SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended: September 30, 1996
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: 0-16667
DNB Financial Corporation
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2222567
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4 Brandywine Avenue - Downingtown, PA 19335
(Address of principal executive offices and Zip Code)
(610) 269-1040
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock ($10.00 Par Value) 658,793
(Class) (Shares Outstanding as of
November 14, 1996)
- ---------------------------------------------------------------------------
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and December 31, 1995 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1996 and 1995 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1996 and 1995 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1996 and 1995 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and December 31, 1995 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGE IN SECURITIES 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 17
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
<PAGE>
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Assets
Cash and due from banks $ 9,184,741 $ 8,154,175
Federal funds sold 7,032,000 7,640,000
Securities available for sale (cost $18,862,327
in 1996 and $13,271,018 in 1995) 18,741,808 13,339,451
Investment securities (market value $48,870,239
in 1996 and $38,943,606 in 1995) 49,264,291 38,450,977
Loans 116,811,988 118,307,769
Less:
Unearned discount on installment loans (269,359) (422,358)
Allowance for possible loan losses (5,085,164) (5,514,600)
------------- -------------
Net loans 111,457,465 112,370,811
------------- -------------
Office property and equipment, net 4,047,095 4,252,253
Accrued interest receivable 1,637,339 1,648,186
Other real estate owned 1,095,892 810,263
Deferred income tax asset 1,065,139 1,034,520
Other assets 2,733,197 1,080,402
------------- -------------
Total assets $ 206,258,967 $ 188,781,038
============= =============
Liabilities and Stockholders' Equity
Liabilities
Non-interest-bearing deposits $ 24,916,031 $ 22,936,240
Interest-bearing deposits:
NOW 26,619,391 27,484,736
Money market 17,465,551 16,333,386
Savings 28,771,534 29,223,690
Time 77,572,559 69,030,876
------------- -------------
Total deposits 175,345,066 165,008,928
------------- -------------
Repurchase agreements 14,003,865 8,218,709
Accrued interest payable 488,148 458,943
Other liabilities 787,747 739,499
------------- -------------
Total liabilities 190,624,826 174,426,079
------------- -------------
Stockholders' Equity
Preferred stock, $10.00 par value;
1,000,000 shares authorized; none issued -- --
Common stock, $10.00 par value;
5,000,000 shares authorized;
658,793 issued and outstanding 6,587,930 6,587,930
Surplus 4,382,981 4,112,869
Retained earnings 4,759,645 3,592,242
Net unrealized (loss) gain on securities
available for sale, net of tax (96,415) 61,918
------------- -------------
Total stockholders' equity 15,634,141 14,354,959
------------- -------------
Total liabilities and stockholders' equity $ 206,258,967 $ 188,781,038
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For Three Months Ended September 30
1996 1995
<S> <C> <C>
Interest Income:
Interest and fees on loans $2,648,313 $2,630,174
Interest on investment securities:
Taxable 1,133,330 804,114
Interest on Federal funds sold 74,352 113,808
---------- ----------
Total interest income 3,855,995 3,548,096
---------- ----------
Interest Expense:
Interest on time deposits 1,040,712 927,545
Interest on NOW, money market and savings 479,969 503,472
Interest on repurchase agreements 122,584 83,263
Interest on Federal funds purchased 1,963 331
---------- ----------
Total interest expense 1,645,228 1,514,611
---------- ----------
Net interest income 2,210,767 2,033,485
---------- ----------
Provision for possible loan losses -- --
Net interest income after provision for possible loan losses 2,210,767 2,033,485
---------- ----------
Non-interest Income:
Service charges 87,287 92,292
Trust income 78,873 75,258
Other 72,097 35,812
---------- ----------
Total non-interest income 238,257 203,362
---------- ----------
Non-interest Expense:
Salaries and employee benefits 903,397 921,003
Occupancy 111,084 112,607
Furniture and equipment 162,935 170,720
FDIC insurance 12,221 17,056
Professional and consulting 69,167 78,797
Printing and supplies 41,907 58,006
Insurance 22,249 28,108
Advertising and marketing 48,054 29,001
