10-Q 1 document-10q_march2001.txt DNB 1ST QUARTER 10-Q 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, 2001 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) 1,691,575 (Class) (Shares Outstanding as of May 14, 2001) --------------------------------------------------------------------------- DNB FINANCIAL CORPORATION AND SUBSIDIARY INDEX PART I - FINANCIAL INFORMATION PAGE NO. ITEM 1. FINANCIAL STATEMENTS (Unaudited): CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION March 31, 2001 and December 31, 2000 3 CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, 2001 and 2000 4 CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2001 and 2000 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 and December 31, 2000 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 16 ITEM 2. CHANGE IN SECURITIES 16 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 16 SECURITY HOLDERS ITEM 5. OTHER INFORMATION 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 17 DNB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (Dollars in thousands, except per share data) MARCH 31, DECEMBER 31, 2001 2000 -------------------------------------------------------------------------------- ASSETS Cash and due from banks ............................... $ 9,432 $ 13,002 Federal funds sold .................................... 21,263 14,350 Investment securities available for sale, fair value .. 86,604 86,088 Investment securities held to maturity (fair value $40,867 in 2001 and $42,052 in 2000) .............. 43,939 42,328 Loans, net of unearned income ......................... 193,583 191,201 Allowance for loan losses ...................... (4,982) (4,917) --------- --------- Net loans ............................................. 188,601 186,284 --------- --------- Office property and equipment ......................... 6,430 5,889 Accrued interest receivable ........................... 2,411 2,580 Other real estate owned ............................... 183 183 Deferred income tax asset ............................. 1,054 1,427 Other assets .......................................... 7,585 4,539 --------- --------- TOTAL ASSETS .......................................... 367,502 356,670 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Non-interest-bearing deposits ......................... 36,196 38,898 Interest-bearing deposits: NOW ................................................ 41,063 44,450 Money market ....................................... 68,024 59,250 Savings ............................................ 31,527 29,811 Time ............................................... 112,918 118,382 --------- --------- TOTAL DEPOSITS ........................................ 289,728 290,791 --------- --------- FHLB advances ......................................... 50,000 40,000 Lease obligations ..................................... 740 741 --------- --------- TOTAL BORROWINGS ...................................... 50,740 40,741 --------- --------- Accrued interest payable .............................. 1,459 1,450 Other liabilities ..................................... 1,131 458 --------- --------- TOTAL LIABILITIES ..................................... 343,058 333,440 --------- --------- 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; 1,691,575 issued and outstanding, respectively ........................ 1,692 1,692 Surplus ............................................... 19,676 19,676 Retained Earnings ..................................... 3,496 3,111 Accumulated other comprehensive loss .................. (420) (1,249) --------- --------- TOTAL STOCKHOLDERS' EQUITY ............................ 24,444 23,230 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............ $ 367,502 $ 356,670 --------- --------- See accompanying notes to consolidated financial statements DNB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Ended March 31 -------------------------------------------------------------------------------- 2001 2000 -------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans ............................ $ 3,906 $ 3,565 Interest on investment securities: Taxable .......................................... 2,010 1,709 Exempt from Federal taxes ........................ 121 114 Interest on federal funds sold ........................ 193 67 ---------- ---------- Total interest income ............................ 6,230 5,455 ---------- ---------- INTEREST EXPENSE: Interest on time deposits ............................. 1,711 1,475 Interest on NOW, money market and savings ............. 1,147 927 Interest on FHLB advances ............................. 693 293 Interest on lease obligations ......................... 25 25 Interest on Federal funds purchased ................... -- 1 ---------- ---------- Total interest expense .......................... 3,576 2,721 ---------- ---------- ---------- Net interest income ................................... 2,654 2,734 Provision for loan losses ............................. -- -- ---------- ---------- Net interest income after provision for loan losses ... 2,654 2,734 ---------- ---------- NON-INTEREST INCOME: Service charges ....................................... 233 166 Trust and investment services ......................... 80 124 Other ................................................. 144 103 ---------- ---------- Total non-interest income ...................... 457 393 ---------- ---------- NON-INTEREST EXPENSE: Salaries and employee benefits ........................ 1,310 1,162 Furniture and equipment ............................... 238 258 Occupancy ............................................. 162 151 Advertising and marketing ............................. 57 83 Professional and consulting ........................... 86 113 Printing and supplies ................................. 48 61 Other ................................................. 