Beneficial Mutual Bancorp Inc - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - Beneficial Mutual Bancorp Inc	c19114exv32.htm
EX-31.1 - EXHIBIT 31.1 - Beneficial Mutual Bancorp Inc	c19114exv31w1.htm
EX-31.2 - EXHIBIT 31.2 - Beneficial Mutual Bancorp Inc	c19114exv31w2.htm
EXCEL - IDEA: XBRL DOCUMENT - Beneficial Mutual Bancorp Inc	Financial_Report.xls

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)


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

For the quarterly period ended June 30, 2011


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 þ 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 þ 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 þ		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 þ

As of August 4, 2011, there were 80,717,553 shares of the registrant’s common stock outstanding. Of such shares outstanding, 45,792,775 were held by Beneficial Savings Bank MHC and 34,924,778 shares were publicly held.

BENEFICIAL MUTUAL BANCORP, INC.

Table of Contents


	Page
	No.
Part I. Financial Information

Item 1. Financial Statements (unaudited)

Unaudited Condensed Consolidated Statements of Financial Condition as of June 30, 2011 and December 31, 2010		1

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010		2

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2011		3

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010		4

Notes to Unaudited Condensed Consolidated Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		36

Item 3. Quantitative and Qualitative Disclosures About Market Risk		55

Item 4. Controls and Procedures		56

Part II. Other Information

Item 1. Legal Proceedings		57

Item 1A. Risk Factors		57

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		57

Item 3. Defaults Upon Senior Securities		58

Item 4. (Removed and Reserved)		58

Item 5. Other Information		58

Item 6. Exhibits		58

Signatures		59

Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION


Item 1.		Financial Statements

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Financial Condition

(Dollars in thousands, except share amounts)


	June 30,			December 31,
	2011			2010
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from banks	$	36,458		$	33,778
Interest-bearing deposits		310,704			56,521

Total cash and cash equivalents		347,162			90,299


Trading securities		—			6,316

INVESTMENT SECURITIES:
Available-for-sale (amortized cost of $870,834 and $1,527,183 at June 30, 2011 and December 31, 2010, respectively)		901,563			1,541,991
Held-to-maturity (estimated fair value of $409,380 and $88,648 at June 30, 2011 and December 31, 2010, respectively)		406,914			86,609
Federal Home Loan Bank stock, at cost		20,978			23,244

Total investment securities		1,329,455			1,651,844


LOANS		2,729,592			2,796,402
Allowance for loan losses		(51,298	)		(45,366	)

Net loans		2,678,294			2,751,036


ACCRUED INTEREST RECEIVABLE		17,496			19,566

BANK PREMISES AND EQUIPMENT, Net		61,302			64,339

OTHER ASSETS
Goodwill		110,486			110,486
Bank owned life insurance		34,529			33,818
Other intangibles		15,153			16,919
Other assets		118,604			185,162

Total other assets		278,772			346,385

TOTAL ASSETS	$	4,712,481		$	4,929,785


LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Non-interest bearing deposits	$	288,799		$	282,050
Interest-bearing deposits		3,468,642			3,660,254

Total deposits		3,757,441			3,942,304

Borrowed funds		250,326			273,317
Other liabilities		80,700			98,617

Total liabilities		4,088,467			4,314,238


COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred Stock — $.01 par value; 100,000,000 shares authorized, none issued or outstanding as of June 30, 2011 and December 31, 2010		—			—
Common Stock — $.01 par value 300,000,000 shares authorized, 82,267,457 shares issued and 80,717,553 shares outstanding as of June 30, 2011 and December 31, 2010		823			823
Additional paid-in capital		349,221			348,415
Unearned common stock held by employee stock ownership plan		(21,066	)		(22,587	)
Retained earnings (partially restricted)		305,313			304,232
Accumulated other comprehensive income (loss)		3,177			(1,882	)
Treasury Stock at cost, 1,549,904 shares at June 30, 2011 and December 31, 2010		(13,454	)		(13,454	)

Total stockholders’ equity		624,014			615,547

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	4,712,481		$	4,929,785

See accompanying notes to unaudited condensed consolidated financial statements.

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)


	For the Three Months Ended				For the Six Months Ended
	June 30,		June 30,		June 30,			June 30,
	2011		2010		2011			2010
INTEREST INCOME:
Interest and fees on loans	$	35,610	$	37,947	$	71,436		$	74,460
Interest on overnight investments		247		44		349			169
Interest on trading securities		—		23		26			56
Interest and dividends on investment securities:
Taxable		8,952		12,382		18,924			24,650
Tax-exempt		923		1,261		1,915			2,402

Total interest income		45,732		51,657		92,650			101,737

INTEREST EXPENSE:
Interest on deposits:
Interest bearing checking accounts		2,195		2,501		4,625			5,059
Money market and savings deposits		2,293		2,331		4,698			4,604
Time deposits		3,354		3,646		6,473			8,227

Total		7,842		8,478		15,796			17,890
Interest on borrowed funds		2,137		4,034		4,405			8,398

Total interest expense		9,979		12,512		20,201			26,288


Net interest income		35,753		39,145		72,449			75,449

Provision for loan losses		10,000		6,200		20,000			11,150


Net interest income after provision for loan losses		25,753		32,945		52,449			64,299


NON-INTEREST INCOME:
Insurance and advisory commission and fee income		1,667		1,762		4,204			4,772
Service charges and other income		3,470		4,424		7,163			7,689
Net gain on sale of investment securities		233		—		419			2,004
Trading securities profits		—		86		81			112

Total non-interest income		5,370		6,272		11,867			14,577


NON-INTEREST EXPENSE:
Salaries and employee benefits		13,482		15,103		28,492			30,736
Occupancy expense		2,635		2,915		5,728			6,060
Depreciation, amortization and maintenance		2,143		2,240		4,391			4,417
Marketing expense		872		1,648		1,769			2,650
Intangible amortization expense		906		884		1,766			1,767
FDIC Insurance		1,621		1,382		3,260			2,704
Restructuring charge		963		—		5,058			—
Other		6,475		7,307		12,836			13,630

Total non-interest expense		29,097		31,479		63,300			61,964


Income (loss) before income taxes		2,026		7,738		1,016			16,912

Income tax expense (benefit)		47		2,142		(65	)		3,788


NET INCOME (LOSS)	$	1,979	$	5,596	$	1,081		$	13,124


EARNINGS PER SHARE — Basic	$	0.03	$	0.07	$	0.01		$	0.17
EARNINGS PER SHARE — Diluted	$	0.03	$	0.07	$	0.01		$	0.17

Average common shares outstanding — Basic		77,092,682		77,840,396		77,049,673			77,812,874
Average common shares outstanding — Diluted		77,301,043		78,008,337		77,255,328			77,962,324

See accompanying notes to unaudited condensed consolidated financial statements.

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands, except share amounts)


																Accumulated
	Number of				Additional			Common								Other			Total
	Shares		Common		Paid in			Stock held			Retained		Treasury			Comprehensive			Stockholders’			Comprehensive
	Issued		Stock		Capital			by KSOP			Earnings		Stock			Income (Loss)			Equity			Income

BALANCE, JANUARY 1, 2011		82,267,457	$	823	$	348,415		$	(22,587	)	$	304,232	$	(13,454	)	$	(1,882	)	$	615,547

Net Income												1,081								1,081			1,081
KSOP shares committed to be released						(204	)		1,521											1,317
Stock option expense						547														547
Restricted stock shares						463														463
Net unrealized gain on AFS and HTM securities arising during the year (net of deferred tax of $5,070)																	9,416			9,416			9,416
Reclassification adjustment for net losses on AFS securities included in net income (net of tax of $147)																	(272	)		(272	)		(272	)
Pension, other post retirement and postemployment benefit plan adjustments (net of tax benefit of $1,398)																	(4,085	)		(4,085	)		(4,085	)

Total other comprehensive income																							5,059

Comprehensive income																							6,140

BALANCE, JUNE 30, 2011		82,267,457	$	823	$	349,221		$	(21,066	)	$	305,313	$	(13,454	)	$	3,177		$	624,014

See accompanying notes to the unaudited condensed consolidated financial statements.

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)


	Six Months Ended
	June 30,
	2011			2010
OPERATING ACTIVITIES:
Net income	$	1,081		$	13,124
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		20,000			11,150
Depreciation and amortization		2,782			3,095
Intangible amortization		1,766			1,767
Net gain on sale of investments		(419	)		(2,004	)
Accretion of discount on investments		(732	)		(986	)
Amortization of premium on investments		224			267
Gain on sale of loans		(10	)		—
Deferred income taxes		279			(355	)
Net loss from disposition of premises and equipment		991			280
Other real estate impairment		56			67
Amortization of KSOP		1,317			1,560
Increase in bank owned life insurance		(711	)		(774	)
Stock based compensation expense		1,010			1,420
Changes in assets and liabilities that provided (used) cash:
Purchases of trading securities		(216,487	)		(418,795	)
Proceeds from sale of trading securities		223,546			424,954
Accrued interest receivable		2,070			(654	)
Accrued interest payable		397			(616	)
Income taxes payable (receivable)		6,065			(1,288	)
Other liabilities		6,568			(24,512	)
Other assets		3,642			(15,325	)

Net cash provided by (used in) operating activities		53,435			(7,625	)


INVESTING ACTIVITIES:
Loans originated or acquired		(247,503	)		(283,077	)
Principal repayment on loans		296,758			254,280
Proceeds from sale of loans		1,004			—
Purchases of investment securities available for sale		—			(363,929	)
Proceeds from sales and maturities of investment securities available for sale		414,868			470,122
Purchases of investment securities held to maturity		(83,770	)		(59,039	)
Proceeds from sales, maturities, calls or repayments of investment securities held to maturity		40,287			8,766
Net (purchases) proceeds from sales of money market funds		(34,813	)		(36,454	)
Redemption of Federal Home Loan Bank stock		2,266			—
Proceeds from sale of other real estate owned		574			1,718
Purchases of premises and equipment		(1,289	)		(8,923	)
Proceeds from sale of premises and equipment		—			880
Cash used in other investing activities		(1	)		(442	)

Net cash provided by (used in) in investing activities		388,381			(16,098	)


FINANCING ACTIVITIES:
Net decrease in borrowed funds		(22,991	)		(36,741	)
Net (decrease) increase in checking, savings and demand accounts		(221,918	)		172,110
Net increase (decrease) in time deposits		59,956			(64,461	)
Proceeds from stock issuance		—			13
Purchase of treasury stock		—			(795	)

Net cash (used in) provided by financing activities		(184,953	)		70,126


NET INCREASE IN CASH AND CASH EQUIVALENTS		256,863			46,403
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		90,299			179,701

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	347,162		$	226,104


SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash payments for interest	$	15,399		$	18,497
Cash payments for income taxes		—			5,432
Transfers of loans to other real estate owned		2,493			3,105
Transfers of bank branches to other real estate		—			485
Transfers of bank branches to fixed assets held for sale		553			—
Transfers of securities at fair value from available for sale to held to maturity		276,828			—

See accompanying notes to the unaudited condensed consolidated financial statements.

BENEFICIAL MUTUAL BANCORP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Annual Report on Form 10-K filed by Beneficial Mutual Bancorp, Inc. (the “Company” or “Bancorp”) with the U. S. Securities and Exchange Commission on March 11, 2011. The results for the three and six month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011 or any other period.

Principles of Consolidation

The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Specifically, the financial statements include the accounts of Beneficial Mutual Savings Bank, the Company’s wholly owned subsidiary (“Beneficial Bank” or the “Bank”), and the Bank’s wholly owned subsidiaries. The Bank’s wholly owned subsidiaries are as follows: (i) Beneficial Advisors, LLC, which offers non-deposit investment products and 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.

Use of Estimates in the Preparation of Financial Statements

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

NOTE 2 — NATURE OF OPERATIONS

The Company is a federally chartered stock holding company and owns 100% of the outstanding common stock of the Bank, a Pennsylvania chartered stock savings bank. The Bank offers a variety of consumer and commercial banking services to individuals, businesses, and nonprofit organizations through 60 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”). Pursuant to the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Office of Thrift Supervision (the “OTS”), which previously served as the Company’s and the MHC’s primary federal regulator, was eliminated on July 21, 2011. As a result of the elimination of the OTS, effective July 21, 2011, savings and loan holding companies, such as the Company and the MHC, are now regulated by the Board of Governors of the Federal Reserve System. The deposits of the Bank are insured by the Deposit Insurance Fund of the FDIC.

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, 2011 and 2010. 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 12 for further discussion of stock grants.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands, except share and per share amounts)	2011		2010		2011		2010

Basic and diluted earnings per share:
Net income	$	1,979	$	5,596	$	1,081	$	13,124
Basic average common shares outstanding		77,092,682		77,840,396		77,049,673		77,812,874
Effect of dilutive securities		208,361		167,941		205,655		149,450

Dilutive average shares outstanding		77,301,043		78,008,337		77,255,328		77,962,324
Net earnings per share
Basic	$	0.03	$	0.07	$	0.01	$	0.17
Diluted	$	0.03	$	0.07	$	0.01	$	0.17

For the three and six months ended June 30, 2011, there were 2,135,740 and 2,138,840 outstanding options and 26,000 and 0 restricted stock grants, respectively, that were anti-dilutive for the earnings per share calculation. For the three and six months ended June 30, 2010, there were 2,042,850 outstanding options and 0 restricted stock grants, respectively, that were anti-dilutive for the earnings per share calculation.

