U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1998
OR
[_] Transition report under Section 13 or 15(d) of the Securities and Exchange
Act of 1934
Commission File No.: 0-23499
DELAWARE FIRST FINANCIAL CORPORATION
(Name of Small Business Issuer in Its Charter)
Delaware 52-2063973
(State of Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
400 Delaware Avenue, Wilmington, Delaware 19801
(Address of Principal (Zip Code)
Executive Offices)
Issuer's Telephone Number, Including Area Code: (302) 421-9090
Securities registered under Section 12(b) of the Exchange Act:
Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock (par value $.01 per share)
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $3.0 million.
As of March 25, 1999, the aggregate value of the 1,059,143 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
97,857 shares held by all directors and executive officers of the Registrant and
the Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was
approximately $14.9 million. This figure is based on the closing sales price of
$14.062 per share of the Registrant's Common Stock on March 25, 1999. Although
directors and executive officers and the ESOP were assumed to be "affiliates" of
the Registrant for purposes of this calculation, the classification is not to be
interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of March 25, 1999: 1,157,000
Transitional Small Business Disclosure Format: Yes [_] No [X]
<PAGE>
PART I
Item 1. Business
General
Delaware First Financial Corporation (the "Company") is a
Delaware-chartered savings and loan holding company and the sole stockholder of
Delaware First Bank, FSB (the "Savings Bank"). The only significant assets of
the Company are the capital stock of the Savings Bank, the Company's loan to the
Employee Stock Ownership Plan ("ESOP") and the portion of the proceeds retained
by the Company in connection with the Savings Bank's conversion to stock form,
discussed below. The business of the Company currently consists of the business
of the Savings Bank. At December 31, 1998, the Company had total assets of $98.8
million, total deposits of $66.3 million, and total stockholders' equity of
$16.3 million or 16.5% of total assets.
On November 18, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with The Crown Group, Inc.("Crown"),
Casselberry, Florida, pursuant to which Crown will acquire the Company and the
Savings Bank. The Agreement was subsequently amended and restated as of February
17, 1999. The Agreement provides for the exchange of each share of the Company's
issued and outstanding common stock for $15.50. The acquisition is contingent
upon receipt of approvals from regulatory authorities and the Company's
stockholders. It is presently anticipated that the transaction will be
consummated in the second quarter of calendar year 1999.
The Savings Bank was founded in 1922 as Ninth Ward Building & Loan
Association, a Delaware chartered institution. In 1954, the Savings Bank changed
its name to Ninth Ward Savings & Loan Association. In 1992, the Savings Bank
adopted a federal savings association charter, and changed its name to Ninth
Ward Savings Bank, FSB. The Savings Bank converted from a federally-chartered
mutual savings bank to a federally-chartered capital stock savings bank and
became a wholly-owned subsidiary of the Company in December 1997 (the
"Conversion"). Subsequent to the Conversion, in January 1998, the Savings Bank
changed its name to Delaware First Bank, FSB. The Savings Bank's business has
been conducted from a single location since its inception.
The principal sources of funds for the Savings Bank's activities are
deposits, repayments of loans and mortgage-backed securities, maturities of
investments and interest-bearing deposits, funds provided from operations and
advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh. The Savings
Bank's funds are used principally for the origination of loans secured by first
mortgages on one- to four-family residences which are located in its market
area. Such loans totaled $70.9 million, or 87.4 %, of the Savings Bank's total
loan portfolio at December 31, 1998. The Savings Bank's principal source of
revenue is the interest received on loans, and its principal expense is the
interest paid on deposits and FHLB of Pittsburgh advances.
The Savings Bank is subject to examination and comprehensive regulation by
the Office of Thrift Supervision ("OTS"), which is the Savings Bank's chartering
authority and primary federal
1
<PAGE>
regulator. The Savings Bank is also regulated by the Federal Deposit Insurance
Corporation ("FDIC"), the administrator of the Savings Association Insurance
Fund ("SAIF"). The Savings Bank is also subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System ("FRB") and
is a member of the FHLB of Pittsburgh, which is one of the 12 regional banks
comprising the FHLB System.
The Company's and the Savings Bank's executive office is located at 400
Delaware Avenue, Wilmington, Delaware 19801, and their telephone number is (302)
421-9090.
This Form 10-KSB contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of management
as well as assumptions made by the information currently available to
management. In addition, in those and other portions of this document, the words
"anticipate," "believe," "estimate," "expect," "intend," "should," and similar
expressions, or the negative thereof, as they related to the Company or the
Company's management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
looking events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking
statements.
Market Area
The Savings Bank's primary market area consists of New Castle County,
Delaware. New Castle County, which contains the city of Wilmington, is the site
of incorporation of many of the nation's largest corporations. The largest
industries are service, nondurable goods manufacturing and finance, insurance
and real estate. Agriculture also plays a prominent part in the state's economy.
The Savings Bank is located approximately 15 miles from Newark, Delaware, site
of the University of Delaware. Delaware has two other state supported
institutions and four private schools awarding post-secondary degrees. Owing to
its preferred location as the state of incorporation for many of the nation's
largest corporations, the city has many law, accounting and consulting firms.
The state of Delaware has the fourth lowest population in the nation but has
both high employment and higher than average income levels.
The state of Delaware has adopted numerous favorable tax laws to attract
and retain businesses. Delaware has no sales tax and a relatively low real
property tax. Additionally, the state has a regressive bank franchise tax which
is favorable for large financial institutions. Several large banking companies
have established headquarters and other facilities here for credit card
operations. Delaware has also sought to augment the service-based sector of its
economy, having recently adopted a new trust law to facilitate the location of
trusts in Delaware.
Economic growth in the Savings Bank's market area remains dependent upon
the local economy. In addition, the Savings Bank's deposit and loan activity is
significantly affected by
2
<PAGE>
economic conditions in the Savings Bank's market area. Based on the economic
demographic history of the Savings Bank's primary market area, the Savings Bank
expects its market area to be relatively stable in the future. Significant
banking competition, however, will likely cause the cost of funds to remain
relatively high.
Supervisory Agreement
Since May 21, 1997, the Savings Bank has been operating under a Supervisory
Agreement with the OTS. Under the Supervisory Agreement, the Savings Bank has
agreed to take actions to improve its compliance with certain OTS regulations in
the area of interest rate risk, develop a three year business plan, implement
and periodically follow up on the Savings Bank's interest rate risk policy,
establish procedures providing for detailed minutes of Board of Directors and
committee meetings, establish procedures to insure Board members are presented
with sufficient information in order to make informed judgments and improve
regulatory compliance. With regard to interest rate risk management, the Savings
Bank has adopted and submitted to the OTS a revised interest rate risk policy
and undertaken certain actions including the sale of fixed rate mortgage loans
to the Federal Home Loan Mortgage Corporation ("FHLMC") and lengthening the
maturities of certain FHLB advances. The Supervisory Agreement also required
that the Savings Bank submit a three year written Business Plan to the OTS which
addresses goals and strategies for improving and sustaining earnings. The
Business Plan is required to identify major areas for improving operating
performance and achieving and maintaining adequate levels of capital while
addressing operating expenses (including management compensation), the Savings
Bank's cost of funds and asset growth. The Business Plan is required to be
updated annually and reviewed by the Savings Bank's Board of Directors at least
quarterly. Pursuant to the requirements of the Supervisory Agreement, the
Business Plan was submitted to the OTS regional office on August 28, 1997. The
Supervisory Agreement also required the OTS be notified 30 days before a new
director or executive officer is appointed. Further, the Savings Bank must
provide notice to the OTS prior to extending, renewing, reviewing or entering
into any compensation or benefit-related contract with a senior executive
officer or director of the Savings Bank. The Supervisory Agreement will remain
in effect until terminated by the OTS.
Due to the planned acquisition of the Company by Crown, the provision in
the Supervisory Agreement requiring annual updates of the Company's business
plan has been waived as long as the Agreement remains in effect. All other
provisions of the Supervisory Agreement remain in effect.
3
<PAGE>
Lending Activities
The following table sets forth information concerning the types of loans
held by the Company:
<TABLE>
<CAPTION>
Composition of Loan Portfolio
---------------------------------------------------------------
December 31,
---------------------------------------------------------------
1998 1997
---------------------------- -----------------------------
Percent of Percent of
Amount Total Amount Total
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Real estate loans:
Residential mortgage $70,855,074 87.44% $79,244,982 89.11%
----------- ------ ----------- ------
Total real estate loans 70,855,074 87.44 79,244,982 89.11
Other loans:
Deposit accounts 630,761 0.78 749,969 0.84
Small business loans 774,746 0.95 0 0.00
Home equity loans 7,556,783 9.33 7,413,485 8.34
Equity lines of credit 2,551,908 3.15 2,946,938 3.31
----------- ------ ----------- ------
Total other loans 11,514,198 14.21 11,110,392 12.49
----------- ------ ----------- ------
Total loans, gross 82,369,272 101.65 90,355,374 101.60
----------- ------ ----------- ------
Less:
Unamortized loan fees 852,604 1.05 959,350 1.08
Allowance for loan losses 489,355 0.60 462,815 0.52
----------- ------ ----------- ------
Total loans, net $81,027,313 100.00% $88,933,209 100. 0%
=========== ====== =========== ======
</TABLE>
The Company is currently servicing loans for the benefit of others. Such
loans totaled $51.8 million, $56.7 million and $54.3 million at December 31,
1998, 1997 and 1996, respectively. Servicing loans for others generally consists
of collecting mortgage payments, maintaining escrow accounts, disbursing
payments to investors and foreclosure processing. Loan servicing fees generated
by these activities were $56,000, $105,000 and $190,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Additionally, at December 31,
1998, the Company had outstanding loan origination commitments of $1,474,000 for
fixed and adjustable rate loans with rates ranging from 5.50% to 9.95%. These
commitments are expected to be funded within one year. Commitments are issued in
accordance with the same loan policies and underwriting standards as settled
loans.
The following table sets forth the estimated maturity of the Company's
gross loan portfolio at December 31, 1998. Scheduled contractual principal
repayments of loans do not reflect the actual life of such assets. The actual
life of the loan is substantially less than its contractual terms because of
prepayments. In addition, due on sale clauses on loans generally give the
Company the right to declare loans immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase, however, when the current mortgage loan market rates are substantially
higher
4
<PAGE>
than rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are substantially higher than current mortgage loan
market rates. All mortgage loans are shown as maturing based on the date of the
last payment required by the loan agreement except as noted.
<TABLE>
<CAPTION>
Contractual Maturity of Loans
---------------------------------------------------------------------------------------
More than More than
Within 6 6 to 12 one year to three years Over 5
months months three years to five years years Total
-------- ------- ----------- ------------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential
Mortgage $ 3 $ 0 $1,239 $3,016 $66,597 $70,855
Deposit accounts 630 0 0 0 0 630
Small business loans 0 177 250 77 271 775
Home equity loans 18 138 1,153 2,610 3,638 7,557
Equity lines of
credit(1) 2,552 0 0 0 0 2,552
------- ------- ------- ------- ------- -------
Total loans $3,203 $315 $2,642 $5,703 $70,506 $82,369
======= ======= ======= ======= ======= =======
</TABLE>
- - ----------
(1) Equity lines of credit are open-ended and have no stated maturity date and
are shown as being due when interest rates are next subject to change.
The following table sets forth the amount of fixed rate and adjustable rate
loans at December 31, 1998 which are due after December 31, 1999:
<TABLE>
<CAPTION>
Loans at 12/31/98 due after 12/31/99
------------------------------------
Fixed Adjustable Total
------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Residential mortgage $63,040 $7,812 $70,852
Small business loans 0 598 598
Deposit account loans 0 0 0
Home equity loans 7,401 0 7,401
Equity lines of credit 0 0 0
------- ------- -------
Total $70,441 $8,410 $78,851
======= ======= =======
Percent of total loans 85.52% 10.21% 95.73%
</TABLE>
5
<PAGE>
The following table sets forth certain information with respect to the
Company's loan origination, purchase and sales activity for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net loans receivable at beginning of period $ 88,933,209 $ 98,042,118 $ 78,835,306
Loans originated:
Real estate loans:
First mortgage loans 13,239,365 6,220,820 31,673,585
Home equity loans 4,131,020 2,267,896 3,139,302
Equity lines of credit 1,770,042 2,103,992 2,691,392
Small business loans 864,505 0 0
Collateral loans 644,112 783,065 713,357
------------ ------------ ------------
Total loans originated $ 20,649,044 $ 11,375,773 $ 38,217,636
Loans purchased:
Participations 67,924 57,371 18,400
------------ ------------ ------------
Total loans purchased $ 67,924 $ 57,371 $ 18,400
Loans sold:
Whole loans $ (5,218,213) (6,812,130) (2,599,494)
Participations 0 0 (2,008,782)
------------ ------------ ------------
Total loans sold $ (5,218,213) $ (6,812,130) $ (4,608,276)
------------ ------------ ------------
Principal repayments $(23,530,448) $(13,618,232) $(15,414,110)
Allowance for losses -(increase) (69,294) (215,815) (47,000)
Reclassifications-Held for Sale 0 0 1,020,000
Other activity, net 195,091 104,124 20,162
------------ ------------ ------------
Net loan increase (decrease) (7,905,896) (9,108,909) 19,206,812
------------ ------------ ------------
Net loans receivable at end of period $ 81,027,313 $ 88,933,209 $ 98,042,118
============ ============ ============
</TABLE>
At December 31, 1998, total loans amounted to $81.0 million of which $70.9
million or 87.4% were first mortgage loans secured by one- to four-family
residences. The majority of the Company's loans have interest rates which are
fixed for the term of the loan ("fixed rate"). To a much lesser extent, when
market conditions are favorable, the Company originates loans with rates of
interest which may adjust from period to period during the term of the loan
("adjustable rate"). The Company's reliance on interest income from fixed rate
loans has made it more susceptible to changes in interest rates and, as a
result, both its capital and its interest income could be adversely affected in
a rising interest rate environment.
The Company obtains mortgage loans from a variety of sources. The most
frequently utilized method of obtaining mortgage loans is through employee
originators who handle telephone calls, walk-in customers and referrals from
real estate brokers.
6
<PAGE>
An appraisal on each property which secures a first mortgage loan made by
the Company is obtained from an independent appraisal firm. These appraisers are
approved by the Savings Bank's Appraisal Committee, and certain appraisals are
reviewed randomly by the Committee throughout the year. Each appraiser must
annually submit updated licenses and evidence of insurance coverage to maintain
their status as an approved appraiser. The appraised value of a property is
determined by a physical inspection of the property and comparison of the
property to at least three comparable properties in the immediate area. The
appraised value is used as a basis for determining loan to value ratios unless
the sale price of the property is less than the appraisal value. In that case,
the sale price is used.
Certain officers of the Savings Bank each individually have lending
authority as defined and approved by the Board of Directors. Limits of this
lending authority are set for the loan amount, loan-to-value ratio, credit
ratios and credit quality. Residential mortgage and home equity loans that fit
within these authority limits are approved by an individual officer or officers.
All other loans are reviewed by a Loan Committee consisting of (1) either the
President, the Executive Vice President or the Vice President of Finance and
Administration; (2) the Vice President of Residential Lending; and (3) the Vice
President of Retail Banking Services. In the case of loans that are reviewed by
the Loan Committee, a majority of the Committee is required for the approval of
a loan. The Vice President of Residential Lending is responsible for maintaining
records of all Loan Committee meetings. A summary report of all loans approved
is submitted to the Board of Directors each month for their ratification.
Promptly after the Company approves a loan it provides a commitment letter
to the borrower which specifies the terms and conditions of the proposed loan
including the amount of the loan, the interest rate, the amortization term, a
brief description of the required collateral and required insurance coverage,
including fire and casualty insurance, and flood insurance as required. The
Company also requires each loan to have title insurance. At December 31, 1998,
the Company had commitments to originate $1,449,000 in mortgage and home equity
loans.
The Company does not purchase whole loans. However, it does occasionally
purchase participation interests in loans. Participation interests in loans are
reviewed and approved by either the Board of Directors or the Executive
Committee. The amount of the loan participation must be approved by the Board of
Directors. For the year ended December 31, 1998, the Company purchased $68,000
of loan participations originated by Delaware Community Investment Corporation
("DCIC").
The Company requires private mortgage insurance on all first mortgage loans
when the loan-to-value ratio exceeds 80%. The Company retains servicing on all
loans originated. From time to time, the Company also sells certain of the loans
or participation interests in loans it originates. The only loans the Company
sells are fixed-rate residential mortgage loans. For the year ended December 31,
1998, the Company sold $5.2 million of such loans. Such loans are sold to either
the FHLMC, Federal National Mortgage Association ("FNMA"), another financial
institution, or a state housing authority.
7
<PAGE>
All loans collateralized by deposits held by the Savings Bank must be
approved by the Customer Service Supervisor, Branch Manager, or their designee.
Loans of this type in excess of $25,000 must be approved by either the Vice
President - Branch Sales Manager, Vice President Retail Banking Services or the
Chief Operating Officer.
Originations, Purchases and Sales of Loans. As a federal association, the
Savings Bank is permitted to make and/or purchase loans nationwide. The Company
originates and purchases participations in loans secured by real estate located
only in its market area. Recently, the Company's purchasing activities have been
limited to purchasing participations from DCIC. The Company makes home mortgage
loans secured by owner and nonowner occupied dwellings as well as second
mortgage loans secured by real estate. The Company also makes small business
loans and loans secured by savings accounts. To a lesser extent, from time to
time, the Company makes construction loans secured by residential real estate or
participates in permanent or construction loans originated by other
federally-insured financial institutions. The Company also participates in
permanent mortgage loans originated by DCIC secured by multi-family dwelling
units. DCIC is a community investment corporation formed to provide financing
for low and moderate income families through a loan pool formed by the
commitment of over 30 banks. The Company purchases participations in loans based
upon its pro-rata share of the total loan pool.
The Company's ability to originate loans is based on several factors. These
include the level of interest rates, the needs of its customers, its asset and
liability funding needs and the success of its marketing efforts. The Company's
mortgage loan originations for the year ended December 31, 1998 were $13.2
million compared to $6.2 million for the year ended December 31, 1997.
