UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
-------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________________
Commission file number: 0-13649
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BERKSHIRE BANCORP INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2563513
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Broadway, New York, New York 10038
--------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 791-5362
---------------
N/A
--------------------------------------------------
(Former name 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 May 11, 2001, there were 2,504,658 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, (ix) the Company's ability to integrate
the operations of its newly acquired bank, and other factors referred to in the
sections of this Quarterly Report entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Certain information customarily disclosed by financial institutions,
such as estimates of interest rate sensitivity and the adequacy of the loan loss
allowance, are inherently forward-looking statements because, by their nature,
they represent attempts to estimate what will occur in the future.
The Company cautions readers not to place undue reliance upon any
forward-looking statement contained in this Quarterly Report. Forward-looking
statements speak only as of the date they were made and the Company assumes no
obligation to update or revise any such statements upon any change in applicable
circumstances.
2
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2001 and December 31, 2000 4
Consolidated Statements of Income
For The Three Months Ended
March 31, 2001 and 2000 5
Consolidated Statements of Cash Flows
For The Three Months Ended
March 31, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 16
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Index of Exhibits
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
March 31, December 31,
2001 2000
---------------------------------------
ASSETS
Cash and due from banks $ 22,159 $ 2,512
Interest bearing deposits 2,838 6,605
Federal funds sold 20,000 27,250
--------- ---------
Total cash and cash equivalents 44,997 36,367
Investment Securities:
Available-for-sale 87,296 96,309
Held-to-maturity 786 20,751
--------- ---------
Total investment securities 88,082 117,060
Loans, net of unearned income 76,445 75,623
Less: allowance for loan losses (1,128) (1,108)
--------- ---------
Net loans 75,317 74,515
Accrued interest receivable 1,529 1,355
Premises and equipment, net 3,993 359
Prepaid expenses and other 3,038 2,824
Goodwill, net of amortization of
$1,524 in 2001 and $1,365 in 2000 11,384 11,543
--------- ---------
Total assets $ 228,340 $ 244,023
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 13,857 $ 14,509
Interest bearing 122,005 123,138
--------- ---------
Total deposits 135,862 137,647
Securities sold under agreements to repurchase 9,140 23,127
Long term borrowings 1,500 1,500
Accrued interest payable 1,304 1,333
Other liabilities 1,026 1,309
--------- ---------
Total liabilities 148,832 164,916
--------- ---------
Stockholders' equity
Preferred stock - $.10 Par value: -- --
2,000,000 shares authorized - none issued
Common stock - $.10 par value
Authorized -- 10,000,000 shares
Issued -- 2,566,095 shares
Outstanding --
March 31, 2001, 1,943,725 shares
December 31, 2000, 2,127,265 shares 256 256
Additional paid-in capital 78,549 78,549
Accumulated other comprehensive
income (loss), net 270 (85)
Retained earnings 8,758 8,352
Less: Common stock in treasury - at cost:
March 31, 2001, 622,370 shares
December 31, 2000, 610,470 shares (8,325) (7,965)
--------- ---------
Total stockholders' equity 79,508 79,107
--------- ---------
$ 228,340 $ 244,023
========= =========
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
Three Months Ended
March 31,
------------------------------
2001 2000
-------- ------
INTEREST INCOME
Short-term interest-earning assets $ 294 $ 275
Securities and other investments 1,732 1,414
Loans 1,702 1,426
-------- --------
Total interest income 3,728 3,115
-------- --------
INTEREST EXPENSE
Deposits 1,496 996
Borrowings 216 31
-------- --------
Total interest expense 1,712 1,027
-------- --------
Net interest income 2,016 2,088
PROVISION FOR LOAN LOSSES 10 5
-------- --------
Net interest income after
provision for loan losses 2,006 2,083
-------- --------
NON-INTEREST INCOME
Investment securities gains 3 13,079
Other income 165 139
-------- --------
Total non-interest income 168 13,218
