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, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________________
Commission file number: 0-13649
BERKSHIRE BANCORP INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2563513
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Broadway, New York, New York 10038
--------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 791-5362
--------------
N/A
--------------------------------------------------
(Former name if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of May 10, 2002, there were 2,321,390 outstanding shares of the
issuers Common Stock, $.10 par value.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q that are not based on
historical fact may be "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Words such as "believe",
"may", "will", "expect", "estimate", "anticipate", "continue" or similar terms
identify forward-looking statements. A wide variety of factors could cause the
Company's actual results and experiences to differ materially from the results
expressed or implied by the Company's forward-looking statements. Some of the
risks and uncertainties that may affect operations, performance, results of the
Company's business, the interest rate sensitivity of its assets and liabilities,
and the adequacy of its loan loss allowance, include, but are not limited to:
(i) deterioration in local, regional, national or global economic conditions
which could result, among other things, in an increase in loan delinquencies, a
decrease in property values, or a change in the housing turnover rate; (ii)
changes in market interest rates or changes in the speed at which market
interest rates change; (iii) changes in laws and regulations affecting the
financial services industry; (iv) changes in competition; (v) changes in
consumer preferences, (vi) changes in banking technology; (vii) ability to
maintain key members of management, (viii) possible disruptions in the Company's
operations at its banking facilities, and other factors referred to in the
sections of this Quarterly Report entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Certain information customarily disclosed by financial institutions,
such as estimates of interest rate sensitivity and the adequacy of the loan loss
allowance, are inherently forward-looking statements because, by their nature,
they represent attempts to estimate what will occur in the future.
The Company cautions readers not to place undue reliance upon any
forward- looking statement contained in this Quarterly Report. Forward-looking
statements speak only as of the date they were made and the Company assumes no
obligation to update or revise any such statements upon any change in applicable
circumstances.
2
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2002 (unaudited) and
December 31, 2001 4
Consolidated Statements of Income
For The Three Months Ended
March 31, 2002 and 2001 (unaudited) 5
Consolidated Statements of Stockholders'
Equity For The Three Months Ended
March 31, 2002 6
Consolidated Statements of Cash Flows
For The Three Months Ended
March 31, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 18
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
March 31, December 31,
2002 2001
----------------------------------
ASSETS
Cash and due from banks $ 3,601 $ 7,170
Interest bearing deposits 222 213
Federal funds sold 12,600 3,000
-------- --------
Total cash and cash equivalents 16,423 10,383
Investment Securities:
Available-for-sale 248,012 240,966
Held-to-maturity 1,498 1,613
-------- --------
Total investment securities 249,510 242,579
Loans, net of unearned income 260,545 252,233
Less: allowance for loan losses (2,058) (2,030)
-------- --------
Net loans 258,487 250,203
Accrued interest receivable 3,587 3,399
Premises and equipment, net 8,337 7,446
Other assets 4,726 4,110
Goodwill, net of amortization of
$2,300 in 2001 18,549 18,438
-------- --------
Total assets $559,619 $536,558
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 33,523 $ 30,163
Interest bearing 353,144 308,613
-------- --------
Total deposits 386,667 338,776
Securities sold under agreements to repurchase 23,833 53,756
Long term borrowings 46,749 42,278
Accrued interest payable 3,395 2,406
Other liabilities 4,199 3,350
-------- --------
Total liabilities 464,843 440,566
-------- --------
Stockholders' equity
Preferred stock - $.10 Par value: -- --
2,000,000 shares authorized - none issued
Common stock - $.10 par value
Authorized -- 10,000,000 shares
Issued -- 2,566,095 shares
Outstanding --
March 31, 2002, 2,348,390 shares
December 31, 2001, 2,379,990 shares 256 256
Additional paid-in capital 89,914 89,914
Retained Earnings 12,359 11,053
Accumulated other comprehensive loss, net (1,874) (281)
Less: Common stock in treasury - at cost:
March 31, 2002, 217,705 shares
December 31, 2001, 186,105 shares (5,879) (4,950)
-------- --------
Total stockholders' equity 94,776 95,992
-------- --------
$559,619 $536,558
======== ========
The accompanying notes are an integral part of this statement.
