Notes to Consolidated Financial Statements
December 31, 2012 and 2011
Note A - ORGANIZATION AND CAPITALIZATION
Organization
Berkshire Bancorp Inc.,
a Delaware corporation, is a bank holding company registered under the Bank Holding Company Act of 1956. References herein to "Berkshire",
the "Company" or "we" and similar pronouns shall be deemed to refer to Berkshire Bancorp Inc. and its consolidated
subsidiaries unless the context otherwise requires. Berkshire's principal activity is the ownership and management of its indirect
wholly-owned subsidiary, The Berkshire Bank (the "Bank"), a New York State chartered commercial bank. The Bank is owned
through Berkshire's wholly-owned subsidiary Greater American Finance Group, Inc. ("GAFG").
The Bank was established
in 1989 to provide highly personalized services to high net worth individuals and to small and mid-sized commercial businesses
primarily from the New York City metropolitan area. The Bank's main office and branch is in mid-town Manhattan. The Bank has two
other branches in Manhattan, four branches in Brooklyn, New York, four branches in Orange and Sullivan Counties in New York State,
and a branch in Teaneck, New Jersey.
The Bank competes with
other banking and financial institutions in its markets. Commercial banks, savings banks, savings and loan associations, mortgage
bankers and brokers, and credit unions actively compete for deposits and loans. Such institutions, as well as consumer finance,
mutual funds, insurance companies, and brokerage and investment banking firms may be considered to be competitors of the Bank with
respect to one or more of the services provided by the Bank.
The Company and the
Bank are subject to the regulations of certain state and federal agencies and, accordingly, are periodically examined by those
regulatory authorities. As a consequence of such regulation of banking activities, the Bank's business may be affected by state
and federal legislation.
In May 2009, in connection
with the Bank's examination by the Federal Deposit Insurance Corporation (the "FDIC") the Bank received a Joint Memorandum
of Understanding (as modified January 31, 2013, the "MOU") from the FDIC and the New York State Department of Financial
Services (the "NYSDFS"), formerly called the New York State Banking Department, which the Bank executed. The MOU sets
forth an informal understanding among the Bank, the FDIC and the NYSDFS addressing asset quality, loan review, underwriting and
administration and certain other concerns identified in the examination. The Bank's board of directors appointed a committee comprised
of three directors to monitor the Bank's compliance with the MOU. Compliance with the MOU has not had a material adverse effect
on our results of operations or financial condition. As set forth in "Management's Discussion and Analysis of Financial Condition
and Results of Operations – Capital” and Note N to the Company's consolidated financial statements, the Bank has been
notified by the regulators that it is well capitalized for regulatory purposes as of December 31, 2012.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note B - SUMMARY OF ACCOUNTING POLICIES
|
1.
|
Basis of Financial Statement Presentation
|
The consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.
GAAP") and predominant practice within the banking industry, and include the accounts of Berkshire Bancorp Inc. and its wholly-owned
subsidiaries, Greater American Finance Group, Inc. ("GAFG"), and GAFG's wholly-owned subsidiary, the Bank, and East 39,
LLC, (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated.
In preparing the financial
statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the balance sheets, and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The principal estimates
that are susceptible to significant change in the near term relate to the allowance for loan losses, carrying value of investments
designated as available for sale, fair value of financial instruments, other than temporary impairment analysis 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.
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.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note B - SUMMARY OF ACCOUNTING POLICIES (continued)
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.
In estimating other-than-temporary
impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than amortized
cost, (2) the current interest rate environment, (3) the financial condition and near-term prospects of the issuer, if applicable,
and (4) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. Other-than-temporary impairment losses for debt securities are measured using a discounted
cash flow model. Other-than temporary impairment losses for equity securities are measured using quoted market prices, when available,
or, when market quotes are not available due to an illiquid market, the Company uses an impairment model from a third party or
quotes from investment brokers.
The Company did not
have a trading securities portfolio as of December 31, 2012. 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.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note B - SUMMARY OF ACCOUNTING POLICIES (continued)
|
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, loan origination costs and an allowance for loan losses. The allowance for
loan losses is established through a provision for loan losses charged to expense. Loan principal considered to be uncollectible
by management is charged against the allowance for credit losses. The allowance is an amount that management believes will be adequate
to absorb probable and estimateable losses and losses on existing loans that may become uncollectible based upon an evaluation
of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature
and size of the loan portfolio, overall portfolio quality, specific problem or impaired loans, and current economic conditions
which may affect the borrowers' ability to pay. The evaluation details historical losses by loan category, the resulting loss rates
for which are projected at current loan total amounts.
Interest income is
accrued as earned on a simple interest basis. Accrual of interest is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of contractual
principal and interest is doubtful. When a loan is placed on such non-accrual status, all accumulated accrued interest receivable
applicable to periods prior to the current year is charged off to the allowance for loan losses. Interest which had accrued in
the current year is reversed out of current period income. The interest on these loans is accounted for on a cash basis, until
qualifying for return to accrual. Loans 90 days or more past due and still accruing interest must have both principal and accruing
interest adequately secured and must be in the process of collection.
The allowance for loan
losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet
date. The allowance is established through the provision for loan losses that is charged against income. In determining the allowance
for loan losses, management makes significant estimates and therefore has identified the allowance as a critical accounting policy.
The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the
high degree of judgment involved, the subjectivity of the assumptions utilized, and the potential for changes in the economic environment
that could result in changes to the amount of the recorded allowance for loan losses.
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 quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two
components: specific reserves and general reserves. Specific reserves are made for loans determined to be impaired.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note B - SUMMARY OF ACCOUNTING POLICIES (continued)
A loan is impaired
when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual
interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement.
The Company accounts
for its impaired loans in accordance with FASB ASC 310. These standards require that a creditor measure impairment based on
the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral
if the loan is collateral-dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair
value of the collateral when the creditor determines that foreclosure is probable. Management considers its investment in one-to-four
family real estate loans and consumer loans to be homogeneous groups of loans. As such, these loans are not individually evaluated
for impairment but rather are collectively evaluated under ASC 450.
The general reserve
is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. Management
also analyzes historical loss experience, delinquency trends, general economic conditions, geographic concentrations, and industry
and peer comparisons. This analysis establishes factors that are applied to the loan segments to determine the amount of the general
reserve. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revisions
based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance
for loan losses management has established which could have a material adverse effect on the Company's financial results.
On a quarterly basis,
the Bank's management committee reviews the current status of various loans as part of our evaluation of the adequacy of the allowance
for loan losses. In this evaluation process, specific loans are analyzed to determine their potential risk of loss. This process
includes all loans, concentrating on non-accrual and classified loans. Each non-accrual or classified loan is evaluated for potential
loss exposure. Any shortfall results in a recommendation of a specific allowance if the likelihood of loss is evaluated as probable.
To determine the adequacy of collateral on a particular loan, an estimate of the fair market value of the collateral is based on
the most current appraised value available. This appraised value is then reduced to reflect estimated liquidation expenses.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note B - SUMMARY OF ACCOUNTING POLICIES (continued)
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.
Although management
believes that we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if
future economic and other conditions differ substantially from the current operating environment. Although management uses what
it believes is the best information available, the level of the allowance for loan losses remains an estimate that is subject to
significant judgment and short-term change. In addition, the Federal Deposit Insurance Corporation, NYSDFS, and other regulatory
bodies, as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies
may require us to recognize adjustments to the allowance based on its judgments about information available to them at the time
of their examination.
The Company, from time
to time, has entered into interest rate cap agreements in order to hedge its exposure to interest rate fluctuations. The Company
adopted the provisions of FASB ASC 815, "Derivatives and Hedging Activities", on January 1, 2009. The statement requires
the Company to recognize all derivative instruments at fair value as either assets or liabilities. Financial derivatives are reported
at fair value in other assets or other liabilities. For derivatives not designated as hedges, the gain or loss is recognized in
current earnings. Amounts reclassed into earnings, when the hedged transaction culminates, are included in interest income. At
both December 31, 2012 and 2011, the Company had notional amounts of $40.0 million outstanding.
|
5.
|
Bank Premises and Equipment
|
Bank premises and equipment,
including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation expense is computed on the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the estimated useful
lives of the improvements or the terms of the related leases. An accelerated depreciation method is used for tax purposes.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note B - SUMMARY OF ACCOUNTING POLICIES (continued)
|
6.
|
Other Real Estate Owned
|
Other real estate owned,
representing property acquired through foreclosure, is recorded at estimated fair market value, less costs of disposal. When property
is acquired, the excess, if any, of the loan balance over fair market value is charged to the allowance for loan losses. Periodically
thereafter, the asset is reviewed for subsequent declines in the estimated fair market value. Subsequent declines, if any, and
holding costs, as well as gains and losses on subsequent sale, are included in the consolidated statements of income.
