UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2007
----------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _________________
Commission file number: 0-13649
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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, 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 November 12, 2007, there were 7,039,706 outstanding shares of the issuers
Common Stock, $.10 par value.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS. STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q
THAT ARE NOT BASED ON HISTORICAL FACT MAY BE "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WORDS SUCH
AS "BELIEVE", "MAY", "WILL", "EXPECT", "ESTIMATE", "ANTICIPATE", "CONTINUE" OR
SIMILAR TERMS IDENTIFY FORWARD-LOOKING STATEMENTS. A WIDE VARIETY OF FACTORS
COULD CAUSE THE ACTUAL RESULTS AND EXPERIENCES OF BERKSHIRE BANCORP INC. (THE
"COMPANY") TO DIFFER MATERIALLY FROM THE RESULTS EXPRESSED OR IMPLIED BY THE
COMPANY'S FORWARD-LOOKING STATEMENTS. SOME OF THE RISKS AND UNCERTAINTIES THAT
MAY AFFECT OPERATIONS, PERFORMANCE, RESULTS OF THE COMPANY'S BUSINESS, THE
INTEREST RATE SENSITIVITY OF ITS ASSETS AND LIABILITIES, AND THE ADEQUACY OF ITS
LOAN LOSS ALLOWANCE, INCLUDE, BUT ARE NOT LIMITED TO: (I) DETERIORATION IN
LOCAL, REGIONAL, NATIONAL OR GLOBAL ECONOMIC CONDITIONS WHICH COULD RESULT,
AMONG OTHER THINGS, IN AN INCREASE IN LOAN DELINQUENCIES, A DECREASE IN PROPERTY
VALUES, OR A CHANGE IN THE HOUSING TURNOVER RATE; (II) CHANGES IN MARKET
INTEREST RATES OR CHANGES IN THE SPEED AT WHICH MARKET INTEREST RATES CHANGE;
(III) CHANGES IN LAWS AND REGULATIONS AFFECTING THE FINANCIAL SERVICES INDUSTRY;
(IV) CHANGES IN COMPETITION; (V) CHANGES IN CONSUMER PREFERENCES, (VI) CHANGES
IN BANKING TECHNOLOGY; (VII) ABILITY TO MAINTAIN KEY MEMBERS OF MANAGEMENT,
(VIII) POSSIBLE DISRUPTIONS IN THE COMPANY'S OPERATIONS AT ITS BANKING
FACILITIES, (IX) COST OF COMPLIANCE WITH NEW CORPORATE GOVERNANCE REQUIREMENTS,
AND OTHER FACTORS REFERRED TO IN THIS QUARTERLY REPORT AND IN ITEM 1A, "RISK
FACTORS", OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2006.
CERTAIN INFORMATION CUSTOMARILY DISCLOSED BY FINANCIAL INSTITUTIONS,
SUCH AS ESTIMATES OF INTEREST RATE SENSITIVITY AND THE ADEQUACY OF THE LOAN LOSS
ALLOWANCE, ARE INHERENTLY FORWARD-LOOKING STATEMENTS BECAUSE, BY THEIR NATURE,
THEY REPRESENT ATTEMPTS TO ESTIMATE WHAT WILL OCCUR IN THE FUTURE.
THE COMPANY CAUTIONS READERS NOT TO PLACE UNDUE RELIANCE UPON ANY
FORWARD-LOOKING STATEMENT CONTAINED IN THIS QUARTERLY REPORT. FORWARD-LOOKING
STATEMENTS SPEAK ONLY AS OF THE DATE THEY WERE MADE AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE OR REVISE ANY SUCH STATEMENTS UPON ANY CHANGE IN APPLICABLE
CIRCUMSTANCES.
2
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2007 (unaudited) and
December 31, 2006 4
Consolidated Statements of Income
For The Three and Nine Months Ended
September 30, 2007 and 2006 (unaudited) 5
Consolidated Statements of Stockholders'
Equity For The Nine Months Ended
September 30, 2007 and 2006 (unaudited) 6
Consolidated Statements of Cash Flows
For The Nine Months Ended
September 30, 2007 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 17
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 26
Item 4. Controls and Procedures 34
PART II OTHER INFORMATION
Item 6. Exhibits 35
Signature 36
Index of Exhibits 37
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------------ ------------------
ASSETS
Cash and due from banks $ 4,221 $ 8,061
Interest bearing deposits 10,035 4,950
Federal funds sold 19,200 11,300
----------- -----------
Total cash and cash equivalents 33,456 24,311
Investment Securities:
Available-for-sale 595,607 514,798
Held-to-maturity, fair value of $405
in 2007 and $436 in 2006 400 433
----------- -----------
Total investment securities 596,007 515,231
Loans, net of unearned income 396,776 370,923
Less: allowance for loan losses (4,006) (3,771)
----------- -----------
Net loans 392,770 367,152
Accrued interest receivable 7,135 6,397
Premises and equipment, net 9,534 9,338
Goodwill, net 18,549 18,549
Other assets 8,647 7,678
----------- -----------
Total assets $ 1,066,098 $ 948,656
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 50,544 $ 49,418
Interest bearing 770,971 632,071
----------- -----------
Total deposits 821,515 681,489
Securities sold under agreements to repurchase 41,911 62,652
Long term borrowings 48,410 52,738
Subordinated debt 22,681 22,681
Accrued interest payable 7,286 8,110
Other liabilities 3,068 5,209
----------- -----------
Total liabilities 944,871 832,879
----------- -----------
Stockholders' equity
Preferred stock - $.10 Par value: -- --
2,000,000 shares authorized - none issued
Common stock - $.10 par value
Authorized -- 10,000,000 shares
Issued -- 7,698,285 shares
Outstanding --
September 30, 2007, 7,054,183 shares
December 31, 2006, 6,877,881 shares 770 770
Additional paid-in capital 90,965 90,659
Retained earnings 41,025 37,285
Accumulated other comprehensive loss, net (5,122) (4,772)
Treasury Stock at cost
September 30, 2007, 644,102 shares
December 31, 2006, 820,404 shares (6,411) (8,165)
----------- -----------
Total stockholders' equity 121,227 115,777
----------- -----------
$ 1,066,098 $ 948,656
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
4
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
2007 2006 2007 2006
-------- -------- -------- --------
INTEREST INCOME
Loans $ 7,363 $ 6,059 $ 21,841 $ 17,148
Investment securities 7,086 5,989 19,337 18,393
Federal funds sold and
interest bearing deposits 208 93 1,270 251
-------- -------- -------- --------
Total interest income 14,657 12,141 42,448 35,792
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 8,281 5,831 23,550 16,031
Short-term borrowings 462 583 1,328 1,577
Long-term borrowings 939 1,095 2,845 3,453
-------- -------- -------- --------
Total interest expense 9,682 7,509 27,723 21,061
-------- -------- -------- --------
Net interest income 4,975 4,632 14,725 14,731
PROVISION FOR LOAN LOSSES 75 45 225 135
-------- -------- -------- --------
Net interest income after
provision for loan losses 4,900 4,587 14,500 14,596
-------- -------- -------- --------
NON-INTEREST INCOME
Service charges on deposits 148 148 512 434
Investment securities gains (losses) (39) -- 86 743
Other income 236 211 653 540
-------- -------- -------- --------
Total non-interest income 345 359 1,251 1,717
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,211 2,149 6,587 6,326
Net occupancy expense 603 489 1,519 1,455
Equipment expense 97 112 297 316
FDIC assessment 23 22 63 65
Data processing expense 111 90 306 271
Other 519 538 1,771 1,757
-------- -------- -------- --------
Total non-interest expense 3,564 3,400 10,543 10,190
-------- -------- -------- --------
Income before provision for taxes 1,681 1,546 5,208 6,123
Provision for income taxes 406 689 1,813 2,850
-------- -------- -------- --------
Net income $ 1,275 $ 857 $ 3,395 $ 3,273
