Attached files
file | filename |
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EX-32.0 - EXHIBIT 32.0 - Beneficial Mutual Bancorp Inc | c16604exv32w0.htm |
EX-31.2 - EXHIBIT 31.2 - Beneficial Mutual Bancorp Inc | c16604exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - Beneficial Mutual Bancorp Inc | c16604exv31w1.htm |
EX-10.1 - EXHIBIT 10.1 - Beneficial Mutual Bancorp Inc | c16604exv10w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-33476
BENEFICIAL MUTUAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
United States | 56-2480744 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
510 Walnut Street, Philadelphia, Pennsylvania | 19106 | |
(Address of principal executive offices) | (Zip Code) |
(215) 864-6000
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one)
Large Accelerated Filer o | Accelerated Filer þ | Non-Accelerated Filer o | Smaller Reporting Company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of May 5, 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.
BENEFICIAL MUTUAL BANCORP, INC.
Table of Contents
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Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.0 |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Financial Condition
(Dollars in thousands, except share amounts)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
CASH AND CASH EQUIVALENTS |
||||||||
Cash and due from banks |
$ | 46,300 | $ | 33,778 | ||||
Interest-bearing deposits |
219,287 | 56,521 | ||||||
Total cash and cash equivalents |
265,587 | 90,299 | ||||||
Trading securities |
| 6,316 | ||||||
INVESTMENT SECURITIES: |
||||||||
Available-for-sale (amortized cost of $1,375,134 and
$1,527,183 at March 31, 2011 and December 31, 2010,
respectively) |
1,385,388 | 1,541,991 | ||||||
Held-to-maturity (estimated fair value of $79,897 and
$88,648 at March 31, 2011 and December 31, 2010,
respectively) |
77,912 | 86,609 | ||||||
Federal Home Loan Bank stock, at cost |
22,082 | 23,244 | ||||||
Total investment securities |
1,485,382 | 1,651,844 | ||||||
LOANS |
2,775,715 | 2,796,402 | ||||||
Allowance for loan losses |
(47,411 | ) | (45,366 | ) | ||||
Net loans |
2,728,304 | 2,751,036 | ||||||
ACCRUED INTEREST RECEIVABLE |
19,095 | 19,566 | ||||||
BANK PREMISES AND EQUIPMENT, Net |
61,994 | 64,339 | ||||||
OTHER ASSETS |
||||||||
Goodwill |
110,486 | 110,486 | ||||||
Bank owned life insurance |
34,169 | 33,818 | ||||||
Other intangibles |
16,059 | 16,919 | ||||||
Other assets |
180,876 | 185,162 | ||||||
Total other assets |
341,590 | 346,385 | ||||||
TOTAL ASSETS |
$ | 4,901,952 | $ | 4,929,785 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
LIABILITIES: |
||||||||
Deposits: |
||||||||
Non-interest bearing deposits |
$ | 311,890 | $ | 282,050 | ||||
Interest-bearing deposits |
3,643,693 | 3,660,254 | ||||||
Total deposits |
3,955,583 | 3,942,304 | ||||||
Borrowed funds |
260,321 | 273,317 | ||||||
Other liabilities |
77,408 | 98,617 | ||||||
Total liabilities |
4,293,312 | 4,314,238 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
STOCKHOLDERS EQUITY: |
||||||||
Preferred Stock $.01 par value; 100,000,000 shares
authorized, none issued or outstanding as of March 31,
2011 and December 31, 2010 |
| | ||||||
Common Stock $.01 par value 300,000,000 shares
authorized, 82,267,457 shares issued and 80,717,553 shares
outstanding as of March 31, 2011 and December 31, 2010 |
823 | 823 | ||||||
Additional paid-in capital |
348,941 | 348,415 | ||||||
Unearned common stock held by employee stock ownership plan |
(21,827 | ) | (22,587 | ) | ||||
Retained earnings (partially restricted) |
303,334 | 304,232 | ||||||
Accumulated other comprehensive income (loss) |
(9,177 | ) | (1,882 | ) | ||||
Treasury Stock at cost, 1,549,904 shares at March 31, 2011
and December 31, 2010 |
(13,454 | ) | (13,454 | ) | ||||
Total stockholders equity |
608,640 | 615,547 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 4,901,952 | $ | 4,929,785 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
Table of Contents
BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
INTEREST INCOME |
||||||||
Interest and fees on loans |
$ | 35,827 | $ | 36,513 | ||||
Interest on overnight investments |
102 | 125 | ||||||
Interest on trading securities |
26 | 34 | ||||||
Interest and dividends on investment securities: |
||||||||
Taxable |
9,972 | 12,267 | ||||||
Tax-exempt |
992 | 1,141 | ||||||
Total interest income |
46,919 | 50,080 | ||||||
INTEREST EXPENSE |
||||||||
Interest on deposits: |
||||||||
Interest bearing checking accounts |
2,430 | 2,559 | ||||||
Money market and savings deposits |
2,405 | 2,273 | ||||||
Time deposits |
3,119 | 4,580 | ||||||
Total |
7,954 | 9,412 | ||||||
Interest on borrowed funds |
2,269 | 4,364 | ||||||
Total interest expense |
10,223 | 13,776 | ||||||
Net interest income |
36,696 | 36,304 | ||||||
Provision for loan losses |
10,000 | 4,950 | ||||||
Net interest income after provision for loan losses |
26,696 | 31,354 | ||||||
NON-INTEREST INCOME |
||||||||
Insurance and advisory commission and fee income |
2,537 | 3,010 | ||||||
Service charges and other income |
3,693 | 3,264 | ||||||
Gains on sale of investment securities available-for-sale |
186 | 2,003 | ||||||
Trading securities profits |
81 | 27 | ||||||
Total non-interest income |
6,497 | 8,304 | ||||||
NON-INTEREST EXPENSE |
||||||||
Salaries and employee benefits |
15,009 | 15,633 | ||||||
Occupancy expense |
3,093 | 3,145 | ||||||
Depreciation, amortization and maintenance |
2,248 | 2,177 | ||||||
Marketing expense |
897 | 1,045 | ||||||
Intangible amortization expense |
860 | 883 | ||||||
FDIC Insurance |
1,639 | 1,322 | ||||||
Restructuring charge |
4,096 | | ||||||
Other |
6,361 | 6,280 | ||||||
Total non-interest expense |
34,203 | 30,485 | ||||||
(Loss) Income before income taxes |
(1,010 | ) | 9,173 | |||||
Income tax (benefit) expense |
(112 | ) | 1,646 | |||||
NET (LOSS) INCOME |
$ | (898 | ) | $ | 7,527 | |||
(Loss) Earnings per share Basic |
$ | (0.01 | ) | $ | 0.10 | |||
(Loss) Earnings per share Diluted |
$ | (0.01 | ) | $ | 0.10 | |||
Average common shares outstanding Basic |
77,006,186 | 77,785,046 | ||||||
Average common shares outstanding Diluted |
77,006,186 | 77,915,633 |
See accompanying notes to the unaudited condensed consolidated financial statements.
2
Table of Contents
BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Changes in Stockholders Equity
(Dollars in thousands, except share amounts)
Accumulated | ||||||||||||||||||||||||||||||||||||
Number | Additional | Common | Other | Total | ||||||||||||||||||||||||||||||||
of Shares | Common | Paid in | Stock held | Retained | Treasury | Comprehensive | Stockholders | Comprehensive | ||||||||||||||||||||||||||||
Issued | Stock | Capital | by KSOP | Earnings | Stock | Income (Loss) | Equity | Income | ||||||||||||||||||||||||||||
BALANCE, JANUARY 1, 2011 |
82,267,457 | $ | 823 | $ | 348,415 | $ | (22,587 | ) | $ | 304,232 | $ | (13,454 | ) | $ | (1,882 | ) | $ | 615,547 | ||||||||||||||||||
Net Loss |
(898 | ) | (898 | ) | (898 | ) | ||||||||||||||||||||||||||||||
KSOP shares committed to be released |
(81 | ) | 760 | 679 | ||||||||||||||||||||||||||||||||
Stock option expense |
290 | 290 | ||||||||||||||||||||||||||||||||||
Restricted stock shares |
317 | 317 | ||||||||||||||||||||||||||||||||||
Purchase of treasury stock |
| |||||||||||||||||||||||||||||||||||
Net unrealized loss on AFS
securities arising during the year
(net of deferred tax of $1,528) |
(2,839 | ) | (2,839 | ) | (2,839 | ) | ||||||||||||||||||||||||||||||
Reclassification adjustment for net
losses on AFS securities included
in net income (net of tax of $65) |
(121 | ) | (121 | ) | (121 | ) | ||||||||||||||||||||||||||||||
Pension, other post retirement and
postemployment benefit plan
adjustments (net of tax of $1,529) |
(4,335 | ) | (4,335 | ) | (4,335 | ) | ||||||||||||||||||||||||||||||
Total other comprehensive income |
(7,295 | ) | ||||||||||||||||||||||||||||||||||
Comprehensive income |
$ | (8,193 | ) | |||||||||||||||||||||||||||||||||
BALANCE, MARCH 31, 2011 |
82,267,457 | $ | 823 | $ | 348,941 | $ | (21,827 | ) | $ | 303,334 | $ | (13,454 | ) | $ | (9,177 | ) | $ | 608,640 | ||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
3
Table of Contents
BENEFICIAL MUTUAL BANCORP, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | (898 | ) | $ | 7,527 | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
10,000 | 4,950 | ||||||
Depreciation and amortization |
1,402 | 1,491 | ||||||
Intangible amortization |
860 | 883 | ||||||
Net gain on sale of investments |
(186 | ) | (2,003 | ) | ||||
Accretion of discount on investments |
(411 | ) | (450 | ) | ||||
Amortization of premium on investments |
154 | 129 | ||||||
Deferred income taxes |
279 | (355 | ) | |||||
Net loss from sales of premises and equipment |
947 | 272 | ||||||
Other Real Estate Impairment |
56 | | ||||||
Amortization of KSOP |
679 | 709 | ||||||
Increase in bank owned life insurance |
(351 | ) | (383 | ) | ||||
Stock based compensation expense |
607 | 588 | ||||||
Changes in assets and liabilities that provided (used) cash: |
||||||||
Purchases of trading securities |
(186,070 | ) | (119,418 | ) | ||||
Proceeds from sale of trading securities |
192,296 | 147,717 | ||||||
Accrued interest receivable |
471 | (687 | ) | |||||
Accrued interest payable |
71 | (432 | ) | |||||
Income taxes payable (receivable) |
(430 | ) | 1,485 | |||||
Other liabilities |
(27,195 | ) | (28,213 | ) | ||||
Other assets |
58,064 | (17,692 | ) | |||||
Net cash provided by (used in) operating activities |
50,345 | (3,882 | ) | |||||
INVESTING ACTIVITIES: |
||||||||
Loans originated or acquired |
(141,611 | ) | (118,893 | ) | ||||
Principal repayment on loans |
154,178 | 118,875 | ||||||
Purchases of investment securities available for sale |
| (363,897 | ) | |||||
Proceeds from sales and maturities of investment securities available for sale |
158,121 | 198,161 | ||||||
Purchases of investment securities held to maturity |
(1,582 | ) | (27,131 | ) | ||||
Proceeds from maturities, calls or repayments of investment securities held to maturity |
10,260 | 3,584 | ||||||
Net (purchases) proceeds from sales of money market funds |
(5,789 | ) | 4,865 | |||||
Redemption of Federal Home Loan Bank stock |
1,162 | | ||||||
Proceeds from sale of other real estate owned |
535 | 1,439 | ||||||
Purchases of premises and equipment |
(557 | ) | (2,640 | ) | ||||
Proceeds from sale of premises and equipment |
| 845 | ||||||
Proceeds from other investing activities |
52 | 28 | ||||||
Net cash provided by (used in) in investing activities |
174,769 | (184,764 | ) | |||||
FINANCING ACTIVITIES: |
||||||||
Net (decrease) in borrowed funds |
(12,996 | ) | (21,745 | ) | ||||
Net (decrease) increase in checking, savings and demand accounts |
(73,525 | ) | 158,796 | |||||
Net increase (decrease) in time deposits |
36,695 | (79,547 | ) | |||||
Net cash(used in) provided by financing activities |
(49,826 | ) | 57,504 | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
175,288 | (131,142 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
90,299 | 179,701 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 265,587 | $ | 48,559 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW |
||||||||
Cash payments for interest |
$ | 7,883 | $ | 9,841 | ||||
Cash payments for income taxes |
| 516 | ||||||
Transfers of loans to other real estate owned |
165 | 601 | ||||||
Transfers of bank branches to fixed assets held for sale |
553 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
4
Table of Contents
BENEFICIAL MUTUAL BANCORP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have been included. These
financial statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes thereto contained in the Annual Report on Form 10-K filed by
Beneficial Mutual Bancorp, Inc. (the Company or Bancorp) with the U. S. Securities and Exchange
Commission on March 11, 2011. The results for the three-month period ended March 31, 2011 are not
necessarily indicative of the results that may be expected for the fiscal year ending December 31,
2011 or any other period.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Specifically, the financial statements include the
accounts of Beneficial Mutual Savings Bank, the Companys wholly owned subsidiary (Beneficial
Bank or the Bank), and the Banks wholly owned subsidiaries. The Banks wholly owned
subsidiaries are as follows: (i) Beneficial Advisors, LLC, which offers non-deposit investment
products and services, (ii) Neumann Corporation, a Delaware corporation formed for the purpose of
managing certain investments, (iii) Beneficial Insurance Services, LLC, which provides insurance
services to individual and business customers and (iv) BSB Union Corporation, a leasing company.
Additionally, the Company has subsidiaries that hold other real estate acquired in foreclosure or
transferred from the commercial real estate loan portfolio. All significant intercompany accounts
and transactions have been eliminated. The various services and products support each other and
are interrelated. Management makes significant operating decisions based upon the analysis of the
entire Company and financial performance is evaluated on a company-wide basis. Accordingly, the
various financial services and products offered are aggregated into one reportable operating
segment: community banking as under guidance in the Financial Accounting Standards Board (the
FASB) Accounting Standards Codification (ASC or codification) Topic 720 for Segment
Reporting.
Use of Estimates in the Preparation of Financial Statements
These unaudited interim condensed consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America (GAAP). The preparation
of the consolidated financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates include the allowance for loan losses, goodwill, other
intangible assets and income taxes.
5
Table of Contents
NOTE 2 NATURE OF OPERATIONS
The Company is a federally chartered stock holding company and owns 100% of the outstanding common
stock of the Bank, a Pennsylvania chartered stock savings bank. On July 13, 2007, the Company
completed its initial minority public offering and simultaneous acquisition of FMS Financial
Corporation, the parent company of Farmers & Mechanics Bank (together FMS Financial). Following
the consummation of the merger and public offering, the Company had a total of 82,264,600 shares of
common stock, par value $0.01 per share, issued and outstanding, of which 36,471,825 were held
publicly and 45,792,775 were held by Beneficial Savings Bank MHC (the MHC), the Companys
federally chartered mutual holding company.
The Bank offers a variety of consumer and commercial banking services to individuals, businesses,
and nonprofit organizations through 65 offices throughout the Philadelphia and Southern New Jersey
area. The Bank is supervised and regulated by the Pennsylvania Department of Banking and the
Federal Deposit Insurance Corporation (the FDIC). The Office of Thrift Supervision (the OTS)
regulates the Company and the MHC. The deposits of the Bank are insured by the Deposit Insurance
Fund of the FDIC.
NOTE 3 EARNINGS PER SHARE
The following table presents a calculation of basic and diluted earnings per share for the three
months ended March 31, 2011 and 2010. Earnings per share is computed by dividing net income
available to common shareholders by the weighted average number of shares of common stock
outstanding. The difference between common shares issued and basic average shares outstanding, for
purposes of calculating basic earnings per share, is a result of subtracting unallocated employee
stock ownership plan (ESOP) shares and unvested restricted stock shares. See Note 12 for further
discussion of stock grants.
Three Months Ended | ||||||||
March 31, | ||||||||
(Dollars in thousands, except share and per share amounts) | 2011 | 2010 | ||||||
Basic and diluted earnings per share: |
||||||||
Net income |
$ | (898 | ) | $ | 7,527 | |||
Basic average common shares outstanding |
77,006,186 | 77,785,046 | ||||||
Effect of dilutive securities |
| 130,587 | ||||||
Dilutive average shares outstanding |
77,006,186 | 77,915,633 | ||||||
Net earnings per share: |
||||||||
Basic |
$ | (0.01 | ) | $ | 0.10 | |||
Diluted |
$ | (0.01 | ) | $ | 0.10 |
There were 205,004 average shares outstanding for the three months ended March 31, 2011 which were
not included in the computation of diluted earnings per share as the result would have been
anti-dilutive under the if converted method as the Company was in a net loss position.
For the three months ended March 31, 2011, there were 1,911,300 outstanding options and no
restricted stock grants that were anti-dilutive for the earnings per share calculation. For the
three months ended March 31, 2010, there were 2,084,850 outstanding options and 390,500 restricted
stock grants that were anti-dilutive for the earnings per share calculation.
6
Table of Contents
NOTE 4 INVESTMENT SECURITIES
The amortized cost and estimated fair value of investments in debt and equity securities at March
31, 2011 and December 31, 2010 are as follows:
March 31, 2011 | ||||||||||||||||
Investment Securities Available-for-Sale | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(Dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||||
Equity securities |
$ | 3,029 | $ | 658 | $ | | $ | 3,687 | ||||||||
U.S.
Government Sponsored Enterprise (GSE) and Agency Notes |
737,614 | 12 | 16,016 | 721,610 | ||||||||||||
GNMA guaranteed mortgage certificates |
8,521 | 266 | | 8,787 | ||||||||||||
Collateralized mortgage obligations |
77,392 | 2,096 | 8 | 79,480 | ||||||||||||
Other mortgage-backed securities |
419,396 | 24,321 | | 443,717 | ||||||||||||
Municipal bonds |
95,280 | 1,224 | 838 | 95,666 | ||||||||||||
Pooled trust preferred securities |
16,990 | 4 | 1,715 | 15,279 | ||||||||||||
Money market fund |
16,912 | 259 | 9 | 17,162 | ||||||||||||
Total |
$ | 1,375,134 | $ | 28,840 | $ | 18,586 | $ | 1,385,388 | ||||||||
March 31, 2011 | ||||||||||||||||
Investment Securities Held-to-Maturity | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
GNMA guaranteed mortgage certificates |
$ | 627 | $ | | $ | 31 | $ | 596 | ||||||||
Other mortgage-backed securities |
27,750 | 1,948 | | 29,698 | ||||||||||||
Municipal bonds |
49,035 | 80 | 12 | 49,103 | ||||||||||||
Foreign bonds |
500 | | | 500 | ||||||||||||
Total |
$ | 77,912 | $ | 2,028 | $ | 43 | $ | 79,897 | ||||||||
December 31, 2010 | ||||||||||||||||
Investment Securities Available-for-Sale | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(Dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||||
Equity securities |
$ | 3,029 | $ | 206 | $ | | $ | 3,235 | ||||||||
U.S.
Government Sponsored Enterprise (GSE) and Agency Notes |
840,011 | 428 | 12,544 | 827,895 | ||||||||||||
GNMA guaranteed mortgage certificates |
8,776 | 213 | | 8,989 | ||||||||||||
Collateralized mortgage obligations |
89,047 | 2,421 | 8 | 91,460 | ||||||||||||
Other mortgage-backed securities |
459,139 | 26,318 | | 485,457 | ||||||||||||
Municipal bonds |
99,069 | 1,040 | 977 | 99,132 | ||||||||||||
Pooled trust preferred securities |
16,989 | 3 | 2,470 | 14,522 | ||||||||||||
Money market fund |
11,123 | 187 | 9 | 11,301 | ||||||||||||
Total |
$ | 1,527,183 | $ | 30,816 | $ | 16,008 | $ | 1,541,991 | ||||||||
7
Table of Contents
December 31, 2010 | ||||||||||||||||
Investment Securities Held-to-Maturity | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
GNMA guaranteed mortgage certificates |
$ | 639 | $ | | $ | 30 | $ | 609 | ||||||||
Other mortgage-backed securities |
30,876 | 2,067 | | 32,943 | ||||||||||||
Municipal bonds |
54,594 | 59 | 58 | 54,595 | ||||||||||||
Foreign bonds |
500 | 1 | | 501 | ||||||||||||
Total |
$ | 86,609 | $ | 2,127 | $ | 88 | $ | 88,648 | ||||||||
During the quarter the Bank sold $102.4 million in agency notes that resulted in a gain of
$170 thousand. The low-yielding agency notes were sold to shorten the duration of the investment
portfolio.
