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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X Annual report under Section 13 or 15(d) of the
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Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
Transition report under Section 13 or 15(d) of the
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Securities and Exchange Act of 1934
Commission File No.: 0-23499
DELAWARE FIRST FINANCIAL CORPORATION
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(Name of Small Business Issuer in Its Charter)
Delaware 52-2063973
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
400 Delaware Avenue, Wilmington, Delaware 19801
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(Address of Principal (Zip Code)
Executive Offices)
Issuer's Telephone Number, Including Area Code: (302) 421-9090
Securities registered under Section 12(b) of the Exchange Act:
Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock (par value $.01 per share)
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
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Issuer's revenues for its most recent fiscal year: $8.0 million.
As of March 31, 1998, the aggregate value of the 1,048,622 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
108,378 shares held by all directors and executives officers of the Registrant
and the Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was
approximately $14.7 million. This figure is based on the closing sales price of
$14.00 per share of the Registrant's Common Stock on March 31, 1998. Although
directors and executive officers and the ESOP were assumed to be "affiliates" of
the Registrant for purposes of this calculation, the classification is not to be
interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of March 31, 1998: 1,157,000
Transitional Small Business Disclosure Format: Yes No X
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PART I
Item 1. Business
General
Delaware First Financial Corporation (the "Company") is a
Delaware-chartered savings and loan holding company and the sole stockholder of
Delaware First Bank, FSB (the "Savings Bank"). The only significant assets of
the Company are the capital stock of the Savings Bank, the Company's loan to the
Employee Stock Ownership Plan ("ESOP") and the portion of the proceeds retained
by the Company in connection with the Savings Bank's conversion to stock form,
discussed below. The business of the Company currently consists of the business
of the Savings Bank. At December 31, 1997, the Company had total assets of
$113.3 million, total deposits of $76.9 million, and total stockholders' equity
of $16.1 million or 14.2% of total assets.
The Savings Bank was founded in 1922 as Ninth Ward Building & Loan
Association, a Delaware chartered institution. In 1954, the Savings Bank changed
its name to Ninth Ward Savings & Loan Association. In 1992, the Savings Bank
adopted a federal savings association charter, and changed its name to Ninth
Ward Savings Bank, FSB. The Savings Bank converted from a federally-chartered
mutual savings bank to a federally-chartered capital stock savings bank and
became a wholly-owned subsidiary of the Company in December 1997 (the
"Conversion"). Subsequent to the Conversion, in January 1998, the Savings Bank
changed its name to Delaware First Bank, FSB. The Savings Bank's business has
been conducted from a single location since its inception. The Savings Bank
intends to operate as an independent community-oriented savings association.
The principal sources of funds for the Savings Bank's activities are
deposits, repayments of loans and mortgage-backed securities, maturities of
investments and interest-bearing deposits, funds provided from operations and
advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh. The Savings
Bank's funds are used principally for the origination of loans secured by first
mortgages on one- to four-family residences which are located in its market
area. Such loans totaled $79.2 million, or 89.1%, of the Savings Bank's total
loan portfolio at December 31, 1997. The Savings Bank's principal source of
revenue is the interest received on loans, and its principal expense is the
interest paid on deposits and FHLB of Pittsburgh advances.
The Savings Bank has operated from a single banking location in the
central business district of Wilmington since 1922. Branch offices are a way to
bring convenient banking services to customers in a bank's market area. Because
of the Savings Bank's single location in downtown Wilmington, it has used other
methods such as personal service and competitively priced deposits to attract
and retain customers. Recently, the mix of business in central Wilmington has
shifted from industrial corporations to financial services companies, including
large banks and credit card lenders. That change has affected the Savings Bank's
ability to attract new customers because the employees of these financial
service companies have banking relationships with their employers.
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The need to develop strategies to preserve the Savings Bank's customer base
while operating from a single location has increased as its customer base has
changed and the financial services in its market have become increasingly
competitive.
The Savings Bank's single office structure has also affected the type of
deposits used to attract loans. For a number of years, the Savings Bank's
deposit structure has been comprised of fixed rate, fixed term certificates of
deposit. The Savings Bank has also used FHLB advances as an alternate source of
funds. The Savings Bank believes that as long as it operates solely from a
single office location it will be necessary to continue to rely on certificates
of deposit as its primary source of funds. At December 31, 1997, 84.3% of the
Savings Bank's deposits were in certificate form. Moreover, of this amount,
21.2% were in certificates of deposit of $100,000 or more. The Savings Bank
believes that its depositors are particularly sensitive to rate changes and that
the Savings Bank could undergo significant decay in these deposits if it
attempted to reduce the rates paid on certificates of deposit. As a result of
the Savings Bank's dependence on higher yielding certificates of deposit and
borrowings from the FHLB of Pittsburgh, the Savings Bank's cost of funds has
been and is likely to remain higher than that of comparable thrift institutions
with more convenient banking facilities, and those which operate in less
competitive banking markets, until it is able to attract more core deposits in
the form of shorter term deposits and transaction accounts.
Depending on general market conditions and the presence of a suitable
location, the Savings Bank anticipates opening branch facilities within the next
two years to provide more convenient banking services to the Savings Bank's
existing customers and to attract new customers. Upon the opening of a branch,
should such occur, it is likely that the initial expenses associated therewith
could cause a decline in earnings. At present, 78.5% of the Savings Bank's
assets are in loans but the establishment of a new branch facility is likely to
reduce that ratio and have an adverse impact on earnings.
The Savings Bank's origination of loans has primarily consisted of
long-term fixed rate loans. These originations increase as a result of
refinancings during low rate environments. The Savings Bank believes the
attractiveness of fixed rate loans and the reluctance of customers to accept
adjustable rate mortgage ("ARM") loans is in large part due to the relative
stability and low level of long term interest rates in the Savings Bank's market
and in the nation as a whole. The Savings Bank, like most banks, has found that
when long term rates are relatively low, the Savings Bank's borrowers prefer the
certainty of a fixed rate loan structure. As a result, over 77.6% of the Savings
Bank's first mortgage loans are fixed rate loans while approximately only 11.4%
are ARM loans. While some of the Savings Bank's fixed rate loans have been sold
in the secondary market, it has held the majority of these loans in its
portfolio. This concentration of long term, fixed rate loans, coupled with the
Savings Bank's reliance on shorter maturity certificates of deposit, has exposed
it to substantial interest rate risk. See "Item 6. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management."
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The Savings Bank intends to expand its product line by offering small
business/commercial loans as well as place more emphasis on home equity lending.
These forms of lending are shorter term, higher yielding and higher risk than
residential lending. The addition of shorter term business loans to the Savings
Bank's loan portfolio may enable it to reduce its dependence on fixed rate, long
term mortgage loans and enable it to work toward reduction of interest rate
risk.
The Savings Bank is subject to examination and comprehensive regulation
by the Office of Thrift Supervision ("OTS"), which is the Savings Bank's
chartering authority and primary federal regulator. The Savings Bank is also
regulated by the Federal Deposit Insurance Corporation ("FDIC"), the
administrator of the Savings Association Insurance Fund ("SAIF"). The Savings
Bank is also subject to certain reserve requirements established by the Board of
Governors of the Federal Reserve System ("FRB") and is a member of the FHLB of
Pittsburgh, which is one of the 12 regional banks comprising the FHLB System.
The Company's and the Savings Bank's executive office is located at 400
Delaware Avenue, Wilmington, Delaware 19801, and their telephone number is (302)
421-9090.
This Form 10-KSB contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of management
as well as assumptions made by the information currently available to
management. In addition, in those and other portions of this document, the words
"anticipate," "believe," "estimate," "expect," "intend," "should," and similar
expressions, or the negative thereof, as they related to the Company or the
Company's management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
looking events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking
statements.
Market Area
The Savings Bank's primary market area consists of New Castle County,
Delaware. New Castle County, which contains the city of Wilmington, is the site
of incorporation of many of the nation's largest corporations. The largest
industries are service, nondurable goods manufacturing and finance, insurance
and real estate. Agriculture also plays a prominent part in the state's economy.
The Savings Bank is located approximately 15 miles from Newark, Delaware, site
of the University of Delaware. Delaware has two other state supported
institutions and four private schools awarding post-secondary degrees. Owing to
its preferred location as the state of incorporation for many of the nation's
largest corporations, the city has many law, accounting and consulting firms.
The state of Delaware has the fourth lowest population in the nation but has
both high employment and higher than average income levels.
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The state of Delaware has adopted numerous favorable tax laws to attract
and retain businesses. Delaware has no sales tax and a relatively low real
property tax. Additionally, the state has a regressive bank franchise tax which
is favorable for large financial institutions. Several large banking companies
have established headquarters and other facilities here for credit card
operations. Delaware has also sought to augment the service-based sector of its
economy, having recently adopted a new trust law to facilitate the location of
trusts in Delaware.
Economic growth in the Savings Bank's market area remains dependent upon
the local economy. In addition, the Savings Bank's deposit and loan activity is
significantly affected by economic conditions in the Savings Bank's market area.
Based on the economic demographic history of the Savings Bank's primary market
area, the Savings Bank expects its market area to be relatively stable in the
future. Significant banking competition, however, will likely cause the cost of
funds to remain relatively high.
Supervisory Agreement
Since May 21, 1997, the Savings Bank has been operating under a
Supervisory Agreement with the OTS. Under the Supervisory Agreement, the Savings
Bank has agreed to take actions to improve its compliance with certain OTS
regulations in the area of interest rate risk, develop a three year business
plan, implement and periodically follow up on the Savings Bank's interest rate
risk policy, establish procedures providing for detailed minutes of Board of
Directors and committee meetings, establish procedures to insure Board members
are presented with sufficient information in order to make informed judgments
and improve regulatory compliance. With regard to interest rate risk management,
the Savings Bank has adopted and submitted to the OTS a revised interest rate
risk policy and undertaken certain actions including the sale of fixed rate
mortgage loans to the Federal Home Loan Mortgage Corporation ("FHLMC") and
lengthening the maturities of certain FHLB advances. The Supervisory Agreement
also required that the Savings Bank submit a three year written Business Plan to
the OTS which addresses goals and strategies for improving and sustaining
earnings. The Business Plan is required to identify major areas for improving
operating performance and achieving and maintaining adequate levels of capital
while addressing operating expenses (including management compensation), the
Savings Bank's cost of funds and asset growth. The Business Plan is required to
be updated annually and reviewed by the Savings Bank's Board of Directors at
least quarterly. Pursuant to the requirements of the Supervisory Agreement, the
Business Plan was submitted to the OTS regional office on August 28, 1997. The
Supervisory Agreement also requires the OTS be notified 30 days before a new
director or executive officer is appointed. Further, the Savings Bank must
provide notice to the OTS prior to extending, renewing, reviewing or entering
into any compensation or benefit-related contract with a senior executive
officer or director of the Savings Bank. The Supervisory Agreement remains in
effect until terminated by the OTS, although it states that the OTS Regional
Director will consider requests for termination after the first Report of
Examination following the May 21, 1997 effective date of the Supervisory
Agreement. The OTS completed its examination of the Savings Bank in March, 1998.
Presently, the Savings Bank is awaiting the
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receipt of the Report of Examination at which time it anticipates requesting
termination of the Supervisory Agreement.
Lending Activities
The following table sets forth information concerning the types of loans
held by the Company:
<TABLE>
<CAPTION>
Composition of Loan Portfolio
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December 31,
----------------------------------------------------------------
1997 1996
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Percent of Percent of
Amount Total Amount Total
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<S> <C> <C> <C> <C>
Real estate loans:
Residential mortgage $79,244,982 89.11% $87,918,256 89.67%
------------- ------------- ------------- -------------
Total real estate loans 79,244,982 89.11 87,918,256 89.67
Other loans:
Deposit account 749,969 0.84 528,198 0.54
Home equity loans 7,413,485 8.34 8,082,865 8.24
Equity lines of credit 2,946,938 3.31 2,823,273 2.88
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Total other loans 11,110,392 12.49 11,434,336 11.66
Less:
Unamortized loan fees 959,350 1.08 1,063,474 1.08
Allowance for loan losses 462,815 0.52 247,000 0.25
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Total loans, net $88,933,209 100.00% $98,042,118 100.00%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Mortgage-backed securities 1,900,986 203,147
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Total $90,834,195 $98,245,265
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</TABLE>
The Company is currently servicing loans for the benefit of others.
Such loans totaled $56.7 million, $54.3 million and $56.7 million at December
31, 1997, 1996 and 1995, respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. Loan servicing fees
generated by these activities were $105,000, $190,000 and $52,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Additionally, at December
31, 1997, the Company had outstanding loan origination commitments of $794,000,
for fixed and adjustable rate loans with rates ranging from 7.125% to 11.75%.
These commitments are expected to be funded within one year. Commitments are
issued in accordance with the same loan policies and underwriting standards as
settled loans.
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The following table sets forth the estimated maturity of the Company's
loan portfolio at December 31, 1997. Scheduled contractual principal repayments
of loans do not reflect the actual life of such assets. The actual life of the
loan is substantially less than its contractual terms because of prepayments. In
addition, due on sale clauses on loans generally give the Company the right to
declare loans immediately due and payable in the event, among other things, that
the borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tend to increase, however, when the
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market rates.
All mortgage loans are shown as maturing based on the date of the last payment
required by the loan agreement except as noted.
<TABLE>
<CAPTION>
Contractual Maturity of Loans and Mortgage-Backed Securities
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More than More than
Within 6 6 to 12 one year to three years Over 5
months months three years to five years years Total
---------- --------- ------------- --------------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential
Mortgage $ 93 $ 2 $ 650 $2,919 $75,580 $79,245
Deposit account
loans 750 0 0 0 0 750
Home equity
loans 6 121 1,166 1,930 4,190 7,413
Equity lines of
credit(2) 2,947 0 0 0 0 2,947
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Total loans 3,796 123 1,817 4,849 79,770 90,355
Mortgage-backed
securities 0 0 170 0 1,731 1,901
------- ------ ------- ------- ------- --------
TOTAL $3,796 $123 $1,987 $4,849 $81,501 $92,256
------- ------ ------- ------- ------- --------
------- ------ ------- ------- ------- --------
</TABLE>
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(1) Equity lines of credit are open-ended and have no stated maturity date
and are shown as being due when interest rates are next subject to
change.
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The following table sets forth the amount of fixed rate and adjustable
rate loans at December 31, 1997 which are due after December 31, 1998:
<TABLE>
<CAPTION>
Loans at 12/31/97 due after 12/31/98
------------------------------------------------
Fixed Adjustable Total
--------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C>
Residential mortgage $69,050 $10,100 $79,150
Deposit account loans 0 0 0
Home equity loans 7,286 0 7,286
Equity lines of credit 0 0 0
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Total $76,336 $10,100 $86,436
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Percent of total loans 84.48% 11.18% 95.66%
</TABLE>
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The following table sets forth certain information with respect to the
Company's loan origination, purchase and sales activity for the periods
indicated:
Loan Activity
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net loans receivable at beginning of period $98,042,118 $78,835,306 $72,134,479
Loans originated:
Real estate loans:
First mortgage loans 6,220,820 31,673,585 41,250,431
Home equity loans 2,267,896 3,139,302 2,701,850
Equity lines of credit 2,103,992 2,691,392 2,263,227
Deposit account loans 783,065 713,357 1,046,369
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Total loans originated $ 11,375,773 $38,217,636 $47,261,877
Loans purchased:
Participations 57,371 18,400 34,181
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Total loans purchased $ 57,371 $ 18,400 $ 34,181
Loans sold:
Whole loans (6,812,130) (2,599,494) (26,010,908)
Participations 0 (2,008,782) (3,859,071)
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Total loans sold $ (6,812,130) $ (4,608,276) $(29,869,979)
----------- ----------- -----------
Principal repayments $(13,618,232) $(15,414,110) $ (9,726,497)
Allowance for losses (increase) (215,815) (47,000) (5,000)
Reclassifications-Held for Sale 0 1,020,000 (1,020,000)
Other activity, net 104,124 20,162 26,245
Net loan increase (decrease) (9,108,909) 19,206,812 6,700,827
----------- ----------- -----------
Net loans receivable at end of period $88,933,209 $98,042,118 $78,835,306
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Most of the Company's loans are first or second mortgage and equity
loans which are secured by one- to four-family residences. The Company also
makes loans on deposit accounts. The Company intends to emphasize small
business/commercial lending, which will require the Company to increase its
staff and add another executive officer experienced in such lending. However,
this is a new area of lending for the Company and one that is highly competitive
in its market area. Accordingly, the Company's ability to originate small
business/commercial loans in a manner which is both profitable and in which
risks are maintained at acceptable levels is not assured. Further, small
business/commercial lending entails significantly greater risk than traditional
real estate lending. The repayment of these loans typically is dependent on the
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successful operation and income stream of the borrower. Such risks can be
significantly affected by economic conditions. When economic conditions or
segments of the economy slow down, business sales and profits may also decline.
Loans made to businesses experiencing a decline may require a restructuring
which could include a reduction or deferral of interest paid on the loan, or in
some cases, a portion or all of the principal may be uncollectible and a loss
would be incurred.
At December 31, 1997, total loans amounted to $88.9 million of which
$79.2 million or 89.1% were first mortgage loans secured by one- to four-family
residences. The majority of the Company's loans have interest rates which are
fixed for the term of the loan ("fixed rate"). To a much lesser extent, when
market conditions are favorable, the Company originates loans with rates of
interest which may adjust from period to period during the term of the loan
("adjustable rate"). The Company's reliance on interest income from fixed rate
loans has made it more susceptible to changes in interest rates and, as a
result, both its capital and its interest income could be adversely affected in
a rising interest rate environment.
The Company intends to begin originating small business/commercial
loans. Commercial loans are business loans which may be secured by real estate
or other collateral or may be unsecured. In connection with this program, the
Company may offer loans secured by property such as small apartment buildings
and small office buildings, shopping centers, and commercial and industrial
buildings. Such loans will typically be originated on an adjustable rate basis.
Small business/commercial lending has an inherently greater risk than
residential one- to four-family lending.
The Company obtains mortgage loans from a variety of sources. The most
frequently utilized method of obtaining mortgage loans is through employee
originators who handle telephone calls, walk-in customers and referrals from
real estate brokers. In previous years, the Company has obtained mortgage loans
from a third party originator.
An appraisal on each property which secures a first mortgage loan made
by the Company is obtained from an independent appraisal firm. These appraisers
are approved by the Savings Bank's Appraisal Committee, and certain appraisals
are reviewed randomly by the Committee throughout the year. Each appraiser must
annually submit updated licenses and evidence of insurance coverage to maintain
their status as an approved appraiser. The appraised value of a property is
determined by a physical inspection of the property and comparison of the
property to at least three comparable properties in the immediate area. The
appraised value is used as a basis for determining loan to value ratios unless
the sale price of the property is less than the appraisal value. In that case,
the sale price is used.
Certain officers of the Savings Bank each individually have lending
authority as defined and approved by the Board of Directors. Limits of this
lending authority are set for the loan amount, loan-to-value ratio, credit
ratios and credit quality. Residential mortgage and home equity loans that fit
within these authority limits are approved by an individual officer or officers.
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All other loans are reviewed by a Loan Committee consisting of (1) either the
President or the Executive Vice President; (2) the Vice President of Residential
Lending; and (3) the Vice President of Retail Banking Services. In the case of
loans that are reviewed by the Loan Committee, a majority of the Committee is
required for the approval of a loan. The Vice President of Residential Lending
is responsible for maintaining records of all Loan Committee meetings. A summary
report of all loans approved is submitted to the Board of Directors each month
for their ratification.
Participation interests in loans are reviewed and approved by either
the Board of Directors or the Executive Committee. The amount of the loan
participation must be approved by the Board of Directors.
Promptly after the Company approves a loan it provides a commitment
letter to the borrower which specifies the terms and conditions of the proposed
loan including the amount of the loan, the interest rate, the amortization term,
a brief description of the required collateral and required insurance coverage,
including fire and casualty insurance, and flood insurance as required. The
Company also requires each loan to have title insurance. At December 31, 1997,
the Company had commitments to originate $794,000 in mortgage and home equity
loans.
The Company does not purchase whole loans. However, it does
occasionally purchase participation interests in loans. For the year ended
December 31, 1997, the Company purchased $57,000 of loan participations
originated by Delaware Community Investment Corporation ("DCIC").
The Company requires private mortgage insurance on all first mortgage
loans when the loan-to-value ratio exceeds 80%. The Company retains servicing on
all loans originated. From time to time, the Company also sells certain of the
loans or participation interests in loans it originates. The only loans the
Company sells are fixed-rate residential mortgage loans. For the year ended
December 31, 1997, the Company sold $6.8 million of such loans. Such loans are
sold to either the FHLMC, Federal National Mortgage Association ("FNMA"), or
another financial institution.
