UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
-------
BERKSHIRE BANCORP INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2563513
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Broadway, New York, New York 10038
--------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 791-5362
---------------
N/A
-----------------------------------------------------
(Former name if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of November 7, 2001, there were 2,419,590 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
September 30, 2001 (unaudited) and
December 31, 2000 4
Consolidated Statements of Income
For The Three and Nine Months Ended
September 30, 2001 and 2000 (unaudited) 5
Consolidated Statement of Stockholders'
Equity For The Nine Months Ended
September 30, 2001 (unaudited) 6
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30,
2001 and 2000 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 20
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
Index of Exhibits 28
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
September 30, December 31,
2001 2000
---------------------------------
ASSETS
Cash and due from banks $ 5,966 $ 2,512
Interest bearing deposits 295 6,605
Federal funds sold 5,700 27,250
--------- ---------
Total cash and cash equivalents 11,961 36,367
Investment Securities:
Available-for-sale 165,946 96,309
Held-to-maturity 1,944 20,751
--------- ---------
Total investment securities 167,890 117,060
Loans, net of unearned income 241,957 75,623
Less: allowance for loan losses (1,974) (1,108)
--------- ---------
Net loans 239,983 74,515
Accrued interest receivable 2,930 1,355
Premises and equipment, net 7,312 359
Prepaid expenses and other 3,404 2,824
Goodwill, net of amortization of
$2,043 in 2001 and $1,365 in 2000 18,695 11,543
--------- ---------
Total assets $ 452,175 $ 244,023
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 27,848 $ 14,509
Interest bearing 284,985 123,138
--------- ---------
Total deposits 312,833 137,647
Securities sold under agreements to repurchase 9,436 23,127
Long term borrowings 27,500 1,500
Accrued interest payable 2,106 1,333
Other liabilities 2,948 1,309
--------- ---------
Total liabilities 354,823 164,916
--------- ---------
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 --
September 30, 2001, 2,421,290 shares
December 31, 2000, 2,127,265 shares 256 256
Additional paid-in capital 89,914 78,549
Accumulated other comprehensive
income (loss), net 867 (85)
Retained earnings 10,072 8,352
Less: Common stock in treasury - at cost:
September 30, 2001, 144,805 shares
December 31, 2000, 610,470 shares (3,757) (7,965)
--------- ---------
Total stockholders' equity 97,352 79,107
--------- ---------
$ 452,175 $ 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 For The
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
2001 2000 2001 2000
-------- -------- -------- --------
INTEREST INCOME
Short-term interest-earning assets $ 96 $ 196 $ 569 $ 903
Securities and other investments 2,490 1,733 6,576 4,637
Loans 4,600 1,655 10,558 4,695
-------- -------- -------- --------
Total interest income 7,186 3,584 17,703 10,235
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 2,970 1,010 7,538 3,027
Borrowings 465 364 1,140 580
-------- -------- -------- --------
Total interest expense 3,435 1,374 8,678 3,607
-------- -------- -------- --------
Net interest income 3,751 2,210 9,025 6,628
PROVISION FOR LOAN LOSSES 115 10 162 15
-------- -------- -------- --------
Net interest income after
provision for loan losses 3,636 2,200 8,863 6,613
-------- -------- -------- --------
NON-INTEREST INCOME
Investment securities gains 12 209 495 13,288
Other income 174 934 597 1,189
-------- -------- -------- --------
Total non-interest income 186 1,143 1,092 14,477
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,238 548 2,936 1,623
Net occupancy expense 323 116 794 333
Equipment expense 51 26 147 74
FDIC assessment 13 7 27 21
Data processing expense 37 5 104 15
Amortization of goodwill 257 159 678 477
Other 545 242 1,371 1,153
-------- -------- -------- --------
Total non-interest expense 2,464 1,103 6,057 3,696
-------- -------- -------- --------
Income before provision for taxes 1,358 2,240 3,898 17,394
Provision for income taxes 714 638 1,920 6,229
-------- -------- -------- --------
Net income $ 644 $ 1,602 $ 1,978 $ 11,165
======== ======== ======== ========
Net income per share:
Basic $ .26 $ .75 $ .86 $ 5.24
======== ======== ======== ========
Diluted $ .26 $ .75 $ .86 $ 5.13
======== ======== ======== ========
The accompanying notes are an integral part of this statement.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 2001
(In Thousands)
Accumulated Accum-
Common Stock Additional other ulated
Par paid-in comprehensive earnings
Shares value capital (loss) income, net (deficit)
------ ----- - -------- - ------------------- ---------
Balance at December 31, 2000 2,566 $256 $78,549 $ (85) $8,352
Net income 1,978
Treasury shares issued 11,386
for acquisition of GSB
Financial Corp
Acquisition of treasury shares
Exercise of stock options (21)
Other comprehensive income net
of reclassification adjustment
and taxes 952
Comprehensive income
Cash dividends (258)
------ ---- ------- ------- --------
Balance at September 30, 2001 2,566 $256 $89,914 $ 867 $ 10,072
==== ======= ======= ========
(Unaudited)
Total
Treasury Comprehensive stockholders'
stock income equity
------------ -------- -------
Balance at December 31, 2000 $(7,965) $79,107
Net income 1,978 1,978
Treasury shares issued 7,887 19,273
for acquisition of GSB
Financial Corp
Acquisition of treasury shares (3,790) (3,790)
