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, 2002
------------------------
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 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
--- ---
As of November 8, 2002, there were 2,241,576 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
September 30, 2002 (unaudited) and
December 31, 2001 4
Consolidated Statements of Income
For The Three and Nine Months Ended
September 30, 2002 and 2001 (unaudited) 5
Consolidated Statement of Stockholders'
Equity For The Nine Months Ended
September 30, 2002 (unaudited) 6
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30,
2002 and 2001 (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 21
Item 4. Controls and Procedures 27
PART II OTHER INFORMATION
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signature 29
Certification of Principal Executive and Financial Officer 30
Index of Exhibits 31
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
September 30, December 31,
2002 2001
--------------------------------
ASSETS
Cash and due from banks $ 5,589 $ 7,170
Interest bearing deposits 250 213
Federal funds sold 3,250 3,000
-------- --------
Total cash and cash equivalents 9,089 10,383
Investment Securities:
Available-for-sale 339,998 240,966
Held-to-maturity 913 1,613
-------- --------
Total investment securities 340,911 242,579
Loans, net of unearned income 273,942 252,233
Less: allowance for loan losses (2,217) (2,030)
-------- --------
Net loans 271,725 250,203
Accrued interest receivable 4,189 3,399
Premises and equipment, net 8,673 7,446
Other assets 2,826 4,110
Goodwill, net of amortization of
$2,300 in 2001 18,549 18,438
-------- --------
Total assets $655,962 $536,558
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 32,311 $ 30,163
Interest bearing 423,764 308,613
--------- --------
Total deposits 456,075 338,776
Securities sold under agreements to repurchase 46,700 53,756
Long term borrowings 49,391 42,278
Accrued interest payable 3,204 2,406
Other liabilities 4,862 3,350
-------- --------
Total liabilities 560,232 440,566
-------- --------
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 --
September 30, 2002, 2,244,676 shares
December 31, 2001, 2,379,990 shares 256 256
Additional paid-in capital 89,869 89,914
Retained earnings 14,824 11,053
Accumulated other comprehensive
loss, net (137) (281)
Less: Common stock in treasury - at cost:
September 30, 2002, 321,419 shares
December 31, 2001, 186,105 shares (9,082) (4,950)
-------- --------
Total stockholders' equity 95,730 95,992
-------- --------
$655,962 $536,558
======== ========
The accompanying notes are an integral part of this statement.
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,
---------------------- ---------------------
2002 2001 2002 2001
------ ------ ------- -------
INTEREST INCOME
Loans $4,730 $4,600 $13,943 $10,558
Investment securities 3,740 2,490 9,815 6,576
Federal funds sold and
interest bearing deposits 25 96 71 569
------ ------ ------- -------
Total interest income 8,495 7,186 23,829 17,703
------ ------ ------- -------
INTEREST EXPENSE
Deposits 2,762 2,970 7,753 7,538
Borrowings 802 465 2,140 1,140
------ ------ ------- -------
Total interest expense 3,564 3,435 9,893 8,678
------ ------ ------- -------
Net interest income 4,931 3,751 13,936 9,025
PROVISION FOR LOAN LOSSES 200 115 357 162
------ ------ ------- -------
Net interest income after
provision for loan losses 4,731 3,636 13,579 8,863
------ ------ ------- -------
NON-INTEREST INCOME
Service charges on deposits 112 84 350 215
Investment securities gains 681 12 1,070 495
Other income 5 90 192 382
------ ------ ------- -------
Total non-interest income 798 186 1,612 1,092
------ ------ ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,269 1,238 3,869 2,936
Net occupancy expense 501 323 1,244 794
Equipment expense 76 51 209 147
FDIC assessment 17 13 47 27
Data processing expense 108 37 164 104
Amortization of goodwill -- 257 -- 678
Other 927 545 2,566 1,371
------ ------ ------- -------
Total non-interest expense 2,898 2,464 8,099 6,057
------ ------ ------- -------
Income before provision for taxes 2,631 1,358 7,092 3,898
Provision for income taxes 1,118 714 3,086 1,920
------ ------ ------- -------
Net income $1,513 $ 644 $ 4,006 $ 1,978
====== ====== ======= =======
Net income per share:
Basic $ .67 $ .26 $ 1.73 $ .86
====== ====== ======= =======
Diluted $ .67 $ .26 $ 1.73 $ .86
====== ====== ======= =======
The accompanying notes are an integral part of this statement.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 2002
(In Thousands)
Accumulated
Stock Additional other Accum- Total
Common Par paid-in comprehensive ulated Treasury Comprehensive stockholders'
Shares value capital (loss), net earnings stock income equity
------ ----- --------- ------------- -------- ------- -------- ------
Balance at December 31, 2001 2,566 $256 $89,914 $ (281) $ 11,053 $(4,950) $95,992
Net income 4,006 4,006 4,006
Acquisition of treasury shares (4,258) (4,258)
Treasury shares issued for
options exercised (45) 126 81
Other comprehensive income net
of reclassification adjustment
and taxes 144 144 144
-------
Comprehensive income $ 4,150
=======
Cash dividends (235) (235)
----- ---- ------- ------- -------- ------- -------
Balance at September 30, 2002 2,566 $256 $89,869 $ (137) $ 14,824 $(9,082) $95,730
