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, 1997
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) 691,422
(Class) (Shares Outstanding as of
August 13, 1997)
_______________________________________________________________________________
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and December 31, 1996 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1997 and 1996 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1997 and 1996 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1997 and 1996 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and December 31, 1996 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,
1997 1996
---------- -----------
<S> <C> <C>
Assets
Cash and due from banks ................................................................ $ 8,362,801 $ 6,636,470
Federal funds sold ..................................................................... 16,500,000 4,833,000
Investment securities available for sale, at market price .............................. 18,400,809 21,678,879
Investment securities (market value $43,111,549
in 1997 and $49,195,997 in 1996) .................................................... 42,922,633 48,871,142
Loans, net of unearned income .......................................................... 126,080,574 121,572,569
Allowance for possible loan losses .................................................. (5,130,967) (5,112,486)
----------- -----------
Net loans .............................................................................. 120,949,607 116,460,083
----------- -----------
Office property and equipment, net ..................................................... 3,816,265 3,986,502
Accrued interest receivable ............................................................ 1,560,541 1,562,565
Other real estate owned ................................................................ 390,500 l,010,500
Deferred income tax asset .............................................................. 872,100 866,354
Other assets ........................................................................... 1,283,051 1,222,594
----------- -----------
Total assets ........................................................................... $ 215,058,307 $ 207,128,089
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Non-interest-bearing deposits .......................................................... $ 26,609,626 $ 26,428,509
Interest-bearing deposits:
NOW accounts ........................................................................ 36,007,536 31,140,486
Money market ........................................................................ 16,451,424 15,549,927
Savings ............................................................................. 28,697,510 28,558,535
Time ................................................................................ 84,108,335 76,746,106
----------- -----------
Total deposits ......................................................................... 191,874,431 178,423,563
----------- -----------
Repurchase agreements .................................................................. 861,197 11,225,273
FHLB advances .......................................................................... 3,000,000 --
Accrued interest payable ............................................................... 586,868 454,574
Other liabilities ...................................................................... 1,452,773 808,665
----------- -----------
Total liabilities ...................................................................... 197,775,269 190,912,075
----------- -----------
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;
691,422 issued and outstanding ...................................................... 6,914,220 6,914,220
Surplus ................................................................................ 5,408,365 5,196,292
Retained earnings ...................................................................... 5,000,094 4,127,905
Net unrealized loss on investment securities
available for sale .................................................................. (39,641) (22,403)
----------- -----------
Total stockholders' equity ............................................................. 17,283,038 16,216,014
----------- -----------
Total liabilities and stockholders' equity ............................................. $ 215,058,307 $ 207,128,089
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended June 30
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Interest Income:
Interest and fees on loans ............................................................................... $2,923,421 $2,621,338
Interest on taxable investment securities ................................................................ 1,110,606 1,022,789
Interest on Federal funds sold ........................................................................... 55,023 115,494
---------- ----------
Total interest income ................................................................................ 4,089,050 3,759,621
---------- ----------
Interest Expense:
Interest on time deposits ................................................................................ 1,122,982 1,011,398
Interest on NOW, money market and savings ................................................................ 509,069 465,203
Interest on repurchase agreements ........................................................................ 14,596 95,673
Interest on FHLB advances ................................................................................ 43,797 --
Interest on Federal funds purchased ...................................................................... 2,462 --
---------- ----------
Total interest expense ............................................................................... 1,692,906 1,572,274
---------- ----------
Net interest income ...................................................................................... 2,396,144 2,187,347
Provision for possible loan losses ....................................................................... -- --
Net interest income after provision for possible loan losses ............................................. 2,396,144 2,187,347
---------- ----------
Non-interest Income:
Service charges .......................................................................................... 82,116 73,813
Trust income ............................................................................................. 80,888 59,801
Other .................................................................................................... 88,955 57,646
