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: MARCH 31, 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
May 6, 1996)
________________________________________________________________________________
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 1996 and December 31, 1995 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1996 and 1995 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and December 31, 1995 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGE IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 18
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks..................................................................... $ 8,006,383 $ 8,154,175
Federal funds sold.......................................................................... 12,659,000 7,640,000
Securities available for sale (cost $13,946,501
in 1996 and $13,271,018 in 1995) ........................................................ 13,885,184 13,339,451
Investment securities (market value $36,234,853
in 1996 and $38,943,606 in 1995) ........................................................ 36,099,234 38,450,977
Loans....................................................................................... 117,379,860 118,307,769
Less:
Unearned discount on installment loans .................................................. (353,826) (422,358)
Allowance for possible loan losses ...................................................... (5,521,031) (5,514,600)
------------- -------------
Net loans................................................................................... 111,505,003 112,370,811
------------- -------------
Office property and equipment, net ......................................................... 4,178,775 4,252,253
Accrued interest receivable ................................................................ 1,352,150 1,648,186
Other real estate owned .................................................................... 810,263 810,263
Deferred income tax asset .................................................................. 1,052,685 1,034,520
Other assets ............................................................................... 1,183,952 1,080,402
------------- -------------
TOTAL ASSETS................................................................................ $190,732,629 $ 188,781,038
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Non-interest-bearing deposits............................................................... $23,343,680 $ 22,936,240
Interest-bearing deposits:
NOW ..................................................................................... 26,846,894 27,484,736
Money market ............................................................................ 17,859,526 16,333,386
Savings ................................................................................. 28,720,548 29,223,690
Time .................................................................................... 70,955,958 69,030,876
------------- -------------
TOTAL DEPOSITS ............................................................................. 167,726,606 165,008,928
------------- -------------
Repurchase agreements ...................................................................... 7,078,776 8,218,709
Accrued interest payable ................................................................... 498,334 458,943
Other liabilities .......................................................................... 797,725 739,499
------------- -------------
TOTAL LIABILITIES .......................................................................... 176,101,441 174,426,079
------------- -------------
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 .................................................................................... 4,201,669 4,112,869
Retained earnings .......................................................................... 3,891,256 3,592,242
Net unrealized (loss) gain on securities
available for sale, net of tax .......................................................... (49,667) 61,918
------------- -------------
TOTAL STOCKHOLDERS' EQUITY ................................................................. 14,631,188 14,354,959
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................................. $ 190,732,629 $ 188,781,038
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For Three Months Ended March 31
1996 1995
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ................................. $2,649,180 $2,492,101
Interest on investment securities:
Taxable ............................................... 883,153 706,580
Exempt from Federal taxes ............................. -- 483
Interest on Federal funds sold ............................. 102,549 19,437
---------- ----------
Total interest income ............................ 3,634,882 3,218,601
---------- ----------
INTEREST EXPENSE:
Interest on NOW, money market and savings .................. 482,709 521,418
Interest on time deposits .................................. 986,146 701,154
Interest on Federal funds purchased ........................ 999 7,057
Interest on repurchase agreements .......................... 93,078 17,972
---------- ----------
Total interest expense ........................... 1,562,932 1,247,601
---------- ----------
Net interest income ........................................ 2,071,950 1,971,000
---------- ----------
Provision for possible loan losses ......................... -- 62
Net interest income after provision for possible loan losses 2,071,950 1,970,938
---------- ----------
NON-INTEREST INCOME:
Service charges ....................................... 79,225 83,112
Trust income .......................................... 70,059 81,321
Other ................................................. 43,753 44,546
---------- ----------