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a
quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The
Company determines whether the unrealized losses are temporary in accordance with guidance under
FASB ASC Topic 320 for Investments Debt and Equity Securities. The evaluation is based upon
factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if
applicable, and the continuing performance of the securities. Management also evaluates other facts
and circumstances that may be indicative of an OTTI condition. This includes, but is not limited
to, an evaluation of the type of security, length of time and extent to which the fair value has
been less than cost, and near-term prospects of the issuer.
The Companys investment in United States GSE and Agency Notes that were in a loss position for
less than 12 months at March 31, 2011 consisted of 19 GSE Step Notes with an unrealized loss of
2.2%. The unrealized loss is due to current interest rate levels relative to the Companys cost and
not credit quality, and because the Company does not intend to sell the investments and it is not
more likely than not that the Company will be required to sell the investments before recovery of
its amortized cost, which may be at maturity, the Company does not consider these investments to be
other-than-temporarily impaired at March 31, 2011.
The Company records the credit portion of OTTI through earnings based on the credit impairment
estimates generally derived from cash flow analyses. The remaining unrealized loss, due to factors
other than credit, is recorded in other comprehensive income (OCI). The unrealized loss of $1.7
million in pooled trust preferred securities as of March 31, 2011 represents securitizations that
have been in an unrealized loss position in prior periods. Based on the analysis of the underlying
cash flows of these securities, there is no expectation of credit impairment.
Credit impairment that is determined through the use of cash flow models is estimated using
cash flows on security specific collateral and the transaction structure. Future expected credit
losses are determined by using various assumptions, the most significant of which include current
default rates, prepayment rates, and loss severities. For the majority of the securities that the
Company has reviewed for OTTI, credit information is available and modeled at the loan level
underlying each security. These inputs are updated on a regular basis to ensure the most current
credit and other assumptions are utilized in the analysis. If, based on this analysis, the Company
does not expect to recover the entire amortized cost basis of the security, the expected cash flows
are then discounted at the securitys initial effective interest rate to arrive at a present value
amount. OTTI credit losses reflect the difference between the present value of cash flows expected
to be collected and the amortized cost basis of these securities.
8
Table of Contents
The following table presents a summary of the significant inputs used in determining the
measurement of credit losses recognized in earnings for pooled trust preferred securities for the
three months ended March 31, 2011:
Three Months Ended | ||||
March 31, 2011 | ||||
Current default rate |
3.6 | % | ||
Prepayment rate |
0.0 | % | ||
Loss severity |
100 | % |
One pooled trust preferred security, Trapeza 2003-4A Class A1A, was rated Aa3 by Moodys and BB+ by
Standard & Poors, which represents a rating of below investment grade. At March 31, 2011 the book
value of the security totaled $9.2 million and the fair value totaled $8.5 million, representing an
unrealized loss of $0.7 million, or 7.4%. At March 31, 2011, there were a total of 33 banks
currently performing of the 41 remaining banks in the security pool. A total of 17.2%, or $59.0
million, of the current collateral of $343.6 million has
defaulted and 5.5%, or $19.0 million, of
the current collateral has deferred. Utilizing a cash flow analysis model in analyzing this
security, an assumption of 0% recovery of current deferrals and defaults and additional defaults of
3.60% of outstanding collateral, every three years beginning in May 2011, with a 0% recovery, was
modeled and resulted in no cash flow shortfalls to our tranche. This represents the assumption of
an additional 24.9% of defaults from the remaining performing collateral of $265.6 million. Excess
subordination for the Trapeza 2003-4A Class A1A security represents 65.8% of the remaining
performing collateral. The excess subordination of 65.8% is calculated by taking the remaining
performing collateral of $265.6 million, subtracting the Class A-1 or senior tranche balance of
$90.9 million and dividing this result, $174.7 million, by the remaining performing collateral.
This excess subordination represents the additional collateral supporting our tranche.
The remaining pooled trust preferred security, US Capital Fund III Class A-1, is rated Baa2 by
Moodys and CCC- by Standard & Poors, which represents a rating of below investment grade. At
March 31, 2011, the book value of the security totaled $7.5 million and the fair value totaled $6.5
million, representing an unrealized loss of $1.0 million, or 13.8%. At March 31, 2011, there were a
total of 31 banks currently performing of the 43 remaining banks in the security pool. A total of
15.4%, or $33.0 million, of the current collateral of $214.7 million has defaulted and 13.1%, or
$28.2 million, of the current collateral has deferred. Utilizing a cash flow analysis model in
analyzing this security, an assumption of 0% recovery of current deferrals and additional defaults
of 3.60% of outstanding collateral, every three years beginning in June 2011, with a 0% recovery,
was modeled and resulted in no cash flow shortfalls to our tranche. This represents the assumption
of an additional 24.1% of defaults from the remaining performing collateral of $153.5 million.
Excess subordination for the US Capital Fund III A-1 security represents 42.6% of the remaining
performing collateral. The excess subordination of 42.6% is calculated by taking the remaining
performing collateral of $153.5 million, subtracting the Class A-1 or senior tranche balance of
$88.1 million and dividing this result, $65.4 million, by the remaining performing collateral. This
excess subordination represents the additional collateral supporting our tranche.
9
Table of Contents
The following table provides information on the gross unrealized losses and fair market value
of the Companys investments with unrealized losses that are not deemed to be other than
temporarily impaired, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at March 31, 2011 and December 31,
2010:
At March 31, 2011 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
GSE and Agency Notes |
$ | 698,030 | $ | 16,014 | $ | 103 | $ | 1 | $ | 698,133 | $ | 16,015 | ||||||||||||
Mortgage-backed securities |
| | 596 | 31 | 596 | 31 | ||||||||||||||||||
Municipal and other bonds |
56,121 | 798 | 1,154 | 53 | 57,275 | 851 | ||||||||||||||||||
Pooled trust preferred securities |
| | 14,944 | 1,715 | 14,944 | 1,715 | ||||||||||||||||||
Collateralized mortgage obligations |
555 | 3 | 139 | 5 | 694 | 8 | ||||||||||||||||||
Subtotal, debt securities |
754,706 | 16,815 | 16,936 | 1,805 | 771,642 | 18,620 | ||||||||||||||||||
Equity securities |
| | | | | | ||||||||||||||||||
Mutual fund |
294 | 9 | | | 294 | 9 | ||||||||||||||||||
Total temporarily impaired securities |
$ | 755,000 | $ | 16,824 | $ | 16,936 | $ | 1,805 | $ | 771,936 | $ | 18,629 | ||||||||||||
At December 31, 2010 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
GSE and Agency Notes |
$ | 692,008 | $ | 12,544 | $ | | $ | | $ | 692,008 | $ | 12,544 | ||||||||||||
Mortgage-backed securities |
| | 608 | 30 | 608 | 30 | ||||||||||||||||||
Municipal and other bonds |
82,066 | 946 | 1,119 | 89 | 83,185 | 1,035 | ||||||||||||||||||
Pooled trust preferred securities |
| | 14,188 | 2,470 | 14,188 | 2,470 | ||||||||||||||||||
Collateralized mortgage obligations |
500 | 3 | 163 | 5 | 663 | 8 | ||||||||||||||||||
Subtotal, debt securities |
774,574 | 13,493 | 16,078 | 2,594 | 790,652 | 16,087 | ||||||||||||||||||
Equity securities |
| | | | | | ||||||||||||||||||
Mutual fund |
304 | 9 | | | 304 | 9 | ||||||||||||||||||
Total temporarily impaired securities |
$ | 774,878 | $ | 13,502 | $ | 16,078 | $ | 2,594 | $ | 790,956 | $ | 16,096 | ||||||||||||
10
Table of Contents
The following table sets forth the stated maturities of the investment securities at March 31,
2011 and December 31, 2010. Mutual funds, money market funds and equity securities are not
included in the table based on lack of maturity.
March 31, 2011 | December 31, 2010 | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
(Dollars are in thousands) | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Available-for-sale: |
||||||||||||||||
Due in one year or less |
$ | 2,080 | $ | 2,085 | $ | 2,393 | $ | 2,406 | ||||||||
Due after one year through five years |
50,208 | 50,405 | 151,758 | 152,430 | ||||||||||||
Due after five years through ten years |
772,553 | 758,471 | 776,999 | 766,453 | ||||||||||||
Due after ten years |
102,435 | 101,073 | 114,279 | 112,033 | ||||||||||||
Mortgage-backed securities |
427,917 | 452,504 | 467,915 | 494,446 | ||||||||||||
Total |
$ | 1,355,193 | $ | 1,364,538 | $ | 1,513,344 | $ | 1,527,768 | ||||||||
Held-to-maturity: |
||||||||||||||||
Due in one year or less |
$ | 46,655 | $ | 46,693 | $ | 52,214 | $ | 52,196 | ||||||||
Due after one year through five years |
2,130 | 2,145 | 2,130 | 2,136 | ||||||||||||
Due after five years through ten years |
625 | 636 | 625 | 636 | ||||||||||||
Due after ten years |
125 | 129 | 125 | 128 | ||||||||||||
Mortgage-backed securities |
28,377 | 30,294 | 31,515 | 33,552 | ||||||||||||
Total |
$ | 77,912 | $ | 79,897 | $ | 86,609 | $ | 88,648 | ||||||||
At March 31, 2011 and December 31, 2010, $740.5 million and $863.4 million, respectively, of
securities were pledged to secure municipal deposits. At March 31, 2011 and December 31, 2010, the
Company had $154.3 million and $153.4 million, respectively, of securities pledged as collateral on
secured borrowings. At March 31, 2011 and December 31, 2010, the Company also pledged $3.1 million
and $3.4 million, respectively, of securities to secure its borrowing capacity at the Federal
Reserve Bank of Philadelphia.
At March 31, 2011 and December 31, 2010, the Company held stock in the FHLB of Pittsburgh totaling
$22.1 million and $23.2 million, respectively. The Company accounts for the stock based on
guidance which requires that the investment be carried at cost and be evaluated for impairment
based on the ultimate recoverability of the par value. The Company evaluated its holdings in FHLB
stock at March 31, 2011 and believes its holdings in the stock are ultimately recoverable at par.
In addition, the Company does not have operational or liquidity needs that would require a
redemption of the stock in the foreseeable future and therefore determined that the stock was not
other-than-temporarily impaired.
11
Table of Contents
NOTE 5 LOANS
Major classifications of loans at March 31, 2011 and December 31, 2010 are summarized as
follows:
(Dollars in thousands) | March 31, 2011 | December 31, 2010 | ||||||
Commercial: |
||||||||
Commercial real estate |
$ | 601,218 | $ | 600,734 | ||||
Commercial business loans |
436,568 | 441,881 | ||||||
Commercial construction |
266,964 | 268,314 | ||||||
Total Commercial |
1,304,750 | 1,310,929 | ||||||
Residential |
||||||||
Residential real estate |
690,604 | 687,565 | ||||||
Residential construction |
11,223 | 11,157 | ||||||
Total real estate loans |
701,827 | 698,722 | ||||||
Consumer loans: |
||||||||
Home equity |
282,558 | 288,875 | ||||||
Personal |
90,425 | 94,036 | ||||||
Education |
244,751 | 249,696 | ||||||
Automobile |
151,404 | 154,144 | ||||||
Total consumer loans |
769,138 | 786,751 | ||||||
Total loans |
2,775,715 | 2,796,402 | ||||||
Allowance for losses |
(47,411 | ) | (45,366 | ) | ||||
Loans, net |
$ | 2,728,304 | $ | 2,751,036 | ||||
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable losses inherent in the loan
portfolio. We evaluate the adequacy of the allowance for loan losses balance on loans on a
quarterly basis. When additional allowances are necessary, a provision for loan losses is charged
to earnings. The Companys methodology for assessing the appropriateness of the allowance for loan
losses consists of: (1) a specific valuation allowance on identified problem loans; (2) a general
valuation allowance on the remainder of the loan portfolio; and (3) an unallocated component.
Although we determine the amount of each element of the allowance separately, the entire allowance
for loan losses is available to absorb losses in the loan portfolio. The Company charges-off the
collateral deficiency on all loans at 90 days past due and, as a result, no specific valuation
allowance was maintained at March 31, 2011 or December 31, 2010.
The summary activity in the allowance for loan losses for all portfolios for the three months
ended March 31, 2011 and March 31, 2010 and for the twelve months ended December 31, 2010, is as
follows:
Three months ended | Year ended | |||||||||||
March 31, | December 31, | |||||||||||
2011 | 2010 | 2010 | ||||||||||
Balance, beginning of year |
$ | 45,366 | $ | 45,855 | $ | 45,855 | ||||||
Provision for loan losses |
10,000 | 4,950 | 70,200 | |||||||||
Charge-offs |
(9,158 | ) | (4,599 | ) | (71,642 | ) | ||||||
Recoveries |
1,203 | 184 | 953 | |||||||||
Balance, end of year |
$ | 47,411 | $ | 46,390 | $ | 45,366 | ||||||
12
Table of Contents
The following tables set forth the activity in the allowance for loan losses by portfolio for
the three months ended March 31, 2011 and for the twelve months ended December 31, 2010:
CONSUMER | ||||||||||||||||||||||||||||||||||||||||||||||
Home | ||||||||||||||||||||||||||||||||||||||||||||||
COMMERCIAL | RESIDENTIAL | Equity & | ||||||||||||||||||||||||||||||||||||||||||||
March 31, 2011 | Real | Real | Equity | Not | ||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Estate | Business | Construction | Estate | Construction | Lines | Personal | Education | Auto | Allocated | Total | |||||||||||||||||||||||||||||||||||
Allowance for credit
losses: |
||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 14,793 | $ | 14,407 | $ | 9,296 | $ | 1,854 | $ | 30 | $ | 2,136 | $ | 977 | $ | 297 | $ | 1,026 | $ | 550 | $ | 45,366 | ||||||||||||||||||||||||
Charge-offs |
1,541 | 820 | 5,384 | 273 | 36 | 323 | 380 | 50 | 351 | | 9,158 | |||||||||||||||||||||||||||||||||||
Recoveries |
123 | 727 | 57 | | | 101 | 48 | | 147 | | 1,203 | |||||||||||||||||||||||||||||||||||
Provision |
1,602 | 98 | 6,944 | 155 | 194 | 170 | 754 | (25 | ) | 108 | | 10,000 | ||||||||||||||||||||||||||||||||||
Allowance ending
balance |
$ | 14,977 | $ | 14,412 | $ | 10,913 | $ | 1,736 | $ | 188 | $ | 2,084 | $ | 1,399 | $ | 222 | $ | 930 | $ | 550 | $ | 47,411 | ||||||||||||||||||||||||
Allowance ending balance |
||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated
for impairment |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||||||||||
Collectively evaluated
for impairment |
14,977 | 14,412 | 10,913 | 1,736 | 188 | 2,084 | 1,399 | 222 | 930 | 550 | 47,411 | |||||||||||||||||||||||||||||||||||
Total Allowance |
$ | 14,977 | $ | 14,412 | $ | 10,913 | $ | 1,736 | $ | 188 | $ | 2,084 | $ | 1,399 | $ | 222 | $ | 930 | $ | 550 | $ | 47,411 | ||||||||||||||||||||||||
Financing receivable: |
||||||||||||||||||||||||||||||||||||||||||||||
Ending balance |
||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated
for impairment |
$ | 37,850 | $ | 27,719 | $ | 50,027 | $ | 16,059 | $ | | $ | 482 | $ | 264 | $ | | $ | 112 | $ | | $ | 132,513 | ||||||||||||||||||||||||
Collectively evaluated
for impairment |
563,368 | 408,849 | 216,937 | 674,545 | 11,223 | 282,076 | 90,161 | 244,751 | 151,292 | | 2,643,302 | |||||||||||||||||||||||||||||||||||
Total Portfolio |
$ | 601,218 | $ | 436,568 | $ | 266,964 | $ | 690,604 | $ | 11,223 | $ | 282,558 | $ | 90,425 | $ | 244,751 | $ | 151,404 | $ | | $ | 2,775,715 | ||||||||||||||||||||||||
CONSUMER | ||||||||||||||||||||||||||||||||||||||||||||||
Home | ||||||||||||||||||||||||||||||||||||||||||||||
COMMERCIAL | RESIDENTIAL | Equity & | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2010 | Real | Real | Lines of | Not | ||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Estate | Business | Construction | Estate | Construction | Credit | Personal | Education | Auto | Allocated | Total | |||||||||||||||||||||||||||||||||||
Allowance for credit
losses: |
||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 9,842 | $ | 20,515 | $ | 4,344 | $ | 5,460 | $ | 97 | $ | 2,169 | $ | 1,041 | $ | 903 | $ | 1,484 | $ | | $ | 45,855 | ||||||||||||||||||||||||
Charge-offs |
22,210 | 14,505 | 29,631 | 918 | | 2,106 | 984 | 198 | 1,090 | | 71,642 | |||||||||||||||||||||||||||||||||||
Recoveries |
162 | 171 | | 2 | | 71 | 208 | | 339 | | 953 | |||||||||||||||||||||||||||||||||||
Provision |
26,999 | 8,226 | 34,583 | (2,690 | ) | (67 | ) | 2,002 | 712 | (408 | ) | 293 | 550 | 70,200 | ||||||||||||||||||||||||||||||||
Allowance ending
balance |
$ | 14,793 | $ | 14,407 | $ | 9,296 | $ | 1,854 | $ | 30 | $ | 2,136 | $ | 977 | $ | 297 | $ | 1,026 | $ | 550 | $ | 45,366 | ||||||||||||||||||||||||
Allowance ending balance |
||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated
for impairment |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||||||||||
Collectively evaluated
for impairment |
14,793 | 14,407 | 9,296 | 1,854 | 30 | 2,136 | 977 | 297 | 1,026 | 550 | 45,366 | |||||||||||||||||||||||||||||||||||
Total Allowance |
$ | 14,793 | $ | 14,407 | $ | 9,296 | $ | 1,854 | $ | 30 | $ | 2,136 | $ | 977 | $ | 297 | $ | 1,026 | $ | 550 | $ | 45,366 | ||||||||||||||||||||||||
Financing receivable: |
||||||||||||||||||||||||||||||||||||||||||||||
Ending balance |
||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated
for impairment |
$ | 28,769 | $ | 21,634 | $ | 31,519 | $ | 13,414 | $ | 308 | $ | | $ | 89 | $ | | $ | 70- | $ | | $ | 95,803 | ||||||||||||||||||||||||
Collectively evaluated
for impairment |
571,965 | 420,247 | 236,795 | 674,151 | 10,849 | 288,875 | 93,947 | 249,696 | 154,074 | | 2,700,599 | |||||||||||||||||||||||||||||||||||
Total Portfolio |
$ | 600,734 | $ | 441,881 | $ | 268,314 | $ | 687,565 | $ | 11,157 | $ | 288,875 | $ | 94,036 | $ | 249,696 | $ | 154,144 | $ | | $ | 2,796,402 | ||||||||||||||||||||||||
13
Table of Contents
The provision for loan losses charged to expense is based upon past loan loss experience and
an evaluation of estimated losses in the current loan portfolio, including the evaluation of
impaired loans under FASB ASC Topic 310 for Loans and Debt Securities. Under the accounting
guidance FASB ASC Topic 310 for Receivables, for all loan segments a loan is considered to be
impaired when, based upon current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan. An insignificant
delay or insignificant shortfall in amount of payments does not necessarily result in the loan
being identified as impaired. When all or a portion of the loan is deemed uncollectible, the
uncollectible portion is charged off. The measurement is based either on the present value of
expected future cash flows discounted at the loans effective interest rate, or the fair value of
the collateral if the loan is collateral-dependent. Most of our commercial loans are collateral
dependent and therefore the Company uses the value of the collateral to measure the loss. Any
collateral shortfall for loans that are 90 days past due are charged-off. Impairment losses are
included in the provision for loan losses. Large groups of homogeneous loans are collectively
evaluated for impairment, except for those loans restructured under a troubled debt restructuring.