One to Four-Family Residential Loans. The Company's primary lending
activity consists of the origination of one to four-family residential mortgage
loans secured by property located in its primary market area. The Company
generally originates conforming one to four-family owner occupied residential
mortgage loans in amounts up to 95% loan-to-value ratio -- 97% in the case of
some first time home buyer programs -- with private mortgage insurance required
on loans with a loan-to-value ratio in excess of 80%. The maximum loan-to-value
ratio on mortgage loans secured by nonowner occupied properties generally is
limited to 75%. The Company primarily originates fixed-rate loans having terms
from five to 30 years, with principal and interest payments calculated using up
to a 30-year amortization period. At December 31, 1998, approximately 11.0% of
the Company's one- to four-family residential loans had adjustable rates of
interest.
Home Equity. The Company's loan portfolio also contains fixed-rate home
equity loans and variable rate equity lines of credit. These loans and lines of
credit totaled $10.1 million and comprised 12.5% of the total loan portfolio at
December 31, 1998.
The Company originates fixed rate home equity loans for a minimum of three
years and a maximum of 15 years in amounts ranging from $5,000 to $150,000. The
maximum loan-to-value ratio is 100%. However, the Company only lends up to 90%
of loan-to-value ratio on loans with first mortgages that have been outstanding
for one year or less. During the year ended December 31,
8
<PAGE>
1998, the Company originated $4.1 million in home equity loans. At December 31,
1998, all of the Company's home equity loans were secured by first or second
mortgages.
The Company also originates variable rate home equity lines of credit.
These lines of credit range in amounts from $10,000 to $100,000 and also require
a perfected second lien on owner occupied real property. For variable rate
equity lines of credit, the maximum loan-to-value ratio is 90%. For the year
ended December 31, 1998, the Company advanced $1.8 million on home equity lines
of credit.
Small Business Loans. On June 1, 1998, the Savings Bank established a Small
Business Banking Division. The purpose of the division was to expand the Savings
Bank's lending activities, diversify the loan portfolio and provide interest
earning assets that were sensitive to interest rate fluctuations. An experienced
commercial lender was hired to develop lending policies and lead the new
division in all aspects of commercial lending. During the first few months of
operation, the new department head developed a Commercial Credit Policy Guide,
set up the operating system to properly process commercial loans and developed a
portfolio of Commercial Lending documents. The Commercial Credit Policy Guide
set parameters and guidelines for credit authority, loan pricing, collateral,
real estate lending and other areas of commercial lending.
Commercial lending activities are limited to customers with total lending
needs of $500,000 or less. All types of loans are considered, including lines of
credit, term loans, time notes, letters of credit and commercial mortgages.
Collateral may include mortgages, vehicles, security agreements and, on
occasion, unsecured loans. Virtually all loans will have variable rates that
adjust with the prime rate and all loans will be guaranteed personally by the
principals of the businesses involved.
During the last five months of 1998, 17 separate commercial loans were
granted aggregating approximately $865,000. All of the loans granted had
variable initial interest rates ranging form 9.5% to 11.0%.
Loans to One Borrower. Federal law requires that, in general, the maximum
amount of loans which the Savings Bank may make to any one borrower may not
exceed the greater of $500,000 or 15% of its unimpaired capital and unimpaired
surplus. Higher limits apply to loans to develop domestic housing units. The
Savings Bank may lend an additional 10% of its unimpaired capital and unimpaired
surplus if the loan is fully secured by readily marketable collateral. Under
federal law, the Savings Bank's maximum loan-to-one borrower limit was
approximately $2.4 million at December 31, 1998. However, the Savings Bank has
established an internal limit on loans to one borrower of $1.0 million. At
December 31, 1998, the aggregate loans outstanding to the Company's three
largest borrowers and related entities were $390,000, $373,000 and $347,000,
respectively. Each of these loans was secured and performing in accordance with
their original terms as of December 31, 1998.
9
<PAGE>
Nonperforming and Problem Assets
Loan Delinquencies. The Company classifies a loan as delinquent when
payment is 16 days past due. When a mortgage loan becomes 16 days past due, a
computer generated notice of nonpayment is sent to the borrower. On the 21st
day, a personal call is made to verify receipt of the first notice and to
request payment. A second delinquency notice is then mailed on the 30th day. If,
after 60 days, payment is still delinquent, the borrower will be advised in
writing of the Company's intent to commence foreclosure. If the loan continues
in a delinquent status for 90 days and no repayment plan is in effect, the
delinquent account is referred to an attorney for foreclosure. At December 31,
1998, the Company's total delinquent loans, consisting of all loans 30 or more
days past due, amounted to $326,000, or .40% of its total loan portfolio.
The following table shows the Company's total delinquent loans at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------
1998 1997
--------------------------------------- ----------------------------------------
Loans Delinquent Percentage Percentage of
For Number Amount of Portfolio Number Amount Portfolio
- - ------------------- -------- ---------- ------------ ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
30-59 days 9 177,193 0.22% 38 $1,886,884 2.09%
60-89 days 1 54,523 0.07 7 188,790 0.21
90 days and
over 3 94,317 0.11 14 774,202 0.86
-------- ---------- ---- ------ ---------- ----
Total delinquent
loans 13 $ 326,033 0.40% 59 $2,849,876 3.16%
======== ========== ==== ====== ========== ====
</TABLE>
The following table shows the Company's delinquent loans by loan type:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1998 1997
---------------------------- -----------------------------
Percentage of Percentage of
Delinquent Delinquent
Loan Type Amount Loans Amount Loans
- - ---------------------- -------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Residential mortgage 212,688 65.23% $2,445,396 85.81%
Small business loans 0 0.00 0 0.00
Deposit accounts 6,768 2.08 60,975 2.14
Home equity loans 106,577 32.69 207,512 7.28
Equity lines of credit 0 0.00 135,993 4.77
-------- ------ ---------- ------
Total $326,033 100.00% $2,849,876 100.00%
======== ====== ========== ======
</TABLE>
Loans are reviewed on a quarterly basis and are placed on a non-accrual
status when the loan becomes more than 90 days delinquent or when, in the
Company's opinion, the collection of
10
<PAGE>
additional interest is doubtful. Interest accrued and unpaid at the time a loan
is placed on nonaccrual status is charged against interest income. Subsequent
interest payments, if any, are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan.
Nonperforming Assets. The following table sets forth information regarding
nonaccrual loans and real estate owned. As of the dates indicated, the Company
had no loans categorized as troubled debt restructurings within the meaning of
SFAS 15. Interest income that would have been recorded on loans accounted for on
a nonaccrual basis under the original terms of such loans was approximately
$4,000 and $18,000 for the years ended December 31, 1998 and December 31, 1997,
respectively.
The following table presents the Company's non-performing and restructured
assets at the dates indicated.
December 31,
---------------------
1998 1997
---- ----
(Dollars in Thousands)
Non-accrual loans $94 $774
Real estate owned 71 0
---- ----
Total non-performing loans $165(1) $774(2)
==== ====
Percentage of total loan
portfolio 0.20% 0.86%
Percentage of total assets 0.17% 0.68%
- - ----------
(1) Consists of $141,000 in residential mortgage loans and $24,000 in home
equity loans.
(2) Consists of $623,000 in residential mortgage loans, $51,000 in home equity
loans and $100,000 in equity lines of credit loans.
Classification of Assets. OTS regulations provide for a classification
system for loans and other assets of savings associations. Under this
classification system, problem assets of savings associations are classified as
"substandard," "doubtful," or "loss." An asset is considered substandard if it
is inadequately protected by the current net worth and paying capacity of the
borrower or of the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that the savings association will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified substandard,
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets
11
<PAGE>
classified as loss are those considered "uncollectible" and of such little value
that their continuance as assets without the establishment of a specific loss
reserve is not warranted. Assets may be designated "special mention" because of
potential weakness that do not currently warrant classification in one of the
aforementioned categories.
When a savings association classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings association classifies problem assets
as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. A savings association's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining a savings association's regulatory capital. Specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
The following table presents the Company's classified assets at the dates
indicated:
December 31,
----------------------
(Dollars in Thousands)
1998 1997
---- ----
Classification
Substandard $861(1) $735(2)
Doubtful 0 0
Loss 0 0
---- ----
Total Classified Assets $861 $735
==== ====
- - ----------
(1) Consists of $779,000 in residential mortgage loans classified as
substandard and $82,000 in home equity loans classified as substandard.
(2) Consists of $625,000 in residential mortgage loans classified as
substandard, $45,000 in home equity loans classified as substandard and
$65,000 in equity line of credit loans classified as substandard.
Allowance for Loan Losses. The Company's policy is to provide for losses
based on management's estimate of the losses that may be incurred with respect
to its loan portfolio. When the
12
<PAGE>
Company increases the allowance for loan losses it does so by establishing a
charge against income. The estimate, including a review of all loans on which
full collectibility of interest and principal may not be reasonably assured,
considers: (i) the Company's past loan loss experience, (ii) known and inherent
risks in the Company's portfolio, (iii) adverse situations that may affect the
borrower's ability to repay, (iv) the estimated value of any underlying
collateral, and (v) current economic conditions.
The Company monitors its allowance for loan losses and makes additions to
the allowance as economic conditions dictate. Although the Company maintains its
allowance for loan losses at a level that it considers to be adequate for the
inherent risk of loss in its loan portfolio, future losses could exceed
estimated amounts and additional provisions for loan losses could be required.
In addition, the Company's determination as to the amount of allowance for loan
losses is subject to review by the OTS, as part of its examination process.
After a review of the information available, the OTS might require the
establishment of an additional provision. As of the latest examination by the
OTS, which concluded in March 1998, no additional provision was required.
The following table sets forth an analysis of the Company's allowance for
loan losses at the dates indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Gross Loan Principal Balance Outstanding $82,369 $90,355 $99,353
======= ======= =======
Average Loans Outstanding $83,848 $95,371 $91,061
======= ======= =======
Allowance Balance at beginning of period $ 463 $ 247 $ 200
------- ------- -------
Loans charged off 43 0 0
Recoveries 0 0 0
------- ------- -------
Net loans charged-off 43 0 0
------- ------- -------
Provision for possible loan losses 69 216 47
------- ------- -------
Allowance Balance at end of period $ 489 $ 463 $ 247
======= ======= =======
Allowance for loan losses to total loans 0.59% 0.51% 0.25%
Allowance for loan losses to total
non-performing loans 296.36% 59.82% 65.69%
Net charge-offs to average loans outstanding
during the period 0.05% -- --
</TABLE>
13
<PAGE>
Allocation of Allowance for Loan Losses. The following table presents an
allocation of the allowance for loan losses among the various loan
classifications and sets forth the percentage of loan type to total loans. The
allowance shown in the table should not be interpreted as an indication that
charge-offs in future periods will occur in these amounts or proportions or that
the analysis indicates future charge-off trends.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1998 1997
---------------------------- ---------------------------
Percentage of Percentage of
Amount Total Loans 1997 Total Loans
------ ------------- ---- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
First mortgage loans $284 86.02% $236 87.70%
Small business loans 12 0.94 0 0
Home equity loans 118 9.17 140 8.21
Equity lines of credit 75 3.10 86 3.26
Collateral loans 0 0.77 1 0.83
---- ------ ---- ------
Total $489 100.00% $463 100.00%
==== ====== ==== ======
</TABLE>
Investment Activities
General. The Savings Bank is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies, state and municipal governments, deposits at the FHLB of Pittsburgh,
certificates of deposit in federally insured institutions, certain bankers'
acceptances and federal funds. The Savings Bank may also invest, subject to
certain limitations, in commercial paper rated in one of the two highest
investment rating categories of a nationally recognized credit rating agency,
and certain other types of corporate debt securities and mutual funds. Federal
regulations require the Savings Bank to maintain an investment in FHLB stock and
a minimum amount of liquid assets which may be invested in cash and specified
securities. From time to time, the OTS adjusts the percentage of liquid assets
which savings banks are required to maintain.
The goals of the Company's investment policy are to (i) maintain
profitability; (ii) invest in relatively high quality securities; (iii) maintain
adequate liquidity levels for meeting cash demands; (iv) maintain compliance
with regulations; and (v) provide a short-term source of funds for the funding
of loans designated for sale. Investment decisions are based on these goals as
well as a review of risk- based capital established for each type of security.
During periods when mortgage loan demand is moderate, the Company has
invested its funds in certain investment and mortgage-backed securities rather
than originating whole loans.
14
<PAGE>
The investment securities purchased by the Company consist primarily of
securities issued or guaranteed by the U.S. government or agencies thereof and
mortgage-backed securities. At December 31, 1998, 10.3% of the Company's
mortgage-backed securities were FHLMC pass-throughs. Investment and aggregate
investment limitations and credit quality parameters of each class of investment
are prescribed in the Company's investment policy. The Company performs analyses
on mortgage-related securities prior to purchase and on an ongoing basis to
determine the impact on earnings and market value under various interest rate
and prepayment conditions. Under the Company's current investment policy, the
President and his designee(s) have been delegated the authority by the Board of
Directors to execute agreements, transactions and any other appropriate material
in order to effectuate investment transactions authorized by the investment
policy. The Board of Directors reviews all securities transactions on a monthly
basis.
Mortgage-Backed Securities. To supplement its lending activities, the
Company has invested in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages. Principal and
interest payments are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors such as the
Company. The quasi-governmental agencies, FHLMC, Government National Mortgage
Association ("GNMA"), and FNMA, guarantee the payment of principal and interest
to investors
Mortgage-backed securities are typically issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed-rate
or adjustable-rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages.
Collateralized Mortgage Obligations. The Company has purchased
collateralized mortgage obligations ("CMOs") as an alternative investment in
order to address its interest rate risk position. CMOs are securities, which
have been collateralized by mortgage-backed securities. The CMO will be divided
into various tranches each with a separate priority for receipt of principal
payments. The maturity of a particular tranche of a CMO is dependent upon the
amount of repayments and prepayments from the mortgage-backed securities.
Generally as mortgage rates exceed the rates on the mortgage-backed securities,
prepayments will decrease and the maturity of the CMO will increase. Conversely,
when mortgage rates are below the rates on the loans securitizing the
mortgage-backed security, prepayments will increase and the maturity of the CMO
will also shorten. The CMOs purchased by the Savings Bank have floating rates
tied to various market indicies that change monthly. As of December 31, 1998,
the balance of CMOs outstanding was $2.6 million.
15
<PAGE>
The following table sets forth the carrying value of the Company's
investment securities, mortgage-backed securities and FHLB stock, at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1998(1) 1997(1)
------------------------------- -------------------------------
Estimated Estimated
Carrying Market Carrying Market
Value Value Value Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation $ 0 $ 0 $1,498,750 $1,498,750
Federal National Mortgage
Association 0 0 499,390 499,390
U.S. Treasury Notes 0 0 501,720 501,720
---------- ---------- ---------- ----------
Total Investment securities $ 0 $ 0 $2,499,860 $2,499,860
========== ========== ========== ==========
Mortgage-backed securities $2,942,264 $2,942,264 $1,900,986 $1,900,986
FHLB stock, at cost 975,000 975,000 975,000 975,000
---------- ---------- ---------- ----------
Total $3,917,264 $3,917,264 $5,375,846 $5,375,846
========== ========== ========== ==========
</TABLE>
- - ----------
(1) All of the Company's investment portfolio was classified as "Available for
Sale" at December 31, 1998 and December 31, 1997 pursuant to SFAS No. 115.
16
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair market values, and weighted
average yields for the Company's investment securities portfolio at December 31,
1998. The following table does not take into consideration the effects of
scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
One Year or Less One to Five Years More than Five Years
------------------------ ------------------- -------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Obligations of U.S.
Government agencies $ 0 -- $0 -- $ 0 --
Mortgage-backed
securities 71,461 7.01% 0 -- 2,870,803 5.62%
FHLB stock(1) 975,000 6.50% 0 -- 0 --
---------- -- ----------
Total investment
securities portfolio $1,046,461 6.53% $0 -- $2,870,803 5.62%
========== == ==========
<CAPTION>
Total Investment Securities
--------------------------------------------------
Average
Approximate Weighed Remaining
Carrying Market Average Years to
Value Value Yield Maturity
-------- ----------- ------- --------
<S> <C> <C> <C> <C>
Obligations of U.S.
Government agencies $ 0 $ 0 -- 0
Mortgage-backed
securities 2,942,264 2,942,264 5.65% 15.42
FHLB stock(1) 975,000 975,000 6.50% --
---------- ----------
Total investment
securities portfolio $3,917,264 $3,917,264 5.86% --
========== ==========
</TABLE>
- - ----------
(1) FHLB stock has no stated maturity, but has been classified based upon its
next stated dividend payment date. As a member of the FHLB of Pittsburgh,
the Savings Bank is required to maintain an investment in stock of the FHLB
of Pittsburgh equal to the greater of 1.0% of the Company's outstanding
home mortgage related assets or 5.0% of its outstanding advances from the
FHLB of Pittsburgh.
17
<PAGE>
Sources of Funds
Deposits are the major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans, prepayment of loans, advances from the FHLB and, to a much lesser extent,
maturities of investment securities and mortgage-backed securities, and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments may be
significantly influenced by general interest rates and market conditions.
Deposits. Consumer deposits are attracted principally from within the
Company's primary market area through the offering of deposit accounts including
regular savings accounts, checking accounts, money market accounts, term
certificate accounts and IRA accounts. Deposit account terms vary according to
the minimum balance required, the time period the funds must remain on deposit,
and the interest rate.
The Company competes for deposits with other institutions in its market
area by offering competitively priced accounts which are tailored to the needs
of its customers. Additionally, the Company seeks to meet its customers' needs
by providing personalized customer service to the community. To provide
additional convenience, the Company participates in the MAC(R) and Plus(R)
automatic teller machine network at locations throughout Delaware and the United
States, through which customers can gain access to their accounts at any time.
The Company does not actively solicit certificate accounts in excess of $100,000
or use brokers to obtain deposits or solicit deposits outside its market area.
The interest rates paid by the Company on deposits are set as needed at the
direction of the Company's senior management based on the Company's liquidity
requirements, interest rates paid by its competitors, the general levels of
interest rates, the Company's growth goals and applicable regulatory
restrictions and requirements.
The Company's deposit base is characterized by a relatively small amount of
passbook depositors and a significantly higher amount of certificates of
deposit. Passbook savings, money market and transaction accounts totalled $10.7
million, or 16.2%, of the Company's deposit portfolio at December 31, 1998. As
of December 31, 1998, certificates of deposit amounted to $55.6 million or 83.8%
of the Company's deposit portfolio. In addition, $11.0 million or 16.6% of the
deposit portfolio consisted of certificates of deposit with balances of $100,000
or more.
