Filed Pursuant to
Rule 424(b)(3)
Registration No. 333-31986
INTERESTS IN
NEWBERRY FEDERAL SAVINGS BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
INVESTED IN
UP TO $960,878 OF
DUTCHFORK BANCSHARES, INC.
COMMON STOCK
The Board of Directors of Newberry Federal has adopted a plan that will convert
the structure of Newberry Federal from a mutual savings institution to a stock
savings institution. As part of the conversion, DutchFork Bancshares, Inc. has
been established to acquire all of the stock of Newberry Federal and
simultaneously offer DutchFork Bancshares common stock to the public under
certain purchase priorities in the plan of conversion. You are now permitted to
direct the trustee of the Newberry Federal Savings Bank Employees' Savings &
Profit Sharing Plan and Trust to use your current account balances to subscribe
for and purchase shares of DutchFork Bancshares common stock through the
DutchFork Bancshares Stock Fund. Based upon the value of the Savings Plan
assets at September 30, 1999, the trustee of the Savings Plan could purchase up
to 96,087 shares of DutchFork Bancshares common stock assuming a purchase price
of $10.00 per share. If the trustee is unable to purchase shares of DutchFork
Bancshares common stock in the conversion, the trustee will purchase shares in
the open market after the conversion at then prevailing market prices, which may
be higher than the initial offering price of $10.00 per share. This prospectus
supplement relates to your election to direct the trustee of the Savings Plan to
invest all or a portion of your Savings Plan accounts in DutchFork Bancshares
common stock.
The prospectus dated May 12, 2000, of DutchFork Bancshares, which we have
attached to this prospectus supplement, includes detailed information regarding
the conversion of Newberry Federal, DutchFork Bancshares common stock and the
financial condition, results of operations and business of Newberry Federal.
This prospectus supplement provides information regarding the Savings Plan. You
should read this prospectus supplement together with the prospectus and keep
both for future reference.
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Please refer to "Risk Factors" beginning on page 9 of the prospectus.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation, nor any other state or
federal agency or any state securities commission, has approved or disapproved
these securities or determined if this prospectus supplement is truthful or
complete. Any representation to the contrary is a criminal offense.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
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This prospectus supplement may be used only in connection with offers and sales
by DutchFork Bancshares of interests or shares of common stock under the Savings
Plan to employees of Newberry Federal. You may not use this prospectus
supplement to reoffer or resell interests or shares of common stock acquired
through the Savings Plan.
You should rely only on the information contained in this prospectus supplement
and the attached prospectus. DutchFork, Newberry Federal and the Savings Plan
have not authorized anyone to provide you with information that is different.
This prospectus supplement does not constitute an offer to sell or solicitation
of an offer to buy any securities in any jurisdiction to any person to whom it
is unlawful to make an offer or solicitation in that jurisdiction. Neither the
delivery of this prospectus supplement and the prospectus nor any sale of common
stock shall under any circumstances imply that there has been no change in the
affairs of Newberry Federal or the Savings Plan since the date of this
prospectus supplement, or that the information contained in this prospectus
supplement or incorporated by reference is correct as of any time after the date
of this prospectus supplement.
The date of this Prospectus Supplement is May 12, 2000.
TABLE OF CONTENTS
THE OFFERING....................................................................................... 1
Securities Offered............................................................................ 1
Election to Purchase DutchFork Bancshares Common Stock in the Conversion of Newberry Federal.. 1
Value of Participation Interests.............................................................. 1
Method of Directing Transfer.................................................................. 1
Time for Directing Transfer................................................................... 2
Irrevocability of Transfer Direction.......................................................... 2
Purchase Price of DutchFork Bancshares Common Stock........................................... 2
Nature of a Participant's Interest in DutchFork Bancshares Common Stock....................... 2
Voting and Tender Rights of DutchFork Bancshares Common Stock................................. 2
DESCRIPTION OF THE SAVINGS PLAN.................................................................... 2
Introduction.................................................................................. 2
Eligibility and Participation................................................................. 3
Contributions Under the Savings Plan.......................................................... 3
Limitations on Contributions.................................................................. 3
Investment of Contributions................................................................... 4
Benefits Under the Savings Plan............................................................... 6
Withdrawals and Distributions From the Savings Plan........................................... 6
Administration of the Savings Plan............................................................ 7
Reports to Savings Plan Participants.......................................................... 7
Plan Administrator............................................................................ 7
Amendment and Termination..................................................................... 7
Merger, Consolidation or Transfer............................................................. 8
Federal Income Tax Consequences............................................................... 8
Restrictions on Resale........................................................................ 9
SEC Reporting and Short-Swing Profit Liability................................................ 9
LEGAL OPINION...................................................................................... 10
CHANGE OF INVESTMENT ALLOCATION FORM............................................................... 11
THE OFFERING
Securities Offered
The securities offered in connection with this prospectus supplement are
participation interests in the Savings Plan, invested in shares of DutchFork
Bancshares common stock. Assuming a purchase price of $10.00 per share, the
trustee may acquire up to 96,087 shares of DutchFork Bancshares common stock for
the DutchFork Bancshares Stock Fund. The interests offered under this
prospectus supplement are conditioned on the completion of the conversion of
Newberry Federal. Your investment in the DutchFork Bancshares Stock Fund in
connection with the conversion of Newberry Federal is also governed by the
purchase priorities contained in the plan of conversion of Newberry Federal.
This prospectus supplement contains information regarding the Savings Plan.
The attached prospectus contains information regarding the conversion of
Newberry Federal and the financial condition, results of operations and business
of Newberry Federal. The address of the principal executive office of Newberry
Federal is 1735 Wilson Road, Newberry, South Carolina 29108. The telephone
number of Newberry Federal is (803) 321-3200.
Election to Purchase DutchFork Bancshares Common Stock in the Conversion of
Newberry Federal
In connection with the conversion of Newberry Federal, the Savings Plan
will permit you to direct the trustee to transfer all or part of the funds,
which represent your current beneficial interest in the assets of the Savings
Plan, to the DutchFork Bancshares Stock Fund. The trustee of the Savings Plan
will subscribe for DutchFork Bancshares common stock offered for sale in
connection with the conversion of Newberry Federal in accordance with your
direction. If there is not enough common stock in the conversion to fill all
subscriptions, the common stock will be apportioned and the trustee for the
Savings Plan may not be able to purchase all of the common stock you requested.
In such case, the trustee will purchase shares in the open market, on your
behalf, after the conversion at then prevailing market prices to fulfill your
initial request. Such purchases may be at prices higher than the initial public
offering price of $10.00 per share.
You are eligible to direct a transfer of funds to the DutchFork Bancshares
Stock Fund. However, such directions are subject to the purchase priorities in
the plan of conversion of Newberry Federal. Your order will be filled based on
your status as an eligible account holder or supplemental eligible account
holder in the conversion of Newberry Federal. An eligible account holder is a
depositor whose savings account(s) totalled $50.00 or more on November 30, 1998.
A supplemental eligible account holder is a depositor whose savings account(s)
totalled $50.00 or more on March 31, 2000. No eligible account holders or
supplemental eligible account holders may purchase in the subscription offering
more than $175,000 of DutchFork Bancshares common stock, which equals 17,500
shares. If you fall into one of the above subscription offering categories, you
have subscription rights to purchase shares of common stock in the subscription
offering and you may use funds in the Savings Plan account to pay for the shares
of DutchFork Bancshares common stock which you are eligible to purchase.
Value of Participation Interests
As of September 30, 1999, the market value of the assets of the Savings
Plan equaled approximately $960,878. The plan administrator has informed you of
the value of your beneficial interest in the Savings Plan as of March 31, 2000.
The value of Savings Plan assets represents past contributions to the Savings
Plan on your behalf, plus earnings or minus losses on the contributions, less
previous withdrawals and loans.
Method of Directing Transfer
The last two pages of this prospectus supplement is a form for you to
direct a transfer to the DutchFork Bancshares Stock Fund (the "Change of
Investment Allocation Form"). If you wish to transfer all, or part, in
multiples of not less than 1%, of your beneficial interest in the assets of the
Savings Plan to the DutchFork Bancshares Stock Fund, you should complete the
Change of Investment Allocation Form. If you do not wish to make such an
election at this time, you do not need to take any action. The minimum
investment in the DutchFork Bancshares Stock Fund during the initial public
offering is $250.
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Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the
DutchFork Bancshares Stock Fund in connection with the conversion of Newberry
Federal is June 12, 2000. You should return the Change of Investment Allocation
Form to Steve Sligh by 4:00 p.m. on June 12, 2000.
Irrevocability of Transfer Direction
Your direction to transfer amounts credited to your account in the Savings
Plan to the DutchFork Bancshares Stock Fund cannot be changed. You will,
however, be provided with opportunities in the future to make other investment
elections with respect to new and previously contributed amounts.
Purchase Price of DutchFork Bancshares Common Stock
The trustee will use the funds transferred to the DutchFork Bancshares
Stock Fund to purchase shares of DutchFork Bancshares common stock in the
conversion of Newberry Federal. The trustee will pay the same price for shares
of DutchFork Bancshares common stock as all other persons who purchase shares of
DutchFork Bancshares common stock in the conversion of Newberry Federal. If
there is not enough Common Stock in the conversion to fill all subscriptions,
the Common Stock will be apportioned and the trustee for the Savings Plan may
not be able to purchase all of the Common Stock you requested. In such case, the
trustee will purchase shares in the open market, on your behalf, after the
conversion at then prevailing market prices to fulfill your initial request.
Such purchases may be at prices higher than the initial public offering price of
$10.00 per share.
Nature of a Participant's Interest in DutchFork Bancshares Common Stock
The trustee will hold DutchFork Bancshares common stock in the name of the
Savings Plan. The trustee will allocate shares of common stock acquired at your
direction to your account under the Savings Plan. Therefore, earnings on your
account should not be affected by the investment designations of other
participants in the Savings Plan.
Voting and Tender Rights of DutchFork Bancshares Common Stock
The Trustee generally will exercise voting and tender rights attributable
to all DutchFork Bancshares common stock held by the DutchFork Bancshares Stock
Fund as directed by participants with interests in the DutchFork Bancshares
Stock Fund. With respect to each matter as to which holders of DutchFork
Bancshares common stock have a right to vote, you will be given voting
instruction rights reflecting your proportionate interest in the DutchFork
Bancshares Stock Fund. The number of shares of DutchFork Bancshares common
stock held in the DutchFork Bancshares Stock Fund that are voted for and against
on each matter will be proportionate to the number of voting instruction rights
exercised in such manner. If there is a tender offer for DutchFork Bancshares
common stock, the Savings Plan provides that you will be allotted a number of
tender instruction rights reflecting your proportionate interest in the
DutchFork Bancshares Stock Fund. The percentage of shares of DutchFork
Bancshares common stock held in the DutchFork Bancshares Stock Fund that will be
tendered will be the same as the percentage of the total number of tender
instruction rights that are exercised in favor of tendering. The remaining
shares of DutchFork Bancshares common stock held in the DutchFork Bancshares
Stock Fund will not be tendered. The Savings Plan provides for you to exercise
your voting instruction rights and tender instruction rights on a confidential
basis.
DESCRIPTION OF THE SAVINGS PLAN
Introduction
Effective May 1, 2000, Newberry Federal adopted the Newberry Federal
Savings Bank Employees' Savings & Profit Sharing Plan and Trust. The Savings
Plan is a continuation of similar programs maintained by Newberry Federal in
prior years. Newberry Federal intends for the Savings Plan to comply, in form
and in operation, with all applicable provisions of the Internal Revenue Code of
1986, as amended, and the Employee Retirement Income Security Act of 1974, as
amended. Newberry Federal may change the Savings Plan from time to time in the
future to ensure
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continued compliance with these laws. Newberry Federal may also amend the
Savings Plan from time to time in the future to add, modify, or eliminate
certain features of the plan, as it sees fit. As a plan governed by the
Employee Retirement Income Security Act of 1974, as amended, federal law
provides you with various rights and protections as a plan participant.
Although the Savings Plan is governed by many of the provisions of the Employee
Retirement Income Security Act of 1974, as amended, your benefits under the plan
are not guaranteed by the Pension Benefit Guaranty Corporation.
Reference to Full Text of Plan. The following portions of this prospectus
supplement provide an overview of the material provisions of the Savings Plan.
Newberry Federal qualifies this overview in its entirety by reference to the
full text of the Savings Plan. You may obtain copies of the full Savings Plan
document by sending a request to Steve Sligh at Newberry Federal. You should
carefully read the full text of the Savings Plan document to understand your
rights and obligations under the plan.
Eligibility and Participation
Any employee of Newberry Federal may participate in the Savings Plan as of
the first day of the month following the attainment of age 21 and the completion
of one "year of service." For purposes of the Savings Plan, you generally
complete one "year of service" if you complete 1,000 hours of service with
Newberry Federal within a 12 consecutive-month period.
As of May 1, 2000, 34 of the 35 eligible employees of Newberry Federal
elected to participate in the Savings Plan.
Contributions Under the Savings Plan
Savings Plan Participant Contributions. The Savings Plan permits you to
annually defer receipt of 1% to 10% of compensation that Newberry Federal would
otherwise currently pay. For purposes of calculating deferrals, the Savings
Plan considers compensation to include your base salary, plus overtime, bonuses
and commissions (total W-2 salary). However, by law, the Savings Plan may not
consider more than $70,000 of compensation for purposes of determining deferrals
for 2000. You may modify the amount contributed to the plan, effective on the
first day of each calendar quarter.
Newberry Federal Contributions. Newberry Federal has discretion under the
Savings Plan about whether or not to make matching contributions. Newberry
Federal currently makes matching contributions to the Savings Plan equal to 100%
of your contributions up to 5% of your compensation for purposes of the Savings
Plan. Newberry Federal may also make special contributions to the Savings Plan
in an amount determined by Newberry Federal as of the last day of the plan year
for all employees who participated in the Savings Plan on the last day of the
plan year.
Limitations on Contributions
Limitation on Employee Salary Deferral. Although the Savings Plan permits
you to defer up to 10% of your compensation, by law your total deferrals under
the Savings Plan, together with similar plans, may not exceed $10,500 for 2000.
The Internal Revenue Service will periodically increase this annual limitation.
Contributions in excess of this limitation, or excess deferrals, will be
included in your gross income for federal income tax purposes in the year they
are made. In addition, you will have to pay federal income taxes on any excess
deferrals when distributed by the Savings Plan to you, unless the excess
deferral and any related income allocable is distributed to you not later than
the first April 15th following the close of the taxable year in which the excess
deferral is made. Any income on the excess deferral that is distributed not
later than such date shall be treated, for federal income tax purposes, as
earned and received by you in the taxable year in which the distribution is
made.
Limitations on Annual Additions and Benefits. Under the requirements of
the Internal Revenue Code, the Savings Plan provides that the total amount of
contributions and forfeitures (annual additions) allocated to you during any
year may not exceed the lesser of 25% of your compensation for that year, or
$30,000. The Savings Plan will also limit annual additions to the extent
necessary to prevent the limitations contained in the Internal Revenue Code for
all
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of the qualified defined benefit plans and defined contribution plans maintained
by Newberry Federal from being exceeded.
Limitation on Plan Contributions for Highly Compensated Employees. Special
provisions of the Internal Revenue Code limit the amount of salary deferrals and
matching contributions that may be made to the Savings Plan in any year on
behalf of highly compensated employees in relation to the amount of deferrals
and matching contributions made by or on behalf of all other employees eligible
to participate in the Savings Plan. If these limitations are exceeded, the
level of deferrals by highly compensated employees must be adjusted.
In general, a highly compensated employee includes any employee who, (1)
was a 5% owner of the sponsoring employer at any time during the year or
preceding year, or (2) had compensation for the preceding year in excess of
$85,000 and, if the sponsoring employer so elects, was in the top 20% of
employees by compensation for such year. The dollar amounts in the foregoing
sentence are for 2000, but maybe adjusted annually to reflect increases in the
cost of living.
Top-Heavy Plan Requirements. If for any calendar year the Savings Plan is
a Top-Heavy Plan, then Newberry Federal may be required to make certain minimum
contributions to the Savings Plan on behalf of non-key employees. In addition,
certain additional restrictions would apply with respect to the combination of
contributions to the Savings Plan and projected annual benefits under any
defined benefit plan maintained by Newberry Federal.
In general, the Savings Plan will be treated as a "Top-Heavy Plan" for any
calendar year if, as of the last day of the preceding calendar year, the
aggregate balance of the accounts of participants who are Key Employees exceeds
60% of the aggregate balance of the accounts of all participants. Key Employees
generally include any employee who, at any time during the calendar year or any
of the four preceding years, is:
(1) an officer of Newberry Federal Savings Bank having annual compensation
in excess of $60,000 who is in an administrative or policy-making capacity,
(2) one of the 10 employees having annual compensation in excess of
$30,000 and owning, directly or indirectly, the largest interests in Newberry
Federal,
(3) a person who owns directly or indirectly more than 5% of the stock of
DutchFork Bancshares, or stock possessing more than 5% of the total combined
voting power of all stock of DutchFork Bancshares, or
(4) a person who owns directly or indirectly combined voting power of all
stock and more than 1% of the total stock of DutchFork Bancshares and has annual
compensation in excess of $150,000.
The foregoing dollar amounts are for 2000.
Investment of Contributions
All amounts credited to your account under the Savings Plan are held in
trust. A trustee appointed by the Board of Directors of Newberry Federal
administers the trust.
The Savings Plan offers the following investment choices:
S&P 500 Stock Fund. This stock fund invests in the stocks of a broad array
of established U.S. companies. Its objective is long-term: to earn higher
returns by investing in the largest companies in the U.S. economy.
Stable Value Fund. This fund invests primarily in Guaranteed Investment
Contracts and Synthetic Guaranteed Investment Contracts. These contracts pay a
steady rate of interest over a certain period of time, usually between three and
five years. Its objective is short to intermediate term: to achieve a stable
return over short to intermediate periods of time while preserving the value of
your principal.
4
S&P MidCap Stock Fund. This stock fund invests in the stocks of mid-sized
U.S. companies, which are expected to grow faster than larger, more established
companies. Its objective is long-term: to earn higher returns which reflect the
growth potential of mid-sized companies.
Money Market Fund. This fund invests in a broad range of high-quality,
short-term instruments issued by banks, corporations and the U.S. Government and
its agencies. These instruments include certificates of deposit and U.S.
Treasury bills. Its objective is short-term: to achieve competitive, short-term
rates of return while preserving the value of your principal.
Government Bond Fund. This bond fund invests in U.S. Treasury bonds with a
maturity of 20 years or more. Its objective is long-term: to earn a higher
level of income along with the potential for capital appreciation.
International Stock Fund. This fund invests in over 1,000 foreign stocks
in 20 countries, based in Europe, Australia, and the Far East. Its objective is
long-term: to offer the potential return of investing in the stocks of
established non-U.S. companies, as well as the potential risk-reduction of broad
diversification.
Income Plus Asset Allocation Fund. This fund diversifies among a broad
range of stable value securities to reduce short-term risk and among a broad
range of large U.S. and international companies to capture growth potential.
The Fund is structured to take advantage of market opportunities with a small
flexible component. Its objective is intermediate-term: to preserve the value
of your investment over short periods of time and to offer some potential for
growth.
Growth and Income Asset Allocation Fund. This fund diversifies among U.S.
and international stocks, U.S. bonds, and stable value investments to pursue
long-term appreciation and short-term stability and takes advantage of market
opportunities with a small flexible component. Its objective is intermediate-
term: to provide a balance between the pursuit of growth and protection from
risk.
Growth Asset Allocation Fund. This fund diversifies among a broad range of
domestic and international stocks and takes advantage of market opportunities
with a large flexible component. Its objective is long-term: to pursue high
growth of your investment over time.
Russell 2000 Stock Fund. This fund invests in most, or all of the same
stocks held in the Russell 2000 Index. The Russell 2000 is one of the better
know indexes used to measure the performance of US small company stocks.
Companies of this size generally have greater investment risk and potentially
higher returns than mid- and large-capitalization stocks. Because this is an
index of 2000 companies, it is broadly diversified in terms of industries and
economic sectors.
S&P 500/Value Stock Fund. This fund invests in most, or all of the stocks
held in the S&P/BARRA Value Index. This index represents approximately 50% of
the market capitalization of the S&P 500 Stock Index. The S&P/BARRA Value and
Growth indexes are constructed by dividing the stocks in the S&P 500 by a single
attribute: market price to book value ratio. The Value Index includes
companies with lower price to book ratios.
S&P 500/Growth Stock Fund. This fund invests in most, or all of the stocks
held in the S&P/BARRA Growth Index. This index represents approximately 50% of
the market capitalization of the S&P 500 Stock Index. The S&P/BARRA Growth and
Value indexes are constructed by dividing the stocks in the S&P 500 by a single
attribute: market price to book value ratio. The Growth Index includes
companies with higher price to book ratios.
Newberry Federal Savings Bank Certificate of Deposit Fund. This fund
invests in certificates of deposit of Newberry Federal Savings Bank. Its
objective is short to intermediate term and to achieve a stable return while
preserving the value of your principal.
The Savings Plan now provides the DutchFork Bancshares Stock Fund as an
additional choice to these investment alternatives. The DutchFork Bancshares
Stock Fund invests primarily in the common stock of DutchFork
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Bancshares. You may direct the trustee to invest all or a portion of your
Savings Plan account balance in the DutchFork Bancshares Stock Fund.
The annual percentage return on the funds (net of fees) listed above for
the prior three years was:
1999 1998 1997
------ ------ ------
S&P 500 Stock Fund....................... 20.4 27.9% 32.7%
Stable Value Fund........................ 5.7 5.9 6.2
S&P MidCap Stock Fund.................... 14.3 18.6 31.5
Money Market Fund........................ 4.9 5.5 5.5
Government Bond Fund..................... -10.6 13.8 15.4
International Stock Fund................. 26.0 19.3 3.6
Income Plus Asset Allocation Fund........ 7.4 9.7 8.9
Growth and Income Asset Allocation Fund.. 14.8 15.5 13.6
Growth Asset Allocation Fund............. 22.7 24.3 19.0
Newberry Federal Savings Bank CD Fund.... 8.5 8.5 8.5
Russell 2000 Stock Fund.................. * * *
S&P 500/Value Stock Fund................. * * *
S&P 500/Growth Stock Fund................ * * *
* Note: These funds became available on January 4, 2000, therefore no
historical information is available.
The DutchFork Bancshares Stock Fund consists of investments in the common
stock of DutchFork Bancshares made on the effective date of the conversion of
Newberry Federal. After the conversion of Newberry Federal, the trustee of the
Savings Plan will, to the extent practicable, use all amounts held by it in the
DutchFork Bancshares Stock Fund, including cash dividends paid on the common
stock held in the fund, to purchase shares of common stock of DutchFork
Bancshares.
As of the date of this prospectus supplement, none of the shares of
DutchFork Bancshares common stock have been issued or are outstanding and there
is no established market for the DutchFork Bancshares common stock.
Accordingly, there is no record of the historical performance of the DutchFork
Bancshares Stock Fund. Performance of the DutchFork Bancshares Stock Fund
depends on a number of factors, including the financial condition and
profitability of DutchFork Bancshares and Newberry Federal and market conditions
for DutchFork Bancshares common stock generally.
Investments in the DutchFork Bancshares Stock Fund may involve certain
special risks in investments in the common stock of DutchFork Bancshares. For a
discussion of these risk factors, see "Risk Factors" beginning on page 9 of the
prospectus.
Benefits Under the Savings Plan
Vesting. You are always 100% vested in your elective deferrals under the
Savings Plan. You vest in regular matching contributions at a rate of 10% per
year through the first four years of employment and an additional 20% per year
through the seventh year of employment with Newberry Federal.
Withdrawals and Distributions From the Savings Plan
Distribution Upon Retirement or Disability. Upon retirement or disability,
you may receive a partial lump sum payment or a full lump sum payment from the
Savings Plan equal to the vested value of your accounts.
Distribution Upon Death. If you die before your benefits are paid from the
Savings Plan, your benefits will be paid to your surviving spouse or beneficiary
under one or more of the forms available under the Savings Plan.
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Distribution Upon Termination for Any Other Reason. If you terminate
employment for any reason other than retirement, disability or death and your
account balance exceeds $5,000, the trustee will make your distribution on your
normal retirement date, unless you request otherwise. If your account balances
does not exceed $5,000, the trustee will generally distribute your benefits to
you as soon as administratively practicable following termination of employment.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order, benefits payable under the Savings Plan shall not be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Savings Plan shall be void.
Applicable federal tax law requires the Savings Plan to impose substantial
restrictions on your right to withdraw amounts held under the plan before your
termination of employment with Newberry Federal. Federal law may also impose an
excise tax on withdrawals made from the Savings Plan before you attain 59 1/2
years of age regardless of whether the withdrawal occurs during your employment
with Newberry Federal or after termination of employment.
Administration of the Savings Plan
Trustees. The trustee with respect to the Savings Plan is the named
fiduciary of the Savings Plan for purposes of ERISA. The trustee receives,
holds and invests the contributions to the Savings Plan in trust and distributes
them to participants and beneficiaries in accordance with the terms of the
Savings Plan and the directions of the plan administrator. The trustee is
responsible for investment of the assets of the trust. The board of directors
of Newberry Federal has appointed Bank of New York as trustee of the DutchFork
Bancshares Stock Fund.
Reports to Savings Plan Participants
The plan administrator will furnish you with a statement at least quarterly
showing the balance in your account as of the end of that period, the amount of
contributions allocated to your account for that period, and any adjustments to
your account to reflect earnings or losses.
Plan Administrator
The current plan administrator of the Savings Plan is Newberry Federal.
The plan administrator is responsible for the administration of the Savings
Plan, interpretation of the provisions of the Savings Plan, prescribing
procedures for filing applications for benefits, preparation and distribution of
information explaining the Savings Plan, maintenance of plan records, books of
account and all other data necessary for the proper administration of the plan,
and preparation and filing of all returns and reports relating to the Savings
Plan which are required to be filed with the U.S. Department of Labor and the
Internal Revenue Service, and for all disclosures required to be made to
participants, beneficiaries and others under Employee Retirement Income Security
Act of 1974, as amended.
Amendment and Termination
Newberry Federal intends to continue the Savings Plan indefinitely.
Nevertheless, Newberry Federal may terminate the Savings Plan at any time. If
Newberry Federal terminates the Savings Plan in whole or in part, then
regardless of other provisions in the plan, you will become fully vested in your
account. Newberry Federal reserves the right to make, from time to time,
changes which do not cause any part of the trust to be used for, or diverted to,
any purpose other than the exclusive benefit of you or your beneficiaries;
provided, however, that Newberry Federal may amend the plan as it determines
necessary or desirable, with or without retroactive effect, to comply with the
Employee Retirement Income Security Act of 1974, as amended, or the Internal
Revenue Code.
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Merger, Consolidation or Transfer
If the Savings Plan merges or consolidates with another plan or transfers
the trust assets to another plan, and if either the Savings Plan or the other
plan is then terminated, the Savings Plan requires you to receive a benefit
immediately after the merger, consolidation or transfer. The benefit would be
equal to or greater than the benefit you would have been entitled to receive
immediately before the merger, consolidation or transfer if the Savings Plan had
then terminated.
Federal Income Tax Consequences
The following is only a brief summary of the material federal income tax
aspects of the Savings Plan. You should not rely on this summary as a complete
or definitive description of the material federal income tax consequences
relating to the Savings Plan. Statutory provisions change, as do their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. You are urged to consult
your tax advisor with respect to any distribution from the Savings Plan and
transactions involving the Savings Plan.
As a "qualified retirement plan," the Internal Revenue Code affords the
Savings Plan special tax treatment, including:
(1) the sponsoring employer is allowed an immediate tax deduction for the
amount contributed to the plan each year;
(2) you pay no current income tax on amounts contributed by the employer
on your behalf; and
(3) earnings of the plan are tax-deferred thereby permitting the tax-free
accumulation of income and gains on investments.
Newberry Federal will administer the Savings Plan to comply in operation
with the requirements of the Internal Revenue Code as of the applicable
effective date of any change in the law. If Newberry Federal receives an
adverse determination letter regarding its tax exempt status from the Internal
Revenue Service, you would generally recognize income equal to your vested
interest in the Savings Plan, you would not be permitted to transfer amounts
distributed from the Savings Plan to an Individual Retirement Account or to
another qualified retirement plan, and Newberry Federal may be denied certain
deductions taken with respect to the Savings Plan.
Lump Sum Distribution. A distribution from the Savings Plan to you or your
beneficiary will qualify as a lump sum distribution if it is made within one
taxable year, on account of your death, disability or separation from service,
or after you attain age 59 1/2; and consists of the balance to your credit under
the Savings Plan and all other profit sharing plans, if any, maintained by
Newberry Federal. The portion of any lump sum distribution required to be
included in your taxable income for federal income tax purposes consists of the
entire amount of the lump sum distribution less the amount of after-tax
contributions, if any, you have made to any other profit sharing plans
maintained by Newberry Federal which is included in the distribution.
DutchFork Bancshares Common Stock Included in Lump Sum Distribution. If a
lump sum distribution includes DutchFork Bancshares common stock, the
distribution generally will be taxed in the manner described above, except that
the total taxable amount will be reduced by the amount of any net unrealized
appreciation with respect to DutchFork Bancshares common stock that exceeds the
value of DutchFork Bancshares common stock at the time of the distribution over
its cost or other basis of the securities in the trust. The tax basis of
DutchFork Bancshares common stock for purposes of computing gain or loss on its
subsequent sale equals the value of DutchFork Bancshares common stock at the
time of distribution less the amount of net unrealized appreciation. Any gain
on a subsequent sale or other taxable disposition of DutchFork Bancshares common
stock, to the extent of the amount of net unrealized appreciation at the time of
distribution, will constitute long-term capital gain regardless of the holding
period of DutchFork Bancshares common stock. Any gain on a subsequent sale or
other taxable disposition of DutchFork Bancshares common stock in excess of the
amount of net unrealized appreciation at the time of distribution will be
considered
8
long-term capital gain regardless of the holding period of DutchFork Bancshares
common stock. Any gain on a subsequent sale or other taxable disposition of
DutchFork Bancshares common stock in excess of the amount of net unrealized
appreciation at the time of distribution will be considered either short-term,
mid-term or long-term capital gain depending upon the length of the holding
period of DutchFork Bancshares common stock. The recipient of a distribution
may elect to include the amount of any net unrealized appreciation in the total
taxable amount of the distribution to the extent allowed by the regulations to
be issued by the Internal Revenue Service.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. You may roll over virtually all distributions from the Savings Plan
to another qualified plan or to an individual retirement account generally.
We have provided you with a brief description of the material federal
income tax aspects of the Savings Plan which are of general application under
the Internal Revenue Code. It is not intended to be a complete or definitive
description of the federal income tax consequences of participating in or
receiving distributions from the Savings Plan. Accordingly, you are urged to
consult a tax advisor concerning the federal, state and local tax consequences
of participating in and receiving distributions from the Savings Plan.
Restrictions on Resale
Any person receiving a distribution of shares of common stock under the
Savings Plan who is an "affiliate" of DutchFork Bancshares under Rules 144 and
405 under the Securities Act of 1933, as amended, may reoffer or resell such
shares only under a registration statement filed under the Securities Act of
1933, as amended, assuming the availability of a registration statement, under
Rule 144 or some other exemption of the registration requirements of the
Securities Act of 1933, as amended. Directors, officers and substantial
shareholders of DutchFork Bancshares are generally considered "affiliates." Any
person who may be an "affiliate" of Newberry Federal may wish to consult with
counsel before transferring any common stock they own. In addition, you are
advised to consult with counsel as to the applicability of Section 16 of the
Securities Exchange Act of 1934, as amended, which may restrict the sale of
DutchFork Bancshares common stock acquired under the Savings Plan, or other
sales of DutchFork Bancshares common stock.
Persons who are not deemed to be "affiliates" of Newberry Federal at the
time of resale will be free to resell any shares of DutchFork Bancshares common
stock distributed to them under the Savings Plan, either publicly or privately,
without regard to the registration and prospectus delivery requirements of the
Securities Act of 1933, as amended, or compliance with the restrictions and
conditions contained in the exemptive rules under federal law. An "affiliate"
of Newberry Federal is someone who directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control, with
Newberry Federal. Normally, a director, principal officer or major shareholder
of a corporation may be deemed to be an "affiliate" of that corporation. A
person who may be deemed an "affiliate" of Newberry Federal at the time of a
proposed resale will be permitted to make public resales of the common stock
only under a "reoffer" prospectus or in accordance with the restrictions and
conditions contained in Rule 144 under the Securities Act of 1933, as amended,
or some other exemption from registration, and will not be permitted to use this
prospectus in connection with any such resale. In general, the amount of the
common stock which any such affiliate may publicly resell under Rule 144 in any
three-month period may not exceed the greater of one percent of DutchFork
Bancshares common stock then outstanding or the average weekly trading volume
reported on the National Association of Securities Dealers Automated Quotation
System during the four calendar weeks before the sale. Such sales may be made
only through brokers without solicitation and only at a time when DutchFork
Bancshares is current in filing the reports required of it under the Securities
Exchange Act of 1934, as amended.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934, as amended, imposes
reporting and liability requirements on officers, directors and persons
beneficially owning more than ten percent of public companies such as DutchFork.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
filing of reports of beneficial ownership. Within ten days of becoming a person
required to file reports under Section 16(a), a Form 3 reporting initial
beneficial ownership must be filed with the Securities and Exchange Commission.
Certain changes in beneficial ownership, such
9
as purchases, sales, gifts and participation in savings and retirement plans
must be reported periodically, either on a Form 4 within ten days after the end
of the month in which a change occurs, or annually on a Form 5 within 45 days
after the close of DutchFork Bancshares' fiscal year. Participation in the
DutchFork Bancshares Stock Fund of the Savings Plan by officers, directors and
persons beneficially owning more than ten percent of common stock of DutchFork
Bancshares must be reported to the SEC annually on a Form 5 by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the Securities Exchange Act of 1934 provides for the recovery by DutchFork
Bancshares of profits realized by any officer, director or any person
beneficially owning more than ten percent of the common stock resulting from the
purchase and sale or sale and purchase of the common stock within any six-month
period.
The Securities and Exchange Commission has adopted rules that exempt many
transactions involving the Savings Plan from the "short-swing" profit recovery
provisions of Section 16(b). The exemptions generally involve restrictions upon
the timing of elections to buy or sell employer securities for the accounts of
any officer, director or any person beneficially owning more than ten percent of
the common stock.
Except for distributions of the common stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, persons who are governed by Section 16(b) may, under limited
circumstances involving the purchase of common stock within six months of the
distribution, be required to hold shares of the common stock distributed from
the Savings Plan for six months following the distribution date.
LEGAL OPINION
The validity of the issuance of the common stock of DutchFork Bancshares
will be passed upon by Muldoon, Murphy & Faucette LLP, Washington, D.C.
Muldoon, Murphy & Faucette LLP acted as special counsel for Newberry Federal in
connection with the conversion of Newberry Federal.
10
NEWBERRY FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN
AND TRUST
CHANGE OF INVESTMENT ALLOCATION
- -------------------------------
1. Member Data
- -----------------------------------------------------------------------------------
Print your full name above (Last, first, middle initial) Social Security Number
- -----------------------------------------------------------------------------------
Street Address City State Zip
2. Instructions
Newberry Federal Savings Bank Employees' Savings & Profit Sharing Plan and Trust
(the "Plan") is giving members a special opportunity to invest their Plan
account balances in a new investment fund - the DutchFork Bancshares Stock Fund
- - which is comprised primarily of common stock ("Common Stock") issued by
DutchFork Bancshares, Inc. (the "Company") in connection with the conversion of
Newberry Federal Savings Bank from mutual to stock form. The percentage of a
member's account transferred at the direction of the member into the DutchFork
Bancshares Stock Fund will be used to purchase shares of Common Stock during the
Subscription and Community Offering. Please review the Prospectus (the
"Prospectus") and the Prospectus Supplement (the "Supplement") before making any
decision.
If there is not enough Common Stock in the conversion to fill all subscriptions,
the Common Stock will be apportioned and the trustee for the Plan may not be
able to purchase all of the Common Stock you requested. In such case, the
trustee will purchase shares in the open market, on your behalf, after the
conversion at then prevailing market prices to fulfill your initial request.
Such purchases may be at prices higher than the initial public offering price of
$10.00 per share.
Investing in Common Stock entails some risks, and we encourage you to discuss
this investment decision with your spouse and investment advisor. The Plan
trustee and the Plan administrator are not authorized to make any
representations about this investment other than what appears in the Prospectus
and Supplement, and you should not rely on any information other than what is
contained in the Prospectus and Supplement. For a discussion of certain factors
that should be considered by each member as to an investment in the Common
Stock, see "Risk Factors" beginning on page 9 of the Prospectus. Any shares
purchased by the Plan pursuant to your election will be subject to the
conditions or restrictions otherwise applicable to Common Stock, as discussed in
the Prospectus and Supplement.
3. Investment Directions (Applicable to Accumulated Balances Only)
To direct a transfer of all or part of the funds credited to your accounts to
the DutchFork Bancshares Stock Fund, you should complete and file this form with
Steve Sligh at Newberry Federal Savings Bank, no later than June 12, 2000 at
4:00 p.m. If you need any assistance in completing this form, please contact
Steve Sligh. If you do not complete and return this form to Steve Sligh by June
12, 2000 at 4:00 p.m., the funds credited to accounts under the Plan will
continue to be invested in accordance with your prior investment direction, or
in accordance with the terms of the Plan if no investment direction had been
provided.
I hereby revoke any previous investment direction and now direct that the market
value of the units that I have invested in the following funds, to the extent
permissible, be transferred out of the specified fund and invested (in whole
percentages) in the DutchFork Bancshares Stock Fund as follows:
Fund Percentage to be transferred
---- ----------------------------
S&P 500 Stock Fund _____%
Stable Value Fund _____%
S&P MidCap Stock Fund _____%
Money Market Fund _____%
Government Bond Fund _____%
International Stock Fund _____%
Income Plus Fund _____%
Growth & Income Fund _____%
Growth Fund _____%
S&P Value Stock Fund _____%
S&P Growth Stock Fund _____%
Russell 2000 Stock Fund _____%
Newberry CD Fund _____%
Note: The total amount transferred may not exceed the total value of your
accounts.
4. Investment Directions (Applicable to Future Contributions Only)
I hereby revoke any previous investment instructions and now direct that any
future contributions and/or loan repayments, if any, made by me or on my behalf
by Newberry Federal Savings Bank, including those contributions and/or
repayments received by Newberry Federal Savings Bank Employees' Savings & Profit
Sharing Plan and Trust during the same reporting period as this form, be
invested in the following whole percentages. If I elect to invest in Common
Stock, such future contributions or loan repayments, if any, will be invested in
the DutchFork Bancshares Stock Fund the month following the conclusion of the
Offering.
Fund Percentage
---- ----------
S&P 500 Stock Fund _____%
Stable Value Fund _____%
S&P MidCap Stock Fund _____%
Money Market Fund _____%
Government Bond Fund _____%
International Stock Fund _____%
Income Plus Fund _____%
Growth & Income Fund _____%
Growth Fund _____%
DutchFork Bancshares Stock Fund _____%
S&P Value Stock Fund _____%
S&P Growth Stock Fund _____%
Russell 2000 Stock Fund _____%
Newberry CD Fund _____%
Total (Important!) 100 %
Notes: No amounts invested in the Stable Value Fund or the Employee CD Fund may
be transferred directly to the Money Market Fund. Stable Value Fund
amounts invested in the S&P 500 Stock Fund, S&P MidCap Stock Fund, S&P
Value Stock Fund, S&P Growth Stock Fund, Russell 2000 Stock Fund,
Government Bond Fund, International Stock Fund, Income Plus Fund, Growth
& Income Fund, Growth Fund and/or Employer Stock Fund, for a period of
three months may be transferred to the Money Market Fund upon the
submission of a separate Change of Investment Allocation Form.
The percentage that can be transferred to the Money Market Fund may be
limited by any amounts previously transferred form the Stable Value Fund
or Employee CD Fund that have not satisfied the equity wash requirement.
Such amounts will remain in either the S&P 500 Stock Fund, S&P MidCap
Stock Fund, S&P Value Stock Fund, S&P Growth Stock Fund, Russell 200
Stock Fund, Government Bond Fund, International Stock Fund, Income Plus
Fund, Growth & Income Fund, Growth Fund and/or Employer Stock Fund and a
separate direction to transfer them to the Money Market Fund will be
required when they become available.
5. Participant Signature and Acknowledgment - Required
By signing this Change Of Investment Allocation Form, I authorize and direct the
Plan administrator and trustee to carry out my instructions. I acknowledge that
I have been provided with and read a copy of the Prospectus and Supplement
relating to the issuance of Common Stock. I am aware of the risks involved in
the investment in Common Stock, and understand that the trustee and Plan
administrator are not responsible for my choice of investment.
MEMBER'S SIGNATURE
- ------------------------------------------------ --------------------------
Signature of Member Date
Pentegra Services, Inc. is hereby authorized to make the above listed change(s)
to this member's record.
- ------------------------------------------------ --------------------------
Signature of Newberry Federal Savings Bank Date
Authorized Representative
Minimum Stock Purchase is $250
Maximum Stock Purchase is $175,000
PLEASE COMPLETE AND RETURN TO STEVE SLIGH AT
NEWBERRY FEDERAL BY 4:00 P.M. ON JUNE 12, 2000.
[To be used in connection with Syndicated Community Offering only]
PROSPECTUS SUPPLEMENT FOR SYNDICATED COMMUNITY OFFERING
[LOGO] DUTCHFORK BANCSHARES, INC.
(Proposed Holding Company for Newberry Federal Savings Bank)
1735 Wilson Road
Newberry, South Carolina 29108
(803) 321-3200
================================================================================
Newberry Federal Savings Bank is converting from the mutual to stock form
of organization. After the conversion, DutchFork Bancshares will own all of
Newberry Federal's stock. DutchFork Bancshares has already received
subscriptions for _________ shares. Up to ________ shares will be sold in the
conversion. The conversion will not be completed and no common stock will be
sold unless additional subscriptions are received for at least the minimum
number of shares in the offering. DutchFork Bancshares will hold all funds of
subscribers in an interest-bearing savings account at Newberry Federal until the
conversion is completed or terminated. Funds will be returned promptly with
interest if the conversion is terminated.
Trident Securities, A Division of McDonald Investments, Inc. will use its
best efforts to assist DutchFork Bancshares in selling at least the minimum
number of shares but does not guarantee that this number will be sold. Neither
Trident Securities nor any selected broker-dealer is obligated to purchase any
shares of common stock in the syndicated community offering. Trident Securities
intends to make a market in the common stock.
================================================================================
PRICE PER SHARE: $10.00
EXPECTED TRADING MARKET AND SYMBOL: Nasdaq SmallCap Market "DFBS"
This offering will expire no later than __:__ .m., Local time, on
____________, 2000, unless extended.
. Number of Shares
Minimum/Maximum
. Estimated Underwriting Commissions and Other Expenses
Minimum/Maximum
. Estimated Net Offering Proceeds to DutchFork Bancshares
Minimum/Maximum
. Estimated Net Offering Proceeds per Share to DutchFork Bancshares
Minimum/Maximum
Please refer to "Risk Factors" beginning on page __ of the attached Prospectus
dated ________ __, 2000.
These securities are not deposits or accounts and are not insured or guaranteed
by DutchFork Bancshares, Newberry Federal, the Federal Deposit Insurance
Corporation or any other government agency. The common stock is subject to
investment risk, including the possible loss of money invested.
Neither the Securities and Exchange Commission, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement is truthful or complete. Any representations to the
contrary is a criminal offense.
Trident Securities, A Division of McDonald Investments, Inc.
The date of this Prospectus Supplement is _______________, 2000
THE SYNDICATED COMMUNITY OFFERING
DutchFork Bancshares is offering for sale between ___________ and
__________ shares of common stock at price of $10.00 per share in a syndicated
community offering. These shares are to be sold in connection with the
conversion of Newberry Federal from a mutual savings bank to a stock savings
bank and the issuance of Newberry Federal' outstanding capital stock to
DutchFork Bancshares. The remaining __________ shares of common stock to be
sold in connection with the conversion have been subscribed for in subscription
and direct community offerings. The prospectus in the form used in the
subscription and direct community offerings is attached to this prospectus
supplement. The purchase price for all shares sold in the syndicated community
offering will be the same as the price paid by subscribers in the subscription
and direct community offerings.
Funds sent with purchase orders will earn interest at Newberry Federal's
passbook rate from the date Newberry Federal receives them until the completion
or termination of the conversion. If the syndicated community offering is not
completed by _________________, 2000, and the Office of Thrift Supervision
allows more time to complete the conversion, Newberry Federal will contact
everyone who subscribed for shares to see if they still want to purchase stock,
and subscribers will be able to confirm, modify or cancel their subscriptions.
A failure to respond will be treated as a cancellation of the purchase order.
If payment for the stock was made by check or money order, subscription funds
will be returned with accrued interest. If payment was authorized by withdrawal
of funds on deposit at Newberry Federal, that authorization would terminate. The
conversion must be completed by _______, 2002.
The minimum number of shares which may be purchased is 25 shares. Except for
the Newberry Federal employee stock ownership plan, which intends to purchase up
to 8% of the total number of shares of common stock sold in the conversion, no
person, together with related persons and persons acting together, may purchase
more than $175,000 of common stock (17,500 shares) in the syndicated community
offering. However, the maximum amount of shares of common stock that may be
subscribed for or purchased in all categories of the conversion by any person,
related persons or persons acting together is $175,000 of common stock (17,500
shares) sold in the conversion. DutchFork Bancshares reserves the right, in its
absolute discretion, to accept or reject, in whole or in part, any or all
subscriptions in the syndicated community offering. If a subscription is
rejected in part, you cannot cancel the remainder of your order.
DutchFork Bancshares and Newberry Federal have engaged Trident Securities,
A Division of McDonald Investments, Inc. as their financial advisor to assist
them in the sale of the common stock in the syndicated community offering.
Trident Securities expects to use the services of other registered broker-
dealers and that fees to Trident Securities and other selected broker-dealers
will not exceed __% of the aggregate purchase price of the shares sold in the
syndicated community offering.
Before this offering, there has not been a public market for the common
stock, and there can be no assurance that an active and liquid trading market
for the common stock will develop. The absence or discontinuance of an active
and liquid trading market may hurt the market price of the common stock. See
"Risk Factors--DutchFork Bancshares cannot assure or guarantee an active trading
market for the common stock." in the attached prospectus.
PROSPECTUS
[LOGO]
DUTCHFORK BANCSHARES, INC.
(Proposed Holding Company for Newberry Federal Savings Bank)
1,357,000 Shares of Common Stock
Newberry Federal Savings Bank is converting from the mutual form to the stock
form of organization. As part of the conversion, DutchFork Bancshares is
offering its shares of common stock to the public. DutchFork Bancshares will
own Newberry Federal after the conversion.
Price Per Share: $10.00
Expected Trading Market: OTC Bulletin Board
Expected Trading Symbol: "DFBS"
Minimum Subscription Requirement: 25 shares or $250
Minimum Maximum
----------- -----------
Number of shares: 1,003,000 1,357,000
Gross offering proceeds: $10,030,000 $13,570,000
Estimated underwriting commissions
and other offering expenses: $ 713,000 $ 786,000
Estimated net proceeds: $ 9,317,000 $12,784,000
Estimated net proceeds per share: $ 9.29 $ 9.42
If the appraiser increases the estimated value, DutchFork Bancshares may
increase the maximum number of shares by up to 15% to 1,560,550 shares.
Trident Securities will use its best efforts to assist DutchFork Bancshares in
selling at least the minimum number of shares but does not guarantee that this
number will be sold. Trident Securities is not obligated to purchase any shares
of common stock in the offering. Trident Securities intends to make a market in
the common stock.
The offering to depositors and borrowers of Newberry Federal will end at 12:00
Noon, Eastern time, on June 22, 2000. An offering to the general public may
also be held and may end as early as 12:00 Noon, Eastern time, on June 22, 2000.
If the conversion is not completed by August 21, 2000, and the Office of Thrift
Supervision allows more time to complete the conversion, all subscribers will be
able to increase, decrease or cancel their orders. DutchFork Bancshares will
hold all funds of subscribers in an interest-bearing savings account at Newberry
Federal until the conversion is completed or terminated. Funds will be returned
promptly with interest if the conversion is terminated.
- --------------------------------------------------------------------------------
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
For a discussion of risks that you should consider, see "Risk Factors" beginning
on page 9.