PA shares tax 34,781 34,931
Postage 31,856 32,401
Other 175,682 128,949
---------- ----------
Total non-interest expense 1,613,333 1,611,579
---------- ----------
Income before income taxes 835,691 625,268
Income tax expense 185,000 75,000
---------- ----------
Net income $ 650,691 $ 550,268
========== ==========
Common Share Data:
Net income per share $ 0.99 $ 0.84
Cash dividends per share 0.15 0.05
Weighted average number of common shares
outstanding 658,793 658,793
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For Nine Months Ended September 30
1996 1995
<S> <C> <C>
Interest Income:
Interest and fees on loans $ 7,918,831 $ 7,779,236
Interest on investment securities:
Taxable 3,039,272 2,277,638
Exempt from Federal taxes -- 483
Interest on Federal funds sold 292,395 210,370
----------- -----------
Total interest income 11,250,498 10,267,727
----------- -----------
Interest Expense:
Interest on time deposits 3,038,256 2,486,855
Interest on NOW, money market and savings 1,427,881 1,540,218
Interest on repurchase agreements 311,335 143,081
Interest on Federal funds purchased 2,962 7,749
----------- -----------
Total interest expense 4,780,434 4,177,903
----------- -----------
Net interest income 6,470,064 6,089,824
----------- -----------
Provision for possible loan losses -- 114
Net interest income after provision for possible loan losses 6,470,064 6,089,710
----------- -----------
Non-interest Income:
Service charges 240,325 254,905
Trust income 208,733 223,730
Other 173,496 130,219
----------- -----------
Total non-interest income 622,554 608,854
----------- -----------
Non-interest Expense:
Salaries and employee benefits 2,791,126 2,746,137
Occupancy 330,610 333,611
Furniture and equipment 488,009 592,929
FDIC insurance 35,941 229,003
Professional and consulting 222,878 286,082
Printing and supplies 162,585 183,586
Insurance 86,741 128,352
Advertising and marketing 154,125 153,759
PA shares tax 104,344 105,506
Postage 98,637 90,381
Other 488,590 427,925
----------- -----------
Total non-interest expense 4,963,586 5,277,271
----------- -----------
Income before income taxes 2,129,032 1,421,293
Income tax expense 428,000 75,000
----------- -----------
Net income $ 1,701,032 $ 1,346,293
=========== ===========
Common Share Data:
Net income per share $ 2.58 $ 2.04
Cash dividends per share 0.40 0.15
Weighted average number of common shares
outstanding 658,793 658,793
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For Nine Months Ended September 30
1996 1995
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 1,701,032 $ 1,346,293
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 255,286 226,903
Provision for possible loan losses -- 114
Provision for OREO -- 6,650
Gain on sale of OREO (7,239) --
Loss on sale of securities 3,414 2,387
Decrease (increase) in interest receivable 10,847 (376,839)
Increase in other assets, net (1,652,795) (492,103)
Increase in interest payable 29,205 135,159
Increase in current taxes payable 68,000 (95,259)
Increase in deferred tax asset -- (65,000)
(Decrease) increase in other liabilities (19,752) 359,438
Decrease in unearned discount (152,999) (261,332)
------------ ------------
Net Cash Provided By Operating Activities 234,999 786,411
------------ ------------
Cash Flows From Investing Activities:
Proceeds from maturities of securities 23,020,907 17,603,260
Purchase of securities AFS (14,211,592) --
Purchase of securities HTM (28,615,676) (31,183,501)
Proceeds from sale of AFS securities 3,474,762 1,974,999
Proceeds from sale of HTM securities -- 2,993,906
Proceeds from sale of OREO 302,225 168,000
Net decrease (increase) in loans 485,730 (4,446,539)
Purchase of bank property and equipment (126,566) (669,838)
------------ ------------
Net Cash Used By Investing Activities (15,670,210) (13,559,713)
------------ ------------
Cash Flows From Financing Activities:
Net increase in deposits 10,336,138 9,774,626
Increase in repurchase agreement 5,785,156 7,747,049
Dividends paid (263,517) (129,637)
------------ ------------
Net Cash Provided By Financing Activities 15,857,777 17,392,038
------------ ------------
Net Change in Cash and Cash Equivalents 422,566 4,618,736
Cash and Cash Equivalents at Beginning of Period 15,794,175 6,866,009
------------ ------------
Cash and Cash Equivalents at End of 0Period $ 16,216,741 $ 11,484,745
============ ============
Supplemental Disclosure Of Cash Flow Information:
Cash paid during the period for:
Interest $ 4,751,229 $ 4,042,744
Taxes 360,000 235,259
