<PAGE>
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, 2000
----------------
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)
<TABLE>
<S> <C>
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)
</TABLE>
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 12, 2000, there were 2,134,044 outstanding shares of the
issuers Common Stock, $.10 par value.
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
Berkshire Bancorp Inc. (the "Company") may from time to time make
"forward-looking statements," including statements contained in the Company's
filings with the Securities and Exchange Commission (including its Annual Report
on Form 10-K and the Exhibits thereto), in its reports to shareholders and in
other communications by the Company, which are made in good faith by the
Company, pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's vision, mission, strategies, goals, beliefs, plans, objectives,
expectations, anticipations, estimates, intentions, financial condition, results
of operations, future performance and business of the Company, including: (i)
statements relating to the Company's expectations and goals with respect to (a)
growth in earnings per share; (b) return on assets; (c) return on equity; (d)
efficiency ratio; (e) tier 1 leverage ratio; (f) annualized net charge-offs and
other asset quality measures; (g) fee income as a percentage of total revenue;
(h) tangible equity to assets; (i) book value and tangible book value per share;
and (j) deposit and loan portfolio compositions, and (ii) statements preceded
by, followed by or that include words like "may", "will", "expect", "estimate",
"anticipate", "continue" or similar terms and reflect the Company's current
analysis of existing trends. Actual results could differ materially from those
expressed or implied due to: major changes in business conditions and the
economy, or the development of an adverse interest rate environment that
adversely affects the interest rate spread or other income anticipated from the
Company's operations and investments, loss of key senior management, major
disruptions in the operations of the Company's banking facilities, new
competitors or technologies, significant disruptions caused by the failure of
third parties to address the Year 2000 issue, acquisition integration costs,
dilution to earnings per share from stock issuance or acquisitions, regulatory
issues, litigation costs, and other items discussed throughout this Quarterly
Report on Form 10-Q.
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.
A wide variety of factors could cause the Company's actual results and
experiences to differ materially from the anticipated results or other
expectations expressed or implied in 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; and (v)
changes in consumer preferences.
For these reasons, the Company cautions readers not to place undue
reliance upon any forward-looking statements. Forward-looking statements speak
only as of the date made and the Company assumes no obligation to update or
revise any such statements, whether written or oral, upon any change in
applicable circumstances.
2
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 4
Consolidated Statements of Income
For The Three Months Ended
March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows
For The Three Months Ended
March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Index of Exhibits 21
</TABLE>
3
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,546 $ 2,545
Interest bearing deposits 17,006 3,834
Federal funds sold 6,000 13,500
--------- ---------
Total cash and cash equivalents 24,552 19,879
Investment Securities:
Available-for-sale 88,439 84,498
Held-to-maturity 4,970 4,999
--------- ---------
Total investment securities 93,409 89,497
Loans, net of unearned income 66,389 65,591
Less: allowance for loan losses (1,018) (923)
--------- ---------
Net loans 65,371 64,668
Accrued interest receivable 1,747 1,614
Premises and equipment, net 353 370
Prepaid expenses and other 3,961 4,029
Goodwill, net of amortization of
$913 in 2000 and $730 in 1999 11,890 12,073
--------- ---------
Total assets $ 201,283 $ 192,130
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 15,448 $ 15,549
Interest bearing 93,468 88,538
--------- ---------
Total deposits 108,916 104,087
Securities sold under agreements to repurchase 1,500 1,500
Accrued interest payable 193 161
Accrued other liabilities 1,672 1,569
Income taxes payable 6,887 2,741
Deferred tax liability 447 4,002
--------- ---------
Total liabilities 119,615 114,060
--------- ---------
