Did Philly's biggest bank discriminate?

Share values for Beneficial Mutual Bancorp, the largest bank still based in Philadelphia, fell 5% to $9.46 Thursday after Beneficial told investors "that it was notified during the first quarter of 2013 by the U.S. Department of Justice that the DOJ had initiated an investigation of the Bank under the Equal Credit Opportunity Act and the Fair Housing Act."

The Equal Credit law "prohibits credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or because you get public assistance."

The Fair Credit law prohibits "the following actions based on race, color, national origin, religion, sex, familial status or handicap (disability):  Refuse to make a mortgage loan... provide information regarding loans... impose different terms or conditions on a loan, such as different interest rates, points, or fees... discriminate in appraising property... refuse to purchase a loan or set different terms or conditions for purchasing a loan."

Says Beneficial: "The investigation results from a referral by the Federal Deposit Insurance Corporation, the Bank’s primary federal regulator, and focuses on the Bank’s origination of home equity and residential mortgage loans.

"The Bank is cooperating fully with the DOJ to resolve this matter. Because the investigation is in the early stages, we cannot predict the eventual outcome of the DOJ investigation or any impact it will have on our future operations or financial results.

"Until this investigation is completed, it is unlikely that Beneficial will be filing any regulatory applications related to strategic expansion or regarding a second step conversion, which the Board had been actively evaluating."

It would be ugly if Beneficial, the biggest bank in a multi-ethnic city, were found to have systematically turned down borrowers with good credit because of who they are. This is a bank that recently chose to raise its city profile by investing in a prominent new Market Street headquarters, in a city where African American elected officials like City Councilman W. Wilson Goode have gone after alleged bank discrimination by pushing restrictive local  laws and calls for boycotts. Beneficial boss Gerry Cuddy has said he wants to lend more but is having a tough time finding good borrowers in Philadelphia's weak economy. The bank has also had to write down bad loans from bank branches it acquired in New Jersey and elsewhere before the real estate market crashed.

Banks walk a narrow path between lending too much (and causing financial crashes like the 2008 blow-up, which resulted precisely from lending too much money to people who didn't pay it back) -- and lending too little, negating their social and economic purpose. Banks get in special trouble if they end up denying a lot of loans to minority groups or neighborhoods, echoing echo past "redlining" practices that, between the Great Depression and the 1970s, helped wreck large swaths of Philadelphia and other cities where mainstream lenders long refused to make home loans.

Discrimination findings would be especially ironic at Beneficial, a company famously founded to serve poor Irish immigrants who couldn't get loans from mainstream banks, and which still stresses its neighborhood roots with school-based loan programs and other small-scale promotions.

Of course the government these days seldom throws the book at banks for any alleged violation. More often banks are allowed to settle, deny they did anything wrong, and promise never to do it again, and spend extra to try to find more good borrowers in bad neighborhoods.

But the possibility Beneficial discriminated, in itself, is not why shares are down. It's the "strategic expansion" and "second step conversion" delays that spooked investors.

Beneficial is saying it is now unlikely to buy any more banks and grow further into the city's affluent suburbs -- or to reorganize its old-fashioned, partly customer-owned "mutual" corporate structure so it becomes more attractive as a pricier takeover target for bigger banks -- until the Feds are done with their probe.

"The effects of a U.S. Department of Justice investigation will impede the company's results," wrote analyst David C. Peppard in a report to clients of Janney Capital Markets, Philadelphia, this morning. He has stopped recommending customers buy the stock and cut his rating to "Neutral" until the government decides what it's going to do to the bank.

"Without knowing the specifics, we would guess that an investigation of this scope could take upward of a year to 18 months," wrote Frank Schiraldi at Sandler O'Neill + Partners, New York.

"We don't believe it is a high probability the investigation will result in any meaningful impact financially," Schiraldi added. In fact, the investigation could actually make it easier for Beneficial "to remain independent" by taking it out of the market until the economy improves, he wrote.

Still, Schiraldi, like Peppard, cut his recommendation on Beneficial shares to "Hold," from "Buy," since he expects investors looking for a Beneficial sale premium are pulling out, for now.