Company Quick10K Filing
Beneficial Bancorp
Price13.82 EPS0
Shares75 P/E30
MCap1,034 P/FCF16
Net Debt-852 EBIT69
TEV181 TEV/EBIT3
TTM 2018-12-31, in MM, except price, ratios
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10-Q 2015-09-30 Filed 2015-10-29
10-Q 2015-06-30 Filed 2015-07-30
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BNCL 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Consolidated Financial and Other Data
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
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EX-32 a15-5039_1ex32.htm

Beneficial Bancorp Earnings 2014-12-31

Balance SheetIncome StatementCash Flow

10-K 1 a15-5039_110k.htm 10-K

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2014

 

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: 001-36806

 

BENEFICIAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

47-1569198

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1818 Market Street, Philadelphia, Pennsylvania

 

19103

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (215) 864-6000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

Nasdaq Stock Market, LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

 

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 o No x

 

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 x No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

(Check one):

 

Large Accelerated Filer o

 

Accelerated Filer x

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).Yes o  No x

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2014 was approximately $404.4 million.  As of February 26, 2015, there were 82,718,611 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated by

reference into Part III of this Form 10-K.

 

 

 



Table of Contents

 

INDEX

 

 

 

Page

Part I

 

 

 

Item 1.

Business

1

 

 

 

Item 1A.

Risk Factors

16

 

 

 

Item 1B.

Unresolved Staff Comments

21

 

 

 

Item 2.

Properties

21

 

 

 

Item 3.

Legal Proceedings

21

 

 

 

Item 4.

Mine Safety Disclosures

21

 

 

 

Part II

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

22

 

 

 

Item 6.

Selected Consolidated Financial Data and Other Data

24

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

55

 

 

 

Item 8.

Financial Statements and Supplementary Data

55

 

 

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

55

 

 

 

Item 9A.

Controls and Procedures

56

 

 

 

Item 9B.

Other Information

58

 

 

 

Part III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

58

 

 

 

Item 11.

Executive Compensation

58

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

58

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

59

 

 

 

Item 14.

Principal Accountant Fees and Services

59

 

 

 

Part IV

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

59

 

 

 

SIGNATURES

 

 



Table of Contents

 

PART I

 

Item 1.     Business

 

General

 

Beneficial Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated in August 2014 to be the successor to Beneficial Mutual Bancorp, Inc. (“Beneficial Mutual Bancorp”) upon completion of the second-step conversion of Beneficial Bank (the “Bank”) from the two-tier mutual holding company structure to the stock holding company structure. Beneficial Savings Bank MHC was the former mutual holding company for Beneficial Mutual Bancorp prior to completion of the second-step conversion. In conjunction with the second-step conversion, Beneficial Savings Bank MHC merged into Beneficial Mutual Bancorp (and ceased to exist), and Beneficial Mutual Bancorp merged into the Company, with the Company as the surviving entity. The second-step conversion was completed on January 12, 2015, at which time the Company sold, for gross proceeds of $503.8 million, a total of 50,383,817 shares of common stock at $10.00 per share, including 2,015,352 shares purchased by the Bank’s employee savings and stock ownership plan. As part of the second-step conversion, each of the existing 29,394,417 outstanding shares of Beneficial Mutual Bancorp common stock owned by persons other than Beneficial Savings Bank MHC was converted into 1.0999 of a share of Company common stock.

 

The consolidated financial statements include the accounts of the Company, the Bank, a Pennsylvania chartered savings bank, and the Bank’s subsidiaries. Because the Bank’s second-step conversion had not been completed by December 31, 2014, all financial and other information presented in this Annual Report on Form 10-K is derived from the consolidated financial statements of Beneficial Mutual Bancorp.

 

Beneficial Bancorp’s business activities are the ownership of Beneficial Bank’s capital stock. Beneficial Bancorp does not own or lease any property but instead uses the premises, equipment and other property of Beneficial Bank with the payment of appropriate rental fees, as required by applicable law and regulations, under the terms of an expense allocation agreement. Accordingly, the information set forth in this Annual Report, including the consolidated financial statements and related financial data, relates primarily to Beneficial Bank.

 

Beneficial Bank was founded in 1853. We have served the financial needs of our depositors and the local community as a community-minded, customer service-focused institution. We offer traditional financial services to consumers and businesses in our market areas. We attract deposits from the general public and use those funds to originate a variety of loans, including commercial real estate loans, commercial business loans, one- to four-family real estate loans, consumer loans, home equity loans and construction loans. We offer insurance brokerage and investment advisory services through our wholly owned subsidiaries, Beneficial Insurance Services, LLC and Beneficial Advisors, LLC, respectively. Upon the completion of the conversion, the Bank changed its legal name from Beneficial Mutual Savings Bank to Beneficial Bank.

 

In 2007, Beneficial Mutual Bancorp completed its initial public offering in which it sold 23,606,625 shares of its common stock to the public, including 3,224,772 shares to Beneficial Bank’s employee savings and stock ownership plan. In addition, 45,792,775 shares of Beneficial Mutual Bancorp’s common stock were issued to Beneficial Savings Bank MHC. To further emphasize Beneficial Bank’s existing community activities, Beneficial Mutual Bancorp also contributed $500,000 in cash and issued 950,000 shares, or 1.15% of its outstanding common stock, to The Beneficial Foundation, a Pennsylvania nonstock charitable foundation organized by Beneficial Bank in connection with its initial public offering.

 

Acquisition History

 

Acquisitions of banking institutions and other financial services companies within and surrounding our market area have been, and we expect will continue to be, a key component of our strategy. In 2007, in connection with the closing of our initial public offering, Beneficial Mutual Bancorp acquired FMS Financial Corporation and its wholly owned subsidiary, Farmers & Mechanics Bank. The acquisition of FMS Financial Corporation and Farmers & Mechanics Bank, which had 31 branch offices in Burlington, Camden and Gloucester Counties in New Jersey, substantially enhanced our market share and solidified Beneficial Bank’s position as the largest Philadelphia-based bank operating solely in the greater Philadelphia metropolitan area. In 2012, Beneficial Mutual Bancorp acquired SE Financial Corp. and its wholly owned subsidiary, St. Edmond’s Federal Savings Bank. The acquisition increased our market share in southeastern Pennsylvania, specifically in Philadelphia and Delaware Counties. Additionally, the acquisition provided Beneficial Bank with new branches in Roxborough, Pennsylvania and Deptford, New Jersey.

 

We have also acquired other financial services companies to expand the retail products and services we offer to our customers. In 2005, Beneficial Insurance Services, LLC, a wholly owned subsidiary of Beneficial Bank, acquired the assets of a Philadelphia-based insurance brokerage firm, Paul Hertel & Co., Inc., which provided property, casualty, life, health and benefits insurance services to individuals and businesses. In 2007, Beneficial Insurance Services, LLC also acquired the business of CLA Agency, Inc., a full-service property and casualty and professional liability insurance brokerage company headquartered in Newtown Square, Pennsylvania.

 

Market Area

 

We are headquartered in Philadelphia, Pennsylvania. We currently operate 33 full-service banking offices in Bucks, Chester, Delaware, Montgomery and Philadelphia Counties, Pennsylvania and 25 full-service banking offices in Burlington, Gloucester, and Camden Counties, New Jersey. We also operate one lending office in Montgomery County, Pennsylvania. In addition, Beneficial Insurance

 

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Services, LLC, operates one office in Delaware County, Pennsylvania, and provides property, causality, life, health and professional liability insurance to our customers. We regularly evaluate our network of banking offices to optimize the penetration in our market area. We will occasionally open or consolidate banking offices.

 

Philadelphia is the sixth largest metropolitan region in the United States and home to over 64 colleges and universities. Traditionally, the economy of the Philadelphia metropolitan area was driven by the manufacturing and distribution sectors. However, the region has evolved into a more diverse economy geared toward information and service-based businesses. Currently, the leading employment sectors in the region are (1) educational and health services; (2) transportation, trade and utilities services; (3) professional and business services; and (4) due to the region’s numerous historic attractions, leisure and hospitality services. The region’s leading employers include Jefferson Health System, the University of Pennsylvania Health System, Merck & Company, Inc. and Comcast Corporation. The Philadelphia metropolitan area has also evolved into one of the major corporate centers in the United States due to its geographic location, access to transportation, significant number of educational facilities to supply technical talent and available land for corporate and industrial development. The Philadelphia metropolitan area is currently home to 13 Fortune 500 companies, including AmerisourceBergen, Comcast, Sunoco, DuPont, Aramark and Lincoln Financial.

 

According to a 2013 census, the population of our eight-county primary retail market area totaled approximately 5.3 million. Overall, the eight counties that comprise our primary retail market area provide attractive long-term growth potential by demonstrating relatively strong household income and wealth growth trends relative to national and state-wide projections. However, the Philadelphia region is slowly recovering from the effects of the recent economic recession where falling home prices and sharply reduced sales volumes, along with the collapse of the United States’ subprime mortgage industry in 2008 that followed a national home price peak, significantly contributed to a recession that officially lasted until June 2009, although the effects continued thereafter. The unemployment rate, not seasonally adjusted, for the Philadelphia metropolitan area totaled 5.0% in December 2014, which was lower than the national unemployment rate of 5.4% in December 2014.

 

Competition

 

We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the many banks, thrift institutions and credit unions operating in our market area and, to a lesser extent, from other financial service companies such as brokerage firms and insurance companies.

 

Over the past several years, a number of large holding companies that operate banks in our market area have experienced significant credit, capital and liquidity setbacks that have led to their acquisition by even larger holding companies, some of which are located outside of the United States, including Sovereign Bank and Commerce Bank, which were acquired by Banco Santander, S.A. and Toronto Dominion Bank, respectively. In addition, Wachovia Bank, which held the largest deposit market share in our market area, has been acquired by Wells Fargo & Company. We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities.

 

Our competition for loans comes primarily from the competitors referenced above and other regional and local community banks, thrifts and credit unions and from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from the increasing number of non-depository financial service companies participating in the mortgage market, such as insurance companies, securities companies and specialty finance companies, although the credit market disruptions stemming from the deterioration of sub-prime loans have reduced the number of non-depository competitors in the residential mortgage market.

 

We expect competition to remain intense in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Competition for deposits and the origination of loans could limit our growth in the future.

 

Lending Activities

 

We offer a variety of loans including commercial, residential and consumer loans. Our commercial loan portfolio includes business loans, commercial real estate loans and commercial construction loans. Our residential loan portfolio includes one- to four-family residential real estate loans and one- to four-family residential construction loans. Our consumer loan portfolio primarily includes automobile loans, personal loans including recreational vehicles, manufactured housing and marine loans, educational loans and home equity loans and lines of credit.

 

We intend to continue to emphasize commercial and small business lending and remain focused on commercial real estate lending. We will continue to proactively monitor and manage existing credit relationships. During the year ended December 31, 2014, we continued to invest in our credit risk management and lending staff and processes to position Beneficial Bank for growth. Specifically, in the past year, we hired additional lenders with significant experience in our market area to expand our commercial real estate and commercial and industrial lending efforts.

 

Commercial Real Estate Loans. At December 31, 2014, commercial real estate loans totaled $609.6 million, or 25.2% of our total loan portfolio. This portfolio is comprised of loans for the acquisition (purchase), financing and/or refinancing of commercial real estate and

 

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the financing of income-producing real estate. Income-producing real estate includes real estate held for lease to third parties and nonresidential real estate. These loans are generally non-owner-occupied properties in which 50% or more of the primary source of repayment is derived from rental income from unaffiliated third-parties. The commercial real estate portfolio includes loans to finance office buildings, apartment buildings, shopping centers, hotels, motels, dormitories, nursing homes, assisted-living facilities, mini-storage warehouse facilities and similar non-owner-occupied properties.

 

We offer both fixed and adjustable rate commercial real estate loans. We originate a variety of commercial real estate loans generally for terms of up to 10 years and with payments generally based on an amortization schedule of up to 25 years. Our fixed rate loans are typically based on either the Federal Home Loan Bank of Pittsburgh’s borrowing rate or U.S. Treasury rate and generally most are fixed with a rate reset after a five-year period.

 

When making commercial real estate loans, we consider the financial statements and tax returns of the borrower, the borrower’s payment history of its debt, the debt service capabilities of the borrower, the projected cash flows of the real estate, leases for any of the tenants located at the collateral property and the value of the collateral.

 

As of December 31, 2014, our largest commercial real estate loan was a $21.7 million loan for a 136-unit hotel in the greater Philadelphia area. The loan is well collateralized and was performing in accordance with its original terms at December 31, 2014.

 

Commercial Business Loans. At December 31, 2014, commercial business loans totaled $442.2 million, or 18.2% of our total loan portfolio.

 

This portfolio is comprised of loans to individuals, sole proprietorships, partnerships, corporations, and other business enterprises, whether secured or unsecured, single-payment or installment, for commercial, industrial and professional purposes as well as owner-occupied real estate loans. Owner-occupied real estate loans are loans where the primary source of repayment is the cash flow generated by the occupying business. Proceeds from these loans may finance the acquisition or construction of business premises or may be used for other business purposes such as working capital. In many cases, the owner of the occupying business owns the building in a separate entity and leases it to the business. In an owner-occupied property, more than 50% of the primary source of repayment is derived from the affiliated entity. Properties such as hospitals, golf courses, recreational facilities, and car washes are considered owner-occupied unless leased to an unaffiliated party.

 

We offer lines of credit, intermediate term loans and long term loans primarily to assist businesses in achieving their growth objectives and/or working or long-term capital needs. The interest rates for these loans are typically based on LIBOR, bank prime, U.S. Treasury or Federal Home Loan Bank of Pittsburgh borrowing rate. These loans are usually secured by business assets, including but not limited to, accounts receivable, inventory, equipment and real estate. Many of these loans include the personal guarantees of the owners or business owners.

 

When making commercial business loans, we review financial information of the borrowers and guarantors. We apply a due diligence process that includes a review of the borrowers’ and/or guarantors’ payment history, an understanding of the business and its industry, an assessment of the management capabilities, an analysis of the financial capacity, financial condition and cash flows of the borrower, an assessment of the collateral and when applicable a review of the guarantors’ financial capacity and condition.

