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| BERK > SEC Filings for BERK > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
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., a Delaware corporation, and its subsidiaries. All references to earnings per share, unless stated otherwise, refer to earnings per basic shares for the 2008 periods and diluted shares for the 2007 periods. References to Notes herein are references to the "Notes to Consolidated Financial Statements" of the Company located in Item 1 herein.
The accompanying financial statements of Berkshire Bancorp Inc. and subsidiaries includes the accounts of the parent company, Berkshire Bancorp Inc., and its wholly-owned subsidiaries: The Berkshire Bank, Greater American Finance Group, Inc. and East 39, LLC.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with US GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with US 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.
With the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002, the Company discontinued the amortization of goodwill resulting from acquisitions. Goodwill is now subject to impairment testing at least annually to determine whether write-downs of the recorded balances are necessary. The Company tests for impairment based on the goodwill maintained at the Bank. A fair value is determined for each reporting unit based on at least one of three various market valuation methodologies. If the fair values of the reporting units exceed their book values, no write-down of recorded goodwill is necessary. If the fair value of the reporting unit is less, an expense may be required on the Company's books to write down the related goodwill to the proper carrying value. The goodwill was evaluated for impairment as of September 30, 2008 with no recognition of impairment considered necessary.
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.
For The Three Months Ended September 30,
--------------------------------------------------------------------------------------
2008 2007
----------------------------------------- -----------------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $ 471,103 $ 8,296 7.04 % $ 385,425 $ 7,363 7.64 %
Investment securities 472,086 5,793 4.91 581,577 7,086 4.87
Other (2)(5) 68,764 433 2.52 18,386 208 4.53
- --------- -- -------- -- -------- - --------- -- -------- -- --------
Total interest-earning assets 1,011,953 14,522 5.74 985,388 14,657 5.95
-- -------- -- --------
Noninterest-earning assets 52,130 47,250
- --------- - ---------
Total Assets $ 1,064,083 $ 1,032,638
- --------- - ---------
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 298,931 1,838 2.46 % 291,919 2,631 3.61 %
Time deposits 450,342 3,785 3.36 461,936 5,650 4.89
Other borrowings 139,042 1,476 4.25 98,123 1,401 5.71
- --------- -- -------- -- -------- - --------- -- -------- -- --------
Total interest-bearing
liabilities 888,315 7,099 3.20 851,978 9,682 4.55
-- -------- -- -------- -- -------- -- --------
Demand deposits 54,259 51,525
Noninterest-bearing liabilities 9,217 9,979
Stockholders' equity (5) 112,292 119,156
- --------- - ---------
Total liabilities and
stockholders' equity $ 1,064,083 $ 1,032,638
- --------- - ---------
Net interest income $ 7,423 $ 4,975
-- -------- -- --------
Interest-rate spread (3) 2.54 % 1.40 %
-- -------- -- --------
Net interest margin (4) 2.93 % 2.02 %
-- -------- -- --------
Ratio of average
interest-earning assets to
average interest bearing
liabilities 1.14 1.16
- --------- - ---------
|
(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 Nine Months Ended September 30,
--------------------------------------------------------------------------------------
2008 2007
----------------------------------------- -----------------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $ 458,166 $ 24,597 7.16 % $ 380,628 $ 21,841 7.65 %
Investment securities 520,606 20,914 5.36 547,809 19,337 4.71
Other (2)(5) 43,958 857 2.60 34,146 1,270 4.96
- --------- -- -------- -- -------- - --------- -- -------- -- --------
Total interest-earning assets 1,022,730 46,368 6.04 962,583 42,448 5.88
-- -------- -- --------
Noninterest-earning assets 48,594 45,988
- --------- - ---------
Total Assets $ 1,071,324 $ 1,008,571
- --------- - ---------
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 306,879 6,408 2.78 % 285,232 7,492 3.50 %
Time deposits 454,748 13,303 3.90 442,395 16,058 4.84
Other borrowings 126,598 4,200 4.42 100,516 4,173 5.54
- --------- -- -------- -- -------- - --------- -- -------- -- --------
Total interest-bearing
liabilities 888,225 23,911 3.59 828,143 27,723 4.46
-- -------- -- -------- -- -------- -- --------
Demand deposits 54,540 50,088
Noninterest-bearing liabilities 10,100 11,892
Stockholders' equity (5) 118,459 118,448
- --------- - ---------
Total liabilities and
stockholders' equity $ 1,071,324 $ 1,008,571
- --------- - ---------
Net interest income $ 22,457 $ 14,725
-- -------- -- --------
Interest-rate spread (3) 2.45 % 1.42 %
-- -------- -- --------
Net interest margin (4) 2.93 % 2.04 %
-- -------- -- --------
Ratio of average
interest-earning assets to
average interest bearing
liabilities 1.15 1.16
- --------- - ---------
|
(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 Nine Months Ended September 30, 2008 Compared to the Three and Nine Months Ended September 30, 2007.
