1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
- TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NO. 0-30483
-------
DUTCHFORK BANCSHARES, INC.
--------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED 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)
(803) 321-3200
--------------
(ISSUER'S TELEPHONE NUMBER)
N/A
-----------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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
--- ---
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE:
1,125,981 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE, WERE
ISSUED AND OUTSTANDING AS OF AUGUST 2, 2004.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES NO X
--- ---
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 2004 and September 30, 2003 (unaudited)
Consolidated Statements of Income for the Three Months and Nine Months Ended
June 30, 2004 and 2003 (unaudited)
Consolidated Statements of Comprehensive Operations for the Three Months and
Nine Months Ended June 30, 2004 and 2003 (unaudited)
Consolidated Statements of Changes in Stockholders' Equity for the Nine Months
Ended June 30, 2004 (unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2004
and 2003 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
ITEM 3: CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
Item 2: Changes in Securities and Small Business Issuer Purchases of Equity
Securities
Item 3: Defaults upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements of DutchFork Banchshares, Inc. (the "Company"
or "DutchFork Bancshares") are set forth in the following pages.
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DUTCHFORK BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
2004 2003
------------------ -------------------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and cash equivalents $ 2,123,517 $ 2,653,640
Investments and mortgage-backed securities:
Available-for-sale:
Investments (cost of $109,782,801 and
$143,998,688 at June 30, 2004 and
September 30, 2003, respectively) 104,046,384 141,901,562
Mortgage-backed securities (cost of
$34,661,831 and $19,117,095 at
June 30, 2004 and September 30,
2003, respectively) 34,305,724 18,908,681
Held-to-maturity:
Mortgage-backed securities (fair
value of $1,368,324 at September
30, 2003) - 1,355,226
Loans receivable 51,272,162 58,371,056
Premises, furniture and equipment, net 2,994,527 3,179,428
Accrued interest receivable:
Loans and mortgage-backed securities 309,583 346,945
Investments and other property 716,310 690,454
Prepaid assets 187,008 408,299
Prepaid income taxes and taxes receivable 764,701 518,585
Deferred tax asset 619,240 936,622
Other 5,550,301 5,782,861
--------------- ------------
TOTAL ASSETS $ 202,889,457 $235,053,359
=============== ============
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DUTCHFORK BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
MARCH 31, SEPTEMBER 30,
2004 2003
------------------ -------------------
(UNAUDITED) (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 135,241,749 $ 143,429,056
Federal Home Loan Bank advances 35,000,000 55,000,000
Advances from borrowers for taxes
and insurance 33,635 62,316
Federal funds purchased 795,000 2,613,022
Accrued income taxes payable 17,689 317,382
Accrued expenses 537,005 748,729
Accrued interest payable 119,939 234,581
Other 204,416 90,502
------------- -------------
TOTAL LIABILITIES 171,949,433 202,495,588
------------- -------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.01 par value, 500,000 shares
authorized and unissued - -
Common stock, $.01 par value,
4,000,000 shares authorized, 1,560,550 issued
and outstanding at June 30, 2004 and September
30, 2003 15,605 15,605
Additional paid-in capital 15,214,305 15,022,479
Retained earnings, substantially restricted 31,974,348 31,446,192
Accumulated other comprehensive income (loss) (3,926,904) (1,470,979)
Treasury stock (434,569 and 432,709 shares at June
30, 2004 and September 30, 2003, respectively) (10,617,620) (10,543,034)
Unearned 2001 Stock-Based Incentive Plan shares
(34,965 and 43,079 shares at March 31, 2004 and
September 30, 2003, respectively) (657,146) (809,608)
Unearned employee stock ownership plan shares (1,062,564) (1,102,884)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 30,940,024 32,557,771
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 202,889,457 $235,053,359
============= ============
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DUTCHFORK BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Loans receivable $ 823,514 $ 977,808 $ 2,599,749 $ 3,057,290
Investments 1,119,175 1,067,875 3,522,041 2,404,248
Mortgage-backed and related securities 8,890 848,947 1,132,799 2,307,459
Other interest-earning assets 83,912 91,474 287,830 228,341
-------------- ------------- ------------- -------------
Total interest income 2,035,491 2,986,104 7,542,419 7,997,338
-------------- ------------- ------------- -------------