 

Commercial business loans include shared national credits, which are participations in loans or loan commitments of at least $20.0 million that are shared by three or more banks. Included in our shared national credit portfolio are purchased participations and assignments in leveraged lending transactions. Leveraged lending transactions are generally used to support a merger- or acquisition-related transaction, to back a recapitalization of a company’s balance sheet or to refinance debt. When considering a participation in the leveraged lending market, we will participate only in first lien senior secured term loans that are highly rated (investment grade) by the rating agencies and that trade in active secondary markets. Even though we intend to hold these loans in our portfolio, we actively monitor the secondary market for these types of loans to ensure that we maintain flexibility to sell such loans in the event of deteriorating credit quality. To further minimize risk, based on our current capital levels and loan portfolio, we have limited the total amount of leveraged loans to $150.0 million with no single obligor exceeding $15.0 million while maintaining single industry concentrations below 30%. We may reevaluate these limits in future periods.

 

The shared national credit loans are typically variable rate with terms ranging from one to seven years. At December 31, 2014, shared national credits totaled $186.7 million, which included $124.8 million of leveraged lending transactions. All of these loans were classified as pass rated as of December 31, 2014 as all payments are current and the loans are performing in accordance with their contractual terms.

 

At December 31, 2014, our largest commercial business loan was a $30.0 million shared national credit. The loan was performing in accordance with its original terms at December 31, 2014.

 

Commercial Construction Loans. At December 31, 2014, commercial construction loans totaled $69.1 million, or 2.9% of our total loan portfolio.

 

We offer commercial construction loans to commercial real estate construction developers in our market area. We offer loans secured by real estate, with original maturities of 60 months or less, made to finance land development costs incurred before erecting new structures (i.e., the process of improving land including laying sewers, water pipes, etc.) or the on-site construction of industrial,

 

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commercial, residential, or farm buildings. Commercial construction loans include loans secured by real estate which are used to acquire and improve developed and undeveloped property as well as used to alter or demolish existing structures to allow for new development.

 

We generally limit the number of model homes and homes built on speculation, and scheduled draws against executed agreements of sales as conditions of the commercial construction loans.

 

Commercial real estate construction loans are typically based upon the prime rate as published in The Wall Street Journal and/or LIBOR. Commercial real estate loans for developed real estate and for real estate acquisition and development are originated generally with loan-to-value ratios up to 75%, while loans for the acquisition of land are originated with a maximum loan to value ratio of 65%.

 

When making commercial construction loans, we consider the financial statements of the borrower, the borrower’s payment history, the projected cash flows from the proposed real estate collateral, and the value of the collateral. In general, our real estate construction loans are guaranteed by the borrowers. We consider the financial statements and tax returns of the guarantors, along with the guarantors’ payment history, when underwriting a commercial construction loan.

 

At December 31, 2014, our largest commercial construction loan was a $9.4 million loan secured by a hotel being developed in Pittsburgh and general business assets. The loan was performing in accordance with its original terms at December 31, 2014.

 

One- to Four-Family Residential Loans. At December 31, 2014, one- to four-family residential loans totaled $667.8 million, or 27.6% of our total loan portfolio.

 

We offer fixed-rate and adjustable-rate residential mortgage loans. We offer fixed-rate mortgage loans with terms of up to 30 years. Approximately 91.9% of our outstanding residential loans were fixed rate loans at December 31, 2014. We also offer adjustable-rate mortgage loans with interest rates and payments that adjust annually after an initial fixed period of one, three or five years. Interest rates and payments on our adjustable-rate loans generally are adjusted to a rate equal to a percentage above the U.S. Treasury Security Index or LIBOR. Our adjustable-rate single-family residential real estate loans generally have a cap of 2% on any increase or decrease in the interest rate at any adjustment date, and a maximum adjustment limit of 5% on any such increase or decrease over the life of the loan. To increase the originations of adjustable-rate loans, we have been originating loans that bear a fixed interest rate for a period of three to five years after which they convert to one-year adjustable-rate loans. Our adjustable-rate loans require that any payment adjustment resulting from a change in the interest rate be sufficient to result in full amortization of the loan by the end of the loan term and, thus, do not permit any of the increased payment to be added to the principal amount of the loan, creating negative amortization. Although we offer adjustable-rate loans with initial rates below the fully indexed rate, loans tied to the one-year constant maturity treasury are underwritten using methods approved by the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”).

 

Borrower demand for adjustable-rate loans compared to fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to the interest rates and loan fees for adjustable-rate loans. At December 31, 2014, floating or adjustable rate mortgage loans totaled approximately $54.0 million and fixed rate mortgage loans totaled approximately $613.8 million. The loan fees, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.

 

While one- to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans. We do not offer loans with negative amortization or interest-only loans.

 

It is our general policy not to make high loan-to-value loans (defined as loans with a loan-to-value ratio of 80% or more) without private mortgage insurance. However, we do offer loans with loan-to-value ratios of up to 100% under a special low income loan program, which consisted of $18.6 million in loans as of December 31, 2014. The maximum loan-to-value ratio we generally permit is 95% with private mortgage insurance, although occasionally we do originate loans with loan-to-value ratios as high as 97% under special loan programs, including our first-time home owner loan program. We require all properties securing mortgage loans to be appraised by an independent appraiser approved by our board of directors. We require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood insurance is required for loans on properties located in a flood zone.

 

Home Equity and Equity Lines of Credit. At December 31, 2014, home equity loans and equity lines of credit totaled $227.1 million, or 9.3% of our total loan portfolio.

 

We offer consumer home equity loans and equity lines of credit that are secured by one- to four-family residential real estate, where Beneficial Bank may be in a first or second lien position. We generally offer home equity loans and lines of credit with a maximum combined loan-to-value ratio of 80%. Home equity loans have fixed-rates of interest and are originated with terms of generally up to 15 years with some exceptions up to 20 years. Home equity lines of credit have adjustable rates and are based upon the prime rate as published in The Wall Street Journal. Home equity lines of credit can have repayment schedules of both principal and interest or interest only paid monthly. We hold a first mortgage position on approximately 51% of the homes that secured our home equity loans and lines of credit at December 31, 2014.

 

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The procedures for underwriting consumer home equity and equity lines of credit include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral to the proposed loan amount.

 

Consumer Personal Loans. At December 31, 2014, consumer personal loans totaled $28.7 million, or 1.2% of our total loan portfolio.

 

We offer a variety of consumer personal loans, including loans for automobiles, unsecured personal loans and lines of credit. Our consumer loans secured by passbook accounts and certificates of deposit held at Beneficial Bank are based upon the prime rate as published in The Wall Street Journal with terms up to four years. We will offer such loans up to 100% of the principal balance of the certificate of deposit or balance in the passbook account. We also offer unsecured loans and lines of credit with terms up to five years. Our unsecured loans and lines of credit bear a substantially higher interest rate than our secured loans and lines of credit. For more information on our loan commitments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity Risk.”

 

Consumer Education Loans. At December 31, 2014, consumer education loans totaled $195.2 million, or 8.1% of our total loan portfolio. Our consumer education loans are unsecured but generally 98% government guaranteed. These loans are serviced by the Pennsylvania Higher Education Assistance Agency and Navient (formerly Sallie Mae). Our consumer education loan portfolio was previously purchased. We do not except to purchase or originate more of these types of loans. Thus, we expect this portfolio to decrease as these loans continue to be paid down.

 

Indirect Automobile Loans. At December 31, 2014, automobile loans that we originated totaled $181.8 million, or 7.5% of our total loan portfolio. We offer loans secured by new and used automobiles. The majority of the loans in this portfolio are indirect automobile loans. These loans have fixed interest rates and generally have terms up to six years. We offer automobile loans with loan-to-value ratios of up to 100% of the purchase price of the vehicle depending upon the credit history of the borrower and other factors.

 

Credit Risks.

 

Commercial Real Estate Loans. Loans secured by commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the property that secures the loan. Additional considerations include: location, market and geographic concentrations, loan to value ratio, strength of guarantors and quality of tenants. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on commercial real estate loans and rent rolls where applicable. In reaching a decision on whether to make a commercial real estate loan, we consider and review a global cash flow analysis of the borrower, when applicable, and consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. We have generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.2x and a loan to value no greater than 75%. An environmental report is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials.

 

Commercial Business Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property, the value of which tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value. Our commercial business loans also include owner-occupied commercial real estate where the cash flow supporting the loan is derived from the owners underlying business.

 

Construction Loans. Loans made to facilitate construction are primarily short term loans used to finance the construction of an owner-occupied residence or income producing assets. Generally, upon stabilization or upon completion and issuance of a certificate of occupancy, these loans convert to permanent loans with long-term amortization. Payments during construction consist of an interest-only period funded generally by borrower equity. As these loans represent higher risk, each project is monitored for progress throughout the life of the loan, and loan funding occurs through borrower draw requests. These requests are compared to agreed-upon project milestones and progress is verified by independent inspectors engaged by us.

 

Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the dwelling. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a project having a value which is insufficient to assure full repayment.

 

Residential Real Estate Loans. Loans made for the purchase of one to four family residential loans generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and are secured by real property with

 

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ascertainable fair values.  Because these loans tend to carry a fixed interest rate and have terms as long as 30 years, the Company can be adversely impacted if interest rates increase.  While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits on such loans.

 

Consumer Home Equity and Equity Lines of Credit. Consumer home equity loans and equity lines of credit are loans secured by one- to four-family residential real estate, where we may be in a first or second lien position. In each instance, the value of the property is determined and the loan is made against identified equity in the market value of the property. When a residential mortgage is not present on the property, a first lien position is secured against the property. In cases where a mortgage is present on the property, a second lien position is established, subordinated to the mortgage. As these subordinated liens represent higher risk, loan collection becomes more influenced by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

 

Consumer and Automobile Loans. Unlike consumer home equity loans, these loans are either unsecured or secured by rapidly depreciating assets such as boats or motor homes. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and, therefore, are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

 

Automobile loans may entail greater risk than residential mortgage loans, as they are secured by assets that depreciate rapidly. Repossessed collateral for a defaulted automobile loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Automobile loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

 

Consumer Education Loans. These consumer loans are unsecured but generally 98% government guaranteed. Consumer education loan collections depend on the efforts of the Pennsylvania Higher Education Assistance Agency and Navient (formerly Sallie Mae) and are dependent on the borrower’s continuing financial stability. Therefore, these loans are likely to be adversely affected by various factors including job loss, divorce, illness or personal bankruptcy. As a result of the government guarantee, we will ultimately be unaffected materially by delinquencies in the portfolio.

 

Loan Originations and Purchases. Loan originations come from a number of sources. The primary sources of loan originations are existing customers, walk-in traffic, advertising and referrals from customers and other business contacts, including attorneys, accountants and other professionals.

 

We enter into purchase participations in loans to supplement our lending portfolio. Loan participations totaled $244.7 million at December 31, 2014 and are primarily comprised of commercial real estate and commercial and industrial loans. A portion of our participation loans are shared national credits, which are participations in loans or loan commitments of at least $20.0 million that are shared by three or more banks. As of December 31, 2014 and December 31, 2013, the balance of Beneficial Bank’s outstanding purchased shared national credits was $186.7 million and $44.7 million, respectively. See “—Lending Activities—Commercial Business Loans.” Loan participations are subject to the same credit analysis and loan approvals as loans we originate. We are permitted to review all of the documentation relating to any loan in which we participate. However, for participation loans, we do not service the loan and, thus, are subject to the policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and instituting foreclosure proceedings.

 

Loan Approval Procedures and Authority Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by management and approved by the board of directors. The board of directors has granted loan approval authority to certain officers or groups of officers up to prescribed limits, based on the officer’s experience and tenure. Generally, all commercial loans greater than $5.0 million must be approved by the Senior Loan Committee, which is comprised of personnel from the Credit, Finance and Lending departments. Generally, all commercial loans greater than $30.0 million must be approved by the director loan committee of Beneficial Bank’s board of trustees, which is comprised of senior Beneficial Bank officers and five non-employee trustees. In addition, leveraged lending transactions must be approved by the Senior Loan Committee and the director loan committee of Beneficial Bank’s board of trustees.

 

Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally 15% of our stated capital and reserves. At December 31, 2014, our regulatory limit on loans to one borrower was $99.9 million. Beneficial Bank’s internal lending limits are lower than the levels permitted by regulation and at December 31, 2014, the total exposure with our largest lending relationship was $30.0 million, which is a shared national credit. This loan is performing in accordance with the original terms at December 31, 2014.

 

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Loan Commitments. We issue commitments for fixed and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Generally, our loan commitments expire after 60 days.

 

Delinquent Loans. We identify loans that may need to be charged-off as a loss by reviewing all delinquent loans, classified loans and other loans that management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as well as a shortfall in collateral value may result in a write down to management’s estimate of net realizable value. The collateral or cash flow shortfall on all secured loans is charged-off when the loan becomes 90 days delinquent or in the case of unsecured loans the entire balance is charged-off when the loan becomes 90 days delinquent. For more information on how Beneficial Bank addresses credit risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management.”

 

Deposit Activities and Other Sources of Funds

 

General. Deposits, borrowings and loan and investment repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan and investment repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

 

Deposit Accounts. Deposits are primarily attracted from within our market area through the offering of a broad selection of deposit instruments, including non-interest bearing demand deposits (such as individual checking accounts), interest-bearing demand accounts (such as NOW, municipal and money market accounts), savings accounts and certificates of deposit.

 

Our three primary categories of deposit customers consist of retail or individual customers, businesses and municipalities. Our business banking and municipal deposit products include a commercial checking account and a checking account specifically designed for small businesses. Additionally, we offer cash management, including remote deposit, lockbox service and sweep accounts.

 

Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, the rates on borrowings, brokered deposits, our liquidity needs, profitability to us, and customer preferences and concerns. We generally review our deposit mix and pricing bi-weekly. Our deposit pricing strategy has generally been to offer competitive rates on all types of deposit products. Over the past few years, Beneficial Bank took advantage of the decrease in interest rates to reposition the balance sheet and improve its profitability, interest rate risk, and capital position through the run-off of higher cost, non-relationship-based municipal deposits.

