-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ch8ciZwg9v1Qy++sAcqWpodVGRMX8HrS8OsAK5+zKZSz+0VagQvkarpKZw7kGiZk P1m1OuV4vEp/IH9NpF4i4A== 0000950159-99-000231.txt : 19990816 0000950159-99-000231.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950159-99-000231 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DNB FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000713671 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232222567 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16667 FILM NUMBER: 99688815 BUSINESS ADDRESS: STREET 1: 4 BRANDYWINE AVE CITY: DOWNINGTOWN STATE: PA ZIP: 19335 BUSINESS PHONE: 6102691040 MAIL ADDRESS: STREET 1: 4 BRANDYWINE AVENUE CITY: DOWNINGTOWN STATE: PA ZIP: 19335 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1999 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ________________ to _____________ COMMISSION FILE NUMBER: 0-16667 DNB FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2222567 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4 BRANDYWINE AVENUE - DOWNINGTOWN, PA 19335 (Address of principal executive offices and Zip Code) (610) 269-1040 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK ($1.00 PAR VALUE) 1,524,229 (Class) (Shares Outstanding as of August 13, 1999) ___________________________________________________________________________ DNB FINANCIAL CORPORATION AND SUBSIDIARY INDEX PART I - FINANCIAL INFORMATION PAGE NO. ITEM 1. FINANCIAL STATEMENTS: CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, 1999 and December 31, 1998 3 CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended June 30, 1999 and 1998 4 CONSOLIDATED STATEMENTS OF OPERATIONS Six Months Ended June 30, 1999 and 1998 5 CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 1999 and 1998 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 and December 31, 1998 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
- ------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - ------------------------------------------------------------------------------------------------------------------------ June 30, December 31, 1999 1998 ------------- ------------- ASSETS Cash and due from banks .............................................................. $ 8,813,695 $ 13,660,149 Federal funds sold ................................................................... 9,140,000 6,171,000 Total cash and cash equivalents ...................................................... 17,953,695 19,831,149 Investment securities available for sale, at market value ............................ 50,690,716 45,519,420 Investment securities (market value $47,963,222 in 1999 and $47,528,269 in 1998) .................................................. 48,195,186 47,380,404 Loans, net of unearned income ........................................................ 165,877,914 148,725,716 Allowance for loan losses ............................................................ (5,233,027) (5,204,869) ------------- ------------- Net loans ............................................................................ 160,644,887 143,520,847 ------------- ------------- Office property and equipment, net ................................................... 4,819,696 4,558,811 Accrued interest receivable .......................................................... 1,792,744 1,670,123 Other real estate owned .............................................................. 555,026 138,775 Deferred income taxes ................................................................ 1,487,636 1,037,415 Other assets......................................................................... 2,462,907 1,761,487 ------------- ------------- Total assets ......................................................................... $ 288,602,493 $ 265,418,431 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Non-interest-bearing deposits ........................................................ $ 34,756,626 $ 30,001,051 Interest-bearing deposits: NOW accounts ...................................................................... 39,356,597 37,074,977 Money market ...................................................................... 42,309,068 32,582,044 Savings ........................................................................... 31,952,221 28,321,246 Time .............................................................................. 99,379,968 97,394,014 ------------- ------------- Total deposits ....................................................................... 247,754,480 225,373,332 ------------- ------------- Federal Home Loan Bank advances ...................................................... 18,000,000 18,000,000 Accrued interest payable ............................................................. 845,390 902,009 Other liabilities .................................................................... 1,373,348 536,872 ------------- ------------- Total liabilities .................................................................... 267,973,218 244,812,213 ------------- ------------- STOCKHOLDERS' EQUITY Preferred stock, $10.00 par value; 1,000,000 shares authorized; none issued .......................................... -- -- Common stock, $1.00 par value; 10,000,000 shares authorized; 1,524,229 and 1,524,229 issued and outstanding, respectively .................................... 1,524,229 1,524,229 Surplus .............................................................................. 17,104,817 17,104,817 Retained earnings .................................................................... 2,902,979 1,924,803 Accumulated other comprehensive (loss) income ........................................ (902,750) 52,369 ------------- ------------- Total stockholders' equity ........................................................... 20,629,275 20,606,218 ------------- ------------- Total liabilities and stockholders' equity ........................................... $ 288,602,493 $ 265,418,431 ============= ============= See accompanying notes to consolidated financial statements.