4
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(unaudited)
For The
Three Months Ended
March 31,
------------------------
2002 2001
------ ------
INTEREST INCOME
Loans $4,543 $1,702
Investment securities 2,750 1,732
Federal funds sold and interest
bearing deposits 23 294
------ ------
Total interest income 7,316 3,728
------ ------
INTEREST EXPENSE
Deposits 2,378 1,496
Borrowings 672 216
------ ------
Total interest expense 3,050 1,712
------ ------
Net interest income 4,266 2,016
PROVISION FOR LOAN LOSSES 50 10
------ ------
Net interest income after
provision for loan losses 4,216 2,006
------ ------
NON-INTEREST INCOME
Service charges on deposits 134 40
Investment securities gains 196 3
Other income 139 125
------ ------
Total non-interest income 469 168
------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,305 619
Net occupancy expense 370 182
Equipment expense 59 30
FDIC assessment 15 6
Data processing expense 37 5
Amortization of goodwill -- 159
Other 613 266
------ ------
Total non-interest expense 2,399 1,267
------ ------
Income before provision for taxes 2,286 907
Provision for income taxes 980 501
------ ------
Net income $1,306 $ 406
====== ======
Net income per share:
Basic $ .55 $ .21
====== ======
Diluted $ .55 $ .21
====== ======
The accompanying notes are an integral part of this statement.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Three Months Ended March 31, 2002
(In Thousands)
Accumulated Accum-
Stock Additional other ulated Total
Common Par paid-in comprehensive earnings Treasury Comprehensive stockholders'
Shares value capital (loss), net (deficit) stock income (loss) equity
------ ----- ---------- ------------- --------- -------- ------------- --------
Balance at December 31, 2001 2,566 $256 $89,914 $ (281) $11,053 $(4,950) $95,992
Net income 1,306 1,306 1,306
Acquisition of treasury shares (929) (929)
Other comprehensive (loss) net
of reclassification adjustment
and taxes (1,593) (1,593) (1,593)
-------
Comprehensive (loss) $ (286)
=======
----- ---- ------- ------- ------- ------- -------
Balance at March 31, 2002 2,566 $256 $89,914 $(1,874) $12,359 $(5,879) $94,776
(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 Three Months Ended
March 31,
------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 1,306 $ 406
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Realized gain on investment securities (197) (3)
Depreciation and amortization 79 192
Provision for loan losses 50 10
(Increase) in accrued interest receivable (188) (174)
Decrease in other assets 298 779
Increase (decrease) in accrued interest payable
and other liabilities 1,838 (312)
--------- --------
Net cash provided by operating activities 3,186 898
--------- --------
Cash flows from investing activities:
Investment securities available for sale
Purchases (164,854) (67,170)
Sales 155,387 75,548
Investment securities held to maturity
Maturities 115 19,965
Net increase in loans (8,334) (812)
Acquisition of premises and equipment (970) (3,667)
--------- --------
Net cash (used in) provided by investing activities (18,656) 23,864
--------- --------
Cash flows from financing activities:
Net increase (decrease) in non interest bearing deposits 3,360 (652)
Net increase (decrease) in interest bearing deposits 44,531 (1,133)
(Decrease) in securities sold under agreements to repurchase (29,923) (13,987)
Proceeds from long term debt 10,000 --
Repayment of long term debt (5,529) --
Acquisition of treasury stock (929) (360)
--------- --------
Net cash provided by (used in) financing activities 21,510 (16,132)
--------- --------
Net increase in cash 6,040 8,630
Cash - beginning of period 10,383 36,367
--------- --------
Cash - end of period $ 16,423 $ 44,997
========= ========
Supplemental cash flow information:
Cash used to pay interest $ 2,061 $ 2,073
Cash used to pay taxes $ 564 $ 680
The accompanying notes are an integral part of this statement.
7
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002 and 2001
NOTE 1. General
Berkshire Bancorp Inc. ("Berkshire" or the "Company"), a Delaware
corporation, is a bank holding company registered under the Bank Holding Company
Act of 1956. Berkshire's principal activity is the ownership and management of
its wholly owned subsidiary, The Berkshire Bank (the "Bank"), a New York State
chartered commercial bank.
The accompanying financial statements of Berkshire Bancorp Inc. and
Subsidiaries includes the accounts of the parent company, Berkshire Bancorp
Inc., and its wholly-owned subsidiaries: The Berkshire Bank and Greater American
Finance Group, Inc.
