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: June 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
August 14, 1996)
- ---------------------------------------------------------------------------
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1996 and December 31, 1995 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1996 and 1995 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1996 and 1995 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996 and 1995 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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>
June 30, December 31,
1996 1995
<S> <C> <C>
Assets
Cash and due from banks .................. $9,415,894 $8,154,175
Federal funds sold ............................ 1,293,000 7,640,000
Securities available for sale (cost $16,683,147
in 1996 and $13,271,018 in 1995) ........... 16,507,896 13,339,451
Investment securities (market value $48,726,802
in 1996 and $38,943,606 in 1995) ........... 49,569,088 38,450,977
Loans ......................................... 116,270,296 118,307,769
Less:
Unearned discount on installment loans ..... (311,475) (422,358)
Allowance for possible loan losses ......... (5,245,700) (5,514,600)
------------- -------------
Net loans ..................................... 110,713,121 112,370,811
------------- -------------
Office property and equipment, net ............ 4,135,129 4,252,253
Accrued interest receivable ................... 1,616,175 1,648,186
Other real estate owned ....................... 1,536,287 810,263
Deferred income tax asset ..................... 1,060,312 1,034,520
Other assets .................................. 1,181,494 1,080,402
------------- -------------
Total assets .................................. $ 197,028,396 $ 188,781,038
============= ============
Liabilities and Stockholders' Equity
Liabilities
Non-interest-bearing deposits ................. $ 25,175,739 $ 22,936,240
Interest-bearing deposits:
NOW ........................................ 27,251,532 27,484,736
Money market ............................... 17,299,878 16,333,386
Savings .................................... 29,504,375 29,223,690
Time ....................................... 74,549,453 69,030,876
------------- -------------
Total deposits ................................ 173,780,977 165,008,928
------------- -------------
Repurchase agreements ......................... 6,960,897 8,218,709
Accrued interest payable ...................... 471,758 458,943
Other liabilities ............................. 792,053 739,499
------------- -------------
Total liabilities ............................. 182,005,685 174,426,079
------------- -------------
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 ....................................... 4,295,289 4,112,869
Retained earnings ............................. 4,295,466 3,592,242
Net unrealized (loss) gain on securities
available for sale, net of tax ............. (155,974) 61,918
------------- -------------
Total stockholders' equity .................... 15,022,711 14,354,959
------------- -------------
Total liabilities and stockholders' equity .... $ 197,028,396 $ 188,781,038
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For Three Months Ended June 30
1996 1995
<S> <C> <C>
Interest Income:
Interest and fees on loans $2,621,338 $2,656,961
Interest on investment securities:
Taxable 1,022,789 766,944
Interest on Federal funds sold 115,494 77,125
-------- --------
Total interest income 3,759,621 3,501,030
-------- --------
Interest Expense:
Interest on time deposits 1,011,398 858,156
Interest on NOW, money market and savings 465,203 515,328
Interest on repurchase agreements 95,673 41,846
Interest on Federal funds purchased -- 361
-------- --------
Total interest expense 1,572,274 1,415,691
--------- --------
Net interest income 2,187,347 2,085,339
-------- --------
Provision for possible loan losses -- 52
Net interest income after provision for possible loan losses . 2,187,347 2,085,287
-------- --------
Non-interest Income:
Service charges 73,813 79,501
Trust income 59,801 67,151
Other 57,646 49,861
-------- --------
Total non-interest income 191,260 196,513
-------- --------
Non-interest Expense:
Salaries and employee benefits 932,674 943,732
Occupancy 96,293 113,208
Furniture and equipment 155,424 206,777
FDIC insurance 12,021 105,974
Professional and consulting 72,786 130,828
Printing and supplies 63,244 53,895
Insurance 31,962 48,935
Advertising and marketing 64,455 68,436
PA shares tax 34,782 34,931
Postage 23,039 24,252
Other 155,279 134,600
-------- --------
Total non-interest expense 1,641,959 1,865,568
-------- --------
Income before income taxes 736,648 416,232
Income tax expense 140,000 --
-------- --------
Net income $ 596,648 $ 416,232
======== ========
Common Share Data:
Net income per share $ 0.91 $ 0.63
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>
For Six Months Ended June 30
1996 1995
<CAPTION>