- -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- Three Months Ended June 30 -------------------------- 1999 1998 INTEREST INCOME: Interest and fees on loans ........................ $3,525,100 $2,959,749 Interest on taxable investment securities ......... 1,434,439 1,104,925 Interest on tax-free investment securities ........ 113,836 -- Interest on Federal funds sold .................... 56,683 245,895 ---------- ---------- Total interest income ............................. 5,130,058 4,310,569 ---------- ---------- INTEREST EXPENSE: Interest on time deposits ......................... 1,310,128 1,268,721 Interest on NOW, money market and savings ......... 808,589 615,664 Interest on FHLB advance .......................... 231,005 64,323 ---------- ---------- Total interest expense ............................ 2,349,722 1,948,708 ---------- ---------- Net interest income ............................... 2,780,336 2,361,861 Provision for loan losses ......................... -- -- ---------- ---------- Net interest income after provision for loan losses 2,780,336 2,361,861 ---------- ---------- NON-INTEREST INCOME: Service charges ................................... 158,783 149,119 Trust income ...................................... 137,545 99,632 Other ............................................. 94,758 147,765 ---------- ---------- Total non-interest income ......................... 391,086 396,516 ---------- ---------- NON-INTEREST EXPENSE: Salaries and employee benefits .................... 1,075,561 979,408 Furniture and equipment .......................... 222,475 159,452 Occupancy ......................................... 166,333 112,233 Advertising and marketing ......................... 134,215 75,890 Professional and consulting ....................... 101,647 65,334 Printing and supplies ............................. 71,378 36,023 Other ............................................. 300,502 299,870 ---------- ---------- Total non-interest expense ........................ 2,072,111 1,728,210 ---------- ---------- Income before income taxes ........................ 1,099,311 1,030,167 Income tax expense ................................ 352,000 285,000 ---------- ---------- NET INCOME ........................................ $ 747,311 $ 745,167 ========== ========== EARNINGS PER SHARE: Basic .......................................... $ 0.49 $ 0.49 Diluted ........................................ 0.47 0.47 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic .......................................... 1,524,229 1,523,942 Diluted ........................................ 1,574,589 1,580,269 CASH DIVIDENDS PER SHARE .......................... $ 0.13 $ 0.12 See accompanying notes to consolidated financial statements
- -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- Six Months Ended June 30 1999 1998 INTEREST INCOME: Interest and fees on loans ......................... $6,649,831 $5,822,742 Interest on taxable investment securities ........... 2,858,405 2,224,618 Interest on tax-free investment securities .......... 217,893 -- Interest on Federal funds sold ...................... 101,105 426,876 Total interest income ............................... 9,827,234 8,474,236 INTEREST EXPENSE: Interest on time deposits ........................... 2,609,256 2,518,878 Interest on NOW, money market and savings ........... 1,500,544 1,173,498 Interest on repurchase agreements ................... -- 673 Interest on FHLB advances ........................... 459,471 102,493 Total interest expense .............................. 4,569,271 3,795,542 Net interest income ................................. 5,257,963 4,678,694 Provision for loan losses ........................... -- -- Net interest income after provision for loan losses . 5,257,963 4,678,694 NON-INTEREST INCOME: Service charges ..................................... 288,382 282,414 Trust income ........................................ 219,886 233,561 Other .............................................. 249,730 218,835 Total non-interest income ......................... 757,998 734,810 NON-INTEREST EXPENSE: Salaries and employee benefits ...................... 2,099,142 2,057,687 Furniture and equipment ............................. 438,124 308,426 Occupancy .......................................... 285,426 212,346 Advertising and marketing ........................... 222,575 120,788 Professional and consulting ......................... 197,497 134,314 Printing and supplies ............................... 135,209 93,486 Other ............................................... 620,512 555,284 Total non-interest expense .......................... 3,998,485 3,482,331 Income before income taxes .......................... 2,017,476 1,931,173 Income tax expense .................................. 643,000 535,000 NET INCOME .......................................... $1,374,476 $1,396,173 COMMON SHARE DATA: Basic .......................................... $ 0.90 $ 0.92 Diluted ........................................ 0.87 0.88 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic .......................................... 1,524,229 1,523,942 Diluted ....................................... 1,574,657 1,578,252 Cash dividends per share ............................ $ 0.26 $ 0.24 See accompanying notes to consolidated financial statements.
