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 September 30, 2005
------------------
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
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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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No 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 November 4, 2005, there were 6,886,556 outstanding shares of the issuers
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 Company's actual results and experiences to differ materially
from the results expressed or implied by the Company's forward-looking
statements. Some of the risks and uncertainties that may affect operations,
performance, results of the Company's business, the interest rate sensitivity of
its assets and liabilities, and the adequacy of its loan loss allowance,
include, but are not limited to: (i) deterioration in local, regional, national
or global economic conditions which could result, among other things, in an
increase in loan delinquencies, a decrease in property values, or a change in
the housing turnover rate; (ii) changes in market interest rates or changes in
the speed at which market interest rates change; (iii) changes in laws and
regulations affecting the financial services industry; (iv) changes in
competition; (v) changes in consumer preferences, (vi) changes in banking
technology; (vii) ability to maintain key members of management, (viii) possible
disruptions in the Company's operations at its banking facilities, (ix) cost of
compliance with new corporate governance requirements, and other factors
referred to in the sections of this Quarterly Report entitled "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Certain information customarily disclosed by financial institutions,
such as estimates of interest rate sensitivity and the adequacy of the loan loss
allowance, are inherently forward-looking statements because, by their nature,
they represent attempts to estimate what will occur in the future.
The Company cautions readers not to place undue reliance upon any
forward-looking statement contained in this 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
September 30, 2005 (unaudited) and
December 31, 2004 4
Consolidated Statements of Income
For The Three and Nine Months Ended
September 30, 2005 and 2004 (unaudited) 5
Consolidated Statement of Stockholders'
Equity For The Nine Months Ended
September 30, 2005 (unaudited) 6
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30,
2005 and 2004 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 18
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 28
Item 4. Controls and Procedures 35
PART II OTHER INFORMATION
Item 6. Exhibits 35
Signature 36
Index of Exhibits 37
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
September 30, December 31,
2005 2004
----------------------------------------
ASSETS
Cash and due from banks $ 7,362 $ 9,511
Interest bearing deposits 4,102 372
Federal funds sold 6,100 7,500
-------- ---------
Total cash and cash equivalents 17,564 17,383
Investment Securities:
Available-for-sale 611,745 630,968
Held-to-maturity, fair value of $593
in 2005 and $633 in 2004 578 624
-------- ---------
Total investment securities 612,323 631,592
Loans, net of unearned income 281,492 286,979
Less: allowance for loan losses (3,129) (2,927)
-------- ---------
Net loans 278,363 284,052
Accrued interest receivable 6,143 6,014
Premises and equipment, net 8,698 8,677
Goodwill, net 18,549 18,549
Other assets 8,640 6,382
-------- ---------
Total assets $950,280 $ 972,649
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 44,069 $42,191
Interest bearing 607,844 577,697
-------- ---------
Total deposits 651,913 619,888
Securities sold under agreements to repurchase 65,290 127,747
Long term borrowings 91,719 95,605
Subordinated debt 22,681 15,464
Accrued interest payable 4,811 2,516
Other liabilities 3,993 3,810
-------- ---------
Total liabilities 840,404 865,030
-------- ---------
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 --
September 30, 2005, 6,874,556 shares
December 31, 2004, 6,751,675 shares 770 770
Additional paid-in capital 90,284 89,543
Retained earnings 32,858 28,983
Accumulated other comprehensive loss, net (6,142) (2,602)
Treasury Stock
September 30, 2005, 823,729 shares
December 31, 2004, 946,610 shares (7,897) (9,075)
-------- ---------
Total stockholders' equity 109,873 107,619
-------- ---------
$950,280 $ 972,649
======== =========
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 For The
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2005 2004 2005 2004
-------- -------- -------- --------
INTEREST INCOME
Loans $ 4,738 $ 4,652 $ 14,279 $ 14,097
Investment securities 6,452 5,601 19,104 15,408
Federal funds sold and
interest bearing deposits 60 23 212 35
-------- -------- -------- --------
Total interest income 11,250 10,276 33,595 29,540
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 3,730 2,448 9,845 7,294
Short-term borrowings 849 641 2,622 1,720
Long-term borrowings 1,300 1,014 3,811 2,605
-------- -------- -------- --------
Total interest expense 5,879 4,103 16,278 11,619
-------- -------- -------- --------
Net interest income 5,371 6,173 17,317 17,921
PROVISION FOR LOAN LOSSES 45 45 135 135
-------- -------- -------- --------
Net interest income after
provision for loan losses 5,326 6,128 17,182 17,786
-------- -------- -------- --------
NON-INTEREST INCOME
Service charges on deposits 158 139 436 380
Investment securities gains -- 173 5 315
Other income 142 143 413 429
-------- -------- -------- --------
Total non-interest income 300 455 854 1,124
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,996 1,670 5,972 4,865
Net occupancy expense 433 453 1,291 1,129
Equipment expense 99 90 293 258
FDIC assessment 70 37 206 83
Data processing expense 51 48 144 126
Other 572 828 1,886 2,799
-------- -------- -------- --------
Total non-interest expense 3,221 3,126 9,792 9,260
-------- -------- -------- --------
Income before provision for taxes 2,405 3,457 8,244 9,650
Provision for income taxes 1,108 1,489 3,898 4,250
-------- -------- -------- --------
Net income $ 1,297 $ 1,968 $ 4,346 $ 5,400
======== ======== ======== ========
Net income per share:
Basic $ .19 $ .29 $ .64 $ .81
======== ======== ======== ========
Diluted $ .19 $ .29 $ .63 $ .79
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 2005
(In Thousands)
(unaudited)
Accumulated
Common Stock Additional other Total
Par paid-in comprehensive Retained Treasury Comprehensive stockholders'
Shares value capital (loss), net earnings stock income (loss) equity
------ ----- -------- ------------ -------- ------ -------------- ------
Balance at December 31, 2004 7,698 $770 $89,543 $(2,602) $28,983 $(9,075) $107,619
Net income 4,346 4,346 4,346
Exercise of stock options 741 1,178 1,919
Other comprehensive (loss) net
of reclassification adjustment
and taxes (3,540) (3,540) (3,540)
------
Comprehensive income $ 806
======
Cash dividends (471) (471)
----- ---- ------- ------- ------- -------- --------
Balance at September 30, 2005 7,698 $770 $90,284 $(6,142) $32,858 $( 7,897) $109,873
(Unaudited) ==== ======= ======= ======= ======== ========
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 Nine Months Ended
September 30,
---------------------------------
2005 2004
------ -----
Cash flows from operating activities:
Net income $ 4,346 $5,400
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Realized gains on investment securities (5) (315)
Net (accretion) amortization of premiums of
investment securities (10) 2,064
Depreciation and amortization 481 430
Provision for loan losses 135 135
(Increase) in accrued interest receivable (129) (428)
(Increase) in other assets (2,258) (3,210)
Increase (decrease) in accrued interest payable
and other liabilities 2,888 (146)
------- -------
Net cash provided by operating activities 5,448 3,930
------- -------
Cash flows from investing activities:
Investment securities available for sale
Purchases (337,510) (1,290,294)
Sales, maturities and calls 353,208 1,216,438
Investment securities held to maturity
Maturities 46 70
Net decrease in loans 5,554 6,673
Acquisition of premises and equipment (502) (484)
------- -------
Net cash provided by (used in) investing activities 20,796 (67,597)
------- -------
7
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Nine Months Ended
September 30,
--------------------------
2005 2004
----------- -----------
Cash flows from financing activities:
Net increase in non interest bearing deposits 1,878 338
Net increase in interest bearing deposits 30,147 17,469
(Decrease) increase in securities sold under agreements
to repurchase (62,457) 28,224
Proceeds from long term debt 20,000 22,000
Repayment of long term debt (23,886) (13,544)
Proceeds from issuance of subordinated debentures 7,217 14,791
Acquisition of treasury stock -- (69)
Proceeds from exercise of common stock options 1,509 1,130
Cash paid for fractional shares -- (463)
Dividends paid (471) (332)
----------- -----------
Net cash (used in) provided by financing activities (26,063) 69,544
----------- -----------
Net increase in cash 181 5,877
Cash - beginning of period 17,383 9,310
----------- -----------
Cash - end of period $ 17,564 $ 15,187
=========== ===========
Supplemental disclosure of cash flow information:
Cash used to pay interest $ 13,983 $ 11,104
Cash used to pay taxes, net of refunds $ 5,558 $ 4,464
The accompanying notes are an integral part of these statements.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
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.
