BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share
Data)
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks
(including restricted cash Of $4,711 and $4,083, respectively)
|
|
$
|
8,009
|
|
|
$
|
8,637
|
|
Interest bearing deposits
|
|
|
96,203
|
|
|
|
140,517
|
|
Total cash and cash equivalents
|
|
|
104,212
|
|
|
|
149,154
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value
|
|
|
354,935
|
|
|
|
355,114
|
|
Federal Home Loan Bank of New York stock
|
|
|
722
|
|
|
|
887
|
|
Held-to-maturity, fair value of $266 in 2013 and $283 in 2012
|
|
|
264
|
|
|
|
275
|
|
Total investment securities
|
|
|
355,921
|
|
|
|
356,276
|
|
Loans, net of unearned income
|
|
|
305,876
|
|
|
|
295,165
|
|
Less: allowance for loan losses
|
|
|
(10,387
|
)
|
|
|
(11,008
|
)
|
Net loans
|
|
|
295,489
|
|
|
|
284,157
|
|
Accrued interest receivable
|
|
|
2,928
|
|
|
|
3,099
|
|
Premises and equipment, net
|
|
|
7,086
|
|
|
|
7,113
|
|
Real Estate Owned
|
|
|
-
|
|
|
|
225
|
|
Deferred Tax Asset, net
|
|
|
19,834
|
|
|
|
16,392
|
|
Other assets
|
|
|
4,371
|
|
|
|
11,629
|
|
Total assets
|
|
$
|
789,841
|
|
|
$
|
828,045
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
89,824
|
|
|
$
|
84,163
|
|
Interest bearing
|
|
|
518,143
|
|
|
|
558,307
|
|
Total deposits
|
|
|
607,967
|
|
|
|
642,470
|
|
Securities sold under agreements to repurchase
|
|
|
45,000
|
|
|
|
45,000
|
|
Borrowings
|
|
|
-
|
|
|
|
1,539
|
|
Accrued interest payable
|
|
|
1,925
|
|
|
|
1,699
|
|
Other liabilities
|
|
|
4,411
|
|
|
|
3,031
|
|
Total liabilities
|
|
|
659,303
|
|
|
|
693,739
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
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, 2013, 14,416,198 shares
December 31, 2012, 14,416,198 shares
|
|
|
1,442
|
|
|
|
1,441
|
|
Additional paid-in capital
|
|
|
143,903
|
|
|
|
143,903
|
|
Accumulated Deficit
|
|
|
(6,035
|
)
|
|
|
(8,061
|
)
|
Accumulated other comprehensive loss, net
|
|
|
(8,772
|
)
|
|
|
(2,977
|
)
|
Total stockholders' equity
|
|
|
130,538
|
|
|
|
134,306
|
|
Total liabilities and stockholders' equity
|
|
$
|
789,841
|
|
|
$
|
828,045
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars In Thousands, Except Per Share
Data)
(unaudited)
|
|
For The
Three Months Ended
June 30,
|
|
|
For The
Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including related fees
|
|
$
|
4,249
|
|
|
$
|
4,882
|
|
|
$
|
8,476
|
|
|
$
|
9,787
|
|
Investment securities
|
|
|
2,093
|
|
|
|
2,288
|
|
|
|
4,278
|
|
|
|
4,737
|
|
Federal Home Loan Bank of New York stock
|
|
|
8
|
|
|
|
12
|
|
|
|
19
|
|
|
|
-
|
|
Interest bearing deposits
|
|
|
90
|
|
|
|
125
|
|
|
|
184
|
|
|
|
184
|
|
Total interest income
|
|
|
6,440
|
|
|
|
7,307
|
|
|
|
12,957
|
|
|
|
14,708
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
949
|
|
|
|
1,174
|
|
|
|
1,907
|
|
|
|
2,400
|
|
Securities sold under agreements to repurchase
|
|
|
384
|
|
|
|
447
|
|
|
|
764
|
|
|
|
891
|
|
Interest expense on borrowings
|
|
|
2
|
|
|
|
144
|
|
|
|
10
|
|
|
|
341
|
|
Total interest expense
|
|
|
1,335
|
|
|
|
1,765
|
|
|
|
2,681
|
|
|
|
3,632
|
|
Net interest income
|
|
|
5,105
|
|
|
|
5,542
|
|
|
|
10,276
|
|
|
|
11,076
|
|
PROVISION FOR LOAN LOSSES
|
|
|
(298
|
)
|
|
|
—
|
|
|
|
(601
|
)
|
|
|
—
|
|
Net interest income after provision for loan losses
|
|
|
5,403
|
|
|
|
5,542
|
|
|
|
10,877
|
|
|
|
11,076
|
|
NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
73
|
|
|
|
148
|
|
|
|
197
|
|
|
|
234
|
|
Investment securities gains (losses)
|
|
|
292
|
|
|
|
(112
|
)
|
|
|
313
|
|
|
|
108
|
|
Other income
|
|
|
94
|
|
|
|
85
|
|
|
|
476
|
|
|
|
302
|
|
Total non-interest income
|
|
|
459
|
|
|
|
121
|
|
|
|
986
|
|
|
|
644
|
|
NON-INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,893
|
|
|
|
2,380
|
|
|
|
5,595
|
|
|
|
4,860
|
|
Net occupancy expense
|
|
|
708
|
|
|
|
577
|
|
|
|
1,301
|
|
|
|
1,161
|
|
Equipment expense
|
|
|
89
|
|
|
|
88
|
|
|
|
178
|
|
|
|
166
|
|
FDIC assessment
|
|
|
(3
|
)
|
|
|
300
|
|
|
|
297
|
|
|
|
600
|
|
Data processing expense
|
|
|
107
|
|
|
|
112
|
|
|
|
234
|
|
|
|
224
|
|
Other
|
|
|
653
|
|
|
|
696
|
|
|
|
1,304
|
|
|
|
1,332
|
|
Total non-interest expense
|
|
|
4,447
|
|
|
|
4,153
|
|
|
|
8,909
|
|
|
|
8,343
|
|
Income before provision for taxes
|
|
|
1,415
|
|
|
|
1,510
|
|
|
|
2,953
|
|
|
|
3,377
|
|
Provision (benefit) for income taxes
|
|
|
538
|
|
|
|
(1,834
|
)
|
|
|
1,126
|
|
|
|
(2,103
|
)
|
Net income
|
|
$
|
877
|
|
|
$
|
3,344
|
|
|
$
|
1,828
|
|
|
$
|
5,480
|
|
Dividends on preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income allocated to common stockholders
|
|
$
|
877
|
|
|
$
|
3,344
|
|
|
$
|
1,828
|
|
|
$
|
5,480
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
0.23
|
|
|
$
|
0.13
|
|
|
$
|
0.38
|
|
Diluted
|
|
$
|
0.06
|
|
|
$
|
0.23
|
|
|
$
|
0.13
|
|
|
$
|
0.38
|
|
Number of shares used to compute
net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,416
|
|
|
|
14,416
|
|
|
|
14,416
|
|
|
|
14,416
|
|
Diluted
|
|
|
14,416
|
|
|
|
14,416
|
|
|
|
14,416
|
|
|
|
14,416
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(in thousands)
(unaudited)
|
|
For The Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Net Income
|
|
$
|
1,828
|
|
|
$
|
5,480
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Unrealized gains(losses) on available- for-sale securities, net of taxes of $4,596 and $3,673, in 2013 and 2012, respectively
|
|
|
(5,623
|
)
|
|
|
5,509
|
|
Less: Reclassification adjustment for realized gains (losses) included in
net earnings, net of taxes of $141 and $43, in 2013 and 2012, respectively
|
|
|
172
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(5,795
|
)
|
|
$
|
5,444
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income(loss)
|
|
$
|
(3,967
|
)
|
|
$
|
10,924
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
For The Six Months Ended June 30, 2013
and 2012
(Dollars In Thousands, Except Share Data)
(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
|
|
|
Total
stockholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
14,443
|
|
|
|
—
|
|
|
$
|
1,444
|
|
|
$
|
—
|
|
|
$
|
143,900
|
|
|
$
|
(10,517
|
)
|
|
$
|
(19,299
|
)
|
|
$
|
—
|
|
|
$
|
115,528
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,480
|
|
|
|
|
|
|
|
5,480
|
|
Other comprehensive income net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,444
|
|
|
|
|
|
|
|
|
|
|
|
5,444
|
|
Adjustment
|
|
|
(27
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Balance at June 30, 2012
|
|
$
|
14,416
|
|
|
|
—
|
|
|
$
|
1,442
|
|
|
$
|
—
|
|
|
$
|
143,903
|
|
|
$
|
(5,073
|
)
|
|
$
|
(13,819
|
)
|
|
$
|
—
|
|
|
$
|
126,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
14,416
|
|
|
|
—
|
|
|
$
|
1,441
|
|
|
$
|
—
|
|
|
$
|
143,903
|
|
|
$
|
(2,977
|
)
|
|
$
|
(8,061
|
)
|
|
$
|
—
|
|
|
$
|
134,306
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,828
|
|
|
|
|
|
|
|
1,828
|
|
Other comprehensive income net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,795
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,795
|
)
|
Adjustment
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
199
|
|
Balance at June 30, 2013
|
|
|
14,416
|
|
|
|
—
|
|
|
$
|
1,442
|
|
|
$
|
—
|
|
|
$
|
143,903
|
|
|
$
|
(8,772
|
)
|
|
$
|
(6,035
|
)
|
|
$
|
—
|
|
|
$
|
130,538
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
For The Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,828
|
|
|
$
|
5,480
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Realized (gains) on investment securities
|
|
|
(313
|
)
|
|
|
(108
|
)
|
Net amortization of premiums of investment securities