Supplemental Disclosure Of Non-cash Flow Information:
Transfer of loans to OREO $ 850,802 $ 179,695
Change in unrealized (loss) gain on AFS securities (188,952) 25,931
Change in deferred tax asset on unrealized loss on AFS securities 30,619 65,000
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND RESTATEMENT
The accompanying consolidated financial statements of DNB Financial
Corporation (referred to herein as the "Company" or the "Registrant" or the
"Corporation") and its subsidiary, Downingtown National Bank (the "Bank"), have
been prepared in accordance with the instructions for Form 10-Q and therefore do
not include certain information or footnotes necessary for the presentation of
financial condition, statement of operations and statement of cash flows
required by generally accepted accounting principles. However, in the opinion of
management, the consolidated financial statements reflect all adjustments (which
consist of normal recurring adjustments) necessary for a fair presentation of
the results for the unaudited periods. The results of operations for the nine
months ended September 30, 1996 are not necessarily indicative of the results
which may be expected for the entire year. The consolidated financial statements
should be read in conjunction with the Annual Report and report on Form 10-K for
the year ended December 31, 1995.
NOTE 2: INCOME TAXES
The rate used for income taxes during the three and nine months ended
September 30, 1996 and 1995 was less than the statutory rate because the Company
recognized certain tax benefits relating primarily to the provisions for
possible loan losses recorded in prior years.
NOTE 3: NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
shares of common stock outstanding during the period. Earnings dilution caused
by common stock equivalents does not exceed three percent (3%), therefore they
are not included in the total weighted average. The weighted average number of
shares of common stock outstanding was 658,793 for the three and nine month
periods ended September 30, 1996 and 1995. Per share net income and dividends
have been adjusted for both five percent (5%) stock dividends paid during 1995.
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed of ("SFAS No.
121"). This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, and that any related impairment be based on the fair
value of the asset. In addition, long-lived assets to be disposed of must
generally be reported at the lower of carrying amount or fair value, less cost
to sell. The effect of the implementation of SFAS No. 121 as of January 1, 1996
was immaterial to the Corporation's results of operations, financial condition
and stockholders' equity.
<PAGE>
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-based
Compensation ("SFAS No. 123"). This statement encourages the adoption of fair
value accounting for stock-based compensation issued to employees. Further, in
the event that fair value accounting is not adopted, the statement requires
proforma disclosure of net income and earnings per share as if fair value
accounting had been adopted. SFAS No. 123 is required to be adopted by the
Corporation in 1996. Management did not adopt fair value accounting for
stock-based compensation issued to employees and, therefore, this statement had
no affect on the Corporation's results of operations, financial condition and
stockholders' equity.
In June 1996, the FASB issued SFAS issued No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS No.
125"). This statement supersedes and amends certain existing standards by
providing consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. Under SFAS 125, after
a transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. SFAS 125 is required to be effective for transactions occurring
after December 31, 1996 and is to be applied prospectively. Management has not
yet evaluated the impact this standard will have on the financial statements.
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Changes in Financial Condition
The Company's total assets were $206.3 million at September 30, 1996 compared to
$188.8 million at December 31, 1995. Total loans, net of unearned discount, were
$116.5 million, down 1.1% from December 31, 1995. Investment securities (AFS and
HTM) totaled $68.0 million, up $16.2 million or 31.3% from December. Federal
funds sold were $7.0 million at September 30, 1996, down $608,000 from December.
The increase in investments was funded by increases in deposits and borrowings.