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.
|
8.
|
Net Earnings/Loss Per Share
|
Basic earnings and/or
loss per common share excludes dilution and is computed by dividing income and/or loss available to common stockholders by the
weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
|
9.
|
Cash and 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.
|
10.
|
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 were approximately $4,083,000 and $3,055,000 at
December 31, 2012 and 2011, respectively.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note B - SUMMARY OF ACCOUNTING POLICIES (continued)
|
11.
|
Federal Home Loan Bank Stock
|
The Company is required
as a condition of membership in the Federal Home Loan Bank of New York ("FHLB-NY") to maintain an investment in FHLB-NY
common stock. The stock is redeemable at par, and therefore, its cost is equivalent to its redemption value. The FHLB-NY paid dividends
on its common stock in each quarter of 2012. At December 31, 2012 and 2011, management did not believe this asset was impaired.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note C – INVESTMENT SECURITIES
The following is a
summary of held to maturity investment securities:
|
|
December 31, 2012
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
275
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
283
|
|
|
|
December 31, 2011
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
298
|
|
|
$
|
1
|
|
|
$
|
(6
|
)
|
|
$
|
293
|
|
The following is a
summary of available-for-sale investment securities:
|
|
December 31, 2012
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
24,868
|
|
|
$
|
19
|
|
|
$
|
(37
|
)
|
|
$
|
24,850
|
|
U.S. Government Agencies
|
|
|
141,653
|
|
|
|
367
|
|
|
|
(151
|
)
|
|
|
141,869
|
|
Mortgage-backed securities
|
|
|
127,508
|
|
|
|
2,343
|
|
|
|
(255
|
)
|
|
|
129,595
|
|
Corporate notes
|
|
|
10,386
|
|
|
|
106
|
|
|
|
(3
|
)
|
|
|
10,489
|
|
Municipal securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Auction rate securities
|
|
|
56,000
|
|
|
|
—
|
|
|
|
(7,815
|
)
|
|
|
48,185
|
|
Marketable equity securities and other
|
|
|
126
|
|
|
|
—
|
|
|
|
—
|
|
|
|
126
|
|
Totals
|
|
$
|
360,541
|
|
|
$
|
2,835
|
|
|
$
|
(8,261
|
)
|
|
$
|
355,114
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note C – INVESTMENT SECURITIES (continued)
|
|
December 31, 2011
|
|
|
|
Amortized
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
80,072
|
|
|
$
|
141
|
|
|
$
|
—
|
|
|
$
|
80,213
|
|
U.S. Government Agencies
|
|
|
130,389
|
|
|
|
510
|
|
|
|
(33
|
)
|
|
|
130,866
|
|
Mortgage-backed securities
|
|
|
140,049
|
|
|
|
2,750
|
|
|
|
(440
|
)
|
|
|
142,359
|
|
Corporate notes
|
|
|
12,949
|
|
|
|
103
|
|
|
|
(49
|
)
|
|
|
13,003
|
|
Municipal securities
|
|
|
2,682
|
|
|
|
—
|
|
|
|
(687
|
)
|
|
|
1,995
|
|
Auction rate securities
|
|
|
65,700
|
|
|
|
—
|
|
|
|
(21,205
|
)
|
|
|
44,495
|
|
Marketable equity securities and other
|
|
|
1,178
|
|
|
|
—
|
|
|
|
(45
|
)
|
|
|
1,133
|
|
Totals
|
|
$
|
433,019
|
|
|
$
|
3,504
|
|
|
$
|
(22,459
|
)
|
|
$
|
414,064
|
|
The following table
shows the outstanding auction rate securities at December 31, 2012 and 2011:
|
|
2012
|
|
|
2011
|
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Preferred Shares of Money Center Banks
|
|
$
|
56,000
|
|
|
$
|
48,185
|
|
|
$
|
63,700
|
|
|
$
|
42,495
|
|
Public Utility Debt and Equity Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,000
|
|
|
|
2,000
|
|
Totals
|
|
$
|
56,000
|
|
|
$
|
48,185
|
|
|
$
|
65,700
|
|
|
$
|
44,495
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note C – INVESTMENT SECURITIES (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 consolidated 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, 2012 (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
|
|
$
|
14,846
|
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,846
|
|
|
$
|
37
|
|
U.S. Government Agencies
|
|
|
45,123
|
|
|
|
151
|
|
|
|
24
|
|
|
|
1
|
|
|
|
45,147
|
|
|
|
152
|
|
Mortgage-backed securities
|
|
|
13,205
|
|
|
|
56
|
|
|
|
5,377
|
|
|
|
199
|
|
|
|
18,582
|
|
|
|
255
|
|
Corporate notes
|
|
|
834
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
834
|
|
|
|
3
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
48,185
|
|
|
|
7,815
|
|
|
|
48,185
|
|
|
|
7,815
|
|
Marketable equity securities and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Municipal securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total temporarily impaired securities
|
|
$
|
74,008
|
|
|
$
|
247
|
|
|
$
|
53,586
|
|
|
$
|
8,015
|
|
|
$
|
127,594
|
|
|
$
|
8,262
|
|
The Company had a total
of 44 debt securities with a fair market value of $79.4 million which were temporarily impaired at December 31, 2012. The total
unrealized loss on these securities was $0.4 million, which is attributable to market interest volatility, the continued illiquidity
of the debt markets, and uncertainty in the financial markets. The remaining unrealized loss of $7.8 million is on 8 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
18.0
%
of total assets at December 31, 2012.
The Company determined that the unrealized losses associated with
these securities are not considered to be other than temporary by performing an impairment analysis using a discounted cash flow
model, with the difference between the present value of the projected cash flows and the amortized cost basis of the security recorded
as a credit related loss against earnings.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note C – INVESTMENT SECURITIES (continued)
Management completed
discounted cash flow analyses to test for other-than-temporarily impaired (“OTTI”). In determining the appropriate
cash flow analysis for the Company’s auction rate securities (ARS), the Company reviewed multiple factors and prepared multiple
discounted cash flow analyses. The four main factors affecting the Company’s 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, the Company used the current ARS rate at December 31, 2012 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 the Company
believes that these rates will not change significantly in the future. In addition, if the rates do increase or decrease in future
periods, the Company believes 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, the Company ran several scenarios. These scenarios
included holding the security until the trust dissolution date (maturity date), and a five year scenario, inasmuch as the Company
believes five years from December 31, 2012 would be the earliest that the ARS market may resume the normal auction process.
The expected principal
that the Company 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, the Company 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, the Company reviewed numerous industry rates and determined a separate discount rate for each ARS as follows:
the Company obtained the 10 year credit default swap spread for each of the underlying issuers (the Company believed that this
was the most readily available information that would most closely represent an equivalent yield). The Company 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 approximately 15 years to 25 years). The Company then added the 10-year swap rate at December 31, 2012, 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 (25 basis points for securities above investment grade and 50 basis points for securities
slightly below investment grade). The final discount rates ranged from 2.3% - 5.0%.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note C – INVESTMENT SECURITIES (continued)
Based on these analyses,
the discounted cash flows ranged from a total of approximately $55.8 million to $60.0 million. The Company believes that of these
scenarios, the most likely scenario as of December 31, 2012 is that the Company will hold these securities to the maturity based
on the high interest rates and will receive par. However, the Company also verified the reasonableness of the value by analyzing
receipt of the par value of the underlying preferred securities at maturity. The calculated fair values using the par value approach
was $55.8 million as compared to $48.2 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 $48.2
million. As the
Company’s current fair value falls below the range of the discounted cash flows analyses performed and lower than the most
likely scenarios, the Company believes that its current fair value is a conservative representation of what a willing market participant
would pay for these securities and is an accurate estimate of its ARS fair value at December 31, 2012.
Based upon the Company’s
methodology for determining the fair value of the auction rate securities, the Company recorded no OTTI charge in 2012 or 2011.
The Company concluded that, as of December 31, 2012 and 2011, the unrealized loss for the remainder of the auction rate securities
is due to 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, 2012,
the Company had six auction rate securities totaling $30.6 million which were below investment grade. At December 31, 2011, the
Company had four auction rate securities totaling $15.3 million which were below investment grade.
During the year ended December 31, 2012, $2.0 million of auction rate securities were redeemed, there
was no such activity for 2011. During fiscal 2012, $5.7 million of auction rate securities were converted to the underlying
preferred securities and sold with a loss of $760,000. Additionally in 2012, $2.0 million of auction rate securities were
sold and a loss of $187,000 was recognized on the sale. During fiscal 2011, $8.3 million of auction rate securities were
sold at auction with a net gain of $2.8 million recognized on the sale.
Based upon the discounted
cash flow analysis performed, there was no credit related OTTI for the years ended December 31, 2012 and 2011.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note C – INVESTMENT SECURITIES (continued)
The following table
indicates the length of time individual securities that we consider temporarily impaired have been in a continuous unrealized loss
position at December 31, 2011 (in thousands):
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
Description of Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
22,791
|
|
|
$
|
33
|
|
|
$
|
293
|
|
|
$
|
6
|
|
|
$
|
23,084
|
|
|
$
|
39
|
|
Mortgage-backed securities
|
|
|
28,957
|
|
|
|
117
|
|
|
|
8,118
|
|
|
|
323
|
|
|
|
37,075
|
|
|
|
440
|
|
Corporate notes
|
|
|
1,244
|
|
|
|
15
|
|
|
|
3,954
|
|
|
|
34
|
|
|
|
5,198
|
|
|
|
49
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
42,495
|
|
|
|
21,205
|
|
|
|
42,495
|
|
|
|
21,205
|
|
Marketable equity securities and other
|
|
|
—
|
|
|
|
—
|
|
|
|
39
|
|
|
|
45
|
|
|
|
39
|
|
|
|
45
|
|
Municipal securities
|
|
|
1,995
|
|
|
|
687
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,995
|
|
|
|
687
|
|
Total temporarily impaired securities
|
|
$
|
54,987
|
|
|
$
|
852
|
|
|
$
|
54,899
|
|
|
$
|
21,613
|
|
|
$
|
109,886
|
|
|
$
|
22,465
|
|
The Company had a total
of 43 debt securities with a fair market value of $67.4 million which were temporarily impaired at December 31, 2011. The total
unrealized loss on these securities was $1.2 million, which is attributable to market interest volatility, the continued illiquidity
of the debt markets, and uncertainty in the financial markets. We also had 1 equity security with a fair market value of $39,000
with an unrealized loss of $45,000. The remaining unrealized loss of $21.2 million is on 9 auction rate securities which have declined
in value due to auction failures beginning in February 2008. It is not more likely than not that we would sell these securities
before maturity, and we have the intent to hold all of these securities to maturity and will not be required to sell these securities,
due to our ratio of cash and cash equivalents of approximately 11.7% of total assets at December 31, 2011. Therefore, the unrealized
losses associated with these securities are not considered to be other than temporary.
