Quarterly Report

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                 BENEFICIAL MUTUAL BANCORP, INC.                

(Exact name of registrant as specified in its charter)

United States		56-2480744
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

PART I.   FINANCIAL INFORMATION

Item 1.    Financial Statements

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Financial Condition

(Dollars in thousands, except share amounts)

		March 31, 2009				December 31, 2008
ASSETS
Cash and Cash Equivalents
Cash and due from banks		$	72,996			$	44,380
Interest-bearing deposits at other banks			250				9
Total cash and cash equivalents			73,246				44,389
Investment Securities:
Available-for-sale (amortized cost of $1,017,591 at March 31, 2009 and $1,095,232 at December 31, 2008)			1,041,615				1,114,086
Held-to-maturity (estimated fair value of $65,872 at March 31, 2009 and $77,369 at December 31, 2008)			64,061				76,014
Federal Home Loan Bank stock, at cost			28,068				28,068
Total investment securities			1,133,744				1,218,168
Loans:			2,544,278				2,424,582
Allowance for loan losses			(37,345	)			(36,905	)
Net loans			2,506,933				2,387,677
Accrued Interest Receivable			18,186				17,543
Bank premises and equipment, net			78,328				78,490
Other Assets:
Goodwill			111,462				111,462
Bank owned life insurance			31,216				30,850
Other intangibles			23,094				23,985
Other assets			73,287				89,486
Total other assets			239,059				255,783
Total Assets		$	4,049,496			$	4,002,050
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing deposits		$	243,845			$	226,382
Interest-bearing deposits			2,675,109				2,515,297
Total deposits			2,918,954				2,741,679
Borrowed funds			443,687				580,054
Other liabilities			66,544				69,777
Total liabilities			3,429,185				3,391,510
Commitments and Contingencies (Note 15)
Stockholders’ Equity:
Preferred Stock - $.01 par value; 100,000,000 shares authorized, none issued or outstanding as of March 31, 2009 or December 31, 2008			-				-
Common Stock - $.01 par value 300,000,000 shares authorized, 82,264,457 shares issued and outstanding as of March 31, 2009 and December 31, 2008			823				823
Additional paid-in capital			343,093				342,420
Unearned common stock held by the employee savings and stock ownership plan			(27,609	)			(28,510	)
Retained earnings (partially restricted)			301,234				296,106
Accumulated other comprehensive income (loss)			4,618				(299	)
Treasury stock at cost, 211,904 shares at March 31, 2009 and 0 shares at December 31, 2008			(1,848	)			-
Total stockholders’ equity			620,311				610,540
Total Liabilities and Stockholders’ Equity		$	4,049,496			$	4,002,050

See accompanying notes to the unaudited consolidated financial statements.

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BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)

		Three Months Ended March 31,
		2009				2008
INTEREST INCOME
Interest and fees on loans		$	33,357			$	32,495
Interest on federal funds sold			2				361
Interest and dividends on investment securities:
Taxable			13,613				15,019
Tax-exempt			556				367
Total interest income			47,528				48,242
INTEREST EXPENSE
Interest on deposits:
Interest bearing checking accounts			1,984				1,286
Money market and savings deposits			3,451				3,758
Time deposits			7,946				11,146
Total			13,381				16,190
Interest on borrowed funds			4,668				4,934
Total interest expense			18,049				21,124
Net interest income			29,479				27,118
Provision for Loan Losses			3,000				300
Net interest income after provision for loan losses			26,479				26,818
Non-interest Income
Insurance commission and related income			2,748				3,265
Service charges and other income			3,652				3,942
Impairment charge on securities available-for-sale			(1,230	)			-
Net gain on sale of investment securities available-for-sale			2,848				128
Total non-interest income			8,018				7,335
Non-interest Expense
Salaries and employee benefits			14,275				12,992
Occupancy expense			3,203				2,946
Depreciation, amortization and maintenance			2,227				1,975
Advertising			1,749				1,111
Intangible amortization expense			891				1,747
Other			6,093				5,121
Total non-interest expense			28,438				25,892
Income before income taxes			6,059				8,261
Income Tax Expense			931				2,200
Net Income		$	5,128			$	6,061
Earnings per Share – Basic		$	0.07			$	0.08
Earnings per Share – Diluted		$	0.07			$	0.08
Average common shares outstanding - Basic			77,756,281				79,214,946
Average common shares outstanding – Diluted			77,797,091				79,214,946

See accompanying notes to the unaudited consolidated financial statements.