 

Certificate of Deposit Account Registry Service (CDARS). Our participation in this program enables our customers to invest balances in excess of the Federal Deposit Insurance Corporation deposit insurance limit into other banks within the CDARS network while maintaining their relationship with us. We work with our customers to obtain the most favorable rates and combine all accounts for convenience onto one statement.

 

Brokered Certificates of Deposit. Our use of brokered deposits is limited. However, we will use brokered certificates of deposit to extend the maturity of our deposits and limit interest rate risk in our deposit portfolio. We generally limit our use of brokered certificates of deposit to 10% or less of total deposits. At December 31, 2014, our brokered certificates of deposits represented approximately 3.6% of total deposits.

 

Borrowings. We have the ability to utilize advances from the Federal Home Loan Bank of Pittsburgh to supplement our liquidity. As a member, we are required to own capital stock in the Federal Home Loan Bank of Pittsburgh and are authorized to apply for advances on the security of such stock and certain mortgage loans and other assets, provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. We also have the ability to utilize securities sold under agreements to repurchase and overnight repurchase agreements, along with the Federal Reserve Bank’s discount window and Federal Funds lines with correspondent banks to supplement our supply of investable funds and to meet deposit withdrawal requirements. To secure our borrowings, we generally pledge securities and/or loans. The types of securities pledged for borrowings include, but are not limited to, government-sponsored enterprises (“GSE”) notes and government agency mortgage-backed securities. The types of loans pledged for borrowings include, but are not limited to, one- to four-family real estate mortgage loans. At December 31, 2014, we had combined maximum borrowing capacity from the Federal Home Loan Bank of Pittsburgh and the Federal Reserve Bank of Philadelphia of $1.2 billion.

 

Personnel

 

As of December 31, 2014, we had 775 full-time employees and 55 part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

 

Subsidiaries

 

Beneficial Insurance Services, LLC is a Pennsylvania limited liability company formed in 2004 and is wholly owned by Beneficial Bank. In 2005, Beneficial Insurance Services, LLC acquired the assets of Philadelphia-based insurance brokerage firm, Paul Hertel & Co., Inc., which provides property, casualty, life, health and benefits insurance services to individuals and businesses. In 2005,

 

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Beneficial Insurance Services, LLC also acquired a 51% majority interest in Graphic Arts Insurance Agency, Inc. through its acquisition of the assets of Paul Hertel & Co. Inc. In 2007, Beneficial Insurance Services, LLC acquired the assets of the insurance brokerage firm, CLA Agency, Inc., based in Newtown Square, Pennsylvania. CLA Agency, Inc. provides property/casualty insurance to commercial business and provides professional liability insurance to physician groups, hospitals and healthcare facilities.

 

Beneficial Advisors, LLC, which is wholly owned by Beneficial Bank, is a Pennsylvania limited liability company formed in 2000 to offer wealth management services and investment and insurance related products, including, but not limited to, fixed- and variable-rate annuities and the sale of mutual funds and securities through a third party broker dealer.

 

Neumann Corporation, which was formed in 1990, is a Delaware investment holding company that holds title to various securities and other investments. Neumann Corporation is 100% owned by Beneficial Bank. At December 31, 2014, Neumann Corporation held $518.9 million in assets.

 

BSB Union Corporation was formed in 1994 to own and lease automobiles. BSB Corporation is wholly owned by Beneficial Bank. In 1998, BSB Union Corporation obtained approval to hold an interest in a “titling trust.” In 2012, BSB Union Corporation obtained approval to engage in equipment leasing activities. The leasing operations of BSB Union Corporation are currently inactive.

 

Beneficial Abstract, LLC is a currently inactive title insurance company in which Beneficial Bank purchased a 40% ownership interest in 2006.

 

Beneficial Equity Holdings, LLC, which is wholly owned by Beneficial Bank, was formed in 2004 and is currently inactive.

 

PA Real Property GP, LLC, which is wholly owned by Beneficial Bank, is a special purpose entity formed in 2009 to manage and hold other real estate owned properties in Pennsylvania until disposition.

 

NJ Real Property GP, LLC, which is wholly owned by Beneficial Bank, is a special purpose entity formed in 2010 to manage and hold OREO properties in New Jersey until disposition.

 

DE Real Property Holding, Inc., which is wholly owned by Beneficial Bank, is a special purpose entity formed in 2011 to manage and hold OREO properties in Delaware until disposition.

 

REGULATION AND SUPERVISION

 

General

 

The Bank is a Pennsylvania-chartered savings bank that is subject to extensive regulation, examination and supervision by the Pennsylvania Department of Banking and Securities, as its primary regulator, and the FDIC, as its deposit insurer. The Bank is a member of the Federal Home Loan Bank system and, with respect to deposit insurance, of the Deposit Insurance Fund managed by the FDIC. The Bank must file reports with the Pennsylvania Department of Banking and Securities and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals before entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The Pennsylvania Department of Banking and Securities and/or the FDIC conduct periodic examinations to test the Bank’s safety and soundness and compliance with various regulatory requirements. This regulatory structure gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in the regulatory requirements and policies, whether by the Pennsylvania Department of Banking and Securities, the FDIC, the Federal Reserve Board or Congress, could have a material adverse impact on the Bank and its operations.

 

The Dodd-Frank Act made extensive changes in the regulation of depository institutions. Under the Dodd-Frank Act, the Office of Thrift Supervision was eliminated. Responsibility for the supervision and regulation of savings and loan holding companies was transferred to the Federal Reserve Board effective July 21, 2011. The Federal Reserve Board now supervises savings and loan holding companies as well as bank holding companies. Additionally, the Dodd-Frank Act created the Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations, a function previously assigned to prudential regulators, and has authority to impose new requirements. However, institutions of less than $10.0 billion in assets, such as the Bank, continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their prudential regulator. It is unclear what impact the Dodd-Frank Act will have on our business as many of the regulations under the act are still being developed. However, we expect that we will need to make additional investments in people, systems and outside consulting and legal resources to comply with the new regulations.

 

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Certain of the regulatory requirements that are applicable to the Bank and the Company are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on the Bank and the Company.

 

Bank Regulation

 

Pennsylvania Savings Bank Law. The Pennsylvania Banking Code of 1965, as amended, contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Pennsylvania Banking Code delegates extensive rule-making power and administrative discretion to the Pennsylvania Department of Banking and Securities so that the supervision and regulation of state-chartered savings banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices. Specifically, under the Pennsylvania Banking Code, the Pennsylvania Department of Banking and Securities is given the authority to exercise such supervision over state-chartered savings banks as to afford the greatest safety to creditors, shareholders and depositors, ensure business safety and soundness, conserve assets, protect the public interest and maintain public confidence in such institutions.

 

The Pennsylvania Banking Code provides, among other powers, that state-chartered savings banks may engage in any activity permissible for a national banking association or federal savings association, subject to regulation by the Pennsylvania Department of Banking and Securities (which shall not be more restrictive than the regulation imposed upon a national banking association or federal savings association, respectively). Before it engages in an activity allowable for a national banking association or federal savings association, a state-chartered savings bank must either obtain prior approval from the Pennsylvania Department of Banking and Securities or provide at least 30 days’ prior written notice to the Pennsylvania Department of Banking and Securities. The authority of the Bank under Pennsylvania law, however, may be constrained by federal law and regulation. See “Investments and Activities” below.

 

Regulatory Capital Requirements. Under FDIC regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as the Bank, are required to comply with minimum leverage capital requirements. For an institution determined by the FDIC to not be anticipating or experiencing significant growth and to be in general a strong banking institution, rated composite 1 under the Uniform Financial Institutions Rating System established by the Federal Financial Institutions Examinations Council, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3%. For all other institutions, the minimum leverage capital ratio is not less than 4%. Tier 1 capital is the sum of common shareholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships) and a percentage of certain nonfinancial equity investments.

 

The Bank must also comply with the FDIC risk-based capital guidelines. The FDIC guidelines require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher levels of capital being required for the categories perceived as representing greater risk.

 

State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock, long-term preferred stock, hybrid capital instruments, including mandatory convertible debt securities, term subordinated debt and certain other capital instruments and a portion of the net unrealized gain on equity securities. The includable amount of Tier 2 capital cannot exceed the amount of the institution’s Tier 1 capital. At December 31, 2014, the Bank met each of these capital requirements.

 

The Dodd-Frank Act required the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. In early July 2013, the Federal Reserve Board and the Office of the Comptroller of the Currency approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

 

The rules include new risk-based capital and leverage ratios, which became effective on January 1, 2015, and revise the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and the Bank are: (1) a new common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6% (increased from 4%); (3) a total capital ratio of 8% (unchanged from current rules); and (4) a Tier 1 leverage ratio of 4% for all institutions. The rules eliminated the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital. Instruments issued before May 19, 2010 are grandfathered for companies with consolidated assets of $15 billion or less. The rules also established a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (1) a common equity Tier 1 capital ratio of 7.0%, (2) a Tier 1 capital ratio of 8.5%, and (3) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution will

 

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be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

As of December 31, 2014, our current capital levels exceed the required capital amounts to be considered “well capitalized” and we believe they also meet the fully-phased in minimum capital requirements, including the related capital conservation buffers, as required by the Basel III capital rules.

 

Restrictions on Dividends. The Company’s ability to declare and pay dividends may depend in part on dividends received from the Bank. The Pennsylvania Banking Code regulates the distribution of dividends by savings banks and provides that dividends may be declared and paid only out of accumulated net earnings and may be paid in cash or property other than its own shares. Dividends may not be declared or paid unless shareholders’ equity is at least equal to contributed capital.

 

Interstate Banking and Branching. Federal law permits a bank, such as the Bank, to acquire an institution by merger in a state other than Pennsylvania unless the other state has opted out of interstate banking and branching. Federal law, as amended by the Dodd-Frank Act, also authorizes de novo branching into another state if the host state allows banks chartered by that state to establish such branches within its borders. The Bank currently has 25 full-service locations in Burlington, Gloucester and Camden counties, New Jersey. At its interstate branches, the Bank may conduct any activity that is authorized under Pennsylvania law that is permissible either for a New Jersey savings bank (subject to applicable federal restrictions) or a New Jersey branch of an out-of-state national bank. The New Jersey Department of Banking and Insurance may exercise certain regulatory authority over the Bank’s New Jersey branches.

 

Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes three categories of capital deficient institutions: undercapitalized, significantly undercapitalized and critically undercapitalized.

 

The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and generally a leverage ratio of 4% or greater (3% or greater for institutions with the highest examination rating). An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a leverage ratio of less than 4% (less than 3% for institutions with the highest examination rating). An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. As of December 31, 2014, the Bank met the conditions to be classified as a “well capitalized” institution.

 

“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. No institution may make a capital distribution, including payment as a dividend, if it would be “undercapitalized” after the payment. A bank’s compliance with such plans is required to be guaranteed by its parent holding company in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount needed to comply with regulatory capital requirements. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce assets and cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions must comply with additional sanctions including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

 

Investments and Activities. Under federal law, all state-chartered banks insured by the FDIC have generally been limited to activities as principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law. The Federal Deposit Insurance Corporation Improvement Act and the FDIC permit exceptions to these limitations. For example, state chartered banks may, with FDIC approval, continue to exercise grandfathered state authority to invest in common or preferred stocks listed on a national securities exchange and in the shares of an investment company registered under federal law. The Bank received grandfathering authority from the FDIC to invest in listed stocks and/or registered shares. The maximum permissible investment is 100% of Tier 1 capital, as specified by the FDIC’s regulations, or the maximum amount permitted by Pennsylvania Banking Law, whichever is less. Such grandfathering authority may be terminated upon the FDIC’s determination that such investments pose a safety and soundness risk to the Bank or if the Bank converts its charter or undergoes a change in control. In addition, the FDIC is authorized to permit such institutions to engage in other state authorized activities or investments (other than non-subsidiary equity investments) that meet all applicable capital requirements if it is determined that such activities or investments do not pose a significant risk to the Deposit Insurance Fund. As of December 31, 2014, the Bank held no marketable equity securities under such grandfathering authority.

 

Transactions with Related Parties. Federal law limits the Bank’s authority to lend to, and engage in certain other transactions with (collectively, “covered transactions”) its “affiliates” (e.g., any company that controls or is under common control with an institution). The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type specified by federal

 

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law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must generally be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliates. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

 

The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Bank to its executive officers and directors. However, the law contains a specific exception for loans by the Bank to its executive officers and directors in compliance with federal banking laws. Under such laws, the Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank’s capital position and requires certain board approval procedures to be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executives are subject to further limitations based on the type of loan involved.

 

Enforcement. The FDIC has extensive enforcement authority over insured savings banks, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices.

 

Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the FDIC determines that a savings institution fails to meet any standard prescribed by the guidelines, the FDIC may require the institution to submit an acceptable plan to achieve compliance with the standard.

 

Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The deposit insurance per account owner is currently $250,000.

 

Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned. In 2011, the FDIC approved a final rule that implemented changes to the deposit insurance assessment system mandated by the Dodd-Frank Act. Under the final rule, assessment base for payment of FDIC premiums was changed from a deposit level base to an asset level base consisting of average tangible assets less average tangible equity.

 

The FDIC may adjust rates uniformly from one quarter to the next, except that no adjustment can deviate more than three basis points from the base scale without notice and comment rulemaking. No institution may pay a dividend if in default of the FDIC assessment.

 

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and our results of operations. Management cannot predict what insurance assessment rates will be in the future.

 

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the Pennsylvania Department of Banking and Securities. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

 

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank system, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. At December 31, 2014, Beneficial Bank had a maximum borrowing capacity from the Federal Home Loan Bank of Pittsburgh of $1.0 billion of which it had $165.0 million in outstanding borrowings. The balance remaining of $878.0 million is our unused borrowing capacity with the Federal Home Loan Bank at December 31, 2014. Beneficial Bank, as a member of the Federal Home Loan Bank of Pittsburgh, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank. Beneficial Bank was in compliance with requirements for the Federal Home Loan Bank of Pittsburgh with an investment of $8.8 million at December 31, 2014.

