UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2007
----------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to_________________
Commission file number: 0-13649
BERKSHIRE BANCORP INC.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2563513
---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 BROADWAY, NEW YORK, NEW YORK 10038
---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 791-5362
---------------
N/A
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
As of May 1, 2007, there were 6,914,206 outstanding shares of the issuer's
Common Stock, $.10 par value.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS. STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q
THAT ARE NOT BASED ON HISTORICAL FACT MAY BE "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WORDS SUCH
AS "BELIEVE", "MAY", "WILL", "EXPECT", "ESTIMATE", "ANTICIPATE", "CONTINUE" OR
SIMILAR TERMS IDENTIFY FORWARD-LOOKING STATEMENTS. A WIDE VARIETY OF FACTORS
COULD CAUSE THE ACTUAL RESULTS AND EXPERIENCES OF BERKSHIRE BANCORP INC. (THE
"COMPANY") TO DIFFER MATERIALLY FROM THE RESULTS EXPRESSED OR IMPLIED BY THE
COMPANY'S FORWARD-LOOKING STATEMENTS. SOME OF THE RISKS AND UNCERTAINTIES THAT
MAY AFFECT OPERATIONS, PERFORMANCE, RESULTS OF THE COMPANY'S BUSINESS, THE
INTEREST RATE SENSITIVITY OF ITS ASSETS AND LIABILITIES, AND THE ADEQUACY OF ITS
LOAN LOSS ALLOWANCE, INCLUDE, BUT ARE NOT LIMITED TO: (I) DETERIORATION IN
LOCAL, REGIONAL, NATIONAL OR GLOBAL ECONOMIC CONDITIONS WHICH COULD RESULT,
AMONG OTHER THINGS, IN AN INCREASE IN LOAN DELINQUENCIES, A DECREASE IN PROPERTY
VALUES, OR A CHANGE IN THE HOUSING TURNOVER RATE; (II) CHANGES IN MARKET
INTEREST RATES OR CHANGES IN THE SPEED AT WHICH MARKET INTEREST RATES CHANGE;
(III) CHANGES IN LAWS AND REGULATIONS AFFECTING THE FINANCIAL SERVICES INDUSTRY;
(IV) CHANGES IN COMPETITION; (V) CHANGES IN CONSUMER PREFERENCES, (VI) CHANGES
IN BANKING TECHNOLOGY; (VII) ABILITY TO MAINTAIN KEY MEMBERS OF MANAGEMENT,
(VIII) POSSIBLE DISRUPTIONS IN THE COMPANY'S OPERATIONS AT ITS BANKING
FACILITIES, (IX) COST OF COMPLIANCE WITH NEW CORPORATE GOVERNANCE REQUIREMENTS,
AND OTHER FACTORS REFERRED TO IN THIS QUARTERLY REPORT AND IN ITEM 1A, "RISK
FACTORS", OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2006.
CERTAIN INFORMATION CUSTOMARILY DISCLOSED BY FINANCIAL INSTITUTIONS, SUCH
AS ESTIMATES OF INTEREST RATE SENSITIVITY AND THE ADEQUACY OF THE LOAN LOSS
ALLOWANCE, ARE INHERENTLY FORWARD-LOOKING STATEMENTS BECAUSE, BY THEIR NATURE,
THEY REPRESENT ATTEMPTS TO ESTIMATE WHAT WILL OCCUR IN THE FUTURE.
THE COMPANY CAUTIONS READERS NOT TO PLACE UNDUE RELIANCE UPON ANY
FORWARD-LOOKING STATEMENT CONTAINED IN THIS QUARTERLY REPORT. FORWARD-LOOKING
STATEMENTS SPEAK ONLY AS OF THE DATE THEY WERE MADE AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE OR REVISE ANY SUCH STATEMENTS UPON ANY CHANGE IN APPLICABLE
CIRCUMSTANCES.
2
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2007 (unaudited) and
December 31, 2006 4
Consolidated Statements of Income
For The Three Months Ended
March 31, 2007 and 2006 (unaudited) 5
Consolidated Statement of Stockholders'
Equity For The Three Months Ended
March 31, 2007 (unaudited) 6
Consolidated Statements of Cash Flows
For The Three Months Ended March 31,
2007 and 2006 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 19
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 25
Item 4. Controls and Procedures 32
PART II OTHER INFORMATION
Item 6. Exhibits 32
Signature 33
Index of Exhibits 34
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2007 2006
--------- -----------
ASSETS
Cash and due from banks $ 7,227 $ 8,061
Interest bearing deposits 8,262 4,950
Federal funds sold 45,200 11,300
--------- ---------
Total cash and cash equivalents 60,689 24,311
Investment Securities:
Available-for-sale 514,865 514,798
Held-to-maturity, fair value of $430
in 2007 and $436 in 2006 426 433
--------- ---------
Total investment securities 515,291 515,231
Loans, net of unearned income 378,151 370,923
Less: allowance for loan losses (3,848) (3,771)
--------- ---------
Net loans 374,303 367,152
Accrued interest receivable 5,897 6,397
Premises and equipment, net 9,181 9,338
Goodwill, net 18,549 18,549
Other assets 7,497 7,678
--------- ---------
Total assets $ 991,407 $ 948,656
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 49,648 $ 49,418
Interest bearing 722,638 632,071
--------- ---------
Total deposits 772,286 681,489
Securities sold under agreements to repurchase 23,206 62,652
Long term borrowings 43,888 52,738
Subordinated debt 22,681 22,681
Accrued interest payable 7,356 8,110
Other liabilities 3,918 5,209
--------- ---------
Total liabilities 873,335 832,879
--------- ---------
Stockholders' equity
Preferred stock - $.10 Par value: -- --
2,000,000 shares authorized - none issued
Common stock - $.10 par value
Authorized -- 10,000,000 shares
Issued -- 7,698,285 shares
Outstanding --
March 31, 2007, 6,905,706 shares
December 31, 2006, 6,877,881 shares 770 770
Additional paid-in capital 90,635 90,659
Retained earnings 39,350 37,285
Accumulated other comprehensive loss, net (4,795) (4,772)
Treasury Stock
March 31, 2007, 792,579 shares
December 31, 2006, 820,404 shares (7,888) (8,165)
--------- ---------
Total stockholders' equity 118,072 115,777
--------- ---------
$ 991,407 $ 948,656
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
4
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE
THREE MONTHS ENDED
MARCH 31,
--------------------
2007 2006
-------- --------
INTEREST INCOME
Loans $ 7,238 $ 5,504
Investment securities 5,835 6,255
Federal funds sold and
interest bearing deposits 686 76
-------- --------
Total interest income 13,759 11,835
-------- --------
INTEREST EXPENSE
Deposits 7,444 4,855
Short-term borrowings 433 541
Long-term borrowings 991 1,211
-------- --------
Total interest expense 8,868 6,607
-------- --------
Net interest income 4,891 5,228
PROVISION FOR LOAN LOSSES 75 45
-------- --------
Net interest income after
provision for loan losses 4,816 5,183
-------- --------
NON-INTEREST INCOME
Service charges on deposit accounts 181 140
Investment securities gains 125 741
Other income 209 172
-------- --------
Total non-interest income 515 1,053
-------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,234 2,107
Net occupancy expense 476 475
Equipment expense 102 96
FDIC assessment 20 21
Data processing expense 96 90
Other 525 624
-------- --------
Total non-interest expense 3,453 3,413
-------- --------
Income before provision for taxes 1,878 2,823
Provision for income taxes 778 1,327
-------- --------
Net income $ 1,100 $ 1,496
======== ========
Net income per share:
Basic $ .16 $ .22
======== ========
Diluted $ .16 $ .21
======== ========
Number of shares used to compute net income per share:
Basic 6,896 6,891
======== ========
Diluted 6,957 6,983
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(In Thousands)
(Unaudited)
ACCUMULATED
OTHER
STOCK ADDITIONAL COMPREHENSIVE TOTAL
COMMON PAR PAID-IN (LOSS) RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
SHARES VALUE CAPITAL NET EARNINGS STOCK INCOME EQUITY
------ ----- ---------- ------------- -------- --------- ------------- -------------
BALANCE AT JANUARY 1, 2007 7,698 $770 $90,659 $(4,772) $ 37,285 $ (8,165) $115,777
Adoption of FIN 48 965 965
-------- --------
Adjusted balance at January 1, 2007 38,250 116,742
Net income 1,100 1,100 1,100
Exercise of stock options (24) 277 253
Other comprehensive (loss) net
of reclassification adjustment
and taxes (23) (23) (23)
-------