During interim periods, the Company follows the accounting policies set
forth in its Annual Report on Form 10-K filed with the Securities and Exchange
Commission (the "SEC"). Readers are encouraged to refer to the Company's Form
10-K for the fiscal year ended December 31, 2004 when reviewing this Form 10-Q.
Quarterly results reported herein are not necessarily indicative of results to
be expected for other quarters or a full fiscal year.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary to present fairly the Company's consolidated
financial position as of September 30, 2005 and December 31, 2004 and the
consolidated results of its operations for the three and nine month periods
ended September 30, 2005 and 2004, and its consolidated stockholders' equity for
the nine month period ended September 30, 2005, and its consolidated cash flows
for the nine month periods ended September 30, 2005 and 2004. As discussed in
Note 2 below, all weighted share and per share information in 2004 has been
retroactively restated to reflect the stock split and stock dividend.
NOTE 2. Stock Split and Stock Dividend.
At the Annual Meeting of Stockholders held on May 18, 2004, the
Company's stockholders approved an amendment to the Company's Certificate of
Incorporation effecting a one-for-ten reverse stock split of the Company's
issued and outstanding Common Stock (the "Reverse Split"). Following the
effectiveness of the Reverse Split, the Company's Board of Directors declared a
thirty-for-one forward stock split in the form of a stock dividend in Common
Stock (the "Stock Dividend) which became effective immediately. The Company paid
approximately $463,000 to purchase fractional shares from stockholders as part
of the Reverse Split. The Company's Common Stock began trading on May 19, 2004
giving effect to these transactions.
NOTE 3. 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%.
9
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 3. - (continued)
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%.
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 is not and BCTII will not be 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.
10
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 4. 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
-------------------------------------------------------------------------------------
September 30, 2005 September 30, 2004
-------------------------------------- -----------------------------------------
Per
Income Shares share Income Shares Per share
(numerator) (denominator) amount (numerator) (denominator) amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except per share data)
Basic earnings per share
Net income available to
common stockholders $ 1,297 6,817 $ .19 $ 1,968 6,688 $ .29
Effect of dilutive securities
options -- 109 -- -- 132 --
------------ ------------ ------------ ------------ ------------ ------------
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $ 1,297 6,926 $ .19 $ 1,968 6,820 $ .29
============ ============ ============ ============ ============ ============
For The Nine Months Ended
-------------------------------------------------------------------------------------
September 30, 2005 September 30, 2004
-------------------------------------- -----------------------------------------
Per
Income Shares share Income Shares Per share
(numerator) (denominator) amount (numerator) (denominator) amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except per share data)
Basic earnings per share
Net income available to
common stockholders $ 4,346 6,778 $ .64 $ 5,400 6,647 $ .81
Effect of dilutive securities
options -- 147 (.01) -- 184 (.02)
------------ ------------ ------------ ------------ ------------ ------------
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $ 4,346 6,925 $ .63 $ 5,400 6,831 $ .79
============ ============ ============ ============ ============ ============
11
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 5. Investment Securities
The following tables summarize held to maturity and available-for-sale
investment securities as of September 30, 2005 and December 31, 2004:
September 30, 2005
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
------------ ------------ ----------- -------------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 578 $ 28 $ -- $ 606
Totals $ 578 $ 28 $ -- $ 606
============ ============ ============ ============
December 31, 2004
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
------------ ------------ ----------- -------------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 624 $ 10 $ (1) $ 633
------------ ------------ ------------ ------------
Totals $ 624 $ 10 $ (1) $ 633
============ ============ ============ ============
September 30, 2005
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
------------ ------------ ----------- -------------
(In thousands)
Available-For-Sale Investment
Securities
U.S. Treasury and Notes $ 14,971 $ -- $ (136) $ 14,835
U.S. Government Agencies 470,080 -- (6,499) 463,581
Mortgage-backed securities 87,256 173 (1,430) 85,999
Corporate notes 37,094 191 (1,811) 35,474
Municipal Securities 1,973 211 -- 2,184
Marketable equity
securities and other 9,479 269 (76) 9,672
------------ ------------ ------------ ------------
Totals $ 620,853 $ 844 $ (9,952) $ 611,745
============ ============ ============ ============
12
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 5. - (continued)
December 31, 2004
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
------------ ------------ ----------- -------------
(In thousands)
Available-For-Sale Investment
securities
U.S. Treasury and Notes $ 24,896 $ -- $ (174) $ 24,722
U.S. Government Agencies 471,018 97 (3,844) 467,271
Mortgage-backed securities 109,822 504 (996) 109,330
Corporate Notes 21,089 692 (154) 21,627
Municipal securities 1,307 134 -- 1,441
Marketable equity
securities and other 6,363 279 (65) 6,577
------------ ------------ ------------ ------------
Totals $ 634,495 $ 1,706 $ (5,233) $ 630,968
============ ============ ============ ============
NOTE 6. Loan Portfolio
The following table sets forth information concerning the Company's
loan portfolio by type of loan at the dates indicated:
September 30, 2005 December 31, 2004
----------------------------- ----------------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Commercial and professional loans $ 23,755 8.4% $ 16,498 5.7%
Secured by real estate
1-4 family 142,168 50.4 155,079 53.9
Multi family 3,022 1.1 4,600 1.6
Non-residential (commercial) 111,019 39.3 109,597 38.1
Consumer 2,281 0.8 1,989 0.7
------------ ------------ ------------ ------------
Total loans 282,245 100.0% 287,763 100.0%
============ ============
Deferred loan fees (753) (784)
Allowance for loan losses (3,129) (2,927)
------------ ------------
Loans, net $ 278,363 $ 284,052
