<PAGE>
UNITED STATES
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, 1998
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 0-23499
DELAWARE FIRST FINANCIAL CORPORATION
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 52-2063973
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Delaware Avenue
Wilmington, Delaware 19801
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(302) 421-9090
----------------------------------------------
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed 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 X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of November 6,
1998, there were issued and outstanding 1,157,000 shares of the Registrant's
Common Stock, par value $.01 per share.
Transitional Small Business Disclosure Format: Yes X No
----- -----
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Part I. Financial Information
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1997 and September 30, 1998 (unaudited) 1
Consolidated Statements of Operations for the three and nine
months ended September 30, 1998 (unaudited) and 1997 (unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended September 30, 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 (unaudited) and 1997 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Part II. Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures
</TABLE>
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
----------------- ------------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 12,433,691 $ 15,199,726
Investment securities available for sale
(amortized cost - 1997, $2,499,753) 2,499,860
Mortgage-backed securities available for sale
(amortized cost - 1998, $3,414,094; 1997, $1,903,007) 3,406,841 1,900,986
Loans receivable - net 79,705,888 88,933,209
Loans held for sale 920,700
Federal Home Loan Bank stock - at cost 975,000 975,000
Accrued interest receivable:
Loans 766,567 823,266
Investments 50,700 81,353
Mortgage-backed securities 17,415 6,902
Real estate owned 99,571
Office property and equipment, net 1,999,637 1,956,404
Prepaid expenses and other assets 114,024 291,613
Prepaid income taxes 53,039 115,316
Mortgage servicing rights 333,190 371,361
Deferred income taxes 181,139 177,429
------------- -------------
TOTAL ASSETS $ 101,057,402 $ 113,332,425
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 68,950,820 $ 76,883,201
Advances from Federal Home Loan Bank 14,085,645 17,400,000
Advances by borrowers for taxes and insurance 271,454 835,417
Accrued interest payable 241,342 358,171
Accounts payable and accrued expenses 1,406,170 1,757,825
------------- -------------
Total liabilities 84,955,431 97,234,614
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value, 500,000 shares authorized, none issued
Common stock, $.01 par value, 3,000,000 authorized; 1,157,000 issued
and outstanding 11,570 11,570
Additional paid in capital 10,966,605 10,966,430
Common stock acquired by the ESOP (833,040) (833,040)
Unrealized losses on available for sale securities, net of tax (5,272) (1,263)
Retained earnings-substantially restricted 5,962,108 5,954,114
------------- -------------
Total stockholders' equity 16,101,971 16,097,811
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 101,057,402 $ 113,332,425
============= =============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------- ------------------------------
1998 1997 1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 1,608,830 $ 1,814,916 $ 5,017,337 $ 5,612,898
Interest on mortgage-backed securities 51,576 16,730 144,779 23,551
Interest and dividends on investments 197,592 151,928 628,449 419,483
----------- ----------- ----------- -----------
Total interest income 1,857,998 1,983,574 5,790,565 6,055,932
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 906,588 1,110,280 2,939,657 3,306,525
Federal Home Loan Bank advances 233,597 355,788 747,342 1,136,434
----------- ----------- ----------- -----------
Total interest expense 1,140,185 1,466,068 3,686,999 4,442,959
----------- ----------- ----------- -----------
NET INTEREST INCOME 717,813 517,506 2,103,566 1,612,973
PROVISION FOR LOAN LOSSES 15,000 200,815 45,000 210,815
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 702,813 316,691 2,058,566 1,402,158
----------- ----------- ----------- -----------
OTHER INCOME:
Service fees (15,363) 88,026 26,900 135,589
Gain on sale of loans 12,923 69,977 42,805 86,609
Realized market adjustment on loans 7,484 12,096 15,558 22,787
Other 12,950 13,024 45,375 23,051
----------- ----------- ----------- -----------
Total other income 17,994 183,123 130,638 268,036
----------- ----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 302,963 322,124 973,311 800,077
Advertising 83,079 37,714 294,056 138,924
Federal insurance premiums 11,583 18,919 49,493 34,184
Occupancy expense 48,218 49,481 148,274 150,906
Data processing expense 43,867 42,791 132,320 112,552
Directors fees 22,565 29,114 71,578 82,852