Total non-interest income ........................ 193,037 208,979
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits ............................. 955,055 881,402
Occupancy .................................................. 123,233 107,796
Furniture and equipment .................................... 169,650 215,432
FDIC insurance ............................................. 11,699 105,973
Professional and consulting ................................ 80,925 76,457
Printing and supplies ...................................... 57,434 71,685
Insurance .................................................. 32,530 51,309
Advertising and marketing .................................. 41,616 56,322
PA shares tax .............................................. 34,781 35,644
Postage .................................................... 43,742 33,728
Other ...................................................... 157,629 164,376
---------- ----------
Total non-interest expense ....................... 1,708,294 1,800,124
---------- ----------
Income before income taxes ................................. 556,693 379,793
Income tax expense ......................................... 103,000 --
---------- ----------
NET INCOME ....................................... $ 453,693 $ 379,793
========== ==========
COMMON SHARE DATA:
Net income per share .................................. $ 0.69 $ 0.58
Cash dividends per share .............................. 0.10 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 CASH FLOWS
<TABLE>
<CAPTION>
For Three Months Ended March 31
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 453,693 $ 379,793
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization................................. 97,863 41,352
Loss on sale of securities.................................... -- 2,387
Provision for possible loan losses............................ -- 62
Decrease (increase) in interest receivable.................... 296,036 (66,077)
Increase in other assets, net................................. (103,550) (557,448)
Increase in interest payable.................................. 39,391 53,605
Increase (decrease) in current taxes payable.................. 63,000 (25,259)
Decrease in other liabilities................................. (4,774) (80,365)
Decrease in unearned discount ................................ (68,532) (87,469)
------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ............. 773,127 (339,419)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities........................ 14,488,221 5,264,933
Purchase of AFS investment securities ........................ (4,199,868) (500,156)
Purchase of investment securities............................. (8,596,738) (12,849,870)
Proceeds from sale of OREO.................................... -- 110,200
Proceeds from sale of AFS securities.......................... -- 1,974,999
Proceeds from sale of HTM securities.......................... -- 2,993,906
Net decrease (increase) in loans.............................. 934,340 (2,077,020)
Purchase of bank property and equipment....................... (39,740) (63,775)
------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ............. 2,586,215 (5,146,783)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits...................................... 2,717,678 6,851,603
(Decrease) increase in repurchase agreements.................. (1,139,933) 942,387
Dividends paid ............................................... (65,879) (35,479)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................... 1,511,866 7,758,511
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ...................... 4,871,208 2,272,309
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............. 15,794,175 6,866,009
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................... $20,665,383 $ 9,138,318
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest...................................................... $ 1,523,541 $ 1,193,966
Taxes......................................................... 100,000 25,259
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION:
Change in unrealized (loss) gain on AFS securities ........... ($129,750) $ 19,500
Deferred tax asset on unrealized loss on AFS securities ...... 18,165 --
</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 three
months ended March 31, 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: SECURITIES
As of January 1, 1994, the Company adopted Statement of Financial
Accounting Standard No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS No. 115"), for accounting and reporting of securities.
In accordance with SFAS No. 115, such investments are accounted for as follows:
Held-To-Maturity ("HTM") - includes debt securities that the Company has the
positive intent and ability to hold to maturity, regardless of changes in market
or economic conditions or liquidity needs, and includes equity securities for
which there is no readily determinable market value. The Company has securities
with a book value of $36.1 million classified as HTM as of March 31, 1996. These
securities are reported at cost, adjusted for amortization of premiums and
accretion of discounts, computed using a method approximating a level-yield
basis. During the three months ended March 31, 1995 the Corporation sold $3.0
million of securities from the HTM portfolio and recognized a $4,000 loss. These
securities could be sold under SFAS No. 115 guidelines which permit sales of
securities that have final maturities within three months.
Trading Account ("TA") - includes securities which are generally held for a
short term, in anticipation of market gains. Such securities would be carried at
fair value with realized and unrealized gains and losses on trading account
securities included in the statement of operations. The Company did not have any
securities classified at TA during 1996 or 1995.
