<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ........ to .........
Commission File Number: 000-23499
DELAWARE FIRST FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 52-2063973
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification Number)
400 Delaware Avenue
Wilmington, Delaware 19801
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including are code: (302) 421-9090
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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_____ No __X___
As of February 13, 1998, there were 1,157,000 shares of the Registrant's
common stock, par value $.01 per share outstanding. The Registrant has no
other classes of equity outstanding.
Transitional Small Business Disclosure Format Yes______ No ___X___
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
Contents
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION: Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 1997 (Unaudited) and December 31, 1996..................... 1
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1997 and 1996 (Unaudited)..................... 2
Consolidated Statement of Changes in Retained Earnings for the
Nine Months Ended September 30, 1997 (Unaudited)......................... 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 (Unaudited)............................ 4
Notes to Consolidated Financial Statements (Unaudited)................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 11
Item 2. Changes in Securities.................................................... 11
Item 3. Defaults Upon Senior Securities.......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders...................... 11
Item 5. Other Information........................................................ 11
Item 6. Exhibits and Reports on Form 8-K......................................... 11
SIGNATURES................................................................................. 11
</TABLE>
i
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 4,927,770 $ 2,643,452
Investment securities available for sale
(amortized cost - 1997, $4,499,425; 1996, $6,494,860) 4,497,971 6,475,800
Mortgage-backed securities available for sale
(amortized cost - 1997, $1,169,514; 1996, $200,666) 1,169,840 203,147
Loans receivable - net 91,348,017 98,042,118
Loans held for sale
Federal Home Loan Bank stock - at cost 1,060,000 1,500,000
Accrued interest receivable:
Loans 944,829 975,244
Investments 60,321 93,526
Mortgage-backed securities 3,751 1,171
Office property and equipment, net 1,992,146 2,020,957
Prepaid expenses and other assets 320,774 66,012
Prepaid income taxes 113,551 166,850
Mortgage servicing rights 384,386 317,435
Deferred income taxes 172,281 177,506
------------- -------------
TOTAL ASSETS $ 106,995,637 $ 112,683,218
============= =============
LIABILITIES AND RETAINED EARNINGS
Liabilities:
Deposits $ 77,697,794 $ 78,408,793
Advances from Federal Home Loan Bank 21,200,000 25,900,000
Advances by borrowers for taxes and insurance 279,290 812,569
Accrued interest payable 280,591 265,764
Accrued income taxes
Accounts payable and accrued expenses 1,510,749 1,338,503
------------- -------------
Total liabilities 100,968,424 106,725,629
Commitments and contingencies
Retained earnings (partially restricted) 6,027,848 5,968,365
Unrealized losses on available for sale securities, net of tax (635) (10,776)
------------- -------------
Total retained earnings 6,027,213 5,957,589
------------- -------------
TOTAL LIABILITIES AND RETAINED EARNINGS $ 106,995,637 $ 112,683,218
============= =============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
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<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 1,814,916 $ 1,821,021 $ 5,612,898 $ 5,167,769
Interest on mortgage-backed securities 16,730 9,735 23,551 31,876
Interest and dividends on investments 151,928 222,366 419,483 616,124
----------- ----------- ----------- -----------
Total interest income 1,983,574 2,053,122 6,055,932 5,815,769
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 1,110,280 1,109,956 3,306,525 3,386,593
Federal Home Loan Bank advances 355,788 409,638 1,136,434 774,111
----------- ----------- ----------- -----------
Total interest expense 1,466,068 1,519,594 4,442,959 4,160,704
----------- ----------- ----------- -----------
NET INTEREST INCOME 517,506 533,528 1,612,973 1,655,065
PROVISION FOR LOAN LOSSES 200,815 210,815 26,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 316,691 533,528 1,402,158 1,629,065
----------- ----------- ----------- -----------
OTHER INCOME:
Service fees 88,026 240,172 135,589 339,012
Gain on sale of loans 69,977 86,609 48,766
Realized market adjustment on loans 12,096 22,787
