10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended: September 30, 2000 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) 1,611,339 (Class) (Shares Outstanding as of November 13, 2000) --------------------------------------------------------------------------- DNB FINANCIAL CORPORATION AND SUBSIDIARY INDEX PART I - FINANCIAL INFORMATION PAGE NO. ITEM 1. FINANCIAL STATEMENTS (Unaudited): CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION September 30, 2000 and December 31, 1999 3 CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended September 30, 2000 and 1999 4 CONSOLIDATED STATEMENTS OF OPERATIONS Nine Months Ended September 30, 2000 and 1999 5 CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2000 and 1999 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 and December 31, 1999 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 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 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18 SIGNATURES 19
---------------------------------------------------------------------------------------------------------------- DNB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (Dollars in thousands, except per share data) ---------------------------------------------------------------------------------------------------------------- September 30, December 31, 2000 1999 ------------- ------------ ..................................................... ASSETS Cash and due from banks ................................. $ 11,070 $ 11,226 Federal funds sold ...................................... 12,863 6,304 --------- --------- Total cash and cash equivalents ......................... 23,933 17,530 --------- --------- Investment securities available for sale, at fair value 82,186 62,988 Investment securities (fair value $44,268 in 2000 and $39,869 in 1999) ......................... 45,510 40,683 Loans, net of unearned income ........................... 182,094 171,456 Allowance for loan losses ............................... (4,928) (5,085) --------- --------- Net loans ............................................... 177,166 166,371 --------- --------- Office property and equipment, net ...................... 5,827 5,776 Accrued interest receivable ............................. 2,510 1,804 Other real estate owned ................................. 183 83 Deferred income taxes ................................... 1,898 2,002 Other assets ............................................ 4,184 4,112 --------- --------- Total assets ............................................ $ 343,397 $ 301,349 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Non-interest-bearing deposits ........................... $ 35,941 $ 31,864 Interest-bearing deposits: NOW accounts ......................................... 39,523 39,501 Money market ......................................... 53,298 47,517 Savings .............................................. 28,763 30,199 Time ................................................. 128,571 105,800 --------- --------- Total deposits .......................................... 286,096 254,881 --------- --------- Borrowings .............................................. 32,743 23,746 Accrued interest payable ................................ 1,314 1,078 Other liabilities ....................................... 1,148 1,106 --------- --------- Total liabilities ....................................... 321,301 280,811 --------- --------- 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; 1,611,339 and 1,609,463 issued and outstanding, respectively ....... 1,611 1,609 Surplus ................................................. 18,570 18,555 Retained earnings ....................................... 3,744 2,429 Accumulated other comprehensive loss .................... (1,829) (2,055) --------- --------- Total stockholders' equity .............................. 22,096 20,538 --------- --------- Total liabilities and stockholders' equity .............. $ 343,397 $ 301,349 ========= =========
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------------------------------------------------------- DNB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars in thousands, except per share amounts) --------------------------------------------------------------------------------------------------------------------------------- Three Months Ended September 30 ------------------------------- 2000 1999 ---- ---- INTEREST INCOME: Interest and fees on loans.................................... $ 3,831 $ 3,549 Interest on taxable investment securities .................... 2,044 1,446 Interest on tax-free investment securities ................... 138 114 Interest on Federal funds sold................................ 152 123 ---------- ---------- Total interest income......................................... 6,165 5,232 ---------- ---------- INTEREST EXPENSE: Interest on time deposits..................................... 1,810 1,353 Interest on NOW, money market and savings .................... 1,136 916 Interest on Federal funds purchased........................... 3 -- Interest on FHLB advances..................................... 454 247 Interest on Lease obligations ................................ 25 -- ---------- ---------- Total interest expense........................................ 