SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X]Preliminary Proxy Statement [ ]Confidential, for Use of the Commission Only
[ ]Definitive Proxy Statement (as permitted by Rule 14a-6(e)(2))
[ ]Definitive Additional Materials
[ ]Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Delaware First Financial Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
------------
(2) Aggregate number of securities to which transaction applies:
1,157,000 shares
----------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$15.50/share
------------
(4) Proposed maximum aggregate value of transaction: $17.9 million
-------------
(5) Total fee paid: $3,587
------
[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid: ______________________________________________
(2) Form, schedule or registration statement no.: ________________________
(3) Filing party: ________________________________________________________
(4) Date filed: __________________________________________________________
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
400 Delaware Avenue
Wilmington, Delaware 19801
(302) 421-9090
________ __, 1999
Dear Stockholder:
You are cordially invited to attend our Special Meeting of Stockholders
on ________, _______ __, 1999 at 10:00 a.m., Eastern Time, at the
________________, ___________________________, ___________ (the "Special
Meeting").
At the Special Meeting, Stockholders will be asked to adopt the Amended
and Restated Merger Agreement dated as of November 18, 1998, as amended on
February 17, 1999, and a related Agreement and Plan of Merger and Combination
Agreement (together, the "Agreement"), whereby we will be collapsed into our
wholly-owned subsidiary, Delaware First Bank, FSB ("Delaware First"), a
federally-chartered stock savings bank and immediately thereafter, Delaware
First will be merged (together, the "Merger") into Crown Bank, FSB ("Crown
Bank"), a federally-chartered stock savings bank, with Crown Bank as the
resulting institution. If the Merger is consummated, each share of our common
stock, par value $0.01 per share ("Common Stock"), outstanding immediately prior
to consummation of the Merger (other than shares as to which dissenters' rights
have been asserted and duly perfected in accordance with applicable law) shall
be converted into and represent the right to receive $15.50 in cash.
As a result of the Merger, our separate corporate existence shall
cease. Approval by our Stockholders of the Agreement is a condition to
consummation of the Merger. The terms of the proposed Merger are explained in
detail in the accompanying Proxy Statement, which we urge you to read carefully.
Each Stockholder entitled to vote at the Special Meeting will have the
right to dissent from the Merger and to obtain payment for the fair value of his
shares upon compliance with the applicable provisions of Delaware law. For a
summary of the rights of our Stockholders to dissent, see "THE MERGER -
Dissenters' Rights" in the attached Proxy Statement and Appendix C thereto.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR
OF THE PROPOSAL TO ADOPT THE AGREEMENT, WHICH THE BOARD BELIEVES IS IN THE BEST
INTERESTS OF OUR STOCKHOLDERS.
<PAGE>
Enclosed is a Notice of Special Meeting of Stockholders, the Proxy
Statement and a proxy card. Your vote is important, regardless of the number of
shares you own. Please complete, sign and date the enclosed proxy card and
return it as soon as possible in the envelope provided. If you decide to attend
the Special Meeting, you may vote your shares in person whether or not you have
previously submitted a proxy. On behalf of the Board, I thank you for your
attention to this important matter.
Very truly yours,
/s/ Ernest J. Peoples
--------------------------------
Ernest J. Peoples
President
and Chief Executive Officer
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
400 Delaware Avenue
Wilmington, Delaware 19801
(302) 421-9090
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON _______ __, 1999
NOTICE IS HEREBY GIVEN that our Special Meeting of Stockholders will be
held at the _____________, ____________________ on ________, _______ __, 1999 at
10:00 a.m., Eastern Time (the "Special Meeting"), for the following purposes,
all of which are more completely set forth in the accompanying Proxy Statement:
1. To consider and vote upon the adoption of the Amended and Restated
Merger Agreement dated as of November 18, 1998, as amended on February
17, 1999, by and among The Crown Group, Inc. ("Crown"), Crown Bank,
Delaware First Financial Corporation ("DFFN") and Delaware First and a
related Agreement and Plan of Merger and Combination Agreement
(together, the "Agreement"), pursuant to which (i) DFFN will be
collapsed into Delaware First and immediately thereafter, Delaware
First will be merged into Crown Bank which is the wholly-owned
subsidiary of Crown and (ii) each share of Common Stock outstanding
immediately prior to consummation of the Merger (other than shares as
to which dissenters' rights have been asserted and duly perfected in
accordance with applicable law) shall be converted into and represent
the right to receive $15.50 in cash.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
Only holders of record of the Common Stock at the close of business on
________ __, 1999 are entitled to notice of and to vote at the Special Meeting
and any adjournments thereof.
Any Stockholder entitled to vote at the Special Meeting will have the
right to dissent from the Merger and to obtain payment for the fair value of his
shares upon compliance with the applicable provisions of Delaware law. For a
summary of the rights of our Stockholders to dissent see "THE MERGER -
Dissenters' Rights" in the attached Proxy Statement and Appendix C thereto.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Ernest J. Peoples
-----------------------------------
Ernest J. Peoples
President
and Chief Executive Officer
<PAGE>
Wilmington, Delaware
________ __, 1999
- --------------------------------------------------------------------------------
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU PLAN TO
BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY
VOTE EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU BY
EXECUTING A LATER DATED PROXY WHICH IS RECEIVED BY DFFN BEFORE THE PROXY IS
EXERCISED OR BY GIVING NOTICE OF REVOCATION TO DFFN IN WRITING OR IN OPEN
MEETING AT ANY TIME PRIOR TO THE EXERCISE OF THE PROXY.
- --------------------------------------------------------------------------------
<PAGE>
DELAWARE FIRST FINANCIAL CORPORATION
400 Delaware Avenue
Wilmington, Delaware 19801
(302) 421-9090
---------------
PROXY STATEMENT
---------------
GENERAL
This Proxy Statement is furnished to holders of our Common Stock in
connection with the solicitation of proxies for the Special Meeting to be held
at _______________________, on __________________, _______ __, 1999 at 10:00
a.m., Eastern Time. The solicitation of proxies in the enclosed form is made on
behalf of our Board of Directors. This Proxy Statement, the attached Notice of
Special Meeting of Stockholders, and the form of proxy and other documents
enclosed herewith are first being mailed to Stockholders on or about __________
__, 1999. The date of this Proxy Statement is ____________________ __, 1999.
At the Special Meeting, Stockholders will be asked to consider and vote
upon a proposal to approve and adopt the Agreement and to approve the Merger.
Pursuant to the Agreement, DFFN will be collapsed into Delaware First, and
immediately thereafter, Delaware First will be merged with and into Crown Bank.
At the effective time of the Merger (the "Effective Time"), each share of Common
Stock issued and outstanding immediately prior to the Effective Time (other than
shares owned of record by our Stockholders who have a right to dissent in the
Merger and who properly exercise their rights under the Section 262 of the
Delaware General Corporation Law ("DGCL")), will be cancelled and by operation
of law will be converted into the right to receive from Crown Bank $15.50 in
cash (the "Merger Consideration"). After the Merger, our Stockholders will have
no further interest in us, except to receive payment for their shares. A copy of
the Agreement is attached as Appendix A to this Proxy Statement.
The proxy solicited hereby, if properly signed and returned to us and
not revoked prior to its use, will be voted in accordance with the instructions
contained therein. If no contrary instructions are given, each proxy received
will be voted FOR the Merger and the transaction of such other business as may
properly come before the meeting in accordance with the best judgment of the
persons appointed as proxies. Any stockholder giving a proxy has the power to
revoke it at any time before it is exercised by (i) filing with our Secretary
written notice thereof (Lori N. Richards, Secretary, Delaware First Financial
Corporation, 400 Delaware Avenue, Wilmington, Delaware 19801); (ii) submitting a
duly-executed proxy bearing a later date; or (iii) appearing at the Special
Meeting and giving the Secretary notice of his or her intention to vote in
person. Proxies solicited hereby may be exercised only at the Special Meeting
and any adjournment thereof and will not be used for any other meeting.
<PAGE>
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith file reports, proxy statements and other information with the
Commission. The reports, proxy statements and other information filed by us with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and at the Commission's Regional Offices at 7
World Trade Center, Suite 1300, New York, New York 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 or
from the Web Site maintained by the Commission at "http://www.sec.gov." Copies
of such material also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
prescribed rates. Common Stock is listed on the Nasdaq Stock Market. Copies of
such reports, proxy statements and other information may also be inspected at
the National Association of Securities Dealers, Inc. (the "NASD"), located at
1735 K Street, N.W., Washington, D.C. 20006. Upon consummation of the Merger,
listing of Common Stock on Nasdaq Stock Market will be terminated.
Statements contained in this Proxy Statement or in any document
supplied herewith as to the contents of any contract or other document referred
to herein or therein are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document, each such
statement being qualified in all respects by such reference.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
GENERAL................................................................. 1
TABLE OF CONTENTS....................................................... 3
SUMMARY................................................................. 6
THE MERGER.............................................................. 10
General.............................................................. 10
Background of and Reasons for the Merger............................. 10
Opinion of Trident Financial Corporation............................. 12
Merger Consideration................................................. 18
Conditions to the Merger............................................. 18
Procedures for Exchange of Our Stock Certificates ................... 20
Regulatory Approvals................................................. 21
Business Pending the Merger.......................................... 21
Acquisition Proposals................................................ 23
Representations and Warranties....................................... 23
Effective Time of Merger; Termination and Amendment.................. 23
Interests of Certain Persons in the Merger........................... 24
Employee Stock Ownership Plan................................... 25
Consulting Services............................................. 26
Officers and Employees of DFFN and Delaware First............... 26
Employee Benefit Plans.......................................... 26
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> . <C>
Indemnification................................................. 27
Insurance ...................................................... 27
Retention Bonuses............................................... 28
Certain Federal Income Tax Consequences.............................. 28
Accounting Treatment of the Merger................................... 29
Dissenters' Rights................................................... 29
Expenses of the Merger............................................... 31
BENEFICIAL OWNERSHIP OF COMMON STOCK BY CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................................ 32
BUSINESS................................................................. 33
REGULATION............................................................... 54
TAXATION................................................................. 58
PROPERTIES............................................................... 60
LEGAL PROCEEDINGS........................................................ 61
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................. 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION ............................................ 62
ADJOURNMENT.............................................................. 76
OTHER MATTERS............................................................ 76
FINANCIAL STATEMENTS..................................................... 77
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Appendices
Appendix A - Amended and Restated Merger Agreement
Appendix B - Form of Opinion of Trident Financial Corporation
Appendix C - Delaware General Corporation Law Section 262
</TABLE>
5
<PAGE>
SUMMARY
While the following paragraphs fairly summarize the material terms and
conditions of the proposed acquisition of DFFN by Crown Bank, they are only a
summary and should be read in conjunction with the full text of this Proxy
Statement, the attachments hereto and the documents referred to herein. Each
Stockholder is urged to read the entire Proxy Statement and attachments with
care.
Special Meeting. This Proxy Statement is being delivered in connection
with the Special Meeting of our Stockholders to be held at
_______________________, on ___________________ ___________ __, 1999 at 10:00
a.m., Eastern Time. At the Special Meeting, Stockholders will be asked to
approve and adopt the Agreement and to approve the Merger. Pursuant to the
Merger, DFFN will be collapsed into Delaware First, and immediately thereafter,
Delaware First will be merged into Crown Bank. When the Merger is consummated,
each share of our Common Stock (other than shares owned of record by our
Stockholders who have the right to dissent and who properly exercise their
rights under the DGCL), will be cancelled and by operation of law will be
converted into the right to receive from Crown $15.50 in cash. After the Merger,
our Stockholders will have no further interest in us, except to receive payment
for their shares.
Stockholders of record as of the close of business on _________ __,
1999 will be entitled to notice of, and to vote their shares of Common Stock at
the Special Meeting. Stockholders are entitled to one vote for each share of
Common Stock held on such date.
Vote Required
A quorum, consisting of a majority of the issued and outstanding Common
Stock, must be present in person or by proxy before any action can be taken at
the Special Meeting, except that less than a quorum may adjourn the Special
Meeting. The affirmative vote of the holders of more than one half of the
outstanding shares of Common Stock is required to approve the Merger and the
Agreement.
Our Board of Directors do not anticipate that any other matter will be
brought before the Special Meeting. If, however, any other matter is properly
brought before the Special Meeting, or any adjournment thereof, the persons
appointed as proxies will have discretion to vote or act thereon in accordance
with their best judgment.
6
<PAGE>
Voting and Revocation of Proxies
A proxy for use at the Special Meeting is enclosed and is solicited by
the Board of Directors. If the enclosed proxy is properly executed and returned
by a Stockholder, it will be voted in accordance with the instructions indicated
thereon. If a proxy is signed but not marked, it will be voted FOR approval of
the Merger and the Agreement. Any Stockholder giving a proxy may revoke it at
any time before it is voted. Revocation of a proxy is effective upon receipt by
our Secretary of either (a) an instrument revoking it or (b) a duly executed
proxy bearing a later date. Any Stockholder who is present at the Special
Meeting may revoke his proxy and vote in person.
Recommendation of the Board of Directors. Our Board of Directors has
unanimously approved the Agreement and the Merger and unanimously recommends a
vote FOR approval of the Agreement and the Merger. The Board has taken such
action and made such recommendation, after consideration of alternatives to us
and engagement of a financial advisor to solicit offers from potential
acquirors, because it believes the Merger to be in the best interests of DFFN
and our Stockholders. See "THE MERGER - Background of and Reasons for the
Merger."
The Agreement. The Agreement sets forth the terms of the Merger and
provides that DFFN will be collapsed into Delaware First and immediately
thereafter, Delaware First will be merged into Crown Bank. The Merger will
become effective upon the filing of Articles of Combination with the Office of
Thrift Supervision (the "OTS"). When the Merger has been consummated, (i) Crown
will have all of the rights, business, properties and obligations which each of
Crown and DFFN had before the consummation of the Merger, and (ii) our
Stockholders will have no further interest in us except to receive payment for
their shares of Common Stock.
Conversion and Exchange of Shares. On the Effective Time, each share of
Common Stock will be automatically converted into the right to receive the
Merger Consideration. After the Effective Time, each Stockholder will be sent
instructions for exchanging stock certificates representing the Common Stock for
the Merger Consideration.
Representations and Warranties; Covenants. The parties to the Agreement
have made representations and warranties customary in such transactions and have
entered into certain covenants. In particular, DFFN has agreed that, pending
consummation of the Merger, it will conduct its business prudently and in
accordance with current practices and has agreed to certain limitations on,
among other things, loans and employee matters. See "THE MERGER - Business
Pending the Merger."
Conditions to the Merger. The obligations of the parties to consummate
the Merger are subject to various conditions, including, the receipt of all
required regulatory approvals; the approval of the Merger by the requisite vote
of our Stockholders; the satisfaction of all other requirements prescribed by
law which are necessary for the consummation of the Merger; the absence of any
order, decree, injunction, statute, rule or regulation prohibiting or enjoining
any part of the Merger; and the absence of any litigation or proceeding by any
governmental agency seeking to prevent
7
<PAGE>
consummation of the Merger. In addition, the Agreement sets forth various
conditions to the respective obligations of Crown and DFFN to consummate the
Merger. See "THE MERGER - Conditions to the Merger."
Termination; Amendment. The Agreement may be terminated and the Merger
abandoned in certain circumstances. In addition, any provision of the Agreement
may be waived by the party benefitted by such provision and the Agreement may be
amended by an agreement in writing signed on behalf of Crown and DFFN. See "THE
MERGER" - Effective Time of Merger; Termination and Amendment."
No Solicitation; Termination Fee. We have agreed that we will not hold
discussions with any other person concerning a business combination, except in
response to an unsolicited proposal and then only to the extent required in
order to discharge the fiduciary duties of our directors. We have agreed to pay
Crown a fee of $800,000 if, under the circumstances described in the Agreement,
we engage in an acquisition transaction with a party other than Crown. See "THE
MERGER Expenses of the Merger."
Regulatory Approvals. Consummation of the Merger is subject to among
other things, prior receipt of all requisite approvals from the OTS, and
expiration of all regulatory waiting periods applicable to the Merger. Crown
filed the necessary application with the OTS in order to consummate the Merger
on March 18, 1999, received comments on the application by letter dated
___________ ___, _____ and filed an amendment to the application on __________
__, ___. The period for the OTS' review of any proposed acquisition, such as the
acquisition of us, commences upon receipt by the OTS of an application deemed
sufficient by the OTS. Crown's application was deemed sufficient by the OTS on
______________. Once an application is deemed sufficient, the OTS generally has
a 60-day period for review of the application, which may be extended by the OTS
for up to an additional 30 days.
Opinion of Financial Advisor. Our Board of Directors has been advised
by Trident Financial Corporation ("Trident"), our financial advisor, that, in
its opinion, the Merger Consideration to be received by our Stockholders is fair
from a financial point of view. A copy of Trident's fairness opinion is attached
hereto as Appendix B. See "THE MERGER - Opinion of Trident Financial
Corporation."
Interests of Certain Persons in the Merger. Certain persons may have
interests in the Merger not related to any Common Stock they may hold. These
include (i) Ernest J. Peoples and J. Bayard Cloud will become consultants to
Crown for a one-year period from the Effective Time; (ii) J. Bayard Cloud will
continue to receive a lifetime supplemental pension benefit from Crown; and
(iii) Crown's agreement to continue rights of indemnification and liability
insurance for DFFN's officers and directors for certain periods. See "THE MERGER
- - Interests of Certain Persons in the Merger."
8
<PAGE>
Certain Federal Income Tax Consequences. If the Merger is consummated,
our Stockholders will recognize gain or loss for federal income tax purposes
upon the exchange of their shares of Common Stock for cash. The gain or loss
will be equal to the difference between the amount of cash received and the
Stockholder's basis in his shares. Such gain or loss will be capital gain or
loss if the shares are held as capital assets by the Stockholder. Because tax
consequences may vary depending on the particular circumstances of a
Stockholder, we recommend that each Stockholder consult with his/her own tax
advisor concerning federal, state, local and foreign income tax consequences of
the Merger. See "THE MERGER" - Certain Federal Income Tax Consequences."
Rights of Dissenting Stockholders. Pursuant to Section 262 of the DGCL,
our Stockholders who (i) file with us before the vote on the Merger at the
Special Meeting a written notice of intention to demand appraisal of their
shares if the Merger is effected and (ii) do not vote in favor of the Merger,
will be entitled to be paid the fair value of their shares as agreed upon with
Crown, or if the fair value remains unsettled, as determined by the Court of
Chancery of Delaware (the "Chancery Court"), provided that the Merger is
consummated and such Stockholders properly comply with certain statutory
procedures. Fair value of dissenting shares ("Dissenting Shares") means the
value immediately before the Effective Time, excluding any change in value in
anticipation of the Merger unless such exclusion is inequitable (which amount
may be more than, less than or the same as the Merger Consideration). The
written notice which a dissenting stockholder ("Dissenting Stockholder") must
deliver to us is in addition to and separate from any proxy or vote against the
Merger. Failure to vote or abstention by a Stockholder will not satisfy the
requirement of written notice of intent to demand payment, but will satisfy the
requirement that a Stockholder not vote in favor of the Merger. A vote in favor
of the Merger will waive any appraisal rights. The additional procedures which
must be followed for a Stockholder to exercise dissenters' rights are described
herein under "THE MERGER - Dissenters' Rights." Failure to take any step in
connection with the exercise of such rights will result in termination or waiver
thereof.
Common Stock Prices. The Common Stock is quoted on the National
Association of Securities Dealers' Automated Quotation System ("NASDAQ") under
the symbol "DFFN." On November 17, 1998, the day before the public announcement
of the Merger, the high ask price per share of the Common Stock as reported by
NASDAQ was $10.25, and low bid price per share of the Common Stock as reported
by NASDAQ was $10.25 with the close at $10.25. On ___________________ __, 1999,
a day shortly before the date of mailing this Proxy Statement, the high ask
price per share of the Common Stock as reported was $______ and the low bid
price per share of the Common Stock as reported by NASDAQ was $____. For
additional information about prices of the Common Stock, see "MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS" herein.
THE ABOVE MATTERS AND OTHER MATTERS RELATING TO THE TRANSACTION ARE
DESCRIBED IN GREATER DETAIL IN THE REMAINDER OF THIS PROXY STATEMENT. YOU ARE
STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT IN ITS
ENTIRETY.
9
<PAGE>
THE MERGER
The following description of the material terms of the Merger does not
purport to be complete and is qualified in its entirety by reference to the
Agreement, a copy of which is attached to this Proxy Statement as Appendix A.
All our Stockholders are urged to read such document carefully.
General
The Boards of Directors of Crown and DFFN have determined that the
acquisition of DFFN by Crown is desirable and in the best interests of Crown's
and our respective Stockholders and have unanimously approved the Merger. The
Merger will be accomplished through the collapsing of DFFN with and into
Delaware First and the Merger of Delaware First with and into Crown Bank,
pursuant to the Agreement, with Crown Bank being the resulting institution. OUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ADOPTION OF THE
AGREEMENT. Upon consummation of the Merger, each share of Common Stock
outstanding at the Effective Time will be converted into and represent the right
to receive $15.50 cash, as described under "THE MERGER - The Merger
Consideration."
Background of and Reasons for the Merger
Like other thrifts, the core of Delaware First's business consists of
attracting deposits from the general public and originating loans to finance the
acquisition, construction, or improvement of residential properties located in
the market areas served by Delaware First. Management has worked to diversify
Delaware First's activities by expanding commercial real estate and consumer
lending and improving the array of deposit products offered by Delaware First.
Our Board of Directors and management have recognized that the
increased competition from commercial banks and other financial institutions has
changed fundamentally the environment in which traditional thrifts have operated
and threatens the market share held by thrifts for their traditional services.
For example, in the Wilmington market, thirteen banks, five thrifts and eighteen
credit unions have offices. As a result, competition with other financial
institutions within our market area is strong.
In the wake of the former Chief Executive Officer's resignation in May
1998, we received several inquiries from other financial institutions concerning
a possible business combination. In June 1998, we retained Trident to perform a
valuation of us in an acquisition context and to evaluate our strategic
alternatives. Trident presented its findings to our Board on July 8, 1998 (the
"Valuation Report"). After reviewing the Valuation Report, the Board concluded
that it was in the best interests of shareholders to explore a business
combination with another financial institution. In reaching this conclusion, the
Board considered the increasingly competitive market for financial services, the
limited resources available to DFFN and Delaware First, and the significant
investment in management, staff and facilities necessary to remain independent.
10
<PAGE>
On July 10, 1998, we retained Trident to pursue a possible business
combination with four potentially interested parties. Three of the four
companies contacted had recently expressed interest in a merger with us. The
fourth company contacted was a large financial institution in Delaware First's
market area that is an active acquiror of thrift institutions. As a result of
these initial inquiries, we received indications of interest from two parties.
On August 26, 1998 and again on September 3, 1998, our Board met to review these
indications of interest. At the September 3, 1998 meeting, the Board determined
that we should pursue one of the indications of interest.
Trident was instructed to explore merger negotiations with this
interested party (the "First Prospective Acquiror"). However, after several
weeks of negotiations and due diligence, the First Prospective Acquiror
significantly revised the terms of its indication of interest and, in
particular, the consideration to be paid to our stockholders. As a result,
Trident was instructed to identify other potentially interested parties to
contact. Trident suggested that we renew discussions with the other interested
party which had initially submitted an indication of interest to us, as well as
seven other financial institutions which had not been contacted previously. In
addition, the First Prospective Acquiror was contacted and given an opportunity
to improve the terms of its revised indication of interest and increase the
consideration proposed to be paid to our stockholders.
The First Prospective Acquiror elected not to alter the terms of its
revised indication of interest, and subsequently withdrew from any further
merger negotiations. Based on discussions with the other eight potentially
interested parties, we received two new indications of interest. One of the
indications of interest was from Crown Bank for $15.50 of cash per share. The
other indication of interest involved an exchange of stock for a lower nominal
value. We invited both interested parties to perform a due diligence evaluation
of us and then re-submit their indications of interest.