======== ======== ======== ========
Net income per share:
Basic $ .18 $ .12 $ .49 $ .47
======== ======== ======== ========
Diluted $ .18 $ .12 $ .49 $ .47
======== ======== ======== ========
Number of shares used to compute
net income per share:
Basic 7,051 6,899 6,965 6,895
======== ======== ======== ========
Diluted 7,052 6,984 6,989 6,983
======== ======== ======== ========
Dividends declared per share $ -- $ -- $ .09 $ .08
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(In Thousands)
(unaudited)
ACCUMULATED
STOCK ADDITIONAL OTHER
COMMON PAR PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES VALUE CAPITAL (LOSS), NET EARNINGS STOCK
------ ----- -------- ------------ -------- ------
BALANCE AT JANUARY 1, 2007 7,698 $770 $90,659 $ (4,772) $ 37,285 $ (8,165)
Adoption of FIN 48 965
--------
Adjusted balance at January 1, 2007 38,250
Net income 3,395
Exercise of stock options 306 1,754
Other comprehensive (loss) net
of reclassification adjustment
and taxes (350)
Comprehensive income (loss)
Cash dividends (620)
------ ---- ------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 2007
(UNAUDITED) 7,698 $770 $90,965 $ (5,122) $ 41,025 $ (6,411)
====== ==== ======= ======== ======== ========
BALANCE AT JANUARY 1, 2006 7,698 $770 $90,594 $ (8,415) $ 33,504 $ (7,743)
Net income 3,273
Exercise of stock options 6 77
Other comprehensive income net
of reclassification adjustment
and taxes 2,065
Comprehensive income
Cash dividends (549)
------ ---- ------- ------- ------- --------
BALANCE AT SEPTEMBER 30, 2006
(UNAUDITED) 7,698 $770 $90,600 $(6,350) $ 36,228 $( 7,666)
====== ==== ======= ======= ======== ========
TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME (LOSS) EQUITY
-------------- ------
BALANCE AT JANUARY 1, 2007 $115,777
Adoption of FIN 48 965
--------
Adjusted balance at January 1, 2007 116,742
Net income 3,395 3,395
Exercise of stock options 2,060
Other comprehensive (loss) net
of reclassification adjustment
and taxes (350) (350)
-------
Comprehensive income (loss) $ 3,045
=======
Cash dividends (620)
--------
BALANCE AT SEPTEMBER 30, 2007
(UNAUDITED) $121,227
========
BALANCE AT JANUARY 1, 2006 $108,710
Net income 3,273 3,273
Exercise of stock options 83
Other comprehensive income net
of reclassification adjustment
and taxes 2,065 2,065
-------
Comprehensive income $ 5,338
=======
Cash dividends (549)
--------
BALANCE AT SEPTEMBER 30, 2006
(UNAUDITED) $113,582
========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
6
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
2007 2006
----------- -----------
Cash flows from operating activities:
Net income $ 3,395 $ 3,273
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized gains on investment securities (86) (743)
Net (accretion) of premiums of investment securities (1,195) (482)
Depreciation and amortization 551 543
Provision for loan losses 225 135
(Increase) decrease in accrued interest receivable (738) 641
(Increase) decrease in other assets (969) 1,597
(Decrease) increase in accrued interest payable
and other liabilities (2,000) 2,140
----------- -----------
Net cash (used in) provided by operating activities (817) 7,104
----------- -----------
Cash flows from investing activities:
Investment securities available for sale
Purchases (1,175,702) (306,995)
Sales, maturities and calls 1,095,769 401,155
Investment securities held to maturity
Maturities 88 122
Net increase in loans (25,843) (43,965)
Acquisition of premises and equipment (747) (1,461)
----------- -----------
Net cash (used in) provided by investing activities (106,435) 48,856
----------- -----------
7
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
2007 2006
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in non interest bearing deposits 1,126 (1,716)
Net increase (decrease) in interest bearing deposits 138,900 (20,842)
(Decrease) in securities sold under agreements
to repurchase (20,741) (22,687)
Proceeds from long term debt 16,000 --
Repayment of long term debt (20,328) (24,453)
Proceeds from exercise of common stock options 2,060 83
Dividends paid (620) (549)
--------- ---------
Net cash provided by (used in) financing activities 116,397 (70,164)
--------- ---------
Net (decrease) increase in cash and cash equivalents 9,145 (14,204)
Cash and cash equivalents - beginning of period 24,311 27,882
--------- ---------
Cash and cash equivalents - end of period $ 33,456 $ 13,678
========= =========
Supplemental disclosure of cash flow information:
Cash used to pay interest $ 27,547 $ 19,410
Cash used to pay taxes, net of refunds $ 2,945 $ 3,871
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
NOTE 1. GENERAL
Berkshire Bancorp Inc., a Delaware corporation, is a bank holding
company registered under the Bank Holding Company Act of 1956. References herein
to "Berkshire", the "Company" or "we" and similar pronouns, shall be deemed to
refer to Berkshire Bancorp Inc. and its consolidated subsidiaries unless the
context otherwise requires. Berkshire's principal activity is the ownership and
management of its wholly owned subsidiary, The Berkshire Bank (the "Bank"), a
New York State chartered commercial bank.
The accompanying financial statements of Berkshire Bancorp Inc. and
subsidiaries includes the accounts of the parent company, Berkshire Bancorp
Inc., and its wholly-owned subsidiaries: The Berkshire Bank, Greater American
Finance Group, Inc. and East 39, LLC.
We have prepared the accompanying financial statements pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC") for
interim financial reporting. These consolidated financial statements are
unaudited and, in our opinion, include all adjustments, consisting of normal
recurring adjustments and accruals necessary for a fair presentation of our
consolidated balance sheets, operating results, and cash flows for the periods
presented. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for 2007 due to a variety of
factors. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") have been omitted in accordance with the
rules and regulations of the SEC. These consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
accompanying notes included in our 2006 Annual Report on Form 10-K.
NOTE 2. TRUST PREFERRED SECURITIES.
As of May 18 2004, the Company established Berkshire Capital Trust I, a
Delaware statutory trust, ("BCTI"). The Company owns all the common capital
securities of BCTI. BCTI issued $15.0 million of preferred capital securities to
investors in a private transaction and invested the proceeds, combined with the
proceeds from the sale of BCTI's common capital securities, in the Company
through the purchase of $15.464 million aggregate principal amount of Floating
Rate Junior Subordinated Debentures (the "2004 Debentures") issued by the
Company. The 2004 Debentures, the sole assets of BCTI, mature on July 23, 2034
and bear interest at a floating rate, three month LIBOR plus 2.70%, currently
8.06%.
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
7.44%.
