Edgar Filing: Beneficial Mutual Bancorp Inc

t68650_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 June 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		(I.R.S. Employer Identification No.)
organization)

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

(215) 864-6000

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Yes x No o

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

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

Large Accelerated Filer o	Accelerated Filer x

Non-Accelerated Filer o	Smaller Reporting Company o
(Do not check if a smaller reporting company)

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

Yes o No x

As of August 5, 2010, there were 81,417,653 shares of the registrant’s common stock outstanding. Of such shares outstanding, 45,792,775 were held by Beneficial Savings Bank MHC and 35,624,878 shares were publicly held.

BENEFICIAL MUTUAL BANCORP, INC.

Table of Contents

		Page No.
Part I. Financial Information

Item 1.	Financial Statements (unaudited)

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

	Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009	2

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2010	3

	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009	4

	Notes to Unaudited Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	38

Part II. Other Information

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

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

Item 3.	Defaults Upon Senior Securities	40

Item 4.	(Removed and Reserved)	40

Item 5.	Other Information	40

Item 6.	Exhibits	40

Signatures		41

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Consolidated Statements of Financial Condition

(Dollars in thousands, except share amounts)

	June 30, 2010			December 31, 2009
ASSETS:
Cash and Cash Equivalents:
Cash and due from banks	$	39,600		$	39,739
Overnight investments		186,504			139,962
Total cash and cash equivalents		226,104			179,701

Trading Securities		25,575			31,825

Investment Securities:
Available-for-sale (amortized cost of $1,193,174 at June 30, 2010 and $1,260,670 at December 31, 2009)		1,233,508			1,287,106
Held-to-maturity (estimated fair value of $117,344 at June 30, 2010 and $49,853 at December 31, 2009)		114,843			48,009
Federal Home Loan Bank stock, at cost		28,068			28,068
Total investment securities		1,376,419			1,363,183
Loans:		2,809,701			2,790,119
Allowance for loan losses		(50,895	)		(45,855	)
Net loans		2,758,806			2,744,264
Accrued Interest Receivable		20,029			19,375
Bank Premises and Equipment, net		71,309			81,255
Other Assets:
Goodwill		110,486			110,486
Bank owned life insurance		33,131			32,357
Other intangibles		18,663			20,430
Other assets		235,776			90,804
Total other assets		398,056			254,077
Total Assets	$	4,876,298		$	4,673,680
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Liabilities:
Deposits:
Non-interest bearing deposits	$	279,268		$	242,412
Interest bearing deposits		3,338,181			3,266,835
Total deposits		3,617,449			3,509,247
Borrowed funds		393,308			433,620
Other liabilities		206,362			93,812
Total liabilities		4,217,119			4,036,679
Commitments and Contingencies
Stockholders’ Equity:
Preferred Stock - $.01 par value, 100,000,000 shares authorized, none issued or outstanding as of June 30, 2010 and December 31, 2009		-			-
Common Stock – $.01 par value, 300,000,000 shares authorized, 82,265,957, shares issued as of June 30, 2010 and 82,264,457 shares issued as of December 31, 2009, and 81,699,653 shares outstanding as of June 30, 2010 and 81,853,553 shares outstanding as of December 31, 2009		823			823
Additional paid-in capital		346,759			345,356
Unearned common stock held by employee stock ownership plan		(23,899	)		(25,489	)
Retained earnings (partially restricted)		326,319			313,195
Accumulated other comprehensive income, net		14,330			6,712
Treasury stock, at cost, 566,304 shares at June 30, 2010 and 410,904 shares at December 31, 2009		(5,153	)		(3,596	)
Total stockholders’ equity		659,179			637,001
Total Liabilities and Stockholders’ Equity	$	4,876,298		$	4,673,680
See accompanying notes to the unaudited consolidated financial statements

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)

	For the Three Months Ended					For the Six Months Ended
	June 30,		June 30,			June 30,		June 30,
	2010		2009			2010		2009
INTEREST INCOME:
Interest and fees on loans	$	37,947	$	33,921		$	74,460	$	67,278
Interest on overnight investments		44		-			169		2
Interest on trading securities		23		-			56		-
Interest and dividends on investment securities:
Taxable		12,382		12,389			24,650		26,002
Tax-exempt		1,261		650			2,402		1,206
Total interest income		51,657		46,960			101,737		94,488

INTEREST EXPENSE:
Interest on deposits:
Interest bearing checking accounts		2,501		2,113			5,059		4,096
Money market and savings deposits		2,331		2,703			4,604		6,154
Time deposits		3,646		7,037			8,227		14,984
Total		8,478		11,853			17,890		25,234
Interest on borrowed funds		4,034		4,691			8,398		9,359
Total interest expense		12,512		16,544			26,288		34,593

Net interest income		39,145		30,416			75,449		59,895

Provision for loan losses		6,200		7,100			11,150		10,100

Net interest income after provision for loan losses		32,945		23,316			64,299		49,795

NON-INTEREST INCOME:
Insurance and advisory commission and fee income		1,762		1,715			4,772		4,463
Service charges and other income		4,424		3,111			7,689		6,762
Impairment charge on securities available-for-sale		-		-			-		(1,230	)
Gain on sale of investment securities available-for-sale		-		1,316			2,004		4,165
Trading securities profits		86		-			112		-
Total non-interest income		6,272		6,142			14,577		14,160

NON-INTEREST EXPENSE:
Salaries and employee benefits		15,103		14,007			30,736		28,282
Occupancy expense		2,915		2,899			6,060		6,102
Depreciation, amortization and maintenance		2,240		2,220			4,417		4,448
Marketing expense		1,648		1,238			2,650		2,987
Intangible amortization expense		884		890			1,767		1,782
FDIC Insurance		1,382		2,868			2,704		3,331
Other		7,307		5,630			13,630		11,258
Total non-interest expense		31,479		29,752			61,964		58,190

Income (loss) before income taxes		7,738		(294	)		16,912		5,765

Income tax expense (benefit)		2,142		(244	)		3,788		687

NET INCOME (LOSS)	$	5,596	$	(50	)	$	13,124	$	5,078

EARNINGS PER SHARE – Basic	$	0.07	$	0.00		$	0.17	$	0.07
EARNINGS PER SHARE – Diluted	$	0.07	$	0.00		$	0.17	$	0.07

Average common shares outstanding – Basic		77,840,396		77,678,961			77,812,874		77,717,407
Average common shares outstanding – Diluted		78,008,337		77,678,961			77,962,324		77,726,194

