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, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File Number 0-13649
Berkshire Bancorp Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-2563513
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification 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]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. Yes [ ] No [X]
Aggregate market value of voting and non-voting common stock held by
non-affiliates of the Registrant as of June 30, 2002: $34,633,451.
Number of shares of Common Stock outstanding as of March 14, 2003: 2,237,976.
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, 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 registered
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").
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy our reports or other filings made with the SEC at the SEC's Public
Reference Room, located at 450 Fifth Street, N.W., Washington, DC 20549. You can
also access information that we file electronically on the SEC's website at
WWW.SEC.GOV.
We do not presently have a website. However, as soon as practicable after
filing with or furnishing to the SEC, we will provide at no cost, paper or
electronic copies of our Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and amendments to those reports. Requests
should be directed to:
Berkshire Bancorp Inc.
Investor Relations
160 Broadway
New York, NY 10038
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
currently operates from three deposit-taking offices in New York City and four
deposit-taking offices in Orange and Sullivan Counties, New York. In July 1995,
the Bank
2
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. 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. In January 2003, the Bank relocated its main office to
and opened a branch at this location.
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.
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.
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
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.
On November 7, 2002, we sold our 24.9% interest in a merchant credit card
processing company for $285,000, which represents our initial purchase price in
December 1999. We accounted for our interest in this company under the equity
method of accounting and have recorded approximately $200,000 in net losses
since December 1999. The purchase price to Berkshire and the amounts owed to the
Bank are being paid in the form of a note to be held by 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
3
common stock of GSB Financial held by them, or, in the alternative, at their
election, 0.6027 shares of Berkshire's common stock. As a result of this
transaction, 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. Effective January 1,
2002, we adopted Statement of Financial Accounting Standard No. 142, Goodwill
and Intangible Assets which eliminates the amortization of goodwill and requires
an annual impairment test. As of December 31, 2002, we have completed the
transitional testing of our intangible assets, including goodwill. We did not
identify any impairment on our outstanding goodwill.
The following table presents a reconciliation of net income and
earnings-per-share amounts, as reported in the financial statements, to those
amounts adjusted for goodwill and intangible asset amortization determined in
accordance with the provisions of Statement of Financial Accounting Standard No.
142.
For The Year Ended
December 31,
----------------------------------------
2002 2001 2000
------ ------ -------
(In thousands, except per share amounts)
Reported net income $5,597 $3,299 $12,066
Add back: goodwill amortization -- 935 635
------ ------ -------
Adjusted net income $5,597 $4,234 $12,701
====== ====== =======
Basic earnings per share:
Reported basic earnings per share $ 2.44 $ 1.41 $ 5.76
Goodwill amortization -- .40 .30
------ ------ -------
Adjusted basic earnings per share $ 2.44 $ 1.81 $ 6.06
====== ====== =======
Diluted earnings per share:
Reported diluted earnings per share $ 2.43 $ 1.41 $ 5.76
Goodwill amortization -- .40 .30
------ ------ -------
Adjusted diluted earnings per share $ 2.43 $ 1.81 $ 6.06
====== ====== =======
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 one subsidiary, Berkshire Agency, Inc., a company engaged in the
title insurance business.
Regulation. Berkshire is 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.
Bank Holding Company Regulation. The Federal Reserve is authorized to make
regular examinations of the Company and its nonbank subsidiaries. Under federal
4
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.
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, 2002 and 2001, 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
5
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.
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, 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, 2002 and 2001, the Bank's
Tier I leverage capital ratio was 7.8% and 9.6%, 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
6
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, 2002 and 2001, the Bank maintained a 18.5%
and 19.6% Tier I risk-based capital ratio and a 19.4% and 20.4% 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, 2002 and 2001, 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
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
2001 and 2002 calendar years totaled approximately $7.60 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.
7
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.
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 2002 was equal to 0.0166% of its insured deposits and which is recorded
as a deposit insurance premium expense for financial statement purposes.
Beginning in 2003, the assessment was revised to 0.0168% 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 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.
8
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,
2002, 2001 and 2000, 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 and November
17, 2000, the Board of Directors of the Company declared cash dividends in the
amounts of $.04 and $.44 per common share, respectively. No such dividend was
required to be paid in fiscal 2002. (See Dividends in Item 5).
Employees. On March 14, 2003, Berkshire had one full time employee and the
Bank employed approximately 78 full time and 5 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 14, 2003:
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
and Bank Branch 9,700 Owned Feb 2008 (4)
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.
(4) Leased by the Bank from the Company at a annual rent of $375,000 which
management believes is comparable to the annual rent that would be paid by
non-affiliated parties in a similar commercial transaction for similar
commercial space.
ITEM 3. Legal Proceedings.
In the ordinary course of operations, the Bank is a party to routine
litigation involving claims incidental to its banking business. Management
believes that no current litigation, threatened or pending, to which the Bank or
its assets is 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, 2002
-----------------------------------
January 1, 2002 to March 31, 2002 28.74 27.66
April 1, 2002 to June 30, 2002 32.00 27.81
July 1, 2002 to September 30, 2002 32.476 29.62
October 1, 2002 to December 31, 2002 34.31 31.00
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
As of the close of business on March 14, 2003, there were approximately
2,151 holders of record of the Company's Common Stock.
Dividends
For the fiscal years ended December 31, 2002, 2001 and 2000, 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 and November 17, 2000, the Board of Directors of the Company
declared cash dividends in the amounts of $.04 and $.44 per common share,
respectively. No such dividend was required to be paid in fiscal 2002.
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, payable in
equal semi-annual installments. Pursuant to said policy, the Board of Directors
declared and the Company paid cash dividends as follows:
Per Share
Declaration Date Record Date Payment Date Amount
------------------ ---------------- ---------------- ---------
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
April 8, 2002 April 23, 2002 April 30, 2002 $.10
October 4, 2002 October 21, 2002 October 29, 2002 $.12
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.
Equity Compensation Plans
See Part III, Item 12 for information concerning the Company's equity
compensation plans.
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, 2002, 2001 and 2000,
at and for the proforma twelve months ended December 31, 1999 and as of and for
the fiscal year ended October 31, 1999. 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,
----------------------------------------- -----------
2002 2001 2000 1999(b) 1999
-------- -------- -------- -------- -----------
(Dollars in thousands, except per share data)
Balance Sheet Data:
Total Assets $683,738 $536,365 $244,023 $192,130 $180,986
Loans, net 273,182 250,010 74,515 64,668 59,652
Investment securities 371,458 242,579 117,060 89,497 82,876
Goodwill, net 18,549 18,438 11,543 12,073 12,195
Deposits 473,818 338,776 137,647 104,087 102,318
Stockholders' equity 98,525 95,992 79,107 78,070 73,306
Interest income 32,242 24,941 14,019 9,852 8,525
Interest expense 13,416 11,877 5,184 3,101 2,548
-------- -------- -------- -------- --------
Net interest income before
provision for loan losses 18,826 13,064 8,835 6,751 5,977
Provision for loan losses 387 287 55 55 45
-------- -------- -------- -------- --------
Net interest income 18,439 12,777 8,780 6,696 5,932
Investment securities gains 1,539 637 13,288 10,731 7,622
Other income 748 786 1,330 578 633
Other expenses 10,780 7,838 3,829 3,489 2,948
Amortization of goodwill -- 935 635 730 608
-------- -------- -------- -------- --------
Income before income taxes 9,946 5,427 18,934 13,786 10,631
Provision for income taxes 4,349 2,128 6,868 5,527 4,091
-------- -------- -------- -------- --------
Net income $ 5,597 $ 3,299 $ 12,066 $ 8,259 $ 6,540
======== ======== ======== ======== ========
Net income per share:
Basic $ 2.44 $ 1.41 $ 5.76 $ 3.88 $ 3.08
======== ======== ======== ======== ========
Diluted $ 2.43 $ 1.41 $ 5.76 $ 3.65 $ 2.89
======== ======== ======== ======== ========
Cash dividends per
common share $ .22 $ .24 $ .64 $ .32 $ .32
======== ======== ======== ======== ========
Selected Operating Ratios
Return on average assets (c) 0.9% 0.8% 5.8% 7.0% 3.9%
Return on average equity (c) 5.9% 3.5% 14.9% 14.6% 6.2%
Net interest margin (c) 3.3% 3.6% 4.7% 4.9% 4.4%
Average equity/average assets 15.6% 23.8% 39.1% 47.9% 48.3%
Allowance for loan
losses/total loans 0.8% 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, 2002, 2001 and
2000. 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 bank
subsidiary, 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, 2001 through March 31, 2001.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and the
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
The Company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than any of its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires material estimates, including, among others, expected default
probabilities, loss given default, the amounts and timing of expected future
cash flows on impaired loans, mortgages, and general amounts for historical loss
experience. The process also considers economic conditions, uncertainties in
estimating losses and inherent risks in the loan portfolio. All of these factors
may be susceptible to significant change. To the extent actual outcomes differ
from management estimates, additional provisions for loan losses may be required
that would adversely impact earnings in future periods.
With the adoption of SFAS No. 142 on January 1, 2002, the Company
discontinued the amortization of goodwill resulting from acquisitions. Goodwill
is now subject to impairment testing at least annually to determine whether
write-downs of the recorded balances are necessary. The Company tests for
impairment based on the goodwill maintained at each defined reporting unit. A
fair value is determined for each reporting unit based on at least one of three
various market valuation methodologies. If the fair values of the reporting
units exceed their book values, no write-down of recorded goodwill is necessary.
If the fair value of the reporting unit is less, an expense may be required on
the Company's books to write down the related goodwill to the proper carrying
value. As of December 31, 2002, the Company completed its transitional testing,
which determined that no impairment write-offs were necessary.
12
The Company recognizes deferred tax assets and liabilities for the future
tax effects of temporary differences, net operating loss carryforwards and tax
credits. Deferred tax assets are subject to management's judgment based upon
available evidence that future realization is more likely than not. If
management determines that the Company may be unable to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the recorded value of the net deferred tax asset to the
expected realizable amount.
Discussion of Results of Operations
Overview
Fiscal Year Ended December 31, 2002 Compared to Fiscal Year Ended December
31, 2001. Net income was $5.60 million, or $2.43 per share, for the fiscal year
ended December 31, 2002, compared to $3.30 million, or $1.41 per share, for the
fiscal year ended December 31, 2001, an increase of 69.66%. Investment
securities, loans and total assets increased by 53.13%, 9.31% and 27.48%,
respectively, due in part to the acquisition of GSB Financial on March 30, 2001.
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.