The Company believes that a portion of its depositors are sensitive to
changes in interest rates. Accordingly, some of the funds placed in certificates
of deposit with the Company are susceptible to withdrawal if alternative
investments pay a higher return or the Company's rates do not adjust as rapidly
as the competition. These deposits cannot, therefore, be viewed as core
deposits, which is also generally the case for deposits at or in excess of
$100,000. However, the Company's certificates are not derived from brokered
deposits, and the majority of those in excess of $100,000 are deposits of
long-standing customers of the Company.
18
<PAGE>
The following table sets forth the Company's distribution of deposit
accounts at the dates indicated and the weighted average interest rate on each
category of deposits represented.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------------------- ---------------------------------------
Weighted
Percent of Weighted Percent of Average
Amount Total Average Rate Amount Total Rate
------- ---------- ------------ ------ ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook Savings $ 1,697 2.56% 2.50% $ 2,494 3.24% 4.14%
Money Market Accounts 7,044 10.62 2.79 8,532 11.10 3.40
IRA Accounts 11,098 16.73 6.47 11,880 15.45 6.51
Certificates of deposit
with an original term
to maturity of:
Less than 1 year 8,005 12.07 4.78 7,843 10.20 5.41
1 to 3 years 27,275 41.11 5.58 33,891 44.09 5.93
More than 3 years 9,226 13.91 6.47 11,179 14.54 6.47
Checking & Other 2,000 3.00 1.70 1,064 1.38 2.05
------- ------ ------- ------
Total Deposits $66,345 100.00% 5.26% $76,883 100.00% 5.65%
======= ====== ======= ======
</TABLE>
19
<PAGE>
The following table sets forth the Company's monthly average balance and
interest rates of deposit accounts for the periods shown.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
Monthly Weighted Monthly Weighted
Amount Average Interest Rate Amount Average Interest Rate
------- --------------------- ------- ----------------------
<S> <C> <C> <C> <C>
Passbook Savings $ 2,096 3.38% $ 2,682 4.14%
Money Market Accounts 7,468 3.39 8,662 3.23
IRA Accounts 11,691 6.48 12,297 6.62
Certificates of
deposits:
Less than 1 year 7,895 5.12 10,485 5.31
1 to 3 years 30,953 5.79 33,363 5.96
More than 3 years 10,094 6.47 12,073 6.55
Checking & Other 1,380 1.91 765 2.05
------- ------
Total Deposits $71,577 5.53% $80,327 5.67%
======= ======
</TABLE>
The following table sets forth the amounts and maturities of the Company's
time deposits at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------
1999 2000 2001 2002 Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
2.00 to 4.00% $ 777,659 $ 0 $ 0 $ 0 $ 777,659
4.01 to 6.00% 32,221,592 6,211,001 2,916,053 2,945,208 44,293,854
6.01 to 8.00% 3,504,937 6,734,375 8,010 285,602 10,532,924
8.01 to 10.00% 0 0 0 0 0
10.01 to 12.00% 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Total $36,504,188 $12,945,376 $ 2,924,063 $ 3,230,810 $55,604,437
=========== =========== =========== =========== ===========
</TABLE>
20
<PAGE>
The following table indicates the amount of our certificates of deposit of
$100,000 or more by time remaining until maturity as of December 31, 1998.
Amount
--------------
(In Thousands)
3 months or less $ 3,180
Over 3 months to 6 months 2,267
Over 6 months to 12 months 3,348
Over 12 months 2,202
-------
Total $10,997
=======
The following table sets forth net changes in the Company's deposit
accounts for the periods shown.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net (decrease) before
interest credited $(13,963,915) $ (5,308,060)
Interest credited 3,425,710 3,782,468
------------ ------------
Net deposit account (decrease) $(10,538,205) $ (1,525,592)
============ ============
Weighted average cost of deposits
during the period 5.37% 5.60%
Weighted average cost of deposits at
end of period 5.26% 5.65%
</TABLE>
Borrowings. The Company may obtain advances (borrowings) from the FHLB of
Pittsburgh to supplement the Company's supply of lendable funds. Advances from
the FHLB of Pittsburgh are typically secured by a pledge of the Company's stock
in the FHLB of Pittsburgh, a portion of the Company's first mortgage loans and
other assets. Each FHLB credit program has its own interest rate, which may be
fixed or adjustable, and range of maturities. If the need arises, the Company
may also access the Federal Reserve Bank discount window to supplement the
Company's supply of lendable funds and to meet deposit withdrawal requirements.
At December 31, 1998, borrowings from the FHLB of Pittsburgh totaled $13.7
million.
21
<PAGE>
The following table sets forth information concerning the Company's
borrowings from the FHLB of Pittsburgh.
At or For the Year Ended December 31,
-------------------------------------
1998 1997
----------- -----------
FHLB Advances:
Average balance(1) $14,798,721 $23,162,560
Maximum balance at any
month-end 15,900,000 25,700,000
Balance at period end 13,742,153 17,400,000
Weighted average interest rate
during the period 6.58% 6.32%
Weighted average interest rate
at period end 6.43% 6.53%
- - ----------
(1) The average balance was computed using an average of daily balances during
the year.
Competition
Competition for deposits and loans comes from commercial banks, thrift
institutions, credit unions, finance companies, credits card banks, mortgage
bankers and multi-state regional banks in the Company's market area, many of
whom have greater resources. Competition for deposits also includes a number of
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers.
The Company operates from a single office and until recent years relied
extensively on the presence of employees of several corporations located near
its single office for deposit growth. The Company's convenience enabled it to
attract and maintain funds that were reasonably priced. The relocation of
corporate offices and the transfer of employees to suburban locations has
manifested itself in a decline in the number of downtown Wilmington customer
relationships and has required the Company to seek deposits from other parts of
New Castle County. The Company has been able to maintain its position in
mortgage loan originations throughout its market areas by virtue of the
Company's long-standing presence in the community, competitive pricing, and
referrals from existing customers.
22
<PAGE>
Employees
At December 31, 1998, the Company had 21 full-time employees, 0 full-time
seasonal employees and 1 part-time employee. None of the Company's employees are
represented by a collective bargaining group. The Company believes that its
relationship with its employees is good.
Subsidiaries
At December 31, 1998, the Company had one wholly owned subsidiary, Delaware
First Bank, FSB.
REGULATION
Set forth below is a brief description of certain laws and regulations
which together with the descriptions of laws and regulation contained elsewhere
herein, are deemed material to an investor's understanding of the extent to
which the Company and the Savings Bank are regulated. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, do not purport to be complete and are qualified in its
entirety by reference to applicable laws and regulations.
Savings and Loan Holding Company Regulation
General. The Company has registered as a savings and loan holding company
with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and any non-savings
institution subsidiaries. This allows the OTS to restrict or prohibit activities
that it determines to be a serious risk to the Company. This regulation is
intended primarily for the protection of the Company's depositors and not for
the benefit of stockholders of the Company.
QTL Test. Since the Company owns one savings institution, it is able to
diversify its operations into activities not related to banking, but only so
long as it satisfies the qualified thrift lender ("QTL") test. If the Company
controls more than one savings institution, it would lose the ability to
diversify its operations into non-banking related activities, unless such other
savings institutions each also qualify as a QTL or were acquired in a supervised
acquisition.
Restrictions on Acquisitions. The Company must obtain approval from the OTS
before acquiring control of any other SAIF-insured savings institution. No
person may acquire control of a federally insured savings institution without
providing at least 60 days written notice to the OTS and giving the OTS an
opportunity to disapprove the proposed acquisition.
23
<PAGE>
Savings Bank Regulation
General. As a federally chartered, SAIF-insured savings bank, the Savings
Bank is subject to extensive regulation by the OTS and the FDIC. The Savings
Bank's lending activities and other investments must comply with various federal
and state statutory and regulatory requirements. The Savings Bank is also
subject to certain reserve requirements promulgated by the FRB.
The OTS, in conjunction with the FDIC, regularly examines the Savings Bank
and prepares reports for the consideration of the Savings Bank's Board of
Directors on any deficiencies that the OTS finds in the Savings Bank's
operations. The Savings Bank's relationship with its depositors and borrowers is
also regulated to a great extent by federal and state law, especially in such
matters as the ownership of savings accounts and the form and content of its
mortgage documents.
The Savings Bank must file reports with the OTS and the FDIC concerning the
Savings Bank's activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with or acquisitions of other financial institutions. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the SAIF
and depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in regulations, whether by the OTS, the FDIC
or any other government agency, could have a material adverse impact on our
operations.
Insurance of Deposit Accounts. The FDIC is authorized to establish separate
annual assessment rates for deposit insurance for members of the Bank Insurance
Fund ("BIF") and the SAIF. The FDIC may increase assessment rates for either
fund if necessary to restore the fund's ratio of reserves to insured deposits to
its target level within a reasonable time and may decrease such assessment rates
if such target level is met. The FDIC has established a risk-based assessment
system for both SAIF and BIF members. Under this system, assessments are set
within a range, based on the risk the institution poses to its deposit insurance
fund. This risk level is determined based on the institution's capital level and
the FDIC's level of supervisory concern about the institution.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranges from 0 to 27 basis points. However, SAIF insured
institutions are required to pay a Financing Corporation assessment, in order to
fund the interest on bonds issued to resolve thrift failures in the 1980s, equal
to approximately 6 basis points for each $100 in domestic deposits, while BIF
insured institutions pay an assessment equal to approximately 1 basis point for
each $100 in domestic deposits. The SAIF assessment is expected to be reduced to
about 2 basis points no later than January 1, 2000, when BIF insured
institutions fully participate in the assessment. These assessments, which may
be revised based upon the level of BIF and SAIF deposits will continue until the
bonds mature in the year 2017.
24
<PAGE>
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
At December 31, 1998, the Savings Bank exceeded its applicable tangible,
core and risk-based capital requirements.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Savings Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company. The OTS has the authority under its
supervisory powers to prohibit the payment of dividends by the Savings Bank to
the Company. In addition, the Savings Bank may not declare or pay a cash
dividend on its capital stock if the effect would be to reduce its regulatory
capital below the amount required for the liquidation account established at the
time of the Conversion.
Qualified Thrift Lender Test. In general, savings associations are required
to maintain at least 65% of their portfolio assets in certain qualified thrift
investments (which consist primarily of loans and other investments related to
residential real estate and certain other assets). A savings association that
fails the qualified thrift lender test is subject to substantial restrictions on
activities and to other significant penalties. A savings association may qualify
as a qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments but also, in the alternative, by qualifying under
the Code as a "domestic building and loan association." The Savings Bank is a
domestic building and loan association as defined in the Code. At December 31,
1998, under the
25
<PAGE>
expanded QTL test, approximately 98.6% of the Savings Bank's portfolio assets
were qualified thrift investments.
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings institution or its
subsidiaries and its affiliates be on terms as favorable to the savings
institution as comparable transactions with non-affiliates. In addition, certain
of these transactions are restricted to an aggregate percentage of the savings
institution's capital or are prohibited altogether. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from
the savings institution. The Savings Bank's affiliates include the Company and
any company which would be under common control with the Savings Bank. In
addition, a savings institution may not extend credit to any affiliate engaged
in activities not permissible for a bank holding company or acquire the
securities of any affiliate that is not a subsidiary. The OTS has the discretion
to treat subsidiaries of savings institution as affiliates on a case-by-case
basis.
Liquidity Requirements. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At December 31, 1998, the Savings Bank's
required liquid asset ratio was 5.0% and its actual ratio was 11.9%. Monetary
penalties may be imposed upon associations for violations of liquidity
requirements.
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by savings institutions and proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the Board of
Directors of the FHLB.
As a member, the Savings Bank is required to purchase and maintain stock in
the FHLB of Pittsburgh in an amount equal to at least 1% of the Savings Bank's
aggregate unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of its advances from the FHLB,
whichever is greater. At December 31, 1998, the Savings Bank held $975,000 in
FHLB stock, at cost, which was in compliance with this requirement. The FHLB
imposes various limitations on advances such as limiting the amount of certain
types of real estate related collateral to 30% of a member's capital and
limiting total advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future.
26
<PAGE>
Federal Reserve System. The Federal Reserve System requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1998, the Savings Bank's reserve met the minimum level required by the
Federal Reserve System.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System. The Savings Bank had no borrowings from the Federal
Reserve System at December 31, 1998.
TAXATION
Federal Taxation
The Company and the Savings Bank are subject to the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), in the same general
manner as other corporations. Prior to August 1996, however, savings
institutions such as the Savings Bank, which met certain definitional tests and
other conditions prescribed by the Code, could benefit from certain favorable
provisions regarding deductions from taxable income for annual additions to bad
debt reserve. The amount of the bad debt deduction that a qualifying savings
institution could claim with respect to additions to its reserve for bad debts
was subject to certain limitations. The Savings Bank reviewed the most favorable
way to calculate the deduction attributable to an addition to its bad debt
reserve on an annual basis.
In August 1996, the Code was revised to equalize the taxation of thrifts
and banks. Thrifts no longer have a choice between the percentage of taxable
income method and the experience method in determining additions to bad debt
reserves. Thrifts with $500 million of assets or less may still use the
experience method, which is generally available to small banks currently. Larger
thrifts must use the specific charge off method regarding bad debts. Any reserve
amounts added after 1987 will be taxed over a six year period beginning in 1996;
however, bad debt reserves set aside through 1987 are generally not taxed. A
savings institution may delay recapturing into income its post-1987 bad debt
reserves for an additional two years if it meets a residential-lending test.
This law is not expected to have a material impact on the Savings Bank. At
December 31, 1998 the Savings Bank had approximately $220,000 of post 1987
bad-debt reserves.
Under the percentage of taxable income method, the bad debt deduction
attributable to "qualifying real property loans" could not exceed the greater of
(i) the amount deductible under the experience method, or (ii) the amount which,
when added to the bad debt deduction for non-qualifying loans, equaled the
amount by which 12% of the sum of the total deposits and the advance payments by
borrowers for taxes and insurance at the end of the taxable year exceeded the
sum of the surplus, undivided profits and reserves at the beginning of the
taxable year. The amount of the
27
<PAGE>
bad debt deduction attributable to qualifying real property loans computed using
the percentage of taxable income method was permitted only to the extent that
the institution's reserve for losses on qualifying real property loans at the
close of the taxable year did not exceed 6% of such loans outstanding at such
time.
Under the experience method, the bad debt deduction may be based on (i) a
six-year moving average of actual losses on qualifying and non-qualifying loans,
or (ii) a fill-up to the institution's base year reserve amount, which is the
tax bad debt reserve determined as of December 31, 1987.
The percentage of specially computed taxable income that was used to
compute a savings institution's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8% at the
time the Code was revised. The percentage of taxable income bad debt deduction
thus computed was reduced by the amount permitted as a deduction for
non-qualifying loans under the experience method. The availability of the
percentage of taxable income method permitted qualifying savings institutions to
be taxed at a lower effective federal income tax rate than that applicable to
corporations generally (approximately 31.3% assuming the maximum percentage bad
debt deduction).
If a savings institution's qualifying assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
institution may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a specified period, which is
immediately accruable for financial reporting purposes. As of December 31, 1998,
at least 60% of the Savings Bank's assets were qualifying assets as defined in
the Code. No assurance can be given that the Savings Bank will meet the 60% test
for subsequent taxable years.
Earnings appropriated to the Savings Bank's pre-1988 bad debt reserve and
claimed as a tax deduction as well as its supplemental reserves for losses will
not be available for the payment of cash dividends or for distribution to the
Savings Bank's stockholders (including distributions made on dissolution or
liquidation), unless the Savings Bank includes the amount in income, along with
the amount deemed necessary to pay the resulting federal income tax. As of
December 31, 1998, the Savings Bank had $1.3 million of accumulated earnings,
representing its base year tax reserve, for which federal income taxes have not
been provided. If such amount is used for any purpose other than bad debt
losses, including a dividend distribution or a distribution in liquidation, it
will be subject to federal income tax at the then current rate.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating loss
carryovers of which the Company and the Savings Bank currently has none. AMTI is
also adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, the Savings Bank's or the Company's AMTI is increased by an amount
equal to 75% of the amount by which its adjusted current earnings exceeds its
AMTI (determined without regard to this adjustment and prior to reduction for
net operating losses).
28
<PAGE>
The Company may exclude from its income 100% of dividends received from the
Savings Bank as a member of the same affiliated group of corporations. A 70%
dividends received deduction generally applies with respect to dividends
received from corporations that are not members of such affiliated group, except
that an 80% dividends received deduction applies if the Company owns more than
20% of the stock of a corporation paying a dividend. The above exclusion
amounts, with the exception of the affiliated group figure, were reduced in
years in which the Savings Bank availed itself of the percentage of taxable
income bad debt deduction method.
The Savings Bank's federal income tax returns have not been audited by the
IRS for at least the last five years.
Delaware State Taxation
The State of Delaware imposes a franchise tax on financial institutions of
8.7% of taxable income. Taxable income, for this purpose, is 56% of net
operating income after adjustments. These taxes have not been a material expense
for the Savings Bank.
As a Delaware holding company earning income in Delaware, the Company is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware. Minimum tax is generally equal to $5,000 for each 100,000
shares of authorized capital stock regardless of whether such stock has been
issued.
29
<PAGE>
Item 2. Properties
The following table sets forth our location and related information at
December 31, 1998.
<TABLE>
<CAPTION>
Net Book Value at
Location Leased or Owned Year Acquired December 31, 1998 (1)
<S> <C> <C> <C>
MAIN OFFICE:
400 Delaware Avenue
Wilmington, Delaware 19801 Owned 1953 $1,844,698
</TABLE>
- - ----------
(1) Net book value is calculated by totaling the estimated value of land and
buildings, $2,344,384, and then subtracting accumulated depreciation of
$499,686.
Item 3. Legal Proceedings
The Company is, from time to time, a party to legal proceedings arising in
the ordinary course of its business, including legal proceedings to enforce its
rights against borrowers. The Company is not currently a party to any legal
proceedings which are expected to have a material adverse effect on its
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Shares of the Company's Common Stock are traded on the over-the-counter
market under the symbol "DFFN," with quotations available through the OTC
Bulletin Board operated by the NASDAQ. At March 25, 1999, the Company had
approximately 229 stockholders of record. Such holdings do not reflect the
number of beneficial owners of Common Stock. The Company issued its common stock
at $10.00 per share in its initial public offering on December 31, 1997.
