UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number: 0-13649
BERKSHIRE BANCORP INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2563513
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Broadway, New York, New York 10038
--------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 791-5362
N/A
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
As of May 2, 2006, there were 6,893,556 outstanding shares of the issuer's
Common Stock, $.10 par value.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
Forward-Looking Statements. Statements in this Quarterly Report on Form 10-Q
that are not based on historical fact may be "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Words such
as "believe", "may", "will", "expect", "estimate", "anticipate", "continue" or
similar terms identify forward-looking statements. A wide variety of factors
could cause the 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
March 31, 2006 (unaudited) and
December 31, 2005 4
Consolidated Statements of Income
For The Three Months Ended
March 31, 2006 and 2005 (unaudited) 5
Consolidated Statement of Stockholders'
Equity For The Three Months Ended
March 31, 2006 (unaudited) 6
Consolidated Statements of Cash Flows
For The Three Months Ended March 31,
2006 and 2005 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 25
Item 4. Controls and Procedures 32
PART II OTHER INFORMATION
Item 6. Exhibits 32
Signature 33
Index of Exhibits 34
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
March 31, December 31,
2006 2005
------------------------
ASSETS
Cash and due from banks $ 6,102 $ 9,825
Interest bearing deposits 4,149 4,457
Federal funds sold 4,400 13,600
--------- -----------
Total cash and cash equivalents 14,651 27,882
Investment Securities:
Available-for-sale 591,033 599,410
Held-to-maturity, fair value of $548
in 2006 and $573 in 2005 546 562
--------- -----------
Total investment securities 591,579 599,972
Loans, net of unearned income 306,917 309,230
Less: allowance for loan losses (3,315) (3,266)
--------- -----------
Net loans 303,602 305,964
Accrued interest receivable 6,210 6,784
Premises and equipment, net 8,899 8,602
Goodwill, net 18,549 18,549
Other assets 8,938 9,699
--------- -----------
Total assets $ 952,428 $ 977,452
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 45,129 $ 50,269
Interest bearing 639,198 629,991
--------- -----------
Total deposits 684,327 680,260
Securities sold under agreements to repurchase 50,841 73,044
Long term borrowings 75,121 83,201
Subordinated debt 22,681 22,681
Accrued interest payable 6,411 5,731
Other liabilities 3,780 3,825
--------- -----------
Total liabilities 843,161 868,742
--------- -----------
Stockholders' equity
Preferred stock - $.10 Par value: -- --
2,000,000 shares authorized - none issued
Common stock - $.10 par value
Authorized -- 10,000,000 shares
Issued -- 7,698,285 shares
Outstanding --
March 31, 2006, 6,893,556 shares
December 31, 2005, 6,890,556 shares 770 770
Additional paid-in capital 90,595 90,594
Retained earnings 35,000 33,504
Accumulated other comprehensive loss, net (9,384) (8,415)
Treasury Stock
March 31, 2006, 804,729 shares
December 31, 2005, 807,729 shares (7,714) (7,743)
--------- -----------
Total stockholders' equity 109,267 108,710
--------- -----------
$ 952,428 $ 977,452
========= ===========
The accompanying notes are an integral part of these statements
4
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(unaudited)
For The
Three Months Ended
March 31,
-----------------------
2006 2005
--------- -----------
INTEREST INCOME
Loans $ 5,504 $ 4,694
Investment securities 6,255 6,179
Federal funds sold and
interest bearing deposits 76 94
--------- -----------
Total interest income 11,835 10,967
--------- -----------
INTEREST EXPENSE
Deposits 4,855 2,891
Short-term borrowings 541 765
Long-term borrowings 1,211 1,158
--------- -----------
Total interest expense 6,607 4,814
--------- -----------
Net interest income 5,228 6,153
PROVISION FOR LOAN LOSSES 45 45
--------- -----------
Net interest income after
provision for loan losses 5,183 6,108
--------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts 140 133
Investment securities gains 741 6
Other income 172 130
--------- -----------
Total non-interest income 1,053 269
--------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,107 1,955
Net occupancy expense 475 381
Equipment expense 96 99
FDIC assessment 21 69
Data processing expense 90 44
Other 624 645
--------- -----------
Total non-interest expense 3,413 3,193
--------- -----------
Income before provision for taxes 2,823 3,184
Provision for income taxes 1,327 1,486
--------- -----------
Net income $ 1,496 $ 1,698
========= ===========
Net income per share:
Basic $ .22 $ .25
========= ===========
Diluted $ .21 $ .25
========= ===========
Number of shares used to compute
net income per share:
Basic 6,891 6,754
========= ===========
Diluted 6,983 6,929
========= ===========
The accompanying notes are an integral part of these statements.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Three Months Ended March 31, 2006 and 2005
(In Thousands)
Accumulated
other
Stock Additional comprehensive Total
Common Par paid-in (loss) Retained Treasury Comprehensive stockholders'
Shares value capital net earnings stock income equity
------ ----- ---------- ------------- -------- -------- ------------- ------------
Balance at January 1, 2006 7,698 $ 770 $ 90,594 $ (8,415) $ 33,504 $ (7,743) $ 108,710
Net income 1,496 1,496 1,496
Exercise of stock options 1 29 30
Other comprehensive (loss) net
of reclassification adjustment
and taxes (969) (969) (969)
-------------
Comprehensive income $ 527
=============
------ ----- ---------- ------------- -------- -------- ------------
Balance at March 31, 2006 7,698 $ 770 $ 90,595 $ (9,384) $ 35,000 $ (7,714) $ 109,267
(Unaudited) ====== ===== ========== ============= ======== ======== ============
Balance at January 1, 2005 7,698 $ 770 $ 89,543 $ (2,602) $ 28,983 $ (9,075) $ 107,619
Net income 1,698 1,698 1,698
Exercise of stock options 426 77 503
Other comprehensive (loss) net
of reclassification adjustment
and taxes (4,846) (4,846) (4,846)
-------------
Comprehensive income $ 3,148
=============
------ ----- ---------- ------------- -------- -------- ------------
Balance at March 31, 2005 7,698 $ 770 $ 89,969 $ (7,448) $ 30,681 $ (8,998) $ 104,974
(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 Three Months Ended
March 31,
--------------------------
2006 2005
------------ ----------
Cash flows from operating activities:
Net income $ 1,496 $ 1,698
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Realized gains on investment securities (741) (6)
Net amortization of premiums of
investment securities 35 40
Depreciation and amortization 176 156
Provision for loan losses 45 45
Decrease (increase) in accrued interest receivable 574 (73)
Decrease (increase) in other assets 761 (2,350)
Increase in accrued interest payable
and other liabilities 635 365
------------ ----------
Net cash provided by (used in) operating activities 2,981 (125)
------------ ----------
Cash flows from investing activities:
Investment securities available for sale
Purchases (137,757) (191,294)
Sales, maturities and calls 145,825 142,161
Investment securities held to maturity
Maturities 62 17
Net decrease in loans 2,317 2,257
Acquisition of premises and equipment (473) (140)
------------ ----------
Net cash provided by (used in) investing activities 9,974 (46,999)
------------ ----------
7
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Three Months Ended
March 31,
--------------------------
2006 2005
------------ ----------
Cash flows from financing activities:
Net (decrease) increase in non interest bearing
deposits (5,140) 882
Net increase in interest bearing deposits 9,207 28,695
(Decrease) increase in securities sold under
agreements to repurchase (22,203) 8,501
Proceeds from long term debt -- 15,000
Repayment of long term debt (8,080) (6,708)
Proceeds from exercise of common stock options 30 93
------------ ----------
Net cash (used in) provided by financing activities (26,186) 46,463
------------ ----------
Net (decrease) in cash and cash equivalents (13,231) (661)
Cash and cash equivalents - beginning of
period 27,882 17,383
------------ ----------
Cash and cash equivalents - end of period $ 14,651 $ 16,722
============ ==========
Supplemental disclosures of cash flow information:
Cash used to pay interest $ 5,927 $ 4,434
Cash used to pay taxes, net of refunds $ 775 $ 1,507
The accompanying notes are an integral part of these statements.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
NOTE 1. General
Berkshire Bancorp Inc., a Delaware corporation, is a bank holding company
registered under the Bank Holding Company Act of 1956. References herein to
"Berkshire", the "Company" or "we" and similar pronouns, shall be deemed to
refer to Berkshire Bancorp Inc. and its consolidated subsidiaries unless the
context otherwise requires. Berkshire's principal activity is the ownership and
management of its wholly owned subsidiary, The Berkshire Bank (the "Bank"), a
New York State chartered commercial bank.