(Unaudited) ==== ======= ======= ======== ======= =======
The accompanying notes are an integral part of this statement
6
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Nine Months Ended
September 30,
-------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 4,006 $ 1,978
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized gain on investment securities (1,070) (495)
Depreciation and amortization 280 842
Provision for loan losses 357 162
Increase in accrued interest receivable (790) (190)
Decrease in other assets 1,172 805
Increase (decrease) in accrued interest
payable and other liabilities 2,310 (168)
----------- ---------
Net cash provided by operating activities 6,265 2,934
----------- ---------
Cash flows from investing activities:
Cash paid for business acquired -- (20,222)
Cash of entity acquired -- 6,047
Investment securities available for sale
Purchases (1,048,313) (227,872)
Sales 950,496 202,901
Investment securities held to maturity
Purchases -- (142,430)
Sales 700 162,023
Net increase in loans (21,879) (31,574)
Acquisition of premises and equipment (1,507) (3,907)
----------- ---------
Net cash used in investing activities (120,503) (55,034)
----------- ---------
7
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Nine Months Ended
September 30,
--------------------------
2002 2001
---- ----
Cash flows from financing activities:
Net increase in non interest bearing deposits 2,148 13,339
Net increase in interest bearing deposits 115,151 33,983
Decrease in securities sold under agreements
to repurchase (7,056) (13,691)
Issuance (repayment) of long term debt 7,113 (2,000)
Acquisition of treasury stock (4,258) (3,769)
Proceeds from exercise of common stock options 81 90
Dividends paid (235) (258)
--------- --------
Net cash provided by financing activities 112,944 27,694
--------- --------
Net (decrease) in cash (1,294) (24,406)
Cash - beginning of period 10,383 36,367
--------- --------
Cash - end of period $ 9,089 $ 11,961
========= ========
Supplemental cash flow information:
Cash used to pay interest $ 9,095 $ 7,905
Cash used to pay taxes $ 3,876 $ 1,366
The accompanying notes are an integral part of this statement.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2002 and 2001
NOTE 1. General
Berkshire Bancorp Inc. ("Berkshire", 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, 2001 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 September 30, 2002 and December 31, 2001 and the
consolidated results of its operations for the three and nine month periods
ended September 30, 2002 and 2001, and its consolidated stockholders' equity for
the nine month period ended September 30, 2002, and its consolidated cash flows
for the nine month periods ended September 30, 2002 and 2001.
NOTE 2. Acquisitions
GSB Financial Corporation/Goshen Savings Bank. On March 30, 2001,
Berkshire, through its wholly-owned subsidiaries, The Berkshire Bank and Greater
American Finance Group, Inc., completed its merger with GSB Financial
Corporation ("GSB Financial"). Under the terms of the merger, 978,032 shares of
GSB Financial common stock were converted into 589,460 shares of Berkshire
common stock, and 974,338 shares of GSB Financial common stock were purchased
for $20.75 per share, totaling approximately $20.2 million. This transaction was
accounted for under the purchase method of accounting and accordingly, the
results of GSB Financial's operations have been included in the Company's
balances commencing April 1, 2001. The acquisition resulted in the recording of
approximately $7.5 million of goodwill, which, through December 31, 2001, has
been amortized on a straight-line basis over 15 years. (See Note 8.)
9
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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, 2002 September 30, 2001
------------------------------------- ----------------------------------------
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 $ 1,513 2,252 $ .67 $ 644 2,445 $ .26
Effect of dilutive securities
Options -- 14 .-- -- 10 .--
-------- ------ ------ -------- ------- ------
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $ 1,513 2,266 $ .67 $ 644 2,455 $ .26
======== ====== ====== ======== ======= ======
Options to purchase 45,375 shares of common stock for $31.75 to $38.00
per share and 119,375 shares of common stock for $30.00 to $38.00 per share were
outstanding during the three month periods ended September 30, 2002 and 2001,
respectively. 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.
For The Nine Months Ended
------------------------------------------------------------------------------------
September 30, 2002 September 30, 2001
----------------------------------------- ----------------------------------------
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 $ 4,006 2,309 $ 1.73 $ 1,978 2,301 $ .86
Effect of dilutive securities
Options -- 10 .-- -- 11 .--
-------- ------- ------ -------- ------- ------
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $ 4,006 2,319 $ 1.73 $ 1,978 2,312 $ .86
======== ======= ====== ======== ======= ======
Options to purchase 45,375 shares of common stock for $31.75 to $38.00
per share and 119,375 shares of common stock for $30.00 to $38.00 per share were
outstanding during the nine month periods ended September 30, 2002 and 2001,
respectively. 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.
