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, 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
August 14, 2000)
---------------------------------------------------------------------------
<PAGE>
DNB FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000 and December 31, 1999 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2000 and 1999 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 17
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
SECURITY HOLDERS 18
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 (UNAUDITED)
(Dollars in thousands, except per share amounts)
-----------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
--------- ---------
<S> .................................................................................. <C> <C>
ASSETS
Cash and due from banks .............................................................. $ 12,917 $ 11,226
Federal funds sold ................................................................... 7,516 6,304
--------- ---------
Total cash and cash equivalents ...................................................... 20,433 17,530
--------- ---------
Investment securities available for sale, at market value ............................ 76,485 62,988
Investment securities (market value $46,169
in 2000 and $39,869 in 1999) ...................................................... 47,199 40,683
Loans, net of unearned income ........................................................ 176,752 171,456
Allowance for loan losses ............................................................ (4,958) (5,085)
--------- ---------
Net loans ............................................................................ 171,794 166,371
--------- ---------
Office property and equipment, net ................................................... 5,654 5,776
Accrued interest receivable .......................................................... 2,144 1,804
Other real estate owned .............................................................. 183 83
Deferred income taxes ................................................................ 1,926 2,002
Other assets ......................................................................... 4,360 4,112
--------- ---------
Total assets ......................................................................... $ 330,178 $ 301,349
========= =========
Liabilities and Stockholders' Equity
Liabilities
Non-interest-bearing deposits ........................................................ $ 38,026 $ 31,864
Interest-bearing deposits:
NOW accounts ...................................................................... 41,792 39,501
Money market ...................................................................... 50,850 47,517
Savings ........................................................................... 30,663 30,199
Time .............................................................................. 112,250 105,800
--------- ---------
Total deposits ....................................................................... 273,581 254,881
--------- ---------
Federal Funds purchased .............................................................. 3,977 --
FHLB Advances ........................................................................ 27,744 23,746
Accrued interest payable ............................................................. 1,017 1,078
Other liabilities .................................................................... 2,238 1,106
--------- ---------
Total liabilities .................................................................... 308,557 280,811
--------- ---------
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 .................................................................... 3,328 2,429
Accumulated other comprehensive loss ................................................. (1,888) (2,055)
--------- ---------
Total stockholders' equity ........................................................... 21,621 20,538
--------- ---------
Total liabilities and stockholders' equity ........................................... $ 330,178 $ 301,349
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30
--------------------------
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans ............................................................................. $ 3,650 $ 3,525
Interest on taxable investment securities .............................................................. 1,865 1,434
Interest on tax-free investment securities ............................................................. 140 114
Interest on Federal funds sold ......................................................................... 43 57
---------- ----------
Total interest income .................................................................................. 5,698 5,130
---------- ----------
INTEREST EXPENSE:
Interest on time deposits .............................................................................. 1,549 1,310
Interest on NOW, money market and savings .............................................................. 1,004 809
Interest on Federal funds purchased .................................................................... 5 --
Interest on FHLB advance ............................................................................... 382 231
Interest on lease obligations .......................................................................... 25 --
---------- ----------
Total interest expense ................................................................................. 2,965 2,350
---------- ----------
NET INTEREST INCOME .................................................................................... 2,733 2,780
PROVISION FOR LOAN LOSSES .............................................................................. -- --
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .................................................... 2,733 2,780
---------- ----------
NON-INTEREST INCOME:
Service charges ........................................................................................ 190 159
Trust income ........................................................................................... 111 137
Other .................................................................................................. 118 95
---------- ----------
Total non-interest income .............................................................................. 419 391
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits ......................................................................... 1,185 1,076
Furniture and equipment ................................................................................ 261 222
Occupancy .............................................................................................. 148 166
Advertising and marketing .............................................................................. 89 134
Professional and consulting ............................................................................ 99 102
Printing and supplies .................................................................................. 69 71
Other .................................................................................................. 381 301
---------- ----------
Total non-interest expense ............................................................................. 2,232 2,072
---------- ----------
INCOME BEFORE INCOME TAXES ............................................................................. 919 1,099
INCOME TAX EXPENSE ..................................................................................... 285 352
---------- ----------
NET INCOME ............................................................................................. $ 634 $ 747
========== ==========
COMMON SHARE DATA:
EARNINGS PER SHARE:
Basic ............................................................................................... $ 0.39 $ 0.47
Diluted ............................................................................................. 0.39 0.45
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ............................................................................................... 1,611,339 1,600,543
Diluted ............................................................................................. 1,624,295 1,644,081
CASH DIVIDENDS PER SHARE ............................................................................... $ 0.13 $ 0.12
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share amounts)
-----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30
------------------------
2000 1999
---------- ----------
<S> .................................................................................................... <C> <C>
INTEREST INCOME:
Interest and fees on loans ............................................................................. $ 7,215 $ 6,650
Interest on taxable investment securities .............................................................. 3,574 2,858
Interest on tax-free investment securities ............................................................. 254 218
Interest on Federal funds sold ......................................................................... 110 101
---------- ----------
Total interest income .................................................................................. 11,153 9,827
