SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended: September 30, 2000
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) 1,611,339
(Class) (Shares Outstanding as of
November 13, 2000)
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<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2000 and December 31, 1999 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2000 and 1999 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2000 and 1999 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and December 31, 1999 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>
----------------------------------------------------------------------------------------------------------------
DNB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollars in thousands, except per share data)
----------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
------------- ------------
<S> ..................................................... <C> <C>
ASSETS
Cash and due from banks ................................. $ 11,070 $ 11,226
Federal funds sold ...................................... 12,863 6,304
--------- ---------
Total cash and cash equivalents ......................... 23,933 17,530
--------- ---------
Investment securities available for sale, at fair value 82,186 62,988
Investment securities (fair value $44,268
in 2000 and $39,869 in 1999) ......................... 45,510 40,683
Loans, net of unearned income ........................... 182,094 171,456
Allowance for loan losses ............................... (4,928) (5,085)
--------- ---------
Net loans ............................................... 177,166 166,371
--------- ---------
Office property and equipment, net ...................... 5,827 5,776
Accrued interest receivable ............................. 2,510 1,804
Other real estate owned ................................. 183 83
Deferred income taxes ................................... 1,898 2,002
Other assets ............................................ 4,184 4,112
--------- ---------
Total assets ............................................ $ 343,397 $ 301,349
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Non-interest-bearing deposits ........................... $ 35,941 $ 31,864
Interest-bearing deposits:
NOW accounts ......................................... 39,523 39,501
Money market ......................................... 53,298 47,517
Savings .............................................. 28,763 30,199
Time ................................................. 128,571 105,800
--------- ---------
Total deposits .......................................... 286,096 254,881
--------- ---------
Borrowings .............................................. 32,743 23,746
Accrued interest payable ................................ 1,314 1,078
Other liabilities ....................................... 1,148 1,106
--------- ---------
Total liabilities ....................................... 321,301 280,811
--------- ---------
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; 1,611,339 and
1,609,463 issued and outstanding, respectively ....... 1,611 1,609
Surplus ................................................. 18,570 18,555
Retained earnings ....................................... 3,744 2,429
Accumulated other comprehensive loss .................... (1,829) (2,055)
--------- ---------
Total stockholders' equity .............................. 22,096 20,538
--------- ---------
Total liabilities and stockholders' equity .............. $ 343,397 $ 301,349
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
DNB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30
-------------------------------
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans.................................... $ 3,831 $ 3,549
Interest on taxable investment securities .................... 2,044 1,446
Interest on tax-free investment securities ................... 138 114
Interest on Federal funds sold................................ 152 123
---------- ----------
Total interest income......................................... 6,165 5,232
---------- ----------
INTEREST EXPENSE:
Interest on time deposits..................................... 1,810 1,353
Interest on NOW, money market and savings .................... 1,136 916
Interest on Federal funds purchased........................... 3 --
Interest on FHLB advances..................................... 454 247
Interest on Lease obligations ................................ 25 --
---------- ----------
Total interest expense........................................ 3,428 2,516
---------- ----------
NET INTEREST INCOME .......................................... 2,737 2,716
PROVISION FOR LOAN LOSSES .................................... -- --
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .......... 2,737 2,716
---------- ----------
NON-INTEREST INCOME:
Service charges............................................... 193 168
Trust income.................................................. 109 89
Other......................................................... 137 237
---------- ----------
Total non-interest income..................................... 439 494
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits................................ 1,243 1,141
Furniture and equipment....................................... 261 240
Occupancy..................................................... 146 152
Advertising and marketing..................................... 59 105
Professional and consulting................................... 126 119
Printing and supplies......................................... 50 78
Other......................................................... 400 363
---------- ----------
Total non-interest expense.................................... 2,285 2,198
---------- ----------
INCOME BEFORE INCOME TAXES ................................... 891 1,012
INCOME TAX EXPENSE ........................................... 266 323
---------- ----------
NET INCOME.................................................... $ 625 $ 689
========== ==========
COMMON SHARE DATA:
EARNINGS PER SHARE:
Basic................................................ $ 0.39 $ 0.43
Diluted.............................................. $ 0.38 $ 0.42
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic................................................ 1,611,339 1,603,924
Diluted.............................................. 1,628,443 1,643,557
CASH DIVIDENDS PER SHARE .................................... $ 0.13 $ 0.12
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