Neither the Securities and Exchange Commission, the Office of Thrift Supervision
nor any state securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
For assistance, please contact the stock information center at (803) 321-2407.
Trident Securities,
A Division of McDonald Investments, Inc.
The date of this prospectus is May 12, 2000
NEWBERRY FEDERAL SAVINGS BANK
NEWBERRY, SOUTH CAROLINA
[Map of South Carolina with inset showing location of
Newberry, Prosperity and Chapin, South Carolina]
* MAIN OFFICE
-----------
1735 WILSON RD
NEWBERRY, SC
. 1323 COLLEGE ST
NEWBERRY, SC
. 101 N. WHEELER AVE.
PROSPERITY, SC
. 127 AMICKS FERRY RD
CHAPIN, SC
TABLE OF CONTENTS
Page
----
Summary.................................................................... 1
Risk Factors............................................................... 9
Selected Financial and Other Data.......................................... 14
Recent Developments........................................................ 16
Use of Proceeds............................................................ 20
DutchFork Bancshares' Dividend Policy...................................... 21
Market for the Common Stock................................................ 22
Capitalization............................................................. 23
Regulatory Capital Compliance.............................................. 24
Pro Forma Data............................................................. 25
Newberry Federal Savings Bank Consolidated Statements of Income............ 30
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 31
Business of DutchFork Bancshares........................................... 42
Business of Newberry Federal Savings Bank.................................. 42
Management of DutchFork Bancshares......................................... 65
Management of Newberry Federal............................................. 66
Regulation and Supervision................................................. 74
Federal and State Taxation on Income....................................... 80
Shares to Be Purchased by Management with Subscription Rights.............. 81
The Conversion............................................................. 82
Restrictions on Acquisition of DutchFork Bancshares and Newberry Federal... 97
Description of DutchFork Bancshares Stock.................................. 102
Description of Newberry Federal Stock...................................... 104
Registration Requirements.................................................. 105
Legal and Tax Opinions..................................................... 105
Experts.................................................................... 105
Where You Can Find More Information........................................ 105
Index to Consolidated Financial Statements - Newberry Federal
Savings Bank and Subsidiary............................................... F-1
SUMMARY
You should read this entire document carefully before you decide to invest.
For assistance, please contact the stock information center at (803) 321-2407.
The Companies
DutchFork Bancshares, Inc. (page 42) Newberry Federal formed DutchFork Bancshares to be its
1735 Wilson Road holding company. To date, DutchFork Bancshares has only
Newberry, South Carolina 29108 conducted organizational activities. After the conversion,
DutchFork Bancshares will own all of Newberry Federal's
capital stock and will direct, plan and coordinate Newberry
Federal's business activities. After the conversion,
DutchFork Bancshares might become an operating company or
acquire or organize other operating subsidiaries, including
other financial institutions or financial services
companies, although it currently has no specific plans or
agreements to do so.
Newberry Federal Savings Bank (page 42) Newberry Federal is a community bank dedicated to serving
1735 Wilson Road the financial service needs of consumers within its primary
Newberry, South Carolina 29108 market area. Currently, Newberry Federal operates out of
its main office in Newberry, South Carolina and its three
branch offices in Newberry, Chapin and Prosperity, South
Carolina.
Historically, Newberry Federal's principal business has been
taking deposits from the general public and using those
funds to originate loans secured by residential real estate
and to invest in securities. Residential real estate loans
accounted for 65.8% of Newberry Federal's total loan
portfolio at December 31, 1999. Newberry Federal also makes
consumer loans, including second mortgage loans, home equity
loans and lines of credit, and automobile loans. Newberry
Federal also maintains significant investment and
mortgage-backed securities portfolios, which together
accounted for 60.6% of total assets at December 31, 1999.
At December 31, 1999, Newberry Federal had total assets of
$226.6 million, deposits of $148.4 million and total
retained earnings of $16.1 million.
For a discussion of Newberry Federal's business strategy and
recent results of operations, see "Management's Discussion
and Analysis of Financial Condition and Results of
Operations." For a discussion of Newberry Federal's
business activities, see "Business of Newberry Federal
Savings Bank."
Restrictions on Acquisition of DutchFork Bancshares certificate of incorporation and bylaws
DutchFork Bancshares (page 97) contain certain provisions that could make more difficult an
acquisition of DutchFork Bancshares by means of a tender
offer, proxy contest or otherwise. Certain provisions will
also make it more difficult to remove the incumbent board of
directors and management of DutchFork Bancshares. These
provisions may deter a future takeover attempt that is not
approved by the DutchFork Bancshares' board of directors.
1
The Conversion
What is the Conversion (page 82) The conversion is a change in Newberry Federal's
legal form of organization. As a mutual savings
bank, Newberry Federal currently has no stock or
stockholders. Instead, Newberry Federal operates
for the mutual benefit of its depositors, who elect
directors and vote on other important matters.
Through the conversion Newberry Federal will become
a stock savings bank and will be owned and
controlled by the holder of all its stock, which
will be DutchFork Bancshares. Voting rights in
DutchFork Bancshares will belong to its
stockholders.
Newberry Federal is conducting the conversion under
the terms of its plan of conversion. The Office of
Thrift Supervision has approved the plan of
conversion with the condition that Newberry
Federal's members approve the plan of conversion.
Newberry Federal has called a special meeting of
members for June 27, 2000 to vote on the plan of
conversion.
Reasons for the Conversion (page 83) By converting to the stock form of organization,
Newberry Federal will be structured in the form
used by commercial banks, most business entities
and a large number of savings institutions. The
conversion will be important to Newberry Federal's
future growth and performance because it will:
. provide a larger capital base from which to
operate;
. expand its ability to serve the public;
. afford its depositors, borrowers and local
community residents the opportunity to participate
as owners in the local financial institution with
which they do business;
. enhance its ability to attract and retain qualified
management through stock-based compensation plans; and
. enhance its ability to diversify into other financial
services related activities.
Currently, Newberry Federal does not have any specific
plans or arrangements for diversification or expansion.
Benefits of the Conversion to Management (page 68) DutchFork Bancshares and Newberry Federal intend to
adopt the following benefit plans and employment
agreements:
. Employee Stock Ownership Plan. This plan
intends to purchase 8% of the shares issued in the
conversion. This plan intends to acquire these
shares either in the offering or in the open market
after the completion of the conversion in
compliance with applicable regulations and policies
of the Office of Thrift Supervision. Newberry
Federal intends to allocate these shares to
employees over a period of 12 years in proportion
to their compensation. Newberry Federal also
intends to adopt a supplemental
2
executive retirement plan to provide key executives
with supplemental benefits that cannot be allocated
directly through the employee stock ownership plan
as a result of certain federal tax law limits.
. Stock-Based Incentive Plan. Under this plan, which
will be implemented after the conversion and submitted
to stockholders for their approval, DutchFork
Bancshares may award stock options to key employees and
directors of DutchFork Bancshares and its affiliates.
The number of options available under this plan
will be equal to 10% of the number of shares issued
in the conversion.
In addition, under this plan, DutchFork Bancshares
may award shares of restricted stock to key employees and
directors at no cost to the recipient. The number of shares
available for stock awards will equal 4% of the number of
shares issued in the conversion.
. Employment Agreements. DutchFork Bancshares and Newberry
Federal intend to enter into employment agreements with
their two executive officers. These agreements will provide
for severance benefits if the executive is terminated
following a change in control of DutchFork Bancshares or
Newberry Federal.
. Employee Severance Compensation Plan. This plan will provide
severance benefits to eligible employees if there is a change
in control of DutchFork Bancshares or Newberry Federal.
The following table summarizes the total number and dollar value
of the shares of common stock, assuming 1,357,000 shares are
issued in the conversion, which the employee stock ownership plan
expects to acquire and the total value of all stock awards that
are expected to be available under the stock-based incentive
plan. The table assumes the value of the shares is $10.00 per
share. The table does not include an estimated value for the
options because their value would be equal to the fair market
value of the common stock on the day that the options are
granted. As a result, financial gains can be realized on an option
only if the market price of common stock increases above the price
at which the options are granted.
Percentage
of Shares
Number Estimated Issued
of Value in the
Shares of Shares Conversion
------- ---------- ------------
Employee stock ownership plan 108,560 $1,085,600 8.0%
Restricted stock awards 54,280 542,800 4.0
Stock options 135,700 -- 10.0
------- ---------- ----
Total 298,540 $1,628,400 22.0%
======= ========== ====
3
The following table summarizes the estimated value of the
benefits payable under the employment agreements and the
employee severance compensation plan assuming a change in
control of DutchFork Bancshares or Newberry Federal had occurred
at December 31, 1999 based on 1999 compensation data. The
estimated value of the benefits payable under the employee
severance compensation plan assumes that all employees are
terminated.
Estimated
Value of
Benefit
-----------
Employment agreements............................... $1,300,000
Employee severance compensation plan................ 774,000
----------
$2,074,000
==========
For a discussion of risks associated with these plans and agreements,
see "Risk Factors--Implementation of additional benefit plans will
increase future compensation expense and may lower Newberry Federal's
net income," "Risk Factors--Issuance of shares for benefit programs
may lower your ownership interest" and "Risk Factors--Takeover
attempts that you want to occur could be more difficult to achieve--
Required change in control payments."
The Offering
Persons Who Can Order Stock in the DutchFork Bancshares is offering shares of its common stock
Offering (page 86) in a subscription offering in the following order of
priority to:
Note: Subscription rights are not transferable,
and persons with subscription rights may not 1. Persons with $50 or more on deposit at Newberry Federal
subscribe for shares for the benefit of as of November 30, 1998.
any other person. If you violate this
prohibition, you may lose your rights to 2. The Newberry Federal employee stock ownership plan,
purchase shares and may face criminal which provides retirement benefits to Newberry Federal's
prosecution and/or other sanctions. employees.
3. Persons with $50 or more on deposit at Newberry Federal
as of March 31, 2000.
4. Newberry Federal's depositors as of April 30, 2000 and
borrowers of Newberry Federal as of February 10, 1987
whose loans continue to be outstanding as of
April 30, 2000.
If the subscription offering is oversubscribed, shares will
be allocated in order of the priorities described above
under a formula outlined in the plan of conversion.
DutchFork Bancshares may offer shares not sold in the
subscription offering to the general public in a direct
community offering. People who are residents of Newberry and
Lexington Counties, South Carolina will have first
preference to purchase shares in a direct community
offering. If shares are available, DutchFork Bancshares
expects to offer them to the general public immediately
after the end of the subscription offering, but may begin a
direct community offering at any time during the
4
subscription offering. Shares not sold in the subscription
offering or direct community offering may be offered for
sale in a syndicated community offering, which will be an
offering to the general public on a best-efforts basis by a
selling group of broker-dealers managed by Trident
Securities.
Deadline for Ordering Common Stock The subscription offering will end at 12:00 Noon, Eastern
time, on June 22, 2000. Newberry Federal expects that the
community offering will terminate at the same time. Newberry
Federal may extend this expiration date without notice to
you until August 21, 2000, unless regulators approve a later
date. All extensions together may not go beyond June 27, 2002.
Purchase Price The purchase price is $10.00 per share. The boards of directors
of DutchFork Bancshares and Newberry Federal consulted with
Trident Securities in determining this price. You will not pay
a commission to buy any shares in the conversion.
Number of Shares to be Sold DutchFork Bancshares is offering for sale between 1,003,000
and 1,357,000 shares of its common stock in this offering.
With regulatory approval, DutchFork Bancshares may increase
the number of shares to be sold to 1,560,550 shares without
giving you further notice or the opportunity to change or
cancel your order. If DutchFork Bancshares intends to sell
fewer than 1,003,000 shares or more than 1,560,550 shares,
all subscribers will be notified and given the opportunity
to change or cancel their orders. If you do not respond to
this notice, DutchFork Bancshares will return your funds
promptly with interest.
How the Offering Range was Determined (page 92) The offering range is based on an independent appraisal of
Newberry Federal by Keller & Company, Inc., an appraisal
firm experienced in appraisals of savings institutions.
Keller & Company has estimated that as of February 7, 2000,
as updated as of April 5, 2000, Newberry Federal's market
value ranged between $10,030,000 and $13,570,000, with a
midpoint of $11,800,000. This results in an offering of
between 1,003,000 and 1,357,000 shares of stock at an
offering price of $10.00 per share. Keller & Company's
appraisal was based in part on Newberry Federal's financial
condition and results of operations and the effect on
Newberry Federal of the additional capital raised by the
sale of common stock in this offering. Keller & Company's
independent appraisal will be updated before the conversion
is completed.
In preparing its independent appraisal, Keller & Company
focused primarily on the price/earnings and price/book
valuation methodologies, both of which are discussed in the
appraisal report. See "Where You Can Find More Information"
for how to obtain a copy of the appraisal report. The
following table compares Newberry Federal's pro forma
price/earnings and pro forma price/book ratios at the
minimum and maximum of the offering range to the medians for
all publicly traded thrift institutions, all publicly traded
South Carolina thrift institutions and a comparable group of
10 publicly traded thrift institutions identified in the
appraisal report. Thrift institutions in the
5
mutual holding company structure are excluded from each
comparison group.
The pro forma price/earnings ratios for Newberry Federal
presented in the following table are based on earnings for
the trailing 12 months as required by regulatory appraisal
guidelines. Therefore, these ratios differ from the ratios
presented in the tables under "Pro Forma Data."
Price/ Price/
Earnings Book
Ratio Ratio
-------- -------
Newberry Federal:
Minimum................................. 7.33x 40.97%
Maximum................................. 9.32x 49.30%
Median for all publicly traded thrifts... 10.59x 86.93%
Median for all publicly traded South
Carolina thrifts........................ 10.83x 97.70%
Median for the comparable group.......... 11.43x 68.44%
The independent appraisal does not indicate or predict
market value. Do not assume or expect that Newberry
Federal's valuation as shown in the above table means that
the common stock will trade at or above the $10.00 per share
purchase price after the conversion. DutchFork Bancshares
cannot guarantee that anyone who purchases shares in the
conversion will be able to sell their shares at or above the
purchase price of $10.00 per share.
Purchase Limitations (page 94) Orders for common stock will be limited in the following ways:
. The minimum purchase is $250, which equals 25 shares.
. The maximum purchase in the subscription offering by any
person or group of persons through a single deposit account
or a similarly titled deposit account is $175,000 of common
stock, which equals 17,500 shares.
. The maximum purchase by any person in the direct community
offering is $175,000 of common stock, which equals 17,500
shares.
. The maximum purchase by any person in the syndicated
community offering is $175,000 of common stock, which
equals 17,500 shares.
. The maximum overall purchase in the subscription offering,
direct community offering and syndicated community offering
combined by any person, related persons or persons acting
together is $175,000 of common stock, which equals
17,500 shares.
How to Purchase Common Stock (page 91) To subscribe for shares in the subscription offering or place
a purchase order for shares in the direct community offering,
complete an original stock order form and send it together
with full payment to Newberry Federal in the postage-paid
envelope provided. You must sign the certification that is
part of the stock order form. Newberry Federal must receive
your stock
6
order form with full payment before the end of the
subscription offering or the end of the direct community
offering, as appropriate. Once your stock order is
submitted, it may not be canceled or changed without the
consent of DutchFork Bancshares.
To ensure that Newberry Federal properly identifies your
subscription rights, you must list all of your deposit
accounts as of the eligibility dates on the stock order
form. If you fail to do so, your subscription may be reduced
or rejected if the offering is oversubscribed.
DutchFork Bancshares and Newberry Federal may reject orders
received in the direct community offering either in whole or
in part. If your order is rejected in part, you cannot
cancel the remainder of your order.
You may pay for shares in the subscription offering or the
direct community offering in any of the following ways:
. By check or money order made payable to DutchFork Bancshares.
. By authorizing withdrawal from an account at Newberry Federal.
To use funds in an Individual Retirement Account at Newberry
Federal, you must transfer your account to an unaffiliated
institution or broker. Please contact the stock information
center at least one week before the end of the subscription
offering or the direct community offering, as appropriate,
for assistance.
Newberry Federal will pay interest on your subscription
funds at the rate it pays on passbook accounts from the date
it receives your funds until the conversion is completed or
terminated. All funds authorized for withdrawal from deposit
accounts with Newberry Federal will earn interest at the
applicable account rate until the conversion is completed.
There will be no early withdrawal penalty for withdrawals
from certificates of deposit used to pay for stock.
No prospectus will be mailed later than five days before the
end of the offering or hand-delivered less than 48 hours
before the end of the offering.
How DutchFork Bancshares and Newberry DutchFork Bancshares will use approximately 90% of the net
Federal Will Use the Proceeds offering proceeds to buy all of the common stock of Newberry
of this Offering (page 20) Federal. Newberry Federal will use the funds it receives for
general business purposes, including originating loans and
purchasing securities.
DutchFork Bancshares also will loan an amount equal to 8% of
the gross proceeds of the offering to the employee stock
ownership plan to fund its purchase of common stock in the
conversion, and will keep the remainder of the net proceeds,
approximately $156,000, for general business purposes.
7
DutchFork Bancshares and Newberry Federal may also
use the proceeds of the offering to expand and
diversify their businesses, although they have no
specific plans to do so at this time.
Purchases by Directors and Executive Newberry Federal's directors and executive officers intend
Officers (page 81) to subscribe for 85,000 shares, which equals 6.26% of the
1,357,000 shares that would be sold at the maximum of the
offering range. If fewer shares are sold in the conversion,
then directors and executive officers may own a greater
percentage of DutchFork Bancshares. Directors and executive
officers will pay the $10.00 per share price as will
everyone else who purchases shares in the conversion.
Market for DutchFork Bancshares DutchFork Bancshares has applied to have its common stock
Common Stock (page 22) quoted on the Nasdaq SmallCap Market under the symbol
"DFBS." If, at the completion of the offering, DutchFork
Bancshares does not meet the requirements for initial
listing on the Nasdaq SmallCap Market, it intends to list
the common stock over-the-counter through the OTC Bulletin
Board or the National Daily Quotation System "Pink Sheets"
published by the National Quotation Bureau, Inc. After
shares of the common stock begin trading, you may contact a
stock broker to buy or sell shares. DutchFork Bancshares
cannot assure you that there will be an active trading
market for the common stock.
DutchFork Bancshares' Dividend Policy Because the Office of Thrift Supervision has limited the
(page 21) amount of net offering proceeds that DutchFork Bancshares
may retain for general business purposes, DutchFork
Bancshares has no present intent of paying cash dividends.
If DutchFork Bancshares decides to pay any cash dividends in
the future, they would have to be financed by dividend
payments from Newberry Federal, which would require Office
of Thrift Supervision permission.
8
RISK FACTORS
Before investing in DutchFork Bancshares' common stock please carefully
consider the matters discussed below.
Rising interest rates are likely to hurt Newberry Federal's profits
Like most financial institutions, Newberry Federal's ability to make a profit
depends largely on its net interest income, which is the difference between
interest income it receives from its loans and securities and interest it pays
on deposits and borrowings. A large percentage of Newberry Federal's interest-
earning assets have longer maturities than the maturities of Newberry Federal's
interest-bearing liabilities. Therefore, if interest rates rise, Newberry
Federal anticipates that its net interest income would decline as interest paid
on its deposits and other interest-bearing liabilities would rise more quickly
than the interest earned on loans and securities. For further discussion of how
changes in interest rates could impact Newberry Federal , see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management of Interest Rate Risk and Market Risk Analysis."
Newberry Federal's capital levels can fluctuate greatly with changes in market
interest rates because of its large investment in long-term fixed-rate U.S.
Government agency securities, long-term zero coupon bonds and certain deep
discounted, fixed-rate collateralized mortgage obligations
Newberry Federal's capital levels can fluctuate greatly with changes in market
interest rates as a result of its large investment in long-term fixed-rate U.S.
Government agency securities, long-term zero coupon bonds and certain deep
discounted, fixed-rate collateralized mortgage obligations. At December 31,
1999, Newberry Federal held $33.3 million of these securities, or 14.7% of its
total assets. These investments, all classified as available-for-sale, will
lose much of their value, and in turn decrease the market value of Newberry
Federal's entire available-for-sale portfolio, in times of rising interest rates
because of their long-term nature. For example, at December 31, 1999, an
assumed 1% increase in interest rates would have decreased the market value of
Newberry Federal's securities available-for-sale portfolio by approximately $8.1
million, or 7.19%, while an assumed 1% decrease in interest rates would have
increased the market value of the portfolio by $7.7 million, or 6.84%. Assuming
no changes in the market value of Newberry Federal's liabilities as a result of
the change in interest rates, Newberry Federal's capital levels would have
decreased or increased by the same amounts. See "Business of Newberry Federal
Savings Bank--Investment Activities" for further information.
After the conversion, Newberry Federal will invest in lower yielding securities
to the extent necessary to comply with Office of Thrift Supervision conditions
on its approval of the conversion requiring Newberry Federal to manage more
closely its risk to changes in interest rates
Newberry Federal will invest its portion of the net offering proceeds in lower
yielding securities because of restrictions imposed by the Office of Thrift
Supervision. Due to Newberry Federal's above average interest rate risk, the
Office of Thrift Supervision has imposed as an approval condition to the
conversion that Newberry Federal maintain a 4% net portfolio value ratio (a
ratio equal to Newberry Federal's net portfolio value divided by the present
value of its assets) after giving effect to a 2% change in interest rates. This
interest rate risk measure quantifies the effect of a 2% increase or decrease in
interest rates on Newberry Federal's net portfolio value ratio. Newberry
Federal will invest its portion of the net offering proceeds in short-term U.S.
government and agency securities and mortgage-backed securities to the extent
necessary to comply with this interest rate risk measure. These securities
typically are lower yielding than the longer-term investment securities
currently held by Newberry Federal. For further discussion of the approval
condition imposed by the Office of Thrift Supervision, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management of Interest Rate Risk and Market Risk Analysis."
9
DutchFork Bancshares' ability to pay dividends, repurchase stock or undertake
other corporate transactions requiring cash outlays will be restricted by the
Office of Thrift Supervision's condition of approval requiring DutchFork
Bancshares to infuse substantially all of the net offering proceeds into
Newberry Federal
DutchFork Bancshares will rely on dividends from Newberry Federal for the
foreseeable future to obtain cash to pay dividends, repurchase stock or to
undertake any other corporate transactions financed with cash. The Office of
Thrift Supervision could prohibit Newberry Federal from paying a dividend to
DutchFork Bancshares based on supervisory grounds, including concern regarding
Newberry Federal's level of interest rate risk. Generally, the Office of Thrift
Supervision permits a holding company to retain up to 50% of the net offering
proceeds, which the holding company could use to pay dividends without obtaining
the approval of the Office of Thrift Supervision. However, due to Newberry
Federal's above average interest rate risk, the Office of Thrift Supervision has
imposed as an approval condition that DutchFork Bancshares infuse all of the net
offering proceeds into Newberry Federal except for an amount sufficient to fund
the loan to Newberry Federal's employee stock ownership plan plus a nominal
amount, approximately $156,000, to pay for general operating expenses. See "Use
of Proceeds" and "DutchFork Bancshares' Dividend Policy" for further
information.
Because of weak loan demand in its primary market area, Newberry Federal invests
heavily in investment securities and mortgage-backed securities, which generally
earn less income than loans
As a result of weak loan demand in Newberry Federal's market area, Newberry
Federal, presently and after the conversion, must invest heavily in investment
and mortgage-backed securities. Investment and mortgage-backed securities
generally earn less than Newberry Federal's loan portfolio, therefore, Newberry
Federal's income is not as high as it could be if it were able to invest more in
loans. Newberry Federal's primary market area for making loans is Newberry
County. According to recent published statistics, the population growth rate
for Newberry County is less than 5.0% and the county's population is the oldest
in South Carolina. Older individuals generally already own homes and they tend
to save more of their disposable income than younger individuals. The demand
for commercial real estate loans and commercial business loans is also
relatively weak because Newberry County is predominately rural. Consequently,
Newberry Federal has had to invest much of the deposit funds it receives in
investment securities and mortgage-backed securities. See "Business of Newberry
Federal Savings Bank--Market Area" and "Business of Newberry Federal Savings
Bank--Lending Activities" for additional information. In addition, Newberry
Federal will also likely invest a majority of the conversion proceeds it
receives from DutchFork Bancshares in investment and mortgage-backed securities.
As a result, DutchFork Bancshares expects that its return on assets will not be
as high as it could be if Newberry Federal were able to invest more of the
conversion proceeds in loans. See "Use of Proceeds."
Newberry Federal's return on equity will continue to be below average after
conversion because of high capital levels
Return on equity, which equals net income divided by average equity, is a
ratio used by many investors to compare the performance of a particular company
with other companies. In recent years, Newberry Federal's return on average
equity has been below the average return on equity for publicly-traded savings
associations and banks of comparable size. As a result of the additional
capital that will be raised in this offering, DutchFork Bancshares expects that
its return on equity will continue to be below that average after the offering.
In addition, compensation expense will increase as a result of the new benefit
plans. Over time, DutchFork Bancshares intends to use the net proceeds from
this offering to increase earnings per share and book value per share, without
assuming undue risk, with the goal of achieving a return on equity competitive
with other publicly traded financial institutions. This goal could take a
number of years to achieve, and DutchFork Bancshares cannot assure you that this
goal can be attained. Consequently, you should not expect a competitive return
on equity in the near future. See "Pro Forma Data" for an illustration of the
financial effects of this stock offering.
Competition has, and is expected to continue to, hurt Newberry Federal's net
interest income
Newberry Federal faces intense competition both in making loans and attracting
deposits. This competition has made it more difficult for Newberry Federal to
make new loans and has forced it to offer higher deposit rates in its market
area. This competition for loans and deposits has contributed to a narrowing of
its interest rate spread, which has hurt net interest income. The competition
for deposits, particularly from mutual funds and
10
other stock market investment vehicles, also has contributed to slower growth in
Newberry Federal's deposit base in recent years. Newberry Federal expects
competition to increase in the future as a result of legislative, regulatory and
technological changes and the continued trend of consolidation in the financial
services industry. Technological advances, for example, have lowered barriers to
entry, allowed banks to expand their geographic reach by providing services over
the Internet and made it possible for non-depository institutions to offer
products and services that traditionally have been provided by banks. The Gramm-
Leach-Bliley Act, which permits affiliation among banks, securities firms and
insurance companies, also will change the competitive environment in which
Newberry Federal conducts business. For more information about Newberry
Federal's market area and the competition it faces, see "Business of Newberry
Federal Savings Bank--Market Area" and "Business of Newberry Federal Savings
Bank--Competition."
Implementation of additional benefit plans will increase future compensation
expense and may lower Newberry Federal's net income
Newberry Federal will recognize additional material employee compensation and
benefit expenses stemming from the shares purchased or granted to employees and
executives under new benefit plans. Newberry Federal cannot predict the actual
amount of these new expenses because applicable accounting practices require
that they be based on the fair market value of the shares of common stock at
specific points in the future. Newberry Federal would recognize expenses for
its employee stock ownership plan when shares are committed to be released to
participants' accounts and would recognize expenses for restricted stock awards
over the vesting period of awards made to recipients. These expenses have been
estimated in the pro forma financial information under "Pro Forma Data" assuming
the $10.00 per share purchase price as fair market value. Actual expenses,
however, may be higher or lower. As a result of the additional compensation
expenses, DutchFork Bancshares expects that its future income will be lower than
if the new benefit plans were not implemented. For further discussion of these
plans, see "Management of Newberry Federal--Benefits."
Management will have substantial discretion over investment of the offering
proceeds and may make investments with which you may disagree
The net offering proceeds to Newberry Federal are estimated to range from $8.4
million to $11.5 million. DutchFork Bancshares expects to retain approximately
$156,000 of the net offering proceeds after it loans a portion of the proceeds
to Newberry Federal's employee stock ownership plan to purchase shares of common
stock. DutchFork Bancshares and Newberry Federal intend to use these funds for
general business purposes, giving management substantial discretion over their
investment. You may disagree with investments that management makes. See "Use
of Proceeds" for further discussion.
Issuance of shares for benefit programs may reduce your ownership interest
If stockholders approve the new stock-based incentive plan, DutchFork
Bancshares intends to issue shares to its officers and directors through these
plans. If the restricted stock awards under the stock-based incentive plan are
funded from authorized but unissued stock, your ownership interest could be
reduced by up to approximately 3.85%. If the options under the stock-based
incentive plan are granted from authorized but unissued stock, your ownership
interest could be reduced by up to approximately 9.09%. See "Pro Forma Data"
and "Management of Newberry Federal--Benefits."
11
Takeover attempts that you want to occur could be more difficult to achieve
Provisions of DutchFork Bancshares' certificate of incorporation and bylaws,
federal and state regulations and various other factors may make it more
difficult for companies or individuals to acquire control of DutchFork
Bancshares without the consent of its board of directors. It is possible,
however, that you might like to see a takeover attempt succeed because, for
example, the potential acquiror could be offering a premium over the then
prevailing market price of DutchFork Bancshares common stock. The factors that
may discourage takeover attempts or make them more difficult include:
. Anti-takeover provisions in corporate governance documents, and
statutory anti-takeover provisions. Provisions in DutchFork
Bancshares' certificate of incorporation and bylaws, the corporate law
of the State of Delaware, and federal regulations may make it
difficult and expensive to pursue a takeover attempt that management
opposes. These provisions will also make the removal of the current
board of directors or management of DutchFork Bancshares, or the
appointment of new directors, more difficult. These provisions
include: limitations on voting rights of beneficial owners of more
than 10% of DutchFork Bancshares' common stock; supermajority voting
requirements for certain business combinations; the election of
directors to staggered terms of three years; the elimination of
cumulative voting for directors; and director residency requirements
and other qualifications for directors. The certificate of
incorporation of DutchFork Bancshares also contains provisions
regarding the timing and content of stockholder proposals and
nominations and limiting the calling of special meetings by
stockholders. For further information about these provisions, see
"Restrictions on Acquisition of DutchFork Bancshares and Newberry
Federal."
. Expected voting control by management and employees. The shares of
common stock that Newberry Federal's directors and executive officers
intend to purchase in the conversion, when combined with the shares
that may be awarded to participants under Newberry Federal's and
DutchFork Bancshares' benefit plans, could result in management and
employees controlling a significant percentage of DutchFork
Bancshares' common stock. If these individuals were to act together,
they could have significant influence over the outcome of any
stockholder vote. In addition, the total voting power of management
and employees could reach in excess of 20% of DutchFork Bancshares'
outstanding stock, which would enable management and employees as a
group to defeat any stockholder matter that requires an 80% vote. For
information about management's intended stock purchases and the number
of shares that may be awarded under new benefit plans, see
"Management of Newberry Federal--Executive Compensation," "Shares to
Be Purchased by Management with Subscription Rights" and "Restrictions
on Acquisition of DutchFork Bancshares and Newberry Federal."
. Required change in control payments. If a change in control had
occurred at December 31, 1999, the aggregate value of the severance
benefits required to be paid under the employment agreements with
executive officers and the employee severance compensation plan would
have been approximately $2.1 million based on 1999 compensation data.
This estimate does not take into account future salary adjustments or
bonus payments or the value of the continuation of other employee
benefits. These payments may have the effect of increasing the costs
of acquiring DutchFork Bancshares, thereby discouraging future
attempts to take over DutchFork Bancshares or Newberry Federal. For
information about the proposed employment and severance agreements and
severance plan, see "Management of Newberry Federal--Executive
Compensation."
Loss of key personnel may hurt Newberry Federal's operations
J. Thomas Johnson and Steve P. Sligh, Newberry Federal's Chief Executive
Officer and President, respectively, have been instrumental in managing the
business affairs of Newberry Federal during the past 16 years. The loss of
either one could have a material adverse impact on the operations of Newberry
Federal and DutchFork Bancshares. Newberry Federal does not have an established
management succession plan. Accordingly, should Newberry Federal lose the
services of either Messrs. Johnson or Sligh, the Board of Directors would have
to search outside of Newberry Federal for a qualified, permanent replacement.
This search may be prolonged and Newberry
12
Federal cannot assure you that it will be able to locate and hire qualified
replacements. Newberry Federal maintains separate "key man" life insurance
policies on the lives of Messrs. Johnson and Sligh each in the face amount of
$650,000. Furthermore, DutchFork Bancshares and Newberry Federal intend to enter
into employment agreements with Messrs. Johnson and Sligh upon the completion of
the conversion to promote their continued employment. For a discussion of
Newberry Federal's management, see "Management of Newberry Federal."
DutchFork Bancshares cannot assure or guarantee an active trading market for the
common stock
Because DutchFork Bancshares has never issued stock, there is no current
trading market for the common stock. Consequently, DutchFork Bancshares has
applied to have its common stock quoted on the Nasdaq SmallCap Market. If, at
the completion of the offering, DutchFork Bancshares does not meet the
requirements for initial listing on the Nasdaq SmallCap Market, it intends to
list the common stock over-the-counter through the OTC Bulletin Board or the
National Daily Quotation System "Pink Sheets" published by the National
Quotation Bureau, Inc. DutchFork Bancshares, however, cannot assure or
guarantee that an active trading market for the common stock will develop or
that an active trading market, if developed, will continue. An active and
orderly trading market will depend on the existence and individual decisions of
willing buyers and sellers at any given time over which neither DutchFork
Bancshares nor any market maker will have any control. If an active trading
market does not develop or is sporadic, this may hurt the market value of the
common stock. Furthermore, DutchFork Bancshares cannot assure or guarantee that
purchasers of common stock in the offering will be able to sell their shares
after the conversion at or above the $10.00 per share purchase price. For
further information, see "Market for Common Stock."
Banking reform legislation restricts the activities in which DutchFork
Bancshares may engage compared to existing unitary holding companies
The Financial Services Modernization Act of 1999, which is intended to
modernize the financial services industry, allows greater affiliations by
commercial bank holding companies with financial companies such as securities
and insurance companies. Under this recent federal legislation, newly formed
unitary savings and loan holding companies, such as DutchFork Bancshares, do not
have the broad powers formerly available to unitary savings and loan holding
companies. Certain unitary savings and loan holding companies are grandfathered
under the legislation, but DutchFork Bancshares is not one. Consequently,
DutchFork Bancshares is restricted in the activities in which it may engage more
than a grandfathered unitary savings and loan holding company. For example,
DutchFork Bancshares generally does not have the authority to engage in
nonfinancial activities whereas a grandfathered unitary holding company has that
authority.
13
SELECTED FINANCIAL AND OTHER DATA
The following tables contain certain information concerning the financial
position and results of operations of Newberry Federal. You should read this
information in conjunction with the consolidated financial statements included
in this prospectus. The data presented at December 31, 1999 and for the three
month periods ended December 31, 1999 and 1998 are derived from unaudited
condensed consolidated financial statements but in the opinion of management
reflects all adjustments necessary to present fairly the results for this
interim period. These adjustments consist only of normal recurring adjustments.
The results of operations for the three months ended December 31, 1999 are not
necessarily indicative of the results of operations that may be expected for the
fiscal year ending September 30, 2000.
At At September 30,
December 31, -----------------------------------------------------
1999 1999 1998 1997 1996
-------------- ----------- ----------- ----------- -----------
(In thousands)
Selected Consolidated Financial Data:
Total assets $226,600 $211,151 $182,775 $175,575 $162,009
Cash and cash equivalents 6,123 3,256 4,964 8,867 4,208
Loans, net 74,788 75,324 71,249 65,997 62,037
Securities held-to-maturity:
Mortgage-backed securities, net 4,332 4,466 6,819 6,826 7,804
Investment securities, net 1,141 1,141 1,346 4,461 --
Securities available-for-sale:
Mortgage-backed securities, net 109,888 96,885 85,152 75,504 75,531
Investment securities, net 22,001 22,068 6,542 7,916 4,366
Deposit accounts 148,437 137,537 141,702 128,721 118,240
Federal Home Loan Bank advances 35,740 39,240 20,600 27,600 26,000
Other borrowings 5,325 7,370 -- -- --
Total retained earnings 16,128 16,701 18,771 17,425 14,922
Repossessed assets 22 14 19 4 833
Nonperforming assets and 259 243 384 242 949
troubled debt restructurings
Three Months
Ended
December 31, Year Ended September 30,
-------------------------- ------------------------------------------------------
1999 1998 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- ------------
(In thousands)
Selected Consolidated Operating Data:
Total interest income $3,774 $2,980 $12,490 $12,299 $11,829 $10,320
Total interest expense 2,143 1,921 7,490 7,555 7,287 6,436
------ ------ ------- ------- ------- -------
Net interest income 1,631 1,059 5,000 4,744 4,542 3,884
Provision for loan losses 160 10 142 85 70 --
------ ------ ------- ------- ------- -------
Net interest income after provision 1,471 1,049 4,858 4,659 4,472 3,884
for loan losses
Noninterest income 241 279 1,155 1,536 1,464 1,106
Noninterest expense 1,215 941 4,228 4,109 4,082 4,929
------ ------ ------- ------- ------- -------
Income before income taxes 497 387 1,785 2,086 1,854 61
Provision for income taxes 199 154 771 834 728 22
------ ------ ------- ------- ------- -------
Net income $ 298 $ 233 $ 1,014 $ 1,252 $ 1,126 $ 39
====== ====== ======= ======= ======= =======
14
At or For the
Three Months Ended
December 31, At or For the Year Ended September 30,
-------------------------- -------------------------------------------------------
1999 1998 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- ----------
Selected Consolidated Operating Ratios
and Other Data (1):
Performance Ratios:
Average yield on interest-earning assets... 7.36% 6.80% 6.94% 7.12% 7.21% 7.08%
Average rate paid on interest-bearing
liabilities............................. 4.55 4.73 4.50 4.73 4.72 4.59
Average interest rate spread (2)........... 2.81 2.07 2.44 2.40 2.49 2.49
Net interest margin (3).................... 3.18 2.42 2.78 2.75 2.77 2.67
Ratio of interest-earning assets to
interest-bearing liabilities............. 108.85 107.85 108.16 108.02 106.36 107.85
Net interest income after provision for
loan losses to noninterest expense ....... 121.06 111.49 114.91 113.38 109.56 78.82
Noninterest expense as a percent of
average assets........................... 2.25 2.06 2.26 2.28 2.36 3.16
Return on average assets................... 0.55 0.51 0.54 0.69 0.65 0.03
Return on average equity................... 7.11 4.91 5.43 6.79 6.82 0.25
Ratio of average equity to average assets.. 7.76 10.39 9.97 10.23 9.56 10.19
Regulatory Capital Ratios:
Tangible capital ratio..................... 8.72 10.34 9.24 10.28 9.96 9.13
Core capital ratio......................... 8.73 10.34 9.24 10.28 9.96 10.03
Risk-based capital ratio................... 18.86 22.49 17.39 24.89 21.29 24.46
Asset Quality Ratios:
Nonperforming loans and troubled
debt restructurings as a percent
of total loans (4)....................... 0.31 0.42 0.30 0.51 0.35 0.18
Nonperforming assets and troubled
debt restructurings as a percent
of total assets (5)..................... 0.12 0.17 0.12 0.21 0.14 0.59
Allowance for loan losses as a percent
of total loans........................... 0.44 0.22 0.24 0.25 0.28 0.36
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings (4)....................... 140.51 72.49 80.79 49.59 80.25 195.69
Net loans charged-off to average
interest-earning loans.................... 0.02 0.04 0.18 0.14 0.17 0.06
Number at end of period:
Full service offices....................... 4 4 4 4 4 4
Mortgage loans............................. 1,965 3,834 2,476 2,328 2,167 1,993
Deposit accounts........................... 10,571 15,880 9,957 14,762 15,728 16,266
- -----------------------
(1) Asset quality ratios and regulatory capital ratios are end of period
ratios. All ratios are based on average monthly balances during the
indicated periods.
(2) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(3) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(4) Nonperforming loans consist solely of all nonaccrual loans.
(5) Nonperforming assets consist of nonperforming loans, troubled debt
restructurings, other repossessed assets and real estate owned.
15
RECENT DEVELOPMENTS
The following tables contain certain information concerning the financial
position and results of operations of Newberry Federal at the date and for the
periods indicated. The data presented at March 31, 2000 and for the three and
six month periods ended March 31, 2000 and 1999 are derived from unaudited
condensed consolidated financial statements but in the opinion of management
reflects all adjustments necessary to present fairly the results for these
interim periods. These adjustments consist only of normal recurring
adjustments. The results of operations for the three and six months ended March
31, 2000 are not necessarily indicative of the results of operations that may be
expected for the fiscal year ending September 30, 2000.
At At
March 31, September 30,
2000 1999
------------ -------------
(unaudited)
(In thousands)
Selected Consolidated Financial Data:
Total assets.................................................................... $220,467 $211,151
Cash and cash equivalents....................................................... 2,425 3,256
Loans, net...................................................................... 75,933 75,324
Securities held-to-maturity:
Mortgage-backed securities, net.............................................. 4,162 4,466
Investment securities, net................................................... 1,141 1,141
Securities available-for-sale:
Mortgage-backed securities, net.............................................. 103,848 96,885
Investment securities, net................................................ 22,662 22,068
Deposit accounts................................................................ 152,049 137,537
Federal Home Loan Bank advances................................................. 35,000 39,240
Other borrowings................................................................ 15,450 7,370
Total retained earnings......................................................... 16,730 16,701
Repossessed assets.............................................................. 8 14
Nonperforming assets and troubled debt restructurings........................... 97 243
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- -------------------------
2000 1999 2000 1999
------------ ---------- ---------- ----------
(unaudited)
(In thousands)
Selected Consolidated Operating Data:
Total interest income.............................................. $3,805 $2,953 $7,579 $5,933
Total interest expense............................................. 2,274 1,787 4,417 3,708
------ ------ ------ ------
Net interest income............................................. 1,531 1,166 3,162 2,225
Provision for loan losses.......................................... 105 70 265 80
------ ------ ------ ------
Net interest income after provision for loan losses............. 1,426 1,096 2,897 2,145
Noninterest income................................................. 251 290 492 569
Noninterest expense................................................ 1,147 952 2,362 1,893
------ ------ ------ ------
Income before income taxes......................................... 530 434 1,027 821
Provision for income taxes......................................... 212 174 411 328
------ ------ ------ ------
Net income...................................................... $ 318 $ 260 $ 616 $ 493
====== ====== ====== ======
16
At or For the At or for the
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Selected Consolidated Operating Ratios
and Other Data (1):
Performance Ratios:
Average yield on interest-earning assets...................... 7.36% 6.75% 7.36% 6.77%
Average rate paid on interest-bearing liabilities............. 4.54 4.44 4.55 4.58
Average interest rate spread (2).............................. 2.82 2.31 2.81 2.19
Net interest margin (3)....................................... 2.96 2.66 3.07 2.54
Ratio of interest-earning assets to
interest-bearing liabilities................................ 103.29 108.65 105.98 108.25
Net interest income after provision for loan
losses to noninterest expense............................... 124.32 115.13 122.65 113.31
Noninterest expense as a percent of
average assets.............................................. 2.11 2.09 2.18 2.07
Return on average assets...................................... 0.59 0.57 0.57 0.54
Return on average equity...................................... 7.74 5.17 7.42 5.05
Ratio of average equity to average assets..................... 7.75 11.03 7.67 10.71
Regulatory Capital Ratios:
Tangible capital ratio........................................ 9.08 10.60 9.08 10.60
Core capital ratio............................................ 9.08 10.60 9.08 10.60
Risk-based capital ratio...................................... 19.09 20.66 19.09 20.66
Asset Quality Ratios:
Nonperforming loans and troubled debt restructurings
as a percent of total loans (4)............................. 0.13 0.39 0.13 0.39
Nonperforming assets and troubled debt restructurings
as a percent of total assets (5)............................ 0.04 0.19 0.04 0.19
Allowance for loan losses as a percent of total loans......... 0.47 0.36 0.47 0.36
Allowance for loan losses as a percent of nonperforming
loans and troubled debt restructurings (4).................. 364.70 75.30 364.70 75.30
Net loans charged-off to average interest-earning loans....... 0.11 0.55 0.13 0.08
Number at end of period:
Full service offices.......................................... 4 4 4 4
Mortgage loans................................................ 3,807 3,789 3,807 3,789
Deposit accounts.............................................. 16,657 16,162 16,657 16,162
- -------------------------
(1) Asset quality ratios and regulatory capital ratios are end of period ratios.
All ratios are based on average monthly balances during the indicated
periods.
(2) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(3) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(4) Nonperforming loans consist solely of all nonaccrual loans.
(5) Nonperforming assets consist of nonperforming loans, troubled debt
restructurings, other repossessed assets and real estate owned.
17
Comparison of Financial Condition at March 31, 2000 and September 30, 1999
Total assets increased by $9.3 million from $211.2 million at September 30,
1999 to $220.5 million at March 31, 2000, primarily as a result of a $7.0
million increase in mortgage-backed securities available-for-sale. Mortgage-
backed securities available-for-sale increased from $96.9 million at September
30, 1999 to $103.4 million at March 31, 2000 primarily as a result of an
increase in deposits and limited loan demand. Loans receivable increased by
only $600,000, from $75.3 million at September 30, 1999 to $75.9 million at
March 31, 2000, reflecting the weak demand for loans in Newberry Federal's
market area. Deposit accounts increased $14.5 million from $137.5 million at
September 30, 1999 to $152.0 million at March 31, 2000. Management attributes
this growth to competitive pricing and the closing of branches of other banks in
its primary market area. Federal Home Loan Bank of Atlanta advances decreased
$4.2 million from $39.2 million at September 30, 1999 to $35.0 million at March
31, 2000 primarily as a result of the repayment of funds in anticipation of Year
2000. Other borrowings increased $8.0 million from $7.4 million at September
30, 1999 to $15.4 million at March 31, 2000, due to more favorable terms of
other borrowings as compared to Federal Home Loan Bank borrowings.
At March 31, 2000, total equity was $16.7 million, which consisted of
retained earnings of $21.1 million reduced by a $4.4 million unrealized loss,
net of taxes, on the investment securities and mortgage-backed securities
portfolios classified as available-for-sale. Because Newberry Federal has a
substantial portfolio of investment securities and mortgage-backed securities
available-for-sale, the market values of these securities will fluctuate
significantly as a result of changes in market interest rates. See "Risk
Factors--Newberry Federal's capital levels can fluctuate greatly with changes in
market interest rates because of its large investment in long-term fixed-rate
U.S. Government agency securities, long-term zero coupon bonds and certain deep
discounted, fixed-rate collateralized mortgage obligations."
Nonperforming assets and troubled debt restructurings decreased from $243,000
at September 30, 1999 to $97,000 at March 31, 2000, primarily as a result of the
write-off of a $73,000 unsecured commercial line of credit.
Comparison of Operating Results for the Three Months Ended March 31, 2000 and
1999
Net Income. Net income increased $58,000 from $260,000 for the three months
ended March 31, 1999 to $318,000 for the same period in 2000 primarily as a
result of a $365,000 increase in net interest income, partially offset by a
$35,000 increase in the provision for loan losses, a $39,000 decrease in
noninterest income and a $195,000 increase in noninterest expense.
Net Interest Income. Net interest income increased from $1.2 million for the
three months ended March 31, 1999 to $1.5 million for the same period in 2000
due to an increase in rates on adjustable-rate loans and mortgage-backed
securities. Interest expense increased by $487,000, from $1.8 million for the
three months ended March 31, 1999 to $2.3 million for the same period in 2000,
due to the rising interest rate environment and an increase in borrowings.
Provision for Loan Losses. Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level that
management considers adequate to provide for estimated losses based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specified impaired loans, and economic conditions. The provision
for loan losses increased from $70,000 for the three months ended March 31, 1999
to $105,000 for the three months ended March 31, 2000. Management deemed the
increase in the provision for loan losses warranted based upon its evaluation of
current economic conditions, particularly the recent rise in interest rates and
gasoline prices, and their adverse effect on the ability of Newberry Federal's
consumer loan borrowers to repay their loans. The vast majority of Newberry
Federal's consumer loan borrowers are low-income or middle-income individuals
who have to commute above average distances to work because they live in rural
areas. The recent rise on gasoline prices adversely affects their ability to
meet their consumer loan obligations because the higher prices divert available
funds away from consumer debt service. Furthermore, if they have adjustable
rate mortgage loans, the recent rise in interest rates leads to higher mortgage
debt service obligations and, based on historical experience, these individuals
tend to default on their consumer loan obligations in order to satisfy their
mortgage loan obligations. Management deemed the allowance for loan losses of
$353,000 at March 31, 2000 as adequate at that date. 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 Newberry Federal's control. While Newberry Federal 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
18
not be made to the allowance for loan losses and that actual losses will not
exceed estimated losses. See "Business of Newberry Federal Savings Bank--Lending
Activities--Allowance for Loan Losses" for further information.
