Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549


FORM 10-Q

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

For the quarterly period ended June 30, 2007

OR

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

For the transition period from ______________ to _____________
 
Commission file number: 1-33476
 

               BENEFICIAL MUTUAL BANCORP, INC.              
(Exact name of registrant as specified in its charter)

United States
  
56-2480744
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
     
     
 510 Walnut Street, Philadelphia, Pennsylvania
  
19106
(Address of principal executive offices)
  
(Zip Code)

 
                                 (215) 864-6000                                
(Registrant’s telephone number, including area code)
 
                                                       Not Applicable                                                    
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

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

Large accelerated filer o
Accelerated filer o
Non-Accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

As of August 14, 2007, there were 82,264,600 shares of the registrant’s common stock outstanding.



 
BENEFICIAL MUTUAL BANCORP, INC.

Table of Contents
 
   
Page
No.
Part I. Financial Information
  
     
Item 1.
Financial Statements
 
     
 
Unaudited Consolidated Statements of Financial Condition as of June 30, 2007 and December 31, 2006
1
     
 
Unaudited Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2007 and 2006
2
     
 
Unaudited Consolidated Statements of Changes in Retained Earnings for the Six Months Ended June 30, 2007 and 2006
3
     
 
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006
4
     
 
Notes to Unaudited Consolidated Financial Statements
5
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
10
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
17
     
Item 4.
Controls and Procedures
19
     
Part II. Other Information
  
     
Item 1.
Legal Proceedings
20
     
Item 1A.
Risk Factors
20
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
20
     
Item 3.
Defaults Upon Senior Securities
20
     
Item 4.
Submission of Matters to a Vote of Security Holders
20
     
Item 5.
Other Information
20
     
Item 6.
Exhibits
20
     
Signatures
21




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Financial Condition
(Dollars in thousands, except share amounts)
   
June 30,
2007
  
December 31,
2006
  
ASSETS:
              
Cash and Cash Equivalents:
              
Cash and due from banks
  
$
20,348
  
$
20,320
  
Interest-bearing deposits
    
3,518
    
2,325
  
Federal funds sold
    
71,512
    
502
  
Total cash and cash equivalents
    
95,378
    
23,147
  
               
Investment Securities:
              
Available for sale (amortized cost of $592,508 and $335,265 at June 30, 2007 and December 31, 2006, respectively)
    
585,297
    
330,867
  
Held to maturity (estimated fair value of $117,043 and $127,233 at June 30, 2007 and December 31, 2006, respectively)
    
120,710
    
130,357
  
Federal Home Loan Bank stock, at cost
    
13,717
    
15,544
  
Total investment securities
    
719,724
    
476,768
  
               
Loans:
    
1,632,639
    
1,688,825
  
Allowance for loan losses
    
(17,238
)
  
(17,368
)
Net loans
    
1,615,401
    
1,671,457
  
               
Accrued Interest Receivable
    
11,526
    
11,565
  
               
Bank Premises and Equipment, net
    
35,500
    
33,168
  
               
Other Assets:
              
Bank owned life insurance
    
28,698
    
28,003
  
Goodwill and other intangibles
    
8,464
    
8,635
  
Other assets
    
65,574
    
47,476
  
Total other assets
    
102,736
    
84,114
  
               
TOTAL ASSETS
  
$
2,580,265
  
$
2,300,219
  
               
LIABILITIES AND RETAINED EARNINGS:
              
Liabilities:
              
Deposits:
             
Non-interest bearing deposits
  
$
89,689
  
$
90,040
  
Interest bearing deposits
    
1,522,997
    
1,588,014
  
Total deposits
    
1,612,686
    
1,678,054
  
Borrowed funds
    
232,746
    
294,896
  
Stock subscription liability
    
394,104
    
0
  
Other liabilities
    
58,319
    
46,854
  
Total liabilities
    
2,297,855
    
2,019,804
  
               
Commitments and Contingencies
             
Retained Earnings:
              
Common Stock - $1 par value 100,000 shares authorized; 100 shares issued and outstanding
    
-
   
-
 
Retained earnings (partially restricted)
    
296,568
    
293,157
  
Accumulated other comprehensive loss
    
(14,158
)
  
(12,742
)
Total retained earnings
    
282,410
    
280,415
  
               
TOTAL LIABILITIES AND RETAINED EARNINGS
  
$
2,580,265
  
$
2,300,219
  

See accompanying notes to the unaudited consolidated financial statements.

1



BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
   
Three Months Ended  
  
Six Months Ended
  
   
June 30,  
  
June 30,
  
   
2007
  
 2006
  
2007
  
2006
  
INTEREST INCOME:
                          
Interest and fees on loans
  
$
25,875
  
$
25,649
  
$
51,641
  
$
50,435
  
                           
Interest on federal funds sold
    
280
    
7
    
292
    
53
  
                           
Interest and dividends on investment securities:
                          
Taxable
    
5,805
    
5,428
    
11,161
    
10,873
  
Tax-exempt
    
248
    
239
    
495
    
453
  
Total interest income
    
32,208
    
31,323
    
63,589
    
61,814
  
                           
INTEREST EXPENSE:
                          
Interest on deposits:
                          
Interest bearing checking accounts
    
478
    
456
    
901
    
884
  
Money market and savings deposits
    
2,904
    
2,081
    
5,573
    
4,109
  
Time deposits
    
8,888
    
8,120
    
18,083
    
15,548
  
Total
    
12,270
    
10,657
    
24,557
    
20,541
  
                           
Interest on borrowed funds
    
3,412
    
4,590
    
7,119
    
9,123
  
 
                          
Total interest expense
    
15,682
    
15,247
    
31,676
    
29,664
  
                           
Net interest income
    
16,526
    
16,076
    
31,913
    
32,150
  
                           
Provision for loan losses
    
0
    
600
    
300
    
1,200
  
                           
Net Interest Income After Provision for Loan Losses
    
16,526
    
15,476
    
31,613
    
30,950
  
                           
NON-INTEREST INCOME:
                          
