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, 2008
----------------------
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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. (See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.) (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller
reporting company)
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 12, 2008, there were 7,054,183 outstanding shares of the issuer's
Common Stock, $.10 par value.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS. STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q
THAT ARE NOT BASED ON HISTORICAL FACT MAY BE "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WORDS SUCH
AS "BELIEVE", "MAY", "WILL", "EXPECT", "ESTIMATE", "ANTICIPATE", "CONTINUE" OR
SIMILAR TERMS IDENTIFY FORWARD-LOOKING STATEMENTS. A WIDE VARIETY OF FACTORS
COULD CAUSE THE ACTUAL RESULTS AND EXPERIENCES OF BERKSHIRE BANCORP INC. (THE
"COMPANY") TO DIFFER MATERIALLY FROM THE RESULTS EXPRESSED OR IMPLIED BY THE
COMPANY'S FORWARD-LOOKING STATEMENTS. SOME OF THE RISKS AND UNCERTAINTIES THAT
MAY AFFECT OPERATIONS, PERFORMANCE, RESULTS OF THE COMPANY'S BUSINESS, THE
INTEREST RATE SENSITIVITY OF ITS ASSETS AND LIABILITIES, AND THE ADEQUACY OF ITS
LOAN LOSS ALLOWANCE, INCLUDE, BUT ARE NOT LIMITED TO: (I) DETERIORATION IN
LOCAL, REGIONAL, NATIONAL OR GLOBAL ECONOMIC CONDITIONS WHICH COULD RESULT,
AMONG OTHER THINGS, IN AN INCREASE IN LOAN DELINQUENCIES, A DECREASE IN PROPERTY
VALUES, OR A CHANGE IN THE HOUSING TURNOVER RATE; (II) CHANGES IN MARKET
INTEREST RATES OR CHANGES IN THE SPEED AT WHICH MARKET INTEREST RATES CHANGE;
(III) CHANGES IN LAWS AND REGULATIONS AFFECTING THE FINANCIAL SERVICES INDUSTRY;
(IV) CHANGES IN COMPETITION; (V) CHANGES IN CONSUMER PREFERENCES, (VI) CHANGES
IN BANKING TECHNOLOGY; (VII) ABILITY TO MAINTAIN KEY MEMBERS OF MANAGEMENT,
(VIII) POSSIBLE DISRUPTIONS IN THE COMPANY'S OPERATIONS AT ITS BANKING
FACILITIES, (IX) COST OF COMPLIANCE WITH NEW CORPORATE GOVERNANCE REQUIREMENTS,
AND OTHER FACTORS REFERRED TO IN THIS QUARTERLY REPORT AND IN ITEM 1A, "RISK
FACTORS", OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2007.
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, 2008 (unaudited) and
December 31, 2007 4
Consolidated Statements of Income
For The Three Months Ended
March 31, 2008 and 2007 (unaudited) 5
Consolidated Statements of Stockholders'
Equity For The Three Months Ended
March 31, 2008 and 2007 (unaudited) 6
Consolidated Statements of Cash Flows
For The Three Months Ended March 31,
2008 and 2007 (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 23
Item 4T. Controls and Procedures 31
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,
2008 2007
----------- ------------
ASSETS
Cash and due from banks $ 7,197 $ 8,614
Interest bearing deposits 7,546 7,579
Federal funds sold 12,500 31,000
----------- -----------
Total cash and cash equivalents 27,243 47,193
Investment Securities:
Available-for-sale 545,603 598,961
Held-to-maturity, fair value of $405
in 2008 and $405 in 2007 390 395
----------- -----------
Total investment securities 545,993 599,356
Loans, net of unearned income 445,411 434,785
Less: allowance for loan losses (4,398) (4,183)
----------- -----------
Net loans 441,013 430,602
Accrued interest receivable 7,177 8,602
Premises and equipment, net 9,198 9,362
Goodwill, net 18,549 18,549
Other assets 12,187 6,854
----------- -----------
Total assets $ 1,061,360 $ 1,120,518
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 54,686 $ 53,805
Interest bearing 767,821 799,410
----------- -----------
Total deposits 822,507 853,215
Securities sold under agreements to repurchase 53,436 76,842
Long term borrowings 37,593 31,607
Subordinated debt 22,681 22,681
Accrued interest payable 5,598 9,089
Other liabilities 2,124 2,826
----------- -----------
Total liabilities 943,939 996,260
----------- -----------
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, 2008, 7,054,183 shares
December 31, 2007, 7,054,183 shares 770 770
Additional paid-in capital 90,986 90,986
Retained earnings 45,001 42,352
Accumulated other comprehensive loss, net (12,925) (3,439)
Treasury Stock
March 31, 2008, 644,102 shares
December 31, 2007, 644,102 shares (6,411) (6,411)
----------- -----------
Total stockholders' equity 117,421 124,258
----------- -----------
$ 1,061,360 $ 1,120,518
=========== ===========
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,
-----------------------
2008 2007
-------- --------
INTEREST INCOME
Loans, including related fees $ 8,205 $ 7,238
Investment securities 7,867 5,835
Federal funds sold and
interest bearing deposits 224 686
-------- --------
Total interest income 16,296 13,759
-------- --------
INTEREST EXPENSE
Deposits 7,733 7,444
Short-term borrowings 594 433
Long-term borrowings 806 991
-------- --------
Total interest expense 9,133 8,868
-------- --------
Net interest income 7,163 4,891
PROVISION FOR LOAN LOSSES 150 75
-------- --------
Net interest income after
provision for loan losses 7,013 4,816
-------- --------
NON-INTEREST INCOME
Service charges on deposit accounts 155 181
Investment securities gains 58 125
Other income 253 209
-------- --------
Total non-interest income 466 515
-------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,399 2,234
Net occupancy expense 538 476
Equipment expense 95 102
FDIC assessment 106 20
Data processing expense 111 96
Other 661 525
-------- --------
Total non-interest expense 3,910 3,453
-------- --------
Income before provision for taxes 3,569 1,878
Provision for income taxes 920 778
-------- --------
Net income $ 2,649 $ 1,100
======== ========
Net income per share:
Basic $ .38 $ .16
======== ========
Diluted $ .38 $ .16
======== ========
Number of shares used to compute
net income per share:
Basic 7,054 6,896
======== ========
Diluted 7,055 6,957
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(In Thousands)
(Unaudited)
ACCUMULATED
OTHER
STOCK ADDITIONAL COMPREHENSIVE TOTAL
COMMON PAR PAID-IN (LOSS) RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
SHARES VALUE CAPITAL NET EARNINGS STOCK INCOME EQUITY
------ ----- ---------- ------------- -------- -------- ------------- -------------
BALANCE AT JANUARY 1, 2007 7,698 $770 $90,659 $(4,772) $ 37,285 $ (8,165) $115,777
Adoption of FIN 48 965 965
-------- --------
Adjusted balance at January 1, 2007 38,250 116,742
Net income 1,100 1,100 1,100
Exercise of stock options (24) 277 253
Other comprehensive (loss) net
of reclassification adjustment
and taxes (23) (23) (23)
-------
Comprehensive income $ 1,077
=======
------ ---- ------- ------- -------- -------- --------