NOTE 4 — INVESTMENT SECURITIES

The amortized cost and estimated fair value of investments in debt and equity securities at June 30, 2011 and December 31, 2010 are as follows:


	June 30, 2011
	Investment Securities Available-for-Sale
	Historical/		Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Equity securities	$	3,029	$	575	$	12	$	3,592
U.S. Government Sponsored Enterprise (“GSE”) and Agency Notes		250,953		194		128		251,019
GNMA guaranteed mortgage certificates		8,288		272		—		8,560
Collateralized mortgage obligations		70,342		2,400		3		72,739
Other mortgage-backed securities		386,945		26,586		—		413,531
Municipal bonds		89,578		2,333		291		91,620
Pooled trust preferred securities		15,762		—		1,437		14,325
Money market fund		45,937		245		5		46,177

Total	$	870,834	$	32,605	$	1,876	$	901,563


	June 30, 2011
	Investment Securities Held-to-Maturity
	Historical/		Unrealized Losses				Other		Other		Estimated
	Amortized		Recognized in		Book		Unrealized		Unrealized		Fair
	Cost		AOCI (1)		Value		Gains		Losses		Value
U.S. Government Sponsored Enterprise (“GSE”) and Agency Notes	$	290,602	$	1,852	$	288,750	$	864	$	509	$	289,105
GNMA guaranteed mortgage certificates		614		—		614		—		29		585
Other mortgage-backed securities		22,212		—		22,212		1,693		—		23,905
Collateralized mortgage obligations		61,158		—		61,158		277		—		61,435
Municipal bonds		33,680		—		33,680		172		2		33,850
Foreign bonds		500		—		500		—		—		500

Total	$	408,766	$	1,852	$	406,914	$	3,006	$	540	$	409,380


(1)		Amount represents the remaining unamortized portion of the unrealized loss that was recognized in accumulated other comprehensive income on May 18, 2011 (the day on which these securities were transferred from available-for-sale to held-to-maturity).


	December 31, 2010
	Investment Securities Available-for-Sale
	Historical/		Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value

Equity securities	$	3,029	$	206	$	—	$	3,235
U.S. Government Sponsored Enterprise (“GSE”) and Agency Notes		840,011		428		12,544		827,895
GNMA guaranteed mortgage certificates		8,776		213		—		8,989
Collateralized mortgage obligations		89,047		2,421		8		91,460
Other mortgage-backed securities		459,139		26,318		—		485,457
Municipal bonds		99,069		1,040		977		99,132
Pooled trust preferred securities		16,989		3		2,470		14,522
Money market fund		11,123		187		9		11,301

Total	$	1,527,183	$	30,816	$	16,008	$	1,541,991


	December 31, 2010
	Investment Securities Held-to-Maturity
	Historical/		Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

GNMA guaranteed mortgage certificates	$	639	$	—	$	30	$	609
Other mortgage-backed securities		30,876		2,067		—		32,943
Municipal bonds		54,594		59		58		54,595
Foreign bonds		500		1		—		501

Total	$	86,609	$	2,127	$	88	$	88,648

During the six months ended June 30, 2011, the Bank sold $310.4 million of government-sponsored enterprises (“GSE”) securities and $9.2 million of mortgage-backed securities (“MBS securities”) that resulted in a net gain of $387 thousand. The sale of these lower rate, longer term securities was driven by management’s repositioning of the Bank’s balance sheet to improve profitability, interest rate risk, and our capital position.

During the six months ended June 30, 2011, the Bank transferred five debt securities at a fair value of $276.8 million from available-for-sale securities to held-to-maturity securities as management has the intent and ability to hold these securities to maturity. On the date of transfer, the securities had an amortized cost of $278.7 million. The difference between the fair value and the amortized cost was $1.9 million and will be accreted into interest income over the expected life of the securities. This amount will be equally offset by the amortization of the unrealized loss at the date of transfer which is included in accumulated other comprehensive income.

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 Bank determines whether the unrealized losses are temporary in accordance with guidance under FASB ASC Topic 320 for Investments — Debt and Equity Securities. The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. Management also evaluates other facts and circumstances that may be indicative of an OTTI condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.

The Company records the credit portion of 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 Company had an unrealized loss of $1.4 million related to its pooled trust preferred securities as of June 30, 2011 compared to an unrealized loss of $2.5 million at December 31, 2010. Based on the analysis of the underlying cash flows of these securities, there is no expectation of credit impairment.

The Company’s investment in United States GSE and Agency Notes that were in a loss position for less than 12 months at June 30, 2011 consisted of 2 GSE Step Notes with an unrealized loss of 0.4%. The unrealized loss is due to current interest rate and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2011. The Company records the credit portion of 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”).

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, 2011:


	Six Months Ended
	June 30, 2011
Current default rate		3.6	%
Prepayment rate		0.0	%
Loss severity		100	%

One pooled trust preferred security, Trapeza 2003-4A Class A1A, was rated Aa3 by Moody’s and BB+ by Standard & Poor’s, which represents a rating of below investment grade. At June 30, 2011 the book value of the security totaled $8.7 million and the fair value totaled $8.2 million, representing an unrealized loss of $0.5 million, or 6.1%. At June 30, 2011, there were a total of 31 banks currently performing of the 41 remaining banks in the security pool. A total of 17.2%, or $59.0 million, of the current collateral of $343.6 million has defaulted and 11.1%, or $38.0 million, of the current collateral has deferred. Utilizing a cash flow analysis model in analyzing this security, an assumption of 0% recovery of current deferrals and defaults and additional defaults of 3.60% of outstanding collateral, every three years beginning in November 2011, with a 0% recovery, was modeled and resulted in no cash flow shortfalls to our tranche. This represents the assumption of an additional 24.8% of defaults from the remaining performing collateral of $246.6 million. Excess subordination for the Trapeza 2003-4A Class A1A security represents 65.0% of the remaining performing collateral. The excess subordination of 65.0% is calculated by taking the remaining performing collateral of $246.6 million, subtracting the Class A-1 or senior tranche balance of $86.3 million and dividing this result, $160.3 million, by the remaining performing collateral. This excess subordination represents the additional collateral supporting our tranche.

The remaining pooled trust preferred security, US Capital Fund III Class A-1, is rated Baa2 by Moody’s and CCC- by Standard & Poor’s, which represents a rating of below investment grade. At June 30, 2011, the book value of the security totaled $7.1 million and the fair value totaled $6.2 million, representing an unrealized loss of $0.9 million, or 12.8%. At June 30, 2011, there were a total of 30 banks currently performing of the 42 remaining banks in the security pool. A total of 15.7%, or $33.0 million, of the current collateral of $209.7 million has defaulted and 13.4%, or $28.2 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 September 2011, with a 0% recovery, was modeled and resulted in no cash flow shortfalls to our tranche. This represents the assumption of an additional 24.1% of defaults from the remaining performing collateral of $148.5 million. Excess subordination for the US Capital Fund III A-1 security represents 44.3% of the remaining performing collateral. The excess subordination of 44.3% is calculated by taking the remaining performing collateral of $148.5 million, subtracting the Class A-1 or senior tranche balance of $82.8 million and dividing this result, $65.7 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, 2011 and December 31, 2010:


	At June 30, 2011
	Less than 12 months				12 months or longer				Total
			Unrealized				Unrealized				Unrealized
(Dollars in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
GSE and Agency Notes	$	149,067	$	636	$	103	$	1	$	149,170	$	637
Mortgage-backed securities		—		—		585		29		585		29
Municipal and other bonds		33,177		271		1,186		22		34,363		293
Pooled trust preferred securities		—		—		14,322		1,437		14,322		1,437
Collateralized mortgage obligations		—		—		129		3		129		3

Subtotal, debt securities		182,244		907		16,325		1,492		198,569		2,399
Equity securities		275		12		—		—		275		12
Mutual fund		333		5		—		—		333		5

Total temporarily impaired securities	$	182,852	$	924	$	16,325	$	1,492	$	199,177	$	2,416


	At December 31, 2010
	Less than 12 months				12 months or longer				Total
			Unrealized				Unrealized				Unrealized
(Dollars in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
GSE and Agency Notes	$	692,008	$	12,544	$	—	$	—	$	692,008	$	12,544
Mortgage-backed securities		—		—		608		30		608		30
Municipal and other bonds		82,066		946		1,119		89		83,185		1,035
Pooled trust preferred securities		—		—		14,188		2,470		14,188		2,470
Collateralized mortgage obligations		500		3		163		5		663		8

Subtotal, debt securities		774,574		13,493		16,078		2,594		790,652		16,087
Mutual fund		304		9		—		—		304		9

Total temporarily impaired securities	$	774,878	$	13,502	$	16,078	$	2,594	$	790,956	$	16,096

The following table sets forth the stated maturities of the investment securities at June 30, 2011 and December 31, 2010. Mutual funds, money market funds and equity securities are not included in the table based on lack of maturity.


	June 30, 2011				December 31, 2010
	Book		Estimated		Book		Estimated
(Dollars are in thousands)	Value		Fair Value		Value		Fair Value

Available-for-sale:
Due in one year or less	$	3,710	$	3,775	$	2,393	$	2,406
Due after one year through five years		11,051		11,463		151,758		152,430
Due after five years through ten years		316,412		319,040		776,999		766,453
Due after ten years		95,462		95,425		114,279		112,033
Mortgage-backed securities		395,233		422,091		467,915		494,446


Total	$	821,868	$	851,794	$	1,513,344	$	1,527,768


Held-to-maturity:
Due in one year or less	$	31,300	$	31,384	$	52,214	$	52,196
Due after one year through five years		14,025		14,063		2,130		2,136
Due after five years through ten years		338,638		339,308		625		636
Due after ten years		125		135		125		128
Mortgage-backed securities		22,826		24,490		31,515		33,552


Total	$	406,914	$	409,380	$	86,609	$	88,648

At June 30, 2011 and December 31, 2010, $655.5 million and $863.4 million, respectively, of securities were pledged to secure municipal deposits. At June 30, 2011 and December 31, 2010, the Company had $143.3 million and $153.4 million, respectively, of securities pledged as collateral on secured borrowings. At June 30, 2011 and December 31, 2010, the Company also pledged $2.9 million and $3.4 million, respectively, of securities to secure its borrowing capacity at the Federal Reserve Bank of Philadelphia.

At June 30, 2011 and December 31, 2010, the Company held stock in the FHLB of Pittsburgh totaling $21.0 million and $23.2 million, respectively. The Company accounts for the stock based on guidance which requires that the investment be carried at cost and be evaluated for impairment based on the ultimate recoverability of the par value. The Company evaluated its holdings in FHLB stock at June 30, 2011 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

Major classifications of loans at June 30, 2011 and December 31, 2010 are summarized as follows:


(Dollars in thousands)	June 30, 2011			December 31, 2010

Commercial:
Commercial real estate	$	581,375		$	600,734
Commercial business loans		420,238			441,881
Commercial construction		273,837			268,314

Total Commercial		1,275,450			1,310,929

Residential
Residential real estate		681,558			687,565
Residential construction		8,685			11,157

Total real estate loans		690,243			698,722

Consumer loans:
Home equity		281,224			288,875
Personal		84,691			94,036
Education		241,673			249,696
Automobile		156,311			154,144

Total consumer loans		763,899			786,751

Total loans		2,729,592			2,796,402

Allowance for losses		(51,298	)		(45,366	)

Loans, net	$	2,678,294		$	2,751,036

Included in the balance of residential loans are $501 thousand of loans held for sale at June 30, 2011. As of December 31, 2010, the Bank did not have any loans held for sale. These loans are carried at estimated fair value, on an aggregate basis. Loans held for sale are loans originated by the Bank to be sold to a third party under contractual obligation to purchase the loans from the Bank. During the second quarter of 2011, the Bank sold residential mortgage loans with an unpaid principal balance of $999 thousand and recognized a pre-tax gain of $10 thousand, which was recorded in non-interest income as a component of service charges and other income. The Bank retained the related mortgage servicing rights and receives a 25 basis point servicing fee. The Bank had no loan sales during 2010.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the adequacy of the allowance for loan losses balance on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings. The Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a specific valuation allowance on identified problem loans; (2) a general valuation allowance on the remainder of the loan portfolio; and (3) an unallocated component. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available to absorb losses in the loan portfolio. The Company charges-off the collateral deficiency on all loans at 90 days past due and, as a result, no specific valuation allowance was maintained at June 30, 2011 or December 31, 2010.

The summary activity in the allowance for loan losses for all portfolios for the six months ended June 30, 2011 and June 30, 2010 and for the year ended December 31, 2010, is as follows:


	Six Months Ended						Year Ended
	June 30,						December 31,
	2011			2010			2010

Balance, beginning of year	$	45,366		$	45,855		$	45,855
Provision for loan losses		20,000			11,150			70,200
Charge-offs		(16,646	)		(6,628	)		(71,642	)
Recoveries		2,578			518			953


Balance, end of period	$	51,298		$	50,895		$	45,366

The following tables set forth the activity in the allowance for loan losses by portfolio for the six months ended June 30, 2011 and for the year ended December 31, 2010:


	COMMERCIAL						RESIDENTIAL				CONSUMER
											Home
											Equity &
June 30, 2011	Real						Real				Equity								Not
(Dollars in thousands)	Estate		Business		Construction		Estate		Construction		Lines		Personal		Education		Auto		Allocated		Total
Allowance for credit losses:

Beginning balance	$	14,793	$	14,407	$	9,296	$	1,854	$	30	$	2,136	$	977	$	297	$	1,026	$	550	$	45,366
Charge-offs		4,145		2,628		7,695		273		36		358		846		72		593		—		16,646
Recoveries		540		787		674		—		—		188		123		—		266		—		2,578
Provision		4,675		2,085		10,547		186		267		118		1,350		185		587		—		20,000

Allowance ending balance	$	15,863	$	14,651	$	12,822	$	1,767	$	261	$	2,084	$	1,604	$	410	$	1,286	$	550	$	51,298


Allowance ending balance
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		15,863		14,651		12,822		1,767		261		2,084		1,604		410		1,286		550		51,298

Total Allowance	$	15,863	$	14,651	$	12,822	$	1,767	$	261	$	2,084	$	1,604	$	410	$	1,286	$	550	$	51,298


Financing receivable:
Ending balance
Individually evaluated for impairment	$	35,503	$	26,279	$	53,116	$	16,253	$	1,116	$	482	$	815	$	—	$	161	$	—	$	133,725
Collectively evaluated for impairment		545,872		393,959		220,721		665,305		7,569		280,742		83,876		241,673		156,150		—		2,595,867

Total Portfolio	$	581,375	$	420,238	$	273,837	$	681,558	$	8,685	$	281,224	$	84,691	$	241,673	$	156,311	$	—	$	2,729,592


	COMMERCIAL						RESIDENTIAL						CONSUMER
													Home
													Equity &
December 31, 2010	Real						Real						Lines of									Not
(Dollars in thousands)	Estate		Business		Construction		Estate			Construction			Credit		Personal		Education			Auto		Allocated		Total
Allowance for credit losses:

Beginning balance	$	9,842	$	20,515	$	4,344	$	5,460		$	97		$	2,169	$	1,041	$	903		$	1,484	$	—	$	45,855
Charge-offs		22,210		14,505		29,631		918			—			2,106		984		198			1,090		—		71,642
Recoveries		162		171		—		2			—			71		208		—			339		—		953
Provision		26,999		8,226		34,583		(2,690	)		(67	)		2,002		712		(408	)		293		550		70,200

Allowance ending balance	$	14,793	$	14,407	$	9,296	$	1,854		$	30		$	2,136	$	977	$	297		$	1,026	$	550	$	45,366


Allowance ending balance
Individually evaluated for impairment	$	—	$	—	$	—	$	—		$	—		$	—	$	—	$	—		$	—	$	—	$	—
Collectively evaluated for impairment		14,793		14,407		9,296		1,854			30			2,136		977		297			1,026		550		45,366

Total Allowance	$	14,793	$	14,407	$	9,296	$	1,854		$	30		$	2,136	$	977	$	297		$	1,026	$	550	$	45,366


Financing receivable:
Ending balance
Individually evaluated for impairment	$	28,769	$	21,634	$	31,519	$	13,414		$	308		$	—	$	89	$	—		$	70	$	—	$	95,803
Collectively evaluated for impairment		571,965		420,247		236,795		674,151			10,849			288,875		93,947		249,696			154,074		—		2,700,599

Total Portfolio	$	600,734	$	441,881	$	268,314	$	687,565		$	11,157		$	288,875	$	94,036	$	249,696		$	154,144	$	—	$	2,796,402

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. Under the accounting guidance FASB ASC Topic 310 for Receivables, for all loan segments a loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired. When all or a portion of the loan is deemed uncollectible, the uncollectible portion is charged off. The measurement is based either on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral-dependent. Most of our commercial loans are collateral dependent and therefore the Company uses the value of the collateral to measure the loss. Any collateral shortfall for loans that are 90 days past due are charged-off. 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.

