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EX-23 - BERKSHIRE BANCORP INC /DE/ | v187538_ex23.htm |
EX-21 - BERKSHIRE BANCORP INC /DE/ | v187538_ex21.htm |
EX-31 - BERKSHIRE BANCORP INC /DE/ | v187538_ex31.htm |
EX-32 - BERKSHIRE BANCORP INC /DE/ | v187538_ex32.htm |
EX-10.13 - BERKSHIRE BANCORP INC /DE/ | v187538_ex10-13.htm |
EX-10.14 - BERKSHIRE BANCORP INC /DE/ | v187538_ex10-14.htm |
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,
2009
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
|
94-2563513
|
|
(State
or other jurisdiction of
|
(I.R.S.
employer
|
|
incorporation
or organization)
|
identification
number)
|
|
160
Broadway, New York, New York
|
10038
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (212) 791-5362
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class
|
Name of Each Exchange on Which Traded
|
|
Common
Stock, par value $.10 per share
|
The
NASDAQ Stock Market LLC
|
|
(The
NASDAQ Global Market)
|
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 ¨ No
x
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 ¨ 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 ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
(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, 2009: $17,656,792.
Number of
shares of Common Stock outstanding as of June 2, 2010: 7,054,183.
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, 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, 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 "Series A Preferred Shares") 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 Series A
Preferred Share bears non-cumulative cash dividends at the rate of 8% per annum,
payable quarterly, is mandatorily convertible into 123.153 shares of our Common
Stock on October 31, 2011, unless previously redeemed, and is redeemable at the
option of the Company between April 30, 2009 and November 1, 2010 at a
redemption price of $1,100. So long as any share of Series A
Preferred Shares remains outstanding, unless the full dividends for the most
recent dividend payment date have been paid or declared, no dividends may be
paid or declared on the Company's Common Stock. No Series A Preferred
Shares have been redeemed to date.
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 deposit
taking offices in Ridgefield and Teaneck, NJ.
3
Branch Locations of The Berkshire Bank
December 31, 2009
|
||
4
East 39th Street
New
York, NY
|
2
South Church Street
Goshen,
NY
|
|
5
Broadway
New
York, NY
|
214
Harriman Drive
Goshen,
NY
|
|
|
||
5010
13th Avenue
Brooklyn,
NY
|
80
Route 17M
Harriman,
NY
|
|
1421
Kings Highway
Brooklyn,
NY
|
60
Main Street
Bloomingburg,
NY
|
|
4917
16th Avenue
Brooklyn,
NY
|
1119
Avenue J
Brooklyn,
NY
|
|
600
Broad Avenue
Ridgefield,
NJ
|
210
Pinehurst Avenue
New
York, NY 10033
|
|
517
Cedar Lane
Teaneck,
NJ
|
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 in investment, mortgage-backed and
auction rate securities.
4
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 subsidiaries, Berkshire Agency, Inc., a
company engaged in the title insurance agency business, and Berkshire 1031, 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.
5
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.
6
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, 2009 and 2008, 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.
7
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 Banking Department (the "NYSBD"), which the Bank
executed. The MOU sets forth an informal understanding among the
Bank, the FDIC and the NYSBD addressing asset quality, loan review, underwriting
and administration and certain other concerns identified in the
examination. The Bank's board has appointed a committee comprised of
three directors to monitor the Bank's compliance. We do not believe
that compliance with the MOU will have 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 O to the Company's consolidated financial statements,
the Bank is well capitalized for regulatory purposes as of December 31,
2009.
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, 2009 and 2008, the Bank's Tier I leverage capital ratio was 9.4%
and 8.9%, 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, 2009 and 2008, the Bank maintained a 15.6%
and 12.2% Tier I risk-based capital ratio and a 16.9% and 13.4% total risk-based
capital ratio, respectively.
8
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, 2009 and 2008, 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 Berkshire, the Federal Reserve will assess
the record of each subsidiary bank in considering certain applications by
Berkshire. 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 New York State Banking Department, the Bank
received "satisfactory" ratings.
Dividends From the Bank to the
Company. One source of funds for Berkshire to pay dividends to
its stockholders is dividends from the Bank to Berkshire. Under the New York
Banking Law, the Bank may pay dividends to Berkshire, 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 profits in fiscal
2009 was $7.64 million. The Bank's aggregate retained net loss for
the 2007 and 2008 fiscal years totaled approximately $74.55
million. Therefore, the Bank may not pay dividends to Berkshire
without obtaining regulatory approval.
Under federal law, the Bank may not
make any capital distribution to Berkshire, 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 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.
9
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 Banking Department have enforcement authority over the
Bank. The Superintendent of the Banking Department (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 New York Banking Board 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. At present, the Bank pays no deposit insurance premium based
upon its risk-based categorization.
10
The FDIC has raised insurance premiums
to cover substantial losses incurred by the Deposit Insurance Fund ("DIF") due
to recent bank failures of 2009 and 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 increased
by 79% to $1.93 million in fiscal 2009 from $1.08 million in fiscal
2008. The increased assessment is a result of the FDIC's anticipation
of greater demands on the Bank Insurance Fund in the future in response to the
current unrest in the banking industry. In June 2009, the Bank paid a
special assessment charged by the FDIC in the amount of $453,000.
In November 2009, the FDIC adopted a
final rule imposing a 13 quarter prepayment of FDIC premiums. The
Bank's prepayment amount totaled $5.59 million and was paid in December
2009. This was an estimated prepayment for the fourth quarter of 2009
through the fourth quarter of 2012. The prepayment amount will be
used to offset future FDIC insurance premiums beginning in March
2010.
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, 2009, 2008 and
2007, the Company has been 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 2009, 2008 and 2007. (See Dividends in Item 5).
11
Employees. On March
31, 2010, the Company had one full time employee and the Bank employed 112 full
time and 4 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 return to and 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 we
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 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.
12
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.
The Bank's loan portfolio is largely
secured by real estate collateral. Conditions in real estate markets in which
the collateral for the Bank's loans are located strongly influence the level of
the Bank's non-performing loans and results of operations. A decline
in the New York City metropolitan area and upstate New York real estate markets,
as well as other external factors, could adversely affect the Bank's loan
portfolio.
Recent
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 the latter half of 2007, throughout 2008 and 2009, and during
2010 to date have resulted in uncertainty in the financial markets in general
with the expectation of the general economic downturn continuing for the
remainder of 2010 and possibly beyond. Loan portfolio performances
have deteriorated at many institutions, including the Bank, resulting from,
among other factors, a weak economy 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. As a result, there is a potential for new
federal or state laws and regulations regarding lending and funding practices
and liquidity standards, and 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.
13
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 2009, 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.
Our portfolio of investment securities
includes auction rate securities. From the first quarter of 2008 to the present,
our balance of auction rate securities 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. During 2009, we recorded
approximately $2.0 million in OTTI charges related to Freddie Mac auction rate
securities. In fiscal 2008 approximately $101 million of auction rate
securities, at cost, were written down to approximately $63 million, based on
our analysis, as an unrealized temporary decrease in fair value, which is
reflected as a component of accumulated other comprehensive loss in the
stockholders' equity section of our consolidated balance sheet. This
is in addition to the other than temporary impairment charge recognized on
auction rate securities which have preferred shares of the Federal National
Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac") as the underlying collateral, as described elsewhere
in this Report. Further discussion of the auction rate securities may
also be found elsewhere in this Report under "Investment
Activities."
14
Declines
in value may adversely impact the investment portfolio.
As of December 31, 2009, we had
approximately $357.5 million and $340,000 in available for sale and held to
maturity investment securities, respectively. We may be required to
record other-than-temporary impairment ("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. In 2009 and 2008, impairment charges on investment
securities were $17.4 million and $94.3 million, respectively. There can be no
assurances that further impairment charges will not have to be
recognized. In addition, as noted in Part II Item 9A(T) - Controls
and Procedures, we identified a material weakness related to our method of
identification and valuation of securities for other than temporary impairment
and related tax accounting. Management has revised the relevant
controls and procedures with respect to these matters which, if not properly
corrected, could have a negative effect on our investment portfolio in future
periods.
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-Blilely 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. We are currently analyzing the Restoring American
Financial Stability Act, passed by the United States Senate on May 10, 2010, and
the effects such act would have on the Company's operations and financial
condition if it were to become law. While we cannot predict what
effect any presently contemplated or future changes in the laws or regulations
or their interpretations would have, these changes could be materially adverse
to our investors and stockholders.
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 Banking Department (the "NYSBD"), which the Bank
executed. The MOU sets forth an informal understanding among the
Bank, the FDIC and the NYSBD addressing asset quality, loan review, underwriting
and administration and certain other concerns identified in the
examination. The Bank's board has appointed a committee comprised of
three directors to monitor the Bank's compliance. We do not believe
that compliance with the MOU will have 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 O to the Company's consolidated financial statements,
the Bank is well capitalized for regulatory purposes as of December 31,
2009.
15
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. In conjunction with an internal
loan review function that operates independently of the lending function,
management monitors the loan portfolio to identify risks on a timely basis so
that an appropriate allowance can be maintained. Based on an evaluation of the
loan portfolio, management presents a periodic review of the loan loss reserve
to the board of directors of the Bank, indicating any changes in the reserve
since the last review and any recommendations as to adjustments in the reserve.
In making its evaluation, in addition to the factors discussed below, management
considers the results of recent regulatory examinations, which typically include
a review of the allowance for loan losses as an integral part of the examination
process.
In establishing the allowance,
management evaluates individual large classified loans and nonaccrual loans, and
determines an aggregate reserve for those loans based on that review. An
allowance for the remainder of the loan portfolio is also determined based on
historical loss experience within the components of the portfolio. These
allocations may be modified if current conditions indicate that loan losses may
differ from historical experience, based on economic factors and changes in
portfolio mix and volume.
In addition, a portion of the allowance
is established for losses inherent in the loan portfolio which have not been
identified by the more quantitative processes described above. This
determination inherently involves a higher degree of subjectivity, and considers
risk factors that may not have yet manifested themselves in historical loss
experience. Those factors include changes in levels and trends of charge-offs,
delinquencies, and nonaccrual loans, trends in volume and terms of loans,
changes in underwriting standards and practices, portfolio mix, tenure of loan
officers and management, entrance into new geographic markets, changes in credit
concentrations, and national and local economic trends and conditions. While the
allowance for loan losses is maintained at a level believed to be adequate by
management for estimated losses in the loan portfolio, determination of the
allowance is inherently subjective, as it requires estimates, all of which may
be susceptible to significant change. Changes in these estimates may impact the
provisions charged to expense in future periods. Federal and state
regulatory authorities, as an integral part of their examination process, review
our loans and allowance for loan losses. We cannot
assure
you that we will not increase the allowance for loan losses or the regulators
will not require us to increase this allowance. Either of these occurrences
could negatively impact Berkshire Bancorp's results of operations.
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 "FHLBNY"), 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.
16
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, of which 60,000 shares have been designated as Series A Preferred Stock,
and of which the remaining 1,940,000 shares 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 delay,
deter, or prevent a change in control of the Company.
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. This 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.
Issuance
of Common Stock Upon Conversion of Series A Preferred Stock and Other Factors
Could Depress our Common Stock Price.
At December 31, 2009, there are 60,000
shares of preferred stock outstanding which have been issued to the Company's
majority stockholder and two unaffiliated entities. The preferred stock may be
redeemed by the Company between April 30, 2009 and November 1, 2010 at $1,100
per share. Each preferred share is mandatorily convertible into
123.153 shares of common stock on October 31, 2011 unless previously
redeemed. The availability of additional shares for sale in the
market could depress our common stock price.
In addition, we have authorized
25,000,000 shares of common stock of which approximately 7,000,000 shares are
issued and outstanding. The price of our common stock may be volatile
at times since our common stock is thinly traded and one individual owns or
controls more than 50% of our outstanding shares. It may be difficult for a
stockholder to sell a significant number of shares at a time and at a price of
their choosing 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.
17
Our
Series A Preferred Shares impact net income available to our common stockholders
and our earnings per share.
As long as there are Series A Preferred
Shares outstanding, no dividends may be paid on our Common Stock unless all
dividends on the Series A Preferred Shares have been paid in
full. The dividends declared on our fixed rate Series A Preferred
Shares will reduce the net income available to holders of our Common Stock and
our earnings per share of Common Stock. The Series A Preferred Shares
will also receive preferential treatment in the event of liquidation,
dissolution or winding up of the Company.
Moreover, holders of our Common Stock
are entitled to receive dividends only when, as and if declared by our board of
directors. We have temporarily ceased paying a dividend on our Common
Stock. The absence of cash dividends on our Common Stock could
adversely affect the market price.
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, 2009, loans secured by real estate, including home equity loans and lines of
credit, represented 88% of our total loans. Both nationally and in the State of
New York, 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 $9.30 million and $4.90 million to
the allowance for loan losses during the fiscal years ended December 31, 2009
and 2008, 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 $1.93 million for 2009 compared to $1.08 million for
2008. 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 31, 2010:
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 | $ | 229,029 |
March
2013
|
||||||||
Brooklyn,
NY
|
Bank
Branch
|
2,866 | $ | 83,898 |
March
2013
|
||||||||
Brooklyn,
NY
|
Bank
Branch
|
2,592 | $ | 118,245 |
December
2012
|
||||||||
Brooklyn,
NY
|
Bank
Branch
|
1,640 | $ | 79,433 |
June
2015
|
||||||||
New
York, NY
|
Bank
Branch
|
9,924 | $ | 353,315 |
June
2010 (2)(3)
|
||||||||
New
York, NY
|
Bank
Branch
|
3,300 | $ | 63,263 |
November
2016 (2)(3)
|
||||||||
Goshen,
NY
|
Bank
Branch
|
10,680 |
Owned
|
||||||||||
Harriman,
NY
|
Bank
Branch
|
1,623 |
Owned
|
||||||||||
Bloomingburg,
NY
|
Bank
Branch
|
1,530 | $ | 22,806 |
August
2010
|
||||||||
Ridgefield,
NJ
|
Bank
Branch
|
6,120 |
Owned
|
||||||||||
Teaneck,
NJ
|
Bank
Branch
|
2,200 | $ | 44,000 |
June
2014
|
18
(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 the financial condition or results of our
operations.
ITEM
4. (Reserved)
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.
19
Fiscal Year Ended December 31,
2008
|
High
|
Low
|
||||||
January
1, 2008 to March 31, 2008
|
$ | 16.94 | $ | 13.52 | ||||
April
1, 2008 to June 30, 2008
|
15.98 | 12.05 | ||||||
July
1, 2008 to September 30, 2008
|
14.71 | 4.71 | ||||||
October
1, 2008 to December 31, 2008
|
8.99 | 4.16 |
Fiscal Year Ended December 31,
2009
|
High
|
Low
|
||||||
January
1, 2009 to March 31, 2009
|
$ | 5.00 | $ | 3.30 | ||||
April
1, 2009 to June 30, 2009
|
6.00 | 4.00 | ||||||
July
1, 2009 to September 30, 2009
|
8.98 | 4.86 | ||||||
October
1, 2009 to December 31, 2009
|
7.78 | 5.23 |
As of the close of business on June 4,
2010, there were 902 holders of record of the Company's Common
Stock.
Dividends
For the fiscal years ended December 31,
2009, 2008 and 2007, the Company has been 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 2009,
2008 or 2007.
On March 23, 1999, the Board of
Directors adopted a policy of paying regular cash dividends in respect of the
Common Stock of the Company, payable in equal semi-annual
installments. Pursuant to said policy, the Board of Directors
declared and the Company paid cash dividends on its Common Stock as
follows:
Declaration Date
|
Record Date
|
Payment Date
|
Per Share
Amount
|
||||||
April
2, 2007
|
April
18, 2007
|
April
26, 2007
|
$ | .09 | |||||
October
3, 2007
|
October
18, 2007
|
October
25, 2007
|
$ | .09 | |||||
April
2, 2008
|
April
18, 2008
|
April
28, 2008
|
$ | .10 | |||||
October
8, 2008
|
October
23, 2008
|
October
30, 2008
|
$ | .10 |
On March 31, 2009, the Company
announced that it would temporarily suspend its previously announced Common
Stock dividend policy and not declare or pay a semi-annual dividend in April
2009. Subsequently, the Board of Directors deemed it appropriate to
continue the suspension and did not declare or pay a cash dividend in October
2009.
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. So long as any Series A Preferred Shares remain
outstanding, unless the full dividends for the most recent dividend payment date
have been paid or declared, no dividends may be paid or declared on the
Company's Common Stock.
20
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, 2006, the Company has purchased a total of
1,898,909 shares of its Common Stock. During fiscal years 2007, 2008 and 2009 we
did not purchase any shares, and at December 31, 2009 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
21
ITEM
7. Managements' 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, 2009, 2008 and 2007. All
references to earnings (loss) per share, unless stated otherwise, refer to loss
per basic shares for the 2009 and 2008 fiscal years, and earnings per diluted
shares for the 2007 fiscal year. The discussion should be read in
conjunction with the consolidated financial statements and related notes (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 Series A Preferred Shares 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 Series A
Preferred Share bears non-cumulative cash dividends at the rate of 8% per annum,
payable quarterly, is mandatorily convertible into 123.153 shares of our Common
Stock on October 31, 2011, unless previously redeemed, and is redeemable at the
option of the Company between April 30, 2009 and November 1, 2010 at a
redemption price of $1,100. No Series A Preferred Shares have been
redeemed to date. So long as any share of Series A Preferred Shares remains
outstanding, unless the full dividends for the most recent dividend payment date
have been paid or declared, no dividends may be paid or declared on the
Company's Common Stock. (See Note A of Notes to Consolidated Financial
Statements for further discussion of Series A Preferred
Shares).
22
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."
In accordance with Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") 350,
"Intangibles-Goodwill and Other", the Company discontinued the amortization of
goodwill resulting from acquisitions. Goodwill is subject to
impairment testing at least annually to determine whether write-downs of the
recorded balances are necessary. The Company tests for impairment
based on the goodwill maintained at the Bank. A fair value is
determined for each reporting unit based on at least one of three various market
valuation methodologies. If the fair value of the reporting units
exceed the book value, no write-down of recorded goodwill is
necessary. If the fair value of the reporting unit is less, an
expense may be required on the Company's books to write down the related
goodwill to the carrying value. As of December 31, 2009, the goodwill
was evaluated for impairment with no recognition of impairment considered
necessary. The fair value of the reporting unit was substantially
greater than the carrying value. However, there can be no guarantees that
impairment will not be recognized in future periods.
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.
23
The Company evaluates unrealized losses
on securities to determine if any reduction in the fair value is other than
temporary. This amount will continue to be dependent on market
conditions, the occurrence of certain events or changes in circumstances of the
issuer of the security, and the Company's intent and ability to hold impaired
investments at the time the valuation is made. If management
determines that an impairment in the investment's value is other than temporary,
earnings would be charged.
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.
Financial assets and financial
liabilities reported at fair value are required to be measured based on the
following alternatives: (1) quoted prices in active markets for identical
financial instruments (level 1), (2) significant other observable inputs (level
2), or (3) significant unobservable inputs (level 3). Judgement is
required in selecting the appropriate level to be used to determine fair
value. The majority of the investments classified as Available for
Sale, were measured using level 2 inputs, which requires judgement to determine
the fair value. The auction rate securities held in the investment
portfolio, were measured using level 3 inputs due to the inactive market for
these securities.
Discussion
of Financial Condition and Results of Operations
Overview
Fiscal Year Ended December 31, 2009
Compared to Fiscal Year Ended December 31, 2008. Net loss
allocated to common stockholders for the fiscal year ended December 31, 2009 was
$7.0 million, or $1.00 per common share, compared to a net loss allocated to
common stockholders of $79.9 million, or $11.45 per common share for the fiscal
year ended December 31, 2008. Net loans decreased by approximately
8%. Investment securities increased by approximately 20% and total assets
decreased by approximately 4%.
24
As of and for the
Fiscal Year Ended December 31,
|
||||||||||||
2009
|
2008
|
%
Inc/(Dec)
|
||||||||||
(In millions, except per share data and percentages
and bank branch information)
|
||||||||||||
Total
Assets
|
$ | 909.3 | $ | 943.7 | (4 | )% | ||||||
Loans,
net
|
418.9 | 457.5 | (8 | )% | ||||||||
Investment
Securities
|
357.8 | 297.9 | 20 | % | ||||||||
Total
Liabilities
|
824.0 | 877.8 | (6 | )% | ||||||||
Deposits
|
713.4 | 726.1 | (2 | )% | ||||||||
Borrowings
|
103.7 | 127.5 | (19 | )% | ||||||||
Stockholders'
Equity
|
85.2 | 66.0 | 29 | % | ||||||||
Total
Income
|
46.1 | 60.3 | (24 | )% | ||||||||
Interest
Income
|
45.9 | 59.6 | (23 | )% | ||||||||
Total
Expense
|
61.6 | 146.0 | (58 | )% | ||||||||
Interest
Expense
|
17.1 | 30.5 | (44 | )% | ||||||||
Net
Interest Income
|
28.8 | 29.1 | (1 | )% | ||||||||
Net
(Loss)
|
(7.0 | ) | (79.9 | ) | (91 | )% | ||||||
(Loss)
Per Common Share
|
(1.00 | ) | (11.45 | ) | (91 | )% | ||||||
Bank
Branches
|
13 | 12 | - |
25
Fiscal Year Ended December 31, 2008
Compared to Fiscal Year Ended December 31, 2007. Net loss
allocated to common stockholders for the fiscal year ended December 31, 2008 was
$79.9 million, or $11.45 per common share, compared to net income of $5.4
million, or $.76 per diluted common share, for the fiscal year ended December
31, 2007. Net loans increased by approximately 6%. Investment
securities and total assets decreased by approximately 50% and 16%,
respectively.
As of and for the
Fiscal Year Ended December 31,
|
||||||||||||
2008
|
2007
|
%
Inc/(Dec)
|
||||||||||
(In millions, except per share data and percentages
and bank branch information)
|
||||||||||||
Total
Income
|
60.3 | 60.2 | 0 | % | ||||||||
Interest
Income
|
59.6 | 58.5 | 2 | % | ||||||||
Total
Expense
|
146.0 | 52.5 | 178 | % | ||||||||
Interest
Expense
|
30.5 | 37.8 | (19 | )% | ||||||||
Net
Interest Income
|
29.1 | 20.7 | 41 | % | ||||||||
Net
Income (Loss)
|
(79.9 | ) | 5.4 | (1,580 | )% | |||||||
Diluted
Income (Loss) Per Share
|
(11.45 | ) | .76 | (1,607 | )% | |||||||
Bank
Branches
|
12 | 12 | - |
26
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, 2009
|
Twelve Months Ended
December 31, 2008
|
Twelve Months Ended
December 31, 2007
|
||||||||||||||||||||||||||
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)
|
$ | 448,394 | $ | 29,777 | 6.63 | % | $ | 461,678 | $ | 32,754 | 7.09 | % | $ | 389,520 | $ | 29,804 | 7.65 | % | ||||||||||
Investment
securities
|
312,966 | 15,506 | 4.95 | 464,927 | 25,456 | 5.48 | 558,742 | 27,178 | 4.86 | |||||||||||||||||||
Other
(2)(5)
|
61,496 | 639 | 1.04 | 54,157 | 1,380 | 2.55 | 31,678 | 1,553 | 4.90 | |||||||||||||||||||
Total
interest-earning assets
|
822,856 | 45,922 | 5.58 | 980,762 | 59,590 | 6.08 | 979,940 | 58,535 | 5.97 | |||||||||||||||||||
Noninterest-earning
assets
|
58,828 | 55,244 | 46,070 | |||||||||||||||||||||||||
Total
Assets
|
$ | 881,684 | $ | 1,036,006 | $ | 1,026,010 | ||||||||||||||||||||||
INTEREST-BEARING
LIABILITIES:
|
||||||||||||||||||||||||||||
Interest
bearing deposits
|
204,629 | 2,316 | 1.13 | 287,772 | 7,645 | 2.66 | 291,049 | 10,338 | 3.55 | |||||||||||||||||||
Time
deposits
|
426,892 | 9,921 | 2.32 | 456,803 | 17,323 | 3.79 | 449,754 | 21,745 | 4.83 | |||||||||||||||||||
Other
borrowings
|
115,869 | 4,866 | 4.20 | 127,343 | 5,555 | 4.36 | 103,112 | 5,710 | 5.54 | |||||||||||||||||||
Total
interest-bearing liabilities
|
747,390 | 17,103 | 2.29 | 871,918 | 30,523 | 3.50 | 843,915 | 37,793 | 4.48 | |||||||||||||||||||
Demand
deposits
|
56,544 | 54,452 | 50,647 | |||||||||||||||||||||||||
Noninterest-bearing
liabilities
|
8,701 | 9,077 | 12,285 | |||||||||||||||||||||||||
Stockholders'
equity (5)
|
69,049 | 100,559 | 119,163 | |||||||||||||||||||||||||
Total
liabilities and stockholders'
equity
|
$ | 881,684 | $ | 1,036,006 | $ | 1,026,010 | ||||||||||||||||||||||
Net
interest income
|
$ | 28,819 | $ | 29,067 | $ | 20,742 | ||||||||||||||||||||||
Interest-rate
spread (3)
|
3.29 | % | 2.58 | % | 1.49 | % | ||||||||||||||||||||||
Net
interest margin (4)
|
3.50 | % | 2.96 | % | 2.12 | % | ||||||||||||||||||||||
Ratio
of average interest-earning assets to average interest bearing
liabilities
|
1.10 | 1.12 | 1.16 |
27
(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.