Comprehensive income $ 1,077
=======
BALANCE AT MARCH 31, 2007 7,698 $770 $90,635 $(4,795) $ 39,350 $ (7,888) $118,072
====== ==== ======= ======= ======== ======== ========
BALANCE AT JANUARY 1, 2006 7,698 $770 $90,594 $(8,415) $ 33,504 $ (7,743) $108,710
Net income 1,496 1,496 1,496
Exercise of stock options 1 29 30
Other comprehensive (loss) net
of reclassification adjustment
and taxes (969) (969) (969)
-------
Comprehensive income $ 527
=======
BALANCE AT MARCH 31, 2006 7,698 $770 $90,595 $(9,384) $ 35,000 $ (7,714) $109,267
====== ==== ======= ======= ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
6
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------
2007 2006
---------- ----------
Cash flows from operating activities:
Net income $ 1,100 $ 1,496
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Realized gains on investment securities (125) (741)
Net (accretion) amortization of premiums (361) 35
of investment securities
Depreciation and amortization 183 176
Provision for loan losses 75 45
Decrease in accrued interest receivable 500 574
Decrease in other assets 181 761
(Decrease) increase in accrued interest
payable and other liabilities (1,080) 635
---------- ----------
Net cash provided by operating activities 473 2,981
---------- ----------
Cash flows from investing activities:
Investment securities available for sale
Purchases (460,195) (137,757)
Sales, maturities and calls 460,591 145,825
Investment securities held to maturity
Maturities 7 62
Net (increase) decrease in loans (7,226) 2,317
Acquisition of premises and equipment (26) (473)
---------- ----------
Net cash (used in) provided by investing activities (6,849) 9,974
---------- ----------
7
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------
2007 2006
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in non interest
bearing deposits 230 (5,140)
Net increase in interest bearing deposits 90,567 9,207
(Decrease) in securities sold under
agreements to repurchase (39,446) (22,203)
Repayment of long term debt (8,850) (8,080)
Proceeds from exercise of common stock options 253 30
---------- ----------
Net cash provided by (used in) financing activities 42,754 (26,186)
---------- ----------
Net increase in cash and cash equivalents 36,378 (13,231)
Cash and cash equivalents - beginning of period 24,311 27,882
---------- ----------
Cash and cash equivalents - end of period $ 60,689 $ 14,651
========== ==========
Supplemental disclosures of cash flow information:
Cash used to pay interest $ 9,622 $ 5,927
Cash used to pay taxes, net of refunds $ 505 $ 775
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
NOTE 1. GENERAL
Berkshire Bancorp Inc., a Delaware corporation, is a bank holding
company registered under the Bank Holding Company Act of 1956. References herein
to "Berkshire", the "Company" or "we" and similar pronouns, shall be deemed to
refer to Berkshire Bancorp Inc. and its consolidated subsidiaries unless the
context otherwise requires. Berkshire's principal activity is the ownership and
management of its wholly owned subsidiary, The Berkshire Bank (the "Bank"), a
New York State chartered commercial bank.
The accompanying financial statements of Berkshire Bancorp Inc. and
subsidiaries includes the accounts of the parent company, Berkshire Bancorp
Inc., and its wholly-owned subsidiaries: The Berkshire Bank, Greater American
Finance Group, Inc. and East 39, LLC.
We have prepared the accompanying financial statements pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC") for
interim financial reporting. These consolidated financial statements are
unaudited and, in our opinion, include all adjustments, consisting of normal
recurring adjustments and accruals necessary for a fair presentation of our
consolidated balance sheets, operating results, and cash flows for the periods
presented. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for 2007 due to a variety of
factors. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") have been omitted in accordance with the
rules and regulations of the SEC. These consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
accompanying notes included in our 2006 Annual Report on Form 10-K.
NOTE 2. TRUST PREFERRED SECURITIES.
As of May 18 2004, the Company established Berkshire Capital Trust I, a
Delaware statutory trust, ("BCTI"). The Company owns all the common capital
securities of BCTI. BCTI issued $15.0 million of preferred capital securities to
investors in a private transaction and invested the proceeds, combined with the
proceeds from the sale of BCTI's common capital securities, in the Company
through the purchase of $15.464 million aggregate principal amount of Floating
Rate Junior Subordinated Debentures (the "2004 Debentures") issued by the
Company. The 2004 Debentures, the sole assets of BCTI, mature on July 23, 2034
and bear interest at a floating rate, three month LIBOR plus 2.70%.
On April 1, 2005, the Company established Berkshire Capital Trust II, a
Delaware statutory trust, ("BCTII"). The Company owns all the common capital
securities of BCTII. BCTII issued $7.0 million of preferred capital securities
to investors in a private transaction and invested the proceeds, combined with
the proceeds from the sale of BCTII's common capital securities, in the Company
through the purchase of $7.217 million aggregate principal amount of Floating
Rate Junior Subordinated Debentures (the "2005 Debentures") issued by the
Company. The 2005 Debentures, the sole assets of BCTII, mature on May 23, 2035
and bear interest at a floating rate, three month LIBOR plus 1.95%.
9
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. - (CONTINUED)
Based on current interpretations of the banking regulators, the 2004
Debentures and 2005 Debentures (collectively, the "Debentures") qualify under
the risk-based capital guidelines of the Federal Reserve as Tier 1 capital,
subject to certain limitations. The Debentures are callable by the Company,
subject to any required regulatory approvals, at par, in whole or in part, at
any time after five years from the date of issuance. The Company's obligations
under the Debentures and related documents, taken together, constitute a full,
irrevocable and unconditional guarantee on a subordinated basis by the Company
of the obligations of BCTI and BCTII under the preferred capital securities sold
by BCTI and BCTII to investors. FIN46(R) precludes consideration of the call
option embedded in the preferred capital securities when determining if the
Company has the right to a majority of BCTI and BCTII expected residual returns.
Accordingly, BCTI and BCTII are not included in the consolidated balance sheet
of the Company.
The Federal Reserve has issued guidance on the regulatory capital
treatment for the trust-preferred securities issued by BCTI and BCTII. This rule
would retain the current maximum percentage of total capital permitted for Trust
Preferred Securities at 25%, but would enact other changes to the rules
governing Trust Preferred Securities that affect their use as part of the
collection of entities known as "restricted core capital elements." The rule
would take effect March 31, 2009; however, a five year transition period
starting March 31, 2004 and leading up to that date would allow bank holding
companies to continue to count Trust Preferred Securities as Tier 1 Capital
after applying FIN-46(R). Management has evaluated the effects of this rule and
does not anticipate a material impact on its capital ratios when the proposed
rule is finalized.
