SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ________________ to _____________
COMMISSION FILE NUMBER: 0-16667
DNB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2222567
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4 BRANDYWINE AVENUE - DOWNINGTOWN, PA 19335
(Address of principal executive offices and Zip Code)
(610) 269-1040
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK ($1.00 PAR VALUE) 1,524,229
(Class) (Shares Outstanding as of
August 13, 1999)
___________________________________________________________________________
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1999 and December 31, 1998 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1999 and 1998 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1999 and 1998 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1999 and 1998 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and December 31, 1998 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGE IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 18
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks .............................................................. $ 8,813,695 $ 13,660,149
Federal funds sold ................................................................... 9,140,000 6,171,000
Total cash and cash equivalents ...................................................... 17,953,695 19,831,149
Investment securities available for sale, at market value ............................ 50,690,716 45,519,420
Investment securities (market value $47,963,222
in 1999 and $47,528,269 in 1998) .................................................. 48,195,186 47,380,404
Loans, net of unearned income ........................................................ 165,877,914 148,725,716
Allowance for loan losses ............................................................ (5,233,027) (5,204,869)
------------- -------------
Net loans ............................................................................ 160,644,887 143,520,847
------------- -------------
Office property and equipment, net ................................................... 4,819,696 4,558,811
Accrued interest receivable .......................................................... 1,792,744 1,670,123
Other real estate owned .............................................................. 555,026 138,775
Deferred income taxes ................................................................ 1,487,636 1,037,415
Other assets......................................................................... 2,462,907 1,761,487
------------- -------------
Total assets ......................................................................... $ 288,602,493 $ 265,418,431
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Non-interest-bearing deposits ........................................................ $ 34,756,626 $ 30,001,051
Interest-bearing deposits:
NOW accounts ...................................................................... 39,356,597 37,074,977
Money market ...................................................................... 42,309,068 32,582,044
Savings ........................................................................... 31,952,221 28,321,246
Time .............................................................................. 99,379,968 97,394,014
------------- -------------
Total deposits ....................................................................... 247,754,480 225,373,332
------------- -------------
Federal Home Loan Bank advances ...................................................... 18,000,000 18,000,000
Accrued interest payable ............................................................. 845,390 902,009
Other liabilities .................................................................... 1,373,348 536,872
------------- -------------
Total liabilities .................................................................... 267,973,218 244,812,213
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $10.00 par value;
1,000,000 shares authorized; none issued .......................................... -- --
Common stock, $1.00 par value;
10,000,000 shares authorized; 1,524,229 and
1,524,229 issued and outstanding, respectively .................................... 1,524,229 1,524,229
Surplus .............................................................................. 17,104,817 17,104,817
Retained earnings .................................................................... 2,902,979 1,924,803
Accumulated other comprehensive (loss) income ........................................ (902,750) 52,369
------------- -------------
Total stockholders' equity ........................................................... 20,629,275 20,606,218
------------- -------------
Total liabilities and stockholders' equity ........................................... $ 288,602,493 $ 265,418,431
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Three Months Ended June 30
--------------------------
1999 1998
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ........................ $3,525,100 $2,959,749
Interest on taxable investment securities ......... 1,434,439 1,104,925
Interest on tax-free investment securities ........ 113,836 --
Interest on Federal funds sold .................... 56,683 245,895
---------- ----------
Total interest income ............................. 5,130,058 4,310,569
---------- ----------
INTEREST EXPENSE:
Interest on time deposits ......................... 1,310,128 1,268,721
Interest on NOW, money market and savings ......... 808,589 615,664
Interest on FHLB advance .......................... 231,005 64,323
---------- ----------
Total interest expense ............................ 2,349,722 1,948,708
---------- ----------
Net interest income ............................... 2,780,336 2,361,861
Provision for loan losses ......................... -- --
---------- ----------
Net interest income after provision for loan losses 2,780,336 2,361,861
---------- ----------
NON-INTEREST INCOME:
Service charges ................................... 158,783 149,119
Trust income ...................................... 137,545 99,632
Other ............................................. 94,758 147,765
---------- ----------
Total non-interest income ......................... 391,086 396,516