Professional fees 55,932 30,010 251,755 88,336
Other general and administrative expenses 63,775 76,983 254,623 159,880
----------- ----------- ----------- -----------
Total other expenses 631,982 607,136 2,175,410 1,567,711
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE (PROVISION) BENEFIT
FOR INCOME TAXES 88,825 (107,322) 13,794 102,483
(PROVISION) BENEFIT FOR INCOME TAXES (37,300) 45,000 (5,800) (43,000)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 51,525 $ (62,322) $ 7,994 $ 59,483
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.05 N/A $ 0.01 N/A
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common
Stock
Acquired Unrealized
Additional by Stock Losses on Total
Common Paid-in Benefit Retained Available for Stockholders'
Stock Capital Plans Earnings Sale Securities Equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $11,570 $10,966,430 ($833,040) $5,954,114 ($1,263) $16,097,811
Net income for the nine months ended
September 30, 1998 (unaudited) 7,994 7,994
Refund of stock conversion costs (unaudited) 175 175
Change in unrealized losses on available for
sale securities, net of tax (unaudited) (4,009) (4,009)
-------- ----------- --------- ------------ ----------- ------------
BALANCE, SEPTEMBER 30, 1998 (unaudited) $11,570 $10,966,605 ($833,040) $5,962,108 ($5,272) $16,101,971
======== =========== ========= ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine-month Period Ended
September 30,
----------------------------
1998 1997
(Unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 7,994 $ 59,483
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 77,735 89,565
Provision for loan losses 45,000 210,815
Gain on sale of loans (42,805) (84,518)
Gain on real estate acquired through foreclosure (8,815)
Loss on disposal of premises and equipment 7,635
Realized market adjustment on loans (15,558) (22,787)
Charge-off of loans receivable (42,753)
Amortization of:
Deferred loan fees (152,314) (75,250)
Discount on investment and
mortgage-backed securities 32,074 (4,458)
Changes in assets and liabilities which
provided (used) cash:
Accrued interest receivable 76,839 61,040
Mortgage servicing rights 38,171 (66,951)
Prepaid expenses and other assets 177,589 (254,762)
Accrued interest payable (116,829) 14,827
Accounts payable and accrued expenses (351,655) 172,246
Income taxes 62,277 53,299
Deferral of loan fees 87,877 78,847
------------ ------------
Net cash provided by (used in) operating activities (117,538) 231,396
------------ ------------
INVESTING ACTIVITIES:
Proceeds from maturity of investments 2,500,000 2,000,000
Principal collected on long-term loans
and mortgage-backed securities 18,833,837 9,983,631
Long-term loans originated (13,378,079) (10,092,632)
Proceeds from sale of loans 3,752,946 6,722,130
Additions to real estate acquired through foreclosure (233,694)
Proceeds from sale of real estate owned 142,938
Redemption of Federal Home Loan Bank stock 549,800
Purchase of Federal Home Loan Bank stock (109,800)
Purchase of investments (2,327,318) (995,175)
Purchases of premises and equipment (128,603) (60,754)
------------ ------------
Net cash provided by investing activities 9,162,027 7,997,200
------------ ------------
FINANCING ACTIVITIES:
Net decrease in deposits (7,932,381) (710,999)
Decrease in advances by borrowers for taxes
and insurance (563,963) (533,279)
Proceeds from Federal Home Loan Bank advances 2,000,000 46,345,726
Repayments of Federal Home Loan Bank advances (5,314,355) (51,045,726)
Refund of conversion costs 175
------------ ------------
Net cash used in financing activities (11,810,524) (5,944,278)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,766,035) 2,284,318
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 15,199,726 2,643,452
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 12,433,691 $ 4,927,770
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,803,828 $ 4,428,133
============ ============
Income taxes $ 4,764 $ 14,967
============ ============
Transfers of loans receivable into real estate owned $ 233,694 $
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
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 presentation of results for the unaudited interim periods.
The results of operations for the three and nine month periods ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the fiscal year ending December 31, 1998. The consolidated
financial statements presented herein should be read in conjunction with
the audited consolidated financial statements and related notes thereto
included in the Company's Form 10-KSB dated April 15, 1998.
Delaware First Financial Corporation (the "Company") was formed in
September 1997, as a Delaware corporation to be the holding company for
Delaware First 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.
Certain items in the 1997 financial statements have been reclassified to
conform with the presentation in the 1998 financial statements.
