SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 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) 1,533,149
(Class) (Shares Outstanding as of
November 15, 1999)
- ---------------------------------------------------------------------------
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1999 and December 31, 1998 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1999 and 1998 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1999 and 1998 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1999 and 1998 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 19
ITEM 2. CHANGE IN SECURITIES 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 19
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<S> <C> <C>
September 30, December 31,
1999 1998
------------ -----------
ASSETS
Cash and due from banks ................................................................ $ 10,455,175 $ 13,660,149
Federal funds sold ..................................................................... 9,118,000 6,171,000
------------ ------------
Total cash and cash equivalents ........................................................ 19,573,175 19,831,149
------------ ------------
Investment securities available for sale, at market value .............................. 58,120,172 45,519,420
Investment securities (market value $43,423,814
in 1999 and $47,528,269 in 1998) .................................................... 43,897,160 47,380,404
Loans, net of unearned income .......................................................... 170,866,961 148,725,716
Allowance for loan losses .............................................................. (5,231,047) (5,204,869)
------------ ------------
Net loans .............................................................................. 165,635,914 143,520,847
------------ ------------
Office property and equipment, net ..................................................... 5,062,800 4,558,811
Accrued interest receivable ............................................................ 1,864,386 1,670,123
Other real estate owned ................................................................ 83,360 138,775
Deferred income taxes .................................................................. 1,715,026 1,037,415
Other assets ........................................................................... 2,446,113 1,761,487
------------ ------------
TOTAL ASSETS ........................................................................... $298,398,106 $265,418,431
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Non-interest-bearing deposits .......................................................... $ 31,509,306 $ 30,001,051
Interest-bearing deposits:
NOW accounts ........................................................................ 35,919,024 37,074,977
Money market ........................................................................ 47,450,766 32,582,044
Savings ............................................................................. 30,962,388 28,321,246
Time ................................................................................ 107,550,712 97,394,014
------------ ------------
TOTAL DEPOSITS ......................................................................... 253,392,196 225,373,332
------------ ------------
FHLB advances .......................................................................... 23,000,000 18,000,000
Accrued interest payable ............................................................... 970,385 902,009
Other liabilities ...................................................................... 392,956 536,872
------------ ------------
TOTAL LIABILITIES ...................................................................... 277,755,537 244,812,213
------------ ------------
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; 1,533,149 and
1,524,229 issued and outstanding, respectively ...................................... 1,533,149 1,524,229
Surplus ................................................................................ 17,105,257 17,104,817
Retained earnings ...................................................................... 3,393,122 1,924,803
Accumulated other comprehensive (loss) income .......................................... (1,388,959) 52,369
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ............................................................. 20,642,569 20,606,218
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................. $298,398,106 $265,418,431
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended September 30
-------------------------------
1999 1998
---------- -----------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ........................................................... $3,549,087 $3,030,646
Interest on taxable investment securities ............................................ 1,446,252 1,254,214
Interest on tax-free investment securities ........................................... 113,456 --
Interest on Federal funds sold ....................................................... 123,426 308,908
---------- ----------
Total interest income ................................................................ 5,232,221 4,593,768
---------- ----------
INTEREST EXPENSE:
Interest on time deposits ............................................................ 1,353,369 1,370,160
Interest on NOW, money market and savings ............................................ 915,743 679,073
Interest on FHLB advances ............................................................ 246,908 145,453
---------- ----------
Total interest expense ............................................................... 2,516,020 2,194,686
---------- ----------
NET INTEREST INCOME .................................................................... 2,716,201 2,399,082
PROVISION FOR LOAN LOSSES .............................................................. -- --
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .................................... 2,716,201 2,399,082
---------- ----------
NON-INTEREST INCOME:
Service charges ...................................................................... 167,936 99,797
Trust income ......................................................................... 89,308 72,841
Other ................................................................................ 236,996 246,432
---------- ----------
Total non-interest income ............................................................ 494,240 419,070
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits ....................................................... 1,141,370 986,163
