U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended September 30, 2000
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to __________
Commission File Number: 0-30483
DUTCHFORK BANCSHARES, INC.
(Name of small business issuer in its charter)
DELAWARE 57-1094236
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1735 Wilson Road, Newberry, South Carolina 29108
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (803) 321-3200
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 $0.01 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's gross revenues for the fiscal year ended September 30, 2000
were $16,647,446.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates was $17,473,279 based upon the average of the bid and asked
price ($13.1875 per share) as quoted on the Nasdaq SmallCap Market on December
1, 2000. Solely for purposes of this calculation, the shares held by the
directors and officers of the registrant are deemed to be held by affiliates.
The number of shares outstanding of the registrant's common stock as of
December 1, 2000 was 1,560,550.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2000 Annual Report to Stockholders and of the Proxy
Statement for the 2001 Annual Meeting of Stockholders are incorporated
by reference in Parts II and III, respectively, of this Form 10-KSB
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
INDEX
Part I
Page
Item 1. Description of Business...........................................1
Item 2. Description of Properties........................................30
Item 3. Legal Proceedings................................................30
Item 4. Submission of Matters to a Vote of Securities Holders............30
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.........30
Item 6. Management's Discussion and Analysis or Plan of Operation........31
Item 7. Financial Statements.............................................31
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure ........................................31
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................31
Item 10. Executive Compensation...........................................31
Item 11. Security Ownership of Certain Beneficial Owners and Management...31
Item 12. Certain Relationships and Related Transactions...................31
Item 13. Exhibits and Reports on Form 8-K.................................32
<PAGE>
This report contains certain "forward-looking statements" within the
meaning of the federal securities laws. These statements are not historical
facts, rather statements based on DutchFork Bancshares, Inc.'s current
expectations regarding its business strategies, intended results and future
performance. Forward-looking statements are preceded by terms such as "expects,"
"believes," "anticipates," "intends" and similar expressions.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the market area in
which DutchFork Bancshares, Inc. operates, as well as nationwide, DutchFork
Bancshares, Inc.'s ability to control costs and expenses, competitive products
and pricing, loan delinquency rates and changes in federal and state legislation
and regulation. These factors should be considered in evaluating the
forward-looking statements and undue reliance should not be placed on such
statements. DutchFork Bancshares, Inc. assumes no obligation to update any
forward-looking statements.
PART I
Item 1. DESCRIPTION OF BUSINESS
General
DutchFork Bancshares, Inc., headquartered in Newberry, South Carolina, was
formed in February 2000 as the holding company for Newberry Federal Savings Bank
in connection with the conversion of Newberry Federal from mutual to stock form
of ownership. The conversion was completed on July 5, 2000 through the sale of
1,560,550 shares of common stock by DutchFork Bancshares at a price of $10.00
per share. DutchFork Bancshares' sole business activity is the ownership of all
of Newberry Federal's capital stock. DutchFork Bancshares does not transact any
material business other than through its subsidiary, Newberry Federal. DutchFork
Bancshares is subject to the regulation of the Office of Thrift Supervision and
the Securities and Exchange Commission. DutchFork Bancshares is listed on the
Nasdaq SmallCap Market under the symbol DFBS.
Newberry Federal's principal business is attracting deposits from the
general public and originating loans secured by one-to-four family residential
real estate properties located in its market area. Newberry Federal is regulated
by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation. Newberry Federal's deposits are federally insured by the Federal
Deposit Insurance Corporation and are currently insured to the maximum allowable
amount by the Federal Deposit Insurance Corporation under the Savings
Association Insurance Fund. Newberry Federal is a member of the Federal Home
Loan Bank System.
Market Area
Newberry Federal is headquartered in Newberry, South Carolina. Newberry
Federal's primary deposit gathering and lending area is concentrated in the
communities surrounding its three banking offices located in Newberry County and
one banking office located in northwest Lexington County, although Newberry
Federal also originates loans to borrowers and accepts deposits from individuals
residing in the bordering areas of contiguous counties. Newberry and Lexington
Counties are located in central South Carolina, approximately 35 miles northwest
of Columbia, the state capital.
Newberry and Lexington Counties are located northwest of Columbia on
Interstate 26 in central South Carolina. Lexington County exhibits stronger
demographics than Newberry County because of its closer proximity to Columbia,
the state capital. On average, the demographics of Newberry County are weaker
than South Carolina and the U.S. as a whole, while the opposite is true for
Lexington County.
Competition
Newberry Federal faces intense competition for the attraction of deposits
and origination of loans in its primary market area. Its most direct competition
for deposits has historically come from the several commercial and savings banks
operating in Newberry Federal's primary market area and, to a lesser extent,
from other financial institutions, such
3
<PAGE>
as brokerage firms, credit unions and insurance companies. While those entities
still provide a source of competition for deposits, Newberry Federal currently
faces significant competition for deposits from the mutual fund industry as
customers seek alternative sources of investment for their funds. Newberry
Federal also faces significant competition for investors' funds from their
direct purchase of short-term money market securities and other corporate and
government securities. While Newberry Federal's faces competition for loans from
the significant number of financial institutions, primarily savings banks and
commercial banks in its market area, its most significant competition comes from
other financial service providers, such as the mortgage companies and mortgage
brokers operating in its primary market area. Additionally, competition may
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions and due to the increasing trend for non-depository
financial service companies entering the financial services market, such as
insurance companies, securities companies and specialty financial companies.
Competition for deposits and the origination of loans may limit Newberry
Federal's growth in the future.
Lending Activities
General. The types of loans that Newberry Federal may originate are limited
by federal laws and regulations. Interest rates that Newberry Federal charges on
loans are affected principally by its current asset/liability strategy, the
demand for the type of loans being originated, the supply of money available for
lending purposes and the rates offered by competitors. All of these factors are
affected by general and economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, legislative tax policies and
governmental budgetary matters.
4
<PAGE>
Loan Portfolio Analysis. The following table presents the composition of
Newberry Federal's loan portfolio at the dates indicated. Newberry Federal had
no concentration of loans exceeding 10% of total loans receivable other than as
disclosed below.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------
2000 1999 1998
------------------ ------------------ -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family................................. $52,439 63.35% $48,984 63.79% $44,543 61.78%
Commercial real estate (1).......................... 12,548 15.15 9,794 12.75 9,119 12.65
Construction........................................ 1,302 1.57 1,695 2.21 1,173 1.63
Land................................................ 1,548 1.87 1,432 1.86 1,510 2.09
------- ----- ------- ----- ------ ------
Total real estate loans.......................... 67,837 81.94 61,905 80.61 56,345 78.15
------- ----- ------- ----- ------ ------
Consumer loans:
Second mortgage loans, home equity
loans and lines of credit........................ 4,989 6.03 4,318 5.62 4,236 5.88
Automobile.......................................... 4,574 5.53 4,398 5.73 4,192 5.81
Other............................................... 4,563 5.51 4,278 5.57 4,709 6.54
------- ----- ------ ----- ------ ------
Total consumer loans............................. 14,126 17.07 12,994 16.92 13,137 18.23
Commercial loans....................................... 820 0.99 1,892 2.47 2,614 3.63
------- ------ ------ ------ ------ ------
Total loans...................................... 82,783 100.00% 76,791 100.00% 72,096 100.00%
====== ====== ======
Less:
Deferred loan origination fees
and discounts.................................... (104) (108) (113)
Loans in process.................................... (3,906) (1,175) (553)
Allowance for loan losses........................... (465) (184) (181)
------- ------- -------
Total loans, net................................. $78,308 $75,324 $71,249
======= ======= =======
<CAPTION>
At September 30,
----------------------------------------
1997 1996
------------------ ------------------
Percent Percent
Amount of Total Amount of Total
-------- -------- ------- --------
(Dollars in thousands)
Real estate loans:
<S> <C> <C> <C> <C>
One- to four-family................................. $42,173 62.54% $41,138 64.60%
Commercial real estate (1).......................... 8,174 12.13 7,060 11.10
Construction........................................ 969 1.44 2,520 3.96
Land................................................ 1,172 1.74 901 1.42
------- ------ ------ -----
Total real estate loans.......................... 52,488 77.85 51,619 81.08
------- ------ ------ -----
Consumer loans:
Second mortgage loans, home equity
loans and lines of credit........................ 2,953 4.38 1,656 2.60
Automobile.......................................... 4,819 7.15 4,439 6.98
Other............................................... 5,116 7.59 4,540 7.13
------ ------ ------ -----
Total consumer loans............................. 12,888 19.12 10,635 16.71
Commercial loans....................................... 2,041 3.03 1,408 2.21
------ ------ ------ ------
Total loans...................................... 67,417 100.00% 63,662 100.00%
====== ======
Less:
Deferred loan origination fees
and discounts.................................... (118) (122)
Loans in process.................................... (1,110) (1,277)
Allowance for loan losses........................... (192) (226)
------- --------
Total loans, net................................. $65,997 $62,037
======= ========
</TABLE>
--------------
(1) Also includes an immaterial amount of multi-family loans.
