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, 2003
----------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________________
Commission file number: 0-13649
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BERKSHIRE BANCORP INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2563513
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Broadway, New York, New York 10038
--------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 791-5362
---------------
N/A
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of November 7, 2003, there were 2,210,780 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
September 30, 2003 (unaudited) and
December 31, 2002 4
Consolidated Statements of Income
For The Three and Nine Months Ended
September 30, 2003 and 2002 (unaudited) 5
Consolidated Statement of Stockholders'
Equity For The Nine Months Ended
September 30, 2003 (unaudited) 6
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30,
2003 and 2002 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 17
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 23
Item 4. Controls and Procedures 29
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 30
Signature 31
Index of Exhibits
3
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
September 30, December 31,
2003 2002
----------------------------------
ASSETS
Cash and due from banks $ 4,965 $ 6,183
Interest bearing deposits 282 127
--------- ---------
Total cash and cash equivalents 5,247 6,310
Investment Securities:
Available-for-sale 489,082 370,625
Held-to-maturity 733 833
--------- ---------
Total investment securities 489,815 371,458
Loans, net of unearned income 295,019 275,497
Less: allowance for loan losses (2,503) (2,315)
--------- ---------
Net loans 292,516 273,182
Accrued interest receivable 5,302 4,106
Premises and equipment, net 8,778 8,976
Other assets 2,728 1,157
Goodwill, net 18,549 18,549
--------- ---------
Total assets $ 822,935 $ 683,738
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 34,780 $ 31,320
Interest bearing 541,971 442,498
--------- ---------
Total deposits 576,751 473,818
Securities sold under agreements to repurchase 74,134 46,673
Long term borrowings 65,530 57,699
Accrued interest payable 2,267 3,348
Other liabilities 3,836 3,675
--------- ---------
Total liabilities 722,518 585,213
--------- ---------
Stockholders' equity
Preferred stock - $.10 Par value: -- --
2,000,000 shares authorized - none issued
Common stock - $.10 par value
Authorized -- 10,000,000 shares
Issued -- 2,566,095 shares
Outstanding --
September 30, 2003, 2,210,280 shares
December 31, 2002, 2,237,976 shares 256 256
Additional paid-in capital 89,866 89,890
Retained earnings 21,152 16,145
Accumulated other comprehensive
income (loss), net (653) 1,480
Common stock in treasury - at cost:
September 30, 2003, 355,815 shares
December 31, 2002, 328,119 shares (10,204) (9,246)
--------- ---------
Total stockholders' equity 100,417 98,525
--------- ---------
$ 822,935 $ 683,738
========= =========
The accompanying notes are an integral part of these statements.
4
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(unaudited)
For The For The
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2003 2002 2003 2002
------ ------ ------- -------
INTEREST INCOME
Loans $4,786 $4,730 $14,250 $13,943
Investment securities 4,068 3,740 11,467 9,815
Federal funds sold and
interest bearing deposits 58 25 84 71
------ ------ ------- -------
Total interest income 8,912 8,495 25,801 23,829
------ ------ ------- -------
INTEREST EXPENSE
Deposits 2,517 2,762 7,712 7,753
Borrowings 815 802 2,403 2,140
------ ------ ------- -------
Total interest expense 3,332 3,564 10,115 9,893
------ ------ ------- -------
Net interest income 5,580 4,931 15,686 13,936
PROVISION FOR LOAN LOSSES 45 200 195 357
------ ------ ------- -------
Net interest income after
provision for loan losses 5,535 4,731 15,491 13,579
------ ------ ------- -------
NON-INTEREST INCOME
Service charges on deposits 134 112 489 350
Investment securities gains 183 681 1,669 1,070
Other income 163 5 477 192
------ ------ ------- -------
Total non-interest income 480 798 2,635 1,612
------ ------ ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,413 1,269 4,139 3,869
Net occupancy expense 432 501 1,262 1,244
Equipment expense 81 76 292 209
FDIC assessment 21 17 59 47
Data processing expense 35 108 148 164
Other 1,111 927 2,632 2,566
------ ------ ------- -------
Total non-interest expense 3,093 2,898 8,532 8,099
------ ------ ------- -------
Income before provision for taxes 2,922 2,631 9,594 7,092
Provision for income taxes 1,339 1,118 4,322 3,086
------ ------ ------- -------
Net income $1,583 $1,513 $ 5,272 $ 4,006
====== ====== ======= =======
Net income per share:
Basic $ .72 $ .67 $ 2.38 $ 1.73
====== ====== ======= =======
Diluted $ .70 $ .67 $ 2.35 $ 1.73
====== ====== ======= =======
The accompanying notes are an integral part of these statements.
5
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 2003
(In Thousands)
Accumulated
other
Common Stock Additional comprehensive Accum-
Par paid-in income (loss) lated
Shares value capital net earnings
------ ----- --------- ----- --------
Balance at December 31, 2002 2,566 $256 $89,890 $ 1,480 $ 16,145
Net income 5,272
Treasury shares issued for (24)
options exercised
Acquisition of treasury shares
Other comprehensive income (loss)
net of reclassification adjustment
and taxes (2,133)
Comprehensive income
Cash dividends
(265)
------ ---- ------- ------- --------
Balance at September 30, 2003 2,566 $256 $89,866 $ (653) $ 21,152
(Unaudited) ==== ======= ======= ========
Total
Treasury Comprehensive stockholders'
stock income equity
------- -------- -------
Balance at December 31, 2002 $(9,246) $ 98,525
Net income 5,272 5,272
Treasury shares issued for 153 129
options exercised
Acquisition of treasury shares (1,111) (1,111)
Other comprehensive income (loss)
net of reclassification adjustment
and taxes (2,133) (2,133)
-------
Comprehensive income $ 3,139
=======
Cash dividends
(265)
-------- --------
Balance at September 30, 2003 $(10,204) $100,417
(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,
----------------------------------------
2003 2002
------ -----
Cash flows from operating activities:
Net income $ 5,272 $ 4,006
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized gains on investment securities (1,669) (1,070)
Depreciation and amortization 465 280
Provision for loan losses 195 357
(Increase) in accrued interest receivable (1,196) (790)
(Increase) decrease in other assets (1,511) 1,172
Increase (decrease) in accrued interest
payable and other liabilities (1,531) 2,310
---------- --------
Net cash provided by operating activities 25 6,265
---------- --------
Cash flows from investing activities:
Investment securities available for sale
Purchases (1,604,999) (1,048,313)
Sales 1,485,877 950,496
Investment securities held to maturity
Sales and maturities 97 700
Net (increase) in loans (18,774) (21,879)
Purchase of premises and equipment (267) (1,507)
---------- --------
Net cash (used in) investing activities (138,066) (120,503)
---------- ---------
7
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Nine Months Ended
September 30,
----------------------------------------
2003 2002
------ -----
Cash flows from financing activities:
Net increase in non interest bearing deposits 3,460 2,148
Net increase in interest bearing deposits 99,473 115,151
Increase (decrease) in securities sold under
agreements to repurchase 27,461 (7,056)
Proceeds from long term debt 7,831 7,113
Acquisition of treasury stock (1,111) (4,258)
Proceeds from exercise of common stock options 129 81
Dividends paid (265) (235)
-------- --------
Net cash provided by financing activities 136,978 112,944
-------- --------
Net (decrease) in cash (1,063) (1,294)
Cash - beginning of period 6,310 10,383
-------- --------
Cash - end of period $ 5,247 $ 9,089
======== ========
Supplemental cash flow information:
Cash used to pay interest $ 11,196 $ 9,095
Cash used to pay taxes, net of refunds $ 3,621 $ 3,876
The accompanying notes are an integral part of these statements.
