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BNCL > SEC Filings for BNCL > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for BENEFICIAL MUTUAL BANCORP INC

Form 10-Q for BENEFICIAL MUTUAL BANCORP INC


2-Nov-2012

Quarterly Report


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

Forward-Looking Statements

This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area, changes in real estate market values in the Company's market area, changes in relevant accounting principles and guidelines and the inability of third party service providers to perform. Additional factors that may affect our results are disclosed in the section titled "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and its other reports filed with the U.S. Securities and Exchange Commission.


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

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

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

EXECUTIVE SUMMARY

Beneficial Mutual Bancorp Inc. is a federally chartered stock savings and loan holding company and owns 100% of the outstanding common stock of Beneficial Mutual Savings Bank ("the Bank"), a Pennsylvania chartered stock savings bank.

The Bank offers a variety of consumer and commercial banking services to individuals, businesses, and nonprofit organizations through 62 offices throughout the Philadelphia and Southern New Jersey area. The Bank was impacted by Hurricane Sandy that affected portions of the Northeastern United States in late October 2012. The impact of Hurricane Sandy on our local economy and customers cannot yet be fully assessed by management.

The Bank is supervised and regulated by the Pennsylvania Department of Banking and the FDIC. Pursuant to the provisions of the Dodd-Frank Act, the Office of Thrift Supervision was eliminated on July 21, 2011. As a result of the elimination of the Office of Thrift Supervision, savings and loan holding companies, such as Company and the MHC, are now regulated by the Board of Governors of the Federal Reserve System. The Bank's customer deposits are insured up to applicable legal limits by the Deposit Insurance Fund of the FDIC. Insurance services are offered through Beneficial Insurance Services, LLC and wealth management services are offered through Beneficial Advisors, LLC, both wholly owned subsidiaries of the Bank.

On April 3, 2012, the Company consummated its acquisition of SE Financial and St. Edmond's. SE Financial's assets totaled $296.0 million at April 3, 2012 and the acquisition resulted in Beneficial having new branches in Roxborough, Pennsylvania and Deptford, New Jersey. See the Company's Current Report on Form 8-K filed with the SEC on December 5, 2011 for additional information regarding the terms of the acquisition and the agreement and plan of merger, and the Company's Current Report on Form 8-K filed with the SEC on April 2, 2012 for additional information regarding the acquisition.

We recorded net income of $4.1 million, or $0.05 per diluted share, for the three months ended September 30, 2012 which was flat to net income of $4.1 million, or $0.05 per diluted share, recorded for the three months ended September 30, 2011. Net income for the nine months ended September 30, 2012 totaled $10.4 million, or $0.13 per diluted share, compared to $5.2 million, or $0.07 per diluted share, for the nine months ended September 30, 2011. Net income for the nine months ended September 30, 2012 included $2.7 million of merger and restructuring charges related to the acquisition of SE Financial Corp. Net income for the nine months ended September 30, 2011 included $5.1 million of restructuring charges related to the implementation of our expense management reduction program. Credit costs have decreased during the three and nine months ended September 30, 2012 from the same periods in 2011 but continue to have a significant impact on our financial results. During the three and nine months ended September 30, 2012, we recorded a provision for credit losses in the amount of $7.0 million and $22.0 million, respectively, compared to a provision of $9.0 million and $29.0 million for the three and nine months ended September 30, 2011, respectively.


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Although we have seen some improvement in our credit quality with non-performing assets decreasing $30.7 million, or 19.9%, to $123.4 million as of September 30, 2012 from $154.1 million at December 31, 2011, we continue to experience high charge-off levels. We expect that the provision for credit losses will remain elevated in 2012 and 2013 as we continue to focus on reducing our non-performing loan levels. We remain cautious despite some improvement in economic conditions as GDP growth is still low, unemployment remains high and residential and commercial real estate markets are still soft. During the nine months ended September 30, 2012, we continued to build our reserves and, at September 30, 2012, our allowance for loan losses totaled $55.8 million, or 2.24% of total loans, compared to $54.2 million, or 2.10% of total loans, at December 31, 2011 and $54.1 million, or 2.01% of total loans, at September 30, 2011.

Non-interest income increased $570 thousand and $2.6 million to $6.9 million and $20.8 million for the three and nine months ended September 30, 2012, respectively, from the same periods in 2011. Our mortgage banking team that was established in 2011 continued to positively impact our non-interest income. During the nine months ended September 30, 2012, we sold approximately $92.1 million of residential mortgage loans and recorded mortgage banking income of $2.3 million related to these loan sales.

Non-interest expense increased $2.1 million and $1.2 million to $30.3 million and $92.7 million for the three and nine months ended September 30, 2012, respectively, from the same periods in 2011. The increase in non-interest expense for the three and nine months ended September 30, 2012 was due to increases in salaries and benefits primarily resulting from the SE Financial acquisition and the expansion of our credit function, as well as increases in loan and other real estate owned losses and expenses.

