Attached files
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EXCEL - IDEA: XBRL DOCUMENT - Beneficial Mutual Bancorp Inc | Financial_Report.xls |
EX-31.2 - EXHIBIT 31.2 - Beneficial Mutual Bancorp Inc | c23833exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - Beneficial Mutual Bancorp Inc | c23833exv31w1.htm |
EX-32.0 - EXHIBIT 32.0 - Beneficial Mutual Bancorp Inc | c23833exv32w0.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 September 30, 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 | (I.R.S. Employer Identification No.) | |
organization) | ||
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 þ 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 November 3, 2011, there were 80,399,507 shares of the registrants common stock outstanding.
Of such shares outstanding, 45,792,775 were held by Beneficial Savings Bank MHC and 34,606,732
shares were publicly held.
BENEFICIAL MUTUAL BANCORP, INC.
Table of Contents
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.0 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
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)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
CASH AND CASH EQUIVALENTS |
||||||||
Cash and due from banks |
$ | 38,029 | $ | 33,778 | ||||
Interest-bearing deposits |
360,051 | 56,521 | ||||||
Total cash and cash equivalents |
398,080 | 90,299 | ||||||
Trading securities |
| 6,316 | ||||||
INVESTMENT SECURITIES: |
||||||||
Available-for-sale (amortized cost of $783,435 and
$1,527,183 at September 30, 2011 and December 31, 2010,
respectively) |
814,857 | 1,541,991 | ||||||
Held-to-maturity (estimated fair value of $417,810 and
$88,648 at September 30, 2011 and December 31, 2010,
respectively) |
414,319 | 86,609 | ||||||
Federal Home Loan Bank stock, at cost |
19,929 | 23,244 | ||||||
Total investment securities |
1,249,105 | 1,651,844 | ||||||
LOANS |
2,687,415 | 2,796,402 | ||||||
Allowance for loan losses |
(54,120 | ) | (45,366 | ) | ||||
Net loans |
2,633,295 | 2,751,036 | ||||||
ACCRUED INTEREST RECEIVABLE |
16,685 | 19,566 | ||||||
BANK PREMISES AND EQUIPMENT, Net |
60,199 | 64,339 | ||||||
OTHER ASSETS |
||||||||
Goodwill |
110,486 | 110,486 | ||||||
Bank owned life insurance |
34,901 | 33,818 | ||||||
Other intangibles |
14,244 | 16,919 | ||||||
Other assets |
115,613 | 185,162 | ||||||
Total other assets |
275,244 | 346,385 | ||||||
TOTAL ASSETS |
$ | 4,632,608 | $ | 4,929,785 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
LIABILITIES: |
||||||||
Deposits: |
||||||||
Non-interest bearing deposits |
$ | 276,035 | $ | 282,050 | ||||
Interest-bearing deposits |
3,325,662 | 3,660,254 | ||||||
Total deposits |
3,601,697 | 3,942,304 | ||||||
Borrowed funds |
250,330 | 273,317 | ||||||
Other liabilities |
152,088 | 98,617 | ||||||
Total liabilities |
4,004,115 | 4,314,238 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
STOCKHOLDERS EQUITY: |
||||||||
Preferred Stock $.01 par value; 100,000,000 shares
authorized, none issued or outstanding as of September 30,
2011 and December 31, 2010 |
| | ||||||
Common Stock $.01 par value 300,000,000 shares
authorized, 82,267,457 shares issued and 80,399,507 and
80,717,553 shares outstanding as of September 30, 2011 and
December 31, 2010, respectively |
823 | 823 | ||||||
Additional paid-in capital |
349,994 | 348,415 | ||||||
Unearned common stock held by employee stock ownership plan |
(20,306 | ) | (22,587 | ) | ||||
Retained earnings (partially restricted) |
309,391 | 304,232 | ||||||
Accumulated other comprehensive income (loss) |
4,516 | (1,882 | ) | |||||
Treasury Stock at cost, 1,867,950 and 1,549,904 shares at
September 30, 2011 and December 31, 2010, respectively |
(15,925 | ) | (13,454 | ) | ||||
Total stockholders equity |
628,493 | 615,547 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 4,632,608 | $ | 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)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
INTEREST INCOME: |
||||||||||||||||
Interest and fees on loans |
$ | 34,577 | $ | 35,480 | $ | 106,013 | $ | 109,940 | ||||||||
Interest on overnight investments |
254 | 151 | 603 | 321 | ||||||||||||
Interest on trading securities |
| 14 | 26 | 70 | ||||||||||||
Interest and dividends on investment securities: |
||||||||||||||||
Taxable |
8,286 | 10,497 | 27,210 | 35,146 | ||||||||||||
Tax-exempt |
849 | 1,150 | 2,764 | 3,552 | ||||||||||||
Total interest income |
43,966 | 47,292 | 136,616 | 149,029 | ||||||||||||
INTEREST EXPENSE: |
||||||||||||||||
Interest on deposits: |
||||||||||||||||
Interest bearing checking accounts |
1,562 | 2,556 | 6,187 | 7,616 | ||||||||||||
Money market and savings deposits |
2,300 | 2,441 | 6,998 | 7,045 | ||||||||||||
Time deposits |
3,173 | 3,395 | 9,646 | 11,621 | ||||||||||||
Total |
7,035 | 8,392 | 22,831 | 26,282 | ||||||||||||
Interest on borrowed funds |
2,100 | 3,810 | 6,506 | 12,208 | ||||||||||||
Total interest expense |
9,135 | 12,202 | 29,337 | 38,490 | ||||||||||||
Net interest income |
34,831 | 35,090 | 107,279 | 110,539 | ||||||||||||
Provision for loan losses |
9,000 | 51,050 | 29,000 | 62,200 | ||||||||||||
Net interest income after provision for loan losses |
25,831 | (15,960 | ) | 78,279 | 48,339 | |||||||||||
NON-INTEREST INCOME: |
||||||||||||||||
Insurance and advisory commission and fee income |
1,898 | 1,944 | 6,102 | 6,716 | ||||||||||||
Service charges and other income |
4,205 | 3,387 | 11,368 | 11,076 | ||||||||||||
Impairment charge on securities available-for-sale |
| (88 | ) | | (88 | ) | ||||||||||
Net gain on sale of investment securities |
197 | 370 | 616 | 2,374 | ||||||||||||
Trading securities profits |
| 123 | 81 | 235 | ||||||||||||
Total non-interest income |
6,300 | 5,736 | 18,167 | 20,313 | ||||||||||||
NON-INTEREST EXPENSE: |
||||||||||||||||
Salaries and employee benefits |
13,960 | 15,580 | 42,452 | 46,316 | ||||||||||||
Occupancy expense |
2,610 | 2,906 | 8,338 | 8,966 | ||||||||||||
Depreciation, amortization and maintenance |
2,165 | 2,443 | 6,556 | 6,859 | ||||||||||||
Marketing expense |
951 | 2,392 | 2,720 | 5,041 | ||||||||||||
Intangible amortization expense |
908 | 886 | 2,674 | 2,653 | ||||||||||||
FDIC Insurance |
1,055 | 1,361 | 4,314 | 4,065 | ||||||||||||
Restructuring charge |
| | 5,058 | | ||||||||||||
Other |
6,575 | 7,783 | 19,411 | 21,415 | ||||||||||||
Total non-interest expense |
28,224 | 33,351 | 91,523 | 95,315 | ||||||||||||
Income (loss) before income taxes |
3,907 | (43,575 | ) | 4,923 | (26,663 | ) | ||||||||||
Income tax expense (benefit) |
(172 | ) | (21,845 | ) | (236 | ) | (18,057 | ) | ||||||||
NET INCOME (LOSS) |
$ | 4,079 | $ | (21,730 | ) | $ | 5,159 | $ | (8,606 | ) | ||||||
EARNINGS PER SHARE Basic |
$ | 0.05 | $ | (0.28 | ) | $ | 0.07 | $ | (0.11 | ) | ||||||
EARNINGS PER SHARE Diluted |
$ | 0.05 | $ | (0.28 | ) | $ | 0.07 | $ | (0.11 | ) | ||||||
Average common shares outstanding Basic |
77,132,264 | 77,541,313 | 77,077,506 | 77,721,359 | ||||||||||||
Average common shares outstanding Diluted |
77,244,916 | 77,541,313 | 77,250,785 | 77,721,359 |
See accompanying notes to 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 of | Additional | Common | Other | Total | ||||||||||||||||||||||||||||||||
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 Income |
5,159 | 5,159 | $ | 5,159 | ||||||||||||||||||||||||||||||||
KSOP shares committed to be released |
(372 | ) | 2,281 | 1,909 | ||||||||||||||||||||||||||||||||
Stock option expense |
902 | 902 | ||||||||||||||||||||||||||||||||||
Restricted stock shares |
1,049 | 1,049 | ||||||||||||||||||||||||||||||||||
Purchase of treasury stock |
(2,471 | ) | (2,471 | ) | ||||||||||||||||||||||||||||||||
Net unrealized gain on AFS
securities arising during the year
(net of deferred tax of $6,597) |
10,633 | 10,633 | 10,633 | |||||||||||||||||||||||||||||||||
Reclassification adjustment for net
gains on AFS securities included in
net income (net of tax of $216) |
(400 | ) | (400 | ) | (400 | ) | ||||||||||||||||||||||||||||||
Pension, other post retirement and
postemployment benefit plan
adjustments (net of tax benefit of
$1,266) |
(3,835 | ) | (3,835 | ) | (3,835 | ) | ||||||||||||||||||||||||||||||
Total other comprehensive income |
6,398 | |||||||||||||||||||||||||||||||||||
Comprehensive income |
11,557 | |||||||||||||||||||||||||||||||||||
BALANCE, SEPTEMBER 30, 2011 |
82,267,457 | $ | 823 | $ | 349,994 | $ | (20,306 | ) | $ | 309,391 | $ | (15,925 | ) | $ | 4,516 | $ | 628,493 | |||||||||||||||||||
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)
Nine Months Ended | ||||||||
September | ||||||||
2011 | 2010 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | 5,159 | $ | (8,606 | ) | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
29,000 | 62,200 | ||||||
Depreciation and amortization |
4,162 | 4,639 | ||||||
Intangible amortization |
2,674 | 2,653 | ||||||
Net gain on sale of investments |
(616 | ) | (2,374 | ) | ||||
Impairment of investments |
| 88 | ||||||
Accretion of discount on investments |
(1,200 | ) | (1,372 | ) | ||||
Amortization of premium on investments |
376 | 422 | ||||||
Gain on sale of loans |
(317 | ) | | |||||
Deferred income taxes |
279 | 1,942 | ||||||
Net loss from disposition of premises and equipment |
991 | 280 | ||||||
Other real estate impairment |
56 | 1,080 | ||||||
Amortization of KSOP |
1,908 | 2,328 | ||||||
Increase in bank owned life insurance |
(1,083 | ) | (1,107 | ) | ||||
Stock based compensation expense |
1,951 | 2,299 | ||||||
Changes in assets and liabilities that provided (used) cash: |
||||||||
Purchases of trading securities |
(216,487 | ) | (758,148 | ) | ||||
Proceeds from sale of trading securities |
223,546 | 789,895 | ||||||
Proceeds from sale of loans |
16,211 | | ||||||
Accrued interest receivable |
2,881 | 892 | ||||||
Accrued interest payable |
184 | (904 | ) | |||||
Income taxes payable (receivable) |
5,545 | (29,697 | ) | |||||
Other liabilities |
3,141 | (30,718 | ) | |||||
Other assets |
6,232 | (40,008 | ) | |||||
Net cash provided by (used in) operating activities |
84,593 | (4,216 | ) | |||||
INVESTING ACTIVITIES: |
||||||||
Loans originated or acquired |
(362,346 | ) | (470,837 | ) | ||||
Principal repayment on loans |
432,145 | 419,413 | ||||||
Purchases of investment securities available for sale |
(130,390 | ) | (946,015 | ) | ||||
Proceeds from sales and maturities of investment securities available for sale |
683,773 | 826,063 | ||||||
Purchases of investment securities held to maturity |
(371,172 | ) | (93,855 | ) | ||||
Proceeds from sales, maturities, calls or repayments of investment securities held to maturity |
371,800 | 53,145 | ||||||
Net (purchases) proceeds from sales of money market funds |
(59,638 | ) | 2,457 | |||||
Redemption of Federal Home Loan Bank stock |
3,315 | 900 | ||||||
Proceeds from sale of other real estate owned |
710 | 2,475 | ||||||
Purchases of premises and equipment |
(1,565 | ) | (10,350 | ) | ||||
Proceeds from sale of premises and equipment |
| 880 | ||||||
Cash used in other investing activities |
(280 | ) | (442 | ) | ||||
Net cash provided by (used in) in investing activities |
566,352 | (216,166 | ) | |||||
FINANCING ACTIVITIES: |
||||||||
Net decrease in borrowed funds |
(22,987 | ) | (86,737 | ) | ||||
Net (decrease) increase in checking, savings and demand accounts |
(309,754 | ) | 429,228 | |||||
Net decrease in time deposits |
(7,952 | ) | (80,726 | ) | ||||
Proceeds from stock issuance |
| 13 | ||||||
Purchase of treasury stock |
(2,471 | ) | (4,987 | ) | ||||
Net cash (used in) provided by financing activities |
(343,164 | ) | 256,791 | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
307,781 | 36,409 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
90,299 | 179,701 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 398,080 | $ | 216,110 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW |
||||||||
Cash payments for interest |
$ | 22,647 | $ | 27,173 | ||||
Cash payments for income taxes |
| 9,715 | ||||||
Transfers of loans to other real estate owned |
3,049 | 9,695 | ||||||
Transfers of bank branches to other real estate |
| 2,207 | ||||||
Transfers of bank branches to fixed assets held for sale |
553 | | ||||||
Securities purchased and not yet settled |
77,290 | |
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 and nine month periods ended September 30,
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 wealth management services
and non-deposit investment products, (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. 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 Federal Deposit
Insurance Corporation (the FDIC). Pursuant to the provisions of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the Dodd-Frank Act), the Office of Thrift Supervision (the
OTS), which previously served as the Companys and the Mutual Holding Companys primary federal
regulator, was eliminated on July 21, 2011. As a result of the elimination of the OTS, savings and
loan holding companies, such as the Company and the MHC, are now regulated by the Board of
Governors of the Federal Reserve System. 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
and nine months ended September 30, 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.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands, except share and per share amounts) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Basic and diluted earnings per share: |
||||||||||||||||
Net income |
$ | 4,079 | $ | (21,730 | ) | $ | 5,159 | $ | (8,606 | ) | ||||||
Basic average common shares outstanding |
77,132,264 | 77,541,313 | 77,077,506 | 77,721,359 | ||||||||||||
Effect of dilutive securities |
112,652 | | 173,279 | | ||||||||||||
Dilutive average shares outstanding |
77,244,916 | 77,541,313 | 77,250,785 | 77,721,359 | ||||||||||||
Net earnings per share |
||||||||||||||||
Basic |
$ | 0.05 | $ | (0.28 | ) | $ | 0.07 | $ | (0.11 | ) | ||||||
Diluted |
$ | 0.05 | $ | (0.28 | ) | $ | 0.07 | $ | (0.11 | ) |
For the three and nine months ended September 30, 2011, there were 2,088,510 outstanding
options and 327,500 and 0 restricted stock grants, respectively, that were anti-dilutive for the
earnings per share calculation. For the three and nine months ended September 30, 2010, there were
2,028,100 and 0 outstanding options and 188,500 and 2,500 restricted stock grants, respectively,
that were anti-dilutive for the earnings per share calculation. See Note 12 for further discussion
of stock grants.