- -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------- Six Months Ended June 30 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................. $ 1,374,476 $ 1,396,173 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .......................... 380,157 459,452 Gain on sale of investments ........................... -- (507) Gain on sale of OREO ................................... (45,811) (64,349) (Increase) decrease in accrued interest receivable ..... (122,621) 48,135 Increase in other assets ............................... (701,420) (174,590) Decrease in accrued interest payable ................... (56,619) (154,717) Decrease in current taxes payable ...................... (8,357) (40,000) Increase (decrease) in other liabilities ............... 844,833 (393,944) Net Cash Provided By Operating Activities .............. 1,664,638 1,075,653 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities & paydowns of AFS securities .. 1,977,117 5,667,092 Proceeds from maturities & paydowns of HTM securities .. 3,199,954 15,886,596 Purchase of AFS securities ............................. (8,578,690) (7,456,407) Purchase of HTM securities ............................. (4,078,644) (17,355,833) Proceeds from sale of AFS securities ................... -- 997,656 Net increase in loans .................................. (17,595,707) (6,687,367) Proceeds from sale of OREO ............................. 101,227 293,556 Purchase of office property and equipment .............. (552,197) (159,725) Net Cash Used By Investing Activities .................. (25,526,940) (8,814,432) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits ............................... 22,381,148 6,772,959 Increase in FHLB advances .............................. -- 5,000,000 Proceeds from exercise of stock options ................ -- 2,949 Dividends paid ......................................... (396,300) (348,435) Net Cash Provided By Financing Activities .............. 21,984,848 11,427,473 Net Change in Cash and Cash Equivalents ................ (1,877,454) 3,688,694 Cash and Cash Equivalents at Beginning of Period ....... 19,831,149 23,392,007 CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 17,953,695 $ 27,080,701 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest ............................................... $ 4,625,890 $ 3,950,259 Taxes .................................................. 650,000 575,000 SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION: Transfer of loans to OREO .............................. $ 471,667 $ 240,404 See accompanying notes to consolidated financial statements.
DNB FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION AND RESTATEMENT The accompanying unaudited consolidated financial statements of DNB Financial Corporation (referred to herein as the "Corporation" or "DNB") and its subsidiary, Downingtown National Bank (the "Bank"), have been prepared in accordance with the instructions for Form 10-Q and therefore do not include certain information or footnotes necessary for the presentation of financial condition, statement of operations and statement of cash flows required by generally accepted accounting principles. However, in the opinion of management, the consolidated financial statements reflect all adjustments (which consist of normal recurring adjustments) necessary for a fair presentation of the results for the unaudited periods. Prior period amounts not affecting net income are reclassified when necessary to conform with current year classifications. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results which may be expected for the entire year. The consolidated financial statements should be read in conjunction with the Annual Report and report on Form 10-K for the year ended December 31, 1998. NOTE 2: EARNINGS PER SHARE (EPS) Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur from the conversion of common stock equivalents and is computed using the treasury stock method. Earnings per share, dividends per share and weighted average shares outstanding have been adjusted to reflect the effects of the 5% stock dividend paid in December 1998. Net income and weighted average number of shares outstanding for basic and diluted EPS for the three and six months ended June 30, 1999 and 1998 are reconciled as follows:
Three months ended Three months ended June 30, 1999 June 30, 1998 ------------------------------- -------------------------------- Income Shares Amount Income Shares Amount ---------- --------- ------ --------- --------- ------ BASIC EPS: Income available to common stockholders .... $ 747,311 1,524,229 $ 0.49 $ 745,16 1,523,942 $ 0.49 Effect of dilutive common stock equivalents- stock options ......................... -- 50,360 0.02 -- 56,327 0.02 ---------- --------- ------ --------- --------- ------ DILUTED EPS: ............................... $ 747,311 1,574,589 $0.47 $ 745,167 1,580,269 $ 0.47 ========== ========= ====== ========= ========= ======
