UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal
year ended
December 31, 2011
OR
¨
TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to
Commission File Number
0-13649
Berkshire Bancorp Inc.
(Exact name of registrant as specified in
its charter)
Delaware
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94-2563513
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(State or other jurisdiction of
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(I.R.S. employer
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incorporation or organization)
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identification number)
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160 Broadway, New York, New York
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10038
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(Address of principal executive offices)
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(Zip Code)
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Registrant's telephone number, including
area code:
(212) 791-5362
Securities registered pursuant to Section
12(b) of the Act:
Title of Each Class
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Name of Each Exchange on Which Traded
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Common Stock, par value $.10 per share
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The NASDAQ Stock Market LLC
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(The NASDAQ Global Market)
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Securities registered pursuant to Section
12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes
x
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
¨
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Accelerated filer
¨
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|
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Non-accelerated filer
¨
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Smaller reporting company
x
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(Do not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. Yes
¨
No
x
Aggregate market value of voting and non-voting
common stock held by non-affiliates of the registrant as of June 30, 2011: $19,449,731.
Number of shares of Common Stock outstanding
as of March 23, 2012: 14,443,183.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Forward-Looking Statements.
Statements in this Annual Report on Form 10-K that are not based on historical fact may be "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believe", "may",
"will", "expect", "estimate", "anticipate", "continue" or similar terms identify
forward-looking statements. A wide variety of factors could cause the actual results and experiences of Berkshire Bancorp Inc.
(the "Company") to differ materially from the results expressed or implied by the Company's forward-looking statements.
Some of the risks and uncertainties that may affect operations, performance, results of the Company's business, the interest rate
sensitivity of its assets and liabilities, and the adequacy of its loan loss allowance, include, but are not limited to: (i) deterioration
in local, regional, national or global economic conditions which could result, among other things, in an increase in loan delinquencies,
a decrease in property values, or a change in the housing turnover rate; (ii) changes in market interest rates or changes in the
speed at which market interest rates change; (iii) changes in laws and regulations affecting the financial services industry; (iv)
changes in competition; (v) changes in consumer preferences, (vi) changes in banking technology; (vii) ability to maintain key
members of management, (viii) possible disruptions in the Company's operations at its banking facilities, (ix) cost of compliance
with new corporate governance requirements, rules and regulations, and other factors referred to in the sections of this Annual
Report entitled "Business", "Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Certain information customarily disclosed
by financial institutions, such as estimates of interest rate sensitivity and the adequacy of the loan loss allowance, are inherently
forward-looking statements because, by their nature, they represent attempts to estimate what will occur in the future.
The Company cautions readers not to place
undue reliance upon any forward-looking statement contained in this Annual Report. Forward-looking statements speak only as of
the date they were made and the Company assumes no obligation to update or revise any such statements upon any change in applicable
circumstances.
PART I
ITEM 1. Business.
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").
We file annual, quarterly
and current reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC").
You may read and copy our reports or other filings made with the SEC at the SEC's Public Reference Room, located at 100 F Street,
N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
You can also access information that we file electronically on the SEC's website at WWW.SEC.GOV.
We do not presently
have a website. However, as soon as practicable after filing with or furnishing to the SEC, upon request we will provide at no
cost, paper or electronic copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments to those reports. Requests should be directed to:
Berkshire Bancorp Inc.
Investor Relations
160 Broadway, First
Floor
New York, NY 10038
Series A Preferred
Shares.
On October 31, 2008, the Company sold an aggregate of 60,000 shares of its 8% Non-Cumulative Mandatorily Convertible
Perpetual Series A Preferred Stock (the "Preferred Stock") at $1,000 per share, or $60 million in the aggregate, to the
Company's Chairman of the Board and majority stockholder, and two non-affiliated investors. Each share of Preferred Stock was entitled
to receive non-cumulative cash dividends at the rate of 8% per annum, payable quarterly, and was mandatorily convertible into 123.153
shares of our Common Stock on October 31, 2011. Accordingly, on October 31, 2011, all 60,000 outstanding shares of Preferred Stock
were mandatorily converted into 7,389,000 shares of the Common Stock, $.10 par value, of the Company at a conversion rate of 123.15
shares of Common Stock for each share of Preferred Stock converted, in accordance with the Certificate of Designation of the Preferred
Stock.
Business of the
Bank - General.
The Bank's principal business consists of gathering deposits from the general public and investing those deposits
primarily in loans, debt obligations issued by the U.S. Government and its agencies, debt obligations of business corporations,
and mortgage-backed securities. The Bank currently 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, NJ. In January 2011, the Company closed
the branch that operated in Ridgefield, NJ.
Branch Locations of The Berkshire Bank
December 31, 2011
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4 East 39th Street
New York, NY
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2 South Church Street
Goshen, NY
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5 Broadway
New York, NY
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214 Harriman Drive
Goshen, NY
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5010 13th Avenue
Brooklyn, NY
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80 Route 17M
Harriman, NY
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1421 Kings Highway
Brooklyn, NY
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60 Main Street
Bloomingburg, NY
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4917 16th Avenue
Brooklyn, NY
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1119 Avenue J
Brooklyn, NY
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517 Cedar Lane
Teaneck, NJ
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210 Pinehurst Avenue
New York, NY 10033
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Principal Loan Types.
The Bank's principal loan types are residential and commercial mortgage loans and commercial non-mortgage loans, both unsecured
and secured by personal property. The Bank's revenues come principally from interest on loans and investment securities. The Bank's
primary sources of funds are deposits, borrowings and proceeds from principal and interest payments on loans and investment securities.
Operating Plan.
The Bank's operating plan concentrates on obtaining deposits from a variety of businesses, professionals and retail customers and
investing those funds in conservatively underwritten loans. Due to the Bank's underwriting criteria, its deposits have significantly
exceeded the level of satisfactory loans available for investment in recent years. Hence, the Bank has invested a portion of its
available funds primarily in U.S. Treasury Notes, U.S. Government Agency Securities and mortgage-backed securities.
Market Area.
The Bank draws its customers principally from the New York City metropolitan area and the Villages of Goshen and Harriman, New
York and their surrounding communities, representing most of Orange County, NY. The Bank also has a branch in Bloomingburg, New
York, just over the border between Orange and Sullivan Counties. Predominantly rural with numerous small towns, many residents
of Orange and Sullivan Counties work in New York City. Consequently, the health of the economy in the New York City metropolitan
area has, and will continue to have a direct effect on the economic well being of residents and businesses in these counties. From
time to time, the Bank may make loans or accept deposits from outside these areas, but such transactions generally represent extensions
of existing local customer relationships.
Competition.
The Bank's principal competitors for deposits are other commercial banks, savings banks, savings and loan associations and credit
unions in the Bank's market areas, as well as money market mutual funds, insurance companies, securities brokerage firms and other
financial institutions, many of which are substantially larger in size than the Bank. The Bank's competition for loans comes principally
from commercial banks, savings banks, savings and loan associations, mortgage bankers, finance companies and other institutional
lenders. Many of the institutions which compete with the Bank have much greater financial and marketing resources than the Bank.
The Bank's principal methods of competition include loan and deposit pricing, maintaining close ties with its local communities,
the quality of the personal service it provides, the types of business services it provides, and other marketing programs.
Operations of the
Bank.
Reference is made to the information set forth in Item 7 herein ("Management's Discussion and Analysis of Financial
Condition and Results of Operations") for information as to various aspects of the Bank's operations, activities and conditions.
Subsidiary Activities.
The Bank is permitted under New York State law and federal law to own subsidiaries for certain limited purposes, generally to engage
in activities which are permissible for a subsidiary of a national bank. The Bank has two operating subsidiaries, Berkshire Agency,
Inc., a company engaged in the title insurance agency business, and Berkshire 1031 Exchange, LLC, a company that acts as a qualified
intermediary in connection with tax free exchanges under Section 1031 of the Internal Revenue Code of 1986.
Regulation.
The Company is a bank holding company under federal law and registered as such with the Federal Reserve. The Bank is a commercial
bank chartered under the laws of New York State. It is subject to regulation at the state level by the New York Superintendent
of Banks and the New York Banking Board, while at the federal level its primary regulator is the Federal Deposit Insurance Corporation
(the "FDIC").
Both the Company and
the Bank are subject to extensive state and federal regulation of their activities. The following discussion summarizes certain
banking laws and regulations that affect Berkshire and the Bank. Proposals to change these laws and regulations are frequently
proposed in Congress, in the New York State legislature, and before state and federal bank regulatory agencies. The likelihood
and timing of any changes and the impact such changes might have on the Company are impossible to determine with any certainty.
A change in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies
or courts, may have a material impact on the business, operations and earnings of the Company, the nature and effect of which cannot
be predicted.
The Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010
On July 21, 2010, President
Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"). The
Dodd-Frank Act has and will continue to have a broad impact on the financial services industry, including significant regulatory
and compliance changes including, among other things, (i) enhanced resolution authority of troubled and failing banks and their
holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes
to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision
and oversight of, and strengthening safety and soundness for, the financial services sector.
Additionally, the Dodd-Frank
Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing
federal regulatory agencies, including the Financial Stability Oversight Council, the Consumer Financial Protection Bureau, the
Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC. A summary of certain provisions of the Dodd-Frank
Act is set forth below.
* Source
of Strength. According to Federal Reserve policy, bank holding companies are expected to act as a source of financial strength
to each subsidiary bank and to commit resources to support each such subsidiary. The Dodd-Frank Act codifies the source-of-strength
doctrine and expands upon the Federal Reserve policy, defining "source of strength" to mean the "ability of a company
that directly or indirectly controls an insured depository institution to provide financial assistance to such insured depository
institution in the event of the financial distress of the insured depository institution." As of January 2012, implementing
regulations of the Dodd-Frank Act source of strength provision have not yet been promulgated.
* Increased
Capital Standards and Enhanced Supervision. The federal banking agencies are required to establish minimum leverage and risk-based
capital requirements for banks and bank holding companies. These new standards will be no lower than current regulatory capital
and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies.
The Dodd-Frank Act requires capital requirements to be countercyclical such that the required amount of capital increases in times
of economic expansion and decreases in times of economic contraction consistent with safety and soundness.
* The Consumer
Financial Protection Bureau ("Bureau"). The Dodd-Frank Act creates the Bureau within the Federal Reserve. The Bureau
is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect
to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many
of the statutes governing products and services offered to bank consumers. In addition, the Dodd-Frank Act permits states to adopt
consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys
general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions.
* Debit
Card Interchange Fees. Effective July 21, 2011, the Dodd-Frank Act requires that the amount of any interchange fee charged by a
debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer
with respect to the transaction. While the restrictions on interchange fees do not apply to banks that, together with their affiliates,
have assets of less than $10 billion, the rule could affect the competitiveness of debit cards issued by smaller banks.
* Deposit
Insurance. The Dodd-Frank Act permanently increases the maximum deposit insurance amount to $250,000 for insured deposits. Amendments
to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institutionÆs deposit
insurance premiums paid to the Deposit Insurance Fund ("DIF") will be calculated. Under the amendments, the assessment
base will no longer be the institution's deposit base, but rather its average consolidated total assets less its average tangible
equity during the assessment period. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of
the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits by 2020 and
eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.
In December 2010, the FDIC increased the reserve ratio to 2.0 percent. The Dodd-Frank Act also provides that, effective one year
after the date of enactment, depository institutions may pay interest on demand deposits.
* Transactions
with Affiliates. Under federal law, we are subject to restrictions that limit certain types of transactions between Berkshire and
its non-bank affiliates. In general, we are subject to quantitative and qualitative limits on extensions of credit, purchases of
assets and certain other transactions involving us and our non-bank affiliates. Transactions between Berkshire and its non-bank
affiliates are required to be on arms length terms. The Dodd-Frank Act enhances the requirements for certain transactions with
affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of "covered transactions"
and "affiliates," as well as an increase in the amount of time for which collateral requirements regarding covered transactions
must be maintained.
* Transactions
with Insiders. Under the Dodd-Frank Act, insider transaction limitations are expanded through the strengthening of loan restrictions
to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase
agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain
asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, if representing
more than 10% of capital, approved by the institution's board of directors.
* Enhanced
Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository institution's credit exposure to one borrower.
Current banking law limits a depository institution's ability to extend credit to one person (or group of related persons) in an
amount exceeding certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising
from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.
* Compensation
Practices. The Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe
and unsound practice any compensation plan of a bank holding company or other "covered financial institution" that provides
an insider or other employee with "excessive compensation" or could lead to a material financial loss to such firm. In
June 2010, prior to the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation
Policies, which requires that financial institutions establish metrics for measuring the impact of activities to achieve incentive
compensation with the related risk to the financial institution of such behavior. Together, the Dodd-Frank Act and the recent guidance
on compensation may impact the current compensation policies at the Company.
* Holding
Company Capital Levels. The Dodd-Frank Act requires bank regulators to establish minimum capital levels for holding companies that
are at least as stringent as those applicable to depository institutions. All trust preferred securities, or TRUPs, issued by bank
holding companies will be excluded from Tier 1 Capital unless such securities were issued prior to May 19, 2010, by a bank holding
company with less than $15 billion in assets as of December 31, 2009. TRUPS issued before May 19, 2010, by a bank holding company
with at least $15 billion in assets as of December 31, 2009, will continue to qualify as Tier 1 capital until January 2013, at
which time the treatment of TRUPS as Tier 1 capital will be phased out over a 3 year period ending in January, 2016.
We expect that many
of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations
over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act
will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements
will have on financial institutions' operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability
of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity
and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant
management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory
requirements.
Supervisory Actions.
The Bank is
subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can prompt certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators involving factors such as the risk weights assigned
to assets and what items may be counted as capital. Regulators also have broad discretion to require any institution to maintain
higher capital levels than otherwise required by statute or regulation, even institutions that are considered "well-capitalized"
under applicable regulations.
Bank Holding Company
Regulation.
The Federal Reserve is authorized to make regular examinations of the Company and its nonbank subsidiaries. Under
federal law and Federal Reserve regulations, the activities in which the Company and its nonbank subsidiaries may engage are limited.
The Company may not acquire direct or indirect ownership or control of more than 5% of the voting shares of any company, including
a bank, without the prior approval of the Federal Reserve, except as specifically authorized under federal law and Federal Reserve
regulations. The Company, subject to the approval of the Federal Reserve, may acquire more than 5% of the voting shares of non-banking
corporations if those corporations engage in activities which the Federal Reserve deems to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. These limitations also apply to activities in which the Company
engages directly rather than through a subsidiary.
The Federal Reserve
has enforcement powers over the Company and its non-bank subsidiaries. This allows the Federal Reserve, among other things, to
stop activities that represent unsafe or unsound practices or constitute violations of law, rules, regulations, administrative
orders or written agreements with a federal bank regulator. These powers may be exercised through the issuance of cease-and-desist
orders, the imposition of civil money penalties or other actions.
Federal Reserve
Capital Requirements.
The Federal Reserve requires that the Company, as a bank holding company, must maintain certain minimum
ratios of capital to assets. The Federal Reserve's regulations divide capital into two categories. Primary capital includes common
equity, surplus, undivided profits, perpetual preferred stock, mandatory convertible instruments, the allowance for loan and lease
losses, contingency and other capital reserves, and minority interests in equity accounts of consolidated subsidiaries. Secondary
capital includes limited-life preferred stock, subordinated notes and debentures and certain unsecured long term debt.
The Federal Reserve
requires that bank holding companies maintain a minimum ratio of primary capital to total assets of 5.5% and a minimum level of
total capital (primary plus secondary capital) equal to 6% of total assets. In calculating capital ratios, the allowance for loan
losses, which is a component of primary capital, is added back in determining total assets. Certain capital components, such as
debt and perpetual preferred stock, are includable as capital only if they satisfy certain definitional tests.
The Company must also
meet a risk-based capital standard. Capital, for the risk-based capital requirement, is divided into Tier I capital and Supplementary
capital, determined as discussed below in connection with the FDIC capital requirements imposed on the Bank. The Federal Reserve
requires that the Bank maintain a ratio of total capital (defined as Tier I plus Supplementary capital) to risk-weighted assets
of at least 8%, of which at least 4% must be Tier I capital. Risk weighted assets are also determined in a manner comparable to
the determination of risk-weighted assets under FDIC regulations as discussed below.
At December 31, 2011
and 2010, the Company met the definition of a "well capitalized" bank holding company.
Inter-state Banking.
Bank holding companies may generally acquire banks in any state. Federal law also permits a bank to merge with an out-of-state
bank and convert any offices into branches of the resulting bank if both states have not opted out of interstate branching; permits
a bank to acquire branches from an out-of-state bank if the law of the state where the branches are located permits the interstate
branch acquisition; and permits banks to establish and operate new interstate branches whenever the host state opts-in to that
authority. Bank holding companies and banks that want to engage in such activities must be adequately capitalized and managed.
The New York Banking
Law generally authorizes interstate branching in New York as a result of a merger, purchase of assets or similar transaction. An
out of state bank may not first enter New York by opening a new branch in New York, but once a branch is acquired as described
in the preceding sentence, additional new branches may be opened state wide.
Regulation of the
Bank.
In general, the powers of the Bank are limited to the express powers described in the New York Banking Law and powers
incidental to the exercise of those express powers. The Bank is generally authorized to accept deposits and make loans on terms
and conditions determined to be acceptable to the Bank. Loans may be unsecured, secured by real estate, or secured by personal
property. The Bank may also invest assets in bonds, notes or other debt securities which are not in default and certain limited
classes of equity securities including certain publicly traded equity securities in an amount aggregating not more than 2% of assets
or 20% of capital. The Bank may also engage in a variety of other traditional activities for commercial banks, such as the issuance
of letters of credit.
The exercise of these
state-authorized powers is limited by FDIC regulations and other federal laws and regulations. In particular, FDIC regulations
limit the investment activities of state-chartered, FDIC-insured banks such as the Bank.
Under FDIC regulations,
the Bank generally may not directly or indirectly acquire or retain any equity investment that is not permissible for a national
bank. In addition, the Bank may not directly or indirectly through a subsidiary, engage as "principal" in any activity
that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the applicable
FDIC insurance fund and the Bank is in compliance with applicable regulatory capital requirements. FDIC regulations permit real
estate investments under certain circumstances. The Bank does not engage in real estate investing activity.
In May 2009, in connection
with the Bank's examination by the Federal Deposit Insurance Corporation (the "FDIC"), the Bank received a Joint Memorandum
of Understanding (the "MOU") from the FDIC and the New York State Department of Financial Services (the "NYSDFS"),
formerly called the New York State Banking Department, which the Bank executed. The MOU sets forth an informal understanding among
the Bank, the FDIC and the NYSDFS addressing asset quality, loan review, underwriting and administration and certain other concerns
identified in the examination. The Bank's board of directors appointed a committee comprised of three directors to monitor the
Bank's compliance with the MOU. Compliance with the MOU has not had a material adverse effect on our results of operations or financial
condition. As set forth in "Management's Discussion and Analysis of Financial Condition And Results of Operations - Capital
Adequacy" and Note N to the Company's consolidated financial statements, the Bank meets the definition of well capitalized
for regulatory purposes as of December 31, 2011.
Loans to One Borrower.
With certain exceptions, the Bank may not make loans or other extensions of credit to a single borrower, or certain related groups
of borrowers, in an aggregate amount in excess of 15% of the Bank's net worth, plus an additional 10% of the Bank's net worth if
such amount is secured by certain types of readily marketable collateral. In addition, the Bank is not permitted to make a mortgage
loan in excess of 15% of capital stock, surplus fund and undivided profits.
FDIC Capital Requirements.
The FDIC requires that the Bank maintain certain minimum ratios of capital to assets. The FDIC's regulations divide capital into
two tiers. The first tier ("Tier I") includes common equity, retained earnings, certain non-cumulative perpetual preferred
stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, minus goodwill and
other intangible assets (except mortgage servicing rights and purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatorily convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan
losses, subject to certain limitations, less required deductions.
The FDIC requires that
the highest rated banks maintain a Tier I leverage ratio (Tier I capital to adjusted total assets) of at least 3.0%. All other
banks subject to FDIC capital requirements must maintain a Tier I leverage ratio of 4.0% to 5.0% or more. As of December 31, 2011
and 2010, the Bank's Tier I leverage capital ratio was 15.9% and 10.8%, respectively.
The Bank must also
meet a risk-based capital standard. The risk-based standard requires the Bank to maintain total capital (defined as Tier I and
Tier II capital) to risk-weighted assets of at least 8%, of which at least 4% must be Tier I capital. In determining the amount
of risk-weighted assets, all assets, plus certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based
on the risks the FDIC believes are inherent in the type of asset. As of December 31, 2011 and 2010, the Bank maintained a 34.8%
and 19.8% Tier I risk-based capital ratio and a 36.1% and 21.0% total risk-based capital ratio, respectively.
In addition to the
foregoing regulatory capital requirements, the FDIC Improvements Act of 1991 created a "prompt corrective action" framework,
under which decreases in a depository institution's capital category trigger various supervisory actions. Pursuant to implementing
regulations adopted by the FDIC, for purposes of the prompt corrective action provisions, a state-chartered, nonmember bank, such
as the Bank, is deemed to be well capitalized if it has: a total risk-based capital ratio of 10% or greater; a Tier I risk-based
capital ratio of 6% or greater; and a leverage ratio of 5% or greater. As of December 31, 2011 and 2010, the Bank met the definition
of a "well capitalized" financial institution.
Community Reinvestment
Act.
The Bank must, under federal law, meet the credit needs of its community, including low and moderate income segments of
its community. The FDIC is required, in connection with its examination of the Bank, to assess whether the Bank has satisfied this
requirement. Failure to satisfy this requirement could adversely affect certain applications which the Bank may make, such as branch
applications, merger applications, and applications for permission to purchase branches. In the case of the Company, the Federal
Reserve will assess the record of each subsidiary bank in considering certain applications made by the Company. The New York Banking
Law contains similar provisions applicable to the Bank. As of the most recent Community Reinvestment Act examinations by the FDIC
and the NYSDFS, the Bank received "satisfactory" ratings.
Dividends From the
Bank to the Company.
One source of funds for the Company to pay dividends to its stockholders is dividends from the Bank to
the Company. Under the New York Banking Law, the Bank may pay dividends to the Company, without regulatory approval, equal to its
net profits for the year in which the payment is made, plus retained net profits for the two previous years, subject to certain
limits not generally relevant. The Bank's retained net income in 2011 was $51.6 million and retained net loss in fiscal 2010 was
$12.0 million, resulting in an aggregate retained net income of $39.6 million. Therefore, subject to the restraints of the MOU
discussed above, the Bank may be able to pay dividends to the Company during fiscal 2012.
Under federal law,
the Bank may not make any capital distribution to the Company, including any dividend or repurchase of the Bank's stock, if, after
making such distribution, the Bank fails to meet the required minimum capital ratio requirements discussed above. The FDIC may
prohibit the Bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice.
Transactions With
Related Parties.
The Company, its direct non-banking subsidiaries, the stockholders who control the Company and other companies
controlled by stockholders who control the Company are affiliates, within the meaning of the Federal Reserve Act, of the Bank and
its subsidiaries. The Bank's authority to engage in transactions with its "affiliates" is limited by Sections 23A and
23B of the Federal Reserve Act. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of
the capital and surplus of the Bank and also limits the aggregate amount of transactions with all affiliates to 20% of the Bank's
capital and surplus. Extensions of credit to affiliates must be secured by certain specified collateral, and the purchase of low
quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including
loans and asset purchases, must be on terms and under circumstances, including credit standards, that are at least as favorable
to the Bank as those prevailing at the time for comparable transactions with non-affiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would
be offered to or would apply to non-affiliated companies.
In accordance with
banking regulations, the Bank may make loans to its and the Company's directors, executive officers, and 10% stockholders, as well
as to entities controlled by them, subject to specific federal and state limits. Among other things, these loans must (a) be made
on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those
prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment
or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the amount of the Bank's capital. In addition, extensions
of credit in excess of certain limits must be approved by the Bank's Board of Directors. However, the Bank may make loans to executive
officers, directors and principal stockholders on preferential terms, provided the extension of credit is made pursuant to a benefit
or compensation program of the Bank that is widely available to employees of the Bank or its affiliates and does not give preference
to any insider over other employees of the Bank or affiliates. The Bank has no such benefit or compensation programs.
Enforcement.
The FDIC and the NYSDFS have enforcement authority over the Bank. The Superintendent of Financial Services of the NYSDFS (the "Superintendent")
may order the Bank to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to keep
prescribed books and accounts. If any director or officer of the Bank has violated any law, or has continued unauthorized or unsafe
practices in conducting the business of the Bank after having been notified by the Superintendent to discontinue such practices,
the Superintendent may remove the individual from office after notice and an opportunity to be heard. The Superintendent also may
take over control of the Bank under specified statutory criteria.
The FDIC's enforcement
authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove
directors and officers. As indicated above, the FDIC is required to take prompt action to correct deficiencies in banks which do
not satisfy specified FDIC capital ratio requirements. Dividends, other capital distributions or the payment of management fees
to any controlling person are prohibited if, following such distribution or payment, a bank would be undercapitalized. An undercapitalized
bank must file a plan to restore its capital within 45 days after being notified that it is undercapitalized. Undercapitalized,
significantly undercapitalized and critically undercapitalized institutions are subject to increasing prohibitions on permitted
activities, and increasing levels of regulatory supervision, based upon the severity of their capital problems. The FDIC is required
to monitor closely the condition of an undercapitalized bank. Enforcement action taken by the FDIC can escalate to the appointment
of a conservator or receiver of a critically undercapitalized bank.
Insurance of Accounts.
Deposit insurance premiums payable to the FDIC are based upon the perceived risk of the institution to the FDIC insurance fund.
The FDIC assigns an institution to one of three capital categories: (a) well capitalized, (b) adequately capitalized or (c) undercapitalized.
The FDIC also assigns an institution to one of three supervisory categories based on an evaluation by the institution's primary
federal regulator and information that the FDIC considers relevant to the institution's financial condition and the risk posed
to the deposit insurance funds ("DIF"). At present, the Bank pays no deposit insurance premium based upon its risk-based
categorization.
The FDIC has raised
insurance premiums to cover substantial losses incurred by the DIF due to the bank failures beginning in 2008. As a result, we
expect deposit insurance premiums may be higher for the foreseeable future than they have been in the recent past. The Bank's FDIC
assessments totalled $1.25 million in fiscal 2011 and $1.65 million in fiscal 2010.
In November 2009, the
FDIC adopted a final rule imposing a 13 quarter prepayment of FDIC premiums. The Bank's original prepayment amount totaled $5.59
million which was paid in December 2009. At December 31, 2011, the FDIC prepayment totalled $2.9 million. This was an estimated
prepayment for the fourth quarter of 2009 through the fourth quarter of 2012.
Reserve Requirements.
The Bank must maintain non-interest-earning reserves against its transaction accounts (primarily NOW and regular checking accounts).
The Bank is generally able to satisfy reserve requirements with cash on hand and other non-interest bearing deposits which it maintains
for other purposes, so the reserve requirements do not impose a material financial burden on the Bank.
Governmental Policies.
Our earnings are significantly affected by the monetary and fiscal policies of governmental authorities, including the Federal
Reserve. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open-market operations
in U.S. Government securities and Federal funds, changes in the discount rate on member bank borrowings and changes in reserve
requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the
overall level of bank loans, investments and deposits, and the interest rates charged on loans and paid for deposits. The Federal
Reserve frequently uses these instruments of monetary policy, especially its open-market operations and the discount rate, to influence
the level of interest rates and to affect the strength of the economy, the level of inflation or the price of the dollar in foreign
exchange markets. The monetary policies of the Federal Reserve have had a significant effect on the operating results of banking
institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future
changes in monetary and fiscal policies, or the effect which they may have on our business and earnings.
Personal Holding
Company Status.
For the fiscal years ended December 31, 2011 and 2010, the Company was deemed to be a Personal Holding Company
(a "PHC"), as defined in the Internal Revenue Code. As a PHC, we may be required to pay an additional income tax or issue
a dividend to our stockholders in an amount based upon the PHC Internal Revenue Code formulas, which is primarily based upon net
income. No such dividend was required to be paid in fiscal 2011 or 2010. (See Dividends in Item 5).
Employees.
On
March 23, 2012, the Company had one full time employee and the Bank employed 107 full time and 5 part time employees. The Bank's
employees are not represented by a collective bargaining unit, and the Bank considers its relationship with its employees to be
good.
ITEM 1A. Risk Factors.
Our business faces
significant risks. These risks include those described below and may include additional risks and uncertainties not presently known
to us or that we currently deem immaterial. Our business, financial condition and results of operations could be materially adversely
affected by any of these risks, and the trading price of our common stock could decline.
Our future success depends on our ability
to compete effectively in a highly competitive market and geographic area.
Our ability to maintain
profitability may depend in part on our ability to expand our scope of available financial services as needed to meet the needs
and demands of our customers. Our business model focuses on using superior customer service to provide traditional banking services
to a growing customer base. However, we face substantial competition in all phases of our operations from a variety of different
competitors. We encounter competition from other commercial banks, savings and loan associations, mutual savings banks, credit
unions and other financial institutions. Our competitors, including credit unions, consumer finance companies, factors, insurance
companies and money market mutual funds, compete with lending and deposit-gathering services offered by us. In addition, our competitors
now include securities dealers, brokers, mortgage bankers, investment advisors and finance and insurance companies who seek to
offer one-stop financial services to their customers that may include services that they have not been able or allowed to offer
to our customers in the past. This increasingly competitive environment is primarily a result of changes in regulation, changes
in technology and product delivery systems and the accelerating pace of consolidation among financial services providers. There
is very strong competition for financial services in the New York and New Jersey state areas in which we currently conduct our
business. This geographic area includes offices of many of the largest financial institutions in the world. Many of those competing
institutions have much greater financial and marketing resources than we have. Due to their size, many competitors can achieve
larger economies of scale and as a result may offer a broader range of products and services than we do. If we are unable to offer
competitive products and services, our earnings may be negatively affected. Some of the financial services organizations with which
we compete are not subject to the same degree of regulation as is imposed on bank holding companies like ourselves and on federally
insured financial institutions like our banking subsidiary, The Berkshire Bank. As a result, these nonbank competitors have certain
advantages over us in accessing funding and in providing various services. The banking business in our current primary market area
is very competitive, and the level of competition we face may increase further, which may limit our asset growth and profitability.
