<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO 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, 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 November 6, 2000, there were 2,065,552 outstanding shares of the
issuers Common Stock, $.10 par value.
<PAGE>
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-Q for the
quarterly period ended September 30, 2000, as set forth in the pages attached
hereto:
ITEM 1 -FINANCIAL STATEMENTS
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
2
<PAGE>
ITEM 1 - FINANCIAL STATEMENTS
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 502 $ 2,545
Interest bearing deposits 12,510 3,834
Federal funds sold 10,750 13,500
-------- ---------
Total cash and cash equivalents 23,762 19,879
Investment Securities:
Available-for-sale 96,886 84,498
Held-to-maturity 860 4,999
-------- --------
Total investment securities 97,746 89,497
Loans, net of unearned income 74,564 65,591
Less: allowance for loan losses (1,053) (923)
-------- --------
Net loans 73,511 64,668
Accrued interest receivable 2,050 1,614
Premises and equipment, net 308 370
Prepaid expenses and other 2,955 4,029
Goodwill, net of amortization of
$1,206 in 2000 and $730 in 1999 11,701 12,073
-------- --------
Total assets $212,033 $192,130
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 13,340 $ 15,549
Interest bearing 84,656 88,538
-------- --------
Total deposits 97,996 104,087
Securities sold under agreements to repurchase 20,402 --
Long term borrowings 6,500 1,500
Accrued interest payable 708 161
Accrued other liabilities 957 1,569
Income taxes payable 2,039 2,741
Deferred tax liability 100 4,002
-------- --------
Total liabilities 128,702 114,060
-------- --------
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 --
September 30, 2000, 2,124,449 shares
December 31, 1999, 2,127,265 shares 256 256
Additional paid-in capital 78,741 78,570
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------------------------------
<S> <C> <C>
Accumulated other comprehensive
(loss) income, net (1,190) 4,425
Retained earnings (accumulated deficit) 8,531 (2,421)
Less: Common stock in treasury - at cost:
September 30, 2000, 441,646 shares
December 31, 1999, 438,830 shares (3,007) (2,760)
-------- --------
Total stockholders' equity 83,331 78,070
-------- --------
$212,033 $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 FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
2000 1999 2000 1999
-------- -------- -------- ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Short-term interest-earning assets $ 196 $ 286 $ 903 $1,820
Securities and other investments 1,733 1,156 4,637 3,081
Loans 1,655 1,018 4,695 2,752
------- ------- ------- ------
Total interest income 3,584 2,460 10,235 7,653
------- ------- ------- ------
INTEREST EXPENSE
Deposits 1,010 594 3,027 2,195
Borrowings 364 23 580 68
------- ------- ------- ------
Total interest expense 1,374 617 3,607 2,263
------- ------- ------- ------
Net interest income 2,210 1,843 6,628 5,390
PROVISION FOR LOAN LOSSES 10 15 15 40
------- ------- ------- ------
Net interest income after
provision for loan losses 2,200 1,828 6,613 5,350
------- ------- ------- ------
NON-INTEREST INCOME
Investment securities gains 209 4,688 13,288 6,863
Other income 934 164 1,189 577
------- ------- ------- ------
Total non-interest income 1,143 4,852 14,477 7,440
------- ------- ------- ------
NON-INTEREST EXPENSE
Salaries and employee benefits 548 483 1,623 1,402
Net occupancy expense 116 115 333 323
Equipment expense 26 34 74 91
FDIC assessment 7 3 21 6
Data processing expense 5 5 15 15
Amortization of goodwill 159 182 477 547
Other 242 219 1,153 825
------- ------- ------- ------
Total non-interest expense 1,103 1,041 3,696 3,209
------- ------- ------- ------
Income before provision for taxes 2,240 5,639 17,394 9,581
Provision for income taxes 638 1,729 6,229 3,603
------- ------- ------- ------
Net income $ 1,602 $ 3,910 $11,165 $5,978
======= ======= ======= ======
Net income per share:
Basic $ .75 $ 1.84 $ 5.24 $ 2.81
======= ======== ======== ======
Diluted $ .75 $ 1.73 $ 5.13 $ 2.64
======= ======== ======== ======
</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 NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2000 1999
------ -----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,165 $ 5,978
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Gain on investment securities (13,288) (6,863)
Depreciation and amortization and other 594 635
Provision for loan losses 15 40