============ ============
13
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 7. Deposits
The following table summarizes the composition of the average balances
of major deposit categories:
September 30, 2005 December 31, 2004
-------------------------- ---------------------------
Average Average Average Average
Amount Yield Amount Yield
------ ----- ------ -----
(Dollars in thousands)
Demand deposits $ 45,155 -- $ 38,896 --
NOW and money market 42,624 0.54% 47,677 0.65%
Savings deposits 237,444 1.93 224,542 1.55
Time deposits 319,140 2.60 309,968 1.96
------------ ------------ ------------ ------------
Total deposits $ 644,363 2.04% $ 621,083 1.58%
============ ============ ============ ============
NOTE 8. Comprehensive Income
The following table presents the components of comprehensive income,
based on the provisions of SFAS No. 130.:
For The Nine Months Ended
--------------------------------------------------------------------------------------------
September 30, 2005 September 30, 2004
-------------------------------------------- --------------------------------------------
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 $ (5,586) $ 2,043 $ (3,543) $ (4,807) $ 1,923 $ (2,884)
gains (losses) arising
during period
Less reclassification
adjustment for gains
realized in net income 5 (2) 3 315 (126) 189
------------ ------------ ------------ ------------ ------------ ------------
Other comprehensive
(loss), net $ (5,581) $ 2,041 $ (3,540) $ (4,492) $ 1,797 $ (2,695)
============ ============ ============ ============ ============ ============
14
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 9. Accounting For Stock Based Compensation
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 123 (Revised), Share-Based Payment, ("FAS 123(R)"). FAS
123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. We will
be required to apply FAS 123(R) in the first quarter of 2006. The scope of FAS
123(R) includes a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. FAS 123(R) revises FASB
Statement 123, Accounting for Stock-Based Compensation ("FAS 123"), and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
At September 30, 2005, the Company has one stock-based employee
compensation plan. The Company accounts for that plan under the recognition and
measurement principles of APB No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Stock-based employee compensation costs
are 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 fair value of each option is estimated on the date of grant using
the Black-Scholes options-pricing model using weighted-average assumptions for
expected volatility, risk-free interest and expected life of the option. Since
all stock options outstanding are vested, proforma net income has not been
presented. The Company did not grant stock options during the nine months ended
September 30, 2005 and 2004.
NOTE 10. 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).
For The For The
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------------
2005 2004 2005 2004
--------------- -------------- ---------------- -----------------
Service cost $ 79,381 $ 62,640 $ 224,762 $ 181,280
Interest cost 35,425 30,750 98,850 90,250
Expected return on
plan assets (38,940) (37,550) (111,880) (112,600)
Amortization and Deferral:
Transition amount -- -- -- --
Prior service cost 4,593 4,625 13,779 13,750
(Gain)/loss 11,228 5,350 28,863 13,700
Net periodic pension cost 91,687 65,815 254,374 186,380
During the fiscal year ending December 31, 2005, we expect to
contribute approximately $112,000 to the Plan, which amount was paid in July
2005.
15
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 11. New Accounting Pronouncements
Stock-Based Compensation
In December 2004, the FASB issued FAS 123(R) which requires that the
compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. In accordance with recent guidance from
the Securities and Exchange Commission, the Company will be required to apply
FAS 123(R) on January 1, 2006.
The scope of FAS 123(R) includes a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase
plans. FAS 123(R) revises FASB Statement 123, Accounting for Stock-Based
Compensation ("FAS 123"), and supersedes the Accounting Principles Board (the
"APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB Opinion
No. 25").
FAS 123(R) provides two methods for companies to transition to the new
standard requiring the expensing of options. Companies may elect to (i) restate
results for prior quarters in the fiscal year of adoption of FAS 123(R) to
reflect the FAS 123 proforma compensation costs, or (ii) restate results for
prior periods, whether annual or quarterly, to reflect the FAS 123 proforma
compensation costs. We are in the process of determining which transition
approach to use and the effect, if any, such transition approach will have on
our financial statements.
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments
In November 2003, the Emerging Issues Task Force (the "EITF") of the
FASB issued EITF Abstract 03-1, "The Meaning of Other-Than-Temporary Impairment
and its Application to Certain Investments" (EITF 03-1). The quantitative and
qualitative disclosure provisions of EITF 03-1 are effective for years ending
after December 15, 2003 and were included in the Company's 2003 Form 10-K. In
March 2004, the EITF issued a Consensus on Issue 03-1 requiring that the
provisions of EITF 03-1 be applied for reporting periods beginning after June
15, 2004 to investments accounted for under SFAS Nos. 115 and 124. EITF 03-1
establishes a three-step approach for determining whether an investment is
considered impaired, whether that impairment is other-than-temporary, and the
measurement of an impairment loss. In September 2004, the FASB issued a proposed
Board-directed FASB Staff Position, FSP EITF Issue 03-1-a, "Implementation
Guidance for the Application of Paragraph 16 of EITF 03-1" ("FSP 115-1")
The proposed FSP 115-1 would provide implementation guidance with
respect to debt securities that are impaired solely due to interest rates and/or
sector spreads and analyzed for other-than-temporary impairment under paragraph
16 of EITF 03-1. The FASB had directed the FASB staff to delay the effective
date for the measurement and recognition guidance contained in paragraphs 10-20
of EITF Issue No. 03-1, including steps two and three of the three-step approach
for determining whether an investment is other-than-temporarily impaired.
However, step one of that approach must still be initially applied for
impairment evaluations in reporting periods beginning after June 15, 2004. The
delay of the effective date for paragraphs 10-20 of EITF Issue 03-1 will be
superseded with the final issuance of proposed FSP EITF Issue 03-1-a,
"Implementation Guidance for the Application of Paragraph 16 of EITF Issue No.
03-1."
