Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _____________

Commission file number: 1-33476

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)

510 Walnut Street, Philadelphia, Pennsylvania	19106
(Address of principal executive offices)	(Zip Code)

(215) 864-6000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x

No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer o	Accelerated Filer x
Non-Accelerated Filer o	Smaller Reporting Company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No x

As of November 6, 2009, there were 81,853,553 shares of the registrant’s common stock outstanding. Of such shares outstanding, 45,792,775 were held by Beneficial Savings Bank MHC and 36,060,778 shares were publicly held.

BENEFICIAL MUTUAL BANCORP, INC.

Table of Contents

		Page No.
Part I. Financial Information

Item 1.	Financial Statements (unaudited)

	Unaudited Consolidated Statements of Financial Condition as of September 30, 2009 and December 31, 2008	1

	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008	2

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2009 and 2008	3

	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008	4

	Notes to Unaudited Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	39

Part II. Other Information

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	40

Item 4.	Submission of Matters to a Vote of Security Holders	40

Item 5.	Other Information	40

Item 6.	Exhibits	40

Signatures		41

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)

	September 30, 2009			December 31, 2008
ASSETS
Cash and Cash Equivalents
Cash and due from banks	$	147,975		$	44,380
Interest-bearing deposits at other banks		423			9
Total cash and cash equivalents		148,398			44,389
Investment Securities:
Available-for-sale (amortized cost of $1,129,149 at September 30, 2009 and $1,095,232 at December 31, 2008)		1,165,253			1,114,086
Held-to-maturity (estimated fair value of $54,479 at September 30, 2009 and $77,369 at December 31, 2008)		52,176			76,014
Federal Home Loan Bank stock, at cost		28,068			28,068
Total investment securities		1,245,497			1,218,168

Loans		2,750,949			2,424,582
Allowance for loan losses		(42,742	)		(36,905	)
Net loans		2,708,207			2,387,677

Accrued Interest Receivable		19,264			17,543

Bank premises and equipment, net		77,402			78,490
Other Assets:
Goodwill		110,486			111,462
Bank owned life insurance		31,971			30,850
Other intangibles		21,311			23,985
Other assets		82,531			89,486
Total other assets		246,299			255,783
Total Assets	$	4,445,067		$	4,002,050

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing deposits	$	230,856		$	226,382
Interest-bearing deposits		3,051,369			2,515,297
Total deposits		3,282,225			2,741,679
Borrowed funds		443,616			580,054
Other liabilities		83,957			69,777
Total liabilities		3,809,798			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 September 30, 2009 or December 31, 2008		-			-
Common Stock - $.01 par value; 300,000,000 shares authorized, 82,264,457 shares issued and outstanding as of September 30, 2009 and December 31, 2008		823			823
Additional paid-in capital		344,663			342,420
Unearned common stock held by the employee savings and stock ownership plan		(26,385	)		(28,510	)
Retained earnings (partially restricted)		307,004			296,106
Accumulated other comprehensive income (loss)		12,760			(299	)
Treasury stock, at cost, 410,904 shares at September 30, 2009 and 0 shares at December 31, 2008		(3,596	)		-
Total stockholders’ equity		635,269			610,540
Total Liabilities and Stockholders’ Equity	$	4,445,067		$	4,002,050

See accompanying notes to the unaudited consolidated financial statements.

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
INTEREST INCOME
Interest and fees on loans	$	36,244		$	33,564		$	103,522		$	98,756
Interest on federal funds sold		-			14			2			522
Interest and dividends on investment securities:
Taxable		11,293			14,074			37,294			43,751
Tax-exempt		902			428			2,108			1,164
Total interest income		48,439			48,080			142,926			144,193
INTEREST EXPENSE
Interest on deposits:
Interest bearing checking accounts		2,319			1,410			6,415			3,931
Money market and savings deposits		2,515			3,856			8,669			11,277
Time deposits		6,176			8,748			21,160			29,976
Total		11,010			14,014			36,244			45,184
Interest on borrowed funds		4,749			4,975			14,108			14,741
Total interest expense		15,759			18,989			50,352			59,925