Six months ended Six months ended June 30, 1999 June 30, 1998 ------------------------------- -------------------------------- Income Shares Amount Income Shares Amount ---------- --------- ------ ---------- --------- ------ BASIC EPS: Income available to common stockholders .... $1,374,476 1,524,229 $ 0.90 $1,396,173 1,523,942 $ 0.92 Effect of dilutive common stock equivalents- stock options ........................ -- 50,428 0.03 -- 54,310 0.04 ---------- --------- ------ ---------- --------- ------ DILUTED EPS:............................... $1,374,476 1,574,657 $ 0.87 $1,396,173 1,578,252 $ 0.88 ========== ========= ====== ========== ========= ======
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 June 30 For six months ended June 30 ------------------------------ ---------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- COMPREHENSIVE INCOME: Net Income ................................... $ 747,311 $ 745,167 $ 1,374,476 $ 1,396,173 Other comprehensive (loss) income, net of tax, relating to unrealized losses on investments (593,003) 10,530 (955,119) (6,864) ----------- ----------- ----------- ----------- Total comprehensive (loss) income ............ $ 154,308 $ 755,697 $ 419,357 $ 1,389,309 =========== =========== =========== ===========
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133") which was subsequently amended in June, 1999. 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 hedges 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. DNB FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION DNB's total assets were $288.6 million at June 30, 1999 compared to $265.4 million at December 31, 1998. Total loans were $165.9 million, up $17.2 million or 12% from $148.7 million at December 31, 1998. Significant increases were noted in the real estate loan portfolio which increased $12.1 million or 15%. Investment securities (AFS and HTM) increased $6.0 million or 6% to $98.9 million at June 30, 1999. Federal funds sold were $9.1 million at June 30, 1999, up $3.0 million from December. A significant portion of these increases were funded from deposits at our two new branches. Other assets increased $701,000 or 40% to $2.5 million at June 30, 1999 as a result of the intangible asset recognized on the Kennett Square branch purchase. Deposits and other borrowings at June 30, 1999 totaled $265.8 million, compared to $243.4 million at December 31, 1998. Since December 31, 1998 there have been increases of $9.7 million in money market accounts, $4.8 million in non-interest bearing accounts, $3.6 million in savings deposits, $2.3 million in NOW accounts, and $2.0 million in time deposits, with $9.1 million of the overall deposit increase coming from the Kennett Square branch purchase at the end of the first quarter. Borrowings were $18.0 million at June 30, 1999, unchanged from December. At June 30, 1999, stockholders' equity was $20.6 million or $13.53 per share, compared to $20.6 million or $13.52 per share at December 31, 1998. The increase in stockholders' equity was the result of net income of $1.4 million for the six months ended June 30, 1999, offset by dividends paid of approximately $396,000 or $.26 per share and the change in fair market value, net of taxes, of available-for-sale securities of $955,000. 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, repurchase agreements, Federal funds purchased, Federal Home Loan Bank advances and other borrowings. Net interest income increased $418,000 or 18% to $2.8 million for the three month period and $579,000 or 12% to $5.3 million for the six month period ended June 30, 1999. As shown in the following tables, the increase in net interest income for the three and six month periods ended June 30, 1999 was largely attributable to the positive effects of volume change, partially offset by the negative effects of rate changes. The positive impact from volume changes during the three and six month periods was attributable to significant increases in interest-earning assets, which increased $44.3 million and $41.1 million on average for both periods, respectively. The negative impact from changes in rates for both periods was primarily attributable to loans and investments rolling over at lower yields, reflecting the current interest rate environment. 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, 1999 compared to the same periods in 1998 (tax-exempt yields have been adjusted to a tax equivalent basis using a 34% tax rate). For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (i) changes in rate (change in rate multiplied by old volume) and (ii) changes in volume (change in volume multiplied by old rate). The net change attributable to the combined impact of rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