Exercise of stock options 111 90
Other comprehensive income net
of reclassification adjustment
and taxes 952 952
-------
Comprehensive income $ 2,930
=======
Cash dividends (258)
------- -------
Balance at September 30, 2001 $(3,757) $97,352
======= =======
(Unaudited)
The accompanying notes are an integral part of this statement
6
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Nine Months Ended
September 30,
--------------------------------------
2001 2000
----- -----
Cash flows from operating activities:
Net income $ 1,978 $ 11,165
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Gain on investment securities (495) (13,288)
Depreciation and amortization and other 842 594
Provision for loan losses 162 15
Changes in assets and liabilities:
(Increase) in accrued interest receivable (190) (436)
Decrease in prepaid expenses and other 805 1,434
(Decrease) in accrued interest payable
and other liabilities (168) (412)
--------- ---------
Net cash provided by (used in) operating activities 2,934 (928)
--------- ---------
Cash flows from investing activities:
Investment in Madison Merchant Services, Inc. -- (285)
Investment in The Berkshire Bank -- (105)
Cash paid for business acquired (20,222) --
Cash of entity acquired 6,047 --
Investment securities available for sale
Purchases (227,872) (54,075)
Sales 202,901 49,447
Investment securities held to maturity
Purchases (142,430) --
Sales 162,023 --
Net increase in loans (31,574) (8,973)
Acquisition of premises and equipment (3,907) (15)
--------- ---------
Net cash (used in) investing activities (55,034) (14,006)
--------- ---------
The accompanying notes are an integral part of this statement.
7
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Nine Months Ended
September 30,
--------------------------------------
2001 2000
----- -----
Cash flows from financing activities:
Net increase (decrease) in non interest bearing deposits 13,339 (2,209)
Net increase (decrease) in interest bearing deposits 33,983 (3,882)
(Decrease) increase in securities sold under agreements
to repurchase (13,691) 20,402
(Repayment) issuance of long term debt (2,000) 5,000
Acquisition of treasury stock (3,769) (296)
Proceeds from exercise of common stock options 90 15
Dividends paid (258) (213)
--------- ---------
Net cash provided by financing activities 27,694 18,817
--------- ---------
Net decrease (increase) in cash (24,406) 3,883
Cash - beginning of period 36,367 19,879
--------- ---------
Cash - end of period $ 11,961 $ 23,762
========= =========
Supplemental cash flow information:
Cash used to pay interest $ 7,905 $ 3,060
Cash used to pay taxes $ 1,366 $ 6,122
The accompanying notes are an integral part of this statement.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 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 September 30, 2001 and December 31, 2000 and the
consolidated results of its operations for the three and nine month periods
ended September 30, 2001 and 2000, and its consolidated stockholders' equity for
the nine month period ended September 30, 2001, and its consolidated cash flows
for the nine month periods ended September 30, 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 $7.5 million
will be amortized over a 15 year period. The results of GSB Financial's
operations have been included in the Company's balances commencing April 1,
2001.
9
NOTE 2. - (continued)
The following represents the unaudited pro forma results of operations
of the Company as if the merger had occurred on the first date of the period
indicated. This pro forma information should be read in conjunction with the
related historical information and is not necessarily indicative of the results
that would have been attained had the merger actually been consummated on the
dates indicated, nor are they necessarily indicative of our future operating
results.
For The Nine Months Ended For The Year Ended
September 30, 2001 December 31, 2000
----------------------------------- -----------------------------------
(In thousands)
Interest income $20,785 $26,019
Interest expense 10,485 12,227
------- -------
Net interest income 10,300 13,792
Provision for loan losses 412 190
Non-interest income 1,197 15,321
Non-interest expense 7,118 8,916
Net income $ 2,026 $12,531
NOTE 3. Earnings Per Share
Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted average common shares outstanding, excluding
stock options from the calculation. In calculating diluted earnings per share,
the dilutive effect of stock options is calculated using the average market
price for the Company's common stock during the period. The following table
presents the calculation of earnings per share for the periods indicated:
For The Three Months Ended
----------------------------------------------------------------------------------
September 30, 2001 September 30, 2000
-------------------------------------- -----------------------------------------
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 $ 644 2,445 $.26 $1,602 2,124 $.75
Effect of dilutive securities
Options -- 10 -- -- 1 --
------ ----- ---- ------ ------ ----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $ 644 2,455 $.26 $1,602 2,125 $.75
===== ===== ===== ====== ====== ====
Options to purchase 119,375 shares of common stock for $30.00 to $38.00
per share and 44,875 shares of common stock for $38.00 per share were
outstanding during the three month periods ended September 30, 2001 and 2000,
respectively. These options were not included in the computation of diluted
earnings per share because the option exercise price was greater than the
average market price for the Company's common stock during this period.