343 322 ---------- ---------- Total non-interest expense ..................... 2,244 2,150 ---------- ---------- Income before income taxes ............................ 867 977 Income tax expense .................................... 262 293 ---------- ---------- NET INCOME ..................................... $ 605 $ 684 ---------- ---------- EARNINGS PER SHARE: Basic ................................................. $ 0.36 $ 0.41 Diluted ............................................... $ 0.35 $ 0.40 CASH DIVIDENDS PER SHARE .............................. $ 0.13 $ 0.12 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic ................................................. 1,691,575 1,672,800 Diluted ............................................... 1,711,890 1,692,808 See accompanying notes to consolidated financial statements DNB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months (DOLLARS IN THOUSANDS) Ended March 31 ---------------------- 2001 2000 -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .............................................. $ 605 $ 684 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net ........... 169 189 Decrease (increase) in interest receivable .............. 169 (266) Increase in other assets ................................ (46) (283) Increase in investment in BOLI .......................... (3,000) -- Increase in interest payable ............................ 9 156 Increase in current taxes payable ....................... 254 293 Increase (decrease) in other liabilities ................ 419 (897) -------- -------- NET CASH USED IN OPERATING ACTIVITIES ................... (1,421) (124) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities & paydowns of AFS securities ... 10,026 926 Proceeds from maturities & paydowns of HTM securities ... 5,653 2,147 Purchase of AFS securities .............................. (9,331) (11,766) Purchase of HTM securities .............................. (7,281) (4,542) Net increase in loans ................................... (2,317) (900) Proceeds from sale of OREO .............................. -- 101 Purchase of property and equipment ...................... (702) (121) -------- -------- NET CASH USED IN INVESTING ACTIVITIES ................... (3,952) (14,155) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits ..................... (1,063) 8,002 Increase (decrease) in FHLB advances .................... 10,000 (1,000) Decrease in lease obligations ........................... (1) (1) Proceeds from exercise of options ....................... -- 17 Dividends paid .......................................... (220) (209) -------- -------- NET CASH PROVIDED IN FINANCING ACTIVITIES ............... 8,716 6,809 -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS ................. 3,343 (7,470) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........ 27,352 17,530 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 30,695 $ 10,060 -------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest ................................................ $ 3,567 $ 2,565 SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION: Transfer of loans to OREO ............................... $ 0 $ 99 Change in unrealized gains (losses) on securities-AFS ... 1,202 536 Change in deferred taxes due to change in unrealized Gains or losses on securities-AFS .................. (373) (171) 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 three months ended March 31, 2001 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, 2000. 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 months ended March 31, 2001, 155,787 stock options were not included because such options were antidilutive. For the three months ended March 31, 2000, 164,711 stock options were not included. 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 2000. Net income and the weighted average number of shares outstanding for basic and diluted EPS for the three months ended March 31, 2001 and 2000 are reconciled as follows:
(Dollars in Thousands, except per share data) Three months ended Three months ended MARCH 31, 2001 MARCH 31, 2000 -------------------------------- ------------------------------- INCOME SHARES AMOUNT INCOME SHARES AMOUNT Basic EPS: Income available to common stockholders ........... $ 605 1,692 $ 0.36 $ 684 1,673 $ 0.41 Effect of dilutive common stock equivalents- stock options ................................ -- 20 0.01 -- 20 0.01 ----- ----- ------ ----- ----- ----- Diluted EPS ....................................... $ 605 1,712 $ 0.35 $ 684 1,693 $ 0.40 ===== ===== ====== ===== ===== =====
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: FOR THREE MONTHS ENDED MARCH 31 2001 2000 ---- ---- COMPREHENSIVE INCOME: Net Income ........................................... $ 605 $ 684 Other comprehensive income (loss), net of tax, relating to unrealized gains (losses) on investments 829 365 ------ ------ Total comprehensive income ........................... $1,434 $1,049 ====== ====== NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS In June 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. SFAS No. 133 was adopted on January 1, 2001 and there was no impact on operations, financial condition and equity and comprehensive income. 