Noninterest Income. Noninterest income decreased $39,000 from $290,000 for
the three months ended March 31, 1999 to $251,000 for the same period in 2000
primarily due to fewer sales of securities.
Noninterest Expense. Noninterest expense increased $195,000 from $952,000
for the three months ended March 31, 1999 to $1.1 million for the three months
ended March 31, 2000 primarily as a result of a $48,000 increase in data
processing expense associated with the upgrade of computer hardware and software
and a $133,000 increase in charitable contributions.
Provision for Income Taxes. The provision for income taxes increased $38,000
from $174,000 for the three months ended March 31, 1999 to $212,000 for the
three months ended March 31, 2000 as a result of increased income before income
taxes.
Comparison of Operating Results for the Six Months Ended March 31, 2000 and 1999
Net Income. Net income increased $123,000 from $493,000 for the six months
ended March 31, 1999 to $616,000 for the same period in 2000 primarily as a
result of a $937,000 increase in net interest income, partially offset by a
$185,000 increase in the provision for loan losses, a $77,000 decrease in
noninterest income and a $469,000 increase in noninterest expense.
Net Interest Income. Net interest income increased from $2.2 million for the
six months ended March 31, 1999 to $3.2 million for the same period in 2000 due
to increases in rates on adjustable-rate loans. Interest expense increased by
$700,000, from $3.7 million for the six months ended March 31, 1999 to $4.4
million for the same period in 2000, due to increased borrowings and an increase
in the cost of funds.
Provision for Loan Losses. The provision for loan losses increased from
$80,000 for the six months ended March 31, 1999 to $265,000 for the six months
ended March 31, 2000. Management deemed the increase in the provision for loan
losses warranted based upon its evaluation of current economic conditions,
particularly the recent rise in interest rates and gasoline prices, and their
adverse effect on the ability of Newberry Federal's consumer loan borrowers to
repay their loans. The vast majority of Newberry Federal's consumer loan
borrowers are low-income or middle-income individuals who have to commute above
average distances to work because they live in rural areas. The recent rise on
gasoline prices adversely affects their ability to meet their consumer loan
obligations because the higher prices divert available funds away from consumer
debt service. Furthermore, if they have adjustable rate mortgage loans, the
recent rise in interest rates leads to higher mortgage debt service obligations
and, based on historical experience, these individuals tend to default on their
consumer loan obligations in order to satisfy their mortgage loan obligations.
Management deemed the allowance for loan losses of $353,000 at March 31, 2000 as
adequate at that date. 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 Newberry Federal's
control. While Newberry Federal 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. See "Business
of Newberry Federal Savings Bank--Lending Activities--Allowance for Loan Losses"
for further information.
Noninterest Income. Noninterest income decreased $77,000 from $569,000 for
the six months ended March 31, 1999 to $492,000 for the same period in 2000
primarily due to fewer sales of securities.
Noninterest Expense. Noninterest expense increased $500,000 from $1.9
million for the six months ended March 31, 1999 to $2.4 million for the six
months ended March 31, 2000 primarily as a result of a $212,000 increase in
charitable contributions, a $113,000 increase in compensation and benefits
associated with the hiring of new employees and annual incentive plan accruals,
a $91,000 increase in data processing expense associated with computer hardware
and software upgrades, and a $59,000 increase in advertising expense associated
with year 2000 advertising and advertising of charitable contributions.
Provision for Income Taxes. The provision for income taxes increased $83,000
from $328,000 for the six months ended March 31, 1999 to $411,000 for the six
months ended March 31, 2000 as a result of increased income before income taxes.
19
USE OF PROCEEDS
The following table shows how DutchFork Bancshares intends to distribute the
net proceeds of the offering. The actual net proceeds will depend on the number
of shares of common stock sold in the offering and the expenses of the offering.
See "Pro Forma Data" for the assumptions used to arrive at these amounts.
1,003,000 Percentage 1,357,000 Percentage 1,560,550 Percentage
Shares at of Gross Shares at of Gross Shares at of Gross
$10.00 Proceeds of $10.00 Proceeds of $10.00 Proceeds of
Per Share $10,030,000 Per Share $13,570,000 Per Share $15,605,500
----------- ------------- ------------ ------------- ------------ -------------
(In thousands)
Offering proceeds.................... $ 10,030 100.00% $ 13,570 100.00% $ 15,606 100.00%
Less: estimated underwriting
commissions and other
offering expenses................. 713 7.11 786 5.79 822 5.27
--------- ---------- ---------- ----------- ---------- -----------
Net offering proceeds................ 9,317 92.89 12,784 94.21 14,784 94.73
Less:
Proceeds to be contributed
to Newberry Federal............ 8,359 83.34 11,542 85.06 13,380 85.74
Proceeds used for loan to
employee stock ownership
plan........................... 802 8.00 1,086 8.00 1,248 8.00
---------- ----------- ---------- ----------- ---------- -----------
Proceeds remaining for DutchFork..... $ 156 1.56% $ 156 1.15% $ 156 1.00%
Bancshares ========== =========== ========== =========== ========== ===========
In addition to loaning funds to Newberry Federal's employee stock ownership
plan, DutchFork Bancshares will use the proceeds it retains from the offering
for general corporate purposes and to invest in securities. In addition,
DutchFork Bancshares may, in the future, use the proceeds of the offering to
repurchase shares of its common stock, pay dividends and acquire other financial
institutions.
Newberry Federal may use the proceeds that it receives from the offering:
. to fund new loans;
. to invest in securities;
. to finance the possible expansion of its business activities; and
. for general corporate purposes.
DutchFork Bancshares and Newberry Federal would need regulatory approvals
to engage in some of the activities listed above. See "Regulation and
Supervision." Neither DutchFork Bancshares nor Newberry Federal currently has
any specific plans or agreements regarding any expansion activities or
acquisitions.
Except as described above, neither DutchFork Bancshares nor Newberry
Federal has any immediate specific use for the proceeds of this offering.
Accordingly, management will have discretion over the investment of the offering
proceeds. See "Risk Factors--Management will have substantial discretion over
investment of the offering proceeds and may make investments with which you may
disagree." Although Newberry Federal's capital currently exceeds regulatory
requirements, it is converting to stock form primarily to structure itself in
the form of organization used by commercial banks and most other financial
services companies. For a discussion of management's business reasons for
undertaking the conversion, see "The Conversion--Reasons for the Conversion."
20
Since both Newberry Federal and DutchFork Bancshares will likely invest a
majority of the conversion proceeds in investment and mortgage-backed
securities, DutchFork Bancshares expects that its return on assets will not be
as high as it could be if Newberry Federal were able to invest more of its share
of the conversion proceeds in loans. See "Risk Factors--Because of weak loan
demand in its primary market area, Newberry Federal invests heavily in
investment securities and mortgage-backed securities, which generally earn less
income than loans."
DUTCHFORK BANCSHARES' DIVIDEND POLICY
Because the Office of Thrift Supervision has limited the amount of net
offering proceeds that DutchFork Bancshares may retain for general corporate
purposes, DutchFork Bancshares' board of directors has no present intent of
paying cash dividends after the conversion. In determining whether to declare
or pay any dividend in the future, whether regular or special, the board of
directors will take into account the amount of the net proceeds retained by
DutchFork Bancshares, DutchFork Bancshares' financial condition, results of
operations, tax considerations, capital requirements, industry standards, and
economic conditions. The regulatory restrictions that affect the payment of
dividends by Newberry Federal to DutchFork Bancshares discussed below will also
be considered. DutchFork Bancshares cannot guarantee that it will pay dividends
or that, if any dividends are paid in the future, that DutchFork Bancshares will
not reduce or eliminate dividends in the future.
DutchFork Bancshares is subject to Delaware law, which generally limits
dividends to an amount equal to the difference between the amount by which total
assets exceed total liabilities and the amount equal to the aggregate par value
of the outstanding shares of capital stock. If there is no difference between
these amounts, dividends are limited to net income for the current and/or
immediately preceding fiscal year.
Dividends from DutchFork Bancshares will depend upon receipt of dividends
from Newberry Federal because DutchFork Bancshares initially will have no source
of income other than dividends from Newberry Federal and earnings from the
investment of the limited net proceeds from the offering retained by DutchFork
Bancshares. Due to Newberry Federal's above average interest rate risk, the
Office of Thrift Supervision has imposed as an approval condition that DutchFork
Bancshares infuse all of the net offering proceeds into Newberry Federal except
for an amount sufficient to fund the loan to Newberry Federal's employee stock
ownership plan plus a nominal amount, approximately $156,000, to pay for general
operating expenses. Office of Thrift Supervision regulations limit
distributions from Newberry Federal to DutchFork Bancshares, and set forth
notice and application procedures that Newberry Federal would have to follow
before paying a dividend to DutchFork Bancshares. In addition, Newberry Federal
may not declare or pay a cash dividend on its capital stock if its effect would
be to reduce the regulatory capital of Newberry Federal below the amount
required for the liquidation account to be established as required by Newberry
Federal's plan of conversion. See "Risk Factors--DutchFork Bancshares' ability
to pay dividends, repurchase stock or undertake other corporate transactions
requiring cash outlays will be restricted by the Office of Thrift Supervision's
condition of approval requiring DutchFork Bancshares to infuse substantially all
of the net offering proceeds into Newberry Federal," "Regulation and
Supervision--Federal Savings Institution Regulation--Limitations on Capital
Distributions," "The Conversion--Effects of Conversion to Stock Form on
Depositors and Borrowers of Newberry Federal--Liquidation Account" and Note 16
of the Notes to Consolidated Financial Statements included in the back of this
prospectus.
Any payment of dividends by Newberry Federal to DutchFork Bancshares that
would be deemed to be drawn out of Newberry Federal's bad debt reserves would
require the payment of federal income taxes by Newberry Federal at the then
current income tax rate on the amount deemed distributed. See "Federal and
State Taxation on Income--Federal Income Taxation" and Note 9 of the Notes to
Consolidated Financial Statements included in this prospectus. DutchFork
Bancshares does not contemplate any distribution by Newberry Federal that would
result in this type of tax liability.
Additionally, DutchFork Bancshares and Newberry Federal have committed to
the Office of Thrift Supervision that during the one-year period following the
conversion, DutchFork Bancshares will not take any action to declare an
extraordinary dividend to stockholders that would be treated by recipients as a
tax-free return of capital for federal income tax purposes.
21
MARKET FOR THE COMMON STOCK
DutchFork Bancshares has not previously issued common stock and there is
currently no established market for the common stock. DutchFork Bancshares has
applied to have its common stock quoted on the Nasdaq SmallCap Market under the
symbol "DFBS" after the conversion.
One of the requirements for initial quotation of the common stock on the
Nasdaq SmallCap Market is that there be at least three market makers for the
common stock. Trident Securities has advised DutchFork Bancshares that it
intends to make a market in the common stock following the conversion, but is
under no obligation to do so. DutchFork Bancshares will seek to encourage and
assist at least two additional market makers to make a market in the common
stock. Other requirements for initial listing on the Nasdaq SmallCap Market
include a public float of one million shares and 300 round lot shareholders,
either or both of which may not be met depending on the number of shares sold in
the offering. If, at the completion of the offering, DutchFork Bancshares does
not meet the requirements for initial listing on the Nasdaq SmallCap Market, it
intends to list the common stock over-the-counter through the OTC Bulletin Board
or the National Daily Quotation System "Pink Sheets" published by the National
Quotation Bureau, Inc. Making a market involves maintaining bid and asked
quotations and being able, as principal, to effect transactions in reasonable
quantities at those quoted prices. Various securities laws and other regulatory
requirements apply to these activities. While DutchFork Bancshares believes
that there will be other broker-dealers to act as market makers for the common
stock, DutchFork Bancshares cannot guarantee that there will be three or more
market makers for the common stock.
Additionally, the development of a liquid public market depends on the
existence of willing buyers and sellers, the presence of which is not within
DutchFork Bancshares' control or under the control of any market maker. The
number of active buyers and sellers of the common stock at any particular time
may be limited. Under such circumstances, you could have difficulty selling
your shares on short notice and therefore you should not view the common stock
as a short-term investment. DutchFork Bancshares cannot assure you that an
active and liquid trading market for the common stock will develop or that, if
it develops, it will continue, nor can DutchFork Bancshares assure you that if
you purchase shares you will be able to sell them at or above $10.00 per share
or that quotations will be available on the Nasdaq SmallCap Market or the OTC
Bulletin Board as contemplated.
22
CAPITALIZATION
The following table presents the historical capitalization of Newberry
Federal at December 31, 1999, and the pro forma capitalization of DutchFork
Bancshares after giving effect to the assumptions listed under "Pro Forma Data,"
based on the sale of the number of shares of common stock indicated in the
table. DutchFork Bancshares pro forma capitalization does not reflect the
issuance of additional shares under the proposed stock-based incentive plan. A
change in the number of shares to be issued in the conversion may materially
affect pro forma capitalization.
DutchFork Bancshares Pro Forma
Capitalization Based Upon the Sale of
---------------------------------------------------
Newberry
Federal
Capitalization 1,003,000 1,357,000 1,560,550
as of Shares at Shares at Shares at
December 31, $10.00 $10.00 $10.00
1999 Per Share Per Share Per Share
-------------- ------------- ------------- -------------
(In thousands)
Deposits (1).............................................. $148,437 $ 148,437 $ 148,437 $ 148,437
Advances from Federal Home Loan Bank...................... 35,740 35,740 35,740 35,740
Other borrowings.......................................... 5,325 5,325 5,325 5,325
-------- ---------- ---------- ----------
Total deposits and borrowed funds......................... $189,502 $ 189,502 $ 189,502 $ 189,502
======== ========== ========== ==========
Stockholders' equity:
Preferred stock:
500,000 shares, $.01 par value per share,
authorized; none issued or outstanding........... $ -- $ -- $ -- $ --
Common stock:
4,000,000 shares, $.01 par value per share,
authorized; specified number of shares
assumed to be issued and outstanding............. -- 10 14 16
Additional paid-in capital................................ -- 9,307 12,770 14,768
Retained earnings, substantially restricted (2)........... 20,850 20,850 20,850 20,850
Net unrealized loss on available-for-sale securities...... (4,722) (4,722) (4,722) (4,722)
Less:
Common stock acquired by employee
stock ownership plan (3)............................ -- 802 1,086 1,248
Common stock to be acquired by stock-based
incentive plan (4).................................. -- 401 543 624
-------- ---------- ---------- ----------
Total stockholders' equity $ 16,128 $ 24,242 $ 27,283 $ 29,040
======== ========== ========== ==========
- -------------------
(1) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the offering. Withdrawals to purchase common stock will
reduce pro forma deposits by the amounts of the withdrawals.
(2) Retained earnings are restricted by applicable regulatory capital
requirements. Additionally, Newberry Federal will be prohibited from paying
any dividend that would reduce its regulatory capital below the amount in
the liquidation account, which will be established for the benefit of
Newberry Federal's eligible depositors as of November 30, 1998 and March 31,
2000 at the time of the conversion and decreased subsequently as these
account holders reduce their balances or cease to be depositors. See "The
Conversion--Effects of Conversion to Stock Form--Liquidation Account."
(3) Assumes that 8% of the common stock issued in the conversion will be
acquired by the employee stock ownership plan in the conversion with funds
borrowed from DutchFork Bancshares. Under generally accepted accounting
principles, the amount of common stock to be purchased by the employee stock
ownership plan represents unearned compensation and is, accordingly,
reflected as a reduction of capital. As shares are released to employee
stock ownership plan participants' accounts, a corresponding reduction in
the charge against capital will occur. Since the funds are borrowed from
DutchFork Bancshares, the borrowing will be eliminated in consolidation and
no liability or interest expense will be reflected in the consolidated
financial statements of DutchFork Bancshares. See "Management of Newberry
Federal--Benefits--Employee Stock Ownership Plan."
(4) Assumes the purchase in the open market at $10.00 per share, under the
proposed stock-based incentive plan, of a number of shares equal to 4% of
the shares of common stock issued in the conversion. The shares are
reflected as a reduction of stockholders' equity. See "Risk Factors--
Issuance of shares for benefit programs may reduce your ownership interest,"
"Pro Forma Data" and "Management of Newberry Federal--Benefits--Stock-Based
Incentive Plan." The stock-based incentive plan will be submitted to
stockholders for approval at a meeting following the conversion.
23
REGULATORY CAPITAL COMPLIANCE
At December 31, 1999, Newberry Federal exceeded all regulatory capital
requirements. The following table presents Newberry Federal's capital position
relative to its regulatory capital requirements at December 31, 1999, on a
historical and pro forma basis. The table reflects receipt by Newberry Federal
of approximately 90% of the net proceeds of the offering. For purposes of the
table, the amount expected to be borrowed by the employee stock ownership plan
and the cost of the shares expected to be awarded under the stock-based
incentive plan as restricted stock are deducted from pro forma regulatory
capital. For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see "Use of Proceeds," "Capitalization" and "Pro
Forma Data." The definitions of the terms used in the table are those provided
in the capital regulations issued by the Office of Thrift Supervision. For a
discussion of the capital standards applicable to Newberry Federal, see
"Regulation and Supervision--Federal Savings Institutions Regulation--Capital
Requirements."
Pro Forma at December 31, 1999
-------------------------------------------------------------
15% Above
Minimum of Maximum of Maximum of
Offering Range Offering Range Offering Range
------------------- -------------------- --------------------
Historical at 1,003,000 Shares 1,357,000 Shares 1,560,550 Shares
December 31, at $10.00 at $10.00 at $10.00
1999 Per Share Per Share Per Share
--------------------------- ------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted
Total Total Total Total
Amount Assets (1) Amount Assets Amount Assets Amount Assets
------------ ----------- ------- ---------- ------- ---------- ------- ----------
(Dollars in thousands)
Generally accepted accounting
principles capital.......... $16,128 7.1% $23,284 10.0% $26,041 11.0% $27,635 11.6%
======= ==== ======= ==== ======= ==== ======= ====
Tangible Capital:
Capital level (2)........... $20,096 8.7% $27,252 11.5% $30,009 12.5% $31,603 13.1%
Requirement................. 3,458 1.5 3,566 1.5 3,607 1.5 3,631 1.5
------- ---- ------- ---- ------- ---- ------- ----
Excess...................... $16,638 7.2% $23,686 10.0% $26,402 11.0% $27,972 11.6%
======= ==== ======= ==== ======= ==== ======= ====
Core Capital:
Capital level (2)........... $20,096 8.7% $27,252 11.5% $30,009 12.5% $31,603 13.1%
Requirement................. 9,222 4.0 9,508 4.0 9,619 4.0 9,682 4.0
------- ---- ------- ---- ------- ---- ------- ----
Excess...................... $10,874 4.7% $17,744 7.5% $20,390 8.5% $21,921 9.1%
======= ==== ======= ==== ======= ==== ======= ====
Total Risk-Based Capital:
Total risk-based
Capital (3)................ $20,415 18.9% $27,571 25.1% $30,328 27.5% $31,922 28.9%
Requirement................. 8,659 8.0 8,774 8.0 8,818 8.0 8,843 8.0
------- ---- ------- ---- ------- ---- ------- ----
Excess...................... $11,756 10.9% $18,797 17.1% $21,510 19.5% $23,079 20.9%
======= ==== ======= ==== ======= ==== ======= ====
- -----------------------
(1) Tangible capital and core capital levels are shown as a percentage of
adjusted total assets of $230.6 million. Risk-based capital levels are
shown as a percentage of risk-weighted assets of $108.2 million.
(2) A portion of the net unrealized gains on available-for-sale investment
securities accounts for the difference between generally accepted accounting
principles capital and leverage capital.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that
carry a 20% risk-weighting.
24
PRO FORMA DATA
The following tables show information about the net income and
stockholders' equity of DutchFork Bancshares reflecting the conversion (referred
to as "pro forma" information). The information provided illustrates the pro
forma net income and stockholders' equity of DutchFork Bancshares based on the
sale of common stock at the minimum of the offering range, the maximum of the
offering range and 15% above the maximum of the offering range. The actual net
proceeds from the sale of the common stock cannot be determined until the
conversion is completed. However, net proceeds indicated in the following tables
are based upon the following assumptions:
. In addition to a management fee of $10,000, Trident Securities will
receive a fee equal to 2.0% of the aggregate purchase price of the
shares sold in the conversion, except that no fee will be paid with
respect to shares purchased by the employee plans, officers,
employees, directors of Newberry Federal or DutchFork Bancshares and
their associates. See "The Conversion--Plan of Distribution for the
Subscription, Direct Community and Syndicated Community Offerings."
Trident Securities' fees would increase if a syndicated community
offering or underwritten public offering is used to sell shares not
sold in the subscription offering and direct community offering.
. Conversion expenses, excluding the fees paid to Trident Securities,
will total approximately $550,000 regardless of the number of shares
sold in the conversion.
Actual expenses may vary from this estimate, and the fees paid will depend
upon whether a syndicate of broker-dealers or other means is necessary to sell
the shares, and other factors.
Pro forma net income for the three months ended December 31, 1999 has been
calculated as if the conversion was completed on October 1, 1999, and the net
proceeds had been invested at 6.19% beginning on that date, which represents the
one-year U.S. Treasury Bill yield as of December 31, 1999. Pro forma net income
for the year ended September 30, 1999 has been calculated as if the conversion
was completed on October 1, 1998, and the net proceeds had been invested at
5.71% beginning on that date, which represents the one-year U.S. Treasury Bill
yield as of September 30, 1999. In light of the changes in market interest
rates in recent periods, DutchFork Bancshares and Newberry Federal believe that
the one-year U.S. Treasury Bill yield more accurately reflects pro forma
reinvestment rates, rather than the arithmetic average of the average yield on
all interest-earning assets and the average rate paid on deposits as required by
Office of Thrift Supervision regulations.
A pro forma after-tax return of 3.83% is used for both DutchFork Bancshares
and Newberry Federal for the year ended December 31, 1999, after giving effect
to a combined federal and state income tax rate of 38.0%. Historical and pro
forma per share amounts have been calculated by dividing historical and pro
forma amounts by the number of shares of common stock indicated in the table.
When reviewing the following tables you should consider the following:
. The final column gives effect to the sale of an additional 203,550
shares in the conversion, which may be issued without any further
notice if Keller & Company increases its appraisal to reflect the
results of this offering or changes in the financial condition or
results of operations of Newberry Federal or changes in market
conditions after the offering begins. See "The Conversion--Stock
Pricing and Number of Shares to be Issued."
. Since funds on deposit at Newberry Federal may be withdrawn to
purchase shares of common stock, the amount of funds available for
investment will be reduced by the amount of withdrawals for stock
purchases. The pro forma tables do not reflect withdrawals from
deposit accounts.
. Historical per share amounts have been computed as if the shares of
common stock expected to be issued in the conversion had been
outstanding at the beginning of the period covered by the table.
However, neither historical nor pro forma stockholders' equity has
been adjusted to reflect the investment of the estimated net proceeds
from the sale of the shares in the conversion, the additional employee
stock ownership plan expense or the proposed stock-based incentive
plan.
25
. Pro forma stockholders' equity ("book value") represents the
difference between the stated amounts of Newberry Federal's assets and
liabilities. The amounts shown do not reflect the liquidation
account, which will be established for the benefit of eligible
depositors as of November 30, 1998 and March 31, 2000, or the federal
income tax consequences of the restoration to income of Newberry
Federal's special bad debt reserves for income tax purposes, which
would be required in the unlikely event of liquidation. See "Federal
and State Taxation on Income" and "The Conversion--Effects of
Conversion to Stock Form." The amounts shown for book value do not
represent fair market values or amounts available for distribution to
stockholders in the unlikely event of liquidation.
. The amounts shown as pro forma stockholders' equity per share do not
represent or imply possible future price appreciation of DutchFork
Bancshares' common stock.
. The amounts shown do not account for the shares to be reserved for
issuance under the stock-based incentive plan, which requires
stockholder approval at a meeting following the conversion.
The following pro forma data, which are based on Newberry Federal's equity
at December 31, 1999, and net income for the three months ended December 31,
1999, and on its equity at September 30, 1999, and net income for the year ended
September 30, 1999, may not represent the actual financial effects of the
conversion or the operating results of DutchFork Bancshares after the
conversion. The pro forma data rely exclusively on the assumptions outlined
above. The pro forma data do not represent the fair market value of DutchFork
Bancshares' common stock, the current fair market value of Newberry Federal's or
DutchFork Bancshares' assets or liabilities, or the amount of money that would
be available for distribution to stockholders if DutchFork Bancshares is
liquidated after the conversion.
26
At or For the Three Months
Ended December 31, 1999
-----------------------------------
15% Above
Minimum of Maximum of Maximum of
Estimated Estimated Estimated
Valuation Valuation Valuation
Range Range Range
---------- ---------- ----------
1,003,000 1,357,000 1,560,550
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
---------- ---------- ----------
(Dollars in thousands,
except per share amounts)
Gross proceeds.................................................................. $ 10,030 $ 13,570 $ 15,606
Less offering expenses.......................................................... (713) (786) (822)
---------- ---------- ----------
Estimated net proceeds.................................................... 9,317 12,784 14,784
Less: common stock acquired by employee stock ownership plan................... (802) (1,086) (1,248)
Less: common stock to be acquired by stock-based incentive plan................ (401) (543) (624)
---------- ---------- ----------
Net investable proceeds...................................................... $ 8,114 $ 11,155 $ 12,912
========== ========== ==========
Pro Forma Net Income:
Number of shares used to calculate pro forma net income per share............... 924,432 1,250,702 1,438,353
Pro forma net income:
Historical................................................................... $ 298 $ 298 $ 298
Pro forma income on net investable proceeds.................................. 78 107 124
Less: pro forma employee stock ownership plan adjustments (1)............... (10) (14) (16)
Less: pro forma stock-based incentive plan adjustments (2).................. (12) (17) (19)
---------- ---------- ----------
Pro forma net income...................................................... $ 354 $ 374 $ 387
========== ========== ==========
Pro forma net income per share:
Historical................................................................... $ 0.32 $ 0.24 $ 0.21
Pro forma adjustments:
Pro forma income on net investable proceeds............................... 0.08 0.09 0.09
Less: pro forma employee stock ownership plan adjustments (1)............ (0.01) (0.01) (0.01)
Less: pro forma stock-based incentive plan adjustments (2)............... (0.01) (0.01) (0.01)
---------- ---------- ----------
Pro forma net income................................................... $ 0.38 $ 0.31 $ 0.28
========== ========== ==========
Pro Forma Stockholders' Equity:
Number of shares used to calculate pro forma stockholders' equity per share..... 1,003,000 1,357,000 1,560,600
Pro forma stockholders' equity (book value):
Historical................................................................... $ 16,128 $ 16,128 $ 16,128
Estimated net proceeds....................................................... 9,317 12,784 14,784
Less: common stock acquired by employee stock ownership plan................ (802) (1,086) (1,248)
Less: common stock to be acquired by stock-based incentive plan (2)......... (401) (543) (624)
---------- ---------- ----------
Pro forma stockholders' equity............................................ $ 24,242 $ 27,283 $ 29,040
========== ========== ==========
Pro forma stockholders' equity per share:
Historical................................................................... $ 16.08 $ 11.89 $ 10.33
Estimated net proceeds....................................................... 9.29 9.42 9.47
Less: common stock acquired by employee stock ownership plan................ (0.80) (0.80) (0.80)
Less: common stock to be acquired by stock-based incentive plan (2)......... (0.40) (0.40) (0.40)
---------- ---------- ----------
Pro forma stockholders' equity per share.................................. $ 24.17 $ 20.11 $ 18.60
========== ========== ==========
Purchase price as a percentage of pro forma stockholders' equity per share...... 41.37% 49.73% 53.76%
Purchase price as a multiple of pro forma net income per share (annualized)..... 6.58x 8.06x 8.93x
27
At or For Year Ended
September 31, 1999
-----------------------------------
15% Above
Minimum of Maximum of Maximum of
Estimated Estimated Estimated
Valuation Valuation Valuation
Range Range Range
---------- ---------- ----------
1,003,000 1,357,000 1,560,550
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
---------- ---------- ----------
(Dollars in thousands,
except per share amounts)
Gross proceeds.................................................................. $ 10,030 $ 13,570 $ 15,606
Less offering expenses.......................................................... (713) (786) (822)
---------- ---------- ----------
Estimated net proceeds.................................................... 9,317 12,784 14,784
Less: common stock acquired by employee stock ownership plan................... (802) (1,086) (1,248)
Less: common stock to be acquired by stock-based incentive plan................ (401) (543) (624)
---------- ---------- ----------
Net investable proceeds...................................................... $ 8,114 $ 11,155 $ 12,912
========== ========== ==========
Pro Forma Net Income:
Number of shares used to calculate pro forma net income per share............... 929,447 1,257,487 1,446,156
Pro forma net income:
Historical................................................................... $ 1,014 $ 1,014 $ 1,014
Pro forma income on net investable proceeds.................................. 287 395 457
Less: pro forma employee stock ownership plan adjustments (1)............... (41) (56) (65)
Less: pro forma stock-based incentive plan adjustments (2).................. (50) (67) (77)
---------- ---------- ----------
Pro forma net income...................................................... $ 1,210 $ 1,286 $ 1,329
========== ========== ==========
Pro forma net income per share:
Historical................................................................... $ 1.09 $ 0.81 $ 0.70
Pro forma adjustments:
Pro forma income on net investable proceeds............................... 0.31 0.31 0.32
Less: pro forma employee stock ownership plan adjustments (1)............ (0.04) (0.04) (0.04)
Less: pro forma stock-based incentive plan adjustments (2)............... (0.05) (0.05) (0.05)
---------- ---------- ----------
Pro forma net income................................................... $ 1.31 $ 1.03 $ 0.93
========== ========== ==========
Pro Forma Stockholders' Equity:
Number of shares used to calculate pro forma stockholders' equity per share..... 1,003,000 1,357,000 1,560,600
Pro forma stockholders' equity (book value):
Historical................................................................... $ 16,701 $ 16,701 $ 16,701
Estimated net proceeds....................................................... 9,317 12,784 14,784
Less: common stock acquired by employee stock ownership plan................ (802) (1,086) (1,248)
Less: common stock to be acquired by stock-based incentive plan (2)......... (401) (543) (624)
---------- ---------- ----------
Pro forma stockholders' equity............................................ $ 24,815 $ 27,856 $ 29,613
========== ========== ==========
Pro forma stockholders' equity per share:
Historical................................................................... $ 16.65 $ 12.31 $ 10.70
Estimated net proceeds....................................................... 9.29 9.42 9.47
Less: common stock acquired by employee stock ownership plan................ (0.80) (0.80) (0.80)
Less: common stock to be acquired by stock-based incentive plan (2)......... (0.40) (0.40) (0.40)
---------- ---------- ----------
Pro forma stockholders' equity per share.................................. $ 24.74 $ 20.53 $ 18.97
========== ========== ==========
Purchase price as a percentage of pro forma stockholders' equity per share...... 40.42% 48.71% 52.71%
Purchase price as a multiple of pro forma net income per share (annualized)..... 7.63x 9.71x 10.75x
28
- --------------
(1) Assumes that the employee stock ownership plan will acquire an amount of
stock equal to 8% of the shares of common stock offered in the conversion.
The employee stock ownership plan will borrow the funds used to acquire
these shares from the net proceeds from the conversion retained by DutchFork
Bancshares. The amount of this borrowing, which will have an interest rate
equal to the prime rate as published in The Wall Street Journal, which is
currently 8.75%, has been reflected as a reduction from gross proceeds to
determine estimated net investable proceeds. Newberry Federal intends to
make contributions to the employee stock ownership plan in amounts at least
equal to the principal and interest requirement of the debt. As the debt is
paid down, stockholders' equity will be increased. Newberry Federal's
payment of the employee stock ownership plan debt is based upon equal
installments of principal over a 12-year period, assuming a combined federal
and state income tax rate of 38.0%. Interest income earned by DutchFork
Bancshares on the loan to the employee stock ownership plan offsets the
interest paid on the loan by Newberry Federal. No reinvestment is assumed
on proceeds contributed to fund the employee stock ownership plan.
Applicable accounting principles require that compensation expense for the
employee stock ownership plan be based upon shares committed to be released
and that unallocated shares be excluded from earnings per share
computations. The valuation of shares committed to be released would be
based upon the average market value of the shares during the year, which,
for purposes of this calculation, was assumed to be equal to the $10.00 per
share purchase price. See "Management of Newberry Federal--Benefits--
Employee Stock Ownership Plan."
(2) In calculating the pro forma effect of the stock-based incentive plan, it is
assumed that the required stockholder approval has been received, that the
shares were acquired by the stock-based incentive plan at the beginning of
the respective period in open market purchases at the $10.00 per share
purchase price, that 20% of the amount contributed was an amortized expense
during the period, and that the combined federal and state income tax rate
is 38.0%. The issuance of authorized but unissued shares of the common
stock instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.85%.
For purposes of this table, shares issued under the stock-based incentive
plan vest at the rate of 20% per year and compensation expense is recognized
on a straight-line basis over each vesting period. If the fair market value
per share is greater than $10.00 per share on the date shares are awarded
under the stock-based incentive plan, total stock-based incentive plan
expense would be greater. The total estimated stock-based incentive plan
expense was multiplied by 20%, which is the total percent of shares for
which expense is recognized in the first year.
The following table shows the estimated pro forma net income and
stockholders' equity per share if shares for the stock-based incentive plan
were authorized but unissued shares instead of repurchased shares. The table
also shows the estimated pre-tax stock-based incentive plan expense.
Minimum Maximum 15% Above
of of Maximum
Estimated Estimated of
Valuation Valuation Estimated
Range Range Valuation
Range
------------- ------------- -------------
Pro forma net income per share:
Three months ended December 31, 1999 $ 0.37 $ 0.29 $ 0.26
Year ended September 30, 1999 $ 1.26 $ 0.99 $ 0.90
Pro forma stockholders' equity per share:
At December 31, 1999 $ 23.24 $ 19.33 $ 17.89
At September 30, 1999 $ 24.17 $ 20.12 $ 18.63
Pre-tax stock-based incentive plan expense:
Three months ended December 31, 1999 $12,000 $17,000 $19,000
Year ended September 30, 1999 $50,000 $67,000 $77,000
29
NEWBERRY FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income for each of the years in the
two year period ended September 30, 1999 have been audited by Clifton D.
Bodiford, certified public accountant, whose report on these Consolidated
Statements of Income appears on page F-2 of this prospectus. The results of
operations for the three months ended December 31, 1999 and 1998, which are
unaudited, includes all adjustments which, in the opinion of management, are of
a normal recurring nature and are necessary for a fair presentation of these
interim periods. The results of operations for the three months ended December
31, 1999 are not necessarily indicative of the results that may be expected for
the fiscal year ending September 30, 2000. These statements should be read in
conjunction with the Consolidated Financial Statements and related Notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus.
Three Months Ended Year Ended
December 31, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ---------- ------------ -----------
(Unaudited)
Interest income:
Loans receivable (Notes 1 and 3)........................... $1,478,184 $1,452,462 $ 5,780,396 $ 5,729,183
Investments (Notes 1 and 2)................................ 596,012 126,255 5,874,925 4,445,304
Mortgage-backed and related securities (Notes 1 and 2)..... 1,632,430 1,300,694 465,361 1,539,770
Other interest-earning assets.............................. 67,543 100,709 368,890 585,088
---------- ---------- ----------- -----------
Total interest income................................ 3,774,169 2,980,120 12,489,572 12,299,345
---------- ---------- ----------- -----------
Interest expense:
Interest expense on deposit accounts (Note 5).............. 1,622,930 1,598,975 5,989,748 6,252,185
Federal Home Loan Bank advances (Note 6)................... 494,115 315,750 1,438,133 1,290,250
Other borrowings purchased................................. 25,791 6,603 61,823 12,744
---------- ---------- ----------- -----------
Total interest expense............................... 2,142,836 1,921,328 7,489,704 7,555,179
---------- ---------- ----------- -----------
Net interest income........................................... 1,631,333 1,058,792 4,999,868 4,744,166
Provision for loan losses (Notes 1 and 3).................. 160,000 10,000 142,000 85,000
---------- ---------- ----------- -----------
Net interest income after provision for loan losses........ 1,471,333 1,048,792 4,857,868 4,659,166
---------- ---------- ----------- -----------
Noninterest income:
Gain (loss) on sales of securities, net.................... -- 10,366 194,170 605,752
Loan origination and commitment fees (Note 1).............. 15,083 56,500 138,449 149,536
Profit on sale of loans.................................... 303 -- -- 19,865
Loan servicing fees (Note 1)............................... 16,841 21,816 76,304 92,754
Bank service charges....................................... 172,662 147,960 585,229 499,239
Loan late charges.......................................... 12,650 13,061 50,669 52,014
Other...................................................... 23,640 28,843 110,245 116,630
---------- ---------- ----------- -----------
Total noninterest income............................. 241,179 278,546 1,155,066 1,535,790
---------- ---------- ----------- -----------
Noninterest expense:
Compensation and benefits.................................. 552,792 440,767 2,036,812 2,081,383
Occupancy and equipment.................................... 78,456 67,939 295,511 304,312
SAIF deposit insurance premium............................. 20,594 19,755 82,298 81,575
Foreclosed real estate expenses............................ 294 2,622 7,651 166
Furniture and equipment.................................... 100,614 96,470 378,450 295,428
Professional fees.......................................... 76,896 34,692 177,696 109,784
Telephone and postage...................................... 38,002 43,039 156,575 146,468
Insurance.................................................. 10,738 10,267 41,076 42,603
Marketing.................................................. 48,225 42,420 153,569 136,984
Data processing............................................ 79,708 50,864 300,301 197,782
Supplies and printing...................................... 15,964 17,505 72,451 67,014
OTS assessments............................................ 11,704 13,146 48,328 51,819
Meetings................................................... 5,135 10,476 68,858 46,829
Bank service charges....................................... 8,620 9,166 33,666 42,359
Loan expenses.............................................. 9,856 23,842 77,211 73,553
Transaction account charges................................ 12,781 9,402 43,816 46,697
Automated teller system.................................... 6,183 4,347 23,473 17,497
Contributions.............................................. 103,889 17,471 111,578 247,939
Other...................................................... 34,877 26,510 118,268 119,004
---------- ---------- ----------- -----------
Total noninterest expense............................ 1,215,328 940,700 4,227,588 4,109,196
---------- ---------- ----------- -----------
Income before income taxes................................. 497,184 386,638 1,785,346 2,085,760
Provision for income taxes (Notes 1 and 7).................... 198,770 154,235 771,016 834,304
---------- ---------- ----------- -----------
Net income.................................................... $ 298,414 $ 232,403 $ 1,014,330 $ 1,251,456
========== ========== =========== ===========
See accompanying notes.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Information" and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this prospectus.
General
Newberry Federal's results of operations depend primarily on net interest
income, which is the difference between the interest income earned on Newberry
Federal's interest-earning assets, such as loans and securities, and the
interest expense on its interest-bearing liabilities, such as deposits and
borrowings. Newberry Federal also earns non-interest income primarily from
gains from the sale of securities and service charges and other fees earned on
deposit accounts and loans. Newberry Federal's non-interest expenses primarily
consist of employee compensation and benefits, occupancy expense, advertising
and other operating expenses. Newberry Federal's results of operations are also
affected by general economic and competitive conditions, notably changes in
market interest rates, government policies and regulations. Newberry Federal
exceeded all of its regulatory capital requirements at December 31, 1999. In
addition to serving the financial service needs of consumers within its primary
market area, Newberry Federal has demonstrated its commitment to its local
communities through philanthropy. Since 1990, it has made monetary gifts and
donations totalling $1.7 million to various cultural, educational and civic
organizations operating within its primary market area. Newberry Federal
intends to continue its tradition of local community support after the
conversion.
Forward Looking Statements
This prospectus contains forward-looking statements that are based on
assumptions and describe future plans, strategies, and expectations of Newberry
Federal and DutchFork Bancshares. These forward-looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Newberry Federal's
and DutchFork Bancshares' 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 Newberry Federal and DutchFork
Bancshares and their subsidiaries include, but are not limited to, changes in
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality and composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in Newberry Federal's and DutchFork
Bancshares' 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.
Operating Strategy
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.
Going forward, one of management's objectives is to reduce Newberry Federal's
above average exposure to rising interest rates. Rising market interest rates
would likely reduce Newberry Federal's net interest income because its interest-
bearing liabilities, which are primarily short-term borrowings and short-term
deposits, would reprice faster than its interest-earning assets, which include a
large portion of fixed-rate loans and long-term investment securities. Newberry
Federal will invest its position of the net offering proceeds in short-term U.S.
Government agency securities and mortgage-backed securities to the extent
necessary to comply with the interest rate risk measure that the Office of
Thrift Supervision has imposed as a condition of approval of the conversion. See
"--Management of Interest Rate Risk and Market Risk Analysis" for further
information. Additionally, subject to market conditions, Newberry Federal may
also use the offering proceeds raised in the conversion to increase its
investment in adjustable-rate mortgage loans and shorter term commercial and
consumer loans, including modular home loans that Newberry Federal would
originate directly.
31
Comparison of Financial Condition at December 31, 1999 and September 30, 1999
Total assets increased by $15.4 million from September 30, 1999, to $226.6
million at December 31, 1999. Loans receivable decreased by $536,000 as loan
repayments exceeded originations, reflecting the weak demand for loans in
Newberry Federal's market area. Investment securities available-for-sale
decreased $66,000, primarily due to the purchase of adjustable-rate securities
as a hedge against the fixed-rate loans in the loan portfolio. Mortgage-backed
securities held-for-investment decreased $134,000 due to repayments and
prepayments. Mortgage-backed securities available-for-sale increased $13.0
million as a result of purchases exceeding both payments and sales by $13.0
million. Management invests funds in private issues of mortgage-backed
securities to achieve higher yields and an overall shorter weighted average
maturity than may be obtained solely through investment in U.S. government
guaranteed mortgage-backed securities. The lack of a government guarantee is
partially offset by the sinking funds attributable to most private issues. A
sinking fund is a contractual obligation that requires the issuer to retire a
specified portion of the mortgage-backed securities debt each year. Deposit
accounts increased $10.9 million from September 30, 1999 to December 31, 1999.
Management attributes this growth to competitive pricing and the closing of
branches of other banks in its primary market area. The funds generated from
loan repayments, securities prepayments and maturities and increased deposit
accounts were partially used to reduce Federal Home Loan Bank advances and other
borrowings, with the remaining funds invested in cash and cash equivalents.
Cash and cash equivalent balances were also higher at December 31, 1999 in
anticipation of Year 2000 needs.
At December 31, 1999, Newberry Federal had a $19.7 million accounts payable
for securities purchases that settled after that date. At September 30, 1999,
Newberry Federal had a $8.9 million accounts payable for securities purchases
that settled after that date.
At December 31, 1999, total equity was $16.1 million which consisted of
retained earnings of $20.8 million reduced by a $4.7 million unrealized loss,
net of taxes, on the investment securities and mortgage-backed securities
portfolios classified as available-for-sale. Because Newberry Federal has a
substantial portfolio of investment securities and mortgage-backed securities
available-for-sale, the market values of these securities will fluctuate
significantly as a result of changes in market interest rates. See "Risk
Factors--Newberry Federal's capital levels can fluctuate greatly with changes in
market interest rates because of its large investment in long-term fixed-rate
U.S. Government agency securities, long-term zero coupon bonds and certain deep
discounted fixed-rate collateralized mortgage obligations."
Comparison of Operating Results for the Three Months Ended December 31, 1999 and
1998
Net Income. Net income increased from $232,000 for the three months ended
December 31, 1998 to $298,000 for the same period in 1999 primarily as a result
of an increase in net interest income of $573,000 partially offset by an
increase in the provision for loan losses of $150,000, a decrease in noninterest
income of $37,000 and an increase in noninterest expenses of $275,000.
Net Interest Income. Net interest income increased from $1.1 million for the
three months ended December 31, 1998 to $1.6 million for the same period in 1999
due to an increase of 0.26% in the average rate received on investments in
mortgage-backed securities due to improved yields on mortgage-backed securities,
along with an increase of $10.3 million in the average balance of these
securities. Interest expense increased by $222,000 due to an increase of $6.9
million in deposits and an increase of $23.6 million in Federal Home Loan Bank
advances and other borrowings while the average rate paid on interest-bearing
liabilities declined by 0.18%. During the three months ended December 31, 1999,
Newberry Federal borrowed $2.1 million from the Federal Home Loan Bank to
purchase adjustable rate mortgage-backed securities indexed to the London
InterBank Offered Rate and collateralized mortgage obligations in an arbitrage
to realize the spread between the rate earned on the securities and the rate
paid on the borrowings. Newberry Federal also borrowed funds to increase cash
reserves by $2.5 million in anticipation of Year 2000 needs.
Provision for Loan Losses. Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level that
management considers adequate to provide for estimated losses based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, any specified impaired loans, and economic conditions. The
provision for loan losses increased from $10,000 for the three months ended
December 31, 1998 to $160,000 for the
32
three months ended December 31, 1999. Management deemed the increase in the
provision for loan losses warranted based upon its evaluation of current
economic conditions, particularly the recent rise in interest rates and gasoline
prices, and their adverse effect on the ability of Newberry Federal's consumer
loan borrowers to repay their loans. The vast majority of Newberry Federal's
consumer loan borrowers are low-income or middle-income individuals who have to
commute above average distances to work because they live in rural areas. The
recent rise on gasoline prices adversely affects their ability to meet their
consumer loan obligations because the higher prices divert available funds away
from consumer debt service. Furthermore, if they have adjustable rate mortgage
loans, the recent rise in interest rates leads to higher mortgage debt service
obligations and, based on historical experience, these individuals tend to
default on their consumer loan obligations in order to satisfy their mortgage
loan obligations. Management deemed the allowance for loan losses of $332,000 at
December 31, 1999 as adequate at that date. 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 Newberry Federal's control. While Newberry Federal 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. See "Business of Newberry Federal Savings Bank--Lending
Activities--Allowance for Loan Losses" for further information.
Noninterest Income. Noninterest income decreased from $279,000 for the three
months ended December 31, 1998 to $241,000 for the same period in 1999 primarily
as a result of a decrease in loan origination and commitment fees of $41,000
caused by the decline in loan origination volume. Offsetting this decrease was
an increase in bank service charges of $25,000 due to restructuring of fee
schedules.
Noninterest Expense. Noninterest expense increased from $941,000 for the
three months ended December 31, 1998 to $1.2 million for the three months ended
December 31, 1999 primarily as a result of increases in compensation and
benefits of $112,000, data processing expense of $29,000, professional fees of
$42,000 and other expenses of $8,000. Compensation and benefits increased due
to general salary and benefit increases as well as increased accruals for
incentive compensation based on earnings performance. Data processing expense
and professional fees increased as a result of Year 2000-related expenditures.
Provision for Income Taxes. The provision for income taxes increased for the
three months ended December 31, 1999 compared to the same quarter in the prior
year as a result of increased income before income taxes.
Comparison of Financial Condition at September 30, 1999 and 1998
Total assets increased from $182.8 million at September 30, 1998 to $211.2
million at September 30, 1999 primarily as a result of an increases in
investment securities available-for-sale of $15.5 million and mortgage-backed
securities available-for-sale of $11.7 million. These securities purchases were
funded with Federal Home Loan Bank advances and other borrowed funds. Because
of low loan demand, Newberry Federal has maintained a significant investment in
high quality, highly liquid investment and mortgage-backed securities that offer
competitive returns. Loans receivable increased by $4.1 million due to general
loan growth. Deposit accounts decreased $4.2 million. Management attributes
this decrease to customers withdrawing funds for investment in non-deposit
alternative investments.
At September 30, 1999, total equity was $16.7 compared to $18.8 million at
September 30, 1998. This decline was caused by an increase in the unrealized
loss, net of taxes, on securities available for sale from an unrealized loss of
$766,000 at September 30, 1998 to an unrealized loss of $3.9 million at
September 30, 1999 due to an increase in market interest rates. See "Risk
Factors--Newberry Federal's capital levels can fluctuate greatly with changes in
market interest rates because of its large investment in long-term fixed-rate
U.S. Government agency securities, long-term zero coupon bonds and certain deep
discounted fixed-rate collateralized mortgage obligations."
33
Comparison of Operating Results for the Years Ended September 30, 1999 and 1998
Net Income. Net income decreased from $1.3 million in 1998 to $1.0 million
in 1999 primarily as a result of an increase in the provision for loan losses of
$57,000, a decrease in noninterest income of $381,000 and an increase in
noninterest expenses of $118,000.