Deposits and other borrowings at September 30, 1996 totaled $189.3 million,
compared to $173.2 million at December 31, 1995. Increases of $8.5 million, $2.0
million and $1.1 million in time, non-interest bearing and money market deposits
were partially offset by decreases in savings and NOW accounts. The increase in
time deposits was the result of certificate of deposit promotions initiated
during the second and third quarters. Other borrowings increased $5.8 million or
70.4% to $14.0 million at September 30, 1996.
At September 30, 1996, total stockholders' equity was $15.6 million or $23.73
per share, compared to $14.4 million or $21.79 per share at December 31, 1995.
The increase in stockholders' equity was the result of net income of $1.7
million for the nine months ended September 30, 1996, offset by dividends paid
of approximately $264,000 or $.40 per share.
Results of Operations
Net Interest Income
The Corporation's earnings performance is primarily dependent upon its level of
net interest income, which is the excess of interest earned on loans,
investments and Federal funds sold over interest expense on deposits and other
borrowings.
Net interest income increased $177,000 or 8.7% to $2.2 million for the three
month period and $380,000 or 6.2% to $6.5 million for the nine month period
ended September 30, 1996. As shown in the first table, the increase in net
interest income for the three month period was largely attributable to the
positive effects of volume and, to a lesser degree, the positive effects of
rate. The positive impact from volume of $102,000 was primarily attributable to
higher levels of securities. The benefit from these higher levels was offset
somewhat by a higher average volume of time deposits and repurchase agreements.
There was a $75,000 net benefit from changes in rate. The primary contributing
factors were improved yields on securities as well as lower yields on deposits.
For the nine month period ended September 30, 1996, the $380,000 increase
was attributable to both rate and volume ($194,000 and $186,000, respectively).
The positive impact from rates was largely attributable to an improved yield on
the securities portfolio as short term securities matured and were reinvested at
higher yields. In addition, the cost of savings deposits decreased due to a
reduction in rates during the year. The benefit of lower savings deposit expense
was partially offset by a $39,000 increase in time deposits expense also
attributable to rates. The positive impact from volume was attributable to
higher volumes of securities ($12.1 million on
<PAGE>
average), and loans ($1.8 million on average), and Federal funds sold ($2.5
million on average) offset by an increase in the volume of time deposits ($12.4
million on average) and repurchase agreements ($4.4 million on average).
The following tables sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest-earning assets
and interest-bearing liabilities have affected interest income and expense
during the three and nine months ended September 30, 1996 and 1995. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided with respect to changes attributable to (i) changes in
rate (change in rate multiplied by old volume) and (ii) changes in volume
(change in volume multiplied by old rate). The net change attributable to the
combined impact of rate and volume has been allocated proportionately to the
change due to rate and the change due to volume.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1996
Compared to 1995
----------------------------
Change Due to
(Dollars in Thousands) Rate Volume Total
------- ------- -------
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 3 $ 15 $ 18
Securities 18 311 329
Federal funds sold (11) (28) (39)
----- ----- -----
Total 10 298 308
----- ----- -----
Interest-bearing liabilities:
Savings deposits (27) 4 (23)
Time deposits (38) 151 113
Federal funds purchased -- 2 2
Repurchase agreements -- 39 39
----- ----- -----
Total (65) 196 131
----- ----- -----
Net Interest Income/interest rate spread $ 75 $ 102 $ 177
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996
Compared to 1995
----------------------------
Change Due to
(Dollars in Thousands) Rate Volume Total
------- ------- -------
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 17 $ 123 $ 140
Securities 151 610 761
Federal funds sold (16) 98 82
----- ----- -----
Total 152 831 983
----- ----- -----
Interest-bearing liabilities:
Savings deposits (83) (28) (111)
Time deposits 39 512 551
Federal funds purchased (1) (4) (5)
Repurchase agreements 3 165 168
----- ----- -----
Total (42) 645 603
----- ----- -----
Net Interest Income/interest rate spread $ 194 $ 186 $ 380
===== ===== =====
</TABLE>
<PAGE>
Provision for Possible Loan Losses
In establishing its allowance for possible loan losses, management considers the
size and risk exposure of each segment of the loan portfolio, past loss
experience, present indicators such as delinquency rates and collateral values,
and the potential for losses in future periods, and other relevant factors. In
assessing this risk, management has taken into consideration various factors and
variables which affect the portfolio, including economic trends, delinquency
trends, underwriting standards, management expertise and concentrations of
credit. In addition, the risk uncertainty contained in the unreviewed portion of
the portfolio has also been considered. Management believes that it makes an
informed judgment based upon available information. The adequacy of the
allowance is ultimately dependent upon the economy, a factor beyond the
Company's control. As such, there can be no assurance that material additions to
the allowance will not be required in future periods.