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
----------------------------------------------------------------------------------
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
-------------------------------------- -----------------------------------------
Per Per
Income Shares share Income Shares share
(numerator) (denominator) amount (numerator) (denominator) amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except per share data)
Basic earnings per share
Net income available to
common stockholders $1,275 7,051 $.18 $ 857 6,899 $.12
Effect of dilutive securities
options -- 1 .-- -- 85 .--
------ ------ ---- ----- ----- ----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $1,275 7,052 $.18 $ 857 6,984 $.12
====== ===== ==== ===== ===== ====
10
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. - (CONTINUED)
FOR THE NINE MONTHS ENDED
------------------------------------------------------------------------------------
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
---------------------------------------- -----------------------------------------
Per Per
Income Shares share Income Shares share
(numerator) (denominator) amount (numerator) (denominator) amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except per share data)
Basic earnings per share
Net income available to
common stockholders $3,395 6,965 $.49 $3,273 6,895 $.47
Effect of dilutive securities
options -- 24 .-- -- 88 .--
------ ----- ---- ------ ----- ----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $3,395 6,989 $.49 $3,273 6,983 $.47
====== ===== ==== ====== ===== ====
NOTE 4. INVESTMENT SECURITIES
The following tables summarize held to maturity and available-for-sale
investment securities as of September 30, 2007 and December 31, 2006:
SEPTEMBER 30, 2007
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------- --------------- ----------------- ---------------
(In thousands)
HELD TO MATURITY
INVESTMENT SECURITIES
U.S. Government Agencies $ 400 $ 6 $ (1) $ 405
----- --- ---- -----
Totals $ 400 $ 6 $ (1) $ 405
===== === ==== =====
DECEMBER 31, 2006
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------- --------------- ----------------- ---------------
(In thousands)
HELD TO MATURITY
INVESTMENT SECURITIES
U.S. Government Agencies $ 433 $ 4 $ (1) $ 436
----- --- ---- -----
Totals $ 433 $ 4 $ (1) $ 436
===== === ==== =====
11
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. - (CONTINUED)
SEPTEMBER 30, 2007
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------- --------------- ----------------- ---------------
(In thousands)
AVAILABLE-FOR-SALE INVESTMENT
SECURITIES
U.S. Treasury and Notes $ -- $ -- $ -- $ --
U.S. Government Agencies 288,616 19 (2,768) 285,867
Mortgage-backed securities 58,186 84 (1,490) 56,780
Corporate notes 60,493 242 (4,180) 56,555
Municipal Securities 1,973 1,226 -- 3,199
Marketable equity
securities and other 193,186 184 (164) 193,206
-------- ------- -------- --------
Totals $602,454 $ 1,755 $ (8,602) $595,607
======== ======= ======== ========
DECEMBER 31, 2006
----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------- --------------- ----------------- ---------------
(In thousands)
AVAILABLE-FOR-SALE INVESTMENT
SECURITIES
U.S. Treasury and Notes $ 5,002 $ -- $ (12) $ 4,990
U.S. Government Agencies 322,986 -- (5,822) 317,164
Mortgage-backed securities 67,472 92 (1,711) 65,853
Corporate Notes 44,366 334 (662) 44,038
Municipal securities 5,698 1,489 -- 7,187
Marketable equity
securities and other 75,419 216 (69) 75,566
-------- ------- -------- --------
Totals $520,943 $ 2,131 $ (8,276) $514,798
======== ======= ======== ========
Our available-for-sale portfolio is carried at estimated fair value,
with any unrealized gains or losses, net of taxes, reported as accumulated other
comprehensive income or loss in stockholders' equity. Our held-to-maturity
portfolio, consisting of debt securities for which we have a positive intent and
ability to hold to maturity, is carried at amortized cost. We conduct a periodic
review and evaluation of the securities portfolio to determine if the value of
any security has declined below its cost or amortized cost, and whether such
decline is other-than-temporary.
The Company has investments in debt and equity securities that have
unrealized losses, but an other-than-temporary impairment has not been
recognized in its financial statements. Based upon management's review of the
available information including the changes in interest rates during the period,
current market conditions, applicable industry and company information specific
to each investment, the creditworthiness of the issuer, and the Company's
ability to hold the investment to maturity, such unrealized losses are not
considered to be other-than-temporary.
12
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. LOAN PORTFOLIO
The following table sets forth information concerning the Company's
loan portfolio by type of loan at the dates indicated:
SEPTEMBER 30, 2007 DECEMBER 31, 2006
---------------------------------- ----------------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
(Dollars in thousands)
Commercial and professional loans $ 66,408 16.7% $ 63,331 17.0%
Secured by real estate
1-4 family 134,042 33.7 139,611 37.5
Multi family 3,639 0.9 4,013 1.1
Non-residential 192,901 48.4 160,417 43.1
Consumer 1,141 0.3 4,763 1.6
-------- ---- -------- ----
Total loans 398,131 100.0% 372,135 100.0%
===== =====
Deferred loan fees (1,355) (1,212)
Allowance for loan losses (4,006) (3,771)
-------- --------
Loans, net $392,770 $367,152
======== ========
Management does not believe that the Company has engaged in any
subprime lending activities.
NOTE 6. DEPOSITS
The following table summarizes the composition of the average balances
of major deposit categories:
SEPTEMBER 30, 2007 DECEMBER 31, 2006
------------------ -----------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD
------- ------- ------- -------
(Dollars in thousands)
Demand deposits $ 50,089 -- $ 47,890 --
NOW and money market 34,245 0.63% 35,141 0.61%
Savings deposits 256,512 3.83 171,604 2.95
Time deposits 442,395 4.84 410,729 4.21
-------- ---- -------- ----
Total deposits $783,241 4.02% $665,364 3.39%
======== ==== ======== ====
13
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. COMPREHENSIVE INCOME
The following table presents the components of comprehensive income,
related to investments only, based on the provisions of SFAS No. 130.:
FOR THE NINE MONTHS ENDED
----------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
---------------------------------------------- ---------------------------------------------------
TAX TAX
BEFORE TAX (EXPENSE) NET OF TAX BEFORE TAX (EXPENSE) NET OF TAX
AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT
-------------- -------------- ------------- ---------------- ---------------- ---------------
(In thousands)
Unrealized gains
(losses) on investment
securities:
Unrealized holding $ (702) $ 300 $ (402) $4,165 $ (1,654) $ (2,511)
gains (losses) arising
during period
Less reclassification
adjustment for gains
realized in net income 86 (34) 52 743 (297) 446
------ ----- ------ ------ -------- ------
Other comprehensive
income (loss), net $ (616) $ 266 $ (350) $3,422 $ (1,357) $2,065
====== ===== ====== ====== ======== ======
NOTE 8. ACCOUNTING FOR STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)")
which requires the measurement and recognition of compensation expense for all
stock-based compensation payments and supersedes the Company's previous
accounting under Accounting Principals Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). SFAS 123(R) is effective for all annual
periods beginning after June 15, 2005 or our fiscal year 2006. In March 2005,
the Securities and Exchange Commission (the "SEC") issued Staff Accounting
Bulletin No. 107 ("SAB 107") relating to the adoption of SFAS 123(R).
The Company adopted SFAS 123(R) in the first quarter of fiscal year
2006. The adoption of SFAS 123(R) did not have an impact on our operating
results or financial condition because all options outstanding under the plan
vested prior to the adoption of SFAS 123(R).
At September 30, 2007, the Company has one stock-based employee
compensation plan, for which 2,076 options at a weighted average exercise price
of $8.30 per share were outstanding with an average remaining life of 1.75
years. 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. The Company did not grant stock options during the nine-month
period ended September 30, 2007 or during the fiscal year ended December 31,
2006. The Company has no plans to grant significant stock options, if any, in
2007. Therefore, we do not expect the implementation of FAS 123(R) to affect our
financial position or results of operations in the near future.
14
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company has a Retirement Income Plan (the "Plan"), a
noncontributory plan covering substantially all full-time, non-union United
States employees of the Company. The following interim-period information is
being provided in accordance with FASB Statement 132(R).