During interim periods, the Company follows the accounting policies set
forth in its Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Readers are encouraged to refer to the Company's Form 10-K for the
fiscal year ended December 31, 2001 when reviewing this Form 10-Q. Quarterly
results reported herein are not necessarily indicative of results to be expected
for other quarters.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary to present fairly the Company's consolidated
financial position as of March 31, 2002 and December 31, 2001 and the
consolidated results of its operations for the three month periods ended March
31, 2002 and 2001, and its consolidated stockholders' equity for the three
months ended March 31, 2002, and its consolidated cash flows for the three month
periods ended March 31, 2002 and 2001.
NOTE 2. Acquisitions
GSB Financial Corporation/Goshen Savings Bank. On March 30, 2001,
Berkshire, through its wholly-owned subsidiaries, The Berkshire Bank and Greater
American Finance Group, Inc., completed its merger with GSB Financial
Corporation ("GSB Financial"). Under the terms of the merger, 978,032 shares of
GSB Financial common stock were converted into 589,460 shares of Berkshire
common stock, and 974,338 shares of GSB Financial common stock were purchased
for $20.75 per share, totaling approximately $20.2 million. This transaction was
accounted for under the purchase method of accounting and accordingly, the
results of GSB Financial's operations have been included in the Company's
balances commencing April 1, 2001. The acquisition resulted in the recording of
approximately $7.5 million of goodwill, which, through December 31, 2001, has
been amortized on a straight-line basis over 15 years.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 3. Earnings Per Share
Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted average common shares outstanding, excluding
stock options from the calculation. In calculating diluted earnings per share,
the dilutive effect of stock options is calculated using the average market
price for the Company's common stock during the period. The following table
presents the calculation of earnings per share for the periods indicated:
For The Three Months Ended
----------------------------------------------------------------------------
March 31, 2002 March 31, 2001
------------------------------------ ------------------------------------
Per Per
Income Shares share Income Shares share
(numerator) (denominator) amount (numerator) (denominator) amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except per share data)
Basic earnings per share
Net income available to
common stockholders $1,306 2,361 $.55 $406 1,950 $.21
Effect of dilutive securities
Options -- 8 -- -- -- --
------ ----- ---- ---- ----- ----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $1,306 2,369 $.55 $406 1,950 $.21
====== ===== ==== ==== ===== ====
Options to purchase 115,375 shares and 45,375 shares of common stock
for $30.00 to $38.00 per share were outstanding during the three month periods
ended March 31, 2002 and 2001, respectively. These options were not included in
the computation of diluted earnings per share because the option exercise price
was greater than the average market price for the Company's common stock during
this period.
NOTE 4. Investment Securities
The following tables summarize held to maturity and available-for-sale
investment securities as of March 31, 2002 and December 31, 2001:
March 31, 2002
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- ------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 259 $1 $-- $ 260
Mortgage-backed securities 1,239 -- -- 1,239
------ -- --- ------
Totals $1,498 $1 $-- $1,499
====== == === ======
9
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 4. (continued)
December 31, 2001
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- ------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $1,613 $ 8 $(23) $1,598
Mortgage-backed securities -- -- -- --
------ --- ---- ------
Totals $1,613 $ 8 $(23) $1,598
====== === ==== ======
March 31, 2002
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- --------
(In thousands)
Available-For-Sale
Investment Securities
U.S. Treasury and Notes $ 40,241 $ -- $ (486) $ 39,755
U.S. Government Agencies 173,051 125 (2,629) 170,547
Mortgage-backed securities 5,081 8 -- 5,089
Corporate notes 9,339 1 (187) 9,153
Marketable equity
securities and other 23,365 170 (67) 23,468
-------- ---- ------- --------
Totals $251,077 $304 $(3,369) $248,012
======== ==== ======= ========
December 31, 2001
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- ------
(In thousands)
Available-For-Sale
Investment Securities
U.S. Treasury and Notes $ 30,012 $ 34 $ (8) $ 30,038
U.S. Government Agencies 170,610 589 (1,043) 170,156
Mortgage-backed securities 2,493 6 -- 2,499
Corporate notes 751 1 (113) 639
Marketable equity
securities and other 37,547 87 -- 37,634
-------- ---- ------- --------
Totals $241,413 $717 $(1,164) $240,966
======== ==== ======= ========
10
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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, 2002 December 31, 2001
--------------------- ---------------------
% of % of
Amount Total Amount Total
-------- ----- -------- -----
