t62764_10q.htm
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 March 31, 2008

OR

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See 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 o
   
Non-Accelerated Filer   x
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 May 13, 2008, there were 82,264,460 shares of the registrant’s common stock outstanding.  Of such shares outstanding, 45,792,775 were held by Beneficial Savings Bank MHC and 36,471,685 shares are publicly held.
 
 
BENEFICIAL MUTUAL BANCORP, INC.

Table of Contents

   
Page
No.
Part I.   Financial Information
     
Item 1.
Financial Statements
1
     
 
Unaudited Consolidated Statements of Financial Condition as of March 31, 2008 and December 31, 2007
1
     
 
Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007
2
     
 
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2008 and 2007
3
     
 
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007
4
     
 
Notes to Unaudited Consolidated Financial Statements
5
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
25
     
Item 4.
Controls and Procedures
26
     
Part II.  Other Information
     
Item 1.
Legal Proceedings
27
     
Item 1A.
Risk Factors
27
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
     
Item 3.
Defaults Upon Senior Securities
27
     
Item 4.
Submission of Matters to a Vote of Security Holders
27
     
Item 5.
Other Information
27
     
Item 6.
Exhibits
27
     
Signatures
27
 

 
PART I.
FINANCIAL INFORMATION

Item 1.
Financial Statements

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
  
             
   
March 31,
2008
    
December 31,
2007
  
             
ASSETS
            
Cash and Cash Equivalents
            
Cash and due from banks
   $ 46,061     $ 53,545  
Interest-bearing deposits at other banks
     4,650       4,782  
Total cash and cash equivalents
     50,711       58,327  
Investment Securities:
                
Available-for-sale (amortized cost of $1,052,459 and $938,835 at March 31, 2008 and December 31, 2007, respectively)
     1,062,297       949,795  
Held-to-maturity (estimated fair value of $93,412 and $111,127 at March 31, 2008 and December 31, 2007, respectively)
     92,903       111,986  
Federal Home Loan Bank stock, at cost
     23,086       18,814  
Total investment securities
     1,178,286       1,080,595  
Loans
     2,156,313       2,120,922  
Allowance for loan losses
     (20,580 )     (23,341 )
Net loans
     2,135,733       2,097,581  
                 
Accrued Interest Receivable
     17,224       18,089  
                 
Bank premises and equipment, net
     77,602       79,027  
Other Assets
                
Goodwill
     110,214       110,335  
Bank owned life insurance
     29,758       29,405  
Other intangibles
     27,452       29,199  
Other assets
     71,729       55,260  
Total other assets
     239,153       224,199  
Total Assets
   $ 3,698,709     $ 3,557,818  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Liabilities:
                
Deposits:
                
Non-interest bearing deposits
   $ 243,179     $ 242,351  
Interest-bearing deposits
     2,311,199       2,222,812  
Total deposits
     2,554,378       2,465,163  
Borrowed funds
     461,080       407,122  
Other liabilities
     69,454       65,736  
Total liabilities
     3,084,912       2,938,021  
Commitments and Contingencies
                
Stockholders’ Equity:
                
Preferred Stock - $.01 par value; 100,000,000 shares authorized, none issued or outstanding as of March 31, 2008 or December 31, 2007
     —       —  
Common Stock - $.01 par value; 300,000,000 shares authorized, 82,264,460 shares issued and outstanding as of March 31, 2008 and December 31, 2007
     823       823  
Additional paid-in capital
     360,108       360,126  
Unearned common stock held by employee stock ownership plan
     (30,232 )     (30,635 )
Retained earnings (partially restricted)
     285,621       291,360  
Accumulated other comprehensive loss
     (2,523 )     (1,877 )
Total stockholders’ equity
     613,797       619,797  
Total Liabilities and Stockholders’ Equity
   $ 3,698,709     $ 3,557,818  
 
See accompanying notes to the unaudited consolidated financial statements.
1

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
  
             
   
Three Months Ended
March 31,
  
   
2008
    
2007
  
             
INTEREST INCOME
            
Interest and fees on loans
   $ 32,495     $ 25,766  
Interest on federal funds sold
     361       12  
Interest and dividends on investment securities:
                
Taxable
     15,019       5,356  
Tax-exempt
     367       247  
Total interest income
     48,242       31,381  
INTEREST EXPENSE
                
Interest on deposits:
                
Interest bearing checking accounts
     1,286       424  
Money market and savings deposits
     3,758       2,669  
Time deposits
     11,146       9,195  
Total
     16,190       12,288  
Interest on borrowed funds
     4,934       3,706  
Total interest expense
     21,124       15,994  
                 
Net interest income
     27,118       15,387  
                 
Provision for Loan Losses
     300       300  
                 
Net interest income after provision for loan losses
     26,818       15,087  
Non-interest Income
                
Insurance commission and related  income
     3,265       1,195  
Service charges and other income
     3,942       1,336  
Gains on sale of investment securities available-for-sale
     128       313  
Total non-interest income
     7,335       2,844  
Non-interest Expense
                
Salaries and employee benefits
     12,992       9,123  
Occupancy expense
     2,946       1,960  
Depreciation, amortization and maintenance
     1,975       1,348  
Advertising
     1,111       686  
Intangible amortization expense
     1,747       88  
Other
     5,121       2,776  
                 
Total non-interest expense
     25,892       15,981  
                 
Income before income taxes
     8,261       1,950  
                 
Income Tax Expense
     2,200       200  
                 
Net Income
   $ 6,061     $ 1,750  
                 
Net Earnings per Share - Basic and Diluted
   $ 0.08     $ 0.04  
                 
Average common shares outstanding - Basic and Diluted
     79,214,946       45,792,775  
Dividends per share
   $ -     $ -  
 
See accompanying notes to the unaudited consolidated financial statements.
2
 
BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF 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
    
Accumulated Other Comprehensive Income (Loss)
    
Total Stockholders’ Equity
    
Comprehensive Income
  
                                                 
BEGINNING BALANCE, JANUARY 1, 2007
     100                       $ 293,157     $ (12,742 )   $ 280,415     $ --  
                                                           
Net Income
                               1,750               1,750       1,750  
Stock dividend of 45,792,675 shares to Beneficial Savings Bank MHC
     45,792,675                                                    
Net unrealized gain on available-for-sale securities arising during the year (net of deferred tax of $358)
                                       666       666       666  
Reclassification adjustment for net gain included in net income (net of tax of $110)
                                       (203 )     (203 )     (203 )
Pension, other post retirement and post-employment benefit plan adjustments (net of tax of $81)
                                       149       149       149  
Comprehensive income
                                                     $ 2,362  
                                                           
BALANCE, MARCH 31, 2007
     45,792,775                       $ 294,907     $ (12,130 )   $ 282,777          
                                                           
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 arising during the quarter (net of deferred tax of $357)
                                             (664 )     (664 )     (664 )
Reclassification adjustment for net gains included in net income (net of tax of $45)
                                             (83 )     (83 )     (83 )
Pension, other post-retirement and post-employment 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          
 
See accompanying notes to the unaudited consolidated financial statements.
3
 
BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
  
   
Three Months Ended March 31
  
   
2008
    
2007
  
OPERATING ACTIVITIES:
            
      Net income
   $ 6,061     $ 1,750  
      Adjustments to reconcile net income to
                
            net cash (used in) provided by operating activities:
                
