UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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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)
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United States
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56-2480744 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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510 Walnut Street, Philadelphia, Pennsylvania
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19106 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (215) 864-6000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
Common Stock, par value $0.01 per share
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Nasdaq Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
(Check one):
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-Accelerated Filer o
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates
as of June 30, 2010 was approximately $334.8 million. As of March 11, 2011, there were 80,717,553
shares of the registrants 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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants 2010 Annual Report to Stockholders and Proxy Statement for the 2011
Annual Meeting of Stockholders are incorporated by reference into Part II and III, respectively, of
this Form 10-K.
This annual report contains forward-looking statements that are based on assumptions and may
describe future plans, strategies and expectations of Beneficial Mutual Bancorp, Inc. These
forward-looking statements are generally identified by use of the words believe, expect,
intend, anticipate, estimate, project or similar expressions. Beneficial Mutual Bancorp,
Inc.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 Beneficial
Mutual Bancorp, Inc. 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 Beneficial Mutual Bancorp, Inc.s
market area, changes in real estate market values in Beneficial Mutual Bancorp, Inc.s market area,
changes in relevant accounting principles and guidelines and inability of third party service
providers to perform. Additional factors that may affect our results are discussed in Item 1A to
this annual report titled Risk Factors below.
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, Beneficial Mutual Bancorp, Inc. 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.
Unless the context indicates otherwise, all references in this annual report to Company, we,
us and our refer to Beneficial Mutual Bancorp, Inc. and its subsidiaries.
PART I
General
Beneficial Mutual Bancorp, Inc. (the Company) was organized on August 24, 2004 under the laws of
the United States in connection with the mutual holding company reorganization of Beneficial Bank
(the Bank), a Pennsylvania chartered savings bank which has also operated under the name
Beneficial Mutual Savings Bank. In connection with the reorganization, the Company became the
wholly owned subsidiary of Beneficial Savings Bank MHC (the MHC), a federally chartered mutual
holding company. In addition, the Company acquired 100% of the outstanding common stock of the
Bank.
On July 13, 2007, the Company completed its initial public offering in which it sold 23,606,625
shares, or 28.70%, of its outstanding common stock to the public, including 3,224,772 shares
purchased by the Beneficial Mutual Savings Bank Employee Stock Ownership Plan Trust (the ESOP).
In addition, 45,792,775 shares, or 55.67% of the Companys outstanding common stock, were issued to
the MHC. To further emphasize the Banks existing community activities, the Company also
contributed $500,000 in cash and issued 950,000 shares, or 1.15% of the Companys outstanding
common stock, to The Beneficial Foundation (the Foundation), a Pennsylvania nonstock charitable
foundation organized by the Company in connection with the Companys initial public offering.
In addition to completing its initial public offering on July 13, 2007, the Company issued
11,915,200 shares, or 14.48% of its outstanding common stock, to stockholders of FMS Financial
Corporation (FMS Financial) in connection with the Companys acquisition of FMS Financial. The
merger was consummated pursuant to an agreement and plan of merger whereby FMS Financial merged
with and into the Company and FMS Financials wholly owned subsidiary, Farmers & Mechanics Bank,
merged with and into the Bank.
The Companys business activities are the ownership of the Banks capital stock and the management
of the proceeds it retained in connection with its initial public offering. The Company does not
own or lease any property but instead uses the premises, equipment and other property of the Bank
with the payment of appropriate rental fees, as required by applicable law and regulations, under
the terms of an expense allocation agreement.
The Bank is a Pennsylvania chartered savings bank originally founded in 1853. We have served the
financial needs of our depositors and the local community since our founding and are a
community-minded, customer service-focused institution. We offer traditional financial services to
consumers and businesses in our market areas. We attract deposits from the general public and use
those funds to originate a variety of loans, including commercial real estate loans, consumer
loans, home equity loans, one-to-four family real estate loans, commercial business loans and
construction loans. We offer insurance brokerage and investment advisory services through our
wholly owned subsidiaries, Beneficial Insurance Services, LLC and Beneficial Advisors, LLC,
respectively. We also maintain an investment portfolio. Our primary market consists of Chester,
Delaware, Montgomery, Philadelphia and Bucks Counties, Pennsylvania and Burlington, Camden, and
Gloucester Counties, New Jersey. The acquisition of FMS Financial and its wholly owned
subsidiary, Farmers & Mechanics Bank, in July 2007 expanded our market presence in New Jersey.
2
The Companys and the Banks executive offices are located at 510 Walnut Street, Philadelphia,
Pennsylvania and our main telephone number is (215) 864-6000. Our website address is
www.thebeneficial.com. Information on our website should not be considered part of this filing.
Market Area
The Company is headquartered in Philadelphia, Pennsylvania. We currently operate 37 full-service
banking offices in Chester, Delaware, Montgomery, Philadelphia and Bucks Counties, Pennsylvania and
28 full-service banking offices in Burlington and Camden Counties, New Jersey and we also operate
one lending office in Chester County, Pennsylvania. In addition, Beneficial Insurance Services,
LLC operates two offices in Pennsylvania, one in Philadelphia County and one in Delaware County,
and provides property, causality, life, health and professional liability insurance to our
customers. We regularly evaluate our network of banking offices to optimize the penetration of our
market area in the most efficient way. We will occasionally open or consolidate banking offices.
The acquisition of FMS Financial substantially enhanced our market share. On July 13, 2007, the
Company completed its merger with FMS Financial. In connection with the merger, FMS Financials
wholly owned subsidiary, Farmers & Mechanics Bank, which had a network of 31 branch offices located
in Burlington and Camden Counties, New Jersey, merged with and into the Bank. The merger
solidified the Banks position as the largest Philadelphia-based bank operating solely in the
greater Philadelphia metropolitan area and greatly expanded its network of neighborhood banking
offices throughout the region.
Beginning in 2008, United States and global financial markets have experienced severe disruption
and volatility, and general economic conditions have declined significantly. Adverse developments
in credit quality, asset values and revenue opportunities throughout the financial services
industry, as well as general uncertainty regarding the economic, industry and regulatory
environment, have had a marked negative impact on the industry. Dramatic declines in the U.S.
housing market over the past few years, with falling home prices, increasing foreclosures and high
unemployment, have negatively affected the credit performance of mortgage loans and commercial real
estate and resulted in significant write-downs of asset values by many financial institutions. The
United States and the governments of other countries have taken steps to try to stabilize the
financial system, including investing in financial institutions, and have also been working to
design and implement programs to improve general economic conditions. Notwithstanding the actions
of the United States and other governments, these efforts may not succeed in restoring industry,
economic or market conditions and may result in adverse unintended consequences. It remains to be
seen whether the recent stabilization and slight improvement in economic activity both in the
Philadelphia metropolitan area and the broader U.S. economy is sustainable as government stimulus
programs come to an end.
According to published statistics, the 2010 population of our seven-county primary retail market
area totaled approximately 4.9 million. Overall, the seven counties that comprise our primary
retail market area provide attractive long-term growth potential by demonstrating relatively strong
household income and wealth growth trends relative to national and state-wide projections.
Competition
We face significant competition for the attraction of deposits and origination of loans. Our most
direct competition for deposits has historically come from the many banks, thrift institutions and
credit unions operating in our market area and, to a lesser extent, from other financial service
companies such as brokerage firms and insurance companies.
During the past few years, several large holding companies that operate banks in our market area
have experienced significant credit, capital and liquidity setbacks that have led to their
acquisition by even larger holding companies, some of which are located outside of the United
States, including Sovereign Bank and Commerce Bank, which were acquired by Banco Santander, S.A.
and Toronto Dominion Bank, respectively. In addition, Wachovia Bank, which held the largest
deposit market share in our market area, has been acquired by Wells Fargo & Company. We also
face competition for investors funds from money market funds, mutual funds and other corporate and
government securities.
Our competition for loans comes primarily from the competitors referenced above and other local
community banks, thrifts and credit unions and, to a lesser extent, from other financial service
providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from
the increasing number of non-depository financial service companies participating in the mortgage
market, such as insurance companies, securities companies and specialty finance companies, although
the recent credit market disruptions stemming from the deterioration of sub-prime loans have
reduced the number of non-depository competitors in the residential mortgage market.
Notwithstanding these recent credit market disruptions, we expect competition to remain intense in
the future as a result of legislative, regulatory and technological changes and the continuing
trend of consolidation in the financial services industry. Technological advances, for example,
have lowered barriers to entry, allowed banks to expand their geographic reach by providing
services over the internet and made it possible for non-depository institutions to offer products
and services that traditionally have been provided by banks. Changes in federal law permit
affiliation among banks, securities firms and insurance companies, and the recently expanded
availability of bank holding
company charters resulting from non-bank financial services companies receiving capital infusions
under the U.S. Treasury Departments Troubled Asset Relief Program, may promote a more competitive
environment in the financial services industry. Competition for deposits and the origination of
loans could limit our growth in the future.
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Lending Activities
We offer a variety of loans including commercial, residential and consumer loans. Our consumer
portfolio primarily includes automobile loans, recreational vehicles and leases, educational loans
and home equity loans and lines of credit. Since 2002, our commercial real estate loan portfolio
has grown steadily. At December 31, 2010 and 2009, our commercial real estate and commercial
construction portfolios combined comprised 31.1% and 30.9% of our total loan portfolio,
respectively.
Weaknesses in the commercial real estate market had a significant impact on our financial results
during 2010. During the year, the Company saw considerable deterioration in the value of a number
of large collateral dependent commercial real estate loans. Additionally, the Company noted a
pronounced slowdown in the commercial real estate market limiting traditional refinance and
repayment sources. The Company believes the recovery for commercial real estate in its market area
will take some time causing continued downward pressure on property valuations in future years. As
a result, the Company recorded a significantly elevated provision for credit losses of $70.2
million for the year ended December 31, 2010 compared to $15.7 million in 2009. The provision was
primarily driven by specific reserves required for commercial real estate loans that the Company
had previously designated as criticized loans and a decision to charge-off the collateral
deficiency on all of its criticized loans (those classified as special mention, substandard,
doubtful, or loss). Although the U.S. economy has shown some sign 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 expect that market conditions coupled with the large
amount of commercial maturities will result in an elevated provision for credit losses in 2011.
In the future, we intend to emphasize commercial and small business lending and remain focused on
commercial real estate lending. We will continue to proactively monitor and manage existing credit
relationships. To this end, we have enhanced our credit risk management staff and procedures.
The Bank does not engage in sub-prime lending, which is defined as mortgage loans advanced to
borrowers who do not qualify for market interest rates because of problems with their credit
history. The Bank focuses its lending efforts within its market area.
One-to-Four Family Residential Loans. We offer two types of residential mortgage loans:
fixed-rate loans and adjustable-rate loans. We offer fixed-rate mortgage loans with terms of up to
30 years. We offer adjustable-rate mortgage loans with interest rates and payments that adjust
annually after an initial fixed period of one, three or five years. Interest rates and payments on
our adjustable-rate loans generally are adjusted to a rate equal to a percentage above the U.S.
Treasury Security Index. The Banks adjustable-rate single-family residential real estate loans
generally have a cap of 2% on any increase or decrease in the interest rate at any adjustment date,
and a maximum adjustment limit of 6% on any such increase or decrease over the life of the loan. In
order to increase the originations of adjustable-rate loans, the Bank has been originating loans
which bear a fixed interest rate for a period of three to five years after which they convert to
one-year adjustable-rate loans. The Banks adjustable-rate loans require that any payment
adjustment resulting from a change in the interest rate be sufficient to result in full
amortization of the loan by the end of the loan term and, thus, do not permit any of the increased
payment to be added to the principal amount of the loan, creating negative amortization. Although
the Bank does offer adjustable-rate loans with initial rates below the fully indexed rate, loans
tied to the one-year constant maturity treasury (CMT) are underwritten using methods approved by
the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Federal National Mortgage
Association (Fannie Mae), which require borrowers to be qualified at a rate equal to 200 basis
points above the discounted loan rate under certain conditions.
Borrower demand for adjustable-rate loans compared to fixed-rate loans is a function of the level
of interest rates, the expectations of changes in the level of interest rates, and the difference
between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to the
interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate and
adjustable-rate mortgage loans that can be originated at any time is largely determined by the
demand for each in a competitive environment. The loan fees, interest rates and other provisions
of mortgage loans are determined by us on the basis of our own pricing criteria and competitive
market conditions.
All of our residential mortgage loans are consistently underwritten to standards established by
Fannie Mae and Freddie Mac.