Economic conditions either nationally
or locally in areas in which our operations are concentrated may be less favorable than expected.
Deterioration in local,
regional, national or global economic conditions could result in, among other things, an increase in loan delinquencies, a decrease
in property values, a change in housing turnover rate or a reduction in the level of bank deposits. Particularly, a weakening of
the real estate or employment market in our primary market areas could result in an increase in the number of borrowers who default
on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect
on our profitability. Substantially all of our real estate loans are collateralized by properties located in these market areas,
and substantially all of our loans are made to borrowers who live in and conduct business in these market areas. Any material economic
deterioration in these market areas could have an adverse impact on our profitability.
Much of the Bank's
lending is in New York City and upstate New York. As a result of this geographic concentration, a significant broad-based deterioration
in economic conditions in the New York City metropolitan area and upstate New York could have a material adverse impact on the
quality of the Bank's loan portfolio, and accordingly, our results of operations. Such a decline in economic conditions could restrict
borrowers' ability to pay outstanding principal and interest on loans when due, and, consequently, adversely affect the cash flows
of our business.
Negative developments in the financial
services industry and U.S. and global credit markets may adversely impact our operations and results.
Negative developments
in the capital markets during 2008 and 2009 resulted in uncertainty in the financial markets. Although conditions improved somewhat
during 2010 and 2011, loan portfolio performances have deteriorated at many institutions, including the Bank, resulting from, among
other factors, high unemployment and a decline in the value of the collateral supporting their loans. The competition for our deposits
has increased significantly due to liquidity concerns at many of these same institutions. Stock prices of bank holding companies
like ours have been negatively affected by the current condition of the financial markets, as has our ability, if needed, to raise
capital or borrow in the debt markets compared to recent years. New federal laws such as the Dodd-Frank Act, or new state laws
and regulations regarding lending and funding practices and liquidity standards may negatively affect our business. Financial institution
regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations. Negative
developments in the financial services industry and the impact of new legislation in response to those developments could negatively
impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact
our financial performance. See the Section of this Report entitled "Business - The Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010."
Changes in interest rates could reduce
our income and cash flows.
Our income and cash
flow and the value of our assets and liabilities depend to a great extent on the difference between the interest rates earned on
interest-earning assets such as loans and investment securities, and the interest rates paid on interest-bearing liabilities such
as deposits and borrowings. These rates are highly sensitive to many factors which are beyond our control, including general economic
conditions and policies of various governmental and regulatory agencies, in particular, the Board of Governors of the Federal Reserve
System. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the returns on
our portfolio of investment securities and the amounts paid on deposits. If the rate of interest we pay on deposits and other borrowings
increases more than the rate of interest we earn on loans and other investments, our net interest income, and therefore our earnings,
could be adversely affected. In addition, there is a risk that certain deposits would not be renewed. Our earnings could also be
adversely affected if the rates on our loans and other investments fall more quickly than those on our deposits and other borrowings.
During 2011, interest rates continued at historic lows, a situation which has negatively affected and continues to negatively affect
the yield we achieve on interest-earning assets.
Due to the recent downturn in the market,
certain of the marketable securities we own may take longer to auction than initially anticipated, if at all.
Since 2008, our portfolio
of investment securities includes auction rate securities which have failed to auction due to sell orders exceeding buy orders.
Unless we hold these securities to maturity, these funds will not be available to us until a successful auction occurs or a buyer
is found outside the auction process.
Declines in value may adversely impact
the investment portfolio.
As of December 31,
2011 and 2010, we had approximately $415.5 million and $341.9 million in available for sale and held to maturity investment securities,
respectively. We may be required to record OTTI charges on our investment securities if they suffer a decline in value that is
related to the credit quality of the issue. Numerous factors, including lack of liquidity for re-sales of certain investment securities,
absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators,
or unanticipated changes in the competitive environment, could have a negative effect on our investment portfolio in future periods.
During 2010, we recorded approximately $1.2 million of OTTI charges. While no such OTTI charges were recorded in 2011, there can
be no assurances that additional OTTI charges will not be necessary in the future.
We operate in a highly regulated environment;
changes in laws and regulations and accounting principles may adversely affect us.
We are subject to extensive
state and federal regulation, supervision, and legislation which govern almost all aspects of our operations. These laws may change
from time to time and are primarily intended for the protection of customers, depositors, and the deposit insurance funds. The
impact of any changes to these laws may negatively impact our ability to expand our services and to increase the value of our business.
Regulatory authorities have extensive discretion in the exercise of their supervisory and enforcement powers. They may, among other
things, impose restrictions on the operation of a banking institution, the classification of assets by such institution and such
institution's allowance for loan losses. Regulatory and law enforcement authorities also have wide discretion and extensive enforcement
powers under various consumer protection, civil rights and other laws, including the Gramm-Leach-Bliley Act, the Bank Secrecy Act,
the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act and the Real Estate Settlement Procedures Act.
These laws also permit private individual and class action lawsuits and provide for the recovery of attorneys fees in certain instances.
Any changes to these laws or any applicable accounting principles may negatively impact our results of operations and financial
condition.
In May 2009, in connection
with the Bank's examination by the Federal Deposit Insurance Corporation (the "FDIC") the Bank received a Joint Memorandum
of Understanding (the "MOU") from the FDIC and the New York State Department of Financial Services (the "NYSDFS"),
formerly called the New York State Banking Department, which the Bank executed. The MOU sets forth an informal understanding among
the Bank, the FDIC and the NYSDFS addressing asset quality, loan review, underwriting and administration and certain other concerns
identified in the examination. The Bank's board of directors appointed a committee comprised of three directors to monitor the
Bank's compliance. Compliance with the MOU has not had a material adverse effect on our results of operations or financial condition
and we do not believe it will have a material adverse effect in the future. As set forth in "Management's Discussion and Analysis
of Financial Condition And Results of Operations - Capital Adequacy" and Note N to the Company's consolidated financial statements,
the Bank meets the definition of well capitalized for regulatory purposes as of December 31, 2011.
The Dodd-Frank Act may adversely impact
our results of operations, financial condition or liquidity.
On July 21, 2010 the
Dodd-Frank Act was signed into law by President Obama. The Dodd-Frank Act represents a comprehensive overhaul of the financial
services industry within the United States, establishes a new federal Bureau, and requires the Bureau and other federal agencies
to implement many new and significant rules and regulations. At this time it is difficult to predict the extent to which the Dodd-Frank
Act or the resulting rules and regulations will impact our business. Compliance with these new laws and regulations will likely
result in additional costs, and may adversely impact our results of operations, financial condition or liquidity. See the Section
of this Report entitled "Business - The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010."
We are required to maintain an allowance
for loan losses. These reserves are based on management's judgment and may have to be adjusted in the future. Any adjustment to
the allowance for loan losses, whether due to regulatory changes, economic conditions or other factors, may affect our financial
condition and earnings.
We maintain an allowance
for loan losses at a level believed adequate by management to absorb losses specifically identifiable and inherent in the loan
portfolio. Our loan customers may fail to repay their loans according to the terms, and the collateral securing the payment of
these loans may be insufficient to assure repayment. Such loan losses could have a material adverse effect on our operating results.
We make various assumptions, estimates and judgments about the collectibility of our loan portfolio, including the creditworthiness
of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.
In determining the amount of the allowance for loan losses, we rely on a number of factors, including our own experience and our
evaluation of economic conditions. If our assumptions prove to be incorrect, our current allowance for loan losses may not be sufficient
to cover losses inherent in our loan portfolio, and adjustments may be necessary that would have a material adverse effect on our
operating results.
We may be adversely affected by the
soundness of other financial institutions.
Financial services
institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many
different industries and counterparties, and routinely execute transactions with counterparties in the financial service industry,
including the Federal Home Loan Bank of New York (the "FHLB-NY"), commercial banks, brokers and dealers, investment banks,
and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty
or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at
prices not sufficient to recover the full amount due to us. Any such losses could have a material adverse effect on our financial
condition and results of operations.
A failure in or breach of our operational
or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of
cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage
our reputation, increase our costs and cause losses.
We depend upon our
ability to process, record, and monitor our client transactions on a continuous basis. As client, public, and regulatory expectations
regarding operational and information security have increased, our operational systems and infrastructure must continue to be safeguarded
and monitored for potential failures, disruptions, and breakdowns. Our business, financial, accounting and data processing systems,
or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of
factors including events that are wholly or partially beyond our control. For example, there could be electrical or telecommunications
outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events arising from local or larger
scale political or social matters, including terrorist acts; and, as described below, cyber attacks. Although we have business
continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread
disruption to our physical infrastructure or operating systems that support our businesses and clients.
Information security
risks for financial institutions such as ours have generally increased in recent years in part because of the proliferation of
new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased
sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. As noted above, our
operations rely on the secure processing, transmission, and storage of confidential information in our computer systems and networks.
Our business relies on our digital technologies, computer and email systems, software, and networks to conduct its operations.
In addition, to access our products and services, our clients may use personal smartphones, tablet PC's, personal computers, and
other mobile devices that are beyond our control systems. Although we have information security procedures and controls in place,
our technologies, systems, networks, and our clients' devices may become the target of cyber attacks or information security breaches
that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients' confidential,
proprietary and other information, or otherwise disrupt our or our clients' or other third parties' business operations.
Third parties with
whom we do business or that facilitate our business activities, including financial intermediaries, or vendors that provide services
or security solutions for our operations, could also be sources of operational and information security risk to us, including from
breakdowns or failures of their own systems or capacity constraints.
Although to date we
have not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance
that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of the evolving
nature of these threats. As a result, cybersecurity and the continued development and enhancement of our controls, processes and
practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain
a focus for us. As threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance
our protective measures or to investigate and remediate information security vulnerabilities.
Disruptions or failures
in the physical infrastructure or operating systems that support our businesses and clients, or cyber attacks or security breaches
of the networks, systems or devices that our clients use to access our products and services could result in client attrition,
regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional
compliance costs, any of which could materially adversely affect our results of operations or financial condition.
The Company is authorized to issue
"Blank Check" Preferred Stock; It may be difficult for a third party to acquire us and this could depress our common
stock price.
Under our amended and
restated certificate of incorporation, we have authorized 2,000,000 shares of preferred stock, all of which may be issued by the
board of directors with terms, rights, preferences and designations as the board of directors may determine and without any vote
of the stockholders, unless otherwise required by law. Issuing the preferred stock, depending upon the rights, preferences and
designations set by the board of directors, may adversely affect the rights of holders of common stock.
In addition, federal
and state banking laws may restrict the ability of the stockholders to approve a merger or business combination or obtain control
of the Company. Moreover, one individual owns or controls more than 50% of our outstanding shares. These factors may tend to make
it more difficult for stockholders to replace existing management or may prevent stockholders from receiving a premium for their
shares of our common stock.
Thin Market for our Common Stock and
Other Factors Could Depress our Common Stock Price.
We have authorized
25,000,000 shares of common stock of which 14,443,183 shares are issued and outstanding at December 31, 2011. The price of our
common stock may be volatile at times since our common stock is thinly traded and less than 30% of our outstanding shares are owned
by non-affiliates. It may be difficult for a stockholder to sell a significant number of shares at a chosen time and/or price or
for a third party to purchase sufficient shares on the open market to cause a change in control of the Company, all of which could
depress the price of the Company's common stock.
Our stock is not insured by any governmental
agency and, therefore, investment in them involves risk.
Our securities are
not deposit accounts or other obligation of any bank, and are not insured by the FDIC, or any other governmental agency, and are
subject to investment risk, including the possible loss of principal.
The Financial Sector Is Experiencing
An Economic Downturn. An Increase In The Number of Non-performing Loans Will Have An Adverse Effect On Our Operations.
Virtually all of our
real estate loans are secured by real estate in New York. At December 31, 2011, loans secured by real estate, including home equity
loans and lines of credit, represented 95% of our total loans. Both nationally and in the States of New York and New Jersey, we
are experiencing an economic downturn that is having a significant impact on the prices of real estate and related assets. The
residential and commercial real estate sectors have been adversely affected by weakening economic conditions and may negatively
impact our loan portfolio. While we believe that our total non-performing loans as a percentage of total assets are relatively
low by industry standards, if loans that are currently performing become non-performing, we may need to increase our allowance
for loan losses, which would have an adverse impact on our financial condition and results of operations. We added approximately
$1.6 million and $5.8 million to the allowance for loan losses during the fiscal years ended December 31, 2011 and 2010, respectively.
Our FDIC Premium Could Be Substantially
Higher In The Future, Which Would Have An Adverse Effect On Our Future Earnings.
Our FDIC insurance
assessment was $1.3 million for 2011 compared to $1.6 million for 2010. See "Insurance of Accounts."
ITEM 1B. Unresolved Staff Comments.
Not Applicable
ITEM 2. Properties.
The following are Berkshire's
and the Bank's principal facilities as of March 5, 2012:
|
|
|
|
Approximate
|
|
Approximate
|
|
|
|
|
|
|
Floor Area
|
|
Annual Lease
|
|
|
Location
|
|
Operations
|
|
(Sq. Ft.)
|
|
Rent
|
|
Expiration
|
New York, NY
|
|
Executive Offices
|
|
1,500
|
|
$
|
18,000
|
|
(1)(3)
|
New York, NY
|
|
Main Bank Office and Bank Branch
|
|
9,729
|
|
|
Owned
|
|
March 2013
|
Brooklyn, NY
|
|
Bank Branch
|
|
4,500
|
|
$
|
238,000
|
|
March 2016
|
Brooklyn, NY
|
|
Bank Branch
|
|
2,866
|
|
$
|
96,700
|
|
March 2016
|
Brooklyn, NY
|
|
Bank Branch
|
|
2,592
|
|
$
|
129,200
|
|
December 2012
|
Brooklyn, NY
|
|
Bank Branch
|
|
1,640
|
|
$
|
88,700
|
|
June 2015
|
New York, NY
|
|
Bank Branch
|
|
9,924
|
|
$
|
464,500
|
|
June 2016 (2)(3)
|
New York, NY
|
|
Bank Branch
|
|
3,300
|
|
$
|
72,900
|
|
November 2016 (2)(3)
|
Goshen, NY
|
|
Bank Branch
|
|
10,680
|
|
|
Owned
|
|
|
Harriman, NY
|
|
Bank Branch
|
|
1,623
|
|
|
Owned
|
|
|
Bloomingburg, NY
|
|
Bank Branch
|
|
1,530
|
|
$
|
37,000
|
|
August 2015
|
Teaneck, NJ
|
|
Bank Branch
|
|
2,200
|
|
$
|
44,000
|
|
June 2014
|
(1)Rented on a month to month basis from
a company affiliated with Mr. Moses Marx, a director of the Company.
(2)Leased
from a company affiliated with Mr. Marx, a director of the Company.
(3)Management
believes the annual rent paid is comparable to the annual rent that would be paid to non-affiliated parties in a similar commercial
transaction for similar commercial space.
ITEM 3. Legal Proceedings.
In the ordinary course
of operations, the Bank is a party to routine litigation involving claims incidental to its banking business. Management believes
that no current litigation, threatened or pending, to which we or our assets are a party, poses a substantial likelihood of potential
loss or exposure which would have a material adverse effect on our financial condition or results of our operations.
ITEM 4. Mine Safety Disclosures
Not Applicable
PART II
ITEM 5. Market for Registrant's Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company's Common
Stock trades on the Nasdaq Global Market under the symbol BERK. The following table sets forth, for the periods indicated, the
high and low sales prices for the Company's Common Stock as reported by NASDAQ.
Fiscal Year Ended December 31, 2010
|
|
High
|
|
|
Low
|
|
January 1, 2010 to March 31, 2010
|
|
$
|
7.17
|
|
|
$
|
5.03
|
|
April 1, 2010 to June 30, 2010
|
|
|
6.30
|
|
|
|
4.58
|
|
July 1, 2010 to September 30, 2010
|
|
|
5.47
|
|
|
|
3.86
|
|
October 1, 2010 to December 31, 2010
|
|
|
5.66
|
|
|
|
3.97
|
|
Fiscal Year Ended December 31, 2011
|
|
High
|
|
|
Low
|
|
January 1, 2011 to March 31, 2011
|
|
$
|
8.00
|
|
|
$
|
5.35
|
|
April 1, 2011 to June 30, 2011
|
|
|
7.16
|
|
|
|
5.17
|
|
July 1, 2011 to September 30, 2011
|
|
|
7.39
|
|
|
|
5.98
|
|
October 1, 2011 to December 31, 2011
|
|
|
7.98
|
|
|
|
6.22
|
|
As of the close of
business on March 22, 2012, there were 752 holders of record of the Company's Common Stock.
Dividends
For the fiscal years
ended December 31, 2011 and 2010, the Company was deemed to be a PHC, as defined in the Internal Revenue Code. As a PHC, we may
be required to pay an additional income tax or issue a dividend to our stockholders in an amount based upon applicable Internal
Revenue Code formulas, which is primarily based upon net income. No such dividend was required to be paid in fiscal 2011 or 2010.
The Board of Directors
did not declare or pay cash dividends during the fiscal years ended December 31, 2011 and 2010. The declaration, payment and amount
of such 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.
On May 15, 2003, The
Company's Board of Directors authorized the purchase of up to 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. From 1990 through December 31, 2011, the
Company has purchased a total of 1,898,909 shares of its Common Stock. During fiscal years 2010 and 2011 we did not purchase any
shares, and at December 31, 2011 there were 501,091 shares of Common Stock which may yet be purchased under our stock repurchase
plan.
Equity Compensation Plans
See Part III, Item 12 for information concerning
the Company's equity compensation plans.
ITEM 6. Selected Financial Data
Not Applicable
ITEM 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
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 for the fiscal years ended December 31, 2011 and 2010. The discussion should be read in
conjunction with the consolidated financial statements and related notes (Located in Item 8 herein). Reference is also made to
Part I, Item 1 "Business" herein.
Segments
Management has determined
that the Company through its wholly owned bank subsidiary, the Bank, operates in one business segment, community banking. The Bank's
principal business activity consists of gathering deposits from the general public and investing those deposits in residential
and commercial mortgage loans and commercial non-mortgage loans, both unsecured and secured by personal property. In addition,
the Bank invests those deposits in debt obligations issued by the U.S. Government, its agencies, business corporations and mortgage-backed
securities.
Series A Preferred Shares
On October 31, 2008,
the Company sold an aggregate of 60,000 shares of its 8% Non-Cumulative Mandatorily Convertible Perpetual Series A Preferred Stock
(the "Preferred Stock") at $1,000 per share, or $60 million in the aggregate, to the Company's Chairman of the Board
and majority stockholder, and two non-affiliated investors. Each share of Preferred Stock was entitled to receive non-cumulative
cash dividends at the rate of 8% per annum, payable quarterly, and was mandatorily convertible into 123.153 shares of our Common
Stock on October 31, 2011. Accordingly, on October 31, 2011, all 60,000 outstanding shares of Preferred Stock were mandatorily
converted into 7,389,000 shares of the Common Stock, $.10 par value, of the Company at a conversion rate of 123.15 shares of Common
Stock for each share of Preferred Stock converted, in accordance with the Certificate of Designation of the Preferred Stock.
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 ("U.S.
GAAP") and general practices within the financial services industry. The preparation of financial statements in conformity
with U.S. 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 estimates. 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 further discussion of the allowance
for loan losses in "Provision 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 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. The Company values
those financial assets and financial liabilities in accordance with ASC Topic 820 "Fair Value Measurements and Disclosures."
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date, establishes a framework for measuring fair value, and expands
disclosures about fair value measurement.
Discussion of Financial Condition and
Results of Operations
Overview
Fiscal Year Ended
December 31, 2011 Compared to Fiscal Year Ended December 31, 2010.
Net income, before dividends on our Series A Preferred Stock
and the provision for income taxes, for the year ended December 31, 2011 was $51.7 million, compared to a net loss, before dividends
on our Series A Preferred Stock and the benefit from income taxes, of $15.0 million for the year ended December 31, 2010. Net income
allocated to common stockholders, after dividends on our Series A Preferred Stock and the provision for income taxes, for the year
ended December 31, 2011 was $45.8 million, or $5.51 per common share, compared to a net loss allocated to common stockholders,
after dividends on our Series A Preferred Stock and the benefit from income taxes, of $18.3 million, or $2.59 per common share,
for the year ended December 31, 2010.
|
|
As of and for the
Fiscal Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
%
Inc/(Dec)
|
|
|
|
(In millions, except per share data and percentages
and bank branch information)
|
|
Total Assets
|
|
$
|
862.1
|
|
|
$
|
829.9
|
|
|
|
4
|
%
|
Loans, net
|
|
|
299.3
|
|
|
|
350.2
|
|
|
|
(15
|
)%
|
Investment Securities
|
|
|
415.5
|
|
|
|
341.9
|
|
|
|
22
|
%
|
Total Liabilities
|
|
|
746.6
|
|
|
|
758.3
|
|
|
|
(2
|
)%
|
Deposits
|
|
|
658.9
|
|
|
|
670.1
|
|
|
|
(2
|
)%
|
Borrowings
|
|
|
78.8
|
|
|
|
83.3
|
|
|
|
(5
|
)%
|
Stockholders' Equity
|
|
|
115.5
|
|
|
|
71.6
|
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income
|
|
|
79.4
|
|
|
|
42.1
|
|
|
|
89
|
%
|
Interest Income
|
|
|
34.5
|
|
|
|
40.0
|
|
|
|
(14
|
)%
|
Total Expense
|
|
|
27.7
|
|
|
|
57.1
|
|
|
|
(51
|
)%
|
Interest Expense
|
|
|
8.8
|
|
|
|
11.1
|
|
|
|
(21
|
)%
|
Net Interest Income
|
|
|
25.7
|
|
|
|
28.9
|
|
|
|
(11
|
)%
|
Net Income (Loss) Allocated to Common Stockholders
|
|
|
45.8
|
|
|
|
(18.3
|
)
|
|
|
|
|
Income (Loss) Per Common Share
|
|
|
5.51
|
|
|
|
(2.59
|
)
|
|
|
|
|
Bank Branches
|
|
|
12
|
|
|
|
13
|
|
|
|
|
|
The Company's average balances, interest,
and average yields are set forth on the following table (in thousands, except percentages):
|
|
Twelve Months Ended
December 31, 2011
|
|
|
Twelve Months Ended
December 31, 2010
|
|
|
Twelve Months Ended
December 31, 2009
|
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Average
Yield/Rate
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Average
Yield/Rate
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Average
Yield/Rate
|
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
339,766
|
|
|
$
|
21,764
|
|
|
|
6.41
|
%
|
|
$
|
390,253
|
|
|
$
|
25,559
|
|
|
|
6.55
|
%
|
|
$
|
448,394
|
|
|
$
|
29,777
|
|
|
|
6.63
|
%
|
Investment securities
|
|
|
394,279
|
|
|
|
12,530
|
|
|
|
3.18
|
|
|
|
360,022
|
|
|
|
14,174
|
|
|
|
3.94
|
|
|
|
312,966
|
|
|
|
15,506
|
|
|
|
4.95
|
|
Other (2)(5)
|
|
|
98,076
|
|
|
|
241
|
|
|
|
0.25
|
|
|
|
69,252
|
|
|
|
262
|
|
|
|
0.38
|
|
|
|
61,496
|
|
|
|
639
|
|
|
|
1.04
|
|
Total interest-earning assets
|
|
|
832,121
|
|
|
|
34,535
|
|
|
|
4.15
|
|
|
|
819,527
|
|
|
|
39,995
|
|
|
|
4.88
|
|
|
|
822,856
|
|
|
|
45,922
|
|
|
|
5.58
|
|
Noninterest-earning assets
|
|
|
30,649
|
|
|
|
|
|
|
|
|
|
|
|
58,617
|
|
|
|
|
|
|
|
|
|
|
|
58,828
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
862,770
|
|
|
|
|
|
|
|
|
|
|
$
|
878,144
|
|
|
|
|
|
|
|
|
|
|
$
|
881,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
217,004
|
|
|
|
864
|
|
|
|
0.40
|
|
|
|
222,872
|
|
|
|
1,490
|
|
|
|
0.67
|
|
|
|
204,629
|
|
|
|
2,316
|
|
|
|
1.13
|
|
Time deposits
|
|
|
379,860
|
|
|
|
5,076
|
|
|
|
1.34
|
|
|
|
400,586
|
|
|
|
6,089
|
|
|
|
1.52
|
|
|
|
426,892
|
|
|
|
9,921
|
|
|
|
2.32
|
|
Other borrowings
|
|
|
80,995
|
|
|
|
2,907
|
|
|
|
3.59
|
|
|
|
90,981
|
|
|
|
3,508
|
|
|
|
3.86
|
|
|
|
115,869
|
|
|
|
4,866
|
|
|
|
4.20
|
|
Total interest-bearing liabilities
|
|
|
677,859
|
|
|
|
8,847
|
|
|
|
1.31
|
|
|
|
714,439
|
|
|
|
11,087
|
|
|
|
1.55
|
|
|
|
747,390
|
|
|
|
17,103
|
|
|
|
2.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
76,900
|
|
|
|
|
|
|
|
|
|
|
|
69,963
|
|
|
|
|
|
|
|
|
|
|
|
56,544
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
5,786
|
|
|
|
|
|
|
|
|
|
|
|
7,508
|
|
|
|
|
|
|
|
|
|
|
|
8,701
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (5)
|
|
|
102,225
|
|
|
|
|
|
|
|
|
|
|
|
86,234
|
|
|
|
|
|
|
|
|
|
|
|
69,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
862,770
|
|
|
|
|
|
|
|
|
|
|
$
|
878,144
|
|
|
|
|
|
|
|
|
|
|
$
|
881,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
25,688
|
|
|
|
|
|
|
|
|
|
|
$
|
28,908
|
|
|
|
|
|
|
|
|
|
|
$
|
28,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate spread (3)
|
|
|
|
|
|
|
|
|
|
|
2.84
|
%
|
|
|
|
|
|
|
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
|
|
|
|
3.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
3.09
|
%
|
|
|
|
|
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets
to average interest bearing liabilities
|
|
|
1.23
|
|
|
|
|
|
|
|
|
|
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
(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 for Berkshire Bancorp Inc. (parent only) have been calculated on a monthly basis.
Changes in net interest
income may be analyzed by segregating the volume and rate components of interest income and interest expense. The following tables
set forth certain information regarding changes in interest income and interest expense of the Company for the years indicated.
For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable
to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (changes in volume multiplied by prior
rate) and (3) changes in rate-volume (change in rate multiplied by change in volume) (in thousands):
|
|
Twelve Months Ended December 31, 2011
Versus
Twelve Months Ended December 31, 2010
Increase (Decrease) Due To
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(546
|
)
|
|
$
|
(3,249
|
)
|
|
$
|
(3,795
|
)
|
Investment securities
|
|
|
(2,736
|
)
|
|
|
1,092
|
|
|
|
(1,644
|
)
|
Other
|
|
|
(90
|
)
|
|
|
69
|
|
|
|
(21
|
)
|
Total
|
|
|
(3,372
|
)
|
|
|
(2,088
|
)
|
|
|
(5,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
(602
|
)
|
|
|
(24
|
)
|
|
|
(626
|
)
|
Time deposits
|
|
|
(721
|
)
|
|
|
(292
|
)
|
|
|
(1,013
|
)
|
Other borrowings
|
|
|
(246
|
)
|
|
|
(355
|
)
|
|
|
(601
|
)
|
Total
|
|
|
(1,569
|
)
|
|
|
(671
|
)
|
|
|
(2,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(1,803
|
)
|
|
$
|
(1,417
|
)
|
|
$
|
(3,220
|
)
|
|
|
Twelve Months Ended December 31, 2010
Versus
Twelve Months Ended December 31, 2009
Increase (Decrease) Due To
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(359
|
)
|
|
$
|
(3,859
|
)
|
|
$
|
(4,218
|
)
|
Investment securities
|
|
|
(3,161
|
)
|
|
|
1,829
|
|
|
|
(1,332
|
)
|
Other
|
|
|
(406
|
)
|
|
|
29
|
|
|
|
(377
|
)
|
Total
|
|
|
(3,926
|
)
|
|
|
(2,001
|
)
|
|
|
(5,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
(941
|
)
|
|
|
115
|
|
|
|
(826
|
)
|
Time deposits
|
|
|
(3,415
|
)
|
|
|
(417
|
)
|
|
|
(3,832
|
)
|
Other borrowings
|
|
|
(394
|
)
|
|
|
(964
|
)
|
|
|
(1,358
|
)
|
Total
|
|
|
(4,750
|
)
|
|
|
(1,266
|
)
|
|
|
(6,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
824
|
|
|
$
|
(735
|
)
|
|
$
|
89
|
|
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 U.S. 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. Except for loans identified as troubled debt restructurings
("TDRs"), 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 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 Federal Deposit Insurance Corporation, NYSDFS, 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 its judgments about information available to them at the time
of their examination.
Results of Operations - Fiscal Year
Ended December 31, 2011 Compared to Fiscal Year Ended December 31, 2010.
Net Income (Loss) Allocated to Common
Stockholders.
