 2016 and 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 Consolidated Balance Sheets as of December 31, 2016 and 2015 was $1.2 million and $1.8 million, respectively.

The Corporation also 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, 2016 and 2015 was $26.3 million and $32.6 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred have been derecognized in the Consolidated Financial Statements. The loans were transferred at their fair value and the related gain was recognized as non-interest income upon the transfer in the 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 loan and lease 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, 2016 and 2015:



	December 31, 2016		December 31, 2015
	(In Thousands)
Contractually required payments	$	3,265	$	5,291
Fair value of purchased credit-impaired loans	1,432		3,250

The following table presents a rollforward of the accretable yield for the year ended December 31, 2016 and 2015:



	December 31, 2016			December 31, 2015
	(In Thousands)
Accretable yield, beginning of period	$	414		$	676
Accretion recognized in interest income	(129		)	(50		)
Reclassification to nonaccretable difference for loans with changing cash flows⁽¹⁾	(244		)	(60		)
Changes in accretable yield for non-credit related changes in expected cash flows⁽²⁾	94			(152		)
Accretable yield, end of period	$	135		$	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.

Certain of the Corporation’s executive officers, directors and their related interests are loan clients of the Banks. As of December 31, 2016 and 2015, loans aggregating approximately $6.3 million and $6.9 million, respectively, were outstanding to such parties. New loans granted to such parties during the years ended December 31, 2016 and 2015 were approximately $673,000 and $3.9 million and repayments on such loans were approximately $1.3 million and $1.4 million, respectively. These loans were made in the ordinary course of business and on substantially the same terms as those prevailing at the time for comparable loans not related to the lender. None of these loans were considered impaired as of December 31, 2016 or 2015.

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, 2016 and 2015:



	December 31, 2016
	Category
	I			II			III			IV			Total
	(Dollars in Thousands)
Commercial real estate:
Commercial real estate — owner occupied	$	142,704		$	20,294		$	11,174		$	2,287		$	176,459
Commercial real estate — non-owner occupied	447,895			20,933			2,721			1,609			473,158
Land development	52,082			823			293			3,440			56,638
Construction	93,510			3,154			1,624			2,918			101,206
Multi-family	87,418			1,937			3,407			—			92,762
1-4 family	38,504			3,144			1,431			2,572			45,651
Total commercial real estate	862,113			50,285			20,650			12,826			945,874
Commercial and industrial	348,201			42,949			46,675			12,473			450,298
Direct financing leases, net	29,351			1,600			—			—			30,951
Consumer and other:
Home equity and second mortgages	8,271			121			12			8			8,412
Other	15,714			—			11			604			16,329
Total consumer and other	23,985			121			23			612			24,741
Total gross loans and leases receivable	$	1,263,650		$	94,955		$	67,348		$	25,911		$	1,451,864
Category as a % of total portfolio	87.04		%	6.54		%	4.64		%	1.78		%	100.00		%



	December 31, 2015
	Category
	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. Commercial lenders 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 or 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 the Banks’ loan committees 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 original 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 the Banks’ loan committees on a monthly basis and the Banks’ boards of directors at each of their regularly scheduled meetings.

Utilizing regulatory classification terminology, the Corporation identified $34.3 million and $26.8 million of loans and leases as Substandard as of December 31, 2016 and 2015, respectively. No loans were considered Special Mention, Doubtful or Loss as of either December 31, 2016 or 2015. The population of Substandard loans is 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, 2016 and 2015 were as follows:



	December 31, 2016
	30-59 Days Past Due			60-89 Days Past Due			Greater than 90 Days Past Due			Total Past Due			Current			Total
	(Dollars in Thousands)
Accruing loans and leases
Commercial real estate:
Owner occupied	$	—		$	—		$	—		$	—		$	174,236		$	174,236
Non-owner occupied	—			—			—			—			471,549			471,549
Land development	—			—			—			—			53,198			53,198
Construction	—			—			—			—			98,288			98,288
Multi-family	—			—			—			—			92,762			92,762
1-4 family	75			—			—			75			43,639			43,714
Commercial and industrial	55			468			—			523			437,312			437,835
Direct financing leases, net	—			—			—			—			30,951			30,951
Consumer and other:
Home equity and second mortgages	—			—			—			—			8,412			8,412
Other	—			—			—			—			15,725			15,725
Total	$	130		$	468		$	—		$	598		$	1,426,072		$	1,426,670
Non-accruing loans and leases
Commercial real estate:
Owner occupied	$	—		$	—		$	1,183		$	1,183		$	1,040		$	2,223
Non-owner occupied	—			—			—			—			1,609			1,609
Land development	—			—			—			—			3,440			3,440
Construction	2,482			—			436			2,918			—			2,918
Multi-family	—			—			—			—			—			—
1-4 family	—			—			1,240			1,240			697			1,937
Commercial and industrial	3,345			168			6,740			10,253			2,210			12,463
Direct financing leases, net	—			—			—			—			—			—
Consumer and other:
Home equity and second mortgages	—			—			—			—			—			—
Other	186			—			378			564			40			604
Total	$	6,013		$	168		$	9,977		$	16,158		$	9,036		$	25,194
Total loans and leases
Commercial real estate:
Owner occupied	$	—		$	—		$	1,183		$	1,183		$	175,276		$	176,459
Non-owner occupied	—			—			—			—			473,158			473,158
Land development	—			—			—			—			56,638			56,638
Construction	2,482			—			436			2,918			98,288			101,206
Multi-family	—			—			—			—			92,762			92,762
1-4 family	75			—			1,240			1,315			44,336			45,651
Commercial and industrial	3,400			636			6,740			10,776			439,522			450,298
Direct financing leases, net	—			—			—			—			30,951			30,951
Consumer and other:
Home equity and second mortgages	—			—			—			—			8,412			8,412
Other	186			—			378			564			15,765			16,329
Total	$	6,143		$	636		$	9,977		$	16,756		$	1,435,108		$	1,451,864
Percent of portfolio	0.42		%	0.04		%	0.69		%	1.15		%	98.85		%	100.00		%