6
Table of Contents
NOTE 4 INVESTMENT SECURITIES
The amortized cost and estimated fair value of investments in debt and equity securities at
September 30, 2011 and December 31, 2010 are as follows:
September 30, 2011 | ||||||||||||||||
Investment Securities Available-for-Sale | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(Dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||||
Equity securities |
$ | 2,477 | $ | | $ | 99 | $ | 2,378 | ||||||||
U.S. Government Sponsored |
||||||||||||||||
Enterprise (GSE) and Agency Notes |
20,025 | 26 | | 20,051 | ||||||||||||
GNMA guaranteed mortgage certificates |
8,054 | 274 | | 8,328 | ||||||||||||
Collateralized mortgage obligations |
193,748 | 2,285 | 239 | 195,794 | ||||||||||||
Other mortgage-backed securities |
384,987 | 27,953 | | 412,940 | ||||||||||||
Municipal bonds |
87,639 | 3,351 | 7 | 90,983 | ||||||||||||
Pooled trust preferred securities |
15,743 | | 2,098 | 13,645 | ||||||||||||
Money market fund |
70,762 | 2 | 26 | 70,738 | ||||||||||||
Total |
$ | 783,435 | $ | 33,891 | $ | 2,469 | $ | 814,857 | ||||||||
September 30, 2011 | ||||||||||||||||
Investment Securities Held-to-Maturity | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
GNMA guaranteed mortgage certificates |
$ | 602 | $ | | $ | 28 | $ | 574 | ||||||||
Other mortgage-backed securities |
342,558 | 3,198 | 195 | 345,561 | ||||||||||||
Collateralized mortgage obligations |
56,092 | 307 | | 56,399 | ||||||||||||
Municipal bonds |
14,567 | 209 | | 14,776 | ||||||||||||
Foreign bonds |
500 | | | 500 | ||||||||||||
Total |
$ | 414,319 | $ | 3,714 | $ | 223 | $ | 417,810 | ||||||||
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 nine months ended September 30, 2011, the Bank sold $310.4 million of
government-sponsored enterprises (GSE) securities and $10.1 million of mortgage-backed securities
(MBS securities) that resulted in a net gain of $431 thousand. The sale of these lower rate,
longer term securities was driven by managements repositioning of the Banks balance sheet to
improve profitability, interest rate risk, and our capital position.
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
Bank 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 Company reviewed its portfolio for the quarter ended September 30, 2011, and with respect to
debt and equity securities in an unrealized loss position, the Company does not intend to sell, and
it is not more likely than not that the Company will be required to sell, these securities in a
loss position prior to their anticipated recovery.
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 Company had an unrealized
loss of $2.1 million related to its pooled trust preferred securities as of September 30, 2011
compared to an unrealized loss of $2.5 million at December 31, 2010. 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
nine months ended September 30, 2011:
Nine Months Ended | ||||
September 30, 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 September 30,
2011, the book value of the security totaled $8.7 million and the fair value totaled $8.2 million,
representing an unrealized loss of $0.5 million, or 5.8%. At September 30, 2011, there were a total
of 29 banks currently performing of the 39 remaining banks in the security pool. A total of 18.2%,
or $59.0 million, of the current collateral of $323.6 million has defaulted and 11.7%, or $38.0
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 September 2011, with a
0% recovery, was modeled and resulted in no cash flow shortfalls to our tranche. This represents
the assumption of an additional 24.8% of defaults from the remaining performing collateral of
$226.6 million. Excess subordination for the Trapeza 2003-4A Class A1A security represents 61.9% of
the remaining performing collateral. The excess subordination of 61.9% is calculated by taking the
remaining performing collateral of $226.6 million, subtracting the Class A-1 or senior tranche
balance of $86.3 million and dividing this result, $140.3 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
September 30, 2011, the book value of the security totaled $7.0 million and the fair value totaled
$5.4 million, representing an unrealized loss of $1.6 million, or 22.6%. At September 30, 2011,
there were a total of 30 banks currently performing of the 42 remaining banks in the security pool.
A total of 16.7%, or $35.0 million, of the current collateral of $209.7 million has defaulted and
12.5%, or $26.2 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 November 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
$148.5 million. Excess subordination for the US Capital Fund III A-1 security represents 44.5% of
the remaining performing collateral. The excess subordination of 44.5% is calculated by taking the
remaining performing collateral of $148.5 million, subtracting the Class A-1 or senior tranche
balance of $82.4 million and dividing this result, $66.1 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 September 30, 2011 and December 31, 2010:
At September 30, 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 |
$ | | $ | | $ | 104 | $ | | $ | 104 | $ | | ||||||||||||
Mortgage-backed securities |
106,930 | 195 | 574 | 28 | 107,504 | 223 | ||||||||||||||||||
Municipal and other bonds |
933 | 5 | 1,205 | 2 | 2,138 | 7 | ||||||||||||||||||
Pooled trust preferred securities |
| | 13,642 | 2,098 | 13,642 | 2,098 | ||||||||||||||||||
Collateralized mortgage obligations |
130,189 | 236 | 118 | 3 | 130,307 | 239 | ||||||||||||||||||
Subtotal, debt securities |
238,052 | 436 | 15,643 | 2,131 | 253,695 | 2,567 | ||||||||||||||||||
Equity securities |
2,378 | 99 | | | 2,378 | 99 | ||||||||||||||||||
Mutual fund |
1,195 | 26 | | | 1,195 | 26 | ||||||||||||||||||
Total temporarily impaired securities |
$ | 241,625 | $ | 561 | $ | 15,643 | $ | 2,131 | $ | 257,268 | $ | 2,692 | ||||||||||||
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 | ||||||||||||||||||
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 September
30, 2011 and December 31, 2010. Mutual funds, money market funds and equity securities are not
included in the table based on lack of maturity.
September 30, 2011 | December 31, 2010 | |||||||||||||||
Book | Estimated | Book | Estimated | |||||||||||||
(Dollars are in thousands) | Value | Fair Value | Value | Fair Value | ||||||||||||
Available-for-sale: |
||||||||||||||||
Due in one year or less |
$ | 3,710 | $ | 3,762 | $ | 2,393 | $ | 2,406 | ||||||||
Due after one year through five years |
10,051 | 10,482 | 151,758 | 152,430 | ||||||||||||
Due after five years through ten years |
212,177 | 214,971 | 776,999 | 766,453 | ||||||||||||
Due after ten years |
91,217 | 91,259 | 114,279 | 112,033 | ||||||||||||
Mortgage-backed securities |
393,041 | 421,267 | 467,915 | 494,446 | ||||||||||||
Total |
$ | 710,196 | $ | 741,741 | $ | 1,513,344 | $ | 1,527,768 | ||||||||
Held-to-maturity: |
||||||||||||||||
Due in one year or less |
$ | 12,302 | $ | 12,389 | $ | 52,214 | $ | 52,196 | ||||||||
Due after one year through five years |
2,135 | 2,184 | 2,130 | 2,136 | ||||||||||||
Due after five years through ten years |
56,722 | 57,101 | 625 | 636 | ||||||||||||
Due after ten years |
| | 125 | 128 | ||||||||||||
Mortgage-backed securities |
343,160 | 346,136 | 31,515 | 33,552 | ||||||||||||
Total |
$ | 414,319 | $ | 417,810 | $ | 86,609 | $ | 88,648 | ||||||||
At September 30, 2011 and December 31, 2010, $521.6 million and $863.4 million, respectively,
of securities were pledged to secure municipal deposits. At September 30, 2011 and December 31,
2010, the Company had $139.6 million and $153.4 million, respectively, of securities pledged as
collateral on
secured borrowings. At September 30, 2011 and December 31, 2010, the Company also pledged $235
thousand and $3.4 million, respectively, of securities to secure its borrowing capacity at the
Federal Reserve Bank of Philadelphia.
At September 30, 2011 and December 31, 2010, the Company held stock in the FHLB of Pittsburgh
totaling $19.9 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 September 30, 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 September 30, 2011 and December 31, 2010 are summarized as
follows:
(Dollars in thousands) | September 30, 2011 | December 31, 2010 | ||||||
Commercial: |
||||||||
Commercial real estate |
$ | 568,907 | $ | 600,734 | ||||
Commercial business loans |
434,646 | 441,881 | ||||||
Commercial construction |
261,626 | 268,314 | ||||||
Total Commercial |
1,265,179 | 1,310,929 | ||||||
Residential |
||||||||
Residential real estate |
665,155 | 687,565 | ||||||
Residential construction |
5,863 | 11,157 | ||||||
Total real estate loans |
671,018 | 698,722 | ||||||
Consumer loans: |
||||||||
Home equity |
276,667 | 288,875 | ||||||
Personal |
78,746 | 94,036 | ||||||
Education |
238,594 | 249,696 | ||||||
Automobile |
157,211 | 154,144 | ||||||
Total consumer loans |
751,218 | 786,751 | ||||||
Total loans |
2,687,415 | 2,796,402 | ||||||
Allowance for losses |
(54,120 | ) | (45,366 | ) | ||||
Loans, net |
$ | 2,633,295 | $ | 2,751,036 | ||||
Included in the balance of residential loans are $3.7 million of loans held for sale at
September 30, 2011. As of December 31, 2010, the Bank did not have any loans held for sale. These
loans are carried at estimated fair value, on an aggregate basis. Loans held for sale are loans
originated by the Bank to be sold to a third party under contractual obligation to purchase the
loans from the Bank. For the nine
months ended September 30, 2011, the Bank sold residential mortgage loans with an unpaid principal
balance of $13.4 million and recognized a pre-tax gain of $157 thousand, which was recorded in
non-interest income as a component of service charges and other income. The Bank retained the
related mortgage servicing rights and receives a 25 basis point servicing fee. The Bank had no
loan sales during 2010.
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 September 30, 2011 or December 31, 2010.