Changes in assets and liabilities:
(Increase) in accrued interest receivable (436) (685)
Decrease in prepaid expenses and other 1,434 1,060
Increase (decrease) in accounts payable, other accrued
expenses, liabilities and income taxes payable (412) 2,351
-------- --------
Net cash provided by (used in) operating activities (928) 2,516
-------- --------
Cash flows from investing activities:
Investment in Madison Merchant Services, Inc. (285) --
Investment in The Berkshire Bank (105) (25,217)
Cash of entity acquired -- 22,439
Proceeds from sales of Elottery common stock 13,288 6,863
Investment securities available for sale
Purchases (54,075) (55,165)
Sales 36,159 33,597
Net increase in loans (8,973) (11,516)
Acquisition of premises and equipment (15) (184)
-------- --------
Net cash (used in) investing activities (14,006) (29,183)
-------- --------
Cash flows from financing activities:
Net (decrease) in non interest bearing deposits (2,209) (5,537)
Net increase (decrease) in interest bearing deposits (3,882) 1,998
Increase in securities sold under agreements to repurchase 20,402 --
Increase in long term borrowings 5,000 --
Proceeds from exercise of common stock options 15 9
Acquisition of treasury stock (296) --
Dividends paid (213) (213)
-------- --------
Net cash provided by (used in) financing activities 18,817 (3,743)
-------- --------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
2000 1999
--------- -------------
<S> <C> <C>
Net increase (decrease) in cash 3,883 (30,410)
Cash - beginning of period 19,879 65,136
-------- --------
Cash - end of period $ 23,762 $ 34,726
======== ========
Supplemental cash flow information:
Cash used to pay interest $ 3,060 $ 3,327
Cash used to pay taxes $ 6,122 $ 340
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 Berkshire 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 September 30, 2000 and December 31, 1999 and the
consolidated results of its operations for the three and nine month periods
ended September 30, 2000 and 1999, and its consolidated cash flows for the nine
month periods ended September 30, 2000 and 1999.
NOTE 2. - ACQUISITIONS
GSB Financial Corporation. On August 16, 2000, the Company and its
wholly-owned subsidiaries, The Berkshire Bank and Greater American Finance
Group, Inc., a Delaware corporation that is the immediate parent of The
Berkshire Bank, entered into an Agreement and Plan of Reorganization (the
"Agreement") with GSB Financial Corporation, a Delaware corporation, which is a
savings and loan holding company ("GSB Financial"), and its wholly-owned
subsidiary, Goshen Savings Bank, a federal savings bank, chartered and existing
under the laws of the United States ("Goshen Bank"). Under the terms and subject
to the conditions set forth in the Agreement, GSB Financial will be merged with
and into the Company and Goshen Bank will be merged with and into The Berkshire
Bank. In connection with the merger, holders of common stock of GSB Financial
will receive, for each share of common stock of GSB Financial held by them,
$20.75, or, in the alternative, at their election, 0.6027 shares of the
Company's common stock. The stock component of the transaction will represent
50.1% of the total consideration, while the cash component will represent 49.9%,
subject to increase in the stock component up to 60% of the total if a higher
number of GSB Financial stockholders elect to receive stock. The right of the
GSB Financial stockholders to elect to receive stock or cash is subject to
allocation procedures if the GSB Financial stockholders electing to receive
stock do not represent between 50.1% and 60% of the total GSB Financial shares
outstanding.
8
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 2. (CONTINUED)
The completion of the transaction is subject to the satisfaction of
various conditions including the receipt of regulatory approval from the Board
of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation,
the Office of Thrift Supervision and the New York State Banking Department.
Approval by the stockholders of both GSB Financial and the Company will also be
required. The transaction is expected to close in the first quarter of 2001.
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 and June
16, 2000, GAFG purchased an additional 5,000 shares and 10,000 shares,
respectively, for a cash purchase price of $10.50 per share, or approximately
$158,000. 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 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.
