SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-13649
Berkshire Bancorp Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-2563513
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
160 Broadway, New York, New York 10038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 791-5362
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting (common) stock held by non-affiliates of the
Registrant as of March 21, 2002: $34,356,644.
Number of shares of Common Stock outstanding as of March 21, 2002: 2,348,390.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Forward-Looking Statements. Statements in this Annual Report on Form 10-K that
are not based on historical fact may be "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Words such as
"believe", "may", "will", "expect", "estimate", "anticipate", "continue" or
similar terms identify forward-looking statements. A wide variety of factors
could cause the Company's actual results and experiences to differ materially
from the results expressed or implied by the Company's forward-looking
statements. Some of the risks and uncertainties that may affect operations,
performance, results of the Company's business, the interest rate sensitivity of
its assets and liabilities, and the adequacy of its loan loss allowance,
include, but are not limited to: (i) deterioration in local, regional, national
or global economic conditions which could result, among other things, in an
increase in loan delinquencies, a decrease in property values, or a change in
the housing turnover rate; (ii) changes in market interest rates or changes in
the speed at which market interest rates change; (iii) changes in laws and
regulations affecting the financial services industry; (iv) changes in
competition; (v) changes in consumer preferences, (vi) changes in banking
technology; (vii) ability to maintain key members of management, (viii) possible
disruptions in the Company's operations at its banking facilities, (ix) the
Company's ability to integrate the operations of its newly acquired bank, and
other factors referred to in the sections of this Annual Report entitled
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Certain information customarily disclosed by financial institutions,
such as estimates of interest rate sensitivity and the adequacy of the loan loss
allowance, are inherently forward-looking statements because, by their nature,
they represent attempts to estimate what will occur in the future.
The Company cautions readers not to place undue reliance upon any
forward- looking statement contained in this Annual Report. Forward-looking
statements speak only as of the date they were made and the Company assumes no
obligation to update or revise any such statements upon any change in applicable
circumstances.
PART I
ITEM 1. Business
General. Berkshire Bancorp Inc., a Delaware corporation ("Berkshire",
the "Company" or "we" and similar pronouns), is a bank holding company under the
Bank Holding Company Act. As used in this Annual Report on Form 10-K, the term
"Berkshire", the "Company" or "we" and similar pronouns shall mean Berkshire
Bancorp Inc. and its consolidated subsidiaries unless the context otherwise
requires. The Company has one wholly-owned banking subsidiary, The Berkshire
Bank, a New York State chartered commercial bank (the "Bank").
On March 30, 2001, pursuant to the terms of an Agreement and Plan of
Reorganization dated August 16, 2000 (the "Agreement"), we completed the merger
with GSB Financial Corporation, a Delaware corporation, 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"). GSB Financial was merged with and into
Berkshire and Goshen Bank was merged with and into The Berkshire Bank. Holders
of the common stock of GSB Financial received $20.75 in cash for each share of
common stock of GSB Financial held by them, or, in the alternative, at their
election, 0.6027 shares of Berkshire's common stock. The stock component of the
transaction represented 50.1% of the total consideration, while the cash
component represented 49.9%. The right of the GSB Financial stockholders to
elect to receive stock or cash was subject to allocation procedures. Based upon
such election and allocation procedures, 978,032 shares of GSB Financial common
stock were converted into 589,460 shares of Berkshire common stock, and 974,338
shares of GSB Financial common stock were purchased for $20.75 per share,
totaling approximately $20.2 million.
This transaction was accounted for under the purchase method of
accounting. Goodwill of $7.5 million was recorded in the transaction and,
effective as of January 1, 2002, will be tested for impairment rather than
amortized over a 15 year period as would have been the case prior to the
adoption of Statement of Financial Accounting Standard No. 142, Goodwill and
Intangible Assets. The
2
results of GSB Financial's operations have been included in the Company's
balances commencing April 1, 2001.
On March 22, 2001, the Company purchased a parcel of land and building
located in mid-town Manhattan for a total purchase price of $3.49 million in
cash. We intend to utilize the property for banking offices and a bank branch.
Business of the Bank - General. The Bank's principal business consists
of gathering deposits from the general public and investing those deposits
primarily in loans, debt obligations issued by the U.S. Government, its
agencies, and business corporations, and mortgage-backed securities. The Bank
operates from three deposit-taking offices in New York City and four
deposit-taking offices in Orange and Sullivan Counties, New York. Its main
office, in Manhattan, is located on the upper floors of a high rise office
building and does not offer a customary retail banking presence. Instead, it
provides personal, face to face banking services for professionals and other
normally high-balance depositors. In July 1995, the Bank opened a branch in
Brooklyn, in January 2001, the Bank opened a branch in downtown Manhattan and in
March 2001, as a result of the merger with Goshen Bank, the Bank acquired two
branches in Goshen, NY, a branch in Harriman, NY and a branch in Bloomingburg,
NY. These branches provide the Bank with customary retail banking offices.
The Bank's principal loan types are residential and commercial mortgage
loans and commercial non-mortgage loans, both unsecured and secured by personal
property. The Bank's revenues come principally from interest on loans and
investment securities. The Bank's primary sources of funds are deposits and
proceeds from principal and interest payments on loans and investment
securities.
Operating Plan. The Bank's operating plan concentrates on obtaining
deposits from a variety of businesses, professionals and retail customers and
investing those funds in conservatively underwritten loans. Due to the Bank's
underwriting criteria, its deposits have significantly exceeded the level of
satisfactory loans available for investment in recent years. Hence, the Bank
has, in recent years, invested a portion of its available funds in investment
and mortgage-backed securities.
The Bank has sought to diversify its revenues and its customer base
through an active merchant credit card processing operation. The Bank, working
in conjunction with two separate credit card service companies, provides credit
card charge slip processing for merchants. This activity, which the Bank
undertook beginning in early 1997, results in fee income for the services
provided, allows the Bank to build deposit balances from the merchant customers,
and also allows the Bank to cross-sell other banking services to merchants as
appropriate. Back office processing is conducted by an independent service
company, while the Bank provides deposit and other traditional banking services
to the merchants.
Market Area. The Bank draws its customers principally from the New York
City metropolitan area and, since the merger with Goshen Bank on March 30, 2001,
the Villages of Goshen and Harriman, New York and their surrounding communities,
representing most of Orange County, NY. The Bank also has a branch in
Bloomingburg, New York, just over the border between Orange and Sullivan
Counties. Predominantly rural with numerous small towns, many residents of
Orange and Sullivan Counties work in New York City. Consequently, the health of
the economy in the New York City metropolitan area has, and will continue to
have a direct effect on the economic well being of residents and businesses in
these Counties. From time to time, the Bank may make loans or accept deposits
from outside these areas, but such transactions generally represent outgrowths
of existing local customer relationships. The Bank's merchant credit card
processing business, as discussed elsewhere in this report, also includes
processing of credit card transactions for merchants outside the New York City
metropolitan area.
Competition. The Bank's principal competitors for deposits are other
commercial banks, savings banks, savings and loan associations and credit unions
in the Bank's market areas, as well as money market mutual funds, insurance
companies, securities brokerage firms and other financial institutions, many of
which are substantially larger in size than the Company. The Bank's competition
for loans comes principally from commercial banks, savings banks, savings and
loan associations, mortgage bankers, finance companies and other institutional
3
lenders. Many of the institutions which compete with the Bank have much greater
financial and marketing resources than the Bank. The Bank's principal methods of
competition include loan and deposit pricing, maintaining close ties with its
local communities, the quality of the personal service it provides, the types of
business services it provides, and other marketing programs.
Operations of the Bank. Reference is made to the information set forth
in Item 7 herein ("Management's Discussion and Analysis of Financial Condition
and Results of Operations") for information as to various aspects of the Bank's
operations, activities and conditions.
Subsidiary Activities. The Bank is permitted under New York State law
and federal law to own subsidiaries for certain limited purposes, generally to
engage in activities which are permissible for a subsidiary of a national bank.
The Bank has no subsidiaries.
Regulation. On January 4, 1999, as a result of the acquisition of the
Bank, Berkshire became a bank holding company under federal law and registered
as such with the Federal Reserve. The Bank is a commercial bank chartered under
the laws of New York State. It is subject to regulation at the state level by
the New York Superintendent of Banks and the New York Banking Board, while at
the federal level its primary regulator is the FDIC.
Both Berkshire and the Bank are subject to extensive state and federal
regulation of their activities. The following discussion summarizes certain
banking laws and regulations that affect Berkshire and the Bank. Proposals to
change these laws and regulations are frequently proposed in Congress, in the
New York State legislature, and before state and federal bank regulatory
agencies. The likelihood and timing of any changes and the impact such changes
might have on the Company are impossible to determine with any certainty. A
change in applicable laws or regulations, or a change in the way such laws or
regulations are interpreted by regulatory agencies or courts, may have a
material impact on the business, operations and earnings of the Company, the
nature and effect of which cannot now be predicted.
Most recently, on November 12, 1999, President Clinton signed into law
the Gramm-Leach-Bliley Act, which makes major changes to the statutory framework
for providing banking and other financial services in the United States. The
Gramm- Leach-Bliley Act, among other things, authorizes affiliations among
commercial banks, securities underwriting firms and insurance underwriting
firms.
Bank Holding Company Regulation. The Federal Reserve is authorized to
make regular examinations of the Company and its nonbank subsidiaries. Under
federal law and Federal Reserve regulations, the activities in which the Company
and its nonbank subsidiaries may engage are limited. The Company may not acquire
direct or indirect ownership or control of more than 5% of the voting shares of
any company, including a bank, without the prior approval of the Federal
Reserve, except as specifically authorized under federal law and Federal Reserve
regulations. The Company, subject to the approval of the Federal Reserve, may
acquire more than 5% of the voting shares of non-banking corporations if those
corporations engage in activities which the Federal Reserve deems to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. These limitations also apply to activities in which the
Company engages directly rather than through a subsidiary. However, pursuant to
Section 103 of the Gramm-Leach-Bliley Act, the Company may elect, provided it
meets certain conditions, to engage in a significantly broader range of
activities or own shares of companies that engage in such broader activities,
those that are determined to be financial in nature or incidental to such
financial activity or complementary in certain situations, to a financial
activity. The Company has not so elected.
The Federal Reserve has enforcement powers over the Company and its
non- bank subsidiaries. This allows the Federal Reserve, among other things, to
stop activities that represent unsafe or unsound practices or constitute
violations of law, rules, regulations, administrative orders or written
agreements with a federal bank regulator. These powers may be exercised through
the issuance of cease-and-desist orders, the imposition of civil money penalties
or other actions.
4
Capital Requirements. The Federal Reserve requires that the Company, as
a bank holding company, must maintain certain minimum ratios of capital to
assets. The Federal Reserve's regulations divide capital into types. Primary
capital includes common equity, surplus, undivided profits, perpetual preferred
stock, mandatory convertible instruments, the allowance for loan and lease
losses, contingency and other capital reserves, and minority interests in equity
accounts of consolidated subsidiaries. Secondary capital includes limited-life
preferred stock, subordinated notes and debentures and certain unsecured long
term debt.
The Federal Reserve requires that bank holding companies maintain a
minimum ratio of primary capital to total assets of 5.5% and a minimum level of
total capital (primary plus secondary capital) equal to 6% of total assets. In
calculating capital ratios, the allowance for loan losses, which is a component
of primary capital, is added back in determining total assets. Certain capital
components, such as debt and perpetual preferred stock, are includable as
capital only if they satisfy certain definitional tests.
The Company must also meet a risk-based capital standard. Capital, for
the risk-based capital requirement, is divided into Tier I capital and
Supplementary capital, determined as discussed below in connection with the FDIC
capital requirements imposed on the Bank. The Federal Reserve requires that the
Bank maintain a ratio of total capital (defined as Tier I plus Supplementary
capital) to risk-weighted assets of at least 8%, of which at least 4% must be
Tier I capital. Risk weighted assets are also determined in a manner comparable
to the determination of risk-weighted assets under FDIC regulations as discussed
below.
At December 31, 2001 and 2000, the Company satisfied all applicable
Federal Reserve minimum capital requirements.
Source of Strength Doctrine. It is the Federal Reserve policy that bank
holding companies must serve as a source of financial strength to its subsidiary
depository institutions and must commit all available resources to support such
institutions even if it might not otherwise do so. Although this "source of
strength" policy has been challenged in litigation, the Federal Reserve
continues to take the position that it has authority to enforce it. The Federal
Reserve also has the authority to terminate any activity of the Company that
constitutes a serious risk to the financial soundness or stability of the Bank
or, in extreme cases, to terminate its control of any bank or nonbank
subsidiaries.
Inter-state Banking. Bank holding companies may generally acquire banks
in any state. Federal law also permits a bank to merge with an out-of-state bank
and convert any offices into branches of the resulting bank if both states have
not opted out of interstate branching; permits a bank to acquire branches from
an out-of-state bank if the law of the state where the branches are located
permits the interstate branch acquisition; and permits banks to establish and
operate new interstate branches whenever the host state opts-in to that
authority. Bank holding companies and banks that want to engage in such
activities must be adequately capitalized and managed.
The New York Banking Law generally authorizes interstate branching in
New York as a result of a merger, purchase of assets or similar transaction. An
out of state bank may not first enter New York by opening a new branch in New
York, but once a branch is acquired as described in the preceding sentence,
additional new branches may be opened.
Regulation of the Bank. In general, the powers of the Bank are limited
to the express powers described in the New York Banking Law and powers
incidental to the exercise of those express powers. The Bank is generally
authorized to accept deposits and make loans on terms and conditions determined
to be acceptable to the Bank. Loans may be unsecured, secured by real estate, or
secured by personal property. The Bank may also invest assets in bonds, notes or
other debt securities which are not in default and certain limited classes of
equity securities including certain publicly traded equity securities in an
amount aggregating not more than 2% of assets or 20% of capital. The Bank may
also engage in a variety of other traditional activities for commercial banks,
such as the issuance of letters of credit.
5
The exercise of these state-authorized powers is limited by FDIC
regulations and other federal laws and regulations. In particular, FDIC
regulations limit the investment activities of state-chartered, FDIC-insured
banks such as the Bank.
Under FDIC regulations, the Bank generally may not directly or
indirectly acquire or retain any equity investment that is not permissible for a
national bank. In addition, the Bank may not directly or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the applicable FDIC insurance fund and the Bank is in compliance with
applicable regulatory capital requirements. FDIC regulations permit real estate
investments under certain circumstances. The Bank does not engage in real estate
investing activity.
Loans to One Borrower. With certain exceptions, the Bank may not make
loans or other extensions of credit to a single borrower, or certain related
groups of borrowers, in an aggregate amount in excess of 15% of the Bank's net
worth, plus an additional 10% of the Bank's net worth if such amount is secured
by certain types of readily marketable collateral. In addition, the Bank is not
permitted to make a mortgage loan in excess of 15% of capital stock, surplus
fund and undivided profits.
Capital Requirements. The FDIC requires that the Bank maintain certain
minimum ratios of capital to assets. The FDIC's regulations divide capital into
two tiers. The first tier ("Tier I") includes common equity, retained earnings,
certain non-cumulative perpetual preferred stock (excluding auction rate issues)
and minority interests in equity accounts of consolidated subsidiaries, minus
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions.
The FDIC requires that the highest rated banks maintain a Tier I
leverage ratio (Tier I capital to adjusted total assets) of at least 3.0%. All
other banks subject to FDIC capital requirements must maintain a Tier I leverage
ration of 4.0% to 5.0% or more. As of December 31, 2001 and 2000, the Bank's
Tier I leverage capital ratio was 9.6% and 8.5%, respectively.
The Bank must also meet a risk-based capital standard. The risk-based
standard requires the Bank to maintain total capital (defined as Tier I and
Supplementary capital) to risk-weighted assets of at least 8%, of which at least
4% must be Tier I capital. In determining the amount of risk-weighted assets,
all assets, plus certain off-balance sheet assets, are multiplied by a risk-
weight of 0% to 100%, based on the risks the FDIC believes are inherent in the
type of asset. As of December 31, 2001 and 2000, the Bank maintained a 19.6% and
12.9% Tier I risk-based capital ratio and a 20.4% and 13.8% total risk-based
capital ratio, respectively.
In addition to the foregoing regulatory capital requirements, the FDIC
Improvements Act of 1991 created a "prompt corrective action" framework, under
which decreases in a depository institution's capital category trigger various
supervisory actions. Pursuant to implementing regulations adopted by the FDIC,
for purposes of the prompt corrective action provisions, a state-chartered,
nonmember bank, such as the Bank, is deemed to be well capitalized if it has: a
total risk-based capital ratio of 10% or greater; a Tier I risk-based capital
ratio of 6% or greater; and a leverage ratio of 5% or greater. As of December
31, 2001 and 2000, the Bank was well capitalized under all three of these
standards.
Community Reinvestment Act. The Bank must, under federal law, meet the
credit needs of its community, including low and moderate income segments of its
community. The FDIC is required, in connection with its examination of the Bank,
to assess whether the Bank has satisfied this requirement. Failure to satisfy
this requirement could adversely affect certain applications which the Bank may
make, such as branch applications, merger applications, and applications for
6
permission to purchase branches. In the case of Berkshire, the Federal Reserve
will assess the record of each subsidiary bank in considering certain
applications by Berkshire. The New York Banking Law contains similar provisions
applicable to the Bank. As of the most recent Community Reinvestment Act
examinations by the FDIC and the New York State Banking Department, the Bank
received satisfactory ratings.
Dividends From the Bank to the Company. One source of funds for
Berkshire to pay dividends to its stockholders is dividends from the Bank to
Berkshire. Under the New York Banking Law, the Bank may pay dividends to
Berkshire, without regulatory approval, equal to its net profits for the year in
which the payment is made, plus retained net profits for the two previous years,
subject to certain limits not generally relevant. The Bank's retained net
profits for the 2000 and 2001 calendar years totaled approximately $2.92
million. However, the ability of Berkshire to pay future dividends is not
presently dependent upon the receipt of dividends from the Bank.
Under federal law, the Bank may not make any capital distribution to
Berkshire, including any dividend or repurchase of the Bank's stock, if, after
making such distribution, the Bank fails to meet the required minimum capital
ratio requirements discussed below. The FDIC may prohibit the Bank from paying
dividends if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice.
Transactions With Related Parties. The Company, its direct non-banking
subsidiaries and other companies controlled by shareholders who control the
Company are affiliates, within the meaning of the Federal Reserve Act, of the
Bank and its subsidiaries. The Bank's authority to engage in transactions with
its "affiliates" is limited by Sections 23A and 23B of the Federal Reserve Act.
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the Bank and also limits the
aggregate amount of transactions with all affiliates to 20% of the Bank's
capital and surplus. Extensions of credit to affiliates must be secured by
certain specified collateral, and the purchase of low quality assets from
affiliates is generally prohibited. Section 23B provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are at least as
favorable to the Bank as those prevailing at the time for comparable
transactions with non- affiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to non- affiliated companies.
The Bank may make loans to its and the Company's directors, executive
officers, and 10% stockholders, as well as to entities controlled by them,
subject to specific federal and state limits. Among other things, these loans
must (a) be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features and (b)
not exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the Bank's capital. In addition, extensions of credit in excess of
certain limits must be approved by the Bank's Board of Directors. However, the
Bank may make loans to executive officers, directors and principal stockholders
on preferential terms, provided the extension of credit is made pursuant to a
benefit or compensation program of the Bank that is widely available to
employees of the Bank or its affiliates and does not give preference to any
insider over other employees of the Bank or affiliate. The Bank has no such
benefit or compensation programs (see Item. 2 - Properties for additional
information).
Enforcement. The FDIC and the Banking Department have enforcement
authority over the Bank. The Superintendent may order the Bank to appear and
explain an apparent violation of law, to discontinue unauthorized or unsafe
practices and to keep prescribed books and accounts. If any director or officer
of the Bank has violated any law, or has continued unauthorized or unsafe
practices in conducting the business of the Bank after having been notified by
the Superintendent to discontinue such practices, the New York Banking Board may
remove the individual from office after notice and an opportunity to be heard.
7
The Superintendent also may take over control of the Bank under specified
statutory criteria.