Insurance commission income
    
938
    
813
    
2,134
    
1,968
  
Service charges and other income
    
1,385
    
1,472
    
2,721
    
2,768
  
Gains on sale of investment securities available for sale
    
367
    
157
    
679
    
774
  
Total non-interest income
    
2,690
    
2,442
    
5,534
    
5,510
  
                           
NON-INTEREST EXPENSE:
                          
Salaries and employee benefits
    
9,267
    
8,436
    
18,390
    
17,053
  
Occupancy
    
2,034
    
1,848
    
3,994
    
3,750
  
Depreciation, amortization and maintenance
    
1,406
    
1,352
    
2,754
    
2,674
  
Advertising
    
1,041
    
727
    
1,727
    
1,168
  
Amortization of intangibles
    
84
    
106
    
172
    
213
  
Other
    
3,247
    
2,435
    
6,024
    
4,891
  
Total non-interest expense
    
17,079
    
14,904
    
33,061
    
29,749
  
                           
INCOME BEFORE INCOME TAXES
    
2,137
    
3,014
    
4,086
    
6,711
  
                           
INCOME TAX EXPENSE
    
225
    
576
    
425
    
1,503
  
                           
NET INCOME
  
$
1,912
  
$
2,438
  
$
3,661
  
$
5,208
  
                           
Basic and diluted earnings per share
  
$
0.04
  
$
0.05
  
$
0.08
  
$
0.11
  

See accompanying notes to the unaudited consolidated financial statements.
2
BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Changes in Retained Earnings
(Dollars in thousands)

   
Retained
Earnings
  
Accumulated Other
Comprehensive
Income (Loss)
  
Total Retained
Earnings
  
Comprehensive
Income
  
                   
BALANCE, JANUARY 1, 2006
  
$
281,532
    
($ 3,160
)
$
278,372
        
                           
Comprehensive income:
                         
Net income
    
5,208
          
5,208
  
$
5,208
  
                           
Other comprehensive income (loss):
                          
Net unrealized holding losses on available for sale
                          
securities arising during the period (net of income tax of $1,554)
                      
(2,886
)
Reclassification adjustment for net gains included in
                          
net income (net of income tax of $271)
                      
(503
)
Total other comprehensive income
          
(3,389
)
  
(3,389
)
  
(3,389
)
                           
Comprehensive Income
                    
$
1,819
  
                           
BALANCE, JUNE 30, 2006
  
$
286,740
    
($ 6,549
)
$
280,191
        
                           
                           
BALANCE, JANUARY 1, 2007
  
$
293,157
    
($12,742
)
$
280,415
        
                           
Comprehensive income:
                          
Net Income
    
3,661
          
3,661
    
3,661
  
                           
Other comprehensive income (loss):
                          
Net unrealized holding losses on available for sale
                         
securities arising during the period (net of income tax of $685)
                      
(1,273
)
Reclassification adjustment for net gains included in net income (net of income tax of $238)
                
(441
)
Pension and other post retirement benefits (net of income tax benefit of $160)
                      
298
  
Total other comprehensive income (loss)
          
(1,416
)
  
(1,416
)
  
(1,416
)
                           
Comprehensive Income
                    
$
2,245
  
Dividend to Parent Company
    
(250
)
        
(250
)
      
BALANCE, JUNE 30, 2007
  
$
296,568
    
($14,158
)
$
282,410
        

See accompanying notes to the unaudited consolidated financial statements.

3

BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(Dollars in thousands)
   
Six Months Ended
June 30,
  
   
2007
  
2006
  
OPERATING ACTIVITIES:
              
Net income
  
$
3,661
  
$
5,208
  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
              
Provision for loan losses
    
300
    
1,200
  
Depreciation and amortization
    
1,778
    
1,752
  
Intangible amortization
    
171
    
213
  
Gain on sale of investments
    
(679
)
  
(774
)
Accretion of discount on investment securities
    
(806
)
  
(127
)
Amortization of premium on investment securities
    
172
    
226
  
Origination of loans held for sale
    
(2,406
)
  
(3,419
)
Proceeds from sales of loans
    
2,064
    
3,403
  
Deferred income taxes
    
(3,166
)
  
(4,792
)
Loss (gain) from sales of premises and equipment
    
8
    
(70
)
Increase in bank owned life insurance
    
(695
)
  
(748
)
Changes in assets and liabilities that provided (used) cash:
              
Accrued interest receivable
    
39
    
(660
)
Accrued interest payable
    
(368
)
  
(143
)
Income taxes payable
    
(1,652
)
  
71
  
Other liabilities
    
12,985
    
(1,487
)
Other assets
    
(12,877
)
  
2,741
  
Net cash provided by (used in) operating activities
    
(1,471
)
  
2,594
  
               
INVESTING ACTIVITIES:
              
Cash paid in excess of cash equivalents for business acquired
    
0
    
(500
)
Loans originated or acquired
    
(206,492
)
  
(256,321
)
Principal repayment on loans
    
262,590
    
246,533
  
Purchase of investment securities available for sale
    
(295,778
)
  
(31,150
)
Proceeds from sales and maturities of investment securities available for sale
    
39,959
    
33,240
  
Proceeds from maturities, calls or repayments of investment securities held to maturity
    
9,536
    
12,535
  
Redemption of Federal Home Loan Bank stock
    
1,827
    
2,272
  
Net (increase) decrease in other real estate owned
    
36
    
280
  
Purchase of premises and equipment
    
(4,182
)
  
(3,228
)
Proceeds from sale of premises and equipment
    
64
    
282
  
Net cash provided by (used in) investing activities
    
(192,440
)
  
3,943
  
               
FINANCING ACTIVITIES:
              
Net increase (decrease) in borrowed funds
    
(62,150
)
  
(36,151
)
Net increase (decrease) in checking, savings and demand accounts
    
34,353
    
(30,926
)
Net increase (decrease) in time deposits
    
(99,721
)
  
52,206
  
Cash dividend to parent company
    
(250
)
  
0
  
Proceeds from stock subscriptions
    
393,910
    
0
  
Net cash provided by (used in) financing activities
    
266,142
    
(14,871
)
               
Net increase (decrease) in cash and cash equivalents
    
72,231
    
(8,334
)
               
Cash and cash equivalents, beginning of period
    
23,147
    
32,930
  
               
Cash and cash equivalents, end of period
  
$
95,378
  
$
24,596
  
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:
              
Cash payments for interest
  
$
32,045
  
$
29,809
  
Cash payments of income taxes
    
5,458
    
6,070
  
Transfers of loans to other real estate owned
    
253
    
328
  

See accompanying notes to the unaudited consolidated financial statements.