BALANCE AT MARCH 31, 2007 7,698 $770 $90,635 $(4,795) $ 39,350 $ (7,888) $118,072
====== ==== ======= ======= ======== ======== ========
BALANCE AT JANUARY 1, 2008 7,698 $770 $90,986 $(3,439) $ 42,352 $ (6,411) $124,258
Net income 2,649 2,649 2,649
Other comprehensive (loss) net
of reclassification adjustment
and taxes (9,486) (9,486) (9,486)
-------
Comprehensive (loss) $(6,837)
=======
------ ---- ------- ------- -------- -------- --------
BALANCE AT MARCH 31, 2008 7,698 $770 $90,986 $(12,925) $ 45,001 $ (6,411) $117,421
====== ==== ======= ======= ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2008 2007
--------- ---------
Cash flows from operating activities:
Net income $ 2,649 $ 1,100
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Realized gains on investment securities (58) (125)
Net accretion of premiums of investment securities (197) (361)
Depreciation and amortization 173 183
Provision for loan losses 150 75
Decrease in accrued interest receivable 1,425 500
(Increase) decrease in other assets (1,763) 181
Decrease in accrued interest payable
and other liabilities (4,193) (1,080)
--------- ---------
Net cash (used in) provided by operating activities (1,814) 473
--------- ---------
Cash flows from investing activities:
Investment securities available for sale
Purchases (767,497) (460,195)
Sales, maturities and calls 808,054 460,591
Investment securities held to maturity
Maturities 5 7
Net increase in loans (10,561) (7,226)
Acquisition of premises and equipment (9) (26)
--------- ---------
Net cash provided by (used in) investing activities 29,992 (6,849)
--------- ---------
7
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2008 2007
-------- --------
Cash flows from financing activities:
Net increase in non interest bearing deposits $ 881 $ 230
Net (decrease) increase in interest bearing deposits (31,589) 90,567
Decrease in securities sold under agreements
to repurchase (23,406) (39,446)
Proceeds from long term debt 10,000 --
Repayment of long term debt (4,014) (8,850)
Proceeds from exercise of common stock options -- 253
-------- --------
Net cash (used in) provided by financing activities (48,128) 42,754
-------- --------
Net (decrease) increase in cash and cash equivalents (19,950) 36,378
Cash and cash equivalents at beginning of period 47,193 24,311
-------- --------
Cash and cash equivalents at end of period $ 27,243 $ 60,689
======== ========
Supplemental disclosures of cash flow information:
Cash used to pay interest $ 12,624 $ 9,622
Cash used to pay taxes, net of refunds $ 680 $ 505
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008 AND 2007
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 indirect wholly-owned subsidiary, The Berkshire Bank (the
"Bank"), a New York State chartered commercial bank. The Bank is owned through
Berkshire's wholly-owned subsidiary, Greater American Finance Group, Inc.
("GAFG").
The 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, GAFG 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 the remaining quarters of
fiscal 2008 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 2007
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%, currently
6.55%.
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%, currently
5.04%.
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, 2008 MARCH 31, 2007
--------------------------------------- ----------------------------------------
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 $2,649 7,054 $ .38 $1,100 6,896 $ .16
Effect of dilutive securities
Options -- 1 .-- -- 61 .--
------ ------ ------ ------ ------ ------
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $2,649 7,055 $ .38 $1,100 6,957 $ .16
====== ====== ====== ====== ====== ======
10
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. LOAN PORTFOLIO
The following table sets forth information concerning the Company's
loan portfolio by type of loan at the dates indicated:
MARCH 31, 2008 DECEMBER 31, 2007
------------------------ -------------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
2008
(Dollars in thousands)
Commercial and professional loans $ 67,275 15.1% $ 76,132 17.4%
Secured by real estate
1-4 family 139,259 31.2 142,140 32.6
Multi family 3,394 0.7 3,506 0.8
Non-residential (commercial) 235,508 52.7 212,850 48.8
Consumer 1,361 0.3 1,691 0.4
-------- ----- -------- -----
Total loans 446,797 100.0% 436,319 100.0%
===== =====
Deferred loan fees (1,386) (1,534)
Allowance for loan losses (4,398) (4,183)
-------- --------
Loans, net $441,013 $430,602
======== ========
As of March 31, 2008, nonaccrual and nonperforming loans totalled
$146,000 compared to $153,000 as of December 31, 2007. At March 31, 2008 and
December 31, 2007, total loans contractually past due 90 days or more but still
accruing interest were zero and $314,000, respectively.
NOTE 5. DEPOSITS
The following table summarizes the composition of the average balances
of major deposit categories:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, 2008 DECEMBER 31, 2007
----------------------- -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD
------ ----- ------ -----
(Dollars in thousands)
Demand deposits $ 53,819 -- $ 50,647 --
NOW and money market 43,003 1.89% 29,984 0.76%
Savings deposits 279,708 3.51 261,065 3.83
Time deposits 447,907 4.54 449,754 4.83
-------- ---- -------- ----
Total deposits $824,437 3.76% $791,450 4.04%
======== ==== ======== ====
11
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. COMPREHENSIVE INCOME (LOSS)
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which includes net
income as well as certain other items which result in a change to equity during
the period. The following table presents the components of comprehensive income,
based on the provisions of SFAS No. 130.:
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, 2008 MARCH 31, 2007
----------------------------------------- -----------------------------------------
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 $(15,893) $ 6,357 $(9,536) $ 39 $ (3) $ 36
gains (losses) arising
during period
Less reclassification
adjustment for gains
realized in net income 58 (23) 35 125 (50) 75
------- ------- ------- ------- ------- -------
Unrealized loss on
investment securities (15,835) 6,334 (9,501) (86) 47 (39)
Change in minimum
pension liability 15 -- 15 16 -- 16
------- ------- ------- ------- ------- -------
Other comprehensive
loss, net $(15,820) $ 6,334 $(9,486) $ (70) $ 47 $ (23)
======= ======= ======= ======= ======= =======
NOTE 7. ACCOUNTING FOR STOCK BASED COMPENSATION
At March 31, 2008, the Company has one stock-based employee
compensation plan. The Company accounts for the plan in accordance with SFAS No.