INTEREST EXPENSE:
Interest expense on deposit accounts 453,672 631,712 1,397,697 2,259,709
Federal Home Loan Bank advances 507,325 501,750 1,568,923 1,516,716
Other borrowings 3,923 83 60,600 166
-------------- ------------- ------------- -------------
Total interest expense 964,920 1,133,545 3,027,220 3,776,591
-------------- ------------- ------------- -------------
NET INTEREST INCOME 1,070,571 1,852,559 4,515,199 4,220,747
Provision for loan losses 21,437 30,000 206,437 170,000
-------------- ------------- ------------- -------------
Net interest income after
provision for loan losses 1,049,134 1,822,559 4,308,762 4,050,747
-------------- ------------- ------------- -------------
NONINTEREST INCOME:
Gain (loss) on sale of securities, net 91,468 458,545 668,552 2,312,374
Loan servicing fees 528 746 1,632 3,504
Bank service charges 126,301 142,121 402,873 417,758
Other 67,806 113,555 180,428 321,100
-------------- ------------- ------------- -------------
Total noninterest income 286,103 714,967 1,253,485 3,054,736
-------------- ------------- ------------- -------------
NONINTEREST EXPENSE:
Compensation and benefits 840,046 642,752 2,509,288 2,294,226
Occupancy 105,407 108,443 312,962 336,145
Furniture and equipment 15,577 22,916 51,432 54,233
Marketing 8,471 25,052 51,262 77,241
Other 1,101,017 393,617 2,034,019 1,289,679
-------------- ------------- ------------- -------------
Total noninterest expense 2,070,518 1,192,780 4,958,963 4,051,524
-------------- ------------- ------------- -------------
Income (loss) before income taxes (735,281) 1,344,746 603,284 3,053,959
Provision for income taxes (84,018) 286,024 75,128 543,215
-------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (651,263) $ 1,058,722 $ 528,156 $ 2,510,744
============== ============= ============= =============
NET INCOME (LOSS) PER SHARE (BASIC) $ (0.65) $ 1.07 $ 0.53 $ 2.43
============== ============= ============= =============
NET INCOME (LOSS) PER SHARE (DILUTED) $ (0.61) $ 1.01 $ 0.50 $ 2.30
============== ============= ============= =============
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DUTCHFORK BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net income (loss) $ (651,263) $ 1,058,722 $ 528,156 $ 2,510,744
Other comprehensive income (loss), net of tax:
Unrealized (losses) arising during
the period, net of tax effect of
$(99,404), $155,712, $670,333 and
$1,305,750 for the three months ended
months ended June 30, 2004 and
2003 and the nine months ended June
30, 2004 and 2003, respectively 397,615 (1,236,148) (2,455,925) (2,135,869)
------------ -------------- ------------- -------------
Comprehensive income (loss) $ (253,648) $ (177,426) $ (1,927,769) $ 374,875
============= ============== ============= ============
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DUTCHFORK BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
NUMBER OF COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY INCENTIVE STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK PLAN ESOP LOAN EQUITY
------------ ---------- ---------- ----------- ------------- ----------- ---------- ---------- --------------
(UNAUDITED) (UNUAUDITED)
Balance at September
30, 2003 1,084,768 $15,605 $15,022,479 $31,446,192 $(1,470,979) $(10,543,034) $(809,608) $(1,102,884) $32,557,771
Net income 528,156 528,156
Release of 6,240 ESOP
shares 210,914 40,320 251,234
Release of Incentive
Plan shares 8,114 (19,088) 152,462 133,374
Purchase of treasury
stock (1,860) (74,586) (74,586)
Change in net
unrealized
depreciation on
investments
available for sale
(net of deferred and
current income taxes
of $670,333) (2,455,925) (2,455,925)
---------- ------- ----------- ----------- ------------ ------------- --------- ------------ -----------
Balance at June
30, 2004 1,091,022 $15,605 $15,214,305 $31,974,348 $(3,926,904) $(10,617,620) $(657,146) $(1,062,564) $30,940,024
========== ======= =========== =========== ============ ============= ========== ============ ===========
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DUTCHFORK BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30,
2004 2003
-------------- --------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income $ 528,156 $ 2,510,744
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 209,123 234,401
Provision for loan losses 206,437 -
Incentive plan shares issued 152,462 -
(Gain) loss on sales of investments and mortgage-
backed securities (668,552) (2,312,374)
Net (gain) loss on sales on loans 263,244 (67,848)
Increase (decrease) in deferred loan origination fees - (20,202)
Amortization of premiums (discounts) on investments,
mortgage-backed securities and loans 1,164,945 360,724
Decrease (increase) in accrued interest receivable 11,506 (128,976)
Decrease (increase) in prepaid and other assets 226,516 (5,410,552)
Decrease (increase) in deferred tax asset 317,382 550,040
Increase (decrease) in accrued interest payable (114,642) (215,040)