Loans decreased $84.4 million, or 3.3%, to $2.5 billion at September 30, 2012 from $2.6 billion at December 31, 2011. Despite the addition of $174.8 million of loans acquired from SE Financial, our loan portfolio has decreased as a result of a number of large commercial loan repayments, continued weak loan demand, and our decision to sell all agency eligible mortgage loans to better position the Company's balance sheet for interest rate risk. During the nine months ended September 30, 2012, we sold approximately $92.1 million of residential mortgage loans originated during 2012 and recorded mortgage banking income of $2.3 million related to these loan sales. Although we will continue to sell mortgages, we may begin to hold certain mortgages based on market conditions and interest rate levels.

Deposits increased $251.2 million, or 7.0%, to $3.8 billion at September 30, 2012 from $3.6 billion at December 31, 2011. The increase was primarily driven by the addition of $274.1 million of deposits acquired from SE Financial. During the nine months ended September 30, 2012, municipal deposits decreased $90.1 million which was consistent with the planned run-off associated with our re-pricing of higher-cost, non-relationship-based municipal accounts. Excluding municipal deposits and the impact of the SE Financial acquisition, we experienced a $150.1 million, or 7.3%, increase in our core deposits, particularly savings products and business checking accounts, which increased $133.1 million and $59.9 million, respectively.

We continue to repurchase shares of our common stock and repurchased 982,900 shares during the nine months ended September 30, 2012 which increased total treasury shares to 2,981,629 at September 30, 2012.

The Federal Reserve Board continues to hold short term interest rates at historic lows. We expect that the persistently low interest rate environment will continue to lower yields on our investment and loan portfolios to a greater extent than we can reduce rates on deposits, which will put pressure on net interest margin in future periods. 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 nine months ended September 30, 2012 and we expect loan demand to remain low in future periods. This has resulted in significant excess liquidity with cash and cash equivalents totaling $460.1 million at September 30, 2012. Our investment portfolio increased $172.1 million, or 12.5%, to $1.5 billion at September 30, 2012 from $1.4 billion at December 31, 2011 as a result of our


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decision to re-invest cash in shorter term investment securities. We continue to focus on purchasing high quality investments that provide a steady stream of cash flow even in rising interest rate environments.

We believe that the economic crisis, which has adversely impacted our customers and communities, has resulted in a refocus on financial responsibility. Through any economic cycle, our strong capital profile positions us to advance our growth strategy by working with our customers to help them save and use credit wisely. It also allows us to continue to dedicate financial and human capital to support organizations that share our sense of responsibility to do what's right for the communities we serve. We remain committed to the financial responsibility we have practiced throughout our 159 year history, and we are dedicated to providing financial education opportunities to our customers by providing the tools necessary to make wise financial decisions.

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 also intend to deploy some of our excess capital to grow the Bank in our markets.

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.

On April 3, 2012, we completed the acquisition of SE Financial and St. Edmond's. The transaction enhanced our presence in southeastern Pennsylvania, and increased our market share in Philadelphia and Delaware Counties. We will continue to look for acquisitions that we believe will increase market share, improve profitability and provide growth opportunities in our footprint.

CURRENT REGULATORY ENVIRONMENT

The Basel Committee on Banking Supervision (Basel) is a committee of central banks and bank regulators from major industrialized countries that develops broad policy guidelines for use by each country's regulators with the purpose of ensuring that financial institutions have adequate capital given the risk levels of assets and off-balance sheet financial instruments.

In December 2010, Basel released a framework for strengthening international capital and liquidity regulations, referred to as Basel III. Basel III includes defined minimum capital ratios, which must be met when implementation occurs on January 1, 2013. An additional "capital conservation buffer" will be phased-in beginning January 1, 2016 and, when fully phased-in three years later, the minimum ratios will be 2.5% higher. Fully phased-in capital standards under Basel III will require banks to maintain more capital than the minimum levels required under current regulatory capital standards. As Basel III is only a framework, the specific changes in capital requirements are to be determined by each country's banking regulators.

In June 2012, U.S. Federal banking regulators adopted two notices of proposed rulemaking (NPR's) that would implement in the United States the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. A third adopted NPR related to banks that are internationally active or that are subject to market risk rules is not applicable to the Company. Comments on the NPR's were accepted through September 7, 2012.


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The first NPR, "Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition Provisions," would apply to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies (collectively, banking organizations). Consistent with the international Basel framework, this NPR would:

Increase the quantity and quality of capital required by proposing a new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and raising the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets;

Retain the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio at 4.00% of average assets;

Introduce a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and

Revise the definition of capital to improve the ability of regulatory capital instruments to absorb losses.

The new minimum regulatory capital requirements would be phased in from January 1, 2013 through January 1, 2016. The capital conservation buffer would be phased in from January 1, 2016 through January 1, 2019.