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BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements Changes in Stockholders’ Equity

(Dollars in thousands, except per share amounts)

		Number of Shares				Common Stock				Additional Paid in Capital				Common Stock held by ESOP				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity				Comprehensive Income
BEGINNING BALANCE, JANUARY 1, 2008			82,264,460			$	823			$	360,126			$	(30,635	)		$	291,360							$	(1,877	)		$	619,797			$	-
Net income																			6,061												6,061				6,061
ESOP shares committed to be released											(18	)			403																385
Net unrealized loss on available-for-sale securities (net of deferred tax of $357)																											(664	)			(664	)			(664	)
Reclassification adjustment for net gains included in net income (net of tax $45)																											(83	)			(83	)			(83	)
Pension and post-retirement benefit plan adjustments (net of tax of $54)																											101				101				101
Comprehensive income																																		$	5,415
Cumulative effect of the adoption of EITF 06-4 Split Dollar Life Insurance																			(11,800	)											(11,800	)
BALANCE, MARCH 31, 2008			82,264,460			$	823			$	360,108			$	(30,232	)		$	285,621							$	(2,523	)		$	613,797
BEGINNING BALANCE, JANUARY 1, 2009			82,264,457			$	823			$	342,420			$	(28,510	)		$	296,106							$	(299	)		$	610,540
Net Income																			5,128												5,128			$	5,128
ESOP shares committed to be released											(27	)			901																874
Stock option expense											272																				272
Restricted stock shares											428																				428
Purchase of treasury stock																						$	(1,848	)							(1,848	)
Net unrealized gain on available-for-sale securities (net of deferred tax of $2,376)																											4,413				4,413				4,413
Reclassification adjustment for net gains included in net income (net of tax of $997)																											(1,851	)			(1,851	)			(1,851	)
Reclassification adjustment for other-than-temporary impairment (net of tax benefit of $430)																											800				800				800
Pension, other  post-retirement benefit plan adjustments (net of tax of $559)																											1,555				1,555				1,555
Total other comprehensive income																																			4,917
Comprehensive income																																		$	10,045
BALANCE, MARCH 31, 2009			82,264,457			$	823			$	343,093			$	(27,609	)		$	301,234			$	(1,848	)			4,618			$	620,311

See accompanying notes to the unaudited consolidated financial statements .

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BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

		Three Months Ended March 31,
		2009				2008
OPERATING ACTIVITIES:
Net income		$	5,128			$	6,061
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses			3,000				300
Depreciation and amortization			1,486				1,384
Intangible amortization			891				1,747
Net gain on sale of investments			(2,848	)			(128	)
Impairment of investments			1,230				-
Accretion of discount on investments			(454	)			(1,978	)
Amortization of premium on investments			103				90
Deferred income taxes			(1,215	)			1,155
Net loss (gain) from sales of premises and equipment			23				(1	)
Increase in bank owned life insurance			(366	)			(353	)
Amortization of employee stock ownership plan			874				385
Stock option and grant expense			700				-
Changes in assets and liabilities that provided (used) cash:
Accrued interest receivable			(643	)			865
Accrued interest payable			(237	)			(101	)
Income taxes payable			1,476				(1,315	)
Other liabilities			(876	)			(6,603	)
Other assets			13,612				(14,569	)
Net cash provided by (used in) operating activities			21,884				(13,061	)
INVESTING ACTIVITIES:
Loans originated or acquired			(297,298	)			(175,556	)
Principal repayment on loans			175,042				136,359
Purchases of investment securities available for sale			(97,098	)			(270,096	)
Net sales (purchases) in money market fund			10,660				(7,101	)
Proceeds from sales and maturities of investment securities available for sale			166,087				164,429
Proceeds from maturities, calls or repayments of investment securities held to maturity			11,914				19,043
Purchase of Federal Home Loan Bank stock			-				(4,272	)
Activity in other real estate owned			76				84
Purchases of premises and equipment			(1,498	)			(847	)
Proceeds from sale of premises and equipment			28				28
Proceeds from other investing activities			-				201
Net cash used in investing activities			(32,087	)			(137,728	)
FINANCING ACTIVITIES:
Net (decrease) increase in borrowed funds			(136,367	)			53,958
Net increase in checking, savings and demand accounts			208,423				93,759
Net decrease in time deposits			(31,148	)			(4,544	)
Purchase of treasury stock			(1,848	)			-
Net cash provided by financing activities			39,060				143,173
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			28,857				(7,616	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			44,389				58,327
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	73,246			$	50,711
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
AND NON-CASH INFORMATION:
Cash payments for interest		$	13,650			$	21,225
Cash payments of income taxes			2,100				15,100
Transfers of loans to other real estate owned			-				745

See accompanying notes to the unaudited consolidated financial statements .