<S> <C> <C>
Interest Income:
Interest and fees on loans $5,270,518 $5,149,062
Interest on investment securities:
Taxable 1,905,942 1,473,524
Exempt from Federal taxes -- 483
Interest on Federal funds sold 218,043 96,562
---------- ----------
Total interest income 7,394,503 6,719,631
---------- ----------
Interest Expense:
Interest on time deposits 1,997,544 1,559,310
Interest on NOW, money market and savings 947,912 1,036,746
Interest on repurchase agreements 188,751 59,818
Interest on Federal funds purchased 999 7,418
---------- ----------
Total interest expense 3,135,206 2,663,292
---------- ----------
Net interest income 4,259,297 4,056,339
---------- ----------
Provision for possible loan losses -- 114
Net interest income after provision for possible loan losses . 4,259,297 4,056,225
---------- ----------
Non-interest Income:
Service charges 153,038 162,613
Trust income 129,860 148,472
Other 101,399 94,407
---------- ----------
Total non-interest income 384,297 405,492
---------- ----------
Non-interest Expense:
Salaries and employee benefits 1,887,729 1,825,134
Occupancy 219,526 221,004
Furniture and equipment 325,074 422,209
FDIC insurance 23,720 211,947
Professional and consulting 153,711 207,285
Printing and supplies 120,678 125,580
Insurance 64,492 100,244
Advertising and marketing 106,071 124,758
PA shares tax 69,563 70,575
Postage 66,781 57,980
Other 312,908 298,976
---------- ----------
Total non-interest expense 3,350,253 3,665,692
---------- ----------
Income before income taxes 1,293,341 796,025
Income tax expense 243,000 --
---------- ----------
Net income $1,050,341$ 796,025
========== ==========
Common Share Data:
Net income per share $ 1.59 $ 1.21
Cash dividends per share 0.25 0.10
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 Six Months Ended June 30
1996 1995
<S> <C> <C>
Net income $ 1,050,341 $ 796,025
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 173,745 126,743
Provision for possible loan losses -- 114
Provision for OREO -- 7,254
Loss on sale of securities -- 2,387
Decrease (increase) in interest receivable 32,011 (327,958)
Increase in other assets, net (101,092) (458,081)
Increase in interest payable 12,815 86,900
Decrease in current taxes payable (17,000) (150,259)
Increase (decrease) in other liabilities 69,554 (2,477)
Decrease in unearned discount (110,883) (187,319)
------------ ------------
Net Cash Provided (Used) By Operating Activities 1,109,491 (106,671)
------------ ------------
Cash Flows From Investing Activities:
Proceeds from maturities of securities 16,946,969 12,123,212
Purchase of securities AFS (8,223,388) --
Purchase of securities HTM (23,217,460) (15,941,582)
Proceeds from sale of AFS securities -- 1,974,999
Proceeds from sale of HTM securities -- 2,993,906
Proceeds from sale of OREO -- 110,200
Net decrease (increase) in loans 1,042,549 (4,433,679)
Proceeds from sales of bank property & equipment 13,340 --
Purchase of bank property and equipment (106,322) (191,669)
------------ ------------
Net Cash Used By Investing Activities (13,544,312) (3,364,613)
------------ ------------
Cash Flows From Financing Activities:
Net increase in deposits 8,772,049 9,627,127
(Decrease) increase in repurchase agreements (1,257,812) 3,690,427
Dividends paid (164,697) (66,865)
------------ ------------
Net Cash Provided By Financing Activities 7,349,540 13,250,689
------------ ------------
Net Change in Cash and Cash Equivalents (5,085,281) 9,779,405
Cash and Cash Equivalents at Beginning of Period 15,794,175 6,866,009
------------ ------------
Cash and Cash Equivalents at End of Period $ 10,708,894 $ 16,645,414
============ ============
Supplemental Disclosure Of Cash Flow Information:
Cash paid during the period for:
Interest $ 3,122,391 $ 2,576,393
Taxes 260,000 150,259
Supplemental Disclosure Of Non-cash Flow Information:
Change in unrealized (loss) gain on AFS securities ($ 217,892) $ 29,985
Change in deferred tax asset on unrealized loss on AFS securities 25,792 --
Transfer on loans to OREO 726,024 95,000
============ ============
</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 six
months ended June 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 six months ended
June 30, 1996 was less than the statutory rate and no income taxes were expensed
during the three and six months ended June 30, 1995 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 six month periods ended June 30, 1996 and 1995. Per share net income, number
of shares, 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 effect 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 $197.0 million at June 30, 1996 compared to
$188.8 million at December 31, 1995. Total loans, net of unearned discount, were
$116.0 million, down 1.6% from December 31, 1995. Investment securities (AFS and
HTM) totaled $66.1 million, up $14.3 million or 27.6% from December. Federal
funds sold were $1.3 million at June 30, 1996, down $6.3 million from December.