---------- ----------
INTEREST EXPENSE:
Interest on time deposits .............................................................................. 3,024 2,609
Interest on NOW, money market and savings .............................................................. 1,931 1,501
Interest on Federal funds purchased .................................................................... 6 --
Interest on FHLB advances .............................................................................. 675 459
Interest on lease obligations .......................................................................... 51 --
---------- ----------
Total interest expense ................................................................................. 5,687 4,569
---------- ----------
NET INTEREST INCOME .................................................................................... 5,466 5,258
PROVISION FOR LOAN LOSSES .............................................................................. -- --
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES..................................................... 5,466 5,258
---------- ----------
NON-INTEREST INCOME:
Service charges ........................................................................................ 356 288
Trust income ........................................................................................... 234 220
Other .................................................................................................. 222 250
---------- ----------
Total non-interest income .............................................................................. 812 758
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits ......................................................................... 2,346 2,099
Furniture and equipment ................................................................................ 520 438
Occupancy .............................................................................................. 298 285
Advertising and marketing .............................................................................. 173 223
Professional and consulting ............................................................................ 212 197
Printing and supplies .................................................................................. 130 135
Other .................................................................................................. 703 621
---------- ----------
Total non-interest expense ............................................................................. 4,382 3,998
---------- ----------
INCOME BEFORE INCOME TAXES ............................................................................. 1,896 2,017
INCOME TAX EXPENSE ..................................................................................... 578 643
---------- ----------
NET INCOME ............................................................................................. $1,318 $1,374
========== ==========
COMMON SHARE DATA:
EARNINGS PER SHARE:
Basic .............................................................................................. $0.82 $0.86
Diluted ............................................................................................. 0.81 0.84
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ............................................................................................... 1,611,339 1,600,543
Diluted ............................................................................................. 1,626,025 1,644,204
CASH DIVIDENDS PER SHARE ............................................................................... $ 0.26 $ 0.25
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
---------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30
------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................................................. $ 1,318 $ 1,374
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................................................................... 354 380
Gain on sale of OREO .................................................................................... -- (46)
Increase in accrued interest receivable ................................................................. (340) (123)
Increase in other assets ................................................................................ (249) (701)
Decrease in accrued interest payable .................................................................... (60) (56)
Decrease in current taxes payable ....................................................................... (982) (8)
Increase in other liabilities ........................................................................... 2,115 845
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................................................... 2,156 1,665
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities & paydowns of AFS securities ................................................... 3,044 1,977
Proceeds from maturities & paydowns of HTM securities ................................................... 4,007 3,200
Purchase of AFS securities .............................................................................. (16,274) (8,579)
Purchase of HTM securities .............................................................................. (10,542) (4,078)
Net increase in loans ................................................................................... (5,522) (17,596)
Proceeds from sale of OREO .............................................................................. -- 101
Purchase of office property and equipment ............................................................... (237) (552)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES ................................................................... (25,524) (25,527)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ................................................................................ 18,699 22,381
Increase in Federal funds purchased ..................................................................... 3,977 --
Decrease in lease obligations ........................................................................... (3) --
Increase in FHLB advances ............................................................................... 4,000 --
Proceeds from issuance of options ....................................................................... 17 --
Dividends paid .......................................................................................... (419) (396)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................................................... 26,271 21,985
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ................................................................. 2,903 (1,877)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................................................ 17,530 19,831
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............................................................. $ 20,433 $ 17,954
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................................................................ $ 5,747 $ 4,626
Taxes ................................................................................................... 560 650
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
(Unaudited)
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 period classifications. The
results of operations for the six months ended June 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 six months ended June 30, 2000, 151,300 and 153,030
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>
(In thousands, except per share amounts)
Three months ended Three months ended
June 30, 2000 June 30, 1999
------------------ ------------------
Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common stockholders ...................... $634 1,611 $ 0.39 $747 1,601 $ 0.47
Effect of dilutive common stock equivalents-
stock options ........................................... -- 13 -- 43 0.02
---- ----- ----- ---- ----- ------
Diluted EPS .................................................. $634 1,624 $ 0.39 $747 1,644 $ 0.45
==== ===== ===== ==== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
--------------------------- ----------------------
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common stockholders .... $1,318 1,611 $0.81 $1,374 1,601 $0.86
Effect of dilutive common stock equivalents-
stock options ........................ -- 15 -- -- 43 0.02
------ ----- ----- ------ ----- -----
Diluted EPS ................................ $1,318 1,626 $0.81 $1,374 1,644 $0.84
====== ===== ===== ====== ===== =====
</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
table:
<TABLE>
<CAPTION>
(Dollars in thousands) For three months ended June 30 For six months ended June 30
------------------------------ ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME:
Net Income $634 $ 747 $1,318 $1,374
Other comprehensive (loss) income, net of tax,
relating to unrealized (losses) gains on investments (198) (593) 167 (955)
----- ----- ------ ------
Total comprehensive income $436 $ 154 $1,485 $ 419
===== ===== ====== ======
</TABLE>
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS
In June 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.
