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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, 2003
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 0-13649
BERKSHIRE BANCORP INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2563513
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Broadway, New York, New York 10038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 791-5362
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
As of August 11, 2003, there were 2,208,464 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, 2003 (unaudited)
and December 31, 2002 4
Consolidated Statements of Income For The Three and Six
Months Ended June 30, 2003 and 2002 (unaudited) 5
Consolidated Statement of Stockholders' Equity For The Six
Months Ended June 30, 2003 (unaudited) 6
Consolidated Statements of Cash Flows For The Six Months
Ended June 30, 2003 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
Item 4. Controls and Procedures 29
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 30
Signature 31
Index of Exhibits 32
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
June 30, December 31,
2003 2002
-------- ------------
ASSETS
Cash and due from banks $ 5,435 $ 6,183
Interest bearing deposits 2,441 127
Federal funds sold 1,000 --
-------- --------
Total cash and cash equivalents 8,876 6,310
Investment Securities:
Available-for-sale 462,867 370,625
Held-to-maturity 766 833
-------- --------
Total investment securities 463,633 371,458
Loans, net of unearned income 272,120 275,497
Less: allowance for loan losses (2,468) (2,315)
-------- --------
Net loans 269,652 273,182
Accrued interest receivable 4,654 4,106
Premises and equipment, net 8,889 8,976
Other assets 1,068 1,157
Goodwill, net 18,549 18,549
-------- --------
Total assets $775,321 $683,738
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 32,698 $ 31,320
Interest bearing 520,744 442,498
-------- --------
Total deposits 553,442 473,818
Securities sold under agreements to repurchase 55,294 46,673
Long term borrowings 57,905 57,699
Accrued interest payable 3,151 3,348
Other liabilities 3,985 3,675
-------- --------
Total liabilities 673,777 585,213
-------- --------
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, 2003, 2,208,228 shares
December 31, 2002, 2,237,976 shares 256 256
Additional paid-in capital 89,887 89,890
Retained earnings 19,569 16,145
Accumulated other comprehensive income, net 2,040 1,480
Common stock in treasury - at cost:
June 30, 2003, 357,867 shares December 31, 2002,
328,119 shares (10,208) (9,246)
-------- --------
Total stockholders' equity 101,544 98,525
-------- --------
$775,321 $683,738
======== ========
The accompanying notes are an integral part of these statements.
4
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(unaudited)
For The For The
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2003 2002 2003 2002
------ ------ ------- -------
INTEREST INCOME
Loans $4,707 $4,670 $ 9,464 $ 9,213
Investment securities 3,789 3,325 7,399 6,075
Federal funds sold and
interest bearing deposits 15 102 26 125
------ ------ ------- -------
Total interest income 8,511 8,097 16,889 15,413
------ ------ ------- -------
INTEREST EXPENSE
Deposits 2,613 2,692 5,195 5,070
Borrowings 782 666 1,588 1,338
------ ------ ------- -------
Total interest expense 3,395 3,358 6,783 6,408
------ ------ ------- -------
Net interest income 5,116 4,739 10,106 9,005
PROVISION FOR LOAN LOSSES 45 107 150 157
------ ------ ------- -------
Net interest income after
provision for loan losses 5,071 4,632 9,956 8,848
------ ------ ------- -------
NON-INTEREST INCOME
Service charges on deposits 137 104 355 238
Investment securities gains 858 127 1,486 323
Other income 168 114 314 253
------ ------ ------- -------
Total non-interest income 1,163 345 2,155 814
------ ------ ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,395 1,295 2,726 2,600
Net occupancy expense 425 373 830 743
Equipment expense 102 74 211 133
FDIC assessment 19 15 38 30
Data processing expense 54 19 113 56
Other 732 1,026 1,521 1,639
------ ------ ------- -------
Total non-interest expense 2,727 2,802 5,439 5,201
------ ------ ------- -------
Income before provision for taxes 3,507 2,175 6,672 4,461
Provision for income taxes 1,560 988 2,983 1,968
------ ------ ------- -------
Net income $1,947 $1,187 $ 3,689 $ 2,493
====== ====== ======= =======
Net income per share:
Basic $ .88 $ .51 $ 1.67 $ 1.07
====== ====== ======= =======
Diluted $ .87 $ .51 $ 1.65 $ 1.06
====== ====== ======= =======
The accompanying notes are an integral part of these statements.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 2003
(In Thousands)
Accumulated
Stock Additional other
Common Par paid-in comprehensive
Shares value capital income, net
------ ----- ---------- -------------
Balance at December 31, 2002 2,566 $256 $89,890 $1,480
Net income
Treasury shares issued for
options exercised (3)
Acquisition of treasury shares
Other comprehensive income net
of reclassification adjustment
and taxes 560
Comprehensive income
Cash dividends
----- ---- ------- ------
Balance at June 30, 2003
(Unaudited) 2,566 $256 $89,887 $2,040
==== ======= ======
Accum- Total
lated Treasury Comprehensive stockholders'
