10-Q 1 document-10q_june2001.txt JUNE 30, 2001 10Q 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: June 30, 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 August 14, 2001) --------------------------------------------------------------------------- DNB FINANCIAL CORPORATION AND SUBSIDIARY INDEX PART I - FINANCIAL INFORMATION PAGE NO. ITEM 1. FINANCIAL STATEMENTS (Unaudited): CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, 2001 and December 31, 2000 3 CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended June 30, 2001 and 2000 4 CONSOLIDATED STATEMENTS OF OPERATIONS Six Months Ended June 30, 2001 and 2000 5 CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 and December 31, 2000 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17 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 amounts) JUNE 30, DECEMBER 31, 2001 2000 -------------------------------------------------------------------------------- ASSETS Cash and due from banks ............................... $ 10,954 $ 13,002 Federal funds sold .................................... 7,996 14,350 --------- --------- Total cash and cash equivalents ....................... 18,950 27,352 Investment securities available for sale, at fair value 99,535 86,088 Investment securities (market value $41,398 in 2001 and $42,357 in 2000) ....................... 40,980 42,328 Loans, net of unearned income ......................... 189,932 191,201 Allowance for loan losses ............................. (4,866) (4,917) --------- --------- Net loans ............................................. 185,066 186,284 --------- --------- Office property and equipment, net .................... 7,098 5,889 Accrued interest receivable ........................... 2,347 2,580 Other real estate owned ............................... 83 183 Deferred income taxes ................................. 1,022 1,427 Other assets .......................................... 7,894 4,539 --------- --------- TOTAL ASSETS .......................................... 362,975 356,670 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Non-interest-bearing deposits ......................... 35,568 38,898 Interest-bearing deposits: NOW accounts ....................................... 42,632 44,450 Money market ....................................... 65,159 59,250 Savings ............................................ 32,881 29,811 Time ............................................... 109,545 118,382 --------- --------- TOTAL DEPOSITS ........................................ 285,785 290,791 FHLB Advances ......................................... 50,000 40,000 Lease obligations ..................................... 738 741 --------- --------- TOTAL BORROWINGS ...................................... 50,738 40,741 Accrued interest payable .............................. 1,183 1,450 Other liabilities ..................................... 372 458 --------- --------- TOTAL LIABILITIES ..................................... 338,078 333,440 --------- --------- 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 ............................. 1,692 1,692 Surplus ............................................... 19,676 19,676 Retained earnings ..................................... 3,883 3,111 Accumulated other comprehensive loss .................. (354) (1,249) --------- --------- TOTAL STOCKHOLDERS' EQUITY ............................ 24,897 23,230 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............ $ 362,975 $ 356,670 ========= ========= 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 June 30 -------------------------------------------------------------------------------- 2001 2000 -------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans ........................ $ 3,944 $ 3,650 Interest on taxable investment securities ......... 1,801 1,865 Interest on tax-free investment securities ........ 121 140 Interest on tax preferred equity securities ....... 153 -- Interest on Federal funds sold .................... 150 42 ---------- ---------- Total interest income ......................... 6,169 5,697 ---------- ---------- INTEREST EXPENSE: Interest on time deposits ......................... 1,611 1,549 Interest on NOW, money market and savings ......... 1,034 1,004 Interest on Federal funds purchased ............... -- 5 Interest on FHLB advance .......................... 736 382 Interest on lease obligations ..................... 25 25 ---------- ---------- Total interest expense .................. 3,406 2,965 ---------- ---------- Net interest income .................................. 2,763 2,732 Provision for loan losses ............................ -- -- ---------- ---------- Net interest income after provision for loan losses .. 2,763 2,732 ---------- ---------- NON-INTEREST INCOME: Service charges ...................................... 250 190 Wealth Management Services ........................... 82 111 Increase in cash surrender value of BOLI ............. 38 -- Other ................................................ 156 118 ---------- ---------- Total non-interest income ............................ 526 419 ---------- ---------- NON-INTEREST EXPENSE: Salaries and employee benefits ....................... 1,338 1,185 Furniture and equipment .............................. 252 261 Occupancy ............................................ 