While one-to-four family residential real estate loans are normally originated with up to 30-year
terms, such loans typically remain outstanding for substantially shorter periods because borrowers
often prepay their loans in full either upon sale of the property pledged as security or upon
refinancing the original loan. Therefore, average loan maturity is a function of, among other
factors, the level of purchase and sale activity in the real estate market, prevailing
interest rates and the interest rates payable on outstanding loans. We do not offer loans with
negative amortization or interest only loans.
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It is our general policy not to make high loan-to-value loans (defined as loans with a
loan-to-value ratio of 80% or more) without private mortgage insurance. However, we do offer loans
with loan-to-value ratios of up to 100% under a special low income loan program consisting of $16.1
million in loans as of December 31, 2010. The maximum loan-to-value ratio we generally permit is
95% with private mortgage insurance, although occasionally we do originate loans with loan-to-value
ratios as high as 97% under special loan programs, including our first time home owner loan
program. We require all properties securing mortgage loans to be appraised by a Board of
Directors-approved independent appraiser. We generally require title insurance on all first
mortgage loans. Borrowers must obtain hazard insurance, and flood insurance is required for loans
on properties located in a flood zone.
Commercial Real Estate Loans. At December 31, 2010, we had commercial real estate loans totaling
$600.7 million, or 21.5%, of our total loan portfolio.
We offer commercial real estate loans secured by real estate primarily with adjustable rates. We
originate a variety of commercial real estate loans generally for terms of up to 25 years and with
payments based on an amortization schedule of up to 25 years. These loans are typically based on
either the Federal Home Loan Bank (FHLB) of Pittsburghs borrowing rate or U.S. Treasury rate and
adjust every five years. Commercial real estate loans also are originated for the acquisition and
development of land. Conditions of acquisition and development loans we originate generally limit
the number of model homes and homes built on speculation, and draws are scheduled against executed
agreements of sale. Commercial real estate loans for the acquisition and development of land are
typically based upon the prime rate as published in The Wall Street Journal and/or LIBOR.
Commercial real estate loans for developed real estate and for real estate acquisition and
development are originated generally with loan-to-value ratios up to 75%, while loans for the
acquisition of land are originated with a maximum loan to value ratio of 65%.
As of December 31, 2010, our largest commercial real estate loan was a $21.7 million construction
loan for a 136 unit hotel in the greater Philadelphia area. The loan is well secured and
performing in accordance with its original terms at December 31, 2010.
Commercial Loans. We offer commercial business loans to professionals, sole proprietorships and
small businesses in our market area. We offer installment loans for capital improvements,
equipment acquisition and long-term working capital. These loans are typically based on the prime
rate as published in The Wall Street Journal and/or LIBOR. These loans are secured by business
assets other than real estate, such as business equipment and inventory, or are backed by the
personal guarantee of the borrower. We originate lines of credit to finance the working capital
needs of businesses to be repaid by seasonal cash flows or to provide a period of time during which
the business can borrow funds for planned equipment purchases. We also offer accounts receivable
lines of credit.
When making commercial business loans, we consider the financial statements of the borrower, the
borrowers payment history of both corporate and personal debt, the debt service capabilities of
the borrower, the projected cash flows of the business, the viability of the industry in which the
customer operates and the value of the collateral.
At December 31, 2010, our largest commercial business loan relationship had a total exposure of
$35.9 million and was secured by various mixed use commercial real estate and general business
assets. The loans are well collateralized and are performing in accordance with their original
terms at December 31, 2010.
Consumer Loans. We offer a variety of consumer loans, including home equity loans and lines of
credit, automobile loans, boat loans, loans for recreational vehicles, guaranteed student loans and
loans secured by passbook accounts and certificates of deposit. We also offer unsecured lines of
credit and unsecured term loans.
We generally offer home equity loans and lines of credit with a maximum combined loan-to-value
ratio of 80%. Home equity loans have fixed-rates of interest and are originated with terms of
generally up to 15 years with some exceptions up to 20 years. Home equity lines of credit have
adjustable rates and are based upon the prime rate as published in The Wall Street Journal. Home
equity lines of credit can have repayment scheduled of either principal and interest or interest
only paid monthly. We hold a first mortgage position on approximately 68% of the homes that secure
our home equity loans.
We offer loans secured by new and used automobiles. These loans have fixed interest rates and
generally have terms up to six years. We offer automobile loans with loan-to-value ratios of up to
100% of the purchase price of the vehicle depending upon the credit history of the borrower and
other factors. We also offer loans on recreational vehicles, which we will originate for terms of
up to 20 years depending upon the loan amount and the loan-to-value ratio on such loans generally
does not exceed 90%. We no longer originate or purchase automobile lease financing.
We offer consumer loans secured by passbook accounts and certificates of deposit held at the Bank
based upon the prime rate as published in The Wall Street Journal with terms up to four years. We
will offer such loans up to 100% of the principal balance of the certificate of deposit or balance
in the passbook account. We also offer unsecured loans and lines of credit with terms up to five
years. Our unsecured loans and lines of credit bear a substantially higher interest rate than our
secured loans and lines of credit. For more information on our loan commitments, see
Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk
ManagementLiquidity Management included in the Companys 2010 Annual Report to Stockholders.
5
The procedures for underwriting consumer loans include an assessment of the applicants payment
history on other debts and ability to meet existing obligations and payments on the proposed loan.
Although the applicants creditworthiness is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral, if any, to the proposed loan amount.
Credit Risks.
Commercial Real Estate Loans. Loans secured by commercial real estate generally have larger
balances and involve a greater degree of risk than one-to-four family residential mortgage loans.
Of primary concern in commercial real estate lending is the borrowers creditworthiness and the
feasibility and cash flow potential of the project. Additional considerations include: location,
market and geographic concentrations, loan to value, strength of guarantors and quality of tenants.
Payments on loans secured by income properties often depend on successful operation and management
of the properties. As a result, repayment of such loans may be subject to a greater extent than
residential real estate loans, to adverse conditions in the real estate market or the economy. To
monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to
provide annual financial statements on commercial real estate loans and rent rolls where
applicable. In reaching a decision on whether to make a commercial real estate loan, we consider
and review a global cash flow analysis of the borrower, when applicable, and consider the net
operating income of the property, the borrowers expertise, credit history and profitability and
the value of the underlying property. We have generally required that the properties securing
these real estate loans have debt service coverage ratios (the ratio of earnings before debt
service to debt service) of at least 1.2x. An environmental report is obtained when the
possibility exists that hazardous materials may have existed on the site, or the site may have been
impacted by adjoining properties that handled hazardous materials.
Commercial Business Loans. Unlike residential mortgage loans, which generally are made on the
basis of the borrowers ability to make repayment from his or her employment or other income, and
which are secured by real property, the value of which tends to be more easily ascertainable,
commercial business loans are of higher risk and typically are made on the basis of the borrowers
ability to make repayment from the cash flow of the borrowers business. As a result, the
availability of funds for the repayment of commercial business loans may depend substantially on
the success of the business itself. Further, any collateral securing such loans may depreciate
over time, may be difficult to appraise and may fluctuate in value.
Commercial Construction Loans. Loans made to facilitate construction of commercial business space.
These loans are primarily short term loans used to finance the construction of income producing
assets. Generally, upon stabilization, these loans convert to commercial real estate loans with
long term amortization. Payments during construction consist of an interest only period funded
generally by borrower equity. As these loans represent higher risk, due to the non-income
producing characteristic of construction, each project is monitored for progress throughout the
life of the loan, and loan funding occurs through borrower draw requests. These requests are
compared to agreed upon project milestones and progress is verified by independent inspectors
engaged by the Bank.
Residential Real Estate. Loans secured by one to four family residential real estate. The value
of the underlying collateral tends to remain relatively stable, and is easily ascertainable.
Borrowers are evaluated based on underlying fundamentals such as verifiable income obtained from
employment, length of employment, level of debt maintained by the borrower and demonstrated debt
repayment history. Risk can be evaluated and monitored by usage of debt to income ratios and
conservative loan to property value ratios.
Residential Construction Loans. Loans made to facilitate construction of a one to four family
residence. These loans are primarily short term loans used to finance the construction of an owner
occupied residence. Generally, upon completion of construction and issuance of a certificate of
occupancy, these loans convert to real estate mortgages with long term amortization. Payments
during construction consist of an interest only period funded generally by borrower equity. As
these loans represent higher risk, due to the nature of carrying additional debt during the
construction period, each project is monitored for progress throughout the life of the loan, and
loan funding occurs through borrower draw requests. These requests are compared to agreed upon
project milestones and progress is verified by independent inspectors engaged by the Bank.
Consumer Home Equity and Equity Lines of Credit Consumer Home Equity loans and Equity Lines of
Credit are loans secured by one to four family residential real estate, where the Bank may be in a
first or second lien position. In each instance, the value of the property is determined and the
loan is made against identified equity in the market value of the property. When a residential
mortgage is not present on the property, a first lien position is secured against the property. In
cases where a mortgage is present on the property, a second lien position is established,
subordinated to the mortgage. As these subordinated liens represent higher risk, loan collection
becomes more influenced by various factors, including job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws, including federal and
state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
6
Consumer Personal Loans. Unlike Consumer Home Equity loans, these loans are either unsecured or
secured by rapidly depreciating assets such as boats or motor homes. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and a small remaining deficiency often does not warrant further
substantial collection efforts against the borrower. Consumer loan collections depend on the
borrowers continuing financial stability, and therefore are likely to be adversely affected by
various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on such loans.
Consumer Education Loans. These consumer loans are unsecured but generally 98% government
guaranteed. Consumer education loan collections depend on the efforts of the Philadelphia Higher
Education Assistance Agency (PHEAA) and Sallie Mae and are depended on the borrowers continuing
financial stability and are, therefore, likely to be adversely affected by various factors
including job loss, divorce, illness or personal bankruptcy. As a result of the government
guarantee, the Bank will ultimately be unaffected by delinquencies in the portfolio.
Auto Loans. Auto loans may entail greater risk than do residential mortgage loans, as they are
secured by assets that depreciate rapidly. Repossessed collateral for a defaulted auto loans may
not provide an adequate source of repayment for the outstanding loan and a small remaining
deficiency often does not warrant further substantial collection efforts against the borrower.
Auto loan collection depends on the borrowers continuing financial stability, and therefore are
likely to be adversely affected by various factors, including job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on
such loans.
Loan Originations and Purchases. Loan originations come from a number of sources. The primary
source of loan originations are existing customers, walk-in traffic, advertising and referrals from
customers. We also purchase home equity, automobile, educational and recreational vehicle loans.
We purchase participations in loans from local banks to supplement our lending portfolio. Loan
participations totaled $90.4 million at December 31, 2010. Loan participations are subject to the
same credit analysis and loan approvals as loans we originate. We are permitted to review all of
the documentation relating to any loan in which we participate. However, in a purchased
participation loan, we do not service the loan and thus are subject to the policies and practices
of the lead lender with regard to monitoring delinquencies, pursuing collections and instituting
foreclosure proceedings.
Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory,
underwriting standards and loan origination procedures established by management and approved by
the Board of Directors. The Board of Directors has granted loan approval authority to certain
officers or groups of officers up to prescribed limits, based on the officers 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 more than $10.0 million 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 $20.0 million must be
approved by the Senior Loan Committee of the Banks Board, as well as the Executive Committee of
the Board, which includes six non-employee directors.
Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrowers
related entities is limited, by regulation, to generally 15% of our stated capital and reserves.
At December 31, 2010, our regulatory limit on loans to one borrower was $93.7 million. At that
date, the total outstanding balance with our largest lending relationship was $35.9 million which
was secured by various mixed use commercial real estate and general business assets. All of the
loans in the relationship are performing in accordance with their original terms at December 31,
2010.
Loan Commitments. We issue commitments for fixed and adjustable-rate mortgage loans conditioned
upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding
agreements to lend to our customers. Generally, our loan commitments expire after 60 days.
Delinquent Loans. We identify loans that may need to be charged off as a loss by reviewing all
delinquent loans, classified loans and other loans that management may have concerns about
collectability. For individually reviewed loans, the borrowers inability to make payments under
the terms of the loan as well as a shortfall in collateral value may result in a write down to
managements estimate of net realizable value. The collateral shortfall on all secured loans is
charged off when the loan becomes 90 days delinquent or in the case of unsecured loans the entire
balance is charged off when the loan becomes 90 days delinquent. For more information on
delinquencies, see Managements Discussion and Analysis of Financial Condition and Results of
Operations Risk Management in the Companys 2010 Annual Report to Stockholders.
7
Deposit Activities and Other Sources of Funds
General. Deposits, borrowings and loan repayments are the major sources of our funds for lending
and other investment purposes. Scheduled loan repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly influenced by general
interest rates and money market conditions.
