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 June 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]
As of August 4, 2005, there were 6,769,606 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 Annual 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 June 30, 2005 (unaudited)
and December 31, 2004 4
Consolidated Statements of Income For The Three and Six
Months Ended June 30, 2005 and 2004 (unaudited) 5
Consolidated Statement of Stockholders' Equity For The Six
Months Ended June 30, 2005 (unaudited) 6
Consolidated Statements of Cash Flows For The Six Months
Ended June 30, 2005 (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 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits 36
Signature 37
Index of Exhibits 38
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
June 30, December 31,
2005 2004
---------- ------------
ASSETS
Cash and due from banks $ 7,027 $ 9,511
Interest bearing deposits 1,567 372
Federal funds sold 4,000 7,500
---------- --------
Total cash and cash equivalents 12,594 17,383
Investment Securities:
Available-for-sale 657,459 630,968
Held-to-maturity, fair value of $619 in 2005 and
$633 in 2004 591 624
---------- --------
Total investment securities 658,050 631,592
Loans, net of unearned income 294,362 286,979
Less: allowance for loan losses (3,081) (2,927)
---------- --------
Net loans 291,281 284,052
Accrued interest receivable 6,626 6,014
Premises and equipment, net 8,548 8,677
Goodwill, net 18,549 18,549
Other assets 7,279 6,382
---------- --------
Total assets $1,002,927 $972,649
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 48,250 $ 42,191
Interest bearing 568,384 577,697
---------- --------
Total deposits 616,634 619,888
Securities sold under agreements to repurchase 138,343 127,747
Long term borrowings 101,038 95,605
Subordinated debt 22,681 15,464
Accrued interest payable 3,936 2,516
Other liabilities 11,002 3,810
---------- --------
Total liabilities 893,634 865,030
---------- --------
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 --
June 30, 2005, 6,769,606 shares
December 31, 2004, 6,751,675 shares 770 770
Additional paid-in capital 89,982 89,543
Retained earnings 31,561 28,983
Accumulated other comprehensive loss, net (4,117) (2,602)
Treasury Stock
June 30, 2005, 928,679 shares
December 31, 2004, 946,610 shares (8,903) (9,075)
---------- --------
Total stockholders' equity 109,293 107,619
---------- --------
$1,002,927 $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 Six Months Ended
June 30, June 30,
------------------ -----------------
2005 2004 2005 2004
------- ------ ------- -------
INTEREST INCOME
Loans $ 4,847 $4,596 $ 9,541 $ 9,445
Investment securities 6,473 5,021 12,652 9,807
Federal funds sold and interest bearing
deposits 58 9 152 12
------- ------ ------- -------
Total interest income 11,378 9,626 22,345 19,264
------- ------ ------- -------
INTEREST EXPENSE
Deposits 3,224 2,391 6,115 4,846
Short-term borrowings 1,008 582 1,773 1,079
Long-term borrowings 1,353 823 2,511 1,591
------- ------ ------- -------
Total interest expense 5,585 3,796 10,399 7,516
------- ------ ------- -------
Net interest income 5,793 5,830 11,946 11,748
PROVISION FOR LOAN LOSSES 45 45 90 90
------- ------ ------- -------
Net interest income after provision for
loan losses 5,748 5,785 11,856 11,658
------- ------ ------- -------
NON-INTEREST INCOME
Service charges on deposits 145 114 278 241
Investment securities gains 3 49 9 142
Other income 137 88 267 286
------- ------ ------- -------
Total non-interest income 285 251 554 669
------- ------ ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,021 1,528 3,976 3,195
Net occupancy expense 477 402 858 676
Equipment expense 95 82 194 168
FDIC assessment 67 24 136 46
Data processing expense 49 46 93 78
Other 669 1,090 1,314 1,971
------- ------ ------- -------
Total non-interest expense 3,378 3,172 6,571 6,134
------- ------ ------- -------
Income before provision for taxes 2,655 2,864 5,839 6,193