|
|
|
896
|
|
|
|
1,313
|
|
Depreciation and amortization
|
|
|
262
|
|
|
|
252
|
|
Provision for loan losses
|
|
|
(601
|
)
|
|
|
-
|
|
(Increase) decrease in accrued interest receivable
|
|
|
171
|
|
|
|
245
|
|
(Increase) decrease in other real estate owned
|
|
|
225
|
|
|
|
—
|
|
(Increase) decrease in other assets
|
|
|
8,411
|
|
|
|
(7,264
|
)
|
(Decrease) increase in accrued interest payable and other liabilities
|
|
|
1,606
|
|
|
|
(4,587
|
)
|
Net cash provided by (used in) operating activities
|
|
|
12,485
|
|
|
|
(4,669
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(245,393
|
)
|
|
|
(228,191
|
)
|
Sales, maturities and calls
|
|
|
234,799
|
|
|
|
254,097
|
|
Investment securities held to maturity
|
|
|
—
|
|
|
|
—
|
|
Payments
|
|
|
11
|
|
|
|
12
|
|
Decrease in FHLBNY stock
|
|
|
165
|
|
|
|
—
|
|
Net decrease in loans
|
|
|
(10,731
|
)
|
|
|
(3,279
|
)
|
Purchases of premises and equipment
|
|
|
(236
|
)
|
|
|
(99
|
)
|
Net cash provided by (used in) investing activities
|
|
|
(21,385
|
)
|
|
|
22,540
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in non interest bearing deposits
|
|
|
5,661
|
|
|
|
1,644
|
|
Net increase/(decrease) in interest bearing deposits
|
|
|
(40,164
|
)
|
|
|
20,281
|
|
Repayment of borrowings
|
|
|
(1,539
|
)
|
|
|
(2,344
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(36,042
|
)
|
|
|
19,581
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
(44,942
|
)
|
|
|
37,452
|
|
Cash and cash equivalents at beginning of period
|
|
|
149,154
|
|
|
|
101,036
|
|
Cash and cash equivalents at end of period
|
|
$
|
104,212
|
|
|
$
|
138,488
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash used to pay interest
|
|
$
|
2,455
|
|
|
$
|
8,504
|
|
Cash used to pay income taxes, net of refunds
|
|
$
|
453
|
|
|
$
|
78
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
(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 wholly-owned 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 consolidated
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 consolidated 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 2013 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 2012 Annual Report on Form
10-K.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 2. Earnings Per Share
Basic earnings per
common share is calculated by dividing income 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-months ended June 30, 2013 and 2012, 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,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
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
|
|
$
|
877
|
|
|
|
|
|
|
|
|
|
|
$
|
3,344
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
877
|
|
|
|
14,416
|
|
|
$
|
0.06
|
|
|
$
|
3,344
|
|
|
|
14,416
|
|
|
$
|
0.23
|
|
|
|
For
The Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
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
|
|
$
|
1,828
|
|
|
|
|
|
|
|
|
|
|
$
|
5,480
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
1,828
|
|
|
|
14,416
|
|
|
$
|
0.13
|
|
|
$
|
5,480
|
|
|
|
14,416
|
|
|
$
|
0.38
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 3. Income Taxes
The income tax provision
(benefit) for
the three months and six months ended June 30, 2013
was
$538
and $1,126, respectively and the income tax provision (benefit) from
three months and six months
ended June 30, 2012
was (
$1,834)
and $(2,103), respectively.
The effective tax rate for the three
month and six month period ended June 30, 2013 was 38.02 and 38.13 percent. The Company’s effective tax rate differs
from the statutory rate primarily due to benefit related to the dividends received deduction.
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. In 2012, the Company released
its valuation allowance on the deferred tax asset for its remaining net operating loss carry forwards. The release during the
three and six-month periods ended June 30, 2012 was due to additional current earnings and the expectation that the Company will
recognize the remaining benefit of the net operating loss carry forwards. The valuation allowance release was the primary driver
of the tax benefits recorded during the three and six months ended June 30, 2012.
There were no
significant uncertain tax positions requiring additional recognition in its financial statements as of June 30, 2013 and the Company
does not believe that there will be any material changes in its unrecognized tax positions over the next twelve months. In addition,
there were no accruals for interest or penalties during the three months and six months ended June 30, 2013.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. Loan Portfolio
The following table
sets forth information concerning the Company's loan portfolio by type of loan at the dates indicated:
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of
Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial and Industrial and Finance Leases
|
|
$
|
23,066
|
|
|
|
7.5
|
%
|
|
$
|
23,184
|
|
|
|
7.8
|
%
|
Secured by Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
81,990
|
|
|
|
26.8
|
|
|
|
84,207
|
|
|
|
28.5
|
|
Multi family
|
|
|
13,872
|
|
|
|
4.5
|
|
|
|
14,491
|
|
|
|
4.9
|
|
Commercial Real Estate and Construction
|
|
|
186,898
|
|
|
|
61.0
|
|
|
|
172,973
|
|
|
|
58.5
|
|
Consumer
|
|
|
566
|
|
|
|
0.2
|
|
|
|
899
|
|
|
|
0.3
|
|
Total loans
|
|
|
306,392
|
|
|
|
100.0
|
%
|
|
|
295,754
|
|
|
|
100.0
|
%
|
Deferred loan fees
|
|
|
(516
|
)
|
|
|
|
|
|
|
(589
|
)
|
|
|
|
|
Allowance for loan losses
|
|
|
(10,387
|
)
|
|
|
|
|
|
|
(11,008
|
)
|
|
|
|
|
Loans, net
|
|
$
|
295,489
|
|
|
|
|
|
|
$
|
284,157
|
|
|
|
|
|
The Bank had $0.9
million of non-accrual loans as of June 30, 2013 and December 31, 2012, and no loans delinquent more than ninety days and still
accruing interest at both June 30, 2013 and December 31, 2012. The Bank did not foreclose on any loans during the six months ended
June 30, 2013. The Bank had one foreclosed real estate property, with a carrying value of $225,000 in the year ended December
31, 2012 which was sold during the first quarter of 2013. The Bank classified the non-accrual loans as impaired loans at both
June 30, 2013 and December 31, 2012. 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 1.25% of risk-weighted assets or approximately
$4.8 million and $4.6 million at June 30, 2013 and December 31, 2012, respectively.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. - (continued)
Average impaired loans
for the three and six months ended June 30, 2013 and 2012 were approximately $7.5 million and $25.6 million, respectively. Interest
income that would have been recognized had these loans performed in accordance with their contractual terms was approximately
$4,000 and $8,000 for the three months ended June 30, 2013 and 2012, respectively, and $9,000 and $17,000 for the six months ended
June 30, 2013 and 2012, respectively.
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, 2013
|
|
|
June 30, 2012
|
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
10,705
|
|
|
$
|
17,720
|
|
|
$
|
11,008
|
|
|
$
|
17,720
|
|
Provision charged to operations
|
|
|
(298
|
)
|
|
|
-
|
|
|
|
(601
|
)
|
|
|
-
|
|
Loans charged-off
|
|
|
(20
|
)
|
|
|
(2
|
)
|
|
|
(20
|
)
|
|
|
(2
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at end of period
|
|
$
|
10,387
|
|
|
$
|
17,718
|
|
|
$
|
10,387
|
|
|
$
|
17,718
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. - (continued)
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 adverse effect on the credit quality in this loan class.