Deposit Accounts. Deposits are primarily attracted from within our market area through the
offering of a broad selection of deposit instruments, including non-interest bearing demand
deposits (such as individual checking accounts), interest-bearing demand accounts (such as NOW,
municipal and money market accounts), savings accounts and certificates of deposit. At December
31, 2010, municipal checking accounts comprised 27.2% of our entire deposit portfolio. The average
number of municipal deposit accounts totaled 1,447 and the average balance of an account totaled $769 thousand.
Our three primary deposit customers consist of retail or individual customers, businesses and
municipalities. Our business banking and municipal deposit products include a commercial checking
account and a checking account specifically designed for small businesses. Additionally, we offer
cash management, including remote deposit, lockbox service and sweep accounts.
Deposit account terms vary according to the minimum balance required, the time periods the funds
must remain on deposit and the interest rate, among other factors. In determining the terms of our
deposit accounts, we consider the rates offered by our competition, the rates on borrowings,
brokered deposits, our liquidity needs, profitability to us, and customer preferences and concerns.
We generally review our deposit mix and pricing bi-weekly. Our deposit pricing strategy has
generally been to offer competitive rates on all types of deposit products.
Certificate of Deposit Account Registry Service (CDARS). Our participation in this program enables
our customers to invest balances in excess of the FDIC limit into other Banks within the CDARS
network while maintaining the relationship with our Bank. We work with our customer to obtain the
most favorable rates and combine all accounts for convenience onto one statement.
Brokered Certificates of Deposit. Our use of brokered deposits is limited. However, we will use
brokered certificates of deposit to extend the maturity of our deposits and limit interest rate
risk in our deposit portfolio. We generally limit our use of brokered certificates of deposits to
10% or less of total deposits. At December 31, 2010, our brokered certificates of deposits were
less than 1% of total deposits.
Borrowings. We have the ability to utilize advances from the FHLB of Pittsburgh to supplement our
liquidity. As a member, we are required to own capital stock in the FHLB and are authorized to
apply for advances on the security of such stock and certain mortgage loans and other assets,
provided certain standards related to creditworthiness have been met. Advances are made under
several different programs, each having its own interest rate and range of maturities. We also
utilize securities sold under agreements to repurchase and overnight repurchase agreements, along
with the Federal Reserve Banks discount window and Federal Funds lines with correspondent banks to
supplement our supply of investable funds and to meet deposit withdrawal requirements. To secure
our borrowings, we generally pledge securities and/or loans. The types of securities pledged for
borrowings include, but are not limited to, agency GSE notes and agency mortgage-backed securities.
The types of loans pledged for borrowings include, but are not limited to, one-to four-family real
estate mortgage loans.
Personnel
As of December 31, 2010, we had 754 full-time employees and 211 part-time employees, none of whom
is represented by a collective bargaining unit. We believe our relationship with our employees is
good.
Subsidiaries
Beneficial Insurance Services, LLC is a Pennsylvania Limited Liability Company formed in 2004. In
2005, Beneficial Insurance Services LLC acquired the assets of a Philadelphia-based insurance
brokerage firm, Paul Hertel & Co., Inc., which provides property, casualty, life, health and
benefits insurance services to individuals and businesses. Beneficial Insurance conducts business
under the trade name of Paul Hertel & Company. Beneficial Insurance also acquired a majority
interest in Graphic Arts Insurance Agency, Inc. through its acquisition of the assets of Paul
Hertel & Co. Inc. On October 5, 2007, Beneficial Insurance acquired the business of CLA Agency,
Inc., a full-service property and casualty and professional liability insurance brokerage company
headquartered in Newtown Square, Pennsylvania. Beneficial Insurance also operates under the trade
name CLA Insurance Agency.
Beneficial Advisors, LLC is a Pennsylvania Limited Liability Company formed in 2000 for the purpose
of offering investment and insurance related products, including, but not limited to, fixed- and
variable-rate annuities and the sale of mutual funds and securities through INVEST, a third party
broker dealer.
8
Neumann Corporation, which was formed in 1990, is a Delaware Investment Holding Company and holds
title to various Bank securities and other investments. At December 31, 2010, Neumann Corporation
held $466.7 million in assets.
BSB Union Corporation was formed in 1994 for the purpose of engaging in the business of owning and
leasing automobiles. In 1998, BSB Union Corporation obtained approval to hold an interest in a
titling trust.
Graphic Arts Insurance Agency is an insurance agency in which Beneficial Insurance purchased a 51%
ownership interest in 2005.
Beneficial Abstract, LLC is a title insurance company in which the Bank purchased a 40% ownership
interest in 2006. Beneficial Abstract, LLC is currently inactive.
Beneficial Equity Holdings, LLC was formed in 2004 and is currently inactive.
9
REGULATION AND SUPERVISION
The following discussion describes elements of an extensive regulatory framework applicable to
savings and loan holding companies and banks and specific information about the Bank, the Company
and the MHC. Federal and state regulation of banks and bank holding companies is intended
primarily for the protection of depositors and the Deposit Insurance Fund, rather than for the
protection of potential shareholders and creditors.
General
The Bank is a Pennsylvania-chartered savings bank that is subject to extensive regulation,
examination and supervision by the Pennsylvania Department of Banking (the Department), as its
primary regulator, and the Federal Deposit Insurance Corporation (FDIC), as its deposits insurer.
The Bank is a member of the FHLB system and, with respect to deposit insurance, of the Deposit
Insurance Fund managed by the FDIC. The Bank must file reports with the Department and the FDIC
concerning its activities and financial condition, in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or acquisitions of, other savings
institutions. The Department and/or the FDIC conduct periodic examinations to test the Banks
safety and soundness and compliance with various regulatory requirements. This regulatory
structure gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including policies with respect to
the classification of assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in the regulatory requirements and policies, whether by the Department, the
FDIC or Congress, could have a material adverse impact on the Bank, the Company, the MHC and their
operations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) made
extensive changes related to the regulation of depository institutions. Among other things, the
Dodd-Frank Act provides for the creation of a new agency, the Consumer Financial Protection Bureau,
to assure the implantation of federal consumer financial protection and fair lending laws for the
depository institution regulators. However, institutions with $10.0 billion or less in assets will
continue to be examined for compliance with such laws and regulations by, and be subject to the
enforcement authority of, their primary federal bank regulator rather than the Consumer Financial
Protection Bureau.
Certain regulatory requirements applicable to the Bank, the Company and the MHC are referred to
below or elsewhere herein. This description of statutes and regulations is not intended to be a
complete explanation of such statutes and regulations and their effects on the Bank, the Company
and the MHC and is qualified in its entirety by reference to the actual statutes and regulations.
Bank Regulation
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code of 1965, as amended (the 1965
Code), and the Pennsylvania Department of Banking Code, as amended (the Department Code, and
collectively, the Codes), contain detailed provisions governing the organization, location of
offices, rights and responsibilities of directors, officers and employees, as well as corporate
powers, savings and investment operations and other aspects of the Bank and its affairs. The Codes
delegate extensive rule-making power and administrative discretion to the Department so that the
supervision and regulation of state-chartered savings banks may be flexible and readily responsive
to changes in economic conditions and in savings and lending practices. Specifically, under the
Department Code, the Department is given the authority to exercise such supervision over
state-chartered savings banks as to afford the greatest safety to creditors, shareholders and
depositors, ensure business safety and soundness, conserve assets, protect the public interest and
maintain public confidence in such institutions.
The 1965 Code provides, among other powers, that state-chartered savings banks may engage in any
activity permissible for a national banking association or federal savings association, subject to
regulation by the Department (which shall not be more restrictive than the regulation imposed upon
a national banking association or federal savings association, respectively). Before it engages in
such an activity allowable for a national banking association or federal savings association, a
state-chartered savings bank must either obtain prior approval from the Department or provide at
least 30 days prior written notice to the Department. The authority of the Bank under
Pennsylvania law, however, may be constrained by federal law and regulation. See Investments and
Activities below.
Regulatory Capital Requirements. Under FDIC regulations, federally insured state-chartered banks
that are not members of the Federal Reserve System (state non-member banks), such as the Bank,
are required to comply with minimum leverage capital requirements. For an institution determined
by the FDIC to not be anticipating or experiencing significant growth and to be in general a strong
banking institution, rated composite 1 under the Uniform Financial Institutions Rating System
established by the Federal Financial Institutions Examinations Council, the minimum capital
leverage requirement is a ratio of Tier 1 capital to total assets of 3%. For all other
institutions, the minimum leverage capital ratio is not less than 4%. Tier 1 capital is the sum of
common stockholders equity, noncumulative perpetual preferred stock (including any related
surplus) and minority investments in certain subsidiaries, less intangible assets (except for
certain servicing rights and credit card relationships) and a percentage of certain nonfinancial
equity investments.
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The Bank must also comply with the FDIC risk-based capital guidelines. The FDIC guidelines require
state non-member banks to maintain certain levels of regulatory capital in relation to regulatory
risk-weighted assets. Risk-based capital ratios are determined by allocating assets and specified
off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher
levels of capital being required for the categories perceived as representing greater risk.
State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at
least 8%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1
capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an
amount of up to 1.25% of risk-weighted assets, cumulative preferred stock, long-term preferred
stock, hybrid capital instruments, including mandatory convertible debt securities, term
subordinated debt and certain other capital instruments and a portion of the net unrealized gain on
equity securities. The includable amount of Tier 2 capital cannot exceed the amount of the
institutions Tier 1 capital. At December 31, 2010, the Bank met each of these capital
requirements. As savings and loan holding companies regulated by the Office of Thrift Supervision
(the OTS), the Company and the MHC are not subject to any separate regulatory
capital requirements.
Restrictions on Dividends. The Companys ability to declare and pay dividends may depend in part
on dividends received from the Bank. The 1965 Code regulates the distribution of dividends by
savings banks and provides that dividends may be declared and paid only out of accumulated net
earnings and may be paid in cash or property other than its own shares. Dividends may not be
declared or paid unless stockholders equity is at least equal to contributed capital.
Interstate Banking and Branching. Federal law permits a bank, such as the Bank, to acquire an
institution by merger in a state other than Pennsylvania unless the other state has opted out of
interstate banking and branching. Federal law, as amended by the
Dodd-Frank Act, also authorizes de novo branching into another state if the host state allows banks
chartered by that state to establish such branches within its borders. The Bank currently has 28
full-service locations in Burlington and Camden counties, New Jersey. At its interstate branches,
the Bank may conduct any activity that is authorized under Pennsylvania law that is permissible
either for a New Jersey savings bank (subject to applicable federal restrictions) or a New Jersey
branch of an out-of-state national bank. The New Jersey Department of Banking and Insurance may
exercise certain regulatory authority over the Banks New Jersey branches.
Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank
regulatory authorities take prompt corrective action with respect to banks that do not meet
minimum capital requirements. For these purposes, the law establishes three categories of capital
deficient institutions: undercapitalized, significantly undercapitalized and critically
undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action legislation. An
institution is deemed to be well capitalized if it has a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater.
An institution is adequately capitalized if it has a total risk-based capital ratio of 8% or
greater, a Tier 1 risk-based capital ratio of 4% or greater and generally a leverage ratio of 4% or
greater. An institution is undercapitalized if it has a total risk-based capital ratio of less
than 8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a leverage ratio of less
than 4% (3% or less for institutions with the highest examination rating). An institution is
deemed to be significantly undercapitalized if it has a total risk-based capital ratio of less
than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%.
An institution is considered to be critically undercapitalized if it has a ratio of tangible
equity (as defined in the regulations) to total assets that is equal to or less than 2%. As of
December 31, 2010, the Bank met the conditions to be classified as a well capitalized
institution.
Undercapitalized banks must adhere to growth, capital distribution (including dividend) and other
limitations and are required to submit a capital restoration plan. No institution may make a
capital distribution, including payment as a dividend, if it would be undercapitalized after the
payment. A banks compliance with such plans is required to be guaranteed by its parent holding
company in an amount equal to the lesser of 5% of the institutions total assets when deemed
undercapitalized or the amount needed to comply with regulatory capital requirements. If an
undercapitalized bank fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized. Significantly undercapitalized banks must comply with one or
more of a number of additional restrictions, including but not limited to an order by the FDIC to
sell sufficient voting stock to become adequately capitalized, requirements to reduce assets and
cease receipt of deposits from correspondent banks or dismiss directors or officers, and
restrictions on interest rates paid on deposits, compensation of executive officers and capital
distributions by the parent holding company. Critically undercapitalized institutions must
comply with additional sanctions including, subject to a narrow exception, the appointment of a
receiver or conservator within 270 days after it obtains such status.