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------------------------
2007 2006 2007 2006
--------------- -------------- ---------------- -----------------
Service cost $ 90,750 $ 90,357 $ 272,250 $ 262,714
Interest cost 43,500 37,531 130,500 112,062
Expected return on plan assets (46,000) (37,710) (138,000) (113,420)
Amortization and Deferral:
Transition amount -- -- -- --
Prior service cost 4,500 4,457 13,500 13,914
Loss 11,750 15,429 35,250 44,858
-------- -------- --------- ---------
Net periodic pension cost $104,500 $110,063 $ 313,500 $ 320,126
======== ======== ========= =========
During the fiscal year ending December 31, 2007, we expect to
contribute approximately $390,000 to the Plan. We contributed $119,600 in April
2007, $84,905 in July 2007 and $185,000 in September 2007. We contributed
$56,000, $221,000 and $56,000 in April, July and October 2006, respectively.
NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS
FAIR VALUE OPTION FOR FINANCIAL ASSETS AND LIABILITIES
In February 2007, the FASB issued Statement 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" ("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 will allow companies the opportunity to mitigate earnings
volatility caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting. Unrealized gains and losses on
items for which the fair value option has been elected should be reported in
earnings. The fair value option election is applied on an instrument by
instrument basis (with some exceptions), is irrevocable, and is applied to an
entire instrument. The election may be made as of the date of initial adoption
for existing eligible items. Subsequent to initial adoption, the Company may
elect the fair value option at initial recognition of eligible items or on
entering into an eligible firm commitment. The Company can only elect the fair
value option after initial recognition in limited circumstances.
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.
15
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. - (CONTINUED)
SFAS No. 159 is required to be adopted by the Company on January 1,
2008. Early adoption is permitted; however, the Company did not adopt SFAS No.
159 prior to the required adoption date of January 1, 2008. The Company is
required to adopt SFAS No. 159 concurrent with SFAS No. 157, "Fair Value
Measurements." The remeasurement to fair-value will be reported as a
cumulative-effect adjustment in the opening balance of retained earnings.
Additionally, any changes in fair value due to the concurrent adoption of SFAS
No. 157 will be included in the cumulative-effect adjustment if the fair value
option is also elected for that item.
The Company is currently evaluating, which, if any items it will elect
to recognize at fair value at the date of adoption. The financial statement
impact will depend on which items the Company elects to recognize at fair value,
fair value at the date of adoption, and the concurrent adoption of SFAS No. 157.
If the Company elects to recognize items at fair value as a result of Statement
159, this could result in increased earnings volatility.
ACCOUNTING FOR FAIR VALUE MEASUREMENT
In September 2006 the FASB issued SFAS No. 157, "Fair Value
Measurements." The Statement is effective for all financial statements issued
for fiscal years beginning after November 15, 2007, 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.
Adoption of SFAS No. 157 is not expected to have a material impact on the
Company's results of operations or financial condition.
ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans." The Statement
requires an employer that is a business entity and sponsors one or more
single-employer defined benefit plans to: (1) recognize the funded status of a
benefit plan - measured as the difference between plan assets at fair value and
the benefit obligation - in its statement of financial position, with the
corresponding credit or charge, net of taxes, upon initial adoption to Other
Comprehensive Income; (2) recognize as a component of other comprehensive
income, net of tax, the gains or losses and prior service costs or credits that
arise during the period but are not recognized as components of net periodic
benefit cost pursuant to SFAS No. 87, "Employers' Accounting for Pensions", or
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions"; (3) measure defined benefit plan assets and obligations as of the
date of the employer's fiscal year end; and (4) expand disclosures in the notes
to the financial statements about certain effects on net periodic benefit cost.
The Statement also amends SFAS No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits", and SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans for
Termination Benefits".
An employer who has publicly traded equity securities, such as the
Company, is required to initially recognize the funded status of a defined
benefit postretirement plan and to provide the required disclosures as of the
end of its first fiscal year ending after December 15, 2006, as to the Company,
the year ended December 31, 2006. The requirement to measure plan assets and
benefit obligations as of the date of the employer's fiscal year end is
effective for fiscal years ending after December 15, 2008. The adoption of this
statement for the year ended December 31, 2006 did not have a significant effect
on Other Comprehensive Income and stockholders' equity.
16
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.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of Berkshire Bancorp Inc., a Delaware corporation. References herein to per
share amounts refer to diluted shares. References to Notes herein are references
to the "Notes to Consolidated Financial Statements" of the Company located in
Item 1 herein.
The accompanying financial statements of Berkshire Bancorp Inc. and
subsidiaries includes the accounts of the parent company, Berkshire Bancorp
Inc., and its wholly-owned subsidiaries: The Berkshire Bank, Greater American
Finance Group, Inc. and East 39, LLC.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The Company's accounting and reporting policies conform with accounting
principles generally accepted in the United States of America and general
practices within the banking industry. The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and the accompanying notes. Actual
results could differ from those estimates.
The Company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than any of its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires material estimates, including, among others, expected default
probabilities, loss given default, the amounts and timing of expected future
cash flows on impaired loans, mortgages, and general amounts for historical loss
experience. The process also considers economic conditions, uncertainties in
estimating losses and inherent risks in the loan portfolio. All of these factors
may be susceptible to significant change. To the extent actual outcomes differ
from management estimates, additional provisions for loan losses may be required
that would adversely impact earnings in future periods.
17
With the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142 ("SFAS No. 142") on January 1, 2002, the Company discontinued
the amortization of goodwill resulting from acquisitions. Goodwill is now
subject to impairment testing at least annually to determine whether write-downs
of the recorded balances are necessary. The Company tests for impairment based
on the goodwill maintained at the Bank. A fair value is determined for each
reporting unit based on at least one of three various market valuation
methodologies. If the fair values of the reporting units exceed their book
values, no write-down of recorded goodwill is necessary. If the fair value of
the reporting unit is less, an expense may be required on the Company's books to
write down the related goodwill to the proper carrying value. As of December 31,
2006, the Company completed its annual testing, which determined that no
impairment write-offs were necessary.
The Company recognizes deferred tax assets and liabilities for the
future tax effects of temporary differences, net operating loss carryforwards
and tax credits. The quarterly evaluation of deferred tax assets are subject to
management's judgment based upon available evidence that future realization is
more likely than not. If management determines that the Company may be unable to
realize all or part of net deferred tax assets in the future, a direct charge to
income tax expense may be required to reduce the recorded value of the net
deferred tax asset to the expected realizable amount.
18
The following table presents the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed in both
dollars and rates.
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
2007 2006
------------------------------------------- ----------------------------------------
INTEREST INTEREST
AVERAGE AND AVERAGE AVERAGE AND AVERAGE
BALANCE DIVIDENDS YIELD/RATE BALANCE DIVIDENDS YIELD/RATE
------- --------- ---------- ------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $ 385,425 $ 7,363 7.64% $330,117 $ 6,059 7.34%
Investment securities 581,577 7,086 4.87 528,760 5,989 4.53
Other (2)(5) 18,386 208 4.53 8,484 93 4.38
---------- --------- ----- -------- -------- ----
Total interest-earning assets 985,388 14,657 5.95 867,361 12,141 5.60
----- ----
Noninterest-earning assets 47,250 49,339
---------- --------
Total Assets $1,032,638 $916,700
========== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 291,919 2,631 3.61% 200,264 1,406 2.81%
Time deposits 461,936 5,650 4.89 400,173 4,425 4.42
Other borrowings 98,123 1,401 5.71 144,697 1,678 4.64
---------- --------- ----- -------- -------- ----
Total interest-bearing
liabilities 851,978 9,682 4.55 745,134 7,509 4.03
--------- ----- -------- ----
Demand deposits 51,525 47,176
Noninterest-bearing liabilities 9,979 15,570
Stockholders' equity (5) 119,156 108,820
---------- --------
Total liabilities and
stockholders' equity $1,032,638 $916,700
========== ========
Net interest income $ 4,975 $ 4,632
======== ========
Interest-rate spread (3) 1.40% 1.57%
==== ====
Net interest margin (4) 2.02% 2.14%
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.16 1.16
========== ========
----------------------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits, federal funds sold and securities
purchased under agreements to resell.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest bearing
liabilities.