8
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003 and 2002
NOTE 1. General
Berkshire Bancorp Inc. ("Berkshire" or the "Company"), a Delaware
corporation, is a bank holding company registered under the Bank Holding Company
Act of 1956. Berkshire's principal activity is the ownership and management of
its wholly owned subsidiary, The Berkshire Bank (the "Bank"), a New York State
chartered commercial bank.
The accompanying financial statements of Berkshire Bancorp Inc. and
subsidiaries includes the accounts of the parent company, Berkshire Bancorp
Inc., and its wholly-owned subsidiaries: The Berkshire Bank and Greater American
Finance Group, Inc.
During interim periods, the Company follows the accounting policies set
forth in its Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Readers are encouraged to refer to the Company's Form 10-K for the
fiscal year ended December 31, 2002 when reviewing this Form 10-Q. Quarterly
results reported herein are not necessarily indicative of results to be expected
for other quarters.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary to present fairly the Company's consolidated
financial position as of September 30, 2003 and December 31, 2002 and the
consolidated results of its operations for the three and nine month periods
ended September 30, 2003 and 2002, and its consolidated stockholders' equity for
the nine month period ended September 30, 2003, and its consolidated cash flows
for the nine month periods ended September 30, 2003 and 2002.
NOTE 2. Earnings Per Share
Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted average common shares outstanding, excluding
stock options from the calculation. In calculating diluted earnings per share,
the dilutive effect of stock options is calculated using the average market
price for the Company's common stock during the period. The following table
presents the calculation of earnings per share for the periods indicated:
For The Three Months Ended
---------------------------------------------------------------------------------------
September 30, 2003 September 30, 2002
----------------------------------------- --------------------------------------------
Per Per
Income Shares share Income Shares share
(numerator) (denominator) amount (numerator) (denominator) amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except per share data)
Basic earnings per share
Net income available to
common stockholders $ 1,583 2,209 $ .72 $ 1,513 2,252 $ .67
Effect of dilutive securities
options -- 40 .02 -- 14 .--
-------- ------- ------ -------- ------- ------
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $ 1,583 2,249 $ .70 $ 1,513 2,266 $ .67
======== ======= ====== ======== ======= ======
9
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 2. - (continued)
Options to purchase 45,375 shares of common stock for $31.75 to $38.00
per share were outstanding during the three month period ended September 30,
2002. These options were not included in the computation of diluted earnings per
share because the option exercise price was greater than the average market
price for the Company's common stock during this period.
For The Nine Months Ended
---------------------------------------------------------------------------------------
September 30, 2003 September 30, 2002
----------------------------------------- --------------------------------------------
Per Per
Income Shares share Income Shares share
(numerator) (denominator) amount (numerator) (denominator) amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except per share data)
Basic earnings per share
Net income available to
common stockholders $ 5,272 2,216 $ 2.38 $ 4,006 2,309 $ 1.73
Effect of dilutive securities
options -- 31 .03 -- 10 .--
-------- ------- ------ -------- ------- ------
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $ 5,272 2,247 $ 2.35 $ 4,006 2,319 $ 1.73
======== ======= ====== ======== ======= ======
Options to purchase 40,375 shares of common stock for $38.00 per share
and 45,375 shares of common stock for $31.75 to $38.00 per share were
outstanding during the nine month periods ended September 30, 2003 and 2002,
respectively. These options were not included in the computation of diluted
earnings per share because the option exercise price was greater than the
average market price for the Company's common stock during this period.