Commercial real
estate
- Loans in this class include non-owner occupied 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 adverse 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 4. - (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 4. - (continued)
Allowance for Credit Losses and Recorded
Investment in Loans
For the Six Months Ended June 30, 2013
(In thousands)
|
|
Commercial
&
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Construction
|
|
|
Multi
Family
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Finance
Leases
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
989
|
|
|
$
|
6,309
|
|
|
$
|
1,441
|
|
|
$
|
326
|
|
|
$
|
1,529
|
|
|
$
|
15
|
|
|
$
|
62
|
|
|
$
|
337
|
|
|
$
|
11,008
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Provision
|
|
|
(21
|
)
|
|
|
215
|
|
|
|
65
|
|
|
|
(49
|
)
|
|
|
(432
|
)
|
|
|
(5
|
)
|
|
|
(37
|
)
|
|
|
(337
|
)
|
|
|
(601
|
)
|
Ending balance
|
|
$
|
968
|
|
|
$
|
6,524
|
|
|
$
|
1,506
|
|
|
$
|
277
|
|
|
$
|
1,077
|
|
|
$
|
10
|
|
|
$
|
25
|
|
|
$
|
-
|
|
|
$
|
10,387
|
|
Ending balance: individually
evaluated for impairment
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Ending balance: collectively
evaluated for impairment
|
|
$
|
968
|
|
|
$
|
6,524
|
|
|
$
|
1,506
|
|
|
$
|
277
|
|
|
$
|
1,077
|
|
|
$
|
10
|
|
|
$
|
25
|
|
|
$
|
-
|
|
|
$
|
10,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
22,123
|
|
|
$
|
161,756
|
|
|
$
|
25,142
|
|
|
$
|
13,872
|
|
|
$
|
81,990
|
|
|
$
|
566
|
|
|
$
|
943
|
|
|
$
|
0
|
|
|
$
|
306,392
|
|
Ending balance: individually
evaluated for impairment
|
|
$
|
0
|
|
|
$
|
1,250
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,224
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
7,474
|
|
Ending balance: collectively
evaluated for impairment
|
|
$
|
22,123
|
|
|
$
|
160,506
|
|
|
$
|
25,142
|
|
|
$
|
13,872
|
|
|
$
|
75,766
|
|
|
$
|
566
|
|
|
$
|
943
|
|
|
$
|
0
|
|
|
$
|
298,918
|
|
Among the loans reviewed
for impairment, $0.8 million of residential loans and $1.2 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 4. - (continued)
Allowance for Credit Losses and Recorded
Investment in Loans
For the Year Ended December 31, 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
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(52
|
)
|
Recoveries
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
Provision
|
|
|
8
|
|
|
|
(1,548
|
)
|
|
|
832
|
|
|
|
(85
|
)
|
|
|
(4,911
|
)
|
|
|
(38
|
)
|
|
|
(64
|
)
|
|
|
(887
|
)
|
|
|
(6,693
|
)
|
Ending balance
|
|
$
|
989
|
|
|
$
|
6,309
|
|
|
$
|
1,441
|
|
|
$
|
326
|
|
|
$
|
1,529
|
|
|
$
|
15
|
|
|
$
|
62
|
|
|
$
|
337
|
|
|
$
|
11,008
|
|
Ending balance: individually
evaluated for impairment
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Ending balance: collectively
evaluated for impairment
|
|
$
|
989
|
|
|
$
|
6,309
|
|
|
$
|
1,441
|
|
|
$
|
326
|
|
|
$
|
1,529
|
|
|
$
|
15
|
|
|
$
|
62
|
|
|
$
|
337
|
|
|
$
|
11,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
21,814
|
|
|
$
|
149,184
|
|
|
$
|
23,789
|
|
|
$
|
14,491
|
|
|
$
|
84,207
|
|
|
$
|
899
|
|
|
$
|
1,370
|
|
|
$
|
0
|
|
|
$
|
295,754
|
|
Ending balance: individually
evaluated for impairment
|
|
$
|
0
|
|
|
$
|
1,277
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
7,596
|
|
|
$
|
13
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
8,886
|
|
Ending balance: collectively
evaluated for impairment
|
|
$
|
21,814
|
|
|
$
|
147,907
|
|
|
$
|
23,789
|
|
|
$
|
14,491
|
|
|
$
|
76,611
|
|
|
$
|
886
|
|
|
$
|
1,370
|
|
|
$
|
0
|
|
|
$
|
286,868
|
|
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 4. - (continued)
Age Analysis of Past Due Loans
As of June 30, 2013
(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
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
22,103
|
|
|
$
|
22,123
|
|
|
$
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,142
|
|
|
|
25,142
|
|
|
|
—
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
161,756
|
|
|
|
161,756
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
440
|
|
|
|
440
|
|
|
|
—
|
|
Overdrafts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
126
|
|
|
|
126
|
|
|
|
—
|
|
Residential - prime
|
|
|
329
|
|
|
|
—
|
|
|
|
882
|
|
|
|
1,211
|
|
|
|
80,779
|
|
|
|
81,990
|
|
|
|
—
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,872
|
|
|
|
13,872
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
943
|
|
|
|
943
|
|
|
|
—
|
|
Total
|
|
$
|
349
|
|
|
$
|
—
|
|
|
$
|
882
|
|
|
$
|
1,231
|
|
|
$
|
305,161
|
|
|
$
|
306,392
|
|
|
$
|
—
|
|
Age Analysis of Past Due Loans
As of December 31, 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
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,814
|
|
|
$
|
21,814
|
|
|
$
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,789
|
|
|
|
23,789
|
|
|
|
—
|
|
Commercial real estate
|
|
|
7,181
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,181
|
|
|
|
142,003
|
|
|
|
149,184
|
|
|
|
—
|
|
Consumer
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
665
|
|
|
|
715
|
|
|
|
—
|
|
Overdrafts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
184
|
|
|
|
184
|
|
|
|
—
|
|
Residential - prime
|
|
|
6,081
|
|
|
|
373
|
|
|
|
861
|
|
|
|
7,315
|
|
|
|
76,892
|
|
|
|
84,207
|
|
|
|
—
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,491
|
|
|
|
14,491
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,370
|
|
|
|
1,370
|
|
|
|
—
|
|
Total
|
|
$
|
13,312
|
|
|
$
|
373
|
|
|
$
|
861
|
|
|
$
|
14,546
|
|
|
$
|
281,208
|
|
|
$
|
295,754
|
|
|
$
|
—
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. - (continued)
Impaired Loans
For the Six Months Ended June 30, 2013
(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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
1,250
|
|
|
|
1,250
|
|
|
|
—
|
|
|
|
1,262
|
|
|
|
42
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential - prime
|
|
|
6,224
|
|
|
|
6,224
|
|
|
|
—
|
|
|
|
6,260
|
|
|
|
202
|
|
|
|
8
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,474
|
|
|
$
|
7,474
|
|
|
$
|
—
|
|
|
$
|
7,522
|
|
|
$
|
244
|
|
|
$
|
8
|
|
Commercial
|
|
|
1,250
|
|
|
|
1,250
|
|
|
|
—
|
|
|
|
1,262
|
|
|
|
42
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
|
—
|
|
Residential
|
|
|
6,224
|
|
|
|
6,224
|
|
|
|
—
|
|
|
|
6,260
|
|
|
|
202
|
|
|
|
8
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. - (continued)
Impaired Loans
For the Year Ended December 31, 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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
1,277
|
|
|
|
1,277
|
|
|
|
—
|
|
|
|
1,307
|
|
|
|
87
|
|
|
|
—
|
|
Consumer
|
|
|
13
|
|
|
|
13
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
—
|
|
Residential - prime
|
|
|
7,596
|
|
|
|
7,596
|
|
|
|
—
|
|
|
|
7,640
|
|
|
|
355
|
|
|
|
6
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,886
|
|
|
$
|
8,886
|
|
|
$
|
—
|
|
|
$
|
8,962
|
|
|
$
|
442
|
|
|
$
|
6
|
|
Commercial
|
|
|
1,277
|
|
|
|
1,277
|
|
|
|
—
|
|
|
|
1,307
|
|
|
|
87
|
|
|
|
—
|
|
Consumer
|
|
|
13
|
|
|
|
13
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
7,596
|
|
|
|
7,596
|
|
|
|
—
|
|
|
|
7,640
|
|
|
|
355
|
|
|
|
6
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. - (continued)
Loans on Nonaccrual Status
As of
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
|
(In thousands)
|
|
Commercial & industrial
|
|
$
|
—
|
|
|
$
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
882
|
|
|
|
861
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
882
|
|
|
$
|
861
|
|
The Company utilizes
a grade risk rating system for the loan portfolio.
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.
Credit Exposure
Credit Risk Profile by Internally Assigned
Grades
As of June 30, 2013
(In thousands)
|
|
Commercial
&
Industrial
|
|
|
Commercial Real
Estate Construction
|
|
|
Commercial
Real Estate Other
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
20,215
|
|
|
$
|
15,512
|
|
|
$
|
142,681
|
|
Watch
|
|
|
1,700
|
|
|
|
—
|
|
|
|
9,582
|
|
Special Mention
|
|
|
103
|
|
|
|
—
|
|
|
|
5,533
|
|
Substandard
|
|
|
105
|
|
|
|
9,630
|
|
|
|
3,960
|
|
Total
|
|
$
|
22,123
|
|
|
$
|
25,142
|
|
|
$
|
161,756
|
|
|
|
Residential
|
|
|
Multi Family
|
|
|
Finance
Leases
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
80,820
|
|
|
$
|
13,872
|
|
|
$
|
—
|
|
Watch
|
|
|
1,091
|
|
|
|
—
|
|
|
|
—
|
|
Special Mention
|
|
|
—
|
|
|
|
—
|
|
|
|
943
|
|
Substandard
|
|
|
79
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
81,990
|
|
|
$
|
13,872
|
|
|
$
|
943
|
|
|
|
Consumer
Overdrafts
|
|
|
Consumer
Other
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
126
|
|
|
$
|
440
|
|
Nonperforming
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
126
|
|
|
$
|
440
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. - (continued)
Credit Exposure
Credit Risk Profile by Internally Assigned
Grades
As of December 31, 2012
(In thousands)
|
|
Commercial
&
Industrial
|
|
|
Commercial Real
Estate Construction
|
|
|
Commercial
Real Estate Other
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
21,679
|
|
|
$
|
23,789
|
|
|
$
|
115,548
|
|
Watch
|
|
|
—
|
|
|
|
—
|
|
|
|
8,226
|
|
Special Mention
|
|
|
—
|
|
|
|
—
|
|
|
|
5,970
|
|
Substandard
|
|
|
135
|
|
|
|
—
|
|
|
|
19,441
|
|
Total
|
|
$
|
21,814
|
|
|
$
|
23,789
|
|
|
$
|
149,184
|
|
|
|
Residential
|
|
|
Multi Family
|
|
Grade:
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
76,097
|
|
|
$
|
14,491
|
|
Watch
|
|
|
716
|
|
|
|
—
|
|
Special Mention
|
|
|
1,086
|
|
|
|
—
|
|
Substandard
|
|
|
6,308
|
|
|
|
—
|
|
Total
|
|
$
|
84,207
|
|
|
$
|
14,491
|
|
|
|
Consumer
Overdrafts
|
|
|
Consumer
Other
|
|
|
Finance
Leases
|
|
Performing
|
|
$
|
184
|
|
|
$
|
715
|
|
|
$
|
1,370
|
|
Nonperforming
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
184
|
|
|
$
|
715
|
|
|
$
|
1,370
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 4. - (continued)
|
|
Loan Modifications
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2013
|
|
|
|
Number
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
Non-
|
|
|
|
|
Troubled Debt
|
|
of
|
|
|
Outstanding Recorded Loans
|
|
|
Outstanding
|
|
|
Accrual
|
|
|
Loan
|
|
Restructuring
|
|
Loans
|
|
|
Recorded Loans
|
|
|
Recorded Loans
|
|
|
Basis
|
|
|
Balance
|
|
Residential Real Estate
|
|
|
5
|
|
|
$
|
1,048
|
|
|
$
|
1,008
|
|
|
|
2
|
|
|
$
|
803
|
|
Commercial Real Estate
|
|
|
3
|
|
|
|
1,354
|
|
|
|
1,250
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
8
|
|
|
$
|
2,402
|
|
|
$
|
2,258
|
|
|
|
2
|
|
|
$
|
803
|
|
|
|
As of December 31, 2012
|
|
|
|
Number
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
Non-
|
|
|
|
|
Troubled Debt
|
|
of
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Accrual
|
|
|
Loan
|
|
Restructuring
|
|
Loans
|
|
|
Recorded Loans
|
|
|
Recorded Loans
|
|
|
Basis
|
|
|
Balance
|
|
Residential Real Estate
|
|
|
7
|
|
|
$
|
2,177
|
|
|
$
|
2,101
|
|
|
|
0
|
|
|
$
|
0
|
|
Commercial Real Estate
|
|
|
3
|
|
|
|
1,354
|
|
|
|
1,276
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
10
|
|
|
$
|
3,531
|
|
|
$
|
3,377
|
|
|
|
0
|
|
|
$
|
0
|
|
The loans restructured
as noted above 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
.