4

BENEFICIAL MUTUAL BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with 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 Prospectus (the “Prospectus”) included in the Registration Statement on Form S-1 initially filed by Beneficial Mutual Bancorp, Inc. (the “Company” or “Bancorp”) with the Securities and Exchange Commission on May 14, 2007. The results for the three and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2007 or any other period.

Principles of Consolidation

The unaudited interim consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and a variable interest entity (“VIE”) where the Company is the primary beneficiary. The financial statements include the accounts of Beneficial Savings Bank (the “Bank”) and its wholly owned subsidiaries. The Bank’s wholly owned subsidiaries are as follows: Beneficial Investment Center, LLC, which offers non-deposit products, Neumann Corporation, a Delaware corporation formed for the purpose of managing certain investments, Beneficial Insurance Services, LLC, which was formed to provide insurance services to individual and business customers and BSB Union Corporation, a leasing company. All significant intercompany accounts and transactions have been eliminated. In addition a VIE was consolidated in the financial statements. Under Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company determined it operates in one reporting segment which is community banking.

Certain reclassifications to prior period amounts have been made to conform to current period presentation.

Use of Estimates in the Preparation of Financial Statements

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


NOTE 2 — NATURE OF OPERATIONS

The Company is a federally chartered stock holding company and owns all of the outstanding common stock of the Bank, a Pennsylvania chartered stock savings bank. At June 30, 2007, the Company was wholly owned by Beneficial Savings Bank MHC (the “MHC”), a federally chartered mutual holding company, and had 100 shares of common stock, par value $1.00, outstanding.
 
5
 
On July 13, 2007, the Company completed its initial public offering (“IPO”) and acquisition of FMS Financial Corporation, which are discussed in more detail below. Following 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, outstanding, 36,471,825 of which are held publicly and 45,792,775 of which are held by the MHC.

The Bank offers a variety of consumer and commercial banking services to individuals, businesses, and nonprofit organizations through 41 offices throughout the Philadelphia metropolitan area. The Bank is supervised and regulated by the Pennsylvania Department of Banking and the Office of Thrift Supervision (the “OTS”) regulates the Company and the MHC. The deposits of the Bank are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (the “FDIC”) and are subject to regulation by the FDIC.

Merger and Minority Stock Offering

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

FMS shareholders received $28.00 per share, in the form of stock, cash or a combination of cash and stock, subject to the election and proration procedures set forth in the merger agreement. In connection with the merger, 11,915,200 shares of Company common stock and $64.2 million in cash were issued to former FMS shareholders.

Bancorp is authorized to issue four hundred million shares, of which three hundred million shares shall be common stock having a par value of $0.01 per share and of which one hundred million shall be preferred stock having a par value of $0.01 per share. Each share of the Company’s common stock has the same relative rights as, and is identical in all respects with, each other share of common stock.

In the event Bancorp pays dividends to its stockholders, it will also be required to pay dividends to the MHC, unless the MHC elects to waive the receipt of dividends. 

The costs associated with the stock offering were deferred and are deducted from the proceeds upon the sale of the stock. To date, no stock offering expenses have been expensed.  At June 30, 2007, $2.6 million of costs had been incurred and deferred. The cost associated with the acquisition of FMS will be recorded as part of the purchase accounting entries and at June 30, 2007, $1.2 million of costs had been incurred and deferred.

The Company established a charitable foundation, named “The Beneficial Foundation,” as part of the offering. The charitable foundation was funded by a combination of Bancorp common stock and cash. The Beneficial Foundation will make charitable grants and donations and support projects located within the Company’s market area.


NOTE 3 — EARNINGS PER SHARE

The Company had 100 shares of common stock issued at June 30, 2007, which is reflected in the Unaudited Consolidated Statements of Financial Condition.

As described in Note 2, the effective date of the Company’s IPO was July 13, 2007, and a total of 82,264,600 shares were issued. The 100 shares issued to the MHC, in connection with the mutual holding company reorganization completed in 2004 were replaced with 45,792,775 shares, representing 55.7% of the shares issued. The remaining shares were sold in the IPO to the public, were used to acquire the shares of FMS, and were contributed to The Beneficial Foundation.
 
6
 
The replacement of MHC shares is analogous to a stock split or significant stock dividend, therefore, the following earnings per share information is calculated by giving retroactive application to the periods presented of the weighted average number of MHC shares outstanding on the July 13, 2007 transaction date.

The following table presents a calculation of basic and fully diluted earnings per share for the three month and six month periods ended June 30, 2007 and 2006. Earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding.
 
   
Three Months Ended
  
Six Months Ended
  
(Dollars in thousands except per share amounts)
  
June 30,
  
June 30,
  
   
2007
  
2006
  
2007
  
2006
  
Basic and diluted earnings per share:
                          
                           
Net income
  
$
1,912
  
$
2,438
  
$
3,661
  
$
5,208
  
                           
Average common shares outstanding
    
45,792,775
    
45,792,775
    
45,792,775
    
45,792,775
  
                           
Net income per common share
  
$
0.04
  
$
0.05
  
$
0.08
  
$
.0.11
  

 
NOTE 4 — RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007 with early adoption permitted as of the beginning of a fiscal year that begins on or before November 15, 2007. Management is currently evaluating the effect of SFAS 159 on the Company’s financial condition and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. SFAS 157 retains the exchange price notion and clarifies that the exchange price is the price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. SFAS 157 is effective for the Company’s financial statements for the year beginning on January 1, 2008, with earlier adoption permitted. Management is currently evaluating the effect of SFAS 157 on the Company’s financial condition and results of operations.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 expresses the SEC Staff’s views regarding the process of quantifying financial statement misstatements. SAB 108 states that in evaluating the materiality of financial statement misstatements a corporation must quantify the impact of correcting misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. SAB 108 is effective January 1, 2007. Under certain circumstances, prior year financial statements will not have to be restated and the effects of initially applying SAB 108 on prior years will be recorded as a cumulative effect adjustment to beginning retained earnings, with disclosure of the items included in the cumulative effect. The adoption of SAB 108 did not have a material impact on the Company’s financial condition and results of operations.

