General
Beneficial
Mutual Bancorp, Inc. (the “Company”) was organized on August 24, 2004 under the
laws of the United States in connection with the mutual holding company
reorganization of Beneficial Bank (the “Bank”), a Pennsylvania chartered savings
bank which has also operated under the name Beneficial Mutual Savings Bank. In
connection with the reorganization, the Company became the wholly owned
subsidiary of Beneficial Savings Bank MHC (the “MHC”), a federally chartered
mutual holding company. In addition, the Company acquired 100% of the
outstanding common stock of the Bank.
On July
13, 2007, the Company completed its initial public offering in which it sold
23,606,625 shares, or 28.70%, of its outstanding common stock to the public,
including 3,224,772 shares purchased by the Beneficial Mutual Savings Bank
Employee Stock Ownership Plan Trust (the “ESOP”). In addition, 45,792,775
shares, or 55.67% of the Company’s outstanding common stock, were issued to the
MHC. To further emphasize the Bank’s existing community activities, the Company
also contributed $500,000 in cash and issued 950,000 shares, or 1.15% of the
Company’s outstanding common stock, to The Beneficial Foundation (the
“Foundation”), a Pennsylvania nonstock charitable foundation organized by the
Company in connection with the Company’s initial public offering.
In
addition to completing its initial public offering on July 13, 2007, the Company
also issued 11,915,200 shares, or 14.48% of its outstanding common stock, to
stockholders of FMS Financial Corporation (“FMS Financial”) in connection with
the Company’s acquisition of FMS Financial. The merger was consummated pursuant
to an agreement and plan of merger whereby FMS Financial merged with and into
the Company and FMS Financial’s wholly owned subsidiary, Farmers & Mechanics
Bank, merged with and into the Bank.
The
Company’s business activities are the ownership of the Bank’s capital stock and
the management of the proceeds it retained in connection with its initial public
offering. The Company does not own or lease any property but instead uses the
premises, equipment and other property of the Bank with the payment of
appropriate rental fees, as required by applicable law and regulations, under
the terms of an expense allocation agreement.
The Bank
is a Pennsylvania chartered savings bank originally founded in 1853. We have
served the financial needs of our depositors and the local community since our
founding and are 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, consumer
loans, home equity loans, one-to-four family real estate loans, commercial
business 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. We also
maintain an investment portfolio. Our primary market consists of Chester,
Delaware, Montgomery, Philadelphia and Bucks Counties, Pennsylvania and
Burlington, Camden, and Gloucester Counties, New Jersey. The acquisition of FMS
Financial and its wholly owned subsidiary, Farmers & Mechanics Bank, in July
2007 expanded our market presence in New Jersey.
The
Company’s and the Bank’s executive offices are located at 510 Walnut Street,
Philadelphia, Pennsylvania and our main telephone number is (215) 864-6000. Our
website address is
http://www
.the
beneficial.com.
Information on our website should not be considered part of this
filing.
Market
Area
The
Company is headquartered in Philadelphia, Pennsylvania. We operate 40
full-service banking offices in Chester, Delaware, Montgomery, Philadelphia and
Bucks Counties, Pennsylvania and 32 full-service offices in Burlington and
Camden Counties, New Jersey.
The
Company has sought to expand its franchise in recent years through acquisition
opportunities and by opening new branch offices, and continues to evaluate
opportunities for further expansion. Our branch expansion has been within our
existing market area as we have sought to penetrate more of our primary market
area. In 2006, we opened one new branch in Bucks County, Pennsylvania and
relocated two branches within Philadelphia, Pennsylvania and Delaware County,
Pennsylvania. In 2007, we opened a new branch office in Camden County, New
Jersey and another in Montgomery County, Pennsylvania. In January 2008, we
opened a new branch office in Montgomery County, Pennsylvania, and in December
of 2008 we relocated one branch in North Philadelphia.
The
acquisition of FMS Financial has substantially enhanced our market share. On
July 13, 2007, the Company completed its merger with FMS Financial. In
connection with the merger, FMS Financial’s wholly owned subsidiary, Farmers
& Mechanics Bank, which had a network of 31 branch offices located in
Burlington and Camden Counties, New Jersey, merged with and into the Bank. The
merger solidified the Bank’s position as the largest Philadelphia-based bank
operating solely in the greater Philadelphia metropolitan area, with more than
$4.0 billion in assets and a greatly expanded network of neighborhood banking
offices throughout the region.
Our
primary retail market area is the greater Philadelphia metropolitan area and
primarily includes the area surrounding our 72 banking offices located in Bucks,
Chester, Delaware, Montgomery and Philadelphia Counties in Pennsylvania and
Burlington and Camden Counties in New Jersey, while our lending market also
includes surrounding counties in Pennsylvania, New Jersey and Delaware. In
Pennsylvania, we serve our customers through our four offices in Bucks County,
seven offices in Delaware County, nine offices in Montgomery County, 19 offices
in Philadelphia County, and one office in Chester County. In New Jersey, we
serve our customers through our 29 offices in Burlington County and three
offices in Camden County. In addition, Beneficial Insurance Services, LLC
(“Beneficial Insurance”) operates two offices in Pennsylvania, one in
Philadelphia County and one in Delaware County.
The
economy of our market area is predominated by the service sector, with a large
concentration in education and health care industries. The economy in the
Philadelphia metropolitan area has declined recently along with the recession in
the national economy. Service sector firms generally reported lower levels of
activity and are planning for reduced activity in 2009 as prospective clients
are increasingly focused on immediate cost-reducing or revenue-enhancing
benefits of purchased services. Manufacturing also has continued to slow as
demand has been reported to decline in most major manufacturing sectors. Both
residential and commercial real estate activity have continued to weaken in the
market. The number of homes for sale has been reported to move lower while time
on the market has increased. Commercial real estate firms have reported that
construction, leasing and purchase activity have declined, and announcements of
project postponements continue.
According
to published statistics, the 2008 population of our seven-county primary retail
market area totaled 4.9 million. Overall, the seven 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.
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.