5
<PAGE>
One- to Four-Family Real Estate Loans. Newberry Federal's primary lending
activity is the origination of loans secured by one- to four-family residences
located in its primary market area. Newberry Federal offers several fixed- and
adjustable-rate mortgage loan products. The loan fees charged, interest rates
and other provisions of Newberry Federal's mortgage loans are determined by
Newberry Federal on the basis of its own pricing criteria and market conditions.
Although Newberry Federal originates all loans on loan documents approved for
use by Fannie Mae and Freddie Mac, the loans are generally not eligible for sale
in the secondary market because of various factors, including credit standards,
that do not conform to secondary market guidelines.
Newberry Federal's fixed-rate loans typically have maturities of 15 to 30
years, although 15 to 20 year terms constitute the largest percentage of current
originations. Generally, all conforming fixed-rate loans with maturities over 15
years are sold in the secondary market with Newberry Federal retaining the
servicing rights.
Newberry Federal's adjustable-rate mortgage loans are typically based on a
15-year or 30-year amortization schedule with interest rates that adjust
annually based on the one-year U.S. Treasury Bill rate. Occasionally, Newberry
Federal offers adjustable-rate mortgage loans with initial rates below
prevailing rates, although loans are generally underwritten based on the fully
indexed interest rate. The maximum amount by which the interest rate may be
increased or decreased in a given period on adjustable-rate mortgage loans is
generally 1% per year and the lifetime interest rate cap is generally 5% over
the initial interest rate of the loan. Newberry Federal qualifies the borrower
based on the borrower's ability to repay the adjustable-rate mortgage loan based
on the maximum interest rate at the first adjustment. Newberry Federal does not
originate negative amortization loans. The terms and conditions of the
adjustable-rate mortgage loans offered by Newberry Federal, including the index
for interest rates, may vary from time to time. Newberry Federal believes that
the annual adjustment feature of its adjustable-rate mortgage loans also
provides flexibility to meet competitive conditions as to initial rate
concessions while limiting the duration of the initial rate concession.
Adjustable-rate mortgage loans help reduce Newberry Federal's exposure to
changes in interest rates. There are, however, unquantifiable credit risks
resulting from the potential of increased costs due to changed rates to be paid
by the borrower. It is possible that during periods of rising interest rates the
risk of default on adjustable-rate mortgage loans may increase as a result of
repricing and the increased payments required by the borrower. In addition,
although adjustable-rate mortgage loans allow Newberry Federal to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the annual and lifetime interest rate
adjustment limits. Because of these considerations Newberry Federal can give no
assurance that yields on adjustable-rate mortgage loans will be sufficient to
offset increases in Newberry Federal's cost of funds during periods of rising
interest rates. Newberry Federal believes these risks, which have not had a
material adverse effect on Newberry Federal to date, generally are less than the
risks associated with holding fixed-rate loans in its portfolio in a rising
interest rate environment.
Newberry Federal's residential mortgage loans typically do not exceed 80%
of the appraised value of the property. Newberry Federal's lending policies
permit Newberry Federal to lend up to 95% of the appraised value of the
property; however, Newberry Federal generally requires private mortgage
insurance on the portion of the principal amount that exceeds 80% of the
appraised value of the property.
Newberry Federal also requires fire, casualty, title, hazard insurance and,
if appropriate, flood insurance be maintained on all properties securing real
estate loans made by Newberry Federal. An independent state-certified appraiser
generally appraises all properties.
In an effort to provide financing for first-time home buyers, Newberry
Federal offers a first-time home buyers program to qualified individuals. Under
this program Newberry Federal offers single family residential mortgage loans
that are originated using Newberry Federal's standard underwriting guidelines,
but with reduced downpayment requirements. Newberry Federal does not require
private mortgage insurance on these loans unless the loan balance exceeds 90% of
the lower of the appraised value or selling price of the property securing the
loan.
6
<PAGE>
Commercial Real Estate Loans. Newberry Federal originates mortgage loans
for the acquisition and refinancing of commercial real estate properties.
Commercial real estate loans are fully amortizing loans that are generally
originated with variable rates with rates tied to the prime lending rate. The
maximum loan-to-value ratio for a commercial loan is generally 75% of appraised
value. Newberry Federal's commercial real estate loans are generally secured by
office, retail and owner occupied properties and churches, all of which are
located in Newberry Federal's primary market area. Loans to churches are fixed-
and adjustable-rate mortgage loans with a maximum loan-to-value ratio of 80%. At
September 30, 2000, church loans totaled $1.1 million.
Commercial real estate lending affords Newberry Federal an opportunity to
receive interest at rates higher than those generally available from one- to
four-family residential lending. However, loans secured by these properties
usually are greater in amount and are more difficult to evaluate and monitor
and, therefore, involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by income
producing properties are often dependent on the successful operation and
management of the properties, repayment of these loans may be affected by
adverse conditions in the real estate market or the economy. Newberry Federal
seeks to minimize these risks by generally limiting the maximum loan-to-value
ratio to up to 75% for multi-family and commercial real estate loans and by
strictly scrutinizing the financial condition of the borrower, the cash flow of
the project, the quality of the collateral and the management of the property
securing the loan. Newberry Federal also generally obtains loan guarantees from
financially capable parties based on a review of personal financial statements.
Residential Construction Loans. Newberry Federal originates construction
loans to individuals and home builders located within Newberry Federal's primary
market area for the construction and acquisition of personal residences.
Newberry Federal does not originate commercial construction loans or speculative
construction loans to builders.
Construction loans generally provide for the payment of interest only
during the construction phase, which is usually four to six months. At the end
of the construction phase, the loan converts automatically to a permanent
mortgage loan without a new loan closing. Construction loans are made with a
maximum loan to value ratio of 90%, provided that the borrower obtains private
mortgage insurance on the loan if the loan balance exceeds 80% of the appraised
value or sales price, whichever is less, of the secured property.
Before making a commitment to fund a construction loan, Newberry Federal
requires an appraisal of the property by an independent state-certified
appraiser. Newberry Federal also reviews and inspects each property before
disbursement of funds during the term of the construction loan. Loan proceeds
are disbursed after inspection based on the percentage of completion method.
Construction lending generally involves a higher degree of risk than
single-family permanent mortgage lending because of the greater potential for
disagreements between borrowers and builders and the failure of builders to pay
subcontractors. Additional risk often exists because of the inherent difficulty
in estimating both a property's value and the estimated cost of the property. If
the estimate of construction cost proves to be inaccurate, Newberry Federal may
be required to advance funds beyond the amount originally committed to protect
the value of the property. If the estimate of value upon completion proves to be
inaccurate, Newberry Federal may be confronted with a property whose value is
insufficient to assure full repayment. Newberry Federal has attempted to
minimize the foregoing risks by, among other things, limiting its construction
lending to residential properties, not making loans to builders and by having
all construction loans convert to permanent mortgage loans at the end of the
construction phase.
Land Loans. Newberry Federal occasionally originates loans secured by
unimproved land. These loans have terms of up to 15 years and generally have
fixed interest rates and loan-to-value ratios of up to 90% of appraised value.
Consumer Loans. Newberry Federal's consumer loans consist primarily of
second mortgage loans, home equity lines of credit and fully amortized home
equity loans, all of which are secured by owner-occupied one- to four- family
residences, as well as automobile loans.
The underwriting standards employed by Newberry Federal for second mortgage
loans, home equity loans and lines of credit include a determination of the
applicant's credit history, an assessment of the applicant's ability to meet
existing obligations and payments on the proposed loan and the value of the
collateral securing the loan. Home equity
7
<PAGE>
lines of credit have adjustable rates of interest which are indexed to the prime
rate as reported in The Wall Street Journal. Interest rate adjustments on home
equity lines of credit are limited to no more than 5% over the life of the loan.
Generally, the maximum loan-to-value ratio on home equity lines of credit is
80%. A home equity line of credit may be drawn down by the borrower for a period
of 10 years from the date of the loan agreement. During this period, the
borrower has the option of paying, on a monthly basis, either principal and
interest or only the interest. The borrower is required to pay back the amount
of principal outstanding under the line of credit at the end of the 10 year
period.
Newberry Federal also offers fixed-rate second mortgage loans and home
equity loans with terms up to 10 years. The loan-to-value ratios of fixed-rate
second mortgage loans and home equity loans are generally limited to 80%, taking
into consideration the outstanding balance of the first mortgage loan.
Newberry Federal originates consumer loans secured by automobiles and,
occasionally, boats and other recreational vehicles. Newberry Federal offers
fixed-rate automobile loans with terms of up to 60 months and loan-to- value
ratios of up to 90% for new cars. For used cars, the maximum loan-to-value ratio
is 80% of the lesser of the retail value shown in the NADA Used Car Guide or the
purchase price, and the maximum terms for used automobile loans range from up to
48 to 54 months depending on the age and condition of the automobile.
Newberry Federal also offers various other consumer loans, including loans
secured by various personal property and share loans generally secured by a
passbook account, a certificate of deposit or marketable securities. Subject to
market conditions and its underwriting standards, Newberry Federal intends to
increase its consumer loan portfolio in the future, particularly emphasizing
modular home loans given the demand for such housing in its primary market area.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as autos. In these cases, any repossessed collateral
for a defaulted consumer loan may not provide an adequate source of repayment of
the outstanding loan balance as a result of the greater likelihood of damage,
loss or depreciation. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections depend on the
borrower's continuing financial stability, and are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy.