Provision for income taxes 1,304 1,383 2,790 2,761
------- ------ ------- -------
Net income $ 1,351 $1,481 $ 3,049 $ 3,432
======= ====== ======= =======
Net income per share:
Basic $ .20 $ .22 $ .45 $ .52
======= ====== ======= =======
Diluted $ .20 $ .22 $ .44 $ .50
======= ====== ======= =======
The accompanying notes are an integral part of these statements.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 2005
(In Thousands)
(unaudited)
Accumulated
Stock Additional other Total
Common 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 3,049 3,049 3,049
Exercise of stock options 439 172 611
Other comprehensive (loss) net
of reclassification adjustment
and taxes (1,515) (1,515) (1,515)
-------
Comprehensive income $ 1,534
=======
Cash dividends (471) (471)
----- ---- ------- ------- ------- ------- --------
Balance at June 30, 2005 7,698 $770 $89,982 $(4,117) $31,561 $(8,903) $109,293
(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 Six Months Ended
June 30,
------------------------
2005 2004
--------- ---------
Cash flows from operating activities:
Net income $ 3,049 $ 3,432
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Realized gain on investment securities (9) (142)
Net amortization of premiums of investment securities 23 1,698
Depreciation and amortization 306 286
Provision for loan losses 90 90
Increase in accrued interest receivable (612) (827)
Increase in other assets (897) (5,878)
Increase in accrued interest payable and other liabilities 9,022 216
--------- ---------
Net cash provided by (used in) operating activities 10,972 (1,125)
--------- ---------
Cash flows from investing activities:
Investment securities available for sale
Purchases (264,286) (655,272)
Sales, maturities and calls 236,266 599,255
Investment securities held to maturity
Maturities 33 42
Net (increase) decrease in loans (7,319) 1,500
Acquisition of premises and equipment (177) (193)
--------- ---------
Net cash (used in) investing activities (35,483) (54,668)
--------- ---------
7
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Six Months Ended
June 30,
------------------------
2005 2004
-------- -------
Cash flows from financing activities:
Net increase in non interest bearing deposits 6,059 29
Net (decrease) increase in interest bearing deposits (9,313) 13,458
Increase in securities sold under agreements to repurchase 10,596 29,830
Proceeds from long term debt 20,000 17,673
Repayment of long term debt (14,567) (8,500)
Proceeds from issuance of subordinated debentures 7,217 14,791
Acquisition of treasury stock -- (69)
Proceeds from exercise of common stock options 201 417
Cash paid for fractional shares -- (463)
Dividends paid (471) (332)
-------- -------
Net cash provided by financing activities 19,722 66,834
-------- -------
Net (decrease) increase in cash (4,789) 11,041
Cash - beginning of period 17,383 9,310
-------- -------
Cash - end of period $ 12,594 $20,351
======== =======
Supplemental disclosure of cash flow information:
Cash used to pay interest $ 8,979 $ 7,208
Cash used to pay taxes, net of refunds $ 4,267 $ 7,397
The accompanying notes are an integral part of these statements.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 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 June 30, 2005 and December 31, 2004 and the
consolidated results of its operations for the three and six month periods ended
June 30, 2005 and 2004, and its consolidated stockholders' equity for the six
month period ended June 30, 2005, and its consolidated cash flows for the six
month periods ended June 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
---------------------------------------------------------------------------
June 30, 2005 June 30, 2004
------------------------------------ ------------------------------------
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 $1,351 6,764 $.20 $1,481 6,631 $.22
Effect of dilutive securities
Options -- 155 .-- -- 201 .
