Edgar Filing: Beneficial Mutual Bancorp Inc

t69209_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 September 30, 2010

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 organization)		(I.R.S. Employer Identification No.)

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

(215) 864-6000

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Yes x No o

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

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

Large Accelerated Filer o Accelerated Filer x

Non-Accelerated Filer o Smaller Reporting Company o

(Do not check if a smaller reporting company)

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

Yes o No x

As of November 5, 2010, there were 81,027,553 shares of the registrant’s common stock outstanding. Of such shares outstanding, 45,792,775 were held by Beneficial Savings Bank MHC and 35,234,778 shares were publicly held.

BENEFICIAL MUTUAL BANCORP, INC.

Table of Contents

		Page No.
Part I. Financial Information

Item 1.	Financial Statements (unaudited)

	Unaudited Condensed Consolidated Statements of Financial Condition as of September 30, 2010 and December 31, 2009	1

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009	2

	Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2010	3

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009	4

	Notes to Unaudited Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	47

Part II. Other Information

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults Upon Senior Securities	48

Item 4.	(Removed and Reserved)	48

Item 5.	Other Information	48

Item 6.	Exhibits	49

Signatures		50

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Condensed Consolidated Statements of Financial Condition

(Dollars in thousands, except share amounts)

	September 30, 2010			December 31, 2009
ASSETS:
Cash and Cash Equivalents:
Cash and due from banks	$	38,223		$	39,739
Overnight investments		177,887			139,962
Total cash and cash equivalents		216,110			179,701
Trading Securities		-			31,825
Investment Securities:
Available-for-sale (amortized cost of $1,381,480 at September 30, 2010 and $1,260,670 at December 31, 2009)		1,419,095			1,287,106
Held-to-maturity		88,782			48,009
Federal Home Loan Bank stock, at cost		27,168			28,068
Total investment securities		1,535,045			1,363,183
Loans:		2,768,753			2,790,119
Allowance for loan losses		(44,959	)		(45,855	)
Net loans		2,723,794			2,744,264
Accrued Interest Receivable		18,483			19,375
Bank Premises and Equipment, net		69,466			81,255
Other Assets:
Goodwill		110,486			110,486
Bank owned life insurance		33,464			32,357
Other intangibles		17,777			20,430
Other assets		174,561			90,804
Total other assets		336,288			254,077
Total Assets	$	4,899,186		$	4,673,680
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Liabilities:
Deposits:
Non-interest bearing deposits	$	292,159		$	242,412
Interest bearing deposits		3,566,144			3,266,835
Total deposits		3,858,303			3,509,247
Borrowed funds		343,313			433,620
Other liabilities		63,481			93,812
Total liabilities		4,265,097			4,036,679
Commitments and Contingencies
Stockholders’ Equity:
Preferred Stock - $.01 par value, 100,000,000 shares authorized, none issued or outstanding as of September 30, 2010 and December 31, 2009		-			-
Common Stock – $.01 par value, 300,000,000 shares authorized, 82,265,957 shares issued as of September 30, 2010 and 82,264,457 shares issued as of December 31, 2009, and 81,355,053 shares outstanding as of September 30, 2010 and 81,853,553 shares outstanding as of December 31, 2009		823			823
Additional paid-in capital		347,581			345,356
Unearned common stock held by employee stock ownership plan		(23,073	)		(25,489	)
Retained earnings (partially restricted)		304,589			313,195
Accumulated other comprehensive income, net		12,752			6,712
Treasury stock, at cost, 910,904 shares at September 30, 2010 and 410,904 shares at December 31, 2009		(8,583	)		(3,596	)
Total stockholders’ equity		634,089			637,001
Total Liabilities and Stockholders’ Equity	$	4,899,186		$	4,673,680

See accompanying notes to the unaudited condensed consolidated financial statements

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)

	For the Three Months Ended						For the Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2009			2010			2009
INTEREST INCOME:
Interest and fees on loans	$	35,480		$	36,244		$	109,940		$	103,522
Interest on overnight investments		151			-			321			2
Interest on trading securities		14			-			70			-
Interest and dividends on investment securities:
Taxable		10,497			11,293			35,146			37,294
Tax-exempt		1,150			902			3,552			2,108
Total interest income		47,292			48,439			149,029			142,926

INTEREST EXPENSE:
Interest on deposits:
Interest bearing checking accounts		2,556			2,319			7,616			6,415
Money market and savings deposits		2,441			2,515			7,045			8,669
Time deposits		3,395			6,176			11,621			21,160
Total		8,392			11,010			26,282			36,244
Interest on borrowed funds		3,810			4,749			12,208			14,108
Total interest expense		12,202			15,759			38,490			50,352

Net interest income		35,090			32,680			110,539			92,574

Provision for loan losses		51,050			2,000			62,200			12,100
Net interest (loss) income after provision for loan losses		(15,960	)		30,680			48,339			80,474

NON-INTEREST INCOME:
Insurance and advisory commission and fee income		1,944			1,818			6,716			6,281
Service charges and other income		3,387			3,456			11,076			10,217
Impairment charge on securities available-for-sale		(88	)		(195	)		(88	)		(1,425	)
Gain on sale of investment securities available-for-sale		370			1,383			2,374			5,548
Gains on sale of trading securities		123			-			235			-
Total non-interest income		5,736			6,462			20,313			20,621

NON-INTEREST EXPENSE:
Salaries and employee benefits		15,580			14,583			46,316			42,865
Occupancy expense		2,906			2,970			8,966			9,072
Depreciation, amortization and maintenance		2,443			2,277			6,859			6,724
Marketing expense		2,392			1,138			5,041			4,124
Intangible amortization expense		886			892			2,653			2,674
FDIC Insurance		1,361			1,052			4,065			4,384
Impairment of goodwill		-			976			-			976
Other		7,783			6,634			21,415			17,891
Total non-interest expense		33,351			30,522			95,315			88,710

(Loss) Income before income taxes		(43,575	)		6,620			(26,663	)		12,385

Income tax (benefit) expense		(21,845	)		800			(18,057	)		1,487

NET (LOSS) INCOME	$	(21,730	)	$	5,820		$	(8,606	)	$	10,898

(LOSS) EARNINGS PER SHARE – Basic	$	(0.28	)	$	0.07		$	(0.11	)	$	0.14
(LOSS) EARNINGS PER SHARE – Diluted	$	(0.28	)	$	0.07		$	(0.11	)	$	0.14

Average common shares outstanding – Basic		77,541,313			77,651,098			77,721,359			77,695,061
Average common shares outstanding – Diluted		77,541,313			77,675,526			77,721,359			77,707,151

See accompanying notes to the unaudited condensed consolidated financial statements

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands, except share amounts)

	Number of Shares Issued		Common Stock		Additional Paid in Capital			Common Stock held by KSOP			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity			Comprehensive Income
BALANCE, JANUARY 1, 2010		82,264,457	$	823	$	345,356		$	(25,489	)	$	313,195		$	(3,596	)	$	6,712		$	637,001
Net loss												(8,606	)								(8,606	)	$	(8,606	)
KSOP shares committed to be released						(86	)		2,416												2,330
Stock option expense						970															970
Restricted stock shares						1,328															1,328
Issuance of common shares		1,500				13															13
Purchase of treasury stock															(4,987	)					(4,987	)
Net unrealized gain on AFS securities arising during the year (net of deferred tax of $4,713)																		8,753			8,753			8,753
Reclassification adjustment for net gains on AFS securities included in net income (net of tax of $831)																		(1,543	)		(1,543	)		(1,543	)
Reclassification adjustment for other-than-temporary impairment (net of tax benefit of $31)																		57			57			57
Pension, other post retirement and postemployment benefit plan adjustments (net of tax of $481)																		(1,227	)		(1,227	)		(1,227	)
Total OCI																								6,040
Comprehensive income																							$	(2,566	)
BALANCE, SEPTEMBER 30, 2010		82,265,957	$	823	$	347,581		$	(23,073	)	$	304,589		$	(8,583	)	$	12,752		$	634,089

See accompanying notes to the unaudited Condensed Consolidated financial statements.

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

	Nine Months Ended September 30,
	2010			2009
OPERATING ACTIVITIES:
Net (loss) income	$	(8,606	)	$	10,898
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		62,200			12,100
Depreciation and amortization		4,639			4,559
Intangible amortization		2,653			2,674
Net gain on sale of investments		(2,374	)		(5,548	)
Impairment of investments		88			1,425
Accretion of discount on investments		(1,372	)		(1,621	)
Amortization of premium on investments		422			374
Deferred income taxes		1,942			(2,206	)
Net loss from sales of premises and equipment		280			15
Impairment on other real estate owned		1,080			528
Impairment of goodwill		-			976
Amortization of employee savings and stock ownership plan		2,328			2,032
Increase in bank owned life insurance		(1,107	)		(1,121	)
Stock based compensation expense		2,299			2,336
Purchases of trading securities		(758,148	)		-
Sales of trading securities		789,895			-
Changes in assets and liabilities that provided (used) cash:
Accrued interest receivable		892			(1,721	)
Accrued interest payable		(904	)		(1,218	)
Income tax benefit		(29,697	)		(2,314	)
Other liabilities		(30,718	)		18,080
Other assets		(40,008	)		6,347
Net cash (used in) provided by operating activities		(4,216	)		46,595

INVESTING ACTIVITIES:
Loans originated or acquired		(470,837	)		(780,449	)
Principal repayment on loans		419,413			409,319
Purchases of investment securities available for sale		(946,015	)		(422,083	)
Purchases of investment securities held to maturity		(93,855	)		-
Net purchases of money market fund		2,457			(7,067	)
Proceeds from sales and maturities of investment securities available for sale		826,063			400,719
Proceeds from maturities, calls or repayments of investment securities held to maturity		53,145			23,721
Proceeds from sales of loans		-			37,272
Redemption of Federal Home Loan Bank stock		900			-
Proceeds from sale of other real estate owned		2,475			636
Purchases of premises and equipment		(10,350	)		(5,194	)
Proceeds from sale of premises and equipment		880			28
Net payments related to other investing activities		(442	)		-
Net cash used in investing activities		(216,166	)		(343,098	)

FINANCING ACTIVITIES:
Net decrease in borrowed funds		(86,737	)		(136,438	)
Net increase in checking, savings and demand accounts		429,228			618,060
Net decrease in time deposits		(80,726	)		(77,514	)
Proceeds from stock issuance		13			-
Purchase of treasury stock		(4,987	)		(3,596	)
Net cash provided by financing activities		256,791			400,512

NET INCREASE IN CASH AND CASH EQUIVALENTS		36,409			104,009

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		179,701			44,389

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	216,110		$	148,398

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash payments for interest	$	27,173		$	37,449
Cash payments for income taxes		9,715			6,771
Transfers of loans to other real estate owned		9.695			1,228
Transfers of bank branches to other real estate owned		2,207			1,667

See accompanying notes to the unaudited Condensed Consolidated financial statements.

BENEFICIAL MUTUAL BANCORP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Annual Report on Form 10-K filed by Beneficial Mutual Bancorp, Inc. (the “Company” or “Bancorp”) with the U. S. Securities and Exchange Commission on March 15, 2010. The results for the three and nine month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2010 or any other period.

Principles of Consolidation

The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Specifically, the financial statements include the accounts of Beneficial Mutual Savings Bank, the Company’s wholly owned subsidiary (“Beneficial Bank” or the “Bank”), and the Bank’s wholly owned subsidiaries. The Bank’s wholly owned subsidiaries are as follows: (i) Beneficial Advisors, LLC, which offers non-deposit investment products and wealth management services, (ii) Neumann Corporation, a Delaware corporation formed for the purpose of managing certain investments, (iii) Beneficial Insurance Services, LLC, which provides insurance services to individual and business customers and (iv) BSB Union Corporation, a leasing company. Additionally, the Company has subsidiaries that hold other real estate acquired in foreclosure or transferred from the commercial real estate loan portfolio. All significant intercompany accounts and transactions have been eliminated. The various services and products support each other and are interrelated. Management makes significant operating decisions based upon the analysis of the entire Company and financial performance is evaluated on a company-wide basis. Accordingly, the various financial services and products offered are aggregated into one reportable operating segment: community banking as under guidance in the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC” or “codification”) Topic 720 for Segment Reporting.

As a result of guidance issued in September 2009 on FASB ASC Topic 810 regarding consolidation of variable interest entities, beginning January 1, 2010 the Company deconsolidated two variable interest entities previously consolidated. The impact of this deconsolidation reduced premises and equipment by $14.1 million, increased other assets by $9.1 million and decreased liabilities by $5.0 million. There was no net impact on the Company’s condensed consolidated Statement of Operations.