---------- ----------
Total non-interest income ............................................................................ 251,959 191,260
---------- ----------
Non-interest Expense:
Salaries and employee benefits ........................................................................... 977,674 932,674
Occupancy ................................................................................................ 119,346 96,293
Furniture and equipment .................................................................................. 171,104 155,424
FDIC insurance ........................................................................................... 18,596 12,021
Professional and consulting .............................................................................. 74,807 72,786
Printing and supplies .................................................................................... 42,519 63,244
Insurance ................................................................................................ 23,942 31,962
Advertising and marketing ................................................................................ 68,204 64,455
PA shares tax ............................................................................................ 35,644 34,782
Postage .................................................................................................. 32,647 23,039
Other .................................................................................................... 145,120 155,279
---------- ----------
Total non-interest expense ........................................................................... 1,709,603 1,641,959
---------- ----------
Income before income taxes ............................................................................... 938,500 736,648
Income tax expense ....................................................................................... 218,000 140,000
---------- ----------
Net income ........................................................................................... $ 720,500 $ 596,648
========== ==========
Common Share Data:
Net income per share ..................................................................................... $1.04 $0.86
Cash dividends per share ................................................................................. 0.20 0.14
Weighted average number of common shares
outstanding ............................................................................................. 691,422 691,422
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1997 1996
---------- -----------
<S> <C> <C>
Interest Income:
Interest and fees on loans ............................................................................... $5,649,524 $5,270,518
Interest on taxable investment securities ................................................................ 2,279,017 1,905,942
Interest on Federal funds sold ........................................................................... 89,124 218,043
--------- ----------
Total interest income ................................................................................ 8,017,665 7,394,503
--------- ----------
Interest Expense:
Interest on time deposits ................................................................................ 2,153,734 1,997,544
Interest on NOW, money market and savings ................................................................ 996,698 947,912
Interest on repurchase agreements ........................................................................ 100,515 188,751
Interest on FHLB advances ................................................................................ 71,797 --
Interest on Federal funds purchased ...................................................................... 5,364 999
---------- ----------
Total interest expense ............................................................................... 3,328,108 3,135,206
---------- ----------
Net interest income ...................................................................................... 4,689,557 4,259,297
Provision for possible loan losses ....................................................................... -- --
Net interest income after provision for possible loan losses ............................................. 4,689,557 4,259,297
---------- ----------
Non-interest Income:
Service charges .......................................................................................... 147,342 153,038
Trust income ............................................................................................. 172,320 129,860
Other .................................................................................................... 150,317 101,399
---------- ----------
Total non-interest income ............................................................................ 469,979 384,297
---------- ----------
Non-interest Expense:
Salaries and employee benefits ........................................................................... 1,954,498 1,887,729
Occupancy ................................................................................................ 230,062 219,526
Furniture and equipment .................................................................................. 336,771 325,074
FDIC insurance ........................................................................................... 36,872 23,720
Professional and consulting .............................................................................. 138,104 153,711
Printing and supplies .................................................................................... 94,638 120,678
Insurance ................................................................................................ 46,051 64,492
Advertising and marketing ................................................................................ 112,969 106,071
PA shares tax ............................................................................................ 71,288 69,563
Postage .................................................................................................. 55,425 66,781
Other .................................................................................................... 292,027 312,908
---------- ----------
Total non-interest expense ........................................................................... 3,368,705 3,350,253
---------- ----------
Income before income taxes ............................................................................... 1,790,831 1,293,341
Income tax expense ....................................................................................... 430,000 243,000