10
NOTE 3. (continued)
For The Nine Months Ended
------------------------------------------------------------------------------------
September 30, 2001 September 30, 2000
--------------------------------------- ------------------------------------------
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 $1,978 2,301 $.86 $ 11,165 2,131 $ 5.24
Effect of dilutive securities
Options -- 11 -- -- 45 (.11)
------ ----- ---- --------- ------ ------
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $1,978 2,312 $.86 $ 11,165 2,176 $ 5.13
====== ===== ==== ========= ====== ======
Options to purchase 119,375 shares of common stock for $30.00 to $38.00
per share and 44,875 shares of common stock for $38.00 per share were
outstanding during the nine month periods ended September 30, 2001 and 2000,
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 4. Investment Securities
The following tables summarize held to maturity and available-for-sale
investment securities as of September 30, 2001 and December 31, 2000:
September 30, 2001
------------------------------------------------------------------------
Gross Gross
Amortized Cost unrealized unrealized Fair
gains losses value
--------------- ---------------- ----------------- ---------------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 1,444 $ 9 $ -- $1,453
Corporate notes 500 -- -- 500
------- --- ---- ------
Totals $ 1,944 $ 9 $ -- $1,953
======= === ==== ======
December 31, 2000
-------------------------------------------------------------------------
Gross Gross
Amortized Cost unrealized unrealized Fair
gains losses value
--------------- ---------------- ----------------- ---------------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 296 $ -- $ (2) $ 294
Corporate notes 20,455 -- (47) 20,408
------- ---- ----- --------
Totals $20,751 $ -- $ (49) $ 20,702
======= ==== ===== ========
11
NOTE 4. (continued)
September 30, 2001
----------------------------------------------------------------------
Gross Gross
Amortized Cost unrealized unrealized Fair
gains losses value
--------------- --------------- --------------- ----------------
(In thousands)
Available-For-Sale Investment
Securities
U.S. Treasury and U.S.
Government Agencies $146,995 $ 1,493 $ -- $148,488
Mortgage-backed
securities 2,730 7 -- 2,737
Corporate notes 972 -- 148 824
Marketable equity
securities and other 13,778 119 -- 13,897
-------- ------- ----- ------
Totals $164,475 $ 1,619 $ 148 $165,946
======== ======= ===== ========
December 31, 2000
----------------------------------------------------------------------
Gross Gross
Amortized Cost unrealized unrealized Fair
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
======== ===== ===== ========
12
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):
September 30, 2001 December 31, 2000
---------------------------------- ---------------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
Commercial and
professional loans $ 24,822 10.3% $8,920 11.8%
Secured by real estate 212,454 87.8 65,409 86.5
Consumer 3,991 1.6 794 1.0
Other 690 0.3 500 0.7
-------- ----- ------- -----
Total loans 241,957 100.0% 75,623 100.0%
===== =====
Less:
Allowance for loan losses (1,974) (1,108)
------- ------
Loans, net $239,983 $74,515
======== =======
NOTE 6. Deposits
The following table summarizes the composition of the average balances
of major deposit categories:
September 30, 2001 December 31, 2000
------------------------------- ------------------------------
Average Average Average Average
Amount Yield Amount Yield
------ ----- ------ -----
(Dollars in thousands)
Demand deposits $ 19,998 -- $ 14,848 --
NOW and money market 47,313 3.13% 44,582 3.85%
Savings deposits 29,532 2.87 4,454 2.93
Time deposits 142,441 5.47 42,158 5.93
-------- ---- -------- ----
Total deposits $239,284 4.23% $106,042 4.08%
======== ==== ======== ====
13
NOTE 7. Comprehensive Income
The following table presents the components of comprehensive income, based
on the provisions of SFAS No. 130.:
For The Nine Months Ended
--------------------------------------------------------------------------------------------------
September 30, 2001 September 30, 2000
---------------------------------------------- -------------------------------------------------
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 (losses) arising
during period $2,082 $ (833) $1,249 $(15,272) $6,109 $ (9,163)
Less reclassification
adjustment for gains
realized in net income 495 (198) 297 13,288 (5,315) 7,973
------ ------ ------ -------- ------ ---------
Other comprehensive
income (loss), net $1,587 $ (635) $ 952 $ (1,984) $ 794 $ (1,190)
====== ====== ===== ======== ====== =========
Note 8. New Accounting Pronouncements
On June 29, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets. These statements
are expected to result in significant modifications relative to the Company's
accounting for goodwill and other intangible assets. SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 must be accounted for
under the purchase method of accounting. SFAS No. 141 was effective upon
issuance. SFAS No. 142 modifies the accounting for all purchased goodwill and
intangible assets. SFAS No. 142 includes requirements to test goodwill and
indefinite lived intangible assets for impairment rather than amortize them.
SFAS No. 142 will be effective for fiscal years beginning after December 31,
2001 and early adoption is not permitted except for business combinations
entered into after June 30, 2001. Upon adoption of SFAS 142, on January 1, 2002,
the Company will no longer amortize goodwill, thereby eliminating annual
amortization expense of approximately $1.0 million.