Use of Estimates in the Preparation of Financial Statements

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

NOTE 2 – NATURE OF OPERATIONS

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

The Bank offers a variety of consumer and commercial banking services to individuals, businesses, and nonprofit organizations through 65 offices throughout the Philadelphia and Southern New Jersey area. The Bank is supervised and regulated by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation (the “FDIC”). The Office of Thrift Supervision (the “OTS”) regulates the Company and the MHC. The Bank’s customer deposits are insured up to applicable legal limits by the Deposit Insurance Fund of the FDIC. Insurance services are offered through Beneficial Insurance Services, LLC and wealth management services are offered through Beneficial Advisors, LLC, both wholly owned subsidiaries of the Bank.

NOTE 3 – EARNINGS PER SHARE

The following table presents a calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009. Earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding less any treasury shares. The difference between common shares issued and basic average shares outstanding, for purposes of calculating basic earnings per share, is a result of subtracting unallocated employee stock ownership plan (“ESOP”) shares and unvested restricted stock shares. See Note 13 for further discussion of stock grants.

(Dollars in thousands, except share and per share amounts)	Three Months Ended September 30,					Nine Months Ended September 30,
	2010			2009		2010			2009
Basic and diluted earnings per share:
Net income	$	(21,730	)	$	5,820	$	(8,606	)	$	10,898
Basic average common shares outstanding		77,541,313			77,651,098		77,721,359			77,695,061
Effect of dilutive securities		-			24,428		-			12,090
Dilutive average shares outstanding		77,541,313			77,675,526		77,721,359			77,707,151
Net earnings per share:
Basic	$	(0.28	)	$	0.07	$	(0.11	)	$	0.14
Diluted	$	(0.28	)	$	0.07	$	(0.11	)	$	0.14

There were 149,509 and 149,095 average shares outstanding for the three and nine month periods ending September 30, 2010, respectively, which were not included in the computation of diluted earnings per share as the result would have been anti-dilutive under the “if converted” method. For the three and nine months ended September 30, 2010, there were 2,028,100 outstanding options and 188,500 and 2,500 restricted stock grants that were anti-dilutive, respectively. For the three months ended September 30, 2009, there were 1,922,750 outstanding options and no restricted stock grants that were anti-dilutive. For the nine months ended September 30, 2009, there were 1,922,750 outstanding options and 699,000 restricted stock grants that were anti-dilutive.

NOTE 4 – INVESTMENT SECURITIES

The amortized cost and estimated fair value of investments in debt and equity securities at September 30, 2010 and December 31, 2009 are as follows.

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

(Dollars in thousands)

	September 30, 2010
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Equity securities	$	3,029	$	84	$	-	$	3,113
U.S. Government Sponsored Enterprise (“GSE”) and Agency Notes		603,381		1,551		146		604,786
GNMA guaranteed mortgage certificates		9,140		264		-		9,404
Collateralized mortgage obligations		102,961		2,605		14		105,552
Other mortgage-backed securities		517,428		32,374		-		549,802
Municipal bonds		123,073		3,562		4		126,631
Pooled trust preferred securities		18,265		5		2,726		15,544
Money market fund		4,203		60		-		4,263
Total	$	1,381,480	$	40,505	$	2,890	$	1,419,095

	December 31, 2009
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Equity securities	$	5,427	$	871	$	236	$	6,062
GSE and Agency Notes		209,135		131		932		208,334
GNMA guaranteed mortgage certificates		10,214		180		-		10,394
Collateralized mortgage obligations		138,857		1,736		285		140,308
Other mortgage-backed securities		680,018		26,857		630		706,245
Municipal bonds		188,980		1,287		310		189,957
Pooled trust preferred securities		21,379		-		2,582		18,797
Money market fund		6,660		349		-		7,009
Total	$	1,260,670	$	31,411	$	4,975	$	1,287,106

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

(Dollars in thousands)
	September 30, 2010

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

GNMA guaranteed mortgage certificates	$	651	$	-	$	28	$	623
Other mortgage-backed securities		33,964		2,261		-		36,225
Municipal bonds		53,667		150		29		53,788
Foreign bonds		500		1		-		501
Total	$	88,782	$	2,412	$	57	$	91,137

	December 31, 2009
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

GNMA guaranteed mortgage certificates	$	685	$	-	$	30	$	655
Other mortgage-backed securities		45,359		1,925		-		47,284
Municipal bonds		1,465		-		52		1,413
Foreign bonds		500		1		-		501
Total	$	48,009	$	1,926	$	82	$	49,853

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

The Company holds certain debt and equity securities having unrealized loss positions as a result of market changes in interest rates and credit spreads. Also, the economic environment and illiquidity in the financial markets since 2008 have increased market yields on certain securities resulting in unrealized losses on certain securities within the Company’s portfolio. The Company reviewed its portfolio for the quarter ended September 30, 2010 for OTTI in accordance with the accounting policies outlined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. As a result, the Company recorded an OTTI loss of $88 thousand related to a $300 thousand equity security that had been in an unrealized loss position for greater than 12 months and for which management had deemed it unlikely that the market value would increase in the near future. For the nine months ended September 30, 2009, the Company recorded an OTTI loss of $1.4 million on equity securities which the Company had intended to sell and were in an unrealized loss position. With respect to debt securities in an unrealized loss position, the Company does not intend to sell, and it is not more likely than not that the Company will be required to sell, these securities in a loss position prior to their anticipated recovery.

The Company records OTTI through earnings based on the credit impairment estimates generally derived from cash flow analyses. The remaining unrealized loss, due to factors other than credit, is recorded in other comprehensive income (“OCI”). The unrealized OTTI loss of $2.7 million in pooled trust preferred securities as of September 30, 2010 securities represent securitizations that have been in an unrealized loss position in prior periods. Based on the analysis of the underlying cash flows of these securities, there is no expectation of credit impairment.

Credit impairment that is determined through the use of cash flow models is estimated using cash flows on security specific collateral and the transaction structure. Future expected credit losses are determined by using various assumptions, the most significant of which include current default rates, prepayment rates, and loss severities. For the majority of the securities that the Company has reviewed for OTTI, credit information is available and modeled at the loan level underlying each security. These inputs are updated on a regular basis to ensure the most current credit and other assumptions are utilized in the analysis. If, based on this analysis, the Company does not expect to recover the entire amortized cost basis of the security, the expected cash flows are then discounted at the security’s initial effective interest rate to arrive at a present value amount. OTTI credit losses reflect the difference between the present value of cash flows expected to be collected and the amortized cost basis of these securities.

The following table presents a summary of the significant inputs used in determining the measurement of credit losses recognized in earnings for pooled trust preferred securities for the nine months ended September 30, 2010:


	Nine Months Ended September 30, 2010
Current default rate		3.6	%
Prepayment rate		0.0	%
Loss severity		100	%

One pooled trust preferred security, Trapeza 2003-4A Class A1A, was rated Aa3 by Moody’s and BB+ by Standard & Poor’s, which represents a rating of below investment grade. The Company evaluated the potential impact of this downgrade and concluded that there would be no material impact to the book value of the security which at September 30, 2010, totaled $9.9 million and the fair value totaled $8.7 million, representing an unrealized loss of $1.2 million, or 12.2%. At September 30, 2010, there were a total of 35 banks currently performing of the 43 remaining banks in the security pool. A total of 16.2%, or $58.0 million, of the current collateral of $358.6 million has defaulted and 6.7%, or $24.0 million, of the current collateral has deferred. Utilizing a cash flow analysis model in analyzing this security, an assumption of 0% recovery of current deferrals and defaults and additional defaults of 3.60% of outstanding collateral, every three years beginning in November 2010, with a 0% recovery, was modeled and resulted in no cash flow shortfalls to our tranche. This represents the assumption of an additional 24.9% of defaults from the remaining performing collateral of $276.6 million. Excess subordination for the Trapeza 2003-4A Class A1A security represents 64.5% of the remaining performing collateral. The excess subordination of 64.5% is calculated by taking the remaining performing collateral of $276.6 million, subtracting the Class A-1 or senior tranche balance of $98.3 million and dividing this result, $178.3 million, by the remaining performing collateral. This excess subordination represents the additional collateral supporting our tranche.

The remaining pooled trust preferred security, US Capital Fund III Class A-1, is rated Baa2 by Moody’s and CCC- by Standard & Poor’s, which represents a rating of below investment grade. At September 30, 2010, the book value of the security totaled $7.7 million and the fair value totaled $6.2 million, representing an unrealized loss of $1.5 million, or 19.7%. At September 30, 2010, there were a total of 35 banks currently performing of the 44 remaining banks in the security pool. A total of 15.2%, or $33.0 million, of the current collateral of $216.7 million has defaulted and 5.2%, or $11.2 million, of the current collateral has deferred. Utilizing a cash flow analysis model in analyzing this security, an assumption of 0% recovery of current deferrals and additional defaults of 3.60% of outstanding collateral, every three years beginning in December 2010, with a 0% recovery, was modeled and resulted in no cash flow shortfalls to our tranche. This represents the assumption of an additional 25.8% of defaults from the remaining performing collateral of $172.5 million. Excess subordination for the US Capital Fund III A-1 security represents 47.5% of the remaining performing collateral. The excess subordination of 47.5% is calculated by taking the remaining performing collateral of $172.5 million, subtracting the Class A-1 or senior tranche balance of $90.6 million and dividing this result, $81.9 million, by the remaining performing collateral. This excess subordination represents the additional collateral supporting our tranche.

The following table provides information on the gross unrealized losses and fair market value of the Company’s investments with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2010 and December 31, 2009:

(Dollars in thousands)

	September 30, 2010
	Less than 12 months				12 months or longer				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

GSE and Agency Notes	$	74,949	$	146	$	-	$	-	$	74,949	$	146
Other mortgage-backed securities		-		-		623		28		623		28
Municipal and other bonds		31,822		33		-		-		31,822		33
Pooled trust preferred securities		-		-		14,869		2,726		14,869		2,726
Collateralized mortgage obligations		2,584		7		198		7		2,782		14
Subtotal, debt securities		109,355		186		15,690		2,761		125,045		2,947
Equity securities		-		-		-		-		-		-
Total temporarily impaired securities	$	109,355	$	186	$	15,690	$	2,761	$	125,045	$	2,947

	December 31, 2009
	Less than 12 months				12 months or longer				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

GSE and Agency Notes	$	154,110	$	932	$	-	$	-	$	154,110	$	932
Other mortgage-backed securities		82,220		630		655		30		82,875		660
Municipal and other bonds		72,166		356		494		6		72,660		362
Pooled trust preferred securities		-		-		18,797		2,582		18,797		2,582
Collateralized mortgage obligations		40,977		232		8,824		53		49,801		285
Subtotal, debt securities		349,473		2,150		28,770		2,671		378,243		4,821
Equity securities		2,264		236		-		-		2,264		236
Total temporarily impaired securities	$	351,737	$	2,386	$	28,770	$	2,671	$	380,507	$	5,057

The following table sets forth the stated maturities of the investment securities at September 30, 2010 and December 31, 2009. Mutual funds, money market funds and equity securities are not included in the table based on lack of maturity.

	September 30, 2010				December 31, 2009
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available for sale:
Due in one year or less	$	18,766	$	18,792	$	80,560	$	80,685
Due after one year through five years		221,565		222,714		28,684		29,029
Due after five years through ten years		476,526		480,142		295,932		296,355
Due after ten years		130,823		130,865		153,175		151,326
Mortgage-backed securities		526,568		559,206		690,232		716,640
Total	$	1,374,248	$	1,411,719	$	1,248,583	$	1,274,035
Held to maturity:
Due in one year or less	$	52,327	$	52,365	$	135	$	134
Due after one year through five years		1,090		1,112		960		945
Due after five years through ten years		625		674		615		591
Due after ten years		125		138		255		244
Mortgage-backed securities		34,615		36,848		46,044		47,939
Total	$	88,782	$	91,137	$	48,009	$	49,853

At September 30, 2010 and December 31, 2009, $751.1 million and $567.7 million, respectively, of securities were pledged to secure municipal deposits. As of September 30, 2010 and December 31, 2009, the Company had $242.0 million and $275.5 million, respectively, of securities pledged as collateral on secured borrowings. At September 30, 2010 and December 31, 2009, the Company also pledged $3.7 million and $4.6 million, respectively, of securities to secure its borrowing capacity at the Federal Reserve Bank of Philadelphia.

At September 30, 2010 and December 31, 2009, the Company held stock in the FHLB of Pittsburgh and New York totaling $27.2 million and $28.1 million, respectively. The Company accounts for the stock based on guidance which requires that the investment be carried at cost and be evaluated for impairment based on the ultimate recoverability of the par value. The Company evaluated its holdings in FHLB stock at September 30, 2010 and believes its holdings in the stock are ultimately recoverable at par. In addition, the Company does not have operational or liquidity needs that would require a redemption of the stock in the foreseeable future and therefore determined that the stock was not other-than-temporarily impaired.

