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| BERK > SEC Filings for BERK > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
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 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 ("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 Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets"("SFAS No. 142") 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. As of December 31, 2008, the goodwill was evaluated for impairment with no recognition of impairment considered necessary. For the three months ended March 31, 2009, management determined that there were no additional impairment indicators since the goodwill was evaluated as of December 31, 2008.
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 income.
For The Three Months Ended March 31,
------------------------------------------------------------------------------------
2009 2008
--------------------------------------- -----------------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
--------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $ 458,820 $ 7,771 6.77 % $ 447,020 $ 8,205 7.34 %
Investment securities 302,347 4,403 5.83 557,554 7,867 5.64
Other (2)(5) 68,368 271 1.59 25,887 224 3.46
- ------- -- -------- -- -------- - --------- -- -------- -- --------
Total interest-earning assets 829,535 12,445 6.00 1,030,461 16,296 6.33
-- -------- -- --------
Noninterest-earning assets 64,368 44,637
- ------- - ---------
Total Assets $ 893,903 $ 1,075,098
- ------- - ---------
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 204,515 716 1.40 % 332,711 2,649 3.28 %
Time deposits 435,326 3,301 3.03 447,907 5,084 4.54
Other borrowings 123,564 1,351 4.38 114,432 1,400 4.89
- ------- -- -------- -- -------- - --------- -- -------- -- --------
Total interest-bearing
liabilities 763,405 5,368 2.81 885,050 9,133 4.13
-- -------- -- -------- -- -------- -- --------
Demand deposits 53,844 53,819
Noninterest-bearing liabilities 10,099 11,069
Stockholders' equity (5) 66,555 125,160
- ------- - ---------
Total liabilities and
stockholders' equity $ 893,903 $ 1,075,098
- ------- - ---------
Net interest income $ 7,077 $ 7,163
-- -------- -- --------
Interest-rate spread (3) 3.19 % 2.20 %
-- -------- -- --------
Net interest margin (4) 3.41 % 2.78 %
-- -------- -- --------
Ratio of average
interest-earning assets to
average interest bearing
liabilities 1.09 1.16
- ------- - ---------
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(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 for the Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008.
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) Allocated to Common Stockholders. Net loss for the three-month period ended March 31, 2009 was $131,000, or $.02 per common share, compared to net income of $2.65 million, or $.38 per common share, for the three-month period ended March 31, 2008. The net loss recorded for the three-month period ended March 31, 2009 includes other than temporary impairment charges on securities of $1.025 million, or $.14 per common share, and dividends on our Series A Preferred Stock of $1.20 million, or $.17 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 quarter ended March 31, 2009, net interest income decreased by approximately $86,000 to $7.08 million from $7.16 million for the quarter ended March 31, 2008. The decrease in net interest income was primarily due to the $200.92 million decrease in the average amounts of interest-earning assets to $829.54 million in the 2009 quarter from $1,030.46 million in the 2008 quarter. The decrease in net interest income was substantially offset by the $121.65 million decrease in the average amounts of interest-bearing liabilities to $763.41 million in 2009 from $885.05 million in 2008 and by the 132 basis point decrease in the average rates paid on the average amounts of interest-bearing liabilities to 2.81% in the 2009 quarter from 4.13% in the 2008 quarter. 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 99 basis points to 3.19% in the 2009 quarter from 2.20% in the 2008 quarter.
Net Interest Margin. Net interest margin, or annualized net interest income as a percentage of average interest-earning assets, increased by 63 basis points to 3.41% in the quarter ended March 31, 2009 from 2.78% in the quarter ended March 31, 2008. 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 increase in net interest margin is primarily due to the increase in the average amount of
Interest Income.Total interest income for the quarter ended March 31, 2009 decreased by $3.85 million to $12.45 million from $16.30 million for the quarter ended March 31, 2008. The decrease in total interest income was primarily due to the decrease in the average amounts of interest-earning assets as discussed above.
The following table presents the composition of interest income for the indicated periods.