10
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 3. Investment Securities
The following tables summarize held to maturity and available-for-sale
investment securities as of September 30, 2003 and December 31, 2002:
September 30, 2003
----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
---------------- ------------------- ------------------- -----------------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 733 $ 3 $ -- $ 736
------- ------- ------- --------
Totals $ 733 $ 3 $ -- $ 736
======= ======= ======= ========
December 31, 2002
----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
---------------- ------------------- ------------------- -----------------
(In thousands)
Held To Maturity
Investment Securities
U.S. Government Agencies $ 833 $ 3 $ (1) $ 835
------- ------- ------- --------
Totals $ 833 $ 3 $ (1) $ 835
======= ======= ======= ========
September 30, 2003
--------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
----------------- ----------------- ----------------- -----------------
(In thousands)
Available-For-Sale
Investment Securities
U.S. Treasury and Notes $ 34,925 $ 11 $ (66) $ 34,870
U.S. Government Agencies 403,931 1,001 (4,124) 400,808
Mortgage-backed securities 35,359 1,548 (30) 36,877
Corporate notes 1,571 51 (123) 1,499
Marketable equity
securities and other 14,932 247 (151) 15,028
-------- ------- ------- --------
Totals $490,718 $ 2,858 $(4,494) $489,082
======== ======= ======= ========
11
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 3. - (continued)
December 31, 2002
--------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
----------------- ----------------- ----------------- ------------------
(In thousands)
Available-For-Sale
Investment securities
U.S. Treasury and Notes $ 20,110 $ 103 $ -- $ 20,213
U.S. Government Agencies 301,224 2,376 (3) 303,597
Mortgage-backed securities 6,256 6 -- 6,262
Corporate Notes 3,878 495 (297) 4,076
Marketable equity
securities and other 33,383 242 (148) 36,477
-------- ------- ------- --------
Totals $367,851 $ 3,222 $ (448) $370,625
======== ======= ======= ========
NOTE 4. Loan Portfolio
The following table sets forth information concerning the Company's
loan portfolio by type of loan at the dates indicated:
September 30, 2003 December 31, 2002
------------------------------------- ------------------------------
% of % of
Amount Total Amount Total
-------- ----- -------- -----
(Dollars in thousands)
Commercial and professional loans $ 20,423 6.9% $ 16,704 6.1%
Secured by real estate
1-4 family 174,018 58.8 180,730 65.4
Multi family 6,776 2.3 8,958 3.2
Non-residential (commercial) 92,108 31.1 65,809 23.8
Consumer 2,515 0.9 4,051 1.5
--
-------- ----- -------- -----
Total loans 295,840 100.0% 276,252 100.0%
===== =====
Deferred loan fees (821) (755)
Allowance for loan losses (2,503) (2,315)
-------- --------
Loans, net $292,516 $273,182
======== ========
12
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 5. Deposits
The following table summarizes the composition of the average balances
of major deposit categories:
September 30, 2003 December 31, 2002
------------------ -----------------
Average Average Average Average
Amount Yield Amount Yield
------ ----- ------ -----
(Dollars in thousands)
Demand deposits $ 30,737 -- $ 30,102 --
NOW and money market 58,016 0.81% 60,114 1.28%
Savings deposits 119,553 1.55 56,217 1.56
Time deposits 322,109 2.43 273,452 3.21
-------- ---- -------- ----
Total deposits $530,415 1.94% $419,885 2.48%
======== ==== ======== ====
NOTE 6. 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, 2003 September 30, 2002
---------------------------------------------- --------------------------------------------------
Tax Tax
Before tax (expense) Net of tax Before tax (expense) Net of tax
amount benefit Amount amount benefit amount
------------------------------ --------------- ------------------------------------ -------------
(In thousands)
Unrealized (losses)
gains on investment
securities:
Unrealized holding $ (1,886) $ 754 $ (1,132) $ 1,310 $ (524) $ 786
gains (losses) arising
during period
Less reclassification
adjustment for (losses)
gains realized in
net income 1,669 (668) 1,001 1,070 (428) 642
-------- -------- -------- -------- -------- --------
Other comprehensive
(loss) income, net $ (3,555) $ 1,422 $ (2,133) $ 240 $ (96) $ 144
======== ======== ======== ======== ======== ========
13
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 7. Accounting For Stock Based Compensation
SFAS No. 148 "Accounting for Stock Based Compensation-Transition and
Disclosure", which amends the disclosure and certain provisions of SFAS No. 123,
was issued in December 2002. SFAS No. 148 requires all entities with stock based
employee compensation arrangements to provide additional disclosures in their
summary of significant accounting policies note. The Company has one stock-based
employee compensation plan. The Company accounts for that plan under the
recognition and measurement principles of APB No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Stock-based employee
compensation costs are not reflected in net income, as all options granted under
the plan had an exercise price equal to the market value of the underlying
common stock on the date of the grant. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
For The
Three Months Ended
September 30,
-------------------------
2003 2002
------ -----
(In thousands, except
per share amounts)
Net income As Reported: $ 1,583 $ 1,513
Less: Stock based compensation
costs determined under fair
value methods for all awards -- --
------- -------
Pro Forma: $ 1,583 $ 1,513
======= =======
Basic earnings per share As Reported: $ .72 $ .67
Pro Forma: .72 .67
Diluted earnings per share As Reported: $ .70 $ .67
Pro Forma: .70 .67
For The
Nine Months Ended
September 30,
-------------------------
2003 2002
------ -----
(In thousands, except
per share amounts)
Net income As Reported: $ 5,272 $ 4,006
Less: Stock based compensation
costs determined under fair
value methods for all awards -- --
------- -------
Pro Forma: $ 5,272 $ 4,006
======= =======
Basic earnings per share As Reported: $ 2.38 $ 1.73
Pro Forma: 2.38 1.73
Diluted earnings per share As Reported: $ 2.35 $ 1.73
Pro Forma: 2.35 1.73
The Company did not grant options during the three and nine months
ended September 30, 2003 and 2002.
14
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE 8. New Accounting Pronouncements
Accounting for Loans or Certain Debt Securities Acquired in a Transfer
In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or
Certain Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with
the evidence of deterioration of credit quality since origination acquired by
completion of a transfer for which it is probable at acquisition, that the
Company will be unable to collect all contractually required payments
receivable. SOP 03-3 requires that the Company recognize the excess of all cash
flows expected at acquisition over the investor's initial investment in the loan
as interest income on a level-yield basis over the life of the loan as the
accretable yield. The loan's contractual required payments receivable in excess
of the amount of its cash flows excepted at acquisition (nonaccretable
difference) should not be recognized as an adjustment to yield, a loss accrual
or a valuation allowance for credit risk. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 31, 2004. Early adoption is
permitted. Management is currently evaluating the provisions of SOP 03-3.
Derivative Instruments and Hedging Activities
The Company adopted Statement of Financial Accounting Standard 149
(SFAS No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after September 30, 2003. The
Company periodically enters into commitments with its customers, which it
intends to sell in the future. Management does not anticipate the adoption of
SFAS No. 149 to have a material impact on the Company's financial position or
results of operations.
Financial Instruments with Characteristics of both Liabilities and Equity
The FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, on May 15,
2003. SFAS No. 150 changes the classification in the statement of financial
position of certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial statements
to recognize changes in fair value or redemption amount, as applicable, in
earnings. SFAS No. 150 is effective for public companies for financial
instruments entered into or modified after May 31, 2003 and is effective at the
beginning of the first interim period beginning after June 15, 2003. Management
does not anticipate the adoption of SFAS No. 150 to have a material impact on
the Company's financial position or results of operations.