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 September 30, 2010 and December 31, 2009 are summarized as follows:

(Dollars in thousands)
	September 30, 2010			December 31, 2009
Real estate loans:
One-to-four family	$	666,574		$	647,687
Commercial real estate		862,398			780,328
Residential construction		12,545			11,938
Total real estate loans		1,541,517			1,439,953

Commercial business loans		442,300			523,033

Consumer loans:
Home equity loans and lines of credit		287,188			314,468
Auto loans		144,453			143,503
Education loans		254,673			257,021
Other consumer loans		98,622			112,141
Total consumer loans		784,936			827,133
Total loans		2,768,753			2,790,119

Allowance for loan losses		(44,959	)		(45,855	)
Loans, net	$	2,723,794		$	2,744,264

During the quarter ended September 30, 2010, the Company saw considerable deterioration in the value of the collateral securing a number of large collateral dependent commercial real estate loans. Additionally, the Company has seen a pronounced slowdown in the commercial real estate market limiting traditional refinance and repayment sources. The Company now believes the recovery for commercial real estate in its market area will take longer than previously anticipated causing continued downward pressure on property valuations. As a result, during the quarter ended September 30, 2010 the Company recorded a provision for loan losses of $51.1 million. The provision was due to specific reserves required for $122.0 million of commercial real estate loans that the Company had previously designated as criticized loans (loans classified special mention, substandard, doubtful or loss). During the quarter ended September 30, 2010, the Company also recorded a partial charge-off of the collateral deficiency which totaled $56.1 million on criticized loans that were determined by management to be collateral dependent.

The activity in the allowance for loan losses for the nine months ended September 30, 2010 and 2009 and the year ended December 31, 2009, is as follows:

(Dollars in thousands)
	September 30,						December 31,
	2010			2009			2009
Balance, beginning of year	$	45,855		$	36,905		$	36,905
Provision for loan losses		62,200			12,100			15,697
Charge-offs		(63,732	)		(6,981	)		(7,703	)
Recoveries		636			718			956
Balance, end of period	$	44,959		$	42,742		$	45,855

The Company has performed an analysis of the entire loan portfolio to determine the required allowance for loan losses which includes segmenting the portfolio by loan type, determining the risks of each loan type, reviewing trends such as collateral deficiency, loss, delinquency, volume and concentration of credit as well as considering national and local trends. The Company identifies and evaluates all impaired loans in accordance with FASB ASC Topic 310 for Loans and Debt Securities. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. Impairment losses are included in the provision for loan losses. Large groups of homogeneous loans are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring. Loans collectively evaluated for impairment include personal loans and most residential mortgage loans, and are not included in the following data.

Components of Impaired Loans

(Dollars in thousands)

	September 30, 2010		December 31, 2009
Impaired loans with a specific related allowance for loan losses	$	1,765	$	30,473
Impaired loans with no specific related allowance for loan losses		87,374		41,414
Total impaired loans		89,139	$	71,887

Specific valuation allowance related to impaired loans	$	507	$	15,878

Analysis of Impaired Loans

(Dollars in thousands)

	For the Nine Months Ended September 30,
	2010		2009
Average impaired loans	$	77,005	$	48,292
Interest income recognized on impaired loans		6		231
Cash basis interest income recognized on impaired loans		866		27

The increase in impaired loans of $17.3 million to $89.1 million at September 30, 2010 from $71.8 million at December 31, 2009 is due to deterioration in the commercial real estate portfolio. In many cases, borrowers have been unable to lease properties servicing commercial loans. Development of land acquired for commercial development and other commercial construction has also slowed.

The Company pledges securities and loans to secure its borrowings at the Federal Reserve Bank of Philadelphia. At September 30, 2010 and December 31, 2009, loans in the amount of $646.2 million and $682.0 million, respectively, were pledged to secure the Company’s borrowing capacity at the Federal Reserve Bank of Philadelphia.

NOTE 6 – GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangible assets arising from the acquisition of CLA Agency, Inc., FMS Financial Corporation, and Paul Hertel & Company were accounted for in accordance with guidance from FASB ASC Topic 350 regarding Goodwill and Intangible Assets. As required under the guidance, goodwill is not amortized but rather is reviewed for impairment at least annually. This annual assessment will be completed during the fourth quarter of 2010. The other intangibles are amortizing intangibles, which primarily consist of a core deposit intangible which is amortized over an estimated useful life of ten years. As of September 30, 2010, the core deposit intangible net of accumulated amortization totaled $11.6 million. The other amortizing intangibles, which include customer lists and other intangibles, vary in estimated useful lives from 2-13 years. The weighted average lives for core deposit intangibles, customer lists, trademarks and agreements not to compete are 11.0 years, 11.6 years, 2.6 years and 3.5 years, respectively.

Overall economic conditions and increased competition significantly impacted the financial results of the insurance brokerage business during 2009. As a result, during the third quarter of 2009, the Company conducted an impairment evaluation of goodwill specifically related to the insurance brokerage business and recorded an impairment charge of $1.0 million. The Company determined the fair value of the insurance brokerage business based upon a combination of the guideline public company technique, the precedent transaction technique and the discounted cash flow technique. No goodwill impairment indicators were noted during the nine months ended September 30, 2010 for the insurance brokerage business. We will complete our annual goodwill impairment assessment in the fourth quarter of 2010. Goodwill and other intangibles at September 30, 2010 and December 31, 2009 are summarized as follows:

(Dollars in thousands)

	Goodwill		Core Deposit Intangible			Customer Relationships and other
Balances at December 31, 2009	$	110,486	$	13,577		$	6,853
Amortization		-		(1,954	)		(699	)
Balances at September 30, 2010	$	110,486	$	11,623		$	6,154

The following table summarizes intangible assets at September 30, 2010 and December 31, 2009.

	September 30, 2010							December 31, 2009
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Amortizing Intangibles:
Core deposits	$	23,215	$	(11,592	)	$	11,623	$	23,215	$	(9,638	)	$	13,577
Customer relationships and other		10,251		(4,097	)		6,154		10,251		(3,398	)		6,853
Total Amortizing	$	33,466	$	(15,689	)	$	17,777	$	33,466	$	(13,036	)	$	20,430

NOTE 7 – DEPOSITS

Deposits at September 30, 2010 and December 31, 2009 are summarized as follows:

(Dollars in thousands)

	September 30,		December 31,
	2010		2009
Non-interest bearing deposits	$	292,159	$	242,412
Interest earning checking accounts		1,422,793		1,122,515
Money market accounts		611,778		665,757
Savings accounts		665,828		532,511
Total core deposits		2,992,558		2,563,195
Time deposits		865,745		946,052
Total deposits	$	3,858,303	$	3,509,247

At September 30, 2010 and December 31, 2009, $1.1 billion and $821.3 million, respectively, of total deposits were municipal deposits consisting primarily of interest-earning checking accounts.

NOTE 8 – BORROWED FUNDS

Borrowed funds at September 30, 2010 and December 31, 2009 are summarized as follows:

(Dollars in thousands)

	September 30, 2010		December 31, 2009
FHLB advances	$	113,000	$	169,750
Repurchase agreements		205,000		235,000
Statutory trust debenture		25,313		25,299
Other		-		3,571
Total borrowed funds	$	343,313	$	433,620

NOTE 9 – 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 September 30, 2010 and December 31, 2009, the Bank met all capital adequacy requirements to which it was subject. As of September 30, 2010 and December 31, 2009, the Bank is considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events that management believes have changed the Bank’s categorization since the most recent notification from the FDIC. The Bank’s actual capital amounts and ratios (under rules established by the FDIC) are presented in the following table:

(Dollars in thousands)

											To Be Well Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Capital Amount		Ratio			Capital Amount		Ratio			Capital Amount		Ratio

As of September 30, 2010:
Tier 1 Capital (to average assets)	$	439,152		9.26	%	$	142,300		3.00	%	$	237,000		5.00	%
Tier 1 Capital (to risk weighted assets)		439,152		16.20	%	$	108,400		4.00	%	$	162,600		6.00	%
Total Capital (to risk weighted assets)		473,214		17.46	%	$	216,800		8.00	%	$	271,100		10.00	%

As of December 31, 2009:
Tier 1 Capital (to average assets)	$	439,865		9.81	%	$	134,500		3.00	%	$	224,200		5.00	%
Tier 1 Capital (to risk weighted assets)		439,865		16.71	%	$	105,300		4.00	%	$	157,900		6.00	%
Total Capital (to risk weighted assets)		473,090		17.98	%	$	210,500		8.00	%	$	263,200		10.00	%

NOTE 10 – INCOME TAXES

For the nine months ended September 30, 2010, the Company recorded an income tax benefit of $18.1 million, for an effective tax rate of 67.7%, compared to an income tax expense of $1.5 million, for an effective tax rate of 12.0% for the same period in 2009. The difference was due to a decrease in income before income taxes of $39.1 million, to a loss of $26.7 million, for the nine months ended September 30, 2010, from income before income taxes of $12.4 million for the nine months ended September 30, 2009. The primary driver of the decrease in income before income taxes was the provision for loan losses of $51.1 million recorded during the quarter ended September 30, 2010. In addition, increases in average tax exempt securities and loans of $79.9 million for the nine months ended September 30, 2010 added to the overall change in the effective income tax rate.

The income tax rates differ from the statutory rate of 35% principally because of tax-exempt investments, non-taxable income related to bank-owned life insurance, state and local income taxes and tax credits received on affordable housing partnerships. Tax-exempt income, state and local income taxes and federal income tax credits reduced the effective tax rates by (11.00%), (7.20%) and (12.30%) in the effective income tax rate calculation for 2010, respectively, and (9.52%), 2.43%, and (13.11%) for 2009, respectively.

Pursuant to accounting guidance, the Company is not required to provide deferred taxes on its tax loan loss reserve as of December 31, 1987. The amount of this reserve on which no deferred taxes have been provided is approximately $2.3 million. This reserve could be recognized as taxable income and create a current and/or deferred tax liability using the income tax rates then in effect if one of the following occur: (1) the Company’s retained earnings represented by this reserve are used for distributions in liquidation or for any other purpose other than to absorb losses from bad debts; (2) the Company fails to qualify as a “bank,” as such term is defined under the Internal Revenue Code; or (3) there is a change in federal tax law.

NOTE 11 – PENSION AND POSTRETIREMENT BENEFIT PLANS

The Bank has noncontributory defined benefit pension plans (“Plans”) covering most of its employees. Additionally, the Company sponsors nonqualified supplemental employee retirement plans for certain participants.

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

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

The components of net pension cost are as follows:

(Dollars in thousands)

	Pension Benefits						Other Postretirement Benefits
	Three Months Ended September 30,						Three Months Ended September 30,
	2010			2009			2010			2009
Service cost	$	-		$	-		$	53		$	42
Interest cost		965			932			332			374
Expected return on assets		(928	)		(768	)		-			-
Amortization of loss (gain)		215			195			(2	)		4
Amortization of prior service cost		-			-			47			37
Amortization of transition obligation		-			-			41			41
Net periodic pension cost	$	252		$	359		$	471		$	498

	Pension Benefits						Other Postretirement Benefits
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Service cost	$	-		$	-		$	160		$	128
Interest cost		2,894			2,795			997			1,121
Expected return on assets		(2,782	)		(2,303	)		-			-
Amortization of loss		644			586			(6	)		11
Amortization of prior service cost		-			-			140			110
Amortization of transition obligation		-			-			123			123
Net periodic pension cost	$	756		$	1,078		$	1,414		$	1,493

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

NOTE 12 – EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN (“KSOP”)

In connection with the Company’s initial public offering, the Bank implemented the ESOP, which provides retirement benefits for substantially all full-time employees who were employed at the date of the initial public offering and are at least 21 years of age. Other salaried employees will be eligible after they have completed 1 year of service and have attained the age of 21. The Bank 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 purchased by 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. As of July 1, 2008, the ESOP was merged with the Bank’s 401(k) plans to form the Employee Savings and Stock Ownership Plan (“KSOP”). The Company accounts for the KSOP based on guidance from FASB ASC Topic 718 for Compensation – Stock Compensation. Shares are released as the loan is repaid.

The balance of the loan to the KSOP as of September 30, 2010 was $25.6 million compared to $28.2 million at September 30, 2009.

All full time employees and certain part time employees are eligible to participate in the KSOP if they meet service criteria. Shares will be allocated and released based on the Bank’s 401(k) Plan Document. While the KSOP is one plan, the two separate components of the 401(k) Plan and the ESOP remain. Under the KSOP the company makes basic contributions and matching contributions. The Bank makes additional contributions for certain employees based on age and years of service. The Bank may also make discretionary contributions under the KSOP. Each participants account is credited with shares of the Company’s stock or cash based on compensation earned during the year in which the contribution was made.