3,428 2,516 ---------- ---------- NET INTEREST INCOME .......................................... 2,737 2,716 PROVISION FOR LOAN LOSSES .................................... -- -- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .......... 2,737 2,716 ---------- ---------- NON-INTEREST INCOME: Service charges............................................... 193 168 Trust income.................................................. 109 89 Other......................................................... 137 237 ---------- ---------- Total non-interest income..................................... 439 494 ---------- ---------- NON-INTEREST EXPENSE: Salaries and employee benefits................................ 1,243 1,141 Furniture and equipment....................................... 261 240 Occupancy..................................................... 146 152 Advertising and marketing..................................... 59 105 Professional and consulting................................... 126 119 Printing and supplies......................................... 50 78 Other......................................................... 400 363 ---------- ---------- Total non-interest expense.................................... 2,285 2,198 ---------- ---------- INCOME BEFORE INCOME TAXES ................................... 891 1,012 INCOME TAX EXPENSE ........................................... 266 323 ---------- ---------- NET INCOME.................................................... $ 625 $ 689 ========== ========== COMMON SHARE DATA: EARNINGS PER SHARE: Basic................................................ $ 0.39 $ 0.43 Diluted.............................................. $ 0.38 $ 0.42 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic................................................ 1,611,339 1,603,924 Diluted.............................................. 1,628,443 1,643,557 CASH DIVIDENDS PER SHARE .................................... $ 0.13 $ 0.12
See accompanying notes to consolidated financial statements
------------------------------------------------------------------------------------------------------------------- DNB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars in thousands, except per share amounts) ------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30 ------------------------------ 2000 1999 ---- ---- INTEREST INCOME: Interest and fees on loans ................................... $ 11,047 $ 10,199 Interest on taxable investment securities .................... 5,618 4,305 Interest on tax-free investment securities ................... 392 331 Interest on Federal funds sold ............................... 262 224 ---------- ---------- Total interest income ........................................ 17,319 15,059 ---------- ---------- INTEREST EXPENSE: Interest on time deposits .................................... 4,834 3,963 Interest on NOW, money market and savings .................... 3,067 2,416 Interest on Federal funds purchased .......................... 9 -- Interest on FHLB advances .................................... 1,130 706 Interest on lease obligations ................................ 76 -- ---------- ---------- Total interest expense........................................ 9,116 7,085 ---------- ---------- NET INTEREST INCOME .......................................... 8,203 7,974 PROVISION FOR LOAN LOSSES .................................... -- -- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .......... 8,203 7,974 ---------- ---------- NON-INTEREST INCOME: Service charges .............................................. 549 456 Trust income ................................................. 343 309 Other ........................................................ 359 487 ---------- ---------- Total non-interest income .................................... 1,251 1,252 ---------- ---------- NON-INTEREST EXPENSE: Salaries and employee benefits ............................... 3,589 3,240 Furniture and equipment ...................................... 781 678 Occupancy .................................................... 445 438 Advertising and marketing ................................... 232 328 Professional and consulting ................................. 338 316 Printing and supplies ....................................... 180 213 Other ....................................................... 1,102 983 ---------- ---------- Total non-interest expense ................................... 6,667 6,196 ---------- ---------- INCOME BEFORE INCOME TAXES ................................... 2,787 3,030 INCOME TAX EXPENSE ........................................... 844 966 ---------- ---------- NET INCOME ................................................... $ 1,943 $ 2,064 ========== ========== COMMON SHARE DATA: EARNINGS PER SHARE: Basic ........................................................ $ 1.21 $ 1.29 Diluted ...................................................... $ 1.19 1.25 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic ..................................................... 1,611,170 1,601,614 Diluted ................................................... 1,626,662 1,651,805 CASH DIVIDENDS PER SHARE ..................................... $ 0.39 $ 0.37
See accompanying notes to consolidated financial statements.