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, 2000, 2,127,265 shares
December 31, 1999, 2,127,265 shares 256 256
Additional paid-in capital 78,570 78,570
Accumulated other comprehensive
(loss) income, net (1,018) 4,425
Retained earnings (accumulated deficit) 6,620 (2,421)
Less: Common stock in treasury - at cost:
March 31, 2000, 438,830 shares
December 31, 1999, 438,830 shares (2,760) (2,760)
--------- ---------
Total stockholders' equity 81,668 78,070
--------- ---------
$ 201,283 $ 192,130
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For The
Three Months Ended
March 31,
----------------------------
2000 1999
-------- ------
<S> <C> <C>
INTEREST INCOME
Short-term interest-earning assets $ 275 $ 1,179
Securities and other investments 1,414 841
Loans 1,426 838
-------- --------
Total interest income 3,115 2,858
-------- --------
INTEREST EXPENSE
Deposits 996 758
Borrowings 31 21
-------- --------
Total interest expense 1,027 779
-------- --------
Net interest income 2,088 2,079
PROVISION FOR LOAN LOSSES 5 15
-------- --------
Net interest income after
provision for loan losses 2,083 2,064
-------- --------
NON-INTEREST INCOME
Investment securities gains 13,079 --
Other income 139 285
-------- --------
Total non-interest income 13,218 285
-------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 524 452
Net occupancy expense 108 103
Equipment expense 24 27
FDIC assessment 4 3
Data processing expense 5 6
Amortization of goodwill 183 182
Other 289 349
-------- --------
Total non-interest expense 1,137 1,122
-------- --------
Income before provision for taxes 14,164 1,227
Provision for income taxes 5,123 575
-------- --------
Net income $ 9,041 $ 652
======== ========
Net income per share:
Basic $ 4.25 $ .31
======== ========
Diluted $ 4.00 $ .29
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
2000 1999
------ -----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,041 $ 652
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Gain on investment securities (13,079) --
Depreciation and amortization 200 206
Provision for loan losses 5 15
Changes in assets and liabilities:
(Increase) in accrued interest receivable (133) (467)
Decrease in prepaid expenses and other 353 958
Increase (decrease) in accounts payable, other accrued
expenses, liabilities and income taxes payable 726 (49)
-------- --------
Net cash provided by (used in) operating activities (2,887) 1,315
-------- --------
Cash flows from investing activities:
Investment in Madison Merchant Services, Inc. (285) --
Investment in The Berkshire Bank -- (25,217)
Cash of entity acquired -- 22,439
Proceeds from sales of investment securities 13,079 --
Investment securities available for sale
Purchases (23,976) (14,982)
Sales 14,711 --
Net increase in loans (798) (2,770)
Acquisition of premises and equipment -- (80)
-------- --------
Net cash provided by (used in) investing activities 2,731 (20,610)
-------- --------
Cash flows from financing activities:
Net (decrease) in non interest bearing deposits (101) (6,524)
Net increase (decrease) in interest bearing deposits 4,930 (4,901)
-------- --------
Net cash provided by (used in) financing activities 4,829 (11,425)
-------- --------
Net increase (decrease) in cash 4,673 (30,720)
Cash - beginning of period 19,879 65,136
-------- --------
Cash - end of period $ 24,552 $ 34,416
======== ========
Supplemental cash flow information:
Cash used to pay interest $ 894 $ 839
Cash used to pay taxes $ 1,082 $ 273
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 1. GENERAL
In December 1998, Berkshire Bancorp Inc., a Delaware corporation (the
"Company"), received regulatory approval from the Federal Reserve Bank of New
York to become a Bank Holding Company registered under the Bank Holding Company
Act of 1956 and to acquire control of The Berkshire Bank (the "Bank"), a New
York State chartered commercial bank. (See Note 2 of Notes to Consolidated
Financial Statements). On December 10, 1999 the Board of Directors of the
Company approved a change in the Company's fiscal year from October 31 to
December 31. This change was effective December 31, 1999.
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 October 31, 1999 and the Company's Form 10-K for the
transition period from November 1, 1999 to December 31, 1999 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, 2000 and December 31, 1999 and the
consolidated results of its operations for the three month periods ended March
31, 2000 and 1999, and its consolidated cash flows for the three month periods
ended March 31, 2000 and 1999.
