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, 2004
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 0-13649
BERKSHIRE BANCORP INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2563513
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Broadway, New York, New York 10038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 791-5362
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
As of May 10, 2004, there were 2,212,173 outstanding shares of the issuers
Common Stock, $.10 par value.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q that are not based on
historical fact may be "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Words such as "believe",
"may", "will", "expect", "estimate", "anticipate", "continue" or similar terms
identify forward-looking statements. A wide variety of factors could cause the
Company's actual results and experiences to differ materially from the results
expressed or implied by the Company's forward-looking statements. Some of the
risks and uncertainties that may affect operations, performance, results of the
Company's business, the interest rate sensitivity of its assets and liabilities,
and the adequacy of its loan loss allowance, include, but are not limited to:
(i) deterioration in local, regional, national or global economic conditions
which could result, among other things, in an increase in loan delinquencies, a
decrease in property values, or a change in the housing turnover rate; (ii)
changes in market interest rates or changes in the speed at which market
interest rates change; (iii) changes in laws and regulations affecting the
financial services industry; (iv) changes in competition; (v) changes in
consumer preferences, (vi) changes in banking technology; (vii) ability to
maintain key members of management, (viii) possible disruptions in the Company's
operations at its banking facilities, and other factors referred to in the
sections of this Quarterly Report entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Certain information customarily disclosed by financial institutions, such
as estimates of interest rate sensitivity and the adequacy of the loan loss
allowance, are inherently forward-looking statements because, by their nature,
they represent attempts to estimate what will occur in the future.
The Company cautions readers not to place undue reliance upon any
forward-looking statement contained in this Quarterly Report. Forward-looking
statements speak only as of the date they were made and the Company assumes no
obligation to update or revise any such statements upon any change in applicable
circumstances.
2
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004 (unaudited)
and December 31, 2003 4
Consolidated Statements of Income For The Three Months Ended
March 31, 2004 and 2003 (unaudited) 5
Consolidated Statement of Stockholders' Equity For The Three
Months Ended March 31, 2004 (unaudited) 6
Consolidated Statements of Cash Flows For The Three Months
Ended March 31, 2004 and 2003 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20
Item 4. Controls and Procedures 26
PART II OTHER INFORMATION
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
Signature 29
Index of Exhibits
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
March 31, December 31,
2004 2003
--------- ------------
ASSETS
Cash and due from banks $ 5,499 $ 7,478
Interest bearing deposits 359 1,832
Total cash and cash equivalents 5,858 9,310
Investment Securities:
Available-for-sale 613,564 569,137
Held-to-maturity 690 711
-------- --------
Total investment securities 614,254 569,848
Loans, net of unearned income 295,336 294,756
Less: allowance for loan losses (2,661) (2,593)
-------- --------
Net loans 292,675 292,163
Accrued interest receivable 5,780 5,298
Premises and equipment, net 8,553 8,665
Other assets 991 1,836
Goodwill, net 18,549 18,549
-------- --------
Total assets $946,660 $905,669
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 38,371 $ 38,422
Interest bearing 584,148 565,833
-------- --------
Total deposits 622,519 604,255
Securities sold under agreements to repurchase 129,476 114,391
Long term borrowings 79,692 77,745
Accrued interest payable 2,154 2,208
Other liabilities 4,737 3,580
-------- --------
Total liabilities 838,578 802,179
-------- --------
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 -- 2,566,095 shares
Outstanding --
March 31, 2004, 2,207,800 shares
December 31, 2003, 2,207,080 shares 256 256
Additional paid-in capital 89,869 89,866
Retained earnings 24,911 22,960
Accumulated other comprehensive
income, net 3,420 775
Common stock in treasury - at cost:
March 31, 2004, 354,670 shares
December 31, 2003, 359,015 shares (10,374) (10,367)
-------- --------
Total stockholders' equity 108,082 103,490
-------- --------
$946,660 $905,669
======== ========
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,
------------------
2004 2003
------ ------
INTEREST INCOME
Loans $4,849 $4,757
Investment securities 4,786 3,610
Federal funds sold and
interest bearing deposits 3 11
------ ------
Total interest income 9,638 8,378
------ ------
INTEREST EXPENSE
Deposits 2,455 2,582
Short-term borrowings 497 149
Long-term borrowings 768 657
------ ------
Total interest expense 3,720 3,388
------ ------
Net interest income 5,918 4,990
PROVISION FOR LOAN LOSSES 45 105
------ ------
Net interest income after provision
for loan losses 5,873 4,885
------ ------
NON-INTEREST INCOME
Service charges on deposit accounts 127 96
Investment securities gains 93 628
Other income 198 268
------ ------
Total non-interest income 418 992
------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,667 1,331
Net occupancy expense 274 405
Equipment expense 86 109
FDIC assessment 22 19
Data processing expense 32 59
Other 881 789
------ ------
Total non-interest expense 2,962 2,712
------ ------
Income before provision for taxes 3,329 3,165
Provision for income taxes 1,378 1,423
------ ------
Net income $1,951 $1,742
====== ======
Net income per share:
Basic $ .88 $ .78
====== ======
Diluted $ .85 $ .78
====== ======
The accompanying notes are an integral part of these statements.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Three Months Ended March 31, 2004
(In Thousands)
Accumulated
other
Stock Additional comprehensive Total
Common Par paid-in income Retained Treasury Comprehensive stockholders'
Shares value capital net earnings stock income equity
------ ----- ---------- ------------- -------- -------- ------------- -------------
Balance at December 31, 2003 2,566 $256 $89,866 $ 775 $22,960 $(10,367) $103,490
Net income 1,951 1,951 1,951
Exercise of stock options 3 62 65
Acquisition of treasury shares (69) (69)
Other comprehensive income net
of reclassification adjustment
and taxes 2,645 2,645 2,645
------
Comprehensive income $4,596
======
----- ---- ------- ------ ------- -------- --------
Balance at March 31, 2004
(Unaudited) 2,566 $256 $89,869 $3,420 $24,911 $(10,374) $108,082
===== ==== ======= ====== ======= ======== ========
The accompanying notes are an integral part of this statement.