In June 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007 and the initial adoption did not have a material impact on the Company’s financial condition and results of operations. At the adoption date of January 1, 2007, the Company had a liability for uncertain tax positions of $135,000. Of this amount, $96,000 represents the total of unrecognized tax benefits that, if recognized, would affect the effective tax rate. The Company recognizes, when applicable, interest and penalties related to unrecognized tax positions in the provision for income taxes in the consolidated statement of income. As of January 1, 2007, the Company had approximately $39,000 of accrued interest and penalties, which are included in the liability for uncertain tax positions. The tax years 2003 through 2006 remain subject to examination by all jurisdictions. As of June 30, 2007, no audits were in process by a tax jurisdiction that, if completed during the next twelve months, would be expected to result in material change to the Company’s uncertain tax positions.
 
7
 
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 133 and 140” (“SFAS 156”), which permits, but does not require, an entity to account for one or more classes of servicing rights (i.e., mortgage servicing rights, or MSRs) at fair value, with the changes in fair value recorded in the Consolidated Statement of Income.  SFAS No. 156 is effective for years beginning after September 15, 2006. The adoption of this standard did not have a material impact on the Company’s financial condition and results of operations.
 
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments” (“SFAS 155”), which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133. The statement also subjects beneficial interests issued by securitization vehicles to the requirements of SFAS 133. The statement is effective for years beginning after September 15, 2006. The adoption of this standard did not have a material impact on the Company’s financial condition and results of operations.

In September 2006, the FASB ratified Emerging Issues Task Force Issue ("EITF") No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements" ("EITF 06-4"). An endorsement split-dollar arrangement is an arrangement whereby an employer owns a life insurance policy that covers the life of an employee and using a separate agreement endorses a portion of the policy death benefit to the insured employee’s beneficiary. EITF 06-4 applies only to those endorsement split-dollar arrangements that provide a death benefit postretirement. This requirement is effective for fiscal years beginning after December 15, 2007. Management is currently evaluating the effect of EITF 06-4 on the Company’s financial condition and results of operations.





8

NOTE 5 — GROSS UNREALIZED LOSSES BY INVESTMENT CATEGORY

Investments that have been in a continuous unrealized loss position for periods of less than 12 months and 12 months or longer at June 30, 2007 and December 31, 2006 are summarized in the following table:

(Dollars in thousands)
  
June 30, 2007
  
   
Less than 12 months
  
12 months or longer
  
Total
  
                           
       
Unrealized
      
Unrealized
      
Unrealized
  
   
Fair Value
  
Losses
  
Fair Value
  
Losses
  
Fair Value
  
Losses
  
U.S. Government Sponsored
                                      
Enterprise ("GSE") and Agency Notes
  
$
6,856
  
$
24
  
$
72,969
  
$
1,206
  
$
79,825
  
$
1,230
  
Other mortgage-backed securities
    
23,621
    
164
    
102,457
    
4,090
    
126,078
    
4,254
  
Municipal and other bonds
    
17,851
    
267
    
6,455
    
154
    
24,306
    
421
  
Collateralized mortgage obligations
    
7,541
    
117
    
105,958
    
5,234
    
113,499
    
5,351
  
Subtotal, debt securities
    
55,869
    
572
    
287,839
    
10,684
    
343,708
    
11,256
  
Equity securities
    
5,307
    
516
    
0
   
0
   
5,307
    
516
  
Total temporarily impaired securities
  
$
61,176
  
$
1,088
  
$
287,839
  
$
10,684
  
$
349,015
  
$
11,772
  
                                       
 
   
December 31, 2006
  
   
Less than 12 months
  
12 months or longer
  
Total
  
                           
       
Unrealized
      
Unrealized
      
Unrealized
  
   
Fair Value
  
Losses
  
Fair Value
  
Losses
  
Fair Value
  
Losses
  
U.S. Government Sponsored
                                      
Enterprise ("GSE") and Agency Notes
  
$
6,859
  
$
17
  
$
73,385
  
$
1,466
  
$
80,244
  
$
1,483
  
Other mortgage-backed securities
    
9,869
   
30
   
126,346
   
3,941
   
136,215
   
3,971
 
Municipal and other bonds
    
4,804
   
16
   
5,891
   
76
   
10,695
   
92
 
Collateralized mortgage obligations
    
0
   
0
   
116,164
   
4,057
   
116,164
   
4,057
 
Subtotal, debt securities
    
21,532
   
63
   
321,786
   
9,540
   
343,318
   
9,603
 
Equity securities
    
1,434
   
66
   
0
   
0
   
1,434
   
66
 
Total temporarily impaired securities
  
$
22,966
  
$
129
  
$
321,786
  
$
9,540
  
$
344,752
  
$
9,669
  
                                       

United States Government Sponsored Enterprise (“GSE”) and Agency Notes

The Company’s investments in GSE Notes consist of debt obligations of the Federal Home Loan Mortgage Corporation (“FHLMC”), the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Bank (“FHLB”), and the Federal Farm Credit Bank (“FFCB”). The Company’s investments in Agency Notes consist of debt obligations of the Department of Housing and Urban Development (“HUD”). The decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2007.
 