Furniture and equipment .............................................................. 239,756 179,876
Occupancy ............................................................................ 152,321 111,231
Advertising and marketing ............................................................ 105,442 52,203
Professional and consulting .......................................................... 118,669 50,808
Printing and supplies ................................................................ 77,700 30,736
Other ................................................................................ 362,731 275,359
---------- ----------
Total non-interest expense ........................................................... 2,197,989 1,686,376
---------- ----------
INCOME BEFORE INCOME TAXES ............................................................. 1,012,452 1,131,776
INCOME TAX EXPENSE ..................................................................... 323,000 384,000
---------- ----------
NET INCOME ............................................................................. $689,452 $747,776
========== ==========
EARNINGS PER SHARE:
Basic ................................................................................ $0.45 $0.49
Diluted .............................................................................. $0.44 $0.47
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ................................................................................ 1,527,546 1,524,229
Diluted .............................................................................. 1,563,157 1,581,570
CASH DIVIDENDS PER SHARE ............................................................... $0.13 $0.11
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<S> <C> <C>
Nine Months Ended September 30
------------------------------
1999 1998
------------- -------------
INTEREST INCOME:
Interest and fees on loans .................................................................. $10,198,918 $ 8,853,388
Interest on taxable investment securities ................................................... 4,304,657 3,478,832
Interest on tax-free investment securities .................................................. 331,349 --
Interest on Federal funds sold .............................................................. 224,531 735,784
---------- ----------
Total interest income ....................................................................... 15,059,455 13,068,004
---------- ----------
INTEREST EXPENSE:
Interest on time deposits ................................................................... 3,962,625 3,889,038
Interest on NOW, money market and savings ................................................... 2,416,287 1,852,571
Interest on repurchase agreements ........................................................... -- 673
Interest on FHLB advances ................................................................... 706,379 247,946
---------- ----------
Total interest expense ...................................................................... 7,085,291 5,990,228
---------- ----------
Net interest income ........................................................................... 7,974,164 7,077,776
Provision for loan losses ..................................................................... -- --
---------- ----------
Net interest income after provision for loan losses ........................................... 7,974,164 7,077,776
---------- ----------
NON-INTEREST INCOME:
Service charges ............................................................................. 456,318 382,211
Trust income ................................................................................ 309,194 306,402
Other ....................................................................................... 486,726 465,267
---------- ----------
Total non-interest income ................................................................... 1,252,238 1,153,880
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits .............................................................. 3,240,512 3,043,850
Furniture and equipment ..................................................................... 677,880 488,302
Occupancy ................................................................................... 437,747 323,577
Advertising and marketing ................................................................... 328,017 172,991
Professional and consulting ................................................................. 287,466 185,122
Printing and supplies ....................................................................... 189,703 124,222
Other ....................................................................................... 1,035,149 830,643
---------- ----------
Total non-interest expense .................................................................. 6,196,474 5,168,707
---------- ----------
INCOME BEFORE INCOME TAXES .................................................................... 3,029,928 3,062,949
INCOME TAX EXPENSE ............................................................................ 966,000 919,000
---------- ----------
NET INCOME .................................................................................... $ 2,063,928 $ 2,143,949
========== ==========
COMMON SHARE DATA:
Basic ....................................................................................... $ 1.35 $ 1.41
Diluted ..................................................................................... $ 1.31 $ 1.36
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ....................................................................................... 1,525,347 1,524,229
Diluted ..................................................................................... 1,570,836 1,579,549
CASH DIVIDENDS PER SHARE ...................................................................... $ 0.39 $ 0.34
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30
------------------------------
1999 1998
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................................... $ 2,063,928 $ 2,143,949
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................................................. 603,397 582,364
Gain on sale of investments ................................................................... -- (4,682)
Gain on sale of OREO .......................................................................... (158,836) (152,754)
Increase (decrease) in accrued interest receivable ............................................ (194,263) 100,477
