<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 June 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)
<TABLE>
<S> <C>
- --------------------------------------------------------------- --------------------
Delaware 52-2063973
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
- --------------------------------------------------------------- --------------------
400 Delaware Avenue
Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
</TABLE>
(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 August 14,
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
Page
----
Part I. Financial Information
- ------- ---------------------
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1997 and June 30, 1998 (unaudited) 1
Consolidated Statements of Operations for the three and six
months ended June 30, 1998 (unaudited) and 1997 (unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the six
months ended June 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 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 12,595,509 $ 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, $3,792,386; 1997, $1,903,007) 3,797,110 1,900,986
Loans receivable - net 82,019,672 88,933,209
Loans held for sale 947,200
Federal Home Loan Bank stock - at cost 975,000 975,000
Accrued interest receivable:
Loans 781,968 823,266
Investments 45,000 81,353
Mortgage-backed securities 19,584 6,902
Office property and equipment, net 2,020,525 1,956,404
Prepaid expenses and other assets 170,058 291,613
Prepaid income taxes 128,751 115,316
Mortgage servicing rights 372,216 371,361
Deferred income taxes 177,066 177,429
------------- -------------
TOTAL ASSETS $ 104,049,659 $ 113,332,425
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 70,235,813 $ 76,883,201
Advances from Federal Home Loan Bank 14,100,000 17,400,000
Advances by borrowers for taxes and insurance 1,781,058 835,417
Accrued interest payable 269,044 358,171
Accounts payable and accrued expenses 1,605,392 1,757,825
------------- -------------
Total liabilities 87,991,307 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 gains/(losses) on available for sale securities, net of tax 2,634 (1,263)
Retained earnings-substantially restricted 5,910,583 5,954,114
------------- -------------
Total stockholders' equity 16,058,352 16,097,811
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 104,049,659 $ 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 Six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 1,679,763 $ 1,928,223 $ 3,408,507 $ 3,797,980
Interest on mortgage-backed securities 53,552 3,360 93,203 6,821
Interest and dividends on investments 210,666 136,178 430,857 267,555
--------- -------- --------- ---------
Total interest income 1,943,981 2,067,761 3,932,567 4,072,356
--------- -------- --------- ---------
INTEREST EXPENSE:
Deposits 975,487 1,107,370 2,033,069 2,196,245
Federal Home Loan Bank advances 252,401 393,622 513,745 780,646
--------- -------- --------- ---------
Total interest expense 1,227,888 1,500,992 2,546,814 2,976,891
--------- -------- --------- ---------
NET INTEREST INCOME 716,093 566,769 1,385,753 1,095,465
PROVISION FOR LOAN LOSSES 15,000 10,000 30,000 10,000
--------- -------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 701,093 556,769 1,355,753 1,085,465
--------- -------- --------- ---------
OTHER INCOME:
Service fees 26,726 36,099 42,263 63,928
Gain on sale of loans 22,391 9,715 29,882 16,632
Realized market adjustment on loans 4,726 (5,292) 8,074 10,691
Other 19,950 11,419 32,425 10,027
--------- -------- --------- ---------
Total other income 73,793 51,941 112,644 101,278
--------- -------- --------- ---------
OTHER EXPENSES:
Salaries and employee benefits 398,769 252,880 670,348 494,319
Advertising 125,447 50,468 210,977 101,211
Federal insurance premiums 19,579 12,782 37,910 15,265
Occupancy expense 48,685 51,081 100,056 101,425
Data processing expense 40,143 35,789 88,453 72,261
Directors fees 19,190 27,797 49,013 53,738
Professional fees 136,552 28,627 175,394 39,609
Other general and administrative expenses 127,405 53,281 211,277 99,111
--------- -------- --------- ---------
Total other expenses 915,770 512,705 1,543,428 976,939
--------- -------- --------- ---------
INCOME (LOSS) BEFORE (PROVISION) BENEFIT
FOR INCOME TAXES (140,884) 96,005 (75,031) 209,804
--------- -------- --------- ---------
(PROVISION) BENEFIT FOR INCOME TAXES 59,200 (40,000) 31,500 (88,000)
--------- -------- --------- ---------
NET INCOME (LOSS) $ (81,684) $ 56,005 $ (43,531) $ 121,804
========= ======== ========= =========
BASIC EARNINGS (LOSS) PER SHARE $ (0.08) N/A $ (0.04) 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 Gains/(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 loss for the six months ended
June 30, 1998 (unaudited) (43,531) (43,531)
Refund of stock conversion costs (unaudited) 175 175
Change in unrealized gains/(losses) on available for
sale securities, net of tax (unaudited) 3,897 3,897
-------- ----------- --------- ---------- ------- -----------
BALANCE, JUNE 30, 1998 (unaudited) $11,570 $10,966,605 ($833,040) $5,910,583 $2,634 $16,058,352
======= =========== ========= ========== ======= ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-month Period Ended
June 30,
------------------------------------
1998 1997
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (43,531) $ 121,804
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 51,775 58,078
Provision for loan losses 30,000 10,000