	December 31, 2015
	30-59 Days Past Due			60-89 Days Past Due			Greater than 90 Days Past Due			Total Past Due			Current			Total
	(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 December 31, 2016 and 2015, respectively.



	December 31, 2016		December 31, 2015
	(In Thousands)
Non-accrual loans and leases
Commercial real estate:
Commercial real estate — owner occupied	$	2,223	$	2,907
Commercial real estate — non-owner occupied	1,609		1,678
Land development	3,440		4,393
Construction	2,918		397
Multi-family	—		2
1-4 family	1,937		2,550
Total non-accrual commercial real estate	12,127		11,927
Commercial and industrial	12,463		9,136
Direct financing leases, net	—		38
Consumer and other:
Home equity and second mortgages	—		542
Other	604		655
Total non-accrual consumer and other loans	604		1,197
Total non-accrual loans and leases	25,194		22,298
Foreclosed properties, net	1,472		1,677
Total non-performing assets	26,666		23,975
Performing troubled debt restructurings	717		1,735
Total impaired assets	$	27,383	$	25,710



	December 31, 2016		December 31, 2015
Total non-accrual loans and leases to gross loans and leases	1.74	%	1.56	%
Total non-performing assets to total gross loans and leases plus foreclosed properties, net	1.83		1.67
Total non-performing assets to total assets	1.50		1.35
Allowance for loan and lease losses to gross loans and leases	1.44		1.14
Allowance for loan and lease losses to non-accrual loans and leases	83.00		73.17

As of December 31, 2016 and 2015, $12.8 million and $16.2 million of the non-accrual loans and leases were considered troubled debt restructurings, respectively. There were no unfunded commitments associated with troubled debt restructured loans and leases as of December 31, 2016.

The following table provides the number of loans modified in a troubled debt restructuring and the pre- and post-modification recorded investment by class of receivable as of December 31, 2016 and 2015:



	As of December 31, 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)
Commercial real estate:
Commercial real estate — owner occupied	3	$	1,065	$	930	3	$	1,209	$	1,188
Commercial real estate — non-owner occupied	1	158		39		5	1,150		904
Land development	1	5,745		3,440		2	5,853		4,393
Construction	2	331		314		1	181		200
Multi-family	—	—		—		1	184		2
1-4 family	11	1,391		1,393		15	2,035		1,869
Commercial and industrial	10	8,094		7,058		10	7,572		8,330
Consumer and other:
Home equity and second mortgage	1	37		8		4	461		349
Other	1	2,076		378		1	2,076		655
Total	30	$	18,897	$	13,560	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 December 31, 2016 and 2015, the Corporation’s troubled debt restructurings grouped by type of concession were as follows:



	As of December 31, 2016			As of December 31, 2015
	Number of Loans	Post-Modification Recorded Investment		Number of Loans	Post-Modification Recorded Investment
	(Dollars in Thousands)
Commercial real estate:
Extension of term	1	$	8	1	$	24
Interest rate concession	1	52		1	55
Combination of extension of term and interest rate concession	16	6,056		25	8,477
Commercial and industrial:
Combination of extension of term and interest rate concession	10	7,058		10	8,330
Consumer and other:
Extension of term	1	378		1	655
Combination of extension of term and interest rate concession	1	8		4	349
Total	30	$	13,560	42	$	17,890

There were no loans and leases modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the year ended December 31, 2016.

