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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 June 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 August 9, 2002, there were 2,253,559 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
June 30, 2002 (unaudited) and
December 31, 2001 4
Consolidated Statements of Income
For The Three and Six Months Ended
June 30, 2002 and 2001 (unaudited) 5
Consolidated Statement of Stockholders'
Equity For The Six Months Ended
June 30, 2002 (unaudited) 6
Consolidated Statements of Cash Flows
For The Six Months Ended
June 30, 2002 (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
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signature 29
Index of Exhibits 30
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
June 30, December 31,
2002 2001
----------------------------------
ASSETS
Cash and due from banks $ 4,481 $ 7,170
Interest bearing deposits 257 213
Federal funds sold 4,000 3,000
-------- --------
Total cash and cash equivalents 8,738 10,383
Investment Securities:
Available-for-sale 311,494 240,966
Held-to-maturity 1,157 1,613
-------- --------
Total investment securities 312,651 242,579
Loans, net of unearned income 264,948 252,233
Less: allowance for loan losses (2,095) (2,030)
-------- --------
Net loans 262,853 250,203
Accrued interest receivable 4,156 3,399
Premises and equipment, net 8,422 7,446
Other assets 2,216 4,110
Goodwill, net of amortization of
$2,300 in 2001 18,549 18,438
-------- --------
Total assets $617,585 $536,558
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 31,206 $ 30,163
Interest bearing 402,640 308,613
-------- --------
Total deposits 433,846 338,776
Securities sold under agreements to repurchase 35,345 53,756
Long term borrowings 45,763 42,278
Accrued interest payable 3,306 2,406
Other liabilities 3,572 3,350
-------- --------
Total liabilities 521,832 440,566
-------- --------
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 --
June 30, 2002, 2,266,090 shares
December 31, 2001, 2,379,990 shares 256 256
Additional paid-in capital 89,896 89,914
Retained earnings 13,311 11,053
Accumulated other comprehensive
income (loss), net 671 (281)
Less: Common stock in treasury - at cost:
June 30, 2002, 300,005 shares
December 31, 2001, 186,105 shares (8,381) (4,950)
-------- --------
Total stockholders' equity 95,753 95,992
-------- --------
$617,585 $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 Six Months Ended
June 30, June 30,
------------------------- ------------------------
2002 2001 2002 2001
------ ------ ------- ------
INTEREST INCOME
Loans $4,670 $4,256 $ 9,213 $ 5,958
Investment securities 3,325 2,354 6,075 4,086
Federal funds sold and
interest bearing deposits 102 179 125 473
------ ------ ------- ------
Total interest income 8,097 6,789 15,413 10,517
------ ------ ------- ------
INTEREST EXPENSE
Deposits 2,692 3,072 5,070 4,568
Borrowings 666 459 1,338 675
------ ------ ------- ------
Total interest expense 3,358 3,531 6,408 5,243
------ ------ ------- ------
Net interest income 4,739 3,258 9,005 5,274
PROVISION FOR LOAN LOSSES 107 37 157 47
------ ------ ------- ------
Net interest income after
provision for loan losses 4,632 3,221 8,848 5,227
------ ------ ------- ------
NON-INTEREST INCOME
Service charges on deposits 104 131 238 131
Investment securities gains 127 480 323 483
Other income 114 127 253 292
------ ------ ------- ------
Total non-interest income 345 738 814 906
------ ------ ------- ------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,295 1,079 2,600 1,698
Net occupancy expense 373 289 743 471
Equipment expense 74 66 133 96
FDIC assessment 15 8 30 14
Data processing expense 19 62 56 67
Amortization of goodwill -- 262 -- 421
Other 1,026 560 1,639 826
------ ------ ------- ------
Total non-interest expense 2,802 2,326 5,201 3,593
------ ------ ------- ------
Income before provision for taxes 2,175 1,633 4,461 2,540
Provision for income taxes 988 705 1,968 1,206
------ ------ ------- ------
Net income $1,187 $ 928 $ 2,493 $1,334
====== ====== ======= ======
Net income per share:
Basic $ .51 $ .37 $ 1.07 $ .60
====== ====== ======= ======
Diluted $ .51 $ .37 $ 1.06 $ .60
====== ====== ======= ======
The accompanying notes are an integral part of this statement.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 2002
(In Thousands)
Accumulated
Stock Additional other Accumu-
Common Par paid-in comprehensive lated Treasury
Shares value capital (loss), net earnings stock