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 determined that there was no impact 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 FINANCIAL CONDITION DNB's total assets were $367.5 million at March 31, 2001 compared to $356.7 million at December 31, 2000. Investment securities (AFS and HTM) increased $2.1 million or 1.7% to $130.5 million at March 31, 2001. Total loans were $188.6 million, up $2.3 million or 1.2% from $186.3 million at December 31, 2000. Federal funds sold were $21.3 million at March 31, 2001, up $6.9 million from December 31, 2000. Other assets increased due to the purchase of a $3 million Bank Owned Life Insurance policy. The increase in assets was funded by a $10 million increase in borrowings since December 31, 2000. Deposits and other borrowings at March 31, 2001 totaled $340.5 million, compared to $331.5 million at December 31, 2000, an increase of $9.0 million. Since December 31, 2000, there have been increases of $8.8 million in Money Market accounts, offset by decreases of $5.5 million in time deposits, $3.4 million in NOW accounts, and $2.7 million in non-interest bearing accounts. Borrowings were $50 million at March 31, 2001, up $10 million from December 31, 2000. At March 31, 2001, stockholders' equity was $24.4 million or $14.45 per share, compared to $23.2 million or $13.73 per share at December 31, 2000. The increase in stockholders' equity was the result of net income of $605,000 for the three months ended March 31, 2001 coupled with an $829,000 increase in the fair market value of available-for-sale securities, net of taxes, offset by dividends paid of approximately $220,000 or $.13 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. Net interest income on a taxable equivalent basis, decreased $38,000 or 1.4% to $2.8 million for the three month period ended March 31, 2001 as compared to the three month period ended March 31, 2000. As shown in the following table, this decrease in net interest income was attributable to the negative effects of rate changes, partially offset by the positive effects of volume changes. The $149,000 negative impact from rate changes in deposits and borrowings was partially offset by rate increases in interest earning assets, primarily taxable investment securities. There was a $111,000 net benefit from changes in volume due largely to increased loans and investments, offset by increases in average deposits and borrowings. 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, 2001 compared to the same period in 2000 (tax-exempt yields and yields on agency-preferred stock that have a 70% dividend received deduction ("DRD") 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, 2001 COMPARED TO 2000 -------------------------------------------- Increase (Decrease) Due to (Dollars in Thousands) RATE VOLUME TOTAL ---------- ------ ------- Interest-earning assets: Loans .................................. $ (50) $ 391 $ 341 Investment securities Taxable ........................... 161 15 176 Tax exempt ........................ (5) 9 4 Tax preferred DRD ................. -- 170 170 Federal funds sold ..................... (3) 129 126 ----- ----- ----- Total ............................. 103 714 817 ----- ----- ----- Interest-bearing liabilities: Savings, NOW and money market deposits . 85 135 220 Time deposits .......................... 150 86 236 Federal funds purchased ................ -- (1) (1) FHLB advances .......................... 17 383 400 Lease obligations ...................... -- -- -- ----- ----- ----- Total ............................. 252 603 855 ----- ----- ----- Net interest income/interest rate spread $(149) $ 111 $ (38) ====== ===== ====== 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 evaluations are also 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, 2001, 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 $65,000 for the three months ended March 31, 2001, compared to net loan charge-offs of $168,000 for the year ended December 31, 2000 and $27,000 for the three months ended March 31, 2000. The percentage of net (charge-offs)/recoveries to total average loans was .03%, (.09%) 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 250.4% at March 31, 2001. 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 1.03% at March 31, 2001. 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) 3/31/01 12/31/00 3/31/00 ------- -------- ------- Beginning Balance ................. $ 4,917 $ 5,085 $ 5,085 Provisions: ....................... -- -- -- Loans charged off: Real estate ................ -- (138) -- Commercial ................. -- (29) (35) Consumer ................... (19) (57) (7) ------- ------- ------- Total charged off (19) (224) (42) Recoveries: Real estate ............... 73 13 1 Commercial ................ 6 24 9 Consumer .................. 5 19 5 ------- ------- ------- Total recoveries ................. 84 56 15 ------- ------- ------- Net recoveries (charge-offs)...... 65 (168) (27) ------- ------- ------- Ending Balance ................... $ 4,982 $ 4,917 $ 5,058 ======= ======= ======= NON-INTEREST INCOME Total non-interest income includes service charges on deposit products; fees received in connection with the sale of nondepository products and services, including fiduciary and investment advisory services, offered through DNB Advisors; securities brokerage products and services and insurance brokerage products and services, offered through DNB Financial Services; and other sources of income such as net gains on sales of investment securities and other real estate owned ("OREO") properties. In addition, DNB receives fees for cash management, merchant services, debit cards, safe deposit box rentals, check cashing, lockbox services and similar activities. For the three month period ended March 31, 2001, non-interest income was $457,000 compared to $393,000 for the same period in 2000. Service charges increased $67,000 to $233,000 for the three month period ended March 31, 2001 compared with the same period in 2000. The increase in service charge income is due, in general, to increased deposit volume coupled with overdraft fees and minimum account balance charges. Other non-interest income increased $41,000, due mainly to income received on an investment in a Bank Owned Life Insurance policy. 