Gain on sale of loans (29,882) (16,632)
Gain on real estate acquired through foreclosure (8,815)
Loss on disposal of premises and equipment 7,635
Realized market adjustment on loans (8,074) (10,691)
Charge-off of loans receivable (41,468)
Amortization of:
Deferred loan fees (121,138) (40,989)
Discount on investment and
mortgage-backed securities 10,835 (3,899)
Changes in assets and liabilities which
provided (used) cash:
Accrued interest receivable 64,969 (24,900)
Mortgage servicing rights (855) (5,098)
Prepaid expenses and other assets 121,555 (20,515)
Accrued interest payable (89,127) 10,697
Accounts payable and accrued expenses (152,433) (587,603)
Income taxes (13,435) 103,286
Deferral of loan fees 68,992 61,798
----------- -----------
Net cash used in operating activities (152,997) (344,664)
----------- -----------
INVESTING ACTIVITIES:
Proceeds from maturity of investments 2,500,000 500,000
Principal collected on long-term loans
and mortgage-backed securities 12,642,918 6,454,429
Long-term loans originated (8,867,777) (7,999,170)
Proceeds from sale of loans 2,718,456 1,128,181
Redemption of Federal Home Loan Bank stock 277,300
Purchase of Federal Home Loan Bank stock (109,800)
Purchase of investments (2,318,963)
Purchases of premises and equipment (124,282) (20,547)
----------- -----------
Net cash provided by investing activities 6,550,352 230,393
----------- -----------
FINANCING ACTIVITIES:
Net decrease in deposits (6,647,388) (57,430)
Increase in advances by borrowers for taxes
and insurance 945,641 1,066,464
Proceeds from Federal Home Loan Bank advances 38,345,726
Repayments of Federal Home Loan Bank advances (3,300,000) (39,045,726)
Refund of additional conversion costs 175
----------- -----------
Net cash provided by (used in) financing activities (9,001,572) 309,034
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,604,217) 194,763
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 15,199,726 2,643,452
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $12,595,509 $ 2,838,215
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,635,941 $ 2,966,194
=========== ===========
Income taxes $ 3,176 $ 9,978
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
SIX-MONTH PERIODS ENDED JUNE 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 six month periods ended June
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. The Bank is
evaluating sites for additional branch locations. No formal agreements
have been made in this regard, and there are no plans for other forms of
diversification or acquisition.
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>
June 30, 1998 December 31, 1997
------------------------------------------- -------------------------------------------
Gross Approximate Gross Approximate
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gain Value Cost Gain/(Loss) Value
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
FHLMC pass-through certificates $ 405,127 $ 583 $ 405,710 $ 168,757 $ 1,687 $ 170,444
Collateralized Mortgage Obligations 3,387,259 4,141 3,391,400 1,734,250 (3,708) 1,730,542
------------------------------------------- --------------------------------------------
Total $ 3,792,386 $ 4,724 $ 3,797,110 $ 1,903,007 $ (2,021) $ 1,900,986
</TABLE>
4. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------------ -----------------
<S> <C> <C>
First mortgage loans (primarily one-
to four-family residential) $ 72,885,653 $ 79,244,982
Loans on savings accounts 669,643 749,969
Home equity loans - fixed rate 7,268,411 7,413,485
Equity lines of credit - variable rate 2,525,734 2,946,938
------------ ------------
Total 83,349,441 90,355,374
Less:
Allowance for loan losses (451,347) (462,815)
Deferred loan fees (878,422) (959,350)
------------ ------------
Total $ 82,019,672 $ 88,933,209
============ ============
</TABLE>
6
<PAGE>
The following is an analysis of the allowance for loan losses:
Six Months Ended
June 30,
-------------------------
1998 1997
Balance, beginning of period $ 462,815 $ 247,000
Provisions charged to operations 30,000 10,000
Charge-offs (41,468) -
--------- ---------
Balance, end of period $ 451,347 $ 257,000
Loans delinquent more than 90 days are placed on nonaccrual status.
Interest reserved from these loans amounted to $16,804 and $18,459 at
June 30, 1998 and December 31, 1997, respectively.
5. DEPOSITS
Deposits by stated type are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-------------------------- --------------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Demand deposit accounts $ 1,233,525 1.8 % $ 1,063,720 1.4 %
Passbook accounts 2,017,248 2.9 2,494,272 3.2
Money market deposit accounts: 7,308,986 10.4 8,532,239 11.1
91-day to five-year money market
certificates: 59,676,054 84.9 64,792,970 84.3
------------ ----- ------------ -----
Total $ 70,235,813 100.0 % $ 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 six
month periods ended June 30, 1998 and 1997 amounted to a loss of $39,634
and income of $129,352, respectively. Total comprehensive income for the
three month periods ended June 30, 1998 and 1997 amounted to a loss of
$80,589 and income of $66,398, respectively.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets decreased $9.3 million or 8.2% to $104.0 million at June
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 $9.2 million or 9.5%
to $88.0 million at June 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 June
30, 1998 and December 31, 1997.