6
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Three Months Ended
March 31,
--------------------------
2004 2003
--------- ---------
Cash flows from operating activities:
Net income $ 1,951 $ 1,742
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized gain on investment securities (93) (628)
Net amortization of securities 813 276
Depreciation and amortization 145 163
Provision for loan losses 45 105
(Increase) decrease in accrued interest receivable (482) 159
Decrease (increase) in other assets 845 (889)
(Decrease) increase in accrued interest payable
and other liabilities (599) 231
--------- ---------
Net cash provided by operating activities 2,625 1,159
--------- ---------
Cash flows from investing activities:
Investment securities available for sale
Purchases (407,636) (518,852)
Sales, maturities and calls 366,836 490,973
Investment securities held to maturity
Maturities 21 31
Net (increase) decrease in loans (557) 4,582
Acquisition of premises and equipment (33) (23)
--------- ---------
Net cash (used in) investing activities (41,369) (23,289)
--------- ---------
7
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Three Months Ended
March 31,
--------------------------
2004 2003
------- --------
Cash flows from financing activities:
Net (decrease) in non interest bearing deposits (51) (392)
Net increase in interest bearing deposits 18,315 42,304
Increase (decrease) in securities sold under agreements 15,085 (10,520)
to repurchase
Proceeds from long term debt 1,947 5,000
Repayment of long term debt -- (2,520)
Proceeds from exercise of common stock options 65 --
Acquisition of treasury stock (69) (978)
------- --------
Net cash provided by financing activities 35,292 32,894
------- --------
Net (decrease) increase in cash (3,452) 10,764
Cash - beginning of period 9,310 6,310
------- --------
Cash - end of period $ 5,858 $ 17,074
======= ========
Supplemental disclosures of cash flow information:
Cash used to pay interest $ 3,774 $ 3,491
Cash used to pay taxes, net of refunds $ 945 $ 399
The accompanying notes are an integral part of these statements.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2004 and 2003
NOTE 1. General
Berkshire Bancorp Inc. ("Berkshire" or the "Company" or "we" and similar
pronouns), a Delaware corporation, is a bank holding company registered under
the Bank Holding Company Act of 1956. 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 and Greater American
Finance Group, Inc.
During interim periods, the Company follows the accounting policies set
forth in its Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Readers are encouraged to refer to the Company's Form 10-K for the
fiscal year ended December 31, 2003 when reviewing this Form 10-Q. Quarterly
results reported herein are not necessarily indicative of results to be expected
for other quarters.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary to present fairly the Company's consolidated
financial position as of March 31, 2004 and December 31, 2003 and the
consolidated results of its operations for the three month periods ended March
31, 2004 and 2003, and its consolidated stockholders' equity for the three month
period ended March 31, 2004, and its consolidated cash flows for the three month
periods ended March 31, 2004 and 2003. Operating results for the three months
ended March 31, 2004 are not necessarily indicative of the results that may be
expected for a full fiscal year.
NOTE 2. 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, 2004 March 31, 2003
------------------------------------ ------------------------------------
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 $1,951 2,208 $ .88 $1,742 2,221 $.78
Effect of dilutive securities
Options -- 73 (.03) -- 21 --
------ ----- ----- ------ ----- ----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $1,951 2,281 $ .85 $1,742 2,242 $.78
====== ===== ===== ====== ===== ====
9
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 2. - (continued)
Options to purchase 40,375 shares of common stock for $38.00 per share were
outstanding during the three month periods ended March 31, 2003. These options
were not included in the computation of diluted earnings per share because the
option exercise price was greater than the average market price for the
Company's common stock during this period.