The FDIC's enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease and desist orders and to
remove directors and officers. As indicated above, the FDIC is required to take
prompt action to correct deficiencies in banks which do not satisfy specified
FDIC capital ratio requirements. Dividends, other capital distributions or the
payment of management fees to any controlling person are prohibited if,
following such distribution or payment, a bank would be undercapitalized. An
undercapitalized bank must file a plan to restore its capital within 45 days
after being notified that it is undercapitalized. Undercapitalized,
significantly undercapitalized and critically undercapitalized institutions are
subject to increasing prohibitions on permitted activities, and increasing
levels of regulatory supervision, based upon the severity of their capital
problems. The FDIC is required to monitor closely the condition of an
undercapitalized bank. Enforcement action taken by the FDIC can escalate to the
appointment of a conservator or receiver of a critically undercapitalized bank.
Insurance of Accounts. Deposit insurance premiums payable to the FDIC
are based upon the perceived risk of the institution to the FDIC insurance fund.
The FDIC assigns an institution to one of three capital categories: (a) well
capitalized, (b) adequately capitalized or (c) undercapitalized. The FDIC also
assigns an institution to one of three supervisory categories based on an
evaluation by the institution's primary federal regulator and information that
the FDIC considers relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. Deposit insurance premiums depend on
an institution's capital and supervisory categories. At present, the Bank pays
no deposit insurance premium based upon its risk-based categorization.
However, the Bank must pay a share of the cost of the bonds issued in
the late 1980s to recapitalize the now defunct Federal Savings and Loan
Insurance Corporation. The Bank must pay an annual assessment for this purpose,
which for fiscal 2001 was equal to 0.0196% of its insured deposits and which is
recorded as a deposit insurance premium expense for financial statement
purposes. Beginning in 2002, the assessment decreased to 0.0166% of the Bank's
insured deposits.
Reserve Requirements. The Bank must maintain non-interest-earning
reserves against its transaction accounts (primarily NOW and regular checking
accounts). The Bank is generally able to satisfy the reserve requirements with
cash on hand and other non-interest bearing deposits which it maintains for
other purposes, so the reserve requirements do not impose a material financial
burden on the Bank.
Governmental Policies. Our earnings are significantly affected by the
monetary and fiscal policies of governmental authorities, including the Federal
Reserve. Among the instruments of monetary policy used by the Federal Reserve to
implement these objectives are open-market operations in U.S. Government
securities and Federal funds, changes in the discount rate on member bank
borrowings and changes in reserve requirements against member bank deposits.
These instruments of monetary policy are used in varying combinations to
influence the overall level of bank loans, investments and deposits, and the
interest rates charged on loans and paid for deposits. The Federal Reserve
frequently uses these instruments of monetary policy, especially its open-market
operations and the discount rate, to influence the level of interest rates and
to affect the strength of the economy, the level of inflation or the price of
the dollar in foreign exchange markets. The monetary policies of the Federal
Reserve have had a significant effect on the operating results of banking
institutions in the past and are expected to continue to do so in the future. It
is not possible to predict the nature of future changes in monetary and fiscal
policies, or the effect which they may have on our business and earnings.
Personal Holding Company Status. For the fiscal years ended December
31, 2001, 2000 and October 31, 1999, the Company has been deemed to be a
Personal Holding Company (a "PHC"), as defined in the Internal Revenue Code. As
a PHC, we are required to pay an additional income tax or issue a dividend to
our shareholders in an amount based upon the PHC Internal Revenue Code formulas,
which is primarily based upon net income. Accordingly, on December 4, 2001,
8
November 17, 2000 and September 14, 1999, the Board of Directors of the Company
declared cash dividends in the amounts of $.04, $.44 and $.12 per common share,
respectively. (See Dividends in Item 5).
Employees. On March 21, 2002, Berkshire had one full time employee and
the Bank employed approximately 68 full time and 9 part time employees. The
Bank's employees are not represented by a collective bargaining unit, and the
Bank considers its relationship with its employees to be good.
ITEM 2. Properties.
The following are Berkshire's and the Bank's principal facilities as of
March 21, 2002:
Approximate Approximate
Floor Area Annual Lease
Location Operations (Sq. Ft.) Rent Expiration
------------ ----------------- --------- --------- ----------
New York, NY Executive Offices 1,500 $ 18,000 (1)(3)
New York, NY Main Bank Office 5,100 $374,000 March 2006
Brooklyn, NY Bank Branch 4,500 $131,000 December 2002
New York, NY Bank Branch 5,500 $237,000 June 2005 (2)(3)
Goshen, NY Bank Branch 10,680 Owned
Harriman, NY Bank Branch 1,623 Owned
Bloomingburg, NY Bank Branch 1,530 $ 25,000 August 2005
-------------
(1) Rented on a month to month basis from a company affiliated with Mr. Moses
Marx, a director of the Company.
(2) Leased from a company affiliated with Mr. Marx, a director of the Company.
(3) Management believes the annual rent paid is comparable to the annual rent
that would be paid to non-affiliated parties in a similar commercial
transaction for similar commercial space.
In April 2001, the Company purchased a parcel of land and building
located in mid-town Manhattan for a total purchase price of $3.45 million in
cash. The Company intends to utilize the property for banking offices and a bank
branch.
ITEM 3. Legal Proceedings.
In the ordinary course of its operations, the Bank is a party to
routine litigation involving claims incidental to its banking business.
Management of the Bank believes that no current litigation, threatened or
pending, to which the Bank or its assets is or may become a party, poses a
substantial likelihood of potential loss or exposure which would have a material
adverse effect on the financial condition or results of operations of the Bank.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
9
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock trades on the Nasdaq National Market System
under the symbol ZAPS.
The following table sets forth, for the periods indicated, the high and
low sales prices for the Company's Common Stock as reported by the National
Association of Securities Dealers, Inc.
High Low
---- ---
Fiscal Year Ended December 31, 2001
-----------------------------------
January 1, 2001 to March 31, 2001 34.25 27.438
April 1, 2001 to June 30, 2001 33.00 28.00
July 1, 2001 to September 30, 2001 31.25 25.57
October 1, 2001 to December 31, 2001 30.45 27.14
High Low
---- ---
Fiscal Year Ended December 31, 2000
-----------------------------------
January 1, 2000 to March 31, 2000 37.50 29.688
April 1, 2000 to June 30, 2000 37.313 30.625
July 1, 2000 to September 30, 2000 36.50 30.50
October 1, 2000 to December 31, 2000 31.00 29.00
High Low
---- ---
Transition Period Ended December 31, 1999
-----------------------------------------
November 1, 1999 to December 31, 1999 37.00 33.00
As of the close of business on March 21, 2002, there were approximately
2,221 holders of record of the Company's Common Stock.
Dividends
In each fiscal year since 1998, the Company has paid an annual special
cash dividend to its shareholders primarily due to the probable status of the
Company as a "personal holding company" for federal income tax purposes. As a
result, if such dividends were not declared and paid to the Company's
shareholders, the Company would have incurred substantial additional federal
income tax liability. For the fiscal years ended December 31, 2001, December 31,
2000 and October 31, 1999, the Company paid special cash dividends of $.04, $.44
and $.12, respectively, on each of its Common Shares outstanding.
On March 23, 1999, the Board of Directors adopted a policy of paying
regular cash dividends in respect of the Common Stock of the Company in the
amount of $.20 per share per annum, payable in equal semi-annual installments of
$.10 each. Pursuant to said policy, the Board of Directors declared and the
Company paid a cash dividends as follows:
Per Share
Declaration Date Record Date Payment Date Amount
------------------ ----------------- ----------------- ----------
March 23, 1999 April 15, 1999 April 30, 1999 $.10
September 14, 1999 October 15, 1999 October 29, 1999 $.10
March 30, 2000 April 14, 2000 April 28, 2000 $.10
September 25, 2000 October 10, 2000 October 24, 2000 $.10
March 8, 2001 April 16, 2001 April 30, 2001 $.10
October 5, 2001 October 19, 2001 October 29, 2001 $.10
The declaration, payment and amount of such dividends in the future is
within the discretion of the Board of Directors and will depend upon our
earnings, capital requirements, financial condition and other relevant factors.
10
ITEM 6. Selected Financial Data.
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Five Year Financial Highlights (a)
The following is a summary of certain financial information with
respect to the Company at and for the fiscal years ended December 31, 2001 and
2000, at and for the proforma twelve months ended December 31, 1999 and as of
and for the fiscal years ended October 31, 1999 and 1998. This information is
derived from and should be read in conjunction with the Company's financial
statements and notes thereto included elsewhere in this Form 10-K.
December 31, October 31,
------------------------------------- ----------------------
2001 2000 1999(b) 1999 1998
---- ---- -------- ---- ----
(Dollars in thousands, except per share data)
Balance Sheet Data:
Total Assets $536,558 $244,023 $192,130 $180,986 $ 66,830
Loans, net 250,203 74,515 64,668 59,652 --
Investment securities 242,579 117,060 89,497 82,876 --
Goodwill 18,438 11,543 12,073 12,195 --
Deposits 338,776 137,647 104,087 102,318 --
Stockholders' equity 95,992 79,107 78,070 73,306 65,466
Interest income 24,941 14,019 9,852 8,525 3,313
Interest expense 11,877 5,184 3,101 2,548 --
-------- -------- -------- -------- --------
Net interest income before
provision for loan losses 13,064 8,835 6,751 5,977 3,313
Provision for loan losses 287 55 55 45 --
-------- -------- -------- -------- --------
Net interest income 12,777 8,780 6,696 5,932 3,313
Investment securities gains 637 13,288 10,731 7,622 38,909
Other income 786 1,330 578 633 44
Other expenses 7,838 3,829 3,489 2,948 1,066
Amortization of goodwill 935 635 730 608 --
-------- -------- -------- -------- --------
Income (loss) before
income taxes 5,427 18,934 13,786 10,631 41,200
Provision for income taxes 2,128 6,868 5,527 4,091 3,573
-------- -------- -------- -------- --------
Net income (loss) $ 3,299 $ 12,066 $ 8,259 $ 6,540 $ 37,627
======== ======== ======== ======== ========
Net income (loss) per share:
Basic $ 1.41 $ 5.76 $ 3.88 $ 3.08 $ 17.70
======== ======== ======== ======== ========
Diluted $ 1.41 $ 5.76 $ 3.65 $ 2.89 $ 16.66
======== ======== ======== ======== ========
Cash dividends per
common share $ .24 $ .64 $ .32 $ .32 $ .72
======== ======== ======== ======== ========
Selected Operating Ratios
Return on average assets (c) 0.8% 5.8% 7.0% 3.9% 55.0%
Return on average equity (c) 3.5% 14.9% 14.6% 6.2% 57.2%
Net interest margin (c) 3.6% 4.7% 4.9% 4.4% 4.8%
Average equity/average assets 23.8% 39.1% 47.9% 48.3% 96.2%
Allowance for loan
losses/total loans 0.8% 1.5% 1.4% 1.5% --
(a) The prior years' amounts have been reclassified to conform to the current
years' presentation.
(b) On December 10, 1999, the Company changed its fiscal year end from October
31 to December 31st of each year. This change was effective December 31,
1999. For presentation purposes, proforma operations data is shown for the
twelve months ended December 31, 1999.
(c) Selected amounts for the two months ended December 31, 1999 were
annualized to calculate ratios.
11
ITEM 7. Managements' 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 ("Berkshire", the "Company" or "we"
and similar pronouns) for the fiscal years ended December 31, 2001 and 2000, the
two months ended December 31, 1999 and the fiscal year ended October 31, 1999.
All references to earnings per share, unless stated otherwise, refer to earnings
per diluted share. The discussion should be read in conjunction with the
consolidated financial statements and related notes (Notes located in Item 8
herein). Reference is also made to Part I, Item 1 "Business" herein.
Segments
Management has determined that the Company through its wholly owned
subsidiary, The Berkshire Bank (the "Bank") operates in one business segment,
community banking. The Bank's principal business activity consists of gathering
deposits from the general public and investing those deposits in residential and
commercial mortgage loans and commercial non-mortgage loans, both unsecured and
secured by personal property. In addition, the Bank invests those deposits in
debt obligations issued by the U.S. Government, its agencies, business
corporations and mortgage-backed securities.
General
On March 30, 2001, the Company acquired GSB Financial Corporation and
its wholly owned subsidiary, Goshen Savings Bank ("Goshen Bank"). Goshen Bank
was simultaneously merged with and into our wholly owned subsidiary, The
Berkshire Bank (the "Bank"). The Company's historic financial statements
included in this Form 10-K for the twelve months ended December 31, 2001 do not
include the operations of Goshen Bank from January 1, through March 31, 2001.
On January 4, 1999, we acquired the Bank and became a bank holding
company under the bank Holding Company Act.
On December 10, 1999, the Board of Directors of the Company approved a
change in fiscal year end from October 31 to December 31st of each year. This
change was effective December 31, 1999.
Discussion of Results of Operations
Overview
Fiscal Year Ended December 31, 2001 Compared to Fiscal Year Ended
December 31, 2000. Net income was $3.30 million, or $1.41 per share, for the
fiscal year ended December 31, 2001, compared to $12.07 million, or $5.76 per
share, for the fiscal year ended December 31, 2000. Net income in fiscal 2000
was favorably impacted by a $13.29 million pre-tax gain on the sale of
investment securities and by a gain of approximately $808,000 as a result of the
successful settlement of certain prior year franchise tax issues.
Fiscal Year Ended December 31, 2000 Compared to Two Months Ended
December 31, 1999. Net income was $12.07 million, or $5.76 per, for the fiscal
year ended December 31, 2000, compared to $2.28 million, or $1.01 per share, for
the two months ended December 31, 1999 and $13.69 million, or $6.06 per share,
on an annualized basis. Net income for the two months ended December 31, 1999
was favorably impacted by a $3.11 million pre-tax gain on the sale of investment
securities.
Two Months Ended December 31, 1999 Compared to Fiscal Year Ended
October 31, 1999. Net income was $13.69, or $6.06 per share, on an annualized
basis for the two months ended December 31, 1999, compared to $6.54 million, or
$2.89 per share, for the fiscal year ended October 31, 1999. Net income for the
fiscal year ended October 31, 1999 was favorably impacted by a $7.62 million
pre-tax gain on the sale of investment securities.
The pre-tax gains on the sale of investment securities mentioned above
are not representative of the Company's ongoing business. (See Note C).
12
Net Interest Income
Net interest income represents the difference between total interest
income earned on earning assets and total interest expense paid on
interest-bearing liabilities. The amount of interest income is dependent upon
many factors including: (i) the amount of interest-earning assets that the
Company can maintain based upon its funding sources; (ii) the relative amounts
of interest- earning assets versus interest-bearing liabilities; and (iii) the
difference between the yields earned on those assets and the rates paid on those
liabilities. Non-performing loans adversely affect net interest income because
they must still be funded by interest-bearing liabilities, but they do not
provide interest income. Furthermore, when the Company designates an asset as
non-performing, all interest which has been accrued but not actually received is
deducted from current period income, further reducing net interest income.
13
The Company's average balances, interest, and average yields are set forth on
the following table (in thousands, except percentages):
Twelve Months Ended Twelve Months Ended
December 31, 2001 December 31, 2000
-------------------------------- -------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
-------- ---------- ---------- -------- --------- ----------
INTEREST-EARNING ASSETS:
Loans (1) $195,296 $15,143 7.75% $ 70,357 $ 6,397 9.09%
Investment securities 154,787 9,156 5.92 90,918 6,381 7.01
Other (2)(5) 15,215 642 4.22 27,410 1,241 4.53
-------- ------- ---- -------- ------ ----
Total interest-earning assets 365,298 24,941 6.83 188,685 14,019 7.43
Noninterest-earning assets 32,993 ---- 18,237 ----
-------- --------
Total Assets $398,291 $206,922
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 85,194 2,291 2.69 49,036 1,845 3.76
Time deposits 155,079 7,867 5.07 42,158 2,499 5.93
Other borrowings 36,510 1,719 4.71 14,277 840 5.88
-------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 276,783 11,877 4.29 105,471 5,184 4.92
------- ---- ------- ----
Demand deposits 21,857 14,848
Noninterest-bearing liabilities 4,802 5,652
Stockholders' equity (5) 94,849 80,951
-------- --------
Total liabilities and
stockholders' equity $398,291 $206,922
======== ========
Net interest income $13,064 $ 8,835
======= =======
Interest-rate spread (3) 2.54% 2.51%
==== ====
Net interest margin (4) 3.58% 4.68%
==== ====
Ratio of average interest-
earning assets to average
interest bearing liabilities 1.32 1.79
======== ========
Two Months Ended
December 31, 1999 (6)
--------------------------------
Interest
Average and Average
Balance Dividends Yield/ Rate
-------- --------- -----------
INTEREST-EARNING ASSETS:
Loans (1) $ 61,691 $ 892 8.68%
Investment securities 77,149 767 5.97
Other (2)(5) 20,299 184 5.44
-------- ------ ----
Total interest-earning assets 159,139 1,843 6.95
Noninterest-earning assets 52,256 ----
--------
Total Assets $211,395
========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 52,659 292 3.33
Time deposits 32,257 245 4.56
Other borrowings 1,500 16 6.40
-------- ------ ----
Total interest-bearing
liabilities 86,416 553 3.84
------ ----
Demand deposits 15,953
Noninterest-bearing liabilities 7,863
Stockholders' equity (5) 101,163
--------
Total liabilities and
stockholders' equity $211,395
========
Net interest income $1,290
======
Interest-rate spread (3) 3.11%
====
Net interest margin (4) 4.86%
====
Ratio of average interest-
earning assets to average
interest bearing liabilities 1.84
========
-------------------
(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 for Berkshire Bancorp Inc. (parent only) have been
calculated on a monthly basis.
(6) The yields and rates were calculated by annualizing the interest for the
two months ended December 31, 1999.
14
Changes in net interest income may also be analyzed by segregating the
volume and rate components of interest income and interest expense. The
following tables set forth certain information regarding changes in interest
income and interest expense of the Company for the years indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (change
in rate multiplied by prior volume), (2) changes in volume (changes in volume
multiplied by prior rate) and (3) changes in rate-volume (change in rate
multiplied by change in volume) (in thousands):
Twelve Months Ended December 31, 2001
Versus
Twelve Months Ended December 31, 2000
Increase (Decrease) Due To
-------------------------------------------------
Rate Volume Total
--------- --------- ---------
Interest-earning assets:
Loans $ (943) $ 9,689 $ 8,746
Investment securities (991) 3,768 2,777
Other (88) (513) (601)
------- ------- -------
Total (2,022) 12,944 10,922
------- ------- -------
Interest-bearing
liabilities:
Deposit accounts:
Interest bearing deposits (525) 971 446
Time deposits (363) 5,731 5,368
Other borrowings (167) 1,046 879
------- ------- -------
Total (1,055) 7,748 6,693
------- ------- -------
Net interest income $ (967) $ 5,196 $ 4,229
======= ======= =======
Twelve Months Ended December 31, 2000
Versus
Two Months Ended December 31, 1999(1)
Increase (Decrease) Due To
-------------------------------------------------
Rate Volume Total
------ --------- ---------
Interest-earning assets:
Loans $253 $ 792 $1,045
Investment securities 471 1,308 1,779
Other 120 17 137
---- ------- ------
Total 844 2,117 2,961
---- ------- ------
Interest-bearing
liabilities:
Deposit accounts:
Interest bearing deposits 226 (133) 93
Time deposits 442 587 1,029
Other borrowings (8) 752 744
---- ------- ------
Total 660 1,206 1,866
---- ------- ------
Net interest income $184 $ 911 $1,095
==== ======= ======
(1) Interest income and expense for the two months ended December 31, 1999
were annualized to prepare the rate/volume analysis to properly reflect
the changes in volume and rate that occurred during the period.
15
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.
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 December 31, 2001 and 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
16
the individual classified loans on the watch list. Loan watch list loans are
managed and monitored by assigned Senior Management.
The allowance based on historical trends uses charge-off experience of
the Company to estimate potential unconfirmed losses in the balances of the loan
and lease portfolios. The historical loss experience percentage is based on the
charge-off history. Historical loss experience percentages are applied to all
non-classified loans to obtain the portion of the allowance for loan losses
which is based on historical trends. Before applying the historical loss
experience percentages, loan balances are reduced by the portion of the loan
balances, which are subject to guarantee, by a government agency. Loan balances
are also adjusted for unearned discount on installment loans.
The Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions, which may cause a
potential loan loss but are not specifically identifiable. It is prudent to
maintain an unallocated portion of the allowance because no matter how detailed
an analysis of potential loan losses is performed these estimates by definition
lack precision. Management must make estimates using assumptions and
information, which is often subjective and changing rapidly.
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.
Results of Operations Fiscal Year Ended December 31, 2001 Compared to Fiscal
Year Ended December 31, 2000.
General. On March 30, 2001, Berkshire Bancorp Inc. ("Berkshire" or the
"Company"), through its wholly-owned subsidiaries, The Berkshire Bank and
Greater American Finance Group, Inc., completed its merger with GSB Financial
Corporation ("GSB Financial") (see Note A). This transaction was accounted for
under the purchase method of accounting and, accordingly, the results of
operation for the Company include only the results of operation of GSB Financial
for the nine month period from April 1 through December 31, 2001. The Company
acquired total loans, assets and deposits of $134.06 million, $190.04 million
and $127.86 million, respectively.
References to per share amounts below, unless stated otherwise, refer to diluted
shares.
Net Income. Net income for the fiscal year ended December 31, 2001 was $3.30
million, or $1.41 per share, as compared to $12.07 million, or $5.76 per share,
for the fiscal year ended December 31, 2000.
Net income in 2000 was favorably impacted by the pretax gain of $13.29
million on sales of the common stock of Elottery, Inc. and is not representative
of the Company's ongoing business. The Company acquired its shares of Elottery,
Inc. common stock as described below.
Net Interest Income. The Company's primary source of revenue is net interest
income, or the difference between interest income on earning assets and interest
expense on interest-bearing liabilities. The declining interest rate environment
that prevailed during 2001 was in contrast with the increasing interest rate
environment that existed during 2000.
In fiscal 2001, net interest income increased by $4.22 million, or
47.74 %, to $13.06 million from $8.84 million in fiscal 2000. The increase was
the result of the growth in average interest-earning assets of $176.61 million,
partially offset by the growth in average interest-bearing liabilities
17
of $171.31 million. The increases in average interest-earning assets and
interest-bearing liabilities were primarily due to the acquisition of GSB
Financial on March 30, 2001. Net interest rate spread, the difference between
the average yield on interest-earning assets and the average cost of interest
bearing liabilities, improved slightly to 2.54% in 2001, from 2.51% in 2000. The
increase in net interest rate spread resulted from a 63 basis point decrease in
the average cost of interest-bearing liabilities to 4.29% in 2001, from 4.92% in
2000, partly offset by a 60 basis point decrease in the average yield on
interest-earning assets to 6.83% in 2001, from 7.43% in 2000.
Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, was 3.58% for the fiscal year
ended December 31, 2001 as compared to 4.68% for the fiscal year ended December
31, 2000. The decrease in net interest margin during fiscal 2001 was primarily
due to the acquisition of GSB Financial whose loan portfolio is made up
primarily of 1-4 family mortgage loans with annual yields less than previously
earned by Berkshire and by the sharply declining interest rate environment. The
decrease in net interest margin was partially offset by the increase in the
average amounts of interest-earning assets to $365.30 million in fiscal 2001
from $188.66 million in fiscal 2000.
Interest Income. Total interest income for the fiscal year ended December 31,
2001 increased by $10.92 million, or 77.89%, to $24.94 million from $14.02
million for the fiscal year ended December 31, 2000. The increase was the result
of a 93.63% increase in the average amounts of interest-earning assets in fiscal
2001, partially offset by a 60 basis point or 8.08% decrease in the average
yield on interest-earning in fiscal 2001. The increase in the average amounts of
interest-earning assets was due primarily to the acquisition of GSB Financial.
Interest income on loans increased by $8.74 million, or 136.56%, to
$15.14 million in fiscal 2001, from $6.40 million in fiscal 2000. The increase
is due to an increase of $124.94 million in average loans balances, partially
offset by the decrease increase in the average yield on loans to 7.75% in fiscal
2001 from 9.09% in fiscal 2000. Interest income on investment securities
increased $2.78 million, or 43.57%, to $9.16 million in 2001, from $6.38 million
in 2000. The increase is due to an increase of $63.87 million in the average
balance of investment securities, partially offset by a decrease in the average
yield on investments to 5.92% in 2001, from 7.01% in 2000.
Interest Expense. Total interest expense for the fiscal year ended December 31,
2001 increased by $6.70 million, or 129.34%, to $11.88 million, from $5.18
million for the fiscal year ended december 31, 2000. The increase was the result
of a $171.31 million increase in the average amounts of interest-bearing
liabilities to $276.78 million in fiscal 2001 from $105.47 million in fiscal
2000, partially offset by the 63 basis point, 12.80% decrease in the average
rate paid on interest-bearing liabilities to 4.29% in 2001 from 4.92% in 2000.
The increase in interest-bearing liabilities, comprised of interest
bearing deposits, time deposits and borrowings, was attributable to the
acquisition of GSB Financial and our strategy of employing excess capital to
fund growth. The year to year increase in the overall costs of interest-bearing
liabilities was partially offset by the declining interest rate environment
during 2001, which serves to lower the rates paid by the Bank to attract and
retain deposit accounts, and reduces the rates paid for borrowed funds.
Interest expense on interest-bearing deposits, money market and savings
accounts, increased by approximately $446,000, or 23.78%, to $2.29 million for
the 2001 fiscal year from $1.85 million for the 2000 fiscal year. The increase
is due to higher average balances, $85.19 million in 2001 compared to $49.04
million in 2000, partially offset by a decrease in average rates paid on
interest-bearing deposits to 2.69% from 3.76%. Interest expense on time deposits
increased by $5.37 million, or 214.80%, to $7.87 million in 2001 from $2.50
million in 2000. The increase is due to an increase of $112.92 million, or
267.84%, in the average balance of time deposits to $155.08 million in fiscal
2001 from $42.16 million in fiscal 2000, partially offset by a decrease in the
average rates paid, 5.07% in 2001 and 5.93% in 2000. Interest expense on
borrowings increased by approximately $880,000, to $1.72 million in 2001, from
$840,000 in 2001 due to higher average balances, $36.51 million compared to
$14.28 million, partially offset by the lower average cost of borrowed funds.
18
Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of marketable securities, loan sales and service fee income. For the
fiscal year ended December 31, 2001, total non-interest income was $1.42
million, compared to $14.62 million for the fiscal year ended December 31, 2000.
Non- interest income in 2000 included $13.29 million of non-recurring realized
gains on sales of marketable securities and $808,000 as a result of the
successful settlement of certain prior year franchise tax issues.
Non-Interest Expense. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees,
amortization of goodwill and other operating expenses associated with the
day-to- day operations of the Company. Total non-interest expense for the fiscal
year ended December 31, 2001 was $8.77 million, compared to $4.46 million for
the fiscal year ended December 31, 2000. The year to year increases are due
primarily to increases of $2.03 million in salaries and employee benefits,
$723,000 in occupancy expenses, $100,000 in equipment expenses and $300,000 in
amortization expenses resulting from the acquisition of GSB Financial, and the
amortization of the goodwill recorded in said acquisition.
Provision for Income Tax. During the fiscal year ended December 31, 2001, the
Company recorded income tax expense of $2.13 million, compared to income tax
expense of $6.87 million for the fiscal year ended December 31, 2000. The tax
provisions for federal, state and local taxes recorded for fiscal 2001 and 2000
represent effective tax rates of 39.21% and 36.27%, respectively. The increase
in the effective rate is due to the increase in non-deductible goodwill
amortization relating to the acquisition of GSB Financial in 2001 and tax
advantageous investment securities sold by the Company during 2000.
Results of Operations Two Months Ended December 31, 1999 and Fiscal Year Ended
October 31, 1999.
On December 10, 1999, the Board of Directors of the Company approved a
change in fiscal year end from October 31 to December 31st of each year. This
change was effective December 31, 1999.
Net Income. Net income was $2.28 million, or $1.01 per share ($13.69 million and
$6.06 per share on an annualized basis) for the two months ended December 31,
1999, compared to $6.54 million, or $2.89 per share, for the fiscal year ended
October 31, 1999.
Non-Interest Income
Proceeds from the sales of investment securities for the fiscal year
ended December 31, 2001, the two month period ended December 31, 1999 and the
fiscal year ended October 31, 1999 were $13.29 million, $3.11 million and $7.63
million, respectively. Gross gains realized on those sales were $13.29 million,
$3.11 million and $7.62 million, and are not representative of the Company's
ongoing business. Such gains were due to open market sales of the common stock
of Elot, Inc. (formerly Executone Information Systems, Inc.) ("Executone"). The
Company acquired its shares of Executone Common Stock as described in the
following paragraphs.
In 1995, Unistar Gaming Corp. ("UGC") acquired Unistar Entertainment,
Inc., a privately held Colorado corporation ("Unistar"). As a result of the
acquisition, approximately 27.5% of the outstanding Common Stock of UGC (the
"UGC Common Stock") was owned by the Company, and approximately 72.5% of the UGC
Common Stock was owned by the former stockholders of Unistar. The shares of UGC
Common Stock which were owned by the Company were purchased for approximately $5
million comprised primarily of cash, portfolio securities and a note payable. In
December 1995, the Company increased its stake in UGC to approximately 31.5% by
purchasing an additional 400,000 shares of UGC Common Stock from a UGC
stockholder for a cash purchase price of $.50 per share.
In December 1995, the Company sold its minority equity interest in UGC
to Executone, a Virginia corporation whose common stock trades on the NASDAQ
National Market System. The Company's investment in UGC was approximately $5.2
million.
19
In exchange for its interest in UGC, the Company received shares of
Executone Common Stock, all of which were sold in open market transactions
during 1998, and shares of Executone Series A and Series B Preferred Stock (the
"Executone Preferred Stock"). In 1997, the Company fully reserved the carrying
value, approximately $2.1 million, of its shares of Executone Preferred Stock
and recorded a deferred tax asset of $925,000.
In March 1999, Executone exercised its right to redeem and convert the
Executone Preferred Stock into Executone Common Stock and on April 6, 1999, in
exchange for its shares of Executone Preferred Stock, the Company received
4,193,204 shares of Executone Common Stock with a market value of approximately
$17.7 million. For the period from April 1999 through December 1999, the Company
recognized gross gains on sales of 2,401,098 shares of Executone common Stock of
approximately $10.74 million.
At December 31, 2001, 2000 and 1999 the Company owned 130,000 shares,
130,000 shares and 1,792,106 shares, respectively, of Executone Common Stock.
Non-Interest Expense. Non-interest expense for the two month period ended
December 31, 1999 was $729,000, or $4.37 million on an annualized basis,
compared to $3.56 million for the fiscal year ended October 31, 1999. The
amortization of intangible assets of $122,000, or $732,000 annualized, for the
two months ended December 31, 1999 and $608,000 for the fiscal year ended
October 31, 1999 is a result of the goodwill recorded in the acquisition of The
Berkshire Bank in January 1999.
Provision for Income Taxes. The provision for income taxes was $1.45 million and
$4.09 million for the two months ended December 31, 1999 and the fiscal year
ended October 31, 1999, respectively.
Investment Activities
General. The investment policy of the Bank is designed primarily to
provide satisfactory yields while maintaining adequate liquidity, a balance of
high quality, diversified investments, and minimal risk. The Bank does not
invest in equity securities. The largest component of the Bank's securities
investments, representing more than 50% of total securities investments, are
debt securities issued by the Federal Home Loan Mortgage Corporation (Freddy
Mac), the Federal National Mortgage Association (Fanny Mae) or the Government
National Mortgage Association (Ginny Mae). The remainder of the Bank's debt
securities investments are primarily short term debt securities issued by the
United States or its agencies. The Bank maintains a small portfolio of less than
$2 million of high-yield corporate debt securities. Recognizing the higher
credit risks of these securities, the Bank underwrites these securities in a
manner similar to its loan underwriting procedures.
As required by the Statement of Financial Accounting Standard No. 115
("SFAS No. 115"), securities are classified into three categories: trading,
held-to-maturity and available-for-sale. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and are reported at fair value with unrealized gains and
losses included in trading account activities in the statement of income.
Securities that the Bank has the positive intent and ability to hold to maturity
are classified as held-to-maturity and reported at amortized cost. All other
securities are classified as available-for-sale. Available-for-sale securities
are reported at fair value with unrealized gains and losses included, on an
after-tax basis, as a separate component of net worth. The Bank does not have a
trading securities portfolio and has no current plans to maintain such a
portfolio in the future. The Bank generally classifies all newly purchased debt
securities as available for sale in order to maintain the flexibility to sell
those securities if the need arises. The Bank has a limited portfolio of
securities classified as held to maturity, represented principally by securities
purchased a number of years ago.
Federal Home Loan Bank Stock. The Bank owns stock of the Federal Home
Loan Bank of New York (the "FHLBNY") which is necessary for it to be a member of
the FHLBNY. Membership requires the purchase of stock equal to 1% of the Bank's
residential mortgage loans. If the Bank borrows from the FHLBNY, the Bank must
own stock at least equal to 5% of its borrowings.
20
The following table sets forth the cost and fair value of
available-for-sale and held-to-maturity securities as of the dates indicated:
December 31,
------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------- ------------------------------ ---------------------------
Cost Fair Cost Fair Cost Fair
Value Value Value
--------------- --------------- -------------- -------------- -------------- ------------
(In thousands)
Available-For-Sale
U.S. Treasury Notes $ 30,012 $ 30,038 $ -- $ -- $ -- $ --
U.S. Government Agencies 170,610 170,156 86,064 85,952 65,907 64,746
Mortgage-backed securities 2,493 2,499 4,208 4,199 4,571 4,496
Corporate notes 751 639 1,654 1,313 -- --
Marketable equity
securities and other 37,547 37,634 4,813 4,845 6,060 15,256
-------- -------- ------- ------- ------- -------
Total $241,413 $240,966 $96,739 $96,309 $76,538 $84,498
======== ======== ======= ======= ======= =======
Held-To-Maturity
U.S. Government Agencies $ 1,613 $ 1,598 $ 296 $ 294 $ 522 $ 522
Corporate notes -- -- 20,455 20,408 4,477 4,476
-------- -------- ------- ------- ------- -------
Total $ 1,613 $ 1,598 $20,751 $20,702 $ 4,999 $ 4,998
======== ======== ======= ======= ======= =======
21
The following tables summarize the Company's available-for-sale and
held-to-maturity securities at December 31, 2001 (dollars in thousands):
December 31, 2001
--------------------------------------------------
Weighted
Average
Yield Cost Fair Value
----- ---- ----------
Available-For-Sale
U.S. Treasury Notes
Due within one year $ -- $ --
Due after one year through five years 2.52 30,012 30,038
Due after five years through ten years -- --
Due after ten years -- --
-------- --------
30,012 30,038
-------- --------
U.S. Government Agencies Obligations
Due within one year -- --
Due after one year through five years 5.00 73,100 73,414
Due after five years through ten years 5.60 75,075 74,549
Due after ten years 6.63 22,435 22,193
-------- --------
170,610 170,156
-------- --------
Mortgage-backed securities
Due within one year -- --
Due after one year through five years -- --
Due after five years through ten years -- --
Due after ten years 6.93 2,493 2,499
-------- --------
2,493 2,499
-------- --------
Corporate Notes
Due within one year 9.88 50 49
Due after one year through five years 6.19 398 345
Due after five years through ten years 14.88 103 45
Due after ten years 7.19 200 200
-------- --------
751 639
-------- --------
Common Stocks -- -- 4
Preferred Stocks 3.93 3,416 3,499
Money market funds 32,013 32,013
Federal Home Loan Bank Stock 7.21 2,118 2,118
-------- --------
37,547 37,634
-------- --------
$241,413 $240,966
======== ========
Held-To-Maturity
U.S. Government Agencies Obligations
Due within one year 6.25 136 138
Due after five years through ten years 5.31 190 190
Due after ten years 6.75 1,287 1,270
-------- --------
Corporate Notes
Due within one year -- -- --
-------- --------
$ 1,613 $ 1,598
======== ========
22
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 December 31, 2001 and 2000 , the Company had total loans of $252.23
million and $75.62 million, respectively, and an allowance for loan losses of
approximately $2.03 million and $1.11 million, respectively. 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.
Interest rates on loans are affected by the demand for loans, the
supply of money available for lending, credit risks, the rates offered by
competitors and other conditions. These factors are in turn affected by, among
other things, economic conditions, monetary policies of the federal government,
and legislative tax policies.
In order to manage interest rate risk, the Bank focuses its efforts on
loans with interest rates that adjust based upon changes in the prime rate or
changes in United States Treasury or similar indices. Generally, credit risks on
adjustable-rate loans are somewhat greater than on fixed-rate loans primarily
because, as interest rates rise, so do borrowers' payments, increasing the
potential for default. The Bank seeks to impose appropriate loan underwriting
standards in order to protect against these and other credit related risks
associated with its lending operations.
In addition to analyzing the income and assets of its borrowers when
underwriting a loan, the Bank obtains independent appraisals on all material
real estate in which the Bank takes a mortgage. The Bank generally obtains title
insurance in order to protect against title defects on mortgaged property.
Commercial and Mortgage Loans. The Bank originates commercial mortgage
loans secured by office buildings, retail establishments, multi-family
residential real estate and other types of commercial property. Substantially
all of the properties are located in the New York City metropolitan area.
The Bank makes commercial mortgage loans with loan to value ratios not
to exceed 75% and with terms to maturity that do not exceed 15 years. Loans
secured by commercial properties generally involve a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on such loans
are often dependent on successful operation or management of the properties,
repayment may be subject, to a greater extent, to adverse conditions in the real
estate market or the economy. The Bank seeks to minimize these risks through its
underwriting policies. The Bank evaluates the qualifications and financial
condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying property. The
factors considered by the Bank include net operating income; the debt coverage
ratio (the ratio of cash net income to debt service); and the loan to value
ratio. When evaluating the borrower, the Bank considers the financial resources
and income level of the borrower, the borrower's experience in owning or
managing similar property and the Bank's lending experience with the borrower.
The Bank's policy requires borrowers to present evidence of the ability to repay
the loan without having to resort to the sale of the mortgaged property. The
Bank also seeks to focus its commercial mortgage loans on loans to companies
with operating businesses, rather than passive real estate investors.
Commercial Loans. The Bank makes commercial loans to businesses for
inventory financing, working capital, machinery and equipment purchases,
expansion, and other business purposes. These loans generally have higher yields
than mortgages loans, with maturities of one year, after which the borrower's
financial condition and the terms of the loan are re-evaluated.
Commercial loans tend to present greater risks than mortgage loans
because the collateral, if any, tends to be rapidly depreciable, difficult to
sell at full value and is often easier to conceal. In order to limit these
risks, the Bank evaluates these loans based upon the borrower's ability to repay
the loan from ongoing operations. The Bank considers the business history of the
borrower
23
and perceived stability of the business as important factors when considering
applications for such loans. Occasionally, the borrower provides commercial or
residential real estate collateral for such loans, in which case the value of
the collateral may be a significant factor in the loan approval process.
Residential Mortgage Loans (1 to 4 family loans). The Bank makes
residential mortgage loans secured by first liens on one-to-four family owner-
occupied or rental residential real estate. At December 31, 2001, approximately
$159.5 million, or 63.2%, of the Company's total loan portfolio consisted of
such loans as compared to approximately $22.1 million, or 29.2%, at December 31,
2000. The increase is due largely to the March 2001 acquisition of GSB
Financial, whose loan portfolio consisted primarily of residential mortgage
loans. The Company offers both adjustable rate mortgages ("ARMS") and fixed-rate
mortgage loans. The relative proportion of fixed-rate loans versus ARMs
originated by the Bank depends principally upon current customer preference,
which is generally driven by economic and interest rate conditions and the
pricing offered by the Bank's competitors. At December 31, 2001, approximately
13% of the Bank's residential one-to-four family owner-occupied first mortgage
portfolio were ARMs and approximately 87% were fixed-rate loans. The percentage
represented by fixed-rate loans tends to increase during periods of low
interest rates. The ARMs generally carry annual caps and life-of-loan ceilings,
which limit interest rate adjustments.
The Bank's residential loan underwriting criteria are generally
comparable to those required by the Federal National Mortgage Association
("FNMA") and other major secondary market loan purchasers. Generally, ARM credit
risks are somewhat greater than fixed-rate loans primarily because, as interest
rates rise, the borrowers' payments rise, increasing the potential for default.