9
 
Other Mortgage-Backed Securities
 
The Company’s investments in other mortgage-backed securities consist of GSE mortgage-backed securities and government agency mortgage-backed securities. The unrealized losses on the Company’s investments in mortgage-backed securities were caused by interest rate increases. The contractual cash flows of those investments in GSE mortgage-backed securities are debt obligations of the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal National Mortgage Association (“FNMA”). The cash flows related to government agency mortgage-backed securities are direct obligations of the U.S. Government. The decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2007.
 
Municipal and Other Bonds
 
The Company’s investments in this category are comprised of municipal bonds and corporate bonds. The municipal bonds consist of general obligation and revenue bonds of entities located in the Commonwealth of Pennsylvania. These bonds are rated AAA by S&P and/or Aaa by Moody’s. Other bonds consist of corporate bonds, which are rated investment grade at June 30, 2007. The unrealized losses on the Company’s municipal and other bonds were caused by interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2007.
 
Collateralized Mortgage Obligations
 
The Company’s investments in this category consist of collateralized mortgage obligations issued by FHLMC, FNMA, and whole loan mortgage-backed securities rated AAA by S&P. The decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2007.
 
Equity Securities
 
The Company’s investments in equity securities consist of bank-issued common stocks. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2007.
 
NOTE 6 — COMMITMENTS

Outstanding loan commitments totaled $128.6 million at June 30, 2007, as compared to $103.6 million as of June 30, 2006. Loan commitments consist of commitments to originate new loans as well as the outstanding undrawn portions of lines of credit and standby letters of credit.

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

Forward-Looking Statements

This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Bank’s market area, changes in real estate market values in the Bank’s market area, changes in relevant accounting principles and guidelines and the inability of third party service providers to perform.
 
10
 
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

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

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

Critical Accounting Policies

Allowance for Loan Losses - We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: value of collateral; loss exposure at default; the amount and timing of future cash flows on impacted loans; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of the examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Deferred Income Taxes - We use the asset and liability method of accounting for income taxes as prescribed in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings.
 
11
 
Comparison of Financial Condition at June 30, 2007 and December 31, 2006

At June 30, 2007, total assets increased $280.0 million, or 12.17% to $2.58 billion from $2.30 billion at December 31, 2006.  This increase was primarily due to increases of $243.0 million or 50.96% in investment securities and $72.2 million in cash and cash equivalents, of which $71.0 million was due to an increase in federal funds sold, partially offset by a decrease in net loans receivable of $56.1 million, or 3.35%. Deposits decreased to $1.61 billion at June 30, 2007 from $1.68 billion at December 31, 2006 as reductions in time deposits, including brokered time deposits, were partially offset by increases in money market, savings and checking accounts. Total borrowed funds decreased from $294.9 million at December 31, 2006 to $232.7 million at June 30, 2007, which included a decrease in Federal Home Loan Bank advances from $196.6 million at December 31, 2006 to $165.3 million at June 30, 2007. A liability in the amount of $394.1 million was incurred during the quarter ended June 30, 2007 relating to the funds received with subscription orders in connection with Bancorp’s minority stock offering. Equity increased $2.0 million or 0.71% between December 31, 2006 and June 30, 2007 due primarily to net income of $ 3.7 million, partially offset by an increase in unrealized losses in the available for sale investment portfolio.
 
Comparison of Operating Results for the Three Months Ended June 30, 2007 and June 30, 2006
 
General - Net income decreased by $526,000, or 21.58% to $1.9 million for the three months ended June 30, 2007, compared to $2.4 million for the same period in 2006.  The change in net income was primarily due to increases in non-interest expenses, partially offset by increases in net interest income and other income as well as decreases in the provision for loan losses and income taxes.

Net Interest Income - Net interest income increased $450,000 or 2.80% to $16.5 million for the three months ended June 30, 2007, compared to $16.1 million for the same period in 2006.  The increase in net interest income in the 2007 period compared to the same period in 2006 was primarily due to earnings on available funds relating to stock subscriptions received.

Provision for Loan Losses - Net charge-offs during the three month period ended June 30, 2007 declined to $224,000, or 0.01% of average loans outstanding, compared to $377,000, or 0.02% of average loans outstanding for the same three month period in 2006.

The Bank did not record a provision for loan losses during the three months ended June 30, 2007 as compared to $600,000 for the same three month period in 2006. The allowance for loan losses at June 30, 2007 totaled $17.2 million, or 1.06% of total loans outstanding, compared to $17.4 million, or 1.03% of total loans outstanding, at December 31, 2006 and was determined by management to be an amount necessary to maintain a balance of allowance for loan losses at a level necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. The change in the provision for loan losses in the 2007 period compared to the same period in 2006 reflects the lower level of net charge-offs and the decrease in average loans outstanding.
 
Non-interest Income - Non-interest income increased $248,000 or 10.16% from $2.4 million for the three months ended June 30, 2006, to $2.7 million for the same period in 2007.  This change was primarily due to an increase in profits on the sale of available for sale equity securities of $210,000 and an increase of insurance commission income of $125,000 during the quarter ended June 30, 2007 compared to the quarter ended June 30, 2006. These increases were partially offset by a reduction in service charges and other income during the quarter of $87,000 which includes operating losses on limited partnerships established to support low to moderate income housing.
 
Non-interest Expense - Non-interest expenses increased $2.2 million, or 14.6% to $17.1 million for the three months ended June 30, 2007 from $14.9 million during the same period in 2006. The increase was primarily due to an increase of $831,000 or 9.85% in salary and employee benefits, an increase of $307,000 or 83.88% in professional fees and an increase of $314,000 or 43.19% in advertising expense. The increase in salaries and employee benefits was primarily attributable to increases in post-retirement and pension benefits expense and the salary and benefits expense of additional sales and marketing personnel. The increase in professional fees relates primarily to additional reporting requirements and to expenses associated with the integration of FMS. The increase in advertising expense can be attributed to the Bank’s increased efforts to promote its products and services.
 
The following table summarizes average balances and average yields and costs for the three-month periods ended June 30, 2007 and 2006.
 