28
Changes in net interest income may also
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, 2009
Versus
Twelve Months Ended December 31, 2008
Increase (Decrease) Due To
|
||||||||||||
Rate
|
Volume
|
Total
|
||||||||||
Interest-earning
assets:
|
||||||||||||
Loans
|
$ | (2,124 | ) | $ | (853 | ) | $ | (2,977 | ) | |||
Investment
securities
|
(2,464 | ) | (7,486 | ) | (9,950 | ) | ||||||
Other
|
(818 | ) | 77 | (741 | ) | |||||||
Total
|
(5,406 | ) | (8,262 | ) | (13,668 | ) | ||||||
Interest-bearing
liabilities:
|
||||||||||||
Deposit
accounts:
|
||||||||||||
Interest
bearing deposits
|
(4,403 | ) | (926 | ) | (5,329 | ) | ||||||
Time
deposits
|
(6,715 | ) | (687 | ) | (7,402 | ) | ||||||
Other
borrowings
|
(204 | ) | (485 | ) | (689 | ) | ||||||
Total
|
(11,322 | ) | (2,098 | ) | (13,420 | ) | ||||||
Net
interest income
|
$ | 5,916 | $ | (6,164 | ) | $ | (248 | ) |
Twelve Months Ended December 31, 2008
Versus
Twelve Months Ended December 31, 2007
Increase (Decrease) Due To
|
||||||||||||
Rate
|
Volume
|
Total
|
||||||||||
Interest-earning
assets:
|
||||||||||||
Loans
|
$ | (2,181 | ) | $ | 5,131 | $ | 2,950 | |||||
Investment
securities
|
3,464 | (5,186 | ) | (1,722 | ) | |||||||
Other
|
(744 | ) | 571 | (173 | ) | |||||||
Total
|
539 | 516 | 1,055 | |||||||||
Interest-bearing
liabilities:
|
||||||||||||
Deposit
accounts:
|
||||||||||||
Interest
bearing deposits
|
(2,590 | ) | (103 | ) | (2,693 | ) | ||||||
Time
deposits
|
(4,677 | ) | 255 | (4,422 | ) | |||||||
Other
borrowings
|
(1,217 | ) | 1,062 | (155 | ) | |||||||
Total
|
(8,484 | ) | 1,214 | (7,270 | ) | |||||||
Net
interest income
|
$ | 9,023 | $ | (698 | ) | $ | 8,325 |
29
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 allocations.
Specific allocations 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 allocation 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 allocations. 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.
30
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.
As 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, New York State Banking Department, 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.
31
Results
of Operations Fiscal Year Ended December 31, 2009 Compared to Fiscal Year Ended
December 31, 2008.
Net Loss Allocated to Common
Stockholders. Net loss allocated to common stockholders for
the fiscal year ended December 31, 2009 was $7.0 million, or $1.00 per common
share, as compared to a net loss of $79.9 million, or $11.45 per common share,
for the fiscal year ended December 31, 2008. The net loss allocated
to common stockholders in fiscal 2009 was primarily due to the other than
temporary impairment ("OTTI") charges on securities of $17.4 million, or $2.47
per common share, and dividends on our Series A Preferred Stock of $4.8 million,
or $.68 per common share, partially offset by the benefit for income taxes of
$13.2 million, or, $1.87 per common share.
32
The net loss in fiscal 2008 was
primarily due to the OTTI charges on securities of $94.3 million or $13.37 per
common share. The OTTI charge was due to our investment, directly and
indirectly through auction rate securities, in preferred shares of Fannie Mae
and Freddie Mac. These government sponsored agencies were placed into
conservatorship by the federal government in September 2008 resulting in, among
other things, the suspension of dividend payments.
In January 2009, the Bank filed an
arbitration proceeding with the Financial Industry Regulatory Authority against
the issuing financial institution of the auction rate securities in our
investment portfolio. The outcome of the arbitration process, postponed from a
scheduled date in March 2010 and rescheduled for the fall of 2010 and the amount
we may recover, if any, is uncertain at this time.
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, 2009 decreased by $13.7
million to $45.9 million from $59.6 million for the fiscal year ended December
31, 2008. The decrease in total interest income in fiscal 2009 was
primarily due to the $157.9 million decrease in the average amounts of
interest-earning assets to $822.9 million from $980.8 million during fiscal 2008
and the 50 basis point decrease in the average yields earned on such assets to
5.58% from 6.08% during fiscal years 2009 and 2008, respectively.
The following table presents the
composition of interest income for the indicated periods:
Fiscal 2009
|
Fiscal 2008
|
|||||||||||||||
Interest
Income
|
% of
Total
|
Interest
Income
|
% of
Total
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Loans
|
$ | 29,777 | 64.84 | % | $ | 32,754 | 54.96 | % | ||||||||
Investment
Securities
|
15,506 | 33.77 | 25,456 | 42.72 | ||||||||||||
Other
|
639 | 1.39 | 1,380 | 2.32 | ||||||||||||
Total
Interest Income
|
$ | 45,922 | 100.00 | % | $ | 59,590 | 100.00 | % |
Loans, which are inherently risky and
therefore command a higher return than our portfolio of investment securities
and other interest-earning assets, increased to 54.49% of total average
interest-earning assets during fiscal 2009 from
47.07% of total interest-earning assets during fiscal 2008. The average amounts
of investment securities decreased to 38.03% of total average interest-earning
assets during fiscal 2009 from 47.40% of total interest-earning assets during
fiscal 2008. 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.
33
At December 31, 2009, our portfolio of
investment securities included approximately $78.9 million at cost of auction
rate securities and approximately $26.5 million at cost of corporate notes,
including single issuer and pooled trust preferred securities, for which an OTTI
charge has not been recorded in our financial statements. The fair
value of these securities, presently $66.9 million and $18.9 million,
respectively, could be negatively impacted in the future. Were this
to occur, we may be required to reflect a write down of certain of our
securities in future periods as a charge to earnings if any of 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 FHLBNY which is necessary
for it to be a member of the FHLBNY. 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 redeem FHLBNY shares is dependent upon
the redemption practices of the FHLBNY. At December 31, 2009, the FHLBNY neither
placed restrictions on redemption of shares in excess of a member's required
investment in stock, nor stated that it will cease paying dividends. The Bank
did not consider this asset impaired at either December 31, 2009 or
2008.
The following table presents the
composition of interest-earning assets for the indicated periods:
Fiscal 2009
|
Fiscal 2008
|
|||||||||||||||
Average
Amount
|
% of
Total
|
Average
Amount
|
% of
Total
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Loans
|
$ | 448,394 | 54.50 | % | $ | 461,678 | 47.08 | % | ||||||||
Investment
Securities
|
312,966 | 38.03 | 464,927 | 47.40 | ||||||||||||
Other
|
61,496 | 7.47 | 54,157 | 5.52 | ||||||||||||
Total
Interest-Earning Assets
|
$ | 822,856 | 100.00 | % | $ | 980,762 | 100.00 | % |
34
Interest
Expense. Total interest expense for the fiscal year ended
December 31, 2009 deceased by $13.4 million to $17.1 million from $30.5 million
for the fiscal year ended December 31, 2008. The decrease in total interest
expense was due to the $124.5 million decrease in the average amounts of
interest-bearing liabilities to $747.4 million during fiscal 2009 from $871.9
million during fiscal 2008 and the 121 basis point decrease in the average rates
paid on such liabilities to 2.29% from 3.50% during fiscal years 2009 and 2008,
respectively.
The following table presents the
composition of interest expense for the indicated periods:
Fiscal 2009
|
Fiscal 2008
|
|||||||||||||||
Interest
Expense
|
% of
Total
|
Interest
Expense
|
% of
Total
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Interest-Bearing
Deposits
|
$ | 2,316 | 13.54 | % | $ | 7,645 | 25.05 | % | ||||||||
Time
Deposits
|
9,921 | 58.01 | 17,323 | 56.75 | ||||||||||||
Other
Borrowings
|
4,866 | 28.45 | 5,555 | 18.20 | ||||||||||||
Total
Interest Expense
|
$ | 17,103 | 100.00 | % | $ | 30,523 | 100.00 | % |
The following table presents the
composition of interest-bearing liabilities for the indicated
periods:
Fiscal 2009
|
Fiscal 2008
|
|||||||||||||||
Average
Amount
|
% of
Total
|
Average
Amount
|
% of
Total
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Interest-Bearing
Deposits
|
$ | 204,629 | 27.38 | % | $ | 287,772 | 33.00 | % | ||||||||
Time
Deposits
|
426,892 | 57.12 | 456,803 | 52.40 | ||||||||||||
Other
Borrowings
|
115,869 | 15.50 | 127,343 | 14.60 | ||||||||||||
Total
Interest-Bearing Liabilities
|
$ | 747,390 | 100.00 | % | $ | 871,918 | 100.00 | % |
35
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,
2009, net interest income decreased by approximately $250,000 to $28.8 million
from $29.1 million for the fiscal year ended December 31, 2008. The
decrease in net interest income was due to the decrease in the average amounts
of interest-earning assets to $822.9 million during fiscal year 2009 from $980.8
million during fiscal year 2008 and the decrease in the average yields earned on
such assets to 5.58% from 6.08% during fiscal years 2009 and 2008,
respectively. The decrease in net interest income was substantially
offset by the decrease in the average amounts of interest-bearing liabilities to
$747.4 million during fiscal year 2009 from $871.9 million during fiscal year
2008 and the decrease in the average rates paid on such liabilities to 2.29%
from 3.50% during fiscal years 2009 and 2008, respectively. The
Company's interest-rate spread, the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities,
increased by 71 basis points to 3.29% during fiscal 2009 from 2.58% during
fiscal 2008.
Net Interest
Margin. Net interest margin, or net interest income as a
percentage of average interest-earning assets, increased by 54 basis points to
3.50% during fiscal 2009 from 2.96% during fiscal 2008. We seek to
secure and retain customer deposits with competitive products and rates, while
making strategic use of the prevailing interest rate environment to borrow funds
at what we believe to be attractive rates. We invest such deposits
and borrowed funds in what we believe to be a prudent mix of fixed and
adjustable rate loans, investment securities and short-term interest-earning
assets. The increase in net interest margin during fiscal 2009 was
primarily due to the increase in the average amounts of higher yielding loans as
a percentage of our total mix of interest-earning assets.
Non-Interest
Income. Non-interest income consists primarily of realized
gains on sales of marketable securities and service fee income. For the fiscal
year ended December 31, 2009, total non-interest income decreased by $561,000 to
$197,000 from $758,000 for the fiscal year ended December 31, 2008.
36
The following table presents the
composition of non-interest income for the indicated periods:
Fiscal 2009
|
Fiscal 2008
|
|||||||||||||||
Non-Interest
Income
|
% of
Total
|
Non-Interest
Income
|
% of
Total
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Service
Charges on Deposits
|
$ | 490 | 248.73 | % | $ | 585 | 77.18 | % | ||||||||
Investment
Securities Losses
|
(860 | ) | (436.55 | ) | (685 | ) | (90.37 | ) | ||||||||
Other
|
567 | 287.82 | 858 | 113.19 | ||||||||||||
Total
Non-Interest Income
|
$ | 197 | 100.00 | % | $ | 758 | 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. Total non-interest expense for the fiscal
years ended December 31, 2009 and 2008 was $35.2 million and $110.6 million,
respectively, including OTTI charges on investment securities of $17.4 million
and $94.3 million, respectively. Excluding the OTTI charges, total
non-interest expense during fiscal 2009 increased by $1.4 million to $17.7
million from $16.3 million during fiscal 2008. This increase was primarily due
to the increase of $846,000 in our FDIC assessment and expenses related to the
opening of a new bank branch.
The following table presents the
composition of non-interest expense for the indicated period.
Fiscal 2009
|
Fiscal 2008
|
|||||||||||||||
Non-Interest
Expense
|
% of
Total
|
Non-Interest
Expense
|
% of
Total
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Salaries
and Employee Benefits
|
$ | 9,517 | 27.06 | % | $ | 9,366 | 8.46 | % | ||||||||
Net
Occupancy Expense
|
2,150 | 6.11 | 2,079 | 1.88 | ||||||||||||
Equipment
Expense
|
378 | 1.07 | 386 | 0.35 | ||||||||||||
FDIC
Assessment
|
1,928 | 5.48 | 1,082 | 0.98 | ||||||||||||
Data
Processing Expense
|
452 | 1.29 | 442 | 0.40 | ||||||||||||
Other
than temporary impairment charges on securities
|
17,435 | 49.58 | 94,346 | 85.29 | ||||||||||||
Other
|
3,311 | 9.41 | 2,915 | 2.64 | ||||||||||||
Total
Non-Interest Expense
|
$ | 35,171 | 100.00 | % | $ | 110,616 | 100.00 | % |
Provision for Income Tax. For
the fiscal year ended December 31, 2009, the Company recorded a benefit for
income taxes of $13.2 million compared to a benefit for income taxes of $5.8
million for the fiscal year ended December 31, 2008. The tax benefit
in fiscal 2009 includes the benefit from the actual losses realized on sales of
investment securities.
The recorded tax benefits in 2008
relates to the OTTI charge related to the Lehman Brothers corporate note which
was treated as an ordinary loss under the current federal tax code when Lehman
Brothers filed for bankruptcy in September 2008. The OTTI charge
related to Fannie Mae and Freddie Mac securities, both direct investments and
through auction rate securities, were considered capital losses under the
federal tax code. A valuation allowance was recorded on the amount of capital
losses in excess of available capital gains. With the passage by the
U.S. Congress of the Emergency Economic Stabilization Act in October 2008, the
nature of the Fannie Mae and Freddie Mac capital losses were changed to ordinary
losses. Due to this change in the tax law, we carried back as much loss as could
be utilized and recognized a deferred tax benefit for the
remainder.
37
Results
of Operations Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended
December 31, 2007.
Net Income
(Loss). Net loss for the fiscal year ended December 31, 2008
was $79.9 million, or $11.45 per share, as compared to net income of $5.4
million, or $.76 per share, for the fiscal year ended December 31,
2007. The net loss in fiscal 2008 was primarily due to the other than
temporary impairment charges on securities of $94.3 million or $13.37 per
share. The other than temporary impairment charge was due to our
investment, directly and indirectly through auction rate securities, in
preferred shares of Fannie Mae and Freddie Mac. These government sponsored
agencies were placed into conservatorship by the federal government in September
2008 resulting in, among other things, the suspension of dividend payments on
our common stock.
Interest Income. Total
interest income for the fiscal year ended December 31, 2008 increased by $1.1
million to $59.6 million from $58.5 million for the fiscal year ended December
31, 2007. The increase in interest income in fiscal 2008 was
primarily due to the increase in the average amount of higher yielding loans and
the decrease in lower yielding investment securities as a percentage of our
total interest-earning assets.
The following table presents the
composition of interest income for the indicated periods:
Fiscal
2008
|
Fiscal
2007
|
|||||||||||||||
Interest
Income
|
%
of
Total
|
Interest
Income
|
%
of
Total
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Loans
|
$ | 32,754 | 54.96 | % | $ | 29,804 | 50.92 | % | ||||||||
Investment
Securities
|
25,456 | 42.72 | 27,178 | 46.43 | ||||||||||||
Other
|
1,380 | 2.32 | 1,553 | 2.65 | ||||||||||||
Total
Interest Income
|
$ | 59,590 | 100.00 | % | $ | 58,535 | 100.00 | % |
38
Loans grew to 54.96% of our total
average interest-earning assets in fiscal 2008 from 50.92% in fiscal 2007. While
we actively seek to originate new loans with qualified borrowers who meet the
Bank's underwriting standards, our long-term strategy has been to maintain those
standards, sacrificing some current income to avoid possible large future losses
in the loan portfolio.
The following table presents the
composition of interest-earning assets for the indicated periods:
Fiscal 2008
|
Fiscal 2007
|
|||||||||||||||
Average
Amount
|
% of
Total
|
Average
Amount
|
% of
Total
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Loans
|
$ | 461,678 | 47.08 | % | $ | 389,520 | 39.75 | % | ||||||||
Investment
Securities
|
464,927 | 47.40 | 558,742 | 57.02 | ||||||||||||
Other
|
54,157 | 5.52 | 31,678 | 3.23 | ||||||||||||
Total
Interest-Earning Assets
|
$ | 980,762 | 100.00 | % | $ | 979,940 | 100.00 | % |
Interest
Expense. Total interest expense for the fiscal year ended
December 31, 2008 decreased by $7.3 million to $30.5 million from $37.8 million
for the fiscal year ended December 31, 2007. The decrease in interest expense
was due to the decrease in the average rates paid on such liabilities, 3.50% and
4.48% in fiscal years 2008 and 2007, respectively, partially offset by the $28.0
million increase in the average amount of total interest-bearing liabilities
during fiscal year 2008.
The following table presents the
composition of interest expense for the indicated periods:
Fiscal 2008
|
Fiscal 2007
|
|||||||||||||||
Interest
Expense
|
% of
Total
|
Interest
Expense
|
% of
Total
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Interest-Bearing
Deposits
|
$ | 7,645 | 25.05 | % | $ | 10,338 | 27.35 | % | ||||||||
Time
Deposits
|
17,323 | 56.75 | 21,745 | 57.54 | ||||||||||||
Other
Borrowings
|
5,555 | 18.20 | 5,710 | 15.11 | ||||||||||||
Total
Interest Expense
|
$ | 30,523 | 100.00 | % | $ | 37,793 | 100.00 | % |
39
The following table presents the
composition of interest-bearing liabilities for the indicated
periods:
Fiscal 2008
|
Fiscal 2007
|
|||||||||||||||
Average
Amount
|
% of
Total
|
Average
Amount
|
% of
Total
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Interest-Bearing
Deposits
|
$ | 287,772 | 33.00 | % | $ | 291,049 | 34.49 | % | ||||||||
Time
Deposits
|
456,803 | 52.40 | 449,754 | 53.29 | ||||||||||||
Other
Borrowings
|
127,343 | 14.60 | 103,112 | 12.22 | ||||||||||||
Total
Interest-Bearing Liabilities
|
$ | 871,918 | 100.00 | % | $ | 843,915 | 100.00 | % |
Net Interest
Income. The Company's primary source of revenue is net
interest income, or the difference between interest income on earning assets,
such as loans and investment securities, and interest expense on
interest-bearing liabilities such as deposits and borrowings.
For the fiscal year ended December 31,
2008, net interest income increased by approximately $8.3 million to $29.1
million from $20.7 million for the fiscal year ended December 31,
2007. The year over year increase in net interest income was the
result of the 98 basis point decrease in the average rates paid on the average
amount of total interest-bearing liabilities and the 11 basis point increase in
the average yields earned on the average amount of total interest-earning
assets. The Company's interest-rate spread, the difference between
the average yield on interest-earning assets and the average cost of
interest-bearing liabilities, widened by 109 basis points to 2.58% during fiscal
2008 from 1.49% during fiscal 2007.
Net Interest
Margin. Net interest margin, or net interest income as a
percentage of average interest-earning assets, increased by 84 basis points to
2.96% during fiscal 2008 from 2.12% during fiscal 2007. We seek to
secure and retain customer deposits with competitive products and rates, and to
make strategic use of the prevailing interest rate environment to borrow funds
at what we believe to be attractive rates. We invest such deposits
and borrowed funds in a prudent mix of fixed rate and adjustable rate loans,
investment securities and short-term interest-earning assets which provided an
aggregate average yield of 6.08% and 5.97% in fiscal 2008 and 2007,
respectively.
The average amount of loans increased
by $72.2 million to $461.7 million during fiscal 2008 from $389.5 million during
fiscal 2007, though the average yield on such loans decreased by 56 basis points
to 7.09% in fiscal 2008 from 7.65% in fiscal 2007. The average amount of
investment securities decreased by $93.8 million to $464.9 million in fiscal
2008 from $558.7 million in fiscal 2007 and the average yield on investment
securities improved by 62 basis points, to 5.48% in 2008 from 4.86% in 2007. The
average amount of other interest-earning assets, primarily cash and short-term
investments, increased by $22.5 million to $54.2 million in 2008 from $31.7
million in 2007 and returned an average yield of 2.55% and 4.90% during the
fiscal years ended December 31, 2008 and 2007, respectively.
40
Non-Interest
Income. Non-interest income consists primarily of realized
gains on sales of marketable securities and service fee income. For the fiscal
year ended December 31, 2008, total non-interest income decreased by $901,000 to
$758,000 from $1.66 million for the fiscal year ended December 31, 2007. The
decrease is primarily due to realized loss of $685,000 on sales of investment
securities during fiscal 2008.
The following table presents the
composition of non-interest income for the indicated periods:
Fiscal 2008
|
Fiscal 2007
|
|||||||||||||||
Non-Interest
Income
|
% of
Total
|
Non-Interest
Income
|
% of
Total
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Service
Charges on Deposits
|
$ | 585 | 77.18 | % | $ | 658 | 39.66 | % | ||||||||
Investment
Securities (Losses) Gains
|
(685 | ) | (90.37 | ) | 86 | 5.18 | ||||||||||
Other
|
858 | 113.19 | 915 | 55.16 | ||||||||||||
Total
Non-Interest Income
|
$ | 758 | 100.00 | % | $ | 1,659 | 100.00 | % |
Non-Interest
Expense. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees and
other operating expenses associated with the day-to-day operations of the
Company. Total non-interest expense for the fiscal year ended December 31, 2008,
including the other than temporary impairment charges on securities of $94.3
million, increased by $96.3 million to $110.6 million from $14.3 million for the
fiscal year ended December 31, 2007. Excluding the other than
temporary impairment charges, total non-interest expense for fiscal 2008
increased by $2.0 million to $16.3 million. This increase was primarily due to
the increase of approximately $1.0 million in our FDIC assessment.
The following table presents the
composition of non-interest expense for the indicated period.
Fiscal
2008
|
Fiscal
2007
|
|||||||||||||||
Non-Interest
Expense
|
%
of
Total
|
Non-Interest
Expense
|
%
of
Total
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Salaries
and Employee Benefits
|
$ | 9,366 | 8.46 | % | $ | 8,971 | 62.66 | % | ||||||||
Net
Occupancy Expense
|
2,079 | 1.88 | 2,050 | 14.32 | ||||||||||||
Equipment
Expense
|
386 | 0.35 | 80 | 0.56 | ||||||||||||
FDIC
Assessment
|
1,082 | 0.98 | 86 | 0.60 | ||||||||||||
Data
Processing Expense
|
442 | 0.40 | 417 | 2.91 | ||||||||||||
Other
than temporary impairment charges on securities
|
94,346 | 85.29 | — | |||||||||||||
Other
|
2,915 | 2.64 | 2,714 | 18.95 | ||||||||||||
Total
Non-Interest Expense
|
$ | 110,616 | 100.00 | % | $ | 14,318 | 100.00 | % |
41
Provision for Income
Tax. For the fiscal year ended December 31, 2008, the Company
recorded an income tax benefit of $5.8 million as compared to income tax expense
of $2.4 million for the fiscal year ended December 31, 2007. The tax benefit
recorded in fiscal 2008 relates to the other than temporary impairment charge on
securities, including (i) a Lehman Brothers corporate note, (ii) direct
investments in Fannie Mae and Freddie Mac securities, and (iii) indirect
investments in Fannie Mae and Freddie Mac securities through our investments in
certain auction rate securities and is a carryback claim. The
Emergency Economic Stabilization Act of 2008 (the "EESA"), enacted on October 3,
2008, provides for, among other things, the characterization of the losses on
direct and indirect investments in Fannie Mae and Freddie Mac securities as
ordinary losses which may be used to offset income taxes on ordinary
income.