          Provision for loan losses
     300       300  
          Depreciation and amortization
     1,384       909  
          Intangible amortization
     1,747       88  
          Net gain on sale of investments
     (128 )     (313 )
          Accretion of discount
     (1,978 )     (71 )
          Amortization of premium
     90       87  
          Origination of loans held for sale
     -       (1,194 )
          Proceeds from sales of loans
     -       1,016  
          Deferred income taxes
     1,155       (2,738 )
          Net (gain) loss from sales of premises and equipment
     (1 )     5  
          Increase in bank owned life insurance
     (353 )     (345 )
          Amortization of employee stock ownership plan
     385       -  
          Changes in assets and liabilities that (used) provided cash:
                
             Accrued interest receivable
     865       514  
             Accrued interest payable
     (101 )     446  
             Income taxes payable
     (1,315 )     1,734  
             Other liabilities
     (6,603 )     2,615  
             Other assets
     (14,569 )      (4,204 )
                 
                Net cash (used in) provided by operating activities
     (13,061 )     599  
                 
INVESTING ACTIVITIES:
                
      Loans originated or acquired
     (175,556 )     (101,102 )
      Principal repayment on loans
     136,359       128,115  
      Purchases of investment securities available-for-sale
     (270,096 )     (9,606 )
      Net purchases in money market fund
     (7,101 )     -  
      Proceeds from sales and maturities of investment securities available-for-sale
     164,429       16,242  
      Proceeds from maturities, calls or repayments of investment securities held to maturity
     19,043       4,871  
      Redemption (Purchase) of Federal Home Loan Bank stock
     (4,272 )     1,436  
      Net (increase) decrease in other real estate owned
     84       (67 )
      Purchases of premises and equipment
     (847 )     (2,146 )
      Proceeds from sale of premises and equipment
     28       38  
      Proceeds from other investing activities
     201       -  
               Net cash provided by (used in) investing activities
     (137,728 )     37,781  
                 
FINANCING ACTIVITIES:
                
       Net increase in borrowed funds
     53,958       4,300  
       Net increase in checking, savings and demand accounts
     93,759       17,702  
       Net decrease in time deposits
     (4,544 )     (52,054 )
                 Net cash (used in) provided by financing activities
     143,173       (30,052 )
                 
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
     (7,616 )     8,328  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF QUARTER
     58,327       23,147  
                 
CASH AND CASH EQUIVALENTS, END OF QUARTER
   $ 50,711     $ 31,475  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
                
AND NON-CASH INFORMATION:
                
Cash payments for interest
   $ 21,225     $ 15,549  
Cash payments of income taxes
     15,100       1,461  
Transfers of loans to other real estate owned
     745       128  

See accompanying notes to the unaudited consolidated financial statements.
4
 
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 31, 2008.  The results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2008 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 (“VIE”) where the Company is the primary beneficiary.  The financial statements include the accounts of Beneficial Bank (the “Bank”) and its wholly owned subsidiaries.  The Bank’s wholly owned subsidiaries are as follows:  Beneficial Advisors, LLC, which offers non-deposit products, Neumann Corporation, a Delaware corporation formed for the purpose of managing certain investments, Beneficial Insurance Services, LLC, which was formed to provide insurance services to individual and business customers and BSB Union Corporation, a leasing company.  All significant intercompany accounts and transactions have been eliminated.  In addition two VIE’s were 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 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.  The significant estimates include the allowance for loan losses, goodwill, other intangible assets and income taxes.  Actual results could differ from those estimates and assumptions.

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, which are discussed in more detail below.  Following the consummation of the merger and public offering, the Company had a total of 82,264,460 shares of common stock, par value $.01 per share, issued and outstanding, of which 36,471,685 were held publicly and 45,792,775 were held by Beneficial Savings Bank Mutual Holding Company (the “MHC”).

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 to the maximum extent provided by law, by the Deposit Insurance Fund of the FDIC.
 
5

Merger and Minority Stock Offering

On October 13, 2006, the Company announced that it had signed a definitive merger agreement with FMS Financial Corporation, the parent of Farmers & Mechanics Bank (together, “FMS”). Under the terms of the agreement, which was approved by the Boards of Directors of both companies, Bancorp conducted a minority stock offering to the Bank’s depositors and the public and immediately thereafter acquired FMS. Upon completion of the merger, Farmers & Mechanics Bank was merged with and into the Bank.  The transaction closed on July 13, 2007.

In connection with the Company’s acquisition of FMS, FMS shareholders received $28.00 per share in the form of stock, cash or a combination of cash and stock, subject to the election and proration procedures set forth in the merger agreement.  There were 11,915,060 shares of Company common stock and $64.2 million in cash issued to former FMS shareholders upon the consummation of the acquisition.  The Company’s Unaudited Consolidated Statements of Operations for the three months ended March 31, 2008 include the impact of FMS subsequent to the July 13, 2007 acquisition.  The FMS transaction is the primary reason for the variances between income and expense items for the three months ended March 31, 2008 and March 31, 2007.

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.

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.  

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 82,264,460 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 were contributed to the Beneficial Foundation, a charitable foundation established 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, 2008 and 2007. Earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding.

6

(Dollars in thousands, except share and per share amounts)
  
Three Months Ended
March 31,
  
   
2008
    
2007
  
Basic and diluted  earnings per share:
            
                 
Net income
   $ 6,061     $ 1,750  
                 
Average common shares outstanding
     79,214,946       45,792,775  
                 
Net earnings per share
   $ .08     $ .04  
 
NOTE 4 – INVESTMENT SECURITIES

The amortized cost and estimated fair value of investments in debt and equity securities at March 31, 2008 and December 31, 2007 are as follows.

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

(Dollars in thousands)
   
March 31, 2008
  
   
Available-for-Sale
  
   
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Estimated Fair
Value
  
Equity securities
   $ 7,664     $ 164     $ (424 )   $ 7,404  
U.S. Government Sponsored Enterprise (“GSE”) and Agency Notes
     74,203       768       (29 )     74,942  
GNMA guaranteed mortgage certificates
     15,637       110       (18 )     15,729  
Collateralized mortgage obligations
     199,268       772       (5,723 )     194,317  
Other mortgage-backed securities
     649,670       14,548       (45 )     664,173  
Municipal and other bonds
     84,199       658       (1,077 )     83,780  
Mutual funds
     21,818       225       (91 )     21,952  
Total
   $ 1,052,459     $ 17,245     $ (7,407 )   $ 1,062,297  


   
December 31, 2007
  
   
Available-for-Sale
  
   
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Estimated Fair
Value
  
Equity securities
   $ 9,391     $ 437     $ (26 )   $ 9,802  
U.S. Government Sponsored Enterprise (“GSE”) and Agency Notes
     184,756       2,437       (130 )     187,063  
GNMA guaranteed mortgage certificates
     17,299       89       —       17,388  
Collateralized mortgage obligations
     206,842       1,873       (2,709 )     206,006  
Other mortgage-backed securities
     431,500       8,987       (303 )     440,184  
Municipal and other bonds
     74,330       288       (392 )     74,226  
Mutual funds
     14,717       432       (23 )     15,126  
Total
   $ 938,835     $ 14,543     $ (3,583 )   $ 949,795  
 
7
 
Investment securities held-to-maturity are summarized in the following tables:

(Dollars in thousands)
   