Other 13,024 17,126 23,051 26,790
----------- ----------- ----------- -----------
Total other income 183,123 257,298 268,036 414,568
----------- ----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 140,545 153,436 618,498 664,452
Advertising 37,714 41,573 138,924 183,597
Federal insurance premiums 18,919 46,700 34,184 140,753
SAIF Special Assessment 492,000 492,000
Occupancy expense 49,481 65,377 150,906 200,615
Data processing expense 37,780 34,933 107,541 100,636
Directors fees 29,114 28,507 82,852 85,553
Other general and administrative expenses 293,583 314,172 434,806 491,053
----------- ----------- ----------- -----------
Total other expenses 607,136 1,176,698 1,567,711 2,358,659
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (107,322) (385,872) 102,483 (315,026)
----------- ----------- ----------- -----------
(PROVISION)/BENEFIT FOR INCOME TAXES 45,000 232,700 (43,000) 202,700
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (62,322) $ (153,172) $ 59,483 $ (112,326)
========= ========== ======== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
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<TABLE>
<CAPTION>
Unrealized
Losses on Total
Retained Available for Retained
Earnings Sale Securities Earnings
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 5,642,982 $ 5,642,982
Net income for the year ended
December 31, 1995 419,924 419,924
----------- -----------
BALANCE, DECEMBER 31, 1995 6,062,906 6,062,906
Net loss for the year ended
December 31, 1995 (94,541) (94,541)
Unrealized losses on available for
sale securities, net of tax $ (10,776) (10,776)
BALANCE, DECEMBER 31, 1996 5,968,365 (10,776) 5,957,589
----------- ------ -----------
Net income for the nine-month period
ended September 30, 1997 (unaudited) 59,483 59,483
Recovery of unrealized losses on available for
sale securities, net of tax (unaudited) 10,141 10,141
----------- ------ -----------
BALANCE, SEPTEMBER 30, 1997 (UNAUDITED) $ 6,027,848 $ (635) $ 6,027,213
=========== ====== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
Nine-Month Period Ended
September 30,
-------------------------------
1997 1996
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 59,483 $ (112,326)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation 89,565 140,533
Provision for loan losses 210,815 26,000
Gain on sale of loans (84,518) (16,727)
Realized market adjustment on loans (22,787)
Amortization of:
Deferred loan fees (75,250) (167,481)
Discount on investment and
mortgage-backed securities (4,458) (6,447)
Changes in assets and liabilities which
provided (used) cash:
Accrued interest receivable 61,040 (293,391)
Mortgage servicing rights (66,951) 3,368
Prepaid expenses and other assets (254,762) 860,595
Accrued interest payable 14,827 20,512
Accounts payable and accrued expenses 172,246 (36,962)
Income taxes 53,299 (512,840)
Deferral of loan fees 78,847 288,876
------------ ------------
Net cash provided by operating activities 231,396 193,710
------------ ------------
INVESTING ACTIVITIES:
Proceeds from maturity of investments 2,000,000 5,000,000
Principal collected on long-term loans
and mortgage-backed securities 9,983,631 17,246,669
Long-term loans originated (10,092,632) (38,236,212)
Proceeds from sale of loans 6,722,130 1,013,297
Redemption of Federal Home Loan Bank stock 549,800 28,200
Purchase of Federal Home Loan Bank stock (109,800) (993,400)
Purchase of investments (995,175) (4,996,437)
Purchases of premises and equipment (60,754) (21,990)
------------ ------------
Net cash provided by (used in) investing activities 7,997,200 (20,959,873)
------------ ------------
FINANCING ACTIVITIES:
Net decrease in deposits (710,999) (2,850,453)
Increase in advances by borrowers for taxes
and insurance (533,279) (433,528)
Proceeds from Federal Home Loan Bank advances 46,345,726 64,079,328
Repayments of Federal Home Loan Bank advances (51,045,726) (38,329,328)
------------ ------------
Net cash provided by (used in) financing activities (5,944,278) 22,466,019
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,284,318 1,699,856
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,643,452 1,060,856
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,927,770 $ 2,760,712
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 4,428,133 $ 4,140,192
============ ============
Income taxes $ 14,967 $ 310,140
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996 AND FOR THE THREE-
AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
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1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
However, such information reflects all adjustments (consisting solely of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the unaudited interim
periods.