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 we designate 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, 2002 December 31, 2001
--------------------------------- ---------------------------------
Interest Interest
Average and Average Average and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
-------- --------- ---------- -------- --------- ----------
INTEREST-EARNING ASSETS:
Loans (1) $265,961 $18,723 7.04% $195,296 $15,143 7.75%
Investment securities 298,008 13,383 4.49 154,787 9,156 5.92
Other (2)(5) 8,479 136 1.60 15,215 642 4.22
-------- ------- ---- -------- ------- ----
Total interest-earning assets 572,448 32,242 5.63 365,298 24,941 6.83
---- ----
Noninterest-earning assets 36,541 32,993
-------- --------
Total Assets $608,989 $398,291
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 116,331 1,644 1.41 85,194 2,291 2.69
Time deposits 273,452 8,766 3.21 155,079 7,867 5.07
Other borrowings 86,210 3,006 3.49 36,510 1,719 4.71
-------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 475,993 13,416 2.82 276,783 11,877 4.29
------- ---- ------- ----
Demand deposits 30,102 21,857
Noninterest-bearing liabilities 7,586 4,802
Stockholders' equity (5) 95,308 94,849
-------- --------
Total liabilities and
stockholders' equity $608,989 $398,291
======== ========
Net interest income $18,826 $13,064
======= =======
Interest-rate spread (3) 2.81% 2.54%
==== ====
Net interest margin (4) 3.29% 3.58%
==== ====
Ratio of average interest-earning
assets to average interest bearing
liabilities 1.20 1.32
======== ========
Twelve Months Ended
December 31, 2000
---------------------------------
Interest
Average and Average
Balance Dividends Yield/Rate
-------- --------- ----------
INTEREST-EARNING ASSETS:
Loans (1) $ 70,357 $ 6,397 9.09%
Investment securities 90,918 6,381 7.01
Other (2)(5) 27,410 1,241 4.53
-------- ------- ----
Total interest-earning assets 188,685 14,019 7.43
----
Noninterest-earning assets 18,237
--------
Total Assets $206,922
========
INTEREST-BEARING LIABILITIES:
Interest bearing deposits 49,036 1,845 3.76
Time deposits 42,158 2,499 5.93
Other borrowings 14,277 840 5.88
-------- ------- ----
Total interest-bearing
liabilities 105,471 5,184 4.92
------- ----
Demand deposits 14,848
Noninterest-bearing liabilities 5,652
Stockholders' equity (5) 80,951
--------
Total liabilities and
stockholders' equity $206,922
========
Net interest income $ 8,835
=======
Interest-rate spread (3) 2.51%
====
Net interest margin (4) 4.68%
====
Ratio of average interest-earning
assets to average interest bearing
liabilities 1.79
========
----------
(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.
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, 2002
Versus
Twelve Months Ended December 31, 2001
Increase (Decrease) Due To
-------------------------------------
Rate Volume Total
------- ------- ------
Interest-earning assets:
Loans $(1,395) $ 4,975 $3,580
Investment securities (2,204) 6,431 4,227
Other (399) (107) (506)
------- ------- ------
Total (3,998) 11,299 7,301
------- ------- ------
Interest-bearing liabilities:
Deposit accounts:
Interest bearing deposits (1,090) 443 (647)
Time deposits (2,884) 3,783 899
Other borrowings (449) 1,736 1,287
------- ------- ------
Total (4,423) 5,962 1,539
------- ------- ------
Net interest income $ 425 $ 5,337 $5,762
======= ======= ======
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
======= ======= =======
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.
We seek to maximize our 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 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 $59,000 of classified loans at December 31, 2002 and 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, 2002 Compared to Fiscal
Year Ended December 31, 2001.
General. On March 30, 2001, Berkshire, through its wholly-owned subsidiaries,
the Bank and Greater American Finance Group, Inc., completed its merger with GSB
Financial (see Note A of Notes to Consolidated Financial Statements). This
transaction was accounted for under the purchase method of accounting and,
accordingly, the results of operation for the Company include only the results
of operation of GSB Financial for the 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, 2002 was $5.60
million, or $2.43 per share, as compared to $3.30 million, or $1.41 per share,
for the fiscal year ended December 31, 2001. The increase was due in part to the
acquisition of GSB Financial referenced above.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, thereby eliminating annual goodwill amortization
expense of approximately $1.0 million. Had SFAS No. 142 been in effect on
January 1, 2001, net income in fiscal 2001 would have been $4.23 million, or
$1.81 per share.
The Company's net income is largely dependent on interest rate levels, the
demand for the Company's loan and deposit products and the strategies employed
to manage the risks inherent in the banking business. Interest rates, as
measured by the prime rate, stabilized at 4.75% throughout the first ten months
of 2002. During 2001, in contrast, the prime rate declined from 9.00% at the
beginning of the year to 4.75% at years' end.
17
Net Interest Income. The Company's primary source of revenue is net interest
income, or the difference between interest income on earning assets and interest
expense on interest-bearing liabilities.
For the fiscal year ended December 31, 2002, net interest income increased
by approximately $5.76 million, or 44.11%, to $18.83 million from $13.06 million
for the fiscal year ended December 31, 2001. The year over year increase in net
interest income was the result of two factors. Firstly, the $207.15 million, or
56.71%, increase in average interest-earning assets to $572.45 million from
$365.30 million in fiscal 2001, partially offset by the $199.21 million, or
71.97%, increase in average interest-bearing liabilities to $475.99 million from
$276.78 million in fiscal 2001. The second factor contributing to the increase
in net interest income was the difference between the yield on assets compared
to the cost of liabilities. The average yield on interest-earning assets in 2002
declined to 5.63% from 6.83% in 2001, a decline of 120 basis points, or 17.57%,
however, the average cost of interest-bearing liabilities in 2002 declined to
2.82% from 4.29%, a steeper decline of 147 basis points, or 34.27% The
interest-rate spread, the difference between the average yield on
interest-earning assets and the average cost of interest bearing liabilities,
which has a direct bearing on net interest income, improved to 2.81% in fiscal
2002 from 2.54% in fiscal 2001.
Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, declined to 3.29% in fiscal 2002
from 3.58% in fiscal 2001.
During fiscal 2002, the Company made use of the prevailing interest rate
environment to secure deposits and to borrow funds at what we believe to be
attractive rates, and to invest such funds in loans and investment securities.
The average amounts of loans and investment securities increased by $70.67
million and $143.22 million, respectively, to $265.96 million and $298.01
million, respectively, in fiscal 2002 from $195.30 million and $154.79 million,
respectively, in fiscal 2001. Time deposits and borrowings increased by $118.37
million and $49.70 million, respectively, during 2002 to $273.45 million and
$86.21 million, respectively, from $155.08 million and $36.51 million,
respectively, during 2001.
Interest Income. Total interest income for the fiscal year ended December 31,
2002 increased by $7.30 million, or 29.27%, to $32.24 million from $24.94
million for the fiscal year ended December 31, 2001. The increase was the result
of the higher levels of average interest-earning assets during fiscal 2002 over
fiscal 2001. The average amount of loans and investment securities increased by
36.18% and 92.53%, respectively, contributing $18.72 million and $13.38 million
of interest income, respectively, compared to $15.14 million and $9.16 million
of interest income, respectively, in fiscal 2001.
As may be expected during a period of falling interest rates, the average
yield on interest-earning assets declined to 5.63% during fiscal 2002 from 6.83%
in fiscal 2001. The average yield on loans declined to 7.04% from 7.75% and we
expect this trend may continue as homeowners refinance their existing mortgage
loans, commercial loans at higher rates are paid off and/or renewed, and new
mortgage loans and commercial loans are made, all at today's lower rates. The
average yield on investment securities has declined as well, to 4.49% in 2002
from 5.92% in 2001, as securities in our portfolio with above market rates have
either matured or have been called by the issuer, and have been replaced by
securities that meet our investment policy criteria, albeit with lower yields.
Interest Expense. Total interest expense for the fiscal year ended December 31,
2002 increased by $1.54 million, to $13.42 million from $11.88 million for the
fiscal year ended December 30, 2001. The increase is due to the overall increase
of $199.21 million in the average amount of interest-bearing liabilities to
$475.99 million in fiscal 2002 from $276.78 million in fiscal 2001. Interest
bearing deposits and time deposits increased by 62.23% to $389.78 million in
2002 from $240.27 million in 2001. Borrowings increased by 136.13% to $86.21
million in 2002 from $36.51 million in 2001 as a result of our strategy of
employing excess capital to fund the growth of our business. The increase in
total interest expense was partially offset by the decline in the average rates
paid on interest-bearing liabilities to 2.82% during the 2002 period from 4.29%
during the 2001 period.
18
Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of investment securities and service fee income. For the fiscal year ended
December 31, 2002, total non-interest income was $2.29 million, compared to
$1.42 million for the fiscal year ended December 31, 2001. Service fee income
increased to $548,000 in fiscal 2002 from $395,000 in fiscal 2001 as a result of
the growth in deposits at the Bank. Investment securities gains increased to
$1.54 million in 2002 from $637,000 in 2001, and other non-interest income
declined to $200,000 in 2002 from $391,000 in 2001.
Non-Interest Expense. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees and
other operating expenses associated with the day-to-day operations of the
Company. Total non-interest expense for the fiscal year ended December 31, 2002
was $10.78 million as compared to $8.77 million for the fiscal year ended
December 31, 2001. The year to year increases are due primarily to increases in
salaries and employee benefits and net occupancy expenses resulting from the
expansion of the business.
Provision for Income Tax. During the fiscal year ended December 31, 2002, the
Company recorded income tax expense of $4.35 million, compared to income tax
expense of $2.13 million for the fiscal year ended December 31, 2001. The tax
provisions for federal, state and local taxes recorded for fiscal 2002 and 2001
represent effective tax rates of 43.73% and 39.21%, respectively. The increase
in the effective rate is primarily due to the elimination of the non-deductible
amortization expense of goodwill.
Results of Operations Fiscal Year Ended December 31, 2001 Compared to Fiscal
Year Ended December 31, 2000.
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 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.
19
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 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.
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.
20
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.
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 investment securities, 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 $4 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.