The Bank's teaser rate ARMs (ARMs with low initial interest rates that are not
based upon the index plus the margin for determining future rate adjustments)
were underwritten based on the payment due at the fully-indexed rate.
In addition to verifying income and assets of borrowers, the Bank
obtains independent appraisals on all residential first mortgage loans and title
insurance is required at closing. Private mortgage insurance is required on all
loans with a loan-to-value ratio in excess of 80% and the Bank requires real
estate tax escrows on such loans. Real estate tax escrows are voluntary on
residential mortgage loans with loan-to-value ratios of 80% or less.
Fixed-rate residential mortgage loans are generally originated by the
Bank for terms of 15 to 30 years. Although 30 year fixed-rate mortgage loans may
adversely affect our net interest income in periods of rising interest rates,
the Bank originates such loans to satisfy customer demand. Such loans are
generally originated at initial interest rates which exceed the fully indexed
rate on ARMs offered at the same time. Fixed-rate residential mortgage loans
originated by the Bank generally include due-on-sale clauses, which permit the
Bank to demand payment in full if the borrower sells the property without the
Bank's consent. Due-on-sale clauses are an important means of adjusting the
rates on the Bank's fixed-rate mortgage loan portfolio, and the Bank will
generally exercise its rights under these clauses if necessary to maintain
market yields.
ARMs originated in recent years have interest rates that adjust
annually based upon the movement of the one year treasury bill constant maturity
index, plus a margin of 2% to 2.75%. These loans generally have a maximum
interest rate adjustment of 2% per year, with a lifetime maximum interest rate
adjustment, measured from the initial interest rate, of 5.5% or 6%.
The Bank offers a variety of other loan products including residential
single family construction loans to persons who intend to occupy the property
upon completion of construction, home equity loans secured by junior mortgages
on one-to-four family owner-occupied residences, and short-term fixed-rate
consumer loans either unsecured or secured by monetary assets such as bank
deposits and marketable securities or personal property.
24
Origination of Loans. Loan originations can be attributed to
depositors, retail customers, telephone inquiries, advertising, the efforts of
the Bank's loan officers, and referrals from other borrowers and real estate
brokers and builders. The Bank originates loans primarily through its own
efforts. Occasionally, the Bank may obtain loan opportunities as a result of
referrals from loan brokers.
At December 31, 2001, the Bank's total capital was approximately $64.2
million and thus it was generally not permitted to make loans to one borrower in
excess of approximately $9.63 million, with an additional approximately $6.42
million being permitted if secured by readily marketable collateral. The Bank
was also not permitted to make any single mortgage loan in an amount in excess
of approximately $9.63 million. At December 31, 2001, the Bank was in compliance
with these standards.
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cause the deficiency to be cured by
contacting the borrower. The Bank reviews past due loans on a case by case
basis, taking the action it deems appropriate in order to collect the amount
owed. Litigation may be necessary if other procedures are not successful.
Judicial resolution of a past due loan can be delayed if the borrower files a
bankruptcy petition because collection action cannot be continued unless the
Bank first obtains relief from the automatic stay provided by the Bankruptcy
Code.
If a non-mortgage loan becomes delinquent and satisfactory arrangements
for payment cannot be made, the Bank seeks to realize upon any personal property
collateral to the extent feasible and collect any remaining amount owed from the
borrower through legal proceedings, if necessary.
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.
The following tables set forth information concerning the Company's
loan portfolio by type of loan at the dates indicated (dollars in thousands):
December 31,
----------------------------------------------------------------
2001 2000
-------------------------------- -------------------------------
% of % of
Amount Total Amount Total
---------------- -------------- ---------------- -------------
Commercial and professional loans $ 19,130 7.6% $ 9,419 12.5%
Secured by real estate
1 - 4 family 165,195 65.5 25,677 34.0
Multi family 11,186 4.4 4,765 6.3
Non-residential (commercial) 51,893 20.6 34,968 46.2
Consumer 4,689 1.8 229 0.3
Other 140 0.1 565 0.7
-------- ----- -------- -----
Total loans 252,233 100.0% 75,623 100.0%
===== =====
Less: Allowance for loan losses (2,030) (1,108)
-------- --------
Loans, net $250,203 $ 74,515
======== ========
25
October 31,
-----------------------------------------------------------------------------------------
1999 (1) 1998 (1) 1997 (1)
-------------------------------- --------------------------- --------------------------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
Commercial and
professional loans $ 6,824 11.3% $ 3,548 8.9% $ 7,011 18.6%
Secured by real
estate 51,300 84.7 33,015 82.9 27,164 72.0
Personal 1,932 3.2 1,970 5.0 2,275 6.0
Other 501 0.8 1,264 3.2 1,265 3.4
------- ----- ------- ------- -----
Total loans 60,557 100.0% 39,797 100.0% 37,715 100.0%
===== ===== =====
Less:
Allowance for loan
losses (905) (803) (723)
------- ------- -------
Loans, net $59,652 $38,994 $36,992
======= ======= =======
(1) Information is prepared on a proforma basis for comparability purposes.
Balances stated are not reflected in the historical financial
statements of the Company.
Impaired loan balance, nonaccrual loans and loans greater than 90 days still
accruing
The following table sets forth certain information regarding nonaccrual
loans, including the ratio of such loans to total assets as of the dates
indicated, and certain other related information. The Bank had no foreclosed
real estate during these periods and approximately $58,000 of loans past due
more than 90 days still accruing at December 31, 2001.
December 31, October 31,
------------------- --------------------------------
2001 2000 1999(1) 1998(1) 1997(1)
---- ---- ------- ------- -------
(Dollars in thousands)
Nonaccrual loans:
Commercial and $ 9 $ -- $ -- $ -- $ --
professional loans
Secured by real estate -- -- 121 30 237
------ ------ ----- ----- -----
Total nonaccrual loans 9 -- 121 30 237
------ ------ ----- ----- -----
Total nonperforming loans $ 9 $ -- $ 121 $ 30 $ 237
====== ====== ===== ===== =====
Total nonperforming loans
to total assets -- -- .07% .08% .63%
====== ====== ===== ===== =====
(1) Information is prepared on a proforma basis for comparability purposes.
Balances stated are not reflected in the historical financial
statements of the Company.
26
The following tables present information regarding the Company's total
allowance for loan losses as well as the allocation of such amounts to the
various categories of loans at the dates indicated (dollars in thousands):
December 31, 2001
----------------------------------------------------
Allowance
for Loan Percent of Percent of
Losses Allowance Total Loans
------------------ ------------------ -------------------
Commercial and
professional loans $ 188 9.3% 0.07%
Secured by real estate
1 - 4 family 804 39.6 0.32
Multi family 84 4.1 0.03
Non-residential 790 38.9 0.32
Consumer and other 24 1.2 0.06
General allowance (1) 140 6.9 0.06
------ ----- ----
Total allowance
for loan losses $2,030 100.0% 0.79%
====== ===== ====
----------
(1) The allowance for loan losses is allocated to specific loans as necessary.
December 31, 2000
----------------------------------------------------
Allowance
for Loan Percent of Percent of
Losses Allowance Total Loans
------------------ ------------------ -------------------
Commercial and
professional loans $ 89 8.0% 0.12%
Secured by real estate 654 59.0 0.86
Personal and other 13 1.2 0.02
General allowance (1) 352 31.8 0.47%
------ ----- ----
Total allowance
for loan losses $1,108 100.0% 1.47%
====== ===== ====
----------
(1) The allowance for loan losses is allocated to specific loans as necessary.
October 31, 1999(2)
-------------------------------------------------------
Allowance
for Loan Percent of Percent of
Losses Allowance Total Loans
------------------ ------------------ -------------------
Commercial and
professional loans $ 69 7.6% 0.11%
Secured by real estate 569 63.0 0.94
Personal and other 77 8.5 0.13
General allowance (1) 190 20.9 0.31
---- ---- ----
Total allowance
for loan losses $905 100.0% 1.49%
==== ===== ====
----------
(1) The allowance for loan losses is allocated to specific loans as necessary.
(2) Information is prepared on a proforma basis for comparability purposes.
Balances stated are not reflected in the historical financial
statements of the Company.
27
October 31, 1998(2)
-------------------------------------------------------
Allowance
for Loan Percent of Percent of
Losses Allowance Total Loans
------------------ ------------------ -------------------
Commercial and
professional loans $ 35 4.4% 0.09%
Secured by real estate 394 49.1 0.99
Personal and other 34 4.2 0.09
General allowance (1) 340 42.3 0.85
---- ----- -----
Total allowance
for loan losses $803 100.0% 2.02%
==== ===== =====
----------
(1) The allowance for loan losses is allocated to specific loans as necessary.
(2) Information is prepared on a proforma basis for comparability purposes.
Balances stated are not reflected in the historical financial
statements of the Company.
October 31, 1997(2)
----------------------------------------------------
Allowance
for Loan Percent of Percent of
Losses Allowance Total Loans
------------------ ------------------ -------------------
Commercial and
professional loans $ 70 9.7% 0.19%
Secured by real estate 391 54.1 1.04
Personal and other 41 5.7 0.11
General allowance (1) 221 30.5 0.59
---- ----- -----
Total allowance
for loan losses $723 100.0% 1.93%
==== ===== =====
----------
(1) The allowance for loan losses is allocated to specific loans as necessary.
(2) Information is prepared on a proforma basis for comparability purposes.
Balances stated are not reflected in the historical financial
statements of the Company.
The following table sets forth information regarding the aggregate
maturities of the Company's loans in the specified categories and the amount of
such loans which have fixed and variable rates.
December 31, 2001
---------------------------------------------------------------------
Within 1 to After
1 Year 5 Years 5 Years Total
-------- --------- --------- -----
(In thousands)
Commercial-fixed rate $ 2,197 $ 4,111 $ 907 $ 7,215
Other fixed rate 6,701 11,057 146,521 164,279
------- ------- -------- --------
Total fixed rate $ 8,898 $15,168 $147,428 $171,494
------- ------- -------- --------
Commercial-adjustable rate 8,512 3,403 -- 11,915
Other adjustable rate 11,733 15,298 41,793 68,824
------- ------- -------- --------
Total adjustable rate 20,245 18,701 41,793 80,739
------- ------- -------- --------
Total $29,143 $33,869 $189,221 $252,233
======= ======= ======== ========
28
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):
Two Months
Ended
Years Ended December 31 December 31, Years Ended October 31,
----------------------- -------------- ------------------------------------
2001 2000 1999 1999(1) 1998(1) 1997(1)
---- ---- ---- ---- ---- ----
Average loans outstanding $195,296 $ 70,357 $ 61,691 $ 48,387 $ 39,085 $ 31,081
======== ======== ======== ======== ======== ========
Allowance at beginning
of period 1,108 923 905 803 723 824
Charge-offs:
Commercial and other
loans 97 -- -- -- -- --
Real estate loans -- -- -- 31 -- 196
-------- -------- -------- -------- -------- --------
Total loans charged-off 97 -- -- 31 -- 196
-------- -------- -------- -------- -------- --------
Recoveries:
Commercial and other
loans 41 130 8 78 20 28
Real estate loans -- -- -- -- -- 7
-------- -------- -------- -------- -------- --------
Total loans recovered 41 130 8 78 20 35
-------- -------- -------- -------- -------- --------
Net recoveries
(charge-offs) (56) 130 8 47 20 161
-------- -------- -------- -------- -------- --------
Provision for loan losses
charged to operating
expenses 287 55 10 55 60 60
Acquisition of GSB 691 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Allowance at end of period $ 2,030 $ 1,108 $ 923 $ 905 $ 803 $ 723
-------- -------- -------- -------- -------- --------
Ratio of net recoveries
(charge-offs) to average
loans outstanding (2) (.02)% .18% .08% .09% .05% .51%
======== ======== ======== ======== ======== ========
Allowance as a percent
of total loans 0.80% 1.47% 1.41% 1.49% 2.02% 1.92%
======== ======== ======== ======== ======== ========
Total loans at end
of period $252,233 $ 75,623 $ 65,591 $ 60,557 $ 39,797 $ 37,715
======== ======== ======== ======== ======== ========
(1) Information is prepared on a proforma basis for comparability purposes.
Balances stated are not reflected in the historical financial statements of
the Company.
(2) Net recoveries have been annualized to calculate ratios for comparability
purposes.
Deposits
The Bank concentrates on obtaining deposits from a variety of
businesses, professionals and retail customers. The Bank offers a number of
different deposit programs, including statement savings accounts, NOW accounts,
money market deposits accounts, checking accounts and certificates of deposits
with terms from seven days to five years. Deposit account terms vary according
to the minimum balance required, the time period the funds must remain on
deposit and the interest rate, among other factors. The Bank prices its deposit
offerings competitively within the market it serves. These products are designed
to attract new customers, retain existing customers and create opportunities to
offer other bank products or services. While the market and pricing for deposit
funds are very competitive, the Bank believes that personalized, quality service
is also an important element in retaining core deposit customers.
29
The following table summarizes the composition of the average balances
of major deposit categories:
December 31, October 31,
------------------------------------------------------------------ ------------
2001 2000 1999 (2) 1999 (1)
---- ---- -------- --------
Average Average Average Average Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Demand deposits $ 21,857 -- $ 14,848 -- $ 15,953 -- $17,485 --
NOW and money market 51,026 2.64% 44,582 3.85% 47,994 3.49% 48,515 3.19%
Savings deposits 34,168 2.69 4,454 2.93 4,665 2.66 4,721 2.58
Time deposits 155,079 5.07 42,158 5.93 32,257 4.56 21,714 5.55
-------- ---- -------- ---- -------- ---- ------- ----
Total deposits $262,130 3.89% $106,042 4.08% $100,869 3.19% $92,435 3.11%
======== ==== ======== ==== ======== ==== ======= ====
(1) Information is prepared on a proforma basis for comparability purposes.
Balances stated are not reflected in the historical financial statements
of the Company.
(2) Interest expense was annualized to calculate average yield for the two
months ended December 31, 1999.
The aggregate amount of jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $68.88 million and $55.32
million at December 31, 2001 and 2000, respectively.
The following table summarizes the maturity distribution of time
deposits of $100,000 or more as of the dates indicated:
December 31,
--------------
2001
-----
(In thousands)
3 months or less $26,181
Over 3 months but within 6 months 18,181
Over 6 months but within 12 months 16,757
Over 12 months 7,762
-------
Total $68,881
=======
Short-Term Borrowings
Securities sold under agreements to repurchase generally mature within
30 days from the date of the transactions. Short-term borrowings consist of
Treasury Tax and Loan Note Options and various other borrowings which generally
have maturities of less than one year. The details of these categories are
presented below:
Year Ended December 31,
--------------------------------------
2001 2000
------------------ -------------------
(Dollars in Thousands)
Securities sold under repurchase
agreements and federal funds purchased
Balance at year-end $53,756 $23,127
Average during the year $13,372 $12,367
Maximum month-end balance $53,756 $24,495
Weighted average rate during the year 3.62% 5.85%
Rate at December 31 1.67% 5.75%
30
Capital Resources and Liquidity
Liquidity
The management of the Company's liquidity focuses on ensuring that
sufficient funds are available to meet loan funding commitments, withdrawals
from deposit accounts, the repayment of borrowed funds, and ensuring that the
Bank and the Company comply with regulatory liquidity requirements. Liquidity
needs of The Berkshire Bank have historically been met by deposits, investments
in federal funds sold, principal and interest payments on loans, and maturities
of investment securities.
For the parent company, Berkshire Bancorp Inc., liquidity means having
cash available to fund operating expenses and to pay shareholder dividends, when
and if declared by our Board of Directors. We paid cash dividends of $.24 per
share, $.64 per share, $.32 per share and $.72 per share in fiscal 2001, 2000,
1999 and 1998, respectively. The ability to fund our operations and to pay
dividends is not dependent upon the receipt of dividends from The Berkshire
Bank. At December 31, 2001, we had cash of $16.45 million and marketable
securities of $4.0 million.
The Company maintains financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and stand-by
letters of credit. At December 31, 2001, the Company had outstanding commitments
of $8.25 million. These commitments include $6.45 million that mature or renew
within one year, $1.3 million that mature or renew after one year and within
three years, $0.5 million that mature or renew after three years and within five
years, and no commitments that mature or renew after five years.
The Company currently does not have any unconsolidated subsidiaries or
special purpose entities.
The Company is responsible for payments under operating leases as
disclosed in Note M of the Company's financial statements. The Company has no
capital leases.
Capital
The capital ratios of the Bank and Berkshire are presently in excess of
the requirements necessary to meet the "well capitalized" capital category
established by bank regulators. See Note P.
Interest Rate Risk
Fluctuations in market interest rates can have a material effect on the
Bank'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,
31
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:
Berkshire Bancorp Inc.
Interest Rate Sensitivity Gap at December 31, 2001
(in thousands, except for percentages)
-----------------------------------------------------------------------------
3 Months 3 Through 1 Through Over
or Less 12 Months 3 Years 3 Years Total
-------- ---------- ---------- ------- --------
Federal funds sold $ 3,000 $ -- $ -- $ -- $ 3,000
(Rate) 0.84% 0.84%
Interest bearing deposits
in banks 213 -- -- -- 213
(Rate) 1.25% 1.25%
Loans (1)(2)
Adjustable rate loans 38,443 23,070 5,419 13,807 80,739
(Rate) 6.22% 6.91% 8.36% 8.30%
Fixed rate loans 186 8,713 7,395 155,200 171,494
(Rate) 6.26% 7.58% 8.18% 7.30% 7.35%
--------- --------- --------- --------- ----------
Total loans 38,629 31,783 12,814 169,007 252,233
Investments (3)(4) 32,773 136 38,212 169,286 240,407
(Rate) 2.39% 6.35% 2.95% 5.67% 4.78%
--------- --------- --------- --------- ----------
Total rate-sensitive assets 74,615 31,919 51,026 338,293 495,853
--------- --------- --------- --------- ----------
Deposit accounts (5)
Savings and NOW 64,351 -- -- -- 64,351
(Rate) 1.11% 1.11%
Money market 44,311 -- -- -- 44,311
(Rate) 1.48% 1.48%
Time Deposits 55,462 122,849 21,611 29 199,951
(Rate) 3.58% 3.91% 4.56% 3.92% 3.89%
--------- --------- --------- --------- ----------
Total deposit accounts 164,124 122,849 21,611 29 308,613
Repurchase Agreements 53,756 -- -- -- 53,756
(Rate) 1.86% 1.86%
Other borrowings 5,000 10,000 500 26,778 42,278
(Rate) 3.56% 2.58% 6.09% 5.51% 4.59%
--------- --------- --------- --------- ----------
Total rate-sensitive liabilities 220,880 132,849 22,111 26,807 404,647
--------- --------- --------- --------- ----------
Interest rate caps 20,000 -- (5,000) (15,000)
Gap (repricing differences) (168,265) (100,930) 33,915 326,486 91,206
========= ========= ========= ========= ==========
Cumulative Gap (168,265) (269,195) (235,280) 91,206
========= ========= ========= =========
Cumulative Gap to Total Rate
Sensitive Assets (33.93)% (54.29)% (47.45)% 18.39%
========= ========= ========= =========
--------------------------------
(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 among
maturity/repricing periods based upon The Berkshire Bank's historical
experience. All other time accounts are scheduled according to their
respective maturity dates.
32
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.
New Accounting Pronouncements
Business Combinations, Goodwill and Intangible Assets
On June 29, 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets. These statements
are expected to result in significant modifications relative to the Company's
accounting for goodwill and other intangible assets. SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 must be accounted for
under the purchase method of accounting. SFAS No. 141 was effective upon
issuance. SFAS No. 142 modifies the accounting for all purchased goodwill and
intangible assets. SFAS No. 142 includes requirements to test goodwill and
indefinite lived intangible assets for impairment rather than amortize them.
SFAS No. 142 will be effective for fiscal years beginning after December 31,
2001 and early adoption is not permitted except for business combinations
entered into after June 30, 2001. Upon adoption of SFAS 142, on January 1, 2002,
the Company will no longer amortize goodwill, thereby eliminating annual
amortization expense of approximately $1.0 million.