 

Community Reinvestment Act. Under the Community Reinvestment Act, as implemented by FDIC regulations, a state non-member bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate-income neighborhoods. The Community Reinvestment Act neither establishes specific lending requirements or programs for financial institutions nor limits an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The Community Reinvestment Act requires the FDIC, in connection with its examination of an institution, to assess the institution’s record of meeting the credit needs of its community and to consider such record when it evaluates applications made by such institution. The Community Reinvestment Act requires public disclosure of an institution’s Community Reinvestment Act rating. The Bank’s latest Community Reinvestment Act rating received from the FDIC was “outstanding.”

 

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Other Regulations. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:

 

·                  Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

 

·                  Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

·                  Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

·                  Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

 

·                  Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies; and

 

·                  Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

 

The operations of the Bank also are subject to the:

 

·                  Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

·                  Electronic Funds Transfer Act and Regulation E promulgated thereunder, which establishes the rights, liabilities and responsibilities of consumers who use electronic fund transfer (EFT) services and financial institutions that offer these services; its primary objective is the protection of individual consumers in their dealings with these services;

 

·                  Check Clearing for the 21st Century Act (also known as “Check 21”), which allows banks to create and receive “substitute checks” (paper reproduction of the original check), and discloses the customers rights regarding “substitute checks” pertaining to these items having the “same legal standing as the original paper check”;

 

·                  Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), and related regulations that require savings associations operating in the United States to develop new anti-money laundering compliance programs (including a customer identification program that must be incorporated into the anti-money laundering compliance program), due diligence policies and controls to ensure the detection and reporting of money laundering;

 

·                  The Gramm-Leach-Bliley Act, which prohibits a financial institution from disclosing non-public personal information about a consumer to non-affiliated third parties, unless the institution satisfies various notice and opt-out requirements;

 

·                  The Fair and Accurate Reporting Act of 2003, as an amendment to the Fair Credit Reporting Act, as noted previously, which includes provisions to help reduce identity theft by providing procedures for the identification, detection, and response to patterns, practices, or specific activities—known as “red flags”; and

 

·                  Truth in Savings Act, which establishes the requirement for clear and uniform disclosure of terms and conditions regarding interest and fees to help promote economic stability, competition between depository institutions, and allow the consumer to make informed decisions.

 

Holding Company Regulation

 

General.  The Company is subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the Federal Reserve Board. As a result, prior Federal Reserve Board approval would be required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company. In addition to the approval of the Federal Reserve Board, before any bank acquisition can be completed, prior approval may also be required to be obtained from other agencies having supervisory jurisdiction over the bank to be acquired.

 

A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking are: (1) making or servicing loans; (2) performing certain data processing services; (3) providing discount brokerage services; (4) acting as

 

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fiduciary, investment or financial advisor; (5) leasing personal or real property; (6) making investments in corporations or projects designed primarily to promote community welfare; and (7) acquiring a savings and loan association.

 

The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including being “well capitalized” and “well managed,” to opt to become a “financial holding company” and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking.

 

The Company is also subject to the Federal Reserve Board’s capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to those of the FDIC for the Bank.

 

A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve Board has adopted an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions.

 

The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve Board’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.

 

Under the Federal Deposit Insurance Act, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would have potential applicability if the Company ever held as a separate subsidiary a depository institution in addition to the Bank.

 

The Company and the Bank will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for management to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of the Company or the Bank.

 

The status of the Company as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.

 

Under the Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a bank holding company or savings association. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the outstanding voting stock of the company or institution, unless the Federal Reserve Board has found that the acquisition will not result in a change of control. Under the Change in Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control would then be subject to regulation as a bank company.

 

Financial Reform Legislation

 

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

 

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

 

In December 2013, final rules implementing the Volcker Rule (Section 619 of the Dodd-Frank Act) were promulgated by the five federal financial regulatory agencies responsible for implementing and enforcing the rule. The final rules are effective July 21, 2016. The Volcker Rule prohibits “banking entities” from proprietary trading and imposes substantial restrictions on their ownership or sponsorship of, and relationships with, certain “covered funds,” largely hedge funds and private equity funds. Importantly, with respect to proprietary trading, the final rule tightens the requirements for the hedging exemption to require that the hedge demonstrably mitigates a “specific, identified exposure.”

 

During the quarter ended December 31, 2013, Beneficial Mutual Bancorp, the Bank’s former parent holding company, sold $4.7 million of pooled trust securities that resulted in a $1.2 million loss due to the uncertainty regarding banking institutions being allowed to hold pooled trust preferred securities under the Volcker Rule. These securities were in a $740 thousand unrealized loss position at the time of the sale. Management reviewed the securities included in Beneficial Mutual Bancorp’s investment portfolio and noted that, at December 31, 2013, the majority of the investment portfolio was comprised of mortgage-backed securities issued by Freddie Mac and Fannie Mae and Ginnie Mae, including CMO securities issued by Freddie Mac and Fannie Mae. The Company’s investment portfolio also includes municipal bonds, GSE and government agency notes, foreign bonds, mutual funds and money market funds. The Company does not engage in proprietary trading and does not have a position in covered funds as defined in the Volcker Rule as of December 31, 2014. Management believes that securities held in the Company’s investment portfolio as of December 31, 2014 are not impacted by Volcker Rule. In addition, management determined that we have no hedges that would be impacted by the Volcker Rule.

 

Federal Securities Laws

 

The Company’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act. As a result, the Company is required to file quarterly and annual reports with the Securities and Exchange Commission and is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act.

 

Federal Income Taxation

 

General. We report our income on a calendar year basis using the accrual method of accounting. The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly our reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us. The tax years 2011 through 2013 remain subject to examination by the Internal Revenue Service and by Pennsylvania and Philadelphia taxing authorities. The 2012 and 2013 tax years remain subject to examination by New Jersey taxing authorities. For 2014, Beneficial Bank’s maximum federal income tax rate was 35%.

 

Beneficial Bancorp and Beneficial Bank have entered into a tax allocation agreement. Because Beneficial Bancorp owns 100% of the issued and outstanding capital stock of Beneficial Bank, Beneficial Bancorp and Beneficial Bank are members of an affiliated group within the meaning of Section 1504(a) of the Internal Revenue Code, of which group Beneficial Bancorp is the common parent corporation. As a result of this affiliation, Beneficial Bank may be included in the filing of a consolidated federal income tax return with Beneficial Bancorp and, if a decision to file a consolidated tax return is made, the parties have agreed to compensate each other for their individual share of the consolidated tax liability and/or any tax benefits provided by them in the filing of the consolidated federal income tax return.

 

Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for non-qualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and required savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves as of December 31, 1987. Approximately $2.3 million of income tax related to our accumulated bad debt reserves would not be recognized unless Beneficial Bank makes a “non-dividend distribution” to Beneficial Bancorp as described below.

 

Distributions. If Beneficial Bank makes “non-dividend distributions” to Beneficial Bancorp, the distributions will be considered to have been made from Beneficial Bank’s un-recaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1987, to the extent of the “non-dividend distributions,” and then from Beneficial Bank’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in Beneficial Bank’s taxable income. Non-dividend distributions include distributions in excess of Beneficial Bank’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of Beneficial Bank’s current or accumulated earnings and profits will not be so included in Beneficial Bank’s taxable income.

 

The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if Beneficial Bank makes a non-dividend distribution to Beneficial Bancorp,

 

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approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. Beneficial Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.

 

State Taxation

 

Pennsylvania Taxation. Beneficial Bank, as a savings bank conducting business in Pennsylvania, is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax (“MTIT”) Act, as amended to include thrift institutions having capital stock. The MTIT is a tax upon separately stated net book income, determined in accordance with generally accepted accounting principles with certain adjustments. In computing income subject to MTIT taxation, there is an allowance for the deduction of interest income earned on state, federal and local obligations, while also disallowing a portion of a thrift’s interest expense associated with such tax-exempt income. The MTIT tax rate is 11.5%. Net operating losses, if any, can be carried forward a maximum of three years for MTIT purposes.

 

Philadelphia Taxation. In addition, as a savings bank conducting business in Philadelphia, Beneficial Bank is also subject to the City of Philadelphia Business Privilege Tax. The City of Philadelphia Business Privilege Tax is a tax upon net income or taxable receipts imposed on persons carrying on or exercising for gain or profit certain business activities within Philadelphia. Pursuant to the City of Philadelphia Business Privilege Tax, the 2014 tax rate was 6.45% on net income and 0.14% on gross receipts. For regulated industry taxpayers, the tax is the lesser of the tax on net income or the tax on gross receipts. The City of Philadelphia Business Privilege Tax allows for the deduction by financial businesses from receipts of (a) the cost of securities and other intangible property and monetary metals sold, exchanged, paid at maturity or redeemed, but only to the extent of the total gross receipts from securities and other intangible property and monetary metals sold, exchanged, paid out at maturity or redeemed; (b) moneys or credits received in repayment of the principal amount of deposits, advances, credits, loans and other obligations; (c) interest received on account of deposits, advances, credits, loans and other obligations made to persons resident or having their principal place of business outside Philadelphia; (d) interest received on account of other deposits, advances, credits, loans and other obligations but only to the extent of interest expenses attributable to such deposits, advances, credits, loans and other obligations; and (e) payments received on account of shares purchased by shareholders. An apportioned net operating loss may be carried forward for three tax years following the tax year for which it was first reported.

 

New Jersey Taxation. Beneficial Bank and BSB Union Corporation are subject to New Jersey’s Corporation Business Tax at the rate of 9.0% on their separate company apportioned taxable income. For this purpose, “taxable income” generally means federal taxable income subject to certain adjustments (including addition of interest income on state and municipal obligations). Net operating losses may be carried forward for twenty years following the tax year for which they were first reported.

 

Executive Officers

 

Our executive officers are elected annually by the board of directors and serve at the board’s discretion. The following individuals currently serve as executive officers and will serve in the same positions following the conversion and the offering:

 

Name

 

Position

Gerard P. Cuddy

 

President and Chief Executive Officer of Beneficial Bancorp and Beneficial Bank

Thomas D. Cestare

 

Executive Vice President and Chief Financial Officer of Beneficial Bancorp and Beneficial Bank

Martin F. Gallagher

 

Executive Vice President and Chief Lending Officer of Beneficial Bank

Robert J. Maines

 

Executive Vice President and Director of Operations of Beneficial Bank

Pamela M. Cyr

 

Executive Vice President and Chief Retail Banking Officer of Beneficial Bank

Joanne R. Ryder

 

Executive Vice President and Director of Brand & Strategy of Beneficial Bank

 

Below is information regarding our executive officers who are not also directors. Each executive officer has held his or her current position for the period indicated below. Ages presented are as of December 31, 2014.

 

Thomas D. Cestare joined Beneficial Bank as Executive Vice President and Chief Financial Officer of Beneficial Bank in July 2010. Before joining Beneficial Bancorp and Beneficial Bank, Mr. Cestare served as Executive Vice President and Chief Accounting Officer of Sovereign Bancorp. Mr. Cestare is a certified public accountant who was a partner with the public accounting firm of KPMG LLP before joining Sovereign Bancorp in 2005. Age 46.

 

Martin F. Gallagher has served as Executive Vice President and Chief Lending Officer of Beneficial Bank since February 2015.  Mr.  Gallagher joined Beneficial Bank’s commercial banking group in June 2011 and was named Executive Vice President and Chief Credit Officer in January 2012. Before that time, Mr. Gallagher managed and developed commercial banking portfolios for Bryn Mawr Trust Company and National Penn Bank. Age 58.

 

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Robert J. Maines joined Beneficial Bank in July 2008 and was named Executive Vice President and Director of Operations in January 2012. Before that time, Mr. Maines served as the Director of Risk Management at Accume Partners. Before joining Accume Partners in 2006, Mr. Maines served as First Vice President, Senior Audit Manager at MBNA. Age 46.

 

Pamela M. Cyr is the former President and Chief Executive Officer of SE Financial Corp. Ms. Cyr joined Beneficial Bank in June 2012 and was named Executive Vice President and Chief Retail Banking Officer. Age 47.

 

Joanne R. Ryder joined Beneficial Bank in July 2007 as Director of Marketing and was named Executive Vice President and Director of Brand & Strategy in January 2012. Before that time, Ms. Ryder served as Vice President, Field Marketing Manager at Commerce Bank. Age 40.

 

Item 1A.    RISK FACTORS

 

Continued low loan demand may negatively impact our earnings and results of operations.

 

The severe economic recession of 2008 and 2009 and the slow economic recovery since then have resulted in continued uncertainty in the financial markets and the expectation of slow economic conditions. The resulting economic pressure on consumers and businesses has adversely affected our business, financial condition, and results of operations and has reduced loan demand in our market areas. As a result of this reduced loan demand, we have invested excess liquidity in low-yielding cash equivalent assets and low-yielding investment securities, which has negatively impacted our earnings. Prolonged low loan demand in our market area could require us to continue to invest excess liquidity in these types of low-yielding assets, which would continue to adversely affect our earnings and results of operations.

 

Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.

 

Changes in the interest rate environment may reduce profits. The primary source of our income is the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. As prevailing interest rates change, net interest spreads are affected by the difference between the maturities and re-pricing characteristics of interest-earning assets and interest-bearing liabilities. At December 31, 2014, we were asset sensitive and would benefit from an increase in interest rates.  In the event of a 200 basis point increase in interest rates, we would expect to experience a 6.7% increase in net interest income. Because the 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.

 

In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. An increase in the general level of interest rates may also adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially adversely affect our net interest spread, asset quality, loan origination volume and overall profitability. In addition, our deposits are subject to increases in interest rates and as interest rates rise we may lose these deposits if we do not pay competitive interest rates, which may affect our liquidity and profits.

 

Our emphasis on commercial loans may expose us to increased lending risks.