Net Interest Income. Net interest income increased from $4.7 million in 1998
to $5.0 million in 1999 primarily as a result of an increase in the ratio of
interest-earning assets to interest-bearing liabilities from 108.02 to 108.16
and a slight increase in the interest rate spread from 2.40% to 2.44%, both
increases a result of improved yields on mortgage-backed securities.
Provision for Loan Losses. The provision for loan losses increased from
$85,000 in 1998 to $142,000 in 1999 primarily as a result of an increase in
consumer loan charge-offs from $106,000 in 1998 to $161,000 in 1999. See
"Business of Newberry Federal Savings Bank--Lending Activities--Allowance for
Loan Losses" for further information.
Noninterest Income. Noninterest income decreased from $1.5 million in 1998
to $1.2 million in 1999. Gains on sales of securities, net, decreased from
$606,000 in 1998 to $194,000 in 1999. In 1998 management sold securities to
restructure the portfolio to decrease the weighted average term and increase the
weighted average yield of the portfolio. In 1999 market interest rates rose,
decreasing imbedded gains in the securities portfolio. Newberry Federal manages
its unrealized losses through a continuing attempt to match maturities of assets
and liabilities while seeking to maintain a profit margin. On a quarterly
basis, Newberry Federal conducts a detailed review of its interest rate risk
exposure and the effects on capital of any restructuring of the portfolio that
might be deemed appropriate. As part of this process, Newberry Federal takes
advantage of opportunities to shorten asset maturities and has taken steps to
increase the percent of adjustable-rate mortgage-backed securities. In
addition, Newberry Federal attempts to extend the maturity of liabilities when
borrowing money and occasionally uses interest rate swaps to limit the effects
of any market interest rate fluctuation. See "Business of Newberry Federal
Savings Bank--Investment Activities" for information regarding the use of
interest rate swaps. Loan servicing fees decreased from $93,000 in 1998 to
$76,000 in 1999 as a result of a decline in the servicing portfolio due to
prepayments, maturities and refinancings. Offsetting these decreases was an
increase in service charges due to the restructuring of fee schedules.
Noninterest Expense. Noninterest expense increased from $4.1 million in 1998
to $4.2 million in 1999 primarily as a result of increases in data processing
expense of $103,000 and professional fees of $68,000 as a result of Year 2000-
related expenditures. In addition, furniture and equipment expense increased
$83,000 due to remodeling and improvements at the Chapin branch office and
repairs at the Prosperity branch office.
Provision for Income Taxes. The provision for income taxes decreased between
1998 and 1999 as a result of lower income before income taxes, offset by a
slightly higher state tax rate in 1999 because of the absence in 1999 of income
from state tax exempt securities.
34
Average Balances, Interest and Average Yields/Cost
The following table presents certain information for the periods indicated
regarding average balances of assets and liabilities, as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and the resulting
average yields and costs. The yields and costs for the periods indicated are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. Average balances were
derived from monthly balances.
Three Months Ended
December 31,
At December 31, ----------------------------------------------------------
1999 1999 1998
------------------- --------------------------- ------------------------------
Average Average
Yield/ Average Yield/ Average Yield/
Balance Rate Balance Interest Rate Balance Interest Rate
---------- -------- --------- --------- ------- --------- --------- ----------
(Dollars in thousands)
Interest earning assets:
Loans receivable (1)........................... $ 74,788 7.91% $ 74,946 $1,478 7.89% $ 71,824 $1,452 8.09%
Mortgage-backed securities (2)................. 114,220 5.72 104,976 1,632 6.22 94,631 1,411 5.96
Investment securities (3)...................... 23,005 7.76 22,967 595 7.77 3,573 59 6.61
Interest-bearing deposits...................... 1,368 3.30 2,052 68 3.31 2,869 29 4.04
Federal funds sold............................. -- -- -- -- -- 2,387 28 4.69
Other.......................................... 137 2.92 133 1 3.01 73 1 5.48
-------- -------- ------ -------- ------
Total interest-earning assets............ 213,518 7.07 205,074 3,774 7.36 175,357 2,980 6.80
Noninterest-earning assets..................... 13,082 11,009 7,305
-------- -------- --------
Total assets............................. $226,600 $216,083 $182,662
======== ======== ========
Interest-bearing liabilities:
Deposits:
Passbook accounts........................... $ 17,381 2.83 $ 17,490 $ 123 2.81 $ 17,538 $ 123 2.81
Money market and NOW accounts.............. 27,619 2.32 28,192 160 2.27 26,111 141 2.16
Certificates of deposit..................... 103,437 5.18 103,229 1,339 5.19 97,784 1,335 5.46
-------- -------- ------ -------- ------
Total deposits........................ 148,437 4.37 148,911 1,622 4.36 141,433 1,599 4.52
Federal Home Loan Bank advances................ 35,740 5.53 35,073 494 5.63 20,600 316 6.14
Other borrowings............................... 5,325 2.03 4,417 27 2.45 554 6 4.33
-------- -------- ------ -------- ------
Total interest-bearing liabilities....... 189,502 4.52% 188,401 2,143 4.55% 162,587 1,921 4.73%
Noninterest-bearing liabilities................ 20,970 10,911 1,104
-------- -------- --------
Total liabilities........................ 210,472 199,312 163,691
Total retained earnings........................ 16,128 16,771 18,971
-------- -------- --------
Total liabilities and retained earnings.. $226,600 $216,083 $182,662
======== ======== ========
Net interest-earning assets.................... $ 24,016 $ 16,673 $ 12,770
Net interest income/interest rate spread (4)... 2.55% $1,631 2.81% $1,059 2.07%
Net interest margin as a percentage............ 3.06% 3.18% 2.42%
of interest-earning assets (5)
Ratio of interest-earning assets to............ 112.67% 108.85% 107.85%
interest-bearing liabilities
___________________________________
(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,
stock in the Federal Home Loan Bank of Atlanta and mutual funds.
(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.
35
Year Ended September 30,
-----------------------------------------------------------------
1999 1998
--------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------- --------- -------- --------- -------- --------
(Dollars in thousands)
Interest earning assets:
Loans receivable (1)............................. $ 73,561 $ 5,780 7.86% $ 69,493 $ 5,729 8.24%
Mortgage-backed securities (2)................... 90,625 5,708 6.30 82,342 4,892 5.94
Investment securities (3)........................ 11,884 800 6.73 15,968 1,258 7.88
Interest-bearing deposits........................ 1,878 95 5.06 2,253 154 6.84
Federal funds sold............................... 2,059 101 4.91 2,553 265 10.38
Other............................................ 92 6 6.52 43 1 2.33
-------- ------- -------- -------
Total interest-earning assets.............. 180,099 12,490 6.94 172,652 12,299 7.12
Noninterest-earning assets....................... 7,081 7,388
-------- --------
Total assets............................... $187,180 $180,040
======== ========
Interest-bearing liabilities:
Deposits:
Passbook accounts............................. $ 17,588 493 2.80 $ 17,780 508 2.86
Money market and NOW accounts................. 26,632 548 2.06 23,886 471 1.97
Certificates of deposit....................... 95,220 4,949 5.20 94,330 5,273 5.59
-------- ------- -------- -------
Total deposits.......................... 139,440 5,990 4.30 135,996 6,252 4.60
Federal Home Loan Bank advances.................. 24,944 1,438 5.76 23,100 1,290 5.58
Other borrowings................................. 2,121 62 2.92 737 13 1.76
-------- ------- -------- -------
Total interest-bearing liabilities......... 166,505 7,490 4.50% 159,833 7,555 4.73%
-------- --------
Noninterest-bearing liabilities.................. 2,013 1,795
-------- --------
Total liabilities.......................... 168,518 161,628
Total retained earnings.......................... 18,662 18,412
-------- --------
Total liabilities and retained earnings.... $187,180 $180,040
======== ========
Net interest-earning assets...................... $ 13,594 $ 12,819
Net interest income/interest rate spread (4)..... $ 5,000 2.44% $ 4,744 2.40%
Net interest margin as a percentage.............. 2.78% 2.75%
of interest-earning assets (5)
Ratio of interest-earning assets to.............. 108.16% 108.02%
interest-bearing liabilities
___________________________________
(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,
stock in the Federal Home Loan Bank of Atlanta and mutual funds.
(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.
36
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on the
interest income and interest expense of Newberry Federal. The rate column shows
the effects attributable to changes in rate (changes in rate multiplied by prior
volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The net column represents the sum
of the prior columns. For purposes of this table, changes attributable to
changes in both rate and volume, which cannot be segregated, have been allocated
proportionately based on the absolute value of the change due to rate and the
change due to volume.
Three Months Ended Year Ended
December 31, 1999 September 30, 1999
Compared to Compared to
Three Months Ended Year Ended
December 31, 1998 September 30, 1998
--------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------- ----------------------
Rate Volume Net Rate Volume Net
---------- --------- -------- ---------- --------- --------
(Dollars in thousands)
Interest-earning assets:
Loans..................................... $ (39) $ 65 $ 26 $(411) $ 462 $ 51
Mortgage-backed securities (1)............ 65 156 221 313 503 816
Investment securities (1)................. 190 392 582 (152) (306) (458)
Interest-earning deposits with banks...... 1 (8) (7) (38) (21) (59)
Other borrowings.......................... -- (28) (28) (135) (29) (164)
Other..................................... -- -- -- 3 2 5
------- ------- ---- ----- ----- -----
Total interest-earning assets....... 217 577 794 (420) 611 191
Interest-bearing liabilities:
Deposits:
Passbook accounts...................... -- -- -- (10) (5) (15)
Money market and NOW accounts......... 8 11 19 22 55 77
Certificates of deposit................ (971) 975 4 (370) 46 (324)
Federal Home Loan Bank advances........ (1,336) 1,514 178 44 104 148
Federal funds borrowed................. (6) 27 21 19 30 49
Total interest-bearing
liabilities...................... (2,305) 2,527 222 295 (230) (65)
------- ------- ---- ----- ----- -----
Increase(decrease) in net
interest income........................... $ 2,522 $(1,950) $572 $(125) $ 381 $ 256
======= ======= ==== ===== ===== =====
_____________________________
(1) Includes securities available-for-sale and held-to-maturity on a tax
equivalent basis.
Management of Interest Rate Risk and Market Risk Analysis
Qualitative Aspects of Market Risk. Newberry Federal is particularly subject
to interest rate risk. Like most financial institutions, a large percentage of
Newberry Federal's interest-earning assets have longer maturities than the
maturities of Newberry Federal's interest-bearing liabilities which reduces
Newberry Federal's income as interest rates rise. In addition, however,
Newberry Federal's capital levels can fluctuate greatly with changes in market
interest rates as a result of its large investment in long-term fixed-rate U.S.
Government agency securities, certain deep discounted, fixed-rate collateralized
mortgage obligations and long-term zero coupon bonds. At December 31, 1999,
Newberry Federal held $33.3 million of these securities, or 14.7% of its total
assets.
Due to Newberry Federal's above average interest rate risk, the Office of
Thrift Supervision has imposed as an approval condition to the conversion that
Newberry Federal maintain a 4% net portfolio value ratio (a ratio equal to
Newberry Federal's net portfolio value divided by the present value of its
assets) after giving effect to a 2% change in interest rates. This interest
rate risk measure quantifies the effect of a 2% increase or decrease in interest
rates on Newberry Federal's net portfolio value ratio. A higher ratio indicates
a lower level of interest rate risk. See "Risk Factors--After the conversion,
Newberry Federal will invest in lower yielding securities to the extent
necessary to comply with Office of Thrift Supervision conditions on its approval
of the conversion requiring Newberry Federal to manage more closely its risk of
fluctuations in interest rates."
37
As shown in the table that follows, at December 31, 1999, Newberry Federal's
net portfolio value ratio after giving effect to a 2% increase and decrease in
interest rates was (0.36)% and 11.50%, respectively. If the Office of Thrift
Supervision's condition of approval had been in effect at December 31, 1999, the
(0.36)% ratio would have not complied with the condition. These ratios,
however, do not give effect to steps that management would take, including
restructuring Newberry Federal's securities portfolio, to counteract the change
in interest rates.
Newberry Federal will invest its portion of the net offering proceeds in
short-term U.S. government and agency securities and mortgage-backed securities
to the extent necessary to comply with the Office of Thrift Supervision interest
rate risk measure. These securities typically are lower yielding than the
longer-term investment securities currently held by Newberry Federal. Assuming
the conversion was completed on December 31, 1999, Newberry Federal's net
portfolio value ratio after giving effect to a 2% change in interest rates would
have been 3.68%, 4.42%, 5.10% and 5.88%, assuming net offering proceeds
contributed to Newberry Federal of $8.3 million at the minimum, $10.0 million at
the midpoint, $11.5 million at the maximum and $13.3 million at the maximum, as
adjusted. Upon the completion of the conversion, Newberry Federal expects to
comply with the 4% interest rate risk measure imposed by the Office of Thrift
Supervision. If the conversion is completed at the minimum of the offering
range, resulting in less than a 4% interest rate risk measure, Newberry Federal
intends to restructure the securities portfolio to the extent necessary to
achieve compliance with the 4% interest rate risk measure, unless otherwise
directed by the Office of Thrift Supervision.
If market interest rates continue to rise and Newberry Federal is not able to
comply with the Office of Thrift Supervision interest rate risk measure after
the conversion, Newberry Federal's income and capital positions would be
expected to suffer unless management restructures its securities portfolio by
disposing of the interest rate sensitive securities and increasing its
investment in shorter-term securities. While all of the interest rate sensitive
securities are classified as available-for-sale, in a rising interest rate
environment these securities, if sold, would likely be sold at a loss. If
Newberry Federal fails to take corrective action to achieve compliance with the
interest rate risk requirement after the conversion, the Office of Thrift
Supervision may take supervisory action.
Because of weak loan demand in its primary market area, Newberry Federal has
invested in long-term fixed-rate U.S. Government agency securities, long-term
zero coupon bonds and certain deep discounted, fixed-rate collateralized
mortgage obligations with the goal of generating stable and competitive returns.
These securities have above average interest rate risk associated with them
because of their long-term characteristics. Newberry Federal intends to
maintain its current position in these securities to the extent it does not
violate the Office of Thrift Supervision interest rate risk measure. Newberry
Federal does not intend to invest its portion of the net offering proceeds or
other funds in similar securities immediately after the conversion. Changes in
interest rates and changes in Newberry Federal's interest rate risk profile,
however, may provide opportunities for Newberry Federal to invest further in
these types of securities.
Newberry Federal maintains a trading account for certain classes of
collateralized mortgage obligations. Newberry Federal does not have any foreign
currency exchange rate risk or commodity price risk. Newberry Federal does
invest in mortgage derivative securities, primarily collateralized mortgage
obligations, whose market values decrease in a rising interest rate environment.
At December 31, 1999, Newberry Federal engaged in an interest rate swap
agreement. At December 31, 1999, this swap agreement covered approximately 20%
of the floating rate collateralized mortgage obligations owned by Newberry
Federal with an 8% interest rate cap. For information regarding the sensitivity
to interest rate risk of Newberry Federal's interest-earning assets and
interest-bearing liabilities, see the tables under "Business of Newberry Federal
Savings Bank--Lending Activities--Maturity of Loan Portfolio," "--Investment
Activities" and "--Deposit Activities and Other Sources of Funds--Deposit
Accounts."
Newberry Federal has sought to reduce the exposure of its earnings to changes
in market interest rates by attempting to manage the mismatch between asset and
liability maturities and interest rates. Newberry Federal seeks to achieve this
objective by increasing the interest rate sensitivity of its interest-earning
assets by originating, for its portfolio, adjustable-rate mortgage loans and
shorter term commercial and consumer loans, as well as decrease the average
lives of its investment securities and mortgage-backed securities portfolios.
Newberry Federal relies on retail deposits as its primary source of funds.
Newberry Federal also seeks to sell conforming fixed-rate mortgage loans with
maturities of more than 15 years. Management believes retail deposits, compared
to brokered deposits, reduce the effects of interest rate fluctuations because
they generally represent a more stable source of
38
funds. Newberry Federal also intends to decrease the interest rate sensitivity
of its interest-bearing liabilities by attempting to increase the maturity of
its borrowings and deposit accounts.
In managing its asset/liability mix and in an effort to enhance net interest
income, Newberry Federal, depending on the relationship between long- and short-
term interest rates, market conditions and consumer preference, often places
more emphasis on managing short-term net interest margin than on better matching
the interest rate sensitivity of its assets and liabilities. Management
believes that the increased net interest income resulting from a mismatch in the
maturity of its asset and liability portfolios can, during periods of declining
or stable interest rates, provide high enough returns to justify the increased
exposure to sudden and unexpected increases in interest rates.
Quantitative Aspects of Market Risk. Newberry Federal primarily utilizes an
interest rate risk report prepared by the Office of Thrift Supervision to review
its level of interest rate risk. The following table, which was prepared by the
Office of Thrift Supervision, presents the change in Newberry Federal's net
portfolio value at December 31, 1999, that would occur upon an immediate change
in interest rates based on Office of Thrift Supervision assumptions, but without
effect to any steps that management might take to counteract that change. Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. A higher net portfolio value ratio
indicates a lower level of interest rate risk.
Net Portfolio Value as % of
Present Value of Assets
Change in ----------------------------------------
Interest Rates Net Portfolio Value Net Portfolio
In Basis Points --------------------------------------------------------- Value
(Rate Shock) Amount Change % Change Ratio Change (1)
- --------------- ------------ ----------- -------------- --------------- --------------
(Dollars in thousands)
300 $(9,607) $(26,464) (157)% (4.92)% (1,238)
200 (746) (17,603) (104) (0.36) (738)
100 8,381 (8,477) (50) 3.88 (358)
Static 16,858 -- -- 7.46 --
(100) 24,728 7,871 47 10.52 306
(200) 27,504 10,647 63 11.50 404
(300) 27,219 10,361 61 11.33 387
____________________________
(1) Expressed in basis points.
As presented in the above table, based on assumptions by the Office of Thrift
Supervision as of December 31, 1999, it is estimated that a sudden 200 basis
point increase in interest rates would decrease Newberry Federal's net portfolio
value by $17.6 million, or 104.0%.
The Office of Thrift Supervision has delayed the implementation of a
regulation that would require an institution with higher than "normal" interest
rate risk to deduct an interest rate risk component from its risk-based capital
for purposes of calculating its risk-based capital requirements. An institution
with a "normal" level of interest rate risk is defined as one whose "measured
interest rate risk" is less than 2%. Measured interest rate risk, which is
expressed as a percentage, is defined as the change in net portfolio value as a
result of a 2% change in interest rates divided by the present value of total
assets. Assuming this regulation was in effect at December 31, 1999, Newberry
Federal's "measured interest rate risk" would have been 7.79%, indicating that
it had a higher than "normal" level of interest rate risk. Assuming this
regulation was implemented at December 31, 1999, the conversion was completed on
that date and Newberry Federal had invested its portion of the net conversion
proceeds as planned, Newberry Federal's "measured interest rate risk" would have
been 7.52%, 7.46%, 7.41% and 7.36%, assuming net offering proceeds contributed
to Newberry Federal of $8.3 million at the minimum, $10.0 million at the
midpoint, $11.5 million at the maximum and $13.3 million at the maximum, as
adjusted. None of these "measured interest rate risk" measures would have
caused Newberry Federal to fail to meet its regulatory risk-based capital
requirement at December 31, 1999. See "Regulation--Federal Savings Institution
Regulation--Capital Requirements" for a discussion of the regulatory capital
requirements applicable to Newberry Federal.
39
The Office of Thrift Supervision uses certain assumptions in assessing the
interest rate risk of savings associations. These assumptions relate to interest
rates, loan prepayment rates, deposit decay rates, and the market values of
certain assets under differing interest rate scenarios, among others. As with
any method of measuring interest rate risk, certain shortcomings are inherent in
the method of analysis presented in the foregoing table. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable rate mortgage loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, if interest rates change, expected rates of prepayments on loans and
early withdrawals from certificates could deviate significantly from those
assumed in calculating the table.
Liquidity and Capital Resources
Newberry Federal's most stable and traditional source of funding has been the
attraction and retention of deposit accounts, the success of which it believes
is based primarily on the strength and reputation of Newberry Federal, effective
marketing and rates paid on deposit accounts. Newberry Federal has a
significant market share of deposits in Newberry County. Due to the migration
of traditional savings balances to non-deposit investment products, including
the equity markets, annuities and mutual funds, the pool of retail deposit funds
held in financial institutions has contracted over time, resulting in Newberry
Federal relying more on other sources of funds.
Newberry Federal's primary sources of funds are deposits and proceeds from
principal and interest payments on loans and mortgage-backed securities. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition. Newberry
Federal generally manages the pricing of its deposits to be competitive and to
increase core deposit relationships. Other primary sources of funds include
borrowings from the Federal Home Loan bank of Atlanta, principal repayments on
loans and mortgage-backed securities, reverse repurchase agreements and sales of
loans.
Federal regulations require Newberry Federal to maintain minimum levels of
liquid assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 4.0% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less during
the preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency and corporate
securities and other obligations generally having remaining maturities of less
than five years. Newberry Federal has historically maintained its liquidity
ratio for regulatory purposes at levels in excess of those required. At
December 31, 1999, Newberry Federal's liquidity ratio for regulatory purposes
was 15.3%.
Newberry Federal's most liquid assets are cash and short-term investments.
The levels of these assets depend on Newberry Federal's operating, financing,
lending and investing activities during any given period. At December 31, 1999,
cash and short-term investments totaled $6.1 million. Newberry Federal has
other sources of liquidity if a need for additional funds arises, including
securities maturing within one year and the repayment of loans. Newberry
Federal may also sell securities available-for-sale, and use federal funds
purchased and Federal Home Loan Bank of Atlanta advances as sources of funds.
At December 31, 1999, Newberry Federal had the ability to borrow a total of
approximately $52.4 million from the Federal Home Loan Bank of Atlanta. On that
date, Newberry Federal had outstanding advances of $35.7 million.
At December 31, 1999, Newberry Federal had outstanding commitments to
originate loans of $1.1 million, $838,000 of which had fixed interest rates.
These loans are to be secured by properties located in its primary market area.
Newberry Federal anticipates that it will have sufficient funds available to
meet its current loan commitments. Loan commitments have, in recent periods,
been funded through liquidity or through Federal Home Loan Bank borrowings.
Certificates of deposit which are scheduled to mature in one year or less from
December 31, 1999 totaled $90.2 million. Management believes, based on past
experience, that a significant portion of such deposits will remain with
Newberry Federal. Based on the foregoing, in addition to Newberry Federal's
high level of core deposits and capital, Newberry Federal considers its
liquidity and capital resources sufficient to meet its outstanding short-term
and long-term needs.
40
Liquidity management is both a daily and long-term responsibility of
management. Newberry Federal 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 Newberry Federal requires funds beyond its ability to generate
them internally, it has additional borrowing capacity with the Federal Home Loan
Bank of Atlanta. It is anticipated that immediately upon completion of the
conversion, DutchFork Bancshares' and Newberry Federal's liquid assets will be
increased. See "Use of Proceeds."
The desired level of liquidity for Newberry Federal is determined by
management in conjunction with the Asset/Liability Committees of Newberry
Federal. The level of liquidity is based on management's strategic direction
for Newberry Federal's commitments to make loans and the Committees' assessment
of Newberry Federal's ability to generate funds. Historically, sources of
liquidity have included net deposits to savings accounts, amortizations and
prepayments of loans, Federal Home Loan Bank advances, reverse repurchase
agreements and sales of securities and loans held for sale.
Newberry Federal is subject to various regulatory capital requirements
imposed by the Office of Thrift Supervision. At December 31, 1999, Newberry
Federal was in compliance with all applicable capital requirements. See
"Regulation--Federal Savings Institution Regulation--Capital Requirements" and
"Regulatory Capital Compliance" and Note 12 of the Notes to Consolidated
Financial Statements.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this
prospectus have been prepared in conformity with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Unlike many
industrial companies, substantially all of the assets and liabilities of
Newberry Federal are monetary in nature. As a result, interest rates have a
more significant impact on Newberry Federal's performance than the general level
of inflation. Over short periods of time, interest rates may not necessarily
move in the same direction or in the same magnitude as inflation.
Impact of New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities. Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," addresses the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts and hedging
activities. As recently amended by Statement of Financial Standards No. 137,
the statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. On that date, hedging relationships shall be designed in
accordance with the statement. Earlier application is encouraged but is
permitted only at the beginning of any fiscal quarter that begins after issuance
of the statement. Earlier application of selected provisions of the statement
is not permitted. The statement shall not be applied retroactively to financial
statements of prior periods. The statement is not expected to have a material
adverse impact on the consolidated financial position or results of operations
of Newberry Federal.
Accounting for Mortgage-Backed Securities Retained After the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," issued in October 1998, amends Statement of
Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking
Activities," and Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," for years
beginning after December 15, 1998. Statement of Financial Accounting Standards
No. 134 allows entities with mortgage banking operations which convert pools of
mortgages into securities to classify these securities as available-for-sale,
trading, or held-to-maturity, instead of the current requirement to classify
these pools as trading. Newberry Federal adopted this standard on October 1,
1999, however, the impact was not material to the consolidated financial
statements.
41
BUSINESS OF DUTCHFORK BANCSHARES
General
DutchFork Bancshares was organized as a Delaware business corporation at the
direction of Newberry Federal in February 2000 to become the holding company for
Newberry Federal upon completion of the conversion. As a result of the
conversion, Newberry Federal will be a wholly owned subsidiary of DutchFork
Bancshares and all of the issued and outstanding capital stock of Newberry
Federal will be owned by DutchFork Bancshares.
Business
Before the completion of the conversion, DutchFork Bancshares will not engage
in any significant activities other than of an organizational nature. Upon
completion of the conversion, DutchFork Bancshares' business activity will be
the ownership of the outstanding capital stock of Newberry Federal and
management of the investment of proceeds retained from the conversion. In the
future, DutchFork Bancshares may acquire or organize other operating
subsidiaries. There are no current plans, arrangements, agreements or
understandings, written or oral, to do so.
Initially, DutchFork Bancshares will neither own nor lease any property but
will instead use the premises, equipment and furniture of Newberry Federal with
the payment of appropriate rental fees, as required by applicable law and
regulations.
Since DutchFork Bancshares will hold the outstanding capital stock of
Newberry Federal after the conversion, the competitive conditions applicable to
DutchFork Bancshares will be the same as those confronting Newberry Federal.
See "Business of Newberry Federal Savings Bank--Competition."
BUSINESS OF NEWBERRY FEDERAL SAVINGS BANK
General
Newberry Federal was founded in 1930 as a South Carolina-chartered mutual
savings association. Newberry Federal is regulated by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation. Newberry Federal's
deposits are insured to the maximum allowable amount by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation. Newberry Federal
is a member of the Federal Home Loan Bank System.
Newberry Federal is a traditional savings bank, specializing in the
acceptance of retail deposits from the general public in the areas surrounding
its four full-service banking offices and using those funds, together with funds
generated from operations and borrowings, to originate residential mortgage
loans and consumer loans, and to a lesser extent, construction, land and
commercial business loans. Newberry Federal originates loans primarily for
investment. However, Newberry Federal also sells loans, primarily conforming
fixed-rate mortgage loans with maturities of more than 15 years, in the
secondary market, while generally retaining the servicing rights. See "--Lending
Activities." Newberry Federal also invests in mortgage-backed securities, debt
and equity securities and other permissible investments. Newberry Federal's
revenues are derived principally from interest and fees on loans originated and
interest and dividends on investment and mortgage-backed securities. Newberry
Federal's primary sources of funds are deposits, principal and interest payments
on loans and investments and mortgage-backed securities and advances from the
Federal Home Loan Bank of Atlanta.
In addition to serving the financial service needs of consumers within its
primary market area, Newberry Federal has demonstrated its commitment to its
local communities through philanthropy. Since 1990 it has made monetary gifts
and donations totaling approximately $1.7 million to various cultural,
educational and civic organizations operating within its primary market area.
Beneficiaries include the Newberry Opera House, Newberry College, Piedmont
Technical College and the Newberry YMCA, among others. Newberry Federal intends
to continue its tradition of local community support after the conversion.
42
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. According to published statistics, Newberry County's 1999
population was approximately 35,000 and consisted of approximately 13,000
households. Lexington County's 1999 population was approximately 210,000 and
consisted of approximately 80,000 households. Between 1990 and 1999 Lexington
County's population increased approximately 25% while Newberry County's
population increased only 4.5%. For 1999 Newberry County's per capita income
($15,000) was less than both South Carolina ($17,700) and the U.S. ($20,600).
Lexington County's 1999 per capital income was $22,500. Likewise, for 1999
Newberry County's median household income ($32,000) was less than both South
Carolina ($35,900) and the U.S. ($39,800). Lexington County's 1999 median
household income was $46,600.
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 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. See "Risk Factors--
Competition has, and is expected to continue to, hurt Newberry Federal's net
interest income."
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.
43
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.
At September 30,
At December 31, -----------------------------------------------------
1999 1999 1998
-------------------------- -----------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------- ----------- -----------------------------------------------------
(Dollars in thousands)
Real estate loans:
One- to four-family.................... $50,139 65.75% $48,984 63.79% $44,543 61.78%
Commercial real estate (1)............. 10,077 13.21 9,794 12.75 9,119 12.65
Construction........................... 1,136 1.49 1,695 2.21 1,173 1.63
Land................................... 1,340 1.76 1,432 1.86 1,510 2.09
------- ------ ------- ------ ------- ------
Total real estate loans............. 62,692 82.21 61,905 80.61 56,345 78.15
------- ------ ------- ------ ------- ------
Consumer loans:
Second mortgage loans, home equity
loans and lines of credit........... 3,628 4.76 4,318 5.62 4,236 5.88
Automobile............................. 4,332 5.68 4,398 5.73 4,192 5.81
Other.................................. 3,776 4.95 4,278 5.57 4,709 6.54
------- ------ ------- ------ ------- ------
Total consumer loans................ 11,736 15.39 12,994 16.92 13,137 18.23
Commercial loans.......................... 1,833 2.40 1,892 2.47 2,614 3.63
------- ------ ------- ------ ------- ------
Total loans......................... 76,261 100.00% 76,791 100.00% 72,096 100.00%
====== ====== ======
Less:
Deferred loan origination fees
and discounts....................... (107) (108) (113)
Loans in process....................... (1,033) (1,175) (553)
Allowance for loan losses.............. (333) (184) (181)
------- ------- -------
Total loans, net.................... $74,788 $75,324 $71,249
======= ======= =======
At September 30,
------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------------------------------------------------------------------
(Dollars in thousands)
Real estate loans:
One- to four-family.................... $42,173 62.54% $41,138 64.60% $42,805 69.39%
Commercial real estate (1)............. 8,174 12.13 7,060 11.10 6,456 10.47
Construction........................... 969 1.44 2,520 3.96 432 0.70
Land................................... 1,172 1.74 901 1.42 862 1.40
------- ------ ------- ------ ------- ------
Total real estate loans............. 52,488 77.85 51,619 81.08 50,555 81.96
------- ------ ------- ------ ------- ------
Consumer loans:
Second mortgage loans, home equity
loans and lines of credit........... 2,953 4.38 1,656 2.60 2,881 4.67
Automobile............................. 4,819 7.15 4,439 6.98 4,394 7.12
Other.................................. 5,116 7.59 4,540 7.13 2,776 4.50
------- ------ ------- ------ ------- ------
Total consumer loans................ 12,888 19.12 10,635 16.71 10,051 16.29
Commercial loans.......................... 2,041 3.03 1,408 2.21 1,080 1.75
------- ------ ------- ------ ------- ------
Total loans......................... 67,417 100.00% 63,662 100.00% 61,686 100.00%
====== ====== ======
Less:
Deferred loan origination fees
and discounts....................... (118) (122) (126)
Loans in process....................... (1,110) (1,277) (324)
Allowance for loan losses.............. (192) (226) (265)
------- ------- -------
Total loans, net.................... $65,997 $62,037 $60,971
======= ======= =======
- --------------------------------------
(1) Also includes an immaterial amount of multi-family loans.
44
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.
45
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%.
Church loans are originated with fixed interest rates tied to the U.S. Treasury
Bill rate and with variable rates tied to the prime lending rate. At December
31, 1999, church loans totaled $1.4 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.
46
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 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.
47
Maturity of Loan Portfolio. The following table presents certain
information at December 31, 1999 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 do not
include undisbursed loan proceeds, net deferred loan origination costs and
allowance for loan losses.
At December 31, 1999
----------------------------------------------------------------------------------------
Multi-
One- to Family and
Four- Commercial Total
Family Real Estate Construction Land Consumer Commercial Loans
----------------------------------------------------------------------------------------
(In thousands)
Amounts due in:
One year or less........................ $ 4,974 $ 1,140 $1,136 $ 295 $ 5,782 $ 286 $13,613
After one year.......................... 250 53 -- 85 1,301 323 2,012
More than one year to three years....... 506 337 -- 51 2,121 237 3,252
More than three years to four years..... 667 624 -- 54 1,260 636 3,241
More than four years to five years...... 892 632 -- 255 971 247 2,997
More than five years to 10 years........ 9,496 2,651 -- 469 301 104 13,067
More than 10 years to 15 years.......... 15,723 2,004 -- 131 -- -- 17,858
More than 15 years...................... 17,631 2,636 -- -- -- -- 20,267
------- ------- ------------ ------ ------- ------ -------
Total amount due..................... $50,139 $10,077 $1,136 $1,340 $11,736 $1,833 $76,261
======= ======= ============ ====== ======= ====== =======
The following table presents, the dollar amount of all loans due after
December 31, 2000, which have fixed interest rates and floating or adjustable
interest rates.
Due After December 31, 2000
---------------------------------------------------
Fixed Adjustable Total
----------- ------------ -----------
(In thousands)
Real estate loans:
One- to four-family....................................... $22,587 $22,578 $45,165
Multi-family.............................................. -- 54 54
Commercial................................................ 4,056 4,827 8,883
Construction.............................................. -- -- --
Land...................................................... 280 765 1,045
------- ------- -------
Total real estate loans................................ 26,923 28,225 55,147
Consumer loans............................................... 5,684 269 5,953
Commercial loans............................................. 1,547 -- 1,547
------- ------- -------
Total loans............................................ $34,154 $28,494 $62,647
======= ======= =======
Loans to One Borrower. The maximum amount that Newberry Federal may lend
to one borrower is limited by regulation. At December 31, 1999, Newberry
Federal's regulatory limit on loans to one borrower was $3.1 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 $2.2 million and consisted of
commercial real estate loans and equity lines of credit. These loans were
performing according to their original terms at December 31, 1999 and had an
outstanding balance of $1.6 million at that date.
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.
48
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 sells loans, it generally retains the servicing
rights. Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure procedures. At December 31, 1999, Newberry Federal was servicing
$21.8 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.
49
The following table presents total loans originated, sold and repaid during
the periods indicated. Newberry Federal did not purchase any loans during the
periods indicated.
Three Months Ended Year Ended
December 31, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
(In thousands)
Loans at beginning of period................................ $76,791 $72,096 $72,096 $67,417
Originations:
Real estate:
One- to four-family................................ 960 5,653 13,007 11,926
Multi-family....................................... -- -- -- --
Commercial......................................... 552 103 1,142 1,990
Construction....................................... 643 260 1,373 1,831
Land............................................... 92 50 309 292
------- ------- ------- -------
Total real estate loans......................... 2,247 6,066 15,831 16,039
Consumer:
Second mortgage loans, home equity loans
and lines of credit............................. 377 757 2,571 2,798
Automobile......................................... 657 875 2,510 1,633
Education.......................................... -- -- 14 20
Other.............................................. 1,072 760 4,255 3,387
------- ------- ------- -------
Total consumer loans............................ 2,106 2,392 9,350 7,838
Commercial............................................ 244 582 1,798 1,893
------- ------- ------- -------
Total loans originated.......................... 4,597 9,040 26,979 25,770
------- ------- ------- -------
Loans purchased.............................................
Deduct:
Principal loan repayments and prepayments............. 4,596 6,463 22,284 17,922
Loan sales............................................ 531 -- -- 3,169
Transfers to real estate owned........................ -- -- -- --
------- ------- ------- -------
Sub-total....................................... 5,127 6,463 22,284 21,091
------- ------- ------- -------
Net loan activity........................................... (530) 2,577 4,695 4,679
------- ------- ------- -------
Loans at end of period................................ $76,261 $74,673 $76,791 $72,096
======= ======= ======= =======
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 December 31, 1999, Newberry Federal
had loan commitments and unadvanced loans and lines of credit totaling $7.5
million. See Note 10 of the Notes to Consolidated Financial Statements included
in this prospectus.
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 December 31, 1999,
Newberry Federal had $107,000 of net deferred loan costs. Newberry Federal
amortized $15,000 and $138,000 of net deferred loan costs during the three
months ended December 31, 1999 and the year ended September 30, 1999,
respectively.
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
50
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.
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.
At September 30,
At December 31, ---------------------------------------------
1999 1999 1998 1997 1996 1995
-------------------------------------------------------------------
(Dollars in thousands)
Nonaccruing loans:
One- to four-family real estate................. $ 63 $ 149 $ 207 $ 100 $ 56 $ 112
Multi-family.................................... -- -- -- -- -- --
Commercial real estate.......................... -- -- -- -- -- --
Construction.................................... -- -- -- -- -- --
Land............................................ -- -- -- -- -- --
Consumer........................................ 89 14 62 65 30 39
----- ----- ----- ----- ----- ------
Total........................................ 152 163 269 165 86 151
Real estate owned(1)............................... -- -- 1 1 833 947
Other repossessed assets........................... 22 14 18 3 -- --
----- ----- ----- ----- ----- ------
Total nonperforming assets(2)................ 174 177 288 169 919 1,098
Troubled debt restructurings....................... 85 66 96 73 30 32
----- ----- ----- ----- ----- ------
Troubled debt restructurings and
total nonperforming assets....................... $ 259 $ 243 $ 384 $ 242 $ 949 $1,130
===== ===== ===== ===== ===== ======
Total nonperforming loans and troubled debt
restructurings as a percentage of total loans... 0.31% 0.30% 0.51% 0.35% 0.18% 0.30%
Total nonperforming assets and troubled debt
restructurings as a percentage of total assets.. 0.12% 0.12% 0.21% 0.14% 0.59% 0.77%
- -------------------------------
(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 three months ended
December 31, 1999 and the year ended September 30, 1999, had nonaccruing loans
been current according to their original terms amounted to approximately $3,000
and $3,200, respectively. Newberry Federal included income on such loans of
$9,000 and $10,000 in total interest income for the three months ended December
31, 1999 and the year ended September 30, 1999, respectively.
51
The following tables set forth the delinquencies in Newberry Federal's loan
portfolio as of the dates indicated.
At December 31, 1999
----------------------------------------------------
60-89 Days 90 Days or More
-------------------------- ----------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
------------ ----------- -------- ----------
(Dollars in thousands)
Real estate loans:
One- to four-family.................... 12 $ 449 5 $ 63
Multi-family........................... -- -- -- --
Commercial............................. -- -- -- --
Construction........................... -- -- -- --
Land................................... -- -- -- --
Consumer loans:
Second mortgage loans, home
equity loans and lines of credit.... -- -- -- --
Automobile............................. 3 39 5 74
Other.................................. 1 15 1 2
Commercial loans.......................... 1 4 2 13
-- ----- -- -----
Total............................... 17 $ 507 13 $ 152
== ===== == =====
Delinquent loans to total loans........... 0.66% 0.20%
At September 30,
-------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------- ------------------------------------------
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:
One- to four-family................. 21 $ 620 8 $ 149 23 $ 611 25 $ 207
Multi-family........................ -- -- -- -- -- -- -- --
Commercial.......................... 4 174 -- -- 3 112 -- --
Construction........................ -- -- -- -- -- -- -- --
Land................................ -- -- -- -- -- -- -- --
Consumer loans:
Second mortgage loans, home equity
loans and lines of credit......... 5 44 -- -- 7 65 18 62
Automobile.......................... 5 47 -- -- 2 25 -- --
Other............................... 5 17 4 14 10 111 -- --
Commercial loans....................... 4 68 -- -- -- -- -- --
---- ----- ------ ----- ---- ----- ------ -----
Total............................ 44 $ 970 12 $ 163 45 $ 924 43 $ 269
==== ===== ====== ===== ==== ===== ====== =====
Delinquent loans to total loans........ 1.26% 0.20% 1.28% 0.37%
52
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 December 31, 1999, 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."
The following table sets forth classified assets at December 31, 1999.
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:
One- to four-family....... $ -- -- $ -- -- $ 166 10 $ -- --
Multi-family.............. -- -- -- -- -- -- -- --
Commercial................ -- -- -- -- -- -- -- --
Construction.............. -- -- -- -- -- -- -- --
Land...................... -- -- -- -- -- -- -- --
Consumer loans:
Second mortgage loans,
home equity loans and
lines of credit......... -- -- -- -- -- -- -- --
Automobile................ -- -- -- -- 27 3 -- --
Other..................... -- -- 1 2 40 9 -- --
Commercial loans............. -- -- -- -- 114 3 -- --
------ ------ ------ -------- ----- -- -------- --------
Total.................. $ -- -- $ 1 2 $ 347 25 $ -- --
====== ====== ====== ======== ===== == ======== ========
Delinquent loans to
total loans............... -- 0.001% 0.46% --
53
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, 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.
54
The following table presents an analysis of Newberry Federal's allowance
for loan losses.
Three Months
Ended
December 31, Year Ended September 30,
---------------------- -------------------------------------------
1999 1998 1999 1998 1997 1996
---------------------- -------------------------------------------
(Dollars in thousands)
Allowance for loan losses, beginning of year.............. $ 184 $ 181 $ 181 $ 192 $ 227 $ 265
Charged-off loans:
One- to four-family real estate........................ -- 5 5 16 4 1
Multi-family........................................... -- -- -- -- -- --
Commercial real estate................................. -- -- -- -- -- --
Construction........................................... -- -- -- -- -- --
Land................................................... -- 1 1 -- -- --
Commercial............................................. -- -- -- -- -- --
Consumer............................................... 15 23 161 106 144 59
------- ------ ------ ------ ------ -------
Total charged-off loans............................. 15 29 167 122 148 60
Recoveries on loans previously charged off:
One- to four-family real estate........................ -- -- 1 -- 18 --
Multi-family........................................... -- -- -- -- -- --
Commercial real estate................................. -- -- -- -- -- --
Construction........................................... -- -- -- -- -- --
Land................................................... -- -- -- -- -- --
Commercial............................................. -- -- -- -- -- --
Consumer............................................... 3 4 27 26 24 22
------- ------ ------ ------ ------ -------
Total recoveries.................................... 3 4 28 26 42 22
Net loans charged-off..................................... 12 25 139 96 106 38
Provision for loan losses................................. 160 10 142 85 70 --
------- ------ ------ ------ ------ -------
Allowance for loan losses, end of period.................. $ 332 $ 166 $ 184 $ 181 $ 191 $ 227
======= ====== ====== ====== ====== =======
Net loans charged-off to average
interest-earning loans................................. 0.02% 0.04% 0.18% 0.14% 0.17% 0.06%
Allowance for loan losses to total loans.................. 0.44% 0.22% 0.24% 0.25% 0.28% 0.36%
Allowance for loan losses to nonperforming
loans and troubled debt restructurings................. 140.51% 72.49% 80.79% 49.59% 80.25% 195.69%
Net loans charged-off to allowance
for loan losses........................................ 3.60% 15.06% 74.59% 52.49% 55.50% 16.74%
Recoveries to charge-offs................................. 25.00% 13.79% 17.37% 22.13% 28.38% 36.67%
For additional discussion regarding the provision for loan losses in recent
periods, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Operating Results for the Three months
Ended December 31, 1999 and 1998--Provision for Loan Losses."
55
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.
At December 31, At September 30,
------------------------------------------- ----------------------------------------
1999 1999
------------------------------------------- ----------------------------------------
% of Percent % of Percent
Allowance of Loans Allowance of Loans
in each in Each in each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
-------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate............ $167 50.15% 82.14% $ 85 45.95% 80.61%
Consumer............... 166 49.85 15.39 100 54.05 16.92
Commercial............. -- -- -- -- -- --
---- ------ ---- ------
Total allowance
for loan losses... $333 100.00% $185 100.00%
==== ====== ==== ======
At September 30,
------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------------
% of Percent % of Percent % of Percent
Allowance of Loans Allowance of Loans Allowance of Loans
in each in Each in each in Each in each in Each
Category Category Category Category Category Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate............ $118 65.19% 78.15% $164 85.86% 77.85% $209 92.07 81.08%
Consumer............... 63 34.81 18.23 27 14.14 19.12 18 7.93 16.71
Commercial............. -- -- -- -- -- -- -- -- --
---- ------ ---- ------ ---- ------
Total allowance
for loan losses... $181 100.00% $191 100.00% $227 100.00%
==== ====== ==== ====== ==== ======
56
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. See "Regulation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
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.
At December 31, 1999, Newberry Federal had an investment in long-term zero
coupon bonds long-term, fixed-rate U.S. Government agency securities and certain
deep discounted, fixed-rate collateralized mortgage obligations. These
securities amounted to $33.3 million, or 14.7% of total assets at December 31,
1999. These securities, all of which are classified as available-for-sale, are
highly sensitive to changes in market interest rates and their market values can
decline sharply during times of rising market interest rates because of their
long-term characteristics. At December 31, 1999, an assumed 1% increase in
interest rates would have decreased both the market value of Newberry Federal's
available-for-sale portfolio and its capital by approximately $8.1 million.
Newberry Federal's investment in long-term zero coupon bonds, long-term fixed-
rate U.S. Government agency securities and deep discount collateralized mortgage
obligations would have accounted for approximately $2.7 million, or 33%, of that
$8.1 million decrease. See "Risk Factors--Newberry Federal's capital levels can
fluctuate greatly with changes in market interest rates because of its large
investment in long-term fixed-rate U.S. Government agency securities, long-term
zero coupon bonds and certain deep discounted, fixed-rate collateralized
mortgage obligations." For a discussion of Newberry Federal's investment plans
relating to these type of securities, see "Management of Interest Rate Risk and
Market Risk Analysis."
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 swap
agreements. At December 31, 1999, Newberry Federal was a party to an interest
rate swap agreement with a notional principal amount of $10.0 million. Newberry
Federal borrowed funds from the Federal Home Loan Bank of Atlanta to purchase
floating rate collateralized mortgage obligations with interest rates capped at
8%. At December 31, 1999, this swap agreement covers approximately 20.0% of the
floating rate collateralized mortgage obligations with an 8% interest rate cap.
Under the terms of the swap agreement, if the London Interbank Offered Rate
exceeds 8%, Newberry Federal receives quarterly cash payments. At December 31,
1999, no cash payments were due to Newberry Federal.
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.
57
Newberry Federal maintains a trading account for certain classes of
collateralized mortgage obligations. At December 31, 1999, 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 December 31, 1999, Newberry Federal's investment in mortgage-backed
securities had an aggregate book value in excess of 10% of Newberry Federal's
retained earnings at that date, with an aggregate book value of $114.2 million
or 709.32% of retained earnings.
The following table presents the amortized cost and fair value of Newberry
Federal's securities, by type of security, at the dates indicated.