16
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 11. (continued)
In June 2005, the FASB decided to issue proposed FSP 115-1 as final and
without providing additional guidance on the meaning of other-than-temporary
impairment. The final FSP will be retitled FSP FAS 115-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," and
will supersede EITF 03-1. The final FSP will replace the guidance in paragraphs
10-18 of EITF Issue 03-1 with references to existing other-than-temporary
impairment guidance, such as Statement 115, "Accounting for Certain Investments
in Debt and Equity Securities," Staff Accounting Bulletin 59, "Accounting for
Noncurrent Marketable Equity Securities," and APB Opinion No. 18, "The Equity
Method of Accounting for Investments in Common Stock." FSP FAS 115-1 will
clarify that an investor should recognize an impairment loss no later than when
the impairment is deemed other than temporary, even if a decision to sell has
not been made.
At its September 1, 2005 meeting, the FASB decided that it will further
discuss whether to provide transition accounting for debt securities subsequent
to other-than-temporary impairment and whether to proceed with drafting the
final FSP.
The Company is in the process of determining the impact that this FSP
will have on its financial statements.
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. The SEC requires us to 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.
17
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
"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. 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.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services 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 the
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 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 each defined reporting unit. 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, 2004, the Company completed its impairment 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. 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.
18
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 September 30,
----------------------------------------------------------------------------------------
2005 2004
------------------------------------------ ------------------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
------- --------- ---------- ------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $ 284,282 $ 4,738 6.67% $ 289,476 $ 4,652 6.43%
Investment securities 646,601 6,452 3.99 628,530 5,601 3.56
Other (2)(5) 7,982 60 3.01 7,443 23 1.24
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets 938,865 11,250 4.79 925,449 10,276 4.44
------------ ------------
Noninterest-earning assets 44,063 43,303
------------ ------------
Total Assets $ 982,928 $ 968,752
============ ============
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 239,469 1,109 1.85% 272,840 955 1.40%
Time deposits 353,417 2,621 2.97 309,465 1,493 1.93
Other borrowings 225,670 2,149 3.81 238,319 1,655 2.78
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing
liabilities 818,556 5,879 2.87 820,624 4,103 2.00
------------ ------------ ------------ ------------
Demand deposits 44,419 39,048
Noninterest-bearing liabilities 8,182 7,094
Stockholders' equity (5) 111,771 101,986
------------ ------------
Total liabilities and
stockholders' equity $ 982,928 $ 968,752
============ ============
Net interest income 5,371 6,173
============ ============
Interest-rate spread (3) 1.92% 2.44%
============ ============
Net interest margin (4) 2.29% 2.67%
============ ============
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.15 1.13
============ ============
----------------------
(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.
19
For The Nine Months Ended September 30,
----------------------------------------------------------------------------------------
2005 2004
-------------------------------------------- ------------------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
------- --------- ---------- ------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $ 286,888 $ 14,279 6.64% $ 292,139 $ 14,097 6.43%
Investment securities 661,744 19,104 3.85 614,828 15,408 3.34
Other (2)(5) 11,158 212 2.53 4,239 35 1.10
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets 959,790 33,595 4.67 911,206 29,540 4.32
------------ ------------
Noninterest-earning assets 43,915 39,465
------------ ------------
Total Assets $ 1,003,705 $ 950,671
============ ============
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 280,068 3,615 1.72% 265,234 2,704 1.36%
Time deposits 319,140 6,230 2.60 316,817 4,590 1.93
Other borrowings 242,904 6,433 3.53 214,077 4,325 2.69
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing
liabilities 842,112 16,278 2.58 796,128 11,619 1.95
------------ ------------ ------------ ------------
Demand deposits 45,155 37,864
Noninterest-bearing liabilities 7,308 13,007
Stockholders' equity (5) 109,130 103,672
------------ ------------
Total liabilities and
stockholders' equity $ 1,003,705 $ 950,671
============ ============
Net interest income 17,317 17,921
============ ============
Interest-rate spread (3) 2.09% 2.37%
============ ============
Net interest margin (4) 2.41% 2.62%
============ ============
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.14 1.14
============ ============
----------------------
(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 and Nine Months Ended September 30, 2005
Compared to the Three and Nine Months Ended September 30, 2004.
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 nine branch locations, five branches in New
York City and four branches in Orange and Sullivan counties New York.
Net Income. Net income for the three-month period ended September 30, 2005 was
$1.30 million, or $.19 per share, as compared to $1.97 million, or $.29 per
share, for the three-month period ended September 30, 2004. Net income for the
nine-month period ended September 30, 2005 was $4.35 million, or $.63 per share,
as compared to $5.40 million, or $.79 per share, for the nine-month period ended
September 30, 2004.
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. From September 2003 through September 30, 2004, interest rates, as
measured by the prime rate, remained constant at 4.00%. On July 1, 2004,
inflation fighting actions taken by the Federal Reserve Board resulted in a 25
basis point increase in the prime rate to 4.25%, the first such increase in more
than four years. Similar 25 basis point moves taken by the Federal Reserve Board
during 2004 and 2005, the last occurring in September 2005, have moved the prime
rate to its present level of 6.75%.
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 September 30, 2005, net interest income decreased
by $802,000 to $5.37 million from $6.17 million for the quarter ended September
30, 2004. The quarter over quarter decrease in net interest income was the
result of the 87 basis point increase in the average rate paid on the average
amount of interest-bearing liabilities to 2.87% in the 2005 quarter from 2.00%
in the 2004 quarter and the smaller, 35 basis point increase in the average
yield earned on the average amount of interest-earning assets. Partially
offsetting the interest rate factors was the $2.07 million decrease in the
average amount of interest-bearing liabilities to $818.56 million in 2005 from
$820.62 million in 2004 and $13.42 million increase in the amount of
interest-earning assets to $938.87 million in 2005 from $925.45 million in 2004.
The interest-rate spread, the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities,
narrowed by 52 basis points to 1.92% in the 2005 quarter from 2.44% in the 2004
quarter.
For the nine-month period ended September 30, 2005, net interest income
decreased by $604,000 to $17.32 million from $17.92 million for the nine-month
period ended September 30, 2004. The period over period decrease in net interest
income was the result of the 63 basis point increase in the average rate paid on
the average amount of interest-bearing liabilities to 2.58% in the 2005 period
from 1.95% in the 2004 period, and the smaller, 35 basis point increase in the
average yield earned on the average amount of interest-earning assets, and the
$45.98 million increase in the average amount of interest-bearing liabilities to
$842.11 million in the 2005 period from $796.13 million in the 2004 period.
Partially offsetting these factors was the $48.58 million increase in the amount
of interest-earning assets to $959.79 million in the 2005 period from $911.21
million in the 2004 period. The interest-rate spread narrowed by 28 basis points
to 2.09% in the 2005 period from 2.37% in the 2004 period.
