-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DwwXpBeUzRMQQQ2iVB0vqtlk/uX7/f9pvAq6+vf2COunCpIkXL8JW6Qr0jKqAH1n up7PsJsVu4ZE8GJCOcoSOQ== 0000713671-99-000002.txt : 19990514 0000713671-99-000002.hdr.sgml : 19990514 ACCESSION NUMBER: 0000713671-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DNB FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000713671 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232222567 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16667 FILM NUMBER: 99619359 BUSINESS ADDRESS: STREET 1: 4 BRANDYWINE AVE CITY: DOWNINGTOWN STATE: PA ZIP: 19335 BUSINESS PHONE: 6102691040 MAIL ADDRESS: STREET 1: 4 BRANDYWINE AVENUE CITY: DOWNINGTOWN STATE: PA ZIP: 19335 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1999 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ________________ to _____________ COMMISSION FILE NUMBER: 0-16667 DNB FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2222567 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4 BRANDYWINE AVENUE - DOWNINGTOWN, PA 19335 (Address of principal executive offices and Zip Code) (610) 269-1040 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK ($1.00 PAR VALUE) 1,524,229 (Class) (Shares Outstanding as of May 13, 1999) - -------------------------------------------------------------------------------- DNB FINANCIAL CORPORATION AND SUBSIDIARY INDEX PART I - FINANCIAL INFORMATION PAGE NO. ITEM 1. FINANCIAL STATEMENTS: CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION March 31, 1999 and December 31, 1998 3 CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, 1999 and 1998 4 CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1999 and 1998 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999 and December 31, 1998 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 18 ITEM 2. CHANGE IN SECURITIES 18 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 18 SECURITY HOLDERS ITEM 5. OTHER INFORMATION 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19 SIGNATURES 20
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION MARCH 31, DECEMBER 31, 1999 1998 ------------- ------------- ASSETS Cash and due from banks ............................................................... $ 13,527,438 $ 13,660,149 Federal funds sold .................................................................... 8,436,000 6,171,000 ------------- ------------- Total cash and cash equivalents ....................................................... 21,963,438 19,831,149 ------------- ------------- Investment securities available for sale, at market value ............................. 48,523,628 45,519,420 Investment securities (market value $46,847,339 in 1999 and $47,528,269 in 1998)....... 46,848,451 47,380,404 Loans, net of unearned income ......................................................... 153,730,867 148,725,716 Allowance for loan losses ........................................................... (5,226,011) (5,204,869) ------------- ------------- Net loans ............................................................................. 148,504,856 143,520,847 ------------- ------------- Office property and equipment ......................................................... 4,725,101 4,558,811 Accrued interest receivable ........................................................... 1,792,707 1,670,123 Other real estate owned ............................................................... 191,851 138,775 Deferred income taxes ................................................................. 1,208,626 1,037,415 Other assets .......................................................................... 2,708,666 1,761,487 ------------- ------------- Total assets .......................................................................... $ 276,467,324 $ 265,418,431 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Non-interest-bearing deposits ......................................................... $ 30,139,665 $ 30,001,051 Interest-bearing deposits: NOW ................................................................................ 37,056,457 37,074,977 Money market ....................................................................... 38,550,073 32,582,044 Savings ............................................................................ 31,428,016 28,321,246 Time ............................................................................... 98,672,052 97,394,014 ------------- ------------- Total deposits ........................................................................ 235,846,263 225,373,332 ------------- ------------- Federal Home Loan Bank advances ....................................................... 18,000,000 18,000,000 Accrued interest payable .............................................................. 937,558 902,009 Other liabilities ..................................................................... 1,010,386 536,872 ------------- ------------- Total liabilities ..................................................................... 255,794,207 244,812,213 ------------- ------------- STOCKHOLDERS' EQUITY Preferred stock, $10.00 par value; 1,000,000 shares authorized; none issued ........................................... -- -- Common stock, $1.00 par value; 10,000,000 shares authorized; 1,524,229 issued and outstanding, respectively ............................................... 1,524,229 1,524,229 Surplus ............................................................................... 17,104,817 17,104,817 Retained earnings ..................................................................... 2,353,818 1,924,803 Accumulated other comprehensive (loss) income ......................................... (309,747) 52,369 ------------- ------------- Total stockholders' equity ............................................................ 20,673,117 20,606,218 ------------- ------------- Total liabilities and stockholders' equity ............................................ $ 276,467,324 $ 265,418,431 ============= =============
