SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended: September 30, 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) 1,382,844
(Class) (Shares Outstanding as of
November 10, 1997)
- ---------------------------------------------------------------------------
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1997 and December 31, 1996 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1997 and 1996 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1997 and 1996 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1996 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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>
September 30, December 31,
1997 1996
------------ -----------
<S> <C> <C>
Assets
Cash and due from banks ..................................................................... $ 6,625,880 $ 6,636,470
Federal funds sold .......................................................................... 8,146,000 4,833,000
Investment securities available for sale, at market value ................................... 13,569,993 21,678,879
Investment securities (market value $50,692,223
in 1997 and $49,195,997 in 1996) ......................................................... 50,482,321 48,871,142
Loans, net of unearned income ............................................................... 132,096,607 121,572,569
Allowance for possible loan losses .......................................................... (5,228,158) (5,112,486)
----------- -----------
Net loans ................................................................................... 126,868,449 116,460,083
----------- -----------
Office property and equipment, net .......................................................... 3,724,736 3,986,502
Accrued interest receivable ................................................................. 1,599,306 1,562,565
Other real estate owned ..................................................................... 231,187 l,010,500
Deferred income tax asset ................................................................... 851,343 866,354
Other assets ................................................................................ 1,510,104 1,222,594
----------- -----------
Total assets ................................................................................ $ 213,609,319 $ 207,128,089
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Non-interest-bearing deposits ............................................................... $ 23,882,314 $ 26,428,509
Interest-bearing deposits:
NOW accounts ............................................................................. 30,042,945 31,140,486
Money market ............................................................................. 15,192,312 15,549,927
Savings .................................................................................. 28,616,222 28,558,535
Time ..................................................................................... 96,643,916 76,746,106
----------- -----------
Total deposits .............................................................................. 194,377,709 178,423,563
----------- -----------
Repurchase agreements ....................................................................... -- 11,225,273
Accrued interest payable .................................................................... 683,373 454,574
Other liabilities ........................................................................... 680,172 808,665
----------- -----------
Total liabilities ........................................................................... 195,741,254 190,912,075
----------- -----------
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; 1,382,844 and
691,422 issued and outstanding, respectively ............................................. 13,828,440 6,914,220
Surplus ..................................................................................... -- 5,196,292
Retained earnings ........................................................................... 4,012,100 4,127,905
Net unrealized gain (loss) on investment securities
available for sale ....................................................................... 27,525 (22,403)
----------- -----------
Total stockholders' equity .................................................................. 17,868,065 16,216,014
----------- -----------
Total liabilities and stockholders' equity .................................................. $ 213,609,319 $ 207,128,089
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended September 30
-------------------------------
1997 1996
------------- ------------
<S> <C> <C>
Interest Income:
Interest and fees on loans ................................. $2,938,947 $2,648,313
Interest on taxable investment securities .................. 1,001,859 1,133,330
Interest on Federal funds sold ............................. 207,059 74,352
------------- ------------
Total interest income ................................. 4,147,865 3,855,995
------------- ------------
Interest Expense:
Interest on time deposits .................................. 1,259,100 1,040,712
Interest on NOW, money market and savings .................. 514,355 479,969
Interest on repurchase agreements .......................... 7,067 122,584
Interest on FHLB advance ................................... 17,150 --
Interest on Federal funds purchased ........................ -- 1,963
------------- ------------
Total interest expense ................................ 1,797,672 1,645,228
------------- ------------
Net interest income ........................................ 2,350,193 2,210,767
Provision for possible loan losses ......................... -- --