Allowance for Loan Losses
On July 6, 2001, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues. SAB No. 102 provides guidance on the
development, documentation, and application of a systematic methodology for
determining the allowance for loans and leases in accordance with US GAAP. The
adoption of SAB No. 102 is not expected to have a material impact on the
Company's financial position or results of operations.
Derivatives and Hedging
SFAS No. 133, ("SFAS 133") "Accounting for Derivative Instruments and
Hedging Activities" was amended in June, 1999 by SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," and in June, 2000, by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," (collectively
SFAS 133). SFAS 133 requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. Under SFAS 133 an entity may designate a derivative
as a hedge of exposure to either changes in: (a) fair value of a recognized
asset or liability or firm commitment, (b) cash flows of a recognized or
forecasted transaction, or (c) foreign currencies of a net investment in foreign
operations, firm commitments, available-for-sale securities or a forecasted
transaction. Depending upon the effectiveness of the hedge and/or the
transaction being hedged, any changes in the fair value of the derivative
instrument is either recognized in earnings in the current year, deferred to
future periods, or recognized in other comprehensive income. Changes in the fair
value of all derivative instruments not recognized as hedge accounting are
recognized in current year earnings. SFAS 133 is required for all fiscal
quarters or fiscal years beginning after June 15, 2000. The Company adopted SFAS
133 effective January 1, 2001.
The adoption of SFAS 133 did not have a material impact on the
Company's financial position or results of operations.
33
Accounting for the Impairment or Disposal of Long-Lived Assets
In August of 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (FAS No.144). FAS No. 144 retains the existing requirements to recognize
and measure the impairment of long-lived assets to be held and used or to be
disposed of by sale. However, FAS 144 makes changes to the scope and certain
measurement requirements of existing accounting guidance. FAS 144 also changes
the requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The adoption of this statement is not
expected to have a significant impact on the financial condition or results of
operations of the Company.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," replacing SFAS No. 125. This new statement
revises the standard for accounting and reporting for transfers and servicing of
financial assets and extinguishments of liabilities. The new standard is based
on consistent application of a financial-components approach that recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered and derecognizes
liabilities when extinguished. The standard provides consistent guidelines for
distinguishing transfers of financial assets from transfers that are secured
borrowings. SFAS 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001.
However, for recognition and reclassification of collateral and for disclosures
relating to securitizations transactions and collateral this statement is
effective for fiscal years ending after December 15, 2000 with earlier
application not allowed and is to be applied prospectively. Management does not
expect this new standard to have a material impact upon the Company's
consolidated financial statements.
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.
See Item 7. Managements' Discussion and Analysis of Financial Condition
and Results of Operations.
ITEM 8. Financial Statements and Supplementary Data.
Inasmuch as the acquisition of the GSB Financial Corporation and Goshen
Savings Bank was consummated on March 30, 2001, the financial statements set
forth below include the results of operations of GSB Financial and Goshen Bank
from April 1, 2001, through December 31, 2001.
34
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Berkshire Bancorp Inc.
We have audited the accompanying consolidated balance sheets of Berkshire
Bancorp Inc. and its subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ended December 31, 2001 and 2000, the two months in the period
ended December 31, 1999 and the year ended October 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Berkshire Bancorp
Inc. and its subsidiaries as of December 31, 2001 and 2000, and the consolidated
results of their operations and their consolidated cash flows for the years
ended December 31, 2001 and 2000, the two months in the period ended December
31, 1999 and the year ended October 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Philadelphia, Pennsylvania
January 25, 2002
35
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31, December 31,
2001 2000
------------------------------
ASSETS
Cash and due from banks $ 7,170 $ 2,512
Interest bearing deposits 213 6,605
Federal funds sold 3,000 27,250
-------- --------
Total cash and cash equivalents 10,383 36,367
Investment Securities:
Available-for-sale 240,966 96,309
Held-to-maturity, fair value of $1,598
in 2001 and $20,702 in 2000 1,613 20,751
-------- --------
Total investment securities 242,579 117,060
Loans, net of unearned income 252,233 75,623
Less: allowance for loan losses (2,030) (1,108)
-------- --------
Net loans 250,203 74,515
Accrued interest receivable 3,399 1,355
Premises and equipment, net 7,446 359
Goodwill, net of accumulated amortization
of $2,300 in 2001 and $1,365 in 2000 18,438 11,543
Other assets 4,110 2,824
-------- --------
Total assets $536,558 $244,023
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 30,163 $ 14,509
Interest bearing 308,613 123,138
-------- --------
Total deposits 338,776 137,647
Securities sold under agreements to repurchase 53,756 23,127
Long term borrowings 42,278 1,500
Accrued interest payable 2,406 1,333
Other liabilities 3,350 1,309
-------- --------
Total liabilities 440,566 164,916
-------- --------
Stockholders' equity
Preferred stock - $.10 Par value: -- --
2,000,000 shares authorized - none issued
Common stock - $.10 par value
Authorized -- 10,000,000 shares
Issued -- 2,566,095 shares
Outstanding --
December 31, 2001, 2,379,990 shares
December 31, 2000, 1,955,625 shares 256 256
Additional paid-in capital 89,914 78,549
Retained earnings 11,053 8,352
Accumulated other comprehensive (loss), net (281) (85)
Less: Treasury Stock
December 31, 2001, 186,105 shares
December 31, 2000, 610,470 shares (4,950) (7,965)
-------- --------
Total stockholders' equity 95,992 79,107
-------- --------
$536,558 $244,023
======== ========
The accompanying notes are an integral part of this statement
36
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
For The
For The For The Two Months For The
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, October 31,
------------ ------------ ------------ -----------
2001 2000 1999 1999
-------- -------- -------- ------
INTEREST INCOME
Short-term interest-earning assets $ 642 $ 1,241 $ 184 $ 965
Securities and other investments 9,156 6,381 767 4,415
Loans 15,143 6,397 892 3,145
-------- -------- -------- --------
Total interest income 24,941 14,019 1,843 8,525
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 10,158 4,344 537 2,473
Borrowings 1,719 840 16 75
-------- -------- -------- --------
Total interest expense 11,877 5,184 553 2,548
-------- -------- -------- --------
Net interest income 13,064 8,835 1,290 5,977
PROVISION FOR LOAN LOSSES 287 55 10 45
-------- -------- -------- --------
Net interest income after
provision for loan losses 12,777 8,780 1,280 5,932
-------- -------- -------- --------
NON-INTEREST INCOME
Service charges on deposits 395 146 14 161
Investment securities gains 637 13,288 3,109 7,622
Other income 391 1,184 56 472
-------- -------- -------- --------
Total non-interest income 1,423 14,618 3,179 8,255
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 4,153 2,125 324 1,474
Net occupancy expense 1,170 447 70 360
Equipment expense 201 101 22 99
FDIC assessment 42 27 3 8
Data processing expense 138 21 -- 17
Amortization of goodwill 935 635 122 608
Other 2,134 1,108 188 990
-------- -------- -------- --------
Total non-interest expense 8,773 4,464 729 3,556
-------- -------- -------- --------
Income before provision for taxes 5,427 18,934 3,730 10,631
Provision for income taxes 2,128 6,868 1,448 4,091
-------- -------- -------- --------
Net income $ 3,299 $ 12,066 $ 2,282 $ 6,540
======== ======== ======== ========
Net income per share:
Basic $ 1.41 $ 5.76 $ 1.07 $ 3.08
======== ======== ======== ========
Diluted $ 1.41 $ 5.76 $ 1.01 $ 2.89
======== ======== ======== ========
Dividends per share $ .24 $ .64 $ -- $ .32
The accompanying notes are an integral part of this statement
37
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 2001 and 2000,
For The Two Months Ended December 31, 1999,
and For The Year Ended October 31, 1999
(In Thousands)
Accumulated Accum-
Common Stock Additional other lated
Par paid-in comprehensive earnings
Shares value capital loss, net (deficit)
------ ----- --------- ----------- ---------
Balance at November 1, 1998 2,566 $256 $78,546 $ -- $(10,563)
Net income 6,540
Treasury shares issued for
options exercised 24
Other comprehensive income net
of reclassification adjustment
and taxes 1,943
Comprehensive income
Cash dividends (680)
------ ---- ------- ------- --------
Balance at October 31, 1999 2,566 $256 $78,570 $ 1,943 $ (4,703)
Net income 2,282
Other comprehensive income (loss)
net of reclassification adjustment
and taxes 2,482
Comprehensive income
------ ---- ------- ------- --------
Balance at December 31, 1999 2,566 $256 $78,570 $ 4,425 $ (2,421)
Net income 12,066
Treasury shares issued for (21)
options exercised
Acquisition of treasury shares
Other comprehensive income (loss)
net of reclassification adjustment
and taxes (4,510)
Comprehensive income
Cash dividends (1,293)
------ ---- ------- ------- --------
Balance at December 31, 2000 2,566 $256 $78,549 $ (85) $ 8,352
Total
Treasury Comprehensive stockholders'
stock income equity
------- -------- -------
Balance at November 1, 1998 $(2,773) $65,466
Net income 6,540 6,540
Treasury shares issued for
options exercised 13 37
Other comprehensive income net
of reclassification adjustment
and taxes 1,943 1,943
-------
Comprehensive income $ 8,483
=======
Cash dividends (680)
------- -------
Balance at October 31, 1999 $(2,760) $73,306
Net income 2,282 2,282
Other comprehensive income (loss)
net of reclassification adjustment
and taxes 2,482 2,482
-------
Comprehensive income $ 4,763
=======
------- -------
Balance at December 31, 1999 $(2,760) $78,070
Net income 12,066 12,066
Treasury shares issued for 49 28
options exercised
Acquisition of treasury shares (5,254) (5,254)
Other comprehensive income (loss)
net of reclassification adjustment
and taxes (4,510) (4,510)
-------
Comprehensive income $ 7,556
=======
Cash dividends (1,293)
------- -------
Balance at December 31, 2000 $(7,965) $79,107
38
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 2001 and 2000,
For The Two Months Ended December 31, 1999,
and For The Year Ended October 31, 1999
(In Thousands)
Accumulated Accum-
Common Stock Additional other lated
Par paid-in comprehensive earnings
Shares value capital loss, net (deficit)
------ ----- --------- ----------- ---------
Net income 3,299
Treasury shares issued
for acquisition of
GSB Financial Corp 11,386
Acquisition of treasury shares
Treasury shares issued for
options exercised (21)
Other comprehensive (loss) net
of reclassification adjustment
and taxes (196)
Comprehensive income
Cash dividends (598)
------ ---- ------- ------- --------
Balance at December 31, 2001 2,566 $256 $89,914 $ (281) $ 11,053
====== ==== ======= ======= ========
Total
Treasury Comprehensive stockholders'
stock income equity
------- -------- -------
Net income 3,299 3,299
Treasury shares issued
for acquisition of
GSB Financial Corp 7,887 19,273
Acquisition of treasury shares (4,983) (4,983)
Treasury shares issued for
options exercised 111 90
Other comprehensive (loss) net
of reclassification adjustment
and taxes (196)
-------
Comprehensive income $ 3,103
=======
Cash dividends (598)
------- -------
Balance at December 31, 2001 $(4,950) $95,992
======= =======
The accompanying notes are an integral part of this statement
39
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For The For The For The Two For The
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, October 31,
------------ ------------ ------------ -----------
2001 2000 1999 1999
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,299 $ 12,066 $ 2,282 $ 6,540
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Realized gain on investment securities (637) (13,288) (3,109) (7,622)
Depreciation and amortization 1,197 740 144 713
Provision for loan losses 287 55 10 45
Increase in deferred taxes (426) 1,522 -- (1,402)
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in accrued
interest receivable (659) 259 (47) (817)
Decrease (increase) other assets 1,320 (81) (1,025) 115
Increase (decrease) in accrued
interest payable and other liabilities 534 (1,781) 2,806 4,542
--------- -------- ------- --------
Net cash provided by (used in)
operating activities 4,915 (508) 1,061 2,114
--------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Madison Merchant
Services, Inc. -- (285) -- --
Investment in The Berkshire Bank -- (105) -- (25,216)
Cash paid for business acquired (20,222) -- -- --
Cash of entities acquired 6,047 -- -- 22,439
Investment securities available
for sale
Purchases (461,048) (84,247) (4,856) (23,138)
Sales 359,278 77,212 3,110 7,634
Investment securities held to maturity
Purchases (167,800) (19,909) -- --
Maturities 187,724 4,157 -- --
Net increase in loans (41,921) (9,902) (5,034) (18,744)
Net increase in loans held for sale -- -- -- (1,872)
Acquisition of premises and equipment (4,138) (93) -- (191)
--------- -------- ------- --------
Net cash (used in) investing activities (142,080) (33,172) (6,780) (39,088)
--------- -------- ------- --------
40
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For The For The For The Two For The
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, October 31,
------------ ------------ ------------ -----------
2001 2000 1999 1999
---- ---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in non interest
bearing deposits 15,654 (1,040) 873 (6,361)
Net increase in interest bearing
deposits 57,611 34,600 896 2,577
Increase in securities sold under
agreements to repurchase 30,629 23,127 -- --
Issuance of long term debt 24,778 -- -- --
Repayment of long term debt (12,000) -- -- --
Acquisition of treasury stock (4,983) (5,254) -- --
Proceeds from exercise of common
stock options 90 28 -- 9
Dividends paid (598) (1,293) -- (680)
-------- ------- ------- --------
Net cash provided by (used in)
financing activities 111,181 50,168 1,769 (4,455)
-------- ------- ------- --------
Net (decrease) increase in cash
and cash equivalents (25,984) 16,488 (3,950) (41,429)
Cash and cash equivalents at
beginning of period 36,367 19,879 23,829 65,258
-------- ------- ------- --------
Cash and cash equivalents at
end of period $ 10,383 $36,367 $19,879 $ 23,829
======== ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash used to pay interest $ 10,804 $ 4,012 $ 682 $ 2,258
Cash used to pay income taxes $ 1,637 $ 7,163 -- $ 2,602
The accompanying notes are an integral part of this statement
41
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
NOTE A - ORGANIZATION AND PLAN OF MERGER AND CAPITALIZATION
Organization
Berkshire Bancorp Inc. ("Berkshire" or the "Company"), a Delaware
corporation, is a bank holding company registered under the Bank Holding Company
Act of 1956. Berkshire's principal activity is the ownership and management of
its wholly owned subsidiary, The Berkshire Bank (the "Bank"). In fiscal 1999,
the Company changed its name to Berkshire Bancorp Inc. from Cooper Life
Sciences, Inc.
The Bank, a New York State chartered commercial bank, was established
in 1989 to provide highly personalized services to high net worth individuals
and to small and mid-sized commercial businesses primarily from the New York
City metropolitan area. In March 2001, we expanded our customer base and market
area with the acquisition of GSB Financial Corporation. The Bank's main office
is in mid-town Manhattan. It has one branch in Brooklyn, NY, one branch in
downtown Manhattan and four branches in Orange and Sullivan Counties in New York
state.
The Bank competes with other banking and financial institutions in its
markets. Commercial banks, savings banks, savings and loan associations,
mortgage bankers and brokers, and credit unions actively compete for deposits
and loans. Such institutions, as well as consumer finance, mutual funds,
insurance companies, and brokerage and investment banking firms may be
considered to be competitors of the Bank with respect to one or more of the
services provided by the Bank.
The Company and the Bank are subject to the regulations of certain
state and federal agencies and, accordingly, are periodically examined by those
regulatory authorities. As a consequence of such regulation of banking
activities, the Bank's business may be affected by state and federal
legislation.
Prior to the acquisition of the Bank on January 4, 1999, Berkshire has
not been engaged in any operating activities since October 1994 when it disposed
of its majority interest in a company engaged in mortgage banking.
Mergers and Acquisitions
On March 30, 2001, Berkshire completed its acquisition of GSB Financial
Corporation ("GSB Financial"). As a result, GSB Financial merged with and into
Berkshire and Goshen Savings Bank ("Goshen Bank") merged with and into The
Berkshire Bank. Under the terms of the merger, each share of GSB Financial
common stock was redeemed for $20.75, or converted into 0.6027 shares of
Berkshire's common stock. The stock component of the transaction represented
50.1% of the total consideration, while the cash component represented 49.9%.
The right of the GSB Financial stockholders to elect to receive stock or cash
was subject to allocation procedures. Based upon such election and allocation
procedures, 978,032 shares of GSB Financial common stock were converted into
589,460 shares of Berkshire common stock, and 974,338 shares of GSB Financial
common stock were purchased for $20.75 per share, totaling approximately $20.2
million.
This transaction was accounted for under the purchase method of
accounting and accordingly, the results of operations of the Company for the
year ended December 31, 2001, include only the results of operations of GSB
Financial from April 1, 2001 through December 31, 2001. The acquisition resulted
in the recording of approximately $7.5 million of goodwill, which, through
December 31, 2001, has been amortized on a straight-line basis over 15 years.
The following represents the unaudited pro forma financial information
of the Company as if the acquisition occurred on the first date of the periods
indicated. The pro forma information should be read in conjunction with the
related historical information and is not necessarily indicative of the results
that would have been attained had the transaction actually taken place.
42
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note A - (continued)
For The Year Ended
December 31,
----------------------------------------------
2001 2000
------ -----
(In thousands)
Interest income $ 31,499 $ 26,019
Interest Expense 15,396 12,227
-------- --------
Net interest income 16,103 13,792
Provision for loan losses 547 190
Non-interest income 1,696 15,321
Non-interest expense 11,007 8,916
Net income $ 3,427 $ 12,531
On January 4, 1999 Berkshire completed its acquisition of Berkshire
Bank. Berkshire acquired 100% of the outstanding shares of the Bank's common
stock for $10.50 per share in cash, a purchase price of approximately $25.2
million. In connection with this transaction, the Bank became a wholly owned
subsidiary of Berkshire.
This transaction was accounted for under the purchase method of
accounting and accordingly, the results of operations of the Company for the
year ended October 31, 1999, include only the results of operations of the Bank
from the date of acquisition, January 4, 1999, through October 31, 1999. The
acquisition resulted in the recording of approximately $14.6 million of
goodwill, which is being amortized on a straight-line basis over 20 years.
NOTE B - SUMMARY OF ACCOUNTING POLICIES
1. Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Berkshire
Bancorp and its wholly owned subsidiaries, Greater American Finance Group, Inc.
("GAFG") and The Berkshire Bank (the "Bank"), (collectively, the "Company"). All
significant intercompany accounts and transactions have been eliminated.
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.
In preparing the financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the balance sheets, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The principal estimate that is susceptible to significant change in the
near term relates to the allowance for loan losses and goodwill. The evaluation
of the adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and market conditions,
the capability of specific borrowers to pay specific loan obligations, as well
as current loan collateral values. However, actual losses on specific loans,
which also are encompassed in the analysis, may vary from estimated losses.
43
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE B - (continued)
Substantially all outstanding goodwill resulted from the acquisition of
The Berkshire bank and Goshen Savings bank, depository institutions
concentrating in the New York City and Orange and Sullivan County communities,
respectively. As the result of the market penetration in these New York areas,
the Company had formulated its own strategy to create such a market role.
Accordingly, implicit in the purchase of these franchises was the acquisition of
that role. However, if such benefits, including new business, are not derived or
the Company changes its business plan an impairment may be recognized.
SFAS 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in subsequent interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and services,
geographic areas, and major customers. The statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and assess performance. The statement also requires that
public enterprises report a measure of segment profit or loss, certain specific
revenue and expense items and segment assets. It also requires that information
be reported about revenues derived from the enterprises' products or services,
or about the countries in which the enterprises earn revenues and holds assets,
and about major customers, regardless of whether that information is used in
making operating decisions.
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the others.
For example, commercial lending is dependent upon the ability of the Bank to
fund itself with retail deposits and other borrowings and to manage interest
rate and credit risk. This situation is also similar for consumer and
residential mortgage lending. Accordingly, all significant operating decisions
are based upon analysis of the Company as one operating segment or unit.
2. Investment Securities
The Company accounts for its investment securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". This standard requires investments in securities to be classified
in one of three categories: held to maturity, trading or available for sale.
Investments for which management has both the ability and intent to hold to
maturity, are carried at cost, adjusted for the amortization of premiums and
accretion of discounts computed by the interest method. Investments which
management believes may be sold prior to maturity due to changes in interest
rates, prepayment risk and equity, liquidity requirements or other factors, are
classified as available for sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses, net of tax, and reported as a
separate component of stockholders' equity and excluded from the determination
of net income. Gains or losses on disposition are based on the net proceeds and
cost of the securities sold, adjusted for amortization of premiums and accretion
of discounts, using the specific identification method.