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31 --------------------------- 1999 1998 ------------ ------------ Interest and fees on loans ................................................... $3,124,731 $2,862,993 Interest on investment securities: Taxable .................................................................... 1,423,966 1,119,693 Exempt from Federal taxes .................................................. 104,057 -- Interest on Federal funds sold ............................................... 44,422 180,981 ------------ ------------ Total interest income ........................................................ 4,697,176 4,163,667 ------------ ------------ INTEREST EXPENSE: Interest on time deposits .................................................... 1,299,128 1,250,157 Interest on NOW, money market and savings .................................... 691,955 557,834 Interest on repurchase agreements ............................................ -- 673 Interest on FHLB advances .................................................... 228,466 38,170 ------------ ------------ Total interest expense ....................................................... 2,219,549 1,846,834 ------------ ------------ Net interest income .......................................................... 2,477,627 2,316,833 Provision for loan losses .................................................... -- -- ------------ ------------ Net interest income after provision for loan losses .......................... 2,477,627 2,316,833 ------------ ------------ NON-INTEREST INCOME: Service charges .............................................................. 129,599 114,345 Trust income ................................................................. 82,341 133,929 Other ........................................................................ 154,972 90,020 ------------ ------------ Total non-interest income .................................................... 366,912 338,294 ------------ ------------ NON-INTEREST EXPENSE: Salaries and employee benefits ............................................... 1,023,581 1,078,279 Furniture and equipment ...................................................... 213,073 148,974 Occupancy .................................................................... 121,669 100,113 Professional and consulting .................................................. 95,850 68,980 Printing and supplies ........................................................ 63,831 57,463 Advertising and marketing .................................................... 88,360 44,898 Other ........................................................................ 320,010 255,414 ------------ ------------ Total non-interest expense ................................................... 1,926,374 1,754,121 ------------ ------------ Income before income taxes ................................................... 918,165 901,006 Income tax expense ........................................................... 291,000 250,000 ------------ ------------ NET INCOME ................................................................... $ 627,165 $ 651,006 ============ ============ EARNINGS PER SHARE: Basic ........................................................................ $ 0.41 $ 0.43 Diluted ...................................................................... 0.40 0.41 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: ........................ Basic ........................................................................ 1,524,229 1,523,942 Diluted ...................................................................... 1,574,725 1,576,236 CASH DIVIDENDS PER SHARE ..................................................... $ 0.13 $ 0.12
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31 --------------------------- 1999 1998 ----------- ----------- Cash Flows From Operating Activities: Net income ........................................................................................... $ 627,165 $ 651,006 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net ........................................................ 178,223 135,499 Gain on sale of OREO ................................................................................. (45,811) -- Increase (decrease) in interest receivable ........................................................... (122,584) 207,434 Increase in other assets ............................................................................. (947,179) (363,344) Increase in interest payable ......................................................................... 35,549 33,239 Increase in current taxes payable .................................................................... 233,871 225,000 Increase (decrease) in other liabilities ............................................................. 239,643 (448,698) ----------- ----------- Net Cash Provided By Operating Activities ............................................................ 198,877 440,136 ----------- ----------- Cash Flows From Investing Activities: Proceeds from maturities & paydowns of AFS securities ................................................ 1,059,210 5,161,578 Proceeds from maturities & paydowns of HTM securities ................................................ 