SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 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
May 13, 1999)
- --------------------------------------------------------------------------------
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 1999 and December 31, 1998 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and December 31, 1998 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
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 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<S> <C> <C>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
ASSETS
Cash and due from banks ............................................................... $ 13,527,438 $ 13,660,149
Federal funds sold .................................................................... 8,436,000 6,171,000
------------- -------------
Total cash and cash equivalents ....................................................... 21,963,438 19,831,149
------------- -------------
Investment securities available for sale, at market value ............................. 48,523,628 45,519,420
Investment securities (market value $46,847,339 in 1999 and $47,528,269 in 1998)....... 46,848,451 47,380,404
Loans, net of unearned income ......................................................... 153,730,867 148,725,716
Allowance for loan losses ........................................................... (5,226,011) (5,204,869)
------------- -------------
Net loans ............................................................................. 148,504,856 143,520,847
------------- -------------
Office property and equipment ......................................................... 4,725,101 4,558,811
Accrued interest receivable ........................................................... 1,792,707 1,670,123
Other real estate owned ............................................................... 191,851 138,775
Deferred income taxes ................................................................. 1,208,626 1,037,415
Other assets .......................................................................... 2,708,666 1,761,487
------------- -------------
Total assets .......................................................................... $ 276,467,324 $ 265,418,431
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Non-interest-bearing deposits ......................................................... $ 30,139,665 $ 30,001,051
Interest-bearing deposits:
NOW ................................................................................ 37,056,457 37,074,977
Money market ....................................................................... 38,550,073 32,582,044
Savings ............................................................................ 31,428,016 28,321,246
Time ............................................................................... 98,672,052 97,394,014
------------- -------------
Total deposits ........................................................................ 235,846,263 225,373,332
------------- -------------
Federal Home Loan Bank advances ....................................................... 18,000,000 18,000,000
Accrued interest payable .............................................................. 937,558 902,009
Other liabilities ..................................................................... 1,010,386 536,872
------------- -------------
Total liabilities ..................................................................... 255,794,207 244,812,213
------------- -------------
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
issued and outstanding, respectively ............................................... 1,524,229 1,524,229
Surplus ............................................................................... 17,104,817 17,104,817
Retained earnings ..................................................................... 2,353,818 1,924,803
Accumulated other comprehensive (loss) income ......................................... (309,747) 52,369
------------- -------------
Total stockholders' equity ............................................................ 20,673,117 20,606,218
------------- -------------
Total liabilities and stockholders' equity ............................................ $ 276,467,324 $ 265,418,431
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C>
THREE MONTHS ENDED MARCH 31
---------------------------
1999 1998
------------ ------------
Interest and fees on loans ................................................... $3,124,731 $2,862,993
Interest on investment securities:
Taxable .................................................................... 1,423,966 1,119,693
Exempt from Federal taxes .................................................. 104,057 --
Interest on Federal funds sold ............................................... 44,422 180,981
------------ ------------
Total interest income ........................................................ 4,697,176 4,163,667
------------ ------------
INTEREST EXPENSE:
Interest on time deposits .................................................... 1,299,128 1,250,157
Interest on NOW, money market and savings .................................... 691,955 557,834
Interest on repurchase agreements ............................................ -- 673
Interest on FHLB advances .................................................... 228,466 38,170
------------ ------------
Total interest expense ....................................................... 2,219,549 1,846,834
------------ ------------
Net interest income .......................................................... 2,477,627 2,316,833
Provision for loan losses .................................................... -- --
------------ ------------
Net interest income after provision for loan losses .......................... 2,477,627 2,316,833
------------ ------------
NON-INTEREST INCOME:
Service charges .............................................................. 129,599 114,345
Trust income ................................................................. 82,341 133,929
Other ........................................................................ 154,972 90,020
------------ ------------
Total non-interest income .................................................... 366,912 338,294
------------ ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits ............................................... 1,023,581 1,078,279
Furniture and equipment ...................................................... 213,073 148,974
Occupancy .................................................................... 121,669 100,113
Professional and consulting .................................................. 95,850 68,980
Printing and supplies ........................................................ 63,831 57,463
Advertising and marketing .................................................... 88,360 44,898
Other ........................................................................ 320,010 255,414
------------ ------------
Total non-interest expense ................................................... 1,926,374 1,754,121
------------ ------------
Income before income taxes ................................................... 918,165 901,006
Income tax expense ........................................................... 291,000 250,000
------------ ------------
NET INCOME ................................................................... $ 627,165 $ 651,006
============ ============
EARNINGS PER SHARE:
Basic ........................................................................ $ 0.41 $ 0.43
Diluted ...................................................................... 0.40 0.41
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: ........................