NOTE 3. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted average common shares 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. The following table
presents the calculation of earnings per share for the periods indicated:
FOR THE THREE MONTHS ENDED
----------------------------------------------------------------------------------------------
MARCH 31, 2007 MARCH 31, 2006
---------------------------------------------- ---------------------------------------------
Per Per
Income Shares share Income Shares share
(numerator) (denominator) amount (numerator) (denominator) amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except per share data)
Basic earnings per share
Net income available to
common stockholders $1,100 6,896 $.16 $1,496 6,891 $.22
Effect of dilutive securities
Options -- 361 .-- -- 92 (.01)
------ ----- ---- ------ ----- ----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $1,100 6,957 $.16 $1,496 6,983 $.21
====== ===== ==== ====== ===== ====
10
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INVESTMENT SECURITIES
The following tables summarize held to maturity and available-for-sale
investment securities as of March 31, 2007 and December 31, 2006:
MARCH 31, 2007
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ --------
(In thousands)
HELD TO MATURITY
INVESTMENT SECURITIES
U.S. Government Agencies $ 426 $ 4 $ -- $ 430
----- --- ---- -----
Totals $ 426 $ 4 $ -- $ 430
===== === ==== =====
DECEMBER 31, 2006
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ --------
(In thousands)
HELD TO MATURITY
INVESTMENT SECURITIES
U.S. Government Agencies $ 433 $ 4 $ (1) $ 436
----- --- ---- -----
Totals $ 433 $ 4 $ (1) $ 436
===== === ==== =====
MARCH 31, 2007
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ --------
(In thousands)
AVAILABLE-FOR-SALE
INVESTMENT SECURITIES
U.S. Treasury and Notes $ 5,002 $ -- $ (5) $ 4,997
U.S. Government Agencies 303,995 1 (4,989) 299,007
Mortgage-backed securities 64,265 118 (1,579) 62,804
Corporate notes 67,262 336 (612) 66,986
Municipal Securities 5,698 1,234 (859) 6,073
Marketable equity
securities and other 74,874 207 (83) 74,998
-------- ------ ------- --------
Totals $521,096 $1,896 $(8,127) $514,865
======== ====== ======= ========
11
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. - (CONTINUED)
DECEMBER 31, 2006
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ --------
(In thousands)
AVAILABLE-FOR-SALE
INVESTMENT SECURITIES
U.S. Treasury and Notes $5,002 $ -- $ (12) $ 4,990
U.S. Government Agencies 322,986 -- (5,822) 317,164
Mortgage-backed securities 67,472 92 (1,711) 65,853
Corporate Notes 44,366 334 (662) 44,038
Municipal securities 5,698 1,489 -- 7,187
Marketable equity
securities and other 75,419 216 (69) 75,566
-------- ------ ------- --------
Totals $520,943 $2,131 $(8,276) $514,798
======== ====== ======== ========
Our available-for-sale portfolio is carried at estimated fair value,
with any unrealized gains or losses, net of taxes, reported as accumulated other
comprehensive income or loss in stockholders' equity. Our held-to-maturity
portfolio, consisting of debt securities for which we have a positive intent and
ability to hold to maturity, is carried at amortized cost. We conduct a periodic
review and evaluation of the securities portfolio to determine if the value of
any security has declined below its cost or amortized cost, and whether such
decline is other-than-temporary.
The Company has investments in debt and equity securities that have
unrealized losses, but an other-than-temporary impairment has not been
recognized in its financial statements. Based upon management's review of the
available information including the changes in interest rates during the period,
current market conditions, applicable industry and company information specific
to each investment, the creditworthiness of the issuer, and the Company's
ability to hold the investment to maturity, such unrealized losses are not
considered to be other-than-temporary.
12
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. LOAN PORTFOLIO
The following table sets forth information concerning the Company's loan
portfolio by type of loan at the dates indicated:
MARCH 31, 2007 DECEMBER 31, 2006
----------------- --------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ----- ------- --------
(Dollars in thousands)
Commercial and professional loans $ 64,377 17.0% $ 63,331 17.0%
Secured by real estate
1-4 family 138,162 36.4 139,611 37.5
Multi family 3,883 1.0 4,013 1.1
Non-residential (commercial) 168,031 44.3 160,417 43.1
Consumer 4,860 1.3 4,763 1.6
-------- ----- ------- --------
Total loans 379,313 100.0% 372,135 100.0%
===== ========
Deferred loan fees (1,162) (1,212)
Allowance for loan losses (3,848) (3,771)
-------- --------
Loans, net $374,303 $367,152
======== ========
NOTE 6. DEPOSITS
The following table summarizes the composition of the average balances
of major deposit categories:
MARCH 31, 2007 DECEMBER 31, 2006
------------------ --------------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD
-------- ------- ------- --------
(Dollars in thousands)
Demand deposits $ 48,266 -- $ 47,890 --
NOW and money market 28,870 0.56% 35,141 0.61%
Savings deposits 244,262 3.73 171,604 2.95
Time deposits 424,970 4.82 410,729 4.21
-------- ---- -------- ----
Total deposits $746,368 3.99% $665,364 3.39%
======== ==== ======== ====
13
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. COMPREHENSIVE INCOME (LOSS)
The following table presents the components of comprehensive income,
based on the provisions of SFAS No. 130.:
FOR THE THREE MONTHS ENDED
-------------------------------------------------------------------------------------
MARCH 31, 2007 MARCH 31, 2006
----------------------------------------- -----------------------------------------
TAX TAX
BEFORE TAX (EXPENSE) NET OF TAX BEFORE TAX (EXPENSE) NET OF TAX
AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT
------------ ----------- ------------ ------------ ----------- ------------
(In thousands)
Unrealized (losses)
gains on investment
securities:
Unrealized holding $ 39 $ (3) $ 36 $ (835) $ 311 $ (524)
gains (losses) arising
during period
Less reclassification
adjustment for gains
realized in net income 125 (50) 75 741 (296) 445
----- ---- ----- ------- ----- ------
Unrealized gain (loss) on
investment securities (86) 47 (39)
Change in minimum
pension liability 16 -- 16 -- -- --
----- ---- ----- ------- ----- ------
Other comprehensive $ (70) $ 47 $ (23) $(1,576) $ 607 $ (969)
(loss) income, net ===== ==== ===== ======= ===== ======
NOTE 8. ACCOUNTING FOR STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)")
which requires the measurement and recognition of compensation expense for all
stock-based compensation payments and supersedes the Company's previous
accounting under Accounting Principals Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). SFAS 123(R) is effective for all annual
periods beginning after June 15, 2005 or our fiscal year 2006. In March 2005,
the Securities and Exchange Commission (the "SEC") issued Staff Accounting
Bulletin No. 107 ("SAB 107") relating to the adoption of SFAS 123(R).
The Company adopted SFAS 123(R) in the first quarter of fiscal year
2006. The adoption of SFAS 123(R) did not have an impact on its operating
results and financial condition because the Company made no stock-based
compensation payments in fiscal 2006 or in the first quarter of fiscal 2007.
At March 31, 2007, the Company has one stock-based employee compensation
plan. The Company accounted for that plan under the recognition and measurement
principles of APB 25 and related interpretations. Stock-based employee
compensation costs were not reflected in net income, as all options granted
under the plan had an exercise price equal to the market value of the underlying
common stock on the date of the grant. The Company did not grant stock options
during the quarter ended March 31, 2007 or during the fiscal year ended December
31, 2006. We have no plans to grant significant stock options, if any, in 2007.
Therefore, we do not expect the implementation of FAS 123(R) to affect our
financial position or results of operations in the near future.
14
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company has a Retirement Income Plan (the "Plan"), a noncontributory
plan covering substantially all full-time, non-union United States employees of
the Company. The following interim-period information is being provided in
accordance with FASB Statement 132(R) as amended by FAS 158.
FOR THE
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2007 2006
------------- ---------------
Service cost $ 90,750 $ 82,000
Interest cost 43,500 37,000
Expected return on plan assets (46,000) (38,000)
Amortization and Deferral:
Transition amount -- --
Prior service cost 4,500 5,000
(Gain)/loss 11,750 14,000
-------- --------
Net periodic pension cost $104,500 $100,000
======== ========
During the fiscal year ending December 31, 2007, we expect to contribute
approximately $340,000 to the Plan. We did not make any contributions, required
or otherwise, to the Plan in the three months ended March 31, 2007 and 2006.
NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS
FAIR VALUE OPTION FOR FINANCIAL ASSETS AND LIABILITIES
In February 2007, the FASB issued Statement 159, The Fair Value Option
for Financial Assets and Financial Liabilities ("Statement 159"). The objective
of Statement 159 is to provide companies with the option to recognize most
financial assets and liabilities and certain other items at fair value.
