SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
4 BRANDYWINE AVENUE, DOWNINGTOWN, PENNSYLVANIA 19335
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(610) 269-1040
Securities registered pursuant to Section 12 (b) of the Act
NOT APPLICABLE
Securities registered pursuant to Section 12 (g) of the Act
Common stock, par value $10.00 per share
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ] Yes [ ] No
As of March 23, 1998, the aggregate market value of the 1,382,766 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
154,258 shares beneficially owned by all directors and officers of the
Registrant as a group, was approximately $45.3 million. This figure is based on
the closing sales price of $32.75 per share of the Registrant's Common Stock on
March 20, 1998.
Number of shares of Common Stock outstanding as of March 23, 1998
1,451,661
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
Parts I, III and IV - Proxy Statement for the Annual Meeting of Stockholders to
be held April 21, 1998. Parts II and IV - Annual Report to Stockholders for the
Year Ended December 31, 1997.
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DNB FINANCIAL CORPORATION
Table of Contents
Part I Page
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for Registrant's Common Equity and Related 12
Stockholder Matters
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 8. Financial Statements Supplementary Data 12
Item 9. Changes in and Disagreements with Accountants 12
on Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant 12
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain 12
Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions 12
Part IV
Item 14. Exhibits, Financial Statement Schedules, and 13
Reports on Form 8-K
Signatures 15
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DNB FINANCIAL CORPORATION
FORM 10-K
Part I
Item 1. Business
General
DNB Financial Corporation (the "Registrant"), a Pennsylvania business
corporation, is a bank holding company registered with and supervised by the
Board of Governors of the Federal Reserve System (Federal Reserve Board).
Registrant was incorporated on October 28, 1982 and commenced operations on July
1, 1983 upon consummation of the acquisition of all of the outstanding stock of
The Downingtown National Bank (the "Bank"). Since commencing operations,
Registrant's business has consisted primarily of managing and supervising the
Bank, and its principal source of income has been dividends paid by the Bank.
Registrant has one wholly-owned subsidiary, the Bank. At December 31, 1997,
Registrant had total consolidated assets, total liabilities and stockholders'
equity of $219.5 million, $201.1 million, and $18.4 million, respectively.
The Bank was organized in 1861. The Bank is a national banking association
that is a member of the Federal Reserve System, the deposits of which are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank, having
six full service branch locations within Chester County, Pennsylvania, is a full
service commercial bank providing a wide range of services to individuals and
small to medium sized businesses in its southeastern Pennsylvania market area,
including accepting time, demand, and savings deposits and making secured and
unsecured commercial, real estate and consumer loans. In addition the Bank has
one limited service branch and a full-service trust and investment services
division. The Bank's subsidiary, Downco, Inc. was incorporated in December, 1995
for the purpose of acquiring and holding other real estate owned acquired
through foreclosure or deed in lieu of foreclosure.
The Bank's legal headquarters are located at 4 Brandywine Avenue,
Downingtown, Pennsylvania. As of December 31, 1997, the Bank had total assets of
$219.5 million, total deposits of $199.2 million and total stockholders' equity
of $18.4 million. The Bank's business is not seasonal in nature. Its deposits
are insured by the FDIC to the extent provided by law. At December 31, 1997, the
Bank had 89 full-time employees and 6 part-time employees.
The Bank derives its income principally from interest charged on loans and,
to a lesser extent, interest earned on investments and fees received in
connection with the origination of loans and for other services. The Bank's
principal expenses are interest expense on deposits and operating expenses.
Funds for activities are provided principally by operating revenues, deposit
growth and the repayment of outstanding loans.
Competition - Bank
The Bank faces vigorous competition from a number of sources, including
other commercial banks, thrift institutions, other financial institutions and
financial intermediaries. In addition to commercial banks, federal and state
savings and loan associations, savings banks, credit unions and industrial
savings banks actively compete in the Bank's market area to provide a wide
variety of banking services. Mortgage banking firms, real estate investment
trusts, finance companies, insurance companies, leasing companies and brokerage
companies, financial affiliates of industrial companies and certain government
agencies
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provide additional competition for loans and for certain financial services. The
Bank also currently competes for interest-bearing funds with a number of other
financial intermediaries which offer a diverse range of investment alternatives,
including brokerage firms and mutual funds.
Supervision and Regulation - Registrant
Federal Banking Laws
The Registrant is subject to a number of complex Federal banking laws ---
most notably the provisions of the Bank Holding Company Act of 1956, as amended
("Bank Holding Company Act") and the Change in Bank Control Act of 1978 ("Change
in Control Act"), and to supervision by the Federal Reserve Board.
Bank Holding Company Act
The Bank Holding Company Act requires a "company" (including the
Registrant) to secure the prior approval of the Federal Reserve Board before it
owns or controls, directly or indirectly, more than five percent (5%) of the
voting shares or substantially all of the assets of any bank. It also prohibits
acquisition by any "company" (including the Registrant) of more than five
percent (5%) of the voting shares of, or interest in, or all or substantially
all of the assets of, any bank located outside of the state in which a current
bank subsidiary is located unless such acquisition is specifically authorized by
laws of the state in which such bank is located. A "bank holding company"
(including the Registrant) is prohibited from engaging in or acquiring direct or
indirect control of more than five percent (5%) of the voting shares of any
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
making this determination, the Federal Reserve Board considers whether the
performance of these activities by a bank holding company would offer benefits
to the public that outweigh possible adverse effects. Applications under the
Bank Holding Company Act and the Change in Control Act are subject to review
based upon the record of compliance of the applicant with the Community
Reinvestment Act of 1977 ("CRA"). See further discussion below.
The Registrant is required to file an annual report with the Federal
Reserve Board and any additional information that the Federal Reserve Board may
require pursuant to the Bank Holding Company Act. The Federal Reserve Board may
also make examinations of the Registrant and any or all of its subsidiaries.
Further, under Section 106 of the 1970 amendments to the Bank Holding Company
Act and the Federal Reserve Board's regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or provision of credit or provision of
any property or services. The so-called "anti-tie-in" provisions state generally
that a bank may not extend credit, lease, sell property or furnish any service
to a customer on the condition that the customer provide additional credit or
service to the bank, to its bank holding company or to any other subsidiary of
its bank holding company or on the condition that the customer not obtain other
credit or service from a competitor of the bank, its bank holding company or any
subsidiary of its bank holding company.
Permitted Non-Banking Activities. The Federal Reserve Board permits bank
holding companies to engage in non-banking activities so closely related to
banking or managing or controlling banks as to be a proper incident thereto. A
number of activities are authorized by Federal Reserve Board regulation, while
other activities require prior Federal Reserve Board approval. The types of
permissible activities are subject to change by the Federal Reserve Board.
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Change in Bank Control Act
Under the Change in Control Act, no person, acting directly or indirectly
or through or in concert with one or more other persons, may acquire "control"
of any federally insured depository institution unless the appropriate Federal
banking agency has been given 60 days prior written notice of the proposed
acquisition and within that period has not issued a notice disapproving of the
proposed acquisition or has issued written notice of its intent not to
disapprove the action. The period for the agency's disapproval may be extended
by the agency. Upon receiving such notice, the Federal agency is required to
provide a copy to the appropriate state regulatory agency, if the institution of
which control is to be acquired is state chartered, and the Federal agency is
obligated to give due consideration to the views and recommendations of the
state agency. Upon receiving a notice, the Federal agency is also required to
conduct an investigation of each person involved in the proposed acquisition.
Notice of such proposal is to be published and public comment solicited thereon.
A proposal may be disapproved by the Federal agency if the proposal would have
anticompetitive effects, if the proposal would jeopardize the financial
stability of the institution to be acquired or prejudice the interests of its
depositors, if the competence, experience or integrity of any acquiring person
or proposed management personnel indicates that it would not be in the interest
of depositors or the public to permit such person to control the institution, if
any acquiring person fails to furnish the Federal agency with all information
required by the agency, or if the Federal agency determines that the proposed
transaction would result in an adverse effect on a deposit insurance fund. In
addition, the Change in Control Act requires that, whenever any Federally
insured depository institution makes a loan or loans secured, or to be secured,
by 25% or more of the outstanding voting stock of a Federally insured depository
institution, the president or chief executive officer of the lending bank must
promptly report such fact to the appropriate Federal banking agency regulating
the institution whose stock secures the loan or loans.
Pennsylvania Banking Laws
Under the Pennsylvania Banking Code of 1965, as amended ("PA Code"), the
Registrant is permitted to control an unlimited number of banks, subject to
prior approval of the Federal Reserve Board as more fully described above. The
PA Code authorizes reciprocal interstate banking without any geographic
limitation. Reciprocity between states exists when a foreign state's law
authorizes Pennsylvania bank holding companies to acquire banks or bank holding
companies located in that state on terms and conditions substantially no more
restrictive than those applicable to such an acquisition by a bank holding
company located in that state. Interstate ownership of banks in Pennsylvania
with banks in Delaware, Maryland, New Jersey, Ohio, New York and other states,
is currently authorized. A number of additional states are considering
legislation to authorize reciprocal interstate banking. Congress has passed
interstate banking legislation that should accelerate the authorization for
interstate banking. (See discussion of 1994 Interstate and PA Banking
Legislation on Page 11)
Environmental Laws
The Registrant, the Bank and the Bank's customers are subject in the course
of their activities to a growing number of Federal, state and local
environmental laws and regulations. Neither the Registrant nor the Bank
anticipates that compliance with environmental laws and regulations will have
any material effect on capital expenditures, earnings, or on its competitive
positions.
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Supervision and Regulation - Bank
The operations of the Bank are subject to Federal and State statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits are insured by
the FDIC. Bank operations are also subject to regulations of the Office of the
Comptroller of the Currency ("OCC"), the Federal Reserve Board and the FDIC.
The primary supervisory authority of the Bank is the OCC, who regularly
examines the Bank. The OCC has the authority to prevent a national bank from
engaging in an unsafe or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among other things,
the scope of a bank's business, the investments a bank may make, the reserves
against deposits a bank must maintain, loans a bank makes and collateral it
takes, the activities of a bank with respect to mergers and consolidations and
the establishment of branches. All nationally and state-chartered banks in
Pennsylvania are permitted to maintain branch offices in any county of the
state. National bank branches may be established only after approval by the OCC.
It is the general policy of the OCC to approve applications to establish and
operate domestic branches, including ATMs and other automated devices that take
deposits, provided that approval would not violate applicable Federal or state
laws regarding the establishment of such branches. The OCC reserves the right to
deny an application or grant approval subject to conditions if (1) there are
significant supervisory concerns with respect to the applicant or affiliated
organizations, (2) in accordance with CRA, the applicant's record of helping
meet the credit needs of its entire community, including low and moderate income
neighborhoods, consistent with safe and sound operation, is less than
satisfactory, or (3) any financial or other business arrangement, direct or
indirect, involving the proposed branch or device and bank "insiders"
(directors, officers, employees and 10%-or-greater shareholders) involves terms
and conditions more favorable to the insiders than would be available in a
comparable transaction with unrelated parties.
The Bank, as a subsidiary of a bank holding company, is subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or its subsidiaries, on investments in the stock or
other securities of the bank holding company or its subsidiaries and on taking
such stock or securities as collateral for loans. The Federal Reserve Act and
Federal Reserve Board regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal shareholders of its
parent holding company, among others, and to related interests of such principal
shareholders. In addition, such legislation and regulations may affect the terms
upon which any person becoming a principal shareholder of a holding company may
obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.
Prompt Corrective Action - Federal banking law mandates certain "prompt
corrective actions" which Federal banking agencies are required to take, and
certain actions which they have discretion to take, based upon the capital
category into which a Federally regulated depository institution falls.
Regulations have been adopted by the Federal bank regulatory agencies setting
forth detailed procedures and criteria for implementing prompt corrective action
in the case of any institution which is not adequately capitalized. Under the
rules, an institution will be deemed to be "adequately capitalized" or better if
it exceeds the minimum Federal regulatory capital requirements. However, it will
be deemed "undercapitalized" if it fails to meet the minimum capital
requirements, "significantly undercapitalized" if it has a total risk-based
capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is
less than 3.0%, or a leverage ratio that is less than 3.0%, and "critically
undercapitalized" if the institution has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
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The rules require an undercapitalized institution to file a written capital
restoration plan, along with a performance guaranty by its holding company or a
third party. In addition, an undercapitalized institution becomes subject to
certain automatic restrictions including a prohibition on the payment of
dividends, a limitation on asset growth and expansion, and in certain cases, a
limitation on the payment of bonuses or raises to senior executive officers, and
a prohibition on the payment of certain "management fees" to any "controlling
person". Institutions that are classified as undercapitalized are also subject
to certain additional supervisory actions, including increased reporting burdens
and regulatory monitoring, a limitation on the institution's ability to make
acquisitions, open new branch offices, or engage in new lines of business,
obligations to raise additional capital, restrictions on transactions with
affiliates, and restrictions on interest rates paid by the institution on
deposits. In certain cases, bank regulatory agencies may require replacement of
senior executive officers or directors, or sale of the institution to a willing
purchaser. If an institution is deemed to be "critically undercapitalized" and
continues in that category for four quarters, the statute requires, with certain
narrowly limited exceptions, that the institution be placed in receivership.
Under the Federal Deposit Insurance Act, the OCC possesses the power to
prohibit institutions regulated by it, such as the Bank, from engaging in any
activity that would be an unsafe and unsound banking practice and in violation
of the law. Moreover, Federal law enactments have expanded the circumstances
under which officers or directors of a bank may be removed by the institution's
Federal supervisory agency; restricted and further regulated lending by a bank
to its executive officers, directors, principal shareholders or related
interests thereof; and restricted management personnel of a bank from serving as
directors or in other management positions with certain depository institutions
whose assets exceed a specified amount or which have an office within a
specified geographic area; and restricted management personnel from borrowing
from another institution that has a correspondent relationship with their bank.
Capital Rules. Pursuant to The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the laws it amended, the Federal banking
agencies have issued certain "risk-based capital" guidelines, which supplemented
existing capital requirements. In addition, the OCC imposes certain "leverage"
requirements on national banks such as the Bank. Banking regulators have
authority to require higher minimum capital ratios for an individual bank or
bank holding company in view of its circumstances.
The risk-based guidelines require all banks and bank holding companies to
maintain two "risk-weighted assets" ratios. The first is a minimum ratio of
total capital ("Tier 1" and "Tier 2" capital) to risk-weighted assets equal to
8.00%; the second is a minimum ratio of "Tier 1" capital to risk-weighted assets
equal to 4.00%. Assets are assigned to five risk categories, with higher levels
of capital being required for the categories perceived as representing greater
risk. In making the calculation, certain intangible assets must be deducted from
the capital base. The risk-based capital rules are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks
and bank holding companies and to minimize disincentives for holding liquid
assets.
The risk-based capital rules also account for interest rate risk.
Institutions with interest rate risk exposure above a normal level, would be
required to hold extra capital in proportion to that risk. A bank's exposure to
declines in the economic value of its capital due to changes in interest rates
is a factor that the banking agencies will consider in evaluating a bank's
capital adequacy. The rule does not codify an explicit minimum capital charge
for interest rate risk. The Bank currently monitors and manages its assets and
liabilities for interest rate risk, and management believes that the interest
rate risk rules which have been implemented and proposed will not materially
adversely affect the Bank's operations.