------ ----- --------- ------------- -------- -------
Balance at December 31, 2001 2,566 $256 $89,914 $ (281) $ 11,053 $(4,950)
Net income 2,493
Acquisition of treasury shares (3,471)
Treasury shares issued for (18) 40
options exercised
Other comprehensive income net
of reclassification adjustment
and taxes 952
Comprehensive income
Cash dividends (235)
------ ---- ------- ------- -------- -------
Balance at June 30, 2002 2,566 $256 $89,896 $ 671 $ 13,311 $(8,381)
(Unaudited) ==== ======= ======= ======== =======
Total
Comprehensive stockholders'
income equity
-------- -------
Balance at December 31, 2001 $95,992
Net income 2,493 2,493
Acquisition of treasury shares (3,471)
Treasury shares issued for 22
options exercised
Other comprehensive income net
of reclassification adjustment
and taxes 952 952
-------
Comprehensive income $ 3,445
=======
Cash dividends (235)
-------
Balance at June 30, 2002 $95,753
(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 Six Months Ended
June 30,
----------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 2,493 $ 1,334
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Realized gain on investment securities (323) (483)
Depreciation and amortization 155 487
Provision for loan losses 157 47
(Increase) decrease in accrued interest receivable (757) 120
Decrease in other assets 869 398
Increase (decrease) in accrued interest payable
and other liabilities 19 (105)
-------- --------
Net cash provided by (used in) operating activities 2,613 (1,798)
-------- --------
Cash flows from investing activities:
Cash paid for business acquired -- (20,222)
Cash of entity acquired -- 6,047
Investment securities available for sale
Purchases (441,088) (134,137)
Sales 373,852 118,254
Investment securities held to maturity
Purchases -- (141,645)
Sales and maturities 456 160,963
Net increase in loans (12,807) (22,390)
Acquisition of premises and equipment (1,131) (3,749)
-------- --------
Net cash (used in) investing activities (80,718) (36,879)
-------- --------
7
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Six Months Ended
June 30,
----------------------------
2002 2001
-------- --------
Cash flows from financing activities:
Net increase in non interest bearing deposits 1,043 10,937
Net increase in interest bearing deposits 94,027 27,042
(Decrease) in securities sold under agreements
to repurchase (18,411) (12,393)
Proceeds from long term debt 10,000 --
Repayment of long term debt (6,515) (10,000)
Acquisition of treasury stock (3,471) (1,634)
Proceeds from exercise of common stock options 22 --
Dividends paid (235) (258)
-------- --------
Net cash provided by financing activities 76,460 13,694
-------- --------
Net decrease in cash (1,645) (21,387)
Cash - beginning of period 10,383 36,367
-------- --------
Cash - end of period $ 8,738 $ 14,980
======== ========
Supplemental cash flow information:
Cash used to pay interest $ 5,508 $ 4,002
Cash used to pay taxes $ 2,822 $ 1,319
The accompanying notes are an integral part of this statement.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE 1. General
Berkshire Bancorp Inc. ("Berkshire" or the "Company"), 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 June 30, 2002 and December 31, 2001 and the
consolidated results of its operations for the three and six month periods ended
June 30, 2002 and 2001, and its consolidated stockholders' equity for the six
month period ended June 30, 2002, and its consolidated cash flows for the six
month periods ended June 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.
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
----------------------------------------------------------------------------------------
June 30, 2002 June 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 $1,187 2,315 $.51 $ 928 2,502 $.37
Effect of dilutive securities
Options -- 9 -- -- 1 --
------ ------ ---- ------ ------ ----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $1,187 2,324 $.51 $ 928 2,503 $.37
====== ====== ==== ====== ====== ====
Options to purchase 119,375 and 44,875 shares of common stock for
$30.00 to $38.00 per share were outstanding during the three month periods ended
June 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 Six Months Ended
----------------------------------------------------------------------------------------
June 30, 2002 June 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 $2,493 2,338 $1.07 $1,334 2,228 $.60
Effect of dilutive securities
Options -- 10 .01 -- 1 .