Several
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 have
been 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. Several other large
banking companies have been the subject of continued negative publicity due to
the significant losses incurred, including Citizens Bank, Citibank and Bank of
America. While these institutions are significantly larger than us and,
therefore, have significantly greater resources, we believe our financial
condition and our concentrated focus on our primary market may benefit us in the
coming year. 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 local community banks, thrifts and credit unions and, to a lesser extent,
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 recent credit market disruptions stemming from the
deterioration of sub-prime loans have reduced the number of non-depository
competitors in the residential mortgage market.
Notwithstanding
these recent credit market disruptions, 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. Changes in federal law
permit affiliation among banks, securities firms and insurance companies, and
the recently expanded availability of bank holding company charters resulting
from the potential for non-bank financial services companies to receive capital
infusions under the U.S. Treasury Department’s Troubled Asset Relief Program,
may promote a more competitive environment in the financial services industry.
Competition for deposits and the origination of loans could limit our growth in
the future.
Lending
Activities
We offer
a variety of loans. Historically, we have had a substantial portion of our loan
portfolio concentrated in consumer loans, which have primarily consisted of
automobile loans and leases, educational loans and home equity loans and lines
of credit. In 2004, we stopped providing automobile lease financing and our
automobile loan portfolio has decreased in recent years. It is likely that our
automobile loan portfolio will continue to decline as we place greater emphasis
on originating commercial real estate and commercial business loans. Since 2002,
our commercial real estate loan portfolio has grown steadily. During 2008, the
commercial real estate portfolio has remained steady amidst the weakened
economy, and at December 31, 2008 and 2007 it comprised 32.6% and 32.8% of our
total loan portfolio, respectively, which, at December 31, 2008 was greater than
any other loan category.
In the
future, we intend to continue to emphasize commercial real estate and commercial
business lending including small business lending. We have added to our
experienced staff of commercial lenders and continue to seek participation
opportunities with other local lenders. Participation opportunities will be
subject to our internal underwriting guidelines, which are consistently applied.
We will also continue to proactively monitor and manage existing credit
relationships. To this end, we have enhanced our credit risk management staff
and procedures. In addition, we intend to increase our share of the local market
for home equity loans, as a result of recent additional investments in
advertising, and the introduction of home equity lending as a new product in our
recently expanded New Jersey branch network.
The Bank
does not engage in sub-prime lending, which is defined as mortgage loans
advanced to borrowers who do not qualify for market interest rates because of
problems with their credit history. The Bank focuses its lending efforts within
its market area.
One-to-Four
Family Residential Loans
.
We offer two types of
residential mortgage loans: fixed-rate loans and adjustable-rate loans. We offer
fixed-rate mortgage loans with terms of up to 30 years. We 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. The Bank’s 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 6% on any such increase or decrease over the life of the loan. In order
to increase the originations of adjustable-rate loans, the Bank has been
originating loans which bear a fixed interest rate for a period of three to five
years after which they convert to one-year adjustable-rate loans. The Bank’s
adjustable-rate loans require that any payment adjustment resulting from a
change in the interest rate of an adjustable-rate loan 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 the Bank does offer
adjustable-rate loans with initial rates below the fully indexed rate, loans
tied to the one-year constant maturity treasury (“CMT”) are underwritten using
methods approved by the Federal Home Loan Mortgage Corporation (“Freddie Mac”)
or the Federal National Mortgage Association (“Fannie Mae”), which require
borrowers to be qualified at 2% above the discounted loan rate under certain
conditions.
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. The relative amount of fixed-rate and
adjustable-rate mortgage loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. 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.
All of
our residential mortgage loans are consistently underwritten to standards
established by Fannie Mae and Freddie Mac.
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 90% under a special low
income loan program consisting of $15.4 million in loans as of December 31,
2008. 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 a board-approved independent appraiser. We generally
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.
Commercial Real
Estate Loans
.
At
December 31, 2008, we had commercial real estate loans totaling $787.7 million,
or 32.6%, of our total loan portfolio, which was greater than any other loan
category, including one-to-four family loans.
We offer
commercial real estate loans secured by real estate primarily with adjustable
rates. We originate a variety of commercial real estate loans generally for
terms up to 25 years and payments based on an amortization schedule of up to 25
years. These loans are typically based on either the Federal Home Loan Bank
(“FHLB”) of Pittsburgh’s borrowing rate or U.S. Treasury rate and adjust every
five years. Commercial real estate loans also are originated for the acquisition
and development of land. Conditions of acquisition and development loans we
originate generally limit the number of model homes and homes built on
speculation, and draws are scheduled against executed agreements of sale.
Commercial real estate loans for the acquisition and development of land 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 with loan-to-value ratios
of up to 75%, while loans for the acquisition of land are originated with a
maximum loan to value ratio of 65%.
As of
December 31, 2008, our largest commercial real estate loan was a $28.7 million
construction participation for site development and the construction of a 260
lot age restricted community. The loan is secured by the land being developed.
This is a participation with two other local banks and our portion is 61%. Our
portion of the loan balance was $12.8 million at December 31, 2008. This loan
was performing in accordance with its original terms at December 31, 2007.
However, due to the nature of the loan in the current economy, we are more
aggressive in the monitoring of this loan. We closely monitor absorption rate,
commitments and timely universal cash flows associated with the borrower to
ensure identification of issues posing risk or stress to the adequate
performance of the credit.
Commercial
Loans.
We offer commercial business loans to professionals, sole
proprietorships and small businesses in our market area. We offer installment
loans for capital improvements, equipment acquisition and long-term working
capital. These loans are typically based on the prime rate as published in
The Wall Street Journal
and/or LIBOR. These loans are secured by business assets other than real estate,
such as business equipment and inventory, or are backed by the personal
guarantee of the borrower. We originate lines of credit to finance the working
capital needs of businesses to be repaid by seasonal cash flows or to provide a
period of time during which the business can borrow funds for planned equipment
purchases. We also offer accounts receivable lines of credit.
When
making commercial business loans, we consider the financial statements of the
borrower, the borrower’s payment history of both corporate and personal debt,
the debt service capabilities of the borrower, the projected cash flows of the
business, the viability of the industry in which the customer operates and the
value of the collateral.
