UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
x
|
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended
June
30, 2012
or
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ______________ to ______________
Commission file number:
0-13649
BERKSHIRE BANCORP INC.
(Exact Name of Registrant as Specified in
Its Charter)
Delaware
|
|
94-2563513
|
(State or Other Jurisdiction of
|
|
(I.R.S. Employer
|
Incorporation or Organization)
|
|
Identification No.)
|
|
|
|
160 Broadway, New York, New York
|
|
10038
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(Address of Principal Executive Offices)
|
|
(Zip Code)
|
Registrant's Telephone Number, Including Area Code:
(212)
791-5362
(Former Name, Former Address and Former
Fiscal Year, if Changed Since Last Report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (See the definitions
of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of
the Exchange Act.) (Check one):
Large accelerated filer
¨
|
Accelerated filer
¨
|
|
|
Non-accelerated filer
¨
|
Smaller reporting company
x
|
(Do not check if a smaller reporting company)
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes
¨
No
x
As of August 10, 2012, there were 14,416,198
outstanding shares of the issuer's Common Stock, $.10 par value.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
Forward-Looking Statements.
Statements in this Quarterly Report on Form 10-Q that are not based on historical fact may be "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believe", "may",
"will", "expect", "estimate", "anticipate", "continue" or similar terms identify
forward-looking statements. A wide variety of factors could cause the actual results and experiences of Berkshire Bancorp Inc.
(the "Company") to differ materially from the results expressed or implied by the Company's forward-looking statements.
Some of the risks and uncertainties that may affect operations, performance, results of the Company's business, the interest rate
sensitivity of its assets and liabilities, and the adequacy of its loan loss allowance, include, but are not limited to: (i) deterioration
in local, regional, national or global economic conditions which could result, among other things, in an increase in loan delinquencies,
a decrease in property values, or a change in the housing turnover rate; (ii) changes in market interest rates or changes in the
speed at which market interest rates change; (iii) changes in laws and regulations affecting the financial services industry; (iv)
changes in competition; (v) changes in consumer preferences, (vi) changes in banking technology; (vii) ability to maintain key
members of management, (viii) possible disruptions in the Company's operations at its banking facilities, (ix) cost of compliance
with new corporate governance requirements, rules and regulations, and other factors referred to in this Quarterly Report and in
Item 1A, "Risk Factors", of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Certain information
customarily disclosed by financial institutions, such as estimates of interest rate sensitivity and the adequacy of the loan loss
allowance, are inherently forward-looking statements because, by their nature, they represent attempts to estimate what will occur
in the future.
The Company cautions
readers not to place undue reliance upon any forward-looking statement contained in this Quarterly Report. Forward-looking statements
speak only as of the date they were made and the Company assumes no obligation to update or revise any such statements upon any
change in applicable circumstances.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
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Page No.
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PART I.
|
FINANCIAL INFORMATION
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|
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Item 1.
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Financial Statements
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|
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|
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Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 (unaudited)
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4
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|
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Consolidated Statements of Operations For The Three and Six Months Ended June 30, 2012 and 2011 (unaudited)
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5
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Consolidated Statements of Comprehensive Income For The Six Months Ended June 30, 2012 and 2011 (unaudited)
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6
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Consolidated Statement of Stockholders' Equity and Comprehensive Income (Loss) For The Six Months Ended June 30, 2012 and 2011 (unaudited)
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7
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|
|
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Consolidated Statements of Cash Flows For The Six Months Ended June 30, 2012 and 2011 (unaudited)
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8
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|
|
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Notes to Consolidated Financial Statements (unaudited)
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10
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|
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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38
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Item 3.
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Quantitative and Qualitative Disclosure About Market Risk
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59
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|
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Item 4.
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Controls and Procedures
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60
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|
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PART II
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OTHER INFORMATION
|
|
|
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Item 6.
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Exhibits
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61
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|
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Signature
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61
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Index of Exhibits
|
62
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
ASSETS
|
|
|
|
|
|
|
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Cash and due from banks
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|
$
|
7,270
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|
|
$
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12,105
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Interest bearing deposits
|
|
|
131,218
|
|
|
|
88,931
|
|
Total cash and cash equivalents
|
|
|
138,488
|
|
|
|
101,036
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
393,503
|
|
|
|
415,170
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Held-to-maturity, fair value of $286 in 2012 and $293 in 2011
|
|
|
286
|
|
|
|
298
|
|
Total investment securities
|
|
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393,789
|
|
|
|
415,468
|
|
Loans, net of unearned income
|
|
|
320,298
|
|
|
|
317,021
|
|
Less: allowance for loan losses
|
|
|
(17,718
|
)
|
|
|
(17,720
|
)
|
Net loans
|
|
|
302,580
|
|
|
|
299,301
|
|
Accrued interest receivable
|
|
|
2,979
|
|
|
|
3,224
|
|
Premises and equipment, net
|
|
|
7,321
|
|
|
|
7,474
|
|
Other assets
|
|
|
42,890
|
|
|
|
35,626
|
|
Total assets
|
|
$
|
888,047
|
|
|
$
|
862,129
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
75,717
|
|
|
$
|
74,073
|
|
Interest bearing
|
|
|
605,100
|
|
|
|
584,819
|
|
Total deposits
|
|
|
680,817
|
|
|
|
658,892
|
|
Securities sold under agreements to repurchase
|
|
|
50,000
|
|
|
|
50,000
|
|
Borrowings
|
|
|
3,794
|
|
|
|
6,139
|
|
Subordinated debt
|
|
|
22,681
|
|
|
|
22,681
|
|
Accrued interest payable
|
|
|
2,124
|
|
|
|
6,996
|
|
Other liabilities
|
|
|
2,178
|
|
|
|
1,893
|
|
Total liabilities
|
|
|
761,594
|
|
|
|
746,601
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock - $.01 Par value:
|
|
|
|
|
|
|
|
|
2,000,000 shares authorized - none issued
|
|
|
|
|
|
|
|
|
Common stock - $.10 par value
|
|
|
|
|
|
|
|
|
Authorized — 25,000,000 shares
|
|
|
|
|
|
|
|
|
Issued — 14,416,198 shares
|
|
|
|
|
|
|
|
|
Outstanding —
|
|
|
|
|
|
|
|
|
June 30, 2012, 14,416,198 shares
|
|
|
|
|
|
|
|
|
December 31, 2011, 14,443,183 shares
|
|
|
1,442
|
|
|
|
1,444
|
|
Additional paid-in capital
|
|
|
143,903
|
|
|
|
143,900
|
|
Accumulated Deficit
|
|
|
(13,819
|
)
|
|
|
(19,299
|
)
|
Accumulated other comprehensive loss, net
|
|
|
(5,073
|
)
|
|
|
(10,517
|
)
|
Total stockholders' equity
|
|
|
126,453
|
|
|
|
115,528
|
|
Total liabilities and stockholders' equity
|
|
$
|
888,047
|
|
|
$
|
862,129
|
|
The accompanying notes are an integral
part of these statements
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(unaudited)
|
|
For The
Three Months Ended
June 30,
|
|
|
For The
Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including related fees
|
|
$
|
4,882
|
|
|
$
|
5,498
|
|
|
$
|
9,787
|
|
|
$
|
11,177
|
|
Investment securities
|
|
|
2,300
|
|
|
|
3,480
|
|
|
|
4,737
|
|
|
|
6,661
|
|
Interest bearing deposits
|
|
|
125
|
|
|
|
73
|
|
|
|
184
|
|
|
|
134
|
|
Total interest income
|
|
|
7,307
|
|
|
|
9,051
|
|
|
|
14,708
|
|
|
|
17,972
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,174
|
|
|
|
1,543
|
|
|
|
2,400
|
|
|
|
3,109
|
|
Securities sold under agreements to repurchase
|
|
|
447
|
|
|
|
495
|
|
|
|
891
|
|
|
|
994
|
|
Interest expense on borrowings
|
|
|
144
|
|
|
|
250
|
|
|
|
341
|
|
|
|
512
|
|
Total interest expense
|
|
|
1,765
|
|
|
|
2,288
|
|
|
|
3,632
|
|
|
|
4,615
|
|
Net interest income
|
|
|
5,542
|
|
|
|
6,763
|
|
|
|
11,076
|
|
|
|
13,357
|
|
PROVISION FOR LOAN LOSSES
|
|
|
—
|
|
|
|
400
|
|
|
|
—
|
|
|
|
1,600
|
|
Net interest income after provision for loan losses
|
|
|
5,542
|
|
|
|
6,363
|
|
|
|
11,076
|
|
|
|
11,757
|
|
NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposits accounts
|
|
|
148
|
|
|
|
110
|
|
|
|
234
|
|
|
|
237
|
|
Investment securities (losses) gains
|
|
|
(112
|
)
|
|
|
(192
|
)
|
|
|
108
|
|
|
|
(137
|
)
|
Other income
|
|
|
85
|
|
|
|
43,067
|
|
|
|
302
|
|
|
|
43,164
|
|
Total non-interest income
|
|
|
121
|
|
|
|
42,985
|
|
|
|
644
|
|
|
|
43,264
|
|
NON-INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,380
|
|
|
|
2,399
|
|
|
|
4,860
|
|
|
|
4,834
|
|
Net occupancy expense
|
|
|
577
|
|
|
|
500
|
|
|
|
1,161
|
|
|
|
1,065
|
|
Equipment expense
|
|
|
88
|
|
|
|
78
|
|
|
|
166
|
|
|
|
160
|
|
FDIC assessment
|
|
|
300
|
|
|
|
268
|
|
|
|
600
|
|
|
|
652
|
|
Data processing expense
|
|
|
112
|
|
|
|
152
|
|
|
|
224
|
|
|
|
261
|
|
Other
|
|
|
696
|
|
|
|
911
|
|
|
|
1,332
|
|
|
|
1,747
|
|
Total non-interest expense
|
|
|
4,153
|
|
|
|
4,308
|
|
|
|
8,343
|
|
|
|
8,719
|
|
Income before provision for taxes
|
|
|
1,510
|
|
|
|
45,040
|
|
|
|
3,377
|
|
|
|
46,302
|
|
(Benefit) provision for income taxes
|
|
|
(1,834
|
)
|
|
|
2,311
|
|
|
|
(2,103
|
)
|
|
|
2,093
|
|
Net income
|
|
$
|
3,344
|
|
|
$
|
42,729
|
|
|
$
|
5,480
|
|
|
$
|
44,209
|
|
Dividends on preferred stock
|
|
|
—
|
|
|
|
1,200
|
|
|
|
—
|
|
|
|
2,400
|
|
Income allocated to common stockholders
|
|
$
|
3,344
|
|
|
$
|
41,529
|
|
|
$
|
5,480
|
|
|
$
|
41,809
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
5.89
|
|
|
$
|
0.38
|
|
|
$
|
5.93
|
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
5.89
|
|
|
$
|
0.38
|
|
|
$
|
5.93
|
|
Number of shares used to compute net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,416
|
|
|
|
7,054
|
|
|
|
14,416
|
|
|
|
7,054
|
|
Diluted
|
|
|
14,416
|
|
|
|
7,054
|
|
|
|
14,416
|
|
|
|
7,054
|
|
The accompanying notes are an integral
part of these statements.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(in thousands)
(unaudited)
|
|
For The Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Net earnings
|
|
$
|
5,480
|
|
|
$
|
44,209
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Unrealized gains on available-for-sale securities, net of taxes of $3,673 and $3,309,in 2012 and 2011, respectively
|
|
|
5,509
|
|
|
|
4,964
|
|
Reclassification adjustment for realized gains (losses) included in net earnings, net of taxes (benefits) of $43 and $55, in 2012 and 2011, respectively
|
|
|
65
|
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
10,924
|
|
|
$
|
49,255
|
|
The accompanying notes are an integral
part of these statements
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
and COMPREHENSIVE INCOME (LOSS)
For The Six Months Ended June 30, 2012
and 2011
(In Thousands)
(Unaudited)
|
|
Common
Shares
|
|
|
Preferred
Shares
|
|
|
Common
Stock
Par
Value
|
|
|
Preferred
Stock
Par
Value
|
|
|
Additional
paid-in
capital
|
|
|
Accumulated
other
comprehensive
(loss), net
|
|
|
Retained
Earnings/
(Accumulated
deficit)
|
|
|
Treasury
stock
|
|
|
Comprehensive
income
(loss)
|
|
|
Total
stockholders'
equity
|
|
Balance at December 31, 2010
|
|
|
7,698
|
|
|
|
60
|
|
|
$
|
770
|
|
|
$
|
1
|
|
|
$
|
150,985
|
|
|
$
|
(8,589
|
)
|
|
$
|
(65,123
|
)
|
|
$
|
(6,411
|
)
|
|
|
|
|
|
$
|
71,633
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,209
|
|
|
|
|
|
|
$
|
44,209
|
|
|
|
44,209
|
|
Other comprehensive income net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,046
|
|
|
|
|
|
|
|
|
|
|
|
5,046
|
|
|
|
5,046
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,255
|
|
|
|
|
|
Cash dividends - Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,400
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,400
|
)
|
Balance at June 30, 2011
|
|
|
7,698
|
|
|
|
60
|
|
|
$
|
770
|
|
|
$
|
1
|
|
|
$
|
150,985
|
|
|
$
|
(3,543
|
)
|
|
$
|
(23,314
|
)
|
|
$
|
(6,411
|
)
|
|
|
|
|
|
$
|
118,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
14,443
|
|
|
|
—
|
|
|
$
|
1,444
|
|
|
$
|
—
|
|
|
$
|
143,900
|
|
|
$
|
(10,517
|
)
|
|
$
|
(19,299
|
)
|
|
$
|
—
|
|
|
|
|
|
|
$
|
115,528
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,480
|
|
|
|
|
|
|
$
|
5,480
|
|
|
|
5,480
|
|
Other comprehensive income net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,444
|
|
|
|
|
|
|
|
|
|
|
|
5,444
|
|
|
|
5,444
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,924
|
|
|
|
|
|
Adjustment
|
|
|
(27
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Balance at June 30, 2012
|
|
|
14,416
|
|
|
|
—
|
|
|
$
|
1,442
|
|
|
$
|
—
|
|
|
$
|
143,903
|
|
|
$
|
(5,073
|
)
|
|
$
|
(13,819
|
)
|
|
$
|
—
|
|
|
|
|
|
|
$
|
126,453
|
|
The accompanying notes are an integral
part of these statements.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
For The Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,480
|
|
|
$
|
44,209
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Realized (gains) losses on investment securities
|
|
|
(108
|
)
|
|
|
137
|
|
Net amortization of premiums of investment securities
|
|
|
1,313
|
|
|
|
632
|
|
Depreciation and amortization
|
|
|
252
|
|
|
|
(211
|
)
|
Provision for loan losses
|
|
|
—
|
|
|
|
1,600
|
|
Decrease in accrued interest receivable
|
|
|
245
|
|
|
|
221
|
|
(Increase) decrease in other assets
|
|
|
(7,264
|
)
|
|
|
16,929
|
|
(Decrease) increase in accrued interest payable and other liabilities
|
|
|
(4,587
|
)
|
|
|
9,979
|
|
Net cash (used in) provided by operating activities
|
|
|
(4,669
|
)
|
|
|
73,496
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(228,191
|
)
|
|
|
(249,474
|
)
|
Sales, maturities and calls
|
|
|
254,097
|
|
|
|
188,664
|
|
Investment securities held to maturity
|
|
|
|
|
|
|
|
|
Maturities
|
|
|
12
|
|
|
|
9
|
|
Net (increase) decrease in loans
|
|
|
(3,279
|
)
|
|
|
19,607
|
|
(Acquisition) disposition of premises and equipment
|
|
|
(99
|
)
|
|
|
745
|
|
Net cash provided by (used in) investing activities
|
|
|
22,540
|
|
|
|
(40,449
|
)
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
For The Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net increase in non interest bearing deposits
|
|
|
1,644
|
|
|
|
9,427
|
|
Net increase (decrease) in interest bearing deposits
|
|
|
20,281
|
|
|
|
(5,344
|
)
|
Repayment of borrowings
|
|
|
(2,344
|
)
|
|
|
(2,237
|
)
|
Net cash provided by financing activities
|
|
|
19,581
|
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
37,452
|
|
|
|
34,893
|
|
Cash and cash equivalents at beginning of period
|
|
|
101,036
|
|
|
|
79,117
|
|
Cash and cash equivalents at end of period
|
|
$
|
138,488
|
|
|
$
|
114,010
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash used to pay interest
|
|
$
|
8,504
|
|
|
$
|
4,724
|
|
Cash used to pay income taxes, net of refunds
|
|
$
|
78
|
|
|
$
|
2,618
|
|
Schedule of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Dividends declared and not paid
|
|
$
|
—
|
|
|
$
|
2,400
|
|
The accompanying notes are an integral
part of these statements.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2012 and 2011
(unaudited)
Note 1. General
Berkshire Bancorp Inc.,
a Delaware corporation, is a bank holding company registered under the Bank Holding Company Act of 1956. References herein to "Berkshire",
the "Company" or "we" and similar pronouns, shall be deemed to refer to Berkshire Bancorp Inc. and its consolidated
subsidiaries unless the context otherwise requires. Berkshire's principal activity is the ownership and management of its indirect
wholly-owned subsidiary, The Berkshire Bank (the "Bank"), a New York State chartered commercial bank. The Bank is owned
through Berkshire's wholly-owned subsidiary, Greater American Finance Group, Inc. ("GAFG").