Three Months Ended June 30, 1999 Compared to 1998 -------------------------------- Increase (Decrease) Due to -------------------------------- (Dollars in Thousands) ................. Rate Volume Total ----- ----- ----- Interest-earning assets: Loans .................................. $ (24) $ 589 $ 565 Investment securities-taxable .......... (31) 360 329 Investment securities-tax exempt ....... -- 147 147 Federal funds sold ..................... (48) (141) (189) ----- ----- ----- Total .................................. (103) 955 852 Interest-bearing liabilities: Savings, NOW and money market deposits . 33 160 193 Time deposits .......................... (71) 112 41 FHLB advances .......................... -- 167 167 ----- ----- ----- Total ............................. (38) 439 401 ----- ----- ----- NET INTEREST INCOME/INTEREST RATE SPREAD $ (65) $ 516 $ 451 ===== ===== =====
Six Months Ended June 30, 1999 Compared to 1998 ------------------------------- Increase (Decrease) Due to ------------------------------ (Dollars in Thousands) Rate Volume Total ---- ------ ----- Interest-earning assets: Loans ................................. $(166) $ 993 $ 827 Investment securities-taxable .......... (62) 696 634 Investment securities-tax exempt ....... -- 282 282 Federal funds sold ..................... (86) (240) (326) --- ---- ---- Total ............................. (314) 1,731 1,417 Interest-bearing liabilities: Savings, NOW and money market deposits . 52 276 328 Time deposits .......................... (120) 210 90 Other borrowings ....................... -- 356 356 ---- ---- ---- Total .................................. (68) 842 774 ---- ---- ---- NET INTEREST INCOME/INTEREST RATE SPREAD $ (246) $ 889 $ 643 ==== ==== ====
PROVISION FOR LOAN LOSSES To provide for potential losses in the loan portfolio, DNB maintains an allowance for loan losses. To maintain an adequate allowance, management charges the provision for loan losses against income. Loan losses are charged directly against the allowance and recoveries on previously charged-off loans are added to the allowance. In establishing its allowance for loan losses, management considers the size and risk exposure of each segment of the loan portfolio, past loss experience, present indicators of risk such as delinquency rates, levels of nonaccruals, the potential for losses in future periods, and other relevant factors. Management's evaluation of the loan portfolio generally includes reviews, on a sample basis, of individual borrowers regardless of size and reviews of problem borrowers of $100,000 or greater. Consideration is also given to examinations performed by regulatory agencies, primarily the Office of the Comptroller of the Currency ("OCC"). The provisions are based on management's review of the economy, interest rates, general market conditions, estimates of the fair value of collateral, financial strength and ability of the borrowers and guarantors to pay, and considerations regarding the current and anticipated operating or sales environment. These estimates are particularly susceptible to change and may result in a material adjustment to the allowance. While management uses the latest information available to make its evaluation of the adequacy of the allowance, future adjustments may be necessary if conditions differ substantially from the assumptions used in making the evaluations. There were no provisions made during the six months ended June 30, 1999, since management determined the allowance for loan losses was adequate based on its analysis and the level of net charge-offs/recoveries compared to the total allowance. Net loan recoveries were $28,000 for the six months ended June 30, 1999, compared to net loan charge-offs of $76,000 for the year ended December 31, 1998 and loan charge-offs of $161,000 for the six months ended June 30, 1998. The percentage of net recoveries/(charge-offs) to total average loans was .0l%, (.03%) and .07% for the same periods, respectively. Another measure of the adequacy of the allowance is the coverage ratio of the allowance to non-performing loans, which was 218% at June 30, 1999. In addition, the ratio of non-performing loans to total loans has steadily declined and was 1.4% at June 30, 1999. The following table summarizes the changes in the allowance for loan losses for the periods indicated. Real estate includes both residential and commercial real estate.