44
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE B - (continued)
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was amended in June, 1999 by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," and in June, 2000, by SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," (collectively SFAS 133).
SFAS 133 requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. Under SFAS 133 an entity may designate a derivative
as a hedge of exposure to either changes in: (a) fair value of a recognized
asset or liability or firm commitment, (b) cash flows of a recognized or
forecasted transaction, or (c) foreign currencies of a net investment in foreign
operations, firm commitments, available-for-sale securities or a forecasted
transaction. Depending upon the effectiveness of the hedge and/or the
transaction being hedged, any changes in the fair value of the derivative
instrument is either recognized in earnings in the current year, deferred to
future periods, or recognized in other comprehensive income. Changes in the fair
value of all derivative instruments not recognized as hedge accounting are
recognized in current year earnings. SFAS 133 is required for all fiscal
quarters or fiscal years beginning after June 15, 2000. The Company adopted SFAS
133 effective January 1, 2001. The adoption of SFAS 133 did not have a material
impact on the Company's consolidated financial position or results of
operations.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. In September 2000, the Financial Accounting Standards Board
issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," replacing SFAS No. 125. This new statement
revises the standard for accounting and reporting for transfers and servicing of
financial assets and extinguishments of liabilities. The new standard is based
on consistent application of a financial-components approach that recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered and derecognizes
liabilities when extinguished. The standard provides consistent guidelines for
distinguishing transfers of financial assets from transfers that are secured
borrowings. SFAS 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. The
Company adopted SFAS 140 on April 1, 2001 and the adoption did not have a
material impact upon the Company's consolidated financial statements.
3. Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal and are net of unearned discount, unearned loan fees and an
allowance for credit losses. The allowance for loan losses is established
through a provision for loan losses charged to expense. Loan principal
considered to be uncollectible by management is charged against the allowance
for credit losses. The allowance is an amount that management believes will be
adequate to absorb probable losses on existing loans that may become
uncollectible based upon an evaluation of known and inherent risks in the loan
portfolio. The evaluation takes into consideration such factors as changes in
the nature and size of the loan portfolio, overall portfolio quality, specific
problem loans, and current and future economic conditions which may affect the
borrowers' ability to pay. The evaluation details historical losses by loan
category, the resulting loss rates for which are projected at current loan total
amounts.
Interest income is accrued as earned on a simple interest basis.
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
When a loan is placed on such non-accrual status, all accumulated accrued
interest receivable
45
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE B - (continued)
applicable to periods prior to the current year is charged off to the allowance
for loan losses. Interest which had accrued in the current year is reversed out
of current period income. Loans 90 days or more past due and still accruing
interest must have both principal and accruing interest adequately secured and
must be in the process of collection.
The Company accounts for its impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." This standard requires that a creditor measure impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral-dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," replacing SFAS No. 125. This new statement
revises the standard for accounting and reporting for transfers and servicing of
financial assets and extinguishments of liabilities. The new standard is based
on consistent application of a financial-components approach that recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered and derecognizes
liabilities when extinguished. The standard provides consistent guidelines for
distinguishing transfers of financial assets from transfers that are secured
borrowings. SFAS 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. The
Company adopted SFAS 140 on April 1, 2001 and the adoption did not have a
material impact upon the Company's consolidated financial statements.
On July 6, 2001, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues. SAB No. 102 provides guidance on the
development, documentation, and application of a systematic methodology for
determining the allowance for loans and leases in accordance with US GAAP.
The adoption of SAB No. 102 is not expected to have a material impact on the
Company's financial position or results of operations.
4. Bank Premises and Equipment
Bank premises and equipment, including leasehold improvements, are
stated at cost less accumulated depreciation. Depreciation expense is computed
on the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the estimated useful
lives of the improvements or the terms of the related leases.
5. Other Real Estate Owned
Other real estate owned, representing property acquired through
foreclosure, is recorded at the lower of cost or estimated fair market value,
less costs of disposal. When property is acquired, the excess, if any, of the
loan balance over fair market value is charged to the allowance for loan losses.
Periodically thereafter, the asset is reviewed for subsequent declines in the
estimated fair market value. Subsequent declines, if any, and holding costs, as
well as gains and losses on subsequent sale, are included in the consolidated
statements of operations.
46
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note B - (continued)
6. Goodwill
Goodwill resulting from the acquisition of the Berkshire Bank and GSB
Financial has been amortized on a straight-line basis over approximately 20
years. Amortization expense for the years ended December 31, 2001 and 2000, the
two months ended December 31, 1999 and the year ended October 31, 1999, was
approximately $935,000, $635,000, $122,000 and $608,000, respectively.
On June 29, 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets. These statements
are expected to result in significant modifications relative to the Company's
accounting for goodwill and other intangible assets. SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 must be accounted for
under the purchase method of accounting. SFAS No. 141 was effective upon
issuance. SFAS No. 142 modifies the accounting for all purchased goodwill and
intangible assets. SFAS No. 142 includes requirements to test goodwill and
indefinite lived intangible assets for impairment rather than amortize them.
SFAS No. 142 will be effective for fiscal years beginning after December 31,
2001 and early adoption is not permitted except for business combinations
entered into after June 30, 2001. Upon adoption of SFAS 142, on January 1, 2002,
the Company will no longer amortize goodwill, thereby eliminating annual
amortization expense of approximately $1.0 million.
7. Income Taxes
The Company accounts for income taxes under the provisions of SFAS No.
109 - "Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities as measured by the enacted tax rates that will be in
effect when these differences reverse. Deferred tax expense is the result of
changes in deferred tax assets and liabilities. The principal types of
differences between assets and liabilities for financial statement and tax
return purposes are allowance for loan losses, deferred loan fees, deferred
compensation and securities available for sale.
8. Net Income Per Share
The Company follows the provisions of SFAS No. 128, "Earnings Per
Share," which eliminated primary and fully dilutive earnings per share and
requires presentation of basic and dilutive earnings per share in conjunction
with the disclosure of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock.
9. Employee Benefit Plans
The Company follows SFAS No. 123 "Accounting for Stock Based
Compensation," This statement introduced a method of accounting for employee
stock-based compensation plans based upon the fair value of the awards on the
date they are granted. Under this fair value based method, public companies
estimate the fair value of stock options using a pricing model, such as the
Black-Scholes model, which requires inputs such as the expected volatility of
the stock price and an estimate of the dividend yield over the option's expected
life. The FASB, however, does not require the use of this method. Entities that
continue to account for stock option plans under the existing method (APB No.
25) are required to disclose proforma net income and earnings per share, as if
the fair value method had been used.
47
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note B - (continued)
10. Cash Equivalents
The Company considers all highly liquid debt investments purchased with
an original maturity of three months or less, and amounts due from brokers to be
cash equivalents.
11. Restrictions on Cash and Due From Banks
The Bank is required to maintain reserves against customer demand
deposits by keeping cash on hand or balances with the Federal Reserve Bank in a
non-interest bearing account. The amounts of those reserve and cash balances was
approximately $900,000, $1,032,000 and $1,169,000 at December 31, 2001, 2000 and
1999, respectively.
12. Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income." This standard establishes standards for reporting
omprehensive income, which includes net income as well as certain other items,
which results in a change to equity during the period. (In thousands.)
Year Ended
December 31, 2001
---------------------------------------------------
Tax
Before tax (expense) Net of tax
amount benefit Amount
-------------- ------------- ---------------
Unrealized gains (losses) on
investment securities:
Unrealized holding (losses)
arising during period $ 357 $ (171) $ 186
Less reclassification
adjustment for gains
realized in net income 637 (255) 382
------ ------ ------
Other comprehensive
loss, net $ (280) $ 84 $ (196)
====== ====== ======
Year Ended
December 31, 2000
---------------------------------------------------
Tax
Before tax (expense) Net of tax
amount benefit Amount
-------------- ------------- ---------------
Unrealized gains (losses) on
investment securities:
Unrealized holding gains
arising during period $ 4,898 $ (1,435) $ 3,463
Less reclassification
adjustment for gains
realized in net income 13,288 (5,315) 7,973
-------- -------- --------
Other comprehensive
loss, net $ (8,390) $ 3,880 $ (4,510)
========= ======== ========
48
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note B - (continued)
For The Two Months Ended
December 31, 1999
---------------------------------------------------
Tax
Before tax (expense) Net of tax
amount benefit Amount
-------------- ------------- ---------------
Unrealized gains on
investment securities:
Unrealized holding gains
arising during period $ 6,986 $ (2,640) $ 4,346
Less reclassification
adjustment for gains
realized in net income 3,109 (1,244) 1,865
------- -------- -------
Other comprehensive
income, net $ 3,877 $ (1,396) $ 2,481
======= ======== =======
Year Ended
October 31, 1999
---------------------------------------------------
Tax
Before tax (expense) Net of tax
amount benefit Amount
-------------- ------------- ---------------
Unrealized gains on
investment securities:
Unrealized holding gains
arising during period $ 10,860 $ (4,344) $ 6,516
Less reclassification
adjustment for gains
realized in net income 7,622 (3,049) 4,573
-------- -------- -------
Other comprehensive
income, net $ 3,238 $ (1,295) $ 1,943
======== ======== =======
13. Reclassifications
Certain amounts in the December 31, 2000 and 1999 financial statements
have been reclassified to conform to the current period's presentation.
NOTE C - INVESTMENT SECURITIES
The following is a summary of held to maturity investment securities:
December 31, 2001
---------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
------------------ ------------------ ------------------- ------------------
(In thousands)
Investment securities
U.S. Government
Agencies $ 1,613 $ 8 $ (23) $ 1,598
------- ------- ------- --------
Totals $ 1,613 $ 8 $ (23) $ 1,598
======= ======= ======= ========
49
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note C - (continued)
December 31, 2000
------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
----------------- ----------------- ----------------- -----------------
(In thousands)
Investment securities
U.S. Government
Agencies $ 296 $ -- $ (2) $ 294
Corporate notes 20,455 -- (47) 20,408
------- ------- ------- --------
Totals $20,751 $ -- $ (49) $ 20,702
======= ======= ======= ========
The following is a summary of available-for-sale investment securities:
December 31, 2001
------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
----------------- ----------------- ----------------- -----------------
(In thousands)
Investment securities
U.S. Treasury and Notes $ 30,012 $ 34 $ (8) $ 30,038
U.S. Government Agencies 170,610 589 (1,043) 170,156
Mortgage-backed securities 2,493 6 -- 2,499
Corporate notes 751 1 (113) 639
Marketable equity
securities and other 37,547 87 -- 37,634
-------- ------- ------- --------
Totals $241,413 $ 717 $(1,164) $240,966
======== ======= ======= ========
December 31, 2000
------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
----------------- ----------------- ----------------- -----------------
(In thousands)
Investment securities
U.S. Treasury and U.S.
Government Agencies $ 86,064 $ 76 $ (188) $ 85,952
Mortgage-backed securities 4,208 -- (9) 4,199
Corporate notes 1,654 9 (350) 1,313
Marketable equity
securities and other 4,813 150 (118) 4,845
-------- ------- ------- --------
Totals $ 96,739 $ 235 $ (665) $ 96,309
======== ======= ======= ========
50
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note C - (continued)
The amortized cost and fair value of investment securities available
for sale and held to maturity, by contractual maturity, at December 31, 2001 are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
December 31, 2001
---------------------------------------------------------------------------------
Available for Sale Held to Maturity
------------------------------------------ -------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------- -------------------- ------------------ ------------------
(In thousands)
Due in one year or less $ 50 $ 50 $ 136 $ 138
Due after one through
five years 103,511 103,796 -- --
Due after five through
ten years 55,179 54,997 190 190
Due after ten years 48,492 47,939 1,287 1,270
Marketable equity
securities and other 34,181 34,185 -- --
-------- -------- -------- --------
Totals $241,413 $240,966 $ 1,613 $ 1,598
======== ======== ======== ========
Proceeds from the sales of investment securities and gross gains
realized on such sales for the years ended December 31, 2001 and 2000 and for
the two month period ending December 31, 1999 were $637,000, $13.29 million and
$3.11 million, respectively. Losses were not material for these periods.
As of December 31, 2001 and 2000, investment securities with a book
value of approximately $56,750,000 and $23,428,000, respectively, were pledged
to secure public deposits and for other purposes as provided by law. As of
December 31, 2001 and 2000, the Company did not have any investment securities
of any one issuer where the carrying value exceeded 10% of shareholders' equity.
Common Stock of Executone Information Systems, Inc.
In 1995, Unistar Gaming Corp. ("UGC") acquired Unistar Entertainment,
Inc., a privately held Colorado corporation ("Unistar"). As a result of the
acquisition, approximately 27.5% of the outstanding Common Stock of UGC (the
"UGC Common Stock") was owned by the Company, and approximately 72.5% of the UGC
Common Stock was owned by the former stockholders of Unistar. Unistar held an
exclusive contract with the Coeur d'Alene Indian Tribe in Idaho to develop and
manage what would be the first national lottery in the United States. The shares
of UGC Common Stock which were owned by the Company were purchased for
approximately $5 million comprised primarily of cash, portfolio securities and a
note payable. In December 1995, the Company increased its stake in UGC to
approximately 31.5% by purchasing an additional 400,000 shares of UGC Common
Stock from a UGC stockholder for a cash purchase price of $.50 per share.
In December 1995, the Company sold its minority equity interest in
Unistar Gaming Corp. ("UGC") to Executone, a Virginia corporation whose common
stock trades on the NASDAQ National Market System. The Company's investment in
UGC was approximately $5.2 million.
In exchange for its interest in UGC, the Company received shares of
Executone Common Stock, all of which were sold in open market transactions
during 1998, and shares of Executone Series A and Series B Preferred Stock (the
"Executone Preferred Stock"). In 1997, the Company fully reserved the carrying
value, approximately $2.1 million, of its shares of Executone Preferred Stock
and recorded a deferred tax asset of $925,000.
51
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note C - (continued)
In March 1999, Executone exercised its right to redeem and convert the
Executone Preferred Stock into Executone Common Stock and on April 6, 1999, in
exchange for its shares of Executone Preferred Stock, the Company received
4,193,204 shares of Executone Common Stock with a market value of approximately
$17.7 million.
At December 31, 2001, 2000 and 1999, the Company owned 130,000 shares,
130,000 shares and 1,792,106 shares, respectively, of Executone Common Stock
which have been classified as available-for-sale securities. At December 31,
2001, 2000 and 1999, the unrealized gain of approximately $2,200, $39,000, $5.8
million, net of deferred taxes of approximately $1,500, $26,000 and $3.9
million, respectively, have been recorded as a component of other accumulated
comprehensive income.
NOTE D - LOANS
Major classifications of loans are as follows:
December 31, December 31,
2001 2000
------------ ------------
(In thousands)
Commercial and professional loans $ 19,130 $ 9,419
Secured by real estate
1 - 4 family 165,195 25,677
Multi family 11,186 4,765
Non-residential 51,893 34,968
Consumer 4,689 229
Other 140 565
-------- --------
252,233 75,623
Allowance for loan losses (2,030) (1,108)
-------- --------
$250,203 $ 74,515
======== ========
Changes in the allowance for loan losses are as follows:
For The Year Ended
---------------------------------
For The Two For The Year
Months Ended Ended
December 31, December 31, December 31, October 31,
2001 2000 1999 1999
------------ ------------ ------------- -------------
(In thousands)
Balance at beginning
of year $1,108 $ 923 $905 $ --
Provision charged to
operations 287 55 10 45
Loans charged off 97 -- -- --
Recoveries 41 130 8 69
Acquisition of GSB
Financial Corp 691 -- -- 791
------ ------ ---- -----
Balance at end of year $2,030 $1,108 $923 $905
====== ====== ==== ====
52
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note D - (continued)
The Company had $9,000 and $0 non accrual loans as of December 31, 2001
and 2000, respectively. The Company did not have any impaired loans as of
December 31, 2001 and 2000. The Company had approximately $58,000 and $0 of
loans past due more than 90 days and still accruing interest as of December 31,
2001 and 2000, respectively. The Bank has entered into lending transactions in
the ordinary course of business with directors, executive officers, principal
stockholders and affiliates of such persons on the same terms as those
prevailing for comparable transactions with other borrowers. At December 31,
2001, loans to these related parties amounted to $9.6 million, were current as
to principal and interest payments, and do not involve more than normal risk of
collectibility. An analysis of activity in loans to related parties at December
31, 2001, resulted in new loans of $1.3 million and repayments of approximately
$84,000.
NOTE E - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as
follows:
Estimated December 31, December 31,
useful lives 2001 2000
------------------ --------------------- ---------------------
(In thousands)
Land Indefinite $ 1,817 $ --
Buildings 39 years 838 --
Furniture and equipment 3 to 10 years 1,594 969
Leasehold improvements 2 to 10 years 585 316
Construction in progress 3,765 --
------- ------
8,599 1,285
Accumulated depreciation
and amortization (1,153) (904)
------- ------
Total $ 7,446 $ 359
======= ======
Depreciation expense was approximately $249,000 and $104,000 for the
years ended December 31, 2001 and 2000, respectively, $22,000 for the two months
ended December 31, 1999 and $105,000 for the year ended October 31, 1999.
NOTE F - DEPOSITS
The aggregate amount of jumbo certificates of deposits greater than
$100,000 were $68,881,000 and $55,319,000 as of December 31, 2001 and 2000,
respectively.
The scheduled maturities of all certificates of deposit are as follows:
December 31, 2001
-----------------
(In thousands)
2002 $178,262
2003 21,397
2004 214
2005 78
--------
$199,951
========
53
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE G - BORROWINGS
Short-Term Borrowings Securities sold under agreements to repurchase
generally mature within 30 days from the date of the transactions. Short-term
borrowings consist of various borrowings which generally have maturities of less
than one year. The details of these categories are presented below:
Year Ended December 31,
-----------------------------
2001 2000
-------- ---------
(Dollars in Thousands)
Securities sold under repurchase
agreements and federal funds purchased
Balance at year-end $53,756 $23,127
Average during the year $13,372 $12,367
Maximum month-end balance $53,756 $24,495
Weighted average rate during the year 3.62% 5.85%
Rate at December 31 1.67% 5.75%
Long-Term Borrowings At December 31, 2001, advances from the Federal
Home Loan Bank ("FHLB") totaling $42,278,000 will mature within one to ten years
and are reported as long-term borrowings. The advances are collateralized by
FHLB stock and certain first mortgage loans. The advances had a weighted average
rate of 4.59%. Unused lines of credit at the FHLB were $47,764,800 and
$18,457,300 at December 31, 2001 and 2000, respectively.
Outstanding borrowings mature as follows (in thousands):
Year Amount
------ --------
2002 $15,000
2003 500
2004 --
2005 1,000
2006 9,778
Thereafter 16,000
-------
Total $42,278
=======
NOTE H - EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS
No. 128 is as follows:
Year Ended December 31, 2001
(in thousands, except per share data)
-------------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ----------
Basic earnings per share
Net income available to
common stockholders $3,299 2,326 $1.41
Effect of dilutive securities
Options -- 10 --
------ ----- -----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $3,299 2,336 $1.41
====== ===== =====
54
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note H - (continued)
Options to purchase 119,375 shares of common stock for $30.00 to $38.00
per share were outstanding during the year ended December 31, 2001. 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.
Year Ended December 31, 2000
(in thousands, except per share data)
---------------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ----------
Basic earnings per share
Net income available to
common stockholders $12,066 2,095 $5.76
Effect of dilutive securities
Options -- 1 --
------- ----- ------
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $12,066 2,094 $5.76
======= ===== ======
Options to purchase 48,875 shares of common stock for $31.75 to $38.00
per share were outstanding during the year ended December 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.
For The Two Months Ended December 31, 1999
(in thousands, except per share data)
---------------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ----------
Basic earnings per share
Net income available to
common stockholders $2,282 2,127 $1.07
Effect of dilutive securities
Options -- 132 (.06)
------- ------ -----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $2,282 2,259 $1.01
====== ===== =====
Options to purchase 44,875 shares of common stock for $38.00 per share
were outstanding during the two months ended December 31, 1999. 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.