1,502,943 7,698,599 Purchase of AFS securities ........................................................................... (4,606,240) (6,457,813) Purchase of HTM securities ........................................................................... (1,000,000) (8,591,966) Net increase in loans ................................................................................ (5,092,501) (2,248,853) Proceeds from sale of OREO ........................................................................... 101,227 -- Purchase of bank property and equipment .............................................................. (306,008) (56,863) ----------- ----------- Net Cash Used By Investing Activities ................................................................ (8,341,369) (4,495,318) ----------- ----------- Cash Flows From Financing Activities: Net increase in deposits ............................................................................. 10,472,931 1,615,461 Increase in FHLB advances ............................................................................ -- 5,000,000 Dividends paid ....................................................................................... (198,150) (174,199) Proceeds form issuance of common stock ............................................................... -- 2,949 ----------- ----------- Net Cash Provided By Financing Activities ............................................................ 10,274,781 6,444,211 ----------- ----------- Net Change in Cash and Cash Equivalents .............................................................. 2,132,289 2,389,029 Cash and Cash Equivalents at Beginning of Period ..................................................... 19,831,149 23,392,007 ----------- ----------- Cash and Cash Equivalents at End of Period ........................................................... $ 21,963,438 $ 25,781,036 =========== =========== Supplemental Disclosure Of Cash Flow Information: Cash paid during the period for: Interest ............................................................................................. $ 2,184,000 $ 1,813,595 Taxes ................................................................................................ 360,000 360,000 Supplemental Disclosure Of Non-Cash Flow Information: Transfer of loans to OREO ............................................................................ $ 108,492 $ 171,035
See accompanying notes to consolidated financial statements. DNB FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION AND RESTATEMENT The accompanying unaudited consolidated financial statements of DNB Financial Corporation (referred to herein as the "Corporation" or "DNB") and its subsidiary, Downingtown National Bank (the "Bank"), have been prepared in accordance with the instructions for Form 10-Q and therefore do not include certain information or footnotes necessary for the presentation of financial condition, statement of operations and statement of cash flows required by generally accepted accounting principles. However, in the opinion of management, the consolidated financial statements reflect all adjustments (which consist of normal recurring adjustments) necessary for a fair presentation of the results for the unaudited periods. Prior period amounts not affecting net income are reclassified when necessary to conform with current year classifications. The results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results which may be expected for the entire year. The consolidated financial statements should be read in conjunction with the Annual Report and report on Form 10-K for the year ended December 31, 1998. NOTE 2: EARNINGS PER SHARE (EPS) Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. 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 dividend paid in December 1998. Net income and weighted average number of shares outstanding for basic and diluted EPS for the three months ended March 31, 1999 and 1998 are reconciled as follows:
1999 1998 ----------------------------- ---------------------------- Income Shares Amount Income Shares Amount BASIC EPS: ----------------------------- ---------------------------- Income available to common stockholders ........ $627,165 1,524,229 $0.41 $651,006 1,523,942 $0.43 Effect of dilutive common stock equivalents- stock options ............................. -- 50,496 0.01 -- 52,294 0.02 -------- --------- ----- -------- --------- ----- DILUTED EPS .................................... $627,165 1,574,725 $0.40 $651,006 1,576,236 $0.41 ======== ========= ===== ======== ========= =====
NOTE 3: COMPREHENSIVE INCOME Comprehensive income includes all changes in stockholders' equity during the period, except those resulting from investments by owners and distributions to owners. DNB's comprehensive income for the three months ended March 31, 1999 and 1998 was $265,049 and $633,612 and consisted of net income and other comprehensive income relating to the change in unrealized losses on investment securities available for sale, as shown in the following table:
1999 1998 --------- --------- COMPREHENSIVE INCOME: Net income ................................... $ 627,165 $ 651,006 Other comprehensive income, net of tax, relating to unrealized losses on investments (362,116) (17,394) --------- --------- Total comprehensive income ................... $ 265,049 $ 633,612 ========= =========