On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and
Documentation Issues. SAB No. 102 provides guidance on the development,
documentation, and application of a systematic methodology for determining the
allowance for loans and leases in accordance with US GAAP. The adoption of SAB
No. 102 is not expected to have a material impact on the Company's financial
position or results of operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of Berkshire Bancorp Inc. and subsidiaries (the "Company"). References to the
Company herein shall be deemed to refer to the Company and its consolidated
subsidiaries unless the context otherwise requires. References to per share
amounts refer to diluted shares. References to Notes herein are references to
the "Notes to Consolidated Financial Statements" of the Company located in Item
1 herein.
14
The following table presents the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed in both
dollars and rates.
For The Three Months Ended September 30,
---------------------------------------------------------------------------------
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) $240,361 $ 4,600 7.66% $ 72,242 $ 1,655 9.16%
Investment securities 163,847 2,490 6.08 97,992 1,733 7.07
Other (2)(5) 10,932 96 3.51 18,856 196 4.16
-------- --------- ---- -------- -------- ----
Total interest-earning assets 415,140 7,186 6.92 189,090 3,584 7.58
---- ----
Noninterest-earning assets 37,309 17,958
-------- --------
Total Assets 452,449 207,048
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 106,490 772 2.90% 40,661 368 3.62%
Time deposits 179,812 2,198 4.90 42,235 642 6.08
Other borrowings 36,971 465 5.03 23,923 364 6.09
-------- --------- ---- -------- -------- ----
Total interest-bearing
liabilities 323,273 3,435 4.25 106,819 1,374 5.15
--------- ---- -------- ----
Demand deposits 26,369 13,587
Noninterest-bearing liabilities 5,347 4,115
Stockholders' equity (5) 97,460 82,527
-------- -------
Total liabilities and
stockholders' equity 452,449 207,048
======== =======
Net interest income 3,751 2,210
======== ========
Interest-rate spread (3) 2.67% 2.43%
========== =======
Net interest margin (4) 3.61% 4.68%
========== =======
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.28 1.77
======== ========
----------------------
(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.
15
For The Nine Months Ended September 30,
---------------------------------------------------------------------------------
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) $178,340 $ 10,558 7.89% $ 68,922 $ 4,695 9.08%
Investment securities 129,617 6,576 6.76 89,257 4,637 6.93
Other (2)(5) 15,938 569 4.76 26,755 903 4.50
-------- --------- ---- -------- -------- ----
Total interest-earning assets 323,895 17,703 7.29 184,934 10,235 7.38
----------- -------
Noninterest-earning assets 41,500 19,586
-------- --------
Total Assets 365,395 204,520
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 76,845 1,730 3.00% 54,813 1,573 3.83%
Time deposits 142,441 5,808 5.44 34,243 1,454 5.66
Other borrowings 28,501 1,140 5.33 13,035 580 5.93
-------- --------- ----------- -------- -------- -------
Total interest-bearing
liabilities 247,787 8,678 4.67 102,091 3,607 4.71
--------- ----------- -------- -------
Demand deposits 19,998 15,033
Noninterest-bearing liabilities 4,271 6,328
Stockholders' equity (5) 93,339 81,068
-------- --------
Total liabilities and
stockholders' equity 365,395 204,520
======== ========
Net interest income 9,025 6,628
========= ========
Interest-rate spread (3) 2.62 2.67
============ =======
Net interest margin (4) 3.72% 4.78%
============ =======
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.31 1.81
======== ========
----------------------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits, federal funds sold and securities
purchased under agreements to resell.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest bearing
liabilities.
(4) Net interest margin is net interest income as a percentage of average
interest-earning assets.
(5) Average balances are daily average balances except for the parent company
which have been calculated on a monthly basis.
16
Results of Operations
Results of Operations for the Three and Nine Months Ended September 30, 2001
Compared to the Three and Nine Months Ended September 30, 2000.
General. On March 30, 2001, Berkshire Bancorp Inc. ("Berkshire" or the
"Company"), through its wholly-owned subsidiaries, The Berkshire Bank and
Greater American Finance Group, Inc., completed its merger with GSB Financial
Corporation ("GSB Financial") (see Note 2). This transaction was accounted for
under the purchase method of accounting and, accordingly, the results of
operation for the Company include only the results of operation of GSB Financial
for the six month period from April 1 through September 30, 2001. The Company
acquired total loans, assets and deposits of $134.06 million, $190.04 million
and $127.86 million, respectively.
References to per share amounts below, unless stated otherwise, refer to diluted
shares.
Net Income. Net income for the three-month period ended September 30, 2001 was
$644,000, or $.26 per share, as compared to $1.60 million, or $.75 per share,
for the three-month period ended September 30, 2000. Net income for the
nine-month period ended September 30, 2001 was $1.98 million, or $.86 per share,
as compared to $11.17 million, or $5.13 per share, for the nine-month period
ended September 30, 2000.
Net income in 2000 was favorably impacted by the pretax gain of $13.29
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 $13.29 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 September 30, 2001 and December 31, 2000, the Company owned
130,000 shares of Elottery, Inc. Common Stock with a fair market value of
approximately $46,000 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 nine months of 2001 was in contrast with the
increasing interest rate environment that existed during the first nine months
of 2000.