The accompanying financial
statements of Berkshire Bancorp Inc. and subsidiaries include the accounts of the parent company, Berkshire Bancorp Inc., and its
wholly-owned subsidiaries: The Berkshire Bank, GAFG and East 39, LLC.
We have prepared the
accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC")
for interim financial reporting. These consolidated financial statements, including the notes thereto, are unaudited and, in our
opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of
our consolidated balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods
presented are not necessarily indicative of the results that may be expected for the remaining quarters of fiscal 2012 due to a
variety of factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") have been omitted in accordance with the
rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and accompanying notes included in the Company's 2011 Annual Report on Form 10-K.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 2. Earnings (Loss) Per Share
Basic earnings (loss)
per common share is calculated by dividing income (loss) available to common stockholders by the weighted average common stock
outstanding, excluding stock options from the calculation. As of and for the three and six-month periods ended June 30, 2012 and
2011, there were no potential dilutive shares. The following tables present the Company's calculation of income per common share:
|
|
For The Three Months Ended
|
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
|
|
Income
(numerator)
|
|
|
Shares
(denominator)
|
|
|
Per
share
amount
|
|
|
Income
(numerator)
|
|
|
Shares
(denominator)
|
|
|
Per
share
amount
|
|
|
|
(In thousands, except per share data)
|
|
Basic earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,344
|
|
|
|
|
|
|
|
|
|
|
$
|
42,729
|
|
|
|
|
|
|
|
|
|
Dividends paid to preferred shareholders
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(1,200
|
)
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
|
3,344
|
|
|
|
14,416
|
|
|
$
|
0.23
|
|
|
|
41,529
|
|
|
|
7,054
|
|
|
$
|
5.89
|
|
|
|
For The Six Months Ended
|
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
|
|
Income
(numerator)
|
|
|
Shares
(denominator)
|
|
|
Per
share
amount
|
|
|
Income
(numerator)
|
|
|
Shares
(denominator)
|
|
|
Per
share
amount
|
|
|
|
(In thousands, except per share data)
|
|
Basic earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,480
|
|
|
|
|
|
|
|
|
|
|
$
|
44,209
|
|
|
|
|
|
|
|
|
|
Dividends paid to preferred shareholders
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(2,400
|
)
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
|
5,480
|
|
|
|
14,416
|
|
|
$
|
0.38
|
|
|
|
41,809
|
|
|
|
7,054
|
|
|
$
|
5.93
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 3. Loan Portfolio
The following table
sets forth information concerning the Company's loan portfolio by type of loan at the dates indicated:
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Amount
|
|
|
% of
Total
|
|
|
A
mount
|
|
|
% of
Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial and Industrial and Finance Leases
|
|
$
|
17,907
|
|
|
|
5.6
|
%
|
|
$
|
15,660
|
|
|
|
4.9
|
%
|
Secured by Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
102,412
|
|
|
|
31.9
|
|
|
|
104,854
|
|
|
|
33.0
|
|
Multi family
|
|
|
13,931
|
|
|
|
4.3
|
|
|
|
12,169
|
|
|
|
3.8
|
|
Commercial Real Estate and Construction
|
|
|
186,016
|
|
|
|
58.0
|
|
|
|
183,819
|
|
|
|
57.9
|
|
Consumer
|
|
|
672
|
|
|
|
0.2
|
|
|
|
1,240
|
|
|
|
0.4
|
|
Total loans
|
|
|
320,938
|
|
|
|
100.0
|
%
|
|
|
317,742
|
|
|
|
100.0
|
%
|
Deferred loan fees
|
|
|
(640
|
)
|
|
|
|
|
|
|
(721
|
)
|
|
|
|
|
Allowance for loan losses
|
|
|
(17,718
|
)
|
|
|
|
|
|
|
(17,720
|
)
|
|
|
|
|
Loans, net
|
|
$
|
302,580
|
|
|
|
|
|
|
$
|
299,301
|
|
|
|
|
|
The Bank had $520,000
and $647,000 of non-accrual loans as of June 30, 2012 and December 31, 2011, respectively, and no loans delinquent more than ninety
days and still accruing interest at both June 30, 2012 and December 31, 2011. The Bank did not foreclose on any loans during both
the six months ended June 30, 2012 and the year ended December 31, 2011. The Bank classified the non-accrual loans as impaired
loans at both June 30, 2012 and December 31, 2011. However, no specific reserves for impaired loans was made because the collateral
underlying the impaired loans was deemed to be sufficient to cover any loss in the event of a default. Therefore, the allowance
for loan loss is includable in the calculation of regulatory capital up to a maximum of 125% of risk-weighted assets or approximately
$5.0 million and $5.2 million at June 30, 2012 and December 31, 2011, respectively.
Average impaired loans
for the three and six months ended June 30, 2012 and 2011 were approximately $25.6 million and $25.6 million, respectively, and
$3.6 million and $3.8 million, respectively. Interest income that would have been recognized had these loans performed in accordance
with their contractual terms was approximately $9,000 and $17,000 for the three and six months ended June 30, 2012, respectively,
and $3,000 and $6,000 for the three and six months ended June 30, 2011, respectively.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 3. - (continued)
The following table
sets forth information concerning activity in the Company's allowance for loan losses for the indicated periods.
|
|
For The Three Months Ended
|
|
|
For The Six Months Ended
|
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
17,720
|
|
|
$
|
17,324
|
|
|
$
|
17,720
|
|
|
$
|
16,105
|
|
Provision charged to operations
|
|
|
—
|
|
|
|
400
|
|
|
|
—
|
|
|
|
1,600
|
|
Loans charged-off
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Recoveries
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
27
|
|
Balance at end of period
|
|
$
|
17,718
|
|
|
$
|
17,730
|
|
|
$
|
17,718
|
|
|
$
|
17,730
|
|
Allowance for Credit Losses and Recorded
Investment in Financing Receivables
The qualitative factors
are determined based on the various risk characteristics of each loan class. Relevant risk characteristics are as follows:
Commercial and industrial
loans
- Loans in this class are made to businesses. Generally these loans are secured by assets of the business and repayment
is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and/or business spending
will have an effect on the credit quality in this loan class.
Commercial real
estate
- Loans in this class include income-producing investment properties and owner-occupied real estate used for business
purposes. The underlying properties are generally located largely in our primary market area. The cash flows of the income producing
investment properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn,
will have an effect on credit quality. In the case of owner-occupied real estate used for business purposes a weakened economy
and resultant decreased consumer and/or business spending will have an adverse effect on credit quality.
Construction loans
- Loans in this class primarily include land loans to local individuals, contractors and developers for developing the land for
sale or for the purpose of making improvements thereon. Repayment is derived from sale of the lots/units including any pre-sold
units. Credit risk is affected by market conditions, time to sell at an adequate price and cost overruns. To a lesser extent this
class includes commercial development projects we finance which in most cases have an interest-only phase during construction and
then convert to permanent financing. Credit risk is affected by cost overruns, market conditions and the availability of permanent
financing, to the extent such permanent financing is not being provided by us.
Residential real
estate
- Loans in this class are made to and secured by owner-occupied residential real estate and repayment is dependent on
the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices,
will have an effect on the credit quality in this loan class. The Company generally does not originate loans with a loan-to-value
ratio greater than 80 percent and does not grant subprime loans.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 3. - (continued)
Multi-Family real
estate
- Loans in this class are made to and secured by owner-occupied residential real estate and repayment is dependent on
the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices,
will have an effect on the credit quality in this loan class. The Company generally does not originate loans with a loan-to-value
ratio greater than 80 percent and does not grant subprime loans.
Consumer loans
- Loans in this class may be either secured or unsecured and repayment is dependent on the credit quality of the individual borrower
and, if applicable, sale of the collateral securing the loan (such as automobile or other secured assets). Therefore the overall
health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan
class.
Financing Leases
- Loans in this class may be either secured or unsecured and repayment is dependent on the credit quality of the individual borrower
and, if applicable, sale of the collateral securing the loan (such as equipment or other secured assets). Therefore the overall
health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan
class.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 3. - (continued)
Allowance for Credit Losses and Recorded
Investment in Loans
For the Six Months Ended June 30, 2012
(In thousands)
|
|
Commercial &
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Construction
|
|
|
Multi Family
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Finance
Leases
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
950
|
|
|
$
|
7,857
|
|
|
$
|
609
|
|
|
$
|
411
|
|
|
$
|
6,490
|
|
|
$
|
53
|
|
|
$
|
126
|
|
|
$
|
1,224
|
|
|
$
|
17,720
|
|
Charge-offs
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
|
(275
|
)
|
|
|
(199
|
)
|
|
|
504
|
|
|
|
59
|
|
|
|
(408
|
)
|
|
|
(27
|
)
|
|
|
(63
|
)
|
|
|
409
|
|
|
|
0
|
|
Ending balance
|
|
$
|
673
|
|
|
$
|
7,658
|
|
|
$
|
1,113
|
|
|
$
|
470
|
|
|
$
|
6,082
|
|
|
$
|
26
|
|
|
$
|
63
|
|
|
$
|
1,633
|
|
|
$
|
17,718
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
673
|
|
|
$
|
7,658
|
|
|
$
|
1,113
|
|
|
$
|
470
|
|
|
$
|
6,082
|
|
|
$
|
26
|
|
|
$
|
63
|
|
|
$
|
1,633
|
|
|
$
|
17,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
15,348
|
|
|
$
|
165,396
|
|
|
$
|
20,620
|
|
|
$
|
13,931
|
|
|
$
|
102,412
|
|
|
$
|
672
|
|
|
$
|
2,559
|
|
|
$
|
0
|
|
|
$
|
320,938
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
0
|
|
|
$
|
13,371
|
|
|
$
|
9,750
|
|
|
$
|
0
|
|
|
$
|
2,348
|
|
|
$
|
14
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
25,483
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
15,348
|
|
|
$
|
152,025
|
|
|
$
|
10,870
|
|
|
$
|
13,931
|
|
|
$
|
100,064
|
|
|
$
|
658
|
|
|
$
|
2,559
|
|
|
$
|
0
|
|
|
$
|
295,455
|
|
The Company believes
the unallocated amount included in the allowance for credit losses is appropriate given the nature of the portfolio with the size
of individual loans and the current economy's impact on the real estate market. The Company will continue to closely monitor the
environment and loan portfolio and make adjustments when appropriate.
Among the loans reviewed
for impairment, $2.4 million of residential loans and $1.3 million of commercial real estate loans were identified as troubled
debt restructurings ("TDRs"). TDRs are the result of an economic concession being granted to borrowers experiencing financial
difficulties. Certain TDRs are classified as nonperforming at the time of restructuring and may only return to performing status
after considering the borrower's sustained repayment performance under the revised payment terms for a reasonable period, generally
six months. We evaluated all of the impaired loans by analyzing the collateral value and by evaluating the discounted cash flow.
Based on the nature of the modifications no impairment was required.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 3. - (continued)
Allowance for Credit Losses and Recorded
Investment in Loans
For the Year Ended December 31, 2011
(In thousands)
|
|
Commercial &
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Construction
|
|
|
Multi Family
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Finance
Leases
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
417
|
|
|
$
|
8,610
|
|
|
$
|
2,784
|
|
|
$
|
147
|
|
|
$
|
2,066
|
|
|
$
|
25
|
|
|
$
|
419
|
|
|
$
|
1,637
|
|
|
$
|
16,105
|
|
Charge-offs
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
Recoveries
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Provision
|
|
|
518
|
|
|
|
(753
|
)
|
|
|
(2,175
|
)
|
|
|
264
|
|
|
|
4,424
|
|
|
|
28
|
|
|
|
(293
|
)
|
|
|
(413
|
)
|
|
|
1,600
|
|
Ending balance
|
|
$
|
950
|
|
|
$
|
7,857
|
|
|
$
|
609
|
|
|
$
|
411
|
|
|
$
|
6,490
|
|
|
$
|
53
|
|
|
$
|
126
|
|
|
$
|
1,224
|
|
|
$
|
17,720
|
|
Ending balance: individually evaluated for
impairment
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Ending balance: collectively evaluated for
impairment
|
|
$
|
950
|
|
|
$
|
7,857
|
|
|
$
|
609
|
|
|
$
|
411
|
|
|
$
|
6,490
|
|
|
$
|
53
|
|
|
$
|
126
|
|
|
$
|
1,224
|
|
|
$
|
17,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
11,006
|
|
|
$
|
169,015
|
|
|
$
|
14,804
|
|
|
$
|
12,169
|
|
|
$
|
104,854
|
|
|
$
|
1,240
|
|
|
$
|
4,654
|
|
|
$
|
0
|
|
|
$
|
317,742
|
|
Ending balance: individually evaluated for
impairment
|
|
$
|
122
|
|
|
$
|
23,343
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,566
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
25,031
|
|
Ending balance: collectively evaluated for
impairment
|
|
$
|
10,884
|
|
|
$
|
145,672
|
|
|
$
|
14,804
|
|
|
$
|
12,169
|
|
|
$
|
103,288
|
|
|
$
|
1,240
|
|
|
$
|
4,654
|
|
|
$
|
0
|
|
|
$
|
292,711
|
|
The Company believes
the unallocated amount included in the allowance for credit losses is appropriate given the nature of the portfolio with the size
of individual loans and the current economy's impact on the real estate market. The Company will continue to closely monitor the
environment and loan portfolio and make adjustments when appropriate.