Basic ........................................................................ 1,524,229 1,523,942
Diluted ...................................................................... 1,574,725 1,576,236
CASH DIVIDENDS PER SHARE ..................................................... $ 0.13 $ 0.12
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C>
THREE MONTHS ENDED MARCH 31
---------------------------
1999 1998
----------- -----------
Cash Flows From Operating Activities:
Net income ........................................................................................... $ 627,165 $ 651,006
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and accretion, net ........................................................ 178,223 135,499
Gain on sale of OREO ................................................................................. (45,811) --
Increase (decrease) in interest receivable ........................................................... (122,584) 207,434
Increase in other assets ............................................................................. (947,179) (363,344)
Increase in interest payable ......................................................................... 35,549 33,239
Increase in current taxes payable .................................................................... 233,871 225,000
Increase (decrease) in other liabilities ............................................................. 239,643 (448,698)
----------- -----------
Net Cash Provided By Operating Activities ............................................................ 198,877 440,136
----------- -----------
Cash Flows From Investing Activities:
Proceeds from maturities & paydowns of AFS securities ................................................ 1,059,210 5,161,578
Proceeds from maturities & paydowns of HTM securities ................................................ 1,502,943 7,698,599
Purchase of AFS securities ........................................................................... (4,606,240) (6,457,813)
Purchase of HTM securities ........................................................................... (1,000,000) (8,591,966)
Net increase in loans ................................................................................ (5,092,501) (2,248,853)
Proceeds from sale of OREO ........................................................................... 101,227 --
Purchase of bank property and equipment .............................................................. (306,008) (56,863)
----------- -----------
Net Cash Used By Investing Activities ................................................................ (8,341,369) (4,495,318)
----------- -----------
Cash Flows From Financing Activities:
Net increase in deposits ............................................................................. 10,472,931 1,615,461
Increase in FHLB advances ............................................................................ -- 5,000,000
Dividends paid ....................................................................................... (198,150) (174,199)
Proceeds form issuance of common stock ............................................................... -- 2,949
----------- -----------
Net Cash Provided By Financing Activities ............................................................ 10,274,781 6,444,211
----------- -----------
Net Change in Cash and Cash Equivalents .............................................................. 2,132,289 2,389,029
Cash and Cash Equivalents at Beginning of Period ..................................................... 19,831,149 23,392,007
----------- -----------
Cash and Cash Equivalents at End of Period ........................................................... $ 21,963,438 $ 25,781,036
=========== ===========
Supplemental Disclosure Of Cash Flow Information:
Cash paid during the period for:
Interest ............................................................................................. $ 2,184,000 $ 1,813,595
Taxes ................................................................................................ 360,000 360,000
Supplemental Disclosure Of Non-Cash Flow Information:
Transfer of loans to OREO ............................................................................ $ 108,492 $ 171,035
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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 three months ended March 31, 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
reflects 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 months ended March 31, 1999 and 1998 are reconciled as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 1998
----------------------------- ----------------------------
Income Shares Amount Income Shares Amount
BASIC EPS: ----------------------------- ----------------------------
Income available to common stockholders ........ $627,165 1,524,229 $0.41 $651,006 1,523,942 $0.43
Effect of dilutive common stock equivalents-
stock options ............................. -- 50,496 0.01 -- 52,294 0.02
-------- --------- ----- -------- --------- -----
DILUTED EPS .................................... $627,165 1,574,725 $0.40 $651,006 1,576,236 $0.41
======== ========= ===== ======== ========= =====
</TABLE>
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. DNB's comprehensive income for the three months ended March 31, 1999
and 1998 was $265,049 and $633,612 and consisted of net income and other
comprehensive income relating to the change in unrealized losses on investment
securities available for sale, as shown in the following table:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
--------- ---------
COMPREHENSIVE INCOME:
Net income ................................... $ 627,165 $ 651,006
Other comprehensive income, net of tax,
relating to unrealized losses on investments (362,116) (17,394)
--------- ---------
Total comprehensive income ................... $ 265,049 $ 633,612
========= =========
</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"). 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, 1999, 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
CHANGES IN FINANCIAL CONDITION
DNB's total assets were $276.5 million at March 31, 1999 compared to $265.4
million at December 31, 1998. Total loans, net of unearned income, increased
$5.0 million or 3% to $153.7 million from $148.7 million at December 31, 1998.