17
For the quarter ended September 30, 2001, net interest income increased
by $1.54 million, or 69.73%, to $3.75 million, from $2.21 million for the
quarter ended September 30, 2000. The increase was the result of the growth in
average interest-earning assets of $226.05 million, partially offset by the
growth in average interest-bearing liabilities of $216.45 million. The increases
in average interest-earning assets and interest-bearing liabilities were
primarily due to the acquisition of GSB Financial on March 31, 2001. Net
interest rate spread, the difference between the average yield on
interest-earning assets and the average cost of interest bearing liabilities,
improved to 2.67% for the 2001 quarter, from 2.43% for the 2000 quarter. The
increase in net interest rate spread resulted from a 90 basis point decrease in
the average cost of interest-bearing liabilities to 4.25% in the 2001 quarter,
from 5.15% in the 2000 quarter, partly offset by a 66 basis point decrease in
the average yield on interest-earning assets to 6.92% for the 2001 quarter, from
7.58% for the 2000 quarter.
For the nine months ended September 30, 2001, net interest income
increased by $2.40 million, or 36.16%, to $9.03 million, from $6.63 million for
the six months ended September 30, 2000. The increase was the result of the
growth in average interest-earning assets of $138.96 million, partially offset
by the growth in average interest-bearing liabilities of $145.70 million. The
increases in average interest-earning assets and interest-bearing liabilities
were primarily due to the acquisition of GSB Financial on March 31, 2001. Net
interest rate spread declined by 5 basis points to 2.62% for the 2001 six
months, from 2.67% for the 2000 six months. The decline in net interest rate
spread resulted from a decrease in the average cost of interest-bearing
liabilities to 4.67% in the 2001 period, from 4.71% in the 2000 period, and a
decrease in the average yield on interest-earning assets to 7.29% for 2001, from
7.38% for 2000.
Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, was 3.61% for the three months
ended September 30, 2001 as compared to 4.68% for the quarter ended September
30, 2000. For the nine months ended September 30, 2001, net interest margin was
3.72% as compared to 4.78% for the nine months ended September 30, 2000. The
decrease in net interest margin during fiscal 2001 was primarily due to the
acquisition of GSB Financial whose loan portfolio is made up primarily of 1-4
family loans with annual yields less than previously earned by Berkshire and by
the sharply declining interest rate environment. The decrease in net interest
margin was partially offset by the increase in the average amounts
interest-earning assets to $323.90 million in 2001 from $184.93 million in 2000.
Interest Income. Total interest income for the three-month period ended
September 30, 2001 increased by $3.60 million, or 101.50%, to $7.19 million from
$3.58 million for the three-month period ended September 30, 2000. The increase
was the result of a $226.05 million increase in average interest-earning assets
to $415.14 million for the quarter ended September 30, 2001, from $189.09
million for the quarter ended September 30, 2000., partially offset by the
decrease in the average yield of interest-earning assets to 6.92% in 2001, from
7.58% in 2000. The increase in average interest-earning assets was due primarily
to the acquisition of GSB Financial.
Interest income on loans increased by $2.95 million to $4.60 million
for the three months ended September 30, 2001, from $1.66 million for the three
months ended September 30, 2000. The increase is due to an increase of $168.12
million in average loans balances, partially offset by the decrease increase in
the average yield on loans to 7.66% in the 2001 quarter from 9.16% in the 2000
quarter. Interest income on investment securities increased $757,000 to $2.49
million in the 2001 quarter, from $1.73 million in the 2000 quarter. The
increase is due to an increase of $65.86 million in the average balance of
investment securities, partially offset by a decrease in the average yield on
investments to 6.08% in 2001, from 7.07% in 2000.
18
Total interest income for the nine-month period ended September 30,
2001 increased by $7.47 million, or 72.96%, to $17.70 million, from $10.24
million for the nine-month period ended September 30, 2000. The increase was the
result of a $138.96 million increase in average interest-earning assets to
$323.90 million in the 2001 period from $184.93 million in the 2000 period,
partially offset by the decrease in the average yield of interest-earning assets
to 7.29% in 2001, from 7.38% in 2000. The increase in average interest-earning
assets was due to increases in the loan portfolio and investment securities.
Interest income on loans increased by $5.86 million to $10.56 million
for the nine months ended September 30, 2001 from $4.70 million in 2000. The
increase was due to an increase of $109.42 million in average loan balances,
partially offset by the decrease in the average yield on loans to 7.89% in 2001
from 9.08% in 2000. Interest income on investment securities increased $1.94
million to $6.58 million in 2001 from $4.64 million in 2000. The increase is due
to an increase of $40.36 million in the average balance of investment
securities, partially offset by a decrease in the average yield on investments
to 6.76% in 2001 from 6.93% in 2000.
Interest Expense. Total interest expense for the three-month period ended
September 30, 2001 increased $2.06 million to $3.44 million from $1.37 million
for the three-month period ended September 30, 2000. The increase was the result
of a $216.45 million increase in average interest-bearing liabilities to $323.27
million for the quarter ended September 30, 2001 from $106.82 million for the
quarter ended September 30, 2000, partially offset by the decrease in the
average rate paid on interest-bearing liabilities to 4.25% in 2001 from 5.15% in
2000.