Available-For-Sale ("AFS") - includes debt and equity securities not classified
as HTM or TA securities. Securities classified as AFS are securities that the
Company intends to hold for an indefinite period of time but not necessarily to
maturity. Decisions to sell a security classified as AFS would be based on
various factors, including significant movements in interest rates, liquidity
needs, changes in maturity mix of the Company's balance sheet, capital
considerations, and other factors. Such securities are reported at fair value,
with unrealized holding gains and losses excluded from earnings and reported,
net of tax, as a separate component of stockholders' equity. The Company has
securities with a book value of $13.9 million classified as AFS as of March 31,
1996. Realized gains and losses on the sale of AFS securities are computed on
the basis of specific identification of the adjusted cost of each security.
<PAGE>
NOTE 3: INCOME TAXES
The rate used for income taxes during the three months ended March 31,
1996 was less than the statutory rate and no income taxes were expensed during
the three months ended March 31, 1995 because the Company recognized certain tax
benefits relating primarily to the provisions for possible loan losses recorded
in prior years.
NOTE 4: 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%). Per share
net income and dividends have been adjusted for both five percent (5%) stock
dividends paid during 1995.
NOTE 5: COMMITMENTS
The amount of standby letters of credit issued and outstanding
amounted to approximately $207,000 and $755,000 at March 31, 1996 and December
31, 1995, respectively.
NOTE 6: STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Corporation considers
cash in banks, amounts due from banks, and Federal funds sold to be cash
equivalents. Generally, Federal funds are sold for one-day periods.
NOTE 7: 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.
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.
<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 $190.7 million at March 31, 1996 compared to
$188.8 million at December 31, 1995. Total loans, net of unearned discount, were
$117.0 million, down .7% from December 31, 1995. Investment securities (AFS and
HTM) totaled $50.0 million, down $1.8 million or 3.5% from December 31, 1995.
The decrease in loans and investments was caused by maturities and paydowns,
with excess cash being invested in overnight Federal funds sold.
Deposits and other borrowings at March 31, 1996 totaled $174.8 million, compared
to $173.2 million at December 31, 1995. Increases of $1.9 million and $1.5
million in time deposits and money market accounts, respectively, were partially
offset by decreases of $1.1 million in repurchase agreements and a combined
total of $1.1 million in savings and NOW accounts.
At March 31, 1996, total stockholders' equity was $14.6 million or $22.20 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 $454,000 for
the three months ended March 31, 1996, offset by dividends paid of approximately
$66,000 or $.10 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 $101,000 or 5.1% to $2.1 million for the three
month period ended March 31, 1996. As shown in the following table, the increase
in net interest income for the three month period ended March 31, 1996 was
largely attributable to the positive effects of rate changes and to a lesser
extent, to the positive effects of volume changes. There was a $90,000 net
benefit from changes in rate. The primary contributing factor was from improved
yields on securities as short term securities matured and were reinvested at
higher yields. The benefit to income from changes in rate for interest-earning
assets was offset somewhat by higher costing time deposits. The positive impact
from volume was attributable to higher levels of loans, securities and Federal
funds sold. The benefit from these higher levels of interest-earning assets was
significantly offset by a higher volume of time deposits and repurchase
agreements.
The following table 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 months ended March 31, 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.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
Compared to 1995
Increase (Decrease) Due to
(Dollars in Thousands) Rate Volume Total
------- ------- -------
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 76 $ 81 $ 157
Securities 97 79 176
Federal funds sold ( 3) 86 83
------- ------- -------
Total 170 246 416
------- ------- -------
Interest-bearing liabilities:
Savings deposits ( 16) ( 23) ( 39)
Time deposits 95 190 285
Federal funds purchased ( 1) ( 5) ( 6)
Repurchase agreements 2 73 75
------- ------- -------
Total 80 235 315
------- ------- -------
Net Interest Income/interest rate spread $ 90 $ 11 $ 101
======== ======= =======
</TABLE>
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. These estimates are
particularly susceptible to changes that may result in a material adjustment to
the allowance for possible loan losses.
