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BNCL > SEC Filings for BNCL > Form 10-Q on 1-Aug-2013All Recent SEC Filings

Show all filings for BENEFICIAL MUTUAL BANCORP INC

Form 10-Q for BENEFICIAL MUTUAL BANCORP INC


1-Aug-2013

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 or regulatory changes or regulatory actions, 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, 2012 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.

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 60 offices throughout the Philadelphia and Southern New Jersey area.

The Bank is supervised and regulated by the Pennsylvania Department of Banking and the FDIC. The Company is 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 $296.3 million at April 3, 2012 and the acquisition resulted in Beneficial having new branches in Roxborough, Pennsylvania and Deptford, New Jersey. Refer to Note 4 to these unaudited condensed consolidated financial statements for further detail.

The Board of Governors of the Federal Reserve System (the "Federal Reserve Board") continues to hold short term interest rates at historic lows and expects rates to remain low throughout 2014. The low rate environment has impacted the yield on our investment portfolio as maturing investments and liquidity generated by prepayments and pay-offs of our loan portfolio was invested at lower interest rates. Elevated unemployment, slow economic growth, and continued economic uncertainty has resulted in a slow recovery and limited 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 throughout 2012 and the first half of 2013.

The Bank recorded net income of $2.9 million and $6.1 million for the three and six month periods ended June 30, 2013, respectively, compared to $2.3 million and $6.3 million for the same periods in 2012.


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The low interest rate environment has continued to reduce the yields on our investment and loan portfolios resulting in net interest income decreasing $5.0 million and $7.8 million, respectively, to $31.2 million and $62.8 million, respectively, for the three and six months ended June 30, 2013 compared to $36.2 million and $70.6 million, respectively, for the three and six months ended June 30, 2012. Net interest margin decreased to 2.83% for both the three and six months ended June 30, 2013 from 3.21% and 3.23%, respectively, for the same periods in 2012 due to the low rate environment as well as continued weak loan demand. We expect that the continued low interest rate environment will put pressure on net interest margin in future periods.

The reductions in net interest income were partially offset by improvement in our asset quality which resulted in lower required provisions for credit losses. During the three and six months ended June 30, 2013, the Bank recorded a provision for credit losses in the amount of $5.0 million and $10.0 million, respectively, compared to a provision of $7.5 million and $15.0 million, respectively, for the three and six months ended June 30, 2012. Net charge-offs during the three and six months ended June 30, 2013 totaled $5.0 million and $9.0 million, or an annualized net charge-off rate of 0.84% and 0.75%, respectively, compared to $7.0 million and $13.6 million, or an annualized net charge off rate of 1.08% and 1.05%, respectively, for the same period in 2012.

Our asset quality metrics continue to improve as we reduce our non-performing asset levels. At June 30, 2013, our non-performing assets were $87.7 million, representing a decrease of $16.5 million, or 15.9%, from $104.2 million at December 31, 2012. Reserves as a percentage of non-performing loans, excluding government guaranteed student loans, totaled 101.3% at June 30, 2013 compared to 84.3% at December 31, 2012. At June 30, 2013, our allowance for loan losses was $58.7 million, or 2.46% of total loans, compared to $57.6 million, or 2.36% of total loans, at December 31, 2012.

We experienced contraction in our loan portfolio during the six months ended June 30, 2013 with loans decreasing $62.2 million, or 2.5%, to $2.4 billion at June 30, 2013 from $2.4 billion at December 31, 2012. Despite total loan originations of $281.0 million during the six months ended June 20, 2013, our loan portfolio has decreased as a result of high commercial loan repayments and continued weak loan demand. During the quarter ended December 31, 2012, we made a decision to begin to hold in portfolio some of our agency eligible mortgage production as the yields on these mortgages were attractive compared to the rates available on investment securities. As a result of this decision, our mortgage banking income decreased $711 thousand to $752 thousand during the six months ended June 30, 2013 as compared to $1.5 million during the same period last year.

During the quarter ended June 30, 2013, J.D. Power and Associates awarded Beneficial Bank the rating of "Highest Customer Satisfaction with Retail Banks in the Mid-Atlantic Region." We believe this award demonstrates our commitment to deliver an education-based experience to our customers through "The Beneficial Conversation" and staying true to our mission to always help our customers to do the right thing financially.