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits .................... 1,075,561 979,408
Furniture and equipment .......................... 222,475 159,452
Occupancy ......................................... 166,333 112,233
Advertising and marketing ......................... 134,215 75,890
Professional and consulting ....................... 101,647 65,334
Printing and supplies ............................. 71,378 36,023
Other ............................................. 300,502 299,870
---------- ----------
Total non-interest expense ........................ 2,072,111 1,728,210
---------- ----------
Income before income taxes ........................ 1,099,311 1,030,167
Income tax expense ................................ 352,000 285,000
---------- ----------
NET INCOME ........................................ $ 747,311 $ 745,167
========== ==========
EARNINGS PER SHARE:
Basic .......................................... $ 0.49 $ 0.49
Diluted ........................................ 0.47 0.47
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic .......................................... 1,524,229 1,523,942
Diluted ........................................ 1,574,589 1,580,269
CASH DIVIDENDS PER SHARE .......................... $ 0.13 $ 0.12
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended June 30
1999 1998
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ......................... $6,649,831 $5,822,742
Interest on taxable investment securities ........... 2,858,405 2,224,618
Interest on tax-free investment securities .......... 217,893 --
Interest on Federal funds sold ...................... 101,105 426,876
Total interest income ............................... 9,827,234 8,474,236
INTEREST EXPENSE:
Interest on time deposits ........................... 2,609,256 2,518,878
Interest on NOW, money market and savings ........... 1,500,544 1,173,498
Interest on repurchase agreements ................... -- 673
Interest on FHLB advances ........................... 459,471 102,493
Total interest expense .............................. 4,569,271 3,795,542
Net interest income ................................. 5,257,963 4,678,694
Provision for loan losses ........................... -- --
Net interest income after provision for loan losses . 5,257,963 4,678,694
NON-INTEREST INCOME:
Service charges ..................................... 288,382 282,414
Trust income ........................................ 219,886 233,561
Other .............................................. 249,730 218,835
Total non-interest income ......................... 757,998 734,810
NON-INTEREST EXPENSE:
Salaries and employee benefits ...................... 2,099,142 2,057,687
Furniture and equipment ............................. 438,124 308,426
Occupancy .......................................... 285,426 212,346
Advertising and marketing ........................... 222,575 120,788
Professional and consulting ......................... 197,497 134,314
Printing and supplies ............................... 135,209 93,486
Other ............................................... 620,512 555,284
Total non-interest expense .......................... 3,998,485 3,482,331
Income before income taxes .......................... 2,017,476 1,931,173
Income tax expense .................................. 643,000 535,000
NET INCOME .......................................... $1,374,476 $1,396,173
COMMON SHARE DATA:
Basic .......................................... $ 0.90 $ 0.92
Diluted ........................................ 0.87 0.88
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic .......................................... 1,524,229 1,523,942
Diluted ....................................... 1,574,657 1,578,252
Cash dividends per share ............................ $ 0.26 $ 0.24
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Six Months Ended June 30
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 1,374,476 $ 1,396,173
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .......................... 380,157 459,452
Gain on sale of investments ........................... -- (507)
Gain on sale of OREO ................................... (45,811) (64,349)
(Increase) decrease in accrued interest receivable ..... (122,621) 48,135
Increase in other assets ............................... (701,420) (174,590)
Decrease in accrued interest payable ................... (56,619) (154,717)
Decrease in current taxes payable ...................... (8,357) (40,000)
Increase (decrease) in other liabilities ............... 844,833 (393,944)
Net Cash Provided By Operating Activities .............. 1,664,638 1,075,653
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities & paydowns of AFS securities .. 1,977,117 5,667,092
Proceeds from maturities & paydowns of HTM securities .. 3,199,954 15,886,596
Purchase of AFS securities ............................. (8,578,690) (7,456,407)
Purchase of HTM securities ............................. (4,078,644) (17,355,833)
Proceeds from sale of AFS securities ................... -- 997,656
Net increase in loans .................................. (17,595,707) (6,687,367)
Proceeds from sale of OREO ............................. 101,227 293,556
Purchase of office property and equipment .............. (552,197) (159,725)
Net Cash Used By Investing Activities .................. (25,526,940) (8,814,432)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................... 22,381,148 6,772,959
Increase in FHLB advances .............................. -- 5,000,000
Proceeds from exercise of stock options ................ -- 2,949
Dividends paid ......................................... (396,300) (348,435)
Net Cash Provided By Financing Activities .............. 21,984,848 11,427,473
Net Change in Cash and Cash Equivalents ................ (1,877,454) 3,688,694
Cash and Cash Equivalents at Beginning of Period ....... 19,831,149 23,392,007
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 17,953,695 $ 27,080,701
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................... $ 4,625,890 $ 3,950,259
Taxes .................................................. 650,000 575,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION:
Transfer of loans to OREO .............................. $ 471,667 $ 240,404
See accompanying notes to consolidated financial statements.