DNB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
-------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30
------------------------------
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ................................... $ 11,047 $ 10,199
Interest on taxable investment securities .................... 5,618 4,305
Interest on tax-free investment securities ................... 392 331
Interest on Federal funds sold ............................... 262 224
---------- ----------
Total interest income ........................................ 17,319 15,059
---------- ----------
INTEREST EXPENSE:
Interest on time deposits .................................... 4,834 3,963
Interest on NOW, money market and savings .................... 3,067 2,416
Interest on Federal funds purchased .......................... 9 --
Interest on FHLB advances .................................... 1,130 706
Interest on lease obligations ................................ 76 --
---------- ----------
Total interest expense........................................ 9,116 7,085
---------- ----------
NET INTEREST INCOME .......................................... 8,203 7,974
PROVISION FOR LOAN LOSSES .................................... -- --
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .......... 8,203 7,974
---------- ----------
NON-INTEREST INCOME:
Service charges .............................................. 549 456
Trust income ................................................. 343 309
Other ........................................................ 359 487
---------- ----------
Total non-interest income .................................... 1,251 1,252
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits ............................... 3,589 3,240
Furniture and equipment ...................................... 781 678
Occupancy .................................................... 445 438
Advertising and marketing ................................... 232 328
Professional and consulting ................................. 338 316
Printing and supplies ....................................... 180 213
Other ....................................................... 1,102 983
---------- ----------
Total non-interest expense ................................... 6,667 6,196
---------- ----------
INCOME BEFORE INCOME TAXES ................................... 2,787 3,030
INCOME TAX EXPENSE ........................................... 844 966
---------- ----------
NET INCOME ................................................... $ 1,943 $ 2,064
========== ==========
COMMON SHARE DATA:
EARNINGS PER SHARE:
Basic ........................................................ $ 1.21 $ 1.29
Diluted ...................................................... $ 1.19 1.25
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ..................................................... 1,611,170 1,601,614
Diluted ................................................... 1,626,662 1,651,805
CASH DIVIDENDS PER SHARE ..................................... $ 0.39 $ 0.37
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
DNB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
----------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30
------------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 1,943 $ 2,064
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .......................... 526 603
Gain on sale of investments ............................ (25) --
Gain on sale of OREO ................................... -- (159)
Increase in accrued interest receivable ................ (706) (194)
Increase in other assets ............................... (72) (684)
Increase in accrued interest payable ................... 236 68
Decrease in current taxes payable ...................... (806) (53)
Increase (decrease) in other liabilities ............... 848 (91)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 1,944 1,554
-------- --------
Cash Flows From Investing Activities:
Proceeds from maturities & paydowns of AFS securities .. 5,361 2,650
Proceeds from maturities & paydowns of HTM securities .. 5,853 11,951
Purchase of AFS securities ............................. (28,818) (17,413)
Purchase of HTM securities ............................. (10,710) (8,578)
Proceeds from sale of AFS securities ................... 4,654 --
Net increase in loans .................................. (10,894) (22,584)
Proceeds from sale of OREO ............................. -- 683
Purchase of office property and equipment .............. (587) (954)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES .................. (35,141) (34,245)
-------- --------
Cash Flows From Financing Activities:
Net increase in deposits ............................... 31,215 28,019
Increase in FHLB advances .............................. 9,000 5,000
Decrease in lease obligations .......................... (4) --
Proceeds from exercise of stock options ................ 17 9
Dividends paid ......................................... (628) (595)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .............. 39,600 32,433
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ................ 6,403 (258)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....... 17,530 19,831
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 23,933 $ 19,573
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................... $ 8,880 $ 7,017
Taxes .................................................. 650 1,057
Supplemental Disclosure Of Non-Cash Flow Information:
Transfer of loans to OREO .............................. $ 99 $ 472
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of DNB
Financial Corporation (referred to herein as the "Corporation" or "DNB") and its
subsidiary, Downingtown National Bank (the "Bank"), have been prepared in
accordance with the instructions for Form 10-Q and therefore do not include
certain information or footnotes necessary for the presentation of financial
condition, statement of operations and statement of cash flows required by
generally accepted accounting principles. However, in the opinion of management,
the consolidated financial statements reflect all adjustments (which consist of
normal recurring adjustments) necessary for a fair presentation of the results
for the unaudited periods. Prior period amounts not affecting net income are
reclassified when necessary to conform with current year classifications. The
results of operations for the nine months ended September 30, 2000 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, 1999.