Off Balance Sheet Guarantees
The Company adopted FASB Interpretation 45 (FIN 45) Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others on January 1, 2003. FIN 45 requires a
guarantor entity, at the inception of a guarantee covered by the measurement
provisions of the interpretation, to record a liability for the fair value of
the obligation undertaken in issuing the guarantee. The Company has financial
and performance letters of credit. Financial letters of credit require the
Company to make payment if the customer's financial condition deteriorates, as
defined in the agreements. Performance letters of credit require the Company to
make payments
15
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 8. - (continued)
if the customer fails to perform certain non-financial contractual obligations.
The Company previously did not record an initial liability, other than the fees
received for these letters of credit, when guaranteeing obligations unless it
became probable that the Company would have to perform under the guarantee. FIN
45 applies prospectively to letters of credit the Company issues or modifies
subsequent to December 31, 2002.
The Company defines the initial fair value of these letters of credit
as the fee received from the customer. The maximum potential undiscounted amount
of future payments of these letters of credit as of September 30, 2003 are
$19.94 million and they expire through 2008. Amounts due under these letters of
credit would be reduced by any proceeds that the Company would be able to obtain
in liquidating the collateral for the loans, which varies depending on the
customer.
Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, for certain
entities that do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. The Company has
not acquired any variable interest entities after February 1, 2003 through
September 30, 2003. The Company is in process of determining what impact, if
any, the adoption of the provisions of FIN 46 will have on entities held prior
to the issuance of FIN 46 on its financial condition or results of operations.
The adoption of FIN 46 did not have a material impact on the consolidated
financial position or results of operations.
Note 9. Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and the
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
The Company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than any of its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires material estimates, including, among others, expected default
probabilities, loss given default, the amounts and timing of expected future
cash flows on impaired loans, mortgages, and general amounts for historical loss
experience. The process also considers economic conditions, uncertainties in
estimating losses and inherent risks in the loan portfolio. All of these factors
may be susceptible to significant change. To the extent actual outcomes differ
16
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 9. - (continued)
from management estimates, additional provisions for loan losses may be required
that would adversely impact earnings in future periods.
With the adoption of SFAS No. 142 on January 1, 2002, the Company
discontinued the amortization of goodwill resulting from acquisitions. Goodwill
is now subject to impairment testing at least annually to determine whether
write-downs of the recorded balances are necessary. The Company tests for
impairment based on the goodwill maintained at each defined reporting unit. A
fair value is determined for each reporting unit based on at least one of three
various market valuation methodologies. If the fair values of the reporting
units exceed their book values, no write-down of recorded goodwill is necessary.
If the fair value of the reporting unit is less, an expense may be required on
the Company's books to write down the related goodwill to the proper carrying
value. As of December 31, 2002, the Company completed its transitional testing,
which determined that no impairment write-offs were necessary.
The Company recognizes deferred tax assets and liabilities for the
future tax effects of temporary differences, net operating loss carryforwards
and tax credits. Deferred tax assets are subject to management's judgment based
upon available evidence that future realization is more likely than not. If
management determines that the Company may be unable to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the recorded value of the net deferred tax asset to the
expected realizable amount.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of Berkshire Bancorp Inc., a Delaware corporation ("Berkshire, the "Company", or
"we" and similar pronouns). References to the Company herein shall be deemed to
refer to the Company and its consolidated subsidiaries unless the context
otherwise requires. References to per share amounts refer to diluted shares.
References to Notes herein are references to the "Notes to Consolidated
Financial Statements" of the Company located in Item 1 herein.
17
The following table presents the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed in both
dollars and rates.
For The Three Months Ended September 30,
------------------------------------------------------------------------------
2003 2002
----------------------------------- --------------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
------- --------- ---------- ------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $283,944 $4,786 6.74% $269,938 $4,730 7.01%
Investment securities 467,063 4,068 3.48 333,326 3,740 4.49
Other (2)(5) 2,925 58 7.93 5,453 25 1.83
-------- ------ ---- -------- ------ ----
Total interest-earning assets 753,932 8,912 4.73 608,717 8,495 5.58
---- ----
Noninterest-earning assets 35,949 35,844
-------- --------
Total Assets $789,881 $644,561
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 206,632 716 1.39% 119,932 431 1.44%
Time deposits 326,852 1,801 1.84 299,609 2,331 3.11
Other borrowings 113,993 815 2.87 89,423 802 3.59
-------- ------ ---- -------- ------ ----
Total interest-bearing
liabilities 647,477 3,332 2.06 508,964 3,564 2.80
------ ---- ------ ----
Demand deposits 31,579 32,060
Noninterest-bearing liabilities 6,792 7,965
Stockholders' equity (5) 104,033 95,572
-------- --------
Total liabilities and
stockholders' equity $789,881 $644,561
======== ========
Net interest income 5,580 4,931
====== ======
Interest-rate spread (3) 2.67% 2.78%
==== ====
Net interest margin (4) 2.96% 3.24%
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.16 1.20
======== ========
----------------------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits, federal funds sold and securities
purchased under agreements to resell.
(3) Interest-rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest
bearing liabilities.
(4) Net interest margin is net interest income as a percentage of average
interest-earning assets.
(5) Average balances are daily average balances except for the parent
company which have been calculated on a monthly basis.
18
For The Nine Months Ended September 30,
----------------------------------------------------------------------
2003 2002
----------------------------------- ----------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
------- --------- ---------- ------- --------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1) $278,077 $14,250 6.83% $263,756 $13,943 7.05%
Investment securities 426,708 11,467 3.58 280,756 9,815 4.66
Other (2)(5) 4,558 84 2.46 5,671 71 1.67
-------- ------- ---- -------- ------- ----
Total interest-earning assets 709,343 25,801 4.85 550,183 23,829 5.77
---- ----
Noninterest-earning assets 36,640 36,460
-------- --------
Total Assets $745,983 $586,643
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 177,569 1,833 1.38% 112,538 1,192 1.41%
Time deposits 322,109 5,879 2.43 262,304 6,561 3.34
Other borrowings 106,445 2,403 3.01 78,992 2,140 3.61
-------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 606,123 10,115 2.23 453,834 9,893 2.91
------- ---- ------- ----
Demand deposits 30,737 30,287
Noninterest-bearing liabilities 8,265 7,194
Stockholders' equity (5) 100,858 95,328
-------- --------
Total liabilities and
stockholders' equity $745,983 $586,643
======== ========
Net interest income 15,686 13,936
======= =======
Interest-rate spread (3) 2.62% 2.86%
==== ====
Net interest margin (4) 2.95% 3.38%
==== ====
Ratio of average interest-earning
assets to average interest
bearing liabilities 1.17 1.21
======== ========
----------------------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits,federal funds sold and securities
purchased under agreements to resell.