Increase in other assets ...................................................................... (684,626) (250,615)
Increase in accrued interest payable .......................................................... 68,376 71,479
Decrease in current taxes payables ............................................................ (52,860) (66,000)
(Decrease) increase in other liabilities ...................................................... (91,056) 569,701
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................................................... 1,554,060 2,993,919
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities & paydowns of AFS securities ......................................... 2,650,606 6,247,625
Proceeds from maturities & paydowns of HTM securities ......................................... 11,950,899 31,452,996
Purchase of AFS securities .................................................................... (17,412,878) (23,901,043)
Purchase of HTM securities .................................................................... (8,578,019) (33,722,793)
Proceeds from sale of AFS securities .......................................................... -- 1,996,371
Net increase in loans ......................................................................... (22,584,149) (13,373,707)
Proceeds from sale of OREO .................................................................... 683,333 392,314
Purchase of office property and equipment ..................................................... (954,441) (516,414)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES ......................................................... (34,244,649) (31,424,651)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ...................................................................... 28,018,864 15,421,780
Increase in FHLB advances ..................................................................... 5,000,000 16,000,000
Proceeds from exercise of stock options ....................................................... 9,360 2,949
Dividends paid ................................................................................ (595,609) (522,670)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..................................................... 32,432,615 30,902,059
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS ....................................................... (257,974) 2,471,327
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............................................. 19,831,149 23,392,007
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................................... $ 19,573,175 $ 25,863,334
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ...................................................................................... $ 7,016,915 $ 5,918,749
Taxes ......................................................................................... 1,057,056 985,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION:
Transfer of loans to OREO ..................................................................... $ 471,667 $ 240,404
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of DNB
Financial Corporation (referred to herein as the "Corporation" or "DNB") and its
subsidiary, Downingtown National Bank (the "Bank"), have been prepared in
accordance with the instructions for Form 10-Q and therefore do not include
certain information or footnotes necessary for the presentation of financial
condition, statement of operations and statement of cash flows required by
generally accepted accounting principles. However, in the opinion of management,
the consolidated financial statements reflect all adjustments (which consist of
normal recurring adjustments) necessary for a fair presentation of the results
for the unaudited periods. Prior period amounts not affecting net income are
reclassified when necessary to conform with current year classifications. The
results of operations for the nine months ended September 30, 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 nine months ended September 30, 1999 and 1998 are
reconciled as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------------------
1999 1998
---------------------------------- --------------------------------
Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common stockholders ............. $689,452 1,527,546 $ 0.45 $ 747,776 1,524,229 $ 0.49
Effect of dilutive common stock
equivalents-stock options ...................... -- 35,611 0.01 -- 57,341 0.02
-------- --------- ------ --------- --------- ------
Diluted EPS ......................................... $689,452 1,563,157 $ 0.44 $ 747,776 1,581,570 $ 0.47
======== ========= ====== ========= ========= ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------------------------
1999 1998
-------------------------------- ---------------------------------
Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common stockholders .............. $2,063,928 1,525,347 $ 1.35 $2,143,949 1,524,229 $ 1.41
Effect of dilutive common stock
equivalents-stock options ....................... -- 45,489 0.04 -- 55,320 0.05
---------- --------- ------ ---------- --------- ------
Diluted EPS .......................................... $2,063,928 1,570,836 $ 1.31 $2,143,949 1,579,549 $ 1.36
========== ========= ====== ========== ========= ======
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
For Three Months ended Sept. 30 For Nine Months ended Sept. 30
------------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME:
Net Income ...................................................... $ 689,452 $ 747,776 $ 2,063,928 $ 2,143,949
Other comprehensive (loss) income, net of tax,
relating to unrealized (losses) gains on investments .......... (486,209) 9,116 (1,441,328) 5,572
---------- --------- ----------- -----------
Total comprehensive income ...................................... $ 203,243 $ 756,892 $ 622,600 $ 2,149,521
========== ========= =========== ===========
</TABLE>
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 hedged asset or liability
that are attributable to the hedged risk, so long as the hedge is effective.
Prospective application of SFAS No. 133 is required for all fiscal years
beginning after June 15, 2000, however earlier application is permitted. DNB has
not yet determined the impact, if any, of this statement including its
provisions for the potential reclassifications of investment securities, on
operations, financial condition and equity and comprehensive income. However,
DNB currently has no derivatives covered by this statement and currently
conducts no hedging activities.