123(R), "Share Based Payment". Under the fair value recognition provisions of
SFAS 123R, share-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as expense over the vesting
period. Determining the fair value of share-based awards at the grant date
requires judgement, including estimating the Company's stock price volatility,
employee stock option exercise behaviors and employee option forfeiture rates.
The Company did not grant stock options, nor did any stock options vest
during the three-month periods ended March 31, 2008 and 2007, as a result of
which, no stock based compensation expense was recorded in either of those
periods.
12
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. EMPLOYEE BENEFIT PLANS
The Company has a Retirement Income Plan (the "Plan"), a
noncontributory defined benefit 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) based
upon the most recent actuarial valuation dated December 31, 2007.
FOR THE
THREE MONTHS ENDED
MARCH 31,
-------------------------
2008 2007
--------- ---------
Service cost $ 105,250 $90,750
Interest cost 54,750 43,500
Expected return on plan assets (62,250) (46,000)
Amortization and Deferral:
Prior service cost 4,500 4,500
Loss 10,750 11,750
--------- ---------
Net periodic pension cost $ 113,000 $ 104,500
========= =========
The Pension Protection Act of 2006 (the "PPA") changes the funding
rules for defined benefit pension plans, beginning in 2008. A key element of the
PPA is the introduction of benefit restrictions on plans that are funded below
80% of the plan's target liabilities. In order to avoid these restrictions,
during the fiscal year ending December 31, 2008, we expect to contribute
approximately $869,000 to the Plan. On March 27, 2008, we contributed $577,500
to the Plan. We did not make any contributions to the Plan, required or
otherwise, during the three months ended March 31, 2007.
NOTE 9 - FAIR VALUE MEASUREMENTS
Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements." SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosure about fair value. SFAS 157 defines
fair value as the price that would be received to sell an asset or paid to
transfer a liability (an exit price) in an orderly transaction between market
participants on the measurement date. SFAS 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value. A
financial instrument's level within the fair value hierarchy is based on the
lowest level of input significant to the fair value measurement. There have been
no material changes in valuation techniques as a result of the adoption of SFAS
No. 157.
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities in active markets; quoted prices in markets that
are not active for identical or similar assets or liabilities; or other inputs
that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity
and significant to the fair value of the assets or liabilities that are
developed using the reporting entities' estimates and assumptions, which reflect
those that market participants would use.
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS
A description of the valuation methodologies used for financial
instruments measured at fair value on a recurring basis, as well as the
classification of the instruments pursuant to the valuation hierarchy, are as
follows:
SECURITIES AVAILABLE FOR SALE
Securities classified as available for sale are reported using Level 1,
Level 2 and Level 3 inputs. Level 1 securities generally include equity
securities valued based on quoted market prices in active markets. Level 2
instruments include U.S. government agency obligations, state and municipal
bonds, mortgage-backed securities, collateralized mortgage obligations and
corporate bonds. For these securities, the Company obtains fair value
measurements from an independent pricing service. The fair value measurements
consider observable data that may include dealer quotes, market spreads, cash
flows, the U.S. Treasury yield curve, live trading levels, trade execution data,
market consensus prepayment speeds, credit information and the bond's terms and
conditions, among other things. Level 3 securities available for sale consist of
instruments that are not readily marketable and may only be redeemed with the
issuer at par such as Federal Home Loan Bank and Federal Reserve Bank stock.
These securities are stated at par value.
Assets measured at fair value on a recurring basis are summarized below.
Fair Value Measurement Using
-------------------------------------------------- ----------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable Balance
Assets/Liabilities Inputs Inputs March 31,
(Dollars in thousands) (Level 1) (Level 2) (Level 3) 2008
------------------ ----------- ------------ ---------
ASSETS
Investment securities available for sale $ 10,071 $ 352,743 $ 182,789 $ 545,603
-------- --------- --------- ---------
Total assets $ 10,071 $ 352,743 $ 182,789 $ 545,603
======== ========= ========= =========
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS USING
SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
The table below presents a reconciliation for assets measured at fair
value on a recurring basis for which the Corporate has utilized significant
unobservable inputs (Level 3).
Investment
Securities
Available
(Dollars in thousands) for Sale
----------
Balance, January 1, 2008 $ 184,597
Total gains/losses (realized/unrealized)
Included in earnings (or changes in net assets) --
Included in other comprehensive income (8,924)
Purchases, Sales, Issuances, and Settlements 7,116
Redemptions --
Interest --
Capital deductions for operating expenses --
---------
Balance, March 31, 2008 $ 182,789
=========
The amount of total gains or losses for the period
included in earnings (or changes in net assets)
attributable to the change in unrealized gains or losses
relating to assets still held at March 31, 2008 $ --
NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR FAIR VALUE MEASUREMENT
In September 2006, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS
No. 157 is effective for all financial statements issued for fiscal years
beginning after November 15, 2007, or January 1, 2008 as to the Company. The
Statement defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. The adoption of
SFAS No. 157 did not have a material impact on the Company's results of
operations or financial condition, but required expanded disclosures (Note 9).
FAIR VALUE OPTION FOR FINANCIAL ASSETS AND LIABILITIES
In February 2007, the FASB issued Statement 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" ("SFAS No. 159"). The objective
of SFAS No. 159 is to provide companies with the option to recognize most
financial assets and liabilities and certain other items at fair value.
Statement 159 allows companies the opportunity to mitigate earnings volatility
caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting. Unrealized gains and losses on items for which
the fair value option has been elected should be reported in earnings. The fair
value option election is applied on an instrument by instrument basis (with some
exceptions), is irrevocable, and is applied to an entire instrument. The
election may be made as of the date of initial adoption for existing eligible
items.
13
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. - (CONTINUED)
Subsequent to initial adoption, the Company may elect the fair value option at
initial recognition of eligible items or on entering into an eligible firm
commitment. The Company can only elect the fair value option after initial
recognition in limited circumstances.
SFAS No. 159 requires similar assets and liabilities for which the
Company has elected the fair value option to be displayed on the face of the
balance sheet either (a) together with financial instruments measured using
other measurement attributes with parenthetical disclosure of the amount
measured at fair value or (b) in separate line items. In addition, SFAS No. 159
requires additional disclosures to allow financial statement users to compare
similar assets and liabilities measured differently either within the financial
statements of the Company or between financial statements of different
companies.
