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, 2002 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) 1,794,462
(Class) (Shares Outstanding as of
August 14, 2002)
- --------------------------------------------------------------------------------
DNB FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2002 and December 31, 2001 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2002 and 2001 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2002 and 2001 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2002 and 2001 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and December 31, 2001 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGE IN SECURITIES 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 23
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollars in thousands, except per share amounts)
June 30, December 31,
2002 2001
- ------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks ........................................ $ 8,882 $ 11,466
Federal funds sold ............................................. -- 7,162
--------- ---------
Total cash and cash equivalents ................................ 8,882 18,628
--------- ---------
Investment securities available for sale, at fair value ........ 125,625 135,619
Investment securities (market value $37,658
in 2002 and $33,618 in 2001) ................................ 37,347 33,089
Loans, net of unearned income .................................. 192,076 186,050
Allowance for loan losses ...................................... (4,794) (4,809)
--------- ---------
Net loans ...................................................... 187,282 181,241
--------- ---------
Office property and equipment, net ............................. 7,773 7,701
Accrued interest receivable .................................... 2,141 2,230
Bank owned life insurance ...................................... 5,301 5,203
Deferred income taxes .......................................... 1,205 1,213
Other assets ................................................... 2,903 4,480
--------- ---------
TOTAL ASSETS ................................................... $ 378,459 $ 389,404
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Non-interest-bearing deposits .................................. $ 43,081 $ 40,355
Interest-bearing deposits:
NOW accounts ................................................ 48,502 46,346
Money market ................................................ 61,006 64,491
Savings ..................................................... 39,230 34,480
Time ........................................................ 88,864 107,711
--------- ---------
Total deposits ................................................. 280,683 293,383
--------- ---------
Federal funds purchased ........................................ 1,968 --
Borrowings ..................................................... 63,732 63,735
Junior subordinated debentures ................................. 5,000 5,000
--------- ---------
Total borrowings ............................................... 70,700 68,735
--------- ---------
Accrued interest payable ....................................... 1,152 1,455
Other liabilities .............................................. 499 543
--------- ---------
TOTAL LIABILITIES .............................................. 353,034 364,116
--------- ---------
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; 1,794,462 and 1,785,595
issued and outstanding, respectively ........................ 1,794 1,786
Treasury stock, at cost (60,995 and 14,854 shares, respectively) (1,239) (266)
Surplus ........................................................ 21,371 21,292
Retained earnings .............................................. 4,129 3,235
Accumulated other comprehensive loss ........................... (630) (759)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ..................................... 25,425 25,288
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 378,459 $ 389,404
========= =========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ended June 30
2002 2001
----------- ----------
INTEREST INCOME:
Interest and fees on loans .......................... $ 3,603 $ 3,944
Interest on taxable investment securities ........... 1,684 1,801
Interest on tax-free investment securities .......... 125 121
Interest on tax preferred equity securities ......... 157 153
Interest on Federal funds sold ...................... 17 150
---------- ----------
TOTAL INTEREST INCOME ............................... 5,586 6,169
---------- ----------
INTEREST EXPENSE:
Interest on Federal funds purchased ................. 3 --
Interest on NOW, money market and savings ........... 463 1,034
Interest on time deposits ........................... 893 1,611
Interest on FHLB advances ........................... 893 736
Interest on junior subordinated debentures .......... 73 --
Interest on lease obligations ....................... 25 25
---------- ----------
TOTAL INTEREST EXPENSE .............................. 2,350 3,406
---------- ----------
Net interest income ................................. 3,236 2,763
Provision for loan losses ........................... -- --
---------- ----------
Net interest income after provision for loan losses . 3,236 2,763
---------- ----------
NON-INTEREST INCOME:
Service charges ..................................... 258 250
DNBAdvisors ......................................... 97 82
Gains on sales of investment securities ............. 69 26
Increase in cash surrender value of BOLI ............ 49 38
Other ............................................... 152 130
---------- ----------
TOTAL NON-INTEREST INCOME ........................... 625 526
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits ...................... 1,575 1,338
Furniture and equipment ............................. 323 252
Occupancy ........................................... 196 161
Professional and consulting ......................... 146 186
Marketing ........................................... 125 72
Printing and supplies ............................... 102 55
Other ............................................... 441 384
---------- ----------
TOTAL NON-INTEREST EXPENSE .......................... 2,908 2,448
---------- ----------
Income before income taxes .......................... 953 841
Income tax expense .................................. 215 233
---------- ----------
NET INCOME .......................................... $ 738 $ 608
========== ==========
COMMON SHARE DATA:
EARNINGS PER SHARE:
Basic ............................................... $ 0.43 $ 0.34
Diluted ............................................. 0.41 0.34