We continue to rigorously review our loan portfolio to ensure that the collateral values remain
sufficient to support the outstanding balances.
Classified Loans
The Banks credit review process includes a risk classification of all commercial and residential
loans that includes pass, special mention, substandard and doubtful. The classification of a loan
may change based on changes in the creditworthiness of the borrower. The description of the risk
classifications are as follows:
A loan is classified as pass when payments are current and it is performing under the original
contractual terms and conditions. A loan is classified as special mention when the borrower
exhibits potential credit weakness or a downward trend which, if not checked or corrected, will
weaken the asset or inadequately protect the banks position. While potentially weak, the borrower
is currently marginally acceptable; no loss of principal or interest is envisioned. A loan is
classified as substandard when the borrower has a well defined weakness or weaknesses that
jeopardize the orderly liquidation of the debt. A substandard loan is inadequately protected by the
current sound worth and paying capacity of the obligor, normal repayment from this borrower is in
jeopardy, and there is a distinct possibility that a partial loss of interest and/or principal will
occur if the deficiencies are not corrected. A loan is classified as doubtful when a borrower has
all weaknesses inherent in one classified as substandard with the added provision that: (1) the
weaknesses make collection of debt in full on the basis of currently existing facts, conditions and
values highly questionable and improbable; (2) serious problems exist to the point where a partial
loss of principal is likely (3) the possibility of loss is extremely high, but because of certain
important, reasonably specific pending factors which may work to the advantage and strengthening of
the assets, its classification as an estimated loss is deferred until its more exact status may be
determined. Pending factors include proposed merger, acquisition, or liquidation procedures,
capital injection, perfecting liens and additional refinancing plans. The Company charges-off the
collateral deficiency on all loans classified as substandard. In all cases, loans are placed on
nonaccrual when 90 days past due or earlier if collection of principal or interest is considered
doubtful.
14
Table of Contents
The following table sets forth the amounts of classified asset categories for the commercial and
residential loan portfolios at March 31, 2011 and December 31, 2010:
Commercial and Residential Loans
Credit Risk Internally Assigned
(Dollars in thousands)
Credit Risk Internally Assigned
(Dollars in thousands)
March 31, 2011 | ||||||||||||||||||||||||
Commercial | Commercial | Commercial | Residential | Residential | ||||||||||||||||||||
Real Estate | Business | Construction | Real Estate | Construction | Total | |||||||||||||||||||
Grade |
||||||||||||||||||||||||
Pass |
$ | 555,561 | $ | 392,216 | $ | 190,418 | $ | 674,545 | $ | 11,223 | $ | 1,823,963 | ||||||||||||
Special Mention |
7,807 | 16,633 | 26,519 | | | 50,959 | ||||||||||||||||||
Substandard |
25,941 | 23,289 | 30,579 | 16,059 | | 95,868 | ||||||||||||||||||
Doubtful |
11,909 | 4,430 | 19,448 | | | 35,787 | ||||||||||||||||||
Total |
$ | 601,218 | $ | 436,568 | $ | 266,964 | $ | 690,604 | $ | 11,223 | $ | 2,006,577 | ||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
Commercial | Commercial | Commercial | Residential | Residential | ||||||||||||||||||||
Real Estate | Business | Construction | Real Estate | Construction | Total | |||||||||||||||||||
Grade |
||||||||||||||||||||||||
Pass |
$ | 558,679 | $ | 408,148 | $ | 204,824 | $ | 674,151 | $ | 10,849 | $ | 1,856,651 | ||||||||||||
Special Mention |
6,375 | 9,557 | 26,711 | | | 42,643 | ||||||||||||||||||
Substandard |
26,044 | 21,794 | 19,996 | 13,414 | 106 | 81,354 | ||||||||||||||||||
Doubtful |
9,636 | 2,382 | 16,783 | | 202 | 29,003 | ||||||||||||||||||
Total |
$ | 600,734 | $ | 441,881 | $ | 268,314 | $ | 687,565 | $ | 11,157 | $ | 2,009,651 | ||||||||||||
The Banks credit review process is based on payment history for all consumer loans. The
collateral deficiency on consumer loans is charged off when they become 90 days delinquent with the
exception of education loans which are guaranteed by the government. The following table sets
forth the consumer loan risk profile based on payment activity at March 31, 2011 and December 31,
2010:
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
(Dollars in thousands)
Credit Risk Profile Based on Payment Activity
(Dollars in thousands)
March 31, 2011 | ||||||||||||||||||||
Home Equity | ||||||||||||||||||||
& Lines of | ||||||||||||||||||||
Credit | Personal | Education | Auto | Total | ||||||||||||||||
Performing |
$ | 282,076 | $ | 90,161 | $ | 219,639 | $ | 151,292 | $ | 743,168 | ||||||||||
Nonperforming |
482 | 264 | 25,112 | 112 | 25,970 | |||||||||||||||
Total |
$ | 282,558 | $ | 90,425 | $ | 244,751 | $ | 151,404 | $ | 769,138 | ||||||||||
December 31, 2010 | ||||||||||||||||||||
Home Equity | ||||||||||||||||||||
& Lines of | ||||||||||||||||||||
Credit | Personal | Education | Auto | Total | ||||||||||||||||
Performing |
$ | 288,875 | $ | 93,947 | $ | 221,808 | $ | 154,074 | $ | 758,704 | ||||||||||
Nonperforming |
| 89 | 27,888 | 70 | 28,047 | |||||||||||||||
Total |
$ | 288,875 | $ | 94,036 | $ | 249,696 | $ | 154,144 | $ | 786,751 | ||||||||||
15
Table of Contents
Loan Delinquencies and Non-accrual Loans
The Company monitors the past due and non-accrual status of loans in determining the loss
classification, impairment status and in determining the allowance for loan losses. Generally, all
loans past due 90 days are put on non-accrual status. Education loans greater than 90 days delinquent
continue to accrue interest as they are government guaranteed with little risk of credit loss.
Once a loan has been put on non-accrual status, it will only be put back on accruing status when
the following criteria are met; 1) the ultimate collectability of all amounts contractually due on
the loan being considered for accrual status are not in doubt, and 2) there is a period of
satisfactory payment performance by the borrower. Generally, a period of satisfactory payment
performance by the borrower is at least six months for a monthly amortizing loan; but could be a
longer period of time depending on the facts and circumstances, including the value of the loan
collateral and consideration of guarantees. For loans in which the principal amortization schedule
is extended or where interest payments are deferred and capitalized; the period of satisfactory
payment performance is assessed in detail as the six month period noted above will most likely not
be long enough to support placing the loan back on accruing status.
The Bank considers a loan a troubled debt restructured (TDR) when the borrower is experiencing
financial difficulty and we grant a concession that we would not otherwise consider but for the
borrowers financial difficulties. A TDR includes a modification of debt terms or assets received
in satisfaction of the debt (includes foreclosure or deed in lieu of foreclosure) or a combination
of types. The Bank evaluates selective criteria to determine if a borrower is experiencing
financial difficulty including the ability of the borrower to obtain funds from sources other than
the Bank at market rates. The Bank considers all TDR loans as impaired loans and they are put on
non-accrual status. The Bank will not consider the loan a TDR if the loan modification was a
result of a customer retention program.
We had 39 TDRs at March 31, 2011 totaling $27.7 million and 24 TDRs at December 31, 2010 totaling
$26.7 million. All TDRs are included in non-accrual loans at March 31, 2011 and December 31,
2010. Management monitors the activity and performance of nonperforming assets on a weekly basis.
16
Table of Contents
The following tables provide information about delinquent and non-accrual loans in our portfolio at
the dates indicated:
Aged Analysis of Past Due and Non-accrual Financing Receivables
As of March 31, 2011
As of March 31, 2011
Recorded | ||||||||||||||||||||||||||||||||
30-59 | 60-89 | > 90 | Investment | |||||||||||||||||||||||||||||
Days | Days | Days | Total | Total | >90 Days | |||||||||||||||||||||||||||
Past | Past | Past | Past | Financing | And | Non- | ||||||||||||||||||||||||||
(Dollars in thousands) | Due | Due | Due | Due | Current | Receivables | Accruing | Accruing | ||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||||||||||
Commercial real estate |
$ | 2,271 | $ | 1,542 | $ | 16,839 | $ | 20,652 | $ | 580,566 | $ | 601,218 | $ | | $ | 30,464 | ||||||||||||||||
Commercial business loans |
2,893 | 4,373 | 11,041 | 18,307 | 418,261 | 436,568 | | 26,843 | ||||||||||||||||||||||||
Commercial construction |
9,136 | 1,108 | 25,479 | 35,723 | 231,241 | 266,964 | | 45,878 | ||||||||||||||||||||||||
Total commercial |
$ | 14,300 | $ | 7,023 | $ | 53,359 | $ | 74,682 | $ | 1,230,068 | $ | 1,304,750 | $ | | $ | 103,185 | ||||||||||||||||
Residential: |
||||||||||||||||||||||||||||||||
Residential real estate |
$ | 3,264 | $ | 1,551 | $ | 9,002 | $ | 13,817 | $ | 676,787 | $ | 690,604 | $ | | $ | 15,953 | ||||||||||||||||
Residential construction |
| | 106 | 106 | 11,117 | 11,223 | | 106 | ||||||||||||||||||||||||
Total residential |
$ | 3,264 | $ | 1,551 | $ | 9,108 | $ | 13,923 | $ | 687,904 | $ | 701,827 | $ | | $ | 16,059 | ||||||||||||||||
Consumer loans: |
||||||||||||||||||||||||||||||||
Home equity & lines of credit |
$ | 777 | $ | 333 | $ | 482 | $ | 1,592 | $ | 280,966 | $ | 282,558 | $ | | $ | 482 | ||||||||||||||||
Personal |
373 | 795 | 187 | 1,355 | 89,070 | 90,425 | | 264 | ||||||||||||||||||||||||
Education |
14,299 | 9,714 | 25,112 | 49,125 | 195,626 | 244,751 | 25,112 | 0 | ||||||||||||||||||||||||
Automobile |
1,296 | 197 | 0 | 1,493 | 149,911 | 151,404 | | 112 | ||||||||||||||||||||||||
Total consumer |
$ | 16,745 | $ | 11,039 | $ | 25,781 | $ | 53,565 | $ | 715,573 | $ | 769,138 | $ | 25,112 | $ | 858 | ||||||||||||||||
Total |
$ | 34,309 | $ | 19,613 | $ | 88,248 | $ | 142,170 | $ | 2,633,545 | $ | 2,775,715 | $ | 25,112 | $ | 120,102 | ||||||||||||||||
Aged Analysis of Past
Due and Non-accrual Financing Receivables
As of December 31, 2010
As of December 31, 2010
Recorded | ||||||||||||||||||||||||||||||||
30-59 | 60-89 | Investment | ||||||||||||||||||||||||||||||
Days | Days | Total | >90 Days | |||||||||||||||||||||||||||||
Past | Past | >90 Days | Total | Financing | And | Non- | ||||||||||||||||||||||||||
(Dollars in thousands) | Due | Due | Past Due | Past Due | Current | Receivables | Accruing | Accruing | ||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||||||||||
Commercial real
estate |
$ | 2,243 | $ | 520 | $ | 16,158 | $ | 18,921 | $ | 581,813 | $ | 600,734 | $ | | $ | 28,769 | ||||||||||||||||
Commercial business |
4,810 | 246 | 6,712 | 11,768 | 430,113 | 441,881 | | 21,634 | ||||||||||||||||||||||||
Commercial
construction |
4,706 | 1,581 | 14,110 | 20,397 | 247,917 | 268,314 | | 31,519 | ||||||||||||||||||||||||
Total commercial |
$ | 11,759 | $ | 2,347 | $ | 36,980 | $ | 51,086 | $ | 1,259,843 | $ | 1,310,929 | $ | | $ | 81,922 | ||||||||||||||||
Residential: |
||||||||||||||||||||||||||||||||
Residential real
estate |
$ | 5,619 | $ | 1,850 | $ | 8,522 | $ | 15,991 | $ | 671,574 | $ | 687,565 | $ | 44 | $ | 13,414 | ||||||||||||||||
Residential
construction |
| | 308 | 308 | 10,849 | 11,157 | | 308 | ||||||||||||||||||||||||
Total residential |
$ | 5,619 | $ | 1,850 | $ | 8,830 | $ | 16,299 | $ | 682,423 | $ | 698,722 | $ | 44 | $ | 13,722 | ||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Home equity and
lines of credit |
$ | 906 | $ | 100 | $ | | $ | 1,006 | $ | 287,869 | $ | 288,875 | $ | | $ | | ||||||||||||||||
Personal |
1,064 | 247 | 8 | 1,319 | 92,717 | 94,036 | | 89 | ||||||||||||||||||||||||
Education |
16,156 | 11,229 | 27,888 | 55,273 | 194,423 | 249,696 | 27,888 | | ||||||||||||||||||||||||
Auto |
1,537 | 315 | | 1,852 | 152,292 | 154,144 | | 70 | ||||||||||||||||||||||||
Total consumer |
$ | 19,663 | $ | 11,891 | $ | 27,896 | $ | 59,450 | $ | 727,301 | $ | 786,751 | $ | 27,888 | $ | 159 | ||||||||||||||||
Total |
$ | 37,041 | $ | 16,088 | $ | 73,706 | $ | 126,835 | $ | 2,669,567 | $ | 2,796,402 | $ | 27,932 | $ | 95,803 | ||||||||||||||||
17
Table of Contents
Impaired Loans
Loans for which it is probable that payment of interest and principal will not be made in
accordance with the contractual terms of the loan agreement are considered impaired. Once a loan
is identified as individually impaired, management measures the extent of the impairment in
accordance with guidance under FASB ASC Topic 310 for Receivables. The fair value of impaired
loans is estimated using one of several methods, including collateral value, market value of
similar debt, enterprise value, liquidation value or discounted cash flows. However, collateral
value is predominantly used to assess the fair value of an impaired loan. Those impaired loans not
requiring an allowance represent loans for which the fair value of the collateral or expected
repayments exceed the recorded investments in such loans.
Components of Impaired Loans
Impaired Loans
Year to Date March 31, 2011
Year to Date March 31, 2011
Interest | ||||||||||||||||||||||||
Income | ||||||||||||||||||||||||
Unpaid | Average | Interest | Recognized | |||||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | Using Cash | |||||||||||||||||||
(Dollars in thousands) | Investment | Balance | Allowance | Investment | Recognized | Basis | ||||||||||||||||||
Impaired loans with no related
specific allowance recorded: |
||||||||||||||||||||||||
Commercial Real Estate |
$ | 30,464 | $ | 41,199 | $ | | $ | 29,835 | $ | | $ | | ||||||||||||
Commercial Business |
26,843 | 32,393 | | 24,211 | | | ||||||||||||||||||
Commercial Construction |
45,878 | 67,609 | | 36,998 | | | ||||||||||||||||||
Residential Real Estate |
15,953 | 16,674 | | 14,964 | | | ||||||||||||||||||
Residential Construction |
106 | 205 | | 27 | | | ||||||||||||||||||
Home Equity and Lines of Credit |
482 | 482 | | 120 | | | ||||||||||||||||||
Personal |
264 | 399 | | 130 | | | ||||||||||||||||||
Education |
| | | | | | ||||||||||||||||||
Auto |
112 | 112 | | 121 | | | ||||||||||||||||||
Total Impaired Loans: |
$ | 120,102 | $ | 159,073 | $ | | $ | 106,406 | $ | | $ | | ||||||||||||
Commercial |
103,185 | 141,201 | | 91,044 | | | ||||||||||||||||||
Residential |
16,059 | 16,879 | | 14,991 | | | ||||||||||||||||||
Consumer |
858 | 993 | | 371 | | | ||||||||||||||||||
Total |
$ | 120,102 | $ | 159,073 | $ | | $ | 106,406 | $ | | $ | | ||||||||||||
18
Table of Contents
Impaired Loans
For the Year Ended December 31, 2010
For the Year Ended December 31, 2010
Interest | ||||||||||||||||||||||||
Income | ||||||||||||||||||||||||
Unpaid | Average | Interest | Recognized | |||||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | Using Cash | |||||||||||||||||||
(Dollars in thousands) | Investment | Balance | Allowance | Investment | Recognized | Basis | ||||||||||||||||||
Impaired loans with no
related specific
allowance recorded: |
||||||||||||||||||||||||
Commercial Real Estate |
$ | 28,769 | $ | 50,044 | $ | | $ | 29,028 | $ | 6 | $ | 795 | ||||||||||||
Commercial Business |
21,634 | 32,114 | | 13,870 | | 71 | ||||||||||||||||||
Commercial Construction |
31,519 | 61,150 | | 33,946 | | | ||||||||||||||||||
Residential Real Estate |
13,414 | 13,823 | | 3,745 | | | ||||||||||||||||||
Residential Construction |
308 | 722 | | 302 | | | ||||||||||||||||||
Consumer Personal |
159 | 159 | | 339 | | | ||||||||||||||||||
Total Impaired Loans: |
$ | 95,803 | $ | 158,012 | $ | | $ | 81,230 | $ | 6 | $ | 866 | ||||||||||||
Commercial |
81,922 | 143,308 | | 76,844 | 6 | 866 | ||||||||||||||||||
Residential |
13,722 | 14,545 | | 4,047 | | | ||||||||||||||||||
Consumer |
159 | 159 | | 339 | | | ||||||||||||||||||
Total |
$ | 95,803 | $ | 158,012 | $ | | $ | 81,230 | $ | 6 | $ | 866 | ||||||||||||
The Company charged off the collateral deficiency on all loans and as a result, no specific
valuation allowance was required for any loans at March 31, 2011.
Analysis of Impaired Loans
For the three months ended | For the year ended | |||||||||||
March 31, | March 31, | December 31, | ||||||||||
(Dollars in thousands) | 2011 | 2010 | 2010 | |||||||||
Average impaired loans |
$ | 106,406 | $ | 71,752 | $ | 81,230 | ||||||
Interest income recognized on impaired loans |
| | 6 | |||||||||
Cash basis interest income recognized on impaired loans |
| 77 | 866 |
Interest income that would have been recorded for the three months ended March 31, 2011, had
impaired loans been current according to their original terms, amounted to approximately $1.7
million.
Nonperforming loans (which includes nonaccrual loans and loans past 90 days or more and still
accruing) at March 31, 2011 and 2010 amounted to approximately $145.2 million and $120.6 million,
respectively, and include $25.1 million and $31.7 million in guaranteed student loans,
respectively. As of March 31, 2011, all impaired loans greater than 90 days delinquent are on a non
accrual status and all payments are applied to principal.
The Company pledges securities and loans to secure its borrowings at the Federal Reserve Bank of
Philadelphia. At March 31, 2011 and December 31, 2010, loans in the amount of $586.3 million and
$619.1 million, respectively, were pledged to secure the Companys borrowing capacity at the
Federal Reserve Bank of Philadelphia.
19
Table of Contents
NOTE 6 OTHER ASSETS
The following table provides selected information on other assets at March 31, 2011 and December
31, 2010:
March 31, | December 31, | |||||||
(Dollars in thousands) | 2011 | 2010 | ||||||
Investments in affordable housing and other
partnerships |
$ | 19,163 | $ | 20,378 | ||||
Cash surrender value of life insurance |
18,800 | 18,629 | ||||||
Prepaid assets |
14,418 | 15,873 | ||||||
Net deferred tax assets |
34,772 | 31,928 | ||||||
Other real estate |
16,449 | 16,694 | ||||||
Accounts receivable ACH |
50,108 | 22,901 | ||||||
Accounts receivable trading securities |
123 | 31,127 | ||||||
Fixed assets held for sale |
3,627 | 3,074 | ||||||
Mortgage servicing rights |
268 | 219 | ||||||
All other assets |
23,148 | 24,339 | ||||||
Total other assets |
$ | 180,876 | $ | 185,162 | ||||
During the quarter, the Company determined that five branches would be consolidated into
existing branch locations. As a result, there were two owned branches that were transferred to
fixed assets held for sale at their fair market value, less costs to sell of $553 thousand, and a
loss of $947 thousand was recorded as part of the restructuring charge in non-interest expense for
the quarter ended March 31, 2011.