Any material loans deemed
to be TDRs are individually evaluated for impairment with any loss recognized in the allowance for loan losses.
The following table
shows our recorded investment for loans classified as TDR that are performing according to their restructured terms :
|
|
As of June 30,
|
|
|
|
2013
|
|
|
2012
|
|
(Dollars in thousands)
|
|
Number of
contracts
|
|
|
Recorded
investments
|
|
|
Numbers of
contracts
|
|
|
Recorded investments
|
|
Multi-family residential
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Commercial real estate
|
|
|
3
|
|
|
|
1,250
|
|
|
|
3
|
|
|
|
1,315
|
|
One-to-four family – residential
|
|
|
5
|
|
|
|
1,008
|
|
|
|
7
|
|
|
|
2,134
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial business and others
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total Performing TDRs
|
|
|
8
|
|
|
$
|
2,258
|
|
|
|
10
|
|
|
$
|
3,449
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 5. Investment Securities
The following is a
summary of held to maturity investment securities:
|
|
June 30, 2013
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
264
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
266
|
|
|
|
December 31, 2012
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
275
|
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
283
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 5. - (continued)
The following is a
summary of available-for-sale investment securities:
|
|
June 30, 2013
|
|
|
|
Amortized Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
39,859
|
|
|
$
|
—
|
|
|
$
|
(1,149
|
)
|
|
$
|
38,710
|
|
U.S. Government Agencies
|
|
|
140,011
|
|
|
|
—
|
|
|
|
(8,008
|
)
|
|
|
132,003
|
|
Mortgage-backed securities
|
|
|
129,074
|
|
|
|
725
|
|
|
|
(1,849
|
)
|
|
|
127,950
|
|
Corporate notes
|
|
|
8,459
|
|
|
|
56
|
|
|
|
(10
|
)
|
|
|
8,505
|
|
Auction rate securities
|
|
|
53,000
|
|
|
|
—
|
|
|
|
(5,355
|
)
|
|
|
47,645
|
|
Marketable equity Securities and other
|
|
|
122
|
|
|
|
—
|
|
|
|
—
|
|
|
|
122
|
|
Totals
|
|
$
|
370,525
|
|
|
$
|
781
|
|
|
$
|
(16,371
|
)
|
|
$
|
354,935
|
|
|
|
December 31, 2012
|
|
|
|
Amortized Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
24,868
|
|
|
$
|
19
|
|
|
$
|
(37
|
)
|
|
$
|
24,850
|
|
U.S. Government Agencies
|
|
|
141,653
|
|
|
|
367
|
|
|
|
(151
|
)
|
|
|
141,869
|
|
Mortgage-backed securities
|
|
|
127,507
|
|
|
|
2,343
|
|
|
|
(255
|
)
|
|
|
129,595
|
|
Corporate notes
|
|
|
10,386
|
|
|
|
106
|
|
|
|
(3
|
)
|
|
|
10,489
|
|
Auction rate securities
|
|
|
56,000
|
|
|
|
—
|
|
|
|
(7,815
|
)
|
|
|
48,185
|
|
Marketable equity Securities and other
|
|
|
126
|
|
|
|
—
|
|
|
|
—
|
|
|
|
126
|
|
Totals
|
|
$
|
360,540
|
|
|
$
|
2,835
|
|
|
$
|
(8,261
|
)
|
|
$
|
355,114
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 5. - (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 at June 30, 2013 and December 31, 2012:
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Preferred Shares of Money Center Banks
|
|
$
|
53,000
|
|
|
$
|
47,645
|
|
|
$
|
56,000
|
|
|
$
|
48,185
|
|
Totals
|
|
$
|
53,000
|
|
|
$
|
47,645
|
|
|
$
|
56,000
|
|
|
$
|
48,185
|
|
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, 2013 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, 2013 and
December 31, 2012, the amortized cost of our auction rate securities was $ 53.0 million and $56.0 million, respectively. The fair
value of the auction rate securities was $47.6 million and $48.2 million at June 30, 2013 and December 31, 2012, respectively.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 5. - (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, 2013, 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, 2013, the auction rate
securities have continued to pay interest at the highest rate as stipulated in the original prospectus.
At June 30, 2013,
we had 6 auction rate securities with an aggregate fair market value of $33.0 million which were below investment grade. At December
31, 2012, we had four auction rate securities with an aggregate fair market value of $30.6 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, 2013, 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 5/6 issuers 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.
There has been one
credit rating downgrade on our auction rate securities subsequent to December 31, 2012.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 5. - (continued)
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, 2013 (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
|
|
$
|
38,710
|
|
|
$
|
1,149
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38,710
|
|
|
$
|
1,149
|
|
U.S. Government Agencies
|
|
|
119,353
|
|
|
|
7,519
|
|
|
|
12,650
|
|
|
|
489
|
|
|
|
132,003
|
|
|
|
8,008
|
|
Mortgage-backed securities
|
|
|
66,563
|
|
|
|
1,295
|
|
|
|
40,291
|
|
|
|
554
|
|
|
|
106,854
|
|
|
|
1,849
|
|
Corporate Notes
|
|
|
1,078
|
|
|
|
9
|
|
|
|
630
|
|
|
|
1
|
|
|
|
1,708
|
|
|
|
10
|
|
Auction rate securities
|
|
|
47,645
|
|
|
|
5,355
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47,645
|
|
|
|
5,355
|
|
Total temporarily impaired securities
|
|
$
|
273,349
|
|
|
$
|
15,327
|
|
|
$
|
53,571
|
|
|
$
|
1,044
|
|
|
$
|
326,920
|
|
|
$
|
16,371
|
|
The Company had a
total of 152 debt securities with a fair market value of $326.9 million which were temporarily impaired at June 30, 2013. The
total unrealized loss on these securities was $16.4 million, which is attributable to the market interest volatility, the continued
illiquidity of the debt markets, and uncertainty in the financial markets. The unrealized loss on our debt securities is comprised
of a loss of $5.4 million on eight auction rate securities which have declined in value due to auction failures beginning in February
2008 and a loss of $11.0 million on other debt securities. It is not more likely than not that we would sell the
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 13.2% of total assets at June 30, 2013. 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 5. - (continued)
The amortized cost
and fair value of investment securities available for sale and held to maturity, by contractual maturity, at June 30, 2013 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, 2013
|
|
|
|
Available for Sale
|
|
|
Held to Maturity
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized Cost
|
|
|
Fair
Value
|
|
|
|
(In thousands)
|
|
Due in one year or less
|
|
$
|
2,704
|
|
|
$
|
2,719
|
|
|
|
-
|
|
|
|
-
|
|
Due after one through five years
|
|
|
36,563
|
|
|
|
36,118
|
|
|
|
-
|
|
|
|
-
|
|
Due after five through ten years
|
|
|
66,983
|
|
|
|
64,390
|
|
|
|
245
|
|
|
|
246
|
|
Due after ten years
|
|
|
211,153
|
|
|
|
203,941
|
|
|
|
19
|
|
|
|
20
|
|
Auction rate securities
|
|
|
53,000
|
|
|
|
47,645
|
|
|
|
-
|
|
|
|
-
|
|
Marketable equity securities and other
|
|
|
122
|
|
|
|
122
|
|
|
|
-
|
|
|
|
-
|
|
Totals
|
|
$
|
370,525
|
|
|
$
|
354,935
|
|
|
$
|
264
|
|
|
$
|
266
|
|
Gross gains realized
on the sales of available-for-sale securities for the six months ended June 30, 2013, and 2012 were $444,000 and $785,000 respectively.