On November 2, 1998, our Board met to review the terms of the two
indications of interest. Neither interested party materially changed the terms
of its indication of interest as a result of its due diligence review. At such
meeting, our Board elected to pursue further negotiations with Crown because the
Board believed the Crown Bank indication of interest offered greater
consideration and less risk than the competing indication of interest, which was
all stock.
On November 18, 1998, the Board of Directors met with Trident and our
legal counsel to discuss and review the terms of the Agreement. Trident provided
its opinion that the merger consideration was fair to our stockholders from a
financial point of view. On the basis of the independent judgment of the members
of our Board of Directors, and the opinion of Trident, the Board of Directors
concluded that the Merger with Crown was in the best interests of DFFN and our
Stockholders. Accordingly, the Board of Directors unanimously authorized
execution of the Agreement.
11
<PAGE>
Opinion of Trident Financial Corporation
In June 1998, Trident was engaged to perform a valuation analysis of
DFFN and to advise the Board of Directors with regard to strategic alternatives.
On July 8, 1998, Trident presented its Valuation Report to the Board of
Directors, and subsequently, Trident was engaged to represent us in merger
negotiations with other financial institutions and to render a fairness opinion
in the event of a successful merger transaction.
On November 18, 1998, Trident met with our Board of Directors to review
the proposed Agreement. At that time, Trident presented a report (the "Fairness
Opinion Report") to our Board of Directors summarizing the financial terms of
the Merger and providing updated market information with respect to thrift
mergers and acquisitions. Trident also analyzed the advantages and disadvantages
of the Merger from a financial point of view. In addition, Trident rendered its
written opinion to our Board of Directors to the effect that, as of that date,
the consideration to be received by our Stockholders pursuant to the Agreement
was fair to them from a financial point of view. The financial fairness standard
employed by Trident in rendering its opinion was whether such consideration was
within the range of the economic values of consideration that companies having
the characteristics of DFFN and Crown might negotiate in comparable
circumstances, not whether the consideration proposed in the Agreement is at or
approaching the higher end of such range.
Trident confirmed and delivered its opinion to our Board of Directors
as of the date of this Proxy Statement that the consideration to be received by
our Stockholders in the Merger is fair from a financial point of view, as of
such date (the "Opinion"). A copy of the Opinion, which sets forth certain
assumptions made, matters considered and limitations on the reviews undertaken,
is attached to this Proxy Statement as Appendix B. Trident has consented to the
inclusion of such Opinion and summaries of the Valuation Report and Fairness
Opinion Report in this Proxy Statement.
TRIDENT'S OPINION IS DIRECTED TO OUR BOARD OF DIRECTORS AND IS DIRECTED
ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE
RECEIVED BY OUR STOCKHOLDERS BASED ON CONDITIONS AS THEY EXISTED AND COULD BE
EVALUATED AS OF THE DATE OF THE OPINION. TRIDENT'S OPINION DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
SPECIAL MEETING, NOR DOES TRIDENT'S OPINION ADDRESS THE UNDERLYING BUSINESS
DECISION TO EFFECT THE MERGER. THIS SUMMARY OF TRIDENT'S OPINION IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION, WHICH IS ATTACHED TO
THIS PROXY STATEMENT AS APPENDIX B. STOCKHOLDERS ARE URGED TO READ TRIDENT'S
OPINION IN ITS ENTIRETY FOR A DESCRIPTION OF THE ASSUMPTIONS MADE AND MATTERS
CONSIDERED AND THE LIMITS ON THE REVIEW UNDERTAKEN IN RENDERING SUCH OPINION.
12
<PAGE>
In connection with rendering its Opinion, Trident reviewed and
analyzed, among other things, the following: (i) the Agreement; (ii) this Proxy
Statement; (iii) certain publicly available information concerning us, including
our audited financial statements for each of the years in the three-year period
ended December 31, 1998; (iv) certain information concerning Crown, including
the audited financial statements of Crown for each of the years in the
three-year period ended December 31, 1998; (v) certain other internal
information, primarily financial in nature, concerning the business and
operations of us and Crown furnished to Trident by us and Crown for purposes of
Trident's analysis; (vi) information with respect to the trading market for the
Common Stock; (vii) certain publicly available information with respect to other
companies that Trident believed to be comparable to us and the trading markets
for such other companies' securities; and (viii) certain publicly available
information concerning the nature and terms of other transactions that Trident
considered relevant to its inquiry. Trident also met with certain officers and
employees of DFFN and Crown to discuss the foregoing, as well as other matters
which it believed relevant to its inquiry. No limitations were imposed by our
Board with respect to the investigation made or procedures followed by Trident.
In its review and analysis and in arriving at its Opinion, Trident
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to it by us, or that was publicly available, the
accuracy of the representations and warranties of the officers and the employees
of DFFN and Crown with whom Trident held discussions, and the accuracy of the
representations and warranties of DFFN and Crown in the Agreement, and did not
attempt to independently verify any such information. Trident further assumed
that there are no conditions in the regulatory approvals of the Agreement that
will have a material adverse effect upon the contemplated economic benefits of
the Merger. The financial information provided to Trident by us was of the type
normally produced by our management and reviewed by our Board of Directors at
its regular meetings and our Board and management have represented to Trident
that they have no reason to believe that Trident's reliance thereon was
unreasonable. Trident did not conduct a physical inspection of our properties or
facilities, nor did they make or obtain any independent evaluations or
appraisals of any of such properties or facilities.
In conducting its analyses and arriving at its Opinion as expressed
herein, Trident considered such financial and other factors as it deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial condition and results of operations of DFFN
and Crown, including interest income, interest expense, net interest income, net
interest margin, interest sensitivity, non-interest expense, earnings,
dividends, book value, return on assets, return on equity, capitalization, the
amount and type of non-performing assets and the reserve for loan losses; (ii)
our business prospects; (iii) the economy in our market area; (iv) the
historical and current market for the Common Stock and for the equity securities
of certain other companies that Trident believed to be comparable to us; and (v)
the nature and terms of certain other acquisition transactions that Trident
believed to be relevant. Trident also took into account its assessment of
general economic, market, financial and regulatory conditions and trends, as
well as its knowledge of the financial institutions industry, its experience in
connection with similar transactions, and its knowledge of securities valuation
generally. Trident's Opinion necessarily was based upon
13
<PAGE>
conditions in existence and subject to evaluation on the respective dates of its
Opinion. Trident's Opinion is, in any event, limited to the fairness, from a
financial point of view, of the consideration to be received by the holders of
the Common Stock in the Merger and does not address our underlying business
decision to effect the Merger.
The summaries set forth below reflect all the material analysis,
factors and assumptions considered by Trident and the material valuation
methodologies used by Trident in arriving at its Opinion as to fairness
described above. The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to partial or summary description. Trident
believes that its analyses and the summary set forth below must be considered as
a whole, and that selecting portions of its analyses without considering all of
the analyses, or reviewing the summary without considering all factors and
analyses, would create an incomplete view of the processes underlying the
analyses set forth in Trident's reports and its Opinion. Therefore, the ranges
of valuations resulting from any single analysis described below should not be
taken to be Trident's view of our actual value or the combined company. In
performing its analyses, Trident made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond our control. The results of the specific
analyses performed by Trident may differ from our actual values or actual future
results as a result of changing economic conditions, changes in company strategy
and policies, as well as a number of other factors. Such individual analyses
were prepared to provide valuation guidance solely as part of Trident's overall
valuation analysis and the determination of the fairness of the consideration to
be paid to our Stockholders. The analyses do not purport to be appraisals or to
reflect the prices at which a company might actually be sold or the prices at
which any securities may trade at the present time or at any time in the future.
In addition, as described above, Trident's Opinion and presentations to our
Board of Directors were among the many factors taken into consideration by our
Board of Directors in making its determination to approve the Agreement.
Trident met or engaged in discussions with our Board of Directors at
various times between June 1998 and November 1998 to present analyses contained
in a series of reports that serve as the basis for Trident's Opinion. Two key
reports presented by Trident were the Valuation Report dated July 8, 1998 and
the Fairness Opinion Report dated November 18, 1998. The following is a brief
summary of the Valuation Report presented by Trident to our Board of Directors
on July 8, 1998:
Financial Analysis. Trident examined our financial performance for the
period December 31, 1994 through March 31, 1998 by analyzing the
composition of our balance sheet, adjusting and normalizing our
earnings, and calculating a variety of operating and financial ratios
for us. Trident compared our deposit market share with other financial
institutions operating in the same market. Trident also studied the
trading market for the Common Stock and compared the performance of
the Common Stock over the preceding six months to the performance of
the Standard and Poor's 500 Index.
Peer Group Analysis. Trident evaluated our strengths and weaknesses by
comparing our financial performance to that of the following groups of
stock thrift institutions based on
14
<PAGE>
regulatory financial information as of December 31, 1997: (i) all U.S.
thrifts; (ii) Delaware thrifts; (iii) Mid-Atlantic thrifts; (iv) U.S.
thrifts of similar size ($50 to $150 million of assets); and (v)
Mid-Atlantic thrifts of similar size. This analysis compared a number
of our historical financial ratios to those of the peer groups,
including but not limited to: (i) balance sheet composition; (ii) key
ratios; (iii) income and expense ratios for the trailing four
quarters, the most recent quarter, and the most recent calendar year;
(iv) historical ROAA and ROAE; and (v) asset, loan, deposit and equity
growth rates for selected periods.
State of the Market. Trident reviewed the current and historical
trading market for thrift and bank equities, and current and
historical trends in the acquisition markets for banks and thrifts.
Trident focused on the acquisition market for thrifts with particular
attention to the segments of the market which it believed to be the
most relevant to us, such as thrifts of similar size and
profitability, thrifts with similar capital structures and asset
quality, and thrifts located in the same geographic region.
Control Valuation of Common Stock. Trident estimated the fair market
value of the Common Stock in a merger. In valuing the Common Stock,
Trident utilized the income approach, the asset approach and the
market approach, and then reconciled the values derived therefrom.
Trident used an income method in its valuation of us by capitalizing
our projected earnings contribution in a merger context. In order to
estimate our earnings contribution, Trident normalized our reported
earnings for the quarter ended March 31, 1998 by excluding
non-recurring income and expenses. Trident assumed cost savings of 50%
to 80% of total operating expenses could be realized as a result of a
merger. The earnings contribution is the annualized sum of the
normalized earnings and the after-tax cost savings. The earnings
contribution was then capitalized at rates between 7% and 13%, to
reflect discount rates between 13% and 17% and earnings growth rates
between 4% and 6%. The capitalization rates chosen were estimates of
the required rates of return for holders or prospective holders of
shares of financial institutions similar to us, based on a number of
factors, including prevailing interest rates, the pricing ratios of
publicly traded financial institutions, our financial condition and
operating results, as well as Trident's general knowledge of
valuation, the securities markets, and acquisition values in mergers
of other financial institutions. Trident adjusted the resulting values
to reflect the costs and benefits of terminating certain benefit plans
and other merger-related expenses. Using the income approach, Trident
established a reference range of $7.00 to $13.00 per share.
The asset approach considers the market value of a company's assets
and liabilities, as well as any intangible value the company may have.
Trident estimated our net asset value by adjusting the carrying value
of our assets and liabilities to reflect current market values. In
addition, Trident adjusted our net asset value for the impact of
terminating certain benefit plans and other merger-related expenses.
Based on the adjustments discussed above, Trident estimated our
fully-diluted net asset value to be approximately $16.9 million, or
$14.57 per
15
<PAGE>
share. After determining our net asset value, Trident added an
intangible premium to reflect the estimated value of our customer
relationships. Based on intangible ("core deposit") premiums observed
in the market for thrift acquisitions, as well as Trident's knowledge
of us, Trident applied premiums equal to 3% and 6% of core deposits to
our estimated fully-diluted net asset value. Using the asset approach,
Trident established a reference range of $16.25 to $17.75 per share.
In the market approach, Trident analyzed certain median pricing ratios
(e.g., price to book value, price to tangible book value, price to
reported earnings, price to assets, and the premium paid over tangible
book value as a percentage of core deposits) resulting from selected
completed thrift merger transactions, as well as recently announced
pending transactions. In applying the market approach, Trident
considered the pricing ratios for the following groups of thrift
merger transactions: (i) all pending thrift merger transactions (55
transactions); (ii) all pending thrift mergers announced during the 90
days prior to June 30, 1998 (the date of the market data) (23
transactions); (iii) all pending thrift mergers involving thrifts
located in the Mid-Atlantic region (27 transactions); (iv) all pending
thrift mergers in which the target thrift had assets between $50
million and $150 million (41 transactions); (v) all pending thrift
mergers in which the aggregate consideration was between $10 million
and $25 million (31 transactions); (vi) all pending thrift mergers in
which the target thrift had a return on assets of between 0.00% and
0.25% (10 transactions); (vii) all pending thrift mergers in which the
target thrift had a return on equity of between 0% and 3% (16
transactions); and (viii) all pending thrift mergers in which the
target thrift had a tangible equity to assets ratio of between 12% and
17% (20 transactions). Trident also considered the pricing ratios for
eight pending or completed thrift merger transactions in which the
target thrift was of similar size and capital structure as us, and in
which the target thrift had similar profitability and asset quality.
Trident then compared a number of financial ratios for us to those of
the target thrift institutions.
Based on our financial condition and results of operations, as well as
other factors, relative to the groups of thrift mergers noted above,
Trident chose ranges of pricing ratios to apply to us. Trident chose
price to book value ratios of 110% to 130%, resulting in per share
values of $15.25 to $18.25; price to tangible book value ratios of
110% to 130%, also resulting in per share values of $15.25 to $18.25;
price to assets ratios of 15% to 19%, resulting in per share values of
$14.25 to $18.00; and premiums over tangible book value as a
percentage of core deposits of 3% to 6%, resulting in per share values
of $15.50 to $17.25. Price to earnings ratios were not meaningful due
to our low profitability. Based on these derived ranges of value,
Trident established a reference range of $15.00 to $18.00 per share
using the market approach.
Trident then reviewed the results from the three approaches, and after
consideration of all relevant facts, determined a final range of
$15.00 to $18.00 per share for our acquisition value. Trident did not
apply specific weights to the three individual approaches, but Trident
16
<PAGE>
gave greater consideration to the asset and market approaches in its
final range of value for us.
Strategic Alternatives. Trident presented a list of the pros and cons
of various strategic alternatives open to us: (i) remain independent;
(ii) merger with a larger financial institution; and (iii)
simultaneous merger and stock conversion with a mutual thrift
institution. Trident projected future trading prices and acquisition
values for the Common Stock based on our business plan. Trident also
compared the present values and rates of return for remaining
independent with the expected present value and rate of return that
might be realized in a merger transaction.
Prospective Acquirors. Trident presented us with a list of other
financial institutions with operations in the Mid-Atlantic that it
believed to be prospective acquirors (a total of 45 companies). These
prospective acquirors were categorized based on Trident's perceived
level of interest from the prospective acquiror and compatibility with
us.
The following is a summary of the Fairness Opinion Report presented to our Board
of Directors on November 18, 1998:
Process. Trident briefly reviewed the process that led to the
Agreement. Trident presented a list of the financial institutions that
were contacted regarding a possible business combination with us.
Recent Developments. Trident reviewed changes in the trading market
and the acquisition market for thrift institutions since the Valuation
Report. Trident outlined changes in the composition of our balance
sheet and financial performance since the Valuation Report. Trident
discussed the impact of changes in market conditions and changes in
our financial condition on the valuation range for the Common Stock
presented in the Valuation Report.
Summary of Proposed Transaction. Trident presented a summary of the
financial terms of the Merger. Trident discussed the advantages and
disadvantages of the Merger from a financial point of view. Trident
also compared the pricing ratios for the Merger with the median
pricing ratios for selected groups of recently announced thrift
mergers and acquisitions.
Trident reported that during its investigation, Trident did not
discover any conditions that would prevent it from rendering its fairness
opinion to our Board of Directors. As discussed above, Trident relied, without
independent verification, upon the accuracy and completeness of all of the
financial and other information provided by Crown.
Trident, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwriting, and valuations for corporate
and other purposes. Trident has extensive experience
17
<PAGE>
with the valuation of financial institutions. Trident Securities Inc., an
affiliate of Trident, served as our sales agent in our mutual-to-stock
conversion in 1997, and received total fees and commissions of $166,755 for that
transaction. In addition, in the ordinary course of business, Trident Securities
may trade our securities for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. The Board of Directors selected Trident as its financial
advisor because of its previous experience with Trident, because Trident is a
nationally recognized investment banking firm specializing in financial
institutions, and because of its substantial experience in transactions similar
to the Merger. Trident is not affiliated with us or Crown.
For its services as financial advisor, we paid Trident $15,000 to
perform a valuation of DFFN and to advise the Board of Directors with regard to
strategic alternatives. We paid Trident a fee of $25,000 upon execution of the
Agreement. An additional fee equal to 1.35% of the aggregate merger
consideration, less $40,000, will be payable to Trident upon consummation of the
Merger (a balance due of approximately $202,100 based on the total Merger
Consideration and the aforementioned fee structure). We have also agreed to
reimburse Trident for its reasonable out-of-pocket expenses and to indemnify
Trident against certain liabilities, including certain liabilities under federal
securities laws.
Merger Consideration
The Agreement provides that at the Effective Time, each share of Common
Stock outstanding immediately prior to the Effective Time (other than shares as
to which dissenters' rights have been asserted and duly perfected in accordance
with Delaware law) will be converted into and represent the right to receive the
Merger Consideration of $15.50.
Conditions to the Merger
The Agreement provides that consummation of the proposed transaction is
subject to the satisfaction of certain conditions, or waiver of such conditions
by the party entitled to do so, at or before the Effective Time. Each of the
parties' obligations under the Agreement is subject to the following conditions,
among others: (a) all necessary approvals and consents for the transactions
contemplated by the Agreement from the OTS and any other governmental entity and
the other transactions contemplated hereby have been received without any term
or condition which would materially impair the value of us to Crown or
materially adversely affect the terms of the Merger as they relate to our
Stockholders; all conditions required to be satisfied prior to the Effective
Time by the terms of such approvals and consents shall have been satisfied; and
all statutory waiting periods in respect thereof shall have expired; (b) all
corporate action necessary to authorize the execution and delivery of the
Agreement and consummation of the transactions contemplated thereby have been
duly and validly taken by Crown, Crown Bank, DFFN and Delaware First, including
the adoption by the requisite vote of our Stockholders of the Agreement; (c)
none of Crown, DFFN, their respective subsidiaries or a third party is (i)
subject to any outstanding order, judgment or decree that would have the effect
of preventing completion of the Merger, (ii) subject to a pending
18
<PAGE>
or threatened suit, action or other proceeding by any governmental body in which
it is sought to restrain or prohibit the Merger, or (iii) subject to a suit,
action or other proceeding before any court or governmental agency in which it
is sought to restrain or prohibit the Merger or obtain other substantial
monetary or other relief against one or more of the parties to the Agreement and
which Crown, Crown Bank, DFFN or Delaware First determines in good faith, based
upon the advice of their respective counsel, would make it inadvisable to
proceed with the Merger because any such pending suit, action or proceeding has
a significant potential to be resolved in such a way as to deprive the party
electing not to proceed of any of the material benefits to it of the Merger.
In addition to the foregoing conditions, Crown's and Crown Bank's
obligations under the Agreement are conditioned upon, among other things: (a)
the performance by DFFN and Delaware First in all material respects all
obligations and covenants required to be performed by us pursuant to the
Agreement on or prior to the Effective Time, and the representations and
warranties of DFFN and Delaware First contained in the Agreement are true and
correct as of November 18, 1998 and as of the Effective Time as though made at
and as of the Effective Time, except (i) as to any representation or warranty
which specifically relates to an earlier date, (ii) where the facts which caused
the failure of any representation or warranty to be so true and correct would
not, either individually or in the aggregate, constitute a material adverse
change in the business, operations, assets or financial condition of DFFN and
Delaware First taken as a whole, and Crown and Crown Bank shall have received a
certificate to that effect signed by the President and Chief Executive Officer
of DFFN and Delaware First; (b) the aggregate amount of our consolidated
stockholders' equity immediately prior to the Effective Time, as shown by and
reflected in our books and records of accounts on a consolidated basis in
accordance with generally accepted accounting principles, consistently applied,
shall not be less than $15,602,000, excluding (i) expenses associated with the
Merger or (ii) market value adjustments to the investment portfolio of DFFN and
Delaware First; (c) Delaware First's gross loan portfolio immediately prior to
the Effective Time, as shown and reflected in its books and records of accounts
in accordance with generally accepted accounting principles, consistently
applied, shall not be less than $56,700,000.
In addition to the conditions set forth above as applicable to all
parties, DFFN's and Delaware First's obligations under the Agreement are
conditioned upon, among others: (a) the performance by Crown and Crown Bank in
all material respects all obligations and covenants required to be performed by
them pursuant to the Agreement on or prior to the closing ("Closing"), and the
representations and warranties of Crown and Crown Bank contained in the
Agreement are true and correct as of November 18, 1998 and as of the Effective
Time as though made at and as of the Effective Time, except (i) as to any
representation or warranty which specifically relates to an earlier date or (ii)
where the facts which caused the failure of any representation or warranty to be
so true and correct would not, either individually or in the aggregate,
constitute a material adverse change in the business, operations, assets or
financial condition of Crown and Crown Bank, taken as a whole, and we and
Delaware First shall have received a certificate to that effect signed by the
President and Chief Executive Officer of Crown and Crown Bank; and (b) Crown and
Crown Bank shall have furnished us and Delaware First with such certificates of
its officers or others and such
19
<PAGE>
other documents to evidence fulfillment of the conditions as us and Delaware
First may reasonably request.
Procedures for Exchange of Our Stock Certificates
As of the Effective Time, Crown Bank shall deposit in trust with the
Exchange Agent cash in an amount equal to the Aggregate Merger Consideration. No
later than five business days following the Effective Time, Crown Bank shall
cause the Exchange Agent to mail or make available to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented issued and outstanding shares of Common Stock a notice and letter of
transmittal (which shall specify that delivery shall be effected and risk of
loss and title to the certificates theretofore representing shares of Common
Stock shall pass only upon proper delivery of such certificates to the Exchange
Agent) advising each holder of the effectiveness of the Merger and the procedure
for surrendering to the Exchange Agent such certificate or certificates which
immediately prior to the Effective Time represented issued and outstanding
shares of Common Stock in exchange for the Merger Consideration. Within five
business days following receipt of surrendered certificates and a properly
completed letter of transmittal, the Exchange Agent shall deliver the Merger
Consideration to each former Stockholder. The Exchange Agent shall accept such
certificates upon compliance with such reasonable terms and conditions as the
Exchange Agent may impose to effect an orderly exchange thereof in accordance
with normal exchange practices.
Each outstanding certificate which prior to the Effective Time
represented Common Stock (other than Dissenting Shares) and which is not
surrendered to the Exchange Agent in accordance with the procedures provided for
in the Agreement shall, except as otherwise provided in the Agreement, until
duly surrendered to the Exchange Agent be deemed to evidence the right to
receive the Merger Consideration for each share evidenced by each such
certificate. After the Effective Time, there shall be no further transfer on our
records of certificates representing shares of Common Stock and if such
certificates are presented to us for transfer, they shall be cancelled against
delivery of the Merger Consideration provided in the Agreement.