The increase in investments was caused by the purchase of U. S. Treasury and
Agency securities, funded by the decrease in Federal fund sold and net increase
in deposits and borrowings.
Deposits and other borrowings at June 30, 1996 totaled $180.7 million, compared
to $173.2 million at December 31, 1995. Increases of $5.5 million and $2.2
million and $1.2 million in time, non-interest bearing and savings and money
market (combined) deposits were partially offset by decreases of $1.3 million in
repurchase agreements and $233,000 in NOW accounts. The increase in time
deposits was the result of a limited certificate of deposit promotion initiated
during the second quarter.
At June 30, 1996, total stockholders' equity was $15.0 million or $22.80 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 $1.1 million
for the six months ended June 30, 1996, offset by dividends paid of
approximately $165,000 or $.25 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 $102,000 or 4.9% to $2.2 million for the three
month period and $203,000 or 5.0% to $4.3 million for the six month period ended
June 30, 1996. As shown in the first table, the increase in net interest income
for the three month period ended June 30, 1996 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 $85,000 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 $16,000 net benefit from changes in rate. The primary contributing
factors were improved yields on securities as well as lower yields on deposits
and borrowings.
For the six month period ended June 30, 1996, the $203,000 increase was
attributable to both rate and volume ($113,000 and $90,000, respectively). The
positive impact from rates was attributable to an improved yield on the
securities portfolio as short term securities matured and were reinvested at
higher yields. In addition, the yield on the loan portfolio increased due to a
<PAGE>
reduction in the level of non-performing loans. The increased interest income
due to rates was partially offset by an $81,000 increase in time deposits
expense attributable to rates. The positive impact from volume was attributable
to higher volumes of securities ($9.0 million on average), and loans ($2.1
million on average), and Federal funds sold ($4.7 million on average) offset by
an increase in the volume of time deposits ($13.0 million on average) and
repurchase agreements ($5.2 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 six months ended June 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 June 30, 1996
Compared to 1995
Increase (Decrease) Due to
(Dollars in Thousands) Rate Volume Total
------- ------ -------
<S> <C> <C> <C>
Interest-earning assets:
Loans $ (55) $ 20 $ (35)
Securities 34 222 256
Federal funds sold (3) 41 38
----- ----- -----
Total (24) 283 259
----- ----- -----
Interest-bearing liabilities:
Savings deposits (28) (22) (50)
Time deposits (10) 163 153
Federal funds purchased -- -- --
Repurchase agreements (4) 58 54
----- ----- -----
Total (42) 198 157
----- ----- -----
Net Interest Income/interest rate spread $ 16 $ 85 $ 102
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1996
Compared to 1995
Increase (Decrease) Due to
(Dollars in Thousands) Rate Volume Total
---------- ------ -------
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 28 $ 94 $ 122
Securities 134 298 432
Federal funds sold (9) 130 121
----- ----- -----
Total 153 522 675
----- ----- -----
Interest-bearing liabilities:
Savings deposits (40) (49) (89)
Time deposits 81 357 438
Federal funds purchased -- (6) (6)
Repurchase agreements (1) 130 129
----- ----- -----
Total 40 432 472
----- ----- -----
Net Interest Income/interest rate spread $ 113 $ 90 $ 203
===== ===== =====
</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 six
month periods ended June 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, 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
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>
6 Months Year 6 Months
Ended Ended Ended
(Dollars in Thousands) 6/30/96 12/31/95 6/30/95
------- ------- -------
<S> <C> <C> <C>
Beginning Balance $ 5,515 $ 5,645 $ 5,645
Provisions -- -- --
Loans charged off:
Real estate (274) (25) (10)
Commercial (1) (124) (1)
Installment (33) (164) (67)
------- ------- -------
Total charged off (308) (313) (78)
Recoveries:
Real estate 1 86 82
Commercial 14 24 14
Installment 24 73 37
------- ------- -------
Total recoveries 39 183 133
------- ------- -------
Net (Charge-offs) Recoveries (269) (130) 55
------- ------- -------
Ending Balance $ 5,246 $ 5,515 $ 5,700
======= ======= =======
</TABLE>
<PAGE>
Management believes that the Company has adequate reserves at June 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 June 30, 1996, non-interest income was
$191,000, compared to $196,000 for the same three month period in 1995. Trust
income was down $7,000, service charges were down $6,000 while other income was
up $8,000 during the three month period ended June 30, 1996, compared to the
same period in 1995.