---------------------------------------------------------------------------------------------------------------------- DNB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands) ---------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30 ------------------------------ 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................. $ 1,943 $ 2,064 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .......................... 526 603 Gain on sale of investments ............................ (25) -- Gain on sale of OREO ................................... -- (159) Increase in accrued interest receivable ................ (706) (194) Increase in other assets ............................... (72) (684) Increase in accrued interest payable ................... 236 68 Decrease in current taxes payable ...................... (806) (53) Increase (decrease) in other liabilities ............... 848 (91) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 1,944 1,554 -------- -------- Cash Flows From Investing Activities: Proceeds from maturities & paydowns of AFS securities .. 5,361 2,650 Proceeds from maturities & paydowns of HTM securities .. 5,853 11,951 Purchase of AFS securities ............................. (28,818) (17,413) Purchase of HTM securities ............................. (10,710) (8,578) Proceeds from sale of AFS securities ................... 4,654 -- Net increase in loans .................................. (10,894) (22,584) Proceeds from sale of OREO ............................. -- 683 Purchase of office property and equipment .............. (587) (954) -------- -------- NET CASH USED BY INVESTING ACTIVITIES .................. (35,141) (34,245) -------- -------- Cash Flows From Financing Activities: Net increase in deposits ............................... 31,215 28,019 Increase in FHLB advances .............................. 9,000 5,000 Decrease in lease obligations .......................... (4) -- Proceeds from exercise of stock options ................ 17 9 Dividends paid ......................................... (628) (595) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES .............. 39,600 32,433 -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS ................ 6,403 (258) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....... 17,530 19,831 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 23,933 $ 19,573 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest ............................................... $ 8,880 $ 7,017 Taxes .................................................. 650 1,057 Supplemental Disclosure Of Non-Cash Flow Information: Transfer of loans to OREO .............................. $ 99 $ 472 ======== ========
See accompanying notes to consolidated financial statements. DNB FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION 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 nine months ended September 30, 2000 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, 1999. 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 reflect the potential dilution that could occur from the conversion of common stock equivalents (i.e., stock options) and is computed using the treasury stock method. For the three and nine months ended September 30, 2000, 150,612 and 152,224 stock options were not included because such options were antidilutive. These shares may be dilutive in the future. 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 1999. Net income and the weighted average number of shares outstanding for basic and diluted EPS for the three and six months ended June 30, 2000 and 1999 are reconciled as follows:
Three months ended Three months ended September 30, 2000 September 30, 1999 ----------------------------------- -------------------------- Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Basic EPS: Income available to common stockholders .... $625 1,611 $0.39 $689 1,604 $0.43 Effect of dilutive common stock equivalents- stock options ......................... -- 17 0.01 -- 40 0.01 ---- ----- ------ ---- ----- ------- Diluted EPS ................................ $625 1,628 $0.38 $689 1,644 $0.42 ==== ===== ====== ==== ===== ======
Nine months ended Nine months ended September 30, 2000 September 30, 1999 ---------------------------------- ----------------------- Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Basic EPS: Income available to common stockholders .... $1,943 1,611 $ 1.21 $2,064 1,602 $ 1.29 Effect of dilutive common stock equivalents- stock options ........................ -- 16 0.02 -- 50 0.04 ------ ----- ----- ------ ----- ----- Diluted EPS ................................ $1,943 1,627 $ 1.19 $2,064 1,652 $ 1.25 ====== ===== ===== ====== ===== ====
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. Comprehensive income for all periods consisted of net income and other comprehensive (loss) income relating to the change in unrealized (losses) gains on investment securities available for sale, as shown in the following tables:
(Dollars in thousands) For three months ended Sept. 30 For nine months ended Sept. 30 ------------------------------- ------------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- COMPREHENSIVE INCOME: Net Income ........................................... $625 $ 689 $1,943 $ 2,064 Other comprehensive income (loss), net of tax, relating to unrealized gains (losses) on investments 60 (486) 226 (1,441) ---- ----- ------ ------- Total comprehensive income ........................... $685 $ 203 $2,169 $ 623 ==== ===== ====== =======