12
Table of Contents
The summary activity in the allowance for loan losses for all portfolios for the nine months ended
September 30, 2011 and 2010 and for the year ended December 31, 2010, is as follows:
Nine Months Ended | Year Ended | |||||||||||
September 30, | December 31, | |||||||||||
(In thousands) | 2011 | 2010 | 2010 | |||||||||
Balance, beginning of year |
$ | 45,366 | $ | 45,855 | $ | 45,855 | ||||||
Provision for loan losses |
29,000 | 62,200 | 70,200 | |||||||||
Charge-offs |
(23,622 | ) | (63,732 | ) | (71,642 | ) | ||||||
Recoveries |
3,376 | 636 | 953 | |||||||||
Balance, end of period |
$ | 54,120 | $ | 44,959 | $ | 45,366 | ||||||
The following tables set forth the activity in the allowance for loan losses by portfolio for
the nine months ended September 30, 2011 and for the year ended December 31, 2010:
September 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | COMMERCIAL | RESIDENTIAL | CONSUMER | |||||||||||||||||||||||||||||||||||||||||
Home | ||||||||||||||||||||||||||||||||||||||||||||
Equity & | ||||||||||||||||||||||||||||||||||||||||||||
Real | Real | Equity | Not | |||||||||||||||||||||||||||||||||||||||||
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 |
5,896 | 3,243 | 11,479 | 273 | 36 | 567 | 1,104 | 109 | 915 | | 23,622 | |||||||||||||||||||||||||||||||||
Recoveries |
557 | 924 | 876 | | | 353 | 235 | | 431 | | 3,376 | |||||||||||||||||||||||||||||||||
Provision |
6,772 | 3,000 | 16,093 | 209 | 129 | 256 | 1,560 | 148 | 833 | | 29,000 | |||||||||||||||||||||||||||||||||
Allowance ending
balance |
$ | 16,226 | $ | 15,088 | $ | 14,786 | $ | 1,790 | $ | 123 | $ | 2,178 | $ | 1,668 | $ | 336 | $ | 1,375 | $ | 550 | $ | 54,120 | ||||||||||||||||||||||
Allowance ending
balance |
||||||||||||||||||||||||||||||||||||||||||||
Individually
evaluated for
impairment |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||||||||
Collectively
evaluated for
impairment |
16,226 | 15,088 | 14,786 | 1,790 | 123 | 2,178 | 1,668 | 336 | 1,375 | 550 | 54,120 | |||||||||||||||||||||||||||||||||
Total Allowance |
$ | 16,226 | $ | 15,088 | $ | 14,786 | $ | 1,790 | $ | 123 | $ | 2,178 | $ | 1,668 | $ | 336 | $ | 1,375 | $ | 550 | $ | 54,120 | ||||||||||||||||||||||
Financing receivable: |
||||||||||||||||||||||||||||||||||||||||||||
Ending balance |
||||||||||||||||||||||||||||||||||||||||||||
Individually
evaluated for
impairment |
$ | 36,589 | $ | 26,457 | $ | 48,302 | $ | 14,441 | $ | 1,967 | $ | 648 | $ | 774 | $ | | $ | 62 | $ | | $ | 129,420 | ||||||||||||||||||||||
Collectively
evaluated for
impairment |
532,318 | 408,189 | 213,324 | 650,714 | 3,896 | 276,019 | 77,972 | 238,594 | 157,149 | | 2,558,175 | |||||||||||||||||||||||||||||||||
Total Portfolio |
$ | 568,907 | $ | 434,646 | $ | 261,626 | $ | 665,155 | $ | 5,863 | $ | 276,667 | $ | 78,746 | $ | 238,594 | $ | 157,211 | $ | | $ | 2,687,415 | ||||||||||||||||||||||
13
Table of Contents
December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||||||
(Dollars in | ||||||||||||||||||||||||||||||||||||||||||||
thousands) | COMMERCIAL | RESIDENTIAL | CONSUMER | |||||||||||||||||||||||||||||||||||||||||
Home | ||||||||||||||||||||||||||||||||||||||||||||
Equity & | ||||||||||||||||||||||||||||||||||||||||||||
Real | Real | Lines of | Not | |||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||
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.
14
Table of Contents
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. 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 net 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; and (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.
The following tables set forth the amounts and percentage of the portfolio of classified asset
categories for the commercial and residential loan portfolios at September 30, 2011 and December
31, 2010:
Commercial and Residential Loans
Credit Risk Internally Assigned
(Dollars in thousands)
September 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Commercial | Commercial | Residential | Residential | ||||||||||||||||||||||||||||||||||||||||||||
Real Estate | Business | Construction | Real Estate | Construction | Total | |||||||||||||||||||||||||||||||||||||||||||
Grade |
||||||||||||||||||||||||||||||||||||||||||||||||
Pass |
$ | 521,242 | 91 | % | $ | 376,042 | 87 | % | $ | 195,675 | 74 | % | $ | 650,714 | 98 | % | $ | 3,896 | 66 | % | $ | 1,747,569 | 90 | % | ||||||||||||||||||||||||
Special Mention |
11,076 | 2 | % | 32,147 | 7 | % | 17,649 | 7 | % | | | % | | | % | 60,872 | 3 | % | ||||||||||||||||||||||||||||||
Substandard |
26,762 | 5 | % | 22,459 | 5 | % | 33,040 | 13 | % | 14,441 | 2 | % | 1,967 | 34 | % | 98,669 | 5 | % | ||||||||||||||||||||||||||||||
Doubtful |
9,827 | 2 | % | 3,998 | 1 | % | 15,262 | 6 | % | | | % | | | % | 29,087 | 2 | % | ||||||||||||||||||||||||||||||
Total |
$ | 568,907 | 100 | % | $ | 434,646 | 100 | % | $ | 261,626 | 100 | % | $ | 665,155 | 100 | % | $ | 5,863 | 100 | % | $ | 1,936,197 | 100 | % | ||||||||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Commercial | Commercial | Residential | Residential | ||||||||||||||||||||||||||||||||||||||||||||
Real Estate | Business | Construction | Real Estate | Construction | Total | |||||||||||||||||||||||||||||||||||||||||||
Grade |
||||||||||||||||||||||||||||||||||||||||||||||||
Pass |
$ | 558,679 | 93 | % | $ | 408,148 | 92 | % | $ | 204,824 | 76 | % | $ | 674,151 | 98 | % | $ | 10,849 | 97 | % | $ | 1,856,651 | 92 | % | ||||||||||||||||||||||||
Special Mention |
6,375 | 1 | % | 9,557 | 2 | % | 26,711 | 10 | % | | | % | | | % | 42,643 | 2 | % | ||||||||||||||||||||||||||||||
Substandard |
26,044 | 4 | % | 21,794 | 5 | % | 19,996 | 8 | % | 13,414 | 2 | % | 106 | 1 | % | 81,354 | 4 | % | ||||||||||||||||||||||||||||||
Doubtful |
9,636 | 2 | % | 2,382 | 1 | % | 16,783 | 6 | % | | | % | 202 | 2 | % | 29,003 | 2 | % | ||||||||||||||||||||||||||||||
Total |
$ | 600,734 | 100 | % | $ | 441,881 | 100 | % | $ | 268,314 | 100 | % | $ | 687,565 | 100 | % | $ | 11,157 | 100 | % | $ | 2,009,651 | 100 | % | ||||||||||||||||||||||||
The increase in substandard loans from December 31, 2010 is primarily driven by commercial
construction and residential loans. We have assessed the value of the collateral supporting these
loans and recorded a charge-off if the carrying amount of the loan exceeded the fair value of the
collateral.
15
Table of Contents
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 tables set
forth the consumer loan risk profile based on payment activity at September 30, 2011 and December
31, 2010:
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
(Dollars in thousands)
September 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||
Home Equity & | ||||||||||||||||||||||||||||||||||||||||||||||||
Lines of Credit | Personal | Education | Auto | Total | ||||||||||||||||||||||||||||||||||||||||||||
Performing |
$ | 276,019 | 100 | % | $ | 77,972 | 99 | % | $ | 213,079 | 89 | % | $ | 157,149 | 100 | % | $ | 724,219 | 96 | % | ||||||||||||||||||||||||||||
Nonperforming |
648 | | % | 774 | 1 | % | 25,515 | 11 | % | 62 | | % | 26,999 | 4 | % | |||||||||||||||||||||||||||||||||
Total |
$ | 276,667 | 100 | % | $ | 78,746 | 100 | % | $ | 238,594 | 100 | % | $ | 157,211 | 100 | % | $ | 751,218 | 100 | % | ||||||||||||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||||||||||
Home Equity & | ||||||||||||||||||||||||||||||||||||||||||||||||
Lines of Credit | Personal | Education | Auto | Total | ||||||||||||||||||||||||||||||||||||||||||||
Performing |
$ | 288,875 | 100 | % | $ | 93,947 | 100 | % | $ | 221,808 | 89 | % | $ | 154,074 | 100 | % | $ | 758,704 | 96 | % | ||||||||||||||||||||||||||||
Nonperforming |
| | % | 89 | | % | 27,888 | 11 | % | 70 | | % | 28,047 | 4 | % | |||||||||||||||||||||||||||||||||
Total |
$ | 288,875 | 100 | % | $ | 94,036 | 100 | % | $ | 249,696 | 100 | % | $ | 154,144 | 100 | % | $ | 786,751 | 100 | % | ||||||||||||||||||||||||||||
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.
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.
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 September 30, 2011
As of September 30, 2011
30-59 | 60-89 | > 90 | Recorded 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 |
$ | 2,152 | 7 | % | $ | 1,166 | 7 | % | $ | 22,685 | 21 | % | $ | 26,003 | 16 | % | $ | 542,904 | 22 | % | $ | 568,907 | 21 | % | $ | | $ | 33,373 | 28 | % | ||||||||||||||||||||||||||||||
Commercial business loans |
1,997 | 6 | % | 2,364 | 14 | % | 13,740 | 12 | % | 18,101 | 12 | % | 416,545 | 16 | % | 434,646 | 16 | % | | 25,303 | 21 | % | ||||||||||||||||||||||||||||||||||||||
Commercial construction |
2,852 | 9 | % | | | % | 37,215 | 34 | % | 40,067 | 25 | % | 221,559 | 9 | % | 261,626 | 10 | % | | 42,332 | 36 | % | ||||||||||||||||||||||||||||||||||||||
Total commercial |
$ | 7,001 | 22 | % | $ | 3,530 | 21 | % | $ | 73,640 | 67 | % | $ | 84,171 | 53 | % | $ | 1,181,008 | 47 | % | $ | 1,265,179 | 47 | % | $ | | $ | 101,008 | 85 | % | ||||||||||||||||||||||||||||||
Residential: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate |
$ | 3,015 | 9 | % | $ | 405 | 3 | % | $ | 8,399 | 7 | % | $ | 11,819 | 8 | % | $ | 653,336 | 26 | % | $ | 665,155 | 25 | % | $ | | $ | 14,441 | 12 | % | ||||||||||||||||||||||||||||||
Residential construction |
| | % | | | % | 1,968 | 2 | % | 1,968 | 1 | % | 3,895 | | % | 5,863 | | % | | 1,968 | 2 | % | ||||||||||||||||||||||||||||||||||||||
Total residential |
$ | 3,015 | 9 | % | $ | 405 | 3 | % | $ | 10,367 | 9 | % | $ | 13,787 | 9 | % | $ | 657,231 | 26 | % | $ | 671,018 | 25 | % | $ | | $ | 16,409 | 14 | % | ||||||||||||||||||||||||||||||
Consumer loans: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home equity & lines of credit |
$ | 1,448 | 5 | % | $ | 350 | 2 | % | $ | 461 | | % | $ | 2,259 | 1 | % | $ | 274,408 | 11 | % | $ | 276,667 | 10 | % | $ | | $ | 647 | | % | ||||||||||||||||||||||||||||||
Personal |
651 | 2 | % | 193 | 1 | % | 664 | 1 | % | 1,508 | 1 | % | 77,238 | 3 | % | 78,746 | 3 | % | | 774 | 1 | % | ||||||||||||||||||||||||||||||||||||||
Education |
18,086 | 56 | % | 11,889 | 72 | % | 25,515 | 23 | % | 55,490 | 35 | % | 183,104 | 7 | % | 238,594 | 9 | % | 25,515 | | | % | ||||||||||||||||||||||||||||||||||||||
Automobile |
2,030 | 6 | % | 168 | 1 | % | | | % | 2,198 | 1 | % | 155,013 | 6 | % | 157,211 | 6 | % | | 63 | | % | ||||||||||||||||||||||||||||||||||||||
Total consumer |
$ | 22,215 | 69 | % | $ | 12,600 | 76 | % | $ | 26,640 | 24 | % | $ | 61,455 | 38 | % | $ | 689,763 | 27 | % | $ | 751,218 | 28 | % | $ | 25,515 | $ | 1,484 | 1 | % | ||||||||||||||||||||||||||||||
Total |
$ | 32,231 | 100 | % | $ | 16,535 | 100 | % | $ | 110,647 | 100 | % | $ | 159,413 | 100 | % | $ | 2,528,002 | 100 | % | $ | 2,687,415 | 100 | % | $ | 25,515 | $ | 118,901 | 100 | % | ||||||||||||||||||||||||||||||
17
Table of Contents
Aged Analysis of Past Due and Non-accrual Financing Receivables
As of December 30, 2010
As of December 30, 2010
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 |
$ | 2,243 | 6 | % | $ | 520 | 3 | % | $ | 16,158 | 22 | % | $ | 18,921 | 15 | % | $ | 581,813 | 22 | % | $ | 600,734 | 21 | % | $ | | $ | 28,769 | 30 | % | ||||||||||||||||||||||||||||||
Commercial business loans |
4,810 | 13 | % | 246 | 1 | % | 6,712 | 9 | % | 11,768 | 9 | % | 430,113 | 16 | % | 441,881 | 16 | % | | 21,634 | 23 | % | ||||||||||||||||||||||||||||||||||||||
Commercial construction |
4,706 | 13 | % | 1,581 | 10 | % | 14,110 | 19 | % | 20,397 | 16 | % | 247,917 | 9 | % | 268,314 | 10 | % | | 31,519 | 33 | % | ||||||||||||||||||||||||||||||||||||||
Total commercial |
$ | 11,759 | 32 | % | $ | 2,347 | 14 | % | $ | 36,980 | 50 | % | $ | 51,086 | 40 | % | $ | 1,259,843 | 47 | % | $ | 1,310,929 | 47 | % | $ | | $ | 81,922 | 86 | % | ||||||||||||||||||||||||||||||
Residential: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate |
$ | 5,619 | 15 | % | $ | 1,850 | 11 | % | $ | 8,522 | 12 | % | $ | 15,991 | 13 | % | $ | 671,574 | 25 | % | $ | 687,565 | 25 | % | $ | 44 | $ | 13,414 | 14 | % | ||||||||||||||||||||||||||||||
Residential construction |
| | % | | | % | 308 | | % | 308 | | % | 10,849 | | % | 11,157 | | % | | 308 | | % | ||||||||||||||||||||||||||||||||||||||
Total residential |
$ | 5,619 | 15 | % | $ | 1,850 | 11 | % | $ | 8,830 | 12 | % | $ | 16,299 | 13 | % | $ | 682,423 | 25 | % | $ | 698,722 | 25 | % | $ | 44 | $ | 13,722 | 14 | % | ||||||||||||||||||||||||||||||
Consumer loans: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home equity & lines of credit |
$ | 906 | 2 | % | $ | 100 | 1 | % | $ | | | % | $ | 1,006 | 1 | % | $ | 287,869 | 11 | % | $ | 288,875 | 10 | % | $ | | $ | | | % | ||||||||||||||||||||||||||||||
Personal |
1,064 | 3 | % | 247 | 2 | % | 8 | | % | 1,319 | 1 | % | 92,717 | 4 | % | 94,036 | 3 | % | | 89 | | % | ||||||||||||||||||||||||||||||||||||||
Education |
16,156 | 44 | % | 11,229 | 70 | % | 27,888 | 38 | % | 55,273 | 44 | % | 194,423 | 7 | % | 249,696 | 9 | % | 27,888 | | | % | ||||||||||||||||||||||||||||||||||||||
Automobile |
1,537 | 4 | % | 315 | 2 | % | | | % | 1,852 | 1 | % | 152,292 | 6 | % | 154,144 | 6 | % | | 70 | | % | ||||||||||||||||||||||||||||||||||||||
Total consumer |
$ | 19,663 | 53 | % | $ | 11,891 | 75 | % | $ | 27,896 | 38 | % | $ | 59,450 | 47 | % | $ | 727,301 | 28 | % | $ | 786,751 | 28 | % | $ | 27,888 | $ | 159 | | % | ||||||||||||||||||||||||||||||
Total |
$ | 37,041 | 100 | % | $ | 16,088 | 100 | % | $ | 73,706 | 100 | % | $ | 126,835 | 100 | % | $ | 2,669,567 | 100 | % | $ | 2,796,402 | 100 | % | $ | 27,932 | $ | 95,803 | 100 | % | ||||||||||||||||||||||||||||||
18
Table of Contents
Troubled Debt Restructured Loans
The Company determines whether a restructuring of debt constitutes a troubled debt restructuring in
accordance with guidance under FASB ASC Topic 310 Receivables. The Company considers a loan a
troubled debt restructuring (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 (including a foreclosure or a 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.