We remain focused on improving profitability and are making a number of investments in people, brand and technology to drive future growth. Although these investments may result in lower profitability in the short-term, we believe that ultimately they will drive future profitability and value for our shareholders.

We continue to repurchase shares of our common stock and repurchased 485,600 shares of our outstanding common stock during the six months ended June 30, 2013 which increased total treasury shares to 3,483,821 at June 30, 2013.

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 160 year history, and we are


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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 strive 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 consolidation in recent years, which is likely to continue in future periods. Consolidation may affect the markets in which we operate 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. 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 believe that there are opportunities to continue to grow via acquisition in our markets and expect that acquisitions will continue to be a key part of our future growth strategy. 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

In December 2010 and January 2011, the International Basel Committee on Banking Supervision, a committee of central banks and bank supervisors, published the final texts of reforms on capital and liquidity, which is referred to as "Basel
III." On July 2, 2013, the Federal Reserve Board approved the final Basel III capital rules, establishing unique standards for the largest institutions (advanced approach) through to community banks. The effective date of the implementation of Basel III is January 1, 2015 for Beneficial Bank. When fully phased-in on January 1, 2019, and if implemented by the U.S. banking agencies, Basel III will require banks to maintain: (i) 4.5 Common Equity Tier 1 to risk-weighted assets; (ii) 6.0% Tier 1 capital to risk-weighted assets; and
(iii) 8.0% Total capital to risk-weighted assets. Each of these ratios will also require an additional 2.5% "capital conservation buffer" on top of the minimum requirements.

As of June 30, 2013, our current capital levels exceed the required capital amounts to be considered "well capitalized" and we believe they also meet the fully-phased in minimum capital requirements, including capital conservation buffers, as defined in the Basel III capital rules.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). In addition to eliminating the Office of Thrift Supervision and creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other things, repealed 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. Their impact on operations cannot 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 and the Company.

Effective October 1, 2011, debit-card interchange regulations were issued that capped interchange rates 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 $2.7 million of interchange revenue during the six months ended June 30, 2013 and $2.4 million during the six months ended June 30, 2012.


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CURRENT INTEREST RATE ENVIRONMENT

Net interest income represents a significant portion of our revenues. Accordingly, the interest rate environment has a substantial impact on the Company's earnings. For the three months ended June 30, 2013, the Company reported net interest income of $31.2 million, a decrease of $5.0 million, or 13.7%, from the three months ended June 30, 2012. The decrease in net interest income during the three months ended June 30, 2013 compared to the same period last year was primarily the result of a reduction in the average interest rate earned on investment securities and loans due to the low interest rate environment and a decline in average loan balances of $290.7 million, partially offset by a reduction in the average cost of liabilities. We have been able to lower the cost of our liabilities to 0.69% for both the three and six months ended June 30, 2013, compared to 0.87% and 0.88%, respectively, for the three and six months ended June 30, 2012 by re-pricing higher cost deposits. The reduction in deposit costs has been primarily due to decreasing rates on our municipal deposits coupled with the planned run-off of these deposits.

For the six months ended June 30, 2013, the Company reported net interest income of $62.8 million, a decrease of $7.8 million, or 11.1%, from the six months ended June 30, 2012. The decrease in net interest income during the six months ended June 30, 2013 compared to the same period last year was primarily the result of a 56 basis point reduction in the average interest rate earned on investment securities and loans, and a decline in average loan balances of $208.8 million, partially offset by a reduction in the average cost of liabilities. Our net interest margin decreased to 2.83% for the six months ended June 30, 2013 from 3.23% for the six months ended June 30, 2012.