Classified Loans

The Bank’s credit review process includes a risk classification of all commercial and residential loans that includes pass, special mention, substandard and doubtful. The classification of a loan may change based on changes in the creditworthiness of the borrower. The description of the risk classifications are as follows:

A loan is classified as pass when payments are current and it is performing under the original contractual terms and conditions. A loan is classified as special mention when the borrower exhibits potential credit weakness or a downward trend which, if not checked or corrected, will weaken the asset or inadequately protect the bank’s position. While potentially weak, the borrower is currently marginally acceptable; no loss of principal or interest is envisioned. A loan is classified as substandard when the borrower has a well defined weakness or weaknesses that jeopardize the orderly liquidation of the debt. A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor, normal repayment from this borrower is in jeopardy, and there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. A loan is classified as doubtful when a borrower has all weaknesses inherent in one classified as substandard with the added provision that: (1) the weaknesses make collection of debt in full on the basis of currently existing facts, conditions and values highly questionable and improbable; (2) serious problems exist to the point where a partial loss of principal is likely (3) the possibility of loss is extremely high, but because of certain important, reasonably specific pending factors which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens and additional refinancing plans. The Company charges-off the collateral deficiency on all loans classified as substandard. In all cases, loans are placed on nonaccrual when 90 days past due or earlier if collection of principal or interest is considered doubtful.

The following tables set forth the amounts and percentage of the portfolio of classified asset categories for the commercial and residential loan portfolios at June 30, 2011 and December 31, 2010:

Commercial and Residential Loans

Credit Risk Internally Assigned

(Dollars in thousands)


	June 30, 2011
	Commercial				Commercial				Commercial				Residential				Residential
	Real Estate				Business				Construction				Real Estate				Construction				Total
Grade
Pass	$	534,890	92	%	$	367,017	87	%	$	207,269	76	%	$	665,305	98	%	$	7,569	87	%	$	1,782,050	91	%
Special Mention		10,982	2	%		26,942	7	%		13,452	5	%		—	—	%		—	—	%		51,376	2	%
Substandard		25,291	4	%		22,199	5	%		37,848	14	%		16,253	2	%		1,116	13	%		102,707	5	%
Doubtful		10,212	2	%		4,080	1	%		15,268	5	%		—	—	%		—	—	%		29,560	2	%

Total	$	581,375	100	%	$	420,238	100	%	$	273,837	100	%	$	681,558	100	%	$	8,685	100	%	$	1,965,693	100	%


	December 31, 2010
	Commercial				Commercial				Commercial				Residential				Residential
	Real Estate				Business				Construction				Real Estate				Construction				Total
Grade
Pass	$	558,679	93	%	$	408,148	92	%	$	204,824	76	%	$	674,151	98	%	$	10,849	97	%	$	1,856,651	92	%
Special Mention		6,375	1	%		9,557	2	%		26,711	10	%		—	—	%		—	—	%		42,643	2	%
Substandard		26,044	4	%		21,794	5	%		19,996	8	%		13,414	2	%		106	1	%		81,354	4	%
Doubtful		9,636	2	%		2,382	1	%		16,783	6	%		—	—	%		202	2	%		29,003	2	%

Total	$	600,734	100	%	$	441,881	100	%	$	268,314	100	%	$	687,565	100	%	$	11,157	100	%	$	2,009,651	100	%

The increase in substandard loans from December 31, 2010 is primarily driven by commercial construction and residential real estate loans. We have assessed the value of the collateral supporting these loans and recorded a charge-off if the carrying amount of the loan exceeded the fair value of the collateral.

The Bank’s credit review process is based on payment history for all consumer loans. The collateral deficiency on consumer loans is charged off when they become 90 days delinquent with the exception of education loans which are guaranteed by the government. The following tables set forth the consumer loan risk profile based on payment activity at June 30, 2011 and December 31, 2010:

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

(Dollars in thousands)


	June 30, 2011
	Home Equity &
	Lines of Credit				Personal				Education				Auto				Total
Performing	$	280,742	100	%	$	83,876	99	%	$	216,500	90	%	$	156,150	100	%	$	737,268	97	%
Nonperforming		482	—	%		815	1	%		25,173	10	%		161	—	%		26,631	3	%

Total	$	281,224	100	%	$	84,691	100	%	$	241,673	100	%	$	156,311	100	%	$	763,899	100	%


	December 31, 2010
	Home Equity &
	Lines of Credit				Personal				Education				Auto				Total
Performing	$	288,875	100	%	$	93,947	100	%	$	221,808	89	%	$	154,074	100	%	$	758,704	96	%
Nonperforming		—	—	%		89	—	%		27,888	11	%		70	—	%		28,047	4	%

Total	$	288,875	100	%	$	94,036	100	%	$	249,696	100	%	$	154,144	100	%	$	786,751	100	%

Loan Delinquencies and Non-accrual Loans

The Company monitors the past due and non-accrual status of loans in determining the loss classification, impairment status and in determining the allowance for loan losses. Generally, all loans past due 90 days are put on non-accrual status. Education loans greater than 90 days delinquent continue to accrue interest as they are government guaranteed.

Once a loan has been put on non-accrual status, it will only be put back on accruing status when the following criteria are met; (1) the ultimate collectability of all amounts contractually due on the loan being considered for accrual status are not in doubt, and (2) there is a period of satisfactory payment performance by the borrower. Generally, a period of satisfactory payment performance by the borrower is at least six months for a monthly amortizing loan; but could be a longer period of time depending on the facts and circumstances, including the value of the loan collateral and consideration of guarantees. For loans in which the principal amortization schedule is extended or where interest payments are deferred and capitalized; the period of satisfactory payment performance is assessed in detail as the six month period noted above will most likely not be long enough to support placing the loan back on accruing status.

The Bank considers a loan a troubled debt restructured (“TDR”) when the borrower is experiencing financial difficulty and we grant a concession that we would not otherwise consider but for the borrower’s financial difficulties. A TDR includes a modification of debt terms or assets received in satisfaction of the debt (includes foreclosure or deed in lieu of foreclosure) or a combination of types. The Bank evaluates selective criteria to determine if a borrower is experiencing financial difficulty including the ability of the borrower to obtain funds from sources other than the Bank at market rates. The Bank considers all TDR loans as impaired loans and they are put on non-accrual status. The Bank will not consider the loan a TDR if the loan modification was a result of a customer retention program.

We had 39 TDRs at June 30, 2011 totaling $27.0 million and 24 TDRs at December 31, 2010 totaling $26.7 million. All TDRs are included in non-accrual loans at June 30, 2011 and December 31, 2010.

The following tables provide information about delinquent and non-accrual loans in our portfolio at the dates indicated:

Aged Analysis of Past Due and Non-accrual Financing Receivables
As of June 30, 2011


																									Recorded
	30-59				60-89				> 90																Investment
	Days				Days				Days				Total								Total				>90 Days
	Past				Past				Past				Past								Financing				And		Non-
(Dollars in thousands)	Due				Due				Due				Due				Current				Receivables				Accruing		Accruing
Commercial:
Commercial real estate	$	12,250	25	%	$	2,412	13	%	$	17,200	17	%	$	31,862	19	%	$	549,513	21	%	$	581,375	21	%	$	—	$	28,481	24	%
Commercial business loans		4,101	8	%		275	2	%		11,693	12	%		16,069	10	%		404,169	16	%		420,238	15	%		—		24,496	21	%
Commercial construction		12,228	25	%		—	—	%		35,904	36	%		48,132	29	%		225,705	9	%		273,837	10	%		—		46,894	40	%

Total commercial	$	28,579	58	%	$	2,687	15	%	$	64,797	65	%	$	96,063	58	%	$	1,179,387	46	%	$	1,275,450	46	%	$	—	$	99,871	85	%

Residential:
Residential real estate	$	2,213	4	%	$	2,554	14	%	$	7,515	8	%	$	12,282	7	%	$	669,276	26	%	$	681,558	25	%	$	—	$	16,252	14	%
Residential construction		—	—	%		470	3	%		646	1	%		1,116	1	%		7,569	—	%		8,685	1	%		—		1,116	1	%

Total residential	$	2,213	4	%	$	3,024	17	%	$	8,161	9	%	$	13,398	8	%	$	676,845	26	%	$	690,243	26	%	$	—	$	17,368	15	%

Consumer loans:
Home equity & lines of credit	$	1,249	3	%	$	3	—	%	$	482	1	%	$	1,734	1	%	$	279,490	11	%	$	281,224	10	%	$	—	$	482	—	%
Personal		1,102	2	%		229	1	%		187	—	%		1,518	1	%		83,173	3	%		84,691	3	%		—		815	—	%
Education		14,967	30	%		11,817	66	%		25,173	25	%		51,957	31	%		189,716	8	%		241,673	9	%		25,173		—	—	%
Automobile		1,780	3	%		184	1	%		—	—	%		1,964	1	%		154,347	6	%		156,311	6	%		—		161	—	%

Total consumer	$	19,098	38	%	$	12,233	68	%	$	25,842	26	%	$	57,173	34	%	$	706,726	28	%	$	763,899	28	%	$	25,173	$	1,458	—	%


Total	$	49,890	100	%	$	17,944	100	%	$	98,800	100	%	$	166,634	100	%	$	2,562,958	100	%	$	2,729,592	100	%	$	25,173	$	118,697	100	%

Aged Analysis of Past Due and Non-accrual Financing Receivables
As of December 30, 2010


																									Recorded
	30-59				60-89				> 90																Investment
	Days				Days				Days				Total								Total				>90 Days
	Past				Past				Past				Past								Financing				And		Non-
(Dollars in thousands)	Due				Due				Due				Due				Current				Receivables				Accruing		Accruing
Commercial:
Commercial real estate	$	2,243	6	%	$	520	3	%	$	16,158	22	%	$	18,921	15	%	$	581,813	22	%	$	600,734	21	%	$	—	$	28,769	30	%
Commercial business loans		4,810	13	%		246	1	%		6,712	9	%		11,768	9	%		430,113	16	%		441,881	16	%		—		21,634	23	%
Commercial construction		4,706	13	%		1,581	10	%		14,110	19	%		20,397	16	%		247,917	9	%		268,314	10	%		—		31,519	33	%

Total commercial	$	11,759	32	%	$	2,347	14	%	$	36,980	50	%	$	51,086	40	%	$	1,259,843	47	%	$	1,310,929	47	%	$	—	$	81,922	86	%

Residential:
Residential real estate	$	5,619	15	%	$	1,850	11	%	$	8,522	12	%	$	15,991	13	%	$	671,574	25	%	$	687,565	25	%	$	44	$	13,414	14	%
Residential construction		—	—	%		—	—	%		308	—	%		308	—	%		10,849	—	%		11,157	—	%		—		308	—	%

Total residential	$	5,619	15	%	$	1,850	11	%	$	8,830	12	%	$	16,299	13	%	$	682,423	25	%	$	698,722	25	%	$	44	$	13,722	14	%

Consumer loans:
Home equity & lines of credit	$	906	2	%	$	100	1	%	$	—	—	%	$	1,006	1	%	$	287,869	11	%	$	288,875	10	%	$	—	$	—	—	%
Personal		1,064	3	%		247	2	%		8	—	%		1,319	1	%		92,717	4	%		94,036	3	%		—		89	—	%
Education		16,156	44	%		11,229	70	%		27,888	38	%		55,273	44	%		194,423	7	%		249,696	9	%		27,888		—	—	%
Automobile		1,537	4	%		315	2	%		—	—	%		1,852	1	%		152,292	6	%		154,144	6	%		—		70	—	%

Total consumer	$	19,663	53	%	$	11,891	75	%	$	27,896	38	%	$	59,450	47	%	$	727,301	28	%	$	786,751	28	%	$	27,888	$	159	—	%


Total	$	37,041	100	%	$	16,088	100	%	$	73,706	100	%	$	126,835	100	%	$	2,669,567	100	%	$	2,796,402	100	%	$	27,932	$	95,803	100	%

Impaired Loans

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 the extent of the 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 or discounted cash flows. However, collateral value is predominantly used to assess the fair value of an impaired loan. Those impaired loans not requiring an allowance represent loans for which the fair value of the collateral or expected repayments exceed the recorded investments in such loans.