The
Bank had 38 loans totaling $26.5 million and 36 loans totaling $26.7 million whose terms were
modified in a manner that met the criteria for a TDR as of September 30, 2011 and December 31,
2010, respectively. As of September 30, 2011, 13 of the TDRs were commercial real estate loans with
an aggregate outstanding balance of $10.4 million, 10 were commercial business loans with an
aggregate outstanding balance of $10.0 million, one loan was a commercial construction loan with an
outstanding balance of $4.0 and the remaining 14 loans were residential real estate loans with an
aggregate outstanding balance of $2.1 million.
The Company does not restructure troubled consumer loans, thus all TDRs relate to commercial and
residential loans. The following table summarizes information about TDRs as of and for the nine
months ended September 30, 2011:
At or For the Nine Months Ended | ||||||||
September 30, 2011 | ||||||||
(Dollars in thousands, except number of loans) | No. of Loans | Balance | ||||||
Loans modified during the period in a manner that met the definition of a TDR |
4 | $ | 1,801 | |||||
Modifications granted: |
||||||||
Reduction of outstanding principal due |
| | ||||||
Deferral of principal amounts due |
1 | 43 | ||||||
Temporary reduction in interest rate |
1 | 60 | ||||||
Deferral of interest due |
2 | 1,698 | ||||||
Below market interest rate granted |
| | ||||||
Outstanding principal balance immediately before and after modification |
4 | 1,801 | ||||||
Aggregate principal charge-off recognized on TDRs outstanding at period end* |
12 | 5,436 | ||||||
Outstanding principal balance at period end |
38 | 26,546 | ||||||
TDRs that re-defaulted subsequent to being modified in the past twelve months |
| |
* | Aggregate principal charge-offs recognized on TDRs outstanding at period end since
origination. |
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.
19
Table of Contents
Components of Impaired Loans
Interest | ||||||||||||||||||||||||
Income | ||||||||||||||||||||||||
Unpaid | Average | Interest | Recognized | |||||||||||||||||||||
Year to date September 30, 2011 | 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 |
$ | 33,373 | $ | 46,337 | $ | | $ | 30,246 | $ | 159 | $ | | ||||||||||||
Commercial Business |
25,303 | 32,004 | | 24,751 | 43 | | ||||||||||||||||||
Commercial Construction |
42,332 | 69,031 | | 42,052 | 122 | | ||||||||||||||||||
Residential Real Estate |
14,441 | 14,991 | | 15,367 | 5 | | ||||||||||||||||||
Residential Construction |
1,968 | 2,066 | | 741 | 13 | | ||||||||||||||||||
Home Equity and Lines of Credit |
647 | 647 | | 380 | 7 | | ||||||||||||||||||
Personal |
774 | 912 | | 562 | 7 | | ||||||||||||||||||
Auto |
63 | 63 | | 106 | 3 | | ||||||||||||||||||
Total Impaired Loans: |
$ | 118,901 | $ | 166,051 | $ | | $ | 114,205 | $ | 359 | $ | | ||||||||||||
Commercial |
101,008 | 147,372 | | 97,049 | 324 | | ||||||||||||||||||
Residential |
16,409 | 17,057 | | 16,108 | 18 | | ||||||||||||||||||
Consumer |
1,484 | 1,622 | | 1,048 | 17 | | ||||||||||||||||||
Total |
$ | 118,901 | $ | 166,051 | $ | | $ | 114,205 | $ | 359 | $ | | ||||||||||||
Interest | ||||||||||||||||||||||||
Income | ||||||||||||||||||||||||
For the year ended | Unpaid | Average | Interest | Recognized | ||||||||||||||||||||
December 31, 2010 | 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 | ||||||||||||
* | Amounts represent interest income recognized on impaired loans during the year prior to impaired status. |
20
Table of Contents
The Company charged off the collateral deficiency on all impaired loans and as a result, no
specific valuation allowance was required for any impaired loans at September 30, 2011.
For the Nine Months Ended | For the Year Ended | |||||||||||
Analysis of Impaired Loans | September 30, | September 30, | December 31, | |||||||||
(Dollars in thousands) | 2011 | 2010 | 2010 | |||||||||
Average impaired loans |
$ | 114,205 | $ | 77,005 | $ | 81,230 | ||||||
Interest income recognized on impaired loans |
359 | 6 | 6 | |||||||||
Cash basis interest income recognized on impaired loans |
| 866 | 866 |
Interest income that would have been recorded for the nine months ended September 30, 2011,
had impaired loans been current according to their original terms, amounted to approximately $6.0
million.
Nonperforming loans (which includes nonaccrual loans and loans past due 90 days or more and still
accruing) at September 30, 2011 and 2010 amounted to approximately $144.4 million and $116.3
million, respectively, and included $25.5 million and $26.6 million in guaranteed student loans,
respectively. As of September 30, 2011, all impaired loans greater than 90 days delinquent are on
a nonaccrual status and all payments are applied to principal.
The Bank pledges loans to secure its borrowings at the Federal Reserve Bank of Philadelphia. At
September 30, 2011 and December 31, 2010, loans in the amount of $839.0 million and $619.1 million,
respectively, were pledged to secure the Companys borrowing capacity at the Federal Reserve Bank
of Philadelphia.
NOTE 6 OTHER ASSETS
The following table provides selected information on other assets at September 30, 2011 and
December 31, 2010:
September 30, | December 31, | |||||||
(Dollars in thousands) | 2011 | 2010 | ||||||
Investments in affordable housing and other partnerships |
$ | 17,808 | $ | 20,378 | ||||
Cash surrender value of life insurance |
18,989 | 18,629 | ||||||
Prepaid assets |
12,285 | 15,873 | ||||||
Net deferred tax assets |
26,534 | 31,928 | ||||||
Other real estate |
19,058 | 16,694 | ||||||
Accounts receivable ACH |
| 22,901 | ||||||
Accounts receivable trading securities |
| 31,127 | ||||||
Fixed assets held for sale |
3,627 | 3,074 | ||||||
Mortgage servicing rights |
207 | 219 | ||||||
All other assets |
17,105 | 24,339 | ||||||
Total other assets |
$ | 115,613 | $ | 185,162 | ||||
During the nine months ended September 30, 2011, the Company determined that five Bank
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 nine months ended September 30, 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 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.
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NOTE 7 DEPOSITS
Deposits at September 30, 2011 and December 31, 2010 are summarized as follows:
September 30, | December 31, | |||||||
(Dollars in thousands) | 2011 | 2010 | ||||||
Non-interest bearing deposits |
$ | 276,035 | $ | 282,050 | ||||
Interest earning checking accounts |
457,315 | 420,873 | ||||||
Municipal checking accounts |
702,667 | 1,072,574 | ||||||
Money market accounts |
574,361 | 622,050 | ||||||
Savings accounts |
751,144 | 696,629 | ||||||
Time deposits |
840,175 | 848,128 | ||||||
Total deposits |
$ | 3,601,697 | $ | 3,942,304 | ||||
NOTE 8 BORROWED FUNDS
Borrowed funds at September 30, 2011 and December 31, 2010 are summarized as follows:
September 30, | December 31, | |||||||
(Dollars in thousands) | 2011 | 2010 | ||||||
FHLB advances |
$ | 100,000 | $ | 113,000 | ||||
Repurchase agreements |
125,000 | 135,000 | ||||||
Statutory trust debenture |
25,330 | 25,317 | ||||||
Total borrowed funds |
$ | 250,330 | $ | 273,317 | ||||
The Company pledges securities and loans to secure its borrowings at the Federal Reserve Bank
of Philadelphia. At September 30, 2011 and December 31, 2010, loans in the amount of $839.0 million
and $619.1 million, respectively, were pledged to secure the Companys borrowing capacity at the
Federal Reserve Bank of Philadelphia. At September 30, 2011 and December 31, 2010, the Company had
$139.6 million and $153.4 million, respectively, of securities pledged as collateral on secured
borrowings. At September 30, 2011 and December 31, 2010, the Company also pledged $235 thousand 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 September 30, 2011 and
December 31, 2010, the Bank met all capital adequacy requirements to which it was subject.
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As of September 30, 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.
The Banks actual capital amounts and ratios (under rules established by the FDIC) are presented in
the following table:
(Dollars in thousands)
To Be Well Capitalized | ||||||||||||||||
Under Prompt Corrective | ||||||||||||||||
Actual | Action Provisions | |||||||||||||||
Capital | Capital | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
As of September 30, 2011: |
||||||||||||||||
Tier 1 Capital (to
average assets) |
$ | 445,576 | 9.70 | % | $ | 229,791 | 5.00 | % | ||||||||
Tier 1 Capital (to risk
weighted assets) |
445,576 | 17.67 | % | 151,314 | 6.00 | % | ||||||||||
Total Capital (to risk
weighted assets) |
477,382 | 18.93 | % | 252,189 | 10.00 | % | ||||||||||
As of December 31, 2010: |
||||||||||||||||
Tier 1 Capital (to
average assets) |
$ | 432,374 | 8.89 | % | $ | 243,200 | 5.00 | % | ||||||||
Tier 1 Capital (to risk
weighted assets) |
432,374 | 15.69 | % | 165,300 | 6.00 | % | ||||||||||
Total Capital (to risk
weighted assets) |
467,051 | 16.95 | % | 275,600 | 10.00 | % |
NOTE 10 INCOME TAXES
For the nine months ended September 30, 2011, the Company recorded an income tax benefit of $236
thousand, for an effective tax rate of 4.8%, compared to an income tax benefit of $18.1 million,
for an effective tax rate of 67.7%, for the same period in 2010. The difference was due to an
increase in income before income taxes of $31.6 million, to $4.9 million for the nine months ended
September 30, 2011, from a net loss before income taxes of $26.7 million for the nine months ended
September 30, 2010. The increase in income before income taxes for the nine months ended September
30, 2011 as compared to the nine months ended September 30, 2010 was primarily due to a decrease in
the provision for loan losses of $33.2 million, which was partially offset by a restructuring
charge of $5.1 million and a decrease in gains on the sale of investment securities 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 low income housing partnerships. Tax-exempt income, state and local
income taxes and federal income tax credits increased (reduced) the effective tax rates by (20.1%),
3.6% and (30.9%) in the effective income tax rate calculation for 2011, respectively, and (9.5%),
(8.1%), and (10.5%) for 2010, respectively.
As of September 30, 2011, the Companys net deferred tax assets were $26.5 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 September 30,
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.
