Note 4. Loans and Leases

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

	September 30,			December 31,
(In thousands)	2011			2010
Commercial and industrial	$	57,148		$	74,027
Construction		17,199			29,044
Land Development		38,249			50,594
Real Estate - residential		27,529			29,299
Real Estate - non-residential		181,308			194,203
Real Estate - multi-family		11,998			10,277
Tax certificates		53,513			70,443
Leases		35,758			38,725
Other		1,247			793
Total gross loans	$	423,949		$	497,405
Deferred fees, net		(563	)		(551	)
Total loans and leases	$	423,386		$	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 September 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.

At September 30, 2011 and December 31, 2010, the Company had $23.7 million and $29.6 million, respectively, in loans held for sale (“LHFS”). LHFS at September 30, 2011 are comprised of $19.1 million in non-accrual loans and $4.6 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 September 30, 2011 and December 31, 2010, excluding LHFS.

September 30, 2011					Special
(In thousands)	Pass		Watch		Mention		Substandard		Non-accrual		Total
Construction and land development	$	981	$	21,242	$	21,479	$	-	$	11,746	$	55,448
Real Estate-non-residential		88,865		54,642		28,125		-		9,676		181,308
Commercial & industrial		25,340		5,947		13,216		-		12,645		57,148
Residential real estate		19,344		6,447		305		-		1,433		27,529
Multi-family		5,224		4,042		1,015		-		1,717		11,998
Leasing		35,130		167		10		-		451		35,758
Consumer		1,171		76		-		-		-		1,247
Tax certificates		52,126		-		-		-		1,387		53,513
Subtotal LHFI		228,181		92,563		64,150		-		39,055		423,949
Less: Deferred loan fees												(563	)
Total LHFI											$	423,386

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 following tables present an aging analysis of past due payments for each loan portfolio segment at September 30, 2011 and December 31, 2010, excluding LHFS.

September 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	$	723	$	-	$	-	$	11,746	$	42,979	$	55,448
Real Estate-non-residential		1,063		-		-		9,676		170,569		181,308
Commercial & industrial		40		-		-		12,645		44,463		57,148
Residential real estate		575		214		-		1,433		25,307		27,529
Multi-family		-		-		-		1,717		10,281		11,998
Leasing		167		10		-		451		35,130		35,758
Consumer		216		-		-		-		1,031		1,247
Tax certificates		-		-		-		1,387		52,126		53,513
Subtotal LHFI		2,784		224		-		39,055		381,886		423,949
Less: Deferred loan fees												(563	)
Total LHFI											$	423,386

December 31, 2010	30-59 Days		60-89 Days		Accruing		Total
(In thousands)	Past Due		Past Due		90+ Days		Non-accrual		Current		Total
Construction and land development	$	-	$	-	$	-	$	19,758	$	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		341		-		2,399		25,218		29,299
Multi-family		-		-		-		2,453		7,824		10,277
Leasing		252		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 September 30, 2011 and December 31, 2010.

	September 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	$	11,746	$	-	$	19,758	$	-
Real Estate-non-residential		9,676		-		10,060		1,363
Commercial & industrial		12,645		430		5,958		-
Residential real estate		1,433		23		2,399		74
Multi-family		1,717		-		2,453		245
Leasing		451		204		732		194
Tax certificates		1,387		106		1,802		31
Total non-accrual LHFI	$	39,055	$	763	$	43,162	$	1,907

Non-accrual loans held for sale
Construction and land development	$	12,193	$	-	$	13,371	$	-
Real Estate-non-residential		6,687		-		8,638		-
Residential real estate		240		-		634		-
Total non-accrual LHFS	$	19,120		-	$	22,643		-
Total non-accrual loans	$	58,175	$	763	$	65,805	$	1,907

Total non-accrual loans at September 30, 2011 were $58.2 million and were comprised of $39.1 million in LHFI and $19.1 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. For the three quarters ended September 30, 2011, the $7.6 million decrease in non-accrual loans was the result of a $20.0 million reduction in existing non-accrual loan balances through payments or return to accrual status, $9.8 million in charge-offs and impairments, and $3.9 million transferred to OREO which were offset by additions of $26.1 million. The Company does not accrue interest income on non-accrual loans. If interest had been accrued, such income would have been approximately $1.1 million and $4.0 million for the three and nine months ended September 30, 2011, respectively. The Company had 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 $763,000 in specific reserves at September 30, 2011 was $740,000 in new or additional impairment on three existing non-accrual loans based on new appraisals or changes in expected cash flows.