12

 
(Dollars in thousands)
  
Three Months Ended
June 30, 2007
  
Three Months Ended
June 30, 2006
  
    
Average
Balance
   
Interest
And
Dividends
   
Yield/
Cost
   
Average
Balance
   
Interest
And
Dividends
   
Yield/
Cost
  
                           
Assets:
                                      
Interest-bearing demand deposits
  
$
9,694
  
$
99
    
       4.07%
 
$
727
  
$
8
    
    4.67%
 
Loans
    
1,654,533
    
25,875
    
    6.27
    
1,745,367
    
25,649
    
5.89
  
Investment securities
    
190,121
    
2,170
    
    4.61
    
158,588
    
1,651
    
4.17
  
Mortgage-backed securities
    
175,865
    
2,090
    
    4.75
    
199,354
    
2,255
    
4.41
  
Collateralized mortgage obligations
    
133,261
    
1,694
    
    5.08
    
142,724
    
1,753
    
4.91
  
Other interest-earning assets
    
21,311
     
280
    
    5.20
    
605
     
7
    
4.67
  
Total interest-earning assets
    
2,184,785
    
32,208
    
    5.90
    
2,247,365
    
31,323
    
5.58
  
 
                                      
Non-interest earning assets
    
142,117
                 
114,431
               
Total assets
  
$
2,326,902
    
$
32,208
        
$
2,361,796
   
$
31,323
        
                                       
Liabilities and stockholders’ equity:
                                      
Interest-earning checking accounts
  
$
173,080
  
$
478
    
    1.11
  
$
165,426
  
$
456
    
1.10
  
Money market accounts
    
307,023
    
2,453
    
    3.20
    
256,573
    
1,572
    
2.46
  
Savings accounts
    
243,116
    
451
    
      .74
    
274,156
    
509
    
.75
  
Time deposits
    
821,726
      
8,888
    
    4.34
    
880,168
     
8,120
    
3.70
 
Total interest-bearing deposits
    
1,544,945
     
12,270
    
    3.19
    
1,576,323
     
10,657
    
2.71
  
                                       
Federal Home Loan Bank advances
    
186,741
    
2,295
    
    4.93
    
237,794
    
2,895
    
4.88
  
Repurchase agreements
    
78,477
    
960
    
    4.91
    
99,316
    
1,210
    
4.89
  
Other borrowings
    
13,183
    
157
    
    4.77
    
40,064
    
485
    
4.85
  
Total interest-bearing liabilities
    
1,823,346
     
15,682
    
    3.45
    
1,953,497
     
15,247
    
3.13
  
                                       
Non-interest-bearing deposits
    
83,896
                
92,254
              
Other non-interest-bearing liabilities
    
137,178
                 
29,415
               
Total liabilities
    
2,044,420
     
15,682
          
2,075,166
     
15,247
        
                                       
Total stockholders’ equity
    
282,482
                
286,630
              
Total liabilities and stockholders’ equity
  
$
2,326,902
              
$
2,361,796
              
Net interest income
        
$
16,526
              
$
16,076
        
Interest rate spread
                
    2.45
                
2.45
  
Net interest margin
                
    3.02
                
2.87
  
Average interest-earning assets to
average interest-bearing liabilities
                      
119.82
                     
115.04   
 

Income Tax Expense - The provision for income taxes was $225,000 for the period ended June 30, 2007, reflecting an effective tax rate of 10.53%, compared to $576,000 for the period ended June 30, 2006, reflecting an effective tax rate of 19.11%. The change in 2007 from 2006 was primarily due to a decrease in income before income taxes of $877,000, while tax-exempt income on tax-exempt securities and Bank-owned life insurance, and federal income tax credits remained fairly constant.

Comparison of Operating Results for the Six Months Ended June 30, 2007 and June 30, 2006
 
General - Net income decreased by $1.5 million, or 29.70% to $3.7 million for the six months ended June 30, 2007, compared to $5.2 million for the same period in 2006.  The change in net income was primarily due to decreases in net interest income and an increase in non-interest expenses, partially offset by decreases in the provisions for loan losses and income taxes. Non-interest income remained relatively constant for the first six months of each year.
 
13
 
The following table summarizes average balances and average yields and costs for the six-month periods ended June 30, 2007 and 2006.
 
(Dollars in thousands)
  
Six Months Ended
June 30, 2007
   
Six Months Ended
June 30, 2007
  
      
Average
Balance
   
Interest
And
Dividends
  
Yield/
Cost
  
Average
Balance
   
Interest
And
Dividends
   
Yield/
Cost
  
                           
Assets:
                                      
Interest-bearing demand deposits
  
$
8,358
  
$
186
    
    4.45%
 
$
1,384
  
$
31
    
   4.46%
 
Loans
    
1,667,068
    
51,641
    
6.22
   
1,742,809
    
50,435
    
5.82
  
Investment securities
    
170,801
    
3,795
    
4.49
    
155,835
    
3,074
    
3.96
  
Mortgage-backed securities
    
180,249
    
4,280
    
4.91
    
204,838
    
4,634
    
4.41
  
Collateralized mortgage obligations
    
134,325
    
3,395
    
5.05
    
146,471
    
3,587
    
4.90
  
Other interest-earning assets
    
11,167
     
292
    
5.20
    
2,445
     
53
    
4.33
  
Total interest-earning assets
    
2,171,968
    
63,589
    
5.88
    
2,253,782
    
61,814
    
5.51
  
                                       
Non-interest-earning assets
    
136,959
                 
112,433
               
Total assets
  
$
2,308,927
   
$
63,589
        
$
2,366,215
   
$
61,814
        
                                       
Liabilities and stockholders’ equity:
                                      