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The OCC's "leverage" ratio rules require national banks which are rated the
highest by the OCC in the composite areas of capital, asset quality, management,
earnings and liquidity to maintain a ratio of "Tier 1" capital to "adjusted
total assets" (equal to the bank's average total assets as stated in its most
recent quarterly call report filed with the OCC, minus end-of-quarter intangible
assets that are deducted from Tier 1 capital) of not less than 3.00%. For banks
which are not the most highly rated, the minimum "leverage" ratio will range
from 4.00% to 5.00%, or higher at the discretion of the OCC, and is required to
be at a level commensurate with the nature of the riskiness of the bank's
condition and activities.
For purposes of the capital requirements, "Tier 1" or "core" capital is
defined to include common stockholders' equity and certain noncumulative
perpetual preferred stock and related surplus. "Tier 2" or "qualifying
supplementary" capital is defined to include a bank's allowance for loan and
lease losses up to 1.25% of risk-weighted assets, plus certain types of
preferred stock and related surplus, certain "hybrid capital instruments" and
certain term subordinated debt instruments.
The Bank is in compliance with each of these capital rules, and as of
December 31, 1997 the required ratios and the Bank's actual ratios are as
follows:
Capital Rule Required Ratio Bank's Ratio Excess
Tier 1 Risk-Based Capital 4.00% 13.15% 9.15%
Total (Tiers 1 and 2)
Risk-Based Capital 8.00 14.43 6.43
Leverage Ratio 4.00 8.46 4.46
On the basis of an analysis of the rules and the projected composition of
the Registrant's consolidated assets and the risks presented by the Bank's
activities, it is not expected that the foregoing capital rules will have a
material effect on the Registrant's business and capital plans.
The Bank was examined by the OCC during the fourth quarter of 1996. The
Bank was not required to make additional provisions to its allowance for
possible loan losses or charge-offs as a result of this examination.
Deposit Insurance Assessments. On November 22, 1996, the Financing
Corporation ("FICO") adopted a regulation pursuant to the 1996 Banking Law which
obligates all Federally insured depository institutions to pay special
assessments toward the funding of interest payments on FICO bonds which were
issued in 1989 to fund the savings and loan bailout. The special assessments,
which are effective for periods commencing January 1, 1997, are calculated on a
deposit-by-deposit basis and differs depending upon whether a deposit is insured
by SAIF or BIF. Currently, the special assessment rates are 6.4 basis points on
all SAIF-assessable deposits, and 20% of that rate, or approximately 1.3 basis
points, on all BIF-assessable deposits, regardless of whether an institution is
a "bank", a "savings association". After December 31, 1999 (or when the last
savings association ceases to exist, if earlier), all assessable deposits at all
institutions will be assessed at the same rates in order to pay FICO bond
interest.
The FDIC sets deposit insurance assessment rates on a semiannual basis. The
FDIC has authority to reduce the assessment rates whenever the ratio of its
reserves to insured deposits is equal to or greater than 1.25%, and to increase
deposit insurance assessments whenever that ratio is less than 1.25%.
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An institution's semiannual deposit insurance assessment is computed
primarily by multiplying its "average assessment base" (generally, total
insurable domestic deposits) for the prior semiannual period by one-half the
annual assessment rate applicable to that institution depending upon its risk
category, which is based principally on two measures of risk. These measures
involve capital and supervisory factors.
For the capital measure, institutions are assigned semiannually to one of
three capital groups according to their levels of supervisory capital as
reported on their call reports: "well capitalized" (group 1), "adequately
capitalized" (group 2) and "undercapitalized" (group 3). The capital ratio
standards for classifying an institution in one of these three groups are total
risk-based capital ratio (10 percent or greater for group 1, and between 8 and
10 percent for group 2), the Tier 1 risk-based capital ratio (6 percent or
greater for group 1, and between 4 and 6 percent for group 2), and the leverage
capital ratio (5 percent or greater for group 1, between 4 and 5 percent for
group 2). Management believes that the Bank has met the definition of "well
capitalized" for regulatory purposes on December 31, 1996 and thereafter.
Within each capital group, institutions are assigned to one of three
supervisory risk subgroups --subgroup A, B, or C, depending upon an assessment
of the institution's perceived risk based upon the results of its most recent
examination and other information available to regulators. Subgroup A will
consist of financially sound institutions with only a few minor weaknesses.
Subgroup B will consist of institutions that demonstrate weaknesses which, if
not corrected, could result in significant deterioration of the institution and
increased risk of loss to the BIF. Subgroup C will consist of institutions that
pose a substantial probability of loss to the deposit insurance fund unless
effective corrective action is taken. Thus, there are nine possible
classifications to which varying assessment rates are applicable. The regulation
generally prohibits institutions from disclosing their subgroup assignments or
assessment risk classifications without FDIC authorization.
The following table sets forth the BIF assessment rates by capital group
and supervisory risk subgroup for semiannual assessment periods beginning
January 1, 1997 (with no minimum assessment amount):
Supervisory subgroup
Capital Group A B C
1 0 3 17
2 3 10 24
3 10 24 27
Thus, the total semi-annual assessment for BIF member institutions on
BIF-assessable deposits will continue to range from 0 to 27 basis points
(depending upon an institution's risk classifications), plus the special FICO
assessment, which in the Bank's case is approximately 1.3 basis points on the
Bank's assessable deposits.
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Interstate Banking - The Riegel-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), enacted on September 29,
1994, permits bank holding companies to acquire banks in any state beginning in
1995. Acquired banks in different states may be merged into a single bank, and
merged banks may establish and acquire additional branches anywhere the acquiree
could have branched. States were entitled to opt out of interstate branching
until June 1, 1997. Limited branch purchases are still subject to state laws. On
July 6, 1995, Pennsylvania adopted an interstate banking act (the "PA Interstate
Banking Act") to harmonize Pennsylvania banking laws with the Federal Interstate
Banking Act. The PA Interstate Banking Act "opts in" early under the Federal
Interstate Banking Act to permit interstate mergers, non-Pennsylvania holding
company acquisitions of Pennsylvania banks, branch acquisitions and de novo
branching in any of the manners contemplated by the Federal Interstate Banking
Act, subject to prior regulatory approvals or filings. In general, the PA
Interstate Banking Act permits out-of-state banking institutions to establish
branches in Pennsylvania with the approval of the Pennsylvania Banking
Department, provided the law of the state where the banking institution is
located would permit a Pennsylvania banking institution to establish and
maintain a branch in that state on substantially similar terms and conditions.
It also permits Pennsylvania banking institutions to maintain branches in other
states. Bank management anticipates that the Interstate Banking Act and the PA
Interstate Banking Act will increase competitive pressures in the Bank's market
by permitting entry of additional competitors, but management is of the opinion
that this will not have a material impact upon the anticipated results of
operations of the Bank.
Under the Bank Secrecy Act ("BSA"), the Bank is required to report to the
Internal Revenue Service currency transactions of more than $10,000 or multiple
transactions of which the Bank is aware in any one day that aggregate in excess
of $10,000. Civil and criminal penalties are provided under the BSA for failure
to file a required report, for failure to supply information required by the BSA
or for filing a false or fraudulent report.
Under the Community Reinvestment Act of 1977 ("CRA"), the record of a bank
holding company and its subsidiary banks must be considered by the appropriate
Federal banking agencies, including the Federal Reserve and the OCC, in
reviewing and approving or disapproving a variety of regulatory applications
including approval of a branch or other deposit facility, office relocation, a
merger and certain acquisitions of bank shares. Federal banking agencies have
recently demonstrated an increased readiness to deny applications based on
unsatisfactory CRA performance. The OCC is required to assess the record of the
Bank to determine if it is meeting the credit needs of the community (including
low and moderate neighborhoods) which it serves. FIRREA amended the CRA to
require, among other things, that the OCC make publicly available an evaluation
of the Bank's record of meeting the credit needs of its entire community
including low- and moderate-income neighborhoods. This evaluation includes a
descriptive rating (outstanding, satisfactory, needs to improve, or substantial
noncompliance) and a statement describing the basis for the rating.
The Bank is subject to a variety of consumer protection laws, including the
Truth in Lending Act, the Truth in Savings Act adopted as part of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the Equal
Credit Opportunity Act, the Home Mortgage Disclosure Act, the Electronic Funds
Transfer Act, the Real Estate Settlement Procedures Act and the regulations
adopted thereunder. In the aggregate, compliance with these consumer protection
laws and regulations involves substantial expense and administrative time on the
part of the Bank and the Registrant.
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Legislation and Regulatory Changes - From time to time, legislation is
enacted which has the effect of increasing the cost of doing business, limiting
or expanding permissible activities and/or affecting the competitive balance
between banks and other financial institutions. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently made in Congress, and
before various bank regulatory agencies. No prediction can be made as to the
likelihood of any major changes or the impact such changes might have on the
Registrant and its subsidiary Bank.
Effect of Government Monetary Policies - The earnings of the Registrant are
and will be affected by domestic economic conditions and the monetary and fiscal
policies of the United States Government and its agencies (particularly the
Federal Reserve Board). The monetary policies of the Federal Reserve Board have
had and will likely continue to have, an important impact on the operating
results of commercial banks through its power to implement national monetary
policy in order, among other things, to curb inflation or combat a recession.
The Federal Reserve Board has a major effect upon the levels of bank loans,
investments and deposits through its open market operations in United States
Government securities and through its regulation of, among other things, the
discount rate on borrowing of member banks and the reserve requirements against
member bank deposits. It is not possible to predict the nature and impact of
future changes in monetary and fiscal policies.
Item 2. Properties
The main office of the Bank is located at 4 Brandywine Avenue, Downingtown,
Pennsylvania 19335. The Registrant's registered office is also at this location.
The Registrant pays no rent or other form of consideration for the use of the
Bank's main office as its principal executive office. The Bank also has an
operations center located at 104 Brandywine Avenue, Downingtown. With the
exception of its limited service office at Tel Hai, which it leases, the Bank
owns all of the properties described below which had a net book value of $2.8
million including leasehold improvements at December 31, 1997.
The bank has six full service branch offices located in Chester County,
Pennsylvania. They are: Little Washington Office (Intersection of Route 322 and
Little Washington Road, Downingtown), East End Office (701 East Lancaster
Avenue, Downingtown), Lionville Office (Intersection of Route 100 and Welsh Pool
Road, Exton), Ludwig's Corner Office (Intersection of Routes 100 and 401,
Uwchland), Caln Office (1835 East Lincoln Highway, Coatesville). The Bank also
has a limited service office at Tel Hai Retirement Community (Beaver Dam Road,
Honey Brook).
Item 3. Legal Proceedings
Neither the Registrant nor the Bank, are involved in any pending legal
proceedings other than nonmaterial legal proceedings occurring in the ordinary
course of business. In the opinion of management, the aggregate amount involved
in such proceedings is not material to the financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
11
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required herein is incorporated by reference in the
Registrant's Annual Report to Stockholders ("Annual Report") for the fiscal year
ended December 31, 1997 at page 18 filed as Exhibit 13.
Item 6. Selected Financial Data
The information required herein is incorporated by reference in the
Registrant's Annual Report for the year ended December 31, 1997 at page 1 filed
as Exhibit 13.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required herein is incorporated by reference in the
Registrant's Annual Report for the year ended December 31, 1997 from pages 4 to
18 filed as Exhibit 13.
Item 8. Financial Statements and Supplementary Data
The information required herein is incorporated by reference in the
Registrant's Annual Report for the year ended December 31, 1997 from pages 19 to
37 filed as Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
12
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference in the
Registrant's Proxy Statement from pages 2 to 6 filed as Exhibit 22.
Item 11. Executive Compensation
The information required herein is incorporated by reference in the
Registrant's Proxy Statement from pages 6 to 9 filed as Exhibit 22.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein is incorporated by reference in the
Registrant's Proxy Statement at page 2 filed as Exhibit 22.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference in the
Registrant's Proxy Statement at page 9 filed as Exhibit 22.
12
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) Documents filed as part of this report
(1.) The Annual Report to Stockholders of the Registrant for the
year ended December 31, 1997.
(2.) All schedules are omitted because they are not applicable or
the required information is shown in the financial
statements or notes thereto.
(3.) Exhibits, pursuant to Item 601 of Regulation S-K.
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
3A Articles of Incorporation filed on March
31, 1989, at Exhibit 3A to Form 10-K for
the fiscal year ended December 31, 1988
(No. 0-16667) and hereby incorporated by
reference
3B Amended By-laws of the Registrant filed
on January 8, 1990, at Item 7C to Form
8-K, date of report, January 3, 1990
(No. 0-16667) and hereby incorporated by
reference
3D Amended Articles of Incorporation filed
on May 2, 1990, at Item 7C to Form 8-K,
date of report, April 26, 1990 (No.
0-16667) and hereby incorporated by
reference
3E Amended by-laws of the Registrant filed
on July 20, 1990, at Item 7C to Form
8-K, date of report July 18, 1990 (No.
0-16667) and hereby incorporated by
reference
10 Employee agreement between Downingtown
National Bank and Henry F. Thorne, the
written description of which is
incorporated by reference to the Proxy
Statement for the Annual Meeting to be
held April 21, 1998
13 Annual Report to Stockholders for the
year ended December 31, 1997 (This
document shall be deemed to have been
"Filed" only to the extent of the
material incorporated herein by
reference)
21 List of Subsidiaries, Form 10-K for the
fiscal year ended December 31, 1997 (No.
0-16667) and hereby incorporated by
reference
22 Proxy Statement for the Annual Meeting
of Stockholders to be held April 21,
1998 and hereby incorporated by
reference
24 Consent of Independent Certified Public
Accountants dated March 23, 1998 to S-8
Registration Statement
13
<PAGE>
(B) Reports on Form 8-K
Not applicable
(C) The exhibits required to be filed pursuant to this item are listed
above under Item 14(a)(3).
(D) Not Applicable
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 23, 1998
BY: /s/ Henry F. Thorne
Henry F. Thorne, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons and on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Henry F. Thorne March 23, 1998
Henry F. Thorne, President,
Chief Executive Officer and Director
/s/ Bruce E. Moroney March 23, 1998
Bruce E. Moroney
Chief Financial Officer
(Principal Accounting Officer)
/s/ Robert J. Charles March 23, 1998
Robert J. Charles
Chairman of the Board
/s/ Vernon J. Jameson March 23, 1998
Vernon J. Jameson
Vice-Chairman of the Board
/s/ Thomas R. Greenleaf March 23, 1998
Thomas R. Greenleaf
Director
/s/ William S. Latoff March 23, 1998
William S. Latoff
Director
/s/ Joseph G. Riper March 23, 1998
Joseph G. Riper
Director
/s/Louis N. Teti March 23, 1998
Louis N. Teti
Director
/s/James H. Thornton March 23, 1998
James H. Thornton
Director
15
DNB Financial Corporation and Subsidiary
Selected Financial Data (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
At or For the Year Ended December 31
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Interest income $ 16,364 $ 15,162 $ 13,996 $ 11,699 $ 11,643
Interest expense 6,984 6,459 5,788 4,209 4,974
- ---------------------------------------------------------------------------------------------
Net interest income 9,380 8,703 8,208 7,490 6,669
Provision for loan losses -- -- -- -- 63
Non-interest income 1,283 896 814 900 1,060
Non-interest expense 7,083 6,623 6,983 7,070 6,731
- ---------------------------------------------------------------------------------------------
Income before income taxes 3,580 2,976 2,039 1,320 935
Income tax expense 865 658 169 -- 234
- ---------------------------------------------------------------------------------------------
Net income $ 2,715 $ 2,318 $ 1,870 $ 1,320 $ 701
- ---------------------------------------------------------------------------------------------
PER SHARE DATA*
Basic earnings $ 1.87 $ 1.60 $1.29 $0.91 $0.48
Diluted earnings 1.84 1.59 1.29 0.91 0.48
Cash dividends 0.42 0.25 0.09 0.04 --
Book value 12.64 11.17 9.89 8.65 7.78
Common shares outstanding 1,451,661 1,451,661 1,451,661 1,451,661 1,451,661
FINANCIAL CONDITION
Total assets $219,451 $207,128 $188,781 $166,268 $168,561
Loans, less unearned income 129,954 121,573 117,886 112,925 104,868
Allowance for loan losses 5,281 5,112 5,515 5,645 6,000
Deposits 199,237 178,424 165,009 150,926 156,412
Stockholders' equity 18,356 16,216 14,355 12,556 11,302
SELECTED RATIOS
Return on average stockholders' equity 15.77% 15.35% 14.01% 11.17% 6.40%
Return on average assets 1.29 1.18 1.04 0.78 0.41
Average equity to average assets 8.21 7.65 7.40 6.99 6.38
Loans to deposits 65.22 68.14 71.44 74.82 67.05
Dividend payout ratio 22.41 15.63 6.71 4.76 --
- ---------------------------------------------------------------------------------------------
<FN>
* Per share data and shares outstanding have been adjusted for the 2 for 1
stock split in September 1997 and for stock dividends in 1997, 1996, 1995
and 1994.