SFAS No. 159 was adopted by the Company on January 1, 2008, concurrent
with the adoption of SFAS No. 157. At March 31, 2008, the Company has not
elected the fair value measurement option for any of its assets or liabilities.
ACCOUNTING FOR BUSINESS COMBINATIONS
In December 2007, the FASB issued SFAS 141(R), "Accounting for Business
Combinations." This Statement replaces FASB Statement No. 141, "Business
Combinations" and is effective as of the beginning of the fiscal year beginning
on or after December 15, 2008, or January 1, 2009 as to the Company. SFAS 141(R)
establishes principles and requirements for how the acquirer of a business (i)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, (ii) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and (iii) determines the
information to disclose in its financial statements with respect to the nature
and financial effects of the business combination. The adoption of SFAS 141(R)
is not expected to have a material impact on the Company's results of operations
or financial condition.
In March 2008, FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities." SFAS 161 requires enhanced disclosures to
enable investors to better understand their effects on an entity's financial
position, financial performance and cash flows. Specifically, it requires that
objectives for using derivatives instruments be disclosed in terms of underlying
risk and accounting designation, disclosing the fair values of derivative
instruments and their gains and losses in a tabular format, disclosure about
credit-risk-related contingent features and cross-referencing within the
footnotes. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, or January 1, 2009 as to the
Company, with early application encouraged. The Company is currently assessing
the impact of the adoption of this statement on its financial statement
disclosures.
14
INTERNAL CONTROL OVER FINANCIAL REPORTING
The objective of the Company's Internal Control Program is to allow the
Bank and management to comply with Part 363 of the FDIC's regulations ("FDICIA")
and to allow the Company to comply with Section 302 of the Sarbanes-Oxley Act of
2002 (the "Act"). In November 2005, the FDIC amended Part 363 of its regulations
by raising the asset-size threshold from $500 million to $1 billion for internal
control assessments by management and external auditors. The final rule was
effective December 28, 2005.
Section 302 of the Act requires the CEOs and CFOs 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 (i) report on internal control over financial reporting, (ii)
assess the effectiveness of such internal controls, and (iii) obtain an external
auditor's report on management's assessment of its internal control. The Company
is not an accelerated filer as defined in Rule 12b-2 of the Securities Exchange
Act of 1934. Therefore, the Company was first required to comply with Section
404 for the fiscal year ended 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, and its subsidiaries. All
references to earnings per share, unless stated otherwise, refer to earnings per
diluted share. 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,
2007, the Company completed its annual testing, which determined that no
impairment charge was 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,
--------------------------------------------------------------------------------
2008 2007
------------------------------------- -------------------------------------
INTEREST INTEREST
AVERAGE AND AVERAGE AVERAGE AND AVERAGE
BALANCE DIVIDENDS YIELD/RATE BALANCE DIVIDENDS YIELD/RATE
------- --------- ---------- ------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $ 447,020 $ 8,205 7.34% $ 376,914 $ 7,238 7.68%
Investment securities 557,554 7,867 5.64 507,614 5,835 4.60
Other (2)(5) 25,887 224 3.46 54,382 686 5.05
---------- --------- -------- ---------- -------- -------
Total interest-earning assets 1,030,461 16,296 6.33 938,910 13,759 5.86
-------- -------
Noninterest-earning assets 44,637 45,240
---------- ----------
Total Assets $1,075,098 $ 984,150
========== ==========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 322,711 2,649 3.28% 273,132 2,321 3.40%
Time deposits 447,907 5,084 4.54 424,970 5,123 4.82
Other borrowings 114,432 1,400 4.89 106,668 1,424 5.34
---------- --------- -------- ---------- -------- -------
Total interest-bearing
liabilities 885,050 9,133 4.13 804,770 8,868 4.41
--------- -------- -------- -------
Demand deposits 53,819 48,266
Noninterest-bearing liabilities 11,069 13,482
Stockholders' equity (5) 125,160 117,632
---------- ----------
Total liabilities and
stockholders' equity $1,075,098 $ 984,150
========== ==========
Net interest income $ 7,163 $ 4,891
========= ========
Interest-rate spread (3) 2.20% 1.45%
======== =======
Net interest margin (4) 2.78% 2.08%
======== =======
Ratio of average interest-earning
assets to average interest bearing
liabilities 1.16 1.17
========== ==========
----------------------
(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, 2008 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2007.
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 twelve branch locations; seven branches in
New York City, four branches in Orange and Sullivan counties New York, and one
branch in Ridgefield, New Jersey.
NET INCOME. Net income for the three-month period ended March 31, 2008 increased
by $1.55 million to $2.65 million, or $.38 per share, from $1.10 million, or
$.16 per share, for the three-month period ended March 31, 2007.
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.
NET INTEREST INCOME. The Company's primary source of revenue is net interest
income, or the difference between interest income earned on earning assets, such
as loans and investment securities, and interest expense on interest-bearing
liabilities such as deposits and borrowings. The amount of interest income is
dependent upon many factors including: (i) the amount of interest-earning assets
that the Company can maintain based upon its funding sources; (ii) the relative
amounts of interest-earning assets versus interest-bearing liabilities; and
(iii) the difference between the yields earned on those assets and the rates
paid on those liabilities. Non-performing loans adversely affect net interest
income because they must still be funded by interest-bearing liabilities, but
they do not provide interest income. Furthermore, when we designate an asset as
non- performing, all interest which has been accrued but not actually received
is deducted from current period income, further reducing net interest income.
For the quarter ended March 31, 2008, net interest income increased by
$2.27 million to $7.16 million from $4.89 million for the quarter ended March
31, 2007. The quarter over quarter increase in net interest income was the
result of the 47 basis point increase in the average yields earned on the
average amounts of interest-earning assets to 6.33% in 2008 from 5.86% in 2007
and the the 28 basis point decrease in the average rates paid on the average
amounts of interest-bearing liabilities to 4.13% in 2008 from 4.41% in 2007.
The Company's interest-rate spread, the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities, grew by 75 basis points to 2.20% in the 2008 quarter from 1.45% in
the 2007 quarter.
NET INTEREST MARGIN. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, increased by 70 basis points to
2.78% in the first quarter of fiscal 2008 from 2.08% in the first quarter of
fiscal 2007. 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. The
increase in net interest margin is primarily due to the increase in net interest
income, and by the increase in the average amount of higher yielding loans as a
percentage of our total mix of interest-earning assets.