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BENEFICIAL MUTUAL BANCORP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Annual Report on Form 10-K filed by Beneficial Mutual Bancorp, Inc. (the “Company” or “Bancorp”) with the Securities and Exchange Commission on March 27, 2009.  The results for the three months ended March, 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2009 or any other period.

Principles of Consolidation

The unaudited interim consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and two variable interest entities (“VIEs”) where the Company is the primary beneficiary.  The financial statements include the accounts of Beneficial Bank, the Company’s wholly owned subsidiary (the “Bank”), and the Bank’s wholly owned subsidiaries.  The Bank’s wholly owned subsidiaries are as follows:  (i) Beneficial Advisors, LLC, which offers non-deposit investment products and services, (ii) Neumann Corporation, a Delaware corporation formed for the purpose of managing certain investments, (iii) Beneficial Insurance Services, LLC, which was formed to provide insurance services to individual and business customers and (iv) BSB Union Corporation, a leasing company.  All significant intercompany accounts and transactions have been eliminated.  In addition, two VIEs are consolidated in the financial statements.  Under Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company determined that it operates in one reporting segment which is community banking.

Use of Estimates in the Preparation of Financial Statements

These unaudited interim consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates.  Significant estimates include the allowance for loan losses, goodwill, other intangible assets and income taxes.

NOTE 2 – NATURE OF OPERATIONS

The Company is a federally chartered stock holding company and owns 100% of the outstanding common stock of the Bank, a Pennsylvania chartered stock savings bank.  On July 13, 2007, the Company completed its initial minority public offering and acquisition of FMS Financial Corporation and its wholly owned subsidiary, Farmers & Mechanics Bank, which was merged with and into the Bank.  Following the consummation of the merger and public offering, the Company had a total of 82,264,457 shares of common stock, par value $.01 per share, issued and outstanding, of which 36,471,682 were held publicly and 45,792,775 were held by Beneficial Savings Bank MHC (the “MHC”).  In the event the Company pays dividends to its stockholders, it will also be required to pay dividends to the MHC, unless the MHC elects to waive the receipt of dividends.  The Company is authorized to issue a total of four hundred million shares, of which three hundred million shares shall be common stock, par value $0.01 per share, and of which one hundred million shares shall be preferred stock, par value $0.01 per share.  Each share of the Company’s common stock has the same relative rights as, and is identical in all respects with, each other share of common stock.

 

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The Bank offers a variety of consumer and commercial banking services to individuals, businesses, and nonprofit organizations through 72 offices throughout the Philadelphia and Southern New Jersey area.  The Bank is supervised and regulated by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation (the “FDIC”). The Office of Thrift Supervision (the “OTS”) regulates the Company and the MHC.  The Bank’s customer deposits are insured up to applicable legal limits, by the Deposit Insurance Fund of the FDIC.   Insurance services are offered through Beneficial Insurance Services, LLC and wealth management services are offered through Beneficial Advisors, LLC, both wholly owned subsidiaries of the Bank.

NOTE 3 – EARNINGS PER SHARE

As described in Note 2, the closing date of the Company’s minority stock offering was July 13, 2007, and a total of 82,264,457 shares were issued. The 100 shares of the Company’s common stock issued to the MHC prior to July 13, 2007, in connection with the Bank’s mutual holding company reorganization in 2004, were replaced with 45,792,775 shares, representing 55.7% of the shares of the Company’s outstanding common stock. The remaining shares were sold to the public, issued to former FMS shareholders in connection with the acquisition of FMS and contributed to The Beneficial Foundation (“Foundation”), a charitable foundation established by the Company to make charitable grants and donations and support projects primarily located in the Company’s market area.