The Company follows the authoritative guidance under ASC 860-50 Servicing Assets and Liabilities to
account for its mortgage servicing rights (MSRs). Effective January 1, 2011, the Company elected
the fair value measurement method to value its existing and new mortgage servicing assets at fair
value in accordance with ASC 860-50. Under the fair value measurement method, the Company measures
its MSRs at fair value at each reporting date and reports changes in the fair value of its MSRs in
earnings in the period in which the changes occur.
NOTE 7 DEPOSITS
Deposits at March 31, 2011 and December 31, 2010 are summarized as follows:
March 31, | December 31, | |||||||
(Dollars in thousands) | 2011 | 2010 | ||||||
Non-interest bearing deposits |
$ | 311,890 | $ | 282,050 | ||||
Interest earning checking accounts |
429,371 | 420,873 | ||||||
Municipal checking accounts |
992,227 | 1,072,574 | ||||||
Money market accounts |
625,237 | 622,050 | ||||||
Savings accounts |
712,035 | 696,629 | ||||||
Time deposits |
884,823 | 848,128 | ||||||
Total deposits |
$ | 3,955,583 | $ | 3,942,304 | ||||
20
Table of Contents
NOTE 8 BORROWED FUNDS
Borrowed funds at March 31, 2011 and December 31, 2010 are summarized as follows:
March 31, | December 31, | |||||||
(Dollars in thousands) | 2011 | 2010 | ||||||
FHLB advances |
$ | 100,000 | $ | 113,000 | ||||
Repurchase agreements |
135,000 | 135,000 | ||||||
Federal Reserve overnight borrowings |
| | ||||||
Statutory trust debenture |
25,321 | 25,317 | ||||||
Other |
| | ||||||
Total borrowed funds |
$ | 260,321 | $ | 273,317 | ||||
The Company pledges securities and loans to secure its borrowings at the Federal Reserve Bank
of Philadelphia. At March 31, 2011 and December 31, 2010, loans in the amount of $586.3 million
and $619.1 million, respectively, were pledged to secure the Companys borrowing capacity at the
Federal Reserve Bank of Philadelphia. At March 31, 2011 and December 31, 2010, the Company had
$154.3 million and $153.4 million, respectively, of securities pledged as collateral on secured
borrowings. At March 31, 2011 and December 31, 2010, the Company also pledged $3.1 million and $3.4
million, respectively, of securities to secure its borrowing capacity at the Federal Reserve Bank
of Philadelphia.
NOTE 9 REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by state and federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Banks financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Banks assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Banks capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes that, as of March 31, 2011 and
December 31, 2010, the Bank met all capital adequacy requirements to which it was subject.
As of March 31, 2011 and December 31, 2010, the Bank is considered well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth
in the table. There are no conditions or events that management believes have changed the Banks
categorization since the most recent notification from the FDIC.
21
Table of Contents
The Banks actual capital amounts and ratios (under rules established by the FDIC) are presented in
the following table:
To Be Well Capitalized | ||||||||||||||||||||||||
For Capital | Under Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
Capital | Capital | Capital | ||||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
As of March 31, 2011: |
||||||||||||||||||||||||
Tier 1 Capital (to
average assets) |
429,143 | 9.08 | % | 141,823 | 3.00 | % | 236,371 | 5.00 | % | |||||||||||||||
Tier 1 Capital (to risk
weighted assets) |
429,143 | 15.91 | % | 107,899 | 4.00 | % | 161,848 | 6.00 | % | |||||||||||||||
Total Capital (to risk
weighted assets) |
463,149 | 17.17 | % | 215,798 | 8.00 | % | 269,747 | 10.00 | % | |||||||||||||||
As of December 31, 2010: |
||||||||||||||||||||||||
Tier 1 Capital (to
average assets) |
$ | 432,374 | 8.89 | % | $ | 145,900 | 3.00 | % | $ | 243,200 | 5.00 | % | ||||||||||||
Tier 1 Capital (to risk
weighted assets) |
432,374 | 15.69 | % | 110,200 | 4.00 | % | 165,300 | 6.00 | % | |||||||||||||||
Total Capital (to risk
weighted assets) |
467,051 | 16.95 | % | 220,500 | 8.00 | % | 275,600 | 10.00 | % |
NOTE 10 INCOME TAXES
For the three months ended March 31, 2011, the Company recorded an income tax benefit of $112
thousand, for an effective tax rate of 11.1%, compared to an income tax expense of $1.6 million,
for an effective tax rate of 17.9% for the same period in 2010. The difference was due to a
decrease in income before income taxes of $10.2 million, to a loss of $1.0 million, for the three
months ended March 31, 2011, from income before income taxes of $9.2 million for the three months
ended March 31, 2010. The decrease in income before income taxes for the quarter ended March 31,
2011 as compared to the quarter ended March 31, 2010 was primarily due to an increase in the
provision for loan losses of $5.0 million, a restructuring charge of $4.1 million and a decrease in
gains on the sale of investment securities available-for-sale of $1.8 million.
The income tax rates differ from the statutory rate of 35% principally because of tax-exempt
investments, non-taxable income related to bank-owned life insurance, state and local income taxes
and tax credits received on affordable housing partnerships. Tax-exempt income, state and local
income taxes and federal income tax credits increased (reduced) the effective tax rates by (19.3%),
3.5% and (31.3%) in the effective income tax rate calculation for 2011, respectively, and (9.5%),
(8.1%), and (10.5%) for 2010, respectively.
As of March 31, 2011, the Companys net deferred tax assets were $34.8 million. We regularly
evaluate the realizability of deferred tax asset positions. In determining whether a valuation
allowance is necessary, we consider the level of taxable income in prior years to the extent that
carrybacks are permitted under current tax laws, as well as estimates of future pre-tax and taxable
income and tax planning strategies that would, if necessary, be implemented. We currently maintain
a valuation allowance for certain state net operating losses, charitable contribution carryovers
and other-than-temporary impairments, and management believes it is more likely than not that such
deferred tax assets will not be realized. We expect to realize our remaining deferred tax assets
over the allowable carryback and/or carryforward periods. Therefore, no valuation allowance is
deemed necessary against our federal or remaining state deferred tax assets as of March 31, 2011.
However, if an unanticipated event occurred that materially changed pre-tax and taxable income in
future periods, an increase in the valuation allowance may become necessary.
22
Table of Contents
NOTE 11 PENSION AND POSTRETIREMENT BENEFIT PLANS
The Bank has non-contributory defined benefit pension plans covering most of its employees.
Additionally, the Company sponsors nonqualified supplemental employee retirement plans for certain
participants.
In 2010, the Banks two qualified defined benefit plans: The Employees Pension and Retirement Plan
of Beneficial Mutual Savings Bank and the Farmers & Mechanics Bank Restated Pension Plan were
merged into one plan under the name of the Beneficial Mutual Savings Bank Consolidated Pension
Plan. The merger of the plans did not impact participant benefits.
The Bank also provides certain postretirement benefits to qualified former employees. These
postretirement benefits principally pertain to certain health insurance and life insurance
coverage. Information relating to these employee benefits program are included in the table that
follows.
Effective June 30, 2008, the defined pension benefits for Bank employees were frozen at the current
levels. In 2008, the Company enhanced its 401(k) Plan and combined it with its Employee Stock
Ownership Plan (ESOP) to fund employer contributions.
The components of net pension cost are as follows:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
(Dollars in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Service Cost |
$ | | $ | | $ | 60 | $ | 53 | ||||||||
Interest Cost |
954 | 964 | 347 | 332 | ||||||||||||
Expected return on plan assets |
(1,026 | ) | (927 | ) | | | ||||||||||
Amortization of loss (gain) |
237 | 215 | 67 | (2 | ) | |||||||||||
Amortization of prior service cost |
| | 36 | 47 | ||||||||||||
Amortization of transition obligation |
| | 41 | 41 | ||||||||||||
Net periodic pension cost |
$ | 165 | $ | 252 | $ | 551 | $ | 471 | ||||||||
The Companys funding policy is to contribute annually an amount, as determined by consulting
actuaries and approved by the Board of Directors, which can be deducted for federal income tax
purposes.
NOTE 12 STOCK BASED COMPENSATION
Stock-based compensation is accounted for in accordance with FASB ASC 718 Compensation-Stock
Compensation. The Company establishes fair value for its equity awards to determine their cost.
The Company recognizes the related expense for employees over the appropriate vesting period, or
when applicable, service period, using the straight-line method. However, consistent with the
guidance, the amount of stock-based compensation recognized at any date must at least equal the
portion of the grant date value of the award that is vested at that date. As a result, it may be
necessary to recognize the expense using a ratable method.
The Companys 2008 Equity Incentive Plan (EIP) authorizes the issuance of shares of common stock
pursuant to awards that may be granted in the form of stock options to purchase common stock
(options) and awards of shares of common stock (stock awards). The purpose of the Companys
stock-based incentive plans is to attract and retain personnel for positions of substantial
responsibility and to provide additional incentive to certain officers, directors and employees. In
order to fund grants of stock awards under the EIP, the Equity Incentive Plan Trust (the Trust)
purchased 1,612,386 shares of Company common stock in the open market for approximately $19.0
million during the year ended December 31, 2008. The Company made sufficient contributions to the
Trust to fund the stock purchases. The acquisition of these shares by the Trust reduced the
Companys outstanding additional paid in capital. The EIP shares will generally vest at a rate of
20% over five years. As of March 31, 2011, 142,500 shares were fully vested and 123,000 shares were
forfeited. All grants that were issued contain a service condition in order for the shares to vest.
Awards of common stock include awards to certain officers of the Company that will vest only if a
return on average assets of 1% or within the top 25% of the SNL index of nationwide thrifts with
total assets between $1.0 billion and $10.0 billion nationwide is attained.
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Compensation expense related to the stock awards is recognized ratably over the five year
vesting period in an amount which totals the market price of the Companys stock at the grant date.
The expense recognized for the three months ended March 31, 2011 was $317 thousand, compared to
$300 thousand for the three months ended March 31, 2010.
The following table summarizes the non-vested stock award activity for the three months ended March
31, 2011:
Weighted | ||||||||
Number of | Average | |||||||
Summary of Non-vested Stock Award Activity | Shares | Grant Price | ||||||
Non-vested Stock Awards outstanding, January 1, 2011 |
837,500 | $ | 11.00 | |||||
Issued |
| | ||||||
Vested |
(12,500 | ) | 9.05 | |||||
Forfeited |
(39,000 | ) | 10.76 | |||||
Non-vested Stock Awards outstanding, March 31, 2011 |
786,000 | $ | 11.04 | |||||
The following table summarizes the non-vested stock award activity for the three months ended
March 31, 2010:
Weighted | ||||||||
Number of | Average | |||||||
Summary of Non-vested Stock Award Activity | Shares | Grant Price | ||||||
Non-vested Stock Awards outstanding, January 1, 2010 |
836,500 | $ | 11.28 | |||||
Issued |
150,500 | 9.70 | ||||||
Vested |
(6,000 | ) | 8.35 | |||||
Forfeited |
(76,500 | ) | 11.13 | |||||
Non-vested Stock Awards outstanding, March 31, 2010 |
904,500 | $ | 11.05 | |||||
The fair value of the 12,500 shares vested during the three months ended March 31, 2011 was
$110 thousand. The value of the 6,000 awards vested in the three months ending March 31, 2010 was
$70 thousand.
The EIP authorizes the grant of options to officers, employees, and directors of the company to
acquire shares of common stock with an exercise price equal to the fair value of the common stock
at the grant date. Options expire ten years after the date of grant, unless terminated earlier
under the option terms. Options are granted at the then fair market value of the Companys stock.
The options were valued using the Black-Scholes option pricing model. During the three months ended
March 31, 2011, the Company did not grant any options compared to 276,600 options that were granted
during the same period ended March 31, 2010. All options issued contain service conditions based
on the participants continued service. The options generally vest and are exercisable over five
years. Compensation expense for the options totaled $290 thousand for the three months ended March
31, 2011 compared to $300 thousand for the three months ended March 31, 2010.
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A summary of option activity as of March 31, 2011 and changes during the three month period is
presented below:
Weighted Exercise | ||||||||
Number of Options | Price per Shares | |||||||
January 1, 2011 |
2,001,950 | $ | 11.21 | |||||
Granted |
| | ||||||
Exercised |
| | ||||||
Forfeited |
(85,350 | ) | 10.82 | |||||
Expired |
(4,900 | ) | 11.22 | |||||
March 31, 2011 |
1,911,700 | $ | 11.23 | |||||
A summary of option activity as of March 31, 2010 and changes during the three month period is
presented below:
Weighted Exercise | ||||||||
Number of Options | Price per Shares | |||||||
January 1, 2010 |
1,922,250 | $ | 11.44 | |||||
Granted |
276,600 | 9.70 | ||||||
Exercised |
| | ||||||
Forfeited |
(111,000 | ) | 11.57 | |||||
March 31, 2010 |
2,087,850 | $ | 11.20 | |||||
The weighted average remaining contractual term was approximately 7.61 years for options
outstanding as of March 31, 2011. Exercisable options totaled 743,960 and 393,050 at March 31,
2011 and 2010, respectively.
As of March 31, 2011, there was $3.3 million of total unrecognized compensation cost related to
options and $5.7 million in unrecognized compensation cost related to non-vested stock awards,
granted under the EIP. As of March 31, 2010, there was $5.0 million in unrecognized compensation
cost related to options and $8.0 million in unrecognized compensation cost related to non-vested
stock awards, granted under the EIP. The average weighted lives for the option expense were 2.73
and 3.72 years as of March 31, 2011 and March 31, 2010, respectively. The average weighted lives
for the stock award expense were 2.85 and 3.82 years at March 31, 2011 and March 31, 2010,
respectively.
NOTE 13 COMMITMENTS AND CONTINGENCIES
At March 31, 2011 and December 31, 2010, the Company had outstanding commitments to purchase or
make loans aggregating approximately $53.0 million and $107.2 million, respectively, and
commitments to customers on available lines of credit of $174.0 million and $176.8 million,
respectively, at competitive rates. Commitments are issued in accordance with the same policies
and underwriting procedures as settled loans. We have a reserve for our commitments and
contingencies of $0.4 million at March 31, 2011 and December 31, 2010.
In April 2011, we were notified of a lawsuit that was filed with the Court of Common Pleas of
Philadelphia County against the Bank related to the notices that we issue to customers in
connection with automobile repossessions. Pennsylvania law requires parties who use self-help
repossession to provide consumers with a proper repossession and redemption notice shortly after
repossession (the Repo Notice) and a deficiency notice (the Deficiency Notice) shortly after
sale. The Plaintiff is alleging that Beneficials Repo Notice and Deficiency Notice fail to comply
with Pennsylvania law. We have engaged outside counsel to assist with the matter to determine the
merits of the above claims and any potential exposure. At the present time, we cannot estimate the
potential loss associated with this claim. We will continue to assess this claim in future
periods.
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Aside from the litigation discussed above, the Company is also involved in routine legal
proceedings in the ordinary course of business. Such routine legal proceedings, in the aggregate,
are believed by management to be immaterial to the Companys financial condition, results of
operations and cash flows.
NOTE 14 RECENT ACCOUNTING PRONOUNCEMENTS
In April 2011, the FASB issued Accounting Standards Update (ASU) 2011-02, Receivables (Topic 310):
A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The
amendments in this Update clarify the guidance on a creditors evaluation of whether it has granted
a concession and whether a debtor is experiencing financial difficulties. In addition, the
amendments to Topic 310 clarify that a creditor is precluded from using the effective interest test
in the debtors guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating
whether a restructuring constitutes a troubled debt restructuring. This update is intended to
facilitate a more consistent application of U.S. GAAP for debt restructurings. The amendments in
this update are effective for the first interim or annual period beginning on or after June 15,
2011, and should be applied retrospectively to the beginning of the annual period of the adoption.
The Company will comply with the guidance and its effective date. The Company does not anticipate
any material impact to the financial statements related to this guidance.
In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the Effective
Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in ASU
2011-01 temporarily delay the effective date of the disclosures about trouble debt restructuring in
Update No. 2010-20, Receivables (Topic 310): Disclosures about the Quality of Financing Receivables
and the Allowance for Credit Losses, for public entities. The delay is intended to allow the FASB
time to complete its deliberations on what constitutes trouble debt restructuring. The effective
date of the new disclosures about troubled debt restructuring for public entities and the guidance
for determining what constitutes a troubled debt restructuring will then be coordinated. Currently
that guidance is anticipated to be effective for interim and annual periods ending after June 15,
2011. The deferral in ASU 2011-01 is effective January 19, 2011 and relates to ASU 2010-20 as
reported in the third quarter of 2010 accounting pronouncements and outlined below.
In December 2010, FASB issued ASU 2010-29 Business Combinations-Disclosure of Supplementary Pro
Forma Information for Business Combinations. The amendments in this update specify that if a
public company presents comparative financial statements, the entity should disclose revenue and
earnings of the combined entity as though the business combination that occurred during the current
year had occurred as of the beginning of the comparable prior annual reporting period only. The
amendments also expand the supplemental pro forma disclosures to include a description of the
nature and the amount of material, nonrecurring pro forma adjustments directly attributable to the
business combination included in the reported pro forma revenue and earnings. The amendments are
effective prospectively for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2010. Early
adoption is permitted. This amendment will be reviewed in further detail when/if the Company plans
on acquiring new businesses.
In December 2010, FASB issued ASU 2010-28 Intangibles-Goodwill and Other-When to Perform step 2 of
the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The
amendments of this update affect all entities that have recognized Goodwill and have one or more
reporting units whose carrying value for purposes of performing Step
1 of the Goodwill impairment
test is zero or negative. The amendments are effective for fiscal years, and interim periods within
those beginning after December 15, 2010. Early adoption is not permitted. For the quarter ended
March 31, 2011, the Company has adopted and complied with the provisions of this guidance. The
adoption of this guidance did not have a material impact on the unaudited interim condensed
consolidated financial statements.
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In July 2010, the FASB issued ASU 2010-20 Receivables (Topic 310): Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses. As a result of this update
the financial statements will provide greater transparency about the entitys allowance for credit
losses and the credit quality of its financing receivables. This update affects any entity with
financing receivables, excluding short term trade accounts receivable or receivables measured at
fair value or lower of cost or
fair value. Traditional banking institutions, such as the Bank, that currently measure a large
number of financing receivables at amortized cost will be affected to a greater extent than brokers
and dealers in securities and investment companies that currently measure most financing
receivables at fair value. This guidance will impact the Companys interim and annual reporting,
as this amendment is effective for reporting periods ending on or after December 15, 2010 and the
provisions of the guidance are included in Note 5.
In April 2010, the FASB issued ASU 2010-18 Receivables (Topic 310): Effect of a Loan Modification
When the Loan is Part of a Pool That Is Accounted for as a Single Asset. This update affects any
entity that accounts for loans with similar risk characteristics as an aggregate pool and
subsequently modifies one or more of these loans. This pending change addresses loans that were
acquired with deteriorated credit. The amendment states that modifications of loans that are
accounted for within a pool do not result in the removal of those loans from the pool. Even if the
modification would otherwise cause a loan to be a trouble debt restructuring, the loans would not
be removed from the pool. An entity will continue to be required to consider whether the pool of
assets in which the loan is included is impaired if expected cash flows for the pool change. This
amendment is effective for interim and annual periods ending on or after July 15, 2010. This
guidance did not impact the Companys current loan portfolio but, may be applicable for future
business acquisitions of the Company.
In February 2010, the FASB issued ASU 2010-09 Subsequent Events (Topic 855): Amendments to
Certain Recognition and Disclosure Requirements. This update requires SEC filers to evaluate
subsequent events through the date the financial statements are issued. These amendments remove the
requirement for a SEC filer to disclose the evaluation date in both issued and revised financial
statements. Revised financial statements are a result of correction of an error or a retrospective
application of GAAP. Upon revising its financial statements, a filer is required to review
subsequent events through the revised date. This amendment is effective for interim or annual
periods ending after June 15, 2010. The Company has adopted and complied with the provisions of
this guidance. The adoption of this guidance did not have a material impact on the unaudited
interim condensed consolidated financial statements.