------ ------ ----- ------ ------ ----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $2,493 2,348 $1.06 $1,334 2,229 $.60
====== ====== ===== ====== ====== ====
Options to purchase 45,375 and 44,875 shares of common stock for $31.75
to $38.00 per share were outstanding during the six month periods ended June 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 June 30, 2002 and December 31, 2001:
June 30, 2002
---------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
----------------- ----------------- ------------------- -----------------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $1,157 $ -- $ -- $1,157
----- ------- ------- ------
Totals $1,157 $ -- $ -- $1,157
====== ======= ======= ======
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
====== ======= ===== ========
June 30, 2002
--------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
----------------- ----------------- ----------------- -----------------
(In thousands)
Available-For-Sale
Investment Securities
U.S. Treasury and Notes $ 30,175 $ 120 $ -- $ 30,295
U.S. Government Agencies 210,734 1,536 (293) 211,977
Mortgage-backed securities 5,297 9 (27) 5,279
Corporate notes 39,320 -- (340) 38,980
Marketable equity
securities and other 24,865 187 (89) 24,963
-------- ------ ----- --------
Totals $310,391 $1,852 $(749) $311,494
======== ====== ===== ========
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:
June 30, 2002 December 31, 2001
--------------------------- -----------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Commercial and professional loans $ 21,205 8.0% $ 19,130 7.6%
Secured by real estate
1-4 family 177,100 66.9 165,195 65.5
Multi family 9,398 3.5 11,186 4.4
Non-residential (commercial) 52,992 20.0 51,893 20.6
Consumer 4,253 1.6 4,689 1.8
Other -- . 140 0.1
-------- ----- -------- -----
Total loans 264,948 100.0% 252,233 100.0%
===== =====
Less: Allowance for loan losses (2,095) (2,030)
-------- --------
Loans, net $262,853 $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:
June 30, 2002 December 31, 2001
============= =================
Average Average Average Average
Amount Yield Amount Yield
------ ----- ------ -----
(Dollars in thousands)
Demand deposits $ 29,395 -- $ 21,857 --
NOW and money market 46,094 1.92% 51,026 2.64%
Savings deposits 49,434 1.47 34,168 2.69
Time deposits 243,342 3.48 155,079 5.07
-------- ---- -------- ----
Total deposits $368,265 2.73% $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 Six Months Ended
-------------------------------------------------------------------------------------
June 30, 2002 June 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 $1,873 $(727) $1,146 $558 $(239) $319
gains arising during
period
Less reclassification 323 (129) 194 480 (192) 288
------ ----- ------ ---- ----- ----
adjustment for gains
realized in net income
Other comprehensive $1,550 $(598) $ 952 $ 78 $ (47) $ 31
income, net ====== ===== ====== ==== ===== ====
Note 8. New Accounting Pronouncements
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 is in the process of completing the first step of the goodwill
transitional impairment test, as of January 1, 2002. Management does not
anticipate this test to result in an impairment loss.