All loans collateralized by deposits held by the Savings Bank must be
approved by the Customer Service Supervisor, Branch Manager, or their designee.
Loans of this type in excess of $25,000 must be approved by either the Vice
President - Branch Sales Manager, Vice President - Retail Banking Services or
the Chief Operations Officer.
Originations, Purchases and Sales of Loans. As a federal association,
the Savings Bank is permitted to make and/or purchase loans nationwide. The
Company originates and purchases participations in loans secured by real estate
located only in its market area. Recently, the Company's purchasing activities
have been limited to purchasing participations from DCIC. The Company makes home
mortgage loans secured by owner and nonowner occupied dwellings as well as
second mortgage loans secured by real estate. The Company occasionally makes
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construction loans secured by residential real estate and loans secured by
savings accounts. To a lesser extent, from time to time, the Company
participates in permanent or construction loans originated by other
federally-insured financial institutions. The Company also participates in
permanent mortgage loans originated by DCIC secured by multi-family dwelling
units. DCIC is a community investment corporation formed to provide financing
for low and moderate income families through a loan pool formed by the
commitment of over 30 banks. The Savings Bank purchases participations in loans
based upon its pro-rata share of the total loan pool.
The Company's ability to originate loans is based on several factors.
These include the level of interest rates, the needs of its customers, its asset
and liability funding needs and the success of its marketing efforts. In 1995,
the Company began to increase its mortgage lending and hold loans in portfolio,
rather than selling them into the secondary market. The growth was largely due
to the Company's desire to increase income through additional mortgage lending
and a high refinancing demand of consumers. Nearly all of these loans were fixed
rate loans with terms of 15 to 30 years. Holding these long-term loans with
fixed rates, while assisting in the Company's income growth, caused its interest
rate risk to increase and made it more susceptible to declines in its interest
income if interest rates increased. Accordingly, in the last quarter of 1996 the
Company reduced its lending activities so that it could better manage its
interest rate risk. This reduction also was the result of less refinancing
activity. The Company's mortgage loan originations for the year ended December
31, 1997 were $6.2 million compared to $31.7 million for the year ended December
31, 1996.
One-to-Four Family Residential Loans. The Company's primary lending
activity consists of the origination of one-to-four-family residential mortgage
loans secured by property located in its primary market area. The Company
generally originates conforming one-to-four family owner occupied residential
mortgage loans in amounts up to 95% loan-to-value ratio -- 97% in the case of
some first time home buyer programs -- with private mortgage insurance required
on loans with a loan-to-value ratio in excess of 80%. The maximum loan-to-value
ratio on mortgage loans secured by nonowner occupied properties generally is
limited to 75%. The Company primarily originates fixed-rate loans having terms
from five to 30 years, with principal and interest payments calculated using up
to a 30-year amortization period. At December 31, 1997, approximately 12.7% of
the Company's one- to four-family residential loans had adjustable rates of
interest.
Home Equity. The Company's loan portfolio also contains
fixed-rate home equity loans and variable rate equity lines of credit. These
loans and lines of credit totaled $10.4 million and comprised 11.6% of our total
loan portfolio at December 31, 1997.
The Company originates fixed rate home equity loans for a minimum of
three years and a maximum of 15 years in amounts of $5,000 to $150,000. The
maximum loan-to-value ratio is 100%. However, the Company only lends up to 90%
of loan-to-value ratio on loans with first mortgages that have been outstanding
for one year or less. During the year ended December 31,
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1997, the Company originated $2.3 million in home equity loans. At December 31,
1997, all of the Company's home equity loans were secured by first or second
mortgages.
The Company also originates variable rate home equity lines of credit.
These lines of credit range in amounts from $10,000 to $100,000 and also require
a perfected second lien on owner occupied real property. For variable rate
equity lines of credit, the maximum loan-to-value ratio is 90%. For the year
ended December 31, 1997, the Company advanced $2.1 million on home equity lines
of credit.
Loans to One Borrower. Federal law requires that, in general, the
maximum amount of loans which the Savings Bank may make to any one borrower may
not exceed the greater of $500,000 or 15% of its unimpaired capital and
unimpaired surplus. Higher limits apply to loans to develop domestic housing
units. The Savings Bank may lend an additional 10% of its unimpaired capital and
unimpaired surplus if the loan is fully secured by readily marketable
collateral. Under federal law, the Savings Bank's maximum loan-to-one borrower
limit was approximately $2.5 million at December 31, 1997. However, the Savings
Bank has established an internal limit on loans to one borrower of $900,000. At
December 31, 1997, the aggregate loans outstanding to the Company's three
largest borrowers and related entities were $395,000, $391,000 and $314,000,
respectively. Each of these loans was secured and performing as of December 31,
1997.
Nonperforming and Problem Assets
Loan Delinquencies. The Company classifies a loan as delinquent when
payment is 16 days past due. When a mortgage loan becomes 16 days past due, a
computer generated notice of nonpayment is sent to the borrower. On the 21st
day, a personal call is made to verify receipt of the first notice and to
request payment. A second delinquency notice is then mailed on the 30th day. If,
after 60 days, payment is still delinquent, the borrower will be advised in
writing of the Company's intent to commence foreclosure. If the loan continues
in a delinquent status for 90 days and no repayment plan is in effect, the
delinquent account is referred to an attorney for foreclosure. At December 31,
1997, the Company's total delinquent loans, consisting of all loans 30 or more
days past due, amounted to $2.8 million, or 3.16% of its total loan portfolio.
12
<PAGE>
The following table shows the Company's total delinquent loans at the
dates indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------
1997 1996
--------------------------------------- -------------------------------------------
Loans Delinquent Percentage Percentage
For Number Amount of Portfolio Number Amount of Portfolio
- ---------------- -------- ---------- ------------ -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
30-59 days 38 $1,886,884 2.09% 35 $1,438,199 1.45%
60-89 days 7 188,790 0.21 8 130,490 0.13
90 days and
over 14 774,202 0.86 9 375,509 0.38
-------- ---------- ------------ -------- ------------- --------------
Total delinquent
loans 59 $2,849,876 3.16% 52 $1,944,198 1.96%
-------- ---------- ------------ -------- ------------- --------------
-------- ---------- ------------ -------- ------------- --------------
</TABLE>
The following table shows the Company's delinquent loans by loan type:
<TABLE>
<CAPTION>
December 31,
1997 1996
Percentage of Percentage of
Delinquent Delinquent
Loan Type Amount Loans Amount Loans
- --------------------------- ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C>
Residential mortgage $2,445,396 85.81% $1,740,229 89.51%
Deposit account loans 60,975 2.14 56,417 2.90
Home equity loans 207,512 7.28 108,147 5.56
Equity lines of credit 135,993 4.77 39,405 2.03
---------- -------------- ---------- -------------
Total $2,849,876 100.00% $1,944,198 100.00%
---------- -------------- ---------- -------------
---------- -------------- ---------- -------------
</TABLE>
Loans are reviewed on a quarterly basis and are placed on a
non-accrual status when the loan becomes more than 90 days delinquent or when,
in the Company's opinion, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on nonaccrual status is
charged against interest income. Subsequent interest payments, if any, are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
Nonperforming Assets. The following table sets forth information
regarding nonaccrual loans and real estate owned. As of the dates indicated, the
Company had no loans categorized as troubled debt restructurings within the
meaning of SFAS 15. Interest income that would have been recorded on loans
accounted for on a nonaccrual basis under the original terms of such loans was
approximately $18,000 and $4,000 for the years ended December 31, 1997 and
December 31, 1996, respectively.
Nonperforming and Restructured Assets
13
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Non-accrual loans $774(1) $376(2)
Accruing loans delinquent
90 days or more 0 0
Real estate owned 0 0
---------- ----------
Total non-performing loans $ 774 $ 376
---------- ----------
---------- ----------
Percentage of total loan 0.86% 0.38%
portfolio
Percentage of total assets 0.68% 0.33%
</TABLE>
- ------------------------
(1) Consists of $623,000 in residential mortgage loans, $51,000 in home equity
loans and $100,000 in equity lines of credit loans.
(2) Consists of $229,000 in residential mortgage loans, $108,000 in home equity
loans and $39,000 in equity line of credit loans.
Classification of Assets. OTS regulations provide for a classification
system for loans and other assets of savings associations. Under this
classification system, problem assets of savings associations are classified as
"substandard," "doubtful," or "loss." An asset is considered substandard if it
is inadequately protected by the current net worth and paying capacity of the
borrower or of the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that the savings association will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified substandard,
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as loss are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets may be designated "special mention" because of potential weakness that do
not currently warrant classification in one of the aforementioned categories.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings association classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that
14
<PAGE>
portion of the asset so classified or to charge off such amount. A savings
association's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS, which may
order the establishment of additional general or specific loss allowances. A
portion of general loss allowances established to cover possible losses
related to assets classified as substandard or doubtful may be included in
determining a savings association's regulatory capital. Specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
The following table presents the Company's classified assets at the
dates indicated:
Classified Assets
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
--------- ---------
Classification (Dollars in thousands)
--------------
<S> <C> <C>
Substandard $735(1) $303(2)
Doubtful 0 0
Loss 0 0
- -
Total Classified Assets $735 $303
=== ===
</TABLE>
- ---------------------------
(1) Consists of $625,000 in residential mortgage loans classified as
substandard, $45,000 in home equity loans classified as substandard
and $65,000 in equity line of credit loans classified as substandard.
(2) Consists of $168,000 in residential mortgage loans classified as
substandard, $88,000 in home equity loans classified as substandard,
and $47,000 in equity line of credit loans classified as substandard.
Allowances for Loan Losses. The Company's policy is to provide for
losses based on management's estimate of the losses that may be incurred with
respect to its loan portfolio. When the Company increases the allowances for
loan losses it does so by establishing a charge against income. The estimate,
including a review of all loans on which full collectibility of interest and
principal may not be reasonably assured, considers: (i) the Company's past loan
loss experience, (ii) known and inherent risks in the Company's portfolio, (iii)
adverse situations that may affect the borrower's ability to repay, (iv) the
estimated value of any underlying collateral, and (v) current economic
conditions.
15
<PAGE>
The Company monitors its allowance for loan losses and makes additions
to the allowance as economic conditions dictate. Although the Company maintains
its allowance for loan losses at a level that it considers to be adequate for
the inherent risk of loss in its loan portfolio, future losses could exceed
estimated amounts and additional provisions for loan losses could be required.
In addition, the Company's determination as to the amount of allowance for loan
losses is subject to review by the OTS, as part of its examination process.
After a review of the information available, the OTS might require the
establishment of an additional provision. As of the latest examination by the
OTS, which concluded in March 1998, no additional provision was required.
The following table sets forth an analysis of the Company's allowance
for loan losses at the dates indicated:
Allowance for Loan Losses
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
--------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Gross Loan Principal Balance Outstanding $90,355 $99,353 $79,918
Average Loans Outstanding 95,371 91,061 78,025
Allowance Balance at beginning of period 247 200 195
Loans charged off 0 0 0
Recoveries 0 0 0
Net loans charged-off 0 0 0
Provision for possible loan losses 216 47 5
--- -- -
Allowance Balance at end of period $463 $247 $200
=== === ===
Allowance for loan losses to total loans 0.51% 0.25% 0.25%
Ratio of Allowance for loan losses to total
non-performing loans 59.82% 65.69% 81.97%
</TABLE>
16
<PAGE>
Allocation of Allowance for Loan Losses. The following table
presents an allocation of the entire allowance for loan losses among various
loan classifications and sets forth the percentage of loan type to total
loans. The allowance shown in the table should not be interpreted as an
indication that charge-offs in future periods will occur in these amounts or
proportions or that the analysis indicates future charge-off trends.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1997 1996
---------------------------- ---------------------------
Percentage of Percentage of
Amount Total Loans Amount Total Loans
------ -------------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
First mortgage loans $236 89% $169 90%
Home equity loans 140 8 10 8
Equity lines of credit 86 3 67 2
Deposit account loans 1 0 1 0
- - - -
Total $463 100% $247 100%
=== === === ===
</TABLE>
Investment Activities
General. The Savings Bank is permitted under federal law to make
certain investments, including investments in securities issued by various
federal agencies, state and municipal governments, deposits at the FHLB of
Pittsburgh, certificates of deposit in federally insured institutions,
certain bankers' acceptances and federal funds. The Savings Bank may also
invest, subject to certain limitations, in commercial paper rated in one of
the two highest investment rating categories of a nationally recognized
credit rating agency, and certain other types of corporate debt securities
and mutual funds. Federal regulations require the Savings Bank to maintain an
investment in FHLB stock and a minimum amount of liquid assets which may be
invested in cash and specified securities. From time to time, the OTS adjusts
the percentage of liquid assets which savings banks are required to maintain.
The goals of the Company's investment policy are to (i) maintain
profitability; (ii) invest in relatively high quality securities; (iii)
maintain adequate liquidity levels for meeting cash demands; (iv) maintain
compliance with regulations; and (v) provide a short-term source of funds for
the funding of loans designated for sale.
Investment decisions will include these objectives as well as a
review of risk-based capital established for each type of security.
17
<PAGE>
During periods when mortgage loan demand is moderate, the Company
has invested its funds in certain investment and mortgage-backed securities
rather than originating whole loans.
The investment securities purchased by the Company consist
primarily of securities issued or guaranteed by the U.S. government or
agencies thereof and mortgage-backed securities. At December 31, 1997, 9.0%
of the Company's mortgage-backed securities were FHLMC pass-throughs.
Investment and aggregate investment limitations and credit quality parameters
of each class of investment are prescribed in the Company's investment
policy. The Company performs analyses on mortgage-related securities prior to
purchase and on an ongoing basis to determine the impact on earnings and
market value under various interest rate and prepayment conditions. Under the
Company's current investment policy, the President and his designee(s) have
been delegated the authority by the Board of Directors to execute agreements,
transactions and any other appropriate material in order to effectuate
investment transactions authorized by the investment policy. The Board of
Directors reviews all securities transactions on a monthly basis.
The Company has adopted SFAS No. 115. This statement requires that
the Company classify its investment securities as either "trading,"
"available for sale" or "held to maturity." The Company has no securities
designated as "trading." Securities designated as held to maturity are those
assets which the Savings Bank has the ability and intent to hold to maturity.
A held to maturity investment portfolio is carried at amortized cost. In
contrast, those securities designated as available for sale are those assets
which are not classified as trading securities or held to maturity.
Securities designated as "available for sale" are carried at market value
with unrealized gains or losses, net of tax effect, recognized in retained
earnings.
Mortgage-backed Securities. To supplement its lending activities,
the Company has invested in residential mortgage-backed securities.
Mortgage-backed securities can serve as collateral for borrowings and,
through repayments, as a source of liquidity. Mortgage-backed securities
represent a participation interest in a pool of single-family or other type
of mortgages. Principal and interest payments are passed from the mortgage
originators, through intermediaries (generally quasi-governmental agencies)
that pool and repackage the participation interests in the form of
securities, to investors such as the Company. The quasi-governmental
agencies, FHLMC, Government National Mortgage Association ("GNMA"), and FNMA,
guarantee the payment of principal and interest to investors
Mortgage-backed securities are typically issued with stated
principal amounts. The securities are backed by pools of mortgages that have
loans with interest rates that are within a set range and have varying
maturities. The underlying pool of mortgages can be composed of either
fixed-rate or adjustable rate mortgage loans. Mortgage-backed securities are
generally referred to as mortgage participation certificates or pass-through
certificates. The interest rate risk characteristics of the underlying pool
of mortgages (i.e., fixed-rate or adjustable-rate) and the prepayment risk,
are passed on to the certificate holder. The life of a mortgage-backed
pass-through security is equal to the life of the underlying mortgages.
18
<PAGE>
Collateralized Mortgage Obligations. The Company has purchased
collateralized mortgage obligations ("CMOs") as an alternative investment in
order to address its interest rate risk position. CMOs are securities, which
have been collateralized by mortgage-backed securities. The CMO will be
divided into various tranches each with a separate priority for receipt of
principal payments. The maturity of a particular tranche of a CMO is
dependent upon the amount of repayments and prepayments from the
mortgage-backed securities. Generally as mortgage rates exceed the rates on
the mortgage-backed securities, prepayments will decrease and the maturity of
the CMO will increase. Conversely, when mortgage rates are below the rates on
the loans securitizing the mortgage-backed security, prepayments will
increase and the maturity of the CMO will also shorten. The CMOs purchased by
the Savings Bank have floating rates tied to various market indicies that
change monthly. As of December 31, 1997, the balance of CMOs outstanding was
$1.7 million.
19
<PAGE>
The following table sets forth the carrying value of the Company's
investment securities and mortgage-backed securities, at the dates indicated.
Investment Portfolio
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1997(1) 1996(1)
--------------------------- ----------------------------
Estimated Estimated
Carrying Market Carrying Market
Value Value Value Value
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation $1,498,750 $1,498,750 $ 499,500 $ 499,500
Federal National Mortgage
Association 499,390 499,390 495,805 495,805
Student Loan Marketing
Association 0 0 992,510 992,510
U.S. Treasury Notes 501,720 501,720 2,003,520 2,003,520
------- ------- --------- ---------
Total Investment securities $2,499,860 $2,499,860 $6,475,800 $6,475,800
========= ========= ========= =========
Mortgage-backed securities $1,900,986 $1,900,986 $ 203,147 $ 203,147
Federal Home Loan Bank
capital stock, at cost 975,000 975,000 1,500,000 1,500,000
------- ------- --------- ---------
Total $5,375,846 $5,375,846 $8,178,947 $8,178,947
========= ========= ========= =========
</TABLE>
- -------------------------
(1) All of the Company's investment portfolio was classified as "Available
for Sale" at December 31, 1997 and December 31, 1996 pursuant to SFAS
No. 115.
20
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair market values, and weighted
average yields for the Company's investment securities portfolio at December 31,
1997. The following table does not take into consideration the effects of
scheduled repayments or the effects of possible prepayments.
Investment Portfolio Maturity
At December 31, 1997
<TABLE>
<CAPTION>
One Year or Less One to Five Years More than Five Years Total Investment Securities
---------------- ----------------- -------------------- ---------------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Approximate Weighted
Carrying Average Carrying Average Carrying Average Carrying Fair Average
Value Yield Value Yield Value Yield Value Value Yield
---------- ----------- -------- --------- --------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of U.S. $2,499,860 5.40% $ 0 N/A $ 0 N/A $2,499,860 $2,499,860 5.40%
Government agencies
Mortgage-backed securities
0 N/A 170,444 7.01% 1,730,542 6.14% 1,900,986 1,900,986 6.22
FHLB stock(1) 975,000 6.38 0 N/A 0 N/A 975,000 975,000 6.38
------- - - ------- -------
Total investment
securities portfolio $3,474,860 5.67% $170,444 7.01% $1,730,542 6.14% $5,375,846 $5,375,846 5.87%
========== ======= ========= ========= =========
</TABLE>
(1) FHLB stock has no stated maturity, but has been classified based upon its
next stated dividend payment date. As a member of the FHLB of Pittsburgh,
the Savings Bank is required to maintain an investment in stock of the
FHLB of Pittsburgh
21
<PAGE>
equal to the greater of 1.0% of the Savings Bank's outstanding home
mortgage related assets or 5.0% of its outstanding advances from the FHLB
of Pittsburgh.
22
<PAGE>
Sources of Funds
Deposits are the major external source of funds for lending and
other investment purposes. Funds are also derived from the receipt of payments
on loans, prepayment of loans advances from the FHLB and, to a much lesser
extent, maturities of investment securities and mortgage-backed securities, and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments may be
significantly influenced by general interest rates and market conditions.
Deposits. Consumer deposits are attracted principally from within
the Company's primary market area through the offering of deposit accounts
including regular savings accounts, checking accounts, money market accounts,
term certificate accounts and IRA accounts. Deposit account terms vary according
to the minimum balance required, the time period the funds must remain on
deposit, and the interest rate.
The Company competes for deposits with other institutions in its
market area by offering competitively priced accounts which are tailored to the
needs of its customers. Additionally, the Company seeks to meet its customers'
needs by providing personalized customer service to the community. To provide
additional convenience, the Company participates in the MAC(R) and Plus(R)
automatic teller machine network at locations throughout Delaware and the United
States, through which customers can gain access to their accounts at any time.
The Company does not actively solicit certificate accounts in excess of $100,000
nor do they use brokers to obtain deposits or solicit deposits outside its
market area.