---------- ----------
Net income ........................................................................................... $1,360,831 $1,050,341
========== ==========
Common Share Data:
Net income per share ..................................................................................... $1.97 $1.52
Cash dividends per share ................................................................................. 0.40 0.24
Weighted average number of common shares
outstanding ............................................................................................. 691,422 691,422
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ......................................................................... $1,360,831 $1,050,341
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ...................................................... 176,046 173,745
Gain on sale of OREO ............................................................... (6,533) --
Decrease in interest receivable .................................................... 2,024 32,011
Increase in other assets, net ...................................................... (60,457) (101,092)
Increase in interest payable ....................................................... 132,294 12,815
Increase in other liabilities ...................................................... 644,108 52,554
---------- ----------
Net Cash Provided By Operating Activities .......................................... 2,248,313 1,220,374
---------- ----------
Cash Flows From Investing Activities:
Proceeds from maturities & paydowns of AFS securities .............................. 3,299,203 16,946,969
Proceeds from maturities & paydowns of HTM securities .............................. 9,608,524 --
Purchase of AFS securities ......................................................... -- (8,223,388)
Purchase of HTM securities ......................................................... (3,673,109) (23,217,460)
Net (increase) decrease in loans ................................................... (4,489,524) 931,666
Proceeds from sales of bank property & equipment ................................... -- 13,340
Proceeds from sale of OREO ......................................................... 626,533 --
Purchase of bank property and equipment ............................................ (36,832) (106,322)
---------- ----------
Net Cash Used (Provided) By Investing Activities ................................... 5,334,795 (13,655,195)
---------- ----------
Cash Flows From Financing Activities:
Net increase in deposits ........................................................... 13,450,868 8,772,049
Decrease in repurchase agreements .................................................. (10,364,076) (1,257,812)
Increase in FHLB advances .......................................................... 3,000,000 --
Dividends paid ..................................................................... (276,569) (164,697
---------- ----------
Net Cash Provided By Financing Activities .......................................... 5,810,223 7,349,540
---------- ----------
Net Change in Cash and Cash Equivalents ............................................ 13,393,331 (5,085,281
Cash and Cash Equivalents at Beginning of Period ................................... 11,469,470 15,794,175
---------- ----------
Cash and Cash Equivalents at End of Period ......................................... $24,862,801 $10,708,894
========== ==========
Supplemental Disclosure Of Cash Flow Information:
Cash paid during the period for:
Interest .......................................................................... $3,195,814 $3,122,391
Taxes ............................................................................. 350,000 260,000
---------- ----------
Supplemental Disclosure Of Non-cash Flow Information:
Transfer on loans to OREO ......................................................... -- $ 726,024
---------- ----------
</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 "Corporation" or "DNB") 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, 1997 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, 1996.
NOTE 2: FEDERAL INCOME TAXES
DNB accounts for income taxes in accordance with the asset and liability
method of accounting for income taxes. Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.
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 691,422 for the three and six months
ended June 30, 1997 and 1996. Per share net income, number of shares and
dividends have been adjusted for the five percent (5%) stock dividend paid in
1996.
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE. This
statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This Statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods, earlier application is not permitted. This Statement requires
restatement of all prior-period EPS data presented. The adoption of this
statement is not expected to have a material impact on DNB's EPS disclosure.
<PAGE>
In June 1997, the FASB adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. According to the statement, all items of "comprehensive income" are to
be reported in a "financial statement that is displayed with the same prominence
as other financial statements". Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. Along with net income, examples
of comprehensive income include foreign currency translation adjustments,
unrealized holding gains and losses on available-for-sale securities, changes in
the market value of a futures contract that qualifies as a hedge of an asset
reported at fair value, and minimum pension liability adjustments. Currently,
the comprehensive income of DNB would consist primarily of net income and
unrealized holding gains and losses on available-for-sale securities. This
statement becomes effective for fiscal years beginning after December 15, 1997.
Additionally, in June 1997 the FASB adopted SFAS No. 131 DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement which
supersedes SFAS No. 14, requires public companies to report financial and
descriptive information about their reportable operating segments on both an
annual and interim basis. SFAS No. 131 mandates disclosure of a measure of
segment profit/loss, certain revenue and expense items and segment assets. In
addition, the statement requires reporting information on the entity's products
and services, countries in which the entity earns revenues and holds assets, and
major customers. This statement requires changes in disclosures and would not
effect the financial condition of DNB. This statement becomes effective for
fiscal years beginning after December 15, 1997.