The accompanying financial statements of Berkshire Bancorp Inc. and
subsidiaries includes the accounts of the parent company, Berkshire Bancorp
Inc., and its wholly-owned subsidiaries: The Berkshire Bank, Greater American
Finance Group, Inc. and East 39, LLC.
We have prepared the accompanying financial statements pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC") for
interim financial reporting. These consolidated financial statements are
unaudited and, in our opinion, include all adjustments, consisting of normal
recurring adjustments and accruals necessary for a fair presentation of our
consolidated balance sheets, operating results, and cash flows for the periods
presented. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for 2006 due to a variety of
factors. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") have been omitted in accordance with the
rules and regulations of the SEC. These consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
accompanying notes included in our 2005 Annual Report on Form 10-K.
NOTE 2. Trust Preferred Securities.
As of May 18 2004, the Company established Berkshire Capital Trust I, a
Delaware statutory trust, ("BCTI"). The Company owns all the common capital
securities of BCTI. BCTI issued $15.0 million of preferred capital securities to
investors in a private transaction and invested the proceeds, combined with the
proceeds from the sale of BCTI's common capital securities, in the Company
through the purchase of $15.464 million aggregate principal amount of Floating
Rate Junior Subordinated Debentures (the "2004 Debentures") issued by the
Company. The 2004 Debentures, the sole assets of BCTI, mature on July 23, 2034
and bear interest at a floating rate, three month LIBOR plus 2.70%.
On April 1, 2005, the Company established Berkshire Capital Trust II, a
Delaware statutory trust, ("BCTII"). The Company owns all the common capital
securities of BCTII. BCTII issued $7.0 million of preferred capital securities
to investors in a private transaction and invested the proceeds, combined with
the proceeds from the sale of BCTII's common capital securities, in the Company
through the purchase of $7.217 million aggregate principal amount of Floating
Rate Junior Subordinated Debentures (the "2005 Debentures") issued by the
Company. The 2005 Debentures, the sole assets of BCTII, mature on May 23, 2035
and bear interest at a floating rate, three month LIBOR plus 1.95%.
9
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 2. - (continued)
Based on current interpretations of the banking regulators, the 2004
Debentures and 2005 Debentures (collectively, the "Debentures") qualify under
the risk-based capital guidelines of the Federal Reserve as Tier 1 capital,
subject to certain limitations. The Debentures are callable by the Company,
subject to any required regulatory approvals, at par, in whole or in part, at
any time after five years from the date of issuance. The Company's obligations
under the Debentures and related documents, taken together, constitute a full,
irrevocable and unconditional guarantee on a subordinated basis by the Company
of the obligations of BCTI and BCTII under the preferred capital securities sold
by BCTI and BCTII to investors. FIN46(R) precludes consideration of the call
option embedded in the preferred capital securities when determining if the
Company has the right to a majority of BCTI and BCTII expected residual returns.
Accordingly, BCTI and BCTII are not included in the consolidated balance sheet
of the Company.
The Federal Reserve has issued guidance on the regulatory capital
treatment for the trust-preferred securities issued by BCTI and BCTII. This rule
would retain the current maximum percentage of total capital permitted for Trust
Preferred Securities at 25%, but would enact other changes to the rules
governing Trust Preferred Securities that affect their use as part of the
collection of entities known as "restricted core capital elements." The rule
would take effect March 31, 2009; however, a five year transition period
starting March 31, 2004 and leading up to that date would allow bank holding
companies to continue to count Trust Preferred Securities as Tier 1 Capital
after applying FIN-46(R). Management has evaluated the effects of this rule and
does not anticipate a material impact on its capital ratios when the proposed
rule is finalized.
NOTE 3. Earnings Per Share
Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted average common shares outstanding, excluding
stock options from the calculation. In calculating diluted earnings per share,
the dilutive effect of stock options is calculated using the average market
price for the Company's common stock during the period. The following table
presents the calculation of earnings per share for the periods indicated:
For The Three Months Ended
---------------------------------------------------------------------------
March 31, 2006 March 31, 2005
------------------------------------ ------------------------------------
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 $ 1,496 6,891 $ .22 $ 1,698 6,754 $ .25
Effect of dilutive securities
Options 30 92 (.01) -- 175 .--
----------- ------------- ------ ----------- ------------- ------
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $ 1,466 6,983 $ .21 $ 1,698 6,929 $ .25
=========== ============= ====== =========== ============= ======
10
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 4. Investment Securities
The following tables summarize held to maturity and available-for-sale
investment securities as of March 31, 2006 and December 31, 2005:
March 31, 2006
------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 546 $ 2 $ -- $ 548
--------- ---------- ---------- ---------
Totals $ 546 $ 2 $ -- $ 548
========= ========== ========== =========
December 31, 2005
-----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 562 $ 11 $ -- $ 573
--------- ---------- ---------- ---------
Totals $ 562 $ 11 $ -- $ 573
========= ========== ========== =========
March 31, 2006
-----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
Available-For-Sale
Investment Securities
U.S. Treasury and Notes $ 5,000 $ -- $ (11) $ 4,989
U.S. Government Agencies 455,770 -- (10,044) 445,726
Mortgage-backed securities 80,777 25 (2,661) 78,141
Corporate notes 45,492 89 (2,168) 43,413
Municipal Securities 1,973 571 -- 2,544
Marketable equity
securities and other 15,962 319 (61) 16,220
--------- ---------- ---------- ---------
Totals $ 604,974 $ 1,004 $ (14,945) $ 591,033
========= ========== ========== =========
11
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 4. - (continued)
December 31, 2005
-----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
Available-For-Sale
Investment securities
U.S. Treasury and Notes $ 14,985 $ -- $ (86) $ 14,899
U.S. Government Agencies 448,196 -- (8,551) 439,645
Mortgage-backed securities 81,681 112 (2,107) 79,686
Corporate Notes 54,590 352 (2,638) 52,304
Municipal securities 1,972 334 -- 2,306
Marketable equity
securities and other 10,351 284 (65) 10,570
--------- ---------- ---------- ---------
Totals $ 611,775 $ 1,082 $ (13,447) $ 599,410
========= ========== ========== =========
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 Issue No. 03-1). In March 2004,
the EITF reached a consensus on EITF Issue No. 03-1 and in September 2004, the
FASB issued a proposed Board-directed FASB Staff Position (an "FSP"), FSP EITF
03-1-a "Implementation Guidance for the Application of Paragraph 16 of EITF
Issue No. 03-1" (FSP EITF 03-1-a). The guidance in FSP EITF 03-1-a is applicable
for investments in (a) debt and equity securities that are within the scope of
SFAS Nos. 115 and 124, and (b) equity securities that are not subject to the
scope of FAS 115 and 124 and not accounted for under the equity method of
accounting, "cost-method investments."