- ---------------------------------------------------------------------------------------------
</FN>
</TABLE>
1
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion provides an overview of the financial condition
and results of operations of DNB Financial Corporation (the "Corporation" or
"DNB") and its wholly owned subsidiary, Downing-town National Bank (the "Bank")
and should be read in conjunction with the Corporation's consolidated financial
statements presented elsewhere in this annual report.
Results of Operations
Summary of Performance
Highlighted by a substantial increase in total loan revenue, 1997 was a
year of record earnings for DNB. For the year ended December 31, 1997, DNB
reported net income of $2.7 million or $1.87 per share. This represents a
$398,000 or 17% increase from $2.3 million or $1.60 per share in 1996. Earnings
for the year ended December 31, 1995 were $1.9 million or $1.29 per share.
Interest income grew $1.2 million or 8% to record levels at $16.4 million
for the year ended December 31, 1997. Total loans at December 31, 1997 were
$130.0 million versus $121.6 million at December 31, 1996. The growth in loan
volume contributed significantly to the increase in interest income over the
prior year. Interest expense increased $525,000 or 8% to $7.0 million at
December 31, 1997. The increase in interest expense was due largely to higher
levels of time deposits, significantly offset by a reduction in repurchase
agreements. Overall, the net interest margin increased $677,000 or 8% to $9.4
million in 1997. Net interest income was $8.7 million and $8.2 million in 1996
and 1995, respectively.
Non-interest income was $1.3 million for the year ended December 31, 1997.
Non-interest income for 1996 and 1995 was $1.0 million and $929,000,
respectively. The $280,000 or 28% increase in 1997 was due to a series of events
which positively contributed to earnings performance. During the year, DNB sold
several properties held in other real estate owned (OREO) for gains amounting to
$108,000. In addition, DNB's Investment Services and Trust Division revenue
increased $110,000, reflecting commissions earned on estate settlements during
the year.
Non-interest expense was $7.1 million for the year ended December 31, 1997.
This represented a $352,000 or 5% increase from $6.7 million for the year ended
December 31, 1996. Non-interest expense for 1995 was $7.1 million. The increase
in 1997 was due substantially to increased salary & employee benefits, as well
as to increased professional & consulting fees and marketing expense. These
increases were mitigated by reductions in OREO expense, insurance, and postage
expense.
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 interest-earning
cash, as well as loan fees and dividend income. Interest expense includes
interest cost for deposits, repurchase agreements, Federal funds purchased and
other borrowings.
During 1997, net interest income increased $677,000 or 8% to $9.4 million,
from $8.7 million in 1996. As shown in the Rate/Volume Analysis below, the
increase in net interest income during 1997 was due to the positive effects of
changes in volume, which were only modestly offset by the negative effects of
rate changes. The increased volume resulted from several strategic areas of
growth which included not only average balance increases in loans, investments
and Federal funds sold, but also increases in lower cost funding sources such as
NOW and money market accounts. Average loan balances for 1997 increased $10.4
million, while average investment securities and Federal funds sold were up $3.3
million and $655,000, respectively. The impact of the increased volume of
earning assets amounted to an increase of $1.2 million in interest income.
Average
4
<PAGE>
Management's Discussion and Analysis
NOW, money market and savings accounts increased a total of $3.4 million. In
addition, time deposits increased $11.1 million (largely in public fund deposits
over $100,000), funding the payoff of repurchase agreements, which decreased an
average of $6.4 million. The net impact of an increased volume of
interest-bearing liabilities amounted to $493,000, partially offsetting the
impact from an increased volume of interest-earning assets. The overall impact
of rate changes amounted to a negative $27,000, resulting from modestly
unfavorable repricing in time deposits.
During 1996, net interest income increased $495,000 or 6% to $8.7 million
from $8.2 million in 1995. The increase in net interest income during 1996 was
due to the positive effects of changes in volume, and to a lesser degree by the
changes in rates. The positive impact from volume was largely attributable to a
$12.7 million increase in average investment securities as well as a $2.3
million increase in average Federal funds sold and a $1.3 million increase in
average loans. The positive impact of these volume changes was considerably
offset by average balance increases of $11.4 million and $3.9 million of time
deposits and repurchase agreements, respectively. The positive impact from
change in rates was due to an improved yield on investment securities. In
addition, reduced rates on repurchase agreements and savings deposits also had a
positive impact on net interest income.
The following tables set 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 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>
Rate / Volume Analysis
(Dollars in thousands) 1997 Versus 1996 1996 Versus 1995
Change Due To Change Due To
Rate Volume Total Rate Volume Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 22 $ 940 $ 962 $ (47) $ 119 $ 72
Investment securities (41) 221 180 130 861 991
Federal funds sold 24 36 60 (19) 122 103
- -------------------------------------------------------------------------------------------------------------
Total $ 5 $ 1,197 $ 1,202 $ 64 $ 1,102 $ 1,166
- -------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Time deposits $ 32 $ 597 $ 629 $ (118) $ (14) $ (132)
NOW, money market and savings deposits 51 88 139 -- 628 628
Repurchase agreements (51) (283) (334) (15) 195 180
Other borrowings -- 91 91 (1) (4) (5)
- -------------------------------------------------------------------------------------------------------------
Total 32 493 525 (134) 805 671
- -------------------------------------------------------------------------------------------------------------
Net interest income $ (27) $ 704 $ 677 $ 198 $ 297 $ 495
- -------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
Management's Discussion and Analysis
The following table provides, for the periods indicated, information
regarding: (i) DNB's average balance sheet; (ii) the total dollar amounts of
interest income from interest-earning assets and the resulting average yields
(tax-exempt yields have not been adjusted to a tax equivalent basis); (iii) the
total dollar amounts of interest expense on interest-bearing liabilities and the
resulting average costs; (iv) net interest income; (v) net interest rate spread;
and (vi) net interest margin. Average balances were calculated based on daily
balances. Nonaccrual loan balances are included in total loans. Loan fees are
included in interest on total loans.
<TABLE>
<CAPTION>
Average Balances, Rates, and Interest Income and Expense
(Dollars in thousands)
Year Ended December 31
1997 1996 1995
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Investment securities:
Taxable $ 64,676 $ 4,359 6.74% $ 61,394 $ 4,179 6.81% $ 48,683 $ 3,187 6.55%
Tax-exempt -- -- -- -- -- .-- 8 1 6.00
- --------------------------------------------------------------------------------------------------------------------------
Total securities 64,676 4,359 6.74 61,394 4,179 6.81 48,691 3,188 6.55
Federal funds sold 8,543 486 5.69 7,888 426 5.40 5,604 323 5.76
Total loans 127,950 11,519 9.00 117,506 10,557 8.98 116,177 10,485 9.03
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 201,169 16,364 8.13 186,788 15,162 8.12 170,472 13,996 8.21
Non-interest-earning assets 8,553 10,790 9,776
- --------------------------------------------------------------------------------------------------------------------------
Total assets $209,722 $197,578 $180,248
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW, money market
and savings deposits $ 77,609 $ 2,042 2.63% $ 74,189 $ 1,902 2.56% $ 74,750 $ 2,035 2.72%
Time deposits 85,566 4,740 5.54 74,485 4,111 5.52 63,104 3,483 5.52
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 163,175 6,782 4.16 148,674 6,013 4.04 137,854 5,518 4.00
Federal funds purchased 92 5 5.43 52 3 5.77 118 8 6.78
Other borrowings 4,021 197 4.90 8,858 443 5.00 4,954 262 5.29
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 167,288 6,984 4.17 157,584 6,459 4.10 142,926 5,788 4.05
Demand deposits 23,668 23,473 22,682
Other liabilities 1,553 1,420 1,295
Stockholders' equity 17,213 15,101 13,345
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $209,722 $197,578 $180,248
- --------------------------------------------------------------------------------------------------------------------------
Net interest income $ 9,380 $ 8,703 $ 8,208
- --------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.96% 4.02% 4.16%
- --------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.66% 4.66% 4.81%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
Management's Discussion and Analysis
Provision for Loan Losses
To provide for potential losses inherent in the loan portfolio, DNB
maintains an allowance for loan losses. To maintain an adequate allowance,
management charges the provision for loan losses against income. There were no
provisions made during the three years ended December 31, 1997, as the quality
of DNB's loan portfolio continued to show improvement, based on available
information. Effective workout strategies, fewer assets classified by internal
loan review, sales of OREO properties and other reductions in non-performing
assets have temporarily eliminated the need to make additional provisions. As a
result of improved asset quality, the ratio of the allowance for loan losses to
non-performing loans improved to 178% at December 31, 1997 from 156% at December
31, 1996 and 129% at December 31, 1995.
Non-Interest Income
Total non-interest income includes service charges on deposit products;
fees received by DNB's Investment Services and Trust Division; and other sources
of income such as net gains on sales of investment securities and OREO
properties, fees for safe deposit box rentals, issuing travelers' checks and
money orders, check cashing, collecting bills for local municipalities and
similar activities.
Non-interest income was $1.3 million in 1997, compared to $1.0 million in
1996 and $929,000 in 1995. Service charges on deposit accounts increased $37,000
or 8% to $469,000 in 1997 from $433,000 in 1996 and $458,000 in 1995. Much of
the increase in this category was caused by increased volume of transactions as
well as a concerted effort by management to reduce the waived fee percentage on
deposit account overdrafts.
Trust income was $416,000 in 1997, compared to $306,000 in 1996 and
$298,000 in 1995. The $110,000 or 36% increase in 1997 was due largely to
commissions earned on several large estate settlements. Trust assets at December
31, 1997 remained relatively the same as the prior year at approximately $61
million.
Other non-interest income grew $133,000 or 50% to $398,000 for the year
ended December 31, 1997, from $265,000 in 1996. Other non-interest income was
$173,000 in 1995. The increase in this category during 1997 was caused by net
gains recognized on the sales of several OREO properties.
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. During 1997,
management strengthened its focus on controlling non-interest expenses by
embarking on a bank-wide project designed to identify and implement improved
operating procedures. While DNB incurred some initial costs relating to
consulting fees, this project was undertaken to move the Bank forward with
greater operating efficiencies and ultimately greater cost savings.
Non-interest expenses were $7.1 million in 1997, compared to $6.7 million
and $7.1 million in 1996 and 1995. This increase of $352,000 or 5% was due
primarily to increased salary & employee benefits, professional & consulting
expense, and advertising & marketing expense, partially offset by decreased
insurance, postage and other expenses.
Salaries & employee benefits expense totaled $4.0 million in 1997, compared
to $3.6 million in 1996 and $3.7 million in 1995. The increase in salary &
employee benefits expense during 1997 resulted from the addition of staff in the
Credit Services and the Investment Services & Trust Division. In addition, DNB
incurred increased costs for hospitalization, other employee benefits and normal
merit increases during the year. Salary & employee benefits expense for 1996
reflected fewer full-time equivalent employees than 1995, offsetting the merit
increase for that year.
Professional & consulting expense includes costs associated with legal
services, audit and accounting services, asset/liability management services as
well as consulting fees for data processing, human resources and other special
projects. Professional and consulting expenses for 1997 were $445,000, compared
to $317,000 in 1996 and $359,000 in 1995. The increase in 1997 reflects costs
incurred in the third and fourth quarters in relation to a project undertaken
with an outside consultant to help identify and imple-
7
<PAGE>
Management's Discussion and Analysis
ment improved operating procedures. The decrease in professional and consulting
expense in 1996 from 1995 related to services associated with DNB's Stock Option
Plan and strategic planning efforts.
Insurance expense, which includes DNB's fidelity bond, commercial package,
workers compensation and directors' & officers' liability coverages, decreased
$15,000 to $96,000 in 1997, compared to $111,000 and $163,000 in 1996 and 1995.
Insurance expense continues to decrease as DNB recognizes the full benefit from
lower premium quotes and broader benefits under its new policies.
Advertising & marketing expense increased $12,000 to $216,000 for the year
ended December 31, 1997, compared to $205,000 and $208,000 for 1996 and 1995.
The increase in these expenditures was due largely to the promotion of the new
Premier Money Market account and Premier Check Card.
Postage expense decreased $10,000 to $115,000 for the year ended December
31, 1997, compared to $125,000 and $113,000 for 1996 and 1995. The improvement
in this category reflects fewer target mailings in 1997 compared to 1996. In
addition, DNB benefited in 1997 from favorable discount mailing rates associated
with bar coded customer statements. Postage expense in 1996 increased from 1995
due to the increased target mailings.
Other expenses include such items as OREO expense, satisfaction fees,
appraisal fees, telephone and other miscellaneous expenses. Other expenses
decreased $94,000 to $709,000 in 1997, compared to $803,000 and $737,000 in 1996
and 1995. The decrease in this category was primarily caused by a reduction in
OREO expense for costs incurred to manage and insure properties which were sold
during 1997.
Income Taxes
Income tax expense was $865,000 in 1997, $658,000 in 1996, and $169,000 in
1995. DNB has deferred tax assets, largely attributable to the allowance for
loan losses and alternative minimum tax credit carryforwards. These benefits
reduced DNB's effective tax rate to 24%, 22% and 8% for the years ended December
31, 1997, 1996 and 1995, respectively.
Financial Condition Analysis
Investment Securities
DNB's investment portfolio consists of US agency securities,
mortgage-backed securities issued by US Government agencies, commercial paper,
certificates of deposit and other bonds and notes. In addition to generating
revenue, DNB maintains the investment portfolio to manage interest rate risk,
provide liquidity, provide collateral for borrowings and to diversify the credit
risk of earning assets. The portfolio is structured to maximize DNB's net
interest income given changes in the economic environment, liquidity position
and balance sheet mix.
Given the nature of the portfolio, and its generally high credit quality,
management expects to realize all of its investment upon the maturity of such
instruments, and believes that any market value decline is temporary in nature.
Management determines the appropriate classification of securities at the time
of purchase. Investment securities are classified as: (a) securities held to
maturity ("HTM") based on management's intent and ability to hold them to
maturity; (b) trading account ("TA") securities that are bought and held
principally for the purpose of selling them in the near term; and (c) securities
available for sale ("AFS"). DNB does not currently maintain a trading account
portfolio.
Securities classified as AFS include securities that may be sold in
response to changes in interest rates, changes in prepayment assumptions, the
need to increase regulatory capital or other similar requirements. DNB does not
necessarily intend to sell such securities, but has classified them as AFS to
provide flexibility to respond to liquidity needs.