The average amount of loans in our portfolio increased by $70.11
million to $447.02 million in the quarter ended March 31, 2008 from $376.91
million in the quarter ended March 31, 2007. The average amount of investment
securities
18
increased by $49.94 million, to $557.55 million in the three months ended March
31, 2008 from $507.61 million in the three months ended March 31, 2007, while
the average yield on investment securities improved by 104 basis points, to
5.64% in 2008 from 4.60% in 2007.
INTEREST INCOME. Total interest income for the quarter ended March 31, 2008
increased by $2.54 million to $16.30 million from $13.76 million for the quarter
ended March 31, 2007. The increase in total interest income was primarily due to
the increase in the average yields earned on interest-earning assets and the
increase in the average amount of such assets as discussed above.
The following table shows the composition of interest income.
---------------------------------------------
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
2008 2007
-------------------- --------------------
INTEREST % OF INTEREST % OF
INCOME TOTAL INCOME TOTAL
(In thousands, except percentages)
Loans $ 8,205 50.35% $ 7,238 52.60%
Investment Securities 7,867 48.28 5,835 42.41
Other 224 1.37 686 4.99
------- ------ ------- ------
Total Interest Income $16,296 100.00% $13,759 100.00%
Loans, which are inherently risky and therefore command a higher return
than our portfolio of investment securities and other interest-earning assets,
increased to 43.38% of our total amount of average interest-earning assets
during the three months ended March 31, 2008 from 40.14% of our total average
interest-earning assets during the three months ended March 31, 2007. Investment
securities remained relatively flat at 54.11% and 54.06% of total
interest-earning assets in 2008 and 2007, respectively, and other
interest-earning assets declined to 2.51% in 2008 from 5.79% in 2007. 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.
At March 31, 2008, our portfolio of investment securities included
approximately $182.8 million of auction rate securities. These investments have
high credit quality ratings of AA or AAA and are fully collateralized by bonds
and other financial instruments. Auction rate securities are generally long-term
debt instruments that provide liquidity through a Dutch auction process that
resets the applicable interest rate at pre-determined calendar intervals,
generally every 90 days for the securities in our portfolio.
Recent uncertainties in the credit markets have negatively impacted our
ability to liquidate, if necessary, investments in auction rate securities
because, in recent auctions, the amount of securities submitted for sale has
exceeded the amount of purchase orders. We are not certain as to when the
liquidity issues relating to these investments will improve. As a result of the
timing of the recent auction failures beginning in February 2008, we recorded an
unrealized loss net of tax in accordance with SFAS No. 115 "Accounting for
Certain Debt and Equities Securities" totalling approximately $8.9 million as of
March 31, 2008. Based on the fair market value of the auction rate securities
and an analysis of other-than-temporary impairment factors, including, but not
limited to, whether the credit ratings of the issuers or the insurers
deteriorate, or the collateral of the securities deteriorates, we determined
that none of the auction rate securities are other-than-temporarily impaired.
19
Based on our expected operating cash flows, and our other sources of
cash, we do not expect the potential lack of liquidity in these investments to
affect our capital, liquidity or ability to execute our current business plan.
INTEREST EXPENSE. Total interest expense for the quarter ended March 31, 2008
increased by $265,000 to $9.13 million from $8.87 million for the quarter ended
March 31, 2007. The increase in interest expense was due primarily to the
quarter over quarter increase in the average amount of interest-bearing
liabilities, to $885.05 million in 2008 from $804.77 million in 2007,
substantially offset by the decrease in rates paid on the average amount of
interest-bearing liabilities, 4.13% in the 2008 quarter from 4.41% in the 2007
quarter.
The following table shows the composition of interest expense.
---------------------------------------------
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
2008 2007
-------------------- --------------------
INTEREST % OF INTEREST % OF
EXPENSE TOTAL EXPENSE TOTAL
(In thousands, except percentages)
Interest-Bearing Deposits $ 2,649 29.00% $ 2,321 26.17%
Time Deposits 5,084 55.67 5,123 57.77
Other Borrowings 1,400 15.33 1,424 16.06
------- ------ ------- ------
Total Interest Expense $ 9,133 100.00% $ 8,868 100.00%
NON-INTEREST INCOME. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the three months
ended March 31, 2008, total non-interest income decreased by $49,000, to
$466,000 from $515,000 for the three months ended March 31, 2007. The decrease
was primarily attributable to a decrease of $26,000 in service charges on
deposit accounts and a $67,000 decrease in gains on investment securities,
partially offset by an increase of $44,000 in other income.
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, 2008
increased by $457,000 to $3.91 million from $3.45 million for the three months
ended March 31, 2007. The largest component of non-interest expense,
approximately 61% of the total, are salaries and employee benefits which
increased by $165,000 to $2.40 million in the 2008 quarter from $2.23 million in
the 2007 quarter. The increase is due to the addition of personnel in our
internal control and compliance departments, and the staff at our Washington
Heights branch which opened in May 2007.
20
The following table shows the components of non-interest expense.
-------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------
2008 2007
------------------------- -------------------------
NON-INTEREST % OF NON-INTEREST % OF
EXPENSE TOTAL EXPENSE TOTAL
(In thousands, except percentages)
Salaries and Employee Benefits $ 2,399 61.36% $ 2,234 64.70%
Net Occupancy Expense 538 13.76 476 13.79
Equipment Expense 95 2.43 102 2.95
FDIC Assessment 106 2.71 20 0.58
Data Processing Expense 111 2.84 96 2.78
Other 661 16.90 525 15.20
------- ------ ------- ------
Total Non-Interest Expense $ 3,910 100.00% $ 3,453 100.00%
PROVISION FOR INCOME TAX. During the three-month periods ended March 31, 2008
and 2007, we recorded income tax expense of $920,000 and $778,000, respectively.
The tax provisions for federal, state and local taxes recorded for the 2008 and
2007 periods represent effective tax rates of 25.78% and 41.43%, respectively.
The decrease in the effective tax rate in the 2008 period compared to the 2007
period is primarily due to the tax-free income earned on certain of the auction
rate securities in our investment portfolio.
ISSUER PURCHASES OF EQUITY SECURITIES
On May 15, 2003, The Company's Board of Directors authorized the
purchase of up to an additional 450,000 shares of its Common Stock in the open
market, from time to time, depending upon prevailing market conditions, thereby
increasing the maximum number of shares which may be purchased by the Company
from 1,950,000 shares of Common Stock to 2,400,000 shares of Common Stock. Since
1990 through March 31, 2008, the Company has purchased a total of 1,898,909
shares of its Common Stock. We did not repurchase shares of the Company's Common
Stock during the first quarter of 2008. At March 31, 2008, there were 501,091
shares of Common Stock which may yet be purchased under our stock repurchase
plan.