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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 | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Service Cost |
$ | | $ | | $ | 59 | $ | 53 | ||||||||
Interest Cost |
954 | 965 | 347 | 332 | ||||||||||||
Expected return on plan assets |
(1,026 | ) | (928 | ) | | | ||||||||||
Amortization of loss (gain) |
238 | 215 | 67 | (2 | ) | |||||||||||
Amortization of prior service cost |
| | 37 | 47 | ||||||||||||
Amortization of transition obligation |
| | 41 | 41 | ||||||||||||
Net periodic pension cost |
$ | 166 | $ | 252 | $ | 551 | $ | 471 | ||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Service Cost |
$ | | $ | | $ | 179 | $ | 160 | ||||||||
Interest Cost |
2,863 | 2,894 | 1,041 | 997 | ||||||||||||
Expected return on plan assets |
(3,079 | ) | (2,782 | ) | | | ||||||||||
Amortization of loss (gain) |
712 | 644 | 201 | (6 | ) | |||||||||||
Amortization of prior service cost |
| | 110 | 140 | ||||||||||||
Amortization of transition obligation |
| | 123 | 123 | ||||||||||||
Net periodic pension cost |
$ | 496 | $ | 756 | $ | 1,654 | $ | 1,414 | ||||||||
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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 September 30, 2011, 334,600 shares were fully vested and 200,500 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 the Company achieves a return on average assets of 1% or if the
Company achieves a return on average assets within the top 25% of the SNL index of nationwide thrifts
with total assets between $1.0 billion and $10.0 billion nationwide in the fifth full
year subsequent to the grant.
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 and nine months ended September 30, 2011 was $586 thousand and
$1.0 million, respectively, compared to $517 thousand and $1.3 million for the three and nine
months ended September 30, 2010, respectively.
The following table summarizes the non-vested stock award activity for the nine months ended
September 30, 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 |
175,500 | 8.38 | ||||||
Vested |
(204,600 | ) | 11.68 | |||||
Forfeited |
(116,500 | ) | 10.95 | |||||
Non-vested Stock Awards outstanding, September 30, 2011 |
691,900 | $ | 10.14 | |||||
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The following table summarizes the non-vested stock award activity for the nine months ended
September 30, 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 |
153,000 | 9.70 | ||||||
Vested |
(68,000 | ) | 11.55 | |||||
Forfeited |
(82,500 | ) | 11.00 | |||||
Non-vested Stock Awards outstanding, September 30, 2010 |
839,000 | $ | 11.00 | |||||
The fair value of the 204,600 shares vested during the nine months ended September 30, 2011
was $1.6 million. The fair value of the 68,000 awards vested during the nine months ending
September 30, 2010 was $676 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 nine months ended
September 30, 2011, the Company granted 352,000 options compared to 279,100 options during the same
period ended September 30, 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 $355 thousand and $902 thousand for the three and nine
months ended September 30, 2011, respectively, compared to $362 thousand and $1.0 million for the
three and nine months ended September 30, 2010, respectively.
A summary of option activity as of September 30, 2011 and changes during the nine month period is
presented below:
Weighted Exercise | ||||||||
Number of Options | Price per Shares | |||||||
January 1, 2011 |
2,001,950 | $ | 11.21 | |||||
Granted |
352,000 | 8.38 | ||||||
Exercised |
| | ||||||
Forfeited |
(166,480 | ) | 11.08 | |||||
Expired |
(98,960 | ) | 11.35 | |||||
September 30, 2011 |
2,088,510 | $ | 10.74 | |||||
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A summary of option activity as of September 30, 2010 and changes during the nine month period
is presented below:
Weighted Exercise | ||||||||
Number of Options | Price per Shares | |||||||
January 1, 2010 |
1,922,250 | $ | 11.44 | |||||
Granted |
279,100 | 9.70 | ||||||
Exercised |
(1,500 | ) | 8.35 | |||||
Forfeited |
(141,650 | ) | 11.33 | |||||
Expired |
(27,800 | ) | 9.66 | |||||
September 30, 2010 |
2,030,400 | $ | 11.21 | |||||
The weighted average remaining contractual term was approximately 7.55 years for options
outstanding as of September 30, 2011. Exercisable options totaled 916,850 and 673,850 at September
30, 2011 and 2010, respectively.
For the Nine Months | For the Nine Months | |||||||
Ended | Ended | |||||||
September 30, 2011 | September 30, 2010 | |||||||
Weighted average fair value of options granted |
$ | 3.29 | $ | 3.56 | ||||
Weighted average risk-free rate of return |
2.17 | % | 2.98 | % | ||||
Weighted average expected option life in months |
78 | 78 | ||||||
Weighted average expected volatility |
35.18 | % | 29.86 | % | ||||
Expected dividends |
$ | | $ | |
As of September 30, 2011, there was $3.6 million of total unrecognized compensation cost
related to options and $5.6 million in unrecognized compensation cost related to non-vested stock
awards granted under the EIP. As of September 30, 2010, there was $4.2 million in unrecognized
compensation cost related to options and $7.0 million in unrecognized compensation cost related to
non-vested stock awards granted under the EIP. The average weighted lives for the option expense
were 3.00 and 3.23 years as of September 30, 2011 and September 30, 2010, respectively. The average
weighted lives for the stock award expense were 2.99 and 3.33 years at September 30, 2011 and
September 30, 2010, respectively.
NOTE 13 COMMITMENTS AND CONTINGENCIES
At September 30, 2011 and December 31, 2010, the Company had outstanding commitments to make loans
aggregating approximately $82.7 million and $107.2 million, respectively, and commitments to
customers on available lines of credit of $161.4 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 $400
thousand and $432 thousand at September 30, 2011 and December 31, 2010, respectively.
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. In October 2011, we were notified by the plaintiffs counsel of a proposed
settlement amount of $3.7 million. We believe that we have valid
defenses to the plaintiffs suit. We believe that a loss is
reasonably possible in the future but are not able to estimate a loss
related to this claim at this time.
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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 September 2011, the FASB issued Accounting Standards Update (ASU) 2011-08, Intangibles
Goodwill and Other (Topic 350). The amendments in this update will allow an entity to first assess
qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. Under these amendments, an entity would not be required to calculate the
fair value of a reporting unit unless the entity determines, based on qualitative assessment, that
it is more likely than not that its fair value is less than its carrying amount. The amendments
include a number of events and circumstances for an entity to consider in conducting the
qualitative assessment. These amendments are effective for annual and interim goodwill impairment
tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted,
including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entitys financial statements for the
most recent annual or interim period have not been issued. The Company plans to early adopt the
amendments of this update during the fourth quarter of 2011. The Company does not anticipate any
material impact to the financial statements related to this guidance.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income. This ASU amends the FASB Accounting Standards Codification (Codification) to
allow an entity the option to present the total of comprehensive income, the components of net
income, and the components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. In both choices, an entity is
required to present each component of net income along with total net income, each component of
other comprehensive income along with a total for other comprehensive income, and a total amount
for comprehensive income. ASU 2011-05 eliminates the option to present the components of other
comprehensive income as part of the statement of changes in stockholders equity. The amendments to
the Codification in the ASU do not change the items that must be reported in other comprehensive
income or when an item of other comprehensive income must be reclassified to net income. ASU
2011-05 should be applied retrospectively. For public entities, the amendments are effective for
fiscal years, and interim periods within those years, beginning after December 15, 2011. Early
adoption is permitted. The Company will comply with guidance and its effective date. The Company
does not anticipate any material impact to the financial statements related to this guidance.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to achieve
Common Fair Value Measurement (Topic 820) and Disclosure Requirement in U.S. GAAP and IFRSs. This
ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value
measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have
resulted in common requirements for measuring fair value and for disclosing information about fair
value measurement, including a consistent meaning of the term fair value. The Boards have
concluded the common requirements will result in greater comparability of fair value measurements
presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The
amendments in this update apply to all reporting entities that are required or permitted to measure
or disclose the fair value of an asset, a liability, or an instrument classified in a reporting
entitys shareholders equity in the financial statements. The amendments in this ASU are to be
applied prospectively. For public entities, the amendments are effective during interim and annual
periods beginning after December 15, 2011. Early application by public entities is not permitted.
The Company will comply with guidance and its effective date. The Company does not anticipate any
material impact to the financial statements related to this guidance.
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Table of Contents
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of
Effective Control for Repurchase Agreements. The ASU is intended to improve financial reporting of
repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to
repurchase or redeem financial assets before their maturity. The amendments to the Codification in
this ASU are intended to improve the accounting for these transactions by removing from the
assessment of effective control the criterion requiring the transferor to have the ability to
purchase or redeem the financial assets. The amendments in this update apply to all entities, both
public and nonpublic. This ASU is effective for the first interim or annual periods beginning on or
after December 15, 2011. The guidance should be applied prospectively to transactions or
modification of existing transactions that occur on or after the effective date. Early adoption is
not permitted. The Company will comply with guidance and its effective date. The Company does not
anticipate any material impact to the financial statements related to this guidance.
Also in April 2011, the FASB issued 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. For the quarter ended September 30, 2011, the
Company has adopted the amendments in this update. See Note 5 Loans.
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. 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. The provisions of the guidance
are included in Note 5 Loans.
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 1of 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
June 30, 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 Loans.
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 June 30, 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 nine months ended September 30, 2011.
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
September 30, 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.
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Those assets which will continue to be measured at fair value on a recurring basis at September 30,
2011 and December 31, 2010 are as follows:
Category Used for Fair Value Measurement | ||||||||||||||||
As of September 30, 2011 | ||||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
||||||||||||||||
Mortgage servicing rights |
$ | 207 | $ | 207 | ||||||||||||
Loans held for sale |
$ | 3,736 | 3,736 | |||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. GSE and agency notes |
20,051 | 20,051 | ||||||||||||||
GNMA guaranteed mortgage certificates |
8,328 | 8,328 | ||||||||||||||
Collateralized mortgage obligations (CMOs) |
||||||||||||||||
Government (GNMA) guaranteed CMOs |
6,658 | 6,658 | ||||||||||||||
Agency CMOs |
147,167 | 147,167 | ||||||||||||||
Non-agency CMOs |
41,969 | 41,969 | ||||||||||||||
Other mortgage-backed securities |
412,940 | 412,940 | ||||||||||||||
Municipal bonds |
||||||||||||||||
General obligation municipal bonds |
71,381 | 71,381 | ||||||||||||||
Revenue municipal bonds |
19,602 | 19,602 | ||||||||||||||
Pooled trust preferred securities (financial industry) |
13,645 | 13,645 | ||||||||||||||
Equity securities (financial industry) |
$ | 2,378 | 2,378 | |||||||||||||
Money market funds |
68,992 | 68,992 | ||||||||||||||
Mutual funds |
1,461 | 1,461 | ||||||||||||||
Certificates of deposit |
285 | 285 | ||||||||||||||
Total |
$ | 73,116 | $ | 731,832 | $ | 13,852 | $ | 818,800 | ||||||||
Category Used for Fair Value Measurement | ||||||||||||||||
As of December 31, 2010 | ||||||||||||||||
(Dollars in thousands) | 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 | ||||||||
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.
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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:
Loans
Held for Sale. Beneficial originates certain mortgage loans
to be sold to FNMA. These loans are carried at fair value based on
the Companys election of the Fair Value Option. The fair value
is primarily based on quoted market prices for securities backed by
similar types of loans. The changes in fair value of these assets are
largely driven by changes in interest rates subsequent to loan
funding and changes in the fair value of servicing associated with
the mortgage loan held for sale.
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.
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.
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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.
The table below presents all assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the nine months ended September 30, 2011.
Nine Months Ended | ||||||||
September 30, 2011 | ||||||||
Level 3 Investments Only | Trust Preferred | Mortgage Servicing | ||||||
(Dollars in thousands) | Securities | Rights | ||||||
Balance, January 1, 2011 |
$ | 14,522 | $ | 268 | ||||
Included in earnings |
| (61 | ) | |||||
Included in other comprehensive income |
370 | | ||||||
Payments |
(1,325 | ) | | |||||
Net accretion / (amortization) |
78 | | ||||||
Balance, September 30, 2011 |
$ | 13,645 | $ | 207 | ||||
* | 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. |
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Nine Months Ended | ||||
Level 3 Investments Only | September 30, 2010 | |||
(Dollars in thousands) | Trust Preferred Securities | |||
Balance, January 1, 2010 |
$ | 18,797 | ||
Included in other comprehensive income |
(139 | ) | ||
Payments |
(3,114 | ) | ||
Balance, September 30, 2010 |
$ | 15,544 | ||
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. 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 September 30, 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) | September 30, 2011 | Level 1 | Level 2 | Level 3 | Gain/(Losses) | |||||||||||||||
Impaired loans |
$ | 46,571 | | | $ | 46,571 | $ | (20,247 | ) | |||||||||||
Long lived assets held for sale |
615 | | 615 | | (627 | ) |
At | ||||||||||||||||||||
(Dollars in thousands) | September 30, 2010 | Level 1 | Level 2 | Level 3 | Gain/(Losses) | |||||||||||||||
Impaired loans |
$ | 55,636 | | | $ | 55,636 | $ | (61,986 | ) | |||||||||||
Other real estate owned |
8,865 | | 8,865 | | (5,615 | ) |
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.
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Table of Contents
Fair Value of Financial Instruments | ||||||||||||||||
At | At | |||||||||||||||
September 30, 2011 | December 31, 2010 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 398,080 | $ | 398,080 | $ | 90,299 | $ | 90,299 | ||||||||
Trading securities |
| | 6,316 | 6,316 | ||||||||||||
Investment securities |
1,249,105 | 1,232,667 | 1,651,844 | 1,653,883 | ||||||||||||
Loans net |
2,633,295 | 2,629,279 | 2,751,036 | 2,773,373 | ||||||||||||
Liabilities: |
||||||||||||||||
Checking deposits |
1,436,017 | 1,436,017 | 1,787,006 | 1,787,006 | ||||||||||||
Money market and savings accounts |
1,325,505 | 1,325,505 | 1,307,170 | 1,307,170 | ||||||||||||
Time deposits |
840,175 | 845,920 | 848,128 | 855,045 | ||||||||||||
Borrowed funds |
250,330 | 265,992 | 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.