Commercial Business Loans. Newberry Federal makes commercial business loans
primarily in its primary market area to a variety of professionals, sole
proprietorships and small businesses. Newberry Federal offers a variety of
commercial lending products, including term loans for fixed assets and working
capital, revolving lines of credit, and Small Business Administration guaranteed
loans. Commercial business loans are generally offered with fixed interest rates
and with terms of up to five years. Business lines of credit have adjustable
rates of interest and are payable on demand, subject to annual review and
renewal. Business loans with variable rates of interest adjust on a daily basis
and are generally indexed to the prime rate as published in The Wall Street
Journal.
In making commercial business loans, Newberry Federal considers the
financial statements of the borrower, Newberry Federal's lending history with
the borrower, the debt service capabilities of the borrower, the projected cash
flows of the business and the value of the collateral. Commercial business loans
are generally secured by a variety of collateral, primarily equipment, assets
and accounts receivable, and are generally supported by personal guarantees.
Depending on the collateral used to secure the loans, commercial business loans
are made in amounts of up to 50% of the adjusted value of the collateral
securing the loan although Newberry Federal's policy permits a loan-to-value
ratio of 65%. Newberry Federal generally does not make unsecured commercial
loans.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans are of higher risk and typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial loans may depend substantially on the success of the business itself.
Further, any collateral securing such loans may depreciate over time, may be
difficult to appraise and may fluctuate in value.
8
<PAGE>
Maturity of Loan Portfolio. The following table presents certain
information at September 30, 2000 regarding the dollar amount of loans maturing
in Newberry Federal's portfolio based on their contractual terms to maturity or
scheduled amortization, but does not include potential prepayments. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as becoming due within one year. Loan balances are
before undisbursed loan proceeds, net deferred loan origination costs and
allowance for loan losses.
<TABLE>
<CAPTION>
At September 30, 2000
----------------------------------------------------------------------------
Multi-
One-to Family and
Four- Commercial Total
Family Real Estate Construction Land Consumer Commercial Loans
-------- ----------- ------------ -------- --------- ---------- ---------
(In thousands)
Amounts due in:
<S> <C> <C> <C> <C> <C> <C> <C>
One year or less.................. $ 5,360 $ 103 $1,302 $ 253 $ 8,031 $159 $15,208
More than one year to three years. 759 257 -- 115 3,600 402 5,133
More than three years to four years 762 532 -- 14 1,146 103 2,557
More than four years to five years 992 544 -- 349 1,032 94 3,011
More than five years to 10 years.. 7,530 3,052 -- 567 268 62 11,479
More than 10 years to 15 years.... 15,210 5,476 -- 250 49 -- 20,985
More than 15 years................ 21,826 2,584 -- -- -- -- 24,410
-------- ---------- --------- -------- --------- ------ --------
Total amount due............... $ 52,439 $ 12,548 $1,302 $1,548 $14,126 $820 $82,783
======== ========== ========= ======== ========= ====== ========
</TABLE>
The following table presents, the dollar amount of all loans due after
September 30, 2001, which have fixed interest rates and floating or adjustable
interest rates.
Due After September 30, 2001
-------------------------------------------
Fixed Adjustable Total
---------- ---------- ---------
(In thousands)
Real estate loans:
One- to four-family.......... $22,997 $24,082 $47,079
Multi-family................. -- 51 51
Commercial................... 7,314 5,080 12,394
Construction................. -- -- --
Land......................... 583 712 1,295
------- ------- -------
Total real estate loans... 30,894 29,925 60,819
Consumer loans.................. 364 5,731 6,095
Commercial loans................ 661 -- 661
------- ------- -------
Total loans............... $31,919 $35,656 $67,575
======= ======= =======
Loans to One Borrower. The maximum amount that Newberry Federal may lend to
one borrower is limited by regulation. At September 30, 2000, Newberry Federal's
regulatory limit on loans to one borrower was $5.2 million, which equaled 15% of
its Tier 1 capital at that date. At that date, Newberry Federal's largest credit
exposure to one borrower, including the borrower's related interests, totaled
approximately $3.6 million and consisted of commercial real estate loans, lines
of credit and one-to-four family loans. These loans were performing according to
their original terms at September 30, 2000.
Loan Approval Procedures and Authority. Newberry Federal's lending
activities follow written, non- discriminatory, underwriting standards and loan
origination procedures established by Newberry Federal's board of directors and
management.
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<PAGE>
Newberry Federal's policies and loan approval limits are established by the
Chief Executive Officer and the chief lending officer and are approved by the
board of directors. For mortgage loans, loan officers, other than the chief
lending officer may approve a loan up to $50,000. The chief lending officer and
any two members of the loan officers' loan committee may approve loans up to
$200,000. In addition, loans exceeding $200,000 require review and approval by
the loan officers' loan committee and at least one member of the executive loan
committee, which currently consists of J. Thomas Johnson, Steve P. Sligh, Robert
W. Owen and James E. Wiseman, Jr. Loans exceeding $250,000 must be approved by
the executive loan committee. All loans over $500,000 require the prior approval
of the board of directors.
Loan Originations, Purchases and Sales. Newberry Federal's primary loan
origination sources are walk-in customers and referrals. Newberry Federal does
not have any commissioned loan personnel and does not use loan correspondents or
other third-party originators. Newberry Federal is not an active purchaser of
loans.
All loans originated by Newberry Federal are underwritten by Newberry
Federal according to policies and procedures adopted by its board of directors.
Newberry Federal originates both adjustable-rate and fixed-rate mortgage loans.
Newberry Federal's ability to originate fixed- or adjustable-rate loans depends
upon the relative customer demand for such loans, which is affected by the
current and expected future level of interest rates.
In an effort to manage its interest rate risk position, Newberry Federal
generally sells the conforming fixed-rate mortgage loans with terms in excess of
15 years that it originates. The sale of loans in the secondary mortgage market
reduces Newberry Federal's risk that the interest rates paid to depositors will
increase while Newberry Federal holds long-term, fixed-rate loans in its
portfolio. It also allows Newberry Federal to continue to fund loans when
savings flows decline or funds are not otherwise available.
When Newberry Federal has sold loans, it generally has retained the
servicing rights. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and foreclosure procedures. At September 30, 2000, Newberry Federal was
servicing $20.4 million of loans for others. Gains, net of origination expense,
from the sale of such loans are recorded at the time of sale. Generally a loan
is committed to be sold and a price for the loan is fixed after the loan is
approved and the interest rate is accepted by the customer. This eliminates the
risk to Newberry Federal that a rise in market interest rates will reduce the
value of a mortgage before it can be sold.
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<PAGE>
The following table presents total loans originated, sold and repaid during
the periods indicated.
Year Ended
September 30,
---------------------
2000 1999
-------- ---------
(In thousands)
Loans at beginning of period.......................... $76,791 $72,096
Originations:
Real estate:
One- to four-family.......................... 6,140 13,007
Multi-family................................. -- --
Commercial................................... 4,801 1,142
Construction................................. 1,535 1,373
Land......................................... 823 309
-------- ---------
Total real estate loans................... 13,299 15,831
Consumer:
Second mortgage loans, home equity loans
and lines of credit....................... 2,055 2,571
Automobile................................... 2,851 2,510
Education.................................... 21 14
Other........................................ 4,424 4,255
-------- ---------
Total consumer loans...................... 9,351 9,350
Commercial...................................... 4,093 1,798
-------- ---------
Total loans originated.................... 26,743 26,979
-------- ---------
Loans purchased....................................... -- --
Deduct:
Principal loan repayments and prepayments....... 19,018 22,284
Loan sales...................................... 1,680 --
Transfers to real estate owned.................. 53 --
-------- ---------
Sub-total................................. 20,751 22,284
-------- ---------
Net loan activity..................................... 5,992 4,695
-------- ---------
Loans at end of period ......................... $82,783 $76,791
======== =========
Loan Commitments. Newberry Federal issues loan commitments to its
prospective borrowers conditioned on the occurrence of certain events.
Commitments are made in writing on specified terms and conditions and are
honored for up to 30 days from approval. At September 30, 2000, Newberry Federal
had loan commitments and unadvanced loans and lines of credit totaling $8.5
million.
Loan Fees. In addition to interest earned on loans, Newberry Federal
receives income from fees on loan originations, loan modifications, late
payments and for miscellaneous services related to its loans. Income from these
activities varies from period to period depending upon the volume and type of
loans made and competitive conditions.
Newberry Federal charges loan origination fees for mortgage loans which are
calculated as a percentage of the amount borrowed. As required by applicable
accounting principles, loan origination fees, discount points and certain loan
origination costs are deferred and recognized over the contractual remaining
lives of the related loans on a level yield basis. At September 30, 2000,
Newberry Federal had $104,000 of net deferred loan costs. Newberry Federal
amortized $4,300 of net deferred loan costs during the year ended September 30,
2000.