Among the loans reviewed
for impairment, $2.4 million of residential loans and $1.3 million of commercial real estate loans were identified as troubled
debt restructurings ("TDRs"). TDRs are the result of an economic concession being granted to borrowers experiencing financial
difficulties. Certain TDRs are classified as nonperforming at the time of restructuring and may only return to performing status
after considering the borrower's sustained repayment performance under the revised payment terms for a reasonable period, generally
six months. We evaluated all of the impaired loans by analyzing the collateral value and by evaluating the discounted cash flow.
Based on the nature of the modifications no impairment was required.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 3. - (continued)
Age Analysis of Past Due Loans
As of June 30, 2012
(In thousands)
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Greater
Than
90 Days
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Loans
|
|
|
Recorded
Loans >
90 Days and
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,348
|
|
|
$
|
15,348
|
|
|
$
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,620
|
|
|
|
20,620
|
|
|
|
—
|
|
Commercial real estate
|
|
|
12
|
|
|
|
16
|
|
|
|
—
|
|
|
|
28
|
|
|
|
165,368
|
|
|
|
165,396
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
467
|
|
|
|
467
|
|
|
|
—
|
|
Overdrafts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
205
|
|
|
|
205
|
|
|
|
—
|
|
Residential - prime
|
|
|
—
|
|
|
|
—
|
|
|
|
520
|
|
|
|
520
|
|
|
|
101,892
|
|
|
|
102,412
|
|
|
|
—
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,931
|
|
|
|
13,931
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,559
|
|
|
|
2,559
|
|
|
|
—
|
|
Total
|
|
$
|
12
|
|
|
$
|
16
|
|
|
$
|
520
|
|
|
$
|
548
|
|
|
$
|
320,390
|
|
|
$
|
320,938
|
|
|
$
|
—
|
|
Age Analysis of Past Due Loans
As of December 31, 2011
(In thousands)
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Greater
Than
90 Days
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Loans
|
|
|
Recorded
Loans >
90 Days and
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
122
|
|
|
$
|
133
|
|
|
$
|
10,873
|
|
|
$
|
11,006
|
|
|
$
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,804
|
|
|
|
14,804
|
|
|
|
—
|
|
Commercial real estate
|
|
|
21
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
|
|
168,994
|
|
|
|
169,015
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
778
|
|
|
|
778
|
|
|
|
—
|
|
Overdrafts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
462
|
|
|
|
462
|
|
|
|
—
|
|
Residential - prime
|
|
|
63
|
|
|
|
—
|
|
|
|
525
|
|
|
|
588
|
|
|
|
104,266
|
|
|
|
104,854
|
|
|
|
—
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,169
|
|
|
|
12,169
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,654
|
|
|
|
4,654
|
|
|
|
—
|
|
Total
|
|
$
|
95
|
|
|
$
|
—0
|
|
|
$
|
647
|
|
|
$
|
742
|
|
|
$
|
317,000
|
|
|
$
|
317,742
|
|
|
$
|
—
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 3. - (continued)
Impaired Loans
For the Six Months Ended June 30, 2012
(In thousands)
|
|
Recorded
Loan
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Loan
|
|
|
Interest
Income
Recognized
|
|
|
Interest
Income
Foregone
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Construction
|
|
|
9,750
|
|
|
|
9,750
|
|
|
|
—
|
|
|
|
9,786
|
|
|
|
336
|
|
|
|
—
|
|
Commercial real estate
|
|
|
13,371
|
|
|
|
13,371
|
|
|
|
—
|
|
|
|
13,483
|
|
|
|
449
|
|
|
|
—
|
|
Consumer
|
|
|
14
|
|
|
|
14
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
—
|
|
Residential - prime
|
|
|
2,348
|
|
|
|
2,348
|
|
|
|
—
|
|
|
|
2,362
|
|
|
|
43
|
|
|
|
17
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,483
|
|
|
$
|
25,483
|
|
|
$
|
—
|
|
|
$
|
25,646
|
|
|
$
|
828
|
|
|
$
|
17
|
|
Commercial
|
|
|
23,121
|
|
|
|
23,121
|
|
|
|
—
|
|
|
|
23,269
|
|
|
|
785
|
|
|
|
—
|
|
Consumer
|
|
|
14
|
|
|
|
14
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
2,348
|
|
|
|
2,348
|
|
|
|
—
|
|
|
|
2,362
|
|
|
|
43
|
|
|
|
17
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 3. - (continued)
Impaired Loans
For the Year Ended December 31, 2011
(In thousands)
|
|
Recorded
Loan
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Loan
|
|
|
Interest
Income
Recognized
|
|
|
Interest
Income
Foregone
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
122
|
|
|
$
|
122
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
23,343
|
|
|
|
23,343
|
|
|
|
—
|
|
|
|
18,898
|
|
|
|
2,021
|
|
|
|
3
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential - prime
|
|
|
1,566
|
|
|
|
1,566
|
|
|
|
—
|
|
|
|
1,235
|
|
|
|
56
|
|
|
|
54
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,031
|
|
|
$
|
25,031
|
|
|
$
|
—
|
|
|
$
|
20,164
|
|
|
$
|
2,077
|
|
|
$
|
70
|
|
Commercial
|
|
|
23,465
|
|
|
|
23,465
|
|
|
|
—
|
|
|
|
18,929
|
|
|
|
2,021
|
|
|
|
16
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
1,566
|
|
|
|
1,566
|
|
|
|
—
|
|
|
|
1,235
|
|
|
|
56
|
|
|
|
54
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 3. - (continued)
Loans on Nonaccrual Status
As of
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
|
|
(In thousands)
|
|
Commercial & industrial
|
|
$
|
—
|
|
|
$
|
122
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
520
|
|
|
|
525
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
520
|
|
|
$
|
647
|
|
Credit Exposure
Credit Risk Profile by Internally Assigned
Grades
For the Six Months Ended June 30, 2012
(In thousands)
|
|
Commercial
&
Industrial
|
|
|
Commercial
Real
Estate
Construction
|
|
|
Commercial
Real
Estate
Other
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
15,192
|
|
|
$
|
10,870
|
|
|
$
|
124,651
|
|
Watch
|
|
|
—
|
|
|
|
—
|
|
|
|
8,475
|
|
Special Mention
|
|
|
—
|
|
|
|
—
|
|
|
|
20,214
|
|
Substandard
|
|
|
156
|
|
|
|
9,750
|
|
|
|
12,056
|
|
Total
|
|
$
|
15,348
|
|
|
$
|
20,620
|
|
|
$
|
165,396
|
|
|
|
Residential
|
|
|
Residential
Multi
Family
|
|
Grade:
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
94,125
|
|
|
$
|
13,931
|
|
Watch
|
|
|
722
|
|
|
|
—
|
|
Special Mention
|
|
|
1,544
|
|
|
|
—
|
|
Substandard
|
|
|
6,021
|
|
|
|
—
|
|
Total
|
|
$
|
102,412
|
|
|
$
|
13,931
|
|
|
|
Consumer
Overdrafts
|
|
|
Consumer
Other
|
|
|
Finance
Leases
|
|
Performing
|
|
$
|
205
|
|
|
$
|
467
|
|
|
$
|
2,559
|
|
Nonperforming
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
205
|
|
|
$
|
467
|
|
|
$
|
2,559
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 3. - (continued)
Credit Exposure
Credit Risk Profile by Internally Assigned
Grades
For the Year Ended December 31, 2011
(In thousands)
|
|
Commercial
&
Industrial
|
|
|
Commercial
Real Estate
Construction
|
|
|
Commercial
Real Estate
Other
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
10,840
|
|
|
$
|
14,804
|
|
|
$
|
114,508
|
|
Watch
|
|
|
—
|
|
|
|
—
|
|
|
|
8,650
|
|
Special Mention
|
|
|
—
|
|
|
|
—
|
|
|
|
19,489
|
|
Substandard
|
|
|
166
|
|
|
|
—
|
|
|
|
26,368
|
|
Total
|
|
$
|
11,006
|
|
|
$
|
14,804
|
|
|
$
|
169,015
|
|
|
|
Residential
|
|
|
Residential
Multi Family
|
|
Grade:
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
96,475
|
|
|
$
|
12,169
|
|
Watch
|
|
|
731
|
|
|
|
—
|
|
Special Mention
|
|
|
1,561
|
|
|
|
—
|
|
Substandard
|
|
|
6,086
|
|
|
|
—
|
|
Total
|
|
$
|
104,853
|
|
|
$
|
12,169
|
|
|
|
Consumer
Overdrafts
|
|
|
Consumer
Other
|
|
|
Finance
Leases
|
|
Performing
|
|
$
|
463
|
|
|
$
|
778
|
|
|
$
|
4,654
|
|
Nonperforming
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
463
|
|
|
$
|
778
|
|
|
$
|
4,654
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 3. - (continued)
The Company utilizes
a grade risk rating system for commercial and industrial, commercial real estate and construction loans.
On a quarterly basis,
or more often if needed, the Company formally reviews the ratings on all classified commercial and industrial, commercial real
estate and construction loans. Semi-annually, the Company engages an independent third-party to review a significant portion of
loans within these segments. Management uses the results of these reviews as part of its periodic review process.
|
|
Loan Modifications
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012
|
|
Troubled Debt Restructuring
|
|
Number
of
Loans
|
|
|
Pre-Modification
Outstanding
Recorded Loans
|
|
|
Post-Modification
Outstanding
Recorded Loans
|
|
Residential - prime
|
|
|
8
|
|
|
$
|
2,362
|
|
|
$
|
2,362
|
|
Commercial Real Estate
|
|
|
4
|
|
|
|
1,314
|
|
|
|
1,314
|
|
|
|
|
12
|
|
|
$
|
3,676
|
|
|
$
|
3,676
|
|
|
|
As of December 31, 2011
|
|
Troubled Debt Restructuring
|
|
Number
of
Loans
|
|
|
Pre-Modification
Outstanding
Recorded Loans
|
|
|
Post-Modification
Outstanding
Recorded Loans
|
|
Residential
|
|
|
8
|
|
|
$
|
2,388
|
|
|
$
|
2,388
|
|
Commercial Real Estate
|
|
|
3
|
|
|
|
1,326
|
|
|
|
1,326
|
|
|
|
|
11
|
|
|
$
|
3,714
|
|
|
$
|
3,714
|
|
The loans restructured
during the six months ended June 30, 2012 were restructured by extending maturity dates or reducing interest rates. No loans were
restructured into two notes nor are there any commitments to extend additional funds on any TDRs. The commercial real estate loans
are individually evaluated for impairment with any loss recognized in the allowance for loan losses.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. Investment Securities
The following is a
summary of held to maturity investment securities as of the dates indicated:
|
|
June 30, 2012
|
|
|
|
Amortized Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
286
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
286
|
|
|
|
December 31, 2011
|
|
|
|
Amortized Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
298
|
|
|
$
|
1
|
|
|
$
|
(6
|
)
|
|
$
|
293
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. - (continued)
The following is a
summary of available-for-sale investment securities as of the dates indicated:
|
|
June 30, 2012
|
|
|
|
Amortized Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
84,988
|
|
|
$
|
37
|
|
|
$
|
(6
|
)
|
|
$
|
85,019
|
|
U.S. Government Agencies
|
|
|
123,606
|
|
|
|
722
|
|
|
|
(21
|
)
|
|
|
124,307
|
|
Mortgage-backed securities
|
|
|
120,950
|
|
|
|
2,836
|
|
|
|
(420
|
)
|
|
|
123,366
|
|
Corporate notes
|
|
|
10,124
|
|
|
|
90
|
|
|
|
(5
|
)
|
|
|
10,209
|
|
Municipal securities
|
|
|
2,706
|
|
|
|
263
|
|
|
|
(428
|
)
|
|
|
2,541
|
|
Auction rate securities
|
|
|
58,200
|
|
|
|
—
|
|
|
|
(12,087
|
)
|
|
|
46,113
|
|
Marketable equity securities and other
|
|
|
2,201
|
|
|
|
4
|
|
|
|
(257
|
)
|
|
|
1,948
|
|
Totals
|
|
$
|
402,775
|
|
|
$
|
3,952
|
|
|
$
|
(13,224
|
)
|
|
$
|
393,503
|
|
|
|
December 31, 2011
|
|
|
|
Amortized Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
80,072
|
|
|
$
|
141
|
|
|
$
|
—
|
|
|
$
|
80,213
|
|
U.S. Government Agencies
|
|
|
130,389
|
|
|
|
510
|
|
|
|
(33
|
)
|
|
|
130,866
|
|
Mortgage-backed securities
|
|
|
140,049
|
|
|
|
2,750
|
|
|
|
(440
|
)
|
|
|
142,359
|
|
Corporate notes
|
|
|
12,949
|
|
|
|
103
|
|
|
|
(49
|
)
|
|
|
13,003
|
|
Municipal securities
|
|
|
2,682
|
|
|
|
—
|
|
|
|
(687
|
)
|
|
|
1,995
|
|
Auction rate securities
|
|
|
65,700
|
|
|
|
—
|
|
|
|
(21,205
|
)
|
|
|
44,495
|
|
Marketable equity securities and other
|
|
|
2,284
|
|
|
|
—
|
|
|
|
(45
|
)
|
|
|
2,239
|
|
Totals
|
|
$
|
434,125
|
|
|
$
|
3,504
|
|
|
$
|
(22,459
|
)
|
|
$
|
415,170
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. - (continued)
Management uses a multi-factor
approach to determine whether each investment security in an unrealized loss position is other-than-temporarily impaired ("OTTI").
An unrealized loss position exists when the current fair value of an investment is less than its amortized cost basis. The valuation
factors utilized by management incorporate the ideas and concepts outlined in relevant accounting guidance. These include such
factors as:
|
|
*The length of time and the extent to which the market value has been less than cost;
|
|
|
*The financial condition of the issuer of the security as well as the near and long-term prospect
for the issuer;
|
|
|
*The rating of the security by a national rating agency;
|
|
|
*Historical volatility and movement in the fair market value of the security; and
|
|
|
*Adverse conditions relative to the security, issuer or industry.
|
The following table
shows the outstanding auction rate securities aggregated by type of underlying collateral at June 30, 2012 and December 31, 2011:
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Preferred Shares of Money Center Banks
|
|
$
|
58,200
|
|
|
$
|
46,113
|
|
|
$
|
63,700
|
|
|
$
|
42,495
|
|
Public Utility Debt and Equity Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,000
|
|
|
|
2,000
|
|
Totals
|
|
$
|
58,200
|
|
|
$
|
46,113
|
|
|
$
|
65,700
|
|
|
$
|
44,495
|
|
In accordance with
ASC 320-10, Investment - Debt and Equity Securities, Management's impairment analysis for the corporate and auction rate securities
that were in a loss position as of June 30, 2012 began with management's determination that it had the intent to hold these securities
for sufficient time to recover the cost basis. Management also concluded that it was unlikely that it would be required to sell
any of the securities before recovery of the cost basis.