Results of Operations for the Three and Six Months Ended June 30, 1998 and
1997.
General. Net losses amounted to $82,000 for the three months ended June
30, 1998 compared to net income of $56,000 for the second quarter of 1997. Net
losses amounted to $43,000 for the six months ended June 30, 1998 compared to
net income of $122,000 for the six months ended June 30, 1997. A significant
portion of these decreases was attributed to one-time charges incurred during
the second quarter related to the resignation of the Company's president.
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 $149,000 or 26.3%
to $716,000 for the three months ended June 30, 1998 compared to $567,000 for
the same period in 1997. Net interest income increased $290,000 or 26.5% to
$1,386,000 for the six months ended June 30, 1998 compared to $1,095,000 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. Such actions included repaying FHLB advances and reducing higher
rate certificates of deposit. The interest rate spread increased from 1.74% at
June 30, 1997 to 1.79% at June 30, 1998.
Interest Income. Total interest income was $1.9 million for the three
months ended June 30, 1998 compared to $2.1 million for the same period in
1997 representing a decrease of $124,000 or 6.0%. Interest income was $3.9
million for the six months ended June 30, 1998 compared to $4.1 million for
the same period in 1997 representing a decrease of $140,000 or 3.4%. The
decrease in interest income on loans for both periods in 1998, due to a
decrease in the average balance of such assets, was substantially offset 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 investment in
such assets of a portion of the proceeds received in the Conversion. These
proceeds are currently earning interest and have not yet been fully utilized
in the Bank's expansion efforts.
8
<PAGE>
Interest Expense. Interest expense decreased $273,000 or 18.2% to $1.2
million for the three months ended June 30, 1998 compared to $1.5 million for
the comparable period in 1997. For the six months ended June 30, 1998,
interest expense decreased $430,000 or 14.4% to $2.5 million from $3.0 million
for the six months ended June 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.
Proceeds from mortgage loan prepayments and excess funds have been used to
repay FHLB advances as they became due.
Provision for Loan Losses. The provision for loan losses increased to
$15,000 for the three months ended June 30, 1998 compared to the $10,000
provision for the second quarter ended June 30, 1997. For the six months ended
June 30, 1998 the provision for loan losses amounted to $30,000 compared to
$10,000 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 increased $22,000 or 42.1% to $74,000 for the
three months ended June 30, 1998 compared to the same period in 1997 due to an
increase in gains on loans sold. Other income increased $11,000 or 11.2% to
$113,000 for the six months ended June 30, 1998 compared to the same period in
1997 due to an increase in loans sold and due to an adjustment made to reflect
a loss on the sale of investment securities.
Other Expenses. Other expenses increased $403,000 or 78.6% to $916,000
for the three months ended June 30, 1998 compared to the same period in 1997.
Other expenses increased $566,000 or 58.0% to $1.5 million for the six months
ended June 30, 1998 compared to the same period in 1997. Such increases were
primarily due to increases in salaries and employee benefits, advertising 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 of 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
associated with the Company's annual meeting.
9
<PAGE>
Income Taxes. The provision for income taxes amounted to a benefit of
$59,000 and a provision of $40,000 for the three months ended June 30, 1998
and 1997, respectively, resulting in effective tax rates of (42.0%) and 41.7%,
respectively. The provision for income taxes amounted to a benefit of $32,000
and a provision of $88,000 for the six months ended June 30, 1998 and 1997,
respectively, resulting in effective tax rates of (42.0%) and 41.9%,
respectively.
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 June 30, 1998, the Bank had $14.1 million of outstanding advances
from the FHLB of Pittsburgh.
As of June 30, 1998, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At June 30, 1998, the Bank's tangible,
core and risk-based capital ratios amounted to 12.8%, 12.8% and 23.3%,
respectively, compared to regulatory requirements of 1.5%, 3.0% and 8.0%,
respectively.
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.
10
<PAGE>
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 to allow the Bank to test their system for Year 2000
compliance during the third quarter of 1998. 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-Q 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 those and other portions of 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
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
The following 8-K report was filed during this reporting period:
May 26, 1998 Resignation of Ronald P. Crouch as
President and Chief Executive Officer
and appointment of Ernest J. Peoples
as interim President and Chief
Executive Officer.
12
<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: August 14, 1998 By: /s/Ernest J. Peoples
---------------------
Ernest J. Peoples
President
Date: August 14, 1998 By: /s/Lori N. Richards
-------------------
Lori N. Richards
Secretary and Treasurer
(principal accounting officer)
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