Net income allocated to common stockholders for the fiscal year ended December 31, 2011 was $45.8 million, or
$5.51 per common share, as compared to a net loss allocated to common stockholders of $18.3 million, or $2.59 per common share,
for the fiscal year ended December 31, 2010. The number of common shares outstanding at December 31, 2011 increased by 7,395,000
shares to 14,443,183 shares from 7,048,183 shares outstanding at December 31, 2010, and the average number of common shares outstanding
at December 31, 2011 increased by 1,255,118 shares to 8,309,301 shares from 7,054,183 shares at December 31, 2010. The increases
were due to the mandatory conversion of our Series A Preferred Stock into common stock on October 31, 2011.
The net income allocated
to common stockholders for the fiscal year ended December 31, 2011 was significantly affected by a settlement agreement we entered
into in May 2011 with the selling financial institution of the auction rate securities in the Bank's investment portfolio. In January
2009, the Bank filed an arbitration proceeding with the Financial Industry Regulatory Authority against the selling financial institution
of the auction rate securities in our investment portfolio. Pursuant to the agreement, in settlement of all claims made by the
Bank, the institution paid to the Bank the sum of $42.5 million, or $5.11 per common share.
The net loss allocated
to common stockholders for the fiscal year ended December 31, 2010 was primarily due to the write-off of goodwill of $18.5 million,
or $2.63 per common share, the other than temporary impairment ("OTTI") charges on securities of $1.2 million, or $0.17
per common share, the loss on the termination of our pension plan of $1.9 million, or $0.27 per common share and dividends on our
Series A Preferred Stock of $4.8 million, or $0.68 per common share, partially offset by the benefit for income taxes of $1.5 million,
or $0.21 per common share.
The Company's net income
is largely dependent on interest rate levels, the demand for the Company's loan and deposit products and the strategies employed
to manage the interest rate and other risks inherent in the banking business.
Interest Income.
Total interest
income for the fiscal year ended December 31, 2011 decreased by $5.5 million to $34.5 million from $40.0 million for the fiscal
year ended December 31, 2010. The decrease in total interest income in fiscal year 2011 was primarily due to the decrease in the
average yields earned on interest-earning assets to 4.15% in fiscal year 2011 from 4.88% in fiscal year 2010, partially offset
by the increase in the average amount of interest-earning assets to $832.1 million in fiscal year 2011 from $819.5 million in fiscal
year 2010.
The following table
presents the composition of interest income for the indicated periods:
|
|
Fiscal 2011
|
|
|
Fiscal 2010
|
|
|
|
Interest
Income
|
|
|
% of
Total
|
|
|
Interest
Income
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
Loans
|
|
$
|
21,764
|
|
|
|
63.02
|
%
|
|
$
|
25,559
|
|
|
|
63.90
|
%
|
Investment Securities
|
|
|
12,530
|
|
|
|
36.28
|
|
|
|
14,174
|
|
|
|
35.44
|
|
Other
|
|
|
241
|
|
|
|
0.70
|
|
|
|
262
|
|
|
|
0.66
|
|
Total Interest Income
|
|
$
|
34,535
|
|
|
|
100.00
|
%
|
|
$
|
39,995
|
|
|
|
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 40.8% of total average interest-earning assets during fiscal 2011 from 47.6% of total interest-earning assets during fiscal
2010. The average amounts of investment securities increased to 47.4% of total average interest-earning assets during fiscal 2011
from 43.9% of total interest-earning assets during fiscal 2010. 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 December 31, 2011,
our portfolio of investment securities included approximately $65.7 million at cost of auction rate securities. The fair value
of these securities, presently $44.5 million, could be negatively impacted in the future. Were this to occur, we may be required
to reflect a write down of these securities in future periods as a charge to earnings if any of these securities are deemed to
be other than temporarily impaired. Such impairment charge could be material to our results of operations.
As required by FASB
ASC 320, "Investments-Debt and Equity Securities", securities are classified into three categories: trading, held-to-maturity
and available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified
as trading securities and are reported at fair value with unrealized gains and losses included in trading account activities in
the statement of income. Securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity
and reported at amortized cost. All other securities are classified as available-for-sale. Available-for-sale securities are reported
at fair value with unrealized gains and losses included, on an after-tax basis, as a separate component of stockholders' equity.
The Company does not have a trading securities portfolio and has no current plans to maintain such a portfolio in the future. The
Company generally classifies all newly purchased debt securities as available for sale in order to maintain the flexibility to
sell those securities if the need arises. The Bank has a limited portfolio of securities classified as held to maturity, represented
principally by securities purchased a number of years ago.
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 dispose of FHLB-NY shares is dependent upon the redemption practices of the FHLB-NY. At December 31,
2011, 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 December 31, 2011 or 2010.
The following table
presents the composition of average interest-earning assets for the indicated periods:
|
|
Fiscal 2011
|
|
|
Fiscal 2010
|
|
|
|
Average
Amount
|
|
|
% of
Total
|
|
|
Average
Amount
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
Loans
|
|
$
|
339,766
|
|
|
|
40.83
|
%
|
|
$
|
390,253
|
|
|
|
47.62
|
%
|
Investment Securities
|
|
|
394,279
|
|
|
|
47.38
|
|
|
|
360,022
|
|
|
|
43.93
|
|
Other
|
|
|
98,076
|
|
|
|
11.79
|
|
|
|
69,252
|
|
|
|
8.45
|
|
Total Interest-Earning Assets
|
|
$
|
832,121
|
|
|
|
100.00
|
%
|
|
$
|
819,527
|
|
|
|
100.00
|
%
|
Interest Expense.
Total interest
expense for the fiscal year ended December 31, 2011 decreased by $2.3 million to $8.8 million from $11.1 million for the fiscal
year ended December 31, 2010. The decrease in total interest expense was due to the $36.6 million decrease in the average amounts
of interest-bearing liabilities to $677.8 million during fiscal 2011 from $714.4 million during fiscal 2010 and the decrease in
the average rates paid on such liabilities to 1.31% from 1.55% during fiscal years 2011 and 2010, respectively.
The following table
presents the composition of interest expense for the indicated periods:
|
|
Fiscal 2011
|
|
|
Fiscal 2010
|
|
|
|
Interest
Expense
|
|
|
% of
Total
|
|
|
Interest
Expense
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
Interest-Bearing Deposits
|
|
$
|
864
|
|
|
|
9.76
|
%
|
|
$
|
1,490
|
|
|
|
13.44
|
%
|
Time Deposits
|
|
|
5,076
|
|
|
|
57.38
|
|
|
|
6,089
|
|
|
|
54.92
|
|
Other Borrowings
|
|
|
2,907
|
|
|
|
32.86
|
|
|
|
3,508
|
|
|
|
31.64
|
|
Total Interest Expense
|
|
$
|
8,847
|
|
|
|
100.00
|
%
|
|
$
|
11,087
|
|
|
|
100.00
|
%
|
The following table
presents the composition of average interest-bearing liabilities for the indicated periods:
|
|
Fiscal 2011
|
|
|
Fiscal 2010
|
|
|
|
Average
Amount
|
|
|
% of
Total
|
|
|
Average
Amount
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
Interest-Bearing Deposits
|
|
$
|
217,004
|
|
|
|
32.01
|
%
|
|
$
|
222,872
|
|
|
|
31.20
|
%
|
Time Deposits
|
|
|
379,860
|
|
|
|
56.04
|
|
|
|
400,586
|
|
|
|
56.07
|
|
Other Borrowings
|
|
|
80,995
|
|
|
|
11.95
|
|
|
|
90,981
|
|
|
|
12.73
|
|
Total Interest-Bearing Liabilities
|
|
$
|
677,859
|
|
|
|
100.00
|
%
|
|
$
|
714,439
|
|
|
|
100.00
|
%
|
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 fiscal year
ended December 31, 2011, net interest income decreased by $3.2 million to $25.7 million from $28.9 million for the fiscal year
ended December 31, 2010. The decrease in net interest income in fiscal 2011 was due to the decrease in interest income discussed
above, partially offset by the decrease in the average amount of interest-bearing liabilities, the decrease in interest expense
and the decrease in the average rates paid on interest-bearing liabilities as discussed above. The Company's interest-rate spread,
the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, decreased
to 2.84% during fiscal 2011 from 3.33% during fiscal 2010.
Net Interest Margin.
Net interest
margin, or net interest income as a percentage of average interest-earning assets, decreased to 3.09% during fiscal 2011 from 3.53%
during fiscal 2010. We seek to secure and retain customer deposits with competitive products and rates, while making strategic
use of the prevailing interest rate environment to borrow funds at what we believe to be attractive rates. We invest such deposits
and borrowed funds in what we believe to be a prudent mix of fixed and adjustable rate loans, investment securities and short-term
interest-earning assets. The decrease in net interest margin during fiscal 2011 was primarily due to the decrease in the average
yields earned on interest-earning assets, partially offset by the decrease in the average rates paid on interest-bearing liabilities.
Non-Interest Income.
Non-interest
income consists primarily of realized gains on sales of marketable securities and service fee income. In May 2011, we entered into
a settlement agreement with the selling financial institution of the auction rate securities in the Bank's investment portfolio.
Pursuant to the agreement, the institution paid to the Bank the sum of $42.5 million which is included in other non-interest income.
In April 2011, we sold the property we owned in Ridgefield, New Jersey, a bank branch we closed in fiscal year 2010, for $941,000
and recorded a gain of $490,000 in other non-interest income. For the fiscal year ended December 31, 2011, total non-interest income
increased by $42.8 million to $44.9 million from $2.1 million for the fiscal year ended December 31, 2010. The increase was due
to the non-recurring items above.
The following table
presents the composition of non-interest income for the indicated periods:
|
|
Fiscal 2011
|
|
|
Fiscal 2010
|
|
|
|
Non-Interest
Income
|
|
|
% of
Total
|
|
|
Non-Interest
Income
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
Service Charges on Deposits
|
|
$
|
479
|
|
|
|
1.07
|
%
|
|
$
|
515
|
|
|
|
24.00
|
%
|
Investment Securities Gains
|
|
|
1,079
|
|
|
|
2.40
|
|
|
|
1,002
|
|
|
|
46.69
|
|
Other
|
|
|
43,335
|
|
|
|
96.53
|
|
|
|
629
|
|
|
|
29.31
|
|
Total Non-Interest Income
|
|
$
|
44,893
|
|
|
|
100.00
|
%
|
|
$
|
2,146
|
|
|
|
100.00
|
%
|
Non-Interest Expense.
Non-interest
expense includes salaries and employee benefits, occupancy and equipment expenses, legal and professional fees, other operating
expenses associated with the day-to-day operations of the Company and OTTI charges on investment securities. For the fiscal year
ended December 31, 2011, non-interest expense decreased by $23.0 million to $17.3 million from $40.3 million for the fiscal year
ended December 31, 2010. The decrease was primarily due to the following non-recurring items. During the third quarter of fiscal
2010, the Company determined to close its bank branch in Ridgefield, NJ. Based upon an appraisal of the property, we recorded an
impairment charge of $380,000 at December 31, 2010. During fiscal 2010 we recorded an OTTI charge of $1.2 million, a $1.9 million
loss on the termination of our pension plan and an $18.5 million charge for the impairment of goodwill.
The following table
presents the composition of non-interest expense for the indicated periods.
|
|
Fiscal 2011
|
|
|
Fiscal 2010
|
|
|
|
Non-Interest
Expense
|
|
|
% of
Total
|
|
|
Non-Interest
Expense
|
|
|
% of
Total
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
Salaries and Employee Benefits
|
|
$
|
9,517
|
|
|
|
55.03
|
%
|
|
$
|
9,442
|
|
|
|
23.44
|
%
|
Net Occupancy Expense
|
|
|
2,545
|
|
|
|
14.72
|
|
|
|
2,109
|
|
|
|
5.24
|
|
Equipment Expense
|
|
|
330
|
|
|
|
1.91
|
|
|
|
360
|
|
|
|
0.89
|
|
FDIC Assessment
|
|
|
1,252
|
|
|
|
7.24
|
|
|
|
1,646
|
|
|
|
4.09
|
|
Data Processing Expense
|
|
|
447
|
|
|
|
2.58
|
|
|
|
489
|
|
|
|
1.21
|
|
Other than temporary impairment charges on securities
|
|
|
—
|
|
|
|
0.00
|
|
|
|
1,202
|
|
|
|
2.98
|
|
Loss on termination of pension plan
|
|
|
—
|
|
|
|
0.00
|
|
|
|
1,871
|
|
|
|
4.64
|
|
Impairment of goodwill
|
|
|
—
|
|
|
|
0.00
|
|
|
|
18,549
|
|
|
|
46.05
|
|
Other
|
|
|
3,203
|
|
|
|
18.52
|
|
|
|
4,615
|
|
|
|
11.46
|
|
Total Non-Interest Expense
|
|
$
|
17,294
|
|
|
|
100.00
|
%
|
|
$
|
40,283
|
|
|
|
100.00
|
%
|
Provision for Income Tax.
For the
fiscal year ended December 31, 2011, the Company recorded a provision for income taxes of $1.9 million. The provision for income
taxes relates to the income before taxes and the decrease in the valuation allowance.
For the fiscal year
ended December 31, 2010, the Company recorded a benefit for income taxes of $1.5 million. The tax benefit in fiscal 2010 relates
to the loss before provision for income taxes and the decrease in the valuation allowance, offset by significant permanent item
add backs mainly related to the goodwill write-off.
Investment Activities
General.
The
investment policy of the Bank is designed primarily to provide satisfactory yields while maintaining adequate liquidity, a balance
of high quality, diversified investments, and minimal risk. Generally, the Bank does not invest in equity securities. However,
the Company does invest in some equity securities. The largest component of the Bank's investments, representing more than 50%
of total investment securities, are debt securities issued by U.S. Government agencies including Freddie Mac, Fannie Mae or the
Government National Mortgage Association ("Ginnie Mae"). The remainder of the Bank's debt securities investments are
primarily short term debt securities issued by the United States or its agencies. We have no exposure to the sovereign debt of
any foreign country. The Bank maintains a portfolio of high-yield corporate debt securities. Recognizing the higher credit risks
of these securities, the Bank underwrites these securities in a manner similar to its loan underwriting procedures.
The following is a
summary of held to maturity investment securities:
|
|
December 31, 2011
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
298
|
|
|
$
|
1
|
|
|
$
|
(6
|
)
|
|
$
|
293
|
|
|
|
December 31, 2010
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
319
|
|
|
$
|
1
|
|
|
$
|
(4
|
)
|
|
$
|
316
|
|
|
|
December 31, 2009
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
340
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
337
|
|
The following is a
summary of available-for-sale investment securities:
|
|
December 31, 2011
|
|
|
|
Amortized Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
80,072
|
|
|
$
|
141
|
|
|
$
|
—
|
|
|
$
|
80,213
|
|
U.S. Government Agencies
|
|
|
130,389
|
|
|
|
510
|
|
|
|
(33
|
)
|
|
|
130,866
|
|
Mortgage-backed securities
|
|
|
140,049
|
|
|
|
2,750
|
|
|
|
(440
|
)
|
|
|
142,359
|
|
Corporate notes
|
|
|
12,949
|
|
|
|
103
|
|
|
|
(49
|
)
|
|
|
13,003
|
|
Municipal securities
|
|
|
2,682
|
|
|
|
—
|
|
|
|
(687
|
)
|
|
|
1,995
|
|
Auction rate securities
|
|
|
65,700
|
|
|
|
—
|
|
|
|
(21,205
|
)
|
|
|
44,495
|
|
Marketable equity securities and other
|
|
|
2,284
|
|
|
|
—
|
|
|
|
(45
|
)
|
|
|
2,239
|
|
Totals
|
|
$
|
434,125
|
|
|
$
|
3,504
|
|
|
$
|
(22,459
|
)
|
|
$
|
415,170
|
|
|
|
December 31, 2010
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
50,015
|
|
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
50,076
|
|
U.S. Government Agencies
|
|
|
88,469
|
|
|
|
591
|
|
|
|
(1,533
|
)
|
|
|
87,527
|
|
Mortgage-backed securities
|
|
|
117,724
|
|
|
|
4,099
|
|
|
|
(686
|
)
|
|
|
121,137
|
|
Corporate notes
|
|
|
13,773
|
|
|
|
44
|
|
|
|
(639
|
)
|
|
|
13,178
|
|
Single Issuer Trust Preferred CDO
|
|
|
1,023
|
|
|
|
271
|
|
|
|
—
|
|
|
|
1,294
|
|
Pooled Trust Preferred CDO
|
|
|
6,459
|
|
|
|
—
|
|
|
|
(6,000
|
)
|
|
|
459
|
|
Municipal securities
|
|
|
2,632
|
|
|
|
102
|
|
|
|
(46
|
)
|
|
|
2,688
|
|
Auction rate securities
|
|
|
73,993
|
|
|
|
397
|
|
|
|
(12,311
|
)
|
|
|
62,079
|
|
Marketable equity securities and other
|
|
|
2,810
|
|
|
|
316
|
|
|
|
—
|
|
|
|
3,126
|
|
Totals
|
|
$
|
356,898
|
|
|
$
|
5,881
|
|
|
$
|
(21,215
|
)
|
|
$
|
341,564
|
|
|
|
December 31, 2009
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
50,236
|
|
|
$
|
35
|
|
|
$
|
(65
|
)
|
|
$
|
50,206
|
|
U.S. Government Agencies
|
|
|
76,259
|
|
|
|
59
|
|
|
|
(793
|
)
|
|
|
75,525
|
|
Mortgage-backed securities
|
|
|
134,810
|
|
|
|
1,943
|
|
|
|
(710
|
)
|
|
|
136,043
|
|
Corporate notes
|
|
|
19,029
|
|
|
|
1,011
|
|
|
|
(2,311
|
)
|
|
|
17,729
|
|
Single Issuer Trust Preferred CDO
|
|
|
1,021
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,021
|
|
Pooled Trust Preferred CDO
|
|
|
6,463
|
|
|
|
—
|
|
|
|
(6,313
|
)
|
|
|
150
|
|
Municipal securities
|
|
|
1,973
|
|
|
|
198
|
|
|
|
—
|
|
|
|
2,171
|
|
Auction rate securities
|
|
|
78,895
|
|
|
|
—
|
|
|
|
(11,953
|
)
|
|
|
66,942
|
|
Marketable equity securities and other
|
|
|
7,648
|
|
|
|
69
|
|
|
|
(26
|
)
|
|
|
7,691
|
|
Totals
|
|
$
|
376,334
|
|
|
$
|
3,315
|
|
|
$
|
(22,171
|
)
|
|
$
|
357,478
|
|
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 aggregated by type of underlying collateral at December 31, 2011 and 2010:
|
|
2011
|
|
|
2010
|
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Mortgage Corporation Preferred Shares
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
693
|
|
|
$
|
1,089
|
|
Preferred Shares of Money Center Banks
|
|
|
63,700
|
|
|
|
42,495
|
|
|
|
71,300
|
|
|
|
58,990
|
|
Public Utility Debt and Equity Securities
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
2,000
|
|
Totals
|
|
$
|
65,700
|
|
|
$
|
44,495
|
|
|
$
|
73,993
|
|
|
$
|
62,079
|
|
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 December 31, 2011 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.
The fair value of the
auction rate securities is determined by management using a discounted cash flow analysis and by valuing the underlying security.
The auction rate securities allow for conversion to the underlying preferred security after two failed auctions. As of December
31, 2011, there have been more than two failed auctions for all outstanding auction rate securities. Because of the lack of liquidity
in the market for the auction rate securities as compared to the market for the underlying preferred shares and as there is a possibility
of an orderly transaction and market for the underlying preferred shares without significant adjustment to their carrying value,
we considered the market value of the underlying preferred shares to be more objective and relevant. For the public utility debt
and equity securities, the security is collateralized by a mutual fund in which the majority of the investments are public utility
debt and equity securities. As this fund, as well as other mutual funds for public utilities, has not been severely impacted by
the market dislocation, these funds, and consequently our auction rate securities, have continued to perform.
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 December 31, 2011, the auction rate securities
have continued to pay interest at the highest rate as stipulated in the original prospectus, except for the auction rate securities
collateralized by the Federal Home Loan Mortgage Corporation Preferred Shares which were sold for a gain of $2.8 million during
the quarter ended June 30, 2011.
In addition to valuing
the auction rate securities (ARS) by valuing the collateral, we completed discounted cash flow analyses. In determining the appropriate
cash flow analysis for our auction rate securities, the Company reviewed multiple factors and prepared multiple discounted cash
flow analyses. The four main factors affecting our cash flow analysis for each ARS were: the expected future interest rate of the
ARS, the expected holding period, the expected principal to be received at the end of the holding period, and an assumed discount
rate.
In determining the
expected future interest rate, we used the current ARS rate at December 31, 2011 and kept the rate constant for future cash flow
estimates. The current rates being paid on the majority of these securities are the maximum penalty rate and we believe that these
rates will not change significantly in the future. In addition, if the rates do increase or decrease in future periods, we believe
that this would increase or decrease the risk profile of these securities which would cause a corresponding change in the discount
rate assumption so the discounted cash flow analysis would not be significantly affected by interest rate changes.
In determining the
expected holding period of each security using discounted cash flow analysis, we ran several scenarios. These scenarios included
holding the security until the trust dissolution date (maturity date), and a five year scenario, inasmuch as we believe four years
from December 31, 2011 would be the earliest that the ARS market may resume the normal auction process.
The expected principal
that we would receive in the discounted cash flow analysis was based upon two scenarios. These scenarios included receiving par
at the maturity date and at the five-year assumed recovery date and receiving the market value of the underlying preferred shares
at the maturity date and at the five-year assumed recovery date. Under the terms of the ARS agreements, we would receive the assets
of the Trust at the trust dissolution date which would constitute a conversion to the underlying preferred shares.
Finally, in determining
the discount rate, we reviewed numerous industry rates and determined a separate discount rate for each ARS as follows: We obtained
the 10 year credit default swap spread for each of the underlying issuers (we believed that this was the most readily available
information that would most closely represent an equivalent yield). We then adjusted this rate by 25 - 50 basis points depending
on how far out the actual maturity date was in excess of 10 years (maturity dates range from approximately 15 years to 25 years).
We then added the 10-year swap rate at December 31, 2011, and finally added 25 or 50 basis points for the illiquidity and other
market risks. The liquidity factor applied to these securities was based on the credit rating of the security (25 basis points
for securities above investment grade and 50 basis points for securities slightly below investment grade). The final discount rates
ranged from 2.5% - 6.7%.
Based on these analyses,
the discounted cash flows ranged from a total of approximately $60.6 million to $55.0 million. We believe that of these scenarios,
the most likely scenario as of December 31, 2011 is that we will hold these securities to the maturity based on the high interest
rates and will receive par. However, we also verified the reasonableness of the value by analyzing receipt of the par value of
the underlying preferred securities at maturity. The calculated fair values using the par value approach was $55.0 million as compared
to $44.5 million using the underlying preferred securities. The current fair value that the Bank has recorded for the ARS portfolio
based on the value of the underlying securities is approximately $44.5 million. As our current fair value falls below the range
of the discounted cash flows analyses performed and lower than the most likely scenarios, we believe that our current fair value
is a conservative representation of what a willing market participant would pay for these securities and is an accurate estimate
of our ARS fair value at December 31, 2011.
Based upon our methodology
for determining the fair value of the auction rate securities, we recorded an OTTI charge of $1.2 million for the year ended December
31, 2010, while no OTTI charge was required for 2011. We concluded that, as of December 31, 2011 and 2010, the unrealized loss
for the remainder of 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 issuer
of the auction rate securities or a downgrade of the auction rate security 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.
At December 31, 2011,
we had four auction rate securities totaling $15.3 million which were below investment grade. At December 31, 2010, we had six
auction rate securities totaling $21.0 million which were below investment grade.
During the years ended
December 31, 2011 and 2010 no auction rate securities were redeemed. During fiscal year 2011, $8.3 million of auction rate securities
were sold with a net gain of $2.8 million recognized on the sale. During fiscal year 2010, $3.7 million of auction rate securities
were sold at auction with no gain or loss recognized on the sale.
At December 31, 2010,
we had a trust preferred security issued by a non-registrant regional bank with an amortized cost of $1.0 million (after OTTI charges)
and a fair value of $1.3 million. When this asset was acquired it was an investment grade security that subsequently deteriorated
to a non-rated security. We sold the security during fiscal year 2011 and recognized a gain of $510,000 on the sale.
At December 31, 2010,
we had one pooled trust preferred CDO ("TPCDO") with an amortized cost of $6.5 million (after OTTI charges) and a fair
value of $459,000. We owned a Class B tranche of the TPCDO, which was considered below investment grade at December 31, 2010. We
sold the security during fiscal year 2011 and recognized a loss of $4.2 million on the sale.
Based upon the discounted
cash flow analysis performed, there was no credit related OTTI for the years ended December 31, 2011 and 2010.
The table below reflects
the amount of single issue debt securities below investment grade and the lowest rating by security type at December 31, 2011 and
2010 (in thousands):
|
|
December 31, 2011
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Unrealized
Gain (Loss)
|
|
|
Lowest Credit
Rating
|
Auction Rate Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Center Banks
|
|
$
|
26,000
|
|
|
$
|
15,293
|
|
|
$
|
(10,707
|
)
|
|
Ba3
|
The below investment
grade auction rate securities collateralized by preferred shares of money center banks consists of four securities, from two original
issuers. In the first quarter of 2009, one of the issuers was acquired by the other.
|
|
December 31, 2010
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Unrealized
Gain (Loss)
|
|
|
Lowest Credit
Rating
|
Single Issuer Corporate Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Lender
|
|
$
|
5,000
|
|
|
$
|
4,578
|
|
|
$
|
(422
|
)
|
|
B
|
Trust Preferred Security
|
|
|
1,023
|
|
|
|
1,293
|
|
|
|
270
|
|
|
No rating
|
Auction Rate Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Mortgage Corporation
|
|
|
693
|
|
|
|
1,089
|
|
|
|
396
|
|
|
Ca
|
Money Center Banks
|
|
|
20,300
|
|
|
|
14,746
|
|
|
|
(5,554
|
)
|
|
Ba3
|
Pooled Issuers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TPCDO
|
|
|
6,459
|
|
|
|
458
|
|
|
|
(6,001
|
)
|
|
No rating
|
The below investment
grade Federal Home Loan Mortgage Corporation auction rate securities were comprised of two securities. The below investment grade
auction rate securities collateralized by preferred shares of money center banks consisted of four securities, from two original
issuers. In the first quarter of 2009, one of the issuers was acquired by the other.
The below investment
grade for the student lender was one factor evaluated in determining whether it was appropriate to recognize OTTI. We also considered
and evaluated analysis prepared by two independent third party analysts and the financial data of the issuer. The financial factors
we evaluated included but are not limited to, net income, return on assets, increased cash and cash equivalents, increased originations,
and the amount of debt included in current liabilities. We also considered the effects of the student loan overhaul included in
the Health Care legislation signed by President Obama in March 2010 which will eliminate the student lender's ability to originate
new student loans. Management believes this security has a fair value below cost due to the weak economic environment, high unemployment,
slow salary growth, and high consumer debt which has adversely affected income generation of the borrowers. As a result, student
loans have exhibited increased delinquency and defaults. The student lender bond the Company owns was purchased in 2004 prior to
the current credit crisis and for which the underlying loans are guaranteed by the Federal Government at 98%. Based upon the entirety
of the evidence of the student lender corporate bond outlined above, management concluded that OTTI was not appropriate and that
the unrealized loss was due to market factors.
At December 31, 2011
and 2010, all other single issuer debt securities had a credit rating of investment grade.
At December 31, 2011,
the Company owned $83,000, at cost, of preferred stocks with a fair market value of $38,000. The fair market value was determined
by quoted market prices. In order to determine whether an OTTI charge should be recognized, we evaluate the length of time and
the extent to which the fair value is below cost, the financial condition and near term prospects of the issuer, and the Company's
intent and ability to retain the equity security to allow for recovery. Accordingly, no OTTI was recognized on the unrealized loss
of $45,000.
At December 31, 2010,
the Company owned preferred and common stock (collectively "equities"). The fair value of the equities was determined
by quoted market prices; unrealized gain or loss was determined by comparing the cost of the equity to its fair value.
The table below details
certain information related to the equity securities as of December 31, 2011 and 2010 (in thousands):
|
|
|
|
December 31, 2011
|
|
|
|
Industry
|
|
Cost
|
|
|
Fair
Value
|
|
|
Unrealized
Gain (Loss)
|
|
Preferred
|
|
Airline
|
|
$
|
61
|
|
|
$
|
13
|
|
|
$
|
(48
|
)
|
|
|
Other
|
|
|
22
|
|
|
|
25
|
|
|
|
3
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Industry
|
|
Cost
|
|
|
Fair
Value
|
|
|
Unrealized
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Telecommunications
|
|
$
|
91
|
|
|
$
|
113
|
|
|
$
|
22
|
|
|
|
Airline
|
|
|
862
|
|
|
|
1,049
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
Airline
|
|
|
61
|
|
|
|
73
|
|
|
|
12
|
|
|
|
Flooring and other
|
|
|
33
|
|
|
|
38
|
|
|
|
5
|
|
|
|
Mining
|
|
|
27
|
|
|
|
118
|
|
|
|
91
|
|
The Company has investments
in certain debt securities, as noted in the table below, that have unrealized losses or may be otherwise impaired, but 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. In addition, these securities are making payments in accordance with the terms of the instruments.