(4) Net interest margin is net interest income as a percentage of average
interest-earning assets.
(5) Average balances are daily average balances except for the parent company
which have been calculated on a monthly basis.
19
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------
2007 2006
------------------------------------------- -------------------------------------------
INTEREST INTEREST
AVERAGE AND AVERAGE AVERAGE AND AVERAGE
BALANCE DIVIDENDS YIELD/RATE BALANCE DIVIDENDS YIELD/RATE
------- --------- ---------- ------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $ 380,628 $ 21,841 7.65% $ 317,612 $ 17,148 7.20%
Investment securities 547,809 19,337 4.71 564,102 18,393 4.35
Other (2)(5) 34,146 1,270 4.96 8,404 251 3.98
---------- --------- ---- ---------- -------- ----
Total interest-earning assets 962,583 42,448 5.88 890,118 35,792 5.36
---- ----
Noninterest-earning assets 45,988 47,491
---------- ----------
Total Assets $1,008,571 $ 937,609
========== ==========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 285,232 7,492 3.50% 208,545 3,772 2.41%
Time deposits 442,395 16,058 4.84 408,203 12,259 4.00
Other borrowings 100,516 4,173 5.54 151,635 5,030 4.42
---------- --------- ---- ---------- -------- ----
Total interest-bearing
liabilities 828,143 27,723 4.46 768,383 21,061 3.65
--------- ---- -------- ----
Demand deposits 50,088 47,535
Noninterest-bearing liabilities 11,892 12,120
Stockholders' equity (5) 118,448 109,571
---------- ----------
Total liabilities and
stockholders' equity $1,008,571 $ 937,609
========== ==========
Net interest income $ 14,725 $ 14,731
========== ========
Interest-rate spread (3) 1.42% 1.71%
==== ====
Net interest margin (4) 2.04% 2.21%
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.16 1.16
==== ====
----------------------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits, federal funds sold and securities
purchased under agreements to resell.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest bearing
liabilities.
(4) Net interest margin is net interest income as a percentage of average
interest-earning assets.
(5) Average balances are daily average balances except for the parent company
which have been calculated on a monthly basis.
20
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006.
GENERAL. Berkshire Bancorp Inc., a bank holding company registered under the
Bank Holding Company Act of 1956, has one wholly-owned banking subsidiary, The
Berkshire Bank, a New York State chartered commercial bank. The Bank is
headquartered in Manhattan and has 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 September 30, 2007 was
$1.28 million, or $.18 per share, as compared to $857,000, or $.12 per share,
for the three-month period ended September 30, 2006. Net income for the
nine-month period ended September 30, 2007 was $3.40 million, or $.49 per share,
as compared to $3.27 million, or $.47 per share, for the nine-month period ended
September 30, 2006.
The Company's net income is largely dependent on interest rate levels,
the demand for the Company's loan and deposit products and the strategies
employed to manage the interest rate and other risks inherent in the banking
business. The difference between the yield on short-term, 3-month U.S. Treasury
Notes, and long-term, 10-year U.S. Treasury Bonds, referred to as the yield
curve, is at historic lows. The Company's rising cost of funds, the rates paid
on deposits and borrowings, has not been matched by the ability to safely
increase the yields on interest earning assets.
NET INTEREST INCOME. The Company's primary source of revenue is net interest
income, or the difference between interest income on interest-earning assets,
such as loans and investment securities, and interest expense on
interest-bearing liabilities such as deposits and borrowings.
For the quarter ended September 30, 2007, net interest income increased
by $343,000 to $4.98 million from $4.63 million for the quarter ended September
30, 2006. The quarter over quarter increase in net interest income was due to
the $118.03 million increase in the average amount of interest-earning assets
and the 35 basis point increase in the average yield earned on such assets,
partially offset by the $106.84 million increase in the average amount of
interest-bearing liabilities and the 52 basis point increase in the average rate
paid on such liabilities. The Company's interest-rate spread, the difference
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities, narrowed by 17 basis points to 1.40% in the 2007
quarter from 1.57% in the 2006 quarter.
For the nine-month period ended September 30, 2007, net interest income
was flat, decreasing by $6,000 to $14.73 million for both nine-month periods
ended September 30, 2007 and 2006. The average amount of interest-earning assets
increased by $72.47 million to $962.58 million in the 2007 period from $890.12
million in the 2006 period and the average yield earned on such assets increased
by 52 basis points to 5.88% in 2007 from 5.36% in 2006. The Company's
interest-rate spread narrowed by 29 basis points to 1.42% during the nine-month
period ended September 30, 2007 from 1.71% during the nine-month period ended
September 30, 2006.
NET INTEREST MARGIN. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, declined by 12 basis points to
2.02% in the third quarter of 2007 from 2.14% in the third quarter of 2006, and
declined by 17 basis points to 2.04% in the nine-month period ended September
30, 2007 from 2.21% in the nine-month period ended September 30, 2006. We seek
to secure and retain customer deposits with competitive products and rates, and
to make strategic use of the prevailing interest rate environment to borrow
funds
21
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 5.95% and 5.88% in the three and nine months ended September 30, 2007,
respectively, compared to an aggregate average yield of 5.60% and 5.36% in the
three and nine months ended September 30, 2006, respectively.
The increased yield on interest-earning assets is primarily the result
of the increase in our loan portfolio as a percentage of our total
interest-earning assets. For the three months ended September 30, 2007, the
average amount of loans increased by $55.31 million to $385.43 million from
$330.12 million for the three months ended September 30, 2006. The average yield
on such loans increased by 30 basis points to 7.64% in the 2007 quarter from
7.34% in the 2006 quarter. The average amount of investment securities increased
by $52.82 million, to $581.58 million during the quarter ended September 30,
2007 from $528.76 million during the quarter ended September 30, 2006 and the
average yield on investment securities increased to 4.87% during the 2007
quarter from 4.53% during the 2006 quarter. The average amount of other
interest-earning assets, primarily cash and short-term investments, increased by
$9.90 million to $18.39 million from $8.48 million in the three months ended
September 30, 2007 and 2006, respectively.
During the nine-month period ended September 30, 2007, the average
amount of loans in our loan portfolio increased by $63.02 million to $380.63
million from $317.61 million for the nine-month period ended September 30, 2006.
The average yield on such loans increased by 45 basis points to 7.65% in the
2007 period from 7.20% in the 2006 period. The average amount of investment
securities decreased by $16.29 million to $547.81 million in the 2007 period
from $564.10 million in the 2006 period, and the average yield on such
securities increased by 36 basis points to 4.71% from 4.35% in the nine-month
period ended September 30, 2007 and 2006, respectively. Other interest-earning
assets increased by $25.74 million to $34.14 million in the 2007 period from
$8.40 million in the 2006 period, and the average yield on other
interest-earning assets increased by 98 basis points to 4.96% in the nine-month
period ended September 30, 2007 from 3.98% in the nine-month period ended
September 30, 2006.
INTEREST INCOME. Total interest income for the quarter ended September 30, 2007
increased by $2.52 million to $14.66 million from $12.14 million for the quarter
ended September 30, 2006, and increased by $6.66 million to $42.45 million for
the nine months ended September 30, 2007 from $35.79 million for the nine months
ended September 30, 2006. The increase in total interest income during the three
and nine months of fiscal year 2007 was due to the higher average yields earned
and the higher average amounts of interest-earning assets.