See accompanying notes to the unaudited consolidated financial statements

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited 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 Income												13,124								13,124			13,124
KSOP shares committed to be released						(30	)		1,590											1,560
Stock option expense						608														608
Restricted stock shares						812														812
Issuance of common shares		1,500				13														13
Purchase of treasury stock														(1,557	)					(1,557	)
Net unrealized gain on AFS securities arising during the year (net of deferred tax of $5,566)																	10,337			10,337			10,337
Reclassification adjustment for net gains on AFS securities included in net income (net of tax of $701)																	(1,303	)		(1,303	)		(1,303	)
Pension, other post retirement and postemployment benefit plan adjustments (net of tax of $592)																	(1,416	)		(1,416	)		(1,416	)
Total OCI																							7,618
Comprehensive income																						$	20,742
BALANCE, JUNE 30, 2010		82,265,957	$	823	$	346,759		$	(23,899	)	$	326,319	$	(5,153	)	$	14,330		$	659,179

See accompanying notes to the unaudited consolidated financial statements.

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

	Six Months Ended June 30,
	2010			2009
OPERATING ACTIVITIES:
Net income	$	13,124		$	5,078
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		11,150			10,100
Depreciation and amortization		3,095			3,087
Intangible amortization		1,767			1,782
Net gain on sale of investments		(2,004	)		(4,165	)
Impairment of investments		-			1,230
Accretion of discount on investments		(986	)		(1,130	)
Amortization of premium on investments		267			251
Deferred income taxes		(355	)		(2,206	)
Net loss from sales of premises and equipment		280			20
Impairment on other real estate owned		67			-
Increase in bank owned life insurance		(774	)		(739	)
Amortization of employee savings and stock ownership plan		1,560			1,476
Stock based compensation expense		1,420			1,509
Purchases of trading securities		(418,795	)		-
Sales of trading securities		424,954			-
Changes in assets and liabilities that (used) provided cash:
Accrued interest receivable		(654	)		(429	)
Accrued interest payable		(616	)		(1,096	)
Income taxes payable		(1,288	)		(1,664	)
Other liabilities		(24,512	)		17,658
Other assets		(15,325	)		14,000
Net cash (used) provided by operating activities		(7,625	)		44,762

INVESTING ACTIVITIES:
Loans originated or acquired		(283,077	)		(552,861	)
Principal repayment on loans		254,280			278,412
Purchases of investment securities available for sale		(363,929	)		(164,997	)
Purchases of investment securities held to maturity		(59,039	)		-
Net purchases of money market fund		(36,454	)		(64,887	)
Proceeds from sales and maturities of investment securities available for sale		470,122			285,010
Proceeds from maturities, calls or repayments of investment securities held to maturity		8,766			17,848
Proceeds from sale of other real estate owned		1,718			405
Purchases of premises and equipment		(8,923	)		(3,302	)
Proceeds from sale of premises and equipment		880			28
Net payments related to other investing activities		(442	)		-
Net cash used in investing activities		(16,098	)		(204,344	)

FINANCING ACTIVITIES:
Net decrease in borrowed funds		(36,741	)		(136,443	)
Net increase in checking, savings and demand accounts		172,110			361,191
Net decrease in time deposits		(64,461	)		(64,854	)
Proceeds from stock issuance		13			-
Purchase of treasury stock		(795	)		(2,475	)
Net cash provided by financing activities		70,126			157,419

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		46,403			(2,163	)

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

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	226,104		$	42,226

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash payments for interest	$	18,497		$	24,129
Cash payments for income taxes		5,432			5,321
Transfers of loans to other real estate owned		3,105			289
Transfers of bank branches to other real estate owned		485			1,060

See accompanying notes to the unaudited consolidated financial statements.

BENEFICIAL MUTUAL BANCORP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Basis of Presentation

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

Use of Estimates in the Preparation of Financial Statements

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

FASB Accounting Standards Codification

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

NOTE 2 – NATURE OF OPERATIONS

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

The Bank offers a variety of consumer and commercial banking services to individuals, businesses, and nonprofit organizations through 68 offices throughout the Philadelphia and Southern New Jersey area. The Bank is supervised and regulated by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation (the “FDIC”). The Office of Thrift Supervision (the “OTS”) regulates the Company and the MHC. The Bank’s customer deposits are insured up to applicable legal limits by the Deposit Insurance Fund of the FDIC. Insurance services are offered through Beneficial Insurance Services, LLC and wealth management services are offered through Beneficial Advisors, LLC, both wholly owned subsidiaries of the Bank.

NOTE 3 – EARNINGS PER SHARE

The following table presents a calculation of basic and diluted earnings per share for the three and six months ended June 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. 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 June 30,					Six Months Ended June 30,
	2010		2009			2010		2009
Basic and diluted earnings per share:
Net income	$	5,596	$	(50	)	$	13,124	$	5,078
Basic average common shares outstanding		77,840,396		77,678,961			77,812,874		77,717,407
Effect of dilutive securities		167,941		-			149,450		8,787
Dilutive average shares outstanding		78,008,337		77,678,961			77,962,324		77,726,194
Net earnings per share:
Basic	$	0.07	$	0.00		$	0.17	$	0.07
Diluted	$	0.07	$	0.00		$	0.17	$	0.07

For the three and six months ended June 30, 2010, there were 2,042,850 outstanding options and no restricted stock grants that were anti-dilutive. For the three months ended June 30, 2009, there were 1,919,750 outstanding options and 897,500 restricted stock grants that were anti-dilutive. For the six months ended June 30, 2009, there were 1,919,750 outstanding options and 761,500 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 June 30, 2010 and December 31, 2009 are as follows.

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

(Dollars in thousands)

	June 30, 2010
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Equity securities	$	3,117	$	18	$	30	$	3,105
U.S. Government Sponsored Enterprise (“GSE”) and Agency Notes		305,878		1,228		3		307,103
GNMA guaranteed mortgage certificates		9,370		242		-		9,612
Collateralized mortgage obligations		114,446		3,319		20		117,745
Other mortgage-backed securities		562,562		36,539		-		599,101
Municipal bonds		136,420		1,936		66		138,290
Pooled trust preferred securities		18,267		6		3,063		15,210
Money market fund		43,114		228		-		43,342
Total	$	1,193,174	$	43,516	$	3,182	$	1,233,508

	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)
	June 30, 2010

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

GNMA guaranteed mortgage certificates	$	662	$	-	$	28	$	634
Other mortgage-backed securities		36,571		2,518		-		39,089
Municipal bonds		77,110		76		66		77,120
Foreign bonds		500		1		-		501
Total	$	114,843	$	2,595	$	94	$	117,344

	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.