For the six month period ended June 30, 1996, non-interest income was $384,000,
compared to $405,000 for the same period in 1995, down $21,000 or 5.2%. The
decrease is largely attributable to a decline in Trust income of almost $19,000,
a decrease in service charge income of $10,000, offset by a modest increase in
other income of $7,000.
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 expenses decreased $224,000 to $1.6 million and $315,000 to $3.4
million for the three and six month periods ended June 30, 1996, respectively,
from $1.9 million and $3.7 million for the comparable periods in 1995. The
decrease during both periods resulted primarily from lower level of FDIC
insurance premiums, furniture & equipment, professional and consulting and
insurance expense.
Salaries & employee benefits decreased $11,000 or 1.2% to $933,000 for the three
months ended June 30, 1996 compared to $944,000 for the same period in 1995. The
decrease was caused by a reduction in the average number of full-time equivalent
employees during these comparable periods. Salaries & employee benefits
increased $63,000 or 3.4% to $1.9 million for the six months ended June 30, 1996
compared to $1.8 million for the same period in 1995. The increase in this
category has been caused by normal salary merit increases and increases in other
benefit/incentive plans offered by the Corporation.
<PAGE>
Furniture & equipment expense decreased approximately $51,000 or 24.8% to
$155,000 and $97,000 or 23.0% to $325,000 for the three and six months ended
June 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 $94,000 or 88.7% to $12,000 and $188,000 or 88.8% to
$24,000 for the three and six months ended June 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 $58,000 or 44.4% to
$73,000 and $54,000 or 25.9% to $154,000 for the three and six months ended June
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
$17,000 or 34.7% to $32,000 and $36,000 or 35.7% to $64,000 for the three and
six months ended June 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 decreased $4,000 or 5.8% to $64,000 and $19,000
or 15.0% to $106,000 for the three and six months ended June 30, 1996 compared
to 1995. Advertising & marketing expense in 1995 included additional costs
associated with several limited deposit promotions initiated in the first and
second quarter.
These decreases were offset slightly by a modest increase in "other expenses".
Other expenses include such items as OREO expense, satisfaction fees, appraisal
fees, telephone & fax expense and other miscellaneous expenses. Other expenses
increased $21,000 or 15.4% to $155,000 and $14,000 or 4.7% to $313,000 for the
three and six months ended June 30, 1996 compared to 1995. The increase in this
category was caused by additional costs incurred to manage and supervise the
Bank's OREO properties.
