UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number 0-23499
DELAWARE FIRST FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 52-2063973
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Delaware Avenue
Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
(302) 421-9090
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of May 12, 1999, there
were issued and outstanding 1,157,000 shares of the Registrant's Common Stock,
par value $.01 per share.
Transitional Small Business Disclosure Format: Yes _X_ No ___
DELAWARE FIRST FINANCIAL CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1998 and March 31, 1999 (unaudited) 1
Consolidated Statements of Operations for the three
months ended March 31, 1999 (unaudited) and 1998 (unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
for the three months ended March 31, 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 (unaudited) and 1998 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------------
March 31, December 31,
ASSETS 1999 1998
------------ ------------
(Unaudited)
Cash and cash equivalents $ 7,323,628 $ 10,483,297
Mortgage-backed securities available for sale
(amortized cost - 1999, $2,564,802; 1998, $2,950,049) 2,550,784 2,942,264
Loans receivable - net 82,257,541 81,027,313
Federal Home Loan Bank stock - at cost 975,000 975,000
Accrued interest receivable:
Loans 794,079 714,730
Investments 19,400 36,550
Mortgage-backed securities 11,565 14,393
Real estate owned 71,391 70,645
Office property and equipment, net 1,966,528 1,988,371
Prepaid expenses and other assets 63,271 64,303
Prepaid income taxes 8,527
Mortgage servicing rights 321,743 335,650
Deferred income taxes 183,439 181,319
------------ ------------
TOTAL ASSETS $ 96,538,369 $ 98,842,362
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 64,041,715 $ 66,344,996
Advances from Federal Home Loan Bank 13,198,011 13,742,153
Advances by borrowers for taxes and insurance 1,212,431 673,655
Accrued interest payable 176,604 254,970
Accrued income taxes 369
Accounts payable and accrued expenses 1,507,679 1,546,691
------------ ------------
Total liabilities 80,136,809 82,562,465
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value, 500,000 shares authorized, none issued
Common stock, $.01 par value, 3,000,000 authorized; 1,157,000 issued
and outstanding 11,570 11,570
Additional paid in capital 10,988,356 10,988,356
Common stock acquired by the ESOP (740,480) (740,480)
Accumulated other comprehensive loss (9,735) (5,622)
Retained earnings-substantially restricted 6,151,849 6,026,073
------------ ------------
Total stockholders' equity 16,401,560 16,279,897
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 96,538,369 $ 98,842,362
============ ============
See notes to unaudited consolidated financial statements.
1
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Three months ended
March 31,
----------------------------
1999 1998
(Unaudited)
INTEREST INCOME:
Interest on loans $ 1,580,818 $ 1,728,744
Interest on mortgage-backed securities 34,564 39,651
Interest and dividends on investments 108,493 220,191
----------- -----------
Total interest income 1,723,875 1,988,586
----------- -----------
INTEREST EXPENSE:
Deposits 760,970 1,057,582
Federal Home Loan Bank advances 213,439 261,344
----------- -----------
Total interest expense 974,409 1,318,926
----------- -----------
NET INTEREST INCOME 749,466 669,660
PROVISION FOR LOAN LOSSES 15,000 15,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 734,466 654,660
----------- -----------
OTHER INCOME:
Service fees 23,866 15,537
Gain on sale of loans 7,491
Other 14,404 15,823
----------- -----------
Total other income 38,270 38,851
----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 282,030 257,145
Advertising 25,844 85,530
Federal insurance premiums 10,758 18,331
Occupancy expense 44,627 51,371
Data processing expense 33,697 48,310
Directors fees 12,041 29,823
Other general and administrative expenses 146,963 137,148
----------- -----------
Total other expenses 555,960 627,658
----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 216,776 65,853
----------- -----------
PROVISION FOR INCOME TAXES (91,000) (27,700)
----------- -----------
NET INCOME $ 125,776 $ 38,153
=========== ===========
BASIC EARNINGS PER SHARE $ 0.11 $ 0.03
=========== ===========
See notes to unaudited consolidated financial statements.