The amortized cost
and fair value of investment securities available for sale and held to maturity, by contractual maturity, at December 31, 2012
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.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note C – INVESTMENT SECURITIES (continued)
|
|
December 31, 2012
|
|
|
|
Available for Sale
|
|
|
Held to Maturity
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(In thousands)
|
|
Due in one year or less
|
|
$
|
2,196
|
|
|
$
|
2,202
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one through five years
|
|
|
23,373
|
|
|
|
23,609
|
|
|
|
—
|
|
|
|
—
|
|
Due after five through ten years
|
|
|
72,650
|
|
|
|
73,219
|
|
|
|
254
|
|
|
|
260
|
|
Due after ten years
|
|
|
206,196
|
|
|
|
207,773
|
|
|
|
21
|
|
|
|
23
|
|
Auction rate securities
|
|
|
56,000
|
|
|
|
48,185
|
|
|
|
—
|
|
|
|
—
|
|
Marketable equity securities and other
|
|
|
126
|
|
|
|
126
|
|
|
|
—
|
|
|
|
—
|
|
Totals
|
|
$
|
360,541
|
|
|
$
|
355,114
|
|
|
$
|
275
|
|
|
$
|
283
|
|
Gross gains realized
on the sales of available-for-sale securities for the years ended December 31, 2012 and 2011 were approximately $1.4 million and
$7.6 million respectively. Gross losses were approximately $1.0 million and $6.6 million for the years ended December 31, 2012
and 2011, respectively. During the year ended December 31, 2012, we sold US treasury notes, agency securities, corporate notes
and auction rate securities. During the year ended December 31, 2011, we sold single issuer trust preferred securities, pooled
trust CDO's, auction rate securities and certain corporate notes.
During the year, the
Company entered into and exited trading security activity. As of December 31, 2012, all trading securities had been sold, which
resulted in a net loss of $211,000. There was no trading activity in 2011.
At both December 31,
2012 and 2011, securities sold under agreements to repurchase with a book value of approximately $45.0 million and $50.0 million,
respectively, were outstanding. The book value of the securities pledged for these repurchase agreements was $50.6 million and
$55.6 million, respectively. As of December 31, 2012, the Company owns investment securities to one issuer where the carrying value
exceeded 10% of stockholders' equity. As of December 31, 2011, the Company did not own investment securities of any one issuer
where the carrying value exceeded 10% of stockholders' equity.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note D – LOANS
Major classifications
of loans are as follows:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
Commercial and Industrial and Finance Leases
|
|
$
|
23,184
|
|
|
$
|
15,660
|
|
Secured by Real Estate
|
|
|
|
|
|
|
|
|
Residential
|
|
|
84,207
|
|
|
|
104,854
|
|
Multi family
|
|
|
14,491
|
|
|
|
12,169
|
|
Commercial Real Estate and Construction
|
|
|
172,973
|
|
|
|
183,819
|
|
Consumer
|
|
|
899
|
|
|
|
1,240
|
|
|
|
|
295,754
|
|
|
|
317,742
|
|
Deferred loan fees, net
|
|
|
(589
|
)
|
|
|
(721
|
)
|
Allowance for loan losses
|
|
|
(11,008
|
)
|
|
|
(17,720
|
)
|
|
|
$
|
284,157
|
|
|
$
|
299,301
|
|
Changes in the allowance
for loan losses are as follows:
|
|
For The Years Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
17,720
|
|
|
$
|
16,105
|
|
Provision of (reduction in)charged to operations
|
|
|
(6,693
|
)
|
|
|
1,600
|
|
Loans charged off
|
|
|
(52
|
)
|
|
|
(12
|
)
|
Recoveries
|
|
|
33
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
11,008
|
|
|
$
|
17,720
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
The Bank had $861,000
and $647,000 of non-accrual loans as of December 31, 2012 and 2011, respectively, and no loans delinquent more than ninety days
and still accruing interest at December 31, 2012 and 2011. The Bank classified the non-accrual loans as impaired loans at both
December 31, 2012 and 2011. However, no specific reserves for impaired loans was made because the collateral underlying the non-accrual
loans was deemed to be sufficient to cover any loss in the event of a default. Therefore, the allowance for loan loss is includable
in the calculation of regulatory capital up to a maximum of 1.25% of risk-weighted assets or approximately $4.6 million and $5.2
million at December 31, 2012 and 2011, respectively. Interest payments on non-accrual loans are accounted for on a cash basis.
Average impaired loans
for the twelve months ended December 31, 2012 and 2011 were approximately $9.0 million and $20.2 million, respectively. Interest
income that would have been recognized had these loans performed in accordance with their contractual terms was approximately $6,000
and $70,000, respectively.
Allowance for Credit Losses and Recorded
Investment in Financing Receivables
The qualitative factors
are determined based on the various risk characteristics of each loan class. Relevant risk characteristics are as follows:
Commercial and industrial
loans
- Loans in this class are made to businesses. Generally these loans are secured by assets of the business and repayment
is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and/or business spending
will have an effect on the credit quality in this loan class.
Commercial real
estate
- Loans in this class include income-producing investment properties and owner-occupied real estate used for business
purposes. The underlying properties are generally located largely in our primary market area. The cash flows of the income producing
investment properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn,
will have an effect on credit quality. In the case of owner-occupied real estate used for business purposes a weakened economy
and resultant decreased consumer and/or business spending will have an adverse effect on credit quality.
Construction loans
- Loans in this class primarily include land loans to local individuals, contractors and developers for developing the land for
sale or for the purpose of making improvements thereon. Repayment is derived from sale of the lots/units including any pre-sold
units. Credit risk is affected by market conditions, time to sell at an adequate price and cost overruns. To a lesser extent this
class includes commercial development projects we finance which in most cases have an interest-only phase during construction and
then convert to permanent financing. Credit risk is affected by cost overruns, market conditions and the availability of permanent
financing, to the extent such permanent financing is not being provided by us.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
Residential real
estate
- Loans in this class are made to and secured by owner-occupied residential real estate and repayment is dependent on
the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices,
will have an effect on the credit quality in this loan class. The Company generally does not originate loans with a loan-to-value
ratio greater than 80 percent and does not grant subprime loans.
Multi-Family real
estate
- Loans in this class are made to and secured by owner-occupied residential real estate and repayment is dependent on
the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices,
will have an effect on the credit quality in this loan class. The Company generally does not originate loans with a loan-to-value
ratio greater than 80 percent and does not grant subprime loans.
Consumer loans
- Loans in this class may be either secured or unsecured and repayment is dependent on the credit quality of the individual borrower
and, if applicable, sale of the collateral securing the loan (such as automobile or other secured assets). Therefore the overall
health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan
class.