Statement 159 will allow companies the opportunity to mitigate earnings
volatility caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting. Unrealized gains and losses on
items for which the fair value option has been elected should be reported in
earnings. The fair value option election is applied on an instrument by
instrument basis (with some exceptions), is irrevocable, and is applied to an
entire instrument. The election may be made as of the date of initial adoption
for existing eligible items. Subsequent to initial adoption, the Company may
elect the fair value option at initial recognition of eligible items or on
entering into an eligible firm commitment. The Company can only elect the fair
value option after initial recognition in limited circumstances.
Statement 159 requires similar assets and liabilities for which the
Company has elected the fair value option to be displayed on the face of the
balance sheet either (a) together with financial instruments measured using
other measurement attributes with parenthetical disclosure of the amount
measured at fair value or (b) in separate line items. In addition, Statement 159
requires additional disclosures to allow financial statement users to compare
similar assets and liabilities measured differently either within the financial
statements of the Company or between financial statements of different
companies.
15
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. - (CONTINUED)
Statement 159 is required to be adopted by the Company on January 1,
2008. Early adoption is permitted; however, the Company does not intend to adopt
Statement 159 prior to the required adoption date of January 1, 2008. The
Company expects to adopt Statement 159 along with Statement 157, Fair Value
Measurements. The remeasurement to fair value will be reported as a
cumulative-effect adjustment in the opening balance of retained earnings.
Additionally, any changes in fair value due to the concurrent adoption of
Statement 157 will be included in the cumulative-effect adjustment if the fair
value option is also elected for that item.
The Company is currently evaluating, which, if any items it will elect
to recognize at fair value at the date of adoption. The financial statement
impact will depend on which items the Company elects to recognize at fair value,
fair value at the date of adoption, and the concurrent adoption of Statement
157. If the Company elects to recognize items at fair value as a result of
Statement 159, this could result in increased earnings volatility.
ACCOUNTING FOR FAIR VALUE MEASUREMENT
In September 2006 the FASB issued SFAS No. 157, "Fair Value
Measurements." The Statement is effective for all financial statements issued
for fiscal years beginning after November 15, 2007. The Statement defines fair
value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. Adoption of SFAS No. 157 is not
expected to have a material impact on the Company's results of operations or
financial condition.
ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans." The Statement
requires an employer that is a business entity and sponsors one or more
single-employer defined benefit plans to: (1) recognize the funded status of a
benefit plan - measured as the difference between plan assets at fair value and
the benefit obligation - in its statement of financial position, with the
corresponding credit or charge, net of taxes, upon initial adoption to Other
Comprehensive Income; (2) recognize as a component of other comprehensive
income, net of tax, the gains or losses and prior service costs or credits that
arise during the period but are not recognized as components of net periodic
benefit cost pursuant to SFAS No. 87, "Employers' Accounting for Pensions", or
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions"; (3) measure defined benefit plan assets and obligations as of the
date of the employer's fiscal year end; and (4) expand disclosures in the notes
to the financial statements about certain effects on net periodic benefit cost.
The Statement also amends SFAS No. 132 (revised 2003), "Employers' Disclosures
about
Pensions and Other Postretirement Benefits", and SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans for Termination Benefits". An employer who has publicly traded
equity securities, such as the Company, is required to initially recognize the
funded status of a defined benefit postretirement plan and to provide the
required disclosures as of the end of its first fiscal year ending after
December 15, 2006. For the Company, this is for the year ended December 31,
2006. The requirement to measure plan assets and benefit obligations as of the
date of the employer's fiscal year end is effective for fiscal years ending
after December 15, 2008. The adoption of this statement for the year ended
December 31, 2006 did not have a significant effect on Other Comprehensive
Income and stockholders' equity.
16
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. - (CONTINUED)
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
On July 13, 2006, the FASB issued FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48"): an interpretation of
FASB No. 109. FIN 48 clarifies the accounting for uncertainty involved in the
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. In accordance with FIN 48, the Company's financial
statements must reflect only those tax positions that are more-likely-than-not
to be sustained as of the adoption date. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company's adoption of FIN 48 resulted
in a decrease in our tax reserves of $965,000 and a corresponding increase
to stockholders' equity as of January 1, 2007.
As of March 31, 2007, the Company does not have any uncertain tax
positions under FIN 48. As a result, there are no unrecognized tax benefits
as of March 31, 2007. The Company's 2003 through 2006 federal tax returns
still remain subject to examination by the Internal Revenue Service. If the
Company were to incur any interest and penalties in connection with income
tax deficiencies, the Company would classify interest in the "interest expense"
category and classify penalties in the "non-interest expense" category within
the consolidated statements of income.
ACCOUNTING FOR FINANCIAL ASSETS
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets-an amendment of FASB Statement No. 140." This statement
requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset, and that the
servicing assets and servicing liabilities be initially measured at fair value.
The statement also permits an entity to choose a subsequent measurement method
for each class of separately recognized servicing assets and servicing
liabilities. SFAS No. 156 is effective as of the beginning of the fiscal year
that begins after September 15, 2006. The application of SFAS No. 156 is not
expected to have a material impact on the Company's financial condition or
results of operations.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments." The Statement amends SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and SFAS No.140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The Statement also resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, "Application of Statement 133 to Beneficial
Interest in Securitized Financial Assets." SFAS No. 155 permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133, establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain as embedded
derivative requiring bifurcation, and clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives. The Statement
eliminates the interim guidance in SFAS No. 133 Implementation Issue No. D1,
which provided that beneficial interests in securitized financial assets are not
subject to the provisions of SFAS No. 133.
In October 2006, the FASB recommended a narrow scope exception for asset
backed securities, including mortgage-backed securities, created from pools of
loans containing embedded call features, that (a) only contain an embedded
derivative that is tied to the prepayment risk of the underlying prepayable
financial assets, and (b) the investor does not control the right to accelerate
the settlement. The Statement is effective for all financial instruments
acquired or issued after the beginning of an entity's first fiscal year that
begins after September 15, 2006. Since the Statement is effective for purchases
made by the Company after December 31, 2006, management is unable, at this time,
to determine the impact of this statement.
17
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. - (CONTINUED)
ACCOUNTING FOR PRIOR YEAR MISSTATEMENTS
In September 2006, the SEC staff issued Staff Accounting Bulletin No.
108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB 108 was issued to
provide consistency between how registrants quantify financial statement
misstatements. Historically, there have been two widely-used methods for
quantifying the effects of financial statement misstatements. These methods are
referred to as the "roll-over" and "iron curtain" method. The roll-over method
quantifies the amount by which the current year income statement is misstated.
Exclusive reliance on an income statement approach can result in the
accumulation of errors on the balance sheet that may not have been material to
any individual income statement, but which may misstate one or more balance
sheet accounts. The iron curtain method quantifies the error as the cumulative
amount by which the current year balance sheet is misstated. Exclusive reliance
on a balance sheet approach can result in disregarding the effects of errors in
the current year income statement that results from the correction of an error
existing in previously issued financial statements.
SAB 108 established an approach that requires quantification of
financial statement misstatements based on the effects of the misstatement on
each of the Company's financial statements and the related financial statement
disclosures. This approach is commonly referred to as the "dual approach"
because it requires quantification of errors under both the roll-over and iron
curtain methods. SAB 108 allows registrants to initially apply the dual approach
either by (1) retroactively adjusting prior financial statements as if the dual
approach had always been used or by (2) recording the cumulative effect of
initially applying the dual approach as adjustments to the carrying values of
assets and liabilities as of January 1, 2006 with an offsetting adjustment
recorded to the opening balance of retained earnings. Use of this "cumulative
effect" transition method requires detailed disclosure of the nature and amount
of each individual error being corrected through the cumulative adjustment and
how and when it arose. SAB 108 is effective for fiscal years ending after
November 15, 2006. The adoption of SAB 108 did not have a material effect on the
Company's results of operations or financial condition.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The current objective of the Bank's Internal Control Program is to allow
management to comply with FDICIA requirements and with Section 302 of the
Sarbanes-Oxley Act of 2002 (the "Act"). Section 302 of the Act requires the CEO
and CFO of the Company to (i) certify that the annual and quarterly reports
filed with the Securities and Exchange Commission are accurate and (ii)
acknowledge that they are responsible for establishing, maintaining and
periodically evaluating the effectiveness of the disclosure controls and
procedures. Section 404 of the Act requires management to report on internal
control over financial reporting. Presently, the SEC requires the Company to
first comply with Section 404 by the year ending December 31, 2007.