At June 30, 2012 and
December 31, 2011, the amortized cost of our auction rate securities was $58.2 million and $65.7 million, respectively. The fair
value of the auction rate securities was $46.1 million and $44.5 million at June 30, 2012 and December 31, 2011, respectively.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. - (continued)
The fair value of the
auction rate securities is determined by management valuing the underlying security. The auction rate securities allow for conversion
to the underlying preferred security after two failed auctions. As of June 30, 2012, there have been more than two failed auctions
for all outstanding auction rate securities. It is our intention to continue to hold these securities and not convert to the underlying
preferred securities. We also perform a discounted cash flow analysis, but we considered the market value of the underlying preferred
shares to be more objective and relevant in pricing auction rate securities.
In determining whether
there is OTTI, management considers the factors noted above. The financial performance indicators we review include, but are not
limited to, net earnings, change in liquidity, and change in cash from operating activities, and, for money center banks, the regulatory
capital ratios and the allowance for loan losses to the nonperforming loans. Through June 30, 2012, the auction rate securities
have continued to pay interest at the highest rate as stipulated in the original prospectus. Currently, the interest rate paid
approximates the rate paid on money market deposit accounts.
At June 30, 2012, we
had four auction rate securities and three preferred stock issues with an aggregate fair market value of $27.6 million which were
below investment grade. At December 31, 2011, we had four auction rate securities with an aggregate fair market value of $15.3
million which were below investment grade.
Based upon our methodology
for determining the fair value of the auction rate securities, we concluded that as of June 30, 2012, the unrealized loss for the
auction rate securities is due to the market interest volatility, the continued illiquidity of the auction rate markets, and uncertainty
in the financial markets as there has not been a deterioration in the credit quality of the issuer of the auction rate securities
or a downgrade of additional auction rate securities from investment grade. It is not more likely than not that the Company would
be required to sell the auction rate securities prior to recovery of the unrealized loss, nor does the Company intend to sell the
security at the present time.
During the six months
ended June 30, 2012 and the year ended December 31, 2011, $2.0 million and zero auction rate securities, respectively, were redeemed.
There has been one
credit rating down grade on our auction rate securities subsequent to December 31, 2011.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. - (continued)
At June 30, 2012 and
December 31, 2011, the Company owned preferred and common stock (collectively "equity securities"), with an amortized
cost of $2.2 million and $2.3 million, respectively. The fair value of the equity securities was $1.9 million and $2.2 million
at June 30, 2012 and December 31, 2011, respectively.
The Company has investments
in certain debt securities that have unrealized losses or may be otherwise impaired, but an OTTI has not been recognized in the
financial statements as management believes the decline is due to the credit markets coupled with the interest rate environment.
The following table
indicates the length of time individual securities that we consider temporarily impaired have been in a continuous unrealized
loss position at June 30, 2012 (in thousands):
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
Description of Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
14,956
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,956
|
|
|
$
|
6
|
|
U.S. Government Agencies
|
|
|
9,968
|
|
|
|
20
|
|
|
|
26
|
|
|
|
1
|
|
|
|
9,994
|
|
|
|
21
|
|
Mortgage-backed securities
|
|
|
8,791
|
|
|
|
67
|
|
|
|
9,181
|
|
|
|
353
|
|
|
|
17,972
|
|
|
|
420
|
|
Corporate notes
|
|
|
1,774
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,774
|
|
|
|
5
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
46,113
|
|
|
|
12,087
|
|
|
|
46,113
|
|
|
|
12,087
|
|
Municipal securities
|
|
|
—
|
|
|
|
—
|
|
|
|
427
|
|
|
|
428
|
|
|
|
427
|
|
|
|
428
|
|
Subtotal, debt securities
|
|
|
35,489
|
|
|
|
98
|
|
|
|
55,747
|
|
|
|
12,869
|
|
|
|
91,236
|
|
|
|
12,967
|
|
Marketable equity securities and other
|
|
|
763
|
|
|
|
236
|
|
|
|
40
|
|
|
|
21
|
|
|
|
803
|
|
|
|
257
|
|
Total temporarily impaired securities
|
|
$
|
36,252
|
|
|
$
|
334
|
|
|
$
|
55,787
|
|
|
$
|
12,890
|
|
|
$
|
92,039
|
|
|
$
|
13,224
|
|
The Company had a total
of 46 debt securities with a fair market value of $91.2 million which were temporarily impaired at June 30, 2012. The total unrealized
loss on these securities was $13.0 million, which is attributable to the market interest volatility, the continued illiquidity
of the debt markets, and uncertainty in the financial markets. We also had 4 equity securities with a fair market value of $803,000
and an unrealized loss of $257,000. The remaining unrealized loss of $12.1 million is on 9 auction rate securities which have declined
in value due to auction failures beginning in February 2008. It is not more likely than not that we would sell these securities
before maturity, and we have the intent to hold all of these securities to maturity and will not be required to sell these securities,
due to our ratio of cash and cash equivalents of approximately 15.6% of total assets at June 30, 2012. Therefore, the unrealized
losses associated with these securities are not considered to be other than temporary.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. - (continued)
The amortized cost
and fair value of investment securities available for sale and held to maturity, by contractual maturity, at June 30, 2012 are
shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
June 30, 2012
|
|
|
|
Available for Sale
|
|
|
Held to Maturity
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(In thousands)
|
|
Due in one year or less
|
|
$
|
73,648
|
|
|
$
|
73,698
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Due after one through five years
|
|
|
42,223
|
|
|
|
42,474
|
|
|
|
—
|
|
|
|
—
|
|
Due after five through ten years
|
|
|
46,111
|
|
|
|
46,940
|
|
|
|
—
|
|
|
|
—
|
|
Due after ten years
|
|
|
180,392
|
|
|
|
182,330
|
|
|
|
286
|
|
|
|
286
|
|
Auction rate securities
|
|
|
58,200
|
|
|
|
46,113
|
|
|
|
—
|
|
|
|
—
|
|
Marketable equity securities and other
|
|
|
2,201
|
|
|
|
1,948
|
|
|
|
—
|
|
|
|
—
|
|
Totals
|
|
$
|
402,775
|
|
|
$
|
393,503
|
|
|
$
|
286
|
|
|
$
|
286
|
|
Gross gains realized
on the sales of investment securities for the six months ended June 30, 2012, and 2011 were approximately $785,000 and $4.1 million,
respectively. Gross losses realized for the six months ended June 30, 2012 and 2011 were approximately $677,000 and $4.3 million,
respectively.
At both June 30, 2012
and December 31, 2011, securities sold under agreements to repurchase with a book value of $50.0 million were outstanding. The
book value of the securities pledged for these repurchase agreements was $59.3 million and $55.6 million, respectively. As of June
30, 2012 and December 31, 2011, the Company did not own investment securities of any one issuer where the carrying value exceeded
10% of shareholders' equity.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 5. Deposits
The following table
summarizes the composition of the average balances of major deposit categories:
|
|
Six Months Ended
June 30, 2012
|
|
|
Twelve Months Ended
December 31, 2011
|
|
|
|
Average
Amount
|
|
|
Average
Yield
|
|
|
Average
Amount
|
|
|
Average
Yield
|
|
|
|
(Dollars in thousands)
|
|
Demand deposits
|
|
$
|
72,182
|
|
|
|
—
|
|
|
$
|
76,900
|
|
|
|
—
|
|
NOW and money market
|
|
|
26,515
|
|
|
|
0.23
|
%
|
|
|
25,688
|
|
|
|
0.36
|
%
|
Savings deposits
|
|
|
198,061
|
|
|
|
0.18
|
|
|
|
191,316
|
|
|
|
0.40
|
|
Time deposits
|
|
|
366,002
|
|
|
|
1.20
|
|
|
|
379,860
|
|
|
|
1.34
|
|
Total deposits
|
|
$
|
662,760
|
|
|
|
0.72
|
%
|
|
$
|
673,764
|
|
|
|
0.87
|
%
|
Note 6. Other Comprehensive Income (Loss)
The Company follows
the provisions of FASB ASC 220, Comprehensive Income, ("ASC 220") which includes net income as well as certain other
items which result in a change to equity during the period. The following table presents the components of comprehensive income
(loss):
|
|
For The Six Months Ended
|
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
|
|
Before tax
amount
|
|
|
Tax
(expense)
benefit
|
|
|
Net of tax
amount
|
|
|
Before tax
amount
|
|
|
Tax
(expense)
benefit
|
|
|
Net of tax
amount
|
|
|
|
(In thousands)
|
|
Unrealized gains (losses) on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period
|
|
$
|
9,182
|
|
|
$
|
(3,673
|
)
|
|
$
|
5,509
|
|
|
$
|
8,273
|
|
|
$
|
(3,309
|
)
|
|
$
|
4,964
|
|
Less reclassification adjustment for gains (losses) realized in net income
|
|
|
108
|
|
|
|
(43
|
)
|
|
|
65
|
|
|
|
(137
|
)
|
|
|
55
|
|
|
|
(82
|
)
|
Unrealized gain (loss) on investment securities
|
|
|
9,074
|
|
|
|
(3,630
|
)
|
|
|
5,444
|
|
|
|
8,410
|
|
|
|
(3,364
|
)
|
|
|
5,046
|
|
Other comprehensive income, net
|
|
$
|
9,074
|
|
|
$
|
(3,630
|
)
|
|
$
|
5,444
|
|
|
$
|
8,410
|
|
|
$
|
(3,364
|
)
|
|
$
|
5,046
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 7. Fair Value of Financial Instruments
FASB ASC 820, "Fair
Value Measurements and Disclosure", ("ASC 820") defines fair value, establishes a framework for measuring fair value,
and expands disclosure about fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid
to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. ASC 820
also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair
value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input significant to the
fair value measurement. There have been no material changes in valuation techniques as a result of the adoption of ASC 820.
Level 1 - Quoted prices (unadjusted) in
active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not
active for identical or similar assets or liabilities; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are
supported by little or no market activity and significant to the fair value of the assets or liabilities that are developed using
the reporting entities' estimates and assumptions, which reflect those that market participants would use.
The Company is required
to disclose the estimated fair value of its assets and liabilities considered to be financial instruments. For the Company, as
for most financial institutions, the majority of its assets and liabilities are considered financial instruments. However, many
such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction.
Also, it is the Company's general practice and intent to hold its financial instruments to maturity and not to engage in trading
or sales activities, except for certain loans. Therefore, the Company had to use significant estimations and present value calculations
to prepare this disclosure.
Changes in the assumptions
or methodologies used to estimate fair values may materially affect the estimated amounts. Also, there may not be reasonable comparability
between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack
of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.
Estimated fair values
have been determined by the Company using the best available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair values, and recorded book balances at June 30, 2012
and December 31, 2011 are outlined below.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 7. - (continued)
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
|
(In thousands)
|
|
Investment securities
|
|
$
|
393,789
|
|
|
$
|
393,788
|
|
|
$
|
415,468
|
|
|
$
|
415,463
|
|
Loans, net of unearned income
|
|
|
320,298
|
|
|
|
316,128
|
|
|
|
317,021
|
|
|
|
359,989
|
|
Time Deposits
|
|
|
366,232
|
|
|
|
367,919
|
|
|
|
369,259
|
|
|
|
371,266
|
|
Repurchase Agreements
|
|
|
50,000
|
|
|
|
51,717
|
|
|
|
50,000
|
|
|
|
52,432
|
|
Borrowings
|
|
|
3,794
|
|
|
|
3,843
|
|
|
|
6,139
|
|
|
|
6,256
|
|
Subordinated debt
|
|
|
22,681
|
|
|
|
22,681
|
|
|
|
22,681
|
|
|
|
22,681
|
|
For cash and cash equivalents,
the recorded book values of $138.5 million and $101.0 million at June 30, 2012 and December 31, 2011, respectively, approximates
fair value because of the relatively short term between the origination of the instrument and its expected realization. Therefore,
the Company believes the measurement of fair value of cash and cash equivalents is derived from Level 1 inputs.
The estimated fair values
of investment securities are based on quoted market prices (Level 1 inputs), if available. Estimated fair values are based on quoted
market prices of comparable instruments if quoted market prices are not available (Level 2 inputs). Estimated fair values are also
determined using unobservable inputs that are supported by little or no market values and significant assumptions and estimates
(Level 3 inputs).
The net loan portfolio
at June 30, 2012 and December 31, 2011 has been valued using a present value discounted cash flow where market prices were not
available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The Company
believes the fair value of portfolio loans is derived from Level 3 inputs.
The carrying value of
interest receivable and payable approximates fair value and is derived from Level 1 inputs.
The estimated fair values
of demand deposits (i.e. interest (checking) and non-interest bearing demand accounts, savings and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The fair
value of such deposits is derived from Level 2 inputs. The fair value of time deposits have been valued using net present value
discounted cash flow and is derived from Level 2 inputs.
The fair value of commitments
to extend credit is estimated based upon the amount of unamortized deferred loan commitment fees. The fair value of letters of
credit is based upon the amount of unearned fees plus the estimated cost to terminate letters of credit. Fair values of unrecognized
financial instruments, including commitments to extend credit, and the fair value of letters of credit are considered immaterial.
As such, no disclosures are made on the fair value of commitments.
The fair value of interest
rate caps, included in borrowings, are based upon the estimated amount the Company would receive or pay to terminate the contracts
or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties.
The aggregate fair value for the interest rate caps were zero at both June 30, 2012 and December 31, 2011.
The fair value of borrowings,
repurchase agreements and subordinated debt approximates the carrying value due to the re-pricing of the debt. The Company measures
the fair value of borrowings, repurchase agreements and subordinated debt using Level 2 inputs.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 7. - (continued)
Assets and Liabilities Measured at Fair
Value on a Recurring Basis
A description of the
valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the classification
of the instruments pursuant to the valuation hierarchy, are as follows:
Securities Available for Sale
When quoted market prices
are available in an active market, securities are classified within Level 1 of the fair value hierarchy. If quoted market prices
are not available or accessible, then fair values are estimated using pricing models, matrix pricing, or discounted cash flow models.
The fair values of securities estimated using pricing models or matrix pricing are generally classified within Level 2 of the fair
value hierarchy. When discounted cash flow models are used there is omitted activity or less transparency around inputs to the
valuation and securities are classified within Level 3 of the fair value hierarchy.