In January 2010, the FASB issued ASU 2010-06 Fair Value Measurements and Disclosures (topic 958):
Improving Disclosures about Fair Value Measurements. This amendment requires disclosures for
transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amount of
significant transfers in and out of Level 1 and 2 fair value measurements and describe the reasons
for the transfers. Additionally, for the activity in Level 3 fair value measurements, a reporting
entity should present separately information about purchases, sales, issuance and settlements on a
gross basis rather than on a net number. The guidance clarifies existing disclosures for level of
disaggregation. The guidance requires fair value measurement disclosures for each class of assets
and liabilities. Additionally, the guidance requires disclosures about inputs and valuation
techniques. The majority of the new requirements are effective for interim and annual reporting
periods for years beginning after December 15, 2009. The disclosures regarding the roll forward of
activity for Level 3 fair value measurements are effective for fiscal years beginning on or after
December 15, 2010. For the quarter ended March 31, 2010, the Company has adopted the required
disclosures. See Note 15 Fair Value of Financial Instruments.
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NOTE 15 FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows the authoritative guidance under FASB ASC Topic 820 for Fair Value Measurements
and Disclosures. The authoritative guidance does not require any new fair value measurements. The
definition of fair value retains the exchange price notion in earlier definitions of fair value.
The guidance clarifies that the exchange price is the price in an orderly transaction between
market participants to sell the asset or transfer the liability in the market in which the
reporting entity would transact for the asset or liability. The definition focuses on the price
that would be received to sell
the asset or paid to transfer the liability (an exit price), not the price that would be paid to
acquire the asset or received to assume the liability (an entry price). The guidance emphasizes
that fair value is a market-based measurement, not an entity-specific measurement.
Fair value is based on quoted market prices, when available. If listed prices or quotes are not
available, fair value is based on fair value models that use market participant or independently
sourced market data which include: discount rate, interest rate yield curves, credit risk, default
rates and expected cash flow assumptions. In addition, valuation adjustments may be made in the
determination of fair value. These fair value adjustments may include amounts to reflect counter
party credit quality, creditworthiness, liquidity and other unobservable inputs that are applied
consistently over time. These adjustments are estimated and, therefore, subject to significant
management judgment, and at times, may be necessary to mitigate the possibility of error or
revision in the model-based estimate of the fair value provided by the model. The methods
described above may produce fair value calculations that may not be indicative of the net
realizable value. While the Company believes its valuation methods are consistent with other
financial institutions, the use of different methods or assumptions to determine fair values could
result in different estimates of fair value.
FASB ASC Topic 820 for Fair Value Measurements and Disclosures describes three levels of inputs
that may be used to measure fair value:
Level 1 | Quoted prices in active markets for identical assets or
liabilities. Level 1 assets and liabilities include debt,
equity securities and derivative contracts that are traded in
an active exchange market as well as certain U.S. Treasury
securities that are highly liquid and actively traded in
over-the-counter markets. |
|
Level 2 | Observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are
observable or can be corroborated by observable market data
for substantially the full term of the assets or liabilities.
Level 2 assets and liabilities include debt securities with
quoted market prices that are traded less frequently than
exchange traded assets and liabilities. The values of these
items are determined using pricing models with inputs
observable in the market or can be corroborated from
observable market data. This category generally includes U.S.
Government and agency mortgage-backed debt securities,
corporate debt securities and derivative contracts. |
|
Level 3 | Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the
assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing
models, discounted cash flow methodologies, or similar
techniques, as well as instruments for which the determination
of fair value requires significant management judgment or
estimation. |
At the end of each quarter, the Company assesses the valuation hierarchy for each asset or
liability measured. From time to time, assets or liabilities will be transferred within hierarchy
levels as a result of changes in valuation methodologies used. There were no transfers between
levels during the three months ended March 31, 2011.
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In addition, the authoritative guidance requires the Company to disclose the fair value for
financial assets on both a recurring and non-recurring basis. The Company measures loans held for
sale, impaired loans, SBA servicing assets, restricted equity investments and loans transferred to
other real estate owned at fair value on a non-recurring basis. However, from time to time, a loan
is considered impaired and an allowance for loan losses is established. Loans for which it is
probable that payment of interest and principal will not be made in accordance with the contractual
terms of the loan agreement are considered impaired. Once a loan is identified as individually
impaired, management measures impairment in accordance with guidance under FASB ASC Topic 310 for
Receivables. The fair value of impaired loans is estimated using one of several methods, including
collateral value, market value of similar debt, enterprise value, liquidation value and discounted
cash flows. Those impaired loans not requiring an allowance represent loans for which the fair
value of the expected repayments or collateral exceed the recorded investments in such loans. At
March 31, 2011, substantially all of the total impaired loans were evaluated based on the fair
value of the collateral. In accordance with authoritative guidance, impaired loans where an
allowance is established based on the fair value of collateral require classification in the
fair value hierarchy. When the fair value of the collateral is based on an observable market price
or a current appraised value, the Company records the impaired loan as a non-recurring Level 3
valuation.
Those assets which will continue to be measured at fair value on a recurring basis at March 31,
2011 and December 31, 2010 are as follows:
Category Used for Fair Value Measurement | ||||||||||||||||
As of March 31, 2011 | ||||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
||||||||||||||||
Mortgage servicing rights |
$ | 268 | $ | 268 | ||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. GSE and agency notes |
$ | 721,610 | 721,610 | |||||||||||||
GNMA guaranteed mortgage certificates |
8,787 | 8,787 | ||||||||||||||
Collateralized mortgage obligations (CMOs) |
||||||||||||||||
Government (GNMA) guaranteed CMOs |
7,293 | 7,293 | ||||||||||||||
Agency CMOs |
22,136 | 22,136 | ||||||||||||||
Non-agency CMOs |
50,051 | 50,051 | ||||||||||||||
Other mortgage-backed securities |
443,717 | 443,717 | ||||||||||||||
Municipal bonds |
||||||||||||||||
General obligation municipal bonds |
76,974 | 76,974 | ||||||||||||||
Revenue municipal bonds |
18,691 | 18,691 | ||||||||||||||
Pooled trust preferred securities (financial industry) |
15,279 | 15,279 | ||||||||||||||
Equity securities (financial industry) |
$ | 3,687 | 3,687 | |||||||||||||
Money market funds |
14,861 | 14,861 | ||||||||||||||
Mutual funds |
1,989 | 1,989 | ||||||||||||||
Certificates of deposit |
313 | 313 | ||||||||||||||
Total |
$ | 20,850 | $ | 1,349,259 | $ | 15,547 | $ | 1,385,656 | ||||||||
Category Used for Fair Value Measurement | ||||||||||||||||
As of December 31, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Trading Securities |
$ | 6,316 | $ | 6,316 | ||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. GSE and agency notes |
827,895 | 827,895 | ||||||||||||||
GNMA guaranteed mortgage certificates |
8,989 | 8,989 | ||||||||||||||
Collateralized mortgage obligations (CMOs) |
||||||||||||||||
Government (GNMA) guaranteed CMOs |
7,979 | 7,979 | ||||||||||||||
Agency CMOs |
26,944 | 26,944 | ||||||||||||||
Non-agency CMOs |
56,537 | 56,537 | ||||||||||||||
Other mortgage-backed securities |
485,457 | 485,457 | ||||||||||||||
Municipal bonds |
||||||||||||||||
General obligation municipal bonds |
80,265 | 80,265 | ||||||||||||||
Revenue municipal bonds |
18,867 | 18,867 | ||||||||||||||
Pooled trust preferred securities (financial industry) |
$ | 14,522 | 14,522 | |||||||||||||
Equity securities (financial industry) |
$ | 3,235 | 3,235 | |||||||||||||
Money market funds |
8,963 | 8,963 | ||||||||||||||
Mutual funds |
2,025 | 2,025 | ||||||||||||||
Certificates of deposit |
313 | 313 | ||||||||||||||
Total |
$ | 14,536 | $ | 1,519,249 | $ | 14,522 | $ | 1,548,307 | ||||||||
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Level 1 Valuation Techniques and Inputs
Included in this category are equity securities, money market funds, mutual funds and certificates
of deposit. To estimate the fair value of these securities, the Company utilizes observable
quotations for the indicated security.
Level 2 Valuation Techniques and Inputs
The majority of the Companys investment securities are reported at fair value utilizing Level 2
inputs. Prices of these securities are obtained through independent, third-party pricing services.
Prices obtained through these sources include market derived quotations and matrix pricing and may
include both observable and unobservable inputs. Fair market values take into consideration data
such as dealer quotes, new issue pricing, trade prices for similar issues, prepayment estimates,
cash flows, market credit spreads and other factors. The Company reviews the output from the
third-party providers for reasonableness by the pricing consistency among securities with similar
characteristics, where available, and comparing values with other pricing sources available to the
Company. In general, the Level 2 valuation process uses the following significant inputs in
determining the fair value of our different classes of investments:
GSE and Agency Notes. To estimate the fair value of these securities, the Company utilizes an
industry standard pricing service. For pricing evaluations, an Option Adjusted Spread (OAS) model
is incorporated to adjust spreads of issues that have early redemption features.
GNMA Guaranteed Mortgage Certificates. To estimate the fair value of the securities, the Company
utilizes an industry standard pricing service. Pricing evaluations are based on issuer type,
coupon, maturity, and original weighted average maturity. The pricing services seasoned evaluation
model runs a daily cash flow incorporating projected prepayment speeds to generate an average file
for each pool. The appropriate spread is applied to the point on the Treasury curve that is equal
to the average life of any given pool. This is the yield by which the cash flows are discounted.
Additionally, for adjustable rate mortgages, the model takes into account indices, margin, periodic
and life caps, reset dates of the coupon and the convertibility of the bond.
GNMA Collateralized Mortgage Obligations. To estimate the fair value of the securities, the Company
utilizes an industry standard pricing service. For pricing evaluations, the pricing service obtains
and applies available trade information, dealer quotes, market color, spreads, bids, offers,
prepayment information, U.S. Treasury curves, swap curves and to be announced forward contract on
MBSs values (TBA).
Agency CMOs. To estimate the fair value of the securities, the Company utilizes an industry
standard pricing service. For pricing evaluations, the pricing service, in general, obtains and
applies available trade information, dealer quotes, market color, spreads, bids, offers, prepayment
information, U.S. Treasury curves, swap curves and TBA values. For CMOs, depending upon the
characteristics of a given tranche, a volatility-driven, multi-dimensional single cash flow stream
model or option-adjusted spread (OAS) model is used.
Non-Agency (whole loan) CMOs. Included in this category are pass-through certificates, 15-year
sequential and senior support pass-through certificates. To estimate the fair value of the
securities, the Company utilizes a brokers approach to pricing which is cognizant of the current
whole loan CMO market environment.
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Table of Contents
Other Residential Mortgage-backed Securities. Included in this category are Fannie Mae and Freddie
Mac fixed rate residential mortgage backed securities and Fannie Mae and Freddie Mac Adjustable
Rate residential mortgage backed securities. To estimate the fair value of the securities, the
Company utilizes an industry standard pricing service. Pricing evaluations are based on issuer
type, coupon, maturity, and original weighted average maturity. The pricing services seasoned
evaluation model runs a daily cash flow incorporating projected prepayment speeds to generate an
average life for each pool. The
appropriate spread is applied to the point on the Treasury curve that is equal to the average life
of any given pool. This is the yield by which the cash flows are discounted. Additionally, for
adjustable rate mortgages, the model takes into account indices, margin, periodic and life caps,
reset dates of the coupon and the convertibility of the bond.
General Obligation Municipal Bonds. Included in this category are securities issued by Pennsylvania
municipalities and/or school districts rated A or better by S&P or rated Aa3 or better by Moodys..
To estimate the fair value of these securities, the Company utilizes an industry standard pricing
service. For pricing, the pricing services evaluators build internal yield curves, which are
adjusted throughout the day based on trades and other pertinent market information. Evaluators
apply this information to bond sectors, and individual bond evaluations are then extrapolated.
Within a given sector, evaluators have the ability to make daily spread adjustments for various
attributes that include, but are not limited to, discounts, premiums, credit, alternative minimum
tax (AMT), use of proceeds, and callability.
Revenue Municipal Bonds. These securities are issued by the Pennsylvania Housing Finance Agency and
rated Aa2 by Moodys. To estimate the fair value of the securities, the Company utilizes an
industry standard pricing service. For pricing, the pricing services evaluators build internal
yield curves, which are adjusted throughout the day based on trades and other pertinent market
information. Evaluators apply this information to bond sectors, and individual bond evaluations are
then extrapolated. Within a given sector, evaluators have the ability to make daily spread
adjustments for various attributes that include, but are not limited to, discounts, premiums,
credit, alternative minimum tax (AMT), use of proceeds, and callability.
Level 3 Valuation Techniques and Inputs
Pooled Trust Preferred Securities. The underlying value of pooled trust preferred securities
consists of financial services debt. These investments are thinly traded and the Company determines
the estimated fair values for these securities by using observable transactions of similar rated
single trust preferred issues to obtain an average discount margin which was applied to a cash flow
analysis model in determining the fair value of our pooled trust preferred securities. The fair
market value estimates we assign to these securities assume liquidation in an orderly fashion and
not under distressed circumstances. Due to the continued illiquidity and credit risk of certain
securities, the market value of these securities is highly sensitive to assumption changes and
market volatility.
Mortgage Servicing Rights. The Company determines the fair value of its MSRs by estimating the
amount and timing of future cash flows associated with the servicing rights and discounting the
cash flows using market discount rates. The valuation included the application of certain
assumptions made by management of the Bank, including prepayment projections, and prevailing
assumptions used in the marketplace at the time of the valuation.
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The table below presents all assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the three months ended March 31, 2011.
Level 3 Investments Only | Three Months Ended | |||||||
(Dollars in thousands) | March 31, 2011 | |||||||
Available-for-Sale | Mortgage Servicing | |||||||
Securities | Rights | |||||||
Balance, January 1, 2011 |
$ | 14,522 | * $268 | |||||
Total gains or losses realized/(unrealized): |
||||||||
Included in earnings |
| | ||||||
Included in other comprehensive income |
756 | | ||||||
Payments |
(11 | ) | | |||||
Net accretion / (amortization) |
12 | | ||||||
Purchases, issuances and settlements |
| | ||||||
Transfers in and/or out of Level 3 |
| | ||||||
Balance, March 31, 2011 |
$ | 15,279 | $ | 268 | ||||
* | As described in Note 6 Other Assets, effective January 1, 2011, the Company elected the fair
value measurement method to account for its mortgage servicing rights |
Level 3 Investments Only | Three Months Ended | |||
(Dollars in thousands) | March 31, 2010 | |||
Available-for-Sale Securities | ||||
Balance, January 1, 2010 |
$ | 18,797 | ||
Total gains or losses realized/(unrealized): |
||||
Included in earnings |
| |||
Included in other comprehensive income |
314 | |||
Payments |
(28 | ) | ||
Purchases, issuances and settlements |
| |||
Transfers in and/or out of Level 3 |
| |||
Balance, March 31, 2010 |
$ | 19,083 | ||
The Company also has assets that, under certain conditions, are subject to measurement at fair
value on a non-recurring basis. These include assets that are measured at the lower of cost or
market value and had a fair value below cost at the end of the period as summarized below (in
thousands). A loan is impaired when, based on current information, the Company determines that it
is probable that the Company will be unable to collect amounts due according to the terms of the
loan agreement. The Companys impaired loans at March 31, 2011 are measured based on the estimated
fair value of the collateral since the loans are collateral dependent.
Assets measured at fair value on a nonrecurring basis are as follows:
At | ||||||||||||||||||||
(Dollars in thousands) | March 31, 2011 | Level 1 | Level 2 | Level 3 | Gain/(Losses) | |||||||||||||||
Impaired Loans |
$ | 25,801 | | | $ | 25,801 | $ | (9,160 | ) | |||||||||||
Other real estate owned |
| | | | 125 | |||||||||||||||
Long lived assets held for sale |
615 | | 615 | | (627 | ) |
At | ||||||||||||||||||||
(Dollars in thousands) | March 31, 2010 | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Goodwill |
$ | 110,486 | | | $ | 110,486 | ||||||||||||||
Impaired Loans |
71,930 | | | 71,930 |
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In accordance with FASB ASC Topic 825 for Financial Instruments, Disclosures about Fair Value
of Financial Instruments, the Company is required to disclose the fair value of financial
instruments. The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a distressed sale. Fair value is best determined
using observable market prices, however for many of the Companys financial instruments no quoted
market prices are readily available. In instances where quoted market prices are not readily
available, fair value is determined using present value or other techniques appropriate for the
particular instrument. These techniques involve some degree of judgment, and as a result, are not
necessarily indicative of the amounts the Company would realize in a current market exchange.
Different assumptions or estimation techniques may have a material effect on the estimated fair
value.
Fair Value of Financial Instruments | ||||||||||||||||
At | At | |||||||||||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 265,587 | $ | 265,587 | $ | 90,299 | $ | 90,299 | ||||||||
Trading securities |
| | 6,316 | 6,316 | ||||||||||||
Investment securities |
1,485,382 | 1,487,367 | 1,651,844 | 1,653,883 | ||||||||||||
Loans net |
2,728,304 | 2,766,886 | 2,751,036 | 2,773,373 | ||||||||||||
Liabilities: |
||||||||||||||||
Checking deposits |
1,733,488 | 1,733,488 | 1,787,006 | 1,787,006 | ||||||||||||
Money market and savings accounts |
1,337,271 | 1,337,271 | 1,307,170 | 1,307,170 | ||||||||||||
Time deposits |
884,824 | 890,395 | 848,128 | 855,045 | ||||||||||||
Borrowed funds |
260,321 | 261,227 | 273,317 | 274,930 |
Cash and Cash Equivalents - For cash and cash equivalents, the carrying amount is a
reasonable estimate of fair value.
Investments - The fair value of investment securities, mortgage-backed securities and
collateralized mortgage obligations is based on quoted market prices, dealer quotes, yield curve
analysis, and prices obtained from independent pricing services. The fair value of CDOs is
determined by using observable transactions of similar rated singe trust preferred issues to obtain
an average discount margin which is applied to a cash flow analysis model. The fair value of
Federal Home Loan Bank stock is not determinable since there is no active market for the stock.
Loans Receivable - The fair value of loans is estimated by discounting the future cash flows using
the current rate at which similar loans would be made to borrowers with similar credit and for the
same remaining maturities. Additionally, to be consistent with the requirements under FASB ASC
Topic 820 for Fair Value Measurements and Disclosures, the loans were valued at a price that
represents the Companys exit price or the price at which these instruments would be sold or
transferred.
Checking and Money Market Deposits, Savings Accounts, and Time Deposits - The fair value of
checking and money market deposits and savings accounts is the amount reported in the consolidated
financial statements. The carrying amount of checking, savings and money market accounts is the
amount that is payable on demand at the reporting date. The fair value of time deposits is
generally based on a present value estimate using rates currently offered for deposits of similar
remaining maturity.
Borrowed Funds - The fair value of borrowed funds is based on a present value estimate using rates
currently offered. Under FASB ACS Topic 820 for Fair Value Measurements and Disclosures, the
subordinated debenture was valued based on managements estimate of similar trust preferred
securities activity in the market.
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Commitments to Extend Credit and Letters of Credit - The majority of the Companys commitments to
extend credit and letters of credit carry current market interest rates if converted to loans.
Because commitments to extend credit and letters of credit are generally unassignable by either the
Company or the borrower, they only have value to the Company and the borrower. The estimated fair
value approximates the recorded net deferred fee amounts, which are not significant.