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Investments and Activities. Under federal law, all state-chartered FDIC-insured banks have
generally been limited to activities as principal and equity investments of the type and in the
amount authorized for national banks, notwithstanding state law. The FDIC Improvement Act and the
FDIC permit exceptions to these limitations. For example, state chartered banks, such as the Bank,
may, with FDIC approval, continue to exercise grandfathered
state authority to invest in common or preferred stocks listed on a national securities exchange or
the Nasdaq Global Select Market and in the shares of an investment company registered under federal
law. All non-subsidiary equity investments, unless otherwise authorized or approved by the FDIC,
must have been divested by December 19, 1996, under an FDIC-approved divesture plan, unless such
investments were grandfathered by the FDIC. The Bank received grandfathering authority from the
FDIC to invest in listed stocks and/or registered shares. The maximum permissible investment is
100% of Tier I capital, as specified by the FDICs regulations, or the maximum amount permitted by
Pennsylvania Banking Law, whichever is less. Such grandfathering authority may be terminated upon
the FDICs determination that such investments pose a safety and soundness risk to the Bank or if
the Bank converts its charter or undergoes a change in control. In addition, the FDIC is
authorized to permit such institutions to engage in other state authorized activities or
investments (other than non-subsidiary equity investments) that meet all applicable capital
requirements if it is determined that such activities or investments do not pose a significant risk
to the Deposit Insurance Fund. As of December 31, 2010, the Bank held no marketable equity
securities under such grandfathering authority.
Transactions with Related Parties. Federal law limits the Banks authority to lend to, and engage
in certain other transactions with (collectively, covered transactions), affiliates (e.g., any
company that controls or is under common control with an institution, including the Company, the
MHC and their non-savings institution subsidiaries). The aggregate amount of covered transactions
with any individual affiliate is limited to 10% of the capital and surplus of the savings
institution. Certain transactions with affiliates are required to be secured by collateral in an
amount and of a type specified by federal law. The purchase of low quality assets from affiliates
is generally prohibited. Transactions with affiliates must generally be on terms and under
circumstances, that are at least as favorable to the institution as those prevailing at the time
for comparable transactions with non-affiliated companies. In addition, savings institutions are
prohibited from lending to any affiliate that is engaged in activities that are not permissible for
bank holding companies and no savings institution may purchase the securities of any affiliate
other than a subsidiary.
The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Bank to its executive officers and
directors. However, the law contains a specific exception for loans by the Bank to its executive
officers and directors in compliance with federal banking laws. Under such laws, the Banks
authority to extend credit to executive officers, directors and 10% shareholders (insiders), as
well as entities such persons control, is limited. The law limits both the individual and
aggregate amount of loans the Company may make to insiders based, in part, on the Companys capital
position and requires certain board approval procedures to be followed. Such loans are required to
be made on terms substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. There is an exception for loans made pursuant to a
benefit or compensation program that is widely available to all employees of the institution and
does not give preference to insiders over other employees. Loans to executives are subject to
further limitations based on the type of loan involved.
Enforcement. The FDIC has extensive enforcement authority over insured savings banks, including
the Bank. This enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease and desist orders and to remove directors and officers. In
general, these enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
Standards for Safety and Soundness. As required by statute, the federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set
forth the safety and soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes impaired. If the FDIC
determines that a savings institution fails to meet any standard prescribed by the guidelines, the
FDIC may require the institution to submit an acceptable plan to achieve compliance with the
standard.
Insurance of Deposit Accounts. The Banks deposits are insured up to applicable limits by the
Deposit Insurance Fund of the Federal Deposit Insurance Corporation. The Deposit Insurance Fund is
the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were
merged in 2006.
Under the Federal Deposit Insurance Corporations risk-based assessment system, insured
institutions are assigned to one of four risk categories based on supervisory evaluations,
regulatory capital levels and certain other factors, with less risky institutions paying lower
assessments. An institutions assessment rate depends upon the category to which it is assigned.
Effective April 1, 2009, assessment rates range from seven to 77.5 basis points. On February 7,
2011, the Federal Deposit Insurance Corporation approved a final rule that implemented changes to
the deposit insurance assessment system mandated by the Dodd-Frank Act. The final rule, which will
take effect for the quarter beginning April 1, 2011, requires that the base on which deposit
insurance assessments are charged be revised from one that is based on domestic deposits to one
that is based on average consolidated total assets minus average tangible equity. Under the final
rule, insured depository institutions are required to report their average consolidated total
assets on a daily basis, using the regulatory accounting methodology established for reporting
total assets. For purposes of the final rule, tangible equity is defined as Tier 1 capital. Prior
to the April 1, 2011 effective date of the final rule, the Federal Deposit Insurance Corporation
will continue to calculate the assessment base from adjusted domestic deposits.
The Federal Deposit Insurance Corporation may adjust rates uniformly from one quarter to the next,
except that no adjustment can deviate more than three basis points from the base scale without
notice and comment rulemaking. No institution may pay a dividend if in default of the Federal
Deposit Insurance Corporation assessment.
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The Federal Deposit Insurance Corporation imposed on each insured institution a special emergency
assessment of five basis points of total assets minus tier 1 capital, as of June 30, 2009 (capped
at ten basis points of an institutions deposit assessment base on the same date) in order to cover
losses to the Deposit Insurance Fund. That special assessment was collected on September 30, 2009.
The Federal Deposit Insurance Corporation provided for similar special assessments during the two
final quarters of 2009, if deemed necessary. However, in lieu of further special assessments, the
Federal Deposit Insurance Corporation required insured institutions to prepay estimated quarterly
risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. The
estimated assessments which totaled $1.9 million, which include an assumed annual assessment base
increase of 5%, were recorded as a prepaid expense asset as of December 30, 2009. As of December
31, 2009, and each quarter thereafter, a charge to earnings will be recorded for each regular
assessment with an offsetting credit to the prepaid asset.
The deposit insurance per account owner has been permanently raised to $250,000 for all types of
accounts. In addition, the Federal Deposit Insurance Corporation adopted an optional Temporary
Liquidity Guarantee Program (TLGP) by which, for a fee, noninterest bearing transaction accounts
would receive unlimited insurance coverage until December 31, 2010. Certain senior unsecured debt
issued by institutions and their holding companies between specified time frames could also be
guaranteed by the Federal Deposit Insurance Corporation through June 30, 2012, or in some cases,
December 31, 2012. The Bank opted to participate in the unlimited noninterest bearing transaction
account coverage and the Bank, the Company and the MHC opted to participate in the unsecured debt
guarantee program. The TLGP unlimited insurance coverage on noninterest bearing transaction
accounts expired on December 31, 2010.
In accordance with the Dodd-Frank Act, from December 31, 2010 through December 31, 2012, all funds
in noninterest bearing transaction accounts will be insured in full by the Federal Deposit
Insurance Corporation. The term noninterest bearing transaction account generally includes a
traditional checking account (or demand deposit account) on which the insured depository
institution pays no interest. It does not include any transaction account that may earn interest,
such as a negotiable order of withdrawal (NOW) account, or money-market deposit account, even if
checks may be drawn on the account. The temporary full insurance coverage of noninterest bearing
transaction accounts expires on December 31, 2012. After December 31, 2012, funds in
noninterest-bearing transaction accounts will be insured under the FDICs general deposit insurance
rules, subject to the Standard Maximum Deposit Insurance Amount of $250,000. Unlike the FDICs
TLGP program, no opt outs are permitted. There is no separate assessment applicable on these
covered accounts but all institutions will be required to report qualifying accounts beginning on
December 31, 2010, for purposes of quantifying the FDICs exposure under this program. As a result
of the Dodd-Frank provision, the FDIC has decided to not extend its Transaction Account Guarantee
(TAG ) program which ended on December 31, 2010.
In addition to the assessment for deposit insurance, institutions are required to make payments on
bonds issued in the late 1980s by the financing corporation to recapitalize a predecessor deposit
insurance funds. That payment is established quarterly and for the four quarters ended December
31, 2010 averaged 1.04 basis points of assessable deposits.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A
significant increase in insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank. Management cannot predict what insurance
assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation, rule, order or
condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision.
The management of the Bank does not know of any practice, condition or violation that might lead
to termination of deposit insurance.
Federal Home Loan Bank System. The Bank is a member of the FHLB system, which consists of 12
regional Federal Home Loan Banks. The FHLB provides a central credit facility primarily for member
institutions. At December 31, 2010 the Bank had borrowings of $113.0 million outstanding and an
additional borrowing capacity of $566.9 million. The Bank, as a member of the FHLB of Pittsburgh, is
required to acquire and hold shares of capital stock in that FHLB. The Bank assumed Farmers &
Mechanics Banks obligation to the FHLB of New York as part of the Companys acquisition of FMS
Financial on July 13, 2007. At December 31, 2010, the Bank had no outstanding obligations with the
FHLB of New York and held no stock. The Bank was in compliance with requirements for FHLB
Pittsburgh with an investment of $23.2 million at December 31, 2010.
Community Reinvestment Act. Under the Community Reinvestment Act, as implemented by FDIC
regulations, a state non-member bank has a continuing and affirmative obligation consistent with
its safe and sound operation to help meet the credit needs of its entire community, including low
and moderate-income neighborhoods. The
Community Reinvestment Act neither establishes specific lending requirements or programs for
financial institutions nor limits an institutions discretion to develop the types of products and
services that it believes are best suited to its particular community. The Community Reinvestment
Act requires the FDIC, in connection with its examination of an institution, to assess the
institutions record of meeting the credit needs of its community and to consider such record when
it evaluates applications made by such institution. The Community Reinvestment Act requires public
disclosure of an institutions Community Reinvestment Act rating. The Banks latest Community
Reinvestment Act rating received from the FDIC was outstanding.
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Other Regulations. Interest and other charges collected or contracted for by the Bank are subject
to state usury laws and federal laws concerning interest rates. The Banks operations are also
subject to federal laws applicable to credit transactions, such as the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
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Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide
information to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the
community it serves; |
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed
or other prohibited factors in extending credit; |
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Fair Credit Reporting Act of 1978, governing the use and provision of information to
credit reporting agencies; |
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Fair Debt Collection Practices Act, governing the manner in which consumer debts may
be collected by collection agencies; and |
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Rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws. |
The operations of the Bank also are subject to the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records; |
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Electronic Funds Transfer Act and Regulation E promulgated there under, which
establishes the rights, liabilities and responsibilities of consumers who use
electronic fund transfer (EFT) services and financial institutions that offer these
services; its primary objective is the protection of individual consumers in their
dealings with these services; |
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Check Clearing for the 21st Century Act (also known as Check 21), which
allows banks to create and receive substitute checks (paper reproduction of the
original check), and discloses the customers rights regarding substitute checks
pertaining to these items having the same legal standing as the original paper check; |
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Title III of The Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the USA
PATRIOT Act), and the related regulations of the OTS, which require savings
associations operating in the United States to develop new anti-money laundering
compliance programs (including a customer identification program that must be
incorporated into the AML compliance program), due diligence policies and controls to
ensure the detection and reporting of money laundering; and |
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The Gramm-Leach-Bliley Act, which prohibits a financial institution from disclosing
nonpublic personal information about a consumer to nonaffiliated third parties, unless
the institution satisfies various notice and opt-out requirements. |
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The Fair and Accurate Reporting Act of 2003, as an amendment to the Fair Credit
Reporting Act, as noted previously, which includes provisions to help reduce identity
theft by providing procedures for the identification, detection, and response to
patterns, practices, or specific activities known as red flags. |
Holding Company Regulation
General. The Company and the MHC are savings and loan holding companies within the meaning of
federal law. As such, they are registered with the OTS and are subject to OTS regulations,
examinations, supervision, reporting requirements and regulations concerning corporate governance
and activities. In addition, the OTS has enforcement
authority over the Company and the MHC and their non-savings institution subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that are determined to be
a serious risk to the Bank.