 

At December 31, 2014, $609.6 million, or 25.2%, of our loan portfolio consisted of commercial real estate loans, $442.2 million, or 18.2%, of our loan portfolio consisted of commercial business loans, and $69.1 million, or 2.9%, of our loan portfolio consisted of commercial construction loans, including loans for the acquisition and development of property. At December 31, 2014, we had a total of 36 land acquisition and development loans totaling $87.8 million included in commercial real estate and commercial construction loans, which consist of seven residential land acquisition and development loans totaling $27.6 million and 29 commercial land acquisition and development loans totaling $60.2 million. We are committed to growing our commercial banking business and, in the past year, we have hired additional lenders with significant experience in our market area to expand our commercial real estate and commercial and industrial lending efforts. We expect to continue to look for additional qualified lenders to further accelerate our commercial loan growth.

 

Commercial real estate loans and commercial business loans generally expose a lender to a greater risk of loss than one- to four-family residential loans. Repayment of commercial real estate and commercial business loans generally is dependent, in large part, on sufficient income from the property or business to cover operating expenses and debt service. Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Changes in economic conditions that are out of the control of the borrower and lender could impact the value of the security for the loan, the future cash flow of the affected property, or the marketability of a construction project with respect to loans originated for the acquisition and development of property. Additionally, any decline in real estate values may be more pronounced with respect to commercial real estate properties than residential properties. Also, many of our multi-family and commercial real estate and commercial business borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential mortgage loan. Further, unlike residential mortgages or multi-family and commercial real estate loans, commercial and industrial loans may be secured by collateral other than real estate, such as inventory and accounts receivable, the value of which may be more difficult to appraise and may be more susceptible to fluctuation in value at default.

 

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Commercial business loans include shared national credits, which are participations in loans or loan commitments of at least $20.0 million that are shared by three or more banks. Included in our shared national credit portfolio are purchased participations and assignments in leveraged lending transactions. Leveraged lending transactions are generally used to support a merger- or acquisition-related transaction, to back a recapitalization of a company’s balance sheet or to refinance debt. When considering a participation in the leveraged lending market, we will participate only in first lien senior secured term loans that are highly rated (investment grade) by the rating agencies and that trade in active secondary markets. Even though we intend to hold these loans in our portfolio, we actively monitor the secondary market for these types of loans to ensure that we maintain flexibility to sell such loans in the event of deteriorating credit quality. To further minimize risk, based on our current capital levels and loan portfolio, we have limited the total amount of leveraged loans to $150.0 million with no single obligor exceeding $15.0 million while maintaining single industry concentrations below 30%. However, we may reevaluate these limits in future periods.

 

Strong competition within our market area could hurt our profits and slow growth.

 

We face substantial competition in originating loans, both commercial and consumer. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of our competitors enjoy advantages that we do not, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income by decreasing the number and size of loans that we originate and the interest rates we may charge on these loans.

 

In attracting business and consumer deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages that we do not, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations. As a result, we may need to seek other sources of funds that may be more expensive to obtain and could increase our cost of funds.

 

Our banking and non-banking subsidiaries also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies and governmental organizations, which may offer more favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our banking operations. As a result, such non-bank competitors may have advantages over our banking and non-banking subsidiaries in providing certain products and services. This competition may reduce or limit our margins on banking and non-banking services, reduce our market share, and adversely affect our earnings and financial condition.

 

In addition, our performance is largely dependent on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees is intense, and we are aware that certain of our competitors have directly targeted our employees. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.

 

Our emphasis on residential mortgage loans and home equity loans exposes us to lending risks, and the geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the local economy.

 

At December 31, 2014, $667.8 million, or 27.6% of our loan portfolio, was secured by one- to four-family real estate and $227.1 million, or 9.3% of our loan portfolio, was secured by home equity loans and lines of credit. One- to four-family residential mortgage lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. The decline in residential real estate values as a result of the downturn in our local housing market has reduced the value of the real estate collateral securing these types of loans. Declines in real estate values could cause some of our residential mortgages and home equity loans to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral. Real estate values are affected by various factors, including supply and demand, changes in general or regional economic conditions, interest rates, governmental rules or policies and natural disasters. Future weakness in economic conditions also could result in reduced loan demand and a decline in loan originations. In particular, a significant decline in real estate values would likely lead to a decrease in new multi-family, commercial real estate, residential mortgage, and home equity loan originations and increased delinquencies and defaults in our real estate loan portfolio.

 

A return to recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.

 

Although economic conditions have improved since the end of the economic recession in June 2009, economic growth has been slow and uneven, wage growth has been low, and concerns still exist over the federal deficit and government spending, which have all contributed to diminished expectations for the economy. A return of recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in real estate values and sales volumes and increases in unemployment levels may result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified

 

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assets and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity and financial condition.

 

If our allowance for loan losses is not sufficient to cover actual loan losses, our results of operations will be negatively impacted.

 

In determining the amount of the allowance for loan losses, we analyze our loss and delinquency experience by loan categories and we consider the effect of existing economic conditions. In addition, we make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. If the results of our analyses are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to our allowance and would decrease our net income. Our emphasis on loan growth and on increasing our portfolio of multi-family, commercial business and commercial real estate loans, as well any future credit deterioration, could also require us to increase our allowance further in the future.

 

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations and financial condition.

 

A significant percentage of our assets is invested in securities which typically have a lower yield than our loan portfolio.

 

Our results of operations are substantially dependent on our net interest income. At December 31, 2014, 42.7% of our assets was invested in investment securities, overnight investments and cash and due from banks. These investments yield substantially less than the loans we hold in our portfolio. While we intend to invest a greater proportion of our assets in loans with the goal of increasing our net interest income, we may not be able to increase originations of loans that are acceptable to us.

 

We are subject to certain risks in connection with our strategy of growing through mergers and acquisitions.

 

Mergers and acquisitions have contributed significantly to our growth in the past, and remain a component of our business model. Accordingly, it is possible that we could acquire other banking institutions, other financial services companies or branches of banks in the future. Acquisitions typically involve the payment of a premium over book and trading values and, therefore, may result in the dilution of our book value per share. Our ability to engage in future mergers and acquisitions depends on various factors, including (1) our ability to identify suitable merger partners and acquisition opportunities, (2) our ability to finance and complete transactions on acceptable terms and at acceptable prices and (3) our ability to receive the necessary regulatory and, when required, shareholder approvals. Furthermore, mergers and acquisitions involve a number of risks and challenges, including (1) our ability to integrate the branches and operations we acquire, and the internal controls and regulatory functions into our current operations and (2) the diversion of management’s attention from existing operations. Our inability to engage in an acquisition or merger for any of these reasons could have an adverse impact on the implementation of our business strategies.

 

We hold goodwill, an intangible asset that could be classified as impaired in the future. If goodwill is considered to be either partially or fully impaired in the future, our earnings and the book value of goodwill would decrease.

 

We are required to test our goodwill for impairment on a periodic basis. The impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similarly situated insured depository institutions. It is possible that future impairment testing could result in a partial or full impairment of the value of our goodwill. If an impairment determination is made in a future reporting period, our earnings and the book value of goodwill will be reduced by the amount of the impairment.

 

Beneficial Insurance Services, LLC represents $9.3 million of our goodwill balance. Based on our latest annual impairment assessment in 2014 for Beneficial Insurance Services, LLC we concluded that goodwill was not impaired. Although, we concluded that no impairment of goodwill existed for Beneficial Insurance Services, LLC for 2014, Beneficial Insurance Services, LLC has experienced declining revenues and profitability over the past few years and any further declines in financial performance for Beneficial Insurance Services, LLC could result in potential goodwill impairment in future periods.

 

The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations and is subject to review by taxing authorities.

 

We are subject to the income tax laws of the U.S., its states and municipalities. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We are subject to ongoing tax examinations and assessments in various jurisdictions.

 

As of December 31, 2014, we had net deferred tax assets totaling $43.7 million. These deferred tax assets can only be realized if we generate 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,

 

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be implemented. We currently maintain a valuation allowance for certain state net operating losses and other-than-temporary impairments that management believes it is more likely than not that such deferred tax assets will not be realized. We expect to realize our remaining deferred tax assets over the allowable carryback and/or carryforward periods. Therefore, no valuation allowance is deemed necessary against our federal or remaining state deferred tax assets as of December 31, 2014. 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.

 

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

 

We are subject to extensive regulation, supervision and examination by the Federal Deposit Insurance Corporation, as insurer of our deposits, and by the Pennsylvania Department of Banking and Securities as our primary regulator. Beneficial Bancorp is subject to regulation and supervision by the Federal Reserve Board. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of Beneficial Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may increase our costs of operations and have a material impact on our operations.

 

Legislative financial reforms and future regulatory reforms required by such legislation could have a significant impact on our business, financial condition and results of operations.

 

The Dodd-Frank Act, which was signed into law on July 21, 2010, will have a broad impact on the financial services industry, including significant regulatory and compliance changes. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. Under the Dodd-Frank Act, the Office of Thrift Supervision was merged into the Office of the Comptroller of the Currency. Savings and loan holding companies, including Beneficial Bancorp, became regulated by the Federal Reserve Board.

 

Although savings and loan holding companies are not currently subject to specific regulatory capital requirements, the Dodd-Frank Act requires the Federal Reserve Board to promulgate consolidated capital requirements for all depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. In addition, the Dodd-Frank Act codifies the Federal Reserve Board’s existing “source of strength” policy that holding companies act as a source of strength to their insured institution subsidiaries by providing capital, liquidity and other support in times of distress. The Dodd-Frank Act also provides for the creation of a new agency, the Consumer Financial Protection Bureau, to assure the implementation of federal consumer financial protection and fair lending laws for the depository institution regulators. Furthermore, the Dodd-Frank Act repealed payment of interest on commercial demand deposits, forced originators of securitized loans to retain a percentage of the risk for the transferred loans, required regulatory rate-setting for certain debit card interchange fees and contained a number of reforms related to mortgage origination. In response to the changing regulatory environment, we have made enhancements to people, processes, and controls to ensure we are complying with new regulations. It is unclear what impact the Dodd-Frank Act will have on our business in the future as many of the regulations under the act are still being developed. However, we expect that we will need to continue to make additional investments in people, systems and outside consulting and legal resources to comply with the new regulations.

 

While it is difficult to predict at this time what specific impact the Dodd-Frank Act and the related yet to be written implementing rules and regulations will have on us, we expect that, at a minimum, our operating and compliance costs will increase, and our interest expense could increase, as a result of these new rules and regulations.

 

In addition to the enactment of the Dodd-Frank Act, the federal regulatory agencies recently have begun to take stronger supervisory actions against financial institutions that have experienced increased loan losses and other weaknesses as a result of the recent economic crisis. The actions include the entering into of written agreements and cease and desist orders that place certain limitations on their operations. Federal bank regulators recently have also been using with more frequency their ability to impose individual minimal capital requirements on banks, which requirements may be higher than those imposed under the Dodd-Frank Act or which would otherwise qualify the bank as being “well capitalized” under the Federal Deposit Insurance Corporation’s prompt corrective action regulations. If we were to become subject to a supervisory agreement or higher individual capital requirements, such action may have a negative impact on our ability to execute our business plans, as well as our ability to grow, pay dividends or engage in mergers and acquisitions and may result in restrictions in our operations. See “Regulation and Supervision—Federal Banking Regulation—Capital Requirements” for a discussion of regulatory capital requirements.

 

We will become subject to more stringent capital requirements, which may adversely impact our return on equity, or constrain us from paying dividends or repurchasing shares.

 

In July 2013, the Federal Deposit Insurance Corporation and the Federal Reserve Board approved a new rule that will substantially amend the regulatory risk-based capital rules applicable to Beneficial Bank and Beneficial Bancorp. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

 

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The rules include new risk-based capital and leverage ratios, which became effective on January 1, 2015, and revise the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and the Bank are: (1) a new common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6% (increased from 4%); (3) a total capital ratio of 8% (unchanged from current rules); and (4) a Tier 1 leverage ratio of 4% for all institutions. The rules eliminate the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital. Instruments issued prior to May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (1) a common equity Tier 1 capital ratio of 7.0%, (2) a Tier 1 capital ratio of 8.5%, and (3) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

The application of more stringent capital requirements for Beneficial Bank and Beneficial Bancorp could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were to be unable to comply with such requirements.

 

Our framework for managing risks may not be effective in mitigating risk and loss.

 

Our risk management framework seeks to mitigate risk and loss. We have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which we are subject, including liquidity risk, interest rate risk, credit risk, market risk and reputational risk, among others. However, as with any risk management framework, there are inherent limitations to our risk management strategies and there may exist, or develop in the future, risks that we have not anticipated or identified. If our risk management framework proves to be ineffective, we could suffer unexpected losses and could be materially adversely affected.

 

Loss of, or failure to adequately safeguard, confidential or proprietary information may adversely affect our operations, net income or reputation.

 

We regularly collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our own business, operations, plans and strategies. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf.

 

Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks and mobile phishing. Mobile phishing, a means for identity thieves to obtain sensitive personal information through fraudulent e-mail, text or voice mail, is an emerging threat targeting the customers of popular financial entities. A failure in or breach of our operational or information security systems, or those of our third-party service providers, as a result of cyber-attacks or information security breaches or due to employee error, malfeasance or other disruptions could adversely affect our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or cause losses.

 

If this confidential or proprietary information were to be mishandled, misused or lost, we could be exposed to significant regulatory consequences, reputational damage, civil litigation and financial loss.

 

Although we employ a variety of physical, procedural and technological safeguards to protect this confidential and proprietary information from mishandling, misuse or loss, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, and that if mishandling, misuse or loss of the information did occur, those events will be promptly detected and addressed. Similarly, when confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf, our policies and procedures require that the third party agree to maintain the confidentiality of the information, establish and maintain policies and procedures designed to preserve the confidentiality of the information, and permit us to confirm the third party’s compliance with the terms of the agreement. Although we believe that we have adequate information security procedures and other safeguards in place, as information security risks and cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.

 

The failure of other companies to adequately provide key components of our business infrastructure could adversely affect our operations and revenues.