Level 1 securities generally
include equity securities valued based on quoted market prices in active markets. Level 2 instruments include U.S. government agency
obligations, state and municipal bonds, mortgage-backed securities, collateralized mortgage obligations and corporate bonds. For
these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements
consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading
levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among
other things. Level 3 securities available for sale consist of instruments that are not readily marketable and may only be redeemed
with the issuer at par such as Federal Home Loan Bank and Federal Reserve Bank stock. These securities are valued at par value.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 7. - (continued)
Assets measured at fair
value at June 30, 2012 and at December 31, 2011 are summarized below.
|
|
At June 30, 2012
Fair Value Measurement Using
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance
June 30,
2012
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,483
|
|
|
$
|
25,483
|
|
Investment securities available for sale: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
85,019
|
|
|
|
—
|
|
|
|
—
|
|
|
|
85,019
|
|
U.S. Government Agencies
|
|
|
—
|
|
|
|
124,307
|
|
|
|
—
|
|
|
|
124,307
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
123,366
|
|
|
|
—
|
|
|
|
123,366
|
|
Corporate notes
|
|
|
10,209
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,209
|
|
Municipal securities
|
|
|
2,541
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,541
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
46,113
|
|
|
|
46,113
|
|
Marketable equity securities and other
|
|
|
66
|
|
|
|
1,882
|
|
|
|
—
|
|
|
|
1,948
|
|
Total Investment securities available for sale
|
|
|
97,835
|
|
|
|
249,555
|
|
|
|
46,113
|
|
|
|
393,503
|
|
Total assets
|
|
$
|
97,835
|
|
|
$
|
249,555
|
|
|
$
|
71,596
|
|
|
$
|
418,986
|
|
(1) Non-recurring basis
(2) Recurring basis
The above table includes
$9.3 million in net unrealized losses on the Company's available for sale securities. The Company has reviewed its investment portfolio
at June 30, 2012, and determined that the unrealized losses are temporary.
The fair value of the
derivative is zero and valued as a Level 3 input. Further disclosures are not included because they were not deemed material.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 7. - (continued)
|
|
At December, 31, 2011
Fair Value Measurement Using
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance
December 31,
2011
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,031
|
|
|
$
|
25,031
|
|
Investment securities available for sale: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
80,213
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80,213
|
|
U.S. Government Agencies
|
|
|
—
|
|
|
|
130,866
|
|
|
|
—
|
|
|
|
130,866
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
142,359
|
|
|
|
—
|
|
|
|
142,359
|
|
Corporate notes
|
|
|
13,003
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,003
|
|
Municipal securities
|
|
|
1,995
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,995
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
44,495
|
|
|
|
44,495
|
|
Marketable equity securities and other
|
|
|
803
|
|
|
|
1,436
|
|
|
|
—
|
|
|
|
2,239
|
|
Total Investment securities available for sale
|
|
|
96,014
|
|
|
|
274,661
|
|
|
|
44,495
|
|
|
|
415,170
|
|
Total assets
|
|
$
|
96,014
|
|
|
$
|
274,661
|
|
|
$
|
69,526
|
|
|
$
|
440,201
|
|
(1) Non-recurring basis
(2) Recurring basis
The above table includes
$19.0 million in net unrealized losses on the Company's available for sale securities. The Company has reviewed its investment
portfolio at December 31, 2011, and determined that the unrealized losses are temporary.
The fair value of the
derivative is zero and valued as a Level 3 input. Further disclosures are not included because they were not deemed material.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 7. - (continued)
Assets and Liabilities Measured at Fair
Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The following table
presents a reconciliation for assets measured at fair value on a recurring basis for which the Company has utilized significant
unobservable inputs (Level 3).
(Dollars in thousands)
|
|
Investment
Securities
Available
for Sale
|
|
|
|
|
|
Balance, January 1, 2012
|
|
$
|
44,495
|
|
Total gains/losses (realized/unrealized)
|
|
|
|
|
Included in earnings
|
|
|
—
|
|
Included in other comprehensive income
|
|
|
9,118
|
|
Purchases
|
|
|
—
|
|
Sales
|
|
|
(7,500
|
)
|
Issuances
|
|
|
—
|
|
Settlements
|
|
|
—
|
|
Redemptions
|
|
|
—
|
|
Interest
|
|
|
—
|
|
Other than temporary impairment expense
|
|
|
—
|
|
Capital deductions for operating expenses
|
|
|
—
|
|
Balance, June 30, 2012
|
|
$
|
46,113
|
|
|
|
|
|
|
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2012
|
|
$
|
—
|
|
Note 8. New Accounting Pronouncements
In April 2011, the FASB
issued ASU No. 2011-03, which amends the accounting for repurchase agreements and other agreements that both entitle and obligate
a transferor to repurchase or redeem financial assets before their maturity. The amendments remove from the assessment of effective
control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially
the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related
to that criterion. ASU No. 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011.
Adoption of this update did not have a material effect on the Company's results of operations or financial condition.
In May 2011, the FASB
issued ASU No. 2011-04, which results in common fair value measurement and disclosure requirements for US GAAP and International
Financial Reporting Standards. ASU No. 2011-04 is effective for the first interim or annual period beginning after December 15,
2011. Adoption of this update did not have a material effect on the Company's results of operations or financial condition but
resulted in additional disclosures.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 8. - (continued)
In June 2011, the FASB
issued ASU No. 2011-05 in order to improve the comparability, consistency and transparency of financial reporting and to increase
the prominence of items reported in other comprehensive income. This standard eliminates the option to present components of other
comprehensive income as part of the statement of changes in stockholders' equity. This update requires all nonowner changes in
stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive
statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively
by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the
total of comprehensive income. This update is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. Adoption of this update
did not have a material effect on the Company's results of operations or financial condition. See the Consolidated Statements of
Comprehensive Income.
In December 2011, the
FASB issued ASU No. 2011-11, which amends Topic 210, "Balance Sheet," to require an entity to disclose both gross and
net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements
and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial
position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods
beginning on January 1, 2013, and is not expected to have a material effect on the Company's results of operations or financial
condition.
Note 9. Subsequent Events
On April 2, 2012, we
received a notice from the Federal Reserve Bank of New York stating that they do not object to the Company's request to redeem
$15.5 million of Floating Rate Junior Subordinated Debt Securities Due 2034. Accordingly, on July 23, 2012, we redeemed said security.
We evaluated subsequent
events under ASC Topic 855, Subsequent Events. We did not identify any items which would require disclosure in or adjustment to
the interim financial statements except as disclosed in Form 10-Q as of and for the period ended June 30, 2012.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Internal Control Over Financial Reporting
The objective of the
Company's Internal Control Program is to allow the Bank and management to comply with Part 363 of the FDIC's regulations ("FDICIA")
and to allow the Company to comply with Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 ("SOX"). In November 2005,
the FDIC amended Part 363 of its regulations by raising the asset-size threshold from $500 million to $1 billion for internal control
assessments by management and external auditors. The final rule was effective December 28, 2005.
Section 302 of SOX requires
the CEOs and CFOs of the Company to, among other matters, (i) certify that the annual and quarterly reports filed with the Securities
and Exchange Commission are accurate and (ii) acknowledge that they are responsible for establishing, maintaining and periodically
evaluating the effectiveness of the disclosure controls and procedures. Section 404 of SOX requires management to (i) report on
internal control over financial reporting, (ii) assess the effectiveness of such internal controls, and (iii) obtain an external
auditor's report on management's assessment of its internal control.
The Company is not an
accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. On July 21, 2010, President Obama signed the
Dodd-Frank Act into law. The Dodd-Frank Act includes a provision which permanently exempts non-accelerated filers, including the
Company, from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls provided
in Section 404(b) of SOX. Disclosure of management's attestations on internal control over financial reporting under Section 404(a)
of SOX is still required. See the Section of this Report entitled "Business - The Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010."
The Committee of Sponsoring
Organizations (COSO) methodology may be used to document and test the internal controls pertaining to the accuracy of Company issued
financial statements and related disclosures. COSO requires a review of the control environment (including anti-fraud and audit
committee effectiveness), risk assessment, control activities, information and communication, and ongoing monitoring.
ITEM 2 -
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
Executive Summary
We are a Delaware corporation
organized in March 1979, and a bank holding company registered under the Bank Holding Company Act of 1956. We acquired The Berkshire
Bank (the "Bank"), our indirect wholly-owned subsidiary in March 1999. The Bank was organized in 1987 as a New York State
chartered commercial bank. Our principal activity is the ownership and management of the Bank. Our activities are primarily funded
by cash on hand, rental income, income from our portfolio of investment securities and dividends, if any, received from the Bank.
Our common stock is traded on the NASDAQ Stock Market under the symbol "BERK."
The Bank's principal
business consists of gathering deposits from the general public and investing those deposits together with funds generated from
ongoing operations and borrowings, primarily in residential and commercial loans, debt obligations issued by the U.S. Government
and its agencies, debt obligations of business corporations, and mortgage-backed securities. The Bank operates from seven deposit-taking
offices in New York City, four deposit-taking offices in Orange and Sullivan Counties, New York, and one deposit-taking office
in Teaneck, New Jersey. The Bank's revenues are derived principally from interest on loans, and interest and dividends on investments
in the securities portfolio. The Bank's primary regulator at the state level is by the New York Superintendent of Banks and the
New York Banking Board, while at the federal level its primary regulator is the Federal Deposit Insurance Corporation (the "FDIC").
Deposits are insured to the maximum allowable amount by the FDIC. The Bank is a member of the Federal Home Loan Bank system.
Our results of operations
depend primarily on net interest income, which is the difference between the income earned on our interest-earning assets and the
cost of our interest-bearing liabilities. Net interest income is the result of our interest rate margin, which is the difference
between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for
the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities.
We also generate non-interest income from loan fees, service charges on deposit accounts, mortgage servicing fees, and other fees,
dividends on Federal Home Loan Bank of New York ("FHLB-NY") stock and net gains and losses on sales of securities and
loans. Our operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general
and administrative expenses and income tax expense. Our results of operations also can be significantly affected by our periodic
provision for loan losses and specific provision for losses on loans.
On July 21, 2010 the
Dodd-Frank Act was signed into law by President Obama. The Dodd-Frank Act represents a comprehensive overhaul of the financial
services industry within the United States, establishes a new federal Bureau, and will require the Bureau and other federal agencies
to implement many new and significant rules and regulations. At this time it is difficult to predict the extent to which the Dodd-Frank
Act or the resulting rules and regulations will impact our business. Compliance with these new laws and regulations will likely
result in additional costs, and may adversely impact our results of operations, financial condition or liquidity.
Our investment policy,
approved by the Board of Directors, is designed primarily to manage the interest rate sensitivity of our overall assets and liabilities,
to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and
to provide and maintain liquidity. In establishing our investment strategies, we consider our business and growth strategies, the
economic environment, our interest rate risk exposure, our interest rate sensitivity "gap" position, the types of securities
to be held, and other factors. We classify our investment securities as available for sale.
We did not record a
provision for loan losses during the three and six- month periods ended June 30, 2012, compared to a provision for loan losses
of $400,000 and $1.6 million recorded during the three and six-month periods ended June 30, 2011, respectively. We deemed this
appropriate as a result of the regular quarterly analysis of the allowance for loan losses. The regular quarterly analysis is based
on management's evaluation of the risk inherent in the various components of the loan portfolio and other factors, including historical
loan loss experience (which is updated at least annually), changes in the composition and volume of the portfolio, collection policies
and experience, trends in the volume of non-accrual loans and regional and national economic conditions. See "Provision for
Loan Losses" below in this Item 2 for further discussion of the allowance for loan losses.
Net income, before benefit
for income taxes, for the three and six months ended June 30, 2012 was $1.5 million and $3.4 million, respectively, compared to
net income, before dividends on our Series A Preferred Stock and before the provision for income taxes, for the three and six months
ended June 30, 2011 of $45.0 million and $46.3 million, respectively. Net income for the three and six months ended June 30, 2011
includes a one time gain of $42.5 million. No Series A Preferred Stock was outstanding during the three and six months ended June
30, 2012. Net income allocated to common stockholders, after the benefit for income taxes, was $3.3 million and $5.5 million for
the three and six months ended June 30, 2012, respectively, compared to net income allocated to common stockholders, including
dividends on our Series A Preferred Stock and the provision for income taxes, of $41.5 million and $41.8 million for the three
and six months ended June 30, 2011, respectively.
On May 16, 2011, we
entered into a settlement agreement with the selling financial institution of the auction rate securities in the Bank's investment
portfolio. Pursuant to the agreement, in settlement of all claims made by the Bank, the institution paid to the Bank the sum of
$42.5 million, which is recorded in other income on the Statement of Operations.
The following discussion
and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of
Berkshire Bancorp Inc. and subsidiaries. All references to earnings per share, unless stated otherwise, refer to earnings per diluted
share. References to Notes herein are references to the "Notes to Consolidated Financial Statements" of the Company located
in Item 1 herein.
Critical Accounting Policies, Judgments
and Estimates
The accounting and reporting
policies of the Company conform with accounting principles generally accepted in the United States of America ("GAAP")
and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates.
The Company considers
that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than any of its other
significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level
believed by management to be sufficient to absorb estimated credit losses. Management's determination of the adequacy of the allowance
is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective
as it requires material estimates, including, among others, expected default probabilities, loss given default, the amounts and
timing of expected future cash flows on impaired loans, mortgages, and general amounts for historical loss experience. The process
also considers economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio. All of these factors
may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions
for loan losses may be required that would adversely impact earnings in future periods. See "Provision for Loan Losses"
below in this Item 2 for further discussion of the allowance for loan losses.
The Company recognizes
deferred tax assets and liabilities for the future tax effects of temporary differences, net operating loss carryforwards and tax
credits. Deferred tax assets are subject to management's judgment based upon available evidence that future realization is more
likely than not. If management determines that the Company may be unable to realize all or part of net deferred tax assets in the
future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the
expected realizable amount.
The Company conducts
a periodic review and evaluation of its securities portfolio, taking into account the severity and duration of each unrealized
loss, as well as management's intent and ability to hold the security until the unrealized loss is substantially eliminated, in
order to determine if a decline in market value of any security below its carrying value is either temporary or other than temporary. Unrealized
losses on held-to-maturity securities that are deemed temporary are disclosed but not recognized. Unrealized losses
on debt or equity securities available-for-sale that are deemed temporary are excluded from net income and reported net of deferred
taxes as other comprehensive income or loss. All unrealized losses that are deemed other than temporary on either available-for-sale
or held-to-maturity securities are recognized immediately as a reduction of the carrying amount of the security, with a charge
recorded in the Company's consolidated statements of operations.