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 September 30, 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
September 30, 2011 and December 31, 2010, and therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
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NOTE 16 EMPLOYEE SEVERANCE CHARGES AND OTHER RESTRUCTURING COSTS
During the first quarter of 2011, 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
payments due under employment contract and other costs, and $947 thousand of fixed asset retirement
expense. During the second quarter of 2011, $978 thousand of additional severance expense was
accrued relating to the departure of an executive officer. These charges are included in
restructuring charge, a component of non-interest expense, within the consolidated statements of
operations. A schedule of the current restructuring and severance accrual is summarized below as of
September 30, 2011:
Contract termination and | ||||||||||||
(Dollars in thousands) | Severance | other costs | Total | |||||||||
Accrued at June 30, 2011 |
$ | 2,271 | $ | 416 | $ | 2,687 | ||||||
Payments made in the 3rd quarter |
(761 | ) | (74 | ) | (835 | ) | ||||||
Accrued at September 30, 2011 |
$ | 1,510 | $ | 342 | $ | 1,852 | ||||||
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.
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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Table of Contents
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 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.
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 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.
The Bank recorded net income of $4.1 million and $5.2 million for the three and nine month periods
ended September 30, 2011, respectively, compared to net losses of $21.7 million and $8.6 million
for the same periods in 2010. Our financial results continue to be impacted by credit costs as we
recorded a provision for loan losses of $9.0 million and $29.0 million for three and nine months
ended September 30, 2011, respectively, compared to a provision of $51.1 million and $62.2 million
for the same periods in 2010.
We have begun to see some stabilization in our credit quality as non-performing assets remained
relatively constant for the quarter at $163.5 million as compared to $162.6 million at June 30,
2011. However, we remain cautious given the current economic environment and future outlook with a
slow GDP growth, high unemployment levels and soft residential and commercial real estate markets.
As a result, we continue to position the Company for any further weakening in economic conditions
and have increased our allowance for loan losses to $54.1 million at September 30, 2011 compared to
$45.4 million at December 31, 2010. Our loan loss reserve coverage ratio (allowance for loan
losses/total loans) increased to 2.01% at September 30, 2011 as compared to 1.62% at December 31,
2010. A significant portion of our commercial real estate and commercial construction portfolios
contractually matures in 2011 (approximately 33%) and we are actively managing these maturities and
continuing to write off collateral deficiencies on all classified loans once they are 90 days
delinquent. We expect that market conditions, coupled with the large amount of commercial
maturities, will result in an elevated provision for credit losses for the rest of 2011 and 2012.
We are focused on improving our operating efficiency and reducing costs. We completed a
comprehensive review of our operating cost structure during the first quarter of 2011 and finalized
an expense management reduction program which resulted in a $5.1 million restructuring charge for
the nine months ended September 30, 2011. The impact of the expense management reduction program
implemented during the first quarter of 2011 resulted in lower operating expenses which decreased
$5.1 million to $28.2 million for the quarter ended September 30, 2011 compared to $33.3 million in
the third quarter of 2010. We expect to incur additional lending,
credit and compliance costs as we expand our teams to reposition the
balance sheet while taking market share.
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The Bank has taken advantage of the decrease in interest rates during the year to reposition its
balance sheet to improve the Banks profitability, interest rate risk, and capital position.
Through the sale of lower rate, longer term securities and the run-off of higher cost,
non-relationship-based municipal deposits, we have contracted the Banks balance sheet by
approximately $297.2 million to $4.6 billion at September 30, 2011 from $4.9 billion at December
31, 2010. At September 30, 2011, we had higher than usual cash balances as we were holding cash to
cover additional municipal deposit run-off that is expected to occur during the remainder of 2011;
as well as, investments that were purchased and had not yet settled as of September 30, 2011. As a
result of this repositioning, the Banks tier 1 leverage ratio improved to 9.70% at September 30,
2011 compared to 8.89% at December 31, 2010 and the Banks total risk based capital ratio increased
to 18.93% at September 30, 2011 compared to 16.95% at December 31, 2010. Our
capital levels remain strong and our capital ratios are well in excess of the levels required to be
considered well-capitalized.
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 nine months
ended September 30, 2011 and we expect loan demand to remain low during the fourth quarter of 2011.
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 whats right for the communities
we serve. 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. During the second quarter, we
launched BenMobile, our mobile banking product that provides customers easy, convenient, and
secure access to their money via text messaging, mobile web and phone apps. Also during the second
quarter, we introduced interest on the Start Growing and Professional Package products, which
allow our small business customers to enjoy the advantages of an all-purpose small business package
while earning tiered interest on the account.
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.
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.
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CURRENT REGULATORY ENVIRONMENT
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 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.
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 $306 thousand reduction in FDIC premiums in the third
quarter of 2011 compared to the same period in 2010 and we expect premiums will be reduced throughout the remainder of the year.
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 Banks interest expense in the future.
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.
The Bank recognized $3.3 million of interchange revenue for the nine months ended September 30,
2011.
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. This
regulation has resulted in a reduction in non-interest income during the nine months ended
September 30, 2011 in the amount of $810 thousand.
STANDARD & POORS DOWNGRADE IN THE U.S. GOVERNMENTS SOVEREIGN CREDIT RATING
On August 5, 2011, Standard & Poors downgraded the United States long-term debt rating from its
AAA rating to AA+. On August 8, 2011, Standard & Poors downgraded the credit ratings of certain
long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies
linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of
financial institutions, including the Bank. These downgrades could adversely affect the market
value of such instruments, and could adversely impact our ability to obtain funding that is
collateralized by affected instruments, as well as affect the pricing of that funding when it is
available. In addition, these downgrades could materially affect global and domestic financial
markets and economic conditions, which may affect the Companys and the Banks business, financial
condition and liquidity and result in future changes in capital requirements or a rebalancing of
investment portfolios in response to managements assessment of the related risk weightings. We
cannot predict if, when or how these changes to the credit ratings will affect economic conditions.
As a result, the changes to the credit ratings could result in a significant adverse impact to the
Company, and could exacerbate the other risks to which the Company is subject.
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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 quarter
ended September 30, 2011, Beneficial reported net interest income of $34.8 million, a decrease of
$259 thousand, or 0.7%, from $35.1 million for the quarter ended September 30, 2010. The net
interest margin increased 7 basis points to 3.21% for the quarter ended September 30, 2011 from
3.14% for the quarter ended September 30, 2010. The third quarter of 2010 included interest
reversals of $2.6 million related to loans that were put on non-accrual status which resulted in a
24 basis point reduction to the net interest margin for the quarter. For the nine months ended
September 30, 2011, net interest income decreased $3.2 million, or 2.9%, to $107.3 million from
$110.5 million for the nine months ended September 30, 2010. The net interest margin decreased 13
basis points to 3.22% for the nine months ended September 30, 2011 from 3.35% for the nine months
ended September 30, 2010. Net interest income in 2011 has been impacted by reduced loan demand and
higher levels of cash as we manage the run-off of higher cost, non-relationship-based municipal
deposits to improve our interest rate risk position and capital levels. As a result, cash and cash
equivalents increased from $90.3 million at December 31, 2010 to $398.1 million at
September 30, 2011. We expect cash levels to decrease as municipal deposit run off continues during
the remainder of 2011 and $77.3 million of investment purchases that had not yet settled as of
September 30, 2011. The yield on our investment portfolio has decreased as a result of the low
interest rate environment. We have also seen a reduction of yields on our mortgage portfolio as
borrowers refinance their existing mortgages at lower interest rates. We have been able to offset
some of this downward pressure on margin by reducing the cost of our interest bearing liabilities
which decreased to 0.98% and 1.02% for both the three and nine month ended September 30, 2011,
respectively, compared to 1.27% and 1.37%, respectively, in the prior year. We expect net interest
margin to continue to improve during the fourth quarter as the run-off occurs. 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
During the nine months ended September 30, 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. Although
non-performing assets remained relatively constant at $163.5 million as of September 30, 2011 as
compared to $162.6 million at June 30, 2011, non-performing assets have increased significantly
from $140.4 million at December 31, 2010. As a result, we continue to increase our allowance for
loan losses given our credit trends. At September 30, 2011, the Companys allowance for loan losses
totaled $54.1 million, or 2.01% of total loans, compared to $45.4 million, or 1.62% of total loans,
at December 31, 2010.
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, approximately
one-third of our commercial real estate and commercial construction portfolios contractually
matures. We are actively managing these maturities and continue to write off all collateral
deficiencies on all classified loans once they are 90 days delinquent. We expect that market
conditions, coupled with the large amount of commercial maturities, will result in an elevated
provision for credit losses for the rest of 2011 and 2012.
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 $450 thousand to $900 thousand for the quarter
ended September 30, 2011. During the nine months ended September 30, 2011, we continued to
experience increased levels of delinquencies, net charge-offs and non-performing assets. Management
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 September 30, 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.
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 September 30, 2011, the Companys net deferred tax assets were $26.5 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
September 30, 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 September 30, 2011 and December 31, 2010
At September 30, 2011, total assets decreased $297.2 million, or 6.0%, to $4.6 billion from $4.9
billion at December 31, 2010. During the nine months ended September 30, 2011, the Bank
repositioned its balance sheet to increase profitability, improve its capital position and reduce
its interest rate risk profile by selling investments and reducing higher cost,
non-relationship-based municipal deposits. At September 30, 2011, the Bank was holding excess cash
to cover planned additional municipal deposit run-off that is expected to occur during the
remainder of 2011 as well as to settle $77.3 million of investments purchased in September 2011,
the balance of which is included in other liabilities on the statement of financial condition. As a
result, cash and cash equivalents at September 30, 2011 totaled $398.1 million as compared to $90.3
million at December 31, 2010. Additionally, the balance of investment securities decreased $402.7
million, or 24.4%, to $1.3 billion at September 30, 2011 from $1.7 billion at December 31, 2010 as
we continue to sell longer term investments to shorten the duration of the investment portfolio and
better position the Bank for rising interest rates.
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Total loans decreased $109.0 million, or 3.9%, to $2.7 billion at September 30, 2011 from $2.8
billion at December 31, 2010 primarily due to continued slow loan demand as consumers and
businesses continue to deleverage and remain cautious about the economy. We expect loan demand to
remain weak for the rest of 2011. Additionally, we continue to sell the majority of our
residential mortgage loan production with approximately $12.4 million of loans sold in the third
quarter.
Total deposits decreased $340.1 million, or 8.6%, to $3.6 billion at September 30, 2011, from $3.9
billion at December 31, 2010 primarily due to the run off of $369.9 million in municipal deposits.
The Company
continues to focus on growing its core deposit portfolio and reducing costlier time deposits and
non-relationship based accounts.
Stockholders equity equaled $628.5 million, or 13.6% of total assets, at September 30, 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 11.2% at September 30, 2011 compared to 10.2% at December
31, 2010.
Comparison of Operating Results for the Three Months Ended September 30, 2011 and September 30,
2010
General For the three months ended September 30, 2011, Beneficial recorded net income of $4.1
million, or $0.05 per share, compared to a net loss of $21.7 million, or $0.28 per share, for the
three months ended September 30, 2010. The net loss for the three months ended September 30, 2010
was driven by an increased provision for loan losses as a result of specific reserves required for
commercial real estate loans. In 2011, the Bank has continued to work through credit and loan
maturity issues which has resulted in a provision for loan losses of $9.0 million for the three
months ended September 30, 2011 as compared to $51.1 million for the same period in 2010. The
Company recorded a significantly elevated provision during the third quarter of 2010 as a result of
a pronounced slowdown in the commercial real estate market and downward pressure on property
valuations.
Net Interest Income For the three months ended September 30, 2011, Beneficial reported net
interest income of $34.8 million, a decrease of $259 thousand, or 0.7%, from the three months ended
September 30, 2010. The net interest margin increased 7 basis points to 3.21% for the three months
ended September 30, 2011 from 3.14% for the three months ended September 30, 2010. The third
quarter of 2010 included interest reversals of $2.6 million related to loans that were put on
non-accrual status which resulted in a 24 basis point reduction to net interest margin for the
quarter. The decrease in net interest income was driven by low interest rates which have reduced
the yields on our investment portfolio as excess liquidity is invested at lower yields. Mortgage
re-financings have also resulted in lower yields on our mortgage portfolio. Offsetting these
decreases to interest income, we have been able to reduce the cost of our interest bearing
liabilities during the third quarter of 2011 with average rates decreasing to 0.98% for the three
months ending September 30, 2011 from 1.27% for the three months ending September 30, 2010.
Provision for Loan Losses The Bank recorded a provision for loan losses of $9.0
million for the three months ended September 30, 2011 compared to $51.1 million for the same period
in 2010. The Company recorded a significantly elevated provision during the third quarter of 2010
as a result of a pronounced slowdown in the commercial real estate market and downward pressure on
property valuations. Net charge-offs totaled $6.2 million during the three months ended September
30, 2011 as compared to $57.0 million during the same period in 2010. We have continued to
experience elevated levels of net charge-offs in 2011 as we charge-off the collateral deficiency on
all classified collateral dependent loans across all portfolios once they are 90 days delinquent.