NOTE 3. Investment Securities
The following tables summarize held to maturity and available-for-sale
investment securities as of March 31, 2004 and December 31, 2003:
March 31, 2004
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- -----
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $690 $4 $(1) $693
---- -- --- ----
Totals $690 $4 $(1) $693
==== == === ====
December 31, 2003
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- -----
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $711 $4 $-- $715
---- -- --- ----
Totals $711 $4 $-- $715
==== == === ====
10
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 3. - (continued)
March 31, 2004
----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- --------
(In thousands)
Available-For-Sale
Investment Securities
U.S. Treasury and Notes $ 14,975 $ 31 $ -- $ 15,006
U.S. Government Agencies 479,398 2,212 (675) 480,935
Mortgage-backed securities 101,775 3,707 (260) 105,222
Corporate notes 1,571 409 (123) 1,857
Municipal Securities 1,609 163 -- 1,772
Marketable equity
securities and other 8,609 246 (83) 8,772
-------- ------ ------- --------
Totals $607,937 $6,768 $(1,141) $613,564
======== ====== ======= ========
December 31, 2003
----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- --------
(In thousands)
Available-For-Sale
Investment securities
U.S. Treasury and Notes $ 39,941 $ -- $ (94) $ 39,847
U.S. Government Agencies 419,175 637 (3,059) 416,753
Mortgage-backed securities 93,875 3,838 (265) 97,448
Corporate Notes 1,570 214 (122) 1,662
Municipal securities 991 70 -- 1,061
Marketable equity
securities and other 12,305 177 (116) 12,366
-------- ------ ------- --------
Totals $567,857 $4,936 $(3,656) $569,137
======== ====== ======= ========
11
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, 2004 December 31, 2003
---------------- -----------------
% of % of
Amount Total Amount Total
-------- ----- -------- -----
(Dollars in thousands)
Commercial and professional loans $ 18,669 6.3% $ 22,228 7.5%
Secured by real estate
1-4 family 166,198 56.1 169,589 57.4
Multi family 6,277 2.2 6,608 2.2
Non-residential (commercial) 99,646 33.6 94,956 32.1
Consumer 5,402 1.8 2,239 0.8
-------- ----- -------- -----
Total loans 296,192 100.0% 295,620 100.0%
===== =====
Deferred loan fees (856) (864)
Allowance for loan losses (2,661) (2,593)
-------- --------
Loans, net $292,675 $292,163
======== ========
NOTE 5. Deposits
The following table summarizes the composition of the average balances of
major deposit categories:
March 31, 2004 December 31, 2003
------------------ ------------------
Average Average Average Average
Amount Yield Amount Yield
-------- ------- -------- -------
(Dollars in thousands)
Demand deposits $ 37,199 -- $ 32,592 --
NOW and money market 49,523 0.75% 58,723 1.02%
Savings deposits 209,672 1.54 143,094 1.95
Time deposits 320,081 1.95 333,112 2.26
-------- ---- -------- ----
Total deposits $616,475 1.60% $567,521 1.78%
======== ==== ======== ====
12
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 6. Comprehensive Income
The following table presents the components of comprehensive income, based
on the provisions of SFAS No. 130.:
For The Three Months Ended
-------------------------------------------------------------------------
March 31, 2004 March 31, 2003
----------------------------------- -----------------------------------
Tax Tax
Before tax (expense) Net of tax Before tax (expense) Net of tax
amount benefit Amount amount benefit amount
---------- --------- ---------- ---------- --------- ----------
(In thousands)
Unrealized (losses)
gains on investment
securities:
Unrealized holding
gains (losses) arising
during period $4,440 $(1,739) $2,589 $(291) $ 117 $(174)
Less reclassification
adjustment for (losses)
gains realized in
net income 93 (37) 56 628 (251) 377
------ ------- ------ ----- ----- -----
Other comprehensive
(loss) income, net $4,347 $(1,702) $2,645 $(919) $ 368 $(551)
====== ======= ====== ===== ===== =====
NOTE 7. Accounting For Stock Based Compensation
SFAS No. 148 "Accounting for Stock Based Compensation-Transition and
Disclosure", which amends the disclosure and certain provisions of SFAS No. 123,
was issued in December 2002. SFAS No. 148 requires all entities with stock based
employee compensation arrangements to provide additional disclosures in their
summary of significant accounting policies note. The Company has one stock-based
employee compensation plan. The Company accounts for that plan under the
recognition and measurement principles of APB No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Stock-based employee
compensation costs are not reflected in net income, as all options granted under
the plan had an exercise price equal to the market value of the underlying
common stock on the date of the grant. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
For The
Three Months Ended
March 31,
------------------
2004 2003
------ ------
(In thousands,
except per
share amounts)
Net income As Reported: $1,951 $1,742
Less: Stock based compensation
costs determined under fair
value methods for all awards
-- (32)
------ ------
Pro Forma: $1,951 $1,710
====== ======
Basic earnings per share As Reported: $ .88 $ .78
Pro Forma: .88 .77
Diluted earnings per share As Reported: $ .85 $ .78
Pro Forma: .85 .76
The Company did not grant options during the three months ended March 31,
2004 and 2003.
13
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 7. - (continued)
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, Share-Based Payment an Amendment of FASB Statements No. 123
and APB No. 95, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including employee stock options, would be
treated the same as other forms of compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date. Current accounting guidance requires that the
expense relating to so-called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company
is currently evaluating this proposed statement and its effects on its results
of operations.
Note 8. 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). See Note 9, Employers' Disclosure About
Pensions and Other Postretirement Benefits, below.
For The
Three Months Ended
March 31,
-------------------
2004 2003
-------- --------
Service cost $ 56,000 $ 48,791
Interest cost 28,750 26,803
Expected return on plan assets (37,500) (30,871)
Amortization and Deferral:
Transition amount -- --
Prior service cost 4,500 4,593
(Gain)/loss 3,000 6,210
Net periodic pension cost 54,750 55,526
During the fiscal year ending December 31, 2004, we expect to contribute
approximately $110,000 to the Plan. We are, however, evaluating the impact of
the Pension Funding Equity Act enacted in April 2004 on our projected funding.