-------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 619 524
Net occupancy expense 182 108
Equipment expense 30 24
FDIC assessment 6 4
Data processing expense 5 5
Amortization of goodwill 159 183
Other 266 289
-------- --------
Total non-interest expense 1,267 1,137
-------- --------
Income before provision for taxes 907 14,164
Provision for income taxes 501 5,123
-------- --------
Net income $ 406 $ 9,041
======== ========
Net income per share:
Basic $ .21 $ 4.25
======== ========
Diluted $ .21 $ 4.00
======== ========
The accompanying notes are an integral part of this statement.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Three Months Ended
March 31,
----------------------------------------------
2001 2000
------ -----
Cash flows from operating activities:
Net income $ 406 $ 9,041
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Realized gain on investment securities (3) (13,079)
Depreciation and amortization 192 200
Provision for loan losses 10 5
Changes in assets and liabilities:
(Increase) in accrued interest receivable (174) (133)
Decrease in prepaid expenses and other 779 353
Increase (decrease) in accounts payable, other accrued
expenses, liabilities and income taxes payable (312) 726
-------- --------
Net cash provided by (used in) operating activities 898 (2,887)
-------- --------
Cash flows from investing activities:
Investment in Madison Merchant Services, Inc. -- (285)
Investment securities available for sale
Purchases (67,170) (23,976)
Sales 75,548 27,790
Investment securities held to maturity
Sales 19,965 --
Net increase in loans (812) (798)
Acquisition of real estate owned (3,487) --
Acquisition of premises and equipment (180) --
-------- --------
Net cash provided by investing activities 23,864 2,731
-------- --------
Cash flows from financing activities:
Net (decrease) in non interest bearing deposits (652) (101)
Net increase (decrease) in interest bearing deposits (1,133) 4,930
(Decrease) in securities sold under
agreements to repurchase (13,987) --
Acquisition of treasury stock (360) --
-------- --------
Net cash provided by (used in) financing activities (16,132) 4,829
-------- --------
Net increase in cash 8,630 4,673
Cash - beginning of period 36,367 19,879
-------- --------
Cash - end of period $ 44,997 $ 24,552
======== ========
Supplemental cash flow information:
Cash used to pay interest $ 2,073 $ 894
Cash used to pay taxes $ 680 $ 1,082
The accompanying notes are an integral part of this statement.
6
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
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, 2000 when reviewing this Form 10-Q. Quarterly
results reported herein are not necessarily indicative of
results to be expected for other quarters.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary to present fairly the Company's consolidated
financial position as of March 31, 2001 and December 31, 2000 and the
consolidated results of its operations for the three month periods ended March
31, 2001 and 2000, and its consolidated cash flows for the three month periods
ended March 31, 2001 and 2000.
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. Goodwill
of $8.5 million will be amortized over a 15 year period. The results of GSB
Financial's operations will be included in the Company's balances commencing
April 1, 2001.
7
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 March 31, 2001
-----------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
(In thousands, except per share data)
Basic earnings per share
Net income available to
common stockholders $406 1,950 $.21
Effect of dilutive securities
Options -- -- --
---- ----- ----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $406 1,950 $.21
==== ===== ====
Options to purchase 40,375 shares of common stock for $38.00 per share
and 5,000 shares of common stock for $31.75 per share were outstanding during
the three months ended March 31, 2001. 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 Three Months Ended March 31, 2000
-----------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
(In thousands, except per share data)
Basic earnings per share
Net income available to
common stockholders $9,041 2,127 $4.25
Effect of dilutive securities
Options -- 132 (.25)
------ ----- -----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $9,041 2,259 $4.00
====== ===== =====
Options to purchase 44,875 shares of common stock for $38.00 per share
were outstanding during the three months ended March 31, 2000. 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.