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. The Bank does not, as a
rule, 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. 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.
42
The following is a summary of held to
maturity investment securities:
December 31, 2009
|
||||||||||||||||
Amortized
Cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Fair
value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
U.S.
Government Agencies
|
$ | 340 | $ | — | $ | (3 | ) | $ | 337 |
December 31, 2008
|
||||||||||||||||
Amortized
Cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Fair
value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
U.S.
Government Agencies
|
$ | 360 | $ | 3 | $ | (1 | ) | $ | 362 |
The following is a summary of
available-for-sale investment securities:
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 |
43
December 31, 2008
|
||||||||||||||||
Amortized
Cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Fair
value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
U.S.
Government Agencies
|
$ | 91,429 | $ | 72 | $ | (380 | ) | $ | 91,121 | |||||||
Mortgage-backed
securities
|
83,882 | 1,037 | (1,061 | ) | 83,858 | |||||||||||
Corporate
notes
|
51,150 | 112 | (13,138 | ) | 38,124 | |||||||||||
Single
Issuer Trust Preferred CDO
|
3,000 | — | (1,794 | ) | 1,206 | |||||||||||
Pooled
Trust Preferred CDO
|
10,000 | — | (7,006 | ) | 2,994 | |||||||||||
Municipal
securities
|
1,973 | 125 | (495 | ) | 1,603 | |||||||||||
Auction
rate securities
|
101,110 | — | (38,030 | ) | 63,080 | |||||||||||
Marketable
equity securities and other
|
16,708 | 80 | (1,238 | ) | 15,550 | |||||||||||
Totals
|
$ | 359,252 | $ | 1,426 | $ | (63,142 | ) | $ | 297,536 |
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.
44
The following table shows the
outstanding auction rate securities at December 31, 2009 and 2008:
2009
|
2008
|
|||||||||||||||
Amortized
Cost
|
Fair Value
|
Amortized
Cost
|
Fair Value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Federal
National Mortgage Association Preferred Shares
|
$ | — | $ | — | $ | 2,223 | $ | 728 | ||||||||
Federal
Home Loan Mortgage Corporation Preferred Shares
|
1,895 | 1,895 | 3,904 | 704 | ||||||||||||
Preferred
Shares of Money Center Banks
|
65,000 | 53,767 | 65,000 | 32,789 | ||||||||||||
Other
Assets of Money Center Banks
|
10,000 | 9,280 | 10,000 | 8,876 | ||||||||||||
Public
Utility Debt and Equity Securities
|
2,000 | 2,000 | 15,000 | 15,000 | ||||||||||||
Other
|
- | — | 4,983 | 4,983 | ||||||||||||
Totals
|
$ | 78,895 | $ | 66,942 | $ | 101,110 | $ | 63,080 | ||||||||
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, 2009, 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. The final market sector,
noted above as "other", is collateralized by long term debt of a seasoned issuer
that deals in business machinery.
In determining whether there is an
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, 2009, the
auction rate securities have continued to pay interest at the highest rate as
stipulated in the original prospectus, except for the Federal Home Loan Mortgage
Corporation ("Freddie Mac").
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, 2009 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.
45
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 five years from December 31, 2009 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 50 - 100 basis
points depending on how far out the actual maturity date was in excess of 10
years (maturity dates range from 16.5 years to 25 years). We then
added the 15-year swap rate at December 31, 2009, and finally added 50 or 100
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 (50
basis points for securities above investment grade and 100 basis points for
securities slightly below investment grade). The final discount rates ranged
from 4.4% - 6.9%.
For the Freddie Mac securities that we
are holding as of December 31, 2009, we did not perform a discounted cash flow
analysis. These securities are no longer paying interest so a discounted cash
flow analysis would show a value far less than what would be an appropriate fair
value. We believe that for these securities an analysis of the
underlying value of the preferred shares is the best way to value these
securities.
Based on these analyses, the discounted
cash flows ranged from a total of approximately $62.5 million to $73.3 million.
We believe that of these scenarios, the most likely scenario as of December 31,
2009 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 fair value of the
underlying preferred securities at maturity. The calculated fair values using
the par value approach was $65.6 million as compared to $62.5 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 $67 million. As our current fair value falls within the range
of the discounted cash flows analyses performed and higher than the most likely
scenarios, we believe that our current fair value is an appropriate
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,
2009.
46
Based upon our methodology for
determining the fair value of the auction rate securities, we recorded an OTTI
charge totaling $2.0 million related to the Freddie Mac auction rate securities
for the year ended December 31, 2009. We concluded that, as of
December 31, 2009, 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, 2009, we had six
auction rate securities totaling $25.9 million which were below investment
grade. At December 31, 2008, we had four auction rate securities
totaling $6.1 million which were below investment grade.
During the year ended December 31,
2009, approximately $18.0 million of auction rate securities were redeemed with
no gain or loss recognized. During the year ended December 31, 2009,
$2.2 million of Federal National Mortgage Association (Fannie Mae) auction rate
securities were converted into the underlying preferred shares and
simultaneously sold recognizing a loss totaling $1.4 million in addition to the
OTTI charge recognized in 2008.
For the year ended December 31, 2008,
we valued the auction rate securities by valuing the underlying
collateral. During the year ended December 31, 2008, the Federal
government placed Fannie Mae and Freddie Mac into receivership and suspended
dividend payments. As a result of placing Fannie Mae and Freddie Mac
into receivership, we considered the auction rate securities collateralized by
these quasi-government agencies as impaired and recognized a credit related
impairment charge totaling $80.2 million. The OTTI charge was
calculated based upon the fair market value of the underlying preferred
shares. We concluded that any further decline in the market value as
of December 31, 2008 was caused by market interest volatility, a significant
widening of credit spreads across markets for these securities, and illiquidity
and uncertainty in the financial markets.
At both December 31, 2009 and 2008, 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 $2.9 million,
respectively, and a fair value of $1.0 million and $1.2 million,
respectively. There are no tranches associated with this security.
When this asset was acquired it was an investment grade security but has
subsequently deteriorated to a non-rated security. The issuer of this
security is experiencing deterioration of its loan portfolio and net losses, but
appears to be prepared to rectify these adverse conditions as the controlling
family recently contributed an amount to ensure this institution remains well
capitalized. This security has not defaulted nor deferred any
interest payments as all interest has been paid as contractually
stipulated. Based on an evaluation of the OTTI factors (as fully
described above) during the year ended December 31, 2009, the Company recorded a
credit related OTTI charge of $1.9 million. The OTTI charge was
determined using a price quote from an independent broker (Level 2) as compared
to the amortized cost as of December 31, 2009.
47
At both December 31, 2009 and 2008, we
had one pooled trust preferred CDO ("TPCDO") with an amortized cost of $6.5
million (after OTTI charges) and $10.0 million, respectively, and a fair value
of $150,000 and $3.0 million, respectively. We own a Class B tranche
of the TPCDO, which was considered below investment grade at both December 31,
2009 and 2008. During the year ended December 31, 2009, we recognized
a credit related impairment charge totaling $3.5 million to reduce the amortized
cost to $6.5 million. For the period ended September 30, 2009, an
independent third party analyzed the collateral waterfall. Based upon
this analysis, the Company recognized an impairment charge of $3.0
million. At December 31, 2009, we obtained discounted cash flow
scenarios from independent third parties. We used the most conservative result
in order to value our TPCDO, which we believe also reflects the most likely
expected cash flow. The factors used to value the TPCDO were a
discount rate of 1.9%, a prepayment speed of 0.00%, and default ratios based
upon the Texas ratios as noted.
Historically, there have been no
prepayments on this security but the issuers into the TPCDO can prepay at their
discretion after January 2008. We used prepayment speed range of 0%
to 1% in the cash flow analyses. The cash flow analysis that we
utilized in valuing the TPCDO used a 0% prepayment speed for the next two
years. As there have been no prepayments and we continue to expect
the underlying issuers in the TPCDO to focus on improving capital and liquidity,
we expect prepayments to be minimal on this security. We factored in
a nominal prepayment assumption into our cash flow analysis as the underlying
issuers have the right to prepay.
The discount rate used in our analysis
was the effective interest rate implicit in the security at the date of
acquisition.
For purposes of completing the cash
flow analysis, defaults and deferrals are treated in the same
manner. At December 31, 2009, there are five institutions in deferral
status which were excluded from the discounted cash flow analysis. In
order to estimate potential defaults and deferrals we segregated the underlying
issuers by the Texas ratio. This ratio is a key indicator of the
health of the institution and the likelihood of failure. The
underlying issuers were pooled based upon their Texas ratio as if the underlying
issuer had already defaulted. There was one underlying issuer with a
Texas ratio greater than 100% for which it was assumed to default at the next
scheduled payment date. This security was included with the deferred
issuers in the cash flow analysis. The second pool of underlying
issuers were those institutions with a Texas ratio of 75.00% to
99.99%. The rate of deferral for these institutions was
35%. The third pool of underlying issuers was those institutions that
had a Texas ratio between 50.00% and 74.99%. The rate of deferral for
these institutions was 20%. The 35% and 20% rates were used as they
are representative of current industry statistics of bank
failures. The final group of underlying issuers is comprised of those
with a Texas ratio of less than 49.99%, and a money center bank with a ratio
slightly above 50.00%. As these banks are considered healthy, we
concluded that there is minimal risk of default and assigned a zero default
assumption in the cash flow analyses.
Based upon the discounted cash flow
analysis, an additional credit related OTTI charge totaling $529,000 was
recognized during the quarter ended December 31, 2009, resulting in a total
credit related impairment charge of $3.5 million for this security for the year
ended December 31, 2009.
48
The table below reflects the number and
amount of single issue debt securities below investment grade and the lowest
rating by security type at December 31, 2009 (in thousands):
Amortized
Cost
|
Fair
Value
|
Unrealized
Gain (Loss)
|
Lowest Credit
Rating
|
||||||||||
Single
Issuer Corporate
Bonds:
|
|||||||||||||
Airline
#1
|
$ | 1,597 | $ | 1,594 | $ | (3 | ) |
Ba2
|
|||||
Airline
#2
|
552 | 552 | — |
No
rating
|
|||||||||
Automobile
|
800 | 1,506 | 706 |
D
|
|||||||||
Commercial
|
495 | 435 | (60 | ) |
No
rating
|
||||||||
Student
Lender
|
5,000 | 3,920 | (1,080 | ) |
Ba1
|
||||||||
Trust
Preferred Security
|
1,021 | 1,021 | — |
No
rating
|
|||||||||
Auction
Rate Securities:
|
|||||||||||||
Federal
Home Loan Bank Corporation
|
1,895 | 1,895 | — |
Ca
|
|||||||||
Money
Center Banks
|
24,000 | 17,537 | (6,463 | ) |
Ba3
|
||||||||
Pooled
Issuers:
|
|||||||||||||
TPCDO
|
6,463 | 150 | (6,313 | ) |
No
rating
|
||||||||
The below investment grade Federal Home
Loan Mortgage Corporation auction rate securities are comprised of two
securities. 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.
The below investment grade for the
student lender was one factor evaluated in determining whether it was
appropriate to recognize an 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, 2009, all other single
issuer debt securities had a credit rating of investment grade.
49
During the year ended December 31,
2009, the Company recorded OTTI charges related to four single issuer corporate
bonds totaling $9.1 million. The Company evaluated the length of time
and extent the amortized cost exceeded fair value and the credit rating of the
issuer. During 2009, two issuers filed for bankruptcy which resulted
in a credit related OTTI charge of $7.2 million. The Company
concluded that the financial deterioration of these two issuers resulted in a
credit loss. The preponderance of the remainder of the loss was due
to an airline company bond. The airline company issuer had not shown
improved earnings and operations since a merger in the fourth quarter of
2008. Since there was no improvement, the Company concluded full
receipt of the principal was unlikely and recorded a credit related
OTTI. The amounts of the OTTI charges were determined based upon
broker quotes (Level 2).
At December 31, 2009 and 2008, the
Company owned preferred and common stock (collectively
"equities"). The fair value of the equities was determined by quoted
market prices; unrealized loss was determined by comparing the cost of the
equity to its fair value. In order to determine whether OTTI should
be recognized, we evaluated the length of time and the extent to which the fair
value was 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. Based upon the length of time these securities
were in an unrealized loss position, the amount by which the cost exceeded fair
value, and the financial prospects of the issuer, we recorded a $0.8 million
OTTI charge during the fiscal year ended December 31, 2009.
The table below details certain
information related to the equity securities as of December 31, 2009 (in
thousands):
Industry
|
Cost
|
Fair
Value
|
Unrealized
Gain (Loss)
|
|||||||||||
Common
|
Telecommunications
|
$ | 91 | $ | 94 | $ | 3 | |||||||
Airline
|
862 | 862 | — | |||||||||||
Preferred
|
Airline
|
61 | 61 | — | ||||||||||
Flooring
and other
|
35 | 34 | (1 | ) | ||||||||||
Mining
|
27 | 91 | 64 | |||||||||||
Money
Center Banks
|
2,008 | 1,984 | (24 | ) |
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, 2009 (in
thousands):
50
Less than 12 months
|
12 months or longer
|
Total
|
||||||||||||||||||||||
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
|||||||||||||||||||
Description
of Securities
|
||||||||||||||||||||||||
U.S.
Treasury Notes
|
$ | 30,048 | $ | 65 | $ | — | $ | — | $ | 30,048 | $ | 65 | ||||||||||||
U.S.
Government Agencies
|
40,518 | 748 | 19,948 | 45 | 60,466 | 793 | ||||||||||||||||||
Mortgage-backed
securities
|
7,932 | 43 | 15,661 | 667 | 23,593 | 710 | ||||||||||||||||||
Corporate
notes
|
1,613 | 13 | 7,522 | 2,298 | 9,135 | 2,311 | ||||||||||||||||||
Pooled
Trust Preferred CDO
|
— | — | 150 | 6,313 | 150 | 6,313 | ||||||||||||||||||
Auction
rate securities
|
— | — | 58,047 | 11,953 | 58,047 | 11,953 | ||||||||||||||||||
Subtotal,
debt securities
|
80,111 | 869 | 101,328 | 21,276 | 181,439 | 22,145 | ||||||||||||||||||
Marketable
equity securities and other
|
— | — | 1,044 | 26 | 1,044 | 26 | ||||||||||||||||||
Total
temporarily impaired
securities
|
$ | 80,111 | $ | 869 | $ | 102,372 | $ | 21,302 | $ | 182,483 | $ | 22,171 |
The Company had a total of 52 debt
securities with a fair market value of $123.4 million which were temporarily
impaired at December 31, 2009. The total unrealized loss on these
securities was $10.2 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 $12.0 million
is on 10 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 6.2%
of total assets at December 31, 2009. Therefore, the unrealized
losses associated with these securities are not considered to be other than
temporary.
The Company also had 2 equity
securities with an aggregate fair market value of $1.0 million which were
temporarily impaired at December 31, 2009. The total unrealized loss
on these securities was $26,000. The preponderance of the unrealized
loss for marketable equity securities and other is a $24,000 unrealized loss at
December 31, 2009 on one money center bank preferred issue. As the
stock market declined in the first and second quarter of 2009, especially
related to the financial sector, the Company's investments decreased in
value. At March 31, 2009, the unrealized loss totaled
$348,000. subsequent to March 31, 2009, the fair value of this
security has rebounded to an unrealized position of $24,000 at December 31,
2009. The issuer of this preferred equity security has raised
sufficient capital to repay the Troubled Asset Relief Program ("TARP") funds,
continue to pay its dividend, maintain its credit rating and remain
well-capitalized. Based upon these factors, coupled with the
increasing stock market prices, especially in the financial sector, the Company
does not believe an OTTI charge is warranted at December 31,
2009.
51
The following table indicates the
length of time individual securities have been in a continuous unrealized loss
position at December 31, 2008 (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
|
$ | 71,241 | $ | 378 | $ | 5,072 | $ | 2 | $ | 76,313 | $ | 380 | ||||||||||||
Mortgage-backed
securities
|
6,135 | 58 | 21,769 | 1,003 | 27,904 | 1,061 | ||||||||||||||||||
Corporate
notes
|
14,480 | 3,407 | 4,100 | 9,731 | 18,580 | 13,138 | ||||||||||||||||||
Single
Issuer Trust Preferred CDO
|
— | — | 1,149 | 1,794 | 1,149 | 1,794 | ||||||||||||||||||
Pooled
Trust Preferred CDO
|
— | — | 2,981 | 7,006 | 2,981 | 7,006 | ||||||||||||||||||
Municipal
securities
|
— | — | 1,478 | 495 | 1,478 | 495 | ||||||||||||||||||
Auction
rate securities
|
38,098 | 38,030 | — | — | 38,098 | 38,030 | ||||||||||||||||||
Subtotal,
debt securities
|
129,954 | 41,873 | 36,549 | 20,031 | 166,503 | 61,904 | ||||||||||||||||||
Marketable
equity securities and other
|
1,681 | 332 | 900 | 906 | 2,581 | 1,238 | ||||||||||||||||||
Total
temporarily impaired
securities
|
$ | 131,635 | $ | 42,205 | $ | 37,449 | $ | 20,937 | $ | 169,084 | $ | 63,142 | ||||||||||||
The Company had a total of 63 debt
securities with an aggregate fair market value of $128.4 million which were
temporarily impaired at December 31, 2008. The total unrealized loss on these
securities was $23.9 million, which is attributable to market interest
volatility, the continued illiquidity of the debt markets, and uncertainty in
the financial markets which have decreased the market value of these
securities. The remaining unrealized loss of $38.0 million is on 14
auction rate securities which have declined in value due to auction failures
beginning in February 2008. We have the intent to hold these
securities to maturity and will not be required to sell these securities, due to
our ratio of cash and cash equivalents to total assets of approximately 10.85%
of total assets at December 31, 2008. Therefore, the unrealized
losses associated with these securities are not considered to be other than
temporary.
The Company also had 10 equity
securities with an aggregate fair market value of $2.6 million which were
temporarily impaired at December 31, 2008. The total unrealized loss
on these securities was $1.2 million.
52
The amortized cost and fair value of
investment securities available for sale and held to maturity, by contractual
maturity, at December 31, 2009 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, 2009
|
||||||||||||||||
Available for Sale
|
Held to Maturity
|
|||||||||||||||
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Due
in one year or less
|
$ | 23,070 | $ | 23,153 | $ | — | $ | — | ||||||||
Due
after one through five years
|
56,766 | 56,101 | — | — | ||||||||||||
Due
after five through ten years
|
21,857 | 21,784 | — | — | ||||||||||||
Due
after ten years
|
188,098 | 181,807 | 340 | 337 | ||||||||||||
Auction
rate securities
|
78,895 | 66,942 | — | — | ||||||||||||
Marketable
equity securities and other
|
7,648 | 7,691 | — | — | ||||||||||||
Totals
|
$ | 376,334 | $ | 357,478 | $ | 340 | $ | 337 |
Gross
gains realized on the sales of investment securities for the years ended
December 31, 2009 and 2008 were approximately $553,000 and $313,000,
respectively. Gross
losses were approximately $1,413,000 and $998,000 for the years ended December
31, 2009 and 2008, respectively. During the year ended December 31,
2009, we sold the Fannie Mae auction rate securities and certain corporate
notes. During the year ended December 31, 2008, we sold our preferred
shares in Fannie Mae and Freddie Mac, the corporate note for which we took an
OTTI charge, U.S. Treasuries, U.S. Agencies and certain corporate
notes.
As of December 31, 2009 and 2008,
securities sold under agreements to repurchase with a book value of
approximately $50.0 million and $59.5 million, respectively, were
outstanding. The book value of the securities pledged for these
repurchase agreements was $55.60 million and $69.60 million, respectively. As of
December 31, 2009 and 2008, the Company did not own investment securities of any
one issuer where the carrying value exceeded 10% of stockholders'
equity.
53
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,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
Cost
|
Fair
Value
|
Cost
|
Fair
Value
|
Cost
|
Fair
Value
|
|||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
Available-For-Sale
|
||||||||||||||||||||||||
U.S.
Treasury Notes
|
$ | 50,236 | $ | 50,206 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
U.S.
Government Agencies
|
76,259 | 75,525 | 91,466 | 91,158 | 272,789 | 272,318 | ||||||||||||||||||
Mortgage-backed
securities
|
134,810 | 136,043 | 83,845 | 83,821 | 53,886 | 53,057 | ||||||||||||||||||
Corporate
notes
|
19,029 | 17,729 | 51,150 | 38,124 | 71,147 | 67,601 | ||||||||||||||||||
Single
Issuer Trust Preferred CDO
|
1,021 | 1,021 | 3,000 | 1,206 | ||||||||||||||||||||
Pooled
Trust Preferred CDO
|
6,463 | 150 | 10,000 | 2,994 | ||||||||||||||||||||
Municipal
securities
|
1,973 | 2,171 | 1,973 | 1,603 | 1,973 | 3,004 | ||||||||||||||||||
Auction
rate securities
|
78,895 | 66,942 | 101,110 | 63,080 | 184,597 | 184,597 | ||||||||||||||||||
Marketable
equity securities
and other
|
7,648 | 7,691 | 16,708 | 15,550 | 18,698 | 18,384 | ||||||||||||||||||
Total
|
$ | 376,334 | $ | 357,478 | $ | 359,252 | $ | 297,536 | $ | 603,090 | $ | 598,961 | ||||||||||||
Held-To-Maturity
|
||||||||||||||||||||||||
U.S.
Government Agencies
|
$ | 340 | $ | 337 | $ | 360 | $ | 362 | $ | 395 | $ | 405 |
54
The following tables summarize the
Company's available-for-sale and held- to-maturity securities:
December 31, 2009
|
||||||||||||
Weighted
Average
Yield
|
Cost
|
Fair Value
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Available-For-Sale
|
||||||||||||
U.S.
Treasury Notes
|
||||||||||||
Due
within one year
|
1.93 | % | $ | 20,123 | $ | 20,158 | ||||||
Due
after one through five years
|
0.91 | 30,113 | 30,048 | |||||||||
50,236 | 50,206 | |||||||||||
U.S.
Government Agencies Obligations
|
||||||||||||
Due
after one year through five years
|
3.26 | 9,973 | 10,028 | |||||||||
Due
after five years through ten years
|
4.38 | 20,567 | 20,526 | |||||||||
Due
after ten years
|
6.02 | 45,719 | 44,971 | |||||||||
76,259 | 75,525 | |||||||||||
Municipal
Obligations
|
||||||||||||
Due
after ten years
|
9.41 | 1,973 | 2,171 | |||||||||
1,973 | 2,171 | |||||||||||
Mortgage-backed
securities
|
||||||||||||
Due
after one year through five years
|
4.43 | 6,768 | 6,946 | |||||||||
Due
after five years through ten years
|
4.82 | 654 | 689 | |||||||||
Due
after ten years
|
5.64 | 127,388 | 128,408 | |||||||||
134,810 | 136,043 | |||||||||||
Corporate
Notes (1)
|
||||||||||||
Due
within one year
|
3.38 | 3,442 | 3,430 | |||||||||
Due
after one year through five years
|
5.70 | 9,912 | 9,079 | |||||||||
Due
after five years through ten years
|
8.45 | 1,188 | 1,122 | |||||||||
Due
after ten years
|
8.53 | 11,971 | 5,269 | |||||||||
26,513 | 18,900 | |||||||||||
Auction
rate and other securities
|
||||||||||||
Common
Stocks
|
0.11 | 953 | 956 | |||||||||
Preferred
Stocks
|
6.77 | 2,131 | 2,170 | |||||||||
Auction
Rate Securities
|
4.90 | 78,895 | 66,942 | |||||||||
Money
market funds
|
0.31 | 2,250 | 2,250 | |||||||||
Federal
Home Loan Bank Stock
|
7.43 | 2,314 | 2,315 | |||||||||
86,543 | 74,633 | |||||||||||
$ | 376,334 | $ | 357,478 | |||||||||
Held-To-Maturity
|
||||||||||||
U.S.
