10-Q 1 form10q-53510_dutchfork.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark one) |X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2003 |_| Transition report under Section 13 or 15(d) of the Exchange Act for the transition period from _______________ to Commission File No. 0-30483 DUTCHFORK BANCSHARES, INC. (Exact name of Small Business Issuer as Specified in its Charter) Delaware 57-1094236 State or Other Jurisdication of I.R.S. Employer Identification No. Incorporation or Organization 1735 Wilson Road, Newberry, South Carolina 29108 (Address of Principal Executive Offices) (803) 321-3200 (Issuer's Telephone Number) N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 1,133,341 shares of common stock, par value $0.01 per share, were issued and outstanding as of July 31, 2003. Transitional Small Business Disclosure Format (check one): Yes |_| No |X| 1 PART I - FINANCIAL INFORMATION Item 1: Financial Statements Consolidated Balance Sheets at June 30, 2003 and September 30, 2002 (unaudited) Consolidated Statements of Income for the Three Months and Nine Months Ended June 30, 2003 and 2002 (unaudited) Consolidated Statements of Comprehensive Operations for the Three Months and Nine Months Ended June 30, 2003 and 2002 (unaudited) Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended June 30, 2003 (unaudited) Consolidated Statements of Cash Flows for the Three Months and Nine Months Ended June 30, 2003 and 2002 (unaudited) Notes to Consolidated Financial Statements (unaudited) Item 2: Management's Discussion and Analysis or Plan of Operation Item 3: Controls and Procedures PART II - OTHER INFORMATION Item 1: Legal Proceedings Item 2: Changes in Securities Item 3: Defaults upon Senior Securities Item 4: Submission of Matters to a Vote of Security Holders Item 5: Other Information Item 6: Exhibits and Reports on Form 8-K 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements The financial statements of DutchFork Banchshares, Inc. (the "Company" or "DutchFork Bancshares") are set forth in the following pages. 3 DutchFork Bancshares, Inc. and Subsidiaries Consolidated Balance Sheets

4 DutchFork Bancshares, Inc. and Subsidiaries Consolidated Balance Sheets (continued)

5 DutchFork Bancshares, Inc. and Subsidiaries Consolidated Statements of Income

6 DutchFork Bancshares, Inc. and Subsidiaries Consolidated Statements of Comprehensive Operations

7 DutchFork Bancshares, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity

8 DutchFork Bancshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows

9 DutchFork Bancshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued)

10 DutchFork Bancshares, Inc. Notes to Financial Statements June 30, 2003 Note 1 - Organization DutchFork Bancshares was incorporated under the laws of Delaware in February 2000 for the purpose of serving as the holding company of Newberry Federal Savings Bank ("Newberry Federal" or the "Bank") as part of the Bank's conversion from the mutual to stock form of organization. The conversion, completed on July 5, 2000, resulted in the Company issuing an aggregate of 1,560,550 shares of its common stock, par value $.01 per share, at a price of $10 per share. Prior to the conversion, the Company had not engaged in any material operations and had no assets or income. The Company is a savings and loan holding company and subject to regulation by the Office of Thrift Supervision and the Securities and Exchange Commission. Note 2 - Accounting Principles The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with instruction to Form 10-QSB and of Regulation S-B. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the current fiscal year. 11 Note 3 - Earnings Per Share The following reconciles the numerator and denominator of the basic and diluted earnings per share computation:

The average market price used in calculating the assumed number of shares issued for the three months and nine months ended June 30, 2003 was $31.12 and $28.95 per share, respectively. 12 Item 2. Management's Discussion and Analysis or Plan of Operation Forward Looking Statements This quarterly report contains forward-looking statements that are based on assumptions and describe future plans, strategies and expectations of DutchFork Bancshares and its wholly owned subsidiary, Newberry Federal. These forward looking statements are generally identified by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. DutchFork Bancshares and Newberry Federal's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of DutchFork Bancshares and Newberry Federal include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposits flow, competition, demand for financial services in DutchFork Bancshares' and Newberry Federal's market area and accounting principles. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Except as required by law or regulation, the Company disclaims any obligation to update such forward-looking financial statements. Operating Strategy DutchFork Bancshares' wholly owned subsidiary, Newberry Federal, is an independent community-oriented savings bank, delivering quality customer service and offering a wide range of deposit and loan products to its customers. Because of weak loan demand in Newberry Federal's primary market area, management has maintained a substantial investment in investment securities and mortgage-backed securities classified as available-for-sale. Management's objective in managing the securities portfolio is to maintain a portfolio of high quality, highly liquid investments with competitive returns in order to maximize current income without compromising credit quality. Comparison of Financial Condition at June 30, 2003 and September 30, 2002: Total assets decreased by $6.0 million from $219.1 million at September 30, 2002 to $213.1 million at June 30, 2003. During the nine months ended June 30, 2003, the Bank experienced significant pay-downs on mortgage-backed securities due to the low interest rate environment, which caused early pay-offs of the underlying loans. The funds were reinvested in fixed and adjustable rate collateralized mortgage obligations, corporate obligations and other investments, including preferred stock, in order to improve interest rate spread. However, in this environment of decreasing rates, the Bank is subject to reinvestment risk to the extent that it is not able to reinvest such prepayments at rates which are comparable to the rates that the Bank previously earned on the prepaid securities. At June 30, 2003, the Bank did not have any investments held for trading. Depending on market volatility and the elements of supply and demand certain investments are purchased with the expressed intent of selling them prior to their stated maturity and are placed in a trading account. Prevailing market conditions and risk exposure determine when this procedure is followed. 13 Comparison of Financial Condition at June 30, 2003 and September 30, 2002 (continued): Loans receivable at June 30, 2003 and September 30, 2002 were as follows: June 30, September 30, 2003 2002 ----------- ----------- Commercial real estate $ 1,219,262 $ 8,164,632 Commercial - other 12,599,763 8,475,251 Real estate construction 575,773 3,493,438 Residential mortgage - 1-4 family 26,999,046 28,369,889 Multi-family 829,431 879,028 Consumer loans 12,325,493 13,498,564 ----------- ----------- 60,548,768 62,880,802 ----------- ----------- Less: Allowance for loan losses 393,817 424,322 Loans in process 1,139,000 745,270 Deferred loan origination fees, net 2,129 5,514 ----------- ----------- 1,534,946 1,175,106 ----------- ----------- Loans receivable, net $59,013,822 $61,705,696 =========== =========== Loans receivable declined by $2,692,000 during the nine months ended June 30, 2003 due to loan pay-offs largely due to the declining interest rate environment. Non-accrual loans totaled $726,000 at June 30, 2003 compared to $771,000 at September 30, 2002. When a loan becomes 90 days past due, it is converted to non-accrual status. The Bank had no loans past due 90 days or more still accruing interest at June 30, 2003 and September 30, 2002. Loans receivable that were troubled debt restructurings totaled $180,000 at June 30, 2003 and $364,000 at September 30, 2002. Interest income that would have been recorded for the nine months ended June 30, 2003, had nonaccruing loans been current according to their original terms, amounted to approximately $73,000. The Bank included income on such loans of $19,000 in total interest income for the nine months ended June 30, 2003. There are no loans which are not discussed above where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. Other assets at June 30, 2003 include $5,330,000 of cash surrender value of Bank-owned life insurance on directors, officers and employees. During the nine months ended June 30, 2003, this amount increased approximately $4,500,000 due to the purchase of additional single premium life insurance policies. 14 Comparison of Financial Condition at June 30, 2003 and September 30, 2002 (continued): At June 30, 2003, total equity was $31.3 million, after a $1,900,000 unrealized loss, net of taxes, on the investment and mortgage-backed securities portfolios classified as available-for-sale. This compares with total equity at September 30, 2002 of $33.5 million, including a $193,000 unrealized gain, net of taxes, on the investment and mortgage-backed securities portfolios classified as available-for-sale. During the nine months ended June 30, 2003, the market values of investments and mortgage-backed securities decreased by $3,400,000, and after the tax effect of $1,300,000, equity decreased by $2,100,000 from this decrease in market values. Due to the size of the Bank's investment portfolio, extreme volatility in the rate environment requires extensive restructuring when call options by issuers are exercised and prepayments reach new highs. These two occurrences heavily impact cash flows and reinvestment opportunities. In an attempt to manage current and future interest rate spreads, investments must be restructured when rate changes occur in rapid and possibly sustained periods. It is essential to control liquidity while preserving investment value. The restructuring undertaken has resulted in positive income gains for the quarter. This, however, complicates the prediction of future income capabilities due to the low rates of return afforded from investment opportunities. Comparison of Operating Results for the Three Months Ended June 30, 2003 and June 30, 2002: Net Income Net income for the three months ended June 30, 2003 increased by $440,000 to $1,059,000 when compared to the same period for the prior year. Net interest income, after the provision for loan losses, increased by $261,000, and non-interest income increased by $111,000. The increase in non-interest income was primarily due to a $68,000 increase in gains on the sale of securities. Net Interest Income Net interest income increased from $1.6 million for the three months ended June 30, 2002 to $1.9 million for the same period in 2003. This was a result of a $447,000 decrease in total interest expense which was only partially offset by a $156,000 increase in total interest income. Total interest income declined due to a $28.8 million decline in average interest earning assets, partially offset by a 0.48% increase