We did not make any contributions, required or otherwise, to the Plan in the
three months ended March 31, 2004.
14
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 9. New Accounting Pronouncements
Loan Commitments Accounted for as Derivative Instruments
The Securities and Exchange Commission staff recently released Staff
Accounting Bulletin (SAB) 105, "Loan Commitments Accounted for as Derivative
Instruments." SAB 105 provides guidance about the measurement of loan
commitments recognized at fair value under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. SAB 105 also requires
companies to disclose their accounting policy for those loan commitments
including methods and assumptions used to estimate fair value and associated
hedging strategies. SAB 105 is effective for all loan commitments accounted for
as derivatives that are entered into after March 31, 2004. The adoption of SAB
105 is not expected to have a material effect on our consolidated financial
statements.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of Berkshire Bancorp Inc., a Delaware corporation. References herein to
"Berkshire", the "Company" or "we" and similar pronouns, shall be deemed to
refer to the Company and its consolidated subsidiaries unless the context
otherwise requires. References to per share amounts refer to diluted shares.
References to Notes herein are references to the "Notes to Consolidated
Financial Statements" of the Company located in Item 1 herein.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and the
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
The Company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than any of its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires material estimates, including, among others, expected default
probabilities, loss given default, the amounts and timing of expected future
cash flows on impaired loans, mortgages, and general amounts for historical loss
experience. The process also considers economic conditions, uncertainties in
estimating losses and inherent risks in the loan portfolio. All of these factors
may be susceptible to significant change. To the extent actual outcomes differ
from management estimates, additional provisions for loan losses may be required
that would adversely impact earnings in future periods.
With the adoption of SFAS No. 142 on January 1, 2002, the Company
discontinued the amortization of goodwill resulting from acquisitions. Goodwill
is now subject to impairment testing at least annually to determine whether
write-downs of the recorded balances are necessary. The Company tests for
impairment based on the goodwill maintained at each defined reporting unit. A
15
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, 2003, the Company completed its transitional testing,
which determined that no impairment write-offs were necessary.
The Company recognizes deferred tax assets and liabilities for the future
tax effects of temporary differences, net operating loss carryforwards and tax
credits. Deferred tax assets are subject to management's judgment based upon
available evidence that future realization is more likely than not. If
management determines that the Company may be unable to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the recorded value of the net deferred tax asset to the
expected realizable amount.
16
The following table presents the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed in both
dollars and rates.
For The Three Months Ended March 31,
---------------------------------------------------------------------
2004 2003
--------------------------------- ---------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
-------- --------- ---------- -------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $293,441 $4,849 6.61% $274,929 $4,757 6.92%
Investment securities 589,961 4,786 3.24 389,726 3,610 3.71
Other (2)(5) 2,081 3 0.58 6,100 11 0.72
-------- ------ ---- -------- ------ ----
Total interest-earning assets 885,483 9,638 4.35 670,755 8,378 5.00
---- ----
Noninterest-earning assets 37,710 36,464
-------- --------
Total Assets $923,193 $707,219
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 259,195 898 1.39% 144,683 472 1.30%
Time deposits 320,081 1,557 1.95 317,443 2,110 2.66
Other borrowings 194,709 1,265 2.60 106,232 806 3.03
-------- ------ ---- -------- ------ ----
Total interest-bearing
liabilities 773,985 3,720 1.92 568,357 3,388 2.38
------ ---- ------ ----
Demand deposits 37,199 30,911
Noninterest-bearing liabilities 7,348 8,366
Stockholders' equity (5) 104,661 99,585
-------- --------
Total liabilities and
stockholders' equity $923,193 $707,219
======== ========
Net interest income 5,918 4,990
====== ======
Interest-rate spread (3) 2.43% 2.62%
==== ====
Net interest margin (4) 2.67% 2.98%
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.14 1.18
======== ========
----------
(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, 2004 Compared to the
Three Months Ended March 31, 2003.
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"). The
Bank is headquartered in Manhattan and has nine branch locations, five branches
in New York City and four branches in Orange and Sullivan counties. We opened
two new branches in Brooklyn, New York in April and June of 2003.
Net Income. Net income for the three-month period ended March 31, 2004 was $1.95
million, or $.85 per share, as compared to $1.74 million, or $.78 per share, for
the three-month period ended March 31, 2003. Our net income is largely dependent
on interest rate levels, demand for our loan and deposit products and the
strategies we employ to manage the interest rate risk and other risks inherent
in the banking business. From June 2003 to date, interest rates, as measured by
the prime rate, have remained at 4.0%, declining 25 basis points since March 31,
2003.
Net Interest Income. The Company's primary source of revenue is net interest
income, or the difference between interest income on earning assets, such as
loans and investment securities, and interest expense on interest-bearing
liabilities, typically deposits and borrowings.
For the quarter ended March 31, 2004, net interest income increased by
$928,000, or 18.60%, to $5.92 million from $4.99 million for the quarter ended
March 31, 2003. The quarter over quarter increase in net interest income was the
result of the 32.01% growth in average interest-earning assets to $885.48
million in 2004 from $670.76 million in 2003 and the 20.34% increase in average
non interest-bearing demand deposits to $37.20 million from $30.91 million.