The replacement of the MHC shares is analogous to a stock split or significant stock dividend. Therefore, the earnings per share information is calculated by giving retroactive application to the periods presented of the weighted average number of MHC shares outstanding on the July 13, 2007 closing date.

The following table presents a calculation of basic and diluted earnings per share for the three-month periods ended March 31, 2009 and 2008. Earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding.  The difference between common shares issued and basic average shares outstanding, for purposes of calculating basic earnings per share, is a result of subtracting unallocated ESOP shares and unvested restricted stock shares. The grants of restricted shares issued and options granted in the first quarter of 2009 are dilutive for the three months ended March 31, 2009.   See Note 14 for further discussion of stock grants.

(Dollars in thousands, except share and per share amounts)		Three Months Ended March 31,
		2009				2008
Basic and diluted earnings per share:
Net income		$	5,128			$	6,061
Basic average common shares outstanding			77,756,281				79,214,946
Effect of dilutive securities			40,810				-
Dilutive average shares outstanding			77,797,091				79,214,946
Net earnings per share
Basic		$	0.07			$	0.08
Diluted		$	0.07			$	0.08

 

For the three months ended March 31, 2009, there were 1,697,500 outstanding options  and 761,000 restricted stock grants that were anti-dilutive for the year-to-date earnings per share calculation.  There was no equity incentive plan during the period ended March 31, 2008.

 

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NOTE 4 – INVESTMENT SECURITIES

The amortized cost and estimated fair value of investments in debt and equity securities at March 31, 2009 and December 31, 2008 are as follows.

Investment securities available for sale are summarized in the following table:

(Dollars in thousands)

		March 31, 2009
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Equity securities		$	6,189			$	137			$	365			$	5,961
U.S. Government Sponsored Enterprise
and Agency Notes			8,347				7				3				8,351
GNMA guaranteed mortgage certificates			12,346				59				27				12,378
Collateralized mortgage obligations			158,093				1,746				980				158,859
Other mortgage-backed securities			722,360				30,695				-				753,055
Municipal and other bonds			105,363				840				7,933				98,270
Mutual funds			4,893				-				152				4,741
Total		$	1,017,591			$	33,484			$	9,460			$	1,041,615

		December 31, 2008
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Equity securities		$	7,638			$	108			$	-			$	7,746
U.S. Government Sponsored Enterprise
and Agency Notes			8,687				17				5				8,699
GNMA guaranteed mortgage certificates			12,796				3				294				12,505
Collateralized mortgage obligations			177,300				1,222				2,149				176,373
Other mortgage-backed securities			767,978				25,342				40				793,280
Municipal and other bonds			105,280				798				6,148				99,930
Mutual funds			15,553				-				-				15,553
Total		$	1,095,232			$	27,490			$	8,636			$	1,114,086

Management evaluates all investments with an unrealized loss in value, whether caused by adverse interest rates, credit movements or some other factor to determine if the loss is other than temporary.

Investment securities held to maturity are summarized in the following table:

(Dollars in thousands)

		March 31, 2009
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
GNMA guaranteed mortgage certificates		$	717			$	-			$	28			$	689
Other mortgage-backed securities			63,344				1,843				4				65,183
Total		$	64,061			$	1,843			$	32			$	65,872

 

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		December 31, 2008
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Government Sponsored Enterprise and Agency Notes		$	7,500			$	47			$	-			$	7,547
GNMA guaranteed mortgage certificates			728				-				29				699
Other mortgage-backed securities			67,786				1,378				41				69,123
Total		$	76,014			$	1,425			$	70			$	77,369

The following table provides information on the gross unrealized losses and fair market value of the Company’s investments with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2009 and December 31, 2008:

(Dollars in thousands)

		March 31, 2009
		Less than 12 months								12 months or longer								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
GSE and Agency Notes		$	525			$	3			$	-			$	-			$	525			$	3
Mortgage-backed securities			4,760				30				689				29				5,449				59
Municipal and other bonds			7,179				151				17,302				7,782				24,481				7,933
Collateralized mortgage obligations			5,103				52				96,299				928				101,402				980
Subtotal, debt securities			17,567				236				114,290				8,739				131,857				8,976
Equity securities			2,674				365				-				-				2,674				365
Mutual funds			1,104				152				-				-				1,104				152
Total temporarily impaired securities		$	21,345			$	753			$	114,290			$	8,739			$	135,635			$	9,492