The following table
indicates the length of time individual securities that we consider temporarily impaired have been in a continuous unrealized loss
position at December 31, 2011 (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. Government Agencies
|
|
$
|
22,791
|
|
|
$
|
33
|
|
|
$
|
293
|
|
|
$
|
6
|
|
|
$
|
23,084
|
|
|
$
|
39
|
|
Mortgage-backed securities
|
|
|
28,957
|
|
|
|
117
|
|
|
|
8,118
|
|
|
|
323
|
|
|
|
37,075
|
|
|
|
440
|
|
Corporate notes
|
|
|
1,244
|
|
|
|
15
|
|
|
|
3,954
|
|
|
|
34
|
|
|
|
5,198
|
|
|
|
49
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
42,495
|
|
|
|
21,205
|
|
|
|
42,495
|
|
|
|
21,205
|
|
Marketable equity securities and other
|
|
|
—
|
|
|
|
—
|
|
|
|
39
|
|
|
|
45
|
|
|
|
39
|
|
|
|
45
|
|
Municipal securities
|
|
|
1,995
|
|
|
|
687
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,995
|
|
|
|
687
|
|
Total temporarily impaired securities
|
|
$
|
54,987
|
|
|
$
|
852
|
|
|
$
|
54,899
|
|
|
$
|
21,613
|
|
|
$
|
109,886
|
|
|
$
|
22,465
|
|
The Company had a total
of 43 debt securities with a fair market value of $67.4 million which were temporarily impaired at December 31, 2011. The total
unrealized loss on these securities was $1.2 million, which is attributable to the market interest volatility, the continued illiquidity
of the debt markets, and uncertainty in the financial markets. We also had 1 equity security with a fair market value of $39,000
with an unrealized loss of $45,000. The remaining unrealized loss of $21.2 million is on 9 auction rate securities which have declined
in value due to auction failures beginning in February 2008. It is not more likely than not that we would sell these 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 11.7% of total assets at December 31, 2011. Therefore, the unrealized
losses associated with these securities are not considered to be other than temporary.
The following table
indicates the length of time individual securities that we consider temporarily impaired have been in a continuous unrealized loss
position at December 31, 2010 (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. Government Agencies
|
|
$
|
37,071
|
|
|
$
|
1,533
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
37,102
|
|
|
$
|
1,533
|
|
Mortgage-backed securities
|
|
|
24,860
|
|
|
|
381
|
|
|
|
9,745
|
|
|
|
305
|
|
|
|
34,605
|
|
|
|
686
|
|
Corporate notes
|
|
|
1,373
|
|
|
|
9
|
|
|
|
8,314
|
|
|
|
630
|
|
|
|
9,687
|
|
|
|
639
|
|
Pooled Trust Preferred CDO
|
|
|
—
|
|
|
|
—
|
|
|
|
458
|
|
|
|
6,000
|
|
|
|
458
|
|
|
|
6,000
|
|
Auction rate securities
|
|
|
4,504
|
|
|
|
497
|
|
|
|
54,486
|
|
|
|
11,814
|
|
|
|
58,990
|
|
|
|
12,311
|
|
Municipal securities
|
|
|
1,747
|
|
|
|
46
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,747
|
|
|
|
46
|
|
Total temporarily impaired securities
|
|
$
|
69,555
|
|
|
$
|
2,466
|
|
|
$
|
73,034
|
|
|
$
|
18,749
|
|
|
$
|
142,589
|
|
|
$
|
21,215
|
|
The Company had a total
of 40 debt securities with a fair market value of $81.9 million which were temporarily impaired at December 31, 2010. The total
unrealized loss on these securities was $8.9 million, which is attributable to the market interest volatility, the continued illiquidity
of the debt markets, and uncertainty in the financial markets. The remaining unrealized loss of $12.3 million is on 11 auction
rate securities which have declined in value due to auction failures beginning in February 2008. It is not more likely than not
that we would sell these 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 9.3% of total assets at
December 31, 2010. Therefore, the unrealized losses associated with these securities are not considered to be other than temporary.
The amortized cost
and fair value of investment securities available for sale and held to maturity, by contractual maturity, at December 31, 2011
and 2010 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.
|
|
December 31, 2011
|
|
|
|
Available for Sale
|
|
|
Held to Maturity
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(In thousands)
|
|
Due in one year or less
|
|
$
|
81,847
|
|
|
$
|
82,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Due after one through five years
|
|
|
58,182
|
|
|
|
58,596
|
|
|
|
—
|
|
|
|
—
|
|
Due after five through ten years
|
|
|
41,987
|
|
|
|
42,594
|
|
|
|
—
|
|
|
|
—
|
|
Due after ten years
|
|
|
184,125
|
|
|
|
185,246
|
|
|
|
298
|
|
|
|
293
|
|
Auction rate securities
|
|
|
65,700
|
|
|
|
44,495
|
|
|
|
—
|
|
|
|
—
|
|
Marketable equity securities and other
|
|
|
2,284
|
|
|
|
2,239
|
|
|
|
—
|
|
|
|
—
|
|
Totals
|
|
$
|
434,125
|
|
|
$
|
415,170
|
|
|
$
|
298
|
|
|
$
|
293
|
|
|
|
December 31, 2010
|
|
|
|
Available for Sale
|
|
|
Held to Maturity
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(In thousands)
|
|
Due in one year or less
|
|
$
|
41,736
|
|
|
$
|
41,805
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Due after one through five years
|
|
|
37,074
|
|
|
|
36,812
|
|
|
|
—
|
|
|
|
—
|
|
Due after five through ten years
|
|
|
39,515
|
|
|
|
40,114
|
|
|
|
—
|
|
|
|
—
|
|
Due after ten years
|
|
|
161,770
|
|
|
|
157,628
|
|
|
|
319
|
|
|
|
316
|
|
Auction rate securities
|
|
|
73,993
|
|
|
|
62,079
|
|
|
|
—
|
|
|
|
—
|
|
Marketable equity securities and other
|
|
|
2,810
|
|
|
|
3,126
|
|
|
|
—
|
|
|
|
—
|
|
Totals
|
|
$
|
356,898
|
|
|
$
|
341,564
|
|
|
$
|
319
|
|
|
$
|
316
|
|
Gross gains realized
on the sales of investment securities for the years ended December 31, 2011 and 2010 were approximately $7,637,000 and $1,224,000,
respectively. Gross losses were approximately $6,558,000 and $222,000 for the years ended December 31, 2011 and 2010, respectively.
During the year ended December 31, 2011, we sold single issuer trust preferred securities, pooled trust CDO’s, auction rate securities
and certain corporate notes. During the year ended December 31, 2010, we sold money center bank auction rate securities and certain
corporate notes.
At both December 31,
2011 and 2010, securities sold under agreements to repurchase with a book value of approximately $50.0 million were outstanding.
The book value of the securities pledged for these repurchase agreements was $55.6 million and $57.8 million, respectively. As
of December 31, 2011 and 2010, we did not own investment securities of any one issuer where the carrying value exceeded 10% of
stockholders' equity.
The following table
sets forth the cost and fair value of available-for-sale and held-to-maturity securities as of the dates indicated:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
|
(In thousands)
|
|
Available-For-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
80,072
|
|
|
$
|
80,213
|
|
|
$
|
50,015
|
|
|
$
|
50,076
|
|
U.S. Government Agencies
|
|
|
130,389
|
|
|
|
130,866
|
|
|
|
88,469
|
|
|
|
87,527
|
|
Mortgage-backed securities
|
|
|
140,049
|
|
|
|
142,359
|
|
|
|
117,724
|
|
|
|
121,137
|
|
Corporate notes
|
|
|
12,949
|
|
|
|
13,003
|
|
|
|
13,773
|
|
|
|
13,178
|
|
Single Issuer Trust Preferred CDO
|
|
|
—
|
|
|
|
—
|
|
|
|
1,023
|
|
|
|
1,294
|
|
Pooled Trust Preferred CDO
|
|
|
—
|
|
|
|
—
|
|
|
|
6,459
|
|
|
|
459
|
|
Municipal securities
|
|
|
2,682
|
|
|
|
1,995
|
|
|
|
2,632
|
|
|
|
2,688
|
|
Auction rate securities
|
|
|
65,700
|
|
|
|
44,495
|
|
|
|
73,993
|
|
|
|
62,079
|
|
Marketable equity securities and other
|
|
|
2,284
|
|
|
|
2,239
|
|
|
|
2,810
|
|
|
|
3,126
|
|
Total
|
|
$
|
434,125
|
|
|
$
|
415,170
|
|
|
$
|
356,898
|
|
|
$
|
341,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-To-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
298
|
|
|
$
|
293
|
|
|
$
|
319
|
|
|
$
|
316
|
|
The following tables
summarize the Company's available-for-sale and held- to-maturity securities:
|
|
December 31, 2011
|
|
|
|
Weighted
Average
Yield
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
Available-For-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
0.48
|
%
|
|
$
|
80,072
|
|
|
$
|
80,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,072
|
|
|
|
80,213
|
|
U.S. Government Agencies Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years
|
|
|
1.46
|
|
|
|
48,213
|
|
|
|
48,416
|
|
Due after five years through ten years
|
|
|
2.60
|
|
|
|
37,266
|
|
|
|
37,445
|
|
Due after ten years
|
|
|
2.83
|
|
|
|
44,910
|
|
|
|
45,005
|
|
|
|
|
|
|
|
|
130,389
|
|
|
|
130,866
|
|
Municipal Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after ten years
|
|
|
6.92
|
|
|
|
2,682
|
|
|
|
1,995
|
|
|
|
|
|
|
|
|
2,682
|
|
|
|
1,995
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years
|
|
|
4.61
|
|
|
|
2,489
|
|
|
|
2,625
|
|
Due after five years through ten years
|
|
|
4.62
|
|
|
|
4,721
|
|
|
|
5,149
|
|
Due after ten years
|
|
|
4.04
|
|
|
|
132,839
|
|
|
|
134,585
|
|
|
|
|
|
|
|
|
140,049
|
|
|
|
142,359
|
|
Corporate Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
5.47
|
|
|
|
1,314
|
|
|
|
1,318
|
|
Due after one year through five years
|
|
|
3.70
|
|
|
|
7,941
|
|
|
|
8,025
|
|
Due after ten years
|
|
|
7.28
|
|
|
|
3,694
|
|
|
|
3,660
|
|
|
|
|
|
|
|
|
12,949
|
|
|
|
13,003
|
|
Auction rate and other securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stocks
|
|
|
2.25
|
|
|
|
80
|
|
|
|
80
|
|
Preferred Stocks
|
|
|
10.84
|
|
|
|
83
|
|
|
|
38
|
|
Auction Rate Securities
|
|
|
4.40
|
|
|
|
65,700
|
|
|
|
44,495
|
|
Money market funds
|
|
|
0.25
|
|
|
|
1,015
|
|
|
|
1,015
|
|
Federal Home Loan Bank Stock
|
|
|
1.09
|
|
|
|
1,106
|
|
|
|
1,106
|
|
|
|
|
|
|
|
|
67,984
|
|
|
|
46,734
|
|
|
|
|
|
|
|
$
|
434,125
|
|
|
$
|
415,170
|
|
Held-To-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after ten years
|
|
|
6.54
|
|
|
|
298
|
|
|
|
293
|
|
|
|
|
|
|
|
$
|
298
|
|
|
$
|
293
|
|
Federal Home Loan
Bank Stock.
The Bank owns stock of the FHLB-NY which is necessary for it to be a member of the FHLB-NY. Membership requires
the purchase of stock equal to 0.20% of the Bank's mortgage related assets (investments and loans) plus 4.5% of the outstanding
borrowings. The stock is redeemable at par. Therefore, its cost is equivalent to its redemption value. The Bank's ability to dispose
of FHLBNY shares is dependent upon the redemption practices of the FHLB-NY. At December 31, 2011, 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 December 31, 2011 or 2010.
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 December 31, 2011 and 2010, the Company
had total loans, net of unearned income of $317.0 million and $366.3 million, respectively, and an allowance for loan losses of
$17.7 million and $16.1 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.
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 December 31, 2011 and 2010, approximately $15.6 million and
$19.3 million, respectively, or 4.9% and 5.3%, 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 December 31, 2011 and 2010, approximately $104.9 million and $114.6 million, respectively, or 33.0% and 31.2%,
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 both December 31, 2011 and 2010, approximately 14% of the Bank's residential one-to-four family owner-occupied
first mortgage portfolio were ARMs and approximately 86% 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 December 31, 2011 and 2010, approximately $197.2 million and $233.3 million,
respectively, or 62.1% and 63.5%, 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.
At December 31, 2011, the Bank was generally
not permitted to make loans to one borrower in excess of approximately $21.6 million, with an additional amount of approximately
$14.4 million being permitted if secured by readily marketable collateral. The Bank was also not permitted to make any single loan
in an amount in excess of approximately $21.6 million. At December 31, 2011, the Bank was in compliance with these standards.
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.
The following table
sets forth information concerning the Company's loan portfolio by type of loan at the dates indicated. (dollars in thousands):
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of
Total
|
|
Commercial and industrial and finance leases
|
|
$
|
15,660
|
|
|
|
4.9
|
%
|
|
$
|
19,321
|
|
|
|
5.3
|
%
|
|
$
|
50,672
|
|
|
|
11.7
|
%
|
|
$
|
68,148
|
|
|
|
14.6
|
%
|
|
$
|
76,132
|
|
|
|
17.4
|
%
|
Secured by real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
104,854
|
|
|
|
33.0
|
|
|
|
114,594
|
|
|
|
31.2
|
|
|
|
129,925
|
|
|
|
30.1
|
|
|
|
140,150
|
|
|
|
30.0
|
|
|
|
142,140
|
|
|
|
32.6
|
|
Multi family
|
|
|
12,169
|
|
|
|
3.8
|
|
|
|
5,865
|
|
|
|
1.6
|
|
|
|
7,432
|
|
|
|
1.7
|
|
|
|
4,031
|
|
|
|
0.9
|
|
|
|
3,506
|
|
|
|
0.8
|
|
Commercial real estate and construction
|
|
|
183,819
|
|
|
|
57.9
|
|
|
|
226,667
|
|
|
|
61.7
|
|
|
|
242,927
|
|
|
|
56.4
|
|
|
|
254,831
|
|
|
|
54.4
|
|
|
|
212,850
|
|
|
|
48.8
|
|
Consumer
|
|
|
1,240
|
|
|
|
0.4
|
|
|
|
795
|
|
|
|
0.2
|
|
|
|
396
|
|
|
|
0.1
|
|
|
|
460
|
|
|
|
0.1
|
|
|
|
1,691
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
317,742
|
|
|
|
100.0
|
%
|
|
|
367,242
|
|
|
|
100.0
|
%
|
|
|
431,352
|
|
|
|
100.0
|
%
|
|
|
467,890
|
|
|
|
100.0
|
%
|
|
|
436,319
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(17,720
|
)
|
|
|
|
|
|
|
(16,105
|
)
|
|
|
|
|
|
|
(11,416
|
)
|
|
|
|
|
|
|
(9,204
|
)
|
|
|
|
|
|
|
(4,183
|
)
|
|
|
|
|
Deferred loan fees
|
|
|
(721
|
)
|
|
|
|
|
|
|
(937
|
)
|
|
|
|
|
|
|
(1,003
|
)
|
|
|
|
|
|
|
(1,137
|
)
|
|
|
|
|
|
|
(1,534
|
)
|
|
|
|
|
Loans, net
|
|
$
|
299,301
|
|
|
|
|
|
|
$
|
350,200
|
|
|
|
|
|
|
$
|
418,933
|
|
|
|
|
|
|
$
|
457,549
|
|
|
|
|
|
|
$
|
430,602
|
|
|
|
|
|
Impaired loan balance, nonaccrual
loans and loans greater than 90 days
still accruing
The following
table sets forth certain information regarding nonaccrual loans, including the ratio of such loans to total assets as of the dates
indicated, and certain other related information. The Bank had no foreclosed real estate during these periods.
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in Thousands)
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial and finance leases
|
|
$
|
122
|
|
|
$
|
137
|
|
|
$
|
1,700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential real estate
|
|
|
525
|
|
|
|
1,380
|
|
|
|
12,210
|
|
|
|
130
|
|
|
|
153
|
|
Total nonaccrual loans
|
|
|
647
|
|
|
|
1,517
|
|
|
|
13,910
|
|
|
|
130
|
|
|
|
153
|
|
Accruing loans delinquent 90 days or more
|
|
|
—
|
|
|
|
495
|
|
|
|
—
|
|
|
|
99
|
|
|
|
314
|
|
Total nonperforming loans
|
|
$
|
647
|
|
|
$
|
2,012
|
|
|
$
|
13,910
|
|
|
$
|
229
|
|
|
$
|
467
|
|
Total nonperforming loans to total assets
|
|
|
0.08
|
%
|
|
|
0.23
|
%
|
|
|
1.54
|
%
|
|
|
.02
|
%
|
|
|
.04
|
%
|
Average impaired
loans for the twelve months ended December 31, 2011 and 2010 were approximately $20.2 million and $5.9 million, respectively. Interest
income that would have been recognized had these loans performed in accordance with their contractual terms was approximately $70,000
and $325,000, respectively.
The following
tables present information regarding the Company's total allowance for loan losses as well as the allocation of such amounts to
the various categories of loans at the dates indicated. (dollars in thousands):
|
|
December 31, 2011
|
|
|
|
Allowance
for Loan
Losses
|
|
|
Percent of
Allowance
|
|
|
Percent of
Total Loans
|
|
Commercial and industrial and finance leases
|
|
$
|
1,076
|
|
|
|
6.1
|
%
|
|
|
4.9
|
%
|
Secured by real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
6,490
|
|
|
|
36.6
|
|
|
|
33.0
|
|
Multi family
|
|
|
411
|
|
|
|
2.3
|
|
|
|
3.8
|
|
Commercial real estate and construction
|
|
|
8,466
|
|
|
|
47.8
|
|
|
|
57.9
|
|
Consumer and other
|
|
|
53
|
|
|
|
0.3
|
|
|
|
0.4
|
|
General allowance (1)
|
|
|
1,224
|
|
|
|
6.9
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
17,720
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
(1)The allowance
for loan losses is allocated to specific loans as necessary.
|
|
December 31, 2010
|
|
|
|
Allowance
for Loan
Losses
|
|
|
Percent of
Allowance
|
|
|
Percent of
Total Loans
|
|
Commercial and industrial and finance leases
|
|
$
|
836
|
|
|
|
5.2
|
%
|
|
|
5.3
|
%
|
Secured by real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
2,066
|
|
|
|
12.8
|
|
|
|
31.2
|
|
Multi family
|
|
|
147
|
|
|
|
0.9
|
|
|
|
1.6
|
|
Commercial real estate and construction
|
|
|
11,403
|
|
|
|
70.8
|
|
|
|
61.7
|
|
Consumer and other
|
|
|
25
|
|
|
|
0.2
|
|
|
|
0.2
|
|
General allowance (1)
|
|
|
1,627
|
|
|
|
10.1
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
16,105
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
(1)The allowance for loan
losses is allocated to specific loans as necessary.
The following
table sets forth information regarding the aggregate maturities of the Company's loans in the specified categories and the amount
of such loans which have fixed and variable rates.
|
|
December 31, 2011
|
|
|
|
Within
1 Year
|
|
|
1 to
5 Years
|
|
|
After
5 Years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Fixed Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial and finance leases
|
|
$
|
2,363
|
|
|
$
|
5,596
|
|
|
$
|
731
|
|
|
$
|
8,690
|
|
Commercial real estate and construction
|
|
|
32,134
|
|
|
|
15,799
|
|
|
|
39,118
|
|
|
|
87,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed rate
|
|
$
|
34,497
|
|
|
$
|
21,395
|
|
|
$
|
39,849
|
|
|
$
|
95,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial and finance leases
|
|
|
3,901
|
|
|
|
3,069
|
|
|
|
—
|
|
|
|
6,970
|
|
Commercial real estate and construction
|
|
|
6,387
|
|
|
|
45,425
|
|
|
|
44,956
|
|
|
|
96,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate
|
|
$
|
10,288
|
|
|
$
|
48,494
|
|
|
$
|
44,956
|
|
|
$
|
103,738
|
|
Total
|
|
$
|
44,785
|
|
|
$
|
69,889
|
|
|
$
|
84,805
|
|
|
$
|
199,479
|
|
Demand loans,
loans with no stated maturity, are included in the table above in the Within One Year category.
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):
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Average loans outstanding
|
|
$
|
339,766
|
|
|
$
|
390,253
|
|
|
$
|
448,394
|
|
|
$
|
461,678
|
|
|
$
|
389,520
|
|
Allowance at beginning of period
|
|
|
16,105
|
|
|
|
11,416
|
|
|
|
9,204
|
|
|
|
4,183
|
|
|
|
3,771
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and other loans
|
|
|
12
|
|
|
|
300
|
|
|
|
1,169
|
|
|
|
1
|
|
|
|
—
|
|
Real estate loans
|
|
|
—
|
|
|
|
767
|
|
|
|
6,025
|
|
|
|
—
|
|
|
|
—
|
|
Total loans charged-off
|
|
|
12
|
|
|
|
1,066
|
|
|
|
7,194
|
|
|
|
1
|
|
|
|
—
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and other loans
|
|
|
27
|
|
|
|
5
|
|
|
|
106
|
|
|
|
118
|
|
|
|
57
|
|
Real estate loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total loans recovered
|
|
|
27
|
|
|
|
5
|
|
|
|
106
|
|
|
|
118
|
|
|
|
57
|
|
Net recoveries (charge-offs)
|
|
|
15
|
|
|
|
(1,061
|
)
|
|
|
(7,088
|
)
|
|
|
117
|
|
|
|
57
|
|
Provision for loan losses charged to operating expenses
|
|
|
1,600
|
|
|
|
5,750
|
|
|
|
9,300
|
|
|
|
4,904
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
17,720
|
|
|
$
|
16,105
|
|
|
$
|
11,416
|
|
|
$
|
9,204
|
|
|
$
|
4,183
|
|
Ratio of net recoveries (charge-offs) to average loans outstanding
|
|
|
0.00
|
%
|
|
|
(0.27
|
)%
|
|
|
(1.58
|
)%
|
|
|
.03
|
%
|
|
|
.01
|
%
|
Allowance as a percent of total loans
|
|
|
5.58
|
%
|
|
|
4.39
|
%
|
|
|
2.65
|
%
|
|
|
1.97
|
%
|
|
|
0.96
|
%
|
Total loans at end of period
|
|
$
|
317,742
|
|
|
$
|
367,242
|
|
|
$
|
431,352
|
|
|
$
|
467,890
|
|
|
$
|
436,319
|
|
Deposits
The Bank
concentrates on obtaining deposits from a variety of businesses, professionals and retail customers. The Bank offers a number of
different deposit programs, including statement savings accounts, NOW accounts, money market deposits accounts, checking accounts
and certificates of deposits with terms from seven days to five years. Deposit account terms vary according to the minimum balance
required, the time period the funds must remain on deposit and the interest rate, among other factors. The Bank prices its deposit
offerings competitively within the market it serves. These products are designed to attract new customers, retain existing customers
and create opportunities to offer other bank products or services. While the market and pricing for deposit funds are very competitive,
the Bank believes that personalized, quality service is also an important element in retaining core deposit customers.
The following table
summarizes the composition of the average balances of major deposit categories:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
Average
Amount
|
|
|
Average
Yield
|
|
|
Average
Amount
|
|
|
Average
Yield
|
|
|
Average
Amount
|
|
|
Average
Yield
|
|
|
|
(Dollars in thousands)
|
|
Demand deposits
|
|
$
|
76,900
|
|
|
|
—
|
|
|
$
|
69,963
|
|
|
|
—
|
|
|
$
|
56,544
|
|
|
|
—
|
|
NOW and money market
|
|
|
25,688
|
|
|
|
0.36
|
%
|
|
|
26,274
|
|
|
|
0.30
|
%
|
|
|
23,900
|
|
|
|
0.31
|
%
|
Savings deposits
|
|
|
191,316
|
|
|
|
0.40
|
|
|
|
196,598
|
|
|
|
0.71
|
|
|
|
180,729
|
|
|
|
1.24
|
|
Time deposits
|
|
|
379,860
|
|
|
|
1.34
|
|
|
|
400,586
|
|
|
|
1.52
|
|
|
|
426,892
|
|
|
|
2.32
|
|
Total deposits
|
|
$
|
673,764
|
|
|
|
0.87
|
%
|
|
$
|
693,421
|
|
|
|
1.09
|
%
|
|
$
|
688,065
|
|
|
|
1.78
|
%
|
The aggregate
amount of jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $176.7 million and $179.1
million at December 31, 2011 and 2010, respectively.
The following
table summarizes the maturity distribution of time deposits of $100,000 or more as of December 31, 2011 and 2010:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
3 months or less
|
|
$
|
35,513
|
|
|
$
|
45,608
|
|
Over 3 months but within 6 months
|
|
|
22,374
|
|
|
|
55,736
|
|
Over 6 months but within 12 months
|
|
|
81,675
|
|
|
|
32,382
|
|
Over 12 months
|
|
|
37,172
|
|
|
|
45,330
|
|
Total
|
|
$
|
176,734
|
|
|
$
|
179,056
|
|
It has been
the Bank's experience that the majority of these certificates will renew.
Short-Term Borrowings
Securities
sold under agreements to repurchase generally mature within 30 days from the date of the transactions. Short-term borrowings consist
of securities sold under agreements to repurchase and various other borrowings which generally have maturities of less than one
year. The details of these categories are presented below:
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
Securities sold under repurchase agreements and federal funds purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Average balance during the year
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
56,436
|
|
Maximum month-end balance
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
57,000
|
|
Weighted average rate during the year
|
|
|
3.57
|
%
|
|
|
4.02
|
%
|
|
|
4.08
|
%
|
Rate at December 31
|
|
|
3.51
|
%
|
|
|
3.97
|
%
|
|
|
4.02
|
%
|
Capital Resources and Liquidity
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 $412.7 million
is available from the Federal Reserve Bank and the FHLBNY.
The ongoing
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.
No auction
rate securities came due during the years ended December 31, 2011 and 2010. During the year ended December 31, 2011, we sold a
single issuer trust preferred, a pooled trust preferred CDO and $8.3 million of auction rate securities, realizing an aggregate
loss of $2.3 million. During the year ended December 31, 2010, $3.7 million of auction rate securities were sold at auction with
no gain or loss recognized.
At December
31, 2011, our portfolio of investment securities included $2.6 million, at cost, of municipal securities for which an OTTI charge
has not been recorded in our financial statements. The fair value of these securities, presently $2.0 million, may be negatively
impacted in the future.
At December
31, 2011 and 2010, our portfolio of investment securities included $65.7 million and $74.0 million at cost, respectively, of auction
rate securities for which an OTTI charge has not been recorded in our financial statements. The fair value of these securities,
$44.5 million and $62.1 million at December 31, 2011 and 2010, respectively, may be negatively impacted in the future.
OTTI is a
non-cash charge and not necessarily an indicator of a permanent decline in value. Security valuations require significant estimates,
judgments and assumptions by management and are considered a critical accounting policy of the Company.
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
and municipal securities to affect our capital, liquidity or our ability to execute our current business plan. We have cash and
cash equivalents totaling $101.0 million, or 11.7% of total assets at December 31, 2011.
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 March 31, 2009, the Company announced that it
would temporarily suspend its previously announced policy of paying a regular cash dividend on the Company's common stock. Due
to a notification we received from the Federal Reserve Bank of New York restricting the payment of dividends without its consent,
we have declared and accrued, but have not paid $4.0 million of dividends on our preferred stock through October 31, 2011, the
date on which the preferred stock was converted into common stock, and are continuing the suspension of dividends on our common
stock.
The ability of the
Company to fund its normal operating expenses is not currently dependent upon the receipt of dividends from the Bank. At December
31, 2011, the Company had cash of approximately $731,000 and investment securities with a fair market value of $2.8 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.
Contingent Liabilities and Commitments
The Bank maintains
financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
See Note M - Financial Instruments With Off-Balance-Sheet Risk and Concentrations of Credit Risk - to the Consolidated Financial
Statements. These financial instruments include commitments to extend credit and stand-by letters of credit. The following table
presents the Company's commitments at December 31, 2011.
|
|
Expiration By Period
|
|
|
|
Total
|
|
|
Less
Than
1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
Than
5 Years
|
|
|
|
(In thousands)
|
|
Lines of Credit
|
|
$
|
9,707
|
|
|
$
|
5,972
|
|
|
$
|
937
|
|
|
$
|
1,059
|
|
|
$
|
1,739
|
|
Standby Letters of Credit
|
|
|
491
|
|
|
|
491
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loan Commitments
|
|
|
1,218
|
|
|
|
1,218
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,416
|
|
|
$
|
7,681
|
|
|
$
|
937
|
|
|
$
|
1,059
|
|
|
$
|
1,739
|
|
Contractual Obligations
The following table
presents the Company's contractual obligations at December 31, 2011.
|
|
Payments Due By Periods
|
|
|
|
Total
|
|
|
Less
Than
1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
Than
5 Years
|
|
|
|
(In thousands)
|
|
Borrowings
|
|
$
|
6,139
|
|
|
$
|
789
|
|
|
$
|
5,350
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating Leases
|
|
|
4,597
|
|
|
|
1,135
|
|
|
|
3,049
|
|
|
|
413
|
|
|
|
—
|
|
Time Deposits
|
|
|
369,259
|
|
|
|
294,883
|
|
|
|
74,374
|
|
|
|
2
|
|
|
|
—
|
|
Total Contractual Obligations
|
|
$
|
379,995
|
|
|
$
|
296,807
|
|
|
$
|
82,773
|
|
|
$
|
415
|
|
|
$
|
—
|
|
Capital
The capital ratios of the Bank and the Company
are presently in excess of the requirements necessary to meet the "well capitalized" capital category established by
bank regulators. See Note N - "Regulatory Matters" to the Consolidated Financial Statements.
Interest Rate Risk
Fluctuations in market interest rates can
have a material effect on the Bank's net interest income because the yields earned on loans and investments may not adjust to market
rates of interest with the same frequency, speed and extent as the rates paid by the Bank on its deposits.