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,
-------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -----------------
Fair Fair Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- ------- -------
(In thousands)
Available-For-Sale
U.S. Treasury Notes $ 20,110 $ 20,213 $ 30,012 $ 30,038 $ -- $ --
U.S. Government Agencies 301,224 303,597 170,610 170,156 86,064 85,952
Mortgage-backed securities 6,256 6,262 2,493 2,499 4,208 4,199
Corporate notes 3,878 4,076 751 639 1,654 1,313
Marketable equity
securities and other 36,383 36,477 37,547 37,634 4,813 4,845
-------- -------- -------- -------- ------- -------
Total $367,851 $370,625 $241,413 $240,966 $96,739 $96,309
======== ======== ======== ======== ======= =======
Held-To-Maturity
U.S. Government Agencies $ 833 $ 835 $ 1,613 $ 1,598 $ 296 $ 294
Corporate notes -- -- -- -- 20,455 20,408
-------- -------- -------- -------- ------- -------
Total $ 833 $ 835 $ 1,613 $ 1,598 $20,751 $20,702
======== ======== ======== ======== ======= =======
21
The following tables summarize the Company's available-for-sale and held-
to-maturity securities at December 31, 2002 and 2001:
December 31, 2002
--------------------------------
Weighted
Average
Yield Cost Fair Value
-------- -------- ----------
(Dollars in thousands)
Available-For-Sale
U.S. Treasury Notes
Due after one year through five years 2.11% $ 20,110 $ 20,213
-------- --------
20,110 20,213
-------- --------
U.S. Government Agencies Obligations
Due within one year -- --
Due after one year through five years 3.96 120,681 121,562
Due after five years through ten years 4.67 127,261 128,369
Due after ten years 4.45 53,282 53,666
-------- --------
301,224 303,597
-------- --------
Municipal Obligations
Due after ten years 4.95 1,025 1,092
-------- --------
1,025 1,092
-------- --------
Mortgage-backed securities
Due after ten years 7.03 6,256 6,262
-------- --------
6,256 6,262
-------- --------
Corporate Notes
Due within one year 6.41 1,078 1,051
Due after one year through five years 32.14 2,676 3,022
Due after five years through ten years 15.29 124 3
-------- --------
3,878 4,076
-------- --------
Common Stocks -- 50 51
Preferred Stocks 9.71 3,098 3,124
Money market funds 1.39 29,325 29,325
Federal Home Loan Bank Stock 5.58 2,885 2,885
-------- --------
35,358 35,385
-------- --------
$367,851 $370,625
======== ========
Held-To-Maturity
U.S. Government Agencies Obligations
Due after five years through ten years 3.33 168 169
Due after ten years 6.37 665 666
-------- --------
$ 833 $ 835
======== ========
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, 2002, 2001 and 2000 , the Company had total loans of
$276.25 million, $252.23 million and $75.62 million, respectively, and an
allowance for loan losses of $2.32 million, $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.
22
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 generally 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
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, 2002 and 2001,
approximately $180.73 million and $165.20 million, respectively, or 65.4% and
65.5%, respectively, of the Company's total loan portfolio consisted of such
loans as compared to approximately $25.68 million, or 34.0%, 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
23
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, 2002 and 2001,
approximately 10% and 13%, respectively, of the Bank's residential one-to-four
family owner-occupied first mortgage portfolio were ARMs and approximately 88%
and 87%, respectively, 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 2.00% 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 6.0%.
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.
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, 2002, the Bank's total capital, net of goodwill and loan
loss reserves, was approximately $53.7 million and thus it was generally not
permitted to make loans to one borrower in excess of approximately $8.1 million,
with an additional amount of approximately $5.4 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 $8.1
million. At December 31, 2002, the Bank was in compliance with these standards.
24
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:
December 31,
-----------------------------------------------------
2002 2001 2000
---------------- ---------------- ---------------
% of % of % of
Amount Total Amount Total Amount Total
-------- ----- -------- ----- ------- -----
(Dollars in thousands)
Commercial and
professional loans $ 16,704 6.0% $ 19,130 7.6% $ 9,419 12.5%
Secured by real estate
1 - 4 family 180,730 65.4 165,195 65.5 25,677 34.0
Multi family 8,958 3.2 11,186 4.4 4,765 6.3
Non-residential
(commercial) 65,809 23.8 51,893 20.6 34,968 46.2
Consumer 4,051 1.6 4,689 1.8 229 0.3
Other -- -- 140 0.1 565 0.7
-------- ----- -------- ----- ------- -----
Total loans 276,252 100.0% 252,233 100.0% 75,623 100.0%
===== ===== =====
Less:
Allowance for
loan losses (2,315) (2,030) (1,108)
Unearned fees (755) (193) (275)
-------- -------- -------
Loans, net $273,182 $250,010 $74,240
======== ======== =======
25
October 31,
---------------------------------
1999 (1) 1998 (1)
--------------- ---------------
(Dollars in thousands)
% of % of
Amount Total Amount Total
------- ----- ------- -----
Commercial and
professional loans $ 6,824 11.3% $ 3,548 8.9%
Secured by real
estate 51,300 84.7 33,015 82.9
Personal 1,932 3.2 1,970 5.0
Other 501 0.8 1,264 3.2
------- ----- -------
Total loans 60,557 100.0% 39,797 100.0%
===== =====
Less:
Allowance for loan losses (905) (803)
------- -------
Loans, net $59,652 $38,994
======= =======
(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 $0 and $58,000 of loans past
due more than 90 days still accruing at December 31, 2002 and 2001,
respectively.
December 31, October 31,
------------------ -----------------
2002 2001 2000 1999(1) 1998(1)
---- ---- ---- ------- -------
(Dollars in thousands)
Nonaccrual loans:
Commercial and $ $ 9 $-- $ -- $ --
professional loans
Secured by real estate 59 -- -- 121 30
--- --- --- ---- ----
Total nonaccrual loans 59 9 -- 121 30
--- --- --- ---- ----
Total nonperforming loans $59 $ 9 $-- $121 $ 30
=== === === ==== ====
Total nonperforming loans
to total assets -- -- -- .07% .08%
=== === === ==== ====
(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, 2002
------------------------------------
Allowance
for Loan Percent of Percent of
Losses Allowance Total Loans
--------- ---------- -----------
Commercial and
professional loans $ 225 9.7% 0.08%
Secured by real estate
1 - 4 family 452 19.5 0.16
Multi family 121 5.2 0.04
Non-residential 888 38.4 0.32
Consumer and other 55 2.4 0.02
General allowance (1) 574 24.8 0.21
------ ----- ----
Total allowance
for loan losses $2,315 100.0% 0.83%
====== ===== ====
----------
(1) The allowance for loan losses is allocated to specific loans as necessary.
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.
27
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.
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.
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, 2002
-------------------------------------
Within 1 to After
1 Year 5 Years 5 Years Total
------- ------- ------- -------
(In thousands)
Fixed Rate
Commercial, financial
and agricultural $ 2,204 $ 8,083 $20,858 $31,145
Real estate-construction -- 1,099 386 1,485
------- ------- ------- -------
Total fixed rate $ 2,204 $ 9,182 $21,244 $32,630
------- ------- ------- -------
Adjustable Rate
Commercial, financial
and agricultural 31,784 6,723 100 38,607
Real estate-construction 506 2,350 -- 2,856
------- ------- ------- -------
Total adjustable rate $32,290 $ 9,073 $ 100 $41,463
------- ------- ------- -------
Total $34,494 $18,255 $21,344 $74,093
======= ======= ======= =======
28
The following table sets forth information with respect to activity in the
Company's allowance for loan losses during the periods indicated (in thousands,
except percentages):
Two Months Year Ended
Ended October 31,
Years Ended December 31, December 31, (1)
----------------------------- ------------ -----------
2002 2001 2000 1999 1999
-------- -------- ------- ------------ -----------
Average loans outstanding $265,961 $195,296 $70,357 $61,691 $48,387
======== ======== ======= ======= =======
Allowance at beginning of period 2,030 1,108 923 905 803
Charge-offs:
Commercial and other loans 199 97 -- -- --
Real estate loans -- -- -- -- 31
-------- -------- ------- ------- -------
Total loans charged-off 199 97 -- -- 31
-------- -------- ------- ------- -------
Recoveries:
Commercial and other loans 97 41 130 8 78
Real estate loans -- -- -- -- --
-------- -------- ------- ------- -------
Total loans recovered 97 41 130 8 78
-------- -------- ------- ------- -------
Net recoveries (charge-offs) (102) (56) 130 8 47
-------- -------- ------- ------- -------
Provision for loan losses charged
to operating expenses 387 287 55 10 55
Acquisition of GSB -- 691 -- -- --
-------- -------- ------- ------- -------
Allowance at end of period $ 2,315 $ 2,030 $ 1,108 $ 923 $ 905
-------- -------- ------- ------- -------
Ratio of net recoveries (charge-
offs) to average loans
outstanding (2) (.03)% (.02)% .18% .08% .09%
======== ======== ======= ======= =======
Allowance as a percent of total loans 0.83% 0.80% 1.47% 1.41% 1.49%
======== ======== ======= ======= =======
Total loans at end of period $276,252 $252,233 $75,623 $65,591 $60,557
======== ======== ======= ======= =======
(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,
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Average Average Average Average Average Average
Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
Demand deposits $ 30,102 -- $ 21,857 -- $ 14,848 --
NOW and money market 60,114 1.28% 51,026 2.64% 44,582 3.85%
Savings deposits 56,217 1.56 34,168 2.69 4,454 2.93
Time deposits 273,452 3.21 155,079 5.07 42,158 5.93
-------- ---- -------- ---- -------- ----
Total deposits $419,885 2.48% $262,130 3.89% $106,042 4.08%
======== ==== ======== ==== ======== ====
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was approximately $108.72 million, $68.88 million and
$55.32 million at December 31, 2002, 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,
--------------
2002
--------------
(In thousands)
3 months or less $ 44,472
Over 3 months but within 6 months 36,898
Over 6 months but within 12 months 25,624
Over 12 months 1,727
--------
Total $108,721
========
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,
---------------------------
2002 2001 2000
------- ------- -------
(Dollars in thousands)
Securities sold under repurchase
agreements and federal funds purchased
Balance at year-end $46,673 $53,756 $23,127
Average during the year $38,443 $13,372 $12,367
Maximum month-end balance $47,407 $53,756 $24,495
Weighted average rate during the year 1.79% 3.62% 5.85%
Rate at December 31 1.46% 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 $.22 per share,
$.24 per share, $.64 per share, $.32 per share and $.72 per share in fiscal
2002, 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, 2002, we had cash of $7.44 million and
investment securities of $6.15 million.
Contingent Liabilities and Commitments
The Bank 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. The following table presents the Company's commitments at December
31, 2002.