Impaired Loans

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 non-accrual loans. Excess proceeds received over the principal amounts due on impaired non-accrual loans are recognized as income on a cash basis.

Total cash collected on impaired loans during the nine months ended September 30, 2011 and September 30, 2010 was $16.3 million and $14.5 million respectively, of which $16.3 million and $14.2 million was credited to the principal balance outstanding on such loans, respectively.

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

	September 30,		December 31,
(In thousands)	2011		2010
Impaired LHFI with a valuation allowance	$	6,250	$	9,620
Impaired LHFI without a valuation allowance		34,683		32,805
Impaired LHFS		19,120		22,643
Total impaired loans	$	60,053	$	65,068
Valuation allowance related to impaired LHFI	$	763	$	1,907

Troubled Debt Restructurings

A loan modification is deemed a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower or collateral with similar credit risk characteristics. During the third quarter of 2011, the Company adopted ASU 2011-02, “A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (“ASU 2011-02”) which amended guidance related to identifying and reporting TDRs. If in modifying a loan the Company, for economic or legal reasons related to a borrower's financial difficulties, grants a concession it would not normally consider then the loan modification is classified as a TDR. All loans classified as TDRs are considered to be impaired. TDRs are returned to an accrual status when the loan is brought current, has performed in accordance with the contractual restructured terms for a reasonable period of time (generally six months) and the ultimate collectibility of the total contractual restructured principal and interest is no longer in doubt. As required under ASU 2011-02, the Company reassessed all loan modifications that occurred after December 31, 2010 for identification as TDRs. At September 30, 2011, the Company had eight TDRs, of which seven are on non-accrual status, with a total carrying value of $10.9 million. At the time of the modifications the eight loans were already classified as impaired loans. The Company had one TDR at December 31, 2010 which was classified as a multi-family real estate non-accrual loan in the amount of $1.8 million. The Company's policy for TDRs is to recognize income on currently performing restructured loans under the accrual method.

The following table details the Company's TDRs that are on an accrual status and a non-accrual status at September 30, 2011.

(In thousands)	Number of loans		Accrual Status		Non-Accrual Status		Total TDRs

Construction and land development		2	$	2,256	$	967	$	3,223
Real Estate-non-residential		2		-		3,010		3,010
Commercial & industrial		1		-		2,774		2,774
Residential real estate		2		-		185		185
Multi-family		1		-		1,717		1,717
Total		8	$	2,256	$	8,653	$	10,909

The following tables present newly restructured loans that occurred during the three and nine months ended September 30, 2011.

	Modifications by type for the three months ended
	September 30, 2011

(Dollars in thousands)	Number of loans		Rate		Term		Payment		Combination		Total		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Construction and land development		1	$	-	$	-	$	-	$	2,256	$	2,256	$	4,178	$	2,652
Real Estate-non-residential		2		-		2,927		83		-		3,010		3,013		3,013
Commercial & industrial		1		2,774		-		-		-		2,774		2,774		2,774
Residential real estate		1		-		-		45		-		45		46		46
Total		5	$	2,774	$	2,927	$	128	$	2,256	$	8,085	$	10,011	$	8,485

	Modifications by type for the nine months ended
	September 30, 2011

(Dollars in thousands)	Number of loans		Rate		Term		Payment		Combination		Total		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Construction and land development		2	$	-	$	-	$	-	$	3,223	$	3,223	$	5,178	$	3,652
Real Estate-non-residential		2		-		2,927		83		-		3,010		3,013		3,013
Commercial & industrial		1		2,774		-		-		-		2,774		2,774		2,774
Residential real estate		2		140		-		45		-		185		193		193
Total		7	$	2,914	$	2,927	$	128	$	3,223	$	9,192	$	11,158	$	9,632

At September 30, 2011, the Company had one commercial real estate TDR with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the three and nine months ended September 30, 2011. The carrying amount of the TDR in default was $83,000 at September 30, 2011.