161 148 Advertising and marketing ............................ 72 89 Professional and consulting .......................... 186 99 Printing and supplies ................................ 55 69 Other ................................................ 384 381 ---------- ---------- Total non-interest expense ........................... 2,448 2,232 ---------- ---------- Income before income taxes ........................... 841 919 Income tax expense ................................... 233 285 ---------- ---------- NET INCOME ........................................... $ 608 $ 634 ========== ========== EARNINGS PER SHARE: Basic ................................................ $ 0.36 $ 0.37 Diluted .............................................. 0.35 0.37 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic ................................................ 1,691,575 1,691,575 Diluted .............................................. 1,714,142 1,705,465 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) Six Months Ended June 30 -------------------------------------------------------------------------------- 2001 2000 -------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans ........................... $ 7,851 $ 7,215 Interest on taxable investment securities ............ 3,685 3,574 Interest on tax-free investment securities ........... 242 254 Interest on tax preferred equity securities .......... 278 -- Interest on Federal funds sold ....................... 342 110 ---------- ---------- Total interest income ................................ 12,398 11,153 ---------- ---------- INTEREST EXPENSE: Interest on time deposits ............................ 3,322 3,024 Interest on NOW, money market and savings ............ 2,181 1,931 Interest on Federal funds purchased .................. -- 6 Interest on FHLB advances ............................ 1,429 675 Interest on lease obligations ........................ 50 51 ---------- ---------- Total interest expense ............................... 6,982 5,687 ---------- ---------- Net interest income .................................. 5,416 5,466 Provision for loan losses ............................ -- -- ---------- ---------- Net interest income after provision for loan losses .. 5,416 5,466 ---------- ---------- NON-INTEREST INCOME: Service charges ...................................... 483 356 Wealth Management Services ........................... 162 234 Increase in cash surrender value of BOLI ............. 58 -- Other ................................................ 281 222 ---------- ---------- Total non-interest income ............................ 984 812 ---------- ---------- NON-INTEREST EXPENSE: Salaries and employee benefits ....................... 2,648 2,346 Furniture and equipment .............................. 490 520 Occupancy ............................................ 323 298 Advertising and marketing ............................ 129 173 Professional and consulting .......................... 272 212 Printing and supplies ................................ 103 130 Other ................................................ 727 703 ---------- ---------- Total non-interest expense ........................... 4,692 4,382 ---------- ---------- Income before income taxes ........................... 1,708 1,896 Income tax expense ................................... 495 578 ---------- ---------- Net income ........................................... $ 1,213 $ 1,318 ========== ========== EARNINGS PER SHARE: Basic ................................................ $ 0.72 $ 0.78 Diluted .............................................. 0.71 0.77 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic ................................................ 1,691,575 1,691,575 Diluted .............................................. 1,713,016 1,706,728 CASH DIVIDENDS PER SHARE ............................. $ 0.26 $ 0.25 See accompanying notes to consolidated financial statements. DNB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands) Six Months Ended June 30 ------------------------ 2001 2000 -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .......................................... $ 1,213 $ 1,318 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ....................... 401 354 Gain on sale of investments ......................... (26) -- Decrease (increase) in accrued interest receivable .. 233 (340) Increase in other assets ............................ (317) (249) Increase in investment in BOLI ...................... (3,038) -- Decrease in accrued interest payable ................ (267) (60) Decrease in current taxes payable ................... (349) (982) Increase in other liabilities ....................... 263 2,115 -------- -------- NET CASH USED IN OPERATING ACTIVITIES ............... (1,887) 2,156 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities & paydowns of AFS securities 17,940 3,044 Proceeds from maturities & paydowns of HTM securities 8,955 4,007 Purchase of AFS securities .......................... (33,040) (16,274) Purchase of HTM securities .......................... (7,660) (10,542) Proceeds from sale of securities .................... 2,973 -- Net decrease (increase) in loans .................... 1,218 (5,522) Proceeds from sale of OREO .......................... 