2. 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>
5
<PAGE>
3. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-----------------------------------------------------------------------------------------
Gross Approximate Gross Approximate
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Loss Value Cost Gain/(Loss) Value
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
FHLMC pass-through certificates $ 355,004 $ (468) $ 354,536 $ 168,757 $ 1,687 $ 170,444
Collateralized Mortgage Obligations 3,059,090 (6,785) 3,052,305 1,734,250 (3,708) 1,730,542
---------- -------- ----------- ----------- -------- -----------
Total $3,414,094 $ (7,253) $ 3,406,841 $ 1,903,007 $ (2,021) $ 1,900,986
========== ======== =========== =========== ======== ===========
</TABLE>
4. LOANS RECEIVABLE
Loans receivable consist of the following:
September 30, December 31,
1998 1997
------------ ------------
First mortgage loans (primarily one-
to four-family residential) $ 70,132,667 $ 79,244,982
Loans on savings accounts 627,036 749,969
Home equity loans - fixed rate 7,541,063 7,413,485
Equity lines of credit - variable rate 2,379,278 2,946,938
Small business loans 344,011
------------ ------------
Total 81,024,055 90,355,374
Less:
Allowance for loan losses (465,062) (462,815)
Deferred loan fees (853,105) (959,350)
------------ ------------
Total $ 79,705,888 $ 88,933,209
============ ============
6
<PAGE>
The following is an analysis of the allowance for loan losses:
Nine Months Ended
September 30,
----------------------
1998 1997
--------- ---------
Balance, beginning of period $ 462,815 $ 247,000
Provision charged to operations 45,000 210,815
Charge-offs (42,753) --
--------- ---------
Balance, end of period $ 465,062 $ 457,815
========= =========
Loans delinquent more than 90 days are placed on nonaccrual status.
Interest reserved from these loans amounted to $11,133 and $18,459 at
September 30, 1998 and December 31, 1997, respectively.
5. DEPOSITS
Deposits by stated type are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------ -----------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Demand deposit accounts $ 1,315,365 1.9% $ 1,063,720 1.4%
Passbook accounts 1,762,239 2.5 2,494,272 3.2
Money market deposit accounts: 6,871,742 10.0 8,532,239 11.1
91-day to five-year money market
certificates: 59,001,474 85.6 64,792,970 84.3
---------- ---- ---------- ----
Total $68,950,820 100.0% $76,883,201 100.0%
=========== ===== =========== =====
</TABLE>
6. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, effective January 1, 1998. The statement
requires disclosure of amounts from transactions and other events which
are currently excluded from the statement of operations and are recorded
directly to stockholders' equity. Total comprehensive income for the nine
month periods ended September 30, 1998 and 1997 amounted to income of
$3,985 and $69,624, respectively. Total comprehensive income for the three
month periods ended September 30, 1998 and 1997 amounted to income of
$43,619 and a loss of $59,729, respectively.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets decreased $12.3 million or 10.8% to $101.1 million at
September 30, 1998 compared to $113.3 million at December 31, 1997. Such
decrease was primarily due to decreases in investment securities available for
sale, cash and cash equivalents, and loans receivable, offset somewhat by
increases in mortgage-backed securities. Total liabilities decreased $12.2
million or 12.6% to $85.0 million at September 30, 1998. Such decrease was
primarily due to a decrease in both deposits and advances from the Federal Home
Loan Bank ("FHLB") of Pittsburgh. Stockholders' equity amounted to $16.1 million
at September 30, 1998 and December 31, 1997.
Results of Operations for the Three and Nine Months Ended September 30, 1998 and
1997.
General. Net income amounted to $52,000 for the three months ended
September 30, 1998 compared to a net loss of $62,000 for the third quarter of
1997. Net income amounted to $8,000 for the nine months ended September 30, 1998
compared to net income of $59,000 for the nine months ended September 30, 1997.
The net income for the three months ended September 30, 1998 compared to a net
loss in the same period in 1997, was primarily due to an increase in net
interest income from $518,000 for the three months ended September 30, 1997, to
$718,000 for the three months ended September 30, 1998. The $51,000 decrease in
net income for the nine months ended September 30, 1998 was primarily due to an
increase in other expenses from $1,568,000 for the nine months ended September
30, 1997 to $2,175,000 for the nine months ended September 30, 1998, which was
partially offset by an increase in net interest income of $491,000and a decrease
in the provision for loan losses of $166,000.