The Company's Board of Directors has the authority to declare dividends on
the shares, subject to statutory and regulatory requirements. The Company has
not declared or paid any cash
30
<PAGE>
dividends on its Common Stock. Generally, declarations of dividends by the Board
of Directors depends upon a number of factors, including, but not limited to:
(i) the amount of the net proceeds retained by the Company in the Conversion,
(ii) investment opportunities available, (iii) capital requirements, (iv)
regulatory limitations, (v) results of operations and financial condition, (vi)
tax considerations, and (vii) general economic conditions. Upon review of such
considerations, the board may authorize dividends in the future if it deems such
payment appropriate and in compliance with applicable law and regulation. For a
period of one year following the completion of the Conversion, the Company will
not pay dividends that would be treated for tax purposes as a return of capital,
nor take any actions to pursue or propose such dividends.
The Company is not subject to OTS regulatory restrictions on the payment of
dividends to its stockholders, although the source of such dividends will be
dependent in part upon the receipt of dividends from the Savings Bank. The
Savings Bank, like all financial institutions regulated by the OTS, is subject
to certain restrictions on the payment of dividends based on its net income, its
capital in excess of regulatory capital requirements and the amount of capital
required for the liquidation account required to be established in connection
with the Conversion. The Company is subject, however, to the requirements of
Delaware law, which generally limit the payment of dividends to amounts that
will not affect the ability of the Company, after the dividend has been
distributed, to pay its debts in the ordinary course of business.
During the periods indicated the high and low sale price of the Company's
stock was:
For the quarter ended High Low
- - --------------------------- ------ ------
March 31, 1998 $14.13 $12.50
June 30, 1998 15.25 12.38
September 30, 1998 12.62 8.69
December 31, 1998 14.38 8.25
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the consolidated financial
condition and results of operations of the Company. The following discussion and
analysis of financial condition and results of operations of the Company should
be read in conjunction with the Company's consolidated financial statements and
the notes thereto found in "Item 7. Financial Statements" below.
General
The Company's results of operations depend primarily on net interest
income, which is determined by (i) the difference between rates of interest
earned on interest-earning assets and the rates of interest paid on
interest-bearing liabilities ("interest rate spread"), and (ii) the relative
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<PAGE>
amounts of interest-earning assets and interest-bearing liabilities. The
Company's results of operations also are affected by (i) non-interest income,
which includes income from customer deposit account service charges, loan
servicing fee income, gains and losses from the sale of loans, investments and
mortgage-backed securities and (ii) non-interest expense, which includes
compensation and employee benefits, federal deposit insurance premiums, office
occupancy costs, advertising costs and data processing costs. The Company's
results of operations also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, all of which are
beyond the Company's control.
The Savings Bank currently is operating under a Supervisory Agreement with
the OTS which requires the Savings Bank to take certain actions, including, but
not limited to, addressing the Savings Bank's interest rate risk profile. The
Supervisory Agreement will remain in place until terminated by the OTS.
Asset/Liability Management
The Company's assets and liabilities may be analyzed by examining the
extent to which its assets and liabilities are interest rate sensitive and by
evaluating the expected effects of interest rate changes on its net portfolio
value. The ability to maintain consistent net interest income is largely
dependent upon the achievement of a positive interest rate spread that can be
sustained during fluctuations in prevailing interest rates. Interest rate
sensitivity is a measure of the difference between amounts of interest-earning
assets and interest-bearing liabilities that either reprice or mature within a
given period of time.
Thus, an asset or liability is interest rate sensitive within a specific
time period if it will mature or reprice within that time period. If the
Company's assets mature or reprice more quickly or to a greater extent than its
liabilities, the Company's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. Conversely, if the Company's assets mature or
reprice more slowly or to a lesser extent than its liabilities, the Company's
net portfolio value and net interest income would tend to decrease during
periods of rising interest rates but increase during periods of falling interest
rates. The difference or interest rate repricing "Gap" provides an indication of
the extent to which an institution's interest rate spread will be affected by
changes in interest rates. A Gap is considered positive when the amount of
interest rate sensitive assets maturing or repricing within a given period
exceeds the amount of interest rate sensitive liabilities maturing or repricing
within such period. A Gap is considered negative when the amount of
interest-bearing liabilities repricing or maturing within a given period exceeds
the amount of interest rate sensitive assets repricing or maturing within such
period.
The Company's lending activities historically have emphasized long-term
fixed rate mortgage loans secured by one-to-four family residences. At December
31, 1998, 77.8% of all of the Company's loans were of this type. Conversely, the
Company's deposit accounts mature or are subject to repricing within a
relatively short period of time. These factors historically have caused
32
<PAGE>
the income earned by the Company on its loan portfolio to adjust more slowly to
changes in interest rates than the interest the Company pays on its deposits.
In recent years the Company has sought to manage its interest rate risk by
selling portions of its fixed rate loans to the FHLMC or another financial
institution (while retaining the servicing of those loans). The Company has also
sought to manage interest rate risk by lengthening the maturities of its
certificates of deposit and through longer term borrowings from the FHLB of
Pittsburgh. This imbalance, however, between the Company's assets and
liabilities has caused it to remain susceptible to significant levels of
interest rate risk.
The Savings Bank's Supervisory Agreement with the OTS identifies the
Savings Bank's interest rate risk level as unacceptably high and requires the
Savings Bank to develop and pursue strategies to reduce interest-rate risk. The
strategies considered include adjustment of FHLB advances by replacing
short-term variable advances with the proceeds of longer termed fixed rate
advances. The Savings Bank has also sold fixed rate loans to the FHLMC in order
to help manage its interest-rate risk. The proceeds of these sales were used to
either acquire short term variable rate assets or to repay short term or
variable rate borrowings.
On June 26, 1997, the Savings Bank adopted a revised interest rate risk
policy and also took certain actions to implement this policy, including loan
sales and lengthening the maturities of some FHLB borrowings. In implementing
these strategies, the Savings Bank will attempt to balance the need to improve
its interest rate risk against the impact such restructuring will have on
profitability. The Savings Bank has also significantly increased its capital
position through a mutual to stock conversion. This additional capital has
mitigated the severity of the Savings Bank's interest rate position, and also
increased the percentage of interest earning assets to interest sensitive
liabilities.
The following table, often referred to as a "Gap Table," sets forth asset
and liability balances at December 31, 1998 which are expected to reprice or
mature in each of the future periods indicated. Loans with adjustable rates are
shown as being due in the next adjustment period. Passbook accounts, money
market deposit accounts and NOW accounts are not assumed to be subject to
immediate repricing and are placed in repricing periods based upon assumptions
prepared by management.
33
<PAGE>
<TABLE>
<CAPTION>
More than 1 More than 2 More than 3
Less than 1 Month through 2 Months through 3 Months through 6
Month Months Months Months
------------ ---------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-Earning Assets
Cash and Interest Earning Deposits $8,066 $0 $0 $0
Investments 0 0 0 0
FHLB Stock 0 0 975 0
Equity Loans/Lines 2,556 0 6 8
Collateral Loans 631 0 0 0
Mortgage-Backed Securities 2,871 71 0 0
Small Business Loans 775 0 0 0
Adjustable Rate Mortgages 578 303 670 1,202
Balloon Mortgages(1) 40 40 40 120
Fixed Rate Mortgages(2) 786 786 786 2,363
-------- -------- -------- --------
Total Interest-Earning Assets $16,303 $1,200 $2,477 $3,693
======== ======== ======== ========
Interest-bearing liabilities
Passbook Accounts(3) 25 25 25 75
Checking Accounts(4) 0 0 0 0
Money Market Deposit Accounts(5) 511 511 511 1,078
Fixed Rate Fixed Term Deposits 3,757 3,967 4,435 8,649
FHLB Advances - Fixed Rate and Term 0 500 0 2,300
Escrow Deposits 25 25 25 25
-------- -------- -------- --------
Total Interest-Bearing Liabilities $4,318 $5,028 $4,996 $12,127
======== ======== ======== ========
Excess (Deficiency) of Interest-Earning Assets
over Interest-Bearing Liabilities $11,985 $(3,828) $(2,519) $(8,434)
======== ======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets Over Interest-Bearing
Liabilities at December 31, 1998 $11,985 $8,157 $5,638 $(2,796)
======== ======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets Over Interest-Bearing
Liabilities as a Percent of Total Assets at
December 31, 1998 12.40% 8.44% 5.83% (2.89)%
======== ======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets over Interest-Bearing
Liabilities as a percent of Total Interest-
Earning Assets 12.81% 8.72% 6.02% (2.99)%
======== ======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets over Interest-Bearing
Liabilities as a percent of Cumulative
Interest-Bearing Liabilities 277.56% 87.28% 39.31% (10.56)%
======== ======== ======== ========
<CAPTION>
More than 6 More than 1
Months through Year through 3 More than 3
1 year Years Years
-------------- --------------- ------------
<S> <C> <C> <C>
Interest-Earning Assets
Cash and Interest Earning Deposits $0 $0 $0
Investments 0 0 0
FHLB Stock 0 0 0
Equity Loans/Lines 138 1,153 6,248
Collateral Loans 0 0 0
Mortgage-Backed Securities 0 0 0
Small Business Loans 0 0 0
Adjustable Rate Mortgages 4,017 1,042 0
Balloon Mortgages(1) 240 1,568 561
Fixed Rate Mortgages(2) 4,720 18,880 32,113
-------- -------- --------
Total Interest-Earning Assets $9,115 $22,643 $38,922
======== ======== ========
Interest-bearing liabilities
Passbook Accounts(3) 150 300 2,395
Checking Accounts(4) 0 0 2,071
Money Market Deposit Accounts(5) 341 1,362 1,362
Fixed Rate Fixed Term Deposits 15,695 15,761 3,339
FHLB Advances - Fixed Rate and Term 4,200 4,700 2,042
Escrow Deposits 574 0 0
-------- -------- --------
Total Interest-Bearing Liabilities $20,960 $22,123 $11,209
======== ======== ========
Excess (Deficiency) of Interest-Earning Assets
over Interest-Bearing Liabilities $(11,845) $520 $27,713
======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets Over Interest-Bearing
Liabilities at December 31, 1998 $(14,641) $(14,121) $13,592
======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets Over Interest-Bearing
Liabilities as a Percent of Total Assets at
December 31, 1998 (15.14)% (14.61)% 14.06%
======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets over Interest-Bearing
Liabilities as a percent of Total Interest-
Earning Assets (15.65)% (15.09)% 14.52%
======== ======== ========
Cumulative Excess (Deficiency) of Interest-
Earning Assets over Interest-Bearing
Liabilities as a percent of Cumulative
Interest-Bearing Liabilities (30.87)% (20.30)% 16.83%
======== ======== ========
</TABLE>
34
<PAGE>
- - ----------
(1) 24% annual prepayment rate is based on assumptions provided by the OTS.
(2) 16% annual prepayment rate for 30 year loans and 8% annual prepayment rate
for 15 year loans is based on assumptions provided by the OTS.
(3) Repricing rate is estimated at 10% for year one, 10% for one-to-three
years, and 80% for more than three years.
(4) Repricing rate is estimated at 100% for more than three years.
(5) Repricing is based on the assumption that approximately 40% of accounts
with balances greater than $10,000 to reprice evenly over six months. The
remainder of accounts, assumed to be core deposits, reprice evenly over all
time periods.
Interest Rate Sensitivity Analysis
The Company has measured its interest rate sensitivity by computing the
"Gap" between the assets and liabilities which were expected to mature or
reprice within certain time periods, based on assumptions regarding loan
prepayment and deposit repricing provided by the OTS and management. The OTS
requires the computation of the net present value of an institution's cash flow
from assets, liabilities and off balance sheet items (the institution's net
portfolio value or "NPV") and measures the change in NPV in the event of a range
of assumed changes in market interest rates. The OTS, at its discretion, may
impose additional capital requirements to institutions that it considers has
significant interest rate risk. This requirement would be based on factors such
as, but not limited to, interest rate sensitivity, the total capital position of
the institution, and other risk factors associated with the institution.
Qualitative Risk Analysis. The OTS measures an institution's interest rate
risk by the change in its NPV as a result of a hypothetical 200 basis point
("bp") change in market rates. The following table estimates the effect on the
Savings Bank's NPV from instantaneous and permanent 1% to 4% (100 to 400 basis
points) increases and decreases in market interest rates. The following table
presents the Savings Bank's NPV at December 31, 1998, which is based upon
quarterly information that the Savings Bank provides to the OTS and which is
calculated for the Savings Bank by the OTS.
35
<PAGE>
<TABLE>
<CAPTION>
Net Portfolio Value at December 31, 1998 NPV as % of PV of Assets
---------------------------------------- -----------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
--------------- -------- -------- -------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $7,378 $(7,372) (49)% 8.67% (6.53)%
+300 bp 9,734 (5,375) (36) 10.59 (4.61)
+200 bp 11,767 (3,343) (22) 12.44 (2.76)
+100 bp 13,670 (1,439) (10) 14.06 (1.14)
0 bp 15,110 0 0 15.20
-100 bp 15,683 574 4 15.57 3.70
-200 bp 15,831 721 5 15.57 3.70
-300 bp 16,161 1,052 7 15.71 5.10
-400 bp 16,384 1,275 8 15.76 5.60
</TABLE>
Qualitative Risk Analysis. While the Company cannot predict future interest
rates or their effects on its "Gap," NPV or net interest income, the Company
does not expect current interest rates to have a material adverse effect on its
NPV or net interest income in the near future. Computations of prospective
effects of hypothetical interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, prepayments and deposit
run-offs and should not be relied upon as indicative of actual results. Certain
shortcomings are inherent in such computations. Although certain assets and
liabilities may have similar maturity or periods of repricing, they may react at
different times and in different degrees to changes in the market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while rates on other
types of assets and liabilities may lag behind changes in market interest rates.
Certain assets, such as adjustable rate mortgages, generally have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In the event of a change in interest rates, prepayments and early
withdrawal levels could deviate significantly from those assumed in making
calculations set forth above. Additionally, increased credit risk may result as
the ability of many borrowers to service their debt may decrease in the event of
an interest rate increase.
Interest Risk Analysis and Monitoring. The Savings Bank has established a
Funds Management Committee which is currently comprised of one non-employee
director, Thomas L. Cloud, Chairman, as well as the Savings Bank's Chief
Executive Officer, Ernest J. Peoples. This committee meets periodically and
reviews the maturity of the Savings Bank's assets and liabilities and discusses
and recommends policies and strategies designed to regulate its flow of funds
and to coordinate the sources, uses and pricing of such funds. The first
priority in structuring and pricing of the Savings Bank's assets and liabilities
is to maintain an acceptable interest rate spread while reducing the net effects
of changes in interest rates.
36
<PAGE>
The Board of Directors also reviews the Savings Bank's asset and liability
policies. The Board of Directors meets monthly to review interest rate risk and
interest rate trends, as well as liquidity and capital ratios and requirements.
Management administers the policy and determinations of the Board of Directors
with respect to the Savings Bank's asset and liability goals and strategies. The
Savings Bank expects that its asset and liability policy and strategies will
continue as described so long as competitive and regulatory conditions in the
financial institution industry and market interest rates continue as they have
in recent years.
Analysis of Net Interest Income
The Company's earnings historically have depended upon its net interest
income, which is the difference between interest income earned on loans and
investments (the "interest-earning assets") and interest paid on deposits and
any borrowed funds (the "interest-bearing liabilities"). It is the single
largest component of the Company's operating income.
The following tables present an analysis of certain aspects of the
Company's operations during the periods indicated. The first table presents the
average balances of and the interest and dividends earned or paid on each major
class of the Company's interest-earning assets and interest-bearing liabilities.
Average balances are daily average balances. The yields and costs include fees
which are considered adjustments to yields.
37
<PAGE>
<TABLE>
<CAPTION>
For the Year ended December 31,
-----------------------------------------------------------------------------------------
1998 1997
-------------------------------------------- -----------------------------------------
Average Daily Interest & Average Daily Interest &
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
--------------- ---------- ---------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets
Loans receivable, net (1) $83,848,241 $6,586,596 7.86% $95,370,924 7,352,557 7.71%
Investment securities(2) 4,726,501 282,882 5.99 7,336,699 427,656 5.83
Interest-bearing deposits 13,082,488 693,614 5.30 4,523,787 198,227 4.38
------------ ------------ ---------
Total interest-earning assets 101,657,230 7,563,092 7.44 107,231,410 7,978,440 7.44
Non-interest-earning assets 3,793,663 3,777,951
------------ ------------
Total assets $105,450,893 $111,009,361
============ ============
Liabilities and Stockholders' Equity:
Interest-bearing liabilities
Deposits $71,397,897 $3,832,880 5.37 $78,891,620 $4,416,447 5.60
Advances from FHLB 14,798,721 972,949 6.58 23,162,560 1,464,357 6.32
------------ ------------
Total interest-bearing
liabilities 86,196,618 4,805,829 5.58 102,054,180 5,880,804 5.76
Non-interest-bearing liabilities 2,871,418 2,598,910
------------ ------------
Total liabilities $89,068,036 $104,653,090
Stockholder's Equity 16,382,857 6,356,271
------------ ------------
Total liabilities and stockholders' equity
$105,450,893 $111,009,361
============ ============
Net interest income/Interest rate
spread(3) $2,757,263 1.86% $2,097,636 1.68%
========== ====== ========== ======
Net interest-earning assets/net
interest margin(4) $15,460,612 2.71% $ 5,177,230 1.96%
=========== ====== ============ ======
Interest-earning assets to
interest-bearing liabilities 117.94% 105.07%
====== ======
<CAPTION>
-------------------------
At December 31, 1998
-------------------------
Balance Yield/Rate
------- ----------
<S> <C> <C>
Assets:
Interest-earning assets
Loans receivable, net (1) $81,027,313 7.39%
Investment securities(2) 3,917,264 5.65
Interest-bearing deposits 10,374,130 4.54
-----------
Total interest-earning assets 95,318,707 7.01
Non-interest-earning assets 3,523,655
-----------
Total assets $98,842,362
===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities
Deposits $66,344,996 5.26
Advances from FHLB 13,742,153 6.43
-----------
Total interest-bearing
liabilities 80,087,149 5.46
Non-interest-bearing liabilities 2,475,316
-----------
Total liabilities $82,562,465
Stockholder's Equity 16,279,897
-----------
Total liabilities and stockholders' equity
$98,842,362
===========
Net interest income/Interest rate
spread(3) 1.55%
======
Net interest-earning assets/net
interest margin(4)
Interest-earning assets to
interest-bearing liabilities 119.02%
======
</TABLE>
- - ----------
(1) The inclusion of nonaccrual loans in average daily balance and loan fees in
interest and dividends has been deemed to have an immaterial impact on this
analysis.