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 $94,000 to $2.2 million for the three month period ended March 31, 2001 compared to the same period in 2000. The increase during this period resulted primarily from higher levels of salaries & employee benefits expense. Salaries & employee benefits increased $148,000 or 12.8% to $1.3 million for the three month period ended March 31, 2001, compared to $1.2 million for the same period in 2000. The increase in this category reflects an increase in full-time equivalent employees, merit increases as well as the creation of new positions associated with several new e-Business initiatives. INCOME TAXES Income tax expense was $262,000 for the three months ended March 31, 2001 compared with $293,000 for the three months ended March 31, 2000. The effective tax rate was 30% for the three month periods ending March 31, 2001 and 2000. 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, (iii) troubled debt restructurings and (iv) other real estate owned as a result of foreclosure or voluntary transfer to DNB. (Dollars in Thousands) 3/31/01 12/31/00 3/31/00 ------- -------- ------- Nonaccrual Loans: Residential mortgage ............... $ 132 $ 137 $ 201 Commercial mortgage ................ 243 157 125 Commercial ......................... 638 573 482 Consumer ........................... 351 317 325 ------ ------ ------ Total nonaccrual loans .................. 1,364 1,184 1,133 Loans 90 days past due and still accruing 586 609 660 Troubled debt restructurings ............ 40 40 -- ------ ------ ------ Total non-performing loans .............. 1,990 1,833 1,793 Other real estate owned ................. 183 183 183 ------ ------ ------ Total non-performing assets ............. $2,173 $2,016 $1,976 ====== ====== ====== The following table sets forth the DNB's asset quality and allowance coverage ratios at the dates indicated: 3/31/01 12/31/00 3/31/00 ------- -------- ------- Non-performing Loans/Total Loans ................. 1.0% 1.0% 1.1% Non-performing Assets/Total Loans and OREO ....... 1.1 1.1 1.2 Allowance for Loan Losses/Total Loans ............ 2.6 2.6 3.0 Allowance for Loan Losses/Total Loans and OREO ... 2.6 2.6 3.0 Allowance for Loan Losses/Non-performing Assets .. 229.3 243.9 256.0 Allowance for Loan Losses/Non-performing Loans ... 250.4 268.2 282.1 If interest income had been recorded on nonaccrual loans, interest would have increased as shown in the following table: 3 Months Year 3 Months Ended Ended Ended (Dollars in thousands) 3/31/01 12/31/00 3/31/00 ------- -------- ------- Interest income which would have been recorded under original terms ................... $ 29 $ 98 $ 23 Interest income recorded during the period .... -- (21) -- ---- ---- ---- Net impact on interest income ................. $ 29 $ 77 $ 23 ==== ==== ==== DNB had impaired loans with total recorded investments of $651,000 and an average recorded investment of $603,000 for the three month period ended March 31, 2001 and $693,000 for the year ended December 31, 2000. As of March 31, 2001 and December 31, 2000, no addition to the allowance for credit losses was necessary for these impaired loans. There was no cash collected on impaired loans during three months ended March 31, 2001 as compared to $14,000 that was credited to the outstanding principal balance during the three months ended March 31, 2000. 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, 2001 DNB has $24.7 million in commitments to fund commercial real estate, construction and land development. In addition, DNB had commitments to fund $4.6 million in home equity lines of credit and $6.7 million in other unused commitments. Management anticipates the majority of these commitments will be funded by means of normal cash flows. In addition, $68.2 million of time deposits at DNB are scheduled to mature during the nine months ending December 31, 2001. 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 $24.4 million at March 31, 2001 as a result of the $605,000 profit reported for the three months then ended, the $829,000 increase in market value of available for sale investments, net of tax, less dividends paid totaling $220,000 year-to-date. The Bank's common equity position at March 31, 2001 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 (Dollars in thousands) Actual Adequacy Purposes Action Provisions -------------------- ----------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- As of March 31, 2001: Total risk-based capital ................. $27,534 10.46% $21,062 8.00% $26,32 10.00% Tier 1 capital ........................... 24,222 9.20 10,531 4.00 15,797 6.00 Tier 1 (leverage) capital ................ 24,222 6.83 14,183 4.00 17,728 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 7.9% at March 31, 2001, 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 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 March 31, 2001 and December 31, 2000, 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.
MARCH 31, 2001 DECEMBER 31, 2000 -------------------------- -------------------------------- Change in rates FLAT -200BP +200BP FLAT -200BP +200 BP ---- ------ ------ ---- ------ ------- Economic Value of Portfolio Equity ........................ 26,233 22,733 24,242 28,870 27,205 23,082 Change ....................................... (3,490) (1,981) (1,665) (5,788) Change as a % of assets ............. (0.95%) (0.54%) (0.47%) (1.62%)
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; and (5) 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: None (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 14, 2001 ________________________________ Henry F. Thorne, President and Chief Executive Officer DATE: May 14, 2001 ________________________________ 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: May 14, 2000 /S/ HENRY F. THORNE ------------------------------ Henry F. Thorne, President and Chief Executive Officer DATE: May 14, 2000 /S/ BRUCE E. MORONEY ---------------------------- Bruce E. Moroney Chief Financial Officer