In 1995 the Financial Accounting Standards Board ("FASB") released a
special report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." This guide contained a
provision which allowed a one-time reclassification of securities previously
classified as HTM to the AFS portfolio. Management believed that it was
appropriate to take advantage of this reclassification opportunity since a
bank's ability to manage overall risk is enhanced by having a larger AFS
portfolio. Accordingly, DNB reclassified securities with a book value of $12.8
mil-
8
<PAGE>
Management's Discussion and Analysis
lion to the AFS portfolio on December 29, 1995 and recognized unrealized gains
of $103,000 and unrealized losses of $58,000.
DNB's investment portfolio (HTM and AFS securities) totaled $63.6 million
at December 31, 1997, down from $70.6 million at December 31, 1996. The decrease
was caused in part by the calls or maturities of agency securities available for
sale. Cash flows from these maturities were subsequently re-invested in the loan
portfolio or in Federal funds sold.
The following tables set forth information regarding the composition,
stated maturity and average yield of DNB's investment security portfolio as of
the dates indicated. The first two tables do not include amortization or
anticipated prepayments on mortgage-backed securities. Callable US Government
agency securities are included at their stated maturity dates.
<TABLE>
<CAPTION>
Investment Maturity Schedule, including Weighted Average Yield
(Dollars in thousands)
Over 10 Years
Less than or No Stated
Held to Maturity 1 Year 1-5 Years 5-10 Years Maturity Total Yield
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US Government agency and
corporations $1,493 $18,160 $19,259 $2,895 $41,807 7.0%
Mortgage-backed securities -- 1,200 875 3,715 5,790 6.7
Other securities 1,000 -- -- 1,097 2,097 6.0
- ---------------------------------------------------------------------------------------------------
Total $2,493 $19,360 $20,134 $7,707 $49,694
- ---------------------------------------------------------------------------------------------------
Percent of portfolio 5% 39% 41% 15% 100%
- ---------------------------------------------------------------------------------------------------
Weighted average yield 6.3% 6.5% 7.6% 6.5% 6.9%
- ---------------------------------------------------------------------------------------------------
Over 10 Years
Less than or No Stated
Available for Sale 1 Year 1-5 Years 5-10 Years Maturity Total Yield
- ---------------------------------------------------------------------------------------------------
US Government agency and
corporations $2,503 $1,250 $ 997 $ -- $ 4,750 6.6%
Mortgage-backed securities -- 1,718 3,061 4,359 9,138 6.7
- ---------------------------------------------------------------------------------------------------
Total $2,503 $2,968 $4,058 $4,359 $13,888
- ---------------------------------------------------------------------------------------------------
Percent of portfolio 18% 21% 29% 32% 100%
- ---------------------------------------------------------------------------------------------------
Weighted average yield 6.4% 6.3% 6.8% 6.9% 6.7%
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Composition of Investment Securities
(Dollars in thousands) December 31
1997 1996
Held to Available Held to Available
Maturity for Sale Maturity for Sale
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Government agency and
corporations $41,807 $ 4,750 $35,904 $14,974
Mortgage-backed securities 5,790 9,138 7,311 6,705
Other securities 2,097 -- 5,656 --
- --------------------------------------------------------------------------------------------
Total $49,694 $13,888 $48,871 $21,679
- --------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Management's Discussion and Analysis
Loans
The loan portfolio consists primarily of commercial and residential real
estate loans, commercial loans and lines of credit, consumer loans and, to a
lesser degree, student loans. The loan portfolio provides a stable source of
interest income, monthly amortization of principal and, in the case of
adjustable rate loans, repricing opportunities.
Net loans were $124.7 million at December 31, 1997, up $8.2 million or 7%
from 1996. Commercial loans increased $5.0 million or 17% to $35.0 million and
residential loans increased $2.7 million or 15% to $20.4 million. The increase
in both portfolios reflects DNB's commitment to commercial and residential
development in the Chester County community.
The following table sets forth information concerning the composition of
total loans outstanding, net of the allowance for loan losses, as of the dates
indicated.
Non-Performing Assets
Asset quality improved significantly for the fifth consecutive year as the
level of non-performing assets at December 31, 1997 declined $1.1 million or 25%
to $3.2 million from $4.3 million at December 31, 1996 and from $5.1 million at
December 31, 1995. The improvement resulted from a concentrated effort to reduce
the levels of such assets through workout strategies and vigilant monitoring of
weakened credits. Current economic conditions are favorable for DNB, which has a
significant level of
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Loans Outstanding, Net of Allowance for Loan Losses
(Dollars in thousands) December 31
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential mortgage $ 20,392 $ 17,658 $ 19,009 $ 18,617 $ 24,350
Commercial mortgage 46,130 45,907 42,945 43,900 45,622
Commercial 34,966 29,970 28,803 22,958 21,763
Consumer 26,062 25,325 24,110 24,214 9,885
Student 2,404 2,712 3,019 3,236 3,248
- ----------------------------------------------------------------------------------------------
Total loans 129,954 121,572 117,886 112,925 104,868
Less allowance for loan losses (5,281) (5,112) (5,515) (5,645) (6,000)
- ----------------------------------------------------------------------------------------------
Net loans $124,673 $116,460 $112,371 $107,280 $ 98,868
- ----------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth information as of December 31, 1997
concerning the contractual maturities of the loan portfolio, net of unearned
income. For amortizing loans, scheduled repayments for the maturity category in
which the payment is due are not reflected below because such information is not
readily available.
<TABLE>
<CAPTION>
Loan Maturities
(Dollars in thousands) Less than 1 Year 1-5 Years Over 5 Years Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate $15,864 $33,835 $16,823 $ 66,522
Commercial 33,900 825 241 34,966
Consumer 3,421 9,169 13,472 26,062
Student 38 405 1,961 2,404
- -------------------------------------------------------------------------------------------
Total loans 53,223 44,234 32,497 129,954
- -------------------------------------------------------------------------------------------
Loans with predetermined interest rates 8,272 18,598 30,903 57,773
Loans with variable interest rates 44,951 25,636 1,594 72,181
- -------------------------------------------------------------------------------------------
Total loans $53,223 $44,234 $32,497 $129,954
- -------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Management's Discussion and Analysis
commercial, real estate and consumer loans. In order to improve asset quality
and position DNB for possible economic downturns in the future, management has
tightened underwriting standards and has made improvements in DNB's lending
policies and procedures during the last five years. Non-performing assets have,
and will continue to have, an impact on earnings. Management intends to continue
working aggressively in an effort to reduce the level of such assets.
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 on 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 includes both real estate obtained as a result of, or in lieu
of, foreclosure. Any significant change in the level of non-performing assets is
dependent, to a large extent, on the economic climate within DNB's market area.
The following table sets forth those assets that are: (i) placed on
nonaccrual status, (ii) contractually delinquent by 90 days or more and still
accruing, (iii) troubled debt restructurings other than those included in items
(i) and (ii), and (iv) other real estate owned ("OREO") as a result of
foreclosure or voluntary transfer to DNB.
The Special Assets Committee monitors the performance of the loan portfolio
to identify potential problem assets on a timely basis. In addition, committee
members meet to design, implement and review asset recovery strategies which
serve to maximize the recovery of each troubled asset. DNB had $5.9 million of
loans which, although performing at December 31, 1997, are believed to require
increased
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-Performing Assets December 31
(Dollars in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Residential mortgage $ 676 $ 743 $1,355 $1,790 $3,114
Commercial mortgage 1,301 1,315 1,832 1,872 3,035
Commercial 821 650 722 1,551 1,790
Consumer 107 187 237 197 419
- ----------------------------------------------------------------------------------------------
Total nonaccrual loans 2,905 2,895 4,146 5,410 8,358
Consumer loans 90 days past due
and still accruing 70 194 129 112 87
Troubled debt restructurings -- 184 -- 40 297
- ----------------------------------------------------------------------------------------------
Total non-performing loans 2,975 3,273 4,275 5,562 8,742
Other real estate owned 231 1,010 810 445 635
- ----------------------------------------------------------------------------------------------
Total non-performing assets $3,206 $4,283 $5,085 $6,007 $9,377
- ----------------------------------------------------------------------------------------------
Asset quality ratios:
Non-performing loans to total loans 2.29% 2.69% 3.63% 4.93% 8.34%
Non-performing assets to total assets 1.46 2.07 2.69 3.61 5.56
Allowance for loan losses to:
Total loans 4.06 4.20 4.68 5.00 5.72
Non-performing loans 177.51 156.17 129.02 101.50 68.64
Non-performing assets 164.72 119.36 108.46 93.98 63.99
- ----------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Management's Discussion and Analysis
supervision and review; and may, depending on the economic environment and other
factors, become non-performing assets in future periods. The amount of such
loans at December 31, 1996 was $7.2 million. The majority of the loans are
secured by commercial real estate, with lesser amounts being secured by
residential real estate, inventory and receivables.
Allowance for Loan Losses
The allowance for loan losses is increased by the provision for loan losses
which is charged to operations. Loan losses are charged directly against the
allowance and recoveries on previously charged-off loans are added to the
allowance.
In establishing its allowance for loan losses, management considers the
size and risk exposure of each segment of the loan portfolio, past loss
experience, present indicators of risk such as delinquency rates, levels of
nonaccruals, the potential for losses in future periods, and other relevant
factors. Management's evaluation of the loan portfolio generally includes
reviews of individual borrowers with aggregate balances of $300,000 or greater
and reviews of problem borrowers of $100,000 or greater. Consideration is also
given to examinations performed by regulatory agencies, primarily the Office of
the Comptroller of the Currency ("OCC"). The provisions are based on
management's review of the economy, interest rates, general market conditions,
estimates of the fair value of collateral, financial strength and ability of the
borrowers and guarantors to pay, and considerations regarding the current and
anticipated operating or sales environment. These estimates are particularly
susceptible to change and may result in a material adjustment to the allowance.
While management uses the latest information available to make its evaluation of
the adequacy of the allowance, future adjustments may be necessary if conditions
differ substantially from the assumptions used in making the evaluations.
There were no provisions made during the three years ended December 31,
1997, due to a reduction of internally classified assets, recoveries of prior
charge-offs, as well as a further reduction in the level of non-performing
assets. Net loan recoveries were $169,000 in 1997, compared to net loan
charge-offs of $403,000 in 1996 and $130,000 in 1995. The percentage of net
charge-offs to total average loans was .34% and .11% during 1996 and 1995,
respectively.
The following table sets forth the changes in DNB's allowance for loan
losses for the years indicated. Real estate includes both residential and
commercial real estate.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Analysis of Allowance for Loan Losses
(Dollars in thousands) Year Ended December 31
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $5,112 $5,515 $5,645 $6,000 $6,100
Provisions -- -- -- -- 63
Loans charged off:
Real estate -- (454) (25) (280) (344)
Commercial (32) (50) (124) (140) (78)
Consumer (16) (30) (164) (77) (112)
- ----------------------------------------------------------------------------------------------
Total charged off (48) (534) (313) (497) (534)
- ----------------------------------------------------------------------------------------------
Recoveries:
Real estate 1 38 86 3 75
Commercial 167 48 24 43 87
Consumer 49 45 73 96 209
- ----------------------------------------------------------------------------------------------
Total recoveries 217 131 183 142 371
- ----------------------------------------------------------------------------------------------
Ending balance $5,281 $5,112 $5,515 $5,645 $6,000
- ----------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Management's Discussion and Analysis
In determining the adequacy of the allowance, DNB utilizes a methodology
which includes an analysis of historical loss experience for the commercial real
estate, commercial, residential real estate, home equity and consumer
installment loan pools to determine a historical loss factor. The historical
loss factors are then applied to the current portfolio balances to determine the
required reserve percentage for each loan pool based on risk rating. In
addition, specific allocations are established for loans where loss is probable
and reasonably identifiable, based on management's judgment and an evaluation of
the individual credit, which includes various factors mentioned above. The
allocated portion of the reserve is then determined as a result of an analysis
of the loan pools and specific allocations.
The following table sets forth the composition of DNB's allowance for loan
losses at the dates indicated. The portion allocated to each category is
generally not the total amount available for future losses that might occur
within such categories. The allocation of the allowance should also not be
interpreted as an indication that charge-offs will occur in these amounts or
proportions. The specific allocations in any particular category may prove
excessive or inadequate and consequently may be reallocated in the future to
reflect current conditions. Accord-ingly, management considers the entire
allowance to be available to absorb losses in any category.
Liquidity and Capital Resources
Management maintains liquidity to meet depositors' needs for funds, to
satisfy or fund loan commitments, and for other operating purposes. DNB's
foundation for liquidity is a stable and loyal customer deposit base and a
marketable investment portfolio that provides periodic cash flow through regular
maturities and amortization, or that can be used as collateral to secure
funding. DNB's primary source of liquidity is dependent upon its ability to
maintain and expand its customer deposit base. During 1997, deposits increased
$20.8 million or 12% while repurchase agreements were paid off. The substantial
increase in deposits was a result of several successful certificate of deposit
promotions initiated during the year, along with the introduction and promotion
of DNB's new Premier Money Market account.
As of December 31, 1997, deposits totaled $199.2 million, up from $178.4
million at December 31, 1996. Certificates of deposit increased $14.7 million or
23% to $78.5 million. In addition, non-interest bearing deposits and NOW
accounts increased $3.0 million combined. Money market accounts increased $3.7
million, due largely to DNB's new money market account.
DNB maintains borrowing arrangements with a correspondent bank and the
Federal Home Loan Bank of Pittsburgh, as well as access to the discount window
at the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs.
Through these relationships, DNB has available short-term credit of
approximately $49 million.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Composition of Allowance for Loan Losses
(Dollars in thousands)
December 31
1997 1996 1995 1994 1993
Percent of Percent of Percent of Percent of Percent of
Loan Type to Loan Type to Loan Type to Loan Type to Loan Type to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate $1,104 51% $1,405 52% $1,504 53% $1,575 55% $3,060 66%
Commercial 410 27 531 25 590 24 1,223 20 2,171 20
Consumer 164 22 231 23 289 23 771 25 105 14
Unallocated 3,603 -- 2,945 -- 3,132 -- 2,076 -- 664 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total $5,281 100% $5,112 100% $5,515 100% $5,645 100% $6,000 100%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Management's Discussion and Analysis
The following table sets forth the composition of DNB's deposits at the
dates indicated.
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deposits by Major Classification
(Dollars in thousands) December 31
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-interest-bearing deposits $ 27,150 $ 26,429 $ 22,936 $ 24,967 $ 23,087
Interest-bearing deposits:
NOW 33,387 31,140 27,485 27,688 23,827
Money market 19,289 15,550 16,333 18,198 27,750
Savings 27,714 28,559 29,224 31,836 32,123
Certificates 78,509 63,783 56,533 37,698 38,521
IRA 13,188 12,963 12,498 10,539 11,104
- ---------------------------------------------------------------------------------------------
Total deposits $199,237 $178,424 $165,009 $150,926 $156,412
- ---------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, DNB has $4.2 million in commitments to fund
commercial real estate, construction and land development loans. In addition,
there are $1.3 million in unfunded home equity lines of credit and $14.3 million
in other unused loan commitments. Management anticipates the majority of these
commitments will be funded by means of normal cash flows. There are
approximately $69.0 million of certificates of deposit scheduled to mature
during the twelve months ending December 31, 1998. To meet its funding needs,
DNB maintains assets which comprise its primary liquidity totaling $43.1 million
on December 31, 1997. Primary liquidity includes Federal funds sold, investments
and interest-bearing cash balances, less pledged securities. DNB also
anticipates scheduled payments and prepayments on its loan and mortgage-backed
securities portfolios.