Net interest income after provision for possible loan losses 2,350,193 2,210,767
------------- ------------
Non-interest Income:
Service charges ............................................ 88,051 87,287
Trust income ............................................... 84,924 78,873
Other ...................................................... 172,929 72,097
------------- ------------
Total non-interest income ............................. 345,904 238,257
------------- ------------
Non-interest Expense:
Salaries and employee benefits ............................. 984,264 903,397
Occupancy .................................................. 122,086 111,084
Furniture and equipment .................................... 172,620 162,935
FDIC insurance ............................................. 5,478 12,221
Professional and consulting ................................ 190,590 69,167
Printing and supplies ...................................... 40,880 41,907
Insurance .................................................. 24,539 22,249
Advertising and marketing .................................. 45,097 48,054
PA shares tax .............................................. 35,644 34,781
Postage .................................................... 23,568 31,856
Other ...................................................... 151,529 175,682
------------- ------------
Total non-interest expense ............................ 1,796,295 1,613,333
------------- ------------
Income before income taxes ................................. 899,802 835,691
Income tax expense ......................................... 218,000 185,000
------------- ------------
Net income ............................................ $ 681,802 $ 650,691
============= ============
Per Common Share Data:
Net income ................................................. $ 0.49 $ 0.47
Cash dividends ............................................. 0.12 0.07
Weighted average number of common shares outstanding ....... 1,382,844 1,382,844
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1997 1996
------------- -----------
<S> <C> <C>
Interest Income:
Interest and fees on loans ................................. $ 8,588,471 $ 7,918,831
Interest on taxable investment securities .................. 3,280,876 3,039,272
Interest on Federal funds sold ............................. 296,183 292,395
------------- -----------
Total interest income ................................. 12,165,530 11,250,498
------------- -----------
Interest Expense:
Interest on time deposits .................................. 3,412,834 3,038,256
Interest on NOW, money market and savings .................. 1,511,053 1,427,881
Interest on repurchase agreements .......................... 107,582 311,335
Interest on FHLB advances .................................. 88,947 --
Interest on Federal funds purchased ........................ 5,364 2,962
------------- -----------
Total interest expense ................................ 5,125,780 4,780,434
------------- -----------
Net interest income ........................................ 7,039,750 6,470,064
Provision for possible loan losses ......................... -- --
Net interest income after provision for possible loan losses 7,039,750 6,470,064
------------- -----------
Non-interest Income:
Service charges ............................................ 235,393 240,325
Trust income ............................................... 257,244 208,733
Other ...................................................... 323,246 173,496
------------- -----------
Total non-interest income ............................. 815,883 622,554
------------- -----------
Non-interest Expense:
Salaries and employee benefits ............................. 2,938,762 2,791,126
Occupancy .................................................. 352,148 330,610
Furniture and equipment .................................... 509,391 488,009
FDIC insurance ............................................. 42,350 35,941
Professional and consulting ................................ 328,694 222,878
Printing and supplies ...................................... 135,518 162,585
Insurance .................................................. 70,590 86,741
Advertising and marketing .................................. 158,066 154,125
PA shares tax .............................................. 106,932 104,344
Postage .................................................... 78,993 98,637
Other ...................................................... 443,556 488,590
------------- -----------
Total non-interest expense ............................ 5,165,000 4,963,586
------------- -----------
Income before income taxes ................................. 2,690,633 2,129,032
Income tax expense ......................................... 646,000 428,000
------------- -----------
Net income ............................................ $ 2,044,633 $ 1,701,032
============= ===========
Per Common Share Data:
Net income ................................................. $1.48 $1.23
Cash dividends ............................................. 0.32 0.19
Weighted average number of common shares outstanding ....... 1,382,844 1,382,844
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Nine Months Ended September 30
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ............................................. $ 2,044,633 $ 1,701,032
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .......................... 293,761 255,286
Gain on sale of OREO ................................... (107,748) (7,239)
Net loss on sale of securities ......................... -- 3,414
(Decrease) increase in interest receivable ............. (36,741) 10,847