		December 31, 2008
		Less than 12 months								12 months or longer								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
GSE and Agency Notes		$	522			$	5			$	-			$	-			$	522			$	5
Mortgage-backed securities			33,551				375				699				29				34,250				404
Municipal and other bonds			23,465				5,895				3,843				253				27,308				6,148
Collateralized mortgage obligations			78,951				1,367				55,768				782				134,719				2,149
Total temporarily impaired securities		$	136,489			$	7,642			$	60,310			$	1,064			$	196,799			$	8,706

Due to the continued weakened condition of the market for equity securities in the first quarter of 2009 and the evaluation of the near term prospects of the issuers in relation to the severity of the decline, the Company recorded a charge related to the value of common equity securities of various financial services companies that were deemed to be other than temporarily impaired.  The Company recognized an other-than-temporary impairment for these securities of $1.2 million during the three months ended March 31, 2009.

When evaluating for impairment, the Company’s management considers the duration and extent to which fair value is less than cost, the creditworthiness and near-term prospects of the issuer, and other available information to determine the nature of the decline in market value of the securities.  The following summarizes, by security type, the basis for the conclusion that the applicable investments within the Company’s available-for-sale and held-to-maturity portfolio were not other than temporarily impaired.

 

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United States Government Sponsored Enterprise and Agency Notes

The Company’s investments in the preceding table in United States government sponsored enterprise notes consist of a government guaranteed debt obligation of the Department of Housing and Urban Development (“HUD”).  The unrealized loss is due to current interest rate levels relative to the Company’s cost and not credit quality, and because the Company has the ability and intent to hold this investment until a recovery of fair value, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2009.

 

Mortgage-Backed Securities

 

The Company’s investments in the preceding table in mortgage-backed securities consist of GSE mortgage-backed securities and government agency mortgage-backed securities.  The unrealized losses are due to current interest rate levels relative to the Company’s cost.  The contractual cash flows of those investments in GSE mortgage-backed securities are debt obligations of the Federal National Mortgage Association (“Fannie Mae”).  Fannie Mae is currently under the conservatorship of the Federal Housing Finance Agency (“FHFA”).  The cash flows related to government agency mortgage-backed securities are direct obligations of the U.S. Government.  The decline in market value is attributable to changes in interest rates relative to the Company’s cost, and not due to underlying credit.  The contractual cash flows for these investments are performing as expected.  As the decline in market value is attributable to changes in interest rates and not underlying credit, and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other than temporarily impaired at March 31, 2009. 

Municipal and Other Bonds

 

The Company’s investments in the preceding table in municipal and other bonds are comprised of municipal bonds and trust preferred/collateralized debt obligations (“CDOs”) backed by bank trust preferred capital securities.  The municipal bonds consist of obligations issued by the Pennsylvania Housing Finance Agency and obligations issued by the Philadelphia Authority for Industrial Development and were in an unrealized loss position, on average, of 2.06% at March 31, 2009.    Those bonds are rated investment grade at March 31, 2009.  The decline in market value is attributable to widening of spreads and changes in the ratings of bond insurers.  Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other than temporarily impaired at March 31, 2009.  

Other bonds that were in a loss position for greater than 12 months consisted of three trust preferred CDOs with an unrealized loss, on average, of 31.0% at March 31, 2009.   There has been little secondary market trading for these types of securities, as a declining domestic economy and increasing credit losses in the banking industry have led to illiquidity in the market for these types of securities. Only a limited number of issuers have contractually deferred their interest payments. As a result, the Company believes all contractual cash flows will be received on this portfolio.  The trust preferred CDOs in this category are all senior tranches.   The senior tranches of trust preferred CDOs are generally protected from defaults by over-collateralization.  The Company expects the issuers to continue to perform according to the terms of the contracts and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other than temporarily impaired at March 31, 2009.

Collateralized Mortgage Obligations

 

In the preceding table, the Company’s investments in this category consist of collateralized mortgage obligations (“CMOs”) issued by Freddie Mac, Fannie Mae and non-agency (whole loan) mortgage-backed securities. While the decline in market value of whole loan CMOs is attributable to the widening of credit spreads in the whole loan CMO market, the majority of securities in this category were issued in 2003 and 2004 with 15 year and 20 year collateral. The weighted average loan to value ratio for the overall portfolio is less than 50%, and the Company expects the full payment of principal. The Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity. The Company therefore does not consider these investments to be other than temporarily impaired at March 31, 2009. 