The interest rates paid by the Company on deposits are set as
needed at the direction of the Company's senior management. Rates on deposits
are determined based on the Company's liquidity requirements, interest rates
paid by its competitors, the general levels of interest rates, the Company's
growth goals and applicable regulatory restrictions and requirements.
The Company's deposit base is characterized by a relatively small
amount of passbook depositors and a significantly higher amount of certificates
of deposit. Passbook savings, money market and transaction accounts totalled
$12.1 million, or 15.7%, of the Company's deposit portfolio at December 31,
1997. As of December 31, 1997, certificates of deposit were $64.8 million or
84.3% of the Company's deposit portfolio. In addition, $13.8 million or 17.9% of
the deposit portfolio were certificates of deposit with balances of $100,000 or
more.
The Company believes that a portion of its depositors are
sensitive to changes in interest rates. Accordingly, some of the funds placed in
certificates of deposit with the Company are susceptible to withdrawal if
alternative investments pay a higher return or the Company's rates do not adjust
as rapidly as the competition. These deposits cannot, therefore, be viewed as
core deposits, which is also generally the case for deposits at or in excess of
$100,000. However, the Company's certificates are not derived from brokered
deposits, and the majority of those in excess of $100,000 are deposits of
long-standing customers of the Company.
23
<PAGE>
The following table sets forth the Company's distribution of
deposit accounts at the dates indicated and the weighted average interest rate
on each category of deposits represented.
Account Distribution Balances
<TABLE>
<CAPTION>
----------------------------------------------------------------
December 31, 1997 December 31, 1996
----------------------------------------------------------------
Weighted Weighted
Percent of Average Percent of Average
Amount Total Rate Amount Total Rate
------ ---------- -------- ------ ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook Savings $2,494 3.24% 4.14% $2,536 3.23% 4.14%
Money Market Accounts 8,532 11.10 3.40 8,246 10.52 3.35
IRA Accounts 11,880 15.45 6.51 12,073 15.40 6.47
Certificates of deposit
with an original term
to maturity of:
Less than 1 year 7,843 10.20 5.41 9,962 12.71 5.46
1 to 3 years 33,891 44.09 5.93 33,194 42.33 5.83
More than 3 years 11,179 14.54 6.47 11,517 14.69 6.46
Demand deposit accounts 1,064 1.38 2.05 881 1.12 2.05
----- ---- --- ----
Total Deposits $76,883 100.00% 5.65% $78,409 100.00% 5.62%
====== ====== ====== ======
</TABLE>
24
<PAGE>
The following table sets forth the Company's monthly average balance
and interest rates of deposit accounts for the periods shown.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------
1997 1996
---------------------------------------------------------------
Monthly Weighted Monthly Weighted
Amount Average Interest Rate Amount Average Interest Rate
------ --------------------- ------ ---------------------
<S> <C> <C> <C> <C>
Passbook Savings $2,503 4.14% $2,682 4.14%
Money Market Accounts 8,727 3.38 8,662 3.23
IRA Accounts 11,910 6.50 12,297 6.62
Certificates of
deposits:
Less than 1 year 8,798 5.47 10,485 5.31
1 to 3 years 34,028 5.90 33,363 5.96
More than 3 years 11,379 6.46 12,073 6.55
Demand Deposit Accounts 1,024 2.05 765 2.05
----- ---
Total Deposits $78,369 5.64% $80,327 5.67%
====== ======
</TABLE>
The following table sets forth the amounts and maturities of the
Company's time deposits at the dates indicated.
<TABLE>
<CAPTION>
Time Deposit Maturities
------------------------------------------------------------------------------------
December 31,
------------------------------------------------------------------------------------
1998 1999 2000 2001 Total
----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
2.00 to 4.00% $ 5,485 $ 0 $ 0 $ 0 $ 5,485
4.01 to 6.00% 43,210,745 5,387,356 1,148,240 3,352,237 53,098,578
6.01 to 8.00% 1,763,539 3,375,028 6,263,364 286,976 11,688,907
8.01 to 10.00% 0 0 0 0 0
10.01 to 12.00% 0 0 0 0 0
- - - - -
Total $44,979,769 $8,762,384 $7,411,604 $ 3,639,213 $64,792,970
========== ========= ========= ========= ==========
</TABLE>
25
<PAGE>
The following table indicates the amount of our certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1997.
Certificates of Deposit of $100,000 or More
<TABLE>
<CAPTION>
Primary Maturity Period Amount
----------------------- --------------
(In Thousands)
<S> <C>
3 months or less $ 4,834
Over 3 months to 6 months 2,490
Over 6 months to 12 months 3,010
Over 12 months 3,433
-----
Total $13,767
=======
</TABLE>
The following table sets forth net changes in the Company's deposit
accounts for the periods shown.
Net Changes in Deposit Activity
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net (decrease) before
interest credited ($5,308,060) ($7,074,384)
Interest credited 3,782,468 3,960,928
--------- ---------
Net deposit account (decrease) ($1,525,592) ($3,113,456)
========= =========
Weighted average cost of deposits during the
period 5.60% 5.61%
Weighted average cost of deposits at end of
period 5.65% 5.62%
</TABLE>
Borrowings. The Company may obtain advances (borrowings) from the FHLB
of Pittsburgh to supplement the Company's supply of lendable funds. Advances
from the FHLB of Pittsburgh are typically secured by a pledge of the Company's
stock in the FHLB of Pittsburgh,
26
<PAGE>
a portion of the Company's first mortgage loans and other assets. Each FHLB
credit program has its own interest rate, which may be fixed or adjustable, and
range of maturities. If the need arises, the Company may also access the Federal
Reserve Bank discount window to supplement the Company's supply of lendable
funds and to meet deposit withdrawal requirements. At December 31, 1997,
borrowings from the FHLB of Pittsburgh totaled $17.4 million.
The following table sets forth information concerning the Company's
borrowings from the FHLB of Pittsburgh.
Borrowings
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------
1997 1996
------------ -----------
<S> <C> <C>
FHLB Advances:
Average balance(1) $23,162,560 20,868,039
Maximum balance at any month- 25,700,000 33,700,000
end
Balance at period end 17,400,000 25,900,000
Weighted average interest rate
during the period 6.32% 6.00%
Weighted average interest rate
at period end 6.53% 6.33%
</TABLE>
- -------------------------
(1) The average balance was computed using an average of daily
balances during the year.
Competition
Competition for deposits and loans comes from commercial banks, thrift
institutions, credit unions, finance companies, credits card banks, mortgage
bankers and multi-state regional banks in the Company's market area, many of
whom have greater resources. Competition for deposits also includes a number of
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers.
The Company operates from a single office and until recent years
relied extensively on the presence of employees of several corporations located
near its single office for deposit growth. The Company's convenience enabled it
to attract and maintain funds that were reasonably priced. The relocation of
corporate offices and the transfer of employees to suburban locations has
27
<PAGE>
manifested itself in a decline in the number of downtown Wilmington customer
relationships and has required the Company to seek deposits from other parts of
New Castle County. The Company has been able to maintain its position in
mortgage loan originations throughout its market areas by virtue of the
Company's long-standing presence in the community, competitive pricing, and
referrals from existing customers.
Employees
At December 31, 1997, the Company had 18 full-time employees, one
full-time seasonal employee and one part-time employee. None of the Company's
employees are represented by a collective bargaining group. The Company believes
that its relationship with its employees is good.
Subsidiaries
At December 31, 1997, the Company had one wholly owned subsidiary,
Delaware First Bank.
REGULATION
Set forth below is a brief description of certain laws and regulations
which together with the descriptions of laws and regulation contained elsewhere
herein, are deemed material to an investor's understanding of the extent to
which the Company and the Savings Bank are regulated. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, do not purport to be complete and are qualified in its
entirety by reference to applicable laws and regulations.
Savings and Loan Holding Company Regulation
General. The Company has registered as a savings and loan holding
company with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and any non-savings
institution subsidiaries. This allows the OTS to restrict or prohibit activities
that it determines to be a serious risk to the Company. This regulation is
intended primarily for the protection of the Company's depositors and not for
the benefit of stockholders of the Company.
QTL Test. Since the Company owns one savings institution, it is able
to diversify its operations into activities not related to banking, but only so
long as it satisfies the qualified thrift lender ("QTL") test. If the Company
controls more than one savings institution, it would lose the ability to
diversify its operations into non-banking related activities, unless such other
savings institutions each also qualify as a QTL or were acquired in a supervised
acquisition. See "- Qualified Thrift Lender Test."
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Restrictions on Acquisitions. The Company must obtain approval from
the OTS before acquiring control of any other SAIF-insured savings institution.
No person may acquire control of a federally insured savings institution without
providing at least 60 days written notice to the OTS and giving the OTS an
opportunity to disapprove the proposed acquisition.
Savings Bank Regulation
General. As a federally chartered, SAIF-insured savings bank, the
Savings Bank is subject to extensive regulation by the OTS and the FDIC. The
Savings Bank's lending activities and other investments must comply with various
federal and state statutory and regulatory requirements. The Savings Bank is
also subject to certain reserve requirements promulgated by the FRB.
The OTS, in conjunction with the FDIC, regularly examines the Savings
Bank and prepares reports for the consideration of the Savings Bank's Board of
Directors on any deficiencies that the OTS finds in the Savings Bank's
operations. The Savings Bank's relationship with its depositors and borrowers is
also regulated to a great extent by federal and state law, especially in such
matters as the ownership of savings accounts and the form and content of its
mortgage documents.
The Savings Bank must file reports with the OTS and the FDIC
concerning the Savings Bank's activities and financial condition, in addition to
obtaining regulatory approvals prior to entering into certain transactions such
as mergers with or acquisitions of other financial institutions. This regulation
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the SAIF
and depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in regulations, whether by the OTS, the FDIC
or any other government agency, could have a material adverse impact on our
operations.
Insurance of Deposit Accounts. The FDIC is authorized to establish
separate annual assessment rates for deposit insurance for members of the Bank
Insurance Fund ("BIF") and the SAIF. The FDIC may increase assessment rates for
either fund if necessary to restore the fund's ratio of reserves to insured
deposits to its target level within a reasonable time and may decrease such
assessment rates if such target level is met. The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under this system,
assessments are set within a range, based on the risk the institution poses to
its deposit insurance fund. This risk level is determined based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Because a significant portion of the assessments paid into the SAIF by
savings institutions were used to pay the cost of prior savings institution
failures, the reserves of the SAIF were below
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the level required by law at the end of 1995. The BIF had, however, met its
required reserve level during the third calendar quarter of 1995. As a result,
deposit insurance premiums for deposits insured by the BIF were substantially
less than premiums for deposits such as ours which are insured by the SAIF.
Legislation to recapitalize the SAIF and to eliminate the significant premium
disparity between the BIF and the SAIF became effective September 30, 1996. The
recapitalization plan provided for a special assessment equal to $.657 per $100
of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to
the level required by law. Certain BIF institutions holding SAIF-insured
deposits were required to pay a lower special assessment. Based on its deposits
at March 31, 1995, on November 27, 1996, the Savings Bank paid a pre-tax special
assessment of approximately $492,000.
The recapitalization plan also provides that the cost of prior
failures, which were funded through the issuance of the Financing Corporation
Bonds, will be shared by members of both the SAIF and the BIF. This will
increase BIF assessments for healthy banks to approximately $.013 per $100 of
deposits in 1997. SAIF assessments for healthy savings institutions in 1997 were
approximately $.064 per $100 in deposits and may be reduced, but not below the
level set for healthy BIF institutions.
Pursuant to the recapitalization plan, the FDIC has lowered the rates
on assessments paid to the SAIF and widened the spread of those rates. The
FDIC's action established a base assessment schedule for the SAIF with rates
ranging from 4 to 31 basis points, and an adjusted assessment schedule that
reduces these rates by 4 basis points. As a result, the effective SAIF rates
range from 0 to 27 basis points as of October 1, 1996. Finally, the FDIC's
action established a procedure for making limited adjustments to the base
assessment rates by rulemaking without notice and comment, for both the SAIF and
the BIF.
The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings institutions
chartered under federal law. Under separate proposed legislation, Congress is
considering the elimination of the federal thrift charter and the separate
federal regulation of thrifts. As a result, the Savings Bank might have to
convert to a different financial institution charter and be regulated under
federal law as a bank, including being subject to the more restrictive activity
limitations imposed on national banks. The impact of the Savings Bank's
conversion to, or regulation as, a bank cannot be determined until the
legislation requiring such change is enacted.
Under regulations of the FDIC relating to premiums paid for deposit
insurance, the Savings Bank is also required to pay more for federal deposit
insurance than it previously has because of the Savings Bank's Supervisory
Agreement. That additional cost will continue as long as the Supervisory
Agreement remains in effect and will prevent the Savings Bank from achieving the
full benefit of the recapitalization plan. The lowest premium is available only
to those institutions that are well-capitalized and meet other requirements set
by the FDIC. The Savings Bank does not qualify for the lowest premium because of
the Supervisory Agreement.
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Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets. In August 1995, the OTS indefinitely delayed
implementation of this regulation.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Savings Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company. The OTS has the authority under its
supervisory powers to prohibit the payment
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of dividends by the Savings Bank to the Company. In addition, the Savings Bank
may not declare or pay a cash dividend on its capital stock if the effect would
be to reduce its regulatory capital below the amount required for the
liquidation account established at the time of the Conversion.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. Based on
the Savings Bank's capital level at December 31, 1997, the Savings Bank
qualified as a Tier 1 institution.
In the event the Savings Bank's capital falls below its fully
phased-in requirement or the OTS notifies the Savings Bank that it is in need of
more than normal supervision, the Savings Bank would become a Tier 2 or Tier 3
institution and as a result, its ability to make capital distributions could be
restricted. Tier 2 institutions, which are institutions that before and after
the proposed distribution meet their current minimum capital requirements, may
only make capital distributions of up to 75% of net income over the most recent
four quarter period. Tier 3 institutions, which are institutions that do not
meet current minimum capital requirements and propose to make any capital
distribution, and Tier 2 institutions that propose to make a capital
distribution in excess of the noted safe harbor level, must obtain OTS approval
prior to making such distribution. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. The OTS has proposed rules relaxing
certain approval and notice requirements for well-capitalized institutions.
A savings institution is prohibited from making a capital distribution
if, after making the distribution, the savings institution would be
undercapitalized (i.e., the savings institution does not meet any one of its
minimum regulatory capital requirements). Further, a savings institution cannot
distribute regulatory capital that is needed for its liquidation account.
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
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Recent legislation permits a savings association to qualify as a
qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments but also, in the alternative, by qualifying under
the Code as a "domestic building and loan association." The Savings Bank is a
domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family and
household purposes (other than credit card small business and educational loans)
are now included without limit with other assets that, in the aggregate, may
account for up to 20% of the total assets. At December 31, 1997, under the
expanded QTL test, approximately 95.6% of the Savings Bank's portfolio assets
were qualified thrift investments.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings institution or its
subsidiaries and its affiliates be on terms as favorable to the savings
institution as comparable transactions with non-affiliates. In addition, certain
of these transactions are restricted to an aggregate percentage of the savings
institution's capital or are prohibited altogether. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from
the savings institution. The Savings Bank's affiliates include the Company and
any company which would be under common control with the Savings Bank. In
addition, a savings institution may not extend credit to any affiliate engaged
in activities not permissible for a bank holding company or acquire the
securities of any affiliate that is not a subsidiary. The OTS has the discretion
to treat subsidiaries of savings institution as affiliates on a case-by-case
basis.
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At December 31, 1997, the Savings Bank's
required liquid asset ratio was 4.0% and its actual ratio was 19.8%. Monetary
penalties may be imposed upon associations for violations of liquidity
requirements.
Federal Home Loan Bank System. The Savings Bank is a member of the
FHLB of Pittsburgh, which is one of 12 regional FHLBs. Each FHLB serves as a
reserve or central bank for its members within its assigned region. It is funded
primarily from funds deposited by savings institutions and proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB.
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As a member, the Savings Bank is required to purchase and maintain
stock in the FHLB of Pittsburgh in an amount equal to at least 1% of the Savings
Bank's aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year. At December 31, 1997, the
Savings Bank held $975,000 in FHLB stock, at cost, which was in compliance with
this requirement. The FHLB imposes various limitations on advances such as
limiting the amount of certain types of real estate related collateral to 30% of
a member's capital and limiting total advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1997, the Savings Bank's reserve met the minimum level required by the
Federal Reserve System.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System. The Savings Bank had no borrowings from the Federal
Reserve System at December 31, 1997.
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TAXATION
Federal Taxation
The Company and the Savings Bank are subject to the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), in the same general
manner as other corporations. Prior to August 1996, however, savings
institutions such as the Savings Bank, which met certain definitional tests and
other conditions prescribed by the Code, could benefit from certain favorable
provisions regarding deductions from taxable income for annual additions to bad
debt reserve. The amount of the bad debt deduction that a qualifying savings
institution could claim with respect to additions to its reserve for bad debts
was subject to certain limitations. The Savings Bank reviewed the most favorable
way to calculate the deduction attributable to an addition to its bad debt
reserve on an annual basis.
In August 1996, the Code was revised to equalize the taxation of
thrifts and banks. Thrifts no longer have a choice between the percentage of
taxable income method and the experience method in determining additions to bad
debt reserves. Thrifts with $500 million of assets or less may still use the
experience method, which is generally available to small banks currently. Larger
thrifts must use the specific charge off method regarding bad debts. Any reserve
amounts added after 1987 will be taxed over a six year period beginning in 1996;
however, bad debt reserves set aside through 1987 are generally not taxed. A
savings institution may delay recapturing into income its post-1987 bad debt
reserves for an additional two years if it meets a residential-lending test.
This law is not expected to have a material impact on the Savings Bank. At
December 31, 1997, the Savings Bank had approximately $330,000 of post 1987
bad-debt reserves.
Under the percentage of taxable income method, the bad debt deduction
attributable to "qualifying real property loans" could not exceed the greater of
(i) the amount deductible under the experience method, or (ii) the amount which,
when added to the bad debt deduction for non-qualifying loans, equaled the
amount by which 12% of the sum of the total deposits and the advance payments by
borrowers for taxes and insurance at the end of the taxable year exceeded the
sum of the surplus, undivided profits and reserves at the beginning of the
taxable year. The amount of the bad debt deduction attributable to qualifying
real property loans computed using the percentage of taxable income method was
permitted only to the extent that the institution's reserve for losses on
qualifying real property loans at the close of the taxable year did not exceed
6% of such loans outstanding at such time.
Under the experience method, the bad debt deduction may be based on
(i) a six-year moving average of actual losses on qualifying and non-qualifying
loans, or (ii) a fill-up to the institution's base year reserve amount, which is
the tax bad debt reserve determined as of December 31, 1987.
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The percentage of specially computed taxable income that was used to
compute a savings institution's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8% at the
time the Code was revised. The percentage of taxable income bad debt deduction
thus computed was reduced by the amount permitted as a deduction for
non-qualifying loans under the experience method. The availability of the
percentage of taxable income method permitted qualifying savings institutions to
be taxed at a lower effective federal income tax rate than that applicable to
corporations generally (approximately 31.3% assuming the maximum percentage bad
debt deduction).
If a savings institution's qualifying assets (generally, loans secured
by residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
institution may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a specified period, which is
immediately accruable for financial reporting purposes. As of December 31, 1997,
at least 60% of the Savings Bank's assets were qualifying assets as defined in
the Code. No assurance can be given that the Savings Bank will meet the 60% test
for subsequent taxable years.
Earnings appropriated to the Savings Bank's pre-1988 bad debt reserve
and claimed as a tax deduction as well as its supplemental reserves for losses
will not be available for the payment of cash dividends or for distribution to
the Savings Bank's stockholders (including distributions made on dissolution or
liquidation), unless the Savings Bank includes the amount in income, along with
the amount deemed necessary to pay the resulting federal income tax. As of
December 31, 1997, the Savings Bank had $1.3 million of accumulated earnings,
representing its base year tax reserve, for which federal income taxes have not
been provided. If such amount is used for any purpose other than bad debt
losses, including a dividend distribution or a distribution in liquidation, it
will be subject to federal income tax at the then current rate.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating loss
carryovers of which the Company and the Savings Bank currently has none. AMTI is
also adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, the Savings Bank's or the Company's AMTI is increased by an amount
equal to 75% of the amount by which its adjusted current earnings exceeds its
AMTI (determined without regard to this adjustment and prior to reduction for
net operating losses).
The Company may exclude from its income 100% of dividends received
from the Savings Bank as a member of the same affiliated group of corporations.