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). This statement standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and those used for hedging activities, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. SFAS No. 133 generally provides for matching of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, so long as the hedge is effective. Prospective application of SFAS No. 133 is required for all fiscal years beginning after June 15, 1999, however earlier application is permitted. DNB has not yet determined the impact, if any, of this statement, including its provisions for the potential reclassifications of investment securities, on operations, financial condition and equity and comprehensive income. However, DNB currently has no derivatives covered by this statement and currently conducts no hedging activities. DNB FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHANGES IN FINANCIAL CONDITION DNB's total assets were $276.5 million at March 31, 1999 compared to $265.4 million at December 31, 1998. Total loans, net of unearned income, increased $5.0 million or 3% to $153.7 million from $148.7 million at December 31, 1998. Total investment securities (AFS and HTM) increased $2.5 million or 3% to $95.4 million from $92.9 million at December 31, 1998, while Federal funds sold increased $2.3 million to $8.4 million at March 31, 1999. These increases were funded from deposits at our new Kennett Square branch, which was purchased from Keystone Financial Bank on March 27, 1999. Other assets increased $947,000 or 54% to $2.7 million at March 31, 1999. The increase in this category resulted from the intangible asset recognized on the branch purchase, as well as an increase in prepaid expenses relating to annual equipment maintenance contracts. Deposits at March 31, 1999 totaled $235.8 million, compared to $225.4 million at December 31, 1998. $9.1 million of the increase was attributable to the new branch purchase from Keystone. Total borrowings at March 31, 1999 were $18.0 million, unchanged from December 31, 1998. At March 31, 1999, total stockholders' equity was $20.7 million or $13.56 per share, compared to $20.6 million or $13.52 per share at December 31, 1998. The increase in stockholders' equity was the result of net income of $627,000 for the three months ended March 31, 1999, offset by dividends paid of approximately $198,000 or $0.13 per share and change in the fair market value of available-for-sale investment securities. RESULTS OF OPERATIONS NET INTEREST INCOME DNB's earnings performance is primarily dependent upon its level of net interest income, which is the excess of interest revenue over interest expense. Interest revenue includes interest earned on loans (net of interest reversals on non-performing loans), investments, Federal funds sold and interest-earning cash, as well as loan fees and dividend income. Interest expense includes interest cost for deposits, Federal funds purchased, Federal Home Loan Bank advances, and other borrowings. Net interest income, on a taxable equivalent basis, increased $208,000 or 9% to $2.5 million for the three month period ended March 31, 1999. As shown in the following table, the increase in net interest income for the three month period ended March 31, 1999 was attributable to the positive effects of volume changes partially offset by the negative effects of rate changes. There was a $395,000 net benefit from changes in volume due largely to increased loans and investments, offset by significant increases in average deposits and borrowings. The negative impact from rate changes was largely attributable to lower yields on all interest-earning assets, which repriced more rapidly than interest-bearing liabilities. The following table sets forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the three months ended March 31, 1999 compared to the three months ended March 31, 1998 (tax-exempt yields have been adjusted to a tax equivalent basis using a 34% tax rate). 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.
Three Months Ended March 31, 1999 Compared to 1998 --------------------------------- Increase (Decrease) Due to --------------------------------- Rate Volume Total -------- -------- -------- (Dollars in thousands) Interest-earning assets: Loans .......................... (138) 400 262 Investment securities-taxable .. (51) 356 305 Investment securities-tax-exempt -- 151 151 Federal funds sold ............. (27) (110) (137) ----- ----- ----- Total .......................... (216) 797 581 Interest-bearing liabilities: Time deposits .................. (47) 96 49 Savings deposits ............... 17 117 134 Other borrowings ............... 1 189 190 ----- ----- ----- Total .......................... (29) 402 373 ----- ----- ----- Net Interest Income ............ (187) 395 208 ===== ===== =====
PROVISION FOR LOAN LOSSES To provide for potential losses 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. 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, on a sample basis, of individual borrowers regardless of size 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 months ended March 31, 1999, since management determined the allowance for loan losses was adequate based on its analysis and the level of net charge-offs/recoveries compared to the total allowance. Net loan recoveries were $21,000 for the three months ended March 31, 1999, compared to net loan charge-offs of $76,000 for the year ended December 31, 1998 and net loan charge-offs of $181,000 for the three months ended March 31, 1998. The percentage of net recoveries/(charge-offs) to total average loans was .01%, (.06%) and (.14%) for the same periods, respectively. Another measure of the adequacy of the allowance is the coverage ratio of the allowance to non-performing loans, which was 179% at March 31, 1999. In addition, the ratio of non-performing loans to total loans has steadily declined and was 1.9% at March 31, 1999. The following table summarizes the changes in the allowance for loan losses for the periods indicated. Real estate includes both residential and commercial real estate.