These two factors were partially offset by the 36.18% increase in the average
amount of interest-bearing liabilities to $773.99 million in 2004 from $568.36
million in 2003 and by difference between the yield on assets compared to the
cost of liabilities.
For the quarter ended March 31, 2004, the average yield on interest-earning
assets declined by 65 basis points to 4.35% from 5.00% for the quarter ended
March 31, 2003, whereas the average rates paid on interest-bearing liabilities
declined by 46 basis points to 1.92% in 2004 from 2.38% in 2003. The
interest-rate spread, the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities,
which has a direct bearing on net interest income, eased by 19 basis points to
2.43% from 2.62%.
With interest rates stabilized at historic lows, though a rate increase
appears to be on the horizon, we expect to see minimal pressure on the Company's
interest-rate spread and net interest income during the next several quarters.
Investment securities in our portfolio that have been sold, matured or called by
the issuer have been replaced with securities carrying somewhat lower yields and
by design, shorter maturities to hedge against a rising interest rate
environment. Rates paid on deposit accounts, particularly time deposits, are
more likely to trend up rather than down for the remainder of the year.
Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, declined by 31 basis points to
2.67% in the first quarter of fiscal 2004 from 2.98% in the first quarter of
fiscal 2003. 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 borrowed funds, along with other available funds, in a prudent mix of loans
and investment securities which provided an average yield of 6.61% and 3.24%,
respectively, during the first three months of fiscal 2004 compared to an
average yield of 6.92% and 3.71%, respectively during the comparable period in
2003.
18
The average amounts of loans and investment securities increased by $18.51
million and $200.24 million, respectively, to $293.44 million and $589.96
million, respectively, in the quarter ended March 31, 2004, from $274.93 million
and $389.73 million, respectively, in the quarter ended March 31, 2003. Total
average interest-earning assets increased to $885.48 million in the 2004
quarter, yielding 4.35% on average, from $670.76 million in the 2003 quarter,
yielding 5.00% on average, a decline of 65 basis points.
The average amounts of interest bearing deposits and time deposits
increased by $114.51 million and $2.64 million, respectively, to $259.20 million
and $320.08 million, respectively, during the quarter ended March 31, 2004 from
$144.68 million and $317.44 million, respectively, during the quarter ended
March 31, 2003. Borrowed funds increased by $88.48 million to $194.71 million in
the 2004 quarter from $106.23 million in the 2003 quarter. Total average
interest-bearing liabilities increased by $205.63 million to $773.99 million in
the 2004 quarter from $568.36 million in the 2003 quarter. The average rates
paid on such amounts decreased to 1.92% in 2004 from 2.38% in 2003, a decline of
46 basis points.
Interest Income. Total interest income for the quarter ended March 31, 2004
increased by $1.26 million, or 15.04%, to $9.64 million from $8.38 million for
the quarter ended March 31, 2003. The increase was the result of a 32.01%
increase in the average amount of total interest-earning assets to $885.48
million in the 2004 quarter from $670.76 million in 2003 quarter, partially
offset by the 13.0% decrease in the average yield earned of such amounts. Loans
and investment securities contributed $4.85 million and $4.79 million,
respectively, to interest income during the first three months of fiscal year
2004, compared to $4.76 million and $3.61 million, respectively, for the
comparable period in fiscal year 2003.
Interest Expense. Total interest expense for the quarter ended March 31, 2004
increased by $332,000 to $3.72 million from $3.39 million for the quarter ended
March 31, 2003. The increase in interest expense was due primarily to higher
average balances of interest bearing deposits, time deposits and other
borrowings during the 2004 fiscal quarter, partially offset by the 19.33%
decrease in the average rates paid on total interest-bearing balances during the
2004 fiscal quarter from the 2003 fiscal quarter. If interest rates increase
over the next several months, we expect competitive pressure in our markets will
push up the rates paid on interest bearing deposits and time deposits, resulting
in an increase in interest expense.
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, 2004, total non-interest income decreased by $574,000, to
$418,000 from $992,000 for the three months ended March 31, 2003. The decrease
is largely due to the $535,000 decrease in gains on sales of investment
securities.
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, 2004
was $2.96 million compared to $2.71 million for the three months ended March 31,
2003. The $250,000 increase was primarily due to costs associated with the
expansion of our business.
Provision for Income Tax. We recorded income tax expense of $1.38 million and
$1.42 million for the three-month periods ended March 31, 2004 and 2003,
respectively. The tax provisions for federal, state and local taxes represent
effective tax rates of 41.39% and 44.96%, respectively.
19
Common Stock Repurchases
On May 15, 2003, The Company's Board of Directors authorized the purchase
of up to an additional 150,000 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 650,000 shares of Common Stock to 800,000 shares of Common Stock. Since
1990 through December 31, 2003, the Company has purchased a total of 614,882
shares of its Common Stock. At March 31, 2004, there were 183,697 shares of
Common Stock which may yet be purchased under our stock repurchase plan. The
following table sets forth information with respect to such purchases during the
periods indicated.
Fiscal Year 2004
Number of Average Price
Shares Paid Per
Purchased Share
--------- -------------
January 1,421 $49.00
February -- --
March -- --
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.
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.