Expiration By Period
-------------------------------------------
Less More
Than 1-3 3-5 Than
Total 1 Year Years Years 5 Years
------- ------ ------ ----- -------
(In thousands)
Lines of Credit $ 7,624 $2,231 $4,652 $ -- $ 741
Standby Letters
of Credit 750 408 342 -- --
Loan Commitments 2,243 2,243
Home Equity Unused
Commitments 3,565 174 835 675 1,881
------- ------ ------ ---- ------
Total $14,182 $5,056 $5,829 $675 $2,622
======= ====== ====== ==== ======
31
Contractual Obligations
The following table presents the Company's contractual obligations at
December 31, 2002.
Payments Due By Periods
-------------------------------------------------
Less More
Than 1-3 3-5 Than
Total 1 Year Years Years 5 Years
-------- -------- ------- ------- -------
(In thousands)
Long-Term Debt $ 57,699 $ 500 $ 1,000 $42,199 $14,000
Operating Leases 3,118 900 947 595 676
Time Deposits 311,979 299,691 12,230 58 --
-------- -------- ------- ------- -------
Total Contractual
Obligations $372,796 $301,091 $14,177 $42,852 $14,676
======== ======== ======= ======= =======
The Company currently does not have any unconsolidated subsidiaries or
special purpose entities.
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,
arises when the maturity or repricing characteristics of assets differ
significantly from the maturity or repricing characteristics of liabilities.
32
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, 2002
(in thousands, except for percentages)
--------------------------------------------------------------------
3 Months 3 Through 1 Through Over
or Less 12 Months 3 Years 3 Years Total Fair Value
-------- --------- --------- ------- ------- ----------
Interest bearing deposits in banks 127 -- -- -- 127 127
(Rate) 1.25% 1.25%
Loans (1)(2)
Adjustable rate loans 42,397 10,654 9,656 12,423 75,130 75,130
(Rate) 5.90% 5.82% 5.51% 7.71% 6.14%
Fixed rate loans 577 3,062 8,811 188,672 201,122 203,122
(Rate) 6.98% 8.00% 7.52% 6.96% 7.00%
-------- -------- -------- ------- -------
Total loans 42,974 13,716 18,467 201,095 276,252 278,252
Investments (3)(4) 79,964 1,261 75,898 211,398 368,521 368,523
(Rate) 2.62% 6.23% 4.20% 4.99% 4.32%
-------- -------- -------- ------- -------
Total rate-sensitive assets 123,065 14,977 94,365 412,493 644,900
-------- -------- -------- ------- -------
Deposit accounts (5)
Savings and NOW 90,653 -- -- -- 90,653 90,653
(Rate) 1.46% 1.46%
Money market 39,866 -- -- -- 39,866 39,866
(Rate) 1.13% 1.13%
Time Deposits 111,868 187,823 12,275 13 311,979 312,117
(Rate) 2.65% 2.85% 2.90% 2.47% 2.78%
-------- -------- -------- ------- -------
Total deposit accounts 242,387 187,823 12,275 13 442,498
Repurchase Agreements 41,673 5,000 -- -- 46,673 46,673
(Rate) 1.49% 1.20% 1.46%
Other borrowings 500 -- 1,000 56,199 57,699 57,699
(Rate) 6.09% 5.90% 4.56% 4.60%
-------- -------- -------- ------- -------
Total rate-sensitive liabilities 284,560 192,823 13,275 56,212 546,870
-------- -------- -------- ------- -------
Interest rate caps 20,000 -- (10,000) (10,000) 53
Gap (repricing differences) (181,495) (177,846) 91,090 366,281 98,030
======== ======== ======== ======= =======
Cumulative Gap (181,495) (359,341) (268,251) 98,030
======== ======== ======== =======
Cumulative Gap to Total Rate
Sensitive Assets (28.14)% (55.72)% (41.60)% 15.20%
======== ======== ======== =======
----------
(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.
33
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
The Financial Accounting Standards Board (FASB) issued SFAS No. 147,
Acquisitions of Certain Financial Institutions: An amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No 9, which removes acquisitions of
financial institutions from the scope of SFAS 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions. SFAS No. 147 also requires that
the acquisition of a less-than-whole financial institution, such as a branch, be
accounted for as a business combination if the transferred assets and activities
constitute a business. The adoption on October 1, 2002 of SFAS No. 147 did not
have an impact on the Company's financial position or results of operations.
Goodwill and Intangible Assets
Statement of Financial Accounting Standard ("SFAS") No. 141, Business
Combinations ("SFAS No. 141"), and SFAS No. 142, Goodwill and Intangible Assets
("SFAS No. 142") was adopted on January 1, 2002. 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. As a result of the adoption of SFAS
No. 142, Berkshire eliminated the amortization of goodwill as of January 1,
2002. The Company has completed the transitional impairment testing and did not
identify any impairment on its outstanding goodwill.
The following table presents a reconciliation of net income and
earnings-per-share amounts, as reported in the financial statements, to those
amounts adjusted for goodwill and intangible asset amortization determined in
accordance with the provisions of Statement of Financial Accounting Standard No.
142.
For The Year Ended
December 31,
----------------------------------------
2002 2001 2000
------ ------ -------
(In thousands, except per share amounts)
Reported net income $5,597 $3,299 $12,066
Add back: goodwill amortization -- 935 635
------ ------ -------
Adjusted net income $5,597 $4,234 $12,701
====== ====== =======
Basic earnings per share:
Reported basic earnings per share $ 2.44 $ 1.41 $ 5.76
Goodwill amortization -- .40 .30
------ ------ -------
Adjusted basic earnings per share $ 2.44 $ 1.81 $ 6.06
====== ====== =======
Diluted earnings per share:
Reported diluted earnings per share $ 2.43 $ 1.41 $ 5.76
Goodwill amortization -- .40 .30
------ ------ -------
Adjusted diluted earnings per share $ 2.43 $ 1.81 $ 6.06
====== ====== =======
34
Accounting for Stock Based Compensation
SFAS No. 148 "Accounting for Stock Based Compensation-Transition and
Disclosure", which amends the disclosure and certain provisions of SFAS No. 123,
was issued in December 2002. SFAS No. 148 requires all entities with stock based
employee compensation arrangements to provide additional disclosures in their
summary of significant accounting policies note. The new interim period
disclosures are required in financial statements for interim periods beginning
after December 15, 2002.
For The Years Ended December 31,
----------------------------------------
2002 2001 2000
------ ------ -------
(In thousands, except per share amounts)
Net income As Reported: $5,597 $3,299 $12,066
Less: Stock based compensation
costs determined under fair
value methods for all awards 680 316 618
------ ------ -------
Pro Forma: $4,917 $2,983 $11,448
====== ====== =======
Basic earnings per share As Reported: $ 2.44 $ 1.41 $ 5.76
Pro Forma: 2.14 1.28 5.46
Diluted earnings per share As Reported: 2.43 1.41 5.76
Pro Forma: 2.14 1.28 5.46
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 and 2000, expected
volatility of 22%, and 25%, respectively, risk-free interest of 5.34% and 6.37%,
respectively, and expected lives of 5 years for all years. The Company did not
grant options in 2002.
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.
See Item 7. Managements' Discussion and Analysis of Financial Condition and
Results of Operations - Interest Rate Risk
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.
35
Report of Independent Certifieds 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, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note B6 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142 Goodwill and Other
Intangible Assets on January 1, 2002.
/s/ GRANT THORNTON LLP
--------------------------
Philadelphia, Pennsylvania
January 31, 2003
36
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31, December 31,
2002 2001
------------ ------------
ASSETS
Cash and due from banks $ 6,183 $ 7,170
Interest bearing deposits 127 213
Federal funds sold -- 3,000
-------- --------
Total cash and cash equivalents 6,310 10,383
Investment Securities:
Available-for-sale 370,625 240,966
Held-to-maturity, fair value of $835
in 2002 and $1,598 in 2001 833 1,613
-------- --------
Total investment securities 371,458 242,579
Loans, net of unearned income 275,497 252,040
Less: allowance for loan losses (2,315) (2,030)
-------- --------
Net loans 273,182 250,010
Accrued interest receivable 4,106 3,399
Premises and equipment, net 8,976 7,446
Goodwill, net of accumulated amortization
of $2,300 in 2001 18,549 18,438
Other assets 1,157 4,110
-------- --------
Total assets $683,738 $536,365
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 31,320 $ 30,163
Interest bearing 442,498 308,613
-------- --------
Total deposits 473,818 338,776
Securities sold under agreements to repurchase 46,673 53,756
Long term borrowings 57,699 42,278
Accrued interest payable 3,348 2,406
Other liabilities 3,675 3,157
-------- --------
Total liabilities 585,213 440,373
-------- --------
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, 2002, 2,237,976 shares
December 31, 2001, 2,379,990 shares 256 256
Additional paid-in capital 89,890 89,914
Retained earnings 16,145 11,053
Accumulated other comprehensive income (loss), net 1,480 (281)
Treasury Stock
December 31, 2002, 328,119 shares
December 31, 2001, 186,105 shares (9,246) (4,950)
-------- --------
Total stockholders' equity 98,525 95,992
-------- --------
$683,738 $536,365
======== ========
The accompanying notes are an integral part of these statements
37
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
For The Years Ended December 31,
--------------------------------
2002 2001 2000
------- ------- -------
INTEREST INCOME
Federal funds sold and interest bearing
deposits $ 136 $ 642 $ 1,241
Investments 13,383 9,156 6,381
Loans, including related fees 18,723 15,143 6,397
------- ------- -------
Total interest income 32,242 24,941 14,019
------- ------- -------
INTEREST EXPENSE
Deposits 10,410 10,158 4,344
Short-term borrowings 687 483 723
Long-term borrowings 2,319 1,236 117
------- ------- -------
Total interest expense 13,416 11,877 5,184
------- ------- -------
Net interest income 18,826 13,064 8,835
PROVISION FOR LOAN LOSSES 387 287 55
------- ------- -------
Net interest income after
provision for loan losses 18,439 12,777 8,780
------- ------- -------
NON-INTEREST INCOME
Service charges on deposit accounts 548 395 146
Investment securities gains 1,539 637 13,288
Other income 200 391 1,184
------- ------- -------
Total non-interest income 2,287 1,423 14,618
------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 5,183 4,153 2,125
Net occupancy expense 1,625 1,170 447
Equipment expense 312 201 101
FDIC assessment 66 42 27
Data processing expense 193 138 21
Amortization of goodwill -- 935 635
Other 3,401 2,134 1,108
------- ------- -------
Total non-interest expense 10,780 8,773 4,464
------- ------- -------
Income before provision for taxes 9,946 5,427 18,934
Provision for income taxes 4,349 2,128 6,868
------- ------- -------
Net income $ 5,597 $ 3,299 $12,066
======= ======= =======
Net income per share:
Basic $ 2.44 $ 1.41 $ 5.76
======= ======= =======
Diluted $ 2.43 $ 1.41 $ 5.76
======= ======= =======
Dividends per share $ .22 $ .24 $ .64
The accompanying notes are an integral part of these statements
38
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 2002, 2001 and 2000
(In Thousands)
Accumulated
other Accumu-
Stock Additional comprehensive lated Total
Common Par paid-in income earnings Treasury Comprehensive stockholders'
Shares value capital (loss), net (deficit) stock income equity
------ ----- ---------- ------------- --------- -------- ------------- -------------
Balance at January 1, 2000 2,566 $256 $78,570 $ 4,425 $ (2,421) $(2,760) $78,070
Net income 12,066 12,066 12,066
Treasury shares issued for (21) 49 28
options exercised
Acquisition of treasury shares (5,254) (5,254)
Other comprehensive (loss) net
of reclassification
adjustment and taxes (4,510) (4,510) (4,510)
-------
Comprehensive income $ 7,556
=======
Cash dividends (1,293) (1,293)
----- ---- ------- ------- -------- ------- -------
Balance at December 31, 2000 2,566 $256 $78,549 $ (85) $ 8,352 $(7,965) $79,107
Net income 3,299 3,299 3,299
Treasury shares issued
for acquisition of
GSB Financial Corp 11,386 7,887 19,273
Acquisition of treasury shares (4,983) (4,983)
Treasury shares issued for
options exercised (21) 111 90
Other comprehensive (loss) net
of reclassification
adjustment and taxes (196) (196)
-------
Comprehensive income $ 3,103
=======
Cash dividends (598) (598)
----- ---- ------- ------- -------- ------- -------