Government Agencies Obligations
|
||||||||||||
Due
after ten years
|
6.58 | 340 | 337 | |||||||||
$ | 340 | $ | 337 |
(1)
Includes Single Issuer Trust Preferred CDO and Pooled Trust Preferred
CDO
55
Federal Home Loan Bank
Stock. The Bank owns stock of the FHLBNY which is necessary
for it to be a member of the FHLBNY. Membership requires the purchase
of stock equal to 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 redeem FHLBNY shares is dependent upon
the redemption practices of the FHLBNY. At December 31, 2009, the FHLBNY neither
placed restrictions on redemption of shares in excess of a member's required
investment in stock, nor stated that it will cease paying dividends. The Bank
did not consider this asset impaired at either December 31, 2009 or
2008.
56
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, 2009, 2008 and 2007, the Company
had total loans, net of unearned income of $430.3 million, $466.8 million and
$434.8 million, respectively, and an allowance for loan losses of $11.4 million,
$9.2 million and $4.2 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 and 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.
57
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, 2009 and 2008, approximately $50.7
million and $68.4 million, respectively, or 11.7% and 14.6%, 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, 2009 and 2008, approximately
$129.9 million and $140.2 million, respectively, or 30.1% and 30.0%,
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 December 31, 2009 and
2008, approximately 14% and 13%, respectively, of the Bank's residential
one-to-four family owner-occupied first mortgage portfolio were ARMs and
approximately 86% and 87%, respectively, 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.
58
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, 2009
and 2008,
the Company's loan portfolio was comprised of $250.8 million and $259.3 million,
respectively, or 58.2% and 55.4%, respectively, of 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, 2009, the Bank was
generally not permitted to make loans to one borrower in excess of approximately
$13.5 million, with an additional amount of approximately $9.0 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 $13.5 million. At December 31, 2009, 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.
59
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.
60
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,
|
||||||||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||
Amount
|
%
of
Total
|
Amount
|
%
of
Total
|
Amount
|
%
of
Total
|
Amount
|
%
of
Total
|
Amount
|
%
of
Total
|
|||||||||||||||||||||||||||||||
Commercial
and professional
loans
|
$ | 50,672 | 11.7 | % | $ | 68,418 | 14.6 | % | $ | 76,132 | 17.4 | % | $ | 63,331 | 17.0 | % | $ | 33,370 | 10.8 | % | ||||||||||||||||||||
Secured
by real estate
|
||||||||||||||||||||||||||||||||||||||||
1 -
4 family
|
129,925 | 30.1 | 140,150 | 30.0 | 142,140 | 32.6 | 139,611 | 37.5 | 139,931 | 45.1 | ||||||||||||||||||||||||||||||
Multi
family
|
7,432 | 1.7 | 4,031 | 0.9 | 3,506 | 0.8 | 4,013 | 1.1 | 2,874 | 0.9 | ||||||||||||||||||||||||||||||
Non-residential
(commercial)
|
242,927 | 56.4 | 254,831 | 54.4 | 212,850 | 48.8 | 160,417 | 43.1 | 132,142 | 42.6 | ||||||||||||||||||||||||||||||
Consumer
|
396 | 0.1 | 460 | 0.1 | 1,691 | 0.4 | 4,763 | 1.3 | 2,018 | 0.6 | ||||||||||||||||||||||||||||||
Total
loans
|
431,352 | 100.0 | % | 467,890 | 100.0 | % | 436,319 | 100.0 | % | 372,135 | 100.0 | % | 310,335 | 100.0 | % | |||||||||||||||||||||||||
Less:
Allowance for
loan losses
|
(11,416 | ) | (9,204 | ) | (4,183 | ) | (3,771 | ) | (3,266 | ) | ||||||||||||||||||||||||||||||
Unearned
fees
|
(1,003 | ) | (1,137 | ) | (1,534 | ) | (1,212 | ) | (1,105 | ) | ||||||||||||||||||||||||||||||
Loans,
net
|
$ | 418,933 | $ | 457,549 | $ | 430,602 | $ | 367,152 | $ | 305,964 |
61
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 and loans past due more than 90 days still accruing
were $0 and $99,000 at December 31, 2009 and 2008, respectively.
December
31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||
Nonaccrual
loans:
|
||||||||||||||||||||
Commercial
and professional
loans
|
$ | 1,700 | $ | — | $ | — | $ | — | $ | — | ||||||||||
Consumer
|
— | — | — | — | 3 | |||||||||||||||
Secured
by real estate
|
12,210 | 130 | 153 | 201 | 253 | |||||||||||||||
Total
nonaccrual loans
|
13,910 | 130 | 153 | 201 | 256 | |||||||||||||||
Accruing
loans delinquent 90
days or more
|
— | 99 | 314 | — | 74 | |||||||||||||||
Total
nonperforming loans
|
$ | 13,910 | $ | 229 | $ | 467 | $ | 201 | $ | 330 | ||||||||||
Total
nonperforming loans to
total assets
|
1.54 | % | .02 | % | .04 | % | .02 | % | .03 | % |
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, 2009
|
||||||||||||
Allowance
for
Loan
Losses
|
Percent
of
Allowance
|
Percent of
Total Loans
|
||||||||||
Commercial
and professional loans
|
$ | 1,774 | 15.5 | % | 11.7 | % | ||||||
Secured
by real estate
|
||||||||||||
1 -
4 family
|
651 | 5.7 | 30.1 | |||||||||
Multi
family
|
30 | 0.3 | 1.7 | |||||||||
Non-residential
|
8,194 | 71.7 | 56.4 | |||||||||
Consumer
and other
|
7 | 0.1 | 0.1 | |||||||||
General
allowance (1)
|
760 | 6.7 | ||||||||||
Total
allowance for loan losses
|
$ | 11,416 | 100.0 | % | 100.0 | % |
(1)The
allowance for loan losses is allocated to specific loans as
necessary.
62
December
31, 2008
|
||||||||||||
Allowance
for
Loan
Losses
|
Percent
of
Allowance
|
Percent of
Total Loans
|
||||||||||
Commercial
and professional loans
|
$ | 898 | 9.7 | % | 14.6 | % | ||||||
Secured
by real estate
|
||||||||||||
1 -
4 family
|
696 | 7.6 | 30.0 | |||||||||
Multi
family
|
19 | 0.2 | 0.9 | |||||||||
Non-residential
|
7,512 | 81.6 | 54.4 | |||||||||
Consumer
and other
|
4 | 0.1 | 0.1 | |||||||||
General
allowance (1)
|
75 | 0.8 | ||||||||||
Total
allowance for loan losses
|
$ | 9,204 | 100.0 | % | 100.0 | % |
(1)The
allowance for loan losses is allocated to specific loans as
necessary.
December 31, 2007
|
||||||||||||
Allowance
for Loan
Losses
|
Percent of
Allowance
|
Percent of
Total Loans
|
||||||||||
Commercial
and professional loans
|
$ | 929 | 22.2 | % | 17.4 | % | ||||||
Secured
by real estate
|
||||||||||||
1 -
4 family
|
591 | 14.2 | 32.6 | |||||||||
Multi
family
|
43 | 1.0 | 0.8 | |||||||||
Non-residential
|
2,597 | 62.1 | 48.8 | |||||||||
Consumer
and other
|
21 | 0.5 | 0.4 | |||||||||
General
allowance (1)
|
3 | 0.0 | ||||||||||
Total
allowance for loan losses
|
$ | 4,183 | 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, 2009
|
||||||||||||||||
Within
1 Year
|
1 to
5 Years
|
After
5 Years
|
Total
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Fixed
Rate
|
||||||||||||||||
Commercial
and professional
|
$ | 7,904 | $ | 18,561 | $ | 893 | $ | 27,358 | ||||||||
Non-residential
|
25,556 | 7,100 | 47,303 | 79,959 | ||||||||||||
Total
fixed rate
|
$ | 33,460 | $ | 25,661 | $ | 48,196 | $ | 107,317 | ||||||||
Adjustable
Rate
|
||||||||||||||||
Commercial
and professional
|
13,215 | 7,028 | 3,071 | 23,314 | ||||||||||||
Non-residential
|
61,280 | 23,624 | 78,064 | 162,968 | ||||||||||||
Total
adjustable rate
|
$ | 74,495 | $ | 30,652 | $ | 81,135 | $ | 186,282 | ||||||||
Total
|
$ | 107,955 | $ | 56,313 | $ | 129,331 | $ | 293,599 |
63
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,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Average
loans outstanding
|
$ | 448,394 | $ | 461,678 | $ | 389,520 | $ | 327,210 | $ | 287,178 | ||||||||||
Allowance
at beginning of
period
|
9,204 | 4,183 | 3,771 | 3,266 | 2,927 | |||||||||||||||
Charge-offs:
|
||||||||||||||||||||
Commercial
and other loans
|
1,169 | 1 | — | 42 | 26 | |||||||||||||||
Real
estate loans
|
6,025 | — | — | — | — | |||||||||||||||
Total
loans charged-off
|
7,194 | 1 | — | 42 | 26 | |||||||||||||||
Recoveries:
|
||||||||||||||||||||
Commercial
and other loans
|
106 | 118 | 57 | 137 | 185 | |||||||||||||||
Real
estate loans
|
— | — | — | — | — | |||||||||||||||
Total
loans recovered
|
106 | 118 | 57 | 137 | 185 | |||||||||||||||
Net
recoveries (charge-offs)
|
(7,088 | ) | 117 | 57 | 95 | 159 | ||||||||||||||
Provision
for loan losses charged
to operating expenses
|
9,300 | 4,904 | 355 | 410 | 180 | |||||||||||||||
Allowance
at end of period
|
$ | 11,416 | $ | 9,204 | $ | 4,183 | $ | 3,771 | $ | 3,266 | ||||||||||
Ratio
of net recoveries (charge-offs)
to average loans
outstanding
|
(1.58 | )% | .03 | % | .01 | % | .03 | % | .06 | % | ||||||||||
Allowance
as a percent of
total loans
|
2.65 | % | 1.97 | % | 0.96 | % | 1.01 | % | 1.05 | % | ||||||||||
Total
loans at end of
period
|
$ | 431,352 | $ | 467,890 | $ | 436,319 | $ | 372,135 | $ | 310,335 |
64
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,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
Average
Amount
|
Average
Yield
|
Average
Amount
|
Average
Yield
|
Average
Amount
|
Average
Yield
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Demand
deposits
|
$ | 56,544 | — | $ | 54,452 | — | $ | 50,647 | — | |||||||||||||||
NOW
and money market
|
23,900 | 0.31 | % | 39,849 | 1.58 | % | 29,984 | 0.76 | % | |||||||||||||||
Savings
deposits
|
180,729 | 1.24 | 247,923 | 2.84 | 261,065 | 3.83 | ||||||||||||||||||
Time
deposits
|
426,892 | 2.32 | 456,803 | 3.79 | 449,754 | 4.83 | ||||||||||||||||||
Total
deposits
|
$ | 688,065 | 1.78 | % | $ | 799,027 | 3.13 | % | $ | 791,450 | 4.04 | % |
The
aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was approximately $191.32 million and $213.58 million
at December 31, 2009 and 2008, respectively.
The
following table summarizes the maturity distribution of time deposits of
$100,000 or more as of December 31, 2009 and 2008:
December
31,
|
||||||||
2009
|
2008
|
|||||||
(In
thousands)
|
||||||||
3
months or less
|
$ | 51,133 | $ | 121,288 | ||||
Over
3 months but within 6 months
|
60,658 | 69,751 | ||||||
Over
6 months but within 12 months
|
35,452 | 19,920 | ||||||
Over
12 months
|
44,078 | 2,619 | ||||||
Total
|
$ | 191,321 | $ | 213,578 |
It has
been the Bank's experience that the majority of these certificates will
renew.
65
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,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Securities
sold under repurchase
agreements
and federal funds purchased
|
||||||||||||
Balance
at year-end
|
$ | 50,000 | $ | 59,504 | $ | 76,842 | ||||||
Average
during the year
|
$ | 56,436 | $ | 61,162 | $ | 40,049 | ||||||
Maximum
month-end balance
|
$ | 57,000 | $ | 72,324 | $ | 76,842 | ||||||
Weighted
average rate during the year
|
4.08 | % | 3.83 | % | 4.93 | % | ||||||
Rate
at December 31
|
4.02 | % | 3.76 | % | 4.65 | % |
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 $284
million is available from the Federal Reserve Bank and the FHLBNY.
The
current uncertainties in the credit markets have negatively impacted our ability
to liquidate, if necessary, investments in auction rate securities. We are not
certain as to when the liquidity issues relating to these investments will
improve; however, we have the intent to hold these available for sale securities
to maturity, and do not believe we will be required to sell these securities
prior to maturity.
Approximately
$18.0 million principal amount of auction rate securities that came due during
the twelve months ended December 31, 2009 were redeemed.
At
December 31, 2009, our portfolio of investment securities included approximately
$26.5 million, at cost, of corporate notes, including single issuer and pooled
trust preferred securities, for which an OTTI charge has not been recorded in
our financial statements. Due primarily to market liquidity issues, the fair
value of these securities, presently $18.9 million, may be negatively impacted
in the future.
66
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. See "New Accounting Pronouncements - Accounting For Fair Value
Measurement" below for further discussion of this policy.
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
corporate notes to affect our capital, liquidity or our ability to execute our
current business plan. We have cash and cash equivalents totaling
$60.8 million, or 6.7% of total assets at December 31, 2009. In
addition, we have the capacity to borrow up to approximately $195 million from
the Federal Reserve Bank and approximately $89 million from the FHLBNY if the
need should arise.
For the
parent company, Berkshire Bancorp Inc., liquidity means having cash available to
fund its operating expenses and to pay stockholder dividends on its preferred
and 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. We are current as to dividend
payments on our preferred stock.
The
ability of the Company to meet these obligations, including the payment of
dividends on its preferred and common stock when and if declared by the Board of
Directors, is not currently dependent upon the receipt of dividends from the
Bank. At December 31, 2009, the Company had cash of approximately
$6.6 million and investment securities with a fair market value of $5.8
million.
On
September 7, 2008, the US Treasury and the FHFA announced a plan to place Fannie
Mae and Freddie Mac into conservatorship under the authority of the FHFA, a plan
which eliminated dividends on Fannie Mae and Freddie Mac common and preferred
stock for the foreseeable future.
As of
June 30, 2008, the Bank held auction rate securities with a cost basis of $86.3
million, including securities which were collateralized by Fannie Mae or Freddie
Mac preferred shares. The Bank also held preferred shares of Fannie Mae and
Freddie Mac with a cost basis of $8.7 million and $6.9 million, respectively,
and a corporate note from Lehman Brothers which filed for bankruptcy protection
on September 15, 2008. Due to the U.S. Treasury actions and the
bankruptcy of Lehman Brothers, we determined that these securities were other
than temporarily impaired and recognized a pre-tax charge totaling $94.3
million, consisting of $80.2 million related to the auction rate securities;
$8.1 million related to the Fannie Mae and Freddie Mac preferred shares and $6.1
million charge for the Lehman Brothers corporate note. The Freddie
Mac auction rate securities were further reduced in 2009 through an
other-than-temporary impairment charge of approximately $2.0
million.
67
The OTTI
charge related to the Lehman Brothers corporate note was considered an ordinary
loss under the current federal tax code. Therefore, we recognized a
deferred tax asset, and related tax benefit, related to this ordinary loss of
$6.1 million. The other than temporary charge related to the Fannie
Mae and Freddie Mac preferred shares, both direct investments and through the
auction rate securities, were originally considered capital losses under the
federal tax code. As such, we recognized a tax benefit of $760,000
relating to $1.735 million of previously recognized capital gains. A
valuation allowance was recorded on the remaining deferred tax
asset.
In
October 2008, the U.S. Congress passed EESA which changed the characteristics of
direct and indirect ownership of the Fannie Mae and Freddie Mac capital losses
to ordinary losses. In addition to this change in the nature of the
losses, the EESA also provided for financial institutions to apply for funds
under the Troubled Asset Repurchase Program which provided capital from the US
Treasury in the form of Preferred Shares. We applied to participate
in this program, but declined to accept the funds offered in December
2009.
As a
result of the previously discussed OTTI charge related to the Fannie Mae and
Freddie Mac stock and the Lehman Brothers note, the Bank no longer met the
definition of a "well capitalized" institution as of September 30,
2008. In order to restore our "well capitalized" position, in October
2008, the Company's Chairman of the Board and majority stockholder, and two
non-affiliated investors, purchased an aggregate of 60,000 Series A Preferred
Shares at $1,000 per share, or $60 million in the aggregate. Each
Series A Preferred Share bears non-cumulative cash dividends at the rate of 8%
per annum, payable quarterly, is mandatorily convertible into 123.153 shares of
our Common Stock on October 31, 2011, unless previously redeemed, and is
redeemable at the option of the Company between April 30, 2009 and November 1,
2010 at a redemption price of $1,100. The transaction was consummated on October
31, 2008. There were no redemptions of Series A Preferred Shares
during the year ended December 31, 2009. After the sale of the Series
A Preferred Stock, we met the definition of "well capitalized"
institution.
At
December 31, 2009 and 2008, our portfolio of investment securities included
approximately $78.9 million and $101 million at cost, respectively, of auction
rate securities for which an OTTI charge has not been recorded in our financial
statements.
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. 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, 2009.
Expiration
By Period
|
||||||||||||||||||||
Total
|
Less
Than
1 Year
|
1-3
Years
|
3-5
Years
|
More
Than
5 Years
|
||||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Lines
of Credit
|
$ | 7,859 | $ | 5,521 | $ | 28 | $ | 54 | $ | 2,256 | ||||||||||
Standby
Letters of Credit
|
1,117 | 1,117 | 00 | 00 | 00 | |||||||||||||||
Loan
Commitments
|
1,292 | 1,292 | 00 | 00 | 00 | |||||||||||||||
Total
|
$ | 10,268 | $ | 7,930 | $ | 28 | $ | 54 | $ | 2,256 |
68
Contractual
Obligations
The
following table presents the Company's contractual obligations at December 31,
2009.
Payments
Due By Periods
|
||||||||||||||||||||
Total
|
Less
Than
1 Year
|
1-3
Years
|
3-5
Years
|
More
Than
5 Years
|
||||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Borrowings
|
$ | 31,004 | $ | 16,000 | $ | 15,004 | $ | — | $ | — | ||||||||||
Operating
Leases
|
4,385 | 1,284 | 2,252 | 623 | 226 | |||||||||||||||
Time
Deposits
|
427,777 | 343,279 | 82,259 | 2,239 | — | |||||||||||||||
Total
Contractual Obligations
|
$ | 463,166 | $ | 360,563 | $ | 99,515 | $ | 2,862 | $ | 226 |
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 O - "Regulatory Matters" to
the Consolidated Financial Statements.
69
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, or with the same speed, 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.
70
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, 2009
(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
|
55,376 | — | — | — | 55,376 | 55,376 | ||||||||||||||||||
(Rate)
|
0.43 | % | 0.43 | % | ||||||||||||||||||||
Loans
(1)(2)
|
||||||||||||||||||||||||
Adjustable
rate loans
|
103,268 | 17,904 | 60,091 | 27,660 | 208,923 | 204,030 | ||||||||||||||||||
(Rate)
|
5.09 | % | 6.03 | % | 7.02 | % | 6.58 | % | 5.91 | % | ||||||||||||||
Fixed
rate loans
|
12,990 | 20,690 | 27,852 | 160,897 | 222,429 | 224,936 | ||||||||||||||||||
(Rate)
|
5.15 | % | 6.74 | % | 7.33 | % | 6.25 | % | 6.35 | % | ||||||||||||||
Total
loans
|
116,258 | 38,594.00 | 87,943 | 188,557 | 431,352 | 419,918 | ||||||||||||||||||
Investments
(3)(4)
|
121,651 | 22,777 | 36,656 | 194,996 | 376,080 | 357,815 | ||||||||||||||||||
(Rate)
|
4.69 | % | 2.42 | % | 1.67 | % | 5.49 | % | 4.67 | % | ||||||||||||||
Total
rate-sensitive assets
|
293,285 | 61,371.00 | 124,599 | 383,553 | 862,808 | |||||||||||||||||||
Deposit
accounts (5)
|
||||||||||||||||||||||||
Savings
and NOW
|
213,366 | — | — | — | 213,366 | 213,366 | ||||||||||||||||||
(Rate)
|
0.94 | % | 0.94 | % | ||||||||||||||||||||
Money
market
|
9,431 | — | — | — | 9,431 | 9,431 | ||||||||||||||||||
(Rate)
|
0.43 | % | 0.43 | % | ||||||||||||||||||||
Time
Deposits
|
115,942 | 227,336 | 82,259 | 2,240 | 427,777 | 429,449 | ||||||||||||||||||
(Rate)
|
1.56 | % | 1.65 | % | 2.27 | % | 1.80 | % | 1.75 | % | ||||||||||||||
Total
deposit accounts
|
338,739 | 227,336.00 | 82,259 | 2,240 | 650,574 | |||||||||||||||||||
Repurchase
Agreements
|
— | 5,000 | 45,000 | — | 50,000 | 49,842 | ||||||||||||||||||
(Rate)
|
4.68 | % | 3.89 | % | 3.97 | % | ||||||||||||||||||
Other
borrowings
|
2,000 | 14,000 | 15,004 | 22,681 | 53,685 | 54,437 | ||||||||||||||||||
(Rate)
|
5.95 | % | 5.97 | % | 3.85 | % | 2.72 | % | 4.00 | % | ||||||||||||||
Total
rate-sensitive liabilities
|
340,739 | 246,336.00 | 142,263 | 24,921 | 754,259 | |||||||||||||||||||
Interest
rate caps
|
40,000 | (40,000 | ) | |||||||||||||||||||||
Gap
(repricing differences)
|
(87,454 | ) | (184,965 | ) | (17,664 | ) | 398,632 | 108,549 | ||||||||||||||||
Cumulative
Gap
|
(87,454 | ) | (272,419 | ) | (290,083 | ) | 108,549 | |||||||||||||||||
Cumulative
Gap to Total Rate Sensitive Assets
|
(10.14 | )% | (31.57 | )% | (33.62 | )% | 12.58 | % |
(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.
71
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
Accounting
For Derivative Instruments and Hedging Activities
The FASB issued FASB ASC 815,
"Derivatives and Hedging", ("ASC 815"), which requires enhanced disclosures
about an entity's derivative and hedging activities, including information about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under ASC 815 and its
related interpretations, and (c) how derivative instruments and related hedged
items affect an entity's financial position, financial performance, and cash
flows. The requirements are effective for all financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with earlier
adoption permitted. Adoption of ASC 815 on January 1, 2009 did not have a
material impact on the Company's results of operations or financial
condition.
Determining
The Fair Value Of A Financial Asset When The Market For That Asset Is Not
Active
The FASB amended FASB ASC 820, "Fair
Value Measurements and Disclosures", ("ASC 820"), which applies to financial
assets within the scope of accounting pronouncements that require or permit fair
value measurements in accordance with ASC 820. ASC 820 clarifies the
application of ASC 820 in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. ASC 820
permits, in determining fair value for a financial asset in a dislocated market,
the use of a reporting entity's own assumptions about future cash flows and
appropriately risk-adjusted discount rates when relevant observable inputs are
not available. ASC 820 was effective upon issuance. Adoption of ASC 820 did not
have a material impact on the Company's results of operations or financial
condition.
Employer's
Disclosures about Postretirement Benefit Plan Assets
The FASB issued FASB ASC 715,
"Compensation-Retirement Benefits", ("ASC 715"), which provides guidance on an
employer's disclosures about plan assets of a defined benefit pension or other
postretirement plan. ASC 715 clarifies that the objectives of the
disclosures about plan assets in an employer's defined benefit pension or other
postretirement plan are to provide users of financial statements with an
understanding of: (1) how investment allocation decisions are made, including
the factors that are pertinent to an understanding of investment policies and
strategies; (2) the categories of plan assets; (3) the inputs and valuation
techniques used to measure the fair value of plan assets; (4) the effect of fair
value measurements using significant unobservable inputs (Level 3) on changes in
plan assets for the period; and (5) significant concentrations of risk within
plan assets. ASC 715 also expands the disclosures related to these
objectives. The disclosures about plan assets required by ASC 715 are
effective for fiscal years ending after December 15, 2009, or January 1, 2010 as
to the Company. Upon initial application, the provisions of ASC 715 are not
required for earlier periods that are presented for comparative purposes,
although application of the provisions of ASC 715 to prior periods is permitted.