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
DNB's total assets were $215.1 million at June 30, 1997 compared to $207.1
million at December 31, 1996. Total loans were $126.1 million, up $4.5 million
or 4% from $121.6 million at December 31, 1996. The increase was primarily in
the commercial and commercial construction loan portfolio which increased $5.1
million or 17%. Investment securities (AFS and HTM) were $61.3 million, down
$9.2 million or 13% from December, reflecting maturities and paydowns in the
portfolio. Federal funds sold were $16.5 million at June 30, 1997, up $11.7
million from December. Cash flows from the investment portfolio and increased
deposits funded the increases in total loans and Federal funds sold.
Deposits and other borrowings at June 30, 1997 totaled $195.7 million,
compared to $189.6 million at December 31, 1996. Increases of $7.4 million in
time deposits, $4.9 million in NOW accounts and $1.2 million in all other
deposits combined, were partially offset by a decrease of $7.4 million in other
borrowings. The increases in time deposits was a result of several successful
time deposit promotions initiated in the second quarter.
At June 30, 1997, stockholders' equity was $17.3 million or $25.01 per
share, compared to $16.2 million or $23.47 per share at December 31, 1996. The
increase in stockholders' equity was the result of net income of $1.4 million
for the six months ended June 30, 1997, offset by dividends paid of
approximately $277,000 or $.40 per share.
RESULTS OF OPERATIONS
NET INTEREST INCOME
DNB'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 $209,000 or 9.6% to $2.4 million for the
three month period and $430,000 or 10.1% to $4.7 million for the six month
period ended June 30, 1997. As shown in the following tables, the increase in
net interest income for the three and six month periods ended June 30, 1997 was
largely attributable to the positive effects of volume changes and, to a lesser
degree, the positive effects of rate changes. The positive impact from changes
in volume for both periods was primarily attributable to higher levels of loans.
The benefit from these higher levels was offset somewhat by a higher average
volume of time deposits. There was no net benefit from rate changes during the
three month period and only a modest net benefit ($24,000) during the six month
period. The primary contributing factor for this was improved yields on the loan
portfolio due to the reduction in non-performing loans.
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, 1997 and 1996.
For each category of interest-earning assets and interest-bearing liabilities,
information is
<PAGE>
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, 1997
Compared to 1996
---------------------------
Change Due to
(Dollars in Thousands) Rate Volume Total
---- ------ -----
<S> <C> <C> <C>
Interest-earning assets:
Loans ........................................................................................ $ 72 $ 230 $ 302
Securities ................................................................................... (2) 90 88
Federal funds sold ........................................................................... (17) (43) (60)
--- --- ---
Total ................................................................................... 53 277 330
--- --- ---
Interest-bearing liabilities:
Savings deposits ............................................................................. 45 (1) 44
Time deposits ................................................................................ 3 109 112
FHLB advances ................................................................................ 22 22 44
Federal funds purchased ...................................................................... 1 1 2
Repurchase agreements ........................................................................ (18) (63) (81)
--- --- ---
Total ................................................................................... 53 68 121
--- --- ---
Net interest income/interest rate spread ..................................................... $ 0 $ 209 $ 209
=== === ===
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
Compared to 1996
--------------------------
Change Due to
(Dollars in Thousands) Rate Volume Total
---- ------ -----
<S> <C> <C> <C>
Interest-earning assets:
Loans ...................................................................................... $ 32 $ 347 $ 379
Securities ................................................................................. 7 366 373
Federal funds sold ......................................................................... (9) (120) (129)
--- --- ---
Total ................................................................................. 30 593 623
--- --- ---
Interest-bearing liabilities:
Savings deposits ........................................................................... 26 23 49
Time deposits .............................................................................. (36) 192 156
FHLB advances .............................................................................. 36 36 72
Federal funds purchased .................................................................... -- 4 4
Repurchase agreements ...................................................................... (20) (68) (88)
--- --- ---
Total ................................................................................. 6 187 193
--- --- ---
Net interest income/interest rate spread ................................................... $ 24 $ 406 $ 430
=== === ===
</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,
<PAGE>
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.