Components of Impaired Loans


											Interest
											Income
			Unpaid				Average		Interest		Recognized
Year to date June 30, 2011	Recorded		Principal		Related		Recorded		Income		Using Cash
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Recognized*		Basis
Impaired loans with no related specific allowance recorded:
Commercial Real Estate	$	28,481	$	40,586	$	—	$	29,222	$	14	$	—
Commercial Business		24,496		31,081		—		24,631		1		—
Commercial Construction		46,894		70,122		—		40,748		122		—
Residential Real Estate		16,252		16,802		—		15,298		2		—
Residential Construction		1,116		1,214		—		337		5		—
Home Equity and Lines of Credit		482		482		—		320		—		—
Personal		815		949		—		450		8		—
Auto		161		161		—		115		4		—

Total Impaired Loans:	$	118,697	$	161,397	$	—	$	111,121	$	156	$	—

Commercial		99,871		141,789		—		94,601		137		—
Residential		17,368		18,016		—		15,635		7		—
Consumer		1,458		1,593		—		885		12		—

Total	$	118,697	$	161,397	$	—	$	111,121	$	156	$	—


											Interest
											Income
For the year ended			Unpaid				Average		Interest		Recognized
December 31, 2010	Recorded		Principal		Related		Recorded		Income		Using Cash
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Recognized*		Basis
Impaired loans with no related specific allowance recorded:
Commercial Real Estate	$	28,769	$	50,044	$	—	$	29,028	$	6	$	795
Commercial Business		21,634		32,114		—		13,870		—		71
Commercial Construction		31,519		61,150		—		33,946		—		—
Residential Real Estate		13,414		13,823		—		3,745		—		—
Residential Construction		308		722		—		302		—		—
Consumer Personal		159		159		—		339		—		—

Total Impaired Loans:	$	95,803	$	158,012	$	—	$	81,230	$	6	$	866

Commercial		81,922		143,308		—		76,844		6		866
Residential		13,722		14,545		—		4,047		—		—
Consumer		159		159		—		339		—		—

Total	$	95,803	$	158,012	$	—	$	81,230	$	6	$	866


*		Amounts represent interest income recognized on impaired loans during the year prior to impaired status.

The Company charged off the collateral deficiency on all impaired loans and as a result, no specific valuation allowance was required for any impaired loans at June 30, 2011.


	For the Six Months Ended				For the Year Ended
Analysis of Impaired Loans	June 30,		June 30,		December 31,
(Dollars in thousands)	2011		2010		2010

Average impaired loans	$	111,121	$	72,264	$	81,230
Interest income recognized on impaired loans		156		13		6
Cash basis interest income recognized on impaired loans		—		866		866

Interest income that would have been recorded for the six months ended June 30, 2011, had impaired loans been current according to their original terms, amounted to approximately $3.0 million.

Nonperforming loans (which includes nonaccrual loans and loans past 90 days or more and still accruing) at June 30, 2011 and 2010 amounted to approximately $143.9 million and $113.3 million, respectively, and included $25.2 million and $24.8 million in guaranteed student loans, respectively. As of June 30, 2011, all impaired loans greater than 90 days delinquent are on a non accrual status and all payments are applied to principal.

The Bank pledges securities and loans to secure its borrowings at the Federal Reserve Bank of Philadelphia. At June 30, 2011 and December 31, 2010, loans in the amount of $564.6 million and $619.1 million, respectively, were pledged to secure the Company’s borrowing capacity at the Federal Reserve Bank of Philadelphia.

NOTE 6 — OTHER ASSETS

The following table provides selected information on other assets at June 30, 2011 and December 31, 2010:


	June 30,		December 31,
(Dollars in thousands)	2011		2010
Investments in affordable housing and other partnerships	$	18,389	$	20,378
Cash surrender value of life insurance		18,783		18,629
Prepaid assets		13,382		15,873
Net deferred tax assets		28,123		31,928
Other real estate		18,740		16,694
Accounts receivable — ACH		—		22,901
Accounts receivable — trading securities		—		31,127
Fixed assets held for sale		3,627		3,074
Mortgage servicing rights		266		219
All other assets		17,294		24,339

Total other assets	$	118,604	$	185,162

During the six months ended June 30, 2011, the Company determined that five Bank branches would be consolidated into existing branch locations. As a result, there were two owned branches that were transferred to fixed assets held for sale at their fair market value, less costs to sell of $553 thousand, and a loss of $947 thousand was recorded as part of the restructuring charge in non-interest expense for the six months ended June 30, 2011.

The Company follows the authoritative guidance under ASC 860-50 Servicing Assets and Liabilities to account for its mortgage servicing rights (“MSRs”). Effective January 1, 2011, the Company elected the fair value measurement method to value its existing mortgage servicing assets at fair value in accordance with ASC 860-50. Under the fair value measurement method, the Company measures its MSRs at fair value at each reporting date and reports changes in the fair value of its MSRs in earnings in the period in which the changes occur.

NOTE 7 — DEPOSITS

Deposits at June 30, 2011 and December 31, 2010 are summarized as follows:


	June 30,		December 31,
(Dollars in thousands)	2011		2010
Non-interest bearing deposits	$	288,799	$	282,050
Interest earning checking accounts		409,688		420,873
Municipal checking accounts		777,067		1,072,574
Money market accounts		603,137		622,050
Savings accounts		770,667		696,629
Time deposits		908,083		848,128

Total deposits	$	3,757,441	$	3,942,304

NOTE 8 — BORROWED FUNDS

Borrowed funds at June 30, 2011 and December 31, 2010 are summarized as follows:


	June 30,		December 31,
(Dollars in thousands)	2011		2010
FHLB advances	$	100,000	$	113,000
Repurchase agreements		125,000		135,000
Statutory trust debenture		25,326		25,317

Total borrowed funds	$	250,326	$	273,317

The Company pledges securities and loans to secure its borrowings at the Federal Reserve Bank of Philadelphia. At June 30, 2011 and December 31, 2010, loans in the amount of $564.6 million and $619.1 million, respectively, were pledged to secure the Company’s borrowing capacity at the Federal Reserve Bank of Philadelphia. At June 30, 2011 and December 31, 2010, the Company had $143.3 million and $153.4 million, respectively, of securities pledged as collateral on secured borrowings. At June 30, 2011 and December 31, 2010, the Company also pledged $2.9 million and $3.4 million, respectively, of securities to secure its borrowing capacity at the Federal Reserve Bank of Philadelphia.

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, 2011 and December 31, 2010, the Bank met all capital adequacy requirements to which it was subject.

As of June 30, 2011 and December 31, 2010, 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:


						To Be Well Capitalized
						Under Prompt Corrective
	Actual					Action Provisions
	Capital					Capital
(Dollars in thousands)	Amount		Ratio			Amount		Ratio

As of June 30, 2011:
Tier 1 Capital (to average assets)	$	438,794		9.28	%	$	236,314		5.00	%
Tier 1 Capital (to risk weighted assets)		438,794		17.13	%		153,716		6.00	%
Total Capital (to risk weighted assets)		471,169		18.39	%		256,194		10.00	%

As of December 31, 2010:
Tier 1 Capital (to average assets)	$	432,374		8.89	%	$	243,200		5.00	%
Tier 1 Capital (to risk weighted assets)		432,374		15.69	%		165,300		6.00	%
Total Capital (to risk weighted assets)		467,051		16.95	%		275,600		10.00	%

NOTE 10 — INCOME TAXES

For the six months ended June 30, 2011, the Company recorded an income tax benefit of $65 thousand, for an effective tax rate of 6.4%, compared to an income tax expense of $3.8 million, for an effective tax rate of 22.4%, for the same period in 2010. The difference was due to a decrease in income before income taxes of $15.9 million, to $1.0 million for the six months ended June 30, 2011, from income before income taxes of $16.9 million for the six months ended June 30, 2010. The decrease in income before income taxes for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010 was primarily due to an increase in the provision for loan losses of $8.9 million, a restructuring charge of $5.1 million and a decrease in gains on the sale of investment securities of $1.6 million.

The income tax rates differ from the statutory rate of 35% principally because of tax-exempt investments, non-taxable income related to bank-owned life insurance, state and local income taxes and tax credits received on low income housing partnerships. Tax-exempt income, state and local income taxes and federal income tax credits increased (reduced) the effective tax rates by (20.5%), 3.8% and (31.1%) in the effective income tax rate calculation for 2011, respectively, and (9.5%), (8.1%), and (10.5%) for 2010, respectively.

As of June 30, 2011, the Company’s net deferred tax assets were $28.1 million. We regularly evaluate the realizability of deferred tax asset positions. In determining whether a valuation allowance is necessary, we consider the level of taxable income in prior years to the extent that carrybacks are permitted under current tax laws, as well as estimates of future pre-tax and taxable income and tax planning strategies that would, if necessary, be implemented. We currently maintain a valuation allowance for certain state net operating losses, charitable contribution carryovers and other-than-temporary impairments, and management believes it is more likely than not that such deferred tax assets will not be realized. We expect to realize our remaining deferred tax assets over the allowable carryback and/or carryforward periods. Therefore, no valuation allowance is deemed necessary against our federal or remaining state deferred tax assets as of June 30, 2011. However, if an unanticipated event occurred that materially changed pre-tax and taxable income in future periods, an increase in the valuation allowance may become necessary.

NOTE 11 — PENSION AND POSTRETIREMENT BENEFIT PLANS

The Bank has non-contributory defined benefit pension plans covering most of its employees. Additionally, the Company sponsors nonqualified supplemental employee retirement plans for certain participants.

In 2010, the Bank’s two qualified defined benefit plans: The Employees’ Pension and Retirement Plan of Beneficial Mutual Savings Bank and the Farmers & Mechanics Bank Restated Pension Plan were merged into one plan under the name of the Beneficial Mutual Savings Bank Consolidated Pension Plan. The merger of the plans did not impact participant benefits.

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

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

The components of net pension cost are as follows:


	Pension Benefits						Other Postretirement Benefits
	Three Months Ended						Three Months Ended
	June 30,						June 30,
(Dollars in thousands)	2011			2010			2011		2010
Service Cost	$	—		$	—		$	60	$	53
Interest Cost		955			964			347		332
Expected return on plan assets		(1,027	)		(927	)		—		—
Amortization of loss (gain)		237			215			67		(2	)
Amortization of prior service cost		—			—			37		47
Amortization of transition obligation		—			—			41		41

Net periodic pension cost	$	165		$	252		$	552	$	471


	Pension Benefits						Other Postretirement Benefits
	Six Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2011			2010			2011		2010
Service Cost	$	—		$	—		$	120	$	107
Interest Cost		1,909			1,929			694		664
Expected return on plan assets		(2,053	)		(1,855	)		—		—
Amortization of loss (gain)		474			430			134		(4	)
Amortization of prior service cost		—			—			73		94
Amortization of transition obligation		—			—			82		82

Net periodic pension cost	$	330		$	504		$	1,103	$	943

NOTE 12 — 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, 2011, 142,500 shares were fully vested and 200,500 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 a return on average assets of 1% or within the top 25% of the SNL index of nationwide thrifts with total assets between $1.0 billion and $10.0 billion nationwide is attained in the fifth full year subsequent to the grant.

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 months ended June 30, 2011 was $146 thousand and $463 thousand, respectively, compared to $509 thousand and $812 thousand for the three and six months ended June 30, 2010, respectively.

The following table summarizes the non-vested stock award activity for the six months ended June 30, 2011:


				Weighted
	Number of			Average
Summary of Non-vested Stock Award Activity	Shares			Grant Price

Non-vested Stock Awards outstanding, January 1, 2011		837,500		$	11.00
Issued		175,500			8.38
Vested		(12,500	)		9.05
Forfeited		(116,500	)		10.95

Non-vested Stock Awards outstanding, June 30, 2011		884,000		$	10.51

The following table summarizes the non-vested stock award activity for the six months ended June 30, 2010:


				Weighted
	Number of			Average
Summary of Non-vested Stock Award Activity	Shares			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 12,500 shares vested during the six months ended June 30, 2011 was $110 thousand. The fair value of the 6,000 awards vested during the six months ending June 30, 2010 was $70 thousand.

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, 2011, the Company granted 352,000 options compared to 276,600 options during the same period ended June 30, 2010. All options issued contain service conditions based on the participant’s continued service. The options generally vest and are exercisable over five years. Compensation expense for the options totaled $257 thousand and $547 thousand for the three and six months ended June 30, 2011, respectively, compared to $324 thousand and $608 thousand for the three and six months ended June 30, 2010, respectively.

A summary of option activity as of June 30, 2011 and changes during the six month period is presented below:


				Weighted Exercise
	Number of Options			Price per Shares

January 1, 2011		2,001,950		$	11.21
Granted		352,000			8.38
Exercised		—			—
Forfeited		(165,740	)		11.09
Expired		(49,370	)		11.17

June 30, 2011		2,138,840		$	10.75

A summary of option activity as of June 30, 2010 and changes during the six month period is presented below:


				Weighted Exercise
	Number of Options			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 7.79 years for options outstanding as of June 30, 2011. Exercisable options totaled 699,440 and 393,050 at June 30, 2011 and 2010, respectively.


	For the Six Months			For the Six Months
	Ended			Ended
	June 30, 2011			June 30, 2010
Weighted average fair value of options granted	$	3.29		$	3.56
Weighted average risk-free rate of return		2.17	%		2.99	%
Weighted average expected option life in months		78			78
Weighted average expected volatility		35.18	%		29.87	%
Expected dividends	$	—		$	—

As of June 30, 2011, there was $3.9 million of total unrecognized compensation cost related to options and $6.2 million in unrecognized compensation cost related to non-vested stock awards granted under the EIP. As of June 30, 2010, there was $4.6 million in unrecognized compensation cost related to options and $7.5 million in unrecognized compensation cost related to non-vested stock awards granted under the EIP. The average weighted lives for the option expense were 3.20 and 3.50 years as of June 30, 2011 and June 30, 2010, respectively. The average weighted lives for the stock award expense were 3.19 and 3.60 years at June 30, 2011 and June 30, 2010, respectively.