Nonperforming Assets and Delinquencies. All loan payments are due on the
first day of each month. When a borrower fails to make a required loan payment
by the 16th day of the month, Newberry Federal attempts to cure the deficiency
by contacting the borrower and seeking the payment. In most cases, deficiencies
are cured promptly. If a delinquency continues beyond the 30th day of the month,
a late notice is mailed and beyond the 60th day of the month, a demand letter is
sent out. While Newberry Federal generally prefers to work with borrowers to
resolve problems, Newberry Federal will refer the loan to an attorney and will
institute foreclosure or other proceedings after the 90th day of a delinquency,
as necessary, to minimize any potential loss.
11
<PAGE>
Management informs the board of directors monthly of the amount of loans
delinquent more than 30 days, all loans in foreclosure, and all foreclosed and
repossessed property that Newberry Federal owns.
Newberry Federal ceases accruing interest on mortgage loans when principal
or interest payments are delinquent 90 days or more. Once the accrual of
interest on a loan is discontinued, all interest previously accrued is reversed
against current period interest income once management determines that interest
is uncollectible. No additional interest is accrued to loan balance until the
collection of both principal and interest becomes reasonably certain.
The following table presents information with respect to Newberry Federal's
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in thousands)
Nonaccruing loans:
<S> <C> <C> <C> <C> <C>
One- to four-family real estate................................ $111 $149 $207 $100 $ 56
Multi-family................................................... -- -- -- -- --
Commercial real estate......................................... -- -- -- -- --
Construction................................................... -- -- -- -- --
Land........................................................... -- -- -- -- --
Consumer....................................................... 22 14 62 65 30
------ ------ ------ ------ ------
Total....................................................... 133 163 269 165 86
Real estate owned(1).............................................. -- -- 1 1 833
Other repossessed assets.......................................... 22 14 18 3 --
------ ------ ------ ------- ------
Total nonperforming assets(2)............................... 155 177 288 169 919
Troubled debt restructurings...................................... 30 66 96 73 30
------ ------ ------ ------- ------
Troubled debt restructurings and
total nonperforming assets...................................... $185 $243 $384 $242 $949
====== ====== ====== ======= ======
Total nonperforming loans and troubled debt
restructurings as a percentage of total loans.................. 0.20% 0.30% 0.51% 0.35% 0.18%
Total nonperforming assets and troubled debt
restructurings as a percentage of total assets................. 0.08% 0.12% 0.21% 0.14% 0.59%
</TABLE>
------------
(1) Real estate owned balances are shown net of related loss allowances.
(2) Nonperforming assets consist of nonperforming loans, impaired loans, other
repossessed assets and real estate owned.
Interest income that would have been recorded for the year ended September
30, 2000, had nonaccruing loans been current according to their original terms
amounted to approximately $12,199. Newberry Federal included income on such
loans of $4,677 in total interest income for the year ended September 30, 2000.
12
<PAGE>
The following tables set forth the delinquencies in Newberry Federal's
loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------
2000 1999
----------------------------------- -----------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------- ----------------- ----------------- -----------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------- --------- ------- --------- ------- --------- ------- ---------
(Dollars in thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.................. 20 $518 5 $119 21 $620 8 $149
Multi-family......................... -- -- -- -- -- -- -- --
Commercial........................... 2 24 -- -- 4 174 -- --
Construction......................... -- -- -- -- -- -- -- --
Land................................. -- -- -- -- -- -- -- --
Consumer loans:
Second mortgage loans, home
equity loans and lines of credit... -- -- -- -- 5 44 -- --
Automobile........................... -- -- -- -- 5 47 -- --
Other................................ 4 9 3 5 5 17 4 14
Commercial loans........................ -- -- -- -- 4 68 -- --
----- ----- ----- ------ --- ----- -- -----
Total............................. 26 $551 8 $124 44 $970 12 $163
===== ===== ===== ====== === ===== == =====
Delinquent loans to total loans......... 0.67% 0.15% 1.26% 0.20%
</TABLE>
Real Estate Owned and Other Repossessed Assets. Real estate that Newberry
Federal acquires through foreclosure or by deed-in-lieu of foreclosure is
classified as real estate owned until sold. When property is acquired it is
recorded at fair market value at the date of foreclosure, establishing a new
cost basis. Holding costs and declines in fair value result in changes to
expense after acquisition are expensed. At September 30, 2000, Newberry Federal
had no real estate owned and $22,000 of repossessed personal property.
Asset Classification. Regulators have adopted various regulations and
practices regarding problem assets of savings institutions. Under such
regulations, federal and state examiners have authority to identify problem
assets during examinations and, if appropriate, require them to be classified.
There are three classifications for problem assets: substandard, doubtful
and loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover probable losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention."
13
<PAGE>
The following table sets forth classified assets at September 30, 2000.
<TABLE>
<CAPTION>
Loss Doubtful Substandard Special Mention
------------------- ------------------- ------------------- -------------------
Principal Number of Principal Number of Principal Number of Principal Number of
Balance Loans Balance Loans Balance Loans Balance Loans
--------- --------- -------- --------- -------- --------- --------- ---------
(Dollars in thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.......... -- -- -- -- $328 13 -- --
Multi-family................. -- -- -- -- 18 1 -- --
Commercial................... -- -- -- -- -- -- -- --
Construction................. -- -- -- -- -- -- -- --
Land......................... -- -- -- -- -- -- -- --
Consumer loans:
Second mortgage loans,
home equity loans and
lines of credit............ -- -- -- -- -- -- -- --
Automobile................... -- -- -- -- -- -- -- --
Other........................ -- -- -- -- 39 16 -- --
Commercial loans................ -- -- -- -- 8 1 -- --
---- ---- ---- ---- ---- ---- ---- ----
Total..................... -- -- -- -- $393 31 -- --
==== ==== ==== ==== ==== ==== ==== ====
Delinquent loans to
total loans.................. -- -- .47% --
</TABLE>
Allowance for Loan Losses. In originating loans, Newberry Federal
recognizes that losses will be experienced on loans and that the risk of loss
will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the security for
the loan. Newberry Federal maintains an allowance for loan losses to absorb
losses inherent in the loan portfolio. The allowance for loan losses represents
management's estimate of probable losses based on information available as of
the date of the financial statements. The allowance for loan losses is based on
management's evaluation of the collectibility of the loan portfolio, including
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral, and current economic conditions.
The loan portfolio and other credit exposures are regularly reviewed by
management to evaluate the adequacy of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes
comparison to actual losses, peer group comparisons, industry data and economic
conditions. In addition, the regulatory agencies, as an integral part of their
examination process, periodically review Newberry Federal's allowance for loan
losses and may require Newberry Federal to make additional provisions for
estimated losses based upon judgments different from those of management.
In assessing the allowance for loan losses, Newberry Federal applies loss
factors to various pools of outstanding loans and certain unused commitments.
Newberry Federal segregates the loan portfolio according to risk characteristics
(i.e., mortgage loans, home equity, consumer). Loss factors are derived using
Newberry Federal's historical loss experience and may be adjusted for
significant factors that, in management's judgment, affect the collectibility of
the portfolio as of the evaluation date.
In addition, management assesses the allowance using factors that cannot be
associated with specific credit or loan categories. These factors include
management's subjective evaluation of local and national economic and business
conditions, portfolio concentration and changes in the character and size of the
loan portfolio. The allowance methodology reflects management's objective that
the overall allowance appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected credit losses.
Although management believes that it uses the best information available to
establish the allowance for loan losses, future adjustments to the allowance for
loan losses may be necessary and results of operations could be adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore,
14
<PAGE>
while Newberry Federal believes it has established its existing allowance for
loan losses in conformity with generally accepted accounting principles, there
can be no assurance that regulators, in reviewing Newberry Federal's loan
portfolio, will not request Newberry Federal to increase its allowance for loan
losses. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that increases will not be necessary
should the quality of any loans deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely
affect Newberry Federal's financial condition and results of operations.
The following table presents an analysis of Newberry Federal's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of year......... $184 $181 $192 $227 $265
Charged-off loans:
One- to four-family real estate................... -- 5 16 4 1
Multi-family...................................... -- -- -- -- --
Commercial real estate............................ -- -- -- -- --
Construction...................................... -- -- -- -- --
Land.............................................. -- 1 -- -- --
Commercial........................................ -- -- -- -- --
Consumer.......................................... 150 161 106 144 59
----- ----- ----- ----- -----
Total charged-off loans........................ 150 167 122 148 60
Recoveries on loans previously charged off:
One- to four-family real estate................... -- 1 -- 18 --
Multi-family...................................... -- -- -- -- --
Commercial real estate............................ -- -- -- -- --
Construction...................................... -- -- -- -- --
Land.............................................. -- -- -- -- --
Commercial........................................ -- -- -- -- --
Consumer.......................................... 91 27 26 24 22
----- ----- ------ ------ ------
Total recoveries............................... 91 28 26 42 22
Net loans charged-off................................ 59 139 96 106 38
Provision for loan losses............................ 340 142 85 70 --
----- ----- ------ ------ ------
Allowance for loan losses, end of period............. $465 $184 $181 $191 $227
===== ===== ====== ====== ======
Net loans charged-off to average interest-earning loans 0.19% 0.18% 0.14% 0.17% 0.06%
Allowance for loan losses to total loans............. 0.56% 0.24% 0.25% 0.28% 0.36%
Allowance for loan losses to nonperforming
loans and troubled debt restructurings............ 251.48% 80.79% 49.59% 80.25% 195.69%
Net loans charged-off to allowance for loan losses... 32.26% 74.59% 52.49% 55.50% 16.74%
Recoveries to charge-offs............................ 60.67% 17.37% 22.13% 28.38% 36.67%
</TABLE>
15
<PAGE>
The following table presents the approximate allocation of the allowance
for loan losses by loan category at the dates indicated. Management believes
that the allowance can be allocated by category only on an approximate basis.