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 which has not been allocated to the account of a participant can be used to repay the loan. Allocation of shares to the participants is contingent upon the repayment of a loan to the Company. The Company recorded an expense of approximately $0.9 million and $2.7 million for the three and nine month periods ended September 30, 2010, respectively, and an expense of approximately $0.8 million and $2.4 million for the three and nine month periods ended September 30, 2009, respectively, associated with the KSOP.

NOTE 13 – STOCK BASED COMPENSATION

Stock-based compensation is accounted for in accordance with FASB ASC 718 “Compensation-Stock Compensation.” The Company establishes fair value for its equity awards to determine their cost. The Company recognizes the related expense for employees over the appropriate vesting period, or when applicable, service period, using the straight-line method. However, consistent with the guidance, the amount of stock-based compensation recognized at any date must at least equal the portion of the grant date value of the award that is vested at that date. As a result, it may be necessary to recognize the expense using a ratable method.

The Company’s 2008 Equity Incentive Plan (“EIP”) authorizes the issuance of shares of common stock pursuant to awards that may be granted in the form of stock options to purchase common stock (“options”) and awards of shares of common stock (“stock awards”). The purpose of the Company’s stock-based incentive plans is to attract and retain personnel for positions of substantial responsibility and to provide additional incentive to certain officers, directors and employees. In order to fund grants of stock awards under the EIP, the Equity Incentive Plan Trust (the “Trust”) purchased 1,612,386 shares of Company common stock in the open market for approximately $19.0 million during the year ended December 31, 2008. The Company made sufficient contributions to the Trust to fund the stock purchases. The acquisition of these shares by the Trust reduced the Company’s outstanding additional paid in capital. The EIP shares will generally vest at a rate of 20% over five years. As of September 30, 2010, 130,000 shares were fully vested and 82,500 shares were forfeited. All grants that were issued contain a service condition in order for the shares to vest. Awards of common stock include awards to certain officers of the Company that will vest only if certain specified performance requirements are met during a specific performance measurement period.

Compensation expense related to the stock awards is recognized ratably over the five-year vesting period in an amount which totals the market price of the Company’s stock at the grant date. The expense recognized for the three and nine month periods ended September 30, 2010 was $0.5 million and $1.3 million, respectively, compared to $0.5 million and $1.4 million for the three and nine month periods ending September 30, 2009, respectively.

The following table summarizes the non-vested stock award activity for the nine months ended September 30, 2010.

(Dollars in thousands)
Summary of Non-vested Stock Award Activity	Number of Shares			Weighted Average Grant Price

Non-vested Stock Awards outstanding, January 1, 2010		836,500		$	11.28
Issued		153,000			9.70
Vested		(68,000	)		11.55
Forfeited		(82,500	)		11.00
Non-vested Stock Awards outstanding, September 30, 2010		839,000		$	11.00

The fair value of the 68,000 shares vested during the nine months ended September 30, 2010 was $0.7 million. There were 62,000 shares vested for the three months ended September 30, 2010 and 2009.

The EIP authorizes the grant of options to officers, employees, and directors of the company to acquire shares of common stock with an exercise price equal to the fair value of the common stock at the grant date. Options expire ten years after the date of grant, unless terminated earlier under the option terms. Options are granted at the then fair market value of the Company’s stock. The options were valued using the Black-Scholes option pricing model. During the nine months ended September 30, 2010, the Company granted 279,100 options compared to 230,250 during the nine months ended September 30, 2009. All options issued contain service conditions based on the participant’s continued service. The options generally vest and are exercisable at the rate of 20% a year over five years. For the three and nine months ended September 30, 2010 the compensation expense for options was $0.4 million and $1.0 million, respectively, compared to $0.3 million and $0.9 million for the three and nine months ended September 30, 2009, respectively. A summary of option activity as of September 30, 2010 and changes during the nine month period is presented below:

	Number of Options			Weighted Average Price per Shares

January 1, 2010		1,922,250		$	11.44
Granted		279,100			9.70
Exercised		(1,500	)		8.35
Forfeited		(141,650	)		11.33
Expired		(27,800	)		9.66
September 30, 2010		2,030,400		$	11.21

The weighted average remaining contractual term was approximately 8.12 years for options outstanding as of September 30, 2010. There were 673,850 shares and 338,500 shares exercisable at September 30, 2010 and 2009, respectively.

Significant weighted average assumptions used to calculate the fair value of the options for the nine months ended September 30, 2010 and September 30, 2009 are as follows.

	For the Nine Months Ended			For the Nine Months Ended
	September 30, 2010			September 30, 2009
Weighted average fair value of options granted	$	3.56		$	2.95
Weighted average risk-free rate of return		2.98	%		2.39	%
Weighted average expected option life in months		78			78
Weighted average expected volatility		29.86	%		29.80	%
Expected dividends	$	-		$	-

The risk-free rate of return is based on the U.S. Treasury yield curve in effect at the time of grant.

The expected volatility was determined using historical volatilities based on historical stock prices. The Company used the simplified method for determining the expected life for options as allowed under accounting guidance on Stock Compensation. As of September 30, 2010, there was $4.2 million of total unrecognized compensation cost related to options and $7.0 million in unrecognized compensation cost related to non-vested stock awards, granted under the EIP. As of September 30, 2009, there was $5.0 million in unrecognized compensation cost related to options and $8.1 million in unrecognized compensation cost related to non-vested stock awards, granted under the EIP. The average weighted lives for the option expense were 3.2 years and 4.2 years for nine months ended September 30, 2010 and September 30, 2009, respectively. The average weighted lives for the stock award expense was 3.3 years and 3.9 years as of September 30, 2010 and September 30, 2009, respectively.

NOTE 14 – COMMITMENTS AND CONTINGENCIES

Outstanding loan commitments totaled $385.7 million at September 30, 2010, as compared to $268.6 million as of December 31, 2009. 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.

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 and cashflows.

NOTE 15 – RECENT ACCOUNTING PRONOUNCEMENTS

In August 2010, the FASB issued Accounting Standards Update (ASU) 2010-21 “Accounting for Technical Amendments to Various SEC Rules and Schedules” (SEC Update). These are amendments to SEC Paragraphs pursuant to release No. 33-9026: Technical Amendments to Rules, Forms, Schedules, Codification of Financial Reporting Policies. The changes are immaterial and have no significant impact on the actual guidance or to the Company.

In July 2010, the FASB issued ASU 2010-20 “Receivables” (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the allowance for Credit Losses.” As a result of this update the financial statements will provide greater transparency about the entity’s allowance for credit losses and the credit quality of its financing receivables. This update affects any entity with financing receivables, excluding short term trade accounts receivable or receivables measured at fair value or lower of cost or fair value. Traditional banking institutions, such as the Bank, that currently measure a large number of financing receivables at amortized cost will be affected to a greater extent than brokers and dealers in securities and investment companies that currently measure most financing receivables at fair value. This guidance will impact the Bank’s interim and annual reporting, as this amendment will be effective for reporting periods ending on or after December 15, 2010.

In April 2010, the FASB issued Accounting Standards Update (ASU) 2010-18 “Receivables” (Topic 310): Effect of a Loan Modification When the Loan is Part of a Pool That Is Accounted for as a Single Asset.” This update affects any entity that accounts for loans with similar risk characteristics as an aggregate pool and subsequently modifies one or more of these loans. This pending change addresses loans that were acquired with deteriorated credit. The amendment states that modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool. Even if the modification would otherwise cause a loan to be a trouble debt restructuring, the loans would not be removed from the pool. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. This amendment will be effective for interim and annual periods ending on or after July 15, 2010. This guidance will not impact the Company’s current loan portfolio but, may be applicable for future business acquisitions of the Company.

In February 2010, the FASB issued Accounting Standards Update (ASU) 2010-09 “Subsequent Events” (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.” This update requires SEC filers to evaluate subsequent events through the date the financial statements are issued. These amendments remove the requirement for a SEC filer to disclose the evaluation date in both issued and revised financial statements. Revised financial statements are a result of correction of an error or a retrospective application of GAAP. Upon revising its financial statements, a filer is required to review subsequent events through the revised date. This amendment is effective for interim or annual periods ending after September 15, 2010. The Company has adopted the new guidance.

In January 2010, the FASB issued ASU 2010-06 “Fair Value Measurements and Disclosures (topic 958): Improving Disclosures about Fair Value Measurements”. This amendment requires disclosures for transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amount of significant transfers in and out of Level 1 and 2 fair value measurements and describe the reasons for the transfers. Additionally, for the activity in Level 3 fair value measurements, a reporting entity should present separately information about purchases, sales, issuance and settlements on a gross basis rather than on a net number. The guidance clarifies existing disclosures for level of disaggregation. The guidance requires fair value measurement disclosures for each class of assets and liabilities. Additionally, the guidance requires disclosures about inputs and valuation techniques. The majority of the new requirements are effective for interim and annual reporting periods for years beginning after December 15, 2009. The disclosures regarding the roll forward of activity for Level 3 fair value measurements are effective for fiscal years beginning on or after December 15, 2010. The Company adopted the required disclosures during the quarter ended March 31, 2010. See Note 16 – Fair Value of Financial Instruments.

In August 2009, the FASB issued ASU No. 2009-05 “Fair Value Measurement and Disclosures (Topic 820) “Measuring Liabilities at Fair Value.” ASU No. 2009-05 provides clarification and guidance regarding how to value a liability when a quoted price in an active market is not available for that liability. The changes as a result of this update are effective for the first reporting period (including interim periods) beginning after issuance. The Company adopted this ASU in its disclosures containing the fair value of financial liabilities. See Note 16 – Fair Value of Financial Instruments.

NOTE 16 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company adopted authoritative guidance under FASB ASC Topic 820 for Fair Value Measurements and Disclosures which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The authoritative guidance does not require any new fair value measurements. The definition of fair value retains the exchange price notion in earlier definitions of fair value. The guidance 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). The guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement.

Fair value is based on quoted market prices, when available. If listed prices or quotes are not available, fair value is based on fair value models that use market participant or independently sourced market data which include: discount rate, interest rate yield curves, credit risk, default rates and expected cash flow assumptions. In addition, valuation adjustments may be made in the determination of fair value. These fair value adjustments may include amounts to reflect counter party credit quality, creditworthiness, liquidity and other unobservable inputs that are applied consistently over time. These adjustments are estimated and, therefore, subject to significant management judgment, and at times, may be necessary to mitigate the possibility of error or revision in the model-based estimate of the fair value provided by the model. The methods described above may produce fair value calculations that may not be indicative of the net realizable value. While the Company believes its valuation methods are consistent with other financial institutions, the use of different methods or assumptions to determine fair values could result in different estimates of fair value.

FASB ASC Topic 820 for Fair Value Measurements and Disclosures 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 1 assets and liabilities include debt, equity securities and derivative contracts that are traded in an active exchange market as well as certain U.S. Treasury securities that are highly liquid and actively traded in over-the-counter markets.
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 2 assets and liabilities include debt securities with quoted market prices that are traded less frequently than exchange traded assets and liabilities. The values of these items are determined using pricing models with inputs observable in the market or can be corroborated from observable market data. This category generally includes U.S. Government and agency mortgage-backed debt securities, corporate debt securities and derivative contracts.
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.

At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities will be transferred within hierarchy levels as a result of changes in valuation methodologies used. In accordance with FASB ASU 2010-06, the Company discloses significant transfers between levels and describes the reason for the transfer. Transfers will be completed at the end of the quarter in which the input for fair measurement changes. There were no transfers between levels during the nine months ended September 30, 2010.

In addition, the authoritative guidance 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, SBA servicing assets, restricted equity investments and loans transferred to other real estate owned at fair value on a non-recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with guidance under FASB ASC Topic 310 for Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with authoritative guidance, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as a non-recurring Level 3 valuation.