A 70% dividends received deduction generally applies with respect to dividends
received from corporations that are not members of such affiliated group, except
that an 80% dividends received deduction applies if the Company owns more than
20% of the stock of a corporation paying a dividend. The above exclusion
amounts, with the exception of the affiliated group figure, were reduced in
years in
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which the Savings Bank availed itself of the percentage of taxable income bad
debt deduction method.
The Savings Bank's federal income tax returns have not been audited by
the IRS for at least the last five years.
Delaware State Taxation
The State of Delaware imposes a franchise tax on financial
institutions of 8.7% of taxable income. Taxable income, for this purpose, is 56%
of net operating income after adjustments. These taxes have not been a material
expense for the Savings Bank.
As a Delaware holding company earning income in Delaware, the Company
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware. Minimum tax is generally equal to $5,000 for each 100,000
shares of authorized capital stock regardless of whether such stock has been
issued.
Item 2. Properties
The following table sets forth our location and related information at
June 30, 1997.
<TABLE>
<CAPTION>
Net Book Value at
Location Leased or Owned Year Acquired December 31, 1997 (1)
-------- ------ -- ----- ---- -------- ------------ ---- ---
<S> <C> <C> <C>
MAIN OFFICE:
400 Delaware Avenue
Wilmington, Delaware 19801 Owned 1953 $1,806,632
</TABLE>
- -----------------
(1) Net book value is calculated by totaling the estimated value of land
and buildings, $2,278,764, and then subtracting accumulated
depreciation of $472,132.
Item 3. Legal Proceedings
The Company is, from time to time, a party to legal proceedings
arising in the ordinary course of its business, including legal proceedings to
enforce its rights against borrowers. The Company is not currently a party to
any legal proceedings which are expected to have a material adverse effect on
its financial condition or results of operations.
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Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Shares of the Company's common stock are traded on the
over-the-counter market under the symbol "DFFN," with quotations available
through the OTC Bulletin Board operated by the NASDAQ. At March 31, 1998, the
Company had 273 shareholders of record. Such holdings do not reflect the number
of beneficial owners of common stock. The Company issued its common stock at
$10.00 per share in its initial public offering on December 31, 1997.
The Company's Board of Directors has the authority to declare
dividends on the shares, subject to statutory and regulatory requirements. The
Company has not declared or paid any cash dividends on its common stock.
Generally, declarations of dividends by the Board of Directors depends upon a
number of factors, including, but not limited to: (i) the amount of the net
proceeds retained by the Company in the Conversion, (ii) investment
opportunities available, (iii) capital requirements, (iv) regulatory
limitations, (v) results of operations and financial condition, (vi) tax
considerations, and (vii) general economic conditions. Upon review of such
considerations, the board may authorize dividends in the future if it deems such
payment appropriate and in compliance with applicable law and regulation. For a
period of one year following the completion of the Conversion, the Company will
not pay dividends that would be treated for tax purposes as a return of capital,
nor take any actions to pursue or propose such dividends.
The Company is not subject to OTS regulatory restrictions on the
payment of dividends to its stockholders, although the source of such dividends
will be dependent in part upon the receipt of dividends from the Savings Bank.
The Savings Bank, like all financial institutions regulated by the OTS, is
subject to certain restrictions on the payment of dividends based on its net
income, its capital in excess of regulatory capital requirements and the amount
of capital required for the liquidation account required to be established in
connection with the Conversion. The Company is subject, however, to the
requirements of Delaware law, which generally limit the payment of dividends to
amounts that will not affect the ability of the Company, after the dividend has
been distributed, to pay its debts in the ordinary course of business.
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Management's discussion and analysis of financial condition and
results of operations is intended to assist in understanding the consolidated
financial condition and results of operations of the Company. The following
discussion and analysis of financial condition and results of operations of the
Company should be read in conjunction with the Company's consolidated financial
statements and the notes thereto found in "Item 7. Financial Statements" below.
General
The Company's results of operations depend primarily on net interest
income, which is determined by (i) the difference between rates of interest
earned on interest-earning assets and the rates paid on interest-bearing
liabilities ("interest rate spread"), and (ii) the relative amounts of
interest-earning assets and interest-bearing liabilities. The Company's results
of operations also are affected by (i) non-interest income, which includes
income from customer deposit account service charges, loan servicing fee income,
gains and losses from the sale of loans, investments and mortgage-backed
securities and (ii) non-interest expense, which includes compensation and
employee benefits, federal deposit insurance premiums, office occupancy costs,
advertising costs and data processing costs. The Company's results of operations
also are affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, all of which are beyond the Company's control.
The Savings Bank currently is operating under a Supervisory Agreement
with the OTS which requires the Savings Bank to take certain actions, including,
but not limited to, addressing the Savings Bank's interest rate risk profile.
The Supervisory Agreement will remain in place until terminated by the OTS,
although it provides that the OTS Regional Director will consider requests for
termination after the first Report of Examination of the Bank is concluded
following May 21, 1997, which was the effective date of the Supervisory
Agreement.
Asset/Liability Management
The Company's assets and liabilities may be analyzed by examining the
extent to which its assets and liabilities are interest rate sensitive and by
evaluating the expected effects of interest rate changes on its net portfolio
value. The ability to maintain consistent net interest income is largely
dependent upon the achievement of a positive interest rate spread that can be
sustained during fluctuations in prevailing interest rates. Interest rate
sensitivity is a measure of the difference between amounts of interest-earning
assets and interest-bearing liabilities that either reprice or mature within a
given period of time.
Thus, an asset or liability is interest rate sensitive within a
specific time period if it will mature or reprice within that time period. If
the Company's assets mature or reprice more quickly
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<PAGE>
or to a greater extent than its liabilities, the Company's net portfolio value
and net interest income would tend to increase during periods of rising interest
rates but decrease during periods of falling interest rates. Conversely, if the
Company's assets mature or reprice more slowly or to a lesser extent than its
liabilities, the Company's net portfolio value and net interest income would
tend to decrease during periods of rising interest rates but increase during
periods of falling interest rates. The difference or interest rate repricing
"Gap" provides an indication of the extent to which an institution's interest
rate spread will be affected by changes in interest rates. A Gap is considered
positive when the amount of interest rate sensitive assets maturing or repricing
within a given period exceeds the amount of interest rate sensitive liabilities
maturing or repricing within such period. A Gap is considered negative when the
amount of interest-bearing liabilities repricing or maturing within a given
period exceeds the amount of interest rate sensitive assets repricing or
maturing within such period.
The Company's lending activities historically have emphasized
long-term fixed rate mortgage loans secured by one-to-four family residences. At
December 31, 1997, 77.6% of all of the Company's loans were of this type.
Conversely, the Company's deposit accounts mature or are subject to repricing
within a relatively short period of time. These factors historically have caused
the income earned by the Company on its loan portfolio to adjust more slowly to
changes in interest rates than the interest the Company pays on its deposits.
In recent years the Company has sought to manage its interest rate
risk by selling portions of its fixed rate loans to the FHLMC or another
financial institution (while retaining the servicing of those loans). The
Company has also sought to manage interest rate risk by lengthening the
maturities of its certificates of deposit and through longer term borrowings
from the FHLB of Pittsburgh. The imbalance, however, between the Company's
assets and liabilities has caused its interest rate risk to remain high.
The Savings Bank's Supervisory Agreement with the OTS identifies the
Savings Bank's interest rate risk level as unacceptably high and requires the
Savings Bank to develop and pursue strategies to reduce interest-rate risk. The
strategies considered include adjustment of FHLB advances by replacing
short-term variable advances with the proceeds of longer termed fixed rate
advances. The Savings Bank has also sold or is considering the sale of new fixed
rate loans to the FHLMC in order to help manage its interest-rate risk. The
proceeds of these sales will be used to either acquire short term variable rate
assets or to repay short term or variable rate borrowings.
On June 26, 1997, the Savings Bank adopted a revised interest rate
risk policy and also took certain actions to implement this policy, including
loan sales and lengthening the maturities of some FHLB borrowings. The Savings
Bank anticipates taking additional actions of this nature in order to reduce its
interest rate sensitivity. In implementing these strategies, the Savings Bank
will attempt to balance the need to improve its interest rate risk against the
impact such restructuring will have on profitability. As a result of the
Conversion, the Savings Bank has experienced an increase in investable assets
approximately equal to the net proceeds from the sale
40
<PAGE>
of Common Stock in the Conversion less the amount of the ESOP loan. As these
proceeds are invested, it is expected that any positive Gap will be increased
and any negative Gap will be reduced because such investment will add short-term
interest sensitive assets while there will be no immediate corresponding
increase in short-term interest sensitive liabilities.
The following table, often referred to as a "Gap Table," sets forth
asset and liability balances at December 31, 1997 which are expected to reprice
and mature in each of the future periods indicated. Loans with adjustable rates
are shown as being due in the next adjustment period. Passbook accounts, money
market deposit accounts and NOW accounts are not assumed to be subject to
immediate repricing and are placed in repricing periods based upon assumptions
prepared by management.
41
<PAGE>
<TABLE>
<CAPTION>
More than 1 More than 2 More than 3
Less than 1 Month through 2 Months through 3 Months through 6
Month Months Months Months
------------ --------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-Earning Assets
Cash and Interest Earning Deposits $ 15,200 $ 0 $ 0 $ 0
Investments 500 1,498 0 502
FHLB Stock 0 0 975 0
Equity Loans/Lines 2,947 3 0 3
Collateral Loans 750 0 0 0
Mortgage-Backed Securities 1,731 0 0 0
Adjustable Rate Mortgages 876 308 896 1,795
Balloon Mortgages(1) 43 43 43 128
Fixed Rate Mortgages(2) 485 485 486 1,547
-------- -------- -------- --------
Total Interest-Earning Assets $ 22,532 $ 2,337 $ 2,400 $ 3,975
======== ======== ======== ========
Interest-bearing liabilities
Passbook Accounts(3) 31 31 31 94
Checking Accounts(4) 0 0 0 0
Money Market Deposit Accounts(5) 654 654 654 380
Fixed Rate Fixed Term Deposits 4,602 4,889 7,253 12,520
FHLB Advances - Fixed Rate and Term 1,500 500 0 1,300
Escrow Deposits 40 40 40 120
-------- -------- -------- --------
Total Interest-Bearing Liabilities $ 6,827 $ 6,114 $ 7,978 $ 15,414
======== ======== ======== ========
Excess (Deficiency) of Interest-Earning Assets
over Interest-Bearing Liabilities $ 15,705 ($ 3,777) ($ 5,578) ($11,439)
======== ======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets Over Interest-Bearing
Liabilities at December 31, 1997 $ 15,705 $ 11,928 $ 6,350 ($ 5,089)
======== ======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets Over Interest-Bearing
Liabilities as a Percent of Total Assets at
December 31, 1997 13.86% 10.52% 5.60% (4.49%)
======== ======== ======== ========
Cumulative Excess (Deficiency) of
Interest-Earning
Assets over Interest-Bearing Liabilities as a
percent of Total Interest-Earning Assets 14.16% 10.75% 5.72% (4.59%)
======== ======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets over Interest-Bearing
Liabilities as a percent of Cumulative
Interest-Bearing Liabilities 230.04% 92.17% 30.36% (14.01%)
======== ======== ======== ========
<CAPTION>
More than 6 More than 1
Months through Year through 3 More than
1 year Years 3 Years
--------------- -------------- ---------
<S> <C> <C> <C>
Interest-Earning Assets
Cash and Interest Earning Deposits $ 0 $ 0 $ 0
Investments 0 0 0
FHLB Stock 0 0 0
Equity Loans/Lines 121 1,165 6,121
Collateral Loans 0 0 0
Mortgage-Backed Securities 0 170 0
Adjustable Rate Mortgages 2,207 4,018 0
Balloon Mortgages(1) 256 1,451 2,401
Fixed Rate Mortgages(2) 2,913 11,644 47,220
-------- -------- --------
Total Interest-Earning Assets $ 5,497 $ 18,448 $ 55,742
======== ======== ========
Interest-bearing liabilities
Passbook Accounts(3) 188 376 3,011
Checking Accounts(4) 0 0 1,064
Money Market Deposit Accounts(5) 436 1,743 1,743
Fixed Rate Fixed Term Deposits 15,716 16,174 3,639
FHLB Advances - Fixed Rate and Term 3,300 7,300 3,500
Escrow Deposits 596 0 0
-------- -------- --------
Total Interest-Bearing Liabilities $ 20,236 $ 25,593 $ 12,957
======== ======== ========
Excess (Deficiency) of Interest-Earning Assets
over Interest-Bearing Liabilities ($14,739) ($ 7,145) $ 42,785
======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets Over Interest-Bearing
Liabilities at December 31, 1997 ($19,828) ($26,973) $ 15,812
======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets Over Interest-Bearing
Liabilities as a Percent of Total Assets at
December 31, 1997 (17.50%) (23.80%) 13.95%
======== ======== ========
Cumulative Excess (Deficiency) of
Interest-Earning
Assets over Interest-Bearing Liabilities as a
percent of Total Interest-Earning Assets (17.87%) (24.32%) 14.25%
======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets over Interest-Bearing
Liabilities as a percent of Cumulative
Interest-Bearing Liabilities (35.05%) (32.83%) 16.62%
======== ======== ========
</TABLE>
42
<PAGE>
- ------------------------
(1) 12% annual prepayment rate is based on assumptions provided by the OTS.
(2) 9% annual prepayment rate for 30 year loans and 8% annual prepayment
rate for 15 year loans is based on assumptions provided by the OTS.
(3) Repricing rate is estimated at 10% for year 1, 10% for 1-3 yrs., and
80% for 3+ years.
(4) Repricing rate is estimated 100% for 3 plus years.
(5) Repricing is based on the assumption that approximately 40% of accounts
with balances greater than $10,000 to reprice evenly over 6 months. The
remainder of accounts, assumed to be core deposits, reprice evenly over
all time periods.
Interest Rate Sensitivity Analysis
The Company has measured its interest rate sensitivity by computing
the "Gap" between the assets and liabilities which were expected to mature or
reprice within certain time periods, based on assumptions regarding loan
prepayment and deposit repricing provided by the OTS and management. In order to
encourage savings associations such as the Savings Bank to reduce interest rate
risk, however, the OTS added an interest rate risk component to its risk-based
capital rules. The OTS requires the computation of the net present value of an
institution's cash flow from assets, liabilities and off balance sheet items
(the institution's net portfolio value or "NPV") and measures the change in NPV
in the event of a range of assumed changes in market interest rates.
Qualitative Risk Analysis. The OTS measures an institution's interest
rate risk by the change in its NPV as a result of a hypothetical 200 basis point
("bp") change in market rates. A resulting change in NPV of more than 2% of the
estimated present value of total assets ("PV") will require the Savings Bank to
add to its capital 50% of that excess change. The rules provide that the OTS
will calculate the IRR component quarterly for each institution such as the
Savings Bank. The OTS has indefinitely delayed implementation of this regulation
regarding interest rate risk. Nevertheless, the following table estimates the
effect on the Savings Bank's NPV from instantaneous and permanent 1% to 4% (100
to 400 basis points) increases and decreases in market interest rates. The
following table presents the Savings Bank's NPV at December 31, 1997, which is
based upon quarterly information that the Savings Bank provides to the OTS and
which is calculated for the Savings Bank by the OTS.
43
<PAGE>
<TABLE>
<CAPTION>
Net Portfolio Value at December 31, 1997 NPV as % of PV of Assets
---------------------------------------- ------------------------
Change in
Rates $ Amount $ Change % Change NPV Ratio Change
----- -------- -------- -------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $6,307 $(9,135) (59)% 6.21% (7.34)%
+300 bp 8,593 (6,848) (44) 8.21 (5.33)
+200 bp 10,974 (4,468) (29) 10.18 (3.37)
+100 bp 13,337 (2,104) (14) 12.01 (1.53)
0 bp 15,441 0 0 13.55 0
-100 bp 16,818 1,377 9 14.47 .92
-200 bp 16,992 1,551 10 14.48 .93
-300 bp 16,792 1,351 9 14.22 .67
-400 bp 17,040 1,599 10 14.28 .73
</TABLE>
The above calculations indicate that the Savings Bank would be deemed
to have an excessive level of interest rate risk under applicable regulatory
requirements in a rising rate environment. In the event of a 200 bp change in
interest rates, the Savings Bank would experience a 10% increase in NPV in a
declining rate environment and a 29% decrease in NPV in a rising rate
environment. If the interest rate risk component of the capital regulations had
been in effect, at December 31, 1997, the Savings Bank would have been required
to deduct $1.1 million pursuant to such regulations in calculating total
risk-based capital.
Qualitative Risk Analysis. While the Company cannot predict future
interest rates or their effects on its "Gap," NPV or net interest income, the
Company does not expect current interest rates to have a material adverse effect
on its NPV or net interest income in the near future. Computations of
prospective effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, prepayments and
deposit run-offs and should not be relied upon as indicative of actual results.
Certain shortcomings are inherent in such computations. Although certain assets
and liabilities may have similar maturity or periods of repricing, they may
react at different times and in different degrees to changes in the market
interest rates. The interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while rates on
other types of assets and liabilities may lag behind changes in market interest
rates. Certain assets, such as adjustable rate mortgages, generally have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. In the event of a change in interest rates, prepayments
and early withdrawal levels could deviate significantly from those assumed in
making calculations set forth above.
44
<PAGE>
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
INTEREST RISK ANALYSIS AND MONITORING. The Savings Bank has
established an Asset/Liability Committee which is currently comprised of
non-employee directors Thomas L. Cloud, Chairman, Alan B. Levin and Dr.
Robert L. Schweitzer as well as the Savings Bank's Chief Executive Officer,
Ronald P. Crouch. This committee meets periodically and reviews the maturity
of the Savings Bank's assets and liabilities and discusses and recommends
policies and strategies designed to regulate its flow of funds and to
coordinate the sources, uses and pricing of such funds. The first priority in
structuring and pricing of the Savings Bank's assets and liabilities is to
maintain an acceptable interest rate spread while reducing the net effects of
changes in interest rates.
The Board of Directors also reviews the Savings Bank's asset and
liability policies. The Board of Directors meets monthly to review interest rate
risk and interest rate trends, as well as liquidity and capital ratios and
requirements. Management administers the policy and determinations of the Board
of Directors with respect to the Savings Bank's asset and liability goals and
strategies. The Savings Bank expects that its asset and liability policy and
strategies will continue as described so long as competitive and regulatory
conditions in the financial institution industry and market interest rates
continue as they have in recent years.
ANALYSIS OF NET INTEREST INCOME
The Company's earnings historically have depended upon its net interest
income, which is the difference between interest income earned on loans and
investments (the "interest-earning assets") and interest paid on deposits and
any borrowed funds (the "interest-bearing liabilities"). It is the single
largest component of the Company's operating income. Net interest income is
affected by (i) the difference between rates of interest earned on the Company's
interest-earning assets and rates paid on its interest-earning liabilities (the
"interest rate spread") and (ii) the relative amounts of the Company's
interest-earning assets and interest-bearing liabilities.
The following tables present an analysis of certain aspects of the
Company's operations during the periods indicated. The first table presents the
average balances of and the interest and dividends earned or paid on each major
class of the Company's interest earning assets and interest-bearing liabilities.
Average balances are daily average balances. The yields and costs include fees
which are considered adjustments to yields.
45
<PAGE>
<TABLE>
<CAPTION>
For the Year ended December 31,
------------------------------------------------------------------------------------------------------
1997 1996 At December 31, 1997
------------------------------------- -------------------------------------- ------------------------
Average Daily Interest & Average Daily Interest &
Balance Dividends Yield/Rate Balance Dividends Yield/Rate Balance Yield/Rate
------------- ---------- ---------- ------------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets
Loans receivable, net (1) $95,370,924 $7,352,557 7.71% $91,061,307 7,092,065 7.79% $88,933,209 7.62%
Investment securities(2) 7,336,699 427,656 5.83 12,644,840 709,493 5.61 5,375,846 5.72
Interest-bearing deposits 4,523,787 198,227 4.38 2,412,209 120,551 5.00 12,987,050 5.72
------------- ---------- ----------- --------- -----------
Total interest-earning
assets 107,231,410 7,978,440 7.44 106,118,356 7,922,109 7.47 107,296,105 7.29
Non-interest-earning assets 3,777,951 3,621,634 6,036,320
------------- ------------ -----------
Total assets $111,009,361 $109,739,990 $113,332,425
------------- ------------ -----------
------------- ------------ -----------
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities
Deposits $78,891,620 $4,416,447 5.60 $80,199,233 $4,497,657 5.61 $76,883,201 5.65
Advances from FHLB 23,162,560 1,464,357 6.32 20,868,039 1,252,482 6.00 17,400,000 6.53
------------- ---------- ------------ ---------- -----------
Total interest-bearing
liabilities 102,054,180 5,880,804 5.76 101,067,272 5,750,139 5.69 94,283,201 5.81
Non-interest-bearing
liabilities 2,598,910 2,386,544 2,951,413
------------- ------------ -----------
Total liabilities $104,653,090 $103,453,816 $97,234,614
Stockholder's Equity 6,356,271 6,286,174 16,097,811
------------- ------------ -----------
Total liabilities and
stockholders' equity $111,009,361 $109,739,990 $113,332,425
------------- ------------ -----------
------------- ------------ -----------
Net interest income/Interest
rate spread(3) $2,097,636 1.68% $2,171,970 1.78% 1.48%
---------- -------- ----------- -------
---------- -------- ----------- -------
Net interest-earning
assets/net interest
margin(4) $5,177,230 1.96% 5,051,084 2.05%
------------ -------- -------
------------ -------- -------
Interest-earning assets to
interest-bearing liabilities 105.07% 105.00% 113.80%
-------- ------- -------
-------- ------- -------
</TABLE>
46
<PAGE>
- ----------------------
(1) The inclusion of nonaccrual loans in average daily balance and
loan fees in interest and dividends has been deemed to have an
immaterial impact on this analysis.