13
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 8. (continued)
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
June 30,
----------------------------------------
2002 2001
---- ----
(In thousands, except per share amounts)
Reported net income $1,187 $ 928
Add back: goodwill amortization 262
------ ------
Adjusted net income $1,187 $1,190
====== ======
Basic earnings per share:
Reported basic earnings per share $ .51 $ .37
Goodwill amortization .10
------ ------
Adjusted basic earnings per share $ .51 $ .47
====== ======
Diluted earnings per share:
Reported diluted earnings per share $ .51 $ .37
Goodwill amortization .10
------ ------
Adjusted diluted earnings per share $ .51 $ .47
====== ======
For The Six Months Ended
June 30,
----------------------------------------
2002 2001
---- ----
(In thousands, except per share amounts)
Reported net income $2,493 $1,334
Add back: goodwill amortization 421
------ ------
Adjusted net income $2,493 $1,755
====== ======
Basic earnings per share:
Reported basic earnings per share $ 1.07 $ .60
Goodwill amortization .19
------ ------
Adjusted basic earnings per share $ 1.07 $ .79
====== ======
Diluted earnings per share:
Reported diluted earnings per share $ 1.06 $ .60
Goodwill amortization .19
------ ------
Adjusted diluted earnings per share $ 1.06 $ .79
====== ======
14
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 June 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) $264,853 $4,670 7.05% $218,213 $4,256 7.80%
Investment securities 268,524 3,325 4.95 149,568 2,354 6.30
Other (2)(5) 5,515 102 7.40 15,250 179 4.67
-------- ------ ---- -------- ------ ----
Total interest-earning assets 538,892 8,097 6.01 383,031 6,789 7.09
---- ----
Noninterest-earning assets 37,682 34,411
-------- --------
Total Assets 576,574 417,442
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 108,990 382 1.40% 99,657 746 2.99%
Time deposits 268,390 2,310 3.44 166,117 2,326 5.60
Other borrowings 67,209 666 3.96 32,690 459 5.62
-------- ------ ---- -------- ------ ----
Total interest-bearing
liabilities 444,589 3,358 3.02 298,464 3,531 4.73
------ ---- ------ ----
Demand deposits 30,256 19,030
Noninterest-bearing liabilities 7,156 4,610
Stockholders' equity (5) 94,573 95,338
-------- --------
Total liabilities and
stockholders' equity 576,574 417,442
======== ========
Net interest income 4,739 3,258
====== ======
Interest-rate spread (3) 2.99% 2.36%
==== ====
Net interest margin (4) 3.52% 3.40%
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.21 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 Six Months Ended June 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) $260,623 $ 9,213 7.07% $148,102 $ 5,958 8.05%
Investment securities 254,038 6,075 4.78 127,121 4,086 6.43
Other (2)(5) 5,652 125 4.42 18,108 473 5.21
-------- ------- ---- -------- ------- ----
Total interest-earning assets 520,313 15,413 5.92 293,331 10,517 7.17
---- ----
Noninterest-earning assets 36,905 30,187
-------- --------
Total Assets 557,218 323,518
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 108,795 761 1.40% 62,449 957 3.06
Time deposits 243,342 4,309 3.54 123,211 3,611 5.86
Other borrowings 73,689 1,338 3.63 24,399 675 5.53
-------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 425,826 6,408 3.01 210,059 5,243 4.99
------- ---- ----- ----
Demand deposits 29,395 16,900
Noninterest-bearing liabilities 6,808 3,754
Stockholders' equity (5) 95,189 92,805
-------- --------
Total liabilities and
stockholders' equity 557,218 323,518
======== ========
Net interest income 9,005 5,274
======= =====
Interest-rate spread (3) 2.91% 2.18%
==== ====
Net interest margin (4) 3.46% 3.60%
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.22 1.39
======== ========
- ----------------------
(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 Six Months Ended June 30, 2002 Compared
to the Three and Six Months Ended June 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 June 30, 2002 was $1.19
million, or $.51 per share, as compared to $928,000, or $.37 per share, for the
three-month period ended June 30, 2001. Net income for the six-month period
ended June 30, 2002 was $2.49 million, or $1.06 per share, as compared to $1.33
million, or $.60 per, for the six-month period ended June 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 six months ended June
30, 2001 would have been $1.19 million and $1.76 million, or $.47 per share and
$.79 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 six
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 June 30, 2002, net interest income increased by
approximately $1.48 million, or 45.46%, to $4.74 million from $3.26 million for
the quarter ended June 30, 2001. The quarter over quarter increase in net
interest income was the result of the growth in average interest-earning assets
of $155.86 million, partially offset by the growth in average interest-bearing
liabilities of $146.13 million, and the difference between the yield on assets
compared to the cost of liabilities. The average yield on interest-earning
assets fell to 6.01% from 7.09%, a decline of 108 basis points, or 15.23%,
however, the average cost of interest-bearing liabilities fell to 3.02% from
4.73%, a decline of 171 basis points, or 36.15% The interest-rate spread, the
difference between the average yield on interest-earning assets and the average
cost of interest bearing liabilities, improved by 63 basis points to 2.99% from
2.36%
18
For the six-month period ended June 30, 2002, net interest income
increased by approximately $3.73 million, or 70.74%, to $9.01 million from $5.27
million for the six-month period ended June 30, 2001. The period over period
increase in net interest income was the result of the growth in average
interest-earning assets of $226.98 million, partially offset by the growth in
average interest- bearing liabilities of $215.77 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 5.92% from 7.17% in 2001, a decline of 125 basis points, or 17.43%,
however, the average cost of interest-bearing liabilities fell to 3.01% from
4.99%, a decline of 198 basis points, or 39.68% The interest-rate spread
improved by 73 basis points to 2.91% in 2002 from 2.18% in 2001.
Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, improved to 3.52% in the second
quarter of 2002 from 3.40% in the second quarter of 2001, and declined to 3.46%
in the six-month period of 2002 from 3.60% in the six-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 approximately $46.64
million and $118.96 million, respectively, to $264.85 million and $268.52
million, respectively, in the quarter ended June 30, 2002, from $218.21 million
and $149.57 million, respectively, in the year ago quarter. Time deposits and
borrowings increased by approximately $102.27 million and $34.52 million,
respectively, during the 2002 quarter to $268.39 million and $67.21 million,
respectively, from $166.12 million and $32.69 million, respectively, during the
2001 quarter.
Interest Income. Total interest income for the quarter ended June 30, 2002
increased by approximately $1.31 million, or 19.27%, to $8.10 million from $6.79
million for the quarter ended June 30, 2001. The increase was the result of a
$155.86 million increase in average interest-earning assets to $538.89 million
for the 2002 quarter from $383.03 million for the 2001 quarter. Loans and
investment securities increased by 99.88% and 79.53%, respectively, and
contributed $4.67 million and $3.33 million, respectively, to interest income.
Total interest income for the six-month period ended June 30, 2002
increased by approximately $4.90 million, or 46.55%, to $15.41 million from
$10.52 million for the six-month period ended June 30, 2001. The average amounts
of interest-earning assets increased by approximately $226.98 million, or
77.38%, to $520.31 million in 2002 from $293.33 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 $3.26 million and $1.99
million, respectively, to $9.21 million and $6.08 million from $5.96 million and
$4.07 million in 2001.
The average yield on interest-earning assets declined to 6.01% and
5.92%, respectively, for the three and six months ended June 30, 2002, from
7.09% and 7.17%, respectively, for the three and six months ended June 30, 2001.
During the first six months of 2002, the average yield on the Company's loan
portfolio was 7.07% compared to 8.05% during the first six months of 2001. We
expect this trend to continue as homeowners refinance their existing mortgage
loans at today's lower rates. The average yield on investment securities has
declined as well, to 4.78% in 2002 from 6.43% 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 June 30, 2002
decreased by $173,000, to $3.36 million from $3.53 million for the quarter ended
June 30, 2001. The decrease is due to lower rates paid on interest-bearing
liabilities, 3.02% in 2002 compared to 4.73% in 2001, offset by the overall
increase of $146.13 million in the average amount of interest-bearing
liabilities to $444.59 million in the 2002 quarter from $298.46 million in the
2001 quarter.
Total interest expense for the six-month period ended June 30, 2002
increased by approximately $1.17 million, or 22.22%, to $6.41 million in the
2002 period from $5.24 million in the 2001 period. The increase was the result
of the 102.72% growth in the average amount of interest-bearing liabilities, to
$425.83 million in 2002 from $210.06 million in 2001. Deposits increased by
89.67% to $352.14 million in 2002 from $185.66 million in 2001 partly as a
result of the acquisition of GSB Financial. Borrowings increased by 202.02% to
$73.69 million in 2002 from $24.40 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 3.01% during the 2002 period from 4.99%
during the 2001 period.
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 June 30, 2002, total non-interest income was $345,000, compared to
$738,000 for the three months ended June 30, 2001. The decrease is primarily due
to the decrease in gains on sales of investment securities.
For the six months ended June 30, 2002, total non-interest income was
$814,000, compared to $906,000 in the year ago period. Service fee income
increased to $238,000 in 2002 from $131,000 in 2001 as a result of the growth in
deposits at the bank. Investment securities gains declined to $323,000 from
$483,000 and other non-interest income declined to $253,000 in 2002 from
$292,000 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 six-month periods ended
June 30, 2002 was $2.80 million and $5.20 million, respectively, compared to
$2.33 million and $3.59 million, respectively for the same periods in 2001. The
year to year increases are due primarily to increases in salaries and employee
benefits and occupancy expenses resulting from the expansion of the business.