General.Berkshire Bancorp Inc., a bank holding company registered under the Bank Holding Company Act of 1956, has one indirect wholly-owned banking subsidiary, The Berkshire Bank, a New York State chartered commercial bank. The Bank is headquartered in Manhattan and has twelve branch locations; seven branches in New York City, four branches in Orange and Sullivan counties New York, and one branch in Ridgefield, New Jersey.
Net Income (Loss). Net loss for the three-month period ended September 30, 2008 was $88.69 million, or $12.57 per share, as compared to net income of $1.28 million, or $.18 per share, for the three-month period ended September 30, 2007. Net loss for the nine-month period ended September 30, 2008 was $83.40 million, or $11.82 per share, as compared to net income of $3.40 million, or $.49 per share, for the nine-month period ended September 30, 2007. The net loss for the three and nine months periods ended September 30, 2008 was due to the other than temporary impairment charges on securities of $94.35 million, or $13.37 per 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 quarter ended September 30, 2008, net interest income increased by $2.45 million to $7.42 million from $4.98 million for the quarter ended September 30, 2007. The quarter over quarter increase in net interest income was due to the $26.57 million increase in the average amount of interest-earning assets and the 135 basis point decrease in the average rates paid on the average amount of interest-bearing liabilities to 3.20% from 4.55% for the three months ended September 30, 2008 and 2007, 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, increased by 114 basis points to 2.54% during the quarter ended September 30, 2008 from 1.40% in the comparable 2007 quarter.
For the nine-month period ended September 30, 2008, net interest income increased by $7.73 million to $22.46 million from $14.73 million for the nine-month period ended September 30, 2007. The period over period increase in net interest income was due to the $60.15 million increase in the average amount of interest-earning assets and the 87 basis point decrease in the average rates paid on the average amount of interest-bearing liabilities to 3.59% from 4.46% for the nine month periods ended September 30, 2008 and 2007, respectively. The Company's interest-rate spread increased by 103 basis points to 2.45% in the 2008 nine- month period from 1.42% in the 2007 nine-month period.
The average amount of loans in our loan portfolio increased by $85.68 million and $77.54 million during the three and nine month periods ended September 30, 2008, respectively, to $471.10 million and $458.17 million, respectively, from $385.43 million and $380.63 million during the three and nine months ended September 30, 2007, respectively. The average amount of investment securities in our securities portfolio decreased by $109.49 million and $27.20 million during the three and nine months ended September 30, 2008, respectively, to $472.09 million and $520.61 million, respectively, from $581.58 million and $547.81 million during the three and nine months ended September 30, 2007, respectively. The average yields earned on investment securities increased to 4.91% and 5.36% during the three and nine months ended September 30, 2008, respectively, from 4.87% and 4.71% during the three and nine months ended September 30, 2007, respectively.
Interest Income. Total interest income for the quarter ended September 30, 2008 decreased by $135,000 to $14.52 million from $14.66 million for the quarter ended September 30, 2007. Total interest income for the nine months ended September 30, 2008 increased by $3.92 million to $46.37 million from $42.45 million for the nine months ended September 30, 2007.