Determining the level of the allowance for possible loan losses at any given
date is difficult, particularly in an uncertain economic environment. The
Company's management must make estimates, using assumptions and information
which are often subjective and rapidly changing. Management has continued its
loan review program throughout the year.
The Company made no provisions for possible loan losses during the three and
nine month periods ended September 30, 1996 and 1995. This lack of provisions
was attributable to management's belief that there has been no significant
further deterioration in the loan portfolio, based on available information. In
addition, the continued reduction in the Bank's level of non-performing and
classified assets and lack of loan growth, eliminated the need for any
provision.
The following table summarizes the changes in the allowance for possible loan
losses for the periods indicated. Real estate includes both residential and
commercial real estate.
<TABLE>
<CAPTION>
9 Months Year 9 Months
Ended Ended Ended
(Dollars in Thousands) 9/30/96 12/31/95 9/30/95
------- ------- -------
<S> <C> <C> <C>
Beginning Balance $ 5,515 $ 5,645 $ 5,645
Provisions -- -- --
Loans charged off:
Real estate (450) (25) (19)
Commercial (7) (124) (45)
Installment (42) (164) (105)
------- ------- -------
Total charged off (499) (313) (169)
Recoveries:
Real estate 1 86 85
Commercial 36 24 18
Installment 32 73 56
------- ------- -------
Total recoveries 69 183 159
------- ------- -------
Net (Charge-offs) Recoveries (430) (130) (10)
------- ------- -------
Ending Balance $ 5,085 $ 5,515 $ 5,635
======= ======= =======
</TABLE>
<PAGE>
Management believes that the Company has adequate reserves at September 30,
1996, however, it continues to monitor its loan portfolio and will make any
adjustments as needed. In addition, loan classifications and loss reserves as
determined by management of the Bank are subject to periodic examination by the
OCC, the Federal Deposit Insurance Corporation and the Federal Reserve Bank.
Management cannot predict with any degree of certainty whether a regulatory
examination would require any changes in its loan classifications or adjustments
to the allowance for possible loan losses. The Bank was examined by the OCC
during the fourth quarter of 1995. The OCC's examination was as of September 30,
1995 for all matters. As a result of the examination, no additional provisions
were required.
Non-Interest Income
Total non-interest income includes service charges on deposit products, trust
commissions and fees received by the Corporation's Trust and Investment Services
Division, and other less significant sources of income such as fees for safe
deposit box rentals, issuing travelers' checks and money orders, collecting
bills for local municipalities and similar activities.
For the three month period ended September 30, 1996, non-interest income was
$238,000 compared to $203,000 for the same three month period in 1995. This
increase of $35,000 or 17.2% was due to rental income on OREO property, net
gains on sale of OREO properties and increased other fee income.
For the nine month period ended September 30, 1996, non-interest income was
$623,000 compared to $609,000 for the same period in 1995. The net increase of
$14,000 or 2.3% was due largely to increased other income from OREO properties
partially offset by decreased service charges and trust income.
Non-Interest Expense
Non-interest expense includes salaries & employee benefits, occupancy, FDIC
insurance, professional & consulting fees as well as printing & supplies,
insurance, advertising and other less significant expense items. Management
remains committed to controlling non-interest expenses by monitoring staffing
levels and examining procedures and methods for cost savings within each
functional area of the Bank.
Non-interest expense for the three month periods ended September 30, 1996 and
1995 was $1.6 million. Overall expense remained relatively the same, however
expenses for salaries & benefits, supplies, professional & consulting, furniture
& equipment, FDIC and other insurances dropped a combined $62,000. This decline
was offset by increased advertising & marketing and other expenses.