21
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 from time to time 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, when written, are entered into with major financial
institutions.
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.
22
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, 2008
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
------------------------------------------------------------------------------------------
3 MONTHS 3 THROUGH 1 THROUGH OVER
OR LESS 12 MONTHS 3 YEARS 3 YEARS TOTAL
---------------- ---------------- ---------------- ---------------- --------------
Federal funds sold 12,500 -- -- -- 12,500
(Rate) 2.25% 2.25%
Interest bearing deposits in banks 7,546 -- -- -- 7,546
(Rate) 2.13% 2.13%
Loans (1)(2)
Adjustable rate loans 121,172 15,627 28,666 44,085 209,550
(Rate) 6.86% 6.91% 6.75% 7.19% 6.92%
Fixed rate loans 13,645 19,857 40,471 163,274 237,247
(Rate) 8.41% 6.51% 7.98% 6.34% 6.75%
--------- --------- --------- --------- ----------
Total loans 134,817 35,484 69,137 207,359 446,797
Investments (3)(4) 288,891 28,244 50,207 198,676 566,018
(Rate) 5.78% 5.11% 4.93% 6.71% 6.00%
--------- --------- --------- --------- ----------
Total rate-sensitive assets 443,754 63,728 119,344 406,035 1,032,861
--------- --------- --------- --------- ----------
Deposit accounts (5)
Savings and NOW 282,586 -- -- -- 282,586
(Rate) 3.14% 3.63%
Money market 33,162 -- -- -- 33,162
(Rate) 2.03% 2.03%
Time Deposits 210,449 241,310 313 -- 452,072
(Rate) 4.38% 3.99% 3.31% % 4.17%
--------- --------- --------- --------- ----------
Total deposit accounts 526,197 241,310 313 0.00 767,820
Repurchase Agreements 11,436 -- -- 42,000 53,436
(Rate) 2.88% 4.12% 3.85%
Other borrowings 295 6,954 21,596 31,429 60,274
(Rate) 4.18% 2.78% 5.49% 5.51% 5.18%
--------- --------- --------- --------- ----------
Total rate-sensitive liabilities 537,928 248,264 21,909 73,429 881,530
--------- --------- --------- --------- ----------
Interest rate caps 40,000 -- -- (40,000) --
Gap (repricing differences) (134,174) (184,536) 97,435 372,606 151,331
========= ========= ========= ========= ==========
Cumulative Gap (134,174) (318,710) (221,275) 151,331
========= ========= ========= =========
Cumulative Gap to Total Rate
Sensitive Assets (12.99)% (30.86)% (21.42)% 14.65%
========= ========= ========= =========
----------------------
(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.
23
PROVISION FOR LOAN LOSSES. The allowance for loan losses is the estimated amount
considered necessary to cover credit losses inherent in the loan portfolio at
the balance sheet date. The allowance is established through the provision for
loan losses that is charged against income. In determining the allowance for
loan losses, management makes significant estimates and therefore has identified
the allowance as a critical accounting policy. The methodology for determining
the allowance for loan losses is considered a critical accounting policy by
management due to the high degree of judgment involved, the subjectivity of the
assumptions utilized, and the potential for changes in the economic environment
that could result in changes to the amount of the recorded allowance for loan
losses.
The allowance for loan losses has been determined in accordance with
accounting principles generally accepted in the United States of America,
principally "SFAS" No. 5, "Accounting for Contingencies" and SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan, an amendment to FASB
Statements No. 5 and 15," as amended. Under the above accounting principles, we
are required to maintain an allowance for probable losses at the balance sheet
date. We are responsible for the timely and periodic determination of the amount
of the allowance required. Management believes that the allowance for loan
losses is adequate to cover specifically identifiable losses, as well as
estimated losses inherent in our portfolio for which certain losses are probable
but not specifically identifiable.
Management performs a quarterly evaluation of the adequacy of the
allowance for loan losses. The analysis of the allowance for loan losses has two
components: specific and general allocations. Specific allocations are made for
loans determined to be impaired. Impairment is measured by determining the
present value of expected future cash flows or, as a practical expedient for
collateral-dependent loans, the fair value of the collateral adjusted for market
conditions and selling expenses. The Bank considers its investment in
one-to-four family real estate loans and consumer loans to be smaller balance
homogeneous loans and therefore excluded from separate identification for
evaluation of impairment. These homogeneous loan groups are evaluated for
impairment on a collective basis under SFAS No. 5, "Accounting for
Contingencies".
The general allocation is determined by segregating the remaining loans
by type of loan, risk weighting (if applicable) and payment history. Management
also analyzes historical loss experience, delinquency trends, general economic
conditions, geographic concentrations, and industry and peer comparisons. This
analysis establishes factors that are applied to the loan segments to determine
the amount of the general allocations. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to significant
revisions based upon changes in economic and real estate market conditions.
Actual loan losses may be significantly more than the allowance for loan losses
management has established which could have a material negative effect on the
Company's financial results.
On a quarterly basis, the Bank's management committee reviews the
current status of various loan assets in order to evaluate the adequacy of the
allowance for loan losses. In this evaluation process, specific loans are
analyzed to determine their potential risk of loss. This process includes all
loans, concentrating on non-accrual and classified loans. Each non-accrual or
classified loan is evaluated for potential loss exposure. Any shortfall results
in a recommendation of a specific allowance if the likelihood of loss is
evaluated as probable. To determine the adequacy of collateral on a particular
loan, an estimate of the fair market value of the collateral is based on the
most current appraised value available. This appraised value is then reduced to
reflect estimated liquidation expenses.
24
The Company's primary lending emphasis has been the origination of
commercial and residential mortgages and commercial and consumer loans and lines
of credit. The bank also originates home equity loans and home equity lines of
credit. These activities resulted in a loan concentration in commercial and
residential mortgages. As a substantial amount of our loan portfolio is
collateralized by real estate, appraisals of the underlying value of property
securing loans are critical in determining the amount of the allowance required
for specific loans. Assumptions for appraisal valuations are instrumental in
determining the value of properties. Overly optimistic assumptions or negative
changes to assumptions could significantly impact the valuation of a property
securing a loan and the related allowance determined. The assumptions supporting
such appraisals are carefully reviewed by management to determine that the
resulting values reasonably reflect amounts realizable on the related loans.