The Committee of Sponsoring Organizations (COSO) methodology may be used
to document and test the internal controls pertaining to the accuracy of Company
issued financial statements and related disclosures. COSO requires a review of
the control environment (including anti-fraud and audit committee
effectiveness), risk assessment, control activities, information and
communication, and ongoing monitoring.
18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of Berkshire Bancorp Inc., a Delaware corporation. References herein to per
share amounts refer to diluted shares. References to Notes herein are references
to the "Notes to Consolidated Financial Statements" of the Company located in
Item 1 herein.
The accompanying financial statements of Berkshire Bancorp Inc. and
subsidiaries includes the accounts of the parent company, Berkshire Bancorp
Inc., and its wholly-owned subsidiaries: The Berkshire Bank, Greater American
Finance Group, Inc. and East 39, LLC.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The Company's accounting and reporting policies conform with accounting
principles generally accepted in the United States of America and general
practices within the banking industry. The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and the accompanying notes. Actual
results could differ from those estimates.
The Company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than any of its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires material estimates, including, among others, expected default
probabilities, loss given default, the amounts and timing of expected future
cash flows on impaired loans, mortgages, and general amounts for historical loss
experience. The process also considers economic conditions, uncertainties in
estimating losses and inherent risks in the loan portfolio. All of these factors
may be susceptible to significant change. To the extent actual outcomes differ
from management estimates, additional provisions for loan losses may be required
that would adversely impact earnings in future periods.
With the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142 ("SFAS No. 142") on January 1, 2002, the Company discontinued
the amortization of goodwill resulting from acquisitions. Goodwill is now
subject to impairment testing at least annually to determine whether write-downs
of the recorded balances are necessary. The Company tests for impairment based
on the goodwill maintained at the Bank. A fair value is determined for each
reporting unit based on at least one of three various market valuation
methodologies. If the fair values of the reporting units exceed their book
values, no write-down of recorded goodwill is necessary. If the fair value of
the reporting unit is less, an expense may be required on the Company's books to
write down the related goodwill to the proper carrying value. As of December 31,
2006, the Company completed its annual testing, which determined that no
impairment write-offs were necessary.
The Company recognizes deferred tax assets and liabilities for the
future tax effects of temporary differences, net operating loss carryforwards
and tax credits. The quarterly evaluation of 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.
19
The following table presents the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed in both
dollars and rates.
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------------------
2007 2006
------------------------------------------- -------------------------------------------
INTEREST INTEREST
AVERAGE AND AVERAGE AVERAGE AND AVERAGE
BALANCE DIVIDENDS YIELD/RATE BALANCE DIVIDENDS YIELD/RATE
----------- ----------- ------------ ----------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $ 376,914 $ 7,238 7.68% $ 310,007 $ 5,504 7.10%
Investment securities 507,614 5,835 4.60 594,526 6,255 4.21
Other (2)(5) 54,382 686 5.05 8,496 76 3.53
----------- ----------- ------------ ----------- --------- ---------
Total interest-earning assets 938,910 13,759 5.86 913,029 11,835 5.18
------------ ---------
Noninterest-earning assets 45,240 46,352
----------- -----------
Total Assets $ 984,150 $ 959,381
=========== ===========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 273,132 2,321 3.40% 214,675 1,143 2.13%
Time deposits 424,970 5,123 4.82 412,963 3,711 3.59
Other borrowings 106,668 1,424 5.34 164,405 1,753 4.27
----------- ----------- ------------ ----------- --------- ---------
Total interest-bearing
liabilities 804,770 8,868 4.41 792,043 6,607 3.34
----------- ------------ --------- ---------
Demand deposits 48,266 46,422
Noninterest-bearing liabilities 13,482 11,728
Stockholders' equity (5) 117,632 109,188
----------- -----------
Total liabilities and
stockholders' equity $ 984,150 $ 959,381
=========== ===========
Net interest income 4,891 5,228
=========== =========
Interest-rate spread (3) 1.45% 1.84%
============ =========
Net interest margin (4) 2.08% 2.29%
============ =========
Ratio of average interest-earning assets
to average interest bearing liabilities
1.17 1.15
=========== ===========
----------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits, federal funds sold and securities
purchased under agreements to resell.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest bearing
liabilities.
(4) Net interest margin is net interest income as a percentage of average
interest-earning assets.
(5) Average balances are daily average balances except for the parent company
which have been calculated on a monthly basis.
20
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2006.
GENERAL. Berkshire Bancorp Inc., a bank holding company registered under the
Bank Holding Company Act of 1956, has one wholly-owned banking subsidiary, The
Berkshire Bank, a New York State chartered commercial bank. The Bank is
headquartered in Manhattan and has eleven branch locations, six branches in New
York City and four branches in Orange and Sullivan counties New York, and one
branch in Ridgefield, New Jersey which opened in May 2006.
NET INCOME. Net income for the three-month period ended March 31, 2007 was $1.10
million, or $.16 per share, as compared to $1.50 million, or $.21 per share, for
the three-month period ended March 31, 2006.
The Company's net income is largely dependent on interest rate levels,
the demand for the Company's loan and deposit products and the strategies
employed to manage the interest rate and other risks inherent in the banking
business. The difference between the yield on short-term, 3 month U.S. Treasury
Notes, and long-term, 10 year U.S. Treasury bonds, referred to as the yield
curve is at historic lows. Inflation fighting actions taken by the Federal
Reserve Board have moved short-term rates up while long-term rates have remained
relatively flat. The Company's rising cost of funds, the rates paid on deposits
and borrowings, has not been matched by the ability to increase the yields on
interest-earning assets.
NET INTEREST INCOME. The Company's primary source of revenue is net interest
income, or the difference between interest income on earning assets, such as
loans and investment securities, and interest expense on interest-bearing
liabilities such as deposits and borrowings.
For the quarter ended March 31, 2007, net interest income decreased by
$337,000 to $4.89 million from $5.23 million for the quarter ended March 31,
2006. The quarter over quarter decrease in net interest income was the result of
the 107 basis point increase in the average rates paid on the average amounts of
interest-bearing liabilities to 4.41% in the 2007 quarter from 3.34% in the 2006
quarter. The decrease was partially offset by the 68 basis point increase in the
average yields earned on the average amounts of interest-earning assets to 5.86%
in 2007 from 5.18% in 2006. The Company's interest-rate spread, the difference
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities, narrowed by 39 basis points to 1.45% in the 2007
quarter from 1.84% in the 2006 quarter.
NET INTEREST MARGIN. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, declined by 21 basis points to
2.08% in the first quarter of fiscal 2007 from 2.29% in the first quarter of
fiscal 2006. We seek to secure and retain customer deposits with competitive
products and rates, while making strategic use of the prevailing interest rate
environment to borrow funds at what we believe to be attractive rates. We invest
such deposits and borrowed funds in a prudent mix of fixed and adjustable rate
loans, investment securities and short-term interest-earning assets which
provided an aggregate average yield of 5.86% and 5.18% during the quarters ended
March 31, 2007 and 2006, respectively. The decrease in net interest margin is
primarily due to the decrease in net interest income, partially offset by the
increase in the average amount of higher yielding loans as a percentage of our
total mix of interest-earning assets.