<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 $330.2 million at June 30, 2000 compared to $301.3
million at December 31, 1999. Investment securities (AFS and HTM) increased
$20.0 million or 19% to $123.7 million at June 30, 2000. There were significant
increases in U. S. Agency securities which grew by $14.4 million or 13.9%. Total
loans were $171.8 million, up $5.4 million or 3% from $166.4 million at December
31, 1999. Federal funds sold were $7.5 million at June 30, 2000, up $1.2 million
from December 31, 1999. The increase in assets was funded by an $18.7 million
and a $7.8 million increase in deposits and borrowings, respectively.
Deposits and other borrowings at June 30, 2000 totaled $305.3 million,
compared to $278.6 million at December 31, 1999, an increase of $26.6 million,
resulting from several successful deposit promotions. Since December 31, 1999,
there have been increases of $6.4 million in time deposits, $6.1 million in
non-interest bearing accounts, $3.3 million in Money Market accounts and $2.3
million in NOW accounts. Borrowings were $27.0 million at June 30, 2000, up $4
million from December 31, 1999.
At June 30, 2000, stockholders' equity was $21.6 million or $13.42 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 $1.3 million
for the six months ended June 30, 2000, offset by dividends paid of
approximately $419,000 or $.26 per share and a $167,000 change in the fair
market value of available-for-sale securities, net of taxes.
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, Federal funds purchased,
Federal Home Loan Bank advances and other borrowings.
On a tax-equivalent basis, net interest income decreased $42,000 or 1.5% to
$2.8 million for the three month period and increased $224,000 or 4% to $5.6
million for the six month period ended June 30, 2000 compared to the three and
six month periods ending June 30, 1999. As shown in the following tables, the
decrease in net interest income for the three month period ended June 30, 2000
compared to the three month period ending June 30, 1999 was largely attributable
to the negative effects of rate change, partially offset by the positive effects
of volume changes. The increase in net interest income for the six month period
ending June 30, 2000 compared to the six month period ending June 30, 1999 was
largely attributable to the positive effects of volume changes, partially offset
by the negative effects of rate changes. The positive impact from volume changes
was attributable to significant increases in average interest-earning assets of
$31.3 million and $32.3 million during the three and six month periods,
respectively. The negative impact from changes in rates for both periods was
primarily attributable to an increase in DNB's composite cost of funds,
reflecting the current interest rate environment, as well as the competitive
market for deposits.