NOTE 13 — COMMITMENTS AND CONTINGENCIES

At June 30, 2011 and December 31, 2010, the Company had outstanding commitments to make loans aggregating approximately $42.6 million and $107.2 million, respectively, and commitments to customers on available lines of credit of $170.3 million and $176.8 million, respectively, at competitive rates. Commitments are issued in accordance with the same policies and underwriting procedures as settled loans. We have a reserve for our commitments and contingencies of $414 thousand at June 30, 2011 and December 31, 2010.

In April 2011, we were notified of a lawsuit that was filed with the Court of Common Pleas of Philadelphia County against the Bank related to the notices that we issue to customers in connection with automobile repossessions. Pennsylvania law requires parties who use self-help repossession to provide consumers with a proper repossession and redemption notice shortly after repossession (the “Repo Notice”) and a deficiency notice (the “Deficiency Notice”) shortly after sale. The Plaintiff is alleging that Beneficial’s Repo Notice and Deficiency Notice fail to comply with Pennsylvania law. We have engaged outside counsel to assist with the matter to determine the merits of the above claims and any potential exposure. At the present time, we cannot estimate the potential loss associated with this claim. We will continue to assess this claim in future periods.

Aside from the litigation discussed above, the Company is also involved in routine legal proceedings 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, results of operations and cash flows.

NOTE 14 — RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the FASB Accounting Standards Codification (Codification) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholder’s equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company will comply with guidance and its effective date. The Company does not anticipate any material impact to the financial statements related to this guidance.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to achieve Common Fair Value Measurement (Topic 820) and Disclosure Requirement in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the “Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurement, including a consistent meaning of the term “fair value”. The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments in this update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company will comply with guidance and its effective date. The Company does not anticipate any material impact to the financial statements related to this guidance.

In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The ASU is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments to the Codification in this ASU are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to purchase or redeem the financial assets. The amendments in this update apply to all entities, both public and nonpublic. This ASU is effective for the first interim or annual periods beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modification of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company will comply with guidance and its effective date. The Company does not anticipate any material impact to the financial statements related to this guidance.

Also in April 2011, the FASB issued Accounting Standards Update (ASU) 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring. This update is intended to facilitate a more consistent application of U.S. GAAP for debt restructurings. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of the adoption. The Company will comply with the guidance and its effective date. The Company does not anticipate any material impact to the financial statements related to this guidance.

In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in ASU 2011-01 temporarily delay the effective date of the disclosures about trouble debt restructuring in Update No. 2010-20, Receivables (Topic 310): Disclosures about the Quality of Financing Receivables and the Allowance for Credit Losses, for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes trouble debt restructuring. The effective date of the new disclosures about troubled debt restructuring for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The deferral in ASU 2011-01 is effective January 19, 2011 and relates to ASU 2010-20 as reported in the third quarter of 2010 accounting pronouncements and outlined below.

In December 2010, FASB issued ASU 2010-29 “Business Combinations-Disclosure of Supplementary Pro Forma Information for Business Combinations.” The amendments in this update specify that if a public company presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and the amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. This amendment will be reviewed in further detail when/if the Company plans on acquiring new businesses.

In December 2010, FASB issued ASU 2010-28 “Intangibles-Goodwill and Other-When to Perform step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments of this update affect all entities that have recognized Goodwill and have one or more reporting units whose carrying value for purposes of performing Step 1of the Goodwill impairment test is zero or negative. The amendments are effective for fiscal years, and interim periods within those beginning after December 15, 2010. Early adoption is not permitted. For the quarter ended June 30, 2011, the Company has adopted and complied with the provisions of this guidance. The adoption of this guidance did not have a material impact on the unaudited interim condensed consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20 “Receivables” (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” As a result of this update the financial statements will provide greater transparency about the entity’s allowance for credit losses and the credit quality of its financing receivables. This update affects any entity with financing receivables, excluding short term trade accounts receivable or receivables measured at fair value or lower of cost or fair value. Traditional banking institutions, such as the Bank, that currently measure a large number of financing receivables at amortized cost will be affected to a greater extent than brokers and dealers in securities and investment companies that currently measure most financing receivables at fair value. This guidance will impact the Company’s interim and annual reporting, as this amendment is effective for reporting periods ending on or after December 15, 2010 and the provisions of the guidance are included in Note 5.

In April 2010, the FASB issued 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 is effective for interim and annual periods ending on or after July 15, 2010. This guidance did 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 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 and complied with the provisions of this guidance. The adoption of this guidance did not have a material impact on the unaudited interim condensed consolidated financial statements.

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. For the quarter ended June 30, 2010, the Company has adopted the required disclosures. See Note 15 — Fair Value of Financial Instruments.

NOTE 15 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company follows the authoritative guidance under FASB ASC Topic 820 for Fair Value Measurements and Disclosures. 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. There were no transfers between levels during the six months ended June 30, 2011.

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, 2011, 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, 2011 and December 31, 2010 are as follows:


	Category Used for Fair Value Measurement
	As of June 30, 2011
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Mortgage servicing rights					$	266	$	266
Investment securities available for sale:
U.S. GSE and agency notes				251,019				251,019
GNMA guaranteed mortgage certificates				8,560				8,560
Collateralized mortgage obligations (“CMOs”)
Government (GNMA) guaranteed CMOs				7,069				7,069
Agency CMOs				19,553				19,553
Non-agency CMOs				46,117				46,117
Other mortgage-backed securities				413,531				413,531
Municipal bonds
General obligation municipal bonds				72,474				72,474
Revenue municipal bonds				19,146				19,146
Pooled trust preferred securities (financial industry)						14,325		14,325
Equity securities (financial industry)		3,592						3,592
Money market funds		43,963						43,963
Mutual funds		1,930						1,930
Certificates of deposit		284						284

Total	$	49,769	$	837,469	$	14,591	$	901,829


	Category Used for Fair Value Measurement
	As of December 31, 2010
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Trading Securities			$	6,316			$	6,316
Investment securities available for sale:
U.S. GSE and agency notes				827,895				827,895
GNMA guaranteed mortgage certificates				8,989				8,989
Collateralized mortgage obligations (“CMOs”)
Government (GNMA) guaranteed CMOs				7,979				7,979
Agency CMOs				26,944				26,944
Non-agency CMOs				56,537				56,537
Other mortgage-backed securities				485,457				485,457
Municipal bonds
General obligation municipal bonds				80,265				80,265
Revenue municipal bonds				18,867				18,867
Pooled trust preferred securities (financial industry)					$	14,522		14,522
Equity securities (financial industry)	$	3,235						3,235
Money market funds		8,963						8,963
Mutual funds		2,025						2,025
Certificates of deposit		313						313

Total	$	14,536	$	1,519,249	$	14,522	$	1,548,307

Level 1 Valuation Techniques and Inputs

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

Level 2 Valuation Techniques and Inputs

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

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

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

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

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

Non-Agency (whole loan) CMOs. Included in this category are pass-through certificates, 15-year sequential 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 securities issued by Pennsylvania municipalities and/or school districts rated A or better by S&P or rated Aa3 or better by Moody’s.. 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.

Level 3 Valuation Techniques and Inputs

Pooled Trust Preferred Securities. The underlying value of pooled trust preferred securities 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.

Mortgage Servicing Rights. The Company determines the fair value of its MSRs by estimating the amount and timing of future cash flows associated with the servicing rights and discounting the cash flows using market discount rates. The valuation included the application of certain assumptions made by management of the Bank, including prepayment projections, and prevailing assumptions used in the marketplace at the time of the valuation.

The table below presents all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2011.


Level 3 Investments Only	Six Months Ended
(Dollars in thousands)	June 30, 2011
	*Trust Preferred*			*Mortgage Servicing*
	*Securities*			*Rights*
Balance, January 1, 2011	$	14,522	*	$	268
Included in earnings		—			(2	)
Included in other comprehensive income		1,030			—
Payments		(1,293	)		—
Net accretion / (amortization)		66			—

Balance, June 30, 2011	$	14,325		$	266


*		As described in Note 6 — Other Assets, effective January 1, 2011, the Company elected the fair value measurement method to account for its mortgage servicing rights.


Level 3 Investments Only	Six Months Ended
(Dollars in thousands)	June 30, 2010
	*Trust Preferred Securities*
Balance, January 1, 2010	$	18,797
Included in other comprehensive income		(474	)
Payments		(3,113	)

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. 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, 2011 are measured based on the estimated fair value of the collateral since the loans are collateral dependent.

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


	At
(Dollars in thousands)	June 30, 2011		Level 1		Level 2		Level 3		Gain/(Losses)
Impaired Loans	$	37,894		—		—	$	37,894	$	(16,646	)
Long lived assets held for sale		615		—		615		—		(627	)

	At
(Dollars in thousands)	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				At
	June 30, 2011				December 31, 2010
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Cash and cash equivalents	$	347,162	$	347,162	$	90,299	$	90,299
Trading securities		—		—		6,316		6,316
Investment securities		1,329,455		1,331,921		1,651,844		1,653,883
Loans — net		2,678,294		2,611,081		2,751,036		2,773,373

Liabilities:
Checking deposits		1,475,554		1,475,554		1,787,006		1,787,006
Money market and savings accounts		1,373,804		1,373,804		1,307,170		1,307,170
Time deposits		908,083		914,677		848,128		855,045
Borrowed funds		250,326		252,893		273,317		274,930

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 the future cash flows using the current rate at which similar loans would be made to borrowers with similar credit and for the same remaining maturities. Additionally, to be consistent with the requirements under FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the loans were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.

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, 2011 and December 31, 2010. 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, 2011 and December 31, 2010, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.

NOTE 16 — EMPLOYEE SEVERANCE CHARGES AND OTHER RESTRUCTURING COSTS

During the first quarter of 2011, Beneficial’s management completed a comprehensive review of the Bank’s operating cost structure and finalized an expense management reduction program. As a result of this review, the Bank reduced approximately 4% of its workforce. Additionally, the Bank made the decision to consolidate five of its branch locations into other existing branches. These actions resulted in a $4.1 million restructuring charge, which consisted of $2.5 million of severance, $672 thousand of payments due under employment contract and other costs, and $947 thousand of fixed asset retirement expense. During the second quarter of 2011, $978 thousand of additional severance expense was accrued relating to the departure of an executive officer. These charges are included in restructuring charge, a component of non-interest expense, within the consolidated statements of operations. A schedule of the current restructuring and severance accrual is summarized below as of June 30, 2011:


				Contract termination
(Dollars in thousands)	Severance			and other costs			Total
Accrued at March 31, 2011	$	2,478		$	690		$	3,168
Additional accurals in 2nd quarter		978			—			978
Payments made in the 2nd quarter		(1,185	)		(274	)		(1,459	)

Accrued at June 30, 2011	$	2,271		$	416		$	2,687


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

Forward-Looking Statements

This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area, changes in relevant accounting principles and guidelines and the inability of third party service providers to perform. Additional factors that may affect our results are disclosed in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and its other reports filed with the U.S. Securities and Exchange Commission.

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

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

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

EXECUTIVE SUMMARY

Beneficial Mutual Bancorp Inc. is a federally chartered stock savings and loan holding company and owns 100% of the outstanding common stock of the Bank, a Pennsylvania chartered stock savings bank. On July 13, 2007, the Company completed its initial minority public offering and simultaneous acquisition of FMS Financial Corporation and its wholly owned subsidiary, Farmers & Mechanics Bank, which was merged with and into the Bank. Following the consummation of the merger and public offering, the Company had a total of 82,264,600 shares of common stock, par value $.01 per share, issued and outstanding, of which 36,471,825 were held publicly and 45,792,775 were held by Beneficial Savings Bank MHC.

The Bank offers a variety of consumer and commercial banking services to individuals, businesses, and nonprofit organizations through 60 offices throughout the Philadelphia and Southern New Jersey area. The Bank is supervised and regulated by the Pennsylvania Department of Banking and the FDIC. Pursuant to the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Office of Thrift Supervision was eliminated on July 21, 2011. As a result of the elimination of the Office of Thrift Supervision, effective July 21, 2011, savings and loan holding companies, such as Company and the MHC, are now regulated by the Board of Governors of the Federal Reserve System. 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.

The Bank recorded net income of $2.0 million and $1.1 million for the three and six month periods ended June 30, 2011, respectively, compared to $5.6 million and $13.1 million for the same periods in 2010. Our financial results continued to be impacted by deterioration in asset quality, particularly in our commercial construction portfolio. This resulted in a provision for loan losses of $10.0 million and $20.0 million for three and six months ended June 30, 2011 compared to $6.2 million and $11.2 million for the three and six months ended June 30, 2010. Although some economic measures have shown signs of improvement during 2011, credit quality and revenue growth continue to be challenging. The Company believes recovery of commercial real estate in our region will take some time causing continued downward pressure on property valuation. We expect our provision for credit losses to remain elevated in 2011.

We are focused on improving our operating efficiency and reducing costs. We completed a comprehensive review of our operating cost structure during the first quarter of 2011 and finalized an expense management reduction program which resulted in a $5.1 million restructuring charge for the six months ended June 30, 2011. The impact of the expense management reduction program implemented during the first quarter of 2011 resulted in lower operating expenses which decreased $2.4 million to $29.1 million for the quarter ended June 30, 2011 compared to $31.5 million in the second quarter of 2010.

The Bank also took advantage of the decrease in interest rates during the second quarter to reposition its balance sheet to improve the Bank’s profitability, interest rate risk, and capital position. Through the sale of lower rate, longer term securities and the run-off of higher cost, non relationship based municipal deposits, we have contracted the Bank’s balance sheet by approximately $217.3 million to $4.7 billion at June 30, 2011 from $4.9 billion at December 31, 2010. As a result of the repositioning, the Bank’s tier 1 leverage ratio improved to 9.28% at June 30, 2011 compared to 8.89% at December 31, 2010 and the Bank’s total risk based capital ratio increased to 18.39% at June 30, 2011 compared to 16.95% at December 31, 2010. Our capital levels remain strong and our capital ratios are well in excess of the levels required to be considered well-capitalized.

The Federal Reserve Board continues to hold short term interest rates at historic lows. The low rate environment impacted the yield on our investment portfolio as maturing investments and liquidity generated by our deposit growth was invested at lower interest rates. Elevated unemployment, depressed home values, and continued economic uncertainty has constrained consumer consumption. Additionally, capital spending and investing by businesses has remained sluggish given the slow and uneven economic recovery. This resulted in low loan demand during the first six months of 2011 and we expect loan demand to remain low during the remaining six months of 2011. During the second quarter of 2011, we hired a new chief lending officer and the Bank is focused on a number of initiatives to increase loan volume including expansion of our commercial and industrial lending team, creating small business administration lending capabilities and building a mortgage banking team.