The fair value estimates presented herein are based on pertinent information available to
management as of March 31, 2011 and December 31, 2010. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these consolidated financial statements since March
31, 2011 and December 31, 2010, and therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
NOTE 16 EMPLOYEE SEVERANCE CHARGES AND OTHER RESTRUCTURING COSTS
During the quarter, Beneficials management completed a comprehensive review of the Banks
operating cost structure and finalized an expense management reduction program. As a result of
this review, the Bank reduced approximately 4% of its workforce. Additionally, the Bank made the
decision to consolidate five of its branch locations into other existing branches. These actions
resulted in a $4.1 million restructuring charge, which consisted of $2.5 million of severance, $672
thousand of contract termination and other costs, and $947 thousand of fixed asset retirement
expense. These charges are included in restructuring charge, a component of non-interest expense,
within the consolidated statements of operations. A schedule of the restructuring and severance
accrual is summarized below as of March 31, 2011:
Contract termination | ||||||||||||
(Dollars in thousands) | Severance | and other costs | Total | |||||||||
Accrued at March 31, 2011 |
$ | 2,478 | $ | 690 | $ | 3,168 |
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This quarterly report contains forward-looking statements that are based on assumptions and may
describe future plans, strategies and expectations of the Company. These forward-looking
statements are generally identified by use of the words believe, expect, intend,
anticipate, estimate, project or similar expressions. The Companys ability to predict
results or the actual effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations of the Company and its subsidiary include,
but are not limited to, changes in interest rates, national and regional economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including
policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the
loan or investment portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Companys market area, changes in real estate market values in the
Companys market area, changes in relevant accounting principles and guidelines and the inability
of third party service providers to perform. Additional factors that may affect our results are
disclosed in the section titled Risk Factors in the Companys Annual Report on Form 10-K for the
year ended December 31, 2010 and its other reports filed with the U.S. Securities and Exchange
Commission.
These risks and uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements. Except as required by applicable law or
regulation, the Company does not undertake, and specifically disclaims any obligation, to release
publicly the result of any revisions that may be made to any forward-looking statements to reflect
events or circumstances after the date of the statements or to reflect the occurrence of
anticipated or unanticipated events.
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In the preparation of our condensed consolidated financial statements, we have adopted various
accounting policies that govern the application of accounting principles generally accepted in the
United States.
Certain accounting policies involve significant judgments and assumptions by us that have a
material impact on the carrying value of certain assets and liabilities. We consider these
accounting policies to be critical accounting policies. The judgments and assumptions we use are
based on historical experience and other factors, which we believe to be reasonable under the
circumstances. Actual results could differ from these judgments and estimates under different
conditions, resulting in a change that could have a material impact on the carrying values of our
assets and liabilities and our results of operations.
EXECUTIVE SUMMARY
Beneficial Mutual Bancorp Inc. is a federally chartered stock savings and loan holding company and
owns 100% of the outstanding common stock of the Bank, a Pennsylvania chartered stock savings bank.
On July 13, 2007, the Company completed its initial minority public offering and simultaneous
acquisition of FMS Financial Corporation and its wholly owned subsidiary, Farmers & Mechanics Bank,
which was merged with and into the Bank. Following the consummation of the merger and public
offering, the Company had a total of 82,264,600 shares of common stock, par value $.01 per share,
issued and outstanding, of which 36,471,825 were held publicly and 45,792,775 were held by
Beneficial Savings Bank MHC.
The Bank offers a variety of consumer and commercial banking services to individuals, businesses,
and nonprofit organizations through 65 offices throughout the Philadelphia and Southern New Jersey
area. The Bank is supervised and regulated by the Pennsylvania Department of Banking and the FDIC.
The OTS regulates the Company and the MHC. The Banks customer deposits are insured up to
applicable legal limits by the Deposit Insurance Fund of the FDIC. Insurance services are offered
through Beneficial Insurance Services, LLC and wealth management services are offered through
Beneficial Advisors, LLC, both wholly owned subsidiaries of the Bank.
During the first quarter of 2011, our financial results continued to be impacted by deterioration
in asset quality, particularly in our commercial construction portfolio. This resulted in a
provision for loan losses of $10.0 million for the first quarter of 2011 compared to the prior year
provision for loan losses of $5.0 million. During the quarter, the Bank also completed a
comprehensive review of its operating cost structure and finalized an expense management reduction
program which resulted in a $4.1 million restructuring charge. The Bank reduced its workforce by 4%
and announced that it was consolidating five of its branch locations. As a result of the above
items, Beneficial recorded a net loss of $0.9 million for the quarter ended March 31, 20011
compared to net income of $7.5 million for the quarter ended March 31, 2010.
Although some economic measures showed signs of improvement during 2011, credit quality and revenue
growth continue to be challenging. The Company believes recovery of commercial real estate in our
region will take some time causing continued downward pressure on property valuation. We expect
our provision for credit losses to remain elevated in 2011. The Federal Reserve Board continues to
hold short term interest rates at historic lows. The low rate environment impacted the yield on
our investment portfolio as maturing investments and liquidity generated by our deposit growth was
invested at lower interest rates. Elevated unemployment, depressed home values, and continued
economic uncertainty has constrained consumer consumption. Additionally, capital spending and
investing by businesses has remained sluggish given the slow and uneven economic recovery. This
resulted in low loan demand during the first quarter of 2011. We expect loan demand to remain low
in 2011.
We believe that the economic crisis which has adversely impacted our customers and communities has
resulted in a refocus on financial responsibility. We remain committed to the financial
responsibility we have practiced throughout our 158 year history, and we are dedicated to providing
financial education opportunities to our customers by providing the tools necessary to make wise
financial decisions. Through any economic cycle, our strong capital profile positions us to
advance our growth strategy by working with our customers to help them save and use credit wisely. It also allows us to continue
to dedicate financial and human capital to support organizations that share our sense of
responsibility to do whats right for the communities we serve.
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The Banks tier 1 leverage ratio totaled 9.08% at March 31, 2011 compared to 8.89% at December 31,
2010. The Banks total risk based capital ratio was 17.17% at March 31, 2011 compared to 16.95% at
December 31, 2010 and 18.15% at March 31, 2010. Our capital levels and ratios are well in excess of
the levels required to be considered well-capitalized. We continued to position the Company for
any further weakening in economic conditions maintaining our loan loss reserve coverage ratio of
1.71% at March 31, 2011 as compared to 1.62% at December 31, 2010, with non-performing assets
increasing $21.3 million to $161.7 million at March 31, 2011 as compared to $140.4 million at
December 31, 2010.
In order to further improve our operating returns, we continue to leverage our position as one of
the largest and oldest banks headquartered in the Philadelphia Metropolitan area. We are focused
on acquiring and retaining customers, and then educating them by aligning our products and services
to their financial needs. We are focused on effectively managing our cost structure to be aligned
with the current business environment.
In this challenging economic environment, we are focused on credit risk management and loss
prevention. We diligently risk rate our commercial customers to ensure we actively and effectively
manage our customer relationships and minimize losses. We believe it is important to have a strong
balance sheet and strong healthy capital levels.
RECENT INDUSTRY CONSOLIDATION
The banking industry has experienced significant consolidation in recent years, which is likely to
continue in future periods. Consolidation may affect the markets in which Beneficial operates as
competitors integrate newly acquired businesses, adopt new business and risk management practices
or change products and pricing as they attempt to maintain or grow market share and maximize
profitability. Merger activity involving national, regional and community banks and specialty
finance companies in the Philadelphia metropolitan area, has and will continue to impact the
competitive landscape in the markets we serve. Management continually monitors our primary market
areas and assesses the impact of industry consolidation, as well as the practices and strategies of
our competitors, including loan and deposit pricing and customer behavior.
CURRENT REGULATORY ENVIRONMENT
On July 21, 2010, President Obama signed 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.
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In the fourth quarter of 2009, the Federal Reserve Board (FRB) announced regulatory changes to
debit card and automated teller machine (ATM) overdraft practices that were effective July 1,
2010. These changes prohibit financial institutions from charging consumers fees for paying
overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a
consumer consents, or opts in, to the overdraft service for those types of transactions. We believe
that the combination of these changes will have an impact that could be material to our
non-interest income. The actual impact could vary due to a variety of factors, including changes in
customer behavior.
CURRENT INTEREST RATE ENVIRONMENT
Net interest income represents a significant portion of the Companys revenues. Accordingly, the
interest rate environment has a substantial impact on Beneficials earnings. During the first three
months of 2011, our net interest margin decreased to 3.27% from 3.34% in the three months ended
March 31, 2010. Excess liquidity and reduced loan demand partially offset by a reduction in deposit
and borrowing costs were the primary reasons for the margin compression. Net interest margin in
future periods will continue to be impacted by several factors such as but not limited to, our
ability to grow and retain low cost core deposits, the future interest rate environment, loan and
investment prepayment rates, loan growth and changes in non-accrual loans.
CREDIT RISK ENVIRONMENT
The credit quality of our loan portfolio has a significant impact on our operating results. During
the first quarter of 2011, we continued to experience elevated levels of charge-offs, delinquencies
and non-performing assets as a result of continued high levels of unemployment, reduced property
values and limited traditional refinancing options. Non-performing assets for the three-month
period ended March 31, 2011 increased to $161.7 million, from $140.4 million at December 31, 2010.
Delinquencies also increased to $142.2 million at March 31, 2011 from $126.8 million at December
31, 2010. The deterioration in the asset quality indicators led to a provision for credit losses of
$10.0 million for the quarter ended March 31, 2011 compared to $5.0 million for the same period in
2010. We are continuing to strengthen our credit monitoring efforts by expanding resources in our
credit and risk management functions and maintaining focus on improving the credit quality of our
loan portfolio.
Although the U.S. economy has shown some signs of improvement, unemployment remains high and
commercial real estate conditions are still weak. We expect that property values will remain
volatile until underlying market fundamentals improve consistently. In 2011, a significant portion
of our commercial real estate and commercial construction portfolios contractually matures
(approximately 33%). We expect that market conditions coupled with the large amount of commercial
maturities will result in a continued elevated provision for credit losses in 2011.
CRITICAL ACCOUNTING POLICIES
In the preparation of our condensed consolidated financial statements, we have adopted various
accounting policies that govern the application of accounting principles generally accepted in the
United States.
Certain accounting policies involve significant judgments and assumptions by us that have a
material impact on the carrying value of certain assets and liabilities. We consider these
accounting policies to be critical accounting policies. The judgments and assumptions we use are
based on historical experience and other factors, which we believe to be reasonable under the
circumstances. Actual results could differ from these judgments and estimates under different
conditions, resulting in a change that could have a material impact on the carrying values of our
assets and liabilities and our results of operations.
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Allowance for Loan Losses. We consider the allowance for loan losses to be a critical accounting
policy. The allowance for loan losses is determined by management based upon portfolio segment,
past experience, evaluation of estimated loss and impairment in the loan portfolio, current
economic conditions and other pertinent factors. Management also considers risk characteristics by
portfolio segments including, but not limited to, renewals and real estate valuations. The
allowance for loan losses is maintained at a level that management considers adequate to provide
for estimated losses and impairment based upon an evaluation of known and inherent risk in the loan
portfolio. Loan impairment is evaluated based on the fair value of collateral or estimated net
realizable value. While management uses the best information available to make such evaluations,
future adjustments to the allowance may be necessary if economic conditions differ substantially
from the assumptions used in making the evaluations.
The allowance for loan losses (ALLL) is established through a provision for loan losses charged
to expense which is based upon past loan and loss experience and an evaluation of estimated losses
in the current loan portfolio, including the evaluation of impaired loans. Determining the amount
of the allowance for loan losses necessarily involves a high degree of judgment. Among the
material estimates required to establish the allowance are: overall economic conditions; value of
collateral; strength of guarantors; loss exposure at default; the amount and timing of future cash
flows on impaired loans; and determination of loss factors to be applied to the various elements of
the portfolio. All of these estimates are susceptible to significant change. Management reviews
the level of loss experience, current economic conditions and other factors related to the
collectability of the loan portfolio. Although we believe that we use the best information
available to establish the allowance for loan losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used in making the
evaluation. In addition, the FDIC and the Pennsylvania Department of Banking (the Department),
as an integral part of their examination process, periodically review our allowance for loan
losses. Such agencies may require us to recognize adjustments to the allowance based on judgments
about information available to them at the time of their examination. Our financial results are
affected by the changes in and the absolute level of the ALLL. This process involves our analysis
of complex internal and external variables, and it requires that we exercise judgment to estimate
an appropriate ALLL. As a result of the uncertainty associated with this subjectivity, we cannot
assure the precision of the amount reserved, should we experience sizeable loan or lease losses in
any particular period. For example, changes in the financial condition of individual borrowers,
economic conditions, or the condition of various markets in which collateral may be sold could
require us to significantly decrease or increase the level of the ALLL. Such an adjustment could
materially affect net income as a result of the change in provision for credit losses. For example,
a change in the estimate resulting in a 5% to 10% difference in the allowance would have resulted
in an additional provision for credit losses of $500 thousand to $1.0 million for the quarter ended
March 31, 2011. During the first three months of 2011, we experienced continued increases in
delinquencies, net charge-offs and non-performing assets The ALLL considered these market
conditions in deriving the estimated ALLL; however, given the continued economic difficulties, the
ultimate amount of loss could vary from that estimate.
Goodwill and Intangible Assets. The purchase method of accounting for business combinations
requires the Company to make use of estimates and judgments to allocate the purchase price paid for
acquisitions to the fair value of the assets acquired and liabilities assumed. The excess of the
purchase price of an acquired business over the fair value of the identifiable assets and
liabilities represents goodwill. Goodwill totaled $110.5 million at March 31, 2011.
Goodwill and other indefinite lived intangible assets are not amortized on a recurring basis, but
rather are subject to periodic impairment testing. The impairment test for goodwill requires the
Company to compare the fair value of business reporting units to their carrying value including
assigned goodwill on an annual basis. In addition, goodwill is tested more frequently if changes in
circumstances or the occurrence of events indicate impairment potentially exists.
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The goodwill impairment analysis estimates the fair value of equity using discounted cash flow
analyses which require assumptions, as well as guideline company and guideline transaction
information, where available. The inputs and assumptions specific to each reporting unit are
incorporated in the valuations
including projections of future cash flows, discount rates, the fair value of tangible and
intangible assets and liabilities, and applicable valuation multiples based on the guideline
information. We assess the reasonableness of the estimated fair value of the reporting units by
giving consideration to our market capitalization over a reasonable period of time. Based on our
latest annual impairment analysis of goodwill, we believe that the fair value for all reporting
units is substantially in excess of the respective reporting units carrying value. The Company
performs an annual impairment test as of year end.
Other intangible assets subject to amortization are evaluated for impairment in accordance with
authoritative guidance. An impairment loss will be recognized if the carrying amount of the
intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible
is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use of the asset. Intangible assets included customer relationships and other
related intangibles that are amortized on a straight-line basis using estimated lives of nine to 13
years for customer relationships and two to four years for other intangibles.
Income Taxes. We are subject to the income tax laws of the various jurisdictions where we conduct
business and estimate income tax expense based on amounts expected to be owed to these various tax
jurisdictions. The estimated income tax expense/(benefit) is reported in the Consolidated
Statements of Operations. The evaluation pertaining to the tax expense and related tax asset and
liability balances involves a high degree of judgment and subjectivity around the ultimate
measurement and resolution of these matters.
Accrued taxes represent the net estimated amount due to or to be received from tax jurisdictions
either currently or in the future and are reported in other assets on the Consolidated Statements
of Financial Position. We assess the appropriate tax treatment of transactions and filing positions
after considering statutes, regulations, judicial precedent and other pertinent information and
maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes
occur periodically due to changes in tax rates, interpretations of tax laws, the status of
examinations by the tax authorities and newly enacted statutory, judicial and regulatory guidance
that could impact the relative merits of tax positions. These changes, when they occur, impact
accrued taxes and can materially affect our operating results. We regularly evaluate our uncertain
tax positions and estimate the appropriate level of reserves related to each of these positions.
As of March 31, 2011, the Companys net deferred tax assets were $34.8 million. We regularly
evaluate the realizability of deferred tax asset positions. In determining whether a valuation
allowance is necessary, we consider the level of taxable income in prior years to the extent that
carrybacks are permitted under current tax laws, as well as estimates of future pre-tax and taxable
income and tax planning strategies that would, if necessary, be implemented. We currently maintain
a valuation allowance for certain state net operating losses, charitable contribution carryovers
and other-than-temporary impairments that management believes it is more likely than not that such
deferred tax assets will not be realized. We expect to realize our remaining deferred tax assets
over the allowable carryback and/or carryforward periods. Therefore, no valuation allowance is
deemed necessary against our remaining federal or remaining state deferred tax assets as of March
31, 2011. However, if an unanticipated event occurred that materially changed pre-tax and taxable
income in future periods, an increase in the valuation allowance may become necessary.
Postretirement Benefits. Several variables affect the annual cost for our defined benefit
retirement programs. The main variables are: (1) size and characteristics of the employee
population, (2) discount rate, (3) expected long-term rate of return on plan assets, (4)
recognition of actual asset returns, and (5) other actuarial assumptions. Below is a brief
description of these variables and the effect they have on our pension costs.
Size and Characteristics of the Employee Population
Pension cost is directly related to the number of employees covered by the plans, and other
factors including salary, age, years of employment, and benefit terms. Effective June 30, 2008,
plan participants ceased to accrue additional benefits under the existing pension benefit formula
and their accrued benefits were frozen.
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Discount Rate
The discount rate is used to determine the present value of future benefit obligations. The
discount rate for each plan is determined by matching the expected cash flows of each plan to a
yield curve based on long-term, high quality fixed income debt instruments available as of the
measurement date. The discount rate for each plan is reset annually or upon occurrence of a
triggering event on the measurement date to reflect current market conditions.
Expected Long-term Rate of Return on Plan Assets
Based on historical experience, market projections, and the target asset allocation set forth
in the investment policy for the retirement plans, the pre-tax expected rate of return on plan
assets was 8.0% for both 2010 and 2009. This expected rate of return is dependent upon the asset
allocation decisions made with respect to plan assets.
Annual differences, if any, between expected and actual returns are included in the
unrecognized net actuarial gain or loss amount. We generally amortize any unrecognized net
actuarial gain or loss in excess of 10% in net periodic pension expense over the average future
service of active employees, which is approximately seven years, or average future lifetime for
plans with no active participants that are frozen.
Recognition of Actual Asset Returns
Accounting guidance allows for the use of an asset value that smoothes investment gains and
losses over a period up to five years. However, we have elected to use a preferable method in
determining pension cost. This method uses the actual market value of the plan assets. Therefore,
we will experience more variability in the annual pension cost, as the asset values will be more
volatile than companies who elected to smooth their investment experience.
Other Actuarial Assumptions
To estimate the projected benefit obligation, actuarial assumptions are required with respect
to factors such as mortality rate, turnover rate, retirement rate and disability rate. These
factors do not tend to change significantly over time, so the range of assumptions, and their
impact on pension cost, is generally limited. We annually review the assumptions used based on
historical and expected future experience.
In addition to our defined benefit programs we offer a defined contribution plan (401(k)
Plan) covering substantially all of our employees. During 2008, in conjunction with freezing
benefit accruals under the defined benefit program, we enhanced our 401(k) Plan and combined it
with a recently formed Employee Stock Ownership Plan (ESOP) to form the Employee Savings and
Stock Ownership Plan (KSOP). While the KSOP is one plan, the two separate components of the
401(k) Plan and ESOP remain. Under the KSOP we make basic and matching contributions as well as
additional contributions for certain employees based on age and years of service. We may also make
discretionary contributions. Each participants account is credited with shares of the Companys
stock or cash based on compensation earned during the year.
Comparison of Financial Condition at March 31, 2011 and December 31, 2010
At March 31, 2011 total assets decreased $27.8 million, or 0.56%, to $4.9 billion from December 31,
2010. The decrease in total assets was primarily due to a decrease in investment securities of
$166.5 million and a decrease in total loans of $20.7 million partially offset by a $175.3 million
increase in cash and cash equivalents. The Bank has been positioning its balance sheet for rising
interest rates by shortening the duration of different asset classes which resulted in the shift
from investment securities to cash and cash equivalents during the quarter. The reduction in total
loans is the result of low demand for both consumer and business loans as consumers and businesses
continue to deleverage and remain cautious about the economy.