The following represents additional information regarding the Corporation’s impaired loans and leases, including performing troubled debt restructurings, by class:



	As of and for the Year Ended December 31, 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	$	1,788	$	1,788	$	—	$	3,577	$	328	$	118	$	210
Non-owner occupied	1,609		1,647		—		1,318		91		79		12
Land development	3,440		6,111		—		3,898		107		—		107
Construction	436		438		—		291		20		—		20
Multi-family	—		—		—		—		1		134		(133		)
1-4 family	2,379		2,379		—		2,755		125		94		31
Commercial and industrial	3,769		3,769		—		918		143		62		81
Direct financing leases, net	—		—		—		6		—		—		—
Consumer and other:
Home equity and second mortgages	8		8		—		307		16		127		(111		)
Other	604		1,270		—		529		71		—		71
Total	$	14,033	$	17,410	$	—	$	13,599	$	902	$	614	$	288
With impairment reserve recorded:
Commercial real estate:
Owner occupied	$	499	$	499	$	70	$	111	$	28	$	—	$	28
Non-owner occupied	—		—		—		—		—		—		—
Land development	—		—		—		—		—		—		—
Construction	2,482		2,482		1,790		834		45		—		45
Multi-family	—		—		—		—		—		—		—
1-4 family	193		199		39		203		5		—		5
Commercial and industrial	8,704		8,704		3,700		8,239		637		—		637
Direct financing leases, net	—		—		—		—		—		—		—
Consumer and other:
Home equity and second mortgages	—		—		—		—		—		—		—
Other	—		—		—		—		—		—		—
Total	$	11,878	$	11,884	$	5,599	$	9,387	$	715	$	—	$	715
Total:
Commercial real estate:
Owner occupied	$	2,287	$	2,287	$	70	$	3,688	$	356	$	118	$	238
Non-owner occupied	1,609		1,647		—		1,318		91		79		12
Land development	3,440		6,111		—		3,898		107		—		107
Construction	2,918		2,920		1,790		1,125		65		—		65
Multi-family	—		—		—		—		1		134		(133		)
1-4 family	2,572		2,578		39		2,958		130		94		36
Commercial and industrial	12,473		12,473		3,700		9,157		780		62		718
Direct financing leases, net	—		—		—		6		—		—		—
Consumer and other:
Home equity and second mortgages	8		8		—		307		16		127		(111		)
Other	604		1,270		—		529		71		—		71
Grand total	$	25,911	$	29,294	$	5,599	$	22,986	$	1,617	$	614	$	1,003


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



	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
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.



	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
Land development	4,962		7,633		—		5,253		155		—		155
Construction	195		195		—		32		—		—		—
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
Land development	—		—		—		—		—		—		—
Construction	—		—		—		—		—		—		—
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
Land development	4,962		7,633		—		5,253		155		—		155
Construction	195		195		—		32		—		—		—
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 $3.4 million, $3.9 million and $4.4 million as of December 31, 2016, 2015 and 2014, respectively, represents partial charge-offs resulting from losses due to the appraised 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 $717,000, $1.7 million and $2.0 million of loans as of December 31, 2016, 2015 and 2014, respectively, 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 categorizes the portfolio into segments with similar risk characteristics. 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, 2016
	Commercial Real Estate			Commercial and Industrial			Consumer and Other			Total
	(Dollars in Thousands)
Allowance for loan and lease losses:
Beginning balance	$	11,220		$	4,387		$	709		$	16,316
Charge-offs	(1,194		)	(2,273		)	(127		)	(3,594		)
Recoveries	274			91			7			372
Provision	2,084			5,765			(31		)	7,818
Ending balance	$	12,384		$	7,970		$	558		$	20,912
Ending balance: individually evaluated for impairment	$	1,899		$	3,700		$	—		$	5,599
Ending balance: collectively evaluated for impairment	$	10,485		$	4,270		$	558		$	15,313
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—
Loans and lease receivables:
Ending balance, gross	$	945,874		$	481,249		$	24,741		$	1,451,864
Ending balance: individually evaluated for impairment	$	11,222		$	12,452		$	612		$	24,286
Ending balance: collectively evaluated for impairment	$	933,048		$	468,776		$	24,129		$	1,425,953
Ending balance: loans acquired with deteriorated credit quality	$	1,604		$	21		$	—		$	1,625
Allowance as percent of gross loans and leases	1.31		%	1.66		%	2.26		%	1.44		%



	As of and for the Year Ended December 31, 2015
	Commercial Real Estate			Commercial and Industrial			Consumer and Other			Total
	(Dollars in Thousands)
Allowance for loan and lease 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 percent of gross loans and leases	1.24		%	0.87		%	2.89		%	1.14		%

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



	As of December 31,
	2016			2015
	(In Thousands)
Minimum lease payments receivable	$	26,096		$	27,361
Estimated unguaranteed residual values in leased property	7,625			7,036
Initial direct costs	106			158
Unearned lease and residual income	(2,876		)	(3,462		)
Investment in commercial direct financing leases	$	30,951		$	31,093

There were no impairments of residual value of leased property during the years ended December 31, 2016, 2015 and 2014.

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,
2017	$	7,863
2018	7,584
2019	5,331
2020	3,520
2021	1,251
Thereafter	547
	$	26,096