March 31, 2008
  
   
Held-to-Maturity
  
   
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Estimated Fair
Value
  
U.S. Government Sponsored Enterprise (“GSE”) and Agency Notes
   $ 12,501     $ 109     $ —     $ 12,610  
GNMA guaranteed mortgage certificates
     758       —       (25 )     733  
Other mortgage-backed securities
     79,644       870       (445 )     80,069  
Total
   $ 92,903     $ 979     $ (470 )   $ 93,412  



   
December 31, 2007
  
   
Held-to-Maturity
  
   
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Estimated Fair
Value
  
U.S. Government Sponsored Enterprise (“GSE”) and Agency Notes
   $ 27,498     $ 33     $ (44 )   $ 27,487  
GNMA guaranteed mortgage certificates
     771       —       (26 )     745  
Other mortgage-backed securities
     83,717       485       (1,307 )     82,895  
Total
   $ 111,986     $ 518     $ (1,377 )   $ 111,127  

Investments that have been in a continuous unrealized loss position for periods of less than 12 months and 12 months or longer at March 31, 2008 and December 31, 2007 are summarized in the following table:

(Dollars in thousands)
   
March 31, 2008
  
   
Less than 12 months
    
12 months or longer
    
Total
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
                                     
GSE and Agency Notes
   $ —     $ —     $ 17,650     $ 28     $ 17,650     $ 28  
Mortgage-backed securities
     62,298       66       33,090       467       95,388       533  
Municipal and other bonds
     37,912       1,072       930       5       38,842       1,077  
Collateralized mortgage obligations
     114,042       3,862       42,712       1,861       156,754       5,723  
Subtotal, debt securities
     214,252       5,000       94,382       2,361       308,634       7,361  
Equity securities
     4,312       425       —       —       4,312       425  
Mutual Funds
     279       91       —       —       279       91  
Total temporarily impaired securities
   $ 218,843     $ 5,516     $ 94,382     $ 2,361     $ 313,225     $ 7,877  


   
December 31, 2007
  
   
Less than 12 months
    
12 months or longer
    
Total
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
                                     
GSE and Agency Notes
   $ —     $ —     $ 63,979     $ 174     $ 63,979     $ 174  
Mortgage-backed securities
     8,357       14       87,931       1,621       96,288       1,635  
Municipal and other bonds
     28,293       376       3,075       16       31,368       392  
Collateralized mortgage obligations
     37,414       408       97,324       2,300       134,738       2,708  
Subtotal, debt securities
     74,064       798       252,309       4,111       326,373       4,909  
Equity securities
     750       26       —       —       750       26  
Mutual Funds
     347       24       —       —       347       24  
Total temporarily impaired securities
   $ 75,161     $ 848     $ 252,309     $ 4,111     $ 327,470     $ 4,959  
 
8

United States Government Sponsored Enterprise and Agency Notes

The Company’s investments in the preceding table in United States government sponsored enterprise (“GSE”) notes consist of debt obligations of the Federal Home Loan Bank (“FHLB”).  The Company’s investments in government agency notes consist of debt obligations of the Department of Housing and Urban Development (“HUD”).  Included in the 12 months or longer are three securities with a loss, on average of 0.16%.  The unrealized losses are 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 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, 2008.

Other 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.  Included in the less than 12 months are eight securities with a loss, on average, of 0.11%.  Included in the 12 months or longer are 11 securities with a loss, on average, of 1.39%.  The unrealized losses are due to current interest rate levels relative to the Company’s cost.  The contractual cash flows of these investments in GSE mortgage-backed securities are debt obligations of the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal National Mortgage Association (“FNMA”).  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 credit quality, 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, 2008.

Municipal and Other Bonds

The Company’s investments in the preceding table in municipal and other bonds are comprised of municipal bonds, a bond anticipation note, a corporate bond and trust preferred/collateralized debt obligations (“CDOs”).

The municipal bonds consist of obligations of entities located in the Commonwealth of Pennsylvania.  Included in the less than 12 months is one municipal bond with a loss, on average, of 0.01%.  The security is rated AAA by S&P and Aaa by Moody’s.  The unrealized loss is attributable to changes in current interest rates relative to the Company’s cost and not credit quality.   Included in the 12 months or longer are two securities with a loss, on average, of 0.57%.  These securities’ bond ratings have been downgraded due to the municipal bond insurance rating changes; however, they are rated investment grade as of March 31, 2008.  The unrealized loss is attributable to the downgrade in the ratings of the bond insurers, and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, therefore, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2008.  

The bond anticipation note is an obligation of an entity located in the state of New Jersey which is not rated and is in a loss position of 0.16%.  The unrealized loss is attributable to changes in current interest rates 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, 2008.

Other bonds that were in a loss position for less than 12 months consisted of three pooled Trust Preferred/CDOs with a loss, on average, of 2.83%.  The unrealized loss is not a result of credit quality; however, it is a result of the current market disruption in the pooled Trust Preferred market. The Trust Preferred/CDOs in this category are all Senior Note AAA rated pools, 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 other-than-temporarily impaired at March 31, 2008.

Other Bonds that were in a loss position for more than 12 months consisted of one corporate bond with a loss, on average of 0.01%.  The bond was rated investment grade at March 31, 2008.  The unrealized loss is attributable to changes in current interest rates 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 other-than-temporarily impaired at March 31, 2008.
 
9

Collateralized Mortgage Obligations

The Company’s investments in this category consist of collateralized mortgage obligations (“CMOs”) issued by FHLMC, FNMA, and whole-loan mortgage-backed securities rated AAA by S&P. Included in the less than 12 months are four floating rate agency CMOs with a loss, on average, of 1.46% and 28 whole-loan CMOs with a loss, on average, of 4.02%.  Included in the 12 months or longer are four agency CMOs with a loss, on average, of 0.36% and ten whole-loan CMOs with a loss, on average, of 4.91%. The agency CMOs decline in market value is attributable to changes in interest rates relative to the Company’s cost and not credit quality.  The price declines in the whole-loan CMO market, while not due to credit quality, are attributable to extraordinary events in the mortgage industry.  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, 2008.

Equity Securities

The Company’s investments in the preceding table in equity securities consist of bank-issued common stock and a mutual fund.  Included in the less than 12 months are 16 bank-issued common stocks with a loss, on average, of 8.96% and one mutual fund in a loss position of 24.6%.  The Company evaluated the severity and duration of the impairment.  Based on that evaluation, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2008.
 
10
 
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.