Non-interest expense for the nine month period ended September 30, 1996 was $5.0
million compared to $5.3 million for the same period in 1995. This decline of
$314,000 or 5.9% was due primarily to reduced expenses for FDIC insurance,
furniture & equipment, professional & consulting and insurance expenses.
Salaries & employee benefits, postage and "other" expenses increased a combined
$114,000, partially offsetting the decreases mentioned above.
Salaries & employee benefits decreased $18,000 or 1.9% in the third quarter of
1996 compared to the same period in 1995. The temporary decrease was caused by
turnover of several officers and other employees. Salaries & employee benefits
increased $45,000 or 1.6% for the nine
<PAGE>
month period ended September 30, 1996 compared to the same period in
1995.The increase for this time period has been caused by normal salary merit
increases and in other benefit or incentive plans offered by the Corporation.
Furniture & equipment expense decreased approximately $8,000 or 4.6% to $163,000
and $105,000 or 17.7% to $488,000 for the three and nine months ended September
30, 1996, compared to the same periods in 1995. During the first quarter of
1995, the Company operated and incurred costs for two MIS systems during a
computer conversion. There was no duplication of expenditures in this area in
1996.
FDIC insurance decreased $5,000 or 28.4% to $12,000 and $193,000 or 84.3% to
$36,000 for the three and nine months ended September 30, 1996 compared to the
same periods in 1995. The reduction in FDIC insurance premium was the result of
lower insurance rates due to the recapitalization by the Bank Insurance Fund
("BIF") as it reached its required level of 1.25% of BIF insured deposits.
Professional & consulting expense decreased approximately $10,000 or 12.2% to
$69,000 and $63,000 or 22.1% to $223,000 for the three and nine months ended
September 30, 1996 compared to the same periods in 1995. Professional &
consulting expense in 1995 included professional and legal services associated
with DNB Financial Corporation's Stock Option Plan as well as for costs
associated with strategic planning. There were no such expenses in 1996.
Insurance expense, which includes the Corporation's fidelity bond, commercial
package, workers compensation and directors & officers liability, decreased
$6,000 or 20.8% to $22,000 and $42,000 or 32.4% to $87,000 for the three and
nine months ended September 30, 1996 compared to 1995. Insurance expense
continues to decrease as the Bank recognizes the full benefit from lower premium
quotes obtained on the above policies during 1995 and the beginning of 1996.
Advertising & marketing expense increased $19,000 or 65.7% to $48,000 for the
third quarter of 1996 compared to $29,000 for the same period in 1995. The
increase in this category is attributable to additional costs associated with
promoting our new direct banking service, "Phone Access Banking" and home page
on the Internet, as well as additional costs associated with our deposit and
home equity loan promotions. Advertising & marketing expense remained relatively
the same for the nine month periods ended September 30, 1996 and 1995.
Other expenses include such items as OREO expense, satisfaction fees, appraisal
fees, telephone and other miscellaneous expenses. Other expenses increased
$47,000 or 36.2% to $176,000 and $61,000 or 14.2% to $489,000 for the three and
nine months ended September 30, 1996 compared to 1995. The increase in this
category was primarily caused by additional costs incurred to manage and
supervise the Bank's OREO properties.
Income Taxes
Income tax expense was $185,000 and $428,000 for the three and nine months ended
September 30, 1996 compared to $75,000 for the same periods in 1995. The rates
used for income taxes for these periods were less than the statutory rate as the
Corporation recognized certain tax benefits relating to the provisions for
possible loan losses recorded in prior years.
<PAGE>
Asset Quality
Non-performing assets are comprised of nonaccrual loans, loans delinquent over
ninety days and still accruing and Other Real Estate Owned ("OREO"). Nonaccrual
loans are loans for which the accrual of interest ceases when the collection of
principal or interest payments is determined to be doubtful by management. It is
the policy of the Company to discontinue the accrual of interest when principal
or interest payments are delinquent 90 days or more (unless the loan principal
and interest are determined by management to be fully secured and in the process
of collection), or earlier, if considered prudent. Interest received on such
loans is applied to the principal balance, or may in some instances, be
recognized as income on a cash basis.
