Note 4.Loans and Leases

Major classifications of loans are as follows:


	June 30,		December 31,
(In thousands)	2016		2015
Commercial real estate	$	239,776	$	225,679
Construction and land development		65,385		47,984
Commercial and industrial		97,270		85,980
Multi-family		21,010		16,249
Residential real estate		50,104		51,588
Leases		66,898		64,341
Tax certificates		4,390		4,755
Consumer		2,254		2,527
Total loans, net of unearned income	$	547,087	$	499,103

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 June 30, 2016 and December 31, 2015.


As of June 30, 2016
(In thousands)	Pass		Pass-Watch		Special Mention		Substandard		Non-accrual		Total
Commercial real estate	$	210,706	$	27,813	$	349	$	—	$	908	$	239,776
Construction and land development		10,234		55,006		—		—		145		65,385
Commercial and industrial		85,324		9,199		116		1,869		762		97,270
Multi-family		17,012		3,998		—		—		—		21,010
Residential real estate		49,405		108		—		—		591		50,104
Leases		64,383		801		429		—		1,285		66,898
Tax certificates		3,280		—		—		—		1,110		4,390
Consumer		2,143		111		—		—		—		2,254
Total loans, net of unearned income	$	442,487	$	97,036	$	894	$	1,869	$	4,801	$	547,087


As of December 31, 2015
(In thousands)	Pass		Pass-Watch		Special Mention		Substandard		Non-accrual		Total
Commercial real estate	$	191,320	$	31,994	$	870	$	—	$	1,495	$	225,679
Construction and land development		4,429		43,410		—		—		145		47,984
Commercial and industrial		68,998		13,971		195		2,065		751		85,980
Multi-family		15,982		267		—		—		—		16,249
Residential real estate		50,699		—		—		—		889		51,588
Leases		62,896		319		39		—		1,087		64,341
Tax certificates		3,630		—		—		—		1,125		4,755
Consumer		2,439		88		—		—		—		2,527
Total loans, net of unearned income	$	400,393	$	90,049	$	1,104	$	2,065	$	5,492	$	499,103

The following tables present an aging analysis of past due payments for each loan portfolio classification at June 30, 2016 and December 31, 2015.


As of June 30, 2016	30-59 Days		60-89 Days		Accruing
(In thousands)	Past Due		Past Due		90+ Days		Non-accrual		Current		Total
Commercial real estate	$	—	$	—	$	—	$	908	$	238,868	$	239,776
Construction and land development		—		—		—		145		65,240		65,385
Commercial and industrial		349		133		—		762		96,026		97,270
Multi-family		—		—		—		—		21,010		21,010
Residential real estate		251		118		—		591		49,144		50,104
Leases		801		429		—		1,285		64,383		66,898
Tax certificates		—		—		—		1,110		3,280		4,390
Consumer		—		—		—		—		2,254		2,254
Total loans, net of unearned income	$	1,401	$	680	$	—	$	4,801	$	540,205	$	547,087


As of December 31, 2015	30-59 Days		60-89 Days		Accruing
(In thousands)	Past Due		Past Due		90+ Days		Non-accrual		Current		Total
Commercial real estate	$	96	$	—	$	—	$	1,495	$	224,088	$	225,679
Construction and land development		507		—		—		145		47,332		47,984
Commercial and industrial		910		592		—		751		83,727		85,980
Multi-family		—		—		—		—		16,249		16,249
Residential real estate		724		159		—		889		49,816		51,588
Leases		319		39		—		1,087		62,896		64,341
Tax certificates		—		—		—		1,125		3,630		4,755
Consumer		—		—		—		—		2,527		2,527
Total loans, net of unearned income	$	2,556	$	790	$	—	$	5,492	$	490,265	$	499,103

If interest had accrued on non-accrual loans, such income would have been approximately $157 thousand and $315 thousand for the three and six months ended June 30, 2016 and $193 thousand and $397 thousand for the the three and six months ended June 30, 2015, respectively.

Impaired Loans

Total cash collected on impaired loans during the six months ended June 30, 2016 and 2015 was $1.1 million and $3.6 million respectively, of which $994 thousand and $2.7 million was credited to the principal balance outstanding on such loans, respectively. Interest income recognized on a cash basis on impaired loans and leases was $0 for the three months ended June 30, 2016 and 2015, respectively and $0 and $135 thousand for the six months ended June 30, 2016 and 2015, respectively.

Troubled Debt Restructurings (“TDRs”)

The following table details our TDRs that are on an accrual status and non-accrual status at June 30, 2016 and December 31, 2015.


	As of June 30, 2016
				Non-
	Number of	Accrual		Accrual
(In thousands)	loans	Status		Status		Total TDRs
Commercial real estate	1	$	21	$	—	$	21
Construction and land development	1		—		145		145
Commercial and industrial	2		1,869		177		2,046
Residential real estate	1		86		—		86
Total	5	$	1,976	$	322	$	2,298


	As of December 31, 2015
				Non-
	Number of	Accrual		Accrual
(In thousands)	loans	Status		Status		Total TDRs
Commercial real estate	1	$	24	$	—	$	24
Construction and land development	1		—		145		145
Commercial and industrial	3		2,315		—		2,315
Residential real estate	1		—		92		92
Total	6	$	2,339	$	237	$	2,576

At June 30, 2016, there were no TDRs modified within the past 12 months, for which there was a payment default. We did not classify any loan modifications as TDRs during the first two quarters of 2016 and 2015.

We may obtain physical possession of real estate collateralizing residential mortgage loans or home equity loans through or in lieu of, foreclosure. As of June 30, 2016, we have a foreclosed residential real estate property with a carrying value of $28 thousand as a result of physical possession. In addition, as of June 30, 2016, we had residential mortgage loans with a carrying value of $446 thousand collateralized by residential real estate property for which formal foreclosure proceedings were in process.