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The OTS also takes the position that its capital distribution regulations apply to state savings
banks in savings and loan holding company structures. Those regulations impose limitations upon
all capital distributions by an institution, including cash dividends, payments to repurchase its
shares and payments to shareholders of another institution in a cash-out merger. Under the
regulations, an application to and prior approval of the OTS is required prior to any capital
distribution if the institution does not meet the criteria for expedited treatment of
applications under OTS regulations (i.e., generally, examination and Community Reinvestment Act
ratings in the two top categories), the total capital distributions for the calendar year exceed
net income for that year plus the amount of retained net income for the preceding two years, the
institution would be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with the OTS. If an application is not
required, the institution must still provide prior notice to the OTS of the capital distribution
if, like the Bank, it is a subsidiary of a holding company. In the event the Banks capital fell
below its regulatory requirements or the OTS notified it that it was in need of increased
supervision, the Banks ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
To be regulated as a savings and loan holding company (rather than as a bank holding company by the
Federal Reserve Board), the Bank must qualify as a Qualified Thrift Lender (QTL). To qualify as
a QTL, the Bank must maintain compliance with the test for a domestic building and loan
association, as defined in the Internal Revenue Code, or with a Qualified Thrift Test. Under the
QTL Test, a savings institution is required to maintain at least 65% of its portfolio assets
(total assets less: (1) specified liquid assets up to 20% of total assets; (2) intangibles,
including goodwill; and (3) the value of property used to conduct business) in certain qualified
thrift investments (primarily residential mortgages and related investments, including
mortgage-backed and related securities, but also including education, credit and small business
loans) in at least nine months out of each 12-month period. At December 31, 2010, the Bank
maintained 71.80% of its portfolio assets in qualified thrift investments. For the year ended
December 31, 2010, the Bank met the QTL test in at least nine months out of each of the 12-month
period as required.
The Dodd-Frank Act provides for the termination of the OTS and the transfer of its responsibilities
to other agencies. In particular, the Dodd-Frank Act requires the Federal Reserve Board to assume
the role of the OTS as the primary regulatory agency for savings and loan holding companies such as
the Company and the MHC. This transition is scheduled to occur one year from July 21, 2010, the
date the Dodd-Frank Act was signed into law, subject to a possible six month extension. The
Federal Reserve Board, which is the agency that regulates bank holding companies, will take over
the supervisory and regulatory responsibilities of the OTS with respect to savings and loan holding
companies.
Restrictions Applicable to Mutual Holding Companies. According to federal law and regulations, a
mutual holding company, such as the MHC, may generally engage in the following activities: (1)
investing in the stock of a stock savings association; (2) acquiring a mutual association through
the merger of such association into a stock savings association subsidiary of such holding company
or an interim savings association subsidiary of such holding company; (3) merging with or acquiring
another mutual or stock savings and loan holding company; (4) investing in a corporation the
capital stock of which could be purchased by a federal savings association or a state savings
association under Pennsylvania law; and (5) any activity approved by the Federal Reserve Board for
a bank holding company or financial holding company or approved by the OTS for multiple savings and
loan holding companies.
Federal law prohibits a savings and loan holding company, including a federal mutual holding
company, from directly or indirectly, or through one or more subsidiaries, acquiring more than 5%
of the voting stock of another savings institution, or its holding company, without prior written
approval of the Office of Thrift Supervision. Federal law also prohibits a savings and loan
holding company from acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies by federal law; or acquiring or retaining control
of a depository institution that is not insured by the FDIC. In evaluating applications by holding
companies to acquire savings institutions, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the community and
competitive factors.
The OTS is prohibited from approving any acquisition that would result in a multiple savings and
loan holding company controlling savings institutions in more than one state, except: (1) the
approval of interstate supervisory acquisitions by savings and loan holding companies, and (2) the
acquisition of a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
If the savings bank subsidiary of a savings and loan holding company fails to meet the QTL test,
the company is subject to certain operating restrictions, including dividend limitations. In
addition, the Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement
action as a violation of law.
Stock Holding Company Subsidiary Regulation. The OTS has adopted regulations governing the
two-tier mutual holding company form of organization and subsidiary stock holding companies that
are controlled by mutual holding companies. We have adopted this form of organization, pursuant to
which the Company is permitted to engage in activities that are permitted for the MHC subject to
the same restrictions and conditions.
15
Waivers of Dividends by Beneficial Savings Bank MHC. OTS regulations require the MHC to notify the
OTS if it proposes to waive receipt of dividends from the Company. The OTS reviews dividend waiver
notices on a case-by-case basis, and, in general, does not object to a waiver if: (1) the waiver
would not be detrimental to the safe and sound operation of the savings association; and (2) the
mutual holding companys board of directors determines that such waiver is consistent with such
directors fiduciary duties to the mutual holding companys members. We anticipate that the MHC
will waive dividends that the Company may pay, if any. However, in recent months, the OTS has
applied additional scrutiny and, in some cases, raised objections, when evaluating dividend waiver
requests for institutions located in the northeast region of the United States. If the OTS were to
object to the MHCs waiver of a dividend, the cost of declaring dividends would increase materially
for the Company and would restrict its ability to pay dividends to its stockholders.
The Dodd-Frank Act addressed the issue of dividend waivers in the context of the transfer of the
supervision of savings and loan holding companies to the Federal Reserve Board. The Dodd-Frank Act
specified that dividends may be waived if certain conditions are met, including that the Federal
Reserve Board does not object after being given written notice of the dividend and proposed waiver.
The Dodd-Frank Act indicates that the Federal Reserve Board may not object to such a waiver (i) if
the mutual holding company involved has, prior to December 1, 2009, reorganized into a mutual
holding company structure, engaged in a minority stock offering and waived dividends; (ii) the
board of directors of the mutual holding company expressly determines that a waiver of the dividend
is consistent with its fiduciary duties to members and (iii) the waiver would not be detrimental to
the safe and sound operation of the savings association subsidiaries of the holding company. The
MHC did not waive dividends prior to December 1, 2009.
Capital Requirements. Savings and loan holding companies are not currently subject to specific
regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board
to promulgate consolidated capital requirements for depository institution holding companies that
are no less stringent, both quantitatively and in terms of components of capital, than those
applicable to institutions themselves. There is a five year transition period from the July 21,
2010 date of enactment of the Dodd-Frank Act before the capital requirements will apply to savings
and loan holding companies. The Dodd-Frank Act also requires the Federal Reserve Board to
promulgate regulations implementing the source of strength policy that requires holding companies
to act as a source of strength to their subsidiary depository institutions by providing capital,
liquidity and other support in times of financial stress.
Conversion of Beneficial Savings Bank MHC to Stock Form. OTS regulations permit the MHC to convert
from the mutual form of organization to the capital stock form of organization. There can be no
assurance when, if ever, a conversion transaction will occur, and the board of directors has no
current intention or plan to undertake a conversion transaction. In a conversion transaction, a new
holding company would be formed as the successor to the Company, the MHCs corporate existence
would end, and certain depositors of the Bank would receive the right to subscribe for additional
shares of the new holding company. In a conversion transaction, each share of common stock held by
stockholders other than the MHC would be automatically converted into a number of shares of common
stock of the new holding company based on an exchange ratio determined at the time of conversion
that ensures that stockholders other than the MHC own the same percentage of common stock in the
new holding company as they owned in the Company immediately before conversion. The total number
of shares held by stockholders other than the MHC after a conversion transaction would be increased
by any purchases by such stockholders in the stock offering conducted as part of the conversion
transaction.
The Dodd-Frank Act provides that waived dividends will also not be considered in determining the
appropriate exchange ratio after the transfer of responsibilities to the Federal Reserve Board
provided that the mutual holding company involved was formed, engaged in a minority offering and
waived dividends prior to December 1, 2009. Although the MHC was formed and engaged in a minority
offering prior to December 1, 2009, the MHC had not waived dividends prior to that date.
Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted
to the OTS if any person (including a company), or group acting in concert, seeks to acquire
control of a savings and loan holding company. An acquisition of control can occur upon the
acquisition of 10% or more of the voting stock of a savings and loan holding company or as
otherwise defined by the OTS. Under the Change in Bank Control Act, the OTS has 60 days from the
filing of a complete notice to act, taking into consideration certain factors, including the
financial and managerial resources of the acquirer and the anti-trust effects of the acquisition.
Any company that so acquires control would then be subject to regulation as a savings and loan
holding company.
16
Financial Reform Legislation
On July 21, 2010, President Obama signed the Dodd-Frank Act. In addition to eliminating the OTS
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. Their impact 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.
Income Taxation
General. We report our income on a calendar year basis using the accrual method of accounting. The
federal income tax laws apply to us in the same manner as to other corporations with some
exceptions, including particularly our reserve for bad debts discussed below. The following
discussion of tax matters is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to us. In 2009, an examination of the 2006 consolidated
federal income tax return was completed by the Internal Revenue Service (IRS) with no changes to
reported tax. In 2010, an examination of the 2007 consolidated federal income tax return was
completed by the IRS and the Company received net refunds of $1.9 million, primarily related to
certain losses on securities that were not reflected on the original tax return. The tax years
2007 through 2009 remain subject to examination by the IRS, Pennsylvania and Philadelphia taxing
authorities. The tax years 2006 through 2009 remain subject to examination by New Jersey taxing
authorities. For 2010, the Banks maximum federal income tax rate was 35%.
The Company and the Bank have entered into a tax allocation agreement. Because the Company owns
100% of the issued and outstanding capital stock of the Bank, the Company and the Bank are members
of an affiliated group within the meaning of Section 1504(a) of the Internal Revenue Code, of which
group the Company is the common parent corporation. As a result of this affiliation, the Bank is
included in the filing of a consolidated federal income tax return with the Company and, the
parties compensate each other for their individual share of the consolidated tax liability and/or
any tax benefits provided by them in the filing of the consolidated federal income tax return.
Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that
qualified under certain definitional tests and other conditions of the Internal Revenue Code were
permitted to use certain favorable provisions to calculate their deductions from taxable income for
annual additions to their bad debt reserve. A reserve could be established for bad debts on
qualifying real property loans, generally secured by interests in real property improved or to be
improved, under the percentage of taxable income method or the experience method. The reserve for
non-qualifying loans was computed using the experience method. Federal legislation enacted in 1996
repealed the reserve method of accounting for bad debts and the percentage of taxable income method
for tax years beginning after 1995 and required savings institutions to recapture or take into
income certain portions of their accumulated bad debt reserves as of December 31, 1987.
Approximately $2.3 million of income taxes related to our accumulated bad debt reserves would not be
recognized unless the Bank makes a non-dividend distribution to the Company as described
below.
Distributions. If the Bank makes non-dividend distributions to the Company, the distributions
will be considered to have been made from the Banks un-recaptured tax bad debt reserves, including
the balance of its reserves as of December 31, 1987, to the extent of the non-dividend
distributions, and then from the Banks supplemental reserve for losses on loans, to the extent of
those reserves, and an amount based on the amount distributed, but not more than the amount of
those reserves, will be included in the Banks taxable income. Non-dividend distributions include
distributions in excess of the Banks current and accumulated earnings and profits, as calculated
for federal income tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Banks current or accumulated earnings and
profits will not be so included in the Banks taxable income.
The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced
by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if
the Bank makes a non-dividend distribution to the Company, approximately one and one-half times the
amount of the distribution not in excess of the amount of the reserves would be includable in
income for federal income tax purposes, assuming a 35% federal corporate income tax rate. The Bank
does not intend to pay dividends that would result in a recapture of any portion of its bad debt
reserves.
State Taxation
Pennsylvania Taxation. The Bank, as a savings bank conducting business in Pennsylvania, is subject
to tax under the Pennsylvania Mutual Thrift Institutions Tax (MTIT) Act, as amended to include
thrift institutions having capital stock. The MTIT is a tax upon separately stated net book
income, determined in accordance with generally accepted accounting principles with certain
adjustments. In computing income subject to MTIT taxation, there is an allowance for the deduction
of interest income earned on state, federal and local obligations, while also disallowing a
portion of a thrifts interest expense associated with such tax-exempt income. The MTIT tax rate
is 11.5%. Net operating losses, if any, can be carried forward a maximum of three years for MTIT
purposes.
17
Philadelphia Taxation. In addition, as a savings bank conducting business in Philadelphia, the
Bank is also subject to the City of Philadelphia Business Privilege Tax. The City of Philadelphia
Business Privilege Tax is a tax upon net income or taxable receipts imposed on persons carrying on
or exercising for gain or profit certain business activities within Philadelphia. Pursuant to the
City of Philadelphia Business Privilege Tax, the 2010 tax rate was 6.45% on net income and .142% on
gross receipts. For regulated industry taxpayers, the tax is the lesser of the tax on net income
or the tax on gross receipts. The City of Philadelphia Business Privilege Tax allows for the
deduction by financial businesses from receipts of (a) the cost of securities and other intangible
property and monetary metals sold, exchanged, paid at maturity or redeemed, but only to the extent
of the total gross receipts from securities and other intangible property and monetary metals sold,
exchanged, paid out at maturity or redeemed; (b) moneys or credits received in repayment of the
principal amount of deposits, advances, credits, loans and other obligations; (c) interest received
on account of deposits, advances, credits, loans and other obligations made to persons resident or
having their principal place of business outside Philadelphia; (d) interest received on account of
other deposits, advances, credits, loans and other obligations but only to the extent of interest
expenses attributable to such deposits, advances, credits, loans and other obligations; and (e)
payments received on account of shares purchased by shareholders. An apportioned net operating
loss may be carried forward for three tax years following the tax year for which it was first
reported.