Most of the Bank's deposits are either interest-bearing
demand deposits or short term certificates of deposit and other interest-bearing deposits with interest rates that fluctuate as
market rates change. Management of the Bank seeks to reduce the risk of interest rate fluctuations by concentrating on loans and
securities investments with either short terms to maturity or with adjustable rates or other features that cause yields to adjust
based upon interest rate fluctuations. In addition, to cushion itself against the potential adverse effects of a substantial and
sustained increase in market interest rates, the Bank has from time to time purchased off balance sheet interest rate cap contracts
which generally provide that the Bank will be entitled to receive payments from the other party to the contract if interest rates
exceed specified levels. These contracts, when written, are entered into with major financial institutions.
The Company seeks to maximize its net interest
margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of the forecasted net
interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing
characteristics of liabilities.
In the banking industry, a traditional measure of interest rate
sensitivity is known as "gap" analysis, which measures the cumulative differences between the amounts of assets and liabilities
maturing or repricing at various time intervals. The following table sets forth the Company's interest rate repricing gaps for
selected maturity periods:
|
|
Berkshire Bancorp Inc.
Interest Rate Sensitivity Gap at December 31, 2011
(in thousands, except for percentages)
|
|
|
|
3 Months
or Less
|
|
|
3 Through
12 Months
|
|
|
1 Through
3 Years
|
|
|
Over
3 Years
|
|
|
Total
|
|
|
Fair
Value
|
|
Federal funds sold
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
(Rate)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks
|
|
|
88,931
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
88,931
|
|
|
|
88,931
|
|
(Rate)
|
|
|
0.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.28
|
%
|
|
|
|
|
Loans (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable rate loans
|
|
|
28,779
|
|
|
|
30,037
|
|
|
|
35,797
|
|
|
|
26,710
|
|
|
|
121,323
|
|
|
|
129,714
|
|
(Rate)
|
|
|
5.87
|
%
|
|
|
5.87
|
%
|
|
|
6.40
|
%
|
|
|
5.98
|
%
|
|
|
6.05
|
%
|
|
|
|
|
Fixed rate loans
|
|
|
10,389
|
|
|
|
25,163
|
|
|
|
12,809
|
|
|
|
148,058
|
|
|
|
196,419
|
|
|
|
196,795
|
|
(Rate)
|
|
|
6.93
|
%
|
|
|
6.09
|
%
|
|
|
6.31
|
%
|
|
|
6.02
|
%
|
|
|
6.10
|
%
|
|
|
|
|
Total loans
|
|
|
39,168
|
|
|
|
55,200
|
|
|
|
48,606
|
|
|
|
174,768
|
|
|
|
317,742
|
|
|
|
326,509
|
|
Investments (3)(4)
|
|
|
67,404
|
|
|
|
81,607
|
|
|
|
11,158
|
|
|
|
274,254
|
|
|
|
434,423
|
|
|
|
415,463
|
|
(Rate)
|
|
|
4.42
|
%
|
|
|
0.53
|
%
|
|
|
2.81
|
%
|
|
|
3.28
|
%
|
|
|
2.93
|
%
|
|
|
|
|
Total rate-sensitive assets
|
|
|
195,503
|
|
|
|
136,807
|
|
|
|
59,764
|
|
|
|
449,022
|
|
|
|
841,096
|
|
|
|
|
|
Deposit accounts (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW
|
|
|
207,269
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
207,269
|
|
|
|
207,269
|
|
(Rate)
|
|
|
0.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.24
|
%
|
|
|
|
|
Money market
|
|
|
8,291
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,291
|
|
|
|
8,291
|
|
(Rate)
|
|
|
0.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.25
|
%
|
|
|
|
|
Time Deposits
|
|
|
73,419
|
|
|
|
221,462
|
|
|
|
74,376
|
|
|
|
2
|
|
|
|
369,259
|
|
|
|
361,630
|
|
(Rate)
|
|
|
1.10
|
%
|
|
|
1.15
|
%
|
|
|
1.71
|
%
|
|
|
1.00
|
%
|
|
|
1.25
|
%
|
|
|
|
|
Total deposit accounts
|
|
|
288,979
|
|
|
|
221,462
|
|
|
|
74,376
|
|
|
|
2
|
|
|
|
584,819
|
|
|
|
|
|
Repurchase Agreements
|
|
|
—
|
|
|
|
5,000
|
|
|
|
45,000
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
52,432
|
|
(Rate)
|
|
|
|
|
|
|
4.68
|
%
|
|
|
3.38
|
%
|
|
|
|
|
|
|
3.51
|
%
|
|
|
|
|
Other borrowings
|
|
|
—
|
|
|
|
789
|
|
|
|
5,350
|
|
|
|
22,681
|
|
|
|
28,820
|
|
|
|
28,937
|
|
(Rate)
|
|
|
|
|
|
|
4.83
|
%
|
|
|
3.66
|
%
|
|
|
2.95
|
%
|
|
|
3.41
|
%
|
|
|
|
|
Total rate-sensitive liabilities
|
|
|
288,979
|
|
|
|
227,251
|
|
|
|
124,726
|
|
|
|
22,683
|
|
|
|
663,639
|
|
|
|
|
|
Interest rate caps
|
|
|
40,000
|
|
|
|
—
|
|
|
|
(40,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Gap (repricing differences)
|
|
|
(133,476
|
)
|
|
|
(90,444
|
)
|
|
|
(24,962
|
)
|
|
|
426,339
|
|
|
|
177,457
|
|
|
|
|
|
Cumulative Gap
|
|
|
(133,476
|
)
|
|
|
(223,920
|
)
|
|
|
(248,882
|
)
|
|
|
177,457
|
|
|
|
|
|
|
|
|
|
Cumulative Gap to Total Rate Sensitive Assets
|
|
|
(15.87
|
)%
|
|
|
(26.62
|
)%
|
|
|
(29.59
|
)%
|
|
|
21.10
|
%
|
|
|
|
|
|
|
|
|
(1) Adjustable-rate
loans are included in the period in which the interest rates are next scheduled to adjust rather than in the period in which the
loans mature. Fixed-rate loans are scheduled according to their maturity dates.
(2) Includes
nonaccrual loans.
(3) Investments
are scheduled according to their respective repricing (variable rate investments) and maturity (fixed rate securities) dates.
(4) Investments
are stated at book value.
(5) NOW accounts
and savings accounts are regarded as readily accessible withdrawal accounts. The balances in such accounts have been allocated
among maturity/repricing periods based upon The Berkshire Bank's historical experience. All other time accounts are scheduled according
to their respective maturity dates.
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.
New Accounting Pronouncements
In January 2010, the FASB issued Accounting
Standards Update ("ASU") No. 2010-06, which amends the authoritative accounting guidance under ASC Topic 820. The update
requires the following additional disclosures: (1) separately disclose the amounts of significant transfers in and out of Level
1 and Level 2 fair value measurements and describe the reasons for the transfers; and (2) separately disclose information about
purchases, sales, issuances and settlements in the reconciliation for fair value measurements using Level 3. The update provides
for amendments to existing disclosures as follows: (1) fair value measurement disclosures are to be made for each class of assets
and liabilities; and (2) disclosures are to be made about valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements. The update also includes conforming amendments to guidance on employers' disclosures
about postretirement benefit plan assets. The update is effective for interim and annual reporting periods beginning after December
15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level
3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. Adoption of this update did not have a material effect on the Company's results of operations
or financial condition.
In January 2011, the FASB issued ASU No.
2011-01, which temporarily delays the effective date of the required disclosures about troubled debt restructurings contained in
ASU No. 2010-20. The delay is intended to allow the FASB additional time to deliberate what constitutes a troubled debt restructuring.
All other amendments contained in ASU No. 2010-20 are effective as issued. Adoption of this update did not have a material effect
on the Company's results of operations or financial condition.
In April 2011, the FASB issued ASU No. 2011-02,
which amends the authoritative accounting guidance under ASC Topic 310 "Receivables." The update provides clarifying
guidance as to what constitutes a troubled debt restructuring. The update provides clarifying guidance on a creditor's evaluation
of the following: (1) how a restructuring constitutes a concession; and (2) if the debtor is experiencing financial difficulties.
The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should
be applied retrospectively to the beginning of the annual period of adoption. In addition, disclosures about troubled debt restructurings
which were delayed by the issuance of ASU NO. 2011-01, are effective for interim and annual periods beginning on or after June
15, 2011. Adoption of this update did not have a material effect on the Company's results of operations or financial condition.
In April 2011, the FASB issued ASU No. 2011-03,
which amends the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase
or redeem financial assets before their maturity. The amendments remove from the assessment of effective control (1) the criterion
requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even
in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion.
ASU No. 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. Adoption of this update
is not expected to have a material effect on the Company's results of operations or financial condition.
In May 2011, the FASB issued ASU No. 2011-04,
which results in common fair value measurement and disclosure requirements for US GAAP and International Financial Reporting Standards.
ASU No. 2011-04 is effective for the first interim or annual period beginning after December 15, 2011. Adoption of this update
is not expected to have a material effect on the Company's results of operations or financial condition but may have an effect
on disclosures.
In June 2011, the FASB issued ASU No. 2011-05
in order to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items
reported in other comprehensive income. This standard eliminates the option to present components of other comprehensive income
as part of the statement of changes in stockholders' equity. This update requires all nonowner changes in stockholders' equity
be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In
the two-statement approach, the first statement should present total net income and its components followed consecutively by a
second statement that should present total other comprehensive income, the components of other comprehensive income, and the total
of comprehensive income. This update is effective for fiscal years, and interim periods within those years, beginning after December
15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. Adoption of this update is not
expected to have a material effect on the Company's results of operations or financial condition.
Internal Control Over Financial Reporting
The objective of the Company's Internal
Control Program is to allow the Bank and management to comply with Part 363 of the FDIC's regulations ("FDICIA") and
to allow the Company to comply with Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 ("SOX"). In November 2005,
the FDIC amended Part 363 of its regulations by raising the asset-size threshold from $500 million to $1 billion for internal control
assessments by management and external auditors. The final rule was effective December 28, 2005.
Section 302 of SOX requires the CEOs and
CFOs of the Company to, among other matters, (i) certify that the annual and quarterly reports filed with the Securities and Exchange
Commission are accurate and (ii) acknowledge that they are responsible for establishing, maintaining and periodically evaluating
the effectiveness of the disclosure controls and procedures. Section 404 of SOX requires management to (i) report on internal control
over financial reporting, (ii) assess the effectiveness of such internal controls, and (iii) obtain an external auditor's report
on management's assessment of its internal control.
The Company is not an accelerated filer
as defined in Rule 12b-2 of the Securities Exchange Act of 1934. On July 21, 2010, President Obama signed the Dodd-Frank Act into
law. The Dodd-Frank Act includes a provision which permanently exempts non-accelerated filers, including the Company, from the
requirement to obtain an external audit on the effectiveness of internal financial reporting controls provided in Section 404(b)
of SOX. Disclosure of management's attestations on internal control over financial reporting under Section 404(a) of SOX is still
required. See the Section of this Report entitled "Business - The Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010."
The Committee of Sponsoring Organizations
(COSO) methodology may be used to document and test the internal controls pertaining to the accuracy of Company issued financial
statements and related disclosures. COSO requires a review of the control environment (including anti-fraud and audit committee
effectiveness), risk assessment, control activities, information and communication, and ongoing monitoring.
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risk.
Not Applicable
ITEM 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Board of Directors and Shareholders
Berkshire Bancorp Inc.
We have audited the accompanying consolidated
balance sheets of Berkshire Bancorp Inc. and Subsidiaries (the "Company") as of December 31, 2011 and 2010, and the related
consolidated statements of operations, stockholders' equity and comprehensive income (loss) and cash flows for each of the two
years in the period ended December 31, 2011. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
was not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the Company's internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Berkshire Bancorp Inc. and Subsidiaries
as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the two years in the period
ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
New York, New York
March 30, 2012
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
12,105
|
|
|
$
|
4,920
|
|
Interest bearing deposits
|
|
|
88,931
|
|
|
|
74,197
|
|
Total cash and cash equivalents
|
|
|
101,036
|
|
|
|
79,117
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
415,170
|
|
|
|
341,564
|
|
Held-to-maturity, fair value of $293 in 2011 and $316 in 2010
|
|
|
298
|
|
|
|
319
|
|
Total investment securities
|
|
|
415,468
|
|
|
|
341,883
|
|
Loans, net of unearned income
|
|
|
317,021
|
|
|
|
366,305
|
|
Less: allowance for loan losses
|
|
|
(17,720
|
)
|
|
|
(16,105
|
)
|
Net loans
|
|
|
299,301
|
|
|
|
350,200
|
|
Accrued interest receivable
|
|
|
3,224
|
|
|
|
3,578
|
|
Premises and equipment, net
|
|
|
7,474
|
|
|
|
7,815
|
|
Other receivable
|
|
|
—
|
|
|
|
10,047
|
|
Other assets
|
|
|
35,626
|
|
|
|
37,257
|
|
Total assets
|
|
$
|
862,129
|
|
|
$
|
829,897
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
74,073
|
|
|
$
|
73,609
|
|
Interest bearing
|
|
|
584,819
|
|
|
|
596,527
|
|
Total deposits
|
|
|
658,892
|
|
|
|
670,136
|
|
Securities sold under agreements to repurchase
|
|
|
50,000
|
|
|
|
50,000
|
|
Borrowings
|
|
|
6,139
|
|
|
|
10,657
|
|
Subordinated debt
|
|
|
22,681
|
|
|
|
22,681
|
|
Accrued interest payable
|
|
|
6,996
|
|
|
|
2,743
|
|
Other liabilities
|
|
|
1,893
|
|
|
|
2,047
|
|
Total liabilities
|
|
|
746,601
|
|
|
|
758,264
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock - $.01 Par value: Authorized — 2,000,000 shares Issued — 60,000 shares Outstanding — December 31, 2011, 0 shares December 31, 2010, 60,000 shares
|
|
|
—
|
|
|
|
1
|
|
Common stock - $.10 par value Authorized — 25,000,000 shares Issued — 14,443,183 shares Outstanding — December 31, 2011, 14,443,183 shares December 31, 2010, 7,054,183 shares
|
|
|
1,444
|
|
|
|
770
|
|
Additional paid-in capital
|
|
|
143,900
|
|
|
|
150,985
|
|
Accumulated Deficit
|
|
|
(19,299
|
)
|
|
|
(65,123
|
)
|
Accumulated other comprehensive loss, net
|
|
|
(10,517
|
)
|
|
|
(8,589
|
)
|
Treasury Stock at cost December 31, 2011, 0 shares December 31, 2010, 644,102 shares
|
|
|
—
|
|
|
|
(6,411
|
)
|
Total stockholders' equity
|
|
|
115,528
|
|
|
|
71,633
|
|
Total liabilities and stockholders' equity
|
|
$
|
862,129
|
|
|
$
|
829,897
|
|
The accompanying notes are an integral
part of these statements
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
|
|
For The Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
Loans, including related fees
|
|
$
|
21,764
|
|
|
$
|
25,559
|
|
Investment securities
|
|
|
12,530
|
|
|
|
14,174
|
|
Interest bearing deposits
|
|
|
241
|
|
|
|
262
|
|
Total interest income
|
|
|
34,535
|
|
|
|
39,995
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
5,940
|
|
|
|
7,579
|
|
Securities sold under agreements to repurchase
|
|
|
1,925
|
|
|
|
2,012
|
|
Interest expense on borrowings
|
|
|
982
|
|
|
|
1,496
|
|
Total interest expense
|
|
|
8,847
|
|
|
|
11,087
|
|
Net interest income
|
|
|
25,688
|
|
|
|
28,908
|
|
PROVISION FOR LOAN LOSSES
|
|
|
1,600
|
|
|
|
5,750
|
|
Net interest income after provision for loan losses
|
|
|
24,088
|
|
|
|
23,158
|
|
NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
479
|
|
|
|
515
|
|
Investment securities gains
|
|
|
1,079
|
|
|
|
1,002
|
|
Other income
|
|
|
43,335
|
|
|
|
629
|
|
Total non-interest income
|
|
|
44,893
|
|
|
|
2,146
|
|
NON-INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
Total other than temporary impairment ("OTTI") charges on securities
|
|
|
—
|
|
|
|
1,202
|
|
Less non-credit portion of OTTI recorded in Accumulated other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
Net OTTI recognized in earnings
|
|
|
—
|
|
|
|
1,202
|
|
Salaries and employee benefits
|
|
|
9,517
|
|
|
|
9,442
|
|
Net occupancy expense
|
|
|
2,545
|
|
|
|
2,109
|
|
Equipment expense
|
|
|
330
|
|
|
|
360
|
|
FDIC assessment
|
|
|
1,252
|
|
|
|
1,646
|
|
Data processing expense
|
|
|
447
|
|
|
|
489
|
|
Loss on termination of pension plan
|
|
|
—
|
|
|
|
1,871
|
|
Write-off goodwill
|
|
|
—
|
|
|
|
18,549
|
|
Other
|
|
|
3,203
|
|
|
|
4,615
|
|
Total non-interest expense
|
|
|
17,294
|
|
|
|
40,283
|
|
Income (loss) before provision for income taxes
|
|
|
51,687
|
|
|
|
(14,979
|
)
|
Provision (benefit) for income taxes
|
|
|
1,863
|
|
|
|
(1,489
|
)
|
Net income (loss)
|
|
$
|
49,824
|
|
|
$
|
(13,490
|
)
|
Dividends on preferred stock
|
|
|
4,000
|
|
|
|
4,800
|
|
Income (loss) allocated to common stockholders
|
|
$
|
45,824
|
|
|
$
|
(18,290
|
)
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
5.51
|
|
|
$
|
(2.59
|
)
|
Diluted
|
|
$
|
5.51
|
|
|
$
|
(2.59
|
)
|
Number of shares used to compute net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,309
|
|
|
|
7,054
|
|
Diluted
|
|
|
8,309
|
|
|
|
7,054
|
|
Dividends per common share
|
|
$
|
—
|
|
|
$
|
—
|
|
The accompanying notes are an integral
part of these statements
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)
(in thousands)
|
|
For the Years Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Net earnings (losses)
|
|
$
|
49,824
|
|
|
$
|
(13,490
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on available-for-sale securities, net of taxes (benefits) of $(2,005) and $3,045, respectively
|
|
|
(2,575
|
)
|
|
|
4,567
|
|
Reclassification adjustment for realized gains (losses) included in net earnings, net of taxes (benefits) of $432 and $(80), respectively
|
|
|
647
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(1,928
|
)
|
|
$
|
4,687
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
47,896
|
|
|
$
|
(8,803
|
)
|
The accompanying notes are an integral
part of these statements
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY
and COMPREHENSIVE INCOME (LOSS)
For The Years Ended December 31, 2011
and 2010
(In Thousands)
|
|
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 January 1, 2010
|
|
|
7,698
|
|
|
|
60
|
|
|
$
|
770
|
|
|
$
|
1
|
|
|
$
|
150,985
|
|
|
$
|
(13,276
|
)
|
|
$
|
(46,833
|
)
|
|
$
|
(6,411
|
)
|
|
$
|
85,236
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,490
|
)
|
|
|
|
|
|
|
(13,490
|
)
|
Other comprehensive income net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,687
|
|
|
|
|
|
|
|
|
|
|
|
4,687
|
|
Cash dividends - Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,800
|
)
|
|
|
|
|
|
|
(4,800
|
)
|
Balance at December 31, 2010
|
|
|
7,698
|
|
|
|
60
|
|
|
|
770
|
|
|
|
1
|
|
|
|
150,985
|
|
|
|
(8,589
|
)
|
|
|
(65,123
|
)
|
|
|
(6,411
|
)
|
|
|
71,633
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,824
|
|
|
|
|
|
|
|
49,824
|
|
Other comprehensive (loss) net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,928
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,928
|
)
|
Conversion of Preferred Stock into Common Stock
|
|
|
6,745
|
|
|
|
(60
|
)
|
|
|
674
|
|
|
|
(1
|
)
|
|
|
(7,085
|
)
|
|
|
|
|
|
|
|
|
|
|
6,411
|
|
|
|
(1
|
)
|
Cash dividends - Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
(4,000
|
)
|
Balance at December 31, 2011
|
|
|
14,443
|
|
|
|
—
|
|
|
$
|
1,444
|
|
|
$
|
—
|
|
|
$
|
143,900
|
|
|
$
|
(10,517
|
)
|
|
$
|
(19,299
|
)
|
|
$
|
—
|
|
|
$
|
115,528
|
|
The accompanying notes are an integral
part of these statements
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
For The Years Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
49,824
|
|
|
$
|
(13,490
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Realized (gains) on investment securities
|
|
|
(1,079
|
)
|
|
|
(1,002
|
)
|
Gain on sale of foreclosed real estate
|
|
|
—
|
|
|
|
(229
|
)
|
Other than temporary impairment charges on securities
|
|
|
—
|
|
|
|
1,202
|
|
Net amortization of premiums of investment securities
|
|
|
1,454
|
|
|
|
2,182
|
|
Depreciation and amortization
|
|
|
487
|
|
|
|
513
|
|
Provision for loan losses
|
|
|
1,600
|
|
|
|
5,750
|
|
Loss on termination of pension plan
|
|
|
—
|
|
|
|
1,871
|
|
Write-off of goodwill
|
|
|
—
|
|
|
|
18,549
|
|
|
|
|
|
|
|
|
|
|
CHANGES IN ASSETS AND LIABILITIES:
|
|
|
|
|
|
|
|
|
Decrease in accrued interest receivable
|
|
|
354
|
|
|
|
675
|
|
Decrease (increase) in other assets
|
|
|
11,678
|
|
|
|
(6,925
|
)
|
Increase (decrease) in accrued interest payable and other liabilities
|
|
|
99
|
|
|
|
(3,983
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
64,417
|
|
|
|
5,113
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(451,321
|
)
|
|
|
(234,561
|
)
|
Sales, maturities and calls
|
|
|
375,411
|
|
|
|
252,780
|
|
Investment securities held to maturity
|
|
|
|
|
|
|
|
|
Payments
|
|
|
21
|
|
|
|
21
|
|
Net decrease in loans
|
|
|
49,299
|
|
|
|
50,664
|
|
Proceeds from sale of foreclosed real estate
|
|
|
—
|
|
|
|
12,548
|
|
(Acquisition) sale of premises and equipment
|
|
|
(146
|
)
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(26,736
|
)
|
|
|
81,656
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net increase in non interest bearing deposits
|
|
|
464
|
|
|
|
10,739
|
|
Net decrease in interest bearing deposits
|
|
|
(11,708
|
)
|
|
|
(54,047
|
)
|
Repayment of borrowings
|
|
|
(4,518
|
)
|
|
|
(20,347
|
)
|
Dividends paid on preferred stock
|
|
|
—
|
|
|
|
(4,800
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
(15,762
|
)
|
|
|
(68,455
|
)
|
Net increase in cash and cash equivalents
|
|
|
21,919
|
|
|
|
18,314
|
|
Cash and cash equivalents at beginning of year
|
|
$
|
79,117
|
|
|
$
|
60,803
|
|
Cash and cash equivalents at end of year
|
|
$
|
101,036
|
|
|
$
|
79,117
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash used to pay interest
|
|
$
|
4,594
|
|
|
$
|
11,922
|
|
Cash used to pay income taxes, net of refunds
|
|
$
|
(151
|
)
|
|
$
|
(1,080
|
)
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Trade date securities receivable
|
|
$
|
(10,047
|
)
|
|
$
|
10,047
|
|
Transfer from loans to real estate owned
|
|
$
|
—
|
|
|
$
|
12,318
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Dividends declared and not paid
|
|
$
|
4,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these statements
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2011 and 2010
Note
A - ORGANIZATION AND CAPITALIZATION
Organization
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 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
Bank was established in 1989 to provide highly personalized services to high net worth individuals and to small and mid-sized
commercial businesses primarily from the New York City metropolitan area. The Bank's main office and branch is in mid-town Manhattan.
The Bank has two other branches in Manhattan, four branches in Brooklyn, New York, four branches in Orange and Sullivan Counties
in New York State, and a branch in Teaneck, New Jersey.
The
Bank competes with other banking and financial institutions in its markets. Commercial banks, savings banks, savings and loan
associations, mortgage bankers and brokers, and credit unions actively compete for deposits and loans. Such institutions, as well
as consumer finance, mutual funds, insurance companies, and brokerage and investment banking firms may be considered to be competitors
of the Bank with respect to one or more of the services provided by the Bank.
The
Company and the Bank are subject to the regulations of certain state and federal agencies and, accordingly, are periodically examined
by those regulatory authorities. As a consequence of such regulation of banking activities, the Bank's business may be affected
by state and federal legislation.
In
May 2009, in connection with the Bank's examination by the Federal Deposit Insurance Corporation (the "FDIC") the Bank
received a Joint Memorandum of Understanding (the "MOU") from the FDIC and the New York State Department of Financial
Services (the "NYSDFS"), formerly called the New York State Banking Department, which the Bank executed. The MOU sets
forth an informal understanding among the Bank, the FDIC and the NYSDFS addressing asset quality, loan review, underwriting and
administration and certain other concerns identified in the examination. The Bank's board of directors appointed a committee comprised
of three directors to monitor the Bank's compliance with the MOU. Compliance with the MOU has not had a material adverse effect
on our results of operations or financial condition. As set forth in "Management's Discussion and Analysis of Financial Condition
And Results of Operations - Capital Adequacy" and Note N to the Company's consolidated financial statements, the Bank has
been notified by the regulators that it is well capitalized for regulatory purposes as of December 31, 2011.
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
B - SUMMARY OF ACCOUNTING POLICIES
|
1.
|
Basis
of Financial Statement Presentation
|
The
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and predominant practice within the banking industry, and include the accounts of Berkshire
Bancorp Inc. and its wholly owned subsidiaries, Greater American Finance Group, Inc. ("GAFG"), and GAFG's wholly owned
subsidiary, the Bank, and East 39, LLC, (collectively, the "Company"). All significant intercompany accounts and transactions
have been eliminated.
In
preparing the financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
The
principal estimates that are susceptible to significant change in the near term relate to the allowance for loan losses, carrying
value of investments designated as available for sale, and deferred tax assets and liabilities. The evaluation of the adequacy
of the allowance for loan losses includes an analysis of the individual loans and overall risk characteristics and size of the
different loan portfolios, and takes into consideration current economic and market conditions, the capability of specific borrowers
to pay specific loan obligations, as well as current loan collateral values. However, actual losses on specific loans, which also
are encompassed in the analysis, may vary from estimated losses.
The
carrying value of investments designated as available for sale are based upon quoted market prices or prices for similar assets.
If no quoted market prices or prices for similar assets exist, unobservable inputs are required. If the quoted market prices or
unobservable inputs are not accurate, additional impairment charges may be required.
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 accounts for its investment securities in accordance with Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") 320, "Investments-Debt and Equity Securities" ("FASB ASC 320"). As
required by FASB ASC 320, investment securities are classified into three categories: trading, held-to-maturity and available-for-sale.
Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities
and are reported at fair value with all unrealized gains and losses included in trading account activities in the statement of
income. Securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity
and carried at cost, adjusted for the amortization of premiums and accretion of discounts computed by the interest method. Investments
which management believes may be sold prior to maturity due to changes in interest rates, prepayment risk and equity, liquidity
requirements or other factors, are classified as available for sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity and excluded from the
determination of net income. Gains or losses on disposition are based on the net proceeds and cost of the securities sold, adjusted
for amortization of premiums and accretion of discounts, using the specific identification method.
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
B - (continued)
The
Company does not have a trading securities portfolio and has no current plans to maintain such a portfolio in the future. The
Company generally classifies all newly purchased debt securities as available for sale in order to maintain the flexibility to
sell those securities if the need arises. The Company has a limited portfolio of securities classified as held to maturity, represented
principally by securities purchased a number of years ago.
|
3.
|
Loans
and Allowance for Loan Losses
|
Loans
that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount
of unpaid principal and are net of unearned discount, unearned loan fees and an allowance for loan losses. The allowance for loan
losses is established through a provision for loan losses charged to expense. Loan principal considered to be uncollectible by
management is charged against the allowance for credit losses. The allowance is an amount that management believes will be adequate
to absorb
probable and estimateable losses and losses on existing
loans that may become uncollectible based upon an evaluation of known and inherent risks in the loan portfolio. The evaluation
takes into consideration such factors as changes in the nature and size of the loan portfolio, overall portfolio quality, specific
problem or impaired loans, and current economic conditions which may affect the borrowers' ability to pay. The evaluation details
historical losses by loan category, the resulting loss rates for which are projected at current loan total amounts.
Interest
income is accrued as earned on a simple interest basis. Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that
collection of contractual principal and interest is doubtful. When a loan is placed on such non-accrual status, all accumulated
accrued interest receivable applicable to periods prior to the current year is charged off to the allowance for loan losses. Interest
which had accrued in the current year is reversed out of current period income. The interest on these loans is accounted for on
a cash basis, until qualifying for return to accrual. Loans 90 days or more past due and still accruing interest must have both
principal and accruing interest adequately secured and must be in the process of collection.
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 and therefore has identified the allowance as
a critical accounting policy. The methodology for determining the allowance for loan losses is considered a critical accounting
policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized, and the potential
for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
B - (continued)
The
allowance for loan losses has been determined in accordance with U.S. 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 reserves 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 FASB 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 reserve. 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 loans as part of our evaluation of 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 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.
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
B - (continued)
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.
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 Federal Deposit Insurance Corporation, NYSDFS, 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 its judgments about information available to them at
the time of their examination.