At
December 31, 2008, our largest commercial business loan relationship had a total
exposure of $37.7 million secured by various mixed use commercial real estate
and general business assets. This relationship consists of six separate credit
facilities with total outstanding balances of approximately $33.0 million. The
loans are well collateralized, with an aggregate loan to value ratio of 55.2%.
All loans in the relationship are performing in accordance with their original
terms at December 31, 2008.
Consumer
Loans
.
We offer a
variety of consumer loans, including home equity loans and lines of credit,
automobile loans, including loans for recreational vehicles, guaranteed student
loans and loans secured by passbook accounts and certificates of deposit. We
also offer unsecured lines of credit.
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 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 scheduled of either principal and
interest or interest only paid monthly. We hold a first mortgage position on
approximately 60% of the homes that secure our home equity loans.
We offer
loans secured by new and used automobiles. 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. We also
offer loans on recreational vehicles, which we will originate for terms of up to
20 years depending upon the loan amount and the loan-to-value ratio on such
loans generally does not exceed 90%. We no longer originate or purchase
automobile lease financing.
We offer
consumer loans secured by passbook accounts and certificates of deposit held at
the Bank 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—Risk
Management—Liquidity Management”
included in the Company’s 2008 Annual
Report to Stockholders.
The
procedures for underwriting consumer loans 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, if any, to the proposed
loan amount.
Credit
Risks.
Adjustable-Rate Loans
. 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, an
increased monthly mortgage payment 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 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.
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 project.
Additional considerations include: location, loan to value, 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 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. 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.
Consumer Loans
. Consumer
loans may entail greater risk than do residential mortgage loans, particularly
in the case of consumer loans that are unsecured or secured by assets that
depreciate rapidly, such as motor vehicles, recreational vehicles and boats. In
the latter case, 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.
Loan Originations and
Purchases
. Loan originations come from a number of sources. The primary
source of loan originations are existing customers, walk-in traffic, advertising
and referrals from customers. We also purchase home equity, automobile and
recreational vehicle loans.
We
purchase participations in loans from local banks to supplement our lending
portfolio. Loan participations totaled $97.9 million at December 31, 2008. 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, in a purchased participation loan,
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 our board
of trustees and management. 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. Individual loans or lending
relationships with aggregate exposure of $10.0 million must be approved by the
Senior Loan Committee, which is comprised of senior Bank officers and five
non-employee directors. All loans or lending relationships in excess of $20.0
million must be approved by the Senior Loan Committee of the Bank’s Board, as
well as the Executive Committee of the Board, which includes six non-employee
directors.
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, 2008, our regulatory limit on loans to one borrower
was $93.0 million. At that date, the total outstanding balance with our largest
lending relationship was $33.0 million which was secured by various mixed use
commercial real estate and general business assets. All of the loans in the
relationship are performing in accordance with their original terms at December
31, 2008.
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
collectibility. 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. Personal loans are typically charged off at 120 days delinquent. For more
information on delinquencies, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Risk Management” in the
company’s 2008 Annual Report to stockholders.
Investment
Activities
We have
authority to invest in various types of assets, including United States Treasury
obligations, securities of various U.S. government sponsored enterprises,
federal agencies and state and municipal governments, mortgage-backed securities
and certificates of deposit of federally insured institutions. Within certain
regulatory limits, we also may invest a portion of our assets in corporate
securities and mutual funds. In order to generate additional income, we have the
authority to sell and repurchase covered call options utilizing the equities
portfolio.
While we
have the authority under applicable law to invest in derivative instruments for
hedging activities and to provide opportunities for our commercial loan
customers to hedge interest rate risk, we had no such derivative instruments at
December 31, 2008.
Our
investment objectives are to provide and maintain liquidity, to establish an
acceptable level of interest rate and credit risk, to provide an alternate
source of low-risk investments when demand for loans is weak and to generate a
favorable return. The Company’s Board of Directors approves the investment and
derivatives policies and any revisions, at least annually.
At
December 31, 2008, our investment portfolio excluding FHLB capital stock totaled
$1.2 billion and consisted primarily of mortgage-backed securities, including
collateralized mortgage obligations (“CMOs”). Other securities include United
States government and agency securities, including securities issued by
government sponsored enterprises, municipal and other bonds, including
collateralized debt obligations (“CDOs”) backed by bank trust preferred capital
securities, equity securities and mutual funds. The contractual cash flows of
investments in government sponsored enterprises’ mortgage backed securities are
direct obligations of Freddie Mac and Fannie Mae.
As a
member of the FHLB of Pittsburgh, we are required to acquire and hold shares of
capital stock in that FHLB. At December 31, 2008, we held 245,000 shares of
capital stock in the FHLB of Pittsburgh. Each such share has a par value of $100
for a total carrying value of $24.5 million. On December 23, 2008, the FHLB of
Pittsburgh informed its members of a decision by its Board to suspend dividends
on its capital stock and to suspend repurchases of excess capital stock. These
actions were taken in light of the potential impact of other-than-temporary
impairment charges related to certain private label mortgage backed securities
on FHLB of Pittsburgh’s capitalization. We continue to value our holdings of
FHLB of Pittsburgh capital stock at par value. We have considered the impact of
SOP 01-6 in evaluating for impairment and have determined that there is
currently no other-than-temporary impairment. We will continue to monitor for
impairment in future periods.
We
assumed Farmers & Mechanics Bank’s obligation to the FHLB of New York as
part of our acquisition of FMS Financial on July 13, 2007. The Bank is a
non-member of the FHLB of New York, but is required to hold shares of capital
stock in the FHLB of New York as a result of the FMS Financial acquisition. At
December 31, 2008, we held 36,000 shares of capital stock in the FHLB of New
York, with a par value $100 per share and a total carrying value of $3.6
million. The FHLB of New York continues to pay dividends and has not suspended
repurchases of excess capital stock.
On
September 6, 2008, the Federal Housing Finance Agency (FHFA) was appointed as
conservator of both Fannie Mae and Freddie Mac. In addition, the U.S. Treasury
agreed to provide up to $100 billion of capital to each company as needed to
ensure the continued provision of liquidity to the housing and mortgage markets.