3 Months Year 3 Months Ended Ended Ended (Dollars in thousands) 3/31/99 12/31/98 3/31/98 - ---------------------- -------- -------- ------- Beginning Balance ........................... $ 5,205 $ 5,281 $ 5,281 Provisions .................................. -- -- -- Loans charged off: Real estate .......................... -- (59) (59) Commercial ........................... -- (233) 129 Consumer ............................. (4) (11) -- ------- ------- ------- Total charged off ................ (4) (303) (188) Recoveries: Real estate .......................... -- 144 -- Commercial ........................... 1 71 4 Consumer ............................. 24 12 3 ------- ------- ------- Total recoveries ................. 25 227 7 ------- ------- ------- Net recoveries (charge-offs) ................ 21 (76) (181) ------- ------- ------- Ending Balance .............................. $ 5,226 $ 5,205 $ 5,100 ======= ======= =======
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 other real estate owned ("OREO") properties, fees for cash management, safe deposit box rentals, issuing travelers' checks and money orders, check cashing, lock box services and similar activities. For the three month period ended March 31, 1999, non-interest income was $367,000, compared to $338,000 for the same three month period in 1998. The improvement in non-interest income can be attributed to significant increases in other income, largely offset by a reduction in trust income over the prior year. Service charge income also increased modestly. Service charge income for the three months ended March 31, 1999 was $130,000 compared to $114,000 for the same period in 1998. NSF fees, cycle charges and business analysis charges increased due to an increase in the volume of deposit accounts. Trust income for the three months ended March 31, 1999 was $82,000 compared to $134,000 for the same period in 1998. The decrease in Trust income was due primarily to a higher number of estate settlements in the first quarter of 1998, compared to the same period in 1999. Other non-interest income rose $65,000 or 72% to $155,000 for the three months ended March 31, 1999, from $90,000 for the same period in 1998. $46,000 of the increase was attributable to gains on sale of OREO properties. NON-INTEREST EXPENSE Non-interest expense includes salaries & employee benefits, furniture & equipment, occupancy, professional & consulting fees as well as advertising & marketing, printing & supplies, and other less significant expense items. Management remains committed to controlling non-interest expenses through training and awareness of improved operating procedures. Overall, non-interest expenses increased $172,000 for the three months ended March 31, 1999, compared to the same period in 1998. The increase for the three month period resulted from higher levels of all non-interest expense items, except for salaries & employee benefits. Salaries & employee benefits decreased $55,000 or 5% to $1,024,000 for the three months ended March 31, 1999 compared to $1,078,000 for the same period in 1998. The decrease in this category reflects fewer full-time equivalent employees in 1999. Furniture & equipment and occupancy expense increased $65,000 and $22,000, respectively, for the three months ended March 31, 1999, compared to the same period in 1998. The increase in furniture & fixtures expense was caused by higher levels of depreciation and maintenance costs related to the new equipment purchased at the end of last year to upgrade DNB's customer service and back office processing. The increase in occupancy expense was due to primarily costs incurred during the first quarter of 1999 for salting and snow removal. Advertising & marketing expense increased $43,000 to $88,000 for the three months ended March 31, 1999 compared to $45,000 for the same period in 1998. Advertising & marketing expenditures have increased to include marketing for new products and services, such as Direct Checking, Premier Money Market, and Home Power equity loans, as well as expanded Investment Services and Trust Division. Other non-interest expenses increased $65,000 to $320,000 for the three months ended March 31, 1999 compared to $255,000 for the same period in 1998. The increase was due to higher levels of postage, appraisal, telephone/fax, and other routine expenditures. The overall increase reflects DNB's current branch expansion efforts, and its commitment to service and technology. INCOME TAXES Income tax expense was $291,000 for the three months ended March 31, 1999 and $250,000 for the three months ended March 31, 1998. The rates used for income taxes for both periods were less than the statutory rate due to levels of tax-exempt interest income. ASSET QUALITY Non-performing assets are comprised of nonaccrual loans, loans delinquent over ninety days and still accruing, and Other Real Estate Owned ("OREO"). Nonaccrual loans are loans for which the accrual of interest ceases when the collection of principal or interest payments is determined to 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). Interest received on such loans is applied to the principal balance, or may in some instances, be recognized as 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. OREO consists of real estate acquired by foreclosure or deed in lieu of foreclosure. OREO is carried at the lower of cost or estimated fair value, less estimated disposition costs. Any significant change in the level of nonperforming assets is dependent to a large extent on the economic climate within DNB's markets and to the efforts of management to reduce the level of such assets. The following table sets forth those assets that are: (i) placed on nonaccrual status, (ii) contractually delinquent by 90 days or more and still accruing (iii) other real estate owned as a result of foreclosure or voluntary transfer to DNB.