Net interest income		32,680			29,091			92,574			84,268

Provision for Loan Losses		2,000			3,191			12,100			5,791

Net interest income after provision for loan losses		30,680			25,900			80,474			78,477
Non-interest Income
Insurance commission and related income		1,818			2,738			6,281			7,879
Service charges and other income		3,456			3,827			10,217			12,157
Impairment charge on securities available for sale		(195	)		(264	)		(1,425	)		(737	)
Net gain on sale of investment securities available for sale		1,383			159			5,548			430
Total non-interest income		6,462			6,460			20,621			19,729
Non-interest Expense
Salaries and employee benefits		14,583			13,933			42,865			40,083
Pension curtailment gain		-			-			-			(7,289	)
Occupancy expense		2,970			3,070			9,072			8,827
Depreciation, amortization and maintenance		2,277			2,096			6,724			6,118
Advertising		1,138			1,220			4,124			3,545
Intangible amortization expense		892			906			2,674			4,306
Impairment of goodwill		976			-			976			-
Other		7,686			5,414			22,275			15,582

Total non-interest expense		30,522			26,639			88,710			71,172

Income before income taxes		6,620			5,721			12,385			27,034

Income Tax Expense		800			1,400			1,487			7,550

Net Income	$	5,820		$	4,321		$	10,898		$	19,484

Earnings per Share – Basic	$	0.07		$	0.05		$	0.14		$	0.25
Earnings per Share – Diluted	$	0.07		$	0.05		$	0.14		$	0.25

Average common shares outstanding - Basic		77,651,098			78,566,856			77,695,061			79,010,679
Average common shares outstanding – Diluted		77,675,526			78,573,633			77,707,151			79,010,679

See accompanying notes to the unaudited consolidated financial statements.

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements Changes of Stockholders’ Equity

(Dollars in thousands, except share amounts)

	Number of Shares		Common Stock		Additional Paid in Capital			Common Stock held by KSOP			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity			Comprehensive Income
BEGINNING BALANCE, JANUARY 1, 2008		82,264,457	$	823	$	360,126		$	(30,635	)	$	291,360					$	(1,877	)	$	619,797

Net Income												19,484									19,484		$	19,484
ESOP shares committed to be released						165			1,622												1,787
Stock option expense						243															243
Restricted stock shares						276															276
Funding of restricted stock awards						(17,061	)														(17,061	)
Other						16															16
Net unrealized loss on available-for-sale securities arising during the quarter (net of deferred tax of $6,815)																		(12,656	)		(12,656	)		(12,656	)
Reclassification adjustment for net gains included in net income (net of tax of $150)																		(279	)		(279	)		(279	)
Reclassification adjustment for other-than-temporary-impairment (net of tax benefit of $258)																		479			479			479
Pension, other post retirement and postemployment benefit plan adjustments (net of tax of $592)																		(1,099	)		(1,099	)		(1,099	)
Immediate recognition of prior service cost and unrealized gain loss due to curtailments (net of deferred tax of $4,175)																		7,753			7,753			7,753
Total other comprehensive loss																								(5,802	)
Comprehensive income																							$	13,682
Adoption of ASC Topic 715												(11,800	)								(11,800	)
BALANCE, SEPTEMBER 30, 2008		82,264,457	$	823	$	343,765		$	(29,013	)	$	299,044					$	(7,679	)	$	606,940

BEGINNING BALANCE, JANUARY 1, 2009		82,264,457	$	823	$	342,420		$	(28,510	)	$	296,106					$	(299	)	$	610,540

Net Income												10,898									10,898		$	10,898
KSOP shares committed to be released						(93	)		2,125												2,032
Stock option expense						942															942
Restricted stock shares						1,394															1,394
Purchase of treasury stock															(3,596	)					(3,596	)
Net unrealized gain on available-for-sale securities arising during the year (net of deferred tax of $7,481)																		13,893			13,893			13,893
Reclassification adjustment for net gains on available-for-sale securities included in net income (net of tax of $1,942)																		(3,606	)		(3,606	)		(3,606	)
Reclassification adjustment for other-than-temporary-impairment (net of tax benefit of $499)																		926			926			926
Pension, other post retirement and postemployment benefit plan adjustments (net of tax of $822)																		1,846			1,846			1,846



Total other comprehensive income																								13,059
Comprehensive income																							$	23,957
BALANCE, SEPTEMBER 30, 2009		82,264,457	$	823	$	344,663		$	(26,385	)	$	307,004		$	(3,596	)	$	12,760		$	635,269

See accompanying notes to the unaudited consolidated financial statements .