6 Months Year 6 Months Ended Ended Ended (Dollars in Thousands) 6/30/99 12/31/98 6/30/98 ------- -------- ------- Beginning balance .......... $ 5,205 $ 5,281 $ 5,281 Provisions ................. -- -- -- Loans charged off: Real estate ......... -- (59) (59) Commercial .......... (11) (233) (135) Consumer ............ -- (11) (8) ------- ------- ------- Total charged off (11) (303) (202) Recoveries: Real estate ......... -- 144 23 Commercial .......... 35 71 13 Consumer ............ 4 12 5 ------- ------- ------- Total recoveries 39 227 41 ------- ------- ------- Net recoveries (charge-offs) 28 (76) (161) ------- ------- ------- Ending balance ............. $ 5,233 $ 5,205 $ 5,120 ======= ======= =======
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 six month periods ended June 30, 1999, non-interest income was $391,000 and $758,000, respectively, compared to $397,000 and $735,000 for the same periods in 1998. Service charges increased $10,000 and $6,000, to $159,000 and $288,000 for the three and six month periods ended June 30, 1999. The increase in service charge income came largely from increase in deposit volume. Trust income increased $38,000 and decreased $14,000 to $138,000 and $220,000 for the three and six month periods ended June 30, 1999. The increase for the three month period was the result of several estate settlements along with fees for bond issuances. The decrease for the six month period reflects higher estates fees earned during the first quarter of 1998 over 1999. Other non-interest income decreased $53,000 and increased $31,000 to $95,000 and $250,000 for the three and six month periods ended June 30, 1999. The decrease in other income for the three month period reflected the gains recognized on the sales of OREO properties during the second quarter of 1998. This increase during the six month period reflects higher gains on OREO sales during the first quarter of 1999 versus 1998. 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 $344,000 to $2.1 million and $516,000 to $4.0 million for the three and six month periods ended June 30, 1999. The increase during these periods resulted primarily from higher levels of expenses in all categories due to branch expansion and technology upgrading. Salaries & employee benefits increased $96,000 or 10% to $1.1 million for the three months ended June 30, 1999, compared to $979,000 for the same period in 1998. The increase in this category reflects the increase in full-time equivalent employees caused by the staffing of two new full service branches. Furniture & equipment expense increased approximately $63,000 or 40% to $222,000 and $130,000 or 42% to $438,000 for the three and six months ended June 30, 1999, respectively, compared to $159,000 and $308,000 for the same periods in 1998. The increases for both periods were due to higher levels of depreciation and maintenance. Occupancy expense increased approximately $54,000 or 48% to $166,000 and $73,000 or 34% to $285,000 for the three and six months ended June 30, 1999, respectively. This compares to $112,000 and $212,000 for the same periods in 1998. The increases in this category reflect the added costs incurred in 1999 for the two new offices as well as higher costs for repairs and maintenance of all facilities. Advertising & marketing expense increased $58,000 and $102,000 to $134,000 and $223,000 for the three and six months ended June 30, 1999, respectively, compared to $76,000 and $121,000 for the same periods in 1998. Expenditures have risen due to increased marketing for new products and services, such as Direct Checking, Premier Money Market, and Home Power equity loans, as well as the Investment Services and Trust Division. In addition expenditures have increased due to the opening and promotion of two new branches as well as advertising open employment positions at the Bank INCOME TAXES Income tax expense was $352,000 and $643,000 for the three and six months ended June 30, 1999 and $285,000 and $535,000 for the three and six months ended June 30, 1998. 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 and (iii) other real estate owned as a result of foreclosure or voluntary transfer to DNB.
June 30 Dec. 31 June 30 (Dollars in Thousands) 1999 1998 1998 ---- ---- ---- Nonaccrual Loans: Residential mortgage $ 106 $ 250 $ 250 Commercial mortgage 689 1,063 886 Commercial ......... 781 990 950 Consumer ........... 124 114 93 ----- ----- ----- Total nonaccrual loans .. 1,700 2,417 2,179 Loans 90 days past due and still accruing 703 699 760 ----- ----- ----- Total non-performing loans .............. 2,403 3,116 2,939 Other real estate owned ................. 555 139 206 -- --- ------ ------ Total non-performing assets ............. $2,958 $3,255 $3,145 ====== ====== ======
The following table sets forth the DNB's asset quality and allowance coverage ratios at the dates indicated:
June 30 Dec. 31 June 30 1999 1998 1998 ----- ----- ----- Non-performing Loans/Total Loans .............. 1.4% 2.1% 2.2% Non-performing Assets/Total Loans and OREO .... 1.8 2.2 2.3 Allowance for Loan Losses/Total Loans ......... 3.2 3.5 3.8 Allowance for Loan Losses/Total Loans and OREO 3.1 3.5 3.7 Allowance for Loan Losses/Non-performing Assets 176.9 159.9 162.9 Allowance for Loan Losses/Non-performing Loans 217.8 167.0 174.3
