Note 3.Loans and Leases

At September 30, 2017 and December 31, 2016, the Company had no loans held for sale (“LHFS”).

Major classifications of LHFI are as follows:


	September 30,		December 31,
(In thousands)	2017		2016
Commercial real estate	$	256,452	$	261,561
Construction and land development		78,389		83,369
Commercial and industrial		110,861		108,146
Multi-family		33,751		23,389
Residential real estate		55,643		56,899
Leases		55,270		61,838
Tax certificates		1,290		3,705
Consumer		2,909		3,102
Total loans, net of unearned income	$	594,565	$	602,009

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 Underwriting and Credit Administration Officer (“UCAO”). 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 LHFI portfolio classification at September 30, 2017 and December 31, 2016.


As of September 30, 2017
(In thousands)	Pass		Pass-Watch		Special Mention		Substandard		Non-accrual		Total
Commercial real estate	$	218,860	$	36,112	$	—	$	—	$	1,480	$	256,452
Construction and land development		9,001		69,260		—		—		128		78,389
Commercial and industrial		85,022		23,792		—		1,397		650		110,861
Multi-family		23,519		10,232		—		—		—		33,751
Residential real estate		55,032		100		—		—		511		55,643
Leases		52,955		471		—		—		1,844		55,270
Tax certificates		821		—		—		—		469		1,290
Consumer		2,825		84		—		—		—		2,909
Total loans, net of unearned income	$	448,035	$	140,051	$	—	$	1,397	$	5,082	$	594,565


As of December 31, 2016
(In thousands)	Pass		Pass-Watch		Special Mention		Substandard		Non-accrual		Total
Commercial real estate	$	221,862	$	38,814	$	—	$	—	$	885	$	261,561
Construction and land development		9,643		73,582		—		—		144		83,369
Commercial and industrial		92,174		13,308		320		1,692		652		108,146
Multi-family		16,974		6,415		—		—		—		23,389
Residential real estate		56,225		104		—		—		570		56,899
Leases		59,641		348		—		—		1,849		61,838
Tax certificates		1,798		—		—		—		1,907		3,705
Consumer		2,891		211		—		—		—		3,102
Total loans, net of unearned income	$	461,208	$	132,782	$	320	$	1,692	$	6,007	$	602,009

The following tables present an aging analysis of past due payments for each LHFI portfolio classification at September 30, 2017 and December 31, 2016.


As of September 30, 2017	30-59 Days		60-89 Days		90+ Days*
(In thousands)	Past Due		Past Due		Past Due		Current		Total
Commercial real estate	$	65	$	—	$	1,480	$	254,907	$	256,452
Construction and land development		—		—		128		78,261		78,389
Commercial and industrial		—		—		650		110,211		110,861
Multi-family		—		—		—		33,751		33,751
Residential real estate		99		—		511		55,033		55,643
Leases		255		217		1,844		52,954		55,270
Tax certificates		—		—		469		821		1,290
Consumer		216		—		—		2,693		2,909
Total loans, net of unearned income	$	635	$	217	$	5,082	$	588,631	$	594,565


As of December 31, 2016	30-59 Days		60-89 Days		90+ Days*
(In thousands)	Past Due		Past Due		Past Due		Current		Total
Commercial real estate	$	—	$	507	$	886	$	260,168	$	261,561
Construction and land development		—		—		144		83,225		83,369
Commercial and industrial		416		367		173		107,190		108,146
Multi-family		—		—		—		23,389		23,389
Residential real estate		978		—		355		55,566		56,899
Leases		348		104		1,577		59,809		61,838
Tax certificates		—		—		1,907		1,798		3,705
Consumer		—		—		—		3,102		3,102
Total loans, net of unearned income	$	1,742	$	978	$	5,042	$	594,247	$	602,009

* All loans categorized as “90+ Days Past Due” are non-accrual.

If interest had accrued on non-accrual loans held for investment, such income would have been approximately $109 thousand and $335 thousand for the three and nine months ended September 30, 2017 and $135 thousand and $450 thousand for the three and nine months ended September 30, 2016, respectively.

Impaired Loans

Total cash collected on all impaired loans during the nine months ended September 30, 2017 and 2016 was $1.8 million and $1.4 million, respectively, of which $1.7 million and $1.3 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 and nine months ended September 30, 2017 and September 30, 2016.

Troubled Debt Restructurings (“TDRs”)

The following table details our TDRs that are on an accrual status and non-accrual status at September 30, 2017 and December 31, 2016.


	As of September 30, 2017
				Non-
	Number of	Accrual		Accrual
(In thousands)	loans	Status		Status		Total TDRs
Commercial real estate	1	$	15	$	—	$	15
Construction and land development	1		—		128		128
Commercial and industrial	2		1,396		160		1,556
Residential real estate	1		80		—		80
Total	5	$	1,491	$	288	$	1,779


	As of December 31, 2016
				Non-
	Number of	Accrual		Accrual
(In thousands)	loans	Status		Status		Total TDRs
Commercial real estate	1	$	19	$	—	$	19
Construction and land development	1		—		144		144
Commercial and industrial	2		1,692		173		1,865
Residential real estate	1		83		—		83
Total	5	$	1,794	$	317	$	2,111

At September 30, 2017, 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 three quarters of 2017 and 2016.

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, 2017, we have no foreclosed residential real estate properties as a result of physical possession. In addition, as of September 30, 2017, we had residential mortgage loans with a carrying value of $214 thousand collateralized by residential real estate property for which formal foreclosure proceedings were in process.