This action was taken due to significant credit losses due to continued credit
deterioration in the single-family credit guarantee portfolios of both companies
and impairment charges incurred on the available-for-sale securities portfolios
of both companies. We held no preferred stock or subordinated debentures in
either Fannie Mae or Freddie Mac, and had no exposure to loss from such
activities or from the appointment of a conservator.
Deposit
Activities and Other Sources of Funds
General.
Deposits, borrowings and loan repayments are the major sources of our funds for
lending and other investment purposes. Scheduled loan 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 checking accounts),
interest-bearing demand accounts (such as NOW and money market accounts),
savings accounts and certificates of deposit. From time to time, we solicit
brokered time deposits as an alternative source of funds.
We also
offer a variety of deposit accounts designed for the businesses operating in our
market area. Our business banking 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, and
to periodically offer special rates in order to attract deposits of a specific
type or term.
Borrowings.
We have the ability to utilize advances from the FHLB of Pittsburgh to
supplement our investable funds. The FHLB functions as a central reserve bank
providing credit for member financial institutions. As a member, we are required
to own capital stock in the FHLB and are authorized to apply for advances on the
security of such stock and certain of our mortgage loans and other assets
(principally securities which are obligations of, or guaranteed by, the United
States), 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. Depending on the program, limitations on the
amount of advances are based either on a fixed percentage of an institution’s
net worth or on the FHLB’s assessment of the institution’s creditworthiness. We
also 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, agency GSE notes
and agency mortgage-backed securities. The types of loans pledged for borrowings
include, but are not limited to, 1-4 family real estate mortgage
loans.
Personnel
As of
December 31, 2008, we had 730 full-time employees and 240 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. In 2005, Beneficial Insurance Services LLC acquired the assets of a
Philadelphia-based insurance brokerage firm, Paul Hertel & Co., Inc., which
provides property, casualty, life, health and benefits insurance services to
individuals and businesses. Beneficial Insurance conducts business under the
trade name of Paul Hertel & Company. Beneficial Insurance also acquired a
majority interest in Graphic Arts Insurance Agency, Inc. through its acquisition
of the assets of Paul Hertel & Co. Inc. On October 5, 2007, Beneficial
Insurance acquired the business of CLA Agency, Inc., a full-service property and
casualty and professional liability insurance brokerage company headquartered in
Newtown Square, Pennsylvania. Beneficial Insurance also operates under the trade
name CLA Insurance Agency.
Beneficial
Advisors, LLC is a Pennsylvania Limited Liability Company formed in 2000 for the
purpose of offering investment and insurance related products, including, but
not limited to, fixed- and variable-rate annuities and the sale of mutual funds
and securities through INVEST, a third party broker dealer.
Neumann
Corporation, which was formed in 1990, is a Delaware Investment Holding Company
and holds title to various Bank securities and other investments. At December
31, 2008, Neumann Corporation held $447.6 million in assets.
BSB Union
Corporation was formed in 1994 for the purpose of engaging in the business of
owning and leasing automobiles. In 1998, BSB Union Corporation obtained approval
to hold an interest in a “titling trust.”
St.
Ignatius Senior Housing I, L.P. is a limited partnership formed in 2002 and
sponsored by St. Ignatius Nursing Home, a subsidiary of which is the general
partner. The Bank owns 99.99% of the partnership. The limited partnership was
sponsored as an affordable housing project providing low income housing tax
credits pursuant to Section 42 of the Internal Revenue Code.
St.
Ignatius Senior Housing II, L.P. is a limited partnership formed in 2007 and
sponsored by St. Ignatius Nursing Home, a subsidiary of which is the general
partner. The Bank owns 99.99% of the partnership. The limited partnership was
sponsored as an affordable housing project providing low income housing tax
credits pursuant to Section 42 of the Internal Revenue Code.
Graphic
Arts Insurance Agency is an insurance agency in which Beneficial Insurance
purchased a 51% ownership interest in 2005.
Beneficial
Abstract, LLC is a title insurance company in which the Bank purchased a 40%
ownership interest in 2006. Beneficial Abstract, LLC was inactive as of December
31, 2008.
Beneficial
Equity Holdings, LLC was formed in 2004 and is currently inactive.
REGULATION
AND SUPERVISION
The
following discussion describes elements of an extensive regulatory framework
applicable to savings and loan holding companies and banks and specific
information about the Bank, the Company and the MHC. Federal and state
regulation of banks and bank holding companies is intended primarily for the
protection of depositors and the Deposit Insurance Fund, rather than for the
protection of potential shareholders and creditors.
General
The Bank
is a Pennsylvania-chartered savings bank that is subject to extensive
regulation, examination and supervision by the Pennsylvania Department of
Banking (the “Department”), as its primary regulator, and the Federal Deposit
Insurance Corporation (“FDIC”), as its deposits insurer. The Bank is a member of
the FHLB system and, with respect to deposit insurance, of the Deposit Insurance
Fund managed by the FDIC. The Bank must file reports with the Department and the
FDIC concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other savings institutions. The Department 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 Department, the FDIC or
Congress, could have a material adverse impact on the Bank, the Company, the MHC
and their operations.
Certain
regulatory requirements applicable to the Bank, the Company and the MHC are
referred to below or elsewhere herein. 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, the Company and the MHC and is
qualified in its entirety by reference to the actual statutes and
regulations.
Bank
Regulation
Pennsylvania
Savings Bank Law.
The Pennsylvania Banking Code of 1965, as amended (the
“1965 Code”), and the Pennsylvania Department of Banking Code, as amended (the
“Department Code,” and collectively, the “Codes”), contain 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 Codes
delegate extensive rule-making power and administrative discretion to the
Department 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 Department Code,
the Department 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 1965
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 Department (which shall not be
more restrictive than the regulation imposed upon a national banking association
or federal savings association, respectively). Before it engages in such an
activity allowable for a national banking association or federal savings
association, a state-chartered savings bank must either obtain prior approval
from the Department or provide at least 30 days’ prior written notice to the
Department. 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 stockholders’ 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, 2008, the Bank met each of these capital requirements. As savings
and loan holding companies regulated by the Office of Thrift Supervision (the
“OTS”), the Company and the MHC are not subject to any separate regulatory
capital requirements.