The average amount of loans in our portfolio increased by $66.91 million
to $376.91 million in the quarter ended March 31, 2007 from $310.01 million in
the quarter ended March 31, 2006, and the average yield on our loan portfolio
increased to 7.68% in the 2007 quarter from 7.10% in the 2006 quarter. The
average amount of investment securities decreased by $86.91 million, to $507.61
million in the three months ended March 31, 2007 from $594.53 million in the
three months ended March 31, 2006, and the average yield on investment
securities
21
improved by 39 basis points, to 4.60% in 2007 from 4.21% in 2006. The average
amount of other interest-earning assets, primarily cash and short-term
investments, increased by $45.89 million to $54.38 million in the 2007 quarter
from $8.50 million in the 2006 quarter, and returned an average yield of 5.05%
and 3.53% in the quarter ended March 31, 2007 and 2006, respectively.
INTEREST INCOME. Total interest income for the quarter ended March 31, 2007
increased by $1.92 million to $13.76 million from $11.84 million for the quarter
ended March 31, 2006. The increase in total interest income was primarily due to
the increase in the average yields earned on interest-earning assets and by the
increase in the average amount of such assets. Loans contributed $7.24 million
of interest income in the 2006 quarter, an increase of $1.73 million from the
$5.50 million of interest income contributed in the 2006 quarter. Investment
securities contributed $5.84 million of interest income in the first quarter of
2007, a decrease of $420,000 from the $6.26 million of interest income earned on
investment securities in the first quarter of 2006.
----------------------------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
2007 2006
------------------- -------------------
INTEREST % OF INTEREST % OF
INCOME TOTAL INCOME TOTAL
-------- ------ -------- ------
(In thousands, except percentages)
Loans $ 7,238 52.60% $ 5,504 46.51%
Investment Securities 5,835 42.41 6,255 52.86
Other 686 4.99 76 0.63
------- ------ ------- ------
Total Interest Income $13,759 100.00% $11,835 100.00%
Loans, which are inherently risky and therefore command a higher return
than our portfolio of investment securities, increased to 40.14% of our total
average interest-earning assets during the three months ended March 31, 2007
from 33.95% of total average interest-earning assets during the three months
ended March 31, 2006. Investment securities declined to 54.07% from 65.12% of
total average interest-earning assets during the three-month periods ended March
31, 2007 and 2006, respectively. While we actively seek to originate new loans
with qualified borrowers who meet the Bank's underwriting standards, our
strategy has been to maintain those standards, sacrificing some current income
to avoid possible large future losses in the loan portfolio.
-----------------------------------------------
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
2007 2006
-------------------- --------------------
AVERAGE % OF AVERAGE % OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ------ -------- ------
(In thousands, except percentages)
Loans $376,914 40.14% $310,007 33.95%
Investment Securities 507,614 54.07 594,526 65.12
Other 54,382 5.79 8,496 0.93
-------- ------ -------- ------
Total Interest-Earning Assets $938,910 100.00% $913,029 100.00%
22
INTEREST EXPENSE. Total interest expense for the quarter ended March 31, 2007
increased by $2.26 million to $8.87 million from $6.61 million for the quarter
ended March 31, 2006. The increase in interest expense was due primarily to the
increase in the average rates paid on the average amount of interest-bearing
liabilities, 4.41% in the 2007 quarter compared to 3.34% in the 2006 quarter. In
May 2004 and April 2005, we sold an aggregate of $22.68 million of floating rate
junior subordinated debentures which mature in thirty years and used the net
proceeds to augment the Bank's capital to allow for business expansion. The
interest expense on these debentures, which is included in other borrowings, was
$458,000 and $424,000 during the three months ended March 31, 2007 and 2006,
respectively.
--------------------------------------------
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
2007 2006
------------------ ------------------
INTEREST % OF INTEREST % OF
INCOME TOTAL INCOME TOTAL
-------- ------ -------- ------
(In thousands, except percentages)
Interest-Bearing Deposits $ 2,321 26.17% $ 1,143 17.30%
Time Deposits 5,123 57.77 3,711 56.17
Other Borrowings 1,424 16.06 1,753 26.53
-------- ------ -------- ------
Total Interest Expense $ 8,868 100.00% $ 6,607 100.00%
---------------------------------------------
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
2007 2006
------------------- -------------------
AVERAGE % OF AVERAGE % OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ------ -------- ------
(In thousands, except percentages)
Interest-Bearing Deposits $273,132 33.94% $214,675 37.46%
Time Deposits 424,970 52.81 412,963 34.53
Other Borrowings 106,668 13.25 164,405 28.01
-------- ------ -------- ------
Total Interest-Bearing Liabilities $804,770 100.00% $792,043 100.00%
NON-INTEREST INCOME. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the three months
ended March 31, 2007, total non-interest income decreased by $538,000, to
$515,000 from $1.05 million for the three months ended March 31, 2006. The
decrease is largely due to the $616,000 decrease in gains on the sales of
investment securities in the 2007 quarter.
---------------------------------------------
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
2007 2006
------------------- -------------------
NON- NON-
INTEREST % OF INTEREST % OF
INCOME TOTAL INCOME TOTAL
-------- ------ -------- ------
(In thousands, except percentages)
Service Charges on Deposits $ 181 35.15% $ 140 13.30%
Investment Securities gains 125 24.27 741 70.37
Other 209 40.58 172 16.33
-------- ------ -------- ------
Total Non-Interest Income $ 515 100.00% $ 1,053 100.00%
23
NON-INTEREST EXPENSE. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees and
other operating expenses associated with the day-to-day operations of the
Company. Total non-interest expense for the three months ended March 31, 2007
increased by $40,000 to $3.45 million from $3.41 million for the three months
ended March 31, 2006. The largest component of non-interest expense, almost 65%
of the total, are salaries and employee benefits which increased by $127,000 to
$2.23 million in the 2007 quarter from $2.11 million in the 2006 quarter. The
increase is due to the addition of personnel in our internal control and
compliance departments.
---------------------------------------------
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
2007 2006
------------------- -------------------
NON- NON-
INTEREST % OF INTEREST % OF
EXPENSE TOTAL EXPENSE TOTAL
-------- ------ -------- ------
(In thousands, except percentages)
Salaries and Employee Benefits $ 2,234 64.70% $ 2,107 61.72%
Net Occupancy Expense 476 13.79 475 13.94
Equipment Expense 102 2.95 96 2.81
FDIC Assessment 20 0.58 21 0.61
Data Processing Expense 96 2.78 90 2.64
Other 525 15.20 624 18.28
-------- ------ -------- ------
Total Non-Interest Expense $ 3,453 100.00% $ 3,413 100.00%
PROVISION FOR INCOME TAX. We recorded income tax expense of $778,000 and $1.33
million for the three-month periods ended March 31, 2007 and 2006, respectively.
The tax provisions for federal, state and local taxes represent effective tax
rates of 41.43% and 47.01% for the three months ended March 31, 2007 and 2006,
respectively.
ISSUER PURCHASES OF EQUITY SECURITIES
On May 15, 2003, The Company's Board of Directors authorized the
purchase of up to an additional 450,000 shares of its Common Stock in the open
market, from time to time, depending upon prevailing market conditions, thereby
increasing the maximum number of shares which may be purchased by the Company
from 1,950,000 shares of Common Stock to 2,400,000 shares of Common Stock. Since
1990 through December 31, 2006, the Company has purchased a total of 1,898,909
shares of its Common Stock. At March 31, 2007, there were 501,091 shares of
Common Stock which may yet be purchased under our stock repurchase plan. We did
not repurchase shares of the Company's Common Stock during the first quarter of
2007.
24
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK. Fluctuations in market interest rates can have a material
effect on the Company's net interest income because the yields earned on loans
and investments may not adjust to market rates of interest with the same
frequency, or with the same speed, as the rates paid by the Bank on its
deposits.