Early adoption is not permitted. Adoption of ASC 715 is not expected to have a
material impact on the Company's results of operations or financial
condition.
72
FASB
ASC 325, Investments-Other
The FASB amended ASC 325,
"Investments-Other", to align the impairment guidance with that in FASB ASC 320,
Investments-Debt and Equity Securities, and related implementation guidance. ASC
325 was effective for reporting periods ending after December 15, 2008, and is
applied prospectively. Adoption of ASC 325 on January 1, 2009 did not have a
material impact on the Company's results of operations or financial
condition.
Recognition
and Presentation of Other-Than-Temporary Impairments
The FASB issued FASB ASC 320,
"Investments-Debt and Equity Securities", ("ASC 320"), to make the guidance on
other-than-temporary impairments of debt securities more operational and improve
the financial statement disclosures related to other-than-temporary impairments
for debt and equity securities. ASC 320 clarifies the interaction of the factors
that should be considered when determining whether a debt security is
other-than-temporarily impaired.
To evaluate whether a debt security is
other-than-temporarily impaired, an entity must first determine whether the fair
value of the debt security is less than its amortized cost basis at the
statement of condition date. If the fair value is less than the
amortized cost basis, then the entity must assess whether it intends to sell the
security or whether it is more likely than not that it will be required to sell
the debt security before recovery of its amortized cost basis. If an
entity determines that it will sell a debt security or that it more likely than
not will be required to sell a debt security before recovery of its amortized
cost basis, then it must recognize the difference between the fair value and the
amortized cost basis of the debt security in earnings. Otherwise, the
other-than-temporary impairment must be separated into two
components: the amount related to the credit loss and the amount
related to all other factors. The amount related to the credit loss
must be recognized in earnings, while the other component must be recognized in
other comprehensive income, net of tax. The portion of
other-than-temporary impairment recognized in earnings would decrease the
amortized cost basis of the debt security, and subsequent recoveries in the fair
value of the debt security would not result in a write-up of the amortized cost
basis.
The Company adopted ASC 320 effective
April 1, 2009. The adoption did not have a material impact on the Company's
financial condition and results of operations. The additional
disclosures related to ASC 320 are included in Note C - Investment Securities in
the Consolidated Financial Statements.
73
Determining
Fair Value When The Volume And Level of Activity For The Asset Or Liability Have
Significantly Decreased And Identifying Transactions That Are Not
Orderly
The FASB amended FASB ASC 820 to
provide additional guidance on estimating fair value when the volume and level
of activity for an asset or liability have significantly decreased. ASC 820 also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. ASC 820 emphasizes that, regardless of whether the volume and level
of activity for an asset or liability have decreased significantly and
regardless of which valuation technique was used, the objective of a fair value
measurement remains the same - to estimate the price that would be received to
sell an asset or transfer a liability in an orderly transaction between market
participants at the measurement date under current market
conditions.
The Company adopted ASC 820 effective
April 1, 2009. The adoption did not have a material impact on the Company's
financial condition and results of operations. The additional disclosures
related to ASC 820 are included in Note M - Fair Value of Financial Instruments
in the Consolidated Financial Statements.
Subsequent
Events
The FASB issued FASB ASC 855,
"Subsequent Events", ("ASC 855"), to incorporate the accounting and disclosures
requirements for subsequent events into U.S. GAAP. ASC 855 introduces
new terminology, defines a date through which management must evaluate
subsequent events, and lists the circumstances under which an entity must
recognize and disclose events or transactions occurring after the balance-sheet
date. The Company adopted ASC 855 as of June 30, 2009, which was the
required effective date. The Company evaluated its December 31, 2009
financial statements for subsequent events.
The
FASB Accounting Standards Codification
The FASB issued FASB ASC 105,
"Generally Accepted Accounting Principles", ("ASC 105"), which has become the
source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission ("SEC") under authority of the federal securities laws are
also sources of authoritative U.S. GAAP for SEC registrants. On the
effective date of ASC 105, the Codification superseded all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered
non-SEC accounting literature not included in the Codification has become
non-authoritative. ASC 105 is effective for financial statements
issued for interim and annual periods ending after September 15,
2009. In the FASB's views, the issuance of ASC 105 and the
Codification does not change U.S. GAAP, except for those nonpublic
nongovernmental entities that must now apply FASB ASC
985-Software. The Company adopted ASC 105 as of September 30, 2009
with no material impact on the Company's consolidated financial
statements.
74
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
Section 302 of the Sarbanes-Oxley Act of 2002 (the "Act"). 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 the Act requires
the CEOs and CFOs of the Company to (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 the Act 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 October 2, 2009, the SEC issued a
final extension of SOX 404(b) for non-accelerated filers to fiscal years ending
on or after June 15, 2010. Therefore, the Company, which would have been first
required to comply with Section 404 for the fiscal year ended December 31, 2007,
will be required to obtain an external auditor's report on internal control over
financial reporting for the fiscal year ending December 31, 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.
75
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, 2009 and 2008, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31,
2009. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial position of Berkshire
Bancorp Inc. and Subsidiaries as of December 31, 2009 and 2008, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2009, in conformity
with accounting principles generally accepted in the United States of
America.
/s/ GRANT
THORNTON LLP
New York,
New York
June 9,
2010
76
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Dollars
in Thousands)
December
31,
2009
|
December
31,
2008
|
|||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$ | 5,427 | $ | 3,290 | ||||
Interest
bearing deposits
|
55,376 | 69,097 | ||||||
Federal
funds sold
|
— | 30,000 | ||||||
Total
cash and cash equivalents
|
60,803 | 102,387 | ||||||
Investment
Securities:
|
||||||||
Available-for-sale
|
357,478 | 297,536 | ||||||
Held-to-maturity,
fair value of $337 in
2009 and $362 in 2008
|
340 | 360 | ||||||
Total
investment securities
|
357,818 | 297,896 | ||||||
Loans,
net of unearned income
|
430,349 | 466,753 | ||||||
Less:
allowance for loan losses
|
(11,416 | ) | (9,204 | ) | ||||
Net
loans
|
418,933 | 457,549 | ||||||
Accrued
interest receivable
|
4,253 | 5,866 | ||||||
Premises
and equipment, net
|
8,532 | 8,844 | ||||||
Goodwill,
net
|
18,549 | 18,549 | ||||||
Trade
date securities receivable
|
— | 13,431 | ||||||
Other
assets
|
40,379 | 39,190 | ||||||
Total
assets
|
$ | 909,267 | $ | 943,712 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Deposits:
|
||||||||
Non-interest
bearing
|
$ | 62,870 | $ | 51,312 | ||||
Interest
bearing
|
650,574 | 674,797 | ||||||
Total
deposits
|
713,444 | 726,109 | ||||||
Securities
sold under agreements to repurchase
|
50,000 | 59,504 | ||||||
Borrowings
|
31,004 | 45,272 | ||||||
Subordinated
debt
|
22,681 | 22,681 | ||||||
Accrued
interest payable
|
3,578 | 6,522 | ||||||
Other
liabilities
|
3,324 | 17,672 | ||||||
Total
liabilities
|
824,031 | 877,760 | ||||||
Stockholders'
equity
|
||||||||
Preferred
stock - $.01 Par value:
Authorized —
2,000,000 shares
Issued — 60,000
shares
Outstanding —
December
31, 2009, 60,000 shares
December
31, 2008, 60,000 shares
|
1 | 1 | ||||||
Common
stock - $.10 par value
Authorized
— 25,000,000 shares
Issued — 7,698,285
shares
Outstanding
—
December
31, 2009, 7,054,183 shares
December
31, 2008, 7,054,183 shares
|
770 | 770 | ||||||
Additional
paid-in capital
|
150,985 | 150,985 | ||||||
Accumulated
Deficit
|
(46,833 | ) | (39,795 | ) | ||||
Accumulated
other comprehensive loss, net
|
(13,276 | ) | (39,598 | ) | ||||
Treasury
Stock at cost December
31, 2009 and 2008, 644,102 shares
|
(6,411 | ) | (6,411 | ) | ||||
Total
stockholders' equity
|
85,236 | 65,952 | ||||||
Total
liabilities and stockholders' equity
|
$ | 909,267 | $ | 943,712 |
The
accompanying notes are an integral part of these statements
77
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
Thousands, Except Per Share Data)
For
The Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
INTEREST
INCOME
|
||||||||||||
Federal
funds sold and interest bearing deposits
|
$ | 639 | $ | 1,380 | $ | 1,553 | ||||||
Investment
securities
|
15,506 | 25,456 | 27,178 | |||||||||
Loans,
including related fees
|
29,777 | 32,754 | 29,804 | |||||||||
Total
interest income
|
45,922 | 59,590 | 58,535 | |||||||||
INTEREST
EXPENSE
|
||||||||||||
Deposits
|
12,237 | 24,968 | 32,083 | |||||||||
Securities
sold under agreements to repurchase
|
2,305 | 2,344 | 1,976 | |||||||||
Borrowings
and subordinated debt
|
2,561 | 3,211 | 3,734 | |||||||||
Total
interest expense
|
17,103 | 30,523 | 37,793 | |||||||||
Net
interest income
|
28,819 | 29,067 | 20,742 | |||||||||
PROVISION
FOR LOAN LOSSES
|
9,300 | 4,904 | 355 | |||||||||
Net
interest income after
provision
for loan losses
|
19,519 | 24,163 | 20,387 | |||||||||
NON-INTEREST
INCOME
|
||||||||||||
Service
charges on deposit accounts
|
490 | 585 | 658 | |||||||||
Investment
securities gains (losses)
|
(860 | ) | (685 | ) | 86 | |||||||
Other
income
|
567 | 858 | 915 | |||||||||
Total
non-interest income
|
197 | 758 | 1,659 | |||||||||
NON-INTEREST
EXPENSE
|
||||||||||||
Total
other than temporary impairment ("OTTI") charges on
securities
|
23,748 | 94,346 | — | |||||||||
Less
non-credit portion of OTTI recorded in Accumulated other comprehensive
loss
|
6,313 | — | — | |||||||||
Net
OTTI recognized in earnings
|
17,435 | 94,346 | — | |||||||||
Salaries
and employee benefits
|
9,517 | 9,366 | 8,971 | |||||||||
Net
occupancy expense
|
2,150 | 2,079 | 2,050 | |||||||||
Equipment
expense
|
378 | 386 | 80 | |||||||||
FDIC
assessment
|
1,928 | 1,082 | 86 | |||||||||
Data
processing expense
|
452 | 442 | 417 | |||||||||
Other
|
3,311 | 2,915 | 2,714 | |||||||||
Total
non-interest expense
|
35,171 | 110,616 | 14,318 | |||||||||
Income
(loss) before provision for income taxes
|
(15,455 | ) | (85,695 | ) | 7,728 | |||||||
Provision
(benefit) for income taxes
|
(13,217 | ) | (5,790 | ) | 2,374 | |||||||
Net
income (loss)
|
$ | (2,238 | ) | $ | (79,905 | ) | $ | 5,354 | ||||
Dividends
on preferred stock
|
4,800 | — | — | |||||||||
Income
(loss) allocated to common stockholders
|
$ | (7,038 | ) | $ | (79,905 | ) | $ | 5,354 | ||||
Net
income (loss) per common share:
|
||||||||||||
Basic
|
$ | (1.00 | ) | $ | (11.45 | ) | $ | .77 | ||||
Diluted
|
$ | (1.00 | ) | $ | (11.45 | ) | $ | .76 | ||||
Number
of shares used to compute
net
income (loss) per common share:
|
||||||||||||
Basic
|
7,054 | 7,054 | 6,987 | |||||||||
Diluted
|
7,054 | 7,054 | 7,005 | |||||||||
Dividends
per common share
|
$ | — | $ | .20 | $ | .18 |
The
accompanying notes are an integral part of these statements
78
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
For
The Years Ended December 31, 2009, 2008 and 2007
(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
|
Comprehensive
income
(loss)
|
Total
stockholders'
equity
|
|||||||||||||||||||||||||||||||
Balance
at January 1, 2007
|
7,698 | $ | 770 | $ | — | $ | 90,659 | $ | (4,772 | ) | $ | 38,250 | $ | (8,165 | ) | $ | 116,742 | |||||||||||||||||||||||
Net
income
|
5,354 | $ | 5,354 | 5,354 | ||||||||||||||||||||||||||||||||||||
Exercise
of stock options
|
(32 | ) | 1,754 | 1,722 | ||||||||||||||||||||||||||||||||||||
Tax
benefit from exercise of
stock options
|
359 | 359 | ||||||||||||||||||||||||||||||||||||||
Other
comprehensive income net of
reclassification adjustment and
taxes
|
1,333 | 1,333 | 1,333 | |||||||||||||||||||||||||||||||||||||
Comprehensive
income
|
$ | 6,687 | ||||||||||||||||||||||||||||||||||||||
Cash
dividends
|
(1,252 | ) | (1,252 | ) | ||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2007
|
7,698 | 770 | 90,986 | (3,439 | ) | 42,352 | (6,411 | ) | 124,258 | |||||||||||||||||||||||||||||||
Net
loss
|
(79,905 | ) | (79,905 | ) | (79,905 | ) | ||||||||||||||||||||||||||||||||||
Issuance
of Series A Preferred Stock
|
60 | 1 | 59,999 | 60,000 | ||||||||||||||||||||||||||||||||||||
Other
comprehensive loss net of
reclassification adjustment and
taxes
|
(36,159 | ) | (36,159 | ) | (36,159 | ) | ||||||||||||||||||||||||||||||||||
Comprehensive
loss
|
$ | (116,064 | ) | |||||||||||||||||||||||||||||||||||||
Cash
dividends - Preferred Stock
|
(837 | ) | (837 | ) | ||||||||||||||||||||||||||||||||||||
Cash
dividends - Common Stock
|
(1,405 | ) | (1,405 | ) | ||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2008
|
7,698 | 60 | $ | 770 | $ | 1 | $ | 150,985 | $ | (39,598 | ) | $ | (39,795 | ) | $ | (6,411 | ) | $ | 65,952 | |||||||||||||||||||||
Net
loss
|
(2,238 | ) | (2,238 | ) | (2,238 | ) | ||||||||||||||||||||||||||||||||||
Other
comprehensive income net of taxes
|
26,322 | 26,322 | 26,322 | |||||||||||||||||||||||||||||||||||||
Comprehensive
income
|
$ | 24,084 | ||||||||||||||||||||||||||||||||||||||
Cash
dividends - Preferred Stock
|
(4,800 | ) | (4,800 | ) | ||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2009
|
7,698 | 60 | $ | 770 | $ | 1 | $ | 150,985 | $ | (13,276 | ) | $ | (46,833 | ) | $ | (6,411 | ) | $ | 85,236 |
The
accompanying notes are an integral part of these statements
79
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
For
The Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
(loss) income
|
$ | (2,238 | ) | $ | (79,905 | ) | $ | 5,354 | ||||
Adjustments
to reconcile net (loss) income to
net cash (used in) provided by operating activities:
|
||||||||||||
Realized
losses (gains) on investment securities
|
860 | 685 | (86 | ) | ||||||||
Other
than temporary impairment charges on
securities
|
17,435 | 94,346 | — | |||||||||
Net
amortization (accretion) of premiums of investment
securities
|
721 | (225 | ) | (1,339 | ) | |||||||
Depreciation
and amortization
|
533 | 604 | 739 | |||||||||
Provision
for loan losses
|
9,300 | 4,904 | 355 | |||||||||
CHANGES
IN ASSETS AND LIABILITIES:
|
||||||||||||
Decrease
(increase) in accrued interest
receivable
|
1,613 | 2,757 | (2,205 | ) | ||||||||
Decrease
(increase) in other assets
|
11,015 | (45,767 | ) | 1,184 | ||||||||
(Decrease)
increase in accrued interest payable
and other liabilities
|
(17,292 | ) | 12,280 | (439 | ) | |||||||
Net
cash provided by (used in) operating
activities
|
21,947 | (10,321 | ) | 3,563 | ||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Investment
securities available for sale
|
||||||||||||
Purchases
|
(295,440 | ) | (266,209 | ) | (237,820 | ) | ||||||
Sales,
maturities and calls
|
244,051 | 436,647 | 156,360 | |||||||||
Investment
securities held to maturity Maturities
|
— | 35 | 93 | |||||||||
Net
decrease (increase) in loans
|
29,316 | (31,851 | ) | (63,806 | ) | |||||||
Acquisition
of premises and equipment
|
(221 | ) | (86 | ) | (763 | ) | ||||||
Net
cash (used in) provided by investing
activities
|
(22,294 | ) | 138,536 | (145,936 | ) | |||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
Net
increase (decrease) in non interest bearing
deposits
|
11,558 | (2,493 | ) | 4,387 | ||||||||
Net
(decrease) increase in interest bearing
deposits
|
(24,223 | ) | (124,613 | ) | 167,339 | |||||||
(Decrease)
increase in securities sold under
agreements to repurchase
|
(9,504 | ) | (17,338 | ) | 14,190 | |||||||
Proceeds
from borrowings
|
— | 25,000 | 19,000 | |||||||||
Repayment
of borrowings
|
(14,268 | ) | (11,335 | ) | (40,131 | ) | ||||||
Proceeds
from issuance of Series
A preferred stock, net
|
— | 60,000 | — | |||||||||
Proceeds
from exercise of common stock
options
|
— | — | 1,363 | |||||||||
Tax
benefits from exercise of common
stock options
|
— | — | 359 | |||||||||
Dividends
paid on preferred stock
|
(4,800 | ) | (837 | ) | — | |||||||
Dividends
paid on common stock
|
— | (1,405 | ) | (1,252 | ) | |||||||
Net
cash (used in) provided by financing
activities
|
(41,237 | ) | (73,021 | ) | 165,255 | |||||||
Net
(decrease) increase in cash and cash
equivalents
|
(41,584 | ) | 55,194 | 22,882 | ||||||||
Cash
and cash equivalents at beginning
of year
|
$ | 102,387 | $ | 47,193 | $ | 24,311 | ||||||
Cash
and cash equivalents at end
of year
|
$ | 60,803 | $ | 102,387 | $ | 47,193 | ||||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW
INFORMATION:
|
||||||||||||
Cash
used to pay interest
|
$ | 20,047 | $ | 33,090 | $ | 36,814 | ||||||
Cash
used to pay income taxes, net
of refunds
|
$ | 5,894 | $ | 1,280 | $ | 3,575 | ||||||
SUPPLEMENTAL
DISCLOSURES OF NON-CASH
INVESTING ACTIVITIES
|
||||||||||||
Trade
date securities receivable
|
$ | — | $ | 13,431 | $ | — |
The
accompanying notes are an integral part of these statements
80
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
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. In March 2001, the Company expanded its customer
base and market area with the acquisition of GSB Financial
Corporation. The Bank's main office and branch is in mid-town
Manhattan. The Bank has two other branch in Manhattan, four branches
in Brooklyn, New York, four branches in Orange and Sullivan Counties in New York
State, a branch in Ridgefield, New Jersey and a branch in Teaneck, New Jersey
which opened in November 2009.
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
Banking Department (the "NYSBD"), which the Bank executed. The MOU
sets forth an informal understanding among the Bank, the FDIC and the NYSBD
addressing asset quality, loan review, underwriting and administration and
certain other concerns identified in the examination. The Bank's
board has appointed a committee comprised of three directors to monitor the
Bank's compliance. We do not believe that compliance with the MOU
will have 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 O to
the Company's consolidated financial statements, the Bank is well capitalized
for regulatory purposes as of December 31, 2009.
Trust Preferred
Securities.
As of May 18 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%, currently
2.95%.
On April 1, 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%, currently
2.22%.
81
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
A - (continued)
Based on current interpretations of the
banking regulators, the 2004 Debentures and 2005 Debentures (collectively, the
"Debentures") qualify under the risk-based capital guidelines of the Federal
Reserve as Tier 1 capital, subject to certain limitations. The Debentures are
callable by the Company, subject to any required regulatory approvals, at par,
in whole or in part, at any time after five years from the date of
issuance. The Company's obligations under the Debentures and related
documents, taken together, constitute a full, irrevocable and unconditional
guarantee on a subordinated basis by the Company of the obligations of BCTI and
BCTII under the preferred capital securities sold by BCTI and BCTII to
investors. Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") 810, "Consolidations", precludes consideration of
the call option embedded in the preferred capital securities when determining if
the Company has the right to a majority of BCTI and BCTII expected residual
returns. Accordingly, BCTI and BCTII are not included in the consolidated
balance sheet of the Company.
The Federal Reserve has issued guidance
on the regulatory capital treatment for the trust-preferred securities issued by
BCTI and BCTII. This rule would retain the current maximum percentage
of total capital permitted for Trust Preferred Securities at 25%, but would
enact other changes to the rules governing Trust Preferred Securities that
affect their use as part of the collection of entities known as "restricted core
capital elements." The rule was to become effective on March 31,
2009. However, on March 23, 2009 the Federal Reserve adopted a rule
extending the compliance date for tighter limits to March 31, 2011 in light of
the current stressful financial conditions. Management has evaluated
the effects of this rule and does not anticipate a material impact on the
Company's capital ratios when the proposed rule is finalized.
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 "Series A Preferred Shares") 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 Series A
Preferred Share bears non-cumulative cash dividends at the rate of 8% per annum,
payable quarterly, is mandatorily convertible into 123.153 shares of our Common
Stock on October 31, 2011, unless previously redeemed, and is redeemable at the
option of the Company between April 30, 2009 and November 1, 2010 at a
redemption price of $1,100. No shares have been redeemed as of
December 31, 2009. So long as any share of Series A Preferred Shares
remains outstanding, unless the full dividends for the most recent dividend
payment date have been paid or declared, no dividends may be paid or declared on
the Company's Common Stock. For the year ended December 31, 2009, we
declared and paid cash dividends of $4.8 million on the Series A Preferred
Shares. The Company is current as to dividends on the Series A
Preferred Shares.
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.
82
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
B - (continued)
The principal estimates that are
susceptible to significant change in the near term relate to the allowance for
loan losses, goodwill, 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.
Substantially all outstanding goodwill
resulted from the acquisition of The Berkshire Bank and Goshen Savings Bank,
depository institutions concentrating in the New York City and Orange and
Sullivan County communities, respectively. As the result of the
market penetration in these New York areas, the Company had formulated its own
strategy to create such a market role. Accordingly, implicit in the
purchase of these franchises was the acquisition of that
role. However, if such benefits, including new business, are not
derived or the Company changes its business plan, an impairment may be
recognized.
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.
2.
|
Investment
Securities
|
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.
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.
83
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
B - (continued)
At December 31, 2009, our portfolio of
investment securities included approximately $78.90 million at cost of auction
rate securities and approximately $26.5 million at cost of corporate notes,
including single issuer and pooled trust preferred securities, for which an
other than temporary impairment ("OTTI") charge has not been recorded in our
financial statements. The fair value of these securities, presently $66.9
million and $18.9 million, respectively, could be negatively impacted in the
future.
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 specifically
identifiable 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 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. 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.
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.
84
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
B - (continued)
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 allocations.
Specific allocations 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 allocation 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 allocations. 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.
85
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
B - (continued)
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, New York State Banking Department, 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. 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. 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.
4.
|
Interest Rate
Swap
|
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 December 31, 2009 and 2008, the Company had notional
amounts of $40.0 million and $40.0 million, respectively,
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 the lower of cost or
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.
86
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
B - (continued)
7.
|
Goodwill
|
Goodwill resulting from the acquisition
of the Bank in 1999 and GSB Financial Corporation in 2001 is accounted for under
FASB ASC 350, "Intangibles-Goodwill and Other". The Company
discontinued the amortization of goodwill resulting from acquisitions. Goodwill
is now 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. 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 write-down of recorded goodwill is necessary. If the
fair value of the reporting unit is less, an expense may be required on the
Company's books to write down the related goodwill to the carrying value. The
Company performed its annual test as of December 31, 2009, and did not identify
any impairment on its outstanding goodwill and its identifiable intangible
assets.
8.
|
Income
Taxes
|
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.
As of January 1, 2007, the Company
increased retained earnings by $965,000 for the uncertainty in income taxes as a
previously accrued liability was evaluated and determined to be no longer
necessary as the tax year had expired.
9.
|
Net Income (Loss) Per
Share
|
Basic earnings and/or loss per 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.