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
DNB's total assets were $298.4 million at September 30, 1999 compared to
$265.4 million at December 31, 1998. Total loans were $170.9 million, up $22.2
million or 15% from $148.7 million at December 31, 1998. The increase was
primarily in the real estate loan portfolio which increased $18.1 million or
22%. Investment securities (AFS and HTM) increased $9.1 million or 10% to $102.0
million at September 30, 1999. Federal funds sold were $9.1 million at September
30, 1999, up $2.9 million from December. The overall increase in assets was
funded by growth in both deposits and borrowings.
Deposits and other borrowings at September 30, 1999 totaled $276.4 million,
compared to $243.4 million at December 31, 1998. Since December 31, 1998 there
have been increases of $14.9 million in money market accounts, $10.2 million in
time deposits, $2.6 million in savings deposits. Non-interest bearing deposits
increased $1.5 million, while NOW accounts decreased $1.2 million. Approximately
half of the overall deposit increase has come from the two new branch openings,
which includes the $9.1 million of deposits purchased from Keystone in March.
Borrowings were $23.0 million at September 30, 1999, compared to $18.0 million
at December 31, 1998. The increase was comprised solely of new FHLB advances.
At September 30, 1999, total stockholders' equity increased $36,000 to
$20.6 million or $13.46 per share, compared to $20.6 million or $13.52 per share
at December 31, 1998. The modest increase in stockholders' equity was the result
of net income of $2.1 million for the nine months ended September 30, 1999,
offset by dividends paid of approximately $596,000 or $.39 per share and the
decline in the accumulated other comprehensive income relating to the fair
market value, net of taxes, of available-for-sale securities of $1.4 million.
RESULTS OF OPERATIONS
NET INTEREST INCOME
DNB's earnings performance is primarily dependent upon its level of net
interest income, which is the excess of interest revenue over interest expense.
Interest revenue includes interest earned on loans (net of interest reversals on
non-performing loans), investments and Federal funds sold and interest-earning
cash, as well as loan fees and dividend income. Interest expense includes
interest cost for deposits, repurchase agreements, Federal funds purchased, FHLB
advances and other borrowings.
Net interest income increased $317,000 or 13% to $2.7 million for the three
month period and $896,000 or 13% to $8.0 million for the nine month period ended
September 30, 1999. As shown in the following tables, the increases in net
interest income for the three and nine month periods ended September 30, 1999
was attributable to the positive effects of volume changes which were modestly
offset by the negative effects of rate changes. The positive impact from volume
changes during the three and nine month periods was attributable to significant
increases in interest-earning assets, which increased $39 million and $43
million on average, respectively, compared to increases in interest-bearing
liabilities which grew $38 million and $41 million, respectively. The negative
impact from changes in rates for both periods was primarily
<PAGE>
attributable to lower available yields on loans and investments partially offset
by favorable changes in rates on time deposits.