NOTE 2: EARNINGS PER SHARE (EPS)
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the period. Diluted earnings per share
reflect the potential dilution that could occur from the conversion of common
stock equivalents (i.e., stock options) and is computed using the treasury stock
method. For the three and nine months ended September 30, 2000, 150,612 and
152,224 stock options were not included because such options were antidilutive.
These shares may be dilutive in the future. Earnings per share, dividends per
share and weighted average shares outstanding have been adjusted to reflect the
effects of the 5% stock dividend paid in December 1999. Net income and the
weighted average number of shares outstanding for basic and diluted EPS for the
three and six months ended June 30, 2000 and 1999 are reconciled as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 2000 September 30, 1999
----------------------------------- --------------------------
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common stockholders .... $625 1,611 $0.39 $689 1,604 $0.43
Effect of dilutive common stock equivalents-
stock options ......................... -- 17 0.01 -- 40 0.01
---- ----- ------ ---- ----- -------
Diluted EPS ................................ $625 1,628 $0.38 $689 1,644 $0.42
==== ===== ====== ==== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
---------------------------------- -----------------------
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common stockholders .... $1,943 1,611 $ 1.21 $2,064 1,602 $ 1.29
Effect of dilutive common stock equivalents-
stock options ........................ -- 16 0.02 -- 50 0.04
------ ----- ----- ------ ----- -----
Diluted EPS ................................ $1,943 1,627 $ 1.19 $2,064 1,652 $ 1.25
====== ===== ===== ====== ===== ====
</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>
(Dollars in thousands)
For three months ended Sept. 30 For nine months ended Sept. 30
------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME:
Net Income ........................................... $625 $ 689 $1,943 $ 2,064
Other comprehensive income (loss), net of tax,
relating to unrealized gains (losses) on investments 60 (486) 226 (1,441)
---- ----- ------ -------
Total comprehensive income ........................... $685 $ 203 $2,169 $ 623
==== ===== ====== =======
</TABLE>
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133") which was subsequently
amended. This statement standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and those
used for hedging activities, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. SFAS No. 133 generally provides for matching of gain or loss
recognition on the hedging instrument with the recognition of the changes in the
fair value of the hedged asset or liability that are attributable to the hedged
risk, so long as the hedge is effective. Prospective application of SFAS No. 133
is required for all fiscal years beginning after June 15, 2000, however earlier
application is permitted. 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.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS No.
140"). This statement supercedes and replaces the guidance in Statement 125. It
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, although it
carries over most of Statement 125's provisions without reconsideration.
The Statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001 and for
recognition and reclassification of collateral for fiscal years ending after
December 15, 2000. This statement is to be applied prospectively with certain
exceptions. Other than those exceptions, earlier or retroactive application of
its accounting provisions is not permitted. DNB has not yet determined the
impact if any, of this statement on the Bank's financial condition, equity,
results of operations or disclosures.
<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 $343.4 million at September 30, 2000 compared to
$301.3 million at December 31, 1999. Investment securities (AFS and HTM)
increased $24.0 million or 23% to $127.7 million at September 30, 2000. There
were significant increases in U. S. Agency securities which grew by $17.4
million or 16.8%. Total loans were $177.2 million, up $10.8 million or 6% from
$166.4 million at December 31, 1999. Federal funds sold were $12.9 million at
September 30, 2000, up $6.6 million from December 31, 1999. The increase in
assets was funded by a $31.2 million and a $9.0 million increase in deposits and
borrowings, respectively since December 31, 1999.
Deposits and other borrowings at September 30, 2000 totaled $318.8 million,
compared to $278.6 million at December 31, 1999, an increase of $40.2 million,
resulting from several successful deposit promotions. Since December 31, 1999,
there have been increases of $22.8 million in time deposits, $5.8 million in
Money Market accounts and $4.1 million in non-interest bearing accounts.
Borrowings were $32 million at September 30, 2000, up $9 million from December
31, 1999.
At September 30, 2000, stockholders' equity was $22.1 million or $13.71 per
share, compared to $20.5 million or $12.76 per share at December 31, 1999. The
increase in stockholders' equity was the result of net income of $1.9 million
for the nine months ended September 30, 2000 and a $226,000 increase in the fair
market value of available-for-sale securities, net of taxes, offset by dividends
paid of approximately $628,000 or $.39 per share.
