NOTE 4 – LOANS AND LEASES

Major classifications of LHFI are as follows:

	As of December 31,
(In thousands)	2012			2011
Construction and land development	$	37,215		$	54,120
Residential real estate		24,981			26,637
Multi-family		11,756			11,622
Commercial real estate		167,115			182,579
Commercial and industrial		40,560			54,136
Consumer		1,139			949
Leases		37,347			36,014
Tax certificates		24,569			48,809
Less: Deferred loan fees		(517	)		(623	)
Total LHFI, net of unearned income	$	344,165		$	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 December 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.

The Company granted loans to the officers and directors of the Company and to their associates. In accordance with Regulation O, related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectability. The aggregate dollar amount of these loans and commitments was $1.4 million and $8.8 million at December 31, 2012 and 2011. During 2012 there were no new related party loans. Total payments received on related party loans in 2012 were $18,000. Additionally, $7.4 million is no longer classified as related party due to the resignation of one of the directors during 2012.

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 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 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 CCO. 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 December 31, 2012 and 2011, excluding LHFS.

As of December 31, 2012					Special
(In thousands)	Pass		Pass-Watch		Mention		Substandard		Non-accrual		Total
Construction and land development	$	2,139	$	13,872	$	16,343	$	581	$	4,280	$	37,215
Commercial real estate		64,308		69,510		19,529		3,423		10,345		167,115
Commercial & industrial		14,764		10,774		92		9,969		4,961		40,560
Residential real estate		15,125		6,634		602		1,626		994		24,981
Multi-family		9,019		2,034		703		-		-		11,756
Leases		36,755		325		16		-		251		37,347
Tax certificates		23,968		-		-		-		601		24,569
Consumer		926		213		-		-		-		1,139
Subtotal LHFI		167,004		103,362		37,285		15,599		21,432		344,682
Less: Deferred loan fees												(517	)
Total LHFI											$	344,165

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
Tax certificates		47,786		-		-		-		1,023		48,809
Consumer		847		102		-		-		-		949
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 are an aging analysis of past due payments for each loan portfolio segment at December 31, 2012 and 2011, excluding LHFS.

As of December 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	$	-	$	-	$	-	$	4,280	$	32,935	$	37,215
Commercial real estate		1,548		1,486		-		10,345		153,736		167,115
Commercial & industrial		200		-		-		4,961		35,399		40,560
Residential real estate		562		486		-		994		22,939		24,981
Multi-family		-		-		-		-		11,756		11,756
Leases		325		16		-		251		36,755		37,347
Tax certificates		-		-		-		601		23,968		24,569
Consumer		-		-		-		-		1,139		1,139
Subtotal LHFI		2,635		1,988		-		21,432		318,627		344,682
Less: Deferred loan fees												(517	)
Total LHFI											$	344,165

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
Tax certificates		-		-		-		1,023		47,786		48,809
Consumer		-		-		-		-		949		949
Subtotal LHFI		3,659		510		-		38,755		371,942		414,866
Less: Deferred loan fees												(623	)
Total LHFI											$	414,243

The following table details the composition of the non-accrual loans.

	As of December 31, 2012				As of December 31, 2011
(In thousands)	Loan balance		Specific reserves		Loan balance		Specific reserves
Non-accrual loans held for investment
Construction and land development	$	4,280	$	820	$	13,014	$	-
Commercial real estate		10,345		835		16,671		-
Commercial & industrial		4,961		255		4,720		-
Residential real estate		994		14		1,139		24
Multi-family		-		-		1,703		-
Leases		251		55		485		114
Tax certificates		601		47		1,023		-
Total non-accrual LHFI	$	21,432	$	2,026	$	38,755	$	138
Non-accrual loans held for sale
Construction and land development	$	-	$	-	$	8,901	$	-
Commercial real estate		1,572		-		3,634		-
Residential real estate		-		-		34		-
Total non-accrual LHFS	$	1,572	$	-	$	12,569	$	-
Total non-accrual loans	$	23,004	$	2,026	$	51,324	$	138