 

Third party vendors provide key components of our business infrastructure such as internet connections, network access and core processing systems. While we have selected these third party vendors carefully and our agreements include requirements regarding the levels of their service quality, we ultimately do not control their actions. Any problems caused by these third parties, including those that result from their failure to provide services for any reason or their poor performance of services, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense.

 

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Table of Contents

 

Item 1B.   UNRESOLVED STAFF COMMENTS

 

None.

 

Item 2.     PROPERTIES

 

We conduct our business through our main office and 58 branch offices located in Bucks, Chester, Delaware, Montgomery and Philadelphia Counties in Pennsylvania and Burlington, Camden and Gloucester Counties in New Jersey. We own 30 properties and lease the other 28 properties. In Pennsylvania, we serve our customers through our four offices in Bucks County, six offices in Delaware County, eight offices in Montgomery County, 13 offices in Philadelphia County and two offices in Chester County. In New Jersey, we serve our customers through our 19 offices in Burlington County, five offices in Camden County and one office in Gloucester County. In addition, Beneficial Insurance operates one office in Delaware County, Pennsylvania. All branches and offices are adequate for business operation. During the first quarter of 2014, we also completed our headquarters move to Beneficial Bank Place, 1818 Market Street, Philadelphia, Pennsylvania under a new long-term lease. This long-term lease renews our commitment to remain the oldest and largest Philadelphia-based bank. Our new location increases our visibility in the city and is located in the heart of Philadelphia’s business district.

 

Item 3.     LEGAL PROCEEDINGS

 

Beneficial Bancorp and Beneficial Bank are 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 our financial condition, results of operations and cash flows.

 

Item 4.     MINE SAFETY DISCLOSURES

 

Not applicable.

 

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Table of Contents

 

PART II

 

Item 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s common stock is listed on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbol “BNCL.” As of February 26, 2015, the Company had approximately 2,775 holders of record of common stock.  The number of holders of record of common stock as of February 26, 2015 reflects the composition of the Company’s stockholder base following the consummation of the Bank’s second-step conversion, which was completed on January 12, 2015.

 

The following table sets forth high and low sales prices for Beneficial Bancorp’s common stock for the periods indicated. Beneficial Bancorp did not pay any dividends during these periods.

 

2014:

 

High

 

Low

 

 

 

 

 

 

 

First Quarter

 

$

13.72

 

$

10.71

 

Second Quarter

 

$

13.72

 

$

12.70

 

Third Quarter

 

$

13.98

 

$

12.78

 

Fourth Quarter

 

$

13.92

 

$

12.08

 

 

2013:

 

High

 

Low

 

 

 

 

 

 

 

First Quarter

 

$

10.30

 

$

9.23

 

Second Quarter

 

$

10.11

 

$

8.40

 

Third Quarter

 

$

10.00

 

$

8.40

 

Fourth Quarter

 

$

11.15

 

$

9.75

 

 

Stock Performance Graph

 

The following graph compares the cumulative total return of the Company’s common stock with the cumulative total return of the SNL Mid-Atlantic Thrift Index and the Index for the Nasdaq Stock Market (U.S. Companies, all Standard Industrial Classification, (“SIC”)).  The graph assumes $100 was invested on December 31, 2009, the first day of trading of the Company’s common stock.  Cumulative total return assumes reinvestment of all dividends.  The performance graph is being furnished solely to accompany this report pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

 

 

 

Period Ending

 

Index

 

12/31/09

 

12/31/10

 

12/31/11

 

12/31/12

 

12/31/13

 

12/31/14

 

Beneficial Mutual Bancorp, Inc.

 

100.00

 

88.30

 

83.60

 

95.00

 

109.20

 

122.70

 

NASDAQ Composite

 

100.00

 

98.00

 

96.24

 

111.54

 

154.29

 

174.96

 

SNL Mid-Atlantic Thrift Index

 

100.00

 

72.17

 

53.46

 

61.59

 

77.45

 

79.25

 

 

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Table of Contents

 

Purchases of Equity Securities

 

On October 24, 2013, the Company announced that its Board of Directors had adopted a stock repurchase program enabling the Company to acquire up to 4,000,000 shares of the Company’s outstanding common stock. As of September 30, 2014, the Company had repurchased 2,929,971 shares of its common stock under the October 24, 2013 stock repurchase program.  The Company did not repurchase any shares of its common stock during the fourth quarter of 2014. The repurchase program will continue until it is completed or terminated by the Company’s Board of Directors. However, under current federal regulations, subject to limited exceptions, we may not repurchase shares of our common stock during the first year following the completion of our second-step conversion, which was consummated on January 12, 2015.

 

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Table of Contents

 

Item 6.     SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

At and For the Year Ended December 31,
(Dollars in thousands, except per share amounts)

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Condition Data:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,751,522

 

$

4,583,413

 

$

5,006,404

 

$

4,596,104

 

$

4,929,785

 

Cash and cash equivalents

 

534,015

 

355,683

 

489,908

 

347,956

 

90,299

 

Trading securities

 

 

 

 

 

6,316

 

Investment securities available-for-sale

 

757,834

 

1,034,180

 

1,267,491

 

875,011

 

1,541,991

 

Investment securities held-to-maturity

 

727,755

 

528,829

 

477,198

 

482,695

 

86,609

 

Loans receivable, net

 

2,371,091

 

2,286,158

 

2,389,655

 

2,521,916

 

2,751,036

 

Deposits

 

3,879,709

 

3,660,016

 

3,927,513

 

3,594,802

 

3,942,304

 

Federal Home Loan Bank advances

 

165,000

 

195,000

 

140,000

 

100,000

 

113,000

 

Other borrowed funds

 

25,388

 

55,370

 

110,352

 

150,335

 

160,317

 

Stockholders’ equity

 

610,894

 

615,146

 

633,873

 

629,380

 

615,547

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

139,305

 

$

149,376

 

$

170,430

 

$

180,143

 

$

197,514

 

Interest expense

 

21,881

 

25,640

 

30,973

 

38,046

 

49,896

 

Net interest income

 

117,424

 

123,736

 

139,457

 

142,097

 

147,618

 

Provision for loan losses

 

200

 

13,000

 

28,000

 

37,500

 

70,200

 

Net interest income after provision for loan losses

 

117,224

 

110,736

 

111,457

 

104,597

 

77,418

 

Non-interest income

 

24,783

 

25,125

 

27,606

 

25,236

 

27,220

 

Non-interest expenses

 

118,251

 

120,688

 

123,125

 

120,710

 

128,390

 

Income (loss) before income taxes

 

23,756

 

15,173

 

15,938

 

9,123

 

(23,752

)

Income tax expense (benefit)

 

5,723

 

2,595

 

1,759

 

(1,913

)

(14,789

)

Net income (loss)

 

$

18,033

 

$

12,578

 

$

14,179

 

$

11,036

 

$

(8,963

)

 

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding — Basic

 

73,372,117

 

75,841,392

 

76,657,265

 

77,075,726

 

77,593,808

 

Average common shares outstanding — Diluted

 

73,988,528

 

76,085,398

 

76,827,872

 

77,231,303

 

77,593,808

 

Net income (loss) earnings per share - Basic

 

$

0.25

 

$

0.17

 

$

0.18

 

$

0.14

 

$

(0.12

)

Net income (loss) earnings per share — Diluted

 

$

0.24

 

$

0.17

 

$

0.18

 

$

0.14

 

$

(0.12

)

Dividends per share

 

$

0.00

 

$

0.00

 

$

0.00

 

$

0.00

 

$

0.00

 

 

24



Table of Contents

 

At and For the Year Ended December 31,

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

Return (loss) on average assets

 

0.40

%

0.26

%

0.29

%

0.23

%

(0.18

)%

 

 

 

 

 

 

 

 

 

 

 

 

Return (loss) on average equity

 

2.94

 

2.01

 

2.23

 

1.77

 

(1.39

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread (1)

 

2.72

 

2.70

 

3.01

 

3.07

 

3.13

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin (2)

 

2.82

 

2.81

 

3.13

 

3.22

 

3.32

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense to average assets

 

2.64

 

2.54

 

2.55

 

2.51

 

2.64

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio (3)

 

83.15

 

81.07

 

73.70

 

72.14

 

73.44

 

 

 

 

 

 

 

 

 

 

 

 

 

Average interest-earning assets to average interest-bearing liabilities

 

119.91

 

117.50

 

117.78

 

116.83

 

116.60

 

 

 

 

 

 

 

 

 

 

 

 

 

Average equity to average assets

 

13.67

 

13.15

 

13.10

 

12.94

 

13.30

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios (4):

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital to average assets

 

11.05

 

10.15

 

9.53

 

9.67

 

8.89

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital to risk-weighted assets

 

21.17

 

20.57

 

19.23

 

18.09

 

15.69

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital to risk-weighted assets

 

22.43

 

21.83

 

20.50

 

19.35

 

16.95

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses as a percent of total loans

 

2.09

 

2.38

 

2.36

 

2.10

 

1.62

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses as a percent of non-performing loans

 

126.92

 

73.05

 

62.37

 

39.77

 

36.66

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs to average outstanding loans during the period

 

0.22

 

0.63

 

0.96

 

1.05

 

2.53

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans as a percent of total loans (5)

 

1.65

 

3.25

 

3.78

 

5.29

 

4.42

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing assets as a percent of total assets (5)

 

0.87

 

1.79

 

2.08

 

3.35

 

2.85

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

Number of offices (6)

 

58

 

60

 

62

 

60

 

65

 

 


(1)         Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost on average interest-bearing liabilities.

(2)         Represents net interest income as a percent of average interest-earning assets.

(3)         Represents other non-interest expenses divided by the sum of net interest income and non-interest income.

(4)         Ratios are for Beneficial Bank.

(5)         Non-performing loans and assets include accruing government guaranteed student loans past due 90 days or more.

(6)         During 2012, the Company acquired five branches and consolidated three branches as a result of the merger with SE Financial.

 

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Item 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

Executive Summary

 

Our profitability is generally a function of the revenues we earn from our interest bearing assets less the cost of our interest bearing liabilities plus revenues we receive from non-interest income less our provision for loan losses and non-interest expenses.

 

Our primary source of revenue is net interest income. Net interest income, which comprises 82.6% of our revenue for the year ended December 31, 2014, is the difference between the income we earn on our loans and investments and the interest we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income.

 

A secondary source of revenue is non-interest income, which is income we receive from providing products and services. Traditionally, the majority of our non-interest income has come from service charges (mostly on deposit accounts), interchange income, mortgage banking and from fee income from our insurance and wealth management services.

 

Provision for loan losses is the expense we incur to cover the estimated inherent losses in our portfolio at each reporting period.

 

The non-interest expense represents our operating costs and consists of salaries and employee benefits expenses, the cost of our equity plans, occupancy expenses, depreciation, amortization and maintenance expenses and other miscellaneous expenses, such as loan and owned real estate expenses, advertising, insurance, professional services and printing and supplies expenses. Our largest non-interest expense is salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits.

 

We recorded net income for the year ended December 31, 2014 of $18.0 million, or $0.24 per diluted share, compared to net income of $12.6 million, or $0.17 per diluted share, for the year ended December 31, 2013.  Improving asset quality resulted in lower provisions for loan losses and lower classified loan and real estate owned expense. During 2014, we were able to stabilize our net interest margin, which totaled 2.82% for the year ended December 31, 2014 compared to 2.81% for 2013.

 

Our business results continue to be impacted by slow economic growth in our markets. To stimulate economic growth, the Federal Reserve Board continues to hold short-term interest rates at historic lows and expects rates to remain low throughout 2015. The low rate environment has impacted the yield on our investment and loan portfolios. Slow economic growth and continued economic uncertainty has resulted in a slow recovery and limited consumer consumption. Additionally, capital spending and investing by businesses has remained sluggish given the slow and uneven economic recovery, which has resulted in low loan demand. This has resulted in increased competition among banks to secure new loans often with risky terms and lower pricing. We continue to adhere to our prudent underwriting standards and are committed to originating quality loans. As the economy slowly improves, we have seen reductions in our non-performing assets, past due loans and charge-off levels.

 

During 2014, our asset quality metrics showed continued signs of improvement. Our non-performing loans, including loans 90 days past due and still accruing, decreased to $39.9 million at December 31, 2014, compared to $76.2 million at December 31, 2013.  This decrease was primarily due to the sale of $23.6 million of non-performing commercial loans, which resulted in a $1.7 million net charge-off and a $1.6 million gain.

 

Net charge-offs during the year ended December 31, 2014 were $5.2 million compared to $15.0 million for the year ended December 31, 2013. As a result of the improvement our asset quality metrics, we were also able to reduce our provision for loan losses during 2014. At December 31, 2014, the Bank’s allowance for loan losses totaled $50.7 million, or 2.09% of total loans, compared to $55.6 million, or 2.38% of total loans, at December 31, 2013.

 

We continue to maintain strong levels of capital and our capital ratios are well in excess of the levels required to be considered well-capitalized under applicable federal regulations. The Bank’s tier 1 leverage ratio increased to 11.05% at December 31, 2014 compared to 10.15% at December 31, 2013 and the Bank’s total risk based capital ratio increased to 22.43% at December 31, 2014 compared to 21.83% at December 31, 2013. These ratios have been further strengthened by the completion of our second step conversion that closed on January 12, 2015.  Our capital levels were significantly augmented by the $503.8 million public offering that we completed on January 12, 2015.

 

We believe in working with our customers to help them save and use credit wisely. We dedicate financial and human capital to support organizations that share our sense of responsibility to do what’s right for the communities we serve. We remain committed to the financial responsibility we have practiced throughout our 161-year history, and we are dedicated to providing financial education opportunities to our customers by providing the tools necessary to make wise financial decisions.

 

To further improve our operating returns, we continue to leverage our position as one of the largest and oldest banks headquartered in the Philadelphia metropolitan area. We are focused on acquiring and retaining customers, and then educating them by aligning our products and services to their financial needs. We also intend to deploy some of our excess capital to grow Beneficial Bank in our markets.