RESULTS OF OPERATIONS
NET INTEREST INCOME
DNB's earnings performance is primarily dependent upon its level of net
interest income, which is the excess of interest revenue over interest expense.
Interest revenue includes interest earned on loans (net of interest reversals on
non-performing loans), investments and Federal funds sold and interest-earning
cash, as well as loan fees and dividend income. Interest expense includes
interest cost for deposits, repurchase agreements, Federal funds purchased, FHLB
advances and other borrowings.
On a tax-equivalent basis, net interest income increased $34,000 or 1.2% to
$2.8 million for the three month period and $257,000 or 3.2% to $8.4 million for
the nine month period ended September 30, 2000 compared to the respective
periods in 1999. As shown in the following tables, the increases in net interest
income for the three and nine month periods ended September 30, 2000 were
attributable to the positive effects of volume changes which were offset by the
negative effects of rate changes. The positive impact from volume changes was
attributable to significant increases in interest-earning assets, which
increased $38 million and $35 million on average, respectively, compared to
increases in interest-bearing liabilities which grew $37 million and $33
million, respectively for the same periods. The negative impact from changes in
rates for both periods was primarily attributable to the high cost of deposits
and borrowings, partially offset by favorable changes in rates on investments
during the three and nine month periods ended September 30, 2000.
<PAGE>
The following tables sets forth, among other things, the extent to which
changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have affected interest
income and expense during the three and nine months ended September 30, 2000
compared to the same periods in 1999 (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>
(Dollars in Thousands)
Three Months Ended September 30, 2000
Compared to 1999
--------------------------------------------
Increase (Decrease) Due to
--------------------------------------------
Rate Volume Total
----- ------ -----
<S> <C> <C> <C>
Interest-earning assets:
Loans .................................. $ 17 $ 266 $283
Investment securities-taxable .......... 174 424 598
Investment securities-tax exempt ....... 11 25 36
Federal funds sold ..................... 31 (2) 29
----- ----- ----
Total ............................. 233 713 946
----- ----- ----
Interest-bearing liabilities:
Savings, NOW and money market deposits . 165 55 220
Time deposits .......................... 198 259 457
Federal funds purchased ................ -- 3 3
FHLB advances .......................... 50 157 207
Lease obligations ...................... -- 25 25
----- ----- ----
Total ............................. 413 499 912
----- ----- ----
Net interest income/interest rate spread $(180) $ 214 $ 34
===== ===== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
Nine Months Ended September 30, 2000
Compared to 1999
--------------------------------------------
Increase (Decrease) Due to
--------------------------------------------
Rate Volume Total
------ ------ -----
<S> <C> <C> <C>
Interest-earning assets:
Loans .................................. $(127) $ 975 $ 848
Investment securities-taxable .......... 330 983 1,313
Investment securities-tax exempt ....... 21 67 88
Federal funds sold ..................... 55 (17) 38
----- ------- ------
Total ............................. 279 2,008 2,287
----- ------- ------
Interest-bearing liabilities:
Savings, NOW and money market deposits . 371 280 651
Time deposits .......................... 317 554 871
Federal funds purchased ................ -- 9 9
FHLB advances .......................... 120 303 423
Lease obligations ...................... -- 76 76
----- ------- ------
Total ............................. 808 1,222 2,030
----- ------- ------
Net interest income/interest rate spread $(529) $ 786 $ 257
===== ======= ======
</TABLE>
Provision for Loan Losses
To provide for inherent losses in the loan portfolio, DNB maintains an
allowance for loan losses. To maintain an adequate allowance, management charges
the provision for loan losses against income. Loan losses are charged directly
against the allowance and recoveries on previously charged-off loans are added
to the allowance. In establishing its allowance for loan losses, management
considers the size and risk exposure of each segment of the loan portfolio, past
loss experience, present indicators of risk such as delinquency rates, levels of
nonaccruals, the potential for losses in future periods, and other relevant
factors. Management's evaluation of the loan portfolio generally includes
reviews, on a sample basis, of individual borrowers regardless of size and
reviews of problem borrowers of $100,000 or greater. Consideration is also given
to examinations performed by regulatory agencies, primarily the Office of the
Comptroller of the Currency ("OCC"). The provisions are based on management's
review of the economy, interest rates, general market conditions, estimates of
the fair value of collateral, financial strength and ability of the borrowers
and guarantors to pay, and considerations regarding the current and anticipated
operating or sales environment. These estimates are particularly susceptible to
change and may result in a material adjustment to the allowance. While
management uses the latest information available to make its evaluation of the
adequacy of the allowance, future adjustments may be necessary if conditions
differ substantially from the assumptions used in making the evaluations.