The results of operations of the three and nine month periods ended
September 30, 1997 are not necessarily indicative of the results to be
expected for the fiscal year ending December 31, 1997. The consolidated
financial statements presented herein should be read in conjunction with
the audited financial statements and related notes thereto included in
the Company's Prospectus dated November 12, 1997.
Delaware First Financial Corporation (the "Company") is not an operating
company and has not engaged in any significant business to date. It was
formed in September 1997, as a Delaware corporation to be the holding
company for Ninth Ward Savings Bank, FSB (the "Bank"). The holding
company structure will facilitate: (i) diversification into non-banking
activities, (ii) acquisitions of other financial institutions, such as
savings institutions, (iii) expansion within existing and into new
market areas, and (iv) stock repurchases without adverse tax
consequences. There are no present plans regarding diversification,
acquisitions or expansion.
2. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
September 30, 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 $ 4,499,425 $ 2,841 $ (4,295) $ 4,497,971
----------- ------- -------- -----------
Total $ 4,499,425 $ 2,841 $ (4,295) $ 4,497,971
=========== ======= ======== ===========
</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>
5
<PAGE>
3. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
September 30 , 1997 December 31, 1996
-------------------------------------------- -----------------------------------------
Gross Approximate Gross Approximate
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gain/(Loss) Value Cost Gain Value
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
FHLMC pass-through certificates $ 178,790 $ 1,932 $ 180,722 $ 200,666 $ 2,481 $ 203,147
Collateralized Mortgage Obligations 990,724 (1,606) 989,118
---------- ---------- ---------- ---------- ---------- ----------
Total $1,169,514 $ 326 $1,169,840 $ 200,666 $ 2,481 $ 203,147
========== ========== ========== ========== ========== ==========
</TABLE>
4. LOANS RECEIVABLE
Loans receivable consist of the following:
September 30, December 31,
1997 1996
------------- ------------
First mortgage loans (primarily one-
to four-family residential) $ 81,361,066 $ 87,918,256
Loans on savings accounts 670,328 528,198
Home equity loans - fixed rate 7,821,364 8,082,865
Equity lines of credit - variable rate 2,935,209 2,823,273
------------ ------------
Total 92,787,967 99,352,592
Less:
Allowance for loan losses (457,000) (247,000)
Deferred loan fees (982,950) (1,063,474)
------------ ------------
Total $ 91,348,017 $ 98,042,118
============ ============
The following is an analysis of the allowance for loan losses:
Nine Months Ended
September 30,
----------------------
1997 1996
Balance, beginning of period 247,000 200,000
Provisions charged to operations 210,815 26,000
------- -------
Balance, end of period 457,815 226,000
======= =======
Loans delinquent more than 90 days are placed on nonaccrual status.
Interest reserved from these loans amounted to $11,257 and $3,123 at
September 30, 1997 and December 31, 1996, respectively.
6
<PAGE>
5. DEPOSITS
Deposits by stated type are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------------ ---------------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Demand deposit accounts $ 995,629 1.3% $ 881,302 1.1%
Passbook accounts 2,429,703 3.1 2,536,443 3.2
Money market deposit accounts: 8,967,171 11.5 8,246,455 10.5
91-day to five-year money market
certificates: 65,305,291 84.1 66,744,593 85.2
----------- ----- ----------- -----
Total $77,697,794 100.0% $78,408,793 100.0%
=========== ===== =========== =====
</TABLE>
6. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On June 30, 1997, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federal chartered mutual savings and loan
association to a federal chartered capital stock savings bank with the
concurrent formation of a holding company, subject to approval by
regulatory authorities and depositors of the Bank. On December 31, 1997,
the Company completed its conversion to a stock savings bank and
formation of a holding company.
ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements." The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement
for the express purpose of availing itself of the protections of the safe
harbor with respect to all such forward-looking statements. These
forward-looking statements, which are included in Management's Discussion
and Analysis, describe future plans or strategies and include the
Company's expectations of future financial results. The words "believe,"
"expect," "anticipate," "estimate," "project," and similar expressions
identify forward-looking statements. The Company's ability to predict
results or the effect of future plans or strategies or qualitative or
quantitative changes based on market risk exposure is inherently
uncertain. Factors which could affect actual results include but are not
limited to (i) change in general market interest rates, (ii) general
economic conditions, (iii) legislative/regulatory changes, (iv) monetary
and fiscal policies of the U.S. Treasury and the Federal Reserve, (v)
changes in the quality or composition of the Company's loan and
investment portfolios, (vi) demand for loan products, (vii) deposit
flows, (viii) competition, (ix) demand for financial services in the
Company's markets, and (x) changes in the accounting principles,
policies, and guidelines. These factors should be considered in
evaluating the forward-looking statements, and undue reliance should not
be placed on such statements.
7
<PAGE>
Financial Condition
Total assets decreased by $5.7 million or 5.0% from $112.7 million at
December 31, 1996 to $107.0 million at September 30, 1997. Total
liabilities decreased by $5.8 million or 5.4% from $106.7 million at
December 31, 1996 to $100.9 million at September 30, 1997. Total
deposits decreased $711,000 or 1.0% from $78.4 million at December 31,
1996, to $77.8 million at September 30, 1997. The decrease in assets for
the period ended September 30, 1997 was primarily attributable to the
decrease in the loan portfolio of $7.0 million which was the result of
home mortgage loans sold to the Federal Home Loan Mortgage Corporation.
The loans sold were fixed rate loans for which the Bank retained
servicing. Some of the proceeds were invested in loans and investments
with shorter maturities, but the majority were used to reduce borrowings
from the FHLB of Pittsburgh. Borrowings were reduced by approximately
$4.7 million. Both actions were designed to respond to those provisions
of the OTS Supervisory Agreement which required the Bank to begin to
reduce its exposure to interest rate risk. The Bank is required under
the Supervisory Agreement to report quarterly to the OTS on its progress
in reducing interest rate risk.
Comparison of Operating Results for the Three and Nine Months Ended September
30, 1997 and 1996
Net Income. The Bank had a net loss of $62,000 for the three months
ended September 30, 1997 as compared to a loss of $153,000 for the same
period in 1996. Net income for the nine months ended September 30, 1997
was $59,000 as compared to a net loss of $112,000 for the same period in
1996. The $91,000 or 59.5% decrease in net loss for the three months
ended September 30, 1997 was primarily due to a reduction in other
expenses from $1.2 million for the three months ended September 30, 1996
to $607,000 for the three months ended September 30, 1997. This was
somewhat offset by an decrease in the benefit for income taxes from
$233,000 for the three months ended September 30, 1996, as compared to
$45,000 for the three months ended September 30, 1997. The $171,000
increase in net income for the nine months ended September 30, 1997 was
primarily due to a reduction in other expenses from $2.4 million for the
nine months ended September 30, 1996 to $1.6 million for the nine months
ended September 30, 1997. This was offset by a decrease in the benefit
for income taxes from $203,000 for the nine months ended September 30,
1996, as compared to a provision for income taxes of $43,000 for the
nine months ended September 30, 1997.
Net interest income. Net interest income decreased $16,000 or 3.0% to
$518,000 for the three months ended September 30, 1997 from $534,000 for
the three months ended September 30, 1996. This decrease was due to a
$69,000 or 3.4% decrease in interest income, partially offset by a
$54,000 or 3.6% decrease in interest expense. Net interest income
decreased $42,000 or 2.5% to $1.6 million for the nine months ended
September 30, 1997. This decrease was due to a $282,000 or 6.8% increase
in interest expense, partially offset by a $240,000 or 4.1% increase in
interest income.