Provision for Income Tax. During the three and six-month periods ended June 30,
2002, the Company recorded income tax expense of $988,000 and $1.97 million,
respectively, compared to income tax expense of $705,000 and $1.21 million,
respectively, for the three and six-month periods ended June 30, 2001. The tax
provisions for federal, state and local taxes recorded for 2002 and 2001
represent effective tax rates of 44.12% and 47.48%, 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 June 30, 2002
(in thousands, except for percentages)
--------------------------------------------------------------------
3 Months 3 Through 1 Through Over
or Less 12 Months 3 Years 3 Years Total
-------- --------- --------- ------- -----
Federal funds sold $ 4,000 $ -- $ -- $ -- $ 4,000
(Rate) 1.75% -- -- -- 1.75%
--------- --------- --------- --------- ----------
Interest bearing deposits
in banks 257 -- -- -- 257
(Rate) 1.08% -- -- -- 1.08%
--------- --------- --------- --------- ----------
Loans (1)(2)
Adjustable rate loans 50,776 10,814 4,148 6,939 72,677
(Rate) 6.27% 6.19% 7.93% 7.75% 6.49%
Fixed rate loans 150 2,322 8,956 180,843 192,271
(Rate) 8.61% 7.22% 8.09% 7.13% 7.18%
--------- --------- --------- --------- ----------
Total loans 50,926 13,136 13,104 187,782 264,948
Investments (3)(4) 62,665 1,282 48,140 198,224 310,311
(Rate) 2.29% 6.11% 3.80% 5.72% 4.73%
--------- --------- --------- --------- ----------
Total rate-sensitive assets 117,848 14,418 61,244 386,006 579,516
--------- --------- --------- --------- ----------
Deposit accounts (5)
Savings and NOW 68,858 -- -- -- 68,858
(Rate) 1.33% -- -- -- 1.33%
Money market 43,354 -- -- -- 43,354
(Rate) 1.52% -- -- -- 1.52%
Time Deposits 125,874 153,410 11,052 92 290,428
(Rate) 3.18% 3.11% 4.21% 3.63% 3.18%
--------- --------- --------- --------- ----------
Total deposit accounts 238,086 153,410 11,052 92 402,640
Repurchase agreements 19,995 15,350 -- -- 35,345
(Rate) 1.78% 1.82 -- -- 1.80%
Other borrowings 500 -- -- 45,263 45,763
(Rate) 6.09% -- -- 4.98% 4.99%
--------- --------- --------- --------- ----------
Total rate-sensitive liabilities 258,581 168,760 11,052 45,355 483,748
--------- --------- --------- --------- ----------
Interest rate caps 20,000 -- (10,000) (10,000) --
Gap (repricing differences) (160,733) (154,342) 60,192 350,651 95,768
========= ========= ========= ========= ==========
Cumulative Gap (160,733) (315,075) (254,883) 95,768
========= ========= ========= =========
Cumulative Gap to Total Rate
Sensitive Assets (27.74)% (54.37)% (43.98)% 16.53%
========= ========= ========= =========
- ----------------------
(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 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 of June 30, 2002.
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 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, 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 June 30, 2002 and 2001, the Company did not have any non accrual or
non performing loans or 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 $264.95 million from $232.77 million (including $134.1 million acquired in
the merger with GSB Financial), the provision for the six months ended June 30,
2002 was increased to $2.10 million from $1.86 million (including $691,000
acquired in the merger with GSB Financial) 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 (dollars in
thousands, except percentages):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Average loans outstanding $264,853 $218,213 $260,623 $148,102
======== ======== ======== ========
Allowance at beginning of period 2,058 1,128 2,030 1,108
Charge-offs:
Commercial and other loans 75 9 99 9
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans charged-off 75 9 99 9
-------- -------- -------- --------
Recoveries:
Commercial and other loans 5 13 7 23
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans recovered 5 13 7 23
-------- -------- -------- --------
Net recoveries (charge-offs) (70) 4 (92) 14
-------- -------- -------- --------
Provision for loan losses
charged to operating expenses 107 37 157 47
Acquisition of GSB Financial Corp -- 691 -- 691
-------- -------- -------- --------
Allowance at end of period 2,095 1,860 2,095 1,860
-------- -------- -------- --------
Ratio of net recoveries (charge-offs)
to average loans outstanding .03% .00% .04% .09%
======== ======== ======== ========
Allowance as a percent of total loans .79% .80% .79% .80%
======== ======== ======== ========
Total loans at end of period $264,948 $232,772 $264,948 $232,772
======== ======== ======== ========
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 commercial loans are either made to
individuals or personally guaranteed by the principals of the business to which
the loan is made. At June 30, 2002, the Company had total loans of $264.95
million and an allowance for loan losses of $2.10 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.