8
NOTE 4. Investment Securities
The following tables summarize held to maturity and available-for-sale
investment securities as of March 31, 2001 and December 31, 2000:
March 31, 2001
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- ------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 287 $ 1 $ -- $ 288
Corporate notes 499 -- -- 499
------- ---- ----- -------
Totals $ 786 $ 1 $ -- $ 787
======= ==== ===== =======
December 31, 2000
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- -------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 522 $ -- $ -- $ 522
Corporate notes 4,477 -- (1) 4,476
------- ---- ----- ------
Totals $ 4,999 $ -- $ (1) $4,998
======= ==== ===== ======
March 31, 2001
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- -------
(In thousands)
Available-For-Sale
Investment Securities
U.S. Treasury and U.S.
Government Agencies $78,333 $249 $ -- $78,582
Mortgage-backed
securities 3,795 16 -- 3,811
Corporate notes 1,119 -- (240) 879
Marketable equity
securities and other 3,895 129 -- 4,024
------- ---- ----- -------
Totals $87,142 $394 $(240) $87,296
======= ==== ===== =======
9
December 31, 2000
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- -------
(In thousands)
Available-For-Sale
Investment Securities
U.S. Treasury and U.S.
Government Agencies $ 86,064 $ 76 $(188) $85,952
Mortgage-backed
securities 4,208 -- (9) 4,199
Corporate notes 1,654 9 (350) 1,313
Marketable equity
securities and other 4,813 150 (118) 4,845
------- ---- ----- -------
Totals $96,739 $235 $(665) $96,309
======= ==== ===== =======
NOTE 5. Loan Portfolio
The following tables set forth information concerning the Company's
loan portfolio by type of loan at the dates indicated (dollars in thousands):
March 31, 2001 December 31, 2000
----------------------- ---------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
Commercial and
professional loans $11,333 14.8% $ 8,920 11.8%
Secured by real estate 64,491 84.4 65,409 86.5
Consumer 173 0.2 794 1.0
Other 448 0.6 500 0.7
------- ----- -------- -----
Total loans 76,445 100.0% 75,623 100.0%
===== =====
Less:
Allowance for loan
losses (1,128) (1,108)
------- --------
Loans, net $75,317 $ 74,515
======= ========
NOTE 6. Real Estate Owned
On March 22, 2001, the Company purchased a parcel of land and building
located in mid-town Manhattan for a total purchase price of $3.49 million in
cash. The Company intends to utilize the property for banking offices and a bank
branch.
10
NOTE 7. Deposits
The following table summarizes the composition of the average balances
of major deposit categories:
March 31, 2001 December 31, 2000
-------------- -----------------
Average Average Average Average
Amount Yield Amount Yield
------ ----- ------ -----
(Dollars in thousands)
Demand deposits $ 14,747 -- $ 14,848 --
NOW and money market 23,863 3.21% 44,582 3.85%
Savings deposits 3,443 2.38 4,454 2.93
Time deposits 81,939 6.18 42,158 5.93
-------- ---- -------- ----
Total deposits $123,992 4.76% $106,042 4.08%
======== ==== ======== ====
NOTE 8. Comprehensive Income
The following table presents the components of comprehensive income,
based on the provisions of SFAS No. 130.:
For The Three Months Ended
March 31, 2001
----------------------------------------------------
Tax
Before tax (expense) Net of tax
amount benefit Amount
------------ --------- ------------
(In thousands)
Unrealized gains
on investment securities:
Unrealized holding gains
arising during period 595 (239) 356
Less reclassification
adjustment for gains
realized in net income 3 (2) 1
---- ----- -----
Other comprehensive
income, net $592 $(237) $355
==== ===== =====
For The Three Months Ended
March 31, 2000
----------------------------------------------------
Tax
Before tax (expense) Net of tax
amount benefit Amount
------------ --------- ------------
(In thousands)
Unrealized gains
on investment securities:
Unrealized holding losses
arising during period $(14,776) $ 5,911 $(8,865)
Less reclassification
adjustment for gains
realized in net income 13,079 (5,232) 7,847
-------- ------- -------
Other comprehensive
loss, net $ (1,697) $ 679 $(1,018)
======== ======= =======
11
NOTE 9. New Accounting Pronouncements
SFAS No. 133, ("SFAS 133") "Accounting for Derivative Instruments and