------ ----- ---- ------ ----- ----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $1,351 6,919 $.20 $1,481 6,832 $.22
====== ===== ==== ====== ===== ====
For The Six Months Ended
---------------------------------------------------------------------------
June 30, 2005 June 30, 2004
------------------------------------ ------------------------------------
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 $3,049 6,759 $ .45 $3,432 6,627 $ .52
Effect of dilutive securities
Options -- 165 (.01) -- 210 (.02)
------ ----- ----- ------ ----- -----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $3,049 6,924 $ .44 $3,432 6,837 $ .50
====== ===== ===== ====== ===== =====
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 June 30, 2005 and December 31, 2004:
June 30, 2005
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- -----
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $591 $28 $-- $619
---- --- --- ----
Totals $591 $28 $-- $619
==== === === ====
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
==== === === ====
June 30, 2005
----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- --------
(In thousands)
Available-For-Sale
Investment Securities
U.S. Treasury and Notes $ 24,945 $ -- $ (261) $ 24,684
U.S. Government Agencies 495,616 227 (4,286) 491,557
Mortgage-backed securities 101,744 681 (969) 101,456
Corporate notes 29,559 88 (1,396) 28,251
Municipal Securities 1,973 320 -- 2,293
Marketable equity
securities and other 9,004 275 (61) 9,218
-------- ------ ------- --------
Totals $662,841 $1,591 $(6,973) $657,459
======== ====== ======= ========
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:
June 30, 2005 December 31, 2004
----------------- -----------------
% of % of
Amount Total Amount Total
--------- ----- -------- -----
(Dollars in thousands)
Commercial and professional loans $ 24,064 8.1% $ 16,498 5.7%
Secured by real estate
1-4 family 151,760 51.4 155,079 53.9
Multi family 3,124 1.1 4,600 1.6
Non-residential (commercial) 114,537 38.8 109,597 38.1
Consumer 1,731 0.6 1,989 0.7
-------- ----- -------- -----
Total loans 295,216 100.0% 287,763 100.0%
===== =====
Deferred loan fees (854) (784)
Allowance for loan losses (3,081) (2,927)
-------- --------
Loans, net $291,281 $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:
June 30, 2005 December 31, 2004
------------------ ------------------
Average Average Average Average
Amount Yield Amount Yield
-------- ------- -------- -------
(Dollars in thousands)
Demand deposits $ 45,530 -- $ 38,896 --
NOW and money market 43,654 0.93% 47,677 0.65%
Savings deposits 257,032 1.86 224,542 1.55
Time deposits 301,718 2.64 309,968 1.96
-------- ---- -------- ----
Total deposits $647,934 1.43% $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 Six Months Ended
-----------------------------------------------------------------------------
June 30, 2005 June 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 gains (losses) on
investment securities:
Unrealized holding gains
(losses) arising during
period $(2,516) $1,006 $(1,510) $(9,461) $3,784 $(5,677)
Less reclassification
adjustment for gains
realized in net income 9 (4) 5 142 (57) 85
------- ------ ------- ------- ------ -------
Other comprehensive
income, net $(2,525) $1,010 $(1,515) $(9,603) $3,841 $(5,762)
======= ====== ======= ======= ====== =======
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 June 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 six months ended
June 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 Six Months Ended
June 30, June 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Service cost $ 79,381 $ 62,640 $145,381 $118,640
Interest cost 35,425 30,750 63,425 59,500
Expected return on plan assets (38,940) (37,550) (72,940) (75,050)
Amortization and Deferral:
Transition amount -- -- -- --
Prior service cost 4,593 4,625 9,186 9,125
(Gain)/loss 11,228 5,350 17,635 8,350
Net periodic pension cost 91,687 65,815 162,687 120,565
During the fiscal year ending December 31, 2005, we expect to contribute
approximately $112,000 to the Plan. We did not make any contributions, required
or otherwise, to the Plan in the three and six months ended June 30, 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 Statement No. 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 exspensing 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."
The proposed FSP 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 EITF 03-1-a as final
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.
The FASB decided that FSP FAS 115-1 would be effective for
other-than-temporary impairment analysis conducted in periods beginning after
September 15, 2005. The finalized FSP is expected to be issued in August 2005.
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, 2006.
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 June 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) $ 288,073 $ 4,847 6.73% $293,528 $4,596 6.26%
Investment securities 666,991 6,473 3.88 625,862 5,021 3.21
Other (2)(5) 8,890 58 2.61 3,151 9 1.14
---------- ------- ---- -------- ------ ----
Total interest-earning assets 963,954 11,378 4.72 922,541 9,626 4.17
---- ----
Noninterest-earning assets 45,186 37,352
---------- --------
Total Assets 1,009,140 959,893
========== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 277,810 1,170 1.68% 263,615 852 1.29%
Time deposits 306,881 2,054 2.68 320,985 1,539 1.92
Other borrowings 262,814 2,361 3.59 225,964 1,405 2.49
---------- ------- ---- -------- ------ ----
Total interest-bearing
liabilities 847,505 5,585 2.64 810,654 3,796 1.87
------- ---- ------ ----
Demand deposits 47,331 37,406
Noninterest-bearing liabilities 9,391 7,078
Stockholders' equity (5) 104,913 104,755
---------- --------
Total liabilities and
stockholders' equity 1,009,140 959,893
========== ========
Net interest income 5,793 5,830
======= ======
Interest-rate spread (3) 2.08% 2.30%
==== ====
Net interest margin (4) 2.40% 2.53%
==== ====
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.