earnings stock income equity
-------- -------- ------------- -------------
Balance at December 31, 2002 $16,145 $ (9,246) $ 98,525
Net income 3,689 3,689 3,689
Treasury shares issued for
options exercised 16 13
Acquisition of treasury shares (978) (978)
Other comprehensive income net
of reclassification adjustment
and taxes 560 560
------
Comprehensive income $4,249
======
Cash dividends
(265) (265)
------- -------- --------
Balance at June 30, 2003
(Unaudited) $19,569 $(10,208) $101,544
======= ======== ========
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,
------------------------
2003 2002
----------- ---------
Cash flows from operating activities:
Net income $ 3,689 $ 2,493
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized gains on sales of investment securities (1,486) (323)
Depreciation and amortization 325 155
Provision for loan losses 150 157
(Increase) in accrued interest receivable (548) (757)
Decrease in other assets 149 869
Increase (decrease) in accrued interest payable
and other liabilities (498) 19
----------- ---------
Net cash provided by operating activities 1,781 2,613
----------- ---------
Cash flows from investing activities:
Investment securities available for sale
Purchases (1,208,382) (441,088)
Sales 1,117,982 373,852
Investment securities held to maturity
Purchases -- --
Sales and maturities 67 456
Net (increase) decrease in loans 4,135 (12,807)
Purchase of premises and equipment (238) (1,131)
----------- ---------
Net cash (used in) investing activities (86,436) (80,718)
----------- ---------
7
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Six Months Ended
June 30,
------------------------
2003 2002
------- --------
Cash flows from financing activities:
Net increase in non interest bearing deposits 1,378 1,043
Net increase in interest bearing deposits 78,246 94,027
Increase (decrease) in securities sold under
agreements to repurchase 8,621 (18,411)
Proceeds from long term debt 5,000 10,000
Repayment of long term debt (4,794) (6,515)
Acquisition of treasury stock (978) (3,471)
Proceeds from exercise of common stock options 13 22
Dividends paid (265) (235)
------- ---------
Net cash provided by financing activities 87,221 76,460
------- ---------
Net increase (decrease) in cash 2,566 (1,645)
Cash - beginning of period 6,310 10,383
------- ---------
Cash - end of period $ 8,876 $ 8,738
======= =========
Supplemental cash flow information:
Cash used to pay interest $ 6,980 $ 5,508
Cash used to pay taxes, net of refunds $ 2,512 $ 2,822
The accompanying notes are an integral part of these statements.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
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, 2002 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, 2003 and December 31, 2002 and the
consolidated results of its operations for the three and six month periods ended
June 30, 2003 and 2002, and its consolidated stockholders' equity for the six
month period ended June 30, 2003, and its consolidated cash flows for the six
month periods ended June 30, 2003 and 2002.
NOTE 2. Earnings Per Share
Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted average common shares outstanding, excluding
stock options from the calculation. In calculating diluted earnings per share,
the dilutive effect of stock options is calculated using the average market
price for the Company's common stock during the period. The following table
presents the calculation of earnings per share for the periods indicated:
For The Three Months Ended
---------------------------------------------------------------------------
June 30, 2003 June 30, 2002
------------------------------------ ------------------------------------
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 $1,947 2,208 $ .88 $1,187 2,315 $.51
Effect of dilutive securities
Options -- 28 (.01) -- 9 .--
------ ----- ----- ------ ----- ----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $1,947 2,236 $ .87 $1,187 2,324 $.51
====== ===== ===== ====== ===== ====
9
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 2. - (continued)
Options to purchase 40,375 shares of common stock for $38.00 per share and
119,375 shares of common stock for $30.00 to $38.00 per share were outstanding
during the three month periods ended June 30, 2003 and 2002, 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, 2003 June 30, 2002
------------------------------------ ------------------------------------
Per Per
Income Shares share Income Shares share
(numerator) (denominator) amount (numerator) (denominator) amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except per share data)
Basic earnings per share
Net income available to
common stockholders $3,689 2,215 $1.67 $2,493 2,338 $1.07
Effect of dilutive securities
Options -- 24 (.02) -- 10 .01
------ ----- ----- ------ ----- -----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $3,689 2,239 $1.65 $2,493 2,348 $1.06
====== ===== ===== ====== ===== =====
Options to purchase 40,375 shares of common stock for $38.00 per share and
45,375 shares of common stock for $31.75 to $38.00 per share were outstanding
during the six month periods ended June 30, 2003 and 2002, 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.