March 31 Dec. 31 March 31 (Dollars in thousands) 1999 1998 1998 - ---------------------- -------- ------- -------- Nonaccrual Loans: Residential mortgage ............................. $ 219 $ 250 $ 259 Commercial mortgage .............................. 954 1,063 920 Commercial ....................................... 927 990 923 Consumer ......................................... 126 114 100 ------ ------ ------ Total nonaccrual loans ................................ 2,226 2,417 2,202 Loans 90 days past due and still accruing ............. 693 699 161 ------ ------ ------ Total non-performing loans ............................ 2,919 3,116 2,363 Other real estate owned ............................... 192 139 402 ------ ------ ------ Total non-performing assets ........................... $3,111 $3,255 $2,675 ====== ====== ====== ASSET QUALITY RATIOS: Non-performing Loans/Total Loans ...................... 1.9% 2.1% 1.8% Non-performing Assets/Total Loans and OREO ............ 2.0 2.2 2.1 Allowance for Loan & Lease Losses/Total Loans ......... 3.4 3.5 3.9 Allowance for Loan & Lease Losses/Total Loans and OREO 3.4 3.5 3.8 Allowance for Loan & Lease Losses/Non-performing Assets 168.0 159.9 184.5 Allowance for Loan & Lease Losses/Non-performing Loans 179.0 167.0 215.8
If interest income had been recorded on nonaccrual loans and trouble debt restructurings, interest would have been increased as shown in the following table:
3 Months Year 3 Months Ended Ended Ended (Dollars in thousands) ....................... 3/31/99 12/31/98 3/31/98 ------- -------- ------- Interest income which would have been recorded under original terms .................. $ 43 $ 194 $ 45 Interest income recorded during the period ... (2) (92) (23) ----- ----- ----- Net impact on interest income ................ $ 41 $ 102 $ 22 ===== ===== =====
As of March 31, 1999, DNB had impaired loans with a total recorded investment of $1.4 million and an average recorded investment for the three month period ended March 31, 1999 of $1.5 million. As of March 31, 1999, there were no impaired loans for which a related allowance for credit losses is necessary. Total cash collected on impaired loans was credited to the outstanding principal balance in the amount of $42,000 during the three months ended March 31, 1999. No interest income was recorded on such loans. As of December 31, 1998, DNB had impaired loans with a total recorded investment of $1.7 million and an average recorded investment for the year ended December 31, 1998 of $1.6 million. As of December 31, 1998, there were no impaired loans for which a related allowance for credit losses is necessary. Total cash collected on impaired loans was credited to the outstanding principal balance in the amount of $31,000 during the three months ended March 31,1998. No interest income was recorded on such loans. LIQUIDITY AND CAPITAL RESOURCES For a financial institution, liquidity is a measure of the ability to fund customers' needs for loans and deposit withdrawals. Management regularly evaluates economic conditions in order to maintain a strong liquidity position. One of the most significant factors considered by management when evaluating liquidity requirements is the stability of DNB's core deposit base. In addition to cash, DNB maintains a portfolio of short term investments to meet its liquidity requirements. DNB has historically relied on cash flow from operations and other financing activities. Liquidity is provided by investing activities, including the repayment and maturing of loans and investment securities. At March 31, 1999 DNB has $10.3 million in commitments to fund commercial real estate, construction and land development. In addition, DNB had commitments to fund $2.2 million in home equity lines of credit and $10.7 million in other unused commitments. Management anticipates the majority of these commitments will be funded by means of normal cash flows. In addition, $57.4 million of certificates of deposit at DNB are scheduled to mature during the nine months ending December 31, 1999. Management believes that the majority of such deposits will be reinvested with DNB. Stockholders' equity increased to $20 million at March 31, 1999 as a result of the $627,000 profit reported for the three months then ended and after dividends paid totaling approximately $198,000. Management believes that the Bank is adequately capitalized and as a result of the Bank's common equity position, the Bank's risk-based capital ratios exceed the 1999 regulatory required minimums. The following table summarizes data and ratios pertaining to the Bank's capital structure.