 

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Equities and Mutual Funds

In the preceding table, the Company’s investments in this category consist of bank-issued common stocks and mutual funds.  Commons stocks that were in a loss position for less than 12 months consisted of 11 bank-issued common stocks, with a loss, on average, of 12.0%.  Mutual funds that were in a loss position for less than 12 months consist of two funds in a loss position, on average, of 12.1%.  The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of impairment, and the Company has the ability and intent to hold those investments until a recovery of fair value.  The Company, therefore, does not consider those investments to be other than temporarily impaired at March 31, 2009.

NOTE 5 – LOANS

The Company provides loans to borrowers throughout the continental United States. The majority of these loans are to borrowers located in the Mid-Atlantic region. The ultimate repayment of these loans is dependent, to a certain degree, on the economy of this region.  The U.S. and global economic environment has changed considerably from 2007.  The slowdown in housing activity and decline in home values associated with the subprime mortgage crisis has led to wider credit disruptions throughout the financial services industry, the bankruptcy or failure of financial services companies, sharp declines in stock indices and significant government intervention in banking and insurance companies intended to maintain orderly markets.  The economy continues to decline from quarter to quarter and, it does not appear likely that economic growth will rebound sharply in the coming months, which will further strain the financial condition of both households and businesses.

The Company proactively manages credit risk in its loan portfolio and employs a comprehensive loan review process.

Major classifications of loans at March 31, 2009 and December 31, 2008 are summarized as follows:

 

(Dollars in thousands)

		March 31, 2009				December 31, 2008
Real estate loans:
One-to-four family		$	539,636			$	508,097
Commercial real estate			819,837				787,748
Residential construction			8,466				6,055
Total real estate loans			1,367,939				1,301,900
Commercial business loans			345,520				320,640
Consumer loans:
Home equity loans and lines
of credit			346,676				362,381
Auto loans			139,905				142,097
Other consumer loans			340,042				293,106
Total consumer loans			826,623				797,584
Total loans			2,540,082				2,420,124
Net deferred loan fees and costs			4,196				4,458
Allowance for loan losses			(37,345	)			(36,905	)
Loans, net		$	2,506,933			$	2,387,677

 

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The activity in the allowance for loan losses for the three months ended March 31, 2009 and 2008 and the year ended December 31, 2008, is as follows:

 

(Dollars in thousands)

		March 31,								December 31,
		2009				2008				2008
Balance, beginning of year		$	36,905			$	23,341			$	23,341
Provision for loan losses			3,000				300				18,901
Charge-offs			(2,758	)			(3,261	)			(5,963	)
Recoveries			198				200				626
Balance, end of period		$	37,345			$	20,580			$	36,905

The provision for loan losses charged to expense is based upon past loan loss experience and an evaluation of estimated losses in the current loan portfolio, including the evaluation of impaired loans under “SFAS No. 114, Accounting by Creditors for Impairment of a Loan – an amendment of Financial Accounting Standards Board ( “ FASB ” ) Statements No. 5 and 15” and “SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures – an amendment of FASB Statement No. 114.”  A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan.  An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in a loan being identified as impaired.  For this purpose, delays less than 90 days are considered to be insignificant.  Impairment losses are included in the provision for loan losses.  Large groups of smaller balance homogeneous loans are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring.  Loans collectively evaluated for impairment include personal loans and most residential mortgage loans, and are not included in the following data.

Components of Impaired Loans

(Dollars in thousands)

		March 31, 2009				December 31, 2008
Impaired loans with related allowance for loan losses calculated under SFAS No. 114		$	16,705			$	14,079
Impaired loans with no related allowance for loan losses calculated under SFAS No. 114			-				5,138
Total impaired loans		$	16,705			$	19,217
Valuation allowance related to impaired loans		$	8,906			$	8,707

Analysis of Impaired Loans

(Dollars in thousands)

		For the Three Months Ended March 31,
		2009				2008
Average impaired loans		$	17,664			$	5,939
Interest income recognized on impaired loans			-				-
Cash basis interest income recognized on impaired loans			26				-

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NOTE 6 – BANK PREMISES AND EQUIPMENT

Bank premises and equipment at March 31, 2009 and December 31, 2008 are summarized as follows:

 

(Dollars in thousands)

		March 31, 2009				December 31, 2008
Land		$	15,980			$	16,030
Bank premises			52,583				51,943
Furniture, fixtures and equipment			24,670				24,036
Leasehold improvements			10,642				10,629
Construction in progress			1,239				2,022
Total			105,114				104,660
Accumulated depreciation and amortization			(26,786	)			(26,170	)
Total		$	78,328			$	78,490

NOTE 7 – GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangible assets arising from the acquisition of CLA Agency, Inc. (“CLA”) and FMS were accounted for in accordance with SFAS No. 142 “Goodwill and Intangibles Assets.”  As required under SFAS 142, goodwill is not amortized but rather reviewed for impairment at least annually.  The other intangibles are amortizing intangibles, which primarily consist of a core deposit intangible, which is amortized over an estimated useful life of ten years.  As of March 31, 2009, the core deposit intangible net of accumulated amortization totaled $15.5 million.  The other amortizing intangibles, which include customer lists, vary in estimated useful lives from two to thirteen years .

Goodwill and other intangibles at March 31, 2009 and December 31, 2008 are summarized as follows:

 

(Dollars in thousands)

		Goodwill				Core Deposit Intangible				Customer Relationships and other
Balances at December 31,2008		$	111,462			$	16,157			$	7,828
Amortization			-				(642	)			(249	)
Balances at March 31, 2009		$	111,462			$	15,515			$	7,579

		March 31, 2009												December 31, 2008
		Gross				Accumulated Amortization				Net				Gross				Accumulated Amortization				Net
Amortizing Intangibles:
Core deposits		$	23,215			$	(7,700	)		$	15,515			$	23,215			$	(7,058	)		$	16,157
Customer Relationships and other			10,251				(2,672	)			7,579				10,251				(2,423	)			7,828
Total Amortizing		$	33,466			$	(10,372	)		$	23,094			$	33,466			$	(9,481	)		$	23,985

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NOTE 8 – DEPOSITS

Deposits at March 31, 2009 and December 31, 2008 are summarized as follows:

(Dollars in thousands)

		March 31,				December 31,
		2009				2008
Non-interest bearing deposits		$	243,845			$	226,382
Interest earning checking accounts			684,269				546,133
Money market accounts			584,944				534,012
Savings accounts			396,200				394,308
Time deposits			1,009,696				1,040,844
Total deposits		$	2,918,954			$	2,741,679

NOTE 9 – BORROWED FUNDS

Borrowed funds at March 31, 2009 and December 31, 2008 are summarized as follows:

(Dollars in thousands)

		March 31, 2009				December 31, 2008
Fed funds purchased		$	-			$	40,000
FHLB advances			174,750				174,750
Repurchase agreements			240,080				240,177
Federal Reserve overnight borrowings			-				96,250
Statutory trust debenture			25,286				25,282
Other			3,571				3,595
Total borrowed funds		$	443,687			$	580,054

The Company assumed FMS’s obligation to the FMS Statutory Trust II (the “Trust”) as part of the acquisition of FMS on July 13, 2007. The Company’s debenture to the Trust as of March 31, 2009 was $25.8 million. The fair value of the debenture was recorded as of the acquisition date at $25.3 million.  The difference between market value and the Company’s debenture is being amortized as interest expense over the expected life of the debt. The trust preferred securities are redeemable by the Company anytime after June 2011.

 

NOTE 10 – REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by state and federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).  Management believes that, as of March 31, 2009 and December 31, 2008, the Bank met all capital adequacy requirements to which it was subject.

 

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As of March 31, 2009 and December 31, 2008, the Bank is considered well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table.  There are no conditions or events that management believes have changed the Bank’s categorization since the most recent notification from the FDIC.