We continue to position the Company for any further weakening in economic conditions and have increased our allowance for loan losses to $51.3 million at June 30, 2011 compared to $45.4 million at December 31, 2010. Our loan loss reserve coverage ratio (allowance for loan losses/total loans) increased to 1.88% at June 30, 2011 as compared to 1.62% at December 31, 2010.

We believe that the economic crisis which has adversely impacted our customers and communities has resulted in a refocus on financial responsibility. We remain committed to the financial responsibility we have practiced throughout our 158 year history, and we are dedicated to providing financial education opportunities to our customers by providing the tools necessary to make wise financial decisions. During the second quarter, we launched “BenMobile,” our mobile banking product that provides customers easy, convenient, and secure access to their money via text messaging, mobile web and phone apps. We also introduced interest on the “Start Growing” and “Professional Package” products, which allow our small business customers to enjoy the advantages of an all-purpose small business package while earning tiered interest on the account.

Through any economic cycle, our strong capital profile positions us to advance our growth strategy by working with our customers to help them save and use credit wisely. It also allows us to continue to dedicate financial and human capital to support organizations that share our sense of responsibility to do what’s right for the communities we serve.

In order to further improve our operating returns, we continue to leverage our position as one of the largest and oldest banks headquartered in the Philadelphia metropolitan area. We are focused on acquiring and retaining customers, and then educating them by aligning our products and services to their financial needs.

RECENT INDUSTRY CONSOLIDATION

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

CURRENT REGULATORY ENVIRONMENT

On July 21, 2010, President Obama signed the Dodd-Frank Act. In addition to eliminating the OTS effective as of July 21, 2011 and creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other things, repeals payment of interest on commercial demand deposits, requires changes in the way that institutions are assessed for deposit insurance, mandates the imposition of consolidated capital requirements on savings and loan holding companies, forces originators of securitized loans to retain a percentage of the risk for the transferred loans, requires regulatory rate-setting for certain debit card interchange fees and contains a number of reforms related to mortgage origination. Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates and require the issuance of implementing regulations. The impact of all of the provision on operations can not yet be fully assessed by management. However, there is a significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden, compliance costs and interest expense as well as potential reduced fee income for the Bank, Company and MHC.

Effective April 1, 2011, the assessment base for payment of FDIC premiums was changed from a deposit level base to an asset base consisting of average tangible assets less average tangible equity. We estimate this change will result in a reduction in FDIC premiums throughout the remainder of the year.

Effective July 21, 2011, the Bank began offering interest on certain commercial checking accounts as permitted by the Dodd-Frank Act. The Bank has been actively marketing full service commercial checking accounts that include interest earned on these funds. Interest paid on commercial checking accounts will increase the Bank’s interest expense in the future.

Effective October 1, 2011, the debit-card interchange fee will be capped at $0.21 per transaction and allow an additional 5 basis point charge to cover fraud losses. These fees are much lower than the current market rates. Although the regulation only impacts banks with assets above $10.0 billion, we believe that the provisions could result in a reduction in interchange revenue in the future. The Bank recognized $2.2 million of interchange revenue for the six months ended June 30, 2011.

In the fourth quarter of 2009, the Federal Reserve Board (“FRB”) announced regulatory changes to debit card and automated teller machine (“ATM”) overdraft practices that were effective July 1, 2010. These changes prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. This regulation has resulted in a reduction in non-interest income during the six months ended June 30, 2011 in the amount of $796 thousand.

CURRENT INTEREST RATE ENVIRONMENT

Net interest income represents a significant portion of the Company’s revenues. Accordingly, the interest rate environment has a substantial impact on Beneficial’s earnings. During the quarter ended June 30, 2011, Beneficial reported net interest income of $35.8 million, a decrease of $3.3 million, or 8.7%, from $39.1 million for the quarter ended June 30, 2010. The net interest margin decreased 41 basis points to 3.16% for the quarter ended June 30, 2011 from 3.57% for the quarter ended June 30, 2010. For the six months ended June 30, 2011, net interest income decreased $3.0 million, or 4.0%, to $72.5 million from $75.5 million for the six months ended June 30, 2010. The net interest margin decreased 23 basis points to 3.22% for the six months ended June 30, 2011 from 3.45% for the six months ended June 30, 2010. Our net interest margin has been impacted by reduced loan demand which has resulted in an increase in cash and investments. The yield on our investment portfolio has decreased given the low interest rate environment. We have also seen a reduction yields on our mortgage portfolio as borrowers refinance their existing mortgages at lower interest rates. We have been able to offset some of this downward pressure on margin by reducing the cost of our interest beating liabilities which decreased for both the three and six month ended June 30 2011 compared to the prior year to 1.03% and 1.05% from 1.34% and 1.42%. At June 30, 2011, we had higher than usual cash balances as we were holding cash to cover additional municipal deposit run-off that is expected to occur during the remainder of 2011. As a result, cash and cash equivalents increased from $90.3 million at December 31, 2010 to $347.2 million at June 30, 2011. We expect net interest margin to improve during the third quarter as the run-off occurs. Net interest margin in future periods will continue to be impacted by several factors such as but not limited to, our ability to grow and retain low cost core deposits, the future interest rate environment, loan and investment prepayment rates, loan growth and changes in non-accrual loans.

CREDIT RISK ENVIRONMENT

During the six months ended June 30, 2011, we continued to experience elevated levels of charge-offs, delinquencies and non-performing assets as a result of continued high levels of unemployment, reduced property values and limited traditional refinancing options. Although non-performing assets remained relatively constant at $162.6 million as of June 30, 2011 as compared to $161.7 million at March 31, 2011, non-performing assets have increased significantly from $140.4 million at December 31, 2010. We remain cautious and continue to increase our allowance for loan losses given our credit trends. At June 30, 2011, the Company’s allowance for loan losses totaled $51.3 million, or 1.88% of total loans, compared to $45.4 million, or 1.62% of total loans, at December 31, 2010.

Although the U.S. economy has shown some signs of improvement, unemployment remains high and commercial real estate conditions are still weak. We expect that property values will remain volatile until underlying market fundamentals improve consistently. In 2011, a significant portion of our commercial real estate and commercial construction portfolios contractually matures (approximately 33%). We are actively managing these maturities and continue to write off all collateral deficiencies on all classified loans once they are 90 days delinquent. We expect that market conditions, coupled with the large amount of commercial maturities, will result in an elevated provision for credit losses for the rest of 2011.

CRITICAL ACCOUNTING POLICIES

Allowance for Loan Losses. We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is determined by management based upon portfolio segment, past experience, evaluation of estimated loss and impairment in the loan portfolio, current economic conditions and other pertinent factors. Management also considers risk characteristics by portfolio segments including, but not limited to, renewals and real estate valuations. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairment based upon an evaluation of known and inherent risk in the loan portfolio. Loan impairment is evaluated based on the fair value of collateral or estimated net realizable value. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations.

The allowance for loan losses (“ALLL”) is established through a provision for loan losses charged to expense which is based upon past loan and loss experience and an evaluation of estimated losses in the current loan portfolio, including the evaluation of impaired loans. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: overall economic conditions; value of collateral; strength of guarantors; loss exposure at default; the amount and timing of future cash flows on 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 loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the 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. Our financial results are affected by the changes in and the absolute level of the ALLL. This process involves our analysis of complex internal and external variables, and it requires that we exercise judgment to estimate an appropriate ALLL. As a result of the uncertainty associated with this subjectivity, we cannot assure the precision of the amount reserved, should we experience sizeable loan or lease losses in any particular period. For example, changes in the financial condition of individual borrowers, economic conditions, or the condition of various markets in which collateral may be sold could require us to significantly decrease or increase the level of the ALLL. Such an adjustment could materially affect net income as a result of the change in provision for credit losses. For example, a change in the estimate resulting in a 5% to 10% difference in the allowance would have resulted in an additional provision for credit losses of $500 thousand to $1.0 million for the quarter ended June 30, 2011. During the first six months of 2011, we continued to experience increased levels of delinquencies, net charge-offs and non-performing assets. Management considered these market conditions in deriving the estimated ALLL; however, given the continued economic difficulties, the ultimate amount of loss could vary from that estimate.

Goodwill and Intangible Assets. The purchase method of accounting for business combinations requires the Company to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets acquired and liabilities assumed. The excess of the purchase price of an acquired business over the fair value of the identifiable assets and liabilities represents goodwill. Goodwill totaled $110.5 million at June 30, 2011.

Goodwill and other indefinite lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. The impairment test for goodwill requires the Company to compare the fair value of business reporting units to their carrying value including assigned goodwill on an annual basis. In addition, goodwill is tested more frequently if changes in circumstances or the occurrence of events indicate impairment potentially exists.

The goodwill impairment analysis estimates the fair value of equity using discounted cash flow analyses which require assumptions, as well as guideline company and guideline transaction information, where available. The inputs and assumptions specific to each reporting unit are incorporated in the valuations including projections of future cash flows, discount rates, the fair value of tangible and intangible assets and liabilities, and applicable valuation multiples based on the guideline information. We assess the reasonableness of the estimated fair value of the reporting units by giving consideration to our market capitalization over a reasonable period of time. Based on our latest annual impairment analysis of goodwill, we believe that the fair value for all reporting units is substantially in excess of the respective reporting unit’s carrying value. The Company performs an annual impairment test as of year end.

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 not considered 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.

Income Taxes. We are subject to the income tax laws of the various jurisdictions where we conduct business and estimate income tax expense based on amounts expected to be owed to these various tax jurisdictions. The estimated income tax expense/(benefit) is reported in the Consolidated Statements of Operations. The evaluation pertaining to the tax expense and related tax asset and liability balances involves a high degree of judgment and subjectivity around the ultimate measurement and resolution of these matters.

Accrued taxes represent the net estimated amount due to or to be received from tax jurisdictions either currently or in the future and are reported in other assets on the Consolidated Statements of Financial Position. We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the tax authorities and newly enacted statutory, judicial and regulatory guidance that could impact the relative merits of tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. We regularly evaluate our uncertain tax positions and estimate the appropriate level of reserves related to each of these positions.

As of June 30, 2011, the Company’s net deferred tax assets were $28.1 million. We regularly evaluate the realizability of deferred tax asset positions. In determining whether a valuation allowance is necessary, we consider the level of taxable income in prior years to the extent that carrybacks are permitted under current tax laws, as well as estimates of future pre-tax and taxable income and tax planning strategies that would, if necessary, be implemented. We currently maintain a valuation allowance for certain state net operating losses, charitable contribution carryovers and other-than-temporary impairments that management believes it is more likely than not that such deferred tax assets will not be realized. We expect to realize our remaining deferred tax assets over the allowable carryback and/or carryforward periods. Therefore, no valuation allowance is deemed necessary against our remaining federal or remaining state deferred tax assets as of June 30, 2011. However, if an unanticipated event occurred that materially changed pre-tax and taxable income in future periods, an increase in the valuation allowance may become necessary.

Postretirement Benefits. Several variables affect the annual cost for our defined benefit retirement programs. The main variables are: (1) size and characteristics of the employee population, (2) discount rate, (3) expected long-term rate of return on plan assets, (4) recognition of actual asset returns, and (5) other actuarial assumptions. Below is a brief description of these variables and the effect they have on our pension costs.

Size and Characteristics of the Employee Population

Pension cost is directly related to the number of employees covered by the plans, and other factors including salary, age, years of employment, and benefit terms. Effective June 30, 2008, plan participants ceased to accrue additional benefits under the existing pension benefit formula and their accrued benefits were frozen.

Discount Rate

The discount rate is used to determine the present value of future benefit obligations. The discount rate for each plan is determined by matching the expected cash flows of each plan to a yield curve based on long-term, high quality fixed income debt instruments available as of the measurement date. The discount rate for each plan is reset annually or upon occurrence of a triggering event on the measurement date to reflect current market conditions.

Expected Long-term Rate of Return on Plan Assets

Based on historical experience, market projections, and the target asset allocation set forth in the investment policy for the retirement plans, the pre-tax expected rate of return on plan assets was 8.0% for both 2010 and 2009. This expected rate of return is dependent upon the asset allocation decisions made with respect to plan assets.

Annual differences, if any, between expected and actual returns are included in the unrecognized net actuarial gain or loss amount. We generally amortize any unrecognized net actuarial gain or loss in excess of 10% in net periodic pension expense over the average future service of active employees, which is approximately seven years, or average future lifetime for plans with no active participants that are frozen.

Recognition of Actual Asset Returns

Accounting guidance allows for the use of an asset value that smoothes investment gains and losses over a period up to five years. However, we have elected to use a preferable method in determining pension cost. This method uses the actual market value of the plan assets. Therefore, we will experience more variability in the annual pension cost, as the asset values will be more volatile than companies who elected to “smooth” their investment experience.

Other Actuarial Assumptions

To estimate the projected benefit obligation, actuarial assumptions are required with respect to factors such as mortality rate, turnover rate, retirement rate and disability rate. These factors do not tend to change significantly over time, so the range of assumptions, and their impact on pension cost, is generally limited. We annually review the assumptions used based on historical and expected future experience.

In addition to our defined benefit programs, we offer a defined contribution plan (“401(k) Plan”) covering substantially all of our employees. During 2008, in conjunction with freezing benefit accruals under the defined benefit program, we enhanced our 401(k) Plan and combined it with a recently formed Employee Stock Ownership Plan (‘ESOP”) to form the Employee Savings and Stock Ownership Plan (“KSOP”). While the KSOP is one plan, the two separate components of the 401(k) Plan and ESOP remain. Under the KSOP we make basic and matching contributions as well as additional contributions for certain employees based on age and years of service. We may also make discretionary contributions. Each participant’s account is credited with shares of the Company’s stock or cash based on compensation earned during the year.