Major classifications of loans at March 31, 2008 and December 31, 2007 are summarized as follows:
 
(Dollars in thousands)

   
March 31, 2008
    
December 31, 2007
  
Real estate loans:
            
One-to-four family
   $ 493,957     $ 479,817  
Commercial real estate
     716,412       693,733  
Residential construction
     5,683       1,958  
Total real estate loans
     1,216,052       1,175,508  
                 
Commercial business loans
     157,468       136,345  
                 
Consumer loans:
                
Home equity loans and lines
             390,762  
of credit
     380,883  
Automobile loans
     161,595       174,769  
Other consumer loans
     234,617       237,442  
Total consumer loans
     777,095       802,973  
                 
Deferred loan fees and costs
     5,698       6,096  
Total loans
     2,156,313       2,120,922  
                 
Allowance for losses
     (20,580 )     (23,341 )
Loans, net
   $ 2,135,733     $ 2,097,581  

The activity in the allowance for loan losses for the three months ended March 31, 2008 and 2007 and the year ended December 31, 2007, is as follows:

   
March 31,
    
December 31,
  
(Dollars in thousands)
  
2008
    
2007
    
2007
  
Balance, beginning of period
   $ 23,341     $ 17,368     $ 17,368  
Provision for loan losses
     300       300       2,470  
Allowance purchased
     —       —       5,015  
Charge-offs
     (3,261 )     (486 )     (2,391 )
Recoveries
     200       280       879  
Balance, end of period
   $ 20,580     $ 17,462     $ 23,341  
                         

The recorded investment in impaired loans not requiring an allowance for loan losses was $4.2 million at March 31, 2008 and $2.9 million at December 31, 2007.  The recorded investment in impaired loans requiring an allowance for loan losses was $0.9 million at March 31, 2008 and $5.2 million at December 31, 2007.  At March 31, 2008 and December 31, 2007, the related allowance for loan losses associated with those loans was $0.1 million and $2.7 million, respectively.  For the three months ended March 31, 2008 and the year ended December 31, 2007, the average recorded investment in these impaired loans was $5.9 million and $7.8 million, respectively, and the interest income recognized on impaired loans was $0.1 million and $0.3 million, respectively.
 
11

 
NOTE 6 – BANK PREMISES AND EQUIPMENT

Bank premises and equipment at March 31, 2008 and December 31, 2007 are summarized as follows:
 
(Dollars in thousands)
   
March 31, 2008
    
December 31, 2007
  
             
Land
   $ 16,580     $ 17,012  
Bank premises
     43,601       42,828  
Furniture, fixtures and equipment
     24,929       22,957  
Leasehold improvements
     10,851       10,674  
Construction in progress
     7,316       9,870  
Total
     103,277       103,341  
Accumulated depreciation and amortization
     (25,675 )     (24,314 )
Total
   $ 77,602     $ 79,027  
                 


NOTE 7 – GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangible assets arising from the acquisition of CLA Agency, Inc. and FMS Financial Corporation 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, 2008, the core deposit intangible, net of accumulated amortization totaled $18.8 million.  The other amortizing intangibles, which include customer relationships, vary in estimated useful lives from two to 13 years.

Goodwill and other intangibles at March 31, 2008 and December 31, 2007 are summarized as follows:
 
(Dollars in thousands)
   
Goodwill
    
Core Deposit
Intangible
    
Customer
Relationships
and Other
  
                   
Balance at December 31, 2007
   $ 110,335     $ 20,294     $ 8,905  
Additions and adjustments:
                        
FMS Financial Corporation acquisition adjustments
     (146 )     —       —  
CLA acquisition adjustments
     25       —       —  
Amortization
     —       (1,470 )     (277 )
Balance at March 31, 2008
   $ 110,214     $ 18,824     $ 8,628  

The purchase price adjustments to goodwill were primarily a result of adjustments to the valuation of fixed assets and other assets acquired from FMS and CLA.
 
12
 
NOTE 8 – DEPOSITS

Deposits at March 31, 2008 and December 31, 2007 are summarized as follows:
 
(Dollars in thousands)
   
March 31, 2008
    
December 31, 2007
  
Non interest-bearing deposits
   $ 243,179     $ 242,351  
Interest-earning checking accounts
     403,274       389,812  
Money market accounts
     461,889       376,300  
Savings accounts
     408,278       414,398  
Time deposits
     1,037,758       1,042,302  
Total deposits
   $ 2,554,378     $ 2,465,163  
                 

NOTE 9 – SUBORDINATED DEBENTURES

The Company assumed FMS Financial’s obligation to the FMS Statutory Trust II (the “Trust”) as part of the acquisition of FMS Financial on July 13, 2007. The Company’s debenture to the Trust as of March 31, 2008 were $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, 2008 and December 31, 2007, the Bank met all capital adequacy requirements to which it was subject.

As of March 31, 2008 and December 31, 2007, 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.

13
 
The Bank’s actual capital amounts and ratios (under rules established by the FDIC) are presented in the following table:

   
Actual
    
For Capital
Adequacy Purposes
    
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
  
   
Capital
Amount
    
Ratio
    
Capital
Amount
    
Ratio
    
Capital
Amount
    
Ratio
  
                                     
As of March 31, 2008:
                                    
Tier 1 Capital (to average assets)
   $ 411,269       11.62 %   $ 106,143       3.00 %   $ 176,905       5.00 %
Tier 1 Capital (to risk weighted assets)
     411,269       19.11       86,071       4.00       129,107       6.00  
Total Capital (to risk weighted assets)
     431,849       20.07       172,143       8.00       215,179       10.00  
                                                 
                                               
Tier 1 Capital (to average assets)
   $ 412,551       12.20 %   $ 101,485       3.00 %   $ 169,141       5.00 %
Tier 1 Capital (to risk weighted assets)
     412,551       19.80       83,348       4.00       125,021       6.00  
Total Capital (to risk weighted assets)
     435,892       20.92       166,695       8.00       208,369       10.00  
                                                 

The Company’s capital at March 31, 2008 and December 31, 2007 for financial statement purposes was greater than the Tier I Capital amounts primarily due to the exclusion of goodwill and other intangibles, net of other accumulated other comprehensive income adjustments which may include unrealized gains/losses on available-for-sale investments and adjustments related to SFAS No. 158.  The amounts shown in the above table are for the Bank only.

NOTE 11 – INCOME TAXES

For the three months ended March 31, 2008, the Company recorded an income tax expense of $2.2 million for an effective rate of 26.6% compared to $0.2 million expense for an effective rate of 10.3% for the same period in 2007.
 
NOTE 12 – EMPLOYEE STOCK OWNERSHIP PLAN

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 least twenty-one years of age.  Other salaried employees will be eligible after they have completed one 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 less the dividends received by the ESOP on unallocated shares.   Shares in the ESOP were acquired using funds provided by a loan from the Company and accordingly the cost of those shares is shown as a reduction of stockholders’ equity. The loan to the ESOP as of March 31, 2008 was $30.3 million. The Company accounts for the ESOP based on guidance from Statement of Position (SOP) 96-3 “Employer’s Accounting for Employee Stock Ownership Plans.”  Shares are released to participants proportionately as the loan is repaid.  If the Company declares a dividend, the dividends on the allocated shares would be recorded as dividends and charged to retained earnings.  Dividends declared on common stock held by the ESOP and not allocated to the account of a participant can be used to repay the loan.   Allocation of shares to the ESOP participants is contingent upon the repayment of a loan to Beneficial Mutual Bancorp, Inc.  The Company recorded an expense for the ESOP of approximately $0.4 million in the three months ended March 31, 2008.
 
NOTE 13 – COMMITMENTS AND CONTINGENCIES
 
Outstanding loan commitments totaled $284.6 million at March 31, 2008, as compared to $217.8 million as of December 31, 2007.  Loan commitments consist of commitments to originate new loans as well as the outstanding undrawn portions of lines of credit and standby letters of credit.
 
14
 
The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business.  Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company’s financial condition and results of operations.

The Company received $0.5 million on the partial mandatory redemption of its equity interest in Visa, Inc. in connection with Visa’s initial public offering in March 2008.  A gain was recorded as part of service charges and other income in the consolidated statement of operations.