The following tables sets forth, among other things, the extent to which
changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have affected interest
income and expense during the three and nine months ended September 30, 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.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
Compared to 1998
-------------------------------------
Increase (Decrease) Due to
--------------------------
(Dollars in Thousands) Rate Volume Total
------- ------ ------
<S> <C> <C> <C>
Interest-earning assets:
Loans ......................................................................... $ (67) $ 585 $ 518
Investment securities-taxable ................................................. (33) 226 193
Investment securities-tax exempt .............................................. -- 149 149
Federal funds sold ............................................................ (28) (158) (186)
----- ----- -----
Total .................................................................... (128) 802 674
----- ----- -----
Interest-bearing liabilities:
Savings, NOW & money market deposits .......................................... 47 190 237
Time deposits ................................................................. (154) 137 (17)
FHLB advances ................................................................. 2 99 101
----- ----- -----
Total ......................................................................... (105) 426 321
----- ----- -----
Net interest income/inerest rate spread ....................................... $ (23) $ 376 $ 353
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
Compared to 1998
------------------------------------
Increase (Decrease) Due to
----------------------------
(Dollars in Thousands) Rate Volume Total
------ ------- ------
<S> <C> <C> <C>
Interest-earning assets:
Loans ......................................................................... $ (229) $ 1,575 $ 1,346
Investment securities-taxable ................................................. (117) 943 826
Investment securities-tax exempt .............................................. -- 436 436
Federal funds sold ............................................................ (85) (427) (512)
------ ------- ------
Total .................................................................... (431) 2,527 2,096
------ ------- ------
Interest-bearing liabilities:
Savings, NOW & money market deposits .......................................... 99 466 565
Time deposits ................................................................. (184) 258 74
Other borrowings .............................................................. -- 456 456
------ ------- ------
Total ......................................................................... (85) 1,180 1,095
------ ------- ------
Net interest income/interest rate spread ...................................... $(346) $ 1,347 $1,001
====== ======= ======
</TABLE>
<PAGE>
PROVISION FOR LOAN LOSSES
To provide for inherent losses in the loan portfolio, DNB maintains an
allowance for loan losses. To maintain an adequate allowance, management charges
the provision for loan losses against income. Loan losses are charged directly
against the allowance and recoveries on previously charged-off loans are added
to the allowance. In establishing its allowance for loan losses, management
considers the size and risk exposure of each segment of the loan portfolio, past
loss experience, present indicators of risk such as delinquency rates, levels of
nonaccruals, the potential for losses in future periods, and other relevant
factors. Management's evaluation of the loan portfolio generally includes
reviews, on a sample basis, of individual borrowers regardless of size and
reviews of problem borrowers of $100,000 or greater. Consideration is also given
to examinations performed by regulatory agencies, primarily the Office of the
Comptroller of the Currency ("OCC"). The provisions are based on management's
review of the economy, interest rates, general market conditions, estimates of
the fair value of collateral, financial strength and ability of the borrowers
and guarantors to pay, and considerations regarding the current and anticipated
operating or sales environment. These estimates are particularly susceptible to
change and may result in a material adjustment to the allowance. While
management uses the latest information available to make its evaluation of the
adequacy of the allowance, future adjustments may be necessary if conditions
differ substantially from the assumptions used in making the evaluations.
There were no provisions made during the nine months ended September 30,
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 $26,000 for the nine months ended
September 30, 1999, compared to net loan charge-offs of $76,000 for the year
ended December 31, 1998 and net loan charge-offs of $111,000 for the nine months
ended September 30, 1998. Another measure of the adequacy of the allowance is
the coverage ratio of the allowance to non-performing loans, which was 242% at
September 30, 1999. In addition, the ratio of non-performing loans to total
loans has steadily declined over the last five years and was 1.3% at September
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
9 Months Year 9 Months
Ended Ended Ended
(Dollars in Thousands) 9/30/99 12/31/98 9/30/98
------- -------- -------
Beginning balance .............................. $ 5,205 $ 5,281 $ 5,281
Provisions ..................................... -- -- --
Loans charged off:
Real estate ............................. (14) (59) (59)
Commercial .............................. -- (233) (218)
Consumer ................................ (26) (11) (9)
------- ------- -------
Total charged off ................... (40) (303) (286)
------- ------- -------
Recoveries:
Real estate ............................. 12 144 139
Commercial .............................. 1 71 27
Consumer ................................ 53 12 9
------- ------- -------
Total recoveries .................... 66 227 175
------- ------- -------
Net recoveries (charge-offs) ................... 26 (76) (111)
------- ------- -------
Ending balance ................................. $ 5,231 $ 5,205 $ 5,170
======= ======= =======
</TABLE>
<PAGE>
NON-INTEREST INCOME
Total non-interest income includes service charges on deposit products,
fees received by DNB's Investment Services and Trust Division; and other sources
of income such as net gains on sales of investment securities and other real
estate owned ("OREO") properties, fees for cash management services, safe
deposit box rentals, issuing travelers' checks and money orders, check cashing,
lockbox services and similar activities.