OREO consists of real estate acquired by foreclosure or deed in lieu of
foreclosure. OREO is carried at the lower of cost or estimated fair value, less
estimated disposition costs.
Any significant change in the level of nonperforming assets is dependent to a
large extent on the economic climate within the Company's markets, the financial
condition of the Bank's borrowers and to the efforts of management to reduce the
level of such assets.
The following table sets forth those assets that are: (i) on nonaccrual status,
(ii) contractually delinquent by 90 days or more and still accruing (iii) other
real estate owned as a result of foreclosure or voluntary transfer to the
Company.
<TABLE>
<CAPTION>
Sept. 30 Dec. 31 Sept. 30
(Dollars in Thousands) 1996 1995 1995
------- ------- -------
<S> <C> <C> <C>
Nonaccrual Loans
Residential mortgage $ 757 $1,355 $1,540
Commercial mortgage 1,545 1,832 1,916
Commercial 773 722 1,090
Personal 196 237 229
------ ------ ------
Total nonaccrual loans 3,271 4,146 4,775
Loans 90 days past due and still accruing:
Personal 110 129 50
Real estate 285 0 0
------ ------ ------
Total loans 90 days past due and still accruing 395 129 50
Total non-performing loans 3,666 4,275 4,825
Other real estate owned 1,096 810 433
------ ------ ------
Total non-performing assets $4,762 $5,085 $5,258
====== ====== ======
</TABLE>
If interest income had been recorded on nonaccrual loans, interest would have
been increased as shown in the following table:
<TABLE>
<CAPTION>
9 Months Year 9 Months
Ended Ended Ended
(Dollars in thousands) 9/30/96 12/31/95 9/30/95
------- ------- -------
<S> <C> <C> <C>
Interest income which would have been recorded
under original terms $ 205 $ 353 $ 307
Interest income recorded during the period (63) (222) (81)
----- ----- -----
Net impact on interest income $ 142 $ 131 $ 226
===== ===== =====
</TABLE>
<PAGE>
The following table sets forth the Company's asset quality and allowance
coverage ratios at the dates indicated:
<TABLE>
<CAPTION>
Sept.30 Dec. 31 Sept.30
1996 1995 1995
------- ------- -------
<S> <C> <C> <C>
Non-performing Loans/Total Loans 3.14% 3.63% 4.11%
Non-performing Assets/Total Loans and OREO 4.04 4.29 4.47
Allowance for Loan & Lease Losses/Total Loans 4.36 4.68 4.80
Allowance for Loan & Lease Losses/Total Loans and OREO 4.32 4.65 4.79
Allowance for Loan & Lease Losses/Non-performing Assets 106.78 108.46 107.17
Allowance for Loan & Lease Losses/Non-performing Loans 138.71 129.01 116.79
</TABLE>
Liquidity and Capital Resources
For a financial institution, liquidity is a measure of the ability to fund
customers' needs for loans and deposit withdrawals. Management regularly
evaluates economic conditions in order to maintain a strong liquidity position.
One of the most significant factors considered by management when evaluating
liquidity requirements is the stability of the Company's core deposit base. In
addition to cash, the Company maintains a portfolio of short term investments to
meet its liquidity requirements. The Company has historically relied on cash
flow from operations and other financing activities. Liquidity is provided by
investing activities, including the repayment and maturing of loans and
investment securities.
At September 30, 1996 the Company has $2.3 million in commitments to fund
commercial real estate, construction and land development. In addition, the
Company had commitments to fund $0.5 million in home equity lines of credit and
$12.4 million in other unused commitments. Management anticipates the majority
of these commitments will be funded by means of normal cash flows. In addition,
$19.6 million of certificates of deposit at the Company are scheduled to mature
during the three months ending December 31, 1996. Management believes that the
majority of such deposits will be reinvested with the Company and that
certificates that are not renewed will be funded by maturing loans and
investments.