Increase (decrease) in accounts payable and accrued
expenses (211,724) -
Increase (decrease) in other liabilities (1,803,522) 629,709
Origination of loans held for sale (2,116,850) (9,108,430)
Proceeds from sales of trading securities - 10,000,000
Purchases of trading securities - (10,000,000)
------------ ------------
Net cash provided (used) by operating activities (1,835,519) (12,977,804)
------------ ------------
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DUTCHFORK BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED JUNE 30,
2004 2003
--------------- --------------
(UNAUDITED) (UNAUDITED)
INVESTING ACTIVITIES
Principal payments on mortgage-backed securities 7,601,648 48,516,374
Purchases of available-for-sale securities (45,613,657) (210,618,909)
Purchases of investments held to maturity (2,000,000) 24,000,000
Proceeds from sales of held to maturity securities 2,857,915 -
Proceeds from sales of available-for-sale securities 57,019,868 142,219,035
Net (increase) decrease in loans receivable 7,440,013 2,920,636
Proceeds from sales of loans 1,287,269 8,933,296
Purchases of premises, furniture and equipment (24,222) (43,732)
------------- -------------
Net cash provided (used) by investing activities 28,568,834 15,926,700
------------- -------------
FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts (8,187,307) (3,455,106)
Payments on Federal Home Loan Bank advances (20,000,000) -
Proceeds from other borrowings 40,440,000 -
Repayments of other borrowings (39,645,000) -
Release of ESOP shares 40,320 -
Repayment of ESOP loan - 36,635
Purchase of treasury stock 117,230 (2,737,699)
Unallocated incentive plan - 152,462
Increase (decrease) in advances from borrowers for
taxes and insurance (28,681) (10,453)
------------- -------------
Net cash provided by financing activities (27,263,438) (6,014,161)
------------- -------------
Net increase (decrease) in cash and cash equivalents (530,123) (3,065,265)
Cash and cash equivalents at beginning of year 2,653,640 21,130,629
------------- -------------
Cash and cash equivalents at end of year $ 2,123,517 $ 18,065,364
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest $ 4,023,790 $ 6,322,261
Taxes $ (667,412) $ 690,994
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DUTCHFORK BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - ORGANIZATION
------------
DutchFork Bancshares, Inc. (the "Company") was incorporated under the
laws of Delaware in February 2000 for the purpose of serving as the holding
company of Newberry Federal Savings Bank ("Newberry Federal" or the "Bank") as
part of the Bank's conversion from the mutual to stock form of organization. The
conversion, completed on July 5, 2000, resulted in the Company issuing an
aggregate of 1,560,550 shares of its common stock, par value $.01 per share, at
a price of $10 per share. Prior to the conversion, the Company had not engaged
in any material operations and had no assets or income. The Company is a savings
and loan holding company and subject to regulation by the Office of Thrift
Supervision and the Securities and Exchange Commission.
NOTE 2 - ACCOUNTING PRINCIPLES
---------------------
The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with instruction to Form 10-QSB
and of Regulation S-B. Accordingly, the financial statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of a normal recurring nature) considered necessary
for a fair presentation have been included. Operating results for the periods
presented are not necessarily indicative of the results that may be expected for
the current fiscal year.
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NOTE 3 - EARNINGS PER SHARE
------------------
The following reconciles the numerator and denominator of the basic and
diluted earnings per share computation:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Basic EPS computation:
Numerator $ (651,263) $ 1,058,722 $ 528,156 $ 2,510,744
----------- ----------- ---------- -----------
Denominator 997,378 993,815 992,026 1,034,414
---------- ----------- ---------- -----------
Basic EPS $ (0.65) $ 1.07 $ 0.53 $ 2.43
=========== =========== ========== ===========
Diluted EPS computation:
Numerator $ (651,263) $ 1,058,722 $ 528,156 $ 2,510,744
----------- ----------- ---------- -----------
Denominator:
Common shares outstanding 997,378 993,815 992,026 1,034,414
Dilutive securities:
Stock options - treasury stock
method 58,375 47,858 58,464 43,842
Incentive plan - treasury stock
method 9,342 11,487 11,780 12,347
----------- ------------ ----------- ------------
1,065,095 1,053,160 1,062,270 1,090,063
------------- ------------ ----------- ------------
$ (0.61) $ 1.01 $ 0.50 $ 2.30
=========== ============ =========== ============
The average market price used in calculating the assumed number of
shares issued for the three months and nine months ended June 30, 2004 and 2003
was $38.72 and $31.12, $38.80 and $28.95 per share, respectively.