21
If interest rates remain at current levels or increase slowly over
time, we expect to see only moderate pressure on the Company's interest-rate
spread and net interest income. Investment securities in our portfolio that have
been sold, matured or called by the issuer during fiscal 2004 have been replaced
with securities carrying somewhat lower yields and, by design, shorter
maturities to hedge against a rising interest rate environment. Rates paid on
deposit accounts are likely to increase in a rising rate environment due to
competition for deposits in the market place. The cost of borrowed funds with
floating rather than fixed interest rates have and will continue to increase as
well.
Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, declined by 38 basis points to
2.29% in the third quarter of 2005 from 2.67% in the third quarter of 2004, and
declined by 21 basis points to 2.41% in the nine-month period of 2005 from 2.62%
in the nine-month period of 2004. We seek to secure and retain customer deposits
with competitive products and rates, and to make strategic use of the prevailing
interest rate environment to borrow funds at what we believe to be attractive
rates. We invest such deposits and borrowed funds in a prudent mix of fixed and
adjustable rate loans, investment securities and short-term interest-earning
assets which provided an aggregate average yield of 4.79% and 4.67% in the three
and nine months ended September 30, 2005, respectively, compared to an aggregate
average yield of 4.44% and 4.32% in the three and nine months ended September
30, 2004, respectively. The increased yield is the result of the rising interest
rate environment discussed above which triggers the upward rate adjustment in
our portfolio of adjustable rate loans and investment securities.
For the three months ended September 30, 2005, the average amounts of
loans decreased by $5.19 million to $284.28 million from $289.48 million for the
three months ended September 30, 2004. However, the average yield on such loans
increased by 24 basis points to 6.67% in the 2005 quarter from 6.43% in the 2004
quarter. In the 2005 quarter, the average amount of investment securities and
other interest-earning assets increased by $18.07 million and $539,000,
respectively, to $646.60 million and $7.98 million, respectively, from $628.53
million and $7.44 million, respectively, in the 2004 quarter. The average yield
on investment securities and other interest-earning increased to 3.99% and
3.01%, respectively, during the three months ended September 30, 2005 from 3.56%
and 1.24%, respectively, during the three months ended September 30, 2004.
For the nine month period ended September 30, 2005, the average amounts
of loans decreased by $5.25 million to $286.89 million from $292.14 million for
the nine month period ended September 30, 2004. However, the average yield on
such loans increased by 21 basis points to 6.64% in the first nine months of
2005 from 6.43% in the first nine months of 2004. In the 2005 period, the
average amount of investment securities and other interest-earning assets
increased by $46.92 million and $6.92 million, respectively, to $661.74 million
and $11.16 million, respectively, from $614.83 million and $4.24 million,
respectively, in the 2004 period. The average yield on investment securities and
other interest-earning increased to 3.85% and 2.53%, respectively, during the
nine months ended September 30, 2005 from 3.34% and 1.10%, respectively, during
the nine months ended September 30, 2004.
Interest Income. Total interest income for the quarter ended September 30, 2005
increased by $974,000, or 9.48%, to $11.25 million from $10.28 million for the
quarter ended September 30, 2004. The increase in total interest income was due
to higher average balances and higher average yields on interest-earning assets.
Loans and investment securities contributed $4.74 million and $6.45 million,
respectively, of interest income in the 2005 quarter compared to $4.65 million
and $ $5.60 million, respectively in the 2004 quarter.
22
----------------------------------------------------------
Three Months Ended September 30,
----------------------------------------------------------
2005 2004
---------------------------- ---------------------------
Interest % of Interest % of
Income Total Income Total
(In thousands, except percentages)
Loans $ 4,738 42.12% $ 4,652 45.27%
Investment Securities 6,452 57.35 5,601 54.51
Other 60 0.53 23 0.22
------------ ------------ ------------ ------------
Total Interest Income $ 11,250 100.00% $ 10,276 100.00%
Total interest income for the nine months ended September 30, 2005
increased by $4.06 million, or 13.73%, to $33.60 million from $29.54 million for
the nine months ended September 30, 2004. The increase in total interest income
was due to higher average balances and higher average yields on interest-earning
assets. Loans and investment securities contributed $14.28 million and $19.10
million, respectively, of interest income in the 2005 period compared to $14.10
million and $15.41 million, respectively in the 2005 period.
----------------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------------
2005 2004
---------------------------- ---------------------------
Interest % of Interest % of
Income Total Income Total
(In thousands, except percentages)
Loans $ 14,279 42.50% $ 14,097 47.72%
Investment Securities 19,104 56.87 15,408 52.16
Other 212 0.63 35 0.12
------------ ------------ ------------ ------------
Total Interest Income $ 33,595 100.00% $ 29,540 100.00%
Loans, which are inherently risky and therefore command a higher return
than our conservative portfolio of investment securities, have declined slightly
as a percentage of total average interest-earning assets. During the three and
nine months ended September 30, 2005, the average amount of our loan portfolio
represented 30.28% and 29.89%, respectively, of total interest-earning assets
compared to 31.28% and 32.06%, respectively, for the three and nine months ended
September 30, 2004. The average amount of investment securities have increased
to 68.87% and 68.95% of total interest-earning assets during the three and nine
months of 2005, respectively, compared to 67.92% and 67.47%, respectively,
during the three and nine months ended September 30, 2004. 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 September 30,
----------------------------------------------------------
2005 2004
---------------------------- ---------------------------
Average % of Average % of
Amount Total Amount Total
(In thousands, except percentages)
Loans $ 284,282 30.28% $ 289,476 31.28%
Investment Securities 646,601 68.87 628,530 67.92
Other 7,982 0.85 7,443 0.80
------------ ------------ ------------ ------------
Total Interest-Earning Assets $ 938,865 100.00% $ 925,449 100.00%
23
----------------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------------
2005 2004
---------------------------- ---------------------------
Average % of Average % of
Amount Total Amount Total
(In thousands, except percentages)
Loans $ 286,888 29.89% $ 292,139 32.06%
Investment Securities 661,744 68.95 614,828 67.47
Other 11,158 1.16 4,239 0.47
------------ ------------ ------------ ------------
Total Interest-Earning Assets $ 959,790 100.00% $ 911,206 100.00%
Interest Expense. Total interest expense for the quarter ended September 30,
2005 increased by $1.78 million, or 43.29%, to $5.88 million from $4.10 million
for the quarter ended September 30, 2004. The increase in interest expense was
due primarily to the increase in the average rates paid on such liabilities,
2.87% and 2.00% in the 2005 and 2004 quarters, respectively, partially offset by
the $2.07 million decline in the average amount of interest-bearing liabilities.