Restrictions on
Dividends.
The Company’s ability
to declare and pay dividends may depend in part on dividends received from the
Bank. The 1965 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 stockholders’ 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. Federal law also
authorizes de novo branching into another state if the host state enacts a law
expressly permitting out of state banks to establish such branches within its
borders. The Bank currently has 32 full-service locations in Burlington 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. 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% (3% or less 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, 2008, 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 FDIC-insured banks 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 FDIC Improvement Act and the FDIC
permit exceptions to these limitations. For example, state chartered banks, such
as the Bank, may, with FDIC approval, continue to exercise grandfathered state
authority to invest in common or preferred stocks listed on a national
securities exchange or the Nasdaq Global Select Market and in the shares of an
investment company registered under federal law. All non-subsidiary equity
investments, unless otherwise authorized or approved by the FDIC, must have been
divested by December 19, 1996, under an FDIC-approved divesture plan, unless
such investments were grandfathered by the FDIC. 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 I 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, 2008, 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”), “affiliates” (
e.g
., any company that
controls or is under common control with an institution, including the Company,
the MHC and their non-savings institution subsidiaries). 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 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-affiliated
companies. 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 Company may make to insiders based, in part,
on the Company’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. The FDIC has
authority under federal law to appoint a conservator or receiver for an insured
bank under limited circumstances.
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 Fund is the successor to the Bank Insurance Fund and the
Savings Association Insurance Fund, which were merged in 2006. 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. An institution’s assessment rate depends upon the
category to which it is assigned, with less risky institutions paying lower
assessments.
For 2008,
assessments ranged from five to forty-three basis points of assessable deposits.
Due to losses incurred by the Deposit Insurance fund from failed institutions in
2008, and anticipated future losses, the FDIC has adopted, pursuant to a
Restoration Plan to replenish the fund, an across-the-board seven basis point
increase in the assessment range for the first quarter of 2009. The FDIC has
adopted further refinements to its risk-based assessment system that are
effective April 1, 2009 and effectively make the range seven to 77 1/2 basis
points. The FDIC has also imposed a special emergency assessment of 20 basis
points of assessable deposits, as of June 30, 2009, in order to cover losses to
the Deposit Insurance Fund. The FDIC may adjust the scale 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 federal deposit insurance
assessment.
Due to
the recent difficult economic conditions, deposit insurance per account owner
has been raised to $250,000 for all types of accounts until January 1, 2010. In
addition, the FDIC adopted an optional Temporary Liquidity Guarantee program by
which, for a fee, noninterest bearing transaction accounts would receive
unlimited insurance coverage until December 31, 2009 and certain senior
unsecured debt issued by institutions and their holding companies between
October 13, 2008 and June 30, 2009 would be guaranteed by the FDIC through June
30, 2012. The Bank made the business decision to participate in the unlimited
noninterest bearing transaction account coverage and the Bank, the Company and
the MHC opted to participate in the unsecured debt guarantee
program.
The
Reform Act also provides for a one-time credit for eligible institutions based
on their assessment base as of December 31, 1996. Subject to certain limitations
with respect to institutions that are exhibiting weaknesses, credits can be used
to offset assessments until exhausted. The balance as of December 31, 2008 was
$0.05 million. The Reform Act also provides for the possibility that the FDIC
may pay dividends to insured institutions once the Deposit Insurance Fund
reserve ratio equals or exceeds 1.35% of estimated insured
deposits.
In
addition to the assessment for deposit insurance, institutions are required to
make payments on bonds issued in the late 1980s by the Financing Corporation to
recapitalize a predecessor deposit insurance fund. This payment is established
quarterly and during the calendar year ending December 31, 2008 averaged 1.12
basis points of assessable deposits.
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 results of operations of the Bank. 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 Office of Thrift Supervision. 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 FHLB system, which consists of 12 regional Federal Home Loan Banks. The FHLB
provides a central credit facility primarily for member institutions. The Bank,
as a member of the FHLB of Pittsburgh, is required to acquire and hold shares of
capital stock in that FHLB. The Bank assumed Farmers & Mechanics Bank’s
obligation to the FHLB of New York as part of the Company’s acquisition of FMS
Financial on July 13, 2007. The Bank is not a member of the FHLB of New York,
but is required to hold shares of capital stock in the FHLB of New York as a
result of the FMS Financial acquisition. The Bank was in compliance with these
requirements with a an investment of $24.5 million in FHLB of Pittsburgh and
$3.6 million in FHLB of New York stock at December 31, 2008.
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.”
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:
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Truth-In-Lending
Act, governing disclosures of credit terms to consumer
borrowers;
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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;
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Equal
Credit Opportunity Act, prohibiting discrimination on the basis of race,
creed or other prohibited factors in extending credit;
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Fair
Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies;
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Fair
Debt Collection Practices Act, governing the manner in which consumer
debts may be collected by collection agencies; and
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rules
and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws.
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The
operations of the Bank also are subject to the:
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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;
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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;
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Check
Clearing for the 21
st
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”;
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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 the related regulations of the OTS,
which 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 AML
compliance program), due diligence policies and controls to ensure the
detection and reporting of money laundering; and
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The
Gramm-Leach-Bliley Act, which prohibits a financial institution from
disclosing nonpublic personal information about a consumer to
nonaffiliated third parties, unless the institution satisfies various
notice and opt-out
requirements.
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Holding
Company Regulation
General.
The Company and the MHC are savings and loan holding companies within the
meaning of federal law. As such, they are registered with the OTS and are
subject to OTS regulations, examinations, supervision, reporting requirements
and regulations concerning corporate governance and activities. In addition, the
OTS has enforcement authority over the Company and the MHC and their non-savings
institution subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
Bank.
The OTS
also takes the position that its capital distribution regulations apply to state
savings banks in savings and loan holding company structures. Those regulations
impose limitations upon all capital distributions by an institution, including
cash dividends, payments to repurchase its shares and payments to shareholders
of another institution in a cash-out merger. Under the regulations, an
application to and prior approval of the OTS is required prior to any capital
distribution if the institution does not meet the criteria for “expedited
treatment” of applications under OTS regulations (
i.e.