Increase in other assets ............................... (287,510) (1,652,795)
Increase in interest payable ........................... 228,799 29,205
Decrease (increase) in current taxes payable ........... (29,000) 68,000
Decrease in other liabilities .......................... (99,493) (19,752)
----------- ----------
Net Cash Provided By Operating Activities .............. 2,006,701 387,998
----------- ----------
Cash Flows From Investing Activities:
Proceeds from maturities & paydowns of AFS securities .. 10,466,192 5,334,473
Proceeds from maturities & paydowns of HTM securities .. 16,715,894 17,686,434
Proceeds from sale of AFS securities ................... -- 3,474,762
Purchase of AFS securities ............................. (2,250,688) (14,211,592)
Purchase of HTM securities ............................. (18,351,691) (28,615,676)
Net (increase) decrease in loans ....................... (10,499,053) 332,731
Proceeds from sale of OREO ............................. 977,748 302,225
Purchase of bank property and equipment ................ (49,056) (126,566)
----------- -----------
Net Cash Used By Investing Activities .................. (2,990,654) (15,823,209)
------------ -----------
Cash Flows From Financing Activities:
Net increase in deposits ............................... 15,954,146 10,336,138
(Decrease) increase in repurchase agreements ........... (11,225,273) 5,785,156
Dividends paid ......................................... (442,510) (263,517)
----------- -----------
Net Cash Provided By Financing Activities .............. 4,286,363 15,857,777
----------- -----------
Net Change in Cash and Cash Equivalents ................ 3,302,410 422,566
Cash and Cash Equivalents at Beginning of Period ....... 11,469,470 15,794,175
----------- -----------
Cash and Cash Equivalents at End of Period ............. $ 14,771,880 $ 16,216,741
=========== ===========
Supplemental Disclosure Of Cash Flow Information:
Cash paid during the period for:
Interest ............................................... $ 5,125,780 $ 4,751,229
Taxes .................................................. 650,000 360,000
Supplemental Disclosure Of Non-cash Flow Information:
Transfer on loans to OREO .............................. $ 90,687 $ 850,802
</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 nine months ended
September 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: COMMON STOCK
DNB records common stock at par value. Total common stock at September 30,
1997 was $13.8 million after the 2-for-1 stock split on September 19, 1997. The
stock split was effected in the form of a 100% stock dividend. DNB accounted for
this transaction by increasing its common stock and decreasing its surplus and
retained earnings for the par amount of new shares issued.
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, after considering all
dilutive common stock equivalents. The weighted average number of shares of
common stock outstanding was 1,382,844 for the three and nine months ended
September 30, 1997 and 1996. Earnings dilution caused by common stock
equivalents did not exceed three percent (3%), therefore they were not included
in the total weighted average. Per share net income, number of shares and
dividends have been adjusted for the stock split.
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, Earning 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
affect 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 $213.6 million at September 30, 1997 compared to
$207.1 million at December 31, 1996. Total loans were $132.1 million, up $10.5
million or 9% from $121.6 million at December 31, 1996. The increase was
primarily in the commercial and consumer loan portfolios which increased $6.5
million and $3.3 million, respectively. Investment securities (AFS and HTM) were
$64.1 million, down $6.5 million from $70.6 million at December, reflecting
maturities and paydowns in the portfolio. Federal funds sold were $8.1 million
at September 30, 1997, up $3.3 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 September 30, 1997 totaled $194.4 million,
compared to $189.6 million at December 31, 1996. Increases of $20.0 million in
time deposits were partially offset by decreases of $11.2 million in other
borrowings and $4.0 million in all other deposit categories combined. The
increase in time deposits was the result of promotions initiated in the second
and third quarters.
At September 30, 1997, stockholders' equity was $17.9 million or $12.92 per
share, compared to $16.2 million or $11.73 per share at December 31, 1996. The
increase in stockholders' equity was the result of net income of $2.0 million
for the nine months ended September 30, 1997, partially offset by dividends paid
of approximately $443,000 or $.32 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 revenue over interest expense.
Interest revenue includes interest earned on loans, net of interest reversals on
non-performing loans, investments, Federal funds sold and cash deposits, as well
as loan fees and dividend income. Interest expense includes interest cost for
deposits, repurchase agreements, Federal funds purchased and other borrowings.
Net interest income increased $139,000 or 6% to $2.4 million for the three
month period and $570,000 or 9% to $7.0 million for the nine month period ended
September 30, 1997. As shown in the following tables, the increase in net
interest income for the three and nine month periods ended September 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 a modest net benefit from rate
changes during the three and nine month periods as earning assets and other
borrowings repriced favorably.