The following table
presents the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed in both dollars and rates.
|
|
For The Three Months Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Average
Yield/Rate
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Average
Yield/Rate
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
322,629
|
|
|
$
|
4,882
|
|
|
|
6.05
|
%
|
|
$
|
346,118
|
|
|
$
|
5,498
|
|
|
|
6.35
|
%
|
Investment securities
|
|
|
419,466
|
|
|
|
2,300
|
|
|
|
2.19
|
|
|
|
387,685
|
|
|
|
3,480
|
|
|
|
3.59
|
|
Other (2)(5)
|
|
|
108,948
|
|
|
|
125
|
|
|
|
0.46
|
|
|
|
96,914
|
|
|
|
73
|
|
|
|
0.30
|
|
Total interest-earning assets
|
|
|
851,043
|
|
|
|
7,307
|
|
|
|
3.43
|
|
|
|
830,717
|
|
|
|
9,051
|
|
|
|
4.36
|
|
Noninterest-earning assets
|
|
|
26,366
|
|
|
|
|
|
|
|
|
|
|
|
31,032
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
877,409
|
|
|
|
|
|
|
|
|
|
|
$
|
861,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
232,445
|
|
|
|
97
|
|
|
|
0.17
|
%
|
|
|
212,469
|
|
|
|
238
|
|
|
|
0.45
|
%
|
Time deposits
|
|
|
365,344
|
|
|
|
1,077
|
|
|
|
1.18
|
|
|
|
386,614
|
|
|
|
1,305
|
|
|
|
1.35
|
|
Other borrowings
|
|
|
76,973
|
|
|
|
591
|
|
|
|
3.07
|
|
|
|
81,582
|
|
|
|
745
|
|
|
|
3.65
|
|
Total interest-bearing liabilities
|
|
|
674,762
|
|
|
|
1,765
|
|
|
|
1.05
|
|
|
|
680,665
|
|
|
|
2,288
|
|
|
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
72,897
|
|
|
|
|
|
|
|
|
|
|
|
80,293
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
4,727
|
|
|
|
|
|
|
|
|
|
|
|
6,241
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (5)
|
|
|
125,023
|
|
|
|
|
|
|
|
|
|
|
|
94,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
877,409
|
|
|
|
|
|
|
|
|
|
|
$
|
861,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
5,542
|
|
|
|
|
|
|
|
|
|
|
|
6,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate spread (3)
|
|
|
|
|
|
|
|
|
|
|
2.38
|
%
|
|
|
|
|
|
|
|
|
|
|
3.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
2.60
|
%
|
|
|
|
|
|
|
|
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average interest bearing liabilities
|
|
|
1.26
|
|
|
|
|
|
|
|
|
|
|
|
1.22
|
|
|
|
|
|
|
|
|
|
______________________
(1)Includes nonaccrual loans.
(2)Includes interest-bearing deposits, federal
funds sold and securities purchased under agreements to resell.
(3)Interest-rate spread represents the difference
between the average yield on interest-earning assets and the average cost of interest bearing liabilities.
(4)Net interest margin is net interest income
as a percentage of average interest-earning assets.
(5)Average balances are daily average balances
except for the parent company which have been calculated on a monthly basis.
|
|
For The Six Months Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Average
Yield/Rate
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Average
Yield/Rate
|
|
|
|
(Dollars in Thousands)
|
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
320,569
|
|
|
$
|
9,787
|
|
|
|
6.11
|
%
|
|
$
|
349,474
|
|
|
$
|
11,177
|
|
|
|
6.40
|
%
|
Investment securities
|
|
|
415,576
|
|
|
|
4,737
|
|
|
|
2.28
|
|
|
|
376,623
|
|
|
|
6,661
|
|
|
|
3.54
|
|
Other (2)(5)
|
|
|
103,644
|
|
|
|
184
|
|
|
|
0.71
|
|
|
|
86,699
|
|
|
|
134
|
|
|
|
0.31
|
|
Total interest-earning assets
|
|
|
839,789
|
|
|
|
14,708
|
|
|
|
3.50
|
|
|
|
812,796
|
|
|
|
17,972
|
|
|
|
4.42
|
|
Noninterest-earning assets
|
|
|
28,391
|
|
|
|
|
|
|
|
|
|
|
|
32,851
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
868,180
|
|
|
|
|
|
|
|
|
|
|
$
|
845,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
224,576
|
|
|
|
207
|
|
|
|
0.18
|
%
|
|
|
210,335
|
|
|
|
500
|
|
|
|
0.48
|
%
|
Time deposits
|
|
|
366,002
|
|
|
|
2,193
|
|
|
|
1.20
|
|
|
|
385,957
|
|
|
|
2,609
|
|
|
|
1.35
|
|
Other borrowings
|
|
|
77,557
|
|
|
|
1,232
|
|
|
|
3.18
|
|
|
|
82,141
|
|
|
|
1,506
|
|
|
|
3.67
|
|
Total interest-bearing liabilities
|
|
|
668,135
|
|
|
|
3,632
|
|
|
|
1.09
|
|
|
|
678,433
|
|
|
|
4,615
|
|
|
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
72,182
|
|
|
|
|
|
|
|
|
|
|
|
78,324
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
4,923
|
|
|
|
|
|
|
|
|
|
|
|
5,643
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (5)
|
|
|
122,940
|
|
|
|
|
|
|
|
|
|
|
|
83,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
868,180
|
|
|
|
|
|
|
|
|
|
|
$
|
845,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
11,076
|
|
|
|
|
|
|
|
|
|
|
|
13,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate spread (3)
|
|
|
|
|
|
|
|
|
|
|
2.41
|
%
|
|
|
|
|
|
|
|
|
|
|
3.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
2.64
|
%
|
|
|
|
|
|
|
|
|
|
|
3.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average interest bearing liabilities
|
|
|
1.26
|
|
|
|
|
|
|
|
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
______________________
(1)Includes nonaccrual loans.
(2)Includes interest-bearing deposits, federal
funds sold and securities purchased under agreements to resell.
(3)Interest-rate spread represents the difference
between the average yield on interest-earning assets and the average cost of interest bearing liabilities.
(4)Net interest margin is net interest income
as a percentage of average interest-earning assets.
(5)Average balances are daily average balances
except for the parent company which have been calculated on a monthly basis.
Results of Operations
Results of Operations for the Three and
Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011.
Net Income Allocated to Common Stockholders.
Net income allocated to common stockholders for the three and six-month periods ended June 30, 2012 was $3.3 million and $5.5 million,
respectively, or $0.23 and $0.38 per common share, respectively. Net income allocated to common stockholders for the three and
six-month periods ended June 30, 2011 was $41.5 million and $41.8 million, respectively, or $5.89 and $5.93 per common share, respectively.
The net income allocated
to common stockholders for the three and six months ended June 30, 2012 includes a benefit for income taxes of $1.8 million and
$2.1 million, respectively, or $.13 and $.15 per common share, respectively. The net income allocated to common stockholders for
the three and six months ended June 30, 2011 includes (i) the accrual of dividends on our Series A Preferred Stock of $1.2 million
and $2.4 million, respectively, or $.17 and $.34 per common share, respectively, (ii) a provision for income taxes of $2.3 million
and $2.1 million, respectively, or $.33 and $.30 per common share, respectively, and (iii) a one-time settlement payment of $42.5
million, or $6.02 per common share.
The Company's net income
is largely dependent on interest rate levels, the demand for the Company's loan and deposit products and the strategies employed
to manage the interest rate and other risks inherent in the banking business.
Net Interest Income.
The Company's
primary source of revenue is net interest income, or the difference between interest income earned on earning-assets, such as loans
and investment securities, and interest expense on interest-bearing liabilities such as deposits and borrowings. The amount of
interest income is dependent upon many factors including: (i) the amount of interest-earning assets that the Company can maintain
based upon its funding sources; (ii) the relative amounts of interest-earning assets versus interest-bearing liabilities; and (iii)
the difference between the yields earned on those assets and the rates paid on those liabilities. Non-performing loans adversely
affect net interest income because they must still be funded by interest-bearing liabilities, but they do not provide interest
income. Furthermore, when we designate an asset as non- performing, all interest which has been accrued but not actually received
is deducted from current period income, further reducing net interest income.
For the three and six-month
periods ended June 30, 2012, net interest income was $5.5 million and $11.1 million, respectively, compared to net interest income
of $6.8 million and $13.4 million, respectively, for the three and six-month periods ended June 30, 2011. The decrease in net interest
income during the 2012 periods was primarily due to the decrease in the average yields earned on total interest-earning assets,
partially offset by the increase in the average amounts of interest-earning assets, the decrease in the average amounts of total
interest-bearing liabilities and the decrease in the average rates paid on interest-bearing liabilities.
The average yields earned
on total interest-earning assets declined to 3.43% and 3.50% during the three and six-month periods ended June 30, 2012, respectively,
from 4.36% and 4.42% during the three and six-month periods ended June 30, 2011, respectively. The average rates paid on total
interest-bearing liabilities declined to 1.05% and 1.09% during the three and six-month periods ended June 30, 2012, respectively,
from 1.34% and 1.36% during the three and six-month periods ended June 30, 2011, respectively. The Company's interest-rate spread,
the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, declined
to 2.38% and 2.41% during the three and six-month periods ended June 30, 2012, respectively, from 3.02% and 3.06% during the three
and six-month periods of 2011, respectively.
Net Interest Margin.
Net interest
margin, or annualized net interest income as a percentage of average interest-earning assets, was 2.60% and 2.64% for the three
and six months ended June 30, 2012, respectively, compared to 3.26% and 3.29% during the three and six months ended June 30, 2011.
We seek to secure and retain customer deposits with competitive products and rates, while making strategic use of the prevailing
interest rate environment to borrow funds at what we believe to be attractive rates. We invest such deposits and borrowed funds
in a prudent mix of fixed and adjustable rate loans, investment securities and short-term interest-earning assets. The decrease
in net interest margin is primarily due to the decrease in the average amounts of higher yielding loans as a percentage of our
total mix of interest-earning assets.
Interest Income.
Total interest income
for the quarter ended June 30, 2012 decreased by $1.8 million to $7.3 million from $9.1 million for the quarter ended June 30,
2011. The decrease was due to the decrease in the average yield earned on the average amount of interest-earning assets to 3.43%
during the 2012 quarter from 4.36% during the 2011 quarter, and the decrease in the average amount of higher yielding loans to
$322.6 million during the 2012 quarter from $346.1 million during the 2011 quarter.
Total interest income
for the six months ended June 30, 2012 decreased by $3.3 million to $14.7 million from $18.0 million for the six months ended June
30, 2011. The decrease was due to the decrease in the average yield earned on the average amount of interest-earning assets to
3.50% during the 2012 six-month period from 4.42% during the 2011 six-month period, and the decrease in the average amount of higher
yielding loans to $320.6 million during the 2012 period from $349.5 million during the 2011 period.
The following tables
present the composition of interest income for the indicated periods:
|
|
Three Months Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Interest
Income
|
|
|
% of
Total
|
|
|
Interest
Income
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
Loans
|
|
$
|
4,882
|
|
|
|
66.81
|
%
|
|
$
|
5,498
|
|
|
|
60.74
|
%
|
Investment Securities
|
|
|
2,300
|
|
|
|
31.48
|
|
|
|
3,480
|
|
|
|
38.45
|
|
Other
|
|
|
125
|
|
|
|
1.71
|
|
|
|
73
|
|
|
|
0.81
|
|
Total Interest Income
|
|
$
|
7,307
|
|
|
|
100.00
|
%
|
|
$
|
9,051
|
|
|
|
100.00
|
%
|
|
|
Six Months Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Interest
Income
|
|
|
% of
Total
|
|
|
Interest
Income
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
Loans
|
|
$
|
9,787
|
|
|
|
66.54
|
%
|
|
$
|
11,177
|
|
|
|
62.19
|
%
|
Investment Securities
|
|
|
4,737
|
|
|
|
32.21
|
|
|
|
6,661
|
|
|
|
37.06
|
|
Other
|
|
|
184
|
|
|
|
1.25
|
|
|
|
134
|
|
|
|
0.75
|
|
Total Interest Income
|
|
$
|
14,708
|
|
|
|
100.00
|
%
|
|
$
|
17,972
|
|
|
|
100.00
|
%
|
Loans, which are inherently
risky and therefore command a higher return than our portfolio of investment securities and other interest-earning assets, decreased
to 37.9% and 38.2% of our total amount of average interest-earning assets during the three and six month-periods ended June 30,
2012, respectively, from 41.7% and 43.0% during the three and six month-periods ended June 30, 2011, respectively. The average
amounts of investment securities increased to 49.3% and 49.5% of total average interest-earning assets during the three and six-month
periods ended June 30, 2012, respectively, from 46.7% and 46.3% during the three and six-month periods ended June 30, 2011, respectively.
While we actively seek to originate new loans with qualified borrowers who meet the Bank's underwriting standards, our strategy
has been to maintain those standards, sacrificing some current income to avoid possible large future losses in the loan portfolio.
At June 30, 2012 and
2011, total non-performing loan assets were $520,000 and $3.4 million, respectively, of non-accrual loans. Depending upon the contractual
interest rate of a loan, significant additions to non-performing loans, were such additions to occur, could have a material adverse
effect on our results of operations. The effect of the decrease in non-accrual loans in 2012 from 2011 was negligible.
Federal Home Loan
Bank Stock.
The Bank owns stock of the Federal Home Loan Bank New York ("FHLB-NY") which is necessary for it to be
a member of the FHLB-NY. Membership requires the purchase of stock equal to 1% of the Bank's residential mortgage loans or 5% of
the outstanding borrowings, whichever is greater. The stock is redeemable at par, therefore, its cost is equivalent to its redemption
value. The Bank's ability to redeem FHLB-NY shares is dependent upon the redemption practices of the FHLB-NY. At June 30, 2012,
the FHLB-NY neither placed restrictions on redemption of shares in excess of a member's required investment in stock, nor stated
that it will cease paying dividends. The Bank did not consider this asset impaired at either June 30, 2012 or December 31, 2011.
Interest Expense.
Total interest
expense for the quarter ended June 30, 2012 decreased by $500,000 to $1.8 million from $2.3 million for the quarter ended June
30, 2011. The decrease in total interest expense was due to the decrease in the average rates paid on the average amount of interest-bearing
liabilities to 1.05% in the 2012 quarter from 1.34% in the 2011 quarter, and the decrease in the average amounts of interest-bearing
liabilities to $674.8 million for the quarter ended June 30, 2012 from $680.7 million for the quarter ended June 30, 2011.
Total interest expense
for the six-month period ended June 30, 2012 decreased by $1.0 million to $3.6 million from $4.6 million for the six-month period
ended June 30, 2011. The decrease in total interest expense was due to the decrease in the average rates paid on the average amount
of interest-bearing liabilities to 1.09% during the 2012 six-month period from 1.36% during the 2011 six-month period, and the
decrease in the average amounts of interest-bearing liabilities to $668.1 million from $678.4 million during the six months ended
June 30, 2012 and 2011, respectively.