Commercial and professional loans $ 17,323 6.7% $ 19,130 7.6%
Secured by real estate
1-4 family 174,327 66.9 165,195 65.5
Multi family 10,293 4.0 11,186 4.4
Non-residential (commercial) 53,525 20.5 51,893 20.6
Consumer 3,497 1.3 4,689 1.8
Other 1,580 0.6 140 0.1
-------- ----- -------- -----
Total loans 260,545 100.0% 252,233 100.0%
===== =====
Less: Allowance for loan losses (2,058) (2,030)
-------- --------
Loans, net $258,487 $250,203
======== ========
NOTE 6. Deposits
The following table summarizes the composition of the average balances
of major deposit categories:
March 31, 2002 December 31, 2001
-------------- -----------------
Average Average Average Average
Amount Yield Amount Yield
------ ----- ------ -----
(Dollars in thousands)
Demand deposits $ 28,492 -- $ 21,857 --
NOW and money market 60,107 1.33% 51,026 2.64%
Savings deposits 48,539 1.47 34,168 2.69
Time deposits 218,017 3.67 155,079 5.07
-------- ---- -------- ----
Total deposits $355,155 2.68% $262,130 3.89%
======== ==== ======== ====
11
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 7. 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, 2002 March 31, 2001
----------------------------------- -----------------------------------
Tax Tax
Before tax (expense) Net of tax Before tax (expense) Net of tax
amount benefit Amount amount benefit amount
----------------------------------- -----------------------------------
(In thousands)
Unrealized gains (losses)
on investment securities:
Unrealized holding
gains (losses) arising
during period $(2,421) $1,946 $(1,475) $595 $(239) $356
Less reclassification
adjustment for gains
realized in net income 197 (79) 118 3 (2) 1
------- ------ ------- ---- ----- ----
Other comprehensive
income (loss), net $(2,618) $1,025 $(1,593) $592 $(237) $355
======= ====== ======= ==== ===== ====
NOTE 8. New Accounting Pronouncement
Goodwill. Statement of Financial Accounting Standard ("SFAS") No. 141, Business
Combinations ("SFAS No. 141"), and SFAS No. 142, Goodwill and Intangible Assets
("SFAS No. 142") were issued in June 2001. These statements resulted in
significant modifications relative to the Company's accounting for goodwill and
other intangible assets. SFAS No. 142 modifies the accounting for all purchased
goodwill and intangible assets. SFAS No. 142 includes requirements to test
goodwill and indefinite lived intangible assets for impairment rather than
amortize them. The Company has adopted the provisions of SFAS No. 142 as of
January 1, 2002. Therefore, acquired goodwill is no longer amortized. The
Company is in the process of completing the first step of the goodwill
transitional impairment test, as of January 1, 2002. Management does not
anticipate this test to result in an impairment loss.
12
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 8. (continued)
The following table presents a reconciliation of net income and
earnings- per-share amounts, as reported in the financial statements, to those
amounts adjusted for goodwill and intangible asset amortization determined in
accordance with the provisions of Statement of Financial Accounting Standard No.
142.
For The Three Months Ended
March 31,
----------------------------
2002 2001
---- ----
(In thousands, except per share amounts)
Reported net income $1,306 $406
Add back: goodwill amortization 159
------ ----
Adjusted net income $1,306 $565
====== ====
Basic earnings per share:
Reported basic earnings per share $ .55 $.21
Goodwill amortization .08
------ ----
Adjusted basic earnings per share $ .55 $.29
====== ====
Diluted earnings per share:
Reported diluted earnings per share $ .55 $.21
Goodwill amortization .08
------ ----
Adjusted diluted earnings per share $ .55 $.29
====== ====
13
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 March 31,
--------------------------------------------------------------------
2002 2001
------------------------------- --------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
------- --------- ---------- ------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $256,354 $4,543 7.09% $ 77,208 $1,702 8.81%
Investment securities 239,397 2,750 4.59 104,437 1,732 6.64
Other (2)(5) 5,989 23 1.54 20,979 294 5.77
-------- ------ ---- -------- ------ ----
Total interest-earning assets 501,740 7,316 5.83 202,624 3,728 7.38
---- ----
Noninterest-earning assets 35,922 25,894
-------- --------
Total Assets $537,662 $228,518
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits $108,646 379 1.40 $ 27,306 231 3.38
Time deposits 218,017 1,999 3.67 81,939 1,265 6.18
Other borrowings 80,243 672 3.35 16,017 216 5.39
-------- ------ ---- -------- ------ ----
Total interest-bearing
liabilities 406,906 3,050 3.00 125,262 1,712 5.47
------ ---- ------ ----
Demand deposits 28,492 14,747
Noninterest-bearing liabilities 6,459 2,890
Stockholders' equity 95,805 85,619
-------- --------
Total liabilities and
stockholders' equity $537,662 $228,518
======== ========
Net interest income $4,266 $2,016
====== ======
Interest-rate spread (3) 2.83 1.91
==== ====
Net interest margin (4) 3.40 3.98
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.23 1.62
======== ========
----------------------
(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
Results of Operations
Results of Operations for the Three Months Ended March 31, 2002 Compared to the
Three Months Ended March 31, 2001.