Crown Bank shall not be obligated to deliver the Merger Consideration
to which a holder of Common Stock would otherwise be entitled as a result of the
Merger until such holder surrenders the certificate or certificates representing
the shares of Common Stock for exchange, or, in lieu thereof, an appropriate
affidavit of loss and indemnity agreement and/or a bond as may be required in
each case by Crown Bank. If payment of the Merger Consideration is to be made in
a name other than that in which the certificate evidencing Common Stock
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the certificate so surrendered shall be properly endorsed
or accompanied by an executed form of assignment separate from the certificate
and otherwise in proper form for transfer and that the person requesting such
payment pay to the Exchange Agent in advance, any transfer or other tax required
by reason of the payment in any name other than that of the registered holder of
the certificate surrendered or otherwise establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
20
<PAGE>
Any portion of the Merger Consideration delivered to the Exchange Agent
by Crown Bank that remains unclaimed by any Stockholder for six months after the
Effective Time (as well as any proceeds from any investment thereof) shall be
delivered by the Exchange Agent to Crown Bank. Any Stockholders who have not
exchanged their shares of Common Stock for the Merger Consideration in
accordance with the Agreement shall thereafter look only to Crown Bank for the
Merger Consideration deliverable in respect of each share of Common Stock such
Stockholder holds as determined pursuant to the Agreement without any interest
thereon. If outstanding certificates for shares of Common Stock are not
surrendered or the payment for them is not claimed prior to the date on which
payment of the Merger Consideration would otherwise escheat to or become the
property of any governmental unit or agency, the unclaimed items shall, to the
extent permitted by abandoned property and any other applicable law, become the
property of Crown Bank (and to the extent not in its possession shall be
delivered to it), free and clear of all claims or interest of any person
previously entitled to such property. Neither the Exchange Agent nor any party
to the Agreement shall be liable to any holder of stock represented by any
certificate for any consideration paid to a public official pursuant to
applicable abandoned property, escheat or similar laws. Crown Bank and the
Exchange Agent shall be entitled to rely upon our stock transfer books to
establish the identity of those persons entitled to receive the Merger
Consideration specified in the Agreement, which books shall be conclusive with
respect thereto. In the event of a dispute with respect to ownership of stock
represented by any certificate, Crown Bank and the Exchange Agent shall be
entitled to deposit any consideration represented thereby in escrow with an
independent third party and thereafter be relieved with respect to any claims
thereto.
Regulatory Approvals
Consummation of the Merger is subject to, among other things, prior
receipt of all requisite approvals from the OTS, and any other regulatory agency
of competent jurisdiction necessary to consummate the Merger and expiration of
all regulatory waiting periods applicable to the Merger. Crown has applied to
the OTS pursuant to the Home Owners' Loan Act, as amended ("HOLA") to acquire
us. No other regulatory approval is necessary in connection with the
transactions contemplated by the Agreement.
Business Pending the Merger
Under the terms of the Agreement, DFFN and Delaware First have agreed
not to take certain actions, prior to consummation of the Merger without the
prior written consent of Crown, including, among other things, the following:
(i) change any provision of DFFN's and Delaware First's Certificate of
Incorporation, Charter or Bylaws; (ii) change the number of shares of its
authorized or issued capital stock or issue or grant any option, warrant, call,
commitment, subscription, award, right to purchase or agreement of any character
relating to the authorized or issued capital stock of us, or any securities
convertible into shares of such capital stock, or split, combine or reclassify
any shares of its capital stock, or redeem or otherwise acquire any shares of
such capital stock; (iii) declare, set aside or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof) in
respect of our capital stock; (iv) grant any severance or termination pay
21
<PAGE>
(other than pursuant to binding contracts, plans or policies of DFFN or Delaware
First currently in effect and disclosed to Crown pursuant to the Agreement), to,
or enter into or amend any employment, consulting or compensation agreement
with, any of our directors, officers or employees; or award any increase in
compensation or benefits to our directors, officers or employees, except, such
annual merit raises as may be granted in the ordinary course of business and
consistent with past practices and policies; (v) subject to certain exceptions,
enter into or modify any employee benefit plan or arrangement, or any trust
agreement related thereto, in respect of any of our directors, officers or
employees; or make any contributions to any defined contribution plan or any
defined benefit pension or retirement plan other than in the ordinary course of
business consistent with past practice; (vi) sell or dispose of any material
assets other than in the ordinary course of business consistent with past
practices and policies, or acquire in any manner whatsoever (other than to
realize upon collateral for a defaulted loan) any business or entity; (vii)
enter into any new capital commitments or make any capital expenditures other
than pursuant to binding commitments existing on November 18, 1998, other than
expenditures necessary to maintain existing assets in good repair and other than
as disclosed pursuant to the Agreement, (viii) file any applications or make any
contract with respect to branching or site location or relocation; (ix) make any
material change in its accounting methods or practices, other than changes
required by generally accepted accounting principles, or change any of its
methods of reporting income and deductions for federal income tax purposes,
except as required by changes in laws or regulations; (x) change our lending,
investment, deposit or asset and liability management or other banking policies
in any material respect except as may be required by applicable law; (xi) engage
in any transaction with an "affiliated person" or "affiliate," in each case as
defined in the Agreement; (xii) enter into any futures contract, option or other
agreement or take any other action for purposes of hedging the exposure of its
interest-earing assets and interest-bearing liabilities to changes in market
rates of interest; (xiii) incur any liability for borrowed money except
extensions of credit from the FHLB of Pittsburgh in the ordinary course of
business, or place upon or permit any lien or encumbrance upon any of its
properties or assets, except liens of the type permitted pursuant to the
Agreement; (xiv) take any action that would result in any of our representations
and warranties contained in the Agreement not being true and correct in any
material respect at the Effective Time, or (xv) agree to do any of the
foregoing.
Furthermore, each party has agreed to provide the other party and its
representatives with such financial data and other information with respect to
its business and properties as such party from time to time reasonably requests.
Each party will cause all non-public financial and business information obtained
by it from the other to be treated confidentially. If the Merger is not
consummated, each party will either return to the other all non-public financial
statements, documents and other materials previously furnished by such party or
destroy such information.
22
<PAGE>
Acquisition Proposals
Until the Effective Time or the earlier termination of the Agreement,
DFFN and Delaware First will not, and DFFN and Delaware First will not authorize
or permit any of the directors, officers or employees or any investment banker,
financial advisor, attorney, accountant or other representative of DFFN and
Delaware First to, directly or indirectly, encourage or solicit or hold
discussions or negotiations with, or provide any information to, any person,
entity or group (other than Crown and Crown Bank) concerning any merger, sale of
substantial assets or liabilities not in the ordinary course of business, sale
of shares of capital stock or similar transactions involving us or Delaware
First (an "Acquisition Transaction"); provided, however, that DFFN and Delaware
First may provide information in connection with an unsolicited possible
Acquisition Transaction if our Board of Directors determines in good faith that
the failure to furnish information in response to such unsolicited inquiries is
likely to constitute a breach of their fiduciary duties under applicable
Delaware law. Under the Agreement, we are required to promptly communicate to
Crown Bank the terms of any proposal which we may receive in respect of any such
Acquisition Transaction and to provide Crown Bank with copies of all such
written inquiries or proposals and (ii) an accurate and complete written
synopsis of all such oral inquiries or proposals.
Representations and Warranties
The Agreement contains representations and warranties of Crown and
Crown Bank and DFFN and Delaware First which are customary in transactions of
this type, including, but not limited to, representations and warranties
concerning: (a) the organization and capitalization of DFFN and Delaware First
and Crown and Crown Bank; (b) the due authorization, execution, delivery and
enforceability of the Agreement; (c) consents or approvals required, and the
lack of conflicts or violations under applicable certificates of incorporation,
charters, bylaws, instruments and laws, with respect to the transactions
contemplated by the Agreement; (d) the documents to be filed by Crown, Crown
Bank, us and Delaware First with the OTS and other regulatory agencies; (e) the
conduct of business in the ordinary course and absence of certain changes; (f)
financial statements; (g) compliance with laws; and (h) the allowance for loan
losses and real estate owned.
Effective Time of Merger; Termination and Amendment
The Effective Time will occur upon the filing of Articles of
Combination with the OTS pursuant to HOLA, unless a later date and time is
specified as the Effective Time in such Articles of Combination. Such filing
will occur only after the receipt of all requisite regulatory approvals,
approval of the Agreement by the requisite vote of our Stockholders, the
expiration of all applicable regulatory waiting periods and the satisfaction or
waiver of all other conditions to the Merger.
A Closing will take place immediately prior to the Effective Time at
10:00 a.m. on the fifth business day following the receipt of all necessary
regulatory or governmental approvals and consents and the expiration of all
statutory waiting periods in respect thereof and the satisfaction or waiver (to
the extent permitted) of the conditions to consummation of the Merger, or on
such other date as the parties may mutually agree upon.
23
<PAGE>
The Agreement may be terminated, either before or after approval by our
Stockholders, as follows: (a) by mutual written consent of the parties; (b) by
Crown, Crown Bank, DFFN or Delaware First (i) if the Effective Time has not
occurred on or prior to June 30, 1999 or (ii) if a vote of our Stockholders is
taken and such Stockholders fail to approve the Agreement at the Special Meeting
(or any adjournment thereof), unless the failure of such occurrence is due to
the failure of the party seeking to terminate the Agreement to perform or
observe its agreements set forth therein to be performed or observed by such
party at or before the Effective Time; (c) by Crown or us upon written notice to
the other 30 or more days after the date upon which any application for a
regulatory or governmental approval necessary to consummate the Merger and the
other transactions contemplated by the Agreement have been denied or withdrawn
at the request or recommendation of the applicable regulatory agency or
governmental authority, unless within such 30-day period a petition for
rehearing or an amended application is filed or noticed, or 30 or more days
after any petition for rehearing or amended application is denied; (d) by Crown
or Crown Bank in writing if we or Delaware First has, or by DFFN or Delaware
First in writing if Crown or Crown Bank has, breached (i) any covenant or
undertaking contained in the Agreement, or (ii) any representation or warranty
contained in the Agreement, which breach would have a material adverse effect on
the business, operations, assets or financial condition of DFFN and Delaware
First taken as a whole, or upon the consummation of the transactions
contemplated by the Agreement, in any case if such breach has not been cured by
the earlier 30 days after the date on which written notice of such breach is
given to the party committing such breach or the Effective Time; and (e) by
Crown or us, in writing, if any of the applications for prior approval referred
to in the Agreement are denied or are approved contingent upon the satisfaction
of any condition or requirement which, in the reasonable opinion of the Board of
Directors of Crown or DFFN, as applicable, would materially impair DFFN's and
Delaware First's value taken as a whole to Crown, and the time period for
appeals and requests for reconsideration has run.
To the extent permitted under applicable law, at any time prior to the
consummation of the Merger, whether before or after approval thereof by our
Stockholders, the parties may by written agreement (a) amend the Agreement, (b)
extend the time for the performance of any of the obligations or other acts of
the other parties thereto, (c) waive any inaccuracies in the representations and
warranties contained therein or in any document delivered pursuant thereto, or
(d) waive compliance with any of the agreements or conditions contained therein.
However, after any approval of the Agreement by our Stockholders, there may not
be, without further approval of such Stockholders, any amendment or waiver of
the Agreement which modifies either the amount of the Merger Consideration to be
delivered to our Stockholders.
Interests of Certain Persons in the Merger
In considering the recommendation of our Board of Directors,
Stockholders should be aware that members of our management and our Board of
Directors have interests in the Merger that are in addition to the interests of
Stockholders generally. Our Board of Directors was aware of these interests and
considered them, among other matters, in approving the Agreement and the
transactions contemplated thereby.
24
<PAGE>
Employee Stock Ownership Plan. Notwithstanding any provision to the
contrary contained in the Agreement, each participant in the Delaware First
Bank, FSB Employee Stock Ownership Plan ("ESOP") not fully vested will, in
accordance with the terms of the ESOP, become fully vested in his or her ESOP
account as of the Effective Time. As soon as practicable after the execution of
the Agreement, DFFN and Crown will cooperate to cause the ESOP to be amended and
other action taken, in a manner reasonably acceptable to us and Crown, to
provide that the ESOP will terminate upon the Effective Time. Between the date
of the Agreement and the Effective Time, the existing ESOP indebtedness shall be
paid in the ordinary course of business pursuant to the existing loan
amortization schedule and DFFN or Delaware First shall make such contributions
to the ESOP as necessary to fund such payments. Any indebtedness of the ESOP
remaining as of the Effective Time shall be repaid from the Trust associated
with the ESOP through application of the Merger Consideration received by the
ESOP. Upon the repayment of the ESOP loan, the remaining funds in the ESOP
suspense account will be allocated (to the extent permitted by Sections 401(a),
415, and 4975 of the Internal Revenue Code of 1986, as amended (the "Code") and
other applicable laws and regulations, including without limitation the
applicable provisions of Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) to ESOP participants (as determined under the terms of the
ESOP). DFFN and Crown have agreed that, subject to the conditions described in
the Agreement, as soon as practicable after the Effective Time and repayment of
the ESOP loan, participants in the ESOP shall be entitled at their election to
have the amounts in the their ESOP accounts either distributed to them in a lump
sum or rolled over to another tax-qualified plan (including Crown or Crown Bank
plans to the extent permitted by Crown) or individual retirement account.
The actions relating to termination of the ESOP will be adopted
conditioned upon the consummation of the Merger and upon receiving a favorable
determination letter from the Internal Revenue Service ("IRS") with regard to
the continued qualification of the ESOP after any required amendments (including
the amendment which terminates the ESOP). DFFN and Crown will cooperate in
submitting appropriate requests for any such determination letter to the IRS and
will use their best efforts to seek the issuance of such letter as soon as
practicable following the date of the Agreement. DFFN and Crown will adopt such
additional amendments to the ESOP as may be reasonably required by the IRS as a
condition to granting such determination letter, provided that such amendments
do not (A) substantially change the terms outlined in the Agreement, (B) have a
material adverse effect on us, or (C) result in an additional material liability
to Crown.
As of and following the Effective Time, Crown shall cause the ESOP to
be maintained for the exclusive benefit of employees and other persons who were
participants or beneficiaries therein prior to the Effective Time and proceed
with termination of the ESOP through distribution of its assets in accordance
with its terms subject to the amendments described in the Agreement and as
otherwise may be required to comply with applicable law or to obtain a favorable
determination from the IRS as to the continuing qualified status of the ESOP,
provided, however, that no such termination distributions of the ESOP shall
occur after the Effective Time until a favorable termination letter has been
received from the IRS.
25
<PAGE>
Consulting Services. At the Effective Time, Ernest J. Peoples and J.
Bayard Cloud shall become consultants to Crown for a period of time from the
Effective Time until the first anniversary thereof and during such one-year
period shall each receive a fee of $25,000 for such consulting services which
fee will be payable in four equal installments at the beginning of each quarter
beginning with the first quarter after consummation of the Merger. In addition,
with respect to J. Bayard Cloud, Crown will continue to pay to J. Bayard Cloud
on an annual basis during his lifetime a supplemental pension benefit of $15,468
payable in 12 equal installments on the first day of every month.
Officers and Employees of DFFN and Delaware First. Within ninety (90)
days of the date of the Agreement, Crown and Crown Bank shall use their
reasonable best efforts to inform our employees of the likelihood of such
employees having continued employment with Crown Bank following the Effective
Time and, where appropriate, shall use their reasonable best efforts to
interview our employees to determine if there are mutually beneficial employment
opportunities available at Crown Bank. Crown Bank shall give any full-time
employee who has been employed by us or Delaware First for at least two years
and who is terminated within one year from the Effective Time, except for those
individuals terminated for cause, one week of severance pay for every year of
service with a minimum of four weeks severance pay and a maximum of 26 weeks
severance pay. Crown Bank shall give each other full-time employee who is
terminated within one year from the Effective Time, except for those individuals
terminated for cause, two weeks of severance pay. The severance pay provided for
under the Agreement shall be mitigated to the extent that Crown or Crown Bank
place the terminated employee with another financial institution within a 25
mile radius of Delaware First's main office in a position with comparable
responsibilities and compensation.
Employee Benefit Plans. Subject to the provisions of the Agreement, all
of our employees immediately prior to the Effective Time who are employed by
Crown or Crown Bank immediately following the Effective Time ("Transferred
Employees") will be covered by the employee benefit plans of Crown and Crown
Bank on substantially the same basis as any employee of Crown and Crown Bank in
a comparable position. Notwithstanding the foregoing, Crown and Crown Bank may
determine to continue any of our benefit plans for Transferred Employees in lieu
of offering participation in the Employers' benefit plans providing similar
benefits (e.g., medical and hospitalization benefits), to terminate any of our
benefit plans, or to merge any such benefit plans with the benefit plans of
Crown or Crown Bank, provided the result is the provision of benefits to
Transferred Employees that are substantially similar to the benefits provided to
the employees of Crown and Crown Bank generally. Service to us or Delaware First
by a Transferred Employee prior to the Effective Time shall be recognized as
service to Crown or Crown Bank for purposes of eligibility to participate under
the sick leave policies, paid vacation policies, and medical, long-term
disability and life insurance plans of Crown and Crown Bank. In addition, for
purposes of determining eligibility to participate in and the vesting of
benefits (but not for purposes of benefit accrual) under Crown's benefit plans,
Crown shall recognize years of service with us and Delaware First. Crown and
Crown Bank agree that any pre-existing condition, limitation or exclusion in its
26
<PAGE>
medical, long-term disability and life insurance plans shall not apply to
Transferred Employees or their covered dependents who are covered under a
medical or hospitalization indemnity plan maintained by us and Delaware First on
the Effective Time and who then change coverage to the medical or
hospitalization indemnity health plan of Crown and Crown Bank at the time such
Transferred Employees are first given the option to enroll.
Indemnification. From and after the Effective Time through the third
anniversary of the Effective Time, Crown shall indemnify and hold harmless each
present and former director, officer and employee of DFFN and Delaware First
determined as of the Effective Time (the "Indemnified Parties") against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities (collectively, "Costs") incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time (collectively, "Claims"), to
the fullest extent to which such Indemnified Parties were entitled under
Delaware law, the Certificate of Incorporation or other governing instrument and
Bylaws of us or Delaware First as in effect on the date of the Agreement.
Any Indemnified Party wishing to claim indemnification under the
Agreement, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify Crown, but the failure to so notify shall
not relieve Crown of any liability it may have to such Indemnified Party if such
failure does not materially prejudice Crown. In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) Crown shall have the right to assume the defense thereof
and Crown shall not be liable to such Indemnified Parties for any legal expenses
of other counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that if Crown elects not
to assume such defense or counsel for the Indemnified Parties advises that there
are issues which raise conflicts of interest between Crown and the Indemnified
Parties, the Indemnified Parties may retain counsel which is reasonably
satisfactory to Crown, and Crown shall pay, promptly as statements therefor are
received, the reasonable fees and expenses of such counsel for the Indemnified
Parties (which may not exceed one firm in any jurisdiction unless the use of one
counsel for such Indemnified Parties would present such counsel with a conflict
of interest), (ii) the Indemnified Parties will cooperate in the defense of any
such matter, and (iii) Crown shall not be liable for any settlement effected
without its prior written consent, which consent shall not be withheld
unreasonably.
In the event that Crown or any of its respective successors or assigns
(i) consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then, and in each such case, the successors and assigns of such entity
shall assume the obligations set forth in the Agreement, which obligations are
expressly intended to be for the irrevocable benefit of, and shall be
enforceable by, each of the Indemnified Parties.
Insurance. We shall purchase a directors' and officers' liability
insurance policy for a period of six (6) years after the Effective Time.
27
<PAGE>
Retention Bonuses. We may pay retention bonuses to certain employees,
to be determined by us and Crown. Each such employee identified by us and Crown
who remains employed by us or Delaware First, as applicable, until the Effective
Time (or in certain cases, the date the systems conversion occurs after the
Effective Time) and satisfactorily fulfills the duties and responsibilities of
the position of such employee of us or Delaware First, as the case may be,
through the Effective Time shall be entitled to a retention bonus to be
determined by us and Crown; provided that retention bonuses, in the aggregate,
shall not exceed $36,000.
Certain Federal Income Tax Consequences
This summary does not address any tax considerations under foreign,
state or local laws, or the tax considerations to certain Stockholders in light
of their particular circumstances, including persons who are not United States
citizens, or who are resident aliens, life insurance companies, dealers in
securities, tax exempt entities, Stockholders who received their shares through
the exercise of employee stock options or through other compensation
arrangements, and Stockholders who do not hold their shares as "capital assets"
within the meaning of Section 1221 of the Code.
No rulings have been requested from the IRS as to the federal income
tax consequences of the Merger. Stockholders should also be aware that some of
the tax consequences of the Merger are governed by provisions of the Code as to
which there are no final regulations and little or no judicial or administrative
guidance. There can be no assurance that future legislation, regulations,
administrative rulings, court decisions or IRS interpretations will not
adversely affect the accuracy of the statements contained herein.
The exchange of Common Stock for cash in accordance with the Agreement
will be a taxable transaction for federal income tax purposes under the Code,
and may also be a taxable transaction under state, local and other tax laws.
Similarly, our Stockholders who exercise dissenters' rights and receive cash in
exchange for their shares of Common Stock will realize and recognize income for
federal income tax purposes and may recognize income under state, local and
other tax laws. A Stockholder will recognize gain or loss equal to the
difference between the amount of cash received by the Stockholder pursuant to
the Merger and his tax basis in the Common Stock exchanged by such Stockholder
pursuant to the Merger. Gain or loss must be determined separately for each
block of Common Stock (i.e., shares of Common Stock acquired by the Stockholder
at the same time for the same price) exchanged pursuant to the Merger.
Gain or loss recognized by a Stockholder exchanging his Common Stock
pursuant to the Merger or pursuant to the exercise of dissenters' rights will be
capital gain or loss if such Common Stock is a capital asset in the hands of the
Stockholder. If such Common Stock has been held for more than one year, the gain
or loss will be long-term. Capital gains recognized by an exchanging individual
Stockholder generally will be subject to tax at the top marginal rate applicable
to the Stockholder, and capital gains recognized by an exchanging corporate
Stockholder generally will be subject to tax at a maximum rate of 35%.
28
<PAGE>
Unless an exception is available under applicable law or regulations,
31% of the Merger Consideration payable to a Stockholder will be withheld unless
that payee provides a tax identification number (social security number or
employer number) and certifies that such number is correct on a Form W-9 which
will be provided with the notice and letter of transmittal that will be used to
exchange shares of Common Stock for the Merger Consideration.
Accounting Treatment of the Merger
The Merger will be accounted for as a purchase for financial reporting
purposes. Under this method of accounting, Crown will record the acquisition at
our cost at the Effective Time. The purchase price will be allocated to the
acquired assets and assumed liabilities based upon their estimated fair value at
the Effective Time in accordance with generally accepted accounting principles.
The purchase price in excess of the fair values of the identifiable net assets
acquired will be recorded as an intangible asset and amortized over a period of
15 years for financial accounting purposes. The reported income of Crown will
include our operations after the Effective Time.
Dissenters' Rights
Pursuant to Section 262 of the DGCL, in the event that the Merger is
consummated, any holder of the shares of Common Stock who objects to the Merger
is entitled to dissent from the Merger and to have the fair value of such shares
as determined by Crown, us, or if necessary, judicially determined, paid to him
or her, by complying with the provisions of Section 262. Failure to take any
steps set forth in Section 262 in connection with the exercise of such rights
may result in termination or waiver thereof.
The following is a summary of the statutory procedures required to be
followed by Dissenting Stockholders in order to exercise his or her rights under
Section 262. This summary is qualified in its entirety by reference to Section
262 of the DGCL, the text of which is attached as Appendix C to this Proxy
Statement.
Our Stockholders who (i) are Stockholders of record on the record date
(the "Record Date"), and (ii) before the date of the vote on the Agreement is
taken, deliver written demand in compliance with the provisions of Section 262,
shall be entitled to receive the fair cash value of the shares. The demand must
reasonably inform DFFN of the identity of the Stockholder and that the
Stockholder intends to demand the appraisal of the Stockholder's shares. Any
such Stockholder who wishes to exercise such appraisal rights should review
carefully the following disclosure and Appendix C to this Proxy Statement
because failure to timely and properly comply with the procedures specified will
result in the lost of appraisal rights under Section 262.
A demand for appraisal rights must be in addition to and separate from
any proxy or vote against the Merger. A vote against the Merger does not, by
itself, constitute a demand for appraisal rights. Also, voting in favor of the
Merger will result in the loss of appraisal rights with respect to such shares.
29
<PAGE>
All written demands for appraisal with respect to the Common Stock must
be received by Attn: Ernest J. Peoples, President and Chief Executive Officer,
Delaware First Financial Corporation, 400 Delaware Avenue, Wilmington, Delaware
19801, prior to the vote on the Merger at our Special Meeting.
If DFFN and any Dissenting Stockholder who has complied with the
foregoing procedures have not agreed on the fair cash value of the Dissenting
Shares within one hundred twenty (120) days after the Effective Time of the
Merger, DFFN, Crown or the Dissenting Stockholder may file a petition with the
Chancery Court demanding a determination of the value of the stock of all such
stockholders.