On June 30, 2010, the Company held certain debt and equity securities having unrealized loss positions. With respect to these debt securities, 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. With respect to these equity securities, the Company has the intent and ability to hold these securities until full recovery. The Company has reviewed its portfolio 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. Market changes in interest rates and credit spreads will result in unrealized losses as the market price of securities fluctuates. 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 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 $3.1 million in pooled trust preferred securities as of June 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 further credit impairment.

For the six months ended June 30 2009, the Company recorded OTTI losses on AFS securities of $1.2 million through earnings. No OTTI losses were recognized for the six months ended June 30, 2010.

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 six months ended June 30, 2010:


		Six Months Ended June 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 BBB by Standard & Poor’s. On 7/01/10, S&P downgraded its rating on this security to BB+, 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 June 30, 2010, totaled $9.9 million and the fair value totaled $8.5 million, representing an unrealized loss of $1.4 million, or 14.07%. At June 30, 2010, there were a total of 35 banks currently performing of the 43 remaining banks in the security. A total of 16.17%, or $58.0 million, of the current collateral of $358.6 million has defaulted and 6.69%, 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 June 2010, with a 0% recovery, was modeled and resulted in no cash flow shortfalls to our tranche. This represents the assumption of an additional 24.94% of defaults from the remaining performing collateral of $276.6 million. Excess subordination for the Trapeza 2003-4A Class A1A security represents 64.46% of the remaining performing collateral. The excess subordination of 64.46% 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 BB by Standard & Poor’s, which represents a rating of below investment grade. At June 30, 2010, the book value of the security totaled $7.7 million and the fair value totaled $6.0 million, representing an unrealized loss of $1.7 million, or 21.68%. At June 30, 2010, there were a total of 35 banks currently performing of the 44 remaining banks in the security. A total of 10.15%, or $22.0 million, of the current collateral of $216.7 million has defaulted and 10.22%, or $22.2 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 June 2010, with a 0% recovery, was modeled and resulted in no cash flow shortfalls to our tranche. This represents the assumption of an additional 26.49% of defaults from the remaining performing collateral of $172.5 million. Excess subordination for the US Capital Fund III A-1 security represents 47.39% of the remaining performing collateral. The excess subordination of 47.39% is calculated by taking the remaining performing collateral of $172.5 million, subtracting the Class A-1 or senior tranche balance of $90.7 million and dividing this result, $81.8 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 June 30, 2010 and December 31, 2009:

(Dollars in thousands)

	June 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	$	365	$	3	$	-	$	-	$	365	$	3
Other mortgage-backed securities		-		-		634		28		634		28
Municipal and other bonds		67,923		132		455		-		68,378		132
Pooled trust preferred securities		-		-		14,534		3,063		14,534		3,063
Collateralized mortgage obligations		1,281		12		795		8		2,076		20
Subtotal, debt securities		69,569		147		16,418		3,099		85,987		3,246
Equity securities		300		30		-		-		300		30
Total temporarily impaired securities	$	69,869	$	177	$	16,418	$	3,099	$	86,287	$	3,276

	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 June 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.

	June 30, 2010				December 31, 2009
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available for sale:
Due in one year or less	$	30,748	$	30,792	$	80,560	$	80,685
Due after one year through five years		150,328		151,129		28,684		29,029
Due after five years through ten years		256,247		259,911		295,932		296,355
Due after ten years		137,689		136,517		153,175		151,326
Mortgage-backed securities		571,931		608,713		690,232		716,640
Total	$	1,146,943	$	1,187,062	$	1,248,583	$	1,274,035
Held to maturity:
Due in one year or less	$	59,573	$	59,641	$	135	$	134
Due after one year through five years		17,167		17,139		960		945
Due after five years through ten years		615		598		615		591
Due after ten years		255		243		255		244
Mortgage-backed securities		37,233		39,723		46,044		47,939
Total	$	114,843	$	117,344	$	48,009	$	49,853

At June 30, 2010 and December 31, 2009, $634.7 million and $567.7 million, respectively, of securities were pledged to secure municipal deposits. As of June 30, 2010 and December 31, 2009, the Company had $275.0 million and $ 275.5 million, respectively, of securities pledged as collateral on secured borrowings. At June 30, 2010 and December 31, 2009, the Company also pledged $4.1 million and $4.6 million, respectively, of securities to secure its borrowing capacity at the Federal Reserve Bank of Philadelphia.

The Company holds stock in the FHLB of Pittsburgh and New York totaling $28.1 million as of both June 30, 2010 and December 31, 2009. The Company accounts for the stock based on industry 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 June 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. The U.S. and global economic environment has changed considerably over the past couple of years. While the Company does not engage in subprime lending, the slowdown in housing activity and decline in home values associated with the subprime mortgage crisis has led to wider credit disruptions throughout the financial services industry, bankruptcy or failure of financial services companies, sharp declines in stock indices and significant government intervention in the banking and insurance industries. Though economic activity has improved somewhat from its weakened condition, it does not appear likely that economic growth and real estate collateral values will improve significantly in the coming months. This will cause continued strain on the financial condition of both households and businesses.

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

Major classifications of loans at June 30, 2010 and December 31, 2009 are summarized as follows:

(Dollars in thousands)
	June 30, 2010			December 31, 2009
Real estate loans:
One-to-four family	$	652,375		$	647,687
Commercial real estate		883,667			780,328
Residential construction		15,599			11,938
Total real estate loans		1,551,641			1,439,953

Commercial business loans		460,829			523,033

Consumer loans:
Home equity loans and lines of credit		293,829			314,468
Auto loans		139,248			143,503
Education loans		261,723			257,021
Other consumer loans		102,431			112,141
Total consumer loans		797,231			827,133
Total loans		2,809,701			2,790,119

Allowance for loan losses		(50,895	)		(45,855	)
Loans, net	$	2,758,806		$	2,744,264

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

(Dollars in thousands)
	June 30,						December 31,
	2010			2009			2009
Balance, beginning of year	$	45,855		$	36,905		$	36,905
Provision for loan losses		11,150			10,100			15,697
Charge-offs		(6,628	)		(4,163	)		(7,703	)
Recoveries		518			393			956
Balance, end of period	$	50,895		$	43,235		$	45,855