The Company made no provisions and nominal provisions for possible loan losses
during the three month periods ended March 31, 1996 and 1995, respectively. This
lack of provisions and nominal 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, recoveries of prior
charge-offs, as well as a further reduction in the Bank's level of
non-performing and classified assets, eliminated the need for a larger
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.
<PAGE>
<TABLE>
<CAPTION>
3 Months Year 3 Months
Ended Ended Ended
(Dollars in Thousands) 3/31/96 12/31/95 3/31/95
------- -------- --------
<S> <C> <C> <C>
Beginning Balance $5,515 $5,645 $5,645
Provisions -- -- --
Loans charged off:
Real estate -- (25) (1)
Commercial -- (124) --
Installment (10) (164) (7)
------ ------ ------
Total charged off (10) (313) (8)
Recoveries:
Real estate -- 86 82
Commercial 5 24 6
Installment 11 73 21
------ ------ ------
Total recoveries 16 183 109
------ ------ ------
Net Recoveries (Charge-offs) 6 (130) 101
------ ------ ------
Ending Balance $5,521 $5,515 $5,746
====== ====== ======
</TABLE>
Management believes that the Company has adequate reserves at March 31, 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. Most components of
non-interest income are stable, with variances occasionally arising from
non-recurring events.
For the three month period ended March 31, 1996, non-interest income was
$193,000, compared to $209,000 for the same three month period in 1995. Trust
income was down $11,000 while service charges and other income were down a
combined $5,000 during the three month period ended March 31, 1996, compared to
the same period in 1995.
<PAGE>
NON-INTEREST EXPENSE
Non-interest expenses decreased $92,000 to $1.7 million for the three months
ended March 31, 1996, from $1.8 million for the comparable period in 1995. The
decrease for the three month period resulted largely from decreases in FDIC
insurance premiums, furniture & equipment, insurance, advertising & marketing,
and printing & supplies expense. These decreases were partially offset by
increases in salaries & employee benefits, occupancy and postage expense.
Salaries & employee benefits increased $74,000 or 8.4% to $955,000 for the three
months ended March 31, 1996 compared to $881,000 for the same period in 1995.
The increase in this category has been caused by the addition of Saturday hours,
normal salary merit increases, and increases in other benefit/incentive plans
offered by the Corporation.
Occupancy expense increased $15,000 or 14.3% to $123,000 for the three months
ended March 31, 1996, compared to $108,000 for the same period in 1995. The
increase was caused by an increase in office building maintenance & repairs,
largely due to excess snow removal and salting during the first quarter.
Furniture & equipment expense decreased approximately $46,000 or 21.3% to
$170,000 for the three months ended March 31, 1996, compared to the same period
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 during the first quarter of 1996.
FDIC insurance decreased $94,000 or 89.0% to $12,000 for the three month period
ended March 31, 1996 compared to $106,000 for the same period in 1995. The
reduction in FDIC insurance premium was the result of recapitalization by the
Bank Insurance Fund ("BIF") as it reached its required level of 1.25% of BIF
insured deposits.
Printing & supplies, insurance and "other" expenses decreased a total of $40,000
for the three month period ended March 31, 1996 as a result of management's
continued focus on examining procedures and methods for cost savings within each
functional area of the bank.
INCOME TAXES
Income tax expense was $103,000 for the three months ended March 31, 1996. No
income taxes were expensed during the first three months of 1995. The rates used
for income taxes for both 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.
ASSET QUALITY
Non-performing assets are comprised of nonaccrual loans, loans delinquent over
ninety days and still accruing, troubled debt restructurings ("TDRs") 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
<PAGE>
received on such loans is applied to the principal balance, or may in some
instances, be recognized as income on a cash basis.
TDRs are loans which have been restructured and meet all the criteria of such a
loan as outlined in SFAS No. 15, Accounting by Debtors and Creditors For
Troubled Debt Restructurings ("SFAS No. 15").
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 and to the
efforts of management to reduce the level of such assets.