The following tables
present the components of interest expense for the indicated periods:
|
|
Three Months Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Interest
Expense
|
|
|
% of
Total
|
|
|
Interest
Expense
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
Interest-Bearing Deposits
|
|
$
|
97
|
|
|
|
5.50
|
%
|
|
$
|
238
|
|
|
|
10.40
|
%
|
Time Deposits
|
|
|
1,077
|
|
|
|
61.02
|
|
|
|
1,305
|
|
|
|
57.04
|
|
Other Borrowings
|
|
|
591
|
|
|
|
33.48
|
|
|
|
745
|
|
|
|
32.56
|
|
Total Interest Expense
|
|
$
|
1,765
|
|
|
|
100.00
|
%
|
|
$
|
2,288
|
|
|
|
100.00
|
%
|
|
|
Six Months Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Interest
Expense
|
|
|
% of
Total
|
|
|
Interest
Expense
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
Interest-Bearing Deposits
|
|
$
|
207
|
|
|
|
5.70
|
%
|
|
$
|
500
|
|
|
|
10.83
|
%
|
Time Deposits
|
|
|
2,193
|
|
|
|
60.38
|
|
|
|
2,609
|
|
|
|
56.53
|
|
Other Borrowings
|
|
|
1,232
|
|
|
|
33.92
|
|
|
|
1,506
|
|
|
|
32.64
|
|
Total Interest Expense
|
|
$
|
3,632
|
|
|
|
100.00
|
%
|
|
$
|
4,615
|
|
|
|
100.00
|
%
|
Non-Interest Income.
Non-interest
income consists primarily of realized gains on sales of marketable securities and service fee income. Total non-interest income
for the three and six months ended June 30, 2012 was $121,000 and $644,000 million, respectively. For the three and six months
ended June 30, 2011, total non-interest income amounted to $43.0 million and $43.3 million, respectively.
In May 2011, we entered into a settlement
agreement with the selling financial institution of the auction rate securities in the Bank's investment portfolio. Pursuant to
the agreement, the institution paid to the Bank the sum of $42.5 million which was included in other non-interest income. Excluding
the settlement payment of $42.5 million, total non-interest income for the three and six months ended June 30, 2011 was approximately
$500,000 and $800,000, respectively.
Non-Interest Expense.
Non-interest
expense includes salaries and employee benefits, occupancy and equipment expenses, legal and professional fees and other operating
expenses associated with the day-to-day operations of the Company. Total non-interest expense for the three and six months ended
June 30, 2012 was $4.2 million and $8.3 million, respectively, compared to $4.3 million and $8.7 million for the three and six
months ended June 30, 2011, respectively.
The following tables
present the components of non-interest expense for the indicated periods:
|
|
Three Months Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Non-Interest
Expense
|
|
|
% of
Total
|
|
|
Non-Interest
Expense
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
Salaries and Employee Benefits
|
|
$
|
2,380
|
|
|
|
57.31
|
%
|
|
$
|
2,399
|
|
|
|
55.68
|
%
|
Net Occupancy Expense
|
|
|
577
|
|
|
|
13.89
|
|
|
|
500
|
|
|
|
11.61
|
|
Equipment Expense
|
|
|
88
|
|
|
|
2.12
|
|
|
|
78
|
|
|
|
1.81
|
|
FDIC Assessment
|
|
|
300
|
|
|
|
7.22
|
|
|
|
268
|
|
|
|
6.22
|
|
Data Processing Expense
|
|
|
112
|
|
|
|
2.70
|
|
|
|
152
|
|
|
|
3.53
|
|
Other
|
|
|
696
|
|
|
|
16.76
|
|
|
|
911
|
|
|
|
21.15
|
|
Total Non-Interest Expense
|
|
$
|
4,153
|
|
|
|
100.00
|
%
|
|
$
|
4,308
|
|
|
|
100.00
|
%
|
|
|
Six Months Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Non-Interest
Expense
|
|
|
% of
Total
|
|
|
Non-Interest
Expense
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
Salaries and Employee Benefits
|
|
$
|
4,860
|
|
|
|
58.25
|
%
|
|
$
|
4,834
|
|
|
|
55.44
|
%
|
Net Occupancy Expense
|
|
|
1,161
|
|
|
|
13.92
|
|
|
|
1,065
|
|
|
|
12.21
|
|
Equipment Expense
|
|
|
166
|
|
|
|
1.99
|
|
|
|
160
|
|
|
|
1.84
|
|
FDIC Assessment
|
|
|
600
|
|
|
|
7.19
|
|
|
|
652
|
|
|
|
7.48
|
|
Data Processing Expense
|
|
|
224
|
|
|
|
2.68
|
|
|
|
261
|
|
|
|
2.99
|
|
Other
|
|
|
1,332
|
|
|
|
15.97
|
|
|
|
1,747
|
|
|
|
20.04
|
|
Total Non-Interest Expense
|
|
$
|
8,343
|
|
|
|
100.00
|
%
|
|
$
|
8,719
|
|
|
|
100.00
|
%
|
Provision
(Benefit) for Income Tax.
During the three and six months ended June 30, 2012, the Company recorded an income tax benefit
of $1.8 million and $2.1 million, respectively, compared to income tax expense of $2.3 million and $2.1 million,
respectively, for the three and six months ended June 30, 2011. The Company has net operating loss carry forwards which can
be offset against current taxable income. In addition, the Company had significant valuation allowances on the deferred tax
asset for the remaining net operating loss carry forwards. The valuation allowance was released during the three and
six-month periods ended June 30, 2012 due to additional current earnings and the expectation that we will recognize the
remaining benefit of the net operating loss carry forwards within the next few years. This release was the primary driver of
the tax benefits recorded during the three and six months ended June 30, 2012. The tax expense recorded during the three
and six months ended June 30, 2011 mainly relates to changes in deferred taxes.
Issuer Purchases of Equity Securities
On May 15, 2003, The
Company's Board of Directors authorized the purchase of up to an additional 450,000 shares of its Common Stock in the open market,
from time to time, depending upon prevailing market conditions, thereby increasing the maximum number of shares which may be purchased
by the Company from 1,950,000 shares of Common Stock to 2,400,000 shares of Common Stock. Since 1990 through June 30, 2012, the
Company has purchased a total of 1,898,909 shares of its Common Stock. We did not repurchase shares of the Company's Common Stock
during the first and second quarters of 2012. At June 30, 2012, there were 501,091 shares of Common Stock which may yet be purchased
under our stock repurchase plan.
Provision for Loan Losses.
The allowance
for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance
sheet date. The allowance is established through the provision for loan losses that is charged against income. In determining the
allowance for loan losses, management makes significant estimates which involve a high degree of judgment, subjectivity of the
assumptions utilized, and potential for changes in the economic environment that could result in changes to the amount of the recorded
allowance for loan losses.
The allowance for loan
losses has been determined in accordance with U.S. GAAP, principally FASB ASC 450, "Contingencies", ("ASC 450")
and FASB ASC 310, "Receivables", ("ASC 310"). Under the above accounting principles, we are required to maintain
an allowance for probable losses at the balance sheet date. We are responsible for the timely and periodic determination of the
amount of the allowance required. Management believes that the allowance for loan losses is adequate to cover specifically identifiable
losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.
Management performs
a monthly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components:
specific and general reserves. Specific reserves are made for loans determined to be impaired. Impairment is measured by determining
the present value of expected future cash flows or, as a practical expedient for collateral-dependent loans, the fair value of
the collateral adjusted for market conditions and selling expenses. The Bank considers its investment in one-to-four family real
estate loans and consumer loans to be smaller balance homogeneous loans and therefore excluded from separate identification for
evaluation of impairment. These homogeneous loan groups are evaluated for impairment on a collective basis under FASB ASC 310.
The general reserve
is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. Management
also analyzes historical loss experience, delinquency trends, general economic conditions, geographic concentrations, and industry
and peer comparisons. This analysis establishes factors that are applied to the loan segments to determine the amount of the general
reserves. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revisions
based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance
for loan losses management has established which could have a material negative effect on the Company's financial results.
On a monthly basis,
the Bank's management committee reviews the current status of various loan assets in order to evaluate the adequacy of the allowance
for loan losses. In this evaluation process, specific loans are analyzed to determine their potential risk of loss. This process
includes all loans, concentrating on non-accrual and classified loans. Each non-accrual or classified loan is evaluated for potential
loss exposure. Any shortfall results in a recommendation of a specific allowance if the likelihood of loss is evaluated as probable.
To determine the adequacy of collateral on a particular loan, an estimate of the fair market value of the collateral is based on
the most current appraised value available. This appraised value is then reduced to reflect estimated liquidation expenses.
As a substantial amount
of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical
in determining the amount of the allowance required for specific loans. Assumptions for appraisal valuations are instrumental in
determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact
the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals are
carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
Based on the composition of our loan portfolio, management believes the primary risks are increases in interest rates, a decline
in the economy, generally, and a decline in real estate market values in the New York metropolitan area. Any one or combination
of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of
loan loss provisions. Management believes the allowance for loan losses reflects the inherent credit risk in our portfolio, the
level of our non-performing loans and our charge-off experience.
A loan is considered
nonperforming when it becomes delinquent ninety days or when other adverse factors become known to us. We generally order updated
appraisals from independent third party licensed appraisers at the time the loan is identified as nonperforming. Depending upon
the property type, we receive appraisals within thirty to ninety days from the date the appraisals are ordered. Upon receipt of
the appraisal, which is discounted by us to take account of estimated selling and other holding costs, we compare the adjusted
appraisal amount to the carrying amount of the real estate dependent loan and record any impairment through the allowance for loan
loss at that time.
The majority of our
real estate dependent loans are concentrated in the New York City metropolitan area, we do not make adjustments to the appraisals
for this concentration. We do not increase the appraised value of any property. Any adjustments we make to the appraisals are to
decrease the appraised value due to selling and other holding costs.
Although management
believes that we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if
future economic and other conditions differ substantially from the current operating environment. Although management uses what
it believes is the best information available, the level of the allowance for loan losses remains an estimate that is subject to
significant judgment and short-term change. In addition, the Federal Deposit Insurance Corporation, the New York State Department
of Financial Services, and other regulatory bodies, as an integral part of their examination process, will periodically review
our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on its judgments about
information available to them at the time of their examination.
The following table
sets forth information with respect to activity in the Company's allowance for loan losses during the periods indicated (in thousands,
except percentages):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding
|
|
$
|
322,629
|
|
|
$
|
346,118
|
|
|
$
|
320,569
|
|
|
$
|
349,474
|
|
Allowance at beginning of period
|
|
|
17,720
|
|
|
|
17,324
|
|
|
|
17,720
|
|
|
|
16,105
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and other loans
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
Real estate loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total loans charged-off
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and other loans
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
27
|
|
Real estate loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total loans recovered
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
27
|
|
Net recoveries (charge-offs)
|
|
|
(2
|
)
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
25
|
|
Provision for loan losses charged to operating expenses
|
|
|
—
|
|
|
|
400
|
|
|
|
—
|
|
|
|
1,600
|
|
Allowance at end of period
|
|
|
17,718
|
|
|
|
17,730
|
|
|
|
17,718
|
|
|
|
17,730
|
|
Ratio of net recoveries (charge-offs) to average loans outstanding
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.01
|
%
|
Allowance as a percent of total loans
|
|
|
5.52
|
%
|
|
|
5.10
|
%
|
|
|
5.52
|
%
|
|
|
5.10
|
%
|
Total loans at end of period
|
|
$
|
320,938
|
|
|
$
|
347,583
|
|
|
$
|
320,938
|
|
|
$
|
347,583
|
|
Loan Portfolio.
Loan Portfolio Composition.
The Company's loans consist primarily of mortgage loans secured by residential and non-residential properties as well as commercial
loans which are either unsecured or secured by personal property collateral. Most of the Company's loans are either made to individuals
or personally guaranteed by the principals of the business to which the loan is made. At June 30, 2012 and December 31, 2011, the
Company had loans, net of unearned income, of $320.3 million and $317.0 million, respectively, and an allowance for loan losses
of $17.7 million and $17.7 million, respectively. From time to time, the Bank may originate residential mortgage loans, sell them
on the secondary market, normally recognizing fee income in connection with the sale.
Interest rates on loans
are affected by the demand for loans, the supply of money available for lending, credit risks, the rates offered by competitors
and other conditions. These factors are in turn affected by, among other things, economic conditions, monetary policies of the
federal government, and legislative tax policies.
In order to manage
interest rate risk, the Bank focuses its efforts on loans with interest rates that adjust based upon changes in the prime rate
or changes in United States Treasury or similar indices. Generally, credit risks on adjustable-rate loans are somewhat greater
than on fixed-rate loans primarily because, as interest rates rise, so do borrowers' payments, increasing the potential for default.
The Bank seeks to impose appropriate loan underwriting standards in order to protect against these and other credit related risks
associated with its lending operations.
In addition to analyzing
the income and assets of its borrowers when underwriting a loan, the Bank obtains independent appraisals on all material real estate
in which the Bank takes a mortgage. The Bank generally obtains title insurance in order to protect against title defects on mortgaged
property.
Commercial Mortgage
Loans.
The Bank originates commercial mortgage loans secured by office buildings, retail establishments, multi-family residential
real estate and other types of commercial property. Substantially all of the properties are located in the New York City metropolitan
area.
The Bank generally
makes commercial mortgage loans with loan to value ratios not to exceed 75% and with terms to maturity that do not exceed 15 years.
Loans secured by commercial properties generally involve a greater degree of risk than one-to four-family residential mortgage
loans. Because payments on such loans are often dependent on successful operation or management of the properties, repayment may
be subject, to a greater extent, to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these
risks through its underwriting policies. The Bank evaluates the qualifications and financial condition of the borrower, including
credit history, profitability and expertise, as well as the value and condition of the underlying property. The factors considered
by the Bank include net operating income; the debt coverage ratio (the ratio of cash net income to debt service); and the loan
to value ratio. When evaluating the borrower, the Bank considers the financial resources and income level of the borrower, the
borrower's experience in owning or managing similar property and the Bank's lending experience with the borrower. The Bank's policy
requires borrowers to present evidence of the ability to repay the loan without having to resort to the sale of the mortgaged property.
The Bank also seeks to focus its commercial mortgage loans on loans to companies with operating businesses, rather than passive
real estate investors.
Commercial Loans.
The Bank makes commercial loans to businesses for inventory financing, working capital, machinery and equipment purchases, expansion,
and other business purposes. These loans generally have higher yields than mortgage loans, with maturities of one year, after which
the borrower's financial condition and the terms of the loan are re-evaluated. At June 30, 2012 and December 31, 2011, $17.9 million
and $15.7 million, respectively, or 5.6% and 4.9%, respectively, of the Company's total loan portfolio consisted of such loans.
Commercial loans tend
to present greater risks than mortgage loans because the collateral, if any, tends to be rapidly depreciable, difficult to sell
at full value and is often easier to conceal. In order to limit these risks, the Bank evaluates these loans based upon the borrower's
ability to repay the loan from ongoing operations. The Bank considers the business history of the borrower and perceived stability
of the business as important factors when considering applications for such loans. Occasionally, the borrower provides commercial
or residential real estate collateral for such loans, in which case the value of the collateral may be a significant factor in
the loan approval process.
Residential Mortgage
Loans (1 to 4 family loans).