NOTE 2. - ACQUISITIONS
MADISON MERCHANT SERVICES, INC. On February 7, 2000, the Company
completed the acquisition of 24.9% of the issued and outstanding shares of the
common stock of Madison Merchant Services, Inc., a privately held New York State
corporation ("Madison"), for a cash purchase price of $285,000. In addition, the
Company received an option to purchase up to an additional 26.1% of the
presently outstanding shares of Madison common stock during the period from
November 1, 2001 and February 1, 2003. Madison currently provides merchant
credit card processing services for restaurants, other retail establishments and
a variety of other merchants.
THE BERKSHIRE BANK. On January 4, 1999, the Company, through its wholly
owned subsidiary, Greater American Finance Group, Inc. ("GAFG"), purchased
2,396,600 shares, or approximately 99%, of the outstanding shares of Common
Stock (the "Shares") of the Bank, a privately-owned New York State chartered
commercial bank. The Shares were acquired for a purchase price of $10.50 per
share, net to the seller in cash, upon the terms and conditions set forth in an
Offer to Purchase dated August 6, 1998, and in the related Letter of Transmittal
(collectively, the "Offer"). The total amount of funds required by GAFG to
purchase the Shares was approximately $25.2 million. On March 31, 1999, GAFG
purchased an additional 5,000 shares for a cash purchase price of $10.50 per
share, or approximately $53,000. All such funds were obtained by GAFG from the
Company's cash on hand. The purchase of the Shares pursuant to the Offer was
subject to receipt of the approval of the New York State Banking Board and the
approval of the Federal Reserve Board. The acquisition was accounted for as a
7
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 2. (CONTINUED)
purchase and, accordingly, the results of operations of the Bank have been
included in the consolidated statements of income from the date of acquisition.
In connection with the acquisition, the Company acquired assets with an
aggregate fair value of $119,429,000 and assumed deposits and other liabilities
of $108,760,000.
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:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
---------------------- ---------------------- ------------------
<S> <C> <C> <C>
Basic earnings per share
Net income available to
common stockholders $ 9,041 2,127 $ 4.25
Effect of dilutive securities
Options -- 132 (.25)
-------- ------- ------
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $ 9,041 2,259 $ 4.00
======== ======= ======
</TABLE>
Options to purchase 44,875 shares of common stock for $38.00 per share
were outstanding during the three months ended March 31, 2000. These options
were not included in the computation of diluted earnings per share because the
option exercise price was greater than the average market price for the
Company's common stock during this period.
8
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 3. (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
---------------------- ---------------------- ------------------
<S> <C> <C> <C>
Basic earnings per share
Net income available to
common stockholders $ 652 2,126 $ .31
Effect of dilutive securities
Options -- 132 (.02)
-------- ------- --------
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $ 652 2,258 $ .29
======== ======= ========
</TABLE>
NOTE 4. INVESTMENT SECURITIES
The following tables summarize held to maturity and available-for-sale
investment securities as of March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------- ------------------ ------------------ ----------------
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY
INVESTMENT SECURITIES
U.S. Government Agencies $ 481 $ -- $ -- $ 481
Corporate notes 4,489 8 -- 4,497
------- ------- ------- --------
Totals $ 4,970 $ 8 $ -- $ 4,978
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------- ------------------ ------------------ ----------------
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY
INVESTMENT SECURITIES
U.S. Government Agencies $ 522 $ -- $ -- $ 522
Corporate notes 4,477 -- (1) 4,476
------- ------- ------- --------
Totals $ 4,999 $ -- $ (1) $ 4,998
======= ======= ======= ========
</TABLE>
9
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 4. (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------ ------------------- ------------------ -----------------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
INVESTMENT SECURITIES
U.S. Treasury and U.S.