Balance at December 31, 2001 2,566 $256 $89,914 $ (281) $ 11,053 $(4,950) $95,992
Net income 5,597 5,597 5,597
Acquisition of treasury shares (4,422) (4,422)
Exercise of stock options (24) 126 102
Other comprehensive income net
of reclassification
adjustment and taxes 1,761 1,761 1,761
-------
Comprehensive income $ 7,358
=======
Cash dividends (505) (505)
----- ---- ------- ------- -------- ------- -------
Balance at December 31, 2002 2,566 $256 $89,890 $ 1,480 $ 16,145 $(9,246) $98,525
===== ==== ======= ======= ======== ======= =======
The accompanying notes are an integral part of these statements
39
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For The Years Ended December 31,
----------------------------------
2002 2001 2000
----------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,597 $ 3,299 $ 12,066
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Realized gain on investment securities (1,539) (637) (13,288)
Depreciation and amortization 414 1,197 740
Provision for loan losses 387 287 55
Increase in deferred taxes 133 (426) 1,522
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in accrued
interest receivable (707) (659) 259
Decrease (increase) other assets 2,760 1,320 (81)
Increase (decrease) in accrued interest
payable and other liabilities 1,316 616 (1,692)
----------- --------- --------
Net cash provided by (used in)
operating activities 8,361 4,997 (419)
----------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Madison Merchant
Services, Inc. -- -- (285)
Investment in The Berkshire Bank -- -- (105)
Cash paid for business acquired -- (20,222) --
Cash of entities acquired -- 6,047 --
Investment securities available
for sale
Purchases (1,729,416) (461,048) (84,247)
Sales 1,603,261 359,278 77,212
Investment securities held to maturity
Purchases -- (167,800) (19,909)
Maturities 780 187,724 4,157
Net increase in loans (23,559) (42,003) (9,991)
Acquisition of premises and equipment (2,055) (4,138) (93)
----------- --------- --------
Net cash (used in) investing activities (150,989) (142,162) (33,261)
----------- --------- --------
40
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For The Years Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in non interest
bearing deposits 1,157 15,654 (1,040)
Net increase in interest bearing deposits 133,885 57,611 34,600
(Decrease) increase in securities sold
under agreements to repurchase (7,083) 30,629 23,127
Issuance of long term debt 34,923 24,778 --
Repayment of long term debt (19,502) (12,000) --
Acquisition of treasury stock (4,422) (4,983) (5,254)
Proceeds from exercise of common
stock options 102 90 28
Dividends paid (505) (598) (1,293)
-------- -------- -------
Net cash provided by financing activities 138,555 111,181 50,168
-------- -------- -------
Net (decrease) increase in cash
and cash equivalents (4,073) (25,984) 16,488
Cash and cash equivalents at
beginning of year $ 10,383 36,367 19,879
-------- -------- -------
Cash and cash equivalents at
end of year $ 6,310 $ 10,383 $36,367
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash used to pay interest $ 12,474 $ 10,804 $ 4,012
Cash used to pay income taxes $ 5,692 $ 1,637 $ 7,163
The accompanying notes are an integral part of these statements
41
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
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").
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, the Company expanded its customer base and
market area with the acquisition of GSB Financial Corporation. The Bank's main
office and branch 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.
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. As a result of this transaction, 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
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.
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.
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.
The Company provides disclosures under SFAS 131 Disclosures About Segments
of an Enterprise and Related Information. 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 Company has one operating segment
and, accordingly, 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
43
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE B - (continued)
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".
Investments in securities are 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.
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 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 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 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.
44
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE B - (continued)
The Company follows the provisions of SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
SFAS No. 140 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. SFAS No. 140
provides consistent guidelines for distinguishing transfers of financial assets
from transfers that are secured borrowings. 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 (the "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.
On January 1, 2002 the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 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, SFAS No. 144 makes changes
to the scope and certain measurement requirements of existing accounting
guidance. SFAS No. 144 also changes the requirements relating to reporting the
effects of a disposal or discontinuation of a segment of a business. The
adoption of this statement did not have a significant impact on the financial
condition or results of operations of the Company.
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.
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 and 15 years, respectively. Amortization expense for the years ended
December 31, 2001 and 2000 was approximately $935,000 and $635,000,
respectively.
On June 29, 2001, SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Intangible Assets were issued. These statements resulted in
significant modifications relative to the Company's accounting for goodwill and
other intangible assets. SFAS No. 141, which was effective upon issuance,
requires that all business combinations initiated after June 30, 2001 must be
accounted for under the purchase method of accounting. 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
45
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE B - (continued)
impairment rather than amortize them. Upon adoption of SFAS 142, on January 1,
2002, the Company no longer amortized goodwill, thereby eliminating annual
amortization expense of approximately $1.0 million.
The following table presents a reconciliation of net income and
earnings-per-share amounts, as reported in the financial statements, to those
amounts adjusted for goodwill and intangible asset amortization determined in
accordance with the provisions of SFAS No. 142.
For The Year Ended
December 31,
-------------------------
2002 2001 2000
------ ------ -------
(In thousands, except per share amounts)
Reported net income $5,597 $3,299 $12,066
Add back: goodwill amortization -- 935 635
------ ------ -------
Adjusted net income $5,597 $4,234 $12,701
====== ====== =======
Basic earnings per share:
Reported basic earnings per share $ 2.44 $ 1.41 $ 5.76
Goodwill amortization -- .40 .30
------ ------ -------
Adjusted basic earnings per share $ 2.44 $ 1.81 $ 6.06
====== ====== =======
Diluted earnings per share:
Reported diluted earnings per share $ 2.43 $ 1.41 $ 5.76
Goodwill amortization -- .40 .30
------ ------ -------
Adjusted diluted earnings per share $ 2.43 $ 1.81 $ 6.06
====== ====== =======
7. Income Taxes
The Company accounts for income taxes under the liability method of
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."
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.
46
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE B - (continued)
9. Stock Based Compensation
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.
At December 31, 2002, the Company has one stock-based employee compensation
plan, which is more fully described in Note K. The Company accounts for that
plan under the recognition and measurement principles of APB No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Stock-based
employee compensation costs are not reflected in net income, as all options
granted under the plan had an exercise price equal to the market value of the
underlying common stock on the date of the grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
For The Years Ended December 31,
----------------------------------------
2002 2001 2000
------ ------ -------
(In thousands, except per share amounts)
Net income As Reported: $5,597 $3,299 $12,066
Less: Stock based compensation
costs determined under fair
value methods for all awards 680 316 618
------ ------ -------
Pro Forma: $4,917 $2,983 $11,448
====== ====== =======
Basic earnings per share As Reported: $ 2.44 $ 1.41 $ 5.76
Pro Forma: 2.14 1.28 5.46
Diluted earnings per share As Reported: 2.43 1.41 5.76
Pro Forma: 2.14 1.28 5.46
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 and 2000, expected
volatility of 22%, and 25%, respectively, risk-free interest of 5.34% and 6.37%,
respectively, and expected lives of 5 years for all years. The Company did not
grant options in 2002.
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 $1,155,000, $900,000 and $1,032,000 at December 31, 2002, 2001 and
2000, respectively.
47
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE B - (continued)
12. Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive 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, 2002
-----------------------------------
Tax
Before tax (expense) Net of tax
amount benefit Amount
---------- --------- ----------
Unrealized gains on
investment securities:
Unrealized holding gains
arising during period $4,760 $(1,872) $2,888
Less reclassification
adjustment for gains
realized in net income 1,539 (616) 923
------ ------- ------
Unrealized gain (loss) on
investment securities 3,221 (1,256) 1,965
Minimum pension liability (340) 136 (204)
------ ------- ------
Other comprehensive
income, net $2,881 $(1,120) $1,761
====== ======= ======
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)
===== ===== =====
48
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note B - (continued)
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)
======= ======= =======
13. Reclassifications
Certain amounts in the December 31, 2001 and 2000 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, 2002
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- -----
(In thousands)
Investment securities
U.S. Government Agencies $833 $3 $(1) $835
---- --- --- ----
Totals $833 $3 $(1) $835
==== === === ====
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)
The following is a summary of available-for-sale investment securities:
December 31, 2002
----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- --------
(In thousands)
Investment securities
U.S. Treasury and Notes $ 20,110 $ 103 $ -- $ 20,213
U.S. Government Agencies 301,224 2,376 (3) 303,597
Mortgage-backed securities 6,256 6 -- 6,262
Corporate notes 3,878 495 (297) 4,076
Marketable equity
securities and other 36,383 242 (148) 36,477
-------- ------ ----- --------
Totals $367,851 $3,222 $(448) $370,625
======== ====== ===== ========
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
======== ==== ======= ========
The amortized cost and fair value of investment securities available for
sale and held to maturity, by contractual maturity, at December 31, 2002 and
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, 2002
----------------------------------------
Available for Sale Held to Maturity
-------------------- -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- -----
(In thousands)
Due in one year or less $ 1,078 $ 1,051 $ -- $ --
Due after one through five
years 143,467 144,797 -- --
Due after five through ten
years 127,385 128,372 168 169
Due after ten years 59,538 59,928 665 666
Marketable equity securities
and other 36,383 36,477 -- --
-------- -------- ---- ----
Totals $367,851 $370,625 $833 $835
======== ======== ==== ====
50
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE C - (continued)
Gross gains realized on the sales of investment securities for the years
ended December 31, 2002, 2001 and 2000 were $1.54 million, $637,000 and $13.29
million, respectively. Losses were not material for these periods.