Interest-earning checking accounts
  
$
167,518
  
$
901
    
1.08
  
$
164,802
  
$
884
    
1.08
  
Money market accounts
    
299,713
    
4,667
    
3.14
    
260,727
    
3,084
    
2.39
  
Savings accounts
    
245,257
    
906
    
.74
    
277,522
    
1,025
    
   .74
  
Time deposits
    
847,030
     
18,083
    
4.31
    
869,374
     
15,548
    
3.61
  
Total interest-bearing deposits
    
1,559,518
     
24,557
    
3.18
    
1,572,425
     
20,541
    
2.63
  
                                       
Federal Home Loan Bank advances
    
190,983
    
4,731
    
5.00
    
264,193
    
6,234
    
4.73
  
Repurchase agreements
    
83,511
    
2,043
    
4.93
    
95,999
    
2,259
    
4.71
  
Other borrowings
    
14,238
     
345
    
4.88
    
24,484
    
630
    
4.71
  
Total interest-bearing liabilities
    
1,848,250
     
31,676
    
3.46
    
1,957,101
     
29,664
    
3.05
  
                                       
Non-interest-bearing deposits
    
83,846
                
57,809
              
Other non-interest-bearing liabilities
    
95,059
                 
65,973
               
Total liabilities
    
2,027,155
     
31,676
          
2,080,883
     
29,664
        
                                       
Total stockholders’ equity
    
281,772
                
285,332
              
Total liabilities and stockholders’ equity
  
$
2,308,927
              
$
2,366,215
              
Net interest income
        
$
31,913
              
$
32,150
        
Interest rate spread
                
2.42
                
2.46
  
Net interest margin
                
2.94
                
2.86
  
Average interest-earning assets to
average interest-bearing liabilities
                    
117.51    
                  
115.16   
 
 
Net Interest Income - Net interest income decreased $237,000 or 0.74% to $31.9 million for the six months ended June 30, 2007, compared to $32.2 million for the same period in 2006.  The decrease in net interest income in the 2007 period compared to the same period in 2006 was primarily due to continued pressure on the Bank’s interest rate spread, offset by increased earnings related to available funds resulting from stock subscriptions received.  The Bank’s interest rate spread equaled 2.42% for the six months ended June 30, 2007, compared to 2.46% for the six months ended June 30, 2006. 
 
Provision for Loan Losses - Net charge-offs during the six month period ended June 30, 2007 were $430,000, or 0.03% of average loans outstanding, compared to $825,000, or 0.05% of average loans outstanding for the same six month period in 2006.

The provision for loan losses amounted to $300,000 for the six months ended June 30, 2007, compared to $1.2 million for the same period in 2006, and was determined by management to be an amount necessary to maintain a balance of allowance for loan losses at a level necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date.  The change in the provision for loan losses in the 2007 period compared to the same period in 2006 reflects the lower level of net charge-offs and the decrease in average loans outstanding.
 
14
 
Non-interest Income - Non-interest income remained relatively constant at $5.5 million for the six months ended June 30, 2007 and the six months ended June 30, 2006.  This included an increase in insurance commission income of $166,000 during the six months ended June 30, 2007 compared to the same period in 2006. This was partially offset by a decrease in profits on the sale of available for sale equity securities of $95,000 and a decrease of $47,000 in service charges and other income during the same periods.
 
Non-interest Expense - Non-interest expenses increased $3.3 million, or 11.13% to $33.1 million for the six months ended June 30, 2007 from $29.7 million during the same period in 2006. The increase was primarily due to an increase of $1.3 million or 7.84% in salary and employee benefits, an increase of $615,000 or 98.94% in professional fees and an increase of $559,000 or 47.86% in advertising expense. The increase in salaries and employee benefits was primarily attributable to increases in post-retirement and pension benefits expense and the salary and benefits of additional sales and marketing personnel. The increase in other expenses includes professional fees which relate primarily to additional reporting requirements and to expenses associated with the integration of FMS. The increase in advertising expense can be attributed to the Bank’s increased efforts to promote its products and services.
 
Income Tax Expense - The provision for income taxes was $425,000 for the period ended June 30, 2007, reflecting an effective tax rate of 10.40%, compared to $1.5 million for the period ended June 30, 2006, reflecting an effective tax rate of 22.40%. The change in 2007 from 2006 was primarily due to a decrease in income before income taxes of $2.6 million, while tax-exempt income on tax-exempt securities and Bank-owned life insurance, and federal income tax credits remained fairly constant.
 
Asset Quality

The Company does not engage in subprime lending and investment activities, which are defined as mortgage loans advanced to borrowers who do not qualify for market interest rates because of problems with their credit history.  The Company's lending and investment activities are discussed in the Prospectus included in the Registration Statement on Form S-1 filed by the Company with the Securities and Exchange Commission on May 14, 2007. All mortgage-backed securities owned by the Company as of June 30, 2007 possessed the highest possible investment credit rating.

Liquidity and Capital Management

Liquidity Management - Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposits, loan repayments, maturities of and payments on investment securities and borrowings from the Federal Home Loan Bank of Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposits and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. At June 30, 2007, the Company does not anticipate that its future levels of principal repayments will be materially impacted by problems currently being experienced in the residential mortgage market. See “Asset Quality” for a further discussion of the Bank’s asset quality.

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

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2007, cash and cash equivalents totaled $95.4 million. In addition, at June 30, 2007, we had arrangements to borrow up to $962.4 million from the Federal Home Loan Bank of Pittsburgh. On June 30, 2007, we had $165.3 million of advances outstanding.

A significant use of our liquidity is the funding of loan originations. At June 30, 2007, we had $128.6 million in loan commitments outstanding, which consisted of $35.0 million and $3.1 million in commercial and consumer commitments to fund loans, respectively, $71.8 and $12.6 million in commercial and consumer unused lines of credit, respectively, and $6.1 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, 2007 totaled $657.0 million, or 82.73% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the recent low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2008. We expect, 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.
 