NOTE 4 - AGREEMENT AND PLAN OF MERGER
----------------------------
On April 12, 2004, the Company entered into and Agreement and Plan of
Merger with First Community Corporation ("First Community") the holding company
for First Community Bank, N.A. The Agreement provides among other things that
DutchFork will merge with and into First Community with First Community as the
surviving entity. Immediately following the merger, Newberry Federal will merge
with and into First Community Bank, N.A., with First Community Bank N.A. being
the surviving entity.
Pursuant to the Agreement, each share of DutchFork common stock issued
and outstanding immediately before the Effective Date (as defined in the
Agreement) will be converted into the right to receive at the election of the
holder either (i) $42.75 in cash, without interest or (ii) 1.78125 shares of
First Community common stock, subject to the allocation and election procedures
set forth in the Agreement.
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Consummation of the merger is subject to the satisfaction of certain
conditions, including approval of the Agreement by the respective stockholders
of DutchFork and of First Community and approval by the appropriate regulatory
agencies.
NOTE 5 - RECLASSIFICATION OF HELD-TO-MATURITY SECURITIES
-----------------------------------------------
The Company sold $2,857,915 of mortgage-backed securities designated as
held-to-maturity before maturity date. Due to this, the remaining
mortgage-backed securities totaling $212,268 were reclassified as
available-for-sale.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward Looking Statements
- --------------------------
This quarterly report contains forward-looking statements that are
based on assumptions and describe future plans, strategies and expectations of
DutchFork Bancshares and its wholly owned subsidiary, Newberry Federal. These
forward looking statements are generally identified by use of the works
"believe", "expect", "intend", "anticipate", "estimate", "project", or similar
expressions. DutchFork Bancshares and Newberry Federal's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of DutchFork Bancshares and Newberry Federal include, but are not limited to,
changes in interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Reserve Board, the quality and
composition of the loan or investment portfolios, demand for loan products,
deposits flow, competition, demand for financial services in DutchFork
Bancshares' and Newberry Federal's market area and accounting principles. These
risks and uncertainties should be considered in evaluating forward looking
statements and undue reliance should not be placed on such statements. Except as
required by law or regulation, the Company disclaims any obligation to update
such forward-looking financial statements.
Operating Strategy
- ------------------
DutchFork Bancshares' wholly owned subsidiary, Newberry Federal, is an
independent community-oriented savings bank, delivering quality customer service
and offering a wide range of deposit and loan products to its customers. Because
of weak loan demand in Newberry Federal's primary market area, management has
maintained a substantial investment in investment securities and mortgage-backed
securities classified as available-for-sale. Management's objective in managing
the securities portfolio is to maintain a portfolio of high quality, highly
liquid investments with competitive returns in order to maximize current income
without compromising credit quality.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND SEPTEMBER 30, 2003:
Total assets decreased by $32.2 million from $235.1 million at
September 30, 2003 to $202.9 million at June 30, 2004. Assets declined due to
the repayment of $20 million in Federal Home Loan Bank advances and an $8.2
million decrease in deposit accounts. The decrease is reflected in a $23.8
million decrease in investments and mortgage-backed securities along with a $7.0
million decrease in loans receivable. The decrease in loans receivable was due
to a sale of a $3.1 million loan that the Company sold in order to more closely
conform its loan portfolio with the loan portfolio of First Community Bank.
At June 30, 2004, the Bank did not have any investments held for
trading. Depending on market volatility and the elements of supply and demand
certain investments are purchased with the expressed intent of selling them
prior to their stated maturity and are placed in a trading account. Prevailing
market conditions and risk exposure determine when this procedure is followed.
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COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND SEPTEMBER 30, 2003
(CONTINUED):
Loans receivable at June 30, 2004 and September 30, 2003 were as
follows:
MARCH 31, SEPTEMBER 30,
2004 2003
------------ --------------
Commercial real estate $ 8,038,954 $ 10,966,123
Commercial - other 7,713,581 8,719,151
Real estate construction 821,000 811,000
Residential mortgage - 1-4 family 23,291,108 25,192,999
Second mortgage loans, home equity
loans and lines of credit 5,470,830 5,671,360
Multi-family 757,227 812,001
Consumer loans 5,995,786 7,064,593
----------- ------------
52,088,486 59,237,227
----------- ------------
Less:
Allowance for loan losses 477,589 400,892
Loans in process 338,500 464,996
Deferred loan origination fees, net 235 283
----------- ------------
816,324 866,171
----------- ------------
Loans receivable, net $51,272,162 $ 58,371,056
=========== ============
Loans receivable declined by $7,024,000 during the nine months ended
June 30, 2004 due to loan pay-offs and the sale of a loan of $3.1 million as
discussed earlier.