9
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
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 SEPTEMBER 30, 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 $1,602 2,124 $ .75
Effect of dilutive securities
Options -- 1 .00
------ ------ -----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $1,602 2,125 $ .75
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 $11,165 2,131 $5.24
Effect of dilutive securities
Options -- 45 (.11)
------- ----- -----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $11,165 2,176 $5.13
======= ===== =====
</TABLE>
Options to purchase 43,875 shares of common stock for $38.00 per share
were outstanding during the three and nine month periods ended September 30,
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.
10
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 3. (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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 $3,910 2,125 $1.84
Effect of dilutive securities
Options -- 135 (.11)
------ ------ -----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $3,910 2,260 $1.73
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 $5,978 2,127 $2.81
Effect of dilutive securities
Options -- 137 (.17)
------ ------ -----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $5,978 2,264 $2.64
====== ====== =====
</TABLE>
11
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 4. INVESTMENT SECURITIES
The following tables summarize held to maturity and available-for-sale
investment securities as of September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, 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 $362 $ -- $ (2) $360
Corporate notes 498 1 -- 499
---- ---- ---- ----
Totals $860 $ 1 $ (2) $859
==== ==== ==== ====
</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>
<TABLE>
<CAPTION>
SEPTEMBER 30, 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 $88,254 $ -- $ (792) $87,462
Mortgage-backed
securities 3,344 -- (46) 3,298
Marketable equity
securities and other 6,236 220 (330) 6,126
------- ---- ------- -------
Totals $97,834 $220 $(1,168) $96,886
======= ==== ======= =======
</TABLE>
12
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 4. (CONTINUED)
<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.
In March 1999, Elottery exercised its right to redeem and convert the
Elottery Preferred Stock into Elottery Common Stock and on April 6, 1999, in
exchange for its shares of Elottery Preferred Stock, the Company received
4,193,204 shares of Elottery Common Stock with a market value of approximately
$17.7 million.
At September 30, 2000, the Company owned 130,000 shares of Elottery
Common Stock which have been classified as available-for-sale securities. The
unrealized gain of approximately $211,000, net of deferred taxes of
approximately $85,000 has been recorded as a component of other accumulated
comprehensive income.
13
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
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>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
--------------------- -----------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
<S> <C> <C> <C> <C>
Commercial and
professional loans $ 8,230 11.0% $ 5,358 8.2%
Secured by real estate 65,777 88.2 57,652 87.9
Personal 267 0.4 2,345 3.6
Other 290 0.4 236 0.3
-------- ----- -------- -----
Total loans 74,564 100.0% 65,591 100.0%
===== =====
Less:
Allowance for loan
losses (1,053) (923)
-------- --------
Loans, net $ 73,511 $ 64,668
======== ========
</TABLE>
NOTE 6. DEPOSITS
The following table summarizes the composition of the average balances
of major deposit categories:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
---------------------- -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand deposits $ 15,032 -- $ 17,485 --
NOW and money market 50,273 3.89% 48,515 3.19%
Savings deposits 4,540 3.08 4,721 2.58
Time deposits 34,243 5.52 21,714 5.55
-------- ---- -------- ----
Total deposits $104,088 3.83% $ 92,435 3.11%
======== ==== ======== ====
</TABLE>
(1) Interest expense was annualized to calculate average yield for the two
months ended December 31, 1999.
14
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 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 NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
-------------------------------------------- --------------------------------------------
TAX TAX
BEFORE TAX (EXPENSE) NET OF TAX BEFORE TAX (EXPENSE) NET OF TAX
AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT
------------- ------------- ----------- ------------- ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains on
investment securities:
Unrealized holding losses
arising during period $(15,272) $ 6,109 $(9,163) $(1,238) $ 495 $ (743)
Less reclassification
adjustment for gains
realized in net income 13,288 (5,315) 7,973 6,863 (2,745) 4,118
--------- -------- -------- -------- -------- --------
Other comprehensive
loss, net $ (1,984) $ 794 $(1,190) $ 5,625 $(2,250) $ 3,375
========= ======== ======== ======== ======== ========
</TABLE>
NOTE 8. TAXES
The Company is a party to a tax sharing agreement, as amended, (the
"Tax Sharing Agreement") with The Cooper Companies, Inc. ("TCC") and Cooper
Development Company ("CDC") related to the Cooper Labs, Inc. ("CLI") liquidation
on June 27, 1985. The above companies have agreed that: (i) in the event that
the amount of tax liability, including interest and penalties, shall be
ultimately determined to be greater or less than $10,000,000, then such excess
or deficiency shall be shared 50%, 25%, and 25% by TCC, CDC, and the Company,
respectively, and (ii) they are jointly and severally liable. TCC is
coordinating the defenses for these tax examinations. Since 1985, the Company
has adjusted its accrual for interest charges related to potential assessments.