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

	Nine Months Ended September 30,
	2009			2008
OPERATING ACTIVITIES:
Net income	$	10,898		$	19,484
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		12,100			5,791
Depreciation and amortization		4,559			4,169
Intangible amortization		2,674			4,306
Net gain on sale of investments		(5,548	)		(430	)
Impairment of investments		1,425			737
Pension curtailments		-			(7,289	)
Accretion of discount on investments		(1,621	)		(3,338	)
Amortization of premium on investments		374			261
Deferred income taxes		(2,206	)		(2,207	)
Net loss from sales of premises and equipment		15			(12	)
Impairment of other real estate owned		528			-
Impairment of goodwill		976			-
Amortization of KSOP		2,032			-
Increase in bank owned life insurance		(1,121	)		(1,076	)
Stock based compensation expense		2,336			2,306
Changes in assets and liabilities that provided (used) cash:
Accrued interest receivable		(1,721	)		583
Accrued interest payable		(1,218	)		(766	)
Income taxes payable		(2,314	)		1,072
Other liabilities		18,080			4,281
Other assets		6,347			(22,717	)
Net cash provided by operating activities		46,595			5,155

INVESTING ACTIVITIES:
Loans originated or acquired		(780,449	)		(629,152	)
Principal repayment on loans		409,319			422,148
Purchases of investment securities available for sale		(422,083	)		(397,303	)
Net (purchases) sales in money market fund		(7,067	)		295
Proceeds from sales and maturities of investment securities available for sale		400,719			304,888
Proceeds from maturities, calls or repayments of investment securities held to maturity		23,721			27,460
Proceeds from sales of loans		37,272			-
Purchase of Federal Home Loan Bank stock		-			(9,058	)
Proceeds from sale of other real estate owned		636			888
Purchases of premises and equipment		(5,194	)		(3,759	)
Proceeds from sale of premises and equipment		28			33
Proceeds from other investing activities		-			201
Net cash used in investing activities		(343,098	)		(283,359	)

FINANCING ACTIVITIES:
Net increase (decrease) in borrowed funds		(136,438	)		128,774
Net increase in checking, savings and demand accounts		618,060			201,290
Net decrease in time deposits		(77,514	)		(31,300	)
Purchase of restricted stock		-			(17,061	)
Purchase of treasury stock		(3,596	)		-
Net cash provided by financing activities		400,512			281,703

NET INCREASE IN CASH AND CASH EQUIVALENTS		104,009			3,499

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		44,389			58,327

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	148,398		$	61,826

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash payments for interest	$	37,449		$	60,747
Cash payments for income taxes		6,771			4,972
Transfers of loans to other real estate owned		1,228			722
Transfers of bank branches to other real estate owned		1,667			2,800

See accompanying notes to the unaudited consolidated financial statements .

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 U. S. Securities and Exchange Commission on March 27, 2009. The results for the three or nine month periods ended September 30, 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, its wholly owned subsidiaries and two variable interest entities (“VIEs”) where the Company is the primary beneficiary. Specifically, the financial statements include the accounts of Beneficial Mutual Savings Bank, the Company’s wholly owned subsidiary (“Beneficial Bank” or 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 provides 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. The Company monitors revenue from the various services and products offered. The various services and products support each other and are interrelated. Management makes significant operating decisions based upon the analysis of the entire Company and financial performance is evaluated on a company-wide basis. Accordingly, the various financial services and products offered are aggregated into one reportable operating segment: community banking as under guidance in the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC” or “codification”) Topic 720 for Segment Reporting.

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.

FASB Accounting Standards Codification

In June 2009, the FASB confirmed that FASB ASC would become the single official source of GAAP (other than guidance issued by the SEC), superseding all other accounting literature except that issued by the SEC. The literature is considered non-authoritative. The FASB ASC is effective for interim and annual periods ending on or after September 15, 2009. Therefore, we have changed the way specific accounting standards are referenced in our unaudited interim consolidated financial statements.