<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 six months ended June 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>
Three Months Ended June 30, 2000
Compared to 1999
--------------------------------
Increase (Decrease) Due to
--------------------------------
Rate Volume Total
---- ------ -----
<S> <C> <C> <C>
Interest-earning assets:
Loans ......................................... $(133) $ 258 $ 125
Investment securities-taxable ................. 186 245 431
Investment securities-tax exempt .............. 3 29 32
Federal funds sold ............................ 15 (30) (15)
----- ----- -----
Total .................................... 71 502 573
----- ----- -----
Interest-bearing liabilities:
Savings, NOW and money market deposits ........ 115 80 195
Time deposits ................................. -- 5 5
FHLB advances ................................. 43 108 151
Lease obligations ............................. -- 25 25
----- ----- -----
Total .................................... 248 367 615
----- ----- -----
Net Interest Income ........................... $(177) $ 135 $ (42)
===== ===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000
Compared to 1999
------------------------------
Increase (Decrease) Due to
------------------------------
Rate Volume Total
------- ------- -------
<S> <C> <C> <C>
Interest-earning assets:
Loans ............................................................... $ (140) $ 705 $ 565
Investment securities-taxable ....................................... 157 559 716
Investment securities-tax exempt .................................... 9 43 52
Federal funds sold .................................................. 28 (19) 9
------- ------- -------
Total .......................................................... 54 1,288 1,342
------- ------- -------
Interest-bearing liabilities:
Savings, NOW and money market deposits .............................. 110 320 430
Time deposits ....................................................... 118 297 415
Federal funds purchased ............................................. -- 6 6
FHLB advances ....................................................... 68 148 216
Lease obligations ................................................... -- 51 51
------- ------- -------
Total .......................................................... 296 822 1,118
------- ------- -------
Net Interest Income ................................................. $ (242) $ 466 $ 224
======= ======= =======
</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 six months ended June 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 $127,000 for the six months ended June 30,
2000, compared to $120,000 for the year ended December 31, 1999 and $28,000 for
the six months ended June 30, 1999. The percentage of net
(charge-offs)/recoveries to total average loans was (.07%), (.07%) and .01% 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 274% at
June 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 1.02%
at June 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>
6 Months Year 6 Months
Ended Ended Ended
6/30/00 12/31/99 6/30/99
------- -------- -------
<S> .................................................................. <C> <C> <C>
Beginning balance .................................................... $ 5,085 $ 5,205 $ 5,205
Provisions ........................................................... -- -- --
Loans charged off:
Real estate ................................................... (105) (171) --
Commercial .................................................... (25) -- (11)
Consumer ...................................................... (25) (45) --
------- ------- -------
Total charged off ......................................... (155) (216) (11)
Recoveries:
Real estate ................................................... 3 21 --
Commercial .................................................... 13 15 35
Consumer ...................................................... 12 60 4
------- ------- -------
Total recoveries .......................................... 28 96 39
------- ------- -------
Net recoveries (charge-offs) ......................................... (127) (120) 28
------- ------- -------
Ending balance ....................................................... $ 4,958 $ 5,085 $ 5,233
======= ======= =======
</TABLE>
<PAGE>
NON-INTEREST INCOME
Total non-interest income includes service charges on deposit products;
fees received by DNB's Investment Services & 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, lockbox services and similar activities.
For the three and six month periods ended June 30, 2000, non-interest
income was $419,000 and $812,000, respectively, compared to $391,000 and
$758,000 for the same periods in 1999. Service charges increased $31,000 and
$68,000, to $190,000 and $356,000 for the three and six month periods ended June
30, 2000. Much of the increase in this category come from non-sufficient funds
("NSF") fees, which rose $19,000 and $36,000, respectively, due to an increase
in the volume of accounts as well as a concerted effort by management to reduce
the waived fee percentage on deposit account overdrafts. In addition, cycle
charges rose $8,000 and $16,000 for the three and six month periods.
Other non-interest income increased $23,000 and decreased $28,000 to
$118,000 and $222,000 for the three and six month periods ended June 30, 2000,
respectively. The increase in other income for the three month period reflected
additional debit card commissions and cash management fees. The decrease during
the six month period reflects gains on OREO sales during the first quarter of
1999, while there were no such gains in 2000.
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 $160,000 to $2.2 million and $384,000 to
$4.4 million for the three and six month periods ended June 30, 2000 compared to
the three and six month periods ended June 30, 1999. The increase during these
periods resulted primarily from higher levels of salaries & employee benefits
and furniture & equipment expense.
Salaries & employee benefits increased $109,000 to $1.2 million and
$247,000 to $2.3 million for the three and six months ended June 30, 2000,
compared to $1.1 million and $2.1 million for the same periods in 1999. The
increase in this category reflects the increase in full-time equivalent
employees and the staffing of the two new full service branches opened in 1999.
Furniture & equipment expense increased $39,000 or 18% to $261,000 and
$82,000 or 19% to $520,000 for the three and six months ended June 30, 2000,
respectively, compared to $222,000 and $438,000 for the same periods in 1999.
The increases for both periods were due to higher levels of depreciation and
maintenance on new computer equipment and software.
Occupancy expense decreased approximately $18,000 or 11% to $148,000 and
increased $14,000 or 5% to $299,000 for the three and six months ended June 30,
2000, respectively. This compares to $166,000 and $285,000 for the same periods
in 1999. The decrease for the three month period reflects a reclass for the West
Goshen lease, offset by higher repairs and maintenance expense. The increase for
the six month period in this category reflects the added costs incurred for the
two new offices as well as higher costs for repairs and maintenance of all
facilities.
Advertising & marketing expense decreased $44,000 and $50,000 to $90,000
and $173,000 for the three and six months ended June 30, 2000, respectively,
compared to $134,000 and $223,000 for the same periods in 1999. Expenditures
have decreased mainly due to the opening and promotion of two new branches in
1999.