On July 18, 2000, the Company was notified that all remaining issues
covered by the Tax Sharing Agreement had been resolved. Based upon the
information available and after consultation with its tax advisors, the Company
has reversed approximately $808,000 of reserves deemed no longer necessary.
NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 138 ("SFAS No. 138"), "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" an amendment of
FASB Statement No. 133. SFAS No. 138 amends SFAS No. 133 for the following
items: normal purchases and normal sales exception, hedging the benchmark
interest rate, hedging recognized foreign currency-denominated debt instruments
and hedging with intercompany derivatives. SFAS No. 138 is required to be
adopted concurrently with SFAS No. 133. The Company has reviewed the provisions
of SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138 and does not
anticipate these statements having a material affect on the Company's
financial position or results of operations.
15
<PAGE>
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.
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.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
2000 1999
------------------------------------------ -----------------------------------------
INTEREST INTEREST
AVERAGE AND AVERAGE AVERAGE AND AVERAGE
BALANCE DIVIDENDS YIELD/RATE BALANCE DIVIDENDS YIELD/RATE
------- ---------- ---------- ------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $ 72,242 $1,655 9.16% $ 49,136 $1,018 8.29%
Investment securities 97,992 1,733 7.07 79,735 1,156 5.80
Other (2)(5) 18,856 196 4.16 24,559 286 4.66
-------- ------ ----- -------- ------ -----
Total interest-earning assets 189,090 3,584 7.58 153,430 2,460 6.41
----- -----
Noninterest-earning assets 17,958 29,673
-------- --------
Total Assets 207,048 183,103
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 40,661 368 3.62% 53,431 413 3.09%
Time deposits 42,235 642 6.08 26,203 181 2.76
Other borrowings 23,923 364 6.09 1,500 23 6.13
-------- ------ ----- -------- ------ -----
Total interest-bearing
liabilities 106,819 1,374 5.15 81,134 617 3.04
------ ----- ------ -----
Demand deposits 13,587 17,318
Noninterest-bearing liabilities 4,115 9,721
Stockholders' equity 82,527 74,930
-------- --------
Total liabilities and
stockholders' equity 207,048 183,103
======== ========
Net interest income 2,210 1,843
====== ======
Interest-rate spread (3) 2.43% 3.37%
===== =====
Net interest margin (4) 4.68% 4.80%
===== =====
Ratio of average interest-
earning assets to average
interest bearing liabilities 1.77 1.89
======== ========
</TABLE>
16
<PAGE>
----------------------
(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.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
2000 1999
----------------------------------------- -------------------------------------------
INTEREST INTEREST
AVERAGE AND AVERAGE AVERAGE AND AVERAGE
BALANCE DIVIDENDS YIELD/RATE BALANCE DIVIDENDS YIELD/RATE
------- --------- ---------- ------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $ 68,922 $ 4,695 9.08% $ 45,298 $ 1,820 5.36%
Investment securities 89,257 4,637 6.93 72,123 3,087 5.70
Other (2)(5) 26,755 903 4.50 30,163 2,752 12.17
-------- -------- ------------ -------- -------- ---------
Total interest-earning assets 184,934 10,235 7.38 147,584 7,653 6.91
------------ ---------
Noninterest-earning assets 19,586 29,231
-------- --------
Total Assets 204,520 176,815
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 54,813 1,573 3.83% 54,831 1,281 3.12%
Time deposits 34,243 1,454 5.66 22,174 914 5.50
Other borrowings 13,035 580 5.93 1,519 68 5.97
-------- -------- ---------- -------- -------- ---------
Total interest-bearing
liabilities 102,091 3,607 4.71 78,524 2,263 3.84
-------- ---------- -------- ---------
Demand deposits 15,033 16,937
Noninterest-bearing liabilities 6,328 7,866
Stockholders' equity 81,068 73,488
-------- --------
Total liabilities and
stockholders' equity 204,520 176,815
======== ========
Net interest income 6,628 5,390
======== ========
Interest-rate spread (3) 2.67 3.07
========== =========
Net interest margin (4) 4.78% 4.87%
========== =========
Ratio of average interest-
earning assets to average
interest bearing liabilities 1.81 1.88
======== ========
</TABLE>
17
<PAGE>
----------------------
(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
<PAGE>
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 and nine months ended September 30, 2000 and 1999 include operations of
the Berkshire Bank.