</TABLE>
<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 six months ended June 30, 1999 are not necessarily
indicative of the results which may be expected for the entire year. The
consolidated financial statements should be read in conjunction with the Annual
Report and report on Form 10-K for the year ended December 31, 1998.
NOTE 2: EARNINGS PER SHARE (EPS)
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the period. Diluted earnings per share
reflect the potential dilution that could occur from the conversion of common
stock equivalents and is computed using the treasury stock method. Earnings per
share, dividends per share and weighted average shares outstanding have been
adjusted to reflect the effects of the 5% stock dividend paid in December 1998.
Net income and weighted average number of shares outstanding for basic and
diluted EPS for the three and six months ended June 30, 1999 and 1998 are
reconciled as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 1999 June 30, 1998
------------------------------- --------------------------------
Income Shares Amount Income Shares Amount
---------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Income available to common stockholders .... $ 747,311 1,524,229 $ 0.49 $ 745,16 1,523,942 $ 0.49
Effect of dilutive common stock equivalents-
stock options ......................... -- 50,360 0.02 -- 56,327 0.02
---------- --------- ------ --------- --------- ------
DILUTED EPS: ............................... $ 747,311 1,574,589 $0.47 $ 745,167 1,580,269 $ 0.47
========== ========= ====== ========= ========= ======
</TABLE>
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1999 June 30, 1998
------------------------------- --------------------------------
Income Shares Amount Income Shares Amount
---------- --------- ------ ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Income available to common stockholders .... $1,374,476 1,524,229 $ 0.90 $1,396,173 1,523,942 $ 0.92
Effect of dilutive common stock equivalents-
stock options ........................ -- 50,428 0.03 -- 54,310 0.04
---------- --------- ------ ---------- --------- ------
DILUTED EPS:............................... $1,374,476 1,574,657 $ 0.87 $1,396,173 1,578,252 $ 0.88
========== ========= ====== ========== ========= ======
</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 June 30 For six months ended June 30
------------------------------ ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME:
Net Income ................................... $ 747,311 $ 745,167 $ 1,374,476 $ 1,396,173
Other comprehensive (loss) income, net of tax,
relating to unrealized losses on investments (593,003) 10,530 (955,119) (6,864)
----------- ----------- ----------- -----------
Total comprehensive (loss) income ............ $ 154,308 $ 755,697 $ 419,357 $ 1,389,309
=========== =========== =========== ===========
</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 hedges asset or liability
that are attributable to the hedged risk, so long as the hedge is effective.
Prospective application of SFAS No. 133 is required for all fiscal years
beginning after June 15, 2000, however earlier application is permitted. DNB has
not yet determined the impact, if any, of this statement, including its
provisions for the potential reclassifications of investment securities, on
operations, financial condition and equity and comprehensive income. However,
DNB currently has no derivatives covered by this statement and currently
conducts no hedging activities.
<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 $288.6 million at June 30, 1999 compared to $265.4
million at December 31, 1998. Total loans were $165.9 million, up $17.2 million
or 12% from $148.7 million at December 31, 1998. Significant increases were
noted in the real estate loan portfolio which increased $12.1 million or 15%.
Investment securities (AFS and HTM) increased $6.0 million or 6% to $98.9
million at June 30, 1999. Federal funds sold were $9.1 million at June 30, 1999,
up $3.0 million from December. A significant portion of these increases were
funded from deposits at our two new branches. Other assets increased $701,000 or
40% to $2.5 million at June 30, 1999 as a result of the intangible asset
recognized on the Kennett Square branch purchase.
Deposits and other borrowings at June 30, 1999 totaled $265.8 million,
compared to $243.4 million at December 31, 1998. Since December 31, 1998 there
have been increases of $9.7 million in money market accounts, $4.8 million in
non-interest bearing accounts, $3.6 million in savings deposits, $2.3 million in
NOW accounts, and $2.0 million in time deposits, with $9.1 million of the
overall deposit increase coming from the Kennett Square branch purchase at the
end of the first quarter. Borrowings were $18.0 million at June 30, 1999,
unchanged from December.
At June 30, 1999, stockholders' equity was $20.6 million or $13.53 per
share, compared to $20.6 million or $13.52 per share at December 31, 1998. The
increase in stockholders' equity was the result of net income of $1.4 million
for the six months ended June 30, 1999, offset by dividends paid of
approximately $396,000 or $.26 per share and the change in fair market value,
net of taxes, of available-for-sale securities of $955,000.
RESULTS OF OPERATIONS
NET INTEREST INCOME
DNB's earnings performance is primarily dependent upon its level of net
interest income, which is the excess of interest revenue over interest expense.