The final FSP, retitled FSP FAS 115-1 and FAS 124-1 "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,"
nullifies certain requirements of EITF No. 03-1 and supersedes EITF Topic No.
D-44, "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a
Security Whose Cost Exceeds Fair Value." FSP FAS 115-1 and FAS 124-1
specifically (a) nullifies the requirements of paragraphs 10-18 of EITF No.
03-1, (b) carries forward the requirements of paragraphs 8 and 9 with respect to
cost-method-investments and the disclosure requirements included in paragraphs
21 and 22 of EITF No. 03-1 and related examples, and (c) references existing
other-than-temporary impairment guidance. FSP FAS 115-1 and FAS 124-1
establishes a three-step approach for determining when an investment is
considered impaired, whether that impairment is other than temporary, and the
measurement of an impairment loss. Application of the guidance in FSP FAS 115-1
and FAS 124-1 is applicable to reporting periods beginning after December 15,
2005. The Company adopted FSP FAS 115-1 and FAS 124-1 in the first quarter of
fiscal year 2006, the adoption of which did not have an impact on its operating
results and financial condition.
The Company has investments in debt and equity securities that have
unrealized losses or may otherwise be impaired, but an other than temporary
impairment has not been recognized in its financial statements. Based upon our
review of the available information, such unrealized losses are not considered
to be other than temporary.
12
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 5. Loan Portfolio
The following table sets forth information concerning the Company's loan
portfolio by type of loan at the dates indicated:
March 31, 2006 December 31, 2005
----------------- -----------------
% of % of
Amount Total Amount Total
--------- ----- --------- -----
(Dollars in thousands)
Commercial and professional loans $ 34,772 11.3% $ 33,370 10.8%
Secured by real estate
1-4 family 143,839 46.7 139,931 45.1
Multi family 2,769 0.9 2,874 0.9
Non-residential (commercial) 125,398 40.7 132,142 42.6
Consumer 1,101 0.4 2,018 0.6
--------- ----- --------- -----
Total loans 307,879 100.0% 310,335 100.0%
===== =====
Deferred loan fees (962) (1,105)
Allowance for loan losses (3,315) (3,266)
--------- ---------
Loans, net $ 303,602 $ 305,964
========= =========
NOTE 6. Deposits
The following table summarizes the composition of the average balances of
major deposit categories:
March 31, 2006 December 31, 2005
------------------- -------------------
Average Average Average Average
Amount Yield Amount Yield
--------- ------- --------- -------
(Dollars in thousands)
Demand deposits $ 46,422 -- $ 44,739 --
NOW and money market 40,253 0.62% 42,756 0.56%
Savings deposits 174,422 2.48 221,374 1.99
Time deposits 412,963 3.59 338,834 2.82
--------- ------- --------- -------
Total deposits $ 674,060 2.89% $ 647,703 2.19%
========= ======= ========= =======
13
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 7. Comprehensive Income (Loss)
The following table presents the components of comprehensive income, based
on the provisions of SFAS No. 130.:
For The Three Months Ended
-------------------------------------------------------------------------
March 31, 2006 March 31, 2005
----------------------------------- -----------------------------------
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
gains (losses) arising
during period $ (835) $ 311 $ (524) $ (7,627) $ 2,785 $ (4,842)
Less reclassification
adjustment for gains
realized in net income 741 (296) 445 6 (2) 4
---------- --------- ---------- ---------- --------- ----------
Other comprehensive
(loss) income, net $ (1,576) $ 607 $ (969) $ (7,633) $ 2,787 $ (4,846)
========== ========= ========== ========== ========= ==========
NOTE 8. Accounting For Stock Based Compensation
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)")
which requires the measurement and recognition of compensation expense for all
stock-based compensation payments and supersedes the Company's current
accounting under Accounting Principals Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). SFAS 123(R) is effective for all annual
periods beginning after June 15, 2005 or our fiscal year 2006. In March 2005,
the Securities and Exchange Commission (the "SEC") issued Staff Accounting
Bulletin No. 107 ("SAB 107") relating to the adoption of SFAS 123(R).
The Company adopted SFAS 123(R) in the first quarter of fiscal year 2006,
the adoption of which did not have an impact on its operating results and
financial condition.
At March 31, 2006, the Company has one stock-based employee compensation
plan. Prior to the adoption of SFAS 123(R), the Company accounted for that plan
under the recognition and measurement principles of APB 25 and related
interpretations. Stock-based employee compensation costs were not reflected in
net income, as all options granted under the plan had an exercise price equal to
the market value of the underlying common stock on the date of the grant. The
Company did not grant stock options during the quarter ended March 31, 2006 or
during the fiscal year ended December 31, 2005. We have no plans to grant
significant stock options, if any, in 2006. Therefore, we do not expect the
implementation of FAS 123(R) to affect our financial position or results of
operations in the near future.
14
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 9. Employee Benefit Plans
The Company has a Retirement Income Plan (the "Plan"), a noncontributory
plan covering substantially all full-time, non-union United States employees of
the Company. The following interim-period information is being provided in
accordance with FASB Statement 132(R).
For The
Three Months Ended
March 31,
--------------------
2006 2005
--------- --------
Service cost $ 82,000 $ 66,000
Interest cost 37,000 28,000
Expected return on plan assets (38,000) (34,000)
Amortization and Deferral:
Transition amount -- --
Prior service cost 5,000 4,593
(Gain)/loss 14,000 6,407
Net periodic pension cost 100,000 71,000
During the fiscal year ending December 31, 2006, we expect to contribute
approximately $333,000 to the Plan. We did not make any contributions, required
or otherwise, to the Plan in the three months ended March 31, 2006 and 2005.