Determining the level of the allowance for possible loan losses at any
given date is difficult, particularly in an uncertain economic environment.
DNB'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.
DNB made no provisions for possible loan losses during the three and six
month periods ended June 30, 1997 and 1996, based on available information, as
well as continuing improvement in the quality of the loan portfolio.
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) 6/30/97 12/31/96 6/30/96
------- -------- -------
<S> <C> <C> <C>
Beginning balance .................................................... $ 5,112 $ 5,515 $ 5,515
Provisions ........................................................... -- -- --
Loans charged off:
Real estate ................................................... -- (454) (274)
Commercial .................................................... (24) (50) (1)
Consumer ...................................................... (2) (30) (33)
----- ----- -----
Total charged off ......................................... (26) (534) (308)
----- ----- -----
Recoveries:
Real estate ................................................... 1 38 1
Commercial .................................................... 7 48 14
Consumer ...................................................... 37 45 24
----- ----- -----
Total recoveries .......................................... 45 131 39
----- ----- -----
Net recoveries (charge-offs) ......................................... 19 (403) (269)
----- ----- -----
Ending balance ....................................................... $ 5,131 $ 5,112 $ 5,246
===== ===== =====
</TABLE>
Management believes that DNB has adequate reserves at June 30, 1997,
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 1996. The OCC's examination was as of September 30,
1996 for all matters. As a result of the examination, no additional provisions
were required.
<PAGE>
NON-INTEREST INCOME
Total non-interest income includes service charges on deposit products,
trust commissions and fees received by DNB's Trust and Investment Services
Division, and other less significant sources of income such as fees for safe
deposit box rentals, travelers' checks and money order sales, collecting bills
for local municipalities and similar activities.
For the three month period ended June 30, 1997, non-interest income was
$252,000, compared to $191,000 for the same three month period in 1996. Trust
income was up $21,000, service charges were up $8,000 while other income was up
$31,000 during the three month period ended June 30, 1997, compared to the same
period in 1996.
For the six month period ended June 30, 1997, non-interest income was
$470,000, compared to $384,000 for the same period in 1996, up $86,000 or 22%.
The increase was largely attributable to a $42,000 increase in Trust income, an
increase in other income of $49,000, partially offset by a modest decrease in
service charges of $6,000.
The increases in Trust income for the three and six month periods ended
June 30, 1997 were due to commissions received from estate settlements. The
increases in other income, for the same periods, were due to fees received for
utility bill collections.
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 increased $68,000 to $1.7 million and $18,000 to $3.4
million for the three and six month periods ended June 30, 1997, respectively,
from $1.6 million and $3.4 million for the comparable periods in 1996. The
increases during both periods resulted primarily from higher levels of salaries
and employee benefits, occupancy expense, furniture and equipment expense and
FDIC insurance premiums, partially offset by decreases in printing and supplies
and "other" expenses.
Salaries & employee benefits increased $45,000 or 5% to $978,000 and
$67,000 or 4% to $2.0 million for the three and six months ended June 30, 1997,
respectively, compared to $933,000 and $1.9 million for the same periods in
1996. The increases in this category were caused by normal salary merit
increases and increases in other benefit/incentive plans offered by DNB.
Occupancy expense increased approximately $23,000 or 24% to $119,000 and
$11,000 or 5% to $230,000 for the three and six months ended June 30, 1997,
respectively. This compares to $96,000 and $220,000 for the same periods in
1996. The increases in this category were due to additional costs associated
with minor painting and renovations at several locations and for increases in
real estate taxes.
<PAGE>
Furniture & equipment expense increased approximately $16,000 or 10% to
$171,000 and $12,000 or 4% to $337,000 for the three and six months ended June
30, 1997, respectively, compared to $155,000 and $325,000 for the same periods
in 1996. The increases for both periods were primarily attributable to machinery
and equipment service costs as warranties expired on newly owned equipment.