The provision for loan losses charged to expense is based upon past loan loss experience and an evaluation of estimated losses in the current loan portfolio, including the evaluation of impaired loans under FASB ASC Topic 310 for Loans and Debt Securities. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. 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)

	June 30, 2010		December 31, 2009
Impaired loans with related allowance for loan losses	$	47,999	$	30,473
Impaired loans with no related allowance for loan losses		22,234		41,414
Total impaired loans	$	70,233	$	71,887

Valuation allowance related to impaired loans	$	20,205	$	15,878

Analysis of Impaired Loans

(Dollars in thousands)

	For the six months ended June 30,
	2010		2009
Average impaired loans	$	72,264	$	33,788
Interest income recognized on impaired loans		13		185
Cash basis interest income recognized on impaired loans		866		24

The Company pledges securities and loans to secure it’s borrowings at the Federal Reserve Bank of Philadelphia. At June 30, 2010 and December 31, 2009, loans in the amount of $683.6 million and $682.5 million, respectively, and securities in the amount of $4.1 million and $4.6 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. 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 June 30, 2010, the core deposit intangible net of accumulated amortization totaled $12.3 million. The other amortizing intangibles of $6.4 million, 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 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 June 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		-		(1,301	)		(466	)
Balances at June 30, 2010	$	110,486	$	12,276		$	6,387

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

	June 30, 2010							December 31, 2009
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Amortizing Intangibles:
Core deposits	$	23,215	$	(10,939	)	$	12,276	$	23,215	$	(9,638	)	$	13,577
Customer relationships and other		10,251		(3,864	)		6,387		10,251		(3,398	)		6,853
Total Amortizing	$	33,466	$	(14,803	)	$	18,663	$	33,466	$	(13,036	)	$	20,430

NOTE 7 – DEPOSITS

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

(Dollars in thousands)
	June 30,		December 31,
	2010		2009
Non-interest bearing deposits	$	279,268	$	242,412
Interest earning checking accounts		1,204,034		1,122,515
Money market accounts		616,143		665,757
Savings accounts		635,994		532,511
Total core deposits	$	2,735,439	$	2,563,195
Time deposits		882,010		946,052
Total deposits	$	3,617,449	$	3,509,247

At June 30, 2010 and December 31, 2009, $867.1 million 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 June 30, 2010 and December 31, 2009 are summarized as follows:

(Dollars in thousands)

	June 30, 2010		December 31, 2009
FHLB advances	$	133,000	$	169,750
Repurchase agreements		235,000		235,000
Statutory trust debenture		25,308		25,299
Other		-		3,571
Total borrowed funds	$	393,308	$	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 June 30, 2010 and December 31, 2009, the Bank met all capital adequacy requirements to which it was subject.

As of June 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 June 30, 2010:
Tier 1 Capital (to average assets)	$	458,467	9.94%	$	138,300	3.00%	$	230,500	5.00%
Tier 1 Capital (to risk weighted assets)	$	458,467	16.52%	$	111,000	4.00%	$	166,500	6.00%
Total Capital (to risk weighted assets)	$	493,469	17.78%	$	222,000	8.00%	$	277,500	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 six months ended June 30, 2010, the Company recorded an income tax expense of $3.8 million, for an effective tax rate of 22.4%, compared to a tax expense of $0.7 million, for an effective tax rate of 11.9% for the same period in 2009. The increase was due primarily to an increase in income before income taxes of $11.1 million to $16.9 million for the six months ended June 30, 2010, from income before income taxes of $5.8 million for the six months ended June 30, 2009. In addition, increases in average tax exempt securities and loans of $95.4 million for the six months ended June 30, 2010 compared to the same period in 2009 helped to minimize the overall increase 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 and tax credits received on affordable housing partnerships. These tax credits relate to investments maintained by the Bank as a limited partner in partnerships that sponsor affordable housing projects utilizing low-income housing tax credits pursuant to Section 42 of the Internal Revenue Code.

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 Company enhanced its 401(k) Plan and combined it with its Employee Stock Ownership Plan to fund employer contributions.

The components of net pension cost are as follows:

(Dollars in thousands)

	Pension Benefits						Other Postretirement Benefits
	Three Months Ended June 30,						Three Months Ended June 30,
	2010			2009			2010			2009
Service cost	$	-		$	-		$	53		$	43
Interest cost		964			932			332			374
Expected return on assets		(927	)		(767	)		-			-
Amortization of loss (gain)		215			195			(2	)		3
Amortization of prior service cost		-			-			47			36
Amortization of transition obligation		-			-			41			41
Net periodic pension cost	$	252		$	360		$	471		$	497

	Pension Benefits						Other Postretirement Benefits
	Six Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Service cost	$	-		$	-		$	107		$	86
Interest cost		1,929			1,863			664			748
Expected return on assets		(1,855	)		(1,535	)		-			-
Amortization of loss		430			391			(4	)		7
Amortization of prior service cost		-			-			94			73
Amortization of transition obligation		-			-			82			81
Net periodic pension cost	$	504		$	719		$	943		$	995

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 initial public offering, the Company implemented an Employee Stock Ownership Plan (“ESOP”), which provides retirement benefits for substantially all full-time employees who were employed at the date of the initial public offering and are at least 21 years of age. Other salaried employees will be eligible after they have completed 1 year of service and have attained the age of 21. The Company makes annual contributions to the ESOP equal to the ESOP’s debt service or equal to the debt service 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 Company’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 June 30, 2010 was $26.3 million compared to $28.9 million at June 30, 2009.

The Company recorded an expense of approximately $0.9 million and $1.8 million for the three and six month periods ended June 30, 2010, respectively, and an expense of approximately $0.7 million and $1.6 million for the three and six month periods ended June 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 June 30, 2010, 68,000 shares were fully vested and 77,500 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 six month periods ended June 30, 2010 was $0.5 million and $0.8 million, respectively, compared to $0.5 million and $0.9 million for the three and six month periods ending June 30, 2009, respectively.