100 -- Purchase of office property and equipment ........... (1,552) (237) -------- -------- NET CASH USED IN INVESTING ACTIVITIES ............... (11,066) (25,524) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits ................. (5,006) 18,699 Increase in Federal funds purchased ................. -- 3,977 Decrease in lease obligations ....................... (3) (3) Increase in FHLB advances ........................... 10,000 4,000 Proceeds from issuance of options ................... -- 17 Dividends paid ...................................... (440) (419) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES ........... 4,551 26,271 -------- -------- Net Change in Cash and Cash Equivalents ............. (8,402) 2,903 Cash and Cash Equivalents at Beginning of Period .... 27,352 17,530 -------- -------- Cash and Cash Equivalents at End of Period .......... $ 18,950 $ 20,433 ======== ======== Supplemental Disclosure Of Cash Flow Information: Cash paid during the period for: Interest ............................................ $ 7,249 $ 5,747 Taxes ............................................... 250 560 Supplemental Disclosure Of Non-Cash Flow Information: Transfer of loans to OREO ........................... $ -- $ 99 ======== ======== See accompanying notes to consolidated financial statements DNB FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 period classifications. The results of operations for the six months ended June 30, 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 and six months ended June 30, 2001, 185,941 and 187,067 stock options were not included because such options were antidilutive. For the three and six months ended June 30, 2000, 151,300 and 153,030 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 2000. Net income and the weighted average number of shares outstanding for basic and diluted EPS for the three and six months ended June 30, 2001 and 2000 are reconciled as follows: (In thousands, except per share amounts)
Three months ended Three months ended June 30, 2001 June 30, 2000 ------------------------ ------------------------ Income Shares Amount Income Shares Amount ------- ------ ------ ------- ------ ------ Basic EPS: Income available to common stockholders ................... $ 608 1,692 $ 0.36 $ 634 1,692 $ 0.37 Effect of dilutive common stock equivalents- stock options ........................................ -- 22 0.01 -- 13 -- ------ ----- ------ ------ ----- ------ Diluted EPS ............................................... $ 608 1,714 $ 0.35 $ 634 1,705 $ 0.37 ====== ===== ====== ====== ===== ======
Six months ended Six months ended June 30, 2001 June 30, 2000 ------------------------ ----------------------- Income Shares Amount Income Shares Amount ------ ------ ----- ------ ------ ------ Basic EPS: Income available to common stockholders .................... $ 1,213 1,692 $ 0.72 $ 1,318 1,692 $ 0.78 Effect of dilutive common stock equivalents- stock options ........................................ -- 21 0.01 -- 15 0.01 ------- ----- ------ ----- ----- ------ Diluted EPS ................................................ $ 1,213 1,713 $ 0.71 $ 1,318 1,707 $ 0.77 ======= ===== ====== ======= ====== ======
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 income (loss) relating to the change in unrealized gains (losses) on investment securities available for sale, as shown in the following table:
(Dollars in thousands) FOR THREE MONTHS ENDED JUNE 30 FOR SIX MONTHS ENDED JUNE 30 ------------------------------ ---------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- COMPREHENSIVE INCOME: Net Income ........................................... $ 608 $ 634 $1,213 $1,318 Other comprehensive income (loss), net of tax, relating to unrealized gains (losses) on investments 66 (198) 895 167 ------ ------ ------ ------ Total comprehensive income ........................... $ 674 $ 436 $2,108 $1,485 ====== ====== ====== ======
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. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141, "Business Combinations" (SFAS No. 141). The Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All Business combinations in the scope of the Statement are to be accounted for using the purchase method. The provisions of the Statement apply to all Business combinations initiated after June 30, 2001. The Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. DNB has determined that there was no impact of this statement on the Bank's financial condition, equity, results of operations or disclosures. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142, "Goodwill and other Intangible Assets" (SFAS No. 142). This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. The Statement also addresses ho goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of the statement are required to be applied starting with fiscal years beginning after December 15, 2001, except that goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the nonamortization and amortization provisions of the Statement. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. The Statement is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. 