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| BERK > SEC Filings for BERK > Form 10-Q on 11-Aug-2009 | All Recent SEC Filings |
11-Aug-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 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. As of December 31, 2008, the goodwill was evaluated for impairment with no recognition of impairment considered necessary. For the six months ended June 30, 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 June 30,
------------------------------------------------------------------------------------
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) $ 451,768 $ 7,449 6.60 % $ 456,232 $ 8,096 7.10 %
Investment securities 292,782 4,042 5.52 541,773 7,254 5.36
Other (2)(5) 60,450 182 1.20 36,951 200 2.17
- ------- -- -------- -- -------- - --------- -- -------- -- --------
Total interest-earning
assets 805,000 11,673 5.80 1,034,956 15,550 6.01
-- -------- -- --------
Noninterest-earning assets 66,576 39,946
- ------- - ---------
Total Assets $ 871,576 $ 1,074,902
- ------- - ---------
|
INTEREST-BEARING
LIABILITIES:
Interest bearing deposits 200,642 559 1.11 % 299,143 1,921 2.57 %
Time deposits 431,037 2,678 2.49 466,044 4,434 3.81
Other borrowings 116,961 1,169 4.00 126,183 1,324 4.20
- ------- -- -------- -- -------- - --------- -- -------- -- --------
Total interest-bearing
liabilities 748,640 4,406 2.35 891,370 7,679 3.45
-- -------- -- -------- -- -------- -- --------
Demand deposits 53,778 55,546
Noninterest-bearing
liabilities 9,189 4,582
Stockholders' equity (5) 59,969 123,404
- ------- - ---------
Total liabilities and
stockholders' equity $ 871,576 $ 1,074,902
- ------- - ---------
Net interest income 7,267 7,871
-- -------- -- --------
Interest-rate spread (3) 3.45 % 2.56 %
-- -------- -- --------
Net interest margin (4) 3.61 % 3.04 %
-- -------- -- --------
Ratio of average
interest-earning assets to
average interest bearing
liabilities 1.08 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.
For The Six Months Ended June 30,
------------------------------------------------------------------------------------
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) $ 455,275 $ 15,220 6.69 % $ 451,626 $ 16,301 7.22 %
Investment securities 297,537 8,445 5.68 545,124 15,121 5.55
Other (2)(5) 64,388 453 1.41 31,420 424 2.70
- ------- -- -------- -- -------- - --------- -- -------- -- --------
Total interest-earning
assets 817,200 24,118 5.90 1,028,170 31,846 6.12
-- -------- -- --------
Noninterest-earning assets 65,480 46,810
- ------- - ---------
Total Assets $ 882,680 $ 1,074,980
- ------- - ---------
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INTEREST-BEARING
LIABILITIES:
Interest bearing deposits 202,567 1,276 1.26 % 310,900 4,570 2.94 %
Time deposits 433,169 5,978 2.76 456,976 9,518 4.17
Other borrowings 120,244 2,520 4.19 120,308 2,724 4.53
- ------- -- -------- -- -------- - --------- -- -------- -- --------
Total interest-bearing
liabilities 755,980 9,774 2.59 888,184 16,812 3.79
-- -------- -- -------- -- -------- -- --------
Demand deposits 53,811 54,683
Noninterest-bearing
liabilities 9,644 10,546
Stockholders' equity (5) 63,245 121,567
- ------- - ---------
Total liabilities and
stockholders' equity $ 882,680 $ 1,074,980
- ------- - ---------
Net interest income 14,344 15,034
-- -------- -- --------
Interest-rate spread (3) 3.31 % 2.33 %
-- -------- -- --------
Net interest margin (4) 3.51 % 2.92 %
-- -------- -- --------
Ratio of average
interest-earning assets to
average interest bearing
liabilities 1.08 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 for the Three and Six Months Ended June 30, 2009 Compared to the Three and Six Months Ended June 30, 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 June 30, 2009 was $3.64 million, or $.52 per common share, compared to net income of $2.64 million, or $.37 per common share, for the three-month period ended June 30, 2008. Net loss for the six-month period ended June 30, 2009 was $3.77 million, or $.53 per common share, compared to net income of $5.29 million, or $.75 per common share, for the six-month period ended June 30, 2008. The net loss reported for the three months ended June 30, 2009 includes other than temporary impairment charges on securities of $4.10 million, or $.58 per common share, and dividends on our Series A Preferred Stock of $1.20 million, or $.17 per common share. The net loss reported for the six months ended June 30, 2009 includes other than temporary impairment charges on securities of $5.13 million, or $.73 per common share, and dividends on our Series A Preferred Stock of $2.40 million, or $.34 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 June 30, 2009, net interest income decreased by approximately $600,000 to $7.27 million from $7.87 million for the quarter ended June 30, 2008. The decrease in net interest income was due to the decrease in the average amounts of interest-earning assets to $805.00 million during the 2009 period from $1,034.96 million during the 2008 period, and the decrease in the average yields earned on such assets to 5.80% during the 2009 period from 6.01% during the 2008 period. The decrease in net interest income was substantially offset by the decrease in the average amounts of interest-bearing liabilities to $748.64 million during the 2009 period from $891.37 million during the 2008 period and the decrease in the average rates paid on such liabilities to 2.35% during the 2009 period from 3.45% during the 2008 period. 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 89 basis points to 3.45% from 2.56% during the three months ended June 30, 2009 and 2008, respectively.