NET INCOME. Net income for the three-month period ended September 30, 2000 was
$1.60 million, or $.75 per diluted share, as compared to $3.91 million, or $1.73
per diluted share, for the three-month period ended September 30, 1999. Net
income in the 1999 period was favorably impacted by the pretax gain of $4.69
million on sales of the common stock of Elottery, Inc. (see Note 4). Net income
for the nine-month period ended September 30, 2000 was $11.17 million, or $5.13
per diluted share, as compared to $5.98 million, or $2.64 per diluted share, in
the same period in 1999. Net income in the 2000 period was favorably impacted by
the pretax gain of $13.29 million on sales of the common stock of Elottery, Inc.
and the gain of approximately $808,000 as a result of the successful settlement
of certain prior year franchise tax issues (see Note 8).
The favorable impact on net income due to the pretax gains on the sales
of the common stock of Elottery, Inc. of $4.69 million and $13.29 million,
respectively, in 1999 and 2000 is not representative of the Company's ongoing
business. The Company intends to sell its remaining shares as market conditions
allow. The Company acquired its shares of Elottery, Inc. common stock as
described in the following paragraphs.
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.
In March 1999, Elottery exercised its right to redeem and convert the
19
<PAGE>
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 December 31, 1999 and September 30, 2000, the Company owned
1,792,106 shares and 130,000 shares with a fair market value of approximately
$9,744,000 and $211,000, respectively, of Elottery, Inc. common stock.
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 for the quarter
ended September 30, 2000 increased by $367,000, or 19.9%, to $2.21 million from
$1.84 million for the quarter ended September 30, 1999. Net interest income for
the nine months ended September 30, 2000 increased by $1.24 million, or 23.0%,
to $6.63 million from $5.39 million for the nine months ended September 30,
1999.
INTEREST INCOME. Interest income for the quarter ended September 30, 2000
increased by $1.12 million, or 45.7%, to $3.58 million from $2.46 million for
the quarter ended September 30, 1999. The increase is due to the increase in the
average amount of interest earning assets to $189.09 million in the 2000 quarter
from $153.43 million in the 1999 quarter and the increase in the average yield
on such assets to 7.58% in the 2000 quarter from 6.41% in the 1999 quarter.
Interest income for the nine months ended September 30, 2000 increased
by $2.58 million, or 33.7%, to $10.24 million from $7.65 million for the nine
month ended September 30, 1999. The increase is due to the increase in the
average amount of interest earning assets to $184.93 million in the nine months
ended September 30, 2000 from $147.58 million in the comparable 1999 period and
the increase in the average yield on such assets to 7.38% in the nine months of
2000 from 6.91% in the nine months of 1999.
INTEREST EXPENSE. Interest expense for the quarter ended September 30, 2000
increased by $757,000, or 122.7%, to $1.37 million from $617,000 for the quarter
ended September 30, 1999. The increase is due to the increase in the average
amount of interest bearing liabilities to $106.82 million in the 2000 quarter
from $81.13 million in the 1999 quarter and the increase in the average rates
paid on such liabilities to 5.15% in the 2000 quarter from 3.04% in the 1999
quarter.
Interest expense for the nine months ended September 30, 2000 increased
by $1.34 million, or 59.4%, to $3.61 million from $2.26 million for the nine
months ended September 30, 1999. The increase is due to the increase in the
average amount of interest bearing liabilities to $102.09 million in the nine
months of 2000 from $78.52 million in the nine months of 1999 and the increase
in the average rates paid on such liabilities to 4.71% in the 2000 period from
3.84% in the 1999 period.