The
Company accounts for its impaired loans in accordance with FASB ASC 310. These standards require that a creditor measure impairment
based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if
the loan is collateral-dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable. Management considers its investment in one-to-four
family real estate loans and consumer loans to be homogeneous groups of loans. As such, these loans are not individually evaluated
for impairment but rather are collectively evaluated under ASC 450.
The
Company, from time to time, has entered into interest rate cap agreements in order to hedge its exposure to interest rate fluctuations.
The Company adopted the provisions of FASB ASC 815, "Derivatives and Hedging Activities", on January 1, 2009. The statement
requires the Company to recognize all derivative instruments at fair value as either assets or liabilities. Financial derivatives
are reported at fair value in other assets or other liabilities. For derivatives not designated as hedges, the gain or loss is
recognized in current earnings. Amounts reclassed into earnings, when the hedged transaction culminates, are included in interest
income. At both December 31, 2011 and 2010, the Company had notional amounts of $40.0 million outstanding.
|
5.
|
Bank
Premises and Equipment
|
Bank
premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation expense
is computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over
the shorter of the estimated useful lives of the improvements or the terms of the related leases. An accelerated depreciation
method is used for tax purposes.
|
6.
|
Other
Real Estate Owned
|
Other
real estate owned, representing property acquired through foreclosure, is recorded at estimated fair market value, less costs
of disposal. When property is acquired, the excess, if any, of the loan balance over fair market value is charged to the allowance
for loan losses. Periodically thereafter, the asset is reviewed for subsequent declines in the estimated fair market value. Subsequent
declines, if any, and holding costs, as well as gains and losses on subsequent sale, are included in the consolidated statements
of operations.
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
B - (continued)
Goodwill
resulting from acquisitions is accounted for under FASB ASC 350, "Intangibles-Goodwill and Other". Goodwill is subject
to impairment testing at least annually or when triggering events occur to determine whether write-downs of the recorded balances
are necessary. The Company tests for impairment based on the goodwill maintained at the Bank, the reporting unit. A fair value
is determined for the reporting unit based on at least one of three various market valuation methodologies. If the fair value
of the reporting unit exceeds the book value, no impairment of recorded goodwill is necessary. If the fair value of the reporting
unit is less, a charge may be required on the Company's books to write down the related goodwill to the fair value, which would
then become the new carrying value. The Company performed its annual test as of December 31, 2010 and determined that a write
down of $18.5 million, all of the goodwill maintained at the reporting unit, was appropriate.
The
Company accounts for income taxes under the liability method of accounting for income taxes. Deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by
the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement
and tax return purposes are allowance for loan losses, deferred loan fees, deferred compensation and securities available for
sale.
|
9.
|
Net
Earnings/Loss Per Share
|
Basic
earnings and/or loss per common share excludes dilution and is computed by dividing income and/or loss available to common stockholders
by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential
dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
For
purposes of reporting cash flows, cash and cash equivalents are comprised of cash and due from banks, interest bearing deposits
in other financial institutions with an original maturity of less than ninety days, and federal funds sold.
|
11.
|
Restrictions
on Cash and Due From Banks
|
The
Bank is required to maintain reserves against customer demand deposits by keeping cash on hand or cash balances with the Federal
Reserve Bank in a non-interest bearing account. The amounts of those reserve and cash balances was approximately $3,055,000 and
$4,737,000 at December 31, 2011 and 2010, respectively.
|
12.
|
Federal
Home Loan Bank Stock
|
The
Company is required as a condition of membership in the Federal Home Loan Bank of New York ("FHLBNY") to maintain an
investment in FHLBNY common stock. The stock is redeemable at par, and therefore, its cost is equivalent to its redemption value.
At December 31, 2011 and 2010, management does not believe this asset is impaired.
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
C - INVESTMENT SECURITIES
The
following is a summary of held to maturity investment securities:
|
|
December 31, 2011
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
298
|
|
|
$
|
1
|
|
|
$
|
(6
|
)
|
|
$
|
293
|
|
|
|
December 31, 2010
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
319
|
|
|
$
|
1
|
|
|
$
|
(4
|
)
|
|
$
|
316
|
|
The
following is a summary of available-for-sale investment securities:
|
|
December 31, 2011
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
80,072
|
|
|
$
|
141
|
|
|
$
|
—
|
|
|
$
|
80,213
|
|
U.S. Government Agencies
|
|
|
130,389
|
|
|
|
510
|
|
|
|
(33
|
)
|
|
|
130,866
|
|
Mortgage-backed securities
|
|
|
140,049
|
|
|
|
2,750
|
|
|
|
(440
|
)
|
|
|
142,359
|
|
Corporate notes
|
|
|
12,949
|
|
|
|
103
|
|
|
|
(49
|
)
|
|
|
13,003
|
|
Municipal securities
|
|
|
2,682
|
|
|
|
—
|
|
|
|
(687
|
)
|
|
|
1,995
|
|
Auction rate securities
|
|
|
65,700
|
|
|
|
—
|
|
|
|
(21,205
|
)
|
|
|
44,495
|
|
Marketable equity securities and other
|
|
|
2,284
|
|
|
|
—
|
|
|
|
(45
|
)
|
|
|
2,239
|
|
Totals
|
|
$
|
434,125
|
|
|
$
|
3,504
|
|
|
$
|
(22,459
|
)
|
|
$
|
415,170
|
|
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
C - (continued)
|
|
December 31, 2010
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
50,015
|
|
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
50,076
|
|
U.S. Government Agencies
|
|
|
88,469
|
|
|
|
591
|
|
|
|
(1,533
|
)
|
|
|
87,527
|
|
Mortgage-backed securities
|
|
|
117,724
|
|
|
|
4,099
|
|
|
|
(686
|
)
|
|
|
121,137
|
|
Corporate notes
|
|
|
13,773
|
|
|
|
44
|
|
|
|
(639
|
)
|
|
|
13,178
|
|
Single Issuer Trust Preferred CDO
|
|
|
1,023
|
|
|
|
271
|
|
|
|
—
|
|
|
|
1,294
|
|
Pooled Trust Preferred CDO
|
|
|
6,459
|
|
|
|
—
|
|
|
|
(6,000
|
)
|
|
|
459
|
|
Municipal securities
|
|
|
2,632
|
|
|
|
102
|
|
|
|
(46
|
)
|
|
|
2,688
|
|
Auction rate securities
|
|
|
73,993
|
|
|
|
397
|
|
|
|
(12,311
|
)
|
|
|
62,079
|
|
Marketable equity securities and other
|
|
|
2,810
|
|
|
|
316
|
|
|
|
—
|
|
|
|
3,126
|
|
Totals
|
|
$
|
356,898
|
|
|
$
|
5,881
|
|
|
$
|
(21,215
|
)
|
|
$
|
341,564
|
|
The
following table shows the outstanding auction rate securities at December 31, 2011 and 2010:
|
|
2011
|
|
|
2010
|
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Federal Home Loan Mortgage Corporation Preferred Shares
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
693
|
|
|
$
|
1,089
|
|
Preferred Shares of Money Center Banks
|
|
|
63,700
|
|
|
|
42,495
|
|
|
|
71,300
|
|
|
|
58,990
|
|
Public Utility Debt and Equity Securities
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
65,700
|
|
|
$
|
44,495
|
|
|
$
|
73,993
|
|
|
$
|
62,074
|
|
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
C - (continued)
The
Company has investments in certain debt securities, as noted in the table below, that have unrealized losses or may be otherwise
impaired, but 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. In addition, these securities are making payments in accordance with the terms
of the instruments.
The
following table indicates the length of time individual securities that we consider temporarily impaired have been in a continuous
unrealized loss position at December 31, 2011 (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. Government Agencies
|
|
$
|
22,791
|
|
|
$
|
33
|
|
|
$
|
293
|
|
|
$
|
6
|
|
|
$
|
23,084
|
|
|
$
|
39
|
|
Mortgage-backed securities
|
|
|
28,957
|
|
|
|
117
|
|
|
|
8,118
|
|
|
|
323
|
|
|
|
37,075
|
|
|
|
440
|
|
Corporate notes
|
|
|
1,244
|
|
|
|
15
|
|
|
|
3,954
|
|
|
|
34
|
|
|
|
5,198
|
|
|
|
49
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
42,495
|
|
|
|
21,205
|
|
|
|
42,495
|
|
|
|
21,205
|
|
Marketable equity securities and other
|
|
|
—
|
|
|
|
—
|
|
|
|
39
|
|
|
|
45
|
|
|
|
39
|
|
|
|
45
|
|
Municipal securities
|
|
|
1,995
|
|
|
|
687
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,995
|
|
|
|
687
|
|
Total temporarily impaired securities
|
|
$
|
54,987
|
|
|
$
|
852
|
|
|
$
|
54,899
|
|
|
$
|
21,613
|
|
|
$
|
109,886
|
|
|
$
|
22,465
|
|
The
Company had a total of 42 debt securities with a fair market value of $67.1 million which were temporarily impaired at December
31, 2011. The total unrealized loss on these securities was $1.2 million, which is attributable to the market interest volatility,
the continued illiquidity of the debt markets, and uncertainty in the financial markets. We also had 1 equity security with a
fair market value of $39,000 with an unrealized loss of $45,000. The remaining unrealized loss of $21.2 million is on 9 auction
rate securities which have declined in value due to auction failures beginning in February 2008. It is not more likely than not
that we would sell these 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 11.7% of total assets
at December 31, 2011. 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)
Note
C - (continued)
The
following table indicates the length of time individual securities that we consider temporarily impaired have been in a continuous
unrealized loss position at December 31, 2010 (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. Government Agencies
|
|
$
|
37,071
|
|
|
$
|
1,533
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
37,102
|
|
|
$
|
1,533
|
|
Mortgage-backed securities
|
|
|
24,860
|
|
|
|
381
|
|
|
|
9,745
|
|
|
|
305
|
|
|
|
34,605
|
|
|
|
686
|
|
Corporate notes
|
|
|
1,373
|
|
|
|
9
|
|
|
|
8,314
|
|
|
|
630
|
|
|
|
9,687
|
|
|
|
639
|
|
Pooled Trust Preferred CDO
|
|
|
—
|
|
|
|
—
|
|
|
|
458
|
|
|
|
6,000
|
|
|
|
458
|
|
|
|
6,000
|
|
Auction rate securities
|
|
|
4,504
|
|
|
|
497
|
|
|
|
54,486
|
|
|
|
11,814
|
|
|
|
58,990
|
|
|
|
12,311
|
|
Municipal securities
|
|
|
1,747
|
|
|
|
46
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,747
|
|
|
|
46
|
|
Total temporarily impaired securities
|
|
$
|
69,555
|
|
|
$
|
2,466
|
|
|
$
|
73,034
|
|
|
$
|
18,749
|
|
|
$
|
142,589
|
|
|
$
|
21,215
|
|
The
Company had a total of 40 debt securities with a fair market value of $81.9 million which were temporarily impaired at December
31, 2010. The total unrealized loss on these securities was $8.9 million, which is attributable to the market interest volatility,
the continued illiquidity of the debt markets, and uncertainty in the financial markets. The remaining unrealized loss of $12.3
million is on 11 auction rate securities which have declined in value due to auction failures beginning in February 2008. It is
not more likely than not that we would sell these 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
9.3% of total assets at December 31, 2010. 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)
Note
C - (continued)
The
amortized cost and fair value of investment securities available for sale and held to maturity, by contractual maturity, at December
31, 2011 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.
|
|
December 31, 2011
|
|
|
|
Available for Sale
|
|
|
Held to Maturity
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(In thousands)
|
|
Due in one year or less
|
|
$
|
81,847
|
|
|
$
|
82,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Due after one through five years
|
|
|
58,182
|
|
|
|
58,596
|
|
|
|
—
|
|
|
|
—
|
|
Due after five through ten years
|
|
|
41,987
|
|
|
|
42,594
|
|
|
|
—
|
|
|
|
—
|
|
Due after ten years
|
|
|
184,125
|
|
|
|
185,246
|
|
|
|
298
|
|
|
|
293
|
|
Auction rate securities
|
|
|
65,700
|
|
|
|
44,495
|
|
|
|
—
|
|
|
|
—
|
|
Marketable equity securities and other
|
|
|
2,284
|
|
|
|
2,239
|
|
|
|
—
|
|
|
|
—
|
|
Totals
|
|
$
|
434,125
|
|
|
$
|
415,170
|
|
|
$
|
298
|
|
|
$
|
293
|
|
Gross
gains realized on the sales of investment securities for the years ended December 31, 2011 and 2010 were approximately $7,637,000
and $1,224,000, respectively. Gross losses were approximately $6,558,000 and $222,000 for the years ended December 31, 2011 and
2010, respectively. During the year ended December 31, 2011, we sold single issuer trust preferred securities, pooled trust CDO’s,
auction rate securities and certain corporate notes. During the year ended December 31, 2010, we sold certain money center auction
rate securities and certain corporate notes.
At
both December 31, 2011 and 2010, securities sold under agreements to repurchase with a book value of approximately $50.0 million
were outstanding. The book value of the securities pledged for these repurchase agreements was $55.6 million and $57.8 million,
respectively. As of December 31, 2011 and 2010, the Company did not own investment securities of any one issuer where the carrying
value exceeded 10% of stockholders' equity.
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
D - LOANS
Major
classifications of loans are as follows:
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
(In thousands)
|
|
Commercial and Industrial and Finance Leases
|
|
$
|
15,660
|
|
|
$
|
19,321
|
|
Secured by Real Estate
|
|
|
|
|
|
|
|
|
Residential
|
|
|
104,854
|
|
|
|
114,594
|
|
Multi family
|
|
|
12,169
|
|
|
|
5,865
|
|
Commercial Real Estate and Construction
|
|
|
183,819
|
|
|
|
226,667
|
|
Consumer
|
|
|
1,240
|
|
|
|
795
|
|
|
|
|
317,742
|
|
|
|
367,242
|
|
Deferred loan fees
|
|
|
(721
|
)
|
|
|
(937
|
)
|
Allowance for loan losses
|
|
|
(17,720
|
)
|
|
|
(16,105
|
)
|
|
|
$
|
299,301
|
|
|
$
|
350,200
|
|
Changes
in the allowance for loan losses are as follows:
|
|
For The Years Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
16,105
|
|
|
$
|
11,416
|
|
Provision charged to operations
|
|
|
1,600
|
|
|
|
5,750
|
|
Loans charged off
|
|
|
(12
|
)
|
|
|
(1,066
|
)
|
Recoveries
|
|
|
27
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
17,720
|
|
|
$
|
16,105
|
|
The
Bank had $647,000 and $1.5 million of non-accrual loans as of December 31, 2011 and 2010, respectively, and no loans loans delinquent
more than ninety days and still accruing interest at December 31, 2011 compared to $495,000 at December 31, 2010. The Bank classified
the non-accrual loans as impaired loans at both December 31, 2011 and 2010. However, no specific reserves for impaired loans was
made because the collateral underlying the non-accrual 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 $5.2 million and $5.8 million at December 31, 2011 and 2010, respectively.
Average
impaired loans for the twelve months ended December 31, 2011 and 2010 were approximately $20.2 million and $5.9 million, respectively.
Interest income that would have been recognized had these loans performed in accordance with their contractual terms was approximately
$70,000 and $325,000, respectively.
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
D - (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 effect on the credit quality in this loan class.
Commercial
real estate
- Loans in this class include 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 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.
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)
Note
D - (continued)
Allowance
for Credit Losses and Recorded Investment in Loans
For
the Year Ended December 31, 2011
(In
thousands)
|
|
Commercial &
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Construction
|
|
|
Multi Family
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Finance
Leases
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
417
|
|
|
$
|
8,610
|
|
|
$
|
2,784
|
|
|
$
|
147
|
|
|
$
|
2,066
|
|
|
$
|
25
|
|
|
$
|
419
|
|
|
$
|
1,637
|
|
|
$
|
16,105
|
|
Charge-offs
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
Recoveries
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Provision
|
|
|
518
|
|
|
|
(753
|
)
|
|
|
(2,175
|
)
|
|
|
264
|
|
|
|
4,424
|
|
|
|
28
|
|
|
|
(293
|
)
|
|
|
(413
|
)
|
|
|
1,600
|
|
Ending balance
|
|
$
|
950
|
|
|
$
|
7,857
|
|
|
$
|
609
|
|
|
$
|
411
|
|
|
$
|
6,490
|
|
|
$
|
53
|
|
|
$
|
126
|
|
|
$
|
1,224
|
|
|
$
|
17,720
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
950
|
|
|
$
|
7,857
|
|
|
$
|
609
|
|
|
$
|
411
|
|
|
$
|
6,490
|
|
|
$
|
53
|
|
|
$
|
126
|
|
|
$
|
1,224
|
|
|
$
|
17,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
11,006
|
|
|
$
|
169,015
|
|
|
$
|
14,804
|
|
|
$
|
12,169
|
|
|
$
|
104,854
|
|
|
$
|
1,240
|
|
|
$
|
4,654
|
|
|
$
|
0
|
|
|
$
|
317,742
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
122
|
|
|
$
|
23,343
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,566
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
25,031
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
10,884
|
|
|
$
|
145,672
|
|
|
$
|
14,804
|
|
|
$
|
12,169
|
|
|
$
|
103,288
|
|
|
$
|
1,240
|
|
|
$
|
4,654
|
|
|
$
|
0
|
|
|
$
|
292,711
|
|
The
Company believes the unallocated amount included in the allowance for credit losses is appropriate given the nature of the portfolio
with the size of individual loans and the current economy's impact on the real estate market. The Company will continue to closely
monitor the environment and loan portfolio and make adjustments when appropriate.
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)
Note
D - (continued)
Allowance
for Credit Losses and Recorded Investment in Loans
For
the Year Ended December 31, 2010
(In
thousands)
|
|
Commercial &
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Construction
|
|
|
Multi Family
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Finance
Leases
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,349
|
|
|
$
|
2,592
|
|
|
$
|
3,211
|
|
|
$
|
30
|
|
|
$
|
763
|
|
|
$
|
57
|
|
|
$
|
115
|
|
|
$
|
3,299
|
|
|
$
|
11,416
|
|
Charge-offs
|
|
|
(300
|
)
|
|
|
(766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,067
|
)
|
Recoveries
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Provision
|
|
|
(638
|
)
|
|
|
6,784
|
|
|
|
(427
|
)
|
|
|
117
|
|
|
|
1,303
|
|
|
|
(31
|
)
|
|
|
304
|
|
|
|
(1,662
|
)
|
|
|
5,750
|
|
Ending balance
|
|
$
|
417
|
|
|
$
|
8,610
|
|
|
$
|
2,784
|
|
|
$
|
147
|
|
|
$
|
2,066
|
|
|
$
|
25
|
|
|
$
|
419
|
|
|
$
|
1,637
|
|
|
$
|
16,105
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
16,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
10,498
|
|
|
$
|
193,500
|
|
|
$
|
33,167
|
|
|
$
|
5,865
|
|
|
$
|
114,594
|
|
|
$
|
795
|
|
|
$
|
8,823
|
|
|
$
|
0
|
|
|
$
|
367,242
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
0
|
|
|
$
|
816
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,998
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,814
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
10,498
|
|
|
$
|
192,684
|
|
|
$
|
33,167
|
|
|
$
|
5,865
|
|
|
$
|
112,596
|
|
|
$
|
795
|
|
|
$
|
8,823
|
|
|
$
|
0
|
|
|
$
|
364,428
|
|
The
$2.0 million of residential impaired loans were identified as TDRs. 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)
Note
D - (continued)
Age
Analysis of Past Due Loans
As
of December 31, 2011
(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
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
122
|
|
|
$
|
133
|
|
|
$
|
10,873
|
|
|
$
|
11,006
|
|
|
$
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,804
|
|
|
|
14,804
|
|
|
|
—
|
|
Commercial real estate
|
|
|
21
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
|
|
168,994
|
|
|
|
169,015
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
778
|
|
|
|
778
|
|
|
|
—
|
|
Overdrafts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
462
|
|
|
|
462
|
|
|
|
—
|
|
Residential - prime
|
|
|
63
|
|
|
|
—
|
|
|
|
525
|
|
|
|
588
|
|
|
|
104,266
|
|
|
|
104,854
|
|
|
|
—
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,169
|
|
|
|
12,169
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,654
|
|
|
|
4,654
|
|
|
|
—
|
|
Total
|
|
$
|
95
|
|
|
$
|
—
|
|
|
$
|
647
|
|
|
$
|
742
|
|
|
$
|
317,000
|
|
|
$
|
317,742
|
|
|
$
|
—
|
|
Age
Analysis of Past Due Loans
As
of December 31, 2010
(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
|
|
$
|
251
|
|
|
$
|
—
|
|
|
$
|
166
|
|
|
$
|
417
|
|
|
$
|
10,081
|
|
|
$
|
10,498
|
|
|
$
|
29
|
|
Construction
|
|
|
900
|
|
|
|
—
|
|
|
|
—
|
|
|
|
900
|
|
|
|
32,267
|
|
|
|
33,167
|
|
|
|
—
|
|
Commercial real estate
|
|
|
1,356
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
3,356
|
|
|
|
190,144
|
|
|
|
193,500
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
|
|
15
|
|
|
|
780
|
|
|
|
795
|
|
|
|
11
|
|
Residential - prime
|
|
|
404
|
|
|
|
387
|
|
|
|
695
|
|
|
|
1,486
|
|
|
|
113,108
|
|
|
|
114,594
|
|
|
|
451
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,865
|
|
|
|
5,865
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,823
|
|
|
|
8,823
|
|
|
|
—
|
|
Total
|
|
$
|
2,911
|
|
|
$
|
2,387
|
|
|
$
|
876
|
|
|
$
|
6,174
|
|
|
$
|
361,068
|
|
|
$
|
367,242
|
|
|
$
|
495
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D - (continued)
Impaired Loans
For the Year Ended December 31, 2011
(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
|
|
$
|
122
|
|
|
$
|
122
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
23,343
|
|
|
|
23,343
|
|
|
|
—
|
|
|
|
18,898
|
|
|
|
2,021
|
|
|
|
3
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
1,566
|
|
|
|
1,566
|
|
|
|
—
|
|
|
|
1,235
|
|
|
|
56
|
|
|
|
54
|
|
Multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,031
|
|
|
$
|
25,031
|
|
|
$
|
—
|
|
|
$
|
20,164
|
|
|
$
|
2,077
|
|
|
$
|
70
|
|
Commercial
|
|
|
23,465
|
|
|
|
23,465
|
|
|
|
—
|
|
|
|
18,929
|
|
|
|
2,021
|
|
|
|
16
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
1,566
|
|
|
|
1,566
|
|
|
|
—
|
|
|
|
1,235
|
|
|
|
56
|
|
|
|
54
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D - (continued)
Impaired Loans
For the Year Ended December 31, 2010
(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
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
292
|
|
|
$
|
—
|
|
|
$
|
22
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,211
|
|
|
|
—
|
|
|
|
303
|
|
Commercial real estate
|
|
|
816
|
|
|
|
816
|
|
|
|
—
|
|
|
|
400
|
|
|
|
99
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
1,998
|
|
|
|
1,998
|
|
|
|
—
|
|
|
|
963
|
|
|
|
125
|
|
|
|
—
|
|
Multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,814
|
|
|
$
|
2,814
|
|
|
$
|
—
|
|
|
$
|
5,866
|
|
|
$
|
224
|
|
|
$
|
325
|
|
Commercial
|
|
|
816
|
|
|
|
816
|
|
|
|
—
|
|
|
|
4,903
|
|
|
|
99
|
|
|
|
325
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
1,998
|
|
|
|
1,998
|
|
|
|
—
|
|
|
|
963
|
|
|
|
67
|
|
|
|
—
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D - (continued)
Loans on Nonaccrual Status
As of
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(In thousands)
|
|
Commercial & industrial
|
|
$
|
122
|
|
|
$
|
137
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
525
|
|
|
|
1,380
|
|
Multi family
|
|
|
—
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
647
|
|
|
$
|
1,517
|
|
Credit Exposure
Credit Risk Profile by Internally Assigned
Grades
For the Year Ended December 31, 2011
(In thousands)
|
|
Commercial
&
Industrial
|
|
|
Commercial
Real Estate
Construction
|
|
|
Commercial
Real Estate
Other
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
10,840
|
|
|
$
|
14,804
|
|
|
$
|
114,508
|
|
Watch
|
|
|
—
|
|
|
|
—
|
|
|
|
8,650
|
|
Special Mention
|
|
|
—
|
|
|
|
—
|
|
|
|
19,489
|
|
Substandard
|
|
|
166
|
|
|
|
—
|
|
|
|
26,368
|
|
Total
|
|
$
|
11,006
|
|
|
$
|
14,804
|
|
|
$
|
169,015
|
|
|
|
Residential
|
|
|
Multi Family
|
|
Grade:
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
96,475
|
|
|
$
|
12,169
|
|
Watch
|
|
|
731
|
|
|
|
—
|
|
Special Mention
|
|
|
1,561
|
|
|
|
—
|
|
Substandard
|
|
|
6,086
|
|
|
|
—
|
|
Total
|
|
$
|
104,853
|
|
|
$
|
12,169
|
|
|
|
Consumer
Overdrafts
|
|
|
Consumer
Other
|
|
|
Finance
Leases
|
|
Performing
|
|
$
|
463
|
|
|
$
|
778
|
|
|
$
|
4,654
|
|
Nonperforming
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
463
|
|
|
$
|
778
|
|
|
$
|
4,654
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D - (continued)
Credit Exposure
Credit Risk Profile by Internally Assigned
Grades
For the Year Ended December 31, 2010
(In thousands)
|
|
Commercial
&
Industrial
|
|
|
Commercial
Real Estate
Construction
|
|
|
Commercial
Real Estate
Other
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
10,344
|
|
|
$
|
23,085
|
|
|
$
|
151,200
|
|
Watch
|
|
|
—
|
|
|
|
—
|
|
|
|
8,624
|
|
Special Mention
|
|
|
—
|
|
|
|
10,082
|
|
|
|
15,344
|
|
Substandard
|
|
|
154
|
|
|
|
—
|
|
|
|
18,332
|
|
Total
|
|
$
|
10,498
|
|
|
$
|
33,167
|
|
|
$
|
193,500
|
|
|
|
Residential
|
|
|
Residential
Multi Family
|
|
Grade:
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
106,165
|
|
|
$
|
5,865
|
|
Watch
|
|
|
336
|
|
|
|
—
|
|
Special Mention
|
|
|
5,929
|
|
|
|
—
|
|
Substandard
|
|
|
2,164
|
|
|
|
—
|
|
Total
|
|
$
|
114,594
|
|
|
$
|
5,865
|
|
|
|
Consumer
Overdrafts
|
|
|
Consumer
Other
|
|
|
Finance
Leases
|
|
Performing
|
|
$
|
61
|
|
|
$
|
719
|
|
|
$
|
8,823
|
|
Nonperforming
|
|
|
4
|
|
|
|
11
|
|
|
|
—
|
|
Total
|
|
$
|
65
|
|
|
$
|
730
|
|
|
$
|
8,823
|
|
The Company utilizes
a grade risk rating system for commercial and industrial, commercial real estate and construction loans as follows:
Pass:
These loans have low to average
risk.
Watch:
A Watch loan is similar to
a Pass classification and it is not a criticized or classified loan. Documentation exceptions require additional attention by management
for corrective action. These loans are paying as agreed and meeting their loan agreement obligations; however existing and developing
factors may elevate the risk levels requiring added attention by management. Those factors may include industry conditions, operating
problems, pending litigation of a minor nature, declining collateral quality, and customer's failure to provide financial information,
occasional payment difficulties (late payments, overdrafts, renewals) or other minor exceptions to policy.
Special mention:
Includes loans,
which are fundamentally sound, but exhibit potential credit risk or unsatisfactory characteristics, which, if not corrected, could
lead to loan loss. A Special Mention loan has potential weaknesses that deserve management's close attention and dictate a higher
level of attention and oversight. If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the loan or in the Bank's credit position at some future date. Special Mention loans are not adversely classified
and do not expose the Bank to sufficient risk to warrant adverse classification.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D - (continued)
Substandard:
Includes loans with
positive and well defined weaknesses which are inadequately protected by current net worth and paying capacity of borrower or pledged
collateral. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies
are not corrected. Loans have one or more weaknesses (such as being on non-accrual status and 90 days or more past due) that could
jeopardize the repayment of the debt and result in some form of loss to the Bank. This category includes loans that may be impaired.
Substandard loans should be evaluated at least on a quarterly basis to determine if additional course of action would be required
by management.
Doubtful:
Loans classified as Doubtful
have weaknesses that make collection or liquidation in full, on the basis of the currently known facts, conditions, and values,
highly questionable and improbable. All Doubtful loans are placed on non-accrual status. Doubtful loans are considered impaired.
Loss:
Loans classified as Loss are
considered to be uncollectible and have such little value that their continuance on the Bank's books is not warranted. This classification
does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing
off this loan even though partial recovery may be effected in the future. Loans classified Loss should be promptly charged off
prior to the end of the calendar quarter in which they are identified.
The Company does assign
risk ratings to residential real estate, home equity and consumer loans secured by real estate (such as 1-to-4 family homes) that
are contractually past due 90 days or more or where legal action has commenced against the borrower. Consumer loans other than
those secured by real estate are charged off when they become contractually past due 120 days. Those loans not assigned a rating
watch, special mention, substandard or loss are considered "pass".