 

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Business Strategy

 

Our business strategy is to continue to operate and grow a profitable community-oriented financial institution. We plan to achieve this by executing our strategy of:

 

·                          Differentiating Beneficial Bank as a community bank that educates its customers to “do the right thing” financially by utilizing the “Beneficial Conversation” to better understand our customers and their needs and offer more personalized products and services;

 

·                          Increasing profitability through an improved balance sheet mix by growing commercial banking and small business lending and reducing our cash and investments;

 

·                          Employing a shareholder-focused management of capital;

 

·                          Expanding our franchise by selectively pursuing acquisition opportunities in or adjacent to our market area;

 

·                          Enhancing earnings by increasing core deposits and emphasizing operational efficiencies; and

 

·                          Maintaining asset quality by using consistent, disciplined underwriting practices to maintain the quality of our loan portfolio.

 

Differentiating Beneficial Bank as a community bank that educates its customers to “do the right thing” financially by utilizing the “Beneficial Conversation” to better understand our customers and their needs and offer more personalized products and services

 

We are committed to educating our customers to “do the right thing” financially by providing them with the tools necessary to make wise financial decisions. To effect this, we seek to understand our customers’ financial needs and goals through a conversational approach known as the “Beneficial Conversation,” which allows us to build financial plans around each customers’ needs, life stages and priorities. We have developed a sophisticated training program centered around the Beneficial Conversation that we have administered to our entire retail group in an effort to familiarize our employees with our broad array of financial products, including cash management, insurance and other related retail services we provide. We require that all of our employees become fluent and certified in this conversational approach to customer interaction, and we have implemented the “Beneficial Conversation” in our branch offices as well as through digital social media outlets. The Beneficial Conversation is a continuous, multi-step process that enables us to better understand a customer’s current financial state, future financial goals and the best path towards achieving those goals. Once we develop such an understanding, we then educate the customer on the products and services we offer that best help them attain their financial goals.

 

In addition to our branch offices, we maintain educational campuses that we believe provide the ideal setting for us to engage in the Beneficial Conversation with our customers. We opened our first two educational campuses in 2010 in Cherry Hill, New Jersey and have subsequently opened four additional campuses in Pennsylvania. Our educational campuses, which are strategically located within our branch network, exemplify our “knowledge bank” philosophy by providing educational workshops, where customers can receive helpful financial tips on a variety of topics from experts in their respective fields, in addition to traditional banking services. Each of our educational campuses also hosts a learning library that includes books for customers to read and borrow, offers as a “knowledge bar” that allows customers to explore new technologies in banking and includes space that can be used by local community members free of charge for meetings or seminars.

 

We believe that this approach to understanding our customers’ financial needs and providing customized product offerings will distinguish us from other regional and local community banks and increase products and services to our existing customers and acquire new customers.

 

Increasing profitability through an improved balance sheet mix by growing commercial banking and small business lending and reducing our cash and investments

 

We have a diversified loan portfolio, which includes commercial real estate and commercial and industrial loans made to middle market and small business customers. We are focused on improving the composition of our balance sheet by increasing loan production, particularly by originating commercial loans. Commercial loan customers provide us with an opportunity to offer a full range of our products and services including cash management, insurance, loan and deposit products. We have strengthened our infrastructure to support future growth by investing in highly-qualified employees in key areas, particularly with respect to our commercial banking business and by improving our technological capabilities and brand recognition. Specifically, in the past year, we have hired additional lenders with significant experience in our market area to expand our commercial real estate and commercial and industrial lending efforts. We plan to hire additional commercial lenders in the future. We are also focused on increasing our small business lending. At December 31, 2014, we had $94.4 million in small business loans, which represented approximately 3.9% of total loans. We currently offer a wide array of lending and deposit products that we can effectively market to our small business customers in an effort to increase our small business market share. To better capitalize on these opportunities, in recent years, we restructured our lending department and created a dedicated team of small business lenders who work with our branches and focus solely on small business lending. Also, by offering quicker decision making in the delivery of banking products and services, offering customized products where appropriate and providing access to senior officers, we can distinguish ourselves from the larger banks operating in our market area. At the same time, our capital base and greater product mix enables us to effectively compete against smaller banks.

 

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Employing a shareholder-focused management of capital

 

Maintaining a strong capital base is critical to support our long-range business plan; however, we recognize that we will have a historically high level of capital following completion of the offering. Consequently, we intend to manage our capital position, using appropriate capital management tools to return excess capital to our stockholders, consistent with applicable regulations and policies. We have repurchased a total of $75.7 million, or 20%, of our publicly held common stock since 2008 and we may continue stock repurchases after completion of the conversion subject to market conditions and regulatory restrictions. Under current federal regulations, subject to limited exceptions, we may not repurchase shares of our common stock during the first year following the completion of our second-step conversion, which was consummated on January 12, 2015.

 

Expanding our franchise by selectively pursuing acquisition opportunities in or adjacent to our market area

 

Our growth strategy also includes the acquisition of other financial institutions and other financial service corporations primarily in or adjacent to our existing market areas. The markets we operate in are considered to be some of the most attractive banking markets in the United States, and we believe they will continue to provide us with exceptional opportunities to grow and transform Beneficial Bank. Since our initial public offering, we have expanded our franchise to include the suburbs of South Jersey. Additionally, we have strengthened our presence in our historic markets throughout Philadelphia and the surrounding counties, which has established Beneficial Bank as the oldest and largest bank headquartered in Philadelphia.

 

In July 2007, in connection with the consummation of its initial public offering, Beneficial Mutual Bancorp acquired FMS Financial Corporation and its wholly owned subsidiary, Farmers & Mechanics Bank. In April 2012, Beneficial Mutual Bancorp acquired SE Financial Corp. and its wholly owned subsidiary, St. Edmond’s Federal Savings Bank. These acquisitions increased our market share and solidified our position as the largest Philadelphia-based bank operating solely in the greater Philadelphia metropolitan area. In 2005, Beneficial Insurance Services, LLC, a wholly owned subsidiary of Beneficial Bank, acquired the assets of a Philadelphia-based insurance brokerage firm, Paul Hertel & Co., Inc., which provided property, casualty, life, health and benefits insurance services to individuals and businesses. In 2007, Beneficial Insurance Services, LLC acquired the business of CLA Agency, Inc., a full-service property and casualty and professional liability insurance brokerage company headquartered in Newtown Square, Pennsylvania.

 

We continue to operate in a highly fragmented banking market, in which 82 of the 110 banking institutions in the Philadelphia metro area have less than 10 branches. We believe that this fragmented market will provide opportunities to deploy the capital raised from the second step conversion and grow both organically and through acquisition. We further believe that changes in the regulatory environment as well as continued economic challenges for the banking industry have created and will create acquisition opportunities for us. Following the offering, we believe that we will be well positioned to execute on our growth strategies and to continue to pursue selective acquisitions of banking institutions and other financial services companies primarily in and adjacent to our existing market area due to our strong capital position.

 

Enhancing earnings by increasing core deposits and emphasizing operational efficiencies

 

Deposits are our primary source of funds for investing and lending. Core deposits, excluding the subscription funds from the stock offering, which include all deposit account types except certificates of deposit, comprised 93.2% of our total deposits at December 31, 2014, up from 73.0% of total deposits at December 31, 2009. We value our core deposits because they represent a lower cost of funding and are generally less sensitive to withdrawal when interest rates fluctuate as compared to certificate of deposit accounts. We will continue to customize existing deposit products and introduce new products to meet the needs of our customers while based on employing the Beneficial Conversation at our branch locations.

 

We also recognize that controlling operating expenses is essential to our long-term profitability. While we anticipate that our efficiency ratio may be negatively impacted in future periods as a result of our expansion of our lending efforts and technology enhancements, we intend to continue to focus on operational efficiencies and methods to identify cost savings opportunities, such as reviewing our current branch structure, reviewing key third-party contracts and evaluating certain other operating expenses.

 

Maintaining asset quality by using consistent, disciplined underwriting practices to maintain the quality of our loan portfolio

 

We believe that maintaining high asset quality is a key to long-term financial success. In recent years, weaknesses in the local commercial real estate market have had a significant impact on our financial results. As a result, we recorded a significantly elevated provision for loan losses of $70.2 million for the year ended December 31, 2010. Over the past several years, in an effort to improve asset quality, we have strengthened and added additional resources to our lending and credit teams, have continued to apply prudent and disciplined underwriting standards and have continued to diligently monitor collection efforts. We hired a new Chief Lending Officer in May 2011 and hired a new Chief Credit Officer during the third quarter of 2011 to supervise the workout department and identify, manage and work through non-performing assets. Further, we have strengthened our oversight of problem assets through the formation of a special assets committee. The committee, which consists of our Chief Credit Officer, Chief Financial Officer and other members of senior management, increase the frequency with which classified and watch list credits are reviewed and aggressively acts to resolve problem assets. As a result of these efforts, we have improved our asset quality over the past several years. A provision for loan losses of $200 thousand was recorded for the year ended December 31, 2014 compared to provisions of $13.0 million, $28.0 million, and $37.5 million for the years ended December 31, 2013, 2012, and 2011, respectively. Non-performing assets have decreased from a high of $154.1 million at December 31, 2011 to $41.5 million at December 31, 2014.

 

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Current Interest Rate Environment

 

Net interest income represents a significant portion of our revenues.  Both the low interest rate environment, which has reduced the yields on our investment and loan portfolios, and lower loan balances, as a result of high commercial loan repayments and continued weak loan demand, caused net interest income to decrease. During the year ended December 31, 2014, we reported net interest income of $117.4 million, a decrease of $6.3 million, or 5.1%, from the year ended December 31, 2013. The decrease in net interest income during the year ended December 31, 2014 compared to the same period last year was primarily the result of a decline in the average balance of investments and loans, coupled with a reduction in the average interest rate earned on loans, partially offset by a reduction in the average cost of liabilities and a $214.3 million decrease in the average balance of municipal deposits. Our net interest margin remained relatively consistent at 2.82% for the year ended December 31, 2014 compared to 2.81% for the same period in 2013. We have been able to lower the average cost of our liabilities to 0.63% for the year ended December 31, 2014 compared to 0.69% for the year ended December 31, 2013 by re-pricing higher cost deposits. The reduction in deposit costs has been primarily due to decreasing rates on our municipal deposits and money market accounts. We expect that the persistently low interest rate environment will continue to lower yields on our investment and loan portfolios to a greater extent than we can reduce rates on deposits and other interest bearing liabilities, which will put pressure on net interest margin in future periods. Net interest margin in future periods will be impacted by several factors such as, but not limited to, our ability to grow and retain low cost core deposits, the future interest rate environment, loan and investment prepayment rates, loan growth and changes in non-accrual loans.

 

Critical Accounting Policies

 

In the preparation of our consolidated financial statements, we have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and that conform to general practices within the banking industry. Our significant accounting policies are described in note 2 to the consolidated financial statements included in this Annual Report.

 

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

 

Allowance for Loan Losses. We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is determined by management based upon portfolio segment, past experience, evaluation of estimated loss and impairment in the loan portfolio, current economic conditions and other pertinent factors. Management also considers risk characteristics by portfolio segments including, but not limited to, renewals and real estate valuations. The allowance for loan losses is maintained at a level that management considers 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 is established through a provision for loan losses charged to expense, which is based upon past loan loss experience and an evaluation of estimated losses in the current loan portfolio, including the evaluation of impaired loans. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: overall economic conditions; value of collateral; strength of guarantors; loss exposure at default; the amount and timing of future cash flows on impaired loans; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management regularly reviews the level of loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking and Securities, 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 level of the allowance for loan losses. This process involves our analysis of complex internal and external variables, and it requires that we exercise judgment to estimate an appropriate allowance for loan losses. As a result of the uncertainty associated with this subjectivity, we cannot assure the precision of the amount reserved, should we experience sizeable loan or lease losses in any particular period. For example, changes in the financial condition of individual borrowers, economic conditions, or the condition of various markets in which collateral may be sold could require us to significantly decrease or increase the level of the allowance for loan losses. Such an adjustment could materially affect net income as a result of the change in provision for credit losses. For example, a change in the estimate resulting in a 10% to 20% difference in the allowance would have resulted in an additional provision for credit losses of $5.1 million to $10.1 million for the twelve months ended December 31, 2014. We also have approximately $41.5 million in non-performing assets consisting of non-performing loans and other real estate owned. Most of these assets are collateral dependent loans where we have incurred significant credit losses to write the assets down to their current appraised value less selling costs. We continue to assess the realizability of these loans and update our appraisals on these loans each year. To the extent the property values continue to decline, there could be additional losses on these non-performing assets which may be material. For example, a 10% decrease in the collateral value supporting the non-performing assets could result in additional credit losses of $4.1 million. During 2014 and 2013, levels of delinquencies, net charge-offs and non-performing assets

 

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declined. Management considered market conditions in deriving the estimated allowance for loan losses; however, given the continued economic difficulties, the ultimate amount of loss could vary from that estimate. For additional discussion related to the determination of the allowance for loan losses, see “—Risk Management—Analysis and Determination of the Allowance for Loan Losses” and the notes to the consolidated financial statements included in this Annual Report.

 

Goodwill and Intangible Assets. The acquisition method of accounting for business combinations requires us to record assets acquired, liabilities assumed and consideration paid at their estimated fair values as of the acquisition date. The excess of consideration paid over the fair value of net assets acquired represents goodwill. Goodwill totaled $122.0 million at both December 31, 2014 and December 31, 2013.

 

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

 

During 2014, management reviewed qualitative factors for the banking unit, which represents $112.7 million of our goodwill balance, including financial performance, market changes and general economic conditions and noted there was not a significant change in any of these factors as compared to 2013. Accordingly, it was determined that it was more likely than not that the fair value of the banking unit continued to be in excess of its carrying amount as of December 31, 2014. Additionally during 2014, we assessed the qualitative factors related to Beneficial Insurance Services, LLC, which represents $9.3 million of our goodwill balance and determined that the two-step quantitative goodwill impairment test was warranted. We performed a two-step quantitative goodwill impairment for Beneficial Insurance Services, LLC based on estimates of the fair value of equity using discounted cash flow analyses as well as guideline company information. The inputs and assumptions are incorporated in the valuations including projections of future cash flows, discount rates, the fair value of tangible and intangible assets and liabilities, and applicable valuation multiples based on the guideline information. Based on our latest annual impairment assessment of Beneficial Insurance Services, LLC and their current and projected financial results, we believe that the fair value is in excess of the carrying amount. As a result, management concluded that there was no impairment of goodwill during the year ended December 31, 2014. Although we concluded that no impairment of goodwill existed for Beneficial Insurance Services, LLC for 2014, Beneficial Insurance Services, LLC has experienced declining revenues and profitability over the past few years and any further declines in financial performance for Beneficial Insurance Services, LLC could result in potential goodwill impairment in future periods.