The Bank’s actual capital amounts and ratios (under rules established by the FDIC) are presented in the following table:

(Dollars in thousands)

																		To Be Well Capitalized
										For Capital								Under Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
		Capital Amount				Ratio				Capital Amount				Ratio				Capital Amount				Ratio
As of March 31, 2009:
Tier 1 Capital (to average assets)		$	429,542				11.17	%		$	115,390				3.00	%		$	192,317				5.00	%
Tier 1 Capital (to risk weighted assets)			429,542				17.88	%			96,086				4.00	%			144,128				6.00	%
Total Capital (to risk weighted assets)			459,670				19.14	%			192,171				8.00	%			240,214				10.00	%
As of December 31, 2008:
Tier 1 Capital (to average assets)		$	421,665				11.24	%		$	112,523				3.00	%		$	187,538				5.00	%
Tier 1 Capital (to risk weighted assets)			421,665				17.78	%			94,866				4.00	%			142,300				6.00	%
Total Capital (to risk weighted assets)			451,413				19.03	%			189,733				8.00	%			237,166				10.00	%

NOTE 11 – INCOME TAXES

For the three months ended March 31, 2009, the Company recorded an income tax expense of $0.9 million for an effective rate of 15.4% compared to a tax expense of $2.2 million, reflecting an effective rate of 26.6% for the same period in 2008.   The decrease was due primarily to a decrease in income before income taxes of $2.2 million to $6.1 million for the three months ended March 31, 2009, from income before income taxes of $8.3 million for the three months ended March 31, 2008 as well as projected increases in income tax credits related to affordable housing investments of $0.6 million for 2009 over 2008.

 

As of March 31, 2009, the Company had a recorded valuation allowance of $1.3 million relating to assets written down, primarily consisting of equity securities deemed to be other than temporarily impaired.

 

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”) on January 1, 2007.  FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns.  The initial adoption did not have a material impact on the Company’s financial condition and results of operations and cash flows.  Currently, the Company believes no significant uncertain tax positions exist, whether individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit and no liability for uncertain tax positions is recognized in the unaudited interim consolidated financial statements. The Company recognizes, when applicable, interest and penalties related to unrecognized tax positions in the provision for income taxes in the consolidated statement of operations.  The tax years 2005 through 2008 remain subject to examination by taxing authorities.

 

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Pursuant to SFAS No. 109, the Company is not required to provide deferred taxes on its tax loan loss reserve as of December 31, 1987.  The amount of this reserve on which no deferred taxes have been provided is approximately $2.3 million. This reserve could be recognized as taxable income and create a current and/or deferred tax liability using the income tax rates then in effect if one of the following occur: (i) the Company’s retained earnings represented by this reserve are used for distributions in liquidation or for any other purpose other than to absorb losses from bad debts; (ii) the Company fails to qualify as a Bank, as provided by the Internal Revenue Code; or (iii) there is a change in federal tax law.

NOTE 12 – PENSION AND POSTRETIREMENT BENEFIT PLANS

 

The Bank has noncontributory defined benefit pension plans (“Plans”) covering most of its employees.  Additionally, the Company sponsors nonqualified supplemental employee retirement plans for certain participants.  During 2007, the Bank assumed sponsorship of the Farmers & Mechanics Pension Plan (the “FMS Plan”) in conjunction with the FMS merger.

 

The Bank also provides certain postretirement benefits to qualified former employees.  These postretirement benefits principally pertain to certain health insurance and life insurance coverage. Information relating to these employee benefits program are included in the table that follows.

 

Effective June 30, 2008, the defined pension benefits for Bank employees were frozen at the current levels.  In 2008, the Company enhanced its 401(k) Plan and combined it with its Employee Stock Ownership Plan to fund employer contributions.

 

The components of net pension cost are as follows:

(Dollars in thousands)

		Pension Benefits								Other Postretirement Benefits
		Three Months Ended March 31,								Three Months Ended March 31,
		2009				2008				2009				2008
Service cost		$	-			$	639			$	179			$	57
Interest cost			931				1,227				237				375
Expected return on assets			(768	)			(1,127	)			-				-
Amortization of loss			196				47				4				29
Amortization of prior service cost			-				9				37				47
Amortization of transition obligation			-				-				41				41
Net periodic pension cost		$	359			$	795			$	498			$	549

 

The Company’s funding policy is to contribute annually an amount, as determined by consulting actuaries and approved by the Board of Directors, which can be deducted for federal income tax purposes.

NOTE 13 – EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN (KSOP)

In connection with the initial public offering, the Company implemented an Employee Stock Ownership Plan (“ESOP”), which provides retirement benefits for substantially all full-time employees who were employed at the date of the initial public offering and are at least 21 years of age.  Other salaried employees will be eligible after they have completed 1 year of service and have attained the age of 21.  The Company makes annual contributions to the ESOP equal to the ESOP’s debt service or equal to the debt service l