Gross losses were $131,000 and $677,000 for the six months ended June 30, 2013 and 2012, respectively.
At both June 30, 2013
and December 31, 2012, securities sold under agreements to repurchase with a book value of $45.0 million were outstanding. The
book value of the securities pledged for these repurchase agreements was $52.0 million and $55.9 million, respectively. As of June
30, 2013 and December 31, 2012, the Company owns investment securities in one issuer where the carrying value exceeded 10% of shareholders'
equity.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 6. Deposits
The following table
summarizes the composition of the average balances of major deposit categories:
|
|
Six Months Ended
June
30,
2013
|
|
|
Twelve Months Ended
December
31,
2012
|
|
|
|
Average
Amount
|
|
|
Average
Yield
|
|
|
Average
Amount
|
|
|
Average
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
81,025
|
|
|
|
—
|
|
|
$
|
74,630
|
|
|
|
—
|
|
NOW and money market
|
|
|
39,739
|
|
|
|
0.42
|
%
|
|
|
27,536
|
|
|
|
0.29
|
%
|
Savings deposits
|
|
|
167,364
|
|
|
|
0.20
|
%
|
|
|
201,251
|
|
|
|
0.18
|
|
Time deposits
|
|
|
330,782
|
|
|
|
0.98
|
%
|
|
|
357,706
|
|
|
|
1.13
|
|
Total deposits
|
|
$
|
618,910
|
|
|
|
0.62
|
%
|
|
$
|
661,123
|
|
|
|
0.68
|
%
|
The following table
provides the Weighted Average rate for each of the deposit categories:
|
|
As of June 30,
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Balance
|
|
|
Ave Rate
|
|
|
Balance
|
|
|
Ave Rate
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit accounts
|
|
$
|
321,624
|
|
|
|
0.96
|
%
|
|
$
|
366,232
|
|
|
|
1.19
|
%
|
Savings accounts
|
|
|
155,953
|
|
|
|
0.20
|
%
|
|
|
210,271
|
|
|
|
0.16
|
%
|
Money Market accounts
|
|
|
8,908
|
|
|
|
0.17
|
%
|
|
|
7,986
|
|
|
|
0.20
|
%
|
NOW accounts
|
|
|
29,187
|
|
|
|
0.53
|
%
|
|
|
18,495
|
|
|
|
0.25
|
%
|
Total interest-bearing demand deposits
|
|
|
515,672
|
|
|
|
|
|
|
|
602,984
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
89,824
|
|
|
|
|
|
|
|
76,039
|
|
|
|
|
|
Total due to depositors
|
|
|
605,496
|
|
|
|
|
|
|
|
679,023
|
|
|
|
|
|
Mortgagors' escrow deposits
|
|
|
2,471
|
|
|
|
|
|
|
|
2,197
|
|
|
|
|
|
Total Deposits
|
|
$
|
607,967
|
|
|
|
|
|
|
$
|
681,220
|
|
|
|
|
|
Note 7. 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,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
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
|
|
$
|
(10,219
|
)
|
|
$
|
4,596
|
|
|
$
|
(5,623
|
)
|
|
$
|
9,182
|
|
|
$
|
(3,673
|
)
|
|
$
|
5,509
|
|
Less reclassification adjustment for gains (losses) realized in net income
|
|
|
313
|
|
|
|
(141
|
)
|
|
|
172
|
|
|
|
108
|
|
|
|
(43
|
)
|
|
|
65
|
|
Unrealized gain (loss) on investment securities
|
|
|
(10,532
|
)
|
|
|
4,737
|
|
|
|
(5,795)
|
|
|
|
9,074
|
|
|
|
(3,630
|
)
|
|
|
5,444
|
|
Other comprehensive Income (loss), net
|
|
$
|
(10,532
|
)
|
|
$
|
4,737
|
|
|
$
|
(5,795)
|
|
|
$
|
9,074
|
|
|
$
|
(3,630
|
)
|
|
$
|
5,444
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 8. 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, 2013 and December
31, 2012 are outlined below.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 8. - (continued)
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
|
(In thousands)
|
|
Investment securities
|
|
$
|
355,199
|
|
|
$
|
355,201
|
|
|
$
|
355,389
|
|
|
$
|
355,397
|
|
Loans, net of unearned income
|
|
|
305,876
|
|
|
|
312,108
|
|
|
|
295,165
|
|
|
|
305,123
|
|
Time Deposits
|
|
|
321,624
|
|
|
|
322,660
|
|
|
|
337,492
|
|
|
|
338,723
|
|
Other Deposits
|
|
|
286,343
|
|
|
|
286,343
|
|
|
|
304,978
|
|
|
|
304,978
|
|
Repurchase Agreements
|
|
|
45,000
|
|
|
|
45,502
|
|
|
|
45,000
|
|
|
|
46,138
|
|
Borrowings
|
|
|
—
|
|
|
|
—
|
|
|
|
1,539
|
|
|
|
1,548
|
|
The following table sets forth the fair
value hierarchy for financial instruments measured at fair value at June 30, 2013 and December 31, 2012:
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active Markets
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
|
|
|
for Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
Total carried at
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
fair value
|
|
(In thousands)
|
|
June 30,
2013
|
|
|
December
31, 2012
|
|
|
June 30,
2013
|
|
|
December
31, 2012
|
|
|
June 30,
2013
|
|
|
December
31, 2012
|
|
|
June 30,
2013
|
|
|
December
31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities
|
|
|
45,501
|
|
|
$
|
21,234
|
|
|
|
261,224
|
|
|
$
|
285,978
|
|
|
|
48,210
|
|
|
$
|
48,185
|
|
|
|
354,935
|
|
|
$
|
355,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of Unearned Income
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
312,108
|
|
|
|
305,123
|
|
|
|
312,108
|
|
|
|
305,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits
|
|
|
—
|
|
|
|
—
|
|
|
|
322,660
|
|
|
|
338,723
|
|
|
|
—
|
|
|
|
—
|
|
|
|
322,660
|
|
|
|
338,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Deposits
|
|
|
—
|
|
|
|
—
|
|
|
|
286,432
|
|
|
|
304,978
|
|
|
|
—
|
|
|
|
—
|
|
|
|
286,432
|
|
|
|
304,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements
|
|
|
—
|
|
|
|
—
|
|
|
|
45,502
|
|
|
|
46,138
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,502
|
|
|
|
46,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
|
1,548
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
|
1,548
|
|
For cash and cash equivalents, the recorded
book values of $104.2 million and $149.2 million at June 30, 2013 and December 31, 2012, 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, 2013 and December 31, 2012 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 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, 2013 and December 31, 2012.
The fair value of borrowings
and repurchase agreements approximates the carrying value due to the re-pricing of the debt. The Company measures the fair value
of borrowings and repurchase agreements using Level 2 inputs.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
(unaudited)
Note 8. - (continued)
Assets and Liabilities Measured at Fair
Value on a Recurring and Non 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 stock. These securities are valued at par value.
Assets measured at
fair value on a recurring and nonrecurring basis at June 30, 2013 and at December 31, 2012 are summarized below.
|
|
At June 30, 2013
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)
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,474
|
|
|
$
|
7,474
|
|
Investment securities available for sale: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
38,710
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38,710
|
|
U.S. Government Agencies
|
|
|
—
|
|
|
|
132,003
|
|
|
|
—
|
|
|
|
132,003
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
127,950
|
|
|
|
—
|
|
|
|
127,950
|
|
Corporate notes
|
|
|
6,791
|
|
|
|
1,149
|
|
|
|
565
|
|
|
|
8,505
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
47,645
|
|
|
|
47,645
|
|
Marketable equity securities and other
|
|
|
—
|
|
|
|
122
|
|
|
|
—
|
|
|
|
122
|
|
Total Investment securities available for sale
|
|
$
|
45,501
|
|
|
$
|
261,224
|
|
|
$
|
48,210
|
|
|
$
|
354,935
|
|
Total assets
|
|
$
|
45,501
|
|
|
$
|
261,224
|
|
|
$
|
55,684
|
|
|
$
|
362,409
|
|
(1) Non-recurring basis-impaired loans
represent carrying amount as no write downs were taken to date.
(2) Recurring basis.
The above table includes
$15.6 million in net unrealized losses on the Company's available for sale securities. The Company has reviewed its investment
portfolio at June 30, 2013, and determined that the unrealized losses are temporary.
|
|
At December, 31, 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)
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,886
|
|
|
$
|
8,886
|
|
Investment securities available for sale: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
14,846
|
|
|
$
|
10,004
|
|
|
$
|
—
|
|
|
$
|
24,850
|
|
U.S. Government Agencies
|
|
|
—
|
|
|
|
141,869
|
|
|
|
—
|
|
|
|
141,869
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
129,595
|
|
|
|
—
|
|
|
|
129,595
|
|
Corporate notes
|
|
|
6,388
|
|
|
|
4,101
|
|
|
|
—
|
|
|
|
10,489
|
|
Municipal securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
48,185
|
|
|
|
48,185
|
|
Marketable equity securities and other
|
|
|
—
|
|
|
|
126
|
|
|
|
—
|
|
|
|
126
|
|
Total Investment securities available for sale
|
|
$
|
21,234
|
|
|
$
|
285,695
|
|
|
$
|
48,185
|
|
|
$
|
355,114
|
|
Total assets
|
|
$
|
21,234
|
|
|
$
|
285,695
|
|
|
$
|
57,071
|
|
|
$
|
364,000
|
|
(1) Non-recurring basis-impaired loans
represent carrying amount as no write downs were taken to date.