Non-accrual loans totaled $80,271 at June 30, 2004 compared to $550,000
at September 30, 2003. When a loan becomes 90 days past due, it is converted to
non-accrual status. The Bank had no loans past 90 days or more still accruing
interest at June 30, 2004 and September 30, 2003. Loans receivable that were
troubled debt restructurings totaled $423,595 at June 30, 2004 and $193,000 at
September 30, 2003. Interest income that would have been recorded for the nine
months ended June 30, 2004, had nonaccruing loans been current according to
their original terms, amounted to approximately $45,886. The Bank included
income on such loans of $29,092 in total interest income for the nine months
ended June 30, 2004. There are no loans which are not discussed above where
known information about possible credit problems of borrowers causes management
to have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms.
Other assets at June 30, 2004 and September 30, 2003 include $5,496,000
and $5,340,000, respectively of cash surrender value of Bank-owned life
insurance on directors, officers and employees.
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COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND SEPTEMBER 30, 2003
(CONTINUED):
At June 30, 2004, total equity was $30.9 million, after a $3.0 million
unrealized loss, net of taxes, on the investment and mortgage-backed securities
portfolios classified as available-for-sale. This compares with total equity at
September 30, 2003 of $32.6 million, including a $1.5 million unrealized loss,
net of taxes, on the investment and mortgage-backed securities portfolios
classified as available-for-sale. During the nine months ended June 30, 2004,
the market values of investments and mortgage-backed securities decreased by
$3,126,000, and after the tax effect of $670,000, equity decreased by
$2,456,0000 from this decrease in market values.
Due to the size of the Bank's investment portfolio, extreme volatility
in the rate environment requires extensive restructuring when call options by
issuers are exercised and prepayments reach new highs. These two occurrences
heavily impact cash flows and reinvestment opportunities. In an attempt to
manage current and future interest rate spreads, investments must be
restructured when rate changes occur in rapid and possibly sustained periods. It
is essential to control liquidity while preserving investment value. This,
however, complicates the prediction of future income capabilities due to the low
rates of return afforded from investment opportunities.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND
JUNE 30, 2003:
Net Income (Loss)
- -----------------
There was a net (loss) of $651,000 for the three months ended June 30,
2004 compared to a profit of $1,059,000 for the same period in 2003. The decline
was a result of a $773,000 decline in net interest income, after the provision
for loan losses. In addition, non-interest income decreased by $429,000
primarily due to a decrease in the gain on sale of securities, while
non-interest expense increased by $878,000, largely due to $429,000 in costs
associated with the proposed merger, and a loss of $307,000 on the sale of a
$3.1 million loan that the Company sold in order to more closely conform its
loan portfolio with the loan portfolio of First Community Bank.
Net Interest Income
- -------------------
Net interest income increased from $1.9 million for the three months
ended June 30, 2003 to $1.1 million for the same period in 2004. This was a
result of a $951,000 decrease in total interest income and a $169,000 decline in
total interest expense.
Total interest income declined due to a $7.2 million decline in average
interest earning assets, and a 175 basis point decrease in average yield. The
decrease in the yield from 5.97% for the three months ended June 30, 2003 to
4.22% for the three months ended June 30, 2004 was primarily due to a decreased
yield on mortgage-backed securities.
Total interest expense decreased due to a $8.5 million decline in
average interest-bearing liabilities, along with a 27 basis point decline in the
average interest rate paid.
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17
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND
JUNE 30, 2003 (CONTINUED):
Provision for Loan Losses
- -------------------------
The provision for loan losses for the three months ended June 30, 2004
and 2003 was $21,000 compared to $30,000 for the same period in 2003. The
allowance was carefully evaluated and determined to be adequate at its current
level based upon current market trends. The Bank evaluated individual larger
loans (those in excess of $500,000) for impairment and determined that none of
these loans were impaired. The changes in concentration of loans between June
30, 2004 and September 30, 2003 were relatively insignificant. Although
management uses the best information available, future adjustments to the
allowance may be necessary due to changes in economic, operating, regulatory and
other conditions that may be beyond the Company's control. While the Company
maintains its allowance for loan losses at a level which it considers adequate
to provide for estimated losses, there can be no assurance that further
additions will not be made to the allowance for loan losses and that actual
losses will not exceed estimated losses.
The table on page 23 presents an analysis on the Bank's allowance for
loan losses.
Non-Interest Income
- -------------------
Non-interest income decreased by $429,000, primarily as a result of a
decrease of $367,000 in gains on the sale of securities and a decrease in other
income of $46,000 primarily due to a decrease in loan fees and gains on the sale
of loans due to the lower volume of mortgage loans.