The allocation of the allowance to each category is not indicative of future
losses and does not restrict the use of any of the allowance to absorb losses in
any category.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- -------------------------
Percent Percent Percent Percent Percent Percent
Allowance of Loans Allowance of Loans Allowance of Loans
in each in Each in each on Each in each on Each
Category Category Category Category Category Category
to Total to Total to Total of Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- --------- ------- --------- -------- ------ --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate.................. $140 30.11% 81.94% $ 85 45.95% 80.61% $118 65.19% 78.15%
Consumer..................... 325 69.89 17.07 100 54.05 16.92 63 34.81 18.23
Commercial................... -- -- -- -- -- -- -- -- --
------ --------- ------ --------- ------ ---------
Total allowance
for loan losses......... $465 100.00% $185 100.00% $181 100.00%
====== ========= ====== ========= ====== =========
<CAPTION>
At September 30,
-------------------------------------------------------
1997 1996
-------------------------- ---------------------------
Percent Percent Percent Percent
Allowance of Loans Allowance of Loans
in each in Each in each on Each
Category Category Category Category
to Total to Total to Total of Total
Amount Allowance Loans Amount Allowance Loans
------ --------- -------- ------ --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate................. $164 85.86% 77.85% $209 92.07% 81.08%
Consumer.................... 27 14.14 19.12 18 7.93 16.71
Commercial.................. -- -- -- -- -- --
------ ------ ----- ------
Total allowance
for loan losses........ $191 100.00% $227 100.00%
====== ====== ===== ======
</TABLE>
Investment Activities
Newberry Federal is permitted under federal law to invest in various types
of liquid assets, including U.S. Government obligations, securities of various
federal agencies and of state and municipal governments, deposits at the Federal
Home Loan Bank of Atlanta, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Within certain
regulatory limits, Newberry Federal may also invest a portion of its assets in
commercial paper and corporate debt securities. Savings institutions like
Newberry Federal are also required to maintain an investment in Federal Home
Loan Bank stock. Newberry Federal is required under federal regulations to
maintain a minimum amount of liquid assets.
Because of low loan demand in its primary market area, Newberry Federal has
maintained a significant investment in investment securities and mortgage-backed
securities classified as available-for-sale. Newberry Federal's investment
securities consist primarily of U.S. Government and agency obligations. Newberry
Federal's mortgage- backed securities consist of U.S. Government agency issues
as well as investment grade private issues. Newberry Federal's investment and
mortgage-backed securities generally have average life of less than 15 years.
16
<PAGE>
Newberry Federal's investment policy permits Newberry Federal to be a party
to financial instruments with off-balance sheet risk in the normal course of
business in order to manage interest rate risk, including interest rate cap and
floor agreements. See Note 14 of the Financial Statements.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that investments be
categorized as "held to maturity," "trading securities" or "available for sale,"
based on management's intent as to the ultimate disposition of each security.
Statement of Financial Accounting Standards No. 115 allows debt securities to be
classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities would be included in earnings.
Debt and equity securities not classified as either "held to maturity" or
"trading securities" are classified as "available for sale." These securities
are reported at fair value, and unrealized gains and losses on the securities
are excluded from earnings and reported, net of deferred taxes, as a separate
component of equity.
Newberry Federal maintains a trading account for certain classes of
collateralized mortgage obligations. At September 30, 2000, Newberry Federal had
no securities classified as "trading securities."
All of Newberry Federal's investment and mortgage-backed securities carry
market risk insofar as increases in market rates of interest may cause a
decrease in their market value, which would lower Newberry Federal's capital
position. They also carry prepayment risk insofar as they may be called or
repaid before maturity in times of low market interest rates, so that Newberry
Federal may have to invest the funds at a lower interest rate.
At September 30, 2000, Newberry Federal's investment in mortgage-backed
securities had an aggregate book value in excess of 251.00% of Newberry
Federal's retained earnings at that date, with an aggregate book value of $109.8
million or 28.49% of retained earnings.
17
<PAGE>
The following table presents the amortized cost and fair value of Newberry
Federal's securities, by type of security, at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------
2000 1999
--------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- --------- --------- ---------
(In thousands)
Investment securities:
<S> <C> <C> <C> <C>
Debt securities held-to-maturity:
Obligations of U.S. government agencies........................ $ -- $ -- $ -- $ --
Other securities............................................... 1,091 1,091 1,091 1,091
---------- --------- --------- --------
Total.................................................... 1,091 1,091 1,091 1,091
Debt securities available-for-sale:
Obligations of U.S. Treasury and U.S.
government agencies.......................................... 24,414 21,885 21,487 19,111
Other securities............................................... -- -- -- --
---------- --------- --------- --------
Total.................................................... 24,414 21,885 21,487 19,111
Equity securities available-for-sale:
Federal Home Loan Bank stock................................... 1,882 1,882 1,962 1,962
Mutual funds................................................... 1,061 915 1,057 914
Other securities............................................... 72 91 72 80
---------- --------- --------- --------
Total........................................................ 3,015 2,888 3,091 2,956
Equity securities held-to-maturity:
Other securities............................................... 50 50 50 50
Total debt and equity securities......................... 28,570 25,914 25,719 23,208
---------- --------- --------- --------
Mortgage-backed securities:
Mortgage-backed securities held-to-maturity:
FHLMC.......................................................... 2,645 2,282 2,977 2,858
FNMA........................................................... 1,230 1,211 1,489 1,482
---------- --------- --------- -------
Total mortgage-backed securities
held-to-maturity....................................... 3,875 3,493 4,466 4,340
---------- --------- --------- -------
Mortgage-backed securities available-for-sale:
FHLMC.......................................................... 36,223 34,921 34,445 33,899
FNMA........................................................... 40,707 39,124 30,509 28,863
GNMA.......................................................... 9,626 9,495 11,839 11,589
Private issues................................................. 23,547 22,425 23,786 22,534
---------- --------- --------- -------
Total mortgage-backed securities
available-for-sale.......................................... 110,103 105,965 100,579 96,885
---------- --------- --------- -------
Net unrealized (losses) gains on
available-for-sale securities.............................. (6,795) -- (6,204) --
---------- --------- --------- -------
Total securities......................................... $135,753 $135,372 $124,560 $124,433
========== ========= ========= ========
</TABLE>
18
<PAGE>
The following presents the activity in the investment securities and
mortgage-backed securities portfolios for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
----------------------
2000 1999
-------- ----------
(In thousands)
Mortgage-backed securities:
<S> <C> <C>
Mortgage-backed securities, beginning of period (1)............ $101,351 $ 91,971
Purchases:
Mortgage-backed securities - held-to-maturity................ -- --
Mortgage-backed securities - available-for-sale.............. 48,233 102,695
Sales:
Mortgage-backed securities - available-for-sale.............. (25,380) (55,720)
Repayments and prepayments:
Mortgage-backed securities................................... (14,215) (35,230)
Increase (decrease) in net premium............................. 294 183
Increase (decrease) in unrealized gain......................... (443) (2,548)
--------- ---------
Net increase (decrease) in mortgage-backed securities...... 8,489 9,380
--------- ---------
Mortgage-backed securities, end of period...................... $109,840 $101,351
========= ========
Investment securities:
Investment securities, beginning of period (2)................. $23,209 $ 7,888
Purchases:
Investment securities - held-to-maturity..................... -- 1,141
Investment securities - available-for-sale................... 2,313 22,562
Investment securities - trading.............................. 3,336 --
Sales:
Investment securities - available-for-sale................... (275) (4,892)
Investment securities - trading.............................. (3,336) --
Calls:
Investment securities - held-to-maturity..................... -- (1,352)
Investment securities - available-for-sale................... -- --
Maturities:
Investment securities - held-to-maturity..................... -- --
Investment securities - available-for-sale................... -- --
Increase (decrease) in net premium............................. 814 283
Increase (decrease) in unrealized gain......................... (147) (2,421)
--------- --------
Net increase (decrease) in investment securities........... 2,705 15,321
--------- --------
Investment securities, end of period........................... $25,914 $23,209
========= ========
</TABLE>
---------------
(1) Includes mortgage-backed securities available-for-sale.
(2) Includes investment securities available-for-sale.
19
<PAGE>
The following table presents certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of
Newberry Federal's debt securities at September 30, 2000.
<TABLE>
<CAPTION>
At September 30, 2000
-----------------------------------------------------------------
More than More than
One Year One Year to Five Years to
or Less Five Years Ten Years
-------------------- --------------------- --------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
--------- --------- ---------- ---------- --------- ---------
(Dollars in thousands)
Held-to-maturity securities:
Investment securities:
Municipal securities (1)........ $1,091 7.46% $ -- --% $ -- --%
Obligations of U.S.