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS In September 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133") which was subsequently amended. 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, 2000, 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. In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS No. 140"). This statement supercedes and replaces the guidance in Statement 125. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, although it carries over most of Statement 125's provisions without reconsideration. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. This statement is to be applied prospectively with certain exceptions. Other than those exceptions, earlier or retroactive application of its accounting provisions is not permitted. DNB has not yet determined the impact if any, of this statement on the Bank's financial condition, equity, results of operations or disclosures. 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 $343.4 million at September 30, 2000 compared to $301.3 million at December 31, 1999. Investment securities (AFS and HTM) increased $24.0 million or 23% to $127.7 million at September 30, 2000. There were significant increases in U. S. Agency securities which grew by $17.4 million or 16.8%. Total loans were $177.2 million, up $10.8 million or 6% from $166.4 million at December 31, 1999. Federal funds sold were $12.9 million at September 30, 2000, up $6.6 million from December 31, 1999. The increase in assets was funded by a $31.2 million and a $9.0 million increase in deposits and borrowings, respectively since December 31, 1999. Deposits and other borrowings at September 30, 2000 totaled $318.8 million, compared to $278.6 million at December 31, 1999, an increase of $40.2 million, resulting from several successful deposit promotions. Since December 31, 1999, there have been increases of $22.8 million in time deposits, $5.8 million in Money Market accounts and $4.1 million in non-interest bearing accounts. Borrowings were $32 million at September 30, 2000, up $9 million from December 31, 1999. At September 30, 2000, stockholders' equity was $22.1 million or $13.71 per share, compared to $20.5 million or $12.76 per share at December 31, 1999. The increase in stockholders' equity was the result of net income of $1.9 million for the nine months ended September 30, 2000 and a $226,000 increase in the fair market value of available-for-sale securities, net of taxes, offset by dividends paid of approximately $628,000 or $.39 per share. RESULTS OF OPERATIONS NET INTEREST INCOME DNB's earnings performance is primarily dependent upon its level of net interest income, which is the excess of interest revenue over interest expense. Interest revenue includes interest earned on loans (net of interest reversals on non-performing loans), investments and 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, FHLB advances and other borrowings. On a tax-equivalent basis, net interest income increased $34,000 or 1.2% to $2.8 million for the three month period and $257,000 or 3.2% to $8.4 million for the nine month period ended September 30, 2000 compared to the respective periods in 1999. As shown in the following tables, the increases in net interest income for the three and nine month periods ended September 30, 2000 were attributable to the positive effects of volume changes which were offset by the negative effects of rate changes. The positive impact from volume changes was attributable to significant increases in interest-earning assets, which increased $38 million and $35 million on average, respectively, compared to increases in interest-bearing liabilities which grew $37 million and $33 million, respectively for the same periods. The negative impact from changes in rates for both periods was primarily attributable to the high cost of deposits and borrowings, partially offset by favorable changes in rates on investments during the three and nine month periods ended September 30, 2000. The following tables sets forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the three and nine months ended September 30, 2000 compared to the same periods in 1999 (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.
(Dollars in Thousands) Three Months Ended September 30, 2000 Compared to 1999 -------------------------------------------- Increase (Decrease) Due to -------------------------------------------- Rate Volume Total ----- ------ ----- Interest-earning assets: Loans .................................. $ 17 $ 266 $283 Investment securities-taxable .......... 174 424 598 Investment securities-tax exempt ....... 11 25 36 Federal funds sold ..................... 31 (2) 29 ----- ----- ---- Total ............................. 233 713 946 ----- ----- ---- Interest-bearing liabilities: Savings, NOW and money market deposits . 165 55 220 Time deposits .......................... 198 259 457 Federal funds purchased ................ -- 3 3 FHLB advances .......................... 50 157 207 Lease obligations ...................... -- 25 25 ----- ----- ---- Total ............................. 413 499 912 ----- ----- ---- Net interest income/interest rate spread $(180) $ 214 $ 34 ===== ===== ====
(Dollars in Thousands) Nine Months Ended September 30, 2000 Compared to 1999 -------------------------------------------- Increase (Decrease) Due to -------------------------------------------- Rate Volume Total ------ ------ ----- Interest-earning assets: Loans .................................. $(127) $ 975 $ 848 Investment securities-taxable .......... 330 983 1,313 Investment securities-tax exempt ....... 21 67 88 Federal funds sold ..................... 55 (17) 38 ----- ------- ------ Total ............................. 279 2,008 2,287 ----- ------- ------ Interest-bearing liabilities: Savings, NOW and money market deposits . 371 280 651 Time deposits .......................... 317 554 871 Federal funds purchased ................ -- 9 9 FHLB advances .......................... 120 303 423 Lease obligations ...................... -- 76 76 ----- ------- ------ Total ............................. 808 1,222 2,030 ----- ------- ------ Net interest income/interest rate spread $(529) $ 786 $ 257 ===== ======= ======
Provision for Loan Losses To provide for inherent 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 nine months ended September 30, 2000, 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 charge-offs were $157,000 for the nine months ended September 30, 2000, compared to net loan charge-offs of $120,000 for the year ended December 31, 1999 and net loan recoveries of $26,000 for the nine months ended September 30, 1999. . The percentage of net (charge-offs)/recoveries to total average loans was (.09%), (.07%) and .02% for the same respective periods. Another measure of the adequacy of the allowance is the coverage ratio of the allowance to non-performing loans, which was 294% at September 30, 2000. DNB'S coverage ratio is high relative to peers. However, its level of delinquencies and non-performing assets, although down significantly in the last few years, still remains well above peer averages. In addition, the ratio of non-performing loans to total loans has steadily declined and was 0.92% at September 30, 2000. 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.