For the three and six-month periods ended June 30, 2002, the Company sold
approximately $498,000 and $1.05 million, respectively, of such loans and
recorded in other income, gains of $110,000 and $128,000, respectively, on such
sales.
The following tables set forth information concerning the Company's
loan portfolio by type of loan at the dates indicated:
June 30, December 31,
2002 2001
--------------------- ---------------------
Amount Amount
------ ------
(in thousands)
Commercial and professional loans $ 21,205 $ 19,130
Secured by real estate
1-4 family 177,100 165,195
Multi family 9,398 11,186
Non-residential (commercial) 52,992 51,893
Consumer 4,253 4,698
Other -- 140
-------- --------
Total loans 264,948 252,233
Less: Allowance for loan losses (2,095) (2,030)
-------- --------
Loans, net $262,853 $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.
At June 30, 2002 and 2001, the Company did not have any non-accrual or
non performing loans or loans past due more than 90 days and still accruing
interest.
25
Quantitative measures established by regulation to ensure capital
adequacy require the Company and The Berkshire 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 June 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.
The following tables set forth the actual and required regulatory
capital amounts and ratios of the Company and The Berkshire Bank as of June 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
------ ----- ------ ----- ------ -----
June 30, 2002
Total Capital (to Risk-Weighted Assets)
Company 78,628 27.1% 23,233 >=8.0% -- N/A
Bank 50,584 18.7 21,665 >=8.0% 27,052 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 76,533 26.4% 11,616 >=4.0% -- N/A
Bank 48,489 17.9 10,833 >=4.0% 16,249 >=6.0%
Tier I Capital (to Average Assets)
Company 76,533 14.2% 21,547 >=4.0% -- N/A
Bank 48,489 8.7% 22,306 >=4.0% 27,882 >=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%
26
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 Berkshire 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 parent company, Berkshire Bancorp Inc. ("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 Berkshire Bank. At June 30, 2002, Berkshire
had cash and cash equivalents of $9.01 million and investment securities
available for sale of $5.51 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 June 30, 2002, the Company had outstanding commitments of
approximately $30.49 million. These commitments include $9.66 million that
mature or renew within one year, $10.70 million that mature or renew after one
year and within three years, $29,000 that mature or renew after three years and
within five years and $10.10 million that mature or renew 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.
27
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of Stockholders was held on May 16, 2002.
Each of the five individuals nominated to serve as directors of the
Company was elected:
Director Shares For Shares Withheld
- -------- ---------- ---------------
William L. Cohen 2,171,520 44,355
Thomas V. Guarino 2,171,527 44,348
Moses Marx 2,171,508 44,367
Steven Rosenberg 2,717,522 44,353
Randolph B. Stockwell 2,171,527 44,348
Item 5. Other Information
Certification Reference
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
10.7 Amendment No. 1 to Employment Agreement, dated as of June 3,
2002, by and between The Berkshire Bank and David Lukens.
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: August 12, 2002 By: /s/ Steven Rosenberg
--------------- --------------------------
Steven Rosenberg
President and Chief
Financial Officer
29
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
- ------- ----------- -----------
10.7 Amendment No. 1 to Employment Agreement, 31
dated as of June 3, 2002, by and between The Berkshire Bank
and David Lukens.
30
STATEMENT OF DIFFERENCES
The greater-than-or-equal-to sign shall be expressed as.......................>=