NOTE 14 – RECENT ACCOUNTING PRONOUNCEMENTS

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”.  This statement is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows.  This statement requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular form.  It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk related.  Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments.  This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The Company is evaluating the impact of adopting this Statement on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” which replaces SFAS No. 141, “Business Combinations” (“SFAS No. 141”).  This Statement retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting (formerly referred to as the purchase method) be used for all business combinations and that an acquirer be identified for each business combination.  This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as of the date that the acquirer takes control.  This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at fair values.  This Statement requires the acquirer to recognize acquisition-related costs and restructuring costs separately from the business combination as period expense.  This Statement is effective for business combinations for which the acquisition is on or after the first annual reporting period of the acquisition beginning on or after December 15, 2008.  The adoption of this Statement will impact the accounting and reporting of acquisitions after January 1, 2009.

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements – an Amendment to ARB No. 51.”  This Statement established new accounting and reporting standards that require that ownership interests in subsidiaries held by parties other than the parent be clearly identified and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This Statement also requires that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income.  In addition, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary shall be initially measured at fair value, with the gain or loss on the deconsolidation of the subsidiary measured using fair value of any noncontrolling equity investments rather than the carrying amount of that retained investment.  SFAS No. 160 also clarifies that changes in parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest.  This Statement is effective for fiscal years on or after December 15, 2008.  Early adoption is prohibited.  The Company is evaluating the impact of adopting this Statement on the Company’s consolidated financial statements.

In November 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 109, “Written Loan Commitments Recorded at Fair Value through Earnings” (“SAB 109”).  This SAB supersedes SAB No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB 105”), and expresses the current view of the staff that, consistent with guidance in SFAS No. 156 and 159, the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings.  Additionally, this SAB expands SAB 105’s view that internally-developed intangible assets should not be recorded as part of the fair value for any written loan commitments that are accounted for at fair value through earnings. This SAB was effective for fiscal quarters beginning after December 15, 2007.  The adoption of SAB 109 did not have a material impact on the Company’s financial condition and results of operations as of March 31, 2008.
 
15
 
In June 2007, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 06-11, “Accounting for Income Tax Benefits of the Share-Based Payment Awards.”  The Issue states that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase to additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards.  This Issue was effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years.  The Company will prospectively apply this Issue to the applicable dividends declared on or after January 1, 2008.

In May 2007, the FASB issued FASB Staff Position No. 48-1 (“FSP No. 48-1), “Definition of Settlement in FASB FIN 48.”  FSP No. 48-1 amends FIN 48 to provide guidance on determining whether a tax position is “effectively settled” for the purpose of recognizing previously unrecognized tax benefits.  The concept of “effectively settled” replaces the concept of “ultimately settled” originally issued in FIN 48.  The tax position can be considered “effectively settled” upon completion of an examination by the taxing authority if the entity does not plan to appeal or litigate any aspect of the tax position and it is remote that the taxing authority would examine any aspect of the tax position.  For effectively settled tax positions, the full amount of the tax benefit can be recognized.  The guidance in FSP No. 48-1 was effective upon initial adoption of FIN 48.  FIN 48 was effective for fiscal years beginning after December 15, 2006.  The adoption of FSP No. 48-1 did not have a material impact on the Company’s financial condition and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  Management adopted SFAS No. 159 on January 1, 2008 but has not elected to fair value any of the Company’s financial assets and financial liabilities that are not currently required to be measured at fair value.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. SFAS No. 157 retains the exchange price notion and clarifies that the exchange price is the price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. SFAS No. 157 is effective for the Company’s financial statements for the year beginning on January 1, 2008. The Company adopted SFAS No. 157 on January 1, 2008 and has included additional disclosures about fair value in Note 15.
 
In September 2006, the FASB ratified EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF No. 06-4”).  An endorsement split-dollar arrangement is an arrangement whereby an employer owns a life insurance policy that covers the life of an employee and using a separate agreement endorses a portion of the policy death benefit to the insured employee’s beneficiary.  EITF 06-4 applies only to those endorsement split-dollar arrangements that provide a death benefit postretirement. This EITF requires an employer recognize a liability for future benefits if, in substance, the benefit exists. The liability would be accounted for in accordance with SFAS No. 106 “Employers Accounting for Postretirement Benefits Other Than Pensions”. The EITF’s requirement is effective for fiscal years beginning after December 15, 2007. Upon adoption of the accounting guidance under EITF 06-4 as of January 1, 2008, the Company recognized a liability of $11.8 million in accordance with SFAS No. 106 and recorded a corresponding reduction to retained earnings representing the cumulative effect of the change in accounting principle.
 
16
 
NOTE 15 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Effective January 1, 2008, the Company adopted SFAS 157. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  SFAS No. 157 does not require any new fair value measurements. The definition of fair value retains the exchange price notion in earlier definitions of fair value. SFAS No. 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. FASB Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement No. 157, issued in February 2008, delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008.

SFAS No. 157 describes three levels of inputs that may be used to measure fair value:
 
 
Level 1
Quoted prices in active markets for identical assets or liabilities.
     
 
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
     
 
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. 

In addition, SFAS No. 157 requires the Company to disclose the fair value for financial assets on both a recurring and non-recurring basis.  The Company measures loans held for sale, impaired loans, FHLB stock, and other real estate owned on a non-recurring basis.  At March 31, 2008, these assets were valued in accordance with GAAP and did not require fair value disclosure under the provisions of SFAS No. 157.

Those assets which will continue to be measured at fair value on a recurring basis are as follows:

   
Category Used for Fair Value Measurement
  
   
Level 1
    
Level 2
    
Level 3
  
Assets:
                  
Investment securities available-for-sale:
                  
U.S. Government agencies and mortgage-backed securities
     —       949,161       —  
Municipal and other bonds
     —       83,780       —  
Equity securities
     7,404                  
Money market funds
     —       20,113       —  
Mutual funds
     —       1,839       —  

NOTE 16 – SUBSEQUENT EVENTS

On April 1, 2008, the Company’s Board of Directors amended Article III, Section 2 of the Company’s Bylaws to decrease the number of Company directors from seventeen (17) to thirteen (13).

On April 16, 2008, the Company announced that the defined benefit pension plans maintained by the Bank, including the defined benefit pension plan the Bank assumed in connection with the merger of Farmers & Mechanics Bank with and into the Bank, will be frozen. Effective with the freeze of both plans, each active participant's pension benefit will be determined based upon a participant's compensation and period of employment as of June 30, 2008.  Compensation and employment after that date will not be taken into account.  The curtailment gain or loss associated with the freeze has not yet been determined.
 
17
 
In conjunction with the freeze, the Company announced that it plans on increasing its match of employee contributions in the current 401(k) defined contribution plan ("401(k) plan") to up to 6% of an employee's salary, up from a dollar based formula which limited Company contributions to a maximum of $1,000 per participant per year.  Also, transition credits will be applied to certain eligible participants. The Company also plans to combine the 401(k) plan with the Company's Employee Stock Ownership Plan to fund employer contributions.

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

Forward-Looking Statements

This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company.  These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions.  The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Bank’s market area, changes in real estate market values in the Bank’s market area, changes in relevant accounting principles and guidelines and the inability of third party service providers to perform.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

In the preparation of our consolidated financial statements, we have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States.