10
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 4. Investment Securities
The following tables summarize held to maturity and available-for-sale
investment securities as of September 30, 2002 and December 31, 2001:
September 30, 2002
----------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- -------------- ---------------- ------------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 913 $ 2 $ (1) $ 914
------- ------- ------- --------
Totals $ 913 $ 2 $ (1) $ 914
======= ======= ======= ========
December 31, 2001
----------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- -------------- ---------------- ------------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 1,613 $ 8 $ (23) $ 1,598
------- ------- ------- --------
Totals $ 1,613 $ 8 $ (23) $ 1,598
======= ======= ======= ========
September 30, 2001
----------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- -------------- ---------------- ------------
(In thousands)
Available-For-Sale
Investment Securities
U.S. Treasury and Notes $ 15,000 $ 301 $ -- $ 15,301
U.S. Government Agencies 293,333 1,458 (1,225) 293,566
Mortgage-backed securities 6,318 10 -- 6,328
Corporate notes 16,107 -- (17) 16,090
Marketable equity
securities and other 9,470 231 (988) 8,713
-------- ------- ------- --------
Totals $340,228 $ 2,000 $(2,230) $339,998
======== ======= ======= ========
11
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 4. - (continued)
December 31, 2001
----------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- -------------- --------------- ------------
(In thousands)
Available-For-Sale
Investment securities
U.S. Treasury and Notes $ 30,012 $ 34 $ (8) $ 30,038
U.S. Government Agencies 170,610 589 (1,043) 170,156
Mortgage-backed securities 2,493 6 -- 2,499
Corporate Notes 751 1 (113) 639
Marketable equity
securities and other 37,547 87 -- 37,634
-------- ------- ------- --------
Totals $241,413 $ 717 $(1,164) $240,966
======== ======= ======= ========
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, 2002 December 31, 2001
---------------------------- ---------------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Commercial and professional loans $ 17,140 6.3% $ 19,130 7.6%
Secured by real estate
1-4 family 185,132 67.6 165,195 65.5
Multi family 9,145 3.3 11,186 4.4
Non-residential (commercial) 58,979 21.5 51,893 20.6
Consumer 2,809 1.0 4,689 1.8
Other 737 0.3 140 0.1
-------- ----- -------- -----
Total loans 273,942 100.0% 252,233 100.0%
===== =====
Less: Allowance for loan losses (2,217) (2,030)
-------- --------
Loans, net $271,725 $250,203
======== ========
12
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 6. Deposits
The following table summarizes the composition of the average balances
of major deposit categories:
September 30, 2002 December 31, 2001
------------------ -----------------
Average Average Average Average
Amount Yield Amount Yield
------ ----- ------ -----
(Dollars in thousands)
Demand deposits $ 30,287 -- $ 21,857 --
NOW and money market 47,827 2.05% 51,026 2.64%
Savings deposits 52,246 1.52 34,168 2.69
Time deposits 262,304 3.34 155,079 5.07
-------- ---- -------- ----
Total deposits $392,664 2.68% $262,130 3.89%
======== ==== ======== ====
NOTE 7. Comprehensive Income
The following table presents the components of comprehensive income,
based on the provisions of SFAS No. 130.:
For The Nine Months Ended
---------------------------------------------------------------------------
September 30, 2002 September 30, 2001
------------------------------------ -------------------------------------
Tax Tax
Before tax (expense) Net of tax Before tax (expense) Net of tax
amount benefit Amount amount benefit amount
------ ------ ---- ------ ------ ------
(In thousands)
Unrealized gains on
investment securities:
Unrealized holding $1,310 $(524) $786 $2,082 $(833) $1,249
gains arising
during period
Less reclassification 1,070 (428) 642 495 (198) 297
adjustment for gains ------ ------ ---- ------ ------ ------
realized in net income
Other comprehensive $ 240 $ (96) $144 $1,587 $(635) $ 952
income, net ====== ===== ==== ====== ===== ======
13
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 8. New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued SFAS No. 147,
Acquisitions of Certain Financial Institutions: An amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No 9, which removes acquisitions of
financial institutions from the scope of SFAS 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, except for transactions between
mutual enterprises. SFAS No. 147 also requires that the acquisition of a
less-than-whole financial institution, such as a branch, be accounted for as a
business combination if the transferred assets and activities constitute a
business. The provisions of the SFAS No. 147 related to unidentifiable
intangible assets and the acquisition of a less-than-whole financial institution
are effective for acquisitions for which the date of acquisition is on or after
October 1, 2002. Management does not anticipate the adoption of SFAS No. 147 to
have a material impact on the Company's financial position or results of
operations.
Goodwill. Statement of Financial Accounting Standard ("SFAS") No. 141, Business
Combinations ("SFAS No. 141"), and SFAS No. 142, Goodwill and Intangible Assets
("SFAS No. 142") was adopted on January 1, 2002. These statements resulted in
significant modifications relative to the Company's accounting for goodwill and
other intangible assets. SFAS No. 142 modifies the accounting for all purchased
goodwill and intangible assets. SFAS No. 142 includes requirements to test
goodwill and indefinite lived intangible assets for impairment rather than
amortize them. The Company has adopted the provisions of SFAS No. 142 as of
January 1, 2002. Therefore, acquired goodwill is no longer amortized. The
Company has completed the transitional impairment testing and did not identify
any impairment on its outstanding goodwill.
The following table presents a reconciliation of net income and
earnings- per-share amounts, as reported in the financial statements, to those
amounts adjusted for goodwill and intangible asset amortization determined in
accordance with the provisions of Statement of Financial Accounting Standard
No. 142.