FDIC insurance increased $7,000 or 55% to $19,000 and $13,000 or 55% to
$37,000 for the three and six months ended June 30, 1997 compared to the same
periods in 1996. The increase in FDIC insurance was caused by additional
premiums for the FICO bond funding.
These increases were partially offset by decreases in printing and supplies
and "other" expenses. Printing and supplies expense decreased $21,000 or 33% to
$43,000 and $26,000 or 22% to $95,000 for the three and six months ended June
30, 1997, respectively, compared to $63,000 and $121,000 for the same periods in
1996. During the second quarter DNB outsourced its inventory system for forms
and supplies. This created temporary timing differences for certain supplies
expense as new items purchased were inventoried.
Other expenses include such items as OREO expense, satisfaction fees,
appraisal fees, telephone & fax expense and other miscellaneous expenses. Other
expenses decreased $10,000 or 7% to $145,000 and $21,000 or 7% to $292,000 for
the three and six months ended June 30, 1997 compared to 1996. The decrease in
this category was caused primarily by a reduction in OREO expense, as the Bank
sold a significant portion of its OREO property in the second quarter of 1997.
INCOME TAXES
Income tax expense was $218,000 and $430,000 for the three and six months
ended June 30, 1997 and $140,000 and $243,000 for the three and six months ended
June 30, 1996. 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 DNB 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 DNB's markets and to the efforts
of management to reduce the level of such assets.
<PAGE>
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) 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 DNB.
<TABLE>
<CAPTION>
June 30 Dec.31 June 30
(Dollars in Thousands) 1997 1996 1996
- ---------------------- ----- ----- -----
<S> <C> <C> <C>
Nonaccrual Loans
Residential mortgage ........................................... $ 846 $ 743 $ 849
Commercial mortgage ............................................ 982 1,315 1,150
Commercial ..................................................... 845 650 845
Consumer ....................................................... 140 187 196
----- ----- -----
Total nonaccrual loans .............................................. 2,813 2,895 3,040
Loans 90 days past due and still accruing:
Consumer ....................................................... 21 194 324
Troubled debt restructurings ................................... -- 184 --
----- ----- -----
Total non-performing loans .......................................... 2,834 3,273 3,364
Other real estate owned ............................................. 391 1,010 1,536
----- ----- -----
Total non-performing assets ......................................... $3,225 $4,283 $4,900
===== ===== =====
</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) 6/30/97 12/31/96 6/30/96
- ---------------------- ------- -------- -------
<S> <C> <C> <C>
Interest income which would have been recorded
under original terms .......................................... $ 118 $ 254 $ 127
Interest income recorded during the period ........................... (16) (80) (28)
--- --- ---
Net impact on interest income ........................................ $ 102 $ 174 $ 99
=== === ===
</TABLE>
As of June 30, 1997, DNB had impaired loans with a total recorded
investment of $1.2 million and an average recorded investment for the six month
period ended June 30, 1997 of $1.3 million. As of June 30, 1997, their was no
related allowance for credit losses necessary for these impaired loans. Total
cash collected on impaired loans was credited to the outstanding principal
balance in the amount of $35,000 during the six months ended June 30, 1996. No
interest income was recorded on such loans.
As of December 31, 1996, DNB had impaired loans with a total recorded
investment of $1.4 million and an average recorded investment for the year ended
December 31, 1996 of $1.6 million. As of December 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 was $160,000. The amount of the
recorded investment in impaired loans for which there was no related allowance
for credit losses at December 31, 1996 was $1.3 million.