(2) Includes mortgage-backed securities.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average rate on interest-bearing
liabilities.
(4) Net interest margin represents net interest income before the provision for
loan losses divided by average interest-earning assets.
38
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes
in the Company's interest income and interest expense for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by the old rate); (ii) changes in rate (changes in
rate multiplied by old volume); and (iii) total change in rate and volume. The
combined effects of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
<TABLE>
<CAPTION>
Year Ended December 31,
Increase (Decrease)
---------------------------------------------------------------------------------------
1998 vs.1997 1997 vs. 1996
----------------------------------------- ------------------------------------------
Volume Rate Net Volume Rate Net
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $(902,910) $136,949 $(765,961) $332,995 $(72,503) $260,492
Investment securities (155,934) 11,160 (144,774) (308,423) 26,586 (281,837)
Interest-bearing
deposits 463,595 31,792 495,387 94,141 (16,465) 77,676
----------- ----------- ----------- ----------- ----------- -----------
Total interest income (595,249) 179,901 (415,348) 118,713 (62,382) 56,331
----------- ----------- ----------- ----------- ----------- -----------
Interest Expense
Deposits $(388,868) $(194,699) $(583,567) $(73,173) $(8,037) $(81,210)
Advances from FHLB (547,889) 56,481 (491,408) 152,044 59,831 211,875
----------- ----------- ----------- ----------- ----------- -----------
Total interest
expense (936,757) (138,218) (1,074,975) 78,871 51,794 130,665
----------- ----------- ----------- ----------- ----------- -----------
Net interest income $341,508 $318,119 $659,627 $39,842 $(114,176) $(74,334)
=========== =========== =========== =========== =========== ===========
</TABLE>
39
<PAGE>
Financial Condition
Total assets amounted to $98.8 million at December 31, 1998 compared to
$113.3 million at December 31, 1997. The decrease of $14.5 million or 12.8% was
primarily due to a decrease of $7.9 million in net loans receivable, a decrease
of $4.7 million in cash and cash equivalents and a $2.5 million decrease in
investment securities available for sale, which were somewhat offset by a $1.0
million increase in mortgage-backed securities available for sale. The decrease
in net loans receivable was primarily due to sales of long-term fixed rate loans
in the secondary market as well as loan principal repayments. The decrease in
cash and cash equivalents was primarily due to using cash to fund deposit
outflows and repay FHLB advances. The decrease in investment securities was due
to maturities during 1998 of $2.5 million. The increase in mortgage-backed
securities was due to purchases during 1998 of $2.3 million. Total liabilities
decreased $14.7 million or 15.1% to $82.6 million at December 31, 1998 compared
to $97.2 million at December 31, 1997 due primarily to a decrease in deposits
and FHLB advances. Stockholders' equity increased from $16.1 million at December
31, 1997 to $16.3 million at December 31, 1998 due to net income and the
allocation of ESOP shares committed to be released
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997.
General. The Company had net income of $72,000 for the year ended December
31, 1998 compared to a net loss of $14,000 for the year ended December 31, 1997.
The income during 1998 was primarily due to an increase in net interest income
of $660,000, and a decrease in the provision for loan losses of $147,000,
substantially offset by an increase in other expenses of $608,000.
Net Interest Income. Net interest income for the year ended December 31,
1998 was $2.8 million compared to $2.1 million for the year ended December 31,
1997. The interest rate spread and net interest margin increased to 1.86% and
2.71%, respectively, for 1998 compared to 1.68% and 1.96%, respectively, for
1997. The ratio of interest-earning assets to interest-bearing liabilities
increased to 117.94% for 1998 compared to 105.07% for 1997.
Interest income. Total interest and dividend income was $7,563,000 for the
year ended December 31, 1998 compared to $7,978,000 for the year ended December
31, 1997, representing a decrease of $415,000 or 5.2%. The decrease in fiscal
1998 was due primarily to a decrease in interest on loans from $7.4 million for
the year ended December 31, 1997 to $6.6 million for the year ended December 31,
1998, which was the result of a decrease in the average balance of the Company's
loan portfolio. This decrease was slightly offset by an increase in interest and
dividends on investments from $582,000 for the year ended December 31, 1997 to
$789,000 for the year ended December 31, 1998 due to an increase in the average
balance of such assets.
Interest expense. Total interest expense, which consists primarily of
interest on savings deposits, decreased from $5,881,000 for the year ended
December 31, 1997 to $4,806,000 for the year ended December 31, 1998, which is a
decrease of $1,075,000 or 18.3%. This decrease primarily was the result of a
decrease in interest paid on deposits and FHLB advances due to a decrease in the
average balance of such liabilities.
40
<PAGE>
Provision for Loan Losses. Provisions for loan losses are charged to
earnings to maintain the total allowance for loan losses at a level considered
adequate by the Company to provide for probable loan losses based on prior loss
experience, volume and type of lending conducted by the Company, available peer
group information, and past due loans in the Company's loan portfolio. The
Company's policies require the review of assets on a quarterly basis. While the
Company believes it uses the best information available to make a determination
with respect to the allowance for loan losses, the Company recognizes that
future adjustments may be necessary. The Company provided $69,000 for loan
losses for the year ended December 31, 1998 while providing $216,000 for loan
losses for the year ended December 31, 1997. In establishing such provisions,
the Company also considered the levels of its non-performing loans which were
$165,000 and $774,000 at December 31, 1998 and 1997, respectively.
Other income. Total other income decreased from $256,000 for the year ended
December 31, 1997 to $207,000 for the year ended December 31, 1998. This
decrease in other income was attributable to a decrease in service fees of
$49,000 and a decrease in gains on sale of loans of $34,000, offset by an
increase in other income of $33,000. The decrease in service fees was caused by
a write-down in the value of mortgage servicing rights. The decrease in gains on
sale of loans was due to a decrease in the volume of loans sold. The increase in
other income was due to the amortization of loans valued at the lower of cost or
market. Several of these loans prepaid causing the difference between cost and
market value to be realized.
Other expense. Total other expenses increased from $2,162,000 for the year
ended December 31, 1997 to $2,771,000 for the year ended December 31, 1998,
which represents an increase of $608,000 or 28.1%. Such increases were primarily
due to an increase in salaries and benefits of $132,000, an increase in
advertising expense of $115,000 and an increase in other general and
administrative expenses of $396,000. The increase in salaries and benefits was
due to costs related to the resignation of the Company's president, Ronald P.
Crouch. The increase in advertising expense was due to increased costs related
to introducing new products, such as small business loans and new home equity
loan products and advertising for core deposits, particularly checking accounts.
Other general and administrative expenses were increased primarily due to fees
charged by professional firms in connection with reporting and other obligations
associated with being a public company and costs incurred by the Company in
seeking an acquiror.
Income taxes. The Company experienced a provision for income taxes of
$52,000 for 1998 and a benefit of $10,000 for 1997, resulting in an effective
tax rate of 41.9% and (42.0%), respectively.
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996.
General. The Company had a net loss of $14,000 for the year ended December
31, 1997 compared to a net loss of $95,000 for the year ended December 31, 1996.
The loss during 1997 was primarily due to an increase in the provision for loan
losses and decreases in net interest income and other income, substantially
offset by a decrease in other expenses.
41
<PAGE>
Net Interest Income. Net interest income for the year ended December 31,
1997 was $2.1 million compared to $2.2 million for the year ended December 31,
1996. The interest rate spread and net interest margin decreased to 1.68% and
1.96%, respectively, for 1997 compared to 1.78% and 2.05%, respectively, for
1996. The ratio of interest-earning assets to interest-bearing liabilities
remained stable at 105.07% for 1997 compared to 105.00% for 1996.
Interest income. Total interest and dividend income was $7,978,000 for the
year ended December 31, 1997 compared to $7,922,000 for the year ended December
31, 1996, representing an increase of $56,000 or 0.7%. The increase in fiscal
1997 was due primarily to an increase in interest on loans from $7.1 million for
the year ended December 31, 1996 to $7.4 million for the year ended December 31,
1997, which was the result of an increase in the average balance of the
Company's loan portfolio. This increase was slightly offset by a decrease in
interest and dividends on investments from $791,000 for the year ended December
31, 1996 to $582,000 for the year ended December 31, 1997 due to a decrease in
the average balance of such assets.
Interest expense. Total interest expense, which consists primarily of
interest on savings deposits, increased from $5,750,000 for the year ended
December 31, 1996 to $5,881,000 for the year ended December 31, 1997, an
increase of $131,000 or 2.3%. This increase primarily was the result of an
increase in interest paid on FHLB advances due to an increase in the average
balance of and rate paid on such liabilities. This increase in advances was due
to increased funding needs and a decrease in deposits.
Provision for Loan Losses. Provisions for loan losses are charged to
earnings to maintain the total allowance for loan losses at a level considered
adequate by the Company to provide for probable loan losses based on prior loss
experience, volume and type of lending conducted by the Company, available peer
group information, and past due loans in the Company's loan portfolio. The
Company's policies require the review of assets on a quarterly basis. While the
Company believes it uses the best information available to make a determination
with respect to the allowance for loan losses, the Company recognizes that
future adjustments may be necessary. The Company provided $216,000 for loan
losses for the year ended December 31, 1997 while providing $47,000 for loan
losses for the year ended December 31, 1996. The Company continues to increase
the provision for loan losses due to the growth in the loan portfolio during the
year and due to the increase in non-performing loans. As the loan portfolio
continues to grow, the Company increases the provision for loan losses due to
risk inherent in the loan portfolio. In establishing such provisions, the
Company also considered the levels of its non-performing loans which were
$774,000 and $376,000 at December 31, 1997 and 1996, respectively.
Other income. Total non-interest income decreased from $305,000 for the
year ended December 31, 1996 to $256,000 for the year ended December 31, 1997.
This decrease in non-interest income was attributable to a decrease in service
fees of $85,000 partially offset by an increase in gains from the sale of loans
of $19,000 and an increase in miscellaneous other income of $17,000. The
decrease in service fees was caused by a decrease in application fees collected
due to fewer loan originations and by a write-down in the value of mortgage
servicing rights.
42
<PAGE>
Other expense. Total other expenses decreased from $2,593,000 for the year
ended December 31, 1996 to $2,162,000 for the year ended December 31, 1997, a
decrease of $431,000 or 16.6%. Such decrease was due to the one-time SAIF
special assessment of $492,000 in 1996. Correspondingly, federal insurance
premiums decreased $134,000 to $53,000 in 1997 compared to $187,000 in 1996 due
to a reduction in premiums upon the recapitalization of the SAIF. Such decreases
were partially offset by an increase in salaries and employee benefits of
$163,000 to $1.1 million for 1997 compared to $917,000 for 1996. Salaries and
employee benefits increased due to expenses incurred for the ESOP at the end of
the year of $93,000. The remainder of the increase was caused by lower fee
income provided by loan originations, which was due to a lower volume of
originations during the year. In addition, other general and administrative
expenses increased $61,000 to $414,000 for 1997 due to an increase in legal and
consulting expenses.
Income taxes. The Company experienced a benefit for income taxes of $10,000
for 1997 and $69,000 for 1996. Such benefits were due to losses from operations
during such periods.
Liquidity and Capital Resources
The Savings Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of the Savings Bank's deposits and short-term borrowings. The required ratio
currently is 4.0%. The Savings Bank's average liquidity ratio was 13.2%, 13.9%
and 11.2% at December 31, 1998, December 31, 1997, and December 31, 1996,
respectively.
The Company's primary sources of funds are deposits, repayment and sales of
loans and mortgage-backed securities, maturities of investments and
interest-bearing deposits, funds provided from operations and advances from the
FHLB of Pittsburgh. While scheduled repayments of loans and mortgage-backed
securities and maturities of investment securities are predictable, other
sources of funds, such as deposit flows and loan prepayments, can be greatly
influenced by the general level of interest rates, economic conditions and
competition. The Company uses its liquidity resources principally to fund
existing and future loan commitments, to fund maturing certificates of deposit
and demand deposit withdrawals, to invest in other interest-earning assets, to
maintain liquidity, and to meet operating expenses.
Liquidity may be adversely affected by unexpected deposit outflows, higher
interest rates paid by competitors, and similar matters. Management monitors
projected liquidity needs and determines the level desirable, based in part on
the Company's commitments to make loans and management's assessment of the
Company's ability to generate funds.
The Company and the Savings Bank are subject to federal regulations that
impose certain minimum capital requirements. For a discussion on such capital
levels, see "Item 1. Business-Regulation."
43
<PAGE>
Impact of Inflation and Changing Prices
The Company's financial statements and the accompanying notes presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
The Year 2000 Issue
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 ("Year 2000") approaches. The Year
2000 issue is the result of computer programs being written using two digits
rather than four digits to define the applicable year. Computer programs that
have time-sensitive coding may recognize a date using "00" as the year 1900
rather than the year 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
The Savings Bank has conducted a review of its computer systems to identify
the systems that could be affected by the Year 2000 issue and has developed an
implementation plan to resolve the issue. The majority of the Savings Bank's
data processing is provided by a third party service bureau. The service bureau
is actively involved in resolving Year 2000 issues and has provided the Savings
Bank with frequent updates regarding their progress. The Bank tested their
system for Year 2000 compliance during the third quarter of 1998 with no
material exceptions noted. The Savings Bank presently believes that, based on
the progress of the Savings Bank's service bureau, the Year 2000 problem will
not pose significant operational problems for the Savings Bank's computer
system. Since the critical portion of the Company's Year 2000 issue involves its
third party service bureau, and since testing of that system has been completed
with no significant exceptions, additional costs are anticipated to be
immaterial at this time.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
The accounting for changes in fair value of a derivative depends on the intended
use of the derivative and the resulting designation. This statement is effective
for fiscal years beginning after June 15, 1999, and will not be applied
retroactively to financial statements of prior periods. The impact of this
statement on the Company will depend on the extent of derivatives and embedded
derivatives at the date this statement is adopted
44
<PAGE>
Item 7. Financial Statements
Delaware First Financial Corporation and Subsidiary
Consolidated Financial Statements as of December 31, 1998 and 1997 and for
Each of the Three Years in the Period Ended December 31, 1998, and
Independent Auditors' Report
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Delaware First Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of Delaware First Financial Corporation and subsidiary (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, comprehensive income (loss), changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Delaware First Financial
Corporation and subsidiary at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 5, 1999
46
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------------
ASSETS 1998 1997
------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 10,483,297 $ 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,
$2,950,049; 1997, $1,903,007) 2,942,264 1,900,986
Loans receivable - net 81,027,313 88,933,209
Federal Home Loan Bank stock - at cost 975,000 975,000
Accrued interest receivable:
Loans 714,730 823,266
Investments 36,550 81,353
Mortgage-backed securities 14,393 6,902
Real estate owned 70,645
Office property and equipment, net 1,988,371 1,956,404
Prepaid expenses and other assets 64,303 291,613
Prepaid income taxes 8,527 115,316
Mortgage servicing rights 335,650 371,361
Deferred income taxes 181,319 177,429
------------- -------------
TOTAL ASSETS $ 98,842,362 $ 113,332,425
============= =============
LIABILITIES AND RETAINED EARNINGS
Liabilities:
Deposits $ 66,344,996 $ 76,883,201
Advances from Federal Home Loan Bank 13,742,153 17,400,000
Advances by borrowers for taxes and insurance 673,655 835,417
Accrued interest payable 254,970 358,171
Accounts payable and accrued expenses 1,546,691 1,757,825
------------- -------------
Total liabilities 82,562,465 97,234,614
Stockholders' Equity:
Preferred stock, $.01 par value, 500,000 shares authorized, none issued
Common stock, $.01 par value, 3,000,000 authorized; issued and outstanding,
1,157,000 shares 11,570 11,570
Additional paid-in capital 10,988,356 10,966,430
Common stock acquired by stock benefit plan (740,480) (833,040)
Accumulated other comprehensive loss (5,622) (1,263)
Retained earnings - substantially restricted 6,026,073 5,954,114
------------- -------------
Total stockholders' equity 16,279,897 16,097,811
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 98,842,362 $ 113,332,425
============= =============
</TABLE>
See notes to consolidated financial statements.
47
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 6,586,596 $ 7,352,557 $ 7,092,065
Interest on mortgage-backed securities 187,565 44,057 38,982
Interest and dividends on investments 788,931 581,826 791,062
----------- ----------- -----------
Total interest income 7,563,092 7,978,440 7,922,109
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 3,832,880 4,416,447 4,497,657
Federal Home Loan Bank advances 972,949 1,464,357 1,252,482
----------- ----------- -----------
Total interest expense 4,805,829 5,880,804 5,750,139
----------- ----------- -----------
NET INTEREST INCOME 2,757,263 2,097,636 2,171,970
PROVISION FOR LOAN LOSSES 69,294 215,815 47,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,687,969 1,881,821 2,124,970
----------- ----------- -----------
OTHER INCOME:
Service fees 55,866 104,507 189,604
Gain on sale of loans 54,598 88,125 68,629
Other 96,093 63,389 46,543
----------- ----------- -----------
Total other income 206,557 256,021 304,776
----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 1,195,861 1,063,969 915,532
Advertising 277,658 162,382 202,825
Federal insurance premiums 59,917 52,795 187,057
SAIF special assessment 491,992
Occupancy expense 188,405 208,727 214,968
Data processing expense 140,809 142,887 121,121
Directors fees 98,590 117,915 106,920
Other general and administrative expenses 809,427 413,718 352,872
----------- ----------- -----------
Total other expenses 2,770,667 2,162,393 2,593,287
----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (BENEFIT) 123,859 (24,551) (163,541)
PROVISION FOR INCOME TAXES (BENEFIT) 51,900 (10,300) (69,000)
----------- ----------- -----------
NET INCOME (LOSS) $ 71,959 $ (14,251) $ (94,541)
=========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.06 N/A N/A
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
48
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
<S> <C> <C> <C>
NET INCOME (LOSS) $ 71,959 $ (14,251) $ (94,541)
OTHER COMPREHENSIVE INCOME (LOSS)-
Unrealized (losses) gains on securities (net of
of tax (benefit) - 1998 ($1,512); 1997, $5,151;
1996, ($5,802) (4,359) 9,513 (10,776)
--------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 67,600 $ (4,738) $(105,317)
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
49
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION AMD SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
Common
Stock
Acquired Accumulated
Additional by Stock Other Total
Common Paid-in Benefit Comprehensive Retained Stockholders'
Stock Capital Plan Loss Earnings Equity
----------- ------------ ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 6,062,906 $ 6,062,906
Net loss (94,541) (94,541)
Change in unrealized losses on available for
sale securities, net of tax $(10,776) (10,776)
-------- ----------- ------------
BALANCE, DECEMBER 31, 1996 (10,776) 5,968,365 5,957,589
Common stock issued $ 11,570 $ 10,966,430 10,978,000
Common stock acquired by stock benefit plans $ (925,600) (925,600)
ESOP stock committed to be released 92,560 92,560
Change in unrealized losses on available
for sale securities, net of tax 9,513 9,513
Net loss (14,251) (14,251)
----------- ------------ ----------- -------- ----------- ------------
BALANCE, DECEMBER 31, 1997 11,570 10,966,430 (833,040) (1,263) 5,954,114 16,097,811
ESOP stock committed to be released 21,751 92,560 114,311
Refund of stock conversion costs 175 175
Change in unrealized losses on available
for sale securities, net of tax (4,359) (4,359)
Net income 71,959 71,959
BALANCE, DECEMBER 31, 1998 $ 11,570 $ 10,988,356 $ (740,480) $ (5,622) $ 6,026,073 $ 16,279,897
=========== ============ =========== ======== =========== ============
</TABLE>
See notes to consolidated financial statements.
