Note 4.

Loans and Leases

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

	March 31,			December 31,
(In thousands)	2012			2011
Commercial and industrial	$	52,794		$	54,136
Construction		8,534			14,066
Land development		40,865			40,054
Residential real estate		27,155			26,637
Commercial real estate		180,123			182,579
Multi-family		13,735			11,622
Tax certificates		39,056			48,809
Leases		37,468			36,014
Other		945			949
Total gross loans	$	400,675		$	414,866
Deferred fees, net		(535	)		(623	)
Total loans and leases	$	400,140		$	414,243

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 March 31, 2012. A substantial portion of its debtors' ability to honor their contracts is dependent upon the housing sector specifically and the economy in general.

Loans and leases are classified as LHFI when management has the intent and ability to hold the loan or lease for the foreseeable future or until maturity or payoff. LHFI are stated at their outstanding unpaid principal balances, net of an allowance for loan and leases losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan.

At March 31, 2012 and December 31, 2011, the Company had $8.7 million and $12.6 million; respectively, in non-accrual LHFS. These loans were transferred from LHFI at the lower of cost or fair market value using expected net sales proceeds. During the first quarter of 2012, the Company sold three loans and received proceeds of $3.8 million as a result of these sales.

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 uses a nine point grading risk classification system commonly used in the financial services industry as the credit quality indicator. The first five classifications are rated Pass. The riskier classifications include 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 allowance.

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

Pass-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 March 31, 2012 and December 31, 2011, excluding LHFS.

March 31, 2012					Special
(In thousands)	Pass		Pass-Watch		Mention		Substandard		Non-accrual		Total
Construction and land development	$	759	$	17,337	$	19,417	$	2,374	$	9,512	$	49,399
Commercial real estate		86,299		66,237		14,291		1,083		12,213		180,123
Commercial & industrial		19,183		12,268		14,973		-		6,370		52,794
Residential real estate		15,581		9,542		698		-		1,334		27,155
Multi-family		7,125		3,884		1,038		-		1,688		13,735
Leases		36,938		147		28		-		355		37,468
Other		852		93		-		-		-		945
Tax certificates		38,031		-		-		-		1,025		39,056
Subtotal LHFI		204,768		109,508		50,445		3,457		32,497		400,675
Less: Deferred loan fees												(535	)
Total LHFI											$	400,140

December 31, 2011					Special
(In thousands)	Pass		Pass-Watch		Mention		Substandard		Non-accrual		Total
Construction and land development	$	1,303	$	17,493	$	19,936	$	2,374	$	13,014	$	54,120
Commercial real estate		87,308		64,878		13,722		-		16,671		182,579
Commercial & industrial		19,073		12,101		18,242		-		4,720		54,136
Residential real estate		15,335		9,092		1,071		-		1,139		26,637
Multi-family		4,962		3,907		1,050		-		1,703		11,622
Leases		35,355		147		27		-		485		36,014
Other		847		102		-		-		-		949
Tax certificates		47,786		-		-		-		1,023		48,809
Subtotal LHFI		211,969		107,720		54,048		2,374		38,755		414,866
Less: Deferred loan fees												(623	)
Total LHFI											$	414,243

The following tables present an aging analysis of past due payments for each loan portfolio segment at March 31, 2012 and December 31, 2011, excluding LHFS.

March 31, 2012	30-59 Days		60-89 Days		Accruing		Total
(In thousands)	Past Due		Past Due		90+ Days		Non-accrual		Current		Total
Construction and land development	$	-	$	-	$	-	$	9,512	$	39,887	$	49,399
Commercial real estate		2,874		295		-		12,213		164,741		180,123
Commercial & industrial		86		-		-		6,370		46,338		52,794
Residential real estate		310		343		-		1,334		25,168		27,155
Multi-family		-		-		-		1,688		12,047		13,735
Leases		158		85		-		355		36,870		37,468
Other		22		-		-		-		923		945
Tax certificates		-		-		-		1,025		38,031		39,056
Subtotal LHFI		3,450		723		-		32,497		364,005		400,675
Less: Deferred loan fees												(535	)
Total LHFI											$	400,140