<PAGE>
The following table sets forth the DNB's asset quality and allowance coverage
ratios at the dates indicated:
<TABLE>
<CAPTION>
June 30 Dec. 31 June 30
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Non-performing Loans/Total Loans ................................................... 2.2% 2.7% 2.9%
Non-performing Assets/Total Loans and OREO ......................................... 2.5 3.5 4.2
Allowance for Loan & Lease Losses/Total Loans ...................................... 4.1 4.2 4.5
Allowance for Loan & Lease Losses/Total Loans and OREO ............................. 4.1 4.2 4.5
Allowance for Loan & Lease Losses/Non-performing Assets ............................ 159.1 119.4 107.1
Allowance for Loan & Lease Losses/Non-performing Loans ............................. 181.1 156.2 156.0
</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 DNB's core deposit base. In addition
to cash, DNB maintains a portfolio of short term investments to meet its
liquidity requirements. DNB 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, 1997 DNB has $9.3 million in commitments to fund commercial
real estate, construction and land development. In addition, DNB had commitments
to fund $600,000 in home equity lines of credit and $7.9 million in other unused
commitments. Management anticipates the majority of these commitments will be
funded by means of normal cash flows. In addition, $43.8 million of time
deposits at DNB are scheduled to mature during the six months ending December
31, 1996. Management believes that the majority of such deposits will be
reinvested with DNB and that certificates that are not renewed will be funded by
maturing loans and investments.
Stockholders' equity increased to $17.3 million at June 30, 1997 as a
result of the $1,361,000 profit reported for the six months then ended and after
dividends paid totaling approximately $277,000 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 1997 regulatory
required minimums. The following table summarizes data and ratios pertaining to
the Bank's capital structure.
<TABLE>
<CAPTION>
(Dollars in Thousands)
June 30, 1997
-------------
<S> <C>
Tier I Capital:
Common stock .................................................................. $ 6,914
Surplus ....................................................................... 5,409
Retained earnings ............................................................. 5,000
------
Total ..................................................................... 17,323
Tier II Capital .................................................................. 1,748
------
Total Capital .................................................................... $19,071
======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Required Current Excess
-------- ------- ------
<S> <C> <C> <C>
Leverage ............................................................. 5.00% 8.40% 3.40%
Tier I ............................................................... 4.00 12.69 8.69
Risk-based ........................................................... 8.00 13.97 5.97
</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. DNB's primary capital ratio and its total capital ratio are both
10.2%, well in excess of FRB requirements.
REGULATORY MATTERS
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: August 13, 1997 /S/ Henry F. Thorne
-------------------
Henry F. Thorne, President
and Chief Executive Officer
DATE: August 13, 1997 /S/ Bruce E. Moroney
--------------------
Bruce E. Moroney
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000713671
<NAME> DNB FINANCIAL CORP.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,905,263
<INT-BEARING-DEPOSITS> 457,538
<FED-FUNDS-SOLD> 16,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,400,809
<INVESTMENTS-CARRYING> 42,922,633
<INVESTMENTS-MARKET> 43,111,549
<LOANS> 126,080,574
<ALLOWANCE> 5,130,967
<TOTAL-ASSETS> 215,058,307
<DEPOSITS> 191,874,431
<SHORT-TERM> 3,861,197
<LIABILITIES-OTHER> 2,039,641
<LONG-TERM> 0
0
0
<COMMON> 6,914,220
<OTHER-SE> 10,368,818
<TOTAL-LIABILITIES-AND-EQUITY> 215,058,307
<INTEREST-LOAN> 5,649,524
<INTEREST-INVEST> 2,279,017
<INTEREST-OTHER> 89,124
<INTEREST-TOTAL> 8,017,665
<INTEREST-DEPOSIT> 3,150,432
<INTEREST-EXPENSE> 3,328,108
<INTEREST-INCOME-NET> 4,689,557
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,368,705
<INCOME-PRETAX> 1,790,831
<INCOME-PRE-EXTRAORDINARY> 1,360,831
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,360,831
<EPS-PRIMARY> 1.97
<EPS-DILUTED> 1.97
<YIELD-ACTUAL> 8.24
<LOANS-NON> 2,813,243
<LOANS-PAST> 21,619
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,846,138
<ALLOWANCE-OPEN> 5,112,486
<CHARGE-OFFS> 26,792
<RECOVERIES> 45,273
<ALLOWANCE-CLOSE> 5,130,967
<ALLOWANCE-DOMESTIC> 5,130,967
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