9 Months Year 9 Months Ended Ended Ended (Dollars in Thousands) 9/30/00 12/31/99 9/30/99 ------- -------- ------- Beginning balance .................... $ 5,085 $ 5,205 $ 5,205 Provisions ........................... -- -- -- Loans charged off: Real estate ................... (138) (171) (14) Commercial .................... (26) -- -- Consumer ...................... (38) (45) (26) ------- ------- ------- Total charged off ......... (202) (216) (40) Recoveries: Real estate ................... 8 21 12 Commercial .................... 19 15 1 Consumer ...................... 18 60 53 ------- ------- ------- Total recoveries........... 45 96 66 ------- ------- ------- Net recoveries (charge-offs).......... (157) (120) 26 ------- ------- ------- Ending balance ............. $ 4,928 $ 5,085 $ 5,231 ======= ======= =======
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 services, safe deposit box rentals, issuing travelers' checks and money orders, check cashing, lockbox services and similar activities. For the three and nine month periods ended September 30, 2000, non-interest income was $439,000 and $1.3 million, respectively, compared to $494,000 and $1.3 million for the same periods in 1999. Service charges increased $25,000 and $93,000, to $193,000 and $549,000 for the three and nine month periods ended September 30, 2000 compared with the same periods in 1999. The increase in service charge income is due to increased deposit volume coupled with better collection methods of overdraft fees and cycle charges. NON-INTEREST EXPENSE Non-interest expense includes salaries & employee benefits, furniture & equipment, occupancy, professional & consulting fees as well as printing & supplies, insurance, advertising and other less significant expense items. Non-interest expenses increased $87,000 to $2.3 million and $471,000 to $6.7 million for the three and nine month periods ended September 30, 2000 compared to the same periods in 1999. The increase during these periods resulted primarily from higher levels of salaries & employee benefits and furniture & equipment expense. Salaries & employee benefits increased $101,000 or 8.9% to $1.2 million and $348,000 or 10.8% to $3.6 million for the three and nine month periods ended September 30, 2000, compared to $1.1 million and $3.2 million for the same periods in 1999. The increase in this category reflects an increase in full-time equivalent employees, merit increases as well as staffing for two new full service offices opened during 1999. Furniture & equipment expense increased $21,000 or 8.9% to $261,000 and $103,000 or 15.2% to $781,000 for the three and nine months ended September 30, 2000, respectively, compared to $240,000 and $678,000 for the same periods in 1999. The increases for both periods were due to higher levels of depreciation and maintenance agreements on new computer equipment and software. Advertising & marketing expense decreased $46,000 and $96,000 to $59,000 and $232,000 for the three and nine months ended September 30, 2000, respectively, compared to $105,000 and $328,000 for the same periods in 1999. Expenditures in 1999 were higher due to the opening and promotion of two new offices. INCOME TAXES Income tax expense was $266,000 and $844,000 for the three and nine months ended September 30, 2000 compared with $323,000 and $966,000 for the three and nine months ended September 30, 1999. The effective tax rate was 30% for the three and nine month period ending September 30, 2000 compared to 32% for the three and nine month periods ending September 30, 1999. The rates used for income taxes for both periods were less than the statutory rate as a result 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), 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. 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) on nonaccrual status, (ii) contractually delinquent by 90 days or more and still accruing and (iii) other real estate owned as a result of foreclosure or voluntary transfer to DNB.