Interest Rate Sensitivity Analysis
The largest component of DNB's total income is net interest income, and the
majority of DNB's financial instruments are composed of interest rate-sensitive
assets and liabilities with various terms and maturities. The primary objective
of management is to maximize net interest income while minimizing interest rate
risk. Interest rate risk is derived from timing differences in the repricing of
assets and liabilities, loan prepayments, deposit withdrawals, and differences
in lending and funding rates. The Asset-Liability Committee ("ALCO") actively
seeks to monitor and control the mix of interest rate-sensitive assets and
interest rate-sensitive liabilities.
One measure of interest rate risk is the gap ratio, which is defined as the
difference between the dollar volume of interest-earning assets and
interest-bearing liabilities maturing or repricing within a specified period of
time as a percentage of total assets. A positive gap results when the volume of
interest rate-sensitive assets exceeds that of interest rate-sensitive
liabilities within comparable time periods. A negative gap results when the
volume of interest rate-sensitive liabilities exceeds that of interest
rate-sensitive assets within comparable time periods.
As indicated in the table below, the one year gap position at December 31,
1997 was a negative 2.1%. Generally, a financial institution with a negative gap
position will most likely experience decreases in net interest income during
periods of rising rates and increases in net interest income during periods of
falling interest rates.
The negative gap was brought about in part due to customer preferences for
short-term and floating rate deposit products which caused interest-rate
sensitive liabilities to exceed interest-rate sensitive assets during the
earlier time periods presented. While gap analysis represents a useful
asset/liability management tool, it does not necessarily indicate the effect of
general interest rate movements on DNB's net interest income, due to
discretionary repricing of assets and liabilities, and other competitive
pressures.
DNB reports its callable agency investments ($40.2 million at December 31,
1997) at their Option
14
<PAGE>
Management's Discussion and Analysis
Adjusted Spread ("OAS") modified duration date, as opposed to the call or
maturity date. In management's opinion, using modified duration dates on
callable agency securities provides a better estimate of the option exercise
date under any interest rate environment. The OAS methodology is an approach
whereby the likelihood of option exercise takes into account the coupon on the
security, the distance to the call date, the maturity date and current interest
rate volatility. In addition, prepayment assumptions derived from historical
data have been applied to mortgage-related securities, which are included in
investments.
Included in the analysis of the gap position are certain savings deposit
and demand accounts which
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
(Dollars in thousands)
More Than More Than More Than More Than
Six Months One Year Two Years Five Years Ten Years
Under Six Through Through Through Through and Fair
Months One Year Two Years Five Years Ten Years Non-repricing Total Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks
and Federal funds sold $15,889 $ -- $ -- $ -- $ -- $ 7,503 $ 23,392 $ 23,392
Average interest rate 5.50% --% --% --% --% --%
Investments 16,685 13,619 21,257 9,538 1,266 1,218 63,583 63,799
Average interest rate 6.96% 6.65% 6.96% 7.02% 6.55% 7.00%
Commercial loans 26,511 1,816 1,963 3,705 401 570 34,966 34,649
Average interest rate 9.24% 8.50% 8.67% 8.80% 8.47% --%
Mortgage loans 11,852 8,889 12,338 21,918 7,156 4,369 66,522 67,155
Average interest rate 8.66% 8.26% 8.39% 8.57% 8.04% 6.34%
Consumer loans 4,749 3,086 3,926 8,465 7,971 269 28,466 28,715
Average interest rate 8.32% 7.95% 8.06% 7.99% 8.23% 4.93%
Total loans 43,111 13,791 18,227 34,088 15,528 5,209 129,954 130,519
Average interest rate 8.98% 8.22% 8.35% 8.45% 8.15% 5.60%
Other assets (net) -- -- -- -- -- 2,522 2,522
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $75,686 $27,410 $39,484 $43,626 $16,794 $16,451 $219,451
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
Non-interest-bearing demand $ 9,176 $-- $ 6,159 $11,815 $ -- $ -- $ 27,150 $ 27,150
NOW 11,826 -- 3,080 12,321 6,160 -- 33,387 33,387
Average interest rate 2.68% -- 2.08% 2.08% 2.08% -- %
Money market 5,254 4,390 4,822 4,823 -- -- 19,289 19,289
Average interest rate 3.58% 3.58% 3.58% 3.58% -- % -- %
Savings 8,037 -- 3,049 11,085 5,543 -- 27,714 27,714
Average interest rate 2.71% -- 2.71% 2.71% 2.71% -- %
Certificates and IRA's less
than $100,000 25,651 21,511 13,108 7,909 -- -- 68,179 68,627
Average interest rate 5.38% 5.53% 5.76% 6.25% -- % -- %
Certificates and IRA's at or
more than $100,000 18,540 3,262 646 1,070 -- -- 23,518 23,634
Average interest rate 5.62% 5.47% 5.80% 6.48% -- % -- %
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 78,484 29,163 30,864 49,023 11,703 -- 199,237 $199,801
Average interest rate 3.97% 5.11% 3.47% 2.45% 2.38% -- %
Other liabilities, net -- -- -- -- -- 1,858 1,858
Stockholders' equity -- -- -- -- -- 18,356 18,356
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $78,484 $29,163 $30,864 $49,023 $11,703 $20,214 $219,451
- ------------------------------------------------------------------------------------------------------------------------------------
Gap $(2,798) $(1,753) $ 8,620 $(5,397) $ 5,091 $ 3,763
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative gap $(2,798) $(4,551) $ 4,069 $(1,328) $ 3,763 --
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative gap to total assets (1.3%) (2.1%) 1.9% (0.6%) 1.7%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Management's Discussion and Analysis
are less sensitive to fluctuations in interest rates than other interest-bearing
sources of funds. In determining the sensitivity of such deposits, management
reviews the movement of its deposit rates for the past four years relative to
market rates. Using regression analysis, the ALCO committee has estimated that
these deposits are approximately 25-30% sensitive to interest rate changes
(i.e., if short term rates were to increase 100 basis points, the interest rate
on such deposits would increase 25-30 basis points).
The preceding table sets forth certain information relating to DNB's
financial instruments that are sensitive to changes in interest rates,
categorized by expected maturity or repricing and the instruments fair value at
December 31, 1997.
The Bank continually evaluates interest rate risk management opportunities,
including the use of derivative financial instruments. Management believes that
hedging instruments currently available are not cost-effective, and therefore,
has focused its efforts on increasing the Bank's spread by attracting lower-
costing retail deposits.
In addition to utilizing the gap ratio for interest rate risk management,
the ALCO committee utilizes simulation analysis whereby the model estimates the
variance in net interest income with a change in interest rates of plus or minus
300 basis points over a twelve month period. Given recent simulations, net
interest income would be within policy guidelines regardless of the direction of
market rates.
Capital Resources
Stockholders' equity increased to $18.4 million at December 31, 1997,
primarily as a result of the $2.7 million net income reported for the year.
Management believes that the Corporation and the Bank each have met the
definition of "well capitalized" for regulatory purposes on December 31, 1997
and thereafter. The Bank's capital category is determined for the purposes of
applying the bank regulators' "prompt corrective action" regulations and for
determining levels of deposit insurance assessments and may not constitute an
accurate representation of the Corporation's or the Bank's overall financial
condition or prospects. The Corporation's capital exceeds the FRB's minimum
leverage ratio requirements for bank holding companies (see additional
discussion in Regulatory Matters -- Footnote 14).
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.
Interstate Banking -- The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), enacted on September 29,
1994, permits bank holding companies to acquire banks in any state beginning in
1995. Acquired banks in different states may be merged into a single bank, and
merged banks may establish and acquire additional branches anywhere the acquiree
could have branched. States were entitled to opt out of interstate branching
until June 1, 1997. Limited branch purchases are still subject to state laws. On
July 6, 1995, Pennsylvania adopted an interstate banking act (the "PA Interstate
Banking Act") to harmonize Pennsylvania banking laws with the Federal Interstate
Banking Act. The PA Interstate Banking Act "opts in" early under the Federal
Interstate Banking Act to permit interstate mergers, non-Pennsylvania holding
company acquisitions of Pennsylvania banks, branch acquisitions and de novo
branching in any of the manners contemplated by the Federal Interstate Banking
Act, subject to prior regulatory approvals or filings. In general, the PA
Interstate Banking Act permits out-of-state banking institutions to establish
branches in Pennsylvania with the approval of the Pennsylvania Banking
Department, provided the law of the state where the banking institution is
located would permit a Pennsylvania banking institution to establish and
maintain a branch in that state on substantially similar terms and conditions.
It also permits Pennsylvania banking institutions to maintain branches in other
states. Management believes that the Interstate Banking Act and the PA
Interstate
16
<PAGE>
Management's Discussion and Analysis
Banking Act have increased competitive pressures in DNB's market by permitting
entry of additional competitors, but management is of the opinion that this did
not have a material impact upon the results of operations of DNB, for the year
ended December 31, 1997.
Amendments to FDIC Deposit Insurance Assessment Rules-- On November 22,
1996, the Financing Corporation ("FICO") adopted a regulation pursuant to the
1996 Banking Law which obligates all Federally insured depository institutions
to pay special assessments toward the funding of interest payments on FICO bonds
which were issued in 1989 to fund the savings and loan bailout. The special
assessments, which are effective for periods commencing January 1, 1997, are
calculated on a deposit-by-deposit basis and differs depending upon whether a
deposit is insured by the Savings Association Insurance Fund ("SAIF") or the
Bank Insurance Fund ("BIF"). The special FICO assessment rate is 6.4 basis
points on all SAIF-assessable deposits, and 20% of that rate, or approximately
1.3 basis points, on all BIF-assessable deposits, regardless of whether an
institution is a "bank" or a "savings association". The Bank's FICO assessment
rate is currently 1.3 basis point. After December 31, 1999 (or when the last
savings association ceases to exist, if earlier), all assessable deposits at all
institutions will be assessed at the same rates in order to pay FICO bond
interest.
The semi-annual deposit insurance assessment for BIF member institutions on
BIF-assessable deposits ranges from 0 to 27 basis points, depending upon an
institution's risk classification. The Bank's current assessment rate is 0 basis
points.
Year 2000 -- Year 2000 compliance has been defined by DNB as the point at
which each organizational function, system, application, file, program and
database will correctly process, provide and/or receive date data within and
between the 20th and 21st centuries. DNB has developed a comprehensive approach
to solving Year 2000 issues. Headed up by DNB's Technology Steering Committee,
the Bank has conducted an in-depth review of its systems to identify and assess
the risks posed by the Year 2000. The committee has worked with the Bank's
primary software and hardware vendors to prepare the computer operating
environment. DNB has purchased software products to aid in identifying programs
that might be affected by the Year 2000. In addition to all of the technology
enhancements planned, current plans call for upgrading all personal computers
that are not Year 2000 compliant. Testing has been scheduled for all systems.
DNB, while not completely Year 2000 compliant, is working diligently to achieve
this goal. DNB has established an organization-wide initiative and every area of
the Bank is participating. Management currently expects DNB to be Year 2000
compliant in all material respects before December 31, 1999. Management
currently estimates the costs of Year 2000 compliance will be approximately
$60,000 during the two years ended December 31, 1999.
Recent Accounting Pronouncements
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS No.
125"). That Statement established, among other things, new criteria for
determining whether a transfer of financial assets should be accounted for as a
sale or as a pledge of collateral in a secured borrowing. SFAS No. 125 also
established new accounting requirements for pledged collateral. As issued, SFAS
No. 125 was effective for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is applied
prospectively. The Company adopted the provisions of SFAS No. 125, effective
January 1, 1997. In December 1996, the FASB issued SFAS No. 127. Under the
provisions of SFAS No. 127, the effective date of certain provisions of SFAS No.
125, including repurchase agreement, dollar-roll, securities lending, and
similar transactions, are deferred for a period of one year. Management
anticipates the effect of implementation of SFAS No. 127 will be immaterial to
DNB's results of operations, financial condition or stockholders' equity.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
("SFAS No. 130"). This statement establishes standards for the report-
17
<PAGE>
Management's Discussion and Analysis
ing and display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements. The statement does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the impact, if any, of this
statement on DNB.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. Management has not yet determined the impact,
if any, of this statement on DNB.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits ("SFAS No. 132"). This
statement amends the disclosure requirements of Statements No. 87, Employers'
Accounting for Pensions ("Statement No. 87"). No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pensions Plans and for
Termination Benefits ("Statement No. 88"), and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions ("Statement No. 106"). SFAS No.
132 is applicable to all entities. This statement standardizes the disclosure
requirements of Statements No. 87 and No. 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and other
postretirement benefits. SFAS No. 132 only addresses disclosure and does not
change any of the measurement or recognition provisions provided for in
Statements No. 87, No. 88, or No. 106. The statement is effective for fiscal
years beginning after December 15, 1997. Restatement of comparative period
disclosures is required unless the information is not readily available, in
which case the notes to the financial statements should include all available
information and a description of the information not available.
Market for Common Stock
DNB Financial's common stock is listed under the symbol "DNBF" on the Over
The Counter Electronic Bulletin Board, an automated quotation service, made
available through and governed by the NASDAQ system. Current price information
is available from account executives at most brokerage firms as well as the
firms listed at the back of this annual report who are market makers of DNB's
common stock. There were approximately 900 stockholders who owned 1,451,661
shares of common stock outstanding at December 31, 1997.
The following table sets forth the quarterly high and low prices for a
share of DNB's common stock during the periods indicated. Prices for the sale of
stock are based upon transactions reported by the brokerage firms of Hopper
Soliday & Company, Inc. and Ryan, Beck & Company. The quoted high and low bid
prices are limited only to those transactions known by management to have
occurred and there may, in fact, have been additional transactions of which
management is unaware. Prices have been adjusted for the stock split and stock
dividends.