Hedging Activities" was amended in June, 1999 by SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," and in June, 2000, by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," (collectively
SFAS 133). SFAS 133 requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. Under SFAS 133 an entity may designate a derivative
as a hedge of exposure to either changes in: (a) fair value of a recognized
asset or liability or firm commitment, (b) cash flows of a recognized or
forecasted transaction, or (c) foreign currencies of a net investment in foreign
operations, firm commitments, available-for-sale securities or a forecasted
transaction. Depending upon the effectiveness of the hedge and/or the
transaction being hedged, any changes in the fair value of the derivative
instrument is either recognized in earnings in the current year, deferred to
future periods, or recognized in other comprehensive income. Changes in the fair
value of all derivative instruments not recognized as hedge accounting are
recognized in current year earnings. SFAS 133 is required for all fiscal
quarters or fiscal years beginning after June 15, 2000. The Company adopted SFAS
133 effective January 1, 2001. No adjustment was required as a result of the
change in accounting principle.
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 Notes herein
are references to the "Notes to Consolidated Financial Statements" of the
Company located in Item 1 herein.
12
The following table presents the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed in both
dollars and rates.
For The Three Months Ended March 31,
---------------------------------------------------------------------------------
2001 2000
--------------------------------------- ----------------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
-------- --------- ---------- ------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $ 77,208 $1,702 8.81% $ 68,471 $1,426 8.33%
Investment securities 104,437 1,732 6.64 81,070 1,414 6.98
Other (2)(5) 20,979 294 5.77 33,094 275 3.32
-------- ------ ---- -------- ------ ----
Total interest-earning assets 202,624 3,728 7.38 182,635 3,115 6.82
---- -------- ----
Noninterest-earning assets 25,894 18,442
-------- --------
Total Assets 228,518 201,077
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 27,306 231 3.38 60,548 592 3.91
Time deposits 81,939 1,265 6.18 32,096 404 5.03
Other borrowings 16,017 216 5.39 2,159 31 5.74
-------- ------ ---- -------- ------ ----
Total interest-bearing
liabilities 125,262 1,712 5.47 94,803 1,027 4.33
------ ---- ------ ----
Demand deposits 14,747 16,195
Noninterest-bearing liabilities 2,890 9,361
Stockholders' equity 85,619 80,718
-------- --------
Total liabilities and
stockholders' equity 228,518 201,077
======== ========
Net interest income 2,016 2,088
====== ======
Interest-rate spread (3) 1.91 2.49
==== ====
Net interest margin (4) 3.98 4.57
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.62 1.93
======== ========
----------------------
(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.
13
Results of Operations
Results of Operations for the Three Months Ended March 31, 2001 Compared to the
Three Months Ended March 31, 2000.
Net Income. Net income for the three-month period ended March 31, 2001 was
$406,000, or $.21 per diluted share, as compared to $9.04 million, or $4.00 per
diluted share, for the three-month period ended March 31, 2000. Net income in
2000 was favorably impacted by the pretax gain of $13.08 million on sales of the
common stock of Elottery, Inc.
The favorable impact on net income due to the pretax gains on the sales
of the common stock of Elottery, Inc. of $13.08 million in 2000 is not
representative of the Company's ongoing business. The Company acquired its
shares of Elottery, Inc. common stock as described in the following paragraphs.
As more fully discussed in the Company's 2000 10-K, in December 1995,
the Company sold its minority equity interest in Unistar Gaming Corp. ("UGC") to
Elottery, Inc. (formerly Executone Information Systems, Inc., a Virginia
corporation whose common stock trades on the NASDAQ National Market System,
("Elottery") (the "Elottery Common Stock"). The Company's investment in UGC was
approximately $5.2 million.