Those assets which will continue to be measured at fair value on a recurring basis at September 30, 2010 and December 31, 2009 are as follows:

(Dollars in thousands)

	Category Used for Fair Value Measurement As of September 30, 2010
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available for sale:
U.S. GSE and agency notes			$	604,786			$	604,786
GNMA guaranteed mortgage certificates				9,404				9,404
Collateralized mortgage obligations (“CMOs”)
Government (GNMA) guaranteed CMOs				8,682				8,682
Agency CMOs				33,378				33,378
Non-agency CMOs				63,492				63,492
Other mortgage-backed securities				549,802				549,802
Municipal bonds
General obligation municipal bonds				106,760				106,760
Revenue municipal bonds				19,871				19,871
Mutual funds (large blend)				1,804				1,804
Pooled trust preferred securities (financial industry)					$	15,544		15,544
Equity securities (financial industry)	$	3,113						3,113
Money market funds		2,146						2,146
Certificates of deposit		313						313
Total	$	5,572	$	1,397,979	$	15,544	$	1,419,095

	Category Used for Fair Value Measurement As of December 31, 2009
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Trading securities			$	39,739			$	39,739
Investment securities available for sale:
U.S. Government Sponsored Enterprise (“GSE”) and agency notes				208,334				208,334
GNMA guaranteed mortgage certificates				10,394				10,394
Collateralized mortgage obligations				140,308				140,308
Other mortgage-backed securities				706,245				706,245
Municipal bonds				189,957				189,957
Pooled trust preferred securities					$	18,797		18,797
Equity securities	$	6,062						6,062
Money market funds				5,085				5,085
Mutual funds				1,627				1,627
Certificates of deposits		297						297
Total	$	6,359	$	1,301,689	$	18,797	$	1,326,845

Level 1 Valuation Techniques and Inputs

Included in this category are equity securities, money market funds and certificates of deposit. To estimate the fair value of these securities, the Company utilizes observable quotations for the indicated security.

Level 2 Valuation Techniques and Inputs

The majority of the Company’s investment securities are reported at fair value utilizing Level 2 inputs. Prices of these securities are obtained through independent, third-party pricing services. Prices obtained through these sources include market derived quotations and matrix pricing and may include both observable and unobservable inputs. Fair market values take into consideration data such as dealer quotes, new issue pricing, trade prices for similar issues, prepayment estimates, cash flows, market credit spreads and other factors. The Company reviews the output from the third-party providers for reasonableness by the pricing consistency among securities with similar characteristics, where available, and comparing values with other pricing sources available to the Company. In general, the Level 2 valuation process uses the following significant inputs in determining the fair value of our different classes of investments:

GSE and Agency Notes. To estimate the fair value of these securities, the Company utilizes an industry standard pricing service. For pricing evaluations, an Option Adjusted Spread (OAS) model is incorporated to adjust spreads of issues that have early redemption features.

GNMA Guaranteed Mortgage Certificates. To estimate the fair value of the securities, the Company utilizes an industry standard pricing service. Pricing evaluations are based on issuer type, coupon, maturity, and original weighted average maturity. The pricing service’s seasoned evaluation model runs a daily cash flow incorporating projected prepayment speeds to generate an average file for each pool. The appropriate spread is applied to the point on the Treasury curve that is equal to the average life of any given pool. This is the yield by which the cash flows are discounted. Additionally, for adjustable rate mortgages, the model takes into account indices, margin, periodic and life caps, reset dates of the coupon and the convertibility of the bond.

GNMA Collateralized Mortgage Obligations. To estimate the fair value of the securities, the Company utilizes an industry standard pricing service. For pricing evaluations, the pricing service obtains and applies available trade information, dealer quotes, market color, spreads, bids, offers, prepayment information, U.S. Treasury curves, swap curves and to be announced forward contract on MBS’s values (TBA).

Agency CMOs. To estimate the fair value of the securities, the Company utilizes an industry standard pricing service. For pricing evaluations, the pricing service, in general, obtains and applies available trade information, dealer quotes, market color, spreads, bids, offers, prepayment information, U.S. Treasury curves, swap curves and TBA values. For CMOs, depending upon the characteristics of a given tranche, a volatility-driven, multi-dimensional single cash flow stream model or option-adjusted spread (OAS) model is used.

Non-Agency (whole loan) CMOs. Included in this category are pass-through certificates, 15-year sequentials and senior support pass-through certificates. To estimate the fair value of the securities, the Company utilizes a brokers’ approach to pricing which is cognizant of the current whole loan CMO market environment.

Other Residential Mortgage-backed Securities. Included in this category are Fannie Mae and Freddie Mac fixed rate residential mortgage backed securities and Fannie Mae and Freddie Mac Adjustable Rate residential mortgage backed securities. To estimate the fair value of the securities, the Company utilizes an industry standard pricing service. Pricing evaluations are based on issuer type, coupon, maturity, and original weighted average maturity. The pricing service’s seasoned evaluation model runs a daily cash flow incorporating projected prepayment speeds to generate an average life for each pool. The appropriate spread is applied to the point on the Treasury curve that is equal to the average life of any given pool. This is the yield by which the cash flows are discounted. Additionally, for adjustable rate mortgages, the model takes into account indices, margin, periodic and life caps, reset dates of the coupon and the convertibility of the bond.

General Obligation Municipal Bonds. Included in this category are short term municipal anticipation notes which mature within one year. To estimate fair value of the short term municipal anticipation notes, these securities are priced based off of a similar yield curve. Also Included in this category are securities issued by Pennsylvania municipalities and/or school districts rated A or better by Moody’s and/or S&P and securities issued by a Pennsylvania school district which is rated Baa1. To estimate the fair value of these securities, the Company utilizes an industry standard pricing service. For pricing, the pricing service’s evaluators build internal yield curves, which are adjusted throughout the day based on trades and other pertinent market information. Evaluators apply this information to bond sectors, and individual bond evaluations are then extrapolated. Within a given sector, evaluators have the ability to make daily spread adjustments for various attributes that include, but are not limited to, discounts, premiums, credit, alternative minimum tax (AMT), use of proceeds, and callability.

Revenue Municipal Bonds. These securities are issued by the Pennsylvania Housing Finance Agency and rated Aa2 by Moody’s. To estimate the fair value of the securities, the Company utilizes an industry standard pricing service. For pricing, the pricing service’s evaluators build internal yield curves, which are adjusted throughout the day based on trades and other pertinent market information. Evaluators apply this information to bond sectors, and individual bond evaluations are then extrapolated. Within a given sector, evaluators have the ability to make daily spread adjustments for various attributes that include, but are not limited to, discounts, premiums, credit, alternative minimum tax (AMT), use of proceeds, and callability.

Mutual Funds. To estimate the fair value of these funds, the value is priced using the closing NAV available on Bloomberg.

Level 3 Valuation Techniques and Inputs

The Bank’s Level 3 assets are comprised of pooled trust preferred securities whose underlying collateral consists of financial services debt. These investments are thinly traded and the Company determines the estimated fair values for these securities by using observable transactions of similar rated single trust preferred issues to obtain an average discount margin which was applied to a cash flow analysis model in determining the fair value of our pooled trust preferred securities. The fair market value estimates we assign to these securities assume liquidation in an orderly fashion and not under distressed circumstances. Due to the continued illiquidity and credit risk of certain securities, the market value of these securities is highly sensitive to assumption changes and market volatility.

The table below presents all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2010 and September 30, 2009.

Level 3 Investments Only (Dollars in thousands)	Period Ended September 30, 2010
	Trust Preferred Securities
Balance, January 1, 2010	$	18,797
Total gains or losses realized/(unrealized):
Included in earnings
Included in OCI		(139	)
Payments		(3,114	)
Purchases, issuances and settlements		-
Transfers in and/or out of Level 3		-
Balance, September 30, 2010	$	15,544

Level 3 Investments Only (Dollars in thousands)	Period Ended September 30, 2009
	Trust Preferred Securities
Balance, January 1, 2009	$	19,329
Total gains or losses realized/(unrealized):
Included in earnings		-
Included in OCI		2,094
Payments		(1,863	)
Purchases, issuances and settlements		-
Transfers in and/or out of Level 3		-
Balance, September 30, 2009	$	19,560

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. These include assets that are measured at the lower of cost or market value and had a fair value below cost at the end of the period as summarized below (in thousands). A loan is impaired when, based on current information, the Company determines that it is probable that the Company will be unable to collect amounts due according to the terms of the loan agreement. The Company’s impaired loans at September 30, 2010 are measured based on the estimated fair value of the collateral since the loans are collateral dependent.

For the quarter ended September 30, 2010 there were $6.7 million from impaired loans transferred to other real estate owned. There were no impaired loans transferred to other real estate owned for the quarter ended September 30, 2009. The valuation of the transfer to other real estate is a level 2 measurement since the real estate was valued using comparable pricing of similar assets.

Assets measured at fair value on a nonrecurring basis are as follows:

	Balance Transferred YTD At September 30, 2010		Level 1	Level 2		Level 3		Gain/(Losses)
Impaired loans	$	55,636				$	55,636		(61,986	)
Other real estate owned		8,865		$	8,865				(5,615	)

	Balance at Transferred YTD At September 30, 2009		Level 1	Level 2		Level 3		Gain/(Losses)
Goodwill	$	110,486				$	110,486	$	(976	)
Impaired loans		17,951					17,951		(18,445	)
Other real estate owned		1,196		$	1,196				(385	)

In accordance with FASB ASC Topic 825 for Financial Instruments, Disclosures about Fair Value of Financial Instruments, the Company is required to disclose the fair value of financial instruments. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a distressed sale. Fair value is best determined using observable market prices, however for many of the Company’s financial instruments no quoted market prices are readily available. In instances where quoted market prices are not readily available, fair value is determined using present value or other techniques appropriate for the particular instrument. These techniques involve some degree of judgment, and as a result, are not necessarily indicative of the amounts the Company would realize in a current market exchange. Different assumptions or estimation techniques may have a material effect on the estimated fair value.

(Dollars in thousands)	Fair Value of Financial Instruments
	At September 30, 2010				At December 31, 2009

			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Cash and cash equivalents	$	216,110	$	216,110	$	179,701	$	179,701
Trading securities		-		-		31,825		31,825
Investment securities		1,535,045		1,537,400		1,363,183		1,365,026

Loans - net		2,723,794		2,719,232		2,744,264		2,663,740
Liabilities:
Checking deposits		1,714,952		1,714,952		1,363,516		1,363,516
Money market and savings accounts		1,277,606		1,277,606		1,199,679		1,199,679
Time deposits		865,745		874,875		946,052		954,835
Borrowed funds		343,313		347,240		433,620		438,769

Cash and Cash Equivalents - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

Investments - The fair value of investment securities, mortgage-backed securities and collateralized mortgage obligations is based on quoted market prices, dealer quotes, yield curve analysis, and prices obtained from independent pricing services. The fair value of CDOs is determined by using observable transactions of similar rated single trust preferred issues to obtain an average discount margin which is applied to a cash flow analysis model. The fair value of Federal Home Loan Bank stock is not determinable since there is no active market for the stock.

Loans Receivable - The fair value of loans is estimated by discounting anticipated future cash flows. The discount margin is derived by using current offering rates for similar loans made to borrowers with similar credit ratings and for the same remaining maturities. The discount rate is then applied against a forward treasury or swap yield curve, as appropriate. Discount rates used in this analysis are further adjusted as appropriate to consider external factors, including market uncertainty, size of loans and other economic components to arrive at a reasonable exit price to be consistent with guidance in FASB ASC 820 for Fair Value Measurements and Disclosures.

Checking and Money Market Deposits, Savings Accounts, and Time Deposits - The fair value of checking and money market deposits and savings accounts is the amount reported in the condensed consolidated financial statements. The carrying amount of checking, savings and money market accounts is the amount that is payable on demand at the reporting date. The fair value of time deposits is generally based on a present value estimate using rates currently offered for deposits of similar remaining maturity.

Borrowed Funds - The fair value of borrowed funds is based on a present value estimate using rates currently offered. Under FASB ACS Topic 820 for Fair Value Measurements and Disclosures, the subordinated debenture was valued based on management’s estimate of similar trust preferred securities activity in the market.

Commitments to Extend Credit and Letters of Credit - The majority of the Company’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally not assignable by either the Company or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded net deferred fee amounts, which are not significant.

The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2010 and December 31, 2009. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these condensed consolidated financial statements since September 30, 2010 and December 31, 2009, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.

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 Company’s market area, changes in real estate market values in the Company’s market area, changes in relevant accounting principles and guidelines and the inability of third party service providers to perform. Additional factors that may affect our results are disclosed in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 and its other reports filed with the U.S. Securities and Exchange Commission.

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 condensed 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.

EXECUTIVE SUMMARY

Beneficial Mutual Bancorp Inc. is a federally chartered stock savings and loan 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 simultaneous acquisition of FMS Financial Corporation and its wholly owned subsidiary, Farmers & Mechanics Bank, which was merged with and into the Bank. Following the consummation of the merger and public offering, the Company had a total of 82,264,457 shares of common stock, par value $.01 per share, issued and outstanding, of which 36,471,682 were held publicly and 45,792,775 were held by Beneficial Savings Bank MHC (the “MHC”), the Company’s parent mutual holding company.

The Bank’s tier 1 leverage ratio totaled 9.26% at September 30, 2010 compared to 9.81% at December 31, 2009. The Bank’s total risk based capital ratio was 17.46% compared to 17.98% at December 31, 2009 and 18.41% a year ago. Our capital levels and ratios are well in excess of the levels required to be considered well-capitalized. We continued to position the Company for any further weakening in economic conditions maintaining our loan loss reserve coverage ratio of 1.62% at September 30, 2010 as compared to 1.64% at December 31, 2009, with non-performing assets decreasing 18% to $133.7 million as compared to $162.9 million at December 31, 2009.