The increase in interest-bearing liabilities, comprised of interest
bearing deposits, time deposits and borrowings, was attributable to the
acquisition of GSB Financial and our strategy of employing excess capital to
fund growth. The decrease in the overall costs of interest-bearing liabilities
is primarily due to the declining interest rate environment which serves to
lower the rates paid by the Bank to attract and retain deposit accounts, and
reduces the rates paid for borrowed funds.
Interest expense on interest-bearing deposits, money market and savings
accounts, increased by $404,000, to $772,000 for the 2001 quarter from $368,000
for the 2000 quarter. The increase is due to higher average balances, partially
offset by a decrease in average rates paid on interest-bearing deposits to 2.90%
from 3.62%. Interest expense on time deposits increased by $1.56 million to
$2.20 million for the 2001 quarter from $642,000 for the 2000 quarter. The
increase is due to an increase of $137.58 million in the average balance of time
deposits to $179.81 million for the 2001 quarter from $42.24 million for the
2000 quarter. Interest expense on borrowings increased to $465,000 in the 2001
quarter from $364,000 in the 2000 quarter due to higher average balances,
partially offset by the lower average cost of borrowed funds.
Total interest expense for the nine-month period ended September 30,
2001 increased by $5.07 million to $8.68 million from $3.61 million for the
nine-month period ended September 30, 2000. The increase was the result of a
$145.70 million increase in average interest-bearing liabilities to $247.78
million in the 2001 period from $102.09 million in the 2000 period, partly
offset by the decrease in the average rate paid on interest-bearing liabilities
to 4.67% in the 2001 period from 4.71% in the 2000 period.
Interest expense on interest-bearing deposit accounts increased by
$157,000 to $1.73 million for the 2001 nine months from $1.57 million for the
2000 nine months. The increase is due to higher average balances in the 2001
period partially offset by decrease in average rates paid on interest-bearing
deposits to 3.00% in 2001 from 3.83% in 2000. Interest expense on time deposits
increased by $4.35 million to $5.81 million in 2001 from $1.45 million in 2000.
The increase is due to an increase of $108.20 million in the average balance of
time
19
deposits to $142.44 million in 2001 from $34.24 million in 2000, partially
offset by the decrease in average rates paid on such deposits to 5.44% and 5.66%
for the nine months ended September 30, 2001 and 2000, respectively. Interest
expense on borrowings increased to $1.14 million in 2001 from $580,000 in 2000
due to higher average balances, partially offset by the lower average cost of
borrowed funds.
Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the three and nine
months ended September 30, 2001, total non-interest income was $186,000 and
$1.09 million, respectively, compared to $1.14 million and $14.48 million in the
year ago periods, respectively. Non-interest income in 2000 included $13.29
million of non-recurring realized gains on sales of marketable securities and
$808,000 as a result of the successful settlement of certain prior year
franchise tax issues.
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
and nine months ended September 30, 2001 was $2.46 million and $6.06 million,
respectively, compared to $1.10 million and $3.70 million, respectively, for the
same periods in 2000. The year to year increases are due primarily to increases
in salaries and employee benefits and occupancy expenses resulting from the
acquisition of GSB Financial, and the amortization of the goodwill recorded in
said acquisition.
Provision for Income Tax. During the nine-month period ended September 30, 2001,
the Company recorded income tax expense of $1.92 million, compared to income tax
expense of $6.23 million for the nine-month period ended September 30, 2000. The
tax provisions for federal, state and local taxes recorded for 2001 and 2000
represent effective tax rates of 49.26% and 35.81%, respectively. The increase
in the effective rate is due to tax advantageous investment securities sold by
the Company during the first nine months of 2000, and the increase in
non-deductible goodwill amortization relating to the acquisition of GSB
Financial in 2001.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk. Fluctuations in market interest rates can have a material
effect on the Company's net interest income because the yields earned on loans
and investments may not adjust to market rates of interest with the same
frequency, or with the same speed, as the rates paid by the Bank on its
deposits.
Most of the Bank's deposits are either interest-bearing demand deposits
or short term certificates of deposit and other interest-bearing deposits with
interest rates that fluctuate as market rates change. Management of the Bank
seeks to reduce the risk of interest rate fluctuations by concentrating on loans
and securities investments with either short terms to maturity or with
adjustable rates or other features that cause yields to adjust based upon
interest rate fluctuations. In addition, to cushion itself against the potential
adverse effects of a substantial and sustained increase in market interest
rates, the Bank has purchased off balance sheet interest rate cap contracts
which generally provide that the Bank will be entitled to receive payments from
the other party to the contract if interest rates exceed specified levels. These
contracts are entered into with major financial institutions.
The Company seeks to maximize its net interest margin within an
acceptable level of interest rate risk. Interest rate risk can be defined as the
amount of the forecasted net interest income that may be gained or lost due to
favorable or unfavorable movements in interest rates. Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets
differ significantly from the maturity or repricing characteristics of
liabilities.