(2) Recurring basis.
The above table includes
$5.4 million in net unrealized losses on the Company's available for sale securities. The Company has reviewed its investment portfolio
at December 31, 2012, and determined that the unrealized losses are temporary.
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).
|
|
Investment Securities
Available for Sale
For the six months ended June 30,
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Balance, January 1,
|
|
$
|
48,185
|
|
$
|
44,495
|
Included in other comprehensive income
|
|
|
2,460
|
|
|
9,118
|
Redemptions and sales
|
|
|
(3,000
|
)
|
|
(7,500)
|
Balance, June 30,
|
|
$
|
47,645
|
|
$
|
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, 2013
|
|
$
|
—
|
|
$
|
—
|
In accordance with
FASB Accounting Standards Update (“ASU”) No. 2011-04, the Bank establishes valuation processes and procedures to ensure
that the valuation techniques for investments that are categorized within Level 3 of the fair value hierarchy are fair, consistent
and verifiable.
The Bank periodically
tests its valuation of Level 3 investments through performing Discounted Cash Flow analysis of the investments by comparing
the results of the discounted cash flow to the values obtained from valuation of the underlying collateral of the Auction Rate
Securities. The following table presents additional information in accordance with ASU 2011-04 about the valuation processes utilized
in measuring assets and liabilities at fair value using significant unobservable inputs (Level 3):
Assets (at Fair Value)
|
|
Fair Value at
June 30, 2013
(in thousands)
|
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
Range of Preferred
Share Pricing
|
|
Auction Rate Securities
|
|
$
|
47,645
|
|
|
Market Prices
|
|
Underlying Collateral
|
|
|
$21.17 to $24.04
|
|
Note 9. Related Party Transactions
In accordance with
banking regulations, the Bank, from time to time, enters into lending transactions in the ordinary course of business with directors,
executive officers, principal stockholders and affiliates of such persons on the same terms as those prevailing for comparable
transactions with other borrowers. The following table summarizes the activity in loans to related parties. (In thousands)
Balance at 12/31/12
|
|
$
|
4,900
|
|
New Loans
|
|
|
—
|
|
Repayments
|
|
|
(164
|
)
|
Balance at 6/30/13
|
|
$
|
4,736
|
|
Aggregate deposits
from related parties at June 30, 2013 and December 31, 2012 amounted to approximately $55.3 million and $61.5 million, respectively.
At both June 30, 2013 and December 31, there were no related party overdrawn deposit accounts reclassified to loans.
NOTE 10. 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, 2013, the Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 2013,
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 institution'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, 2013 (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, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
141,914
|
|
|
|
36.96
|
%
|
|
|
30,721
|
|
|
|
>
8.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
$
|
132,232
|
|
|
|
35.00
|
%
|
|
|
30,221
|
|
|
|
>
8.0
|
%
|
|
|
37,776
|
|
|
|
>
10.0
|
%
|
Tier I Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
137,045
|
|
|
|
35.69
|
%
|
|
|
15,360
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
$
|
127,440
|
|
|
|
33.74
|
%
|
|
|
15,110
|
|
|
|
>
4.0
|
%
|
|
|
22,665
|
|
|
|
>
6.0
|
%
|
Tier I Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
137,045
|
|
|
|
16.92
|
%
|
|
|
32,402
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
$
|
127,440
|
|
|
|
15.86
|
%
|
|
|
32,137
|
|
|
|
>
4.0
|
%
|
|
|
40,172
|
|
|
|
>
5.0
|
%
|
Note 11. New Accounting Pronouncements
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 did not have a material effect on the consolidated statements of operations or financial condition.
In February 2013, the
FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220 “Comprehensive Income.” The
amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements.
However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive
income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented
or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of
net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in
the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net
income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about
those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2013.
Early adoption is permitted. Adoption of this update is not expected to have a material effect on the Company’s consolidated
results of operation or financial condition.
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 the New York State Department of Financial Services
(the "DFS"), 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. The
Company, as a bank holding company, is regulated by the Federal Reserve Bank of New York.
The May 14, 2009 Memorandum
of Understanding entered into between the Board of Directors of The Berkshire Bank, the Federal Deposit Insurance Corporation (FDIC)
and the New York State Banking Department (NYSBD) was replaced on January 31, 2013 with a revised Memorandum of Understanding (MOU)
between the Board of Directors of The Berkshire Bank, the Federal Deposit Insurance Corporation and the New York State Department
of Financial Services (NYSDFS).
The
MOU requires that a committee of the board of directors (“Compliance Committee”) of at least three directors be established
to ensure compliance with the MOU. The Compliance Committee meets monthly and presents a monthly written status report to the Board
of the Bank on actions to ensure compliance with the MOU. In addition, a quarterly progress report is submitted to the FDIC and
NYSDFS 30 days after each quarter end
covering each provision of the MOU. We believe that
the Bank is in full compliance with all of the provisions of the January 31, 2013 MOU.
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.
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 primarily classify our investment securities as available for sale.
During the first and
second quarter of 2013, upon reviewing its historical experience of defaults in its portfolio and the current loan and housing
environment, the Bank reduced its loan loss provision by $303 thousand and $298 thousand, respectively. No net provisions were
made in the first or second quarters of 2013.
Net income, before
the provision for income taxes, for the three and six months ended June 30, 2013 was $1.4 million and $3.0 million, respectively,
compared to net income, before the benefit for income taxes, for the three and six months ended June 30, 2012 of $1.5 million and
$3.4 million, respectively.
Net income allocated
to common stockholders, after the provision for income taxes, was $0.7 million and $1.7 million for the three and six months ended
June 30, 2013, respectively, compared to $3.3 million and $5.5 million for the three and six months ended June 30, 2012, respectively.
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,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Average
Yield/Rate
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Average
Yield/Rate
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
297,735
|
|
|
$
|
4,249
|
|
|
|
5.71
|
%
|
|
$
|
322,629
|
|
|
$
|
4,882
|
|
|
|
6.05
|
%
|
Investment securities
|
|
|
358,997
|
|
|
|
2,093
|
|
|
|
2.33
|
|
|
|
419,466
|
|
|
|
2,300
|
|
|
|
2.19
|
|
Other (2)(5)
|
|
|
131,854
|
|
|
|
98
|
|
|
|
0.30
|
|
|
|
108,948
|
|
|
|
125
|
|
|
|
0.46
|
|
Total interest-earning assets
|
|
|
788,586
|
|
|
|
6,440
|
|
|
|
3.27
|
|
|
|
851,043
|
|
|
|
7,307
|
|
|
|
3.43
|
|
Non-interest-earning assets
|
|
|
22,024
|
|
|
|
|
|
|
|
|
|
|
|
26,366
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
810,610
|
|
|
|
|
|
|
|
|
|
|
$
|
877,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
207,888
|
|
|
|
134
|
|
|
|
0.26
|
|
|
|
232,445
|
|
|
|
97
|
|
|
|
0.17
|
|
Time deposits
|
|
|
328,288
|
|
|
|
815
|
|
|
|
0.99
|
|
|
|
365,344
|
|
|
|
1,077
|
|
|
|
1.18
|
|
Other borrowings
|
|
|
45,207
|
|
|
|
386
|
|
|
|
3.41
|
|
|
|
76,973
|
|
|
|
591
|
|
|
|
3.07
|
|
Total interest-bearing liabilities
|
|
|
581,383
|
|
|
|
1,335
|
|
|
|
0.92
|
|
|
|
674,762
|
|
|
|
1,765
|
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
84,604
|
|
|
|
|
|
|
|
|
|
|
|
72,897
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities
|
|
|
6,478
|
|
|
|
|
|
|
|
|
|
|
|
4,727
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (5)
|
|
|
138,145
|
|
|
|
|
|
|
|
|
|
|
|
125,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
810,610
|
|
|
|
|
|
|
|
|
|
|
$
|
877,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
5,105
|
|
|
|
|
|
|
|
|
|
|
$
|
5,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate spread (3)
|
|
|
|
|
|
|
|
|
|
|
2.35
|
%
|
|
|
|
|
|
|
|
|
|
|
2.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
2.59
|
%
|
|
|
|
|
|
|
|
|
|
|
2.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average interest bearing liabilities
|
|
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
1.26
|
|
|
|
|
|
|
|
|
|
(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,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Average
Yield/Rate
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Average
Yield/Rate
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
295,370
|
|
|
$
|
8,476
|
|
|
|
5.74
|
%
|
|
$
|
320,569
|
|
|
$
|
9,787
|
|
|
|
6.11
|
%
|
Investment securities
|
|
|
356,478
|
|
|
|
4,278
|
|
|
|
2.40
|
|
|
|
415,576
|
|
|
|
4,737
|
|
|
|
2.28
|
|
Other (2)(5)
|
|
|
131,503
|
|
|
|
203
|
|
|
|
0.31
|
|
|
|
103,644
|
|
|
|
184
|
|
|
|
0.36
|
|
Total interest-earning assets
|
|
|
783,351
|
|
|
|
12,957
|
|
|
|
3.31
|
|
|
|
839,789
|
|
|
|
14,708
|
|
|
|
3.50
|
|
Non-interest-earning assets
|
|
|
23,724
|
|
|
|
|
|
|
|
|
|
|
|
28,391
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
807,075
|
|
|
|
|
|
|
|
|
|
|
$
|
868,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
207,103
|
|
|
|
256
|
|
|
|
0.25
|
|
|
|
224,576
|
|
|
|
207
|
|
|
|
0.18
|
|
Time deposits
|
|
|
330,782
|
|
|
|
1,651
|
|
|
|
1.00
|
|
|
|
366,002
|
|
|
|
2,193
|
|
|
|
1.20
|
|
Other borrowings
|
|
|
45,545
|
|
|
|
774
|
|
|
|
3.40
|
|
|
|
77,557
|
|
|
|
1,232
|
|
|
|
3.18
|
|
Total interest-bearing liabilities
|
|
|
583,430
|
|
|
|
2,681
|
|
|
|
0.92
|
|
|
|
668,135
|
|
|
|
3,632
|
|
|
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
81,025
|
|
|
|
|
|
|
|
|
|
|
|
72,182
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities
|
|
|
5.971
|
|
|
|
|
|
|
|
|
|
|
|
4,923
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (5)
|
|
|
136,649
|
|
|
|
|
|
|
|
|
|
|
|
122,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
807,075
|
|
|
|
|
|
|
|
|
|
|
$
|
868,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
10,276
|
|
|
|
|
|
|
|
|
|
|
$
|
11,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate spread (3)
|
|
|
|
|
|
|
|
|
|
|
2.39
|
%
|
|
|
|
|
|
|
|
|
|
|
2.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
2.62
|
%
|
|
|
|
|
|
|
|
|
|
|
2.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average interest bearing liabilities
|
|
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
1.26
|
|
|
|
|
|
|
|
|
|
(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, 2013 Compared to the Three and Six Months Ended June 30, 2012.