(3) Interest-rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest
bearing liabilities.
(4) Net interest margin is net interest income as a percentage of average
interest-earning assets.
(5) Average balances are daily average balances except for the parent
company which have been calculated on a monthly basis.
19
Results of Operations
Results of Operations for the Three and Nine Months Ended September 30, 2003
Compared to the Three and Nine Months Ended September 30, 2002.
General. Berkshire Bancorp Inc., a bank holding company registered under the
Bank Holding Company Act of 1956 has one wholly-owned banking subsidiary, The
Berkshire Bank, a New York State chartered commercial bank (the "Bank"). The
Bank is headquartered in Manhattan and has nine branch locations, five branches
in New York City and four branches in Orange and Sullivan counties.
Net Income. Net income for the three-month period ended September 30, 2003 was
$1.58 million, or $.70 per share, as compared to $1.51 million, or $.67 per
share, for the three-month period ended September 30, 2002. Net income for the
nine-month period ended September 30, 2002 was $5.27 million, or $2.35 per
share, as compared to $4.01 million, or $1.73 per share, for the nine-month
period ended September 30, 2002.
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 September 30, 2003, net interest income increased
by $649,000, or 13.16%, to $5.58 million from $4.93 million for the quarter
ended September 30, 2002. The quarter over quarter increase in net interest
income was the result of the 23.86% growth in average interest-earning assets of
$145.22 million, partially offset by the 27.21% growth in average
interest-bearing liabilities of $138.52 million, and the difference between the
yield on assets compared to the cost of liabilities. The average yield on
interest-earning assets fell to 4.73% from 5.58%, a decline of 85 basis points,
or 15.23%, while the average cost of interest-bearing liabilities fell to 2.06%
from 2.80%, a decline of 74 basis points, or 26.43% The interest-rate spread,
the difference between the average yield on interest-earning assets and the
average cost of interest bearing liabilities, eased by 11 basis points to 2.67%
from 2.78%
For the nine-month period ended September 30, 2003, net interest income
increased by $1.75 million, or 12.56%, to $15.69 million from $13.94 million for
the nine-month period ended September 30, 2002. The period over period increase
in net interest income was the result of the 28.93% growth in average interest-
earning assets of $159.16 million, partially offset by the 33.56% growth in
average interest-bearing liabilities of $152.29 million, and the difference
between the yield on assets compared to the cost of liabilities. In the 2003
period, the average yield on interest-earning assets fell to 4.85% from 5.77% in
2002, a decline of 92 basis points, or 15.94%, however, the average cost of
interest-bearing liabilities fell to 2.23% from 2.91%, a decline of 68 basis
points, or 23.37% The interest-rate spread eased by 24 basis points to 2.62% in
2003 from 2.86% in 2002.
Interest rates, as measured by the prime rate, stabilized at 4.75%
throughout the first ten months of 2002, easing to 4.25% in November of 2002,
and remaining at the 4.25% level until June 25, 2003 when the rate was lowered
to 4.00%. With interest rates stabilizing at historic lows, we expect to see
only moderate pressure on the Company's interest-rate spread and net interest
income. Investment securities in our portfolio that have matured or have been
called by the issuer have been replaced with securities carrying somewhat lower
yields and longer maturities. Rates paid on deposit accounts may continue to
decline as well, albeit at a slower pace due to competition for deposits in the
market place.
20
Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, declined to 2.96% in the third
fiscal quarter of 2003 from 3.24% in the third fiscal quarter of 2002, and
declined to 2.95% in the nine-month period of 2003 from 3.38% in the nine-month
period of 2002.
The Company makes strategic use of the prevailing interest rate
environment to secure and retain deposits, and to borrow funds at what we
believe to be attractive rates, and to invest such funds in a prudent mix of
loans and investment securities. The average amounts of loans and investment
securities increased by $14.01 million and $133.74 million, respectively, to
$283.94 million and $467.06 million, respectively, in the quarter ended
September 30, 2003, from $269.94 million and $333.33 million, respectively, in
the quarter ended September 30, 2002. The average amounts of interest bearing
deposits and time deposits increased by $86.70 million and $27.24 million,
respectively, to $206.63 million and $326.85 million, respectively, from $119.93
million and $299.61 million, respectively, in the year ago quarter. Borrowed
funds increased by $24.57 million to $113.99 million in the 2003 quarter from
$89.42 million in the 2002 quarter.
During the nine months ended September 30, 2003, the average amounts of
loans and investments securities was $278.08 million and $426.71 million,
espectively, compared to $263.76 million and $280.76 million, respectively,
during the nine months ended September 30, 2002. Interest bearing deposits and
time deposits averaged $177.57 million and $322.11 million in 2003,
respectively, compared to $112.54 million and $262.30 million, respectively in
2002. Borrowed funds averaged $106.45 million and $78.99 million in 2003 and
2002, respectively.
Interest Income. Total interest income for the quarter ended September 30, 2003
increased by $417,000, or 4.91%, to $8.91 million from $8.50 million for the
quarter ended September 30, 2002. The increase was the result of a 23.86%
increase in the average amount of total interest-earning assets to $753.93
million in 2003 from $608.72 million in 2002. Average loans and investment
securities increased by 5.19% and 40.12%, respectively, and contributed $4.79
million and $4.07 million, respectively, to interest income during the quarter
ended September 30, 2003.
Total interest income for the nine-month period ended September 30,
2003 increased by $1.97 million, or 8.28%, to $25.80 million from $23.83 million
for the nine-month period ended September 30, 2002. The increase was the result
of a 28.93% increase in the average amount of total interest-earning assets to
$709.34 million in 2003 from $550.18 million in 2002. Average loans and
investment securities increased by 5.43% and 51.99%, respectively, and
contributed $14.25 million and $11.47 million, respectively, to interest income
during the nine months ended September 30, 2003.