20
In the banking industry, a traditional measure of interest rate
sensitivity is known as "gap" analysis, which measures the cumulative
differences between the amounts of assets and liabilities maturing or repricing
at various time intervals. The following table sets forth the Company's interest
rate repricing gaps for selected maturity periods:
Berkshire Bancorp Inc.
Interest Rate Sensitivity Gap at September 30, 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 $ 5,700 $ -- $ -- $ -- $ 5,700
(Rate) 2.50% -- -- -- 2.50%
--------- --------- --------- --------- ----------
Interest bearing deposits
in banks 295 -- -- -- 295
(Rate) 2.00% -- -- -- 2.00%
--------- --------- --------- --------- ----------
Loans (1)(2)
Adjustable rate loans 38,315 23,902 5,524 13,871 81,612
(Rate) 6.94% 7.75% 8.35% 8.30% 7.50%
Fixed rate loans 6,886 713 8,774 143,972 160,345
(Rate) 6.84% 8.87% 8.50% 7.43% 7.46%
--------- --------- --------- --------- ----------
Total loans 45,201 24,615 14,298 157,843 241,957
Investments (3)(4) 9,992 504 4,727 151,035 166,258
(Rate) 3.49% 7.10% 4.77% 5.85% 5.66%
--------- ------- --------- --------- ----------
Total rate-sensitive assets 61,188 25,119 19,025 308,878 414,210
--------- ------- --------- --------- ----------
Deposit accounts (5)
Savings and NOW 61,346 -- -- -- 61,346
(Rate) 2.45% -- -- -- 2.45%
Money market 43,488 -- -- -- 43,488
(Rate) 2.83% -- -- -- 2.83%
Time Deposits 52,896 109,267 17,988 -- 180,151
(Rate) 4.37% 4.35% 4.57% --% 4.38%
--------- -------- --------- --------- ----------
Total deposit accounts 157,730 109,267 17,988 -- 284,985
Repurchase agreements 9,436 -- -- -- 9,436
(Rate) 3.10% -- -- -- 3.10%
Other borrowings -- 5,000 500 22,000 27,500
(Rate) -- 3.56 6.09% 5.90% 5.48%
--------- --------- --------- --------- ----------
Total rate-sensitive liabilities 167,166 114,267 18,488 22,000 321,921
--------- --------- --------- --------- ----------
Interest rate caps 20,000 -- -- (20,000) --
Gap (repricing differences) (85,978) (89,148) 537 266,878 92,289
========= ========= ========= ========= ==========
Cumulative Gap (85,978) (175,126) (174,589) 92,289
========= ========= ========= =========
Cumulative Gap to Total Rate Sensitive
Assets (20.76)% (42.23)% (42.15)% 22.28%
========= ========= ========= =========
---------------
(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.
21
Provision for Loan Losses. The Company maintains an allowance for loan losses at
a level deemed sufficient to absorb losses, which are inherent in the loan
portfolio at each balance sheet date. Management reviews the adequacy of the
allowance on at least a quarterly basis to ensure that the provision for loan
losses has been charged against earnings in an amount necessary to maintain the
allowance at a level that is appropriate based on management's assessment of
probable estimated losses. The Company's methodology for assessing the
appropriateness of the allowance for loan losses consists of several key
elements. These elements include a specific allowance for loan watch list
classified loans, an allowance based on historical trends, an additional
allowance for special circumstances, and an unallocated portion. The Company
consistently applies the following comprehensive methodology.
The allowance for loan watch list classified loans addresses those
loans maintained on the Company's loan watch list, which are assigned a rating
of substandard, doubtful, or loss. Substandard loans are those with a
well-defined weakness or a weakness, which jeopardizes the repayment of the
debt. A loan may be classified as substandard as a result of impairment of the
borrower's financial condition and repayment capacity. Loans for which repayment
plans have not been met or collateral equity margins do not protect the Company
may also be classified as substandard. Doubtful loans have the characteristics
of substandard loans with the added characteristic that collection or
liquidation in full, on the basis of presently existing facts and conditions, is
highly improbable. Although the possibility of loss is extremely high for
doubtful loans, the classification of loss is deferred until pending factors,
which might improve the loan, have been determined. Loans rated as doubtful in
whole or in part are placed in nonaccrual status. Loans, which are classified as
loss, are considered uncollectible and are charged to the allowance for loan
losses. There were no loans classified as of September 30, 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.
22
Since all identified losses are immediately charged off, no portion of
the allowance for loan losses is restricted to any individual loan or groups of
loans, and the entire allowance is available to absorb any and all loan losses.
A loan is placed in a nonaccrual status at the time when ultimate
collectibility of principal or interest, wholly or partially, is in doubt. Past
due loans are those loans which were contractually past due 90 days or more as
to interest or principal payments but are well secured and in the process of
collection. Renegotiated loans are those loans which terms have been
renegotiated to provide a reduction or deferral of principal or interest as a
result of the deteriorating financial position of the borrower.