19
For The Six Months Ended June 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) $ 288,186 $ 9,541 6.62% $293,484 $ 9,445 6.44%
Investment securities 669,449 12,652 3.78 607,911 9,807 3.23
Other (2)(5) 12,764 152 2.38 2,621 12 0.92
---------- ------- ---- -------- ------- ----
Total interest-earning assets 970,399 22,345 4.61 904,016 19,264 4.26
---- ----
Noninterest-earning assets 43,857 37,527
---------- --------
Total Assets 1,014,256 941,543
========== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 300,686 2,508 1.67% 261,404 1,749 1.34%
Time deposits 301,718 3,607 2.39 320,533 3,097 1.93
Other borrowings 251,684 4,284 3.40 210,640 2,670 2.54
---------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 854,088 10,399 2.44 792,577 7,516 1.90
------- ---- ------- ----
Demand deposits 45,530 37,302
Noninterest-bearing liabilities 6,862 7,215
Stockholders' equity (5) 107,776 104,449
---------- --------
Total liabilities and
stockholders' equity 1,014,256 941,543
========== ========
Net interest income 11,946 11,748
======= =======
Interest-rate spread (3) 2.17% 2.36%
==== ====
Net interest margin (4) 2.46% 2.60%
==== ====
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 Six Months Ended June 30, 2005 Compared
to the Three and Six Months Ended June 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 June 30, 2005 was $1.35
million, or $.20 per share, as compared to $1.48 million, or $.22 per share, for
the three-month period ended June 30, 2004. Net income for the six-month period
ended June 30, 2005 was $3.05 million, or $.44 per share, as compared to $3.43
million, or $.50 per share, for the six-month period ended June 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 June 2003 through June 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 in August, September,
November and December of 2004, and February, March, May and June of 2005 have
moved the prime rate to its present level of 6.25%.
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 June 30, 2005, net interest income decreased by
$37,000 to $5.79 million from $5.83 million for the quarter ended June 30, 2004.
The quarter over quarter decrease in net interest income was the result of the
4.55% growth in the average amount of interest-bearing liabilities to $847.51
million from $810.65 million during the quarter ended June 30, 2004, and the 77
basis point increase in the average rate paid on such liabilities to 2.64% in
the 2005 quarter from 1.87% in the 2004 quarter. Partially offsetting these
factors was the 4.49% growth in the average amount of interest-earning assets to
$963.95 million during the 2005 quarter from $922.54 million during the 2004
quarter, and the 55 basis point increase in the average yield on such assets to
4.72% in the 2005 quarter from 4.17% in the 2004 quarter. The interest-rate
spread, the difference between the average yield on interest-earning assets and
the average cost of interest-bearing liabilities, narrowed by 22 basis points to
2.08% in the 2005 quarter from 2.30% in the 2004 quarter.
For the six-month period ended June 30, 2005, net interest income increased
by $198,000 to $11.95 million from $11.75 million for the six-month period ended
June 30, 2004. The period over period increase in net interest income was the
result of the 7.34% growth in average interest-earning assets to $970.40 million
in 2005 from $904.02 million in the 2004 period, partially offset by the 7.76%
growth in average interest-bearing liabilities to $854.09 million in 2005 from
$792.58 million in 2004. The interest-rate spread declined by 19 basis points to
2.17% in 2005 from 2.36% in 2005.
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
21
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 will increase as well.
Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, declined by 13 basis points to
2.40% in the second quarter of 2005 from 2.53% in the second quarter of 2004,
and declined by 14 basis points to 2.46% in the six-month period of 2005 from
2.60% in the six-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 4.72% and
4.61% in the three and six months ended June 30, 2005, respectively, compared to
4.17% and 4.26% in the three and six months ended June 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 June 30, 2005, the average amounts of loans
decreased by $5.45 million to $288.07 million from $293.53 million for the three
months ended June 30, 2004. However, the average yield on such loans increased
by 47 basis points to 6.73% in the 2005 quarter from 6.26% in the 2004 quarter.