NOTE 3. Investment Securities
The following tables summarize held to maturity and available-for-sale
investment securities as of June 30, 2003 and December 31, 2002:
June 30, 2003
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- -----
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $766 $3 $-- $769
---- --- --- ----
Totals $766 $3 $-- $769
==== === === ====
10
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 3. (continued)
December 31, 2002
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- -----
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $833 $3 $(1) $835
---- --- --- ----
Totals $833 $3 $(1) $835
==== === === ====
June 30, 2003
----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- --------
(In thousands)
Available-For-Sale Investment
Securities
U.S. Treasury and Notes $ 44,951 $ 95 $ (33) $ 45,013
U.S. Government Agencies 381,767 3,179 (54) 384,892
Mortgage-backed securities 6,628 20 (139) 6,509
Corporate notes 102 -- (34) 68
Marketable equity
securities and other 26,301 280 (196) 26,385
-------- ------ ----- --------
Totals $459,749 $3,574 $(456) $462,867
======== ====== ===== ========
December 31, 2002
----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- --------
(In thousands)
Available-For-Sale Investment
securities
U.S. Treasury and Notes $ 20,110 $ 103 $ -- $ 20,213
U.S. Government Agencies 301,224 2,376 (3) 303,597
Mortgage-backed securities 6,256 6 -- 6,262
Corporate Notes 3,878 495 (297) 4,076
Marketable equity
securities and other 33,383 242 (148) 36,477
-------- ------ ----- --------
Totals $367,851 $3,222 $(448) $370,625
======== ====== ===== ========
11
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 4. Loan Portfolio
The following table sets forth information concerning the Company's loan
portfolio by type of loan at the dates indicated:
June 30, 2003 December 31, 2002
---------------- -----------------
% of % of
Amount Total Amount Total
-------- ----- -------- -----
(Dollars in thousands)
Commercial and professional loans $ 18,122 6.6% $ 16,704 6.1%
Secured by real estate
1-4 family 166,060 60.9 180,730 65.4
Multi family 6,758 2.5 8,958 3.2
Non-residential (commercial) 79,245 29.0 65,809 23.8
Consumer 2,629 1.0 4,051 1.5
-------- ----- -------- -----
Total loans 272,814 100.0% 276,252 100.0%
===== =====
Deferred loan fees (694) (755)
Allowance for loan losses (2,468) (2,315)
-------- --------
Loans, net $269,652 $273,182
======== ========
NOTE 5. Deposits
The following table summarizes the composition of the average balances of
major deposit categories:
June 30, 2003 December 31, 2002
------------------ ------------------
Average Average Average Average
Amount Yield Amount Yield
-------- ------- -------- -------
(Dollars in thousands)
Demand deposits $ 30,016 -- $ 30,102 --
NOW and money market 59,127 0.95% 60,114 1.28%
Savings deposits 103,653 1.60 56,217 1.56
Time deposits 319,698 2.55 273,452 3.21
-------- ---- -------- ----
Total deposits $512,494 2.03% $419,885 2.48%
======== ==== ======== ====
12
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 6. Comprehensive Income
The following table presents the components of comprehensive income, based
on the provisions of SFAS No. 130.:
For The Six Months Ended
-------------------------------------------------------------------------
June 30, 2003 June 30, 2002
----------------------------------- -----------------------------------
Tax Tax
Before tax (expense) Net of tax Before tax (expense) Net of tax
amount benefit Amount amount benefit amount
---------- --------- ---------- ---------- --------- ----------
(In thousands)
Unrealized gains
(losses) on investment
securities:
Unrealized holding
gains arising during
period $2,420 $(968) $1,452 $1,873 $(727) $1,146
Less reclassification
adjustment for gains
realized in net income 1,486 (594) 892 323 (129) 194
------ ----- ------ ------ ----- ------
Other comprehensive $ 934 $(374) $ 560 $1,550 $(598) $ 952
income, net ====== ===== ====== ====== ===== ======
NOTE 7. Accounting For Stock Based Compensation
SFAS No. 148 "Accounting for Stock Based Compensation-Transition and
Disclosure", which amends the disclosure and certain provisions of SFAS No. 123,
was issued in December 2002. SFAS No. 148 requires all entities with stock based
employee compensation arrangements to provide additional disclosures in their
summary of significant accounting policies note. The Company has one stock-based
employee compensation plan. The Company accounts for that plan under the
recognition and measurement principles of APB No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Stock-based employee
compensation costs are not reflected in net income, as all options granted under
the plan had an exercise price equal to the market value of the underlying
common stock on the date of the grant. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
13
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 7. (continued)
For The
Three Months Ended
June 30,
-------------------------
2003 2002
------ ------
(In thousands, except per
share amounts)
Net income As Reported: $1,947 $1,187
Less: Stock based compensation costs
determined under fair value methods
for all awards -- --
------ ------
Pro Forma: $1,947 $1,187
====== ======
Basic earnings per share As Reported: $ .88 $ .51
Pro Forma: .88 .51
Diluted earnings per share As Reported: $ .87 $ .51
Pro Forma: .87 .51
For The
Six Months Ended
June 30,
-------------------------
2003 2002
------ ------
(In thousands, except per
share amounts)
Net income As Reported: $3,689 $2,493
Less: Stock based compensation costs
determined under fair value methods
for all awards -- --
------ ------
Pro Forma: $3,689 $2,493
====== ======
Basic earnings per share As Reported: $ 1.67 $ 1.07
Pro Forma: 1.67 1.07
Diluted earnings per share As Reported: $ 1.65 $ 1.06
Pro Forma: 1.65 1.06
The Company did not grant options during the three and six months ended
June 30, 2003 and 2002.
14
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 8. New Accounting Pronouncements
Derivative Instruments and Hedging Activities
The Company adopted Statement of Financial Accounting Standard 149 (SFAS
No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company periodically enters into commitments with its customers, which it
intends to sell in the future. Management does not anticipate the adoption of
SFAS No. 149 to have a material impact on the Company's financial position or
results of operations.
Financial Instruments with Characteristics of both Liabilities and Equity
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No.
150 changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management does not anticipate the
adoption of SFAS No. 150 to have a material impact on the Company's financial
position or results of operations.
Off Balance Sheet Guarantees
The Company adopted FASB Interpretation 45 (FIN 45) Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others on January 1, 2003. FIN 45 requires a guarantor entity,
at the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company has financial and performance
letters of credit. Financial letters of credit require the Company to make
payment if the customer's financial condition deteriorates, as defined in the
agreements. Performance letters of credit require the Company to make payments
if the customer fails to perform certain non-financial contractual obligations.