At September 30, 2001 and 2000, the Company did not have any non
accrual or non performing loans or any loans past due more than 90 days and
still accruing interest. Based upon management's evaluations of the overall
analysis of the Bank's allowance for loan losses and the year over year increase
in total loans to $239.98 million (including $134.1 million acquired in the
merger with GSB Financial) from $73.51 million, the provision for the nine
months ended September 30, 2001 was increased to $1.97 million (including
$691,000 acquired in the merger with GSB Financial) from $1.05 million in the
year ago period.
Management believes that the allowance for loan losses and
nonperforming loans remained safely within acceptable levels.
The following table sets forth information with respect to activity in
the Company's allowance for loan losses during the periods indicated (dollars in
thousands, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2001 2000 2001 2000
---- ---- ---- ----
Average loans outstanding $240,361 $ 72,242 $178,340 $ 68,297
======== ======== ======== ========
Allowance at beginning of period 1,860 1,031 1,108 923
Charge-offs:
Commercial and other loans 12 -- 21 --
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans charged-off 12 -- 21 --
-------- -------- -------- --------
Recoveries:
Commercial and other loans 11 12 34 115
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans recovered 11 12 34 115
-------- -------- -------- --------
Net (charge-offs) recoveries (1) 12 13 115
-------- -------- -------- --------
Provision for loan losses
charged to operating expenses 115 10 162 15
Acquisition of GSB Financial Corp -- -- 691 --
-------- -------- -------- --------
Allowance at end of period 1,974 1,053 1,974 1,053
-------- -------- -------- --------
Ratio of net recoveries (charge-offs)
to average loans outstanding .00% .02% .01% .17%
======== ======== ======== ========
Allowance as a percent of total loans .82% 1.43% .82% 1.43%
======== ======== ======== ========
Total loans at end of period $239,983 $ 73,511 $239,983 $ 73,511
======== ======== ======== ========
23
Loan Portfolio.
Loan Portfolio Composition. The Company's loans consist primarily of mortgage
loans secured by residential and non-residential properties as well as
commercial loans which are either unsecured or secured by personal property
collateral. Most of the Company's loans are either made to individuals or
personally guaranteed by the principals of the business to which the loan is
made. At September 30, 2001, the Company had total loans of $241.96 million and
an allowance for loan losses of $1.97 million. From time to time, the Bank may
originate residential mortgage loans and then sell them on the secondary market,
normally recognizing fee income in connection with the sale.
The following tables set forth information concerning the Company's
loan portfolio by type of loan at the dates indicated:
September 30, December 31,
2001 2000
---------------------- ---------------------
Amount Amount
------ ------
(in thousands)
Commercial and professional loans $ 24,822 $ 8,920
Secured by real estate 212,454 65,409
Consumer 3,991 794
Other 690 500
------- ------
Total loans 241,957 75,623
Less:
Allowance for loan losses (1,974) (1,108)
------- ------
Loans, net $239,983 $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 September 30, 2001 and 2000, the Company did not have any non
accrual or non performing loans, or any loans past due more than 90 days and
still accruing interest.
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 September 30, 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.
24
The following tables set forth the actual and required regulatory
capital amounts and ratios of the Company and The Berkshire Bank as of September
30, 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
------ ----- ------ ----- ------ -----
September 30, 2001
Total Capital (to Risk-Weighted Assets)
Company 79,764 36.4% 17,551 >=8.0% -- N/A
Bank 47,069 23.2% 16,252 >=8.0% 20,315 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 77,790 35.5% 8,776 >=4.0% -- N/A
Bank 45,095 22.2% 8,126 >=4.0% 12,189 >=6.0%
Tier I Capital (to Average Assets)
Company 77,790 17.9% >=4.0% -- N/A
Bank 45,095 10.9% 16,610 >=4.0% 20,762 >=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.
25
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 September 30, 2001,
Berkshire had cash of $16.64 million and marketable securities of $5.26 million.
As more fully describe in Note 2, as of the close of business on March
30, 2001, GSB Financial was merged with and into the Company and Goshen Savings
Bank was merged with and into The Berkshire Bank. The Company utilized
approximately $20.2 million of its cash on hand to fund the cash component of
the transaction.
Impact of Inflation and Changing Prices
The Company's financial statements measure financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increasing cost of the Company's operations.
The assets and liabilities of the Company are largely monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. In addition, interest rates do not
necessarily move in the direction, or to the same extent as the price of goods
and services. However, in general, high inflation rates are accompanied by
higher interest rates, and vice versa.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
10.6 Amendment No. 1 to Employment Agreement, dated August 1, 2001,
by and between The Berkshire Bank and Moses Krausz.
b. There were no reports on Form 8-K filed by the Company during the quarter
for which this report on Form 10-Q is filed.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKSHIRE BANCORP INC.
(Registrant)
Date: November 13, 2001 By: /s/ Steven Rosenberg
----------------- --------------------------
Steven Rosenberg
President and Chief
Financial Officer
27
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
10.6 Amendment No. 1 to Employment Agreement, 29
dated August 1, 2001, by and between
The Berkshire Bank and Moses Krausz.
28
STATEMENT OF DIFFERENCES
The greater-than-or-equal-to sign shall be expressed as.....................>=