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 $363.0 million at June 30, 2001 compared to $356.7 million at December 31, 2000. Investment securities (AFS and HTM) increased $12.1 million or 9.4% to $140.5 million at June 30, 2001. There were significant increases in U. S. Agency Mortgage Backed securities which grew by $26.6 million or 20.7% and Agency Preferred Stocks which grew by $5.5 million or 4.3%. These increases were partially offset by $18.4 million in matured or sold U.S. Agency bonds. Total loans were $185.1 million, down $1.2 million or 0.7% from $186.3 million at December 31, 2000. Federal funds sold were $8.0 million at June 30, 2001, down $6.4 million from December 31, 2000. Deposits and other borrowings at June 30, 2001 totaled $336.5 million, compared to $331.5 million at December 31, 2000, an increase of $5.0 million, resulting from an increase in FHLB advances, partially offset by a decrease in deposits. Since December 31, 2000, there have been decreases of $8.8 million in time deposits and $3.3 million in non-interest bearing accounts. This was partially offset by increases of $5.9 million in Money Market accounts and $3.1 million in Savings accounts. Borrowings were $50 million at June 30, 2001, up $10 million from December 31, 2000. At June 30, 2001, stockholders' equity was $24.9 million or $14.72 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 $1.2 million for the six months ended June 30, 2001, in addition to an $894,000 increase in the fair market value of available-for-sale securities, net of taxes. These additions to capital were offset by dividends paid of approximately $440,000 or $.26 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, investments and 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. On a tax-equivalent basis, net interest income increased $75,000 or 2.7% to $2.9 million for the three month period and decreased $55,000 or 1% to $5.6 million for the six month period ended June 30, 2001, compared to the three and six month periods ending June 30, 2000. As shown in the following tables, the increase in net interest income for the three month period ended June 30, 2001 compared to the three month period ending June 30, 2000 was largely attributable to the positive effects of volume change, partially offset by the negative effects of rate changes. The decrease in net interest income for the six month period ending June 30, 2001 compared to the six month period ending June 30, 2000 was largely attributable to the negative effects of rate changes, partially offset by the positive effects of volume changes. The positive impact from volume changes was attributable to significant increases in average interest-earning assets of $46.5 million and $44.9 million during the three and six month periods, respectively. The negative impact from changes in rates for both periods was primarily attributable to interest-bearing deposits repricing at a slower rate than interest-earning assets. The following tables set forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the three and six months ended June 30, 2001 compared to the same periods in 2000 (tax-exempt yields and yields on agency-preferred stock that have a 70% dividend received deduction 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 June 30, 2001 Compared to 2000 -------------------------------- Increase (Decrease) Due to Rate Volume Total ---- ------ ----- Interest-earning assets: Loans ................................ $ (76) $ 370 $ 294 Investment securities Taxable ......................... (246) 182 (64) Tax-exempt ...................... (11) (19) (30) Tax-preferred equity securities . -- 208 208 Federal funds sold ................... (13) 121 108 ----- ----- ----- Total ........................... (346) 862 516 ----- ----- ----- Interest-bearing liabilities: Savings, NOW and money market deposits (72) 102 30 Time deposits ........................ 57 5 62 Federal funds purchased .............. (3) (2) (5) FHLB advances ........................ (7) 361 354 ----- ----- ----- Total ................................ (25) 466 441 ----- ----- ----- Net Interest Income .................. $(321) $ 396 $ 75 ===== ===== ===== Six Months Ended June 30, 2001 Compared to 2000 ------------------------------ Increase (Decrease) Due to Rate Volume Total ---- ------ ----- Interest-earning assets: Loans ......................................... $(125) $ 761 $ 636 Investment securities Taxable .................................. (99) 210 111 Tax-exempt ............................... (8) (9) (17) Tax-preferred equity securities .......... -- 278 278 Federal funds sold ............................ (19) 251 232 ------ ----- ----- Total .................................... (251) 1,491 1,240 ------ ----- ----- Interest-bearing liabilities: Savings, NOW and money market deposits ........ (50) 300 250 Time deposits ................................. 207 91 298 Federal funds purchased ....................... 4 (10) (6) FHLB advances ................................. 10 744 754 Lease obligations ............................. -- (1) (1) ------ ------ ------ Total .................................... 171 1,124 1,295 ------ ------ ------ Net Interest Income ........................... $(422) $ 367 $ (55) ====== ===== ====== 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 six months ended June 30, 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 charge-offs were $51,000 for the six months ended June 30, 2001, compared to $168,000 for the year ended December 31, 2000 and $127,000 for the six months ended June 30, 2000. The percentage of net (charge-offs)/recoveries to total average loans was (.03%), (.09%) and (.07%) 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 266% at June 30, 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 0.96% at June 30, 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. 