In exchange for its interest in UGC, the Company received shares of
Elottery Common Stock, all of which were sold in open market transactions during
1998, and shares of Elottery Series A and Series B Preferred Stock (the
"Elottery Preferred Stock"). In 1997, the Company fully reserved the carrying
value, approximately $2.1 million, of its shares of Elottery Preferred Stock and
recorded a deferred tax asset of $925,000.
In March 1999, Elottery exercised its right to redeem and convert the
Elottery Preferred Stock into Elottery Common Stock and on April 6, 1999, in
exchange for its shares of Elottery Preferred Stock, the Company received
4,193,204 shares of Elottery Common Stock with a market value of approximately
$17.7 million. At March 31, 2001 and December 31, 2000, the Company owned
130,000 shares of Elottery, Inc. Common Stock with a fair market value of
approximately $20,000 and $65,000, respectively. The Company intends to sell its
remaining shares of Elottery Common Stock as market conditions allow.
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. The declining interest rate environment
that prevailed during the first three months of 2001 was in contrast with the
increasing interest rate environment that existed during the first three months
of 2000.
For the quarter ended March 31, 2001, net interest income decreased by $72,000,
or 3.45%, to $2.02 million, from $2.09 million for the first quarter of 2000.
The decrease was the result of the growth in average interest-bearing
liabilities of $30.46 million partially offset by the growth in average
interest-earning assets of $19.98 million. Net interest rate spread declined to
1.91% for the quarter ended March 31, 2001, from 2.49% for the quarter ended
March 31, 2000. The change in net interest rate spread resulted from an increase
in the average cost of interest-bearing liabilities to 5.47% for the quarter
ended March 31, 2001, from 4.33% for 2000, partially offset by an increase in
the average yield on interest-earning assets to 7.38% for the quarter ended
March 31, 2001, from 6.82% for the year ago period.
Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, was 3.98% for the first quarter
of 2001 as compared to 4.57% for the same period in 2000. The decrease in net
interest margin was due to the increase in the average amounts and average rates
14
paid on interest-bearing liabilities to $125.26 million and 5.47% in 2001, from
$94.80 million and 4.33% in 2000, partially offset by the increase in the
average amounts and average yield on interest-earning assets to $202.62 million
and 7.38% in 2001 from $182.64 million and 6.82% in 2000.
Interest Income. Interest income for the three-month period ended March 31, 2001
increased $613,000, or 19.68%, to $3.73 million, from $3.12 million for the
three-month period ended March 31, 2000. The increase was the result of a $19.98
million increase in average interest-earning assets to $202.62 million for the
quarter ended March 31, 2001, from $182.64 million for 2000, and the increase in
the average yield of interest-earning assets to 7.38% in 2001, from 6.82% for
2000. The increase in average interest-earning assets was due to increases in
the loan portfolio and investment securities.
Interest income on loans increased $276,000 to $1.70 million for 2001, from
$1.43 million in 2000, which was the result of an increase in the average
balance of $8.74 million and an increase in the average yield on loans to 8.81%
in 2001, from 8.33% in 2000. Interest income on investment securities increased
$318,000 to $1.73 million for 2001, from $1.41 million in 2000, which was the
result of an increase in the average balance of $23.37 million, partially offset
by a decrease in the average yield on investments to 6.64% in 2001, from 6.98%
in 2000.
Interest Expense. Interest expense for the three-month period ended March 31,
2001 increased $685,000, or 66.02%, to $1.71 million, from $1.03 million for the
three-month period ended March 31, 2000. The increase was the result of a $30.46
million increase in average interest-bearing liabilities to $125.26 million for
the quarter ended March 31, 2001, from $94.80 million for 2000, and the increase
in the average rate paid on interest-bearing liabilities to 5.47% in 2001, from
4.33% in 2000. The increase in interest-bearing liabilities, deposits and other
borrowings, was attributable to our strategy of employing excess capital through
growth. The increase in the overall costs of our interest-bearing liabilities is
primarily due to attractive rates offerred on time deposits in furthering our
growth strategy.