Based on the composition of our loan portfolio, management believes the primary
risks are increases in interest rates, a decline in the economy, generally, and
a decline in real estate market values in the New York metropolitan area. Any
one or combination of these events may adversely affect our loan portfolio
resulting in increased delinquencies, loan losses and future levels of loan loss
provisions. Management believes the allowance for loan losses reflects the
inherent credit risk in our portfolio, the level of our non-performing loans and
our charge-off experience.
Although management believes that we have established and maintained
the allowance for loan losses at adequate levels, additions may be necessary if
future economic and other conditions differ substantially from the current
operating environment. Although management uses the best information available,
the level of the allowance for loan losses remains an estimate that is subject
to significant judgment and short-term change. In addition, the Federal Deposit
Insurance Corporation, New York State Banking Department, and other regulatory
bodies, as an integral part of their examination process, will periodically
review our allowance for loan losses. Such agencies may require us to recognize
adjustments to the allowance based on its judgments about information available
to them at the time of their examination.
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,
-----------------------
2008 2007
-------- --------
Average loans outstanding $447,020 $376,914
======== ========
Allowance at beginning of period 4,183 3,771
Charge-offs:
Commercial and other loans 1 --
-------- --------
Total loans charged-off 1 --
-------- --------
Recoveries:
Commercial and other loans 66 2
-------- --------
Total loans recovered 66 2
-------- --------
Net (charge-offs) recoveries 65 2
-------- --------
Provision for loan losses
charged to operating expenses 150 75
-------- --------
Allowance at end of period $ 4,398 $ 3,848
-------- --------
Ratio of net recoveries (charge-offs)
to average loans outstanding 0.01% 0.00%
======== ========
Allowance as a percent of total loans 0.98% 1.01%
======== ========
Total loans at end of period $446,797 $379,313
======== ========
25
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 loans are either made to individuals or
personally guaranteed by the principals of the business to which the loan is
made. At March 31, 2008 and December 31, 2007, the Company had loans, net of
unearned income, of $445.41 million and $434.79 million, respectively, and
allowances for loan losses of $4.40 million and $4.18 million, respectively.
From time to time, the Bank may originate residential mortgage loans, sell them
on the secondary market, normally recognizing fee income in connection with the
sale.
Interest rates on loans are affected by the demand for loans, the
supply of money available for lending, credit risks, the rates offered by
competitors and other conditions. These factors are in turn affected by, among
other things, economic conditions, monetary policies of the federal government,
and legislative tax policies.
In order to manage interest rate risk, the Bank focuses its efforts on
loans with interest rates that adjust based upon changes in the prime rate or
changes in United States Treasury or similar indices. Generally, credit risks on
adjustable-rate loans are somewhat greater than on fixed-rate loans primarily
because, as interest rates rise, so do borrowers' payments, increasing the
potential for default. The Bank seeks to impose appropriate loan underwriting
standards in order to protect against these and other credit related risks
associated with its lending operations.
In addition to analyzing the income and assets of its borrowers when
underwriting a loan, the Bank obtains independent appraisals on all material
real estate in which the Bank takes a mortgage. The Bank generally obtains title
insurance in order to protect against title defects on mortgaged property.
COMMERCIAL AND MORTGAGE LOANS. The Bank originates commercial mortgage
loans secured by office buildings, retail establishments, multi-family
residential real estate and other types of commercial property. Substantially
all of the properties are located in the New York City metropolitan area.
The Bank generally makes commercial mortgage loans with loan to value
ratios not to exceed 75% and with terms to maturity that do not exceed 15 years.
Loans secured by commercial properties generally involve a greater degree of
risk than one- to four-family residential mortgage loans. Because payments on
such loans are often dependent on successful operation or management of the
properties, repayment may be subject, to a greater extent, to adverse conditions
in the real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting policies. The Bank evaluates the qualifications and
financial condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying property. The
factors considered by the Bank include net operating income; the debt coverage
ratio (the ratio of cash net income to debt service); and the loan to value
ratio. When evaluating the borrower, the Bank considers the financial resources
and income level of the borrower, the borrower's experience in owning or
managing similar property and the Bank's lending experience with the borrower.
The Bank's policy requires borrowers to present evidence of the ability to repay
the loan without having to resort to the sale of the mortgaged property. The
Bank also seeks to focus its commercial mortgage loans on loans to companies
with operating businesses, rather than passive real estate investors.
26
COMMERCIAL LOANS. The Bank makes commercial loans to businesses for
inventory financing, working capital, machinery and equipment purchases,
expansion, and other business purposes. These loans generally have higher yields
than mortgages loans, with maturities of one year, after which the borrower's
financial condition and the terms of the loan are re-evaluated. At March 31,
2008 and 2007, approximately $67.28 million and $64.38 million, respectively, or
15.06% and 16.97%, respectively, of the Company's total loan portfolio consisted
of such loans.
Commercial loans tend to present greater risks than mortgage loans
because the collateral, if any, tends to be rapidly depreciable, difficult to
sell at full value and is often easier to conceal. In order to limit these
risks, the Bank evaluates these loans based upon the borrower's ability to repay
the loan from ongoing operations. The Bank considers the business history of the
borrower and perceived stability of the business as important factors when
considering applications for such loans. Occasionally, the borrower provides
commercial or residential real estate collateral for such loans, in which case
the value of the collateral may be a significant factor in the loan approval
process.
RESIDENTIAL MORTGAGE LOANS (1 TO 4 FAMILY LOANS). The Bank makes
residential mortgage loans secured by first liens on one-to-four family
owner-occupied or rental residential real estate. At March 31, 2008 and 2007,
approximately $139.26 million and $138.16 million, respectively, or 31.17% and
36.42%, respectively, of the Company's total loan portfolio consisted of such
loans. The Bank offers both adjustable rate mortgages ("ARMS") and fixed-rate
mortgage loans. The relative proportion of fixed-rate loans versus ARMs
originated by the Bank depends principally upon current customer preference,
which is generally driven by economic and interest rate conditions and the
pricing offered by the Bank's competitors. At March 31, 2008 and 2007,
approximately 12.50% and 17.74%, respectively, of the Bank's residential one-to-
four family owner-occupied first mortgage portfolio were ARMs and approximately
87.50% and 82.26%, respectively, were fixed-rate loans. The percentage
represented by fixed-rate loans tends to increase during periods of low interest
rates. The ARMs generally carry annual caps and life-of-loan ceilings, which
limit interest rate adjustments.