6 Months Year 6 Months Ended Ended Ended 6/30/01 12/31/00 6/30/00 ------- ------- ------- Beginning balance .................... $ 4,917 $ 5,085 $ 5,085 Provisions ........................... -- -- -- Loans charged off: Real estate ................... (108) (138) (105) Commercial .................... (10) (65) (25) Consumer ...................... (31) (21) (25) ------- ------- ------- Total charged off ......... (149) (224) (155) Recoveries: Real estate ................... 77 13 3 Commercial .................... 9 33 13 Consumer ...................... 12 10 12 ------- ------- ------- Total recoveries .......... 98 56 28 ------- ------- ------- Net recoveries (charge-offs) ......... (51) (168) (127) ------- ------- ------- Ending balance ....................... $ 4,866 $ 4,917 $ 4,958 ======= ======= ======= 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 and six month periods ended June 30, 2001, non-interest income was $526,000 and $984,000, respectively, compared to $419,000 and $812,000 for the same periods in 2000. Service charges increased $60,000 and $127,000, to $250,000 and $483,000 for the three and six month periods ended June 30, 2001, respectively. Much of the increase in this category came from non-sufficient funds ("NSF") fees, which rose $60,000 and $119,000, respectively, due to an increase in the volume of accounts as well as a concerted effort by management to reduce the waived fee percentage on deposit account overdrafts. Other non-interest income increased $76,000 and $117,000 to $194,000 and $339,000 for the three and six month periods ended June 30, 2001, respectively. The increase in other income for the three and six month periods reflected increases in cash surrender value of Bank owned life insurance on key executives, gains on the sale of investments, as well as higher cash management and mortgage correspondent fees. NON-INTEREST EXPENSE Non-interest expense includes salaries & employee benefits, furniture & equipment, occupancy, professional & consulting fees as well as printing & supplies, advertising and other less significant expense items. Non-interest expenses increased $216,000 to $2.4 million and $310,000 to $4.7 million for the three and six month periods ended June 30, 2001 compared to the three and six month periods ended June 30, 2000. The increase during these periods resulted primarily from higher levels of salaries & employee benefits and professional & consulting expense, partially offset by decreases in advertising & marketing expense. Salaries & employee benefits increased $153,000 to $1.3 million and $302,000 to $2.6 million for the three and six months ended June 30, 2001, compared to $1.2 million and $2.3 million for the same periods in 2000. The increase in this category resulted from merit increases as well as the creation of several new positions associated with e-Business and Wealth Management initiatives. Professional & consulting expense increased $87,000 or 88% to $187,000 and $60,000 or 46% to $272,000 for the three and six months ended June 30, 2001, respectively, compared to $90,000 and $212,000 for the same periods in 2000. The increases for both periods were due to legal expenses incurred in forming a new subsidiary, as well as consulting services, Wealth Management and training. Advertising & marketing expense decreased $17,000 and $44,000 to $72,000 and $129,000 for the three and six months ended June 30, 2001, respectively, compared to $89,000 and $173,000 for the same periods in 2000. INCOME TAXES Income tax expense was $233,000 and $495,000 for the three and six months ended June 30, 2001 compared to $285,000 and $578,000 for the same periods in 2000. The effective tax rate was 28% for the three month period and 29% for the six month period ending June 30, 2001 compared to 31% for the three month period and 30% for the six month period ending June 30, 2000. The rates used for income taxes for both periods were less than the statutory rate as a result of tax exempt interest and dividend income. The effective tax rate decreased during the most recent three and six month periods due to a higher volume of Tax Preferred Equity Securities and Bank Owned Life Insurance in those periods compared to the same periods in 2000. 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) loans restructured in a troubled debt restructuring and (iv) other real estate owned as a result of foreclosure or voluntary transfer to DNB. (Dollars in thousands) June 30 Dec. 31 June 30 2001 2000 2000 ------- -------- -------- Nonaccrual Loans: Residential mortgage ............... $ 130 $ 137 $ 132 Commercial mortgage ................ 158 157 125 Commercial ......................... 615 573 562 Consumer ........................... 290 317 327 ------ ------ ------ Total nonaccrual loans .................. 1,193 1,184 1,146 Loans 90 days past due and still accruing 594 609 626 Troubled debt restructurings ............ 40 40 40 ------ ------ ------ Total non-performing loans .............. 1,827 1,833 1,812 Other real estate owned ................. 