For The Three Months Ended
September 30,
--------------------------
2002 2001
---- ----
(In thousands, except per share amounts)
Reported net income $1,513 $644
Add back: goodwill amortization -- 257
------ ----
Adjusted net income $1,513 $901
====== ====
Basic earnings per share:
Reported basic earnings per share $ .67 $.26
Goodwill amortization -- .11
------ ----
Adjusted basic earnings per share $ .67 $.37
====== ====
Diluted earnings per share:
Reported diluted earnings per share $ .67 $.26
Goodwill amortization -- .11
------ ----
Adjusted diluted earnings per share $ .67 $.37
====== ====
14
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 8. - (continued)
For The Nine Months Ended
September 30,
----------------------------
2002 2001
---- ----
(In thousands, except per share amounts)
Reported net income $4,006 $1,978
Add back: goodwill amortization 678
------ ------
Adjusted net income $4,006 $2,656
====== ======
Basic earnings per share:
Reported basic earnings per share $1.73 $ .86
Goodwill amortization .29
------ ------
Adjusted basic earnings per share $1.73 $1.15
====== ======
Diluted earnings per share:
Reported diluted earnings per share $1.73 $ .86
Goodwill amortization .29
------ ------
Adjusted diluted earnings per share $1.73 $1.15
====== ======
NOTE 9. Subsequent Events
On November 7, 2002, Berkshire sold its 24.9% interest in a merchant
credit card processing company for $285,000. We accounted for our interest in
this company under the equity method of accounting and have recorded
approximately $200,000 in net losses since the purchase of this investment in
December 1999. In addition, the Bank had loans outstanding to this company,
which are being repaid as a result of this transaction. The purchase price to
Berkshire and the amounts owed to the Bank are being paid in the form of a note
to be held by the Bank.
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. and subsidiaries (the "Company"). References to the
Company herein 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.
15
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,
---------------------------------------------------------------------------
2002 2001
----------------------------------- -----------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
------- --------- ---------- ------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $269,938 $4,730 7.01% $240,361 $4,600 7.66%
Investment securities 333,326 3,740 4.49 163,847 2,490 6.08
Other (2)(5) 5,453 25 1.83 10,932 96 3.51
-------- ------ ---- -------- ------ ----
Total interest-earning assets 608,717 8,495 5.58 415,140 7,186 6.92
---- ----
Noninterest-earning assets 35,844 37,309
-------- --------
Total Assets $644,561 $452,449
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 119,932 431 1.44% 106,490 772 2.90%
Time deposits 299,609 2,331 3.11 179,812 2,198 4.90
Other borrowings 89,423 802 3.59 36,971 465 5.03
-------- ------ ---- -------- ------ ----
Total interest-bearing
liabilities 508,964 3,564 2.80 323,273 3,435 4.25
------ ---- ------ ----
Demand deposits 32,060 26,369
Noninterest-bearing liabilities 7,965 5,347
Stockholders' equity (5) 95,572 97,460
-------- --------
Total liabilities and
stockholders' equity 644,561 452,449
======== ========
Net interest income 4,931 3,751
====== ======
Interest-rate spread (3) 2.78% 2.67%
==== ====
Net interest margin (4) 3.24% 3.61%
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.20 1.28
======== ========
----------------------
(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.
16
For The Nine Months Ended September 30,
---------------------------------------------------------------------------
2002 2001
----------------------------------- -----------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
------- --------- ---------- ------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $263,756 $13,943 7.05% $178,340 $10,558 7.89%
Investment securities 280,756 9,815 4.66 129,617 6,576 6.76
Other (2)(5) 5,671 71 1.67 15,938 569 4.76
-------- ------- ---- -------- ------- ----
Total interest-earning assets 550,183 23,829 5.77 323,895 17,703 7.29
---- ----
Noninterest-earning assets 36,460 41,500
-------- --------
Total Assets $586,643 $365,395
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 112,538 1,192 1.41% 76,845 1,730 3.00%
Time deposits 262,304 6,561 3.34 142,441 5,808 5.44
Other borrowings 78,992 2,140 3.61 28,501 1,140 5.33
-------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 453,834 9,893 2.91 247,787 8,678 4.67
------- ---- ------- ----
Demand deposits 30,287 19,998
Noninterest-bearing liabilities 7,194 4,271
Stockholders' equity (5) 95,328 93,339
-------- --------
Total liabilities and
stockholders' equity 586,643 365,395
======== ========
Net interest income 13,936 9,025
======= =======
Interest-rate spread (3) 2.86% 2.62%
==== ====
Net interest margin (4) 3.38% 3.72%
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.21 1.31
======== ========
----------------------
(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 and Nine Months Ended September 30, 2002
Compared to the Three and Nine Months Ended September 30, 2001.
General. Berkshire Bancorp Inc., a Delaware corporation ("Berkshire", the
"Company" or "we" and similar pronouns), is a bank holding company registered
under the Bank Holding Company Act of 1956. The Company has one wholly-owned
banking subsidiary, The Berkshire Bank, a New York State chartered commercial
bank (the "Bank").