For the six-month period ended June 30, 2009, net interest income decreased by approximately $690,000 to $14.34 million from $15.03 million for the six-month period ended June 30, 2008. The decrease in net interest income was due to the decrease in the average amounts of interest-earning assets to $817.20 million during the 2009 six-month period from $1,028.17 million during the 2008 six-month period, and the decrease in the average yields earned on such assets to 5.90% during the 2009 six-month period from 6.12% during the 2008 six-month period. The decrease in net interest income was substantially offset by the decrease in the average amounts of interest-bearing liabilities to $755.98 million during the 2009 six month period from $888.18 million during the 2008 six-month period and the decrease in the average rates paid on such liabilities to 2.59% during the 2009 six-month period from 3.79% during the 2008 six-month period. The Company's interest-rate spread increased by 98 basis points to 3.31% from 2.33% during the six months ended June 30, 2009 and 2008, respectively.
Net Interest Margin.Net interest margin, or annualized net interest income as a percentage of average interest-earning assets, increased by 57 basis points to 3.61% during the quarter ended June 30, 2009 from 3.04% during the quarter ended June 30, 2008. Net interest margin increased by 59 basis points to 3.51% during the six-months ended June 30, 2009 from 2.92% during the six-months ended June 30, 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 what we believe to be a prudent mix of fixed and adjustable rate loans, investment securities and short-term interest-earning assets. The increase in net interest margin during the three and six months ended June 30, 2009 was primarily due to the increase in the average amounts of higher yielding loans as a percentage of our total mix of interest-earning assets.
The following tables present the composition of interest income for the indicated periods:
Three Months Ended June 30,
--------------------------------------------
2009 2008
--------------------- --------------------
Interest % of Interest % of
Income Total Income Total
(In thousands, except percentages)
Loans $ 7,449 63.81 % $ 8,096 52.06 %
Investment Securities 4,042 34.63 7,254 46.65
Other 182 1.56 200 1.29
--- ------ - ------ -- ------ - ------
Total Interest Income $ 11,673 100.00 % $ 15,550 100.00 %
--- ------ - ------ -- ------ - ------
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Six Months Ended June 30,
--------------------------------------------
2009 2008
--------------------- --------------------
Interest % of Interest % of
Income Total Income Total
(In thousands, except percentages)
Loans $ 15,220 63.10 % $ 16,301 51.19 %
Investment Securities 8,445 35.02 15,121 47.48
Other 453 1.88 424 1.33
--- ------ - ------ -- ------ - ------
Total Interest Income $ 24,118 100.00 % $ 31,846 100.00 %
--- ------ - ------ -- ------ - ------
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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 56.1% and 55.7% of total average interest-earning assets during the three and six months ended June 30, 2009, respectively, from 44.1% and 43.9% during the three and six months ended June 30, 2008, respectively. Investment securities comprised 36.4% and 36.4% of total average interest-earning assets during the three and six-month periods ended June 30, 2008, respectively, from 52.4% and 53.0% during the three and six-month periods ended June 30, 2008, 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, 2009, our portfolio of investment securities included approximately $88.12 million at cost of auction rate securities and $54.61 million at cost of corporate notes, including the $4.90 million cost of a note issued by General Motors for which an other than temporary impairment charge has been recorded in our financial statements in the amount of $4.10 million, pre-tax, as a result of bankruptcy proceedings of the issuer, significant downgrades on the security and the discontinuation of interest payments. The fair value of the remaining securities, presently $57.81 million and $29.9 million, respectively, could be negatively impacted in the future. Were this to occur, we may be required to reflect additional write downs 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.
In January 2009, The Bank filed an arbitration proceeding with the Financial Industry Regulatory Authority against the issuing financial institution of the auction rate securities in our investment portfolio. The outcome of the arbitration process and the amount we may recover, 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. Available-for-sale securities are reported at fair value with unrealized gains and losses included, on an after-tax basis, as a separate component of net worth. The Bank does not have a trading securities portfolio and has no current plans to maintain such a portfolio in the future. The Bank generally classifies all newly purchased debt securities as available for sale in order to maintain the flexibility to sell those securities if the need arises. The Bank has a limited portfolio of securities classified as held to maturity, represented principally by securities purchased a number of years ago.
Interest Expense.Total interest expense for the quarter ended June 30, 2009 decreased by $3.27 million to $4.41 million from $7.68 million for the quarter ended June 30, 2008. The decrease in interest expense was due to the decrease in the average rates paid on the average amount of interest-bearing liabilities to 2.35% in the 2009 quarter from 3.45% in the 2008 quarter, and the decrease in the average amounts of interest-bearing liabilities to $748.64 million from $891.37 million for the quarters ended June 30, 2009 and 2008, respectively.
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