In order to further improve our operating returns, we continue to leverage our position as one of the largest and oldest banks headquartered in the Philadelphia Metropolitan area. Our customers select Beneficial for banking and other financial services based on our ability to rapidly make decisions as we are better informed than many of our competitors about the markets we serve. We are focused on acquiring and retaining customers, and then educating them by aligning our products and services to their financial needs. We are focused on effectively managing our cost structure to be aligned with the current business environment.

In this challenging economic environment, we are focused on credit risk management and loss prevention. We diligently risk rate our commercial customers to ensure we actively and effectively manage our customer relationships and minimize losses. We believe it is important to have a strong balance sheet and strong healthy capital levels.

RECENT INDUSTRY CONSOLIDATION

The banking industry has experienced significant consolidation in recent years, which is likely to continue in future periods. Consolidation may affect the markets in which Beneficial operates as competitors integrate newly acquired businesses, adopt new business and risk management practices or change products and pricing as they attempt to maintain or grow market share and maximize profitability. Merger activity involving national, regional and community banks and specialty finance companies in the Philadelphia metropolitan area, has and will continue to impact the competitive landscape in the markets we serve. Management continually monitors our primary market areas and assesses the impact of industry consolidation, as well as the practices and strategies of our competitors, including loan and deposit pricing and customer behavior.

CURRENT REGULATORY ENVIRONMENT

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is a significant development for the industry. The elements of the act addressing financial stability are largely focused on issues related to systemic risks and capital markets-related activities. The Dodd-Frank Act includes a number of specific provisions designed to promote enhanced supervision and regulation of financial firms and financial markets, protect consumers and investors from financial abuse and provide the government with tools to manage a financial crisis and raise international regulatory standards. The Dodd-Frank Act also restructures the regulation of depository institutions. Specifically, under the Dodd-Frank Act, the Office of Thrift Supervision will be merged into the Office of the Comptroller of the Currency, which regulates national banks. Savings and loan holding companies will be regulated by the Federal Reserve Board. The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008 and 2009. Also included is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions will be reduced as well. The Dodd-Frank Act also will impose consolidated capital requirements on savings and loan holding companies effective in five years, which will limit our ability to borrow at the holding company and invest the proceeds from such borrowings as capital in the Bank that could be leveraged to support additional growth. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

In the fourth quarter of 2009, the Federal Reserve Board (“FRB”) announced regulatory changes to debit card and automated teller machine (“ATM”) overdraft practices that were effective July 1, 2010. These changes prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. We believe that the combination of these changes will have an impact that could be material to our non-interest income. The actual impact could vary due to a variety of factors, including changes in customer behavior.

CURRENT INTEREST RATE ENVIRONMENT

Net interest income represents a significant portion of the Company’s revenues. Accordingly, the interest rate environment has a substantial impact on Beneficial’s earnings. During the first nine months of 2010, our net interest margin increased to 3.35% from 3.27% in the nine months ended September 30, 2009. Asset growth coupled with an improvement in our deposit mix to lower cost deposit categories were the primary reasons for this margin expansion. Net interest margin in future periods will be impacted by several factors such as but not limited to, our ability to grow and retain low cost core deposits, the future interest rate environment, loan and investment prepayment rates, and changes in non-accrual loans.

CREDIT RISK ENVIRONMENT

The credit quality of our loan portfolio has a significant impact on our operating results. As part of the Company’s normal process for updating appraisals for criticized loans, considerable deterioration in the value of a number of the Company’s large commercial real estate properties collateralizing these loans was noted during the third quarter and a $51.1 million provision for loan losses was recorded for the quarter ended September 30, 2010. This deterioration reflected the pronounced slowdown in the commercial real estate market limiting traditional refinance and repayment sources. The Company now believes the recovery for the commercial real estate market in its region will take longer than previously anticipated causing continued downward pressure on property valuations. The provision was primarily due to specific reserves required for $122.0 million of commercial real estate loans that the Company had previously designated as criticized loans. The Company also recorded a partial charge-off of the collateral deficiency which totaled $56.1 million on criticized loans that were determined by management to be collateral dependent. For the nine months ended September 30, 2010 our provision for loan losses totaled $62.2 million compared to $12.1 million for the prior year.

The slowdown in the U.S. and global environment has continued throughout 2010 and has caused stress on the financial condition of both households and businesses. Unemployment remains at 9.6% and consumer confidence declined to 48.5% during September 2010. We expect our provision for credit losses to remain elevated until economic conditions improve.

Non-performing assets for the nine-month period ended September 30, 2010 decreased to $133.7 million, from $162.9 million at December 31, 2009. Delinquencies also decreased from $157.9 million at December 31, 2009 to $110.7 million at September 30, 2010. Non-performing commercial loans decreased from $110.7 million at December 31, 2009 to $78.2 million at September 30, 2010, and commercial loan delinquencies decreased from $75.4 million at December 31, 2009 to $38.8 million at September 30, 2010. These declines were primarily due to the level of charge-offs recorded during the third quarter.

CRITICAL ACCOUNTING POLICIES

Allowance for Loan Losses. We consider the allowance for loan losses to be a critical accounting policy. 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. The Company includes troubled debt restructured loans in the allowance for loan loss analysis. Among the material estimates required to establish the allowance are: overall economic conditions; value of collateral; delinquencies; historical charge off; strength of guarantors; loss exposure at default; the amount and timing of future cash flows on impaired 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. 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 loan portfolio collectability. 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 FDIC and the Pennsylvania Department of Banking (“the Department”), as an integral part of their examination process, periodically review our allowance for loan losses and charge-offs. Such agencies may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of their examination and/or charge-off certain loans.

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 FASB ASC Topic 350 for Intangibles – Goodwill and Other) 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. Overall economic conditions and increased competition have significantly impacted the financial results of the insurance brokerage business recently. As a result, during the third quarter of 2009, the Company conducted an impairment evaluation of the goodwill specifically related to the insurance brokerage business. This impairment test is generally performed annually. As a result of this testing, the Company recorded a charge of $1.0 million for impairment of goodwill relating to the Bank’s insurance brokerage subsidiary. During 2010, no additional impairment indicators were noted for the insurance brokerage business. We will complete our annual goodwill impairment analysis in the fourth quarter of 2010.

Other intangible assets subject to amortization are evaluated for impairment in accordance with authoritative guidance. 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. 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. At September 30, 2010 the fair value of other intangible assets exceeded the carrying amount and no impairment was recorded.

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 condensed consolidated Statement of Operations.

The Company uses the asset and liability method of accounting for income taxes as prescribed in FASB ASC Topic 740 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. The Company exercises 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.

Stock Based Compensation. The Company accounts for stock awards and stock options granted to employees and directors based on guidance FASB ASC Topic 718 for Compensation – Stock Compensation. The Company recognizes the related expense for the options and awards over the service period using the straight-line method.

Postretirement Benefits. The Company currently provides certain postretirement benefits to qualified retired employees. These postretirement benefits principally pertain to health insurance coverage and life insurance. The costs of such benefits are accrued during the years the employees provide service and are determined by consulting actuaries based upon certain assumptions such as discount rates, premium costs and mortality.

Comparison of Financial Condition at September 30, 2010 and December 31, 2009

At September 30, 2010 total assets increased $225.5 million, or 4.8%, to $4.9 billion from December 31, 2009. The increase was attributable to increases in the investment portfolio of $171.9 million, other assets of $82.2 million and cash and cash equivalents of $36.4 million. The increase in the investment portfolio is the result of the growth in the deposit portfolio in excess of loan growth during the nine months ended September 30, 2010. The increase in other assets is primarily due to a $40.5 million increase in an Automated Clearing House receivable due to the timing of settlements at quarter end and a $18.1 million increase in an income tax receivable as a result of the loss recorded for the year. Beneficial’s loan portfolio balance remained relatively unchanged during 2010 at $2.8 billion despite low demand for both consumer and business loans as consumers and businesses continue to deleverage and remain cautious about the economy.

Total deposits increased $349.1 million, or 9.9%, to $3.9 billion at September 30, 2010 compared to $3.5 billion at December 31, 2009. Increases in checking accounts of $338.5 million and savings accounts of $133.3 million were partially offset by decreases in time deposits of $80.3 million and money market accounts of $54.0 million. Deposits included $1.0 billion and $821.3 million of municipal deposits at September 30, 2010 and December 31, 2009, respectively, which consist primarily of interest-earning checking accounts. The Company continues to focus on growing its core deposit portfolio and reducing costlier time deposits. Other liabilities decreased $30.3 million, or 32.3% to $63.5 million at September 30, 2010 compared to $93.8 million at December 31, 2009, primarily due to a $27.8 million decrease in trading securities that had been purchased but had not yet settled at year end.

Stockholders’ equity totaled $634.1 million, or 12.9% of total assets at September 30, 2010 compared to $637.0 million, or 13.6% of total assets, at December 31, 2009. Beneficial’s tangible equity (total stockholders equity less goodwill and intangibles) to tangible assets (total assets less goodwill and intangibles) totaled 10.6% at September 30, 2010 compared to 11.1% at December 31, 2009 and 11.7% at September 30, 2009.

Comparison of Operating Results for the Three Months Ended September 30, 2010 and September 30, 2009

General – The Company recorded a net loss of $21.7 million, or $0.28 per share, for the three months ended September 30, 2010, compared to net income of $5.8 million, or $0.07 per share, for the same period in 2009. The Company recorded $51.1 million provision for loan losses for the three months ended September 30, 2010 compared to $2.0 million for the same period in 2009. As part of the Company’s normal process for updating appraisals for criticized loans, considerable deterioration in the value of a number of the Company’s large commercial real estate properties collateralizing these loans was noted during the third quarter. This deterioration reflected the pronounced slowdown in the commercial real estate market limiting traditional refinance and repayment sources. The Company believes the recovery for the commercial real estate market in its region will take longer than previously anticipated causing continued downward pressure on property valuations. Additionally, the Company reversed $2.6 million of interest that was accrued on these loans during the three months ended September 30, 2010.

Net Interest Income – The Company’s net interest income increased $2.4 million, or 7.4%, to $35.1 million for the three months ended September 30, 2010 from $32.7 million for the same period in 2009. The net interest margin decreased 25 basis points to 3.14% for the quarter ended September 30, 2010, from 3.39% for the same quarter in 2009. The interest reversal of $2.6 million on charged-off loans accounted for 24 basis points of that decline.

Total interest income decreased $1.1 million to $47.3 million for the three months ended September 30, 2010 from $48.4 million for the same period in 2009. This was due to a decrease in the rate on interest earning assets of 77 basis points to 4.23% for the three months ended September 30, 2010 from 5.00% for the same period in 2009. This decrease was the result of $2.6 million of interest that was reversed on charged-off loans as well as an increase in the average balance of lower-yielding overnight investments.

Total interest expense decreased $3.6 million to $12.2 million for the three months ended September 30, 2010 from $15.8 million for the same period in 2009. This decrease was due to a shift in deposits from higher yielding time deposits into lower yielding checking and money market accounts.

Interest expense on borrowings decreased $939 thousand to $3.8 million for the three months ended September 30, 2010 compared to $4.7 million for the same period in 2009 primarily due to a decline in the average balance of $67.0 million to $376.6 million for the three months ended September 30, 2010 compared to the same period in 2009.

Provision for Loan Losses – The Bank recorded a provision for loan losses of $51.1 million for the quarter ended September 30, 2010 compared to a provision of $2.0 million for the quarter ended September 30, 2009. As part of the Company’s normal process for updating appraisals for criticized loans, considerable deterioration in the value of a number of the Company’s large commercial real estate properties collateralizing these loans was noted during the third quarter and a $51.1 million provision for loan losses was recorded for the quarter ended September 30, 2010. This deterioration reflected the pronounced slowdown in the commercial real estate market and a challenged economic environment in the Company’s market area that the Company does not see recovering anytime in the near future.

The allowance for loan losses at September 30, 2010 totaled $45.0 million, or 1.6% of total loans outstanding, compared to $45.9 million, or 1.6% of total loans outstanding, at December 31, 2009 and $42.7 million, or 1.6% of total loans outstanding, at September 30, 2009. The provision for loan losses was determined by management to be an appropriate amount to maintain an allowance for loan losses at a level necessary to absorb credit losses inherent in the loan portfolio that are both probable and reasonably estimable at the balance sheet date.

Non-interest Income – Non-interest income decreased $726 thousand to $5.7 million for the quarter ended September 30, 2010, from $6.5 million recorded for the same period in 2009. This decrease was partially due to a $69 thousand decrease in service charges and other income as a result of the impact of changes to the Federal Reserve Board’s Regulation E that were implemented during the third quarter. An impairment charge of $88 thousand was also recorded on an equity security in an unrealized loss position that management deemed to be other than temporary. Results for the quarter ended September 30, 2009 include $1.4 million of gains on the sale of investment securities available for sale compared to $0.4 million for the quarter ended September 30, 2010.