20
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, 2004
(in thousands, except for percentages)
----------------------------------------------------
3 Months 3 Through 1 Through Over
or Less 12 Months 3 Years 3 Years Total
-------- --------- --------- ------- -------
Interest bearing deposits in banks 359 -- -- -- 359.00
(Rate) 0.28% 0.28%
Loans (1)(2)
Adjustable rate loans 46,484 18,347 10,038 15,575 90,444
(Rate) 5.60% 4.34% 6.65% 6.94% 5.69%
Fixed rate loans 1,419 8,447 10,601 185,281 205,748
(Rate) 7.19% 7.90% 6.71% 6.42% 6.50%
-------- -------- -------- ------- -------
Total loans 47,903 26,794 20,639 200,856 296,192
Investments (3)(4) 205,610 88,487 78,189 241,968 614,254
(Rate) 3.71% 4.88% 3.10% 4.13% 3.97%
-------- -------- -------- ------- -------
Total rate-sensitive assets 253,872 115,281 98,828 442,824 910,805
-------- -------- -------- ------- -------
Deposit accounts (5)
Savings and NOW 228,906 -- -- -- 228,906
(Rate) 1.48% 1.45%
Money market 27,290 -- -- -- 27,290
(Rate) 0.82% 0.84%
Time Deposits 117,586 183,699 24,676 1,991 327,952
(Rate) 1.79% 1.93% 2.45% 1.98% 1.97%
-------- -------- -------- ------- -------
Total deposit accounts 373,782 183,699 24,676 1,991 584,148
Repurchase Agreements 57,515 33,961 35,000 3,000 129,476
(Rate) 1.09% 1.34% 2.77% 3.52% 1.67%
Other borrowings 23,866 55,826 79,692
(Rate) % 3.59% 3.86% 3.84%
-------- -------- -------- ------- -------
Total rate-sensitive liabilities 431,297 217,660 83,542 60,817 793,316
-------- -------- -------- ------- -------
Interest rate caps 30,000 (10,000) (20,000)
Gap (repricing differences) (207,425) (92,379) 15,286 362,007 77,489
======== ======== ======== ======= =======
Cumulative Gap (207,425) (299,804) (284,518) 77,489
======== ======== ======== =======
Cumulative Gap to Total Rate
Sensitive Assets (22.77)% (32.92)% (31.24)% 8.51%
======== ======== ======== =======
----------
(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.
21
Provision for Loan Losses. The Company maintains an allowance for loan losses at
a level deemed sufficient to absorb losses, which are inherent in the loan
portfolio at each balance sheet date. Management reviews the adequacy of the
allowance on at least a quarterly basis to ensure that the provision for loan
losses has been charged against earnings in an amount necessary to maintain the
allowance at a level that is appropriate based on management's assessment of
probable estimated losses. The Company's methodology for assessing the
appropriateness of the allowance for loan losses consists of several key
elements. These elements include a specific allowance for loan watch list
classified loans, an allowance based on historical trends, an additional
allowance for special circumstances, and an unallocated portion. The Company
consistently applies the following comprehensive methodology.
The allowance for loan watch list classified loans addresses those loans
maintained on the Company's loan watch list, which are assigned a rating of
substandard, doubtful, or loss. Substandard loans are those with a well-defined
weakness or a weakness, which jeopardizes the repayment of the debt. A loan may
be classified as substandard as a result of impairment of the borrower's
financial condition and repayment capacity. Loans for which repayment plans have
not been met or collateral equity margins do not protect the Company may also be
classified as substandard. Doubtful loans have the characteristics of
substandard loans with the added characteristic that collection or liquidation
in full, on the basis of presently existing facts and conditions, is highly
improbable. Although the possibility of loss is extremely high for doubtful
loans, the classification of loss is deferred until pending factors, which might
improve the loan, have been determined. Loans rated as doubtful in whole or in
part are placed in nonaccrual status. Loans, which are classified as loss, are
considered uncollectible and are charged to the allowance for loan losses. There
were no loans classified as loss as of March 31, 2004.
For the three months ended March 31, 2004, we did not charge-off any loans
and we recovered loans totaling $23,000, which amount was returned to the
provision for loan loss reserves. For the three months ended March 31, 2003, we
charged-off $1,000 of loans and recovered $2,000.
Loans on the loan watch list may also be impaired loans, which are defined
as nonaccrual loans or troubled debt restructurings, which are not in compliance
with their restructured terms. Each of the classified loans on the loan watch
list is individually analyzed to determine the level of the potential loss in
the loan under the current circumstances. The specific reserve established for
these criticized and impaired loans is based on careful analysis of the loan's
performance, the related collateral value, cash flow considerations and the
financial capability of any guarantor. The allowance for loan watch list
classified loans is equal to the total amount of potential unconfirmed losses
for the individual classified loans on the watch list. Loan watch list loans are
managed and monitored by assigned Senior Management.
The allowance based on historical trends uses charge-off experience of the
Company to estimate potential unconfirmed losses in the balances of the loan and
lease portfolios. The historical loss experience percentage is based on the
charge-off history. Historical loss experience percentages are applied to all
non-classified loans to obtain the portion of the allowance for loan losses
which is based on historical trends. Before applying the historical loss
experience percentages, loan balances are reduced by the portion of the loan
balances, which are subject to guarantees, by a government agency. Loan balances
are also adjusted for unearned discount on installment loans.
The Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions, which may cause a
potential loan loss but are not specifically identifiable. It is prudent to
maintain an unallocated portion of the allowance because no matter how detailed
an analysis of potential loan losses is performed these estimates by definition
lack precision. Management must make estimates using assumptions and
information, which is often subjective and changing rapidly.
22
Since all identified losses are immediately charged off, no portion of the
allowance for loan losses is restricted to any individual loan or groups of
loans, and the entire allowance is available to absorb any and all loan losses.
A loan is placed in a nonaccrual status at the time when ultimate
collectibility of principal or interest, wholly or partially, is in doubt. Past
due loans are those loans which were contractually past due 90 days or more as
to interest or principal payments but are well secured and in the process of
collection. Renegotiated loans are those loans which terms have been
renegotiated to provide a reduction or deferral of principal or interest as a
result of the deteriorating financial position of the borrower.
At March 31, 2004 and 2003, we had a total of $328,000 and $109,000,
respectively, of non-accrual loans, and no loans past due more than 90 days and
still accruing interest at either date. Based upon management's evaluations of
the overall analysis of the Bank's allowance for loan losses and the year over
year increase in total loans to $295.34 million from $272.30 million, the
provision for the three months ended March 31, 2004 was increased to $2.66
million from $2.42 million in the year ago period.
Management believes that the allowance for loan losses and nonperforming
loans remains safely within acceptable levels.
The following table sets forth information with respect to activity in the
Company's allowance for loan losses during the periods indicated (in thousands,
except percentages):
Three Months Ended
March 31,
-------------------
2004 2003
-------- --------
Average loans outstanding $293,441 $274,929
======== ========
Allowance at beginning of period 2,593 2,315
Charge-offs:
Commercial and other loans -- 1
-------- --------
Total loans charged-off -- 1
-------- --------
Recoveries:
Commercial and other loans 23 2
-------- --------
Total loans recovered 23 2
-------- --------
Net (charge-offs) recoveries 23 1
-------- --------
Provision for loan losses
charged to operating expenses 45 105
-------- --------
Allowance at end of period $ 2,661 $ 2,421
-------- --------
Ratio of net recoveries (charge-offs)
to average loans outstanding 0.00% 0.00%
======== ========
Allowance as a percent of total loans 0.90% 0.89%
======== ========
Total loans at end of period $295,336 $272,298
======== ========
23
Loan Portfolio.
Loan Portfolio Composition. The Company's loans consist primarily of mortgage
loans secured by residential and non-residential properties as well as
commercial loans which are either unsecured or secured by personal property
collateral. Most of the Company's commercial loans are either made to
individuals or personally guaranteed by the principals of the business to which
the loan is made. At March 31, 2004, we had total gross loans of $296.19
million, deferred loan fees of $856,000 and an allowance for loan losses of
$2.66 million. From time to time, the Bank may originate residential mortgage
loans and then sell them on the secondary market, normally recognizing fee
income in connection with the sale. During the three-month period ended March
31, 2004, the Bank sold approximately $3.63 million of such loans and recorded
in other income a gain of $62,000 on such sales.
The following tables set forth information concerning the Company's loan
portfolio by type of loan at the dates indicated:
March 31, December 31,
2004 2003
--------- ------------
Amount Amount
-------- --------
(in thousands)
Commercial and professional loans $ 18,669 $ 22,228
Secured by real estate
1-4 family 166,198 169,589
Multi family 6,277 6,608
Non-residential (commercial) 99,646 94,956
Consumer 5,402 2,239
-------- --------
Total loans 296,192 295,620
Less:
Deferred loan fees (856) (864)
Allowance for loan losses (2,661) (2,593)
-------- --------
Loans, net $292,675 $292,163
======== ========
It is the Bank's polcy to discontinue accruing interest on a loan when it
is 90 days past due or if management believes that continued interest accruals
are unjustified. The Bank may continue interest accruals if a loan is more than
90 days past due if the Bank determines that the nature of the delinquency and
the collateral are such that collection of the principal and interest on the
loan in full is reasonably assured. When the accrual of interest is
discontinued, all accrued but unpaid interest is charged against current period
income. Once the accrual of interest is discontinued, the Bank records interest
as and when received until the loan is restored to accruing status. If the Bank
determines that collection of the loan in full is in reasonable doubt, then
amounts received are recorded as a reduction of principal until the loan is
returned to accruing status. At March 31, 2004 and 2003, we did not have any
loans past due more than 90 days and still accruing interest.
24
Capital Adequacy
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and Tier I capital (as defined) to average assets (as defined). As of
March 31, 2004, the most recent notification from the FDIC categorized the Bank
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank must maintain certain Total
risk-based, Tier I risk-based, and Tier I leverage ratios. There are no
conditions or events since the notification that management believes have
changed the Bank's category.