December 31, 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	$	-	$	-	$	-	$	13,014	$	41,106	$	54,120
Commercial real estate		2,837		100		-		16,671		162,971		182,579
Commercial & industrial		148		-		-		4,720		49,268		54,136
Residential real estate		527		382		-		1,139		24,589		26,637
Multi-family		-		-		-		1,703		9,919		11,622
Leases		147		28		-		485		35,354		36,014
Other		-		-		-		1,023		47,786		48,809
Tax certificates		-		-		-		-		949		949
Subtotal LHFI		3,659		510		-		38,755		371,942		414,866
Less: Deferred loan fees												(623	)
Total LHFI											$	414,243

The following tables detail the composition of the non-accrual loans at March 31, 2012 and December 31, 2011.

	March 31, 2012				December 31, 2011
(In thousands)	Loan balance		Specific reserves		Loan balance		Specific reserves
Non-accrual loans held for investment
Construction and land development	$	9,512	$	-	$	13,014	$	-
Commercial real estate		12,213		-		16,671		-
Commercial & industrial		6,370		47		4,720		-
Residential real estate		1,334		20		1,139		24
Multi-family		1,688		-		1,703		-
Leases		355		53		485		114
Tax certificates		1,025		55		1,023		-
Total non-accrual LHFI	$	32,497	$	175	$	38,755	$	138
Non-accrual loans held for sale
Construction and land development	$	5,131	$	-	$	8,901	$	-
Commercial real estate		3,574		-		3,634		-
Residential real estate		31		-		34		-
Total non-accrual LHFS	$	8,736	$	-	$	12,569	$	-
Total non-accrual loans	$	41,233	$	175	$	51,324	$	138

Total non-accrual loans at March 31, 2012 were $41.2 million and were comprised of $32.5 million in LHFI and $8.7 million in LHFS. Total non-accrual loans at December 31, 2011 were $51.3 million and were comprised of $38.7 million in LHFI and $12.6 million in LHFS. The $10.1 million decrease was the result of $7.2 million in transfers to OREO, a $5.8 million reduction in existing non-accrual loan balances through payments and sales, and $153,000 in charge-offs partially offset by additions of $3.1 million. If interest had been accrued, such income would have been approximately $963,000 for the three months ended March 31, 2012. 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.

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 non-accrual and impaired loans during the three months ended March 31, 2012 and 2011 was $6.1 million and $5.8 million respectively, of which $6.0 million and $5.8 million was credited to the principal balance outstanding on such loans, respectively.

The following is a summary of information pertaining to impaired loans which includes troubled debt restructurings:

	March 31,		December 31,
(In thousands)	2012		2011
Impaired loans with a valuation allowance	$	2,360	$	1,068
Impaired loans without a valuation allowance		34,510		45,009
Impaired LHFS		8,736		12,569
Total impaired loans	$	45,606	$	58,646

Valuation allowance related to impaired loans	$	175	$	138

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 March 31 2012, the Company had ten TDRs, of which six are on non-accrual status, with a total carrying value of $12.9 million. At the time of the modifications, six of the loans were already classified as impaired loans. At December 31, 2011, the Company had twelve TDRs with a total carrying value of $14.2 million. The Company's policy for TDRs is to recognize income on currently performing restructured loans under the accrual method. During the first quarter of 2012, the Company sold two of the TDRs and received $980,000 in proceeds.

The following table details the Company's TDRs that are on an accrual status and a non-accrual status at March 31, 2012.

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

Construction and land development		4	$	4,216	$	659	$	4,875
Commercial real estate		2		634		2,786		3,420
Commercial & industrial		1		-		2,711		2,711
Residential real estate		2		-		174		174
Multi-family		1		-		1,688		1,688
Total		10	$	4,850	$	8,018	$	12,868

The Company did not have any new TDRs during the first quarter of 2012.

At March 31, 2012, 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 fourth quarter of 2011. The carrying amount of the TDR in default was $2.8 million at March 31, 2012.