NET INTEREST MARGIN. Net interest margin, or annualized net interest income
as a percentage of average interest-earning assets, declined to 4.68% for the
quarter ended September 30, 2000 from 4.80% for the quarter ended September
20
<PAGE>
30, 1999. Net interest margin declined to 4.78% for the nine months ended
September 30, 2000 from 4.87% for the nine months ended September 30, 1999. The
decline in net interest margin in the three and nine months of fiscal 2000 is
due to the increase in the average amounts and average rates paid on
interest-bearing liabilities, primarily time deposits and other borrowings,
partially offset by the increase in the average amounts and average yields
earned on interest-earning assets.
AVERAGE BALANCES, YIELDS AND RATES. Average interest-earning assets totaled
$189.09 million and $184.93 million for the three and nine months ended
September 30, 2000, respectively, compared to $153.43 million and $147.58
million, respectively, for the same periods in 1999. The increase in average
interest-earning assets in 2000 is due primarily to the increase in the average
balances of loans to $68.92 million from $45.30 million in 1999, and the
increase in the average balances of investment securities to $89.26 million from
$72.12 million in 1999.
The increase in the average balances of loans during 2000 is due to the
increase in commercial and professional loans and loans secured by real estate
to $8.23 million and $65.78 million, respectively, at September 30, 2000 from
$5.36 million and $57.65 million, respectively, at December 31, 1999, partially
offset by the decrease in personal loans to $267,000 at September 30, 2000 from
$2.35 million at December 31, 1999.
NON-INTEREST INCOME. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the three and nine
months ended September 30, 2000, service fee income was $126,000 and $381,000,
respectively, as compared to $164,000 and $577,000, respectively, for the same
periods in 1999. The decrease in service fee income in 2000 as compared to 1999
is due primarily to the decrease in the principal amount of loans serviced for
third parties.
NON-INTEREST EXPENSE. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees,
amortization of goodwill and other operating expenses associated with the
day-to-day operations of the Company. Total non-interest expense for the three
and nine month periods ended September 30, 2000 was $1.10 million and $3.70
million, respectively, as compared to $1.04 million and $3.21 million,
respectively, for the three and nine months ended September 30, 1999.
PROVISION FOR INCOME TAX. The Company recorded income tax expense of $638,000
and $6.23 million, respectively, for the three and nine months of fiscal 2000,
compared to $1.73 million and $3.60 million, respectively, for the same periods
in fiscal 1999. The tax provisions for federal, state and local taxes recorded
for the nine months of fiscal 2000 and 1999 represent effective tax rates of
35.8% and 37.6%, respectively. Effective tax rates are attributable to the level
of net income adjusted for certain tax-preference items.
21
<PAGE>
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.
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:
22
<PAGE>
<TABLE>
<CAPTION>
BERKSHIRE BANCORP INC.