Financing Leases
- Loans in this class may be either secured or unsecured and repayment is dependent on the credit quality of the individual borrower
and, if applicable, sale of the collateral securing the loan (such as equipment or other secured assets). Therefore the overall
health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan
class.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
Allowance for Credit Losses and Recorded
Investment in Loans
For the Year Ended December 31, 2012
(In thousands)
|
|
Commercial &
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Construction
|
|
|
Multi Family
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Finance
Leases
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
950
|
|
|
$
|
7,857
|
|
|
$
|
609
|
|
|
$
|
411
|
|
|
$
|
6,490
|
|
|
$
|
53
|
|
|
$
|
126
|
|
|
$
|
1,224
|
|
|
$
|
17,720
|
|
Charge-offs
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
52
|
|
Recoveries
|
|
|
33
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33
|
|
Provision
|
|
|
8
|
|
|
|
(1,548
|
)
|
|
|
832
|
|
|
|
(85
|
)
|
|
|
(4,911
|
)
|
|
|
(38
|
)
|
|
|
(64
|
)
|
|
|
(887
|
)
|
|
|
(6,693
|
)
|
Ending balance
|
|
$
|
989
|
|
|
$
|
6,309
|
|
|
$
|
1,441
|
|
|
$
|
326
|
|
|
$
|
1,529
|
|
|
$
|
15
|
|
|
$
|
62
|
|
|
$
|
337
|
|
|
$
|
11,008
|
|
Ending balance: individually
evaluated
for impairment
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Ending balance: collectively
evaluated
for impairment
|
|
$
|
989
|
|
|
$
|
6,309
|
|
|
$
|
1,441
|
|
|
$
|
326
|
|
|
$
|
1,529
|
|
|
$
|
15
|
|
|
$
|
62
|
|
|
$
|
337
|
|
|
$
|
11,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
21,814
|
|
|
$
|
149,184
|
|
|
$
|
23,789
|
|
|
$
|
14,491
|
|
|
$
|
84,207
|
|
|
$
|
899
|
|
|
$
|
1,370
|
|
|
$
|
0
|
|
|
$
|
295,754
|
|
Ending balance: individually
evaluated
for impairment
|
|
$
|
0
|
|
|
$
|
1,277
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
7,596
|
|
|
$
|
13
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
8,886
|
|
Ending balance: collectively evaluated for
impairment
|
|
$
|
21,814
|
|
|
$
|
147,907
|
|
|
$
|
23,789
|
|
|
$
|
14,491
|
|
|
$
|
76,611
|
|
|
$
|
886
|
|
|
$
|
1,370
|
|
|
$
|
0
|
|
|
$
|
286,868
|
|
The Company believes
the unallocated amount included in the allowance for credit losses is appropriate given the nature of the portfolio with the size
of individual loans and the current economy's impact on the real estate market. The Company will continue to closely monitor the
environment and loan portfolio and make adjustments when appropriate.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
Allowance for Credit Losses and Recorded
Investment in Loans
For the Year Ended December 31, 2011
(In thousands)
|
|
Commercial &
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Construction
|
|
|
Multi Family
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Finance
Leases
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
417
|
|
|
$
|
8,610
|
|
|
$
|
2,784
|
|
|
$
|
147
|
|
|
$
|
2,066
|
|
|
$
|
25
|
|
|
$
|
419
|
|
|
$
|
1,637
|
|
|
$
|
16,105
|
|
Charge-offs
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
Recoveries
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Provision
|
|
|
518
|
|
|
|
(753
|
)
|
|
|
(2,175
|
)
|
|
|
264
|
|
|
|
4,424
|
|
|
|
28
|
|
|
|
(293
|
)
|
|
|
(413
|
)
|
|
|
1,600
|
|
Ending balance
|
|
$
|
950
|
|
|
$
|
7,857
|
|
|
$
|
609
|
|
|
$
|
411
|
|
|
$
|
6,490
|
|
|
$
|
53
|
|
|
$
|
126
|
|
|
$
|
1,224
|
|
|
$
|
17,720
|
|
Ending balance: individually
evaluated for impairment
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Ending balance: collectively
evaluated for impairment
|
|
$
|
950
|
|
|
$
|
7,857
|
|
|
$
|
609
|
|
|
$
|
411
|
|
|
$
|
6,490
|
|
|
$
|
53
|
|
|
$
|
126
|
|
|
$
|
1,224
|
|
|
$
|
17,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
11,006
|
|
|
$
|
169,015
|
|
|
$
|
14,804
|
|
|
$
|
12,169
|
|
|
$
|
104,854
|
|
|
$
|
1,240
|
|
|
$
|
4,654
|
|
|
$
|
0
|
|
|
$
|
317,742
|
|
Ending balance: individually
evaluated for impairment
|
|
$
|
122
|
|
|
$
|
23,343
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,566
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
25,031
|
|
Ending balance: collectively
evaluated for impairment
|
|
$
|
10,884
|
|
|
$
|
145,672
|
|
|
$
|
14,804
|
|
|
$
|
12,169
|
|
|
$
|
103,288
|
|
|
$
|
1,240
|
|
|
$
|
4,654
|
|
|
$
|
0
|
|
|
$
|
292,711
|
|
Among the loans reviewed
for impairment, $2.4 million of residential loans and $1.3 million of commercial real estate loans were identified as troubled
debt restructurings ("TDRs"). TDRs are the result of an economic concession being granted to borrowers experiencing financial
difficulties. Certain TDRs are classified as nonperforming at the time of restructuring and may only return to performing status
after considering the borrower's sustained repayment performance under the revised payment terms for a reasonable period, generally
six months. We evaluated all of the impaired loans by analyzing the collateral value and by evaluating the discounted cash flow.
Based on the nature of the modifications no impairment was required.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
Age Analysis of Past Due Loans
As of December 31, 2012
(In thousands)
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Greater
Than
90 Days
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Loans
|
|
|
Recorded
Loans >
90 Days and
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,814
|
|
|
$
|
21,814
|
|
|
$
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,789
|
|
|
|
23,789
|
|
|
|
—
|
|
Commercial real estate
|
|
|
7,181
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,181
|
|
|
|
142,003
|
|
|
|
149,184
|
|
|
|
—
|
|
Consumer
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
665
|
|
|
|
715
|
|
|
|
—
|
|
Overdrafts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
184
|
|
|
|
184
|
|
|
|
—
|
|
Residential – prime
|
|
|
6,081
|
|
|
|
373
|
|
|
|
861
|
|
|
|
7,315
|
|
|
|
76,892
|
|
|
|
84,207
|
|
|
|
—
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,491
|
|
|
|
14,491
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,370
|
|
|
|
1,370
|
|
|
|
—
|
|
Total
|
|
|
$ 13 312
|
|
|
$
|
373
|
|
|
$
|
861
|
|
|
$
|
14,546
|
|
|
$
|
281,208
|
|
|
$
|
295,754
|
|
|
$
|
—
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
Age Analysis of Past Due Loans
As of December 31, 2011
(In thousands)
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Greater
Than
90 Days
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Loans
|
|
|
Recorded
Loans >
90 Days and
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
122
|
|
|
$
|
133
|
|
|
$
|
10,873
|
|
|
$
|
11,006
|
|
|
$
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,804
|
|
|
|
14,804
|
|
|
|
—
|
|
Commercial real estate
|
|
|
21
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
|
|
168,994
|
|
|
|
169,015
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
778
|
|
|
|
778
|
|
|
|
—
|
|
Overdrafts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
462
|
|
|
|
462
|
|
|
|
—
|
|
Residential – prime
|
|
|
63
|
|
|
|
—
|
|
|
|
525
|
|
|
|
588
|
|
|
|
104,266
|
|
|
|
104,854
|
|
|
|
—
|
|
Residential - multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,169
|
|
|
|
12,169
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,654
|
|
|
|
4,654
|
|
|
|
—
|
|
Total
|
|
$
|
95
|
|
|
$
|
—
|
|
|
$
|
647
|
|
|
$
|
742
|
|
|
$
|
317,000
|
|
|
$
|
317,742
|
|
|
$
|
—
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
Impaired Loans
For the Year Ended December 31, 2012
(In thousands)
|
|
Recorded
Loan
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Loan
|
|
|
Interest
Income
Recognized
|
|
|
Interest
Income
Foregone
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
1,277
|
|
|
|
1,277
|
|
|
|
—
|
|
|
|
1,307
|
|
|
|
87
|
|
|
|
—
|
|
Consumer
|
|
|
13
|
|
|
|
13
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
7,596
|
|
|
|
7,596
|
|
|
|
—
|
|
|
|
7,640
|
|
|
|
355
|
|
|
|
6
|
|
Multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,886
|
|
|
$
|
8,886
|
|
|
$
|
—
|
|
|
$
|
8,962
|
|
|
$
|
442
|
|
|
$
|
6
|
|
Commercial
|
|
|
1,277
|
|
|
|
1,277
|
|
|
|
—
|
|
|
|
1,307
|
|
|
|
87
|
|
|
|
—
|
|
Consumer
|
|
|
13
|
|
|
|
13
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
7,596
|
|
|
|
7,596
|
|
|
|
—
|
|
|
|
7,640
|
|
|
|
355
|
|
|
|
6
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
Impaired Loans
For the Year Ended December 31, 2011
(In thousands)
|
|
Recorded
Loan
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Loan
|
|
|
Interest
Income
Recognized
|
|
|
Interest
Income
Foregone
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
122
|
|
|
$
|
122
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
23,343
|
|
|
|
23,343
|
|
|
|
—
|
|
|
|
18,898
|
|
|
|
2,021
|
|
|
|
3
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
1,566
|
|
|
|
1,566
|
|
|
|
—
|
|
|
|
1,235
|
|
|
|
56
|
|
|
|
54
|
|
Multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,031
|
|
|
$
|
25,031
|
|
|
$
|
—
|
|
|
$
|
20,164
|
|
|
$
|
2,077
|
|
|
$
|
70
|
|
Commercial
|
|
|
23,465
|
|
|
|
23,465
|
|
|
|
—
|
|
|
|
18,929
|
|
|
|
2,021
|
|
|
|
16
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
1,566
|
|
|
|
1,566
|
|
|
|
—
|
|
|
|
1,235
|
|
|
|
56
|
|
|
|
54
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
Loans on Nonaccrual Status
As of
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
(In thousands)
|
|
Commercial & industrial
|
|
$
|
—
|
|
|
$
|
122
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
861
|
|
|
|
525
|
|
Multi family
|
|
|
—
|
|
|
|
—
|
|
Finance leases
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
861
|
|
|
$
|
647
|
|
Credit Exposure