55
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note H - (continued)
Year Ended October 31, 1999
(in thousands, except per share data)
--------------------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic earnings per share
Net income available to
common stockholders $6,540 2,126 $3.08
Effect of dilutive securities
Options -- 135 (.19)
------ ----- -----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $6,540 2,261 $2.89
====== ===== =====
NOTE I - INCOME TAXES
The components of income tax expense are as follows:
Year Ended Year Ended Two Months Ended Year Ended
December 31, December 31, December 31, October 31,
------------ ------------ -------------- -----------
2001 2000 1999 1999
---- ---- ---- ----
Current $1,702,000 $ 8,390,000 $ 46,000 $2,689,000
Deferred Taxes
(Benefit) 426,000 (1,522,000) 1,402,000 1,402,000
---------- ----------- ---------- ----------
$2,128,000 $ 6,868,000 $1,448,000 $4,091,000
========== =========== ========== ==========
A reconciliation of the provision for income taxes for the years ended
December 31, 2001 and 2000, for the two months ended December 31, 1999 and for
the year ended October 31, 1999 and the amount computed by applying the
statutory Federal income tax rate to income from continuing operations follows:
Year Ended Year Ended Two Months Ended Year Ended
December 31, December 31, December 31, October 31,
------------ ------------ -------------- -----------
2001 2000 1999 1999
---- ---- ---- ----
Computed expected
provision for
income taxes $1,845,000 $6,438,500 $1,306,000 $3,721,000
Nondeductible expenses,
including goodwill 217,000 216,000 49,000 243,000
Other 66,000 214,000 93,000 127,000
---------- ---------- ---------- ----------
Actual provision
for income taxes $2,128,000 $6,868,000 $1,448,000 $4,091,000
========== ========== ========== ==========
56
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note I - (continued)
The tax effect of the principal temporary differences at December 31,
2001, 2000 and 1999 are as follows:
December 31,
----------------------------------------------------------------
2001 2000 1999
---- ---- ----
Net deferred tax assets
Net operating losses $ 107,000 $ 515,000 $ 548,000
Credit carryforwards -- -- 386,000
Loan loss provision 973,000 620,000 427,000
Depreciation 33,000 66,000 --
Other 120,000 (146,000) (1,828,000)
Unrealized loss (gain)
on investment securities 132,000 168,000 (3,535,000)
---------- ---------- -----------
Net deferred tax asset
(liability), included in
other assets (liabilities) $1,365,000 $1,223,000 $(4,002,000)
========== ========== ===========
As a result of the acquisition of GSB Financial, the Company computed a
net deferred tax asset of approximately $556,000 which included a deferred tax
liability on unrealized holding gains of $48,000 during 2001.
As of the acquisition date of The Berkshire Bank in January 1999,
deferred tax assets of $2,162,000 were recorded, less a $1,812,000 valuation
allowance. It was determined that the deferred tax asset was more likely to be
realized than not. Accordingly, at October 31, 1999, the deferred tax valuation
account and goodwill was reduced by $1,812,000.
NOTE J - ESTIMATED TAX LIABILITIES
The Company was 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 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. 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, in 2000, the
Company reversed approximately $808,000 of reserves deemed no longer necessary.
NOTE K - STOCK PLANS
In March 1999, the stockholder's of the Company approved the 1999 Stock
Incentive Plan (the "1999 Stock Incentive Plan"). The 1999 Stock Incentive Plan
replaces the 1991 Stock Option Plan For Non-Employee Directors and the 1991
Stock Incentive Plan For Employees (collectively the "1991 Plans"). No further
awards may be granted under the 1991 Plans.
The 1999 Stock Incentive Plan permits the granting of awards in the
form of nonqualified stock options, incentive stock options, restricted stock,
deferred stock, and other stock-based incentives. Up to 200,000 shares of common
stock of the Company may be issued pursuant to the 1999 Stock Incentive Plan.
Officers, directors and other key employees of the Company or any subsidiary are
eligible to receive awards under the 1999 Stock Incentive Plan. At December 31,
2001 and 2000, 81,775 options and 5,000 options, respectively, have been granted
under the 1999 Stock Incentive Plan. As of December 31, 2001, 70,721 options
were outstanding as a result of the GSB acquisition.
57
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note K - (continued)
SFAS No. 123 "Accounting for Stock Based Compensation." This statement
introduced a method of accounting for employee stock-based compensation plans
based upon the fair value of the awards on the date they are granted. Under this
fair value based method, public companies estimate the fair value of stock
options using a pricing model, such as the Black-Scholes model, which requires
inputs such as the expected volatility of the stock price and an estimate of the
dividend yield over the option's expected life. The FASB, however, does not
require the use of this method. Entities that continue to account for stock
option plans under the existing method (APB No. 25) are required to disclose
proforma net income and earnings per share, as if the fair value method had been
used. Certain additional disclosures are also required, as follows:
A summary of the activity with respect to the 1999 Stock Incentive Plan
and the 1991 Plans is as follows:
December 31,
------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 50,375 $36.67 212,375 $13.83 212,375 $13.83
Granted 152,496 $27.68 5,000 $31.75 --
Cancelled (7,443) $29.84 (151,000) $7.21 --
Exercised (3,832) $23.59 (16,000) $10.08 --
-------- -------- --------
Outstanding at
end of year 191,596 $29.74 50,375 $36.67 212,375 $13.83
======== ======== ========
Exercisable at
end of year 84,799 45,375 $37.21 167,500 $ 7.36
======== ======== ========
Weighted average
fair value of
options granted
during the year $ 9.54 $11.14 --
====== ====== ======
The following table summarizes information about options outstanding at
December 31, 2001:
Options outstanding Options exercisable
---------------------------------------------------------------------------- ------------------------------
Number Weighted Number
outstanding average Weighted outstanding Weighted
at remaining average at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 2001 life (years) price 2001 price
--------------- ------ ------------ ------- ------ ------
$14.25 1,500 0.20 $14.25 1,500 $14.25
17.94 - 26.34 60,028 6.59 24.80 31,509 25.05
27.79 - 38.00 130,068 5.02 32.37 51,790 36.13
-------- --------
191,596 84,799
======== ========
58
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note K - (continued)
The Company's stock option plan has been accounted for under APB
Opinion No. 25, and related interpretations. No compensation cost has been
recognized for the plan. Had compensation cost for the plan been determined
based upon fair value of the options at the grant dates consistent with the
requirements of SFAS No. 123, the Company's net income and earnings per share
would have been the pro forma amounts indicated below).
For The Two For The
For The Year Ended Months Ended Year Ended
December 31, December 31, October 31,
------------------------ ---------------- ---------------
2001 2000 1999 1999
------ ------ ------ -----
(In thousands, except
per share amounts)
Net income As Reported: $3,299 $12,066 $2,343 $6,540
Pro Forma: 2,983 11,448 2,333 6,480
Basic earnings As Reported: 1.41 5.76 1.10 3.08
per share
Pro Forma: 1.28 5.46 1.10 3.04
Diluted earnings As Reported: 1.41 5.76 1.04 2.89
per share
Pro Forma: 1.28 5.46 1.04 2.87
The fair value of each option is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants as of December 31, 2001, 2000 and October 31, 1999,
expected volatility of 22%, 25% and 40% respectively, risk-free interest of
5.34%, 6.37% and 6.14% respectively, and expected lives of 5 years for all
years.
NOTE L - EMPLOYEE BENEFIT PLANS
1. Retirement Income Plan
In April 1985, the Company adopted its Retirement Income Plan (the
"Retirement Plan"), a noncontributory plan covering substantially all full-time,
non-union United States employees of the Company. Benefits were based upon a
combination of employee compensation and years of service. The Company paid the
entire cost of the plan for its employees and funded such costs as they accrued.
The Company's funding policy was to make annual contributions within minimum and
maximum levels required by applicable regulations. The Company's customary
contributions were designed to fund normal cost on a current basis and fund over
30 years the estimated prior service cost of benefit improvements (15 years of
annual gains and losses). The projected unit cost method was used to determine
the annual cost. Plan assets consist principally of equity and fixed income
mutual funds.
Benefit accruals were frozen as of September 15, 1988, resulting in a
plan curtailment. As a result of such curtailment, the Company did not accrue
benefits for future services; however, the Company did continue to contribute as
necessary for any unfunded liabilities. In 2000, the Company reinstated the
Retirement Plan to cover substantially all full-time, non-union United States
employees of the Company.
Assumptions used in the accounting were:
December 31,
----------------------
2001 2000
------- ------
Discount rates-liability 7.50% 7.50%
Long-term rate of return-assets 8.50% 8.50%
59
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note L - (continued)
A summary of the components of net periodic pension cost for the years
ended December 31, 2001 and 2000, two months ended December 31, 1999 and year
ended October 31, 1999 is as follows:
December 31, October 31,
------------------------------------------------------ --------------------
2001 2000 1999 1999
----------------- ----------------- ------------------ -------------------
Service cost-benefits earned
during the period $ 68,214 $ 50,075 $ -- $ --
Interest cost on projected
benefit obligation 103,364 98,525 14,284 85,706
Expected return on plan assets (177,560) (184,740) (20,784) (124,703)
Net amortization and deferral 10,913 (5,121) 478 2,870
--------- --------- -------- ---------
Net pension cost/(income) of
defined benefit plan $ 4,931 $ (41,261) $ (6,022) $ (36,127)
========= ========= ======== =========
The following table sets forth the funded status and amounts recognized
in the Company's balance sheet for its defined benefit plan at December 31, 2001
and 2000:
December 31,
-------------------------------------------------
2001 2000
------------------------ ------------------------
Actuarial present value of vested
accumulated benefit obligations $ 1,413,923 $ 1,339,103
Actuarial present value of
accumulated benefit obligations 1,416,491 1,339,103
----------- -----------
Projected benefit obligations $(1,496,907) $(1,413,542)
Fair value of plan assets 1,809,700 2,141,792
----------- -----------
Excess of projected benefit
obligation over fair value
of plan assets 312,793 728,250
Unrecognized prior service cost 194,354 212,724
Unrecognized net loss/(gain) 102,293 (326,603)
Adjustment required to recognize
minimum liability 0 0
----------- -----------
Prepaid pension cost, included
in other assets $ 609,440 $ 614,371
=========== ===========
60
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note L - (continued)
2. Former Goshen Bank Pension Plan
The Bank, as successor to Goshen Bank, had a non-contributory defined
benefit pension plan covering substantially all of its employees. In the fourth
quarter of 2000, the Goshen Bank froze its defined benefit pension plan and
provided that there would be no further accruals under the plan.
December 31, 2001
---------------------------
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of year $1,116
Service cost --
Interest cost 85
Actual loss 81
Benefits paid (89)
------
Benefits obligations at end of year 1,193
Change in plan assets
Fair value of plan assets
at beginning of year 1,518
Actual return on plan assets (127)
Employer contribution 7
Benefits paid (89)
------
Fair value of plan assets
at end of year 1,309
Funded status 116
Unrecognized net actuarial loss 80
------
Prepaid benefit cost (included in
other assets) $ 196
======
Net pension cost included the following components:
Year Ended
December 31, 2001
---------------------------
(In thousands)
Service cost $ --
Interest cost on projected benefit
obligation 85
Expected return on plan assets (99)
Purchase accounting change 61
----
Net periodic benefit cost $ 47
====
The assumed discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 8.00% in 2001.
61
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note L - (continued)
3. Postretirement Welfare Plan
In addition to pension benefits, the Bank, as successor to Goshen Bank
provides certain health care and life insurance benefits for retired employees
and their spouses. The postretirement health care and life insurance benefits
plan was terminated for persons retiring after December 31, 1998. Eligible
employees retired on or before that date will have benefits paid through the
plan under the agreed upon terms existing at the employee's retirment date.
December 31, 2001
---------------------------
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 667
Service cost --
Interest cost 51
Actual gain 48
Benefits paid (54)
-----
Benefits obligation at end of year 711
-----
Change in plan assets
Fair value of plan assets
at beginning of year --
Actual return on plan assets --
Employer contribution 54
Benefits paid (54)
-----
Fair value of plan assets
at end of year --
-----
(711)
Funded status
Unrecognized net actuarial gain 4
-----
Accrued benefit cost (included in
other liabilities) $ 708
=====
Net benefit cost included the following components:
Year Ended
December 31, 2001
---------------------------
(In thousands)
Service cost $--
Interest cost on projected benefit
obligation 51
Actual return on plan assets --
---
Net periodic benefit cost $51
===
The assumed discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 8.00% in 2001.
62
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note L - (continued)
4. 401(k) Plans
The Bank has a 401(k) plan in which employees can contribute up to 15%
of thei salary. The Bank also matches 50% of the employee contribution up to a
maximum of 3% of the employee's salary.
Goshen Bank had a 401(k) profit sharing plan which covered
substantially all employees of the Goshen Bank prior to the acquisition by
Berkshire. Each employee could contribute up to 10% of their salary. Goshen Bank
matched 100% of the employee contribution up to a maximum of 3% of the
employee's salary. This plan was terminated and merged into the Bank's plan
effective October 2001.
The expense was $57,000 for both the Bank and Goshen Bank plans for the
year ended December 31, 2001 and $29,000 and $21,000 for the Bank plan for the
years ended December 31, 2000 and 1999, respectively.
5. Deferred Compensation Arrangements
GSB Financial and Goshen Bank established deferred compensation
arrangements for certain directors and executives. These deferred compensation
arrangements were terminated as a result of the acquisition. At December 31,
2001, the balance accumulated under these arrangements was approximately
$242,000 and will be paid out when the individual (i) ceases to be a director
and/or executive of the Company; (ii) attains the age of 75; or (iii) specifies
a particular date.
NOTE M - COMMITMENTS AND CONTINGENCIES
1. Leases and Other Commitments
The Company leases certain of its operating facilities under
non-cancelable operating leases expiring in 2002 through 2006. The leases
require payment by the Company of the real estate taxes and insurance on the
leased properties. Approximate future minimum annual rental payments are as
follows:
Year Ending (In thousands)
December 31,
-----------------
2002 $ 610,000
2003 612,000
2004 625,000
2005 496,000
2006 92,000
----------
$2,435,000
==========
Rental expense was approximately $717,000 and $335,000 for the fiscal
years ended December 31, 2001 and 2000, respectively, $70,000 for the two months
ended December 31, 1999 and $278,000 for the year ended October 31, 1999.
Included in rental expense was approximately $18,000 for the fiscal years ended
December 31, 2001 and 2000 and $3,000 for the two months ended December 31,
1999, which was paid to a company affiliated with a director of the Company.
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For the
Company, as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments as defined in SFAS No. 107.
However, many such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange transaction.
Also, it is the Company's general practice and intent to hold its financial
instruments to maturity and not to engage in trading or sales activities, except
for certain loans. Therefore, the Company had to use significant estimations and
present value calculations to prepare this disclosure.
63
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note N - (continued)
Changes in the assumptions or methodologies used to estimate fair
values may materially affect the estimated amounts. Also, management is
concerned that there may not be reasonable comparability between institutions
due to the wide range of permitted assumptions and methodologies in the absence
of active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Estimated fair values have been determined by the Company using the
best available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and recorded book balances at December 31, 2001 and 2000 are outlined
below.
For cash and cash equivalents, the recorded book values of $10.38
million and $36.37 million at December 31, 2001 and 2000, respectively,
approximate fair values. The estimated fair values of investment securities are
based on quoted market prices, if available. Estimated fair values are based on
quoted market prices of comparable instruments if quoted market prices are not
available.
December 31,
----------------------------------------------------------------------
2001 2000
-------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------------- --------------- ---------------- ----------------
(In thousands)
Investment securities $242,579 $242,564 $117,060 $117,011
Loans, net of unearned income 252,233 289,482 75,623 75,623
Time Deposits 199,951 200,237 55,319 55,319
The net loan portfolio at December 31, 2001 and 2000 has been valued
using a present value discounted cash flow where market prices were not
available. The discount rate used in these calculations is the estimated current
market rate adjusted for credit risk. The carrying value of accrued interest
approximates fair value.
The estimated fair values of demand deposits (i.e. interest (checking)
and non-interest bearing demand accounts, savings and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e. their carrying amounts). The carrying amount of accrued
interest payable approximates its fair value.
The fair values of the securities sold under agreements to repurchase
and other long-term borrowings totaling $96.03 million and $24.63 million are
estimated to approximate their recorded book balances at December 31, 2001 and
2000, respectively.
The fair value of commitments to extend credit is estimated based upon
the amount of unamortized deferred loan commitment fees. The fair value of
letters of credit is based upon the amount of unearned fees plus the estimated
cost to terminate letters of credit. Fair values of unrecognized financial
instruments, including commitments to extend credit, and the fair value of
letters of credit are considered immaterial.
The fair value of interest rate caps are based upon the estimated
amount the Company would receive or pay to terminate the contracts or
agreements, taking into account current interest rates and, when appropriate,
the current creditworthiness of the counterparties. The aggregate fair value for
the interest rate caps are approximately $22,000 and $113,000 at December 31,
2001 and 2000, respectively.
64
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE O - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Bank is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of their customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they become payable. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract or notional amounts
of those instruments reflect the extent of involvement the Banks have in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual or notional amount
of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as they do for on-balance-sheet
instruments.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk. The approximate
contract amounts are as follows:
December 31,
---------------------------
2001 2000
-------- --------
(In thousands)
Commitments to extend credit $ 7,718 $10,447
Standby letters of credit and financial
guarantees written 529 2,712
------- -------
$ 8,247 $13,159
======= =======
Interest rate caps-notional amount $20,000 $20,000
======= =======
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds residential or commercial real estate, accounts receivable,
inventory and equipment as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held for those
commitments at December 31, 2001 varies up to 100%.
The Bank grants loans primarily to customers in New York and its
immediately adjacent suburban. Although the Bank has a diversified loan
portfolio, a large portion of their loans are secured by commercial or
residential real property. The Bank does not generally engage in non-recourse
lending and typically will require the principals of any commercial borrower to
obligate themselves personally on the loan. Although the Bank has a diversified
loan portfolios, a substantial portion of their debtors' ability to honor their
contracts is dependent upon the economic sector. Commercial and standby letters
of credit were granted primarily to commercial borrowers.
65
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note O - (continued)
The Bank has entered into interest rate cap agreements in order to
hedge its exposure to interest rate fluctuations. The unamortized cost of these
agreements is included in the balance sheet in other assets.
NOTE P - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possible additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes that, as of December 31, 2001, the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 2001, the Bank met all regulatory requirements for
classification as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the following table. There are no conditions or events since that date
that management believes have changed the institution's category.