For the three and nine month periods ended September 30, 1999, non-interest
income was $494,000 and $1.3 million, respectively, compared to $419,000 and
$1.2 million for the same periods in 1998. Service charges increased $68,000 and
$74,000, to $168,000 and $456,000 for the three and nine month periods ended
September 30, 1999. The increase in service charge income is due, in general, to
increased deposit volume. Specific categories such as NSF fees, business
analysis and cycle charges have all risen significantly.
NON-INTEREST EXPENSE
Non-interest expense includes salaries & employee benefits, furniture &
equipment, occupancy, professional & consulting fees as well as printing &
supplies, insurance, advertising and other less significant expense items.
Non-interest expenses increased $512,000 to $2.2 million and $1.0 million
to $6.2 million for the three and nine month periods ended September 30, 1999.
The increase during both periods resulted primarily from higher levels of
expenses in all categories due to DNB's recent branch expansion and investment
in technology.
Salaries & employee benefits increased $155,000 or 16% to $1.1 million and
$197,000 or 6% to $3.2 million for the three and nine month periods ended
September 30, 1999, compared to $986,000 and $3.0 million for the same periods
in 1998. The increase in this category was primarily caused by staff hired for
our new Kennett Square and West Goshen branches.
Furniture & equipment expense increased approximately $60,000 or 33% to
$240,000 and $190,000 or 39% to $678,000 for the three and nine months ended
September 30, 1999, respectively. The increases for both periods relate to
higher levels of depreciation and maintenance resulting from equipment purchased
during the last fifteen months to up-grade DNB's back-office and branch
processing.
<PAGE>
Occupancy expense increased approximately $41,000 or 37% to $152,000 and
$114,000 or 35% to $438,000 for the three and nine months ended September 30,
1999, respectively. This compares to $111,000 and $324,000 for the same periods
in 1998. The increases in this category reflect the higher costs incurred during
the year for repairs and maintenance of our community offices, as well as the
addition of rent expense for our new West Goshen office.
Advertising & marketing increased $53,000 or 102% to $105,000 and $155,000
or 90% to $328,000 for the three and nine months ended September 30, 1999,
respectively. This compares to $52,000 and $172,000 for the same periods in
1998. The increase for both periods is attributable to advertising for our new
branches (including grand opening costs), as well as increased advertising
relating to employee recruitment.
Professional & consulting fees increased $68,000 or 134% to $119,000 and
$102,000 or 55% to $287,000 for the three and nine months ended September 30,
1999. This compares to $51,000 and $173,000 for the same periods in 1998. DNB
incurred significant expenses during the year for legal costs related to the new
branches and several non-performing loans. In addition, DNB incurred significant
costs from other consultants related to the Bank's technology upgrade.
Printing & supplies increased $47,000 or 153% to $78,000 and $65,000 or 53%
to $190,000 for the three and nine months ended September 30, 1999. This
compares to $31,000 and $124,000 for the same periods in 1998. The increase is
attributable to costs incurred for supplies and brochures relating to new
deposit products, the Investment Services and Trust Division and new branches.
Other expenses include such items as PA shares tax, insurance, ATM charges,
OREO expense, satisfaction fees, appraisal fees, telephone & fax, and other
miscellaneous expenses. Other expenses increased $87,000 or 32% and $205,000 or
27% for the three and nine month periods ended September 30, 1999 to $363,000
and $1,035,000 compared to $275,000 and $831,000 for the same respective periods
in 1998.