On March 30, 2001, Berkshire, through its wholly-owned subsidiaries,
The Berkshire Bank and Greater American Finance Group, Inc., completed its
merger with GSB Financial Corporation ("GSB Financial") (see Note 2). This
transaction was accounted for under the purchase method of accounting and,
accordingly, the results of operation for the Company include only the results
of operation of GSB Financial for the period from April 1, 2001. The Company
acquired total loans, assets and deposits of $134.06 million, $190.04 million
and $127.86 million, respectively.
References to per share amounts below, unless stated otherwise, refer to diluted
shares.
Net Income. Net income for the three-month period ended September 30, 2002 was
$1.51 million, or $.67 per share, as compared to $644,000, or $.26 per share,
for the three-month period ended September 30, 2001. Net income for the
nine-month period ended September 30, 2002 was $4.01 million, or $1.73 per
share, as compared to $1.98 million, or $.86 per, for the nine-month period
ended September 30, 2001.
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, thereby eliminating annual goodwill
amortization expense of approximately $1.0 million. Had SFAS No. 142 been in
effect on January 1, 2001, net income for the three and nine months ended
September 30, 2001 would have been $901,000 and $2.66 million, or $.37 per share
and $1.15 per share, respectively. (See Note 8.)
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 risks inherent in the banking business. Interest rates,
as measured by the prime rate, stabilized at 4.75% throughout the first nine
months of 2002. During 2001, in contrast, the prime rate declined from 9.00% at
the beginning of the year to 4.75% at years' end.
Net Interest Income. The Company's primary source of revenue is net interest
income, or the difference between interest income on earning assets and interest
expense on interest-bearing liabilities.
For the quarter ended September 30, 2002, net interest income increased
by approximately $1.18 million, or 31.46%, to $4.93 million from $3.75 million
for the quarter ended September 30, 2001. The quarter over quarter increase in
net interest income was the result of the growth in average interest-earning
assets of $193.58 million, partially offset by the growth in average
interest-bearing liabilities of $185.69 million, and the difference between the
yield on assets compared to the cost of liabilities. The average yield on
interest-earning assets fell to 5.58% from 6.92%, a decline of 134 basis points,
or 19.36%, however, the average cost of interest-bearing liabilities fell to
2.80% from 4.25%, a decline of 145 basis points, or 34.12% The interest-rate
spread, the difference between the average yield on interest-earning assets and
the average cost of interest bearing liabilities, improved by 11 basis points to
2.78% from 2.67%
18
For the nine-month period ended September 30, 2002, net interest income
increased by approximately $4.91 million, or 54.42%, to $13.94 million from
$9.03 million for the nine-month period ended September 30, 2001. The period
over period increase in net interest income was the result of the growth in
average interest-earning assets of $226.29 million, partially offset by the
growth in average interest-bearing liabilities of $206.05 million, due in part
to the inclusion of the assets and liabilities of GSB Financial as of April 1,
2001, and the difference between the yield on assets compared to the cost of
liabilities. In the 2002 period, the average yield on interest-earning assets
fell to 5.77% from 7.29% in 2001, a decline of 152 basis points, or 20.85%,
however, the average cost of interest-bearing liabilities fell to 2.91% from
4.67%, a decline of 176 basis points, or 37.69% The interest-rate spread
improved by 24 basis points to 2.86% in 2002 from 2.62% in 2001.
Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, declined to 3.24% in the third
fiscal quarter of 2002 from 3.61% in the third fiscal quarter of 2001, and
declined to 3.38% in the nine-month period of 2002 from 3.72% in the nine-month
period of 2001.
The Company strategically uses the prevailing interest rate environment
to secure deposits and to borrow funds at what we believe to be attractive
rates, and to invest such funds in loans and investment securities. The average
amounts of loans and investment securities increased by $29.58 million and
$169.48 million, respectively, to $269.94 million and $333.33 million,
respectively, in the quarter ended September 30, 2002, from $240.36 million and
$163.85 million, respectively, in the year ago quarter. Time deposits and
borrowings increased by approximately $119.80 million and $52.45 million,
respectively, during the 2002 quarter to $299.61 million and $89.42 million,
respectively, from $179.81 million and $36.97 million, respectively, during the
2001 quarter.
Interest Income. Total interest income for the quarter ended September 30, 2002
increased by approximately $1.31 million, or 18.22%, to $8.50 million from $7.19
million for the quarter ended September 30, 2001. The increase was the result of
a $193.58 million increase in average interest-earning assets to $608.72 million
for the 2002 quarter from $415.14 million for the 2001 quarter. Loans and
investment securities increased by 12.31% and 103.44%, respectively, and
contributed $4.73 million and $3.74 million, respectively, to interest income.
Total interest income for the nine-month period ended September 30,
2002 increased by approximately $6.13 million, or 34.60%, to $23.83 million from
$17.70 million for the nine-month period ended September 30, 2001. The average
amounts of interest-earning assets increased by approximately $226.29 million,
or 69.86%, to $550.18 million in 2002 from $323.90 million in 2001, due in part
to the acquisition of GSB Financial on March 30, 2001. Interest income on loans
and investment securities increased by approximately $3.39 million and $3.24
million, respectively, to $13.94 million and $9.82 million from $10.56 million
and $6.58 million in 2001.