Non-Interest Expense
- --------------------
Non-interest expense increased by $877,000 due to $429,000 in expenses
related to the merger with First Community Corporation and a loss of $307,000 on
the sale of a $3.1 million loan that the Company sold in order to more closely
conform its loan portfolio with the loan portfolio of First Community Bank.
Provision for Income Taxes
- --------------------------
Income taxes for the quarter ended June 30, 2004 were a benefit of
$84,000 due to the loss for the quarter.
17
18
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2004 AND JUNE
30, 2003:
Net Income
- ----------
Net income for the nine months ended June 30, 2004 decreased by $2.0
million to $528,000 when compared to the same period for the prior year. Net
interest income, after the provision for loan losses, increased by $758,000, and
non-interest income decreased by $1.8 million. The decrease in non-interest
income was primarily due to a $1.6 million decrease in gains on the sale of
securities during the period ended June 30, 2004 and a $68,000 decrease in loan
origination fees and a $40,000 decrease in gains on the sale of securities due
to the significantly lower volume of mortgage loans closed.
Net Interest Income
- -------------------
Net interest income increased from $4.2 million for the nine months
ended June 30, 2003 to $4.5 million for the same period in 2004. This was the
result of a $749,000 decrease in total interest expense which was only partially
offset by a $455,000 decrease in total interest income.
Total interest income declined due to a 37 basis point decline in the
average yield, which was partially offset by a $2.6 million increase in average
interest-earning assets. Total interest expense declined due to a 54 basis point
decrease in the average rate on interest-bearing liabilities.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the nine months ended June 30, 2004
was $206,000, compared to $170,000 for the same period in 2003. The allowance
was carefully evaluated and determined to be adequate at its current level based
upon current market trends. The Bank evaluated individual larger loans (those in
excess of $500,000) for impairment and determined that none of these loans were
impaired.
18
19
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2004 AND JUNE
30, 2003 (CONTINUED):
Non-Interest Income
- -------------------
Non-interest income decreased by $1.8 million, primarily as a result of
a $1.6 million decrease in gains on the sale of securities and a decrease in
loan origination fees and the gain on the sale of loans of $113,000, due to the
lower volume of mortgage loans originated. Securities in the period ended June
30, 2003 were sold as part of a restructuring plan designed to protect the Bank
from potential volatility due to the Iraq war.
Non-Interest Expense
- --------------------
Non-interest expense increased from $4.1 million for the nine months
ended June 30, 2003 to $5.0 million for the nine months ended June 30, 2004. The
increase was primarily due to $429,000 in costs associated with the proposed
merger, and a loss of $307,000 on the sale of a $3.1 million loan that the
Company sold in order to more closely conform its loan portfolio with the loan
portfolio of First Community Bank.
Provision for Income Taxes
- --------------------------
Income tax decreased by $468,000 from the $543,000 for the nine months
ended June 30, 2003. The decrease was due to a decline in income before taxes
and an overall lower effective rate on the lower income due to the impact of the
dividend exclusion on preferred stocks.
19
20
Liquidity and Capital Resources
- -------------------------------
Management believes that the Company's liquidity remains adequate to
meet operating, investment and loan funding requirements. Cash and cash
equivalents, along with investments and mortgage-backed securities available for
sale, represented 69.1% of assets at June 30, 2004.
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of expected loan demand, expected deposit flows, yields
available on interest-earning deposits and investment securities and the
objectives of its asset/liability management program. Excess liquid assets are
invested generally in interest-earning overnight deposits and short-and
intermediate-term U.S. Government and agency obligations and mortgage-backed
securities. If the Company requires funds beyond its ability to generate them
internally, it has additional borrowing capacity with the Federal Home Loan Bank
of Atlanta.
The desired level of liquidity for the Company is determined by
management in conjunction with the Asset/Liability Committees of the Bank. The
level of liquidity is based on management's strategic direction for the
Company's commitments to make loans and the Committees' assessment of the Bank's
ability to generate funds. Historically, sources of liquidity have included net
deposits to savings accounts, amortization and prepayments of loans, Federal
Home Loan Bank advances, reverse repurchase agreements and sales of securities
and loans held for sale.
The Bank is subject to various regulatory capital requirements imposed
by the Office of Thrift Supervision. At June 30, 2004, the Bank was in
compliance with all applicable capital requirements.