Comparison of Financial Condition at June 30, 2011 and December 31, 2010

At June 30, 2011, total assets decreased $217.3 million, or 4.4%, to $4.7 billion from $4.9 billion at December 31, 2010. During the six months ended June 30, 2011, the Bank repositioned its balance sheet to increase profitability, improve its capital position and reduce its interest rate risk profile by selling investments and reducing higher cost, non relationship based municipal deposits. At June 30, 2011, the Bank was holding excess cash to cover additional municipal deposit run-off that is expected to occur during the remainder of 2011. As a result, cash and cash equivalents at June 30, 2011 totaled $347.2 million as compared to $90.3 million at December 31, 2010. Additionally, the balance of investments decreased $322.4 million, or 19.5%, to $1.3 billion at June 30, 2011 from $1.7 billion at December 31, 2010 as we continue to sell longer term investments to shorten the duration of the investment portfolio and better position the Bank for rising interest rates.

Total loans decreased $66.8 million, or 2.4%, to $2.7 billion at June 30, 2011 from $2.8 billion December 31, 2010 primarily due to continued slow loan demand as consumers and businesses continue to deleverage and remain cautious about the economy.

Total deposits decreased $184.9 million, or 4.7%, to $3.8 billion at June 30, 2011, from $3.9 billion at December 31, 2010 primarily due to the run off of $295.5 million in municipal deposits. The Company continues to focus on growing its core deposit portfolio and reducing costlier time deposits and non-relationship based municipal accounts.

Stockholders’ equity equaled $624.0 million, or 13.2% of total assets, at June 30, 2011 compared to $615.5 million, or 12.5% of total assets, at December 31, 2010. Beneficial’s tangible equity (total stockholders equity less goodwill and intangibles) to tangible assets (total assets less goodwill and intangibles) totaled 10.87% at June 30, 2011 compared to 10.16% at December 31, 2010.

Comparison of Operating Results for the Three Months Ended June 30, 2011 and June 30, 2010

General — For the three months ended June 30, 2011, Beneficial recorded net income of $2.0 million, or $0.03 per share, compared to net income of $5.6 million, or $0.07 per share, for the three months ended June 30, 2010. The decrease was primarily due to higher provision for loan losses and restructuring costs. The Bank continued to work through credit and loan maturity issues which resulted in a provision for loan losses of $10.0 million for the three months ended June 30, 2011 as compared to $6.2 million for the same period in 2010. We also recorded a restructuring charge of $963 thousand for the three months ended June 30, 2011 related to the departure of our chief lending officer.

Net Interest Income — For the three months ended June 30, 2011, Beneficial reported net interest income of $35.8 million, a decrease of $3.4 million, or 8.7%, from the three months ended June 30, 2010. The net interest margin decreased 41 basis points to 3.16% for the three months ended June 30, 2011 from 3.57% for the three months ended June 30, 2010. The decrease in net interest income was driven by low interest rates which have reduced the yields on our investment portfolio as excess liquidity is invested at lower yields. Mortgage re-financings have also resulted in lower yields on our mortgage portfolio. Offsetting these decreases to interest income, we have been able to reduce the cost of our interest bearing liabilities during the second quarter of 2011 with average rates decreasing to 1.03% for the three months ending June 30, 2011 from 1.34% for the three months ending June 30, 2010.

Provision for Loan Losses — The Bank recorded a provision for loan losses of $10.0 million for the three months ended June 30, 2011 compared to $6.2 million for the same period in 2010. The increase in the provision was the result of a high level of charge-offs, as well as increased delinquency and non-performing asset levels. Net charge-offs totaled $6.1 million during the three months ended June 30, 2011 as compared to $1.7 million during the same period in 2010. We continue to charge-off the collateral deficiency on all classified collateral dependent loans across all portfolios once they are 90 days delinquent.

At June 30, 2011, the Company’s allowance for loan losses totaled $51.3 million, or 1.88% of total loans, compared to an allowance for loan losses in the amount of $45.4 million, or 1.62% of total loans, at December 31, 2010.

Non-interest Income — Non-interest income decreased $902 thousand, or 14.4%, to $5.4 million for the three months ended June 30, 2011 compared to $6.3 million for the same period in 2010 primarily due to a $455 thousand decrease in overdraft charges to Regulation E, which became effective in the third quarter of 2010 and generally prevents an institution from charging overdraft fees on certain automated transactions without prior customer consent and lower income from investments in limited partnerships.

Non-interest Expense — Non-interest expense decreased $2.4 million, or 7.6%, to $29.1 million for the three months ended June 30, 2011 compared $31.5 million for the same period in 2010. The decrease during the three months ended June 30, 2011 was primarily due to a $1.6 million decrease in salaries and employee benefits, a $776 thousand decrease in marketing expense and a $280 thousand decrease in occupancy expense as a result of the expense reduction program implemented during the first quarter of 2011.

Income Taxes — The Company recorded income tax expense of $47 thousand for the three months ended June 30, 2011, reflecting an effective tax rate of 2.3%, compared to income tax expense of $2.1 million, reflecting an effective tax rate of 27.7%, for the same period in 2010. The difference was due to a decrease in income before income taxes of $5.7 million, to $2.0 million for the three months ended June 30, 2011, from income before income taxes of $7.7 million for the three months ended June 30, 2010. The decrease in income before income taxes for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010 was primarily due to an increase in the provision for loan losses of $3.8 million, a restructuring charge of $1.0 million and a decrease in net interest income of $3.4 million, which was offset by reduced other non-interest expenses of $3.3 million.

The 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 Company as a limited partner in partnerships that sponsor affordable housing projects utilizing low-income housing credits pursuant to Section 42 of the Internal Revenue Code.

The following table summarizes average balances and average yields and costs for the three month periods ended June 30, 2011 and June 30, 2010:


	Three Months Ended June 30,							Three Months Ended June 30,
	2011							2010
	Average		Interest &		Yield /			Average		Interest &		Yield /
(Dollars in thousands)	Balance		Dividends		Cost			Balance		Dividends		Cost

Interest Earning Assets:
Investment Securities:
Trading Securities	$	—	$	—		0.00	%		8,917		23		1.01	%
Overnight Investments		391,297		247		0.25	%		66,856		44		0.26	%
Stock		21,317		—		0.00	%		28,068		26		0.37	%
Other Investment securities		1,360,803		9,875		2.90	%		1,497,112		13,617		3.64	%

Total Investment securities & O/N Inv		1,773,417		10,122		2.28	%		1,600,953		13,710		3.43	%

Loans:
Real estate loans
Residential		693,529		8,555		4.93	%		662,942		8,938		5.39	%
Non-residential		772,675		10,066		5.22	%		785,593		10,475		5.34	%

Total real estate		1,466,204		18,621		5.08	%		1,448,535		19,413		5.36	%
Business loans		363,775		5,029		5.53	%		376,016		5,297		5.64	%
Small Business loans		147,611		2,235		6.06	%		161,357		2,400		5.95	%

Total Business & Small Business loans		511,386		7,264		5.69	%		537,373		7,697		5.73	%

Total Business loans		1,284,061		17,330		5.40	%		1,322,966		18,172		5.50	%
Personal loans		766,949		9,725		5.09	%		805,973		10,837		5.39	%

Total loans, net of discount		2,744,539		35,610		5.20	%		2,791,881		37,947		5.44	%

Total interest earning assets		4,517,956		45,732		4.05	%		4,392,834		51,657		4.71	%

Non-interest earning assets		359,088							373,087

Total assets		4,877,044							4,765,921

Interest Bearing Liabilities:
Interest bearing savings and demand deposits:
Savings and club accounts		728,357		1,186		0.65	%		609,145		1,072		0.71	%
Money market accounts		614,771		1,107		0.72	%		623,293		1,259		0.81	%
Demand deposits		418,835		236		0.23	%		374,223		285		0.31	%
Demand deposits — Municipals		949,531		1,959		0.83	%		858,073		2,216		1.04	%
Certificates of deposit		921,693		3,354		1.46	%		878,971		3,646		1.67	%

Total interest-bearing deposits		3,633,187		7,842		0.87	%		3,343,705		8,478		1.02	%

Borrowings		254,829		2,137		3.36	%		402,823		4,034		4.02	%

Total interest-bearing liabilities		3,888,016		9,979		1.03	%		3,746,528		12,512		1.34	%

Non-interest-bearing deposits		284,018							267,194
Other non-interest-bearing liabilities		87,637							100,117

Total liabilities		4,259,671							4,113,839

Total stockholders’ equity		617,373							652,082

Total liabilities and stockholders’ equity		4,877,044							4,765,921

Net interest income				35,753							39,145
Interest rate spread						3.02	%						3.37	%
Net interest margin						3.16	%						3.57	%
Average interest-earning assets to average interest-bearing liabilities						116.20	%						117.25	%

Comparison of Operating Results for the Six Months Ended June 30, 2011 and June 30, 2010

General — For the six months ended June 30, 2011, Beneficial recorded net income of $1.1 million, or $0.01 per share, compared to net income of $13.1 million, or $0.17 per share, for the six months ended June 30, 2010. The decrease was primarily due to higher provisions for loan losses and restructuring costs. During the six months ended June 30, 2011, the Bank completed a comprehensive review of its operating cost structure and finalized an expense management reduction program which resulted in a $5.1 million restructuring charge. The restructuring charge is related to expenses associated with a reduction in force and costs related to consolidation of five Bank branch locations into other branches. The Bank also continued to work through credit and loan maturity issues which resulted in an elevated provision for loan losses of $20.0 million for the six months ended June 30, 2011 as compared to $11.2 million for the same period in 2010. In 2011, a significant portion of our commercial real estate and commercial construction portfolios contractually mature (approximately 33%). We expect that market conditions coupled with the large amount of commercial maturities will result in elevated provision for credit losses in 2011.

Net Interest Income — For the six months ended June 30, 2011, net interest income decreased $3.0 million, or 4.0%, to $72.4 million from $75.4 million for the six months ended June 30, 2010. The net interest margin decreased 23 basis points to 3.22% for the six months ended June 30, 2011 from 3.45% for the six months ended June 30, 2010. The decrease in net interest income was driven by excess liquidity and low interest rates on our investment and loan portfolio partially offset by a reduction in deposit and borrowing costs.

Provision for Loan Losses — The Bank recorded a provision for loan losses of $20.0 million for the six months ended June 30, 2011 compared to $11.2 million for the same period in 2010. The increase in the provision was the result of a high level of charge-offs as well as increased delinquency and non-performing asset levels. Net charge-offs totaled $14.1 million for the six months ended June 30, 2011 as compared to $6.1 million during the same period in 2010. We continue to charge-off the collateral deficiency on all classified collateral dependent loans across all portfolios once they are 90 days delinquent.

Non-interest Income — Non-interest income decreased $2.7 million to $11.9 million for the six months ended June 30, 2011 compared to the same period in 2010, primarily due to a $1.6 million decrease in gain on the sale of securities, a $568 thousand decrease in insurance and advisory income, and a $796 thousand decrease in overdraft charges due to Regulation E which became effective in the third quarter of 2010 and generally prevents an institution from charging overdraft fees on certain automated transactions without prior customer consent.

Non-interest Expense — Non-interest expense increased $1.3 million to $63.3 million for the six months ended June 30, 2011 compared to the same period in 2010, primarily due to a $5.1 million restructuring charge. This increase was partially offset by a $2.2 million decrease in salaries and benefits, an $881 thousand decrease in marketing expense, a $435 thousand decrease in printing and office supplies expense, and a $208 thousand decrease in utility expense as a result of the expense reduction initiatives implemented during the first quarter of 2011.

Income Taxes — The Company recorded an income tax benefit of $65 thousand for the six months ended June 30, 2011, reflecting an effective tax rate of 6.4%, compared to income tax expense of $3.8 million, reflecting an effective tax rate of 22.4%, for the same period in 2010. The difference was due to a decrease in income before income taxes of $15.9 million, to $1.0 million for the six months ended June 30, 2011, from income before income taxes of $16.9 million for the six months ended June 30, 2010. The decrease in income before income taxes for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010 was primarily due to an increase in the provision for loan losses of $8.9 million, a restructuring charge of $5.1 million and a decrease in gains on the sale of investment securities of $1.6 million.

The 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 low income housing partnerships. These tax credits relate to investments maintained by the Company as a limited partner in partnerships that sponsor affordable housing projects utilizing low-income housing credits pursuant to Section 42 of the Internal Revenue Code.

As of June 30, 2011, the Company had net deferred tax assets totaling $28.1 million. These deferred tax assets can only be realized if the Company generates taxable income in the future. We regularly evaluate the realizability of deferred tax asset positions. In determining whether a valuation allowance is necessary, we consider the level of taxable income in prior years to the extent that carrybacks are permitted under current tax laws, as well as estimates of future pre-tax and taxable income and tax planning strategies that would, if necessary, be implemented. We currently maintain a valuation allowance for certain state net operating losses, charitable contribution carryovers and other-than-temporary impairments, that management believes it is more likely than not that such deferred tax assets will not be realized. We expect to realize our remaining deferred tax assets over the allowable carryback and/or carryforward periods. Therefore, no valuation allowance is deemed necessary against our remaining federal or remaining state deferred tax assets as of June 30, 2011. However, if an unanticipated event occurred that materially changed pre-tax and taxable income in future periods, an increase in the valuation allowance may become necessary and it could be material to our financial statements.