In the 2005 quarter, the average amount of investment securities and other
interest-earning assets increased by $41.13 million and $5.74 million,
respectively, to $666.99 million and $8.89 million, respectively, from $625.86
million and $3.15 million, respectively, in the 2004 quarter. The average yield
on investment securities and other interest-earning increased to 3.88% and
2.61%, respectively, during the three months ended June 30, 2005 from 3.21% and
1.14%, respectively, during the three months ended June 30, 2004.
For the six months ended June 30, 2005, the average amounts of loans
decreased by $5.30 million to $288.19 million from $293.48 million for the six
months ended June 30, 2004. However, the average yield on such loans increased
by 18 basis points to 6.62% in the first six months of 2005 from 6.44% in the
first six months of 2005 quarter. In the 2005 period, the average amount of
investment securities and other interest-earning assets increased by $61.54
million and $10.14 million, respectively, to $669.45 million and $12.76 million,
respectively, from $607.91 million and $2.62 million, respectively, in the 2004
period. The average yield on investment securities and other interest-earning
increased to 3.78% and 2.38%, respectively, during the six months ended June 30,
2005 from 3.23% and 0.92%, respectively, during the six months ended June 30,
2004.
Interest Income. Total interest income for the quarter ended June 30, 2005
increased by $1.75 million, or 18.20%, to $11.38 million from $9.63 million for
the quarter ended June 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 $4.85 million and $6.47 million,
respectively, of interest income in the 2005 quarter compared to $4.60 million
and $ $5.02 million, respectively in the 2004 quarter.
22
-------------------------------------
Three Months Ended June 30,
-------------------------------------
2005 2004
----------------- -----------------
Interest % of Interest % of
Income Total Income Total
-------- ------ -------- ------
(In thousands, except percentages)
Loans $ 4,847 42.60% $4,596 47.75%
Investment Securities 6,473 56.89 5,021 52.16
Other 58 0.51 9 0.09
------- ------ ------ ------
Total Interest Income $11,378 100.00% $9,626 100.00%
Total interest income for the six months ended June 30, 2005 increased by
$3.08 million, or 15.99%, to $22.35 million from $19.26 for the six months ended
June 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 $9.54 million and $12.65 million,
respectively, of interest income in the 2005 period compared to $9.45 million
and $9.81 million, respectively in the 2005 period.
-------------------------------------
Six Months Ended June 30,
-------------------------------------
2005 2004
----------------- -----------------
Interest % of Interest % of
Income Total Income Total
-------- ------ -------- ------
(In thousands, except percentages)
Loans $ 9,541 42.70% $ 9,445 49.03%
Investment Securities 12,652 56.62 9,807 50.91
Other 152 0.68 12 0.06
------- ------ ------- ------
Total Interest Income $22,345 100.00% $19,264 100.00%
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
six months ended June 30, 2005, the average amount of our loan portfolio
represented 29.89% and 29.70%, respectively, of total interest-earning assets
compared to 31.82% and 32.46%, respectively, for the three and six months ended
June 30, 2004. The average amount of investment securities have increased to
69.19% and 68.98% of interest-earning assets during the three and six months of
2005, respectively, compared to 67.84% and 67.25%, respectively, during the
three and six months ended June 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 June 30,
-------------------------------------
2005 2004
----------------- -----------------
Average % of Average % of
Amount Total Amount Total
-------- ------ -------- ------
(In thousands, except percentages)
Loans $288,073 29.89% $293,528 31.82%
Investment Securities 666,991 69.19 625,862 67.84
Other 8,890 0.92 3,151 0.34
-------- ------ -------- ------
Total Interest-Earning Assets $963,954 100.00% $922,541 100.00%
23
-------------------------------------
Six Months Ended June 30,
-------------------------------------
2005 2004
----------------- -----------------
Average % of Average % of
Amount Total Amount Total
-------- ------ -------- ------
(In thousands, except percentages)
Loans $288,186 29.70% $293,484 32.46%
Investment Securities 669,449 68.98 607,911 67.25
Other 12,764 1.32 2,621 0.29
-------- ------ -------- ------
Total Interest-Earning Assets $970,399 100.00% $904,016 100.00%
Interest Expense. Total interest expense for the quarter ended June 30, 2005
increased by $1.79 million, or 47.13%, to $5.59 million from $3.80 million for
the quarter ended June 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, 2.64% and 1.87%
in the 2005 and 2004 quarters, respectively. 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 $343,000 and $64,000
during the three months end June 30, 2005 and 2004, respectively.