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities.  We consider these accounting policies to be critical accounting policies.  The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances.  Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

Critical Accounting Policies

Allowance for Loan Losses – The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date.  The allowance is established through the provision for loan losses, which is charged to income.  Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment.  Among the material estimates required to establish the allowance are: overall economic conditions; value of collateral; strength of guarantors; loss exposure at default; the amount and timing of future cash flows on impacted loans; and determination of loss factors to be applied to the various elements of the portfolio.  All of these estimates are susceptible to significant change.  The Company estimates that a 10 percent increase in the loss factors used on the loan portfolio would increase the allowance for loan losses at March 31, 2008 by approximately $2.1 million, of which $0.4 million would relate to consumer loans, $1.5 million to commercial loans and $0.2 million to residential mortgage loans. These sensitivity analyses do not represent management’s expectations of the increase in loss factors, but are provided as hypothetical scenarios to assess the sensitivity of the allowance for loan losses to change in key inputs. We believe the loss factors currently in use are appropriate in order to evaluate the allowance for loan losses at the balance sheet dates. The process of determining the level of the allowance for loan losses requires a high degree of judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions.
 
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Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio.  Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation.  In addition, the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking, as an integral part of their examination process, periodically review our allowance for loan losses.  Such agencies may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of the examination.  A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Income Taxes – The Company estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which the Company conducts business.  On a quarterly basis, management assesses the reasonableness of its effective tax rate based upon its current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year.  The estimated income tax expense is recorded in the Consolidated Statement of Operations.  As of January 1, 2007, the Company adopted FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty of Income Taxes” (“FIN 48”).

We use the asset and liability method of accounting for income taxes as prescribed in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this method, deferred tax assets and tax liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established.  Deferred tax assets and tax liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and tax assets.  These judgments require us to make projections of future taxable income.  The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change.  Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.  A valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings.

Goodwill and Intangible Assets – Net assets of companies acquired in purchase transactions are recorded at fair value at the date of acquisition and, as such, the historical cost basis of individual assets and liabilities are adjusted to reflect their fair value. Identified intangibles are amortized on an accelerated or straight-line basis over the period benefited. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment, at the reporting unit level. The impairment test is performed in two phases. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure must be performed. That additional procedure compares the implied fair value of the reporting unit’s goodwill (as defined in Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”)), with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. In 2007, our step one impairment analysis indicated goodwill was not impaired.

Other intangible assets subject to amortization are evaluated for impairment in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). An impairment loss will be recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. At March 31, 2008, intangible assets included customer relationships and other related intangibles that are amortized on a straight-line basis using estimated lives of nine to 13 years for customer relationships and two to four years for other intangibles.
 
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Comparison of Financial Condition at March 31, 2008 and December 31, 2007

Total assets increased $140.9 million, or 4.0%, to $3.7 billion at March 31, 2008, compared to $3.6 billion at December 31, 2007.  The increase in total assets was primarily due to increases in investment securities of $97.7 million, or 9.0% and increases in total loans of $35.4 million, or 1.7%.  Total deposits increased $89.2 million, or 3.6%, to $2.6 billion at March 31, 2008 compared to $2.5 billion at December 31, 2007.  Interest bearing deposits increased $88.4 million, or 4.0%, to $2.3 billion and non-interest bearing deposits increased $0.8 million, or 0.34%, to $243.2 million during this period.  The increase in interest bearing deposits is primarily a result of increased marketing efforts during the first quarter of 2008.  Stockholders’ equity decreased $6.0 million, or 0.97%, to $613.8 million at March 31, 2008 compared to $619.8 million at December 31, 2007.  The decline in equity resulted primarily from the impact of the adoption of new accounting guidance on life insurance benefit programs during the quarter ended March 31, 2008.
 
  Comparison of Operating Results for the Three Months Ended March 31, 2008 and March 31, 2007
 
General – The Company recorded net income of $6.1 million, or $0.08 per share, for the three months ended March 31, 2008, compared to net income of $1.8 million, or $0.04 per share, for the same period in 2007.

The FMS transaction is the primary reason for the variances between income and expense items for the three months ended March 31, 2008 and March 31, 2007.

Net Interest Income – The Company’s net interest income increased $11.7 million, or 76.2%, to $27.1 million for the three months ended March 31, 2008 from $15.4 million for the same period in 2007.  Total interest income increased $16.9 million to $48.2 million for the three months ended March 31, 2008 from $31.4 million for the same period in 2007. This was due to an increase in average interest earning assets of $1.1 billion to $3.3 billion for the three months ended March 31, 2008 from $2.2 billion for the same period in 2007 and an increase in the average yield on interest earning assets of 7 basis points to 5.88% for the three months ended March 31, 2008 compared to 5.81% for the same period in 2007. Total interest expense increased $5.1 million to $21.1 million for the three months ended March 31, 2008 from $16.0 million for the same period in 2007. This was due to an increase in average interest bearing liabilities of $828.7 million to $2.7 billion for the three months ended March 31, 2008 from $1.9 billion for the same period in 2007, partially offset by a decrease of 29 basis points in the cost of interest bearing liabilities to 3.12% for the three months ended March 31, 2008 compared to 3.41% for the same period in 2007.

Provision for Loan Losses – Net charge-offs during the three month period ended March 31, 2008 increased to $3.1 million, or 0.14% of average loans outstanding, compared to $0.2 million, or 0.01% of average loans outstanding for the same three month period in 2007.  The increase in net charge-offs resulted primarily from the charge-off of a single loan to an affiliate of a Philadelphia based development company that filed for Chapter 11 bankruptcy in June 2007.

The Bank recorded a provision for loan losses of $0.3 million during the three months ended March 31, 2008 as compared to $0.3 million for the same three month period in 2007.  The allowance for loan losses at March 31, 2008 totaled $20.6 million, or 0.95% of total loans outstanding, compared to $23.3 million, or 1.1% of total loans outstanding, at December 31, 2007. The allowance for loan losses included $5 million acquired as a result of the merger with FMS (see Note 5 – Loans).  The provision for loan losses in the 2008 period was determined by management to be an amount necessary to maintain a balance of allowance for loan losses at a level necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. 
 
Non-interest Income – Non-interest income increased $4.5 million, or 157.9%, to $7.3 million for the three months ended March 31, 2008, compared to the same period in 2007.   The increase in non-interest income was primarily due to an increase to service charges and other income of $2.6 million and an increase in insurance commission income of $2.1 million during the three months ended March 31, 2008 compared to the same period in 2007.   The increase in service charges is the result of higher transaction volume and service fees from the deposit accounts acquired through the FMS merger and to the receipt of partial proceeds of our interest in the VISA initial public offering.  The increase in insurance commission income is the result of the additional income generated since the acquisition by Beneficial Insurance Services, LLC of the CLA Agency, Inc., a full-service property and casualty and professional liability insurance brokerage company, in the third quarter of 2007.
 
20
 
Non-interest Expense – Non-interest expense increased by $9.9 million, or 62.0%, to $25.9 million during the three months ended March 31, 2008 compared to $16.0 million during the same period in 2007.  The increase was primarily due to increases in salaries and employee benefits, advertising expenses and professional fees incurred as a result of the FMS merger. Amortization of intangibles expense increased $1.7 million, to $1.8 million for the three months ended March 31, 2008 from $0.1 million during the same period in 2007, due to the addition of $23.2 million of core deposit intangible that resulted from the acquisition of FMS.
 
Income Taxes – The income tax expense totaled $2.2 million for the three months ended March 31, 2008, reflecting an effective tax rate of 26.6%, compared to income tax expense of $0.2 million for the same period in 2007, reflecting an effective tax rate of 10.3 %.
 
21
 
The following table summarizes average balances and average yields and costs for the three-month periods ended March 31, 2008 and 2007.