General. Berkshire Bancorp Inc., a Delaware corporation ("Berkshire", the
"Company" or "we" and similar pronouns), is a bank holding company registered
under the Bank Holding Company Act of 1956. The Company has one wholly-owned
banking subsidiary, The Berkshire Bank, a New York State chartered commercial
bank (the "Bank").
On March 30, 2001, Berkshire, through its wholly-owned subsidiaries,
The Berkshire Bank and Greater American Finance Group, Inc., completed its
merger with GSB Financial Corporation ("GSB Financial") (see Note 2 of Notes to
Consolidated Financial Statements). This transaction was accounted for under the
purchase method of accounting and, accordingly, the results of operation for the
Company include only the results of operation of GSB Financial for the period
from April 1, 2001. The Company acquired total loans, assets and deposits of
$134.06 million, $190.04 million and $127.86 million, respectively.
References to per share amounts below, unless stated otherwise, refer to diluted
shares.
Net Income. Net income for the three-month period ended March 31, 2002 was $1.31
million, or $.55 per share, as compared to $406,000, or $.21 per share, for the
three-month period ended March 31, 2001. On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, thereby
eliminating annual goodwill amortization expense of approximately $1.0 million.
Had SFAS No. 142 been in effect on January 1, 2001, net income for the first
quarter of fiscal 2001 would have been $565,000, or $.29 per share. (See Note
8.)
Net Interest Income. The Company's primary source of revenue is net interest
income, or the difference between interest income on earning assets and interest
expense on interest-bearing liabilities. For the quarter ended March 31, 2002,
net interest income increased by $2.25 million, or 111.37%, to $4.27 million,
from $2.02 million for the quarter ended March 31, 2001. The increase in net
interest income was the result of the growth in average interest-earning assets
of $299.12 million, partially offset by the growth in average interest-bearing
liabilities of $281.64 million. Such increases in interest-earning assets and
interest-bearing liabilities were largely due to the acquisition of GSB
Financial Corp. on March 30, 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
2.83% in 2002 from 1.91% in 2001. The increase in net interest-rate spread
resulted from a 2.47% decrease in the average cost of interest-bearing
liabilities to 3.00% for the quarter ended March 31, 2002, from 5.47% for the
quarter ended March 31, 2001, partially offset by a decrease of 1.55% in the
average yield on interest-earning assets to 5.83% in 2002, from 7.38% in 2001.
Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, declined by 58 basis points to
3.40% for the first quarter of 2002 from 3.98% for the same period in 2001. The
decrease in net interest margin was due, in part, to the acquisition of GSB
Financial whose loan portfolio consists primarily of 1-4 family mortgage loans
with annualized yields less than previously earned by Berkshire and, in part, by
the sharp decline in interest rates from a prime rate of 8.00% at March 31, 2001
to a prime rate of 4.75% at March 31, 2002. Lower interest rates encourage
homeowners to refinance more costly mortgage loans and reduces the yields on
investment securities purchased by the Bank.
16
For the three-month period ended March 31, 2002, the average balances
of loans, investment securities and total interest-earning assets increased by
approximately 232%, 129% and 148%, respectively, from the three-month period
ended March 31, 2001. However, the average yields on loans, investment
securities and total interest-earning assets decreased by approximately 20%, 31%
and 21%, respectively, during the same periods resulting in lower net interest
margin.