Interest Income. Total interest and dividend income was $2.1 million for
the three months ended September 30, 1996 compared to $2.0 million for
the three months ended September 30, 1997, representing a decrease of
$69,000 or 3.4%. The decrease in 1997 was primarily due to a decrease in
interest and dividends on investments from $222,000 for the three months
ended September 30, 1996 to $152,000 for the three months ended
September 30, 1997. This decrease was slightly offset by an increase in
interest on mortgage-backed securities from $10,000 for the three months
ended September 30, 1996 to $17,000 for the three months ended September
30, 1997. Total interest and dividend income was $6.1 million for the
nine months ended September 30, 1997 compared to $5.8 million for the
nine months ended September 30, 1996, representing an increase of
$240,000 or 4.1%. The increase in 1997 was primarily due to an increase
in interest on loans from $5.2 million for the nine months ended
September 30, 1996 to $5.6 million for the nine months ended September
30, 1997. This increase was offset by a decrease in interest and
dividends on investments from $616,000 for the nine months ended
September 30, 1996 to $419,000 for the nine months ended September 30,
1997.
8
<PAGE>
Interest Expense. Total interest expense, which consists primarily of
interest on savings deposits, was $1.5 million for the three months
ended September 30, 1996 compared to $1.4 million for the three months
ended September 30, 1997, representing a decrease of $54,000 or 3.6%.
This decrease was primarily the result of a decrease in interest paid on
FHLB advances, which were reduced during the third quarter. Total
interest expense was $4.2 million for the nine months ended September
30, 1996 compared to $4.4 million for the nine months ended September
30, 1997, representing an increase of $282,000 or 6.8%. This increase
was primarily the result of an increase in interest paid on FHLB
advances.
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 Bank to provide for probable loan losses
based on prior loss experience, volume and type of lending conducted by
the Bank, available peer group information, and past due loans in the
loan portfolio. The Bank's policies require the review of assets on a
quarterly basis. Loans are appropriately classified, as well as other
assets, if warranted. While the Bank uses the best information available
to make a determination with respect to the allowance for loan losses,
future adjustments may be necessary. Provisions for loan losses of
$201,000 and $211,000 were provided for the three and nine months ended
September 30, 1997, respectively, as compared to no provision made for
the three months ended September 30, 1996 and a provision of $26,000
made for the nine months ended September 30, 1996. The Bank continues to
increase the provision for loan losses due to the increase in
nonperforming loans. The Bank increases the provision for loan losses
due to risk inherent in the loan portfolio. In establishing such
provisions, the levels of the Bank's nonperforming loans were
considered, which were $376,000 and $675,000 at December 31, 1996 and
September 30, 1997, respectively. This was attributable to an increase
in the past due status of certain residential and home equity loans.
Non-interest income. Total non-interest income decreased $74,000 or
28.8% to $183,000 and $147,000 or 35.5% to $268,000 for the three and
nine months ended September 30, 1997, respectively. Such decreases were
primarily due to a $152,000 or 63.3% and a $203,000 or 60.0% decrease in
service fees for the three and nine months ended September 30, 1997,
respectively, which were partially offset by a $70,000 or 100.0% and a
$38,000 or 77.6% increase in gain on sale of loans.
Non-interest expense. Total non-interest expenses decreased $570,000 or
48.4% and $791,000 or 33.5% for the three and nine months ended
September 30,1997, respectively. Such decreases were attributable to a
one-time special SAIF assessment of $492,000 for the three and nine
months ended September 30, 1996. 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 Bank's
deposits as of March 31, 1995, the date for measuring the amount of the
special assessment pursuant to the Act, the 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 Bank before the recapitalization of the SAIF was 23
basis points per $100 of deposits and has decreased to 6.4 basis points
per $100 of deposits after the recapitalization of the SAIF. Federal
insurance premiums were decreased $28,000 or 59.5% and $107,000 or 75.7%
for the three and nine months ended September 30, 1997, respectively.