Interest revenue includes interest earned on loans, investments and Federal
funds sold and interest-earning cash, as well as loan fees and dividend income.
Interest expense includes interest cost for deposits, repurchase agreements,
Federal funds purchased, Federal Home Loan Bank advances and other borrowings.
Net interest income increased $418,000 or 18% to $2.8 million for the three
month period and $579,000 or 12% to $5.3 million for the six month period ended
June 30, 1999. As shown in the following tables, the increase in net interest
income for the three and six month periods ended June 30, 1999 was largely
attributable to the positive effects of volume change, partially offset by the
negative effects of rate changes. The positive impact from volume changes during
the three and six month periods was attributable to significant increases in
interest-earning assets, which increased $44.3 million and $41.1 million on
average for both periods, respectively. The negative impact from changes in
rates for both periods was primarily attributable to loans and investments
rolling over at lower yields, reflecting the current interest rate environment.
<PAGE>
The following tables set forth, among other things, the extent to which
changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have affected interest
income and expense during the three and six months ended June 30, 1999 compared
to the same periods in 1998 (tax-exempt yields have been adjusted to a tax
equivalent basis using a 34% tax rate). For each category of interest-earning
assets and interest-bearing liabilities, information is provided with respect to
changes attributable to (i) changes in rate (change in rate multiplied by old
volume) and (ii) changes in volume (change in volume multiplied by old rate).
The net change attributable to the combined impact of rate and volume has been
allocated proportionately to the change due to rate and the change due to
volume.
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
Compared to 1998
--------------------------------
Increase (Decrease) Due to
--------------------------------
(Dollars in Thousands) ................. Rate Volume Total
----- ----- -----
<S> <C> <C> <C>
Interest-earning assets:
Loans .................................. $ (24) $ 589 $ 565
Investment securities-taxable .......... (31) 360 329
Investment securities-tax exempt ....... -- 147 147
Federal funds sold ..................... (48) (141) (189)
----- ----- -----
Total .................................. (103) 955 852
Interest-bearing liabilities:
Savings, NOW and money market deposits . 33 160 193
Time deposits .......................... (71) 112 41
FHLB advances .......................... -- 167 167
----- ----- -----
Total ............................. (38) 439 401
----- ----- -----
NET INTEREST INCOME/INTEREST RATE SPREAD $ (65) $ 516 $ 451
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
Compared to 1998
-------------------------------
Increase (Decrease) Due to
------------------------------
(Dollars in Thousands) Rate Volume Total
---- ------ -----
<S> <C> <C> <C>
Interest-earning assets:
Loans ................................. $(166) $ 993 $ 827
Investment securities-taxable .......... (62) 696 634
Investment securities-tax exempt ....... -- 282 282
Federal funds sold ..................... (86) (240) (326)
--- ---- ----
Total ............................. (314) 1,731 1,417
Interest-bearing liabilities:
Savings, NOW and money market deposits . 52 276 328
Time deposits .......................... (120) 210 90
Other borrowings ....................... -- 356 356
---- ---- ----
Total .................................. (68) 842 774
---- ---- ----
NET INTEREST INCOME/INTEREST RATE SPREAD $ (246) $ 889 $ 643
==== ==== ====
</TABLE>
<PAGE>
PROVISION FOR LOAN LOSSES
To provide for potential losses in the loan portfolio, DNB maintains an
allowance for loan losses. To maintain an adequate allowance, management charges
the provision for loan losses against income. Loan losses are charged directly
against the allowance and recoveries on previously charged-off loans are added
to the allowance. In establishing its allowance for loan losses, management
considers the size and risk exposure of each segment of the loan portfolio, past
loss experience, present indicators of risk such as delinquency rates, levels of
nonaccruals, the potential for losses in future periods, and other relevant
factors. Management's evaluation of the loan portfolio generally includes
reviews, on a sample basis, of individual borrowers regardless of size and
reviews of problem borrowers of $100,000 or greater. Consideration is also given
to examinations performed by regulatory agencies, primarily the Office of the
Comptroller of the Currency ("OCC"). The provisions are based on management's
review of the economy, interest rates, general market conditions, estimates of
the fair value of collateral, financial strength and ability of the borrowers
and guarantors to pay, and considerations regarding the current and anticipated
operating or sales environment. These estimates are particularly susceptible to
change and may result in a material adjustment to the allowance. While
management uses the latest information available to make its evaluation of the
adequacy of the allowance, future adjustments may be necessary if conditions
differ substantially from the assumptions used in making the evaluations.