Interest Income. Total interest income for the three-month period ended March
31, 2002 increased by $3.59 million, or 96.25%, to $7.32 million, from $3.73
million for the three-month period ended March 31, 2001. The increase was the
result of a $299.12 million increase in average interest-earning assets to
$501.74 million for the quarter ended March 31, 2001, from $202.62 million for
the quarter ended March 31, 2001, partially offset by a decrease in average
yield to 5.83% in 2002 from 7.38% in 2001. Interest income on loans and
investment securities in the 2002 quarter increased to $4.54 million and $2.75
million, respectively, from $1.70 million and $1.73 million, respectively, in
the 2001 quarter.
Interest Expense. Total interest expense for the three-month period ended March
31, 2002 increased by $1.34 million, or 78.36%, to $3.05 million, from $1.71
million for the three-month period ended March 31, 2001. The increase was the
result of a $281.64 million increase in average interest-bearing liabilities to
$406.91 million for the 2002 quarter, from $125.26 million for the 2001 quarter,
partially offset by the decrease in the average rate paid on interest-bearing
liabilities to 3.00% in 2002, from 5.47% in 2001. Average balances of interest
bearing deposits, time deposits and other borrowings were $108.66 million,
$218.02 million and $80.24 million, respectively, in the 2002 quarter, compared
to $27.31 million, $81.94 million and $16.02 million, respectively, in the 2001
quarter. The increase in deposits accounts was primarily due to the GSB
Financial acquisition, whereas the increase in other borrowings was attributable
to our strategy of employing excess capital to fund the growth of our business.
Interest expense on interest-bearing deposits, time deposits and other
borrowings was $379,000, $2.0 million and $672,000, respectively, in the 2002
quarter, compared to $231,000, $1.27 million and $216,000, respectively, in the
2001 quarter.
Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of marketable securities, loan sales and service fee income. For the three
months ended March 31, 2002, non-interest income was $470,000 as compared to
$168,000 for the three months ended March 31, 2001.
Non-Interest Expense. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees and
other operating expenses associated with the day-to-day operations of the
Company. Total non-interest expense for the three-month period ended March 31,
2002 increased by $1.13 million, or approximately 89%, to $2.40 million from
$1.27 million for the three-month period ended March 31, 2001. The increase was
due primarily to increases of $686,000 for salaries and employee benefits,
$188,000 for occupancy expenses and $347,000 for various other items.
Provision for Income Tax. During the first quarter of 2002, the Company recorded
income tax expense of $980,000 compared to $501,000 for the first quarter of
2001. The tax provisions for federal, state and local taxes recorded for 2002
and 2001 represent effective tax rates of 42.87% and 55.24%, respectively. The
decrease in the effective rate is due to the elimination of the non-deductible
amortization expense of goodwill.
17
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.
18
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, 2002
(in thousands, except for percentages)
--------------------------------------------------------
3 Months 3 Through 1 Through Over
or Less 12 Months 3 Years 3 Years Total
--------- --------- --------- ------- -----
Federal funds sold $ 12,600 $ -- $ -- $ -- $ 12,600
(Rate) 1.63% -- -- -- 1.63%
--------- --------- --------- -------- --------
Interest bearing deposits
in banks 222 -- -- -- 222
(Rate) 1.80% -- -- -- 1.80%
--------- --------- --------- -------- --------
Loans (1)(2)
Adjustable rate loans 39,771 20,841 4,837 14,031 79,480
(Rate) 5.69% 7.14% 8.36% 8.28% 6.69%
Fixed rate loans 30 6,988 8,353 165,694 181,065
(Rate) 9.55% 7.22% 8.10% 7.16% 7.21%
--------- --------- --------- -------- --------
Total loans 39,801 27,829 13,190 179,725 260,545
Investments (3)(4) 5,650 1,108 63,074 177,273 247,105
(Rate) 3.74% 5.16% 3.46% 5.13% 4.84%
--------- --------- --------- -------- --------
Total rate-sensitive assets 58,273 28,937 76,264 356,998 520,472
--------- --------- --------- -------- --------
Deposit accounts (5)
Savings and NOW 66,634 -- -- -- 66,634
(Rate) 1.41% -- -- -- 1.41%
Money market 45,352 -- -- -- 45,352
(Rate) 1.59% -- -- -- 1.59%
Time Deposits 86,252 139,771 15,044 91 241,158
(Rate) 3.56% 3.35% 4.50% 3.67 3.50%
--------- --------- --------- -------- --------
Total deposit accounts 198,238 139,771 15,044 91 353,144
Repurchase agreements 23,833 -- -- -- 23,833
(Rate) 1.94% -- -- -- 1.94%
Other borrowings 10,000 500 -- 36,249 46,749
(Rate) 2.58% 6.09% % 5.14% 4.60%
--------- --------- --------- -------- --------
Total rate-sensitive liabilities 232,071 140,271 15,044 36,340 423,726
--------- --------- --------- -------- --------
Interest rate caps 20,000 -- (10,000) (10,000) --
Gap (repricing differences) (193,798) (111,334) 71,220 330,658 96,746
========= ========= ========= ======== ========
Cumulative Gap (193,798) (305,132) (233,912) 96,746
========= ========= ========= ========
Cumulative Gap to Total Rate
Sensitive Assets (37.24)% (58.63)% (44.94)% 18.59%
========= ========= ========= ========
------------------
(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.