Government Agencies $ 78,525 $ -- $(1,184) $ 77,341
Mortgage-backed
securities 4,176 -- (85) 4,091
Marketable equity
securities and other 6,409 1,116 (518) 7,007
-------- ------- ------- --------
Totals $ 89,110 $ 1,116 $(1,787) $ 88,439
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------- ------------------- ------------------ --------------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
INVESTMENT SECURITIES
U.S. Treasury and
U.S. Government Agencies $ 65,907 $ -- $(1,161) $ 64,746
Mortgage-backed
securities 4,571 -- (75) 4,496
Marketable equity
securities and other 6,060 9,745 (549) 15,256
-------- ------- ------- --------
Totals $ 76,538 $ 9,745 $(1,785) $ 84,498
======== ======= ======= ========
</TABLE>
COMMON STOCK OF ELOTTERY, INC. (FORMERLY EXECUTONE INFORMATION SYSTEMS, INC.)
As more fully discussed in the Company's 1999 10-K, in December 1995,
the Company sold its minority equity interest in Unistar Gaming Corp. ("UGC") to
Elottery, Inc. (formerly Executone Information Systems, Inc., a Virginia
corporation whose common stock trades on the NASDAQ National Market System,
("Elottery") (the "Elottery Common Stock"). The Company's investment in UGC was
approximately $5.2 million.
In exchange for its interest in UGC, the Company received shares of
Elottery Common Stock, all of which were sold in open market transactions during
1998, and shares of Elottery Series A and Series B Preferred Stock (the
"Elottery Preferred Stock"). In 1997, the Company fully reserved the carrying
value, approximately $2.1 million, of its shares of Elottery Preferred Stock and
recorded a deferred tax asset of $925,000.
10
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 4. (CONTINUED)
In March 1999, Elottery exercised its right to redeem and convert the
Elottery Preferred Stock into Elottery Common Stock and on April 6, 1999, in
exchange for its shares of Elottery Preferred Stock, the Company received
4,193,204 shares of Elottery Common Stock with a market value of approximately
$17.7 million.
At March 31, 2000, the Company owned 190,000 shares of Elottery Common
Stock which have been classified as available-for-sale securities. The
unrealized gain of approximately $1.1 million, net of deferred taxes of
approximately $446,000 has been recorded as a component of other accumulated
comprehensive income.
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):
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
------------------------- ---------------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Commercial and
professional loans $ 7,569 11.4% $ 5,358 8.2%
Secured by real estate 56,673 85.4 57,652 87.9
Personal 1,853 2.8 2,345 3.6
Other 294 0.4 236 0.3
-------- ----- -------- -----
Total loans 66,389 100.0% 65,591 100.0%
===== =====
Less:
Allowance for loan
losses (1,018) (923)
-------- --------
Loans, net $ 65,371 $ 64,668
======== ========
</TABLE>
11
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 6. DEPOSITS
The following table summarizes the composition of the average balances
of major deposit categories:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999 (1)
----------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand deposits $ 15,448 -- $ 17,485 --
NOW and money market 61,127 4.06% 48,515 3.19%
Savings deposits 4,049 3.23 4,721 2.58
Time deposits 28,294 5.21 21,714 5.55
-------- ---- -------- ----
Total deposits $108,918 4.07% $ 92,435 3.11%
======== ==== ======== ====
</TABLE>
(1) Interest expense was annualized to calculate average yield for the two
months ended December 31, 1999.
NOTE 7. COMPREHENSIVE INCOME
The following table presents the components of comprehensive income,
based on the provisions of SFAS No. 130.:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 2000
------------------------------------------------------
Tax
Before tax (expense) Net of tax
amount benefit Amount
------------------- ------------------ ----------------
(In thousands)
<S> <C> <C> <C>
Unrealized gains on investment securities:
Unrealized holding losses $(14,776) $ 5,911 $ (8,865)
arising during period
Less reclassification 13,079 (5,232) 7,847
adjustment for gains -------- -------- --------
realized in net income
Other comprehensive $ (1,697) $ 679 $ (1,018)
loss, net ======== ======== ========
</TABLE>
12
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 7. (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1999
------------------------------------------------------
Tax
Before tax (expense) Net of tax
amount benefit Amount
------------------- ------------------ ----------------
(In thousands)
<S> <C> <C> <C>
Unrealized gains on investment securities:
Unrealized holding gains $ (505) $ 202 $ (303)
arising during period
Less reclassification -- -- --
adjustment for gains -------- -------- --------
realized in net income
Other comprehensive $ (505) $ 202 $ (303)
income, net ======== ======== ========
</TABLE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of Berkshire Bancorp Inc. and subsidiaries (the "Company"). References to the
Company herein shall be deemed to refer to the Company and its consolidated
subsidiaries unless the context otherwise requires. References to Notes herein
are references to the "Notes to Consolidated Financial Statements" of the
Company located in Item 1 herein.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1999.