The Bank's residential loan underwriting criteria are generally
comparable to those required by the Federal National Mortgage Association
("FNMA") and other major secondary market loan purchasers. Generally, ARM credit
risks are somewhat greater than fixed-rate loans primarily because, as interest
rates rise, the borrowers' payments rise, increasing the potential for default.
The Bank's teaser rate ARMs (ARMs with low initial interest rates that are not
based upon the index plus the margin for determining future rate adjustments)
were underwritten based on the payment due at the fully-indexed rate.
In addition to verifying income and assets of borrowers, the Bank
obtains independent appraisals on all residential first mortgage loans and title
insurance is required at closing. Private mortgage insurance is required on all
loans with a loan-to-value ratio in excess of 80% and the Bank requires real
estate tax escrows on such loans. Real estate tax escrows are voluntary on
residential mortgage loans with loan-to-value ratios of 80% or less.
Fixed-rate residential mortgage loans are generally originated by the
Bank for terms of 15 to 30 years. Although 30 year fixed-rate mortgage loans may
adversely affect our net interest income in periods of rising interest rates,
the Bank originates such loans to satisfy customer demand. Such loans are
generally originated at initial interest rates which exceed the fully indexed
rate on ARMs offered at the same time. Fixed-rate residential mortgage loans
originated by the Bank generally include due-on-sale clauses, which permit the
Bank to demand payment in full if the borrower sells the property without the
Bank's consent.
27
Due-on-sale clauses are an important means of adjusting the rates on
the Bank's fixed-rate mortgage loan portfolio, and the Bank will generally
exercise its rights under these clauses if necessary to maintain market yields.
ARMs originated in recent years have interest rates that adjust
annually based upon the movement of the one year treasury bill constant maturity
index, plus a margin of 2.00% to 2.75%. These loans generally have a maximum
interest rate adjustment of 2% per year, with a lifetime maximum interest rate
adjustment, measured from the initial interest rate, of 5.5% or 6.0%.
The Bank offers a variety of other loan products including residential
single family construction loans to persons who intend to occupy the property
upon completion of construction, home equity loans secured by junior mortgages
on one-to-four family owner-occupied residences, and short-term fixed-rate
consumer loans either unsecured or secured by monetary assets such as bank
deposits and marketable securities or personal property. At March 31, 2008 and
2007, the Company's loan portfolio was comprised of $240.26 million and $176.77
million, respectively, or 53.17% and 46.60%, respectively, of other loan
products.
CAPITAL ADEQUACY
Quantitative measures established by regulations to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk- weighted assets, and of Tier I capital to average assets. Management
believes that, as of March 31, 2008, the Bank meets all capital adequacy
requirements to which it is subject.
As of March 31, 2008, the Bank met all regulatory requirements for
classification as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the following table. There are no conditions or events since that date
that management believes have changed the Bank's category.
The following table set forth the actual and required regulatory
capital amounts and ratios of the Company and the Bank as of March 31, 2008.
(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, 2008
Total Capital (to Risk-Weighted Assets)
Company $138,876 17.9% $61,937 >8.0% -- N/A
-
Bank 106,464 14.1% 60,356 >8.0% $75,445 >10.0%
- -
Tier I Capital (to Risk-Weighted Assets)
Company 134,478 17.4% 30,968 >4.0% -- N/A
-
Bank 102,066 13.5% 30,178 >4.0% 45,267 >6.0%
- -
Tier I Capital (to Average Assets)
Company 134,478 12.5% 43,004 >4.0% -- N/A
-
Bank 102,066 9.9% 41,208 >4.0% 51,510 >5.0%
- -
28
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.
At March 31, 2008, our portfolio of investment securities included
approximately $182.8 million of auction rate securities. These investments have
high credit quality ratings of AA or AAA and are fully collateralized by bonds
and other financial instruments. Auction rate securities are generally long-term
debt instruments that provide liquidity through a Dutch auction process that
resets the applicable interest rate at pre-determined calendar intervals,
generally every 90 days for the securities in our portfolio.
Recent uncertainties in the credit markets have negatively impacted our
ability to liquidate, if necessary, investments in auction rate securities
because, in recent auctions, the amount of securities submitted for sale has
exceeded the amount of purchase orders. We are not certain as to when the
liquidity issues relating to these investments will improve; however, we have
the ability to hold these available for sale securities to maturity,
(predominately greater than 19 years after March 31, 2008) thereby recovering
our investment. We have collected all income due us from the auction rate
securities.
Based on our expected operating cash flows, and our other sources of
cash, we do not expect the potential lack of liquidity in these investments to
affect our capital, liquidity or our ability to execute our current business
plan.
For the parent company, Berkshire Bancorp Inc., liquidity means having
cash available to fund operating expenses and to pay stockholder dividends, when
and if declared by the Company's Board of Directors. 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, 2008, the
Company had cash of approximately $11.8 million and investment securities with a
fair market value of $9.6 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 $50.5 million at March 31, 2008,
include commitments to extend credit, stand-by letters of credit and loan
commitments. The Bank also had interest rate caps with a notional amount of
$40.0 million.
At March 31, 2008, the Bank had outstanding commitments of
approximately $494.16 million; including $37.59 million of long-term debt, $4.50
million of operating leases, and $452.07 million of time deposits. These
commitments include $459.97 million that mature or renew within one year, $32.36
million that mature or renew after one year and within three years, $1.29
million that mature or renew after three years and within five years and
$544,000 that mature or renew after five years.
29
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.
ITEM 4T - CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES.
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"). 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 Securities and Exchange Commission's
rules and forms and that any material information relating to the Company is
accumulated and communicated with management, including its principal
executive/financial officer to allow timely decisions regarding required
disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
In accordance with SEC requirements, the CEO/CFO notes that during the fiscal
quarter ended March 31, 2008, no changes in the Company's Internal Control have
occurred that have materially affected or are reasonably likely to materially
affect the Company's Internal Control.
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.
30
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number Description
-------- -----------
10.1 Amendment No.3 to Employment Agreement,
dated January 1, 2001, by and between
The Berkshire Bank and David Lukens. +
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.
31
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 12, 2008 By: /s/ Steven Rosenberg
------------------ -----------------------
STEVEN ROSENBERG
PRESIDENT AND CHIEF
FINANCIAL OFFICER
32
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1 Amendment No.3 to Employment Agreement,
dated January 1, 2001, by and between
The Berkshire Bank and David Lukens. +
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.
--------------------
+ Denotes a management compensation plan or arrangement.
33