If a complaint requesting an appraisal is timely filed, after a hearing
on such petition, the Chancery Court may determine that the Dissenting
Stockholders are entitled to appraisal rights and, in such a case, may order an
appraisal of the "fair value" of the shares of such Common Stock. Holders of
shares of Common Stock considering seeking appraisal rights should be aware that
the fair value of their shares of Common Stock as determined under Section 262
could be more than, the same as, or less than the value of the consideration
they would receive pursuant to the Agreement if they did not seek appraisal of
their shares of Common Stock.
The costs of any appraisal proceeding may be apportioned and assessed
by the Chancery Court as it deems equitable against all or some of the parties.
Any Dissenting Stockholder who has duly demanded an appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote the shares of Common Stock subject to such demand for any purpose or be
entitled to the payment of dividends or other distributions on those shares
(except dividends or other distributions payable to Stockholders of record at a
date which is prior to the Effective Time of the Merger).
A Stockholder's rights to receive the fair cash value for the
Dissenting Shares terminates if (i) the Dissenting Stockholder does not strictly
comply with the requirements of Section 262, (ii) the Merger is abandoned, (iii)
the Dissenting Stockholder withdraws the demand for fair cash value, or (iv) we
and the Dissenting Stockholder have not come to an agreement regarding the fair
cash value of the Dissenting Shares and neither has filed a petition with the
Chancery Court within the time period prescribed by Section 262.
If any holder of Common Stock who demands appraisal of his shares under
Section 262 fails to perfect, or effectively withdraws or loses his right to
appraisal as approved in Section 262, the shares of such Stockholder will be
converted into the right to receive the Merger Consideration in accordance with
the terms of the Agreement.
Failure to follow the steps required by Section 262 for perfecting
appraisal rights may result in the loss of such rights.
30
<PAGE>
Expenses of the Merger
The Agreement provides that Crown, Crown Bank, DFFN and Delaware First
will each bear and pay their own costs and expenses incurred in connection with
the transactions contemplated by the Agreement, including, without limitation,
legal, accounting, investment banking, printing expenses and filing fees.
In the event that any of the parties shall willfully default in its
obligations hereunder, the non-defaulting party may pursue any remedy available
at law or in the equity to enforce its rights and shall be paid by the willfully
defaulting party (i) $150,000 and (ii) the amount of all costs and expenses,
including without limitation legal, accounting and investment banking fees and
expenses, incurred or suffered by the non-defaulting party in connection with
the Merger or in the enforcement of its rights if such non-defaulting party
prevails.
We shall pay Crown, and Crown shall be entitled to payment of, a fee
equal to $800,000 (the "Fee") upon the occurrence of an Acquisition Transaction
so long as the Acquisition Transaction occurs prior to a Fee Termination Event.
Such payment shall be made to Crown in immediately available funds within five
business days after the occurrence of an Acquisition Transaction. A Fee
Termination Event shall be the first to occur of the following: (i) the
Effective Time or (ii) termination of the Agreement in accordance with the terms
in the Agreement prior to the occurrence of an Acquisition Transaction (other
than a termination of the Agreement by Crown as a result of a willful breach of
any representation, warranty, covenant or agreement of us and Delaware First).
31
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 22, 1999, certain
information as to our Common Stock 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 us to be the beneficial owner of more
than 5% of the issued and outstanding Common Stock, (ii) our directors, (iii)
our executive officers whose salary and bonus exceeded $100,000 in fiscal 1998,
and (iv) all of our directors and executive officers 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 Stock Ownership Plan and Trust ......... 74,048(2) 6.4%
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 DFFN
and Delaware First as a group (nine persons) .... 23,809 2.1
</TABLE>
- --------------------
* Represents less than 1% of the outstanding Common Stock.
(1) Based upon filings made to the Exchange Act and information furnished by
the respective individuals. Under regulations, promulgated pursuant to the
Exchange Act, shares of our 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.
(Footnotes continued on next page)
32
<PAGE>
(Footnotes continued from previous page)
(2) The Delaware First Employee Stock Ownership Plan Trust ("Trust") was
established pursuant to the ESOP by an agreement between us 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 our 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 our Common Stock allocated to Mr. Arrison under
the ESOP which the Trustees will vote in accordance with Mr. Arrison's
instructions.
BUSINESS
General
We are a Delaware-chartered savings and loan holding company and the
sole stockholder of Delaware First. Our only significant assets are the capital
stock of Delaware First, our loan to the ESOP and the portion of the proceeds
retained by us in connection with Delaware First's conversion to stock form,
discussed below. Our business currently consists of the business of Delaware
First. At December 31, 1998, we 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.
Delaware First was founded in 1922 as Ninth Ward Building & Loan
Association, a Delaware chartered institution. In 1954, Delaware First changed
its name to Ninth Ward Savings & Loan Association. In 1992, Delaware First
adopted a federal savings association charter, and changed its name to Ninth
Ward Savings Bank, FSB. Delaware First converted from a federally-chartered
mutual savings bank to a federally-chartered capital stock savings bank and
became our wholly-owned subsidiary in December 1997 (the "Conversion").
Subsequent to the Conversion, in January 1998, Ninth Ward Savings Bank, FSB
changed its name to Delaware First Bank, FSB. Delaware First's business has been
conducted from a single location since its inception.
The principal sources of funds for Delaware First'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 FHLB of Pittsburgh. Delaware First'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 Delaware First's total loan portfolio at December
31, 1998. Delaware First'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.
33
<PAGE>
Delaware First is subject to examination and comprehensive regulation
by the OTS, which is Delaware First's chartering authority and primary federal
regulator. Delaware First is also regulated by the Federal Deposit Insurance
Corporation ("FDIC"), the administrator of the Savings Association Insurance
Fund ("SAIF"). Delaware First 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 executive offices of DFFN and Delaware First are located at 400
Delaware Avenue, Wilmington, Delaware 19801, and the telephone number is (302)
421-9090.
This Proxy Statement contains certain forward-looking statements and
information relating to us 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 us or our management, are intended to
identify forward- looking statements. Such statements reflect the current views
of us 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. We do not intend to update these
forward-looking statements.
Market Area
Delaware First'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.
Delaware First 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 Delaware First's market area remains dependent upon
the local economy. In addition, Delaware First's deposit and loan activity is
significantly affected by economic conditions in Delaware First's market area.
Based on the economic demographic history of Delaware First's primary market
area, Delaware First expects its market area to be relatively stable
34
<PAGE>
in the future. Significant banking competition, however, will likely cause the
cost of funds to remain relatively high.
Supervisory Agreement
Since May 21, 1997, Delaware First has been operating under a
Supervisory Agreement with the OTS. Under the Supervisory Agreement, Delaware
First 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 Delaware First'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,
Delaware First 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 Delaware First 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), Delaware
First's cost of funds and asset growth. The Business Plan is required to be
updated annually and reviewed by Delaware First'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, Delaware First 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 Delaware First. The Supervisory Agreement will remain in effect
until terminated by the OTS.
Due to the planned acquisition of us by Crown, the provision in the
Supervisory Agreement requiring annual updates of our business plan has been
waived as long as the Agreement remains in effect. All other provisions of the
Supervisory Agreement remain in effect.
35
<PAGE>
Lending Activities
The following table sets forth information concerning the types of
loans held by us:
<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% $88,933,209 100.00%
========== ====== ========== ======
</TABLE>
We are 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, we 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 our 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 us the right to declare
loans immediately due and payable in the event, among other things, that the
borrower sells the real
36
<PAGE>
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 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.
37
<PAGE>
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:
Loans at 12/31/98 due after 12/31/99
------------------------------------
Fixed Adjustable Total
----- ---------- -----
(Dollars in thousands)
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%
The following table sets forth certain information with respect to our
loan origination, purchase and sales activity for the periods indicated:
Year Ended December 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
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
============ ============ ============
38
<PAGE>
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 our 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, we originate loans with rates of interest which may
adjust from period to period during the term of the loan ("adjustable rate").
Our 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.
We obtain 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.
An appraisal on each property which secures a first mortgage loan made
by us is obtained from an independent appraisal firm. These appraisers are
approved by Delaware First'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 Delaware First 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 we approve a loan we provide 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. We also
require each loan to have title insurance. At December 31, 1998, we had
commitments to originate $1,449,000 in mortgage and home equity loans.
39
<PAGE>
We do not purchase whole loans. However, we do 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, we purchased $68,000 of loan participations
originated by Delaware Community Investment Corporation ("DCIC").
We require private mortgage insurance on all first mortgage loans when
the loan-to-value ratio exceeds 80%. We retain servicing on all loans
originated. From time to time, we also sell certain of the loans or
participation interests in loans we originate. The only loans we sell are
fixed-rate residential mortgage loans. For the year ended December 31, 1998, we
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.
All loans collateralized by deposits held by Delaware First 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,
we are permitted to make and/or purchase loans nationwide. We originate and
purchase participations in loans secured by real estate located only in our
market area. Recently, our purchasing activities have been limited to purchasing
participations from DCIC. We make home mortgage loans secured by owner and
nonowner occupied dwellings as well as second mortgage loans secured by real
estate. We also make small business loans and loans secured by savings accounts.
To a lesser extent, from time to time, we make construction loans secured by
residential real estate or participates in permanent or construction loans
originated by other federally-insured financial institutions. We also
participate 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. We purchase participations in loans
based upon our pro-rata share of the total loan pool.
Our ability to originate loans is based on several factors. These
include the level of interest rates, the needs of our customers, our asset and
liability funding needs and the success of our marketing efforts. Our 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. Our primary lending activity
consists of the origination of one to four-family residential mortgage loans
secured by property located in our primary market area. We generally originate
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%. We primarily originate fixed-rate loans having
40
<PAGE>
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 our one- to four-family residential loans had adjustable rates of
interest.
Home Equity. Our 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.
We originate 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, we only lend 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, 1998, we originated $4.1
million in home equity loans. At December 31, 1998, all of our home equity loans
were secured by first or second mortgages.
We also originate 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, we advanced $1.8 million on home equity lines of credit.
Small Business Loans. On June 1, 1998, Delaware First established a
Small Business Banking Division. The purpose of the division was to expand
Delaware First'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 Delaware First 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
41
<PAGE>
domestic housing units. Delaware First 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, our maximum loan-to-one
borrower limit was approximately $2.4 million at December 31, 1998. However,
Delaware First has established an internal limit on loans to one borrower of
$1.0 million. At December 31, 1998, the aggregate loans outstanding to our 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.
Nonperforming and Problem Assets
Loan Delinquencies. We classify 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
our 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, our 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 our total delinquent loans at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1998 1997
-------------------------------- -----------------------------------
Loans Percentage Percentage
Delinquent For Number Amount of Portfolio Number Amount of 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>
42
<PAGE>
The following table shows our 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 our opinion, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.
Nonperforming Assets. The following table sets forth information
regarding nonaccrual loans and real estate owned. As of the dates indicated, we
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 our 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.
43
<PAGE>
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 associations will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified substandard,
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as loss are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets may be designated "special mention" because of potential weakness that do
not currently warrant classification in one of the aforementioned categories.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings association classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that 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 our classified assets at the dates
indicated:
December 31,
----------------------
1998 1997
---- ----
(Dollars in Thousands)
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.
44
<PAGE>
Allowance for Loan Losses. Our policy is to provide for losses based
on management's estimate of the losses that may be incurred with respect to our
loan portfolio. When we increase the allowance for loan losses we do 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) our past loan loss experience, (ii) known and
inherent risks in our 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.
We monitor our allowance as economic conditions dictate. Although we
maintain our allowance for loan losses at a level that we consider to be
adequate for the inherent risk of loss in our loan portfolio, future losses
could exceed estimated amounts and additional provisions for loan losses could
be required. In addition, our 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 our allowance for loan
losses at the dates indicated:
Year Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
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% -- --
45
<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. Delaware First 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. Delaware First 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 Delaware First 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 our 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, we have invested
our funds in certain investment and mortgage-backed securities rather than
originating whole loans.
46
<PAGE>
The investment securities purchased by us 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 our mortgage-backed
securities were FHLMC pass-throughs. Investment and aggregate investment
limitations and credit quality parameters of each class of investment are
prescribed in our investment policy. We perform 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 our 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 our lending activities, we
have 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 us.
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. We have purchased collateralized
mortgage obligations ("CMOs") as an alternative investment in order to address
our 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.
47
<PAGE>
The CMOs purchased by Delaware First 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.
The following table sets forth the carrying value of our investment
securities, mortgage-backed securities and FHLB stock, at the dates indicated.
December 31,
-------------------------------------------------
1998(1) 1997(1)
----------------------- -----------------------
Estimated Estimated
Carrying Market Carrying Market
Value Value Value Value
---------- ---------- ---------- ----------
Federal Home Loan Mortgage
Corporation ............. $ 0 $ 0 $1,498,750 $1,498,750
Federal National Mortgage
Delaware First .......... 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
========== ========== ========== ==========
- ----------
(1) All of our investment portfolio was classified as "Available for Sale" at
December 31, 1998 and December 31, 1997 pursuant to SFAS No. 115.
48
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair market values, and weighted
average yields for our 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%
========= === =========
</TABLE>
Total Investment Securities
-----------------------------------------------
Average
Approximate Weighed Remaining
Carrying Market Average Years to
Value Value Yield Maturity
----- ----- ----- --------
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% --
========= =========
- -----------
(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,
Delaware First is required to maintain an investment in stock of the FHLB
of Pittsburgh equal to the greater of 1.0% of our outstanding home mortgage
related assets or 5.0% of its outstanding advances from the FHLB of
Pittsburgh.
49
<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 our
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.
We compete for deposits with other institutions in its market area by
offering competitively priced accounts which are tailored to the needs of our
customers. Additionally, we seek to meet our customers' needs by providing
personalized customer service to the community. To provide additional
convenience, we participate 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. We do not actively
solicit certificate accounts in excess of $100,000 or use brokers to obtain
deposits or solicit deposits outside our market area.
The interest rates paid by us on deposits are set as needed at the
direction of our senior management based on our liquidity requirements, interest
rates paid by our competitors, the general levels of interest rates, our growth
goals and applicable regulatory restrictions and requirements.
Our 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 our deposit portfolio at December 31, 1998. As of December
31, 1998, certificates of deposit amounted to $55.6 million or 83.8% of our
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.
We believe that a portion of our depositors are sensitive to changes
in interest rates. Accordingly, some of the funds placed in certificates of
deposit with us are susceptible to withdrawal if alternative investments pay a
higher return or our 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, our certificates are
not derived from brokered deposits, and the majority of those in excess of
$100,000 are deposits of long-standing customers.
The following table sets forth our distribution of deposit accounts at
the dates indicated and the weighted average interest rate on each category of
deposits represented.
50
<PAGE>
<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>
The following table sets forth our 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>
51
<PAGE>
The following table sets forth the amounts and maturities of our 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>
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 our deposit accounts for
the periods shown.
Year Ended December 31,
-------------------------------
1998 1997
------------ -----------
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%
52
<PAGE>
Borrowings. We may obtain advances (borrowings) from the FHLB of
Pittsburgh to supplement our supply of lendable funds. Advances from the FHLB of
Pittsburgh are typically secured by a pledge of our stock in the FHLB of
Pittsburgh, a portion of our 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, we may also access the Federal Reserve
Bank discount window to supplement our supply of lendable funds and to meet
deposit withdrawal requirements. At December 31, 1998, borrowings from the FHLB
of Pittsburgh totaled $13.7 million.
The following table sets forth information concerning our 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 our 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.
We operate from a single office and until recent years relied
extensively on the presence of employees of several corporations located near
our single office for deposit growth. Our convenience enabled us 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 us to seek deposits from other parts of New Castle County. We have been
able to maintain our position in
53
<PAGE>
mortgage loan originations throughout our market areas by virtue of our
long-standing presence in the community, competitive pricing, and referrals from
existing customers.
Employees
At December 31, 1998, we had 21 full-time employees, 0 full-time
seasonal employees and 1 part-time employee. None of our employees are
represented by a collective bargaining group. We believe that our relationship
with our employees is good.
Subsidiaries
At December 31, 1998, we 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 we and Delaware First 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. We have registered as a savings and loan holding company with
the OTS and are subject to regulation and examination by the OTS. In addition,
the OTS has enforcement authority over us and any non-savings institution
subsidiaries. This allows the OTS to restrict or prohibit activities that it
determines to be a serious risk to us. This regulation is intended primarily for
the protection of our depositors and not for the benefit of our stockholders.
QTL Test. Since we own one savings institution, we are able to
diversify our operations into activities not related to banking, but only so
long as Delaware First satisfies the qualified thrift lender ("QTL") test. If we
control more than one savings institution, we would lose the ability to
diversify our 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. We 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.
54
<PAGE>
Savings Bank Regulation
General. As a federally chartered, SAIF-insured savings bank, Delaware
First is subject to extensive regulation by the OTS and the FDIC. Delaware
First's lending activities and other investments must comply with various
federal and state statutory and regulatory requirements. Delaware First is also
subject to certain reserve requirements promulgated by the FRB.
The OTS, in conjunction with the FDIC, regularly examines Delaware
First and prepares reports for the consideration of Delaware First's Board of
Directors on any deficiencies that the OTS finds in Delaware First's operations.
Delaware First'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.
Delaware First must file reports with the OTS and the FDIC concerning
Delaware First'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.
55
<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, Delaware First exceeded its applicable tangible,
core and risk-based capital requirements.
Dividend and Other Capital Distribution Limitations. OTS regulations
require Delaware First to give the OTS 30 days advance notice of any proposed
declaration of dividends to us. The OTS has the authority under its supervisory
powers to prohibit the payment of dividends by Delaware First to us. In
addition, Delaware First 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." Delaware First is a domestic building and loan association as
defined in the Code. At December 31, 1998, under the
56
<PAGE>
expanded QTL test, approximately 98.6% of Delaware First'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. Delaware First's affiliates include us and any company
which would be under common control with Delaware First. 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, Delaware First's
required liquid asset ratio was 5.0% and its actual ratio was 11.9%. Monetary
penalties may be imposed upon a savings association for violations of liquidity
requirements.
Federal Home Loan Bank System. Delaware First 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, Delaware First is required to purchase and maintain stock
in the FHLB of Pittsburgh in an amount equal to at least 1% of Delaware First'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, Delaware First 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.
57
<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, Delaware First'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. Delaware First had no borrowings from the Federal
Reserve System at December 31, 1998.
TAXATION
Federal Taxation
We and Delaware First are subject to the provisions of the Code, in
the same general manner as other corporations. Prior to August 1996, however,
savings institutions such as Delaware First, 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. Delaware First
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 Delaware First. At
December 31, 1998, Delaware First 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 bad debt deduction attributable to qualifying
real property loans computed using the percentage of
58
<PAGE>
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 Delaware First's assets were qualifying assets as defined in the
Code. No assurance can be given that Delaware First will meet the 60% test for
subsequent taxable years.
Earnings appropriated to Delaware First'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
Delaware First's stockholders (including distributions made on dissolution or
liquidation), unless Delaware First includes the amount in income, along with
the amount deemed necessary to pay the resulting federal income tax. As of
December 31, 1998, Delaware First 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 we and Delaware First 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, Delaware First's or our 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).
59
<PAGE>
We may exclude from our income 100% of dividends received from
Delaware First 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 we own 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
Delaware First availed itself of the percentage of taxable income bad debt
deduction method.
Delaware First'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 Delaware First.
As a Delaware holding company earning income in Delaware, we are
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.
PROPERTIES
The following table sets forth our location and related information at
December 31, 1998.
Leased Year Net Book Value at
Location or Owned Acquired December 31, 1998(1)
-------- -------- -------- --------------------
MAIN OFFICE:
400 Delaware Avenue
Wilmington, Delaware 19801......... Owned 1953 $1,844,698
- ----------
(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.
60
<PAGE>
LEGAL PROCEEDINGS
We are, from time to time, a party to legal proceedings arising in the
ordinary course of its business, including legal proceedings to enforce our
rights against borrowers. We are not currently a party to any legal proceedings
which are expected to have a material adverse effect on our financial condition
or results of operations.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of our 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, we had approximately 229
stockholders of record. Such holdings do not reflect the number of beneficial
owners of Common Stock. We issued our Common Stock at $10.00 per share in our
initial public offering on December 31, 1997.
Our Board of Directors has the authority to declare dividends on the
shares, subject to statutory and regulatory requirements. We have not declared
or paid any cash dividends on our 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 us 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, we 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.
We are not subject to OTS regulatory restrictions on the payment of
dividends to our Stockholders, although the source of such dividends will be
dependent in part upon the receipt of dividends from Delaware First. Delaware
First, 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. We are subject, however, to the requirements of Delaware
law, which generally limit the payment of dividends to amounts that will not
affect the ability of us, after the dividend has been distributed, to pay our
debts in the ordinary course of business.
61
<PAGE>
During the periods indicated the high and low sale price of our 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
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 us. The following discussion
and analysis of financial condition and our results of operations should be read
in conjunction with our consolidated financial statements and the notes thereto.
General
Our 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 amounts of
interest-earning assets and interest-bearing liabilities. Our 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. Our 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 our control.
Delaware First currently is operating under a Supervisory Agreement
with the OTS which requires Delaware First to take certain actions, including,
but not limited to, addressing Delaware First's interest rate risk profile. The
Supervisory Agreement will remain in place until terminated by the OTS.
Asset/Liability Management
Our assets and liabilities may be analyzed by examining the extent to
which our 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
62
<PAGE>
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
our assets mature or reprice more quickly or to a greater extent than our
liabilities, our 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 our assets mature or reprice more slowly
or to a lesser extent than our liabilities, our 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.
Our 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 our loans were of this type. Conversely, our deposit
accounts mature or are subject to repricing within a relatively short period of
time. These factors historically have caused the income earned by us on our loan
portfolio to adjust more slowly to changes in interest rates than the interest
we pay on our deposits.
In recent years, we have sought to manage our interest rate risk by
selling portions of our fixed rate loans to the FHLMC or another financial
institution (while retaining the servicing of those loans). We have has also
sought to manage interest rate risk by lengthening the maturities of our
certificates of deposit and through longer term borrowings from the FHLB of
Pittsburgh. This imbalance, however, between our assets and liabilities has
caused us to remain susceptible to significant levels of interest rate risk.
Delaware First's Supervisory Agreement with the OTS identifies
Delaware First's interest rate risk level as unacceptably high and requires
Delaware First 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. Delaware First 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, Delaware First 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, Delaware First will attempt to balance the need to improve its
interest rate risk against the impact such restructuring will have on
profitability. Delaware First has also significantly increased its capital
position through a mutual to stock
63
<PAGE>
conversion. This additional capital has mitigated the severity of Delaware
First'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.