, generally, examination
and Community Reinvestment Act ratings in the two top categories), the total
capital distributions for the calendar year exceed net income for that year plus
the amount of retained net income for the preceding two years, the institution
would be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with the OTS. If an
application is not required, the institution must still provide prior notice to
the OTS of the capital distribution if, like the Bank, it is a subsidiary of a
holding company. In the event the Bank’s capital fell below its regulatory
requirements or the OTS notified it that it was in need of increased
supervision, the Bank’s ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
To be
regulated as a savings and loan holding company by the OTS (rather than as a
bank holding company by the Federal Reserve Board), the Bank must qualify as a
Qualified Thrift Lender (“QTL”). To qualify as a QTL, the Bank must maintain
compliance with the test for a “domestic building and loan association,” as
defined in the Internal Revenue Code, or with a Qualified Thrift Test. Under the
QTL Test, a savings institution is required to maintain at least 65% of its
“portfolio assets” (total assets less: (1) specified liquid assets up to 20% of
total assets; (2) intangibles, including goodwill; and (3) the value of property
used to conduct business) in certain “qualified thrift investments” (primarily
residential mortgages and related investments, including mortgage-backed and
related securities, but also including education, credit and small business
loans) in at least nine months out of each 12-month period. At year end 2008,
the Bank maintained 76.93% of its portfolio assets in qualified thrift
investments. The Bank also met the QTL test in each of the prior four
quarters.
Restrictions
Applicable to Mutual Holding Companies.
According to federal law and OTS
regulations, a mutual holding company, such as the MHC, may generally engage in
the following activities: (1) investing in the stock of a stock savings
association; (2) acquiring a mutual association through the merger of such
association into a stock savings association subsidiary of such holding company
or an interim savings association subsidiary of such holding company; (3)
merging with or acquiring another mutual or stock savings and loan holding
company; (4) investing in a corporation the capital stock of which could be
purchased by a federal savings association or a state savings association under
Pennsylvania law; and (5) any activity approved by the Federal Reserve Board for
a bank holding company or financial holding company or approved by the OTS for
multiple savings and loan holding companies.
Federal
law prohibits a savings and loan holding company, including a federal mutual
holding company, from directly or indirectly, or through one or more
subsidiaries, acquiring more than 5% of the voting stock of another savings
institution, or its holding company, without prior written approval of the
Office of Thrift Supervision. Federal law also prohibits a savings and loan
holding company from acquiring more than 5% of a company engaged in activities
other than those authorized for savings and loan holding companies by federal
law; or acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating applications by holding companies to acquire
savings institutions, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
The OTS
is prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, except: (1) the approval of interstate supervisory acquisitions
by savings and loan holding companies, and (2) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the extent
to which they permit interstate savings and loan holding company
acquisitions.
If the
savings institution subsidiary of a savings and loan holding company fails to
meet the QTL test, the holding company must register with the Federal Reserve
Board as a bank holding company within one year of the savings institution’s
failure to so qualify.
Stock Holding
Company Subsidiary Regulation.
The OTS has adopted regulations governing
the two-tier mutual holding company form of organization and subsidiary stock
holding companies that are controlled by mutual holding companies. We have
adopted this form of organization, pursuant to which the Company is permitted to
engage in activities that are permitted for the MHC subject to the same
restrictions and conditions.
Waivers of
Dividends by Beneficial Savings Bank MHC.
OTS regulations require the MHC
to notify the OTS if it proposes to waive receipt of dividends from the Company.
The OTS reviews dividend waiver notices on a case-by-case basis, and, in
general, does not object to a waiver if: (1) the waiver would not be detrimental
to the safe and sound operation of the savings association; and (2) the mutual
holding company’s board of directors determines that such waiver is consistent
with such directors’ fiduciary duties to the mutual holding company’s members.
We anticipate that the MHC will waive dividends that the Company may pay, if
any.
Conversion of
Beneficial Savings Bank MHC to Stock Form.
OTS regulations permit the MHC
to convert from the mutual form of organization to the capital stock form of
organization. There can be no assurance when, if ever, a conversion transaction
will occur, and the board of directors has no current intention or plan to
undertake a conversion transaction. In a conversion transaction, a new holding
company would be formed as the successor to the Company, the MHC’s corporate
existence would end, and certain depositors of the Bank would receive the right
to subscribe for additional shares of the new holding company. In a conversion
transaction, each share of common stock held by stockholders other than the MHC
would be automatically converted into a number of shares of common stock of the
new holding company based on an exchange ratio determined at the time of
conversion that ensures that stockholders other than the MHC own the same
percentage of common stock in the new holding company as they owned in the
Company immediately before conversion. The total number of shares held by
stockholders other than the MHC after a conversion transaction would be
increased by any purchases by such stockholders in the stock offering conducted
as part of the conversion transaction.
Acquisition of
Control.
Under the federal Change in Bank Control Act, a notice must be
submitted to the OTS if any person (including a company), or group acting in
concert, seeks to acquire “control” of a savings and loan holding company. An
acquisition of “control” can occur upon the acquisition of 10% or more of the
voting stock of a savings and loan holding company or as otherwise defined by
the OTS. Under the Change in Bank Control Act, the OTS 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 so acquires control
would then be subject to regulation as a savings and loan holding
company.
Federal
Income Taxation
General.
We report our income on a fiscal 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. Our federal income tax returns have been either
audited or closed under the statute of limitations through tax year 2004. For
its 2008 fiscal year, the Bank’s maximum federal income tax rate was
35%.
The
Company and the Bank have entered into a tax allocation agreement. Because the
Company owns 100% of the issued and outstanding capital stock of the Bank, the
Company and the Bank are members of an affiliated group within the meaning of
Section 1504(a) of the Internal Revenue Code, of which group the Company is the
common parent corporation. As a result of this affiliation, the Bank may be
included in the filing of a consolidated federal income tax return with the
Company and, if a decision to file a consolidated tax return is made, the
parties agree 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 nonqualifying 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 our accumulated bad debt reserves would not be recaptured into
taxable income unless the Bank makes a “non-dividend distribution” to the
Company as described below.