The Company previously did not record an initial liability, other than the fees
received for these letters of credit, when guaranteeing obligations unless it
became probable that the Company would have to perform under the guarantee. FIN
45 applies prospectively to letters of credit the Company issues or modifies
subsequent to December 31, 2002.
The Company defines the initial fair value of these letters of credit as
the fee received from the customer. The maximum potential undiscounted amount of
future payments of these letters of credit as of June 30, 2003 are $19.94
million and they expire through 2008. Amounts due under these letters of credit
would be reduced by any proceeds that the Company would be able to obtain in
liquidating the collateral for the loans, which varies depending on the
customer.
15
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 8. - (continued)
Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, for certain
entities that do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. The Company has
not acquired any variable interest entities after February 1, 2003 through June
30, 2003. The Company is in process of determining what impact, if any, the
adoption of the provisions of FIN 46 will have on entities held prior to the
issuance of FIN 46 on its financial condition or results of operations. The
Company does not anticipate FIN 46 to have a material impact on the consolidated
financial position or results of operations.
Note 9. Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and the
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
The Company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than any of its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires material estimates, including, among others, expected default
probabilities, loss given default, the amounts and timing of expected future
cash flows on impaired loans, mortgages, and general amounts for historical loss
experience. The process also considers economic conditions, uncertainties in
estimating losses and inherent risks in the loan portfolio. All of these factors
may be susceptible to significant change. To the extent actual outcomes differ
from management estimates, additional provisions for loan losses may be required
that would adversely impact earnings in future periods.
With the adoption of SFAS No. 142 on January 1, 2002, the Company
discontinued the amortization of goodwill resulting from acquisitions. Goodwill
is now subject to impairment testing at least annually to determine whether
write-downs of the recorded balances are necessary. The Company tests for
impairment based on the goodwill maintained at each defined reporting unit. A
fair value is determined for each reporting unit based on at least one of three
various market valuation methodologies. If the fair values of the reporting
units exceed their book values, no write-down of recorded goodwill is necessary.
16
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 9. - (continued)
If the fair value of the reporting unit is less, an expense may be required on
the Company's books to write down the related goodwill to the proper carrying
value. As of December 31, 2002, the Company completed its transitional testing,
which determined that no impairment write-offs were necessary.
The Company recognizes deferred tax assets and liabilities for the future
tax effects of temporary differences, net operating loss carryforwards and tax
credits. Deferred tax assets are subject to management's judgment based upon
available evidence that future realization is more likely than not. If
management determines that the Company may be unable to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the recorded value of the net deferred tax asset to the
expected realizable amount.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of Berkshire Bancorp Inc., a Delaware corporation ("Berkshire, the "Company", or
"we" and similar pronouns). 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.
17
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,
---------------------------------------------------------------------
2003 2002
--------------------------------- ---------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
-------- --------- ---------- -------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $275,235 $4,707 6.84% $264,583 $4,670 7.05%
Investment securities 422,479 3,789 3.59 268,524 3,325 4.95
Other (2)(5) 4,670 15 1.28 5,515 102 7.40
-------- ------ ---- -------- ------ ----
Total interest-earning assets 702,384 8,511 4.85 538,892 8,097 6.01
---- ----
Noninterest-earning assets 37,508 37,682
-------- --------
Total Assets 739,892 576,574
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 180,669 636 1.41% 108,990 382 1.40%
Time deposits 321,928 1,977 2.46 268,390 2,310 3.44
Other borrowings 99,295 782 3.15 67,209 666 3.96
-------- ------ ---- -------- ------ ----
Total interest-bearing
liabilities 601,892 3,395 2.26 444,589 3,358 3.02
------ ---- ------ ----
Demand deposits 29,826 30,256
Noninterest-bearing liabilities 7,775 7,156
Stockholders' equity (5) 100,399 94,573
-------- --------
Total liabilities and
stockholders' equity 739,092 576,574
======== ========
Net interest income 5,116 4,739
====== ======
Interest-rate spread (3) 2.59% 2.99%
==== ====
Net interest margin (4) 2.91% 3.52%
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.17 1.21
======== ========
- ----------
(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.
18
For The Six Months Ended June 30,
---------------------------------------------------------------------
2003 2002
--------------------------------- ---------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
-------- --------- ---------- -------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $275,090 $ 9,464 6.88% $260,623 $ 9,213 7.07%
Investment securities 406,193 7,399 3.64 254,038 6,075 4.78
Other (2)(5) 5,383 26 0.97 5,652 125 4.42
-------- ------- ---- -------- ------- ----
Total interest-earning assets 686,666 16,889 4.92 520,313 15,413 5.92
---- ----
Noninterest-earning assets 36,897 36,905
-------- --------
Total Assets 733,563 557,218
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 162,780 1,112 1.37% 108,795 761 1.40
Time deposits 319,698 4,083 2.55 243,342 4,309 3.54
Other borrowings 102,744 1,588 3.09 73,689 1,338 3.63
-------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 585,222 6,783 2.32 425,826 6,408 3.01
------- ---- ------- ----
Demand deposits 30,016 29,395
Noninterest-bearing liabilities 8,454 6,808
Stockholders' equity (5) 99,871 95,189
-------- --------
Total liabilities and
stockholders' equity 723,563 557,218
======== ========
Net interest income 10,106 9,005
======= =======
Interest-rate spread (3) 2.60% 2.91%
==== ====
Net interest margin (4) 2.94% 3.46%
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.17 1.22
======== ========
- ----------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits, federal funds sold and securities
purchased under agreements to resell.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest bearing
liabilities.