(Dollars in thousands) March 31, 1999 - ---------------------- -------------- Tier I Capital .................................. $ 20,248 Tier II Capital ................................. 2,402 ---------- Total Capital ................................... $ 22,650 ----------
Required Current Excess -------- ------- ------ Leverage ............................. 4.00% 7.68% 3.68% Tier I ............................... 4.00 10.83 6.83 Risk-based ........................... 8.00 12.12 4.12
In addition, the Federal Reserve Bank (the "FRB") leverage ratio rules require bank holding companies to maintain a minimum level of "primary capital" to total assets of 5.5% and a minimum level of "total capital" to total assets of 6%. For this purpose, (i) "primary capital" includes, among other items, common stock, contingency and other capital reserves, and the allowance for possible loan losses, (ii) "total capital" includes, among other things, certain subordinated debt, and "total assets" is increased by the allowance for possible loan losses. DNB's primary capital ratio and its total capital ratio are both 9.3%, well in excess of FRB requirements. REGULATORY MATTERS Dividends payable to the Corporation by the Bank are subject to certain regulatory limitations. Under normal circumstances, the payment of dividends in any year without regulatory permission is limited to the net profits (as defined for regulatory purposes) for that year, plus the retained net profits for the preceding two calendar years. YEAR 2000 READINESS DISCLOSURE Year 2000 issues arise from a concern that certain information systems and automated equipment will be unable to recognize and process properly date-related information after December 31, 1999. If not corrected, these system and equipment failures could produce inaccurate or unpredictable results causing disruptions of normal business operations beginning on January 1, 2000. In order to address these Year 2000 issues, DNB has developed a comprehensive approach beginning with the establishment of a Technology Steering Committee. The Committee has developed and implemented a compliance plan, which is divided into five phases: (1) awareness; (2) assessment; (3) renovation; (4) validation & testing; and (5) implementation. The goal is to ensure that each organizational function, system, application, file, program and database will correctly process, provide and/or receive data at the century date change beginning December 31, 1999. DNB has substantially completed the first four phases of the plan for all of its mission-critical systems, and it is currently working on the implementation phase. DNB anticipates that this final phase, which requires testing of all bank interfaces and connections with other systems, will be completed by June 30, 1999. In addition to mission-critical systems, DNB has identified and is monitoring the Year 2000 readiness of other vendors and service providers and has established contingency plans for alternate suppliers based upon target compliance time frames. To evaluate the risk of customer non-compliance with Year 2000 issues, the Bank initiated written communications with all of its commercial deposit and borrowing customers, which included a questionnaire, to assist in determining their awareness and readiness for the century date change. DNB also reviewed significant borrowing relationships (over $250,000) and classified them into high, moderate and low risk categories for non-compliance with Year 2000 issues. DNB is in the process of calling on those customers in the high and moderate risk categories to obtain personal responses to questionnaires in order to evaluate the risk to DNB from the failure of those customers to remediate their own Year 2000 issues. The results of these assessments are being incorporated into DNB's credit risk management processes, including customer risk ratings. At present, approximately 55% of these assessments have been completed, and the process is expected to be complete by June 30, 1999. Currently, DNB is in the process of developing an effective business resumption contingency plan that will outline its courses of action in the event of a Year 2000-related systems failure. The plan is being developed to help DNB resume operations in an orderly fashion and to continue providing essential services in the event of the most reasonably likely worst case scenarios. At this point, the DNB has completed the organizational planning phase of the four-phase process recommended by regulators, and it has almost completed the second phase - a business impact analysis. DNB is assessing the potential impact of internal and external mission-critical systems failures on its core business processes and determining the minimum acceptable level of system support and services. The next step will be to develop the specific Year 2000 business resumption contingency plans for each core business process along with scheduled completion dates, test dates and trigger dates. The goal is to develop strategies that are reasonable, cost-effective and practical. The target date for completion of the business resumption contingency plans is June 30, 1999. When completed, the plans will be validated independently in order