The following table summarizes the non-vested stock award activity for the six months ended June 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		150,500			9.70
Vested		(6,000	)		8.35
Forfeited		(77,500	)		11.10
Non-vested Stock Awards outstanding, June 30, 2010		903,500		$	11.05

The fair value of the 6,000 shares vested during the six months ended June 30, 2010 was $0.1 million. No shares vested for the three months ended June 30, 2010. No shares were vested for the three or six months ended June 30, 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 six months ended June 30, 2010, the Company granted 276,600 options compared to 227,250 during the six months ended June 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 six months ended June 30, 2010 the compensation expense for options was $0.3 million and $0.6 million, respectively compared to $0.3 million and $0.6 million for the three and six months ended June 30, 2009, respectively. A summary of option activity as of June 30, 2010 and changes during the six month period is presented below:

	Number of Options			Weighted Average Price per Shares

January 1, 2010		1,922,250		$	11.44
Granted		276,600			9.70
Exercised		(1,500	)		8.35
Forfeited		(127,200	)		11.44
Expired		(25,000	)		11.86
June 30, 2010		2,045,150		$	11.20

The weighted average remaining contractual term was approximately 8.4 years for options outstanding as of June 30, 2010. As of June 30, 2010, there were 393,050 options that were exercisable. No options were exercisable as of June 30, 2009.

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

	For the Six Months Ended			For the Six Months Ended
	June 30, 2010			June 30, 2009
Weighted average fair value of options granted	$	3.56		$	2.94
Weighted average risk-free rate of return		2.99	%		2.38	%
Weighted average expected option life in months		78			78
Weighted average expected volatility		29.87	%		29.77	%
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 June 30, 2010, there was $4.6 million of total unrecognized compensation cost related to options and $7.5 million in unrecognized compensation cost related to non-vested stock awards, granted under the EIP. As of June 30, 2009, there was $5.3 million in unrecognized compensation cost related to options and $8.5 million in unrecognized compensation cost related to non-vested stock awards, granted under the EIP. The average weighted lives for the option expense were 3.5 and 4.2 years for six months ended June 30, 2010 and June 30, 2009, respectively. The average weighted lives for the stock award expense was 3.6 years and 4.2 years as of June 30, 2010 and June 30, 2009, respectively.

NOTE 14 – COMMITMENTS AND CONTINGENCIES

Outstanding loan commitments totaled $361.2 million at June 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 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 June 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.

In June 2009, FASB issued guidance regarding variable interest entities which is now incorporated into FASB ASC Topic 810 for Consolidation, which addresses certain provisions regarding consolidation of variable interest entities. This guidance defines the primary beneficiary of variable interest entities as meeting the following two criteria 1) the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance 2) the obligation to absorb the losses or receive the benefits that could potentially be significant to the variable interest entity. This statement changes the current requirements which are based on a quantitative approach to a more qualitative approach. Additionally, the statement requires ongoing reassessments of whether an enterprise is the primary beneficiary of the variable interest entity. This statement is effective for periods beginning after November 15, 2009. Management adopted this guidance and deconsolidated the two variable interest entities. As result of the deconsolidation, premises and equipment was reduced by $14.1 million, other assets increased by $9.1 million and liabilities decreased by $5.0 million.

NOTE 16 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Effective January 1, 2008, 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 six months ended June 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 June 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 June 30, 2010 are as follows:

(Dollars in thousands)
	Category Used for Fair Value Measurement As of June 30, 2010
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available for sale:
U.S. GSE and agency notes			$	307,103			$	307,103
GNMA guaranteed mortgage certificates				9,613				9,613
Collateralized mortgage obligations (“CMOs”)
Government (GNMA) guaranteed CMOs				9,290				9,290
Agency CMOs				38,179				38,179
Non-agency CMOs				70,276				70,276
Other mortgage-backed securities				599,101				599,101
Municipal bonds
General obligation municipal bonds				118,933				118,933
Revenue municipal bonds				19,357				19,357
Mutual funds (large blend)				1,517				1,517
Pooled trust preferred securities (financial industry)					$	15,210		15,210
Equity securities (financial industry)	$	3,105						3,105
Money market funds		41,514						41,514
Certificates of deposit		311						311
Total	$	44,930	$	1,173,369	$	15,210	$	1,233,509

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 TBA values.

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 three months ended June 30, 2010.

Level 3 Investments Only (Dollars in thousands)	Period Ended June 30, 2010
Trust Preferred Securities
Balance, January 1, 2010	$	18,797
Total gains or losses realized/(unrealized):		-
Included in earnings		-
Included in OCI		(474	)
Payments		(3,113	)
Purchases, issuances and settlements		-
Transfers in and/or out of Level 3		-
Balance, June 30, 2010	$	15,210

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 June 30, 2010 are measured based on the estimated fair value of the collateral since the loans are collateral dependent.

For the quarter ended June 30, 2010 there were $2.3 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 June 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:

	Category Used for Fair Value Measurement
	Balance at June 30, 2010		Level 1		Level 2		Level 3
Goodwill	$	110,486	$	-	$	-	$	110,486
Impaired loans		70,233		-		-		70,233
Other real estate owned		2,302		-		2,302		-

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.

	Fair Value of Financial Instruments
	At June 30, 2010				At December 31, 2009

			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value

Assets:
Cash and cash equivalents	$	186,504	$	186,504	$	179,701	$	179,701
Trading securities		25,575		25,575		31,825		31,825
Investment securities		1,376,419		1,378,919		1,363,183		1,365,026

Loans - net		2,758,805		2,739,522		2,744,264		2,663,740

Liabilities:
Checking deposits		1,483,305		1,483,305		1,363,516		1,363,516
Money market and savings accounts		1,252,135		1,252,135		1,199,679		1,199,679
Time deposits		882,010		890,229		946,052		954,835
Borrowed funds		393,308		392,702		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 singe 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 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 unassignable 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 June 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 consolidated financial statements since June 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.

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

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

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

Critical Accounting Policies

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

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. 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. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Goodwill and Intangible Assets. Net assets of companies acquired in purchase transactions are recorded at fair value at the date of acquisition and, as such, the historical cost basis of individual assets and liabilities are adjusted to reflect their fair value. Identified intangibles are amortized on an accelerated or straight-line basis over the period benefited. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment, at the reporting unit level. The impairment test is performed in two phases. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure must be performed. That additional procedure compares the implied fair value of the reporting unit’s goodwill (as defined in 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 of December 31. 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 June 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 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.

Background and Overview

The Company is a community-based, diversified financial services company providing consumer and commercial banking services. Its principal subsidiary, Beneficial Bank (the “Bank”), has served individuals and businesses in the Delaware Valley area for more than 156 years. The Company is the oldest and largest bank headquartered in Philadelphia, Pennsylvania with 68 offices in the greater Philadelphia and Southern New Jersey regions. 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.