Government agencies.......... -- -- -- -- -- --
Mortgage-backed securities...... -- -- -- -- -- --
------ ------ -----
Total securities at
amortized cost............ $1,091 7.46% $ -- -- $ -- --
====== ====== =====
Available-for-sale securities:
Investment securities:
Obligations of U.S. Treasury.... $ -- --% $ -- --% $ -- --%
Obligations of U.S.
Government agencies.......... 1,672 6.54 -- -- -- --
Equity securities............... -- -- -- -- -- --
Mutual funds.................... -- -- -- -- -- --
Mortgage-backed securities......... -- -- -- -- 930 7.27
------ ----- ------ ----- ----- -----
Total securities at fair value $1,672 6.54% $ -- --% $930 7.27%
====== ====== =====
<CAPTION>
At September 30, 2000
---------------------------------------------
More than
Ten Years Totals
---------------------- ---------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
----------- --------- ---------- ---------
(Dollars in thousands)
Held-to-maturity securities:
<S> <C> <C> <C> <C>
Investment securities:
Municipal securities (1)........ $ -- --% $ 1,091 7.46%
Obligations of U.S.
Government agencies.......... 50 -- 50 --
Mortgage-backed securities...... 3,875 6.24 3,875 6.98
------- --------
Total securities at
amortized cost............ $ 3,925 6.24 $5,016 7.02
======= ========
Available-for-sale securities:
Investment securities:
Obligations of U.S. Treasury.... $ -- --% $ -- --%
Obligations of U.S.
Government agencies.......... 20,213 8.24 21,885 8.11
Equity securities............... 1,973 7.23 1,973 7.23
Mutual funds.................... 915 5.71 915 5.71
Mortgage-backed securities......... 105,035 7.72 105,965 7.72
------- ------ -------- ------
Total securities at fair value $128,136 7.78% $130,738 7.76%
======== ========
</TABLE>
---------------
(1) Weighted average yield data for municipal securities is presented on a tax
equivalent basis assuming a combined federal and state tax rate of 38%.
20
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for Newberry
Federal's lending and other investment activities. In addition, Newberry Federal
also generates funds internally from loan principal repayments and prepayments
and maturing investment securities. Scheduled loan repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and money market
conditions. Newberry Federal may use borrowings from the Federal Home Loan Bank
of Atlanta to compensate for reductions in the availability of funds from other
sources.
Deposit Accounts. Nearly all of Newberry Federal's depositors reside in
South Carolina. Newberry Federal offers a wide variety of deposit accounts with
a range of interest rates and terms. Newberry Federal's deposit accounts consist
of interest-bearing checking, noninterest-bearing checking, various savings
accounts, money market savings and certificates of deposit. The maturities of
Newberry Federal's certificate of deposit accounts range from three months to
five years. In addition, Newberry Federal offers retirement accounts, including
IRAs, Keogh accounts and simplified employee pension plan accounts. Deposit
account terms vary with the principal differences being the minimum balance
deposit, early withdrawal penalties, limits on the number of transactions and
the interest rate. Newberry Federal reviews its deposit mix and pricing weekly.
Newberry Federal believes it is competitive in the interest rates it offers
on its deposit products. Newberry Federal determines the rates paid based on a
number of factors, including rates paid by competitors, Newberry Federal's need
for funds and cost of funds, borrowing costs and movements of market interest
rates. Newberry Federal does not use brokers to obtain deposits and at September
30, 2000 had no brokered deposits.
In the unlikely event Newberry Federal is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to DutchFork Bancshares as the sole stockholder of Newberry
Federal.
The following table presents the deposit activity of Newberry Federal for
the periods indicated.
Year Ended September 30,
-------------------------
2000 1999
----------- -----------
(In thousands)
Beginning balance................................. $137,537 $141,702
Increase (decrease) before interest credited...... 3,347 (10,155)
Interest credited................................. 6,846 5,990
---------- -----------
Net increase (decrease)........................... 10,193 (4,165)
--------- -----------
Ending balance.................................... $147,730 $137,537
========= ===========
The following table indicates the amount of Newberry Federal's jumbo
certificates of deposits by time remaining until maturity as of September 30,
2000. Jumbo certificates of deposits have principal balances of $100,000 or
more.
Weighted
Average
Maturity Period Amount Rate
--------------- ---------- ---------
(In thousands)
Three months or less............ $ 5,091 6.13%
Over 3 through 6 months......... 5,581 5.96
Over 6 through 12 months........ 13,839 6.09
Over 12 months.................. --
-------
Total..................... $ 24,511 6.09%
========
21
<PAGE>
The following table presents information concerning average balances and
rates paid on Newberry Federal's deposit accounts for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------------------------------------
2000 1999
------------------------------- ------------------------------
Percent Percent
of Weighted of Weighted
Average Total Average Average Total Average
Balance Deposits Rate Balance Deposits Rate
-------- -------- -------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts................... $ 17,177 11.38% 2.79% $ 17,588 12.61% 2.80%
NOW and money market
accounts......................... 31,652 20.97 2.24 26,632 19.10 2.06
Certificates of deposit (1)......... 102,092 67.65 6.06 95,220 68.29 5.20
-------- ------ ---------- ------
Total average deposits........ $150,921 100.00% $ 139,440 100.00%
======== ====== ========== ======
</TABLE>
--------------
(1) Based on remaining maturity of certificates of deposit.
Certificates of Deposit by Rates and Maturities. The following table
presents the amount of certificates of deposits in Newberry Federal categorized
by rates and maturities at the dates indicated.
<TABLE>
<CAPTION>
Period to Maturity from September 30, 2000
-----------------------------------------------------------------
Over
Less One Two Over
than One to Two to Three Three
Year Years Years Years Total
-------- ---------- -------- ------ ----------
(Dollars in thousands)
Certificates of deposit:
<S> <C> <C> <C> <C> <C>
0 to 2.00%................................ $ 410 $ -- $ -- $ -- $ 410
2.01 to 4.00%............................. 9 -- -- -- 9
4.01 to 5.00%............................. 3,196 657 125 6 3,984
5.01 to 6.00%............................. 49,466 2,579 454 47 52,546
6.01 to 7.00%............................. 34,153 7,288 462 112 42,015
7.01 to 8.00%............................. 794 648 30 1,472
8.01 to 9.00%............................. -- -- -- -- --
------- -------- --------- ------ ---------
Total certificates of
deposit............................. $88,028 $ 11,172 $ 1,071 $ 165 $ 100,436
======= ======== ========= ====== =========
</TABLE>
Borrowings. Newberry Federal may borrow from the Federal Home Loan Bank of
Atlanta to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The Federal Home Loan Bank of Atlanta functions as a
central reserve bank, providing credit for savings banks and certain other
member financial institutions. As a member of the Federal Home Loan Bank of
Atlanta, Newberry Federal is required to own capital stock in the Federal Home
Loan Bank of Atlanta and may borrow on the security of the capital stock and
certain of its mortgage loans and other assets, principally securities that are
obligations of, or guaranteed by, the U.S. Government or its agencies, provided
certain creditworthiness standards have been met. Advances are made under
several different credit programs. Each credit program has its own interest rate
and range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit. At September 30, 2000,
Newberry Federal had the ability to borrow up to approximately $56.2 million
from the Federal Home Loan Bank of Atlanta. At September 30, 2000, Newberry
Federal had outstanding advances of $35.0 million.
At September 30, 2000, Newberry Federal also maintained an $6.5 million
unsecured credit facility with a third party financial institution. At September
30, 2000, Newberry Federal had an outstanding balance of $2.8 million under this
credit facility.
22
<PAGE>
The following tables presents certain information regarding Newberry
Federal's use of Federal Home Loan Bank of Atlanta advances and other borrowings
(excluding the liability for certain security financing of $4.8 million) during
the periods and at the dates indicated.
<TABLE>
<CAPTION>
At or For the Year Ended
September 30,
-----------------------
2000 1999
--------- ----------
(Dollars in thousands)
Federal Home Loan Bank advances:
<S> <C> <C>
Average balance outstanding............................ $32,423 $24,944
Maximum amount outstanding at any month-end
during the period................................... 37,640 39,240
Balance outstanding at end of period................... 35,000 39,240
Weighted average interest rate during the period....... 5.98% 5.58%
Weighted average interest rate at end of period........ 5.73% 5.65%
Other borrowings:
Average balance outstanding............................ $ 3,517 $ 2,120
Maximum amount outstanding at any month-end
during the period................................... 7,310 7,370
Balance outstanding at end of period................... 2,755 7,370
Weighted average interest rate during the period....... 6.00% 4.95%
Weighted average interest rate at end of period........ 6.90% 5.50%
</TABLE>
Subsidiary Activities
DutchFork Bancshares' sole subsidiary is Newberry Federal. Newberry Federal
has one wholly owned subsidiary, Inter-Community Service Corporation, which
operates as an insurance agency and also owns approximately 30 acres of
residential land for development. At September 30, 2000, Inter-Community Service
Corporation's assets totaled approximately $781,000.