The following table summarizes average balances and average yields and costs for the six month periods ended June 30, 2011 and June 30, 2010:


	Six Months Ended June 30,							Six Months Ended June 30,
	2011							2010
	Average		Interest &		Yield /			Average		Interest &		Yield /
(Dollars in thousands)	Balance		Dividends		Cost			Balance		Dividends		Cost

Interest Earning Assets:
Investment Securities:
Trading Securities		4,489		26		1.19	%		9,803		56		1.15	%
Overnight Investments		277,760		349		0.25	%		134,995		169		0.25	%
Stock		22,038		5		0.04	%		28,068		76		0.54	%
Other Investment securities		1,433,399		20,834		2.91	%		1,412,907		26,976		3.82	%

Total Investment securities & O/N Inv		1,737,686		21,214		2.44	%		1,585,773		27,277		3.44	%

Loans:
Real estate loans
Residential		698,852		17,216		4.93	%		662,369		17,896		5.40	%
Non-residential		779,193		20,000		5.15	%		783,422		19,677		5.04	%

Total real estate		1,478,045		37,216		5.04	%		1,445,791		37,573		5.20	%
Business loans		368,393		10,142		5.52	%		372,002		10,388		5.60	%
Small Business loans		151,039		4,540		6.03	%		160,403		4,782		5.98	%

Total Business & Small Business loans		519,432		14,682		5.67	%		532,405		15,170		5.71	%

Total Business loans		1,298,625		34,682		5.35	%		1,315,827		34,847		5.31	%
Personal loans		772,817		19,538		5.10	%		811,840		21,717		5.39	%

Total loans, net of discount		2,770,294		71,436		5.18	%		2,790,036		74,460		5.36	%

Total interest earning assets		4,507,980		92,650		4.12	%		4,375,809		101,737		4.66	%

Non-interest earning assets		373,020							396,781

Total assets		4,881,000							4,772,590

Interest Bearing Liabilities:
Interest bearing savings and demand deposits:
Savings and club accounts		717,995		2,442		0.69	%		582,339		2,044		0.71	%
Money market accounts		618,786		2,256		0.74	%		632,574		2,560		0.82	%
Demand deposits		413,822		489		0.24	%		362,207		551		0.31	%
Demand deposits — Municipals		987,274		4,136		0.85	%		858,151		4,508		1.06	%
Certificates of deposit		898,772		6,473		1.46	%		894,203		8,227		1.87	%

Total interest-bearing deposits		3,636,649		15,796		0.88	%		3,329,474		17,890		1.09	%

Borrowings		260,946		4,405		3.40	%		413,925		8,398		4.09	%

Total interest-bearing liabilities		3,897,595		20,201		1.05	%		3,743,399		26,288		1.42	%

Non-interest-bearing deposits		282,712							258,485
Other non-interest-bearing liabilities		84,088							122,173

Total liabilities		4,264,395							4,124,057

Total stockholders’ equity		616,605							648,533

Total liabilities and stockholders’ equity		4,881,000							4,772,590

Net interest income				72,449							75,449
Interest rate spread						3.07	%						3.24	%
Net interest margin						3.22	%						3.45	%
Average interest-earning assets to average interest-bearing liabilities						115.66	%						116.89	%

Asset Quality

At June 30, 2011, the Bank’s non-performing assets increased by $22.2 million to $162.6 million from $140.4 million at December 31, 2010. The ratio of non-performing assets to total assets increased to 3.45% at June 30, 2011 from 2.85% at December 31, 2010.


	June 30,			March 31,			December 31,			June 30,
	2011			2011			2010			2010
ASSET QUALITY INDICATORS:
Non-performing assets:
Non-accruing loans	$	118,697		$	120,102		$	95,803		$	68,555
Accruing loans past due 90 days or more*		25,173			25,112			27,932			44,768

Total non-performing loans**	$	143,870		$	145,214		$	123,735		$	113,323

Troubled debt restructurings		—			—			—			22,222
Real estate owned		18,740			16,449			16,694			10,720


Total non-performing assets	$	162,610		$	161,663		$	140,429		$	146,265


Non-performing loans to total loans		5.27	%		5.23	%		4.42	%		4.03	%
Non-performing loans to total assets		3.05	%		2.96	%		2.51	%		2.32	%
Non-performing assets to total assets		3.45	%		3.30	%		2.85	%		3.00	%
Non-performing assets less accruing loans past due 90 days or more to total assets		2.92	%		2.79	%		2.28	%		2.08	%


*		Includes $25.2 million, $25.1 million, $27.9 million and $24.8 million in government guaranteed student loans as of June 30, 2011, March 31, 2011, December 31, 2010 and June 30, 2010, respectively.

**		Includes $27.0 million, $27.7 million and $26.7 million of troubled debt restructured loans (TDRs) as of June 30, 2011, March 31, 2011 and December 31, 2010, respectively

The Bank places all commercial and residential loans on non-performing status at 90 days delinquent or sooner if management believes the loan has become impaired (unless return to current status is expected imminently). The accrual of interest is discontinued and reversed once an account becomes past due 90 days or more. The uncollectible portion including any collateral deficiency of all loans is charged off at 90 days past due or when the Bank has confirmed there is a loss. Nonperforming consumer loans include $25.2 million and $27.9 million in government guaranteed student loans as of June 30, 2011 and December 31, 2010, respectively.

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

Allowance for Loan Losses

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated:


	June 30, 2011							December 31, 2010
	Loan Balance		ALLL		Coverage			Loan Balance		ALLL		Coverage
Commercial (including TDRs)	$	1,275,450	$	43,336		3.40	%	$	1,310,929	$	38,496		2.94	%
Residential		690,243		2,028		0.29	%		698,722		1,884		0.27	%
Consumer		763,899		5,384		0.70	%		786,751		4,436		0.56	%
Unallocated		—		550		—			—		550		—

Total	$	2,729,592	$	51,298		1.88	%	$	2,796,402	$	45,366		1.62	%

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

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

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

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

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

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

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

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

When we determine that the value of an impaired loan is less than its carrying amount, we recognize impairment through a charge-off to the allowance. We perform these assessments on at least a quarterly basis. For commercial loans, a charge-off is recorded when management determines we will not collect 100% of a loan based on the fair value of the collateral, less costs to sell the property, or the net present value of expected future cash flows. Charge-offs are recorded on a monthly basis and partially charged-off loans continue to be evaluated on a monthly basis. The collateral deficiency on consumer loans and residential loans are generally charged-off when deemed to be uncollectible or delinquent 90 days or more, whichever comes first, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Examples that would demonstrate repayment include a loan that is secured by adequate collateral and is in the process of collection, a loan supported by a valid guarantee or insurance, or a loan supported by a valid claim against a solvent estate. Consumer loan delinquency includes $25.2 million in government guaranteed student loans at June 30, 2011.

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

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

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

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

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

Commercial Portfolio. The portion of the allowance for loan losses related to the commercial portfolio totaled $43.3 million at June 30, 2011 (3.4% of commercial loans) which increased from $38.5 million at December 31, 2010 (2.9% of commercial loans). The increase in the reserve balance was primarily driven by continued elevated charge-off trends as well as increases in delinquencies and classified loan levels during 2011. The increase in classified assets resulted in charge-offs in the amount of $14.5 million for our commercial loan portfolio during the six months ended June 30, 2011. We continue to charge off any collateral deficiency for non-performing loans once a loan is 90 days past due. As a result, the entire reserve balance at June 30, 2011 and December 31, 2010 consists of reserves against the pass rated and special mention commercial loans.

Residential Loans. The allowance for the residential loan estate portfolio increased $144 thousand to $2.0 million at June 30, 2011 from $1.9 million at December 31, 2010. During the six months ended June 30, 2011, charge-offs improved, while delinquencies continue to trend upward. The Company expects that the difficult housing environment, as well as general economic conditions, will continue to impact the residential loan portfolio, which may result in higher loss levels. Therefore, we continued to build the reserve for the residential loan portfolio.

Consumer Loans. The allowance for the consumer loan portfolio increased $948 thousand to $5.4 million at June 30, 2011 from $4.4 million at December 31, 2010. The increase in the reserve balance is due to increases in delinquencies and continued elevated levels of actual charge-offs experienced in the consumer loan portfolio during the six months ended June 30, 2011. The allowance as a percentage of consumer loans was 0.7% at June 30, 2011 and 0.6% at December 31, 2010.

Unallocated Allowance. The unallocated allowance for loan losses was $550 thousand at both June 30, 2011 and December 31, 2010. Management continuously evaluates its allowance methodology; however, the unallocated allowance is subject to changes each reporting period due to certain inherent but undetected losses; which are probable of being realized within the loan portfolio.

The allowance for loan losses is maintained at levels that management considers adequate to provide for losses based upon an evaluation of known and inherent risks in the loan portfolio. Management’s evaluation takes into consideration the risks inherent in the loan portfolio, past loan loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic conditions, the level of originations and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the allowance for credit losses may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses will not be necessary should the quality of loans deteriorate as a result of the factors described above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operation.

Liquidity, Capital and Credit Management

Liquidity Management — Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposits, loan repayments, maturities of and payments on investment securities and borrowings from the Federal Home Loan Bank of Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposits and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

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, 2011, cash and cash equivalents totaled $347.2 million. In addition, at June 30, 2011, our maximum borrowing capacity with the FHLB was $857.4 million. On June 30, 2011, we had $100.0 million of advances outstanding, $145.0 million of future dated advances outstanding and $80.6 million of letters of credit outstanding with the FHLB.

A significant use of our liquidity is the funding of loan originations. At June 30, 2011, we had $42.6 million in loan commitments outstanding, which consisted of $31.5 million and $11.1 million in commercial and consumer commitments to fund loans, respectively, $170.3 million in commercial and consumer unused lines of credit, and $27.3 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, 2011 totaled $604.2 million, or 66.5% of certificates of deposit, at June 30, 2011. 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, brokered deposits 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, 2012. 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, 2011:


			Payments due by period
			Less than		One to		Six to		More than
(Dollars in thousands)	Total		One Year		Six Years		Five Years		Five Years
Commitments to fund loans	$	42,599	$	42,599	$	—	$	—	$	—
Unused lines of credit		170,266		101,135						69,131
Standby letters of credit		27,293		27,293
Operating lease obligations		34,281		5,276		9,043		4,930		15,032

Total	$	274,439	$	176,303	$	9,043	$	4,930	$	84,163

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, 2011, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under the regulatory guidelines.

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, 2011, approximately 86.4% 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, 2011 approximately 7.8% of the investment portfolio was rated below AAA but rated investment grade by Moody’s and/or S&P, approximately 1.3% of the investment portfolio was rated below investment grade by Moody’s and/or S&P and approximately 4.5% 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.

Credit Risk Management. The objective of the Company’s credit risk management strategy is to quantify and manage credit risk on a segmented portfolio basis, as well as to limit the risk of loss resulting from an individual customer default. The Company’s credit risk management strategy focuses on conservatism, diversification and monitoring. The Company believes that effective credit risk management begins with conservative lending practices. These practices include conservative exposure limits and conservative underwriting, documentation and collection standards. The Company’s credit risk management strategy also emphasizes diversification on an industry and customer level as well as regular credit examinations and weekly management reviews of large credit exposures and credits experiencing deterioration of credit quality. The Board of Directors has granted loan approval authority to certain officers or groups of officers up to prescribed limits, based on the officer’s experience and tenure. Generally, all commercial loans less than $10.0 million must be approved by a Loan Committee, which is comprised of personnel from the Credit, Finance and Lending departments. Individual loans or lending relationships with aggregate exposure of $5.0 million or more must be approved by the Senior Loan Committee, which is comprised of senior Bank officers and five non-employee directors. All loans or lending relationships in excess of $5.0 million must be approved by the Senior Loan Committee of the Company’s Board. Loans in excess of $15.0 million must also be approved by the Executive Committee of the Board, which includes six non-employee directors. Underwriting activities are centralized. The Credit Risk Review function, within Enterprise Risk Management, provides objective assessments of the quality of underwriting and documentation, the accuracy of risk grades and the charge-off, nonaccrual and reserve analysis process. The Company’s credit review process and overall assessment of required allowances is based on quarterly assessments of the probable estimated losses inherent in the loan portfolio. The Company uses these assessments to promptly identify potential problem loans within the portfolio, maintain an adequate reserve and take any necessary charge-offs. The Company charges off the collateral deficiency on all collateral dependent loans once they become 90 days delinquent. Generally, all consumer loans are charged off once they become 90 days delinquent except for education loans as they are guaranteed by the government and there is little risk of loss. In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review process includes the use of a risk grading system. The enhanced risk rating system is consistent with Basel II expectations and allows for precision in the analysis of commercial credit risk. Historical portfolio performance metrics, current economic conditions and delinquency monitoring are factors used to assess the credit risk in the Company’s homogenous commercial, residential and consumer loan portfolio.

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.

During the second quarter of 2011, the Company entered into two future borrowing arrangements with the FHLB of Pittsburgh to borrow $70.0 million and $75.0 million, respectively, at a fixed interest rate during the period April 2012 through April 2016 and the period March 2013 through March 2017, respectively, to replace existing borrowings that will mature during these periods. The purpose of these arrangements is to manage future interest rate volatility by locking into fixed borrowing rates. There was no impact to the Company’s financial condition, results of operations or cash flows for the period ended June 30, 2011.

For the six months ended June 30, 2011, 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, 2011. 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, 2011:
Basis point change in rates	-200			Base Forecast		+200
(Dollars in thousands)

*Net Interest Income at Risk:*
Net Interest Income		124,865			137,819		135,122
% change		(9.40	%)				(1.96	%)

*Economic Value at Risk:*
Equity		646,136			727,738		636,430
% change		(11.21	%)				(12.55	%)

As of June 30, 2011, based on the scenarios above, net interest 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, 2011, 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(f) 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, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.		Legal Proceedings


Item 1A.		Risk Factors

As of June 30, 2011, 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, 2010. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, 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, 2011.

Total Number

Of Shares

Purchased

Maximum

as Part of

Number of Shares

Total

Publicly

that May Yet Be

Number of

Average

Announced Plans

Purchased Under

Shares

Price Paid

the Plans or

Period

Purchased

Per Share

Programs

Programs(1)

April 1-30, 2011

—

273,680

May 1-31, 2011

—

273,680

June 1-30, 2011

—

273,680


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


Item 3.		Defaults Upon Senior Securities

Not applicable.


Item 4.		(Removed and Reserved)


Item 5.		Other Information

Not applicable.


Item 6.		Exhibits


3.1		Charter of Beneficial Mutual Bancorp, Inc. (1)

3.2		Bylaws of Beneficial Mutual Bancorp, Inc. (2)

4.0		Form of Common Stock Certificate of Beneficial Mutual Bancorp, Inc. (1)

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

32.0		Section 1350 Certification

101.0	*	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text.


*		Furnished, not filed.

(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 May 20, 2009.

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 4, 2011	By:	/s/ Gerard P. Cuddy Gerard P. Cuddy
		President and Chief Executive Officer
		(principal executive officer)

Dated: August 4, 2011	By:	/s/ Thomas D. Cestare Thomas D. Cestare
		Executive Vice President and
		Chief Financial Officer
		(principal financial officer)

Beneficial Mutual Bancorp Inc - FORM 10-Q - August 4, 2011

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