New Jersey Taxation. The Bank and BSB Union Corporation are subject to New Jerseys Corporation
Business Tax at the rate of 9.0% on their separate company apportioned taxable income. For this
purpose, taxable income generally means federal taxable income subject to certain adjustments
(including addition of interest income on state and municipal obligations). Net operating losses
may be carried forward for twenty years following the tax year first reported for losses occurring
in 2009 or after. Net operating losses may be carried forward for seven years following the tax
year first reported for losses occurring before 2009.
18
Executive Officers of the Registrant
The Board of Directors annually elects the executive officers of MHC, the Company, and the Bank,
who serve at the Boards discretion. Our executive officers are:
|
|
|
Name |
|
Position |
Gerard P. Cuddy
|
|
President and Chief Executive Officer of the MHC, the
Company and the Bank |
Thomas D. Cestare
|
|
Executive Vice President and Chief Financial Officer of
the MHC, the Company and the Bank |
Andrew J. Miller
|
|
Executive Vice President and Chief Lending Officer of
the MHC, the Company and the Bank |
Robert J. Bush
|
|
Executive Vice President of the MHC, the Company and the
Bank |
Denise Kassekert
|
|
Executive Vice President of the MHC, the Company and the
Bank |
Below is information regarding our executive officers who are not also directors. Each executive
officer has held his or her current position for at least the last five years, unless otherwise
stated. Ages presented are as of December 31, 2010.
Thomas D. Cestare joined Beneficial Bank as Executive Vice President and Chief Financial Officer
of Beneficial Bank in July 2010. Prior to joining the Company and Bank, Mr. Cestare served as
Executive Vice President and Chief Accounting Officer of Sovereign Bancorp, Inc. Mr. Cestare is a
certified public accountant who was a Partner with the public accounting firm of KPMG LLP prior to
joining Sovereign Bancorp in 2005. Age 42.
Andrew J. Miller has been Executive Vice President and Chief Lending Officer of Beneficial Bank
since 2000. He joined Beneficial Bank in 1973. Age 55.
Robert J. Bush was a Senior Vice President of Beneficial Bank and President of Beneficial Insurance
Services LLC since our acquisition of Paul Hertel & Co., Inc. in January 2005, and was promoted to
Executive Vice President in June 2007. Prior to the acquisition, Mr. Bush served as President of
Paul Hertel & Co., Inc. Age 52.
Denise Kassekert was a Senior Vice President of Community Banking of Beneficial Bank since 2007 and
was promoted to Executive Vice President in July, 2008. Prior to joining Beneficial, Ms. Kassekert
served as Senior Vice President of Sun National Bank in Vineland, NJ. Age 59.
19
A continued deterioration in national and local economic conditions may negatively impact our
financial condition and results of operations.
We currently are operating in a challenging and uncertain economic environment, both nationally and
in the local markets that we serve. Financial institutions continue to be affected by sharp
declines in real estate values. Continued declines in commercial and residential real estate
values and home sales, and an increase in the financial stress on borrowers stemming from an
uncertain economic environment, including high unemployment, could continue to have an adverse
effect on our borrowers or their customers, which could continue to adversely impact the repayment
of the loans we have made. The overall deterioration in economic conditions also could subject us
to increased regulatory scrutiny. In addition, a prolonged recession, or further deterioration in
local economic conditions, could result in an increase in loan delinquencies; an increase in
problem assets and foreclosures; and a decline in the value of the collateral for our loans.
Furthermore, a prolonged recession or further deterioration in local economic conditions could
drive the level of loan losses beyond the level we have provided for in our loan loss allowance,
which could necessitate our increasing our provision for loans losses, which would continue to put
pressure on our earnings. Additionally, the demand for our products and services could be reduced,
which would adversely impact our liquidity and the level of revenues we generate.
A majority of our loans, including our commercial real estate and commercial loans are secured by
real estate or made to businesses in areas where our offices are located. As a result of this
concentration, a continued downturn in the local economy could cause significant increases in
nonperforming loans, which would hurt our profits. The current recession has caused a decline in
real estate values in our market area. A continued decline in real estate values could cause some
of our mortgage loans to become inadequately collateralized, which would expose us to a greater
risk of loss. Additionally, a continued decline in real estate values could adversely impact our
portfolio of commercial real estate loans and could result in a decline in the origination of such
loans.
Continued turmoil in the financial markets could have an adverse effect on our financial position
or results of operations.
Beginning in 2008, United States and global financial markets have experienced severe disruption
and volatility, and general economic conditions have declined significantly. Adverse developments
in credit quality, asset values and revenue opportunities throughout the financial services
industry, as well as general uncertainty regarding the economic, industry and regulatory
environment, have had a marked negative impact on the industry. Dramatic declines in the U.S.
housing market over the past few years, with falling home prices, increasing foreclosures and high
unemployment, have negatively affected the credit performance of mortgage and commercial real
estate loans and resulted in significant write-downs of asset values by many financial
institutions. The United States and the governments of other countries have taken steps to try to
stabilize the financial system, including investing in financial institutions, and have also been
working to design and implement programs to improve general economic conditions. Notwithstanding
the actions of the United States and other governments, these efforts may not succeed in restoring
industry, economic or market conditions and may result in adverse unintended consequences. Factors
that could continue to pressure financial services companies, including the Company, are numerous
and include (i) worsening credit quality, leading among other things to increases in loan losses
and reserves, (ii) continued or worsening disruption and volatility in financial markets, leading
among other things to continuing reductions in asset values, (iii) capital and liquidity concerns
regarding financial institutions generally, (iv) limitations resulting from or imposed in
connection with governmental actions intended to stabilize or provide additional regulation of the
financial system, or (v) recessionary conditions that are deeper or last longer than currently
anticipated.
Our business is subject to interest rate risk and variations in interest rates may negatively
affect our financial performance.
Changes in the interest rate environment may reduce profits. The primary source of our income is
the differential or spread between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing
liabilities. As prevailing interest rates change, net interest spreads are affected by the
difference between the maturities and re-pricing characteristics of interest-earning assets and
interest-bearing liabilities. In addition, loan volume and yields are affected by market interest
rates on loans, and rising interest rates generally are associated with a lower volume of loan
originations. An increase in the general level of interest rates may also adversely affect the
ability of certain borrowers to pay the interest on and principal of their obligations.
Accordingly, changes in levels of market interest rates could materially adversely affect our net
interest spread, asset quality, loan origination volume and overall profitability. In addition, our
deposits are subject to increases in interest rates and as interest rates rise we may lose these
deposits if we do not pay competitive interest rates which may affect our liquidity and profits.
At December 31, 2010, an increase in interest rates of 200 basis points would result in a decrease
in net interest income of 6.29% and economic value of equity of 23.50%.
20
Our emphasis on commercial real estate, commercial construction and commercial business loans may
expose us to increased lending risks.
At December 31, 2010, $869.0 million, or 31.1%, of our loan portfolio consisted of commercial real
estate and commercial construction loans, including loans for the acquisition and development of
property. In addition, at December 31, 2010, $441.9 million, or 15.8%, of our loan portfolio
consisted of commercial business loans. We increased the percentage of commercial real estate and
commercial business loans in our loan portfolio in recent years and intend to continue their
growth. Commercial real estate loans and commercial business loans generally expose a lender to a
greater risk of loss than one-to-four family residential loans. Repayment of commercial real
estate and commercial business loans generally is dependent, in large part, on sufficient income
from the property to cover operating expenses and debt service. Commercial real estate loans
typically involve larger loan balances to single borrowers or groups of related borrowers compared
to one-to-four family residential mortgage loans. Changes in economic conditions that are out of
the control of the borrower and lender could impact the value of the security for the loan, the
future cash flow of the affected property, or the marketability of a construction project with
respect to loans originated for the acquisition and development of property. Additionally, any
decline in real estate values may be more pronounced with respect to commercial real estate
properties than residential properties.
Weaknesses in the commercial real estate market had a significant impact on our financial results
during 2010. During the year, the Company saw considerable deterioration in the value of a number
of large collateral dependent commercial real estate loans. Additionally, the Company noted a
pronounced slowdown in the commercial real estate market limiting traditional refinance and
repayment sources. The Company believes the recovery for commercial real estate in its market area
will take some time causing continued downward pressure on property valuations in future years. Although
the U.S. economy has shown some sign 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 portfolio matures (approximately 33%). We expect that market
conditions coupled with the large amount of commercial maturities will result in an elevated
provision for credit losses in 2011.
At December 31, 2010, we had a total of 143 land acquisition and development loans totaling $255.9
million, which consist of 60 residential land acquisition and development loans totaling $63.7
million and 83 commercial land acquisition and development loans totaling $192.2 million.
A substantial portion of our loan portfolio consists of consumer loans secured by rapidly
depreciable assets.
At December 31, 2010, our loan portfolio included $154.1 million in automobile loans, which
represented 5.5% of our total loan portfolio at that date. In addition, at December 31, 2010,
other consumer loans totaled $632.6 million, or 22.6%, of our loan portfolio. Included in other
consumer loans is $4.1 million in loans secured by manufactured housing and mobile homes, $48.5
million in loans secured by recreational vehicles and $37.6 million in loans secured by boats.
Also included in other consumer loans are educational loans of $249.7 which are generally 98%
government guaranteed loans. Consumer loans secured by rapidly depreciable assets such as
automobiles, recreational vehicles and boats, may subject us to greater risk of loss than loans
secured by real estate because any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance.
We rely heavily on high-average balance municipal deposits as a source of funds and a reduced level
of those deposits may adversely affect our liquidity and our profits.
Municipal deposits, consisting primarily of interest earning checking accounts, are a significant
source of funds for our lending and investment activities. At December 31, 2010, $1.1 billion, or
27.2% of our total deposits, consisted of municipal deposits. The average balance of municipal
deposit relationships is significantly higher than the average balance of all deposit
relationships. The average number of deposits totaled 1,447 and the average balance of an account
totaled $769 thousand. Given our dependence on high-average balance municipal deposits as a source
of funds, our inability to retain such funds could significantly and adversely affect our
liquidity. Further, our municipal checking accounts are demand deposits and are therefore
considered rate-sensitive instruments. If we are forced to pay higher rates on our municipal
checking accounts to retain those funds, or if we are unable to retain such funds and we are forced
to resort to other sources of funds for our lending and investment activities, such as borrowings
from the Federal Home Loan Bank of Pittsburgh, the interest expense associated with these other
funding sources may be higher than the rates we are currently paying on the municipal deposits,
which would adversely affect our profits.
Strong competition within our market area could hurt our profits and slow growth.
We face substantial competition in originating loans, both commercial and consumer. This
competition comes principally from other banks, savings institutions, mortgage banking companies
and other lenders. Many of our competitors enjoy advantages that we do not, including greater
financial resources and higher lending limits, a wider geographic presence, more accessible branch
office locations, the ability to offer a wider array of services or more favorable pricing
alternatives, as well as lower origination and operating costs. This competition could reduce our
net
income by decreasing the number and size of loans that we originate and the interest rates we may
charge on these loans.
21
In attracting business and consumer deposits, the Company faces substantial competition from other
insured depository institutions such as banks, savings institutions and credit unions, as well as
institutions offering uninsured investment alternatives, including money market funds. Many of our
competitors enjoy advantages that we do not, including greater financial resources, more aggressive
marketing campaigns, better brand recognition and more branch locations. These competitors may
offer higher interest rates than we do, which could decrease the deposits that we attract or
require us to increase our rates to retain existing deposits or attract new deposits. Increased
deposit competition could adversely affect our ability to generate the funds necessary for lending
operations. As a result, we may need to seek other sources of funds that may be more expensive to
obtain and could increase our cost of funds.
Our banking and non-banking subsidiaries also compete with non-bank providers of financial
services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies
and governmental organizations which may offer more favorable terms. Some of our non-bank
competitors are not subject to the same extensive regulations that govern our banking operations.
As a result, such non-bank competitors may have advantages over our banking and non-banking
subsidiaries in providing certain products and services. This competition may reduce or limit our
margins on banking and non-banking services, reduce our market share, and adversely affect our
earnings and financial condition.
Special Federal Deposit Insurance Corporation assessments and increased base assessment rates by
the Federal Deposit Insurance Corporation will decrease our earnings.