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D - (continued)
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.
|
|
Loan Modifications
(Dollars in Thousands)
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
|
Number
of
Loans
|
|
|
Pre-Modification
Outstanding
Recorded Loans
|
|
|
Post-Modification
Outstanding
Recorded Loans
|
|
Troubled Debt Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
8
|
|
|
$
|
2,388
|
|
|
$
|
2,388
|
|
Commercial Real Estate
|
|
|
3
|
|
|
|
1,326
|
|
|
|
1,326
|
|
|
|
|
11
|
|
|
$
|
3,714
|
|
|
$
|
3,714
|
|
|
|
For The Year Ended
December 31, 2010
|
|
|
|
Number
of
Loans
|
|
|
Pre-Modification
Outstanding Recorded
Loans
|
|
|
Post-Modification
Outstanding
Recorded Loans
|
|
Troubled Debt Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
6
|
|
|
$
|
1,998
|
|
|
$
|
1,998
|
|
The loans restructured
as noted above were restructured by extending maturitiy dates or reducing interest rates. No loans were restructed into two notes
nor are there any commitments to extend additional funds on any TDRs. The commercial real estate loans are individually evaluated
for impairment with any loss recognized in the allowance for loan losses.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D - (continued)
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 12/31/10
|
|
$
|
19,078
|
|
New Loans
|
|
|
—
|
|
Repayments
|
|
|
5,026
|
|
Balance at 12/31/11
|
|
$
|
14,052
|
|
In April 2010, the Bank assigned its interest
in real estate, that had previously secured a $13.5 million loan, to Momarm II Corporation ("Momarm") for $12.6 million,
which represents the Bank's carrying value. Momarm is owned by immediate family members of the Company's and the Bank's Chairman
of the Board, who are also immediate family members of two other directors of the Bank. The Bank received a fairness opinion with
respect to the value received for the assignment and an independent appraisal of the real estate.
In April 2010, the Bank sold three loans
that it had originally booked at $7.5 million to Momarm for an aggregate purchase price of $3.15 million, which represents the
Bank's carrying value. The Bank received a fairness opinion with respect to the value received for the sale of each loan and an
independent appraisal of the underlying assets.
In August 2010, the Bank sold to Terumah
Foundation Inc., of which Mr. Marx is President and a Director, 77.273% interest in a loan for $1.7 million ,which represented
77.273% of the Bank's carrying value.
In December 2011, the Bank sold a loan to
Farm Associates, of which the Company's and the Bank's Chairman of the Board and his immediate family members who serve as directors
of the Bank are general partners, for approximately $4.5 million, respectively ,which represented the Bank's carrying value.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note E - PREMISES AND EQUIPMENT
Major classifications
of premises and equipment are summarized as follows:
|
|
|
Estimated
useful lives
|
|
|
|
December 31,
2011
|
|
|
|
December 31,
2010
|
|
|
|
|
|
|
|
(In thousands)
|
|
Land
|
|
|
Indefinite
|
|
|
$
|
3,572
|
|
|
$
|
3,572
|
|
Buildings
|
|
|
39 years
|
|
|
|
4,019
|
|
|
|
4,884
|
|
Furniture and equipment
|
|
|
3 to 10 years
|
|
|
|
4,056
|
|
|
|
3,563
|
|
Leasehold improvements
|
|
|
2 to 10 years
|
|
|
|
2,767
|
|
|
|
2,316
|
|
|
|
|
|
|
|
|
14,414
|
|
|
|
14,335
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(6,940
|
)
|
|
|
(6,520
|
)
|
Total
|
|
|
|
|
|
$
|
7,474
|
|
|
$
|
7,815
|
|
Depreciation and amortization
expense was approximately $487,000 and $513,000 for the years ended December 31, 2011 and 2010, respectively.
Note F - DEPOSITS
The aggregate amount
of jumbo certificates of deposits greater than $100,000 were approximately $176.7 million and $179.1 million as of December 31,
2011 and 2010, respectively.
The scheduled maturities of all certificates
of deposit are as follows:
|
|
December 31, 2011
|
|
|
|
(In thousands)
|
|
2012
|
|
$
|
294,883
|
|
2013
|
|
|
69,750
|
|
2014
|
|
|
4,624
|
|
2015
|
|
|
2
|
|
2016
|
|
|
—
|
|
|
|
$
|
369,259
|
|
It has been the Bank's
experience that the majority of these certificates of deposit will renew with the Bank.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note G - BORROWINGS AND SECURITIES SOLD
UNDER AGREEMENTS TO REPURCHASE
Securities sold under
agreements to repurchase generally mature within 30 days from the date of the transactions. Short-term borrowings consist of various
borrowings which generally have maturities of less than one year. The details of these categories are presented below:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in Thousands)
|
|
Securities sold under repurchase agreements and federal funds purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Average balance during the year
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Maximum month-end balance
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Weighted average rate during the year
|
|
|
3.57
|
%
|
|
|
4.02
|
%
|
Rate at December 31
|
|
|
3.51
|
%
|
|
|
3.97
|
%
|
Borrowings
At
December 31, 2011, advances from the FHLBNY totaling $6.1 million will mature within one to three years and are reported as long-term
borrowings. The advances are collateralized by FHLBNY stock and certain first mortgage loans totaling $10.7 million. The advances
had a weighted average rate of 3.81%. Unused lines of credit at the FHLB-NY were $120.6 million at December 31, 2011.
Outstanding long-term
borrowings mature as follows (in thousands):
Year
|
|
Amount
|
|
2012
|
|
$
|
789
|
|
2013
|
|
|
5,350
|
|
|
|
|
|
|
Total
|
|
$
|
6,139
|
|
The borrowings with
the Federal Home Loan Bank are generally renewed.
Subordinated Debentures
In 2004, the Company
established Berkshire Capital Trust I, a Delaware statutory trust, ("BCTI"). The Company owns all the common capital
securities of BCTI. BCTI issued $15.0 million of preferred capital securities to investors in a private transaction and invested
the proceeds, combined with the proceeds from the sale of BCTI's common capital securities, in the Company through the purchase
of $15.464 million aggregate principal amount of Floating Rate Junior Subordinated Debentures (the 2004 "Debentures")
issued by the Company. The 2004 Debentures, the sole assets of BCTI, mature on July 23, 2034 and bear interest at a floating rate,
three month LIBOR plus 2.70%, or 3.12% at December 31, 2011.
In 2005, the Company
established Berkshire Capital Trust II, a Delaware statutory trust, ("BCTII"). The Company owns all the common capital
securities of BCTII. BCTII issued $7.0 million of preferred capital securities to investors in a private transaction and invested
the proceeds, combined with the proceeds from the sale of BCTII's common capital securities, in the Company through the purchase
of $7.217 million aggregate principal amount of Floating Rate Junior Subordinated Debentures (the "2005 Debentures")
issued by the Company. The 2005 Debentures, the sole assets of BCTII, mature on May 23, 2035 and bear interest at a floating rate,
three month LIBOR plus 1.95%, or 2.45% at December 31, 2011.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note H - EARNINGS (LOSS) PER SHARE
Basic earnings (loss)
per common share is calculated by dividing loss available to common stockholders by the weighted average common stock outstanding,
excluding stock options from the calculation. In calculating diluted earnings per share, the dilutive effect of stock options is
calculated using the average market price for the Company's common stock during the period. There is no effect for dilutive shares
for the years ended December 31, 2011 and 2010 due to the expiration of the stock option plan in 2009. The following tables present
the Company's calculation of earnings (loss) per common share.
|
|
Year Ended December 31, 2011
(In thousands, except per share data)
|
|
|
|
Income
(numerator)
|
|
|
Shares
(denominator)
|
|
|
Per share
amount
|
|
Basic earnings per common share
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
49,824
|
|
|
|
|
|
|
|
|
|
Dividends paid to preferred stockholders
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
45,824
|
|
|
|
8,309
|
|
|
$
|
5.51
|
|
|
|
Year Ended December 31, 2010
(In thousands, except per share data)
|
|
|
|
Income
(numerator)
|
|
|
Shares
(denominator)
|
|
|
Per share
amount
|
|
Basic loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,490
|
)
|
|
|
|
|
|
|
|
|
Dividends paid to preferred stockholders
|
|
|
(4,800
|
)
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(18,290
|
)
|
|
|
7,054
|
|
|
$
|
(2.59
|
)
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note I - INCOME TAXES
The components of income
tax expense (benefit) are as follows:
(In thousands)
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
794
|
|
Deferred
|
|
|
225
|
|
|
|
(2,060
|
)
|
State and Local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
166
|
|
|
|
1,048
|
|
Deferred
|
|
|
1,472
|
|
|
|
(1,271
|
)
|
Total
|
|
$
|
1,863
|
|
|
$
|
(1,489
|
)
|
A reconciliation of
the provision (benefit) for income taxes for the years ended December 31, 2011 and 2010 and the amount computed by applying the
statutory Federal income tax rate to income/loss from continuing operations follows: (In thousands)
|
|
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Effective Tax Reconciliation
|
|
|
|
|
|
|
|
|
Tax at statutory rate
|
|
$
|
17,771
|
|
|
$
|
(5,093
|
)
|
State and City, net of federal income tax benefit
|
|
|
1,506
|
|
|
|
(200
|
)
|
Permanent items
|
|
|
(738
|
)
|
|
|
6,310
|
|
Decrease in Federal valuation allowance
|
|
|
(16,326
|
)
|
|
|
(2,423
|
)
|
Other
|
|
|
(350
|
)
|
|
|
(83
|
)
|
Actual provision (benefit) for income taxes
|
|
$
|
1,863
|
|
|
$
|
(1,489
|
)
|
The tax effect of the
principal temporary differences at December 31, 2011 and 2010 are as follows: (In thousands)
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Net deferred tax assets
|
|
|
|
|
|
|
|
|
Loan loss provision
|
|
$
|
7,992
|
|
|
$
|
7,299
|
|
Depreciation
|
|
|
(303
|
)
|
|
|
(441
|
)
|
Non accrual interest
|
|
|
104
|
|
|
|
1,081
|
|
Net operating loss
|
|
|
9,483
|
|
|
|
6,599
|
|
Other
|
|
|
402
|
|
|
|
748
|
|
Other than temporary impairment
|
|
|
425
|
|
|
|
25,972
|
|
Valuation reserve
|
|
|
(3,912
|
)
|
|
|
(25,370
|
)
|
Unrealized loss on investment securities
|
|
|
6,445
|
|
|
|
6,995
|
|
Net deferred tax asset included in other assets
|
|
$
|
20,636
|
|
|
$
|
22,883
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note I - (continued)
As of December
31, 2011, the Company had $24.4 million of net operating losses available to offset future taxable income for federal income
tax purposes that will begin to expire in 2029.
For the fiscal year
ended December 31, 2011, the Company recorded a valuation reserve of $3.9 million relating primarily to net operating losses. Of
the remaining deferred tax asset, management has determined that it is more likely than not that it will realize the net deferred
tax asset based upon the nature and timing of the items referred to above. In order to fully realize the net deferred tax asset,
the Company will need to generate future taxable income. Management has projected that the Company will generate sufficient taxable
income to utilize the net deferred tax asset. However, there can be no assurance that such levels of taxable income will be generated.
For the fiscal year
ended December 31, 2010 the Company recorded a valuation reserve of $25.4 million relating primarily to OTTI and net operating
losses. Of the remaining deferred tax asset, management has determined that it is more likely than not that it will realize the
net deferred tax asset based upon the nature and timing of the items listed above. In order to fully realize the net deferred tax
asset, the Company will need to generate future taxable income. Management has projected that the Company will generate sufficient
taxable income to utilize the net deferred tax asset; however, there can be no assurance that such levels of taxable income will
be generated.
In the normal course
of business, the Company's Federal, New York State and New York City Corporation tax returns are subject to audit. The Company
is currently open to audit by the Internal Revenue Service (the "IRS") under the statute of limitations for years after
2007. The Company is currently undergoing an examination by the IRS for the years 2008 and 2009. This examination has not yet been
completed, however, no significant issues have been raised and we do not expect material adjustments.
The Company has performed
an evaluation of its tax positions and has concluded that as of December 31, 2011, there were no significant uncertain tax positions
requiring additional recognition in its financial statements and does not believe that there will be any material changes in its
unrecognized tax positions over the next twelve months.
The Company's policy
is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. There were no
accruals for interest or penalties during the years ended December 31, 2011 and 2010.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note J - EMPLOYEE BENEFIT PLANS
|
1.
|
Retirement Income Plan
|
The Company's Retirement
Income Plan (the "Plan") was terminated on December 31, 2009 with the full settlement of all Plan benefits provided for
in December 2010. The Plan was invested 100% in cash-equivalent instruments totalling $4.4 million. As of December 31, 2010, the
Plan was settled by the purchase of annuity contracts for all benefit obligations. During 2010, the Company contributed $949,000
to the Plan and recorded a $1.9 million loss on the termination of the Plan.
|
2.
|
Postretirement Welfare Plan
|
The Bank, as successor
to Goshen Bank provides certain health care and life insurance benefits for retired employees and their spouses. The postretirement
health care and life insurance benefits plan was terminated for persons retiring after December 31, 1998. Eligible employees retired
on or before that date will have benefits paid through the plan under the agreed upon terms existing at the employee's retirement
date.
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
628
|
|
|
$
|
722
|
|
Service cost
|
|
|
—
|
|
|
|
—
|
|
Interest cost
|
|
|
34
|
|
|
|
42
|
|
Adjustment for measurement date change
|
|
|
—
|
|
|
|
—
|
|
Actual loss (gain)
|
|
|
142
|
|
|
|
(66
|
)
|
Benefits paid
|
|
|
(56
|
)
|
|
|
(70
|
)
|
Benefits obligation at end of year
|
|
|
748
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
—
|
|
|
|
—
|
|
Actual return on plan assets
|
|
|
—
|
|
|
|
—
|
|
Employer contribution
|
|
|
56
|
|
|
|
70
|
|
Benefits paid
|
|
|
(56
|
)
|
|
|
(70
|
)
|
Fair value of plan assets at end of year
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(748
|
)
|
|
|
(628
|
)
|
Unrecognized net actuarial loss
|
|
|
—
|
|
|
|
—
|
|
Accrued benefit cost (included in other liabilities)
|
|
$
|
748
|
|
|
$
|
628
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note J - (continued)
Net benefit cost included the following
components:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost on projected benefit obligation
|
|
|
34
|
|
|
|
42
|
|
Actual return on plan assets
|
|
|
—
|
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
34
|
|
|
$
|
42
|
|
The assumed discount rate used in determining
the actuarial present value of the projected benefit obligation was 6.13% and 5.50% in 2011 and 2010, respectively.
The Bank has a 401(k)
plan in which employees can contribute up to 15% of their salary. The Bank also matches 50% of the employee contribution up to
a maximum of 3% of the employee's salary. The matching expense was $128,000 and $125,500 for the years ended December 31, 2011
and 2010, respectively.
|
4.
|
Deferred Compensation Arrangements
|
GSB Financial and Goshen
Bank established deferred compensation arrangements for certain directors and executives. These deferred compensation arrangements
were terminated as a result of the acquisition. At December 31, 2011 and 2010, the balance accumulated under these arrangements
was approximately $140,000 and $158,000, respectively, and will be paid out when the individual (i) ceases to be a director and/or
executive of the Company; (ii) attains the age of 75; or (iii) specifies a particular date.
In July 2006, the Bank
established the Deferred Compensation Plan of The Berkshire Bank (the "Plan") to provide for a systematic method by which
key employees of the Bank may defer payment of all or part of the compensation that may be earned by them. The Plan is intended
to be a nonqualified and unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees pursuant to Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income
Security Act of 1974, as amended. At December 31, 2011 and 2010, the balances accumulated under the Plan were approximately $725,000
and $581,000, respectively.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note K - COMMITMENTS AND CONTINGENCIES
Leases and Other
Commitments
The Company leases
certain of its operating facilities under non-cancelable operating leases expiring in 2012 through 2016. The leases require payment
by the Company of the real estate taxes and insurance on the leased properties. Approximate future minimum annual rental payments
are as follows (in thousands):
Year Ending
December 31,
|
|
|
|
2012
|
|
$
|
1,135
|
|
2013
|
|
|
1,031
|
|
2014
|
|
|
1,036
|
|
2015
|
|
|
982
|
|
2016
|
|
|
403
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
4,587
|
|
The Company's rental
expense was approximately $2,060,000 and $1,539,000 for the fiscal years ended December 31, 2011 and 2010, respectively. Included
in the Company's rental expense was approximately $571,000 and $504,000 for the fiscal years ended December 31, 2011 and 2010,
respectively, which was paid to a company affiliated with a director of the Company. The two leases expire in June and November
2016.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note L - FAIR VALUE OF FINANCIAL INSTRUMENTS
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 December 31, 2011 and
2010 are outlined below.
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
|
(In thousands)
|
|
Investment securities
|
|
$
|
415,468
|
|
|
$
|
415,463
|
|
|
$
|
341,883
|
|
|
$
|
341,880
|
|
Loans, net of unearned income
|
|
|
317,021
|
|
|
|
359,989
|
|
|
|
366,305
|
|
|
|
371,110
|
|
Time Deposits
|
|
|
369,259
|
|
|
|
371,266
|
|
|
|
384,301
|
|
|
|
386,446
|
|
Repurchase Agreements
|
|
|
50,000
|
|
|
|
52,432
|
|
|
|
50,000
|
|
|
|
51,661
|
|
Borrowings
|
|
|
6,139
|
|
|
|
6,256
|
|
|
|
10,657
|
|
|
|
10,876
|
|
Subordinated debt
|
|
|
22,681
|
|
|
|
22,681
|
|
|
|
22,681
|
|
|
|
22,681
|
|
For cash and cash equivalents,
the recorded book values of $101.0 million and $79.1 million at December 31, 2011 and 2010, respectively, approximate fair values.
The estimated fair
values of investment securities are based on quoted market prices, if available. Estimated fair values are based on quoted market
prices of comparable instruments if quoted market prices are not available. Estimated fair values are also determined using unobservable
inputs that are supported by little or no market values and significant assumptions and estimates.
The net loan portfolio
at December 31, 2011 and 2010 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 carrying value
of accrued interest approximates fair value.
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 carrying amount of accrued interest payable approximates its fair value. The fair value of time deposits have been valued using
net present value discounted cash flow.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note L - (continued)
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.
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 approximately $0 and $26,000 at December 31, 2011 and 2010, respectively.
The fair value of borrowings
and subordinated debt approximates the carrying value due to the re-pricing of the debt.
FASB ASC 820, "Fair
Value Measurements and Disclosures", ("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.
Assets and Liabilities Measured at Fair
Value on a 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.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note L - (continued)
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 and Federal Reserve Bank stock. These securities are stated at par value.
Assets measured at
fair value during fiscal year 2011 and fiscal year 2010 are summarized below.
|
|
At December, 31, 2011
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)
|
|
|
Balance
December 31,
2011
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,031
|
|
|
$
|
25,031
|
|
Investment securities available for sale: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
80,213
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80,213
|
|
U.S. Government Agencies
|
|
|
—
|
|
|
|
130,866
|
|
|
|
—
|
|
|
|
130,866
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
142,359
|
|
|
|
—
|
|
|
|
142,359
|
|
Corporate notes
|
|
|
13,003
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,003
|
|
Municipal securities
|
|
|
1,995
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,995
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
44,495
|
|
|
|
44,495
|
|
Marketable equity securities and other
|
|
|
803
|
|
|
|
1,436
|
|
|
|
—
|
|
|
|
2,239
|
|
Total Investment securities available for sale
|
|
|
96,014
|
|
|
|
274,661
|
|
|
|
44,495
|
|
|
|
415,170
|
|
Total assets
|
|
$
|
96,014
|
|
|
$
|
274,661
|
|
|
$
|
48,209
|
|
|
$
|
418,884
|
|
(1) Non-recurring basis
(2) Recurring basis
The above table includes
$19.0 million in net unrealized losses on the Company's available for sale securities. The Company has reviewed its investment
portfolio at December 31, 2011, and has determined that the unrealized losses, are temporary.
The fair value of the
derivative is zero and valued as a Level 3 input. Further disclosures are waived due to materiality.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note L - (continued)
|
|
At December, 31, 2010
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)
|
|
|
Balance
December 31,
2010
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,814
|
|
|
$
|
2,814
|
|
Investment securities available for sale: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
50,076
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,076
|
|
U.S. Government Agencies
|
|
|
24,930
|
|
|
|
62,597
|
|
|
|
—
|
|
|
|
87,527
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
121,137
|
|
|
|
—
|
|
|
|
121,137
|
|
Corporate notes
|
|
|
10,246
|
|
|
|
2,932
|
|
|
|
—
|
|
|
|
13,178
|
|
Single Issuer Trust Preferred CDO
|
|
|
—
|
|
|
|
1,294
|
|
|
|
—
|
|
|
|
1,294
|
|
Pooled Trust Preferred CDO
|
|
|
—
|
|
|
|
459
|
|
|
|
—
|
|
|
|
459
|
|
Municipal securities
|
|
|
—
|
|
|
|
2,688
|
|
|
|
—
|
|
|
|
2,688
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
62,079
|
|
|
|
62,079
|
|
Marketable equity securities and other
|
|
|
—
|
|
|
|
3,126
|
|
|
|
—
|
|
|
|
3,126
|
|
Total Investment securities available for sale
|
|
|
85,252
|
|
|
|
194,233
|
|
|
|
62,079
|
|
|
|
341,564
|
|
Total assets
|
|
$
|
85,252
|
|
|
$
|
194,233
|
|
|
$
|
64,893
|
|
|
$
|
344,378
|
|
(1) Non-recurring basis
(2) Recurring basis
The above table includes
$15.3 million in net unrealized losses on the Company's available for sale securities. The Company has reviewed its investment
portfolio at December 31, 2010, and has determined that the unrealized losses, except as discussed in Note C - Investment Securities,
are temporary.
The fair value of the
derivative is approximately $26,000 and valued as a Level 3 input. Further disclosures are waived due to materiality.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note L - (continued)
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).
(Dollars in thousands)
|
|
Investment
Securities
Available
for Sale
|
|
|
|
|
|
Balance, January 1, 2011
|
|
$
|
62,079
|
|
Total gains/losses (realized/unrealized)
|
|
|
|
|
Included in earnings
|
|
|
—
|
|
Included in other comprehensive income
|
|
|
(9,291
|
)
|
Purchases
|
|
|
—
|
|
Sales
|
|
|
(8,293
|
)
|
Issuances
|
|
|
—
|
|
Settlements
|
|
|
—
|
|
Redemptions
|
|
|
—
|
|
Interest
|
|
|
—
|
|
Other than temporary impairment expense
|
|
|
—
|
|
Capital deductions for operating expenses
|
|
|
—
|
|
Balance, December 31, 2011
|
|
$
|
44,495
|
|
|
|
|
|
|
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 December 31, 2011
|
|
$
|
—
|
|
Note M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND CONCENTRATIONS OF CREDIT RISK
The Bank is party to
financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are
recorded in the financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts
of those instruments reflect the extent of involvement the Banks have in particular classes of financial instruments.
The Bank's exposure
to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note M - (continued)
Unless noted otherwise,
the Bank does not require collateral or other security to support financial instruments with credit risk. The approximate contract
amounts are as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Unused lines of credit
|
|
$
|
9,707
|
|
|
$
|
5,270
|
|
Commitments to extend credit
|
|
|
1,218
|
|
|
|
1,207
|
|
Standby letters of credit and financial guarantees written
|
|
|
491
|
|
|
|
139
|
|
|
|
$
|
11,416
|
|
|
$
|
6,616
|
|
Interest rate caps-notional amount
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management's credit evaluation.
Standby letters of
credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank holds residential or commercial real estate, accounts receivable, inventory and equipment as
collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments
at December 31, 2011 varies up to 100%.
The Company defines
the initial fair value of these letters of credit as the fee received from the customer. The maximum potential undiscounted amount
of future payments of these letters of credit as of December 31, 2011 are $491,000 and they expire through 2012. Amounts due under
these letters of credit would be reduced by any proceeds the Company would be able to obtain in liquidating the collateral for
the loans, which varies depending on the customer.
The Bank grants loans
primarily to customers in New York and its immediately adjacent suburban communities. Although the Bank has a diversified loan
portfolio, a large portion of their loans are secured by commercial or residential real property. The Bank does not generally engage
in non-recourse lending and typically will require the principals of any commercial borrower to obligate themselves personally
on the loan. Although the Bank has diversified loan portfolios, a substantial portion of their debtors' ability to honor their
contracts is dependent upon the economic sector. Commercial and standby letters of credit were granted primarily to commercial
borrowers.
The Bank has entered
into interest rate cap agreements in order to hedge its exposure to interest rate fluctuations, which are accounted for under the
provisions of ASC 815, "Accounting for Derivative Instruments and Hedging Activities". The statement requires the Company
to recognize all derivative instruments at fair value as either assets or liabilities. Financial derivatives are reported at fair
value in other assets or other liabilities. For derivatives not designated as hedges, the gain or loss is recognized in current
earnings. Amounts reclassed into earnings, when the hedged transaction culminates, are included in interest income.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note N - REGULATORY MATTERS
The Bank is subject
to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Bank's consolidated financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings
and other factors.
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 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average
assets. Management believes that, as of December 31, 2011, the Bank meets all capital adequacy requirements to which it is subject.
As of December 31,
2011, 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 1 risk-based and
Tier 1 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 Bank is subject
to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements
can prompt certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators involving factors such as the risk weights assigned to assets and what
items may be counted as capital. Regulators also have broad discretion to require any institution to maintain higher capital levels
than otherwise required by statute or regulation, even institutions that are considered "well-capitalized" under applicable
regulations.
New York banking regulations
place certain restrictions on dividends paid by the Bank to the Company. The total amount of dividends which made by paid at any
date is generally equal to the Bank's net profits for the year in which the payment is made, plus retained net profits for the
previous two years subject to certain limits not generally relevant. The Bank's retained aggregate net income is $39.6 million
for the two years ended December 31, 2011.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note N - (continued)
The following table
sets forth the actual and required regulatory capital amounts and ratios of, the Company and the Bank as of December 31, 2011 and
2010 (dollars in thousands):
|
|
Actual
|
|
|
For
capital
adequacy purposes
|
|
|
To
be well
capitalized under
prompt corrective
action provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
153,573
|
|
|
|
37.8
|
%
|
|
$
|
32,503
|
|
|
|
>
8.0
|
%
|
|
$
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
143,893
|
|
|
|
36.1
|
%
|
|
|
31,866
|
|
|
|
>
8.0
|
%
|
|
|
39,833
|
|
|
|
>
10.0
|
%
|
Tier I Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
148,440
|
|
|
|
36.5
|
%
|
|
|
16,252
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
138,757
|
|
|
|
34.8
|
%
|
|
|
15,933
|
|
|
|
>
4.0
|
%
|
|
|
23,900
|
|
|
|
>
6.0
|
%
|
Tier I Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
148,440
|
|
|
|
17.0
|
%
|
|
|
34,988
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
138,757
|
|
|
|
15.9
|
%
|
|
|
34,987
|
|
|
|
>
4.0
|
%
|
|
|
43,733
|
|
|
|
>
5.0
|
%
|
|
|
Actual
|
|
|
For
capital
adequacy purposes
|
|
|
To
be well
capitalized under
prompt corrective
action provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
105,939
|
|
|
|
22.6
|
%
|
|
$
|
37,551
|
|
|
|
>
8.0
|
%
|
|
$
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
96,426
|
|
|
|
21.0
|
%
|
|
|
36,682
|
|
|
|
>
8.0
|
%
|
|
|
45,853
|
|
|
|
>
10.0
|
%
|
Tier I Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
100,072
|
|
|
|
21.3
|
%
|
|
|
18,776
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
90,566
|
|
|
|
19.8
|
%
|
|
|
18,341
|
|
|
|
>
4.0
|
%
|
|
|
27,512
|
|
|
|
>
6.0
|
%
|
Tier I Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
100,072
|
|
|
|
11.4
|
%
|
|
|
35,126
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
90,566
|
|
|
|
10.8
|
%
|
|
|
33,602
|
|
|
|
>
4.0
|
%
|
|
|
42,003
|
|
|
|
>
5.0
|
%
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note O - CONDENSED FINANCIAL INFORMATION
- PARENT COMPANY ONLY
The condensed financial
information for Berkshire Bancorp Inc. (parent company only) is as follows:
CONDENSED BALANCE SHEETS
(In Thousands)
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
731
|
|
|
$
|
2,278
|
|
Equity investment in subsidiaries
|
|
|
134,422
|
|
|
|
83,888
|
|
Investment in securities available for sale
|
|
|
2,799
|
|
|
|
4,079
|
|
Accrued interest receivable
|
|
|
38
|
|
|
|
38
|
|
Other assets
|
|
|
3,406
|
|
|
|
4,540
|
|
Total assets
|
|
$
|
141,396
|
|
|
$
|
94,823
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
$
|
22,681
|
|
|
$
|
22,681
|
|
Other liabilities
|
|
|
3,187
|
|
|
|
509
|
|
Total liabilities
|
|
|
25,868
|
|
|
|
23,190
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,444
|
|
|
|
770
|
|
Series A preferred stock
|
|
|
—
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
143,900
|
|
|
|
150,985
|
|
Accumulated deficit
|
|
|
(19,299
|
)
|
|
|
(65,123
|
)
|
Accumulated other comprehensive loss, net
|
|
|
(10,517
|
)
|
|
|
(8,589
|
)
|
Common stock in treasury, at cost
|
|
|
—
|
|
|
|
(6,411
|
)
|
Total stockholders' equity
|
|
|
115,528
|
|
|
|
71,633
|
|
|
|
$
|
141,396
|
|
|
$
|
94,823
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note O - (continued)
CONDENSED STATEMENTS OF OPERATIONS
(In Thousands)
|
|
For The Years Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
INCOME
|
|
|
|
|
|
|
|
|
Interest income from the Bank
|
|
$
|
2
|
|
|
$
|
1
|
|
Interest income
|
|
|
266
|
|
|
|
654
|
|
(Loss) gain on sales of investment securities
|
|
|
(155
|
)
|
|
|
493
|
|
Other income
|
|
|
338
|
|
|
|
334
|
|
Total income
|
|
|
451
|
|
|
|
1,482
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
373
|
|
|
|
370
|
|
Interest expense
|
|
|
668
|
|
|
|
668
|
|
Loss on termination of pension plan
|
|
|
—
|
|
|
|
1,871
|
|
Other expenses
|
|
|
808
|
|
|
|
1,329
|
|
Total expenses
|
|
|
1,849
|
|
|
|
4,238
|
|
Loss before income taxes and equity in undistributed net income of the Bank
|
|
|
(1,398
|
)
|
|
|
(2,756
|
)
|
Equity in undistributed net income (loss) of the Bank
|
|
|
51,630
|
|
|
|
(11,985
|
)
|
Income (loss) before taxes
|
|
|
50,232
|
|
|
|
(14,741
|
)
|
Provision (benefit) for income taxes
|
|
|
408
|
|
|
|
(1,251
|
)
|
Net income (loss)
|
|
$
|
49,824
|
|
|
$
|
(13,490
|
)
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note O - (continued)
CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
|
|
For The Years Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
49,824
|
|
|
$
|
(13,490
|
)
|
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Loss (gain) on sales of investment securities
|
|
|
155
|
|
|
|
(494
|
)
|
Equity in undistributed net (income) loss of the Bank
|
|
|
(51,630
|
)
|
|
|
11,985
|
|
Equity in undistributed net income of East 39, LLC
|
|
|
(338
|
)
|
|
|
(332
|
)
|
Loss on termination of pension plan
|
|
|
—
|
|
|
|
1,871
|
|
Increase in other liabilities
|
|
|
(1,322
|
)
|
|
|
(1,281
|
)
|
Increase (decrease) in other assets
|
|
|
1,134
|
|
|
|
(327
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,177
|
)
|
|
|
(2,068
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
Sales and redemptions
|
|
|
838
|
|
|
|
2,222
|
|
Other
|
|
|
(208
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
630
|
|
|
|
2,222
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Dividends paid on preferred stock
|
|
|
—
|
|
|
|
(4,800
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
—
|
|
|
|
(4,800
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(1,547
|
)
|
|
|
(4,646
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
2,278
|
|
|
|
6,924
|
|
Cash and cash equivalents at end of year
|
|
$
|
731
|
|
|
$
|
2,278
|
|
Schedule of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Dividends declared and not paid
|
|
$
|
4,000
|
|
|
$
|
—
|
|
ITEM 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure.