50
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 71,959 $ (14,251) $ (94,541)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 91,956 126,656 121,751
Provision for loan losses 69,294 215,815 47,000
Gain on sale of investment and mortgage-backed securities (6,925)
Gain on sale of loans (54,598) (88,125) (68,629)
Gain on real estate acquired through foreclosure (9,741)
Loss on disposal of premises and equipment 7,635
Allocation of ESOP shares 114,311 92,560
Amortization of:
Deferred loan fees (227,525) (100,622) (130,226)
Discount on investment and mortgage-backed securities 33,503 (4,193) (8,827)
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable 145,848 158,420 (221,562)
Mortgage servicing rights 35,711 (53,926) (19,466)
Prepaid expenses and other assets 227,310 (225,601) 9,153
Accrued interest payable (103,201) 92,407 45,211
Accounts payable and accrued expenses (211,134) 419,322 505,430
Income taxes 106,789 51,534 (252,740)
Deferral of loan fees 175,377 84,623 379,572
------------ ------------ ------------
Net cash provided by operating activities 473,494 754,619 305,201
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of investments held to maturity 2,996,406
Proceeds from maturity of investments 2,500,000 4,000,000 6,998,205
Principal collected on long-term loans
and mortgage-backed securities 24,381,912 13,649,576 15,576,441
Long-term loans originated (20,716,968) (11,433,144) (38,236,036)
Proceeds from sale of loans 5,218,213 6,812,130 4,407,397
Proceeds from sale of mortgage-backed securities
held to maturity 346,427
Redemption of Federal Home Loan Bank stock 634,800 263,200
Purchase of Federal Home Loan Bank stock (109,800) (1,035,700)
Purchase of investments and mortgage-backed securities (2,327,318) (1,739,460) (4,996,281)
Proceeds from sale of real estate owned 243,435
Purchase of premises and equipment (131,558) (62,103) (39,244)
------------ ------------ ------------
Net cash provided by (used in) investing activities 9,167,716 11,751,999 (13,719,185)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net decrease in deposits (10,538,205) (1,525,592) (3,113,456)
(Decrease) increase in advances by borrowers for taxes
and insurance (161,762) 22,848 160,036
Proceeds from Federal Home Loan Bank advances 2,000,000 49,345,726 79,119,823
Repayments of Federal Home Loan Bank advances (5,657,847) (57,845,726) (61,169,823)
Proceeds from the sale of stock, net of conversion costs 10,978,000
Refund of conversion costs 175
Common stock acquired by stock benefit plan (925,600)
------------ ------------ ------------
Net cash (used in) provided by financing activities (14,357,639) 49,656 14,996,580
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (4,716,429) 12,556,274 1,582,596
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 15,199,726 2,643,452 1,060,856
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 10,483,297 $ 15,199,726 $ 2,643,452
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 4,909,030 $ 5,788,397 $ 5,704,928
============ ============ ============
Income taxes $ 6,352 $ 25,956 $ 310,140
============ ============ ============
Transfers of loans receivable into real estate owned $ 304,339 $ $
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
51
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- - --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
On June 30, 1997, the Board of Directors of Ninth Ward Savings Bank, FSB
(the "Bank") adopted a plan of conversion to convert from a federally
chartered mutual savings bank to a federally chartered capital stock
savings bank with the concurrent formation of a holding company (the
"Conversion").
The Conversion was completed on December 31, 1997, with the issuance by the
holding company Delaware First Financial Corporation (the "Company"), of
1,157,000 shares of its common stock in a public offering to the Bank's
eligible depositors and borrowers, members of the general public and the
Bank's Employee Stock Ownership Plan (the "ESOP"). Net proceeds from the
Conversion amounted to $10,978,000 of which $8,000,000 was used to acquire
100% of the outstanding capital stock of the Bank, and $925,600 was used
for a loan for the ESOP. The Company retained the remaining proceeds of
$2,052,400.
In connection with the Conversion, the Company established the ESOP for the
benefit of eligible employees. The Company purchased 92,560 shares of
common stock on behalf of the ESOP in the Conversion. The ESOP loan is
being repaid in ten equal annual installments with shares of stock being
allocated to eligible employees in accordance with the provisions of the
ESOP as principal payments are made.
The Company's primary market is concentrated in New Castle County,
Delaware, to which it offers mainly conventional residential real estate
loans on new and existing properties and mortgage refinancing. Since 1994,
the Bank has been active in offering equity lines of credit. In 1998, the
Company began originating secured and unsecured loans to small businesses
in its primary market. Effective January 5, 1998, Ninth Ward Savings Bank,
FSB changed its name to Delaware First Bank, FSB.
On November 18, 1998, the Company agreed to be acquired by Crown Group,
Inc., in a cash transaction valued at approximately $17,900,000. The
Agreement and Plan of Reorganization, executed by the Company and Crown
Group, Inc., provides for the exchange of each share of the Company's
common stock for $15.50 in cash. The acquisition is contingent upon receipt
of approvals from regulatory authorities and the Company's shareholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the
accounts of Delaware First Financial Corporation as of December 31, 1998
and 1997. Amounts prior to December 31, 1997 are the accounts of the
Company's wholly owned subsidiary, Ninth Ward Savings Bank, FSB.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiary. Intercompany accounts and transactions have been eliminated in
consolidation.
52
<PAGE>
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
Interest on Loans - The Company recognizes interest on loans when earned.
The Company does not recognize interest on loans deemed to be
uncollectible, generally when a loan is three months or more delinquent.
Such interest ultimately collected is credited to income in the period of
recovery.
Investment and Mortgage-Backed Securities - The Company accounts for debt
and equity securities as follows:
Held to Maturity - Debt securities that management has the positive
intent and ability to hold until maturity are classified as held to
maturity and are carried at their remaining unpaid principal balance,
net of unamortized premiums or unaccreted discounts. Premiums are
amortized and discounts are accreted using the interest method over
the period remaining until maturity.
Available for Sale - Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity, and changes in the availability of and the yield of
alternative investments, are classified as available for sale. These
assets are carried at fair value. Fair value is determined using
published quotes as of the close of business. Unrealized gains and
losses are excluded from earnings and are reported net of tax as a
separate component of retained earnings until realized.
Office Property and Equipment - Office property and equipment is recorded
at cost. Depreciation is computed using either the straight-line method or
an accelerated method over the expected useful lives of the assets, ranging
from three to fifty years. The costs of maintenance and repairs are
expensed as they are incurred, and renewals and betterments are
capitalized.
Loan Fees - The Company defers all loan fees, net of certain costs, and
accretes them into income over the contractual life of the loan using the
interest method.
Allowance for Loan Losses - The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based
on the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current
economic conditions.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") Nos. 114 and 118, Accounting by Creditors for Impairment of a Loan
and Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures, respectively. SFAS No. 114 requires that certain impaired
loans be measured based either on the present value of expected future cash
flows discounted at the loan's effective interest rate, or the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent.
Federal Home Loan Bank Advances - Periodically, the Company borrows from
the Federal Home Loan Bank of Pittsburgh. These borrowings are
collateralized by Federal Home Loan Bank stock and qualified investments
and mortgage loans.
53
<PAGE>
Income Taxes - Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash and interest-bearing accounts.
Interest Rate Risk - The Company is principally engaged in the business of
attracting deposits from the general public and using these deposits,
together with borrowings and other funds, to make loans secured by real
estate and, to a lesser extent, consumer and commercial loans.
At December 31, 1998, the Company had interest-earning assets of
approximately $96,840,000 having a weighted average effective yield of
7.43% which have a weighted average term to maturity greater than the
interest-bearing liabilities of approximately $80,087,000 having a weighted
average effective interest rate of 5.58%. At December 31, 1997, the Company
had interest-earning assets of approximately $110,931,000 having a weighted
average effective yield of 7.44% which have a weighted average term to
maturity greater than the interest-bearing liabilities of approximately
$94,283,000 having a weighted average effective interest rate of 5.76%. The
shorter duration of the interest-sensitive liabilities indicates that the
Company is exposed to interest rate risk because, in a rising rate
environment, liabilities will reprice faster than assets, thereby reducing
the market value of long-term assets and net interest income. For this
reason, management regularly monitors the maturity structure of the
Company's assets and liabilities in order to measure this risk and enact
measures to manage volatility of future interest rate movements.
Mortgage Loans Held for Sale - The Company originates mortgage loans for
sale in the secondary market to provide additional funds for lending. These
loans are carried at the lower of cost or market value, determined on a net
aggregate basis.
Real Estate Owned - Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations of foreclosed real estate and changes
in the valuation allowance are included in loss on foreclosed real estate.
Mortgage Servicing Rights - The Company accounts for mortgage servicing
rights in accordance with SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This
statement requires an entity to recognize the financial and servicing
assets it controls and the liabilities it has incurred, derecognize
financial assets when control has been surrendered, and derecognize
liabilities when extinguished. It requires that servicing assets and other
retained interests in transferred assets be measured by allocating the
previous carrying amounts between the asset sold, if any, and retained
interest, if any, based on their relative fair values at the date of
transfer. Additionally, the Company is required to assess the fair value of
these assets at each reporting date to determine any potential impairment.
Comprehensive Income - During 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income, which requires an entity to present, as a
component of comprehensive income, the amounts from transactions and other
events which currently are excluded from the statement of income and are
recorded directly to stockholders' equity.
54
<PAGE>
Earnings Per Share - In February 1998, the FASB issued SFAS No. 128,
Earnings Per Share, which is effective for periods ending after December
15, 1998. The Company adopted this statement, effective December 31, 1998.
Basic earnings per share for 1998 is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share for 1998 is computed
using the weighted-average number of common shares outstanding and common
share equivalents that would arise from the exercise of stock options.
There were no stock options outstanding on December 31, 1998. Prior period
information is not comparative and therefore not presented.
Accounting Principles Issued and Not Adopted -In June 1998, the FASB issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
This statement requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure
those instruments at fair value. The accounting for changes in fair value
of a derivative depends on the intended use of the derivative and the
resulting designation. This statement is effective for fiscal years
beginning after June 15, 1999, and will not be applied retroactively to
financial statements of prior periods. The impact of this statement will
depend on the extent of derivatives and embedded derivatives at the date
this statement is adopted.
Reclassifications - Certain items in the 1996 and 1997 financial statements
have been reclassified to conform with the presentation in the 1998
financial statements.
3. INVESTMENT SECURITIES
Investment securities available for sale 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>
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>
55
<PAGE>
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale at December 31, 1998 and 1997
are summarized as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 302,954 $ 684 $ (993) $ 302,645
Collateralized mortgage obligations 2,647,095 4,334 (11,810) 2,639,619
---------- ---------- ---------- ----------
Total $2,950,049 $ 5,018 $ (12,803) $2,942,264
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 168,757 $ 1,687 $ 170,444
Collateralized mortgage obligations 1,734,250 640 $ (4,348) 1,730,542
---------- ---------- ---------- ----------
Total $1,903,007 $ 2,327 $ (4,348) $1,900,986
========== ========== ========== ==========
</TABLE>
5. LOANS RECEIVABLE
Loans receivable consist of the following:
December 31,
---------------------------
1998 1997
----------- -----------
First mortgage loans (primarily one-
to four-family residential) $70,855,074 $79,244,982
Loans on savings accounts 630,761 749,969
Small business loans 774,746
Home equity loans - fixed rate 7,556,783 7,413,485
Equity lines or credit - variable rate 2,551,908 2,946,938
----------- -----------
Total 82,369,272 90,355,374
Less:
Allowance for loan losses 489,355 462,815
Deferred loan fees 852,604 959,350
----------- -----------
Total $81,027,313 $88,933,209
=========== ===========
56
<PAGE>
The Company is servicing loans for the benefit of others totaling
approximately $51,787,000 and $56,730,000 at December 31, 1998 and 1997,
respectively. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to
investors and foreclosure processing. Loan servicing income is recorded on
the cash basis and includes servicing fees from investors and certain
charges collected from borrowers, such as late payment fees. In connection
with these loans serviced for others, the Company held borrowers' escrow
balances of $311,320 and $353,742 at December 31, 1998 and 1997,
respectively.
At December 31, 1998 and 1997, the Company had outstanding loan origination
commitments of $1,473,900 and $793,800, respectively, for fixed and
adjustable rate loans, with rates ranging from 5.50% to 9.95% and 7.125% to
11.75%, respectively. These commitments are expected to be funded within
one year. Commitments are issued in accordance with the same loan policies
and underwriting standards as settled loans. In November 1994, the Company
entered into an initial agreement with a community investment company to
purchase $250,000 of loans for low and moderate income housing over the
next three years. At December 31, 1998 and 1997, the Company had purchased
$172,000 and $122,000 of these loans, respectively. The Company entered
into an agreement in January 1998, with the same community investment
company, to purchase an additional $250,000 of these types of loans over
the next three years. At December 31, 1998, the Company had purchased
$18,000 of these loans.
Certain directors and officers of the Company have loans with the Company.
Such loans were made in the ordinary course of business at the Company's
normal credit terms, including interest rate and collateralization, and do
not represent more than a normal risk of collection. The following is a
summary of loans to these officers and directors:
December 31,
------------------------------
1998 1997
Balance, beginning of year $ 511,456 $ 367,780
Additions 322,400 195,090
Repayments (217,166) (51,414)
--------- ---------
Balance, end of year $ 616,690 $ 511,456
========= =========
The following is a summary of changes in the allowance for loan losses:
Year Ended December 31,
--------------------------------------
1998 1997 1996
Balance, beginning of year $ 462,815 $ 247,000 $ 200,000
Provision charged to operations 69,294 215,815 47,000
Charge-offs (42,754)
--------- --------- ---------
Balance, end of year $ 489,355 $ 462,815 $ 247,000
========= ========= =========
Loans delinquent more than 90 days are placed on nonaccrual status. At
December 31, 1998 and 1997, nonaccrual loans amounted to approximately
$94,000 and $774,000, respectively. Interest reserved from these loans
amounted to $3,880, $18,459 and $3,123 at December 31, 1998, 1997 and 1996,
respectively.
57
<PAGE>
The provision for loan losses charged to expense is based upon past loan
and loss experiences and an evaluation of estimated losses in the current
loan portfolio, including the evaluation of impaired loans under SFAS No.
114. A loan is considered to be impaired when, based upon current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan. An
insignificant delay or insignificant shortfall in amount of payments does
not require application of SFAS No. 114. For this purpose, delays less than
90 days are considered to be insignificant. As of December 31, 1998 and
1997, 100% of the impaired loan balance was measured for impairment based
on the fair value of the loan's collateral. Impairment losses are included
in the provision for loan losses. SFAS No. 114 does not apply to large
groups of smaller balance homogeneous loans that are collectively evaluated
for impairment, except for those loans restructured under a troubled debt
restructuring. At December 31, 1998 and 1997, the Company's impaired loans
consisted of smaller balance residential mortgage loans which are
collectively evaluated for impairment.
Interest income on impaired loans other than nonaccrual loans is recognized
on an accrual basis. Interest income on nonaccrual loans is recognized only
as collected.
6. OFFICE PROPERTY AND EQUIPMENT
Office property and equipment is summarized by major classification as
follows:
December 31,
--------------------------------
1998 1997
Land and buildings $ 2,344,384 $ 2,278,764
Furniture and equipment 1,074,998 1,017,822
----------- -----------
Total 3,419,382 3,296,586
Accumulated depreciation (1,431,011) (1,340,182)
----------- -----------
Net $ 1,988,371 $ 1,956,404
=========== ===========
Depreciation expense totaled $91,956, $126,656, and $121,751 for the years
ended December 31, 1998, 1997 and 1996, respectively.
7. MORTGAGE SERVICING RIGHTS
The Company's servicing portfolio for which mortgage servicing rights have
been capitalized at December 31, 1998 consists of fixed rate, predominately
conforming mortgage loans, as follows:
Whole Loans Sold - $31,258,472 - interest rates range from 5.50% to
8.875%; original terms range from 180 months to 360 months with a
weighted average coupon of 7.324%, weighted average remaining maturity
of 298 months, and an average servicing fee of 0.25%.
Participations Sold - $4,177,373 - interest rates range from 6.75% to
8.00%; original terms range from 120 months to 240 months with a
weighted average coupon of 7.30%, weighted average pass-through rate
of 7.10%, and a weighted average remaining term of 142 months.
58
<PAGE>
Evaluation of potential impairment of the carrying value of mortgage
servicing rights is determined based upon market valuation of loans within
specified interest rate ranges. At December 31, 1998 and 1997, the fair
value of mortgage servicing rights approximates its carrying value.
Mortgage servicing rights are amortized in proportion to projected net
servicing revenue.
8. DEPOSITS
Deposits by stated type are summarized as follows:
December 31,
-------------------------------------------
1998 1997
--------------------- --------------------
Amount Percent Amount Percent
Demand deposit accounts:
1998 - 1.70% $ 1,999,737 3.0%
1997 - 2.05% $ 1,063,720 1.4%
Passbook accounts:
1998 - 2.50% 1,697,025 2.6
1997 - 4.14% 2,494,272 3.2
Money market deposit accounts:
1998 - 2.79% 7,043,797 10.6
1997 - 3.40% 8,532,239 11.1
91-day to five-year certificates
of deposit
1998 - 4.08% - 8.27% 55,604,437 83.8
1997 - 4.94% - 7.04% 64,792,970 84.3
----------- ----- ----------- -----
Total $66,344,996 100.0% $76,883,201 100.0%
=========== ===== =========== =====
The weighted average cost of funds was 5.26% and 5.65% at December 31, 1998
and 1997, respectively.