Income Taxes
Income tax expense was $140,000 and $243,000 for the three and six months ended
June 30, 1996. No income taxes were expensed during the first six 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 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
<PAGE>
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>
June 30 Dec. 31 June 30
(Dollars in Thousands) 1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Nonaccrual Loans
Residential mortgage $ 849 $1,355 $1,604
Commercial mortgage 1,150 1,832 1,963
Commercial 845 722 1,249
Personal 196 237 304
------ ------ ------
Total nonaccrual loans 3,040 4,146 5,120
Loans 90 days past due and still accruing:
Installment/Student 324 129 66
Total non-performing loans 3,364 4,275 5,186
Other real estate owned 1,536 810 423
------ ------ ------
Total non-performing assets $4,900 $5,085 $5,609
====== ====== ======
</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>
6 Months Year 6 Months
Ended Ended Ended
(Dollars in thousands) 6/30/96 12/31/95 6/30/95
------- ------ -------
<S> <C> <C> <C>
Interest income which would have been recorded
under original terms $ 127 $ 353 $ 220
Interest income recorded during the period (28) (222) (33)
----- ----- -----
Net impact on interest income $ 99 $ 131 $ 187
===== ===== =====
</TABLE>
As of June 30, 1996, the Corporation had impaired loans with a total
recorded investment of $1.3 million and an average recorded investment for the
six month period ended June 30, 1996 of $1.6 million. As of June 30, 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 $191,000 and
$107,000, respectively. The amount of the recorded investment in impaired loans
for which there was no related allowance for credit losses at June 30, 1996 is
$1.2 million. Total cash
<PAGE>
collected on impaired loans was credited to the outstanding principal
balance in the amount of $50,000 during the six months ended June 30, 1996. 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>
June 30 Dec. 31 June 30
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Non-performing Loans/Total Loans 2.90% 3.63% 4.42%
Non-performing Assets/Total Loans and OREO 4.17 4.29 4.76
Allowance for Loan & Lease Losses/Total Loans 4.52 4.68 4.86
Allowance for Loan & Lease Losses/Total Loans and OREO 4.46 4.65 4.84
Allowance for Loan & Lease Losses/Non-performing Assets 107.06 108.46 101.62
Allowance for Loan & Lease Losses/Non-performing Loans 155.95 129.01 109.91
</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 June 30, 1996 the Company has $1.4 million in commitments to fund commercial
real estate, construction and land development. In addition, the Company had
commitments to fund $0.6 million in home equity lines of credit and $10.3
million in other unused commitments. Management anticipates the majority of
these commitments will be funded by means of normal cash flows. In addition,
$37.2 million of certificates of deposit at the Company are scheduled to mature
during the six 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 $15.0 million at June 30, 1996 as a result of
the $1,051,000 profit reported for the six months then ended and after dividends
paid totaling approximately $165,000 year to date. In addition, the Federal
Reserve Board requires bank holding companies to maintain similar capital
levels. 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) June 30, 1996
------------
<S> <C>
Tier I Capital:
Common stock $ 6,588
Surplus 4,295
Retained earnings 4,296
-------
Total 15,179
Tier II Capital 1,604
-------
Total Capital $16,783
=======
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Required Current Excess
------ ------ ------
Leverage 5.00% 7.70% 2.70%
Tier I 4.00 12.17 8.17
Risk-based 8.00 13.46 5.46
</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)
/S/ Henry F. Thorne
DATE: August 14, 1996 ________________________________
Henry F. Thorne, President
and Chief Executive Officer
/S/ Bruce E. Moroney
DATE: August 14, 1996 _________________________________
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: August 14, 1996 /S/ Henry F. Thorne
-------------------
Henry F. Thorne, President
and Chief Executive Officer
DATE: August 14, 1996 /S/ Bruce E. Moroney
--------------------
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 9,415,894
<INT-BEARING-DEPOSITS> 2,230,519
<FED-FUNDS-SOLD> 1,293,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,507,896
<INVESTMENTS-CARRYING> 49,569,088
<INVESTMENTS-MARKET> 48,726,802
<LOANS> 115,958,821
<ALLOWANCE> 5,245,700
<TOTAL-ASSETS> 197,028,396
<DEPOSITS> 173,780,977
<SHORT-TERM> 6,960,897
<LIABILITIES-OTHER> 1,263,811
<LONG-TERM> 0
0
0
<COMMON> 6,587,930
<OTHER-SE> 8,590,755
<TOTAL-LIABILITIES-AND-EQUITY> 197,028,396
<INTEREST-LOAN> 5,270,518
<INTEREST-INVEST> 1,905,942
<INTEREST-OTHER> 218,043
<INTEREST-TOTAL> 7,394,503
<INTEREST-DEPOSIT> 2,945,456
<INTEREST-EXPENSE> 3,135,206
<INTEREST-INCOME-NET> 4,259,297
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,350,253
<INCOME-PRETAX> 1,293,341
<INCOME-PRE-EXTRAORDINARY> 1,050,341
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,050,341
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.59
<YIELD-ACTUAL> 8.13
<LOANS-NON> 3,039,563
<LOANS-PAST> 324,531
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,674,000
<ALLOWANCE-OPEN> 5,514,600
<CHARGE-OFFS> 307,581
<RECOVERIES> 38,681
<ALLOWANCE-CLOSE> 5,245,700
<ALLOWANCE-DOMESTIC> 5,245,700
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