in average yield. The increase in the yield on investment securities from 5.49% for the three months ended June 30, 2002 to 5.97% for the three months ended June 30, 2003 was primarily due to an increased yield on mortgage-backed securities. Total interest expense decreased due to a $23.8 million decline in average interest-bearing liabilities, along with a 0.58% decline in the average interest rate paid. 15 Comparison of Operating Results for the Three Months Ended June 30, 2003 and June 30, 2002 (continued): Provision for Loan Losses The provision for loan losses for the three months ended June 30, 2003 and 2002 was $30,000 compared to $0 for the same period 2002. The increase was deemed appropriate due to the 25% increase in commercial loans, which generally involve a higher degree of risk than loans secured by real estate. The allowance was carefully evaluated and determined to be adequate at its current level based upon current market trends. The Bank evaluated individual larger loans (those in excess of $500,000) for impairment and determined that none of these loans were impaired. The changes in concentration of loans between March 31, 2003 and June 30, 2003 were relatively insignificant. Although management uses the best information available, future adjustments to the allowance may be necessary due to changes in economic, operating, regulatory and other conditions that may be beyond the Company's control. While the Company maintains its allowance for loan losses at a level which it considers adequate to provide for estimated losses, there can be no assurance that further additions will not be made to the allowance for loan losses and that actual losses will not exceed estimated losses. The table on page 22 presents an analysis on the Bank's allowance for loan losses. Non-Interest Income Non-interest income increased by $111,000, primarily as a result of an increase of $68,000 in gains on the sale of securities. Non-Interest Expense Non-interest expense remained relatively constant and the total increased by $5,000. Provision for Income Taxes Income tax decreased by $62,000, even though income before tax increased, due to the dividend exclusion on preferred stocks that are now a part of the Bank's investment portfolio. Comparison of Operating Results for the Nine Months Ended June 30, 2003 and June 30, 2002: Net Income Net income for the nine months ended June 30, 2003 increased by $763,000 to $2.5 million when compared to the same period for the prior year. Net interest income, after the provision for loan losses, decreased by $690,000, and non-interest income increased by $1.3 million. The increase in non-interest income was primarily due to a $1.3 million increase in gains on the sale of securities during the period ended June 30, 2003. 16 Comparison of Operating Results for the Nine Months Ended June 30, 2003 and June 30, 2002 (continued): Net Interest Income Net interest income decreased from $4.7 million for the nine months ended June 30, 2002 to $4.2 million for the same period in 2003. This was the result of a $1,975,000 decrease in total interest income which was only partially offset by a $1,455,000 decrease in total interest expense. Total interest income declined due to a $32.9 million decline in average interest earning assets and a 0.38% decline in the average yield. The decline in the yield on investment securities from 4.95% for the nine months ended June 30, 2002 to 3.89% for the nine months ended June 30, 2003 was partially offset by the tax benefit received on preferred stock dividends that is reflected in a lower effective tax rate. Total interest expense decreased due to a $24.6 million decline in average interest-bearing liabilities, along with a 0.61% decline in the average interest interest rate paid. Provision for Loan Losses The provision for loan losses for the nine months ended June 30, 2003 was $170,000, compared to $0 for the same period in 2002. The increase in the provision was deemed appropriate due to the increase in commercial loans which generally have a higher risk than loans secured by real estate. The allowance was carefully evaluated and determined to be adequate at its current level based upon current market trends. The Bank evaluated individual larger loans (those in excess of $500,000) for impairment and determined that none of these loans were impaired. Although management uses the best information available, future adjustments to the allowance may be necessary due to changes in economic, operating, regulatory and other conditions that may be beyond the Company's control. While the Company maintains its allowance for loan losses at a level which it considers adequate to provide for estimated losses, there can be no assurance that further additions will not be made to the allowance for loan losses and that actual losses will not exceed estimated losses. Non-Interest Income Non-interest income increased by $1.3 million, primarily as a result of a $1.3 million increase in gains on the sale of securities. Securities were sold as part of a restructuring plan designed to protect the Bank from potential volatility due to the Mideast war. 17 Comparison of Operating Results for the Nine Months Ended June 30, 2003 and June 30, 2002 (continued): Non-Interest Expense Non-interest expense increased from $3.8 million for the nine months ended June 30, 2002 to $4.1 million for the nine months ended June 30, 2003. The decrease was primarily a result of an increase in compensation and other expenses. Compensation expense increased due to salary and benefit increases, along with the cost associated with several new hires. Other expenses increased due to the cost of interest rate caps and floors. Provision for Income Taxes Income tax decreased by $398,000 from $941,000 for the nine months ended June 30, 2003. The decline was due to a decrease in the effective rate, due to the dividend exclusion on preferred stocks. 18 Liquidity and Capital Resources Management believes that the Company's liquidity remains adequate to meet operating, investment and loan funding requirements. Cash and cash equivalents, along with investments and mortgage-backed securities available for sale, represented 66.0% of assets at June 30, 2003. Liquidity management is both a daily and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management's assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and investment securities and the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits and short- and intermediate-term U.S. Government and agency obligations and mortgage-backed securities. If the Company requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the Federal Home Loan Bank of Atlanta. The desired level of liquidity for the Company is determined by management in conjunction with the Asset/Liability Committees of the Bank. The level of liquidity is based on management's strategic direction for the Company's commitments to make loans and the Committees' assessment of the Bank's ability to generate funds. Historically, sources of liquidity have included net deposits to savings accounts, amortization and prepayments of loans, Federal Home Loan Bank advances, reverse repurchase agreements and sales of securities and loans held for sale. The Bank is subject to various regulatory capital requirements imposed by the Office of Thrift Supervision. At June 30, 2003, the Bank was in compliance with all applicable capital requirements. The Bank's actual capital amounts and ratios are presented in the following table:

19 DutchFork Bancshares, Inc. Yields on Average Interest Earning Assets and Rates On Average Interest Bearing Liabilities (In Thousands)

---------- (1) Balances are net of deferred loan origination costs, undisbursed proceeds of construction loans in process, and include nonaccrual loans. (2) Includes mortgage-backed securities available-for-sale and held-to-maturity. (3) Includes investment securities available-for-sale and held-to-maturity. (4) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (5) Net interest margin represents net interest income as a percentage of average interest-earning assets. 20 DutchFork Bancshares, Inc. Yields on Average Interest Earning Assets and Rates On Average Interest Bearing Liabilities (In Thousands)

---------- (1) Balances are net of deferred loan origination costs, undisbursed proceeds of construction loans in process, and include nonaccrual loans. (2) Includes mortgage-backed securities available-for-sale and held-to-maturity. (3) Includes investment securities available-for-sale and held-to-maturity. (4) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (5) Net interest margin represents net interest income as a percentage of average interest-earning assets. 21 DutchFork Bancshares, Inc. Analysis of Allowance for Loan Losses

22 Item 3. Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive officer and the chief financial officer of the Company concluded that the Company's disclosure controls and procedures were effective. (b) Changes in internal controls. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the chief executive officer and the chief financial officer. 23 PART II OTHER INFORMATION Item 1. Legal Proceedings There are no material legal proceedings to which the Company or any of its subsidiaries is a party or which any of their property is the subject. Item 2. Changes in Securities NONE Item 3. Defaults upon Senior Securities NONE Item 4. Submission of Matters to a Vote of Security Holders NONE Item 5. Other Information NONE 24 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Certificate of incorporation of DutchFork Bancshares, Inc. (1) 3.2 Bylaws of DutchFork Bancshares, Inc. (1) 4.0 Specimen Stock Certificate of DutchFork Bancshares, Inc. (1) 10.1 Newberry Federal Savings Bank Employment Agreement with J. Thomas Johnson (2) 10.2 Newberry Federal Savings Bank Employment Agreement with Steve P. Sligh (2) 10.3 DutchFork Bancshares, Inc. Employment Agreement with J. Thomas Johnson (2) 10.4 DutchFork Bancshares, Inc. Employment Agreement with Steve P. Sligh (2) 10.5 Newberry Federal Savings Bank Employee Severance Compensation Plan (2) 10.6 Adoption Agreement for Employees' Savings & Profit Sharing Plan & Trust (1) 10.7 DutchFork Bancshares, Inc. 2001 Stock-Based Incentive Plan (3) 10.8 Newberry Federal Savings Bank Director Deferred Compensation Plan (4) 99.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 31.1 Rule 13a-14(a)/15d-14(a) Certification (President and Chief Executive Officer) 31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer) 32.0 Section 1350 Certifications (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K on May 14, 2003 announcing its financial results for the quarter ended March 31, 2003. The press release was included as an exhibit to the Form 8-K. ---------- (1) Incorporated herein by reference from the Exhibits to Form SB-2, Registration Statement and amendments thereto, initially filed on March 8, 2000, Registration No. 333-31986. (2) Incorporated herein by reference from the Exhibits to the Annual Report on Form 10-KSB for the fiscal year ended September 30, 2000. (3) Incorporated herein by reference from the Definitive Proxy Statement for the 2001 Annual Meeting of Stockholders. (4) Incorporated herein by reference from the Exhibits to Form S-8 Registration Statement, filed on August 23, 2001, Registration No. 333-68214. 25 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DUTCHFORK BANCSHARES, INC. (Registrant) Date: August 13, 2003 /s/ J. Thomas Johnson --------------------- J. Thomas Johnson President and Chief Executive Officer /s/ Steve P. Sligh ------------------ Steve P. Sligh Executive Vice President and Chief Financial Officer 26

DUTCHFORK BANCSHARES INC 10-Q