(4) Net interest margin is net interest income as a percentage of average
interest-earning assets.
(5) Average balances are daily average balances except for the parent company
which have been calculated on a monthly basis.
19
Results of Operations
Results of Operations for the Three and Six Months Ended June 30, 2003 Compared
to the Three and Six Months Ended June 30, 2002.
General. Berkshire Bancorp Inc., a bank holding company registered under the
Bank Holding Company Act of 1956, has has one wholly-owned banking subsidiary,
The Berkshire Bank, a New York State chartered commercial bank (the "Bank"). The
Bank is headquartered in Manhattan and has nine branch locations, five branches
in New York City and four branches in Orange and Sullivan counties.
Net Income. Net income for the three-month period ended June 30, 2003 was $1.95
million, or $.87 per share, as compared to $1.19 million, or $.51 per share, for
the three-month period ended June 30, 2002. Net income for the six-month period
ended June 30, 2003 was $3.69 million, or $1.65 per share, as compared to $2.49
million, or $1.06 per, for the six-month period ended June 30, 2002. 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.
Net Interest Income. The Company's primary source of revenue is net interest
income, or the difference between interest income on earning assets such as
loans and investment securities, and interest expense on interest-bearing
liabilities such as deposits and borrowings.
For the quarter ended June 30, 2003, net interest income increased by
approximately $377,000, or 7.95%, to $5.12 million from $4.74 million for the
quarter ended June 30, 2002. The quarter over quarter increase in net interest
income was the result of the 30.34% growth in average interest-earning assets to
$702.38 million from $538.89 million, offset by the 35.38% growth in average
interest-bearing liabilities to $601.89 million from $444.59 million, and the
difference between the yield on assets compared to the cost of liabilities. The
average yield on interest-earning assets fell to 4.85% in 2003 from 6.01% in
2002, a decline of 116 basis points, or 19.30%, however, the average cost of
interest-bearing liabilities fell to 2.26% from 3.02%, a smaller decline of 76
basis points, or 25.17%. The interest-rate spread, the difference between the
average yield on interest-earning assets and the average cost of interest
bearing liabilities, narrowed by 40 basis points to 2.59% from 2.99%
For the six-month period ended June 30, 2003, net interest income increased
by approximately $1.10 million, or 12.23%, to $10.11 million from $9.01 million
for the six-month period ended June 30, 2002. The period over period increase in
net interest income was the result of the 31.97% growth in average
interest-earning assets to $686.67 million from $520.31 million, partially
offset by the 37.43% growth in average interest-bearing liabilities to $585.22
million from $425.83 million and the difference between the yield on assets
compared to the cost of liabilities. In the 2003 period, the average yield on
interest-earning assets fell to 4.92% from 5.92% in 2002, a decline of 100 basis
points, or 16.89%, however, the average cost of interest-bearing liabilities
fell to 2.32% from 3.01%, a smaller decline of 69 basis points, or 22.92% The
interest-rate spread narrowed by 31 basis points to 2.60% in 2003 from 2.91% in
2002.
Interest rates, as measured by the prime rate, stabilized at 4.75%
throughout the first ten months of 2002, easing to 4.25% in November of 2002,
and remaining at the 4.25% level until June 25, 2003 when the rate was lowered
to 4.00%. With interest rates at historic lows, we expect to see continued
downward pressure on the Company's interest-rate spread and net interest income
as higher yield investment securities in our portfolio mature, or are called by
the issuer, and are replaced with securities carrying lower yields. Rates paid
on deposit accounts may continue to decline as well, albeit at a slower pace due
to competition for deposits in the market place.
20
Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, declined to 2.91% in the second
quarter of 2003 from 3.52% in the second quarter of 2002, and declined to 2.94%
in the six-month period of 2003 from 3.46% in the six-month period of 2002. For
the three and six months ended June 30, 2003, total average interest-earnings
assets were $702.38 million and $686.67 million, respectively, compared to
$538.89 million and $520.31 million for the three and six months ended June 30,
2002. The average yield on such assets was 4.85% and 4.92% for the three and six
months of 2003, respectively, compared to 6.01% and 5.92% for the three and six
months of 2002, respectively.
The Company makes strategic use of the prevailing interest rate environment
to secure and retain deposits, and to borrow funds at what we believe to be
attractive rates, and to invest such funds in a prudent mix of loans and
investment securities. The average amounts of loans and investment securities
increased by $10.65 million and $153.96 million, respectively, to $275.24
million and $422.48 million, respectively, in the quarter ended June 30, 2003,
from $264.58 million and $268.52 million, respectively, in the quarter ended
June 30, 2002. The average amount of interest bearing deposits and time deposits
increased to $180.67 million and $321.93 million, respectively, from $108.99
million and $268.39, respectively, in the year ago quarter. Borrowed funds
increased to $99.30 million in the 2003 quarter from $67.21 million in the 2002
quarter.