64
<PAGE>
<TABLE>
<CAPTION>
More than 1 More than 2 More than 3 More than 6 More than 1
Less than 1 Month through Months through Months through Months through Year through More than
Month 2 Months 3 Months 6 Months 1 year 3 Years 3 Years
----- -------- -------- -------- ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets
Cash and Interest
Earning Deposits ........ $ 8,066 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Investments .............. 0 0 0 0 0 0 0
FHLB Stock ............... 0 0 975 0 0 0 0
Equity Loans/Lines ....... 2,556 0 6 8 138 1,153 6,248
Collateral Loans ......... 631 0 0 0 0 0 0
Mortgage-Backed
Securities .............. 2,871 71 0 0 0 0 0
Small Business Loans ..... 775 0 0 0 0 0 0
Adjustable Rate Mortgages. 578 303 670 1,202 4,017 1,042 0
Balloon Mortgages(1) ..... 40 40 40 120 240 1,568 561
Fixed Rate Mortgages(2) .. 786 786 786 2,363 4,720 18,880 32,113
-------- -------- -------- -------- -------- -------- --------
Total Interest-Earning
Assets ................. $ 16,303 $ 1,200 $ 2,477 $ 3,693 $ 9,115 $ 22,643 $ 38,922
======== ======== ======== ======== ======== ======== ========
Interest-bearing
liabilities
Passbook Accounts(3) ..... 25 25 25 75 150 300 2,395
Checking Accounts(4) ..... 0 0 0 0 0 0 2,071
Money Market Deposit
Accounts(5) ............. 511 511 511 1,078 341 1,362 1,362
Fixed Rate Fixed Term
Deposits ................ 3,757 3,967 4,435 8,649 15,695 15,761 3,339
FHLB Advances - Fixed
Rate and Term ........... 0 500 0 2,300 4,200 4,700 2,042
Escrow Deposits .......... 25 25 25 25 574 0 0
-------- -------- -------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities ............ $ 4,318 $ 5,028 $ 4,996 $ 12,127 $ 20,960 $ 22,123 $ 11,209
======== ======== ======== ======== ======== ======== ========
Excess (Deficiency) of
Interest-Earning Assets
over Interest-Bearing
Liabilities ............... $ 11,985 $ (3,828) $ (2,519) $ (8,434) $(11,845) $ 520 $ 27,713
======== ======== ======== ======== ======== ======== ========
Cumulative Excess
(Deficiency) of Interest-
Earning Assets Over
Interest-Bearing
Liabilities at
December 31, 1998 ......... $ 11,985 $ 8,157 $ 5,638 $ (2,796) $(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 ......... 12.40% 8.44% 5.83% (2.89)% (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 ............ 12.81% 8.72% 6.02% (2.99)% (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 ............... 277.56% 87.28% 39.31% (10.56)% (30.87)% (20.30)% 16.83%
======== ======== ======== ======== ======== ======== ========
</TABLE>
65
<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
We have measured our 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
Delaware First'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 Delaware First's NPV at December 31, 1998, which is based upon
quarterly information that Delaware First provides to the OTS and which is
calculated for Delaware First by the OTS.
66
<PAGE>
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)
+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
Qualitative Risk Analysis. While we cannot predict future interest
rates or their effects on our "Gap," NPV or net interest income, we do not
expect current interest rates to have a material adverse effect on our 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. Delaware First has established a
Funds Management Committee which is currently comprised of one non-employee
director, Thomas L. Cloud, Chairman, as well as Delaware First's Chief Executive
Officer, Ernest J. Peoples. This committee meets periodically and reviews the
maturity of Delaware First'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
67
<PAGE>
of Delaware First's assets and liabilities is to maintain an acceptable interest
rate spread while reducing the net effects of changes in interest rates.
The Board of Directors also reviews Delaware First'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 Delaware First's asset and liability goals and
strategies. Delaware First 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
Our 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 our operating income.
The following tables present an analysis of certain aspects of our
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
our 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.
68
<PAGE>
<TABLE>
<CAPTION>
For the Year ended December 31,
-------------------------------------------------------------------------------------------------
1998 1997 At December 31, 1998
----------------------------------- --------------------------------- -----------------------
Average Average
Daily Interest Yield/ Daily Interest Yield/ Yield/
Balance & Dividends Rate Balance & Dividends Rate Balance Rate
------- ----------- ---- ------- ----------- ---- ------- ----
<S> <C> <C> <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% $ 81,027,313 7.39%
Investment securities(2) ...... 4,726,501 282,882 5.99 7,336,699 427,656 5.83 3,917,264 5.65
Interest-bearing deposits ..... 13,082,488 693,614 5.30 4,523,787 198,227 4.38 10,374,130 4.54
------------ ------------ ------------ --------- ------------
Total interest-earning assets 101,657,230 7,563,092 7.44 107,231,410 7,978,440 7.44 95,318,707 7.01
Non-interest-earning assets .... 3,793,663 3,777,951 3,523,655
------------ ------------ ------------
Total assets ................... $105,450,893 $111,009,361 $ 98,842,362
============ ============ ============
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities
Deposits ..................... $ 71,397,897 $ 3,832,880 5.37 $ 78,891,620 $ 4,416,447 5.60 $ 66,344,996 5.26
Advances from FHLB ........... 14,798,721 972,949 6.58 23,162,560 1,464,357 6.32 13,742,153 6.43
------------ ------------ ------------ ------------ ------------
Total interest-bearing
liabilities ............... 86,196,618 4,805,829 5.58 102,054,180 5,880,804 5.76 80,087,149 5.46
Non-interest-bearing liabilities 2,871,418 2,598,910 2,475,316
------------ ------------ ------------
Total liabilities .............. $ 89,068,036 $104,653,090 $ 82,562,465
Stockholder's Equity ........... 16,382,857 6,356,271 16,279,897
------------ ------------ ------------
Total liabilities and
stockholders' equity........... $105,450,893 $111,009,361 $ 98,842,362
============ ============ ============
Net interest income/Interest
rate spread(3) ............... $ 2,757,263 1.86% $ 2,097,636 1.68% 1.55%
============ ===== ============ ===== =====
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% 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.
69
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes
in our 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
------ ---- --- ------ ---- ---
Interest Income:
<S> <C> <C> <C> <C> <C> <C>
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>
70
<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. We 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
our 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.
71
<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 us 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 our loan portfolio. Our policies
require the review of assets on a quarterly basis. While we believe we use the
best information available to make a determination with respect to the allowance
for loan losses, we recognize that future adjustments may be necessary. We
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, we 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 our 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 us in seeking an
acquiror.
Income taxes. We 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. We 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.
72
<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
our 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 us to provide for probable loan losses based on prior loss
experience, volume and type of lending conducted by us, available peer group
information, and past due loans in our loan portfolio. Our policies require the
review of assets on a quarterly basis. While we believe we use 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. We
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. We
continue 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, we increase the provision for loan losses
due to risk inherent in the loan portfolio. In establishing such provisions, we
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.
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
73
<PAGE>
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. We 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
Delaware First 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 Delaware First's deposits and short-term borrowings. The required ratio
currently is 4.0%. Delaware First's average liquidity ratio was 13.2%, 13.9% and
11.2% at December 31, 1998, December 31, 1997, and December 31, 1996,
respectively.
Our 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. We use our
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 our commitments to make loans and management's assessment of our ability
to generate funds.
We and Delaware First are subject to federal regulations that impose
certain minimum capital requirements. For a discussion on such capital levels,
see "Business-Regulation."
74
<PAGE>
Impact of Inflation and Changing Prices
Our 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 our operations. As a result,
interest rates have a greater impact on our 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
We are 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.
Delaware First 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 Delaware
First'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
Delaware First with frequent updates regarding their progress. Delaware First
tested their system for Year 2000 compliance during the third quarter of 1998
with no material exceptions noted. Delaware First presently believes that, based
on the progress of Delaware First's service bureau, the Year 2000 problem will
not pose significant operational problems for Delaware First's computer system.
Since the critical portion of our 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 us will depend on the extent of derivatives and embedded
derivatives at the date this statement is adopted
75
<PAGE>
ADJOURNMENT
If sufficient votes in favor of the Merger are not received by the time
scheduled for the Special Meeting, the persons named as proxies may propose one
or more adjournments of the Special Meeting for a period or periods of not more
than 30 days in the aggregate to permit further solicitation of proxies. The
persons named as proxies will vote on a motion for adjournment in accordance
with the instructions therein. If no contrary instructions are received, each
proxy received will be voted in favor of adjournment. Any such adjournment will
require the affirmative vote of a majority of the votes cast on the question in
person or by proxy at the session of the Special Meeting to be adjourned.
Adjournment of the Special Meeting for a period of up to 30 days will not
require the setting of a new record date or notice of the adjourned Special
Meeting.
If a quorum is not present at the Special Meeting, no action will be
taken other than a vote on adjournment.
OTHER MATTERS
Our Board of Directors is not aware of any other matters to be
presented for action at the Special Meeting. If any matters not now known are
properly brought before the Special Meeting or any adjournment thereof, all
proxies returned to us will be voted by the proxy holders in accordance with
their best judgment.
76
<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
77
<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.
78
<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.
79
<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.
80
<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.
81
<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.
82
<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.
83
<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.
84
<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.
85
<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>
86
<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
=========== ===========
87
<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.
88
<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.
89
<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
=========== ===========
90
<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
91
<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.
92
<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.
93
<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>
94
<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
======== ========
95
<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
96
<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.
97
<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.
98
<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>
99
<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>
******
100
<PAGE>
APPENDIX A
AMENDED AND RESTATED MERGER AGREEMENT
(Formerly titled Agreement and Plan of Reorganization)
AMENDED AND RESTATED MERGER AGREEMENT, dated as of February 17, 1999
("Agreement"), by and among The Crown Group, Inc. ("Crown"), a Florida
corporation and Crown Bank, a Federal Savings Bank (the "Bank"), a federally
chartered savings bank and a wholly-owned subsidiary of Crown and Delaware First
Financial Corporation ("DFFN"), a Delaware corporation and Delaware First Bank,
FSB (the "Association"), a federally chartered savings association and
wholly-owned subsidiary of DFFN.
WITNESSETH:
WHEREAS, the Boards of Directors of Crown, the Bank, DFFN and the
Association have determined that it is in the best interests of their respective
companies and their shareholders to consummate the business combination
transactions provided for herein; and
WHEREAS, the parties desire to provide for certain undertakings,
conditions, representations, warranties and covenants in connection with the
transactions contemplated hereby.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants, representations, warranties and agreements herein contained, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
1.01. The Merger. As of the Effective Time, (as hereinafter defined)
DFFN will be collapsed into the Association and immediately thereafter, the
Association will be merged with and into the Bank (together, the "Merger") in
accordance with the provisions of 12 C.F.R. Part 563, Sub- Part B, 12 C.F.R.
Part 574, and 12 C.F.R. Section 552.13 (the "Federal Regulations") and subject
to the terms and conditions of this Agreement, the Agreement and Plan of Merger
between DFFN and the Association and the Combination Agreement by and between
the Association and the Bank. The Bank shall be the surviving entity in the
Merger and shall continue after the Merger to be a federally-chartered savings
bank (the "Resulting Institution") operating under the charter and bylaws of the
Bank. The offices of the Association will be operated as inter-state branch
offices of the Bank pursuant to 12 U.S.C. Section 1464(r) and 12 C.F.R. Section
556.5. The Merger shall have the effects specified in the Federal Regulations.
The name of the Resulting Institution shall be "Crown Bank, FSB."
1.02 Effect of the Merger. As of the Effective Time, the Resulting
Institution shall have all the property, rights, powers and franchise of each of
DFFN, the Association and the Bank that existed prior to the Merger and shall be
subject to and be deemed to have assumed all of the debts, liabilities,
obligations and duties of each of DFFN, the Association, and the Bank and shall
1
<PAGE>
have succeeded to all of each of their relationships, fiduciary or otherwise, as
fully and to the same extent as if such property rights, privileges, powers,
franchises, debts, obligations, duties and relationships had been originally
acquired, incurred or entered into by the Resulting Institution. In addition,
any reference to DFFN, the Association or the Bank in any contract or document,
whether executed or taking effect before or after the Effective Time, shall be
considered a reference to the Resulting Institution if not inconsistent with the
other provisions of the contract or document; and any pending action or other
judicial proceeding to which DFFN, the Association or the Bank is a party, shall
not be deemed to have abated or to have discontinued by reason of the Merger,
but may be prosecuted to final judgment, order or decree in the same manner as
if the Merger had not been made; or the Resulting Institution may be substituted
as a party to such action or proceeding, and any judgment, order or decree may
be rendered for or against it that might have been rendered for or against DFFN,
the Association or the Bank if the Merger had not occurred.
1.03 Charter and Bylaws. As of the Effective Time, the Charter and
Bylaws of the Bank shall be the Charter and Bylaws of the Resulting Institution,
until otherwise amended as provided by law.
1.04 Directors and Officers. As of the Effective Time, the directors
and officers of the Bank shall become the directors and officers of the
Resulting Institution.
1.05 Effective Time. The Merger shall become effective upon the
occurrence of the filing of the Articles of Combination with the OTS, unless a
later date and time is specified as the effective time in such Articles of
Combination ("Effective Time"). A closing (the "Closing") shall take place
immediately prior to the Effective Time at 10:00 a.m., on the fifth business day
following the receipt of all necessary regulatory or governmental approvals and
consents and the expiration of all statutory waiting periods in respect thereof
and the satisfaction or waiver, to the extent permitted hereunder, of the
conditions to the consummation of the Merger specified in Article V of this
Agreement (other than the delivery of certificates and other instruments and
documents to be delivered at the Closing), at the offices of the Bank in
Casselberry, Florida or at such other place, at such other time, or on such
other date as the parties may mutually agree upon. At the Closing, there shall
be delivered to Crown, the Bank, DFFN and the Association the certificates and
other documents required to be delivered under Article V hereof.
1.06 Modification of Structure. Notwithstanding any provision of this
Agreement to the contrary, Crown, with the prior written consent of DFFN, which
shall not be unreasonably withheld, may elect, subject to the filing of all
necessary applications and the receipt of all required regulatory approvals, to
modify the structure of the transactions contemplated hereby so long as (i)
there are no material adverse federal income tax consequences to the
stockholders of Crown as a result of such modification, (ii) the consideration
to be paid to holders of DFFN Common Stock (as defined below)
2
<PAGE>
under this Agreement is not thereby changed in kind or reduced in amount solely
because of such modification and (iii) such modification will not be likely to
materially delay or jeopardize receipt of any required regulatory approvals or
impair or prevent the satisfaction of any conditions to the Closing.
1.07 Conversion of DFFN Common Stock. As of the Effective Time, each
share of common stock, par value $.01 per share, of DFFN (the "DFFN Common
Stock"), issued and outstanding immediately prior to the Effective Time (other
than shares as to which dissenters' rights have been asserted and duly perfected
in accordance with Section 262 of the Delaware General Corporation Law (the
"DGCL") (the "DFFN Dissenting Shares") shall, by virtue of the Merger and
without any action on the part of the holder thereof, be cancelled and by
operation of law be converted into and represent the right to receive from the
Bank, $15.50 in cash (the "Merger Consideration"). The aggregate consideration
to be paid for the conversion of all outstanding shares of DFFN Common Stock
($15.50 times 1,157,000 shares) is hereinafter referred to as the "Aggregate
Merger Consideration."
1.08 Exchange Procedures
(a) As of the Effective Time, the Bank shall deposit in trust with an
exchange agent designated by Crown (the "Exchange Agent") cash in an amount
equal to the Aggregate Merger Consideration. No later than five business days
following the Effective Time, the Bank shall cause the Exchange Agent to mail or
make available to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented issued and outstanding
shares of DFFN Common Stock a notice and letter of transmittal (which shall
specify that delivery shall be effected and risk of loss and title to the
certificates theretofore representing shares of DFFN Common Stock shall pass
only upon proper delivery of such certificates to the Exchange Agent) advising
each holder of the effectiveness of the Merger and the procedure for
surrendering to the Exchange Agent such certificate or certificates which
immediately prior to the Effective Time represented issued and outstanding
shares of DFFN Common Stock in exchange for the Merger Consideration set forth
in Section 1.07 hereof deliverable in respect thereof pursuant to this
Agreement. Within five business days following receipt of surrendered
certificates and a properly completed letter of transmittal, the Exchange Agent
shall deliver the Merger Consideration to each former DFFN shareholder. The
Exchange Agent shall accept such certificates upon compliance with such
reasonable terms and conditions as the Exchange Agent may impose to effect an
orderly exchange thereof in accordance with normal exchange practices.
(b) Each outstanding certificate which prior to the Effective Time
represented DFFN Common Stock (other than DFFN Dissenting Shares) and which is
not surrendered to the Exchange Agent in accordance with the procedures provided
for herein shall, except as otherwise herein provided, until duly surrendered to
the Exchange Agent be deemed to evidence the right to receive the Merger
Consideration for each share evidenced by each such certificate. After the
Effective Time, there shall be no further transfer on the records of DFFN of
certificates representing shares of DFFN Common Stock and if such certificates
are presented to DFFN for transfer, they shall be cancelled against delivery of
the Merger Consideration as hereinabove provided.
3
<PAGE>
(c) The Bank shall not be obligated to deliver the Merger Consideration
to which a holder of DFFN Common Stock would otherwise be entitled as a result
of the Merger until such holder surrenders the certificate or certificates
representing the shares of DFFN Common Stock for exchange as provided in this
Section 1.08, or, in lieu thereof, an appropriate affidavit of loss and
indemnity agreement and/or a bond as may be required in each case by the Bank.
If payment of the Merger Consideration is to be made in a name other than that
in which the certificate evidencing DFFN Common Stock surrendered in exchange
therefor is registered, it shall be a condition of the issuance thereof that the
certificate so surrendered shall be properly endorsed or accompanied by an
executed form of assignment separate from the certificate and otherwise in
proper form for transfer and that the person requesting such payment pay to the
Exchange Agent in advance, any transfer or other tax required by reason of the
payment in any name other than that of the registered holder of the certificate
surrendered or otherwise establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not payable.
(d) Any portion of the Merger Consideration delivered to the Exchange
Agent by the Bank pursuant to Section 1.07 that remains unclaimed by the
shareholders of DFFN for six months after the Effective Time (as well as any
proceeds from any investment thereof) shall be delivered by the Exchange Agent
to the Bank. Any shareholders of DFFN who have not exchanged their shares of
DFFN Common Stock for the Merger Consideration in accordance with this Agreement
shall thereafter look only to the Bank for the Merger Consideration deliverable
in respect of each share of DFFN Common Stock such shareholder holds as
determined pursuant to this Agreement without any interest thereon. If
outstanding certificates for shares of DFFN Common Stock are not surrendered or
the payment for them is not claimed prior to the date on which payment of the
Merger Consideration would otherwise escheat to or become the property of any
governmental unit or agency, the unclaimed items shall, to the extent permitted
by abandoned property and any other applicable law, become the property of the
Bank (and to the extent not in its possession shall be delivered to it), free
and clear of all claims or interest of any person previously entitled to such
property. Neither the Exchange Agent nor any party to this Agreement shall be
liable to any holder of stock represented by any certificate for any
consideration paid to a public official pursuant to applicable abandoned
property, escheat or similar laws. The Bank and the Exchange Agent shall be
entitled to rely upon the stock transfer books of DFFN to establish the identity
of those persons entitled to receive the Merger Consideration specified in this
Agreement, which books shall be conclusive with respect thereto. In the event of
a dispute with respect to ownership of stock represented by any certificate, the
Bank and the Exchange Agent shall be entitled to deposit any consideration
represented thereby in escrow with an independent third party and thereafter be
relieved with respect to any claims thereto.
1.09 Dissenting Shares.
(a) Each outstanding share of DFFN Common Stock the holder of which has
perfected his right to dissent under the DGCL and has not effectively withdrawn
or lost such rights as of the Effective Time shall not be converted into or
represent a right to receive the Merger Consideration, and the holder thereof
shall be entitled only to such rights as are granted by the DGCL. DFFN shall
give Crown prompt notice upon receipt by DFFN of any such written demands
4
<PAGE>
for payment of the fair value of such shares of DFFN Common Stock and of
withdrawals of such demands and any other instruments provided pursuant to the
DGCL (any shareholder duly making such demand being hereinafter called a
"Dissenting DFFN Shareholder"). Any payments made in respect of DFFN Dissenting
Shares shall be made by Crown. If any Dissenting DFFN Shareholder shall
effectively withdraw or lose (through failure to perfect or otherwise) his right
to such payment at or prior to the Effective Time, such holder's shares of DFFN
Common Stock shall be converted into a right to receive the Merger Consideration
in accordance with the applicable provisions of this Agreement.
(b) No holder of Crown common stock, $.01 par value per share ("Crown
Common Stock") shall be entitled to relief as a dissenting shareholder pursuant
to Section 552.14 or otherwise.
1.10 Additional Actions. If at any time after the Effective Time the
Resulting Institution shall consider that any further assignments or assurances
in law or any other acts are necessary or desirable to (i) vest, perfect or
confirm, of record or otherwise, in the Resulting Institution its rights, title
or interest in, to or under any of the rights, properties or assets of DFFN
acquired or to be acquired by the Resulting Institution as a result of, or in
connection with, the Merger, or (ii) otherwise carry out the purposes of this
Agreement, DFFN and its proper officers and directors shall be deemed to have
granted to the Resulting Institution an irrevocable power of attorney to execute
and deliver all such proper deeds, assignments and assurances in law and to do
all acts necessary or proper to vest, perfect or confirm title to and possession
of such rights, properties or assets in the Resulting Institution and otherwise
to carry out the purposes of this Agreement; and the proper officers and
directors of the Resulting Institution are fully authorized in the name of DFFN
or otherwise to take any and all such action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF DFFN
AND THE ASSOCIATION
References to "DFFN Disclosure Schedules" shall mean all of the
disclosure schedules required by this Article II, dated as of the date hereof
and referenced to the specific sections and subsections of Article II of this
Agreement, which have been delivered by DFFN to Crown. DFFN and the Association
hereby represent and warrant to Crown and the Bank as follows as of the date
hereof:
2.01. Corporate Organization.
(a) DFFN is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. DFFN has the corporate power and authority
to own or lease all of its properties and assets and to carry on its business as
it is now being conducted and is duly licensed or qualified to do business and
is in good standing in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties and assets owned
or leased by it makes
5
<PAGE>
such licensing or qualification necessary, except where the failure to be so
licensed, qualified or in good standing would not have a material adverse effect
on the business, operations, assets or financial condition of DFFN. DFFN is
registered as a thrift holding company under the Home Owners' Loan Act ("HOLA").
DFFN Disclosure Schedule 2.01(a) sets forth true and complete copies of the
Certificate of Incorporation and Bylaws of DFFN as in effect on the date hereof.
(b) The only direct or indirect subsidiary of DFFN is the Association.
The Association (i) is duly organized, validly existing and in good standing
under the laws of the United States of America (ii) has the corporate power and
authority to own or lease all of its properties and assets, and (iii) is duly
licensed or qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary, except where the failure to be so
licensed, qualified or in good standing would not have a material adverse effect
on the business, operations, assets or financial condition of DFFN and the
Association taken as a whole. DFFN and the Association each have satisfied in
all material respects all commitments, financial or otherwise, as may have been
agreed upon with the Office of Thrift Supervision ("OTS"). Other than the
Association, DFFN does not own or control, directly or indirectly, greater than
a 5% equity interest in any corporation, company, association, partnership,
joint venture or other entity.
2.02. Capitalization. The authorized capital stock of DFFN consists of
3,000,000 shares of DFFN Common Stock, of which 1,157,000 are issued and
outstanding as of the date hereof, and 500,000 shares of preferred stock, $.01
par value, none of which are issued. DFFN has no treasury shares. All issued and
outstanding shares of capital stock of DFFN have been duly authorized and
validly issued and are fully paid, nonassessable and free of preemptive rights.
DFFN does not have and is not bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for the
transfer, purchase or issuance of any shares of capital stock of DFFN or any
securities representing the right to purchase or otherwise receive any shares of
such capital stock or any securities convertible into or representing the right
to purchase or subscribe for any such stock.
2.03. Authority; No Violation.
(a) Subject to the adoption of this Agreement and the Agreement of
Merger by the stockholders of DFFN, DFFN and the Association have full corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby in accordance with the terms hereof. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
unanimous vote of the Boards of Directors of DFFN and the Association. Except
for the adoption by DFFN's stockholders of this Agreement and the Agreement of
Merger, no other corporate proceedings on the part of DFFN or the Association
are necessary to consummate the Merger. This Agreement has been duly and validly
executed and delivered by DFFN and the Association and constitutes the valid and
binding obligation of DFFN and the Association, enforceable against them in
accordance with and subject to its terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, and except that the availability
6
<PAGE>
of equitable remedies (including, without limitation, specific performance) is
within the discretion of the appropriate court.
(b) Subject to the adoption of this Agreement and the Agreement of
Merger by the stockholders of DFFN, DFFN has full corporate power and authority
to execute and deliver the Agreement of Merger and to consummate the
transactions contemplated thereby in accordance with the terms thereof. The
execution and delivery of the Agreement of Merger by DFFN and the consummation
of the transactions contemplated thereby have been duly and validly approved by
the Board of Directors of DFFN, and no other corporate proceedings on the part
of DFFN are necessary to consummate the transactions so contemplated. The
Agreement of Merger, upon its execution and delivery by DFFN, concurrently with
the execution and delivery of this Agreement, will constitute a valid and
binding obligation of DFFN, enforceable against it in accordance with and
subject to its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally, and except that the availability of equitable remedies (including,
without limitation, specific performance) is within the discretion of the
appropriate court.