Loans contributed $7.36 million and $21.84 million of interest income during the
three and nine months ended September 30, 2007, respectively, compared to $6.06
million and $17.15 million of interest income during the three and nine months
ended September 30, 2006, respectively. Investment securities contributed $7.09
million and $19.34 million of interest income during the three and nine months
ended September 30, 2007, respectively, compared to $5.99 million and $18.39
million of interest income during the three and nine months ended September 30,
2006, respectively.
--------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------
2007 2006
------------------------- --------------------------
INTEREST % OF INTEREST % OF
INCOME TOTAL INCOME TOTAL
(In thousands, except percentages)
Loans $ 7,363 50.23% $ 6,059 49.91%
Investment Securities 7,086 48.35 5,989 49.33
Other 208 1.42 93 0.76
------- ------ ------- ------
Total Interest Income $14,657 100.00% $12,141 100.00%
======= ====== ======= ======
22
--------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------
2007 2006
------------------------- --------------------------
INTEREST % OF INTEREST % OF
INCOME TOTAL INCOME TOTAL
(In thousands, except percentages)
Loans $21,841 51.46% $17,148 47.91%
Investment Securities 19,337 45.55 18,393 51.39
Other 1,270 2.99 251 0.70
------- ------ ------- ------
Total Interest Income $42,448 100.00% $35,792 100.00%
======= ====== ======= ======
Loans, which are inherently risky and therefore command a higher return
than our portfolio of investment securities, have increased as a percentage of
total average interest-earning assets. During the three and nine months ended
September 30, 2007, the average amount of our loan portfolio represented 39.11%
and 39.54%, respectively, of total interest-earning assets compared to 38.06%
and 35.68%, respectively, for the three and nine months ended September 30,
2006. The average amount of investment securities have decreased to 59.02% and
56.91% of total interest-earning assets during the three and nine-month periods
of fiscal year 2007, respectively, compared to 60.96% and 63.37% during the
three and nine-month periods of fiscal year 2006, respectively. While we
actively seek to originate new loans with qualified borrowers who meet the
Bank's underwriting standards, our strategy has been to maintain those
standards, sacrificing some current income to avoid possible large future losses
in the loan portfolio.
------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
2007 2006
------------------------------ --------------------------
AVERAGE % OF AVERAGE % OF
AMOUNT TOTAL AMOUNT TOTAL
(In thousands, except percentages)
Loans $385,425 39.11% $330,117 38.06%
Investment Securities 581,577 59.02 528,760 60.96
Other 18,386 1.87 8,484 0.98
-------- ------ -------- ------
Total Interest-Earning Assets $985,388 100.00% $867,361 100.00%
======== ====== ======== ======
------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
2007 2006
------------------------------ --------------------------
AVERAGE % OF AVERAGE % OF
AMOUNT TOTAL AMOUNT TOTAL
(In thousands, except percentages)
Loans $380,628 39.54% $317,612 35.68%
Investment Securities 547,809 56.91 564,102 63.37
Other 34,146 3.55 8,404 0.95
-------- ------ -------- ------
Total Interest-Earning Assets $962,583 100.00% $890,118 100.00%
======== ====== ======== ======
23
INTEREST EXPENSE. Total interest expense for the quarter ended September 30,
2007 increased by $2.17 million to $9.68 million from $7.51 million for the
quarter ended September 30, 2006. The increase in interest expense was due to
the increase in the average rates paid on such liabilities, 4.55% and 4.03% in
the 2007 and 2006 quarters, respectively, and the increase in the average amount
of interest-bearing liabilities. In May 2004 and April 2005, we sold $15.46
million and $7.22 million, respectively, of floating rate junior subordinated
debentures (the "Debentures") and used the net proceeds to augment the Bank's
capital to allow for business expansion. The interest expense on these
Debentures, which is included in other borrowings was, approximately $458,000
and $444,000 during the three months ended September 30, 2007 and 2006,
respectively.
-------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------
2007 2006
------------------------------ --------------------------
INTEREST % OF INTEREST % OF
EXPENSE TOTAL EXPENSE TOTAL
(In thousands, except percentages)
Interest-Bearing Deposits $2,631 27.17% $1,406 18.72%
Time Deposits 5,650 58.36 4,425 58.93
Other Borrowings 1,401 14.47 1,678 22.35
------ ------ ------ ------
Total Interest Expense $9,682 100.00% $7,509 100.00%
====== ====== ====== ======
Total interest expense for the nine-month period ended September 30,
2007 increased by $6.66 million to $27.72 million from $21.06 million for the
nine-month period ended September 30, 2006. The increase in interest expense was
due to the increase in the average rates paid on such liabilities, 4.46% and
3.65% in the 2007 and 2006 periods, respectively, and the increase in the
average amount of interest-bearing liabilities. The interest expense on the
Debentures was approximately $1.37 million and $1.30 million during the 2007 and
2006 nine-month periods, respectively.
--------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------
2007 2006
------------------------------ ---------------------------
INTEREST % OF INTEREST % OF
EXPENSE TOTAL EXPENSE TOTAL
(In thousands, except percentages)
Interest-Bearing Deposits $7,492 27.02% $3,772 17.91%
Time Deposits 16,058 57.93 12,259 58.21
Other Borrowings 4,173 15.05 5,030 23.88
-------- ------ -------- ------
Total Interest Expense $ 27,723 100.00% $ 21,061 100.00%
======== ====== ======== ======
24
NON-INTEREST INCOME. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the three and nine
months ended September 30, 2007, non-interest income amounted to $345,000 and
$1.25 million, respectively, compared to non-interest income of $359,000 and
$1.72 million for the three and nine months ended September 30, 2006,
respectively.
------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
2007 2006
-------------------------------- ------------------------------
NON-INTEREST % OF NON-INTEREST % OF
INCOME TOTAL INCOME TOTAL
(In thousands, except percentages)
Service Charges on Deposits $ 148 42.90% $ 148 41.23%
Investment Securities Losses (39) (11.30) -- --
Other 236 68.40 211 58.77
----- ------ ----- ------
Total Non-Interest Income $ 345 100.00% $ 359 100.00%
===== ====== ===== ======
------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
2007 2006
-------------------------------- ------------------------------
NON-INTEREST % OF NON-INTEREST % OF
INCOME TOTAL INCOME TOTAL
(In thousands, except percentages)
Service Charges on Deposits $ 512 40.93 $ 434 25.28%
Investment Securities gains 86 6.87 743 43.27
Other 653 52.20 540 31.45
------- ------ ------- ------
Total Non-Interest Income $ 1,251 100.00% $ 1,717 100.00%
======= ====== ======= ======
NON-INTEREST EXPENSE. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees and
other operating expenses associated with the day-to-day operations of the
Company. Total non-interest expense for the three and nine-month periods ended
September 30, 2007 was $3.56 million and $10.54 million, respectively, compared
to $3.40 million and $10.19 million for the three and nine month-periods ended
September 30, 2006, respectively. The increase in the 2007 three and nine-month
periods are primarily due to the expansion of our business. We have added space
and staff and have invested in new technologies to maintain and enhance customer
service levels, and to insure our compliance with various regulatory matters.