There were no provisions made during the six months ended June 30, 1999,
since management determined the allowance for loan losses was adequate based on
its analysis and the level of net charge-offs/recoveries compared to the total
allowance. Net loan recoveries were $28,000 for the six months ended June 30,
1999, compared to net loan charge-offs of $76,000 for the year ended December
31, 1998 and loan charge-offs of $161,000 for the six months ended June 30,
1998. The percentage of net recoveries/(charge-offs) to total average loans was
.0l%, (.03%) and .07% for the same periods, respectively. Another measure of the
adequacy of the allowance is the coverage ratio of the allowance to
non-performing loans, which was 218% at June 30, 1999. In addition, the ratio of
non-performing loans to total loans has steadily declined and was 1.4% at June
30, 1999.
The following table summarizes the changes in the allowance for loan losses
for the periods indicated. Real estate includes both residential and commercial
real estate.
<TABLE>
<CAPTION>
6 Months Year 6 Months
Ended Ended Ended
(Dollars in Thousands) 6/30/99 12/31/98 6/30/98
------- -------- -------
<S> <C> <C> <C>
Beginning balance .......... $ 5,205 $ 5,281 $ 5,281
Provisions ................. -- -- --
Loans charged off:
Real estate ......... -- (59) (59)
Commercial .......... (11) (233) (135)
Consumer ............ -- (11) (8)
------- ------- -------
Total charged off (11) (303) (202)
Recoveries:
Real estate ......... -- 144 23
Commercial .......... 35 71 13
Consumer ............ 4 12 5
------- ------- -------
Total recoveries 39 227 41
------- ------- -------
Net recoveries (charge-offs) 28 (76) (161)
------- ------- -------
Ending balance ............. $ 5,233 $ 5,205 $ 5,120
======= ======= =======
</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 six month periods ended June 30, 1999, non-interest
income was $391,000 and $758,000, respectively, compared to $397,000 and
$735,000 for the same periods in 1998. Service charges increased $10,000 and
$6,000, to $159,000 and $288,000 for the three and six month periods ended June
30, 1999. The increase in service charge income came largely from increase in
deposit volume.
Trust income increased $38,000 and decreased $14,000 to $138,000 and
$220,000 for the three and six month periods ended June 30, 1999. The increase
for the three month period was the result of several estate settlements along
with fees for bond issuances. The decrease for the six month period reflects
higher estates fees earned during the first quarter of 1998 over 1999.
Other non-interest income decreased $53,000 and increased $31,000 to
$95,000 and $250,000 for the three and six month periods ended June 30, 1999.
The decrease in other income for the three month period reflected the gains
recognized on the sales of OREO properties during the second quarter of 1998.
This increase during the six month period reflects higher gains on OREO sales
during the first quarter of 1999 versus 1998.
NON-INTEREST EXPENSE
Non-interest expense includes salaries & employee benefits, furniture &
equipment, occupancy, professional & consulting fees as well as printing &
supplies, advertising and other less significant expense items.
Non-interest expenses increased $344,000 to $2.1 million and $516,000 to
$4.0 million for the three and six month periods ended June 30, 1999. The
increase during these periods resulted primarily from higher levels of expenses
in all categories due to branch expansion and technology upgrading.
Salaries & employee benefits increased $96,000 or 10% to $1.1 million for
the three months ended June 30, 1999, compared to $979,000 for the same period
in 1998. The increase in this category reflects the increase in full-time
equivalent employees caused by the staffing of two new full service branches.
Furniture & equipment expense increased approximately $63,000 or 40% to
$222,000 and $130,000 or 42% to $438,000 for the three and six months ended June
30, 1999, respectively, compared to $159,000 and $308,000 for the same periods
in 1998. The increases for both periods were due to higher levels of
depreciation and maintenance. Occupancy expense increased approximately $54,000
or 48% to $166,000 and $73,000 or 34% to $285,000 for the three and six months
ended June 30, 1999, respectively. This compares to $112,000 and $212,000 for
the same periods in 1998. The increases in this category reflect the added costs
incurred in 1999 for the two new offices as well as higher costs for repairs and
maintenance of all facilities.
Advertising & marketing expense increased $58,000 and $102,000 to $134,000
and $223,000 for the three and six months ended June 30, 1999, respectively,
compared to $76,000 and $121,000 for the same periods in 1998. Expenditures have
risen due to increased marketing for new products and services, such as Direct
Checking, Premier Money Market, and Home Power equity loans, as well as the
Investment Services and Trust Division. In addition expenditures have increased
due to the opening and promotion of two new branches as well as advertising open
employment positions at the Bank
<PAGE>
INCOME TAXES
Income tax expense was $352,000 and $643,000 for the three and six months
ended June 30, 1999 and $285,000 and $535,000 for the three and six months ended
June 30, 1998. The rates used for income taxes for both periods were less than
the statutory rate as a result of tax exempt interest income.