(c) None of the execution and delivery of this Agreement by DFFN and
the Association, the execution and delivery of the Agreement of Merger by DFFN,
the consummation by DFFN and the Association of the transactions contemplated
hereby in accordance with the terms hereof, the consummation by DFFN of the
transactions contemplated by the Agreement of Merger in accordance with the
terms thereof, compliance by DFFN and the Association with any of the terms or
provisions hereof or compliance by DFFN with any terms or provisions of the
Agreement of Merger, will (i) violate any provision of the Certificate of
Incorporation, Charter or Bylaws of DFFN or the Association, as applicable, (ii)
assuming that the consents and approvals set forth below are duly obtained:
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to DFFN or the Association or any of their
respective properties or assets, or (iii) except as disclosed in DFFN Disclosure
Schedule 2.03(c), violate, conflict with, result in a breach of any provisions
of, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of,
accelerate the performance required by, or result in the creation of any lien,
security interest, charge or other encumbrance upon any of the properties or
assets of DFFN or the Association under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which DFFN or the
Association is a party, or by which any of their respective properties or assets
may be bound or affected, except, with respect to (ii) and (iii) above, such as
individually or in the aggregate will not have a material adverse effect on the
business, operations, assets or financial condition of DFFN and the Association
taken as a whole and which will not prevent or delay the consummation of the
transactions contemplated hereby. Except as set forth in DFFN Disclosure
Schedule 2.03(c) and for consents and approvals of or filings or registrations
with or notices to the OTS, the Secretary of State of the State of Delaware and
the stockholders of DFFN, no consents or approvals of or filings or
registrations with or notices to any federal, state, municipal or other
governmental or regulatory commission, board, agency, or non-governmental third
party are required on behalf of DFFN in connection with (a) the execution and
delivery of this Agreement by DFFN and the Association or the execution and
delivery of the
7
<PAGE>
Agreement of Merger by DFFN, and (b) the completion by DFFN and the Association
of the transactions contemplated hereby or the completion by DFFN of the
transactions contemplated by the Agreement of Merger.
2.04. Financial Statements.
(a) DFFN has previously delivered to Crown copies of the consolidated
statements of financial condition of DFFN as of December 31, 1997 and 1996 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995, in each case
accompanied by the audit report of Deloitte & Touche LLP, independent public
accountants, as well as the unaudited consolidated statement of financial
condition of DFFN as of September 30, 1998 and the related unaudited
consolidated statement of operations, stockholders' equity and cash flows for
the nine months ended September 30, 1998 and 1997. The consolidated statements
of financial condition of DFFN referred to herein (including the related notes,
where applicable) fairly present the consolidated financial condition of DFFN as
of the respective dates set forth therein, and the related consolidated
statements of operations, stockholders' equity and cash flows (including the
related notes, where applicable) fairly present the results of the consolidated
operations, stockholders' equity and cash flows of DFFN for the respective
periods or as of the respective dates set forth therein (it being understood
that DFFN's interim financial statements are not audited and are not prepared
with all related notes but reflect all adjustments which are, in the opinion and
reasonable judgment of DFFN, necessary for a fair presentation of such financial
statements).
(b) Each of the financial statements referred to in this Section 2.04
(including the related notes, where applicable) has been prepared in accordance
with generally accepted accounting principles consistently applied during the
periods involved. The books and records of DFFN are being maintained in material
compliance with applicable legal and accounting requirements.
(c) Except to the extent reflected, disclosed or reserved against in
the consolidated financial statements referred to in the first sentence of
Section 2.04(a) or the notes thereto, and except for liabilities incurred since
September 30, 1998 in the ordinary course of business and consistent with past
practice, DFFN does not have any obligation or liability, whether absolute,
accrued, contingent or otherwise, which are material to the business,
operations, assets or financial condition of DFFN and the Association taken as a
whole.
2.05. Absence of Certain Changes or Events. There has not been any
material adverse change in the business, operations, prospects, assets or
financial condition of DFFN and the Association taken as a whole since September
30, 1998 and, to the best knowledge of DFFN and the Association, no fact or
condition exists which DFFN or the Association believes will cause such a
material adverse change in the future. For purposes of this Section 2.05, a
material adverse change shall be deemed to have occurred if DFFN's consolidated
stockholders' equity is less than $15,602,000. For purposes of this Section
2.05, any expenses or accruals after the date hereof relating to (i) expenses
associated with the Merger or (ii) market value adjustments to the investment
8
<PAGE>
portfolio of DFFN and the Association shall be excluded for purposes of
calculation of DFFN's stockholders' equity as contemplated herein prior to the
Effective Time.
2.06. Legal Proceedings. Except as disclosed in DFFN Disclosure
Schedule 2.06, neither DFFN nor the Association is a party to any, and there are
no pending or, to the best knowledge of DFFN and the Association, threatened
legal, administrative, arbitration or other proceedings, claims, actions or
governmental investigations of any nature against DFFN or the Association,
except such proceedings, claims, actions or governmental investigations which in
the good faith judgment of DFFN and the Association will not have, in the
aggregate, a material adverse effect on the business, operations, assets or
financial condition of DFFN and the Association taken as a whole. Neither DFFN
nor the Association is a party to any order, judgment or decree which materially
adversely affects the business, operations, assets or financial condition of
DFFN and the Association taken as a whole.
2.07. Taxes and Tax Returns.
(a) DFFN and the Association have duly filed (and until the Effective
Time will so file) all returns, declarations, reports, information returns and
statements ("Returns") required to be filed or sent by or with respect to them
in respect of any Taxes (as hereinafter defined), and have duly paid (and until
the Effective Time will so pay) all Taxes due and payable other than Taxes or
other charges which (i) are being contested in good faith (and disclosed in
writing to Crown) and (ii) have not finally been determined. DFFN has
established (and until the Effective Time will establish) on its books and
records reserves that are adequate for the payment of all Taxes not yet due and
payable, whether or not disputed, accrued or applicable. Except as set forth in
DFFN Disclosure Schedule 2.07(a), (i) the federal income tax returns of DFFN
have been examined by the Internal Revenue Service ("IRS") (or are closed to
examination due to the expiration of the applicable statute of limitations), and
(ii) the Delaware income tax returns of DFFN have been examined by applicable
authorities (or are closed to examination due to the expiration of the statute
of limitations), and in the case of both (i) and (ii) no deficiencies were
asserted as a result of such examinations which have not been resolved and paid
in full. There are no audits or other administrative or court proceedings
presently pending nor any other disputes pending, or claims asserted for, Taxes
or assessments upon DFFN, nor has DFFN given any currently outstanding waivers
or comparable consents regarding the application of the statute of limitations
with respect to any Taxes or Returns.
(b) Except as set forth in DFFN Disclosure Schedule 2.07(b), DFFN (i)
has not requested any extension of time within which to file any Return which
Return has not since been filed, (ii) is not a party to any agreement providing
for the allocation or sharing of Taxes, (iii) is not required to include in
income any adjustment pursuant to Section 481(a) of the Code, by reason of a
voluntary change in accounting method initiated by DFFN (nor does DFFN have any
knowledge that the IRS has proposed any such adjustment or change of accounting
method), or (iv) has not filed a consent pursuant to Section 341(f) of the Code
or agreed to have Section 341(f)(2) of the Code apply.
(c) For purposes of this Agreement, "Taxes" shall mean all taxes,
charges, fees, levies or other assessments, including, without limitation, all
net income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment
9
<PAGE>
(including withholding, payroll and employment taxes required to be withheld
with respect to income paid to employees), excise, estimated, severance, stamp,
occupation, property or other taxes, customs duties, fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority (domestic
or foreign) upon DFFN.
2.08. Employee Benefit Plans.
(a) Each employee benefit plan currently maintained by DFFN or the
Association or arrangement of DFFN or the Association which is an "employee
benefit plan" within the meaning of Section 3(3) of the Employee Retirement
Income DFFN Act of 1974, as amended ("ERISA"), is listed in DFFN Disclosure
Schedule 2.08(a) ("DFFN Plans"). DFFN has previously furnished to Crown true and
complete copies of each of the DFFN Plans together with (i) the most recent
actuarial and financial reports prepared with respect to any qualified DFFN
Plans, (ii) the most recent annual reports filed with any government agency, and
(iii) all rulings and determination letters and any open requests for rulings or
letters that pertain to any qualified DFFN Plans.
(b) Each DFFN Plan has been operated in compliance in all material
respects with the applicable provisions of ERISA, the Code, all regulations,
rulings and announcements promulgated or issued thereunder, and all other
applicable governmental laws and regulations.
(c) Neither DFFN nor the Association participates in or has incurred
any liability under Section 4201 of ERISA for a complete or partial withdrawal
from a multi-employer plan (as such term is defined in ERISA).
(d) None of DFFN, the Association or, to the best knowledge of DFFN and
the Association, any trustee, fiduciary or administrator of an DFFN Plan or any
trust created thereunder, has engaged in a "prohibited transaction," as such
term is defined in Section 4975 of the Code, which could subject DFFN, or, to
the best knowledge of DFFN and the Association, any trustee, fiduciary or
administrator thereof, to the tax or penalty on prohibited transactions imposed
by said Section 4975.
(e) No DFFN Plan or any trust created thereunder has incurred any
"accumulated funding deficiency," as such term is defined in Section 302 of
ERISA.
(f) Each of the DFFN Plans which is intended to be a qualified plan
within the meaning of Section 401(a) of the Code has been determined by the IRS
to be so qualified, and DFFN is not aware of any fact or circumstance which
would adversely affect the qualified status of any such Plan.
2.09. Regulatory Reports. DFFN and the Association have duly filed with
the OTS in correct form the monthly, quarterly and annual reports required to be
filed under applicable laws and regulations, and DFFN has delivered or made
available to Crown accurate and complete copies of such reports filed since
January 1, 1996. In connection with the most recent examinations of DFFN or the
Association by the OTS, neither DFFN nor the Association was required to correct
or change
10
<PAGE>
any action, procedure or proceeding which DFFN or the Association believes has
not been now corrected or changed as required.
2.10. Compliance with Applicable Law.
(a) DFFN and the Association have all permits, licenses, certificates
of authority, orders and approvals of, and have made all filings, applications
and registrations with, federal, state, local and foreign governmental or
regulatory bodies that are required in order to permit them to carry on their
respective businesses as they are presently being conducted and the absence of
which could have a material adverse effect on the business, operations, assets
or financial condition of DFFN and the Association taken as a whole; all such
permits, licenses, certificates of authority, orders and approvals are in full
force and effect; and to the best knowledge of DFFN and the Association, no
suspension or cancellation of any of the same is threatened.
(b) Neither DFFN nor the Association is in violation of its Certificate
of Incorporation, Charter or Bylaws, as applicable, or of any applicable
federal, state or local law or ordinance or any order, rule or regulation of any
federal, state, local or other governmental agency or body, or in default with
respect to any order, writ, injunction or decree of any court, or in default
under any order, license, regulation or demand of any governmental agency, any
of which violations or defaults could have a material adverse effect on the
business, operations, assets or financial condition of DFFN and the Association
taken as a whole, and neither DFFN nor the Association has received any notice
or communication from any federal, state or local governmental authority
asserting that DFFN or the Association is in violation of any of the foregoing
which could have a material adverse effect on the business, operations, assets
or financial condition of DFFN and the Association taken as a whole or which
would prohibit or materially impact consummation of the transactions
contemplated hereby. Other than as set forth in DFFN Disclosure Schedule 2.10(b)
neither DFFN nor the Association is subject to any regulatory or supervisory
cease and desist order, agreement, written directive, memorandum of
understanding or written commitment (other than those of general applicability
to all savings associations issued by governmental authorities), and has not
received any written communication requesting that it enter into any of the
foregoing.
2.11. Deposit Insurance and Other Regulatory Matters.
(a) The deposit accounts of the Association are insured by the Savings
Association Insurance Fund administered by the FDIC to the maximum extent
permitted by the Federal Deposit Insurance Act, as amended ("FDIA"), and the
Association has paid all premiums and assessments required by the FDIA and the
regulations thereunder.
(b) The Association is a member in good standing of the Federal Home
Loan Bank ("FHLB") of Pittsburgh and owns the requisite amount of stock in the
FHLB of Pittsburgh.
(c) The Association is a "qualified thrift lender," as such term is
defined in the HOLA and the regulations thereunder.
11
<PAGE>
(d) The Association has at all times qualified as a "domestic building
and loan association," as such term is defined in Section 7701(a)(19) of the
Code, for purposes of Section 593 of the Code.
2.12. Certain Contracts.
(a) Except as disclosed in DFFN Disclosure Schedule 2.12(a), neither
DFFN nor the Association is a party to, is bound or affected by, receives, or is
obligated to pay benefits under, (i) any agreement, arrangement or commitment,
including without limitation, any agreement, indenture or other instrument
relating to the borrowing of money by DFFN or the Association or the guarantee
by DFFN or the Association of any obligation, (ii) any agreement, arrangement or
commitment relating to the employment of a consultant or the employment,
election or retention in office of any present or former director or officer of
DFFN or the Association, (iii) any contract, agreement or understanding with a
labor union, (iv) any agreement, arrangement or understanding pursuant to which
any payment (whether of severance pay or otherwise) became or may become due to
any director, officer or employee of DFFN or the Association upon execution of
this Agreement and the Agreement of Merger or upon or following consummation of
the transactions contemplated by this Agreement or the Agreement of Merger
(either alone or in connection with the occurrence of any additional acts or
events), (v) any agreement, arrangement or understanding to which DFFN or the
Association is a party or by which any of the same is bound which limits the
freedom of DFFN or the Association to compete in any line of business or with
any person, or (vi) any other agreement, arrangement or understanding to which
DFFN or the Association is a party and which is material to the business,
operations, assets or financial condition of DFFN and the Association taken as a
whole (excluding loan agreements or agreements relating to deposit accounts), in
each of the foregoing cases whether written or oral.
(b) Neither DFFN nor the Association is in default or in non-compliance
under any contract, agreement, commitment, arrangement, lease, insurance policy
or other instrument to which it is a party or by which its assets, business or
operations may be bound or affected, whether entered into in the ordinary course
of business or otherwise and whether written or oral, which default or
non-compliance would have a material adverse effect on the business, operations,
assets or financial condition of DFFN and the Association taken as a whole or
the transactions contemplated hereby, and there has not occurred any event that
with the lapse of time or the giving of notice, or both, would constitute such a
default or non-compliance.
2.13. Properties and Insurance.
(a) All real and personal property owned by DFFN or the Association or
presently used by them in their respective businesses is in adequate condition
(ordinary wear and tear excepted) and is sufficient to carry on the business of
DFFN and the Association in the ordinary course of business consistent with
their past practices. DFFN and the Association have good and, as to owned real
property, marketable title to all material assets and properties, whether real
or personal, tangible or intangible, reflected in DFFN's consolidated statement
of financial condition as of September 30, 1998, or owned and acquired
subsequent thereto (except to the extent that such assets and properties have
been disposed of for fair value in the ordinary course of business since
September 30, 1998),
12
<PAGE>
subject to no encumbrances, liens, mortgages, DFFN interests or pledges, except
(i) those items that secure liabilities that are reflected in said consolidated
statement of financial condition or the notes thereto or have been incurred in
the ordinary course of business after the date of such consolidated statement of
financial condition, (ii) statutory liens for amounts not yet delinquent or
which are being contested in good faith, (iii) such encumbrances, liens,
mortgages, DFFN interests, pledges and title imperfections that are not in the
aggregate material to the business, operations, assets or financial condition of
DFFN and the Association taken as a whole, and (iv) with respect to owned real
property, title imperfections noted in title reports prior to the date hereof.
DFFN and the Association as lessees have the right under valid and subsisting
leases to occupy, use, possess and control all property leased by them in all
material respects as presently occupied, used, possessed and controlled by DFFN
and the Association and the consummation of the transactions contemplated hereby
and by the Agreement of Merger will not affect any such right. DFFN Disclosure
Schedule 2.13(a) sets forth an accurate listing of each lease pursuant to which
DFFN or the Association act as lessor or lessee, including the expiration date
and the terms of any renewal options which relate to the same.
(b) The business operations and all insurable properties and assets of
DFFN and the Association are insured for their benefit against all risks which,
in the reasonable judgment of the management of DFFN and the Association, should
be insured against, in each case under valid, binding and enforceable policies
or bonds issued by insurers of recognized responsibility, in such amounts with
such deductibles and against such risks and losses as are in the opinion of the
management of DFFN and the Association adequate for the business engaged in by
DFFN and the Association. As of the date hereof, neither DFFN nor the
Association has received any notice of cancellation or notice of a material
amendment of any such insurance policy or bond or is in default under such
policy or bond, no coverage thereunder is being disputed and all material claims
thereunder have been filed in a timely fashion.
2.14. Environmental Matters. For purposes of this Agreement, the
following terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any governmental
entity relating to (1) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (2) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances. The term
Environmental Law includes without limitation (1) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
ss.9601, et seq; the Resource Conservation and Recovery Act, as amended, 42
U.S.C. ss.6901, et seq; the Clean Air Act, as amended, 42 U.S.C. ss.7401, et
seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C. ss.1251, et
seq; the Toxic Substances Control Act, as amended, 15 U.S.C. ss.9601, et seq;
the Emergency Planning and Community Right to Know Act, 42 U.S.C. ss.11001, et
seq; the Safe Drinking Water Act, 42 U.S.C. ss.300f, et seq; and all comparable
state and local laws, and (2) any common law (including without limitation
common law that may impose strict liability) that may impose liability or
obligations for
13
<PAGE>
injuries or damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Substance.
"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any regulated material containing any such substance as a
component. Hazardous Substances include without limitation petroleum (including
crude oil or any fraction thereof), asbestos, radioactive material, and
polychlorinated biphenyls.
"Loan Portfolio Properties" means those properties which serve as
collateral for loans owned by DFFN or the Association.
"Other Properties Owned" means those properties owned, leased or
operated by DFFN or the Association.
(a) To the best knowledge of DFFN and the Association, neither DFFN nor
the Association has been and/or is in violation of or liable under any
Environmental Law, except as set forth in DFFN Disclosure Schedule 2.14(a).
(b) To the best knowledge of DFFN and the Association, none of the Loan
Portfolio Properties has been or is in violation of or liable under any
Environmental Law, except as set forth in DFFN Disclosure Schedule 2.14(b).
(c) To the best knowledge of DFFN and the Association, there are no
actions, suits, demands, notices, claims, investigations or proceedings pending
or threatened relating to the liability of the Loan Portfolio Properties under
any Environmental Law, including without limitation any notices, demand letters
or requests for information from any federal or state environmental agency
relating to any such liabilities under or violations of Environmental Law,
except such which would not have or result in a material adverse effect on the
business, operations, assets or financial condition of DFFN and the Association
taken as a whole.
(d) None of the Other Properties Owned has been or is in violation of
or liable under any Environmental Law, except as set forth in DFFN Disclosure
Schedule 2.14(d).
(e) There are no actions, suits, demands, notices, claims,
investigations or proceedings pending or, to the best knowledge of DFFN and the
Association, threatened relating to the liability of the Other Properties Owned
under any Environmental Law, including without limitation any notices, demand
letters or requests for information from any federal or state environmental
agency relating to any such liabilities under or violations of Environmental
Law, except such which would not have or result in a material adverse effect on
the business, operations, assets or financial condition of DFFN and the
Association taken as a whole.
2.15. Allowance for Loan Losses and Real Estate Owned. The allowance
for loan losses reflected on DFFN's consolidated statements of financial
condition included in the consolidated
14
<PAGE>
financial statements referred to in Section 2.04 hereof is in the opinion of
DFFN's management, adequate in all material respects as of their respective
dates under the requirements of generally accepted accounting principles to
provide for reasonably anticipated losses on outstanding loans net of
recoveries. The real estate owned reflected on the consolidated statements of
financial condition included in the consolidated financial statements referred
to in Section 2.04 hereof is carried at the lower of cost or fair value, or the
lower of cost or net realizable value, as required by generally accepted
accounting principles.
2.16. Minute Books. The minute books of DFFN and the Association
contain complete and accurate records of all meetings and other corporate action
held or taken by their Boards of Directors (including committees of its Board of
Directors) and stockholders.
2.17. Broker Fees. Except as set forth in DFFN Disclosure Schedule
2.17, none of DFFN, the Association or any of the respective directors or
officers of such companies has employed any consultant, broker or finder or
incurred any liability for any consultant's, broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement.
2.18. Disclosures. No representation or warranty contained in Article
II of this Agreement, and no statement contained in the DFFN Disclosure
Schedules, contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements herein or therein not
misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CROWN AND THE BANK
References to "Crown Disclosure Schedules" shall mean all of the
disclosure schedules required by this Article III, dated as of the date hereof
and referenced to the specific sections and subsections of Article III of this
Agreement, which have been delivered by Crown to DFFN. Crown and the Bank hereby
represent and warrant to DFFN and the Association as follows as of the date
hereof:
3.01. Corporate Organization.
(a) Crown is a corporation duly organized, validly existing and in good
standing under the laws of the State of Florida. Crown has the corporate power
and authority to own or lease all of its properties and assets and to carry on
its business as it is now being conducted and is duly licensed or qualified to
do business and is in good standing in each jurisdiction in which the nature of
the business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed, qualified or in good standing would
not have a material adverse effect on the business, operations, assets or
financial condition of Crown and the Bank taken as a whole. Crown is registered
as a thrift holding company under the HOLA. Crown Disclosure Schedule 3.01(a)
sets forth true and complete copies of the Articles of Incorporation or other
governing instrument and Bylaws of Crown and the Bank as in effect on the date
hereof.
15
<PAGE>
(b) The only direct or indirect active subsidiary of Crown is the Bank.
The Bank (i) is duly organized, validly existing and in good standing under the
laws of the United States of America, (ii) has the corporate power and authority
to own or lease all of its properties and assets and to conduct its business as
it is now being conducted, and (iii) is duly licensed or qualified to do
business and is in good standing in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed, qualified or in good standing would
not have a material adverse effect on the business, operations, assets or
financial condition of Crown and the Bank taken as a whole. Crown and the Bank
are in good standing with the OTS.
3.02. Capitalization. As of the date hereof, the authorized capital
stock of Crown consists of 5,000,000 shares of Crown Common Stock, of which
2,075,471 are issued and outstanding as of the date hereof, and no shares of
preferred stock. All issued and outstanding shares of capital stock of Crown,
and all issued and outstanding shares of capital stock of the Bank, have been
duly authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights.
3.03. Authority; No Violation.
(a) Crown and the Bank have full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby in accordance with the terms hereof. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly approved by the Board of Directors of Crown
and the Bank, and no other corporate proceedings on the part of Crown or the
Bank are necessary to consummate the transactions so contemplated. This
Agreement has been duly and validly executed and delivered by Crown and the Bank
and constitutes a valid and binding obligation of Crown and the Bank,
enforceable against them in accordance with and subject to its terms, except as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights generally, and except that the
availability of equitable remedies (including, without limitation, specific
performance) is within the discretion of the appropriate court.
(b) None of the execution and delivery of this Agreement by Crown and
the Bank, the consummation by Crown and the Bank of the transactions
contemplated hereby in accordance with the terms hereof, the compliance by Crown
or the Bank with any of terms or provisions hereof, will (i) violate any
provision of the Articles of Incorporation or other governing instrument or
Bylaws of Crown or the Bank (ii) assuming that the consents and approvals set
forth below are duly obtained, violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction applicable to Crown or
the Bank or any of their respective properties or assets, or (iii) violate,
conflict with, result in a breach of any provisions of, constitute a default (or
an event which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of, accelerate the performance
required by, or result in the creation of any lien, security interest, charge or
other encumbrance upon any of the respective properties or assets of Crown or
the Bank under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Crown or the Bank is a party, or by which any
of their respective properties or assets may be bound or affected, except, with
respect to (ii) and (iii) above, such as individually or in the aggregate will
not have a material adverse
16
<PAGE>
effect on the business, operations, assets or financial condition of Crown and
the Bank taken as a whole and which will not prevent or delay the consummation
of the transactions contemplated hereby. Except for consents and approvals of or
filings or registrations with or notices to the Secretary of State of the State
of Delaware and the OTS, no consents or approvals of or filings or registrations
with or notices to any federal, state, municipal or other governmental or
regulatory commission, board, agency or non-governmental third party are
required on behalf of Crown or the Bank in connection with (a) the execution and
delivery of this Agreement by Crown and the Bank and (b) the completion by Crown
and the Bank of the transactions contemplated hereby.