Internal Control Over Financial Reporting
The current objective of the Bank's Internal Control Program is to allow
management to comply with FDICIA requirements and with Section 302 of the
Sarbanes-Oxley Act of 2002 (the "Act"). Section 302 of the Act requires the CEO
and CFO of the Company to (i) certify that the annual and quarterly reports
filed with the Securities and Exchange Commission are accurate and (ii)
acknowledge that they are responsible for establishing, maintaining and
periodically evaluating the effectiveness of the disclosure controls and
procedures. Section 404 of the Act requires management to report on internal
control over financial reporting. Presently, the SEC requires the Company to
first comply with Section 404 by the year ending December 31, 2007.
The Committee of Sponsoring Organizations (COSO) methodology may be used
to document and test the internal controls pertaining to the accuracy of Company
issued financial statements and related disclosures. COSO requires a review of
the control environment (including anti-fraud and audit committee
effectiveness), risk assessment, control activities, information and
communication, and ongoing monitoring.
15
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.
The accompanying financial statements of Berkshire Bancorp Inc. and
subsidiaries includes the accounts of the parent company, Berkshire Bancorp
Inc., and its wholly-owned subsidiaries: The Berkshire Bank, Greater American
Finance Group, Inc. and East 39, LLC.
Critical Accounting Policies, Judgments and Estimates
The 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 Statement of Financial Accounting Standards ("SFAS")
No. 142 ("SFAS No. 142") on January 1, 2002, the Company discontinued the
amortization of goodwill resulting from acquisitions. Goodwill is now subject to
impairment testing at least annually to determine whether write-downs of the
recorded balances are necessary. The Company tests for impairment based on the
goodwill maintained at the Bank. A fair value is determined for each reporting
unit based on at least one of three various market valuation methodologies. If
the fair values of the reporting units exceed their book values, no write-down
of recorded goodwill is necessary. If the fair value of the reporting unit is
less, an expense may be required on the Company's books to write down the
related goodwill to the proper carrying value. As of December 31, 2005, the
Company completed its annual testing, which determined that no impairment
write-offs were necessary.
The Company recognizes deferred tax assets and liabilities for the future
tax effects of temporary differences, net operating loss carryforwards and tax
credits. 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.
16
The following table presents the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed in both
dollars and rates.
For The Three Months Ended March 31,
--------------------------------------------------------------------------
2006 2005
----------------------------------- ------------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
--------- ---------- ---------- ----------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $ 310,007 $ 5,504 7.10% $ 288,288 $ 4,694 6.51%
Investment securities 594,526 6,255 4.21 671,946 6,179 3.68
Other (2)(5) 8,496 76 3.53 16,683 94 2.25
--------- ---------- ---------- ----------- --------- ----------
Total interest-earning assets 913,029 11,835 5.18 976,917 10,967 4.49
---------- ----------
Noninterest-earning assets 46,352 42,516
--------- -----------
Total Assets $ 959,381 $ 1,019,433
========= ===========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 214,675 1,143 2.13% 321,695 1,337 1.66%
Time deposits 412,963 3,711 3.59 296,497 1,554 2.10
Other borrowings 164,405 1,753 4.27 240,470 1,923 3.20
--------- ---------- ---------- ----------- --------- ----------
Total interest-bearing
liabilities 792,043 6,607 3.34 858,662 4,814 2.24
---------- ---------- --------- ----------
Demand deposits 46,422 43,708
Noninterest-bearing liabilities 11,728 6,656
Stockholders' equity (5) 109,188 110,407
--------- -----------
Total liabilities and
stockholders' equity $ 959,381 $ 1,019,433
========= ===========
Net interest income 5,228 6,153
========== =========
Interest-rate spread (3) 1.84% 2.25%
========== ==========
Net interest margin (4) 2.29% 2.52%
========== ==========
Ratio of average interest-
earning assets to average
interest bearing liabilities 1.15 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.
17
Results of Operations
Results of Operations for the Three Months Ended March 31, 2006 Compared to the
Three Months Ended March 31, 2005.
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 ten branch locations, six branches in New
York City and four branches in Orange and Sullivan counties New York. An
eleventh branch in northern New Jersey is scheduled to open in the Spring of
2006.
Net Income. Net income for the three-month period ended March 31, 2006 was $1.50
million, or $.21 per share, as compared to $1.70 million, or $.25 per share, for
the three-month period ended March 31, 2005.
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 during 2004, 2005 and 2006
have moved the prime rate to its present level of 7.75%.
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 March 31, 2006, net interest income decreased by
$925,000 to $5.23 million from $6.15 million for the quarter ended March 31,
2005. The quarter over quarter decrease in net interest income was the result of
the 110 basis point increase in the average rates paid on the average amounts of
interest-bearing liabilities to 3.34% in the 2006 quarter from 2.24% in the 2005
quarter. The decrease was partially offset by the 69 basis point increase in the
average yields earned on the average amounts of interest-earning assets to 5.18%
in 2006 from 4.49% in 2005. The difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities, or
the Company's interest-rate spread, declined by 41 basis points to 1.84% in the
2006 quarter from 2.25% in the 2005 quarter.
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 2005 have been replaced with
securities carrying somewhat higher yields and, by design, shorter maturities to
partially 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 23 basis points to
2.29% in the first quarter of fiscal 2006 from 2.52% in the first quarter of
fiscal 2005. We seek to secure and retain customer deposits with competitive
products and rates, while making strategic use of the prevailing interest rate
environment to borrow funds at what we believe to be attractive rates. We invest
such deposits and borrowed funds in a prudent mix of fixed and adjustable rate
loans, investment securities and short-term interest-earning assets which
provided an aggregate average yield of 5.18% and 4.49% during the quarters ended
March 31, 2006 and 2005, respectively.
18
The average amount of loans in our portfolio increased by $21.72 million
to $310.01 million in the quarter ended March 31, 2006 from $288.29 million in
the quarter ended March 31, 2005. The average yield on the loan portfolio
increased to 7.10% in the 2006 quarter from 6.51% in the 2005 quarter. The
principal amount of new loans originated, loans sold and principal repayments on
existing loans during the first quarter of 2006 was $8.48 million, $2.66 million
and $8.27 million, respectively.
The average amount of investment securities decreased by $77.42 million,
to $594.53 million in the three months ended March 31, 2006 from $671.95 million
in the three months ended March 31, 2005. The average yield on investment
securities improved by 53 basis points, to 4.21% in 2006 from 3.68% in 2005 and
will likely continue to increase in a rising interest rate environment.
Interest Income. Total interest income for the quarter ended March 31, 2006
increased by $868,000 to $11.84 million from $10.97 million for the quarter
ended March 31, 2005. The increase in total interest income was primarily due to
the increase in the average yields earned on interest-earning assets, partially
offset by the overall decrease in the average amount of such assets. Loans
contributed $5.50 million of interest income in 2006, an increase of $810,000
from the $4.69 million of interest income contributed in 2005. Investment
securities contributed $6.26 million of interest income in the first quarter of
2006, an increase of $76,000 from the $6.18 million of interest income earned on
investment securities in the first quarter of 2005.