The average yield on total interest-earning assets was 4.73% and 4.85%,
respectively, during the three and nine months ended September 30, 2003,
compared to 5.58% and 5.77%, respectively, for the three and nine months ended
September 30, 2002. During the first nine months of 2003, the average yield on
the Company's loan portfolio and investment securities was 6.83% and 3.58%,
respectively, compared to 7.05% and 4.66%, respectively, during the first nine
months of 2002.
Interest Expense. Total interest expense for the quarter ended September 30,
2003 decreased to $3.33 million from $3.56 million for the quarter ended
September 30, 2002. The decrease in interest expense was due primarily to the 74
basis point decline in average rates paid on interest-bearing liabilities to
2.06% in 2003 from 2.80% in 2002, partially offset by the increase in the
average amounts of such liabilities. Total interest-bearing liabilities
increased by 27.21%, averaging $647.48 million in the 2003 quarter compared to
$508.96 million in the 2002 quarter. Average time deposits and other
interest-bearing deposits
21
increased in the 2003 quarter to $326.85 million and $206.63 million,
respectively, from $299.61 million and $119.93 million, respectively, in the
2002 quarter. The average amount of borrowed funds increased as well, to $113.99
million in the 2003 quarter from $89.42 million in the 2002 quarter.
Total interest expense for the nine-month period ended September 30,
2003 increased by $222,000, or 2.24%, to $10.12 million in the 2003 period from
$9.89 million in the 2002 period. The increase in interest expense was due to
the 33.56% increase in interest-bearing liabilities, substantially offset by the
decline in the average rates paid on such liabilities. Total interest-bearing
liabilities averaged $606.12 million in the 2003 period from $453.83 million in
the 2002 period. Average time deposits and other interest-bearing deposits
increased in the 2003 period to $322.11 million and $177.57 million,
respectively, from $262.30 million and $112.54 million, respectively, in the
2002 period. The cost of such deposits, coupled with the cost of borrowed funds,
$106.45 million and $78.99 million in 2003 and 2002, respectively, decreased to
2.23% in 2003 from 2.91% in 2002.
Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the three months
ended September 30, 2003, total non-interest income decreased by $318,000, to
$480,000 from $798,000 for the three months ended September 30, 2002. The
decrease is largely due to the $498,000 decrease in gains on sales of investment
securities.
For the nine months ended September 30, 2003 and 2002, total
non-interest income was $2.64 million and $1.61 million, respectively. The
increase of $1.02 million was largely due to the $599,000 increase in the gains
realized on the sales and issuer redemptions of investment securities and the
$285,000 increase in various items included in other income.
Non-Interest Expense. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees and
other operating expenses associated with the day-to-day operations of the
Company. Total non-interest expense for the three and nine-month periods ended
September 30, 2003 was $3.09 million and $8.53 million, respectively, compared
to $2.90 million and $8.10 million, respectively for the same periods in 2002.
Provision for Income Tax. During the three and nine-month periods ended
September 30, 2003, the Company recorded income tax expense of $1.34 million and
$4.32 million, respectively, compared to income tax expense of $1.12 million and
$3.09 million, respectively, for the three and nine-month periods ended
September 30, 2002. The tax provisions for federal, state and local taxes
recorded for the first nine months of 2003 and 2002 represent effective tax
rates of 45.05% and 43.51%, respectively.
22
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk. Fluctuations in market interest rates can have a material
effect on the Company's net interest income because the yields earned on loans
and investments may not adjust to market rates of interest with the same
frequency, or with the same speed, as the rates paid by the Bank on its
deposits.
Most of the Bank's deposits are either interest-bearing demand deposits
or short term certificates of deposit and other interest-bearing deposits with
interest rates that fluctuate as market rates change. Management of the Bank
seeks to reduce the risk of interest rate fluctuations by concentrating on loans
and securities investments with either short terms to maturity or with
adjustable rates or other features that cause yields to adjust based upon
interest rate fluctuations. In addition, to cushion itself against the potential
adverse effects of a substantial and sustained increase in market interest
rates, the Bank has purchased off balance sheet interest rate cap contracts
which generally provide that the Bank will be entitled to receive payments from
the other party to the contract if interest rates exceed specified levels. These
contracts are entered into with major financial institutions.
The Company seeks to maximize its net interest margin within an
acceptable level of interest rate risk. Interest rate risk can be defined as the
amount of the forecasted net interest income that may be gained or lost due to
favorable or unfavorable movements in interest rates. Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets
differ significantly from the maturity or repricing characteristics of
liabilities.
23
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, 2003
(in thousands, except for percentages)
--------------------------------------------------------------------------------
3 Months 3 Through 1 Through Over
or Less 12 Months 3 Years 3 Years Total
-------- --------- --------- ------- -----
Federal funds sold $ -- $ -- $ -- $ -- $ --
(Rate) --% -- -- -- --%
-------- -------- -------- -------- --------
Interest bearing deposits
in banks 282 -- -- -- 282
(Rate) 0.27% -- -- -- 0.27%
-------- -------- -------- -------- --------
Loans (1)(2)
Adjustable rate loans 42,286 11,252 13,931 8,793 76,262
(Rate) 5.92% 4.33% 5.66% 7.35% 5.80%
Fixed rate loans 1,798 3,158 6,334 208,288 219,578
(Rate) 7.95% 7.56% 7.00% 6.50% 6.54%
-------- -------- -------- -------- --------
Total loans 44,084 14,410 20,265 217,081 295,840
Investments (3)(4) 11,446 -- 36,369 442,000 489,815
(Rate) 0.81% --% 1.61% 4.13% 3.87%
-------- -------- -------- -------- --------
Total rate-sensitive assets 55,812 14,410 56,634 659,081 785,937
-------- -------- -------- -------- --------
Deposit accounts (5)
Savings and NOW 182,758 -- -- -- 182,758
(Rate) 1.42% -- -- -- 1.42%
Money market 33,030 -- -- -- 33,030
(Rate) 0.83% -- -- -- 0.83%
Time Deposits 141,687 174,168 8,325 2,003 326,183
(Rate) 2.13% 1.99% 2.28% 1.98% 2.06%
-------- -------- -------- -------- --------
Total deposit accounts 357,475 174,168 8,325 2,003 541,971
Repurchase agreements 37,172 25,962 8,000 3,000 74,134
(Rate) 1.03% 1.23% 2.98% 3.52% 1.41%
Other borrowings -- -- 4,144 61,386 65,530
(Rate) --% -- 5.10% 4.22% 4.28%
-------- -------- -------- -------- --------
Total rate-sensitive liabilities 394,647 200,130 20,469 66,389 681,635
-------- -------- -------- -------- --------
Interest rate caps 30,000 (5,000) (5,000) (20,000) --
Gap (repricing differences) (368,835) (180,720) 41,165 612,692 104,302
======== ======== ======== ======== ========
Cumulative Gap (368,835) (549,555) (508,390) 104,302
======== ======== ======== ========
Cumulative Gap to Total Rate
Sensitive Assets (46.93)% (69.92)% (64.69)% 13.27%
======== ======== ======== ========
----------------------------
(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.