-------------------------------------
Three Months Ended June 30,
-------------------------------------
2005 2004
----------------- -----------------
Interest % of Interest % of
Expense Total Expense Total
-------- ------ -------- ------
(In thousands, except percentages)
Interest-Bearing Deposits $1,170 20.95% $ 852 22.44%
Time Deposits 2,054 36.78 1,539 40.54
Other Borrowings 2,361 42.27 1,405 37.02
------ ------ ------ ------
Total Interest Expense $5,585 100.00% $3,796 100.00%
Total interest expense for the six-month period ended June 30, 2005
increased by $2.88 million, or 38.35%, to $10.40 million from $7.52 million for
the six-month period ended June 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,
2.44% and 1.90% in the 2005 and 2004 six-month periods, respectively. The
interest expense on the Debentures, which is included in other borrowings was,
approximately $549,000 and $64,000 during the 2005 and 2004 six-month periods,
respectively.
24
-------------------------------------
Six Months Ended June 30,
----------------- -----------------
2005 2004
----------------- -----------------
Interest % of Interest % of
Expense Total Expense Total
-------- ------ -------- ------
(In thousands, except percentages)
Interest-Bearing Deposits $ 2,508 24.12% $1,749 23.27%
Time Deposits 3,607 34.69 3,097 41.21
Other Borrowings 4,284 41.19 2,670 35.52
------- ------ ------ ------
Total Interest Expense $10,399 100.00% $7,516 100.00%
Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the three and six
months ended June 30, 2005, non-interest income amounted to $285,000 and
$554,000, respectively, compared to non-interest income of $251,000 and $669,000
for the three and six months ended June 30, 2004, respectively.
---------------------------------------------
Three Months Ended June 30,
---------------------------------------------
2005 2004
--------------------- ---------------------
Non-Interest % of Non-Interest % of
Income Total Income Total
------------ ------ ------------ ------
(In thousands, except percentages)
Service Charges on Deposits $145 50.88% $114 45.42%
Investment Securities gains 3 1.05 49 19.52
Other 137 48.07 88 35.06
---- ------ ---- ------
Total Non-Interest Income $285 100.00% $251 100.00%
---------------------------------------------
Six Months Ended June 30,
---------------------------------------------
2005 2004
--------------------- ---------------------
Non-Interest % of Non-Interest % of
Income Total Income Total
------------ ------ ------------ ------
(In thousands, except percentages)
Service Charges on Deposits $278 50.18 $241 36.02%
Investment Securities gains 9 1.62 142 21.23
Other 267 48.20 286 42.75
---- ------ ---- ------
Total Non-Interest Income $554 100.00% $669 100.00%
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 six-month periods ended
June 30, 2005 was $3.38 million and $6.57 million, respectively, compared to
$3.17 million and $6.13 million for the three and six month-periods ended June
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 $669,000 and $1.31 million,
respectively, in the three and six months ended June 30, 2005 from $1.09 million
and $1.97 million, respectively, in the three and six months ended June 30,
2004. 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 six months ended June 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 recorded approximately $320,000 of additional
non-interest expense in 2004.