At September 30,
At December 31, ---------------------------------------------
1999 1999 1998
--------------------- --------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ----- --------- ----- --------- -----
(In thousands)
Investment securities:
Debt securities held-to-maturity:
Obligations of U.S. government agencies ... $ -- $ -- $ -- $ -- $ 255 $ 256
Other securities .......................... 1,091 1,091 1,091 1,091 1,091 1,091
--------- --------- --------- --------- --------- ---------
Total ............................... 1,091 1,091 1,091 1,091 1,346 1,347
Debt securities available-for-sale:
Obligations of U.S. Treasury and U.S.
government agencies ..................... 22,140 19,217 21,487 19,111 3,976 3,974
Other securities .......................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total ............................... 22,140 19,217 21,487 19,111 3,976 3,974
Equity securities available-for-sale:
Federal Home Loan Bank stock .............. 1,787 1,787 1,962 1,962 1,530 1,530
Mutual funds .............................. 1,058 909 1,057 914 1,053 966
Other securities .......................... 80 87 72 80 72 72
--------- --------- --------- --------- --------- ---------
Total ................................... 2,925 2,783 3,091 2,956 2,655 2,568
Equity securities held-to-maturity:
Other securities .......................... 50 50 50 50 -- --
Total debt and equity securities .... 26,206 23,141 25,719 23,208 7,977 7,889
--------- --------- --------- --------- --------- ---------
Mortgage-backed securities:
Mortgage-backed securities held-to-maturity:
FHLMC ..................................... 2,898 2,885 2,977 2,858 4,679 4,698
FNMA ...................................... 1,435 1,481 1,489 1,482 2,140 2,135
--------- --------- --------- --------- --------- ---------
Total mortgage-backed securities
held-to-maturity .................. 4,333 4,366 4,466 4,340 6,819 6,833
--------- --------- --------- --------- --------- ---------
Mortgage-backed securities available-for-sale:
FHLMC ..................................... 34,590 33,579 34,445 33,899 42,567 42,243
FNMA ...................................... 35,818 33,464 30,509 28,863 20,742 19,718
GNMA ...................................... 16,665 16,622 11,839 11,589 7,824 7,914
Private issues ............................ 27,367 26,223 23,786 22,534 15,164 15,277
--------- --------- --------- --------- --------- ---------
Total mortgage-backed securities
available-for-sale ..................... 114,440 109,888 100,579 96,885 86,297 85,152
--------- --------- --------- --------- --------- ---------
Net unrealized (losses) gains on
available-for-sale securities ......... (7,608) -- (6,204) -- (1,234) --
--------- --------- --------- --------- --------- ---------
Total securities .................... $ 137,371 $ 137,395 $ 124,560 $ 124,433 $ 99,859 $ 99,874
========= ========= ========= ========= ========= =========
58
The following presents the activity in the investment securities and
mortgage-backed securities portfolios for the periods indicated.
Three Months Ended Year Ended
December 31, September 30,
------------------------------ ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ----------
(In thousands)
Mortgage-backed securities:
Mortgage-backed securities, beginning of period (1) ......... $ 101,351 $ 91,971 $ 91,971 $ 82,330
Purchases:
Mortgage-backed securities - held-to-maturity .......... -- -- -- 1,085
Mortgage-backed securities - available-for-sale ........ 23,114 20,927 102,695 148,795
Sales:
Mortgage-backed securities - available-for-sale ........ (5,024) (10,728) (55,720) (116,814)
Repayments and prepayments:
Mortgage-backed securities ............................. (4,466) (6,205) (35,230) (23,477)
Increase (decrease) in net premium .......................... 105 413 183 (145)
Increase (decrease) in unrealized gain ...................... (860) (367) (2,548) 197
--------- --------- --------- ---------
Net increase (decrease) in mortgage-backed securities... 12,869 4,040 9,380 9,641
--------- --------- --------- ---------
Mortgage-backed securities, end of period ................... $ 114,220 $ 96,011 $ 101,351 $ 91,971
========= ========= ========= =========
Investment securities:
Investment securities, beginning of period (2) .............. $ 23,209 $ 7,888 $ 7,888 $ 12,378
Purchases:
Investment securities - held-to-maturity ............... -- 1,141 1,141 1,250
Investment securities - available-for-sale ............. 465 1 22,562 16,178
Sales:
Investment securities - available-for-sale ............. (175) (3,988) (4,892) (17,951)
Calls:
Investment securities - held-to-maturity ............... -- (1,352) (1,352) (4,832)
Investment securities - available-for-sale ............. -- -- -- --
Maturities:
Investment securities - held-to-maturity ............... -- -- -- --
Investment securities - available-for-sale ............. -- -- -- --
Increase (decrease) in net premium .......................... 196 18 283 911
Increase (decrease) in unrealized gain ...................... (553) (14) (2,421) (46)
--------- --------- --------- ---------
Net increase (decrease) in investment securities ....... (67) (4,194) 15,321 (4,490)
--------- --------- --------- ---------
Investment securities, end of period ........................ $ 23,142 $ 3,694 $ 23,209 $ 7,888
========= ========= ========= =========
- ---------------
(1) Includes mortgage-backed securities available-for-sale.
(2) Includes investment securities available-for-sale.
59
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 December 31, 1999.
At December 31, 1999
------------------------------------------------------------------------------
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 6.60% $ -- --% $ -- --%
Obligations of U.S.
Government agencies .......... -- -- -- -- -- --
----------- --------- ------------
Mortgage-backed securities ...... -- -- -- -- -- --
----------- --------- ------------
Total securities at
amortized cost ............ $ 1,091 6.60 $ -- -- $ -- --
=========== ========= ============
Available-for-sale securities:
Investment securities:
Obligations of U.S. Treasury .... $ -- --% $ -- --% $ -- --%
Obligations of U.S. ............. -- -- -- -- -- --
Government agencies
Equity securities ............... -- -- -- -- -- --
Mutual funds .................... -- -- -- -- -- --
Mortgage-backed securities ......... 9,661 6.75 -- -- 968 6.90
----------- --------- ------------
Total securities at fair value $ 10,752 6.73 $ -- $ 968 6.90
=========== ========= ============
At December 31, 1999
----------------------------------------------------
More than
Ten Years Totals
-------------------------- -----------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
----------- ------------ --------- -----------
(Dollars in thousands)
Held-to-maturity securities:
Investment securities:
Municipal securities (1) ........ $ -- --% $ 1,091 6.60%
Obligations of U.S.
Government agencies .......... 50 -- 50 --
----------- ---------
Mortgage-backed securities ...... 4,332 6.54 4,332 6.54
----------- ---------
Total securities at
amortized cost ............ $ 4,382 6.54 $ 5,473 6.55
=========== =========
Available-for-sale securities:
Investment securities:
Obligations of U.S. Treasury .... $ -- --% $ -- --%
Obligations of U.S. ............. 19,217 8.43 19,217 8.43
Government agencies
Equity securities ............... 1,874 5.57 1,874 5.57
Mutual funds .................... 910 5.74 910 5.74
Mortgage-backed securities ......... 99,259 7.60 109,888 7.52
----------- ---------
Total securities at fair value $125,642 7.65 $137,362 7.57
=========== =========
(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%.
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 December
31, 1999 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.
Three Months Ended Year Ended
December 31, September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- -------- -------- --------
(In thousands)
Beginning balance........................................ $137,537 $141,702 $141,702 $128,721
Increase (decrease) before interest credited............. 9,277 (1,432) (10,155) 6,729
Interest credited........................................ 1,623 1,599 5,990 6,252
-------- -------- -------- --------
Net increase (decrease).................................. 10,900 167 (4,165) 12,981
-------- -------- -------- --------
Ending balance........................................... $148,437 $141,869 $137,537 $141,702
======== ======== ======== ========
The following table indicates the amount of Newberry Federal's jumbo
certificates of deposits by time remaining until maturity as of December 31,
1999. Jumbo certificates of deposits have principal balances of $100,000 or
more.
Weighted
Average
Maturity Period Amount Rate
- ---------------- ------------- -----------
(In thousands)
Three months or less.......... $ 4,572 5.23%
Over 3 through 6 months....... 4,654 5.33
Over 6 through 12 months...... 16,422 5.65
Over 12 months................ 6,095 5.28
-------
Total................... $31,743 5.66%
=======
61
The following table presents information concerning average balances and rates
paid on Newberry Federal's deposit accounts for the periods indicated.
For the Three Months Ended
December 31, For the Year Ended September 30,
At December 31, -------------------------------- ----------------------------------
1999 1999 1998
-------------------------------- -------------------------------- ---------------------------------
Percent Percent Percent
of Weighted of Weighted of Weighted
Total Average Average Total Average Average Total Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
----------- ---------- -------- --------- ---------- --------- ---------- ----------- ---------
(Dollars in thousands)
Passbook accounts.............. $ 17,381 11.71% 2.83% $ 17,490 11.75% 2.81% $ 17,538 12.40% 2.80%
NOW and money market
accounts.................... 27,619 18.61 2.32 28,192 18.93 2.27 26,111 18.46 2.16
Certificates of deposit (1).... 103,437 69.68 5.18 103,229 69.32 5.19 97,784 69.14 5.46
-------- ------ -------- ------ -------- ------
Total average deposits... $148,437 100.00% $148,911 100.00% $141,433 100.00%
======== ====== ======== ====== ======== ======
For the Year Ended September 30,
------------------------------------------------------------------
1999 1998
-------------------------------- ---------------------------------
Percent Percent
of Weighted of Weighted
Average Total Average Average Total Average
Balance Deposits Rate Balance Deposits Rate
----------- ---------- -------- --------- -------- ----------
(Dollars in thousands)
Passbook accounts.............. $ 17,588 12.61% 2.80% $17,780 13.07% 2.86%
NOW and money market
accounts.................... 26,632 19.10 2.06 23,886 17.56 1.97
Certificates of deposit (1).... 95,220 68.29 5.20 94,330 69.37 5.59
-------- ------ -------- ------
Total average deposits... $139,440 100.00% $135,996 100.00%
======== ====== ======== ======
- -------------------
(1) Based on remaining maturity of certificates of deposit.
62
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.
Period to Maturity from December 31, 1999
-------------------------------------------------------------------------------
Less One Two Over
than One to Two to Three Three
Year Years Years Years Total
------------ ------------- ----------- -------- -------------
(Dollars in thousands)
Certificates of deposit:
0 to 2.00%............................. $ 162 $ -- $ -- $ -- $ 162
2.01 to 4.00%.......................... 1,091 -- -- -- 1,091
4.01 to 5.00%.......................... 34,333 1,229 716 131 36,409
5.01 to 6.00%.......................... 47,803 7,595 661 108 56,167
6.01 to 7.00%.......................... 6,755 545 60 64 7,424
7.01 to 8.00%.......................... 100 -- -- -- 100
8.01 to 9.00%.......................... -- 2,084 -- -- 2,084
------- ------- ------ ---- --------
Total certificates of $90,244 $11,453 $1,437 $303 $103,437
deposit ======= ======= ====== ==== ========
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
December 31, 1999, Newberry Federal had the ability to borrow up to
approximately $52.4 million from the Federal Home Loan Bank of Atlanta. At
December 31, 1999, Newberry Federal had outstanding advances of $35.7 million.
At December 31, 1999, Newberry Federal also maintained an $8.0 million
unsecured credit facility with a third party financial institution. At December
31, 1999, Newberry Federal had an outstanding balance of $5.3 million under this
credit facility.
63
The following tables presents certain information regarding Newberry Federal's
use of Federal Home Loan Bank of Atlanta advances and other borrowings during
the periods and at the dates indicated.
At or For the
Three Months
Ended At or For the Year
December 31, Ended September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Dollars in thousands)
Federal Home Loan Bank advances:
Average balance outstanding................................. $35,073 $20,600 $24,944 $23,100
Maximum amount outstanding at any month-end
during the period........................................ 35,740 20,600 39,240 30,600
Balance outstanding at end of period........................ 35,740 20,600 39,240 20,600
Weighted average interest rate during the period............ 5.45% 5.65% 5.58% 5.66%
Weighted average interest rate at end of period............. 5.44% 5.65% 5.65% 5.65%
Other borrowings:
Average balance outstanding................................. $ 4,417 $ 553 $ 2,120 $ 737
Maximum amount outstanding at any month-end
during the period........................................ 5,325 1,660 7,370 5,875
Balance outstanding at end of period........................ 5,325 1,660 7,370 --
Weighted average interest rate during the period............ 5.35% 5.25% 4.95% 5.25%
Weighted average interest rate at end of period............. 5.10% 4.88% 5.50% --%
Subsidiary Activities
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 December 31, 1999, Inter-
Community Service Corporation's assets totaled approximately $770,000.
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.
Net Book Value
Leased, Original of Property
Licensed or Year at December 31,
Location Owned Acquired 1999
- --------- -------------- ----------- ------------------
(In thousands)
Main/Executive Office:
1735 Wilson Road
Newberry, South Carolina 29108................. Owned 1993 $2,594
Branch Offices:
1323 College Street
Newberry, South Carolina 29108................. Owned 1993 250
127 Amicks Ferry Road
Chapin, South Carolina 29036................... Owned 1987 102
101 N. Wheeler Street
Prosperity, South Carolina 29127............... Owned 1989 121
64
Personnel
As of December 31, 1999, Newberry Federal had 44 full-time employees and four
part-time employees, none of whom is represented by a collective bargaining
unit. Newberry Federal believes its relationship with its employees is good.
Legal Proceedings
Periodically, Newberry Federal is involved in various claims and lawsuits,
such as claims to enforce liens, condemnation proceedings on properties in which
it holds security interests, claims involving the making and servicing of real
property loans and other issues incident to its 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.
MANAGEMENT OF DUTCHFORK BANCSHARES
Directors will be elected by the stockholders of DutchFork Bancshares for
staggered three-year terms, or until their successors are elected and qualified.
The board of directors consists of six persons divided into three classes, each
of which contains approximately one-third of the Board. One class, consisting
of Keitt Purcell and James E. Wiseman, Jr., has a term of office expiring at the
first annual meeting of stockholders; a second class, consisting of Robert E.
Livingston, III and Steve P. Sligh, has a term of office expiring at the second
annual meeting of stockholders; and a third class, consisting of J. Thomas
Johnson and Robert W. Owen, has a term of office expiring at the third annual
meeting of stockholders. DutchFork Bancshares anticipates that its first annual
meeting of stockholders will be held in January 2001.
The executive officers of DutchFork Bancshares are elected annually and serve
at the Board's discretion. The executive officers of DutchFork Bancshares are:
Name Position(s)
---- -----------
J. Thomas Johnson................... Chairman of the Board, President
and Chief Executive Officer
Steve P. Sligh...................... Executive Vice President, Treasurer
and Chief Financial Officer
Robert E. Livingston, III........... Corporate Secretary
DutchFork Bancshares was formed in February 2000 and held one meeting relating
to its organization. The board of directors of DutchFork Bancshares has
established the following committees: Compensation Committee (Keitt Purcell,
Robert W. Owen, J. Thomas Johnson and James E. Wiseman, Jr.), Audit Committee
(Robert E. Livingston, III, Keitt Purcell and Robert W. Owen), Nominating
Committee (entire board of directors), Executive Committee (J. Thomas Johnson,
Steve P. Sligh and Keitt Purcell), and Pricing Committee (entire board of
directors).
65
MANAGEMENT OF NEWBERRY FEDERAL
Directors and Executive Officers
The board of directors of Newberry Federal is presently composed of six
members who are elected for terms of three years, approximately one third of
whom are elected annually as required by the bylaws. Four directors are
independent and two directors are members of management. The executive officers
of Newberry Federal are elected annually by the board of directors and serve at
the board of directors' discretion. The following table presents information
regarding the directors and executive officers of Newberry Federal.
Position(s) Held With Director Term
Name Age (1) Newberry Federal Since Expires
- ----- --------- ----------------------- ---------- ----------
J. Thomas Johnson..................... 53 Chairman of the Board and 1980 2003
Chief Executive Officer
Steve P. Sligh........................ 50 President, Treasurer and Director 1993 2002
Robert E. Livingston, III............. 58 Corporate Secretary and Director 1993 2002
James E. Wiseman, Jr.................. 66 Director 1993 2001
Robert W. Owen........................ 73 Vice Chairman of the Board 1968 2003
Keitt Purcell......................... 76 Director 1974 2002
- ---------------
(1) As of December 31, 1999
Biographical Information
Below is certain information regarding the directors and executive officers
of Newberry Federal. Unless otherwise stated, each director and executive
officer has held his current occupation for the last five years. There are no
family relationships among or between the directors or executive officers.
J. Thomas Johnson has worked in the banking industry for over 30 years. He
joined Newberry Federal in September 1977 and served as President of Newberry
Federal from 1984 until January 2000.
Steve P. Sligh has worked in the banking industry for over 29 years. He
joined Newberry Federal in July 1977. He served as Executive Vice President
from 1989 until succeeding Mr. Johnson as President of Newberry Federal in
January 2000.
Dr. Robert W. Owen, Vice Chairman of the Board, is a retired pharmacist and
business owner. Dr. Owen has served as a school board member and on the South
Carolina Board of Education.
Keitt Purcell is an active employee of Purcell's, an insurance and finance
business which has served Newberry County since 1929. Mr. Purcell is past
president of the Newberry County Chamber of Commerce/Development Board.
Dr. Robert E. Livingston, III is a board certified Ophthalmologist having
practiced 29 years in Newberry. He currently serves as a member of the
Conservation Education and Communication Advisory Committee, SC Department of
Natural Resources.
Dr. James E. Wiseman, Jr. is a retired dentist and serves as a member of
the City Council. He is very active in the economic department and the arts in
Newberry County.
66
Meetings and Committees of the Board of Directors of Newberry Federal
Newberry Federal conducts its business through meetings and activities of
the board of directors and its committees. During the year ended September 30,
1999, the board of directors held 12 regular meetings and one special meeting.
No director of Newberry Federal attended fewer than 75% of the total meetings of
the board of directors and committees on which he served. The board of directors
of Newberry Federal has established the following committees:
Executive Committee
Members: J. Thomas Johnson, Keitt Purcell and Steve P. Sligh
Function: Authority to act on all matters except as reserved by law to
the full board of directors
Meetings in fiscal 1999: 2
Audit Committee
Members: Robert E. Livingston, III, Keitt Purcell and Robert W. Owen
Function: Oversees internal audit function, engages external auditor and meets with
external auditor to discuss and review annual financial audit
Meetings in fiscal 1999: 3
Loan Committee
Members: Steve P. Sligh, Robert W. Owen, J. Thomas Johnson and James E. Wiseman, Jr.
Function: Reviews and approves loans within limits established by Newberry Federal's
Lending Policy
Meetings in fiscal 1999: 12
Asset/Liability
Committee
Members: J. Thomas Johnson, Robert E. Livingston, III and Steve P. Sligh
Function: Oversees interest rate risk management and investment portfolio
Meetings in fiscal 1999: 15
Budget and Personnel
Committee
Members: Keitt Purcell, Robert W. Owen, J. Thomas Johnson and James E. Wiseman, Jr.
Function: Creates, reviews and approves annual budget and establishes compensation
for all employees
Meetings in fiscal 1999: 2
Insurance Committee
Members: Keitt Purcell, J. Thomas Johnson and Steve P. Sligh
Function: Reviews and procures all insurance coverages for
Newberry Federal
Meetings in fiscal 1999: 2
67
Directors' Compensation
Each director of Newberry Federal receives a monthly fee of $1,600. In
addition, each director who is not an employee of Newberry Federal receives $50
for each meeting attended of each committee on which he serves. Initially after
the conversion, DutchFork Bancshares does not expect to pay any fees to
directors for service on its board of directors.
Executive Compensation
Summary Compensation Table. The following information is furnished for the
Chief Executive Officer and the other executive officer of Newberry Federal who
received a salary and bonus of $100,000 or more during the year ended September
30, 1999.
Annual Compensation
------------------------------------
Other Annual All Other
Name and Position Year (1) Salary Bonus Compensation (2) Compensation (3)
- ------------------ ---------- -------- ------- ---------------- -------------------
J. Thomas Johnson
Chairman and Chief Executive Officer..... 1999 $156,633 $72,007 $32,519 $4,654
Steve P. Sligh
President and Treasurer.................. 1999 130,280 72,007 25,796 3,870
- -------------------
(1) Compensation information for the years ended September 30, 1998 and 1997 has
been omitted as Newberry Federal was neither a public company nor a
subsidiary of a public company at that time.
(2) Does not include the aggregate amount of perquisites and other personal
benefits, which was less than $50,000 or 10% of the total annual salary and
bonus reported.
(3) Represents matching and discretionary contributions made under Newberry
Federal's 401(k) Plan.
Employment Agreements. Upon the completion of the conversion, Newberry
Federal and DutchFork Bancshares each intend to enter into employment agreements
with Messrs. Johnson and Sligh. The employment agreements are intended to
ensure that Newberry Federal and DutchFork Bancshares will be able to maintain a
stable and competent management base after the conversion. The continued
success of Newberry Federal and DutchFork Bancshares depends to a significant
degree on the skills and competence of these individuals.
The employment agreements will provide for a three-year term. The term of
the DutchFork Bancshares employment agreements and the term of Newberry Federal
employment agreements will be renewable annually. The employment agreements
provide that Messrs. Johnson's and Sligh's base salaries will be reviewed
annually. The initial base salaries for Messrs. Johnson and Sligh will be
$166,000, and $138,200 respectively. In addition to the base salary, the
employment agreements provide for, among other things, participation in stock
benefits plans and other fringe benefits applicable to executive personnel. The
employment agreements provide for termination by Newberry Federal or DutchFork
Bancshares for cause, as defined in the employment agreements, at any time. If
Newberry Federal or DutchFork Bancshares chooses to terminate Mr. Johnson's or
Mr. Sligh's employment for reasons other than for cause, or if Mr. Johnson or
Mr. Sligh resigns from Newberry Federal or DutchFork Bancshares after a: (1)
failure to re-elect the officer to his current offices; (2) material change in
the officer's functions, duties or responsibilities; (3) relocation of the
officer's principal place of employment by more than 35 miles; (4) reduction in
the benefits and perquisites being provided to the officer in the employment
agreement; (5) liquidation or dissolution of Newberry Federal or DutchFork
Bancshares; or (6) breach of the employment agreement by Newberry Federal or
DutchFork Bancshares. Messrs. Johnson and Sligh, or if they die, their
beneficiaries, would be entitled to receive an amount equal to the remaining
base salary and bonus payments due to Mr. Johnson or Sligh for the remaining
term of the employment agreement and the contributions that would have been made
on Mr. Johnson's or Mr. Sligh's behalf to any employee benefit plans of Newberry
Federal and DutchFork Bancshares during the remaining term of the employment
agreement. Newberry Federal and DutchFork Bancshares would also continue and/or
pay for Mr. Johnson's or Mr. Sligh's life, health, dental and disability
coverage for the remaining term of the employment agreement. Upon termination
of Mr. Johnson or Mr. Sligh for reasons other than in connection with a change
in control, each officer will be subject to a one year non-competition
agreement.
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Under the employment agreements, if voluntary or involuntary termination
follows a change in control of Newberry Federal or DutchFork Bancshares, Messrs.
Johnson and Sligh or, if they die, their beneficiaries, would be entitled to a
severance payment equal three times the average of the five preceding taxable
years' annual compensation. Generally, Newberry Federal and DutchFork
Bancshares would also continue Mr. Johnson's and Mr. Sligh's life, health, and
disability coverage for thirty-six months. Even though both the Newberry
Federal and DutchFork Bancshares employment agreements provide for a severance
payment if a change in control occurs, Mr. Johnson and Mr. Sligh would only be
entitled to receive a severance payment under one agreement. If a change in
control of Newberry Federal and DutchFork Bancshares occurred, the total amount
of payments due under the agreements, based solely on Mr. Johnson's and Mr.
Sligh's 1999 cash compensation and without regard to future base salary
adjustments or bonuses and excluding any benefits under any employee benefit
plan which may be payable, would be approximately $1.3 million.
Payments to Mr. Johnson and Mr. Sligh under Newberry Federal's employment
agreement will be guaranteed by DutchFork Bancshares if payments or benefits are
not paid or provided by Newberry Federal. Payment under DutchFork Bancshares'
employment agreement would be made by DutchFork Bancshares. All reasonable
costs and legal fees paid or incurred by Mr. Johnson and Mr. Sligh under any
dispute or question of interpretation relating to the employment agreements
shall be paid by Newberry Federal or DutchFork Bancshares, respectively, if Mr.
Johnson and Mr. Sligh is successful on the merits in a legal judgment,
arbitration or settlement. The employment agreements also provide that Newberry
Federal and DutchFork Bancshares shall indemnify Mr. Johnson and Mr. Sligh to
the fullest extent legally allowable.
Key Man Life Insurance. Newberry Federal maintains separate "key man" life
insurance policies on the lives of Messrs. Johnson and Sligh each in the face
amount of $650,000.
Executive Life Insurance Program. In 1995, Newberry Federal entered into
split dollar life insurance agreements with Messrs. Johnson and Sligh to provide
them with additional life insurance protection. In connection with the
agreements, Newberry Federal has acquired life insurance which provides a death
benefit of $1.0 million for each officer. Each officer pays the share of the
annual premium attributable to the cost of the life insurance coverage they
receive under the policies in an amount determined under federal tax law rules.
Upon the termination of employment of Mr. Johnson or Mr. Sligh, Newberry Federal
will receive a refund of premiums paid with respect to the policies, and the
officer will have the option of continuing the policies at their expense. As of
December 31, 1999, Newberry Federal had paid all required premiums of $633,000
with respect to the policies.
Benefits
Pension Plan. Newberry Federal maintains a non-contributory pension plan
for the benefit of eligible employees. Generally, employees of Newberry Federal
begin participation in the pension plan once they reach age 21 and complete one
year of service. A participant in the pension plan becomes vested in his accrued
benefit under the pension plan in installments over a seven-year period.
Participants also become 100% vested in their accrued benefit upon attainment of
age 65, upon their death or if they die.
The normal retirement benefit under the plan is payable at age 65 in the
form of a life annuity. Participants may also elect to receive benefits in the
form of a lump sum distribution, a joint-and-survivor annuity or a life annuity
with payments guaranteed for either 10 or 20 years. The normal retirement
benefit under the plan is equal to 60 percent of a participant's highest average
annual compensation over a five consecutive years of employment reduced by one
thirty-fifth for each year of service less than 35 years. The benefit is also
reduced to reflect the participant's social security benefits. A participant who
attains age 55 and has at least 10 years of service may elect early retirement
and receive a reduced benefit which is the actuarial equivalent of the benefit
they would otherwise have been eligible to receive at age 65.
At December 31, 1999, which is the date of the most recent pension plan
statement, the pension plan's assets exceeded the benefit obligation by
approximately $176,000.
69
Savings Plan. Newberry Federal maintains the Employees' Savings and Profit
Sharing Plan for employees of Newberry Federal, a tax-qualified profit sharing
plan with a qualified cash or deferred arrangement under Section 401(k) of the
Internal Revenue Code for the benefit of its eligible employees. The plan
currently provides participants with savings and retirement benefits based on
employee deferrals of compensation, as well as matching and other discretionary
contributions made by Newberry Federal. Eligible employees may begin
participating in the plan upon the completion of one year of service (as defined
in the plan) and attainment of age twenty-one. Participants currently may make
annual salary reduction contributions to the plan in amounts from 2% to 10% of
their base compensation, within a legally permissible limit ($10,500 for 2000).
Newberry Federal makes a matching contribution on a discretionary basis but not
in excess of 3% of a participant's base compensation. A participant is always
100% vested in his or her elective deferrals of compensation under the plan.
Participants vest in the matching contributions over a seven-year period in
installments.
Currently, participants may only invest their accounts under the plan in
certificates of deposit at Newberry Federal. Newberry Federal intends to add,
as an investment option, an employer stock fund in which participants may invest
a portion of their account balances primarily in DutchFork Bancshares common
stock, within the limitations set forth in the plan document. In addition,
participants will have the opportunity to invest in a series of other investment
alternatives, including domestic and international equity funds. In the
conversion, a participant's ability to invest in the employer stock fund is
based on his or her status as an eligible account holder or supplemental
eligible account holder in the conversion. Regardless of the source of fund, no
eligible account holders or supplemental eligible account holders may elect to
invest in excess of $175,000 in common stock.
Generally, distributions from the plan may commence upon a participant's
separation from service for any reason. However, participants may request in-
service distributions from the plan in the form of hardship withdrawals,
withdrawals of rollover contributions and the withdrawal of unmatched after-tax
contributions. Distributions from the plan generally must comply with federal
and state income taxes and distributions made before a participant attains age
59 1/2 also must comply with a federal excise tax.
Employee Stock Ownership Plan. Newberry Federal's board of directors has
authorized the adoption of an employee stock ownership plan for employees of
Newberry Federal to be effective upon the completion of the conversion.
Employees who are employed by Newberry Federal on the conversion effective date
will be eligible to participate in the plan immediately. Thereafter, new
employees of DutchFork Bancshares and Newberry Federal who have been credited
with at least 1,000 hours of service during a 12-month period and who have
attained age 21 will be eligible to participate in the employee stock ownership
plan.
The employee stock ownership plan intends to purchase 8% of the shares
issued in the conversion through the offering. If the employee stock ownership
plan is unable to purchase such shares in the offering, it intends to purchase
the shares in the open market after the completion of the conversion subject to
applicable regulations and policies of the Office of Thrift Supervision. In
total, the employee stock ownership plan expects to acquire 8% of the shares
issued in the conversion or between 80,240 shares, assuming 1,003,000 shares are
issued in the conversion, and 108,560 shares assuming 1,357,000 shares are
issued in the conversion. It is anticipated that the employee stock ownership
plan will borrow funds from DutchFork Bancshares to purchase its stock. The loan
will equal 100% of the aggregate purchase price of the common stock. It is
anticipated that the loan to the employee stock ownership plan will be repaid
from Newberry Federal's contributions to the employee stock ownership plan and,
to a lesser extent, from dividends payable on DutchFork Bancshares common stock
held by the employee stock ownership plan over the anticipated 12-year term of
the loan. The interest rate for the employee stock ownership plan loan is
expected to be the prime rate as published in The Wall Street Journal on the
closing date of the conversion. See "Pro Forma Data."
In any plan year, Newberry Federal may make additional discretionary
contributions to the employee stock ownership plan for the benefit of plan
participants in either cash or shares of DutchFork Bancshares common stock,
which may be acquired through the purchase of outstanding shares in the market
or from individual stockholders or which constitute authorized but unissued
shares or shares held in treasury by DutchFork Bancshares. The timing, amount,
and manner of discretionary contributions will be affected by several factors,
including applicable regulatory policies, the requirements of applicable laws
and regulations, and market conditions.
70
Shares purchased by the employee stock ownership plan with the proceeds of
the loan will be held in a suspense account and released on a pro rata basis as
the loan is repaid. Discretionary contributions to the employee stock ownership
plan and shares released from the suspense account will be allocated among
participants on the basis of each participant's proportional share of total
compensation. Any forfeitures will be reallocated among the remaining plan
participants.
Participants will vest in their employee stock ownership plan benefits in
installments over a 12-year period. All years of employment will be counted for
vesting purposes. A participant is fully vested at retirement, upon death or
disability or upon termination of the employee stock ownership plan. Benefits
are distributable upon a participant's retirement, early retirement, death,
disability, or termination of employment. Newberry Federal's contributions to
the employee stock ownership plan are not fixed, so benefits payable under the
employee stock ownership plan cannot be estimated.
It is anticipated that the board of directors of Newberry Federal will
appoint an independent trustee for the employee stock ownership plan. The
trustee votes all allocated shares held in the employee stock ownership plan as
instructed by the plan participants and unallocated shares and allocated shares
for which no instructions are received are voted in the same ratio on any matter
as those shares for which instructions are given.
Under applicable accounting requirements, compensation expense for a
leveraged employee stock ownership plan is recorded at the fair market value of
the employee stock ownership plan shares when committed to be released to
participants' accounts. See "Pro Forma Data."
The employee stock ownership plan must meet the requirements of the
Employee Retirement Income Security Act of 1974 and the regulations of the
Internal Revenue Service and the Department of Labor. Newberry Federal intends
to request a determination letter from the Internal Revenue Service regarding
the tax-qualified status of the employee stock ownership plan. Newberry Federal
expects to receive a favorable determination letter, but cannot guarantee it.
Employee Severance Compensation Plan. Newberry Federal's board of directors
intends to adopt the Newberry Federal Savings Bank Employee Severance
Compensation Plan to provide benefits to eligible employees upon a change in
control of DutchFork Bancshares or Newberry Federal. Eligible employees are
those with a minimum of one year of service with Newberry Federal. Generally,
all eligible employees, other than officers who will enter into separate
employment agreements with DutchFork Bancshares and Newberry Federal, will be
eligible to participate in the severance plan. Under the severance plan, if a
change in control of DutchFork Bancshares or Newberry Federal occurs, eligible
employees who are terminated or who terminate employment, but only upon the
occurrence of events specified in the severance plan, within 12 months of the
effective date of a change in control, will be entitled to a payment based on
years of service with Newberry Federal with a maximum payment equal to 12 months
of compensation, which would be earned after 12 years of service. Assuming that
a change in control had occurred at December 31, 1999, and resulted in the
termination of all eligible employees, the maximum aggregate payment due under
the severance plan would be approximately $774,000.
Supplemental Executive Retirement Plan. Upon the completion of the
conversion, Newberry Federal intends to implement a new plan to provide for
supplemental benefits with respect to the employee stock ownership plan benefits
otherwise limited by other provisions of the Internal Revenue Code.
Specifically, the new plan will provide benefits to eligible individuals
designated by the board of directors of Newberry Federal or its affiliates that
cannot be provided under the employee stock ownership plan as a result of the
limitations imposed by the Internal Revenue Code, but that would have been
provided under the employee stock ownership plan but for such limitations. An
individual's benefits under the supplemental executive retirement plan will
generally become payable at the same time benefits become payable under the
employment stock ownership plan.
In addition to providing for benefits lost under tax-qualified plans as a
result of limitations imposed by the Internal Revenue Code, the supplemental
executive retirement plan will also make up lost employee stock ownership plan
benefits to designated individuals in connection with the participant's
retirement or upon a change in control prior to the complete scheduled repayment
of the employee stock ownership plan loan. Generally, upon a participant's
retirement or a change in control of Newberry Federal or DutchFork Bancshares
before the complete repayment of the employee stock ownership plan loan, this
provision of the supplemental executive retirement plan
71
provides the covered individual with a benefit equal to what the individual
would have received under the employee stock ownership plan and the supplemental
executive retirement loan had he remained employed throughout the schedule term
of the employee stock ownership plan loan less the benefits actually provided
under the employee stock ownership plan on behalf of such individual. An
individual's benefits under the supplemental executive retirement plan will
generally become payable upon the participant's retirement (in accordance with
the standard retirement policies of Newberry Federal) or upon the change in
control of Newberry Federal or DutchFork Bancshares.
Newberry Federal may establish a grantor trust in connection with the new
supplemental executive retirement plan to satisfy its obligations with respect
to the supplemental executive retirement plan. The assets of the grantor trust
would remain subject to the claims of Newberry Federal's general creditors in
the event of Newberry Federal's insolvency until paid to the individual under
the terms of the supplemental executive retirement plan.
Stock-Based Incentive Plan. Following the conversion, the board of
directors of DutchFork Bancshares intends to adopt a stock-based incentive plan
which will provide for the granting of options to purchase common stock and
restricted stock, to eligible officers, employees, and directors of DutchFork
Bancshares and Newberry Federal. If this plan is implemented within one year
after conversion, applicable regulations require such plan to be approved by a
majority of DutchFork Bancshares' stockholders at a meeting of stockholders to
be held no earlier than six months after the completion of the conversion.
Under the plan, DutchFork Bancshares intends to grant stock options in an
amount equal to 10% of the shares of common stock issued in the conversion. The
amount granted would range from 100,300 shares, assuming 1,003,000 shares are
issued in the conversion to 135,700 shares, assuming 1,357,000 shares are issued
in the conversion. Additionally, DutchFork Bancshares intends to grant stock
awards in an amount equal to 4% of the shares of common stock issued in the
conversion. The amount granted would range from 40,120 shares, assuming
1,003,000 shares are issued in the conversion to 54,280 shares, assuming
1,357,000 shares are issued in the conversion. Any common stock awarded under
the plan will be awarded at no cost to the recipients. The plan may be funded
through the purchase of common stock by a trust established as part of the plan
or from authorized but unissued shares. DutchFork Bancshares intends to appoint
an independent fiduciary to serve as trustee of a trust to be established as
part of the plan. If additional authorized but unissued shares are acquired by
the plan after the Conversion, the interests of existing shareholders would be
diluted. See "Pro Forma Data."
The grants of stock options and stock awards will be designed to attract
and retain qualified personnel in key positions, provide officers and key
employees with a proprietary interest in DutchFork Bancshares as an incentive to
contribute to the success of DutchFork Bancshares and reward key employees for
outstanding performance. All employees of DutchFork Bancshares and its
subsidiaries, including Newberry Federal, will be eligible to participate in the
plan. It is expected that the committee administering the plan will determine
the terms of awards granted to officers and employees. The committee will also
determine whether stock options will be incentive or non-statutory stock
options, as defined below, the number of shares available for each stock option
and stock award, the exercise price of each non-statutory stock option, whether
stock options may be exercised by delivering other shares of common stock, and
when stock options become exercisable or stock awards vest. Only employees may
receive grants of incentive stock options. Therefore, under the plan, directors
may receive only grants of non-statutory stock options. If the plan is
implemented within one year after conversion, applicable regulations provide
that no individual officer or employee of Newberry Federal may receive more than
25% of the stock options available under the plan (or any separate plan for
officers and employees) and non-employee directors may not receive more than 5%
individually, or 30% in the aggregate, of the stock options available under the
plan (or any separate plan for directors). Federal regulations also provide that
no individual officer or employee of Newberry Federal may receive more than 25%
of the restricted stock awards available under the plan (or any separate plan
for officers and employees) and non-employee directors may not receive more than
5% individually, or 30% in the aggregate, of the restricted stock awards
available under the plan (or any separate plan for directors).
The plan will provide for the grant of: (1) stock options intended to
qualify as incentive stock options under Section 422 of the Internal Revenue
Code; and (2) stock options that do not so qualify. It is anticipated that all
stock options granted contemporaneously with stockholder approval of the plan
will qualify as incentive stock options to the extent permitted under Section
422 of the Internal Revenue Code. Unless sooner terminated, the plan
72
will be in effect for a period of 10 years from the earlier of adoption by the
DutchFork Bancshares board of directors or approval by DutchFork Bancshares
stockholders. If the stockholders approve the Plan, DutchFork Bancshares intends
to grant stock options under the plan at an exercise price equal to at least the
fair market value of the underlying common stock on the date of grant.
An individual will not be deemed to have received taxable income upon the
grant or exercise of any incentive stock option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received through the stock
option exercise and two years after the date of grant of the stock option (a
"disqualifying disposition"). No compensation deduction will be available to
DutchFork Bancshares as a result of the grant or exercise of incentive stock
options unless there has been a disqualifying disposition. In the case of a
non-statutory stock option and in the case of a disqualifying disposition of an
incentive stock option, an individual will realize ordinary income upon exercise
of the stock option (or upon the disqualifying disposition) in an amount equal
to the amount by which the exercise price exceeds the fair market value of the
common stock purchased by exercising the stock option on the date of exercise.
The amount of any ordinary income realized by an optionee upon the exercise of a
non-statutory stock option or due to a disqualifying disposition of an incentive
stock option will be a deductible expense to DutchFork Bancshares for income tax
purposes.
The plan will provide for the granting of stock awards. Grants of stock
awards to officers and employees may be made in the form of base grants and/or
performance grants, the vesting of which would be contingent upon performance
goals established by the committee administering the plan. In establishing any
performance goals, the committee may utilize the annual financial results of
Newberry Federal, actual performance of Newberry Federal as compared to targeted
goals such as the ratio of Newberry Federal's net worth to total assets,
Newberry Federal's return on average assets, or such other performance standards
as determined by the committee with the approval of the DutchFork Bancshares
board of directors.
When a participant becomes vested with respect to stock awards, the
participant will realize ordinary income equal to the fair market value of the
common stock at the time of vesting, unless the participant made an election
under Section 83(b) of the Internal Revenue Code. The amount of income
recognized by the participants will be a deductible expense for tax purposes for
DutchFork Bancshares. When restricted stock awards become vested and shares of
common stock are actually distributed to participants, the participants would
receive amounts equal to any accrued dividends with respect those shares.
Before vesting, recipients of stock awards may direct the voting of the shares
awarded to them. Shares not subject to grants and shares allocated subject to
the achievement of performance goals will be voted by the trustee in proportion
to the directions provided with respect to shares subject to grants. Vested
shares will be distributed to recipients as soon as practicable following the
day on which they vest.
The vesting periods for awards under the plan will be determined by the
committee administering the plan. If the plan is implemented within one year
after conversion, awards would become vested and exercisable within the limits
of applicable regulations, which such regulations require that any awards begin
vesting no earlier than one year from the date of shareholder approval of the
plan and, thereafter, vest at a rate of no more than 20% per year and may not be
accelerated except in the case of death or disability. Stock options could be
exercisable for three months following the date on which the employee or
director ceases to perform services for Newberry Federal or DutchFork
Bancshares, except that if an employee or director dies or becomes disabled,
stock options accelerate and become fully vested and could be exercisable for up
to one year thereafter or such longer period as determined by DutchFork
Bancshares. In the case of death or disability, stock options may be exercised
for a period of 12 months. However, any incentive stock options exercised more
than three months following the date the employee ceases to perform services as
an employee would be treated as a non-statutory stock option. If the optionee
continues to perform services as a director or consultant on behalf of Newberry
Federal, DutchFork Bancshares or an affiliate after retirement, unvested stock
options would continue to vest in accordance with their original vesting
schedule until the optionee ceases to serve as a consultant or director. If a
participant dies, is disabled or retires, DutchFork Bancshares, if requested by
the optionee, or the optionee's beneficiary, could elect, in exchange for vested
options, to pay the optionee, or the optionee's beneficiary if the optionee
dies, the amount by which the fair market value of the common stock exceeds the
exercise price of the stock options on the date of the employee's termination of
employment.
73
Within the limits of any applicable regulatory requirements, the plan may
be amended after the one-year period ends to provide for accelerated vesting of
previously granted stock options or stock awards if a change in control of
DutchFork Bancshares or Newberry Federal occurs. A change in control would
generally be considered to occur when a person or group of persons acting in
concert acquires beneficial ownership of 20% or more of any class of equity
security of DutchFork Bancshares or Newberry Federal or if a tender or exchange
offer, merger or other form of business combination, sale of all or
substantially all of the assets of DutchFork Bancshares or Newberry Federal or a
contested election of directors which resulted in the replacement of a majority
of the DutchFork Bancshares board of directors by persons not nominated by the
directors in office before the contested election occurs.
Transactions with Newberry Federal
Federal regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, unless the loan or
extension of credit is made under a benefit program generally available to all
other employees and does not give preference to any insider over any other
employee, and must not involve more than the normal risk of repayment or present
other unfavorable features. Newberry Federal's policy is not to make any new
loans or extensions of credit to Newberry Federal's executive officers and
directors at different rates or terms than those offered to the general public.
In addition, loans made to a director or executive officer in an amount that,
when aggregated with the amount of all other loans to the person and his or her
related interests, are in excess of the greater of $25,000 or 5% of Newberry
Federal's capital and surplus, up to a maximum of $500,000, must be approved in
advance by a majority of the disinterested members of the board of directors.
See "Regulation and Supervision--Federal Savings Institution Regulation--
Transactions with Related Parties." The aggregate amount of loans by Newberry
Federal to its executive officers and directors was approximately $567,000 at
December 31, 1999. These loans were performing according to their original
terms at December 31, 1999.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, DutchFork Bancshares will be
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
regulated, examined and supervised extensively 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 its deposit accounts are insured up to applicable
limits by the Savings Association Insurance Fund 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 certain approvals
before entering into certain transactions such as mergers with, or acquisitions
of, other savings institutions. The Office of Thrift Supervision and the Federal
Deposit Insurance Corporation examine Newberry Federal periodically to test
Newberry Federal's safety and soundness and compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework for Newberry Federal's activities and is intended primarily to protect
the insurance fund and Newberry Federal's depositors.
The regulatory structure also gives regulatory authorities extensive
discretion in their supervisory and enforcement activities and examination
policies, including policies regarding asset classification and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in regulatory requirements and policies, 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. The description of statutory provisions and regulations that
apply to DutchFork Bancshares and Newberry Federal discussed below and elsewhere
in this prospectus is not a complete description of them and their effects on
Newberry Federal and DutchFork Bancshares.
74
Holding Company Regulation
DutchFork Bancshares will be a unitary savings and loan holding company
under federal law because Newberry Federal will be its only insured subsidiary
immediately after the conversion. 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 will not qualify for the grandfather and will be 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 and from acquiring or retaining
control of a depository institution that is not insured by the Federal Deposit
Insurance Corporation, unless it first receives the approval of the Office of
Thrift Supervision. 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 the holding company and the
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
results in a multiple savings and loan holding company controlling savings
institutions in more than one state. However, there are two exceptions to this
general rule. First, the approval of interstate supervisory acquisitions by
savings and loan holding companies. Second, the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit the acquisition. The states vary in the extent
to which they permit interstate savings and loan holding company acquisitions.
Although savings and loan holding companies do not have specific capital
requirements or specific restrictions on the payment of dividends or other
capital distributions, federal regulations place these 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, which has authority to order the stoppage 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
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 3% leverage ratio and an 8% risk-based capital ratio.
Effective April 1, 1999, however, the minimum leverage ratio increased to 4% for
all institutions except those with the highest rating on the CAMELS financial
institution rating system. In addition, the prompt corrective 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 CAMELS 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,
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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 requires an institution to maintain Tier 1
or core capital to risk-weighted assets of at least 4% and total capital to
risk-weighted assets of at least 8%. Total capital is defined as core capital
and supplementary capital. 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 or Tier 1 capital is defined as common stockholders' equity and 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 include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock, and the
allowance for loan and lease losses limited to a maximum of 1.25% of risk-
weighted assets. 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. Presently, the Office of Thrift Supervision has deferred
implementation of the interest rate risk component. At December 31, 1999,
Newberry Federal met each of its capital requirements. See "Regulatory Capital
Compliance" for information regarding Newberry Federal's compliance with the
Office of Thrift Supervision's regulatory capital requirements.
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 or core
capital to risk-weighted assets of less than 4%, or a ratio of core capital to
total assets of less than 4%, or 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." Although there is a narrow exception, the Office
of Thrift Supervision is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized" if the institution is
critically undercapitalized on average during the calendar quarter 270 days
after becoming critically undercapitalized. The regulation also provides that
an institution must file a capital restoration plan with the Office of Thrift
Supervision within 45 days of the date that the Office of Thrift Supervision
notifies it 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
immediately apply 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 discretionary supervisory actions, including issuing a
capital directive and replacing senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of Newberry Federal are presently
insured by the Savings Association Insurance Fund. 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 Savings
Association Insurance Fund 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 pay on bonds issued in the late 1980s by the Financing Corporation
to recapitalize the predecessor to the Savings Association Insurance Fund.
During 1998, Financing Corporation payments for Savings Association Insurance
Fund members approximated 6.10 basis points, while Bank Insurance Fund members
paid 1.22 basis points. By law, there was equal sharing of Financing
Corporation payments between the members of both insurance funds beginning on
January 1, 2000.
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Newberry Federal's assessment rate for fiscal 1999 ranged from 0 to 10
basis points and the premium paid for this period was $82,000. Payments toward
the Financing Corporation bonds amounted to $81,000. The Federal Deposit
Insurance Corporation has authority to increase insurance assessments. A
significant increase in Savings Association Insurance Fund 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.
The Federal Deposit Insurance Corporation may terminate an institution's
deposit insurance if it finds 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 its deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996 provided that
the Bank Insurance Fund and the Savings Association Insurance Fund were to have
merged on January 1, 1999 if there were no more savings associations as of that
date. Various proposals to eliminate the federal savings association charter,
create a uniform financial institutions charter, abolish the Office of Thrift
Supervision and restrict savings and loan holding company activities have been
introduced in Congress. Recent legislation has limited the powers in which
unitary savings and loan holding companies may engage. See "Risk Factors--
Banking reform legislation restricts the activities in which DutchFork
Bancshares may engage compared to existing unitary holding companies."
DutchFork Bancshares is unable to predict whether any other legislation will be
enacted or the extent to which it may affect its powers or operations.
Loans to One Borrower. Federal law provides that savings institutions must
generally follow 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. See
"Business of Newberry Federal Savings Bank--Lending Activities--Loans to One
Borrower" for further information.
Qualified Thrift Lender Test. Federal law 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" in
certain "qualified thrift investments" in at least 9 months out of each 12 month
period. "Portfolio assets" equals total assets less specified liquid assets up
to 20% of total assets, intangibles, including goodwill, and the value of
property used to conduct business. "Qualified thrift investments" are primarily
residential mortgages and related investments, including certain mortgage-backed
securities.
A savings institution that fails the qualified thrift lender test faces
certain operating restrictions and may be required to convert to a commercial
bank charter. As of December 31, 1999, Newberry Federal complied with 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. The rule
effective through the first quarter of 1999 established three tiers of
institutions based primarily on an institution's capital level. A Tier I
institution exceeded all capital requirements before and after a proposed
capital distribution and has not been advised by the Office of Thrift
Supervision that it needs more than normal supervision. A Tier I institution
could, after first giving notice to but without obtaining approval of the Office
of Thrift Supervision, make capital distributions during the calendar year equal
to the greater of 100% of its net earnings to date during the calendar year plus
the amount that would have reduced by one-half the excess capital over its
capital requirements at the beginning of the calendar year, or 75% of its net
income for the previous four quarters. Any additional capital distributions
required prior regulatory approval.
