Note 4.Loans and Leases

Major classifications of loans are as follows:


	September 30,		December 31,
(In thousands)	2015		2014
Commercial real estate	$	210,883	$	175,038
Construction and land development		38,864		45,662
Commercial and industrial		82,414		76,489
Multi-family		15,222		13,823
Residential real estate		54,025		42,992
Leases		61,954		51,583
Tax certificates		5,294		7,191
Consumer		2,560		2,354
Total loans, net of unearned income	$	471,216	$	415,132

We use a nine point grading risk classification system commonly used in the financial services industry as the credit quality indicator. The first four classifications are rated Pass. The riskier classifications include Pass-Watch, Special Mention, Substandard, Doubtful and Loss. The risk rating is related to the underlying credit quality and probability of default. These risk ratings are used in the calculation of the allowance for loan and lease losses.

Pass: includes credits that demonstrate a low probability of default;

Pass-watch: a classification which includes currently performing credits that are beginning to demonstrate above average risk through declining earnings, strained cash flows, increased leverage and/or weakening market fundamentals. This class may also include new loan originations which warrant approval but may contain certain risks that require closer than usual monitoring and supervision, such as construction loans;

Special mention: includes credits that have potential weaknesses that if left uncorrected could weaken the credit or result in inadequate protection of our position at some future date. While potentially weak, credits in this classification are marginally acceptable and loss of principal or interest is not anticipated;

Substandard accrual: includes credits that exhibit a well-defined weakness which currently jeopardizes the repayment of debt and liquidation of collateral even though they are currently performing. These credits are characterized by the distinct possibility that we may incur a loss in the future if these weaknesses are not corrected;

Non-accrual (substandard non-accrual, doubtful, loss): includes credits that demonstrate serious problems to the point that it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement.

All loans are assigned an initial loan risk rating by the Chief Credit Officer (“CCO”). The initial loan risk rating is approved by another member of executive management or by the appropriate loan committee approving the loan request. From time to time, and at the general direction of any of the various loan committees, the ratings may be changed based on the findings of that committee. Items considered in assigning ratings include the financial strength of the borrower and/or guarantors, the type of collateral, the collateral lien position, the type of loan and loan structure, any potential risk inherent in the specific loan type, higher than normal monitoring of the loan or any other factor deemed appropriate by any of the various committees for changing the rating of the loan. Any such change in rating is reflected in the minutes of that committee.

The following tables present risk ratings for each loan portfolio classification at September 30, 2015 and December 31, 2014.


As of September 30, 2015
(In thousands)	Pass		Pass-Watch		Special Mention		Substandard		Non-accrual		Total
Commercial real estate	$	172,882	$	35,298	$	1,340	$	312	$	1,051	$	210,883
Construction and land development		5,305		33,269		—		—		290		38,864
Commercial and industrial		62,930		14,668		1,449		2,470		897		82,414
Multi-family		14,439		278		505		—		—		15,222
Residential real estate		53,107		—		—		—		918		54,025
Leases		60,576		534		108		—		736		61,954
Tax certificates		4,088		—		—		—		1,206		5,294
Consumer		2,467		93		—		—		—		2,560
Total loans, net of unearned income	$	375,794	$	84,140	$	3,402	$	2,782	$	5,098	$	471,216


As of December 31, 2014
(In thousands)	Pass		Pass-Watch		Special Mention		Substandard		Non-accrual		Total
Commercial real estate	$	140,045	$	27,229	$	2,512	$	1,568	$	3,684	$	175,038
Construction and land development		12,861		32,165		—		—		636		45,662
Commercial and industrial		60,500		8,527		1,608		3,337		2,517		76,489
Multi-family		12,995		310		518		—		—		13,823
Residential real estate		42,033		—		—		—		959		42,992
Leases		51,113		152		1		—		317		51,583
Tax certificates		5,491		—		—		—		1,700		7,191
Consumer		2,194		160		—		—		—		2,354
Total loans, net of unearned income	$	327,232	$	68,543	$	4,639	$	4,905	$	9,813	$	415,132

The following tables present an aging analysis of past due payments for each loan portfolio classification at September 30, 2015 and December 31, 2014.