Net Interest Income. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. Net interest income increased $200,000 or 38.7% to $718,000 for the
three months ended September 30, 1998 compared to $518,000 for the same period
in 1997. Net interest income increased $491,000or 30.4% to $2,104,000 for the
nine months ended September 30, 1998 compared to $1,613,000 for the same period
in 1997. These significant increases in net interest income were due to actions
taken by the Bank to reduce its interest rate risk exposure and investing the
proceeds received from the stock conversion in interest-earning assets. Such
actions included repaying FHLB advances and reducing higher rate certificates of
deposit. The interest rate spread increased from 1.71% at September 30, 1997 to
1.86% at September 30, 1998.
Interest Income. Total interest income was $1.9 million for the three
months ended September 30, 1998 compared to $2.0 million for the same period in
1997 representing a decrease of $126,000 or 6.3%. Interest income was $5.8
million for the nine months ended September 30, 1998 compared to $6.1 million
for the same period in 1997 representing a decrease of $265,000 or 4.4%. The
decrease in interest income on loans for both periods in 1998 is due to a
decrease in the average balance of such assets and was offset somewhat by an
increase in interest and dividends on investments as a result of an increase in
the average balance of such assets. The balance of loans receivable decreased
due to an increase in loan prepayments. The increase in interest income on
investments for both periods in 1998 was due to the increase in the balance of
such assets due to the proceeds received in the Conversion.
8
<PAGE>
Interest Expense. Interest expense decreased $326,000 or 22.2% to $1.1
million for the three months ended September 30, 1998 compared to $1.5 million
for the comparable period in 1997. For the nine months ended September 30, 1998,
interest expense decreased $756,000 or 17.0% to $3.7 million from $4.4 million
for the nine months ended September 30, 1997. Such decreases were primarily due
to a decrease in interest expense on advances from the FHLB of Pittsburgh and on
deposits as a result of a decrease in the average balance of such liabilities
and a decrease in the average rate paid on these liabilities.
Provision for Loan Losses. The provision for loan losses decreased to
$15,000 for the three months ended September 30, 1998 compared to the $201,000
provision for the third quarter ended September 30, 1997. For the nine months
ended September 30, 1998 the provision for loan losses amounted to $45,000
compared to $211,000 for the same period in 1997. The allowance for loan losses
is increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic evaluation of the adequacy of the allowance
is based on the Bank's past loan 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.
Other Income. Other income decreased $165,000 or 90.2% to $18,000 for
the three months ended September 30, 1998 compared to the same period in 1997
due to a decrease in gains on loans sold and servicing fees. The decrease in
servicing fees was due to an increase mortgage loan prepayments. As a result of
increased mortgage loan prepayments, amortization of mortgage servicing rights
was increased. Other income decreased $137,000 or 51.3% to $131,000 for the nine
months ended September 30, 1998 compared to the same period in 1997 due
primarily to a decrease in gains on loans sold and servicing fees. The decrease
in servicing fees was due to an increase mortgage loan prepayments. As a result
of increased mortgage loan prepayments, amortization of mortgage servicing
rights was increased.
Other Expenses. Other expenses increased $25,000 or 4.1% to $632,000 for
the three months ended September 30, 1998 compared to the same period in 1997.
Other expenses increased $608,000 or 38.8% to $2.2 million for the nine months
ended September 30, 1998 compared to the same period in 1997. The $25,000
increase in other expenses for the three months ended September 30, 1998, as
compared to the third quarter of 1997 was primarily due to increases in
advertising and professional fees. Advertising expenses for the three months
ended September 30, 1998 were higher due to increased advertising in introducing
new products. Professional fees increased for the three months ended September
30, 1998 due to fees charged by outside professional firms in connection with
reporting and other obligations associated with being a public company. The
$608,000 increase in other expenses for the nine months ended September 30, 1998
was primarily due to increases in salaries and employee benefits, advertising,
professional fees and other general and administrative expenses. The increase in
salaries and benefits was primarily due to costs related to the resignation of
the Company's president. The increase in advertising expense was due primarily
to increased advertising in introducing new products. The increase in
professional fees was due to additional legal expenses and outside consultants.
Legal fees have increased due to the additional reporting requirements and other
obligations as a public company and expenses related to the severance agreement
with the Company's former president. Consulting fees have been incurred for
branch feasibility and personnel matters. The increase in other general and
administrative expenses was primarily due to expenses incurred as a result of
the Company's annual meeting held in August 1998.