Total investment securities (AFS and HTM) increased $2.5 million or 3% to $95.4
million from $92.9 million at December 31, 1998, while Federal funds sold
increased $2.3 million to $8.4 million at March 31, 1999. These increases were
funded from deposits at our new Kennett Square branch, which was purchased from
Keystone Financial Bank on March 27, 1999. Other assets increased $947,000 or
54% to $2.7 million at March 31, 1999. The increase in this category resulted
from the intangible asset recognized on the branch purchase, as well as an
increase in prepaid expenses relating to annual equipment maintenance contracts.
Deposits at March 31, 1999 totaled $235.8 million, compared to $225.4
million at December 31, 1998. $9.1 million of the increase was attributable to
the new branch purchase from Keystone. Total borrowings at March 31, 1999 were
$18.0 million, unchanged from December 31, 1998.
At March 31, 1999, total stockholders' equity was $20.7 million or $13.56
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 $627,000
for the three months ended March 31, 1999, offset by dividends paid of
approximately $198,000 or $0.13 per share and change in the fair market value of
available-for-sale investment securities.
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, Federal funds sold and interest-earning
cash, as well as loan fees and dividend income. Interest expense includes
interest cost for deposits, Federal funds purchased, Federal Home Loan Bank
advances, and other borrowings.
<PAGE>
Net interest income, on a taxable equivalent basis, increased $208,000 or
9% to $2.5 million for the three month period ended March 31, 1999. As shown in
the following table, the increase in net interest income for the three month
period ended March 31, 1999 was attributable to the positive effects of volume
changes partially offset by the negative effects of rate changes. There was a
$395,000 net benefit from changes in volume due largely to increased loans and
investments, offset by significant increases in average deposits and borrowings.
The negative impact from rate changes was largely attributable to lower yields
on all interest-earning assets, which repriced more rapidly than
interest-bearing liabilities.
The following table sets forth, among other things, the extent to which
changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have affected interest
income and expense during the three months ended March 31, 1999 compared to the
three months ended March 31, 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 March 31, 1999
Compared to 1998
---------------------------------
Increase (Decrease) Due to
---------------------------------
Rate Volume Total
-------- -------- --------
<S> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans .......................... (138) 400 262
Investment securities-taxable .. (51) 356 305
Investment securities-tax-exempt -- 151 151
Federal funds sold ............. (27) (110) (137)
----- ----- -----
Total .......................... (216) 797 581
Interest-bearing liabilities:
Time deposits .................. (47) 96 49
Savings deposits ............... 17 117 134
Other borrowings ............... 1 189 190
----- ----- -----
Total .......................... (29) 402 373
----- ----- -----
Net Interest Income ............ (187) 395 208
===== ===== =====
</TABLE>
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
<PAGE>
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 three months ended March 31, 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 $21,000 for the three months ended March 31,
1999, compared to net loan charge-offs of $76,000 for the year ended December
31, 1998 and net loan charge-offs of $181,000 for the three months ended March
31, 1998. The percentage of net recoveries/(charge-offs) to total average loans
was .01%, (.06%) and (.14%) 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 179% at March 31, 1999. In addition, the ratio
of non-performing loans to total loans has steadily declined and was 1.9% at
March 31, 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>
3 Months Year 3 Months
Ended Ended Ended
(Dollars in thousands) 3/31/99 12/31/98 3/31/98
- ---------------------- -------- -------- -------
Beginning Balance ........................... $ 5,205 $ 5,281 $ 5,281
Provisions .................................. -- -- --
Loans charged off:
Real estate .......................... -- (59) (59)
Commercial ........................... -- (233) 129
Consumer ............................. (4) (11) --
------- ------- -------
Total charged off ................ (4) (303) (188)
Recoveries:
Real estate .......................... -- 144 --
Commercial ........................... 1 71 4
Consumer ............................. 24 12 3
------- ------- -------
Total recoveries ................. 25 227 7
------- ------- -------
Net recoveries (charge-offs) ................ 21 (76) (181)
------- ------- -------
Ending Balance .............................. $ 5,226 $ 5,205 $ 5,100
======= ======= =======
</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, safe deposit box
rentals, issuing travelers' checks and money orders, check cashing, lock box
services and similar activities.