<PAGE>
The following tables sets forth, among other things, the extent to which
changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have affected interest
income and expense during the three and nine months ended September 30, 1997 and
1996. For each category of interest-earning assets and interest-bearing
liabilities, information is provided with respect to changes attributable to (i)
changes in rate (change in rate multiplied by old volume) and (ii) changes in
volume (change in volume multiplied by old rate). The net change attributable to
the combined impact of rate and volume has been allocated proportionately to the
change due to rate and the change due to volume.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997
Compared to 1996
-------------------------------------
Increase (Decrease) Due to
--------------------------
(Dollars in Thousands) Rate Volume Total
------ -------- -------
<S> <C> <C> <C>
Interest-earning assets:
Loans .................................. $ 4 $ 287 $ 291
Securities ............................. (3) (129) (132)
Federal funds sold ..................... 9 124 133
--- --- ---
Total ............................. 10 282 292
--- --- ---
Interest-bearing liabilities:
Savings deposits ....................... 19 16 35
Time deposits .......................... 25 193 218
FHLB advances .......................... 0 17 17
Federal funds purchased ................ (1) (1) (2)
Repurchase agreements .................. (35) (80) (115)
--- --- ---
Total ............................. 8 145 153
--- --- ---
Net Interest Income $ 2 $ 137 $ 139
=== === ===
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997
Compared to 1996
-------------------------------------
Increase (Decrease) Due to
--------------------------
(Dollars in Thousands) Rate Volume Total
------ -------- -------
<S> <C> <C> <C>
Interest-earning assets:
Loans .................................. $ 19 $ 650 $ 669
Securities ............................. 6 236 242
Federal funds sold ..................... 14 (10) 4
--- --- ---
Total ............................. 39 876 915
--- --- ---
Interest-bearing liabilities:
Savings deposits ....................... 15 68 83
Time deposits .......................... (10) 385 375
FHLB advances .......................... 0 89 89
Federal funds purchased ................ 0 2 2
Repurchase agreements .................. (38) (166) (204)
--- --- ---
Total ............................. (33) 378 345
--- --- ---
Net Interest Income $ 72 $ 498 $ 570
=== === ===
</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. 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 nine
month periods ended September 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>
9 Months Year 9 Months
Ended Ended Ended
(Dollars in Thousands) 9/30/97 12/31/96 9/30/96
------- -------- -------
<S> <C> <C> <C>
Beginning balance .......... $ 5,112 $ 5,515 $ 5,515
Provisions ................. -- -- --
Loans charged off:
Real estate ......... -- (454) (450)
Commercial .......... (32) (50) (7)
Consumer ............ (11) (30) (42)
----- ----- -----
Total charged off (43) (534) (499)
----- ----- -----
Recoveries:
Real estate ......... 1 38 1
Commercial .......... 116 48 36
Consumer ............ 42 45 32
----- ----- -----
Total recoveries 159 131 69
----- ----- -----
Net recoveries (charge-offs) 116 (403) (430)
----- ----- -----
Ending balance ............. $ 5,228 $ 5,112 $ 5,085
===== ===== =====
</TABLE>
Management believes that DNB has adequate reserves at September 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
<PAGE>
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.
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 September 30, 1997, non-interest income
was $346,000, compared to $238,000 for the same three month period in 1996.
Trust income was up $6,000, service charges were up $1,000 while other income
was up $101,000 during the three month period ended September 30, 1997, compared
to the same period in 1996.
For the nine month period ended September 30, 1997, non-interest income was
$816,000, compared to $623,000 for the same period in 1996, up $193,000 or 31%.
The increase was largely attributable to a $150,000 increase in other income, an
increase in Trust income of $49,000, partially offset by a modest decrease in
service charges of $5,000.
The increase in other income for the three and nine month periods ended
September 30, 1997 was due largely to the gain recognized on the sale of an OREO
property and, to a lesser degree, increased fees received for utility bill
collections. The increase in Trust income was due to commissions received from
estate settlements.
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 $183,000 to $1.8 million and $201,000 to
$5.2 million for the three and nine month periods ended September 30, 1997,
respectively, from $1.6 million and $5.0 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 professional and consulting expense, partially offset by decreases
in postage and "other" expenses.