---------------------------------------
Three Months Ended March 31,
---------------------------------------
2006 2005
------------------ ------------------
Interest % of Interest % of
Income Total Income Total
(In thousands, except percentages)
Loans $ 5,504 46.51% $ 4,694 42.81%
Investment Securities 6,255 52.86 6,179 56.35
Other 76 0.63 94 0.84
--------- ------ -------- ------
Total Interest Income $ 11,835 100.00% $ 10,967 100.00%
Loans, which are inherently risky and therefore command a higher return
than our conservative portfolio of investment securities, increased to 33.95% of
our total average interest-earning assets during the three months ended March
31, 2006 from 29.51% of total average interest-earning assets during the three
months ended March 31, 2005. Investment securities declined to 65.12% from
68.78% of total average interest-earning assets during 2006 and 2005,
respectively.
--------------------------------------
Three Months Ended March 31,
--------------------------------------
2006 2005
----------------- ------------------
Average % of Average % of
Amount Total Amount Total
(In thousands, except percentages)
Loans $310,007 33.95% $288,288 29.51%
Investment Securities 594,526 65.12 671,946 68.78
Other 8,496 0.93 16,683 1.71
-------- ------ -------- ------
Total Interest-Earning Assets $913,029 100.00% $976,917 100.00%
19
Interest Expense. Total interest expense for the quarter ended March 31, 2006
increased by $1.79 million to $6.61 million from $4.81 million for the quarter
ended March 31, 2005. The increase in interest expense was due primarily to the
increase in the average rates paid on the average amount of interest-bearing
liabilities, 3.34% in 2006 compared to 2.24% in 2005, partially offset by the
decline in the average amounts of interest-bearing liabilities. As interest
rates move higher, interest expense will increase as we price our deposit
products to meet the competition and the adjustable rates paid on other
borrowings increase as well. In 2004 and 2005, we sold an aggregate of $22.68
million of floating rate junior subordinated debentures which mature in thirty
years and used the net proceeds to augment the Bank's capital to allow for
business expansion. The interest expense on these debentures, which is included
in other borrowings, was $424,000 and $206,000 during the three months ended
March 31, 2006 and 2005, respectively.
--------------------------------------
Three Months Ended March 31,
--------------------------------------
2006 2005
----------------- ------------------
Interest % of Interest % of
Expense Total Expense Total
(In thousands, except percentages)
Interest-Bearing Deposits $ 1,143 17.30% $ 1,337 27.77%
Time Deposits 3,711 56.17 1,554 32.28
Other Borrowings 1,753 26.53 1,923 39.95
-------- ------ -------- ------
Total Interest Expense $ 6,607 100.00% $ 4,814 100.00%
--------------------------------------
Three Months Ended March 31,
--------------------------------------
2006 2005
----------------- ------------------
Average % of Average % of
Amount Total Amount Total
(In thousands, except percentages)
Interest-Bearing Deposits $214,675 27.10% $321,695 37.46%
Time Deposits 412,963 52.14 296,497 34.53
Other Borrowings 164,405 20.76 240,470 28.01
-------- ------ -------- ------
Total Interest-Bearing Liabilities $792,043 100.00% $858,662 100.00%
20
Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the three months
ended March 31, 2006, total non-interest income increased by $784,000, to $1.05
million from $269,000 for the three months ended March 31, 2005. The increase is
largely due to the $735,000 increase in gains on the sales of investment
securities.
----------------------------------------------
Three Months Ended March 31,
----------------------------------------------
2006 2005
--------------------- ----------------------
Non-Interest % of Non-Interest % of
Income Total Income Total
(In thousands, except percentages)
Service Charges on Deposits $ 140 13.30% $ 133 49.44%
Investment Securities gains 741 70.37 6 2.23
Other 172 16.33 130 48.33
------------ ------ ------------ ------
Total Non-Interest Income $ 1,053 100.00% $ 269 100.00%
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 months ended March 31, 2006
increased by $220,00 to $3.41 million from $3.19 million for the three months
ended March 31, 2005. The largest component of non-interest expense, almost 62%
of the total, are salaries and employee benefits which increased by $152,000 to
$2.11 million in the 2006 quarter from $1.96 million in the 2005 quarter. The
increase is due to the addition of personnel in our internal control and
compliance departments.
----------------------------------------------
Three Months Ended March 31,
----------------------------------------------
2006 2005
--------------------- ----------------------
Non-Interest % of Non-Interest % of
Expense Total Expense Total
(In thousands, except percentages)
Salaries and Employee Benefits $ 2,107 61.72% $ 1,955 61.23%
Net Occupancy Expense 475 13.94 381 11.93
Equipment Expense 96 2.81 99 3.10
FDIC Assessment 21 0.61 69 2.16
Data Processing Expense 90 2.64 44 1.38
Other 624 18.28 645 20.20
------------ ------ ------------ ------
Total Non-Interest Expense $ 3,413 100.00% $ 3,193 100.00%
Provision for Income Tax. We recorded income tax expense of $1.33 million and
$1.49 million for the three-month periods ended March 31, 2006 and 2005,
respectively. The tax provisions for federal, state and local taxes represent
effective tax rates of 47.01% and 46.67% for the three months ended March 31,
2006 and 2005, respectively.
21
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 1,848,909
shares of its Common Stock. At March 31, 2006, there were 551,091 shares of
Common Stock which may yet be purchased under our stock repurchase plan. We have
not repurchased shares of the Company's Common Stock during the first quarter of
2006 or in the fiscal year ended December 31, 2005.
Risk Factors.
Our business faces significant risks. These risks include those described
below and may include additional risks and uncertainties not presently known to
us or that we currently deem immaterial. Our business, financial condition and
results of operations could be materially adversely affected by any of these
risks, and the trading price of our common stock could decline.
We operate in the highly competitive banking industry and there can be no
assurance that we will be able to compete successfully.
Our ability to maintain our history of strong financial performance and
return on investment to shareholders may depend in part on our ability to expand
our scope of available financial services as needed to meet the needs and
demands of our customers. Our business model focuses on using superior customer
service to provide traditional banking services to a growing customer base.
However, we operate in an increasingly competitive environment in which our
competitors now include securities dealers, brokers, mortgage bankers,
investment advisors and finance and insurance companies who seek to offer
one-stop financial services to their customers that may include services that we
have not been able or allowed to offer to our customers in the past. This
increasingly competitive environment is primarily a result of changes in
regulation, changes in technology and product delivery systems and the
accelerating pace of consolidation among financial services providers. We cannot
assure you that we will be able to continue to compete successfully in this
environment without expanding the scope of financial services we provide, or
that if we need to expand the scope of services that we provide, that we will be
able to do so successfully.
Our future success depends on our ability to compete effectively in a highly
competitive market and geographic area.
We face substantial competition in all phases of our operations from a
variety of different competitors. We encounter competition from other commercial
banks, savings and loan associations, mutual savings banks, credit unions and
other financial institutions. Our competitors, including credit unions, consumer
finance companies, factors, insurance companies and money market mutual funds,
compete with lending and deposit-gathering services offered by us. There is very
strong competition for financial services in the New York state areas in which
we currently conduct our business. This geographic area includes offices of many
of the largest financial institutions in the world. Many of those competing
institutions have much greater financial and marketing resources than we have.