   
March 31,
  
(Dollars in thousands)
  
2008
    
2007
  
   
Average
Balance
    
Interest
And
Dividends
    
Yield/
Cost
    
Average
Balance
    
Interest
And
Dividends
    
Yield/
Cost
  
                                     
Assets:
                                    
Interest-bearing demand deposits
   $ 6,165     $ 41    
   2.66%
     $ 7,000     $ 87    
    4.97%
  
Loans
     2,126,654       32,495    
6.11
       1,679,741       25,766    
6.14
  
Investment securities
     281,754       4,499    
6.39
       151,267       1,625    
4.30
 
Mortgage-backed securities
     615,985       8,291    
5.38
       184,682       2,190    
4.74
 
Collateralized mortgage obligations
     205,066       2,555    
4.98
       135,401       1,701    
5.03
 
Other interest-earning assets
     47,826       361    
3.02
       911       12    
5.27
  
Total interest-earning assets
     3,283,450       48,242    
5.88
       2,159,002       31,381  
 
5.81
  
                                             
Non-interest-earning assets
     392,938                     131,751                
Total assets
   $ 3,676,388     $ 48,242           $ 2,290,753     $ 31,381        
                                             
Liabilities and stockholders’ equity:
                                        
 
  
Interest-earning checking accounts
     390,057       1,286    
1.32
       164,912       424    
1.03
  
Money market accounts
     431,641       3,107    
2.88
       292,323       2,215    
3.03
  
Savings accounts
     409,223       651    
0.64
       247,421       454    
0.73
  
Time deposits
     1,047,025       11,146    
4.26
       872,615       9,195    
4.21
  
Total interest-bearing deposits
     2,277,946       16,190    
2.84
       1,577,271       12,288    
3.12
  
                                             
Federal Home Loan Bank advances
     207,069       2,349    
4.54
       195,272       2,436    
4.99
  
Repurchase agreements
     191,353       2,148    
4.49
       88,600       1,082    
4.88
  
Federal Home Loan Bank overnight borrowings
     193       1    
2.07
       —       —    
—
  
Statutory Trust Debenture
     25,266       412    
6.52
       —       —    
—
  
Other borrowings
     3,293       24    
2.92
       15,304       188    
4.91
  
Total interest-bearing liabilities
     2,705,120       21,124    
3.12
       1,876,447       15,994    
3.41
  
                                             
Non-interest-bearing deposits
     248,536                     73,541                
Other non-interest-bearing liabilities
     97,941                     59,711                
Total liabilities
     3,051,597       21,124             2,009,699       15,994        
                                             
Total stockholders’ equity
     624,791                     281,054                
Total liabilities and stockholders’ equity
 $ 3,676,388                   $ 2,290,753                
Net interest income
           $ 27,118                   $ 15,387        
Interest rate spread
                  
   2.76%
                    
    2.40%
  
Net interest margin
                  
   3.30%
                    
    2.85%
  
Average interest-earning assets to average interest-bearing liabilities
                  
121.38% 
                   
115.06%
  

Asset Quality

The Company does not engage in subprime lending, which is defined as mortgage loans advanced to borrowers who do not qualify for market interest rates because of problems with their credit history.  The Company's lending and investment activities are discussed in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on March 31, 2008.  All mortgage backed securities owned by the Company as of March 31, 2008 possessed the highest possible investment credit rating.

Nonperforming loans totaled $13.5 million, or 0.36% of total assets, at March 31, 2008 compared to $16.3 million, or 0.46% of total assets, at December 31, 2007.   The decrease in the nonperforming loans is primarily due to the charge-off of a single loan to an affiliate of a Philadelphia based development company that filed for Chapter 11 bankruptcy in June 2007.  Nonperforming loans are evaluated under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan—an Amendment of FASB Statements No. 5 and 15,” and are included in the determination of the allowance for loan losses.
 
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Real estate owned increased $0.8 million to $5.6 million at March 31, 2008 compared to $4.8 million at December 31, 2007.  Real estate owned at both dates includes real estate owned recorded as part of the acquisition of FMS and its wholly owned subsidiary, Farmers & Mechanics Bank, which includes former Farmers & Mechanics Bank branch office locations that were closed by FMS in June 2007 prior to the acquisition.  

Liquidity, Capital and Credit Management

Liquidity Management – Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposits, loan repayments, maturities of and payments on investment securities and borrowings from the Federal Home Loan Bank of Pittsburgh.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposits and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. At March 31, 2008, the Company does not feel that its future levels of principal repayments will be materially impacted by problems currently being experienced in the residential mortgage market. See “Asset Quality” for a further discussion of the Bank’s asset quality.

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.

Our most liquid assets are cash and cash equivalents.  The levels of these assets depend on our operating, financing, lending and investing activities during any given period.  At March 31, 2008, cash and cash equivalents totaled $50.7 million.  In addition, at March 31, 2008, our borrowing capacity with the Federal Home Loan Bank of Pittsburgh is up to $1.6 billion.  On March 31, 2008, we had $216.2 million of advances outstanding.

A significant use of our liquidity is the funding of loan originations.  At March 31, 2008, we had $284.6 million in loan commitments outstanding, which consisted of $93.6 million and $34.2 million in commercial and consumer commitments to fund loans, respectively, $100.6 million and $ 39.5 million in commercial and consumer unused lines of credit, respectively, and $16.5 million in standby letters of credit.  Another significant use of our liquidity is the funding of deposit withdrawals.  Certificates of deposit due within one year of March 31, 2008 totaled $883.1 million, or 85.1% of certificates of deposit.  The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the recent low interest rate environment.  If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings.  Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2009.  We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

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The following table presents certain of our contractual obligations at March 31, 2008:

         
Payments Due by Period
  
(Dollars in thousands)
  
Total
    
Less than One Year
    
One to
Three Years
    
Three to
Five Years
    
More Than
Five Years
  
                               
Commitments to fund loans
   $ 127,942     $ 127,942     $ —     $ —     $ —  
Unused lines of credit
     140,186       100,632       —       —       39,554  
Standby letters of credit
     16,537       16,537       —       —       —  
Operating lease obligations
     30,924       5,250       9,276       4,148       12,250  
Total
   $ 315,589     $ 250,361     $ 9,276     $ 4,148     $ 51,804  

Our primary investing activities are the origination and purchase of loans and the purchase of securities.  Our primary financing activities consist of activity in deposit accounts, repurchase agreements and Federal Home Loan Bank advances.  Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our competitors and other factors.  We generally manage the pricing of our deposits to be competitive.  Occasionally, we offer promotional rates on certain deposit products to attract deposits.

Capital Management – We are subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation, including a risk-based capital measure.  The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.  At March 31, 2008, we exceeded all of our regulatory capital requirements and are considered “well capitalized” under the regulatory guidelines.

The proceeds from the Company’s public stock offering, which was consummated on July 13, 2007, significantly increased our liquidity and capital resources.  After taking into consideration the effect of the acquisition of FMS, the Company’s equity increased by $333.4 million since December 31, 2006 to $613.8 million at March 31, 2008. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of lending activities.  Our financial condition and results of operations have been enhanced by the capital from the offering, resulting in increased net interest-earning assets and net income.  In the future, we may use capital management tools such as cash dividends and common share repurchases.  Under Office of Thrift Supervision regulations generally, we will not be allowed to repurchase any shares during the first year following the offering, except: (1) in extraordinary circumstances, we may make open market repurchases of up to 5% of our outstanding stock if we receive the prior non-objection of the Office of Thrift Supervision of such repurchases; (2) repurchases of qualifying shares of a director or if we conduct an Office of Thrift Supervision-approved offer to repurchase made to all shareholders; (3) if we repurchase to fund a restricted stock award plan that has been approved by shareholders; or (4) if we repurchase stock to fund a tax-qualified employee stock benefit plan.