During the six months ended June 30, 2003, the average amount of loans and
investments securities was $275.09 million and $406.19 million, respectively,
compared to $260.62 million and $254.04 million, respectively, during the six
months ended June 30, 2002. Interest bearing deposits and time deposits averaged
$162.78 million and $319.70 million in 2003, respectively, compared to $108.80
million and $243.34 million, respectively in 2002. Borrowed funds averaged
$102.74 million and $73.69 million in 2003 and 2002, respectively.
Interest Income. Total interest income for the quarter ended June 30, 2003
increased by approximately $414,000, or 5.11%, to $8.51 million from $8.10
million for the quarter ended June 30, 2002. The increase was due to higher
average balances of loans and investments securities, offset by the declining
yields on such interest-earning assets. Loans yielded 6.84% and contributed
$4.71 million, or 55.30% of total interest income in the 2003 quarter compared
to a yield of 7.05% on loans in the year ago quarter and $4.67 million, or
57.68% of total interest income in 2002. Investment securities provided $3.79
million and $3.33 million of interest income, yielding 3.59% and 4.95% on
average balances in 2003 and 2002 quarters, respectively.
Total interest income for the six-month period ended June 30, 2003
increased by approximately $1.48 million, or 9.58%, to $16.89 million from
$15.41 million for the six-month period ended June 30, 2002. The increase was
due to higher average balances of loans and investments securities, offset by
the declining yields on such interest-earning assets. The average amounts of
interest-earning assets increased by approximately $166.35 million, or 31.97%,
to $686.67 million in 2002 from $520.31 million in 2002 and the average yield on
such assets decreased by 16.89%. Average loan balances increased by 5.55% to
$275.09 million in 2003 from $260.62 million in 2002 and provided $9.46 million
and $9.21 million of interest income, respectively, in 2003 and 2002. The
average amounts of investments securities increased by $152.16 million, or
59.89%, to $406.19 million in 2003 from $254.04 million in 2002 and contributed
$7.40 million and $6.08 million of interest income in the six months ended June
30, 2003 and 2002, respectively.
21
Interest Expense. Total interest expense for the quarter ended June 30, 2003
increased slightly to $3.40 million from $3.36 million for the quarter ended
June 30, 2002. Interest-bearing liabilities increased by 35.38%, averaging
$601.89 million in the 2003 quarter from $444.60 million in the 2002 quarter.
Average time deposits and other interest-bearing deposits increased in the 2003
quarter to $321.99 million and $180.67 million, respectively, from $268.39
million and $108.99 million, respectively, in the 2002 quarter. The cost of such
deposits, coupled with the cost of borrowed funds, $99.30 million and $67.21
million in 2003 and 2002, respectively, decreased to 2.26% in 2003 from 3.02% in
2002.
Total interest expense for the six-month period ended June 30, 2003
increased by $375,000, to $6.78 million in the 2003 period from $6.41 million in
the 2002 period. Interest-bearing liabilities increased by 37.43%, averaging
$585.22 million in the 2003 period from $425.83 million in the 2002 period.
Average time deposits and other interest-bearing deposits increased in the 2003
period to $319.70 million and $162.78 million, respectively, from $243.34
million and $108.80 million, respectively, in the 2002 period. The cost of such
deposits, coupled with the cost of borrowed funds, $102.74 million and $73.69
million in 2003 and 2002, respectively, decreased to 2.32% in 2003 from 3.01% in
2002.
Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income.
For the three and six months ended June 30, 2003, total non-interest income
increased by approximately $1.12 million and $2.16 million, respectively,
compared to $345,000 and $814,000, respectively, for the three and six months
ended June 30, 2002. The increase is primarily due to the gains realized on the
sales and issuer redemptions of investment securities. Such gains, which are not
likely to be sustained in future periods, amounted to approximately $1.49
million in 2003 as compared to $323,000 in 2002.
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, 2003 was $2.73 million and $5.44 million, respectively, compared to
$2.80 million and $5.20 million, respectively for the like periods in 2002.
Provision for Income Tax. During the three and six-month periods ended June 30,
2003, the Company recorded income tax expense of $1.56 million and $2.98
million, respectively, compared to income tax expense of $988,000 and $1.97
million, respectively, for the three and six-month periods ended June 30, 2002.
The tax provisions for federal, state and local taxes recorded for the first six
month of 2003 and 2002 represent effective tax rates of 44.71% and 44.12%,
respectively.
22
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.
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:
23
Berkshire Bancorp Inc.