<PAGE>
There were no provisions made during the nine months ended September 30,
2000, since management determined the allowance for loan losses was adequate
based on its analysis and the level of net charge-offs/recoveries compared to
the total allowance. Net loan charge-offs were $157,000 for the nine months
ended September 30, 2000, compared to net loan charge-offs of $120,000 for the
year ended December 31, 1999 and net loan recoveries of $26,000 for the nine
months ended September 30, 1999. . The percentage of net
(charge-offs)/recoveries to total average loans was (.09%), (.07%) and .02% for
the same respective periods. Another measure of the adequacy of the allowance is
the coverage ratio of the allowance to non-performing loans, which was 294% at
September 30, 2000. DNB'S coverage ratio is high relative to peers. However, its
level of delinquencies and non-performing assets, although down significantly in
the last few years, still remains well above peer averages. In addition, the
ratio of non-performing loans to total loans has steadily declined and was 0.92%
at September 30, 2000.
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>
9 Months Year 9 Months
Ended Ended Ended
(Dollars in Thousands) 9/30/00 12/31/99 9/30/99
------- -------- -------
<S> <C> <C> <C>
Beginning balance .................... $ 5,085 $ 5,205 $ 5,205
Provisions ........................... -- -- --
Loans charged off:
Real estate ................... (138) (171) (14)
Commercial .................... (26) -- --
Consumer ...................... (38) (45) (26)
------- ------- -------
Total charged off ......... (202) (216) (40)
Recoveries:
Real estate ................... 8 21 12
Commercial .................... 19 15 1
Consumer ...................... 18 60 53
------- ------- -------
Total recoveries........... 45 96 66
------- ------- -------
Net recoveries (charge-offs).......... (157) (120) 26
------- ------- -------
Ending balance ............. $ 4,928 $ 5,085 $ 5,231
======= ======= =======
</TABLE>
<PAGE>
NON-INTEREST INCOME
Total non-interest income includes service charges on deposit products,
fees received by DNB's Investment Services and Trust Division; and other sources
of income such as net gains on sales of investment securities and other real
estate owned ("OREO") properties, fees for cash management services, safe
deposit box rentals, issuing travelers' checks and money orders, check cashing,
lockbox services and similar activities.
For the three and nine month periods ended September 30, 2000, non-interest
income was $439,000 and $1.3 million, respectively, compared to $494,000 and
$1.3 million for the same periods in 1999. Service charges increased $25,000 and
$93,000, to $193,000 and $549,000 for the three and nine month periods ended
September 30, 2000 compared with the same periods in 1999. The increase in
service charge income is due to increased deposit volume coupled with better
collection methods of overdraft fees and cycle charges.
NON-INTEREST EXPENSE
Non-interest expense includes salaries & employee benefits, furniture &
equipment, occupancy, professional & consulting fees as well as printing &
supplies, insurance, advertising and other less significant expense items.
Non-interest expenses increased $87,000 to $2.3 million and $471,000 to
$6.7 million for the three and nine month periods ended September 30, 2000
compared to the same periods in 1999. The increase during these periods resulted
primarily from higher levels of salaries & employee benefits and furniture &
equipment expense.
Salaries & employee benefits increased $101,000 or 8.9% to $1.2 million and
$348,000 or 10.8% to $3.6 million for the three and nine month periods ended
September 30, 2000, compared to $1.1 million and $3.2 million for the same
periods in 1999. The increase in this category reflects an increase in full-time
equivalent employees, merit increases as well as staffing for two new full
service offices opened during 1999.
Furniture & equipment expense increased $21,000 or 8.9% to $261,000 and
$103,000 or 15.2% to $781,000 for the three and nine months ended September 30,
2000, respectively, compared to $240,000 and $678,000 for the same periods in
1999. The increases for both periods were due to higher levels of depreciation
and maintenance agreements on new computer equipment and software.
Advertising & marketing expense decreased $46,000 and $96,000 to $59,000
and $232,000 for the three and nine months ended September 30, 2000,
respectively, compared to $105,000 and $328,000 for the same periods in 1999.
Expenditures in 1999 were higher due to the opening and promotion of two new
offices.