As of December 31, 2002 and 2001, securities sold under agreements to
repurchase with a book value of approximately $64.84 million and $56.75 million,
respectively, were outstanding. As of December 31, 2002 and 2001, the Company
did not have any investment securities of any one issuer where the carrying
value exceeded 10% of shareholders' equity.
On November 7, 2002, we sold our 24.9% interest in a merchant credit card
processing company for $285,000, which represents our initial purchase price in
December 1999. We accounted for our interest in this company under the equity
method of accounting and have recorded approximately $200,000 in net losses
since December 1999. In addition, the Bank had loans outstanding totaling
$295,000 to this company which are being repaid as a result of this transaction.
The purchase price to Berkshire and the amounts owed to the Bank are being paid
in the form of a note to be held by the Bank.
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.
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, 2002 and 2001, the Company owned 130,000 shares of
Executone Common Stock which have been classified as available-for-sale
securities, all other shares having been sold during 1999 and 2000.
51
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE D - LOANS
Major classifications of loans are as follows:
December 31, December 31,
2002 2001
------------ ------------
(In thousands)
Commercial and professional loans $ 16,704 $ 19,130
Secured by real estate
1 - 4 family 180,730 165,195
Multi family 8,958 11,186
Non-residential 65,809 51,893
Consumer 4,051 4,689
Other -- 140
-------- --------
276,252 252,233
Deferred loan fees (755) (193)
Allowance for loan losses (2,315) (2,030)
-------- --------
$273,182 $250,010
======== ========
Changes in the allowance for loan losses are as follows:
For The Years Ended December 31,
--------------------------------
2002 2001 2000
------ ------ ------
(In thousands)
Balance at beginning
of year $2,030 $1,108 $ 923
Provision charged to
operations 387 287 55
Loans charged off 199 97 --
Recoveries 97 41 130
Acquisition of GSB
Financial Corp -- 691 --
------ ------ ------
Balance at end of year $2,315 $2,030 $1,108
====== ====== ======
The Company had $59,000, $9,000 and $0 non accrual loans as of December 31,
2002, 2001 and 2000, respectively. The Company did not have any impaired loans
as of December 31, 2002, 2001 and 2000. The Company had approximately $0,
$58,000 and $0 of loans past due more than 90 days and still accruing interest
as of December 31, 2002, 2001 and 2000, respectively.
The Company, from time to time, enters 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,
2002, loans to these related parties amounted to $13.9 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, 2002, resulted in new loans of $5.2 million and repayments of approximately
$369,000.
52
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE E - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
Estimated December 31, December 31,
useful lives 2002 2001
------------- ------------ ------------
(In thousands)
Land Indefinite $ 1,817 $ 1,817
Buildings 39 years 838 838
Furniture and equipment 3 to 10 years 2,196 1,594
Leasehold improvements 2 to 10 years 612 585
Construction in progress 5,056 3,765
------- -------
10,519 8,599
Accumulated depreciation and
amortization (1,543) (1,153)
------- -------
Total $ 8,976 $ 7,446
======= =======
Depreciation and amortization expense was approximately $279,000, $249,000
and $104,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
NOTE F - DEPOSITS
The aggregate amount of jumbo certificates of deposits greater than
$100,000 were approximately $108.72 million, $68.88 million and $55.32 million
as of December 31, 2002, 2001 and 2000, respectively.
The scheduled maturities of all certificates of deposit are as follows:
December 31, 2002
-----------------
(In thousands)
2003 $299,691
2004 12,167
2005 63
2006 46
2007 12
--------
$311,979
========
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,
---------------------------
2002 2001 2000
------- ------- -------
(Dollars in Thousands)
Securities sold under repurchase
agreements and federal funds purchased
Balance at year-end $46,673 $53,756 $23,127
Average during the year $38,433 $13,372 12,367
Maximum month-end balance $47,407 $53,756 24,495
Weighted average rate during the year 1.79% 3.62% 5.85%
Rate at December 31 1.46% 1.67% 5.75%
Long-Term Borrowings At December 31, 2002, advances from the Federal Home
Loan Bank ("FHLB") totaling $57,699,000 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 4.69%. Unused lines of credit at the FHLB were $33.21 million at December 31,
2002.
Outstanding long-term borrowings mature as follows (in thousands):
Year Amount
---------- -------
2003 $ 500
2004 0
2005 1,000
2006 7,935
2007 34,264
Thereafter 14,000
-------
Total $57,699
=======
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, 2002
(in thousands, except per share data)
---------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic earnings per share
Net income available to
common stockholders $5,597 2,292 $2.44
Effect of dilutive securities
Options -- 11 (.01)
------ ----- -----
Diluted earnings per share
Net income available to
common stockholders plus
assumed conversions $5,597 2,303 $2.43
====== ===== =====
54
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE H - (continued)
Options to purchase 115,375 shares of common stock for $30.00 to $38.00 per
share were outstanding during the year ended December 31, 2002. These options
were not included in the computation of diluted earnings per share because the
option exercise price was greater than the average market price for the
Company's common stock during this period.
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
====== ===== =====
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.
55
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE I - INCOME TAXES
The components of income tax expense are as follows:
Years Ended December 31,
-------------------------------------
2002 2001 2000
---------- ---------- -----------
Current $4,216,000 $1,702,000 $ 8,390,000
Deferred Taxes (Benefit) 133,000 426,000 (1,522,000)
---------- ---------- -----------
$4,349,000 $2,128,000 $ 6,868,000
========== ========== ===========
A reconciliation of the provision for income taxes for the years ended
December 31, 2002, 2001 and 2000 and the amount computed by applying the
statutory Federal income tax rate to income from continuing operations follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Effective Tax Reconciliation
Tax at statutory rate $3,381,000 $1,846,000 $6,438,000
State and City, net of federal
income tax benefit 940,000 612,000 756,000
Nondeductible expenses,
including goodwill -- 217,000 (144,000)
Tax exempt income (53,000) (44,000) (182,000)
Other 81,000 (503,000) --
---------- ---------- ----------
Actual provision for
income taxes $4,349,000 $2,128,000 $6,868,000
========== ========== ==========
The tax effect of the principal temporary differences at December 31, 2002
and 2001 are as follows:
December 31,
------------------------
2002 2001
----------- ----------
Net deferred tax assets
Net operating losses $ -- $ 107,000
Loan loss provision 1,095,000 973,000
Depreciation 20,000 33,000
Other (15,000) 120,000
Unrealized loss, minimum
pension liability adjustment 136,000 --
Unrealized (gain) loss on
investment securities (1,124,000) 132,000
----------- ----------
Net deferred tax asset
included in other assets $ (112,000) $1,365,000
=========== ==========
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.
56
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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
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. Options outstanding under the 1999 Stock
Incentive Plan were 115,375 and 120,875 as of December 31, 2002 and 2001,
respectively. As of December 31, 2002 and 2001, 62,126 options and 70,721
options, respectively, were outstanding as a result of the GSB acquisition. The
Company did not grant options in 2002.
A summary of activity with respect to the Stock Option Plan follows:
December 31,
-------------------------------------------------------------
2002 2001 2000
------------------ ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- -------- --------
Outstanding at
beginning of year 191,596 $29.74 50,375 $36.67 212,375 $13.83
Granted -- $ -- 152,496 $27.68 5,000 $31.75
Cancelled (6,509) $27.13 (7,443) $29.84 (151,000) $ 7.21
Exercised (7,586) $21.75 (3,832) $23.59 (16,000) $10.08
------- ------- --------
Outstanding at
end of year 177,501 $30.30 191,596 $29.74 50,375 $36.67
======= ======= ========
Exercisable at
end of year 167,500 $33.09 84,799 $31.63 45,375 $37.21
======= ======= ========
Weighted average fair
value of options
granted during the
year $ -- $ 9.54 $11.14
======= ====== ======
57
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE K - (continued)
The following table summarizes information about options outstanding at
December 31, 2002:
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 2002 life (years) price 2002 price
--------------- ------------ ------------ -------- ------------ --------
$17.94 - 26.34 54,447 5.59 $25.20 45,981 $25.05
27.79 - 38.00 123,054 4.02 32.56 121,519 36.13
------- -------
177,501 167,500
======= =======
NOTE L - EMPLOYEE BENEFIT PLANS
1. Retirement Income Plan
The Company has a 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,
------------
2002 2001
---- ----
Discount rates-liability 7.25% 7.50%
Long-term rate of return-assets 8.50% 8.50%
58
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, 2002, 2001 and 2000 is as follows:
December 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Service cost-benefits earned
during the period $ 48,883 $ 68,214 $ 50,075
Interest cost on projected
benefit obligation 98,897 103,364 98,525
Expected return on plan assets (148,973) (177,560) (184,740)
Net amortization and deferral 18,370 10,913 (5,121)
--------- --------- ---------
Net pension cost/(income) of
defined benefit plan $ 17,177 $ 4,931 $ (41,261)
========= ========= =========
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, 2002
and 2001:
December 31,
-------------------------
2002 2001
----------- -----------
Actuarial present value of vested
accumulated benefit obligations $ 1,435,631 $ 1,413,923
Actuarial present value of
accumulated benefit obligations 1,441,790 1,416,491
----------- -----------
Projected benefit obligations $(1,441,790) $(1,496,907)
Fair value of plan assets 1,515,166 1,809,700
----------- -----------
Excess of projected benefit
obligation over fair value
of plan assets 73,376 312,793
Unrecognized prior service cost 175,984 194,354
Unrecognized net loss 342,903 102,293
Adjustment required to recognize
minimum liability 0 0
----------- -----------
Prepaid pension cost, included
in other assets $ 592,263 $ 609,440
=========== ===========
59
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. On October 24,
2002, the Board of Directors of the Bank approved the termination of this plan.
Upon the notice of termination, all participant benefits vest 100%.
