Note 4. Loans and Leases

Major classifications of loans held for investment (“LHFI”) are as follows:

	June 30,			December 31,
(In thousands)	2011			2010
Commercial and industrial	$	56,282		$	74,027
Construction		22,894			29,044
Land Development		43,419			50,594
Real Estate - residential		27,631			29,299
Real Estate - non-residential		180,103			194,203
Real Estate - multi-family		9,880			10,277
Tax certificates		60,009			70,443
Leases		37,598			38,725
Other		745			793
Total gross loans and leases	$	438,561		$	497,405
Deferred fees, net		(578	)		(551	)
Total loans and leases	$	437,983		$	496,854

The Company grants commercial and real estate loans, including construction and land development loans primarily in the greater Philadelphia metropolitan area as well as selected locations throughout the mid-Atlantic region. The Company also has participated with other financial institutions in selected construction and land development loans outside our geographic area. The Company has a concentration of credit risk in commercial real estate, construction and land development loans at June 30, 2011. A substantial portion of its debtors' ability to honor their contracts is dependent upon the housing sector specifically and the economy in general.

The Company classifies its leases as finance leases, in accordance with FASB ASC Topic 840, “Leases”. The difference between the Company's gross investment in the lease and the cost or carrying amount of the leased property, if different, is recorded as unearned income, which is amortized to income over the lease term by the interest method.

The Company's policy for income recognition on troubled debt restructurings (“TDRs”) is to recognize income on currently performing restructured loans under the accrual method. At June 30, 2011, the Company had six TDRs of which five are on non-accrual loans, with a total carrying value of $14.0 million.

At June 30, 2011 and December 31, 2010, the Company had $24.4 million and $29.6 million; respectively, in loans held for sale (“LHFS”). LHFS at June 30, 2011 are comprised of $17.4 million in non-accrual loans and $7.0 million in classified loans. These loans were transferred from LHFI in the fourth quarter of 2010 at the lower of cost or fair market value.

The Company uses 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 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 to calculate the historical loss component of the ALLL.

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

Watch: a warning classification which includes credits that are beginning to demonstrate above average risk through declining earnings, strained cash flows, increased leverage and/or weakening market fundamentals;

Special mention: includes credits that have potential weaknesses that if left uncorrected could weaken the credit or result in inadequate protection of the Company's 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 the Company 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, at the time of presentation to the appropriate loan committee, are given an initial loan “risk” rating by the Chief Credit Officer. 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 segment at June 30, 2011 and December 31, 2010, excluding LHFS.

June 30, 2011					Special
(In thousands)	Pass		Watch		Mention		Substandard		Non-accrual		Total
Construction and land development	$	1,678	$	19,708	$	28,551	$	-	$	16,376	$	66,313
Real Estate-non-residential		82,880		59,211		28,336		-		9,676		180,103
Commercial & industrial		21,355		7,411		13,959		-		13,557		56,282
Residential real estate		19,151		6,762		323		-		1,395		27,631
Multi-family		3,146		4,069		889		-		1,776		9,880
Leasing		36,555		175		61		-		807		37,598
Consumer		695		50		-		-		-		745
Tax certificates		58,300		-		-		-		1,709		60,009
Subtotal LHFI		223,760		97,386		72,119		-		45,296		438,561
Less: Deferred loan fees												(578	)
Total LHFI											$	437,983

December 31, 2010					Special
(In thousands)	Pass		Watch		Mention		Substandard		Non-accrual		Total

Construction and land development	$	7,913	$	24,056	$	27,911	$	-	$	19,758	$	79,638
Real Estate-non-residential		97,142		49,278		37,723		-		10,060		194,203
Commercial & industrial		27,864		6,488		25,400		8,317		5,958		74,027
Residential real estate		19,272		7,430		198		-		2,399		29,299
Multi-family		2,804		4,117		903		-		2,453		10,277
Leasing		37,731		252		10		-		732		38,725
Consumer		768		25		-		-		-		793
Tax certificates		68,641		-		-		-		1,802		70,443
Subtotal LHFI		262,135		91,646		92,145		8,317		43,162		497,405
Less: Deferred loan fees												(551	)
Total LHFI											$	496,854

The past due status of all classes of loans and leases receivable is determined based on contractual due dates for loan payments. Generally, a loan is placed on non-accruing status when it has been delinquent for a period of 90 days or more. The following tables present an aging analysis of past due payments for each loan portfolio segment at June 30, 2011 and December 31, 2010, excluding LHFS.