Non-interest Expense – Non-interest expense for the quarter ended September 30, 2010 increased $2.8 million, or 9.3%, to $33.3 million compared to $30.5 million for the quarter ended September 30, 2009. The increase was primarily due to increases in salaries and benefits of $1.0 million from normal merit increases, as well as growth in the number of employees. The Company also had increases in marketing expenses of $1.2 million as it continued to enhance its product offerings and visibility in the marketplace. Other expenses increased during the quarter primarily due to increased costs for internet banking, debit card reward programs, and expenses for other real estate owned.

Income Taxes – The Company recorded an income tax benefit of $21.8 million for the quarter ended September 30, 2010, compared to an income tax expense of $0.8 million for the same period in 2009. The decrease was due primarily to a decrease in income before income taxes of $50.2 million for the three months ended September 30, 2010, from net income before income taxes of $6.6 million for the three months ended September 30, 2009. The primary driver of the decrease in income before income taxes was the provision for loan losses of $51.1 million recorded during the quarter ended September 30, 2010.

The following table summarizes average balances and average yields and costs for the three-month periods ended September 30, 2010 and September 30, 2009.

Average Balance Tables
(Dollars in thousands)	Three Months Ended September 30,							Three Months Ended September 30,
	2010							2009
	Average		Interest &		Yield /			Average		Interest &		Yield /
	Balance		Dividends		Cost			Balance		Dividends		Cost
Assets:
Interest-bearing demand deposits	$	-	$	-		0.00	%	$	2,624	$	2		0.35	%
Loans		2,812,250		35,480		5.03			2,744,443		36,244		5.29
Trading Securities		4,350		14		1.25			-		-		-
Overnight Investments		237,271		151		0.25
Investment securities		600,717		3,267		2.18			181,346		1,553		3.43
Mortgage backed securities		626,106		7,173		4.58			730,702		9,063		4.96
Collateralized mortgage obligations		113,348		1,143		4.03			134,073		1,487		4.44
Other interest earning assets		66,880		64		0.38			85,184		90		0.42
Total interest earning assets		4,460,922		47,292		4.23			3,878,372		48,439		5.00
Non-interest earning assets		432,672							461,015
Total assets	$	4,893,594	$	47,292				$	4,339,387	$	48,439

Liabilities and stockholders’ equity:
Interest earning checking accounts	$	1,283,907	$	2,556		0.80		$	887,801	$	2,319		1.04
Money market accounts		605,550		1,214		0.79			626,934		1,866		1.18
Savings accounts		651,867		1,227		0.75			426,152		649		0.60
Time deposits		885,599		3,395		1.53			961,621		6,176		2.55
Total interest-bearing deposits		3,426,923		8,392		0.97			2,902,508		11,010		1.50
Federal Home Loan Bank advances		127,239		1,188		3.71			174,750		1,865		4.23
Repurchase agreements		224,022		2,481		4.39			240,000		2,692		4.45
Statutory Trust Debenture		25,310		141		2.23			25,293		146		2.31
Other borrowings		-		-					3,570		46		5.15
Total interest-bearing liabilities		3,803,494		12,202		1.27			3,346,121		15,759		1.87
Non-interest-bearing deposits		274,642							267,218
Other non-interest-bearing liabilities		156,301							101,052
Total liabilities		4,234,437		12,202					3,714,391		15,759
Total stockholders’ equity		659,157							624,996
Total liabilities and stockholders’ equity	$	4,893,594						$	4,339,387
Net interest income			$	35,090						$	32,680
Interest rate spread						2.96	%						3.13	%
Net interest margin						3.14	%						3.39	%
Average interest-earning assets to average interest-bearing liabilities						117.28	%						115.91	%

Comparison of Operating Results for the Nine Months Ended September 30, 2010 and September 30, 2009

General – The Company recorded a net loss of $8.6 million, or $0.11 per share, for the nine months ended September 30, 2010, compared to net income of $10.9 million, or $0.14 per share, for the same period in 2009. The Company recorded a $62.2 million provision for loan losses for the nine months ended September 30, 2010 compared to $12.1 million for the same period in 2009. The provision increase was primarily driven by reserves required for commercial real estate loans as discussed above.

Net Interest Income – Net interest income for the nine months ended September 30, 2010 increased $18.0 million to $110.5 million compared to $92.6 million for the nine months ended September 30, 2009 with the net interest margin increasing 8 basis points to 3.35%. Average earning assets increased $638.2 million to $4.4 billion primarily due to increases in investment securities of $442.7 million, loans of $188.8 million and overnight investments of $169.5 million. The average rate on interest earning assets has decreased by 54 basis points to 4.52% for the nine months ended September 30, 2010 from 5.06% for the same period in 2009. This rate decrease was the result of $2.6 million of interest that was reversed on loans charged off as well as an increase in the average balance of lower-yielding overnight investments.

Interest expense on deposits decreased $10.0 million to $26.3 million for the nine months ended September 30, 2010 from $36.2 million for the same period in 2009, as a result of the shift in the deposit mix from higher yielding time deposits into lower yielding core deposits.

Interest expense on borrowings decreased $1.9 million to $12.2 million for the nine months ended September 30, 2010 compared to $14.1 million for the same period in 2009, primarily due to a decline in the average balance of $58.4 million to $401.3 million for the nine months ended September 30, 2010 compared to the same period in 2009.

Provision for Loan Losses – The Bank recorded a provision for loan losses of $62.2 million for the nine months ended September 30, 2010 compared to a provision of $12.1 million for the nine months ended September 30, 2009. The significantly elevated provision for credit losses was primarily due to additional reserves required for commercial real estate loans as discussed above.

Non-interest Income – For the nine months ended September 30, 2010, non-interest income decreased to $20.3 million from $20.6 million for the nine months ended September 30, 2009. During the nine months ended September 30, 2010, Beneficial recorded gains on the sale of investments of $2.4 million compared to $5.5 million of gains on the sale of investments for the nine months ended September 30, 2009. Results for the nine months ended September 30, 2010 included $0.1 million of impairment charges on investment securities compared to a $1.4 million impairment charge recorded on investment securities during the nine months ended September 30, 2009. For the nine months ended September 30, 2010 insurance and advisory commission income, and services charges and other income increased $0.4 million and $0.9 million, respectively.

Non-interest Expense – Non-interest expense for the nine months ended September 30, 2010 increased $6.6 million, or 7.4%, to $95.3 million compared to $88.7 million for the nine months ended September 30, 2009. The increases were primarily due to increases in salaries and benefits of $3.5 million from normal merit increases, as well as growth in the number of employees. The Company also had increases in marketing expenses of $0.9 million as it continued to enhance its product offerings and visibility in the marketplace. Other expenses increased primarily due to increased costs for internet banking, debit card reward programs, and expenses for other real estate owned. For the nine months ended September 30, 2010 the Company’s efficiency ratio improved to 72.8% from 78.3% for the nine months ended September 30, 2009.

Income Taxes – The Company recorded an Income tax benefit totaling $18.1 million for the nine months ended September 30, 2010, reflecting an effective tax rate of 67.7%, compared to income tax expense of $1.5 million, reflecting an effective tax rate of 12%, for the same period in 2009. The difference was due to a decrease in income before income taxes of $39.0 million, to a loss of $26.7 million, from income before income taxes of $12.4 million for the nine months ended September 30, 2009. The primary driver of the decrease in income before income taxes was the provision for loan losses of $51.1 million recorded during the quarter ended September 30, 2010.

The income tax rates differ from the statutory rate of 35% principally because of tax-exempt investments, non-taxable income related to bank-owned life insurance, state and local income taxes and tax credits received on affordable housing partnerships. Tax-exempt income, state and local income taxes and federal income tax credits reduced the statutory tax rates by (11.00%), (7.20%) and (12.30%) in the effective income tax rate calculation for 2010, respectively, and (9.52%), 2.43%, and (13.11%) for 2009, respectively.

The following table summarizes average balances and average yields and costs for the nine-month periods ended September 30, 2010 and September 30, 2009.

Average Balance Tables
	Nine Months Ended September 30,							Nine Months Ended September 30,
	2010							2009
	Average		Interest &		Yield /			Average		Interest &		Yield /
	Balance		Dividends		Cost			Balance		Dividends		Cost
Assets:
Interest-bearing demand deposits	$	-	$	-		0.00	%	$	1,965	$	7		0.48	%
Loans		2,797,521		109,940		5.25			2,608,751		103,522		5.30
Trading Securities		7,965		70		1.17			-		-
Overnight Investments		169,462		321		0.25			-		-
Investment securities		585,319		11,212		2.55			142,633		3,776		3.53
Mortgage backed securities		672,511		23,569		4.67			793,907		30,309		5.09
Collateralized mortgage obligations		124,523		3,756		4.02			151,608		5,030		4.42
Other interest earning assets		47,190		161		0.45			67,434		282		0.56
Total interest earning assets		4,404,491		149,029		4.52			3,766,298		142,926		5.06
Non-interest earning assets		408,877							389,711
Total assets	$	4,813,368	$	149,029				$	4,156,009	$	142,926

Liabilities and stockholders’ equity:
Interest earning checking accounts	$	1,241,773	$	7,616		0.82		$	754,491	$	6,415		1.13
Money market accounts		623,467		3,774		0.81			594,340		6,885		1.55
Savings accounts		605,770		3,271		0.72			406,583		1,784		0.59
Time deposits		891,303		11,621		1.75			993,282		21,160		2.85
Total interest-bearing deposits		3,362,313		26,282		1.05			2,748,696		36,244		1.76
Fed Funds Purchased		1,314		2		0.25			-		-
Federal Home Loan Bank advances		141,917		4,149		3.91			174,810		5,361		4.09
Repurchase agreements		231,300		7,660		4.43			240,000		7,991		4.45
FHLB overnight borrowings		366		2		0.61			-		-
Fed Res overnight borrowings		742		4		0.75			-		-
Statutory Trust Debenture		25,306		391		2.06			25,288		559		2.95
Other borrowings		392		0		0.00			19,650		197		1.34
Total interest-bearing liabilities		3,763,650		38,490		1.37			3,208,444		50,352		2.10
Non-interest-bearing deposits		263,930							265,705
Other non-interest-bearing liabilities		133,675							63,254
Total liabilities		4,161,255		38,490					3,537,403		50,352

Total stockholders’ equity		652,113							618,606
Total liabilities and stockholders’ equity	$	4,813,368						$	4,156,009
Net interest income			$	110,539						$	92,574
Interest rate spread						3.15	%						2.97	%
Net interest margin						3.35	%						3.27	%
Average interest-earning assets to average interest-bearing liabilities						117.03	%						117.39	%

Asset Quality

At September 30, 2010, Beneficial’s non-performing assets decreased by $29.1 million to $133.7 million compared to $162.9 million at December 31, 2009. Non-performing assets as a percentage of total assets decreased to 2.73% at September 30, 2010 from 3.49% at December 31, 2009. As discussed above, during the third quarter the Company charged-off the collateral deficiency which totaled $56.1 million on all criticized loans of $122.0 million which reduced non-performing assets. The following table sets forth information with respect to our non-performing assets as of the dates indicated:


(Dollars in thousands)	September 30, 2010			December 31, 2009
Nonperforming loans:
Real estate loans:
One-to-four-family	$	10,573		$	5,631
Commercial real estate		58,100			93,611
Residential construction		202			-
Total real estate loans		68,875			99,242
Commercial business loans		20,139			17,069
Consumer loans:
Home equity lines of credit		441			12
Auto loans		230			450
Other consumer loans		26,626			37,046
Total consumer loans		27,297			37,508
Total nonperforming loans		116,311			153,819
Real estate owned		17,438			9,061
Total nonperforming assets	$	133,749		$	162,880

Total nonperforming loans to total loans		4.20	%		5.51	%

Total nonperforming loans to total assets		2.37	%		3.29	%
Total nonperforming assets to total assets		2.73	%		3.49	%

Beneficial generally places all commercial and residential loans on non-performing status at 90 days delinquent or sooner if management believes the loan has become impaired (unless return to current status is expected imminently). For all commercial and residential loans, the accrual of interest is discontinued and reversed once an account becomes past due 90 days or more. The uncollectible portion including any collateral deficiency of all loans is charged off at 90 days past due or when the Company has confirmed there is a loss. Non performing consumer loans include $26.4 million and $36.8 million in government guaranteed student loans as of September 30, 2010 and December 31, 2009, respectively, in which the Bank has virtually no risk of credit loss.