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”), the Company’s parent mutual holding company. In the event the Company pays dividends to its stockholders, it will also be required to pay dividends to the MHC, unless the MHC receives regulatory approval 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.

The Bank offers a variety of consumer and commercial banking services to individuals, businesses, and nonprofit organizations through 68 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

The following table presents a calculation of basic and diluted earnings per share for the three and nine-month periods ended September 30, 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 employee stock ownership plan (“ESOP”) shares and unvested restricted stock shares. See Note 14 for further discussion of stock grants.

(Dollars in thousands, except share and per share amounts)	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
Basic and diluted earnings per share:
Net income	$	5,820	$	4,321	$	10,898	$	19,484
Basic average common shares outstanding		77,651,098		78,566,856		77,695,061		79,010,679
Effect of dilutive securities		24,428		6,777		12,090		-
Dilutive average shares outstanding		77,675,526		78,573,633		77,707,151		79,010,679
Net earnings per share:
Basic	$	0.07	$	0.05	$	0.14	$	0.25
Diluted	$	0.07	$	0.05	$	0.14	$	0.25

For the three months ended September 30, 2009, there were 1,922,750 outstanding options that were anti-dilutive and no restricted stock grants that were anti-dilutive. For the nine months ended September 30, 2009 there were 1,922,750 outstanding options that were anti-dilutive and 699,000 restricted stock grants that were anti-dilutive for the earnings per share calculation. For the three months ended September 30, 2008, there were 1,697,500 outstanding options that were anti-dilutive and no restricted stock shares were anti-dilutive. For the nine months ended September 30, 2008, there were 1,697,500 outstanding options that were anti-dilutive and 761,000 restricted stock grants that were anti-dilutive for the earnings per share calculation.

NOTE 4 – INVESTMENT SECURITIES

The amortized cost and estimated fair value of investments in debt and equity securities at September 30, 2009 and December 31, 2008 are as follows.

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

(Dollars in thousands)

	September 30, 2009
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Equity securities	$	7,696	$	2,069	$	37	$	9,728
U.S. Government Sponsored Enterprise ("GSE")
and Agency Notes		55,678		475		-		56,153
GNMA guaranteed mortgage certificates		10,877		185		-		11,062
Collateralized mortgage obligations		151,552		1,975		614		152,913
Other mortgage-backed securities		707,183		32,489		-		739,672
Municipal bonds		149,794		2,975		-		152,769
Pooled trust preferred securities		23,250		-		3,690		19,560
Corporate bonds		-		-		-		-
Foreign bonds		500		-		-		500
Money market fund		22,620		276				22,896
Total	$	1,129,150	$	40,444	$	4,341	$	1,165,253

	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 bonds		79,542		797		363		79,976
Pooled trust preferred securities		25,113		-		5,785		19,328
Corporate bonds		125		-		-		125
Foreign bonds		500		1		-		501
Money market fund		15,553		-		-		15,553
Total	$	1,095,232	$	27,490	$	8,636	$	1,114,086

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

(Dollars in thousands)

	September 30, 2009

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

GSE and agency notes	$	-	$	-	$	-	$	-
GNMA guaranteed mortgage certificates		696		-		26		670
Other mortgage-backed securities		51,480		2,330		1		53,809
Total	$	52,176	$	2,330	$	27	$	54,479

	December 31, 2008
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

GSE 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

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company determines whether the unrealized losses are temporary in accordance with guidance under FASB ASC Topic 320 for Investments – Debt and Equity Securities. The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. Management also evaluates other facts and circumstances that may be indicative of an OTTI condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.

In accordance with accounting guidance for equity securities, the Company evaluates its securities portfolio for other-than-temporary impairment throughout the year. Each investment, which has an estimated fair value less than the book value is reviewed on a quarterly basis by management. Management considers at a minimum the following factors that, both individually or in combination, could indicate that the decline is other-than-temporary: (1) the length of time and the extent to which the fair value has been less than book value, (2) the financial condition and the near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Among the other factors that are considered in determining intent and ability is a review of capital adequacy, interest rate risk profile and liquidity position of the Company. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses.