15
 
The following table presents certain of our contractual obligations at June 30, 2007:

       
Payments due by period
  
(Dollars in thousands)
     
Total
   
Less than One Year
   
One to
Three Years
   
Three to
Five Years
   
More Than
Five Years
  
                       
Commitments to fund loans
  
$
38,073
  
$
38,073
                    
Unused lines of credit
    
84,412
    
71,769
              
$
12,643
  
Standby letters of credit
    
6,082
    
6,082
                    
Operating lease obligations
    
24,512
    
4,225
  
$
7,834
  
$
4,359
    
8,094
  
Purchase obligations
    
211
     
211
                       
Total
   
$
153,290
   
$
120,360
   
$
7,834
   
$
4,359
   
$
20,737
  
 
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 and Federal Home Loan Bank advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our competitors and other factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

The following table presents our primary investing and financing activities during the periods indicated:

(Dollars in thousands)
  
Six Months
Ended
June 30,
  
Year Ended December 31,
  
   
2007
  
2006
  
2005
  
Investing activities:
                    
Loan purchases
  
$
0
  
$
(5,064
)
$
(38,283
)
Loan originations
    
(206,492
)
  
(502,021
)
  
(661,965
)
Principal repayments on loans
    
262,590
    
550,048
    
544,164
  
Purchases of investment securities available for sale
    
(295,778
)
  
(55,779
)
  
(61,767
)
Purchases of investment securities held to maturity
    
0
    
(474
)
  
(555
)
Proceeds from sales and maturities of investment securities available for sale
    
39,959
    
67,130
    
129,593
  
Proceeds from maturities, calls or repayments of investment securities held to maturity
    
9,536
    
33,162
    
42,345
  
                     
Financing activities:
                    
Increase (decrease) in deposits
    
(65,368
)
  
12,925
    
49,679
  
Increase (decrease) in Federal Home Loan Bank Advances
    
(31,300
)
  
(66,347
)
  
(82,437
)
Increase (decrease) in repurchase agreements
    
(23,600
)
  
(4,318
)
  
78,686
  
Increase (decrease) in Federal Home Loan Bank overnight borrowings
    
0
    
(49,900
)
  
130
  
Increase (decrease) in other borrowings
    
(7,250
)
  
7,250
    
0
  

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, 2007, we exceeded all of our regulatory capital requirements and are considered “well capitalized” under the regulatory guidelines.
 
16
 
The proceeds from the Company’s public stock offering, which was consummated on July 13, 2007, significantly increased our liquidity and capital resources. After taking into consideration the effect of the acquisition of FMS, the Company’s equity increased by approximately $329 million since December 31, 2006 to approximately $610 million. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of lending activities. Our financial condition and results of operations will be enhanced by the capital from the offering, resulting in increased net interest-earning assets and net income. However, the large increase in equity resulting from the capital raised in the offering will, initially, have an adverse impact on our return on equity. Following the offering, we may use capital management tools such as cash dividends and common share repurchases. However, under Office of Thrift Supervision regulations, we will not be allowed to repurchase any shares during the first year following the offering, except: (1) in extraordinary circumstances, we may make open market repurchases of up to 5% of our outstanding stock if we receive the prior non-objection of the Office of Thrift Supervision of such repurchases; (2) repurchases of qualifying shares of a director or if we conduct an Office of Thrift Supervision-approved offer to repurchase made to all shareholders; (3) if we repurchase to fund a restricted stock award plan that has been approved by shareholders; or (4) if we repurchase stock to fund a tax-qualified employee stock benefit plan. All repurchases are prohibited, however, if the repurchase would reduce the Bank’s regulatory capital below regulatory required levels.

Off-Balance Sheet Arrangements

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

For the period ended June 30, 2007, 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 falling interest rates. For example, a bank with predominantly long-term fixed-rate loans, and short-term deposits 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 were changed due to 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.
 
17
 
These two perspectives give rise to income simulation and economic value simulation, each of which presents a unique picture of our risk of 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, 2007. 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 an instantaneous, parallel change in market interest rates of plus or minus 200 basis points for all projected future cash flows. Various assumptions are made regarding the prepayment speed and optionality of loans, investments and deposits, which are based on analysis, market information and in-house studies. The assumptions regarding optionality, such as prepayments of loans and the effective maturity of non-maturity deposit products are documented periodically through evaluation under varying interest rate scenarios.

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.

18
 
As of June 30, 2007:

Basis point change in rates
   
-200
Base Forecast
+200
  
(Dollars in thousands)
              
               
Net Interest Income at Risk:
                    
Net Interest Income
  
$
93,060
  
$
93,302
  
$
94,407
  
% change
    
-0.26
%
        
1.18
%
                     
Net Income at Risk:
                    
Net income
    
24,107
    
24,269
    
24,988
  
% change
    
-0.67
%
        
2.96
%
                     
Economic Value at Risk:
                    
Equity
    
321,713
    
317,042
    
282,725
  
% change
     
1.47
%
         
-10.82
%

As of June 30, 2007, based on the scenarios above, net interest income and net income would be adversely affected over a one-year time horizon in a declining rate environment. Economic value would be adversely affected in a rising rate environment.

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

The present value of equity remains at a premium to book value and our results indicate that we are well positioned with limited net interest income and economic value at risk and that all interest risk results continue to be within our policy guidelines.

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 

19

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s Prospectus, initially filed with the Securities and Exchange Commission on March 14, 2007. As of June 30, 2007, the risk factors of the Company have not changed materially from those reported in the Prospectus.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

 
3.1
Charter of Beneficial Mutual Bancorp, Inc. (1)
     
 
3.2
Bylaws of Beneficial Mutual Bancorp, Inc. (1)
     
 
4.0
Form of Stock Certificate of Beneficial Mutual Bancorp, Inc. (1)
     
 
10.1
Amended and Restated Employment Agreement Between Gerard P. Cuddy and Beneficial Mutual Bancorp, Inc. and Beneficial Mutual Savings Bank
     
 
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
     
 
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
     
 
32.0
Section 1350 Certification
 
______________________________________________________________
 
(1)
Incorporated herein by reference to the Exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-141289), as amended, initially filed with the Securities and Exchange Commission on March 14, 2007.

20

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 14, 2007
   By: /s/ Gerard P. Cuddy  
     
Gerard P. Cuddy
  
     
President and Chief Executive Officer
  
     
(principal executive officer)
  
         
         
Dated: August 14, 2007
   By: /s/ Joseph F. Conners  
     
Joseph F. Conners
  
     
Executive Vice President and Chief Financial Officer
      (principal financial officer)  
 


21