The following tables present the composition of interest income for the indicated periods:
Three Months Ended September 30,
--------------------------------------------
2008 2007
--------------------- --------------------
Interest % of Interest % of
Income Total Income Total
(In thousands, except percentages)
Loans $ 8,296 57.13 % $ 7,363 50.23 %
Investment Securities 5,793 39.89 7,086 48.35
Other 433 2.98 208 1.42
--- ------ - ------ -- ------ - ------
Total Interest Income $ 14,522 100.00 % $ 14,657 100.00 %
--- ------ - ------ -- ------ - ------
|
Nine Months Ended September 30,
--------------------------------------------
2008 2007
--------------------- --------------------
Interest % of Interest % of
Income Total Income Total
(In thousands, except percentages)
Loans $ 24,597 53.05 % $ 21,841 51.46 %
Investment Securities 20,914 45.10 19,337 45.55
Other 857 1.85 1,270 2.99
--- ------ - ------ -- ------ - ------
Total Interest Income $ 46,368 100.00 % $ 42,448 100.00 %
--- ------ - ------ -- ------ - ------
|
Loans, which are inherently risky and therefore command a higher return than our portfolio of investment securities and other interest-earning assets, increased to 46.55% and 44.80% of total average interest-earning assets during the three and nine months ended September 30, 2008, respectively, from 39.11% and 39.54% of total interest-earning assets during the three and nine months ended September 30, 2007, respectively. The average amount of investment securities have decreased to 46.65% and 50.90% of total average interest-earning assets during the three and nine months ended September 30, 2008, respectively, from 59.02% and 56.91% of total interest-earning assets during the three and nine-month periods of fiscal year 2007, 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 September 30, 2008, our investment portfolio consisted of $86.3 million of gross auction rate securities for which the underlying security was either Fannie Mae or Freddie Mac Preferred Shares, as well as $8.7 million of preferred shares of Fannie Mae and Freddie Mac. In addition, the Company held a $6.9 million corporate note from Lehman Brothers who failed on September 15, 2008. Due to the U.S. Treasury actions in the quarter ended September 30, 2008, suspending the dividends on Fannie Mae and Freddie Mac Preferred Shares, and the bankruptcy of Lehman Brothers, we determined that these securities were other than temporarily impaired and recognized a pre-tax charge totaling $94.35 million. The possibility of the reinstatement of Fannie Mae and Freddie Mac dividends, along with the continuation of interest payments on other auction rate securities and the Lehman Brothers corporate note in our investment portfolio is uncertain.
We are currently negotiating a potential settlement of claims we believe we have with the issuing financial institutions of the auction rate securities in our investment portfolio pursuant to the agreement these financial institutions have reached with the SEC and the attorney general for the State of New York. The outcome of these negotiations and the amount we may recover in a settlement agreement, if any, is uncertain at this time.
Interest Expense. Total interest expense for the quarter ended September 30, 2008 decreased by $2.58 million to $7.10 million from $9.68 million for the quarter ended September 30, 2007. The decrease in interest expense was primarily due to the 135 basis point decrease in the average rates paid on the average amount of interest-bearing liabilities to 3.20% in the 2008 quarter from 4.55% in the 2007 quarter. The decrease was partially offset by the increase in the average amount of interest-bearing liabilities to $888.32 million from $851.98 million for the quarters ended September 30, 2008 and 2007, respectively.
The following tables present the components of interest expense as of the dates indicated:
Three Months Ended September 30,
---------------------------------------------
2008 2007
--------------------- ---------------------
Interest % of Interest % of
Expense Total Expense Total
(In thousands, except percentages)
Interest-Bearing Deposits $ 1,838 25.89 % $ 2,631 27.17 %
Time Deposits 3,785 53.32 5,650 58.36
Other Borrowings 1,476 20.79 1,401 14.47
-- ------ - ------ -- ------- - ------
Total Interest Expense $ 7,099 100.00 % $ 9,682 100.00 %
-- ------ - ------ -- ------- - ------
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Nine Months Ended September 30,
--------------------------------------------
2008 2007
--------------------- --------------------
Interest % of Interest % of
Expense Total Expense Total
(In thousands, except percentages)
. . .
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