Beginning in late 2008, the economic environment caused higher levels of bank failures, which
dramatically increased Federal Deposit Insurance Corporation resolution costs and led to a
significant reduction in the Deposit Insurance Fund. As a result, the Federal Deposit Insurance
Corporation has significantly increased the initial base assessment rates paid by financial
institutions for deposit insurance. The base assessment rate was increased by seven basis points
(7 cents for every $100 of deposits) for the first quarter of 2009. Effective April 1, 2009,
initial base assessment rates were changed to range from 12 basis points to 45 basis points across
all risk categories with possible adjustments to these rates based on certain debt-related
components. These increases in the base assessment rate increased our deposit insurance costs and
negatively impacted our earnings. On February 7, 2011, the Federal Deposit Insurance Corporation
approved a final rule that implemented changes to the deposit insurance assessment system mandated
by the Dodd-Frank Act that may further decrease our earnings. The final rule, which will take
effect for the quarter beginning April 1, 2011, requires that the base on which deposit insurance
assessments are charged be revised from one that is based on domestic deposits to one that is based
on average consolidated total assets minus average tangible equity. In addition, the Federal
Deposit Insurance Corporation may impose additional emergency special assessments after June 30,
2009, of up to 5 basis points per quarter on each institutions assets minus Tier 1 capital if
necessary to maintain public confidence in federal deposit insurance or as a result of
deterioration in the Deposit Insurance Fund reserve ratio due to institution failures. Any
additional emergency special assessment imposed by the Federal Deposit Insurance Corporation will
further decrease our earnings.
We operate in a highly regulated environment and we may be adversely affected by changes in laws
and regulations.
We are subject to extensive regulation, supervision and examination by the FDIC, as insurer of our
deposits, and by the Department as our primary regulator. The MHC and the Company are subject to
regulation and supervision by the OTS. Such regulation and supervision governs the activities in
which an institution and its holding company may engage and are intended primarily for the
protection of the insurance fund and the depositors and borrowers of the Bank rather than for
holders of the Company common stock. Regulatory authorities have extensive discretion in their
supervisory and enforcement activities, including the imposition of restrictions on our operations,
the classification of our assets and determination of the level of our allowance for loan losses.
Any change in such regulation and oversight, whether in the form of regulatory policy, regulations,
legislation or supervisory action, may increase our costs of operations and have a material impact
on our operations.
The Preparation of Beneficials Tax Returns Requires the Use of Estimates &
Interpretations of Complex Tax Laws and Regulations and Are Subject to Review
By Taxing Authorities.
Beneficial is subject to the income tax laws of the U.S., its states and municipalities. These tax
laws are complex and subject to different interpretations by the taxpayer and the relevant
Governmental taxing authorities. In establishing a provision for income tax expense and filing
returns, the Company must make judgments and interpretations about the application of these
inherently complex tax laws. Actual income taxes paid may vary from estimates depending upon
changes in income tax laws, actual results of operations, and the final audit of tax returns by
taxing authorities. Tax assessments may arise several years after tax returns have been filed. The
Company is subject to ongoing tax examinations and assessments in various jurisdictions.
22
As of December 31, 2010, the Companys had net deferred tax assets totaling $31.9 million. These
deferred tax assets can only be realized if Beneficial 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 federal or remaining state deferred tax
assets as of December 31, 2010. 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.
Recently enacted legislative reforms and future regulatory reforms required by such legislation
could have a significant impact on our business, financial condition and results of operations.
The Dodd-Frank Act, which was signed into law on July 21, 2010, will have a broad impact on
the financial services industry, including significant regulatory and compliance changes. Many of
the requirements called for in the Dodd-Frank Act will be implemented over time and most will be
subject to implementing regulations over the course of several years. Given the uncertainty
associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the
various regulatory agencies and through regulations, the full extent of the impact such
requirements will have on our operations is unclear. Under the Dodd-Frank Act, the Office of
Thrift Supervision will be merged into the Office of the Comptroller of the Currency over a one
year transition period (subject to a possible six month extension by the Secretary of the
Treasury). As a result, federal thrifts will be regulated by the Office of the Comptroller of the
Currency, along with national banks and federal branches and agencies of foreign banks. The
Federal Reserve Board will continue to supervise all bank holding companies and will assume
jurisdiction over savings and loan holding companies such as the Company. Although savings and
loan holding companies are not currently subject to specific regulatory capital requirements, the
Dodd-Frank Act requires the Federal Reserve Board to promulgate consolidated capital requirements
for all depository institution holding companies that are no less stringent, both quantitatively
and in terms of components of capital, than those applicable to institutions themselves. In
addition, the Dodd-Frank Act codifies the Federal Reserve Boards existing source of strength
policy that holding companies act as a source of strength to their insured institution subsidiaries
by providing capital, liquidity and other support in times of distress. The Dodd-Frank Act also
provides for the creation of a new agency, the Consumer Financial Protection Bureau, to assure the
implantation of federal consumer financial protection and fair lending laws for the depository
institution regulators. Furthermore, the Dodd-Frank Act repeals payment of interest on commercial
demand deposits, 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. While it is difficult to predict at
this time what specific impact the Dodd-Frank Act and the related yet to be written implementing
rules and regulations will have on us, we expect that, at a minimum, our operating and compliance
costs will increase, and our interest expense could increase, as a result of these new rules and
regulations.
23
The issuance of shares for benefit programs may dilute your ownership interest.
In May 2008, the Companys shareholders approved the Companys 2008 Equity Incentive Plan (EIP).
The purpose of the EIP is to attract and retain personnel for positions of substantial
responsibility and to provide additional incentive to certain officers, directors and employees of
the Company and the Bank. 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 stock in the open market
during fiscal 2008. The EIP also authorizes the grant of options to officers, directors and
employees of the Company to acquire shares of common stock with an exercise price equal to the fair
value of the stock at the grant date. The options generally become vested and exercisable at the
rate of 20% a year over five years. If the shares issued upon the exercise of stock options under
the equity incentive plan are issued from authorized but unissued stock, your ownership interest in
the shares issued to persons other than the MHC could be diluted.
Our low return on equity may negatively affect our stock price.
Net income divided by average equity, known as return on equity, is a ratio many investors use to
compare the performance of a financial institution to its peers. Our return on equity was reduced
due to the large amount of capital that we raised in our 2007 stock offering and to expenses we
will incur in pursuing our growth strategies, the costs of being a public company and added
expenses associated with our employee stock ownership plan and equity incentive plan. Until we can
increase our net interest income and non-interest income, we expect our return on equity to be
below the median return on equity for publicly traded thrifts, which may negatively affect the
value of our common stock.
Beneficial Savings Bank MHCs majority control of our common stock enables it to exercise voting
control over most matters put to a vote of stockholders and will prevent stockholders from forcing
a sale or a second-step conversion transaction they may find advantageous.
The MHC owns a majority of the Companys common stock and, through its board of directors,
exercises voting control over most matters put to a vote of stockholders. The members of the
boards of the Company, the MHC and the Bank are the same. As a federally chartered mutual holding
company, the board of directors of MHC must ensure that the interests of depositors of the Bank are
represented and considered in matters put to a vote of stockholders of the Company. Therefore, the
votes cast by the MHC may not be in your personal best interests as a stockholder. For example,
the MHC may exercise its voting control to defeat a stockholder nominee for election to the board
of directors of the Company. The MHCs ability to control the outcome of the election of the board
of directors of the Company restricts the ability of minority stockholders to effect a change of
management. In addition, stockholders will not be able to force a merger or second-step conversion
transaction without the consent of the MHC, as such transactions require the approval of at least
two-thirds of all outstanding voting stock, which can only be achieved if the MHC voted to approve
such transactions. Some stockholders may desire a sale or merger transaction, since stockholders
typically receive a premium for their shares, or a second-step conversion transaction, since fully
converted institutions tend to trade at higher multiples than mutual holding companies.
OTS regulations and anti-takeover provisions in our charter restrict the accumulation of our common
stock, which may adversely affect our stock price.
OTS regulations provide that for a period of three years following the date of the completion of
the stock offering, no person, acting alone, together with associates or in a group of persons
acting in concert, will directly or indirectly offer to acquire or acquire the beneficial ownership
of more than 10% of our common stock without the prior written approval of the OTS. In addition,
the Companys charter provides that, for a period of five years from the date of the stock
offering, no person, other than the MHC may acquire directly or indirectly the beneficial ownership
of more than 10% of any class of any equity security of the Company. In the event a person
acquires shares in violation of this charter provision, all shares beneficially owned by such
person in excess of 10% will be considered excess shares and will not be counted as shares
entitled to vote or counted as voting shares in connection with any matters submitted to the
stockholders for a vote. These restrictions make it more difficult and less attractive for
stockholders to acquire a significant amount of our common stock, which may adversely affect our
stock price.
|
|
|
Item 1B. |
|
UNRESOLVED STAFF COMMENTS |
None.
We conduct our business through our main office and branch offices. During fiscal 2010, we opened
two new campuses in Camden County, New Jersey and one lending office in Chester County,
Pennsylvania. We also closed five branch offices, one in Philadelphia County, Pennsylvania and
four in Burlington County, New Jersey. Our retail market area primarily includes all of the area
surrounding our 65 banking offices located in Bucks, Chester, Delaware, Montgomery and Philadelphia
Counties in Pennsylvania and Burlington and Camden Counties in New Jersey, while our lending market
also includes Gloucester and Mercer Counties in New Jersey. The Company owns 39 properties and
leases 26 other properties. In Pennsylvania, we serve our customers through our four offices in
Bucks County,
seven offices in Delaware County, nine offices in Montgomery County, 16 offices in Philadelphia
County, and one banking office and one lending office in Chester County. In New Jersey, we serve
our customers through our 23 offices in Burlington County and five offices in Camden County. In
addition, Beneficial Insurance operates two offices in Pennsylvania, one in Philadelphia County and
one in Delaware County. All branches and offices are adequate for business operation.
24
|
|
|
Item 3. |
|
LEGAL PROCEEDINGS |
Periodically, there have been various claims and lawsuits against us, such as claims to enforce
liens, condemnation proceedings on properties in which we hold security interests, claims involving
the making and servicing of real property loans and other issues incident to our business. We are
not a party to any pending legal proceedings that we believe would have a material adverse effect
on our financial condition, results of operations or cash flows.
|
|
|
Item 4. |
|
[REMOVED AND RESERVED] |
PART II
|
|
|
Item 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
Market for Common Equity and Related Stockholder Matters
The information regarding the market for the Companys common equity and related stockholder
matters is incorporated herein by reference to the section captioned Investor and Corporate
Information in the Companys 2010 Annual Report to Stockholders.
Purchases of Equity Securities
The Company repurchased shares of its common stock during the year ended December 31, 2010.
The following table sets forth information regarding the Companys repurchases of its common stock
during the fourth quarter of 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
or |
|
|
the Plans or |
|
Period |
|
Purchased |
|
|
Per Share |
|
|
Programs |
|
|
Programs(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1 through October 31, 2010 |
|
|
150,000 |
|
|
$ |
7.42 |
|
|
|
150,000 |
|
|
|
762,680 |
|
November 1 through November 30, 2010 |
|
|
459,000 |
|
|
|
7.64 |
|
|
|
459,000 |
|
|
|
303,680 |
|
December 1 through December 31, 2010 |
|
|
30,000 |
|
|
|
7.93 |
|
|
|
30,000 |
|
|
|
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 Companys common stock. |
The Equity Incentive Plan Trust (the Trust) purchased 1,612,386 shares of Company stock in
the open market. Purchases were made between August and October 2008 at the discretion of an
independent trustee.
25
|
|
|
Item 6. |
|
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA |
The information required by this item is incorporated herein by reference to the section captioned
Selected Consolidated Financial and Other Data in the 2010 Annual Report to Stockholders.
|
|
|
Item 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION |
The information required by this item is incorporated herein by reference to the section captioned
Managements Discussion and Analysis of Results of Operations and Financial Condition in the 2010
Annual Report to the Stockholders.
|
|
|
Item 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The information required by this item is incorporated herein by reference to the section captioned
Managements Discussion and Analysis of Results of Operations and Financial Condition in the 2010
Annual Report to Stockholders.
|
|
|
Item 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required by this item is incorporated herein by reference to the section captioned
Consolidated Financial Statements in the 2010 Annual Report to Stockholders.
|
|
|
Item 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE |
None.
|
|
|
Item 9A. |
|
CONTROLS AND PROCEDURES |
The Companys management, including the Companys principal executive officer and principal
financial officer, have evaluated the effectiveness of the Companys 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 Companys 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 SECs rules and forms,
and (2) is accumulated and communicated to the Companys 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 Companys internal
control over financial reporting occurred during the quarter ended December 31, 2010 that has
materially affected, or is reasonably likely to affect, the Companys internal control over
financial reporting.