The Bank makes residential mortgage loans secured by first liens on one-to-four family owner-occupied
or rental residential real estate. At June 30, 2012 and December 31, 2011, $102.4 million and $104.9 million, respectively, or
31.9% and 33.0%, respectively, of the Company's total loan portfolio consisted of such loans. The Bank offers both adjustable rate
mortgages ("ARMS") and fixed-rate mortgage loans. The relative proportion of fixed-rate loans versus ARMs originated
by the Bank depends principally upon current customer preference, which is generally driven by economic and interest rate conditions
and the pricing offered by the Bank's competitors. At June 30, 2012, 14% of the Bank's residential one-to-four family owner-occupied
first mortgage portfolio were ARMs and 86% were fixed-rate loans. At December 31, 2011, approximately 8% of the Bank's residential
one-to-four family owner-occupied first mortgage portfolio were ARMs and 92% were fixed-rate loans. The percentage represented
by fixed-rate loans tends to increase during periods of low interest rates. The ARMs generally carry annual caps and life-of-loan
ceilings, which limit interest rate adjustments.
The Bank's residential
loan underwriting criteria are generally comparable to those required by Fannie Mae and other major secondary market loan purchasers.
Generally, ARM credit risks are somewhat greater than fixed-rate loans primarily because, as interest rates rise, the borrowers'
payments rise, increasing the potential for default. The Bank's teaser rate ARMs (ARMs with low initial interest rates that are
not based upon the index plus the margin for determining future rate adjustments) were underwritten based on the payment due at
the fully-indexed rate.
In addition to verifying
income and assets of borrowers, the Bank obtains independent appraisals on all residential first mortgage loans and title insurance
is required at closing. Private mortgage insurance is required on all loans with a loan-to-value ratio in excess of 80% and the
Bank requires real estate tax escrows on such loans. Real estate tax escrows are voluntary on residential mortgage loans with loan-to-value
ratios of 80% or less.
Fixed-rate residential
mortgage loans are generally originated by the Bank for terms of 15 to 30 years. Although 30 year fixed-rate mortgage loans may
adversely affect our net interest income in periods of rising interest rates, the Bank originates such loans to satisfy customer
demand. Such loans are generally originated at initial interest rates which exceed the fully indexed rate on ARMs offered at the
same time. Fixed-rate residential mortgage loans originated by the Bank generally include due-on-sale clauses, which permit the
Bank to demand payment in full if the borrower sells the property without the Bank's consent.
Due-on-sale clauses
are an important means of adjusting the rates on the Bank's fixed-rate mortgage loan portfolio, and the Bank will generally exercise
its rights under these clauses if necessary to maintain market yields.
ARMs originated in
recent years have interest rates that adjust annually based upon the movement of the one year treasury bill constant maturity index,
plus a margin of 2.00% to 2.75%. These loans generally have a maximum interest rate adjustment of 2% per year, with a lifetime
maximum interest rate adjustment, measured from the initial interest rate, of 5.5% or 6.0%.
The Bank offers a variety
of other loan products including residential single family construction loans to persons who intend to occupy the property upon
completion of construction, home equity loans secured by junior mortgages on one-to-four family owner-occupied residences, and
short-term fixed-rate consumer loans either unsecured or secured by monetary assets such as bank deposits and marketable securities
or personal property. At June 30, 2012 and December 31, 2011, $218.5 million and $212.9 million, respectively, or 68% and 67%,
respectively, of the Company's total loan portfolio consisted of such other loan products.
Origination of Loans.
Loan originations can be attributed to depositors, retail customers, phone inquiries, advertising, the efforts of the Bank's loan
officers, and referrals from other borrowers, real estate brokers and builders. The Bank originates loans primarily through its
own efforts, occasionally obtaining loan opportunities as a result of referrals from loan brokers.
At June 30, 2012, the
Bank was generally not permitted to make loans to one borrower in excess of approximately $21.6 million, with an additional amount
of approximately $14.4 million being permitted if secured by readily marketable collateral. The Bank was also not permitted to
make any single loan in an amount in excess of approximately $21.6 million. At June 30, 2012, the Bank was in compliance with these
standards.
Delinquency
Procedures.
When a borrower fails to make a required payment on a loan, the Bank attempts to cause the deficiency to be
cured by contacting the borrower. The Bank reviews past due loans on a case by case basis, taking the action it deems
appropriate in order to collect the amount owed. Litigation may be necessary if other procedures are not successful. Judicial
resolution of a past due loan can be delayed if the borrower files a bankruptcy petition because collection action cannot be
continued unless the Bank first obtains relief from the automatic stay provided by the Bankruptcy Code.
If a non-mortgage loan
becomes delinquent and satisfactory arrangements for payment cannot be made, the Bank seeks to realize upon any personal property
collateral to the extent feasible and collect any remaining amount owed from the borrower through legal proceedings, if necessary.
It is the Bank's policy
to discontinue accruing interest on a loan when it is 90 days past due or if management believes that continued interest accruals
are unjustified. The Bank may continue interest accruals if a loan is more than 90 days past due if the Bank determines that the
nature of the delinquency and the collateral are such that collection of the principal and interest on the loan in full is reasonably
assured. When the accrual of interest is discontinued, all accrued but unpaid interest is charged against current period income.
Once the accrual of interest is discontinued, the Bank records interest as and when received until the loan is restored to accruing
status. If the Bank determines that collection of the loan in full is in reasonable doubt, then amounts received are recorded as
a reduction of principal until the loan is returned to accruing status.
Capital Adequacy
Quantitative measures
established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to risk- weighted assets, and of Tier I capital to average
assets. Management believes that, as of June 30, 2012, the Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 2012,
the Bank met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the following table. There are no conditions or events since that date that management believes have changed
the Bank's category.
The following table
sets forth the actual and required regulatory capital amounts and ratios of the Company and the Bank as of June 30, 2012 (dollars
in thousands):
|
|
Actual
|
|
|
For capital
adequacy purposes
|
|
|
To be well
capitalized under
prompt corrective
action provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
157,420
|
|
|
|
39.6
|
%
|
|
$
|
31,814
|
|
|
|
>
8.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
144,148
|
|
|
|
37.0
|
%
|
|
|
31,158
|
|
|
|
>
8.0
|
%
|
|
$
|
38,948
|
|
|
|
>
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
152,449
|
|
|
|
38.3
|
%
|
|
|
15,907
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
139,127
|
|
|
|
35.7
|
%
|
|
|
15,579
|
|
|
|
>
4.0
|
%
|
|
|
23,369
|
|
|
|
>
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
152,449
|
|
|
|
17.4
|
%
|
|
|
35,096
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
139,127
|
|
|
|
16.0
|
%
|
|
|
34,814
|
|
|
|
>
4.0
|
%
|
|
|
43,518
|
|
|
|
>
5.0
|
%
|
RECENT PROPOSED CHANGES TO REGULATORY
CAPITAL RULES
During the second quarter of 2012, the
federal bank regulatory agencies jointly issued three notices of proposed rulemaking ("NPRs") that would revise and replace
the agencies' current capital rules. The NPRs include numerous revisions to the existing capital regulations, including, but not
limited, to the following:
|
*
|
Revises the definition of regulatory capital components and related calculations.
|
|
*
|
Adds a new common equity tier 1 capital ratio.
|
|
*
|
Increases the minimum tier 1 capital ratio requirement from 4 percent to 6 percent.
|
|
*
|
Incorporates the revised regulatory capital requirements into the Prompt Corrective Action framework.
|
|
*
|
Implements a new capital conservation buffer that would limit payment of capital distributions
and certain discretionary bonus payments to executive officers and key risk takers if the banking organization does not hold certain
amounts of common equity tier 1 capital in addition to those needed to meet its minimum risk-based capital requirements.
|
|
*
|
Provides a transition period for several aspects of the proposed rule, including the phase-out
period for certain non-qualifying capital instruments, the new minimum capital ratio requirements, the capital conservation buffer,
and the regulatory capital adjustments and deductions.
|
|
*
|
Revises risk weights for residential mortgages based on loan-to-value ratios and certain product
and underwriting features.
|
|
*
|
Increases capital requirements for past-due loans, high volatility commercial real estate exposures,
and certain short-term loan commitments.
|
|
*
|
Removes references to credit ratings consistent with Section 939A of the Dodd-Frank Act.
|
|
*
|
Establishes due diligence requirements for securitization exposures.
|
The proposed NPRs will result in the Company,
in addition to the Bank, becoming subject to capital requirements. Based on our preliminary assessment of the NPRs, we believe
we will see an increase in our total risk-weighted assets. However, the Company and the Bank would meet the requirements of the
NPRs to be considered well-capitalized.
Liquidity
The management of the
Company's liquidity focuses on ensuring that sufficient funds are available to meet loan funding commitments, withdrawals from
deposit accounts, the repayment of borrowed funds, and ensuring that the Bank and the Company comply with regulatory liquidity
requirements. Liquidity needs of the Bank have historically been met by deposits, investments in federal funds sold, principal
and interest payments on loans, and maturities of investment securities. Additional liquidity, up to approximately $414 million
is available from the Federal Reserve Bank and the FHLB-NY.
The current uncertainties
in the credit markets have negatively impacted our ability to liquidate, if necessary, investments in auction rate securities.
We are not certain as to when the liquidity issues relating to these investments will improve; however, we have the intent to hold
these available for sale securities to maturity, and do not believe we will be required to sell these securities prior to maturity.
Based on our expected
operating cash flows, and our other sources of cash, we do not expect the potential lack of liquidity in these auction rate securities
to affect our capital, liquidity or our ability to execute our current business plan. We have cash and cash equivalents totaling
$138.5 million, or 15.6% of total assets at June 30, 2012. In addition, we have the capacity to borrow up to approximately $125
million from the Federal Reserve Bank and approximately $289 million from the FHLB-NY if the need should arise.
For the parent company,
Berkshire Bancorp Inc., liquidity means having cash available to fund its operating expenses and to pay stockholder dividends on
its common stock, when and if declared by the Company's Board of Directors. On March 31, 2009, the Company announced that it would
temporarily suspend its previously announced policy of paying a regular cash dividend on the Company's common stock.
The ability of the
Company to fund its normal operating expenses is not currently dependent upon the receipt of dividends from the Bank. At June 30,
2012, the Company had cash of $634,000 and investment securities with a fair market value of $2.6 million. However, the payment
of dividends on its common stock when and if declared by the Board of Directors, will be dependent upon the receipt of dividends
from the Bank.
The Bank maintains
financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
These financial instruments, $10.3 million at June 30, 2012, include commitments to extend credit, stand-by letters of credit and
loan commitments. The Bank also had interest rate caps with a notional amount of $40.0 million.
At June 30, 2012, the
Bank had outstanding commitments of $374.1 million; including $3.8 million of borrowings, $4.1 million of operating leases, and
$366.0 million of time deposits. These commitments include $278.4 million that mature or renew within one year, $94.8 million that
mature or renew after one year and within three years, $917,000 that mature or renew after three years and within five years and
none that mature or renew after five years.
Impact of Inflation and Changing Prices
The Company's financial
statements measure financial position and operating results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increasing cost of the
Company's operations. The assets and liabilities of the Company are largely monetary. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of inflation. In addition, interest rates do not necessarily
move in the direction, or to the same extent, as the price of goods and services. However, in general, high inflation rates are
accompanied by higher interest rates, and vice versa.
ITEM 3 - QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk.
Fluctuations
in market interest rates can have a material effect on the Bank's net interest income because the yields earned on loans and investments
may not adjust to market rates of interest with the same frequency, or with the same speed, as the rates paid by the Bank on its
deposits.
Most of the Bank's
deposits are either interest-bearing demand deposits or short term certificates of deposit and other interest-bearing deposits
with interest rates that fluctuate as market rates change. Management of the Bank seeks to reduce the risk of interest rate fluctuations
by concentrating on loans and securities investments with either short terms to maturity or with adjustable rates or other features
that cause yields to adjust based upon interest rate fluctuations. In addition, to cushion itself against the potential adverse
effects of a substantial and sustained increase in market interest rates, the Bank has from time to time purchased off balance
sheet interest rate cap contracts which generally provide that the Bank will be entitled to receive payments from the other party
to the contract if interest rates exceed specified levels. These contracts are entered into with major financial institutions.
The Company seeks to
maximize its net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount
of the forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest
rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity
or repricing characteristics of liabilities.
ITEM 4 - CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
As of the end of the period covered by
this Quarterly Report on Form 10-Q, the Company evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Disclosure
Controls"). The Disclosure Controls are designed to allow the Company to reach a reasonable level of assurance that information
required to be disclosed by the Company is recorded, processed, summarized and reported within the time period specified in the
SEC's rules and forms and that any information relating to the Company is accumulated and communicated with management, including
its principal executive/financial officer to allow timely decisions regarding required disclosure. The evaluation of the Disclosure
Controls ("Controls Evaluation") was done under the supervision and with the participation of the Company's management,
including the Chief Executive Officer ("CEO"), who is also the Chief Financial Officer ("CFO"). Based upon
the Controls Evaluation, the CEO/CFO has concluded that as of June 30, 2012, the Disclosure Controls were effective at the reasonable
assurance level.
Changes in Internal Control over Financial
Reporting.
In accordance with SEC requirements, the
CEO/CFO notes that during the fiscal quarter ended June 30, 2012, no changes in the Company's "internal control over financial
reporting", as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended ("Internal Control")
have occurred that have materially affected or are reasonably likely to materially affect the Company's Internal Control.
Limitations on the Effectiveness of
Controls.
The Company's management, including the
CEO/CFO, does not expect that its Disclosure Controls and/or its Internal Control will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by
the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of
any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control
may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be
detected.
PART II. OTHER INFORMATION
Item 6. Exhibits
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
31
|
|
Certification of Principal Executive and Financial Officer pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002.
|
|
|
|
32
|
|
Certification of Principal Executive and Financial Officer pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002.
|
|
|
|
101.
|
|
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in Extensible Business Reporting Language (XBRL), pursuant to Rule 406T of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders' Equity and Comprehensive Income, (v) Consolidated Statements of Cash Flows and (vi) related notes to consolidated financial statements. Users of this data are advised pursuant to Rule 401 of Regulation S-T that the information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of the Company.
|
|
|
|
|
|
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
|
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
BERKSHIRE BANCORP INC.
|
|
|
|
(Registrant)
|
|
|
|
|
|
Date:
|
August 14, 2012
|
|
By:
|
/s/ Steven Rosenberg
|
|
|
|
Steven Rosenberg
|
|
|
|
President and Chief
|
|
|
|
Financial Officer
|
|
EXHIBIT INDEX
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
31.
|
|
Certification of Principal Executive and Financial Officer pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002.
|
|
|
|
32.
|
|
Certification of Principal Executive and Financial Officer pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002.
|
|
|
|
101.
|
|
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in Extensible Business Reporting Language (XBRL), pursuant to Rule 406T of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders' Equity and Comprehensive Income, (v) Consolidated Statements of Cash Flows and (vi) related notes to consolidated financial statements. Users of this data are advised pursuant to Rule 401 of Regulation S-T that the information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of the Company.
|
|
|
|
|
|
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
|
Berkshire Bancorp (QB) (USOTC:BERK)
過去 株価チャート
から 5 2024 まで 6 2024
Berkshire Bancorp (QB) (USOTC:BERK)
過去 株価チャート
から 6 2023 まで 6 2024