If and when interest rates move higher, interest expense is likely to increase
as we price our deposit products to meet the competition and the adjustable
rates paid on other borrowings increase as well. In May 2004 and April 2005, we
sold $15.46 million and $7.22 million, respectively, of floating rate junior
subordinated debentures (the "Debentures") and used the net proceeds to augment
the Bank's capital to allow for business expansion. The additional interest
expense on these Debentures, which is included in other borrowings was,
approximately $354,000 and $190,000 during the three months ended September 30,
2005 and 2004, respectively.
----------------------------------------------------------
Three Months Ended September 30,
----------------------------------------------------------
2005 2004
---------------------------- ---------------------------
Interest % of Interest % of
Expense Total Expense Total
(In thousands, except percentages)
Interest-Bearing Deposits $ 1,109 18.86% $ 955 23.28%
Time Deposits 2,621 44.59 1,493 36.39
Other Borrowings 2,149 36.55 1,655 40.33
------------ ------------ ------------ ------------
Total Interest Expense $ 5,879 100.00% $ 4,103 100.00%
Total interest expense for the nine-month period ended September 30,
2005 increased by $4.66 million, or 40.10%, to $16.28 million from $11.62
million for the nine-month period ended September 30, 2004. The increase in
interest expense was due primarily to the growth in the average amount of
interest-bearing liabilities and the increase in the average rates paid on such
liabilities, 2.58% and 1.95% in the 2005 and 2004 nine-month periods,
respectively. The interest expense on the Debentures, which is included in other
borrowings was, approximately $903,000 and $254,000 during the 2005 and 2004
nine-month periods, respectively.
24
----------------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------------
2005 2004
---------------------------- ---------------------------
Interest % of Interest % of
Expense Total Expense Total
(In thousands, except percentages)
Interest-Bearing Deposits $ 3,615 22.21% $ 2,704 23.27%
Time Deposits 6,230 38.27 4,590 39.51
Other Borrowings 6,433 39.52 4,325 37.22
------------ ------------ ------------ ------------
Total Interest Expense $ 16,278 100.00% $ 11,619 100.00%
Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the three and nine
months ended September 30, 2005, non-interest income amounted to $300,000 and
$854,000, respectively, compared to non-interest income of $455,000 and $1.12
million for the three and nine months ended September 30, 2004, respectively.
----------------------------------------------------------
Three Months Ended September 30,
----------------------------------------------------------
2005 2004
---------------------------- ---------------------------
Non-Interest % of Non-Interest % of
Income Total Income Total
(In thousands, except percentages)
Service Charges on Deposits $ 158 52.67% $ 139 30.55%
Investment Securities gains -- 0.00 173 38.02
Other 142 47.33 143 31.43
------------ ------------ ------------ ------------
Total Non-Interest Income $ 300 100.00% $ 455 100.00%
----------------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------------
2005 2004
---------------------------- ---------------------------
Non-Interest % of Non-Interest % of
Income Total Income Total
(In thousands, except percentages)
Service Charges on Deposits $ 436 51.05 $ 380 33.81%
Investment Securities gains 5 0.59 315 28.02
Other 413 48.36 429 38.17
------------ ------------ ------------ ------------
Total Non-Interest Income $ 854 100.00% $ 1,124 100.00%
Non-Interest Expense. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees and
other operating expenses associated with the day-to-day operations of the
Company. Total non-interest expense for the three and nine-month periods ended
September 30, 2005 was $3.22 million and $9.79 million, respectively, compared
to $3.13 million and $9.26 million for the three and nine month-periods ended
September 30, 2004, respectively. The increases in the 2005 periods are
primarily due to the expansion of our business. We have added space and staff to
maintain and enhance customer service levels and to insure our compliance with
various regulatory matters.
25
Other non-interest expense decreased to $572,000 and $1.89 million,
respectively, in the three and nine month-periods ended September 30, 2005,
respectively, from $828,000 and $2.80 million in the three and nine
month-periods ended September 30, 2004, respectively. The decreases are
primarily due to expenses of a non-recurring nature. In July 2004, we settled a
cancelled lease for the Bank's former headquarters in an amount which was less
than the full amount remaining on the lease, but more than we had estimated and
accrued. The Company recorded the remaining $175,000, in other non-interest
expense for the three and nine months ended September 30, 2004, to recognize the
full settlement amount which was paid in August 2004. Also in 2004, we engaged
legal and accounting professionals to assist the Company with an internal
investigation and record approximately $320,000 of additional non-interest
expense in 2004.
----------------------------------------------------------
Three Months Ended September 30,
----------------------------------------------------------
2005 2004
---------------------------- ---------------------------
Non-Interest % of Non-Interest % of
Expense Total Expense Total
(In thousands, except percentages)
Salaries and Employee Benefits $ 1,996 61.98% $ 1,670 53.42%
Net Occupancy Expense 433 13.44 453 14.49
Equipment Expense 99 3.07 90 2.88
FDIC Assessment 70 2.17 37 1.18
Data Processing Expense 51 1.58 48 1.54
Other 572 17.76 828 26.49
------------ ------------ ------------ ------------
Total Non-Interest Expense $ 3,221 100.00% $ 3,126 100.00%
------------------------------------------------------------------
Nine Months Ended September 30,
------------------------------------------------------------------
2005 2004
------------------------------- -------------------------------
Non-Interest % of Non-Interest % of
Expense Total Expense Total
(In thousands, except percentages)
Salaries and Employee Benefits $ 5,972 60.99% $ 4,865 52.53%
Net Occupancy Expense 1,291 13.19 1,129 12.19
Equipment Expense 293 2.99 258 2.79
FDIC Assessment 206 2.10 83 0.90
Data Processing Expense 144 1.47 126 1.36
Other 1,886 19.26 2,799 30.23
------------ ------------ ------------ ------------
Total Non-Interest Expense $ 9,792 100.00% $ 9,260 100.00%
Provision for Income Tax. During the three and nine-month periods ended
September 30, 2005, the Company recorded income tax expense of $1.11 million and
$3.90 million, respectively, compared to income tax expense of $1.49 million and
$4.25 million, respectively, for the three and nine-month periods ended
September 30, 2004. The tax provisions for federal, state and local taxes
recorded for the first nine month of 2005 and 2004 represent effective tax rates
of 47.28% and 44.04%, respectively.
26
Common Stock Repurchases
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, 2004, the Company has purchased a total of 1,844,646
shares of its Common Stock. At September 30, 2005, there were 551,091 shares of
Common Stock which may yet be purchased under our stock repurchase plan. The
following table sets forth information with respect to such purchases during the
periods indicated.