3.04. Financial Statements.
(a) Crown has previously delivered to DFFN copies of the consolidated
statements of financial condition of Crown as of December 31, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995, in each case
accompanied by the audit report of Deloitte & Touche LLP, independent public
accountants, as well as the unaudited consolidated statement of financial
condition of Crown as of September 30, 1998 and the related unaudited
consolidated statements of income, stockholders' equity and cash flows for the
nine months ended September 30, 1998, as revised, and 1997. The consolidated
statements of financial condition of Crown referred to herein (including the
related notes, where applicable) fairly present the consolidated financial
condition of Crown as of the respective dates set forth therein, and the related
consolidated statements of income, stockholders' equity and cash flows
(including the related notes, where applicable) fairly present the results of
the consolidated income, stockholders' equity and cash flows of Crown for the
respective periods or as of the respective dates set forth therein (it being
understood that Crown's interim financial statements are not audited and are not
prepared with all related notes but reflect all adjustments which are, in the
opinion of Crown, necessary for a fair presentation of such financial
statements).
(b) Each of the financial statements referred to in this Section 3.04
(including the related notes, where applicable) has been prepared in accordance
with generally accepted accounting principles consistently applied during the
periods involved.
3.05 Ability to Pay Merger Consideration. The Bank will have available
to it as of the Effective Time sufficient cash to pay the Aggregate Merger
Consideration to stockholders of DFFN as set forth in Section 1.07.
3.06 Absence of Certain Changes or Events. There has not been any
material adverse change in the business, operations, prospects, assets or
financial condition of Crown and the Bank taken as a whole since September 30,
1998 and to the best knowledge of Crown and the Bank, no fact or condition
exists which Crown or the Bank believes will cause such a material adverse
change in the future.
3.07. Legal Proceedings. Neither Crown nor the Bank is a party to any,
and there are no pending or, to the best knowledge of Crown and the Bank,
threatened legal, administrative, arbitration or other proceedings, claims,
actions or governmental investigations of any nature against Crown or the Bank,
except such proceedings, claims, actions or governmental investigations which
17
<PAGE>
in the good faith judgment of Crown and the Bank will not prohibit consummation
of the transactions contemplated hereby.
3.08. Broker Fees. Except as set forth in Crown Disclosure Schedule
3.08, neither Crown nor the Bank, nor any of their respective directors or
officers, has employed any consultant, broker or finder or incurred any
liability for any consultant's, broker's or finder's fees or commissions in
connection with any of the transactions contemplated by this Agreement.
3.09. Disclosures. No representation or warranty contained in Article
III of this Agreement, and no statement contained in the Crown Disclosure
Schedules, contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements herein or therein not
misleading.
ARTICLE IV
COVENANTS OF THE PARTIES
4.01. Conduct of the Business of DFFN and the Association. During the
period from the date hereof to the Effective Time, DFFN and the Association
shall conduct their respective businesses and engage in transactions permitted
hereunder or only in the ordinary course and consistent with past practice,
except with the prior written consent of Crown, which consent shall not be
unreasonably withheld. DFFN and the Association shall use their best efforts to
(i) preserve their business organization intact, (ii) keep available for
themselves, Crown and the Bank the present services of the employees of DFFN and
the Association, and (iii) preserve for themselves, Crown and the Bank, the
goodwill of their customers and others with whom business relationships exist.
4.02. Negative Covenants. DFFN agrees that from the date hereof to the
Effective Time, except as otherwise approved by Crown in writing or as permitted
or required by this Agreement, DFFN will not and DFFN will not permit the
Association to:
(i) amend or change any provision of its Certificate of Incorporation,
Charter or Bylaws;
(ii) change the number of shares of its authorized or issued capital
stock or issue or grant any option, warrant, call, commitment, subscription,
award, right to purchase or agreement of any character relating to the
authorized or issued capital stock of DFFN, or any securities convertible into
shares of such capital stock, or split, combine or reclassify any shares of its
capital stock, or redeem or otherwise acquire any shares of such capital stock;
(iii) declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
the capital stock of DFFN;
(iv) Except as set forth in DFFN Disclosure Schedule 4.02, grant any
severance or termination pay (other than pursuant to binding contracts, plans,
or policies of DFFN or the Association in effect on the date hereof and
disclosed to Crown on DFFN Disclosure Schedule 2.13(a)) to, or enter into or
amend any employment, consulting or compensation agreement with, any
18
<PAGE>
of its directors, officers or employees; or award any increase in compensation
or benefits to its officers or employees, except, such annual merit raises as
may be granted in the ordinary course of business and consistent with past
practices and policies;
(v) enter into or modify (except as may be required by applicable law
or as may be required by Section 4.12 hereof, with the prior written consent of
Crown, which shall not be unreasonably withheld) any pension, retirement, stock
option, stock purchase, stock grant, stock appreciation right, savings, profit
sharing, deferred compensation, consulting, bonus, group insurance or other
employee benefit, incentive or welfare contract, plan or arrangement, or any
trust agreement related thereto, in respect of any of its directors, officers or
employees; or make any contributions to any defined contribution plan or any
defined benefit pension or retirement plan other than (i) in the ordinary course
of business consistent with past practice; or (ii) as set forth in DFFN
Disclosure Schedule 4.02;
(vi) sell or dispose of any material assets other than in the ordinary
course of business consistent with past practices and policies, or acquire in
any manner whatsoever (other than to realize upon collateral for a defaulted
loan) any business or entity;
(vii) enter into any new capital commitments or make any capital
expenditures other than pursuant to binding commitments existing on the date
hereof, other than expenditures necessary to maintain existing assets in good
repair and other than as set forth in DFFN Disclosure Schedule 4.02(vii);
(viii) file any applications or make any contract with respect to
branching or site location or relocation;
(ix) make any material change in its accounting methods or practices,
other than changes required by generally accepted accounting principles, or
change any of its methods of reporting income and deductions for federal income
tax purposes, except as required by changes in laws or regulations;
(x) change its lending, investment, deposit or asset and liability
management or other banking policies in any material respect except as may be
required by applicable law;
(xi) engage in any transaction with an "affiliated person" or
"affiliate," in each case as defined in 12 C.F.R. Section 561.5 and 12 C.F.R.
Section 563.41, respectively;
(xii) enter into any futures contract, option or other agreement or
take any other action for purposes of hedging the exposure of its
interest-earning assets and interest-bearing liabilities to changes in market
rates of interest;
(xiii) incur any liability for borrowed money except extensions of
credit from the FHLB of Pittsburgh in the ordinary course of business, or place
upon or permit any lien or encumbrance upon any of its properties or assets,
except liens of the type permitted in the exceptions to Section 2.14(a).
19
<PAGE>
(xiv) take any action that would result in any of its representations
and warranties contained in Article II of this Agreement not being true and
correct in any material respect at the Effective Time; or
(xv) agree to do any of the foregoing.
4.03. No Solicitation. DFFN and the Association shall not, and DFFN and
the Association shall not authorize or permit any of their directors, officers
or employees or any investment banker, financial advisor, attorney, accountant
or other representative of DFFN and the Association to, directly or indirectly,
encourage or solicit or hold discussions or negotiations with, or provide any
information to, any person, entity or group (other than Crown and the Bank)
concerning any merger, sale of substantial assets or liabilities not in the
ordinary course of business, sale of shares of capital stock or similar
transactions involving DFFN or the Association (an "Acquisition Transaction");
provided, however, that DFFN and the Association may provide information in
connection with an unsolicited possible Acquisition Transaction if the Board of
Directors of DFFN determines in good faith that the failure to furnish
information in response to such unsolicited inquiries is likely to be deemed to
constitute a breach of their fiduciary duties under Delaware law. DFFN shall
promptly communicate to Crown the terms of any proposal which it may receive in
respect of any such Acquisition Transaction and shall provide Crown with copies
of (i) all such written inquiries or proposals and (ii) an accurate and complete
written synopsis of all such oral inquiries or proposals.
4.04. Current Information. During the period from the date hereof to
the Effective Time, each party will cause one or more of its designated
representatives to confer from time to time, as either party may reasonably
request, with representatives of the other party regarding its business,
operations, prospects, assets and financial condition and matters relating to
the completion of the transactions contemplated hereby. Within 25 days after the
end of each quarter, each party shall provide the other party with a
consolidated statement of financial condition and a consolidated statement of
operations or income, as the case may be, without related notes, for such
quarter prepared in accordance with generally accepted accounting principles.
4.05. Access to Properties and Records; Confidentiality.
(a) DFFN and the Association shall permit Crown and its representatives
reasonable access to its properties and shall disclose and make available to
Crown all books, papers and records relating to the assets, stock ownership,
properties, operations, obligations and liabilities of DFFN and the Association,
including, but not limited to, all books of account (including the general
ledger), tax records, minute books of directors' and stockholders' meetings,
organizational documents, bylaws, material contracts and agreements, filings
with any regulatory authority, accountants' work papers, litigation files, plans
affecting employees, and any other business activities or prospects in which
Crown may have a reasonable interest. DFFN and the Association shall not be
required to provide access to or to disclose information where such access or
disclosure would violate or prejudice the rights of any customer or would
contravene any law, rule, regulation, order or judgment. DFFN and the
Association will use its best efforts to obtain waivers of any such restriction
and in any event make appropriate substitute disclosure arrangements under
circumstances in which the restrictions of the preceding sentence apply. DFFN
and the Association shall make its
20
<PAGE>
directors, officers, employees and agents and authorized representatives
(including counsel and independent public accountants) available to confer with
Crown and its representatives, provided that such access shall be reasonably
related to the transactions contemplated hereby and not unduly interfere with
normal operations.
(b) All information furnished previously in connection with the
transactions contemplated by this Agreement or pursuant hereto shall be treated
as the sole property of the party furnishing the information until consummation
of the Merger and, if such Merger shall not occur, the party receiving the
information shall, at the request of the party which furnished such information,
return to the party which furnished such information all documents or other
material containing, reflecting or referring to such information; shall use its
best effort to keep confidential all such information; shall use such
information only for the purpose of consummating the transactions contemplated
by this Agreement; and shall not directly or indirectly use such information for
any competitive or commercial purposes. The obligation to keep such information
confidential shall continue for three years from the date the proposed Merger is
abandoned but shall not apply to (i) any information which (A) the party
receiving the information can establish by convincing evidence was already in
its possession prior to the disclosure thereof to it by the party furnishing the
information; (B) was then generally known to the public; (C) became known to the
public through no fault of the party receiving the information; or (D) was
disclosed to the party receiving the information by a third party not bound by
an obligation of confidentiality; or (ii) disclosures pursuant to a legal
requirement or in accordance with an order of a court of competent jurisdiction.
4.06. Regulatory Matters.
(a) Crown and the Bank agree that they will make all filings required
to be filed by Crown or the Bank to obtain the permits, consents, approvals and
authorizations of all third parties and governmental bodies required to
consummate the transactions contemplated by this Agreement within 45 days after
the execution of this Agreement by each of the parties hereto, subject to the
timely receipt of information, if any, which DFFN and the Association may be
required to provide with respect to such filings. Each of DFFN, the Association,
Crown and the Bank shall cooperate with each other and use their best efforts to
prepare all necessary documentation to effect all necessary filings and to
obtain all necessary permits, consents, approvals and authorizations of all
third parties and governmental bodies necessary to consummate the transactions
contemplated by this Agreement as soon as practicable. The parties shall each
have the right to review and approve in advance all information relating to the
other, as the case may be, and any of their respective subsidiaries, which
appears in any filing made with, or written material submitted to, any third
party or governmental body in connection with the transactions contemplated by
this Agreement.
(b) Each of the parties will furnish each other with all information
concerning themselves, their directors, officers and stockholders and such other
matters as may be necessary or advisable in connection with any statement or
application made by or on behalf of them to any governmental body in connection
with the Merger and the other transactions, applications or filings contemplated
by this Agreement provided, however, that confidential information regarding
shareholders of Crown is not required to be disclosed hereunder.
21
<PAGE>
(c) Each of the parties will promptly furnish each other with copies of
written communications received by them from, or delivered by any of the
foregoing to, any governmental body in connection with the Merger and the other
transactions, applications or filings contemplated by this Agreement.
4.07. Approval of Stockholders. DFFN will (a) take all steps necessary
to duly call, give notice of, convene and hold a meeting of its stockholders as
soon as reasonably practicable for the purposes of securing the adoption of such
stockholders of this Agreement and the Agreement of Merger, (b) recommend to its
stockholders the adoption of this Agreement and the Agreement of Merger and the
transactions contemplated hereby and thereby, and use its best efforts to
obtain, as promptly as practicable, such approvals, unless the Board of
Directors of DFFN determines based on the written legal advice of counsel that
such recommendation is likely to be deemed to constitute a breach of their
fiduciary duties under applicable Delaware law, and (c) cooperate and consult
with Crown and the Bank with respect to the foregoing matters.
4.08. Further Assurances. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its best efforts to take, or
cause to be taken, all reasonable action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
satisfy the conditions to closing contained herein and to consummate and make
effective the transactions contemplated by this Agreement and the Agreement of
Merger. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and directors of each party to this Agreement shall take all such
necessary action. Nothing in this section shall be construed to require any
party to participate in any threatened or actual legal, administrative or other
proceedings (other than proceedings, actions or investigations to which it is a
party or subject or threatened to be made a party or subject) in connection with
consummation of the transactions contemplated by this Agreement unless such
party shall consent in advance and in writing to such participation and the
other party agrees to reimburse and indemnify such party for and against any and
all costs and damages related thereto.
4.09. Disclosure Supplements. From time to time prior to the Effective
Time, each party will promptly supplement or amend its respective Disclosure
Schedules delivered pursuant hereto with respect to any matter hereafter arising
which, if existing, occurring or known as of the date hereof, would have been
required to be set forth or described in such Schedules or which is necessary to
correct any information in such Schedules which has been rendered inaccurate
thereby. No supplement or amendment to such Schedules shall have any effect for
the purpose of determining satisfaction of the conditions set forth in Article V
or the compliance by DFFN and the Association with the covenants set forth in
Section 4.01 hereof.
4.10. Public Announcements. The parties hereto shall approve in advance
the substance of and cooperate with each other in the development and
distribution of all news releases and other public disclosures with respect to
this Agreement or any of the transactions contemplated hereby, except as may be
otherwise required by law or regulation and as to which the parties releasing
such information have used their best efforts to discuss with the other parties
in advance.
22
<PAGE>
4.11. Failure to Fulfill Conditions. In the event that either of the
parties hereto determines that a condition to its respective obligations to
consummate the transactions contemplated hereby cannot be fulfilled on or prior
to June 30, 1999 and that it will not waive that condition, it will promptly
notify the other party. Crown and DFFN will promptly inform the other of any
facts applicable to them, or their respective directors or officers, that would
be likely to prevent or materially delay approval of the Merger by any
governmental authority or which would otherwise prevent or materially delay
completion of the Merger.
4.12. Certain Post-Merger Agreements.
The parties hereto agree to the following arrangements following the
Effective Time:
(a) Employee Stock Ownership Plan. Notwithstanding any provision to the
contrary contained herein, each participant in the Delaware First Bank, FSB
Employee Stock Ownership Plan ("ESOP") not fully vested will, in accordance with
the terms of the ESOP, become fully vested in his or her ESOP account as of the
Effective Time. As soon as practicable after the execution of this Agreement,
DFFN and Crown will cooperate to cause the ESOP to be amended and other action
taken, in a manner reasonably acceptable to DFFN and Crown, to provide that the
ESOP will terminate upon the Effective Time. Between the date of this Agreement
and the Effective Time, the existing ESOP indebtedness shall be paid in the
ordinary course of business pursuant to the existing loan amortization schedule
and DFFN or the Association shall make such contributions to the ESOP as
necessary to fund such payments. Any indebtedness of the ESOP remaining as of
the Effective Time shall be repaid from the Trust associated with the ESOP
through application of the Merger Consideration received by the ESOP. Upon the
repayment of the ESOP loan, the remaining funds in the ESOP suspense account
will be allocated (to the extent permitted by Sections 401(a), 415, and 4975 of
the Code and other applicable laws and regulations, including without limitation
the applicable provisions of ERISA) to ESOP participants (as determined under
the terms of the ESOP). DFFN and Crown agree that, subject to the conditions
described herein, as soon as practicable after the Effective Time and repayment
of the ESOP loan, participants in the ESOP shall be entitled at their election
to have the amounts in the their ESOP accounts either distributed to them in a
lump sum or rolled over to another tax-qualified plan (including Crown or Bank
plans to the extent permitted by Crown) or individual retirement account.
The actions relating to termination of the ESOP will be adopted
conditioned upon the consummation of the Merger and upon receiving a favorable
determination letter from the Internal Revenue Service ("IRS") with regard to
the continued qualification of the ESOP after any required amendments (including
the amendment which terminates the ESOP). DFFN and Crown will cooperate in
submitting appropriate requests for any such determination letter to the IRS and
will use their best efforts to seek the issuance of such letter as soon as
practicable following the date of this Agreement. DFFN and Crown will adopt such
additional amendments to the ESOP as may be reasonably required by the IRS as a
condition to granting such determination letter, provided that such amendments
do not (A) substantially change the terms outlined herein, (B) have a material
adverse effect on DFFN, or (C) result in an additional material liability to
Crown.
23
<PAGE>
As of and following the Effective Time, Crown shall cause the ESOP to
be maintained for the exclusive benefit of employees and other persons who were
participants or beneficiaries therein prior to the Effective Time and proceed
with termination of the ESOP through distribution of its assets in accordance
with its terms subject to the amendments described herein and as otherwise may
be required to comply with applicable law or to obtain a favorable determination
from the IRS as to the continuing qualified status of the ESOP, provided,
however, that no such termination distributions or the ESOP shall occur after
the Effective Time until a favorable termination letter has been received from
the IRS.
(b) Consulting Services. At the Effective Time, Ernest J. Peoples and
J. Bayard Cloud shall become consultants to Crown for a period of time from the
Effective Time until the first anniversary thereof and during such one-year
period shall each receive a fee of $25,000 for such consulting services which
fee will be payable in four equal installments at the beginning of each quarter
beginning with the first quarter after consummation of the Merger. In addition,
with respect to J. Bayard Cloud, Crown will continue to pay to J. Bayard Cloud
on an annual basis during his lifetime a supplemental pension benefit of $15,468
payable in 12 equal installments on the first day of every month.
(c) Officers and Employees of DFFN and the Association. Within ninety
(90) days of the date hereof, Crown and the Bank shall use their reasonable best
efforts to inform the employees of DFFN and the Association of the likelihood of
such employees having continued employment with the Bank following the Effective
Time and, where appropriate, shall use their reasonable best efforts to
interview the employees of DFFN or the Association to determine if there are
mutually beneficial employment opportunities available at the Bank. The Bank
shall give any full-time employee who has been employed by DFFN or the
Association for at least two years and who is terminated within one year from
the Effective Time, except for those individuals terminated for cause, one week
of severance pay for every year of service with a minimum of four weeks
severance pay and a maximum of 26 weeks severance pay. The Bank shall give each
other full-time employee of DFFN and/or the Association who is terminated within
one year from the Effective Time, except for those individuals terminated for
cause, two weeks of severance pay. The severance pay provided for under this
Section 4.12(c) shall be mitigated to the extent that Crown or the Bank place
the terminated employee with another financial institution within a 25 mile
radius of the Association's main office in a position with comparable
responsibilities and compensation.
(d) Employee Benefit Plans. Subject to the provisions of this Section
4.12, all employees of DFFN or the Association immediately prior to the
Effective Time who are employed by the Association, Crown or the Bank
immediately following the Effective Time ("Transferred Employees") will be
covered by the employee benefit plans of Crown and the Bank on substantially the
same basis as any employee of Crown and the Bank in a comparable position.
Notwithstanding the foregoing, Crown and the Bank may determine to continue any
of the DFFN benefit plans for Transferred Employees in lieu of offering
participation in the Employers' benefit plans providing similar benefits (e.g.,
medical and hospitalization benefits), to terminate any of DFFN's benefit plans,
or to merge any such benefit plans with the Employers' benefit plans, provided
the result is the provision of benefits to Transferred Employees that are
substantially similar to the benefits provided to the employees of Crown and the
Bank generally. Service to DFFN or the Association by a
24
<PAGE>
Transferred Employee prior to the Effective Time shall be recognized as service
to Crown or the Bank for purposes of eligibility to participate under the sick
leave policies, paid vacation policies, and medical, long-term disability and
life insurance plans of Crown and the Bank. In addition, for purposes of
determining eligibility to participate in and the vesting of benefits (but not
for purposes of benefit accrual) under Crown's benefit plans, Crown shall
recognize years of service with DFFN and the Association. Crown and the Bank
agree that any pre-existing condition, limitation or exclusion in its medical,
long-term disability and life insurance plans shall not apply to Transferred
Employees or their covered dependents who are covered under a medical or
hospitalization indemnity plan maintained by DFFN and the Association on the
Effective Time and who then change coverage to the medical or hospitalization
indemnity health plan of Crown and the Bank at the time such Transferred
Employees are first given the option to enroll.
(e) Indemnification. From and after the Effective Time through the
third anniversary of the Effective Time, Crown shall indemnify and hold harmless
each present and former director, officer and employee of DFFN and the
Association determined as of the Effective Time (the "Indemnified Parties")
against any costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities (collectively, "Costs") incurred
in connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time (collectively, "Claims"), to
the fullest extent to which such Indemnified Parties were entitled under
Delaware law, the Certificate of Incorporation or other governing instrument and
Bylaws of DFFN or the Association as in effect on the date hereof.
Any Indemnified Party wishing to claim indemnification under this
Section 4.12(e), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify Crown, but the failure to so notify shall
not relieve Crown of any liability it may have to such Indemnified Party if such
failure does not materially prejudice Crown. In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) Crown shall have the right to assume the defense thereof
and Crown shall not be liable to such Indemnified Parties for any legal expenses
of other counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that if Crown elects not
to assume such defense or counsel for the Indemnified Parties advises that there
are issues which raise conflicts of interest between Crown and the Indemnified
Parties, the Indemnified Parties may retain counsel which is reasonably
satisfactory to Crown, and Crown shall pay, promptly as statements therefore are
received, the reasonable fees and expenses of such counsel for the Indemnified
Parties (which may not exceed one firm in any jurisdiction unless the use of one
counsel for such Indemnified Parties would present such counsel with a conflict
of interest), (ii) the Indemnified Parties will cooperate in the defense of any
such matter, and (iii) Crown shall not be liable for any settlement effected
without its prior written consent, which consent shall not be withheld
unreasonably.
In the event that Crown or any of its respective successors or assigns
(i) consolidates with or merges into any other person and shall not be the
continuing or Resulting Institution or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then, and in each such case, the successors and assigns of such entity
shall assume the
25
<PAGE>
obligations set forth in this Section 4.12(e), which obligations are expressly
intended to be for the irrevocable benefit of, and shall be enforceable by, each
of the Indemnified Parties.
(f) Insurance. DFFN shall purchase a directors' and officers' liability
insurance policy for a period of six (6) years after the Effective Time,
provided however, that the aggregate cost of such insurance shall not exceed
150% of the amount currently expended by DFFN on an annual basis.
(g) Retention Bonuses. DFFN may pay retention bonuses to certain
employees, to be determined by DFFN and Crown. Each such employee who remains
employed by DFFN or the Association, as applicable, until the Effective Time (or
in certain cases, the date the systems conversion occurs after the Effective
Time) and satisfactorily fulfills the duties and responsibilities of the
position of such employee of DFFN or the Association, as the case may be,
through the Effective Time; provided that retention bonuses, in the aggregate,
shall not exceed $36,000.