Credit Risk Profile by Internally Assigned
Grades
For the Year Ended December 31, 2012
(In thousands)
|
|
Commercial
&
Industrial
|
|
|
Commercial
Real Estate
Construction
|
|
|
Commercial
Real Estate
Other
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
21,679
|
|
|
$
|
23,789
|
|
|
$
|
115,547
|
|
Watch
|
|
|
—
|
|
|
|
—
|
|
|
|
8,226
|
|
Special Mention
|
|
|
—
|
|
|
|
—
|
|
|
|
5,970
|
|
Substandard
|
|
|
135
|
|
|
|
—
|
|
|
|
19,441
|
|
Total
|
|
$
|
21,814
|
|
|
$
|
23,789
|
|
|
$
|
149,183
|
|
|
|
Residential
|
|
|
Multi Family
|
|
Grade:
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
76,097
|
|
|
$
|
14,491
|
|
Watch
|
|
|
716
|
|
|
|
—
|
|
Special Mention
|
|
|
1,086
|
|
|
|
—
|
|
Substandard
|
|
|
6,308
|
|
|
|
—
|
|
Total
|
|
$
|
84,207
|
|
|
$
|
14,491
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
|
|
Consumer
Overdrafts
|
|
|
Consumer
Other
|
|
|
Finance
Leases
|
|
Performing
|
|
$
|
184
|
|
|
$
|
715
|
|
|
$
|
1,370
|
|
Nonperforming
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
184
|
|
|
$
|
715
|
|
|
$
|
1,370
|
|
Credit Exposure
Credit Risk Profile by Internally Assigned
Grades
For the Year Ended December 31, 2011
(In thousands)
|
|
Commercial
&
Industrial
|
|
|
Commercial
Real Estate
Construction
|
|
|
Commercial
Real Estate
Other
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
10,840
|
|
|
$
|
14,804
|
|
|
$
|
114,508
|
|
Watch
|
|
|
—
|
|
|
|
—
|
|
|
|
8,650
|
|
Special Mention
|
|
|
—
|
|
|
|
—
|
|
|
|
19,489
|
|
Substandard
|
|
|
166
|
|
|
|
—
|
|
|
|
26,368
|
|
Total
|
|
$
|
11,006
|
|
|
$
|
14,804
|
|
|
$
|
169,015
|
|
|
|
Residential
|
|
|
Multi Family
|
|
Grade:
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
96,475
|
|
|
$
|
12,169
|
|
Watch
|
|
|
731
|
|
|
|
—
|
|
Special Mention
|
|
|
1,561
|
|
|
|
—
|
|
Substandard
|
|
|
6,086
|
|
|
|
—
|
|
Total
|
|
$
|
104,853
|
|
|
$
|
12,169
|
|
|
|
Consumer
Overdrafts
|
|
|
Consumer
Other
|
|
|
Finance
Leases
|
|
Performing
|
|
$
|
463
|
|
|
$
|
778
|
|
|
$
|
4,654
|
|
Nonperforming
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
463
|
|
|
$
|
778
|
|
|
$
|
4,654
|
|
The Company utilizes
a grade risk rating system for commercial and industrial, commercial real estate and construction loans as follows:
Pass:
These loans have low to average
risk.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
Watch:
A Watch loan is similar to
a Pass classification and it is not a criticized or classified loan. Documentation exceptions require additional attention by management
for corrective action. These loans are paying as agreed and meeting their loan agreement obligations; however existing and developing
factors may elevate the risk levels requiring added attention by management. Those factors may include industry conditions, operating
problems, pending litigation of a minor nature, declining collateral quality, and customer's failure to provide financial information,
occasional payment difficulties (late payments, overdrafts, renewals) or other minor exceptions to policy.
Special mention:
Includes loans,
which are fundamentally sound, but exhibit potential credit risk or unsatisfactory characteristics, which, if not corrected, could
lead to loan loss. A Special Mention loan has potential weaknesses that deserve management's close attention and dictate a higher
level of attention and oversight. If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the loan or in the Bank's credit position at some future date. Special Mention loans are not adversely classified
and do not expose the Bank to sufficient risk to warrant adverse classification.
Substandard:
Includes loans with
positive and well defined weaknesses which are inadequately protected by current net worth and paying capacity of borrower or pledged
collateral. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies
are not corrected. Loans have one or more weaknesses (such as being on non-accrual status and 90 days or more past due) that could
jeopardize the repayment of the debt and result in some form of loss to the Bank. This category includes loans that may be impaired.
Substandard loans should be evaluated at least on a quarterly basis to determine if additional course of action would be required
by management.
Doubtful:
Loans classified as Doubtful
have weaknesses that make collection or liquidation in full, on the basis of the currently known facts, conditions, and values,
highly questionable and improbable. All Doubtful loans are placed on non-accrual status. Doubtful loans are considered impaired.
Loss:
Loans classified as Loss are
considered to be uncollectible and have such little value that their continuance on the Bank's books is not warranted. This classification
does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing
off this loan even though partial recovery may be effected in the future. Loans classified Loss should be promptly charged off
prior to the end of the calendar quarter in which they are identified.
The Company does assign
risk ratings to residential real estate, home equity and consumer loans secured by real estate (such as 1-to-4 family homes) that
are contractually past due 90 days or more or where legal action has commenced against the borrower. Consumer loans other than
those secured by real estate are charged off when they become contractually past due 120 days. Those loans not assigned a rating
watch, special mention, substandard or loss are considered "pass".
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
On a quarterly basis,
or more often if needed, the Company formally reviews the ratings on all classified commercial and industrial, commercial real
estate and construction loans. Semi-annually, the Company engages an independent third-party to review a significant portion of
loans within these segments. Management uses the results of these reviews as part of its periodic review process.
|
|
Loan Modifications
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
|
Number
of
Loans
|
|
|
Pre-Modification
Outstanding
Recorded Loans
|
|
|
Post-Modification
Outstanding
Recorded Loans
|
|
Troubled Debt Restructuring
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
7
|
|
|
$
|
2,177
|
|
|
$
|
2,101
|
|
Commercial Real Estate
|
|
|
3
|
|
|
|
1,354
|
|
|
|
1,276
|
|
|
|
|
10
|
|
|
$
|
3,531
|
|
|
$
|
3,377
|
|
|
|
Loan Modifications
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
|
Number
of
Loans
|
|
|
Pre-Modification
Outstanding
Recorded Loans
|
|
|
Post-Modification
Outstanding
Recorded Loans
|
|
Troubled Debt Restructuring
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
8
|
|
|
$
|
2,388
|
|
|
$
|
2,388
|
|
Commercial Real Estate
|
|
|
3
|
|
|
|
1,326
|
|
|
|
1,326
|
|
|
|
|
11
|
|
|
$
|
3,714
|
|
|
$
|
3,714
|
|
The loans restructured
as noted above were restructured by extending maturity dates or reducing interest rates. No loans were restructed into two notes
nor are there any commitments to extend additional funds on any TDRs. The commercial real estate loans are individually evaluated
for impairment with any loss recognized in the allowance for loan losses.
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)
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note D – LOANS (continued)
Balance at 12/31/11
|
|
$
|
14,052
|
|
New Loans
|
|
|
29
|
|
Repayments
|
|
|
9,181
|
|
Balance at 12/31/12
|
|
$
|
4,900
|
|
In December 2011, the
Bank sold a loan to Farm Associates, of which the Company's and the Bank's Chairman of the Board and his immediate family members
who serve as directors of the Bank are general partners, for approximately $4.5 million, respectively, which represented the Bank's
carrying value.
In August 2012, the
Bank sold a loan to K.F. Investors LLC, of which the Company’s and the Bank's Chairman of the Board and his immediate family
members who serve as directors of the Bank are members, for approximately $6.8 million, which represented the Bank's carrying value.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
Note E – PREMISES AND EQUIPMENT
Major classifications
of premises and equipment are summarized as follows:
|
|
Estimated
useful lives
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
(In thousands)
|
|
Land
|
|
Indefinite
|
|
$
|
3,187
|
|
|
$
|
3,572
|
|
Buildings
|
|
39 years
|
|
|
4,409
|
|
|
|
4,019
|
|
Furniture and equipment
|
|
3 to 10 years
|
|
|
4,203
|
|
|
|
4,056
|
|
Leasehold improvements
|
|
2 to 10 years
|
|
|
2,794
|
|
|
|
2,767
|
|
|
|
|
|
|
14,593
|
|
|
|
14,414
|
|
Accumulated depreciation and amortization
|
|
|
|
|
(7,480
|
)
|
|
|
(6,940
|
)
|
Total
|
|
|
|
$
|
7,113
|
|
|
$
|
7,474
|
|
Depreciation and amortization
expense was approximately $518,000 and $487,000 for the years ended December 31, 2012 and 2011, respectively.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note F – 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 deposit accounts, checking accounts and certificates
of deposit 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.
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
Certificate of deposit accounts
|
|
$
|
337,492
|
|
|
$
|
369,259
|
|
Savings accounts
|
|
|
169,654
|
|
|
|
189,700
|
|
Money Market accounts
|
|
|
12,236
|
|
|
|
8,290
|
|
NOW accounts
|
|
|
36,817
|
|
|
|
16,685
|
|
Total interest-bearing demand deposits
|
|
|
556,200
|
|
|
|
583,934
|
|
Non-interest bearing deposits
|
|
|
84,162
|
|
|
|
73,137
|
|
Total due to depositors
|
|
|
640,362
|
|
|
|
657,071
|
|
Mortgagors' escrow deposits
|
|
|
2,108
|
|
|
|
1,821
|
|
Total Deposits
|
|
$
|
642,470
|
|
|
$
|
658,892
|
|
The aggregate amount
of jumbo certificates of deposits greater than $100,000 was approximately $161.7 million and $176.7 million as of December 31,
2012 and 2011, respectively.