Interest expense on deposits increased $500,000 to $1.50 million for the three
months ended March 31, 2001 from, $996,000 for the three months ended March 31,
2000, reflecting an increase in the average cost of interest-bearing deposits to
5.48% for 2001 from 4.30% for 2000 coupled with an increase in the average
balance of interest-bearing deposits of $16.60 million to $109.25 million in
2001, from $92.64 in 2000. Interest expense on certificates of deposit increased
$861,000 from the combined effect of an increase in the average balance of
$49.84 million and an increase in the average cost to 6.18% for 2001, from 5.03%
for 2000. Interest expense on money market and savings accounts decreased
$361,000 as a result of a decrease in the average balance of $33.24 million and
a decrease in the average cost to 3.38% for 2001, from 3.91% for 2000. As
previously mentioned, declining interest rates during the first three months of
2001 led to our lowering the rates paid on these accounts.
Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the three months
ended March 31, 2001, service fee income was $165,000 as compared to service fee
income of $139,000 in the year ago period. For the three-month period ended
March 31, 2000, total non-interest income was $13.22 million of which $13.08
million was due to non recurring realized gains on sales of marketable
securities.
Non-Interest Expense. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees,
amortization of goodwill and other operating expenses associated with the
day-to-day operations of the Company. Total non-interest expense for the
three-month period ended March 31, 2001 increased to $1.27 million from $1.14
million for the
15
three-month period ended March 31, 2000. The increase in 2001 was due primarily
to increases in (i) salaries and benefits due to higher staffing levels at the
Bank, (ii) occupancy expenses related to a new bank branch and (iii) equipment
expenses, partially offset by decreases in legal and other professional fees.
Provision for Income Tax. During the first quarter of 2001, the Company recorded
income tax expense of $501,000 compared to $5.12 million in the first quarter of
2000. The tax provisions for federal, state and local taxes recorded for 2001
and 2000 represent effective tax rates of 55.2% and 36.2%, respectively.
Effective tax rates are attributable to the level of net income adjusted for
certain tax-preference items.
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.
16
In the banking industry, a traditional measure of interest rate
sensitivity is known as "gap" analysis, which measures the cumulative
differences between the amounts of assets and liabilities maturing or repricing
at various time intervals. The following table sets forth the Company's interest
rate repricing gaps for selected maturity periods:
Berkshire Bancorp Inc.
Interest Rate Sensitivity Gap at March 31, 2001
(in thousands, except for percentages)
-----------------------------------------------------------------------
3 Months 3 Through 1 Through Over
or Less 12 Months 3 Years 3 Years Total
-------- --------- --------- ------- -----
Federal funds sold $ 20,000 $ -- $ -- $ -- $ 20,000
(Rate) 5.42% -- -- -- 5.42%
--------- --------- --------- --------- ----------
Interest bearing deposits
in banks 2,838 -- -- -- 2,838
(Rate) 4.42% -- -- -- 4.42%
--------- --------- --------- --------- ----------
Loans (1)(2)
Adjustable rate loans 32,220 3,298 15,378 9,823 60,719
(Rate) 8.55% 9.21% 8.85% 8.66% 8.68%
Fixed rate loans 358 418 3,022 11,928 15,726
(Rate) 2.98% 8.14% 8.40% 7.87% 7.87%
--------- --------- --------- --------- ----------
Total loans 32,578 3,716 18,400 21,751 76,445
Investments (3)(4) 6,939 187 3,247 76,575 86,948
(Rate) 5.49% 9.40% 5.76% 6.79% 6.65%
--------- --------- --------- --------- ----------
Total rate-sensitive assets 62,355 3,903 21,647 98,326 186,231
--------- --------- --------- --------- ----------
Deposit accounts (5)
Savings and NOW 9,385 -- -- -- 9,385
(Rate) 1.50% -- -- -- 1.50%
Money market 17,097 -- -- -- 17,097
(Rate) 3.00% -- -- -- 3.00%