GENERAL
On January 4, 1999, the Company, through its wholly owned subsidiary,
Greater American Finance Group, Inc. ("GAFG"), acquired approximately 99% of the
outstanding shares of the common stock of The Berkshire Bank (the "Berkshire
Bank" or the "Bank") for $25.2 million (see Note 2). At the date of the
acquisition, the Bank had total assets of $119.4 million. The acquisition was
accounted for as a purchase and, accordingly, the results of operations for the
three months ended March 31, 2000 and 1999 include operations of the Berkshire
Bank.
NET INCOME. Net income for the three-month period ended March 31, 2000 was $9.04
million, or $4.00 per diluted share, as compared to $652,000, or $.29 per
diluted share, for the three-month period ended March 31, 1999. Net income in
2000 was favorably impacted by the pretax gain of $13.08 million on sales of the
common stock of Elottery, Inc. (see Note 4).
13
<PAGE>
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. Net interest income in the first
quarter of 2000 decreased by $19,000 to $2.08 million from $2.06 million in the
first quarter of 1999.
INTEREST INCOME. Interest income for the three-month period ended March 31, 2000
increased by 9.09% to $3.12 million from $2.86 million for the three-month
period ended March 31, 1999.
INTEREST EXPENSE. Interest expense for the three-month period ended March 31,
2000 increased by 32.22% to $1.03 million from $779,000 for the three-month
period ended March 31, 1999.
NET INTEREST MARGIN. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, was 4.62% for the first quarter
of 2000 as compared to 6.08% for the same period in 1999. The decrease in net
interest margin was due to a decline in average yield on average
interest-earning assets to 6.89% in 2000 from 8.87% in 1999.
AVERAGE BALANCES, YIELDS AND RATES. Average interest-earning assets totaled
$180.80 million for the three-month period ended March 31, 2000 compared to
$136.95 million for the comparable 1999 period, an increase of $43.85 million or
32.01%. The increase in average interest earning assets was due to the increase
in average loans to $65.96 million from $41.59 million and the increase in
investment securities to $79.47 million from $58.51 million. Average interest-
bearing liabilities increased to $94.44 million in 2000 from $68.06 million in
1999. The increase in interest-bearing liabilities was principally due to the
increase in time deposits to $31.41 million in the 2000 quarter from $13.00
million in the 1999 quarter. The average rate paid on interest-bearing deposits
declined to 4.35% in 2000 from 6.56% in 1999 due to the decrease in the average
rate paid on time deposits to 5.09% in 2000 from 10.77% in 1999.
NON-INTEREST INCOME. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the three-month
period ended March 31, 2000, total non-interest income was $13.22 million of
which $13.08 million was due to realized gains on sales of marketable
securities. Total non-interest income for the three-month period ended March 31,
1999 was $285,000.
NON-INTEREST EXPENSE. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees,
amortization of goodwill and other operating expenses associated with the
day-to- day operations of the Company. Total non-interest expense for the
three-month period ended March 31, 2000 increased to $1.14 million from $1.12
million for the three-month period ended March 31, 1999. The increase in 2000
was due primarily to the increase in salaries and benefits due to higher
staffing levels at the Bank.
PROVISION FOR INCOME TAX. During the first quarter of 2000, the Company recorded
income tax expense of $5.12 million compared to $575,000 in the first quarter of
1999. The tax provisions for federal, state and local taxes recorded for 2000
and 1999 represent effective tax rates of 36.2% and 46.8%, respectively.