Salaries and employee benefits decreased $12,000 or 7.8% and $46,000 or
6.9% for the three and nine months ended September 30, 1997,
respectively. This was a result of a reduction in staff due to a decline
in loan originations and a decline in pension expenses. Advertising
expenses decreased $4,000 or 9.5% and $45,000 or 24.5% for the three and
nine months ended September 30, 1997, respectively. This decrease was
due to the Bank's management of interest rate risk by reducing the
volume of fixed rate mortgage loan, and thus curbing its marketing
efforts for these loans. Occupancy expenses decreased $16,000 or 24.6%
and $50,000 or 24.9% for the three and nine months ended September 30,
1997, respectively, because the Bank uses an accelerated method of
depreciation.
9
<PAGE>
Income taxes. Income tax benefit was $45,000 for the three months ended
September 30, 1997 compared to $233,000 for the three months ended
September 30, 1996. The decrease was attributable to a decrease in loss
before income taxes for the three months ended September 30, 1997
compared to the three months ended September 30, 1996. Income tax
expense was $43,000 for the nine months ended September 30, 1997, as
compared to an income tax benefit of $203,000 for the nine months ended
September 30, 1996. This change is attributed to the $102,000 net income
before income taxes, as compared to a $315,000 net loss before income
taxes. The effective tax rate was 42%.
Liquidity and Capital Resources
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to
time depending on economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio
currently is 5.0%. The liquidity ratio average was 10.4% and 11.2% at
September 30, 1997 and December 31, 1996, respectively. The decrease in
the average liquidity rate at September 30, 1997 was primarily the
result of the maturity of investments.
Net cash provided by operating activities (i.e., cash items affecting
net income) for the nine months ended September 30, 1997 and September
30,1996 was $231,000 and 194,000 respectively.
Net cash provided by investing activities (i.e., cash receipts,
primarily from investment securities and mortgage-backed securities
portfolios and the loan portfolio) for the nine months ended September
30, 1997 was $8.0 million. In contrast, net cash was used in investing
activities for the nine months ended September 30, 1996 in the amount of
$21.0 million. The decrease in net cash used by investing activities was
primarily due to fewer loan originations during 1997.
Net cash used by financing activities (i.e., cash receipts primarily
from net increases or decreases in deposits and net FHLB advances) for
the nine months ended September 30, 1997 was $5.9 million. In contrast,
net cash provided by financing activities for the nine months ended
September 30, 1996 was $22.5 million. The increase in net cash used is
primarily due to repayments of FHLB advances during 1997.
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 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 its commitments to make loans and
management's assessment of the Bank's ability to generate funds.
Impact of Inflation and Changing Prices
The financial statements and the accompanying notes 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 operations. As
a result, interest rates have a greater impact on 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.
10
<PAGE>
PART II
Item 1. Legal Proceedings
From time to time, the Delaware First Financial Corporation
and its subsidiaries may be a party to various legal
proceedings incident to its or their business. At September
30, 1997, there were no legal proceedings to which the Company
or any subsidiary was a party, or to which any of their
property was subject, which were expected by management to
result in a material loss.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i) Certificate of Incorporation of Registrant
(incorporated by reference to the Registration
Statement on Form SB-2, File No. 333-36737).
3(ii) Bylaws of the Registrant (incorporated by reference
to the Registration Statement on Form SB-2, File
No. 333-36757).
27. Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements 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
Date: February 13, 1997 By: /s/ Ronald P. Crouch
-----------------------------
Ronald P. Crouch
President and Chief Executive Officer
Date: February 13, 1997 By: /s/ Lori N. Richards
-----------------------------
Lori N. Richards
Vice President, Finance and Administration
11
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<NAME> DELAWARE FIRST FINANCIAL CORPORATION
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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