December 31,
---------------
2002 2001
------ ------
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of year $1,193 $1,116
Service cost -- --
Interest cost 84 85
Actual loss 85 81
Benefits paid (91) (89)
------ ------
Benefits obligations at end of year 1,271 1,193
Change in plan assets
Fair value of plan assets
at beginning of year 1,309 1,518
Actual return on plan assets (917) (127)
Employer contribution -- 7
Benefits paid (91) (89)
------ ------
Fair value of plan assets
at end of year 1,127 1,309
Funded status (144) 116
Unrecognized net actuarial loss 340 80
------ ------
Prepaid benefit cost (included in
other assets) $ 196 $ 196
====== ======
Net pension cost included the following components:
Year Ended December 31,
-----------------------
2002 2001
---- ----
(In thousands)
Service cost $ -- $ --
Interest cost on projected benefit
obligation 84 85
Expected return on plan assets (88) (99)
Purchase accounting change -- 61
---- ----
Net periodic benefit cost $ 4 $ 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 7.25% and 8.00% in 2002 and 2001, respectively.
60
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 retirement date.
December 31,
-------------
2002 2001
----- -----
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 712 $ 667
Service cost -- --
Interest cost 50 51
Actual gain 9 48
Benefits paid (53) (54)
----- -----
Benefits obligation at end of year 718 712
----- -----
Change in plan assets
Fair value of plan assets
at beginning of year -- --
Actual return on plan assets -- --
Employer contribution 53 54
Benefits paid (53) (54)
----- -----
Fair value of plan assets
at end of year -- --
----- -----
Funded status (718) (712)
Unrecognized net actuarial loss 13 4
----- -----
Accrued benefit cost (included in
other liabilities) $ 705 $ 708
===== =====
Net benefit cost included the following components:
Year Ended December 31,
-----------------------
2002 2001
---- ----
(In thousands)
Service cost $-- $--
Interest cost on projected
benefit obligation 50 51
Actual return on plan assets -- --
--- ---
Net periodic benefit cost $50 $51
=== ===
The assumed discount rate used in determining the actuarial present value
of the projected benefit obligation was 7.25% and 8.00% in 2002 and 2001,
respectively.
61
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
their 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 $105,000 for the year ended December 31, 2002, $57,000 for
both the Bank and Goshen Bank plans for the year ended December 31, 2001 and
$29,000 for the Bank's plan for the year ended December 31, 2000.
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,
2002 and 2001, the balance accumulated under these arrangements was
approximately $248,000 and $242,000, respectively, 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 2003 through 2007. 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,
------------
2003 $ 900
2004 534
2005 413
2006 292
2007 979
------
$3,118
======
Rental expense was approximately $811,000, $717,000 and $335,000 for the
fiscal years ended December 31, 2002, 2001 and 2000, respectively. Included in
rental expense was approximately $255,000, $255,000 and $18,000 for the fiscal
years ended December 31, 2002, 2001 and 2000, respectively, which was paid to a
company affiliated with a director of the Company.
62
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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.
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, 2002 and 2001 are outlined
below.
For cash and cash equivalents, the recorded book values of $6.31 million
and $10.38 million at December 31, 2002 and 2001, 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,
---------------------------------------------
2002 2001
--------------------- ---------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- ----------
(In thousands)
Investment securities $371,458 $371,460 $242,579 $242,564
Loans, net of unearned income 275,497 278,252 252,040 289,482
Time Deposits 311,979 312,117 199,951 200,237
The net loan portfolio at December 31, 2002 and 2001 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 $104.37 million and $96.03 million are
estimated to approximate their recorded book balances at December 31, 2002 and
2001, 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.
63
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE N - (continued)
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 $53,000 and $22,000 at December 31, 2002
and 2001, respectively.
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,
-----------------
2002 2001
------- -------
(In thousands)
Commitments to extend credit $13,432 $ 7,718
Standby letters of credit and financial
guarantees written 750 529
------- -------
$14,182 $ 8,247
======= =======
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,
2002 varies up to 100%.
64
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE O - (continued)
The Bank grants loans primarily to customers in New York and its
immediately adjacent suburban communities. 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.
The Bank has entered into interest rate cap agreements in order to hedge
its exposure to interest rate fluctuations. The Company adopted the provisions
of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), as amended, as of January 1, 2001. The statement requires the
Company to recognize all derivative instruments at fair value as either assets
or liabilities. Financial derivatives are reported at fair value in other assets
or other liabilities. The accounting for changes in fair value of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship. For derivatives not designated as hedges, the gain or loss
is recognized in current earnings. Amounts reclassed into earnings, when the
hedged transaction culminates, are included in interest income. The Company
performs an assessment, both at the inception of the hedge and quarterly
thereafter, to determine whether these are highly effective in offsetting
changes in the value of the hedged items. The change in fair value of the swaps
attributed to hedge ineffectiveness was not material for the years ended
December 31, 2002 and 2001.
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, 2002, the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 2002, 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.
65
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note P - (continued)
The following table sets forth the actual and required regulatory capital
amounts and ratios of, the Company and the Bank as of December 31, 2002 and 2001
(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, 2002
Total Capital (to Risk-Weighted Assets)
Company $80,811 12.3% $23,801 >=8.0% $ -- N/A
Bank 53,687 19.4% 22,193 >=8.0% 27,741 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 78,496 26.4% 11,900 >=4.0% -- N/A
Bank 51,372 18.5% 11,096 >=4.0% 16,645 >= 6.0%
Tier I Capital (to Average Assets)
Company 78,496 27.2% 25,468 >=4.0% -- N/A
Bank 51,372 7.8% 26,210 >=4.0% 32,763 >= 5.0%
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2001
Total Capital (to Risk-Weighted Assets)
Company 79,867 20.5% 20,097 >=8.0% -- N/A
Bank 48,110 20.4% 18,841 >=8.0% 23,551 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Company 77,837 31.0% 10,048 >=4.0% -- N/A
Bank 46,080 19.6% 9,421 >=4.0% 14,130 >= 6.0%
Tier I Capital (to Average Assets)
Company 77,837 20.5% 15,194 >=4.0% -- N/A
Bank 46,080 9.6% 19,190 >=4.0% 23,988 >= 5.0%
66
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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,
-----------------
2002 2001
------- -------
ASSETS
Cash $ 7,439 $16,449
Equity investment in subsidiaries 71,276 64,225
Investment in securities available for sale 6,147 3,993
Loans 8,420 6,478
Accrued interest receivable 430 37
Premises and equipment 5,056 3,764
Other assets 294 1,371
------- -------
Total assets $99,062 $96,317
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 537 $ 325
Stockholders' equity
Common stock 256 256
Additional paid-in capital 89,890 89,914
Retained earnings 16,145 11,053
Accumulated other comprehensive income
(loss), net 1,480 (281)
Common stock in treasury, at cost (9,246) (4,950)
------- -------
Total stockholders' equity 98,525 95,992
------- -------
$99,062 $96,317
======= =======
67
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE Q - (continued)
CONDENSED STATEMENTS OF INCOME
(In Thousands)
For The Years Ended December 31,
--------------------------------
2002 2001 2000
------ ------ -------
INCOME
Interest income from
the Bank $ 207 $ 836 $ 1,750
Interest income 1,149 1,079 2,011
Gain on sales of
investment securities 7 31 13,288
Other income (loss) (73) (92) 759
------ ------ -------
Total income 1,290 1,854 17,808
EXPENSES
Salaries and employee
benefits 243 217 111
Other expenses 505 661 648
------ ------ -------
Total expenses 748 878 759
------ ------ -------
Income before income
taxes and equity in
undistributed net
income of the Bank 542 976 17,049
Equity in undistributed
net income of the Bank 5,405 2,199 723
------ ------ -------
Income before taxes 5,947 3,175 17,772
Provision (benefit) for
income taxes 350 (124) 5,706
------ ------ -------
Net income $5,597 $3,299 $12,066
====== ====== =======
68
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE Q - (continued)
CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
For The Years Ended December 31,
--------------------------------
2002 2001 2000
------- -------- --------
Operating activities:
Net income $ 5,597 $ 3,299 $ 12,066
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Gain on sales of investment securities (7) (31) (13,288)
Equity in undistributed net income of
the Bank (5,405) (2,199) (723)
Increase (decrease in other
liabilities 214 (1,153) (5,932)
(Increase) decrease in other assets 840 3,624 (445)
------- -------- --------
Net cash provided by (used in)
operating activities 1,239 3,540 (8,322)
------- -------- --------
Investing activities:
Investment in subsidiaries and
affiliates -- -- (390)
Cash paid for acquisition -- (20,222) --
Proceeds from sales of common stock -- -- 13,267
Investment securities available
for sale
Purchases (2,965) -- --
Sales 775 1,124 4,421
Net (increase) decrease in loans (1,942) 1,465 1,927
Purchase of premises and equipment (1,292) (3,764) --
------- -------- --------
Net cash provided by (used in)
investing activities (5,424) (21,397) 19,290
------- -------- --------
Financing activities:
Proceeds from exercise of
common stock options 102 90 28
Acquisition of treasury stock (4,422) (4,983) (5,254)
Dividends paid (505) (598) (1,293)
------- -------- --------
Net cash (used in) financing
activities (4,825) (5,491) (6,519)
------- -------- --------
Net increase (decrease) in
cash and cash equivalents (9,010) (23,348) 4,384
Cash and cash equivalents at
beginning of year 16,449 39,797 35,413
------- -------- --------
Cash and cash equivalents at
end of year $ 7,439 $ 16,449 $ 39,797
======= ======== ========
Supplemental disclosures of cash
flow information:
Cash used to pay income taxes $ 146 $ 1,385 $ 6,418
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
-------- ------- ------------ -----------
2002
Interest income $ 7,316 $ 8,097 $ 8,495 $ 8,334
Interest expense (3,050) (3,358) (3,564) (3,444)
------- ------- ------- -------
Net interest income 4,266 4,739 4,931 4,890
Provision for loan losses (50) (107) (200) (30)
Gain on sale of securities 196 127 681 535
Other operating income 273 218 117 140
Other operating expenses (2,399) (2,802) (2,898) (2,681)
------- ------- ------- -------
Income before taxes 2,286 2,175 2,631 2,854
Provision (benefit) for taxes 980 988 1,118 1,263
------- ------- ------- -------
Net income $ 1,306 $ 1,187 $ 1,513 $ 1,591
======= ======= ======= =======
Per share data
Net income per common share
Basic $ .55 $ .51 $ .67 $ .71
======= ======= ======= =======
Diluted $ .55 $ .51 $ .67 $ .70
======= ======= ======= =======
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 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
======= ======= ======= =======
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 54 President, Director
William L. Cohen 61 Director
Thomas V. Guarino 49 Director
Moses Marx 67 Director
Randolph B. Stockwell 56 Director
Moses Krausz 62 President of The Berkshire Bank
David Lukens 53 Senior Vice President, Chief Financial Officer of
The Berkshire Bank
Mr. Rosenberg has served as President and Chief Executive Officer of
the Company since March 1999 and as Vice President and Chief Financial
Officer of the Company from April 1990 to March 1990. He continues to serve
as Chief Financial Officer. 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. He has been a private
investor for over five years. Mr. Cohen served as President, Chief
Executive Officer and Chairman of the Board of The Andover Apparel Group,
Inc., an apparel manufacturing company, from 1980 to 2000.