Net Income Allocated
to Common Stockholders.
Net income allocated to common stockholders for the three and six months ended June 30, 2013 was $0.9
million and $1.8 million, respectively, or $0.06 per common share and $0.13 per common share, respectively, compared to net
income allocated to common stockholders of $3.3 million and $5.5 million, respectively, or $0.23 per common share and $0.38 per
common share, for the three and six months ended June 30, 2012, respectively.
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 interest-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, 2013, net interest income was $5.1 million and $10.3 million, respectively, compared to net income of $5.5
million and $11.1 million, respectively, for the three and six-month periods ended June 30, 2012. The decrease in net interest
income during the 2013 period compared to the 2012 period was primarily due to the decrease in the average yields earned on the
average amount of interest-earning assets, partially offset by the decrease in the average amount of interest-bearing liabilities
and the decrease in the average rates paid on interest-bearing liabilities.
The average yields
earned on interest-earning assets declined to 3.27% and 3.31% during the three and six-month periods ended June 30, 2013, respectively,
from 3.43% and 3.50% during the three and six-month periods ended June 30, 2012, respectively. The average rates paid on interest-bearing
liabilities declined to 0.92% and 0.92% during the three and six-month periods ended June 30, 2013, respectively, from 1.05% and
1.09% during the three and six-month periods ended June 30, 2012, 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 2.35% and
2.39% during the three and six-month periods ended June 30, 2013, respectively, from 2.38% and 2.41% during the three and six-month
periods ended June 30, 2012, respectively.
Net Interest Margin.
Net interest margin, or annualized net interest income as a percentage of average interest-earning assets, was 2.59% and 2.62%
for the three and six-month periods ended June 30, 2013, respectively, compared to 2.60% and 2.64% for the three and six-month
periods ended June 30, 2012, respectively. 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 June 30, 2013 decreased by $0.9 million to $6.4 million from $7.3 million for the quarter
ended June 30, 2012. The decrease in total interest income was primarily due to the decrease in the average yield earned on the
average amount of interest-earning assets to 3.27% during the 2013 quarter from 3.43% during the 2012 quarter, and the decrease
in the average amount of higher yielding loans to $297.7 million during the 2013 quarter from $322.6 million during the 2012 quarter.
Total interest income
for the six months ended June 30, 2013 decreased by $1.7 million to $13.0 million from $14.7 million for the six months ended June
30, 2012. The decrease in total interest income was primarily due to the decrease in the average yield earned on the average amount
of interest-earning assets to 3.31% during the 2013 six-month period from 3.50% during the 2012 six-month period, and the decrease
in the average amount of higher yielding loans to $295.4 million during the 2013 period from $320.6 million during the 2012 period.
The following tables
present the composition of interest income for the indicated periods:
|
|
Three Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Interest
Income
|
|
|
% of
Total
|
|
|
Interest
Income
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
Loans
|
|
$
|
4,249
|
|
|
|
65.98
|
%
|
|
$
|
4,882
|
|
|
|
66.81
|
%
|
Investment Securities
|
|
|
2,093
|
|
|
|
32.50
|
|
|
|
2,300
|
|
|
|
31.48
|
|
Other
|
|
|
98
|
|
|
|
1.52
|
|
|
|
125
|
|
|
|
1.71
|
|
Total Interest Income
|
|
$
|
6,440
|
|
|
|
100.00
|
%
|
|
$
|
7,307
|
|
|
|
100.00
|
%
|
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Interest
Income
|
|
|
% of
Total
|
|
|
Interest
Income
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
Loans
|
|
$
|
8,476
|
|
|
|
65.42
|
%
|
|
$
|
9,787
|
|
|
|
66.54
|
%
|
Investment Securities
|
|
|
4,278
|
|
|
|
33.02
|
|
|
|
4,737
|
|
|
|
32.21
|
|
Other
|
|
|
203
|
|
|
|
1.56
|
|
|
|
184
|
|
|
|
1.25
|
|
Total Interest Income
|
|
$
|
12,957
|
|
|
|
100.00
|
%
|
|
$
|
14,708
|
|
|
|
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 37.8% and 37.7% of our total average interest-earning assets during the three and six-month periods ended June 30, 2013, respectively,
from 37.9% and 38.2% of total interest-earning assets during the three and six-month periods ended June 30, 2012, respectively.
The average amounts of investment securities was 45.5% and 45.5% of total average interest-earning assets during the three and
six-month periods ended June 30, 2013, respectively, compared to 49.3% and 49.5% of total interest-earning assets during the three
and six-month periods ended June 30, 2012, 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, 2013 and
2012, total non-performing loan assets were $882,000 and $520,000, respectively, all of which were 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 2013 from 2012
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, 2013,
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, 2013 or December 31, 2012.
Interest Expense.
Total interest expense for the quarter ended June 30, 2013 decreased by $0.4 million to $1.3 million from $1.8 million for
the quarter ended June 30, 2012. The decrease in interest expense was due to the decrease in the average amounts of interest-bearing
liabilities to $581.4 million for the quarter ended June 30, 2013 from $674.8 million during the quarter ended June 30, 2012,
and the decrease in the average rates paid on interest-bearing liabilities to 0.92% during the 2013 quarter from 1.05% during
the 2012 quarter.
Total interest expense
for the six-month period ended June 30, 2013 decreased by $0.9 million to $2.7 million from $3.6 million for the six-month period
ended June 30, 2012. The decrease in interest expense was due to the decrease in the average amounts of interest-bearing liabilities
to $583.4 million during the six-month period ended June 30, 2013 from $668.1 million during the six-month period ended June 30,
2012, respectively, and the decrease in the average rates paid on interest-bearing liabilities to 0.92% during the 2013 six-month
period from 1.09% during the 2012 six-month period.
The following tables
present the components of interest expense as of the dates indicated:
|
|
Three Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Interest
Expense
|
|
|
% of
Total
|
|
|
Interest
Expense
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
Interest-Bearing Deposits
|
|
$
|
134
|
|
|
|
10.04
|
%
|
|
$
|
97
|
|
|
|
5.50
|
%
|
Time Deposits
|
|
|
815
|
|
|
|
61.05
|
|
|
|
1,077
|
|
|
|
61.02
|
|
Other Borrowings
|
|
|
386
|
|
|
|
28.91
|
|
|
|
591
|
|
|
|
33.48
|
|
Total Interest Expense
|
|
$
|
1,335
|
|
|
|
100.00
|
%
|
|
$
|
1,765
|
|
|
|
100.00
|
%
|
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Interest
Expense
|
|
|
% of
Total
|
|
|
Interest
Expense
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
Interest-Bearing Deposits
|
|
$
|
256
|
|
|
|
9.55
|
%
|
|
$
|
207
|
|
|
|
5.70
|
%
|
Time Deposits
|
|
|
1,651
|
|
|
|
61.62
|
|
|
|
2,193
|
|
|
|
60.38
|
|
Other Borrowings
|
|
|
774
|
|
|
|
28.83
|
|
|
|
1,232
|
|
|
|
33.92
|
|
Total Interest Expense
|
|
$
|
2,681
|
|
|
|
100.00
|
%
|
|
$
|
3,632
|
|
|
|
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, 2013 was $459,000 and $1.0 million respectively, compared to $121,000 and $644,000
for the three and six months ended June 30, 2012, respectively. The increase in non-interest income was primarily due to a tax
refund.
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, 2013 was $4.4 million and $9.0 million, respectively, compared to $4.2 million and $8.3 million
for the three and six months ended June 30, 2012, respectively.