Total non-accrual loans at December 31, 2012 were $23.0 million and were comprised of $21.4 million in LHFI and $1.6 million in LHFS. Non-accrual loans were $51.3 million and were comprised of $38.7 million in LHFI and $12.6 million in LHFS at December 31, 2011. The $28.3 million decline in total non-accrual loans was the result of a $18.4 million reduction in existing non-accrual loan balances through payments or loans becoming current and placed back on accrual, $8.3 million in charge-offs and write downs related to impairment analysis, and transfers to OREO of $10.8 million, which collectively were offset by $9.2 million in additions. Commercial real estate, commercial loans, and construction and land loans represent 52%, 22%, and 19%, respectively, of the total $23.0 million in non-accrual loans at December 31, 2012. If interest had been accrued, such income would have been approximately $3.1 million, $5.1 million, and $6.5 million, for the years ended December 31, 2012, 2011, and 2010, respectively. At December 31, 2012, the Company had no loans past due 90 days or more on which interest continues to accrue.

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 and leases during 2012, 2011, and 2010 was $23.4 million, $29.9 million, and $21.7 million, respectively, of which $21.1 million, $29.7 million, and $21.4 million was credited to the principal balance outstanding on such loans, respectively.

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

	As of December 31,
(In thousands)	2012		2011
Impaired loans with a valuation allowance	$	9,405	$	1,068
Impaired loans without a valuation allowance		19,423		45,009
Impaired LHFS		1,572		12,569
Total impaired loans	$	30,400	$	58,646

Valuation allowance related to impaired loans	$	2,026	$	138

	For the years ended December 31,
(In thousands)	2012		2011		2010
Average investment in impaired loans and leases	$	39,412	$	62,936	$	78,225
Interest income recognized on impaired loans and leases	$	366	$	202	$	335

Interest income recognized on a cash basis on impaired loans and leases	$	66	$	202	$	335

Troubled Debt Restructurings

A loan modification is deemed a 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 December 31, 2012, the Company had twelve TDRs, of which eight are on non-accrual status, with a total carrying value of $21.1 million. At the time of the modifications, seven of the loans were already classified as impaired loans. At December 31, 2011, the Company had twelve TDRs, of which seven were on non-accrual status, with a total carrying value of $14.2 million. At the time of the modifications, eight of the loans were already classified as impaired loans. 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 December 31, 2012.

(In thousands)	As of December 31, 2012
	Number of loans		Accrual Status		Non-Accrual Status		Total TDRs
Construction and land development		4	$	1,664	$	854	$	2,518
Commercial real estate		4		613		10,063		10,676
Commercial & industrial		2		5,290		2,457		7,747
Residential real estate		2		-		149		149
Total		12	$	7,567	$	13,523	$	21,090

At December 31, 2012, all of the TDRs were in compliance with their restructured terms.

The following table presents newly restructured loans that occurred during the years ended December 31, 2012 and 2011.

	Modifications by type for the year ended December 31, 2012
(Dollars in thousands)	Number of loans		Rate		Term		Payment		Combination of types		Total		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Construction and land development		1	$	-	$	-	$	-	$	282	$	282	$	290	$	290
Commercial real estate		2		-		-		-		7,624		7,624		9,426		9,426
Commercial & industrial		1		-		-		5,290		-		5,290		5,290		5,290
Total		4	$	-	$	-	$	5,290	$	7,906	$	13,196	$	15,006	$	15,006

	Modifications by type for the year ended December 31, 2011
(Dollars in thousands)	Number of loans		Rate		Term		Payment		Combination of types		Total		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Construction and land development		5	$	-	$	2,374	$	-	$	3,567	$	5,941	$	8,219	$	6,693
Commercial real estate		3		-		2,935		60		640		3,635		3,803		3,803
Commercial & industrial		1		-		-		-		2,744		2,744		2,774		2,774
Residential real estate		2		139		-		41		-		180		194		194
Total		11	$	139	$	5,309	$	101	$	6,951	$	12,500	$	14,990	$	13,464