(2) Includes mortgage-backed securities
(3) Interest rate spread represents the difference between the
average yield on interest-earning assets and the average rate
on interest-bearing liabilities.
(4) Net interest margin represents net interest income before the
provision for loan losses divided by average interest-earning
assets.
Rate/Volume Analysis
The following table sets forth certain information regarding changes
in the Company's interest income and interest expense for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to: (i) changes
in volume (changes in volume multiplied by the old rate); (ii) changes in
rate (changes in rate multiplied by old volume); and (iii) total change in
rate and volume. The combined effects of changes in both rate and volume has
been allocated proportionately to the change due to rate and the change due
to volume.
47
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
Increase (Decrease)
--------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $332,995 $(72,503) $260,492 $1,025,048 $(341,549) $683,499
Investment securities (308,423) 26,586 (281,837) (45,053) (9,218) (54,271)
Interest-bearing
deposits 94,141 (16,465) 77,676 40,481 (40,347) 134
---------- ---------- --------- ---------- ---------- ---------
Total interest income 118,713 (62,382) 56,331 1,020,476 (391,114) 629,362
---------- ---------- --------- ---------- ---------- ---------
Interest Expense
Deposits $(73,173) $(8,037) $(81,210) $138,888 $7,761 $146,649
Advances from FHLB 152,044 59,831 211,875 598,343 (49,994) 548,349
---------- ---------- --------- ---------- ---------- ---------
Total interest
expense 78,871 51,794 130,665 737,231 (42,233) 694,998
---------- ---------- --------- ---------- ---------- ---------
Net interest income $39,842 $(114,176) $(74,334) $283,245 $(348,881) $(65,636)
---------- ---------- --------- ---------- ---------- ---------
---------- ---------- --------- ---------- ---------- ---------
</TABLE>
48
<PAGE>
FINANCIAL CONDITION
Total assets amounted to $113.3 million at December 31, 1997 compared
to $112.7 million at December 31, 1996. The increase of $649,000 or 0.6% was
primarily due to an increase of $12.6 million in cash and cash equivalents and a
$1.7 million increase in mortgage-backed securities available for sale which
were substantially offset by a $9.1 million or 9.3% decrease in loans
receivable, net and a $4.0 million decrease in investment securities available
for sale. The increase in cash and cash equivalents was primarily due to net
proceeds from the Conversion of $11.0 million while the decrease in net loans
was primarily due to sales of long-term fixed rate loans in the secondary market
as well as loan principal repayments. The increase in mortgage-backed securities
was due to purchases during 1997 of $1.7 million. The decrease in investment
securities was due to maturities during 1997 of $4.0 million. Total liabilities
decreased $9.5 million or 8.9% to $97.2 million at December 31, 1997 compared to
$106.7 million at December 31, 1996 due primarily to a decrease in FHLB
advances. Stockholders' equity increased from $6.0 million at December 31, 1996
to $16.1 million at December 31, 1997 due to net Conversion proceeds of $11.0
million.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997.
NET INCOME. The Company had a net loss of $14,000 for the year ended
December 31, 1997 compared to a net loss of $95,000 for the year ended December
31, 1996. The loss during 1997 was primarily due to an increase in the provision
for loan losses and decreases in net interest income and other income,
substantially offset by a decrease in other expenses.
NET INTEREST INCOME. Net interest income for the year ended December
31, 1997 was $2.1 million compared to $2.2 million for the year ended December
31, 1996. The interest rate spread and net interest margin decreased to 1.68%
and 1.96%, respectively, for 1997 compared to 1.78% and 2.05%, respectively, for
1996. The ratio of interest-earning assets to interest-bearing liabilities
remained stable at 105.07% for 1997 compared to 105.00% for 1996.
INTEREST INCOME. Total interest and dividend income was $7,978,000 for
the year ended December 31, 1997 compared to $7,922,000 for the year ended
December 31, 1996, representing an increase of $56,000 or 0.7%. The increase in
fiscal 1997 was due primarily to an increase in interest on loans from $7.1
million for the year ended December 31, 1996 to $7.4 million for the year ended
December 31, 1997, which was the result of an increase in the average balance of
the Company's loan portfolio. This increase was slightly offset by a decrease in
interest and dividends on investments from $791,000 for the year ended December
31, 1996 to $582,000 for the year ended December 31, 1997 due to a decrease in
the average balance of such assets.
INTEREST EXPENSE. Total interest expense, which consists primarily of
interest on savings deposits, increased from $5,750,000 for the year ended
December 31, 1996 to $5,881,000 for the year ended December 31, 1997, an
increase of $131,000 or 2.3%. This increase primarily was the result of an
increase in interest paid on FHLB advances due to an increase in the average
49
<PAGE>
balance of and rate paid on such liabilities. This increase in advances was due
to increased funding needs and a decrease in deposits.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to
earnings to maintain the total allowance for loan losses at a level considered
adequate by the Company to provide for probable loan losses based on prior loss
experience, volume and type of lending conducted by the Company, available peer
group information, and past due loans in the Company's loan portfolio. The
Company's policies require the review of assets on a quarterly basis. While the
Company believes it uses the best information available to make a determination
with respect to the allowance for loan losses, the Company recognizes that
future adjustments may be necessary. The Company provided $47,000 for loan
losses for the year ended December 31, 1996 while providing $216,000 for loan
losses for the year ended December 31, 1997. The Company continues to increase
the provision for loan losses due to the growth in the loan portfolio during the
year and due to the increase in non-performing loans. As the loan portfolio
continues to grow, the Company increases the provision for loan losses due to
risk inherent in the loan portfolio. In establishing such provisions, the
Company also considered the levels of its non-performing loans which were
$376,000 and $774,000 at December 31, 1996 and 1997, respectively.
NON-INTEREST INCOME. Total non-interest income decreased from $305,000
for the year ended December 31, 1996 to $256,000 for the year ended December 31,
1997. This decrease in non-interest income was attributable to a decrease in
service fees of $85,000 partially offset by an increase in gains from the sales
of loans of $19,000 and an increase in miscellaneous other income of $17,000.
The decrease in service fees was caused by a decrease in application fees
collected due to fewer loan originations, and by a write-down int he value of
mortgage servicing rights.
NON-INTEREST EXPENSE. Total other expenses decreased from $2,593,000
for the year ended December 31, 1996 to $2,162,000 for the year ended December
31, 1997, a decrease of $431,000 or 16.6%. Such decrease was due to the one-time
SAIF special assessment of $492,000 in 1996. Correspondingly, federal insurance
premiums decreased $134,000 to $53,000 in 1997 compared to $187,000 in 1996 due
to a reduction in premiums upon the recapitalization of the SAIF. Such decreases
were partially offset by an increase in salaries and employee benefits of
$163,000 to $1.1 million for 1997 compared to $917,000 for 1996. Salaries and
employee benefits increased due to expense incurred for the ESOP at the end of
the year of $93,000. The remainder of the increase was caused by lower fee
income provided by loan originations, due to a lower volume of originations
during the year. Fee income from originations offsets salary expense. In
addition, other general and administrative expenses increased $61,000 to
$414,000 for 1997 due to an increase in legal and consulting expenses.
INCOME TAXES. The Company experienced a benefit for income taxes of
$10,000 for 1997 and $69,000 for 1996. Such benefits were due to losses from
operations during such periods.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDING DECEMBER 31, 1995 AND 1996
50
<PAGE>
NET INCOME. The Company had a net loss of $95,000 for the year ended
December 31, 1996 compared to net income of $420,000 for the year ended December
31, 1995. The loss was primarily due to the recognition of a one-time SAIF
special assessment in the amount of $492,000. This decrease was the result of an
increase in total interest expense from $5.1 million for the year ended December
31, 1995 to $5.8 million for the year ended December 31, 1996 an increase in the
provision for loan losses from $5,000 for the year ended December 31, 1995 to
$47,000 for the year ended December 31, 1996 and a decrease in total other
income from $520,000 for the year ended December 31, 1995 to $305,000 for the
year ended December 31, 1996. These fluctuations were offset by an increase in
total interest income from $7.3 million for the year ended December 31, 1995 to
$7.9 million for the year ended December 31, 1996.
NET INTEREST INCOME. Net interest income was approximately $2.2 million
for each of the years ended December 31, 1996 and 1995. The ratio of average
interest-earning assets to average interest-earning liabilities remained fairly
constant. However, the interest rate spread and net interest margin decreased
from 2.13% and 2.40%, respectively, in 1995 to 1.78% and 2.05%, respectively, in
1996.
INTEREST INCOME. Total interest income was $7.9 million for the year
ended December 31, 1996 compared to $7.3 million for the year ended December 31,
1995, representing an increase of $600,000 or 8.2%. Such increase was primarily
due to an increase in interest on loans, and was partially offset by a decrease
on interest and dividends from investments. Interest on loans increased from
$6.4 million for the year ended December 31, 1995 to $7.1 million for the year
ended December 31, 1996. This increase of $700,000 or 10.9% was due primarily to
an increase in the average balance of loans as a result of an increase in
originations of loans secured by single-family residential real estate. The
increase in average balances of loans receivable was partially offset by a 42
basis point decrease in the average yield on loans receivable. Interest and
dividends on investments decreased from $844,000 at December 31, 1995 to
$791,000 at December 31, 1996.
INTEREST EXPENSE. Total interest expense increased from $5.1 million
for the year ended December 31, 1995 to $5.8 million for the year ended December
31, 1996, an increase of $700,000 or 13.7%. During the year ended December 31,
1996, the Company borrowed funds from the FHLB to increase the Company's
mortgage and home equity loan portfolios. The Company determined that FHLB
advances were less costly, on a marginal basis, than increasing rates on savings
accounts and certificates of deposit to attract more funds. As a result,
interest on borrowings increased by $500,000 or 71.4% from $700,000 for the year
ended December 31, 1995 to $1.2 million for the year ended December 31, 1996.
Interest on savings deposits increased $100,000 or 2.3% from $4.4 million for
the year ended December 31, 1995 to $4.5 million for the year ended December 31,
1996. Such increase was primarily due to an increase in the average balance of
deposits.
PROVISION FOR LOAN LOSSES. The Company provided $5,000 and $47,000 for
loan losses for the years ended December 31, 1995 and 1996, respectively. In
establishing such provisions,
51
<PAGE>
management considered (i) the levels of non-performing loans which were $244,000
and $376,000 at December 31, 1995 and 1996, respectively, and (ii) the increase
in the Company's loan portfolio. The size of the Company's loan portfolio is a
component in the model the Company uses to determine the amount of the
provision.
NON-INTEREST INCOME. Total non-interest income decreased from $520,000
for the year ended December 31, 1995 to $305,000 for the year ended December 31,
1996. This change was the result of the reduction of gains on sales of loans
from $439,000 for the year ended December 31, 1995 to $69,000 for the year ended
December 31, 1996. The Company sold fewer loans in 1996 based on the Company's
determination to hold a greater percentage of loans originated in its portfolio
as opposed to selling such loans in the secondary market. This reduction was
offset by an increase in service fees from $52,000 for the year ended December
31, 1995 to $190,000 for the year ended December 31, 1996 and an increase in
other income from $18,000 to $47,000. The increase in fees for the year ended
December 31, 1996 was due to an increase in loan originations.
NON-INTEREST EXPENSE. Other non-interest expense increased by $500,000
or 23.8% from $2.1 million for the year ended December 31, 1995 to $2.6 million
for the year ended December 31, 1996. The increase was attributable to a
one-time special SAIF assessment of $492,000. Pursuant to the Economic Growth
and Paperwork Reduction Act of 1996 (the "Act"), the FDIC imposed a special
assessment on SAIF members to recapitalize the SAIF at the designated reserve
level of 1.25% as of October 1, 1996. Based on the Savings Bank's deposits as of
March 31, 1995, the date for measuring the amount of the special assessment
pursuant to the Act, the Savings Bank's special assessment was $492,000. The
recapitalization of the SAIF has had the effect of lowering premiums for deposit
insurance for the entire thrift industry that holds deposits insured by the
SAIF. The SAIF insurance assessment rate paid by the Savings Bank before the
recapitalization of the SAIF was 23 basis points per $100 of deposit and has
decreased to 6.4 basis points per $100 of deposits after the recapitalization of
the SAIF. Pursuant to the Act, the Savings Bank will pay in addition to its
normal insurance premium as a member of the SAIF an annual amount equal to
approximately 6.4 basis points of outstanding SAIF deposits towards the
retirement of the Financing Corporation bonds issued in the 1980's to assist in
the recovery of the savings and loan industry. Beginning no later than January
1, 2000, the rate paid to retire these bonds will be equal for members of the
BIF and the SAIF. Members of the BIF, by contrast, will pay in addition to their
normal deposit insurance premium approximately 1.3 basis points. Because of the
Supervisory Agreement of May 21, 1997, the Savings Bank incurs higher premiums
than some other institutions. See "Item 1 - Business - Regulation." The Act also
provides for the merging of the BIF and the SAIF by January 1, 1999 provided
there are no financial institutions still chartered as federal savings
associations at that time.
Advertising costs increased from $169,000 for the year ended December
31, 1995 to $203,000 for the year ended December 31, 1996, or a $34,000
increase. Salaries and employee benefits decreased from $941,000 for the year
ended December 31, 1995 to $917,000 for the year ended December 31, 1996. This
decrease was due to an increase in loan volume, which resulted
52
<PAGE>
in allocation of salaries and employee benefits to loan origination costs.
Occupancy expenses also decreased from $237,000 for the year ended December 31,
1995 to $215,000 for the year ended December 31, 1996 because the Company used
an accelerated method of depreciation.
INCOME TAX EXPENSE. The Company's income tax expense was a benefit of
$69,000 for the year ended December 31, 1996 compared to $265,000 owed for the
year ended December 31, 1995. This decrease in taxes was the result of the
Company's net loss of $164,000, before taxes, for the year ended December 31,
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank is required to maintain minimum levels of liquid
assets as defined by OTS regulations. This requirement, which varies from time
to time depending upon economic conditions and deposit flows, is based upon a
percentage of the Savings Bank's deposits and short-term borrowings. The
required ratio currently is 4.0%. The Savings Bank's liquidity ratio average was
14.8%, 11.2% and 13.9% at December 31, 1995, December 31, 1996, and December 31,
1997, respectively. The decrease in the Savings Bank's average liquidity rate at
December 31, 1996 was the result of its sale of investments and increase in
short term borrowings. The increase in the Savings Bank's average liquidity rate
at December 31, 1997 primarily was due to the proceeds from the Conversion.
The Company's primary sources of funds are deposits, repayment and
sales of loans and mortgage-backed securities, maturities of investments and
interest-bearing deposits, funds provided from operations and advances from the
FHLB of Pittsburgh. While scheduled repayments of loans and mortgage-backed
securities and maturities of investment securities are predictable, other
sources of funds, such as deposit flows and loan prepayments, can be greatly
influenced by the general level of interest rates, economic conditions and
competition. The Company uses its liquidity resources principally to fund
existing and future loan commitments, to fund maturing certificates of deposit
and demand deposit withdrawals, to invest in other interest-earning assets, to
maintain liquidity, and to meet operating expenses.
Liquidity may be adversely affected by unexpected deposit outflows,
higher interest rates paid by competitors, and similar matters. Further, the
disparity in Financing Company ("FICO") bond interest payments as previously
described could result in the loss of deposits to BIF members that have this
lower cost and therefore are able to pay higher rates of interest on deposits.
Management monitors projected liquidity needs and determines the level
desirable, based in part on the Company's commitments to make loans and
management's assessment of the Company's ability to generate funds.
The Company and the Savings Bank are subject to federal regulations
that impose certain minimum capital requirements. For a discussion on such
capital levels, see "Item 1. Description of Business-Regulation."
53
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements and the accompanying notes presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
THE YEAR 2000 ISSUE
The Company is aware of the issues associated with the programming code
in existing computer systems as the Year 2000 approaches. The Year 2000 Issue is
the result of computer programs being written using two digits rather than four
digits to define the applicable year. Computer programs that have time-sensitive
coding may recognize a date using "00" as the year 1900 rather than the year
2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail.
The Savings Bank has conducted a review of its computer systems to
identify the systems that could be affected by the Year 2000 issue and has
developed an implementation plan to resolve the issue. The majority of the
Savings Bank's data processing is provided by a third party service bureau. The
service bureau is actively involved in resolving Year 2000 issues and has
provided the Savings Bank with frequent updates regarding their progress. The
service bureau has advised the Savings Bank that it expects to have the majority
of the Year 2000 issues resolved before the end of 1998 to allow the Savings
Bank to test their system for Year 2000 compliance during the third quarter of
1998. The Savings Bank presently believes that, based on the progress of the
Savings Bank's service bureau, the Year 2000 problem will not pose significant
operational problems for the Savings Bank's computer system. Costs are
anticipated to be immaterial at this time.
54
<PAGE>
Recent Accounting Pronouncements
In November 1993, the American Institute of Certified Public
Accountants ("AICPA") issued SOP 93-6 Employers' Accounting for Employee Stock
Ownership Plan. SOP 93-6 addresses accounting for shares of stock issued to
employees by an employee stock ownership plan. SOP 93-6 requires that the
employer record compensation expense in an amount equal to the fair value of
shares committed to be released from the ESOP to employees. SOP 93-6 is
effective for fiscal years beginning after December 15, 1993 and relates to
shares purchased by an ESOP after December 31, 1992. If the Common Stock
appreciates over time, SOP 93-6 will increase compensation expense relative to
the ESOP, as compared with prior guidance that required recognition of
compensation expense based on the cost of the shares acquired by the ESOP. The
amount of any such increase, however, cannot be determined at this time because
the expense will be based on the fair value of the shares committed to be
released to employees, which amount is not determinable.
Item 7. Financial Statements
[Deloitte & Touche LLP Logo]
Delaware First Financial
Corporation
Financial Statements as of December 31, 1997 and 1996 and for Each of the Three
Years in the Period Ended December 31, 1997, and Independent Auditors' Report
55
<PAGE>
[Deloitte & Touche LLP Letterhead]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Delaware First Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of Delaware First Financial Corporation and Subsidiary (the "Company") as of
December 31, 1997, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the year then ended. We have
also audited the related statements of financial condition of Ninth Ward Savings
Bank, FSB (the "Predecessor Bank") as of December 31, 1996 and the related
statements of operations, changes in retained earnings and cash flows for the
years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's and the Predecessor Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Delaware First Financial
Corporation and Subsidiary at December 31, 1997 and the results of their
operations and their cash flows for the year then ended, and the financial
position of Ninth Ward Savings Bank, FSB at December 31, 1996 and the results of
its operations and its cash flows for the years ended December 1996 and 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, on December 31,
1997, the Predecessor Bank converted from a federally chartered mutual savings
bank into a federally chartered capital stock savings bank with the concurrent
formation of the Company.