The scheduled maturities of all certificates
of deposit are as follows:
|
|
December 31, 2012
|
|
|
|
(In thousands)
|
|
2013
|
|
$
|
189,479
|
|
2014
|
|
$
|
138,385
|
|
2015
|
|
$
|
9,628
|
|
2016
|
|
$
|
—
|
|
|
|
$
|
337,492
|
|
The following table
summarizes the maturity distribution of time deposits of $100,000 or more as of December 31, 2012 and 2011:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
3 months or less
|
|
$
|
19,565
|
|
|
$
|
35,513
|
|
Over 3 months but within 6 months
|
|
|
27,326
|
|
|
|
22,374
|
|
Over 6 months but within 12 months
|
|
|
37,819
|
|
|
|
81,675
|
|
Over 12 months
|
|
|
77,032
|
|
|
|
37,172
|
|
Total
|
|
$
|
161,742
|
|
|
$
|
176,734
|
|
It has been the Bank's
experience that the majority of these certificates of deposit will renew with the Bank.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note G – BORROWINGS AND SECURITIES
SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under
agreements to repurchase generally mature within 30 days from the date of the transactions. Short-term borrowings consist of various
borrowings which generally have maturities of less than one year. The details of these categories are presented below:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in Thousands)
|
|
Securities sold under repurchase agreements and federal funds purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end
|
|
$
|
45,000
|
|
|
$
|
50,000
|
|
Average balance during the year
|
|
$
|
45,000
|
|
|
$
|
50,000
|
|
Maximum month-end balance
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Weighted average rate during the year
|
|
|
3.88
|
%
|
|
|
3.57
|
%
|
Rate at December 31
|
|
|
3.38
|
%
|
|
|
3.51
|
%
|
Borrowings
At December 31, 2012,
advances from the FHLB-NY totaling $1.5 million will mature within one year and are reported as long-term borrowings. The advances
are collateralized by FHLB-NY stock and certain first mortgage loans totaling $135.8 million. The advances had a weighted average
rate of 3.68%. Unused lines of credit at the FHLB-NY were $133.4 million at December 31, 2012.
Outstanding long-term
borrowings mature as follows (in thousands):
Year
|
|
Amount
|
|
2013
|
|
$
|
1,539
|
|
|
|
|
|
|
Total
|
|
$
|
1,539
|
|
The borrowings with
the Federal Home Loan Bank are generally renewed.
Subordinated Debt
In 2004, the Company
established Berkshire Capital Trust I, a Delaware statutory trust, ("BCTI"). The Company owned all of 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 were paid in 2012.
In 2005, the Company
established Berkshire Capital Trust II, a Delaware statutory trust, ("BCTII"). The Company owned all of 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 were paid in 2012.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note H – EARNINGS (LOSS) PER SHARE
Basic earnings (loss)
per common share is calculated by dividing earnings (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, 2012 and 2011 due to the expiration of the stock option plan in 2009.
The following
tables present the Company's calculation of earnings (loss) per common share.
|
|
Year Ended December 31, 2012
(In thousands, except per share data)
|
|
|
|
Income
(numerator)
|
|
|
Shares
(denominator)
|
|
|
Per share
amount
|
|
Basic earnings per common share
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,387
|
|
|
|
|
|
|
|
|
|
Dividends paid to preferred stockholders
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
12,387
|
|
|
|
14,416
|
|
|
$
|
0.86
|
|
|
|
Year Ended December 31, 2011
(In thousands, except per share data)
|
|
|
|
Income
(numerator)
|
|
|
Shares
(denominator)
|
|
|
Per share
Amount
|
|
Basic earnings per common share
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
49,824
|
|
|
|
|
|
|
|
|
|
Dividends paid to preferred stockholders
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
45,824
|
|
|
|
8,309
|
|
|
$
|
5.51
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note I – INCOME TAXES
The components of income
tax expense (benefit) are as follows:
(In thousands)
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
123
|
|
|
$
|
—
|
|
Deferred
|
|
|
(1,252
|
)
|
|
|
225
|
|
State and Local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
379
|
|
|
|
166
|
|
Deferred
|
|
|
1,869
|
|
|
|
1,472
|
|
Total
|
|
$
|
1,119
|
|
|
$
|
1,863
|
|
A reconciliation of
the provision (benefit) for income taxes for the years ended December 31, 2012 and 2011 and the amount computed by applying the
statutory Federal income tax rate to income/loss from continuing operations follows: (In thousands)
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Effective Tax Reconciliation
|
|
|
|
|
|
|
|
|
Tax at statutory rate
|
|
$
|
4,592
|
|
|
$
|
17,771
|
|
State and City, net of federal income tax benefit
|
|
|
989
|
|
|
|
1,506
|
|
Permanent items
|
|
|
(623
|
)
|
|
|
(738
|
)
|
Decrease in Federal valuation allowance
|
|
|
(3,552
|
)
|
|
|
(16,326
|
)
|
Other
|
|
|
(286
|
)
|
|
|
(350
|
)
|
Actual provision (benefit) for income taxes
|
|
$
|
1,119
|
|
|
$
|
1,863
|
|
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note I – INCOME
TAXES (continued)
The
tax effect of the principal temporary differences at Dece
mber 31, 2012 and 2011 was as follows: (In thousands)
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Net deferred tax assets
|
|
|
|
|
|
|
|
|
Loan loss provision
|
|
$
|
4,965
|
|
|
$
|
7,992
|
|
Depreciation
|
|
|
(264
|
)
|
|
|
(303
|
)
|
Non accrual interest
|
|
|
104
|
|
|
|
104
|
|
Net operating loss
|
|
|
8,245
|
|
|
|
9,483
|
|
Other
|
|
|
907
|
|
|
|
462
|
|
Other than temporary impairment
|
|
|
—
|
|
|
|
425
|
|
Valuation reserve
|
|
|
—
|
|
|
|
(3,912
|
)
|
Unrealized loss on investment securities
|
|
|
2,436
|
|
|
|
8,201
|
|
Net deferred tax asset included in other assets
|
|
$
|
16,393
|
|
|
$
|
22,452
|
|
As of December 31,
2012, the Company had $20.0 million of net operating losses available to offset future taxable income for federal income tax purposes
that will begin to expire in 2029.
For the fiscal year
ended December 31, 2012, the Company released its remaining valuation reserve of $3.9 million relating primarily to net operating
losses. 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 item referred to above. In order to fully realize the net deferred tax asset, the Company will need to
generate future taxable income. Management has projected that the Company will generate sufficient taxable income to utilize the
net deferred tax asset. However, there can be no assurance that such levels of taxable income will be generated.
In the normal course
of business, the Company's Federal, New York State and New York City Corporation tax returns are subject to audit. The Company
is currently open to audit by the Internal Revenue Service (the "IRS") under the statute of limitations for years after
2008. The Company was under examination by the IRS for the years 2008 and 2009. This examination was completed during 2012 with
no change to the tax returns as filed.
The Company has performed
an evaluation of its tax positions and has concluded that as of December 31, 2012, there were no significant uncertain tax positions
requiring additional recognition in its financial statements and does not believe that there will be any material changes in its
unrecognized tax positions over the next twelve months.
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note I – INCOME
TAXES (continued)
The Company's policy
is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. There were no
accruals for interest or penalties during the years ended December 31, 2012 and 2011.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note J – EMPLOYEE BENEFIT PLANS
|
1.
|
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,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
748
|
|
|
$
|
628
|
|
Service cost
|
|
|
—
|
|
|
|
—
|
|
Interest cost
|
|
|
32
|
|
|
|
34
|
|
Adjustment for measurement date change
|
|
|
—
|
|
|
|
—
|
|
Actual loss (gain)
|
|
|
28
|
|
|
|
142
|
|
Benefits paid
|
|
|
(59
|
)
|
|
|
(56
|
)
|
Benefits obligation at end of year
|
|
|
749
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
—
|
|
|
|
—
|
|
Actual return on plan assets
|
|
|
—
|
|
|
|
—
|
|
Employer contribution
|
|
|
59
|
|
|
|
56
|
|
Benefits paid
|
|
|
(59
|
)
|
|
|
(56
|
)
|
Fair value of plan assets at end of year
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(749
|
)
|
|
|
(748
|
)
|
Unrecognized net actuarial loss
|
|
|
—
|
|
|
|
—
|
|
Accrued benefit cost (included in other liabilities)
|
|
$
|
749
|
|
|
$
|
748
|
|
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note J – EMPLOYEE
BENEFIT PLANS (continued)
Net benefit cost included the following
components:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost on projected benefit obligation
|
|
|
32
|
|
|
|
34
|
|
Amortization of unrecognized (Gain)/Loss
|
|
|
5
|
|
|
|
—
|
|
Actual return on plan assets
|
|
|
—
|
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
37
|
|
|
$
|
34
|
|
The assumed discount rate used in determining
the actuarial present value of the projected benefit obligation was 4.05% and 4.40% in 2012 and 2011, respectively.
The Bank has a 401(k)
plan in which employees can contribute up to 15% of their salary. The Bank also matches 50% of the employee contribution up to
a maximum of 3% of the employee's salary. The matching expense was $114,000 and $128,000 for the years ended December 31, 2012
and 2011, respectively.
|
3.
|
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, 2012 and 2011, the balance accumulated under these arrangements
was approximately $127,000 and $140,000, 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, 2012 and 2011, the balances accumulated under the Plan were approximately $865,000
and $725,000, respectively.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note K – COMMITMENTS AND CONTINGENCIES
Leases and Other
Commitments
The Company leases
certain of its operating facilities under non-cancelable operating leases expiring in 2013 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,
|
|
|
|
2013
|
|
$
|
1,290
|
|
2014
|
|
|
1,194
|
|
2015
|
|
|
1,151
|
|
2016
|
|
|
617
|
|
2017
|
|
|
192
|
|
Thereafter
|
|
|
1,018
|
|
|
|
$
|
5,462
|
|
The Company's rental
expense was approximately $1,324,000
and $2,060,000 for the fiscal years ended December
31, 2012 and 2011, respectively. Included in the Company's rental expense was approximately $594,000 and $571,000 for the fiscal
years ended December 31, 2012 and 2011, respectively, which was paid to a company affiliated with a director of the Company. The
two leases expire in June and November 2016.