Due to their size, many competitors can achieve larger economies of scale and as
a result may offer a broader range of products and services than we do. If we
are unable to offer competitive products and services, our earnings may be
negatively affected. Some of the financial services organizations with which we
compete are not subject to the same degree of regulation as is imposed on bank
holding companies like ourselves and on federally insured financial institutions
like our
22
banking subsidiary, The Berkshire Bank. As a result, these nonbank competitors
have certain advantages over us in accessing funding and in providing various
services. The banking business in our current primary market area is very
competitive, and the level of competition we face may increase further, which
may limit our asset growth and profitability.
Economic conditions either nationally or locally in areas in which our
operations are concentrated may be less favorable than expected.
Deterioration in local, regional, national or global economic conditions
could result in, among other things, an increase in loan delinquencies, a
decrease in property values, a change in housing turnover rate or a reduction in
the level of bank deposits. Particularly, a weakening of the real estate or
employment market in our primary market areas could result in an increase in the
number of borrowers who default on their loans and a reduction in the value of
the collateral securing their loans, which in turn could have an adverse effect
on our profitability. Substantially all of our real estate loans are
collateralized by properties located in these market areas, and substantially
all of our loans are made to borrowers who live in and conduct business in these
market areas. Any material economic deterioration in these market areas could
have an adverse impact on our profitability.
Changes in interest rates could reduce our income and cash flows.
Our income and cash flow and the value of our assets and liabilities
depend to a great extent on the difference between the interest rates earned on
interest-earning assets such as loans and investment securities, and the
interest rates paid on interest-bearing liabilities such as deposits and
borrowings. These rates are highly sensitive to many factors which are beyond
our control, including general economic conditions and policies of various
governmental and regulatory agencies, in particular, the Board of Governors of
the Federal Reserve System. Changes in monetary policy, including changes in
interest rates, will influence the origination of loans, the returns on our
portfolio of investment securities and the amounts paid on deposits. If the rate
of interest we pay on deposits and other borrowings increases more than the rate
of interest we earn on loans and other investments, our net interest income, and
therefore our earnings, could be adversely affected. Our earnings could also be
adversely affected if the rates on our loans and other investments fall more
quickly than those on our deposits and other borrowings.
We operate in a highly regulated environment; changes in laws and regulations
and accounting principles may adversely affect us.
We are subject to extensive state and federal regulation, supervision, and
legislation which govern almost all aspects of our operations. These laws may
change from time to time and are primarily intended for the protection of
customers, depositors, and the deposit insurance funds. The impact of any
changes to these laws may negatively impact our ability to expand our services
and to increase the value of our business. Regulatory authorities have extensive
discretion in the exercise of their supervisory and enforcement powers. They
may, among other things, impose restrictions on the operation of a banking
institution, the classification of assets by such institution and such
institution's allowance for loan losses. Regulatory and law enforcement
authorities also have wide discretion and extensive enforcement powers under
various consumer protection, civil rights and other laws, including the
Gramm-Leach-Blilely Act, the Bank Secrecy Act, the Truth-in-Lending Act, the
Equal Credit Opportunity Act, the Fair Housing Act and the Real Estate
Settlement Procedures Act. These laws also permit private individual and class
action lawsuits and provide for the recovery of attorneys fees in certain
instances. Any changes to these laws or any applicable accounting principles may
negatively impact our results of operations and financial condition. While we
cannot predict what effect any presently contemplated or future changes in the
laws or
23
regulations or their interpretations would have, these changes could be
materially adverse to our investors and stockholders.
We are required to maintain an allowance for loan losses. These reserves are
based on management's judgment and may have to be adjusted in the future. Any
adjustment to the allowance for loan losses, whether due to regulatory changes,
economic conditions or other factors, may affect our financial condition and
earnings.
We maintain an allowance for loan losses. The allowance for loan losses is
maintained at a level believed adequate by management to absorb losses inherent
in the loan portfolio. In conjunction with an internal loan review function that
operates independently of the lending function, management monitors the loan
portfolio to identify risks on a timely basis so that an appropriate allowance
can be maintained. Based on an evaluation of the loan portfolio, management
presents a periodic review of the loan loss reserve to the board of directors of
the Bank, indicating any changes in the reserve since the last review and any
recommendations as to adjustments in the reserve. In making its evaluation, in
addition to the factors discussed below, management considers the results of
recent regulatory examinations, which typically include a review of the
allowance for loan losses as an integral part of the examination process.
In establishing the allowance, management evaluates individual large
classified loans and nonaccrual loans, and determines an aggregate reserve for
those loans based on that review. An allowance for the remainder of the loan
portfolio is also determined based on historical loss experience within the
components of the portfolio. These allocations may be modified if current
conditions indicate that loan losses may differ from historical experience,
based on economic factors and changes in portfolio mix and volume.
In addition, a portion of the allowance is established for losses inherent
in the loan portfolio which have not been identified by the more quantitative
processes described above. This determination inherently involves a higher
degree of subjectivity, and considers risk factors that may not have yet
manifested themselves in historical loss experience. Those factors include
changes in levels and trends of charge-offs, delinquencies, and nonaccrual
loans, trends in volume and terms of loans, changes in underwriting standards
and practices, portfolio mix, tenure of loan officers and management, entrance
into new geographic markets, changes in credit concentrations, and national and
local economic trends and conditions. While the allowance for loan losses is
maintained at a level believed to be adequate by management for estimated losses
in the loan portfolio, determination of the allowance is inherently subjective,
as it requires estimates, all of which may be susceptible to significant change.
Changes in these estimates may impact the provisions charged to expense in
future periods. Federal and state regulatory authorities, as an integral part of
their examination process, review our loans and allowance for loan losses. We
cannot assure you that we will not increase the allowance for loan losses or the
regulators will not require us to increase this allowance. Either of these
occurrences could negatively impact Berkshire Bancorp's results of operations.
It may be difficult for a third party to acquire us and this could depress our
common stock price.
Under our amended and restated certificate of incorporation, we have
authorized 2,000,000 shares of preferred stock, which the board of directors may
issue with terms, rights, preferences and designations as the board of directors
may determine and without any vote of the shareholders, unless otherwise
required by law. Issuing the preferred stock, depending upon the rights,
preferences and designations set by the board of directors, may delay, deter, or
prevent a change in control of the Company.
24
In addition, we have authorized 10,000,000 shares of common stock of which
approximately 7.7 million shares have been issued and approximately 6.9 million
shares are outstanding. The price of our common stock may be volatile at times
since our common stock is thinly traded and one individual owns or controls
approximately 50% of our outstanding shares. It may be difficult for a
stockholder to sell a significant number of shares at a time and at a price of
their choosing or for a third party to purchase sufficient shares on the open
market to cause a change in control of the Company, all of which could depress
the price of Berkshire Bancorp's common stock.