A summary of certificates of deposit by maturity is as follows:
December 31,
---------------------------------
1998 1997
Less than 1 year $36,504,191 $44,979,769
1 to 3 years 15,760,529 16,173,988
3 years or more 3,339,717 3,639,213
----------- -----------
Total $55,604,437 $64,792,970
=========== ===========
59
<PAGE>
A summary of interest expense on savings accounts is as follows:
Year Ended December 31,
----------------------------------------
1998 1997 1996
Passbooks $ 68,497 $ 136,140 $ 109,203
Demand deposit accounts 23,851 19,088 14,634
Money market deposit accounts 228,021 292,641 281,797
Certificates of deposit 3,512,511 3,968,578 4,092,023
---------- ---------- ----------
Total $3,832,880 $4,416,447 $4,497,657
========== ========== ==========
At December 31, 1998, the Company had $10,997,000 of deposits in
denominations of $100,000 or more. Generally, deposits in excess of
$100,000 are not federally insured. The Company does not accept brokered
deposits.
9. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
December 31,
---------------------------------------------------------
1998 1997
------------------------------ --------------------------
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
- - --------------- ----------- -------- ----------- --------
Line of credit
12 months or less $ 7,180,558 6.36% $ 6,600,000 6.27%
13 to 24 months 1,491,580 6.62 6,000,000 6.51
25 to 36 months 3,603,275 6.90 1,300,000 6.72
37 to 48 months 315,684 6.39 3,400,000 6.96
49 to 60 months 1,151,056 5.19 100,000 7.35
----------- -----------
Total $13,742,153 $17,400,000
=========== ==============
The weighted average interest rate for these advances at December 31, 1998,
and 1997 was 6.43% and 6.53%, respectively.
As of December 31, 1997, the Company had an unused line of credit of
$8,592,000 with the Federal Home Loan Bank of Pittsburgh. The Company
cancelled the line of credit in 1998.
10. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and
60
<PAGE>
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible and core capital (as defined in the regulations)
to total adjusted assets (as defined), and of Tier 1 risk-based and total
risk-based capital (as defined) to risk-weighted assets (as defined).
Management believes, as of December 31, 1998, that the Bank meets all
capital adequacy requirements to which they are subject.
The most recent notification to the Office of Thrift Supervision (OTS)
categorized the Bank as well-capitalized under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized, the Bank
must maintain minimum tangible, core and risk-based ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
The Bank's actual capital amounts (in thousands) and ratios are presented
in the table below:
<TABLE>
<CAPTION>
To be Considered
Well Capitalized
Required for Under Prompt
Actual Capital Adequacy Provisions
--------------------- ----------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1998:
Tangible $ 13,349 13.81% $ 1,450 1.50% N/A N/A
Core (leverage) 13,349 13.81 2,899 3.00 $ 4,833 5.00%
Tier 1 risk-based 13,349 24.13 N/A N/A 3,319 6.00
Total risk-based 13,378 24.91 4,426 8.00 5,532 10.00
At December 31, 1997:
Tangible $ 13,085 11.77% $ 1,667 1.50% N/A N/A
Core (leverage) 13,085 11.77 3,335 3.00 $ 5,558 5.00%
Tier 1 risk-based 13,085 21.81 N/A N/A 3,600 6.00
Total risk-based 13,467 22.44 4,800 8.00 6,000 10.00
</TABLE>
Retained earnings for financial statement purposes differs from actual
(leverage) capital amounts by $27,000, and $36,000 at December 31, 1998 and
1997, respectively. This difference represents the unallowed portion of
mortgage servicing rights and the exclusion of the unrealized loss on
available for sale securities. Retained earnings for financial statement
purposes differs from total risk-based capital amounts by the unallowed
portion of mortgage servicing rights, the exclusion of the allowance for
loan losses and the unrealized loss on available for sale securities from
the calculation.
On May 21, 1997, the Bank entered into a supervisory agreement with the OTS
which requires the Bank to develop, adopt and in some cases modify, certain
policies and procedures relating to interest rate risk management,
improvement of operating performance and capital adequacy.
It is management's opinion, based on the Bank's compliance with all
regulatory capital requirements and compliance with various agreements and
directives, that no further regulatory action will be taken and that no
adjustments to the consolidated financial statements will be required.
61
<PAGE>
At the date of the Conversion, the Bank established a liquidation account
in an amount equal to its retained earnings. The liquidation account will
be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after the Conversion. The liquidation
account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an eligible account holder's interest
in the liquidation account. In the event of a complete liquidation of the
Bank, each eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held.
11. INCOME TAXES
As of January 1, 1996, the Company changed its method of computing reserves
for bad debts to the experience method. The bad debt deduction allowable
under this method is available to small banks with assets less than $500
million. Generally, this method allows the Company to deduct an annual
addition to the reserve for bad debts equal to the increase in the balance
of the Company's reserve for bad debts at the end of the year to an amount
equal to the percentage of total loans at the end of the year, computed
using the ratio of the previous six years' net charge-offs divided by the
sum of the previous six years' total outstanding loans at year end.
A thrift institution required to change its method of computing reserves
for bad debts treats such change as a change in a method of accounting
determined solely with respect to the "applicable excess reserves" of the
institution. The amount of the applicable excess reserves is taken into
account ratably over a six-taxable year period, beginning with the first
taxable year beginning after December 31, 1995. For financial reporting
purposes, the Company will not incur any additional tax expense due to
previously provided deferred taxes. At December 31, 1998 under SFAS No.
109, deferred taxes were provided on the difference between the book
reserve at December 31, 1998 and the applicable excess reserve in the
amount equal to the Company's increase in the tax reserve from December 31,
1987 to December 31, 1998. Retained earnings at December 31, 1998 and 1997
includes approximately $1,300,000 representing bad debt deductions for
which no deferred income taxes have been provided.
62
<PAGE>
Income taxes (benefit) consist of the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ---------------------------------- -----------------------------------
Federal State Total Federal State Total Federal State Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current tax provision $42,000 $9,900 $51,900 $(8,400) $(1,900) $(10,300) $(96,200) $(22,800) $(119,000)
Deferred tax provision 50,000 50,000
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total $42,000 $9,900 $51,900 $(8,400) $(1,900) $(10,300) $(46,200) $(22,800) $ (69,000)
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The Company's provision (benefit) for income taxes differs from the amounts
determined by applying the statutory federal income tax rate to income
before income taxes for the following reasons:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- ---------------------
Amount Percentage Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $43,351 35.0% $ (8,593) (35.0)% $(57,239) (35.0)%
Increase (decrease) resulting from:
Benefit of surtax exemption (1,239) (1.0) 246 1.0 1,635 1.0
State income taxes, net of federal
income tax benefit 6,534 5.3 (1,254) (5.1) (15,048) (9.2)
Other 3,254 2.6 (699) (2.8) 1,652 1.0
-------- --- -------- ---- -------- ----
Total $51,900 41.9% $(10,300) (41.9)% $(69,000) (42.2)%
======== === ======== ==== ======== ====
</TABLE>
63
<PAGE>
Items that give rise to significant portions of the deferred tax accounts
at December 31, 1998 and 1997 are as follows:
December 31,
-------------------------
1998 1997
Deferred tax assets:
Deferred loan fees $201,240 $233,526
Reserve for bad debts 91,568 63,840
Other 20,751 14,730
--------- ---------
Total deferred tax assets 313,559 312,096
--------- ---------
Deferred tax liabilities:
Property (18,119) (8,404)
Mortgage servicing rights (114,121) (126,263)
--------- ---------
Total deferred tax liabilities (132,240) (134,667)
--------- ---------
Net deferred income taxes $181,319 $177,429
========= =========
12. EMPLOYEE BENEFITS
Pension Plan
The Company terminated its pension plan on December 17, 1997, ceasing
benefit accruals as of January 15, 1998. The Company distributed excess
funds pro rata to the participants in 1998.
Net pension expense for 1997 and 1996 included the following components:
December 31,
-----------------------
1997 1996
Service cost - benefits earned during the year $62,681 $69,168
Interest cost on projected benefit obligation 60,266 59,198
Actual return on assets (55,469) (29,910)
Net amortization of transition costs (14,376) (47,717)
-------- --------
Net pension expense $53,102 $50,739
======== ========
64
<PAGE>
The following table sets forth the aggregate funded status of the pension
plan for December 31, 1997.
Actuarial present value of benefit obligation:
Vested $653,317
Nonvested 15,998
---------
Total accumulated benefit obligation $669,315
=========
Plan assets at fair value $970,808
Projected benefit obligation (966,140)
---------
Projected benefit obligation less than plan assets 4,668
Unrecognized:
Net gain from past experience (132,423)
Net transition asset (20,923)
---------
Accrued pension liability $(148,678)
=========
The projected benefit obligation was determined using a weighted average
assumed discount rate of 7% and a rate of compensation increase of 4.25%.
The expected weighted average long-term rate of return of plan assets was
7%. Assumed average remaining service lives of employees was approximately
22 years.
The type of assets held by the plan were general trust investments
including cash equivalents, fixed income assets, group annuities and stock
mutual funds.
Deferred compensation agreements are in effect with certain members of the
Board of Directors. Payment of director fees is being deferred under the
terms of the deferred compensation agreements. For the years ended December
31, 1998, 1997 and 1996, $13,939, $11,718 and $11,590, respectively, of
fees were deferred under these agreements.
401(k) Plan
The Company instituted a 401(k) plan beginning in 1997. The plan covers all
full-time employees of the Company and provides for pre-tax contributions
by the employees with matching contributions of 25% of the first 2% of each
employee's contribution. The Company incurred $5,660 and $4,611 in 401(k)
expense for the years ended December 31, 1998 and 1997, respectively.
Common Stock Acquired by Stock Benefit Plan
In connection with the Conversion, the Company established an ESOP for the
benefit of eligible employees. The Company purchased 92,560 shares of
common stock on behalf of the ESOP in the Conversion. For each of the years
ended December 31, 1998 and 1997, 9,256 shares were released from the total
ESOP and allocated to eligible participants. The Company accounts for its
ESOP in accordance with AICPA Statement of Position 93-6, Employers
Accounting for Employee Stock Ownership Plans, which requires the Company
to recognize compensation expense equal to the fair value of the ESOP
shares during the periods in which they become committed to be released. To
the extent that the fair value of the ESOP shares differs from the cost of
such shares, this differential will be charged or credited to equity as
additional paid-in capital. Management expects the recorded amount of
expense to fluctuate as continuing adjustments are made to reflect changes
in the fair value of the ESOP
65
<PAGE>
shares. The Company recorded compensation and employee benefit expense
related to the ESOP of $114,311 and $ 92,560 for the years ended December
31, 1998 and 1997, respectively.
13. CONCENTRATION OF CREDIT RISK
Most of the Company's lending activity is with customers located within the
state of Delaware. Generally, the loans are secured by real estate
consisting of single-family residential properties. The ultimate repayment
of these loans is dependent to a certain degree on the local economy.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1998 1997
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $10,483 $10,483 $15,200 $15,200
Investment securities available for sale 2,500 2,500
Mortgage-backed securities available
for sale 2,942 2,942 1,901 1,901
Loans, net 81,027 80,892 88,933 89,949
Liabilities:
Demand deposits and passbook accounts 3,697 3,697 3,558 3,558
Money market accounts 7,044 7,044 8,532 8,532
Certificates of deposit 55,604 56,357 64,793 65,187
Advances from Federal Home Loan Bank 13,742 13,987 17,400 17,523
</TABLE>
Cash and Cash Equivalents - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
Investments and Mortgage-backed Securities - The fair value of investment
and mortgage-backed securities (including collateralized mortgage
obligations) is based on quoted market prices or dealer quotes.
Loans Receivable - The fair value of loans is estimated based on present
value using approximate current entry-value interest rates applicable to
each category of such financial instruments.
66
<PAGE>
Loans Held for Sale - The fair value of loans held for sale is based upon
commitment prices from the Federal Home Loan Mortgage Corporation.
Demand Deposits, Passbook Accounts, Money Market Accounts and Savings
Certificates - The fair value of demand deposits, passbook accounts and
money market accounts is the amount reported in the financial statements.
The fair value of savings certificates is based on a present value estimate
using rates currently offered for deposits of similar remaining maturity.
Advances from Federal Home Loan Bank - The fair value of advances is based
on a present value estimate using rates currently offered for Federal Home
Loan Bank borrowings of similar remaining maturity.
Commitments to Extend Credit - The majority of the Company's commitments to
extend credit carry current market interest rates if converted to loans.
Because commitments to extend credit are generally unassignable by either
the Company or the borrower, they only have value to the Company and the
borrower. The estimated fair value approximates the recorded deferred fee
amounts, which are insignificant.
The fair value estimates presented herein are based on pertinent
information available to management as of the date indicated. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since the dates
indicated and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
15. SAVINGS ASSOCIATION INSURANCE FUND
On September 30, 1996, an omnibus appropriations bill for fiscal year 1996,
which included recapitalization of the Savings Association Insurance Fund
(SAIF) became law. Accordingly, all SAIF-insured depository institutions
were charged a one-time special assessment based on their SAIF-assessable
deposits as of March 31, 1995 at the rate of 65.7 basis points.
Accordingly, the Company incurred a pre-tax expense of $491,992 during the
third quarter of 1996.
67
<PAGE>
16. PARENT COMPANY FINANCIAL INFORMATION
Financial statements of Delaware First Financial Corporation are as
follows:
Statements of Financial Condition
($000's)
December 31,
----------------------
Assets 1998 1997
Interest-bearing deposits $ 2,417 $ 2,145
Investment in subsidiary bank 14,118 13,954
Other assets 9 1
-------- --------
Total assets $ 16,544 $ 16,100
======== ========
Liabilities and Stockholders' Equity
Other liabilities $ 264 $ 2
-------- --------
Stockholders' equity:
Common stock 12 12
Additional paid-in capital 10,988 10,966
Common stock acquired by the stock benefit plan (740) (833)
Unrealized loss on available for sale securities (6) (1)
Retained earnings 6,026 5,954
-------- --------
Total stockholders' equity 16,280 16,098
-------- --------
Total liabilities and stockholders' equity $ 16,544 $ 16,100
======== ========
Statements of Operations
($000's)
<TABLE>
<CAPTION>
Period
September 23,
1997
(date of
Year Incorporation)
Ended Through
December 31, December 31,
1998 1997
------------- --------------
<S> <C> <C>
Interest income $ 182
Operating expenses (252) $ (1)
----- -----
Net loss before equity in undistributed
earnings from subsidiary 434 (1)
Equity in undistributed earnings from subsidiary 142
----- -----
Net income (loss) $ 72 $ (1)
===== =====
</TABLE>
68
<PAGE>
Statements of Cash Flows
($000's)
<TABLE>
<CAPTION>
Period
September 23,
1997
(date of
Year Incorporation)
Ended Through
December 31, December 31,
1998 1997
---------------- ---------------
<S> <C> <C>
Operating Activities:
Net income (loss) $ 72 $ (1)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary (142)
Increase in other assets (8) (1)
Increase in other liabilities 262 2
Increase in investment in subsidiary (27)
Amortization of common stock acquired by the stock benefit plan 115 93
-------- --------
Net cash provided by operating activities 272 93
-------- --------
Investing Activities - purchase of common
stock of subsidiary (8,000)
--------
Net cash used in investing activities (8,000)
--------
Financing Activities:
Net proceeds from issuance of common stock 10,978
Common stock acquired by stock benefit plan (926)
--------
Net cash provided by financing activities 10,052
--------
Net increase in cash 272 2,145
Cash, Beginning of Period 2,145
-------- --------
Cash, End of Period $ 2,417 $ 2,145
======== ========
</TABLE>
******
69
<PAGE>
Item 8. Changes in and Disagreements on With Accountants on Accounting and
Financial Disclosure
Not applicable
PART III
Item 9. Directors and Executive Officers of the Registrant
Management of the Company and the Savings Bank
The Board of Directors of the Company ("Board") consists of the same
individuals who serve as directors of the Savings Bank. The Company's
Certificate of Incorporation and Bylaws require that directors be divided into
three classes, as nearly equal in number as possible. Each class of directors
serves for a three-year period, with approximately one-third of the directors
elected each year. Officers will be elected annually by the Board and serve at
the Board's discretion.
The Savings Bank's Board of Directors ("Savings Bank Board") is composed of
five members each of whom serves for a term of three years. The Savings Bank's
Federal Stock Charter and Bylaws require that directors be divided into three
classes, as nearly equal in number as possible. Each class of directors serves
for a three-year period, with approximately one-third of the directors elected
each year. Executive officers are elected annually by the Savings Bank Board and
serve at the Savings Bank Board's discretion.
The following table sets forth information with respect to the Company and
Savings Bank's directors and executive officers.
<TABLE>
<CAPTION>
Age at Current
March 31, Director Term
Name 1999 Position Since Expires
---- ---- -------- ----- -------
<S> <C> <C> <C> <C>
J. Bayard Cloud 86 Chairman 1945 1999
Thomas B. Cloud 50 Director 1972 2000
Larry D. Gehrke 53 Director 1988 2000
Alan B. Levin 44 Director 1993 1999
Ernest J. Peoples 66 President, Chief Executive 1964 2001
Officer and Director
</TABLE>
70
<PAGE>
Other Executive Officers
<TABLE>
<CAPTION>
Age at
March 31,
Name 1999 Position
---- ---- --------
<S> <C> <C>
Jerome P. Arrison 47 Executive Vice President, Chief
Operating Officer and Treasurer
A. Joseph Atz 52 Vice President, Small Business
Banking
Genevieve B. Marino 33 Vice President, Retail Banking
Services
Lori N. Richards 36 Vice President, Finance and
Administration
</TABLE>
The principal occupation and business experience of each of the directors
is set forth below. Unless otherwise noted, the information applies for the past
five years. There are no arrangements or understandings between the Company or
the Savings Bank and any person pursuant to which such person has been elected
as a director.
J. Bayard Cloud has been Chairman of the Board since January 1, 1983. He
previously served as President of the Savings Bank from 1961 to 1982. He is the
father of Thomas B. Cloud.
Thomas B. Cloud, since December 1, 1995, has been President and Chief
Executive Officer of United Electric Supply Company, Inc. where he has been
employed since 1973 in various capacities including Controller, Vice President
of Finance and Chief Financial Officer and Executive Vice President. The firm
employs over 190 individuals and distributes electric products to industrial,
institutional and electrical construction customers in a five state area. Mr.