For the three month period ended March 31, 1999, non-interest income was
$367,000, compared to $338,000 for the same three month period in 1998. The
improvement in non-interest income can be attributed to significant increases in
other income, largely offset by a reduction in trust income over the prior year.
Service charge income also increased modestly.
Service charge income for the three months ended March 31, 1999 was
$130,000 compared to $114,000 for the same period in 1998. NSF fees, cycle
charges and business analysis charges increased due to an increase in the volume
of deposit accounts.
Trust income for the three months ended March 31, 1999 was $82,000 compared
to $134,000 for the same period in 1998. The decrease in Trust income was due
primarily to a higher number of estate settlements in the first quarter of 1998,
compared to the same period in 1999.
Other non-interest income rose $65,000 or 72% to $155,000 for the three
months ended March 31, 1999, from $90,000 for the same period in 1998. $46,000
of the increase was attributable to gains on sale of OREO properties.
NON-INTEREST EXPENSE
Non-interest expense includes salaries & employee benefits, furniture &
equipment, occupancy, professional & consulting fees as well as advertising &
marketing, printing & supplies, and other less significant expense items.
Management remains committed to controlling non-interest expenses through
training and awareness of improved operating procedures.
Overall, non-interest expenses increased $172,000 for the three months
ended March 31, 1999, compared to the same period in 1998. The increase for the
three month period resulted from higher levels of all non-interest expense
items, except for salaries & employee benefits.
Salaries & employee benefits decreased $55,000 or 5% to $1,024,000 for the
three months ended March 31, 1999 compared to $1,078,000 for the same period in
1998. The decrease in this category reflects fewer full-time equivalent
employees in 1999.
Furniture & equipment and occupancy expense increased $65,000 and $22,000,
respectively, for the three months ended March 31, 1999, compared to the same
period in 1998. The increase in furniture & fixtures expense was caused by
higher levels of depreciation and maintenance costs related to the new equipment
<PAGE>
purchased at the end of last year to upgrade DNB's customer service and back
office processing. The increase in occupancy expense was due to primarily costs
incurred during the first quarter of 1999 for salting and snow removal.
Advertising & marketing expense increased $43,000 to $88,000 for the three
months ended March 31, 1999 compared to $45,000 for the same period in 1998.
Advertising & marketing expenditures have increased to include marketing for new
products and services, such as Direct Checking, Premier Money Market, and Home
Power equity loans, as well as expanded Investment Services and Trust Division.
Other non-interest expenses increased $65,000 to $320,000 for the three
months ended March 31, 1999 compared to $255,000 for the same period in 1998.
The increase was due to higher levels of postage, appraisal, telephone/fax, and
other routine expenditures. The overall increase reflects DNB's current branch
expansion efforts, and its commitment to service and technology.
INCOME TAXES
Income tax expense was $291,000 for the three months ended March 31, 1999
and $250,000 for the three months ended March 31, 1998. The rates used for
income taxes for both periods were less than the statutory rate due to levels 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). 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) placed on
nonaccrual status, (ii) contractually delinquent by 90 days or more and still
accruing (iii) other real estate owned as a result of foreclosure or voluntary
transfer to DNB.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
March 31 Dec. 31 March 31
(Dollars in thousands) 1999 1998 1998
- ---------------------- -------- ------- --------
Nonaccrual Loans:
Residential mortgage ............................. $ 219 $ 250 $ 259
Commercial mortgage .............................. 954 1,063 920
Commercial ....................................... 927 990 923
Consumer ......................................... 126 114 100
------ ------ ------
Total nonaccrual loans ................................ 2,226 2,417 2,202
Loans 90 days past due and still accruing ............. 693 699 161
------ ------ ------
Total non-performing loans ............................ 2,919 3,116 2,363
Other real estate owned ............................... 192 139 402
------ ------ ------
Total non-performing assets ........................... $3,111 $3,255 $2,675
====== ====== ======
ASSET QUALITY RATIOS:
Non-performing Loans/Total Loans ...................... 1.9% 2.1% 1.8%
Non-performing Assets/Total Loans and OREO ............ 2.0 2.2 2.1
Allowance for Loan & Lease Losses/Total Loans ......... 3.4 3.5 3.9
Allowance for Loan & Lease Losses/Total Loans and OREO 3.4 3.5 3.8
Allowance for Loan & Lease Losses/Non-performing Assets 168.0 159.9 184.5
Allowance for Loan & Lease Losses/Non-performing Loans 179.0 167.0 215.8
</TABLE>
If interest income had been recorded on nonaccrual loans and trouble debt
restructurings, interest would have been increased as shown in the following
table:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
3 Months Year 3 Months
Ended Ended Ended
(Dollars in thousands) ....................... 3/31/99 12/31/98 3/31/98
------- -------- -------
Interest income which would have been recorded
under original terms .................. $ 43 $ 194 $ 45
Interest income recorded during the period ... (2) (92) (23)
----- ----- -----
Net impact on interest income ................ $ 41 $ 102 $ 22
===== ===== =====
</TABLE>
As of March 31, 1999, DNB had impaired loans with a total recorded
investment of $1.4 million and an average recorded investment for the three
month period ended March 31, 1999 of $1.5 million. As of March 31, 1999, there
were no impaired loans for which a related allowance for credit losses is
necessary. Total cash collected on impaired loans was credited to the
outstanding principal balance in the amount of $42,000 during the three months
ended March 31, 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 were no
impaired loans for which a related allowance for credit losses is necessary.