Stockholders' equity increased to $15.6 million at September 30, 1996 as a
result of the $1,701,000 profit reported for the nine months then ended and
after dividends paid totaling approximately $264,000 year to date. Management
believes that the Bank is adequately capitalized and as a result of the Bank's
common equity position, the Bank's risk-based capital ratios exceed the 1996
regulatory required minimums. The following table summarizes data and ratios
pertaining to the Bank's capital structure.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands) September 30, 1996
----------------
<S> <C>
Tier I Capital:
Common stock $ 6,588
Surplus 4,383
Retained earnings 4,759
-------
Total 15,730
Tier II Capital 1,647
-------
Total Capital $17,377
=======
</TABLE>
<TABLE>
<CAPTION>
Required Current Excess
------- ------- -------
<S> <C> <C> <C>
Leverage 5.00% 7.63% 2.63%
Tier I 4.00 12.26 8.26
Risk-based 8.00 13.54 5.54
</TABLE>
Regulatory Matters
On February 1, 1996, the OCC informed the Bank that it had achieved substantial
compliance with the Bank's voluntary 1992 Consent Order (the "Consent Order"),
and that the Consent Order was terminated. Likewise, on February 12, 1996, the
Federal Reserve Bank ("FRB") terminated the 1993 Memorandum of Understanding
which had been entered into between the Corporation and the FRB.
The Bank was examined by the OCC during the fourth quarter of 1995. The Bank was
not required to make additional provisions to its allowance for possible loan
losses or charge-offs as a result of this examination.
Dividends payable to the Corporation by the Bank are subject to certain
regulatory limitations. Under normal circumstances, the payment of dividends in
any year without regulatory permission is limited to the net profits (as defined
for regulatory purposes) for that year plus the retained net profits for the
preceding two calendar years.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6.
(a) EXHIBITS:
Not Applicable
(b) REPORTS ON FORM 8-K
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DNB FINANCIAL CORPORATION
(Registrant)
DATE: November 14, 1996 /S/ Henry F. Thorne
--------------------------
Henry F. Thorne, President
and Chief Executive Officer
DATE: November 14, 1996 /S/ Bruce E. Moroney
--------------------------
Bruce E. Moroney
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DNB FINANCIAL CORPORATION
(Registrant)
DATE: November 14, 1996 /S/ Henry F. Thorne
-------------------
Henry F. Thorne, President
and Chief Executive Officer
DATE: November 14, 1996 /S/ Bruce E. Moroney
--------------------
Bruce E. Moroney
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,184,741
<INT-BEARING-DEPOSITS> 150,429,035
<FED-FUNDS-SOLD> 7,032,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,741,808
<INVESTMENTS-CARRYING> 49,264,291
<INVESTMENTS-MARKET> 48,870,239
<LOANS> 116,542,629
<ALLOWANCE> 5,085,164
<TOTAL-ASSETS> 206,258,967
<DEPOSITS> 175,345,066
<SHORT-TERM> 14,003,865
<LIABILITIES-OTHER> 1,275,895
<LONG-TERM> 0
0
0
<COMMON> 6,587,930
<OTHER-SE> 9,142,626
<TOTAL-LIABILITIES-AND-EQUITY> 206,258,967
<INTEREST-LOAN> 7,918,831
<INTEREST-INVEST> 3,039,272
<INTEREST-OTHER> 292,395
<INTEREST-TOTAL> 11,250,498
<INTEREST-DEPOSIT> 4,466,137
<INTEREST-EXPENSE> 4,780,434
<INTEREST-INCOME-NET> 6,470,064
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (3,414)
<EXPENSE-OTHER> 4,963,586
<INCOME-PRETAX> 2,129,032
<INCOME-PRE-EXTRAORDINARY> 1,701,032
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,701,032
<EPS-PRIMARY> 2.58
<EPS-DILUTED> 2.58
<YIELD-ACTUAL> 8.09
<LOANS-NON> 3,270,701
<LOANS-PAST> 395,190
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,539,000
<ALLOWANCE-OPEN> 5,514,600
<CHARGE-OFFS> 498,961
<RECOVERIES> 69,525
<ALLOWANCE-CLOSE> 5,085,164
<ALLOWANCE-DOMESTIC> 5,085,164
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