Personnel
As of September 30, 2000, Dutchfork Bancshares had 42 full-time employees
and 12 part-time employees, none of whom is represented by a collective
bargaining unit. Dutchfork Bancshares believes its relationship with its
employees is good.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, DutchFork Bancshares is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the Office of Thrift Supervision. Newberry Federal is subject to
extensive regulation, examination and supervision by the Office of Thrift
Supervision, as its primary federal regulator, and the Federal Deposit Insurance
Corporation, as the deposit insurer. Newberry Federal is a member of the Federal
Home Loan Bank System and, with respect to deposit insurance, of the Savings
Association Insurance Fund ("SAIF") managed by the Federal Deposit Insurance
Corporation. Newberry Federal must file reports with the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The Office of Thrift Supervision
and/or the Federal Deposit Insurance Corporation conduct periodic examinations
to test Newberry Federal's safety and soundness and compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies,
23
<PAGE>
whether by the Office of Thrift Supervision, the Federal Deposit Insurance
Corporation or the Congress, could have a material adverse impact on DutchFork
Bancshares, Newberry Federal and their operations. Certain of the regulatory
requirements applicable to Newberry Federal and to DutchFork Bancshares are
referred to below or elsewhere herein. The description of statutory provisions
and regulations applicable to savings institutions and their holding companies
set forth in this Form 10-KSB does not purport to be a complete description of
such statutes and regulations and their effects on Newberry Federal and
DutchFork Bancshares.
Holding Company Regulation
DutchFork Bancshares is a unitary savings and loan holding company under
federal law because Newberry Federal is its only insured subsidiary. Formerly, a
unitary savings and loan holding company was not restricted as to the types of
business activities in which it could engage, provided that its subsidiary
savings association continued to be a qualified thrift lender. See "--Federal
Savings Institution Regulation--Qualified Thrift Lender Test." Recent
legislation, however, restricts unitary savings and loan holding companies not
existing or applied for before May 4, 1999 to activities permissible for a
financial holding company as defined under the legislation, including insurance
and securities activities, and those permitted for a multiple savings and loan
holding company as described below. DutchFork Bancshares does not qualify for
the grandfather and is limited to such activities. If DutchFork Bancshares
acquires another savings institution or savings bank that is not a problem
institution, that meets the qualified thrift lender test and that the Office of
Thrift Supervision considers to be a savings institution, DutchFork Bancshares
would become a multiple savings and loan holding company if the acquired
institution is held as a separate subsidiary and not merged into Newberry
Federal. As a multiple savings and loan holding company, DutchFork Bancshares
would generally be limited to activities permissible for bank holding companies
under federal law so long as the Office of Thrift Supervision first approves of
these activities, and to certain other activities authorized by Office of Thrift
Supervision regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision considers the financial and
managerial resources and future prospects of DutchFork Bancshares and
institution involved, the effect of the acquisition on the risk to the deposit
insurance funds, the convenience and needs of the community and competitive
factors.
The Office of Thrift Supervision may not approve any acquisition that would
result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. Newberry Federal must
notify the Office of Thrift Supervision 30 days before declaring any dividend to
DutchFork Bancshares. In addition, the financial impact of a holding company on
its subsidiary institution is a matter that is evaluated by the Office of Thrift
Supervision and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The Office of Thrift Supervision capital regulations
require savings institutions to meet three minimum capital standards: a 1.5%
tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.
In addition, the prompt corrective
24
<PAGE>
action standards discussed below also establish, in effect, a minimum 2%
tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMEL financial institution rating system), and,
together with the risk-based capital standard itself, a 4% Tier 1 risk-based
capital standard. The Office of Thrift Supervision regulations also require
that, in meeting the tangible, leverage and risk-based capital standards,
institutions must generally deduct investments in and loans to subsidiaries
engaged in activities as principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core (Tier
1) capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk- based
capital requirements. For the present time, the Office of Thrift Supervision has
deferred implementation of the interest rate risk capital charge. At September
30, 2000, Newberry Federal met each of its capital requirements.
The following table presents Newberry Federal's capital position at
September 30, 2000.
<TABLE>
<CAPTION>
Capital
---------------------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
----------------- ------------- ----------------- -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible............ $34,738 $4,550 $30,188 15.27% 1.50%
Core (Leverage)..... 34,738 9,100 25,638 15.27 4.00
Risk-based.......... 35,181 8,703 26,478 32.34 8.00
</TABLE>
Prompt Corrective Regulatory Action. The Office of Thrift Supervision is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4% or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the Office of
Thrift Supervision is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the Office of Thrift
Supervision within 45 days of the date a savings institution receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The Office of Thrift Supervision could also
take any one of a number of
25
<PAGE>
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Newberry Federal is a member of the SAIF.
The Federal Deposit Insurance Corporation maintains a risk-based assessment
system by which institutions are assigned to one of three categories based on
their capitalization and one of three subcategories based on examination ratings
and other supervisory information. An institution's assessment rate depends upon
the categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the Federal Deposit Insurance
Corporation and currently range from zero basis points for the healthiest
institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members approximated 6.1 basis points, while Bank
Insurance Fund ("BIF") members paid 1.2 basis points. By law, SAIF and BIF
members began equal sharing of FICO payments on January 1, 2000. The Federal
Deposit Insurance Corporation has authority to increase insurance assessments. A
significant increase in SAIF insurance premiums would likely have an adverse
effect on the operating expenses and results of operations of Newberry Federal.
Management cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance
Corporation upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The
management of Newberry Federal does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At September
30, 2000, Newberry Federal's limit on loans to one borrower was $5.2 million,
and Newberry Federal's largest aggregate outstanding balance of loans to one
borrower was $3.6 million.
QTL Test. The Home Owners' Loan Act requires savings institutions to meet a
qualified thrift lender test. Under the test, a savings association is required
to either qualify as a "domestic building and loan association" under the
Internal Revenue Code or maintain at least 65% of its "portfolio assets" (total
assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
in at least 9 months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of September 30, 2000, Newberry Federal maintained 100% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
Limitation on Capital Distributions. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to shareholders of another institution in a cash-out merger. An
application to and the prior approval of the Office of Thrift Supervision is
required prior to any capital distribution if the institution does not meet the
criteria for "expedited treatment" of applications under Office of Thrift
Supervision regulations (i.e., generally, examination ratings in the two top
categories), the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with Office of Thrift Supervision. If an application is not required,
the institution must still provide prior notice to Office of Thrift Supervision
of the capital distribution if, like Newberry Federal, it is a subsidiary of a
holding company. In the event Newberry Federal's capital fell below its
regulatory requirements or the Office of Thrift Supervision notified it that it
was in need of more than normal supervision, Newberry Federal's ability to make
capital distributions could be restricted. In addition, the Office
26
<PAGE>
of Thrift Supervision could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the Office
of Thrift Supervision determines that such distribution would constitute an
unsafe or unsound practice.
Liquidity. Newberry Federal is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the Office of Thrift Supervision to any amount within the range
of 4% to 10%. Monetary penalties may be imposed for failure to meet these
liquidity requirements. Newberry Federal's liquidity ratio for September 30,
2000 was 78.8%, which exceeded the applicable requirements. Newberry Federal has
never been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings institutions are required to pay assessments to the
Office of Thrift Supervision to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
Newberry Federal's latest quarterly thrift financial report. The assessments
paid by Newberry Federal for the fiscal year ended September 30, 2000 totaled
$51,000.
Transactions with Related Parties. Newberry Federal's authority to engage
in transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including DutchFork Bancshares and its
non-savings institution subsidiaries) is limited by federal law. The aggregate
amount of covered transactions with any individual affiliate is limited to 10%
of the capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and under
circumstances, that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
Newberry Federal's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is also governed by federal law. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. An exception exists for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. The law limits both the individual and aggregate
amount of loans Newberry Federal may make to insiders based, in part, on
Newberry Federal's capital position and requires certain board approval
procedures to be followed.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $27,500 per day, or even $1.2 million per day in especially egregious
cases. The Federal Deposit Insurance Corporation has the authority to recommend
to the Director of the Office of Thrift Supervision that enforcement action to
be taken with respect to a particular savings institution. If action is not
taken by the Director, the Federal Deposit Insurance Corporation has authority
to take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the Office of Thrift
Supervision determines that a savings institution fails to meet any standard
prescribed by the guidelines, the Office of Thrift Supervision may require the
institution to submit an acceptable plan to achieve compliance with the
standard.
27
<PAGE>
Federal Home Loan Bank System
Newberry Federal is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
provides a central credit facility primarily for member institutions. Newberry
Federal, as a member of the Federal Home Loan Bank, is required to acquire and
hold shares of capital stock in that Federal Home Loan Bank in an amount at
least equal to 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the Federal Home Loan Bank, whichever is greater.
Newberry Federal was in compliance with this requirement with an investment in
Federal Home Loan Bank stock at September 30, 2000 of $1,882,000.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, Newberry Federal's net interest
income would likely also be reduced. Recent legislation has changed the
structure of the Federal Home Loan Banks funding obligations for insolvent
thrifts, revised the capital structure of the Federal Home Loan Banks and
implemented entirely voluntary membership for Federal Home Loan Banks.