2
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Common
Stock
Acquired Accumulated
Additional by Stock Other Total
Common Paid-in Benefit Retained Comprehensive Stockholders'
Stock Capital Plans Earnings Loss Equity
BALANCE, JANUARY 1, 1999 $ 11,570 $ 10,988,356 $ (740,480) $ 6,026,073 $ (5,622) $ 16,279,897
Net income for the
three months ended
March 31, 1999 (unaudited) 125,776 125,776
Change in unrealized losses
on available for sale
securities, net of tax (unaudited) (4,113) (4,113)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1999 (unaudited) $ 11,570 $ 10,988,356 $ (740,480) $ 6,151,849 $ (9,735) $ 16,401,560
============ ============ ============ ============ ============ ============
See notes to unaudited consolidated financial statements.
3
DELAWARE FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------
Three-month Period Ended
March 31,
----------------------------
1999 1998
(Unaudited)
OPERATING ACTIVITIES:
Net income $ 125,776 $ 38,153
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 21,483 24,544
Provision for loan losses 15,000 15,000
Gain on sale of loans (7,491)
Loss on disposal of office property and equipment 7,067
Amortization of:
Deferred loan fees (23,830) (39,081)
Discount on investment and
mortgage-backed securities 1,192 2,570
Changes in assets and liabilities which
provided (used) cash:
Accrued interest receivable (59,371) (4,900)
Mortgage servicing rights 13,907 15,349
Prepaid expenses and other assets 1,032 99,005
Accrued interest payable (78,366) (83,281)
Accounts payable and accrued expenses (39,012) 371,318
Income taxes 8,896 28,985
Deferral of loan fees 30,544 30,549
------------ ------------
Net cash provided by operating activities 17,251 497,787
------------ ------------
INVESTING ACTIVITIES:
Proceeds from maturity of investments 2,000,000
Principal collected on long-term loans
and mortgage-backed securities 5,121,682 5,120,133
Long-term loans originated (5,989,955) (4,334,775)
Proceeds from sale of loans 544,200
Purchase of investments (1,336,747)
Purchases of office property and equipment (30,644)
------------ ------------
Net cash provided by (used in) investing activities (868,273) 1,962,167
------------ ------------
FINANCING ACTIVITIES:
Net decrease in deposits (2,303,281) (2,056,957)
Increase in advances by borrowers for taxes
and insurance 538,776 488,112
Repayments of Federal Home Loan Bank advances (544,142) (2,000,000)
Payment of additional conversion costs (5,841)
------------ ------------
Net cash used in financing activities (2,308,647) (3,574,686)
------------ ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (3,159,669) (1,114,732)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 10,483,297 15,199,726
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 7,323,628 $ 14,084,994
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,052,775 $ 1,402,207
============ ============
Income taxes $ 75,966 $
============ ============
Transfers of loans receivable into real estate owned $ $ 71,726
============ ============
See notes to unaudited consolidated financial statements.
4
DELAWARE FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the unaudited interim periods.
The results of operations for the three month period ended March 31, 1999
are not necessarily indicative of the results to be expected for the fiscal
year ending December 31, 1999. The unaudited consolidated financial
statements presented herein should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in the
Company's Form 10-KSB dated March 31, 1999.
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.
The special meeting for shareholders to consider the approval of the
agreement has been scheduled for June 8, 1999 at 1:30 p.m.
Certain items in the 1998 financial statements have been reclassified to
conform with the presentation in the 1999 financial statements.