Interest Rate Sensitivity Gap at June 30, 2003
(in thousands, except for percentages)
-----------------------------------------------------------
3 Months 3 Through 1 Through Over
or Less 12 Months 3 Years 3 Years Total
--------- --------- --------- -------- --------
Federal funds sold $ 1,000 $ -- $ -- $ -- $ 1,000
(Rate) 1.00% -- -- -- 1.00%
--------- --------- --------- -------- --------
Interest bearing deposits
in banks 2,441 -- -- -- 2,441
(Rate) 0.75% -- -- -- 0.75%
--------- --------- --------- -------- --------
Loans (1)(2)
Adjustable rate loans 41,725 8,758 6,434 9,691 66,608
(Rate) 5.95% 5.11% 6.68% 7.45% 6.13%
Fixed rate loans 1,646 5,332 2,344 196,884 206,206
(Rate) 7.16% 8.31% 7.08% 6.68% 6.73%
--------- --------- --------- -------- --------
Total loans 43,371 14,090 8,778 206,575 272,814
Investments (3)(4) 103,538 20,206 47,599 292,290 463,633
(Rate) 2.70% 3.17% 1.50% 4.44% 3.69%
--------- --------- --------- -------- --------
Total rate-sensitive assets 150,350 34,296 56,377 498,865 739,888
--------- --------- --------- -------- --------
Deposit accounts (5)
Savings and NOW 151,360 -- -- -- 151,360
(Rate) 1.45% -- -- -- 1.45%
Money market 39,021 -- -- -- 39,021
(Rate) 0.92% -- -- -- 0.92%
Time Deposits 146,306 176,694 5,281 2,082 330,363
(Rate) 2.44% 2.27% 2.23% 2.03% 2.34%
--------- --------- --------- -------- --------
Total deposit accounts 336,687 176,694 5,281 2,081 520,744
Repurchase agreements 50,412 4,882 -- -- 55,294
(Rate) 1.08% 1.24 -- -- 1.09%
Other borrowings -- -- 1,000 56,905 57,905
(Rate) % -- 5.90% 4.43% 4.46%
--------- --------- --------- -------- --------
Total rate-sensitive liabilities 387,099 181,576 6,281 58,986 633,942
--------- --------- --------- -------- --------
Interest rate caps 30,000 -- (10,000) (20,000) --
Gap (repricing differences) (266,749) (147,280) 60,096 459,879 105,946
========= ========= ========= ======== ========
Cumulative Gap (266,749) (414,029) (353,933) 105,946
========= ========= ========= ========
Cumulative Gap to Total Rate
Sensitive Assets (36.05)% (55.96)% (47.84)% 14.32%
========= ========= ========= ========
- ----------
(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 Bank's historical
experience. All other time accounts are scheduled according to their
respective maturity dates.
24
Provision for Loan Losses. The Company maintains an allowance for loan losses at
a level deemed sufficient to absorb losses, which are inherent in the loan
portfolio at each balance sheet date. Management reviews the adequacy of the
allowance on at least a quarterly basis to ensure that the provision for loan
losses has been charged against earnings in an amount necessary to maintain the
allowance at a level that is appropriate based on management's assessment of
probable estimated losses. The Company's methodology for assessing the
appropriateness of the allowance for loan losses consists of several key
elements. These elements include a specific allowance for loan watch list
classified loans, an allowance based on historical trends, an additional
allowance for special circumstances, and an unallocated portion. The Company
consistently applies the following comprehensive methodology.
The allowance for loan watch list classified loans addresses those loans
maintained on the Company's loan watch list, which are assigned a rating of
substandard, doubtful, or loss. Substandard loans are those with a well-defined
weakness or a weakness, which jeopardizes the repayment of the debt. A loan may
be classified as substandard as a result of impairment of the borrower's
financial condition and repayment capacity. Loans for which repayment plans have
not been met or collateral equity margins do not protect the Company may also be
classified as substandard. Doubtful loans have the characteristics of
substandard loans with the added characteristic that collection or liquidation
in full, on the basis of presently existing facts and conditions, is highly
improbable. Although the possibility of loss is extremely high for doubtful
loans, the classification of loss is deferred until pending factors, which might
improve the loan, have been determined. Loans rated as doubtful in whole or in
part are placed in nonaccrual status. Loans, which are classified as loss, are
considered uncollectible and are charged to the allowance for loan losses. There
were no loans classified as loss as of June 30, 2003. For the three and six
months ended June 30, 2003 and 2002, the Company charged-off loans amounting to
$1,000 and $2,000, and $75,000 and $99,000, 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 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.
25
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, 2003 and 2002, the Company had $277,000 and $ -0-,
respectively, of non accrual or non performing loans and no 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 $272.12 million from $264.95 million, the
provision for the six months ended June 30, 2003 was increased to $2.47 million
from $2.10 million in the year ago period.
Management believes that the allowance for loan losses and nonperforming
loans remains safely within acceptable levels.
The following table sets forth information with respect to activity in the
Company's allowance for loan losses during the periods indicated (in thousands,
except percentages):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Average loans outstanding $275,235 $264,853 $275,090 $260,623
======== ======== ======== ========
Allowance at beginning of period 2,421 2,058 2,315 2,030
Charge-offs:
Commercial and other loans 1 75 2 99
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans charged-off 1 75 2 99
-------- -------- -------- --------
Recoveries:
Commercial and other loans 3 5 5 7
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans recovered 3 5 5 7
-------- -------- -------- --------
Net recoveries (charge-offs) 2 (70) 3 (92)
-------- -------- -------- --------
Provision for loan losses
charged to operating expenses 45 107 150 157
-------- -------- -------- --------
Allowance at end of period 2,468 2,095 2,468 2,095
-------- -------- -------- --------
Ratio of net recoveries (charge-offs)
to average loans outstanding 0.00% (0.03%) 0.00% (0.04%)
======== ======== ======== ========
Allowance as a percent of total loans 0.91% 0.79% 0.91% 0.79%
======== ======== ======== ========
Total loans at end of period $272,120 $264,948 $272,120 $264,948
======== ======== ======== ========
26
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, 2003, the Company had total gross loans of $272.81
million and an allowance for loan losses of $2.47 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, 2003, the Company sold
approximately $135,000 and $677,000, respectively, of such loans and recorded in
other income, gains of $5,000 and $18,000, 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,
2003 2002
-------- ------------
Amount Amount
-------- ------------
(in thousands)
Commercial and professional loans $ 18,122 $ 16,704
Secured by real estate
1-4 family 166,060 180,730
Multi family 6,758 8,958
Non-residential (commercial) 79,245 65,809
Consumer 2,629 4,051
Other -- --
-------- --------
Total loans 272,814 276,252
Less:
Deferred loan fees (694) (755)
Allowance for loan losses (2,468) (2,315)
-------- --------
Loans, net $269,652 $273,182
======== ========
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, 2003 and 2002, the Company did not have
any loans past due more than 90 days and still accruing interest.