Management cannot predict the effect that these changes may have with respect to
its Federal Home Loan Bank membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $42.8 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $44.3 million, the reserve requirement is $1.284
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $42.8
million. The first $5.5 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. Newberry Federal complies with the foregoing requirements.
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by Office of Thrift
Supervision regulations, a savings association has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The Community Reinvestment Act does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the Office of Thrift
Supervision, in connection with its examination of an institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of applications by such institution.
The Community Reinvestment Act requires public disclosure of an institution's
Community Reinvestment Act rating. Newberry Federal's latest Community
Reinvestment Act rating, received from the Office of Thrift Supervision was
"Satisfactory."
FEDERAL AND STATE TAXATION
Federal Taxation
General. DutchFork Bancshares and Newberry Federal report their income on a
fiscal year, consolidated basis under the accrual method of accounting, and are
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly Newberry Federal's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to DutchFork Bancshares or Newberry Federal. For its 2000 taxable
year, DutchFork Bancshares is subject to a maximum federal income tax rate of
34%.
28
<PAGE>
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve. A reserve could be established for bad
debts on qualifying real property loans (generally secured by interests in real
property improved or to be improved) under (i) the percentage of taxable income
method or (ii) the experience method. The reserve for nonqualifying loans was
computed using the experience method.
Congress repealed the reserve method of accounting for bad debts for tax
years beginning after 1995 and required savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves.
Thrift institutions eligible to be treated as "small banks" (assets of $500
million or less) are allowed to use the experience method applicable to such
institutions, while thrift institutions that are treated as large banks (assets
exceeding $500 million) are required to use only the specific charge-off method.
Thus, the percentage of taxable income method of accounting for bad debts is no
longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the Internal
Revenue Service. Any Section 481(a) adjustment required to be taken into income
with respect to such change generally will be taken into income ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to a 2-year suspension if the "residential loan requirement" is
satisfied.
Under the residential loan requirement provision, the required recapture
will be suspended for each of two successive taxable years, beginning with
Newberry Federal's 1996 taxable year, in which Newberry Federal originates a
minimum of certain residential loans based upon the average of the principal
amounts of such loans made by Newberry Federal during its six taxable years
preceding its current taxable year.
Distributions. If Newberry Federal makes "non-dividend distributions" to
DutchFork Bancshares, such distributions will be considered to have been made
from Newberry Federal's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from Newberry Federal's supplemental reserve for losses on loans, to the extent
thereof, and an amount based on the amount distributed (but not in excess of the
amount of such reserves) will be included in Newberry Federal's income.
Non-dividend distributions include distributions in excess of Newberry Federal's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of Newberry Federal's current or
accumulated earnings and profits will not be so included in its income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if Newberry Federal makes a non- dividend
distribution to DutchFork Bancshares, approximately one and one-half times the
amount of such distribution (but not in excess of the amount of such reserves)
would be includable in income for federal income tax purposes, assuming a 35%
federal corporate income tax rate. Newberry Federal does not intend to pay
dividends that would result in a recapture of any portion of its bad debt
reserves.
State Taxation
South Carolina Taxation. South Carolina has adopted the Internal Revenue
Code, with certain modifications, as it relates to savings and loan
associations, effective for taxable years beginning after December 31, 1984.
Newberry Federal is subject to South Carolina income tax at the rate of 6%. This
rate of tax is imposed on savings and loan associations and savings banks in
lieu of the general state business corporation income tax. Newberry Federal's
state income tax returns have not been audited within the last five years.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, DutchFork Bancshares is exempt from Delaware corporate income tax, but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
29
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
Properties
Newberry Federal currently conducts its business through its main office
located in Newberry, South Carolina, and five other full-service banking
offices. DutchFork Bancshares believes that these facilities are adequate to
meet the present and immediately foreseeable needs of the Newberry Federal and
DutchFork Bancshares.
<TABLE>
<CAPTION>
Net Book Value
Leased, Original of Property at
Licensed or Year September 30,
Location Owned Acquired 2000
--------- ----------- --------- ----------------
(In thousands)
<S> <C> <C> <C>
Main/Executive Office:
1735 Wilson Road
Newberry, South Carolina 29108................................. Owned 1993 $2,448
Branch Offices:
1323 College Street
Newberry, South Carolina 29108................................. Owned 1993 201
127 Amicks Ferry Road (1)
Chapin, South Carolina 29036................................... Owned 1987 91
101 N. Wheeler Street
Prosperity, South Carolina 29127............................... Owned 1989 79
</TABLE>
(1) On December 20, 2000, Newberry Federal and First Community Bank, NA
announced the signing of a definitive agreement by which First Community
Bank, NA will purchase the Chapin branch office.
ITEM 3. LEGAL PROCEEDINGS
DutchFork Bancshares is not a party to any pending legal proceedings.
Periodically, there have been various claims and lawsuits involving Newberry
Federal, such as claims to enforce liens, condemnation proceedings on properties
in which Newberry Federal holds security interests, claims involving the making
and servicing of real property loans and other issues incident to Newberry
Federal's business. Newberry Federal is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of Newberry Federal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information regarding the market for DutchFork Bancshares' common
equity and related stockholder matters is incorporated herein by reference to
DutchFork Bancshares' 2000 Annual Report to Stockholders on page 55.
30
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information regarding management's discussion and analysis of financial
condition and results of operation is incorporated herein by reference to
DutchFork Bancshares' 2000 Annual Report to Stockholders on pages 5 through 14.
ITEM 7. FINANCIAL STATEMENTS
The information regarding financial statements is incorporated herein by
reference to DutchFork Bancshares' 2000 Annual Report to Stockholders on pages
15 through 53.
ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information relating to the directors and officers of DutchFork
Bancshares and information regarding compliance with Section 16(a) of the
Exchange Act is incorporated herein by reference to DutchFork Bancshares' Proxy
Statement for the 2001 Annual Meeting of Stockholders at pages 4 through 6.
ITEM 10. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated herein by
reference to DutchFork Bancshares' Proxy Statement for the 2001 Annual Meeting
of Stockholders at pages 6 through 8.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to DutchFork Bancshares'
Proxy Statement for the 2001 Annual Meeting of Stockholders at pages 3 through
4.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to DutchFork Bancshares' Proxy Statement for
the 2001 Annual Meeting of Stockholders at page 9.
31
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) (1) The following are filed as a part of this report by means of
incorporation to DutchFork Bancshares' 2001 Annual Report to
Stockholders:
o Independent Auditors' Report
o Consolidated Statements of Financial Condition as of
September 30, 2000 and 1999
o Consolidated Statements of Income for the Years Ended
September 30, 2000 and 1999
o Consolidated Statements of Comprehensive Operations for the
Years Ended September 30, 2000 and 1999
o Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended September 30, 2000 and 1999
o Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000 and 1999
o Notes to Consolidated Financial Statements
(2) All financial statement schedules are omitted because they are
not required or applicable, or the required information is shown
in the consolidated financial statements or the notes thereto.
(3) Exhibits
3.1 Certificate of Incorporation of DutchFork Bancshares,
Inc.(1)
3.2 Bylaws of DutchFork Bancshares, Inc.(1)
4.0 Specimen Stock Certificate of DutchFork Bancshares, Inc.(1)
10.1 Newberry Federal Savings Bank Employment Agreement with J.
Thomas Johnson
10.2 Newberry Federal Savings Bank Employment Agreement with
Steve P. Sligh
10.3 DutchFork Bancshares, Inc. Employment Agreement with J.
Thomas Johnson
10.4 DutchFork Bancshares, Inc. Employment Agreement with Steve
P.Sligh
10.5 Newberry Federal Savings Bank Employee Severance
Compensation Plan
10.6 Newberry Federal Savings Bank Supplemental Executive
Retirement Plan
10.7 Adoption Agreement for Employees' Savings & Profit Sharing
Plan and Trust(1)
13.0 Annual Report to Stockholders
21.0 Subsidiary information is incorporated herein by reference
to Part I, Item 1, "Business-Subsidiary Activities."
23.0 Consent of Clifton D. Bodiford, CPA
27.0 Financial Data Schedule
--------------------
(1) Incorporated herein by reference from the Exhibits to Form
SB-2, Registration Statement and amendments thereto,
initially filed on March 8, 2000, Registration No.
333-31986.
(b) Reports on Form 8-K
None.
32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DUTCHFORK BANCSHARES, INC.
Date: December 27, 2000 By: /s/ J. Thomas Johnson
-----------------------------------
J. Thomas Johnson
President, Chief Executive Officer and
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ J. Thomas Johnson President, Chief Executive December 27, 2000
--------------------------- Officer and Chairman of the Board
J. Thomas Johnson (principal executive officer)
/s/ Steve P. Sligh Executive Vice President, Chief December 27, 2000
--------------------------- Financial Officer, Treasurer
Steve P. Sligh and Director (principal financial and
accounting officer)
/s/ Robert E. Livingston Corporate Secretary and Director December 27, 2000
---------------------------
Robert E. Livingston
/s/ Keitt Purcell Director December 27, 2000
---------------------------
Keitt Purcell
/s/ Robert W. Owen Director December 27, 2000
---------------------------
Robert W. Owen
/s/ James E. Wiseman Director December 27, 2000
---------------------------
James E. Wiseman
</TABLE>
33