Accounting guidance for debt securities requires the Company to assess whether the loss existed by considering whether (1) the Company has the intent to sell the security, (2) it is more likely than not that it will be required to sell the security before recovery, or (3) it does not expect to recover the entire amortized cost basis of the security. The guidance allows the Company to bifurcate the impact on securities where impairment in value was deemed to be other than temporary between the component representing credit loss and the component representing loss related to other factors. The portion of the fair value decline attributable to credit loss must be recognized through a charge to earnings. The difference between the fair market value and the credit loss is recognized in other comprehensive income.

Upon adoption of accounting guidance for debt instruments issued in April of 2009 effective on June 30, 2009, which was subsequently incorporated into FASB ASC Topic 320 for Investments – Debt and Equity Securities, a cumulative effect adjustment should be made to reclassify the non-credit portion of any other-than-temporary impairments previously recorded through earnings to accumulated other comprehensive income for investments held as of the beginning of the interim period of adoption. This adjustment should only be made if the entity does not intend to sell and more likely than not will not be required to sell the security before recovery of its amortized cost basis (i.e., the impairment does not meet the new definition of other-than-temporary). The cumulative effect adjustment should be determined based on the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security as of the beginning of the interim period in which the guidance is adopted. The cumulative effect adjustment should include the related tax effects.

As there were no impairments taken on the Company’s debt securities as of December 31, 2008 and March 31, 2009, no cumulative adjustment to retained earnings was recorded.

At September 30, 2009, the Company had five common equity securities with an unrealized loss, on average, of 16.6%, all of which it intends to sell. Therefore, the Company deems these securities to be other than temporarily impaired. The Company recognized an other-than-temporary impairment charge for these securities of $0.2 million during the three months ended September 30, 2009. For the nine months ended September 30, 2009, the Company recognized other-than-temporary impairments on equity securities of $1.4 million in connection with these securities.

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 September 30, 2009 and December 31, 2008:

(Dollars in thousands)

	September 30, 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	$	1,342	$	-	$	-	$	-	$	1,342	$	-
Mortgage-backed securities		584		1		670		26		1,254		27
Municipal bonds		1,154		-		500		-		1,654		-
Pooled trust preferred securities		-		-		19,560		3,690		19,560		3,690
Corporate bonds		-		-		-		-		-		-
Foreign bonds		500		-		-		-		500		-
Collateralized mortgage obligations		41,838		377		23,666		237		65,504		614
Subtotal, debt securities		45,418		378		44,396		3,953		89,814		4,331
Equity securities		250		37		-		-		250		37
Mutual funds		-		-		-		-		-		-
Total temporarily impaired securities	$	45,668	$	415	$	44,396	$	3,953	$	90,064	$	4,368

	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		405
Municipal bonds		7,524		361		330		2		7,854		363
Pooled trust preferred securities		15,816		5,534		3,513		251		19,329		5,785
Corporate bonds		125		-		-		-		125		-
Foreign bonds		-		-		-		-		-		-
Collateralized mortgage obligations		78,951		1,367		55,768		782		134,719		2,149
Subtotal, debt securities	$	136,489	$	7,642	$	60,310	$	1,064	$	196,799	$	8,706
Equity securities		-		-		-		-		-		-
Mutual funds		-		-		-		-		-		-
Total temporarily impaired securities	$	136,489	$	7,642	$	60,310	$	1,064	$	196,799	$	8,706

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, the likelihood of recovering the Company’s investment 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.