Three Months Ended March 31,
--------------------------------------------
2009 2008
--------------------- --------------------
Interest % of Interest % of
Income Total Income Total
(In thousands, except percentages)
Loans $ 7,771 62.44 % $ 8,205 50.35 %
Investment Securities 4,403 35.38 7,867 48.28
Other 271 2.18 224 1.37
--- ------ - ------ -- ------ - ------
Total Interest Income $ 12,445 100.00 % $ 16,296 100.00 %
--- ------ - ------ -- ------ - ------
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Loans, which are inherently risky and therefore command a higher return than our portfolio of investment securities and other interest-earning assets, increased to 55.31% of our total amount of average interest-earning assets during the quarter ended March 31, 2009 from 43.38% during the quarter ended March 31, 2008. Investment securities represented 36.45% and 54.11% of total interest-earning assets in the 2009 quarter and the 2008 quarter, 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 March 31, 2009, our portfolio of investment securities included approximately $94.12 million at cost of auction rate securities and $55.50 million of corporate notes for which an other than temporary impairment charge has not been recorded in our financial statements. The fair value of these securities, presently $45.81 million and $39.86 million, respectively, could be negatively impacted in the future. Were this to occur, we may be required to reflect a write down of certain of our securities in future periods as a charge to earnings if any of our securities are deemed to be other than temporarily impaired. Such impairment charge could be material to our results of operations.
We are currently negotiating a potential settlement of claims we asserted against 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 of 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.
As required by SFAS No. 115, securities are classified into three categories: trading, held-to-maturity and available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in trading account activities in the statement of income. Securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other securities are classified as available-for-sale.
Federal Home Loan Bank Stock. The Bank owns stock of the FHLBNY which is necessary for it to be a member of the FHLBNY. 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 FHLBNY shares is dependent upon the redemption practices of the FHLBNY. At March 31, 2009, the FHLBNY 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 March 31, 2009 or 2008.
Interest Expense. Total interest expense for the quarter ended March 31, 2009 decreased by $3.77 million to $5.37 million from $9.13 million for the quarter ended March 31, 2008. The decrease in interest expense was due primarily to the decrease in the average amounts of interest-bearing liabilities, to $763.41 million in the 2009 quarter from $885.05 million in the 2008 quarter, and the decrease in the average rates paid on the average amounts of interest-bearing liabilities to 2.81% in the 2009 quarter from 4.13% in the 2008 quarter.
The following table presents the composition of interest expense for the indicated periods.
Three Months Ended March 31,
---------------------------------------------
2009 2008
--------------------- ---------------------
Interest % of Interest % of
Expense Total Expense Total
(In thousands, except percentages)
Interest-Bearing Deposits $ 716 13.34 % $ 2,649 29.00 %
Time Deposits 3,301 61.49 5,084 55.67
Other Borrowings 1,351 25.17 1,400 15.33
-- ------- - ------ -- ------- - ------
Total Interest Expense $ 5,368 100.00 % $ 9,133 100.00 %
-- ------- - ------ -- ------- - ------
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Non-Interest Income.Non-interest income consists primarily of realized gains on sales of marketable securities and service fee income. For the three months ended March 31, 2009, total non-interest income decreased by $67,000 to $399,000 from $466,000 for the three months ended March 31, 2008. The decrease was primarily attributable to the decrease of $33,000 in service charges on deposit accounts and the decrease of $51,000 in other income.
The following table presents the components of non-interest expense for the indicated periods.
Three Months Ended March 31,
------------------------------------------------------
2009 2008
------------------------- -------------------------
Non-Interest % of Non-Interest % of
Expense Total Expense Total
(In thousands, except percentages)
Salaries and Employee Benefits $ 2,361 41.57 % $ 2,399 61.36 %
Net Occupancy Expense 506 8.91 538 13.76
Equipment Expense 99 1.74 95 2.43
FDIC Assessment 683 12.02 106 2.71
Data Processing Expense 94 1.65 111 2.84
Other than temporary impairment charges
on securities 1,025 18.05 - -
Other 912 16.06 661 16.90
-- ---------- - ------ -- ---------- - ------
Total Non-Interest Expense $ 5,680 100.00 % $ 3,910 100.00 %
-- ---------- - ------ -- ---------- - ------
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Provision for Income Tax.During the three-month periods ended March 31, 2009 and 2008, we recorded income tax expense of $577,000 and $920,000, respectively. The tax provisions for federal, state and local taxes recorded for the 2009 and 2008 periods represent effective tax rates of 35.05% and 25.78%, respectively. The increase in the effective tax rate in the 2009 period compared to the 2008 period is primarily due to the tax-free income earned on certain of the auction rate securities in our investment portfolio in 2008.
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 March 31, 2009, 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 quarter of 2009. At March 31, 2009, there were 501,091 shares of Common Stock which may yet be purchased under our stock repurchase plan.
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