NOTE 4 – LOANS AND LEASES

Major classifications of LHFI are as follows:

	As of December 31,
(In thousands)	2011			2010
Loans secured by real estate:
Construction	$	14,066		$	29,044
Land development		40,054			50,594
Secured by 1-4 family residential real estate:
Revolving, open-end loans secured by residential real estate and extended under lines of credit		1,165			1,252
All other loans secured by 1-4 family residential real estate:
Secured by first liens		23,521			26,166
Secured by junior liens		1,951			1,881
Secured by multi family (5 or more) residential real estate		11,622			10,277
Secured by non-farm nonresidential real estate		182,579			194,203
Tax certificates		48,809			70,443
Commercial and industrial loans		54,136			74,027
Loans to individuals for household, family, and other personal expenditures		861			768
Lease financing receivables (net of unearned income)		36,014			38,725
All other loans		88			25
Less: Deferred loan fees		(623	)		(551	)
Total LHFI, net of unearned income	$	414,243		$	496,854

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 $8.8 million and $3.9 million at December 31, 2011 and 2010. During 2011 three new related party loans totaling $5.8 million were approved and three were paid off. Total payments received on related party loans in 2011 were $915,000.

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 grants commercial and real estate loans, including construction and land development 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 these geographic areas. The Company has a concentration of credit risk in commercial real estate and construction and land development loans at December 31, 2011. A substantial portion of its debtors' ability to honor these contracts is dependent upon the housing sector specifically and the economy in general.

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 allowance.

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 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, 2011 and 2010, excluding LHFS.

As of December 31, 2011					Special
(In thousands)	Pass		Watch		Mention		Substandard		Non-accrual		Total
Construction and land development	$	1,303	$	17,493	$	19,936	$	2,374	$	13,014	$	54,120
Non-residential 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
Leasing		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

As of 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
Non-residential real estate		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
Tax certificates		68,641		-		-		-		1,802		70,443
Consumer		768		25		-		-		-		793
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 are an aging analysis of past due payments for each loan portfolio segment at December 31, 2011 and 2010, excluding LHFS.

As of 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
Non-residential 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
Leasing		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

As of 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
Non-residential real estate		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
Tax certificates		-		-		-		1,802		68,641		70,443
Consumer		18		-		-		-		775		793
Subtotal LHFI		11,226		1,010		-		43,162		442,007		497,405
Less: Deferred loan fees												(551	)
Total LHFI											$	496,854

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

	As of December 31, 2011				As of December 31, 2010
(In thousands)	Loan balance		Specific reserves		Loan balance		Specific reserves
Non-accrual loans held for investment
Construction and land development	$	13,014	$	-	$	19,758	$	-
Non-residential real estate		16,671		-		10,060		1,363
Commercial & industrial		4,720		-		5,958		-
Residential real estate		1,139		24		2,399		74
Multi-family		1,703		-		2,453		245
Leasing		485		114		732		194
Tax certificates		1,023		-		1,802		31
Total non-accrual LHFI	$	38,755	$	138	$	43,162	$	1,907
Non-accrual loans held for sale
Construction and land development	$	8,901	$	-	$	13,371	$	-
Non-residential real estate		3,634		-		8,638		-
Residential real estate		34		-		634		-
Total non-accrual LHFS	$	12,569		-	$	22,643		-
Total non-accrual loans	$	51,324	$	138	$	65,805	$	1,907

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. Non-accrual loans were $65.8 million and were comprised of $43.2 million in LHFI and $22.6 million in LHFS at December 31, 2010. The $14.5 million decline in total non-accrual loans was the result of a $30.7 million reduction in existing non-accrual loan balances through payments or loans becoming current and placed back on accrual, $13.6 million in charge-offs and write downs related to impairment analysis and transfers to OREO of $4.2 million which collectively were offset by $34.0 million in additions. Construction and land loans, non-residential real estate and commercial loans represent 43%, 40% and 9%, respectively of the $51.3 million in non-accrual loans at December 31, 2011. If interest had been accrued, such income would have been approximately $5.1 million, $6.5 million, and $6.2 million, for the years ended December 31, 2011, 2010, and 2009, respectively. At December 31, 2011, 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 2011, 2010, and 2009 was $29.9 million, $21.7 million, and $21.6 million, respectively, of which $29.7 million, $21.4 million, and $21.3 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)	2011		2010
Impaired LHFI with a valuation allowance	$	1,068	$	9,620
Impaired LHFI without a valuation allowance		45,009		32,805
Impaired LHFS		12,569		22,643
Total impaired loans and leases	$	58,646	$	65,068
Valuation allowance related to impaired LHFI	$	138	$	1,907

	For the years ended December 31,
(In thousands)	2011		2010		2009
Average investment in impaired loans and leases	$	62,936	$	78,225	$	79,754
Interest income recognized on impaired loans and leases	$	202	$	335	$	242
Interest income recognized on a cash basis on impaired loans and leases	$	202	$	335	$	242

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) a concession is 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 December 31, 2011, the Company had twelve TDRs, of which seven are 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 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 December 31, 2011.

	As of December 31, 2011
(In thousands)	Number of loans		Accrual Status		Non- Accrual Status		Total TDRs
Construction and land development		5	$	4,354	$	1,587	$	5,941
Non-residential real estate		3		640		2,995		3,635
Commercial & industrial		1		2,744		-		2,744
Residential real estate		2		-		180		180
Multi-family		1		-		1,703		1,703
Total		12	$	7,738	$	6,465	$	14,203

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

	Modifications by type for the year ended December 31, 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		5	$	-	$	2,374	$	-	$	3,567	$	5,941	$	8,219	$	6,693
Non-residential 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

At December 31, 2011, the Company had two non-residential real estate TDRs with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the three and twelve months ended December 31, 2011. The carrying amount of the TDRs in default was $3.0 million at December 31, 2011.