24
Provision for Loan Losses. The Company maintains an allowance for loan losses at
a level deemed sufficient to absorb losses, which are inherent in the loan
portfolio at each balance sheet date. Management reviews the adequacy of the
allowance on at least a quarterly basis to ensure that the provision for loan
losses has been charged against earnings in an amount necessary to maintain the
allowance at a level that is appropriate based on management's assessment of
probable estimated losses. The Company's methodology for assessing the
appropriateness of the allowance for loan losses consists of several key
elements. These elements include a specific allowance for loan watch list
classified loans, an allowance based on historical trends, an additional
allowance for special circumstances, and an unallocated portion. The Company
consistently applies the following comprehensive methodology.
The allowance for loan watch list classified loans addresses those
loans maintained on the Company's loan watch list, which are assigned a rating
of substandard, doubtful, or loss. Substandard loans are those with a
well-defined weakness or a weakness, which jeopardizes the repayment of the
debt. A loan may be classified as substandard as a result of impairment of the
borrower's financial condition and repayment capacity. Loans for which repayment
plans have not been met or collateral equity margins do not protect the Company
may also be classified as substandard. Doubtful loans have the characteristics
of substandard loans with the added characteristic that collection or
liquidation in full, on the basis of presently existing facts and conditions, is
highly improbable. Although the possibility of loss is extremely high for
doubtful loans, the classification of loss is deferred until pending factors,
which might improve the loan, have been determined. Loans rated as doubtful in
whole or in part are placed in nonaccrual status. Loans, which are classified as
loss, are considered uncollectible and are charged to the allowance for loan
losses. There were no loans classified as loss as of September 30, 2003.
For the three and nine months ended September 30, 2003, the Company
charged-off loans amounting to $13,000 and $15,000, respectively, compared to
$82,000 and $181,000, respectively, for the three and nine months ended
September 30, 2002.
Loans on the loan watch list may also be impaired loans, which are
defined as nonaccrual loans or troubled debt restructurings, which are not in
compliance with their restructured terms. Each of the classified loans on the
loan watch list is individually analyzed to determine the level of the potential
loss in the loan under the current circumstances. The specific reserve
established for these criticized and impaired loans is based on careful analysis
of the loan's performance, the related collateral value, cash flow
considerations and the financial capability of any guarantor. The allowance for
loan watch list classified loans is equal to the total amount of potential
unconfirmed losses for the individual classified loans on the watch list. Loan
watch list loans are managed and monitored by assigned Senior Management.
The allowance based on historical trends uses charge-off experience of
the Company to estimate potential unconfirmed losses in the balances of the loan
and lease portfolios. The historical loss experience percentage is based on the
charge-off history. Historical loss experience percentages are applied to all
non-classified loans to obtain the portion of the allowance for loan losses
which is based on historical trends. Before applying the historical loss
experience percentages, loan balances are reduced by the portion of the loan
balances, which are subject to guarantee, by a government agency. Loan balances
are also adjusted for unearned discount on installment loans.
The Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions, which may cause a
potential loan loss but are not specifically identifiable. It is prudent to
maintain an unallocated portion of the allowance because no matter how detailed
an analysis of potential loan losses is performed these estimates by definition
lack
25
precision. Management must make estimates using assumptions and information,
which is often subjective and changing rapidly.
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, 2003, the Company had a total of $59,000 of
non-accrual or non-performing loans, and no loans past due more than 90 days and
still accruing interest. At September 30, 2002, there were $249,000 of
non-accrual loans and $62,000 of 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 $295.02 million from $273.94 million, the provision for the nine months
ended September 30, 2003 was increased to $2.50 million from $2.22 million in
the year ago period.
Management believes that the allowance for loan losses and
nonperforming loans remains safely within acceptable levels.
The following table sets forth information with respect to activity in
the Company's allowance for loan losses during the periods indicated (in
thousands, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Average loans outstanding $283,944 $269,938 $278,077 $263,756
======== ======== ======== ========
Allowance at beginning of period 2,468 2,095 2,315 2,030
Charge-offs:
Commercial and other loans -- 82 2 181
Real estate loans 13 -- 13 --
-------- -------- -------- --------
Total loans charged-off 13 82 15 181
-------- -------- -------- --------
Recoveries:
Commercial and other loans 3 4 8 11
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans recovered 3 4 8 11
-------- -------- -------- --------
Net recoveries (charge-offs) (10) (78) (7) (170)
-------- -------- -------- --------
Provision for loan losses
charged to operating expenses 45 200 195 357
-------- -------- -------- --------
Allowance at end of period 2,503 2,217 2,503 2,217
-------- -------- -------- --------
Ratio of net recoveries (charge-offs)
to average loans outstanding 0.00% 0.00% 0.00% (0.06%)
======== ======== ======== ========
Allowance as a percent of total loans 0.85% 0.81% 0.85% 0.81%
======== ======== ======== ========
Total loans at end of period $295,019 $273,942 $295,019 $273,942
======== ======== ======== ========
26
Loan Portfolio.
Loan Portfolio Composition. The Company's loans consist primarily of mortgage
loans secured by residential and non-residential properties as well as
commercial loans which are either unsecured or secured by personal property
collateral. Most of the Company's commercial loans are either made to
individuals or personally guaranteed by the principals of the business to which
the loan is made. At September 30, 2003, the Company had total gross loans of
$295.84 million and an allowance for loan losses of $2.50 million. From time to
time, the Bank may originate residential mortgage loans and then sell them on
the secondary market, normally recognizing fee income in connection with the
sale. For the three and nine-month periods ended September 30, 2003, the Company
sold approximately $1.84 million and $2.51 million, respectively, of such loans
and recorded in other income, gains of $34,000 and $52,000, respectively, on
such sales.