Credit Risk Management – Credit risk represents the possibility that a customer or issuer may not perform in accordance with contractual terms either on a loan or security. Credit risk is inherent in the business of community banking.  The risk arises from extending credit to customers and purchasing securities.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.  See “Liquidity Management” for further discussion regarding loan commitments and unused lines of credit.
 
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Item 3.  Quantitative and Qualitative Disclosure about Market Risk

Qualitative Aspects of Market Risk

Interest rate risk is defined as the exposure of current and future earnings and capital that arises from adverse movements in interest rates.  Depending on a bank’s asset/liability structure, adverse movements in interest rates could be either rising or declining interest rates.  For example, a bank with predominantly long-term fixed-rate assets, and short-term liabilities could have an adverse earnings exposure to a rising rate environment.  Conversely, a short-term or variable-rate asset base funded by longer-term liabilities could be negatively affected by falling rates.  This is referred to as repricing or maturity mismatch risk.

Interest rate risk also arises from changes in the slope of the yield curve (yield curve risk); from imperfect correlations in the adjustment of rates earned and paid on different instruments with otherwise similar repricing characteristics (basis risk); and from interest rate related options imbedded in the bank’s assets and liabilities (option risk).

Our goal is to manage our interest rate risk by determining whether a given movement in interest rates affects our net income and the market value of our portfolio equity in a positive or negative way, and to execute strategies to maintain interest rate risk within established limits.

Quantitative Aspects of Market Risk

We view interest rate risk from two different perspectives.   The traditional accounting perspective, which defines and measures interest rate risk as the change in net interest income and earnings caused by a change in interest rates, provides the best view of short-term interest rate risk exposure.  We also view interest rate risk from an economic perspective, which defines and measures interest rate risk as the change in the market value of portfolio equity caused by changes in the values of assets and liabilities, which have been caused by changes in interest rates.  The market value of portfolio equity, also referred to as the economic value of equity is defined as the present value of future cash flows from existing assets, minus the present value of future cash flows from existing liabilities.

These two perspectives give rise to income simulation and economic value simulation, each of which presents a unique picture of our risk from any movement in interest rates.  Income simulation identifies the timing and magnitude of changes in income resulting from changes in prevailing interest rates over a short-term time horizon (usually one year).  Economic value simulation captures more information and reflects the entire asset and liability maturity spectrum.  Economic value simulation reflects the interest rate sensitivity of assets and liabilities in a more comprehensive fashion, reflecting all future time periods.  It can identify the quantity of interest rate risk as a function of the changes in the economic values of assets and liabilities, and the equity of the Bank.  Both types of simulation assist in identifying, measuring, monitoring and controlling interest rate risk and are employed by management to ensure that variations in interest rate risk exposure will be maintained within policy guidelines.

The Bank’s Asset/Liability Management Committee produces reports on a quarterly basis, which compare baseline (no interest rate change) current positions showing forecasted net income, the economic value of equity and the duration of individual asset and liability classes, and of equity.  Duration is defined as the weighted average time to the receipt of the present value of future cash flows.  These baseline forecasts are subjected to a series of interest rate changes, in order to demonstrate or model the specific impact of the interest rate scenario tested on income, equity and duration.  The model, which incorporates all asset and liability rate information, simulates the effect of various interest rate movements on income and equity value.  The reports identify and measure the interest rate risk exposure present in our current asset/liability structure.

The tables below set forth an approximation of our interest rate risk exposure.  The simulation uses projected repricing of assets and liabilities at March 31, 2008.  The primary interest rate exposure measurement applied to the entire balance sheet is the effect on net interest income and earnings of a gradual change in market interest rates of plus or minus 200 basis points over a one year time horizon, and the effect on economic value of equity of a gradual change in market interest rates of plus or minus 200 basis points for all projected future cash flows.  Various assumptions are made regarding the prepayment speed and optionality of loans, investments and deposits, which are based on analysis, market information and in-house studies.  The assumptions regarding optionality, such as prepayments of loans and the effective maturity of non-maturity deposit products are documented periodically through evaluation under varying interest rate scenarios.
 
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Because prospective effects of hypothetical interest rate changes are based on a number of assumptions, these computations should not be relied upon as indicative of actual results.  While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security, collateralized mortgage obligation and loan repayment activity.  Further the computation does not reflect any actions that management may undertake in response to changes in interest rates.  Management periodically reviews its rate assumptions based on existing and projected economic conditions.

As of March 31, 2008
(Dollars in thousands)
  
                   
Basis point change in rates
  
-200
    
Base Forecast
    
+200
  
                       
Net Interest Income at Risk:
                      
Net Interest Income
   $ 116,364     $ 119,199     $ 121,145  
% change
     -2.38 %             1.63 %
                         
Net Income at Risk:
                        
Net income
   $ 28,278     $ 30,133     $ 31,421  
% change
     -6.16 %             4.27 %
                         
Economic Value at Risk:
                        
Equity
   $ 577,263     $ 651,865     $ 647,050  
% change
     -11.44 %             -0.74 %

As of March 31, 2008, based on the scenarios above, net interest income and net income would be adversely affected over a one-year time horizon in a declining rate environment.  Economic value would be adversely affected in both a rising and declining rate environment.

The net interest income at risk results indicate a slightly asset sensitive profile, which provides net interest margin benefits in rising rate scenarios.  The economic value at risk remains limited in magnitude and indicates potential moderate exposures in both decreasing and increasing rate environments.

Our results indicate limited net interest income and economic value at risk, and all results are within our policy guidelines.

Item 4.  Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business.  Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company’s financial condition and results of operations.

Item 1A.  Risk Factors

As of March 31, 2008, the risk factors of the Company have not changed materially from those reported in the Company’s Annual Report on Form 10-K.  In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results.  The risks described in our Annual Report on Form 10-K are not the only risks that we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

Not applicable.

Item 3.  Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5.  Other Information

Not applicable.

Item 6.  Exhibits

 
3.1
Charter of Beneficial Mutual Bancorp, Inc. (1)
     
 
3.2
Bylaws of Beneficial Mutual Bancorp, Inc. (1)
     
 
4.0
Form of Stock Certificate of Beneficial Mutual Bancorp, Inc. (1)
     
 
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
     
 
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
     
 
32.0
Section 1350 Certification
 
    
 
(1)
Incorporated herein by reference to the Exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-141289), as amended, initially filed with the Securities and Exchange Commission on March 14, 2007.
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


  BENEFICIAL MUTUAL BANCORP, INC.
       
       
       
       
Dated:  May 15, 2008
By:
 /s/ Gerard P. Cuddy  
   
Gerard P. Cuddy
  
   
President and Chief Executive Officer
  
   
(principal executive officer)
  
       
       
       
Dated:  May 15, 2008
By:
 /s/ Joseph F. Conners  
   
Joseph F. Conners
  
   
Executive Vice President and Chief Financial
   
Officer
  
   
(principal financial and accounting officer)
 
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