---------------------------------------------
Three Months Ended June 30,
---------------------------------------------
2005 2004
--------------------- ---------------------
Non-Interest % of Non-Interest % of
Income Total Income Total
------------ ------ ------------ ------
(In thousands, except percentages)
Salaries and Employee Benefits $2,021 59.84% $1,528 48.17%
Net Occupancy Expense 477 14.12 402 12.67
Equipment Expense 95 2.81 82 2.59
FDIC Assessment 67 1.98 24 0.76
Data Processing Expense 49 1.45 46 1.45
Other 669 19.80 1,090 34.36
------ ------ ------ ------
Total Non-Interest Expense $3,378 100.00% $3,172 100.00%
---------------------------------------------
Six Months Ended June 30,
---------------------------------------------
2005 2004
--------------------- ---------------------
Non-Interest % of Non-Interest % of
Income Total Income Total
------------ ------ ------------ ------
(In thousands, except percentages)
Salaries and Employee Benefits $3,976 60.51% $3,195 52.09%
Net Occupancy Expense 858 13.06 676 11.02
Equipment Expense 194 2.94 168 2.74
FDIC Assessment 136 2.07 46 0.75
Data Processing Expense 93 1.42 78 1.27
Other 1,314 20.00 1,971 32.13
------ ------ ------ ------
Total Non-Interest Expense $6,571 100.00% $6,134 100.00%
Provision for Income Tax. During the three and six-month periods ended June 30,
2005, the Company recorded income tax expense of $1.30 million and $2.79
million, respectively, compared to income tax expense of $1.38 million and $2.76
million, respectively, for the three and six-month periods ended June 30, 2004.
The tax provisions for federal, state and local taxes recorded for the first six
month of 2005 and 2004 represent effective tax rates of 47.78% and 44.58%,
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 June 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
Shares Paid Per
Purchased Share
--------- -------------
January - June -- --
Fiscal Year 2004
Number of Average Price
Shares Paid 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 $101.04 million at June 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 June 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 4,000 -- -- -- 4,000
(Rate) 3.19% 3.19
Interest bearing deposits in banks 1,567 -- -- -- 1,567
(Rate) 2.06% 2.06%
Loans (1)(2)
Adjustable rate loans 52,222 17,927 6,286 17,526 93,961
(Rate) 7.47% 5.43% 7.53% 6.62% 6.93%
Fixed rate loans 525 5,329 14,981 180,420 201,255
(Rate) 7.17% 7.42% 6.82% 6.92% 6.93%
-------- -------- -------- ------- -------
Total loans 52,747 23,256 21,267 197,946 295,216
Investments (3)(4) 61,877 150,884 150,412 294,877 658,050
(Rate) 2.89% 3.08% 3.38% 4.84% 3.92%
-------- -------- -------- ------- -------
Total rate-sensitive assets 116,191 174,140 171,679 492,823 954,833
-------- -------- -------- ------- -------
Deposit accounts (5)
Savings and NOW 237,751 -- -- -- 237,751
(Rate) 2.03% 2.03%
Money market 20,483 -- -- -- 20,483
(Rate) 0.79% 0.79%
Time Deposits 64,008 207,798 38,291 53 310,150
(Rate) 2.02% 2.85% 2.94% 1.74% 2.69%
-------- -------- -------- ------- -------
Total deposit accounts 322,242 207,798 38,291 53.00 568,384
Repurchase Agreements 92,380 12,963 33,000 -- 138,343
(Rate) 3.16% 2.90% 2.92% 3.08%
Other borrowings 1,000 2,251 59,242 61,226 123,719
(Rate) 5.90% 3.64% 3.58% 4.89% 4.25%
-------- -------- -------- ------- -------
Total rate-sensitive liabilities 415,622 223,012 130,533 61,279 830,446
-------- -------- -------- ------- -------
Interest rate caps 20,000 (20,000)
Gap (repricing differences) (319,431) (48,872) 61,146 431,544 124,387
======== ======== ======== ======= =======
Cumulative Gap (319,431) (368,303) (307,157) 124,387
======== ======== ======== =======
Cumulative Gap to Total Rate Sensitive
Assets (33.45)% (38.57)% (32.17)% 13.03%
======== ======== ======== =======
----------
(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 six months ended June 30, 2005, we charged-off loans of
$25,000 and $25,000, respectively, and recovered loans of $39,000 and $89,000,
respectively. For the three and six months ended June 30, 2004, we charged-off
loans of $1,000 and $1,000, respectively, and recovered loans of $4,000 and
$27,000, 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 June 30, 2005 and 2004, we had a total of $400,000 and $450,000,
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 increase in total loans to $295.22 million from $293.28 million
and the economic conditions in our market area, the provision for the six months
ended June 30, 2005, including net recoveries which are added back to the
provision, increased to $3.08 million from $2.71 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 Six Months Ended
June 30, June 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Average loans outstanding $288,073 $293,528 $288,186 $293,484