The following tables set forth information concerning the Company's
loan portfolio by type of loan at the dates indicated:
September 30, December 31,
2003 2002
-------------------- ---------------------
Amount Amount
------ ------
(in thousands)
Commercial and professional loans $ 20,423 $ 16,704
Secured by real estate
1-4 family 174,018 180,730
Multi family 6,776 8,958
Non-residential (commercial) 92,108 65,809
Consumer 2,515 4,051
-------- --------
Total loans 295,840 276,252
Less:
Deferred loan fees (821) (755)
Allowance for loan losses (2,503) (2,315)
-------- --------
Loans, net $292,516 $273,182
======== ========
It is the Bank's policy to discontinue accruing interest on a loan when
it is 90 days past due or if management believes that continued interest
accruals are unjustified. The Bank may continue interest accruals if a loan is
more than 90 days past due if the Bank determines that the nature of the
delinquency and the collateral are such that collection of the principal and
interest on the loan in full is reasonably assured. When the accrual of interest
is discontinued, all accrued but unpaid interest is charged against current
period income. Once the accrual of interest is discontinued, the Bank records
interest as and when received until the loan is restored to accruing status. If
the Bank determines that collection of the loan in full is in reasonable doubt,
then amounts received are recorded as a reduction of principal until the loan is
returned to accruing status. At September 30, 2003 and 2002, the Company had
$-0- and $62,000 of loans past due more than 90 days and still accruing
interest.
27
Capital Adequacy
Quantitative measures established by regulation to ensure capital
adequacy require the Company and The Berkshire Bank to maintain minimum amounts
and ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and Tier I capital (as defined) to average
assets (as defined). As of September 30, 2003, the most recent notification from
the FDIC categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Bank
must maintain certain Total risk-based, Tier I risk-based, and Tier I leverage
ratios. There are no conditions or events since the notification that management
believes have changed the Bank's category.
The following tables set forth the actual and required regulatory
capital amounts and ratios of the Company and The Berkshire Bank as of September
30, 2003 and December 31, 2002 (dollars in thousands):
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
September 30, 2003
Total Capital (to Risk-Weighted Assets)
Company 85,024 26.7% 25,503 >=8.0% -- N/A
Bank 58,743 19.4% 24,204 >=8.0% 30,255 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 82,521 25.9% 12,752 >=4.0% -- N/A
Bank 56,240 18.6% 12,102 >=4.0% 18,153 >=6.0%
Tier I Capital (to Average Assets)
Company 82,521 11.1% 29,839 >=4.0% -- N/A
Bank 56,240 7.3% 30,921 >=4.0% 38,651 >=5.0%
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2002
Total Capital (to Risk-Weighted Assets)
Company $80,811 12.3% $23,801 >=8.0% -- N/A
Bank 53,687 19.4% 22,193 >=8.0% 27,741 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 78,496 26.4% 11,900 >=4.0% -- N/A
Bank 51,372 18.5% 11,096 >=4.0% 16,645 >=6.0%
Tier I Capital (to Average Assets)
Company 78,496 27.2% 25,468 >=4.0% -- N/A
Bank 51,372 7.8% 26,210 >=4.0% 32,763 >=5.0%
28
Liquidity
The management of the Company's liquidity focuses on ensuring that
sufficient funds are available to meet loan funding commitments, withdrawals
from deposit accounts, the repayment of borrowed funds, and ensuring that the
Bank and the Company comply with regulatory liquidity requirements. Liquidity
needs of The Berkshire Bank have historically been met by deposits, investments
in federal funds sold, principal and interest payments on loans, and maturities
of investment securities.
For Berkshire, liquidity means having cash available to fund operating
expenses and to pay shareholder dividends, when and if declared by Berkshire's
Board of Directors. The ability of Berkshire to fund its operations and to pay
dividends is not dependent upon the receipt of dividends from The Berkshire
Bank. At September 30, 2003, Berkshire had cash and cash equivalents of $11.05
million and investment securities available for sale of $4.40 million.
The Company maintains financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and stand-by
letters of credit.
At September 30, 2003, the Company had outstanding commitments of
approximately $49.42 million. These commitments include $15.78 million that
mature or renew within one year, $9.95 million that mature or renew after one
year and within three years, $21.12 million that mature or renew after three
years and within five years and $2.58 million that mature or renew after five
years.
The Company currently does not have any unconsolidated subsidiaries or
special purpose entities.
Impact of Inflation and Changing Prices
The Company's financial statements measure financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increasing cost of the Company's operations.
The assets and liabilities of the Company are largely monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. In addition, interest rates do not
necessarily move in the direction, or to the same extent as the price of goods
and services. However, in general, high inflation rates are accompanied by
higher interest rates, and vice versa.
ITEM 4 - CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
("CEO"), who is also the Chief Financial Officer ("CFO"), of the effectiveness
of our disclosure controls and procedures as of the end of the quarter ended
September 30, 2003. Based on that evaluation, the CEO/CFO has concluded that the
Company's disclosure controls and procedures are effective at the reasonable
assurance level to timely alert him of information required to be disclosed by
the Company in reports that it files or submits under the Securities Exchange
Act of 1934. In addition, during the quarter ended September 30, 2003, there
were no changes in the Company's internal controls over financial reporting
that have materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial reporting.
29
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
31 Certification of Principal Executive
and Financial Officer pursuant to
Section 302 Of The Sarbanes-Oxley Act
of 2002.
32 Certification of Principal Executive
and Financial Officer pursuant to
Section 906 Of The Sarbanes-Oxley Act
of 2002.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKSHIRE BANCORP INC.
(Registrant)
Date: November 10, 2003 By: /s/ Steven Rosenberg
----------------- -----------------------
Steven Rosenberg
President and Chief
Financial Officer
31
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
------ ----------- -----------
31 Certification of Principal Executive 33
and Financial Officer pursuant to
Section 302 Of The Sarbanes-Oxley Act
of 2002.
32 Certification of Principal Executive 34
and Financial Officer pursuant to
Section 906 Of The Sarbanes-Oxley Act
of 2002.
32
STATEMENT OF DIFFERENCES
The greater-than-or-equal-to sign shall be expressed as.................. >=