Salaries & employee benefits increased $81,000 or 9% to $984,000 and
$148,000 or 5% to $2.9 million for the three and nine months ended September 30,
1997, respectively, compared to $903,000 and $2.8 million for the same periods
in 1996. The increase in this category, for both periods, resulted from the
addition of staff in the commercial loan department and trust department as well
as normal salary merit increases.
<PAGE>
Occupancy expense increased approximately $11,000 or 10% to $122,000 and
$22,000 or 7% to $352,000 for the three and nine months ended September 30,
1997, respectively. This compares to $111,000 and $331,000 for the same periods
in 1996. These increases were due to costs associated with minor painting,
renovations and maintenance at several branch locations as well as modest
increases in real estate taxes.
Furniture & equipment expense increased approximately $10,000 to $173,000
and $21,000 or 4% to $509,000 for the three and nine months ended September 30,
1997, respectively, compared to $163,000 and $488,000 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.
Professional & consulting increased $121,000 to $191,000 and $106,000 to
$329,000 for the three and nine months ended September 30, 1997 compared to the
same periods in 1996. The increased fees relate to a new project with an outside
consultant that is designed to identify and implement improved operating
procedures and systems throughout the Bank.
The increases in the above expenses were partially offset by decreases in
postage expense and "other" expenses. Postage expense decreased $8,000 or 26% to
$24,000 and $20,000 or 20% to $79,000 for the three and nine months ended
September 30, 1997, respectively, compared to $32,000 and $99,000 for the same
periods in 1996. Postage expense has been lower in 1997 due to fewer mass
mailings and an improved bulk mailing process.
Other expenses include such items as OREO expense, satisfaction fees,
appraisal fees, telephone & fax expense and other miscellaneous expenses. Other
expenses decreased $24,000 or 14% to $152,000 and $45,000 or 9% to $444,000 for
the three and nine months ended September 30, 1997 compared to the same periods
in 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 during
the year.
INCOME TAXES
Income tax expense was $218,000 and $646,000 for the three and nine months
ended September 30, 1997 and $185,000 and $428,000 for the three and nine months
ended September 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.
<PAGE>
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.
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>
Sept. 30 Dec. 31 Sept. 30
(Dollars in Thousands) 1997 1996 1996
------ ------ ------
<S> <C> <C> <C>
Nonaccrual Loans
Residential mortgage ................ $ 686 $ 743 $ 757
Commercial mortgage ................. 1,338 1,315 1,545
Commercial .......................... 914 650 773
Consumer ............................ 127 187 196
----- ----- -----
Total nonaccrual loans ................... 3,065 2,895 3,271
Loans 90 days past due and still accruing:
Consumer ............................ 57 194 110
Real Estate ......................... -- -- 285
Troubled debt restructurings ............. -- 184 --
----- ----- -----
Total non-performing loans ............... 3,122 3,273 3,666
Other real estate owned .................. 231 1,010 1,096
----- ----- -----
Total non-performing assets .............. $3,353 $4,283 $4,762
===== ===== =====
</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>
9 Months Year 9 Months
Ended Ended Ended
(Dollars in thousands) 9/30/97 12/31/96 9/30/96
------- -------- -------
<S> <C> <C> <C>
Interest income which would have been recorded
under original terms .................. $ 193 $ 254 $ 205
Interest income recorded during the period ... (47) (80) (63)
--- --- ---
Net impact on interest income ................ $ 146 $ 174 $ 142
=== === ===
</TABLE>
As of September 30, 1997, DNB had impaired loans with a total recorded
investment of $2.0 million and an average recorded investment of $1.5 million.
As of September 30, 1997, there 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 $51,000 during
the quarter ended September 30, 1996. No interest income was recorded on such
loans.
<PAGE>
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.