June 30, 2011	30-59 Days		60-89 Days		Accruing		Total
(In thousands)	Past Due		Past Due		90+ Days		Non-accrual		Current		Total
Construction and land development	$	-	$	-	$	-	$	16,376	$	49,937	$	66,313
Real Estate-non-residential		410		-		-		9,676		170,017		180,103
Commercial & industrial		98		41		-		13,557		42,586		56,282
Residential real estate		229		587		-		1,395		25,420		27,631
Multi-family		-		-		-		1,776		8,104		9,880
Leasing		175		62		-		807		36,554		37,598
Consumer		-		-		-		-		745		745
Tax certificates		-		-		-		1,709		58,300		60,009
Subtotal LHFI		912		690		-		45,296		391,663		438,561
Less: Deferred loan fees												(578	)
Total LHFI											$	437,983

June 30, 2011	30-59 Days		60-89 Days		Accruing		Total
(In thousands)	Past Due		Past Due		90+ Days		Non-accrual		Current		Total
Construction and land development	$	-	$	-	$	-	$	19,756	$	59,880	$	79,638
Real Estate-non-residential		9,469		-		-		10,060		174,674		194,203
Commercial & industrial		146		659		-		5,958		67,264		74,027
Residential real estate		1,341		321		-		2,399		25,218		29,299
Multi-family		-		-		-		2,453		7,824		10,277
Leasing		251		10		-		732		37,731		38,725
Consumer		18		-		-		-		775		793
Tax certificates		-		-		-		1,802		68,641		70,443
Subtotal LHFI		11,226		1,010		-		43,162		442,007		497,405
Less: Deferred loan fees												(551	)
Total LHFI											$	496,854

The following tables detail the composition of the non-accrual loans at June 30, 2011 and December 31, 2010.

	June 30, 2011				December 31, 2010
(In thousands)	Loan balance		Specific reserves		Loan balance		Specific reserves
Non-accrual loans held for investment
Construction and land development	$	16,376	$	1,458	$	19,758	$	-
Real Estate-non-residential		9,676		-		10,060		1,363
Commercial & industrial		13,557		-		5,958		-
Residential real estate		1,395		22		2,399		74
Multi-family		1,776		-		2,453		245
Leasing		807		314		732		194
Tax certificates		1,709		328		1,802		31
Total non-accrual LHFI	$	45,296	$	2,122	$	43,162	$	1,907

Non-accrual loans held for sale
Construction and land development	$	12,603		-	$	13,371		-
Real Estate-non-residential		4,584		-		8,638		-
Residential real estate		246		-		634		-
Total non-accrual LHFS	$	17,433		-	$	22,643		-
Total non-accrual loans	$	62,729	$	2,122	$	65,805	$	1,907

Total non-accrual loans at June 30, 2011 were $62.7 million and were comprised of $45.3 million in LHFI and $17.4 million in LHFS. Total non-accrual loans at December 31, 2010 were $65.8 million and were comprised of $43.2 million in LHFI and $22.6 million in LHFS. The $3.1 million decrease was the result of a $14.8 million reduction in existing non-accrual loan balances through payments or return to accrual status, $7.4 million in charge-offs, and $3.5 million transferred to OREO which were offset by additions of $22.6 million. If interest had been accrued, such income would have been approximately $1.4 million and $2.9 million for the three and six months ended June 30, 2011, respectively. The Company had six TDRs, of which five are on non-accrual loans, with a total carrying value of $14.0 million and no loans past due 90 days or more on which it has continued to accrue interest during the quarter. Typically, loans are restored to accrual status when the loan is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.

Included in the $2.1 million in specific reserves at June 30, 2011 was $1.8 million in new or additional impairment on three existing non-accrual loans based on new appraisals or changes in expected cash flows.

The Company identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The Company does not accrue interest income on impaired loans. Excess proceeds received over the principal amounts due on impaired loans are recognized as income on a cash basis.

Total cash collected on impaired loans during the six months ended June 30, 2011 and June 30, 2010 was $13.8 million and $11.1 million respectively, of which $13.8 million and $10.9 million was credited to the principal balance outstanding on such loans, respectively.

The following is a summary of information pertaining to impaired loans:

	June 30,		December 31,
(In thousands)	2011		2010
Impaired LHFI with a valuation allowance	$	9,709	$	9,620
Impaired LHFI without a valuation allowance		35,088		32,805
Impaired LHFS		17,433		22,643
Total impaired loans	$	62,230	$	65,068
Valuation allowance related to impaired LHFI	$	2,122	$	1,907