United States Government Sponsored Enterprise and Agency Notes

The Company’s investments in the preceding table in United States GSE and agency notes consist of a debt obligation of Fannie Mae which is currently under the conservatorship of the Federal Housing Finance Agency (“FHFA”) and a government guaranteed debt obligation of the Department of Housing and Urban Development (“HUD”). The unrealized losses are due to current interest rate levels relative to the Company’s cost and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

Mortgage-Backed Securities

The Company’s investments in the preceding table in mortgage-backed securities consist of a GSE mortgage-backed security 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 the Company’s investment in the GSE mortgage-backed security are debt obligations of Fannie Mae. Fannie Mae is currently under the conservatorship of the FHFA. The contractual cash flows for this investment are guaranteed by an agency of the U.S. government. The cash flows related to government agency mortgage-backed securities are direct obligations of the U.S. government. Accordingly, the Company expects to recover its full principal of the investments. Because the unrealized losses are due to current interest rate levels relative to the Company’s cost and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

Municipal Bonds

The Company’s investments in the preceding table in municipal bonds consist of municipal bonds which are general obligations of Pennsylvania municipalities and obligations issued by the Pennsylvania Housing Finance Agency. These bonds are rated investment grade at September 30, 2009. The unrealized losses are due to current interest rate levels relative to the Company’s cost and not credit quality. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

Pooled Trust Preferred Securities

The Company’s investments in the preceding table that were in a loss position for greater than 12 months consisted of three pooled trust preferred securities with an unrealized loss, on average, of 15.9%. Two of the pooled trust preferred securities were investment grade while one, US Capital Fund III Class A-1, was rated below investment grade by Standard & Poor’s at BB as of September 30, 2009. This represented the lowest rating assigned to this security. At September 30, 2009, the book value of the security totaled $7.7 million and the fair value totaled $5.7 million, representing an unrealized loss of $2.0 million. At September 30, 2009, there were 37 out of 45 banks currently performing in the security. A total of 6.0%, or $14.0 million, of the original collateral of $233.2 million have defaulted and 9.9%, or $23.2 million, of the original collateral of $233.2 million have deferred. Utilizing a cash flow analysis model in analyzing this security, an assumption of additional defaults of 3.6% of outstanding collateral, every three years beginning in September 2009, with a 0% recovery, was modeled. This represents the assumption of an additional 28.1% of defaults from the remaining performing collateral of $179.5 million. Excess subordination for the US Capital Fund III A-1 security represents 49.0% of the remaining performing collateral. The excess subordination of 49.0% is calculated by taking the remaining performing collateral of $179.5 million, subtracting the Class A-1 or senior tranche balance of $91.6 million and dividing this result, $87.9 million, by the remaining performing collateral. This excess subordination represents the additional collateral supporting our tranche.

There has been little secondary market trading for trust preferred collateralized debt obligations (“CDOs”), 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. While the number of issuers that have contractually deferred their interest payments has increased, the pooled trust preferred securities in this category are all senior tranches. The senior tranches of trust preferred CDOs are generally protected from defaults by over-collateralization. The Company performs a calculation of the present value of the cash flows expected and, based on the analysis performed on September 30, 2009, expects to recover its principal and interest on the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

Foreign Bonds

Foreign bonds that were in a loss position for less than 12 months consisted of one State of Israel bond. The unrealized losses are due to current interest rate levels relative to the Company’s cost and not credit quality. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

Collateralized Mortgage Obligations

In the preceding table, the Company’s investments in this category consist of collateralized mortgage obligations (“CMOs”) issued by GSEs and non-agency (“whole loan”) mortgage-backed securities. The unrealized losses in the GSE CMOs are due to current interest rate levels relative to the Company’s cost. The contractual cash flows of these investments in GSE CMOs are debt obligations of Freddie Mac and Fannie Mae, which are currently under the conservatorship of the FHFA. The contractual cash flows for these investments are guaranteed by an agency of the U.S. government. Accordingly, the Company expects to recover its full payment of principal and interest of the investments. Because unrealized losses are due to current interest rate levels relative to the Company’s cost and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

The decline in market value of whole loan CMOs is attributable to the widening of credit spreads in the whole loan CMO market. The Company performs a qualitative analysis by monitoring certain characteristics of its non-agency CMOs, such as ratings, delinquency and foreclosure percentages, historical default and loss severity ratios, credit support and coverage ratios. Based on the analysis performed at September 30, 2009, the Company expects to recover all principal and interest payments of its non-agency CMOs and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