ASSET QUALITY
Non-performing assets are comprised of nonaccrual loans, loans delinquent
over ninety days and still accruing, and Other Real Estate Owned ("OREO").
Nonaccrual loans are loans for which the accrual of interest ceases when the
collection of principal or interest payments is determined to be doubtful by
management. It is the policy of DNB to discontinue the accrual of interest when
principal or interest payments are delinquent 90 days or more (unless the loan
principal and interest are determined by management to be fully secured and in
the process of collection), or earlier, if considered prudent. Interest received
on such loans is applied to the principal balance, or may in some instances, be
recognized as income on a cash basis. A nonaccrual loan may be restored to
accrual status when management expects to collect all contractual principal and
interest due and the borrower has demonstrated a sustained period of repayment
performance in accordance with the contractual terms. OREO consists of real
estate acquired by foreclosure or deed in lieu of foreclosure. OREO is carried
at the lower of cost or estimated fair value, less estimated disposition costs.
Any significant change in the level of nonperforming assets is dependent to a
large extent on the economic climate within DNB's markets and to the efforts of
management to reduce the level of such assets.
The following table sets forth those assets that are: (i) on nonaccrual
status, (ii) contractually delinquent by 90 days or more and still and (iii)
other real estate owned as a result of foreclosure or voluntary transfer to DNB.
<TABLE>
<CAPTION>
June 30 Dec. 31 June 30
(Dollars in Thousands) 1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Nonaccrual Loans:
Residential mortgage $ 106 $ 250 $ 250
Commercial mortgage 689 1,063 886
Commercial ......... 781 990 950
Consumer ........... 124 114 93
----- ----- -----
Total nonaccrual loans .. 1,700 2,417 2,179
Loans 90 days past due and still accruing 703 699 760
----- ----- -----
Total non-performing loans .............. 2,403 3,116 2,939
Other real estate owned ................. 555 139 206
-- --- ------ ------
Total non-performing assets ............. $2,958 $3,255 $3,145
====== ====== ======
</TABLE>
<PAGE>
The following table sets forth the DNB's asset quality and allowance
coverage ratios at the dates indicated:
<TABLE>
<CAPTION>
June 30 Dec. 31 June 30
1999 1998 1998
----- ----- -----
<S> <C> <C> <C>
Non-performing Loans/Total Loans .............. 1.4% 2.1% 2.2%
Non-performing Assets/Total Loans and OREO .... 1.8 2.2 2.3
Allowance for Loan Losses/Total Loans ......... 3.2 3.5 3.8
Allowance for Loan Losses/Total Loans and OREO 3.1 3.5 3.7
Allowance for Loan Losses/Non-performing Assets 176.9 159.9 162.9
Allowance for Loan Losses/Non-performing Loans 217.8 167.0 174.3
</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>
6 Months Year 6 Months
Ended Ended Ended
(Dollars in thousands) 6/30/99 12/31/98 6/30/98
------- -------- -------
<S> <C> <C> <C>
Interest income which would have been recorded
under original terms .................. $ 66 $ 194 $ 89
Interest income recorded during the period ... (5) (92) (36)
----- ----- -----
Net impact on interest income ................ $ 61 $ 102 $ 53
===== ===== =====
</TABLE>
As of June 30, 1999, DNB had impaired loans with a total recorded
investment of $1.1 million and an average recorded investment for the six month
period ended June 30, 1999 of $1.5 million. As of June 30, 1999, there was no
related allowance for credit losses necessary for these impaired loans. Total
cash collected on impaired loans was credited to the outstanding principal
balance in the amount of $57,000 during the six months ended June 30, 1999. No
interest income was recorded on such loans.
As of December 31, 1998, DNB had impaired loans with a total recorded
investment of $1.7 million and an average recorded investment for the year ended
December 31, 1998 of $1.6 million. As of December 31, 1998, there was no related
allowance for credit losses necessary for these impaired loans. Total cash
collected on impaired loans was credited to the outstanding principal income in
the amount of $115,000 during the six months ended June 30, 1998. No interest
income was recorded on such loans.
<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 June 30, 1999 DNB has $12.7 million in commitments to fund commercial
real estate, construction and land development. In addition, DNB had commitments
to fund $2.3 million in home equity lines of credit and $8.7 million in other
unused commitments. Management anticipates the majority of these commitments
will be funded by means of normal cash flows. In addition, $36.7 million of time
deposits at DNB are scheduled to mature during the six months ending December
31, 1999. Management believes that the majority of such deposits will be
reinvested with DNB and that certificates that are not renewed will be funded by
maturing loans and investments.