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

At June 30, 2010 total assets increased $202.6 million, or 4.3%, to $4.9 billion from December 31, 2009. The increase was attributable to an increase in cash and cash equivalents of $46.4 million, trading and investment securities of $7.0 million, net loans of $14.5 million and other assets of $144.0 million. The increase in other assets is primarily due to $120.0 million of municipal securities that had been purchased and sold at June 30, 2010 but had not yet settled and had a corresponding offset in other liabilities.

Total deposits increased $108.2 million, or 3.1%, to $3.6 billion at June 30, 2010 compared to $3.5 billion at December 31, 2009. Increases in checking accounts of $118.3 million and savings accounts of $103.5 million were partially offset by decreases in time deposits of $64.0 million and money market accounts of $49.6 million.

Stockholders’ equity totaled $659.2 million, or 13.5% of total assets, at June 30, 2010 compared to $637.0 million, or 13.6% of total assets at December 31, 2009. The Bank’s tangible equity to tangible assets totaled 11.17% at June 30, 2010 compared to 11.14% at December 31, 2009.

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

General – The Company recorded net income of $5.6 million, or $0.07 per share, for the three months ended June 30, 2010, compared to a net loss of $.05 million, or $0.00 per share, for the same period in 2009. The increase in net income was primarily the result of an increase in net interest income of $8.7 million, partially offset by an increase in non-interest expense of $1.7 million and an increase in tax expense of $2.4 million.

Net Interest Income – The Company’s net interest income increased $8.7 million, or 28.7%, to $39.1 million for the three months ended June 30, 2010 from $30.4 million for the same period in 2009. The net interest margin increased 33 basis points to 3.57% for the quarter ended June 30, 2010, from 3.24% for the same quarter in 2009. Included in the three months ended June 30, 2010 is a benefit of a 7 basis point increase due to a $788 thousand interest recovery from a payoff of an impaired loan that had been acquired as part of the Company’s acquisition of FMS Financial Corp. in 2007. Total interest income increased $4.7 million to $51.7 million for the three months ended June 30, 2010 from the same period in 2009. This was due to an increase in average interest earning assets of $635.1 million to $4.4 billion for the three months ended June 30, 2010 from $3.8 billion for the same period in 2009 partially offset by a decrease in the average yield on interest earning assets of 29 basis points to 4.71% for the three months ended June 30, 2010 compared to 5.00% for the same period in 2009. Total interest expense decreased $4.0 million to $12.5 million for the three months ended June 30, 2010 from $16.5 million for the same period in 2009. This was due to a shift in the deposit mix from higher yielding time deposits into lower yielding core deposits.

Provision for Loan Losses – The Bank recorded a provision for loan losses of $6.2 million for the quarter ended June 30, 2010 compared to a provision of $7.1 million for the quarter ended June 30, 2009. The provision includes reserves for specific commercial and residential loans, as well as general reserves resulting from the ongoing evaluation of risk factors applied to the loan portfolio in combination with portfolio growth. The allowance for loan losses at June 30, 2010 totaled $50.9 million, or 1.8% of total loans outstanding, compared to $45.9 million, or 1.6%, of total loans outstanding at December 31, 2009 and $43.2 million, or 1.6%, of total loans at June 30, 2009. The provision for loan losses was determined by management to be an appropriate amount to maintain a balance of allowance for loan losses at a level necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date.

Non-interest Income – Non-interest income increased to $6.3 million for the quarter ended June 30, 2010, from $6.1 million recorded for the same quarter in 2009. This growth is attributable to increases in consumer and commercial service charges and banking fees. During the quarter ended June 30, 2010, the Company recorded a gain on the sale of trading securities of $0.1 million compared to $1.3 million of gains on the sale of investment securities during the quarter ended June 30, 2009. No impairment charges were recorded on investment securities for the quarters ended June 30, 2010 or June 30, 2009.

Non-interest Expense – Non-interest expense for the quarter ended June 30, 2010 increased $1.7 million or 5.8% to $31.5 million compared to $29.8 million for the quarter ended June 30, 2009. The increase is primarily due to increases in salaries and benefits resulting from normal merit increases as well as growth in the number of employees. The Company also had increases in marketing, internet banking and debit card reward expenses as product capabilities and Company visibility in the marketplace were enhanced.

Income Taxes – Income tax expense totaled $2.1 million for the quarter ended June 30, 2010, compared to an income tax benefit of $0.2 million for the same period in 2009. The increase was due primarily to an increase in income before income taxes of $8.0 million to $7.7 million for the three months ended June 30, 2010, from a loss before income taxes of $0.3 million for the three months ended June 30, 2009. In addition, increases in average tax exempt securities and loans of $89.9 million for the three months ended June 30, 2010 compared to the same period in 2009 helped to minimize the overall increase in the effective income tax rate.

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

Average Balance Tables

(Dollars in thousands)	Three Months Ended June 30,							Three Months Ended June 30,
	2010							2009
	Average		Interest &		Yield /			Average		Interest &		Yield /
	Balance		Dividends		Cost			Balance		Dividends		Cost

Assets:
Interest-bearing demand deposits	$	-	$	-		0.00	%	$	162	$	2		4.94	%
Loans		2,791,881		37,947		5.44	%		2,618,588		33,921		5.18	%
Trading Securities		8,917		23		1.01	%		-		-		0.00	%
Overnight Investments		66,856		44		0.26	%		-		-		0.00	%
Investment securities		745,330		5,003		2.68	%		120,007		1,139		3.80	%
Mortgage backed securities		627,711		7,371		4.70	%		794,252		10,059		5.07	%
Collateralized mortgage obligations		124,071		1,243		4.01	%		149,865		1,702		4.54	%
Other interest earning assets		28,068		26		0.37	%		74,835		137		0.73	%
Total interest earning assets		4,392,834		51,657		4.71	%		3,757,709		46,960		5.00	%
Non-interest earning assets		373,087		-					358,882		-
Total assets	$	4,765,921	$	51,657				$	4,116,591	$	46,960