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Total deposits increased $13.3 million, or 0.34%, to $3.96 billion at March 31, 2011, compared to
$3.94 billion at December 31, 2010, as non-interest checking accounts increased $29.8 million while
interest bearing deposits decreased $16.5 million. The Company continues to focus on growing its core
deposit portfolio and reducing costlier time deposits and non-relationship based municipal
accounts. Municipal checking accounts have decreased $80.3 million to $992.2 million at March 31,
2011 from $1.1 billion at December 31, 2010 and the rate has decreased 22 basis points to .86% for
the three months ended March 31, 2011 from the same period in 2010 as the Company continues to
lower the rates on these accounts. Other liabilities decreased $21.2 million, or 21.5% to $77.4
million at March 31, 2011 compared to $98.6 million at December 31, 2010, primarily due to a $30.4
million decrease in trading securities that had been purchased at December 31, 2010 but had not yet
settled, partially offset by a $6.0 million pension accrual increase and a $3.2 million
restructuring accrual.
Stockholders equity equaled $608.6 million, or 12.4% of total assets, at March 31, 2011 compared
to $615.5 million, or 12.5% of total assets, at December 31, 2010. Beneficials tangible equity
(total stockholders equity less goodwill and intangibles) to tangible assets (total assets less
goodwill and intangibles) totaled 10.10% at March 31, 2011 compared to 10.16% at December 31, 2010.
Comparison of Operating Results for the Three Months Ended March 31, 2011 and March 31, 2010
General For the three months ended March 31, 2011, Beneficial recorded a net loss of $898
thousand, or ($0.01) per share, compared to net income of $7.5 million, or $0.10 per share, for the
three months ended March 31, 2010.
During the quarter, the Bank completed a comprehensive review of its operating cost structure and
finalized an expense management reduction program which resulted in a $4.1 million restructuring
charge. The restructuring charge related to expenses associated with a reduction in force and costs
related to consolidation of five branch locations into other branches. In addition, we experienced
high levels of net charge-offs that totaled $8.0 million during the quarter, primarily in the
commercial construction portfolio. The Bank also continued to work through credit and loan maturity
issues which resulted in an elevated provision of $10.0 million for the quarter. In 2011, a
significant portion of our commercial real estate and commercial construction portfolios
contractually mature (approximately 33%). We expect that market conditions coupled with the large
amount of commercial maturities will result in elevated provision for credit losses in 2011. We
continue to charge-off the collateral deficiency on all classified collateral dependent loans
across all portfolios once they are 90 days delinquent.
Net Interest Income The Companys net interest income increased $392 thousand, or 1.1%, to $36.7
million for the three months ended March 31, 2011 compared to $36.3 million for the same period in
2010. Total interest income decreased $3.2 million to $46.9 million for the three months ended
March 31, 2011 from $50.1 million for the same period in 2010. This decrease was due to excess
liquidity and low loan demand. Total interest expense decreased $3.6 million to $10.2 million for
the three months ended March 31, 2011 from $13.8 million for the same period in 2010. This decrease
was primarily due to lower deposit costs given the low rate environment and the movement of time
deposits to shorter term deposit products. A portion of the matured borrowings have been replaced
with lower yielding, longer maturity brokered certificates of deposits to manage interest rate
risk. The resulting cost on interest bearing liabilities decreased 44 basis points to 1.06% for the
three months ended March 31, 2011 from 1.50% for the three months ended March 31, 2010.
Provision for Loan Losses The Bank recorded a provision for loan losses of $10.0
million for the three months ended March 31, 2011 compared to $5.0 million for the same period in
2010. The increase in the provision was the result of a high level of charge-offs as well as
increased delinquency and non-performing asset levels. Net charge-offs totaled $8.0 million during
the quarter, primarily in the commercial construction portfolio. We continue to charge-off the
collateral deficiency on all classified collateral dependent loans across all portfolios once they
are 90 days delinquent.
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At March 31, 2011, the Companys allowance for loan losses totaled $47.4 million, or 1.71% of total
loans compared to an allowance for loan losses in the amount of $45.4 million, or 1.62% of total
loans at December 31, 2010.
Non-interest Income Non-interest income decreased $1.8 million, or 21.8%, to $6.5 million for
the three months ended March 31, 2011 compared to $8.3 million for the same period in 2010
primarily due to a $1.8 million decrease in the gain on the sale of securities and a $473 thousand
decrease in insurance and advisory income. These decreases were partially offset by a $162 thousand
increase in debit card fees, a $120 thousand increase in life insurance income and a $54 thousand
increase in trading securities profits.
Non-interest Expense Non-interest expense increased $3.7 million, or 12.2%, to $34.2 million
compared $30.5 million for the same period in 2010. The increase during the three months ended
March 31, 2011 was primarily due to a $4.1 million restructuring charge recorded in connection with
our expense reduction initiatives, a $317 thousand increase in FDIC insurance, a $414 thousand
increase in loan expense and a $169 thousand increase in real estate owned losses and expenses, partially
offset by a $624 thousand decrease in salaries and benefits and a $148 thousand decrease in
marketing expense.
The following table sets forth an analysis of non-interest expense for the three months ended March 31, 2011 and
March 31, 2010:
For the Three Months Ended | ||||||||||||||||
March 31, | Change 2011/2010 | |||||||||||||||
(Dollars in thousands) | 2011 | 2010 | $ | % | ||||||||||||
Salaries and employee benefits |
$ | 15,009 | $ | 15,633 | $ | (624 | ) | (4.0 | )% | |||||||
Occupancy expense |
3,093 | 3,145 | (52 | ) | (1.7 | ) | ||||||||||
Depreciation, amortization and maintenance |
2,248 | 2,177 | 71 | 3.3 | ||||||||||||
Marketing expense |
897 | 1,045 | (148 | ) | (14.2 | ) | ||||||||||
Intangible amortization expense |
860 | 883 | (23 | ) | (2.6 | ) | ||||||||||
FDIC insurance |
1,639 | 1,322 | 317 | 24.0 | ||||||||||||
Restructuring charge |
4,096 | | 4,096 | 100.0 | ||||||||||||
Insurance |
254 | 236 | 18 | 7.6 | ||||||||||||
Professional fees |
1,003 | 837 | 166 | 19.8 | ||||||||||||
Printing and supplies |
476 | 625 | (149 | ) | (23.8 | ) | ||||||||||
Correspondent Bank |
524 | 741 | (217 | ) | (29.3 | ) | ||||||||||
Postage |
332 | 344 | (12 | ) | (3.5 | ) | ||||||||||
Internet Banking |
510 | 296 | 214 | 72.3 | ||||||||||||
Debit Card Rewards |
287 | 212 | 75 | 35.4 | ||||||||||||
OREO Losses and Expenses |
311 | 142 | 169 | 119.0 | ||||||||||||
Loan Expenses |
1,028 | 614 | 414 | 67.4 | ||||||||||||
Other |
1,636 | 2,233 | (597 | ) | (26.7 | ) | ||||||||||
Total |
$ | 34,203 | $ | 30,485 | $ | 3,718 | 12.2 | % | ||||||||
Income Taxes The Company recorded an income tax benefit $112 thousand for the three months ended
March 31, 2011, reflecting an effective tax rate of 11.1%, compared to income tax expense of $1.6
million, reflecting an effective tax rate of 17.9%, for the same period in 2010. The decrease was
primarily due to a reduction in income before income taxes of $10.2 million to a $1.0 million loss
for the for the three months ended March 31, 2011, from income before income taxes of $9.2 million
for the three months ended March 31, 2010. The decrease in income before income taxes for the
quarter ended March 31, 2011 as compared to the quarter ended March 31, 2010 was primarily due to
an increase in the provision for loan losses of $5.0 million, a restructuring charge of $4.1
million and a decrease in gains on the sale of investment securities available-for-sale of $1.8
million.
The tax rates differ from the statutory rate of 35% principally because of tax-exempt investments,
non-taxable income related to bank-owned life insurance and tax credits received on affordable
housing partnerships. These tax credits relate to investments maintained by the Company as a
limited partner in partnerships that sponsor affordable housing projects utilizing low-income
housing credits pursuant to Section 42 of the Internal Revenue Code.
As of March 31, 2011, the Company had net deferred tax assets totaling $34.8 million. These
deferred tax assets can only be realized if the Company generates taxable income in the future. We
regularly evaluate the realizability of deferred tax asset positions. In determining whether a
valuation allowance is necessary, we consider the level of taxable income in prior years to the
extent that carrybacks are permitted under current tax laws, as well as estimates of future pre-tax
and taxable income and tax planning strategies that would, if necessary, be implemented. We
currently maintain a valuation allowance for certain state net operating losses, charitable
contribution carryovers and other-than-temporary impairments, that management believes it is more
likely than not that such deferred tax assets will not be realized. We expect to realize our
remaining deferred tax assets over the allowable carryback and/or carryforward periods. Therefore,
no valuation allowance is deemed necessary against our remaining federal or remaining state
deferred tax assets as of March 31, 2011. However, if an unanticipated event occurred that
materially changed pre-tax and taxable income in future periods, an increase in the valuation
allowance may become necessary and it could be material to our financial statements.
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The
table below summarizes average balances and average yields and costs for the
three-month periods ended March 31, 2011 and March 31, 2010:
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Interest & | Yield / | Average | Interest & | Yield / | |||||||||||||||||||
(Dollars in thousands) | Balance | Dividends | Cost | Balance | Dividends | Cost | ||||||||||||||||||
Interest Earning Assets: |
||||||||||||||||||||||||
Investment Securities: |
||||||||||||||||||||||||
Trading Securities |
9,027 | 26 | 1.19 | % | 10,699 | 34 | 1.27 | % | ||||||||||||||||
Overnight Investments |
162,961 | 102 | 0.25 | % | 203,892 | 125 | 0.25 | % | ||||||||||||||||
Stock |
22,766 | 5 | 0.08 | % | 28,068 | 50 | 0.72 | % | ||||||||||||||||
Other Investment securities |
1,506,803 | 10,959 | 2.91 | % | 1,327,766 | 13,358 | 4.02 | % | ||||||||||||||||
Total Investment securities & O/N Inv |
1,701,557 | 11,092 | 2.61 | % | 1,570,425 | 13,567 | 3.46 | % | ||||||||||||||||
Loans: |
||||||||||||||||||||||||
Real estate loans |
||||||||||||||||||||||||
Residential |
704,235 | 8,661 | 4.92 | % | 661,789 | 8,957 | 5.41 | % | ||||||||||||||||
Non-residential |
785,784 | 9,934 | 5.08 | % | 781,226 | 9,202 | 4.73 | % | ||||||||||||||||
Total real estate |
1,490,019 | 18,595 | 5.00 | % | 1,443,015 | 18,159 | 5.04 | % | ||||||||||||||||
Business loans |
373,062 | 5,113 | 5.50 | % | 367,944 | 5,091 | 5.56 | % | ||||||||||||||||
Small Business loans |
154,505 | 2,305 | 5.99 | % | 159,437 | 2,382 | 6.00 | % | ||||||||||||||||
Total Business & Small Business loans |
527,567 | 7,418 | 5.65 | % | 527,381 | 7,473 | 5.69 | % | ||||||||||||||||
Total Business loans |
1,313,351 | 17,352 | 5.31 | % | 1,308,607 | 16,675 | 5.12 | % | ||||||||||||||||
Personal loans |
778,750 | 9,814 | 5.11 | % | 817,772 | 10,881 | 5.40 | % | ||||||||||||||||
Total loans, net of discount |
2,796,336 | 35,827 | 5.16 | % | 2,788,168 | 36,513 | 5.27 | % | ||||||||||||||||
Total interest earning assets |
4,497,893 | 46,919 | 4.19 | % | 4,358,593 | 50,080 | 4.62 | % | ||||||||||||||||
Non-interest earning assets |
387,107 | 420,741 | ||||||||||||||||||||||
Total assets |
4,885,000 | 4,779,334 | ||||||||||||||||||||||
Interest Bearing Liabilities: |
||||||||||||||||||||||||
Interest bearing savings and
demand deposits: |
||||||||||||||||||||||||
Savings and club accounts |
707,519 | 1,256 | 0.72 | % | 555,234 | 972 | 0.71 | % | ||||||||||||||||
Money market accounts |
622,845 | 1,149 | 0.75 | % | 641,958 | 1,301 | 0.82 | % | ||||||||||||||||
Demand deposits |
408,754 | 252 | 0.25 | % | 350,057 | 266 | 0.31 | % | ||||||||||||||||
Demand deposits Municipals |
1,025,436 | 2,178 | 0.86 | % | 858,230 | 2,293 | 1.08 | % | ||||||||||||||||
Certificates of deposit |
875,595 | 3,119 | 1.44 | % | 909,603 | 4,580 | 2.04 | % | ||||||||||||||||
Total interest-bearing deposits |
3,640,149 | 7,954 | 0.89 | % | 3,315,082 | 9,412 | 1.15 | % | ||||||||||||||||
Borrowings |
267,131 | 2,269 | 3.44 | % | 425,150 | 4,364 | 4.16 | % | ||||||||||||||||
Total interest-bearing liabilities |
3,907,280 | 10,223 | 1.06 | % | 3,740,232 | 13,776 | 1.50 | % | ||||||||||||||||
Non-interest-bearing deposits |
281,391 | 249,675 | ||||||||||||||||||||||
Other non-interest-bearing liabilities |
80,500 | 144,483 | ||||||||||||||||||||||
Total liabilities |
4,269,171 | 4,134,390 | ||||||||||||||||||||||
Total stockholders equity |
615,829 | 644,944 | ||||||||||||||||||||||
Total liabilities and stockholders equity |
4,885,000 | 4,779,334 | ||||||||||||||||||||||
Net interest income |
36,696 | 36,304 | ||||||||||||||||||||||
Interest rate spread |
3.13 | % | 3.12 | % | ||||||||||||||||||||
Net interest margin |
3.27 | % | 3.34 | % | ||||||||||||||||||||
Average interest-earning assets to average
interest-bearing liabilities |
115.12 | % | 116.53 | % |
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Asset Quality
At March 31, 2011, Beneficials non-performing assets increased by $21.3 million to $161.7 million
from $140.4 million at December 31, 2010. The ratio of non-performing assets to total assets
increased to 3.30% at March 31, 2011 from 2.85% at December 31, 2010.
ASSET QUALITY INDICATORS: | March 31, | December 31, | March 31, | |||||||||
(Dollars in thousands) | 2011 | 2010 | 2010 | |||||||||
Non-performing assets: |
||||||||||||
Non-accruing loans |
$ | 120,102 | $ | 95,803 | $ | 72,309 | ||||||
Accruing loans past due 90 days or more* |
25,112 | 27,932 | 48,313 | |||||||||
Total non-performing loans** |
$ | 145,214 | $ | 123,735 | $ | 120,622 | ||||||
Troubled debt restructurings |
| | 22,412 | |||||||||
Real estate owned |
16,449 | 16,694 | 8,202 | |||||||||
Total non-performing assets |
$ | 161,663 | $ | 140,429 | $ | 151,236 | ||||||
Non-performing loans to total loans |
5.23 | % | 4.42 | % | 4.33 | % | ||||||
Non-performing loans to total assets |
2.96 | % | 2.51 | % | 2.56 | % | ||||||
Non-performing assets to total assets |
3.30 | % | 2.85 | % | 3.21 | % | ||||||
Non-performing assets less accruing loans
past due 90 days or more to total assets |
2.79 | % | 2.28 | % | 2.19 | % |
* | Includes $25.1 million, $27.9 million and $31.7 million in government guaranteed student loans
as of March 31, 2011, December 31, 2010 and March 31, 2010, respectively. |
|
** | Includes $27.7 million and $26.7 million of troubled debt restructured loans (TDRs) as of March
31, 2011 and December 31, 2010, respectively. |
Beneficial places all commercial and residential loans on non-performing status at 90 days
delinquent or sooner if management believes the loan has become impaired (unless return to current
status is expected imminently). The accrual of interest is discontinued and reversed once an
account becomes past due 90 days or more. The uncollectible portion including any collateral
deficiency of all loans is charged off at 90 days past due or when the Company has confirmed there
is a loss. Nonperforming consumer loans include $25.1 million and $27.9 million in government
guaranteed student loans as of March 31, 2011 and December 31, 2010, respectively.
Non-performing loans are evaluated under authoritative guidance in FASB ASC Topic 310 for
Receivables, Topic 450 for Contingencies and Topic 470 for Debt and are included in the
determination of the allowance for loan losses. Specific reserves are established for estimated
losses in determination of the allowance for loan loss.
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Table of Contents
Allowance for Loan Losses
The following table sets forth the breakdown of the allowance for loan losses by loan category at
the dates indicated:
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
Loan Balance | ALLL | Coverage | Loan Balance | ALLL | Coverage | |||||||||||||||||||
Commercial (including TDRs) |
1,304,750 | 40,302 | 3.09 | % | 1,310,929 | 38,496 | 2.94 | % | ||||||||||||||||
Residential |
701,827 | 1,924 | 0.27 | % | 698,722 | 1,884 | 0.27 | % | ||||||||||||||||
Consumer |
769,138 | 4,635 | 0.60 | % | 786,751 | 4,436 | 0.56 | % | ||||||||||||||||
Unallocated |
| 550 | | | 550 | | ||||||||||||||||||
Total |
2,775,715 | 47,411 | 1.71 | % | 2,796,402 | 45,366 | 1.62 | % | ||||||||||||||||
The allowance for loan losses is a valuation allowance for probable losses inherent in the
loan portfolio. We evaluate the need to establish allowances against losses on loans on a
quarterly basis. When additional allowances are necessary, a provision for loan losses is charged
to earnings.
The allowance for loan losses consists of two elements: (i) an allocated allowance, which is
comprised of allowances established on specific loans, and allowances for each loan category based
on historical loan loss experience adjusted for current trends and adjusted for both general
economic conditions and other risk factors in the Companys loan portfolios, and (ii) an
unallocated allowance to account for a level of imprecision in managements estimation process.
Management regularly monitors the condition of borrowers and assesses both internal and external
factors in determining whether any relationships have deteriorated considering factors such as
historical loss experience, trends in delinquency and nonperforming loans, changes in risk
composition and underwriting standards, experience and ability of staff and regional and national
economic conditions and trends.
Our credit officers and workout group identify and manage potential problem loans for our
commercial loan portfolios. Changes in management factors, financial and operating performance,
company behavior, industry factors and external events and circumstances are evaluated on an
ongoing basis to determine whether potential impairment is evident and additional analysis is
needed. For our commercial loan portfolios, risk ratings are assigned to each individual loan to
differentiate risk within the portfolio and are reviewed on an ongoing basis by credit risk
management and revised, if needed, to reflect the borrowers current risk profiles and the related
collateral positions. The risk ratings consider factors such as financial condition, debt capacity
and coverage ratios, market presence and quality of management. When a credits risk rating is
downgraded to a certain level, the relationship must be reviewed and detailed reports completed
that document risk management strategies for the credit going forward, and the appropriate
accounting actions to take in accordance with Generally Accepted Accounting Principles in the
United States (US GAAP). When credits are downgraded beyond a certain level, Beneficials workout
department becomes responsible for managing the credit risk.
Risk rating actions are generally reviewed formally by one or more Credit Committees depending on
the size of the loan and the type of risk rating action being taken.
Our consumer loans and residential loans are monitored for credit risk and deterioration
considering factors such as delinquency, loan to value, and credit scores. We evaluate our consumer
and residential portfolios throughout their life cycle on a portfolio basis.
When problem loans are identified that are secured with collateral, management examines the loan
files to evaluate the nature and type of collateral supporting the loans. Management documents the
collateral type, date of the most recent valuation, and whether any liens exist, to determine the
value to compare against the committed loan amount.
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Table of Contents
If a loan is identified as impaired and is collateral dependent, an updated appraisal is obtained
to provide a baseline in determining the propertys fair market value, a key input into the
calculation to measure the level of impairment, and to establish a specific reserve or charge-off
the collateral deficiency. If the collateral value is subject to significant volatility (due to
location of asset, obsolescence, etc.) an appraisal is obtained more frequently. At a minimum,
in-house revaluations are performed on at least a quarterly basis and updated appraisals are
obtained annually.