/s/ Deloitte & Touche LLP
- --------------------------
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 6, 1998
56
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
------------------------------
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
Cash and cash equivalents ...................................................... $ 15,199,726 $ 2,643,452
Investment securities available for sale (amortized cost - 1997,
$2,499,753; 1996, $6,494,860) ................................................ 2,499,860 6,475,800
Mortgage-backed securities available for sale (amortized cost - 1997,
$1,903,007; 1996, $200,666) .................................................. 1,900,986 203,147
Loans receivable - net ......................................................... 88,933,209 98,042,118
Federal Home Loan Bank stock - at cost ......................................... 975,000 1,500,000
Accrued interest receivable:
Loans ........................................................................ 823,266 975,244
Investments .................................................................. 81,353 93,526
Mortgage-backed securities ................................................... 6,902 1,171
Office property and equipment, net ............................................. 1,956,404 2,020,957
Prepaid expenses and other assets .............................................. 291,613 66,012
Prepaid income taxes ........................................................... 115,316 166,850
Mortgage servicing rights ...................................................... 371,361 317,435
Deferred income taxes .......................................................... 177,429 177,506
------------- -------------
TOTAL ASSETS ................................................................... $ 113,332,425 $ 112,683,218
------------- -------------
------------- -------------
LIABILITIES AND RETAINED EARNINGS
Liabilities:
Deposits ..................................................................... $ 76,883,201 $ 78,408,793
Advances from Federal Home Loan Bank ......................................... 17,400,000 25,900,000
Advances by borrowers for taxes and insurance ................................ 835,417 812,569
Accrued interest payable ..................................................... 358,171 265,764
Accounts payable and accrued expenses ........................................ 1,757,825 1,338,503
------------- -------------
Total liabilities ........................................................ 97,234,614 106,725,629
Stockholders' Equity:
Preferred stock, $.01 par value, 500,000 shares authorized, none issued
Common stock, $.01 par value, 3,000,000 authorized; issued and outstanding,
December 31, 1997, 1,157,000 shares ....................................... 11,570
Additional paid in capital ................................................... 10,966,430
Common stock acquired by the ESOP ............................................ (833,040)
Unrealized losses on available for sale securities, net of tax ............... (1,263) (10,776)
Retained earnings - substantially restricted ................................. 5,954,114 5,968,365
------------- -------------
Total stockholders' equity ............................................... 16,097,811 5,957,589
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 113,332,425 $ 112,683,218
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
57
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans ........................... $ 7,352,557 $ 7,092,065 $ 6,408,566
Interest on mortgage-backed securities ...... 44,057 38,982 40,336
Interest and dividends on investments ....... 581,826 791,062 843,845
----------- ----------- -----------
Total interest income .............. 7,978,440 7,922,109 7,292,747
----------- ----------- -----------
INTEREST EXPENSE:
Deposits .................................... 4,416,447 4,497,657 4,351,008
Federal Home Loan Bank advances ............. 1,464,357 1,252,482 704,133
----------- ----------- -----------
Total interest expense ............. 5,880,804 5,750,139 5,055,141
----------- ----------- -----------
NET INTEREST INCOME ......................... 2,097,636 2,171,970 2,237,606
PROVISION FOR LOAN LOSSES ................... 215,815 47,000 5,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ........................... 1,881,821 2,124,970 2,232,606
----------- ----------- -----------
OTHER INCOME:
Service fees ............................ 104,507 189,604 51,700
Gain on sale of loans ................... 88,125 68,629 438,970
Realized market adjustment on loans ..... 11,060
Other ................................... 63,389 46,543 18,469
----------- ----------- -----------
Total other income ................. 256,021 304,776 520,199
----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits .......... 1,079,437 916,635 941,086
Advertising ............................. 162,382 202,825 169,170
Federal insurance premiums .............. 52,795 187,057 171,097
SAIF Special Assessment ................. 491,992
Occupancy expense ....................... 208,727 214,968 236,687
Data processing expense ................. 142,887 121,121 103,178
Directors fees .......................... 102,447 105,817 99,036
Other general and administrative expenses 413,718 352,872 347,957
----------- ----------- -----------
Total other expenses ............... 2,162,393 2,593,287 2,068,211
----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES ........................ (24,551) (163,541) 684,594
PROVISION (BENEFIT) FOR INCOME TAXES ........ (10,300) (69,000) 264,670
----------- ----------- -----------
NET INCOME (LOSS) ........................... $ (14,251) $ (94,541) $ 419,924
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
58
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common
Stock Unrealized
Acquired Losses on
Additional by Stock Available Total
Common Paid-In Benefit for Sale Retained Stockholders'
Stock Capital Plans Securities Earnings Equity
------- ----------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 ...................... $ 5,642,982 $ 5,642,982
Net income ................................ 419,924 419,924
------- ----------- --------- ---------- ------------ ------------
BALANCE, DECEMBER 31, 1995 ..................... 6,062,906 6,062,906
Net loss ................................... (94,541) (94,541)
Unrealized losses on available for
sale securities, net of tax ............... $(10,776) (10,776)
------- ----------- ---------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1996 ..................... $(10,776) 5,968,365 5,957,589
Common stock issued ........................ $11,570 $10,966,430 10,978,000
Common stock acquired by stock benefit plans $(925,600) (925,600)
ESOP stock committed to be released ........ 92,560 92,560
Change in unrealized losses on available
for sale securities, net of tax ........... 9,513 9,513
Net loss ................................... (14,251) (14,251)
------- ----------- ---------- ---------- ------------ ------------
BALANCE, DECEMBER 31, 1997 ..................... $11,570 $10,966,430 $(833,040) $ (1,263) $ 5,954,114 $ 16,097,811
------- ----------- --------- ---------- ------------ ------------
------- ----------- --------- ---------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
59
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .......................................... $ (14,251) $ (94,541) $ 419,924
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation ............................................. 126,656 121,751 164,780
Provision for loan losses ................................ 215,815 47,000 5,000
Gain on sale of investment and
mortgage-backed securities ............................. (6,925)
Gain on sale of loans .................................... (88,125) (68,629) (438,970)
Realized market adjustment on loans ...................... (11,060)
Amortization of:
Deferred loan fees ..................................... (100,622) (130,226) (126,475)
Discount on investment and
mortgage-backed securities ........................... (4,193) (8,827) (6,782)
Changes in assets and liabilities which
provided (used) cash:
Accrued interest receivable ............................ 158,420 (221,562) (170,295)
Mortgage servicing rights .............................. (53,926) (19,466) (297,969)
Prepaid expenses and other assets ...................... (225,601) 9,153 (7,296)
Accrued interest payable ............................... 92,407 45,211 (24,932)
Accounts payable and accrued expenses .................. 419,322 505,430 28,720
Income taxes ........................................... 51,534 (252,740) 452,205
Deferral of loan fees .................................. 84,623 379,572 564,350
------------ ------------ ------------
Net cash provided by operating activities ......... 662,059 305,201 551,200
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of investments held to maturity ......... 2,996,406
Proceeds from maturity of investments ...................... 4,000,000 6,998,205 7,500,000
Principal collected on long-term loans
and mortgage-backed securities ........................... 13,649,576 15,576,441 9,865,735
Long-term loans originated ................................. (11,433,144) (38,236,036) (47,296,058)
Proceeds from sale of loans ................................ 6,812,130 4,407,397 29,869,979
Proceeds from sale of mortgage-backed securities
held to maturity ......................................... 346,427
Redemption of Federal Home Loan Bank stock ................. 634,800 263,200 25,700
Purchase of Federal Home Loan Bank stock ................... (109,800) (1,035,700) (104,400)
Purchase of investments .................................... (1,739,460) (4,996,281) (6,997,017)
Proceeds from sale of real estate owned .................... 63,000
Purchases of premises and equipment ........................ (62,103) (39,244) (62,167)
------------ ------------ ------------
Net cash provided by (used in) investing activities 11,751,999 (13,719,185) (7,135,228)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits ........................ (1,525,592) (3,113,456) 11,025,699
Increase in advances by borrowers for taxes
and insurance ............................................ 22,848 160,036 123,382
Proceeds from Federal Home Loan Bank advances .............. 49,345,726 79,119,823 26,950,000
Repayments of Federal Home Loan Bank advances .............. (57,845,726) (61,169,823) (31,900,000)
Proceeds from the sale of stock, net of conversion costs ... 10,978,000
Common stock acquired by ESOP .............................. (833,040)
------------ ------------ ------------
Net cash provided by financing activities ......... 142,216 14,996,580 6,199,081
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ....................................... 12,556,274 1,582,596 (384,947)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ........................................ 2,643,452 1,060,856 1,445,803
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD .............................................. $ 15,199,726 $ 2,643,452 $ 1,060,856
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................. $ 5,788,397 $ 5,704,928 $ 5,080,072
------------ ------------ ------------
------------ ------------ ------------
Income taxes ............................................. $ 25,956 $ 310,140 $ 31,018
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
60
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
On June 30, 1997, the Board of Directors of Ninth Ward Savings Bank, FSB
(the "Bank") adopted a plan of conversion to convert from a federally
chartered mutual savings bank to a federally chartered capital stock
savings bank with the concurrent formation of a holding company (the
"Conversion").
The Conversion was completed on December 31, 1997, with the issuance by
the holding company Delaware First Financial Corporation (the "Company"),
of 1,157,000 shares of its common stock in a public offering to the Bank's
eligible depositors and borrowers, members of the general public and the
Bank's Employee Stock Ownership Plan (the "ESOP"). In exchange for the net
conversion proceeds of $10,978,000, less $2,144,960 retained by the
Company, the Company acquired 100% of the issued and outstanding capital
stock of the Bank.
In connection with the Conversion, the Company established the ESOP for
the benefit of eligible employees. The Company purchased 92,560 shares of
common stock on behalf of the ESOP in the Conversion.
The Bank's primary market is concentrated in New Castle County, Delaware,
to which it offers mainly conventional residential real estate loans on
new and existing properties and mortgage refinancing. Since 1994, the Bank
has been active in offering equity lines of credit. Effective January 5,
1998, Ninth Ward Savings Bank, FSB changed its name to Delaware First
Bank, FSB.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the
accounts of Delaware First Financial Corporation as of December 31, 1997,
the date of Conversion. Amounts prior to that date include the accounts of
the Company's wholly-owned subsidiary, Ninth Ward Savings Bank, FSB.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. Intercompany accounts and transactions have been eliminated
in consolidation. Assets of the Company consist primarily of interest
bearing deposits and activities are insignificant.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates.
Interest on Loans - The Company recognizes interest on loans when earned.
The Company does not recognize interest on loans deemed to be
uncollectible, generally when a loan is three months or more delinquent.
Such interest ultimately collected is credited to income in the period of
recovery.
61
<PAGE>
Investment and Mortgage-Backed Securities - The Company accounts for debt
and equity securities as follows:
Held to Maturity - Debt securities that management has the positive
intent and ability to hold until maturity are classified as held to
maturity and are carried at their remaining unpaid principal
balance, net of unamortized premiums or unaccreted discounts.
Premiums are amortized and discounts are accreted using the interest
method over the period remaining until maturity.
Available for Sale - Debt and equity securities that will be held
for indefinite periods of time, including securities that may be
sold in response to changes in market interest or prepayment rates,
needs for liquidity, and changes in the availability of and the
yield of alternative investments, are classified as available for
sale. These assets are carried at fair value. Fair value is
determined using published quotes as of the close of business.
Unrealized gains and losses are excluded from earnings and are
reported net of tax as a separate component of retained earnings
until realized.
Office Property and Equipment - Office property and equipment is recorded
at cost. Depreciation is computed using either the straight-line method or
an accelerated method over the expected useful lives of the assets,
ranging from three to fifty years. The costs of maintenance and repairs
are expensed as they are incurred, and renewals and betterments are
capitalized.
Loan Fees - The Company defers all loan fees, net of certain costs, and
accretes them into income over the contractual life of the loan using the
interest method.
Allowance for Loan Losses - 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 Company's 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 Company has adopted Statement of Financial Accounting Standards
("SFAS") Nos. 114 and 118, Accounting by Creditors for Impairment of a
Loan and Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures, respectively. SFAS No. 114 requires that
certain impaired loans be measured based either on the present value of
expected future cash flows discounted at the loan's effective interest
rate, or the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent.
Federal Home Loan Bank Advances - Periodically, the Company borrows from
the Federal Home Loan Bank of Pittsburgh. These borrowings are
collateralized by Federal Home Loan Bank stock and qualified investments
and mortgage loans.
Income Taxes - Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash and interest-bearing accounts.
62
<PAGE>
Interest Rate Risk - The Company is principally engaged in the business of
attracting deposits from the general public and using these deposits,
together with borrowings and other funds, to make loans secured by real
estate and, to a lesser extent, consumer loans.
At December 31, 1997, the Company had interest-earning assets of
approximately $110,931,000 having a weighted average effective yield of
7.44% which have a weighted average term to maturity greater than the
interest-bearing liabilities of approximately $94,283,000 having a
weighted average effective interest rate of 5.76%. At December 31, 1996,
the Company had interest-earning assets of approximately $108,885,000
having a weighted average effective yield of 7.47% which have a weighted
average term to maturity greater than the interest-bearing liabilities of
approximately $104,309,000 having a weighted average effective interest
rate of 5.69%. The shorter duration of the interest-sensitive liabilities
indicates that the Company is exposed to interest rate risk because, in a
rising rate environment, liabilities will reprice faster than assets,
thereby reducing the market value of long-term assets and net interest
income. For this reason, management regularly monitors the maturity
structure of the Company's assets and liabilities in order to measure this
risk and enact measures to manage volatility of future interest rate
movements.
Mortgage Loans Held for Sale - The Company originates mortgage loans for
sale in the secondary market to provide additional funds for lending.
These loans are carried at the lower of cost or market value, determined
on a net aggregate basis.
Real Estate Owned - 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 of foreclosed real
estate and changes in the valuation allowance are included in loss on
foreclosed real estate.
Mortgage Servicing Rights - The Company adopted SFAS No. 122, Accounting
for Mortgage Servicing Rights during 1995. The statement requires the
Company, which services mortgage loans for others in return for servicing
fees, to recognize these servicing rights as assets, regardless if such
assets were acquired or originated. In June 1996, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. The
statement, which is effective for transactions occurring after December
31, 1996, requires an entity to recognize, prospectively, the financial
and servicing assets it controls and the liabilities it has incurred,
derecognize financial assets when control has been surrendered, and
derecognize liabilities when extinguished. It requires that servicing
assets and other retained interests in transferred assets be measured by
allocating the previous carrying amounts between the asset sold, if any,
and retained interest, if any, based on their relative fair values at the
date of transfer. It also provides implementation guidance for servicing
of financial assets, securitizations, loan syndications and participations
and transfers of receivables with recourse. The statement supersedes SFAS
No. 122, Accounting for Mortgage Servicing Rights. In December 1996, the
FASB issued SFAS No. 127, Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125. SFAS No. 127 defers for one year the
effective date of SFAS No. 125 as it relates to transactions involving
secured borrowings and collateral, and transfers and servicing of
financial assets. This statement also provides additional guidance on
these types of transactions. Additionally, the Company is required to
assess the fair value of these assets at each reporting date to determine
any potential impairment.
Earnings Per Share - The Company's conversion was completed on December
31, 1997 and, therefore, earnings per share amounts are not applicable.
63
<PAGE>
Accounting Principles Issued and Not Adopted -In June 1997, the FASB
issued SFAS No. 130, Reporting Comprehensive Income, which requires an
entity to present, as a component of comprehensive income, the amounts
from transactions and other events which currently are excluded from the
statement of income and are recorded directly to stockholders' equity.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. This statement requires
an entity to disclose financial information in a manner consistent to
internally used information and requires more detailed disclosures of
operating and reporting segments than are currently in practice. In
February 1998, the FASB issued SFAS No. 132, Employer's Disclosure About
Pensions and Other Postretirement Benefits. This statement revises
employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
The statements are applicable for years beginning after December 15, 1997.
The adoption of these statements, which concern disclosure standards only,
is not required until 1998. The adoption will not have any impact on the
Company's consolidated financial condition or results of operations.
Reclassifications - Certain items in the 1995 and 1996 financial
statements have been reclassified to conform with the presentation in the
1997 financial statements.
3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---------- ------ -------- -----------
<S> <C> <C> <C> <C>
Available for sale:
Debt securities:
Obligations of U.S. Government
agencies--Due in one year or less $2,499,753 $1,967 $(1,860) $2,499,860
---------- ------ -------- ----------
Total .............................. $2,499,753 $1,967 $(1,860) $2,499,860
---------- ------ -------- ----------
---------- ------ -------- ----------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---------- ------ -------- -----------
<S> <C> <C> <C> <C>
Available for sale:
Debt securities:
Obligations of U.S. Government
agencies:
Due in one year or less ......... $2,499,285 $4,520 $(10,870) $2,492,935
Due after one year through
five years .................... 3,995,575 2,899 (15,609) 3,982,865
---------- ------ -------- ----------
Total .............................. $6,494,860 $7,419 $(26,479) $6,475,800
---------- ------ -------- ----------
---------- ------ -------- ----------
</TABLE>
Included in investment securities at December 31, 1996 are step-up and
floating rate bonds with various U.S. Government agencies. At December 31,
1996, the par value of these bonds was $1,500,000. At December 31, 1997,
no such amounts were outstanding.
64
<PAGE>
On November 29, 1996, the Company sold investment securities with a book
value of $2,998,205 from the held to maturity portfolio resulting in a net
loss of $1,798. Included in these securities were investments with a book
value of $998,205 that had a maturity of April 17, 1997, which exceeded
the three-month example as discussed in SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The securities were
sold in order to achieve "well capitalized" regulatory capital levels as
defined by the Office of Thrift Supervision. As a result of the sale, the
Company transferred all securities previously classified as held to
maturity to available for sale and has subsequently classified all
securities purchased as available for sale.
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available for sale:
FHLMC pass-through certificates ... $ 168,757 $1,687 $ 170,444
Collateralized mortgage obligations 1,734,250 640 $ (4,348) 1,730,542
---------- ------ --------- ----------
Total ............................... $1,903,007 $2,327 $ (4,348) $1,900,986
---------- ------ --------- ----------
---------- ------ --------- ----------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------
Gross Approximate
Amortized Unrealized Fair
Cost Gain Value
---------- ---------- -----------
<S> <C> <C> <C>
Available for sale:
FHLMC pass-through certificates ... $200,666 $2,481 $203,147
-------- ------ ---------
-------- ------ ---------
</TABLE>
In connection with the sale discussed in Note 3, the Company sold
mortgage-backed securities with a book value of $335,918 from the held to
maturity portfolio resulting in a net gain of $8,723. Included in these
securities was a mortgage-backed security with a book value of $173,227
that had a maturity of March 1, 1997 which exceeded the three-month
example. As a result of the sale, the Company transferred all
mortgage-backed securities previously classified as held to maturity to
available for sale and has subsequently classified all securities
purchased as available for sale.
65
<PAGE>
5. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
First mortgage loans (primarily one-
to four-family residential) ........ $ 79,244,982 $ 87,918,256
Loans on savings accounts ............ 749,969 528,198
Home equity loans - fixed rate ....... 7,413,485 8,082,865
Equity lines or credit - variable rate 2,946,938 2,823,273
------------ ------------
Total ..................... 90,355,374 99,352,592
Less:
Allowance for loan losses .......... (462,815) (247,000)
Deferred loan fees ................. (959,350) (1,063,474)
------------ ------------
Total ..................... $ 88,933,209 $ 98,042,118
------------ ------------
------------ ------------
</TABLE>
The Company is servicing loans for the benefit of others totaling
approximately $56,730,000, and $54,321,000 at December 31, 1997 and 1996,
respectively. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to
investors and foreclosure processing. Loan servicing income is recorded on
the cash basis and includes servicing fees from investors and certain
charges collected from borrowers, such as late payment fees. In connection
with these loans serviced for others, the Company held borrowers' escrow
balances of $353,742 and $301,325 at December 31, 1997 and 1996,
respectively.
At December 31, 1997 and 1996, the Company had outstanding loan
origination commitments of $793,800 and $2,270,200, respectively, for
fixed and adjustable rate loans, with rates ranging from 7.125% to 11.75%
and 6.75% to 8.50%, respectively. These commitments are expected to be
funded within one year. Commitments are issued in accordance with the same
loan policies and underwriting standards as settled loans. Additionally,
in November 1994, the Company entered into an agreement with a community
investment company to purchase $250,000 of loans for low and moderate
income housing over the next three years. At December 31, 1997 and 1996,
the Company had purchased $122,000 and $64,000 of these loans,
respectively.
66
<PAGE>
Certain directors and officers of the Company have loans with the Company.
Such loans were made in the ordinary course of business at the Company's
normal credit terms, including interest rate and collateralization, and do
not represent more than a normal risk of collection. The following is a
summary of loans to these officers and directors:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Balance, beginning of year $ 367,780 $ 394,195
Additions ................ 195,090 34,000
Repayments ............... (51,414) (60,415)
--------- ---------
Balance, end of year ..... $ 511,456 $ 367,780
--------- ---------
--------- ---------
</TABLE>
The following is a summary of changes in the allowance for loan losses:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year .... $247,000 $200,000 $195,000
Provision charged to operations 215,815 47,000 5,000
-------- -------- --------
Balance, end of year .......... $462,815 $247,000 $200,000
-------- -------- --------
-------- -------- --------
</TABLE>
Loans delinquent more than 90 days are placed on nonaccrual status.