Stockholders' equity increased to $20.6 million at June 30, 1999 as a
result of the $1.4 million profit reported for the six months then ended and
after dividends paid totaling approximately $396,000 year-to-date. The Bank's
common equity position at June 30, 1999 exceeds the regulatory required
minimums. The following table summarizes data and ratios pertaining to the
Bank's capital structure.
<TABLE>
<CAPTION>
(Dollars in thousands) June 30, 1999
-------------
<S> <C>
Tier I Capital.............................. $20,804
Tier II Capital.............................. 2,527
-------
Total Capital................................ $23,331
=======
</TABLE>
<TABLE>
<CAPTION>
Required Current Excess
-------- ------- ------
<S> <C> <C> <C>
Leverage .................................... 4.00% 7.46% 3.46%
Tier I ...................................... 4.00 10.43 6.43
Risk-based................................... 8.00 11.70 3.70
</TABLE>
In addition, the Federal Reserve Bank (the "FRB") leverage ratio rules
require bank holding companies to maintain a minimum level of "primary capital"
to total assets of 5.5% and a minimum level of "total capital" to total assets
of 6%. For this purpose, (i) "primary capital" includes, among other items,
common stock, contingency and other capital reserves, and the allowance for loan
losses, (ii) "total capital" includes, among other things, certain subordinated
debt, and "total assets" is increased by the allowance for loan losses. DNB's
primary capital ratio and its total capital ratio are both 8.8%, well in excess
of FRB requirements.
<PAGE>
REGULATORY MATTERS
Dividends payable to the Corporation by the Bank are subject to certain
regulatory limitations. Under normal circumstances, the payment of dividends in
any year without regulatory permission is limited to the net profits (as defined
for regulatory purposes) for that year, plus the retained net profits for the
preceding two calendar years.
YEAR 2000 ISSUES
Year 2000 issues arise from a concern that certain information systems and
automated equipment will be unable to recognize and process properly
date-related information after December 31, 1999. If not corrected, these system
and equipment failures could produce inaccurate or unpredictable results causing
disruptions of normal business operations beginning on January 1, 2000.
In order to address these Year 2000 issues, DNB has developed a
comprehensive approach beginning with the establishment of a Technology Steering
Committee. The Committee has developed and implemented a compliance plan, which
is divided into five phases: (1) awareness; (2) assessment; (3) renovation; (4)
validation & testing; and (5) implementation. The goal is to ensure that each
organizational function, system, application, file, program and database will
correctly process, provide and/or receive data at the century date change
beginning December 31, 1999.
DNB has substantially completed the first four phases of the plan for all
of its mission-critical systems, and it is currently working on the
implementation phase. DNB has substantially completed the final phase, which
requires testing of all Bank interfaces and connections with other systems. In
addition to mission-critical systems, DNB has identified and is monitoring the
Year 2000 readiness of other vendors and service providers and has established
contingency plans for alternate suppliers based upon target compliance time
frames.
To evaluate the risk of customer non-compliance with Year 2000 issues, the
Bank initiated written communications with all of its commercial deposit and
borrowing customers, which included a questionnaire, to assist in determining
their awareness and readiness for the century date change. DNB also reviewed
significant borrowing relationships (over $250,000) and classified them into
high, moderate and low risk categories for non-compliance with Year 2000 issues.
DNB called those customers in the high and moderate risk categories to obtain
personal responses to questionnaires in order to evaluate the risk to DNB from
the failure of those customers to remediate their own Year 2000 issues. The
results of these assessments are being incorporated into DNB's credit risk
management processes, including customer risk ratings. These assessments were
completed by June 30, 1999.
<PAGE>
DNB has developed a business resumption contingency plan which outlines its
courses of action in the event of a Year 2000-related systems failure. The plan
was developed to help DNB resume operations in an orderly fashion and to
continue providing essential services in the event of the most reasonably likely
worst case scenarios. At this point, DNB has completed the four-phase process
recommended by regulators. The project was completed by July 14, 1999. During
August and September, the plans will be validated independently in order to
judge the effectiveness and reasonableness of the contingency strategies.
