Note 4. Loans and Leases

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

	June 30,			December 31,
(In thousands)	2012			2011
Commercial and industrial	$	47,567		$	54,136
Construction		5,934			14,066
Land development		40,614			40,054
Residential real estate		26,556			26,637
Commercial real estate		166,315			182,579
Multi-family		13,008			11,622
Tax certificates		34,094			48,809
Leases		37,775			36,014
Other		973			949
Total gross loans	$	372,836		$	414,866
Deferred fees, net		(491	)		(623	)
Total loans and leases	$	372,345		$	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 June 30, 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 June 30, 2012 and December 31, 2011, the Company had $3.6 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 six months of 2012, the Company sold five loans and received proceeds of $11.0 million and recorded gains of $2.0 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 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, 2012 and December 31, 2011, excluding LHFS.

June 30, 2012					Special
(In thousands)	Pass		Pass-Watch		Mention		Substandard		Non-accrual		Total
Construction and land development	$	394	$	16,593	$	20,105	$	2,638	$	6,818	$	46,548
Commercial real estate		67,148		69,406		14,965		2,749		12,047		166,315
Commercial & industrial		17,316		11,082		13,526		-		5,643		47,567
Residential real estate		15,256		9,365		610		-		1,325		26,556
Multi-family		7,106		3,206		1,023		-		1,673		13,008
Leases		37,270		314		19		-		172		37,775
Other		894		79		-		-		-		973
Tax certificates		33,201		-		-		-		893		34,094
Subtotal LHFI		178,585		110,045		50,248		5,387		28,571		372,836
Less: Deferred loan fees												(491	)
Total LHFI											$	372,345

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 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, 2012 and December 31, 2011, excluding LHFS.

June 30, 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	$	289	$	-	$	-	$	6,818	$	39,441	$	46,548
Commercial real estate		2,213		-		-		12,047		152,055		166,315
Commercial & industrial		796		-		-		5,643		41,128		47,567
Residential real estate		299		124		-		1,325		24,808		26,556
Multi-family		-		-		-		1,673		11,335		13,008
Leases		314		19		-		172		37,270		37,775
Other		5		-		-		-		968		973
Tax certificates		-		-		-		893		33,201		34,094
Subtotal LHFI		3,916		143		-		28,571		340,206		372,836
Less: Deferred loan fees												(491	)
Total LHFI											$	372,345

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
Real Estate-non-residential		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
Leasing		147		28		-		485		35,354		36,014
Consumer		-		-		-		-		949		949
Tax certificates		-		-		-		1,023		47,786		48,809
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 June 30, 2012 and December 31, 2011.

	June 30, 2012				December 31, 2011
(In thousands)	Loan balance		Specific reserves		Loan balance		Specific reserves
Non-accrual loans held for investment
Construction and land development	$	6,818	$	1,243	$	13,014	$	-
Commercial real estate		12,047		-		16,671		-
Commercial & industrial		5,643		139		4,720		-
Residential real estate		1,325		22		1,139		24
Multi-family		1,673		439		1,703		-
Leases		172		32		485		114
Tax certificates		893		-		1,023		-
Total non-accrual LHFI	$	28,571	$	1,875	$	38,755	$	138
Non-accrual loans held for sale
Construction and land development	$	-	$	-	$	8,901	$	-
Commercial real estate		3,574		-		3,634		-
Residential real estate		-		-		34		-
Total non-accrual LHFS	$	3,574	$	-	$	12,569	$	-
Total non-accrual loans	$	32,145	$	1,875	$	51,324	$	138

Total non-accrual loans at June 30, 2012 were $32.1 million and were comprised of $28.5 million in LHFI and $3.6 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 $19.2 million decrease was the result of a $15.1 million reduction in existing non-accrual loan balances through payments and sales, $9.1 million in transfers to OREO, and $781,000 in charge-offs partially offset by additions of $5.8 million. There was one commercial loan for $2.7 million that went non-accrual during the first quarter of 2012. If interest had been accrued, such income would have been approximately $831,000 and $1.8 million for the three and six months ended June 30, 2012, 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.

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 six months ended June 30, 2012 and June 30, 2011 was $17.8 million and $13.8 million respectively, of which $15.6 million and $13.8 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)	2012		2011
Impaired loans with a valuation allowance	$	4,829	$	1,068
Impaired loans without a valuation allowance		28,126		45,009
Impaired LHFS		3,574		12,569
Total impaired loans	$	36,529	$	58,646

Valuation allowance related to impaired loans	$	1,875	$	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. 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. At June 30, 2012, the Company had ten TDRs, of which six are on non-accrual status, with a total carrying value of $12.3 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. There were no new TDRs for the six months ended June 30, 2012.

The following table details the Company's TDRs that are on an accrual status and a non-accrual status at June 30, 2012.

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

Construction and land development		4	$	3,894	$	647	$	4,541
Commercial real estate		2		627		2,595		3,222
Commercial & industrial		1		-		2,666		2,666
Residential real estate		2		-		164		164
Multi-family		1		-		1,673		1,673
Total		10	$	4,521	$	7,745	$	12,266

At June 30, 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 $2.6 million at June 30, 2012.