In addition, federal and state banking laws may restrict the ability of
the stockholders to approve a merger or business combination or obtain control
of the Company. This may tend to make it more difficult for shareholders to
replace existing management or may prevent shareholders from receiving a premium
for their shares of our common stock.
Our common stock is not insured by any governmental agency and, therefore,
investment in them involves risk.
Our securities are not deposit accounts or other obligation of any bank,
and are not insured by the FDIC, or any other governmental agency, and are
subject to investment risk, including the possible loss of principal.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk. Fluctuations in market interest rates can have a material
effect on the Company's net interest income because the yields earned on loans
and investments may not adjust to market rates of interest with the same
frequency, or with the same speed, as the rates paid by the Bank on its
deposits.
Most of the Bank's deposits are either interest-bearing demand deposits or
short term certificates of deposit and other interest-bearing deposits with
interest rates that fluctuate as market rates change. Management of the Bank
seeks to reduce the risk of interest rate fluctuations by concentrating on loans
and securities investments with either short terms to maturity or with
adjustable rates or other features that cause yields to adjust based upon
interest rate fluctuations. In addition, to cushion itself against the potential
adverse effects of a substantial and sustained increase in market interest
rates, the Bank has purchased off balance sheet interest rate cap contracts
which generally provide that the Bank will be entitled to receive payments from
the other party to the contract if interest rates exceed specified levels. These
contracts are entered into with major financial institutions.
As an additional interest rate management strategy, the Bank borrows funds
from the Federal Home Loan Bank, approximately $75.12 million at March 31, 2006,
at fixed rates for a period of one to five years.
The Company seeks to maximize its net interest margin within an acceptable
level of interest rate risk. Interest rate risk can be defined as the amount of
the forecasted net interest income that may be gained or lost due to favorable
or unfavorable movements in interest rates. Interest rate risk, or sensitivity,
arises when the maturity or repricing characteristics of assets differ
significantly from the maturity or repricing characteristics of liabilities.
25
In the banking industry, a traditional measure of interest rate
sensitivity is known as "gap" analysis, which measures the cumulative
differences between the amounts of assets and liabilities maturing or repricing
at various time intervals. The following table sets forth the Company's interest
rate repricing gaps for selected maturity periods:
Berkshire Bancorp Inc.
Interest Rate Sensitivity Gap at March 31, 2006
(in thousands, except for percentages)
------------------------------------------------------------
3 Months 3 Through 1 Through Over
or Less 12 Months 3 Years 3 Years Total
---------- ----------- ----------- --------- -------
Federal funds sold 4,400 -- -- -- 4,400
(Rate) 4.75% 4.75%
Interest bearing deposits in banks 4,149 -- -- -- 4,149
(Rate) 3.58% 3.58%
Loans (1)(2)
Adjustable rate loans 50,875 8,977 14,416 23,484 97,752
(Rate) 8.39% 6.11% 7.25% 6.64% 6.47%
Fixed rate loans 1,353 11,314 18,528 178,932 210,127
(Rate) 7.60% 7.37% 6.65% 6.47% 6.37%
---------- ----------- ----------- --------- -------
Total loans 52,228 20,291 32,944 202,416 307,879
Investments (3)(4) 112,503 139,760 141,249 198,067 591,579
(Rate) 4.13% 3.15% 4.11% 4.93% 3.77%
---------- ----------- ----------- --------- -------
Total rate-sensitive assets 168,880 160,051 174,193 400,483 903,607
---------- ----------- ----------- --------- -------
Deposit accounts (5)
Savings and NOW 195,878 -- -- -- 195,878
(Rate) 2.41% 2.41%
Money market 18,786 -- -- -- 18,786
(Rate) 0.80% 0.80%
Time Deposits 140,055 278,834 5,631 14 424,534
(Rate) 3.28% 4.05% 2.87% 1.74% 2.41%
---------- ----------- ----------- --------- -------
Total deposit accounts 354,719 278,834 5,631 14.00 639,198
Repurchase Agreements 12,841 30,000 8,000 -- 50,841
(Rate) 3.48% 2.86% 4.16% 2.79%
Other borrowings -- 8,513 40,655 48,634 97,802
(Rate) % 4.04% 3.43% 6.03% 3.96%
---------- ----------- ----------- --------- -------
Total rate-sensitive liabilities 367,560 317,347 54,286 48,648 787,841
---------- ----------- ----------- --------- -------
Interest rate caps 20,000 -- (20,000) --
Gap (repricing differences) (218,680) (157,296) 139,907 351,835 115,766
========== =========== =========== ========= =======
Cumulative Gap (218,681) (375,976) (236,069) 115,766
========== =========== =========== =========
Cumulative Gap to Total Rate
Sensitive Assets (24.20)% (41.61)% (26.13)% 12.81%
========== =========== =========== =========
----------
(1) Adjustable-rate loans are included in the period in which the interest
rates are next scheduled to adjust rather than in the period in which the
loans mature. Fixed-rate loans are scheduled according to their maturity
dates.
(2) Includes nonaccrual loans.
(3) Investments are scheduled according to their respective repricing
(variable rate loans) and maturity (fixed rate securities) dates.
(4) Investments are stated at book value.
(5) NOW accounts and savings accounts are regarded as readily accessible
withdrawal accounts. The balances in such accounts have been allocated
among maturity/repricing periods based upon The Berkshire Bank's
historical experience. All other time accounts are scheduled according to
their respective maturity dates.
26
Provision for Loan Losses. The 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. There
were no loans classified as loss as of March 31, 2006.
For the three month periods ended March 31, 2006 and 2005, we recovered
loans totaling $5,000 and $50,000, respectively, which amounts were returned to
the provision for loan losses. Loan charge-offs were $1,000 in 2006 and zero in
2005.
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 guarantees, by a government agency. Loan balances
are also adjusted for unearned discount on installment loans.
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.
27
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 March 31, 2006 and 2005, we had a total of $253,000 and $404,000,
respectively, of non-accrual 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 $307.88 million from $285.53 million and the economic
conditions in our market area, the provision for the three months ended March
31, 2006, including net recoveries which are added back to the provision,
increased to $3.32 million from $3.02 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
March 31,
---------------------
2006 2005
--------- ---------
Average loans outstanding $ 310,007 $ 288,288
========= =========
Allowance at beginning of period 3,266 2,927
Charge-offs:
Commercial and other loans 1 --
--------- ---------
Total loans charged-off 1 --
--------- ---------
Recoveries:
Commercial and other loans 5 50
--------- ---------
Total loans recovered 5 50
--------- ---------
Net (charge-offs) recoveries 4 50
--------- ---------
Provision for loan losses
charged to operating expenses 45 45
--------- ---------
Allowance at end of period $ 3,315 $ 3,022
--------- ---------
Ratio of net recoveries (charge-offs)
to average loans outstanding 0.00% 0.02%
========= =========
Allowance as a percent of total loans 1.08% 1.06%
========= =========
Total loans at end of period $ 307,879 $ 285,528
========= =========
28
Loan Portfolio.