The average yield on interest-earning assets declined to 5.58% and
5.77%, respectively, for the three and nine months ended September 30, 2002,
from 6.92% and 7.29%, respectively, for the three and nine months ended
September 30, 2001. During the first nine months of 2002, the average yield on
the Company's loan portfolio was 7.05% compared to 7.89% during the first nine
months of 2001. We expect this trend may continue as homeowners refinance their
existing mortgage loans, commercial loans at higher rates are paid off and/or
renewed, and new loans are made, all at today's lower rates. The average yield
on investment securities has declined as well, to 4.66% in 2002 from 6.76% in
2001 as securities with above market rates are either called by the issuer or
mature, and are replaced by securities with lower yields.
19
Interest Expense. Total interest expense for the quarter ended September 30,
2002 increased by $129,000, to $3.56 million from $3.44 million for the quarter
ended September 30, 2001. The increase is due to the overall increase of $185.69
million in the average amount of interest-bearing liabilities to $508.96 million
in the 2002 quarter from $323.27 million in the 2001 quarter.
Total interest expense for the nine-month period ended September 30,
2002 increased by approximately $1.22 million, or 14.00%, to $9.89 million in
the 2002 period from $8.68 million in the 2001 period. The increase was the
result of the 83.15% growth in the average amount of interest-bearing
liabilities, to $453.83 million in 2002 from $247.78 million in 2001. Interest
bearing deposits and time deposits increased by 70.94% to $374.84 million in
2002 from $219.29 million in 2001 partly as a result of the acquisition of GSB
Financial. Borrowings increased by 177.16% to $78.99 million in 2002 from $28.50
million in 2001 as a result of our strategy of employing excess capital to fund
the growth of our business. The increase in total interest expense was partially
offset by the decline in the average rates paid on interest-bearing liabilities
to 2.91% during the 2002 period from 4.67% during the 2001 period.
Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of investment securities and service fee income. For the three months
ended September 30, 2002, total non-interest income was $798,000, compared to
$186,000 for the three months ended September 30, 2001. The increase is
primarily due to the increase in gains on sales of investment securities of
$681,000.
For the nine months ended September 30, 2002, total non-interest income
was $1.61 million, compared to $1.09 million in the year ago period. Service fee
income increased to $350,000 in 2002 from $215,000 in 2001 as a result of the
growth in deposits at the bank. Investment securities gains increased to $1.07
million in 2002 from $495,000 in 2001, and other non-interest income declined to
$192,000 in 2002 from $382,000 in 2001.
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, 2002 was $2.99 million and $8.10 million, respectively, compared
to $2.46 million and $6.06 million, respectively for the same periods in 2001.
The year to year increases are due primarily to increases in salaries and
employee benefits and net occupancy expenses resulting from the expansion of the
business.
Provision for Income Tax. During the three and nine-month periods ended
September 30, 2002, the Company recorded income tax expense of $1.12 million and
$3.09 million, respectively, compared to income tax expense of $714,000 and
$1.92 million, respectively, for the three and nine-month periods ended
September 30, 2001. The tax provisions for federal, state and local taxes
recorded for 2002 and 2001 represent effective tax rates of 43.51% and 49.26%,
respectively. The decrease in the effective rate is primarily due to the
elimination of the non-deductible amortization expense of goodwill.
20
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.
21
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, 2002
(in thousands, except for percentages)
--------------------------------------------------
3 Months 3 Through 1 Through
or Less 12 Months 3 Years
-------- --------- ---------
Federal funds sold $ 3,250 $ -- $ --
(Rate) 1.75% -- --
--------- --------- ---------
Interest bearing deposits
in banks 250 -- --
(Rate) 1.09% -- --
--------- --------- ---------
Loans (1)(2)
Adjustable rate loans 41,585 13,867 6,765
(Rate) 5.85% 5.75% 7.58%
Fixed rate loans 2,209 1,686 7,943
(Rate) 8.25% 7.94% 7.58%
--------- --------- ---------
Total loans 43,794 15,553 14,708
Investments (3)(4) 32,943 38,109 92,451
(Rate) 2.17% 4.12% 4.49%
--------- --------- ---------
Total rate-sensitive assets 80,237 53,662 107,159
--------- --------- ---------
Deposit accounts (5)
Savings and NOW 79,006 -- --
(Rate) 1.53% -- --
Money market 44,035 -- --
(Rate) 1.38% -- --
Time Deposits 107,390 180,771 12,489
(Rate) 2.83% 3.00% 3.02%
--------- --------- ---------
Total deposit accounts 230,431 180,771 12,489
Repurchase agreements 34,717 11,983 --
(Rate) 1.91% 1.88% --
Other borrowings 500 -- 1,000
(Rate) 6.09% -- 5.90%
--------- --------- ---------
Total rate-sensitive liabilities 265,648 192,754 13,489
--------- --------- ---------
Interest rate caps 20,000 -- (10,000)
Gap (repricing differences) (205,411) (139,092) 103,670
========= ========= =========
Cumulative Gap (205,411) (344,503) (240,833)
========= ========= =========
Cumulative Gap to Total Rate
Sensitive Assets (33.36)% (55.94)% (39.11)%
========= ========= =========
Berkshire Bancorp Inc.