======== ======== ======== ========
Allowance at beginning of period 3,022 2,661 2,927 2,593
Charge-offs:
Commercial and other loans 25 1 25 1
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans charged-off 25 1 25 1
-------- -------- -------- --------
Recoveries:
Commercial and other loans 39 4 89 27
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans recovered 39 4 89 27
-------- -------- -------- --------
Net recoveries (charge-offs) 14 3 64 26
-------- -------- -------- --------
Provision for loan losses charged to
operating expenses 45 45 90 90
-------- -------- -------- --------
Allowance at end of period 3,081 2,709 3,081 2,709
-------- -------- -------- --------
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 1.04% 0.92% 1.04% 0.92%
======== ======== ======== ========
Total loans at end of period $295,216 $293,282 $295,216 $293,282
======== ======== ======== ========
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 June 30, 2005, we had total gross loans of $295.22 million,
deferred loans fees of $854,000 and an allowance for loan losses of $3.08
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 six-month periods ended June 30,
2005, the Bank sold approximately $620,000 and $1.13 million, respectively, of
such loans and recorded in other income, gains of $4,000 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:
June 30, December 31,
2005 2004
-------- ------------
Amount Amount
-------- --------
(in thousands)
Commercial and professional loans $ 24,064 $ 16,498
Secured by real estate
1-4 family 151,760 155,079
Multi family 3,124 4,600
Non-residential (commercial) 114,537 109,597
Consumer 1,731 1,989
-------- --------
Total loans 295,216 287,763
Less:
Deferred loan fees (854) (864)
Allowance for loan losses (3,081) (2,927)
-------- --------
Loans, net $291,281 $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 June 30, 2005 and December 31, 2004, the Bank had $400,000
and $342,000, 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 June
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
June 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 June 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
------- ----- ------ ----- ------ ------
June 30, 2005
Total Capital (to Risk-Weighted Assets)
Company 120,623 30.7% 31,394 >=8.0% -- N/A
Bank 92,898 25.1% 29,577 >=8.0% 36,971 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 117,542 30.0% 15,967 >=4.0% -- N/A
Bank 89,817 24.3% 14,788 >=4.0% 22,183 >=6.0%
Tier I Capital (to Average Assets)
Company 117,542 11.6% 40,570 >=4.0% -- N/A
Bank 89,817 9.3% 38,605 >=4.0% 48,256 >=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 quarter 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 June 30, 2005, the Company, excluding the Bank, had
cash and cash equivalents of approximately $7.00 million and investment
securities available for sale of $12.84 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 $21.47 million at June 30, 2005, include
commitments to extend credit and stand-by letters of credit.
At June 30, 2005, the Company had outstanding commitments of approximately
$41.47 million. These commitments include $12.41 million that mature or renew
within one year, $25.81 million that mature or renew after one year and within
three years, $810,000 that mature or renew after three years and within five
years and $2.44 million that mature or renew after five years.
At June 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,
subject to the limitations noted above, 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 June 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 4. Submission of Matters to a Vote of Security Holders
The 2005 Annual Meeting of Stockholders was held on May 17, 2005. Each of
the five individuals nominated to serve as directors of the Company was elected
by the following votes:
Director Shares For Shares Withheld
-------- ---------- ---------------
William L. Cohen 6,455,754 37,230
Thomas V. Guarino 6,456,654 36,330
Moses Marx 6,383,488 109,496
Steven Rosenberg 6,378,699 114,285
Randolph B. Stockwell 6,451,709 41,275
35
PART II. OTHER INFORMATION - (continued)
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.
36
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: August 4, 2005 By: /s/ Steven Rosenberg
------------------------------------
Steven Rosenberg
President and Chief
Financial Officer
37
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
------- ----------- -----------
31 Certification of Principal Executive and Financial 39
Officer pursuant to Section 302 Of The Sarbanes-Oxley Act
of 2002.
32 Certification of Principal Executive and Financial 40
Officer pursuant to Section 906 Of The Sarbanes-Oxley Act
of 2002.
38
STATEMENT OF DIFFERENCES
The greater-than-or-equal-to sign shall be expressed as.................... >=