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BERK > SEC Filings for BERK > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for BERKSHIRE BANCORP INC /DE/

Form 10-Q for BERKSHIRE BANCORP INC /DE/


14-Nov-2011

Quarterly Report


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 is the New York State Banking Department. Deposits are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation. 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, out 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 recorded a provision for loan losses of $0 and $1.6 million during the three and nine-month periods ended September 30, 2011, respectively, compared to a provision for loan losses of $1.5 million and $4.3 million during the three and nine-month periods ended September 30, 2010, respectively. The decrease in the provision for loan losses was deemed 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.

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.

During the nine months ended September 30, 2010, we recorded a $1.2 million other than temporary impairment ("OTTI") charge on two auction rate securities which had Freddie Mac preferred shares as the underlying collateral. The OTTI charge was deemed appropriate due to the significant decline in the price of the Freddie Mac shares with little expectation of recovery in the near term. No such OTTI charges were recorded during the nine months ended September 30, 2011, during which time we sold the Freddie Mac securities and realized a gain of $2.8 million which has been recorded in our Statement of Operations.

Net income, before dividends on our Series A Preferred Stock and before the provision for income taxes, for the three and nine months ended September 30, 2011 was $3.3 million and $49.6 million, respectively, compared to net income before dividends on our Series A Preferred Stock and before the provision for income taxes, of $240,000 and $2.9 million for the three and nine months ended September 30, 2010. Net income allocated to common stockholders, after dividends on our Series A Preferred Stock and provision for income taxes, was $1.8 million and $43.6 million for the three and nine months ended September 30, 2011, respectively, compared to net income allocated to common stockholders, after dividends on our Series A Preferred Stock and benefit from income taxes,of $431,000 for the three months ended September 30, 2010 and a net loss allocated to common stockholders, after dividends on our Series A Preferred Stock and benefit from income taxes, of $190,000 for the nine months ended September 30, 2010.

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 September 30,
                                                            2011                                               2010
                                                                                                            Interest
                                      Average            Interest            Average        Average            and           Average
                                      Balance          and Dividends       Yield/Rate       Balance         Dividends      Yield/Rate
                                                                             (Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1)                             $   332,246     $         5,229              6.30 %   $  379,983     $     6,295            6.63 %
Investment securities                     418,746               3,240              3.09        354,049           3,542            4.00
Other (2)(5)                              108,682                  65              0.24         64,543              41            0.25
Total interest-earning assets             859,674               8,534              3.97        798,575           9,878            4.95
Noninterest-earning assets                 29,937                                               59,125
Total Assets                          $   889,611                                           $  857,700

INTEREST-BEARING LIABILITIES:
Interest bearing deposits                 219,882                 236              0.43 %      222,710             333            0.60 %
Time deposits                             377,837               1,267              1.34        392,832           1,415            1.44
Other borrowings                           80,437                 721              3.59         84,918             790            3.72
Total interest-bearing liabilities        678,156               2,224              1.31        700,460           2,538            1.45

Demand deposits                            78,270                                               70,865
Noninterest-bearing liabilities            11,751                                                7,603
Stockholders' equity (5)                  121,434                                               78,772

Total liabilities and stockholders'
equity                                $   889,611                                           $  857,700

Net interest income                                   $         6,310                                      $     7,340

Interest-rate spread (3)                                                           2.66 %                                         3.50 %

Net interest margin (4)                                                            2.94 %                                         3.68 %

Ratio of average interest-earning
assets to average interest bearing
liabilities                                  1.27                                                 1.14



(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 Nine Months Ended September 30,
                                                         2011                                            2010
                                                      Interest                                        Interest
                                       Average           and           Average         Average           and           Average
                                       Balance        Dividends       Yield/Rate       Balance        Dividends      Yield/Rate
                                                                       (Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1)                             $  343,668     $    16,406             6.37 %   $  397,356     $    19,301            6.48 %
Investment securities                    390,962           9,901             3.38        361,229          11,062            4.08
Other (2)(5)                              93,964             199             0.28         68,364             157            0.30
Total interest-earning assets            828,594          26,506             4.27        826,949          30,520            4.92
Noninterest-earning assets                30,799                                          59,838
Total Assets                          $  859,393                                      $  886,787

INTEREST-BEARING LIABILITIES:
Interest bearing deposits                213,552             754             0.47 %      226,120           1,237            0.73 %
Time deposits                            383,221           3,858             1.34        404,980           4,724            1.56
Other borrowings                          81,567           2,227             3.64         93,399           2,729            3.90
Total interest-bearing liabilities       678,340           6,839             1.34        724,499           8,690            1.60

Demand deposits                           78,306                                          69,545
Noninterest-bearing liabilities            7,970                                           7,940
Stockholders' equity (5)                  94,777                                          84,803

Total liabilities and stockholders'
equity                                $  859,393                                      $  886,787

Net interest income                                  $    19,667                                     $    21,830

Interest-rate spread (3)                                                     2.93 %                                         3.32 %

Net interest margin (4)                                                      3.16 %                                         3.52 %

Ratio of average interest-earning
assets to average interest bearing
liabilities                                 1.22                                            1.14



(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 Nine Months Ended September 30, 2011 Compared to the Three and Nine Months Ended September 30, 2010.