Most of the Bank's deposits are either interest-bearing demand deposits
or short term certificates of deposit and other interest-bearing deposits with
interest rates that fluctuate as market rates change. Management of the Bank
seeks to reduce the risk of interest rate fluctuations by concentrating on loans
and securities investments with either short terms to maturity or with
adjustable rates or other features that cause yields to adjust based upon
interest rate fluctuations. In addition, to cushion itself against the potential
adverse effects of a substantial and sustained increase in market interest
rates, the Bank has purchased off balance sheet interest rate cap contracts
which generally provide that the Bank will be entitled to receive payments from
the other party to the contract if interest rates exceed specified levels. These
contracts are entered into with major financial institutions.
As an additional interest rate management strategy, the Bank borrows
funds from the Federal Home Loan Bank, approximately $43.89 million at March 31,
2007, at fixed rates for a period of one to five years.
The Company seeks to maximize its net interest margin within an
acceptable level of interest rate risk. Interest rate risk can be defined as the
amount of the forecasted net interest income that may be gained or lost due to
favorable or unfavorable movements in interest rates. Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets
differ significantly from the maturity or repricing characteristics of
liabilities.
25
In the banking industry, a traditional measure of interest rate
sensitivity is known as "gap" analysis, which measures the cumulative
differences between the amounts of assets and liabilities maturing or repricing
at various time intervals. The following table sets forth the Company's interest
rate repricing gaps for selected maturity periods:
BERKSHIRE BANCORP INC.
INTEREST RATE SENSITIVITY GAP AT MARCH 31, 2007
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
--------------------------------------------------------------------------------
3 MONTHS 3 THROUGH 1 THROUGH OVER
OR LESS 12 MONTHS 3 YEARS 3 YEARS TOTAL
--------- --------- --------- --------- ----------
Federal funds sold 45,200 -- -- -- 45,200
(Rate) 5.30% 5.30%
Interest bearing deposits in banks 8,262 -- -- -- 8,262
(Rate) 4.30% 4.30%
Loans (1)(2)
Adjustable rate loans 86,635 13,725 21,483 41,941 163,784
(Rate) 8.94% 7.48% 6.62% 7.02% 8.02%
Fixed rate loans 13,290 13,080 31,778 157,381 215,529
(Rate) 7.99% 8.66% 7.69% 6.45% 6.86%
--------- --------- --------- --------- ----------
Total loans 99,925 26,805 53,261 199,322 379,313
Investments (3)(4) 154,922 88,003 120,332 158,264 521,521
(Rate) 4.48% 4.41% 4.09% 5.06% 4.55%
--------- --------- --------- --------- ----------
Total rate-sensitive assets 263,109 114,808 173,593 357,586 909,096
--------- --------- --------- --------- ----------
Deposit accounts (5)
Savings and NOW 281,661 -- -- -- 281,661
(Rate) 3.63% 3.63%
Money market 14,688 -- -- -- 14,688
(Rate) 0.69% 0.69%
Time Deposits 270,881 149,946 5,459 3 426,289
(Rate) 4.74% 4.94% 2.84% 1.74% 4.79%
--------- --------- --------- --------- ----------
Total deposit accounts 567,230 149,946 5,459 3 722,638
Repurchase Agreements 15,199 8,007 -- -- 23,206
(Rate) 4.87% 4.58% 4.16% 4.77%
Other borrowings 1,711 10,247 19,930 34,681 66,569
(Rate) 3.58% 3.39% 3.92% 7.31% 5.60%
--------- --------- --------- --------- ----------
Total rate-sensitive liabilities 584,140 168,200 25,389 34,684 812,413
--------- --------- --------- --------- ----------
Interest rate caps 20,000 (20,000) -- -- --
Gap (repricing differences) (341,031) (33,392) 148,204 322,902 96,683
========= ========= ========= ========= ==========
Cumulative Gap (341,031) (374,423) (226,219) 96,683
========= ========= ========= =========
Cumulative Gap to Total Rate
Sensitive Assets (37.51)% (41.19)% (24.88)% 10.64%
========= ========= ========= =========
----------
(1) Adjustable-rate loans are included in the period in which the interest
rates are next scheduled to adjust rather than in the period in which the
loans mature. Fixed-rate loans are scheduled according to their maturity
dates.
(2) Includes nonaccrual loans.
(3) Investments are scheduled according to their respective repricing (variable
rate loans) and maturity (fixed rate securities) dates.
(4) Investments are stated at book value.
(5) NOW accounts and savings accounts are regarded as readily accessible
withdrawal accounts. The balances in such accounts have been allocated
among maturity/repricing periods based upon The Berkshire Bank's historical
experience. All other time accounts are scheduled according to their
respective maturity dates.
26
PROVISION FOR LOAN LOSSES. The allowance for loan losses is the estimated amount
considered necessary to cover credit losses inherent in the loan portfolio at
the balance sheet date. The allowance is established through the provision for
loan losses that is charged against income. In determining the allowance for
loan losses, management makes significant estimates 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
accounting principles generally accepted in the United States of America, under
which 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 and general allocations. Specific allocations are made for
loans determined to be impaired. Impairment is measured by determining the
present value of expected future cash flows or, for collateral-dependent loans,
the fair value of the collateral adjusted for market conditions and selling
expenses. The general allocation is determined by segregating the remaining
loans by type of loan, risk weighting (if applicable) and payment history.
Management also analyzes historical loss experience, delinquency trends, general
economic conditions, geographic concentrations, and industry and peer
comparisons. This analysis establishes factors that are applied to the loan
groups to determine the amount of the general allocations. This evaluation is
inherently subjective as it requires material estimates that may be susceptible
to significant revisions based upon changes in economic and real estate market
conditions. Actual loan losses may be significantly more than the allowance for
loan losses management has established which could have a material negative
effect on the Company's financial results.
On a quarterly basis, the Bank's management committee reviews the
current status of various loan assets in order to evaluate the adequacy of the
allowance for loan losses. In this evaluation process, specific loans are
analyzed to determine their potential risk of loss. This process includes all
loans, concentrating on non-accrual and classified loans. Each non-accrual or
classified loan is evaluated for potential loss exposure. Any shortfall results
in a recommendation of a specific allowance if the likelihood of loss is
evaluated as probable. To determine the adequacy of collateral on a particular
loan, an estimate of the fair market value of the collateral is based on the
most current appraised value available. This appraised value is then reduced to
reflect estimated liquidation expenses.
The Company's primary lending emphasis has been the origination of
commercial and residential mortgages and commercial and consumer loans and lines
of credit. The Bank also originates home equity loans and home equity lines of
credit. These activities resulted in a loan concentration in commercial and
residential mortgages. 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
27
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 considers it important to maintain the ratio of our
allowance for loan losses to total loans at an adequate level given current
economic conditions, interest rates, and the composition of the portfolio.
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 the best information available,
the level of the allowance for loan losses remains an estimate that is subject
to significant judgment and short-term change. In addition, the Federal Deposit
Insurance Corporation, New York State Banking Department, and other regulatory
bodies, as an integral part of their examination process, will periodically
review our allowance for loan losses. Such agencies may require us to recognize
adjustments to the allowance based on its judgments about information available
to them at the time of their examination.
For the three-month periods ended March 31, 2007 and 2006, we
charged-off loans of $0 and $1,000, respectively, and recovered loans of $2,000
and $5,000, respectively. All amounts recovered in the 2007 and 2006 periods
were returned to the allowance for loan losses.
The following table sets forth information with respect to activity in
the Company's allowance for loan losses during the periods indicated (in
thousands, except percentages):
THREE MONTHS ENDED
MARCH 31,
------------------------
2007 2006
-------- --------
Average loans outstanding $376,914 $310,007
======== ========
Allowance at beginning of period 3,771 3,266
Charge-offs:
Commercial and other loans -- 1
-------- --------
Total loans charged-off -- 1
-------- --------
Recoveries:
Commercial and other loans 2 5
-------- --------
Total loans recovered 2 5
-------- --------
Net (charge-offs) recoveries 2 4
-------- --------
Provision for loan losses
charged to operating expenses 75 45
-------- --------
Allowance at end of period $ 3,848 $ 3,315
-------- --------
Ratio of net recoveries (charge-offs)
to average loans outstanding 0.00% 0.00%
======== ========
Allowance as a percent of total loans 1.01% 1.08%
======== ========
Total loans at end of period $379,313 $307,879
======== ========
28
LOAN PORTFOLIO.