10.
|
Stock Based
Compensation
|
At December 31, 2008, the Company had
one stock-based employee compensation plan (more fully described in Note J),
which expired in March 2009 in accordance with the terms of the
plan. Share-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense over the
vesting period. Determining the fair value of share-based awards at
the grant date requires judgment, including estimating the Company's stock price
volatility, employee stock option exercise behaviors and employee option
forfeiture rates.
The Company did not grant stock options
in fiscal 2009, 2008 and 2007, as a result of which, no stock based compensation
expense was recorded in each of those years.
11.
|
Cash
Equivalents
|
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.
87
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
B - (continued)
12.
|
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 $4,087,000 and $3,097,000 at December 31, 2009 and 2008,
respectively.
13.
|
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, 2009 and 2008, management does not believe this asset is
impaired.
14.
|
Comprehensive
Income
|
The Company follows the provisions of
FASB ASC 220, "Comprehensive Income", ("ASC 220") which includes net income as
well as certain other items, which result in a change to equity during the
period. The following tables present the components of comprehensive income
(loss). (In thousands.)
Year Ended December 31, 2009
|
||||||||||||
Before tax
amount
|
Tax
(expense)
benefit
|
Net of tax
Amount
|
||||||||||
Unrealized
gains (losses) on
investment securities:
|
||||||||||||
Unrealized
holding gains (losses) arising
during period
|
$ | 24,565 | $ | (8,374 | ) | $ | 15,181 | |||||
Less
reclassification adjustment for gains
(losses) realized in net income
|
(18,295 | ) | 7,318 | (10,977 | ) | |||||||
Unrealized
gain (loss) on investment securities
|
42,860 | (16,702 | ) | 26,158 | ||||||||
Change
in minimum pension liability
|
164 | — | 164 | |||||||||
Other
comprehensive income, net
|
$ | 43,761 | $ | (16,702 | ) | $ | 26,322 |
88
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
B - (continued)
Year Ended December 31, 2008
|
||||||||||||
Before tax
amount
|
Tax
(expense)
benefit
|
Net of tax
Amount
|
||||||||||
Unrealized
gains (losses) on
investment securities:
|
||||||||||||
Unrealized
holding losses arising
during period
|
$ | (52,252 | ) | $ | 20,514 | $ | (31,738 | ) | ||||
Less
reclassification adjustment for losses
realized in net income
|
(5,361 | ) | 2,144 | (3,217 | ) | |||||||
Unrealized
loss on investment securities
|
(57,613 | ) | 22,658 | (34,955 | ) | |||||||
Change
in minimum pension liability
|
(1,204 | ) | — | (1,204 | ) | |||||||
Other
comprehensive loss, net
|
$ | (58,817 | ) | $ | 22,658 | $ | (36,159 | ) |
Year Ended December 31, 2007
|
||||||||||||
Before tax
amount
|
Tax
(expense)
benefit
|
Net of tax
Amount
|
||||||||||
Unrealized
gains (losses) on
investment securities:
|
||||||||||||
Unrealized
holding gains arising
during period
|
$ | 2,278 | $ | (964 | ) | $ | 1,314 | |||||
Less
reclassification adjustment for gains
realized in net income
|
86 | (34 | ) | 52 | ||||||||
Unrealized
gain on investment securities
|
2,192 | (930 | ) | 1,262 | ||||||||
Change
in minimum pension liability
|
71 | — | 71 | |||||||||
Other
comprehensive income, net
|
$ | 2,263 | $ | (930 | ) | $ | 1,333 |
89
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, 2009
|
||||||||||||||||
Amortized
Cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Fair
value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
U.S.
Government Agencies
|
$ | 340 | $ | — | $ | (3 | ) | $ | 337 |
December 31, 2008
|
||||||||||||||||
Amortized
Cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Fair
value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
U.S.
Government Agencies
|
$ | 360 | $ | 3 | $ | (1 | ) | $ | 362 |
The following is a summary of
available-for-sale investment securities:
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 |
90
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
C - (continued)
December 31, 2008
|
||||||||||||||||
Amortized
Cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Fair
value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
U.S.
Government Agencies
|
$ | 91,429 | $ | 72 | $ | (380 | ) | $ | 91,121 | |||||||
Mortgage-backed
securities
|
83,882 | 1,037 | (1,061 | ) | 83,858 | |||||||||||
Corporate
notes
|
51,150 | 112 | (13,138 | ) | 38,124 | |||||||||||
Single
Issuer Trust Preferred CDO
|
3,000 | — | (1,794 | ) | 1,206 | |||||||||||
Pooled
Trust Preferred CDO
|
10,000 | — | (7,006 | ) | 2,994 | |||||||||||
Municipal
securities
|
1,973 | 125 | (495 | ) | 1,603 | |||||||||||
Auction
rate securities
|
101,110 | — | (38,030 | ) | 63,080 | |||||||||||
Marketable
equity securities
and other
|
16,708 | 80 | (1,238 | ) | 15,550 | |||||||||||
Totals
|
$ | 359,252 | $ | 1,426 | $ | (63,142 | ) | $ | 297,536 |
Management uses a multi-factor approach
to determine whether each investment security in an unrealized loss position is
other-than-temporarily impaired ("OTTI"). An unrealized loss position exists
when the current fair value of an investment is less than its amortized cost
basis. The valuation factors utilized by management incorporate the
ideas and concepts outlined in relevant accounting guidance. These include such
factors as:
|
*The
length of time and the extent to which the market value has been less than
cost;
|
|
*The
financial condition of the issuer of the security as well as the near and
long-term prospect for the issuer;
|
|
*The
rating of the security by a national rating
agency;
|
|
*Historical
volatility and movement in the fair market value of the security;
and
|
|
*Adverse
conditions relative to the security, issuer or
industry.
|
The following table shows the
outstanding auction rate securities at December 31, 2009 and
2008:
2009
|
2008
|
|||||||||||||||
Amortized
Cost
|
Fair Value
|
Amortized
Cost
|
Fair Value
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Federal
National Mortgage Association Preferred Shares
|
$ | — | $ | — | $ | 2,223 | $ | 728 | ||||||||
Federal
Home Loan Mortgage Corporation Preferred Shares
|
1,895 | 1,895 | 3,904 | 704 | ||||||||||||
Preferred
Shares of Money Center Banks
|
65,000 | 53,767 | 65,000 | 32,789 | ||||||||||||
Other
Assets of Money Center Banks
|
10,000 | 9,280 | 10,000 | 8,876 | ||||||||||||
Public
Utility Debt and Equity Securities
|
2,000 | 2,000 | 15,000 | 15,000 | ||||||||||||
Other
|
- | — | 4,983 | 4,983 | ||||||||||||
Totals
|
$ | 78,895 | $ | 66,942 | $ | 101,110 | $ | 63,080 |
91
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
C - (continued)
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, 2009, 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. The final market sector,
noted above as "other", is collateralized by long term debt of a seasoned issuer
that deals in business machinery.
In determining whether there is an
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, 2009, the
auction rate securities have continued to pay interest at the highest rate as
stipulated in the original prospectus, except for the Federal Home Loan Mortgage
Corporation ("Freddie Mac").
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, 2009 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 five years from December 31, 2009 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.
92
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
C - (continued)
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 50 - 100 basis
points depending on how far out the actual maturity date was in excess of 10
years (maturity dates range from 16.5 years to 25 years). We then
added the 15-year swap rate at December 31, 2009, and finally added 50 or 100
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 (50
basis points for securities above investment grade and 100 basis points for
securities slightly below investment grade). The final discount rates ranged
from 4.4% - 6.9%.
For the Freddie Mac securities that we
are holding as of December 31, 2009, we did not perform a discounted cash flow
analysis. These securities are no longer paying interest so a discounted cash
flow analysis would show a value far less than what would be an appropriate fair
value. We believe that for these securities an analysis of the
underlying value of the preferred shares is the best way to value these
securities.
Based on these analyses, the discounted
cash flows ranged from a total of approximately $62.5 million to $73.3 million.
We believe that of these scenarios, the most likely scenario as of December 31,
2009 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 fair value of the
underlying preferred securities at maturity. The calculated fair values using
the par value approach was $65.6 million as compared to $62.5 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 $67 million. As our current fair value falls within the range
of the discounted cash flows analyses performed and higher than the most likely
scenarios, we believe that our current fair value is an appropriate
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,
2009.
Based upon our methodology for
determining the fair value of the auction rate securities, we recorded an OTTI
charge totaling $2.0 million related to the Freddie Mac auction rate securities
for the year ended December 31, 2009. We concluded that, as of
December 31, 2009, 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, 2009, we had six
auction rate securities totaling $25.9 million which were below investment
grade. At December 31, 2008, we had four auction rate securities
totaling $6.1 million which were below investment grade.
During the year ended December 31,
2009, approximately $18.0 million of auction rate securities were redeemed with
no gain or loss recognized. During the year ended December 31, 2009,
$2.2 million of Federal National Mortgage Association (Fannie Mae) auction rate
securities were converted into the underlying preferred shares and
simultaneously sold recognizing a loss totaling $1.4 million in addition to the
OTTI charge recognized in 2008.
93
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
C - (continued)
For the year ended December 31, 2008,
we valued the auction rate securities by valuing the underlying
collateral. During the year ended December 31, 2008, the Federal
government placed Fannie Mae and Freddie Mac into receivership and suspended
dividend payments. As a result of placing Fannie Mae and Freddie Mac
into receivership, we considered the auction rate securities collateralized by
these quasi-government agencies as impaired and recognized a credit related
impairment charge totaling $80.2 million. The OTTI charge was
calculated based upon the fair market value of the underlying preferred
shares. We concluded that any further decline in the market value as
of December 31, 2008 was caused by market interest volatility, a significant
widening of credit spreads across markets for these securities, and illiquidity
and uncertainty in the financial markets.
At both December 31, 2009 and 2008, 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 $2.9 million,
respectively, and a fair value of $1.0 million and $1.2 million,
respectively. There are no tranches associated with this security.
When this asset was acquired it was an investment grade security but has
subsequently deteriorated to a non-rated security. The issuer of this
security is experiencing deterioration of its loan portfolio and net losses, but
appears to be prepared to rectify these adverse conditions as the controlling
family recently contributed an amount to ensure this institution remains well
capitalized. This security has not defaulted nor deferred any
interest payments as all interest has been paid as contractually
stipulated. Based on an evaluation of the OTTI factors (as fully
described above) during the year ended December 31, 2009, the Company recorded a
credit related OTTI charge of $1.9 million. The OTTI charge was
determined using a price quote from an independent broker (Level 2) as compared
to the amortized cost as of December 31, 2009.
At both December 31, 2009 and 2008, we
had one pooled trust preferred CDO ("TPCDO") with an amortized cost of $6.5
million (after OTTI charges) and $10.0 million, respectively, and a fair value
of $150,000 and $3.0 million, respectively. We own a Class B tranche
of the TPCDO, which was considered below investment grade at both December 31,
2009 and 2008. During the year ended December 31, 2009, we recognized
a credit related impairment charge totaling $3.5 million to reduce the amortized
cost to $6.5 million. For the period ended September 30, 2009, an
independent third party analyzed the collateral waterfall. Based upon
this analysis, the Company recognized an impairment charge of $3.0
million. At December 31, 2009, we obtained discounted cash flow
scenarios from independent third parties. We used the most conservative result
in order to value our TPCDO, which we believe also reflects the most likely
expected cash flow. The factors used to value the TPCDO were a
discount rate of 1.9%, a prepayment speed of 0.00%, and default ratios based
upon the Texas ratios as noted.
Historically, there have been no
prepayments on this security but the issuers into the TPCDO can prepay at their
discretion after January 2008. We used prepayment speed range of 0%
to 1% in the cash flow analyses. The cash flow analysis that we
utilized in valuing the TPCDO used a 0% prepayment speed for the next two
years. As there have been no prepayments and we continue to expect
the underlying issuers in the TPCDO to focus on improving capital and liquidity,
we expect prepayments to be minimal on this security. We factored in
a nominal prepayment assumption into our cash flow analysis as the underlying
issuers have the right to prepay.
The discount rate used in our analysis
was the effective interest rate implicit in the security at the date of
acquisition.
94
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
C - (continued)
For purposes of completing the cash
flow analysis, defaults and deferrals are treated in the same
manner. At December 31, 2009, there are five institutions in deferral
status which were excluded from the discounted cash flow analysis. In
order to estimate potential defaults and deferrals we segregated the underlying
issuers by the Texas ratio. This ratio is a key indicator of the
health of the institution and the likelihood of failure. The
underlying issuers were pooled based upon their Texas ratio as if the underlying
issuer had already defaulted. There was one underlying issuer with a
Texas ratio greater than 100% for which it was assumed to default at the next
scheduled payment date. This security was included with the deferred
issuers in the cash flow analysis. The second pool of underlying
issuers were those institutions with a Texas ratio of 75.00% to
99.99%. The rate of deferral for these institutions was
35%. The third pool of underlying issuers was those institutions that
had a Texas ratio between 50.00% and 74.99%. The rate of deferral for
these institutions was 20%. The 35% and 20% rates were used as they
are representative of current industry statistics of bank
failures. The final group of underlying issuers is comprised of those
with a Texas ratio of less than 49.99%, and a money center bank with a ratio
slightly above 50.00%. As these banks are considered healthy, we
concluded that there is minimal risk of default and assigned a zero default
assumption in the cash flow analyses.
Based upon the discounted cash flow
analysis, an additional credit related OTTI charge totaling $529,000 was
recognized during the quarter ended December 31, 2009, resulting in a total
credit related impairment charge of $3.5 million for this security for the year
ended December 31, 2009.
The table below reflects the number and
amount of single issue debt securities below investment grade and the lowest
rating by security type at December 31, 2009 (in thousands):
Amortized
Cost
|
Fair
Value
|
Unrealized
Gain (Loss)
|
Lowest Credit
Rating
|
|||||||||||||
Single
Issuer Corporate Bonds:
|
||||||||||||||||
Airline
#1
|
$ | 1,597 | $ | 1,594 | $ | (3 | ) |
Ba2
|
||||||||
Airline
#2
|
552 | 552 | — |
No
rating
|
||||||||||||
Automobile
|
800 | 1,506 | 706 | D | ||||||||||||
Commercial
|
495 | 435 | (60 | ) |
No
rating
|
|||||||||||
Student
Lender
|
5,000 | 3,920 | (1,080 | ) |
Ba1
|
|||||||||||
Trust
Preferred Security
|
1,021 | 1,021 | — |
No
rating
|
||||||||||||
Auction
Rate Securities:
|
||||||||||||||||
Federal
Home Loan Bank Corporation
|
1,895 | 1,895 | — |
Ca
|
||||||||||||
Money
Center Banks
|
24,000 | 17,537 | (6,463 | ) |
Ba3
|
|||||||||||
Pooled
Issuers:
|
||||||||||||||||
TPCDO
|
6,463 | 150 | (6,313 | ) |
No
rating
|
The below investment grade Federal Home
Loan Mortgage Corporation auction rate securities are comprised of two
securities. 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.
95
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
C - (continued)
The below investment grade for the
student lender was one factor evaluated in determining whether it was
appropriate to recognize an 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, 2009, all other single
issuer debt securities had a credit rating of investment grade.
During the year ended December 31,
2009, the Company recorded OTTI charges related to four single issuer corporate
bonds totaling $9.1 million. The Company evaluated the length of time
and extent the amortized cost exceeded fair value and the credit rating of the
issuer. During 2009, two issuers filed for bankruptcy which resulted
in a credit related OTTI charge of $7.2 million. The Company
concluded that the financial deterioration of these two issuers resulted in a
credit loss. The preponderance of the remainder of the loss was due
to an airline company bond. The airline company issuer had not shown
improved earnings and operations since a merger in the fourth quarter of
2008. Since there was no improvement, the Company concluded full
receipt of the principal was unlikely and recorded a credit related
OTTI. The amounts of the OTTI charges were determined based upon
broker quotes (Level 2).
At December 31, 2009 and 2008, the
Company owned preferred and common stock (collectively
"equities"). The fair value of the equities was determined by quoted
market prices; unrealized loss was determined by comparing the cost of the
equity to its fair value. In order to determine whether OTTI should
be recognized, we evaluated the length of time and the extent to which the fair
value was 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. Based upon the length of time these securities
were in an unrealized loss position, the amount by which the cost exceeded fair
value, and the financial prospects of the issuer, we recorded a $0.8 million
OTTI charge during the fiscal year ended December 31, 2009.
The table below details certain
information related to the equity securities as of December 31, 2009 (in
thousands):
Industry
|
Cost
|
Fair
Value
|
Unrealized
Gain (Loss)
|
||||||||||
Common
|
Telecommunications
|
$ | 91 | $ | 94 | $ | 3 | ||||||
Airline
|
862 | 862 | — | ||||||||||
Preferred
|
Airline
|
61 | 61 | — | |||||||||
Flooring
and other
|
35 | 34 | (1 | ) | |||||||||
Mining
|
27 | 91 | 64 | ||||||||||
Money
Center Banks
|
2,008 | 1,984 | (24 | ) |
96
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, 2009 (in
thousands):
Less than 12 months
|
12 months or longer
|
Total
|
||||||||||||||||||||||
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
|||||||||||||||||||
Description
of Securities
|
||||||||||||||||||||||||
U.S.
Treasury Notes
|
$ | 30,048 | $ | 65 | $ | — | $ | — | $ | 30,048 | $ | 65 | ||||||||||||
U.S.
Government Agencies
|
40,518 | 748 | 19,948 | 45 | 60,466 | 793 | ||||||||||||||||||
Mortgage-backed
securities
|
7,932 | 43 | 15,661 | 667 | 23,593 | 710 | ||||||||||||||||||
Corporate
notes
|
1,613 | 13 | 7,522 | 2,298 | 9,135 | 2,311 | ||||||||||||||||||
Pooled
Trust Preferred CDO
|
— | — | 150 | 6,313 | 150 | 6,313 | ||||||||||||||||||
Auction
rate securities
|
— | — | 58,047 | 11,953 | 58,047 | 11,953 | ||||||||||||||||||
Subtotal,
debt securities
|
80,111 | 869 | 101,328 | 21,276 | 181,439 | 22,145 | ||||||||||||||||||
Marketable
equity securities and other
|
— | — | 1,044 | 26 | 1,044 | 26 | ||||||||||||||||||
Total
temporarily impaired
securities
|
$ | 80,111 | $ | 869 | $ | 102,372 | $ | 21,302 | $ | 182,483 | $ | 22,171 |
The Company had a total of 52 debt
securities with a fair market value of $123.4 million which were temporarily
impaired at December 31, 2009. The total unrealized loss on these
securities was $10.2 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 $12.0 million
is on 10 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 6.2%
of total assets at December 31, 2009. Therefore, the unrealized
losses associated with these securities are not considered to be other than
temporary.
The Company also had 2 equity
securities with an aggregate fair market value of $1.0 million which were
temporarily impaired at December 31, 2009. The total unrealized loss
on these securities was $26,000. The preponderance of the unrealized
loss for marketable equity securities and other is a $24,000 unrealized loss at
December 31, 2009 on one money center bank preferred issue. As the
stock market declined in the first and second quarter of 2009, especially
related to the financial sector, the Company's investments decreased in
value. At March 31, 2009, the unrealized loss totaled
$348,000. At December 31, 2009, the fair value of this security has
rebounded to an unrealized loss position of $24,000. The issuer of
this preferred equity security has raised sufficient capital to repay the
Troubled Asset Relief Program ("TARP") funds, continue to pay its dividend,
maintain its credit rating and remain well-capitalized. Based upon
these factors, coupled with the increasing stock market prices, especially in
the financial sector, the Company does not believe an OTTI charge is warranted
at December 31, 2009.
97
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
C - (continued)
The following table indicates the
length of time individual securities have been in a continuous unrealized loss
position at December 31, 2008 (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
|
$ | 71,241 | $ | 378 | $ | 5,072 | $ | 2 | $ | 76,313 | $ | 380 | ||||||||||||
Mortgage-backed
securities
|
6,135 | 58 | 21,769 | 1,003 | 27,904 | 1,061 | ||||||||||||||||||
Corporate
notes
|
14,480 | 3,407 | 4,100 | 9,731 | 18,580 | 13,138 | ||||||||||||||||||
Single
Issuer Trust Preferred CDO
|
— | — | 1,149 | 1,794 | 1,149 | 1,794 | ||||||||||||||||||
Pooled
Trust Preferred CDO
|
— | — | 2,981 | 7,006 | 2,981 | 7,006 | ||||||||||||||||||
Municipal
securities
|
— | — | 1,478 | 495 | 1,478 | 495 | ||||||||||||||||||
Auction
rate securities
|
38,098 | 38,030 | — | — | 38,098 | 38,030 | ||||||||||||||||||
Subtotal,
debt securities
|
129,954 | 41,873 | 36,549 | 20,031 | 166,503 | 61,904 | ||||||||||||||||||
Marketable
equity securities and other
|
1,681 | 332 | 900 | 906 | 2,581 | 1,238 | ||||||||||||||||||
Total
temporarily impaired
securities
|
$ | 131,635 | $ | 42,205 | $ | 37,449 | $ | 20,937 | $ | 169,084 | $ | 63,142 |
The Company had a total of 63 debt
securities with an aggregate fair market value of $128.4 million which were
temporarily impaired at December 31, 2008. The total unrealized loss on these
securities was $23.9 million, which is attributable to market interest
volatility, the continued illiquidity of the debt markets, and uncertainty in
the financial markets which have decreased the market value of these
securities. The remaining unrealized loss of $38.0 million is on 14
auction rate securities which have declined in value due to auction failures
beginning in February 2008. We have the intent to hold these
securities to maturity and will not be required to sell these securities, due to
our ratio of cash and cash equivalents to total assets of approximately 10.85%
of total assets at December 31, 2008. Therefore, the unrealized
losses associated with these securities are not considered to be other than
temporary.
The Company also had 10 equity
securities with an aggregate fair market value of $2.6 million which were
temporarily impaired at December 31, 2008. The total unrealized loss
on these securities was $1.2 million.
98
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, 2009 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, 2009
|
||||||||||||||||
Available for Sale
|
Held to Maturity
|
|||||||||||||||
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Due
in one year or less
|
$ | 23,070 | $ | 23,153 | $ | — | $ | — | ||||||||
Due
after one through five years
|
56,766 | 56,101 | — | — | ||||||||||||
Due
after five through ten years
|
21,857 | 21,784 | — | — | ||||||||||||
Due
after ten years
|
188,098 | 181,807 | 340 | 337 | ||||||||||||
Auction
rate securities
|
78,895 | 66,942 | — | — | ||||||||||||
Marketable
equity securities and other
|
7,648 | 7,691 | — | — | ||||||||||||
Totals
|
$ | 376,334 | $ | 357,478 | $ | 340 | $ | 337 |
Gross gains realized on the sales of
investment securities for the years ended December 31, 2009 and 2008 were
approximately $553,000 and $313,000, respectively. Gross
losses were approximately $1,413,000 and $998,000 for the years ended December
31, 2009 and 2008, respectively. During the year ended December 31,
2009, we sold the Fannie Mae auction rate securities and certain corporate
notes. During the year ended December 31, 2008, we sold our preferred
shares in Fannie Mae and Freddie Mac, the corporate note for which we took an
OTTI charge, U.S. Treasuries, U.S. Agencies and certain corporate
notes.
As of December 31, 2009 and 2008,
securities sold under agreements to repurchase with a book value of
approximately $50.0 million and $59.5 million, respectively, were
outstanding. The book value of the securities pledged for these
repurchase agreements was $55.60 million and $69.60 million, respectively. As of
December 31, 2009 and 2008, the Company did not own investment securities of any
one issuer where the carrying value exceeded 10% of stockholders'
equity.
99
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
C - (continued)
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,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
Cost
|
Fair
Value
|
Cost
|
Fair
Value
|
Cost
|
Fair
Value
|
|||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
Available-For-Sale
|
||||||||||||||||||||||||
U.S.
Treasury Notes
|
$ | 50,236 | $ | 50,206 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
U.S.