83 183 183 ------ ------ ------ Total non-performing assets ............. $1,910 $2,016 $1,995 ====== ====== ====== The following table sets forth the DNB's asset quality and allowance coverage ratios at the dates indicated: June 30 Dec. 31 June 30 2001 2000 2000 ------ ------ ------ Non-performing Loans/Total Loans ................. 1.0% 1.0% 1.0% Non-performing Assets/Total Loans and OREO ....... 1.0 1.1 1.1 Allowance for Loan Losses/Total Loans ............ 2.6 2.6 2.8 Allowance for Loan Losses/Total Loans and OREO ... 2.6 2.6 2.8 Allowance for Loan Losses/Non-performing Assets .. 254.8 243.9 248.5 Allowance for Loan Losses/Non-performing Loans ... 266.3 268.1 273.6 If interest income had been recorded on nonaccrual loans and trouble debt restructurings, interest would have been increased as shown in the following table: 6 Months Year 6 Months Ended Ended Ended (Dollars in thousands) 6/30/01 12/31/00 6/30/00 ------- -------- ------- Interest income which would have been recorded under original terms ..................... $ 47 $ 98 $ 46 Interest income recorded during the period ...... (1) (21) (1) ----- ------ ----- Net impact on interest income ................... $ 46 $ 77 $ 45 ===== ====== ===== At June 30, 2001 and December 31, 2000, DNB had impaired loans with a total recorded investment of $771,000 and $651,000 , respectively, and an average recorded investment of $641,000 for the six month period ended June 30, 2001 and $693,000 for the year ended December 31, 2000. As of June 30, 2001 and December 31, 2000, there was no related allowance for credit losses necessary for these impaired loans. There was no cash collected on impaired loans during six months ended June 30, 2001 as compared to $11,000 that was credited to the outstanding principal balance during the six months ended June 30, 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 June 30, 2001 DNB has $16.2 million in commitments to fund commercial real estate, construction and land development. In addition, DNB had commitments to fund $4.8 million in home equity lines of credit and $11.1 million in other unused commitments. Management anticipates the majority of these commitments will be funded by means of normal cash flows. In addition, $54.5 million of time deposits at DNB are scheduled to mature during the six 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 cash flow from loans and investments. Stockholders' equity increased to $24.9 million at June 30, 2001 as a result of the $1.2 million profit reported for the six months then ended and after dividends paid totaling $440,000 year-to-date. The Bank's common equity position at June 30, 2001 exceeds the regulatory required minimums. The following table summarizes data and ratios pertaining to the Bank's capital structure.
(Dollars in thousands) To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------- ----------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total risk-based capital....... $27,902 10.82% $20,628 8.00% $25,798 10.00% Tier I Capital ................ 24,623 9.54 10,319 4.00 15,479 6.00 Tier 1 (leverage) Capital...... 24,623 6.83 14,424 4.00 18,030 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, certain "perpetual debt instruments" such as eligible trust preferred securities, 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 June 30, 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.
June 30, 2001 December 31, 2000 ------------------------------- ---------------------------- Change in rates Flat -200bp +200bp Flat -200bp +200bp ---- ------ ------ ---- ------ ------ Economic Value of Portfolio Equity .......... 28,117 25,804 24,340 28,870 27,205 23,082 Change ................ (2,313) (3,776) (1,665) (5,788) Change as a % of assets (0.64%) (1.04%) (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 At the Corporation's Annual Meeting held April 24, 2001, the stockholders voted as follows: A. Election of Class "C" Directors: William S. Latoff For: 1,479,167 Withheld: 45,088 Joseph G. Riper For: 1,468,217 Withheld: 56,038 B. Ratification of appointment of KPMG LLP as independent auditors of the Corporation, for the fiscal year ending December 31, 2001: For: 1,494,452 Against: 23,874 Abstain: 5,929 At the Corporation's Adjourned Annual Meeting held May 8, 2001, the stockholders voted on the Amendment of the Corporation's Amended and Restated Articles of Incorporation to: (i) provide that a 75% shareholder vote requirement shall only apply to those mergers, consolidations and similar transactions which have not received the approval of the Corporation's Board of Directors, and (ii) to correct an incorrect numerical reference in Article 6 thereof. For: 1,310,371 Against: 94,844 Abstain: 51,830 Broker non-vote: 89,850 ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. (a) EXHIBITS: Exhibit Number referred to in Item 601 of Regulation S-K Description of Data ----------------------------- ------------------- 3 (i) Amended and Restated Articles of Incorporation, as amended effective June 15, 2001 3 (i) Articles of Amendment filed June 15, 2001 (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: August 14, 2001 ___________________________ Henry F. Thorne, President and Chief Executive Officer DATE: August 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: August 14, 2001 /S/ Henry F. Thorne --------------------------- Henry F. Thorne, President and Chief Executive Officer DATE: August 14, 2001 /S/ Bruce E. Moroney -------------------------- Bruce E. Moroney Chief Financial Officer