The following table sets forth those assets that are: (i) placed on nonaccrual
status, (ii) contractually delinquent by 90 days or more and still accruing
(iii) troubled debt restructurings other than those included in items (i) and
(ii), and (iv) other real estate owned as a result of foreclosure or voluntary
transfer to the Company.
<TABLE>
<CAPTION>
March 31 Dec. 31 March 31
(Dollars in Thousands) 1996 1995 1995
------- ------- -------
<S> <C> <C> <C>
Nonaccrual Loans
Residential mortgage $1,116 $1,355 $1,744
Commercial mortgage 2,082 1,832 1,680
Commercial 669 722 1,467
Installment and Student 240 237 396
------ ------ ------
Total nonaccrual loans 4,107 4,146 5,287
Loans 90 days past due and still accruing:
Installment/Student 70 129 44
Troubled debt restructurings -- -- --
------ ------ ------
Total non-performing loans 4,177 4,275 5,331
Other real estate owned 810 810 335
------ ------ ------
Total non-performing assets $4,987 $5,085 $5,666
====== ====== ======
</TABLE>
If interest income had been recorded on nonaccrual loans and trouble debt
restructurings, interest would have been increased as shown in the following
table:
<TABLE>
<CAPTION>
3 Months Year 3 Months
Ended Ended Ended
(Dollars in thousands) 3/31/96 12/31/95 3/31/95
----------- --------- ---------
<S> <C> <C> <C>
Interest income which would have been recorded
under original terms $ 91 $ 353 $ 114
Interest income recorded during the period ( 8) (222) ( 19)
----------- --------- ---------
Net impact on interest income $ 83 $ 131 $ 95
=========== ========= =========
</TABLE>
<PAGE>
As of March 31, 1996, the Corporation had impaired loans with a total
recorded investment of $2.3 million and an average recorded investment for the
three month period ended March 31, 1996 of $2.1 million. As of March 31, 1996,
the amount of recorded investment in impaired loans for which there is a related
allowance for credit losses and the amount of the allowance is $303,000 and
$121,000, respectively. The amount of the recorded investment in impaired loans
for which there was no related allowance for credit losses at March 31, 1996 is
$2.0 million. Total cash collected on impaired loans was credited to the
outstanding principal balance in the amount of $27,000 during the three months
ended March 31, 1996. No interest income was recorded on such loans.
As of December 31, 1995, the Corporation had impaired loans with a
total recorded investment of $1.9 million. As of December 31, 1995, the amount
of recorded investment in impaired loans for which there is a related allowance
for credit losses and the amount of the allowance is $314,000 and $128,000,
respectively. The amount of the recorded investment in impaired loans for which
there was no related allowance for credit losses at December 31, 1995 is $1.6
million. Total cash collected on impaired loans was credited to the outstanding
principal balance in the amount of $25,279 during the quarter ended March
31, 1995. No interest income was recorded on such loans.
The following table sets forth the Company's asset quality and allowance
coverage ratios at the dates indicated:
<TABLE>
<CAPTION>
March 31 Dec. 31 March 31
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Non-performing Loans/Total Loans 3.57% 3.63% 4.64%
Non-performing Assets/Total Loans and OREO 4.23 4.29 4.91
Allowance for Loan & Lease Losses/Total Loans 4.72 4.68 4.99
Allowance for Loan & Lease Losses/Total Loans and OREO 4.69 4.65 4.97
Allowance for Loan & Lease Losses/Non-performing Assets 110.71 108.46 101.41
Allowance for Loan & Lease Losses/Non-performing Loans 132.18 129.01 107.78
</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 March 31, 1996 the Company has $1.2 million in commitments to fund commercial
real estate, construction and land development. In addition, the Company had
commitments to fund $0.4 million in home equity lines of credit and $11.1
million in other unused commitments. Management anticipates the majority of
these commitments will be funded by means of normal cash flows. In addition,
$49.4 million of certificates of deposit at the Company are scheduled to mature
during the nine months ending December 31, 1996. Management believes that the
majority of such deposits will be reinvested with the Company.