INCOME TAXES
Income tax expense was $266,000 and $844,000 for the three and nine months
ended September 30, 2000 compared with $323,000 and $966,000 for the three and
nine months ended September 30, 1999. The effective tax rate was 30% for the
three and nine month period ending September 30, 2000 compared to 32% for the
three and nine month periods ending September 30, 1999. The rates used for
income taxes for both periods were less than the statutory rate as a result of
tax exempt interest income.
<PAGE>
ASSET QUALITY
Non-performing assets are comprised of nonaccrual loans, loans delinquent
over ninety days and still accruing, and Other Real Estate Owned ("OREO").
Nonaccrual loans are loans for which the accrual of interest ceases when the
collection of principal or interest payments is determined to be doubtful by
management. It is the policy of DNB to discontinue the accrual of interest when
principal or interest payments are delinquent 90 days or more (unless the loan
principal and interest are determined by management to be fully secured and in
the process of collection), or earlier, if considered prudent. Interest received
on such loans is applied to the principal balance, or may in some instances, be
recognized as income on a cash basis. A nonaccrual loan may be restored to
accrual status when management expects to collect all contractual principal and
interest due and the borrower has demonstrated a sustained period of repayment
performance in accordance with the contractual terms. OREO consists of real
estate acquired by foreclosure or deed in lieu of foreclosure. OREO is carried
at the lower of cost or estimated fair value, less estimated disposition costs.
Any significant change in the level of nonperforming assets is dependent to a
large extent on the economic climate within DNB's markets and to the efforts of
management to reduce the level of such assets.
The following table sets forth those assets that are: (i) on nonaccrual
status, (ii) contractually delinquent by 90 days or more and still accruing and
(iii) other real estate owned as a result of foreclosure or voluntary transfer
to DNB.
<TABLE>
<CAPTION>
Sept. 30 Dec. 31 Sept. 30
(Dollars in Thousands) 2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Nonaccrual Loans:
Residential mortgage ......................... $ 142 $ -- $ 40
Commercial mortgage .......................... -- 361 494
Commercial ................................... 562 674 805
Consumer ..................................... 314 292 86
------ ------ ------
Total nonaccrual loans ............................ 1,018 1,327 1,425
Loans 90 days past due and still accruing.......... 616 694 739
Troubled debt restructurings ...................... 40 -- --
------ ------ ------
Total non-performing loans ........................ 1,674 2,021 2,164
Other real estate owned ........................... 183 83 83
------ ------ ------
Total non-performing assets ....................... $1,857 $2,104 $2,247
====== ====== ======
</TABLE>
<PAGE>
The following table sets forth the DNB's asset quality and allowance
coverage ratios at the dates indicated:
<TABLE>
<CAPTION>
Sept. 30 Dec. 31 Sept. 30
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Non-performing Loans/Total Loans .................................. 0.9% 1.2% 1.3%
Non-performing Assets/Total Loans and OREO ........................ 1.0 1.2 1.3
Allowance for Loan Losses/Total Loans ............................. 2.7 3.0 3.1
Allowance for Loan Losses/Total Loans and OREO..................... 2.7 3.0 3.1
Allowance for Loan Losses/Non-performing Assets ................... 265.4 241.7 232.8
Allowance for Loan Losses/Non-performing Loans .................... 294.4 251.6 241.7
</TABLE>
If interest income had been recorded on nonaccrual loans, interest would
have increased as shown in the following table:
<TABLE>
<CAPTION>
9 Months Year 9 Months
Ended Ended Ended
(Dollars in thousands) 9/30/00 12/31/99 9/30/99
------- -------- -------
<S> <C> <C> <C>
Interest income which would have been recorded
under original terms ................................... $ 62 $ 105 $ 83
Interest income recorded during the period .................... (10) (21) (7)
---- ----- ----
Net impact on interest income ................................. $ 52 $ 84 $ 76
==== ===== ====
</TABLE>
At September 30, 2000 and December 31, 1999, DNB had impaired loans with a
total recorded investment of $493,000 and $715,000 , respectively, and an
average recorded investment of $576,000 for the nine month period ended
September 30, 2000 and $1.0 million for the year ended December 31, 1999. As of
September 30, 2000 and December 31, 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 $124,000 during the nine months ended September 30, 2000 as compared to
$130,000 during the nine months ended September 30, 1999. 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 September 30, 2000 DNB has $14.8 million in commitments to fund
commercial real estate, construction and land development. In addition, DNB had
commitments to fund $3.7 million in home equity lines of credit and $6.6 million
in other unused commitments. Management anticipates the majority of these
commitments will be funded by means of normal cash flows. In addition, $30.6
million of time deposits at DNB are scheduled to mature during the three months
ending December 31, 2000. Management believes that the majority of such deposits
will be reinvested with DNB and that certificates that are not renewed will be
funded by a reduction in Federal funds sold or by paydowns and maturities of
loans and investments.