Interest reserved from these loans amounted to $18,459, $3,123 and $4,351
at December 31, 1997, 1996 and 1995, respectively.
The provision for loan losses charged to expense is based upon past loan
and loss experiences and an evaluation of estimated losses in the current
loan portfolio, including the evaluation of impaired loans under SFAS No.
114. A loan is considered to be impaired when, based upon current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan. An
insignificant delay or insignificant shortfall in amount of payments does
not require application of SFAS No. 114. For this purpose, delays less
than 90 days are considered to be insignificant. As of December 31, 1997
and 1996, 100% of the impaired loan balance was measured for impairment
based on the fair value of the loan's collateral. Impairment losses are
included in the provision for loan losses. SFAS No. 114 does not apply to
large groups of smaller balance homogeneous loans that are collectively
evaluated for impairment, except for those loans restructured under a
troubled debt restructuring. At December 31, 1997 and 1996, the Company's
impaired loans consisted of smaller balance residential mortgage loans.
Interest income on impaired loans other than nonaccrual loans is
recognized on an accrual basis. Interest income on nonaccrual loans is
recognized only as collected.
67
<PAGE>
6. OFFICE PROPERTY AND EQUIPMENT
Office property and equipment is summarized by major classification as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land and buildings ..... $ 2,278,764 $ 2,278,764
Furniture and equipment 1,017,822 955,720
----------- -----------
Total .............. 3,296,586 3,234,484
Accumulated depreciation (1,340,182) (1,213,527)
----------- -----------
Net .................... $ 1,956,404 $ 2,020,957
----------- -----------
----------- -----------
</TABLE>
Depreciation expense totaled $126,656, $121,751, and $164,780 for the
years ended December 31, 1997, 1996 and 1995, respectively.
7. MORTGAGE SERVICING RIGHTS
The Company adopted SFAS No. 122 effective January 1, 1995. The effect of
adopting this new statement was an increase of approximately $300,000 to
gain on sale of loans on the 1995 statement of operations, and to mortgage
servicing rights on the 1995 statement of financial condition. For
potential impairment evaluation purposes, the market value of the
servicing portfolio was determined through independent valuation of the
aggregate portfolio.
The Company's servicing portfolio for which mortgage servicing rights have
been capitalized at December 31, 1997 consists of fixed rate,
predominately conforming mortgage loans, as follows:
Whole Loans Sold - $30,612,052 - interest rates range from 6.50% to
8.875%; original terms range from 180 to 360 months with a weighted
average coupon of 7.488%, weighted average remaining maturity of 317
months, and an average servicing fee of 0.25%.
Participations Sold - $5,076,062 - interest rates range from 6.75%
to 8.00%; original terms range from 120 months to 240 months with a
weighted average coupon of 7.316%, weighted average pass-through
rate of 7.10%, and a weighted average remaining term of 157 months.
Evaluation of potential impairment of the carrying value of mortgage
servicing rights is determined based upon market valuation of loans within
specified interest rate ranges. At December 31, 1997, 1996 and 1995, the
fair value of mortgage servicing rights approximates its carrying value.
Mortgage servicing rights are amortized in proportion to projected net
servicing revenue.
68
<PAGE>
8. DEPOSITS
Deposits by stated type are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1997 1996
---------------------------- ----------------------------
Amount Percent Amount Percent
------------- ------- ------------- -------
<S> <C> <C> <C> <C>
Demand deposit accounts:
1997 - 2.05%................................... $1,063,720 1.4%
1996 - 2.05%................................... $881,302 1.1%
Passbook accounts:
1997 - 4.14%................................... 2,494,272 3.2
1996 - 4.14%................................... 2,536,443 3.2
Money market deposit accounts:
1997 - 3.40%................................... 8,532,239 11.1
1996 - 3.35%................................... 8,246,455 10.5
91-day to five-year certificates
of deposits
1997 - 4.94% - 7.04%........................... 64,792,970 84.3
1996 - 4.82 - 8.33%............................ 66,744,593 85.2
------------- ----- ------------- -----
Total $ 76,883,201 100.0% $ 78,408,793 100.0%
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
The weighted average cost of funds was 5.65% and 5.62% at December 31,
1997 and 1996, respectively.
A summary of certificates by maturity is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Less than 1 year ................. $44,979,769 $41,736,900
1 to 3 years ..................... 16,173,988 16,073,655
3 years or more .................. 3,639,213 8,934,038
----------- -----------
Total ............................ $64,792,970 $66,744,593
----------- -----------
----------- -----------
</TABLE>
A summary of interest expense on savings accounts is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Passbooks ...................... $ 136,140 $ 109,303 $ 132,819
Demand deposit accounts ........ 19,088 14,634 11,262
Money market deposit accounts .. 292,641 281,797 329,419
Certificates ................... 3,968,578 4,092,023 3,877,508
---------- ---------- ----------
Total .......................... $4,416,447 $4,497,657 $4,351,008
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
69
<PAGE>
At December 31, 1997, the Company had $13,133,000 of deposits in
denominations of $100,000 or more. Generally, deposits in excess of
$100,000 are not federally insured. The Company does not accept brokered
deposits.
9. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1997 1996
------------------------- ------------------------
Weignted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
----------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Line of credit.................... $ 400,000 7.23%
12 months or less................. $ 6,600,000 6.27% 13,600,000 6.05
13 to 24 months................... 6,000,000 6.51 5,100,000 6.42
25 to 36 months................... 1,300,000 6.72 4,000,000 6.55
37 to 48 months................... 3,400,000 6.96 300,000 7.11
49 to 60 months................... 100,000 7.35 2,400,000 7.09
Thereafter........................ 100,000 7.35
----------- -----------
Total $17,400,000 $25,900,000
----------- -----------
----------- -----------
</TABLE>
The weighted average interest rate for these advances at December 31,
1997, and 1996 was 6.53% and 6.33%, respectively.
As of December 31, 1997 and 1996, the Company had an unused line of credit
of $8,592,000 and $7,363,000, respectively, with the Federal Home Loan
Bank of Pittsburgh.
10. REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal and state 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
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative
measures of the Company's and the Bank's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and
classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of tangible and core capital (as defined in
the regulations) to total adjusted assets (as defined), and of risk-based
capital (as defined) to risk-weighted assets (as defined). Management
believes, as of December 31, 1997, that the Company and the Bank meet all
capital adequacy requirements to which it is subject.
The most recent notification to the Office of Thrift Supervision (OTS)
categorized the Bank as well-capitalized under the regulatory framework
for prompt corrective action. To be categorized as well-
70
<PAGE>
capitalized, the Bank must maintain minimum tangible, core and risk-based
ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the institutions
category.
The Company's and the Bank's actual capital amounts (in thousands) and
ratios are presented in the table below:
<TABLE>
<CAPTION>
To be Considered
Well Capitalized
Required for Under Prompt
Actual Capital Adequacy Provisions
----------------- ---------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1997:
Tangible
Consolidated .... $16,062 14.18% $1,699 1.50% N/A N/A
Bank ............ 13,085 11.77 1,667 1.50 N/A N/A
Core (Leverage)
Consolidated .... 16,062 14.18 3,399 3.00 5,665 5.00
Bank ............ 13,085 11.77 3,335 3.00 5,558 5.00
Tier 1 risk-based
Consolidated .... 16,062 26.58 N/A N/A 3,626 6.00
Bank ............ 13,085 21.81 N/A N/A 3,600 6.00
Total risk-based
Consolidated .... 16,444 27.21 4,835 8.00 6,044 10.00
Bank ............ 13,467 22.44 4,800 8.00 6,000 10.00
At December 31, 1996:
Tangible .......... $ 5,926 5.26% $1,690 1.5% N/A N/A
Core (Leverage) ... 5,926 5.26 3,380 3.0 $5,633 5.0%
Tier 1 risk-based . 5,926 9.63 N/A N/A 3,693 6.0
Total risk-based .. 6,173 10.03 4,924 8.0 6,155 10.0
</TABLE>
Retained earnings for financial statement purposes differs from actual
(leverage) capital amounts by $37,000, and $42,000 at December 31, 1997
and 1996, respectively. This difference represents the unallowed portion
of mortgage servicing rights. Retained earnings for financial statement
purposes differs from total risk-based capital amounts by the unallowed
portion of mortgage servicing rights and the exclusion of the allowance
for loan losses from the calculation.
On May 21, 1997, the Bank entered into a supervisory agreement with the
OTS which requires the Bank to develop, adopt and in some cases modify,
certain policies and procedures relating to interest rate risk management,
improvement of operating performance and capital adequacy.
It is management's opinion, based on the Bank's compliance with all
regulatory capital requirements and compliance with various agreements and
directives, that no further regulatory action will be taken and that no
adjustments to the financial statements will be required.
At the date of the Conversion, the Bank established a liquidation account
in an amount equal to its retained earnings. The liquidation account will
be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after the Conversion. The liquidation
account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary
date. Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete
liquidation of the Bank, each eligible account holder 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.
71
<PAGE>
11. INCOME TAXES
In August 1996, the Small Business Job Protection Act (the "Act") was
signed into law. The Act repealed the percentage of taxable income method
of accounting for bad debts for thrift institutions effective for years
beginning after December 31, 1995. The Act required the Company, as of
January 1, 1996 to change its method of computing reserves for bad debts
to the experience method. The bad debt deduction allowable under this
method is available to small banks with assets less than $500 million.
Generally, this method allows the Company to deduct an annual addition to
the reserve for bad debts equal to the increase in the balance of the
Company's reserve for bad debts at the end of the year to an amount equal
to the percentage of total loans at the end of the year, computed using
the ratio of the previous six years' net charge-offs divided by the sum of
the previous six years' total outstanding loans at year end.
A thrift institution required to change its method of computing reserves
for bad debts treats such change as a change in a method of accounting
determined solely with respect to the "applicable excess reserves" of the
institution. The amount of the applicable excess reserves is taken into
account ratably over a six-taxable year period, beginning with the first
taxable year beginning after December 31, 1995. For financial reporting
purposes, the Company will not incur any additional tax expense due to
previously provided deferred taxes. At December 31, 1997 under SFAS No.
109, deferred taxes were provided on the difference between the book
reserve at December 31, 1997 and the applicable excess reserve in the
amount equal to the Company's increase in the tax reserve from December
31, 1987 to December 31, 1997. Retained earnings at December 31, 1997 and
1996 includes approximately $1,300,000 representing bad debt deductions
for which no deferred income taxes have been provided.
72
<PAGE>
Income tax expense (benefit) consists of the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- ---------------------------------- -------------------------------
Federal State Total Federal State Total Federal State Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current tax provision....... $ (8,400) $ (1,900) $ 10,300) $ (96,200) $ (22,800) $(119,000) $ 172,670 $ 42,000 $ 214,670
Deferred tax provision...... 50,000 50,000 50,000 50,000
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total....................... $ (8,400) $ (1,900) $ 10,300) $ (46,200) $ (22,800) $ (69,000) $ 222,670 $ 42,000 $ 264,670
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
The Company's provision (benefit) for income taxes differs from the
amounts determined by applying the statutory federal income tax rate to income
before income taxes for the following reasons:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1997 1996 1995
----------------------- ---------------------- ---------------------
Amount Percentage Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate........................ $ (8,593) (35.0)% $ (57,239) (35.0)% $ 239,607 35.0 %
Increase (decrease) resulting from:
Benefit of surtax exemption.................. 246 1.0 1,635 1.0 (6,845) (1.0)
State income taxes, net of federal
income tax benefit......................... (1,254) (5.1) (15,048) (9.2) 27,720 4.1
Other........................................ (699) (2.8) 1,652 1.0 4,188 0.6
--------- ----- --------- ---- --------- ----
Total.......................................... $ (10,300) (41.9)% $ (69,000) 42.2 % $ 264,670 38.7 %
--------- ----- --------- ---- --------- ----
</TABLE>
73
<PAGE>
Items that give rise to significant portions of the deferred tax accounts
at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
<S> <C> <C>
Deferred tax assets:
Deferred loan fees................................ $ 233,526 $ 260,120
Reserve for bad debts............................. 63,840
Other............................................. 14,730 73,455
-------- --------
Total deferred tax assets................ 312,096 333,575
-------- --------
Deferred tax liabilities:
Reserve for bad debts............................. (28,240)
Property.......................................... (8,404) (3,417)
Mortgage servicing rights......................... (126,263) (124,412)
-------- --------
Total deferred tax liabilities........... (134,677) (156,069)
-------- --------
Net deferred tax assets............................. $ 177,429 $ 177,506
--------- ---------
--------- ---------
</TABLE>
12. EMPLOYEE BENEFITS
Pension Plan
The Company has a noncontributory defined benefit pension plan which
covers all eligible employees.
Net pension expense included the following components:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Service cost - benefits earned during the year.. $ 62,681 $ 69,168 $ 65,980
Interest cost on projected benefit obligation... 60,266 59,198 55,891
Actual return on assets......................... (55,469) (29,910) (116,479)
Net amortization of transition costs............ (14,376) (47,717) 49,776
--------- --------- ---------
Net pension expense............................. $ 53,102 $ 50,739 $ 55,168
--------- --------- ---------
</TABLE>
74
<PAGE>
The following table sets forth the aggregate funded status of the pension
plan for the years ended:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested.............................................. $ 653,317 $ 545,453
Nonvested........................................... 15,998 22,727
--------- ---------
Total accumulated benefit obligation.................. $ 669,315 $ 568,180
--------- ---------
--------- ---------
Plan assets at fair value............................. 970,808 950,845
Projected benefit obligation.......................... (966,140) 928,292
--------- ---------
Projected benefit obligation less than plan assets.... 4,668 22,553
Unrecognized:
Net gain from past experience....................... (132,423) (95,462)
Net transition asset................................ (20,923) (22,667)
--------- ---------
Accrued pension liability............................. $(148,678) $ (95,576)
--------- ---------
--------- ---------
</TABLE>
The projected benefit obligation was determined using a weighted average
assumed discount rate of 7% and a rate of compensation increase of 4.25%.
The expected weighted average long-term rate of return of plan assets is
7%. Assumed average remaining service lives of employees is approximately
22 years.
The type of assets held by the plan are general trust investments
including cash equivalents, fixed income assets, group annuities and stock
mutual funds.
The Company terminated the pension plan on December 17, 1997, ceasing
benefit accruals as of January 15, 1998. The Company plans to distribute
excess funds pro rata to the participants.
Deferred compensation agreements are in effect with certain members of the
Board of Directors. Payment of Director fees is being deferred until
retirement. For the years ended December 31, 1997, 1996 and 1995, $11,718,
$11,590 and $15,348, respectively, of fees were deferred under these
agreements.
401(k) Plan
The Company instituted a 401(k) plan beginning in 1997. The plan covers
all full-time employees of the Company and provides for pre-tax
contributions by the employees with matching contributions of 25% of the
first 2% of each employee's contribution. The Company incurred $4,611 in
401(k) expense for the year-ended December 31, 1997.
Common Stock Acquired by the Employee Stock Ownership Plan
In connection with the Conversion, the Company established an ESOP for the
benefit of eligible employees. The Company purchased 92,560 shares of
common stock on behalf of the ESOP in the Conversion. At December 31,
1997, 9,256 shares of the total ESOP were committed to be released with
none allocated to participants. The Company accounts for its ESOP in
accordance with AICPA Statement of Position 93-6 "Employers Accounting for
Employee Stock Ownership Plans," which requires the Company to recognize
compensation expense equal to the fair value of the ESOP shares during the
periods in which they become committed to be released. To the extent that
the fair value of the ESOP shares differs from the cost of such shares,
this differential will be charged or credited to equity as additional paid
in capital. Management expects the recorded amount of expense to fluctuate
as continuing
75
<PAGE>
adjustments are made to reflect changes in the fair value of the ESOP
shares. The Company recorded compensation and employee benefit expense
related to the ESOP of $92,560 for the year ended December 31, 1997.
13. CONCENTRATION OF CREDIT RISK
Most of the Company's lending activity is with customers located within
the state of Delaware. Generally, the loans are secured by real estate
consisting of single-family residential properties. The ultimate repayment
of these loans is dependent to a certain degree on the local economy.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1997 1996
--------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents................. $15,200 $15,200 $ 2,643 $ 2,643
Investment securities available for sale.. 2,500 2,500 6,476 6,476
Mortgage-backed securities available
for sale................................ 1,901 1,901 203 203
Loans, net................................ 88,933 89,949 98,042 99,570
Liabilities:
Demand deposits and passbook accounts..... 3,558 3,558 3,418 3,418
Money market accounts..................... 8,532 8,532 8,246 8,246
Savings certificates...................... 64,793 65,187 66,745 67,391
Advances from Federal Home Loan Bank...... 17,400 17,523 25,900 26,024
</TABLE>
Cash and Cash Equivalents - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
Investments and Mortgage-backed Securities - The fair value of investment
securities and mortgage-backed securities (including collateralized
mortgage obligations) is based on quoted market prices or dealer quotes.
Loans Receivable - The fair value of loans is estimated based on present
value using approximate current entry-value interest rates applicable to
each category of such financial instruments.
Loans Held for Sale - The fair value of loans held for sale is based upon
commitment prices from the Federal Home Loan Mortgage Corporation.
76
<PAGE>
Demand Deposits, Passbook Accounts, Money Market Accounts, and Savings
Certificates - The fair value of demand deposits, passbook accounts and
money market accounts is the amount reported in the financial statements.
The fair value of savings certificates is based on a present value
estimate using rates currently offered for deposits of similar remaining
maturity.
Advances from Federal Home Loan Bank - The fair value of advances is based
on a present value estimate using rates currently offered for Federal Home
Loan Bank borrowings of similar remaining maturity.
Commitments to Extend Credit - The majority of the Company's commitments
to extend credit carry current market interest rates if converted to
loans. Because commitments to extend credit are generally unassignable by
either the Company or the borrower, they only have value to the Company
and the borrower. The estimated fair value approximates the recorded
deferred fee amounts, which are insignificant.
The fair value estimates presented herein are based on pertinent
information available to management as of the date indicated. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since the dates
indicated and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
15. SAVINGS ASSOCIATION INSURANCE FUND
On September 30, 1996, an omnibus appropriations bill for fiscal year
1996, which included recapitalization of the Savings Association Insurance
Fund (SAIF) became law. Accordingly, all SAIF insured depository
institutions were charged a one-time special assessment based on their
SAIF-assessable deposits as of March 31, 1995 at the rate of 65.7 basis
points. Accordingly, the Company incurred a pre-tax expense of $491,992
during the third quarter of 1996.
77
<PAGE>
16. PARENT COMPANY FINANCIAL INFORMATION
Financial statements of Delaware First Financial Corporation are as follows:
Statement of Financial Condition
December 31, 1997
($000's)
<TABLE>
<CAPTION>
<S> <C>
Assets:
Interest-bearing deposits.................................. $ 2,145
Investment in subsidiary bank.............................. 13,954
Other assets............................................... 1
--------
Total assets............................................... $ 16,100
--------
--------
Liabilities and Stockholders' Equity:
Other liabilities.......................................... $ 2
Stockholders' equity:
Preferred stock
Common stock............................................. 12
Additional paid in capital............................... 10,966
Common stock acquired by the ESOP........................ (833)
Unrealized loss on available for sale securities......... (1)
Retained earnings........................................ 5,954
--------
Total stockholders' equity................................. 16,098
--------
Total liabilities and stockholders' equity................. $ 16,100
--------
--------
</TABLE>
Statement of Operations
Period September 23, 1997 (date of incorporation) through December 31, 1997
($000's)
<TABLE>
<CAPTION>
<S> <C>
Operating expenses........................................ $ 1
--------
Net loss.................................................. $ (1)
--------
--------
</TABLE>
78
<PAGE>
Statement of Cash Flows
Period September 23, 1997 (date of incorporation) through December 31, 1997
($000's)
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash.............. $ (1)
(used in) provided by operating activities:
Increase in other assets................................. (1)
Increase in other liabilities............................ 2
Amortization of common stock acquired by ESOP............ 93
--------
Net cash provided by operating activities......... $ 93
--------
--------
INVESTING ACTIVITIES:
Purchase of common stock of subsidiary..................... $ (8,000)
--------
Net cash used in investing activities............. $ (8,000)
--------
--------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................. $ 10,978
Common stock acquired by stock benefit plans............... (926)
--------
Net cash provided by financing activities......... $ 10,052
--------
--------
NET INCREASE IN CASH......................................... $ 2,145
CASH, BEGINNING OF PERIOD.................................... --
--------
CASH, END OF PERIOD.......................................... $ 2,145
--------
--------
</TABLE>
******
79
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company ("Board") consists of
the same individuals who serve as directors of the Company's subsidiary,
Delaware First Bank. The Company's Certificate of Incorporation and Bylaws
require that directors be divided into three classes, as nearly equal in number
as possible. Each class of directors serves for a three-year period, with
approximately one-third of the directors elected each year. Officers will be
elected annually by the Board and serve at the Board's discretion.