Liabilities and stockholders’ equity:
Interest earning checking accounts	$	1,232,296	$	2,501		0.81	%	$	741,285		2,113		1.14	%
Money market accounts		623,293		1,259		0.81	%		599,439		2,152		1.44	%
Savings accounts		609,145		1,072		0.71	%		401,818		551		0.55	%
Time deposits		878,971		3,646		1.67	%		991,939		7,037		2.84	%
Total interest-bearing deposits		3,343,705		8,478		1.02	%		2,734,481		11,853		1.73	%
Fed Funds Purchased		3,941		2		0.25	%		-		-		0.00	%
Federal Home Loan Bank advances		135,253		1,294		3.83	%		174,793		1,766		4.04	%
Repurchase agreements		235,000		2,605		4.45	%		240,000		2,663		4.44	%
FHLB overnight borrowings		1,099		2		0.61	%		-		-		0.00	%
Federal Reserve overnight borrowings		2,224		4		0.75	%		-		-		0.00	%
Statutory Trust Debenture		25,306		127		2.01	%		25,288		215		3.40	%
Other borrowings		-		-		0.00	%		4,193		47		4.48	%
Total interest-bearing liabilities		3,746,528		12,512		1.34	%		3,178,755		16,544		2.08	%
Non-interest-bearing deposits		267,194		-					271,985		-
Other non-interest-bearing liabilities		100,117		-					45,701		-
Total liabilities		4,113,839		12,512					3,496,441		16,544
Total stockholders’ equity		652,082							620,150
Total liabilities and stockholders’ equity	$	4,765,921						$	4,116,591
Net interest income			$	39,145						$	30,416
Interest rate spread						3.37	%						2.92	%
Net interest margin						3.57	%						3.24	%
Average interest-earning assets to average
interest-bearing liabilities						117.25	%						118.21	%

Comparison of Operating Results for the Six Months Ended June 30, 2010 and June 30, 2009

General – The Company recorded net income of $13.1 million, or $0.17 per share, for the six months ended June 30, 2010, compared to net income of $5.1 million, or $0.07 per share, for the same period in 2009. The increase in net income was primarily the result of an increase in net interest income of $15.6 million, partially offset by an increase in non-interest expense of $3.8 million.

Net Interest Income – Net interest income for the six months ended June 30, 2010 increased $15.6 million to $75.4 million compared to $59.9 million for the six months ended June 30, 2009 with the net interest margin increasing 22 basis points to 3.45%. Included in the six months ended June 30, 2010 is a benefit of a 3 basis point increase due to a $788 thousand interest recovery from a payoff of an impaired loan that had been acquired as part of the Company’s acquisition of FMS Financial Corp. in 2007. Strong asset growth coupled with a shift in our deposit mix to lower cost deposit categories were the primary reasons for the remaining margin expansion. The Company experienced continued growth in the average balance of the loan portfolio, which increased $250.3 million to $2.8 billion at June 30, 2010 from $2.5 billion reported at June 30, 2009, and resulted in a $7.2 million increase in interest income during the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The shift in the deposit mix from higher yielding time deposits into lower yielding core deposits resulted in a $7.3 million reduction in interest expense on deposits for the six months ended June 30, 2010 compared to the same period in 2009.

Interest expense on borrowings decreased $1.0 million to $8.4 million for the six months ended June 30, 2010 compared to $9.4 million for the same period in 2009 primarily due to a decline in the average balance of Federal Home Loan Bank advances, repurchase agreements and overnight borrowings.

Provision for Loan Losses – The Bank recorded a provision for loan losses of $11.2 million for the six months ended June 30, 2010 compared to a provision of $10.1 million for the six months ended June 30, 2009. The provision includes reserves for specific commercial and residential loans, as well as general reserves resulting from the ongoing evaluation of risk factors applied to the loan portfolio in combination with portfolio growth. The allowance for loan losses at June 30, 2010 totaled $50.9 million, or 1.8% of total loans outstanding, compared to $43.2 million, or 1.6% of total loans outstanding, at June 30, 2009. We continue to rigorously review our loan portfolio to ensure that the collateral values remain sufficient to support the outstanding loan balances.

Non-interest Income – For the six months ended June 30, 2010, non-interest income increased to $14.6 million from $14.2 million for the six months ended June 30, 2009. The growth is primarily attributable to increases in insurance and advisory commission income, consumer and commercial service charges and banking fees. During the six months ended June 30, 2010, the Company recorded gains on the sale of investments of $2.0 million compared to $4.2 million of gains on the sale of investments for the six months ended June 30, 2009. Results for the six months ended June 30, 2009 included $1.2 million of impairment charges on investment securities. No impairment charges were recorded on investment securities for the six months ended June 30, 2010.

Non-interest Expense – Non-interest expense for the six months ended June 30, 2010 increased $3.8 million, or 6.5%, to $62.0 million compared to $58.2 million for the six months ended June 30, 2009. The increase is primarily due to an increase in salaries and benefits resulting from normal merit increases as well as growth in the number of employees. The Company had increases in marketing, internet banking and debit card reward expenses as enhancements to product capabilities and visibility in the marketplace continue to be a priority. For the six months ended June 30, 2010, our efficiency ratio improved to 68.7% from 78.5% for the six months ended June 30, 2009.

Income Taxes – Income tax expense totaled $3.8 million for the six months ended June 30, 2010, reflecting an effective tax rate of 22.4%, compared to income tax expense of $0.7 million, reflecting an effective tax rate of 11.9%, for the same period in 2009. The increase was due primarily to an increase in income before income taxes of $11.1 million to $16.9 million for the six months ended June 30, 2010, from income before income taxes of $5.8 million for the six months ended June 30, 2009. In addition, increases in average tax exempt securities and loans of $95.4 million for the six months ended June 30, 2010 compared to the same period in 2009 helped to minimize the overall increase in the effective income tax rate.