Bancorp rental expense was $18,000, paid
to a company affiliated with a director.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note L – FAIR VALUE OF FINANCIAL
INSTRUMENTS
The Company is required
to disclose the estimated fair value of its assets and liabilities considered to be financial instruments. For the Company, as
for most financial institutions, the majority of its assets and liabilities are considered financial instruments. The Company uses
significant estimations and present value calculations to prepare this disclosure.
Changes in the assumptions
or methodologies used to estimate fair values may materially affect the estimated amounts. Also there may not be reasonable comparability
between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack
of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.
Estimated fair values
have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial
instruments. The estimation methodologies used, the estimated fair values, and recorded book balances at December 31, 2012 and
2011 are outlined below.
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
|
(In thousands)
|
|
Investment securities
|
|
$
|
355,389
|
|
|
$
|
355,397
|
|
|
$
|
415,468
|
|
|
$
|
415,463
|
|
Loans, net of unearned income
|
|
|
295,165
|
|
|
|
305,123
|
|
|
|
317,021
|
|
|
|
359,989
|
|
Time Deposits
|
|
|
337,492
|
|
|
|
338,723
|
|
|
|
369,259
|
|
|
|
371,266
|
|
Other Deposits
|
|
|
304,978
|
|
|
|
304,978
|
|
|
|
289,633
|
|
|
|
289,633
|
|
Repurchase Agreements
|
|
|
45,000
|
|
|
|
46,138
|
|
|
|
50,000
|
|
|
|
52,432
|
|
Borrowings
|
|
|
1,539
|
|
|
|
1,548
|
|
|
|
6,139
|
|
|
|
6,256
|
|
Subordinated debt
|
|
|
—
|
|
|
|
—
|
|
|
|
22,681
|
|
|
|
22,681
|
|
For cash and cash equivalents, the recorded book values of $149.2 million and $101.0
million
at December 31, 2012 and 2011, 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, 2012 and 2011 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.
BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
Note L – FAIR VALUE
OF FINANCIAL INSTRUMENTS (continued)
The estimated fair
values of demand deposits (i.e. interest (checking) and non-interest bearing demand accounts, savings and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts).
The carrying amount of accrued interest payable approximates its fair value. The fair value of time deposits have been valued using
net present value discounted cash flow.
The fair value of commitments
to extend credit is estimated based upon the amount of unamortized deferred loan commitment fees. The fair value of letters of
credit is based upon the amount of unearned fees plus the estimated cost to terminate letters of credit. Fair values of unrecognized
financial instruments, including commitments to extend credit, and the fair value of letters of credit are considered immaterial.
The fair value of interest
rate caps, included in borrowings, are based upon the estimated amount the Company would receive or pay to terminate the contracts
or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties.
The aggregate fair value for the interest rate caps were approximately $0 at December 31, 2012 and 2011.
The fair value of borrowings
and subordinated debt is calculated based on re-pricing of the debt at current market rates.
FASB ASC 820, "Fair
Value Measurements and Disclosures", ("ASC 820") defines fair value, establishes a framework for measuring fair
value, and expands disclosure about fair value. ASC 820 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date.
ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure
fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input significant to
the fair value measurement. There have been no material changes in valuation techniques as a result of the adoption of ASC 820.
Level 1 - Quoted prices (unadjusted) in
active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not
active for identical or similar assets or liabilities; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are
supported by little or no market activity and significant to the fair value of the assets or liabilities that are developed using
the reporting entities' estimates and assumptions, which reflect those that market participants would use.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note L – FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
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.
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.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note L – FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Assets measured at
fair value during fiscal year 2012 and fiscal year 2011 are summarized below.
|
|
At December, 31, 2012
Fair Value Measurement Using
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance
December 31,
2012
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,886
|
|
|
$
|
8,886
|
|
Investment securities available for sale: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
14,846
|
|
|
|
10,004
|
|
|
|
—
|
|
|
|
24,850
|
|
U.S. Government Agencies
|
|
|
—
|
|
|
|
141,869
|
|
|
|
—
|
|
|
|
141,869
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
129,595
|
|
|
|
—
|
|
|
|
129,595
|
|
Corporate notes
|
|
|
6,388
|
|
|
|
4,101
|
|
|
|
—
|
|
|
|
10,489
|
|
Municipal securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
48,185
|
|
|
|
48,185
|
|
Marketable equity securities and other
|
|
|
—
|
|
|
|
126
|
|
|
|
—
|
|
|
|
126
|
|
Total Investment securities available for sale
|
|
|
21,234
|
|
|
|
285,695
|
|
|
|
48,185
|
|
|
|
355,114
|
|
Total assets
|
|
$
|
21,234
|
|
|
$
|
285,695
|
|
|
$
|
57,071
|
|
|
$
|
364,000
|
|
(1) Non-recurring basis
(2) Recurring basis
The above table includes
$5.4 million in net unrealized losses on the Company's available for sale securities. The Company has reviewed its investment portfolio
at December 31, 2012, and has determined that the unrealized losses are temporary.
The fair value of the
derivative is zero and valued as a Level 3 input.
The fair value of the
auction rate securities is determined by management by valuing the underlying security and a discounted cash flow analysis is performed
in order to test for OTTI. The auction rate securities allow for conversion to the underlying preferred security after two failed
auctions. As of December 31, 2012, 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.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note L – FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
|
|
At December, 31, 2011
Fair Value Measurement Using
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance
December 31,
2011
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,031
|
|
|
$
|
25,031
|
|
Investment securities available for sale: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
80,213
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80,213
|
|
U.S. Government Agencies
|
|
|
—
|
|
|
|
130,866
|
|
|
|
—
|
|
|
|
130,866
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
142,359
|
|
|
|
—
|
|
|
|
142,359
|
|
Corporate notes
|
|
|
13,003
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,003
|
|
Municipal securities
|
|
|
1,995
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,995
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
44,495
|
|
|
|
44,495
|
|
Marketable equity securities and other
|
|
|
803
|
|
|
|
330
|
|
|
|
—
|
|
|
|
1,133
|
|
Total Investment securities available for sale
|
|
|
96,014
|
|
|
|
273,555
|
|
|
|
44,495
|
|
|
|
414,064
|
|
Total assets
|
|
$
|
96,014
|
|
|
$
|
273,555
|
|
|
$
|
69,526
|
|
|
$
|
439,095
|
|
(1) Non-recurring basis
(2) Recurring basis
The above table includes
$19.0 million in net unrealized losses on the Company's available for sale securities. The Company has reviewed its investment
portfolio at December 31, 2011, and has determined that the unrealized losses are temporary.
The fair value of the
derivative is zero and valued as a Level 3 input.
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).
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note L – FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
(Dollars in thousands)
|
|
Investment
Securities
Available
for Sale
|
|
|
|
|
|
Balance, January 1, 2012
|
|
$
|
44,495
|
|
Total gains/losses (realized/unrealized)
|
|
|
—
|
|
Included in earnings
|
|
|
—
|
|
Included in other comprehensive income
|
|
|
13,390
|
|
Purchases
|
|
|
—
|
|
Converted and sold
|
|
|
(7,700
|
)
|
Issuances
|
|
|
—
|
|
Settlements
|
|
|
—
|
|
Redemptions
|
|
|
(2,000
|
)
|
Interest
|
|
|
—
|
|
Other than temporary impairment expense
|
|
|
—
|
|
Capital deductions for operating expenses
|
|
|
|
|
Balance, December 31, 2012
|
|
$
|
48,185
|
|
|
|
|
|
|
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, 2012
|
|
|
—
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
Note M
–
|
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND CONCENTRATIONS OF CREDIT RISK
|
The Bank is party to
financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are
recorded in the financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts
of those instruments reflect the extent of involvement the Banks have in particular classes of financial instruments.
The Bank's exposure
to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments.
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,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Unused lines of credit
|
|
$
|
8,480
|
|
|
$
|
9,707
|
|
Commitments to extend credit
|
|
|
815
|
|
|
|
1,218
|
|
Standby letters of credit and financial guarantees written
|
|
|
286
|
|
|
|
491
|
|
|
|
$
|
9,581
|
|
|
$
|
11,416
|
|
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, 2012 varies up to 100%.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
|
Note M
–
|
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK AND CONCENTRATIONS OF CREDIT RISK (continued)
|
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, 2012 was $286,000 and they expire through 2013. Amounts due under
these letters of credit would be reduced by any proceeds the Company would be able to obtain in liquidating the collateral for
the loans, which varies depending on the customer.
The Bank grants loans
primarily to customers in New York and its immediately adjacent suburban communities. Although the Bank has a diversified loan
portfolio, a large portion of their loans are secured by commercial or residential real property. The Bank does not generally engage
in non-recourse lending and typically will require the principals of any commercial borrower to obligate themselves personally
on the loan. Although the Bank has diversified loan portfolios, a substantial portion of their debtors' ability to honor their
contracts is dependent upon the economic sector. Commercial and standby letters of credit were granted primarily to commercial
borrowers.