The Bank's actual capital amounts and ratios are presented in the
following table:
TO BE WELL
CAPITALIZED
MINIMUM FOR PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
-------------------- ------------------ ------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
----- -------- ----- ------ ----- ------
(dollars in thousands)
June 30, 2004:
Tangible capital 16.14% $ 33,694 2.00% $ 4,176 N/A N/A
Core capital 16.14% $ 33,694 4.00% $ 8,351 5.00% $ 10,439
Risk-based capital 20.67% $ 33,976 8.00% $ 13,148 10.00% $ 16,436
20
21
DUTCHFORK BANCSHARES, INC.
YIELDS ON AVERAGE INTEREST EARNING ASSETS AND RATES
ON AVERAGE INTEREST BEARING LIABILITIES
(IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
2004 2003
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
Interest earning assets:
Loans receivable (1) $ 53,257 $ 824 6.19% $ 59,266 $ 978 6.60%
Interest-bearing deposits (2) 2,363 2 0.34% 376 8 8.51%
Investment securities (3) 100,397 1,111 4.43% 91,344 1,043 4.57%
Mortgage-backed securities 30,209 9 0.12% 39,899 848 8.50%
Federal funds sold 3,673 8 0.87% 9,058 25 1.10%
Other 2,867 81 11.30% - 84 -
--------- -------- ------- --------- -------- -----
Total interest earning assets 192,766 2,035 4.22% 199,943 2,986 5.97%
Non-interest earning assets 12,779 15,703
--------- ---------
Total assets $ 205,545 $ 215,646
========= =========
Interest bearing liabilities:
Deposit accounts 139,250 454 1.30% 148,572 632 1.70%
Federal Home Loan Bank
advances 35,000 507 5.79% 35,000 501 5.73%
Other borrowings 802 3 1.50% - - -
--------- -------- ------- --------- -------- -----
Total interest bearing liabilities 175,052 964 2.20% 183,572 1,133 2.47%
Non-interest bearing liabilities 68 6,207
--------- ---------
Total liabilities 175,120 189,779
Total equity 30,425 25,867
--------- ---------
Total liabilities and equity $ 205,545 $ 215,646
========= =========
Net interest spread (4) $ 1,071 2.02% $ 1,853 3.50%
Net interest margin as a percentage
of interest-earning assets (5) 2.22% 3.71%
- ----------------------------
(1) Balances are net of deferred loan origination costs, undisbursed proceeds of construction loans in process, and include
nonaccrual loans.
(2) Includes mortgage-backed securities available-for-sale and held-to-maturity.
(3) Includes investment securities available-for-sale and held-to-maturity.
(4) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the
weighted average cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of average interest-earning assets.
21
22
DUTCHFORK BANCSHARES, INC.
YIELDS ON AVERAGE INTEREST EARNING ASSETS AND RATES
ON AVERAGE INTEREST BEARING LIABILITIES
(IN THOUSANDS)
NINE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
2004 2003
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
Interest earning assets:
Loans receivable (1) $ 55,742 $ 2,600 6.22% $ 59,805 $ 3,057 6.82%
Interest-bearing deposits (2) 2,490 37 1.98% 1,318 17 1.72%
Investment securities (3) 106,662 3,510 4.39% 78,468 2,289 3.89%
Mortgage-backed securities 34,506 1,133 4.38% 50,045 2,307 6.15%
Federal funds sold 1,751 12 0.91% 12,019 115 1.28%
Other 3,109 250 10.72% - 212 -
--------- -------- --------- --------- ------- ------
Total interest earning assets 204,260 7,542 4.92% 201,655 7,997 5.29%
Non-interest earning assets 14,530 17,783
--------- ---------
Total assets $ 218,790 $ 219,438
========= =========
Interest bearing liabilities:
Deposit accounts 141,080 1,398 1.32% 151,129 2,260 1.99%
Federal Home Loan Bank
advances 39,659 1,569 5.27% 35,000 1,516 5.78%
Other borrowings 5,707 60 1.40% - - -
--------- -------- --------- --------- ------- ------
Total interest bearing liabilities 186,446 3,027 2.16% 186,129 3,776 2.70%
Non-interest bearing liabilities 885 4,117
--------- ---------
Total liabilities 187,331 190,246
Total equity 31,459 29,192
--------- ---------
Total liabilities and equity $ 218,790 $ 219,438
========= =========
Net interest spread (4) $ 4,515 2.76% $ 4,221 2.58%
Net interest margin as a percentage
of interest-earning assets (5) 2.95% 2.79%
- ------------------------------
(1) Balances are net of deferred loan origination costs, undisbursed proceeds of construction loans in process, and include
nonaccrual loans.
(2) Includes mortgage-backed securities available-for-sale and held-to-maturity.
(3) Includes investment securities available-for-sale and held-to-maturity.