The Company's loans consist primarily of mortgage loans secured by
residential and non-residential properties as well as commercial loans which are
either unsecured or secured by personal property collateral. Most of the
Company's commercial loans are either made to individuals or personally
guaranteed by the principals of the business to which the loan is made. At March
31, 2006, we had total gross loans of $307.88 million, deferred loan fees of
$962,000 and an allowance for loan losses of $3.32 million. From time to time,
the Bank may originate residential mortgage loans and then sell them on the
secondary market, normally recognizing fee income in connection with the sale.
During the three-month period ended March 31, 2006, the Bank sold approximately
$2.66 million of such loans and recorded in other income a gain of approximately
$7,000 on such sales.
The following tables set forth information concerning the Company's loan
portfolio by type of loan at the dates indicated:
March 31, December 31,
2006 2005
------------ ------------
Amount Amount
------------ ------------
(in thousands)
Commercial and professional loans $ 34,772 $ 33,370
Secured by real estate
1-4 family 143,839 139,931
Multi family 2,769 2,874
Non-residential (commercial) 125,398 132,142
Consumer 1,101 2,018
------------ ------------
Total loans 307,879 310,335
Less:
Deferred loan fees (962) (1,105)
Allowance for loan losses (3,315) (3,266)
------------ ------------
Loans, net $ 303,602 $ 305,964
============ ============
It is the Bank's policy to discontinue accruing interest on a loan when it
is 90 days past due or if management believes that continued interest accruals
are unjustified. The Bank may continue interest accruals if a loan is more than
90 days past due if the Bank determines that the nature of the delinquency and
the collateral are such that collection of the principal and interest on the
loan in full is reasonably assured. When the accrual of interest is
discontinued, all accrued but unpaid interest is charged against current period
income. Once the accrual of interest is discontinued, the Bank records interest
as and when received until the loan is restored to accruing status. If the Bank
determines that collection of the loan in full is in reasonable doubt, then
amounts received are recorded as a reduction of principal until the loan is
returned to accruing status. At March 31, 2006 and 2005, we did not have any
loans past due more than 90 days and still accruing interest.
29
Capital Adequacy
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and Tier I capital (as defined) to average assets (as defined). As of
March 31, 2006, the most recent notification from the FDIC categorized the Bank
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank must maintain certain Total
risk-based, Tier I risk-based, and Tier I leverage ratios. There are no
conditions or events since the notification that management believes have
changed the Bank's category.
The following tables set forth the actual and required regulatory capital
amounts and ratios of the Company and the Bank as of March 31, 2006 and December
31, 2005 (dollars in thousands):
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ -------- ------ --------
March 31, 2006
Total Capital (to Risk-Weighted Assets)
Company 126,099 29.4% 34,290 >or=8.0% -- N/A
Bank 96,620 23.7% 32,553 >or=8.0% 40,691 >or=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 122,784 28.7% 17,145 >or=4.0% -- N/A
Bank 93,305 22.9% 16,276 >or=4.0% 24,415 >or=6.0%
Tier I Capital (to Average Assets)
Company 122,784 12.8% 38,375 >or=4.0% -- N/A
Bank 93,305 10.2% 36,699 >or=4.0% 45,874 >or=5.0%
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- -------- ------ --------
December 31, 2005
Total Capital (to Risk-Weighted Assets)
Company $124,523 28.6% $34,820 >or=8.0% -- N/A
Bank 95,193 23.0% 33,116 >or=8.0% 34,416 >or=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 121,257 27.9% 17,410 >or=4.0% -- N/A
Bank 91,927 22.2% 16,558 >or=4.0% 20,649 >or=6.0%
Tier I Capital (to Average Assets)
Company 121,257 12.2% 39,651 >or=4.0% -- N/A
Bank 91,927 10.1% 36,495 >or=4.0% 46,550 >or=5.0%
30
Liquidity
The management of the Company's liquidity focuses on ensuring that
sufficient funds are available to meet loan funding commitments, withdrawals
from deposit accounts, the repayment of borrowed funds, and ensuring that the
Bank and the Company comply with regulatory liquidity requirements. Liquidity
needs of the Bank have historically been met by deposits, investments in federal
funds sold, principal and interest payments on loans, and maturities of
investment securities.
For the Company, liquidity means having cash available to fund operating
expenses and to pay 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 March 31, 2006, the Company, excluding the Bank, had
cash and cash equivalents of $11.29 million and investment securities available
for sale of $12.62 million.
The Company maintains financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments, approximately $21.78 million at March 31, 2006,
include commitments to extend credit and stand-by letters of credit.
At March 31, 2006, the Company had outstanding commitments of
approximately $503.78 million; including $425 million of time deposits, $75
million of Federal Home Loan Bank debt, and $4 million of operating leases.
These commitments include $428.26 million that mature or renew within one year,
$47.74 million that mature or renew after one year and within three years,
$27.13 million that mature or renew after three years and within five years and
$662,000 that mature or renew after five years.
Impact of Inflation and Changing Prices
The Company's financial statements measure financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increasing cost of the Company's operations.
The assets and liabilities of the Company are largely monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. In addition, interest rates do not
necessarily move in the direction, or to the same extent, as the price of goods
and services. However, in general, high inflation rates are accompanied by
higher interest rates, and vice versa.
31
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of the Company's Disclosure Controls and Internal Control. As of the
end of the period covered by this Quarterly Report on Form 10-Q, the Company
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934 ("Disclosure Controls"). This evaluation ("Controls Evaluation") was
done under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") who is also the Chief
Financial Officer ("CFO").
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO/CFO, does not expect that its Disclosure Controls and/or its
"internal control over financial reporting" as defined in Rule 13(a)-15(f) of
the Securities Exchange Act of 1934 ("Internal Control") will prevent all error
and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
Conclusions. Based upon the Controls Evaluation, the CEO/CFO has concluded that,
the Disclosure Controls are effective in reaching a reasonable level of
assurance that information required to be disclosed by the Company is recorded,
processed, summarized and reported within the time period specified in the SEC's
rules and forms. In accordance with SEC requirements, the CEO/CFO notes that
during the fiscal quarter ended March 31, 2006, no changes in Internal Control
have occurred that have materially affected or are reasonably likely to
materially affect Internal Control.
PART II. OTHER INFORMATION
Item 6. Exhibits
Exhibit
Number Description
------- -----------
31 Certification of Principal Executive and Financial
Officer pursuant to Section 302 Of The Sarbanes-Oxley Act
of 2002.
32 Certification of Principal Executive and Financial
Officer pursuant to Section 906 Of The Sarbanes-Oxley Act
of 2002.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKSHIRE BANCORP INC.
-----------------------
(Registrant)
Date: May 2, 2006 By: /s/ Steven Rosenberg
-----------------------
Steven Rosenberg
President and Chief
Financial Officer
33
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
------- ----------- -----------
31 Certification of Principal Executive and Financial 35
Officer pursuant to Section 302 Of The Sarbanes-
Oxley Act of 2002.
32 Certification of Principal Executive and Financial 36
Officer pursuant to Section 906 Of The Sarbanes-
Oxley Act of 2002.
34