At September 30, 2011, the Companys allowance for loan losses totaled $54.1 million, or 2.01% of
total loans, compared to an allowance for loan losses of $45.4 million, or 1.62% of total loans, at
December 31, 2010.
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Non-interest Income Non-interest income increased $564 thousand, or 9.8%, to $6.3 million for
the three months ended September 30, 2011 compared to $5.7 million for the same period in 2010
primarily due to a $308 thousand increase in the gain on loan sales related to our SBA lending
program and mortgage banking activities and a $125 thousand increase in debit card fees.
Non-interest Expense Non-interest expense decreased $5.1 million, or 15.4%, to $28.2 million for
the three months ended September 30, 2011 compared $33.3 million for the same period in 2010. The
decrease during the three months ended September 30, 2011 was primarily due to a decrease of $1.6
million in salaries and employee benefits, $1.4 million in marketing expense and $296 thousand in
occupancy expense as a result of the expense reduction program implemented during the first quarter
of 2011, as well as a $306 thousand decrease in FDIC insurance as a result of the assessment base
change effective as of April 1, 2011.
Income Taxes The Company recorded income tax benefit of $172 thousand for the three months ended
September 30, 2011, reflecting an effective tax rate of 4.4%, compared to an income tax benefit of
$21.8 million, reflecting an effective tax rate of 50.1%, for the same period in 2010. The
difference was due to an increase in income before income taxes of $47.5 million, to $3.9 million
for the three months ended September 30, 2011, from a loss before income taxes of $43.6 million for
the three months ended September 30, 2010. The increase in income before income taxes for the
three months ended September 30, 2011 as compared to the three months ended September 30, 2010 was
primarily due to an increase in the provision for loan losses of $42.1 million recorded in the
third quarter of 2010 as a result of specific reserves required for commercial real estate loans.
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.
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The following table summarizes average balances and average yields and costs for the three month
periods ended September 30, 2011 and September 30, 2010:
Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2010 | ||||||||||||||||||||||||
Average | Interest & | Yield / | Average | Interest & | Yield / | ||||||||||||||||||||
(Dollars in thousands) | Balance | Dividends | Cost | Balance | Dividends | Cost | |||||||||||||||||||
Interest Earning Assets: |
|||||||||||||||||||||||||
Investment Securities: |
|||||||||||||||||||||||||
Trading Securities |
$ | | $ | | 0.00 | % | $ | 4,350 | $ | 14 | 1.25 | % | |||||||||||||
Overnight Investments |
397,463 | 254 | 0.25 | % | 237,271 | 151 | 0.25 | % | |||||||||||||||||
Stock |
20,248 | | 0.00 | % | 27,764 | 42 | 0.60 | % | |||||||||||||||||
Other Investment securities |
1,209,543 | 9,135 | 3.02 | % | 1,379,287 | 11,605 | 3.37 | % | |||||||||||||||||
Total Investment securities & O/N Inv |
1,627,254 | 9,389 | 2.31 | % | 1,648,672 | 11,812 | 2.87 | % | |||||||||||||||||
Loans: |
|||||||||||||||||||||||||
Real estate loans |
|||||||||||||||||||||||||
Residential |
678,447 | 8,345 | 4.92 | % | 673,600 | 8,427 | 5.00 | % | |||||||||||||||||
Non-residential |
765,834 | 9,548 | 4.97 | % | 797,965 | 9,099 | 4.55 | % | |||||||||||||||||
Total real estate |
1,444,281 | 17,893 | 4.95 | % | 1,471,565 | 17,526 | 4.76 | % | |||||||||||||||||
Business loans |
363,283 | 5,040 | 5.54 | % | 390,606 | 4,811 | 4.91 | % | |||||||||||||||||
Small Business loans |
142,423 | 2,118 | 5.93 | % | 158,725 | 2,291 | 5.76 | % | |||||||||||||||||
Total Business & Small Business loans |
505,706 | 7,158 | 5.65 | % | 549,331 | 7,102 | 5.16 | % | |||||||||||||||||
Total Business loans |
1,271,540 | 16,706 | 5.24 | % | 1,347,296 | 16,201 | 4.80 | % | |||||||||||||||||
Personal loans |
758,207 | 9,526 | 4.98 | % | 791,354 | 10,852 | 5.44 | % | |||||||||||||||||
Total loans, net of discount |
2,708,194 | 34,577 | 5.09 | % | 2,812,250 | 35,480 | 5.03 | % | |||||||||||||||||
Total interest earning assets |
4,335,448 | 43,966 | 4.05 | % | 4,460,922 | 47,292 | 4.23 | % | |||||||||||||||||
Non-interest earning assets |
407,837 | 432,672 | |||||||||||||||||||||||
Total assets |
4,743,285 | 4,893,594 | |||||||||||||||||||||||
Interest Bearing Liabilities: |
|||||||||||||||||||||||||
Interest bearing savings and demand deposits: |
|||||||||||||||||||||||||
Savings and club accounts |
764,729 | 1,260 | 0.65 | % | 651,867 | 1,227 | 0.75 | % | |||||||||||||||||
Money market accounts |
594,802 | 1,040 | 0.69 | % | 605,550 | 1,214 | 0.79 | % | |||||||||||||||||
Demand deposits |
440,133 | 233 | 0.21 | % | 382,554 | 270 | 0.28 | % | |||||||||||||||||
Demand deposits Municipals |
764,812 | 1,329 | 0.69 | % | 901,353 | 2,286 | 1.01 | % | |||||||||||||||||
Certificates of deposit |
874,440 | 3,173 | 1.44 | % | 885,599 | 3,395 | 1.53 | % | |||||||||||||||||
Total interest-bearing deposits |
3,438,916 | 7,035 | 0.81 | % | 3,426,923 | 8,392 | 0.97 | % | |||||||||||||||||
Borrowings |
250,328 | 2,100 | 3.33 | % | 376,571 | 3,810 | 4.01 | % | |||||||||||||||||
Total interest-bearing liabilities |
3,689,244 | 9,135 | 0.98 | % | 3,803,494 | 12,202 | 1.27 | % | |||||||||||||||||
Non-interest-bearing deposits |
275,650 | 274,642 | |||||||||||||||||||||||
Other non-interest-bearing liabilities |
152,742 | 156,301 | |||||||||||||||||||||||
Total liabilities |
4,117,636 | 4,234,437 | |||||||||||||||||||||||
Total stockholders equity |
625,649 | 659,157 | |||||||||||||||||||||||
Total liabilities and stockholders equity |
4,743,285 | 4,893,594 | |||||||||||||||||||||||
Net interest income |
34,831 | 35,090 | |||||||||||||||||||||||
Interest rate spread |
3.07 | % | 2.96 | % | |||||||||||||||||||||
Net interest margin |
3.21 | % | 3.14 | % | |||||||||||||||||||||
Average
interest-earning assets to average interest-bearing liabilities |
117.52 | % | 117.28 | % |
47
Table of Contents
Comparison of Operating Results for the Nine Months Ended September 30, 2011 and September 30,
2010
General For the nine months ended September 30, 2011, Beneficial recorded net income of $5.2
million, or $0.07 per share, compared to a net loss of $8.6 million, or $0.11 per share, for the
nine months ended September 30, 2010. The increase was primarily due to higher provisions for loan
losses in the third quarter of 2010. During the nine months ended September 30, 2011, the Bank
completed a comprehensive review of its operating cost structure and finalized an expense
management reduction program which resulted in a $5.1 million restructuring charge. The
restructuring charge is related to expenses associated with a reduction in force and costs related
to consolidation of five Bank branch locations into other branches. The Company also continued to
work through credit and loan maturity issues which resulted in a provision for loan losses of $29.0
million for the nine months ended September 30, 2011 as compared to $62.2 million for the same
period in 2010. As previously described, the Company recorded a significantly elevated provision
during the third quarter of 2010 as a result of a pronounced slowdown in the commercial real estate
market and downward pressure on property valuations. In 2011, approximately one-third of our
commercial real estate and commercial construction portfolios contractually mature. We expect that
market conditions coupled with the large amount of commercial maturities will result in elevated
provision for credit losses in 2011 and 2012.
Net Interest Income For the nine months ended September 30, 2011, net interest income decreased
$3.2 million, or 3.0%, to $107.3 million from $110.5 million for the nine months ended September
30, 2010. The net interest margin decreased 13 basis points to 3.22% for the nine months ended
September 30, 2011 from 3.35% for the nine months ended September 30, 2010. Net interest income in
2011 has been impacted by reduced loan demand as well as high levels of cash as we manage the
planned run-off of higher cost, non-relationship-based municipal deposits to improve our interest
rate risk position and capital levels.
Provision for Loan Losses The Bank recorded a provision for loan losses of $29.0
million for the nine months ended September 30, 2011 compared to $62.2 million for the same period
in 2010. As previously described, the Company recorded a significantly elevated provision during
the third quarter of 2010 as a result of a pronounced slowdown in the commercial real estate market
and downward pressure on property valuations. Net charge-offs totaled $20.2 million for the nine
months ended September 30, 2011 as compared to $63.1 million during the same period in 2010 driven
by the significant charge-offs in the third quarter of 2010 mentioned above. We continue to
charge-off the collateral deficiency on all classified collateral dependent loans across all
portfolios once they are 90 days delinquent.
At September 30, 2011, the Companys allowance for loan losses totaled $54.1 million, or 2.01% 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 $2.1 million to $18.2 million for the nine
months ended September 30, 2011 compared to the same period in 2010, primarily due to a $1.8
million decrease in the gain on sale of securities.
Non-interest Expense Non-interest expense decreased $3.8 million to $91.5 million for the nine
months ended September 30, 2011 compared to the same period in 2010, primarily due to a $3.9
million decrease in salaries and benefits, a $2.3 million decrease in marketing expense, a $628
thousand decrease in occupancy expense, a $600 thousand decrease in correspondent bank charges and
a $520 thousand decrease in printing and office supply expense as a result of the expense reduction
initiatives implemented during the first quarter of 2011 These decreases in non-interest expense
were partially offset by a $5.1 million restructuring charge related to the previously described
expense reduction initiatives implemented in the first quarter of 2011.
48
Table of Contents
Income Taxes The Company recorded an income tax benefit of $236 thousand for the nine months
ended September 30, 2011, reflecting an effective tax rate of 4.8%, compared to an income tax
benefit of $18.1 million, reflecting an effective tax rate of 67.7%, for the same period in 2010.
The difference was
due to an increase in income before income taxes of $31.6 million, to $4.9 million for the nine
months ended September 30, 2011, from a loss before income taxes of $26.7 million for the nine
months ended September 30, 2010. The increase in income before income taxes for the nine months
ended September 30, 2011 as compared to the same period in 2010 was primarily due to a decrease in
the provision for loan losses in the amount of $33.2 million, which was partially offset by a
restructuring charge of $5.1 million and a decrease in gains on the sale of investment securities
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 September 30, 2011, the Company had net deferred tax assets totaling $26.5 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 September 30, 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.