ARTICLE V
CLOSING CONDITIONS
5.01. Conditions to the Parties' Obligations Under This Agreement. The
respective obligations of the parties under this Agreement shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) All necessary regulatory, governmental or third party approvals,
waivers, clearances, authorizations and consents (including without limitation
the requisite approval of the OTS required to consummate the transactions
contemplated hereby) shall have been obtained without any term or condition
which would materially impair the value of DFFN and the Association to Crown and
the Bank or materially adversely affect the terms of the Merger as they relate
to the shareholders of DFFN; all conditions required to be satisfied prior to
the Effective Time by the terms of such approvals and consents shall have been
satisfied; and all waiting periods in respect thereof shall have expired.
(b) All corporate action necessary to authorize the execution and
delivery of this Agreement and the Agreement of Merger and consummation of the
transactions contemplated hereby and thereby shall have been duly and validly
taken by Crown, the Bank, DFFN and the Association, including adoption by the
requisite vote of the stockholders of DFFN of this Agreement and the Agreement
of Merger.
(c) No order, judgment or decree shall be outstanding against a party
hereto or a third party that would have the effect of preventing completion of
the Merger; no suit, action or other proceeding shall be pending or threatened
by any governmental body in which it is sought to restrain or prohibit the
Merger; and no suit, action or other proceeding shall be pending before any
court or governmental agency in which it is sought to restrain or prohibit the
Merger or obtain other substantial monetary or other relief against one or more
of the parties hereto in connection with this Agreement and which Crown, the
Bank, DFFN or the Association determines in good faith, based upon the advice of
their respective counsel, makes it inadvisable to proceed with the Merger
because
26
<PAGE>
any such suit, action or proceeding has a significant potential to be resolved
in such a way as to deprive the party electing not to proceed of any of the
material benefits to it of the Merger.
5.02. Conditions to the Obligations of Crown and the Bank Under This
Agreement. The obligations of Crown and the Bank under this Agreement shall be
further subject to the satisfaction, at or prior to the Effective Time, of the
following conditions, any one or more of which may be waived by Crown and the
Bank:
(a) Each of the obligations of DFFN and the Association required to be
performed by them at or prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects and the representations and warranties of DFFN and the Association
contained in this Agreement shall have been true and correct as of the date
hereof and as of the Effective Time as though made at and as of the Effective
Time, except (i) as to any representation or warranty which specifically relates
to an earlier date, or (ii) where the facts which caused the failure of any
representation or warranty to be so true and correct would not, either
individually or in the aggregate, constitute a material adverse change in the
business, operations, assets or financial condition of DFFN and the Association
taken as a whole, and Crown and the Bank shall have received a certificate to
that effect signed by the President and Chief Executive Officer of DFFN and the
Association.
(b) The aggregate amount of consolidated stockholders' equity of DFFN
immediately prior to the Effective Time, as shown by and reflected in its books
and records of accounts on a consolidated basis in accordance with generally
accepted accounting principles, consistently applied, shall not be less than
$15,602,000. For purposes of this Section 5.02(b) any expenses or accruals after
the date hereof relating to (i) expenses associated with the Merger or (ii)
market value adjustments to the investment portfolio of DFFN and the Association
shall be excluded for purposes of calculation of DFFN's stockholders' equity as
contemplated herein prior to the Effective Time.
(c) The Association's gross loan portfolio immediately prior to the
Effective Time, as shown and reflected in its books and records of accounts in
accordance with generally accepted accounting principles, consistently applied,
shall not be less than $56,700,000.
(d) DFFN and the Association shall have furnished Crown and the Bank
with such certificates of its officers or others and such other documents to
evidence fulfillment of the conditions set forth in this Section 5.02 as Crown
and the Bank may reasonably request.
5.03. Conditions to the Obligations of DFFN and the Association Under
this Agreement. The obligations of DFFN and the Association under this Agreement
shall be further subject to the satisfaction, at or prior to the Effective Time,
of the following conditions, any one or more of which may be waived by DFFN and
the Association:
(a) Each of the obligations of Crown and the Bank required to be
performed by them at or prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects and the representations and warranties of Crown and the Bank contained
in this Agreement shall have been true and correct as of the date hereof and as
of the Effective Time as though made at and as of the Effective Time, except (i)
as to any representation
27
<PAGE>
or warranty which specifically relates to an earlier date or (ii) where the
facts which caused the failure of any representation or warranty to be so true
and correct would not, either individually or in the aggregate, constitute a
material adverse change in the business, operations, assets or financial
condition of Crown and the Bank taken as a whole, and DFFN and the Association
shall have received a certificate to that effect signed by the President and
Chief Executive Officer of Crown and the Bank.
(b) Crown and the Bank shall have furnished DFFN and the Association
with such certificates of its officers or others and such other documents to
evidence fulfillment of the conditions set forth in this Section 5.03 as DFFN
and the Association may reasonably request.
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER, ETC.
6.01. Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of this Agreement and
the Agreement of Merger by the stockholders of DFFN:
(a) by mutual written consent of the parties hereto;
(b) by Crown, the Bank, DFFN or the Association (i) if the Effective
Time shall not have occurred on or prior to June 30, 1999 or (ii) if a vote of
the stockholders of DFFN is taken and such stockholders fail to approve this
Agreement and the Agreement of Merger at the meeting of stockholders (or any
adjournment thereof) of DFFN contemplated by Section 4.07 hereof; unless the
failure of such occurrence shall be due to the failure of the party seeking to
terminate this Agreement to perform or observe its agreements set forth herein
to be performed or observed by such party at or before the Effective Time;
(c) by Crown or DFFN upon written notice to the other 30 or more days
after the date upon which any application for a regulatory or governmental
approval necessary to consummate the Merger and the other transactions
contemplated hereby shall have been denied or withdrawn at the request or
recommendation of the applicable regulatory agency or governmental authority,
unless within such 30-day period a petition for rehearing or an amended
application is filed or noticed, or 30 or more days after any petition for
rehearing or amended application is denied;
(d) by Crown or the Bank in writing if DFFN or the Association has, or
by DFFN or the Association in writing if Crown or the Bank has, breached (i) any
covenant or undertaking contained herein or in the Agreement of Merger, or (ii)
any representation or warranty contained herein, which breach would have a
material adverse effect on the business, operations, assets or financial
condition of DFFN and the Association taken as a whole, or upon the consummation
of the transactions contemplated hereby, in any case if such breach has not been
cured by the earlier of 30 days after the date on which written notice of such
breach is given to the party committing such breach or the Effective Time; and
(e) by Crown or DFFN in writing, if any of the applications for prior
approval referred to in Section 4.06 hereof are denied or are approved
contingent upon the satisfaction of any condition or requirement which, in the
reasonable opinion of the Board of Directors of Crown or DFFN as
28
<PAGE>
applicable, would materially impair the value of DFFN and the Association taken
as a whole to Crown, or would materially adversely affect the terms of the
Merger as they relate to the shareholders of DFFN and the time period for
appeals and requests for reconsideration has run.
6.02. Effect of Termination. In the event of termination of this
Agreement by Crown, the Bank, DFFN or the Association as provided above, this
Agreement shall forthwith become void (other than Sections 4.05(b) and 7.01
hereof, which shall remain in full force and effect) and there shall be no
further liability on the part of the parties or their respective officers or
directors except for the liability of the parties under Sections 4.05(b) and
7.01 hereof and except for liability for any breach of this Agreement.
6.03. Amendment, Extension and Waiver. Subject to applicable law, at
any time prior to the consummation of the Merger, whether before or after
approval thereof by the stockholders of DFFN, the parties may (a) amend this
Agreement and the Agreement of Merger, (b) extend the time for the performance
of any of the obligations or other acts of the other parties hereto, (c) waive
any inaccuracies in the representations and warranties contained herein or in
any document delivered pursuant hereto, or (d) waive compliance with any of the
agreements or conditions contained herein; provided, however, that after any
approval of the Merger by the stockholders of DFFN, there may not be, without
further approval of such stockholders, any amendment or waiver of this Agreement
or the Agreement of Merger which modifies the amount of the Merger Consideration
to be delivered to stockholders of DFFN. This Agreement and the Agreement of
Merger may not be amended except by an instrument in writing signed on behalf of
each of the parties hereto. Any agreement on the part of a party hereto to any
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party, but such waiver or failure to insist on strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
ARTICLE VII
MISCELLANEOUS
7.01. Expenses.
(a) Whether or not the transactions provided for herein are
consummated, each party to this Agreement will pay its respective expenses
incurred in connection with the preparation and performance of its obligations
under this Agreement, including legal, accounting and investment banking fees
and expenses, filing fees and printing expenses, except as set forth below.
(b) Notwithstanding any provision in this Agreement to the contrary, in
the event that any of the parties shall willfully default in its obligations
hereunder, the nondefaulting party may pursue any remedy available at law or in
equity to enforce its rights and shall be paid by the willfully defaulting party
(i) $150,000 and (ii) the amount of all costs and expenses, including without
limitation legal, accounting and investment banking fees and expenses, incurred
or suffered by the non-defaulting party in connection herewith or in the
enforcement of its rights hereunder if such non-defaulting party prevails.
(c) DFFN shall pay the Bank, and the Bank shall be entitled to payment
of, a fee equal to $800,000 (the "Fee") upon the occurrence of a Purchase Event
(as defined herein) so long as the
29
<PAGE>
Purchase Event occurs prior to a Fee Termination Event (as defined herein). Such
payment shall be made to the Bank in immediately available funds within five
business days after the occurrence of a Purchase Event. A Fee Termination Event
shall be the first to occur of the following: (i) the Effective Time or (ii)
termination of this Agreement in accordance with the terms hereof prior to the
occurrence of a Purchase Event (other than a termination of this Agreement by
Crown or the Bank pursuant to Section 6.01(d) hereof as a result of a willful
breach of any representation, warranty, covenant or agreement of DFFN and the
Association).
(d) The term "Purchase Event" shall mean any of the following events or
transactions occurring after the date hereof:
(i) DFFN or the Association shall have entered into an
agreement to engage in an Acquisition Transaction (as defined below)
with any person (the term "person" for purposes of this Agreement
having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of
the Securities Exchange Act of 1934 and the rules and regulations
thereunder) other than Crown, the Bank or any affiliate of Crown or the
Bank (the term "affiliate" for purposes of this Agreement having the
meaning assigned thereto in Rule 405 under the Securities Act of 1933)
or the Board of Directors of DFFN shall have recommended that the
shareholders of DFFN approve or accept any Acquisition Transaction with
any person other than Crown, the Bank or any affiliate of Crown or the
Bank. For purposes of this Agreement, "Acquisition Transaction" shall
mean (x) a merger or consolidation, or any similar transaction,
involving DFFN or the Association, (y) a purchase, lease or other
acquisition of all or substantially all of the assets of DFFN or the
Association, or (z) a purchase or other acquisition (including by way
of merger, consolidation, share exchange or otherwise) of securities
representing 50% or more of the voting power of DFFN or the
Association;
(ii) After a bona fide written proposal is made by any person
other than Crown or the Bank or any affiliate of Crown or the Bank to
DFFN, the Association or DFFN's shareholders to engage in an
Acquisition Transaction, (A) DFFN or the Association shall have
breached any covenant or obligation contained in this Agreement and
such breach would entitle Crown or the Bank to terminate this Agreement
or (B) the holders of the DFFN Common Stock shall not have approved
this Agreement and the Agreement of Merger at the meeting of such
shareholders held for the purpose of voting on this Agreement and the
Agreement of Merger, such meeting shall not have been held or shall
have been cancelled prior to termination of this Agreement or (C) the
Board of Directors of DFFN shall have withdrawn or modified in a manner
adverse to Crown and the Bank the recommendation of the Board of
Directors of DFFN with respect to this Agreement and the Agreement of
Merger.
If more than one occurrence constituting a Purchase Event under this
Section arises, then all such occurrences shall give rise to only one Purchase
Event.
(e) DFFN shall give written notice to the Bank within 24 hours of the
occurrence of a Purchase Event known to DFFN; however, the giving of such notice
by DFFN shall not be a condition to the right of the Bank to obtain the Fee.
30
<PAGE>
(f) Payment of the Fee shall be in lieu of, and not in addition to, the
payment of damages pursuant to Section 7.01(b) of this Agreement.
7.02. Survival. The respective representations, warranties and
covenants of the parties to this Agreement shall not survive the Effective Time
but shall terminate as of the Effective Time, except for the provisions of
Section 4.12 hereof.
7.03. Notices. All notices or other communications hereunder shall be
in writing and shall be deemed given if delivered personally, sent by overnight
express or mailed by prepaid registered or certified mail (return receipt
requested) or by cable, telegram or telex addressed as follows:
(a) If to DFFN, to:
Delaware First Financial Corporation
400 Delaware Avenue
Wilmington, Delaware 19801
Attn: Ernest J. Peoples
Copy to:
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
Attn: Kevin M. Houlihan, Esq.
(b) If to Crown, to:
The Crown Group, Inc.
105 Live Oaks Gardens
Casselberry, Florida 32707
Attn: John A. Koegel
Copy to:
Igler & Doherty, P.A.
1501 Park Avenue East
Tallahassee, Florida 32301
Attn: A. George Igler, Esq.
or such other address as shall be furnished in writing by any party, and any
such notice or communication shall be deemed to have been given as of the date
so mailed.
7.04. Parties in Interest. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any party hereto
without the prior written consent of the other party and, except as otherwise
expressly provided herein, that nothing in this Agreement is intended to confer,
expressly or by implication, upon any other person any rights or remedies under
or by reason of this Agreement.
31
<PAGE>
7.05. Complete Agreement. This Agreement and the Agreement of Merger,
including the documents and other writings referred to herein or therein or
delivered pursuant hereto or thereto, contain the entire agreement and
understanding of the parties with respect to their subject matter and shall
supersede all prior agreements and understandings between the parties, both
written and oral, with respect to such subject matter. There are no
restrictions, agreements, promises, representations, warranties, covenants or
undertakings between the parties other than those expressly set forth herein or
therein.
7.06. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
7.07. Governing Law. This Agreement shall be governed by the laws of
the State of Delaware, without giving effect to the principles of conflicts of
laws thereof. Any and all disputes arising out of or in connection with this
Agreement shall be submitted to arbitration, and finally settled, under the
Rules of the American Arbitration Association ("AAA") by one arbitrator
appointed in accordance with the said Rules. Any such arbitration shall be
conducted in Seminole County, Florida. Each party to this Agreement shall be
bound by the result of such arbitration. Each party shall bear its own expenses
relating to such disputes or disagreements so arbitrated, and the parties hereto
shall share equally the fees and charges of the arbitrators for conducting such
arbitration. Such arbitration shall be governed by the Federal Arbitration Act,
9.U.S.C. ss.1 et seq; provided, however, that the substantive law of the State
of Florida shall govern any and all such disputes. The parties agree that any
action to confirm an arbitration award shall be brought in any competent court
in Seminole County, Florida, and that such court may enforce or compel
compliance with such award.
7.08. Headings. The Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
7.09. Definitions. Except as otherwise provided herein, the capitalized
terms set forth below shall have the following meanings:
(a) "Best knowledge" or "known." For purposes of this
Agreement, an individual shall be deemed to have "best knowledge" of or to have
"known" a particular fact or other matter if (i) such individual is actually
aware of such fact or other matter, or (ii) a prudent individual could be
expected to discover or otherwise become aware of such fact or other matter in
the course of conducting a reasonably comprehensive investigation concerning the
truth or existence of such fact or other matter. An entity shall be deemed to
have "best knowledge" of or to have "known" a particular fact or other matter if
any individual who is serving as a director or as an officer of the entity, has,
or at any time had, knowledge of such fact or other matter.
(b) "Material." For purposes of this Agreement, material shall
be determined in light of the facts and circumstances of the matter in question;
provided that any specific monetary amount stated in this Agreement shall
determine materiality in that instance.
(c) "Material Adverse Effect." For purposes of this Agreement,
material adverse effect on DFFN or Crown, as applicable, shall mean an event,
change, or occurrence which, individually or together with any other event,
change, or occurrence, has a material adverse impact on (i) the financial
condition, results of operations, or business of DFFN or Crown, taken as a
whole, or (ii) the ability of DFFN or Crown to perform its obligations under
this Agreement or to consummate the Merger or the other transactions
contemplated by this Agreement, provided that "material adverse effect" shall
not be deemed to include the impact of (a) changes in banking and similar laws
of general applicability or interpretations thereof by courts or governmental
authorities,
32
<PAGE>
(b) changes in generally accepted accounting principles or regulatory accounting
principles generally applicable to banks or savings associations and their
holding companies, (c) actions and omissions of any party hereto taken with the
prior informed consent of the other party in contemplation of the transactions
contemplated hereby, and (d) the Merger (and the reasonable expenses incurred in
connection therewith) and compliance with the provisions of this Agreement on
the operating performance of DFFN and Crown.
IN WITNESS WHEREOF, Crown, the Bank, DFFN and the Association have
caused this Agreement to be executed by their duly authorized officers as of the
day and year first above written.
DELAWARE FIRST FINANCIAL CORPORATION
By: /s/ Ernest J. Peoples
------------------------------------------
Ernest J. Peoples
President and Chief Executive Officer
DELAWARE FIRST BANK, FSB
By: /s/ Ernest J. Peoples
------------------------------------------
Ernest J. Peoples
President and Chief Executive Officer
THE CROWN GROUP, INC.
By: /s/ John A. Koegel
------------------------------------------
John A. Koegel
President and Chief Executive Officer
CROWN BANK, FSB
By: /s/ John A. Koegel
------------------------------------------
John A. Koegel
President and Chief Executive Officer
33
<PAGE>
APPENDIX B
[FORM OF FAIRNESS OPINION]
April __, 1999
Board of Directors
Delaware First Financial Corporation
400 Delaware Avenue
Wilmington, DE 19801
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, to the shareholders of common stock (the "Delaware First Common
Stock") of Delaware First Financial Corporation ("Delaware First") of the
consideration to be received by such shareholders in a merger (the "Merger") of
Delaware First with Crown Group, Inc., Casselberry, Florida ("Crown"), pursuant
to the Amended and Restated Merger Agreement dated as of November 18, 1998, as
amended on February 17, 1999, and a related Agreement and Plan of Merger
(together, the "Agreement"). Unless otherwise noted, all terms used herein will
have the same meaning as defined in the Agreement.
As more specifically set forth in the Agreement, and subject to a
number of conditions and procedures described in the Agreement, in the Merger
each of the issued and outstanding shares of Delaware First Common Stock shall
be exchanged for $15.50 of cash.
Trident Financial Corporation ("Trident") is a financial consulting and
investment banking firm experienced in the valuation of business enterprises
with considerable experience in the valuation of thrift institutions. In the
past, Trident and its affiliates have provided financial advisory services for
Delaware First and have received fees for the rendering of these services. In
addition, in the ordinary course of our business we may trade the securities of
Delaware First for our own account and for the accounts of our customers and,
accordingly, may at any one time hold a long or short position in such
securities. Trident is not affiliated with Delaware First or Crown.
In connection with rendering our opinion, we have reviewed and
analyzed, among other things, the following: (i) the Agreement; (ii) the Proxy
Statement; (iii) certain publicly available information concerning Delaware
First, including the audited financial statements for each year in the three
year period ended December 31, 1998; (iv) certain other internal information,
primarily financial in nature, concerning the business and operations of
Delaware First furnished to us by Delaware First for purposes of our analysis;
(v) information with respect to the trading market for Delaware First Common
Stock; (vi) certain publicly available information with respect to other
companies that we believe to be comparable to Delaware
<PAGE>
Board of Directors
April __, 1999
Page 2
First and the trading markets for such other companies' securities; and (vii)
certain publicly available information concerning the nature and terms of other
transactions that we believe relevant to our inquiry. We met with certain
officers and employees of Delaware First to discuss the foregoing. We have also
taken into account our assessment of general economic, market, financial and
regulatory conditions and trends, as well as our knowledge of the thrift
industry, experience in connection with similar transactions and general
knowledge of securities valuation.
In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to us or publicly available. We have not
attempted independently to verify any such information. We have not conducted a
physical inspection of the properties or facilities of Delaware First, nor have
we made or obtained any independent evaluations or appraisals of any such
properties or facilities. We did not specifically evaluate Delaware First's loan
portfolio or the adequacy of reserves for possible loan losses.
Based upon and subject to the foregoing, we are of the opinion that the
consideration to be received by the holders of Delaware First Common Stock in
the Merger is fair, as of the date hereof, from a financial point of view, to
such holders. The standard employed by us in reaching our judgment as to
fairness of such consideration from a financial point of view was whether our
estimation of the economic value of such consideration is within the range of
estimated economic values within which companies having the characteristics of
Delaware First and Crown might negotiate a merger transaction at arm's length,
and not whether such consideration is at or approaching the higher end of such
range.
Our opinion necessarily is based upon conditions as they exist and can
be evaluated on the date hereof and does not address Delaware First's underlying
business decision to effect the Merger. Finally, our opinion does not constitute
a recommendation to any stockholder of Delaware First as to how such stockholder
should vote at the stockholders' meeting held in connection with the Merger.
This opinion is being delivered to the Board of Directors of Delaware
First and may not be summarized, excerpted from, reproduced, disseminated or
delivered to any third party without the express written consent of Trident. Our
opinion is as of the date set forth above, and events or circumstances occurring
after this date may adversely impact the validity of the bases of our opinion
and/or such opinion.
Very truly yours,
TRIDENT FINANCIAL CORPORATION
<PAGE>
APPENDIX C
262 APPRAISAL RIGHTS.-(a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to ss.228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss.251 (other than a merger effected pursuant to ss.251(g)
of this title), ss.252, ss.254, ss.257, ss.258, ss.263 or ss.264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to ss.251, 252, 254,
257, 258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
<PAGE>
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b., and c.of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss.253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If the proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the apprisal of such
stockholder's shares shall deliver to the corporation, before the taking of the
vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to ss.228 or
ss.253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the
2
<PAGE>
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated herein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
3
<PAGE>
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and placed fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such
4
<PAGE>
stock. The Court's decree may be enforced as other decrees in the Court of
Chancery may be enforced, whether such surviving or resulting corporation be a
corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to the stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
5
<PAGE>
REVOCABLE PROXY
DELAWARE FIRST FINANCIAL CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
__________ __, 1999
The undersigned, being a stockholder of Delaware First Financial
Corporation ("Company") as of _________ __, 1999, hereby authorizes Jerome P.
Arrison and Lori N. Richards or any successors thereto as proxies with full
powers of substitution, to represent the undersigned at the Special Meeting of
Stockholders of the Company to be held at the DuPont Country Club, Rockland
Road, Wilmington, Delaware 19803 on _______________________________, Eastern
Time, and at any adjournment of said meeting, and thereat to act with respect to
all votes that the undersigned would be entitled to cast, if then personally
present, as follows:
1. PROPOSAL to adopt the Amended and Restated Merger Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
COMPANY FOR USE AT THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON ___________
__, 1999 AND AT ANY ADJOURNMENT THEREOF.
SHARES OF THE COMPANY'S COMMON STOCK WILL BE VOTED AS SPECIFIED. IF
RETURNED, BUT NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ADOPTION
OF THE AMENDED AND RESTATED MERGER AGREEMENT AND OTHERWISE AT THE DISCRETION OF
THE PROXIES. YOU MAY REVOKE THIS PROXY AT ANY TIME PRIOR TO THE TIME IT IS VOTED
AT THE SPECIAL MEETING.
Please be sure to sign and date this Proxy
in the space below.
Date: __________________________, 1999
__________________________
(signature)
<PAGE>
PLEASE SIGN ABOVE EXACTLY AS YOUR NAME(S) APPEAR(S) ON THIS
PROXY. WHEN SIGNING IN A REPRESENTATIVE CAPACITY, PLEASE GIVE FULL
TITLE. WHEN SHARES ARE HELD JOINTLY, ONLY ONE HOLDER NEED SIGN.
PLEASE ACT PROMPTLY. SIGN, DATE AND MAIL YOUR PROXY CARD
TODAY.