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Effective April 1, 1999, the Office of Thrift Supervision's capital
distribution regulation changed. Under the new regulation, an application to
and the prior approval of the Office of Thrift Supervision is required before
any capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under Office of Thrift Supervision
regulations (generally, compliance with all capital requirements and examination
ratings in one of 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 give advance notice to
Office of Thrift Supervision of the capital distribution. If Newberry Federal's
capital fell below its regulatory requirements or if 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 of Thrift Supervision could prohibit a proposed capital
distribution, which would otherwise be permitted by the regulation if the Office
of Thrift Supervision determines that the distribution would be 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 met these requirements at December 31,
1999. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" for further information.
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. Newberry Federal's
assessments for the fiscal year ended September 30, 1999 totaled $47,000.
Branching. Office of Thrift Supervision regulations permit federally
chartered savings associations to branch nationwide under certain conditions.
Generally, federal savings associations may establish interstate networks and
geographically diversify their loan portfolios and lines of business. The
Office of Thrift Supervision authority preempts any state law purporting to
regulate branching by federal savings associations.
Transactions with Related Parties. Newberry Federal's authority to engage
in transactions with "affiliates" is limited by federal law. Generally, an
affiliate is any company that controls or is under common control with an
institution, including DutchFork Bancshares. 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, as well as entities within the control of these
persons, is also governed by federal law. These persons are often referred to
as "insiders" of a company. Loans to insiders are required to be made on terms
substantially the same as those offered to unaffiliated individuals and may not
involve more than the normal risk of repayment. Recent legislation created an
exception 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
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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 a receivership or conservatorship, or to termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $25,000 per
day, or even $1 million per day in especially serious 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 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.
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.
At December 31, 1999, Newberry Federal complied with this requirement with an
investment in Federal Home Loan Bank stock of $1.8 million. Federal Home Loan
Bank advances must be secured by specified types of collateral.
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 noninterest-earning reserves against their transaction accounts,
primarily NOW and regular checking accounts. The regulations generally require
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $44.3 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 $1.33 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 $44.3 million.
The first $5.0 million of otherwise reservable balances, as adjusted 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
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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 Securities Laws
DutchFork Bancshares has filed with the Securities and Exchange Commission
a registration statement under the Securities Act for the registration of the
common stock to be issued in the conversion. Upon completion of the conversion,
DutchFork Bancshares' common stock will be registered with the Securities and
Exchange Commission under the Exchange Act. DutchFork Bancshares will then have
to observe the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The registration under the Securities Act of shares of the common stock to
be issued in the conversion does not cover the resale of such shares. Shares of
the common stock purchased by persons who are not affiliates of DutchFork
Bancshares may be resold without registration. The resale restrictions of Rule
144 under the Securities Act govern shares purchased by an affiliate of
DutchFork Bancshares. If DutchFork Bancshares meets the current public
information requirements of Rule 144 under the Securities Act, each affiliate of
DutchFork Bancshares who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (1) 1% of the outstanding shares of DutchFork Bancshares or (2) the
average weekly volume of trading in such shares during the preceding four
calendar weeks. Provision may be made in the future by DutchFork Bancshares to
permit affiliates to have their shares registered for sale under the Securities
Act under specific circumstances.
FEDERAL AND STATE TAXATION ON INCOME
Federal Income Taxation
General. DutchFork Bancshares and Newberry Federal intend to report their
income on a calendar year basis using the accrual method of accounting. The
federal income tax laws apply to DutchFork Bancshares and Newberry Federal in
the same manner as to 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
Newberry Federal or DutchFork Bancshares. Newberry Federal's federal income tax
returns have been either audited or closed under the statute of limitations
through tax year 1994. For its 1999 tax year, Newberry Federal's maximum
federal income tax rate was 34%.
Bad Debt Reserves. For fiscal years beginning before February 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986, as amended, 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 the percentage
of taxable income method or the experience method. The reserve for
nonqualifying loans was computed using the experience method.
Federal legislation enacted in 1996 repealed the reserve method of
accounting for bad debts and the percentage of taxable income method for tax
years beginning after 1995 and require savings institutions to recapture or take
into income certain portions of their accumulated bad debt reserves.
Approximately $4.8 million of Newberry Federal accumulated bad debt reserves
would not be recaptured into taxable income unless Newberry Federal makes a
"non-dividend distribution" to DutchFork Bancshares as described below.
Distributions. If Newberry Federal makes "non-dividend distributions" to
DutchFork Bancshares, they will be considered to have been made from Newberry
Federal's unrecaptured tax bad debt reserves, including the balance of its
reserves as of February 31, 1987, to the extent of the "non-dividend
distributions," and then from Newberry Federal's supplemental reserve for losses
on loans, to the extent of those reserves, and an amount based
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on the amount distributed, but not more than the amount of those reserves, will
be included in Newberry Federal's taxable 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 Newberry Federal's taxable
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. Therefore, if Newberry Federal makes a non-dividend
distribution to DutchFork Bancshares, approximately one and one-half times the
amount of the distribution not in excess of the amount of the 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.
SHARES TO BE PURCHASED BY MANAGEMENT WITH SUBSCRIPTION RIGHTS
The following table presents certain information as to the approximate
purchases of common stock by each director and executive officer of Newberry
Federal, including their associates, as defined by applicable regulations. No
individual has entered into a binding agreement to purchase these shares and,
therefore, actual purchases could be more or less than indicated. Directors and
executive officers and their associates may not purchase more than 31% of the
shares sold in the conversion. For purposes of the following table, sufficient
shares are assumed to be available to satisfy subscriptions in all categories.
Percent of Percent of
Anticipated Anticipated Shares at Shares at
Number of Dollar Minimum Maximum
Shares to be Amount to be of Estimated of Estimated
Name Purchased (1) Purchased (1) Valuation Range Valuation Range
- ------ -------------- -------------- ----------------- -----------------
J. Thomas Johnson................................ 17,500 $175,000 1.75% 1.29%
Steve P. Sligh................................... 17,500 175,000 1.75 1.29
Robert E. Livingston, III........................ 17,500 175,000 1.75 1.29
James E. Wiseman, Jr............................. 17,500 175,000 1.75 1.29
Robert W. Owen................................... 10,000 100,000 1.00 0.74
Keitt Purcell.................................... 5,000 50,000 0.47 0.36
------ -------- ---- ----
All Directors and Executive Officers
as a Group (6 persons)........................ 85,000 $850,000 8.47% 6.26%
====== ======== ==== ====
- -------------------------
(1) Does not include shares to be awarded under the employee stock ownership
plan and stock-based incentive plan or options to acquire shares under the
stock-based incentive plan.
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THE CONVERSION
The Office of Thrift Supervision has approved the plan of conversion,
provided that it is approved by the members of Newberry Federal and that
DutchFork Bancshares and Newberry Federal satisfy certain other conditions
imposed by the Office of Thrift Supervision in its approval. Office of Thrift
Supervision approval is not a recommendation or endorsement of the plan of
conversion.
General
On January 18, 2000, the board of directors of Newberry Federal unanimously
adopted the plan of conversion, under which Newberry Federal will be converted
from a federally chartered mutual savings bank to a federally chartered stock
savings bank to be held as a wholly owned subsidiary of DutchFork Bancshares, a
newly formed Delaware corporation. The following discussion of the plan of
conversion contains all material terms about the conversion. Nevertheless, you
should read carefully the plan of conversion, which accompanies Newberry
Federal's proxy statement and is available to members of Newberry Federal upon
request. The plan of conversion is also filed as an exhibit to the registration
statement that DutchFork Bancshares has filed with the Securities and Exchange
Commission. See "Where You Can Find More Information." The Office of Thrift
Supervision has approved the plan of conversion with the condition that it be
approved by the members of Newberry Federal entitled to vote on the matter at a
special meeting on June 27, 2000, and conditioned on the satisfaction of certain
other conditions imposed by the Office of Thrift Supervision in its approval.
The conversion will be accomplished through adoption of a federal stock
charter and bylaws to authorize the issuance of capital stock by Newberry
Federal. As part of the conversion, Newberry Federal will issue all of its
newly issued capital stock, or 1,000 shares of common stock, to DutchFork
Bancshares in exchange for approximately 90% of the net proceeds from the sale
of common stock by DutchFork Bancshares.
The plan of conversion provides generally that:
. Newberry Federal will convert from a federally chartered mutual savings
bank to a federally chartered stock savings bank;
. DutchFork Bancshares will offer its common stock in the subscription
offering to persons having subscription rights;
. if necessary, shares of common stock not subscribed for in the
subscription offering will be offered in a direct community offering
to certain members of the general public, with preference given to
natural persons residing in Newberry and Lexington Counties, South
Carolina, and then to certain members of the general public in a
syndicated community offering through a syndicate of registered broker-
dealers under selected dealers agreements; and
. DutchFork Bancshares will purchase all of the capital stock of Newberry
Federal to be issued in the conversion.
As part of the conversion, DutchFork Bancshares is making a subscription
offering of its common stock to holders of subscription rights in the following
order of priority. First, depositors of Newberry Federal with $50.00 or more on
deposit as of November 30, 1998. Second, Newberry Federal's employee stock
ownership plan. Third, depositors of Newberry Federal with $50.00 or more on
deposit as of March 31, 2000. Finally, depositors of Newberry Federal as of
April 30, 2000 and borrowers of Newberry Federal with loans outstanding as of
February 10, 1987 which continue to be outstanding as of April 30, 2000.
Shares of common stock not subscribed for in the subscription offering may
be offered for sale in the direct community offering. The direct community
offering, if one is held, may begin at any time during the subscription
offering. Shares of common stock not sold in the subscription and direct
community offerings may be offered in the syndicated community offering.
Regulations require that the direct community and syndicated community offerings
be completed within 45 days after completion of the fully extended subscription
offering unless extended by Newberry Federal or DutchFork Bancshares with the
approval of the regulatory authorities. If the syndicated
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community offering is not feasible, the board of directors of Newberry Federal
will consult with the regulatory authorities to determine an appropriate
alternative method for selling the unsubscribed shares of common stock. The plan
of conversion provides that the conversion must be completed within 24 months
after the date of the approval of the plan of conversion by the members of
Newberry Federal.
No sales of common stock may be completed, either in the subscription
offering, direct community offering or syndicated community offering unless the
plan of conversion is approved by the members of Newberry Federal.
The completion of the offering, however, depends on market conditions and
other factors beyond Newberry Federal's control. No assurance can be given as
to the length of time after approval of the plan of conversion at the special
meeting that will be required to complete the direct community or syndicated
community offerings or other sale of the common stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of DutchFork Bancshares and Newberry Federal as converted, together with
corresponding changes in the net proceeds realized by DutchFork Bancshares from
the sale of the common stock. If the conversion is terminated, Newberry Federal
would be required to charge all conversion expenses against current income.
Orders for shares of common stock will not be filled until at least
1,003,000 shares of common stock have been subscribed for or sold and the Office
of Thrift Supervision approves the final valuation and the conversion closes.
If the conversion is not completed within 45 days after the last day of the
fully extended subscription offering and the Office of Thrift Supervision
consents to an extension of time to complete the conversion, subscribers will be
given the right to increase, decrease or rescind their subscriptions. Unless an
affirmative indication is received from subscribers that they wish to continue
to subscribe for shares, the funds will be returned promptly, together with
accrued interest at Newberry Federal's passbook rate from the date payment is
received until the funds are returned to the subscriber. If the period is not
extended, or, in any event, if the conversion is not completed, all withdrawal
authorizations will be terminated and all funds held will be promptly returned
together with accrued interest at Newberry Federal's passbook rate from the date
payment is received until the conversion is terminated.
Reasons for the Conversion
The board of directors and management believe that the conversion is in the
best interests of Newberry Federal, its customers, employees and the communities
it serves. Newberry Federal's board of directors has formed DutchFork
Bancshares to serve as a holding company, with Newberry Federal as its
subsidiary, after the conversion. By converting to the stock form of
organization, DutchFork Bancshares and Newberry Federal will be structured in
the form used by holding companies of commercial banks, most business entities
and by a growing number of savings institutions. Management of Newberry Federal
believes that the conversion offers a number of advantages which will be
important to the future growth and performance of Newberry Federal. The capital
raised in the conversion is intended to support Newberry Federal's future
lending and operational growth and may also support possible future branching
activities or the acquisition of other financial institutions or financial
service companies or their assets and to increase its ability to render services
to the communities it serves, although there are no current specific plans,
arrangements or understandings, written or oral, regarding these activities.
The conversion is also expected to afford Newberry Federal's management, members
and others the opportunity to become stockholders of DutchFork Bancshares and
participate more directly in, and contribute to, any future growth of DutchFork
Bancshares and Newberry Federal. The conversion will also enable DutchFork
Bancshares and Newberry Federal to raise additional capital in the public equity
or debt markets should the need arise, although there are no current specific
plans, arrangements or understandings, written or oral, regarding any financing
activities. Newberry Federal, as a mutual savings bank, does not have the
authority to issue capital stock or debt instruments, other than by accepting
deposits.
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Effects of Conversion to Stock Form
General. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution based upon the balance in his or her account, which interest may
only be realized if the institution is liquidated. However, this ownership
interest is tied to the depositor's account and has no value separate from such
deposit account. Any depositor who opens a deposit account obtains a pro rata
ownership interest in the net worth of the institution without any additional
payment beyond the amount of the deposit. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing for
his ownership interest in the net worth of the institution, which is lost to the
extent that the balance in the account is reduced.
Consequently, mutual savings bank depositors normally realize the value of
their ownership interest only in the unlikely event that the mutual savings bank
is liquidated. In such event, the depositors of record at that time, as owners,
would be able to share in any residual surplus and reserves after other claims,
including claims of depositors to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, depositors lose all
rights to the net worth of the mutual savings bank, except the right to claim a
pro rata share of funds representing the liquidation account established as part
of the conversion. Additionally, permanent nonwithdrawable capital stock is
created and offered to depositors which represents the ownership of the
institution's net worth. The common stock is separate and apart from deposit
accounts and cannot be and is not insured by the Federal Deposit Insurance
Corporation or any other governmental agency. Certificates are issued to
evidence ownership of the permanent stock. The stock certificates are
transferable, and therefore the stock may be sold or traded if a purchaser is
available with no effect on any deposit account the seller may hold in the
institution.
No assets of DutchFork Bancshares or Newberry Federal will be distributed
in the conversion other than the payment of those expenses incurred in the
conversion.
Continuity. While the conversion is being accomplished, the normal
business of Newberry Federal will continue without interruption, including being
regulated by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation. After conversion, Newberry Federal will continue to provide
services for depositors and borrowers under current policies by its present
management and staff.
The directors of Newberry Federal at the time of conversion will serve as
directors of Newberry Federal after the conversion. The directors of DutchFork
Bancshares will be solely composed of individuals who served on the board of
directors of Newberry Federal. All officers of Newberry Federal at the time of
conversion will retain their positions after the conversion.
Savings Accounts and Loans. Newberry Federal's savings accounts, account
balances and existing Federal Deposit Insurance Corporation insurance coverage
of savings accounts will not be affected by the conversion. Furthermore, the
conversion will not affect the loan accounts, loan balances or obligations of
borrowers under their individual contractual arrangements with Newberry Federal.
Effect on Voting Rights. Upon the completion of the conversion, Newberry
Federal's depositors and borrowers will no longer be entitled to vote at
meetings of Newberry Federal. Instead, DutchFork Bancshares, as the sole
stockholder of Newberry Federal, will possess all voting rights in Newberry
Federal. The holders of the common stock of DutchFork Bancshares will possess
all voting rights in DutchFork Bancshares. Depositors and borrowers of Newberry
Federal will not have voting rights after the conversion except to the extent
that they become stockholders of DutchFork Bancshares by purchasing common
stock.
Tax Effects. Newberry Federal has received an opinion from Muldoon, Murphy
& Faucette LLP, Washington, D.C., that addresses all the material federal income
tax consequences of the conversion. The opinion, which relies upon factual
representations given by Newberry Federal, concludes that the conversion will
constitute a nontaxable reorganization under Section 368(a)(1)(F) of the
Internal Revenue Code. Among other things, the opinion states that:
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. no gain or loss will be recognized to Newberry Federal in its mutual
or stock form by reason of the conversion;
. no gain or loss will be recognized to its account holders upon the
issuance to them of accounts in Newberry Federal immediately after the
conversion, in the same dollar amounts and on the same terms and
conditions as their accounts at Newberry Federal in its mutual form
plus interest in the liquidation account;
. the tax basis of account holders' accounts in Newberry Federal
immediately after the conversion will be the same as the tax basis of
their accounts immediately before conversion;
. the tax basis of each account holder's interest in the liquidation
account will be equal to the value, if any, of that interest;
. the tax basis of the common stock purchased in the conversion will be
the amount paid and the holding period for the stock will begin on the
date of purchase; and
. no gain or loss will be recognized to account holders upon the receipt
or exercise of subscription rights in the conversion, except if
subscription rights are deemed to have value as discussed below.
Unlike a private letter ruling issued by the Internal Revenue Service, an
opinion of counsel is not binding on the Internal Revenue Service and the
Internal Revenue Service could disagree with the conclusions reached in the
opinion. If there is a disagreement, no assurance can be given that the
conclusions reached in an opinion of counsel would be sustained by a court if
contested by the Internal Revenue Service.
Based upon past rulings issued by the Internal Revenue Service, the opinion
provides that the receipt of subscription rights by eligible account holders,
supplemental eligible account holders and other individuals under the plan of
conversion will be taxable if the subscription rights are deemed to have a fair
market value. Keller & Company, whose findings are not binding on the Internal
Revenue Service, has issued a letter indicating that the subscription rights do
not have any value, based on the fact that the rights are acquired by the
recipients without cost, are nontransferable and of short duration and afford
the recipients the right only to purchase shares of the common stock at a price
equal to its estimated fair market value, which will be the same price paid by
purchasers in the direct community offering for unsubscribed shares of common
stock. If the subscription rights are deemed to have a fair market value, the
receipt of the rights may only be taxable to those persons who exercise their
subscription rights. Newberry Federal could also recognize a gain on the
distribution of subscription rights. Holders of subscription rights are
encouraged to consult with their own tax advisors as to the tax consequences if
the subscription rights are deemed to have a fair market value.
Newberry Federal has also received an opinion from Clifton D. Bodiford,
CPA, Columbia, South Carolina, that, assuming the conversion does not result in
any federal income tax liability to Newberry Federal, its account holders, or
DutchFork Bancshares, implementation of the plan of conversion will not result
in any South Carolina income tax liability to those entities or persons.
The opinions of Muldoon, Murphy & Faucette LLP and Clifton D. Bodiford,
CPA, and the letter from Keller & Company are filed as exhibits to the
registration statement that DutchFork Bancshares has filed with the Securities
and Exchange Commission. See "Where You Can Find More Information."
You should consult with your own tax advisor regarding the tax consequences
of the conversion particular to you.
Liquidation Account. In the unlikely event of a complete liquidation of
Newberry Federal before the conversion, each depositor in Newberry Federal would
receive a pro rata share of any assets of Newberry Federal remaining after
payment of claims of all creditors, including the claims of all depositors up to
the withdrawal value of their accounts. Each depositor's pro rata share of the
remaining assets would be in the same proportion as the
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value of his or her deposit account to the total value of all deposit accounts
in Newberry Federal at the time of liquidation.
After the completion of the conversion, holders of withdrawals deposit(s)
in Newberry Federal, including certificates of deposit, will not be entitled to
share in any residual assets upon liquidation of Newberry Federal. However,
under Office of Thrift Supervision regulations, Newberry Federal will, at the
time of the conversion, establish a liquidation account in an amount equal to
its total equity as of the date of the latest statement of financial condition
contained in the final prospectus relating to the conversion. Newberry Federal
will maintain the liquidation account for the benefit of eligible account
holders and supplemental eligible account holders who retain their savings
accounts in Newberry Federal. Each eligible account holder and supplemental
eligible account holder will, with respect to each deposit account held, have a
related inchoate interest in a sub-account portion of the liquidation account
balance.
The initial subaccount balance for a savings account held by an eligible
account holder or a supplemental eligible account holder will be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of the holder's "qualifying deposit" in the
deposit account and the denominator is the total amount of the "qualifying
deposits" of all eligible or supplemental eligible account holders. The initial
subaccount balance will not be increased, and it will be decreased as provided
below.
If the deposit balance in any deposit account of an eligible account holder
or supplemental eligible account holder at the close of business on any annual
closing day of Newberry Federal after November 30, 1998, or March 31, 2000 is
less than the lesser of the deposit balance in a deposit account at the close of
business on any other annual closing date after November 30, 1998 or March 31,
2000, or the amount of the "qualifying deposit" in a savings account on November
30, 1998 or March 31, 2000, then the subaccount balance for a deposit account
will be adjusted by reducing the subaccount balance in an amount proportionate
to the reduction in the savings balance. Once reduced, the subaccount balance
will not be subsequently increased, notwithstanding any increase in the savings
balance of the related deposit account. If any deposit account is closed, the
related subaccount balance will be reduced to zero.
Only upon the unlikely event of a complete liquidation of Newberry Federal,
each eligible account holder and supplemental eligible account holder will be
entitled to receive a liquidation distribution from the liquidation account in
the amount of the then current adjusted subaccount balance(s) for deposit
account(s) held by the holder before any liquidation distribution may be made to
stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of savings accounts and other liabilities or similar transactions
with another federally insured institution in which Newberry Federal is not the
surviving institution will be considered to be a complete liquidation. In any
of these transactions, the liquidation account will be assumed by the surviving
institution.
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.
Subscription Offering and Subscription Rights
Under the plan of conversion, nontransferable subscription rights to
purchase DutchFork Bancshares common stock have been issued to persons and
entities entitled to purchase the common stock in the subscription offering.
The amount of the common stock that these parties may purchase will depend on
the availability of the common stock for purchase under the categories described
in the plan of conversion. Subscription priorities have been established for
the allocation of stock that may be available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or more
on deposit at Newberry Federal, including all withdrawals deposits at Newberry
Federal and noninterest-bearing deposits, as of November 30, 1998 has the right
to subscribe for up to the greater of $175,000 of common stock, which equals
17,500 shares, one-tenth of one percent of the total offering of common stock or
15 times the product, rounded down to the next whole number, obtained by
multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of qualifying deposit of the
eligible account holder and the denominator is the total amount of qualifying
deposits of all eligible account holders. If the exercise of subscription
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rights in this category results in an oversubscription, shares of common stock
will be allocated among subscribing eligible account holders so as to permit
each one, if possible, to purchase a number of shares sufficient to make the
person's total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. After that, unallocated shares will be
allocated proportionately, based on the amount of the eligible accountholder's
qualifying deposits as compared to total qualifying deposits of all subscribing
eligible account holders. Subscription rights received by officers and
directors in this category based on any increased deposits in Newberry Federal
in the one year period preceding November 30, 1998 are subordinated to the
subscription rights of other eligible account holders.
Category 2: Employee Stock Ownership Plan. Newberry Federal's employee
stock ownership plan has the right to purchase up to 8% of the shares of common
stock issued in the conversion. The plan intends to purchase 8% of the shares
of common stock issued in the conversion. If the number of shares offered in
the conversion is increased, the plan will have a priority right to purchase any
shares exceeding that amount up to 8% of the common stock. If the plan's
subscription is not filled in its entirety, the employee stock ownership plan
may purchase shares in the open market or may purchase shares directly from
DutchFork Bancshares with the approval of the Office of Thrift Supervision, if
required.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit, including all withdrawals deposits at Newberry
Federal, including noninterest-bearing deposits, as of March 31, 2000 has the
right to subscribe for up to the greater of $175,000 of common stock, which
equals 17,500 shares, one-tenth of one percent of the total offering of common
stock or 15 times the product, rounded down to the next whole number, obtained
by multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
supplemental eligible account holder and the denominator is the total amount of
qualifying deposits of all supplemental eligible account holders. If eligible
account holders and Newberry Federal's employee stock ownership plan subscribe
for all of the shares being offered by DutchFork Bancshares, no shares will be
available for supplemental eligible account holders. If the exercise of
subscription rights in this category results in an oversubscription, shares of
common stock will be allocated among subscribing supplemental eligible account
holders so as to permit each supplemental eligible account holder, if possible,
to purchase a number of shares sufficient to make his or her total allocation
equal 100 shares or the number of shares actually subscribed for, whichever is
less. After that, unallocated shares will be allocated among subscribing
supplemental eligible account holders proportionately, based on the amount of
their respective qualifying deposits as compared to total qualifying deposits of
all subscribing supplemental eligible account holders.
Category 4: Other Members. Each depositor of Newberry Federal, including
persons with withdrawals deposits at Newberry Federal and noninterest-bearing
demand deposits, as of April 30, 2000 and each borrower with a loan outstanding
on February 10, 1987 which continues to be outstanding as of April 30, 2000 has
the right to purchase up to $175,000 of common stock, which equals 17,500
shares. If eligible account holders, Newberry Federal's employee stock
ownership plan and supplemental eligible account holders subscribe for all of
the shares being offered by DutchFork Bancshares, no shares will be available
for other members. If there is an oversubscription in this category, the
available shares will be allocated among subscribing other members so as to
permit each other member, if possible, to purchase a number of shares sufficient
to make his or her total allocation equal 100 shares or the number of shares
actually subscribed for, whichever is less. After that, unallocated shares will
be allocated among subscribing other members proportionately, based on the
number of votes of a subscribing other member as of the record date of the
special meeting of members to vote on the plan of conversion bears to total
votes of all subscribing other members as of the record date of the special
meeting of members
Subscription rights are nontransferable. If you sell or otherwise transfer
your rights to subscribe for common stock in the subscription offering or
subscribe for common stock on behalf of another person, you may forfeit those
rights and face possible further sanctions and penalties imposed by the Office
of Thrift Supervision or another agency of the U.S. Government. If you exercise
your subscription rights, you will be required to certify that you are
purchasing shares solely for your own account and that you have no agreement or
understanding with any other person for the sale or transfer of the shares.
Once tendered, subscription orders cannot be revoked without the consent of
Newberry Federal and DutchFork Bancshares.
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Expiration Date for the Subscription Offering. DutchFork Bancshares and
Newberry Federal will make reasonable attempts to provide a prospectus and
related offering materials to holders of subscription rights. However, the
subscription offering and all subscription rights under the plan of conversion
will expire at 12:00 Noon, Eastern time, on June 22, 2000, whether or not
Newberry Federal has been able to locate each person entitled to subscription
rights. Orders for common stock in the subscription offering received in hand
by Newberry Federal after that time will not be accepted. The subscription
offering may be extended by DutchFork Bancshares and Newberry Federal up to
August 21, 2000 without regulatory approval. Office of Thrift Supervision
regulations require that DutchFork Bancshares complete the sale of common stock
within 45 days after the close of the subscription offering. If the direct
community offering and the syndicated community offerings are not completed
within that period all funds received will be returned promptly with interest at
Newberry Federal's passbook rate and all withdrawal authorizations will be
canceled. If regulatory approval of an extension of the time period has been
granted, all subscribers will be notified of the extension and of the duration
of any extension that has been granted, and will be given the right to increase,
decrease or rescind their orders. If an affirmative response to any
resolicitation is not received by DutchFork Bancshares from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest, or withdrawal authorizations will be canceled. No
single extension can exceed 90 days.
Persons in Non-Qualified States. DutchFork Bancshares and Newberry Federal
will make reasonable efforts to comply with the securities laws of all states in
the United States in which persons entitled to subscribe for stock under the
plan of conversion reside. However, DutchFork Bancshares and Newberry Federal
are not required to offer stock in the subscription offering to any person who
resides in a foreign country or who resides in a state of the United States in
which both of the following apply (i) a small number of persons otherwise
eligible to subscribe for shares of common stock reside, and (ii) the issuance
of subscription rights or the offer or sale of stock to such persons would
require DutchFork Bancshares to register as a broker, dealer, salesman or
selling agent, under the securities laws of the state, or a request or
requirement to register or otherwise qualify the subscription rights or common
stock for sale or submit any filing in the state or such registration or
qualification would be impracticable for reasons of cost or otherwise. Where
the number of persons eligible to subscribe for shares in one state is small,
DutchFork Bancshares and Newberry Federal will base their decision as to whether
or not to offer the common stock in the state on a number of factors, including
the size of accounts held by account holders in the state, the cost of reviewing
the registration and qualification requirements of the state, and of actually
registering or qualifying the shares, or the need to register DutchFork
Bancshares, its officers, directors or employees as brokers, dealers or
salesmen.
Direct Community Offering
Any shares of common stock that remain unsubscribed for in the subscription
offering will be offered by DutchFork Bancshares to certain members of the
general public in a direct community offering, with preference given to natural
persons residing in Newberry and Lexington Counties, South Carolina. Purchasers
in the direct community offering are eligible to purchase up to $175,000 of
common stock, which equals 17,500 shares. If not enough shares are available to
fill orders in the direct community offering, the available shares will be
allocated among purchasers to permit each purchaser, to the extent possible, to
purchase the number of shares necessary to make his or her total allocation of
shares equal to the lesser of 100 shares or the number of shares subscribed for
by such purchaser. Thereafter, unallocated shares will be allocated among
purchasers whose orders remain unsatisfied on a 100 shares per order basis until
all such orders have been filled or the remaining shares have been allocated.
The direct community offering, if held, may be concurrent with, during or
promptly after the subscription offering. The direct community offering may
terminate on or at any time after 12:00 noon, Eastern time, on June 22, 2000,
but no later than 45 days after the close of the subscription offering, unless
extended by DutchFork Bancshares and Newberry Federal, with approval of the
Office of Thrift Supervision. If regulatory approval of an extension of the
time period has been granted, all subscribers will be notified of the extension
and of the duration of any extension that has been granted, and will be given
the right to increase, decrease or rescind their orders. If an affirmative
response to any resolicitation is not received by DutchFork Bancshares from a
subscriber, the subscriber's order will be rescinded and all funds received will
be promptly returned with interest. DutchFork Bancshares and Newberry Federal
have the absolute right to accept or reject in whole or in part any orders to
purchase shares in the direct community offering. If an order is rejected in
part, the purchaser does not have the right to cancel the remainder of the
order. DutchFork Bancshares presently intends to terminate the direct community
offering as soon as it has received orders for all shares available for purchase
in the conversion.
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Syndicated Community Offering
The plan of conversion provides that, if necessary, all shares of common
stock not purchased in the subscription offering and direct community offering,
if any, may be offered for sale to certain members of the general public in a
syndicated community offering through a syndicate of registered broker-dealers
to be formed and managed by Trident Securities acting as agent of DutchFork
Bancshares. DutchFork Bancshares and Newberry Federal have the right to reject
orders, in whole or part, in their sole discretion in the syndicated community
offering. Neither Trident Securities nor any registered broker-dealer will have
any obligation to take or purchase any shares of the common stock in the
syndicated community offering; however, Trident Securities has agreed to use its
best efforts in the sale of shares in the syndicated community offering.
Stock sold in the syndicated community offering also will be sold at the
$10.00 purchase price. See "--Stock Pricing and Number of Shares to Be Issued."
No person will be permitted to subscribe in the syndicated community offering
for shares of common stock with an aggregate purchase price of more than
$175,000, which equals 17,500 shares. See "--Plan of Distribution for the
Subscription, Direct Community and Syndicated Community Offerings" for a
description of the commission to be paid to the selected dealers and to Trident
Securities.
Trident Securities may enter into agreements with selected dealers to
assist in the sale of shares in the syndicated community offering. During the
syndicated community offering, selected dealers may only solicit indications of
interest from their customers to place orders with DutchFork Bancshares as of a
certain date for the purchase of shares. When and if Trident Securities and
DutchFork Bancshares believe that enough indications of interest and orders have
been received in the subscription offering, the direct community offering and
the syndicated community offering to consummate the conversion, Trident
Securities will request, as of that certain date, selected dealers to submit
orders to purchase shares for which they have received indications of interest
from their customers. Selected dealers will send confirmations to customers on
the next business day after that certain date. Selected dealers may settle the
trade by debiting the accounts of their customers on a date which will be three
business days from that certain date. Customers who authorize selected dealers
to debit their brokerage accounts are required to have the funds for payment in
their account on but not before the settlement date. On the settlement date,
selected dealers will remit funds to the account that DutchFork Bancshares
established for each selected dealer. Each customer's funds so forwarded to
DutchFork Bancshares, along with all other accounts held in the same title, will
be insured by the Federal Deposit Insurance Corporation up to the applicable
$100,000 legal limit. After payment has been received by DutchFork Bancshares
from selected dealers, funds will earn interest at Newberry Federal's passbook
rate until the completion of the offering. At the completion of the conversion,
the funds received will be used to purchase the shares of common stock ordered.
The shares issued in the conversion cannot and will not be insured by the
Federal Deposit Insurance Corporation or any other government agency. If the
conversion is not completed, funds with interest will be returned promptly to
the selected dealers, who, in turn, will promptly credit their customers'
brokerage accounts.
The syndicated community offering may terminate no more than 45 days after
the expiration of the subscription offering, unless extended by DutchFork
Bancshares and Newberry Federal, with approval of the Office of Thrift
Supervision.
If Newberry Federal is unable to find purchasers from the general public
for all unsubscribed shares, other purchase arrangements will be made by the
board of directors of Newberry Federal, if feasible. Any other arrangements
must be approved by the Office of Thrift Supervision. The Office of Thrift
Supervision may grant one or more extensions of the offering period, provided
that no single extension exceeds 90 days, subscribers are given the right to
increase, decrease or rescind their subscriptions during the extension period,
and the extensions do not go more than two years beyond the date on which the
board of directors approved the plan of conversion. If the conversion is not
completed within 45 days after the close of the subscription offering, either
all funds received will be returned with interest, and withdrawal authorizations
canceled, or, if the Office of Thrift Supervision has granted an extension of
time, all subscribers will be given the right to increase, decrease or rescind
their subscriptions before the end of the extension period. If an extension of
time is obtained, all subscribers will be notified of the extension and of their
rights to modify their orders. If an affirmative response to any resolicitation
is not received by DutchFork Bancshares from a subscriber, the subscriber's
order will be rescinded and all funds received will be promptly returned with
interest or withdrawal authorizations will be canceled.
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Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
Newberry Federal and DutchFork Bancshares have retained Trident Securities
to consult with and advise Newberry Federal and to assist Newberry Federal and
DutchFork Bancshares, on a best efforts basis, in the distribution of shares in
the offering. Trident Securities is a broker-dealer registered with the
Securities and Exchange Commission and a member of the National Association of
Securities Dealers, Inc. Trident Securities will assist Newberry Federal in the
conversion by acting as marketing advisor with respect to the subscription
offering and will represent Newberry Federal as placement agent on a best
efforts basis in the sale of the common stock in the direct community offering
if one is held; conducting training sessions with directors, officers and
employees of Newberry Federal regarding the conversion process; and assisting in
the establishment and supervision of Newberry Federal's stock information center
and, with management's input, will train Newberry Federal's staff to record
properly and tabulate orders for the purchase of common stock and to respond
appropriately to customer inquiries.
Based on negotiations between Newberry Federal and DutchFork Bancshares
concerning the fee structure, Trident Securities will receive a management fee
of $10,000 plus a fee equal to 2.0% of the aggregate dollar amount of all stock
sold in the subscription and direct community offerings. Such amount does not
include any shares sold to the employee stock ownership plan, directors,
officers and employees of Newberry Federal or DutchFork Bancshares or their
immediate families. Such fee will be paid upon completion of the conversion.
Trident Securities will be reimbursed for its reasonable out-of-pocket expenses,
including legal fees.
Trident Securities has not prepared any report or opinion constituting a
recommendation or advice to DutchFork Bancshares or Newberry Federal or to
persons who subscribe for stock, nor has it prepared an opinion as to the
fairness to DutchFork Bancshares or Newberry Federal of the purchase price or
the terms of the stock to be sold. Trident Securities expresses no opinion as
to the prices at which common stock to be issued may trade. Trident Securities
and selected dealers participating in the syndicated community offering may
receive a commission in the syndicated community offering in a maximum amount to
be agreed upon by DutchFork Bancshares and Newberry Federal to reflect market
requirements at the time of the allocation of shares in the syndicated community
offering.
With certain limitations, DutchFork Bancshares and Newberry Federal have
also agreed to indemnify Trident Securities against liabilities and expenses,
including legal fees, incurred from certain claims or litigation arising out of
or based upon untrue statements or omissions contained in the offering material
for the common stock or with regard to allocations of shares if there is an
oversubscription, or determinations of eligibility to purchase shares.
Description of Sales Activities
The common stock will be offered in the subscription offering and direct
community offering principally by the distribution of this prospectus and
through activities conducted at Newberry Federal's stock information center at
its main office. The stock information center is expected to operate during
normal business hours throughout the subscription offering and direct community
offering. It is expected that at any particular time one or more Trident
Securities employees will be working at the stock information center. Employees
of Trident Securities will be responsible for mailing materials relating to the
offering, responding to questions regarding the conversion and the offering and
processing stock orders.
Sales of common stock will be made by registered representatives affiliated
with Trident Securities or by the selected dealers managed by Trident
Securities. The management and employees of Newberry Federal may participate in
the offering in clerical capacities, providing administrative support in
effecting sales transactions or, when permitted by state securities laws,
answering questions of a mechanical nature relating to the proper execution of
the order form. Management of Newberry Federal may answer questions regarding
the business of Newberry Federal when permitted by state securities laws. Other
questions of prospective purchasers, including questions as to the advisability
or nature of the investment, will be directed to registered representatives.
The management and employees of DutchFork Bancshares and Newberry Federal have
been instructed not to solicit offers to purchase common stock or provide advice
regarding the purchase of common stock.
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No officer, director or employee of Newberry Federal or DutchFork
Bancshares will be compensated, directly or indirectly, for any activities
related to the offer or sale of securities issued in the conversion.
None of Newberry Federal's personnel participating in the offering is
registered or licensed as a broker or dealer or an agent of a broker or dealer.
Newberry Federal's personnel will assist in the above-described sales activities
under an exemption from registration as a broker or dealer provided by Rule 3a4-
1 promulgated under the Securities Exchange Act of 1934, as amended. Rule 3a4-1
generally provides that an "associated person of an issuer" of securities will
not be deemed a broker solely by reason of participation in the sale of
securities of the issuer if the associated person meets certain conditions.
These conditions include, but are not limited to, that the associated person
participating in the sale of an issuer's securities not be compensated in
connection therewith at the time of participation, that the person not be
associated with a broker or dealer and that the person observe certain
limitations on his or her participation in the sale of securities. For purposes
of this exemption, "associated person of an issuer" is defined to include any
person who is a director, officer or employee of the issuer or a company that
controls, is controlled by or is under common control with the issuer.
Procedure for Purchasing Shares in the Subscription and Direct Community
Offerings
To purchase shares in the subscription offering, an executed order form
with the required full payment for each share subscribed for, or with
appropriate authorization indicated on the stock order form for withdrawal of
full payment from the subscriber's deposit account with Newberry Federal, must
be received by Newberry Federal by 12:00 Noon, Eastern time, on June 22, 2000.
DutchFork Bancshares need not accept order forms that are not received by that
time or are executed defectively or are received without full payment or without
appropriate withdrawal instructions. In addition, Newberry Federal and
DutchFork Bancshares are not obligated to accept orders submitted on photocopied
or facsimilied stock order forms and will not accept stock order forms
unaccompanied by an executed certification form. DutchFork Bancshares and
Newberry Federal have the right to waive or permit the correction of incomplete
or improperly executed order forms, but do not represent that they will do so.
Notwithstanding the foregoing, Newberry Federal and DutchFork Bancshares will
have the right, each in their sole discretion, to permit institutional investors
to submit irrevocable orders together with a legally binding commitment for
payment and to thereafter pay for the shares of common stock for which they
subscribe in the direct community offering at any time before 48 hours before
the completion of the conversion. Under the plan of conversion, the
interpretation by DutchFork Bancshares and Newberry Federal of the terms and
conditions of the plan of conversion and of the order form will be final. In
order to purchase shares in the direct community offering, the order form,
accompanied by the required payment for each share subscribed for, must be
received by Newberry Federal before the direct community offering terminates,
which may be on or at any time after the end of the offering. Once received, an
executed order form may not be modified, amended or rescinded without the
consent of Newberry Federal unless the conversion has not been completed within
45 days after the end of the subscription offering, unless extended.
In order to ensure that persons with subscription rights are properly
identified as to their stock purchase priorities, they must list all accounts on
the order form giving all names in each account, the account number and the
approximate account balance as of the appropriate eligibility date. Failure to
list an account could result in fewer shares being allocated to a subscribing
member.
Full payment for subscriptions may be made by check, bank draft or money
order, or by authorization of withdrawal from deposit accounts maintained with
Newberry Federal. Appropriate means by which withdrawals may be authorized are
provided on the order form. No wire transfers or third party checks will be
accepted. Interest will be paid on payments made by cash, check, bank draft or
money order at Newberry Federal's passbook rate from the date payment is
received at the stock information center until the completion or termination of
the conversion. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rates until completion or
termination of the conversion, unless the certificate matures after the date of
receipt of the order form but before closing, in which case funds will earn
interest at the passbook rate from the date of maturity until the conversion is
completed or terminated, but a hold will be placed on the funds, making them
unavailable to the depositor until completion or termination of the conversion.
When the conversion is completed, the funds received in the offering will be
used to purchase the shares of common stock ordered. The shares of common stock
issued in the conversion cannot and will not be insured by the Federal Deposit
Insurance Corporation or any other
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government agency. If the conversion is not consummated for any reason, all
funds submitted will be promptly refunded with interest as described above.
If a subscriber authorizes Newberry Federal to withdraw the amount of the
purchase price from his or her deposit account, Newberry Federal will do so as
of the effective date of conversion, though the account must contain the full
amount necessary for payment at the time the subscription order is received.
Newberry Federal will waive any applicable penalties for early withdrawal from
certificate accounts. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time funds are
actually transferred under the authorization the certificate will be canceled at
the time of the withdrawal, without penalty, and the remaining balance will earn
interest at Newberry Federal's passbook rate.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes, but rather may pay for shares
of common stock subscribed for at the $10.00 purchase price upon the completion
of the conversion; provided that there is in force from the time of its
subscription until that time, a loan commitment from an unrelated financial
institution or DutchFork Bancshares to lend to the employee stock ownership
plan, at that time, the aggregate purchase price of the shares for which it
subscribed.
Individual retirement accounts maintained in Newberry Federal do not permit
investment in the common stock. A depositor interested in using his or her
individual retirement account funds to purchase common stock must do so through
a self-directed individual retirement account. Since Newberry Federal does not
offer those accounts, it will allow a depositor to make a trustee-to-trustee
transfer of the individual retirement account funds to a trustee offering a
self-directed individual retirement account program with the agreement that the
funds will be used to purchase DutchFork Bancshares' common stock in the
offering. There will be no early withdrawal or Internal Revenue Service
interest penalties for transfers. The new trustee would hold the common stock
in a self-directed account in the same manner as Newberry Federal now holds the
depositor's individual retirement account funds. An annual administrative fee
may be payable to the new trustee. Depositors interested in using funds in an
individual retirement account at Newberry Federal to purchase common stock
should contact the stock information center as soon as possible so that the
necessary forms may be forwarded for execution and returned before the
subscription offering ends. In addition, federal laws and regulations require
that officers, directors and 10% shareholders who use self-directed individual
retirement account funds to purchase shares of common stock in the subscription
offering, make purchases for the exclusive benefit of individual retirement
accounts.
Certificates representing shares of common stock purchased, and any refund
due, will be mailed to purchasers at the address specified in properly completed
order forms or to the last address of the persons appearing on the records of
Newberry Federal as soon as practicable following the sale of all shares of
common stock. Any certificates returned as undeliverable will be disposed of as
required by applicable law. Purchasers may not be able to sell the shares of
common stock which they purchased until certificates for the common stock are
available and delivered to them, even though trading of the common stock may
have begun.
To ensure that each purchaser receives a prospectus at least 48 hours
before the end of the offering as required by Rule 15c2-8 under the Securities
Exchange Act of 1934, no prospectus will be mailed any later than five days
before that date or hand delivered any later than two days before that date.
Execution of the order form will confirm receipt or delivery under Rule 15c2-8.
Order forms will only be distributed with a prospectus. By executing and
returning the regulatory mandated certification form, you will be certifying
that you received this prospectus and acknowledging that the common stock is not
a deposit account and is not insured or guaranteed by any federal or state
governmental agency. You will also be acknowledging that you received
disclosure concerning the risks involved in this stock offering. The
certification form could be used as support to show that you understand the
nature of this investment.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities sold in the conversion be based upon an estimated pro forma value of
DutchFork Bancshares and Newberry Federal as converted, as determined by an
independent appraisal. Newberry Federal and DutchFork Bancshares have retained
Keller & Company, which is experienced in the evaluation and appraisal of
business entities, to prepare an appraisal of the pro forma market value of
DutchFork Bancshares and Newberry Federal as converted, as well as a business
plan.
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Keller & Company will receive a fee expected to total approximately
$33,000 for its appraisal services and assistance in the preparation of a
business plan, plus reasonable out-of-pocket expenses incurred in the
preparation of the appraisal and business plan. Newberry Federal has agreed to
indemnify Keller & Company under certain circumstances against liabilities and
expenses, including legal fees, arising out of, related to, or based upon the
conversion.
Keller & Company has prepared an appraisal of the estimated pro forma
market value of DutchFork Bancshares and Newberry Federal as converted taking
into account the formation of DutchFork Bancshares as the holding company for
Newberry Federal. For its analysis, Keller & Company undertook substantial
investigations to learn about Newberry Federal's business and operations.
Management supplied financial information, including annual financial
statements, information on the composition of assets and liabilities, and other
financial schedules. In addition to this information, Keller & Company reviewed
Newberry Federal's conversion application as filed with the Office of Thrift
Supervision and DutchFork Bancshares' registration statement as filed with the
Securities and Exchange Commission. Furthermore, Keller & Company visited
Newberry Federal's facilities and had discussions with Newberry Federal's
management and its special conversion legal counsel, Muldoon, Murphy & Faucette
LLP. Keller & Company did not perform a detailed individual analysis of the
separate components of DutchFork Bancshares' or Newberry Federal's assets and
liabilities.
Keller & Company's analysis utilized three selected valuation procedures,
the price/book method, the price/earnings method, and price/assets method, all
of which are described in its report. Keller & Company placed the greatest
emphasis on the price/earnings and price/book methods in estimating pro forma
market value. In applying these procedures, Keller & Company reviewed, among
other factors, the economic make-up of Newberry Federal's primary market area,
Newberry Federal's financial performance and condition in relation to publicly
traded institutions that Keller & Company deemed comparable to Newberry Federal,
the specific terms of the offering of DutchFork Bancshares' common stock, the
pro forma impact of the additional capital raised in the conversion, conditions
of securities markets in general, and the market for thrift institution common
stock in particular. Keller & Company's analysis provides an approximation of
the pro forma market value of DutchFork Bancshares and Newberry Federal as
converted based on the valuation methods applied and the assumptions outlined in
its report. Included in its report were certain assumptions as to the pro forma
earnings of DutchFork Bancshares after the conversion that were utilized in
determining the appraised value. These assumptions included estimated expenses
and an assumed after-tax rate of return on the net conversion proceeds as
described under "Pro Forma Data," purchases by the employee stock ownership plan
of an amount equal to 8% of the common stock issued in the conversion and
purchases in the open market by the stock-based incentive plan of a number of
shares equal to 4% of the common stock sold in the conversion at the $10.00
purchase price. See "Pro Forma Data" for additional information concerning
these assumptions. The use of different assumptions may yield different
results.
On the basis of the analysis in its report, Keller & Company has advised
DutchFork Bancshares and Newberry Federal that, in its opinion, as of February
7, 2000, and updated as of April 5, 2000, the estimated pro forma market value
of DutchFork Bancshares and Newberry Federal, as converted and, therefore, the
common stock was within the valuation range of $10,030,000 to $13,570,000 with a
midpoint of $11,800,000. After reviewing the methodology and the assumptions
used by Keller & Company in the preparation of the appraisal, the board of
directors established the estimated valuation range which is equal to the
valuation range of $10,030,000 to $13,570,000 with a midpoint of $11,800,000.