Not Applicable.
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures.
As of the end of the period covered by
this Annual Report on Form 10-K, the Company evaluated the effectiveness of the design and operation of its "disclosure controls
and procedures" as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 ("Disclosure Controls"). The
Disclosure Controls are designed to allow the Company to reach a reasonable level of assurance that information required to be
disclosed by the Company is recorded, processed, summarized and reported within the time period specified in the SEC's rules and
forms and that any information relating to the Company is accumulated and communicated with management, including its principal
executive/financial officer to allow timely decisions regarding required disclosure. The evaluation of the Disclosure Controls
("Controls Evaluation") was done under the supervision and with the participation of the Company's management, including
the Chief Executive Officer ("CEO"), who is also the Chief Financial Officer ("CFO"). Based upon the Controls
Evaluation, the CEO/CFO has concluded that as of December 31, 2011
the Disclosure Controls were effective.
Management's Report on Internal Control
over Financial Reporting.
Management of the Company is responsible
for establishing and maintaining adequate "internal control over financial reporting" for the Company as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934 ("Internal Control"). The Company's Internal Control is designed
to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation
of published financial statements and the reliability of financial reporting.
Management of the Company, including the
CEO/CFO, assessed the effectiveness of the Company's Internal Control as of December 31, 2011. In making this assessment, management
used the criteria set forth by COSO in Internal Control-Integrated Framework. Based on its assessment, management concluded that,
as of December 31, 2011, the Company's Internal Control was effective based on those criteria.
This Annual Report on Form 10-K does not
include an attestation report of the Company's registered public accounting firm regarding Internal Control. The Company's Internal
Control is not subject to attestation by the Company's registered public accounting firm pursuant to the provisions of the Dodd-Frank
Act that permit the Company to provide only management's report in this Annual Report.
Limitations on the Effectiveness of
Controls.
The Company's management, including the
CEO/CFO, does not expect that its Disclosure Controls and/or its Internal Control will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by
the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of
any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control
may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be
detected.
Changes in Internal Control over Financial
Reporting.
In accordance with SEC requirements, the
CEO/CFO notes that during the fiscal quarter ended December 31, 2011 no changes in the Company's Internal Control have occurred
that have materially affected or are reasonably likely to materially affect the Company's Internal Control.
ITEM 9B. Other Information
Not Applicable.
PART III
ITEM 10. Directors, Executive Officers
and Corporate Governance
The following are the current directors
and executive officers of the Company:
Name
|
|
Age
|
|
Position(s)
|
Steven Rosenberg
|
|
63
|
|
President, Chief Executive Officer, Chief Financial Officer and Director
|
William L. Cohen
|
|
70
|
|
Director
|
Martin A. Fischer
|
|
74
|
|
Director
|
Moses Marx
|
|
76
|
|
Director
|
Randolph B. Stockwell
|
|
65
|
|
Director
|
Moses Krausz
|
|
71
|
|
President of The Berkshire Bank and Director
|
David Lukens
|
|
62
|
|
Executive Vice President, Chief Financial Officer of The Berkshire Bank
|
Mr. Rosenberg has served
as President and Chief Executive Officer of the Company since March 1999 and as Vice President and Chief Financial Officer of the
Company from April 1990 to March 1999. He continues to serve as Chief Financial Officer. Mr. Rosenberg was elected a director in
May 1995. From September 1987 through April 1990, he served as President and Director of Scomel Industries, Inc., a company engaged
in international marketing and consulting. Mr. Rosenberg is a director of The Cooper Companies, Inc. (a developer and manufacturer
of healthcare products).
Mr. Cohen was elected
a director in July 1993. He has served as the Chief Executive Officer of Andover Properties, LLC, a real estate development company
specializing in self storage facilities, since November 2003, and has been a private investor for over five years. Mr. Cohen served
as President, Chief Executive Officer and Chairman of the Board of The Andover Apparel Group, Inc., an apparel manufacturing company,
from 1980 to 2000.
Mr. Fischer was elected
a director on December 6, 2006. He has been the President and Chief Executive of Mount Carmel Cemetery Association, a New York
State not-for-profit corporation since April 2001. Mr. Fischer was counsel to Warshaw, Burstein, Cohen, Schlesinger and Kuh, a
New York City law firm, from 1987 until 2001 and served as President, Chief Operating Officer and a director of Kinney System,
Inc. and The Katz Parking System, Inc. from 1981 to 1986. Mr. Fischer was appointed Commissioner of the New York State Insurance
Fund in 1977 and served as its Chairman until January 1995.
Mr. Marx was elected
a director in May 1995. Mr. Marx has been the Managing Member of United Equities Company LLC since 2000 and the General Partner
in its predecessor, United Equities Company, since 1954, and General Partner in United Equities Commodities Company since 1972.
He is also President of Momar Corp. All of these are private investment companies. Mr. Marx served as a director of The Cooper
Companies, Inc. from 1995 to March 2010.
Mr. Stockwell was elected
a director in July 1988. He has been a private investor for over five years. Since April 1999, Mr. Stockwell has served as President
of Yachting Systems of America, LLC. In addition, he served in various capacities with the Community Bank, a commercial bank, from
September 1972 to January 1987.
Mr. Krausz has held
the position of President of the Bank since March 1992 and Chief Executive Officer since November 1993. He was elected a director
of the Company in May 2007. Prior to joining the Bank, Mr. Krausz was Managing Director of SFS Management Co., L.P., a mortgage
banker, from 1987 to 1992 and was President of UMB Bank and Trust Company, a New York State chartered bank, from 1978 to 1987.
Mr. Lukens has held
the position of Senior Vice President and Chief Financial Officer of the Bank since December 1999 and Executive Vice President
since December 2003. Prior to joining the Bank, Mr. Lukens was Senior Vice President and Chief Financial officer of First Washington
State Bank, a New Jersey commercial bank, from 1994 to 1999 and was Vice President and Controller at the Philadelphia, PA branch
of Bank Leumi Le-Israel B.M., an international commercial bank, from 1978 to 1994.
There are no family
relationships (whether by blood, marriage or adoption) among any of the Company's current directors or executive officers.
At each annual meeting
of stockholders, the successors to the directors then serving are elected to serve from the time of their election and qualification
until the next annual meeting following their election or until their successors have been duly elected and qualified, or until
their earlier death, resignation or removal. All of our current directors have been elected to serve until the annual meeting of
stockholders to be held in 2012. The Company's officers, in their capacities as such, serve at the discretion of the Board of Directors.
Director Qualifications
In evaluating a director
candidate, the Company, through its Board, seeks directors who represent a mix of backgrounds and experiences that it believes
will enhance the quality of the Board's deliberations and decisions. Candidates are required to have substantial experience with
commercial or financial companies, or shall have achieved a high level of distinction in their chosen professions. While the Board
does not have a specific policy with regard to the consideration of diversity in identifying Board nominees, the Board seeks to
maintain a diverse director mix that includes active or retired chief executive officers and senior executives and individuals
with experience in law, finance and community banking. Finally, in considering candidates for director, all potential board members
are expected to display the personal attributes necessary to be an effective director: integrity, sound judgement, ability to operate
collaboratively, and commitment to the Company, its stockholders, employees and other constituencies. The Company's Board members
represent a desirable mix of backgrounds, skills, and experiences, and they all share the personal attributes of effective directors
described above and represent diverse viewpoints. The specific experience and qualifications of our Board members that contribute
to the effectiveness of our Board and led to our conclusion that they should serve as Board members are discussed above.
The Board may, but
has not, employed professional search firms (for which it would pay a fee) to assist it in identifying potential members of the
Board of Directors with the desired qualifications.
Audit Committee Members, Financial Expert
and Independence
Our Board of Directors
has established an Audit Committee comprised of three independent directors, Messrs. William L. Cohen, Martin A. Fischer and Randolph
B. Stockwell. All of the members of the Audit Committee meet the independence requirements under current NASDAQ corporate governance
standards for companies whose securities are listed on NASDAQ. Based upon their education and relevant experience, our Board has
determined that Messrs. Cohen and Stockwell each qualify as financial experts as defined by the Sarbanes-Oxley Act of 2002 and
the rules of the Securities and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the
Exchange Act requires the Company's executive officers (as defined therein), directors and persons owning more than ten (10%) percent
of a registered class of the Company's equity securities to file reports of ownership and changes in ownership of all equity and
derivative securities of the Company with the SEC. SEC regulations also require that a copy of all such Section 16(a) forms filed
be furnished to the Company by the filer.
Based solely on a review
of the copies of such forms and amendments thereto received by the Company, or on written representations from our executive officers
and directors that no Forms 5 were required to be filed, we believe that during fiscal 2011, all Section 16(a) filing requirements
applicable to our executive officers, directors and beneficial owners of more than ten (10%) percent of our Common Stock were met.
Corporate Code of Ethics
We have adopted a Corporate
Code of Ethics that applies to the directors, officers and employees, including the senior management: the chief executive officer,
chief financial officer, controller and persons performing similar functions, of Berkshire Bancorp Inc. and its subsidiaries. Copies
of our Corporate Code of Ethics are available without charge upon written request to the Company, Attention President, at its principal
executive office.
ITEM 11. Executive Compensation
Our Board of Directors
has delegated primary authority for executive compensation to the three independent members of the Board, or Independent Directors,
who, though not a formal compensation committee of the Board, act in such capacity.
Executive Compensation
The following table
shows the compensation paid in or with respect to the periods indicated to the individual who served as our Chief Executive Officer
and Chief Financial Officer for the fiscal year ended December 31, 2011 and to each of the other executive officers of the Bank
whose total compensation was more than $100,000 during the fiscal year ended December 31, 2011 (our "named executive officers").
Summary Compensation Table
Name and Principal
Position
|
|
Year
|
|
|
Salary
$
|
|
|
Bonus
$
|
|
|
Nonqualified
Deferred
Compensation
Earnings
$
|
|
|
All Other
Compensation
$
|
|
|
Total
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven Rosenberg
|
|
|
2009
|
|
|
|
241,500
|
|
|
|
45,000
|
|
|
|
278,445
|
|
|
|
—
|
|
|
|
564,945
|
|
President, Chief Executive Officer and
|
|
|
2010
|
|
|
|
250,000
|
|
|
|
55,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
305,000
|
|
Chief Financial Officer
|
|
|
2011
|
|
|
|
250,000
|
|
|
|
55,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
305,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moses Krausz
|
|
|
2009
|
|
|
|
481,418
|
|
|
|
200,000
|
|
|
|
16,678
|
|
|
|
7,756
|
|
|
|
705,852
|
|
President and Chief Executive Officer
|
|
|
2010
|
|
|
|
513,123
|
|
|
|
225,000
|
|
|
|
15,149
|
|
|
|
6,653
|
|
|
|
759,925
|
|
of The Berkshire Bank
|
|
|
2011
|
|
|
|
538,779
|
|
|
|
250,000
|
|
|
|
15,907
|
|
|
|
6,551
|
|
|
|
811,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Lukens
|
|
|
2009
|
|
|
|
192,000
|
|
|
|
30,000
|
|
|
|
21,147
|
|
|
|
7,882
|
|
|
|
251,029
|
|
Executive Vice President and Chief
|
|
|
2010
|
|
|
|
193,920
|
|
|
|
30,000
|
|
|
|
5,818
|
|
|
|
6,555
|
|
|
|
236,293
|
|
Financial Officer of The Berkshire Bank
|
|
|
2011
|
|
|
|
199,738
|
|
|
|
30,000
|
|
|
|
5,992
|
|
|
|
6,619
|
|
|
|
242,349
|
|
Narrative To Summary Compensation Table
Mr. Rosenberg does not have an employment
agreement with us. The amounts reported for Nonqualified Deferred Compensation Earnings includes only the change in the value of
his benefit payable under our Retirement Income Plan which was terminated on December 31, 2009. Mr. Rosenberg does not participate
in the Bank's 401(k) Plan or its Deferred Compensation Plan.
Mr. Krausz has an employment agreement
with the Bank. The agreement expires on April 30, 2013 unless automatically renewed for up to three additional years as provided
for in the agreement. The agreement provides for the payment to Mr. Krausz of a specified base salary with fixed annual increases,
the payment of a discretionary bonus and participation in our employee benefit plans. There are no change in control provisions
in Mr. Krausz's employment agreement. Mr. Krausz is a participant in the Bank's 401(k) Plan and its Deferred Compensation Plan.
The amounts reported for Nonqualified Deferred Compensation Earnings includes only the earnings on the Deferred Compensation Plan.
Mr. Krausz did not participate in the Retirement Income Plan. The amounts reported in All Other Compensation consists of contributions
we made to Mr. Krausz's 401(k) account of $6,125, $6,227 and $7,350 in 2011, 2010 and 2009, respectively, and income associated
with life insurance coverage.
Mr. Lukens has an employment agreement
with the Bank. The agreement will expire on June 30, 2013 unless automatically renewed for up to three additional years as provided
for in the agreement. The agreement provides for the payment to Mr. Lukens of a base salary and annual bonus, and participation
in our employee benefit plans. There are no change in control provisions in Mr. Lukens' employment agreement. Mr. Lukens is a participant
in the Bank's 401(k) Plan and its Deferred Compensation Plan. The amounts reported for Nonqualified Deferred Compensation Earnings
includes the earnings on the Deferred Compensation Plan of $5,992, $5,818 and $6,569 in 2011, 2010 and 2009, respectively, and
the change in the value of Mr. Lukens' benefit payable under our Retirement Income Plan of $14,578 in 2009. The amounts reported
in All Other Compensation consists of contributions we made to Mr. Lukens' 401(k) account of $5,743, $5,679 and $6,687, in 2011,
2010 and 2009, respectively, and income associated with life insurance coverage.
1999 Stock Incentive Plan.
Our 1999
Stock Incentive Plan terminated in March 2009. No options are outstanding and no options are available for future grant.
Post-Employment Compensation
Retirement Income Plan.
Our Retirement
Income Plan, a non-contributory defined benefit plan, was terminated on December 31, 2009.
Deferred Compensation Plan.
The
Bank's deferred compensation plan was established in July 2006 to provide for a systematic method by which key employees of the
Bank may defer payment of not less than 3% and not more than 50% of his or her compensation that would otherwise be payable during
the year. The Deferred Compensation Plan is intended to be a nonqualified and unfunded plan maintained primarily for the purpose
of providing deferred compensation for a select group of management or highly compensated employees pursuant to Sections 201(2),
301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended.
On June 30 and December
31 of each year, account balances are credited with the applicable earnings rate, the highest deposit rate paid by the Bank on
its generally available interest bearing deposit accounts (excluding time deposits), in effect at that time. Distributions from
the Deferred Compensation Plan may be made upon (i) termination of employment, (ii) an unforeseeable emergency, (iii) death, (iv)
disability, as defined under Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), and (v) a Change
in Control Event, to the extent such distribution upon such Change in Control Event constitutes permissible payment under Section
409A of the Code.
Compensation of Directors
Director Compensation for the Fiscal
Year Ended December 31, 2011.
Name
|
|
Fees Earned or
Paid in Cash
$
|
|
|
Total
$
|
|
|
|
|
|
|
|
|
William L. Cohen
|
|
|
31,500
|
|
|
|
31,500
|
|
|
|
|
|
|
|
|
|
|
Moses Marx
|
|
|
27,500
|
|
|
|
27,500
|
|
|
|
|
|
|
|
|
|
|
Martin A. Fischer
|
|
|
31,500
|
|
|
|
31,500
|
|
|
|
|
|
|
|
|
|
|
Randolph B. Stockwell
|
|
|
30,500
|
|
|
|
30,500
|
|
Each director who is
not also an employee receives a stipend of $25,000 per annum and $1,500 for each day during which he participates in a meeting
of the Board or a Committee of the Board. Each of these directors also receives a fee of $1,000 for telephonic meetings of the
Board or a Board Committee.
ITEM 12.Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table
sets forth certain information as of March 1, 2012 with respect to the beneficial ownership of our Common Stock by (i) each person
who is known by us to own beneficially more than 5% of our Common Stock, (ii) each of our directors and persons named in the Summary
Compensation Table, and (iii) all executive officers and directors as a group, based on information obtained from such persons.
The address for each beneficial owner, unless otherwise noted, is c/o Berkshire Bancorp Inc., 160 Broadway, New York, NY 10038
Title of Class
|
|
Name and Address of
Beneficial Owner
|
|
Amount and Nature
of Beneficial
Ownership
|
|
|
Percent
of Class
|
|
Common Stock
|
|
William L. Cohen
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Martin A. Fischer
|
|
10,800
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Moses Krausz
|
|
90,464
|
(1)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
David Lukens
|
|
600
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Moses Marx
160 Broadway
New York, NY 10038
|
|
9,977,047
|
(2)
|
|
69.1
|
%
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Steven Rosenberg
|
|
62,580
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Randolph B. Stockwell
|
|
21,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
All executive officers and directors as a group (7 persons)
|
|
10,162,491
|
|
|
70.4
|
%
|
Common Stock
|
|
The George Karfunkel 2007 Grantor Retained Annuity Trust #1
c/o Jay Miller
430 East 57th Street
New York, NY 10022
|
|
1,416,225
|
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
* Less than 1%
|
|
|
|
|
|
|
(1)Includes
2,100 shares owned by Mr. Krausz's spouse.
(2)Includes
(i) 334,979 shares owned by Momar Corporation, (ii) 141,063 shares owned by Terumah Foundation, Inc. (iii) 157,261 shares owned
by Marneu Holding Company, (iv) 10,681 shares owned by United Equities (Commodities) Company and (v) 190,284 shares owned by KF
Investors LLC. Mr. Marx and KF Investors LLC entered into an agreement to act as a "group" within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended, for the purpose of acquiring, holding or disposing of shares of Common
Stock of the Company.
Equity Compensation Plans
The equity compensation
plan approved by security holders expired in March 2009. Therefore, no securities remain available for future issuance and no securities
are to be issued upon exercise of outstanding options, warrants and rights.
ITEM 13. Certain Relationships and
Related Transactions and Director Independence.
The Bank has made loans
to certain of its directors and their affiliates and, assuming continued compliance with generally applicable credit standards,
it expects to continue to make such loans. All of these loans (i) were made in the ordinary course of business, (ii) were made
on substantially the same terms, including interest rates and collateral, as those available to other persons not related to the
Company, and (iii) did not involve more than the normal risk of collectibility or present other unfavorable features.
The Bank has lease
agreements with Bowling Green Associates, LP and Verda Realty, the principal owner of which is Mr. Marx, for commercial space to
operate bank branches. We obtained an appraisal of the market rental value of each space from an independent appraisal firm and
management believes that the terms of the leases, including the annual rent paid, $571,000 and $504,000 in fiscal 2011 and 2010,
is comparable to the terms and annual rent that would be paid to non-affiliated parties in a similar commercial transaction for
similar commercial spaces.
On October 31, 2008,
the Company's Chairman of the Board purchased 30,000 Series A Preferred Shares for an aggregate purchase price of $30,000,000.
On October 31, 2011, the Series A Preferred Shares were mandatorily converted into shares of the Company's Common Stock.
In April 2010, the
Bank assigned its interest in real estate, that had previously secured a $13.5 million loan, to Momarm II Corporation ("Momarm")
for $12.6 million, which represents the Bank's carrying value. Momarm is owned by immediate family members of the Company's and
the Bank's Chairman of the Board, who are also immediate family members of two other directors of the Bank. The Bank received a
fairness opinion with respect to the value received for the assignment and an independent appraisal of the real estate.
In April 2010, the
Bank sold three loans that it had originally booked at $7.5 million to Momarm for an aggregate purchase price of $3.15 million,
which represents the Bank's carrying value. The Bank received a fairness opinion with respect to the value received for the sale
of each loan and an independent appraisal of the underlying assets.
In August 2010, the
Bank sold to Terumah Foundation Inc., of which Mr. Marx is President and a Director, 77.273% interest in a loan for $1.7 million
,which represents 77.273% of the Bank's carrying value.
In December 2011, the
Bank sold a loan to Farm Associates, of which the Company's and the Bank's Chairman of the Board and his immediate family members
who serve as directors of the Bank are general partners, for approximately $4.5 million, which represented the Bank's carrying
value.
See Item 1. Business
- Transactions With Related Parties and Item 2. Properties for additional information.
Independence of Directors
Our board has determined
that Messrs. William L. Cohen, Martin A. Fischer and Randolph B. Stockwell are independent under the independence standards of
the NASDAQ Stock Market LLC.
The NASDAQ listing
standards require that a majority of the members of a company's board of directors must qualify as independent unless the Company
is a controlled company. A controlled company is a company in which more than 50% of the voting power is held by an individual,
group or other company. The Company is a controlled company because Mr. Marx beneficially holds more than 50% of the voting power
of the Company's common stock and the Company as such is not required to have a majority of the members of the board be independent.
ITEM 14. Principal Accounting Fees and
Services
The Company's principal
accountant is Grant Thornton LLP ("Grant Thornton"). The total fees for services rendered by Grant Thornton as of and
for the years ended December 31, 2011 and 2010 were:
|
|
Fiscal Year Ended
December 31, 2011
|
|
|
Fiscal Year Ended
December 31, 2010
|
|
Services Rendered (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit Fees
|
|
$
|
174,550
|
|
|
$
|
486,452
|
|
|
|
|
|
|
|
|
|
|
Audit Related Fees:
Professional services rendered for employee benefit plan audits, accounting assistance in connection with acquisitions and consultations related to financial accounting and reporting standards
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Tax Fees
: Tax consulting, preparation of returns
|
|
|
67,378
|
|
|
|
74,365
|
|
|
|
|
|
|
|
|
|
|
All Other Fees:
Professional services rendered for corporate support
|
|
|
—
|
|
|
|
—
|
|
(1) The aggregate fees included in Audit
Fees are fees billed for the fiscal years. The aggregate fees included in each of the other categories are fees billed in the
fiscal year.
The Audit Committee
has established its pre-approval policies and procedures, pursuant to which the Audit Committee approved the foregoing audit and
permissible non-audit services provided by Grant Thornton LLP in 2011 and 2010. Consistent with the Audit Committee's responsibility
for engaging our independent auditors, all audit and permitted non-audit services require pre-approval by the Audit Committee.
The full Audit Committee approves proposed services and fee estimates for these services. The Audit Committee chairperson has been
designated by the Audit Committee to approve any services arising during the year that were not pre-approved by the Audit Committee
and services that were pre-approved. Service approved by the Audit Committee chairperson are communicated to the full Audit Committee
at its next regular quarterly meeting and the Audit Committee reviews services and fees for the fiscal year at each such meeting.
Pursuant to these procedures, the Audit Committee approved the foregoing audit and permissible non-audit services provided by Grant
Thornton LLP.
PART IV
ITEM 15. Exhibits, Financial Statement
Schedules.
(a) Documents filed
as part of this Report:
(1) Financial Statements
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2011 and 2010
Consolidated
Statements of Income for the Years Ended December 31, 2011 and 2010
Consolidated
Statements of Stockholders' Equity for the Years Ended December 31, 2011 and 2010
Consolidated
Statements of Comprehensive Income for the Years Ended December 31, 2011 and 2010
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2011 and 2010
Notes to
Consolidated Financial Statements
(2) Financial Statement
Schedules
Schedule
None
All schedules for which
provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and, therefore, have been omitted.
(3) Exhibits
Exhibit
Number
Description
2.1Agreement
and Plan of Reorganization, dated as of August 16, 2000, by and between Berkshire Bancorp Inc., Greater American Finance Group,
Inc., The Berkshire Bank, GSB Financial Corporation and Goshen Savings Bank (incorporated by reference to the Companies Registration
Statement on Form S-4 dated October 13, 2000.
3.1Amended
and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Current Report
on Form 8-K dated March 30, 1999, and the Company's Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 2004).
3.2Certificate
of Amendment to the Certificate of Incorporation of the Company effective December 15, 2008 (incorporated by reference to Exhibit
3.1 to the Company's Current Report on Form 8-K dated December 16, 2008).
3.3Certificate
of Designations of the Series A Preferred Stock of the Company (incorporated by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K dated November 5, 2008).
3.4Amended
and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K dated
March 30, 1999).
10.1Employment
Agreement, dated as of May 1, 1999, between The Berkshire Bank and Moses Krausz (incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2000).+
10.2Employment
Agreement, dated as of January 1, 2001, between The Berkshire Bank and David Lukens (incorporated by reference to Exhibit 10.4
to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2000).+
Exhibit
Number
Description
10.3Lease
Agreement, dated October 26, 1999, between Braun Management, Inc. as agent for Bowling Green Associates, L.P., and The Berkshire
Bank (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the Quarterly Period Ended March
31, 2001).
10.4Deferred
Compensation Plan of The Berkshire Bank, effective July 1, 2006, (incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the Quarterly Period Ended June 30, 2006).+
10.5Amendment
No. 1 to Deferred Compensation of The Berkshire Bank, dated August 17, 2006 (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 2006).+
10.6Amendment
No. 2 to Deferred Compensation of The Berkshire Bank, dated November 29, 2007 (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2007).
10.7Amendment
No. 3 to Deferred Compensation of The Berkshire Bank, dated December 31, 2008 (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2008).+
10.8Amendment
No. 5, dated as of December 2, 2011, to Employment Agreement, dated as of May 1, 1999, by and between The Berkshire Bank and Moses
Krausz.
10.9Amendment
No. 5, dated as of December 2, 2011, to Employment Agreement, dated as of January 1, 2001, by and between The Berkshire Bank and
David Lukens.
21.Subsidiaries
of the Company.
23.Consent
of Independent Registered Public Accounting Firm
31.Certification
of Principal Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.Certification
of Principal Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.The
following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 2011, formatted in Extensible
Business Reporting Language (XBRL), pursuant to Rule 406T of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated
Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders'
Equity and Comprehensive Income and (v) related notes to consolidated financial statements. Users of this data are advised pursuant
to Rule 401 of Regulation S-T that the information contained in the XBRL documents is unaudited and these are not the official
publicly filed financial statements of the Company.
+ Denotes a management compensation plan
or arrangement.
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
|
BERKSHIRE BANCORP INC.
|
|
|
|
|
By:
|
/s/ Steven Rosenberg
|
|
|
Steven Rosenberg
|
|
|
President, (Chief Executive Officer)
|
|
|
|
|
Date:
|
March 30, 2012
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
President, (Chief
|
|
|
|
|
Executive Officer,
|
|
|
|
|
Principal Financial
|
|
|
|
|
Officer and Principal
|
|
|
|
|
Accounting Officer);
|
|
|
/s/ Steven Rosenberg
|
|
Director
|
|
March 30, 2012
|
Steven Rosenberg
|
|
|
|
|
|
|
|
|
|
/s/ William L. Cohen
|
|
Director
|
|
March 30, 2012
|
William L. Cohen
|
|
|
|
|
|
|
|
|
|
/s/ Martin A. Fischer
|
|
Director
|
|
March 30, 2012
|
Martin A. Fischer
|
|
|
|
|
|
|
|
|
|
/s/ Moses Krausz
|
|
Director
|
|
March 30, 2012
|
Moses Krausz
|
|
|
|
|
|
|
|
|
|
/s/ Moses Marx
|
|
Director
|
|
March 30, 2012
|
Moses Marx
|
|
|
|
|
|
|
|
|
|
/s/ Randolph B. Stockwell
|
|
Director
|
|
March 30, 2012
|
Randolph B. Stockwell
|
|
|
|
|
Berkshire Bancorp (QB) (USOTC:BERK)
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