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) 6/30/99 12/31/98 6/30/98 ------- -------- ------- Interest income which would have been recorded under original terms .................. $ 66 $ 194 $ 89 Interest income recorded during the period ... (5) (92) (36) ----- ----- ----- Net impact on interest income ................ $ 61 $ 102 $ 53 ===== ===== =====
As of June 30, 1999, DNB had impaired loans with a total recorded investment of $1.1 million and an average recorded investment for the six month period ended June 30, 1999 of $1.5 million. As of June 30, 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 $57,000 during the six months ended June 30, 1999. No interest income was recorded on such loans. As of December 31, 1998, DNB had impaired loans with a total recorded investment of $1.7 million and an average recorded investment for the year ended December 31, 1998 of $1.6 million. As of December 31, 1998, there was no related allowance for credit losses necessary for these impaired loans. Total cash collected on impaired loans was credited to the outstanding principal income in the amount of $115,000 during the six months ended June 30, 1998. No interest income was recorded on such loans. LIQUIDITY AND CAPITAL RESOURCES For a financial institution, liquidity is a measure of the ability to fund customers' needs for loans and deposit withdrawals. Management regularly evaluates economic conditions in order to maintain a strong liquidity position. One of the most significant factors considered by management when evaluating liquidity requirements is the stability of DNB's core deposit base. In addition to cash, DNB maintains a portfolio of short term investments to meet its liquidity requirements. DNB has historically relied on cash flow from operations and other financing activities. Liquidity is provided by investing activities, including the repayment and maturing of loans and investment securities. At June 30, 1999 DNB has $12.7 million in commitments to fund commercial real estate, construction and land development. In addition, DNB had commitments to fund $2.3 million in home equity lines of credit and $8.7 million in other unused commitments. Management anticipates the majority of these commitments will be funded by means of normal cash flows. In addition, $36.7 million of time deposits at DNB are scheduled to mature during the six months ending December 31, 1999. Management believes that the majority of such deposits will be reinvested with DNB and that certificates that are not renewed will be funded by maturing loans and investments. Stockholders' equity increased to $20.6 million at June 30, 1999 as a result of the $1.4 million profit reported for the six months then ended and after dividends paid totaling approximately $396,000 year-to-date. The Bank's common equity position at June 30, 1999 exceeds the regulatory required minimums. The following table summarizes data and ratios pertaining to the Bank's capital structure.
(Dollars in thousands) June 30, 1999 ------------- Tier I Capital.............................. $20,804 Tier II Capital.............................. 2,527 ------- Total Capital................................ $23,331 =======
Required Current Excess -------- ------- ------ Leverage .................................... 4.00% 7.46% 3.46% Tier I ...................................... 4.00 10.43 6.43 Risk-based................................... 8.00 11.70 3.70
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 8.8%, well in excess of FRB requirements. REGULATORY MATTERS Dividends payable to the Corporation by the Bank are subject to certain regulatory limitations. Under normal circumstances, the payment of dividends in any year without regulatory permission is limited to the net profits (as defined for regulatory purposes) for that year, plus the retained net profits for the preceding two calendar years. YEAR 2000 ISSUES Year 2000 issues arise from a concern that certain information systems and automated equipment will be unable to recognize and process properly date-related information after December 31, 1999. If not corrected, these system and equipment failures could produce inaccurate or unpredictable results causing disruptions of normal business operations beginning on January 1, 2000. In order to address these Year 2000 issues, DNB has developed a comprehensive approach beginning with the establishment of a Technology Steering Committee. The Committee has developed and implemented a compliance plan, which is divided into five phases: (1) awareness; (2) assessment; (3) renovation; (4) validation & testing; and (5) implementation. The goal is to ensure that each organizational function, system, application, file, program and database will correctly process, provide and/or receive data at the century date change beginning December 31, 1999. DNB has substantially completed the first four phases of the plan for all of its mission-critical systems, and it is currently working on the implementation phase. DNB has substantially completed the final phase, which requires testing of all Bank interfaces and connections with other systems. In addition to mission-critical systems, DNB has identified and is monitoring the Year 2000 readiness of other vendors and service providers and has established contingency plans for alternate suppliers based upon target compliance time frames. To evaluate the risk of customer non-compliance with Year 2000 issues, the Bank initiated written communications with all of its commercial deposit and borrowing customers, which included a questionnaire, to assist in determining their awareness and readiness for the century