to judge the effectiveness and reasonableness of the contingency strategies. DNB, while not completely Year 2000 compliant, is working diligently to achieve this goal. Year 2000 issues could result in material financial risk to a company such as DNB if the company and third party vendors upon which it relies were unable to address this issue in a timely manner. However, management currently expects DNB and its third party vendors to be Year 2000 compliant in all material respects before June 30, 1999. The Year 2000 statements contained herein, and in other securities filings of DNB are Year 2000 readiness disclosures subject to the Year 2000 Readiness and Disclosure Act of 1998, and may not be relied upon as representations or warranties for any purpose other than disclosure for Federal securities law compliance purposes. Management currently estimates that the costs of Year 2000 compliance will be approximately $60,000 during the two years ended December 31, 1999, or which approximately $30,000 has been expended through March 31, 1999. To date, management has succeeded in implementing its Year 2000 effort with existing staff and internal resources, and has not been obligated to expend significant funds in the process. It is anticipated that this will be possible for the balance of the Year 2000 project, except that in 1999 management plans to upgrade all personal computers that are not Year 2000 compliant. As a consequence, management anticipates that the Year 2000 costs will be funded from operating cash flow. QUANTITATIVE AND QUALIFIED DISCLOSURES ABOUT MARKET RISK No material changes in DNB's market risk occurred from December 31, 1998 to March 31, 1999. FORWARD-LOOKING STATEMENTS Certain statements in this report, including any which are not statements of historical fact, may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Without limiting the foregoing, the words "expect", "anticipate", "plan", "believe", "seek", "estimate", "predict", "internal" and similar words are intended to identify expressions that may be forward-looking statements. Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those contemplated by such statements. For example, actual results may be adversely affected by the following possibilities: (1) competitive pressure among depository institutions may increase; (2) changes in interest rates may reduce banking interest margins; (3) general economic conditions and real estate values may be less favorable than contemplated; (4) adverse legislation or regulatory requirements may be adopted; (5) the impact of the Year 2000 issue may be more significant than currently anticipated; (6) unexpected contingencies relating to Year 2000 compliance; and (7) other unexpected contingencies may arise. Many of these factors are beyond DNB's ability to control or predict. Readers of this report are accordingly cautioned not to place undue reliance on forward-looking statements. DNB disclaims any intent or obligation to update publicly any of the forward-looking statements herein, whether in response to new information, future events or otherwise. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Corporation's Annual Meeting held April 27, 1999, the stockholders voted as follows: A. Election of Class "C" Directors: THOMAS R. GREENLEAF For: 1,138,668 Against: -- Abstain: 40,810 LOUIS N. TETI For: 1,138,322 Against: -- Abstain: 41,156 JAMES H. THORNTON For: 1,138,440 Against: -- Abstain: 41,038 B. Amendment of the Corporation's 1995 Stock Option Plan to increase by 100,000 the number of shares for which options may be issued under the Plan. For: 852,579 Against: 70,563 Abstain: 13,458 C. Ratification of appointment of KPMG LLP as independent auditors of the Corporation, for the fiscal year ending December 31, 1999: For: 1,153,332 Against: 19,169 Abstain: 6,977 ITEM 5. OTHER INFORMATION On March 31, 1999, DNB and the Exton Square, Inc. signed a land lease for a new branch in the Exton area. This lease allows DNB to make certain improvements upon the subject property in order to operate a full service bank branch. This branch opening is planned for the third quarter of 2000 and is subject to various approvals. ITEM 6. (a) EXHIBITS: Exhibit Number Referred to Item 601 of Regulation S-K Description of Exhibit -------------------------- ---------------------- 27 Financial Data Schedule (b) REPORTS ON FORM 8-K Not Applicable SIGNATURES Pursuant to the requirements of The Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DNB FINANCIAL CORPORATION (Registrant) DATE: May 13, 1999 /S/ Henry F. Thorne ------------------- Henry F. Thorne, President and Chief Executive Officer DATE: May 13, 1999 /S/ Bruce E. Moroney -------------------- Bruce E.Moroney Chief Financial Officer EX-27 2
9 0000713671 DNB FINANCIAL CORP. 3-MOS DEC-31-1999 MAR-31-1999 6,715,985 6,811,453 8,436,000 0 48,523,628 46,848,451 46,847,339 153,730,867 5,226,011 276,467,324 235,846,263 0 1,947,944 18,000,000 0 0 1,524,229 19,148,888 276,467,324 3,124,731 1,528,023 44,422 4,697,176 1,991,083 2,219,549 2,477,627 0 0 1,926,374 918,165 627,165 0 0 627,165 .41 .40 7.56 2,226,209 693,050 0 6,944,000 5,204,869 4,130 25,272 5,226,011 5,226,011 0 0
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