The following tables set forth the actual and required regulatory capital
amounts and ratios of the Company and the Bank as of March 31, 2004 and December
31, 2003 (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, 2004
Total Capital (to Risk-Weighted Assets)
Company 88,774 25.4% 25,503 >=8.0% -- N/A
Bank 62,727 18.9% 26,616 >=8.0% 33,270 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 86,113 24.6% 12,752 >=4.0% -- N/A
Bank 60,066 18.1% 13,308 >=4.0% 19,962 >=6.0%
Tier I Capital (to Average Assets)
Company 86,113 9.3% 36,186 >=4.0% -- N/A
Bank 60,066 6.6% 36,244 >=4.0% 45,305 >=5.0%
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------- ----------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------ ------
December 31, 2003
Total Capital (to Risk-Weighted Assets)
Company $86,759 26.1% $26,630 >=8.0% -- N/A
Bank 60,675 19.1% 25,417 >=8.0% 31,772 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 84,166 25.3% 13,315 >=4.0% -- N/A
Bank 58,082 18.3% 12,709 >=4.0% 19,063 >=6.0%
Tier I Capital (to Average Assets)
Company 84,166 10.7% 31,410 >=4.0% -- N/A
Bank 58,082 7.0% 33,391 >=4.0% 41,739 >=5.0%
25
Liquidity
The management of the Company's liquidity focuses on ensuring that
sufficient funds are available to meet loan funding commitments, withdrawals
from deposit accounts, the repayment of borrowed funds, and ensuring that the
Bank and the Company comply with regulatory liquidity requirements. Liquidity
needs of the Bank have historically been met by deposits, investments in federal
funds sold, principal and interest payments on loans, and maturities of
investment securities.
For the Company, liquidity means having cash available to fund operating
expenses and to pay shareholder dividends, when and if declared by the Company's
Board of Directors. The ability of the Company to fund its operations and to pay
dividends is not dependent upon the receipt of dividends from the Bank. At March
31, 2004, the Company had cash and cash equivalents of $10.64 million and
investment securities available for sale of $4.80 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 include commitments to extend credit and stand-by
letters of credit.
At March 31, 2004, the Company had outstanding commitments of approximately
$46.08 million. These commitments include $17.87 million that mature or renew
within one year, $6.13 million that mature or renew after one year and within
three years, $20.09 million that mature or renew after three years and within
five years and $1.20 million that mature or renew after five years.
The Company currently does not have any unconsolidated subsidiaries or
special purpose entities.
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 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 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
26
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
Conclusions. Based upon the Controls Evaluation, the CEO/CFO has concluded that,
subject to the limitations noted above, the Disclosure Controls are effective in
reaching a reasonable level of assurance that information required to be
disclosed by the Company is recorded, processed, summarized and reported within
the time period specified in the Securities and Exchange Commission's rules and
forms.
In accordance with SEC requirements, the CEO/CFO notes that, except as
described in the following paragraph, during the fiscal quarter ended March 31,
2004, no changes in internal controls have occurred that have materially
affected Internal Control.
During the fiscal quarter ended March 31, 2004, in response to certain
concerns raised by the Company's external auditors, Grant Thornton LLP, the
Company, upon the recommendation of a Special Committee of the Audit Committee
of the Board of Directors, adopted and began to implement a Remedial Action Plan
for accounting and financial reporting that was designed to improve the
Company's internal control over financial reporting. See Item 9A of the
Company's Annual Report on Form 10-K for the year ended December 31, 2003 for
details relating to the Remedial Action Plan.
PART II. OTHER INFORMATION
Item 5. Other Information
a. The following supersedes the information set forth in the Company's Proxy
Statement dated April 26, 2004 relating to its Annual Meeting of Stockholders to
be held on May 18, 2004 with respect to submission of stockholder proposals for
the Company's 2005 Annual Meeting of Stockholders.
A stockholder proposal that complies with all of the applicable
requirements under Rule 14a-8 of the Securities Exchange Act of 1934 and any
other applicable regulation or statute must be received by the Company on or
prior to December 27, 2004 at the address of the Company set forth on the first
page of this Proxy Statement in order to be eligible for inclusion in the
Company's proxy statement for the 2005 Annual Meeting of Stockholders. Any such
proposal should be directed to the Secretary or Assistant Secretary of the
Company.
In accordance with Rules 14a-4(c) and 14a-5(e) promulgated under the
Exchange Act, the Company hereby notifies its stockholders that it did not
receive notice of any proposed matter to be submitted for stockholder vote at
the Annual Meeting and, therefore, any proxies received in respect of the Annual
Meeting will be voted in the discretion of the Company's management on any other
27
matters which may properly come before the Annual Meeting. The Company further
notifies its stockholders that if the Company does not receive notice by March
14, 2005 of a proposed matter to be submitted by a stockholder for stockholders
vote at the 2005 Annual Meeting of Stockholders, then any proxies held by
persons designated as proxies by the Company's Board of Directors in respect of
such Annual Meeting may be voted at the discretion of such persons on such
matter if it shall properly come before such Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
b. Reports on Form 8-K
None
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.
28
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 10, 2004 By: /s/ Steven Rosenberg
------------------------------------
Steven Rosenberg
President and Chief
Financial Officer
29
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
------- ----------- -----------
31 Certification of Principal Executive and Financial 31
Officer pursuant to Section 302 Of The Sarbanes-Oxley
Act of 2002.
32 Certification of Principal Executive and Financial 32
Officer pursuant to Section 906 Of The Sarbanes-Oxley
Act of 2002.
30
STATEMENT OF DIFFERENCES
The greater-than-or-equal sign shall be expressed as..........................>=