Distributions.
If the Bank makes “non-dividend distributions” to the Company, the
distributions will be considered to have been made from the Bank’s unrecaptured
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 the
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 the Bank’s taxable income.
Non-dividend distributions include distributions in excess of the 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 the Bank’s current or accumulated
earnings and profits will not be so included in the 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 the Bank makes a non-dividend distribution to
the Company, 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.
The 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.
The Bank, as a savings bank conducting business in
Pennsylvania, is subject to tax under the Pennsylvania Mutual Thrift
Institutions Tax Act, as amended to include thrift institutions having capital
stock. Pursuant to the Mutual Thrift Institutions Tax, the tax rate is 11.5%.
The Mutual Thrift Institutions Tax is a tax upon net income, determined in
accordance with generally accepted accounting principles with certain
adjustments. The Mutual Thrift Institutions Tax, in computing income according
to generally accepted accounting principles, allows for the deduction of
interest earned on state, federal and local obligations, while disallowing a
portion of a thrift’s interest expense associated with tax-exempt income. Net
operating losses, if any, can be carried forward a maximum of three years for
Mutual Thrift Institutions Tax purposes.
Philadelphia
Taxation.
In addition, as a savings bank conducting business in
Philadelphia, the 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 2008 tax rate was 6.5% on net income
and .154% 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.
The Bank and BSB Union Corporation are subject to New Jersey’s
Corporation Business Tax at the rate of 9.0% on their taxable income, before net
operating loss deductions and special deductions for federal income tax
purposes. For this purpose, “taxable income” generally means federal taxable
income subject to certain adjustments (including addition of interest income on
state and municipal obligations).
Executive
Officers of the Registrant
The Board
of Directors annually elects the executive officers of MHC, the Company, and the
Bank, who serve at the Board’s discretion. Our executive officers
are:
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|
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Name
|
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Position
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Gerard
P. Cuddy
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President
and Chief Executive Officer of the MHC, the Company and the
Bank
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Joseph
F. Conners
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Executive
Vice President and Chief Financial Officer of the MHC, the Company and the
Bank
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Andrew
J. Miller
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Executive
Vice President and Chief Lending Officer of the MHC, the Company and the
Bank
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Robert
J. Bush
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Executive
Vice President of the MHC, the Company and the Bank
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Denise
Kassekert
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Executive
Vice President of the MHC, the Company and the
Bank
|
Below is
information regarding our executive officers who are not also directors. Each
executive officer has held his or her current position for at least the last
five years, unless otherwise stated. Ages presented are as of December 31,
2008.
Joseph F.
Conners
has
been Executive Vice President and Chief Financial Officer of Beneficial Bank
since 2000. He joined Beneficial Bank in 1994. Age 51.
Andrew J.
Miller
has
been Executive Vice President and Chief Lending Officer of Beneficial Bank since
2000. He joined Beneficial Bank in 1973. Age 53.
Robert J.
Bush
was a Senior Vice President of Beneficial Bank and President of
Beneficial Insurance Services LLC since our acquisition of Paul Hertel &
Co., Inc. in January 2005, and was promoted to Executive Vice President in June
2007. Prior to the acquisition, Mr. Bush served as President of Paul Hertel
& Co., Inc. Age 50.
Denise Kassekert
was a Senior Vice President of Community Banking of Beneficial Bank since
2007 and was promoted to Executive Vice President in July, 2008. Prior to
joining Beneficial, Ms. Kassekert served as Senior Vice President of Sun
National Bank in Vineland, NJ. Age 57.
A
continued deterioration in national and local economic conditions may negatively
impact our financial condition and results of operations.
We
currently are operating in a challenging and uncertain economic environment,
both nationally and in the local markets that we serve. Financial institutions
continue to be affected by sharp declines in financial and real estate values.
Continued declines in commercial and residential real estate values and home
sales, and an increase in the financial stress on borrowers stemming from an
uncertain economic environment, including rising unemployment, could have an
adverse effect on our borrowers or their customers, which could adversely impact
the repayment of the loans we have made. The overall deterioration in economic
conditions also could subject us to increased regulatory scrutiny. In addition,
a prolonged recession, or further deterioration in local economic conditions,
could result in an increase in loan delinquencies; an increase in problem assets
and foreclosures; and a decline in the value of the collateral for our loans.
Furthermore, a prolonged recession or further deterioration in local economic
conditions could drive the level of loan losses beyond the level we have
provided for in our loan loss allowance, which could necessitate our increasing
our provision for loans losses, which would reduce our earnings. Additionally,
the demand for our products and services could be reduced, which would adversely
impact our liquidity and the level of revenues we generate.
A
majority of our loans, including our commercial real estate and commercial loans
are secured by real estate or made to businesses in areas where our offices are
located. As a result of this concentration, a continued downturn in the local
economy could cause significant increases in nonperforming loans, which would
hurt our profits. The current recession has caused a decline in real estate
values in our market area. A continued decline in real estate values could cause
some of our mortgage loans to become inadequately collateralized, which would
expose us to a greater risk of loss. Additionally, a continued decline in real
estate values could adversely impact our portfolio of commercial real estate
loans and could result in a decline in the origination of such
loans.
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. 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.
Our
increased emphasis on commercial real estate loans and commercial business loans
may expose us to increased lending risks.
At
December 31, 2008, $787.7 million, or 32.60%, of our loan portfolio consisted of
commercial real estate loans, including loans for the acquisition and
development of property. Commercial real estate loans constitute a greater
percentage of our loan portfolio than any other loan category, including
one-to-four family loans, which totaled $508.1 million, or 20.99%, of our total
loan portfolio at December 31, 2008. In addition, at December 31, 2008, $320.6
million, or 13.25%, of our loan portfolio consisted of commercial business
loans. We have increased the percentage of commercial real estate and commercial
business loans in our loan portfolio in recent years and intend to continue to
emphasize these types of lending. 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 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.
At
December 31, 2008 we had a total of 149 land acquisition and development loans
totaling $222.3 million, which consist of 78 residential land acquisition and
development loans totaling $94.4 million and 71 commercial land acquisition and
development loans totaling $127.9 million.