As of September 30, 2015	30-59 Days		60-89 Days		Accruing
(In thousands)	Past Due		Past Due		90+ Days		Non-accrual		Current		Total
Commercial real estate	$	—	$	983	$	—	$	1,051	$	208,849	$	210,883
Construction and land development		—		—		—		290		38,574		38,864
Commercial and industrial		657		191		—		897		80,669		82,414
Multi-family		—		—		—		—		15,222		15,222
Residential real estate		524		112		—		918		52,471		54,025
Leases		534		108		—		736		60,576		61,954
Tax certificates		—		—		—		1,206		4,088		5,294
Consumer		—		—		—		—		2,560		2,560
Total loans, net of unearned income	$	1,715	$	1,394	$	—	$	5,098	$	463,009	$	471,216


As of December 31, 2014	30-59 Days		60-89 Days		Accruing
(In thousands)	Past Due		Past Due		90+ Days		Non-accrual		Current		Total
Commercial real estate	$	311	$	533	$	—	$	3,684	$	170,510	$	175,038
Construction and land development		—		—		—		636		45,026		45,662
Commercial and industrial		92		449		—		2,517		73,431		76,489
Multi-family		—		—		—		—		13,823		13,823
Residential real estate		165		162		—		959		41,706		42,992
Leases		152		1		—		317		51,113		51,583
Tax certificates		—		—		—		1,700		5,491		7,191
Consumer		—		—		—		—		2,354		2,354
Total loans, net of unearned income	$	720	$	1,145	$	—	$	9,813	$	403,454	$	415,132

If interest had accrued on non-accrual loans, such income would have been approximately $142,000 and $539,000 for the three months and nine months ended September 30, 2015, respectively, and $290,000 and $830,000 for the three and nine months ended September 30, 2014, respectively.

Impaired Loans

Total cash collected on impaired loans during the nine months ended September 30, 2015 and 2014 was $5.9 million and $5.0 million respectively, of which $4.8 million and $4.5 million was credited to the principal balance outstanding on such loans, respectively.

Troubled Debt Restructurings (“TDRs”)

The following table details our TDRs that are on an accrual status and non-accrual status at September 30, 2015 and December 31, 2014.


	As of September 30, 2015
				Non-
	Number of	Accrual		Accrual
(In thousands)	loans	Status		Status		Total TDRs
Commercial real estate	3	$	2,818	$	—	$	2,818
Construction and land development	1		—		95		95
Commercial and industrial	4		2,722		—		2,722
Residential real estate	1		—		290		290
Total	9	$	5,540	$	385	$	5,925


	As of December 31, 2014
				Non-
	Number of	Accrual		Accrual
(In thousands)	loans	Status		Status		Total TDRs
Commercial real estate	3	$	2,883	$	—	$	2,883
Construction and land development	3		47		636		683
Commercial and industrial	5		3,643		1,448		5,091
Residential real estate	1		—		102		102
Total	12	$	6,573	$	2,186	$	8,759

At September 30, 2015, the one construction and land development TDR, cited in the above table, was not in compliance with its restructured terms due to payment defaults. We did not classify any loan modifications as TDRs during the first three quarters of 2015. The following table presents restructured loans that occurred during the nine months ended September 30, 2014.


	Modifications by type for the nine months ended September 30, 2014
												Pre-		Post-
												Modification		Modification
												Outstanding		Outstanding
	Number of							Combination				Recorded		Recorded
(Dollars in thousands)	loans	Rate		Term		Payment		of types		Total		Investment		Investment
Commercial and industrial	3	$	—	$	233	$	—	$	28	$	261	$	262	$	262
Total	3	$	—	$	233	$	—	$	28	$	261	$	262	$	262

We may obtain physical possession of real estate collateralizing residential mortgage loans or home equity loans through or in lieu of, foreclosure. As of September 30, 2015, we have a foreclosed residential real estate property with a carrying value of $40,000 as a result of physical possession. In addition, as of September 30, 2015, we had residential mortgage loans with a carrying value of $228,000 collateralized by residential real estate property for which formal foreclosure proceedings were in process.