INTEREST RATE SENSITIVITY GAP AT SEPTEMBER 30, 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>
Federal funds sold $ 10,750 $ -- $ -- $ -- $ 10,750
(Rate) 6.59% -- -- -- 6.59%
--------- --------- --------- --------- ----------
Interest bearing deposits 12,510 -- -- -- 12,510
in banks
(Rate) 5.96% -- -- -- 5.96%
--------- --------- --------- --------- ----------
Loans (1)(2)
Adjustable rate loans 34,940 3,984 10,180 8,744 57,848
(Rate) 9.73% 8.82% 8.98% 8.97%
Fixed rate loans 45 589 3,218 12,864 16,716
(Rate) 9.90% 7.78% 8.36% 7.73% 7.86%
--------- --------- --------- --------- ----------
Total loans 34,985 4,573 13,398 21,608 74,564
Investments (3)(4) 14,416 16,142 36,851 29,165 96,574
(Rate) 7.35% 5.99% 7.05% 6.92% 6.88%
--------- --------- --------- --------- ----------
Total rate-sensitive assets 72,661 20,715 50,249 50,773 194,398
--------- --------- --------- --------- ----------
Deposit accounts (5)
Savings and NOW 10,107 -- -- -- 10,107
(Rate) 2.02% 2.02%
Money market 24,152 -- -- -- 24,152
(Rate) 4.04% -- -- -- 4.04%
Time Deposits 18,894 29,640 1,863 -- 50,397
(Rate) 5.45% 6.68% 5.69% --% 6.18%
--------- --------- --------- --------- ---------
Total deposit accounts 53,153 29,640 1,863 -- 84,656
Repurchase agreements 20,402 -- -- -- 20,402
(Rate) 5.98% -- -- -- 5.98%
Other borrowings 5,000 -- 500 1,000 6,500
(Rate) 6.61% -- 6.09% 5.90% 6.46%
--------- --------- --------- --------- ----------
Total rate-sensitive liabilities 78,555 29,640 2,363 1,000 111,558
--------- --------- --------- --------- ----------
Interest rate caps 20,000 -- -- (20,000) --
Gap (repricing differences) (25,894) (8,925) 47,886 69,773 82,840
========= ========= ========= ========= ==========
Cumulative Gap (25,894) (34,819) 13,067 82,840
========= ========= ========= =========
Cumulative Gap to Total Rate
Sensitive Assets (13.32)% (17.91)% 6.72% 42.61%
========= ========= ========= =========
</TABLE>
--------------
(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.
23
<PAGE>
PROVISION FOR LOAN LOSSES. The Company maintains an allowance for loan losses at
a level deemed sufficient to absorb losses, which are inherent in the loan
portfolio at each balance sheet date. Management reviews the adequacy of the
allowance on at least a quarterly basis to ensure that the provision for loan
losses has been charged against earnings in an amount necessary to maintain the
allowance at a level that is appropriate based on management's assessment of
probable estimated losses. The Company's methodology for assessing the
appropriateness of the allowance for loan losses consists of several key
elements. These elements include a specific allowance for loan watch list
classified loans, an allowance based on historical trends, an additional
allowance for special circumstances, and an unallocated portion. The Company
consistently applies the following comprehensive methodology.
The allowance for loan watch list classified loans addresses those
loans maintained on the Company's loan watch list, which are assigned a rating
of substandard, doubtful, or loss. Substandard loans are those with a
well-defined weakness or a weakness, which jeopardizes the repayment of the
debt. A loan may be classified as substandard as a result of impairment of the
borrower's financial condition and repayment capacity. Loans for which repayment
plans have not been met or collateral equity margins do not protect the Company
may also be classified as substandard. Doubtful loans have the characteristics
of substandard loans with the added characteristic that collection or
liquidation in full, on the basis of presently existing facts and conditions, is
highly improbable. Although the possibility of loss is extremely high for
doubtful loans, the classification of loss is deferred until pending factors,
which might improve the loan, have been determined. Loans rated as doubtful in
whole or in part are placed in nonaccrual status. Loans, which are classified as
loss, are considered uncollectible and are charged to the allowance for loan
losses. There were no loans classified as of September 30, 2000.
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
24
<PAGE>
loan balances, which are subject to guarantee, by a government agency. Loan
balances are also adjusted for unearned discount on installment loans.
The Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions, which may cause a
potential loan loss but are not specifically identifiable. It is prudent to
maintain an unallocated portion of the allowance because no matter how detailed
an analysis of potential loan losses is performed these estimates by definition
lack precision. Management must make estimates using assumptions and
information, which is often subjective and changing rapidly.
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, 2000 and 1999, the Company had $0 and $121,000,
respectively, of non accrual or non performing loans. Loans past due more than
90 days and still accruing interest amounted to $0 at September 30, 2000 and
1999, respectively. As a result of is downward trend as well as management
evaluations of the overall analysis of the Bank's allowance for loan losses the
provision for the three and nine months ended September 30, 2000 and 1999
deceased $5,000 and $25,000.
Management believes that the allowance for loan losses and
nonperforming loans remained safely within acceptable levels.