Total cash collected on impaired loans was credited to the outstanding principal
balance in the amount of $31,000 during the three months ended March 31,1998. No
interest income was recorded on such loans.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For a financial institution, liquidity is a measure of the ability to fund
customers' needs for loans and deposit withdrawals. Management regularly
evaluates economic conditions in order to maintain a strong liquidity position.
One of the most significant factors considered by management when evaluating
liquidity requirements is the stability of DNB's core deposit base. In addition
to cash, DNB maintains a portfolio of short term investments to meet its
liquidity requirements. DNB has historically relied on cash flow from operations
and other financing activities. Liquidity is provided by investing activities,
including the repayment and maturing of loans and investment securities.
At March 31, 1999 DNB has $10.3 million in commitments to fund commercial
real estate, construction and land development. In addition, DNB had commitments
to fund $2.2 million in home equity lines of credit and $10.7 million in other
unused commitments. Management anticipates the majority of these commitments
will be funded by means of normal cash flows. In addition, $57.4 million of
certificates of deposit at DNB are scheduled to mature during the nine months
ending December 31, 1999. Management believes that the majority of such deposits
will be reinvested with DNB.
Stockholders' equity increased to $20 million at March 31, 1999 as a result
of the $627,000 profit reported for the three months then ended and after
dividends paid totaling approximately $198,000. Management believes that the
Bank is adequately capitalized and as a result of the Bank's common equity
position, the Bank's risk-based capital ratios exceed the 1999 regulatory
required minimums. The following table summarizes data and ratios pertaining to
the Bank's capital structure.
<TABLE>
<CAPTION>
<S> <C>
(Dollars in thousands) March 31, 1999
- ---------------------- --------------
Tier I Capital .................................. $ 20,248
Tier II Capital ................................. 2,402
----------
Total Capital ................................... $ 22,650
----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Required Current Excess
-------- ------- ------
Leverage ............................. 4.00% 7.68% 3.68%
Tier I ............................... 4.00 10.83 6.83
Risk-based ........................... 8.00 12.12 4.12
</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
possible loan losses, (ii) "total capital" includes, among other things, certain
subordinated debt, and "total assets" is increased by the allowance for possible
loan losses. DNB's primary capital ratio and its total capital ratio are both
9.3%, well in excess of FRB requirements.
REGULATORY MATTERS
Dividends payable to the Corporation by the Bank are subject to certain
regulatory limitations. Under normal circumstances, the payment of dividends in
any year without regulatory permission is limited to the net profits (as defined
for regulatory purposes) for that year, plus the retained net profits for the
preceding two calendar years.
YEAR 2000 READINESS DISCLOSURE
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 anticipates that this final phase, which requires
testing of all bank interfaces and connections with other systems, will be
completed by June 30, 1999. 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 is in the process of calling on 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
<PAGE>
into DNB's credit risk management processes, including customer risk ratings. At
present, approximately 55% of these assessments have been completed, and the
process is expected to be complete by June 30, 1999.