The Company's loans consist primarily of mortgage loans secured by
residential and non-residential properties as well as commercial loans which are
either unsecured or secured by personal property collateral. Most of the
Company's commercial loans are either made to individuals or personally
guaranteed by the principals of the business to which the loan is made. At March
31, 2007, we had total gross loans of $379.31 million, deferred loan fees of
$1.16 million and an allowance for loan losses of $3.85 million. From time to
time, the Bank may originate residential mortgage loans and then sell them on
the secondary market, normally recognizing fee income in connection with the
sale. During the three-month period ended March 31, 2007, the Bank did not sell
any loans.
The following tables set forth information concerning the Company's loan
portfolio by type of loan at the dates indicated:
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
AMOUNT AMOUNT
--------- ---------
(in thousands)
Commercial and professional loans $ 64,377 $ 63,331
Secured by real estate
1-4 family 138,162 139,611
Multi family 3,883 4,013
Non-residential (commercial) 168,031 160,417
Consumer 4,860 4,763
--------- ---------
Total loans 379,313 372,135
Less:
Deferred loan fees (1,162) (1,212)
Allowance for loan losses (3,848) (3,771)
--------- ---------
Loans, net $ 374,303 $ 367,152
========= =========
It is the Bank's policy to discontinue accruing interest on a loan when
it is 90 days past due or if management believes that continued interest
accruals are unjustified. The Bank may continue interest accruals if a loan is
more than 90 days past due if the Bank determines that the nature of the
delinquency and the collateral are such that collection of the principal and
interest on the loan in full is reasonably assured. When the accrual of interest
is discontinued, all accrued but unpaid interest is charged against current
period income. Once the accrual of interest is discontinued, the Bank records
interest as and when received until the loan is restored to accruing status. If
the Bank determines that collection of the loan in full is in reasonable doubt,
then amounts received are recorded as a reduction of principal until the loan is
returned to accruing status. At March 31, 2007 and 2006, we did not have any
loans past due more than 90 days and still accruing interest.
29
CAPITAL ADEQUACY
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios
of total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and Tier I capital (as defined) to average assets (as
defined). As of March 31, 2007, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain certain Total risk-based, Tier I risk-based, and Tier I leverage
ratios. There are no conditions or events since the notification that management
believes have changed the Bank's category.
The following tables set forth the actual and required regulatory
capital amounts and ratios of the Company and the Bank as of March 31, 2007 and
December 31, 2006 (dollars in thousands):
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
MARCH 31, 2007
Total Capital
(to Risk-Weighted Assets)
Company 130,852 22.9% 45,691 >8.0% -- N/A
-
Bank 100,122 18.2% 44,029 >8.0% 55,036 >10.0%
- -
Tier I Capital
(to Risk-Weighted Assets)
Company 127,004 22.4% 22,845 >4.0% -- N/A
-
Bank 96,274 17.5% 22,014 >4.0% 33,021 >6.0%
- -
Tier I Capital
(to Average Assets)
Company 127,004 12.9% 39,366 >4.0% -- N/A
-
Bank 96,274 10.3% 37,532 >4.0% 46,915 >5.0%
- -
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
DECEMBER 31, 2006
Total Capital
(to Risk-Weighted Assets)
Company $128,452 23.9% $43,031 >8.0% -- N/A
-
Bank 99,170 19.3% 41,120 >8.0% 51,400 >10.0%
- -
Tier I Capital
(to Risk-Weighted Assets)
Company 124,681 23.2% 21,516 >4.0% -- N/A
-
Bank 95,400 18.6% 20,560 >4.0% 30,840 >6.0%
- -
Tier I Capital
(to Average Assets)
Company 124,681 13.4% 37,322 >4.0% -- N/A
-
Bank 95,400 10.9% 35,022 >4.0% 43,778 >5.0%
- -
30
LIQUIDITY
The management of the Company's liquidity focuses on ensuring that
sufficient funds are available to meet loan funding commitments, withdrawals
from deposit accounts, the repayment of borrowed funds, and ensuring that the
Bank and the Company comply with regulatory liquidity requirements. Liquidity
needs of the Bank have historically been met by deposits, investments in federal
funds sold, principal and interest payments on loans, and maturities of
investment securities.
For the Company, liquidity means having cash available to fund operating
expenses and to pay stockholder dividends, when and if declared by the Company's
Board of Directors and to pay the interest on the Debentures issued in May 2004
and April 2005. The ability of the Company to meet all of its obligations,
including the payment of dividends, is not dependent upon the receipt of
dividends from the Bank. At March 31, 2007, the Company, excluding the Bank, had
cash and cash equivalents of $14.41 million and investment securities available
for sale of $11.79 million.
The Company maintains financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments, approximately $45.45 million at March 31, 2007,
include commitments to extend credit and stand-by letters of credit.
At March 31, 2007, the Company had outstanding commitments of
approximately $473.85 million; including $426.29 million of time deposits,
$43.89 million of Federal Home Loan Bank debt, and $3.67 million of operating
leases. These commitments include $433.72 million that mature or renew within
one year, $26.68 million that mature or renew after one year and within three
years, $13.03 million that mature or renew after three years and within five
years and $418,000 that mature or renew after five years.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements measure financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increasing cost of the Company's operations.
The assets and liabilities of the Company are largely monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. In addition, interest rates do not
necessarily move in the direction, or to the same extent, as the price of goods
and services. However, in general, high inflation rates are accompanied by
higher interest rates, and vice versa.
31
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF THE COMPANY'S DISCLOSURE CONTROLS AND INTERNAL CONTROL. As of the
end of the period covered by this Quarterly Report on Form 10-Q, the Company
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934 ("Disclosure Controls"). This evaluation ("Controls Evaluation") was
done under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") who is also the Chief
Financial Officer ("CFO").
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The Company's management,
including the CEO/CFO, does not expect that its Disclosure Controls and/or its
"internal control over financial reporting" as defined in Rule 13(a)-15(f) of
the Securities Exchange Act of 1934 ("Internal Control") will prevent all error
and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
CONCLUSIONS. Based upon the Controls Evaluation, the CEO/CFO has concluded that,
the Disclosure Controls are effective in reaching a reasonable level of
assurance that information required to be disclosed by the Company is recorded,
processed, summarized and reported within the time period specified in the SEC's
rules and forms and that any material information relating to the Company is
accumulated and communicated with management, including its principal
executive/financial officer to allow timely decisions regarding required
disclosure. In accordance with SEC requirements, the CEO/CFO notes that during
the fiscal quarter ended March 31, 2007, no changes in Internal Control have
occurred that have materially affected or are reasonably likely to materially
affect Internal Control.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number Description
31 Certification of Principal Executive
and Financial Officer pursuant to
Section 302 Of The Sarbanes-Oxley Act
of 2002.
32 Certification of Principal Executive
and Financial Officer pursuant to
Section 906 Of The Sarbanes-Oxley Act
of 2002.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKSHIRE BANCORP INC.
(REGISTRANT)
Date: May 4, 2007 By: /s/ Steven Rosenberg
------------------ -----------------------
STEVEN ROSENBERG
PRESIDENT AND CHIEF
FINANCIAL OFFICER
33
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
------- ----------- -----------
31 Certification of Principal Executive 35
and Financial Officer pursuant to
Section 302 Of The Sarbanes-Oxley Act
of 2002.
32 Certification of Principal Executive 36
and Financial Officer pursuant to
Section 906 Of The Sarbanes-Oxley Act
of 2002.
34