Time Deposits 35,690 57,995 1,838 -- 95,523
(Rate) 5.93% 6.03% 5.70% -- 5.99%
--------- --------- --------- --------- ----------
Total deposit accounts 62,172 57,995 1,838 -- 122,005
Repurchase agreements 9,140 -- -- -- 9,140
(Rate) 4.80% -- -- -- 4.80%
Other borrowings -- -- 500 1,000 1,500
(Rate) -- -- 6.09% 5.90% 5.96%
--------- --------- --------- --------- ----------
Total rate-sensitive liabilities 71,312 57,995 2,338 1,000 132,645
--------- --------- --------- --------- ----------
Interest rate caps 20,000 -- -- (20,000) --
Gap (repricing differences) (28,957) (54,092) 19,309 117,326 53,586
========= ========= ========= ========= ==========
Cumulative Gap (28,957) (83,049) (63,740) 53,586
========= ========= ========= =========
Cumulative Gap to Total Rate
Sensitive Assets (15.55)% (44.59)% (34.23)% 28.77%
========= ========= ========= =========
------------------------------
(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.
17
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 March 31, 2001.
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.
18
Since all identified losses are immediately charged off, no portion of
the allowance for loan losses is restricted to any individual loan or groups of
loans, and the entire allowance is available to absorb any and all loan losses.
A loan is placed in a nonaccrual status at the time when ultimate
collectibility of principal or interest, wholly or partially, is in doubt. Past
due loans are those loans which were contractually past due 90 days or more as
to interest or principal payments but are well secured and in the process of
collection. Renegotiated loans are those loans which terms have been
renegotiated to provide a reduction or deferral of principal or interest as a
result of the deteriorating financial position of the borrower.
At March 31, 2001 and 2000, the Company did not have any non accrual or
non performing loans. Loans past due more than 90 days and still accruing
interest were $0 and $128,000 at March 31, 2001 and 2000, respectively. 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 $76.4 million
from $66.4 million the provision for the three months ended March 31, 2001 was
increased to $1.13 million from $1.02 million in the year ago period.
Management believes that the allowance for loan losses and
nonperforming loans remained safely within acceptable levels.
The following table sets forth information with respect to activity in
the Company's allowance for loan losses during the periods indicated (dollars in
thousands, except percentages):
Three Months Ended
March 31,
---------------------------------
2001 2000
---- ----
Average loans outstanding $ 77,208 $ 65,957
======== ========
Allowance at beginning of period 1,108 923
Charge-offs:
Commercial and other loans -- --
Real estate loans -- --
-------- --------
Total loans charged-off -- --
-------- --------
Recoveries:
Commercial and other loans 10 90
Real estate loans -- --
-------- --------
Total loans recovered 10 90
-------- --------
Net (charge-offs) recoveries 10 90
-------- --------
Provision for loan losses
charged to operating expenses 10 5
-------- --------
Allowance at end of period 1,128 1,018
-------- --------
Ratio of net recoveries (charge-offs)
to average loans outstanding (2) .01% .14%
======== ========
Allowance as a percent of total loans 1.48% 1.53%
======== ========
Total loans at end of period $ 76,445 $ 66,389
======== ========
19
Loan Portfolio.
Loan Portfolio Composition. The Company's loans consist primarily of mortgage
loans secured by residential and non-residential properties as well as
commercial loans which are either unsecured or secured by personal property
collateral. Most of the Company's loans are either made to individuals or
personally guaranteed by the principals of the business to which the loan is
made. At March 31, 2001, the Company had total loans of $76.4 million and an
allowance for loan losses of $1.13 million. From time to time, the Bank may
originate residential mortgage loans and then sell them on the secondary market,
normally recognizing fee income in connection with the sale.