When we determine that the value of an impaired loan is less than its carrying amount, we recognize
impairment through a charge-off to the allowance. We perform these assessments on at least a
quarterly basis. For commercial loans, a charge-off is recorded when management determines we will
not collect 100% of a loan based on the fair value of the collateral, less costs to sell the
property, or the net present value of expected future cash flows. Charge-offs are recorded on a
monthly basis and partially charged-off loans continue to be evaluated on a monthly basis. The
collateral deficiency on consumer loans and residential loans are generally charged-off when deemed
to be uncollectible or delinquent 90 days or more, whichever comes first, unless it can be clearly
demonstrated that repayment will occur regardless of the delinquency status. Examples that would
demonstrate repayment include a loan that is secured by adequate collateral and is in the process
of collection, a loan supported by a valid guarantee or insurance, or a loan supported by a valid
claim against a solvent estate. Consumer loan delinquency includes $25.1 million in government
guaranteed student loans at March 31, 2011, in which the Bank has little risk of credit loss.
Additionally, the Company reserves for certain inherent, but undetected, losses that are probable
within the loan portfolio. This is due to several factors, such as, but not limited to, inherent
delays in obtaining information regarding a customers financial condition or changes in their
unique business conditions and the interpretation of economic trends. While this analysis is
conducted at least quarterly, the Company has the ability to revise the allowance factors whenever
necessary in order to address improving or deteriorating credit quality trends or specific risks
associated with a given loan pool classification.
Regardless of the extent of the Companys analysis of customer performance, portfolio evaluations,
trends or risk management processes established, a level of imprecision will always exist due to
the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains
an unallocated allowance to recognize the existence of these exposures.
These risk factors are continuously reviewed and revised by management where conditions indicate
that the estimates initially applied are different from actual results. A comprehensive analysis of
the allowance for loan losses is performed by the Company on a quarterly basis. In addition, a
review of allowance levels based on nationally published statistics is conducted quarterly.
The factors supporting the allowance for loan losses do not diminish the fact that the entire
allowance for loan losses is available to absorb losses in the loan portfolio and related
commitment portfolio, respectively. The Companys principal focus, therefore, is on the adequacy of
the total allowance for loan losses.
The allowance for loan losses is subject to review by banking regulators. The Companys primary
bank regulators regularly conduct examinations of the allowance for loan losses and make
assessments regarding their adequacy and the methodology employed in their determination.
Commercial Portfolio. The portion of the allowance for loan losses related to the commercial
portfolio totaled $40.3 million at March 31, 2011 (3.1% of commercial loans) which increased from
$38.5 million at December 31, 2010 (2.9% of commercial loans). The increase in the reserve balance
was primarily driven by continued elevated charge-off trends as well as increases in delinquencies
and classified loan levels. The increase in classified assets resulted in charge-offs of $7.7
million for our commercial loan portfolio. We continue to charge off any collateral deficiency for
non-performing loans once a loan is 90 days past due. As a result, the entire reserve balance at
March 31, 2011 and December 31, 2010 consists of reserves against the pass rated and special
mention commercial loans.
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Table of Contents
Residential Loans. The allowance for the residential loan estate portfolio remained constant at
$1.9 million at March 31, 2011 and December 31, 2010. During the quarter, charge offs and
delinquencies improved in our residential portfolio. However, the Company expects that the
difficult housing environment, as well as general economic conditions, will continue to impact the
residential loan portfolio which may result in higher loss levels. Therefore, we continued to
maintain the allowance as a percentage of residential loans of 0.27% at March 31, 2011 and December
31, 2010.
Consumer Loans. The allowance for the consumer loan portfolio increased $199 thousand to $4.6
million at March 31, 2011 from $4.4 million at December 31, 2011. The increase in the reserve
balance is due to increases in delinquencies and continued elevated levels of actual charge-offs
experienced in the consumer loan portfolio during the quarter. The allowance as a percentage of
consumer loans was 0.60% at March 31, 2011 and 0.56% at December 31, 2010.
Unallocated Allowance. The unallocated allowance for loan losses was $550 thousand at both March
31, 2011 and December 31, 2010. Management continuously evaluates its allowance methodology;
however, the unallocated allowance is subject to changes each reporting period due to certain
inherent but undetected losses; which are probable of being realized within the loan portfolio.
The allowance for loan losses is maintained at levels that management considers adequate to provide
for losses based upon an evaluation of known and inherent risks in the loan portfolio. Managements
evaluation takes into consideration the risks inherent in the loan portfolio, past loan loss
experience, specific loans with loss potential, geographic and industry concentrations, delinquency
trends, economic conditions, the level of originations and other relevant factors. While management
uses the best information available to make such evaluations, future adjustments to the allowance
for credit losses may be necessary if conditions differ substantially from the assumptions used in
making the evaluations. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the existing allowance for loan
losses will not be necessary should the quality of loans deteriorate as a result of the factors
described above. Any material increase in the allowance for loan losses may adversely affect our
financial condition and results of operation.
Liquidity, Capital and Credit Management
Liquidity Management Liquidity is the ability to meet current and future financial obligations
of a short-term nature. Our primary sources of funds consist of deposits, loan repayments,
maturities of and payments on investment securities and borrowings from the Federal Home Loan Bank
of Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposits and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition. At March 31, 2011, the Company determined that its
future levels of principal repayments would not be materially impacted by problems currently being
experienced in the residential mortgage market. See Asset Quality for a further discussion of the
Banks asset quality.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan
demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and
securities and (4) the objectives of our asset/liability management policy.
Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our
operating, financing, lending and investing activities during any given period. At March 31, 2011,
cash and cash equivalents totaled $265.6 million. In addition, at March 31, 2011, our maximum
borrowing capacity with the FHLB was $909.8 million. On March 31, 2011, we had $100.0 million of
advances outstanding and $129.5 million of letters of credit outstanding with the FHLB.
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Table of Contents
A significant use of our liquidity is the funding of loan originations. At March 31, 2011, we had
$53.0 million in loan commitments outstanding, which consisted of $44.4 million and $8.6 million in
commercial and consumer commitments to fund loans, respectively, $174.0 million in commercial and
consumer unused lines of credit, and $27.6 million in standby letters of credit. Another
significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit
due within one year of March 31, 2011 totaled $631.2 million, or 71.3% of certificates of deposit, at March 31, 2011. The large
percentage of certificates of deposit that mature within one year reflects customers hesitancy to
invest their funds for long periods in the recent low interest rate environment. If these maturing
deposits do not remain with us, we will be required to seek other sources of funds, including other
certificates of deposit, brokered deposits and borrowings. Depending on market conditions, we may
be required to pay higher rates on such deposits or other borrowings than we currently pay on the
certificates of deposit due on or before March 31, 2012. We believe, however, based on past
experience that a significant portion of our certificates of deposit will remain with us. We have
the ability to attract and retain deposits by adjusting the interest rates offered.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In
addition to its operating expenses, the Company is responsible for paying any dividends declared to
its shareholders. The Company also has repurchased shares of its common stock. The amount of
dividends that the Bank may declare and pay to the Company is generally restricted under
Pennsylvania law to the retained earnings of the Bank.
The following table presents certain of our contractual obligations at March 31, 2011:
Payments due by period | ||||||||||||||||||||
Less than | One to | Three to | More than | |||||||||||||||||
(Dollars in thousands) | Total | One Year | Three Years | Five Years | Five Years | |||||||||||||||
Commitments to fund loans |
$ | 52,969 | $ | 52,969 | $ | | $ | | $ | | ||||||||||
Unused lines of credit |
173,986 | 106,552 | | | 67,434 | |||||||||||||||
Standby letters of credit |
27,604 | 27,604 | | | | |||||||||||||||
Operating lease obligations |
35,779 | 5,334 | 10,113 | 4,809 | 15,523 | |||||||||||||||
Total |
$ | 290,338 | $ | 192,459 | $ | 10,113 | $ | 4,809 | $ | 15,523 | ||||||||||
Our primary investing activities are the origination and purchase of loans and the purchase of
securities. Our primary financing activities consist of activity in deposit accounts, repurchase
agreements and FHLB advances. Deposit flows are affected by the overall level of interest rates,
the interest rates and products offered by us and our competitors and other factors. We generally
manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on
certain deposit products to attract deposits.
Capital Management We are subject to various regulatory capital requirements administered by the
Federal Deposit Insurance Corporation, including a risk-based capital measure. The risk-based
capital guidelines include both a definition of capital and a framework for calculating
risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk
categories. At March 31, 2010, we exceeded all of our regulatory capital requirements and were
considered well capitalized under the regulatory guidelines.
In order to mitigate the risk related to the Companys held-to-maturity and available-for-sale
portfolios, the Company monitors the ratings of its securities. As of March 31, 2011, approximately
87.0% of the Companys portfolio consisted of direct government obligations, government sponsored
enterprise obligations or securities rated AAA by Moodys and/or S&P. In addition, at March 31,
2011 approximately 6.7% of the investment portfolio was rated below AAA but rated investment grade
by Moodys and/or S&P, approximately 1.1% of the investment portfolio was rated below investment
grade by Moodys and/or S&P and approximately 5.2% of the investment portfolio was not rated.
Securities not rated consist primarily of short-term municipal anticipation notes, private
placement municipal bonds, equity securities, mutual funds, money market funds and bank
certificates of deposit.
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Credit Risk Management. The objective of the Companys credit risk management strategy is to
quantify and manage credit risk on a segmented portfolio basis, as well as to limit the risk of
loss resulting from an individual customer default. The Companys credit risk management strategy
is based on three core principles: conservatism, diversification and monitoring. The Company
believes that effective credit risk management begins with conservative lending practices. These
practices include conservative exposure limits and conservative underwriting, documentation and
collection standards. The Companys credit risk management strategy also emphasizes diversification
on an industry and customer level as well as regular credit examinations and weekly management
reviews of large credit exposures and credits experiencing deterioration of credit quality. The
Board of Directors has granted loan approval authority to certain officers or groups of officers up
to prescribed limits, based on the 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 $10.0 million or more must be approved by the Senior Loan Committee, which is
comprised of senior Bank officers and five non-employee directors. All loans or lending
relationships in excess of $20.0 million must be approved by the Senior Loan Committee of the
Companys Board, as well as the Executive Committee of the Board, which includes six non-employee
directors. Underwriting activities are centralized. The Credit Risk Review function, within
Enterprise Risk Management, provides objective assessments of the quality of underwriting and
documentation, the accuracy of risk grades and the charge-off, nonaccrual and reserve analysis
process. The Companys credit review process and overall assessment of required allowances is based
on quarterly assessments of the probable estimated losses inherent in the loan portfolio. The
Company uses these assessments to promptly identify potential problem loans within the portfolio,
maintain an adequate reserve and take any necessary charge-offs. The Company charges off the
collateral deficiency on all collateral dependent loans once they become 90 days delinquent.
Generally, all consumer loans are charged off once they become 90 days delinquent except for
education loans as they are guaranteed by the government and there is little risk of loss. In
addition to the individual review of larger commercial loans that exhibit probable or observed
credit weaknesses, the commercial credit review process includes the use of a risk grading system.
The enhanced risk rating system is consistent with Basel II expectations and allows for precision
in the analysis of commercial credit risk. Historical portfolio performance metrics, current
economic conditions and delinquency monitoring are factors used to assess the credit risk in the
Companys homogenous commercial, residential and consumer loan portfolio.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in
accordance with generally accepted accounting principles, are not recorded in our consolidated
financial statements. These transactions involve, to varying degrees, elements of credit, interest
rate and liquidity risk. Such transactions are used primarily to manage customers requests for
funding and take the form of loan commitments and lines of credit. See Liquidity Management for
further discussion regarding loan commitments and unused lines of credit.
For the three months ended March 31, 2011, we did not engage in any off-balance sheet transactions
reasonably likely to have a material effect on our financial condition, results of operations or
cash flows.
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Item 3. | Quantitative and Qualitative Disclosure about Market Risk |
Qualitative Aspects of Market Risk
Interest rate risk is defined as the exposure of current and future earnings and capital that
arises from adverse movements in interest rates. Depending on a banks asset/liability structure,
adverse movements in interest rates could be either rising or declining interest rates. For
example, a bank with predominantly long-term fixed-rate assets, and short-term liabilities could
have an adverse earnings exposure to a rising rate environment. Conversely, a short-term or
variable-rate asset base funded by longer-term liabilities could be negatively affected by falling
rates. This is referred to as repricing or maturity mismatch risk.
Interest rate risk also arises from changes in the slope of the yield curve (yield curve risk);
from imperfect correlations in the adjustment of rates earned and paid on different instruments
with otherwise similar repricing characteristics (basis risk); and from interest rate related
options imbedded in the banks assets and liabilities (option risk).
Our goal is to manage our interest rate risk by determining whether a given movement in interest
rates affects our net income and the market value of our portfolio equity in a positive or negative
way, and to execute strategies to maintain interest rate risk within established limits.
Quantitative Aspects of Market Risk
We view interest rate risk from two different perspectives. The traditional accounting perspective,
which defines and measures interest rate risk as the change in net interest income and earnings
caused by a change in interest rates, provides the best view of short-term interest rate risk
exposure. We also view interest rate risk from an economic perspective, which defines and measures
interest rate risk as the change in the market value of portfolio equity caused by changes in the
values of assets and liabilities, which have been caused by changes in interest rates. The market
value of portfolio equity, also referred to as the economic value of equity is defined as the
present value of future cash flows from existing assets, minus the present value of future cash
flows from existing liabilities.
These two perspectives give rise to income simulation and economic value simulation, each of which
presents a unique picture of our risk from any movement in interest rates. Income simulation
identifies the timing and magnitude of changes in income resulting from changes in prevailing
interest rates over a short-term time horizon (usually one year). Economic value simulation
captures more information and reflects the entire asset and liability maturity spectrum. Economic
value simulation reflects the interest rate sensitivity of assets and liabilities in a more
comprehensive fashion, reflecting all future time periods. It can identify the quantity of
interest rate risk as a function of the changes in the economic values of assets and liabilities,
and the equity of the Bank. Both types of simulation assist in identifying, measuring, monitoring
and controlling interest rate risk and are employed by management to ensure that variations in
interest rate risk exposure will be maintained within policy guidelines.
The Banks Asset/Liability Management Committee produces reports on a quarterly basis, which
compare baseline (no interest rate change) current positions showing forecasted net income, the
economic value of equity and the duration of individual asset and liability classes, and of equity.
Duration is defined as the weighted average time to the receipt of the present value of future
cash flows. These baseline forecasts are subjected to a series of interest rate changes, in order
to demonstrate or model the specific impact of the interest rate scenario tested on income, equity
and duration. The model, which incorporates all asset and liability rate information, simulates
the effect of various interest rate movements on income and equity value. The reports identify and
measure the interest rate risk exposure present in our current asset/liability structure.
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The tables below set forth an approximation of our interest rate risk exposure. The simulation
uses projected repricing of assets and liabilities at March 31, 2011. The primary interest rate
exposure measurement applied to the entire balance sheet is the effect on net interest income and
earnings of a gradual change in market interest rates of plus or minus 200 basis points over a one
year time horizon, and the effect on economic value of equity of a gradual change in market rates of plus or minus 200
basis points for all projected future cash flows. Various assumptions are made regarding the
prepayment speed and optionality of loans, investments and deposits, which are based on analysis,
market information and in-house studies. The assumptions regarding optionality, such as
prepayments of loans and the effective maturity of non-maturity deposit products are documented
periodically through evaluation under varying interest rate scenarios.
Because prospective effects of hypothetical interest rate changes are based on a number of
assumptions, these computations should not be relied upon as indicative of actual results. While
we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment
rates will approximate actual future mortgage-backed security, collateralized mortgage obligation
and loan repayment activity. Further the computation does not reflect any actions that management
may undertake in response to changes in interest rates. Management periodically reviews its rate
assumptions based on existing and projected economic conditions.
As of March 31, 2011:
Basis point change in rates | -200 | Base Forecast | +200 | |||||||||
(Dollars in thousands) | ||||||||||||
Net Interest Income at Risk: |
||||||||||||
Net Interest Income |
$ | 138,365 | $ | 149,286 | $ | 140,499 | ||||||
% change |
(7.32 | %) | (5.89 | %) | ||||||||
Economic Value at Risk: |
||||||||||||
Equity |
$ | 698,159 | $ | 717,572 | $ | 576,907 | ||||||
% change |
(2.71 | %) | (19.60 | %) |
As of March 31, 2011, based on the scenarios above, net interest income and economic value at
risk would be adversely affected over a one-year time horizon in both a rising and a declining rate
environment.
The current historically low interest rate environment reduces the reliability of the measurement
of a 200 basis point decline in interest rates, as such a decline would result in negative interest
rates. The Company has established an interest rate floor of zero percent for purposes of measuring
interest rate risk. Such a floor in our income simulation results in a reduction in our net
interest margin as more of our liabilities than our assets are impacted by the zero percent floor.
In addition, economic value of equity is also reduced in a declining rate environment due to the
negative impact to deposit premium values.
As of March 31, 2011, our results indicate that we are adequately positioned and continue to be
within our policy guidelines.
Item 4. | 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(f) promulgated under the Securities Exchange
Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the principal
executive officer and principal financial officer concluded that, as of the end of the period
covered by this report, the 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 March 31, 2011 that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
In April 2011, we were notified of a lawsuit that was filed with the Court of Common Pleas of
Philadelphia County against the Bank related to the notices that we issue to customers in
connection with automobile repossessions. Pennsylvania law requires parties who use self-help
repossession to provide consumers with a proper repossession and redemption notice shortly after
repossession (the Repo Notice) and a deficiency notice (the Deficiency Notice) shortly after
sale. The Plaintiff is alleging that Beneficials Repo Notice and Deficiency Notice fail to comply
with Pennsylvania law. We have engaged outside counsel to assist with the matter to determine the
merits of the above claims and any potential exposure. At the present time, we cannot estimate the
potential loss associated with this claim. We will continue to assess this claim in future
periods.
Aside from the litigation discussed above, the Company is also involved in routine legal
proceedings in the ordinary course of business. Such routine legal proceedings, in the aggregate,
are believed by management to be immaterial to the Companys financial condition, results of
operations and cash flows.
Item 1A. | Risk Factors |
As of March 31, 2011, the risk factors of the Company have not changed materially from those
reported in the Companys Annual Report Form 10-K for the year ended December 31, 2010. In
addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2010, which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the only risks that we face.
Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial condition and/or operating
results.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table sets forth information regarding the Companys repurchases of its common stock
during the three months ended March 31, 2011.
Total Number | ||||||||||||||||
Of Shares | ||||||||||||||||
Purchased | Maximum | |||||||||||||||
as Part of | Number of Shares | |||||||||||||||
Total | Publicly | that May Yet Be | ||||||||||||||
Number of | Average | Announced Plans | Purchased Under | |||||||||||||
Shares | Price Paid | or | the Plans or | |||||||||||||
Period | Purchased | Per Share | Programs | Programs(1) | ||||||||||||
January 1-31, 2011 |
| | | 273,680 | ||||||||||||
February 1-28, 2011 |
| | | 273,680 | ||||||||||||
March 1-31, 2011 |
| | | 273,680 |
(1) | On September 22, 2008, the Company announced that, on September 18, 2008, its Board of
Directors had approved a stock repurchase program authorizing the Company to purchase up to
1,823,584 shares of the Companys common stock. |
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | (Removed and Reserved) |
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Item 5. | Other Information |
Not applicable.
Item 6. | Exhibits |
3.1 | Charter of Beneficial Mutual Bancorp, Inc. (1) |
|||
3.2 | Bylaws of Beneficial Mutual Bancorp, Inc. (2) |
|||
4.0 | Form of Common Stock Certificate of Beneficial Mutual Bancorp, Inc. (1) |
|||
10.1 | Beneficial Mutual Bancorp, Inc. 2011 Management Incentive Plan* |
|||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Accounting Officer |
|||
32.0 | Section 1350 Certification |
* | Management contract or compensatory plan, contract or arrangement. |
|
(1) | 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. |
|
(2) | Incorporated herein by reference to the Exhibits to the Companys Current
Report on Form 8-K filed with the Securities and Exchange Commission on May 20, 2009. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
BENEFICIAL MUTUAL BANCORP, INC. |
||||
Dated: May 5, 2011 | By: | /s/ Gerard P. Cuddy | ||
Gerard P. Cuddy | ||||
President and Chief Executive Officer (principal executive officer) | ||||
Dated: May 5, 2011 | By: | /s/ Thomas D. Cestare | ||
Thomas D. Cestare | ||||
Executive Vice President and
Chief Financial Officer (principal financial officer) |
||||
54