Effective tax rates are attributable to the level of net income adjusted for
certain tax-preference items.
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.
14
<PAGE>
Most of the Bank's deposits are either interest-bearing demand deposits
or short term certificates of deposit and other interest-bearing deposits with
interest rates that fluctuate as market rates change. Management of the Bank
seeks to reduce the risk of interest rate fluctuations by concentrating on loans
and securities investments with either short terms to maturity or with
adjustable rates or other features that cause yields to adjust based upon
interest rate fluctuations. In addition, to cushion itself against the potential
adverse effects of a substantial and sustained increase in market interest
rates, the Bank has purchased off balance sheet interest rate cap contracts
which generally provide that the Bank will be entitled to receive payments from
the other party to the contract if interest rates exceed specified levels. These
contracts are entered into with major financial institutions.
The Company seeks to maximize its net interest margin within an
acceptable level of interest rate risk. Interest rate risk can be defined as the
amount of the forecasted net interest income that may be gained or lost due to
favorable or unfavorable movements in interest rates. Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets
differ significantly from the maturity or repricing characteristics of
liabilities.
In the banking industry, a traditional measure of interest rate
sensitivity is known as "gap" analysis, which measures the cumulative
differences between the amounts of assets and liabilities maturing or repricing
at various time intervals. The following table sets forth the Company's interest
rate repricing gaps for selected maturity periods:
<TABLE>
<CAPTION>
BERKSHIRE BANCORP INC.
INTEREST RATE SENSITIVITY GAP AT MARCH 31, 2000
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
-------------------------------------------------------------------------------------
3 MONTHS 3 THROUGH 1 THROUGH OVER
OR LESS 12 MONTHS 3 YEARS 3 YEARS TOTAL
-------- --------- --------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 6,000 $ -- $ -- $ -- $ 6,000
(Rate) 5.75% -- -- -- 5.75%
--------- --------- --------- --------- ----------
Interest bearing deposits 17,010 -- -- -- 17,010
in banks
(Rate) 5.61% -- -- -- 5.61%
--------- --------- --------- --------- ----------
Loans (1)(2)
Adjustable rate loans 27,565 8,050 2,917 2,953 41,485
(Rate) 9.49% 8.05% 9.00% 7.98%
Fixed rate loans 1,362 510 1,904 21,128 24,904
(Rate) 7.10% 7.59% 8.43% 8.08% . %
--------- --------- --------- --------- ----------
Total loans 28,927 8,560 4,821 24,081 66,389
Investments (3)(4) 15,900 19,842 18,991 36,722 91,455
(Rate) 5.47% 6.00% 6.57% 7.10% 6.47%
--------- --------- --------- --------- ----------
Total rate-sensitive assets 67,837 28,402 23,812 60,803 180,854
--------- --------- --------- --------- ----------
Deposit accounts (5)
Savings and NOW 10,776 -- -- -- 10,776
(Rate) 2.22% 2.22%
Money market 54,400 -- -- -- 54,400
(Rate) 4.35% -- -- -- 4.35%
Time Deposits 22,479 4,089 134 1,592 28,294
(Rate) 5.20% 5.85% 0.00% 0.00% 4.98%
--------- --------- --------- --------- ----------
Total deposit accounts 87,655 4,089 134 1,592 93,470
Other borrowings -- -- 500 1,000 1,500
(Rate) -- -- 6.04% 5.90% 5.95%
--------- --------- --------- --------- ----------
Total rate-sensitive liabilities 87,655 4,089 634 2,592 94,970
--------- --------- --------- --------- ----------
Gap (repricing differences) (19,818) 24,313 23,178 58,211 85,884
========= ========= ========= ========= ==========
Cumulative Gap (19,818) 4,495 27,673 85,884
========= ========= ========= =========
Cumulative Gap to Total Rate
Sensitive Assets (10.96)% 2.49% 15.30% 47.49%
========= ========= ========= =========
</TABLE>
15
<PAGE>
- --------------------
(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.