Equity Securities

In the preceding table, the Company’s investments in this category consist of one bank-issued common stock in a loss position for less than 12 months at 13.0%. The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of impairment and the Company has the ability and intent to hold this investment until a recovery of fair value. The Company, therefore, does not consider this investment to be other-than-temporarily impaired at September 30, 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. While the Company does not engage in subprime lending, 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, bankruptcy or failure of financial services companies, sharp declines in stock indices and significant government intervention in the banking and insurance industries. Though economic activity has improved somewhat from its weakened condition, it does not appear likely that economic growth and real estate collateral values will improve significantly in the coming months. This will cause continued strain on 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 September 30, 2009 and December 31, 2008 are summarized as follows:

(Dollars in thousands)

	September 30, 2009			December 31, 2008
Real estate loans:
One-to-four family	$	606,217		$	508,097
Commercial real estate		853,903			787,748
Residential construction		11,053			6,055
Total real estate loans		1,471,173			1,301,900

Commercial business loans		442,472			320,640

Consumer loans:
Home equity loans and lines
of credit		323,785			362,381
Auto loans		144,857			142,097
Education loans		251,440			162,488
Other consumer loans		115,033			130,618
Total consumer loans		835,115			797,584
Total loans		2,748,760			2,420,124

Net deferred loan fees and costs		2,189			4,458
Allowance for loan losses		(42,742	)		(36,905	)
Loans, net	$	2,708,207		$	2,387,677

The activity in the allowance for loan losses for the nine months ended September 30, 2009 and 2008 and the twelve months ended December 31, 2008, is as follows:

(Dollars in thousands)

	September 30,						December 31,
	2009			2008			2008
Balance, beginning of year	$	36,905		$	23,341		$	23,341
Provision for loan losses		12,100			5,791			18,901
Charge-offs		(6,981	)		(4,374	)		(5,963	)
Recoveries		718			450			626
Balance, end of period	$	42,742		$	25,208		$	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 FASB ASC Topic 310 for Loans and Debt Securities. 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. A minor delay or immaterial 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 minor. Impairment losses are included in the provision for loan losses. Large groups of 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)

	September 30, 2009		December 31, 2008
Impaired loans with related allowance for loan losses	$	27,084	$	14,079
Impaired loans with no related allowance for loan losses		62,468		5,138
Total impaired loans	$	90,552	$	19,217

Valuation allowance related to impaired loans	$	13,791	$	8,707

Analysis of Impaired Loans

(Dollars in thousands)

	For the Nine Months Ended September 30,
	2009		2008
Average impaired loans	$	48,292	$	6,987
Interest income recognized on impaired loans		231		343
Cash basis interest income recognized on impaired loans		27		55

NOTE 6 – BANK PREMISES AND EQUIPMENT

Bank premises and equipment at September 30, 2009 and December 31, 2008 are summarized as follows:

(Dollars in thousands)

	September 30, 2009			December 31, 2008
Land	$	15,533		$	16,030
Bank premises		53,048			51,943
Furniture, fixtures and equipment		26,612			24,036
Leasehold improvements		10,677			10,629
Construction in progress		1,262			2,022
Total		107,132			104,660
Accumulated depreciation and amortization		(29,730	)		(26,170	)
Total	$	77,402		$	78,490

NOTE 7 – GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangible assets arising from the acquisition of FMS Financial Corporation and two insurance agencies, CLA Agency, Inc. (“CLA”) and Paul Hertel & Company, were accounted for in accordance with the accounting guidance in FASB ASC Topic 350 for Intangibles - Goodwill and Other. As required under the accounting guidance, goodwill is not amortized but rather reviewed for impairment at least annually.

Overall economic conditions and increased competition have significantly impacted the financial results of the insurance brokerage business during 2009. As a result, during the third quarter of 2009, the Company conducted an impairment evaluation of the goodwill specifically related to the insurance brokerage business and recorded an impairment charge of $1.0 million. The Company determined the fair value of the insurance brokerage business based upon a combination of a guideline public company technique, a precedent transaction technique and a discounted cash flow technique. The Company did not have any prior accumulated goodwill impairment charges.

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 September 30, 2009, the core deposit intangible net of accumulated amortization totaled $14.2 million. The other amortizing intangibles, which include customer lists, vary in estimated useful lives from two to thirteen years.

Goodwill and other intangibles at September 30, 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