<PAGE>
Stockholders' equity increased to $14.6 million at March 31, 1996 as a result of
the $454,000 profit reported for the three months then ended and after dividends
paid totaling approximately $66,000 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.
<TABLE>
<CAPTION>
(Dollars in Thousands) March 31, 1996
--------------
<S> <C>
Tier I Capital:
Common stock $ 6,588
Surplus 4,202
Undivided profits 3,891
---------
Total 14,681
Tier II Capital 1,606
---------
Total Capital $ 16,287
=========
</TABLE>
<TABLE>
<CAPTION>
Required Current Excess
-------- ------- ------
<S> <C> <C> <C>
Leverage 5.00% 7.70% 2.70%
Tier I 4.00 11.79 7.79
Risk-based 8.00 13.08 5.08
</TABLE>
In addition, the Federal Reserve Bank (the "FRB") leverage ratio rules require
bank holding companies to maintain a minimum level of "primary capital" to total
assets of 5.5% and a minimum level of "total capital" to total assets of 6%. For
this purpose, (i) "primary capital" includes, among other items, common stock,
contingency and other capital reserves, and the allowance for possible loan
losses, (ii) "total capital" includes, among other things, certain subordinated
debt, and "total assets" is increased by the allowance for possible loan losses.
The Corporation's primary capital ratio and its total capital ratio are both
10.6%, well in excess of FRB requirements.
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
At the Corporation's Annual Meeting held April 23, 1996, the
stockholders voted as follows:
A. Election of Class "A" Directors:
Thomas R. Greenleaf
For: 490,921 Against: 15,880 Abstain: --
Louis N. Teti
For: 494,556 Against: 12,245 Abstain: --
James H. Thornton
For: 495,827 Against: 10,974 Abstain: --
B. Ratification of appointment of KPMG Peat Marwick LLP as
independent public accountants of the Corporation.
For: 503,273 Against: 2,998 Abstain: 530
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: May 6, 1996 /S/ Henry F. Thorne
-------------------
Henry F. Thorne, President
and Chief Executive Officer
DATE: May 6, 1996 /S/ Bruce E. Moroney
--------------------
Bruce E. Moroney
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000713671
<NAME> DNB FINANCIAL CORP.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 6,276,383
<INT-BEARING-DEPOSITS> 1,730,000
<FED-FUNDS-SOLD> 12,659,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,885,184
<INVESTMENTS-CARRYING> 36,099,234
<INVESTMENTS-MARKET> 36,234,853
<LOANS> 117,026,034
<ALLOWANCE> 5,521,031
<TOTAL-ASSETS> 190,732,629
<DEPOSITS> 167,726,606
<SHORT-TERM> 7,078,776
<LIABILITIES-OTHER> 1,296,059
<LONG-TERM> 0
0
0
<COMMON> 6,587,930
<OTHER-SE> 8,043,258
<TOTAL-LIABILITIES-AND-EQUITY> 190,732,629
<INTEREST-LOAN> 2,649,180
<INTEREST-INVEST> 883,153
<INTEREST-OTHER> 102,549
<INTEREST-TOTAL> 3,634,882
<INTEREST-DEPOSIT> 1,468,855
<INTEREST-EXPENSE> 1,562,932
<INTEREST-INCOME-NET> 2,071,950
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,708,294
<INCOME-PRETAX> 556,693
<INCOME-PRE-EXTRAORDINARY> 453,693
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 453,693
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
<YIELD-ACTUAL> 8.15
<LOANS-NON> 4,106,667
<LOANS-PAST> 70,020
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 9,408,000
<ALLOWANCE-OPEN> 5,514,600
<CHARGE-OFFS> 9,525
<RECOVERIES> 15,956
<ALLOWANCE-CLOSE> 5,521,031
<ALLOWANCE-DOMESTIC> 5,521,031
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