MANAGEMENT OF DELAWARE FIRST BANK
DIRECTORS AND EXECUTIVE OFFICERS. The Savings Bank's Board of Directors
("Savings Bank Board") is composed of eight members each of whom serves for a
term of three years. The Savings Bank's Federal Stock Charter and Bylaws require
that directors be divided into three classes, as nearly equal in number as
possible. Each class of directors serves for a three-year
80
<PAGE>
period, with approximately one-third of the directors elected each year.
Executive officers are elected annually by the Savings Bank Board and serve at
the Savings Bank Board's discretion.
The following table sets forth information with respect to the Savings
Bank's directors and executive officers.
<TABLE>
<CAPTION>
Age at Current
March 31, Director Term
Name 1998 Position Since Expires
---- ---- -------- ----- -------
<S> <C> <C> <C> <C>
Dr. William R. Baldt 62 Director 1988 1998
J. Bayard Cloud 85 Chairman 1945 1999
Thomas B. Cloud 49 Director 1972 2000
Ronald P. Crouch 49 President, Chief Executive 1983 1998
Officer and Director
Larry D. Gehrke 52 Director 1988 2000
Alan B. Levin 43 Director 1993 1999
Ernest J. Peoples 65 Vice Chairman 1964 1998
Dr. Robert L. Schweitzer 48 Director 1997 2000
</TABLE>
OTHER EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Age at
March 31,
Name 1998 Position
<S> <C> <C>
Jerome P. Arrison 46 Executive Vice President, Chief Operating
Officer and Treasurer
Genevieve B. Marino 32 Vice President, Retail Banking Services
Lori N. Richards 35 Vice President, Finance and Administration
</TABLE>
The principal occupation and business experience of each of the
directors is set forth below. Unless otherwise noted, the information applies
for the past five years. There are no arrangements or understandings between the
Savings Bank and any person pursuant to which such person has been elected as a
director.
81
<PAGE>
DR. WILLIAM R. BALDT is currently President Emeritus of Goldey-Beacom
College in Wilmington, Delaware. Until August 30, 1996, he was the President of
the college.
J. BAYARD CLOUD has been Chairman of the Board since January 1, 1983.
He previously served as President of the Savings Bank from 1961 to 1982. He is
the father of Thomas B. Cloud.
THOMAS B. CLOUD, since December 1, 1995, has been President and
Chief Executive Officer of United Electric Supply Company, Inc. where he has
been employed since 1973 in various capacities including Controller, Vice
President of Finance and Chief Financial Officer and Executive Vice
President. The firm employs over 190 individuals and distributes electric
products to industrial, institutional and electrical construction customers
in a five state area. Mr. Cloud is the son of J. Bayard Cloud.
RONALD P. CROUCH currently serves as President and Chief Executive
Officer of the Savings Bank, a position he has held since 1983. Mr. Crouch is a
Certified Public Accountant and served as a director of the Federal Home Loan
Bank of Pittsburgh from 1989 to 1996. He is a trustee of Goldey-Beacom College.
LARRY D. GEHRKE is a director and Vice President of Bellevue Holding
Company of Wilmington, Delaware, a real estate development concern. He has been
employed there since 1972. He holds real estate brokerage licenses from the
State of Delaware and the Commonwealth of Pennsylvania.
ALAN B. LEVIN is Chairman, President and Chief Executive Officer of
Happy Harry's, Inc., a privately held pharmacy chain in Delaware with
approximately 1,100 employees. He is a member of the Delaware Bar and a former
chairman of the Delaware Workforce Development Council and Delaware Private
Industry Council. He was formerly a member of the State Attorney General's
Office in Delaware.
ERNEST J. PEOPLES is the Vice Chairman of the board. He was a Vice
President of the Savings Bank. He is retired and was formerly an owner of a
building and construction firm.
DR. ROBERT W. SCHWEITZER is Professor of Finance at the University of
Delaware, located in Newark, Delaware. He also serves as a faculty member of the
Stonier School of Banking and the National School of Banking at Fairfield
University.
82
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following executive officers do not serve on the Savings Bank
Board. There are no arrangements or understandings between the Savings Bank and
any person pursuant to which such person serves as an executive officer. Except
as otherwise noted, they have been employed by the Savings Bank for the last
five years.
JEROME P. ARRISON has been employed by the Savings Bank since August
1989. He is currently the Chief Operating Officer, Executive Vice President and
Treasurer.
GENEVIEVE B. MARINO joined the Savings Bank in November 1995 as the
Director of Marketing and Communications. She assumed her current position, Vice
President of Retail Banking Services, in July 1997. From November 1993 to
November 1995 she was the Advertising and Communications Manager of Wilmington
Savings Fund Society, FSB. Prior to that, she served in other capacities in the
Wilmington Savings Fund Society marketing department.
LORI N. RICHARDS assumed her current position as Vice President of
Finance and Administration in July 1997. From June 1996 to July 1997 she was the
Controller of the Savings Bank. From September 1994 to June 1996 she was an
accounting supervisor at Lanxide Corporation located in Newark, Delaware. From
May 1991 to September 1994 she served as a senior financial accountant at TA
Instruments, Inc. in New Castle, Delaware. She is a Certified Public Accountant.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the officers and directors,
and persons who own more than 10% of the Company's common stock to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc. Officers,
directors and greater than 10% stockholders are required by regulation to
furnish the Company with copies of all Section 16(a) forms they file. The
Company knows of no person who owns 10% or more of the Company's Common Stock.
Based solely on review of the copies of such forms furnished to the
Company, or written representations from its officers and directors, the Company
believes that during, and with respect to, 1997, the Company's officers and
directors complied in all respects with the reporting requirements promulgated
under Section 16(a) of the Exchange Act.
BOARD MEETINGS AND COMMITTEES
The Board of Directors conducts its business through meetings and
activities of its committees. During the year ended December 31, 1997, the Board
of Directors held 12 regular meetings. No director attended fewer than 75% of
the total meetings of the Board of Directors and committees on which such
director served during the year ended December 31, 1997, except
83
<PAGE>
for Mr. Levin who attended 52% of such meetings. The standing committees of the
Board include the following:
EXECUTIVE COMMITTEE. The Executive Committee meets as needed. It makes
recommendations to the full Board and acts on policies adopted by the full Board
in the absence of the meeting of the entire full Board. The committee did not
meet during the year ended December 31, 1997. The committee is composed of
Messrs. Peoples (Chairman), J. Bayard Cloud, Thomas Cloud and Crouch.
APPRAISAL COMMITTEE. The Appraisal Committee consists of Messrs.
Peoples (Chairman), J. Bayard Cloud and Gehrke. The members of the committee
review the appraisals of the real estate collateral for certain loans. The
Appraisal Committee met four times in 1997.
PERSONNEL COMMITTEE. The Personnel Committee reviews and prepares
recommendations for annual salary adjustment and bonuses. The committee also
administers the Savings Bank's various benefit plans. It consists of Messrs.
Gehrke (Chairman), Levin and Dr. Schweitzer. The committee met four times during
1997.
BUDGET COMMITTEE. The Budget Committee is responsible for determining
the capital needs of the Savings Bank and making recommendations regarding how
those needs may be satisfied. The Budget Committee met once during 1997. It
consists of Dr. Baldt (Chairman) and Messrs. Gehrke and Crouch.
AUDIT COMMITTEE. The Audit Committee meets with the Company's
independent certified public accountants annually to review the results of the
annual audit and other related matters. This committee consists of Dr. Baldt
(Chairman) and Messrs. Peoples and Levin. It met twice during 1997.
ASSET/LIABILITY COMMITTEE. The Asset/Liability Committee was
established in 1997 and currently meets monthly. It consists of Messrs. Thomas
Cloud (Chairman), Levin, Crouch and Dr. Schweitzer. It is principally
responsible for management of the Company's interest rate risk.
84
<PAGE>
Item 10. Executive Compensation
Summary Compensation Table. The Company has not yet paid separate
compensation to its directors and officers. The following table sets forth a
summary of certain information concerning the compensation paid by the Savings
Bank for services rendered in all capacities during the year ended December 31,
1997, 1996 and 1995 to the President and Chief Executive Officer and the
Executive Vice President and Chief Operating Officer. No other executive
officers of the Company or the Savings Bank had total annual compensation in
excess of $100,000 during fiscal 1997.
<TABLE>
<CAPTION>
Annual Compensation Long-Term
Compensation
------------------------------------- --------------------
Other Restricted
Name and Annual Stock All Other
Principal Position Year Salary Bonus Compensation(1) Awards Options Compensation(2)
- -------------------------- ---- -------- ------- -------------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald P. Crouch 1997 $120,000 $ 0 $ 0 $0 0 $11,341
President and Chief 1996 116,595 11,132 12,873 0 0 0
Executive Officer 1995 110,682 5,853 11,349 0 0 0
- -------------------------- ---- -------- ------- -------------- ----------- ------- ---------------
Jerome P. Arrison 1997 $101,000 $ 0 $ 0 $0 0 $11,341
Executive Vice 1996 96,606 8,921 12,840 0 0 0
President and Chief 1995 88,581 4,695 10,199 0 0 0
Operating Officer
- -------------------------- ---- -------- ------- -------------- ----------- ------- ---------------
</TABLE>
- ---------------
(1) Amounts reflect the Savings Bank's contribution to its defined
contributory pension plan on behalf of the employee during 1996. Annual
compensation does not include amounts attributable to other miscellaneous
benefits received by the executive officers. The costs to the Savings
Bank of providing such other miscellaneous benefits during fiscal 1997
did not exceed the lesser of $50,000 or 10% of the total salary and bonus
paid to or accrued for the benefit of such individual executive officer.
(2) Consists of amounts allocated during the year ended December 31, 1997 on
behalf of each individual pursuant to the ESOP.
Bonus Compensation. The Savings Bank has a bonus compensation plan
pursuant to which officers can receive bonus compensation up to 20% of their
salaries if certain performance goals are met at the discretion of the Board of
Directors. During 1997, Mr. Crouch and Mr. Arrison did not receive bonuses.
401(k) Plan. In 1997, the Savings Bank established a contributory
savings plan for employees which meets the requirements of Section 401(k) of the
Code. All employees who are at least 21 years old and who have completed at
least one year of service may elect to contribute a percentage of their
compensation to the plan each year subject to certain maximums imposed by
60
<PAGE>
federal law. The Savings Bank matches 25% of each employee's contribution, on
the first 2% of that employee's contribution.
Participants are fully vested in the amounts they contribute to the 401(k).
Participants are fully vested in amounts contributed to the plan on their behalf
by the Savings Bank as employer matching contributions after seven years of
service. Benefits under the 401(k) plan are payable in the event of a
participant's retirement, death, disability, or termination of employment.
Normal retirement age under the 401(k) plan is 65 years of age.
Pension Plan. The Savings Bank terminated its noncontributory
tax-qualified defined pension benefit plan effective December 17, 1997. The
excess funds will be distributed pro rata to the participants.
Employee Stock Ownership Plan. The Savings Bank has established an
employee stock ownership plan (the "ESOP") to allow participating employees to
share in its growth and profits. Participating employees are all employees who
have completed one year of service with the Savings Bank and have attained the
age of 21.
The ESOP is funded by tax-deductible contributions made by the Savings
Bank in cash or common stock. All contributions to the ESOP will be held in the
trust which is part of the ESOP and will be invested primarily in Savings Bank
stock.
To receive an allocation, a participant must be credited with at least
1,000 hours of service during the year and be employed by the Savings Bank on
the last day of the year, or have terminated employment during the year as a
result of death, disability (as defined in the ESOP) or retirement at or after
attaining age 65. A participant becomes vested in his account balance as
follows: after 1 year of service - 20%, 2 years - 40%, 3 years - 60%, 4 years -
80%, 5 years or more - 100%. Full vesting is accelerated upon retirement at or
after age 65, death, disability, or termination of the ESOP, provided such
acceleration is not prohibited by applicable law.
The Board of Directors has appointed the Personnel Committee to
administer the ESOP and to serve as the ESOP Committee. Wilmington Trust Company
has been engaged as the ESOP Trustee. The Personnel Committee is responsible for
administering the ESOP and for instructing the ESOP Trustee regarding the
investment of any ESOP funds which cannot be invested in Savings Bank stock.
Director Compensation
Each of the non-employee directors is paid an annual retainer of
$2,000. Additionally, each non-employee director receives $300 for each board
meeting attended and $300 for each committee meeting attended. The maximum fee
for meetings attended for any director is $300 per day so that if both a board
and committee meeting are held on the same day the
61
<PAGE>
maximum payment for attendance is $300. Mr. Crouch receives no fees for his
services on the board.
J. Bayard Cloud, the Chairman of the Board, receives a special retainer
of $28,800 per year and Ernest J. Peoples, the Vice Chairman, receives a special
retainer of $27,000 per year. These retainers are paid based on their service as
Chair and Vice Chair of the Board and for their review of appraisals.
Additionally, a supplemental pension benefit is paid to J. Bayard Cloud. For
1997 the amount of that benefit was $15,468. Wilmington wage tax is also paid
for all non-employee directors. This tax is currently 1.25% of gross earnings.
Wilmington wage withholding for 1997 was $1,183. Total aggregate fees paid to
the current directors for the year ended December 31, 1997 were $117,915.
Deferred Non-employee Director Compensation Program
The Savings Bank has a deferred non-employee director compensation
program, whereby directors may defer their fees. Currently, Dr. Baldt and Mr.
Gehrke participate in this program. Pursuant to this program, directors defer
their fees until their retirement or resignation from the Board of Directors.
For the year ended December 31, 1997, $8,101 of fees were deferred pursuant to
this program. Fees deferred pursuant to this program are subject to the general
rights of the Bank's creditors.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 31, 1998, certain
information as to the common stock of the Company beneficially owned by (i) each
person or entity, including any "group" as that term is used in Section 13(d)(3)
of the Exchange Act, who or which was known to the Company to be the beneficial
owner of more than 5% of the issued and outstanding Common Stock, (ii) the
directors of the Company, (iii) those executive officers of the Company whose
salary and bonus exceeded $100,000 in fiscal 1997, and (iv) all directors and
executive officers of the Company and the Savings Bank as a group.
62
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
Name of Beneficial of Beneficial Percent of
Owner or Number of Ownership as of Common
Persons in Group March 31, 1998(1) Stock
------------------- ---------------- ----------
<S> <C> <C>
Delaware First Financial Corporation 83,304(2) 7.2%
Employee Stock Ownership Plan
and Trust
400 Delaware Avenue
Wilmington, Delaware 19801
Jeffrey L. Gendell, et al. 114,500(5) 9.9
200 Park Avenue
Suite 3900
New York, New York 10166
Directors:
*
Dr. William R. Baldt 1,000 *
J. Bayard Cloud 1,000 *
Thomas B. Cloud 6,154 *
Ronald P. Crouch 3,284(3) *
Larry D. Gehrke 5,000 *
Alan B. Levin 1,500 *
Ernest J. Peoples 1,000 *
Executive Officer:
Jerome P. Arrison 1,234(4) *
All directors and executive officers of the
Company and the Savings Bank as a group
(11 persons) 25,074 2.2
</TABLE>
(Footnotes on following page)
63
<PAGE>
- -----------------
* Represents less than 1% of the outstanding Common Stock.
(1) Based upon filings made pursuant to the Exchange Act and information
furnished by the respective individuals. Under regulations
promulgated pursuant to the Exchange Act, shares of the Company's
common stock are deemed to be beneficially owned by a person if he or
she directly or indirectly has or shares (i) voting power, which
includes the power to vote or to direct the voting of the shares, or
(ii) investment power, which includes the power to dispose or to
direct the disposition of the shares. Unless otherwise indicated,
the named beneficial owner has sole voting and dispositive power with
respect to the shares.
(2) The Delaware First Financial Corporation Employee Stock Ownership
Plan Trust ("Trust") was established pursuant to the Delaware First
Financial Corporation. Employee Stock Ownership Plan ("ESOP") by an
agreement between the Company and Wilimington Trust Company who acts
as trustee of the plan ("Trustee"). As of March 31, 1998, 9,256
shares held in the Trust have been allocated to the accounts of
participating employees. The 83,304 unallocated shares held in the
Trust as of March 31, 1998 will be voted by the Trustee in accordance
with its fiduciary duty as Trustee. The amount of Common Stock
beneficially owned by all directors and executive officers as a group
does not include the shares held by the Trust.
(3) Includes 1,134 shares of the Company's common stock allocated to Mr.
Crouch under the ESOP which the Trustees will vote in accordance with
Mr. Crouch's instructions.
(4) Includes 1,134 shares of the Company's common stock allocated to Mr.
Arrison under the ESOP which the Trustees will vote in accordance
with Mr. Arrison's instructions.
(5) Mr. Gendell is the managing member of Tontine Management, L.L.C., a
limited liability company organized under the laws of the State of
Delaware ("TM") and Tontine Overseas Associates, L.L.C., a limited
liability company organized under the laws of the State of Delaware
("TOA"). TM is the general partner of Tontine Financial Partners,
L.P., a Delaware limited partnership ("TFP"). TOA serves as the
investment manager to TFP Overseas Funds, Ltd., a company organized
under the laws of the Cayman Islands ("TFPO"). TFP and TFPO directly
own 93,750 and 20,750 shares of the Company's common stock,
respectively. The business address of Mr. Gendell and TM, TOA, TFP
and TFPO is 200 Park Avenue, Suite 3900, New York, New York 10166.
64
<PAGE>
Item 12. Certain Relationships and Related Transactions
The Company offers loans to its directors and officers. These loans
are currently made in the ordinary course of business with the same collateral,
interest rates and underwriting criteria as those of comparable transactions
prevailing at the time and do not involve more than the normal risk of
collectibility or present other favorable features. Under current law, the
Company's loans to directors and executive officers are required to be made on
substantially the same terms, including interest rates, as those prevailing for
comparable transactions and must not involve more than the normal risk of
repayment or present other favorable features. Additionally, all loans to such
persons must be approved in advanced by a disinterested majority of the Board of
Directors. At December 31, 1997, the Company's loans to directors and executive
officers totalled approximately $511,000, or 3.2% of the Company's retained
earnings at that date.
Item 13. Exhibits, List and Reports on Form 8-K
(a) The following exhibits are filed as part of the Form 10-K, and this list
includes the Exhibit Index:
No. Exhibits
- --- ---------
3.1 Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.0 Stock Certificate of the Company.*
21.0 List of Subsidiaries.*
27.0 Financial Data Schedule.
- ----------------
*Incorporated herein by reference from the Company's Registration Statement on
Form SB-2 filed with the SEC on September 26, 1997.
(b) Reports filed on Form 8-K.
None.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DELAWARE FIRST FINANCIAL CORPORATION
By: /s/ Ronald P. Crouch
------------------------------------
Ronald P. Crouch
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/s/ Ronald P. Crouch April 14, 1998
------------------------------
Ronald P. Crouch
President, Chief Executive
Officer and Director
/s/ J. Bayard Cloud April 14, 1998
------------------------------
J. Bayard Cloud
Chairman of the Board
66
<PAGE>
/s/ Ernest J. Peoples April 14, 1998
------------------------------
Ernest J. Peoples
Vice Chairman of the Board
/s/ William R. Baldt
------------------------------ April 14, 1998
Dr. William R. Baldt
Director
/s/ Thomas B. Cloud
------------------------------ April 14, 1998
Thomas B. Cloud
Director
/s/ Larry D. Gehrke
----------------------------- April 14, 1998
Larry D. Gehrke
Director
----------------------------- April , 1998
Alan B. Levin
Director
/s/ Dr. Robert L. Schweitzer
---------------------------- April 14, 1998
Dr. Robert L. Schweitzer
Director
/s/ Jerome P. Arrison
---------------------------- April 14, 1998
Jerome P. Arrison
Executive Vice President, Chief Operating Officer
and Treasurer
(principal financial officer)
/s/ Lori N. Richards
---------------------------- April 14, 1998
Lori N. Richards
Vice President, Finance and Administration
(principal accounting officer)
67
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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0
0
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</TABLE>