19
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, 2002.
Loans on the loan watch list may also be impaired loans, which are
defined as nonaccrual loans or troubled debt restructurings, which are not in
compliance with their restructured terms. Each of the classified loans on the
loan watch list is individually analyzed to determine the level of the potential
loss in the loan under the current circumstances. The specific reserve
established for these criticized and impaired loans is based on careful analysis
of the loan's performance, the related collateral value, cash flow
considerations and the financial capability of any guarantor. The allowance for
loan watch list classified loans is equal to the total amount of potential
unconfirmed losses for the individual classified loans on the watch list. Loan
watch list loans are managed and monitored by assigned Senior Management.
The allowance based on historical trends uses charge-off experience of
the Company to estimate potential unconfirmed losses in the balances of the loan
and lease portfolios. The historical loss experience percentage is based on the
charge-off history. Historical loss experience percentages are applied to all
non-classified loans to obtain the portion of the allowance for loan losses
which is based on historical trends. Before applying the historical loss
experience percentages, loan balances are reduced by the portion of the loan
balances, which are subject to guarantee, by a government agency. Loan balances
are also adjusted for unearned discount on installment loans.
The Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions, which may cause a
potential loan loss but are not specifically identifiable. It is prudent to
maintain an unallocated portion of the allowance because no matter how detailed
an analysis of potential loan losses is performed these estimates by definition
lack precision. Management must make estimates using assumptions and
information, which is often subjective and changing rapidly.
20
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, 2002 and 2001, the Company did not have any non-accrual or
non-performing loans. Loans past due more than 90 days and still accruing
interest were $75,000 and $0 at March 31, 2002 and 2001, 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 $260.55
million (including $134.10 million acquired in the merger with GSB Financial)
from $76.45 million, the provision for the three months ended March 31, 2001 was
increased to $2.06 million (including $691,000 acquired in the merger with GSB
Financial) from $1.13 million in the year ago period.
The decrease in the allowance as a percentage of loans is due to the
acquisition of Goshen on March 30, 2001. Goshen's loan portfolio is primarily
1-4 family mortgage loans which traditionally have a lower charge off rate.
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,
-------------------------------
2002 2001
---- ----
Average loans outstanding $256,354 $77,208
======== =======
Allowance at beginning of period 2,030 1,108
Charge-offs:
Commercial and other loans 24 --
-------- -------
Total loans charged-off 24 --
-------- -------
Recoveries:
Commercial and other loans 2 10
-------- -------
Total loans recovered 2 10
-------- -------
Net (charge-offs) recoveries (22) 10
-------- -------
Provision for loan losses
charged to operating expenses 50 10
-------- -------
Allowance at end of period $ 2,058 $ 1,128
-------- -------
Ratio of net recoveries (charge-offs)
to average loans outstanding (.01)% .01%
======== =======
Allowance as a percent of total loans 0.79% 1.48%
======== =======
Total loans at end of period $260,545 $76,445
======== =======
21
Loan Portfolio.