1997 1996
High Low High Low
- ---------------------------------------------------------
First Quarter $15.95 $14.76 $12.36 $11.79
Second Quarter 19.53 16.76 13.15 12.02
Third Quarter 26.19 19.41 13.83 13.27
Fourth Quarter 31.50 25.24 15.71 14.76
- ---------------------------------------------------------
18
<PAGE>
DNB Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 7,503,007 $ 6,636,470
Federal funds sold 15,889,000 4,833,000
Investment securities available for sale, at market value 13,888,462 21,678,879
Investment securities (market value $49,863,493 in 1997
and $49,195,997 in 1996) 49,694,161 48,871,142
Loans, net of unearned income 129,954,114 121,572,569
Allowance for loan losses (5,280,958) (5,112,486)
- --------------------------------------------------------------------------------------------
Net loans 124,673,156 116,460,083
- --------------------------------------------------------------------------------------------
Office property and equipment 3,644,581 3,986,502
Accrued interest receivable 1,584,213 1,562,565
Other real estate owned 231,187 1,010,500
Deferred income taxes 977,981 866,354
Other assets 1,365,317 1,222,594
- --------------------------------------------------------------------------------------------
Total assets $219,451,065 $207,128,089
- --------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Non-interest-bearing deposits $ 27,149,502 $ 26,428,509
Interest-bearing deposits:
NOW 33,386,755 31,140,486
Money market 19,289,128 15,549,927
Savings 27,714,419 28,558,535
Time 91,697,168 76,746,106
- --------------------------------------------------------------------------------------------
Total deposits 199,236,972 178,423,563
- --------------------------------------------------------------------------------------------
Repurchase agreements -- 11,225,273
Accrued interest payable 830,533 454,574
Other liabilities 1,027,997 808,665
- --------------------------------------------------------------------------------------------
Total liabilities 201,095,502 190,912,075
- --------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
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; 1,451,661 and
691,422 issued and outstanding, respectively 14,516,610 6,914,220
Surplus 1,542,160 5,196,292
Retained earnings 2,276,556 4,127,905
Unrealized gain (loss) on investment securities
available for sale, net of tax 20,237 (22,403)
- --------------------------------------------------------------------------------------------
Total stockholders' equity 18,355,563 16,216,014
- --------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $219,451,065 $207,128,089
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
DNB Financial Corporation and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans $11,518,808 $10,556,381 $10,484,930
Interest on investment securities:
Taxable 4,359,349 4,179,173 3,187,596
Exempt from Federal taxes -- -- 483
Interest on Federal funds sold 485,449 426,177 322,746
- ----------------------------------------------------------------------------------------------
Total interest income 16,363,606 15,161,731 13,995,755
- ----------------------------------------------------------------------------------------------
Interest Expense:
Interest on NOW, money market and savings 2,041,643 1,902,436 2,034,828
Interest on time deposits 4,739,650 4,110,912 3,482,719
Interest on repurchase agreements 108,377 442,584 262,187
Interest on other borrowings 94,311 2,962 7,749
- ----------------------------------------------------------------------------------------------
Total interest expense 6,983,981 6,458,894 5,787,483
- ----------------------------------------------------------------------------------------------
Net interest income 9,379,625 8,702,837 8,208,272
Provision for loan losses -- -- 122
- ----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,379,625 8,702,837 8,208,150
- ----------------------------------------------------------------------------------------------
Non-interest Income:
Service charges 469,393 432,681 458,472
Trust income 416,209 305,930 297,665
Other 398,039 265,411 172,781
- ----------------------------------------------------------------------------------------------
Total non-interest income 1,283,641 1,004,022 928,918
- ----------------------------------------------------------------------------------------------
Non-interest Expense:
Salaries and employee benefits 3,951,844 3,629,185 3,653,950
Furniture and equipment 671,968 664,714 783,480
Occupancy 458,214 467,437 442,008
Professional and consulting 445,032 317,420 358,895
Printing and supplies 229,004 221,688 242,323
Advertising and marketing 216,140 204,587 207,945
PA shares tax 142,576 139,125 140,437
Postage 114,924 124,771 112,899
Insurance 96,092 110,956 162,848
FDIC insurance 48,240 48,584 256,241
Other 709,032 802,792 736,742
- ----------------------------------------------------------------------------------------------
Total non-interest expense 7,083,066 6,731,259 7,097,768
- ----------------------------------------------------------------------------------------------
Income before income taxes 3,580,200 2,975,600 2,039,300
Income tax expense 865,000 658,000 169,000
- ----------------------------------------------------------------------------------------------
Net income $ 2,715,200 $ 2,317,600 $ 1,870,300
- ----------------------------------------------------------------------------------------------
Earnings per share:
Basic $1.87 $1.60 $1.29
Diluted 1.84 1.59 1.29
Weighted average number of shares outstanding:
Basic 1,451,661 1,451,661 1,451,661
Diluted 1,479,629 1,462,105 1,454,556
Cash dividends per share $0.42 $0.25 $0.09
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Investment
Securities
Common Retained Available
Stock Surplus Earnings For Sale Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 5,980,680 $2,877,009 $3,704,352 $ (5,898) $12,556,143
Net income -- -- 1,870,300 -- 1,870,300
Cash dividends -- -- (125,546) -- (125,546)
Issuance of stock dividends 607,250 863,202 (1,470,452) -- --
Cash payment for fractional shares -- -- (13,754) -- (13,754)
Transfer to surplus -- 372,658 (372,658) -- --
Change in unrealized gain
on investment securities
available for sale, net of tax -- -- -- 67,816 67,816
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1995 6,587,930 4,112,869 3,592,242 61,918 14,354,959
Net income -- -- 2,317,600 -- 2,317,600
Cash dividends -- -- (362,336) -- (362,336)
Issuance of stock dividends 326,290 730,254 (1,056,544) -- --
Cash payment for fractional shares -- -- (9,888) -- (9,888)
Transfer to surplus -- 353,169 (353,169) -- --
Change in unrealized loss
on investment securities
available for sale, net of tax -- -- -- (84,321) (84,321)
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1996 6,914,220 5,196,292 4,127,905 (22,403) 16,216,014
Net income -- -- 2,715,200 -- 2,715,200
Cash dividends -- -- (608,452) -- (608,452)
Issuance of stock dividends 688,170 1,410,748 (2,098,918) -- --
Cash payment for fractional shares -- -- (9,839) -- (9,839)
Stock split 6,914,220 (5,550,182) (1,364,038) -- --
Transfer to surplus -- 485,302 (485,302) -- --
Change in unrealized gain
on investment securities
available for sale, net of tax -- -- -- 42,640 42,640
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $14,516,610 $1,542,160 $2,276,556 $20,237 $18,355,563
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
DNB Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 2,715,200 $ 2,317,600 $ 1,870,300
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 420,383 312,036 324,138
Provision for loan losses -- -- 122
Gain on sale of OREO (107,748) (40,940) --
Net (gain) loss on sale of securities (6,669) 4,728 2,387
(Increase) decrease in interest receivable (21,648) 85,621 (579,959)
Increase in other assets (142,723) (142,192) (197,293)
Increase (decrease) in interest payable 375,959 (4,369) 136,165
Increase (decrease) in current taxes payable 64,336 (23,000) 4,472
Decrease (increase) in deferred income taxes (124,336) 181,000 (189,216)
Increase (decrease) in other liabilities 154,996 92,166 (90,559)
- -----------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 3,327,750 2,782,650 1,280,557
- -----------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities and paydowns -
AFS securities 12,225,648 8,224,520 --
Proceeds from maturities and paydowns -
HTM securities 19,478,243 20,500,377 22,618,803
Purchase of AFS securities (5,335,154) (21,823,458) --
Purchase of HTM securities (20,349,660) (30,598,036) (34,304,292)
Proceeds from sale of AFS securities 1,003,750 4,961,039 1,974,999
Proceeds from sale of HTM securities -- -- 2,993,906
Proceeds from sale of OREO 977,748 421,317 287,254
Net increase in loans (8,303,760) (4,669,886) (5,750,071)
Purchase of office property and equipment (71,873) (172,203) (698,172)
- -----------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (375,058) (23,156,330) (12,877,573)
- -----------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase in deposits 20,813,409 13,414,635 14,082,533
(Decrease) increase in repurchase agreements (11,225,273) 3,006,564 6,611,852
Dividends paid (618,291) (372,224) (169,203)
- -----------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 8,969,845 16,048,975 20,525,182
- -----------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 11,922,537 (4,324,705) 8,928,166
Cash and Cash Equivalents at Beginning of Period 11,469,470 15,794,175 6,866,009
- -----------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $23,392,007 $11,469,470 $15,794,175
- -----------------------------------------------------------------------------------------------
Supplemental Disclosure Of Cash Flow Information:
Cash paid during the period for:
Interest $ 6,608,022 $ 6,463,263 $ 5,651,318
Income taxes 925,000 460,000 358,259
Supplemental Disclosure Of Non-cash Flow
Information:
Net transfer of loans to OREO $ 90,687 $ 580,614 $ 658,579
Reclassification of investment securities
from HTM to AFS -- -- 12,797,081
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of DNB Financial Corporation (the
"Corporation" or "DNB") and its subsidiary, Downingtown National Bank (the
"Bank"), are prepared in accordance with generally accepted accounting
principles and general practices within the industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and affect revenues and expenses
for the period. Actual results could differ significantly from those estimates.
The material estimates that are particularly susceptible to significant
changes in the near term relate to the determination of the adequacy of the
allowance for loan losses, the valuation of other real estate owned and the
valuation of deferred tax assets. In connection with the determination of the
allowance for losses on loans and other real estate owned, independent
appraisals for significant properties are obtained when practical.
The more significant accounting policies are summarized below. Prior period
amounts not affecting net income are reclassified when necessary to conform with
current year classifications.
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of the Corporation and the Bank. All significant
intercompany transactions have been eliminated.
Cash and Due From Banks -- DNB is required to maintain certain daily
reserve balances in accordance with Federal Reserve Board requirements. The
average reserve balance maintained in accordance with such requirements for the
years ended December 31, 1997 and 1996 was approximately $275,000 and $150,000,
respectively.
Investment Securities -- Investment securities are classified and accounted
for as follows:
Held-To-Maturity ("HTM") -- includes debt securities that DNB has the
positive intent and ability to hold to maturity. These securities are
reported at cost, adjusted for amortization of premiums and accretion of
discounts.
Trading Account ("TA") -- includes securities which are generally held
for a short term in anticipation of market gains. Such securities would be
carried at fair value with realized and unrealized gains and losses on
trading account securities included in the statement of operations. DNB did
not have any securities classified as TA during 1997, 1996, or 1995.
Available-For-Sale ("AFS") -- includes debt and equity securities not
classified as HTM or TA securities. Securities classified as AFS are
securities that DNB intends to hold for an indefinite period of time, but
not necessarily to maturity. Such securities are reported at fair value,
with unrealized holding gains and losses excluded from earnings and
reported, net of tax (if applicable), as a separate component of
stockholders' equity. Realized gains and losses on the sale of AFS
securities are computed on the basis of specific identification of the
adjusted cost of each security.
Amortization of premiums and accretion of discounts for all types of
securities are computed using a method approximating a level-yield basis.
Loans -- Loans are stated net of unearned discounts, unamortized net loan
origination fees and the allowance for loan losses. Interest income is
recognized on the accrual basis. The accrual of interest on loans is generally
discontinued when loans become 90 days past due or earlier when, in management's
judgment, it is determined that a reasonable doubt
23
<PAGE>
Notes to Consolidated Financial Statements
exists as to its collectibility. When a loan is placed on nonaccrual, interest
accruals cease and uncollected accrued interest is reversed and charged against
current income. Additional interest payments on such loans are applied to
principal or recognized in income on a cash basis. A nonaccrual loan may be
restored to accrual status when management expects to collect all contractual
principal and interest due and the borrower has demonstrated a sustained period
of repayment performance in accordance with the contractual terms.
Deferred Loan Fees -- Loan origination and commitment fees and related
direct-loan origination costs of completed loans are deferred and accreted to
income as a yield adjustment over the life of the loan using the level-yield
method. The accretion to income is discontinued when a loan is placed on
nonaccrual status. When a loan is paid off, any unamortized net deferred-fee
balance is credited to income. When a loan is sold, any unamortized net
deferred-fee balance is considered in the calculation of gain or loss.
Allowance for Loan Losses -- The allowance for loan losses ("allowance") is
based on a periodic evaluation of the portfolio and is maintained at a level
that management considers adequate to absorb losses known and inherent in the
portfolio. Management considers a variety of factors when establishing the
allowance, recognizing that an inherent risk of loss always exists in the
lending process. Consideration is given to the impact of current economic
conditions, diversification of the loan portfolio, historical loss experience,
delinquency statistics, results of detailed loan reviews, borrowers' financial
and managerial strengths, the adequacy of underlying collateral, and other
relevant factors. While management utilizes the latest available information to
determine the potential for losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions as well as adverse
changes in the financial condition of borrowers. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowance. Such agencies may require DNB to recognize additions to the
allowance based on their judgments of information available to them at the time
of their examination. The allowance is increased by the provision for loan
losses which is charged to operations. Loan losses are charged directly against
the allowance and recoveries on previously charged-off loans are added to the
allowance.
For purposes of applying the measurement criteria for impaired loans, DNB
excludes large groups of smaller-balance homogeneous loans, primarily consisting
of residential real estate loans and consumer loans, as well as commercial loans
with balances less than $100,000. For applicable loans, management evaluates the
need for impairment recognition when a loan becomes nonaccrual, or earlier, if
based on an assessment of the relevant facts and circumstances, it is probable
that DNB will be unable to collect all proceeds due according to the
contractural terms of the loan agreement. DNB's policy for the recognition of
interest income on impaired loans is the same as for nonaccrual loans.
Impairment is charged to the allowance when management determines that
foreclosure is probable or the fair value of the collateral is less than the
recorded investment of the impaired loan.
Other Real Estate Owned -- Other real estate owned ("OREO") consists of
properties acquired as a result of, or in-lieu-of, foreclosure. Properties
classified as OREO are reported at the lower of carrying value or fair value,
less estimated costs to sell. Costs relating to the development or improvement
of the properties are capitalized and costs relating to holding the properties
are charged to expense.
Office Properties and Equipment -- Office properties and equipment are
recorded at cost. Depreciation is computed using the straight-line method over
the expected useful lives of the assets.
24
<PAGE>
Notes to Consolidated Financial Statements
The costs of maintenance and repairs are expensed as they are incurred; renewals
and betterments are capitalized. All long-lived assets are reviewed for
impairment, based on the fair value of the asset. In addition, long-lived assets
to be disposed of are generally reported at the lower of carrying amount or fair
value, less costs to sell. Gains or losses on disposition of premises and
equipment are reflected in operations.
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. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Corporation files a consolidated Federal income tax return with the
Bank.
Pension Plan -- The Bank maintains a noncontributory defined benefit
pension plan covering substantially all employees over the age of 21 with one
year of service. Plan benefits are based on years of service and the employee's
monthly average compensation for the highest five consecutive years of their
last ten years of service.
Stock Option Plan -- DNB accounts for its stock option plan in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. On January 1, 1996,
DNB adopted SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"), which permits entities to recognize as expense over the vesting period,
the fair value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. DNB has
elected to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
Earnings Per Share -- Basic earnings per share is computed based on the
weighted average number of common shares outstanding during the year. Diluted
earnings per share reflects the potential dilution that could occur from the
conversion of common stock equivalents and is computed using the treasury stock
method. Earnings per share, dividends per share and weighted average shares
outstanding have been adjusted to reflect the effects of the 5% stock dividends
paid in December 1997, 1996 and 1995 and the September 1997 two for one stock
split, effected in the form of a 100% dividend.
Trust Assets -- Assets held by DNB in fiduciary or agency capacities are
not included in the consolidated financial statements since such items are not
assets of DNB. Operating income and expenses of the Investment Services and
Trust Division are included in the consolidated statements of operations and are
recorded on an accrual basis.
Statements of Cash Flows -- For purposes of the statements of cash flows,
DNB considers cash in banks, amounts due from banks, and Federal funds sold to
be cash equivalents. Generally, Federal funds are sold for one-day periods.
25
<PAGE>
Notes to Consolidated Financial Statements
(2) INVESTMENT SECURITIES
Amortized cost and estimated fair values of investment securities, as of
the dates indicated, are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
Amortized Unrealized Unrealized Estimated
Held to Maturity Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S.Government and agency corporations $41,806,613 $227,183 $ (51,090) $41,982,706
Mortgage-backed securities 5,790,448 38,828 (45,589) 5,783,687
Other securities 2,097,100 -- -- 2,097,100
- ---------------------------------------------------------------------------------------------------
Total investment securities $49,694,161 $266,011 $ (96,679) $49,863,493
- ---------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Available for Sale Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------
U.S.Government and agency corporations $ 4,746,675 $ 6,527 $ (2,600) $ 4,750,602
Mortgage-backed securities 9,115,160 52,982 (30,282) 9,137,860
- ---------------------------------------------------------------------------------------------------
Total investment securities $13,861,835 $ 59,509 $(32,882) $13,888,462
- ---------------------------------------------------------------------------------------------------
December 31, 1996
Amortized Unrealized Unrealized Estimated
Held to Maturity Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------
U.S. Government agency and corporations $35,904,498 $354,004 $(24,777) $36,233,725
Mortgage-backed securities 7,310,626 63,438 (77,436) 7,296,628
Other securities 5,656,018 15,514 (5,888) 5,665,644
- ---------------------------------------------------------------------------------------------------
Total investment securities $48,871,142 $432,956 $(108,101) $49,195,997
- ---------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Available for Sale Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------
U.S. Government agency and corporations $14,947,057 $ 57,758 $ (31,125) $14,973,690
Mortgage-backed securities 6,760,544 9,994 (65,349) 6,705,189
- ---------------------------------------------------------------------------------------------------
Total investment securities $21,707,601 $ 67,752 $ (96,474) $21,678,879
- ---------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of investment securities as of
December 31, 1997, by contractual maturity, are shown below. Actual maturities
may differ from contractual maturities because certain securities may be called
or prepaid without penalties.