DNB is substantially Year 2000 compliant and is working diligently on a few
remaining items with an estimated completion date of September 30, 1999. Year
2000 issues could result in material financial risk to a company such as DNB if
the company and third party vendors upon which it relies were unable to address
this issue in a timely manner. However, management currently expects DNB and its
third party vendors to be Year 2000 compliant in all material respects before
August 15, 1999. The Year 2000 statements contained herein, and in other
securities filings of DNB are Year 2000 readiness disclosures subject to the
Year 2000 Readiness and Disclosure Act of 1998, and may not be relied upon as
representations or warranties for any purpose other than disclosure for Federal
securities law compliance purposes.
Management currently estimates that the costs of Year 2000 compliance will
be approximately $60,000 during the two years ended December 31, 1999, of which
approximately $58,000 has been expended through June 30, 1999. All of these
expenses have been funded from operating cash flow.
RECENT DEVELOPMENTS
On May 17th, DNB opened its eighth office in West Goshen. This new branch
is located at 1115 West Chester Pike in the Shop-Rite/Office Depot Shopping
Center.
In addition, DNB recently announced that it has entered into an agreement
with Exton Square, Inc. to lease a parcel of ground formerly known as the
Guernsey Cow in Exton. The Bank is currently working with its architect on an
adaptive reuse of the Guernsey Cow Dairy Barn. In addition to a full service
branch with four drive-up windows, the building will also house the Bank's
Investment Services & Trust Division as well as Commercial Lending personnel.
The opening is expected to take place in the summer of 2000 and has been
approved by the Office of the Comptroller of the Currency.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in DNB's market risk occurred from December 31, 1998 to
June 30, 1999.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including any which are not statements
of historical fact, may constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Without limiting the foregoing, the words "expect", "anticipate", "plan",
"believe", "seek", "estimate", "predict", "internal" and similar words are
intended to identify expressions that may be forward-looking statements.
Forward-looking statements involve certain risks and uncertainties, and actual
results may differ materially from those contemplated by such statements. For
example, actual results may be adversely affected by the following
possibilities: (1) competitive pressure among depository institutions may
increase; (2) changes in interest rates may reduce banking interest margins; (3)
general economic conditions and real estate values may be less favorable than
contemplated; (4) adverse legislation or regulatory requirements may be adopted;
(5) the impact of the Year 2000 issue may be more significant than currently
anticipated; (6) unexpected contingencies relating to Year 2000 compliance; and
(7) other unexpected contingencies may arise. Many of these factors are beyond
DNB's ability to control or predict. Readers of this report are accordingly
cautioned not to place undue reliance on forward-looking statements. DNB
disclaims any intent or obligation to update publicly any of the forward-looking
statements herein, whether in response to new information, future events or
otherwise.
<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
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6.
(a) EXHIBITS:
Exhibit Number referred to in
Item 601 of Regulation S-K Description of Exhibit
-------------------------- ----------------------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
Not Applicable
<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: August 13, 1999 /S/ Henry F. Thorne
- ----- --------------- -------------------
Henry F. Thorne, President
and Chief Executive Officer
DATE: August 13, 1999 /S/ Bruce E. Moroney
- ----- --------------- --------------------
Bruce E. Moroney
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000713671
<NAME> DNB FINANCIAL CORP.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,717,630
<INT-BEARING-DEPOSITS> 2,096,065
<FED-FUNDS-SOLD> 9,140,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,690,716
<INVESTMENTS-CARRYING> 48,195,186
<INVESTMENTS-MARKET> 47,963,222
<LOANS> 165,877,914
<ALLOWANCE> 5,233,027
<TOTAL-ASSETS> 288,602,493
<DEPOSITS> 247,754,480
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,218,738
<LONG-TERM> 18,000,000
0
0
<COMMON> 1,524,229
<OTHER-SE> 19,105,046
<TOTAL-LIABILITIES-AND-EQUITY> 288,602,493
<INTEREST-LOAN> 6,649,831
<INTEREST-INVEST> 3,076,298
<INTEREST-OTHER> 101,105
<INTEREST-TOTAL> 9,827,234
<INTEREST-DEPOSIT> 4,109,800
<INTEREST-EXPENSE> 4,569,271
<INTEREST-INCOME-NET> 5,257,963
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,998,485
<INCOME-PRETAX> 2,017,476
<INCOME-PRE-EXTRAORDINARY> 1,374,476
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,374,476
<EPS-BASIC> .90
<EPS-DILUTED> .87
<YIELD-ACTUAL> 7.59
<LOANS-NON> 1,700,090
<LOANS-PAST> 702,444
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,460,466
<ALLOWANCE-OPEN> 5,204,869
<CHARGE-OFFS> 11,228
<RECOVERIES> 39,386
<ALLOWANCE-CLOSE> 5,233,027
<ALLOWANCE-DOMESTIC> 5,233,027
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