A
substantial portion of our loan portfolio consists of consumer loans secured by
rapidly depreciable assets.
At
December 31, 2008, our loan portfolio included $142.1 million in automobile
loans, which represented 5.87% of our total loan portfolio at that date. In
addition, at December 31, 2008, other consumer loans totaled $293.1 million, or
12.11%, of our loan portfolio. Included in other consumer loans is $6.2 million
in loans secured by manufactured housing and mobile homes, $64.3 million in
loans secured by recreational vehicles and $55.8 million in loans secured by
boats. Consumer loans secured by rapidly depreciable assets such as automobiles,
recreational vehicles and boats, may subject us to greater risk of loss than
loans secured by real estate because any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan balance.
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, the Company faces 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.
Future
FDIC assessments will hurt our earnings.
In
February 2009, the FDIC adopted an interim final rule imposing a special
assessment on all insured institutions due to recent bank and savings
association failures. The emergency assessment amounts to 20 basis points of
insured deposits as of June 30, 2009. The assessment will be collected on
September 30, 2009. The special assessment will negatively impact the Company’s
earnings and the Company expects that non-interest expenses will increase
approximately $2.8 million in 2009 as compared to 2008. In addition, the interim
rule would also permit the FDIC to impose additional emergency special
assessments after June 30, 2009, of up to 10 basis points per
quarter if necessary to maintain public confidence in federal deposit
insurance or as a result of deterioration in the deposit insurance fund reserve
ratio due to institution failures. Any additional emergency special assessment
imposed by the FDIC will further hurt the Company’s earnings.
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 FDIC, as
insurer of our deposits, and by the Department as our primary regulator. The MHC
and the Company are subject to regulation and supervision by the OTS. 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 the Bank rather than for
holders of the Company 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.
Expenses
from operating as a public company and from new stock-based benefit plans will
continue to adversely affect our profitability.
Our
non-interest expenses are impacted as a result of the financial, accounting, and
legal and various other additional expenses usually associated with operating as
a public company. We also recognize additional annual employee compensation and
benefit expenses stemming from the shares that are purchased or granted to
employees and executives under the employee stock ownership plan and other new
benefit plans. These additional expenses adversely affect our profitability. We
recognize expenses for our employee stock ownership plan when shares are
committed to be released to participants’ accounts and will recognize expenses
for restricted stock awards and stock options over the vesting period of awards
made to recipients.
The
issuance of shares for benefit programs may dilute your ownership
interest.
In May
2008, the Company’s shareholders approved the Company’s 2008 Equity Incentive
Plan (“EIP”). The purpose of the EIP is to attract and retain personnel for
positions of substantial responsibility and to provide additional incentive to
certain officers, directors and employees of the Company and the Bank. In order
to fund grants of stock awards under the EIP, the Equity Incentive Plan Trust
(the “Trust”) purchased 1,612,386 shares of Company stock in the open market
during fiscal 2008. The EIP also authorizes the grant of options to officers,
directors and employees of the Company to acquire shares of common stock with an
exercise price equal to the fair value of the stock at the grant date. The
options generally become vested and exercisable at the rate of 20% a year over
five years. If the shares issued upon the exercise of stock options under the
equity incentive plan are issued from authorized but unissued stock, your
ownership interest in the shares issued to persons other than the MHC could be
diluted.
Our
low return on equity may negatively affect our stock price.
Net
income divided by average equity, known as “return on equity,” is a ratio many
investors use to compare the performance of a financial institution to its
peers. Our return on equity was reduced due to the large amount of capital that
we raised in our 2007 stock offering and to expenses we will incur in pursuing
our growth strategies, the costs of being a public company and added expenses
associated with our employee stock ownership plan and equity incentive plan.
Until we can increase our net interest income and non-interest income, we expect
our return on equity to be below the median return on equity for publicly traded
thrifts, which may negatively affect the value of our common stock.
Beneficial
Savings Bank MHC’s majority control of our common stock enables it to exercise
voting control over most matters put to a vote of stockholders and will prevent
stockholders from forcing a sale or a second-step conversion transaction they
may find advantageous.
The MHC
owns a majority of the Company’s common stock and, through its board of
directors, exercises voting control over most matters put to a vote of
stockholders. The members of the boards of the Company, the MHC and the Bank are
the same. As a federally chartered mutual holding company, the board of
directors of MHC must ensure that the interests of depositors of the Bank are
represented and considered in matters put to a vote of stockholders of the
Company. Therefore, the votes cast by the MHC may not be in your personal best
interests as a stockholder. For example, the MHC may exercise its voting control
to defeat a stockholder nominee for election to the board of directors of the
Company. The MHC’s ability to control the outcome of the election of the board
of directors of the Company restricts the ability of minority stockholders to
effect a change of management. In addition, stockholders will not be able to
force a merger or second-step conversion transaction without the consent of the
MHC, as such transactions require the approval of at least two-thirds of all
outstanding voting stock, which can only be achieved if the MHC voted to approve
such transactions. Some stockholders may desire a sale or merger transaction,
since stockholders typically receive a premium for their shares, or a
second-step conversion transaction, since fully converted institutions tend to
trade at higher multiples than mutual holding companies.
OTS
regulations and anti-takeover provisions in our charter restrict the
accumulation of our common stock, which may adversely affect our stock
price.
OTS
regulations provide that for a period of three years following the date of the
completion of the stock offering, no person, acting alone, together with
associates or in a group of persons acting in concert, will directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of our common stock without the prior written approval of the OTS. In addition,
the Company’s charter provides that, for a period of five years from the date of
the stock offering, no person, other than the MHC may acquire directly or
indirectly the beneficial ownership of more than 10% of any class of any equity
security of the Company. In the event a person acquires shares in violation of
this charter provision, all shares beneficially owned by such person in excess
of 10% will be considered “excess shares” and will not be counted as shares
entitled to vote or counted as voting shares in connection with any matters
submitted to the stockholders for a vote. These restrictions make it more
difficult and less attractive for stockholders to acquire a significant amount
of our common stock, which may adversely affect our stock price.