The following table sets forth the actual and required regulatory
capital amounts and ratios of, the Company and the Bank as of December 31, 2001
and 2000 (dollars in thousands):
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2001
Total Capital (to Risk-Weighted Assets)
Company 79,867 20.5% 20,097 >=8.0% -- N/A
Bank 48,110 20.4% 18,84 >=8.0% 23,551 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 77,837 31.0% 10,048 >=4.0% -- N/A
Bank 46,080 19.6% 9,421 >=4.0% 14,130 >=6.0%
Tier I Capital (to Average Assets)
Company 77,837 20.5% 15,194 >=4.0% -- N/A
Bank 46,080 9.6% 19,190 >=4.0% 23,988 >=5.0%
66
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note P - (continued)
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2000
Total Capital (to Risk-Weighted Assets)
Company $68,848 53.4% $10,302 >=8.0% $ -- N/A
Bank 16,249 13.8% 9,397 >=8.0% 11,746 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 67,740 52.6% 5,155 >=4.0% -- N/A
Bank 15,141 12.9% 4,699 >=4.0% 7,048 >=6.0%
Tier I Capital (to Average Assets)
Company 67,740 35.0% 7,751 >=4.0% -- N/A
Bank 15,141 8.5% 7,151 >=4.0% 8,938 >=5.0%
NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The condensed financial information for Berkshire Bancorp Inc. (parent
company only) is as follows:
CONDENSED BALANCE SHEETS
(In Thousands)
December 31,
-----------------------------
2001 2000
-------- --------
ASSETS
Cash $ 16,449 $ 39,797
Equity investment in subsidiaries 64,225 27,849
Investment in securities available for sale 3,993 3,995
Loans 6,478 7,943
Accrued interest receivable 37 66
Premises and equipment 3,764 --
Other assets 1,371 935
-------- --------
Total assets $ 96,317 $ 80,585
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 325 $ 1,478
Stockholders' equity
Common stock 256 256
Additional paid-in capital 89,914 78,549
Retained earnings 11,053 8,352
Accumulated other comprehensive (loss)
income, net (281) (85)
Less: Common stock in treasury, at cost (4,950) (7,965)
-------- --------
Total stockholders' equity 95,992 79,107
-------- --------
$ 96,317 $ 80,585
======== ========
67
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE Q - (continued)
CONDENSED STATEMENTS OF INCOME
(In Thousands)
For The Year For The Year For The Two For The Year
Ended Ended Months Ended Ended
December 31, December 31, December 31, October 31,
------------ ------------ ------------ -----------
2001 2000 1999 1999
------------ ------------ ------------ -----------
INCOME
Interest income from $ 836 $ 1,750 $ 287 $ 1,153
the Bank
Interest income 1,079 2,011 190 1,138
Gain on sales of
investment securities 31 13,288 3,110 7,634
Other income (loss) (92) 759 -- 130
------ ------- ------ --------
Total income 1,854 17,808 3,587 10,055
EXPENSES
Salaries and employee
benefits 217 111 25 143
Other expenses 661 648 35 440
------ ------- ------ -------
Total expenses 878 759 60 583
------ ------- ------ -------
Income before income
taxes and equity in
undistributed net
income of the Bank 976 17,049 3,527 10,472
Equity in undistributed
net income of the Bank 2,199 723 185 1,060
------ ------- ------ -------
Income before taxes 3,175 17,772 3,712 11,532
Provision (benefit) for
income taxes (124) 5,706 1,430 4,992
------ ------- ------ -------
Net income $3,299 $12,066 $2,282 $ 6,540
====== ======= ====== =======
68
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE Q - (continued)
CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
For The Year For The Year For The Two For The Year
Ended Ended Months Ended Ended
December 31, December 31, December 31, October 31,
------------ ------------ ------------ -----------
2001 2000 1999 1999
------------ ------------ ------------ -----------
Operating activities:
Net income $ 3,299 $ 12,066 $ 2,282 $ 6,540
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Gain on sales of investment securities (31) (13,288) (3,110) (7,643)
Equity in undistributed net income of
the Bank (2,199) (723) (185) (1,060)
(Increase) in deferred taxes -- -- -- (1,402)
Increase (decrease) in other
liabilities (1,153) (5,932) 2,328 6,583
(Increase) decrease in other assets 3,624 (445) (351) 920
-------- -------- -------- --------
Net cash provided by (used in)
operating activities 3,540 (8,322) 964 3,947
-------- -------- -------- --------
Investing activities:
Investment in subsidiaries and
affiliates -- (390) -- (25,216)
Cash paid for acquisition (20,222) -- -- --
Proceeds from sales of common stock -- 13,267 3,110 7,634
Investment securities available
for sale
Purchases -- -- (2,435) (17,178)
Sales 1,124 4,421 -- --
Net decrease in loans 1,465 1,927 -- --
Purchase of premises and equipment (3,764) -- -- --
-------- -------- -------- --------
Net cash provided by (used in)
investing activities (21,397) 19,290 675 (34,760)
-------- -------- -------- --------
Financing activities:
Proceeds from exercise of
common stock options 90 28 -- 9
Acquisition of treasury stock (4,983) (5,254) -- --
Dividends paid (598) (1,293) -- (680)
-------- -------- -------- --------
Net cash (used in) financing
activities (5,491) (6,519) -- (671)
-------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents (23,348) 4,384 1,639 (31,484)
Cash and cash equivalents at
beginning of year 39,797 35,413 33,774 65,258
-------- -------- -------- --------
Cash and cash equivalents at
end of year $ 16,449 $ 39,797 $ 35,413 $ 33,774
======== ======== ======== ========
Supplemental disclosures of cash
flow information:
Cash used to pay income taxes $ 1,385 $ 6,418 $ -- $ 2,602
69
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE R - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the
Company which, in the opinion of management, reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's results of operations. (In thousands, except per
share data).
Three Months Ended
---------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
2001
----
Interest income $ 3,728 $ 6,789 $ 7,186 $ 7,238
Interest expense 1,712 3,531 3,435 3,199
-------- -------- -------- --------
Net interest income 2,016 3,258 3,751 4,039
Provision for loan losses (10) (37) (115) (125)
Gain (loss) on sale of securities 3 480 12 142
Other operating income 165 258 174 189
Other operating expenses (1,267) (2,326) (2,464) (2,716)
-------- -------- -------- --------
Income before taxes 907 1,633 1,358 1,529
Provision (benefit) for taxes 501 705 714 208
-------- -------- -------- --------
Net income $ 406 $ 928 $ 644 $ 1,321
======== ======== ======== ========
Per share data
Net income per common share
Basic $ .21 $ .37 $ .26 $ .57
======== ======== ======== ========
Diluted $ .21 $ .37 $ .26 $ .57
======== ======== ======== ========
Three Months Ended
---------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
2000
----
Interest income $ 3,115 $ 3,536 $ 3,584 $ 3,784
Interest expense 1,027 1,206 1,374 1,577
-------- -------- -------- --------
Net interest income 2,088 2,330 2,210 2,207
Provision for loan losses (5) -- (10) (40)
Gain (loss) on sale of securities 13,079 -- 209 --
Other operating income 139 116 934 141
Other operating expenses (1,137) (1,456) (1,103) (768)
-------- -------- -------- --------
Income before taxes 14,164 990 2,240 1,540
Provision (benefit) for taxes 5,123 468 638 639
-------- -------- -------- --------
Net income $ 9,041 $ 522 $ 1,602 $ 901
======== ======== ======== ========
Per share data
Net income per common share
Basic $ 4.25 $ .24 $ .75 $ .52
======== ======== ======== ========
Diluted $ 4.25 $ .24 $ .75 $ .52
======== ======== ======== ========
70
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not Applicable.
71
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The following are the current directors and executive officers of the Company:
Name Age Position(s)
---- --- ----------------------------
Steven Rosenberg 53 President, Director
William L. Cohen 60 Director
Thomas V. Guarino 48 Director
Moses Krausz 61 President of The Berkshire Bank
David Lukens 52 Senior Vice President, Chief Financial Officer of
The Berkshire Bank
Moses Marx 66 Director
Randolph B. Stockwell 55 Director
Mr. Rosenberg has served as President and Chief Executive Officer of the
Company since March 1999 and as Vice President and Chief Financial Officer since
1990. He also serves as chief administrative officer of the Company. Mr.
Rosenberg was elected a director in May 1995. From September 1987 through April
1990, he served as President and Director of Scomel Industries, Inc., a company
engaged in international marketing and consulting. Mr. Rosenberg is a director
of The Cooper Companies, Inc. (a developer and manufacturer of healthcare
products).
Mr. Cohen was elected a director in July 1993. Mr. Cohen served as
President, Chief Executive Officer and Chairman of the Board of The Andover
Apparel Group, Inc., an apparel manufacturing company, positions he held for
more than twenty years.
Mr. Guarino was elected a director in March 2001. He served as a
director of Goshen Savings Bank from 1996, and chairman of the Board of
Directors of GSB Financial Corporation from April 1998, until the respective
mergers of those companies into The Berkshire Bank and the Company in March
2001. Mr. Guarino is the President and Senior Portfolio Manager of the Hudson
Valley Investment Advisors, Inc., an investment management and advisory company,
a position he has held since 1995. Prior to that, he had been, since 1988, a
Vice President of Fleet Investment Advisors, Inc. and was Vice President in
charge of investments of Norstar Bank of the Hudson Valley from 1981 to 1988.
Mr. Krausz has held the position of President of The Berkshire Bank
since March 1992 and Chief Executive Officer since November 1993. Prior to
joining The Berkshire Bank, Mr. Krausz was Managing Director of SFS Management
Co., L.P., a mortgage banker, from 1987 to 1992 and was President of UMB Bank
and Trust Company, a New York State chartered bank, from 1978 to 1987.
Mr. Lukens has held the position of Senior Vice President and Chief
Financial Officer of The Berkshire Bank since December 1999. Prior to joining
the Bank, Mr. Lukens was Senior Vice President and Chief Financial officer of
First Washington State Bank, a New Jersey commercial bank, from 1994 to 1999 and
was Vice President and Controller at the Philadelphia, PA branch of Bank Leumi
Le-Israel B.M., an international commercial bank, from 1978 to 1994.
Mr. Marx was elected a director in May 1995. Mr. Marx has been a
general partner in United Equities Company (a securities brokerage firm) since
1954 and a general partner in United Equities (Commodities) Company (a
commodities brokerage firm) since 1972. He is also President of Momar Corp.
(a private investment company). Mr. Marx is a director of The Cooper
Companies, Inc.
Mr. Stockwell was elected a director in July 1988. He has been private
investor for over ten years. Since April 1999, Mr. Stockwell has served as
President of Yachting Systems of America, LLC, a small start-up company. In
addition, he served in various capacities with the Community Bank, a commercial
bank, from September 1972 to January 1987.
There are no family relationships (whether by blood, marriage or
adoption) among any of the Company's current directors or executive officers.
72
ITEM 11. Executive Compensation
The following table shows the compensation paid in or with respect to
each of the last three fiscal years to the individual who served as the
Company's Chief Executive Officer for the fiscal ended December 31, 2001, and to
each of the other executive officers who were paid more than $100,000 during the
fiscal year ended December 31, 2001. Mr. Krausz' compensation prior to the
acquisition of The Berkshire Bank by the Company on January 4, 1999 is not
included. Mr. Rosenberg was the only officer of the Company during fiscal 1999.
Summary Compensation Table (1)
Annual Compensation
-----------------------------
Name and Principal Position All Other
--------------------------- Year Salary Bonus Compensation
---- ------ ----- ------------
Steven Rosenberg 2001 $152,500 $ -- $ --
President, Chief Executive 2000 $125,000 $ -- $ --
Officer and Chief Financial 1999 $125,000 $ -- $ --
Officer
Moses Krausz 2001 $330,750 $175,000 $ 9,300(2)
President and Chief Executive 2000 $310,000 $175,000 $ 8,665(2)
Officer of The Berkshire Bank
David Lukens 2001 $115,000 $ 24,000 $ 4,988(3)
Senior Vice President and 2000 $103,500 $ 18,000 $ 812(3)
Chief Financial Officer of
The Berkshire Bank
--------------------
(1) Does not include one employee of The Berkshire Bank, not deemed to be
an executive officer of the Company, who was paid $122,000 in fiscal
2000. Does not include the annual retirement credits of 5% of gross
wages under the Company's Retirement Income Plan.
(2) Consists of contributions by the Company to a 401(k) account of $5,250
and $5,250 respectively in 2001 and 2000, and income associated with
life insurance coverage in excess of $50,000.
(3) Consists of contributions by the Company to a 401(k) account of $4,170
in 2001, and income associated with life insurance coverage in excess
of $50,000 in 2001 and 2000.
Option Grants in Last Fiscal Year
On July 31, 2001, Messrs. Rosenberg, Krausz and Lukens were granted
options to purchase 10,000 shares, 20,000 shares and 5,000 shares, respectively,
of the Company's common stock at $30.00 per share. These options will be
exercisable on July 31, 2002 and expire on July 31, 2007.
Aggregated Option Exercises and Fiscal Year-End Option Values
The following table sets forth information concerning options exercised
during the fiscal year ended December 31, 2001, and the number of options owned
and the value of any in-the-money unexercised options as of December 31, 2001.
Number of
Unexercised
Shares Options at
Acquired Fiscal Year-End Value of Unexercised
on Value (#) In-the-Money Options at
Exercise Realized Exercisable Fiscal Year-End ($)
Name (#) ($) /Unexercisable Exercisable/Unexercisable
---- ----- ----- -------------- -------------------------
Steven Rosenberg -0- -0- 0 / 10,000 0 / 0
Moses Krausz -0- -0- 30,000 / 20,000 0 / 0
David Lukens -0- -0- 5,000 / 5,000 0 / 0
--------------------
Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year end market
value of the common stock. An Option is "in-the-money" if the fiscal year end
fair market value of the Common Stock exceeds the option exercise price.
73
Compensation of Directors
Each director who is not an employee of the Company receives monthly
fees of $1,000 for serving as a director of the Company and $1,000 for each day
during which he participates in a meeting of the Board and, if on a separate
day, $500 for each day during which he participates in a meeting of a committee
of the Board of which is a member. In addition, see "1999 Stock Incentive Plan"
below.
1999 Stock Incentive Plan
The 1999 Stock Incentive Plan permits the granting of awards in the
form of nonqualified stock options, incentive stock options, restricted stock,
deferred stock, and other stock-based incentives. Up to 200,000 shares of common
stock of the Company may be issued pursuant to the 1999 Stock Incentive Plan
(subject to appropriate adjustment in the event of changes in the corporate
structure of the Company). Officers, directors and other key employees of the
Company or any subsidiary are eligible to receive awards under the 1999 Stock
Incentive Plan. The option exercise price of all options which are granted under
the 1999 Stock Incentive Plan must be at least equal to 100% of the fair market
value of a share of common stock of the Company on the date of grant. At March
22, 2002, options to acquire 193,928 shares of common stock have been granted
under this plan and 6,072 options are available for future grants.
Retirement Income Plan
In 2000, the Company reinstated its Retirement Income Plan to cover
substantially all United States employees of the Company (see Note L).
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of December 31,
2001 with respect to the beneficial ownership of the Company's Common Stock by
(i) each person who is known by the Company to own beneficially more than 5% of
the Company's Common Stock, (ii) each of the Company's directors and executive
officers, and (iii) all executive officers and directors as a group.
Number of Percent
Shares of Class
---------------- ----------
William Cohen 2,500 (1) *
Thomas V. Guarino 33,136 (2) 1.4%
Moses Krausz 63,800 (3) 2.6%
David Lukens 10,200 (4) *
Moses Marx 1,071,920 (5) 45.0%
160 Broadway
New York, NY 10038
Steven Rosenberg 20,861 (6) *
Randolph B. Stockwell 8,000 (7) *
All executive officers and directors
as a group (7 persons) 1,210,417 (8) 49.0%
--------------------------------------------------------
* Less than 1%
(1) Includes 1,500 shares issuable upon the exercise of options which have
been granted to Mr. Cohen under the Company's 1991 Stock Option Plan
for Non-Employee Directors and 1999 Stock Incentive Plan.
(2) Includes 14,550 shares issuable upon the exercise of options which
have been granted to Mr. Guarino under the Company's 1999 Stock
Incentive Plan.
(3) Includes 50,000 shares issuable upon the exercise of options which
have been granted to Mr. Krausz under the Company's 1999 Stock
Incentive Plan.
(4) Includes 10,000 shares issuable upon the exercise of options which
have been granted to Mr. Lukens under the Company's 1999 Stock
Incentive Plan.
74
(5) Includes 1,500 shares issuable upon the exercise of options which
have been granted to Mr. Marx under the Company's 1991 Stock Option
Plan for Non-Employee Directors and 1999 Stock Incentive Plan. Does
not include 53,500 shares owned by Eva and Esther, L.P. of which Mr.
Marx has an 80.5% limited partnership interest. Mr. Marx's
daughters and their husbands are the general partners of Eva and
Esther, L.P.
(6) Includes 10,000 shares issuable upon the exercise of options which
have been granted to Mr. Rosenberg under the Company's 1999 Stock
Incentive Plan.
(7) Includes 1,500 shares issuable upon the exercise of options which have
been granted to Mr. Stockwell under the Company's 1991 Stock Option
Plan for Non-Employee Directors and 1999 Stock Incentive Plan.
(8) Includes 89,050 shares of Common Stock which are issuable upon the
exercise of outstanding options.
ITEM 13. Certain Relationships and Related Transactions.
In June 1999, the Company made a term loan in the principal amount of
$2,000,000 to Pharmaceutical Holdings Corp., a Delaware corporation, ("PHC"),
the principal stockholder of which is Momar Corporation ("Momar"). Mr. Moses
Marx, a director and principal stockholder of the Company, is the principal
stockholder and chief executive officer of Momar. The loan was renewed in June
2000 for a term of one year. In April 2001, the Company made an additional term
to PHC in the principal amount of $2,000,000. Such loans were made on
substantially the same terms, including interest rate, as those prevailing at
that time for comparable loans to unrelated parties and did not involve more
than normal risk of collectibility or present other unfavorable features.
In January 2000, the Bank entered into a lease agreement with Bowling
Green Associates, LP, the principal owner of which is Mr. Marx, for commercial
space to open a bank branch. The Company obtained an appraisal of the market
rental value of the space from an independent appraisal firm and management
believes that the terms of the lease, including the annual rent paid, $237,000
in fiscal 2001, is comparable to the terms and annual rent that would be paid to
non- affiliated parties in a similar commercial transaction for similar
commercial space.
In December 1999, the Bank loaned $1,500,000 to Ecogen, Inc., a
corporation in which Mr. Marx may be deemed a principal stockholder. The loan
was guaranteed by Momar. Contemporaneously with the making of the loan, Momar
purchased a 100% interest in such loan on a non-recourse basis for a purchase
price equal to the outstanding balance of the loan. The Bank services such loan
on behalf of Momar for no additional consideration. Such loan was made on
substantially the same terms, including interest rate and collateral, as those
prevailing at that time for comparable loans to unrelated parties and did not
involve more than normal risk of collectibility or present other unfavorable
features.
See Item 1. Business - Transactions With Related Parties and Item 2.
Properties for additional information.
75
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this Report:
(i) Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income for the Years Ended December 31, 2001
and 2000, the Two Months Ended December 31, 1999 and the Year Ended
October 31, 1999
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2001 and 2000, the Two Months Ended December 31, 1999 and
the Year Ended October 31, 1999
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001 and 2000, the Two Months Ended December 31, 1999 and the Year
Ended October 31, 1999,
Notes to Consolidated Financial Statements
(ii) Financial Statement Schedules
Schedule
Number Description
------ -----------
None
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and, therefore, have been omitted.
(iii) Exhibits
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Reorganization, dated as of August 16, 2000, by
and between Berkshire Bancorp Inc., Greater American Finance Group,
Inc., The Berkshire Bank, GSB Financial Corporation and Goshen Savings
Bank (incorporated by reference to the Companies Registration Statement
on Form S-4 dated October 13, 2000.
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K dated March 30, 1999).
3.2 Amended and Restated By-laws of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Current Report on Form 8-K dated March
30, 1999).
10.1 Stock Incentive Plan for Non-Employee Directors of the Company
(incorporated by reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended October 31, 1991).
10.2 1999 Stock Incentive Plan of the Company (incorporated by reference to
Exhibit 10.8 to the Company's Current Report on Form 8-K dated March
30, 1999).
10.3 Employment Agreement, dated May 1, 1999, between The Berkshire Bank and
Moses Krausz (incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended December
31, 2000).
10.4 Employment Agreement, dated January 1, 2001, between The Berkshire Bank
and David Lukens (incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended December
31, 2000).
76
10.5 Lease Agreement, dated October 26, 1999, between Braun Management, Inc. as
agent for Bowling Green Associates, L.P., and The Berkshire Bank
(incorporated by reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the Quarterly Period Ended March 31, 2001).
10.6 Amendment No. 1 to Employment Agreement, dated August 1, 2001, by and
between The Berkshire Bank and Moses Krausz (incorporated by reference
to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 2001).
21. Subsidiaries of the Company.
23. Consent of Independent Certified Public Accountant
(b) Reports on Form 8-K.
None.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BERKSHIRE BANCORP INC.
By: /s/ Steven Rosenberg
------------------------------------
Steven Rosenberg
President, (Chief Executive Officer)
Date: March 25, 2002
------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Steven Rosenberg President, (Chief March 25, 2002
------------------------- Executive Officer,
Steven Rosenberg Principal Financial
Officer and Principal
Accounting Officer);
Director
/s/ William Cohen Director March 25, 2002
-------------------------
William Cohen
/s/ Thomas V. Guarino Director March 25, 2002
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Thomas V. Guarino
/s/ Moses Marx Director March 25, 2002
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Moses Marx
/s/ Randolph B. Stockwell Director March 25, 2002
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Randolph B. Stockwell
78
STATEMENT OF DIFFERENCES
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The greater-than-or-equal-to sign shall be expressed as................ >=