<TABLE>
<CAPTION>
Investment Securities Investment Securities
Held to Maturity Available for Sale
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,492,951 $ 2,499,822 $ 2,497,957 $ 2,502,813
Due after one year through five years 19,359,618 19,425,987 2,987,923 2,968,311
Due after five years through ten years 20,134,767 20,277,742 4,070,424 4,058,827
Due after ten years, or no stated maturity 7,706,825 7,659,942 4,305,531 4,358,511
- ----------------------------------------------------------------------------------------------------
Total investment securities $49,694,161 $49,863,493 $13,861,835 $13,888,462
- ----------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Notes to Consolidated Financial Statements
DNB sold $1.0 million and $5.0 million of securities from the AFS portfolio
during 1997 and 1996, respectively. During 1995, $3.0 million of securities were
sold from the HTM portfolio and $2.0 million from the AFS portfolio. The
securities sold from the HTM portfolio were sold under SFAS No. 115 guidelines
which permit sales of securities that have final maturities within three months.
Gains and losses from sales of investment securities were as follows:
Year Ended December 31
1997 1996 1995
- ------------------------------------------------------------
Gross realized gains $6,669 $ 4,599 $ 1,196
Gross realized losses -- (9,327) (3,583)
- ------------------------------------------------------------
Net realized gain (losses) $6,669 $(4,728) $(2,387)
- ------------------------------------------------------------
In 1995, the FASB allowed a one-time reclassification of securities
previously classified as HTM to the AFS portfolio. Accordingly, DNB reclassified
securities with a carrying value of $12.8 million and unrealized gains of
$103,000 and unrealized losses of $58,000 to the AFS portfolio on December 29,
1995.
At December 31, 1997 and 1996, investment securities with a carrying value
of approximately $36.7 million and $27.8 million, respectively, were pledged to
secure public funds and for other purposes as provided by law.
At December 31, 1997, there were no significant concentrations of
investments (greater than 10% of stockholders' equity) in any individual
security issues, other than those issued by the US Government and related
agencies and corporations. Interest and dividends on investment securities for
the years ended December 31, 1997, 1996 and 1995 consisted of:
Year Ended December 31
1997 1996 1995
- -------------------------------------------------------------
US Treasury $ 10,743 $ 132,006 $ 365,105
US Government agency
and corporations 3,277,121 2,845,377 1,549,996
Mortgage-backed
securities 859,743 964,253 1,063,624
State and municipal -- -- 483
Other securities 211,742 237,537 208,871
- -------------------------------------------------------------
Total $4,359,349 $4,179,173 $3,188,079
- -------------------------------------------------------------
(3) LOANS
December 31
1997 1996
- ----------------------------------------------------------
Residential mortgage $ 20,392,265 $ 17,658,370
Commercial mortgage 46,129,545 45,907,366
Commercial 34,966,230 29,970,062
Consumer 26,062,144 25,325,271
Student 2,403,930 2,711,500
- ----------------------------------------------------------
Total loans 129,954,114 121,572,569
- ----------------------------------------------------------
Less allowance for
loan losses (5,280,958) (5,112,486)
- ----------------------------------------------------------
Net loans $124,673,156 $116,460,083
- ----------------------------------------------------------
Included in the loan portfolio are loans for which DNB has ceased the
accrual of interest. Loans of approximately $2.9 million, $2.9 million and $4.1
million as of December 31, 1997, 1996 and 1995, respectively, were on a
nonaccrual basis. DNB also had loans of approximately $70,000, $194,000 and
$129,000 that were more than 90 days delinquent, but still accruing as of
December 31, 1997, 1996 and 1995, respectively. In addition, DNB had loans not
included in nonaccrual or delinquent loans, which constitute troubled debt
restructurings, which totaled $-0-,
27
<PAGE>
Notes to Consolidated Financial Statements
$184,000 and $-0- as of December 31, 1997, 1996 and 1995, respectively. If
contractual interest income had been recorded on nonaccrual loans during the
years 1997, 1996 and 1995, interest would have been increased as shown in the
following table:
Year Ended December 31
1997 1996 1995
- --------------------------------------------------------------
Interest income which
would have been
recorded under
original terms $243,000 $254,000 $353,000
Interest income recorded
during the year (71,000) (80,000) (222,000)
- --------------------------------------------------------------
Net impact on
interest income $172,000 $174,000 $131,000
- --------------------------------------------------------------
At December 31, 1997, DNB had $5.9 million of loans which, although
performing at December 31, 1996, are believed to require increased supervision
and review, and may, depending on the economic environment and other factors,
become non-performing assets in future periods. The majority of the loans are
secured by commercial real estate with lesser amounts being secured by
residential real estate, inventory and receivables.
Although DNB has a significant concentration of residential and commercial
mortgage loans collateralized by first mortgage liens located in central Chester
County, DNB has no concentration of loans to borrowers engaged in similar
activities which exceed 10% of total loans at December 31, 1997. However, DNB
does have loans of approximately $8.9 million to local residential real estate
developers and loans of approximately $12.1 million relating to local multi-unit
office buildings at December 31, 1997.
Certain officers and directors of DNB and certain corporations and
individuals related to such persons incurred indebtedness, in the form of loans,
as customers. These loans were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other customers and did not involve more than the normal risk
of collectibility. None of these loans are in default or past due more than 90
days.
The following is a summary of activity during 1997 for such loans:
- ----------------------------------------------------------
Balance, January 1, 1997 $774,535
New loans granted 422,653
Less loan repayments (290,680)
- ----------------------------------------------------------
Balance, December 31, 1997 $906,508
- ----------------------------------------------------------
(4) ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses, for the years indicated, are as
follows:
Year Ended December 31
1997 1996 1995
- ------------------------------------------------------------
Beginning balance $5,112,486 $5,514,600 $5,645,000
Provisions -- -- 122
Loans charged off (48,330) (534,165) (313,035)
Recoveries 216,802 132,051 182,513
- ------------------------------------------------------------
Net recoveries
(charge offs) 168,472 (402,114) (130,522)
- ------------------------------------------------------------
Ending balance $5,280,958 $5,112,486 $5,514,600
- ------------------------------------------------------------
At December 31, 1997, 1996 and 1995, DNB had impaired loans with total
recorded investments of $1.8 million, $1.4 million and $1.9 million, and average
recorded investments for the years ended December 31, 1997, 1996 and 1995 of
$1.6 million, $1.6 million and $2.7 million, respectively. The aggregate amount
of impaired loans are measured under the fair value measurement method. As of
December 31, 1997, there was no related allowance for credit losses necessary
for these impaired loans. As of December 31, 1996 and 1995, the amount of
recorded investments in impaired loans for which
28
<PAGE>
Notes to Consolidated Financial Statements
there is a related allowance for credit losses was $160,000 and $314,000,
respectively. The amount of related allowance at December 31, 1996 and 1995 was
$160,000 and $128,000 respectively. The amount of the recorded investment in
impaired loans for which there was no related allowance for credit losses at
December 31, 1996 is $1.3 million. Total cash collected on impaired loans was
credited to the outstanding principal balance in the amounts of $241,000,
$83,000 and $253,000 during the years ended December 31, 1997, 1996 and 1995. No
interest income was recorded on such loans in each of the three years ended
December 31, 1997.
(5) OFFICE PROPERTY AND EQUIPMENT
December 31
Estimated
Useful Lives 1997 1996
- ------------------------------------------------------------
Land $ 854,942 $ 854,942
Buildings 25-33 years 3,721,505 3,709,710
Furniture, fixtures
and equipment 5-20 years 4,376,499 4,316,421
- ------------------------------------------------------------
Total cost 8,952,946 8,881,073
Less accumulated
depreciation (5,308,365) (4,894,571)
- ------------------------------------------------------------
Office property and
equipment, net $ 3,644,581 $3,986,502
- ------------------------------------------------------------
Amounts charged to operating expense for depreciation for the years ended
December 31, 1997, 1996 and 1995 amounted to $413,794, $437,954 and $404,529,
respectively.
(6) DEPOSITS
Included in interest-bearing time deposits are certificates of deposit
issued in amounts of $100,000 or more. These certificates and their remaining
maturities at December 31, 1997 and 1996 were as follows:
December 31
1997 1996
- ----------------------------------------------------------
Three months or less $10,827,882 $1,672,334
Over three through
six months 7,553,041 2,417,333
Over six through
twelve months 3,162,723 2,941,895
Over twelve months 1,715,887 624,120
- ----------------------------------------------------------
Total $23,259,533 $7,655,682
- ----------------------------------------------------------
(7) SHORT-TERM BORROWED FUNDS
Short-term borrowed funds are summarized as follows:
1997 1996
- ---------------------------------------------------------
Federal funds purchased and
repurchase agreements:
At December 31 $ -- $11,225,273
Average during year 2,572,514 8,910,192
Maximum month-end balance 8,145,419 14,003,865
Average rate during year 4.27% 5.00%
- ---------------------------------------------------------
Federal funds purchased generally represent one-day borrowings. Securities
sold under repur-chase agreements, which totaled $11.2 million at December 31,
1996, represent overnight borrowings that are secured by U.S. agency securities.
DNB also had other short term borrowed funds outstanding during 1997. These
consisted of FHLB borrowings with an average balance for the year of $1.5
million. The maximum month-end balance was $3,000,000 and the average rate
during the year was 5.77%.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value assumptions, methods, and estimates are set forth below for
DNB's financial instruments.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time DNB's entire holdings of a particular financial instrument. Because no
market exists for a significant portion of DNB's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncer-
29
<PAGE>
Notes to Consolidated Financial Statements
tainties and matters of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments.
Investments and Mortgage-backed Securities
The carrying amounts for short-term investments (Federal funds sold)
approximate fair value. The fair value of longer term investments and
mortgage-backed securities is estimated based on bid prices published in
financial newspapers or bid quotations received from securities dealers. The
carrying amounts of stocks with no stated maturity approximate fair value
because such shares may be redeemed at par.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
mortgages, residential mortgages, consumer and student loans, and nonaccrual
loans.
The fair value of performing loans is calculated by discounting expected
cash flows using an estimated market discount rate. Expected cash flows include
both contractual cash flows and prepayments of loan balances. Prepayments on
consumer loans were determined using the median of estimates of securities
dealers for mortgage-backed investment pools.
The estimated discount rate considers credit and interest rate risk
inherent in the loan portfolios and other factors such as liquidity premiums and
incremental servicing costs to an investor. Management has made estimates of
fair value discount rates that it believes to be reasonable. However, because
there is no market for many of these financial instruments, management has no
basis to determine whether the fair value presented below would be indicative of
the value negotiated in an actual sale.
The fair value for nonaccrual loans was derived through a discounted cash
flow analysis, which includes the opportunity costs of carrying a non-performing
asset. An estimated discount rate was used for all nonaccrual loans, based on
the probability of loss and the expected time to recovery.
Deposit and Repurchase Liabilities
The fair value of deposits with no stated maturity, such as
non-interest-bearing deposits, savings, NOW and money market accounts as well as
repurchase agreements, is equal to the amount payable on demand as of December
31, 1997 and 1996. The fair value of certificates of deposit is based on the
present value of contractual cash flows. The discount rates used to compute
present values are estimated using the rates currently offered for deposits of
similar maturities in DNB's marketplace.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements. The fair value of letters of credit is based
on fees currently charged for similar agreements.
30
<PAGE>
Notes to Consolidated Financial Statements
The following tables summarize information for all on-balance-sheet and
off-balance-sheet financial instruments.
December 31
1997 1996
- -----------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
- -----------------------------------------------------------------
Financial assets
Short-term
investments $ 15,889 $ 15,889 $ 4,833 $ 4,833
Investment
securities, AFS 13,862 13,888 21,679 21,679
Investment
securities, HTM 49,694 49,863 48,871 49,196
Loans, net of
unearned income 129,954 130,519 121,572 121,679
Accrued interest
receivable 1,584 1,584 1,563 1,563
Financial liabilities
Deposits 199,237 199,801 178,424 178,849
Repurchase
agreements -- -- 11,225 11,227
Accrued interest
payable 831 831 455 455
- -----------------------------------------------------------------
December 31
1997 1996
- -----------------------------------------------------------------
Estimated Estimated
Contract Fair Contract Fair
(Dollars in thousands) Amount Value Amount Value
- -----------------------------------------------------------------
Financial instruments
(Off-balance-sheet)
Commitments to
extend credit $19,758 $145 $14,731 $131
Standby letters
of credit 1,791 19 796 4
- -----------------------------------------------------------------
(9) FEDERAL INCOME TAXES
Income tax expense was comprised of the following:
Year Ended December 31
1997 1996 1995
- ------------------------------------------------------------
Current tax expense $ 989,337 $ 565,467 $ 364,731
Deferred income tax
(benefit) expense (124,337) 92,533 (195,731)
- ------------------------------------------------------------
Income tax expense $ 865,000 $ 658,000 $ 169,000
- ------------------------------------------------------------
The effective income tax rates of 24% for 1997, 22% for 1996 and 8% for
1995 were less than the applicable statutory Federal income tax rate. The reason
for these differences follows:
Year Ended December 31
1997 1996 1995
- --------------------------------------------------------------
Computed "expected"
tax expense $1,217,268 $1,011,704 $ 693,362
Increase (decrease)
resulting from:
Tax-exempt
interest income (73,090) (90,130) (96,392)
Valuation allowance -
deferred taxes (318,000) (322,000) (462,000)
Impact of AMT rate
on deferred taxes 30,147 48,136 24,698
Other, net 8,675 10,290 9,332
- --------------------------------------------------------------
Income tax expense $ 865,000 $ 658,000 $ 169,000
- --------------------------------------------------------------
The significant components of deferred income tax expense (benefit)
attributable to income are as follows:
Year Ended December 31
1997 1996 1995
- ------------------------------------------------------------------
Deferred tax expense
(exclusive of the
effects of the
component
listed below) $ 193,663 $414,533 $ 266,269
Decrease in
beginning-of-the-year
balance of the
valuation allowance
for deferred
tax assets (318,000) (322,000) (462,000)
- ------------------------------------------------------------------
Deferred income tax
(benefit) expense $(124,337) $ 92,533 $(195,731)
- ------------------------------------------------------------------
31
<PAGE>
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
December 31
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------
Deferred tax assets:
Allowance for
loan losses $1,577 $1,515 $1,622
Alternative minimum tax
credit carryforwards -- 234 460
Valuation adjustment for
debt securities -- 6 --
Other 54 47 26
- ---------------------------------------------------------------
Total gross deferred
tax assets 1,631 1,802 2,108
Less valuation
allowance -- (318) (640)
- ---------------------------------------------------------------
Subtotal 1,631 1,484 1,468
Deferred tax liabilities:
Depreciation (130) (99) (50)
Pension expense (406) (379) (314)
Valuation adjustment for
debt securities (6) -- (7)
Other (111) (140) (62)
- ---------------------------------------------------------------
Total gross deferred
tax liabilities (653) (618) (433)
- ---------------------------------------------------------------
Net deferred tax asset $ 978 $ 866 $1,035
- ---------------------------------------------------------------
Based upon DNB's current and historical tax history and the anticipated
level of future taxable income, management believes the existing net deferred
tax asset will, more likely than not, be realized based on future taxable
income. The reductions in the valuation allowance for deferred taxes during
1997, 1996 and 1995 are attributable to improved earnings and expected continued
improvement through the subsequent one year period permitted under applicable
regulations.