49
Table of Contents
The following table summarizes average balances and average yields and costs for the nine month
periods ended September 30, 2011 and September 30, 2010:
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Interest & | Yield / | Average | Interest & | Yield / | |||||||||||||||||||
(Dollars in thousands) | Balance | Dividends | Cost | Balance | Dividends | Cost | ||||||||||||||||||
Interest Earning Assets: |
||||||||||||||||||||||||
Investment Securities: |
||||||||||||||||||||||||
Trading Securities |
$ | 2,976 | $ | 26 | 1.19 | % | $ | 7,965 | $ | 70 | 1.17 | % | ||||||||||||
Overnight Investments |
318,099 | 603 | 0.25 | % | 169,462 | 321 | 0.25 | % | ||||||||||||||||
Stock |
21,435 | 5 | 0.03 | % | 27,965 | 117 | 0.56 | % | ||||||||||||||||
Other Investment securities |
1,357,961 | 29,969 | 2.94 | % | 1,401,578 | 38,581 | 3.67 | % | ||||||||||||||||
Total Investment securities & O/N Inv |
1,700,471 | 30,603 | 2.40 | % | 1,606,970 | 39,089 | 3.24 | % | ||||||||||||||||
Loans: |
||||||||||||||||||||||||
Real estate loans |
||||||||||||||||||||||||
Residential |
691,976 | 25,561 | 4.93 | % | 666,153 | 26,323 | 5.27 | % | ||||||||||||||||
Non-residential |
774,691 | 29,548 | 5.09 | % | 788,323 | 28,776 | 4.87 | % | ||||||||||||||||
Total real estate |
1,466,667 | 55,109 | 5.01 | % | 1,454,476 | 55,099 | 5.05 | % | ||||||||||||||||
Business loans |
366,671 | 15,182 | 5.53 | % | 378,272 | 15,199 | 5.36 | % | ||||||||||||||||
Small Business loans |
148,136 | 6,658 | 6.00 | % | 159,837 | 7,073 | 5.91 | % | ||||||||||||||||
Total Business & Small Business loans |
514,807 | 21,840 | 5.66 | % | 538,109 | 22,272 | 5.52 | % | ||||||||||||||||
Total Business loans |
1,289,498 | 51,388 | 5.32 | % | 1,326,432 | 51,048 | 5.14 | % | ||||||||||||||||
Personal loans |
767,893 | 29,064 | 5.06 | % | 804,936 | 32,569 | 5.41 | % | ||||||||||||||||
Total loans, net of discount |
2,749,367 | 106,013 | 5.15 | % | 2,797,521 | 109,940 | 5.25 | % | ||||||||||||||||
Total interest earning assets |
4,449,838 | 136,616 | 4.10 | % | 4,404,491 | 149,029 | 4.52 | % | ||||||||||||||||
Non-interest earning assets |
384,753 | 408,877 | ||||||||||||||||||||||
Total assets |
4,834,591 | 4,813,368 | ||||||||||||||||||||||
Interest Bearing Liabilities: |
||||||||||||||||||||||||
Interest bearing savings and demand deposits: |
||||||||||||||||||||||||
Savings and club accounts |
733,744 | 3,702 | 0.67 | % | 605,770 | 3,271 | 0.72 | % | ||||||||||||||||
Money market accounts |
610,703 | 3,296 | 0.72 | % | 623,467 | 3,774 | 0.81 | % | ||||||||||||||||
Demand deposits |
422,689 | 720 | 0.23 | % | 369,063 | 821 | 0.30 | % | ||||||||||||||||
Demand deposits Municipals |
912,305 | 5,467 | 0.80 | % | 872,710 | 6,795 | 1.04 | % | ||||||||||||||||
Certificates of deposit |
890,572 | 9,646 | 1.46 | % | 891,303 | 11,621 | 1.75 | % | ||||||||||||||||
Total interest-bearing deposits |
3,570,013 | 22,831 | 0.86 | % | 3,362,313 | 26,282 | 1.05 | % | ||||||||||||||||
Borrowings |
257,368 | 6,506 | 3.38 | % | 401,337 | 12,208 | 4.07 | % | ||||||||||||||||
Total interest-bearing liabilities |
3,827,381 | 29,337 | 1.02 | % | 3,763,650 | 38,490 | 1.37 | % | ||||||||||||||||
Non-interest-bearing deposits |
280,332 | 263,930 | ||||||||||||||||||||||
Other non-interest-bearing liabilities |
107,225 | 133,675 | ||||||||||||||||||||||
Total liabilities |
4,214,938 | 4,161,255 | ||||||||||||||||||||||
Total stockholders equity |
619,653 | 652,113 | ||||||||||||||||||||||
Total liabilities and stockholders equity |
4,834,591 | 4,813,368 | ||||||||||||||||||||||
Net interest income |
107,279 | 110,539 | ||||||||||||||||||||||
Interest rate spread |
3.08 | % | 3.15 | % | ||||||||||||||||||||
Net interest margin |
3.22 | % | 3.35 | % | ||||||||||||||||||||
Average interest-earning assets to average |
||||||||||||||||||||||||
interest-bearing liabilities |
116.26 | % | 117.03 | % |
50
Table of Contents
Asset Quality
At September 30, 2011, the Banks non-performing assets remained relatively constant at $163.5
million from $162.6 million at June 30, 2011 and increased $23.1 million from $140.4 million at
December 31, 2010. The ratio of non-performing assets to total assets increased to 3.53% at
September 30, 2011 from 3.45% at June 30, 2011 and 2.85% at December 31, 2010.
September 30, | June 30, | December 31, | September 30, | |||||||||||||
2011 | 2011 | 2010 | 2010 | |||||||||||||
ASSET QUALITY INDICATORS: |
||||||||||||||||
Non-performing assets: |
||||||||||||||||
Non-accruing loans |
$ | 118,901 | $ | 118,697 | $ | 95,803 | $ | 89,205 | ||||||||
Accruing loans past due 90 days or more* |
25,515 | 25,173 | 27,932 | 27,106 | ||||||||||||
Total non-performing loans** |
$ | 144,416 | $ | 143,870 | $ | 123,735 | $ | 116,311 | ||||||||
Real estate owned |
19,058 | 18,740 | 16,694 | 17,438 | ||||||||||||
Total non-performing assets |
$ | 163,474 | $ | 162,610 | $ | 140,429 | $ | 133,749 | ||||||||
Non-performing loans to total loans |
5.37 | % | 5.27 | % | 4.42 | % | 4.20 | % | ||||||||
Non-performing loans to total assets |
3.12 | % | 3.05 | % | 2.51 | % | 2.37 | % | ||||||||
Non-performing assets to total assets |
3.53 | % | 3.45 | % | 2.85 | % | 2.73 | % | ||||||||
Non-performing assets less accruing loans
past due 90 days or more to total assets |
2.98 | % | 2.92 | % | 2.28 | % | 2.18 | % |
* | Includes $25.5 million, $25.2 million, $27.9 million and $26.6 million in government
guaranteed student loans as of September 30, 2011, June 30, 2011, December 31, 2010 and September
30, 2010, respectively. |
|
** | Includes $26.5 million, $27.0 million, $26.7 million and $26.5 million of troubled debt
restructured loans (TDRs) as of September 30, 2011, June 30, 2011, December 31, 2010 and September
30, 2010, respectively. |
The Bank 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 Bank has confirmed there is
a loss. Non-performing consumer loans include $25.5 million and $27.9 million in government
guaranteed student loans as of September 30, 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.
51
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:
September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
Loan Balance | ALLL | Coverage | Loan Balance | ALLL | Coverage | |||||||||||||||||||
Commercial (including TDRs) |
$ | 1,265,179 | $ | 46,100 | 3.64 | % | $ | 1,310,929 | $ | 38,496 | 2.94 | % | ||||||||||||
Residential |
671,018 | 1,913 | 0.29 | % | 698,722 | 1,884 | 0.27 | % | ||||||||||||||||
Consumer |
751,218 | 5,557 | 0.74 | % | 786,751 | 4,436 | 0.56 | % | ||||||||||||||||
Unallocated |
| 550 | | | 550 | | ||||||||||||||||||
Total |
$ | 2,687,415 | $ | 54,120 | 2.01 | % | $ | 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 Banks 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.
We hired a Chief Credit Officer during the third quarter of 2011 to supervise the workout
department and identify, manage and work through non performing assets. 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 the Banks
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, the Banks 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.
52
Table of Contents
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.
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 $25.5 million in government
guaranteed student loans at September 30, 2011.
Additionally, the Bank 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 Banks 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 $46.1 million at September 30, 2011 (3.6% 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 during 2011. The increase in classified assets resulted in
charge-offs in the amount of $20.6 million for our commercial loan portfolio during the nine months
ended September 30, 2011. 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 September 30,
2011 and December 31, 2010 consists of reserves against the pass rated and special mention
commercial loans.
53
Table of Contents
Residential Loans. The allowance for the residential loan estate portfolio was $1.9 million at both
September 30, 2011 and December 31, 2010. During the nine months ended September 30, 2011,
charge-offs improved and delinquencies started to level off. 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 have maintained a
relatively constant reserve for the residential loan portfolio.
Consumer Loans. The allowance for the consumer loan portfolio increased $1.1 million to $5.5
million at September 30, 2011 from $4.4 million at December 31, 2010. The increase in the reserve
balance is due to increases in delinquencies in the consumer loan portfolio during the nine months
ended September 30, 2011. The allowance as a percentage of consumer loans was 0.7% at September 30,
2011 and 0.6% at December 31, 2010.
Unallocated Allowance. The unallocated allowance for loan losses was $550 thousand at both
September 30, 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.
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 September 30,
2011, cash and cash equivalents totaled $398.1 million. In addition, at September 30, 2011, our
maximum borrowing capacity with the FHLB was $852.3 million. At September 30, 2011, we had $100.0
million of advances outstanding, $145.0 million of future dated advances outstanding and $77.3
million of letters of credit outstanding with the FHLB.
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A significant use of our liquidity is the funding of loan originations. At September 30, 2011, we
had $82.7 million in loan commitments outstanding, which consisted of $22.2 million and $60.5
million in commercial and consumer commitments to fund loans, respectively, $161.4 million in
commercial and consumer unused lines of credit, and $26.1 million in standby letters of credit.
Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of
deposit due within one year of September 30, 2011 totaled $506.2 million, or 60.2% of certificates
of deposit, at September 30, 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 September 30, 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 September 30, 2011:
Payments due by period | ||||||||||||||||||||
Less than | One to | Six to | More than | |||||||||||||||||
(Dollars in thousands) | Total | One Year | Six Years | Five Years | Five Years | |||||||||||||||
Commitments to fund loans |
$ | 82,700 | $ | 82,700 | $ | | $ | | $ | | ||||||||||
Unused lines of credit |
161,444 | 91,371 | 70,073 | |||||||||||||||||
Standby letters of credit |
26,085 | 26,085 | ||||||||||||||||||
Operating lease obligations |
34,668 | 5,359 | 8,960 | 4,728 | 15,621 | |||||||||||||||
Total |
$ | 304,897 | $ | 205,515 | $ | 8,960 | $ | 4,728 | $ | 85,694 | ||||||||||
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 September 30, 2011, 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 September 30, 2011,
approximately 85.9% 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 September 30, 2011, approximately 9.7% of the investment portfolio was rated below AAA
but rated investment grade by Moodys and/or S&P, approximately 1.3% of the investment portfolio
was rated below investment grade by Moodys and/or S&P and approximately 3.1% 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
focuses on 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 $5.0 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 in excess of $5.0 million must be
approved by the Senior Loan Committee of the Companys Board, which is comprised of senior Bank
officers and five non-employee directors. Loans in excess of $15.0 million must also be approved
by the Executive Committee of the Board, which includes six non-employee directors. Underwriting
activities are centralized. The Credit Risk Review function 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. During the third
quarter of 2011, the Company hired a Chief Credit Officer to continue to focus on a number of
initiatives to manage credit risk.
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.
During the second quarter of 2011, the Company entered into two future borrowing arrangements with
the FHLB of Pittsburgh to borrow $70.0 million and $75.0 million, respectively, at a fixed interest
rate during the period April 2012 through April 2016 and the period March 2013 through March 2017,
respectively, to replace existing borrowings that will mature during these periods. The purpose of
these arrangements is to manage future interest rate volatility by locking into fixed borrowing
rates. There was no impact to the Companys financial condition, results of operations or cash
flows for the period ended September 30, 2011.
For the nine months ended September 30, 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 September 30, 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 September 30, 2011:
Basis point change in rates | -200 | Base Forecast | +200 | |||||||||
(Dollars in thousands) | ||||||||||||
Net Interest Income at Risk: |
||||||||||||
Net Interest Income |
124,069 | 135,760 | 136,275 | |||||||||
% change |
(8.61 | %) | 0.38 | % | ||||||||
Economic Value at Risk: |
||||||||||||
Equity |
710,732 | 797,550 | 739,779 | |||||||||
% change |
(10.89 | %) | (7.24 | %) |
As of September 30, 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 September 30, 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 September 30, 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. In October 2011, we were notified by the plaintiffs counsel of a proposed
settlement amount of $3.7 million. We believe that we have valid
defenses to the plaintiffs suit. We believe that a loss is
reasonably possible in the future but are not able to estimate a loss
related to this claim at this time.
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 |
Except as set forth below, as of September 30, 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. One additional risk factor, noted below, was identified during the quarter
ended September 30, 2011. 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.
The Standard & Poors downgrade in the U.S. governments sovereign credit rating, and in the credit
ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and
instrumentalities, could result in risks to the Company and the Bank and general economic
conditions that we are not able to predict.
On August 5, 2011, Standard & Poors downgraded the United States long-term debt rating from its
AAA rating to AA+. On August 8, 2011, Standard & Poors downgraded the credit ratings of certain
long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies
linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of
financial institutions, including the Bank. These downgrades could adversely affect the market
value of such instruments, and could adversely impact our ability to obtain funding that is
collateralized by affected instruments, as well as affect the pricing of that funding when it is
available. In addition, these downgrades could materially affect global and domestic financial
markets and economic conditions, which may affect the Companys and the Banks business, financial
condition and liquidity and result in future changes in capital requirements or a rebalancing of
investment portfolios in response to managements assessment of the related risk weightings. We
cannot predict if, when or how these changes to the credit ratings will affect economic conditions.
As a result, the changes to the credit ratings could result in a significant adverse impact to the
Company, and could exacerbate the other risks to which the Company is subject.
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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 September 30, 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) | ||||||||||||
July 1-31, 2011 |
| | | 273,680 | ||||||||||||
August 1-31, 2011 |
264,366 | (2) | 7.80 | 220,000 | 53,680 | |||||||||||
September 1-30, 2011 |
53,680 | 7.43 | 53,680 | |
(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. |
|
(2) | Includes 44,366 shares that were withheld subject to restricted stock awards under the
Beneficial Mutual Bancorp, Inc. 2008 Equity Incentive Plan as payment of taxes due upon the
vesting of the restricted stock awards. |
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | (Removed and Reserved) |
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) |
|||
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 Principal Financial Officer |
|||
32.0 | Section 1350 Certification |
|||
101.0 | * | The following materials from the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2011, formatted in XBRL (Extensible Business Reporting
Language): (i) the Consolidated Statements of Financial Condition, (ii) the
Consolidated Statements of Operations, (iii) the Consolidated Statement of Changes in
Stockholders Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes
to the Consolidated Financial Statements, tagged as blocks of text. |
* | Furnished, not filed. |
|
(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: November 3, 2011
|
By: | /s/ Gerard P. Cuddy
|
||||
President and Chief Executive Officer | ||||||
(principal executive officer) | ||||||
Dated: November 3, 2011
|
By: | /s/ Thomas D. Cestare
|
||||
Executive Vice President and | ||||||
Chief Financial Officer | ||||||
(principal financial officer) |
61