INCOME TAXES
Income tax expense was $323,000 and $966,000 for the three and nine months
ended September 30, 1999 compared with $384,000 and $928,000 for the three and
nine months ended September 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
<PAGE>
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 accuring and
(iii) other real estate owned as a result of foreclosure or voluntary transfer
to DNB. <TABLE> <CAPTION>
Sept. 30 Dec. 31 Sept. 30
(Dollars in Thousands) ................................................ 1999 1998 1998
-------- ------- --------
<S> <C> <C> <C>
Nonaccrual Loans:
Residential mortgage ............................................. $ 40 $ 250 $ 381
Commercial mortgage .............................................. 494 1,063 1,069
Commercial ....................................................... 805 990 797
Consumer ......................................................... 86 114 87
------ ------ ------
Total nonaccrual loans ................................................ 1,425 2,417 2,334
------ ------ ------
Loans 90 days past due and still accruing ............................. 739 699 711
------ ------ ------
Total non-performing loans ............................................ 2,164 3,116 3,045
Other real estate owned ............................................... 83 139 196
------ ------ ------
Total non-performing assets ........................................... $2,247 $3,255 $3,241
====== ====== ======
</TABLE>
The following table sets forth DNB's asset quality and allowance coverage
ratios at the dates indicated:
<TABLE>
<CAPTION>
Sept. 30 Dec. 31 Sept. 30
1999 1998 1998
-------- ------- --------
<S> <C> <C> <C>
Non-performing Loans/Total Loans ................................................ 1.3% 2.1% 2.1%
Non-performing Assets/Total Loans and OREO ...................................... 1.3 2.2 2.5
Allowance for Loan Losses/Total Loans ........................................... 3.1 3.5 3.6
Allowance for Loan Losses/Total Loans and OREO .................................. 3.1 3.5 3.6
Allowance for Loan Losses/Non-performing Assets ................................. 232.8 159.9 159.5
Allowance for Loan Losses/Non-performing Loans .................................. 241.7 167.0 169.8
</TABLE>
If interest income had been recorded on nonaccrual loans, interest would
have increased as shown in the following table:
<TABLE>
<CAPTION>
9 Months Year 9 Months
Ended Ended Ended
(Dollars in thousands) ................................................ 9/30/99 12/31/98 9/30/98
------- -------- -------
<S> <C> <C> <C>
Interest income which would have been recorded
under original terms ........................................... $ 83 $ 194 $ 142
Interest income recorded during the period ............................ (7) (92) (69)
----- ------ -----
Net impact on interest income ......................................... $ 76 $ 102 $ 73
===== ====== =====
</TABLE>
As of September 30, 1999, DNB had impaired loans with a total recorded
investment of $881,000 and an average recorded investment for the nine month
period ended September 30, 1999 of $1.3 million. As of September 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
<PAGE>
outstanding principal balance in the amount of $83,000 during the nine
months ended September 30, 1999 and no interest income was recorded on such
loans during the period.
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 balance in
the amount of $130,000 during the nine months ended September 30, 1998 and no
interest income was recorded on such loans during the period.
LIQUIDITY AND CAPITAL RESOURCES
For a financial institution, liquidity is a measure of the ability to fund
customers' needs for loans and deposit withdrawals. Management regularly
evaluates economic conditions in order to maintain a strong liquidity position.
One of the most significant factors considered by management when evaluating
liquidity requirements is the stability of DNB's core deposit base. In addition
to cash, DNB maintains a portfolio of short term investments to meet its
liquidity requirements. DNB has historically relied on cash flow from operations
and other financing activities. Liquidity is provided by investing activities,
including the repayment and maturing of loans and investment securities.
At September 30, 1999 DNB has $16.5 million in commitments to fund
commercial real estate, construction and land development. In addition, DNB had
commitments to fund $2.7 million in home equity lines of credit and $6.6 million
in other unused commitments. Management anticipates the majority of these
commitments will be funded by means of normal cash flows. In addition, $31.2
million of time deposits at DNB are scheduled to mature during the three 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 September 30, 1999 as a
result of the $2,064,000 profit reported for the nine months then ended and
after dividends paid of approximately $596,000 year-to-date, largely offset by
the $1.4 million change in unrealized loss on the available-for-sale investment
portfolio. The Bank's common equity position at September 30, 1999 exceeds the
1999 regulatory required minimums. The following table summarizes data and
ratios pertaining to the Bank's capital structure.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------- ----------------- -----------------
(Dollars in thousands) ................. Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------- ------ ----- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Total risk-based capital ............ $ 23,897 11.72% $16,308 8.00% $20,385 10.00%
Tier 1 capital ...................... 21,316 10.46 8,154 4.00 12,231 6.00
Tier 1 (leverage) capital ........... 21,316 7.29 11,702 4.00 14,627 5.00
</TABLE>
<PAGE>
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 9.0%, 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)
internal 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 completed the five phases of its plan for all of its
mission-critical systems, and has substantially completed the five phases for
its non-mission critical 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-
<PAGE>
phase process recommended by regulators. The project was completed by July
14, 1999. During September and October, the plans were internally validated in
order to judge the effectiveness and reasonableness of the contingency
strategies. Management believes that DNB is Year 2000 compliant.