27
Capital Adequacy
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, 2003, 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, 2003 and
December 31, 2002 (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, 2003
Total Capital (to Risk-Weighted Assets)
Company 83,423 27.8% 24,035 >=8.0% -- N/A
Bank 57,020 19.8% 23,014 >=8.0% 28,768 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 80,955 26.9% 12,018 >=4.0% -- N/A
Bank 54,551 19.0% 11,507 >=4.0% 17,261 >=6.0%
Tier I Capital (to Average Assets)
Company 80,955 10.9% 29,596 >=4.0% -- N/A
Bank 54,551 7.6% 28,869 >=4.0% 36,087 >=5.0%
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------ ------
December 31, 2002
Total Capital (to Risk-Weighted Assets)
Company $80,811 12.3% $23,801 >=8.0% -- N/A
Bank 53,687 19.4% 22,193 >=8.0% 27,741 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 78,496 26.4% 11,900 >=4.0% -- N/A
Bank 51,372 18.5% 11,096 >=4.0% 16,645 >=6.0%
Tier I Capital (to Average Assets)
Company 78,496 27.2% 25,468 >=4.0% -- N/A
Bank 51,372 7.8% 26,210 >=4.0% 32,763 >=5.0%
28
Liquidity
The management of the Company's liquidity focuses on ensuring that
sufficient funds are available to meet loan funding commitments, withdrawals
from deposit accounts, the repayment of borrowed funds, and ensuring that the
Bank and the Company comply with regulatory liquidity requirements. Liquidity
needs of The 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 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, 2003, Berkshire had cash and cash equivalents of $14.64
million and investment securities available for sale of $2.91 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, 2003, the Company had outstanding commitments of approximately
$49.94 million. These commitments include $10.06 million that mature or renew
within one year, $17.20 million that mature or renew after one year and within
three years, $20.24 that mature or renew after three years and within five years
and $2.43 million that mature or renew after five years.
The Company currently does not have any unconsolidated subsidiaries or
special purpose entities.
Impact of Inflation and Changing Prices
The Company's financial statements measure financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increasing cost of the Company's operations. The
assets and liabilities of the Company are largely monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. In addition, interest rates do not
necessarily move in the direction, or to the same extent as the price of goods
and services. However, in general, high inflation rates are accompanied by
higher interest rates, and vice versa.
ITEM 4 - CONTROLS AND PROCEDURES
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 as of the end of the
quarter ended June 30, 2003. 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. In addition, during the
quarter ended June 30, 2003, 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.
29
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 2003 Annual Meeting of Stockholders was held on May 15, 2003. Each of
the five individuals nominated to serve as directors of the Company was elected:
Director Shares For Shares Withheld
- -------- ---------- ---------------
William L. Cohen 2,124,956 8,912
Thomas V. Guarino 2,124,935 8,933
Moses Marx 2,124,172 8,696
Steven Rosenberg 2,124,177 8,691
Randolph B. Stockwell 2,124,944 8,294
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
------- -----------
10.8 Amendment No. 2 to Employment Agreement, dated August 1, 2001, by
and between The Berkshire Bank and Moses Krausz.
31 Certification of Principal Executive and Financial Officer
pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002.
32 Certification of Principal Executive and Financial Officer
pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002.
b. The Company furnished a Report on Form 8-K, dated May 9, 2003 (date of
earliest event May 8, 2003), in satisfaction of Item 12 "Disclosure of
Results of Operations and Financial Condition" of Form 8-K, under Item 9
"Regulation FD Disclosure" pursuant to the interim guidance of the
Securities and Exchange Commission contained in its Release No. 33-8216 and
34-47583 with respect to the press release announcing the Company's
financial results for the quarter ended March 31, 2003
30
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 11, 2003 By: /s/ Steven Rosenberg
---------------------------
Steven Rosenberg
President and Chief
Financial Officer
31
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
- ------- ----------- -----------
10.8 Amendment No. 2 to Employment Agreement, dated August 1,
2001, by and between The Berkshire Bank and Moses
Krausz. 33
31 Certification of Principal Executive and Financial
Officer pursuant to Section 302 Of The Sarbanes-Oxley
Act of 2002. 34
32 Certification of Principal Executive and Financial
Officer pursuant to Section 906 Of The Sarbanes-Oxley
Act of 2002. 35
32
STATEMENT OF DIFFERENCES
The greater-than-or-equal-to sign shall be expressed as......................>=