Government Agencies
|
76,259 | 75,525 | 91,466 | 91,158 | 272,789 | 272,318 | ||||||||||||||||||
Mortgage-backed
securities
|
134,810 | 136,043 | 83,845 | 83,821 | 53,886 | 53,057 | ||||||||||||||||||
Corporate
notes
|
19,029 | 17,729 | 51,150 | 38,124 | 71,147 | 67,601 | ||||||||||||||||||
Single
Issuer Trust Preferred CDO
|
1,021 | 1,021 | 3,000 | 1,206 | ||||||||||||||||||||
Pooled
Trust Preferred CDO
|
6,463 | 150 | 10,000 | 2,994 | ||||||||||||||||||||
Municipal
securities
|
1,973 | 2,171 | 1,973 | 1,603 | 1,973 | 3,004 | ||||||||||||||||||
Auction
rate securities
|
78,895 | 66,942 | 101,110 | 63,080 | 184,597 | 184,597 | ||||||||||||||||||
Marketable
equity securities
and other
|
7,648 | 7,691 | 16,708 | 15,550 | 18,698 | 18,384 | ||||||||||||||||||
Total
|
$ | 376,334 | $ | 357,478 | $ | 359,252 | $ | 297,536 | $ | 603,090 | $ | 598,961 | ||||||||||||
Held-To-Maturity
|
||||||||||||||||||||||||
U.S.
Government Agencies
|
$ | 340 | $ | 337 | $ | 360 | $ | 362 | $ | 395 | $ | 405 |
Federal Home Loan Bank
Stock. The Bank owns stock of the FHLBNY which is necessary
for it to be a member of the FHLBNY. Membership requires the purchase
of stock equal to 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 redeem FHLBNY shares is dependent upon
the redemption practices of the FHLBNY. At December 31, 2009, the FHLBNY neither
placed restrictions on redemption of shares in excess of a member's required
investment in stock, nor stated that it will cease paying dividends. The Bank
did not consider this asset impaired at either December 31, 2009 or
2008.
100
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
D - LOANS
Major classifications of loans are as
follows:
December 31,
2009
|
December 31,
2008
|
|||||||
(In thousands)
|
||||||||
Commercial
and professional loans
|
$ | 50,672 | $ | 68,418 | ||||
Secured
by real estate
|
||||||||
1 -
4 family
|
129,925 | 140,150 | ||||||
Multi
family
|
7,432 | 4,031 | ||||||
Non-residential
|
242,927 | 254,831 | ||||||
Consumer
|
396 | 460 | ||||||
431,352 | 467,890 | |||||||
Deferred
loan fees
|
(1,003 | ) | (1,137 | ) | ||||
Allowance
for loan losses
|
(11,416 | ) | (9,204 | ) | ||||
$ | 418,933 | $ | 457,549 |
Changes in the allowance for loan
losses are as follows:
For The Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(In thousands)
|
||||||||||||
Balance
at beginning of
year
|
$ | 9,204 | $ | 4,183 | $ | 3,771 | ||||||
Provision
charged to operations
|
9,300 | 4,904 | 355 | |||||||||
Loans
charged off
|
(7,194 | ) | (1 | ) | — | |||||||
Recoveries
|
106 | 118 | 57 | |||||||||
Balance
at end of year
|
$ | 11,416 | $ | 9,204 | $ | 4,183 |
The Bank had $13.9 million, $130,000
and $153,000 of non accrual loans as of December 31, 2009, 2008 and 2007,
respectively, and $0, $99,000 and $314,000 of loans delinquent more than ninety
days and still accruing interest at December 31, 2009, 2008 and 2007,
respectively. The Bank classified the non-accrual loans of $13.9 million and
$130,000 as impaired loans at December 31, 2009 and 2008, respectively. However,
no specific allocation from the allowance for loan losses was made because the
collateral underlying each loan 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 125% of
risk-weighted assets or approximately $6.90 million.
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 12/31/08
|
$ | 15,098 | ||
New
Loans
|
5,024 | |||
Repayments
|
643 | |||
Balance
at 12/31/09
|
$ | 19,479 |
101
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,
2009
|
December 31,
2008
|
|||||||
(In thousands)
|
|||||||||
Land
|
Indefinite
|
$ | 3,572 | $ | 3,572 | ||||
Buildings
|
39
years
|
5,213 | 5,203 | ||||||
Furniture
and equipment
|
3
to 10 years
|
3,448 | 3,315 | ||||||
Leasehold
improvements
|
2
to 10 years
|
2,306 | 2,226 | ||||||
14,539 | 14,316 | ||||||||
Accumulated
depreciation and amortization
|
(6,007 | ) | (5,472 | ) | |||||
Total
|
$ | 8,532 | $ | 8,844 |
Depreciation and amortization expense
was approximately $533,000, $604,0000 and $739,000 for the years ended December
31, 2009, 2008 and 2007, respectively.
Note
F - DEPOSITS
The aggregate amount of jumbo
certificates of deposits greater than $100,000 were approximately $191.3 million
and $213.6 million as of December 31, 2009 and 2008, respectively.
The
scheduled maturities of all certificates of deposit are as follows:
December 31, 2009
|
||||
(In thousands)
|
||||
2010
|
$ | 343,279 | ||
2011
|
70,394 | |||
2012
|
11,864 | |||
2013
|
2,234 | |||
2014
|
5 | |||
$ | 427,776 |
It has been the Bank's experience that
the majority of these certificates of deposit will renew with the
Bank.
102
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
G - BORROWINGS
Borrowings 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,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(Dollars in Thousands)
|
||||||||||||
Securities
sold under repurchase agreements
and federal funds purchased
|
||||||||||||
Balance
at year-end
|
$ | 50,000 | $ | 59,504 | $ | 76,842 | ||||||
Average
during the year
|
$ | 56,436 | $ | 61,162 | $ | 40,049 | ||||||
Maximum
month-end balance
|
$ | 57,000 | $ | 72,324 | $ | 76,842 | ||||||
Weighted
average rate during the year
|
4.08 | % | 3.83 | % | 4.93 | % | ||||||
Rate
at December 31
|
3.97 | % | 3.76 | % | 4.65 | % |
Long-Term
Borrowings At December 31, 2009, advances from the FHLBNY
totaling $31.00 million will mature within one to four years and are reported as
long-term borrowings. The advances are collateralized by FHLBNY stock
and certain first mortgage loans totaling $118.2 million. The
advances had a weighted average rate of 4.94%. Unused lines of credit
at the FHLBNY were $89.2 million at December 31, 2009.
Outstanding long-term borrowings mature
as follows (in thousands):
Year
|
Amount
|
|||
2010
|
$ | 16,000 | ||
2011
|
— | |||
2012
|
2,435 | |||
2013
|
12,569 | |||
Total
|
$ | 31,004 |
The
borrowings with the Federal Home Loan Bank are generally renewed.
Subordinated
Debentures
As of May 18 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%, currently
2.95%.
On April 1, 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%, currently
2.22%.
103
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
H - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is
calculated by dividing income (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, 2009 and 2008 due to the net loss
recognized. The following tables present the Company's calculation of earnings
(loss) per common share.
Year Ended December 31, 2009
(In thousands, except per share data)
|
||||||||||||
Income
(numerator)
|
Shares
(denominator)
|
Per share
amount
|
||||||||||
Basic
earnings (loss) per share
|
||||||||||||
Net
(loss)
|
$ | (2,238 | ) | |||||||||
Dividends
paid to preferred stockholders
|
(4,800 | ) | ||||||||||
Net
(loss) available to common stockholders
|
$ | (7,038 | ) | 7,054 | $ | (1.00 | ) |
Year Ended December 31, 2008
(In thousands, except per share data)
|
||||||||||||
Income
(loss)
(numerator)
|
Shares
(denominator)
|
Per share
amount
|
||||||||||
Basic
earnings (loss) per share
|
||||||||||||
Net
loss
|
$ | (79,905 | ) | |||||||||
Dividends
paid to preferred stockholders
|
(837 | ) | ||||||||||
Net
loss available to common shareholders
|
$ | (80,742 | ) | 7,054 | $ | (11.45 | ) |
Year Ended December 31, 2007
(In thousands, except per share data)
|
||||||||||||
Income
(numerator)
|
Shares
(denominator)
|
Per share
amount
|
||||||||||
Basic
earnings per share
|
||||||||||||
Net
income available to common stockholders
|
$ | 5,354 | 6,987 | $ | .77 | |||||||
Effect
of dilutive securities Options
|
— | 18 | (.01 | ) | ||||||||
Diluted
earnings per share
|
||||||||||||
Net
income available to common stockholders plus assumed
conversions
|
$ | 5,354 | 7,005 | $ | .76 |
104
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
I - INCOME TAXES
The components of income tax (benefit)
expense are as follows: (In thousands)
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Current
|
$ | (7,376 | ) | $ | (1,476 | ) | $ | 2,723 | ||||
Deferred
Taxes (Benefit)
|
(5,841 | ) | (4,314 | ) | (349 | ) | ||||||
$ | (13,217 | ) | $ | (5,790 | ) | $ | 2,374 |
A reconciliation of the (benefit)
provision for income taxes for the years ended December 31, 2009, 2008 and 2007
and the amount computed by applying the statutory Federal income tax rate to
loss/income from continuing operations follows: (In thousands)
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Effective
Tax Reconciliation
|
||||||||||||
Tax
at statutory rate
|
$ | (5,254 | ) | $ | (29,136 | ) | $ | 2,627 | ||||
State
and City, net of federal income tax benefit
|
2,165 | (750 | ) | 1,195 | ||||||||
Permanent
items
|
3 | (2,244 | ) | (1,430 | ) | |||||||
(Decrease)
increase in Federal valuation allowance
|
(8,156 | ) | 26,340 | — | ||||||||
Other
|
(1,975 | ) | — | (18 | ) | |||||||
Actual
(benefit) provision for income taxes
|
$ | (13,217 | ) | $ | (5,790 | ) | $ | 2,374 |
The tax effect of the principal
temporary differences at December 31, 2009 and 2008 are as follows: (In
thousands)
December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
deferred tax assets
|
||||||||
Loan
loss provision
|
$ | 5,142 | $ | 4,166 | ||||
Depreciation
|
397 | 299 | ||||||
Non
accrual interest
|
1,048 | — | ||||||
Net
operating loss
|
5,036 | — | ||||||
Other
|
786 | 851 | ||||||
Other
than temporary impairment
|
28,530 | 35,396 | ||||||
Valuation
reserve
|
(28,289 | ) | (33,903 | ) | ||||
Unrealized
loss on investment securities
|
7,353 | 23,045 | ||||||
Net
deferred tax asset included in other assets
|
$ | 20,003 | $ | 29,854 |
105
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
I - (continued)
For the fiscal year ended December 31,
2009 the Company recorded a valuation reserve of approximately $28.3 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.
For the fiscal year ended December 31,
2008 the Company recorded a valuation reserve of approximately $33.9 million
relating primarily to OTTI. 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.
At December 31, 2009, the Company
generated a net operating loss for federal income tax purposes ("NOL") of $25.9
million which will expire in year 2029. Due to newly enacted tax
legislation, the NOL generated can be carried back to offset federal incomes
taxes paid in previous years for a period of up to five years. The
portion of the NOL qualifying for the five year carryback period has been
recorded as current tax benefit in the Statements of Income and Comprehensive
Loss. A valuation allowance of $5 million was established and,
therefore, no benefit recognized for the remaining portion of the NOL available
to offset future taxable income as in the opinion of management it is more
likely than not that the deferred tax asset may not be
realized.
106
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
J - STOCK PLANS
In March 1999, the stockholders of the
Company approved the 1999 Stock Incentive Plan (the "1999 Stock Incentive
Plan"). The 1999 Stock Incentive Plan permits the granting of awards
in the form of nonqualified stock options, incentive stock options, restricted
stock, deferred stock, and other stock-based incentives. Up to
600,000 shares of common stock of the Company may be issued pursuant to the 1999
Stock Incentive Plan. Officers, directors and other key employees of the Company
or any subsidiary are eligible to receive awards under the 1999 Stock Incentive
Plan. Options outstanding under the 1999 Stock Incentive Plan were 2,076 as of
December 31, 2008 and 2007. The Company did not grant options in 2009, 2008 and
2007. By its terms, the 1999 Stock Incentive Plan expired in March
2009.
A summary
of activity with respect to the Stock Option Plan follows:
December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
Outstanding
at beginning of year
|
2,076 | $ | 8.29 | 2,076 | $ | 8.29 | 185,878 | $ | 9.70 | |||||||||||||||
Granted
|
— | $ | — | — | $ | — | — | $ | — | |||||||||||||||
Cancelled
|
— | $ | — | — | $ | — | (7,500 | ) | $ | 10.00 | ||||||||||||||
Exercised
|
— | $ | — | — | $ | — | (176,302 | ) | $ | 9.77 | ||||||||||||||
Outstanding
at end of year
|
2,076 | $ | 8.29 | 2,076 | $ | 8.29 | 2,076 | $ | 8.29 | |||||||||||||||
Exercisable
at end of year
|
2,076 | $ | 8.29 | 2,076 | $ | 8.29 | 2,076 | $ | 8.29 | |||||||||||||||
Weighted
average fair value of options granted during the year
|
$ | — | $ | — | $ | — |
The following table summarizes
information about options outstanding and exercisable at December 31,
2009:
Options Outstanding and Exercisable
|
||||||||||||
Range of
exercise prices
|
Number
outstanding
at
December 31,
2009
|
Weighted
average
remaining
contractual
life (years)
|
Weighted
average
exercise
price
|
|||||||||
$
5.98 - $8.64
|
2,076 | 0.45 | $ | 8.29 |
107
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
K - EMPLOYEE BENEFIT PLANS
1.
|
Retirement
Income Plan
|
The Company's Retirement Income Plan
(the "Plan") covers substantially all full-time employees. Benefits are based
upon a combination of employee compensation and years of service. The
Company pays the entire cost of the Plan and funds such costs as they
accrue. The Company's funding policy is to make annual contributions
within minimum and maximum levels required by applicable
regulations. The Company's customary contributions are designed to
fund normal cost on a current basis and to fund over 30 years the estimated
prior service cost of benefit improvements (15 years of annual gains and
losses). The projected unit cost method was used to determine the annual
cost. Effective December 31, 2009, further benefit accruals were
frozen and the Plan was terminated.
The following table summarizes the
major categories of Plan assets as of the dates indicated:
December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Fair Value
|
% of Total
|
Fair Value
|
% of Total
|
|||||||||||||
(In
thousands, except percentages
|
||||||||||||||||
Mutual
Funds
|
||||||||||||||||
International
Equity Fund
|
$ | — | — | % | $ | 72 | 2.97 | % | ||||||||
Large
Cap Equity Growth Fund
|
— | — | 308 | 12.70 | ||||||||||||
International
Investment Grade Bond Fund
|
— | — | 874 | 36.03 | ||||||||||||
Small
Cap Equity Growth Fund
|
— | — | 401 | 16.53 | ||||||||||||
Large
Cap Equity Value Fund
|
— | — | 703 | 28.97 | ||||||||||||
Cash
and cash equivalents
|
4,390 | 100.00 | 68 | 2.80 | ||||||||||||
Total
Plan Assets
|
$ | 4,390 | 100.00 | % | $ | 2,426 | 100.00 | % |
In anticipation of the Plan's
termination on December 31, 2009 and the full settlement of all Plan benefits in
the near future, the Plan is invested 100% in cash-equivalent instruments. The
expected rate of return on these assets, net of expenses is 0%. Previously, the
assets of the Plan were primarily invested in common stock and fixed income
funds designed to minimize risk while maximizing expected portfolio
returns. To achieve the long term rate of return, Plan assets were
invested in a mixture of instruments, including but not limited to, corporate
common stock, investment grade bond funds, small and large cap equity funds and
international equity funds. The allocation of assets was determined
by the Investment Manager, and typically include 50% to 70% equities, with the
remainder invested in fixed income and a minimal amount of cash. The diversified
portfolio was expected to return approximately 8.50% in the long
run.
The expected rate of return on Plan
assets was determined based upon a review of historical returns, both for our
Plan and for medium to large-sized defined benefit pension funds with similar
asset allocations. This review generated separate expected future
long-term returns for each asset class listed in the above
table. These expected future returns were then blended based upon our
Plan's target asset allocation.
108
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
K - (continued)
Assumptions
Weighted-average assumptions used to
determine benefit obligations were as follows at the dates
indicated:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Discount
rate
|
4.15 | % | 6.10 | % | ||||
Rate
of compensation increase
|
5.00 | % | 5.00 | % |
Weighted-average assumptions used to
determine net periodic benefit cost were as follows for the dates
indicated:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Discount
rate
|
6.10 | % | 6.30 | % | ||||
Rate
of compensation increase
|
5.00 | % | 5.00 | % | ||||
Expected
return on plan assets
|
8.50 | % | 8.50 | % | ||||
Measurement
date
|
12/31/2009
|
12/31/2008
|
The following table sets forth the
Plan's benefit obligations, fair value of the Plan assets and the funded status
of the Plan for the years ended December 31, 2009 and 2008:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Change
in benefit obligation
|
||||||||
Benefit
obligation at beginning of year
|
$ | 4,334,533 | $ | 3,560,406 | ||||
Service
cost
|
358,270 | 384,718 | ||||||
Interest
cost
|
256,320 | 231,767 | ||||||
Actuarial
(gain) loss
|
347,528 | 291,131 | ||||||
Benefits
paid
|
(185,942 | ) | (133,489 | ) | ||||
Benefits
obligation at end of year
|
$ | 5,110,709 | $ | 4,334,533 | ||||
Change
in plan assets
|
||||||||
Fair
value of plan assets at beginning of year
|
$ | 2,426,088 | $ | 2,450,590 | ||||
Actual
return on plan assets
|
716,264 | (759,513 | ) | |||||
Employer
contribution
|
1,433,900 | 868,500 | ||||||
Benefits
paid
|
(185,942 | ) | (133,489 | ) | ||||
Fair
value of plan assets at end of year
|
$ | 4,390,310 | $ | 2,426,088 | ||||
Funded
status at end of year
|
$ | (720,399 | ) | $ | (1,908,445 | ) | ||
Amounts
recognized in the statement of financial position
consist of:
|
||||||||
Liabilities
|
$ | (720,399 | ) | $ | (1,908,445 | ) | ||
Net
amount recognized at year end
|
$ | (720,399 | ) | $ | 1,908,445 | |||
Additional
year-end information for pension plans with accumulated benefit
obligations in excess of plan assets
|
||||||||
Projected
benefit obligation
|
$ | 5,110,709 | $ | 4,334,533 | ||||
Accumulated
benefit obligation
|
5,110,709 | 4,334,533 | ||||||
Fair
value of plan assets
|
4,390,310 | 2,426,088 |
109
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
K - (continued)
A summary
of the components of net periodic benefit cost and other amounts recognized in
other comprehensive income in accordance with ASC 715 for the years ended
December 31, 2009, 2008 and 2007 is as follows:
December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Service
cost
|
$ | 358,270 | $ | 384,718 | $ | 407,623 | ||||||
Interest
cost
|
256,320 | 231,767 | 177,221 | |||||||||
Expected
return on assets
|
(276,027 | ) | (245,909 | ) | (182,142 | ) | ||||||
Amortization
|
||||||||||||
Prior
service cost
|
18,370 | 18,370 | 18,370 | |||||||||
(Gain)
loss
|
167,506 | 61,810 | 52,649 | |||||||||
Curtailments
|
47,394 | — | — | |||||||||
Net
periodic pension cost
|
$ | 571,833 | $ | 450,756 | $ | 473,721 |
The Pension Protection Act of 2006 (the
"PPA") changed the funding rules for defined benefit pension plans beginning in
2008. A key element of the PPA is the introduction of benefit
restrictions on plans that are funded below 80% of the plan's target
liabilities. In order to avoid these restrictions, during the fiscal
years ended December 31, 2009 and 2008 we contributed approximately $1.4 million
and $869,000, respectively, to the Plan.
The following table sets forth other
changes in plan assets and benefit obligations recognized in other comprehensive
income in accordance with ASC 715 at December 31, 2009 and 2008:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
loss (gain)
|
$ | (92,709 | ) | $ | 1,296,553 | |||
Prior
service cost
|
N/A | N/A | ||||||
Amortization
of prior service cost
|
(18,370 | ) | (18,370 | ) | ||||
Amortization
of net (loss) gain
|
(167,506 | ) | (61,810 | ) | ||||
Curtailments
|
(47,394 | ) | — | |||||
Total
recognized in other comprehensive (income)
|
(325,979 | ) | 1,216,373 | |||||
Total
recognized in net periodic benefit cost and other comprehensive
(income)
|
$ | 245,854 | $ | 1,667,129 |
Due to
the termination of the Plan on December 31, 2009, the estimated net loss (gain),
prior service cost and net transition obligation that will be amortized from the
accumulated other comprehensive income into net periodic benefit cost over the
next fiscal year will be zero.
110
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
K - (continued)
Estimated
Future Benefit Payments
During 2010, all past and present
employees covered by the Plan will receive their accrued benefits and no further
benefit payments will be made in future years.
We estimate future benefit payments to
be approximately $5.3 million to be paid in the year ending December 31,
2010.
Company
Contributions
The Company contributed $1.4 million
and $868,500 to its Retirement Plan in the fiscal years ended December 31, 2009
and 2008, respectively. During the fiscal year ending December 31,
2010, we intend to contribute the amount necessary to fund all Plan benefits
prior to their distribution under the termination of the Plan. Our
actuary currently estimates the necessary contribution to be
$935,000.
111
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
K - (continued)
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,
|
||||||||
2009
|
2008
|
|||||||
(In
thousands)
|
||||||||
Change
in benefit obligation
|
||||||||
Benefit
obligation at beginning of year
|
$ | 708 | $ | 678 | ||||
Service
cost
|
— | — | ||||||
Interest
cost
|
42 | 42 | ||||||
Adjustment
for measurement date change
|
— | 11 | ||||||
Actual
loss (gain)
|
33 | 33 | ||||||
Benefits
paid
|
(61 | ) | (56 | ) | ||||
Benefits
obligation at end of year
|
722 | 708 | ||||||
Change
in plan assets
|
||||||||
Fair
value of plan assets at beginning of year
|
— | — | ||||||
Actual
return on plan assets
|
— | — | ||||||
Employer
contribution
|
61 | 56 | ||||||
Benefits
paid
|
(61 | ) | (56 | ) | ||||
Fair
value of plan assets at end of year
|
— | — | ||||||
Funded
status
|
(722 | ) | (708 | ) | ||||
Unrecognized
net actuarial loss
|
N/A | N/A | ||||||
Accrued
benefit cost (included in other liabilities)
|
$ | 722 | $ | 708 |
Net
benefit cost included the following components:
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(In
thousands)
|
||||||||
Service
cost
|
$ | — | $ | — | ||||
Interest
cost on projected benefit
obligation
|
42 | 42 | ||||||
Actual
return on plan assets
|
— | — | ||||||
Net
periodic benefit cost
|
$ | 42 | $ | 42 |
The
assumed discount rate used in determining the actuarial present value of the
projected benefit obligation was 6.25% and 6.125% in 2009 and 2008,
respectively.
112
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
K - (continued)
3.
|
401(k)
Plans
|
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 $136,500, $132,000 and $124,000 for
the years ended December 31, 2009, 2008 and 2007, 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, 2009 and 2008, the
balance accumulated under these arrangements was approximately $178,000 and
$194,000, 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, 2009 and 2008, the balances accumulated
under the Plan were approximately $451,000 and $271,000,
respectively.
Note
L - COMMITMENTS AND CONTINGENCIES
1.
|
Leases
and
Other Commitments
|
The Company leases certain of its
operating facilities under non-cancelable operating leases expiring in 2010
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,
|
||||
2010
|
$ | 1,284 | ||
2011
|
1,115 | |||
2012
|
1,137 | |||
2013
|
420 | |||
2014
|
204 | |||
Thereafter
|
225 | |||
$ | 4,385 |
The Company's rental expense was
approximately $1,539,000, $1,433,000 and $1,329,000 for the fiscal years ended
December 31, 2009, 2008 and 2007, respectively. Included in the
Company's rental expense was approximately $428,000, $405,000 and $368,000 for
the fiscal years ended December 31, 2009, 2008 and 2007, respectively, which was
paid to a company affiliated with a director of the Company.
113
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
M - 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, management is concerned that 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, 2009 and 2008 are outlined below.