(10) EARNINGS PER SHARE
The table below is a reconcilement of net income and the weighted average
number of shares outstanding for basic and diluted EPS:
<TABLE>
<CAPTION>
Year Ended December 31
(Amounts in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Income Shares Amount Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income $2,715 $2,318 $1,870
Basic EPS
Income available to
common stockholders $2,715 1,452 $1.87 $2,318 1,452 $1.60 $1,870 1,452 $1.29
Effect of dilutive common
stock equivalents -
stock options -- 28 0.03 -- 10 0.01 -- 3 --
- ------------------------------------------------------------------------------------------------------------------------------
Diluted EPS
Income available to
common stockholders
after assumed
conversions $2,715 1,480 $1.84 $2,318 1,462 $1.59 $1,870 1,455 $1.29
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(11) BENEFIT PLANS
Pension Plan
The Bank maintains a pension plan (the "Plan") covering all employees,
including officers, who have been employed for one year and have attained 21
years of age. Prior to May 1, 1985, an individual must have attained the age of
25 and accrued one year of service. The Plan provides pension benefits to
eligible retired employees at 65 years of age equal to 1.5% of their average
monthly pay multiplied by their years of accredited service (maximum 40 years).
The accrued benefit is based on the monthly average of their highest five
consecutive years of their last ten years of service.
32
<PAGE>
Notes to Consolidated Financial Statements
The following table sets forth the Plan's funded status, as of the
measurement dates of December 31, 1997 and 1996 and amounts recognized in DNB's
consolidated financial statements at December 31, 1997 and 1996:
December 31
1997 1996
- ------------------------------------------------------------------
Actuarial present value of
benefit obligation:
Vested benefit obligation $(3,606,979) $(3,362,222)
- ------------------------------------------------------------------
Accumulated benefit obligation $(3,670,385) $(3,476,731)
- ------------------------------------------------------------------
Projected benefit obligation $(4,302,021) $(4,278,498)
Plan assets at fair value 5,486,448 4,431,541
- ------------------------------------------------------------------
Projected benefit obligation
over plan assets 1,184,427 153,043
Unrecognized net asset at
January 1, 1987 being
amortized over 17 years (130,990) (149,491)
Unrecognized net (gain) loss (35,767) 837,060
- ------------------------------------------------------------------
Prepaid pension cost
included in other assets $ 1,017,670 $ 840,612
- ------------------------------------------------------------------
Net periodic pension costs for the years indicated include the following
components:
Year Ended December 31
1997 1996 1995
- ------------------------------------------------------------------
Service cost-benefits earned
during the period $159,082 $152,691 $146,717
Interest cost on projected
benefit obligation 292,502 267,889 244,784
Actual return on
plan assets (987,562) (258,307) (397,377)
Asset gain (loss) 614,010 (82,047) 89,413
Amortization of
unrecognized net asset
at transition (18,501) (18,501) (18,503)
Amortization of
unrecognized net loss
after transition 15,756 13,327 8,778
- ------------------------------------------------------------------
Net pension cost $ 75,287 $ 75,052 $ 73,812
- ------------------------------------------------------------------
Assumptions used:
Discount rate 7.00% 7.00% 7.00%
Rate of increase in
compensation level 5.00 5.00 5.00
Expected long-term rate
of return on assets 8.50 8.50 8.50
- ------------------------------------------------------------------
The Pension Plan's assets are invested using an asset allocation strategy,
in units of certain equity, bond, real estate and money market funds.
401(k) Retirement Savings Plan
The Bank's retirement savings plan enables employees to become eligible to
participate after one year of service, and will thereafter participate in the
401(k) plan for any year in which they have been employed for at least 1,000
hours. In general, amounts held in a participant's account are not distributable
until the participant terminates employment, reaches age 59 1/2, dies or becomes
permanently disabled.
Participants are permitted to authorize pre-tax savings contributions to a
separate trust established under the 401(k) plan, subject to limitations on
deductibility of contributions imposed by the Internal Revenue Code. The Bank
makes matching contributions of $.25 for every dollar of deferred salary up to
6% of each participant's annual compensation. Each participant is 100% vested at
all times in employee and employer contributions. The matching contributions to
the 401(k) plan were $29,000, $30,000 and $28,000 in 1997, 1996 and 1995,
respectively.
Stock-based Compensation
DNB has a Stock Option Plan for employees and directors. Under the plan,
options (both qualified and non-qualified) to purchase a maximum of 150,490
shares of DNB's common stock could be issued to employees and directors. Option
exercise prices must equal the fair market value of the shares on the date of
option grant and the option exercise period may not exceed ten years. Vesting of
options under the plan is determined by the Plan Committee. There were 58,185
and 85,144 shares available for grant at December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, the number of options exercisable
was 92,305 and 65,346, respectively, and the weighted average exercise price of
those options was $13.55 and $11.18, respectively.
33
<PAGE>
Notes to Consolidated Financial Statements
At December 31, 1997, the range of exercise prices was $9.83-$19.29 and the
weighted-average remaining contractual life of the outstanding options was 8.4
years.
The per share weighted-average fair value of stock options granted during
1997, 1996 and 1995 was $6.13, $4.57 and $3.94 on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: for 1997-expected dividend yield of 2.73%, risk-free interest rate
of 5.77%, expected life of 9.5 years and an expected volatility of stock over
the expected life of the options was 26%; for 1996-expected dividend yield of
1.98%, risk-free interest rate of 6.3%, expected life of 9.5 years and an
expected volatility of stock over the expected life of the options of 22%; for
1995-expected dividend yield of .91%, risk-free interest rate of 5.6%, expected
life of 8.5 years and an expected volatility of stock over the expected life of
the options of 22%.
DNB applies APB Opinion No. 25 in accounting for its Stock Option Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had DNB determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, DNB's net
income and earnings per share would have been reduced to the pro forma amounts
indicated at the top of the next column:
Year Ended December 31
1997 1996 1995
- ----------------------------------------------------------
Net income
as reported $2,715,200 $2,317,600 $1,870,300
pro forma 2,606,086 2,221,921 1,738,345
Net income per share
as reported $1.87 $1.60 $1.29
pro forma 1.78 1.53 1.20
- ----------------------------------------------------------
(12) COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE-SHEET RISK
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as guarantees and commitments to extend
credit, which are not reflected in the consolidated financial statements.
Management does not anticipate any significant losses as a result of these
commitments. DNB had outstanding standby letters of credit in the amount of
approximately $1.8 million and unfunded loan and lines of credit commitments in
the amount of approximately $19.8 million at December 31, 1997.
These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet. The
exposure to credit loss in the event of non-performance by the party to the
financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual amount. Manage-
- --------------------------------------------------------------------------------
Stock option activity, restated for the stock split and stock dividends
issued during the year, is indicated below:
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
Weighted Weighted Weighted
Price Average Price Average Price Average
Number Ranges Price Number Ranges Price Number Ranges Price
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 65,346 $9.83-$13.27 $11.18 38,665 $9.83 $ 9.83 -- $ -- $ --
Granted 26,959 19.29 19.29 26,681 12.47-13.27 13.14 38,665 9.83 9.83
Exercised -- -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 92,305 65,346 38,665
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
Notes to Consolidated Financial Statements
ment uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Standby letters of credit are conditional commitments issued by DNB to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risks involved in issuing letters of credit are essentially the same as
those involved in extending loan facilities to customers. DNB holds various
collateral to support these commitments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. DNB evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral, if any, obtained upon the
extension of credit, usually consists of real estate, but may include
securities, property or other assets.
DNB maintains borrowing arrangements with a correspondent bank and the FHLB
of Pittsburgh, as well as access to the discount window at the Federal Reserve
Bank of Philadelphia to meet short-term liquidity needs. Through these
relationships, DNB has available short-term credit of approximately $49 million.
DNB is a party to a number of lawsuits arising in the ordinary course of
business. While any litigation causes an element of uncertainty, management is
of the opinion that the liability, if any, resulting from the actions, will not
have a material effect on the accompanying financial statements.
(13) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of DNB Financial Corporation (parent
company only) follows:
Condensed Statements of Financial Condition
December 31
1997 1996
- ----------------------------------------------------------
Assets
Investment in subsidiary $18,355,563 $16,216,014
- ----------------------------------------------------------
Total assets $18,355,563 $16,216,014
- ----------------------------------------------------------
Liabilities and
Stockholders' Equity
Liabilities
Dividends payable
to stockholders $ -- $ --
- ----------------------------------------------------------
Total liabilities -- --
- ----------------------------------------------------------
Stockholders' Equity
Total stockholders' equity 18,355,563 16,216,014
- ----------------------------------------------------------
Total liabilities and
stockholders' equity $18,355,563 $16,216,014
- ----------------------------------------------------------
Condensed Statements of Operations
Year Ended December 31
1997 1996 1995
- -----------------------------------------------------------------
Income:
Dividends from
subsidiary $ 618,291 $ 372,224 $ 139,300
Equity in undistributed
income of subsidiary 2,096,909 1,945,376 1,731,000
- -----------------------------------------------------------------
Net income $2,715,200 $2,317,600 $1,870,300
- -----------------------------------------------------------------
35
<PAGE>
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
Year Ended December 31
1997 1996 1995
- ----------------------------------------------------------------------
Cash Flows From
Operating Activities:
Net income $2,715,200 $2,317,600 $1,870,300
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Equity in
undistributed income
of subsidiary (2,096,909) (1,945,376) (1,731,000)
Decrease (increase)
in dividend
receivable -- -- 29,903
- ----------------------------------------------------------------------
Net Cash Provided by
Operating Activities 618,291 372,224 169,203
- ----------------------------------------------------------------------
Cash Flows From
Financing Activities:
Dividends paid (618,291) (372,224) (169,203)
Net Cash Used in
Financing Activities (618,291) (372,224) (169,203)
- ----------------------------------------------------------------------
Net Change in Cash
and Cash Equivalents $ -- $ -- $ --
- ----------------------------------------------------------------------
(14) 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.
Federal banking agencies impose three minimum capital requirements on DNB
- -- risk-based capital ratios based on total capital and "Tier 1" capital, and a
leverage capital ratio. The risk-based capital ratios measure the adequacy of a
bank's capital against the riskiness of its assets and off-balance sheet
activities. Failure to maintain adequate capital is a basis for "prompt
corrective action" or other regulatory enforcement action. In assessing a bank's
capital adequacy, regulators also consider other factors such as interest rate
risk exposure; liquidity, funding and market risks; quality and level of
earnings; concentrations of credit, quality of loans and investments; risks of
any nontraditional activities; effectiveness of bank policies; and management's
overall ability to monitor and control risks.
Quantitative measures established by regulation to ensure capital adequacy
require DNB to maintain certain minimum amounts and ratios as set forth on the
next page. Management believes that DNB meets all capital adequacy requirements
to which it is subject.
The most recent notification from the OCC, dated February 4, 1997
categorized DNB as "Well Capitalized" under the regulatory framework for prompt
corrective action. To be categorized as Well Capitalized, DNB must maintain
minimum ratios as set forth on the next page. There are no conditions or events
since that notification, that management believes would have changed DNB's
category. Actual capital amounts and ratios are as follows.
36
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total risk-based capital.............. $20,123 14.43% $11,155 8.00% $13,944 10.00%
Tier 1 capital........................ 18,336 13.15 5,578 4.00 8,366 6.00
Tier 1 (leverage) capital............. 18,336 8.46 8,665 4.00 10,832 5.00
As of December 31, 1996:
Total risk-based capital.............. 17,957 12.76 10,733 8.00 13.416 10.00
Tier 1 capital........................ 16,238 11.47 5,366 4.00 8,050 6.00
Tier 1 (leverage) capital............. 16,238 7.59 8,205 4.00 10,257 5.00
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(15) QUARTERLY FINANCIAL DATA (Unaudited)
The following table sets forth selected consolidated quarterly financial
data and earnings per share for the periods indicated. Per share data have been
adjusted for the 2 for 1 stock split in September 1997 and for the five percent
(5%) stock dividends declared in 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
(Dollars in thousands, Fourth Third Second First Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $4,198 $4,148 $4,089 $3,928 $3,911 $3,856 $3,760 $3,635
Interest expense 1,858 1,798 1,693 1,635 1,679 1,645 1,572 1,563
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 2,340 2,350 2,396 2,293 2,232 2,211 2,188 2,072
Provision for loan losses -- -- -- -- -- -- -- --
Non-interest income 383 346 252 218 274 238 191 193
Non-interest expense 1,833 1,795 1,709 1,659 1,660 1,613 1,642 1,708
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 890 901 939 852 846 836 737 557
Income tax expense 219 218 218 212 230 185 140 103
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 671 $ 683 $ 721 $ 640 $ 616 $ 651 $ 597 $ 454
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $0.46 $0.47 $0.50 $0.44 $0.43 $0.45 $0.41 $0.31
Diluted earnings per share 0.45 0.46 0.49 0.44 0.42 0.45 0.41 0.31
Dividends per share 0.11 0.11 0.10 0.10 0.07 0.07 0.07 0.04
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
DNB Financial Corporation:
We have audited the accompanying consolidated statements of financial
condition of DNB Financial Corporation and subsidiary as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DNB
Financial Corporation and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
January 16, 1998
Philadelphia, PA
38
EX-24
Consent of Independent Certified Public Accountants
The Board of Directors
DNB Financial Corporation:
We consent to incorporation by reference in the registration statement (No.
33-93272) on Form S-8 of DNB Financial Corporation of our report dated January
16, 1998 relating to the consolidated statements of financial condition of DNB
Financial Corporation and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997,
which report appears in the December 31, 1997 annual report on Form 10-K of DNB
Financial Corporation.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000713671
<NAME> DNB FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,783,533
<INT-BEARING-DEPOSITS> 719,474
<FED-FUNDS-SOLD> 15,889,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,888,462
<INVESTMENTS-CARRYING> 49,694,161
<INVESTMENTS-MARKET> 49,863,493
<LOANS> 129,954,114
<ALLOWANCE> 5,280,958
<TOTAL-ASSETS> 219,451,065
<DEPOSITS> 199,236,972
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,858,530
<LONG-TERM> 0
0
0
<COMMON> 14,516,610
<OTHER-SE> 3,838,953
<TOTAL-LIABILITIES-AND-EQUITY> 219,451,065
<INTEREST-LOAN> 11,518,808
<INTEREST-INVEST> 4,359,349
<INTEREST-OTHER> 485,449
<INTEREST-TOTAL> 16,363,606
<INTEREST-DEPOSIT> 6,781,293
<INTEREST-EXPENSE> 6,983,981
<INTEREST-INCOME-NET> 9,379,625
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 6,669
<EXPENSE-OTHER> 7,083,066
<INCOME-PRETAX> 3,580,200
<INCOME-PRE-EXTRAORDINARY> 2,715,200
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,715,200
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 1.84
<YIELD-ACTUAL> 8.13
<LOANS-NON> 2,904,892
<LOANS-PAST> 70,261
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,937,000
<ALLOWANCE-OPEN> 5,512,486
<CHARGE-OFFS> 48,330
<RECOVERIES> 216,802
<ALLOWANCE-CLOSE> 5,280,958
<ALLOWANCE-DOMESTIC> 5,280,958
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