The following table sets forth the DNB's asset quality and allowance
coverage ratios at the dates indicated:
<TABLE>
<CAPTION>
Sept. 30 Dec. 31 Sept. 30
1997 1996 1996
------ ------ ------
<S> <C> <C> <C>
Non-performing Loans/Total Loans ...................... 2.4% 2.7% 3.1%
Non-performing Assets/Total Loans and OREO ............ 2.5 3.5 4.0
Allowance for Loan & Lease Losses/Total Loans ......... 4.0 4.2 4.4
Allowance for Loan & Lease Losses/Total Loans and OREO 3.9 4.2 4.3
Allowance for Loan & Lease Losses/Non-performing Assets 155.9 119.4 106.8
Allowance for Loan & Lease Losses/Non-performing Loans 167.5 156.2 138.7
</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 September 30, 1997 DNB has $6.9 million in commitments to fund
commercial real estate, construction and land development. In addition, DNB had
commitments to fund $1.3 million in home equity lines of credit and $13.4
million in other unused commitments. Management anticipates the majority of
these commitments will be funded by means of normal cash flows. In addition,
$27.4 million of time deposits at DNB are scheduled to mature during the three
months ending December 31, 1997. Management believes that the majority of such
deposits will be reinvested with DNB and that certificates that are not renewed
will be funded by proceeds for maturing loans and investments.
Stockholders' equity increased to $17.9 million at September 30, 1997 as a
result of the $2,045,000 profit reported for the nine months then ended and
after dividends paid totaling approximately $443,000 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.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands) Sept. 30, 1997
--------------
<S> <C>
Tier I Capital:
Common stock ....................... $13,828
Surplus ............................ --
Retained earnings .................. 4,012
------
Total .......................... 17,840
Tier II Capital ....................... 1,814
------
Total Capital ......................... $19,654
======
</TABLE>
<TABLE>
<CAPTION>
Required Current Excess
-------- ------- ------
<S> <C> <C> <C>
Leverage ........................... 4.00% 8.40% 4.40%
Tier I ............................. 4.00 12.59 8.59
Risk-based ......................... 8.00 13.87 5.87
</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
10.8%, 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
A report on Form 8-K was filed September 29, 1997, to announce:
(1) the declaration by the Board of Directors of the Corporation
of a 2-for-1 stock split, effected in the form of a 100% stock
dividend; and (2) the resignation of Paul F. DiMatteo as a
director of the Corporation and the Bank.
<PAGE>
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DNB FINANCIAL CORPORATION
(Registrant)
DATE: November 10, 1997 /S/ Henry F. Thorne
---------------------------
Henry F. Thorne, President
and Chief Executive Officer
DATE: November 10, 1997 /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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,625,880
<INT-BEARING-DEPOSITS> 484,707
<FED-FUNDS-SOLD> 8,146,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,569,993
<INVESTMENTS-CARRYING> 50,482,321
<INVESTMENTS-MARKET> 50,692,223
<LOANS> 132,096,607
<ALLOWANCE> 5,228,158
<TOTAL-ASSETS> 213,609,319
<DEPOSITS> 194,377,709
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,363,545
<LONG-TERM> 0
0
0
<COMMON> 13,828,440
<OTHER-SE> 4,039,625
<TOTAL-LIABILITIES-AND-EQUITY> 213,609,319
<INTEREST-LOAN> 8,588,471
<INTEREST-INVEST> 3,280,876
<INTEREST-OTHER> 296,183
<INTEREST-TOTAL> 12,165,530
<INTEREST-DEPOSIT> 4,923,887
<INTEREST-EXPENSE> 5,125,780
<INTEREST-INCOME-NET> 7,039,750
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,165,000
<INCOME-PRETAX> 2,690,633
<INCOME-PRE-EXTRAORDINARY> 2,044,633
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,044,633
<EPS-PRIMARY> 1.48
<EPS-DILUTED> 1.48
<YIELD-ACTUAL> 8.18
<LOANS-NON> 3,064,511
<LOANS-PAST> 56,923
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,579,000
<ALLOWANCE-OPEN> 5,112,486
<CHARGE-OFFS> 43,481
<RECOVERIES> 159,153
<ALLOWANCE-CLOSE> 5,228,158
<ALLOWANCE-DOMESTIC> 5,228,158
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