December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Carrying
amount
|
Estimated
fair value
|
Carrying
amount
|
Estimated
fair value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Investment
securities
|
$ | 357,818 | $ | 357,815 | $ | 297,896 | $ | 297,898 | ||||||||
Loans,
net of unearned income
|
430,349 | 428,990 | 466,753 | 465,664 | ||||||||||||
Time
Deposits
|
427,777 | 429,449 | 464,931 | 467,756 | ||||||||||||
Repurchase
Agreements
|
50,000 | 49,842 | 59,504 | 64,519 | ||||||||||||
Long-term
Debt
|
31,004 | 31,756 | 67,953 | 69,739 |
For cash and cash equivalents, the
recorded book values of $60.8 million and $102.4 million at December 31, 2009
and 2008, 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,
2009 and 2008 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 fair value of time deposits have been valued using net
present value discounted cash flow.
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.
114
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
M - (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 $117,000 and $236,000 at December 31, 2009 and 2008,
respectively.
The fair value of the borrowings
approximates the carrying value due to the re-pricing of the debt.
Effective January 1, 2008, the Company
adopted FASB ASC 820, "Fair Value Measurements and Disclosures", ("ASC 820")
which 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.
115
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
M - (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 on a
recurring basis during fiscal 2009 are summarized below.
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,
2009
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Assets
|
||||||||||||||||
Investment
securities available for sale
|
$ | 56,006 | $ | 235,793 | $ | 66,942 | $ | 358,741 | ||||||||
Total
assets
|
$ | 56,006 | $ | 235,793 | $ | 66,942 | $ | 358,741 |
The above table includes $20.8 million
in net unrealized losses on the Company's available for sale
securities. The Company has reviewed its investment portfolio at
December 31, 2009, 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 $117,000 and valued as a Level 3 input. Further
disclosures are waived due to materiality.
116
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
M - (continued)
Assets measured at fair value on a
recurring basis during fiscal 2008 are summarized below.
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,
2008
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Assets
|
||||||||||||||||
Investment
securities available for sale
|
$ | 4,290 | $ | 231,393 | $ | 63,080 | $ | 298,763 | ||||||||
Total
assets
|
$ | 4,290 | $ | 231,393 | $ | 63,080 | $ | 298,763 |
The above table includes $37.46 million
in net unrealized losses on the Company's available for sale
securities. The Company has reviewed its investment portfolio at
December 31, 2008, and has determined that the unrealized losses, except as
discussed in Note C, are temporary. Such determination was based upon an
evaluation of the creditworthiness of the issuers and/or guarantors, the
underlying collateral, if applicable, as well as the continuing performance of
the securities. Management also evaluates other facts and
circumstances that may be indicative of an other-than-temporary impairment
condition. This includes, but is not limited to, an evaluation of the type of
security and length of time and extent to which the fair value has been less
than cost, as well as certain collateral related characteristics. In addition,
management considers the Company's ability to hold such securities to maturity,
if necessary, thereby recovering its investment.
The fair value of the derivative is
approximately $20,000 and valued as a Level 3 input. Further
disclosures are waived due to materiality.
117
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
M - (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, 2009
|
$ | 63,080 | ||
Total
gains/losses (realized/unrealized)
|
||||
Included
in earnings
|
— | |||
Included
in other comprehensive income
|
26,076 | |||
Purchases,
Sales, Issuances and Settlements
|
(2,205 | ) | ||
Redemptions
|
(18,000 | ) | ||
Interest
|
— | |||
Other
than temporary impairment expense
|
(2,009 | ) | ||
Capital
deductions for operating expenses
|
— | |||
Balance,
December 31, 2009
|
$ | 66,942 | ||
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, 2009
|
$ | — |
Impaired loans totalling $13.9 million
and $130,000 at December 31, 2009 and 2008, respectively, are measured for fair
value using Level 3 inputs, primarily appraisals by independent third
parties.
Note
N -
|
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.
118
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
N - (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,
|
||||||||
2009
|
2008
|
|||||||
(In
thousands)
|
||||||||
Unused
lines of credit
|
$ | 7,859 | $ | 29,533 | ||||
Commitments
to extend credit
|
1,292 | 12,491 | ||||||
Trade
date securities
|
— | 13,431 | ||||||
Standby
letters of credit and financial guarantees written
|
1,117 | 1,349 | ||||||
$ | 10,268 | $ | 56,804 | |||||
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, 2009 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, 2009 are $1,117,000 and they expire through
2010. 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.
119
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
N - (continued)
The trade date securities represent the
contractual agreement to purchase $13.4 million of agency mortgage-backed
securities which settled in January 2009.
Note
O - 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, 2009,
the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 2009, 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.
120
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
O - (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, 2009 and 2008 (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, 2009
|
||||||||||||||||||||||
Total
Capital (to Risk-Weighted Assets)
|
||||||||||||||||||||||
Company
|
$ | 106,884 | 19.3 | % | $ | 44,356 |
≥8.0
|
% | $ | — | N/A | |||||||||||
Bank
|
90,751 | 16.9 | % | 43,080 |
≥8.0
|
% | 53,850 |
≥10.0
|
% | |||||||||||||
Tier
I Capital (to Risk-Weighted Assets)
|
||||||||||||||||||||||
Company
|
99,954 | 18.0 | % | 22,178 |
≥4.0
|
% | — | N/A | ||||||||||||||
Bank
|
84,002 | 15.6 | % | 21,540 |
≥4.0
|
% | 32,310 |
≥6.0
|
% | |||||||||||||
Tier
I Capital (to Average Assets)
|
||||||||||||||||||||||
Company
|
99,954 | 11.3 | % | 35,267 |
≥4.0
|
% | — | N/A | ||||||||||||||
Bank
|
84,002 | 9.8 | % | 34,313 |
≥4.0
|
% | 42,891 |
≥5.0
|
% |
Actual
|
For capital
adequacy purposes
|
To be well
capitalized under
prompt corrective
action provisions
|
||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||
December
31, 2008
|
||||||||||||||||||||||
Total
Capital (to Risk-Weighted Assets)
|
||||||||||||||||||||||
Company
|
$ | 111,533 | 16.9 | % | $ | 52,830 |
≥8.0
|
% | $ | — | N/A | |||||||||||
Bank
|
87,178 | 13.4 | % | 51,948 |
≥8.0
|
% | 64,935 |
≥10.0
|
% | |||||||||||||
Tier
I Capital (to Risk-Weighted Assets)
|
||||||||||||||||||||||
Company
|
102,329 | 15.5 | % | 26,415 |
≥4.0
|
% | — | N/A | ||||||||||||||
Bank
|
79,129 | 12.2 | % | 25,974 |
≥4.0
|
% | 38,961 |
≥6.0
|
% | |||||||||||||
Tier
I Capital (to Average Assets)
|
||||||||||||||||||||||
Company
|
102,329 | 9.9 | % | 41,440 |
≥4.0
|
% | — | N/A | ||||||||||||||
Bank
|
79,129 | 8.9 | % | 35,774 |
≥4.0
|
% | 44,718 |
≥5.0
|
% |
121
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
P - 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,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Cash
|
$ | 6,924 | $ | 10,877 | ||||
Equity
investment in subsidiaries
|
92,079 | 67,746 | ||||||
Investment
in securities available for sale
|
5,807 | 4,290 | ||||||
Accrued
interest receivable
|
38 | 230 | ||||||
Other
assets
|
3,704 | 7,715 | ||||||
Total
assets
|
$ | 108,552 | $ | 90,858 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Subordinated
debt
|
$ | 22,681 | $ | 22,681 | ||||
Other
liabilities
|
635 | 2,225 | ||||||
Total
liabilities
|
23,316 | 24,906 | ||||||
Stockholders'
equity
|
||||||||
Common
stock
|
770 | 770 | ||||||
Series
A preferred stock
|
1 | 1 | ||||||
Additional
paid-in capital
|
150,985 | 150,985 | ||||||
Retained
earnings (accumulated deficit)
|
(46,833 | ) | (39,795 | ) | ||||
Accumulated
other comprehensive loss, net
|
(13,276 | ) | (39,598 | ) | ||||
Common
stock in treasury, at cost
|
(6,411 | ) | (6,411 | ) | ||||
Total
stockholders' equity
|
85,236 | 65,952 | ||||||
$ | 108,552 | $ | 90,858 |
122
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
P - (continued)
CONDENSED
STATEMENTS OF OPERATIONS
(In
Thousands)
For The Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
INCOME
|
||||||||||||
Interest
income from the Bank
|
$ | 7 | $ | 32 | $ | 51 | ||||||
Interest
income
|
549 | 1,175 | 1,271 | |||||||||
Gain
on sales of investment
securities
|
— | — | 125 | |||||||||
Other
income
|
330 | 319 | 235 | |||||||||
Total
income
|
886 | 1,526 | 1,682 | |||||||||
EXPENSES
|
||||||||||||
Salaries
and employee benefits
|
893 | 761 | 771 | |||||||||
Interest
expense
|
784 | 1,234 | 1,840 | |||||||||
Other
than temporary credit impairment charges on securities
|
8,948 | — | — | |||||||||
Other
expenses
|
1,090 | 732 | 746 | |||||||||
Total
expenses
|
11,715 | 2,727 | 3,357 | |||||||||
Loss
before income taxes and equity in undistributed net (loss) income of the
Bank
|
(10,829 | ) | (1,201 | ) | (1,675 | ) | ||||||
Equity
in undistributed net income (loss) of the Bank
|
7,638 | (78,866 | ) | 6,727 | ||||||||
(Loss)
income before taxes
|
(3,191 | ) | (80,067 | ) | 5,052 | |||||||
(Benefit)
provision for income taxes
|
(953 | ) | (162 | ) | (302 | ) | ||||||
Net
(loss) income
|
$ | (2,238 | ) | $ | (79,905 | ) | $ | 5,354 |
123
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
P - (continued)
CONDENSED
STATEMENTS OF CASH FLOWS
(In
Thousands)
For The Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Operating
activities:
|
||||||||||||
Net
(loss) income
|
$ | (2,238 | ) | $ | (79,905 | ) | $ | 5,354 | ||||
Adjustments
to reconcile net (loss) income to net cash provided by (used in) operating
activities:
|
||||||||||||
Gain
on sales of investment securities
|
— | — | (125 | ) | ||||||||
Equity
in undistributed net (income) loss of the Bank
|
(7,638 | ) | 78,866 | (6,727 | ) | |||||||
Equity
in undistributed net income of East 39, LLC
|
(329 | ) | (319 | ) | (235 | ) | ||||||
Dividends
received from the Bank
|
2,790 | 2,013 | 1,810 | |||||||||
Decrease
in other liabilities
|
(1,590 | ) | (359 | ) | (1,748 | ) | ||||||
Decrease
in other assets
|
904 | 16 | 136 | |||||||||
Net
cash (used in) provided by operating activities
|
(8,101 | ) | 312 | (1,535 | ) | |||||||
Investing
activities:
|
||||||||||||
Investment
securities available for sale
|
||||||||||||
Purchases
|
— | — | (1,635 | ) | ||||||||
Sales
and redemptions
|
— | 47 | 6,670 | |||||||||
Other
than temporary credit impairment charges on securities
|
8,948 | — | — | |||||||||
Contributions
to the Bank
|
— | (59,718 | ) | — | ||||||||
Net
cash provided by (used in) investing activities
|
8,948 | (59,671 | ) | 2,028 | ||||||||
Financing
activities:
|
||||||||||||
Proceeds
from exercise of common stock options
|
— | — | 1,363 | |||||||||
Tax
benefits from exercise of common stock options
|
— | — | 359 | |||||||||
Issuance
of Series A Preferred Stock
|
— | 60,000 | — | |||||||||
Dividends
paid on preferred stock
|
(4,800 | ) | (837 | ) | — | |||||||
Dividends
paid on common stock
|
— | (1,405 | ) | (1,252 | ) | |||||||
Net
cash (used in) provided by financing activities
|
(4,800 | ) | 57,758 | 470 | ||||||||
Net
(decrease) increase in cash and cash equivalents
|
(3,953 | ) | (1,061 | ) | 963 | |||||||
Cash
and cash equivalents at beginning of year
|
10,877 | 12,478 | 11,515 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 6,924 | $ | 10,877 | $ | 12,478 |
124
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note
Q - SUBSEQUENT EVENTS
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 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 sale
of each loan and an independent appraisal of the underlying
assets.
125
ITEM
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
Not Applicable.
ITEM
9A(T). 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 and subsequent discussions and
actions by the Company as described below, the CEO/CFO has concluded that as of
December 31, 2009, for the reasons set forth below, the Disclosure Controls were
not effective. However, as of June 7, 2010, due to the remediation described
below, the Company believes its Disclosure Control is effective at the
reasonable assurance level.
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.
126
Management
of the Company, including the CEO/CFO, assessed the effectiveness of the
Company's Internal Control as of December 31, 2009. 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, 2009, the Company's Internal Control was not effective based on those
criteria. In December 2009, we received certain comments from the SEC
Staff regarding prior filings. As a result of our discussions with
the SEC Staff, we subsequently determined that certain securities held by us
were other than temporarily impaired as of December 31, 2009 and we are filing
this Annual Report on Form 10-K on that basis. The comments from the
SEC Staff and subsequent discussion led our management to re-evaluate its
controls and procedures and determine that as of December 31, 2009, a material
weakness existed with respect to our method of identification and valuation of
securities for other than temporary impairment and related tax
accounting. As a result of these discussions, management revised the
relevant controls and procedures to ensure that the Company's financial
statements comply with the U.S. GAAP. Due to this remedial action,
management believes that as of June 7, 2010, the Internal Control is
effective.
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 was not subject to
attestation by the Company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission 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.
127
Changes
in Internal Control over Financial Reporting.
In
accordance with SEC requirements, the CEO/CFO notes that during the fiscal
quarter ended December 31, 2009 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
|
61
|
President,
Chief Executive Officer, Chief Financial Officer and
Director
|
||
William
L. Cohen
|
68
|
Director
|
||
Martin
A. Fischer
|
72
|
Director
|
||
Moses
Marx
|
74
|
Director
|
||
Randolph
B. Stockwell
|
63
|
Director
|
||
Moses
Krausz
|
69
|
President
of The Berkshire Bank and Director
|
||
David
Lukens
|
60
|
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.
128
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 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 2010. 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.
129
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.
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, 2009 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, 2009 (our "named executive officers").
130
Summary
Compensation Table
Name and Principal
Position
|
Year
|
Salary
$
|
Bonus
$
|
Nonqualified
Deferred
Compensation
Earnings
$
|
All Other
Compensation
$
|
Total
$
|
||||||||||||||||
Steven
Rosenberg
|
2008
|
230,000 | 30,000 | 356,393 | — | 616,393 | ||||||||||||||||
President,
Chief Executive Officer and Chief Financial Officer
|
2009
|
241,500 | 45,000 | 278,445 | — | 564,945 | ||||||||||||||||
Moses
Krausz
|
2008
|
465,398 | 150,000 | 13,740 | 11,725 | 640,863 | ||||||||||||||||
President
and Chief Executive Officer of The Berkshire Bank
|
2009
|
481,418 | 200,000 | 16,678 | 7,756 | 705,852 | ||||||||||||||||
David
Lukens
|
2008
|
192,000 | 30,000 | 20,127 | 9,258 | 251,385 | ||||||||||||||||
Executive
Vice President and Chief Financial Officer of The Berkshire
Bank
|
2009
|
192,000 | 30,000 | 21,147 | 7,882 | 251,029 |
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. 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, 2012 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 does 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 $7,350 and $6,900 in
2009 and 2008, respectively, and income associated with life insurance
coverage.
Mr.
Lukens has an employment agreement with the Bank. The agreement will
expire on June 30, 2012 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 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 change in the value of
Mr. Lukens' benefit payable under our Retirement Income Plan and earnings on the
Deferred Compensation Plan, $14,578 and $6,569, respectively, in 2009 and
$14,367 and $5,760, respectively, in 2008. The amounts reported in
All Other Compensation consists of contributions we made to Mr. Lukens' 401(k)
account of $6,687 and $6,683, in 2009 and 2008, respectively, and income
associated with life insurance coverage.
131
1999
Stock Incentive Plan
Our 1999 Stock Incentive Plan permits
the granting of awards in the form of nonqualified stock options, incentive
stock options, restricted stock, deferred stock, and other stock-based
incentives. Up to 600,000 shares of our common stock may be issued
pursuant to the 1999 Stock Incentive Plan (subject to appropriate adjustment in
the event of changes in our corporate structure). Officers, directors and other
key employees of us or any of our subsidiaries are eligible to receive awards
under the 1999 Stock Incentive Plan. The option exercise price of all
options which are granted under the 1999 Stock Incentive Plan must be at least
equal to 100% of the fair market value of a share of common stock of the Company
on the date of grant. At December 31, 2009, options to acquire
550,257 shares of our common stock have been granted under this plan and 2,076
options are outstanding and exercisable. In March 2009, the Stock Incentive Plan
terminated and no options are available for future grants.
Post-Employment
Compensation
Retirement Income Plan. Our
Retirement Income Plan is a noncontributory defined benefit plan covering
substantially all of our full-time, non-union United States employees. Under the
Retirement Income Plan, our benefits were based upon a combination of employee
compensation and years of service. We paid the entire cost of the
plan for our employees and funded such costs as they accrued. Our funding policy
was to make annual contributions within minimum and maximum levels required by
applicable regulations. Our customary contributions were designed to
fund normal cost on a current basis and fund over 30 years the estimated prior
service cost of benefit improvements (15 years of annual gains and
losses). The projected unit cost method was used to determine the
annual cost. At December 31, 2009, Plan assets consisted of cash and
cash equivalents.
Except for Mr. Rosenberg whose benefit
is subject to the laws governing the Retirement Income Plan, a participant in
the Retirement Income Plan accumulates a balance in his or her retirement
account by receiving: (i) an annual retirement credit of 5% of gross wages paid
during the year, but not in excess of the applicable annual maximum compensation
permitted to be taken into account under Internal Revenue Service guidelines for
each year of service; and (ii) an annual interest credit based upon the 30-year
U. S. Treasury securities rate. We pay the entire cost of the
Retirement Income Plan for our employees and fund such costs as they
accrue.
The Retirement Income plan provides for
a normal retirement age of 65. However, the estimated annual reduced benefits
payable under the Retirement Income Plan upon earlier retirement at age 62 for
Messrs. Rosenberg and Lukens are approximately $158,300 and $8,400, respectively
at December 31, 2009. In accordance with the laws currently governing
the Retirement Income Plan, the estimated annual benefit payable to Mr.
Rosenberg is not expected to increase. Mr. Krausz is not a
participant in the Retirement Income Plan.
Effective December 31, 2009, further
benefit accruals were frozen and the Retirement Income Plan was terminated. (See
Note K of Notes to Consolidated Financial Statements for more information
concerning the Retirement Income Plan).
132
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
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, 2009.
Name
|
Fees Earned
or Paid in
Cash
$
|
Total
$
|
||||||
William
L. Cohen
|
30,000 | 30,000 | ||||||
Moses
Marx
|
26,500 | 26,500 | ||||||
Martin
A. Fischer
|
32,500 | 32,500 | ||||||
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. The directors were eligible to
participate in the Company's 1999 Stock Incentive Plan, which expired in March
2009, but have not received grants under that plan during 2009.
ITEM
12. Security Ownership of Certain Beneficial Owners and Related Stockholder
Matters.
The following table sets forth certain
information as of March 31, 2010 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.
133
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) | 1.3 | % | |||||
Common
Stock
|
David
Lukens
|
600 | * | |||||||
Common
Stock
|
Moses
Marx
160
Broadway
New
York, NY 10038
|
3,850,484 | (2) | 54.6 | % | |||||
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)
|
4,035,928 | 57.2 | % |
* Less
than 1%
(1)
Includes 2,100 shares owned by Mr. Krausz's spouse.
(2)
Includes 285,000 shares owned by Momar Corporation and 386,163 shares owned by
Terumah Foundation. Does not include 37,302.32 shares representing
23.0% of the shares owned by Eva and Esther, L.P., of which Mr. Marx has a 23.0%
limited partnership interest. Mr. Marx's daughters and their husbands
are the general partners of Eva and Esther, L.P.
Equity
Compensation Plans
The following table details information
regarding our existing equity compensation plans as of December 31, 2009. The
equity compensation plan approved by security holders expired in March 2009.
Therefore, no securities remain available for future issuance.
Plan Category
|
(a)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
(c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
|
|||||||||
Equity
compensation plans
approved by security
holders
|
2,076 | $ | 8.29 | — | ||||||||
Equity
compensation plans
not approved by security
holders
|
— | — | — | |||||||||
Total
|
2,076 | $ | 8.29 | — |
134
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 the same terms, including interest rates, 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.
In January 2000, the Bank entered into
a lease agreement with Bowling Green Associates, LP, the principal owner of
which is Mr. Marx, for commercial space to open a bank branch. We
obtained an appraisal of the market rental value of the space from an
independent appraisal firm and management believes that the terms of the lease,
including the annual rent paid, $428,000, $405,000 and $368,000 in fiscal 2009,
2008 and 2007, is comparable to the terms and annual rent that would be paid to
non-affiliated parties in a similar commercial transaction for similar
commercial space.
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.
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 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 sale
of each loan and an independent appraisal of the underlying assets.
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.
135
ITEM
14. Principal Accounting Fees and Services
The Company's principal accountant is
Grant Thornton LLP ("Grant Thornton"). The total fees paid to Grant Thornton for
the last two fiscal years are as follows:
Fiscal Year Ended
December 31, 2009
|
Fiscal Year Ended
December 31, 2008
|
|||||||
Audit
Fees
|
$ | 432,163 | $ | 338,379 | ||||
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
|
81,480 | 71,695 | ||||||
All Other Fees:
Professional services rendered for corporate support
|
— | — |
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 2009 and 2008. 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.
136
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, 2009 and 2008
Consolidated
Statements of Income for the Years Ended December 31, 2009, 2008 and
2007
Consolidated
Statements of Stockholders' Equity for the Years Ended December 31, 2009, 2008
and 2007
137
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007
Notes to
Consolidated Financial Statements
Schedule
Number
|
Description
|
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
|
||
2.1
|
Agreement
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.
|
||
3.1
|
Amended
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).
|
||
3.2
|
Certificate
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).
|
||
3.3
|
Certificate
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).
|
||
3.4
|
Amended
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).
|
||
10.1
|
1999
Stock Incentive Plan of the Company (incorporated by reference to Exhibit
10.8 to the Company's Current Report on Form 8-K dated March 30,
1999).+
|
||
10.2
|
Employment
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).+
|
||
10.3
|
Amendment
No. 3, dated as of July 31, 2007, to Employment Agreement, dated as of May
1, 1999, by and between The Berkshire Bank and Moses Krausz (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the Quarterly Period Ended June 30,
2007).+
|
138
Exhibit
|
|||
Number
|
Description
|
||
10.4
|
Employment
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).+
|
||
10.5
|
Amendment
No. 3, dated as of May 1, 2008, to Employment Agreement, dated as of
January 1, 2001, by and between The Berkshire Bank and David Lukens
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the Quarterly Period Ended March 31,
2008).+
|
||
10.6
|
Lease
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).
|
||
10.7
|
Deferred
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).+
|
||
10.8
|
Amendment
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).+
|
||
10.9
|
Amendment
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).
|
||
10.10
|
Amendment
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).+
|
||
10.11
|
Stock
Purchase Agreement by and among Berkshire Bancorp Inc. and the Purchasers
named therein, dated October 30, 2008 (incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 2008).
|
||
10.12
|
Registration
Rights Agreement among Berkshire Bancorp Inc. and the Purchasers named
therein, dated as of October 30, 2008 (incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 2008).
|
||
10.13
|
Amendment
No. 4, dated as of November 4, 2009, to Employment Agreement, dated as of
May 1, 1999, by and between The Berkshire Bank and Moses
Krausz.
|
||
10.14
|
Amendment
No. 4, dated as of November 2, 2009, 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.
|
+ Denotes
a management compensation plan or arrangement.
139
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: |
June 9,
2010
|
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
|
June
9, 2010
|
||
Steven
Rosenberg
|
||||
|
||||
/s/ William L. Cohen
|
Director
|
June
9, 2010
|
||
William
L. Cohen
|
||||
/s/ Martin A. Fischer
|
Director
|
June
9, 2010
|
||
Martin
A. Fischer
|
||||
/s/ Moses Krausz
|
Director
|
June
9 2010
|
||
Moses
Krausz
|
||||
/s/ Moses Marx
|
Director
|
June
9, 2010
|
||
Moses
Marx
|
||||
/s/ Randolph B. Stockwell
|
Director
|
June
9, 2010
|
||
Randolph
B. Stockwell
|
140