Assuming that the shares are sold at $10.00 per share in the conversion, the
estimated number of shares would be between 1,003,000 and 1,357,000 with a
midpoint of 1,180,000. The purchase price of $10.00 per share was determined by
discussion among the boards of directors of Newberry Federal and DutchFork
Bancshares and Trident Securities, taking into account, among other factors, the
requirement under Office of Thrift Supervision regulations that the common stock
be offered in a manner that will achieve the widest distribution of the stock
and desired liquidity in the common stock after the conversion. Since the
outcome of the offering relates in large measure to market conditions at the
time of sale, it is not possible to determine the exact number of shares that
will be issued by DutchFork Bancshares at this time. The estimated valuation
range may be amended, with the approval of the Office of Thrift Supervision, if
necessitated by developments following the date of the appraisal in, among other
things, market conditions, the financial condition or operating results of
Newberry Federal, regulatory guidelines or national or local economic
conditions. Keller & Company's appraisal report is filed as an exhibit to the
registration statement that DutchFork Bancshares has filed with the Securities
and Exchange Commission. See "Where You Can Find More Information."
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If, upon completion of the subscription offering, at least the minimum
number of shares are subscribed for, Keller & Company, after taking into account
factors similar to those involved in its prior appraisal, will determine its
estimate of the pro forma market value of DutchFork Bancshares and Newberry
Federal as converted, as of the close of the subscription offering.
No shares will be sold unless Keller & Company confirms that, to the best
of its knowledge and judgment, nothing of a material nature has occurred that
would cause it to conclude that the actual total purchase price on an aggregate
basis was materially incompatible with its estimate of the total pro forma
market value of DutchFork Bancshares and Newberry Federal as converted at the
time of the sale. If, however, the facts do not justify that statement, the
offering may be canceled, a new estimated valuation range and price per share
set and new subscription, direct community and syndicated community offerings
held. Under those circumstances, subscribers would have the right to modify or
rescind their subscriptions and to have their subscription funds returned
promptly with interest and holds on funds authorized for withdrawal from deposit
accounts would be released or reduced.
Depending upon market and financial conditions, the number of shares issued
may be more than 1,560,550 shares or less than 1,003,000 shares. If the total
amount of shares issued is less than 1,003,000 or more than 1,560,550 for
aggregate gross proceeds of less than $10,030,000 or more than $15,605,500,
subscription funds will be returned promptly with interest to each subscriber
unless he indicates otherwise. If Keller & Company establishes a new valuation
range, it must be approved by the Office of Thrift Supervision.
If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
boards of directors of Newberry Federal and DutchFork Bancshares, if possible.
Other purchase arrangements must be approved by the Office of Thrift Supervision
and may provide for purchases for investment purposes by directors, officers,
their associates and other persons in excess of the limitations provided in the
plan of conversion and in excess of the proposed director purchases discussed
earlier, although no purchases are currently intended. If other purchase
arrangements cannot be made, the plan of conversion will terminate.
In formulating its appraisal, Keller & Company relied upon the
truthfulness, accuracy and completeness of all documents Newberry Federal
furnished to it. Keller & Company also considered financial and other
information from regulatory agencies, other financial institutions, and other
public sources, as appropriate. While Keller & Company believes this
information to be reliable, Keller & Company does not guarantee the accuracy or
completeness of the information and did not independently verify the financial
statements and other data provided by Newberry Federal and DutchFork Bancshares
or independently value the assets or liabilities of DutchFork Bancshares and
Newberry Federal. The appraisal is not intended to be, and must not be
interpreted as, a recommendation of any kind as to the advisability of voting to
approve the plan of conversion or of purchasing shares of common stock.
Moreover, because the appraisal must be based on many factors which change
periodically, there is no assurance that purchasers of shares in the conversion
will be able to sell shares after the conversion at prices at or above the
purchase price.
Copies of the appraisal report of Keller & Company, including any
amendments, and the detailed memorandum of the appraiser setting forth the
method and assumptions for such appraisal are available for inspection at the
main office of Newberry Federal and the other locations specified under "Where
You Can Find More Information."
Limitations on Purchases of Shares
The plan of conversion provides for certain limitations to be placed upon
the purchase of common stock by eligible subscribers and others in the
conversion. Each subscriber must subscribe for a minimum of 25 shares. The
plan of conversion provides for the following purchase limitations:
. No eligible subscriber, including all persons on a joint account or
similarly titled account, may purchase more than $175,000 of common
stock in the subscription offering, which equals 17,500 shares. All
persons on a joint account or similarly titled account will be counted
as a single depositor for purposes of determining the maximum amount
that may be subscribed for by owners of a joint account;
94
. The ESOP may purchase, in the aggregate, up to 8% of the shares of
common stock sold in the conversion;
. No person may purchase more than $175,000 of common stock in the
direct community offering, which equals 17,500 shares;
. No person may purchase more than $175,000 of common stock in the
syndicated community offering, which equals 17,500 shares; and
. No person, either alone or together with associates of or persons
acting in concert with such person, may purchase in the aggregate more
than the overall maximum purchase limitation of $175,000 of common
stock, which equals 17,500 shares.
For purposes of the plan of conversion, the directors are not deemed to be
acting in concert solely by reason of their Board membership. Pro rata
reductions within each subscription rights category will be made in allocating
shares if the maximum purchase limitations are exceeded.
Newberry Federal's and DutchFork Bancshares' boards of directors may, in
their sole discretion, increase the maximum purchase limitation up to 9.99% of
the shares of common stock sold in the conversion, provided that orders for
shares that exceed 5% of the shares of common stock sold in the conversion may
not exceed, in the aggregate, 10% of the shares sold in the conversion.
Newberry Federal and DutchFork Bancshares do not intend to increase the maximum
purchase limitation unless market conditions warrant an increase in the maximum
purchase limitation and the sale of a number of shares in excess of the minimum
of the estimated valuation range. If the boards of directors decide to increase
the purchase limitation above, persons who subscribed for the maximum number of
shares of common stock will be, and other large subscribers in the discretion of
DutchFork Bancshares and Newberry Federal may be, given the opportunity to
increase their subscriptions accordingly, based on the rights and preferences of
any person who has priority subscription rights.
The plan of conversion defines "acting in concert" to mean knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not by an express agreement; or a combination
or pooling of voting or other interests in the securities of an issuer for a
common purpose under any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. In general, a person who acts
in concert with another party shall also be deemed to be acting in concert with
any person who is also acting in concert with that other party. DutchFork
Bancshares and Newberry Federal may presume that certain persons are acting in
concert based upon, among other things, joint account relationships and the fact
that persons may have filed joint Schedules 13D with the Securities and Exchange
Commission with respect to other companies.
The plan of conversion defines "associate," with respect to a particular
person, to mean any corporation or organization other than Newberry Federal or a
majority-owned subsidiary of Newberry Federal of which a person is an officer or
partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities; any trust or other estate in which a person has
a substantial beneficial interest or as to which a person serves as trustee or
in a similar fiduciary capacity; and any relative or spouse of a person, or any
relative of a spouse, who either has the same home as a person or who is a
director or officer of Newberry Federal or any of its parents or subsidiaries.
For example, a corporation of which a person serves as an officer would be an
associate of a person and, therefore, all shares purchased by a corporation
would be included with the number of shares that a person could purchase
individually under the purchase limitations described above.
The plan of conversion defines "officer" to mean an executive officer of
Newberry Federal, including its Chief Executive Officer, President, Executive
Vice Presidents, Senior Vice Presidents, Vice Presidents in charge of principal
business functions, Secretary, Treasurer and Controller.
Common stock purchased in the conversion will be freely transferable,
except for shares purchased by directors and officers of Newberry Federal and
DutchFork Bancshares and by NASD members. See "--Restrictions on
Transferability by Directors and Officers and NASD Members."
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Restrictions on Repurchase of Stock
Under Office of Thrift Supervision regulations, savings associations and
their holding companies may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in an offer made to all of its stockholders to repurchase the
common stock on a pro rata basis, approved by the Office of Thrift Supervision
or the repurchase of qualifying shares of a director. Furthermore, repurchases
of any common stock are prohibited if they would cause the association's
regulatory capital to be reduced below the amount required for the liquidation
account or the regulatory capital requirements imposed by the Office of Thrift
Supervision. Repurchases are generally prohibited during the first year
following conversion. Upon ten days' written notice to the Office of Thrift
Supervision, and if the Office of Thrift Supervision does not object, an
institution may make open market repurchases of its outstanding common stock
during years two and three following the conversion, provided that certain
regulatory conditions are met and that the repurchase would not adversely affect
the financial condition of the institution. Any repurchases of common stock by
DutchFork Bancshares must meet these regulatory restrictions unless the Office
of Thrift Supervision would provide otherwise. Stock repurchases by DutchFork
Bancshares will depend upon receipt of dividends from Newberry Federal because
DutchFork Bancshares initially will have no source of income other than
dividends from Newberry Federal and earnings from the investment of the limited
net proceeds from the offering retained by DutchFork Bancshares.
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of common stock purchased by directors and officers of DutchFork
Bancshares may not be sold for a period of one year following the conversion,
except upon the death of the stockholder or unless approved by the Office of
Thrift Supervision. Any stock purchased after the conversion is free of this
restriction. Accordingly, shares of common stock issued by DutchFork Bancshares
to directors and officers will bear a legend giving appropriate notice of the
restriction and, in addition, DutchFork Bancshares will give appropriate
instructions to the transfer agent for DutchFork Bancshares' common stock with
respect to the restriction on transfers. Any shares issued to directors and
officers as a stock dividend, stock split or otherwise with respect to
restricted common stock will also be restricted.
Purchases of outstanding shares of common stock of DutchFork Bancshares by
directors, officers, or any person who was an executive officer or director of
Newberry Federal after adoption of the plan of conversion, and their associates
during the three-year period following the conversion may be made only through a
broker or dealer registered with the Securities and Exchange Commission, except
with the prior written approval of the Office of Thrift Supervision. This
restriction does not apply, however, to negotiated transactions involving more
than 1% of DutchFork Bancshares' outstanding common stock or to the purchase of
stock under the stock-based incentive plan.
DutchFork Bancshares has filed with the Securities and Exchange Commission
a registration statement under the Securities Act of 1933 for the registration
of the common stock to be issued in the conversion. This registration does not
cover the resale of the shares. Shares of common stock purchased by persons who
are not affiliates of DutchFork Bancshares may be resold without registration.
Shares purchased by an affiliate of DutchFork Bancshares will have resale
restrictions under Rule 144 of the Securities Act. If DutchFork Bancshares
meets the current public information requirements of Rule 144, each affiliate of
DutchFork Bancshares who complies with the other conditions of Rule 144,
including those that require the affiliate's sale to be aggregated with those of
certain other persons, would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of 1% of the outstanding shares of DutchFork Bancshares or the average
weekly volume of trading in the shares during the preceding four calendar weeks.
Provision may be made in the future by DutchFork Bancshares to permit affiliates
to have their shares registered for sale under the Securities Act under certain
circumstances.
Under guidelines of the National Association of Securities Dealers, Inc.,
members of that organization and their associates face certain restrictions on
the transfer of securities purchased with subscription rights and to certain
reporting requirements upon purchase of the securities.
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Interpretation, Amendment and Termination
To the extent permitted by law, all interpretations of the plan of
conversion by Newberry Federal will be final; however, such interpretations have
no binding effect on the Office of Thrift Supervision or the Federal Deposit
Insurance Corporation. The plan of conversion provides that, if deemed
necessary or desirable by the board of directors, the plan of conversion may be
substantively amended by the board of directors as a result of comments from
regulatory authorities or otherwise, without the further approval of Newberry
Federal's members.
Completion of the conversion requires the sale of all shares of the common
stock within 24 months following approval of the plan of conversion by Newberry
Federal's board of directors. If this condition is not satisfied, the plan of
conversion will be terminated and Newberry Federal will continue its business in
the mutual form of organization. The plan of conversion may be terminated by
the board of directors at any time.
RESTRICTIONS ON ACQUISITION OF
DUTCHFORK BANCSHARES AND NEWBERRY FEDERAL
General
Newberry Federal's plan of conversion provides for the conversion of
Newberry Federal from the mutual to the stock form of organization and, as part
of the conversion, the adoption of a new federal stock charter and bylaws by
Newberry Federal's members. The plan of conversion also provides for the
concurrent formation of a holding company. See "The Conversion--General." As
described below and elsewhere in this document, certain provisions in DutchFork
Bancshares' certificate of incorporation and bylaws and in its management
remuneration provided for in the conversion, together with provisions of
Delaware corporate law, may have anti-takeover effects. In addition, Newberry
Federal's federal stock charter and bylaws may also have "anti-takeover"
effects. Finally, regulatory restrictions may make it difficult for persons or
companies to acquire control of either DutchFork Bancshares or Newberry Federal.
Restrictions in DutchFork Bancshares' Certificate of Incorporation and Bylaws
DutchFork Bancshares' certificate of incorporation and bylaws contain
provisions that could make more difficult an acquisition of DutchFork Bancshares
by means of a tender offer, proxy context or otherwise. Some provisions will
also render the removal of the incumbent board of directors or management of
DutchFork Bancshares more difficult. These provisions may have the effect of
deterring a future takeover attempt that is not approved by the DutchFork
Bancshares Board, but which DutchFork Bancshares shareholders may deem to be in
their best interests or in which shareholders may receive a substantial premium
for their shares over then current market prices. As a result, shareholders who
might desire to participate in such a transaction may not have the opportunity
to do so. The following description of these provisions is only a summary and
does not provide all of the information contained in DutchFork Bancshares'
certificate of incorporation and bylaws. See "Where You Can Find More
Information" as to where to obtain a copy of these documents.
Business Combinations with Related Persons. The certificate of
incorporation requires the approval of the holders of at least 80% of DutchFork
Bancshares' outstanding shares of voting stock to approve certain "business
combinations" involving a "related person" except in cases where the proposed
transaction has been approved in advance by a majority of those members of
DutchFork Bancshares' board of directors who are unaffiliated with the related
person and were directors before the time when the related person became a
related person.
The term "related person" includes any individual that owns beneficially or
controls, directly or indirectly, 10% or more of the outstanding shares of
voting stock of DutchFork Bancshares or an affiliate of such person or entity.
A "business combination" includes:
. any merger or consolidation of DutchFork Bancshares with or into any
related person;
97
. any sale, lease, exchange, mortgage, transfer, or other disposition of
25% or more of the assets of DutchFork Bancshares or combined assets
of DutchFork Bancshares and its subsidiaries to a related person;
. any merger or consolidation of a related person with or into DutchFork
Bancshares or a subsidiary of DutchFork Bancshares;
. any sale, lease, exchange, transfer, or other disposition of 25% or
more of the assets of a related person to DutchFork Bancshares or a
subsidiary of DutchFork Bancshares;
. the issuance of any securities of DutchFork Bancshares or a subsidiary
of DutchFork Bancshares to a related person;
. the acquisition by DutchFork Bancshares or a subsidiary of DutchFork
Bancshares of any securities of a related person;
. any reclassification of common stock of DutchFork Bancshares or any
recapitalization involving the common stock of DutchFork Bancshares;
or
. any agreement or other arrangement providing for any of the foregoing.
The shares of common stock that Newberry Federal's directors and executive
officers intend to purchase in the conversion, when combined with the shares
that may be awarded to participants under Newberry Federal's employee stock
ownership plan and DutchFork Bancshares' stock-based incentive plan, could
result in management and employees controlling in excess of 20% of DutchFork
Bancshares' outstanding stock, which would enable management and employees as a
group to defeat any business combination involving a related person.
Limitation on Voting Rights. The certificate of incorporation of DutchFork
Bancshares provides that no record owner of any outstanding DutchFork Bancshares
common stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of
DutchFork Bancshares common stock will be entitled or permitted to any vote in
respect of the shares held in excess of the 10% limit. Beneficial ownership is
determined pursuant to the federal securities laws and includes shares
beneficially owned by such person or any of his or her affiliates (as defined in
the certificate of incorporation), shares which such person or his or her
affiliates have the right to acquire upon the exercise of conversion rights or
options and shares as to which such person and his or her affiliates have or
share investment or voting power, but does not include shares beneficially owned
by directors, officers and employees of Newberry Federal or DutchFork Bancshares
or shares that are subject to a revocable proxy and that are not otherwise
beneficially, or deemed by DutchFork Bancshares to be beneficially, owned by
such person and his or her affiliates.
Evaluation of Offers. The certificate of incorporation of DutchFork
Bancshares further provides that the board of directors of DutchFork Bancshares,
when evaluating an offer, to (1) make a tender or exchange offer for any equity
security of DutchFork Bancshares, (2) merge or consolidate DutchFork Bancshares
with another corporation or entity or (3) purchase or otherwise acquire all or
substantially all of the properties and assets of DutchFork Bancshares, may, as
part of the exercise of its judgment in determining what is in the best interest
of DutchFork Bancshares and the stockholders of DutchFork Bancshares, give
consideration to those factors that directors of any subsidiary (including
Newberry Federal) may consider in evaluating any action that may result in a
change or potential change of control of such subsidiary, and the social and
economic effects of acceptance of such offer on: DutchFork Bancshares' present
and future customers and employees and those of its subsidiaries (including
Newberry Federal); the communities in which DutchFork Bancshares and Newberry
Federal operate or are located; the ability of DutchFork Bancshares to fulfill
its corporate objectives as a savings and loan holding company; and the ability
of Newberry Federal to fulfill the objectives of a stock savings bank under
applicable statutes and regulations. By having these standards in the
certificate of incorporation, the board of directors may be in a stronger
position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of DutchFork Bancshares, even if
the price offered is significantly greater than the then market price of any
equity security of DutchFork Bancshares.
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Board of Directors
Classified Board. The board of directors of DutchFork Bancshares is
divided into three classes, each of which contains approximately one-third of
the number of directors. The shareholders elect one class of directors each
year for a term of three years. The classified Board makes it more difficult
and time consuming for a shareholder group to fully use its voting power to gain
control of the board of directors without the consent of the incumbent board of
directors of DutchFork Bancshares.
Filling of Vacancies; Removal. The certificate of incorporation provides
that any vacancy occurring in the DutchFork Bancshares board of directors,
including a vacancy created by an increase in the number of directors, may be
filled by a vote of a majority of the directors then in office. The certificate
of incorporation of DutchFork Bancshares provides that a director may be removed
from the board of directors before the expiration of his or her term only for
cause and only upon the vote of 80% of the outstanding shares of voting stock.
These provisions make it more difficult for shareholders to remove directors and
replace them with their own nominees.
Qualifications. The bylaws of DutchFork Bancshares disqualify from
election, reelection, appointment or reappointment to the board of directors any
person who resides outside a 50 mile radius of Newberry, South Carolina. This
provision prevents non-local shareholders from nominating themselves for
election to the Board. In addition, the bylaws of DutchFork Bancshares
disqualify from election or appointment any person who, among other offenses,
has been convicted of, or is currently charged in any complaint with
participation in, a crime involving dishonesty or breach of trust that is
punishable by imprisonment for a term exceeding one-year under state or federal
law.
Shareholder Action by Written Consent; Special Meetings of Shareholders.
Stockholders of DutchFork Bancshares must act only through an annual or special
meeting. Stockholders cannot act by written consent in lieu of a meeting. The
certificate of incorporation provides that only the Chairman or a majority of
the board of directors of DutchFork Bancshares may call special meetings of the
shareholders of DutchFork Bancshares. Shareholders are not able to call a
special meeting or require that the Board do so. At a special meeting,
shareholders may consider only the business specified in the notice of meeting
given by DutchFork Bancshares. The provisions of DutchFork Bancshares'
certificate of incorporation prohibiting stockholder action by written consent
may have the effect of delaying consideration of a shareholder proposal until
the next annual meeting, unless a special meeting is called by the Chairman or
at the request of a majority of the board of directors. These provisions also
would also prevent the holders of a majority of common stock from unilaterally
using the written consent procedure to take shareholder action. Moreover, a
shareholder could not force shareholder consideration of a proposal between
annual meetings over the opposition of the Chairman and the DutchFork Bancshares
board of directors by calling a special meeting of shareholders.
Advance Notice Provisions for Shareholder Nominations and Proposals. The
DutchFork Bancshares bylaws establish an advance notice procedure for
shareholders to nominate directors or bring other business before an annual
meeting of shareholders of DutchFork Bancshares. A person may not be nominated
for election as a director unless that person is nominated by or at the
direction of the DutchFork Bancshares board of directors or by a shareholder who
has given appropriate notice to DutchFork Bancshares before the meeting.
Similarly, a shareholder may not bring business before an annual meeting unless
the shareholder has given DutchFork Bancshares appropriate notice of its
intention to bring that business before the meeting. DutchFork Bancshares'
Secretary must receive notice of the nomination or proposal not less than 90
days nor more than 120 days before the annual meeting. A shareholder who
desires to raise new business must provide certain information to DutchFork
Bancshares concerning the nature of the new business, the shareholder and the
shareholder's interest in the business matter. Similarly, a shareholder wishing
to nominate any person for election as a director must provide DutchFork
Bancshares with certain information concerning the nominee and the proposing
shareholder.
Advance notice of nominations or proposed business by shareholders gives
the DutchFork Bancshares Board time to consider the qualifications of the
proposed nominees, the merits of the proposals and, to the extent deemed
necessary or desirable by the DutchFork Bancshares board of directors, to inform
shareholders and make recommendations about those matters.
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Preferred Stock. The certificate of incorporation authorize the DutchFork
Bancshares board of directors to establish one or more series of preferred stock
and, for any series of preferred stock, to determine the terms and rights of the
series, including voting rights, conversion rates, and liquidation preferences.
Although the DutchFork Bancshares board of directors has no intention at the
present time of doing so, it could issue a series of preferred stock that could,
depending on its terms, impede a merger, tender offer or other takeover attempt.
The DutchFork Bancshares board of directors will make any determination to issue
shares with those terms based on its judgment as to the best interests of
DutchFork Bancshares and its shareholders.
Amendment of Certificate of Incorporation. DutchFork Bancshares'
certificate of incorporation require the affirmative vote of 80% of the
outstanding voting stock entitled to vote to amend or repeal certain provisions
of the certificate of incorporation, including the provision limiting voting
rights, the provisions relating to approval of business combinations with
related persons, calling special meetings, the number and classification of
directors, director and officer indemnification by DutchFork Bancshares and
amendment of DutchFork Bancshares' bylaws and certificate of incorporation.
These supermajority voting requirements make it more difficult for the
shareholders to amend these provisions of the DutchFork Bancshares certificate
of incorporation. The shares of common stock that Newberry Federal's directors
and executive officers intend to purchase in the conversion, when combined with
the shares that may be awarded to participants under Newberry Federal's employee
stock ownership plan and DutchFork Bancshares' stock-based incentive plan, could
result in management and employees controlling in excess of 20% of DutchFork
Bancshares' outstanding stock, which would enable management and employees as a
group to defeat any shareholder proposal to amend these provisions of the
DutchFork Bancshares certificate of incorporation.
Anti-Takeover Effects of DutchFork Bancshares' Certificate of Incorporation and
Bylaws and Management Remuneration Adopted in Conversion
The provisions described above are intended to reduce DutchFork Bancshares'
vulnerability to takeover attempts and other transactions which have not been
negotiated with and approved by members of its board of directors. Provisions
of the stock-based incentive plan provide for accelerated benefits to
participants if a change in control of DutchFork Bancshares or Newberry Federal
occurs or a tender or exchange offer for their stock is made. See "Management
of Newberry Federal--Benefits--Stock-Based Incentive Plan." DutchFork
Bancshares and Newberry Federal have also entered into agreements with key
officers and intends to establish the employee severance compensation plan which
will provide such officers and eligible employees with additional payments and
benefits on the officer's termination associated with a change in control of
DutchFork Bancshares or Newberry Federal. See "Management of Newberry Federal--
Executive Compensation--Employment Agreements," and "Management of Newberry
Federal--Benefits--Employee Severance Compensation Plan." The foregoing
provisions and limitations may make it more difficult for companies or persons
to acquire control of DutchFork Bancshares. Additionally, the provisions could
deter offers to acquire the outstanding shares of DutchFork Bancshares which
might be viewed by stockholders to be in their best interests.
DutchFork Bancshares' board of directors believes that the provisions of
the certificate of incorporation and bylaws are in the best interest of
DutchFork Bancshares and its stockholders. An unsolicited non-negotiated
takeover proposal can seriously disrupt the business and management of a
corporation and cause it great expense. Accordingly, the board of directors
believes it is in the best interests of DutchFork Bancshares and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts.
Delaware Corporate Law
Delaware has a statute designed to provide Delaware corporations with
additional protection against hostile takeovers. The Delaware takeover statute
is intended to discourage certain takeover practices by impeding the ability of
a hostile acquiror to engage in certain transactions with the target company.
In general, the statute provides that a "person" who owns 15% or more of
the outstanding voting stock of a Delaware corporation (an "interested
stockholder") may not consummate a merger or other business combination
transaction with such corporation at any time during the three-year period
following the date such "person" became an interested stockholder. The term
"business combination" is defined broadly to cover a wide range of corporate
100
transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of the
statute: (1) any business combination if, before the date a person became an
interested stockholder, the board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (2) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an interested stockholder, excluding, for purposes of
determining the number of shares outstanding, shares owned by the corporation's
directors who are also officers and specific employee stock plans; (3) any
business combination with an interested stockholder that is approved by the
board of directors and by a two-thirds vote of the outstanding voting stock not
owned by the interested stockholder; and (4) certain business combinations that
are proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the board of directors. A corporation may exempt itself from the requirements
of the statute by adopting an amendment to its certificate of incorporation or
bylaws electing not to be governed by it. At the present time, the board of
directors does not intend to propose any such amendment.
Restrictions in Newberry Federal's Federal Stock Charter and Bylaws
Although the board of directors of Newberry Federal is not aware of any
effort that might be made to obtain control of Newberry Federal after the
conversion, the board of directors believes that it is appropriate to adopt
provisions permitted by federal regulation to protect the interests of the
converted bank and its stockholders from any hostile takeover. These provisions
may, indirectly, inhibit a change in control of DutchFork Bancshares, as
Newberry Federal's sole stockholder. See "Risk Factors--Takeover attempts that
you want to occur could be difficult to achieve."
Newberry Federal's federal stock charter will contain a provision whereby
the acquisition of beneficial ownership of more than 10% of the issued and
outstanding shares of any class of equity securities of Newberry Federal by any
person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate, will be prohibited for a period of three years following
the date of completion of the conversion without the prior written approval of
the Office of Thrift Supervision. If shares are acquired in violation of this
provision of Newberry Federal's federal stock charter, all shares beneficially
owned by any person in excess of 10% shall be considered "excess shares" and
shall not be counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares with respect to any matters submitted to the
stockholders for a vote. This limitation shall not apply to any transaction in
which Newberry Federal forms a holding company without a change in the
respective beneficial ownership interests of its stockholders other than by the
exercise of any dissenter or appraisal rights. If holders of revocable proxies
for more than 10% of the shares of the common stock of DutchFork Bancshares
seek, among other things, to elect one-third or more of DutchFork Bancshares'
board of directors, to cause DutchFork Bancshares' stockholders to approve the
acquisition or corporate reorganization of DutchFork Bancshares or to exert a
continuing influence on a material aspect of the business operations of
DutchFork Bancshares, which actions could indirectly result in a change in
control of Newberry Federal, the board of directors of Newberry Federal will be
able to assert this provision of Newberry Federal's federal stock charter
against such holders. Although the board of directors of Newberry Federal is
not currently able to determine when and if it would assert this provision of
Newberry Federal's federal stock charter, the board of directors, in exercising
its fiduciary duty, may assert this provision if it were deemed to be in the
best interests of Newberry Federal, DutchFork Bancshares and its stockholders.
It is unclear, however, whether this provision, if asserted, would be successful
against such persons in a proxy contest which could result in a change in
control of Newberry Federal indirectly through a change in control of DutchFork
Bancshares.
In addition, stockholders will not be permitted to cumulate their votes in
the election of directors. Furthermore, Newberry Federal's bylaws provide for
the election of three classes of directors to staggered terms.
Finally, the federal stock charter provides for the issuance of shares of
preferred stock on terms, including conversion and voting rights, as may be
determined by Newberry Federal's board of directors without stockholder
approval. Although Newberry Federal has no arrangements, understandings or
plans at the present time for the issuance or use of the shares of undesignated
preferred stock proposed to be authorized, the board of directors
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believes that the availability of such shares will provide Newberry Federal with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other corporate needs that may arise. If a proposed merger,
tender offer or other attempt to gain control of Newberry Federal occurs of
which management does not approve, the board of directors can authorize the
issuance of one or more series of preferred stock with rights and preferences
which could impede the completion of such a transaction. An effect of the
possible issuance of such preferred stock, therefore, may be to deter a future
takeover attempt. The board of directors does not intend to issue any preferred
stock except on terms which the board of directors deems to be in the best
interest of Newberry Federal and its then existing stockholders.
Regulatory Restrictions
Office of Thrift Supervision Conversion Regulations. Regulations issued by
the Office of Thrift Supervision provide that for a period of three years
following the date of the completion of the conversion, no person, acting singly
or together with associates in a group of persons acting in concert, shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than ten percent (10%) of any class of any equity security of DutchFork
Bancshares without the prior written approval of the Office of Thrift
Supervision. Where any person, directly or indirectly, acquires beneficial
ownership of more than ten percent (10%) of any class of any equity security of
DutchFork Bancshares without the prior written approval of the Office of Thrift
Supervision, the securities beneficially owned by such person in excess of ten
percent (10%) shall not be voted by any person or counted as voting shares with
respect to any matter submitted to the stockholders for a vote, and shall not be
counted as outstanding for purposes of determining the affirmative vote
necessary to approve any matter submitted to the stockholders for a vote.
Change in Bank Control Act. The acquisition of ten percent (10%) or more
of the common stock outstanding may trigger the provisions of the Change in Bank
Control Act. The Office of Thrift Supervision has also adopted a regulation
under the Change in Bank Control Act which generally requires persons who at any
time intend to acquire control of a federally chartered savings association,
including a converted savings bank such as Newberry Federal or a savings and
loan holding company, such as DutchFork Bancshares, to provide 60 days prior
written notice and certain financial and other information to the Office of
Thrift Supervision.
The 60-day notice period does not commence until the information is deemed
to be substantially complete. Control for the purpose of this Act exists in
situations in which the acquiring party has voting control of at least twenty-
five percent (25%) of any class of DutchFork Bancshares' voting stock or the
power to direct the management or policies of DutchFork Bancshares. However,
under Office of Thrift Supervision regulations, control is presumed to exist
where the acquiring party has voting control of at least ten percent (10%) of
any class of DutchFork Bancshares' voting securities if specified "control
factors" are present. The statute and underlying regulations authorize the
Office of Thrift Supervision to disapprove a proposed acquisition on certain
specified grounds.
DESCRIPTION OF DUTCHFORK BANCSHARES STOCK
General
DutchFork Bancshares is authorized to issue 4,000,000 shares of common
stock having a par value of $.01 per share and 500,000 shares of preferred stock
having a par value of $.01 per share. DutchFork Bancshares will not issue any
shares of preferred stock in the conversion. Each share of DutchFork
Bancshares' common stock will have the same relative rights as, and will be
identical in all respects with, each other share of common stock. Upon payment
of the purchase price for the common stock, as required by the plan of
conversion, all stock will be duly authorized, fully paid and nonassessable.
The common stock of DutchFork Bancshares will represent nonwithdrawable
capital, will not be an account of any type, and will not be insured by the
Federal Deposit Insurance Corporation or any other government agency.
102
Common Stock
Dividends. DutchFork Bancshares can pay dividends out of statutory surplus
or from certain net profits if, as and when declared by its board of directors.
The payment of dividends by DutchFork Bancshares is limited by law and
applicable regulation. See "Dividend Policy" and "Regulation and Supervision."
The holders of common stock of DutchFork Bancshares will be entitled to receive
and share equally in dividends as may be declared by the board of directors of
DutchFork Bancshares out of funds legally available for dividends. If DutchFork
Bancshares issues preferred stock, the holders of the preferred stock may have a
priority over the holders of the common stock with respect to dividends.
Voting Rights. After the conversion, the holders of common stock of
DutchFork Bancshares will possess exclusive voting rights in DutchFork
Bancshares. They will elect DutchFork Bancshares' board of directors and act on
other matters as are required to be presented to them under Delaware law or as
are otherwise presented to them by the board of directors. Except as discussed
in "Restrictions on Acquisition of DutchFork Bancshares and Newberry Federal,"
each holder of common stock will be entitled to one vote per share and will not
have any right to cumulate votes in the election of directors. If DutchFork
Bancshares issues preferred stock, holders of DutchFork Bancshares preferred
stock may also possess voting rights. Certain matters require a vote of 80% of
the outstanding shares entitled to vote. See "Restrictions on Acquisition of
DutchFork Bancshares and Newberry Federal."
As a federal mutual savings bank, corporate powers and control of Newberry
Federal are currently vested in (1) its members who elect Newberry Federal's
directors, and (2) its board of directors, who elect the officers of Newberry
Federal and who fill any vacancies on the board of directors. After the
conversion, voting rights will be vested exclusively in DutchFork Bancshares,
which will own all of the outstanding capital stock of Newberry Federal, and
will be voted at the direction of DutchFork Bancshares' board of directors.
Consequently, the holders of the common stock of DutchFork Bancshares will not
have direct control of Newberry Federal.
Liquidation. If there is any liquidation, dissolution or winding up of
Newberry Federal, DutchFork Bancshares, as the holder of Newberry Federal's
capital stock, would be entitled to receive all of Newberry Federal's assets
available for distribution after payment or provision for payment of all debts
and liabilities of Newberry Federal, including all deposit accounts and accrued
interest, and after distribution of the balance in the special liquidation
account to eligible account holders and supplemental eligible account holders.
Upon liquidation, dissolution or winding up of DutchFork Bancshares, the holders
of its common stock would be entitled to receive all of the assets of DutchFork
Bancshares available for distribution after payment or provision for payment of
all its debts and liabilities. If DutchFork Bancshares issues preferred stock,
the preferred stock holders may have a priority over the holders of the common
stock upon liquidation or dissolution.
Indemnification and Limit on Liability. DutchFork Bancshares' certificate
of incorporation contains provisions that limit the liability of and indemnity
of its directors, officers and employees. Such provisions provide that each
person who was or is made a party or is threatened to be made a party to or is
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director or officer of DutchFork Bancshares shall be indemnified and held
harmless by DutchFork Bancshares to the fullest extent authorized by the
Delaware General Corporation Law against all expense, liability and loss
reasonably incurred. Under certain circumstances, the right to indemnification
shall include the right to be paid by DutchFork Bancshares the expenses incurred
in defending any such proceeding in advance of its final disposition. In
addition, a director of DutchFork Bancshares shall not be personally liable to
DutchFork Bancshares or its stockholders for monetary damages except for
liability for any breach of the duty of loyalty, for acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of the
law, under Section 174 of the Delaware General Corporation Law, or for any
transaction from which the director derived an improper personal benefit.
Preemptive Rights; Redemption. Holders of the common stock of DutchFork
Bancshares will not be entitled to preemptive rights with respect to any shares
that may be issued. The common stock cannot be redeemed.
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Preferred Stock
DutchFork Bancshares will not issue any preferred stock in the conversion
and it has no current plans to issue any preferred stock after the conversion.
Preferred stock may be issued with designations, powers, preferences and rights
as the board of directors may from time to time determine. The board of
directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
Restrictions on Acquisition
Acquisitions of DutchFork Bancshares are restricted by provisions in its
certificate of incorporation and bylaws and by rules and regulations of various
regulatory agencies. See "Regulation and Supervision" and "Restrictions on
Acquisition of DutchFork Bancshares and Newberry Federal."
DESCRIPTION OF NEWBERRY FEDERAL STOCK
General
The federal stock charter of Newberry Federal, to be effective upon the
conversion, authorizes the issuance of stock consisting of 10,000 shares of
common stock, par value $1.00 per share, and 1,000 shares of preferred stock,
par value $1.00 per share, which preferred stock may be issued in series and
classes having such rights, preferences, privileges and restrictions as the
board of directors may determine. Each share of common stock of Newberry
Federal will have the same relative rights as, and will be identical in all
respects with, each other share of common stock. After the conversion, the
board of directors will be authorized to approve the issuance of common stock up
to the amount authorized by the stock charter without the approval of Newberry
Federal's stockholders. All of the issued and outstanding common stock of
Newberry Federal will be held by DutchFork Bancshares. Newberry Federal stock
will represent nonwithdrawable capital, will not be an account of an insurable
type and will not be insured by the Federal Deposit Insurance Corporation.
Common Stock
Dividends. The holders of Newberry Federal's common stock will be entitled
to receive and to share equally in such dividends as may be declared by the
board of directors of Newberry Federal out of its legally available funds. See
"DutchFork Bancshares' Dividend Policy" for certain restrictions on the payment
of dividends and "Federal and State Taxation on Income--Federal Income Taxation"
for a discussion of the consequences of the payment of cash dividends from
income appropriated to bad debt reserves.
Voting Rights. Immediately after the conversion, the holders of Newberry
Federal's common stock will possess exclusive voting rights in Newberry Federal.
Each holder of shares of common stock will be entitled to one vote for each
share held. Shareholders shall not be entitled to cumulate their votes for the
election of directors. See "Restrictions on Acquisition of DutchFork Bancshares
and Newberry Federal--Anti-Takeover Effects of DutchFork Bancshares' Certificate
of Incorporation and Bylaws and Management Remuneration Adopted in Conversion."
Liquidation. If there is a liquidation, dissolution, or winding up of
Newberry Federal, the holders of common stock will be entitled to receive, after
payment of all Newberry Federal's debts and liabilities, including all deposit
accounts and accrued interest on deposit accounts, and distribution of the
balance in the special liquidation account to eligible account holders and
supplemental eligible account holders, all assets of Newberry Federal available
for distribution in cash or in kind. If additional preferred stock is issued
after the conversion, the holders thereof may also have priority over the
holders of common stock if there is a liquidation or dissolution.
Preemptive Rights; Redemption. Holders of Newberry Federal's common stock
will not be entitled to preemptive rights with respect to any shares of Newberry
Federal which may be issued. Upon receipt by Newberry Federal of the full
specified purchase price, the common stock will be fully paid and non-
assessable.
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REGISTRATION REQUIREMENTS
DutchFork Bancshares has registered the common stock with the Securities
and Exchange Commission under Section 12(g) of the Securities Exchange Act of
1934 and will not deregister its common stock for a period of at least three
years following the conversion. As a result of registration, the proxy and
tender offer rules, insider trading reporting and restrictions, annual and
periodic reporting and other requirements of that statute will apply.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for DutchFork
Bancshares by Muldoon, Murphy & Faucette LLP, Washington, D.C. The federal tax
consequences of the conversion have been opined upon by Muldoon, Murphy &
Faucette LLP and the South Carolina tax consequences of the conversion have been
opined upon by Clifton D. Bodiford, CPA, Columbia, South Carolina. Muldoon,
Murphy & Faucette LLP and Clifton D. Bodiford have consented to the references
to their opinions in this prospectus. Certain legal matters will be passed upon
for Trident Securities by Elias, Matz, Tiernan & Herrick, L.L.P., Washington,
D.C.
EXPERTS
The consolidated financial statements of Newberry Federal as of September
30, 1999 and 1998, and for each of the years in the two-year period ended
September 30, 1999, are included in this prospectus in reliance upon the report
of Clifton D. Bodiford, CPA, Columbia, South Carolina, included elsewhere in
this prospectus and upon the authority of said firm as experts in accounting and
auditing.
Keller & Company has consented to the summary in this prospectus of its
report to Newberry Federal setting forth its opinion as to the estimated pro
forma market value of DutchFork Bancshares and Newberry Federal, as converted,
and its letter with respect to subscription rights, and to the use of its name
and statements with respect to it appearing in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
DutchFork Bancshares has filed with the Securities and Exchange Commission
a Registration Statement on Form SB-2 (File No. 333-31986) under the Securities
Act of 1933, as amended, with respect to the common stock offered in the
conversion. This prospectus does not contain all the information contained in
the registration statement, certain parts of which are omitted as permitted by
the rules and regulations of the Securities and Exchange Commission. This
information may be inspected at the public reference facilities maintained by
the Securities and Exchange Commission at 450 Fifth Street, NW, Room 1024,
Washington, D.C. 20549 and at its regional offices at 500 West Madison Street,
Suite 1400, Chicago, South Carolina 60661; and 7 World Trade Center, Suite 1300,
New York, New York 10048. Copies may be obtained at prescribed rates from the
Public Reference Room of the Securities and Exchange Commission at 450 Fifth
Street, NW, Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The registration statement also is available
through the Securities and Exchange Commission's World Wide Web site on the
Internet at http://www.sec.gov.
Newberry Federal has filed an application for approval of conversion with
the Office of Thrift Supervision. This prospectus omits certain information
contained in that application. The conversion application may be examined at
the Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552
and at the offices of the Regional Director of the Office of Thrift Supervision
at the Southeast Regional Office of the Office of Thrift Supervision, 1475
Peachtree Street, N.E., Atlanta, Georgia 30309.
DutchFork Bancshares has filed with the Office of Thrift Supervision an
application to form a holding company. This prospectus omits certain
information contained in that application. The application may be inspected,
without charge, at the offices of the Office of Thrift Supervision, 1700 G
Street, N.W., Washington, D.C. 20552 and at the offices of the Regional Director
of the Office of Thrift Supervision at the Southeast Regional Office of the
Office of Thrift Supervision, 1475 Peachtree Street, N.E., Atlanta, Georgia
30309.
A copy of the plan of conversion, DutchFork Bancshares' certificate of
incorporation and bylaws and Newberry Federal's federal stock charter and bylaws
are available without charge from Newberry Federal.
105
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Newberry Federal Savings Bank and Subsidiary
Page
----
Report of Independent Auditor.................................................................... F-2
Consolidated Balance Sheets as of December 31, 1999 (unaudited)
and September 30, 1999 and 1998................................................................ F-3
Consolidated Statements of Income for the Three Months Ended
December 31, 1999 and 1998 (unaudited) and for the Years Ended September 30, 1999 and 1998..... 30
Consolidated Statements of Comprehensive Operations for the Three Months Ended
December 31, 1999 and 1998 (unaudited) and for the Years Ended September 30, 1999 and 1998..... F-5
Consolidated Statements of Retained Earnings for the Three Months Ended
December 31, 1999 (unaudited) and for the Years Ended September 30, 1999 and 1998.............. F-6
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 1999 and 1998 (unaudited) and for the Years Ended September 30, 1999 and 1998..... F-7
Notes to Consolidated Financial Statements....................................................... F-9
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements for DutchFork Bancshares have not been
included in this prospectus because DutchFork Bancshares, which has engaged only
in organizational activities to date, has no significant assets, contingent or
other liabilities, revenues or expenses.
F-1
[LETTERHEAD OF CLIFTON D. BODIFORD]
Report of Independent Auditor
The Board of Directors
Newberry Federal Savings Bank and Subsidiary
Newberry, South Carolina
I have audited the accompanying consolidated balance sheets of Newberry Federal
Savings Bank and Subsidiary as of September 30, 1999 and 1998, and the related
consolidated statements of income, comprehensive operations, retained earnings,
and cash flows for the years then ended. These financial statements are the
responsibility of the Bank's management. My responsibility is to express an
opinion on these financial statements based on my audits.
I conducted the audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Newberry Federal
Savings Bank and Subsidiary at September 30, 1999 and 1998 and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
November 2, 1999 /s/ Clifton D. Bodiford
F-2
Newberry Federal Savings Bank
and Subsidiary
Consolidated Balance Sheets
December 31, September 30,
1999 1999 1998
------------ ------------- ------------
Assets (unaudited)
Cash and cash equivalents (Notes 1, 2
and 12) $ 6,123,328 $ 3,256,053 $ 4,963,719
Investments and mortgage-backed securities
(Notes 1, 3, 7 and 12):
Available for sale:
Investments (cost of $24,577,854 and
$6,631,375 at September 30, 1999
and 1998 respectively and
$25,064,700 at December 31, 1999) 22,000,851 22,067,828 6,542,262
Mortgage-backed securities (cost of
$100,578,925 and $86,297,233 at
September 30, 1999 and 1998
respectively and $114,440,228
at December 31, 1999) 109,887,856 96,884,504 85,152,382
Held for investment:
Investments (fair value of
$1,141,000 and $1,346,700 at
September 30, 1999 and 1998
respectively and $1,141,000 at
December 31, 1999) 1,141,000 1,141,000 1,346,045
Mortgage-backed securities (fair
value of $4,339,769 and $6,833,377
at September 30, 1999 and 1998
respectively and $4,366,219 at
December 31, 1999) 4,332,492 4,465,704 6,818,659
Loans receivable (Notes 1, 4, 7, 10, and 12): 74,788,258 75,324,278 71,249,049
Repossessed assets 22,195 14,271 18,757
Premises, furniture and equipment, net (Notes
1 and 5) 3,622,623 3,656,352 3,743,885
Accrued interest receivable:
Loans and mortgage-backed securities
(Note 1) 470,146 489,453 524,766
Investments and other property 814,711 778,828 524,954
Prepaid assets 159,684 255,218 238,933
Prepaid income tax and tax refunds
receivable 1,706,024 1,440,936 60,567
Deferred tax asset (Notes 1 and 9) 530,050 461,406 525,496
Other 1,000,632 914,991 1,065,571
------------ ------------ ------------
Total assets $226,599,850 $211,150,822 $182,775,045
============ ============ ============
F-3
Newberry Federal Savings Bank
and Subsidiary
Consolidated Balance Sheets (continued)
December 31, September 30,
1999 1999 1998
------------- ------------ -------------
(unaudited)
Liabilities and retained earnings
Liabilities:
Deposit accounts (Note 6, 12 and
15) $148,436,718 $137,537,411 $141,702,366
Federal Home Loan Bank advances
(Notes 7 and 12) 35,740,000 39,240,000 20,600,000
Other borrowings 5,325,000 7,370,000
Advances from borrowers for taxes
and insurance (Note 4) 17,004 59,983 84,930
Accrued income taxes payable 279,479
Accounts payable - securities 19,662,172 8,893,350
Accounts payable 39,479 50,713 107,057
Accrued expenses 690,657 698,873 577,305
Accrued interest payable 465,458 523,227 397,695
Other 95,180 76,461 255,065
------------ ------------ ------------
Total liabilities 210,471,668 194,450,018 164,003,897
------------ ------------ ------------
Commitments and contingencies (Note 10)
Retained earnings, substantially restricted
(Notes 9 and 11) 20,849,689 20,551,275 19,536,945
Net accumulated unrealized gains (losses)
on investments and mortgage backed
securities available for sale
(Notes 1 and 3) (4,721,507) (3,850,471) (765,797)
------------ ------------ ------------
16,128,182 16,700,804 18,771,148
------------ ------------ ------------
Total liabilities and retained earnings $226,599,850 $211,150,822 $182,775,045
============ ============ ============
See accompanying notes.
F-4
Newberry Federal Savings Bank
and Subsidiary
Consolidated Statements of Comprehensive Operations
Three Months Ended
December 31, Year Ended September 30,
1999 1998 1999 1998
---------- ----------- ----------- -----------
(unaudited) (unaudited)
Net income $ 298,414 $ 232,403 $ 1,014,330 $ 1,251,456
Other Comprehensive income (loss),
net of tax:
Unrealized gains (losses) arising
during the period, net of tax effect
of $(1,885,797) and $57,713 for
the years ended September 30, 1999
and 1998, respectively, and $(532,502)
and $141,540 for the three months
ending December 31, 1999 and 1998,
respectively (871,036) (231,523) (3,084,674) 94,415
---------- ---------- ----------- -----------
Comprehensive income (loss) $ (572,622) $ 880 $(2,070,344) $ 1,345,871
========== ========== =========== ===========
See accompanying notes
F-5
Newberry Federal Savings Bank
and Subsidiary
Consolidated Statements of Retained Earnings
Accumulated
Other
Retained Comprehensive
Earnings Income Total
------------ ------------- -----------
Balance at September 30, 1997 $ 18,285,489 $ (860,212) $17,425,277
Net income 1,251,456 1,251,456
Change in net unrealized depreciation
on investments available for sale
(net of deferred and current income
taxes of $57,713) 94,415 94,415
------------ ----------- -----------
Balance at September 30, 1998 19,536,945 (765,797) 18,771,148
Net income 1,014,330 1,014,330
Change in net unrealized depreciation
on investments available for sale
(net of deferred and current income
tax benefit of $(1,885,797)) (3,084,674) (3,084,674)
------------ ----------- -----------
Balance at September 30, 1999 20,551,275 (3,850,471) 16,700,804
Net income (unaudited) 298,414 298,414
Change in net unrealized depreciation
on investments available for sale
(net of deferred and current income
tax benefit of $(532,502))(unaudited) (871,036) (871,036)
------------ ----------- -----------
Balance at December 31, 1999 (unaudited) $ 20,849,689 $(4,721,507) $16,128,182
============ =========== ===========
See accompanying notes.