(4) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the
weighted average cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of average interest-earning assets.
22
23
DUTCHFORK BANCSHARES, INC.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
---------------------------- ---------------------------
2004 2003 2004 2003
---------- ----------- ----------- -----------
Allowance for loan losses, beginning of period $ 395,496 $ 456,288 $ 400,892 $ 424,322
Charged-off loans:
One- to four-family real estate
Multi-family
Commercial real estate
Construction
Land
Commercial 141,242 41,222
Consumer 48,784 164,702 122,804 260,483
--------- --------- --------- ---------
Total charged-off loans 48,784 164,702 264,046 301,705
--------- --------- --------- ---------
Recoveries on loans previously charged off:
One- to four-family real estate
Multi-family
Commercial real estate
Construction
Land
Commercial 97,825 97,825
Consumer 11,615 72,231 36,481 101,200
--------- --------- --------- ---------
Total recoveries 109,440 72,231 134,306 101,200
--------- --------- --------- ---------
Net loans charged-off (recovered) (60,656) 92,471 129,740 200,505
---------- --------- --------- ---------
Provision for loan losses 21,437 30,000 206,437 170,000
--------- --------- --------- ---------
Allowance for loan losses, end of period $ 477,589 $ 393,817 $ 477,589 $ 393,817
========= ========= ========= =========
Net loans charged-off to average interest-earning
loans (0.11%) 0.16% 0.23% 0.34%
Allowance for loan losses to total loans 0.92% 0.65% 0.92% 0.65%
Allowance for loan losses to nonperforming loans
and troubled debt restructurings 94.78% 66.19% 94.78% 66.19%
Net loans charged-off to allowance for loan losses (12.70%) 23.48% 27.17% 50.91%
Recoveries to charge-offs 224.34% 43.86% 50.86% 33.54%
23
24
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company maintains
----------------------------------------------------
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing date of this
report, the chief executive officer and the chief financial officer of the
Company concluded that the Company's disclosure controls and procedures
were effective.
(b) Changes in internal controls. The Company made no significant changes in
------------------------------
its internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation of those controls
by the chief executive officer and the chief financial officer.
24
25
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company or any of its
subsidiaries is a party or which any of their property is the subject.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
(d)
Maximum number (or
(a) (b) (c) approximate dollar value
Total number of Average price Total number of shares (or units) of shares (or units) that
shares (or units) paid per share purchased as part of publicly may yet be purchased
purchased (or unit) announced plans or programs under the plans or programs
------------- --------- --------------------------- ---------------------------
Period
- ------
Apr 1,2004
through Apr 30,
2004 --- --- --- ---
May 1,2004
through May 31,
2004 --- --- --- ---
Jun 1,2004
through Jun
30, 2004 --- --- --- ---
Total --- --- --- ---
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
25
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 (2)
10.2 Newberry Federal Savings Bank Employment Agreement with Steve P. Sligh (2)
10.3 DutchFork Bancshares, Inc. Employment Agreement with J. Thomas Johnson (2)
10.4 DutchFork Bancshares, Inc. Employment Agreement with Steve P. Sligh (2)
10.5 Newberry Federal Savings Bank Employee Severance Compensation Plan (2)
10.6 Adoption Agreement for Employees' Savings & Profit Sharing Plan & Trust (1)
10.7 DutchFork Bancshares, Inc. 2001 Stock-Based Incentive Plan (3)
10.8 Newberry Federal Savings Bank Director Deferred Compensation Plan (4)
31.1 Rule 13a-14(a)/15d-14(a) Certification (President and Chief Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
32.0 Section 1350 Certifications
(b) Reports on Form 8-K
The Company furnished a Current Report on Form 8-K on May 10, 2004
announcing its financial results for the quarter ended March 31, 2004.
The Company filed a Current Report on Form 8-K on April 14, 2004
announcing that it entered into an Agreement and Plan of Merger with
First Community Corporation.
--------------------------
(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.
(2) Incorporated herein by reference from the Exhibits to the Annual Report on Form 10-KSB for the
fiscal year ended September 30, 2000.
(3) Incorporated herein by reference from the Definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders.
(4) Incorporated herein by reference from the Exhibits to Form S-8 Registration Statement, filed on
August 23, 2001, Registration No. 333-68214.
26
27
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DUTCHFORK BANCSHARES, INC.
--------------------------
(Registrant)
Date: August 13, 2004
/s/ J. Thomas Johnson
---------------------
J. Thomas Johnson
President and Chief Executive Officer
/s/ Steve P. Sligh
------------------
Steve P. Sligh
Executive Vice President and Chief
Financial Officer
27