Sept. 30 Dec. 31 Sept. 30 (Dollars in Thousands) 2000 1999 1999 ---- ---- ---- Nonaccrual Loans: Residential mortgage ......................... $ 142 $ -- $ 40 Commercial mortgage .......................... -- 361 494 Commercial ................................... 562 674 805 Consumer ..................................... 314 292 86 ------ ------ ------ Total nonaccrual loans ............................ 1,018 1,327 1,425 Loans 90 days past due and still accruing.......... 616 694 739 Troubled debt restructurings ...................... 40 -- -- ------ ------ ------ Total non-performing loans ........................ 1,674 2,021 2,164 Other real estate owned ........................... 183 83 83 ------ ------ ------ Total non-performing assets ....................... $1,857 $2,104 $2,247 ====== ====== ======
The following table sets forth the DNB's asset quality and allowance coverage ratios at the dates indicated:
Sept. 30 Dec. 31 Sept. 30 2000 1999 1999 ---- ---- ---- Non-performing Loans/Total Loans .................................. 0.9% 1.2% 1.3% Non-performing Assets/Total Loans and OREO ........................ 1.0 1.2 1.3 Allowance for Loan Losses/Total Loans ............................. 2.7 3.0 3.1 Allowance for Loan Losses/Total Loans and OREO..................... 2.7 3.0 3.1 Allowance for Loan Losses/Non-performing Assets ................... 265.4 241.7 232.8 Allowance for Loan Losses/Non-performing Loans .................... 294.4 251.6 241.7
If interest income had been recorded on nonaccrual loans, interest would have increased as shown in the following table:
9 Months Year 9 Months Ended Ended Ended (Dollars in thousands) 9/30/00 12/31/99 9/30/99 ------- -------- ------- Interest income which would have been recorded under original terms ................................... $ 62 $ 105 $ 83 Interest income recorded during the period .................... (10) (21) (7) ---- ----- ---- Net impact on interest income ................................. $ 52 $ 84 $ 76 ==== ===== ====
At September 30, 2000 and December 31, 1999, DNB had impaired loans with a total recorded investment of $493,000 and $715,000 , respectively, and an average recorded investment of $576,000 for the nine month period ended September 30, 2000 and $1.0 million for the year ended December 31, 1999. As of September 30, 2000 and December 31, 1999, there was no related allowance for credit losses necessary for these impaired loans. Total cash collected on impaired loans was credited to the outstanding principal balance in the amount of $124,000 during the nine months ended September 30, 2000 as compared to $130,000 during the nine months ended September 30, 1999. 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 September 30, 2000 DNB has $14.8 million in commitments to fund commercial real estate, construction and land development. In addition, DNB had commitments to fund $3.7 million in home equity lines of credit and $6.6 million in other unused commitments. Management anticipates the majority of these commitments will be funded by means of normal cash flows. In addition, $30.6 million of time deposits at DNB are scheduled to mature during the three months ending December 31, 2000. Management believes that the majority of such deposits will be reinvested with DNB and that certificates that are not renewed will be funded by a reduction in Federal funds sold or by paydowns and maturities of loans and investments. Stockholders' equity increased to $22.1 million at September 30, 2000 as a result of the $1.9 million profit reported for the nine months then ended and after dividends paid totaling $628,000 year-to-date. The Bank's common equity position at September 30, 2000 exceeds the regulatory required minimums. The following table summarizes data and ratios pertaining to the Bank's capital structure.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of September 30, 2000: Total risk-based capital...... $26,216 11.18% $18,764 8.00% $23,455 10.00% Tier 1 capital ............... 23,259 9.92 9,382 4.00 14,073 6.00 Tier 1 (leverage) capital..... 23,259 6.96 13,364 4.00 16,705 5.00
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 loan losses, (ii) "total capital" includes, among other things, certain subordinated debt, and "total assets" is increased by the allowance for loan losses. DNB's primary capital ratio and its total capital ratio are both 8.3%, 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK To measure the impacts of longer-term asset and liability mismatches beyond two years, DNB utilizes Modified Duration of Equity and Economic Value of Portfolio Equity ("EVPE") models. The modified duration of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVPE analysis is also used to dynamically model the present value of asset and liability cash flows, with rates ranging up or down 200 basis points. The economic value of equity is likely to be different if rates change. Results falling outside prescribed ranges require action by management. At September 30, 2000 and December 31, 1999, DNB's variance in the economic value of equity as a percentage of assets with an instantaneous and sustained parallel shift of 200 basis points is within its negative 3% guideline, as shown in the tables below.
September 30, 2000 December 31, 1999 -------------------------------- -------------------------------- Change in rates Flat -200bp +200bp Flat -200bp +200 bp ---- ------ ------ ---- ------ ------- Economic Value of Portfolio Equity ............ 28,523 30,724 20,953 28,232 33,060 20,351 Change ........................... 2,202 (7,569) 4,828 (7,881) Change as a % of assets .......... 0.64% (2.20%) 1.60% (2.62%)
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) unexpected contingencies relating to Year 2000 compliance; and (6) 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 Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. (a) EXHIBITS: Exhibit Number referred to in 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: November 13, 2000 ________________________________ Henry F. Thorne, President and Chief Executive Officer DATE: November 13, 2000 _________________________________ Bruce E. Moroney Chief Financial Officer SIGNATURES Pursuant to the requirements of The Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DNB FINANCIAL CORPORATION (Registrant) DATE: November 13, 2000 /S/ Henry F. Thorne ------------------- Henry F. Thorne, President and Chief Executive Officer DATE: November 13, 2000 /S/ Bruce E. Moroney -------------------- Bruce E.Moroney Chief Financial Officer