The following tables
present the components of non-interest expense as of the dates indicated:
|
|
Three Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Non-Interest
Expense
|
|
|
% of
Total
|
|
|
Non-Interest
Expense
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
Salaries and Employee Benefits
|
|
$
|
2,893
|
|
|
|
63.62
|
%
|
|
$
|
2,380
|
|
|
|
57.31
|
%
|
Net Occupancy Expense
|
|
|
808
|
|
|
|
17.76
|
|
|
|
577
|
|
|
|
13.89
|
|
Equipment Expense
|
|
|
89
|
|
|
|
1.95
|
|
|
|
88
|
|
|
|
2.12
|
|
FDIC Assessment
|
|
|
(3
|
)
|
|
|
-0.06
|
|
|
|
300
|
|
|
|
7.22
|
|
Data Processing Expense
|
|
|
107
|
|
|
|
2.36
|
|
|
|
112
|
|
|
|
2.70
|
|
Other
|
|
|
653
|
|
|
|
14.37
|
|
|
|
696
|
|
|
|
16.76
|
|
Total Non-Interest Expense
|
|
$
|
4,547
|
|
|
|
100.00
|
%
|
|
$
|
4,153
|
|
|
|
100.00
|
%
|
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Non-Interest
Expense
|
|
|
% of
Total
|
|
|
Non-Interest
Expense
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
Salaries and Employee Benefits
|
|
$
|
5,595
|
|
|
|
62.10
|
%
|
|
$
|
4,860
|
|
|
|
58.25
|
%
|
Net Occupancy Expense
|
|
|
1,401
|
|
|
|
15.55
|
|
|
|
1,161
|
|
|
|
13.92
|
|
Equipment Expense
|
|
|
178
|
|
|
|
1.97
|
|
|
|
166
|
|
|
|
1.99
|
|
FDIC Assessment
|
|
|
297
|
|
|
|
3.30
|
|
|
|
600
|
|
|
|
7.19
|
|
Data Processing Expense
|
|
|
234
|
|
|
|
2.60
|
|
|
|
224
|
|
|
|
2.68
|
|
Other
|
|
|
1,304
|
|
|
|
14.48
|
|
|
|
1,332
|
|
|
|
15.97
|
|
Total Non-Interest Expense
|
|
$
|
9,009
|
|
|
|
100.00
|
%
|
|
$
|
8,343
|
|
|
|
100.00
|
%
|
Provision for Income
Tax.
During the three and six months ended June 30, 2013, the Company recorded an income tax provision of $0.5 million and
$1.1 million, respectively, compared to income tax benefit of $1.8 million and $2.1 million for three and six months ended June
30, 2012, respectively.
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, 2013, 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 2013. At June 30, 2013, 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 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 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 City 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 FDIC, the DFS, 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 their 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,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Average loans outstanding
|
|
$
|
297,735
|
|
|
$
|
322,629
|
|
|
$
|
295,370
|
|
|
$
|
320,569
|
|
Allowance at beginning of period
|
|
$
|
10,705
|
|
|
$
|
17,720
|
|
|
$
|
11,008
|
|
|
$
|
17,720
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and other loans
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
Real estate loans
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
|
|
—
|
|
Total loans charged-off
|
|
|
(20
|
)
|
|
|
(2
|
)
|
|
|
(20
|
)
|
|
|
(2
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and other loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Real estate loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total loans recovered
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net recoveries (charge-offs)
|
|
|
(20
|
)
|
|
|
(2
|
)
|
|
|
(20
|
)
|
|
|
(2
|
)
|
Provision for loan losses Charged to operating expenses
|
|
|
(298
|
)
|
|
|
—
|
|
|
|
(601
|
)
|
|
|
—
|
|
Allowance at end of period
|
|
$
|
10,387
|
|
|
|
17,718
|
|
|
$
|
10,387
|
|
|
|
17,718
|
|
Ratio of net recoveries (charge-offs) to average loans outstanding
|
|
|
-0.01
|
%
|
|
|
0.00
|
%
|
|
|
-0.01
|
%
|
|
|
0.00
|
%
|
Allowance as a percent of total loans
|
|
|
3.39
|
%
|
|
|
5.52
|
%
|
|
|
3.72
|
%
|
|
|
5.52
|
%
|
Total loans at end of period
|
|
$
|
306,392
|
|
|
$
|
320,938
|
|
|
$
|
306,392
|
|
|
$
|
320,938
|
|
Based on better economic
conditions during the 3rd quarter, 2012 and the payoff of various commercial loans, management determined that an adjustment was
necessary to reduce the ALL by $4.2 million as of September 30, 2012.
The loan portfolio
as of September 30, 2012 decreased to $309.5 million from $320.9 as of June 30, 2012. In addition, loans rated Special Mention
declined by $10 million during the quarter from $21.7 million to $11.7 million.
The overall ALL allocation
risk factor decreased from 5.52% as of June 30, 2012 to 4.37% as of September 30, 2012. The $4.2 million decline in our September
30, 2012 ALL was composed of (a) $1.37 million reduction of the ALL relating to 1-4 Family Closed End Mortgage loans as the ALL
loss factor for this loan pool fell from 5.95% to 4.61% (b) $1.16 million reduction in our ALL for Other CRE as our ALLL loss factor
for this pool declined from 5.24% to 4.16% (c) Elimination, as of September 30 of unallocated reserve of $1.63 million.
The ALL methodology
implemented in December, 2012 continued for the first quarter of 2013. Our ALL as of March 31, 2013 was $10.7 million, a slight
reduction from December 31, 2012 of $11.0 million. The ALL difference was due to a minor change in our loan portfolio mix with
small loan increases in Other CRE and Construction & Development lending offset by reductions in our loan 1-4 Family Mortgage
portfolios. In addition, there was a marginal overall improvement in loan quality, as loans rated Special Mention fell by $5.3
million while Watch loans increased by $4.3 million.
For the quarter ended
June 30, 2013, the ALL was reduced by $319 thousands due to the reduction of the substandard loan segment.
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, 2013 and December 31, 2012, the
Company had loans, net of unearned income, of $305.9 million and $295.2 million, respectively, and an allowance for loan losses
of $10.4 million and $11.0 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
and Finance Leases.
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, 2013 and December
31, 2012, $23.1 million and $23.2 million, respectively, or 7.5% and 7.8%, 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, 2013 and December 31, 2012, $82.0 million and $84.2 million, respectively, or 26.8%
and 28.5%, 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, 2013, 7.8% of the Bank's residential one-to-four family owner-occupied first
mortgage portfolio were ARMs and 92.2% were fixed-rate loans. At December 31, 2012, approximately 9.0% of the Bank's residential
one-to-four family owner-occupied first mortgage portfolio were ARMs and 91% 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, 2013 and December 31, 2012, $201.3 million and $188.4 million, respectively, or 65.7% and 63.7%,
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.
The Bank’s lending
limit generally restricts extensions of credit to one borrower to 15% of the Bank’s capital stock, surplus fund, and undivided
profits, but allow such extensions of credit to one borrower of up to 25% of the Bank’s capital stock, surplus fund, and
undivided profits, if the additional 10% is secured by collateral that can be adequately valued. This means that as of June 30,
2013, the Bank could lend $19.8 million to one borrower, and this amount may be increased up to $33.0 million, if the loan is secured
by collateral that can be adequately valued.
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, 2013, the Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 2013,
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 institution's category.
The following table
set forth the actual and required regulatory capital amounts and ratios of the Company and the Bank as of June 30, 2013 (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, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
141,914
|
|
|
|
36.96
|
%
|
|
|
30,721
|
|
|
|
>
8.0
|
%
|
|
$
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
132,232
|
|
|
|
35.00
|
%
|
|
|
30,221
|
|
|
|
>
8.0
|
%
|
|
|
37,776
|
|
|
|
>
10.0
|
%
|
Tier I Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
137,045
|
|
|
|
35.69
|
%
|
|
|
15,360
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
127,440
|
|
|
|
33.74
|
%
|
|
|
15,110
|
|
|
|
>
4.0
|
%
|
|
|
22,665
|
|
|
|
>
6.0
|
%
|
Tier I Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
137,045
|
|
|
|
16,92
|
%
|
|
|
32,402
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
127,440
|
|
|
|
15.86
|
%
|
|
|
32,137
|
|
|
|
>
4.0
|
%
|
|
|
40,172
|
|
|
|
>
5.0
|
%
|
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 $368.6 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
$104.2 million, or 13.2% of total assets at June 30, 2013. In addition, we have the capacity to borrow up to approximately $234.4
million from the Federal Reserve Bank and approximately $134.2 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 normal operating expenses and to pay stockholder dividends
on its common stock, when and if declared by the Company's Board of Directors. On November 28, 2012, the Company’s Board
of Directors declared a cash dividend in respect of the common stock of the Company in the amount of $.08 per share. Such dividend
was paid on December 20, 2012 to the holders of record of its common stock as of the close of business on December 10, 2012. This
was the first dividend payment since the Company announced in March 2009 that it would temporarily suspend its stated policy of
paying a regular cash dividend on its common stock. The declaration, payment, and amount of dividends in the future are within
the discretion of the Board of Directors and will depend upon our earnings, capital requirements, financial condition, and other
relevant factors including possibly requiring regulatory approval.
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,
2013, the Company had cash of approximately $3.5 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, $20.1 million at June 30, 2013, include commitments to extend credit, stand-by letters of credit,
and loan commitments.
At June 30, 2013, the
Bank had outstanding commitments of $326.4 million; including $4.8 million of operating leases, and $321.6 million of time deposits.
These commitments include $226.0 million that mature or renew within one year, $97.3 million that mature or renew after one year
and within three years, $3.3 million that mature or renew after three years and within five years and commitments of $0.9 million
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.