Loan Portfolio Composition. The Company's loans consist primarily of mortgage
loans secured by residential and non-residential properties as well as
commercial loans which are either unsecured or secured by personal property
collateral. Most of the Company's commercial loans are either made to
individuals or personally guaranteed by the principals of the business to which
the loan is made. At March 31, 2002, the Company had total loans of $260.55
million and an allowance for loan losses of $2.06 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,
2002 2001
---------- ------------
Amount Amount
------ ------
(in thousands)
Commercial and professional loans $ 17,323 $ 19,130
Secured by real estate
1-4 family 174,327 165,195
Multi family 10,293 11,186
Non-residential (commercial) 53,525 51,893
Consumer 3,497 4,698
Other 1,580 140
-------- --------
Total loans 260,545 252,233
Less: Allowance for loan losses (2,058) (2,030)
-------- --------
Loans, net $258,487 $250,203
======== ========
It is the Bank's policy to discontinue accruing interest on a loan when
it is 90 days past due or if management believes that continued interest
accruals are unjustified. The Bank may continue interest accruals if a loan is
more than 90 days past due if the Bank determines that the nature of the
delinquency and the collateral are such that collection of the principal and
interest on the loan in full is reasonably assured. When the accrual of interest
is discontinued, all accrued but unpaid interest is charged against current
period income. Once the accrual of interest is discontinued, the Bank records
interest as and when received until the loan is restored to accruing status. If
the Bank determines that collection of the loan in full is in reasonable doubt,
then amounts received are recorded as a reduction of principal until the loan is
returned to accruing status.
At March 31, 2002 and 2001, the Company did not have any non-accrual or
non-performing loans. Loans past due more than 90 days and still accruing
interest were $75,000 and $0 at March 31, 2002 and 2001, 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, 2002, the most recent notification from the
FDIC categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain certain Total risk-based, Tier I risk-based, and Tier I leverage
ratios. There are no conditions or events since the notification that management
believes have changed the Bank's category.
22
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,
2002 and December 31, 2001 (dollars in thousands):
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ------
March 31, 2002
Total Capital (to Risk-Weighted Assets)
Company 76,411 29.8% 20,546 >=8.0% -- N/A
Bank 49,256 20.9% 18,896 >=8.0% 23,620 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 74,353 29.0% 10,273 >=4.0% -- N/A
Bank 47,198 20.0% 9,448 >=4.0% 14,172 >=6.0%
Tier I Capital (to Average Assets)
Company 74,353 14.3% 20,765 >=4.0% -- N/A
Bank 47,198 9.1% 20,847 >=4.0% 26,059 >=5.0%
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ------
December 31, 2001
Total Capital (to Risk-Weighted Assets)
Company $79,867 20.5% $20,097 >=8.0% -- N/A
Bank 48,110 20.4% 18,841 >=8.0% 23,551 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 77,837 31.0% 10,048 >=4.0% -- N/A
Bank 46,080 19.6% 9,421 >=4.0% 14,130 >=6.0%
Tier I Capital (to Average Assets)
Company 77,837 20.5% 15,194 >=4.0% -- N/A
Bank 46,080 9.6% 19,190 >=4.0% 23,988 >=5.0%
Liquidity
The management of the Company's liquidity focuses on ensuring that
sufficient funds are available to meet loan funding commitments, withdrawals
from deposit accounts, the repayment of borrowed funds, and ensuring that the
Bank and the Company comply with regulatory liquidity requirements. Liquidity
needs of The 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., 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, 2002, Berkshire had cash and
cash equivalents of $13.7 million and investment securities available for sale
of $5.6 million.
23
The Company maintains financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and stand-by
letters of credit.
At March 31, 2002, the Company had outstanding commitments of
approximately $8.0 million. These commitments include $6.4 million that mature
or renew within one year, $1.6 million that mature or renew after one year and
within three years, $29,000 that mature or renew after three years and within
five years and $0 commitments that mature or renew after five years.
The Company currently does not have any unconsolidated subsidiaries or
special purpose entities.
As more fully describe in Note 2, as of the close of business on March
30, 2001, GSB Financial was merged with and into the Company and Goshen Savings
Bank was merged with and into The Berkshire Bank. The Company utilized
approximately $20.2 million of its cash on hand to fund the cash component of
the transaction.
Impact of Inflation and Changing Prices
The Company's financial statements measure financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increasing cost of the Company's operations.
The assets and liabilities of the Company are largely monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. In addition, interest rates do not
necessarily move in the direction, or to the same extent as the price of goods
and services. However, in general, high inflation rates are accompanied by
higher interest rates, and vice versa.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. The Company did not file any reports on Form 8-K during the quarter for
which this report on Form 10-Q is filed.
24
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 13, 2002 By: /s/ Steven Rosenberg
------------ -------------------------
Steven Rosenberg
President and Chief
Financial Officer
25
STATEMENT OF DIFFERENCES
The greater-than-or-equal-to sign shall be expressed as....................>=