 

Other intangible assets subject to amortization are evaluated for impairment in accordance with authoritative guidance. An impairment loss will be recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. During 2014, management reviewed qualitative factors for its intangible assets and determined that it was more likely than not that the fair value of the intangible assets was greater than their carrying amount.

 

During the year ended December 31, 2014, the Company noted no indicators of impairment as it relates to 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 our consolidated statements of financial condition. We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, 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 December 31, 2014, we had net deferred tax assets totaling $43.7 million. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require us to make projections of future taxable income. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize the deferred tax assets.  The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect earnings. The Company currently maintains a valuation allowance for certain state net operating losses and other-than-temporary impairments, that management believes it is more

 

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likely than not that such deferred tax assets will not be realized. Therefore, no valuation allowance is deemed necessary against our remaining federal or remaining state deferred tax assets as of December 31, 2014.

 

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.

 

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 7.25% for 2014 compared to 7.45% for 2013 and 8.0% for 2012. 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 the 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 an alternative method in determining pension cost that 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 (the “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 our employee stock ownership plan (the “ESOP”) to form the Beneficial Bank Employee Savings and Stock Ownership Plan. While the employee savings and stock ownership plan is one plan, the two separate components of the 401(k) Plan and ESOP remain. Under the employee savings and stock ownership plan, 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 participant’s account is credited with shares of the Company’s stock or cash based on compensation earned during the year.

 

Balance Sheet Analysis

 

Total assets increased $168.1 million, or 3.7%, to $4.75 billion at December 31, 2014 from $4.58 billion at December 31, 2013. The increase in total assets was primarily driven by an increase in cash and cash equivalents.  Cash and cash equivalents increased $178.3 million to $534.0 million at December 31, 2014 from $355.7 million at December 31, 2013.  The increase in cash and cash equivalents was primarily driven by $463.0 million of subscription funds received in connection with the second step stock offering included in interest bearing deposits as of December 31, 2014, partially offset by a planned $241.6 million run-off of municipal deposits and higher-cost time deposits

 

Securities

 

Investments decreased $86.0 million, or 5.4%, to $1.49 billion at December 31, 2014 from $1.58 billion at December 31, 2013. The decrease in investments during the year ended December 31, 2014 was primarily driven by scheduled investment payments, which helped fund the run-off of municipal and time deposits and the growth in our loan portfolio. We continue to focus on maintaining a high quality investment portfolio that provides a steady stream of cash flows both in the current and in rising interest rate environments. We are also focused on improving our balance sheet mix by reducing the percentage of our assets in cash and investments and growing our loan portfolio.

 

At December 31, 2014, our investment portfolio, excluding Federal Home Loan Bank stock, was $1.49 billion, or 31.3% of total assets. At December 31, 2014, 95.9% of the investment portfolio was comprised of mortgage-backed securities issued by Freddie Mac and Fannie Mae and Ginnie Mae, including collateralized mortgage obligations (“CMO”) securities issued by Freddie Mac and Fannie Mae. At December 31, 2014, our investment portfolio also included 3.2% of municipal bonds and 0.6% of GSE and government agency

 

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notes. The remaining 0.3% of our investment portfolio consisted primarily of foreign bonds, mutual funds and money market funds. During 2014, we invested primarily into other mortgage-backed securities (GSEs) issued by Freddie Mac and Fannie Mae, which amortize over their estimated life and therefore provide a constant source of liquidity.

 

To mitigate the credit risk related to Beneficial Bancorp’s held-to-maturity and available-for-sale portfolios, Beneficial Bancorp invests in agency and highly-rated securities. As of December 31, 2014, approximately 96.1% of Beneficial Bancorp’s portfolio consisted of direct government obligations, government sponsored enterprise obligations or securities rated AAA by Moody’s and/or S&P. In addition, at December 31, 2014, approximately 3.2% of the investment portfolio was rated below AAA but rated investment grade by Moody’s and/or S&P and approximately 0.7% of the investment portfolio was not rated. Securities not rated consist primarily of private placement municipal bonds, equity securities and mutual funds.

 

The following table sets forth the cost and fair value of investment securities at December 31, 2014, 2013 and 2012.

 

 

 

2014

 

2013

 

2012

 

December 31,
(Dollars in thousands)

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE and agency notes

 

$

8,538

 

$

8,614

 

$

12,968

 

$

12,917

 

$

26,085

 

$

26,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ginnie Mae guaranteed mortgage certificates

 

5,038

 

5,232

 

5,815

 

6,019

 

6,732

 

6,986

 

GSE mortgage-backed securities

 

641,952

 

648,948

 

840,787

 

833,098

 

940,452

 

965,682

 

Collateralized mortgage obligations

 

45,494

 

45,270

 

98,708

 

96,429

 

157,581

 

158,467

 

Total mortgage-backed securities

 

692,484

 

699,450

 

945,310

 

935,546

 

1,104,765

 

1,131,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal and other bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

44,378

 

46,364

 

65,593

 

67,429

 

75,534

 

80,013

 

Pooled trust preferred securities

 

 

 

 

 

10,382

 

8,722

 

Total municipal and other bonds

 

44,378

 

46,364

 

65,593

 

67,429

 

85,916

 

88,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market, mutual funds and CDs

 

3,458

 

3,406

 

18,337

 

18,288

 

21,110

 

21,254

 

Total securities available-for-sale

 

748,858

 

757,834

 

1,042,208

 

1,034,180

 

1,237,876

 

1,267,491

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ginnie Mae guaranteed mortgage certificates

 

 

 

 

 

536

 

537

 

GSE mortgage-backed securities

 

677,501

 

681,196

 

502,556

 

488,817

 

430,256

 

440,037

 

Collateralized mortgage obligations

 

47,384

 

47,421

 

20,863

 

20,270

 

38,909

 

39,044

 

Total mortgage-backed securities

 

724,885

 

728,617

 

523,419

 

509,087

 

469,701

 

479,618

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

870

 

961

 

3,410

 

3,535

 

5,497

 

5,679

 

Foreign bonds

 

2,000

 

2,011

 

2,000

 

2,011

 

2,000

 

2,010

 

Total municipal and other bonds

 

2,870

 

2,972

 

5,410

 

5,546

 

7,497

 

7,689

 

Total securities held-to-maturity

 

727,755

 

731,589

 

528,829

 

514,633

 

477,198

 

487,307

 

Total investment securities

 

$

1,476,613

 

$

1,489,423

 

$

1,571,037

 

$

1,548,813

 

$

1,715,074

 

$

1,754,798

 

 

Mortgage-backed securities are a type of asset-backed security that is secured by a mortgage, or a collection of mortgages. These securities usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from regulated and authorized financial institutions. The contractual cash flows of investments in government sponsored enterprises’ mortgage-backed securities are debt obligations of Freddie Mac and Fannie Mae, both of which are currently under the conservatorship of the Federal Housing Finance Agency. The cash flows related to Ginnie Mae securities are direct obligations of the U.S. Government. Mortgage-backed securities are also known as mortgage pass-throughs. CMOs are a type of mortgage-backed security that create separate pools of pass-through rates for different classes of bondholders with varying cash flow structures, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds’ prospectuses. At December 31, 2014, we had no investments in a single company or entity (other than United States government sponsored enterprise securities) that had an aggregate book value in excess of 10% of our equity.

 

At December 31, 2014, December 31, 2013 and December 31, 2012, securities totaling $490.6 million, $1.20 billion and $101.5 million, respectively, were in an unrealized loss position and the unrealized losses on these securities totaled $6.1 million, $34.7 million and $2.2 million, respectively. The increase in unrealized losses on securities at December 31, 2013 was primarily due to an increase in intermediate and long-term interest rates in the second half of 2013. When evaluating for impairment, we consider the duration and extent to which fair value is less than cost, the credit worthiness and near-term prospects of the issuer, the likelihood of recovering our

 

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investment, whether we have the intent to sell the investment, or whether it is more likely than not that we will be required to sell the investment before recovery, and other available information to determine the nature of the decline in market value of the securities.

 

At December 31, 2014, the unrealized losses in the portfolio were mainly attributed to GSE mortgage-backed securities and CMOs. The unrealized losses are due to current interest rate levels relative to our cost and not credit quality. As we do not intend to sell the investments, and it is not likely we will be required to sell the investments before recovery, we do not consider the investments to be other than temporarily impaired at December 31, 2014. During the years ended December 31, 2014, and 2013, we did not record any impairment charges for securities.

 

During 2013, we sold $4.7 million of pooled trust securities that resulted in a $1.2 million loss due to the uncertainty regarding banking institutions being allowed to hold pooled trust preferred securities under Section 619 of the Dodd-Frank Act, also known as the Volcker Rule, that was issued in December 2013. These securities were in a $740 thousand unrealized loss position at the time of the sale.

 

The following table sets forth the stated maturities and weighted average yields of investment securities at December 31, 2014. Certain securities have adjustable interest rates and will reprice monthly, quarterly, semi-annually or annually within the various maturity ranges. Mutual funds and money market funds are not included in the table based on lack of a maturity date.

 

 

 

One Year or Less

 

More than One Year to
Five Years

 

More than Five Years
to Ten Years

 

More than Ten Years

 

Total

 

December 31, 2014
(Dollars in thousands)

 

Carrying
Value

 

Weighted
Average
Yield

 

Carrying
Value

 

Weighted
Average
Yield

 

Carrying
Value

 

Weighted
Average
Yield

 

Carrying
Value

 

Weighted
Average
Yield

 

Carrying
Value

 

Weighted
Average
Yield

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE and agency notes

 

$

 

%

$

 

%

$

8,614

 

1.9

%

$

 

%

$

8,614

 

1.9

%

Mortgage-backed securities & CMOs

 

 

 

177,222

 

1.2

 

267,256

 

2.6

 

254,972

 

2.8

 

699,450

 

2.3

 

Municipal bonds

 

352

 

3.2

 

8,531

 

3.9

 

21,052

 

4.1

 

16,429

 

4.5

 

46,364

 

4.2

 

Total available-for-sale

 

352

 

3.2

 

185,753

 

1.3

 

296,922

 

2.6

 

271,401

 

2.9

 

754,428

 

2.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities & CMOs

 

$

 

%

$

29,637

 

1.8

 

$

160,736

 

2.2

%

$

534,512

 

2.7

%

$

724,885

 

2.5

%

Foreign bonds

 

1,500

 

1.5

 

500

 

2.4

 

 

 

 

 

2,000

 

1.7

 

Municipal bonds

 

120

 

4.5

 

495

 

5.0

 

255

 

5.9

 

 

 

870

 

5.2

 

Total held to maturity

 

1,620

 

1.7

 

30,632

 

1.8

 

160,991

 

2.2

 

534,512

 

2.7

 

727,755

 

2.5

 

Total

 

$

1,972

 

2.0

 

$

216,385

 

1.4

 

$

457,913

 

2.5

 

$

805,913

 

2.7

 

$

1,482,183

 

2.5

 

 

Loans

 

Loans increased $79.9 million, or 3.4%, to $2.42 billion at December 31, 2014 from $2.34 billion at December 31, 2013. We experienced a $120.1 million, or 12.0%, increase in our commercial loan portfolio during 2014 due to strong commercial real estate growth. Commercial loans include shared national credits, which increased to $186.7 million at December 31, 2014 compared to $44.7 million at December 31, 2013. Increases in intermediate and long-term interest rates throughout most of 2014 impacted the housing market and contributed to lower mortgage loan originations, which resulted in a $15.9 million, or 2.3%, decrease in our residential loan portfolio for the year ended December 31, 2014. Our consumer loan portfolio continues to be impacted by weak demand and decreased $24.3 million, or 3.7%, during the year ended December 31, 2014.

 

Shared national credit loans are typically variable rate with terms ranging from one to seven years. At December 31, 2014, shared national credits totaled $186.7 million, which included $124.8 million of leveraged lending transactions. All of these loans were classified as pass rated as of December 31, 2014 as all payments are current and the loans are performing in accordance with their contractual terms.

 

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The following table shows the loan portfolio at the dates indicated:

 

December 31,

 

2014

 

2013

 

2012

 

2011

 

2010

 

(Dollars in thousands)

 

Amount

 

Percent

 

Amount

 

Percent

 

Amount

 

Percent

 

Amount

 

Percent

 

Amount

 

Percent

 

Commercial Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

609,646

 

25.2

%

$

584,133

 

24.9

%

$

639,557

 

26.1

%

$

547,010

 

21.2

%

$

600,734

 

21.5

%

Commercial business loans

 

442,190

 

18.2

 

378,663

 

16.2

 

332,169

 

13.6

 

429,266

 

16.7

 

441,881

 

15.8

 

Commercial construction

 

69,140

 

2.9

 

38,067

 

1.6

 

105,047

 

4.3

 

233,545

 

9.1

 

268,314

 

9.6

 

Total commercial loans

 

1,120,976

 

46.3

 

1,000,863

 

42.7

 

1,076,773

 

44.0

 

1,209,821

 

47.0

 

1,310,929

 

46.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

667,800

 

27.6

 

683,700

 

29.2

 

665,246

 

27.2

 

623,955

 

24.2

 

687,565

 

24.6

 

Residential construction

 

268

 

 

277

 

 

2,094

 

0.1

 

5,581

 

0.2

 

11,157

 

0.4

 

Total residential loans

 

668,068

 

27.6

 

683,977

 

29.2

 

667,340

 

27.3

 

629,536