Stockholders' equity increased to $22.1 million at September 30, 2000 as a
result of the $1.9 million profit reported for the nine months then ended and
after dividends paid totaling $628,000 year-to-date. The Bank's common equity
position at September 30, 2000 exceeds the regulatory required minimums. The
following table summarizes data and ratios pertaining to the Bank's capital
structure.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000:
Total risk-based capital...... $26,216 11.18% $18,764 8.00% $23,455 10.00%
Tier 1 capital ............... 23,259 9.92 9,382 4.00 14,073 6.00
Tier 1 (leverage) capital..... 23,259 6.96 13,364 4.00 16,705 5.00
</TABLE>
<PAGE>
In addition, the Federal Reserve Bank (the "FRB") leverage ratio rules
require bank holding companies to maintain a minimum level of "primary capital"
to total assets of 5.5% and a minimum level of "total capital" to total assets
of 6%. For this purpose, (i) "primary capital" includes, among other items,
common stock, contingency and other capital reserves, and the allowance for loan
losses, (ii) "total capital" includes, among other things, certain subordinated
debt, and "total assets" is increased by the allowance for loan losses. DNB's
primary capital ratio and its total capital ratio are both 8.3%, well in excess
of FRB requirements.
REGULATORY MATTERS
Dividends payable to the Corporation by the Bank are subject to certain
regulatory limitations. Under normal circumstances, the payment of dividends in
any year without regulatory permission is limited to the net profits (as defined
for regulatory purposes) for that year, plus the retained net profits for the
preceding two calendar years.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To measure the impacts of longer-term asset and liability mismatches beyond
two years, DNB utilizes Modified Duration of Equity and Economic Value of
Portfolio Equity ("EVPE") models. The modified duration of equity measures the
potential price risk of equity to changes in interest rates. A longer modified
duration of equity indicates a greater degree of risk to rising interest rates.
Because of balance sheet optionality, an EVPE analysis is also used to
dynamically model the present value of asset and liability cash flows, with
rates ranging up or down 200 basis points. The economic value of equity is
likely to be different if rates change. Results falling outside prescribed
ranges require action by management. At September 30, 2000 and December 31,
1999, DNB's variance in the economic value of equity as a percentage of assets
with an instantaneous and sustained parallel shift of 200 basis points is within
its negative 3% guideline, as shown in the tables below.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------------------- --------------------------------
Change in rates Flat -200bp +200bp Flat -200bp +200 bp
---- ------ ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Economic Value of
Portfolio Equity ............ 28,523 30,724 20,953 28,232 33,060 20,351
Change ........................... 2,202 (7,569) 4,828 (7,881)
Change as a % of assets .......... 0.64% (2.20%) 1.60% (2.62%)
</TABLE>
<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) unexpected contingencies relating to Year 2000 compliance; and (6) other
unexpected contingencies may arise. Many of these factors are beyond DNB's
ability to control or predict. Readers of this report are accordingly cautioned
not to place undue reliance on forward-looking statements. DNB disclaims any
intent or obligation to update publicly any of the forward-looking statements
herein, whether in response to new information, future events or otherwise.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6.
(a) EXHIBITS:
Exhibit Number referred to in
Item 601 of Regulation S-K Description of Exhibit
----------------------------- ----------------------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DNB FINANCIAL CORPORATION
(Registrant)
DATE: November 13, 2000 ________________________________
Henry F. Thorne, President
and Chief Executive Officer
DATE: November 13, 2000 _________________________________
Bruce E. Moroney
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DNB FINANCIAL CORPORATION
(Registrant)
DATE: November 13, 2000 /S/ Henry F. Thorne
-------------------
Henry F. Thorne, President
and Chief Executive Officer
DATE: November 13, 2000 /S/ Bruce E. Moroney
--------------------
Bruce E.Moroney
Chief Financial Officer