5
2. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are summarized as follows:
March 31, 1999 December 31, 1998
---------------------------------------- ---------------------------------------
Gross Approximate Gross Approximate
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Loss Value Cost Loss Value
---------- ---------- ---------- ---------- ---------- ----------
Available for sale:
FHLMC pass-through certificates $ 216,255 $ (731) $ 215,524 $ 302,954 $ (309) $ 302,645
Collateralized Mortgage Obligations 2,348,547 (13,287) 2,335,260 2,647,095 (7,476) 2,639,619
---------- ---------- ---------- ---------- ---------- ----------
Total $2,564,802 $ (14,018) $2,550,784 $2,950,049 $ (7,785) $2,942,264
========== ========== ========== ========== ========== ==========
3. LOANS RECEIVABLE
Loans receivable consist of the following:
March 31, December 31,
1999 1998
----------- -----------
First mortgage loans (primarily one-
to four-family residential) $71,294,543 $70,855,074
Loans on savings accounts 680,913 630,761
Home equity loans - fixed rate 7,219,308 7,556,783
Equity lines of credit - variable rate 2,692,393 2,551,908
Small business loans 1,734,057 774,746
----------- -----------
Total 83,621,214 82,369,272
Less:
Allowance for loan losses 504,355 489,355
Deferred loan fees 859,318 852,604
----------- -----------
Total $82,257,541 $81,027,313
=========== ===========
6
The following is an analysis of the allowance for loan losses:
Three Months Ended
March 31,
------------------------
1999 1998
Balance, beginning of period 489,355 462,815
Provisions charged to operations 15,000 15,000
Charge-offs 0 (41,468)
-------- --------
Balance, end of period 504,355 436,347
======== ========
Loans delinquent more than 90 days are placed on nonaccrual status. At
March 31, 1999 and December 31, 1998, nonaccrual loans amounted to
approximately $188,000 and $94,000, respectively. Interest reserved from
these loans amounted to $8,585 and $3,880 at March 31, 1999 and December
31, 1998, respectively.
4. DEPOSITS
Deposits by stated type are summarized as follows:
March 31, 1999 December 31, 1998
----------------------- -------------------------
Amount Percent Amount Percent
Demand deposit accounts $ 2,163,425 3.4% $ 1,999,737 3.0%
Passbook accounts 1,706,483 2.7 1,697,025 2.6
Money market deposit accounts: 7,501,427 11.7 7,043,797 10.6
91-day to five-year money market
certificates: 52,670,380 82.2 55,604,437 83.8
----------- ----- ----------- -----
Total $64,041,715 100.0% $66,344,996 100.0%
=========== ===== =========== =====
5. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, effective January 1, 1998. The statement
requires disclosure of amounts from transactions and other events which are
currently excluded from the statement of operations and are recorded
directly to stockholders' equity. Total comprehensive income for the three
month periods ended March 31, 1999 and 1998 amounted to income of $121,663
and $40,955, respectively.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets decreased $2.3 million or 2.3% to $96.5 million at March 31,
1999 compared to $98.8 million at December 31, 1998. Such decrease was primarily
due to a decrease in cash and cash equivalents. Cash and cash equivalents were
used to fund deposit outflows. Total liabilities decreased $2.4 million or 2.9%
to $80.1 million at March 31, 1999. Such decrease was primarily due to a
decrease in both deposits and advances from the Federal Home Loan Bank ("FHLB")
of Pittsburgh. Stockholders' equity amounted to $16.4 million at March 31, 1999
and $16.3 million at December 31, 1998.
Results of Operations for the Three Months Ended March 31, 1999 and 1998.
General. Net income amounted to $126,000 and $38,000 for the three months
ended March 31, 1999 and 1998, respectively. The increase of $88,000 or 230.0%
was primarily due to a decrease in interest expense and other expenses partially
offset by a decrease in interest income.
Net Interest Income. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. Net interest income increased $80,000 or 11.9% to $749,000 for the
three months ended March 31, 1999 compared to $670,000 for the same period in
1998. The increase in net interest income was due to a decrease in interest
expense of $345,000. This decrease was due to lower average balances of deposits
and FHLB advances.
Interest Income. Interest income decreased $265,000 or 13.3% to $1.7
million for the three months ended March 31, 1999 compared to the same period in
1998. The decrease in interest income was primarily due to a decrease in
interest income on loans, due to a decrease in the average balance of such
assets. The average balance of loans receivable decreased due to fewer loan
originations and an increase in loan prepayments.
Interest Expense. Interest expense decreased $345,000 or 26.1% to $974,000
for the three months ended March 31, 1999 compared to $1.3 million for the
comparable period in 1998. Such decrease was primarily due to a decrease in
interest expense on deposits and advances from the FHLB, which was caused by a
decrease in the average balance of such liabilities.