------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
2007 2006
------------------------------- -------------------------------
NON-INTEREST % OF NON-INTEREST % OF
EXPENSE TOTAL EXPENSE TOTAL
(In thousands, except percentages)
Salaries and Employee Benefits $ 2,211 62.04% $ 2,149 63.21%
Net Occupancy Expense 603 16.92 489 14.38
Equipment Expense 97 2.72 112 3.29
FDIC Assessment 23 0.65 22 0.65
Data Processing Expense 111 3.11 90 2.65
Other 519 14.56 538 15.82
------- ------ ------- ------
Total Non-Interest Expense $ 3,564 100.00% $ 3,400 100.00%
======= ====== ======= ======
25
------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
2007 2006
------------------------------- -------------------------------
NON-INTEREST % OF NON-INTEREST % OF
EXPENSE TOTAL EXPENSE TOTAL
(In thousands, except percentages)
Salaries and Employee Benefits $ 6,587 62.47% $ 6,326 62.08%
Net Occupancy Expense 1,519 14.41 1,455 14.28
Equipment Expense 297 2.82 316 3.10
FDIC Assessment 63 0.60 65 0.64
Data Processing Expense 306 2.90 271 2.66
Other 1,771 16.80 1,757 17.24
------- ------ ------- ------
Total Non-Interest Expense $10,543 100.00% $10,190 100.00%
======= ====== ======= ======
PROVISION FOR INCOME TAX. During the three and nine-month periods ended
September 30, 2007, the Company recorded income tax expense of $406,000 and
$1.81 million, respectively, compared to income tax expense of $689,000 and
$2.85 million, respectively, for the three and nine-month periods ended
September 30, 2006. The tax provisions for federal, state and local taxes
recorded for the first nine months of 2007 and 2006 represent effective tax
rates of 34.81% and 46.55%, respectively. The effective tax rate for the three
months ended September 30, 2007 and 2006 were 24.15% and 44.56%, respectively.
The decline in the effective tax rate in 2007 compared to 2006 is primarily due
the Bank's investment in certain securities which carry a larger tax benefit
because of their dividend payments.
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 September 30, 2007, the Company has purchased a total of 1,898,909
shares of its Common Stock. At September 30, 2007, there were 501,091 shares of
Common Stock which may yet be purchased under our stock repurchase plan. We did
not repurchase shares of the Company's Common Stock during the nine months ended
September 30, 2007.
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.
26
As an additional interest rate management strategy, the Bank borrows
funds from the Federal Home Loan Bank, approximately $48.41 million at September
30, 2007, at fixed rates for a period of one to five years.
The Company seeks to maximize its net interest margin within an
acceptable level of interest rate risk. Interest rate risk can be defined as the
amount of the forecasted net interest income that may be gained or lost due to
favorable or unfavorable movements in interest rates. Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets
differ significantly from the maturity or repricing characteristics of
liabilities.
27
In the banking industry, a traditional measure of interest rate
sensitivity is known as "gap" analysis, which measures the cumulative
differences between the amounts of assets and liabilities maturing or repricing
at various time intervals. The following table sets forth the Company's interest
rate repricing gaps for selected maturity periods:
BERKSHIRE BANCORP INC.
INTEREST RATE SENSITIVITY GAP AT SEPTEMBER 30, 2007
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
----------------------------------------------------------------------------------------
3 MONTHS 3 THROUGH 1 THROUGH OVER
OR LESS 12 MONTHS 3 YEARS 3 YEARS TOTAL
---------------- ---------------- ---------------- ---------------- ------------
Federal funds sold 19,200 -- -- -- 19,200
(Rate) 5.35%
5.35%
Interest bearing deposits in banks 10,035 -- -- -- 10,035
(Rate) 4.17% 4.17%
Loans (1)(2)
Adjustable rate loans 114,552 10,431 19,351 51,542 195,876
(Rate) 8.56% 6.68% 6.83% 7.16% 7.92%
Fixed rate loans 324 23,534 36,230 142,167 202,255
(Rate) 7.59% 7.63% 8.21% 6.30% 6.80%
--------- --------- --------- --------- ----------
Total loans 114,876 33,965 55,581 193,709 398,131
Investments (3)(4) 254,672 93,319 139,436 115,516 602,943
(Rate) 5.16% 4.53% 4.25% 5.16% 4.85%
--------- --------- --------- --------- ----------
Total rate-sensitive assets 398,783 127,284 195,017 309,225 1,030,309
--------- --------- --------- --------- ----------
Deposit accounts (5)
Savings and NOW 280,793 -- -- -- 280,793
(Rate) 3.71% 3.71%
Money market 13,350 -- -- -- 13,350
(Rate) 0.68% 0.68%
Time Deposits 181,338 294,298 1,192 -- 476,828
(Rate) 4.46% 5.04% 3.19% 4.81%
--------- --------- --------- --------- ----------
Total deposit accounts 475,481 294,298 1,192 -- 770,971
Repurchase Agreements 41,911 -- -- -- 41,911
(Rate) 4.86% 4.86%
Other borrowings 15,769 8,441 23,229 23,652 71,091
(Rate) 5.10% 3.34% 5.36% 7.77% 5.86%
--------- --------- --------- --------- ----------
Total rate-sensitive liabilities 533,161 302,739 24,421 23,652 883,973
--------- --------- --------- --------- ----------
Interest rate caps 10,000 (10,000)
Gap (repricing differences) (144,378) (165,455) 170,596 285,573 146,336
========= ========= ========= ========= ==========
Cumulative Gap (144,378) (309,833) (139,237) 146,336
========= ========= ========= =========
Cumulative Gap to Total Rate
Sensitive Assets (14.01)% (30.01)% (13.51)% 14.20%
========= ========= ========= =========
-----------
(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.
28
PROVISION FOR LOAN LOSSES. The allowance for loan losses is the estimated amount
considered necessary to cover credit losses inherent in the loan portfolio at
the balance sheet date. The allowance is established through the provision for
loan losses that is charged against income. In determining the allowance for
loan losses, management makes significant estimates and therefore has identified
the allowance as a critical accounting policy. The methodology for determining
the allowance for loan losses is considered a critical accounting policy by
management due to the high degree of judgment involved, the subjectivity of the
assumptions utilized, and the potential for changes in the economic environment
that could result in changes to the amount of the recorded allowance for loan
losses.
The allowance for loan losses has been determined in accordance with
accounting principles generally accepted in the United States of America, under
which we are required to maintain an allowance for probable losses at the
balance sheet date. We are responsible for the timely and periodic determination
of the amount of the allowance required. Management believes that the allowance
for loan losses is adequate to cover specifically identifiable losses, as well
as estimated losses inherent in our portfolio for which certain losses are
probable but not specifically identifiable.
Management performs a quarterly evaluation of the adequacy of the
allowance for loan losses. The analysis of the allowance for loan losses has two
components: specific and general allocations. Specific allocations are made for
loans determined to be impaired. Impairment is measured by determining the
present value of expected future cash flows or, for collateral-dependent loans,
the fair value of the collateral adjusted for market conditions and selling
expenses. The general allocation is determined by segregating the remaining
loans by type of loan, risk weighting (if applicable) and payment history.
Management also analyzes historical loss experience, delinquency trends, general
economic conditions, geographic concentrations, and industry and peer
comparisons. This analysis establishes factors that are applied to the loan
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.
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
29
such appraisals are carefully reviewed by management to determine that the
resulting values reasonably reflect amounts realizable on the related loans.
Based on the composition of our loan portfolio, management believes the primary
risks are increases in interest rates, a decline in the economy, generally, and
a decline in real estate market values in the New York metropolitan area. Any
one or combination of these events may adversely affect our loan portfolio
resulting in increased delinquencies, loan losses and future levels of loan loss
provisions. Management considers it important to maintain the ratio of our
allowance for loan losses to total loans at an adequate level given current
economic conditions, interest rates, and the composition of the portfolio.
Management believes the allowance for loan losses reflects the inherent credit
risk in our portfolio, the level of our non-performing loans and our charge-off
experience.