Non-performing loans are evaluated under authoritative guidance in FASB ASC Topic 310 for Receivables, Topic 450 for Contingencies and Topic 470 for Debt and are included in the determination of the allowance for loan losses. Specific reserves are established for estimated losses in determination of the allowance for loan loss.

Allowance for Loan Losses

The following table presents the allocation of the allowance for loan losses and the allowance for loan losses as a percentage of each loan category at the dates indicated:


	September 30, 2010					December 31, 2009
	Amount		ALLL/Loans			Amount		ALLL/Loans

Commerical	$	38,496		2.95	%	$	37,978		2.89	%

Residential		1,350		0.20	%		227		0.04	%

Consumer		3,321		0.42	%		7,582		0.92	%

Unallocated		1,792					68

Total Allowance for Loan Losses	$	44,959		1.62	%	$	45,855		1.64	%

The allowance for loan losses is maintained at levels that management considers adequate to provide for losses based upon an evaluation of known and inherent risks in the loan portfolio. Management’s evaluation takes into consideration the risks inherent in the loan portfolio, past loan loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic conditions, the level of originations and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the allowance for credit losses may be necessary if conditions differ substantially from the assumptions used in making the evaluations.

The allowance for loan losses consists of two elements: (i) an allocated allowance, which is comprised of allowances established on specific loans, and allowances for each loan category based on historical loan loss experience adjusted for current trends and adjusted for both general economic conditions and other risk factors in the Company’s loan portfolios, and (ii) an unallocated allowance to account for a level of imprecision in management’s estimation process.

Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any relationships have deteriorated considering factors such as historical loss experience, trends in delinquency and nonperforming loans, changes in risk composition and underwriting standards, experience and ability of staff and regional and national economic conditions and trends.

Our credit officers and workout group identify and manage potential problem loans for our commercial loan portfolios. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and additional analysis is needed. For our commercial loan portfolios, risk ratings are assigned to each individual loan to differentiate risk within the portfolio and are reviewed on an ongoing basis by credit risk management and revised, if needed, to reflect the borrowers’ current risk profiles and the related collateral positions. The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Beneficial’s Internal Asset Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings. When a credit’s risk rating is downgraded to a certain level, the relationship must be reviewed and detailed reports completed that document risk management strategies for the credit going forward, and the appropriate accounting actions to take in accordance with Generally Accepted Accounting Principles in the United States (US GAAP). When credits are downgraded beyond a certain level, Beneficial’s workout department becomes responsible for managing the credit risk.

Risk rating actions are generally reviewed formally by one or more Credit Committees depending on the size of the loan and the type of risk rating action being taken.

Our consumer loans and residential loans are monitored for credit risk and deterioration considering factors such as delinquency, loan to value, and credit scores. We evaluate our consumer and residential portfolios throughout their life cycle on a portfolio basis.

When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral supporting the loans. Management documents the collateral type, date of the most recent valuation, and whether any liens exist, to determine the value to compare against the committed loan amount.

If a loan is identified as impaired and is collateral dependent, an updated appraisal is obtained to provide a baseline in determining the property’s fair market value, a key input into the calculation to measure the level of impairment, and to establish a specific reserve or charge-off the collateral deficiency. If the collateral value is subject to significant volatility (due to location of asset, obsolescence, etc.) an appraisal is obtained more frequently. At a minimum, in-house revaluations are performed on at least a quarterly basis and updated appraisals are obtained annually.

When we determine that the value of an impaired loan is less than its carrying amount, we recognize impairment through a charge-off to the allowance. We perform these assessments on at least a quarterly basis. For commercial loans, a charge-off is recorded when management determines we will not collect 100% of a loan based on the fair value of the collateral, less costs to sell the property, or the net present value of expected future cash flows. Charge-offs are recorded on a monthly basis and partially charged-off loans continue to be evaluated on a monthly basis During the third quarter, the Company saw considerable deterioration in the value of the collateral securing a number of large collateral dependent commercial real estate loans. Additionally, the Company has seen a pronounced slowdown in the commercial real estate market limiting traditional refinance and repayment sources. The Company now believes the recovery for commercial real estate in its market area will take longer than previously anticipated causing continued downward pressure on property valuations. As a result, during the third quarter the Company recorded a provision for loan losses of $51.1 million. The provision was primarily driven by specific reserves required for $122.0 million of commercial real estate loans that the Company had previously designated as criticized loans. The Company also recorded a partial charge-off of the collateral deficiency which totaled $56.1 million on criticized loans that were determined by management to be collateral dependent.

Consumer loans and residential loans not adequately secured are generally charged-off when deemed to be uncollectible or delinquent 90 days or more, whichever comes first, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Examples that would demonstrate repayment include a loan that is secured by adequate collateral and is in the process of collection, a loan supported by a valid guarantee or insurance, or a loan supported by a valid claim against a solvent estate. Consumer loan delinquency includes $26.4 million in government guaranteed student loans at September 30, 2010, in which the Bank has virtually no risk of credit loss.

Additionally, the Company reserves for certain inherent, but undetected, losses that are probable within the loan portfolio. This is due to several factors, such as, but not limited to, inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions and the interpretation of economic trends. While this analysis is conducted at least quarterly, the Company has the ability to revise the allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a given loan pool classification.

Regardless of the extent of the Company’s analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains an unallocated allowance to recognize the existence of these exposures.

These risk factors are continuously reviewed and revised by management where conditions indicate that the estimates initially applied are different from actual results. A comprehensive analysis of the allowance for loan losses is performed by the Company on a quarterly basis. In addition, a review of allowance levels based on nationally published statistics is conducted quarterly.

The factors supporting the allowance for loan losses do not diminish the fact that the entire allowance for loan losses is available to absorb losses in the loan portfolio and related commitment portfolio, respectively. The Company’s principal focus, therefore, is on the adequacy of the total allowance for loan losses.

The allowance for loan losses is subject to review by banking regulators. The Company’s primary bank regulators regularly conduct examinations of the allowance for loan losses and make assessments regarding their adequacy and the methodology employed in their determination.

Commercial Portfolio. The portion of the allowance for loan losses related to the commercial portfolio of $38.5 million at September 30, 2010 (2.95% of commercial loans) is consistent with $38.5 million at December 31, 2009 (2.89% of commercial loans). At December 31, 2009, the commercial reserves included $15.7 million of specific reserves required for impaired loans, which totaled $29.3 million, and $22.5 million of reserves for the remaining commercial loan portfolio. During the quarter ended September 30, 2010, we recorded a partial charge-off of commercial loans equal to the collateral deficiency which totaled $56.1 million on all criticized loans which were determined by management to be collateral dependent. As a result, the entire reserve balance at September 30, 2010 consists of reserves against the commercial loan portfolio. The increase in reserves from year-end is due to the weakening in commercial real estate previously discussed.

Residential Loans. The allowance for the residential loan estate portfolio was $1.4 million at September 30, 2010 and $0.2 million at December 31, 2009. The increase in the reserve balance from year-end is due to increases in actual residential loan charge-offs that have been experienced during the quarter. Non-performing assets and past due loans in our residential loan portfolio continue to increase. The Company expects that the difficult housing environment, as well as general economic conditions, will continue to impact the residential loan portfolio which may result in higher loss levels.

Consumer Loans. The allowance for the consumer loan portfolio decreased from $7.6 million at December 31, 2009 to $3.3 million at September 30, 2010. The decrease in the reserve balance is due to a decline in actual charge-offs experienced in the home equity loan portfolio from last year. The allowance as a percentage of consumer loans was 0.42% at September 30, 2010 and 0.92% at December 31, 2009.

Unallocated Allowance. The unallocated allowance for loan losses was $1.8 million at September 30, 2010 and $68 thousand at December 31, 2009. Management continuously evaluates its allowance methodology; however the unallocated allowance is subject to changes each reporting period due to certain inherent but undetected losses; which are probable of being realized within the loan portfolio.

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 (“FHLB”). 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 September 30, 2010, the Company determined that its future levels of principal repayments would not 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 September 30, 2010, cash and cash equivalents totaled $216.1 million. In addition, at September 30, 2010, our maximum borrowing capacity with the FHLB was $781.5 million. On September 30, 2010, we had $113.0 million of advances outstanding and $180.9 million of letters of credit outstanding with the FHLB.

A significant use of our liquidity is the funding of loan originations. At September 30, 2010, we had $385.7 million in loan commitments outstanding, which consisted of $153.7 million and $25.8 million in commercial and consumer commitments to fund loans, respectively, $179.0 million in commercial and consumer unused lines of credit, and $27.2 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 September 30, 2010 totaled $620.1 million, or 71.6% of certificates of deposit, at September 30, 2010. 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 September 30, 2011. 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.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders. The Company also has repurchased shares of its common stock. The amount of dividends that the Bank may declare and pay to the Company is generally restricted under Pennsylvania law to the retained earnings of the Bank.

The following table presents certain of our contractual obligations at September 30, 2010:

(Dollars in thousands)

			Payments due by period
			Less than		One to		Three to		More than
	Total		One Year		Three Years		Five Years		Five Years
Commitments to fund loans	$	179,402	$	179,402	$	-	$	-	$	-
Unused lines of credit		179,038		114,386		-		-		64,652
Standby letters of credit		27,227		27,227		-		-		-
Operating lease obligations		34,815		5,302		9,797		5,312		14,404
Total	$	420,482	$	326,317	$	9,797	$	5,312	$	79,056

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 FHLB 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 September 30, 2010, we exceeded all of our regulatory capital requirements and were 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. 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. We may use capital management tools such as cash dividends and common share repurchases. As of September 30, 2010, the Company had repurchased 910,904 shares of its common stock. Repurchased shares are held in treasury.

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. In order to mitigate the risk related to the Company’s loan portfolio, the Company conducts a rigorous loan review process.

In order to mitigate the risk related to the Company’s held-to-maturity and available-for-sale portfolios, the Company monitors the ratings of its securities. As of September 30, 2010 approximately 86.47% of the Company’s portfolio consisted of direct government obligations, government sponsored enterprise obligations or securities rated AAA by Moody’s and/or S&P. In addition, at September 30, 2010 approximately 7.42% of the investment portfolio was rated below AAA but rated investment grade by Moody’s and/or S&P, approximately 1.11% of the investment portfolio was rated below investment grade by Moody’s and/or S&P and approximately 5.01% of the investment portfolio was not rated. Securities not rated consist primarily of short-term municipal anticipation notes, private placement municipal bonds, equity securities, mutual funds, money market funds and bank certificates of deposit.

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 condensed 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.

For the period ended September 30, 2010, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

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.

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 September 30, 2010. 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 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.

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 September 30, 2010
Basis point change in rates		-200		Base Forecast			+200
(Dollars in thousands)

Net Interest Income at Risk:
Net Interest Income	$	128,653		$	151,712	$	142,395
% change		(15.20	)%				(6.14	)%

Economic Value at Risk:
Equity	$	651,444		$	682,790	$	607,870
% change		(4.59	)%				(10.97	)%

As of September 30, 2010, based on the scenarios above, net interest income and economic value would be negatively impacted by a 200 basis point increase in interest rates.

The current historically low interest rate environment reduces the reliability of the measurement of a 200 basis point decline in interest rates, as such a decline would result in negative interest rates. The Company has established an interest rate floor of zero percent for purposes of measuring interest rate risk. Such a floor in our income simulation results in a reduction in our net interest margin as more of our liabilities than our assets are impacted by the zero percent floor. In addition, economic value of equity is also reduced in a declining rate environment due to the negative impact to deposit premium values.

As of September 30, 2010, our results indicate that we are adequately positioned and continue to be 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 September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

As of September 30, 2010, the risk factors of the Company have not changed materially from those reported in the Company’s Annual Report Form 10-K for the year ended December 31, 2009 and the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010. 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, 2009, and Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K and Quarterly Report on Form 10-Q 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

The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended September 30, 2010.

Period	Total Number of Shares Purchased		Average Price Paid Per Share (including fees)		Total Number Of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)

July 1-31, 2010		278,900	$	9.97		278,900		978,380
August 1-31, 2010		65,700		9.99		65,700		912,680
September 1-30, 2010		-		-		-		912,680

(1)	On September 22, 2008, the Company announced that, on September 18, 2008, its Board of Directors had approved a stock repurchase program authorizing the Company to purchase up to 1,823,584 shares of the Company’s common stock.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. (Removed and Reserved)

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. (2)

4.0 Form of Common 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.

(2)

Incorporated herein by reference to the Exhibits to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 19, 2010.

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: November 5, 2010	By:	/s/ Gerard P. Cuddy
	Gerard P. Cuddy
	President and Chief Executive Officer (principal executive officer)

Dated: November 5, 2010	By:	/s/ Thomas D. Cestare
	Thomas D. Cestare
	Executive Vice President and Chief Financial Officer (principal financial officer)