Currently, DNB is in the process of developing an effective business
resumption contingency plan that will outline its courses of action in the event
of a Year 2000-related systems failure. The plan is being 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, the DNB has completed the organizational planning phase of the
four-phase process recommended by regulators, and it has almost completed the
second phase - a business impact analysis. DNB is assessing the potential impact
of internal and external mission-critical systems failures on its core business
processes and determining the minimum acceptable level of system support and
services. The next step will be to develop the specific Year 2000 business
resumption contingency plans for each core business process along with scheduled
completion dates, test dates and trigger dates. The goal is to develop
strategies that are reasonable, cost-effective and practical. The target date
for completion of the business resumption contingency plans is June 30, 1999.
When completed, the plans will be validated independently in order to judge the
effectiveness and reasonableness of the contingency strategies.
DNB, while not completely Year 2000 compliant, is working diligently to
achieve this goal. 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 June 30, 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, or which
approximately $30,000 has been expended through March 31, 1999. To date,
management has succeeded in implementing its Year 2000 effort with existing
staff and internal resources, and has not been obligated to expend significant
funds in the process. It is anticipated that this will be possible for the
balance of the Year 2000 project, except that in 1999 management plans to
upgrade all personal computers that are not Year 2000 compliant. As a
consequence, management anticipates that the Year 2000 costs will be funded from
operating cash flow.
QUANTITATIVE AND QUALIFIED DISCLOSURES ABOUT MARKET RISK
No material changes in DNB's market risk occurred from December 31, 1998 to
March 31, 1999.
<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
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Corporation's Annual Meeting held April 27, 1999, the stockholders
voted as follows:
A. Election of Class "C" Directors:
THOMAS R. GREENLEAF
For: 1,138,668 Against: -- Abstain: 40,810
LOUIS N. TETI
For: 1,138,322 Against: -- Abstain: 41,156
JAMES H. THORNTON
For: 1,138,440 Against: -- Abstain: 41,038
B. Amendment of the Corporation's 1995 Stock Option Plan to increase by
100,000 the number of shares for which options may be issued under the
Plan.
For: 852,579 Against: 70,563 Abstain: 13,458
C. Ratification of appointment of KPMG LLP as independent auditors of the
Corporation, for the fiscal year ending December 31, 1999:
For: 1,153,332 Against: 19,169 Abstain: 6,977
<PAGE>
ITEM 5. OTHER INFORMATION
On March 31, 1999, DNB and the Exton Square, Inc. signed a land lease for a
new branch in the Exton area. This lease allows DNB to make certain improvements
upon the subject property in order to operate a full service bank branch. This
branch opening is planned for the third quarter of 2000 and is subject to
various approvals.
ITEM 6.
(a) EXHIBITS:
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
-------------------------- ----------------------
27 Financial Data Schedule
(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: May 13, 1999 /S/ Henry F. Thorne
-------------------
Henry F. Thorne, President
and Chief Executive Officer
DATE: May 13, 1999 /S/ Bruce E. Moroney
--------------------
Bruce E.Moroney
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000713671
<NAME> DNB FINANCIAL CORP.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,715,985
<INT-BEARING-DEPOSITS> 6,811,453
<FED-FUNDS-SOLD> 8,436,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,523,628
<INVESTMENTS-CARRYING> 46,848,451
<INVESTMENTS-MARKET> 46,847,339
<LOANS> 153,730,867
<ALLOWANCE> 5,226,011
<TOTAL-ASSETS> 276,467,324
<DEPOSITS> 235,846,263
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,947,944
<LONG-TERM> 18,000,000
0
0
<COMMON> 1,524,229
<OTHER-SE> 19,148,888
<TOTAL-LIABILITIES-AND-EQUITY> 276,467,324
<INTEREST-LOAN> 3,124,731
<INTEREST-INVEST> 1,528,023
<INTEREST-OTHER> 44,422
<INTEREST-TOTAL> 4,697,176
<INTEREST-DEPOSIT> 1,991,083
<INTEREST-EXPENSE> 2,219,549
<INTEREST-INCOME-NET> 2,477,627
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,926,374
<INCOME-PRETAX> 918,165
<INCOME-PRE-EXTRAORDINARY> 627,165
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 627,165
<EPS-PRIMARY> .41
<EPS-DILUTED> .40
<YIELD-ACTUAL> 7.56
<LOANS-NON> 2,226,209
<LOANS-PAST> 693,050
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,944,000
<ALLOWANCE-OPEN> 5,204,869
<CHARGE-OFFS> 4,130
<RECOVERIES> 25,272
<ALLOWANCE-CLOSE> 5,226,011
<ALLOWANCE-DOMESTIC> 5,226,011
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