Although management believes that we have established and maintained
the allowance for loan losses at adequate levels, additions may be necessary if
future economic and other conditions differ substantially from the current
operating environment. Although management uses the best information available,
the level of the allowance for loan losses remains an estimate that is subject
to significant judgment and short-term change. In addition, the Federal Deposit
Insurance Corporation, New York State Banking Department, and other regulatory
bodies, as an integral part of their examination process, will periodically
review our allowance for loan losses. Such agencies may require us to recognize
adjustments to the allowance based on its judgments about information available
to them at the time of their examination.
For the three and nine months ended September 30, 2007, we did not
charge-off any loans, and we recovered loans of $3,000 and $10,000,
respectively. For the three and nine months ended September 30, 2006, we
charged-off loans of $41,000 and $42,000, respectively, and recovered loans of
$9,000 and $14,000, respectively. All recovered amounts in 2007 and 2006 were
returned to the provision for loan loss reserves.
The provision for loan losses totaled $75,000 and $225,000 for the
three and nine-month periods ended September 30, 2007, respectively, as compared
to $45,000 and $135,000 for the three and nine-month periods ended September 30,
2006, respectively. The increases in the provision for loan losses in the 2007
periods is predicated upon the growth in the loan portfolio.
30
The following table sets forth information with respect to activity in
the Company's allowance for loan losses during the periods indicated (in
thousands, except percentages):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ---------------------------
2007 2006 2007 2006
---- ---- ---- ----
Average loans outstanding $385,425 $330,117 $380,628 $317,612
======== ======== ======== ========
Allowance at beginning of period 3,928 3,360 3,771 3,266
Charge-offs:
Commercial and other loans -- 41 -- 42
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans charged-off -- 41 -- 42
-------- -------- -------- --------
Recoveries:
Commercial and other loans 3 9 10 14
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans recovered 3 9 10 14
-------- -------- -------- --------
Net recoveries (charge-offs) 3 (32) 10 (28)
-------- -------- -------- --------
Provision for loan losses
charged to operating expenses 75 45 225 135
-------- -------- -------- --------
Allowance at end of period 4,006 3,373 4,006 3,373
-------- -------- -------- --------
Ratio of net recoveries (charge-offs)
to average loans outstanding 0.00% (0.01)% 0.00% (0.01)%
======== ======== ======== ========
Allowance as a percent of total loans 1.01% 0.95% 1.01% 0.95%
======== ======== ======== ========
Total loans at end of period $398,131 $354,344 $398,131 $354,344
======== ======== ======== ========
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
September 30, 2007, we had total gross loans of $398.13 million, deferred loans
fees of $1.36 million and an allowance for loan losses of $4.01 million. From
time to time, the Bank may originate residential mortgage loans and then sell
them on the secondary market, normally recognizing fee income in connection with
the sale. During the three and nine-month periods ended September 30, 2007, the
Bank sold approximately $1.40 million, with no recognized gain or loss, and
$5.07 million, with a gain of $3,000, recorded in other income, respectively, on
such sales.
The Bank's policy is 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 September 30, 2007 and 2006, we did not have any
loans past due more than 90 days and still accruing interest.
31
CAPITAL ADEQUACY
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and Tier I capital (as defined) to average assets (as defined). As of
September 30, 2007, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain certain
Total risk-based, Tier I risk-based, and Tier I leverage ratios. There are no
conditions or events since the notification that management believes have
changed the Bank's category.
The following tables set forth the actual and required regulatory capital
amounts and ratios of the Company and the Bank as of September 30, 2007 and
December 31, 2006 (dollars in thousands):
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ -------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
SEPTEMBER 30, 2007
Total Capital (to Risk-Weighted Assets)
Company $134,487 19.6% $55,028 >8.0% -- N/A
-
Bank 102,437 15.3% 53,445 >8.0% 66,807 >10.0%
- -
Tier I Capital (to Risk-Weighted Assets)
Company 130,481 19.0% 27,514 >4.0% -- N/A
-
Bank 98,431 14.7% 26,723 >4.0% 40,084 >6.0%
- -
Tier I Capital (to Average Assets)
Company 130,481 12.9% 40,343 >4.0% -- N/A
-
Bank 98,431 10.0% 39,478 >4.0% 49,347 >5.0%
- -
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
DECEMBER 31, 2006
Total Capital (to Risk-Weighted Assets)
Company $128,452 23.9% $43,031 >8.0% -- N/A
-
Bank 99,170 19.3% 41,120 >8.0% 51,400 >10.0%
- -
Tier I Capital (to Risk-Weighted Assets)
Company 124,681 23.2% 21,516 >4.0% -- N/A
-
Bank 95,400 18.6% 20,560 >4.0% 30,840 >6.0%
- -
Tier I Capital (to Average Assets)
Company 124,681 13.4% 37,322 >4.0% -- N/A
-
Bank 95,400 10.9% 35,022 >4.0% 43,778 >5.0%
- -
32
LIQUIDITY
The management of the Company's liquidity focuses on ensuring that
sufficient funds are available to meet loan funding commitments, withdrawals
from deposit accounts, the repayment of borrowed funds, and ensuring that the
Bank and the Company comply with regulatory liquidity requirements. Liquidity
needs of the Bank have historically been met by deposits, investments in federal
funds sold, principal and interest payments on loans, and maturities of
investment securities.
For the Company, liquidity means having cash available to fund
operating expenses, to pay shareholder dividends, when and if declared by the
Company's Board of Directors and to pay the interest on the Debentures issued in
May 2004 and April 2005. The ability of the Company to meet all of its
obligations, including the payment of dividends, is not dependent upon the
receipt of dividends from the Bank. At September 30, 2007, the Company,
excluding the Bank, had cash and cash equivalents of approximately $15.45
million and investment securities available for sale of $10.02 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 $55.39 million at September 30, 2007,
include commitments to extend credit and stand-by letters of credit.
At September 30, 2007, the Company had outstanding commitments of
approximately $528.49 million; including $476.83 million of time deposits,
$48.41 million of Federal Home Loan Bank debt and $3.25 million of operating
leases. These commitments include $499.41 million that mature or renew within
one year, $26.86 million that mature or renew after one year and within three
years, $1.61 million that mature or renew after three years and within five
years and $617,000 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.
33
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF THE COMPANY'S DISCLOSURE CONTROLS AND INTERNAL CONTROL. As of the
end of the period covered by this Quarterly Report on Form 10-Q, the Company
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934 ("Disclosure Controls"). This evaluation ("Controls Evaluation") was
done under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") who is also the Chief
Financial Officer ("CFO").
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The Company's management,
including the CEO/CFO, does not expect that its Disclosure Controls and/or its
"internal control over financial reporting" as defined in Rule 13(a)-15(f) of
the Securities Exchange Act of 1934 ("Internal Control") will prevent all error
and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
CONCLUSIONS. Based upon the Controls Evaluation, the CEO/CFO has concluded that
the Disclosure Controls are effective in reaching a reasonable level of
assurance that information required to be disclosed by the Company is recorded,
processed, summarized and reported within the time period specified in the SEC's
rules and forms and that any material information relating to the Company is
accumulated and communicated with management, including its principal
executive/financial officer to allow timely decisions regarding required
disclosure. In accordance with SEC requirements, the CEO/CFO notes that during
the fiscal quarter ended September 30, 2007, no changes in Internal Control have
occurred that have materially affected or are reasonably likely to materially
affect Internal Control.
34
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
NUMBER DESCRIPTION
------ -----------
31 Certification of Principal Executive and Financial Officer
pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002.
32 Certification of Principal Executive and Financial Officer
pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKSHIRE BANCORP INC.
----------------------
(REGISTRANT)
Date: NOVEMBER 12, 2007 By: /S/ STEVEN ROSENBERG
----------------- ------------------------------
STEVEN ROSENBERG
PRESIDENT AND CHIEF
FINANCIAL OFFICER
36
EXHIBIT INDEX
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.
37