Interest Rate Sensitivity Gap at September 30, 2002
(in thousands, except for percentages)
--------------------------------------------------
Over
3 Years Total
------- -----
Federal funds sold $ -- $ 3,250
(Rate) -- 1.75%
--------- ----------
Interest bearing deposits
in banks -- 250
(Rate) -- 1.09%
--------- ----------
Loans (1)(2)
Adjustable rate loans 7,807 70,024
(Rate) 7.49% 6.18%
Fixed rate loans 192,080 203,918
(Rate) 7.07% 7.11%
--------- ----------
Total loans 199,887 273,942
Investments (3)(4) 174,861 338,364
(Rate) 5.25% 4.62%
--------- ----------
Total rate-sensitive assets 374,748 615,806
--------- ----------
Deposit accounts (5)
Savings and NOW -- 79,006
(Rate) -- 1.53%
Money market -- 44,035
(Rate) -- 1.38%
Time Deposits 73 300,723
(Rate) 3.54% 2.94%
--------- ----------
Total deposit accounts 73 423,764
Repurchase agreements -- 46,700
(Rate) -- 1.90%
Other borrowings 47,891 49,391
(Rate) 4.87% 4.90%
--------- ----------
Total rate-sensitive liabilities 47,964 519,855
--------- ----------
Interest rate caps (10,000) --
Gap (repricing differences) 336,784 95,951
========= ==========
Cumulative Gap 95,951
=========
Cumulative Gap to Total Rate
Sensitive Assets 15.58%
=========
--------------------
(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
amongst maturity/repricing periods based upon The Berkshire Bank's
historical experience. All other time accounts are scheduled according to
their respective maturity dates.
22
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 high for doubtful
loans, the classification of loss is deferred until pending factors,
which might improve the loan, have been determined. Loans rated as doubtful in
whole or in part are placed in nonaccrual status. Loans, which are classified as
loss, are considered uncollectible and are charged to the allowance for loan
losses. For the nine month-periods ended September 30, 2002 and 2001, the
Company charged-off loans amounting to $181,000 and $21,000, respectively.
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 loans is based on analysis of the loan's performance,
the related collateral value, cash flow considerations and the financial
capability of any guarantor. The allowance for loan watch list classified
loans is equal to the total amount of potential unconfirmed losses for the
individual classified loans on the watch list. Loan watch list loans are
managed and monitored by assigned Senior Management.
The allowance based on historical trends uses charge-off experience of
the Company to estimate potential unconfirmed losses in the balances of the loan
and lease portfolios. The historical loss experience percentage is based on the
charge-off history. Historical loss experience percentages are applied to all
non-classified loans to obtain the portion of the allowance for loan losses
which is based on historical trends. Before applying the historical loss
experience percentages, loan balances are reduced by the portion of the loan
balances, which are subject to guarantee, by a government agency. Loan balances
are also adjusted for unearned discount on installment loans.
The Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions, such as economic
conditions in one or more of the Bank's market areas, 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.
23
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 September 30, 2002, the Company had $311,000 of non-performing loans
consisting of $249,000 of non-accrual loans and $62,000 of accruing loans
delinquent more than 90 days. At September 30, 2001 the Company did not have any
non accrual or non performing loans or any loans past due more than 90 days and
still accruing interest. 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 $273.94 million (including $134.1 million acquired in the
merger with GSB Financial) from $239.98 million, the provision for the nine
months ended September 30, 2002 was increased to $2.22 million (including
$691,000 acquired in the merger with GSB Financial) from $1.97 million in the
year ago period.
Management believes that the allowance for loan losses and
nonperforming loans remained 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 (dollars in
thousands, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Average loans outstanding $269,938 $240,361 $263,756 $178,340
======== ======== ======== ========
Allowance at beginning of period 2,095 1,860 2,030 1,108
Charge-offs:
Commercial and other loans 82 12 181 21
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans charged-off 82 12 181 21
-------- -------- -------- --------
Recoveries:
Commercial and other loans 4 11 11 34
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans recovered 4 11 11 34
-------- -------- -------- --------
Net (charge-offs) recoveries (78) (1) (170) 13
-------- -------- -------- --------
Provision for loan losses
charged to operating expenses 200 115 357 162
Acquisition of GSB Financial Corp -- -- -- 691
-------- -------- -------- --------
Allowance at end of period 2,217 1,974 2,217 1,974
-------- -------- -------- --------
Ratio of net recoveries (charge-offs)
to average loans outstanding .00% .00% (.06)% .01%
======== ======== ======== ========
Allowance as a percent of total loans .81% .82% .81% .82%
======== ======== ======== ========
Total loans at end of period $273,942 $241,957 $273,942 $241,957
======== ======== ======== ========
24
Loan Portfolio.
Loan Portfolio Composition. The Company's loans consist primarily of mortgage
loans secured by residential and non-residential properties as well as
commercial loans which are either unsecured or secured by personal property
collateral. Most of the Company's loans are either made to individuals or
personally guaranteed by the principals of the business to which the loan is
made. At September 30, 2001, the Company had total loans of $241.96 million and
an allowance for loan losses of $1.97 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.