Net Income (Loss) Allocated to Common Stockholders. Net income allocated to common stockholders for the three and nine-month periods ended September 30, 2011 was $1.8 million and $43.6 million, respectively, or $.25 and $6.18 per common share, respectively. Net income allocated to common stockholders for the three-month period ended September 30, 2010 was $431,000, or $.06 per common share. Net loss allocated to common stockholders for the nine-month period ended September 30, 2010 was $190,000, or $.03 per common share. The net income allocated to common stockholders reported for the three months ended September 30, 2011 includes (i) dividends accrued on our Series A Preferred Stock of $1.2 million, or $.17 per common share and (ii) provision for income taxes of $281,000, or $.04 per common share. The net income allocated to common stockholders reported for the nine months ended September 30, 2011 includes (i) dividends accrued on our Series A Preferred Stock of $3.6 million, or $.51 per common share, (ii) a provision for income taxes of $2.4 million, or $.34 per common share, and (iii) a one-time settlement payment of $42.5 million, or $6.02 per common share.

The net income allocated to common stockholders reported for the three months ended September 30, 2010 includes (i) dividends accrued on our Series A Preferred Stock of $1.2 million, or $.17 per common share, and (ii) income tax benefit of $1.4 million, or $.20 per common share. The net loss allocated to common stockholders for the nine months ended September 30, 2010 includes (i) OTTI charges of $1.2 million, or $.17 per common share, (ii) dividends accrued on our Series A Preferred Stock of $3.6 million, or $.51 per common share, and
(iii) income tax benefit of $476,000, or $.07 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 nine months ended September 30, 2011, net interest income was $6.3 million and $19.7 million, respectively, compared to net interest income of $7.3 million and $21.8 million for the three and nine months ended September 30, 2010. The decrease in net interest income was primarily due to the decrease in the average yields earned on interest-earning assets during the three and nine months ended September 30, 2011, partially offset by the increase in the average amounts of interest-earning assets and the decrease in the average amounts and the average rates paid on interest-bearing liabilities.

The average yields earned on interest-earning assets declined to 3.97% and 4.27% during the three and nine months ended September 30, 2011, respectively, from 4.95% and 4.92% during the three and nine months ended September 30, 2010, respectively. The average rates paid on interest-bearing liabilities declined to 1.31% and 1.34% during the three and nine months ended September 30, 2011, respectively, from 1.45% and 1.60% during the three and nine months ended September 30, 2010, 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, decline to 2.66% and 2.93% during the three and nine months September 30, 2011, respectively, from 3.50% and 3.32% during the three and nine months ended September 30, 2010, respectively.

Net Interest Margin. Net interest margin, or annualized net interest income as a percentage of average interest-earning assets, was 2.94% and 3.16% for the three and nine months ended September 30, 2011, respectively, compared to 3.68% and 3.52% during the three and nine months ended September 30, 2010. 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 the total mix of interest-earning assets.


Interest Income. Total interest income for the quarter ended September 30, 2011 decreased by $1.4 million to $8.5 million from $9.9 million for the quarter ended September 30, 2010. The decrease in total interest income was due to the decrease in the average yield earned on the average amount of interest-earning assets to 3.97% during the 2011 quarter from 4.95% during the 2009 quarter, and the decrease in the average amount of higher yielding loans to $332.2 million during the 2011 quarter from $380.0 million during the 2010 quarter, partially offset by the increase in the average amount of interest-earning assets

Total interest income for the nine months ended September 30, 2011 decreased by $4.0 million to $26.5 million from $30.5 million for the nine months ended September 30, 2010. The decrease in total interest income was due to the decrease in the average yield earned on the average amount of interest-earning assets to 4.27% during the nine-month period of 2011 from 4.92% during the nine-month period of 2010 and the decrease in the average amount of higher yielding loans to $343.7 million during the nine-month period of 2011 from $397.4 million during the nine-month period of 2010.

The following tables present the composition of interest income for the indicated periods:

                                 Three Months Ended September 30,
                                 2011                        2010
                         Interest        % of        Interest        % of
                          Income        Total         Income        Total
                                (In thousands, except percentages)
Loans                   $    5,229        61.27 %   $    6,295        63.72 %
Investment Securities        3,240        37.97          3,542        35.86
Other                           65         0.76             41         0.42
Total Interest Income   $    8,534       100.00 %   $    9,878       100.00 %


                                 Nine Months Ended September 30,
                                 2011                       2010
                        Interest        % of       Interest        % of
                         Income        Total        Income        Total
                               (In thousands, except percentages)
Loans                   $  16,406        61.90 %   $  19,301        63.24 %
Investment Securities       9,901        37.35        11,062        36.25
Other                         199         0.75           157         0.51
Total Interest Income   $  26,506       100.00 %   $  30,520       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 38.6% and 41.5% of total average interest-earning assets during the three and nine months ended September 30, 2010, respectively, from 47.6% and 48.1% of total interest-earning assets during the three and nine months ended September 30, 2010, respectively. The average amounts of investment securities increased to 48.7% and 47.2% of total average interest-earning assets during the three and nine months ended September 30, 2011, respectively, from 44.3% and 43.7% of total interest-earning assets during the three and nine months ended September 30, 2010, 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.

. . .

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