The following tables set forth information concerning the Company's
loan portfolio by type of loan at the dates indicated:
March 31, December 31,
2001 2000
--------------------- ---------------------
Amount Amount
------ ------
(in thousands)
Commercial and professional loans $ 11,333 $ 8,920
Secured by real estate 64,491 65,409
Consumer 173 794
Other 448 500
-------- --------
Total loans 76,445 75,623
Less:
Allowance for loan losses (1,128) (1,108)
-------- --------
Loans, net $ 75,317 $ 74,515
======== ========
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 March 31, 2001 and 2000, the Company did not have any non accrual or
non performing loans. Loans past due more than 90 days and still accruing
interest were $0 and $128,000 at March 31, 2001 and 2000, respectively.
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 March 31, 2001, 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.
20
The following tables set forth the actual and required regulatory
capital amounts and ratios of the Company and The Berkshire Bank as of March 31,
2001 and December 31, 2000 (dollars in thousands):
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2001
Total Capital (to Risk-Weighted Assets)
Company 69,522 59.2% 9,391 >=8.0% -- N/A
Bank 16,552 17.2% 7,702 >=8.0% 9,627 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 68,394 58.3% 4,695 >=4.0% -- N/A
Bank 15,424 16.0 3,851 >=4.0% 5,776 >=6.0%
Tier I Capital (to Average Assets)
Company 68,394 31.5% 8,685 >=4.0% -- N/A
Bank 15,424 8.1% 7,615 >=4.0% 9,519 >=5.0%
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2000
Total Capital (to Risk-Weighted Assets)
Company $68,848 53.4% $10,302 >=8.0% -- N/A
Bank 16,249 13.8% 9,397 >=8.0% 11,746 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 67,740 52.6% 5,155 >=4.0% -- N/A
Bank 15,141 12.9% 4,699 >=4.0% 7,048 >=6.0%
Tier I Capital (to Average Assets)
Company 67,740 35.0% 7,751 >=4.0% -- N/A
Bank 15,141 8.5% 7,151 >=4.0% 8,938 >=5.0%
Liquidity
The management of the Company's liquidity focuses on ensuring that
sufficient funds are available to meet loan funding commitments, withdrawals
from deposit accounts, the repayment of borrowed funds, and ensuring that the
Bank and the Company comply with regulatory liquidity requirements. Liquidity
needs of The 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 March 31, 2001, Berkshire
had cash of $35.9 million and marketable securities of $4.0 million.
21
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 will utilize
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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
10.5 Lease Agreement, dated October 26, 1999, between Braun
Management, Inc., as agent for Bowling Green Associates, L.P.
and The Berkshire Bank.
b. The Company filed a Report on Form 8-K, dated April 2, 2001 (date of
earliest event March 30, 2001) under Item 5 to file the press release
announcing the consummation of the merger between the Company and GSB
Financial Corporation.
The Company filed a Report on Form 8-K, dated May 11, 2001 (date of
earliest event March 30, 2001) under Item 7 to file the financial
statements of the business acquired and the proforma financial
statements in connection with the consummation of the merger between
the Company and GSB Financial Corporation.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKSHIRE BANCORP INC.
(Registrant)
Date: May 14, 2001 By: /s/ Steven Rosenberg
------------ --------------------------
Steven Rosenberg
President and Chief
Financial Officer
23
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
10.5 Lease Agreement, dated October 26, 1999, between 25
Braun Management, Inc., as agent for Bowling Green
Associates, L.P., and The Berkshire Bank.
24
STATEMENT OF DIFFERENCES
------------------------
The degree symbol shall be expressed as................................ [d]
The greater-than-or-equal-to sign shall be expressed as................ >=