The Bank has entered
into interest rate cap agreements in order to hedge its exposure to interest rate fluctuations, which are accounted for under the
provisions of ASC 815, "Accounting for Derivative Instruments and Hedging Activities". The statement requires the Company
to recognize all derivative instruments at fair value as either assets or liabilities. Financial derivatives are reported at fair
value in other assets or other liabilities. For derivatives not designated as hedges, the gain or loss is recognized in current
earnings. Amounts reclassed into earnings, when the hedged transaction culminates, are included in interest income.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note N - REGULATORY MATTERS
The Bank is subject
to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Bank's consolidated financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings
and other factors.
In May 2009, in connection
with the Bank's examination by the FDIC, the Bank received a Joint Memorandum of Understanding (as modified January 31, 2013, the
"MOU") from the FDIC and the New York State Department of Financial Services (the "NYSDFS"), formerly called
the New York State Banking Department, which the Bank executed. The MOU sets forth an informal understanding among the Bank, the
FDIC and the NYSDFS addressing asset quality, loan review, underwriting and administration and certain other concerns identified
in the examination. The Bank's board of directors appointed a committee comprised of three directors to monitor the Bank's compliance
with the MOU. Compliance with the MOU has not had a material adverse effect on our results of operations or financial condition.
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.
As of December 31,
2012, 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.
Regulators also have
broad discretion to require any institution to maintain higher capital levels than otherwise required by statute or regulation,
even institutions that are considered "well-capitalized" under applicable regulations.
New York banking regulations
place certain restrictions on dividends paid by the Bank to the Company. The total amount of dividends which made by paid at any
date is generally equal to the Bank's net profits for the year in which the payment is made, plus retained net profits for the
previous two years subject to certain limits not generally relevant. The Bank's retained aggregate net income is $65.1 million
for the two years ended December 31, 2012.
The following table
sets forth the actual and required regulatory capital amounts and ratios of, the Company and the Bank as of December 31, 2012 and
2011 (dollars in thousands):
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note N - REGULATORY MATTERS (continued)
|
|
Actual
|
|
|
For
capital
adequacy purposes
|
|
|
To
be well
capitalized under
prompt
corrective
action provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
133,662
|
|
|
|
36.0
|
%
|
|
$
|
29,737
|
|
|
|
>
8.0
|
%
|
|
$
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
123,634
|
|
|
|
34.0
|
%
|
|
|
29,109
|
|
|
|
>
8.0
|
%
|
|
|
36,387
|
|
|
|
>
10.0
|
%
|
Tier I Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
129,034
|
|
|
|
34.7
|
%
|
|
|
14,869
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
119,006
|
|
|
|
32.7
|
%
|
|
|
14,555
|
|
|
|
>
4.0
|
%
|
|
|
21,832
|
|
|
|
>
6.0
|
%
|
Tier I Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
129,034
|
|
|
|
15.5
|
%
|
|
|
33,412
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
119,006
|
|
|
|
14.5
|
%
|
|
|
32,886
|
|
|
|
>
4.0
|
%
|
|
|
41,108
|
|
|
|
>
5.0
|
%
|
|
|
Actual
|
|
|
For
capital
adequacy purposes
|
|
|
To
be well
capitalized under
prompt
corrective
action provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
153,573
|
|
|
|
37.8
|
%
|
|
$
|
32,503
|
|
|
|
>
8.0
|
%
|
|
$
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
143,893
|
|
|
|
36.1
|
%
|
|
|
31,866
|
|
|
|
>
8.0
|
%
|
|
|
39,833
|
|
|
|
>
10.0
|
%
|
Tier I Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
148,440
|
|
|
|
36.5
|
%
|
|
|
16,252
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
138,757
|
|
|
|
34.8
|
%
|
|
|
15,933
|
|
|
|
>
4.0
|
%
|
|
|
23,900
|
|
|
|
>
6.0
|
%
|
Tier I Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
148,440
|
|
|
|
17.0
|
%
|
|
|
34,988
|
|
|
|
>
4.0
|
%
|
|
|
—
|
|
|
|
N/A
|
|
Bank
|
|
|
138,757
|
|
|
|
15.9
|
%
|
|
|
34,987
|
|
|
|
>
4.0
|
%
|
|
|
43,733
|
|
|
|
>
5.0
|
%
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note O - CONDENSED FINANCIAL INFORMATION
- PARENT COMPANY ONLY
The condensed financial
information for Berkshire Bancorp Inc. (parent company only) is as follows:
CONDENSED BALANCE SHEETS
(In Thousands)
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,597
|
|
|
$
|
731
|
|
Equity investment in subsidiaries
|
|
|
124,871
|
|
|
|
134,422
|
|
Investment in securities available for sale
|
|
|
—
|
|
|
|
2,799
|
|
Accrued interest receivable
|
|
|
—
|
|
|
|
38
|
|
Other assets
|
|
|
3,955
|
|
|
|
3,406
|
|
Total assets
|
|
$
|
132,423
|
|
|
$
|
141,396
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
$
|
—
|
|
|
$
|
22,681
|
|
Other liabilities
|
|
|
119
|
|
|
|
3,187
|
|
Total liabilities
|
|
|
119
|
|
|
|
25,868
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,442
|
|
|
|
1,444
|
|
Series A preferred stock
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
143,903
|
|
|
|
143,900
|
|
Accumulated deficit
|
|
|
(10,065
|
)
|
|
|
(19,299
|
)
|
Accumulated other comprehensive loss, net
|
|
|
(2,976
|
)
|
|
|
(10,517
|
)
|
Common stock in treasury, at cost
|
|
|
—
|
|
|
|
—
|
|
Total stockholders' equity
|
|
|
132,304
|
|
|
|
115,528
|
|
|
|
$
|
132,423
|
|
|
$
|
141,396
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note O - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY
ONLY (continued)
CONDENSED STATEMENTS OF INCOME
(In Thousands)
|
|
For The Years Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
INCOME
|
|
|
|
|
|
|
|
|
Interest income from the Bank
|
|
$
|
—
|
|
|
$
|
2
|
|
Interest income
|
|
|
174
|
|
|
|
266
|
|
(Loss) gain on sales of investment securities
|
|
|
72
|
|
|
|
(155
|
)
|
Other income
|
|
|
338
|
|
|
|
338
|
|
Total income
|
|
|
584
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
465
|
|
|
|
373
|
|
Interest expense
|
|
|
334
|
|
|
|
668
|
|
Loss on termination of pension plan
|
|
|
—
|
|
|
|
—
|
|
Other expenses
|
|
|
811
|
|
|
|
808
|
|
Total expenses
|
|
|
1,610
|
|
|
|
1,849
|
|
Loss before income taxes and equity in undistributed net income of the Bank
|
|
|
(1,026
|
)
|
|
|
(1,398
|
)
|
Equity in undistributed net income (loss) of the Bank
|
|
|
13,019
|
|
|
|
51,630
|
|
Income
before taxes
|
|
|
11,993
|
|
|
|
50,232
|
|
Provision (benefit) for income taxes
|
|
|
(389
|
)
|
|
|
408
|
|
Net income
|
|
$
|
12,382
|
|
|
$
|
49,824
|
|
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
Note O - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY
ONLY (continued)
CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
|
|
For The Years Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
12,382
|
|
|
$
|
49,824
|
|
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Loss (gain) on sales of investment securities
|
|
|
(72
|
)
|
|
|
155
|
|
Equity in undistributed net (income) loss of the Bank
|
|
|
(13,020
|
)
|
|
|
(51,630
|
)
|
Equity in undistributed net income of East 39, LLC
|
|
|
(338
|
)
|
|
|
(338
|
)
|
Increase in other liabilities
|
|
|
(3,067
|
)
|
|
|
(1,322
|
)
|
Increase (decrease) in other assets
|
|
|
(511
|
)
|
|
|
1,134
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(4,626
|
)
|
|
|
(2,177
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
Sales and redemptions
|
|
|
10,982
|
|
|
|
838
|
|
Other
|
|
|
1
|
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
10,983
|
|
|
|
630
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Advances from subsidiaries
|
|
|
20,344
|
|
|
|
—
|
|
Redemption of Junior Subordinated Debentures
|
|
|
(22,681
|
)
|
|
|
—
|
|
Dividends paid on common stock
|
|
|
(1,154
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,491
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
2,866
|
|
|
|
(1,547
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
731
|
|
|
|
2,278
|
|
Cash and cash equivalents at end of year
|
|
$
|
3,597
|
|
|
$
|
731
|
|
Schedule of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Dividends declared and not paid
|
|
$
|
—
|
|
|
$
|
4,000
|
|
Note P - SUBSEQUENT EVENTS
On
March 25, 2013, Mr. Steven Rosenberg informed the Company that he will retire and resign from all positions he holds with the Company
effective at the close of business on the date this Annual Report is filed. The Board of Directors appointed Dr. Joseph Fink as
President, Chief Executive Officer and Chief Financial Officer of the Company and elected Dr. Fink to fill the vacancy on the Board
created by Mr. Rosenberg’s resignation, all effective as of the effectiveness of Mr. Rosenberg’s resignation.
On March 25, 2013,
the Company entered into a severance agreement with Mr. Rosenberg pursuant to which the Company will pay Mr. Rosenberg $200,000
in one lump sum and pay Mr. Rosenberg’s health insurance benefits through December 31, 2013.