Cloud is the son of J. Bayard Cloud.
Larry D. Gehrke is a director and Vice President of Bellevue Holding
Company of Wilmington, Delaware, a real estate development concern. He has been
employed there since 1972. He holds real estate brokerage licenses from the
State of Delaware and the Commonwealth of Pennsylvania.
Alan B. Levin is Chairman, President and Chief Executive Officer of Happy
Harry's, Inc., a privately held pharmacy chain in Delaware with approximately
1,100 employees. He is a member of the Delaware Bar and a former chairman of the
Delaware Workforce Development Council and Delaware Private Industry Council. He
was formerly a member of the State Attorney General's Office in Delaware.
71
<PAGE>
Ernest J. Peoples has been Interim President and Chief Executive Officer of
the Company and the Savings Bank, since June 1, 1998. Prior to that, he was
retired and formerly an owner of a building and construction firm.
Executive Officers Who Are Not Directors
The following executive officers do not serve on the Company or the Savings
Bank Board. There are no arrangements or understandings between the Savings Bank
and any person pursuant to which such person serves as an executive officer.
Except as otherwise noted, they have been employed by the Company or Savings
Bank for the last five years.
Jerome P. Arrison has been employed by the Savings Bank since August 1989.
He is currently the Chief Operating Officer, Executive Vice President and
Treasurer.
A. Joseph Atz was hired by the Savings Bank in May 1998 as Vice President
of Small Business Banking. Prior to joining the Savings Bank, Mr. Atz was
employed by Beneficial National Bank since 1971. Between 1984 and May 1998, he
worked in the commercial lending area of Beneficial National Bank.
Genevieve B. Marino joined the Savings Bank in November 1995 as the
Director of Marketing and Communications. She assumed her current position, Vice
President of Retail Banking Services, in July 1997. From November 1993 to
November 1995 she was the Advertising and Communications Manager of Wilmington
Savings Fund Society, FSB. Prior to that, she served in other capacities in the
Wilmington Savings Fund Society marketing department.
Lori N. Richards assumed her current position as Vice President of Finance
and Administration in July 1997. From June 1996 to July 1997 she was the
Controller of the Savings Bank. From September 1994 to June 1996 she was an
accounting supervisor at Lanxide Corporation located in Newark, Delaware. From
May 1991 to September 1994 she served as a senior financial accountant at TA
Instruments, Inc. in New Castle, Delaware. She is a Certified Public Accountant.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the officers and directors, and
persons who own more than 10% of the Company's Common Stock to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers, Inc. Officers, directors and
greater than 10% stockholders are required by regulation to furnish the Company
with copies of all Section 16(a) forms they file. The Company knows of no person
who owns 10% or more of the Company's Common Stock.
72
<PAGE>
Based solely on review of the copies of such forms furnished to the
Company, or written representations from its officers and directors, the Company
believes that during, and with respect to, 1998, the Company's officers and
directors complied in all respects with the reporting requirements promulgated
under Section 16(a) of the Exchange Act.
Board Meetings and Committees
The Board of Directors conducts its business through meetings and
activities of its committees. During the year ended December 31, 1998, the Board
of Directors held 12 regular meetings and eight special meetings. No director
attended fewer than 75% of the total meetings of the Board of Directors and
committees on which such director served during the year ended December 31,
1998, except for Mr. Levin who attended 58% of such meetings. The standing
committees of the Board include the following:
Executive Committee. The Executive Committee meets as needed. It makes
recommendations to the full Board and acts on policies adopted by the full Board
in the absence of the meeting of the entire full Board. The committee did not
meet during 1998. The committee is composed of Messrs. Peoples (Chairman), J.
Bayard Cloud, and Thomas Cloud.
Appraisal Committee. The Appraisal Committee consists of Messrs. Peoples
(Chairman), J. Bayard Cloud and Gehrke. The members of the committee review the
appraisals of the real estate collateral for certain loans. The Appraisal
Committee met four times in 1998.
Personnel Committee. The Personnel Committee reviews and prepares
recommendations for annual salary adjustment and bonuses. The committee also
administers the Savings Bank's various benefit plans. It consists of Messrs.
Gehrke (Chairman) and Levin. The committee met six times during 1998.
Budget Committee. The Budget Committee is responsible for determining the
capital needs of the Savings Bank and making recommendations regarding how those
needs may be satisfied. The Budget Committee did not meet during 1998. It
consists of Mr. Gehrke.
Audit Committee. The Audit Committee meets with the Company's independent
certified public accountants annually to review the results of the annual audit
and other related matters. This committee consists of Messrs. Peoples and Levin.
It met once during 1998.
Funds Management Committee. The Fund Management Committee (formerly the
Asset/Liability Committee) consists of Mr. Thomas Cloud. It is principally
responsible for management of the Company's interest rate risk. The committee
met six times during 1998.
73
<PAGE>
Item 10. Executive Compensation
Summary Compensation Table. The Company has not paid separate compensation
to its directors and officers. The following table sets forth a summary of
certain information concerning the compensation paid by the Savings Bank for
services rendered in all capacities during the year ended December 31, 1998,
1997 and 1996 to the President and Chief Executive Officer and the Executive
Vice President and Chief Operating Officer. No other executive officers of the
Company or the Savings Bank had total annual compensation in excess of $100,000
during fiscal 1998.
<TABLE>
<CAPTION>
====================================================================================================================================
Annual Compensation Long-Term
Compensation
- - ----------------------------------------------------------------------------------------------------------------------
Name and Year Salary Bonus Other Annual Restricted Options All Other
Principal Position Compensation Stock Compensation
Awards
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ernest J. Peoples 1998 $68,121(1) $ 0 $ 0 $0 $ 0 $13,350(2)
President and Chief 1997 0 0 0 0 0 31,797(2)
Executive Officer 1996 0 0 0 0 0 30,886(2)
- - ------------------------------------------------------------------------------------------------------------------------------------
Jerome P. Arrison
Executive Vice 1998 $102,323 $ 0 $ 0 $0 $ 0 $12,333(4)
President and Chief 1997 101,000 0 0 0 0 11,341(4)
Operating Officer 1996 96,606 8,921 12,840(3) 0 0 0
- - ------------------------------------------------------------------------------------------------------------------------------------
Ronald P. Crouch
Former President and 1998 $ 46,154(5) $ 0 $ 0 $ 0 $ 0 $85,394(6)
Chief Executive 1997 120,000 0 0 0 0 11,341(4)
Officer 1996 116,595 11,132 12,873(3) 0 0 0
====================================================================================================================================
</TABLE>
- - ----------
(1) Mr. Peoples was appointed to the position of Interim President and Chief
Executive Officer as of June 1, 1998. His annual salary as of December 31,
1998 is $121,800. The amount shown represents salary paid to Mr. Peoples
from June 1, 1998 through December 31, 1998.
(2) This amount represents directors' fees, retainers and special retainers
paid to Mr. Peoples for the period January 1, 1998 through May 31, 1998 and
for the years of 1997 and 1996.
(3) Amounts reflect the Savings Bank's contribution to its defined
non-contributory pension plan on behalf of the employee during 1996. Annual
compensation does not include amounts attributable to other miscellaneous
benefits received by the executive officers. The costs to the Savings Bank
of providing such other miscellaneous benefits during fiscal 1998 did not
exceed the lesser of $50,000 or 10% of the total salary and bonus paid to
or accrued for the benefit of such individual executive officer.
(4) Consists of amounts allocated during the years ended December 31, 1998 and
1997 on behalf of each individual pursuant to the ESOP.
(5) Mr. Crouch resigned as President and Chief Executive Officer of the Company
and the Savings Bank as of May 20, 1998. This amount represents salary paid
to Mr. Crouch from January 1, 1998 through May 20, 1998.
(6) This amount represents payments made to or on behalf of Mr. Crouch in
connection with a severance agreement between the Savings Bank and Mr.
Crouch. These payments included salary continuation, medical, life, and
disability insurance, and outplacement services.
74
<PAGE>
401(k) Plan. In 1997, the Savings Bank established a contributory savings
plan for employees which meets the requirements of Section 401(k) of the Code.
All employees who are at least 21 years old and who have completed at least one
year of service may elect to contribute a percentage of their compensation to
the plan each year subject to certain maximums imposed by federal law. The
Savings Bank matches 25% of each employee's contribution, on the first 2% of
that employee's contribution.
Participants are fully vested in the amounts they contribute to the 401(k).
Participants are fully vested in amounts contributed to the plan on their behalf
by the Savings Bank as employer matching contributions after seven years of
service. Benefits under the 401(k) plan are payable in the event of a
participant's retirement, death, disability, or termination of employment.
Normal retirement age under the 401(k) plan is 65 years of age.
Employee Stock Ownership Plan. The Savings Bank has established an employee
stock ownership plan (the "ESOP") to allow participating employees to share in
its growth and profits. Participating employees are all employees who have
completed one year of service with the Savings Bank and have attained the age of
21.
The ESOP is funded by tax-deductible contributions made by the Savings Bank
in cash or common stock. All contributions to the ESOP will be held in the trust
which is part of the ESOP and will be invested primarily in Savings Bank stock.
To receive an allocation, a participant must be credited with at least
1,000 hours of service during the year and be employed by the Savings Bank on
the last day of the year, or have terminated employment during the year as a
result of death, disability (as defined in the ESOP) or retirement at or after
attaining age 65. A participant becomes vested in his account balance as
follows: after 1 year of service - 20%, 2 years - 40%, 3 years - 60%, 4 years -
80%, 5 years or more - 100%. Full vesting is accelerated upon retirement at or
after age 65, death, disability, or termination of the ESOP, provided such
acceleration is not prohibited by applicable law.
The Board of Directors has appointed the Personnel Committee to administer
the ESOP and to serve as the ESOP Committee. Wilmington Trust Company has been
engaged as the ESOP Trustee. The Personnel Committee is responsible for
administering the ESOP and for instructing the ESOP Trustee regarding the
investment of any ESOP funds which cannot be invested in Savings Bank stock.
Director Compensation
Each of the non-employee directors is paid an annual retainer of $2,000.
Additionally, each non-employee director receives $300 for each board meeting
attended and $300 for each committee
75
<PAGE>
meeting attended. The maximum fee for meetings attended for any director is $300
per day so that if both a board and committee meeting are held on the same day
the maximum payment for attendance is $300.
J. Bayard Cloud, the Chairman of the Board, receives a special retainer of
$28,800 per year. Prior to becoming Interim President, Ernest J. Peoples
received a special retainer of $27,000 per year. These retainers are paid based
on their service as Chair and Vice Chair of the Board and for their review of
appraisals. Since assuming the position of Interim President, Mr. Peoples does
not receive any director fees, retainers or special retainers. Additionally, a
supplemental pension benefit is paid to J. Bayard Cloud. For 1998 the amount of
that benefit was $15,468. Wilmington wage tax is also paid for all non-employee
directors. This tax is currently 1.25% of gross earnings. Wilmington wage
withholding for 1998 was $896. Total aggregate fees paid to the current
directors for the year ended December 31, 1998 were $98,590.
Deferred Non-employee Director Compensation Program
The Savings Bank has a deferred non-employee director compensation program,
whereby directors may defer their fees. Currently, Mr. Gehrke participates in
this program. Pursuant to this program, directors defer their fees until their
retirement or resignation from the Board of Directors. For the year ended
December 31, 1998, $11,433 of fees were deferred pursuant to this program. Fees
deferred pursuant to this program are subject to the general rights of the
Bank's creditors.
76
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 22, 1999, certain information
as to the common stock of the Company beneficially owned by (i) each person or
entity, including any "group" as that term is used in Section 13(d)(3) of the
Exchange Act, who or which was known to the Company to be the beneficial owner
of more than 5% of the issued and outstanding Common Stock, (ii) the directors
of the Company, (iii) those executive officers of the Company whose salary and
bonus exceeded $100,000 in fiscal 1998, and (iv) all directors and executive
officers of the Company and the Savings Bank as a group.
<TABLE>
<CAPTION>
Common Stock Beneficially Owned as of
Name of Beneficial Owner March 22, 1999(1)
- - ----------------------------------------------------- ----------------------------------------------
No. %
--------------------- ---------------------
<S> <C> <C>
Delaware First Financial Corporation Employee 74,048(2) 6.4%
Stock Ownership Plan and Trust
400 Delaware Avenue
Wilmington, Delaware 19801
Jeffrey L. Gendell, et al. 114,500(3) 9.9
200 Park Avenue
Suite 3900
New York, New York 10166
Directors:
J. Bayard Cloud 1,000 *
Thomas B. Cloud 6,154 *
Larry D. Gehrke 5,000 *
Alan B. Levin 1,500 *
Ernest J. Peoples 1,000 *
Executive Officer:
Jerome P. Arrison 2,467(4) *
All directors and executive officers of the Company 23,809 2.1
and the Bank as a group (nine persons)
</TABLE>
- - ----------
* Represents less than 1% of the outstanding Common Stock.
(Footnotes continued on next page)
77
<PAGE>
(1) Based upon filings made pursuant to the Exchange Act and information
furnished by the respective individuals. Under regulations promulgated
pursuant to the Exchange Act, shares of the Company's Common Stock are
deemed to be beneficially owned by a person if he or she directly or
indirectly has or shares (i) voting power, which includes the power to vote
or to direct the voting of the shares, or (ii) investment power, which
includes the power to dispose or to direct the disposition of the shares.
Unless otherwise indicated, the named beneficial owner has sole voting and
dispositive power with respect to the shares.
(2) The Delaware First Employee Stock Ownership Plan Trust ("Trust") was
established pursuant to the ESOP by an agreement between DFFN and
Wilmington Trust Company who acts as trustee of the plan ("Trustee"). As of
December 31, 1998, 18,512 shares held in the Trust have been allocated to
the accounts of participating employees. The 74,048 unallocated shares held
in the Trust as of December 31, 1998 will be voted by the Trustee in
accordance with its fiduciary duty as Trustee. The amount of Common Stock
beneficially owned by all directors and executive officers as a group does
not include the shares held by the Trust.
(3) Mr. Gendell is the managing member of Tontine Management, L.L.C., a limited
liability company organized under the laws of the State of Delaware ("TM")
and Tontine Overseas Associates, L.L.C., a limited liability company
organized under the laws of the State of Delaware ("TOA"). TM is the
general partner of Tontine Financial Partners, L.P., a Delaware limited
partnership ("TFP"). TOA serves as the investment manager to TFP Overseas
Funds, Ltd., a company organized under the laws of the Cayman Islands
("TFPO"). TFP and TFPO directly own 93,750 and 20,750 shares of DFFN's
Common Stock, respectively. The business address of Mr. Gendell and TM,
TOA, TFP and TFPO is 200 Park Avenue, Suite 3900, New York, New York 10166.
(4) Includes 2,367 shares of the Company's common stock allocated to Mr.
Arrison under the ESOP which the Trustees will vote in accordance with Mr.
Arrison's instructions.
Item 12. Certain Relationships and Related Transactions
The Company offers loans to its directors and officers. These loans are
currently made in the ordinary course of business with the same collateral,
interest rates and underwriting criteria as those of comparable transactions
prevailing at the time and do not involve more than the normal risk of
collectibility or present other favorable features. Under current law, the
Company's loans to directors and executive officers are required to be made on
substantially the same terms, including interest rates, as those prevailing for
comparable transactions and must not involve more than the normal risk of
repayment or present other favorable features. Additionally, all loans to such
persons must be approved in advanced by a disinterested majority of the Board of
Directors. At December 31, 1998, the Company's loans to directors and executive
officers totalled approximately $617,000, or 3.8% of the Company's retained
earnings at that date.
78
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
(a) The following exhibits are filed as part of the Form 10-K, and this
list includes the Exhibit
Index:
No. Exhibits
- - --- --------
3.1 Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.0 Stock Certificate of the Company.*
21.0 List of Subsidiaries.*
27.0 Financial Data Schedule.
- - ----------
*Incorporated herein by reference from the Company's Registration Statement on
Form SB-2 filed with the SEC on September 26, 1997.
(b) Reports filed on Form 8-K.
On November 24, 1998, the Company filed a Form 8-K Current Report under
Item 5 to reflect the execution on November 18, 1998 of an Agreement and Plan of
Reorganization pursuant to which The Crown Group, Inc. will acquire the Company.
No financial statements were filed.
79
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DELAWARE FIRST FINANCIAL CORPORATION
By: /s/ Ernest J. Peoples
---------------------------------------
Ernest J. Peoples
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ Ernest J. Peoples March 31, 1999
- - --------------------------------------
Ernest J. Peoples
President and Chief Executive Officer
/s/ J. Bayard Cloud March 31, 1999
- - --------------------------------------
J. Bayard Cloud
Chairman of the Board
/s/ Thomas B. Cloud March 31, 1999
- - --------------------------------------
Thomas B. Cloud
Director
/s/ Larry D. Gehrke March 31, 1999
- - --------------------------------------
Larry D. Gehrke
Director
80
<PAGE>
/s/ Alan B. Levin March 31, 1999
- - --------------------------------------
Alan B. Levin
Director
/s/ Jerome P. Arrison March 31, 1999
- - --------------------------------------
Jerome P. Arrison
Vice President
(principal financial officer)
/s/ Lori N. Richards
- - --------------------------------------
Lori N. Richards March 31, 1999
Treasurer
(principal accounting officer)
81
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001046001
<NAME> DELAWARE FIRST FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,483
<INT-BEARING-DEPOSITS> 10,374
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,942
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 81,027
<ALLOWANCE> 489
<TOTAL-ASSETS> 98,842
<DEPOSITS> 66,345
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 2,475
<LONG-TERM> 8,742
0
0
<COMMON> 12
<OTHER-SE> 16,280
<TOTAL-LIABILITIES-AND-EQUITY> 98,842
<INTEREST-LOAN> 6,587
<INTEREST-INVEST> 976
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,563
<INTEREST-DEPOSIT> 3,833
<INTEREST-EXPENSE> 4,806
<INTEREST-INCOME-NET> 2,757
<LOAN-LOSSES> 69
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,771
<INCOME-PRETAX> 124
<INCOME-PRE-EXTRAORDINARY> 124
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
<YIELD-ACTUAL> 2.89
<LOANS-NON> 94
<LOANS-PAST> 0
<LOANS-TROUBLED> 12
<LOANS-PROBLEM> 861
<ALLOWANCE-OPEN> 463
<CHARGE-OFFS> 43
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 489
<ALLOWANCE-DOMESTIC> 349
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 140
</TABLE>