The following tables set forth information concerning the Company's
loan portfolio by type of loan at the dates indicated:
September 30, December 31,
2002 2001
--------------------- --------------------
Amount Amount
------ ------
(in thousands)
Commercial and professional loans $ 17,140 $ 19,130
Secured by real estate
1-4 family 185,132 165,195
Multi family 9,145 11,186
Non-residential (commercial) 58,979 51,893
Consumer 2,809 4,698
Other 737 140
-------- --------
Total loans 273,942 252,233
Less:
Allowance for loan losses (2,217) (2,030)
-------- --------
Loans, net $271,725 $250,203
======== ========
It is the Bank's policy to discontinue accruing interest on a loan when
it is 90 days past due or if management believes that continued interest
accruals are unjustified. The Bank may continue interest accruals if a loan is
more than 90 days past due if the Bank determines that the nature of the
delinquency and the collateral are such that collection of the principal and
interest on the loan in full is reasonably assured. When the accrual of interest
is discontinued, all accrued but unpaid interest is charged against current
period income. Once the accrual of interest is discontinued, the Bank records
interest as and when received until the loan is restored to accruing status. If
the Bank determines that collection of the loan in full is in reasonable doubt,
then amounts received are recorded as a reduction of principal until the loan is
returned to accruing status.
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, 2002, 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.
25
The following tables set forth the actual and required regulatory
capital amounts and ratios of the Company and the Bank as of September 30, 2002
and December 31, 2001 (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, 2002
Total Capital (to Risk-Weighted Assets)
Company 79,535 29.0% 21,909 >=8.0% -- N/A
Bank 52,104 20.5% 20,345 >=8.0% 25,431 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 77,318 28.2% 10,955 >=4.0% -- N/A
Bank 49,887 19.6% 10,172 >=4.0% 15,258 >=6.0%
Tier I Capital (to Average Assets)
Company 77,318 12.0% 25,782 >=4.0% -- N/A
Bank 49,887 8.0% 24,991 >=4.0% 31,239 >=5.0%
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2001
Total Capital (to Risk-Weighted Assets)
Company $79,867 20.5% $20,097 >=8.0% -- N/A
Bank 48,110 20.4% 18,841 >=8.0% 23,551 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 77,837 31.0% 10,048 >=4.0% -- N/A
Bank 46,080 19.6% 9,421 >=4.0% 14,130 >=6.0%
Tier I Capital (to Average Assets)
Company 77,837 20.5% 15,194 >=4.0% -- N/A
Bank 46,080 9.6% 19,190 >=4.0% 23,988 >=5.0%
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.
26
For Berkshire, liquidity means having cash available to fund operating
expenses and to pay shareholder dividends, when and if declared by Berkshire's
Board of Directors. The ability of Berkshire to fund its operations and to pay
dividends is not dependent upon the receipt of dividends from the Bank. At
September 30, 2002, Berkshire had cash of $8.09 million and investment
securities of $5.06 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 September 30, 2002 the Company had outstanding commitments of
approximately $34.01 million. These commitments include $11.28 million that
mature or renew within one year, $12.16 million that mature or renew after one
year and within three years, $10.48 million that mature or renew after three
years and within five years and $100,000 that matures or renews after five
years.
The Company currently does not have any unconsolidated subsidiaries or
special purpose entities.
As more fully describe in Note 2, as of the close of business on March
30, 2001, GSB Financial was merged with and into the Company and Goshen Savings
Bank was merged with and into The Berkshire Bank. The Company utilized
approximately $20.2 million of its cash on hand to fund the cash component of
the transaction.
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
Within the 90-day period prior to the filing of this report, an
evaluation was carried out 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"), of the effectiveness of our disclosure
controls and procedures. Based on that evaluation, the CEO/CFO has concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
the evaluation, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
27
PART II. OTHER INFORMATION
Item 5. Other Information
In accordance with Section 10A(i) (2) of the Securities Exchange Act
of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, the Company
is responsible for disclosing the non-audit services approved by the Company's
Audit Committee to be performed by Grant Thornton LLP, the Company's external
auditor. In September 2002, the Audit Committee's Chairman, pursuant to
delegated authority by the Audit Committee, approved the non-audit engagement of
Grant Thornton LLP to assist the Company in its New York State franchise tax
audit.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
99.1 Certification Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act
Of 2002.
b. There were no reports on Form 8-K filed by the Company during the
quarter for which this report on Form 10-Q is filed.
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: November 13, 2002 By: /s/ Steven Rosenberg
----------------- ---------------------
Steven Rosenberg
Chief Executive Officer,
President and Chief
Financial Officer
29
Certification of Principal Executive and Financial Officer
I, Steven Rosenberg the Chief Executive Officer, President and Chief Financial
Officer of Berkshire Bancorp Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Berkshire Bancorp Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Steven Rosenberg
--------------------
Steven Rosenberg,
Chief Executive Officer, President
and Chief Financial Officer
30
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
------- ----------- -----------
99.1 Certification Pursuant To 18 U.S.C. 32
Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act
Of 2002
31
STATEMENT OF DIFFERENCES
The greater-than-or-equal-to sign shall be expressed as.......................>=