date change. DNB also reviewed significant borrowing relationships (over $250,000) and classified them into high, moderate and low risk categories for non-compliance with Year 2000 issues. DNB called those customers in the high and moderate risk categories to obtain personal responses to questionnaires in order to evaluate the risk to DNB from the failure of those customers to remediate their own Year 2000 issues. The results of these assessments are being incorporated into DNB's credit risk management processes, including customer risk ratings. These assessments were completed by June 30, 1999. DNB has developed a business resumption contingency plan which outlines its courses of action in the event of a Year 2000-related systems failure. The plan was developed to help DNB resume operations in an orderly fashion and to continue providing essential services in the event of the most reasonably likely worst case scenarios. At this point, DNB has completed the four-phase process recommended by regulators. The project was completed by July 14, 1999. During August and September, the plans will be validated independently in order to judge the effectiveness and reasonableness of the contingency strategies. DNB is substantially Year 2000 compliant and is working diligently on a few remaining items with an estimated completion date of September 30, 1999. Year 2000 issues could result in material financial risk to a company such as DNB if the company and third party vendors upon which it relies were unable to address this issue in a timely manner. However, management currently expects DNB and its third party vendors to be Year 2000 compliant in all material respects before August 15, 1999. The Year 2000 statements contained herein, and in other securities filings of DNB are Year 2000 readiness disclosures subject to the Year 2000 Readiness and Disclosure Act of 1998, and may not be relied upon as representations or warranties for any purpose other than disclosure for Federal securities law compliance purposes. Management currently estimates that the costs of Year 2000 compliance will be approximately $60,000 during the two years ended December 31, 1999, of which approximately $58,000 has been expended through June 30, 1999. All of these expenses have been funded from operating cash flow. RECENT DEVELOPMENTS On May 17th, DNB opened its eighth office in West Goshen. This new branch is located at 1115 West Chester Pike in the Shop-Rite/Office Depot Shopping Center. In addition, DNB recently announced that it has entered into an agreement with Exton Square, Inc. to lease a parcel of ground formerly known as the Guernsey Cow in Exton. The Bank is currently working with its architect on an adaptive reuse of the Guernsey Cow Dairy Barn. In addition to a full service branch with four drive-up windows, the building will also house the Bank's Investment Services & Trust Division as well as Commercial Lending personnel. The opening is expected to take place in the summer of 2000 and has been approved by the Office of the Comptroller of the Currency. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes in DNB's market risk occurred from December 31, 1998 to June 30, 1999. FORWARD-LOOKING STATEMENTS Certain statements in this report, including any which are not statements of historical fact, may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Without limiting the foregoing, the words "expect", "anticipate", "plan", "believe", "seek", "estimate", "predict", "internal" and similar words are intended to identify expressions that may be forward-looking statements. Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those contemplated by such statements. For example, actual results may be adversely affected by the following possibilities: (1) competitive pressure among depository institutions may increase; (2) changes in interest rates may reduce banking interest margins; (3) general economic conditions and real estate values may be less favorable than contemplated; (4) adverse legislation or regulatory requirements may be adopted; (5) the impact of the Year 2000 issue may be more significant than currently anticipated; (6) unexpected contingencies relating to Year 2000 compliance; and (7) other unexpected contingencies may arise. Many of these factors are beyond DNB's ability to control or predict. Readers of this report are accordingly cautioned not to place undue reliance on forward-looking statements. DNB disclaims any intent or obligation to update publicly any of the forward-looking statements herein, whether in response to new information, future events or otherwise. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 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: August 13, 1999 /S/ Henry F. Thorne - ----- --------------- ------------------- Henry F. Thorne, President and Chief Executive Officer DATE: August 13, 1999 /S/ Bruce E. Moroney - ----- --------------- -------------------- Bruce E. Moroney Chief Financial Officer EX-27 2
9 0000713671 DNB FINANCIAL CORP. 6-MOS DEC-31-1999 JUN-30-1999 6,717,630 2,096,065 9,140,000 0 50,690,716 48,195,186 47,963,222 165,877,914 5,233,027 288,602,493 247,754,480 0 2,218,738 18,000,000 0 0 1,524,229 19,105,046 288,602,493 6,649,831 3,076,298 101,105 9,827,234 4,109,800 4,569,271 5,257,963 0 0 3,998,485 2,017,476 1,374,476 0 0 1,374,476 .90 .87 7.59 1,700,090 702,444 0 7,460,466 5,204,869 11,228 39,386 5,233,027 5,233,027 0 0
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