PROVISION FOR LOAN LOSSES. 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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
---- ----
<S> <C> <C>
Average loans outstanding $ 65,957 $ 41,592
======== ========
Allowance at beginning of period 923 791
Charge-offs:
Commercial and other loans -- 5
Real estate loans -- --
-------- --------
Total loans charged-off -- 5
-------- --------
Recoveries:
Commercial and other loans 90 47
Real estate loans -- --
-------- --------
Total loans recovered 90 47
-------- --------
Net (charge-offs) recoveries 90 42
-------- --------
Provision for loan losses
charged to operating expenses 5 15
-------- --------
Allowance at end of period 1,018 848
-------- --------
Ratio of net recoveries (charge-offs) .14%
========
to average loans outstanding (2) .10%
========
Allowance as a percent of total loans 1.53% 1.99%
======== ========
Total loans at end of period $ 66,389 $ 42,632
======== ========
</TABLE>
LOAN PORTFOLIO.
Loan Portfolio Composition. The Company's loans consist primarily of mortgage
loans secured by residential and non-residential properties as well as
commercial loans which are either unsecured or secured by personal property
collateral. Most of the Company's loans are either made to individuals or
personally guaranteed by the principals of the business to which the loan is
made. At March 31, 2000, the Company had total loans of $66.39 million and an
allowance for loan losses of approximately $1.02 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.
16
<PAGE>
The following tables set forth information concerning the Company's
loan portfolio by type of loan at the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------------------- ---------------------
AMOUNT AMOUNT
------ ------
(in thousands)
<S> <C> <C>
Commercial and professional loans $ 7,569 $ 5,358
Secured by real estate 56,673 57,652
Personal 1,853 2,345
Other 294 236
-------- --------
Total loans 66,389 65,591
Less:
Allowance for loan losses (1,018) (923)
-------- --------
Loans, net $ 65,371 $ 64,668
======== ========
</TABLE>
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, 2000 and 1999, the Company did not have any non accrual or
non performing loans. Loans past due more than 90 days and still accruing
interest amounted to $128,000 and $50,000 at March 31, 2000 and 1999,
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, 2000, 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.
17
<PAGE>
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,
2000 and December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
MARCH 31, 2000
Total Capital (to Risk-Weighted Assets)
Company 71,816 70.3% 8,174 >=8.0% -- N/A
Bank 13,745 16.5% 6,668 >=8.0% 8,335 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 70,798 69.3% 4,087 >=4.0% -- N/A
Bank 12,822 15.4% 3,334 >=4.0% 5,001 >=6.0%
Tier I Capital (to Average Assets)
Company 70,798 36.0% 7,868 >=4.0% -- N/A
Bank 12,822 8.8% 5,842 >=4.0% 7,302 >=5.0%
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
Total Capital (to Risk-Weighted Assets)
Company 60,336 59.8% 8,072 >=8.0% -- N/A
Bank 13,745 16.5% 6,668 >=8.0% 8,335 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 59,413 58.9% 4,036 >=4.0% -- N/A
Bank 12,822 15.4% 3,334 >=4.0% 5,001 >=6.0%
Tier I Capital (to Average Assets)
Company 59,413 33.7% 7,019 >=4.0% -- N/A
Bank 12,822 8.8% 5,842 >=4.0% 7,302 >=5.0%
</TABLE>
LIQUIDITY
The management of the Company's liquidity focuses on ensuring that
sufficient funds are available to meet loan funding commitments, withdrawals
from deposit accounts, the repayment of borrowed funds, and ensuring that the
Bank and the Company comply with regulatory liquidity requirements. Liquidity
needs of The Berkshire Bank have historically been met by deposits, investments
in federal funds sold, principal and interest payments on loans, and maturities
of investment securities.