F-6
Newberry Federal Savings Bank
and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended
December 31, Year ended September 30,
1999 1998 1999 1998
------------------------- ----------------------------
Operating Activities (unaudited) (unaudited)
Net income $ 298,414 $ 232,403 $ 1,014,330 $ 1,251,456
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 59,450 60,156 234,918 207,022
Provision for losses 160,000 10,000 142,000 85,000
(Gain) loss on sales of investments and mortgage-
backed securities - (10,366) (194,166) (605,752)
Net (gain)loss on sales on loans - - - (19,865)
Net (gain) loss on sales of foreclosed real estate - - 9,861 -
Increase (decrease) in deferred loan origination fees (1,082) (448) (4,747) (5,597)
Amortization of premiums (discounts) on investments,
mortgage-backed securities and loans (300,952) (431,140) (466,154) (765,900)
Decrease (increase) in accrued interest receivable and
other assets 316,297 (364,138) 485,187 (588,697)
Decrease (increase) in prepaid assets 95,534 69,904 (16,285) (152,580)
Decrease (increase) in deferred tax asset (71,194) (12,510) 16,350 (44,141)
Increase (decrease) in accrued interest payable (57,769) (117,311) 125,532 (143,442)
Increase (decrease) in accounts payable and accrued
expenses 10,749,372 (552,657) 8,958,574 6,581
Increase (decrease) in other liabilities (121,080) 100,970 (458,085) 119,396
Origination of loans held for sale (47,357) - (531,370) (2,762,903)
Proceeds from sales of loans held for sale 578,727 - - 3,169,415
----------- ----------- ----------- -----------
Net cash provided (used) by operating activities 11,658,360 (1,015,137) 9,315,945 (250,007)
----------- ----------- ----------- -----------
F-7
Newberry Federal Savings Bank
and Subsidiary
Consolidated Statements of Cash Flows (continued)
Three Months Ended
December 31, Year ended September 30,
1999 1998 1999 1998
------------- ------------- -------------- -------------
(unaudited) (unaudited)
Investing Activities
Principle payments on mortgage-backed securities 4,465,858 6,204,556 35,230,156 23,477,002
Purchases of held to maturity securities - (1,141,000) (56,000) (2,334,734)
Proceeds from maturities of securities - 1,351,782 1,351,781 4,831,715
Purchases of available for sale securities 23,579,442 (20,927,649) (125,256,440) (159,849,705)
Proceeds from sales of available for sale securities 5,199,085 14,705,839 59,720,666 130,247,475
Net (increase) decrease in loans receivable (162,191) (1,782,192) (3,704,569) (5,717,859)
Proceeds from sales of foreclosed real estate - - 18,082 -
Purchases of premises, furniture and equipment (25,721) (86,533) (147,385) (262,867)
------------ ------------ ------------- -------------
Net cash provided (used) by investing activities (14,102,411) (1,675,197) (32,843,709) (9,608,973)
------------ ------------ ------------- -------------
Financing Activities
Net increase (decrease) in deposit accounts 10,899,307 (187,445) (4,164,955) 12,981,319
Proceeds from Federal Home Loan Bank advances 4,600,000 - 18,640,000 22,000,000
Payments on Federal Home Loan Bank advances and
other borrowings (21,270,000) (7,620,000) - (29,000,000)
Proceeds from other borrowings 11,125,000 9,280,000 7,370,000 -
Increase (decrease) in advances from borrowers for
taxes and insurance (42,981) (47,202) (24,947) (26,104)
------------ ------------ ------------- -------------
Net cash provided by financing activities 5,311,326 1,425,353 21,820,098 5,955,215
------------ ------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents 2,867,275 (1,264,981) (1,707,666) (3,903,765)
Cash and cash equivalents at beginning of year 3,256,053 4,963,719 4,963,719 8,867,484
------------ ------------ ------------- -------------
Cash and cash equivalents at end of year $ 6,123,328 $ 3,698,738 $ 3,256,053 $ 4,963,719
============ ============ ============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the year for:
Interest $ 2,200,605 $ 2,690,664 $ 7,271,143 $ 7,698,351
Taxes - - $ 484,097 $ 1,028,211
See accompanying notes.
F-8
Newberry Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
Years Ended September 30, 1999 and 1998 and Three Months Ended December 31, 1999
and 1998
(Data at and for the three months ended December 31, 1999 and 1998 is unaudited)
1. Organization and Summary of Significant Accounting Policies
Organization
The Bank is in the business of obtaining deposits in Newberry and the
surrounding area and investing those deposits in loans and securities.
Summary of Significant Accounting Policies
The data at and for the three months ended December 31, 1999 and 1998,
which are unaudited, includes all adjustments which, in the opinion of
management, are of a normal recurring nature and are necessary for a
fair presentation of these interim periods. The results of operations
for the three month periods are not necessarily indicative of the
results that may be expected for the year.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Bank
and Inter-Community Service Corporation. The activities of the Service
Corporation are the sale of insurance and investment products.
Significant intercompany balances and transactions have been
eliminated upon consolidation.
(b) Cash Equivalents
For the purpose of presentation in the consolidated financial
statements cash equivalents are defined as those investments with a
maturity of three months or less when purchased.
(c) Trading Securities
Government bonds held principally for resale in the near term, and
mortgage-backed securities held for sale in conjunction with the
Bank's mortgage banking activities, are classified as trading account
securities and recorded at their fair values. Unrealized gains and
losses on trading account securities are included immediately in other
income.
(d) Securities Held to Maturity
Bonds, notes, and debentures for which the Bank has the positive
intent and ability to hold to maturity are reported at cost, adjusted
for premiums and discounts that are recognized in interest income
using the interest method over the period to maturity.
F-9
Newberry Federal Savings Bank
and Subsidiary
1. Organization and Summary of Significant Accounting Policies (continued)
(e) Securities Available for Sale
Available-for-sale securities consist of bonds, notes, debentures, and
certain equity securities not classified as trading securities nor as
held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of
equity until realized.
Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary have resulted in write-downs of the individual securities to
their fair value. The related write-downs have been included in
earnings as realized losses.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
(f) Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income.
(g) Loans Receivable
Loans receivable that management has the intent to hold until maturity
are reported at their outstanding principal adjusted for any charge-
offs, the allowance for loan losses, and any deferred fees or costs on
originated loans and unamortized premiums or discounts on purchased
loans.
Discounts and premiums on purchased residential real estate loans are
amortized to income using the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the
related loan. The net amount is deferred and amortized over the
contractual life of the loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
F-10
Newberry Federal Savings Bank
and Subsidiary
1. Organization and Summary of Significant Accounting Policies (continued)
(g) Loans Receivable (continued)
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's
past loan losses 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.
For impairment recognized in accordance with Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, the entire
change in present value of expected cash flows is reported as bad debt
expense in the same manner in which impairment initially was
recognized or as a reduction in the amount of bad debt expense that
otherwise would be reported.
(h) Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and
the real estate is carried at the lower of carrying amount or fair
value, less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in loss on foreclosed
real estate.
(i) Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
(j) Premises and Equipment
Land is carried at cost. Bank premises, and equipment are carried at
cost, less accumulated depreciation computed principally by the
straight-line method.
F-11
Newberry Federal Savings Bank
and Subsidiary
1. Organization and Summary of Significant Accounting Policies (continued)
(k) Financial Instruments
The majority of derivative financial instruments held or issued by the
Bank are held or issued for purposes other than trading.
Interest-Rate Exchange Agreements. Interest-rate exchange agreements
(swaps) used in asset/liability management activities are accounted
for using the accrual method. Net interest income (expense) resulting
from the differential between exchanging floating and fixed-rate
interest payments is recorded on a current basis. Gains or losses on
the sales of swaps used in asset/liability management activities are
deferred and amortized into interest income or expense over the
maturity period of the swap.
Financial Futures. Interest-rate futures contracts are entered into by
the Bank as hedges against exposure to interest-rate risk and are not
for speculation purposes. Changes in the market value of interest-rate
futures contracts are deferred while the contracts are open and
subsequently amortized into interest income or expense over the
maturity period of the hedged assets or liabilities after the contract
closes.
Other Off-Balance-Sheet Instruments. In the ordinary course of
business the Bank has entered into off-balance sheet financial
instruments consisting of commitments to extend credit, and standby
letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred
or received.
(l) Fair Values of Financial Instruments
The following methods and assumptions were used by the Bank in
estimating fair values of financial instruments as disclosed herein:
Cash and short-term instruments. The carrying amounts of cash and
short-term instruments approximate their fair value.
Available-for-sale and held-to-maturity securities. Fair values for
securities, excluding restricted equity securities, are based on
quoted market prices. The carrying values of restricted equity
securities approximate fair values.
F-12
Newberry Federal Savings Bank
and Subsidiary
1. Organization and Summary of Significant Accounting Policies (continued)
(l) Fair Values of Financial Instruments (continued)
Loans receivable. For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain mortgage loans (for example,
one-to-four family residential), credit-card loans, and other consumer
loans are based on quoted market prices of similar loans adjusted for
differences in loan characteristics. Fair values for impaired loans
are estimated using discounted cash flow analyses or underlying
collateral values, where applicable.
Deposit liabilities. The fair values disclosed for demand deposits
are, by definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The carrying amounts
of variable-rate, fixed-term money-market accounts and certificates of
deposit approximate their fair values at the reporting date. Fair
values for fixed-rate certificates of deposit are estimated using
rates currently being offered for similar certificates.
The fair values of the Bank's debt are estimated using discounted cash
flow analyses based on the Bank's current incremental borrowing rates
for similar types of borrowing arrangements.
Accrued interest. The carrying amounts of accrued interest approximate
their fair values.
Off-balance sheet instruments. Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standings.
(m) Use of Estimates
The financial statements are prepared in accordance with generally
accepted accounting principles which require management to make
estimates and assumptions that effect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
F-13
Newberry Federal Savings Bank
and Subsidiary
1. Organization and Summary of Significant Accounting Policies (continued)
(m) Use of Estimates (continued)
Material estimates that are particularly susceptible to significant
change relate to the determination of the reserve for loan losses. The
estimation process includes management's judgment as to inherent
losses on existing loans based on an internal review of the loan
portfolio, including an analysis of the borrowers' current financial
position, the consideration of current and anticipated economic
conditions and the effect on specific borrowers. In determining the
collectibility of loans, management also considers the fair value of
underlying collateral. Various regulatory agencies, as an integral
part of their examination process, review the Bank's allowance for
loan losses. Such agencies may require the Bank to recognize additions
to the allowance based on their judgments about information available
to them at the time of the examination. Because of these factors, it
is possible that the allowance for loan losses could change
materially.
(n) Reclassifications
Certain 1998 amounts have been reclassified to conform with 1999
classifications.
(o) Marketing Expenses
The Bank expenses the cost of marketing as incurred. Marketing
expenses totalled $153,569 and $136,984 for the years ended September
30, 1999 and 1998, and $48,225 and $42,420 for the three months ending
December 31, 1999 and 1998, respectively.
F-14
Newberry Federal Savings Bank
and Subsidiary
2. Cash and Cash Equivalents
Cash and cash equivalents are as follows:
December 31, September 30,
1999 1999 1998
------------ ------------- ----------
Cash and due from banks $ 4,755,381 $ 1,725,337 $ 4,001,809
Interest bearing deposits 1,367,947 1,530,716 961,910
----------- ----------- -----------
$ 6,123,328 $ 3,256,053 $ 4,963,719
=========== =========== ===========
3. Investments and Mortgage-Backed Securities
Securities Available for Sale - The amortized cost, gross unrealized
gains, gross unrealized losses and fair values of securities available
for sale consisted of the following:
December 31, 1999
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ----------- ------------
Bonds and notes-US government
and agency securities $ 22,139,795 $ $2,922,322 $ 19,217,473
------------ ---------- ---------- ------------
Equity securities:
Mutual funds 1,057,512 336 148,371 909,477
Stock in Federal Home Loan Bank 1,787,000 1,787,000
Other 80,393 6,508 86,901
------------ ---------- ---------- ------------
Total equity securities 2,924,905 6,844 148,371 2,783,378
------------ ---------- ---------- ------------
Total investments $ 25,064,700 $ 6,844 $3,070,693 $ 22,000,851
============ ========== ========== ============
Mortgage-backed securities-
Government guaranteed $ 87,073,372 $ 602,928 $4,011,591 $ 83,664,709
Private issues 27,366,856 4,077 1,147,786 26,223,147
------------ ---------- ---------- ------------
Total Mortgage-backed securities $114,440,228 $ 607,005 $5,159,377 $109,887,856
============ ========== ========== ============
F-15
Newberry Federal Savings Bank
and Subsidiary
3. Investments and Mortgage-Backed Securities (continued)
September 30, 1999
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- ---------- ---------- ------------
Bonds and notes-US government
and agency securities $ 21,487,174 $ 498 $2,376,744 $19,110,928
------------ ---------- ---------- -----------
Equity securities:
Mutual funds 1,056,858 142,365 914,493
Stock in Federal Home Loan Bank 1,962,000 1,962,000
Other 71,822 8,585 80,407
------------ ---------- ---------- -----------
Total equity securities 3,090,680 8,585 142,365 2,956,900
------------ ---------- ---------- -----------
Total investments $ 24,577,854 $ 9,083 $2,519,109 $22,067,828
============ ========== ========== ===========
Mortgage-backed securities-
Government guaranteed $ 76,792,538 $1,391,260 $3,833,097 $74,350,701
Private issues 23,786,387 137,936 1,390,520 22,533,803
------------ ---------- ---------- -----------
Total Mortgage-backed securities $100,578,925 $1,529,196 $5,223,617 $96,884,504
============ ========== ========== ===========
F-16
Newberry Federal Savings Bank
and Subsidiary
3. Investments and Mortgage-Backed Securities (continued)
September 30, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- ---------
Bonds and notes-US government
and agency securities $ 3,976,224 $ 11,975 $ 13,778 $ 3,974,421
----------- ---------- ---------- -----------
Equity securities:
Mutual funds 1,053,343 87,310 966,033
Stock in Federal Home Loan Bank 1,530,000 1,530,000
Other 71,808 71,808
----------- ---------- ---------- -----------
Total equity securities 2,655,151 87,310 2,567,841
----------- ---------- ---------- -----------
Total investments $ 6,631,375 $ 11,975 $ 101,088 $ 6,542,262
=========== ========== ========== ===========
Mortgage-backed securities-
Government guaranteed $71,133,220 $1,063,377 $2,321,412 $69,875,185
Private issues 15,164,013 113,184 15,277,197
----------- ---------- ---------- -----------
Total Mortgage-backed securities $86,297,233 $1,176,561 $2,321,412 $85,152,382
=========== ========== ========== ===========
Securities Held to Maturity - The amortized cost, gross unrealized gains, gross
unrealized losses and fair value of securities held to maturity consisted of
the following:
December 31, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Municipal securities $1,091,000 $ $ $1,091,000
Other 50,000 50,000
---------- ---------- -------- ----------
1,141,000 1,141,000
---------- ---------- -------- ----------
Mortgage-backed securities 4,332,492 124,910 91,183 4,366,219
---------- ---------- -------- ----------
Government guaranteed $5,473,492 $ 124,910 $ 91,183 $5,507,219
========== ========== ======== ==========
September 30, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Municipal securities $1,091,000 $ $ $1,091,000
Other 50,000 50,000
---------- ---------- -------- ----------
1,141,000 1,141,000
---------- ---------- -------- ----------
Mortgage-backed securities 4,465,704 10,197 136,132 4,339,769
---------- ---------- -------- ----------
Government guaranteed $5,606,704 $ 10,197 $136,132 $5,480,769
========== ========== ======== ==========
F-17
Newberry Federal Savings Bank
and Subsidiary
3. Investments and Mortgage-Backed Securities (continued)
September 30, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Bonds and notes-US government
and agency securities $ 255,045 $ 655 $ $ 255,700
Municipal securities 1,091,000 1,091,000
---------- -------- ---------- ----------
1,346,045 655 1,346,700
Mortgage-backed securities
Government guaranteed 6,818,659 66,289 51,571 6,833,377
---------- -------- ---------- ----------
$8,164,704 $ 66,944 $ 51,571 $8,180,077
========== ======== ========== ==========
The market value of municipal securities and other securities is not
readily determinable, but approximates cost.
At September 30, 1999, investments with a book value of approximately
$12,153,000 were pledged as collateral for various deposits, and
investments with a book value of $5,843,699 were pledged as collateral on
Federal Home Loan Bank advances. At December 31, 1999, investments with a
book value of approximately $15,274,191 were pledged as collateral on
various deposits, and investments with a book value of $5,278,967 were
pledged as collateral on Federal Home Loan Bank advances.
Gross realized gains and gross realized losses on sales of available-for-
sale securities were $207,410 and $13,249, respectively for the year ended
September 30, 1999. For the year ended September 30, 1998 gross realized
gains were $642,797 and realized losses were $37,045. For the three months
ending December 31, 1999, and 1998, gross realized gains on sales of
available for sale securities were $0 and $10,366, respectively.
F-18
Newberry Federal Savings Bank
and Subsidiary
3. Investments and Mortgage-Backed Securities (continued)
The scheduled maturities of securities (other than equity securities) were
as follows:
December 31, 1999
----------------------------------------------------------------
Held-to maturity securities Available-for-sale securities
----------------------------- -------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ----------
Due in one year or less $ $ $ 9,660,937 $ 9,660,937
Due from one to five years
Due from five to ten years 967,737 935,220
Due after ten years 5,473,492 5,507,219 125,951,349 118,509,172
---------- ---------- ------------ ------------
$5,473,492 $5,507,219 $136,580,023 $129,105,329
========== ========== ============ ============
September 30, 1999
---------------------------------------------------------------
Held-to maturity securities Available-for-sale securities
----------------------------- -------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ----------
Due in one year or less $ $ $ $
Due from one to five years
Due from five to ten years 966,620 959,950
Due after ten years 5,606,704 5,480,769 121,099,479 115,035,482
---------- ---------- ------------ ------------
$5,606,704 $5,480,769 $122,066,099 $115,995,432
========== ========== ============ ============
The Bank adopted Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (FASB
115), September 30, 1994. Under the Statement, debt securities that the
Bank has the positive intent and ability to hold to maturity are classified
as "held-to-maturity" securities and reported at amortized cost. Debt and
equity securities that are bought and held principally for the purpose of
selling in the near term are classified as "trading" securities and
reported at fair value, with unrealized gains and losses included in
earnings. Debt and equity securities that are not classified as either
held-to-maturity or trading securities are classified as "available-for-
sale" securities and reported at fair value with unrealized gains and
losses excluded from earnings and reported as a separate component of
retained earnings.
F-19
Newberry Federal Savings Bank
and Subsidiary
4. Loans Receivable
Loans receivable consisted of the following:
December 31, September 30,
1999 1999 1998
------------ ------------- ------------
Commercial real estate $10,023,468 $ 9,740,346 $ 9,060,586
Commercial-other 1,832,935
Real estate construction 1,136,306 1,891,559 2,614,372
Residential mortgage - 1-4 family 51,478,960 52,111,556 47,226,751
Multi-family 53,561 53,621 57,782
Consumer loans 11,736,328 12,994,160 13,136,919
----------- ----------- -----------
76,261,358 76,791,242 72,096,410
----------- ----------- -----------
Less:
Allowance for losses 332,631 184,170 181,057
Loans in process 1,033,350 1,174,593 553,356
Deferred loan origination fees, net 107,119 108,201 112,948
----------- ----------- -----------
1,473,100 1,466,964 847,361
----------- ----------- -----------
Loans receivable, net $74,788,258 $75,324,278 $71,249,049
=========== =========== ===========
The Bank's loan portfolio consists principally of adjustable rate
residential first mortgage loans to individuals and to builders of single
family homes in South Carolina, primarily in Newberry County.
Loans receivable at September 30, 1999 included $531,370 of loans held for
sale. The fair value of these loans exceeded cost. There were no loans
held for sale at December 31, 1999.
Mortgage loans include $1.5 million and $2.1 million representing
participating interests in loans originated and serviced by other financial
institutions as of September 30, 1999 and 1998, and $1.2 million at
December 31, 1999.
Non-accrual loans are as follows:
Non-accrual loans $152,000 $163,000 $269,000
======== ======== ========
Interest income which would
have been recognized under
original terms $ 12,160 $ 13,040 $ 21,520
Interest income recognized 9,162 9,825 16,214
-------- -------- --------
Interest income not recognized $ 2,998 $ 3,215 $ 5,306
======== ======== ========
F-20
Newberry Federal Savings Bank
and Subsidiary
4. Loans Receivable (continued)
Mortgage loans at September 30, 1999 and 1998 are net of participations and
whole loans sold and serviced for others in the amounts of $22,049,615 and
$29,144,793, respectively and $21,795,925 at December 31, 1999. Servicing
loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts and disbursing payments to investors. Loan
servicing income is recorded on the accrual basis and includes servicing
fees from investors and certain charges collected from borrowers, such as
late payment fees. Custodial escrow balances maintained in connection with
loans serviced for others were $74,859 and $89,198 at September 30, 1999
and 1998, respectively and $37,392 at December 31, 1999.
Changes in the allowance for losses are summarized as follows:
Three Months Ended Year Ended
December 31, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Beginning balance $184,170 $181,057 $ 181,057 $ 191,968
Provision for losses 160,000 10,000 142,000 85,000
Charge-offs (14,758) (28,569) (166,637) (122,000)
Recoveries 3,219 4,000 27,750 26,089
-------- -------- --------- ---------
Ending balance $332,631 $166,488 $ 184,170 $ 181,057
======== ======== ========= =========
Restructured loans totalled approximately $54,000 and $72,000 at September
30, 1999 and 1998 and $85,000 at December 31, 1999.
The Bank is not committed to lend additional funds to debtors whose loans
have been modified.
Loan activity for loans to executive officers and directors was as follows:
Three months
Ended Year Ended
March 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
Balance, beginning of period $564,678 $ 311,657 $ 311,657 $361,467
New loans 5,000 431,000 541,000
Repayments (net of advances) (2,658) (225,989) (287,979) (49,810)
-------- --------- --------- --------
Balance, end of period $567,020 $ 516,668 $ 564,678 $311,657
======== ========= ========= ========
No loans were made to executive officers or directors for the purpose of
buying stock in the conversion.
F-21
Newberry Federal Savings Bank
and Subsidiary
5. Premises, Furniture, and Equipment
Premises, furniture and equipment are summarized as follows:
December 31, September 30,
1999 1999 1998
---------- ---------- ----------
Land $1,071,688 $1,071,688 $1,071,688
Buildings and improvements 2,838,402 2,838,402 2,838,402
Furniture and equipment 1,077,441 1,051,721 904,869
---------- ---------- ----------
4,987,531 4,961,811 4,814,959
Less accumulated depreciation 1,364,908 1,305,459 1,071,074
---------- ---------- ----------
Premises, furniture and
equipment, net $3,622,623 $3,656,352 $3,743,885
========== ========== ==========
Depreciation expense for the years ended September 30, 1999 and 1998 was
$234,918 and $207,022, and $59,540 and $60,156 for the three months ended
December 31, 1999 and 1998, respectively.
6. Deposit Accounts
The following is a comparative summary of deposits and interest rates by
type:
December 31, September 30,
1999 1999 1998
------------ ------------ ------------
NOW and money market
-0.00% to 6.00% $ 27,619,261 $ 27,432,392 $ 24,358,590
------------ ------------ ------------
Passbook -.27% to 5.00% 17,380,879 17,734,474 18,090,133
------------ ------------ ------------
Certificates of deposit:
2.60% to 3.99% 1,253,329 785,723 486,068
4.00% to 5.99% 91,674,411 86,416,426 91,062,213
6.00% to 7.99% 8,424,633 3,328,455 6,082,072
8.00% to 9.99% 2,084,205 1,839,941 1,623,290
------------ ------------ ------------
Total certificates of
deposit 103,436,578 92,370,545 99,253,643
------------ ------------ ------------
Total deposit accounts $148,436,718 $137,537,411 $141,702,366
============ ============ ============
Weighted average interest
rate of NOW and money
market accounts 2.77% 2.47% 2.45%
===== ===== =====
The aggregate amount of short-term CD's with a minimum denomination of
$100,000 was approximately $21.2 million and $26.4 million at September 30,
1999 and 1998, respectively, and $31.7 million at December 31, 1999. Non-
interest bearing deposits were not material at September 30, 1999 and 1998
and at December 31, 1999. Deposits in excess of $100,000 are not insured.
The Bank did not have any brokered deposits.
F-22
Newberry Federal Savings Bank
and Subsidiary
6. Deposit Accounts (continued)
The scheduled maturities of certificates of deposit are as follows:
December 31, September 30,
1999 1999
------------- ------------
2000 $ 91,386,898 $80,194,119
2001 9,968,647 10,419,653
2002 1,772,868 1,447,969
2003 258,500 253,390
2004 36,175 42,108
Thereafter 13,490 13,306
------------ -----------
Total certificates of deposit $103,436,578 $92,370,545
============ ===========
7. Federal Home Loan Bank Advances
The Bank has an agreement for advances and security agreement with blanket
floating lien with the Federal Home Loan Bank (FHLB). Advances are
collateralized by the Bank's investment in stock in the FHLB, certain
wholly owned first mortgage loans on 1-4 family dwelling that have not been
delinquent 30 days or more during the most recent twelve month period, and
certain investments. Loans of $38,488,003 and investments of $5,843,699
collateralized the advances at September 30, 1999. At September 30, 1998,
loans of $34,614,428 and investments of $0 collateralized these advances.
At December 31, 1999, loans of $34,053,643 and investments of $5,278,967
collateralized these advances.
Advances from the FHLB consisted of the following:
December 31, September 30,
1999 1999 1998
------------ ------------- -----------
Contractual Maturity
Within one year- adjustable rate $23,740,000 $29,240,000 $
2000-fixed rate 2,000,000 2,600,000
2002-fixed rate 8,000,000
2008-fixed rate 10,000,000 10,000,000 10,000,000
----------- ----------- -----------
$35,740,000 $39,240,000 $20,600,000
=========== =========== ===========
Weighted average rate 5.44% 5.65% 5.65%
=========== =========== ===========
The Bank had an available line of credit of $7,500,000 at September 30,
1999 and $5,500,000 at December 31, 1999.
F-23
Newberry Federal Savings Bank
and Subsidiary
8. Other Borrowings
Federal funds and other borrowings generally mature within one to four days
of the transaction date. No securities have been pledged to collateralize
other borrowings since September 15, 1998.
Information concerning other borrowings is summarized as follows:
Three Months Ended
December 31, Year Ended December 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Average balance during the period $4,417,000 $ 553,000 $2,120,000 $ 737,000
Average interest rate during the period 5.35% 5.25% 4.95% 5.25%
Average interest rate at end of period 5.10% 4.88% 5.50% ----
Maximum month end balances $5,325,000 $1,660,000 $7,370,000 $5,875,000
9. Income Taxes
The Bank and Subsidiary file consolidated federal income tax returns on
a fiscal year basis.
Income tax expense is summarized as follows:
Three Months Ended
December 31, Year Ended September 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- -----------
Current $ 269,886 $ 169,813 $ 757,786 $ 805,616
Deferred (71,116) (15,578) 13,230 28,688
---------- ---------- ---------- -----------
Total income taxes $ 198,770 $ 154,235 $ 771,016 $ 834,304
========== ========== ========== ===========
Income taxes differed from amounts computed by applying the statutory
federal rate (34%) to income before income taxes and cumulative effect of a
change in accounting principle as follows:
Three Months Ended
December 31, Year Ended September 30,
------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
Tax at federal
income tax rate $169,043 $131,457 $607,018 $709,158
Increase (decrease)
resulting from:
State income tax
expense, net of
federal tax benefit 19,688 15,311 75,020 45,014
Other, net 10,039 7,467 88,978 80,132
-------- -------- -------- --------
Total $198,770 $154,235 $771,016 $834,304
======== ======== ======== ========
Effective tax rate 40.0% 39.9% 43.2% 40.0%
==== ==== ==== ====
F-24
Newberry Federal Savings Bank
and Subsidiary
9. Income Taxes (continued)
The tax effects of significant items comprising the Bank's net deferred tax
asset as of December 31 are as follows:
1999 1998
--------- ---------
Deferred tax assets:
Differences between book and tax basis of bad debt reserves $ 53,255 $ 53,255
Differences between book and tax basis of investments 614,428 663,186
Deferred compensation for Director Emeritus 81,530 63,314
Other 2,719 5,918
--------- ---------
Total deferred tax assets 751,932 785,673
Valuation allowance
--------- ---------
Net deferred tax assets 751,932 785,673
--------- ---------
Deferred tax liabilities:
Differences between book and tax pension expense (58,324) (46,418)
Differences between book and tax basis of Federal Home
Loan Bank stock (31,251) (91,612)
Differences between book and tax basis of property (132,307) (111,094)
--------- ---------
Total deferred tax liabilities (221,882) (249,124)
--------- ---------
Net deferred tax asset $ 530,050 $ 536,549
========= =========
The tax effects of significant items comprising the Bank's net deferred tax
asset as of September 30 are as follows:
1999 1998
--------- ---------
Deferred tax assets:
Differences between book and tax basis of bad debt reserves $ 56,421 $ 64,050
Differences between book and tax basis of investments 616,903 664,642
Deferred compensation for Director Emeritus 81,530 63,214
Other 2,760 7,689
--------- ---------
Total deferred tax assets 757,614 799,595
Valuation allowance
--------- ---------
Net deferred tax assets 757,614 757,614
--------- ---------
Deferred tax liabilities:
Differences between book and tax pension expense (46,418) (34,457)
Differences between book and tax basis of Federal Home
Loan Bank stock (117,483) (91,750)
Differences between book
and tax basis of property (132,307) (147,892)
--------- ---------
Total deferred tax liabilities (296,208) (274,099)
--------- ---------
Net deferred tax asset $ 461,406 $ 525,496
========= =========
During the years ended September 30, 1999 and 1998, income taxes (benefits)
of $(1,885,797) and $57,713, respectively, were allocated to the change in
retained earnings for the tax effects of unrealized gains and losses on
assets available for sale. For the three month periods ending December 31,
1999 and 1998, these income taxes (benefits) allocated were $(532,502) and
$141,540, respectively.
F-25
Newberry Federal Savings Bank
and Subsidiary
9. Income Taxes (continued)
Savings banks which meet certain definitional tests and operating
requirements prescribed by the Internal Revenue Code have been allowed a
special bad debt deduction and other special tax provisions. If a savings
bank did not meet the federal income tax requirements necessary to meet
these definitions, the savings bank would lose the benefits of these
special provisions.
The special bad debt deduction was based on either specified experience
formulas or a specified percentage of taxable income. The deduction was
subject to certain limitations based on the aggregate loans, savings
account balances, and retained earnings at year end. Gains and losses on
sales of repossessed property and provisions for losses on loans and
foreclosed real estate were generally adjustments to the tax bad debt
reserve and not includable in the computation of taxable income before this
deduction.
In 1996, legislation was passed that eliminated the special bad debt
deduction for thrift institutions effective for years beginning after 1995,
or for the Bank's fiscal year beginning October 1, 1996. For tax purposes,
the Bank was required to recapture its past - 1987 additions ("excess
reserves") to its bad debt reserves. Under the legislation, the Bank
qualifies as a "small bank," and the excess reserves will be restored to
taxable income ratably over the six years, beginning in the year the bank
no longer qualifies as a bank. Deferred taxes have been provided for the
amount of these excess reserves. No deferred tax liability is provided for
$4.8 million tax basis bad debt reserves that arose prior to the Bank's
1988 fiscal year.
10. Commitments
In the normal course of business, the Bank enters into financial instrument
transactions to satisfy the financial needs of its customers and to manage
its own exposure to credit and market risks. Many of these financial
instruments typically have off-balance sheet risk resulting from their
nature including the terms of settlement. These instruments may be
categorized as commitments.
Market risk arises from the possibility that market changes, including
interest rate movements, may make financial instruments less valuable.
Credit risk results from the possibility that a loss may occur from the
failure of another party to perform according to the terms of the contract.
The Bank has control procedures regarding the extent of the Bank
transactions with specific counter-parties, the manner in which
transactions are settled and the ongoing assessment of counter-party
creditworthiness.
F-26
Newberry Federal Savings Bank
and Subsidiary
10. Commitments (continued)
The contract or notional (face) amounts disclosed below and at Notes 1 and
12 provide a measure of the Bank's involvement in such instruments but are
not indicative of potential loss. Management does not anticipate any
material adverse effect on the Bank's financial position resulting from its
involvement in these instruments. In many cases, these financial
instruments serve to reduce, rather than increase, market risk.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Commitments to extend credit at
fixed rates exposes the Bank to some degree of interest rate risk. The
Bank evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
counter-party. Collateral held varies, but may include real property,
equipment and income-producing commercial properties.
Most of the Bank's business activity is with customers in South Carolina.
As of September 30, 1999 and December 31, 1999 the Bank had no significant
concentrations of credit risk in its loan portfolio.
The Bank had commitments outstanding to originate loans (excluding
undisbursed portion of loans in process) as follows:
December 31, 1999 September 30, 1999
----------------- ------------------
Variable rate $280,000 $162,000
Fixed rate (ranging
from 6.3% to 10%) 838,190 286,869
Lines of credit extended to borrowers amounted to approximately
$14,526,323, of which $6,554,434 was undisbursed at September 30, 1999. At
December 31, 1999, lines of credit extended to borrowers amounted to
$14,859,668, of which $6,383,405 was undisbursed.
F-27
Newberry Federal Savings Bank
and Subsidiary
11. Regulatory 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 3% leverage ratio and an 8% risk-based capital ratio.
Effective April 1, 1999, however, the minimum leverage ratio increased to
4% for all institutions except those with the highest rating on the CAMELS
financial institution rating system. In addition, the prompt corrective
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 CAMELS 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 requires an institution to maintain Tier 1
or core capital to risk-weighted assets of at least 4% and total capital to
risk-weighted assets of at least 8%. Total capital is defined as core
capital and supplementary capital. 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 or Tier 1 capital is defined as common
stockholders' equity and retained earnings, certain noncumulative perpetual
preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less intangible other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated
debt and intermediate preferred stock, and the allowance for loan and lease
losses limited to a maximum of 1.25% of risk-weighted assets. 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. Presently, the Office of Thrift
Supervision has deferred implementation of the interest rate risk
component.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
As of December 31, 1998, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, core and
tangible ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
F-28
Newberry Federal Savings Bank
and Subsidiary
11. Regulatory Capital Requirements (continued)
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)
December 31, 1999
Tangible capital 9.00% $20,096 2.00% $4,611
Core capital 8.73% $20,096 4.00% $9,222 5.00% $11,527
Risk-based capital 18.86% $20,415 8.00% $8,659 10.00% $10,824
September 30, 1999
Tangible capital 9.24% $19,797 2.00% $4,284
Core capital 9.24% $19,797 4.00% $8,569 5.00% $10,711
Risk-based capital 17.39% $19,945 8.00% $9,174 10.00% $11,467
September 30, 1998
Tangible capital 10.28% $18,785 1.50% $2,740
Core capital 10.28% $18,785 4.00% $7,308 5.00% $ 9,135
Risk-based capital 24.89% $19,670 8.00% $6,323 10.00% $ 7,904
A reconciliation of capital under generally accepted accounting principles
(GAAP) to tangible, core and risk-based capital is as follows:
September 30,
December 31, -------------------
1999 1999 1998
------------ -------- --------
GAAP capital $16,128 $16,701 $18,771
Investment in subsidiary (754) (754) (752)
Unrealized losses (gains) on
available-for-sale securities 4,722 3,850 766
------- ------- -------
Core and tangible capital 20,096 19,797 18,785
Unrealized losses (gains) on
available-for-sale securities 70 64 708
Allowance for loan and lease losses 333 162 246
Equity investments (84) (78) (69)
------- ------- -------
Risk-based capital $20,415 $19,945 $19,670
======= ======= =======
F-29
Newberry Federal Savings Bank
and Subsidiary
12. Fair Value of Financial Instruments
The following tables set forth the fair value of the Bank's financial
and nonfinancial instruments (in thousands):
December 31,
1999
---------------------------
Carrying Fair
Value Value
------------ ------------
Financial instruments:
Assets:
Cash and cash equivalents $ 6,123 $ 6,123
Investments and mortgage-backed
securities 137,362 137,396
Loans receivable 74,788 74,497
Accrued interest receivable 1,285 1,285
Liabilities:
Deposit accounts:
Demand deposits and passbook
accounts 45,000 45,000
Certificates of deposit 103,437 103,573
FHLB advances 35,740 35,740
Other borrowings 5,325 5,325
Advances from borrowers for
taxes and insurance 17 17
September 30,
1999 1998
---------------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- -------------- ------------ -----------
Financial instruments:
Assets:
Cash and cash equivalents $ 3,256 $ 3,256 $ 4,964 $ 4,964
Investments and mortgage-backed
securities 124,559 124,433 99,859 99,874
Loans receivable 75,324 75,163 71,249 71,718
Accrued interest receivable 1,268 1,268 1,050 1,050
Liabilities:
Deposit accounts:
Demand deposits and passbook
accounts 45,166 45,166 42,449 42,449
Certificates of deposit 92,371 92,145 99,253 99,549
FHLB advances 39,240 39,240 20,600 20,600
Other borrowings 7,370 7,370
Advances from borrowers for
taxes and insurance 60 60 85 85
F-30
Newberry Federal Savings Bank
and Subsidiary
12. Fair Value of Financial Instruments (continued)
Commitments to extend credit. The fair values of these instruments are
immaterial because their underlying interest rates approximate market.
The fair value of cash and cash equivalents approximates the carrying
value. The fair values of loans receivable are based on current market
prices for securities backed by similar loans. The fair values of
investments and mortgage-backed securities are based on quoted market
prices, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
The fair value of demand deposits and savings accounts approximates
the carrying value. The fair value of certificates of deposit is
estimated using the rates currently offered for deposits of similar
remaining terms. The fair value of FHLB advances and federal funds
purchased is estimated based on current rate for advances with similar
terms.
The fair value of loan commitments is estimated based on current
levels of interest rates versus the committed interest rates.
Management uses its best judgment in estimating the fair value of non-
traded financial instruments, but there are inherent limitations in
any estimation technique. For example, liquid markets do not exist for
many categories of loans held by the Bank. By definition, the function
as a financial intermediary is, in large part, to provide liquidity
where organized markets do not exist. Therefore, the fair value
estimates presented herein are not necessarily indicative of the
amounts which the Bank could realize in a current transaction.
The information presented is based on pertinent information available
to management as of December 31, 1999. Although management is not
aware of any factors, other than changes in interest rates, that would
significantly affect the estimated fair values, the current estimated
fair value of these instruments may have changed significantly since
then.
13. Employee Benefit Plans
The Bank participates in a non-contributory defined benefit plan
covering employees based on age and years of service. Benefits are
based on length of service and a percentage of qualifying
compensation. The Bank uses the service pro-rata unit credit method as
its actuarial valuation method.
F-31
Newberry Federal Savings Bank
and Subsidiary
13. Employee Benefit Plans (continued)
The following table sets forth the Plan's funded status and amounts
recognized in the consolidated financial statements as of and for the
periods indicated:
September 30
1999 1998
---------- ----------
Accumulated benefit obligation $ 900,498 $ 704,472
Vested 8,448 6,321
Nonvested 504,375 441,542
Additional benefits based on estimated future salaries ---------- ----------
Projected benefit obligation 1,413,321 1,152,335
Plan assets at fair value 1,276,438 1,090,122
---------- ----------
Excess of plan assets over projected benefit obligation 136,883 62,213
Unrecognized net assets at transition being amortized
over 15.8 years 95,584 111,958
Unrecognized net losses (354,619) (264,992)
---------- ----------
Total accrued pension liability (prepaid) $ (122,152) $ (90,821)
========== ==========
A reconciliation of the benefit obligation for the year ended September 30, 1999 is as follows:
Balance, September 30, 1998 $1,152,335
Benefits (49,158)
Service cost 99,707
Interest cost 68,777
Actuarial gain 69,023
Other 72,627
----------
Balance, September 30, 1999 $1,413,321
==========
A reconciliation of the fair value of plan assets for the year ended September 30, 1999 is as
follows:
Balance, September 30, 1998 $1,090,122
Return on assets 109,933
Actual contribution 125,541
Distribution (49,158)
----------
Balance, September 30, 1999 $1,276,438
==========
At September 30, 1999, $935,701 of plan assets were on deposit with the
Bank.
F-32
Newberry Federal Savings Bank
and Subsidiary
13. Employee Benefit Plans (continued)
Pension expense included the following components:
Three Months Ended Year Ended
December 31, September 30,
1999 1998 1999 1998
---------- -------- -------- ---------
Service cost - benefits earned during period $ 28,546 $ 24,926 $ 99,707 $ 86,334
Interest cost on projected benefit obligation 19,640 17,153 68,614 60,337
Expected return on plan assets (32,062) (27,483) (109,933) (59,744)
Amortization of transition asset (4,094) (4,094) (16,374) (16,374)
Recognized net actuarial gain 19,762 17,260 69,033 13,177
-------- -------- --------- --------
Total pension expense $ 31,792 $ 27,762 $ 111,047 $ 83,730
======== ======== ========= ========
The discount rate and rate of increase in future salary levels used in
determining the actuarial present value of the projected benefit obligation
shown in the preceding table were 5.5% and 4.0% for 1999, respectively and
6.0% and 4.0% for 1998, respectively. The expected long-term rate of
return on assets was 5.5% and 6.75% for the years ended September 30, 1999
and 1998, respectively.
The Bank also maintains an Employee Savings Plan for all employees,
qualified under Section 401(k) of the Internal Revenue Code. The Bank
matches 100% of the first 3% of earned compensation consisting of regular
wages and overtime payments. The Bank's contributions to the 401(k) plan
were $30,412 and $31,413 for the years ended September 30, 1999 and 1998,
respectively and $7,603 and $7,853 for the three months ended December 31,
1999 and 1998, respectively.
14. Interest Rate Risk
The Bank maintains a program of asset and liability management designed to
minimize the Bank's vulnerability to material and prolonged changes in
interest rates. An interest-earning asset or interest-bearing liability is
deemed to be interest-rate sensitive within a specific time period if it is
estimated to mature or reprice within that time period. If interest-
earning assets which are estimated to mature or reprice within a particular
time period are less than the amount of interest-bearing liabilities with
comparable maturity or repricing characteristics, a negative difference or
"negative-gap" occurs, and in general, increases in interest rates would
adversely affect net interest income over such period and decreases in
interest rates would have the opposite effect.
F-33
Newberry Federal Savings Bank
and Subsidiary
14. Interest Rate Risk
Similarly, if interest-earning assets which are estimated to mature or
reprice within a particular time period exceed the amount of interest-
bearing liabilities with comparable maturity or repricing characteristics,
a positive difference or "positive gap" is present and, in general,
increases in interest rates would positively affect net interest income
over such period and decreases in interest rates would have the opposite
effect.
Interest-Rate Exchange Agreements. The Bank enters into interest-rate swap
transactions in managing its interest-rate exposure. Interest-rate swap
transactions generally involve the exchange of fixed- and floating-rate
interest-payment obligations without the exchange of the underlying
principal amounts.
Entering into interest-rate swap agreements involves not only the risk of
dealing with counterparties and their ability to meet the terms of the
contracts but also the interest-rate risk associated with unmatched
positions. Notional principal amounts often are used to express the volume
of these transactions, but the amounts potentially subject to credit risk
are much smaller.
At December 31, 1999 and September 30, 1999 and 1998 the Bank had limited
its exposure to interest rate risk through agreements to receive quarterly
payments in the London InterBank offered rate exceeds 8% rate interest
payments. The notional principal amounts of interest-rate swaps
outstanding were $10,000,000 for each of the periods, with original terms
of two years. The net cost was $16,800 the two year period, and has been
amortized against income. Amortization was $8,400 and $5,463 for the years
ended December 31, 1999 and 1998 and $2,100 for the three months ended
December 31, 1999. The Bank has not received any payments under these
agreements.
15. Accounting Changes
Accounting for Derivative Instruments and Hedging Activities. Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities," addresses the accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts and hedging activities. As recently amended by
Statement of Financial Standards No. 137, the statement is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. On
that date, hedging relationships shall be designed in accordance with the
statement. Earlier application is encouraged but is permitted only at the
beginning of any fiscal quarter that begins after issuance of the
statement. Earlier application of selected provisions of the statement is
not permitted. The statement shall not be applied retroactively to
financial statements of prior periods. The statement is not expected to
have a material adverse impact on the consolidated financial position or
results of operations of Newberry Federal.
F-34
Newberry Federal Savings Bank
and Subsidiary
15. Accounting Changes (continued)
Employers' Disclosures about Pensions and Other Postretirement Benefits.
Statement of Financial Accounting Standards No. 132, Employers' Disclosure
about Pension and Other Postretirement Benefits, revises disclosures about
pension and other post-retirement benefit plans. These disclosures are
effective for years beginning after December 15, 1997 and were made for the
year ended September 30, 1999.
16. Adoption of Plan of Conversion (Unaudited)
On January 18, 2000, the Board of Directors of the Bank, subject to
regulatory approval and approval by the members of the Bank, adopted a Plan
of Conversion to convert from a federally-chartered mutual savings bank to
a federal stock savings bank with the adoption of a federal thrift charter.
The conversion will be accomplished through the amendment of the Bank's
charter to stock form, the formation of DutchFork Bancshares, Inc. ("the
Company"), which will acquire 100% of the Bank's outstanding common stock
upon the conversion of the Bank from mutual to stock form, and the sale of
the Company's common stock in an amount equal to the pro forma market value
of the Bank after giving effect to the conversion. A subscription offering
of the shares of common stock will be offered initially to the Bank's
eligible deposit account holders, then to other members of the Bank. Any
shares of common stock not sold in the subscription offering will be
offered for sale to the general public, giving preference to the Bank's
market area.
The Board of Directors of the Bank intend to adopt an Employee Stock
Ownership Plan and the Company may adopt various stock option and incentive
plans, subject to ratification by the stockholders after conversion, if
such stockholder approval is required by any regulatory body having
jurisdiction to require such approval. In addition, the Board of Directors
is authorized to enter into employment contracts with key employees.
At the time of conversion, the Bank will establish a liquidation account in
an amount equal to its total net worth as of the latest statement of
financial condition appearing in the final prospectus. The liquidation
account will be maintained for the benefit of eligible depositors who
continue to maintain their accounts at the Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible
depositors have reduced their qualifying deposits. Subsequent increases
will not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation, each eligible depositor
will be entitled to receive a distribution from the liquidation account in
an amount proportionate to the current adjusted qualifying balances for
accounts then held. The liquidation account balance is not available for
payment of dividends.
The Bank may not declare or pay cash dividends on or repurchase any of its
shares of capital stock if the effect thereof would cause its net worth to
be reduced below applicable regulatory requirements or the amount of the
liquidation accounts of such a declaration and payment would otherwise
violate regulatory requirements.
F-35
Newberry Federal Savings Bank
and Subsidiary
16. Adoption of Plan of Conversion (Unaudited) (continued)
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the conversion. If the conversion is not completed, all
costs will be charged to expense. At December 31, 1999, no expenses have
been incurred or deferred.
F-36
Newberry Federal Savings Bank
and Subsidiary
16. Adoption of Plan of Conversion (Unaudited) (continued)
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the conversion. If the conversion is not completed, all
costs will be charged to expense. At December 31, 1999, no expenses have
been deferred.
F-37
You should rely only on the information contained in this prospectus. Neither
DutchFork Bancshares nor Newberry Federal has authorized anyone to provide you
with different information. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered by this
prospectus to any person or in any jurisdiction in which an offer or
solicitation is not authorized or in which the person making an offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make an offer or solicitation in those jurisdictions. Neither the delivery
of this prospectus nor any sale by means of this prospectus shall under any
circumstances imply that there has been no change in the affairs of DutchFork
Bancshares or Newberry Federal since any of the dates as of which information is
furnished in this prospectus or since the date of this prospectus.
[Logo for DutchFork Bancshares]
DUTCHFORK BANCSHARES, INC.
(Proposed Holding Company for Newberry Federal Savings Bank)
1,357,000 Shares of Common Stock
--------
Prospectus
--------
Trident Securities,
A Division of McDonald Investments, Inc.
May 12, 2000
DEALER PROSPECTUS DELIVERY OBLIGATION
Until August 22, 2000, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.