Fiscal Year 2005
Number of Average Price Paid
Shares Per
Purchased Share
------------------ ------------------
January - September -- --
Fiscal Year 2004
Number of Average Price Paid
Shares Per
Purchased Share
------------------ ------------------
January - March 4,263 $ 16.33
April - December -- --
27
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 additional interest rate management strategy, the Bank borrows funds
from the Federal Home Loan Bank, approximately $91.72 million at September 30,
2005, 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.
28
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 September 30, 2005
(in thousands, except for percentages)
----------------------------------------------------------------------------------------
3 Months 3 Through 1 Through Over
or Less 12 Months 3 Years 3 Years Total
---------------- ---------------- ---------------- ---------------- ------------
Federal funds sold 6,100 -- -- -- 6,100
(Rate) 3.75% 3.75
Interest bearing deposits in banks 4,102 -- -- -- 4,102
(Rate) 2.82% 2.82%
Loans (1)(2)
Adjustable rate loans 44,254 11,631 7,436 20,246 83,567
(Rate) 7.90% 5.43% 7.33% 6.81% 7.24%
Fixed rate loans 373 6,582 24,003 167,720 198,678
(Rate) 7.23% 7.49% 6.75% 6.27% 6.37%
--------- --------- --------- --------- ----------
Total loans 44,627 18,213 31,439 187,966 282,245
Investments (3)(4) 80,919 165,794 103,991 261,619 612,323
(Rate) 3.35% 3.11% 3.80% 4.88% 4.02%
--------- --------- --------- --------- ----------
Total rate-sensitive assets 135,748 184,007 135,430 449,585 904,770
--------- --------- --------- --------- ----------
Deposit accounts (5)
Savings and NOW 200,237 -- -- -- 200,237
(Rate) 1.86% 1.86%
Money market 17,741 -- -- -- 17,741
(Rate) 0.73% 0.73%
Time Deposits 97,754 269,389 22,708 15 389,866
(Rate) 2.53% 3.33% 2.94% 1.74% 3.11%
--------- --------- --------- --------- ----------
Total deposit accounts 315,732 269,389 22,708 15 607,844
Repurchase Agreements 27,408 12,882 25,000 -- 65,290
(Rate) 3.13% 3.35% 2.90% 3.09%
Other borrowings 508 1,099 59,400 53,393 114,400
(Rate) 1.78% 4.48% 3.54% 5.35% 4.42%
--------- --------- --------- --------- ----------
Total rate-sensitive liabilities 343,648 283,370 107,108 53,408 787,534
--------- --------- --------- --------- ----------
Interest rate caps (20,000) (20,000)
Gap (repricing differences) (207,900) (99,363) 48,322 396,177 137,236
========= ========= ========= ========= ==========
Cumulative Gap (207,900) (307,263) (258,941) 137,236
========= ========= ========= =========
Cumulative Gap to Total Rate Sensitive
Assets (22.98)% (33.96)% (28.62)% 15.17%
========= ========= ========= =========
-------------------------------------
(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.
29
Provision for Loan Losses. The Company maintains an allowance for loan losses at
a level deemed sufficient to absorb losses, which are inherent in the loan
portfolio at each balance sheet date. Management reviews the adequacy of the
allowance on at least a quarterly basis to ensure that the provision for loan
losses has been charged against earnings in an amount necessary to maintain the
allowance at a level that is appropriate based on management's assessment of
probable estimated losses. The Company's methodology for assessing the
appropriateness of the allowance for loan losses consists of several key
elements. These elements include a specific allowance for loan watch list
classified loans, an allowance based on historical trends, an additional
allowance for special circumstances, and an unallocated portion. The Company
consistently applies the following comprehensive methodology.
The allowance for loan watch list classified loans addresses those
loans maintained on the Company's loan watch list, which are assigned a rating
of substandard, doubtful, or loss. Substandard loans are those with a
well-defined weakness or a weakness, which jeopardizes the repayment of the
debt. A loan may be classified as substandard as a result of impairment of the
borrower's financial condition and repayment capacity. Loans for which repayment
plans have not been met or collateral equity margins do not protect the Company
may also be classified as substandard. Doubtful loans have the characteristics
of substandard loans with the added characteristic that collection or
liquidation in full, on the basis of presently existing facts and conditions, is
highly improbable. Although the possibility of loss is extremely high for
doubtful loans, the classification of loss is deferred until pending factors,
which might improve the loan, have been determined. Loans rated as doubtful in
whole or in part are placed in nonaccrual status. Loans, which are classified as
loss, are considered uncollectible and are charged to the allowance for loan
losses.
For the three and nine months ended September 30, 2005, we charged-off
loans of $0 and $25,000, respectively, and recovered loans of $3,000 and
$92,000, respectively. For the three and nine months ended September 30, 2004,
we charged-off loans of $0 and $1,000, respectively, and recovered loans of
$112,000 and $139,000, respectively. All recovered amounts in 2005 and 2004 were
returned to the provision for loan loss reserves.
Loans on the loan watch list may also be impaired loans, which are
defined as nonaccrual loans or troubled debt restructurings, which are not in
compliance with their restructured terms. Each of the classified loans on the
loan watch list is individually analyzed to determine the level of the potential
loss in the loan under the current circumstances. The specific reserve
established for these criticized and impaired loans is based on careful analysis
of the loan's performance, the related collateral value, cash flow
considerations and the financial capability of any guarantor. The allowance for
loan watch list classified loans is equal to the total amount of potential
unconfirmed losses for the individual classified loans on the watch list. Loan
watch list loans are managed and monitored by assigned Senior Management.
The allowance based on historical trends uses charge-off experience of
the Company to estimate potential unconfirmed losses in the balances of the loan
and lease portfolios. The historical loss experience percentage is based on the
charge-off history. Historical loss experience percentages are applied to all
non-classified loans to obtain the portion of the allowance for loan losses
which is based on historical trends. Before applying the historical loss
experience percentages, loan balances are reduced by the portion of the loan
balances, which are subject to guarantee, by a government agency. Loan balances
are also adjusted for unearned discount on installment loans.
30
The Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions, which may cause a
potential loan loss but are not specifically identifiable. It is prudent to
maintain an unallocated portion of the allowance because no matter how detailed
an analysis of potential loan losses is performed these estimates by definition
lack precision. Management must make estimates using assumptions and
information, which is often subjective and changing rapidly.
Since all identified losses are immediately charged off, no portion of
the allowance for loan losses is restricted to any individual loan or groups of
loans, and the entire allowance is available to absorb any and all loan losses.
A loan is placed in a nonaccrual status at the time when ultimate
collectibility of principal or interest, wholly or partially, is in doubt. Past
due loans are those loans which were contractually past due 90 days or more as
to interest or principal payments but are well secured and in the process of
collection. Renegotiated loans are those loans which terms have been
renegotiated to provide a reduction or deferral of principal or interest as a
result of the deteriorating financial position of the borrower.