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

Average Balance Tables
	Six Months Ended June 30,							Six Months Ended June 30,
	2010							2009
	Average		Interest &		Yield /			Average		Interest &		Yield /
	Balance		Dividends		Cost			Balance		Dividends		Cost

Assets:
Interest-bearing demand deposits	$	-	$	-		0.00	%	$	178	$	5		5.62	%
Loans		2,790,036		74,460		5.36	%		2,539,777		67,278		5.30	%
Trading Securities		9,803		56		1.15	%		-		-		0.00	%
Overnight Investments		134,995		169		0.25	%		-		-		0.00	%
Investment securities		629,262		8,954		2.85	%		114,186		2,227		3.90	%
Mortgage backed securities		653,442		15,409		4.72	%		826,032		21,246		5.14	%
Collateralized mortgage obligations		130,203		2,613		4.01	%		160,521		3,542		4.41	%
Other interest earning assets		28,068		76		0.54	%		67,184		190		0.57	%
Total interest earning assets		4,375,809		101,737		4.66	%		3,707,878		94,488		5.10	%
Non-interest earning assets		396,781							354,923
Total assets	$	4,772,590	$	101,737				$	4,062,801	$	94,488

Liabilities and stockholders’ equity:
Interest earning checking accounts	$	1,220,358	$	5,059		0.83	%	$	680,733	$	4,096		1.20	%
Money market accounts		632,574		2,560		0.82	%		577,774		5,019		1.74	%
Savings accounts		582,339		2,044		0.71	%		396,636		1,135		0.57	%
Time deposits		894,203		8,227		1.87	%		1,009,375		14,984		2.97	%
Total interest-bearing deposits		3,329,474		17,890		1.09	%		2,664,518		25,234		1.89	%
Fed Funds Purchased		1,981		2		0.25	%
Federal Home Loan Bank advances		149,377		2,961		4.00	%		174,840		3,496		4.00	%
Repurchase agreements		235,000		5,179		4.44	%		240,000		5,299		4.42	%
FHLB overnight borrowings		553		2		0.61	%		-		-		0.00	%
Fed Res overnight borrowings		1,118		4		0.75	%		-		-
Statutory Trust Debenture		25,304		250		1.98	%		25,286		413		3.27	%
Other borrowings		592		-		0.00	%		27,823		151		1.09	%
Total interest-bearing liabilities		3,743,399		26,288		1.42	%		3,132,467		34,593		2.21	%
Non-interest-bearing deposits		258,485							264,939
Other non-interest-bearing liabilities		122,173							50,037
Total liabilities		4,124,057		26,288					3,447,443		34,593

Total stockholders’ equity		648,533							615,358
Total liabilities and stockholders’ equity	$	4,772,590						$	4,062,801
Net interest income			$	75,449						$	59,895
Interest rate spread						3.24	%						2.89	%
Net interest margin						3.45	%						3.23	%
Average interest-earning assets to average
interest-bearing liabilities						116.89	%						118.37	%

Asset Quality

The Company does not engage in subprime lending and investment activities, which are characterized by the advancing of mortgage loans to borrowers who do not qualify for market interest rates because of problems with their credit history. At June 30, 2010, the Company’s investment in pooled trust preferred collateralized debt obligations included three securities, each of which are the most senior tranches, with a total book value of $18.3 million and an estimated fair value of $15.2 million. These securities are backed by trust preferred capital securities issued by banks. The senior tranches of collateralized debt obligations generally are protected from defaults by over-collateralization.

Non-performing loans, including loans 90 days past due and still accruing, decreased to $113.3 million, or 2.32% of total assets at June 30, 2010 from $120.5 million, or 2.58% of total assets at December 31, 2009. Included in non-performing loans at June 30, 2010 is $24.8 million, or 21.9% of total non-performing loans, that are government guaranteed student loans where The Company has nominal 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.

Net charge-offs during the quarter ended June 30, 2010 were $1.7 million, compared to $1.2 million during the quarter ended June 30, 2009. The allowance for loan losses at June 30, 2010 was 1.8% of total loans outstanding, compared to 1.6% of total loans outstanding, at December 31, 2009.

The Bank recorded a provision for loan losses of $6.2 million and $11.2 million for the three and six months ended June 30, 2010, respectively, compared to a provision of $7.1 million and $10.1 million for the three and six months ended June 30, 2009, respectively. The provision includes reserves for specific commercial and residential loans, as well as general reserves resulting from the ongoing evaluation of risk factors applied to the loan portfolio in light of the continued weakness in the commercial real estate market. We continue to rigorously review our loan portfolio to ensure that the collateral values remain sufficient.

Real estate owned increased to $10.7 million during the six months ended June 30, 2010 from $9.1 million at December 31, 2009.

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 June 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 June 30, 2010, cash and cash equivalents totaled $226.1 million. In addition, at June 30, 2010, our maximum borrowing capacity with the FHLB was $749.0 million. On June 30, 2010, we had $133.0 million of advances outstanding and $163.9 million of letters of credit outstanding with the FHLB.

A significant use of our liquidity is the funding of loan originations. At June 30, 2010, we had $361.1 million in loan commitments outstanding, which consisted of $149.6 million and $17.0 million in commercial and consumer commitments to fund loans, respectively, $168.3 million in commercial and consumer unused lines of credit, and $26.2 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 June 30, 2010 totaled $603.1 million, or 68.4% of certificates of deposit, at June 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 June 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 June 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	$	166,643	$	165,978	$	-	$	-	$	665
Unused lines of credit		168,326		104,192		-		-		64,134
Standby letters of credit		26,206		26,206		-		-		-
Operating lease obligations		29,884		5,029		8,304		5,231		11,320
Total	$	391,059	$	301,405	$	8,304	$	5,231	$	76,119

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 June 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 June 30, 2010, the Company had repurchased 566,304 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 June 30, 2010 approximately 82.27 % 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 June 30, 2010 approximately 8.29% of the investment portfolio was rated below AAA but rated investment grade by Moody’s and/or S&P, approximately 1.25% of the investment portfolio was rated below investment grade by Moody’s and/or S&P and approximately 8.19% 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 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 June 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.

Quantitative Aspects of Market Risk

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

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

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

The tables below set forth an approximation of our interest rate risk exposure. The simulation uses projected repricing of assets and liabilities at June 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 June 30, 2010
Basis point change in rates		-200		Base Forecast			+200
(Dollars in thousands)

Net Interest Income at Risk:
Net Interest Income	$	150,277		$	157,757	$	156,477
% change		(4.74	%)				(0.81	%)

Net Income at Risk:
Net income	$	17,497		$	22,425	$	21,663
% change		(21.97	%)				(3.40	%)

Economic Value at Risk:
Equity	$	647,162		$	688,754	$	601,486
% change		(6.04	%)				(12.67	%)

As of June 30, 2010, based on the scenarios above, net interest income, net income and economic value at risk would be adversely affected over a one-year time horizon in both a rising and a declining rate environment.

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 June 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 June 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

Recently enacted regulatory reform may have a material impact on our operations.

On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act restructures the regulation of depository institutions. 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.

Except as listed above, as of June 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. 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, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended June 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)

April 1-30, 2010		-		-		-		1,412,680
May 1-30, 2010		-		-		-		1,412,680
June 1-30, 2010		155,400		10.02		155,400		1,257,280

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

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