9
<PAGE>
Income Taxes. The provision for income taxes amounted to a provision of $37,000
and a benefit of $45,000 for the three months ended September 30, 1998 and 1997,
respectively, resulting in effective tax rates of 42.0% and (41.9%),
respectively. The provision for income taxes amounted to $6,000 and $43,000 for
the nine months ended September 30, 1998 and 1997, respectively, resulting in an
effective tax rate of 42.0% for both periods.
Liquidity and Capital Resources
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's primary
sources of funds are deposits, borrowings, amortization, prepayments and
maturities of outstanding loans, sales of loans, maturities of investment
securities and other short-term investments and funds provided from operations.
Although scheduled loan amortization and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. The Bank manages the pricing of its
deposits to maintain a steady deposit balance. In addition, the Bank invests
excess funds in overnight deposits and other short-term interest-earning assets
which provide liquidity to meet lending requirements. The Bank generally has
been able to generate enough cash through the retail deposit market, its
traditional funding source, to offset the cash utilized in investing activities.
As an additional source of funds, the Bank may borrow from the FHLB of
Pittsburgh and has access to the Federal Reserve discount window. At September
30, 1998, the Bank had $14.1 million of outstanding advances from the FHLB of
Pittsburgh.
As of September 30, 1998, the Bank's regulatory capital was in excess of
all applicable regulatory requirements. At September 30, 1998, the Bank's
tangible, core and risk-based capital ratios amounted to 13.2%, 13.2% and 24.0%,
respectively, compared to regulatory requirements of 1.5%, 3.0% and 8.0%,
respectively.
10
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein
have been prepared in accordance with instructions to Form 10-QSB, which require
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than does the
effect of inflation.
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 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 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 Bank with
frequent updates regarding their progress. The service bureau has advised the
Bank that it expects to have the majority of the Year 2000 issues resolved
before the end of 1998. The Bank tested their system for Year 2000 compliance
during the third quarter of 1998 with no exceptions noted. The Bank presently
believes that, based on the progress of the Bank's service bureau, the Year 2000
problem will not pose significant operational problems for the Bank's computer
system. Costs are anticipated to be immaterial at this time.
Forward-Looking Statements
This form 10-QSB 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 and information currently available to
management. In addition, in this document, the words "anticipate," "believe,"
"estimate," "except," "intend," "should," and similar expressions, or the
negative thereof, as they relate to the Company or 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.
11
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
For a discussion of the Company's asset and liability management
policies as well as the potential impact of interest rate changes upon the
market value of the Bank's portfolio equity, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1997
Annual Report to Stockholders. There has been no material change in the
Company's asset and liability position or the market value of the Bank's
portfolio equity since December 31, 1997.
DELAWARE FIRST FINANCIAL CORPORATION AND SUBSIDIARY
Part II
Item 1. Legal Proceedings
Neither the Corporation nor the Bank is involved in any pending legal
proceedings other than non-material legal proceedings occurring in the
ordinary course of business.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On August 19, 1998, the Annual Meeting of stockholders of the Company
was held to elect one director, to approve the 1998 Stock Option Plan,
to approve the 1998 Recognition and Retention Plan and Trust Agreement,
and to ratify appointment of the Company's independent auditors.
With respect to the election of Ernest J. Peoples as director, the
results were as follows: 862,098 Votes For and 200,464 Votes Withheld.
With respect to the approval of the 1998 Stock Option Plan, the results
were as follows: 428,744 Votes For, 251,850 Votes Against, 77,750 Votes
Abstaining, and 304,218 Non-Votes.
12
<PAGE>
With respect to the approval of the 1998 Recognition and Retention Plan
and Trust Agreement, the results were as follows: 398,551 Votes For,
280,509 Votes Against, 76,385 Votes Abstaining, and 307,117 Non-Votes.
With respect to the ratification of Deloitte and Touche LLP as the
Company's independent auditors, the results were as follows: 960,535
Votes For, 29,127 Votes Against, and 72,900 Votes Abstaining.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
13
<PAGE>
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: November 13, 1998 By: /s/Ernest J. Peoples
-----------------------------------
Ernest J. Peoples
President
Date: November 13, 1998 By: /s/Lori N. Richards
-----------------------------------
Lori N. Richards
Secretary and Treasurer
(principal accounting officer)
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