<PAGE>
INCOME TAXES
Income tax expense was $285,000 and $578,000 for the three and six months
ended June 30, 2000 compared to $352,000 and $643,000 for the same periods in
1999. The effective tax rate was 31% for the three month period and 30% for the
six month period ending June 30, 2000 compared to 32% for the three and six
month periods ending June 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.
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,
(iii) loans restructured in a troubled debt restructuring and (iv) other real
estate owned as a result of foreclosure or voluntary transfer to DNB.
<TABLE>
<CAPTION>
(Dollars in thousands) June 30 Dec. 31 June 30
2000 1999 1999
------ ------ ------
<S> <C> <C> <C>
Nonaccrual Loans:
Residential mortgage ............... $ 132 $ -- $ 106
Commercial mortgage ................ 125 361 689
Commercial ......................... 562 674 781
Consumer ........................... 327 292 124
------ ------ ------
Total nonaccrual loans .................. 1,146 1,327 1,700
Loans 90 days past due and still accruing 626 694 703
Troubled debt restructurings ............ 40 -- --
------ ------ ------
Total non-performing loans .............. 1,812 2,021 2,403
Other real estate owned ................. 183 83 555
------ ------ ------
Total non-performing assets ............. $1,995 $2,104 $2,958
====== ====== ======
</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
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Non-performing Loans/Total Loans .............. 1.0% 1.2% 1.4%
Non-performing Assets/Total Loans and OREO .... 1.1 1.2 1.8
Allowance for Loan Losses/Total Loans ......... 2.8 3.0 3.2
Allowance for Loan Losses/Total Loans and OREO. 2.8 3.0 3.1
Allowance for Loan Losses/Non-performing Assets 248.5 241.7 176.9
Allowance for Loan Losses/Non-performing Loans. 273.6 251.6 217.8
</TABLE>
If interest income had been recorded on nonaccrual loans and trouble debt
restructurings, interest would have been increased as shown in the following
table:
<TABLE>
<CAPTION>
6 Months Year 6 Months
Ended Ended Ended
(Dollars in thousands) 6/30/00 12/31/99 6/30/99
------- -------- -------
<S> <C> <C> <C>
Interest income which would have been recorded
under original terms .................. $ 46 $ 105 $ 66
Interest income recorded during the period ... (1) (21) (5)
----- ----- -----
Net impact on interest income ................ $ 45 $ 84 $ 61
===== ===== =====
</TABLE>
At June 30, 2000 and December 31, 1999, DNB had impaired loans with a total
recorded investment of $618,000 and $715,000, respectively, and an average
recorded investment of $673,000 for the six month period ended June 30, 2000 and
$1.0 million for the year ended December 31, 1999. As of June 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 $11,000 during the six months
ended June 30, 2000, and $57,000 during the six months ended June 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 June 30, 2000 DNB has $13.2 million in commitments to fund commercial
real estate, construction and land development. In addition, DNB had commitments
to fund $3.5 million in home equity lines of credit and $5.3 million in other
unused commitments. Management anticipates the majority of these commitments
will be funded by means of normal cash flows. In addition, $39.1 million of time
deposits at DNB are scheduled to mature during the six 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
cash flow from loans and investments.
Stockholders' equity increased to $21.6 million at June 30, 2000 as a
result of the $1.3 million profit reported for the six months then ended and
after dividends paid totaling $419,000 year-to-date. The Bank's common equity
position at June 30, 2000 exceeds the regulatory required minimums. The
following table summarizes data and ratios pertaining to the Bank's capital
structure.
<TABLE>
<CAPTION>
(Dollars in thousands) To Be Well Capitalized
For Capit Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital $25,596 11.69% $17,520 8.00% $21,900 10.00%
Tier I Capital .......... 22,831 10.43 8,760 4.00 13,140 6.00
Tier 1 (leverage) Capital 22,831 7.27 12,568 4.00 15,711 5.00
</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 8.3%, 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.
<PAGE>
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 June 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>
June 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 ................................ 30,767 34,184 22,729 28,232 33,060 20,351
Change .................................................. 3,417 (8,039) 4,828 (7,881)
Change as a % of assets ................................. 1.03% (2.43%) 1.60% (2.62%)
</TABLE>
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.
<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 14, 2000 ________________________________
Henry F. Thorne, President
and Chief Executive Officer
DATE: August 14, 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: August 14, 2000 /S/ Henry F. Thorne
-------------------
Henry F. Thorne, President
and Chief Executive Officer
DATE: August 14, 2000 /S/ Bruce E. Moroney
--------------------
Bruce E. Moroney
Chief Financial Officer