At September 30, 2005 and 2004, we had a total of $275,000 and
$537,000, respectively, of non accrual or non performing loans, and no loans
past due more than 90 days and still accruing interest at either date. Based
upon management's evaluations of the overall analysis of the Bank's allowance
for loan losses, the year over year decrease in total loans to $282.25 million
from $288.22 million and the economic conditions in our market area, the
provision for the nine months ended September 30, 2005, including net recoveries
which are added back to the provision, increased to $3.13 million from $2.87
million in the year ago period.
Management believes that the allowance for loan losses and
nonperforming loans remains safely within acceptable levels.
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 Nine months ended
September 30, September 30,
----------------------------- ----------------------------
2005 2004 2005 2004
---- ---- ---- ----
Average loans outstanding $284,282 $289,476 $286,888 $292,139
======== ======== ======== ========
Allowance at beginning of period 3,081 2,709 2,927 2,593
Charge-offs:
Commercial and other loans -- -- 25 1
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans charged-off -- -- 25 1
-------- -------- -------- --------
Recoveries:
Commercial and other loans 3 112 92 139
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans recovered 3 112 92 139
-------- -------- -------- --------
Net recoveries (charge-offs) 3 112 67 138
-------- -------- -------- --------
Provision for loan losses
charged to operating expenses 45 45 135 135
-------- -------- -------- --------
Allowance at end of period 3,129 2,866 3,129 2,866
-------- -------- -------- --------
Ratio of net recoveries (charge-offs)
to average loans outstanding 0.00% 0.00% 0.02% 0.00%
======== ======== ======== ========
Allowance as a percent of total loans 1.11% 0.99% 1.11% 0.99%
======== ======== ======== ========
Total loans at end of period $282,245 $288,221 $282,245 $288,221
======== ======== ======== ========
31
Loan Portfolio.
Loan Portfolio Composition. The Company's loans consist primarily of mortgage
loans secured by residential and non-residential properties as well as
commercial loans which are either unsecured or secured by personal property
collateral. Most of the Company's commercial loans are either made to
individuals or personally guaranteed by the principals of the business to which
the loan is made. At September 30, 2005, we had total gross loans of $282.25
million, deferred loans fees of $753,000 and an allowance for loan losses of
$3.13 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 and nine-month periods
ended September 30, 2005, the Bank sold approximately $0 and $1.13 million,
respectively, of such loans and recorded in other income, gains of $0 and
$11,000, respectively, on such sales.
The following tables set forth information concerning the Company's
loan portfolio by type of loan at the dates indicated:
September 30, December 31,
2005 2004
--------------------- -------------------
Amount Amount
------ ------
(in thousands)
Commercial and professional loans $ 23,755 $ 16,498
Secured by real estate
1-4 family 142,168 155,079
Multi family 3,022 4,600
Non-residential (commercial) 111,019 109,597
Consumer 2,281 1,989
-------- --------
Total loans 282,245 287,763
Less:
Deferred loan fees (753) (864)
Allowance for loan losses (3,129) (2,927)
-------- --------
Loans, net $278,363 $284,052
======== ========
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. At September 30, 2005 and December 31, 2004, the Bank
had $275,000 and $343,000, respectively, of loans in non-accrual status. 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 September 30, 2005 and 2004, we did not have any loans past due more
than 90 days and still accruing interest.
32
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 September 30, 2005, 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 September 30, 2005
and December 31, 2004 (dollars in thousands):
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
September 30, 2005
Total Capital (to Risk-Weighted Assets)
Company 124,126 32.0% 31,081 >=8.0% -- N/A
Bank 94,031 25.6% 29,365 >=8.0% 36,706 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 120,997 31.1% 15,540 >=4.0% -- N/A
Bank 90,902 24.8% 14,683 >=4.0% 22,024 >=6.0%
Tier I Capital (to Average Assets)
Company 120,997 12.1% 40,148 >=4.0% -- N/A
Bank 90,902 9.7% 37,669 >=4.0% 47,086 >=5.0%
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2004
Total Capital (to Risk-Weighted Assets)
Company $110,063 30.1% $29,234 >=8.0% -- N/A
Bank 82,970 24.1% 27,533 >=8.0% 34,416 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 107,136 29.3% 14,617 >=4.0% -- N/A
Bank 80,042 23.3% 13,766 >=4.0% 20,649 >=6.0%
Tier I Capital (to Average Assets)
Company 107,136 11.2% 38,250 >=4.0% -- N/A
Bank 80,042 8.6% 37,240 >=4.0% 46,550 >=5.0%
33
The recent issuance of trust preferred securities on April 1, 2005
improved the Company's capital ratios in the second and third quarters of 2005.
The banking regulators have not issued any guidance that would change the
regulatory capital treatment for the trust preferred securities that are now
outstanding, based on the adoption of FIN46(R). However, as additional
interpretations from the banking regulators become available, management will
re-evaluate the potential impact to its Tier 1 capital calculation of such
interpretations.
The Company is not under any agreement with regulatory authorities nor
is the Company aware of any current recommendations by the regulatory
authorities, which, if such recommendations were implemented, would have a
material effect on liquidity, capital resources or operations of the Company.
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, to pay shareholder 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 September 30, 2005, the Company,
excluding the Bank, had cash and cash equivalents of approximately $11.35
million and investment securities available for sale of $12.22 million.
The Bank maintains financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments, approximately $30.74 million at September 30, 2005,
include commitments to extend credit and stand-by letters of credit.
At September 30, 2005, the Company had outstanding commitments of
approximately $485.99 million. These commitments include $369.58 million that
mature or renew within one year, $83.64 million that mature or renew after one
year and within three years, $32.01 million that mature or renew after three
years and within five years and $760,000 that mature or renew after five years.
At September 30, 2005, The Company has two unconsolidated subsidiaries,
Berkshire Capital Trust I, which was established in May 2004, and Berkshire
Capital Trust II, which was established in April 2005.
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.
34
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. In accordance with SEC requirements, the CEO/CFO notes that
during the fiscal quarter ended September 30, 2005, 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.
35
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: November 4, 2005 By: /s/ Steven Rosenberg
------------------- -----------------------
Steven Rosenberg
President and Chief
Financial Officer
36
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
31 Certification of Principal Executive 38
and Financial Officer pursuant to
Section 302 Of The Sarbanes-Oxley Act
of 2002.
32 Certification of Principal Executive 39
and Financial Officer pursuant to
Section 906 Of The Sarbanes-Oxley Act
of 2002.
37
STATEMENT OF DIFFERENCES
The greater-than-or-equal-to sign shall be expressed as.................... >=