25
<PAGE>
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average loans outstanding $ 72,242 $ 49,136 $ 68,927 $ 45,298
======== ======== ======== ========
Allowance at beginning
of period 1,031 874 923 791
Charge-offs:
Commercial and other loans -- -- -- --
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans charged-off -- -- -- --
-------- -------- -------- --------
Recoveries:
Commercial and other loans 12 4 115 62
Real estate loans -- -- -- --
-------- -------- -------- --------
Total loans recovered 12 4 115 62
-------- -------- -------- --------
Net (charge-offs) recoveries 12 4 115 62
-------- -------- -------- --------
Provision for loan losses
charged to operating expenses 10 15 15 40
-------- -------- -------- --------
Allowance at end of period 1,053 893 1,053 893
-------- -------- -------- --------
Ratio of net recoveries
(charge-offs) to average
loans outstanding .02% .01% .17% .14%
======== ======== ======== ========
Allowance as a percent
of total loans 1.43% 1.74% 1.43% 1.74%
======== ======== ======== ========
Total loans at end of period $ 73,511 $ 51,373 $ 73,511 $ 51,373
======== ======== ======== ========
</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 September 30, 2000, the Company had total loans of $73.5 million and an
allowance for loan losses of approximately $1.05 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.
26
<PAGE>
The following tables set forth information concerning the Company's
loan portfolio by type of loan at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------------- --------------
AMOUNT AMOUNT
------ ------
(in thousands)
<S> <C> <C>
Commercial and professional loans $ 8,230 $ 5,358
Secured by real estate 65,777 57,652
Personal 267 2,345
Other 290 236
-------- --------
Total loans 74,564 65,591
Less:
Allowance for loan losses (1,053) (923)
-------- --------
Loans, net $ 73,511 $ 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 September 30, 2000 and 1999, the Company had $0 and $121,000,
respectively, of non accrual or non performing loans. Loans past due more than
90 days and still accruing interest amounted to $0 and $0 at September 30, 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 September 30, 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.
The following tables set forth the actual and required regulatory
capital amounts and ratios of the Company and The Berkshire Bsank as of
27
<PAGE>
September 30, 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>
September 30, 2000
Total Capital (to Risk-Weighted Assets)
Company 73,873 77.7% 7,609 >=8.0% -- N/A
Bank 15,893 17.1% 7,427 >=8.0% 9,284 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 72,820 76.6% 3,805 >=4.0% -- N/A
Bank 14,840 16.0% 3,714 >=4.0% 5,570 >=6.0%
Tier I Capital (to Average Assets)
Company 72,820 37.0% 7,869 >=4.0% -- N/A
Bank 14,840 8.8% 6,713 >=4.0% 8,391 >=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
28
<PAGE>
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, 2000, Berkshire had cash of $44.3 million and marketable securities of $4.1
million.
As more fully described in Note 2, the Company has entered into an
Agreement and Plan of Reorganization with GSB Financial Corporation ("GSB
Financial") and its wholly-owned subsidiary, Goshen Savings Bank pursuant to
which GSB Financial will be merged with and into the Company and Goshen Bank
will be merged with and into The Berkshire Bank. In connection with the merger,
holders of common stock of GSB Financial will receive, for each share of common
stock of GSB Financial held by them, $20.75, or, in the alternative, at their
election, 0.6027 shares of the Company's common stock. The stock component of
the transaction will represent 50.1% of the total consideration, while the cash
component will represent 49.9%, subject to increase in the stock component up to
60% of the total if a higher number of GSB Financial stockholders elect to
receive stock. Depending upon the election of the GSB Financial stockholders,
the Company may utilize between $15.70 million and $19.59 million of its
available cash to fund the cash component of the transaction.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements measure financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increasing cost of the Company's operations.
The assets and liabilities of the Company are largely monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. In addition, interest rates do not
necessarily move in the direction, or to the same extent as the price of goods
and services. However, in general, high inflation rates are accompanied by
higher interest rates, and vice versa.
IMPACT OF THE YEAR 2000 ("Y2K")
In 1999, the Bank completed an in-depth compliance program to minimize
the effect of potential Y2K issues. To date, the Bank has experienced no
difficulties related to Y2K.
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: January 16, 2001
By: /s/ Steven Rosenberg
-------------------------
Steven Rosenberg
President and Chief
Financial Officer
29
STATEMENT OF DIFFERENCES
The greater-than-or-equal-to sign shall be expressed as........... >=