26
Managements Report on Internal Control Over Financial Reporting
The management of Beneficial Mutual Bancorp, Inc. (the Company) is responsible for establishing
and maintaining adequate internal control over financial reporting. The internal control process
has been designed under our supervision to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the Companys financial statements for external
reporting purposes in accordance with U.S. generally accepted accounting principles.
Management conducted an assessment of the effectiveness of the Companys internal control over
financial reporting as of December 31, 2010, utilizing the framework established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management has determined that the Companys internal
control over financial reporting as of December 31, 2010 is effective.
Our internal control over financial reporting includes policies and procedures that pertain to
the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions
and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded
as necessary to permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles; (2) receipts and expenditures are being made only in accordance
with authorizations of management and the directors of the Company; and (3) unauthorized
acquisition, use, or disposition of the Companys assets that could have a material effect on the
Companys financial statements are prevented or timely detected.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited the Companys
consolidated financial statements as of and for the year ended December 31, 2010, and the
effectiveness of the Companys internal control over financial reporting as of December 31, 2010,
as stated in their reports, which are included herein.
|
|
|
/s/
Gerard P. Cuddy
|
|
/s/ Thomas D. Cestare |
|
|
|
Gerard P. Cuddy
|
|
Thomas D. Cestare |
President and Chief Executive Officer
|
|
Executive Vice President and Chief Financial Officer |
27
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
Beneficial Mutual Bancorp, Inc. and Subsidiaries
Philadelphia, Pennsylvania
We have audited the internal control
over financial reporting of Beneficial Mutual Bancorp, Inc. and subsidiaries
(the “Company”) as of December 31, 2010, based on criteria
established in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Because
management’s assessment and our audit were conducted to meet the
reporting requirements of Section 112 of the Federal Deposit Insurance
Corporation Improvement Act (FDICIA), management’s assessment and our
audit of the Company’s internal control over financial reporting included
controls over the preparation of the schedules equivalent to the basic
financial statements in accordance with the Federal Financial Institutions
Examination Council Instructions for Consolidated Reports of Condition and
Income for Schedules RC, RI, RI-A. The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over
financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or
persons performing similar functions, and effected by the company’s board
of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of the inherent limitations of
internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting
as of December 31, 2010, based on the criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended
December 31, 2010 of the Company and our report dated March 11, 2011
expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 11, 2011
28
|
|
|
Item 9B. |
|
OTHER INFORMATION |
None.
PART III
|
|
|
Item 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Board of Directors
For information relating to the directors of Beneficial Mutual Bancorp, Inc., the section captioned
Items to be Voted on by StockholdersItem 1Election of Directors in Beneficial Mutual Bancorp,
Inc.s Proxy Statement for the 2011 Annual Meeting of Stockholders is incorporated herein by
reference.
Executive Officers
For information relating to officers of Beneficial Mutual Bancorp, Inc., see Part I, Item 1,
Business Executive Officers of the Registrant to this Annual Report on Form 10-K.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
For information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, the
cover page to this Annual Report on Form 10-K and the section captioned Other Information Relating
to Directors and Executive OfficersSection 16(a) Beneficial Ownership Reporting Compliance in
Beneficial Mutual Bancorp, Inc.s Proxy Statement for the 2011 Annual Meeting of Stockholders are
incorporated herein by reference.
Disclosure of Code of Ethics
For information concerning Beneficial Mutual Bancorp, Inc.s Code of Ethics, the information
contained under the section captioned Corporate GovernanceCode of Ethics and Business Conduct
in Beneficial Mutual Bancorp, Inc.s Proxy Statement for the 2011 Annual Meeting of Stockholders is
incorporated by reference. A copy of the Code of Ethics and Business Conduct is available to
stockholders on Beneficial Mutual Bancorp, Inc.s website at www.thebeneficial.com.
Corporate Governance
For information regarding the Audit Committee and its composition and the audit committee financial
expert, the section captioned Corporate Governance Committees of the Board of Directors
Audit Committee in Beneficial Mutual Bancorp, Inc.s Proxy Statement for the 2011 Annual Meeting
of Stockholders is incorporated herein by reference.
|
|
|
Item 11. |
|
EXECUTIVE COMPENSATION |
Executive Compensation
For information regarding executive compensation, the sections captioned Compensation Discussion
and Analysis, Executive Compensation and Director Compensation in Beneficial Mutual Bancorp,
Inc.s Proxy Statement for the 2011 Annual Meeting of Stockholders are incorporated herein by
reference.
Corporate Governance
For information regarding the compensation committee report, the section captioned Report of the
Compensation Committee in Beneficial Mutual Bancorp, Incs Proxy Statement for the 2011 Annual
Meeting of Stockholders is incorporated herein by reference.
|
|
|
Item 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS
MATTERS |
(a) |
|
Security Ownership of Certain Beneficial Owners |
|
|
|
Information required by this item is incorporated herein by reference to the section captioned
Stock Ownership in Beneficial Mutual Bancorp, Inc.s Proxy Statement for the 2011 Annual
Meeting of Stockholders. |
29
(b) |
|
Security Ownership of Management |
|
|
|
Information required by this item is incorporated herein by reference to the section captioned
Stock Ownership in Beneficial Mutual Bancorp, Inc.s Proxy Statement for the 2011 Annual
Meeting of Stockholders. |
|
(c) |
|
Changes in Control |
|
|
|
Management of the Company knows of no arrangements, including any pledge by any person or
securities of the Company the operation of which may at a subsequent date result in a change
in control of the registrant. |
|
(d) |
|
Equity Compensation Plan Information |
The following table sets forth information about the Company common stock that may be issued upon
the exercise of stock options, warrants and rights under all of the Companys equity compensation
plans as of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
(a) |
|
|
(b) |
|
|
remaining available for |
|
|
|
Number of securities |
|
|
Weighted-average |
|
|
future issuance under |
|
|
|
to be issued upon exercise |
|
|
exercise price of |
|
|
equity compensation |
|
|
|
of outstanding options, |
|
|
outstanding options, |
|
|
plans (excluding securities |
|
Plan category |
|
warrants and rights |
|
|
warrants and rights |
|
|
reflected in column (a)) |
|
Equity compensation
plans approved by
security holders |
|
|
2,001,950 |
|
|
|
11.21 |
|
|
|
1,983,415 |
|
Equity compensation
plans not approved
by security holders |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,001,950 |
|
|
|
11.21 |
|
|
|
1,983,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Certain Relationships and Related Transactions
For information regarding certain relationships and related transactions, the section captioned
Other Information Relating to Directors and Executive OfficersTransactions with Related Persons
in Beneficial Mutual Bancorp, Inc.s Proxy Statement for the 2011 Annual Meeting of Stockholders is
incorporated herein by reference.
Corporate Governance
For information regarding director independence, the section captioned Corporate
GovernanceDirector Independence in Beneficial Mutual Bancorp, Inc.s Proxy Statement for the
2011 Annual Meeting of Stockholders is incorporated herein by reference.
30
|
|
|
Item 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
For information regarding the principal accountant fees and expenses, the section captioned Items
to Be Voted on By StockholdersItem 3Ratification of Independent Registered Public Accounting
Firm in Beneficial Mutual Bancorp Inc.s Proxy Statement for the 2011 Annual Meeting of
Stockholders is incorporated herein by reference.
PART IV
|
|
|
Item 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
|
(1) |
|
The financial statements required in response to this item are incorporated herein by
reference from Item 8 of this Annual Report on Form 10-K. |
|
(2) |
|
All financial statement schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements or the notes
thereto. |
|
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No. |
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Description |
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3.1 |
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Charter of Beneficial Mutual Bancorp, Inc. (1) |
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3.2 |
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Bylaws of Beneficial Mutual Bancorp, Inc. (2) |
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4.1 |
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Stock Certificate of Beneficial Mutual Bancorp, Inc. (1) |
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10.1 |
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Amended and Restated Employment Agreement between Beneficial Mutual Bancorp,
Inc., Beneficial Bank and Gerard P. Cuddy * (3) |
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10.2 |
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Employment Agreement between Beneficial Mutual Bancorp, Inc., Beneficial Bank
and Thomas D. Cestare * (4) |
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10.3 |
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Amended and Restated Employment Agreement between Beneficial Mutual Bancorp,
Inc., Beneficial Bank and Andrew J. Miller * (3) |
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10.4 |
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Amended and Restated Employment Agreement between Beneficial Mutual Bancorp,
Inc., Beneficial Bank and Robert J. Bush * (3) |
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10.5 |
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Amended and Restated Employment Agreement between Beneficial Mutual Bancorp,
Inc., Beneficial Bank and Denise Kassekert * (3) |
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10.6 |
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Amendment to Beneficial Mutual Savings Bank Executive Salary Continuation Plan
for Andrew J. Miller* (3) |
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10.7 |
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Supplemental Pension and Retirement Plan of Beneficial Mutual Savings Bank* (3) |
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10.8 |
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Second Amendment to the Beneficial Mutual Savings Bank Board of Managers Non-Vested
Deferred Compensation Plan* (3) |
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10.9 |
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Beneficial Mutual Bancorp, Inc. 2008 Equity Incentive Plan* (5) |
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10.10 |
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Beneficial Bank Board of Trustees Non-vested Deferred Compensation Plan * (1) |
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10.11 |
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Beneficial Bank Stock-Based Deferral Plan * (1) |
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10.12 |
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Severance Pay Plan for Eligible Employees of Beneficial Mutual Savings Bank * (6) |
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10.13 |
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Separation Agreement and General Release between Beneficial Mutual Bancorp,
Inc., Beneficial Bank and Joseph F. Conners * (7) |
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13.0 |
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Annual Report to Stockholders |
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21.0 |
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Subsidiary information is incorporated herein by reference to Part I, Item 1 Subsidiaries |
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23.1 |
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Consent of Deloitte & Touche LLP |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
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32.0 |
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Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
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* |
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Management contract or compensatory plan, contract or arrangement. |
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(1) |
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Incorporated herein by reference to the exhibits to the Companys Registration
Statement on Form S-1 (File No. 333-141289), as amended, initially filed with the
Securities and Exchange Commission on March 14, 2007. |
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(2) |
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Incorporated herein by reference to the Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission on July 19, 2010. |
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(3) |
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Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q
filed with the Securities and Exchange Commission on May 11, 2009. |
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(4) |
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Incorporated herein by reference to the Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 16, 2010. |
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(5) |
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Incorporated herein by reference to the appendix to the Companys definitive
proxy materials on Schedule 14A filed with the Securities and Exchange Commission on
April 16, 2008. |
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(6) |
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Incorporated herein by reference to the Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 12, 2007. |
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(7) |
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Incorporated herein by reference to the Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission on April 6, 2010. |
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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BENEFICIAL MUTUAL BANCORP, INC.
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Date: March 11, 2011 |
By: |
/s/
Gerard P. Cuddy |
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Gerard P. Cuddy
President and Chief Executive Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
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Name |
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Title |
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Date |
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/s/
Gerard P. Cuddy
Gerard
P. Cuddy
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President, Chief Executive Officer
and Director
(principal executive officer)
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March 11, 2011 |
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/s/
Thomas D. Cestare
Thomas
D. Cestare
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Executive Vice President and Chief
Financial Officer
(principal financial and
accounting officer)
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March 11, 2011 |
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/s/ Edward G. Boehne
Edward G. Boehne
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Director
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March 11, 2011 |
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/s/ Karen Buchholz
Karen Buchholz
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Director
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March 11, 2011 |
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/s/ Frank A. Farnesi
Frank A. Farnesi
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Director
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March 11, 2011 |
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/s/ Donald F. Gayhardt
Donald F. Gayhardt
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Director
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March 11, 2011 |
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/s/ Elizabeth H. Gemmill
Elizabeth H. Gemmill
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Director
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March 11, 2011 |
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/s/ Thomas F. Hayes
Thomas F. Hayes
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Director
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March 11, 2011 |
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/s/ Charles Kahn, Jr.
Charles Kahn, Jr.
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Director
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March 11, 2011 |
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/s/ Thomas J. Lewis
Thomas J. Lewis
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Director
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March 11, 2011 |
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/s/ Joseph J. McLaughlin
Joseph J. McLaughlin
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Director
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March 11, 2011 |
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/s/ Michael J. Morris
Michael J. Morris
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Director
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March 11, 2011 |
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/s/ George W. Nise
George W. Nise
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Director
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March 11, 2011 |
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/s/ Roy D. Yates
Roy D. Yates
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Director
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March 11, 2011 |
32