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. 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.
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.
There are no family relationships (whether by blood, marriage or
adoption) among any of the Company's current directors or executive
officers.
72
Audit Committee Members, Financial Expert and Independence
The Board of Directors of the Company has established an Audit
Committee comprised of three independent directors, Messrs. William L.
Cohen, Thomas V. Guarino and Randolph B. Stockwell. All of the members of
the Audit Committee meet the independence requirements under current
National Association of Securities Dealers corporate governance standards
for companies whose securities are quoted on NASDAQ. Based upon their
education and relevant experience, the Board of Directors has determined
that Messrs. Guarino and Stockwell each qualify as financial experts as
defined by the Sarbanes-Oxley Act of 2002 and the Securities and Exchange
Commission.
Principal Accountant Fees and Services
The Company's principal accountant is Grant Thornton LLP ("Grant
Thornton"). The total fees paid to Grant Thornton for the last two fiscal
years are as follows:
Fiscal Year Ended Fiscal Year Ended
December 31, 2002 December 31, 2001
----------------- -----------------
Audit Fees $111,399 $ 86,500
Audit Related Fees: Professional services rendered for 6,498 12,381
employee benefit plan audits, accounting assistance in
connection with acquisitions and consultations related to
financial accounting and reporting standards
Tax Fees 71,009 59,478
All Other Fees: Professional services rendered for corporate -- --
support
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, 2002,
and to each of the other executive officers who were paid more than
$100,000 during the fiscal year ended December 31, 2002.
Summary Compensation Table (1)
Annual Compensation
-------------------
All Other
Name and Principal Position Year Salary Bonus Compensation
-------------------------------- ---- -------- -------- ------------
Steven Rosenberg 2002 $167,500 $ -- $ --
President, Chief Executive 2001 $152,500 $ -- $ --
Officer and Chief Financial
Officer 2000 $125,000 $ -- $ --
Moses Krausz 2002 $347,288 $175,000 $10,050(2)
President and Chief Executive 2001 $330,750 $175,000 $ 9,300(2)
Officer of The Berkshire Bank 2000 $310,000 $175,000 $ 8,665(2)
David Lukens 2002 $125,000 $ 24,000 $ 5,367(3)
Senior Vice President and 2001 $115,000 $ 24,000 $ 4,988(3)
Chief Financial Officer of
The Berkshire Bank 2000 $103,500 $ 18,000 $ 812(3)
----------
(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 $6,000,
$5,250 and $5,250, respectively, in 2002, 2001 and 2000, and income
associated with life insurance coverage in excess of $50,000.
73
(3) Consists of contributions by the Company to a 401(k) account of $4,470 and
$4,170, respectively, in 2002 and 2001, and income associated with life
insurance coverage in excess of $50,000 in 2002, 2001 and 2000.
Option Grants in Last Fiscal Year
There were no stock option grants during the fiscal year ended December 31,
2002.
Aggregated Option Exercises and Fiscal Year-End Option Values
The following table sets forth information concerning options exercised
during the fiscal year ended December 31, 2002, and the number of options owned
and the value of any in-the-money unexercised options as of December 31, 2002 by
any of the individuals named in the Summary Compensation Table.
Number of
Unexercised
Shares Options at
Acquired Fiscal Year-End Value of Unexercised
on Value (#) In-the-Money Options at
Exercise Realized Exercisable Fiscal Year-End ($)
Name (#) ($) /Unexercisable Exercisable/Unexercisable
---- -------- -------- --------------- -------------------------
Steven Rosenberg -0- -0- 10,000 / 0 43,100 / 0
Moses Krausz -0- -0- 50,000 / 0 86,200 / 0
David Lukens -0- -0- 10,000 / 0 34,350 / 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.
Compensation of Directors
Each director who is not also an employee of the Company (a "Non-Employee
Director") receives a stipend of $12,000 per annum and $1,000 for each day
during which he participates in a meeting of the Board or a Committee of the
Board. Each Non-Employee Director also receives fees ranging from $100 to $1,000
for telephonic meetings of the Board or a Board Committee depending upon the
length of the meeting. 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 December 31, 2002,
options to acquire 187,419 shares of common stock have been granted under this
plan and 12,581 options are available for future grants.
74
Retirement Income Plan
The Company has a 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.
A participant in the Plan accumulates a balance in his or her retirement
account by receiving: (i) an annual retirement credit of 5% of gross wages paid
during the year, but not in excess of the applicable annual maximum compensation
permitted to be taken into account under Internal Revenue Service guidelines for
each year of service; and (ii) an annual interest credit based upon the 30-year
U. S. Treasury securities rate. The Company pays the entire cost of the Plan for
its employees and funds such costs as they accrue.
The estimated annual benefits payable under the Plan upon retirement (at
the normal retirement age of 65) for Messrs. Rosenberg and Lukens are
approximately $160,000 and $15,000, respectively. In accordance with the laws
currently governing the Plan, the estimated annual benefit payable to Mr.
Rosenberg is not expected to increase. Mr. Krausz is not a participant in the
Plan. (see Note L of Notes to Consolidated Financial Statements).
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Equity Compensation Plans.
The following table sets forth certain information as of March 14, 2003
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 31,781 (2) 1.4%
Moses Krausz 64,800 (3) 2.8%
David Lukens 10,200 (4) *
Moses Marx 1,048,620 (5) 46.8%
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) 1,186,762 (8) 51.1%
----------
* Less than 1%
(1) Includes 1,000 shares issuable upon the exercise of options which have been
granted to Mr. Cohen under the Company's 1999 Stock Incentive Plan.
75
(2) Includes 13,195 shares issuable upon the exercise of options which have
been granted to Mr. Guarino under the Company's 1999 Stock Incentive Plan.
Includes 2,286 shares held in trust for minor children and 301 shares held
by Mr. Guarino's wife
(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.
Does not include 503 shares owned by Mr. Krausz's spouse.
(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.
(5) Includes 1,000 shares issuable upon the exercise of options which have been
granted to Mr. Marx under the Company's 1999 Stock Incentive Plan and
125,000 shares owned by Momar Corporation. Does not include 43,067 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 1,000 shares issuable upon the exercise of options which have been
granted to Mr. Stockwell under the Company's 1999 Stock Incentive Plan.
(8) Includes 86,195 shares of Common Stock which are issuable upon the exercise
of outstanding options.
Equity Compensation Plans
The following table details information regarding the Company's existing
equity compensation plans as of December 31, 2002.
(c)
Number of securities
(a) (b) remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a)
------------- ----------------------- -------------------- -------------------------
Equity compensation 177,501 $30.30 12,581
plans approved by
security holders
Equity compensation -- -- --
plans not approved by
security holders
Total 177,501 $30.30 12,581
ITEM 13. Certain Relationships and Related Transactions.
In April 2001 and June 1999, the Company made term loans in the principal
amount of $2,000,000 and $2,000,000, respectively, to Pharmaceutical Holdings
Corp., a Delaware corporation, the principal stockholder of which is Momar. 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. The notes, which bear interest at the prime rate plus 0.50%, are due
in March 2003 and June 2003.
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
2002 and 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.
76
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. In July 2002, the
loan was repaid in full.
See Item 1. Business - Transactions With Related Parties and Item 2.
Properties for additional information.
ITEM 14. Controls and Procedures
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
Within the 90 days prior to the date of this Annual Report on Form 10-K, the
Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls"). This evaluation
("Controls Evaluation") was done under the supervision and with the
participation of management, including the Chief Executive Officer ("CEO") who
is also the Chief Financial Officer ("CFO").
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO/CFO, does not expect that its Disclosure Controls and/or its
"internal controls and procedures for financial reporting" ("Internal Controls")
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Conclusions. Based upon the Controls Evaluation, the CEO/CFO has concluded that,
subject to the limitations noted above, the Disclosure Controls are effective to
timely alert management to material information relating to the Company during
the period when its periodic reports are being prepared.
In accordance with SEC requirements, the CEO/CFO notes that, since the date of
the Controls Evaluation to the date of this Annual Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
77
PART IV
ITEM 15. 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, 2002 and 2001
Consolidated Statements of Income for the Years Ended December 31, 2002,
2001 and 2000
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
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).'D'
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).'D'
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).'D'
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).
78
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).'D'
10.7 Amendment No. 1 to Employment Agreement, dated June 3, 2002, by and
between The Berkshire Bank and David Lukens (incorporated by reference
to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the
Quarterly Period Ended June 30, 2002).'D'
21. Subsidiaries of the Company.
23. Consent of Independent Certified Public Accountant
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
----------
'D' Denotes a management compensation plan or arrangement.
(b) Reports on Form 8-K.
None.
79
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 21, 2003
--------------
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
--------- ----- ----
President, (Chief
Executive Officer,
Principal Financial
Officer and Principal
Accounting Officer);
/s/ Steven Rosenberg Director March 21, 2003
--------------------------
Steven Rosenberg
/s/ William Cohen Director March 21, 2003
--------------------------
William Cohen
/s/ Thomas V. Guarino Director March 21, 2003
--------------------------
Thomas V. Guarino
/s/ Moses Marx Director March 21, 2003
--------------------------
Moses Marx
/s/ Randolph B. Stockwell Director March 21, 2003
--------------------------
Randolph B. Stockwell
80
Certification of Principal Executive and Financial Officer
I, Steven Rosenberg the Chief Executive Officer, President and Chief Financial
Officer of Berkshire Bancorp Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Berkshire Bancorp Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 21, 2003
/s/ Steven Rosenberg
----------------------------------
Steven Rosenberg,
Chief Executive Officer, President
and Chief Financial Officer
81
Statement of Differences Most Commonly Used Symbols
The dagger symbol shall be expressed as............................... 'D'
The greater-than-or-equal-to sign shall be expressed as................ >=