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. 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.
The costs of Year 2000 compliance totaled $104,000 through September 30,
1999. All of these expenses have been funded from normal operating cash flow.
DNB does not expect to incur any additional material Year 2000 compliance
related expenditures through the end of the year.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To measure the impacts of longer-term asset and liability mismatches beyond
two years, DNB utilizes Modified Duration of Equity and Economic Value of
Portfolio Equity ("EVPE") models. The modified duration of equity measures the
potential price risk of equity to changes in interest rates. A longer modified
duration of equity indicates a greater degree of risk to rising interest rates.
Because of balance sheet optionality, an EVPE analysis is also used to
dynamically model the present value of asset and liability cash flows, with
rates ranging up or down 200 basis points. The economic value of equity is
likely to be different if rates change. Results falling outside prescribed
ranges require action by management. At September 30, 1999 and December 31,
1998, 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.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in Rates ........................................... Flat -200bp +200bp
------ ------ ------
Economic Value of
Portfolio Equity ....................................... $ 26,816 $ 29,908 $ 17,991
Change .................................................... 3,091 (8,825)
Change as a % of assets ................................... 1.04% (2.96%)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in Rates ........................................... Flat -200bp +200bp
------ ------ ------
Economic Value of
Portfolio Equity ........................................ $ 28,307 $ 26,244 $ 20,505
Change .................................................... (2,062) (7,802)
Change as a % of assets.................................... (.78%) (2.94%)
</TABLE>
The change in EVPE, in a falling rate environment, from December 31, 1998
compared to September 30, 1999 is attributable to changes in the portfolio mix
of the investment portfolio as DNB purchased US Agency and tax-free municipal
bonds with call dates beyond two years.
<PAGE>
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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
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
ITEM 6.
(a) EXHIBITS:
Not Applicable
(b) REPORTS ON FORM 8-K
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DNB FINANCIAL CORPORATION
(Registrant)
DATE: November 15, 1999 /S/ Henry F. Thorne
Henry F. Thorne, President
and Chief Executive Officer
DATE: November 15, 1999 /S/ Bruce E. Moroney
Bruce E.Moroney
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000713671
<NAME> DNB FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,455,175
<INT-BEARING-DEPOSITS> 4,083,895
<FED-FUNDS-SOLD> 9,118,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,120,172
<INVESTMENTS-CARRYING> 43,897,160
<INVESTMENTS-MARKET> 43,423,814
<LOANS> 170,866,961
<ALLOWANCE> 5,231,047
<TOTAL-ASSETS> 298,398,106
<DEPOSITS> 253,392,196
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,363,341
<LONG-TERM> 23,000,000
0
0
<COMMON> 1,533,149
<OTHER-SE> 19,109,420
<TOTAL-LIABILITIES-AND-EQUITY> 298,398,106
<INTEREST-LOAN> 10,198,918
<INTEREST-INVEST> 4,636,006
<INTEREST-OTHER> 224,531
<INTEREST-TOTAL> 15,059,455
<INTEREST-DEPOSIT> 6,378,912
<INTEREST-EXPENSE> 7,085,291
<INTEREST-INCOME-NET> 7,974,164
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,196,474
<INCOME-PRETAX> 3,029,928
<INCOME-PRE-EXTRAORDINARY> 2,063,928
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,063,928
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.31
<YIELD-ACTUAL> 7.53
<LOANS-NON> 1,425,000
<LOANS-PAST> 739,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,127,000
<ALLOWANCE-OPEN> 5,204,869
<CHARGE-OFFS> 39,420
<RECOVERIES> 65,598
<ALLOWANCE-CLOSE> 5,231,047
<ALLOWANCE-DOMESTIC> 5,231,047
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