Provision 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 Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral, and current economic conditions.
8
The provision for loan losses amounted to $15,000 for the three months
ended March 31, 1999 and 1998.
Other Income. Other income decreased $1,000 or .1% to $38,000 for the three
months ended March 31, 1999 compared to the same period in 1998 due to a
decrease in the gain on sale of loans, partially offset by increases in service
fees. During the three month period ended March 31, 1999, the Bank did not sell
loans to third parties.
Other Expenses. Other expenses decreased $72,000 or 11.4% to $556,000 for
the three months ended March 31, 1999 compared to the same period in 1998. Such
decrease was primarily due to decreases in advertising and directors' fees. The
decrease in advertising was primarily due to the lack of expenses incurred
during the first quarter of 1999, compared to the same quarter for 1998. During
the first quarter of 1998, the Bank incurred additional advertising expenses
relating to the announcement of its name change. No such expenses were incurred
in the first quarter of 1999. The decrease in directors' fees was due to both
the reduction in the number of the Company's directors being paid and to fewer
meetings during 1999.
Income Taxes. The provision for income taxes amounted to $91,000 and
$28,000 for the three months ended March 31, 1999 and 1998, respectively,
resulting in effective tax rates of 42.0% and 42.1%, respectively.
Liquidity and Capital Resources
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's primary
sources of funds are deposits, borrowings, amortization, prepayments and
maturities of outstanding loans, sales of loans, maturities of investment
securities and other short-term investments and funds provided from operations.
Although scheduled loan amortization and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. The Bank invests excess funds in overnight
deposits and other short-term interest-earning assets which provide liquidity to
meet lending requirements. As an additional source of funds, the Bank may borrow
from the FHLB of Pittsburgh and has access to the Federal Reserve discount
window. At March 31, 1999 the Bank had $13.2 million of outstanding advances
from the FHLB of Pittsburgh.
As of March 31, 1999, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At March 31, 1999, the Bank's tangible, core
and risk-based capital ratios amounted to 14.3%, 14.3% and 25.2%, respectively,
compared to regulatory requirements of 1.5%, 3.0% and 8.0%, respectively.
9
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein have
been prepared in accordance with instructions to Form 10-QSB, which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in relative purchasing power over time due
to inflation.
Unlike most industrial companies, virtually all of the Bank's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than does the
effect of inflation.
The Year 2000 Issue
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The Year 2000 Issue is
the result of computer programs being written using two digits rather than four
digits to define the applicable year. Computer programs that have time-sensitive
coding may recognize a date using "00" as the year 1900 rather than the year
2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail.
The Bank has conducted a review of its computer systems to identify the
systems that could be affected by the Year 2000 issue and has developed an
implementation plan to resolve the issue. The majority of the Bank's data
processing is provided by a third party service bureau. The service bureau is
actively involved in resolving Year 2000 issues and has provided the Bank with
frequent updates regarding their progress. The Bank tested their system for Year
2000 compliance during the third quarter of 1998 with no material exceptions
noted. The Bank presently believes that, based on the progress of the Bank's
service bureau, the Year 2000 problem will not pose significant operational
problems for the Bank's computer system. Since the critical portion of the
Company's Year 2000 issue involves its third party service bureau, and since
testing of that system has been completed with no significant exceptions,
additional costs are anticipated to be immaterial at this time.
10
DELAWARE FIRST FINANCIAL CORPORATION AND SUBSIDIARY
Part II
Item 1. Legal Proceedings
Neither the Corporation nor the Bank is involved in any pending legal
proceedings other than non-material legal proceedings occurring in the
ordinary course of business.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELAWARE FIRST FINANCIAL CORPORATION
Date: May 12, 1999 By: /s/Ernest J. Peoples
--------------------------------
Ernest J. Peoples
President
Date: May 12, 1999 By: /s/Jerome P. Arrison
--------------------------------
Jerome P. Arrison
Vice President
(principal financial officer)