For the parent company, Berkshire Bancorp Inc. ("Berkshire"), liquidity
means having cash available to fund operating expenses and to pay shareholder
dividends, when and if declared by Berkshire's Board of Directors. The ability
of Berkshire to fund its operations and to pay dividends is not dependent upon
the receipt of dividends from The Berkshire Bank. At March 31, 2000, Berkshire
had cash of $37.5 million and marketable securities of $4.9 million.
18
<PAGE>
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.
IMPACT OF THE YEAR 2000
The Company, apart from its subsidiaries, reviewed its financial and
other systems and modified and /or replaced those systems which may have been
impacted by the arrival of the Year 2000. The total cost of the Year 2000
preparedness program for the Company, apart from its subsidiaries, was not
material.
The Bank had an ongoing program to ensure that its operational and
financial systems would not be adversely affected by year 2000 software
failures. The Bank purchased, installed and converted to new hardware and
banking software, and successfully completed a series of tests to ensure Year
2000 compliance. The cost of such conversion and other Year 2000 preparations
was approximately $200,000. The Bank developed a contingency plan which would
allow it to continue operations while unforeseen software problems were
corrected.
While the Bank believes it has and is taking all appropriate steps to
assure Year 2000 compliance, it is dependent on vendor compliance to some
extent. The Bank required its systems and software vendors to represent that the
services and products provided were year 2000 compliant.
In addition to possible expenses related to the Bank's systems and
those of its service providers, the Bank could incur losses if Year 2000
problems adversely affected any of its depositors or borrowers. Such problems
could include, among other things, delayed loan payments. Due to the diversity
of the loan portfolio and the fact that the Bank's market area is not dependent
on one employer or industry, the Bank did not expect any such Year 2000 related
difficulties that may affect its depositors and borrowers to significantly
affect net earnings or cash flow.
As of May 5, 2000, the Company has not experienced any problems related
to Year 2000 issues.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- ------------
<C> <S>
27 Financial Data Schedule.
</TABLE>
b. Report on Form 8-K, dated April 18, 2000 (date of earliest event April 13,
2000) contained the results of matters submitted to the Company's stockholders
at the Annual Meeting of Stockholders of the Company held on April 13, 2000.
19
<PAGE>
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 12, 2000 By: /s/ Steven Rosenberg
------------ ---------------------
STEVEN ROSENBERG
PRESIDENT AND CHIEF
FINANCIAL OFFICER
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
- ------- ----------- ------------
<C> <S> <C>
27 Financial Data Schedule 22
</TABLE>
STATEMENT OF DIFFERENCES
The greater-than or equal-to sign shall be expressed as ............. >=
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BERKSHIRE BANCORP INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,546
<INT-BEARING-DEPOSITS> 17,006
<FED-FUNDS-SOLD> 6,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 88,439
<INVESTMENTS-CARRYING> 4,970
<INVESTMENTS-MARKET> 4,978
<LOANS> 66,389
<ALLOWANCE> 1,018
<TOTAL-ASSETS> 201,283
<DEPOSITS> 108,916
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,199
<LONG-TERM> 1,500
<COMMON> 256
0
0
<OTHER-SE> 81,412
<TOTAL-LIABILITIES-AND-EQUITY> 201,283
<INTEREST-LOAN> 1,426
<INTEREST-INVEST> 1,414
<INTEREST-OTHER> 275
<INTEREST-TOTAL> 3,115
<INTEREST-DEPOSIT> 996
<INTEREST-EXPENSE> 1,027
<INTEREST-INCOME-NET> 2,088
<LOAN-LOSSES> 5
<SECURITIES-GAINS> 13,079
<EXPENSE-OTHER> 1,137
<INCOME-PRETAX> 14,164
<INCOME-PRE-EXTRAORDINARY> 14,164
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,041
<EPS-BASIC> 4.25
<EPS-DILUTED> 4.00
<YIELD-ACTUAL> 4.62
<LOANS-NON> 0
<LOANS-PAST> 128
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 923
<CHARGE-OFFS> 0
<RECOVERIES> 90
<ALLOWANCE-CLOSE> 1,018
<ALLOWANCE-DOMESTIC> 1,018
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,018
</TABLE>