Our net interest margin decreased to 2.83% for both the three and six months ended June 30, 2013 from 3.21% and 3.23% for the three and six months ended June 30, 2012. 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 and other interest bearing liabilities, which will put pressure on net interest margin in future periods. Net interest margin in future periods will 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

Asset quality metrics showed continued signs of improvement during the three and six months ended June 30, 2013. Non-performing loans, including loans 90 days past due and still accruing, decreased to $80.5 million at June 30, 2013, compared to $92.4 million at December 31, 2012. Non-performing loans at June 30, 2013 included $22.5 million of government guaranteed student loans, which represented 28.0% of total non-performing loans. Net charge-offs for the three and six months ended June 30, 2013 were $5.0 million and $9.0 million, compared to $7.0 million and $13.6 million for the same periods in 2012. During the three and six months ended June 30, 2013, we recorded a provision for loan losses in the amount of $5.0 million and $10.0 million compared to $7.5 million and $15.0 million for the same periods in 2012. During the three and six months ended June 30, 2013, we continued to charge-off any collateral or cash flow deficiency for non-performing loans once a loan is 90 days past due. We continued to build our reserves and, at June 30, 2013, our allowance for loan losses totaled $58.7 million, or 2.46% of total loans, compared to $57.6 million, or 2.36% of total loans, at December 31, 2012 and $55.6 million, or 2.14% of total loans, at June 30, 2012.

Although the U.S. economy and our markets have shown some signs of improvement, unemployment remains high and commercial real estate conditions are just starting to improve. We expect that property values will remain volatile until underlying market fundamentals improve consistently. During the six months ended June 30, 2013, we continued to strengthen our credit monitoring efforts by expanding resources in our credit and risk management functions and maintaining our focus on improving the credit quality of our loan portfolio.


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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 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 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 allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations.

The allowance for loan losses is established through a provision for loan losses charged to expense which is based upon past loan 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 regularly 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 allowance for loan losses. This process involves our analysis of complex internal and external variables, and it requires that we exercise judgment to estimate an appropriate allowance for loan losses. 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 allowance for loan losses. 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 six months ended June 30, 2013. We also have approximately $87.7 million in non-performing assets consisting of non-performing loans and other real estate owned. Most of these assets are collateral dependent loans where we have incurred significant credit losses to write the assets down to their current appraised value less selling costs. We continue to assess the realizability of these loans and update our appraisals on these loans each year. To the extent the property values continue to decline, there could be additional losses on these non-performing assets which may be material. For example, a


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10% decrease in the collateral value supporting the non-performing assets could result in additional credit losses of $8.8 million. During the six months ended June 30, 2013, we began to experience a decline in levels of delinquencies, net charge-offs and non-performing assets. Management considered these market conditions in deriving the estimated allowance for loan losses; however, given the continued economic difficulties, the ultimate amount of loss could vary from that estimate.

Goodwill and Intangible Assets. The acquisition method of accounting for business combinations requires us to record assets acquired, liabilities assumed and consideration paid at their estimated fair values as of the acquisition date. The excess of consideration paid over the fair value of net assets acquired represents goodwill. Goodwill totaled $122.0 million at June 30, 2013 and December 31, 2012, respectively.

Goodwill and other indefinite lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. We have adopted the amendments included in Accounting Standards Update ("ASU") 2011-08, which allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.

During 2012, management reviewed qualitative factors for the Bank including financial performance, market changes and general economic conditions and noted there was not a significant change in any of these factors as compared to 2011. Accordingly, it was determined that it was more likely than not that the fair value of each reporting unit continued to be in excess of its carrying amount as of December 31, 2012. Additionally, during 2012, we assessed the qualitative factors related to Beneficial Insurance Services, LLC and determined that the two-step quantitative goodwill impairment test was warranted based on declining revenues. We performed this impairment test which estimates the fair value of equity using discounted cash flow analyses as well as guideline company and guideline transaction information. The inputs and assumptions 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. Based on our latest annual impairment assessment of Beneficial Insurance Services, LLC, we believe that the fair value is in excess of the carrying amount. As a result, management concluded that there was no impairment of goodwill during the year ended December 31, 2012.

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. During 2012, management recorded an impairment charge of $773 thousand related to the customer list intangible due to the fact that the expected cash flows from the customer list intangible were less than the carrying amount of the customer list intangible. The impairment charge was determined by the difference between the fair value of the customer list intangible and the carrying amount of the customer list intangible.

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 Income. 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 Company's consolidated statements of financial condition. 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, . . .

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