The second NPR, "Regulatory Capital Rules: Standardized Approach for Risk-weighted Assets; Market Discipline and Disclosure Requirement," also would apply to all banking organizations. This NPR would revise and harmonize the rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses that have been identified over the past several years. Banks and regulators use risk weighting to assign different levels of risk to different classes of assets and off balance sheet exposures - riskier items require higher capital cushions and less risky items require smaller capital cushions.

As of September 30, 2012, we believe our current capital levels would meet the fully-phased in minimum capital requirements, including capital conservation buffers, as proposed in the NPR's.

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

Effective April 1, 2011, the assessment base for payment of FDIC premiums was changed from a deposit level base to an asset base consisting of average tangible assets less average tangible equity. This change has resulted in a $1.1 million reduction in FDIC premiums for the nine months ended September 30, 2012 compared to the same period in 2011.

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


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Effective October 1, 2011, the debit-card interchange fee was capped at $0.21 per transaction, plus an additional 5 basis point charge to cover fraud losses. These fees are much lower than the current market rates. Although the regulation only impacts banks with assets above $10.0 billion, we believe that the provisions could result in a reduction in interchange revenue in the future. We recognized $3.7 million of interchange revenue for the nine months ended September 30, 2012.

CURRENT INTEREST RATE ENVIRONMENT

Net interest income represents a significant portion of our income. Accordingly, the interest rate environment has a substantial impact on Beneficial's earnings. During three months ended September 30, 2012, Beneficial reported net interest income of $35.6 million, an increase of $738 thousand, or 2.1%, from the three months ended September 30, 2011. The increase in net interest income during the three months ended September 30, 2012 compared to the same period last year was primarily the result of a reduction in the cost of interest bearing liabilities exceeding the decrease in the yield on interest earning assets. Our net interest margin decreased, totaling 3.16% for the three months ended September 30, 2012 as compared to 3.21% for the three months ended September 30, 2011. The net interest margin for the three months ended September 30, 2012 included approximately $765 thousand of loan prepayment fees which benefited our net interest margin by 7 basis points. The decrease in our net interest margin was driven by the low interest rate environment and continued margin compression, partially offset by our efforts to re-price deposits.

During the nine months ended September 30, 2012, we reported net interest income of $106.2 million, a decrease of $1.1 million, or 1.0%, from the nine months ended September 30, 2011. The decrease in net interest income during the nine months ended September 30, 2012 compared to the same period last year was primarily the result of a decline in interest earning assets due to a decision made in 2011 to shrink the balance sheet. As part of the decision to shrink the balance sheet, the Bank has run-off higher cost municipal deposits to strengthen capital, improve our net interest margin and lower loan balances. Despite the low interest rate environment, our net interest margin remained relatively stable, totaling 3.21% for the nine months ended September 30, 2012 as compared to 3.22% for the nine months ended September 30, 2011, largely due to our efforts to re-price deposits.

We have been able to lower the cost of our liabilities to 0.80% and 0.85% for the three and nine months ended September 30, 2012, respectively, compared to 0.98% and 1.02% for the three and nine months ended September 30, 2011, respectively, by re-pricing higher cost deposits. The reduction in deposit costs has been primarily due to decreasing rates on our municipal deposit portfolio as we have run-off higher cost, non-relationship-based municipal deposits.

During the first nine months of 2012, we continued to operate with very high levels of cash and cash equivalents, which was primarily driven by higher than normal commercial loan prepayments, weak overall loan demand and prepayments of higher yielding investments. This excess level of cash coupled with weak loan demand and the current low interest rate environment will likely result in reduced net interest income and net interest margin for the rest of 2012. Net interest margin in future periods will continue to be impacted by several factors including 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

Credit costs have decreased during the three and nine months ended September 30, 2012 from the same periods in 2011 but continue to have a significant impact on our financial results. During the three and nine months ended September 30, 2012, we recorded a provision for credit losses in the amount of $7.0 million and $22.0 million, respectively, compared to a provision of $9.0 million and $29.0 million for the three and nine months ended September 30, 2011, respectively. At September 30, 2012, our nonperforming assets were $123.4 million, down $30.7 million and $40.1 million, from $154.1 million and $163.5 million, respectively, at December 31, 2011 and September 30, 2011. We continue to charge off


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any collateral deficiency for non-performing loans once a loan is 90 days past due. We continued to build our reserves during 2012 and, at September 30, 2012, our allowance for loan losses totaled $55.8 million, or 2.24% of total loans, compared to $54.2 million, or 2.10% of total loans, at December 31, 2011.

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. We expect that the provision for credit losses will continue to remain elevated in 2012 due to market conditions and our continued focus on reducing our non-performing loan levels.

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.

Allowance for Loan Losses. We consider the allowance for loan losses ("ALLL") to be a critical accounting policy. The ALLL 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 ALLL is maintained at a level that management considers appropriate 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 ALLL may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations.

The 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 . . .

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