CASH DIVIDENDS PER SHARE ............................ 0.13 0.12
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ............................................ 1,735,562 1,776,154
Diluted .......................................... 1,784,699 1,792,107
========== ==========
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
Six Months Ended June 30
2002 2001
---------- ----------
INTEREST INCOME:
Interest and fees on loans ........................... $ 7,043 $ 7,851
Interest on taxable investment securities ............ 3,441 3,685
Interest on tax-free investment securities ........... 252 242
Interest on tax-preferred equity securities .......... 321 278
Interest on Federal funds sold ....................... 44 342
---------- ----------
TOTAL INTEREST INCOME ................................ 11,101 12,398
---------- ----------
INTEREST EXPENSE:
Interest on Federal funds purchased .................. 3 --
Interest on NOW, money market and savings ............ 930 2,181
Interest on time deposits ............................ 1,951 3,322
Interest on FHLB advances ............................ 1,776 1,429
Interest on junior subordinated debentures ........... 152 --
Interest on lease obligations ........................ 50 50
---------- ----------
TOTAL INTEREST EXPENSE ............................... 4,862 6,982
---------- ----------
Net interest income .................................. 6,239 5,416
Provision for loan losses ............................ -- --
---------- ----------
Net interest income after provision for loan losses .. 6,239 5,416
---------- ----------
NON-INTEREST INCOME:
Service charges ...................................... 504 483
DNB Advisors ......................................... 198 162
Gains on sales of investment securities .............. 69 26
Increase in cash surrender value of BOLI ............. 98 58
Other ................................................ 304 255
---------- ----------
TOTAL NON-INTEREST INCOME ............................ 1,173 984
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits ....................... 3,104 2,648
Furniture and equipment .............................. 645 490
Occupancy ............................................ 398 323
Professional and consulting .......................... 312 272
Marketing ............................................ 192 129
Printing and supplies ................................ 179 103
Other ................................................ 878 727
TOTAL NON-INTEREST EXPENSE ........................... 5,708 4,692
---------- ----------
Income before income taxes ........................... 1,704 1,708
Income tax expense ................................... 358 495
---------- ----------
NET INCOME ........................................... $ 1,346 $ 1,213
========== ==========
COMMON SHARE DATA:
EARNINGS PER SHARE:
Basic ................................................ $ 0.77 $ 0.68
Diluted .............................................. 0.75 0.68
CASH DIVIDENDS PER SHARE ............................. 0.26 0.25
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ............................................. 1,744,978 1,776,154
Diluted ........................................... 1,792,117 1,796,107
========== ==========
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended June 30
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 1,346 $ 1,213
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization ................................ 1,015 401
Gains on sales of investments ................................ (69) (26)
Decrease in accrued interest receivable ...................... 89 233
Decrease in deferred taxes ................................... (52) --
Decrease (increase) in other assets .......................... 1,577 (317)
Increase in investment in BOLI ............................... (98) (3,038)
Decrease in accrued interest payable ......................... (303) (267)
Decrease in current taxes payable ............................ (80) (349)
Increase in other liabilities ................................ 36 263
-------- --------
NET CASH PROVIDED BY (USED) IN OPERATING ACTIVITIES .......... 3,461 (1,887)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities & paydowns of AFS securities ........ 19,362 17,940
Proceeds from maturities & paydowns of HTM securities ........ 17,344 8,955
Purchase of AFS securities ................................... (19,393) (33,040)
Purchase of HTM securities ................................... (21,752) (7,660)
Proceeds from sale of AFS securities ......................... 9,866 2,973
Net (increase) decrease in loans ............................. (6,041) 1,218
Proceeds from sale of OREO ................................... -- 100
Purchase of office property and equipment .................... (520) (1,552)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ........................ (1,134) (11,066)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits ..................................... (12,700) (5,006)
Increase in Federal funds purchased .......................... 1,968 --
Decrease in lease obligations ................................ (3) (3)
Increase in FHLB advances .................................... -- 10,000
Proceeds from exercise of options ............................ 87 --
Dividends paid ............................................... (452) (440)
Purchase of Treasury stock ................................... (973) --
-------- --------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES ............. (12,073) 4,551
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ...................... (9,746) (8,402)
Cash and Cash Equivalents at Beginning of Period ............. 18,628 27,352
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................... $ 8,882 $ 18,950
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ..................................................... $ 5,165 $ 7,249
Taxes ........................................................ 438 250
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION:
Change in unrealized losses on securities-AFS ................ $ 189 $ 1,299
Change in deferred taxes due to change in unrealized losses
on AFS securities ....................................... (60) (450)
======== ========
See accompanying notes to consolidated financial statements.
DNB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION AND RESTATEMENT
The accompanying unaudited consolidated financial statements of DNB
Financial Corporation (referred to herein as the "Corporation" or "DNB") and its
subsidiary, Downingtown National Bank (the "Bank"), have been prepared in
accordance with the instructions for Form 10-Q and therefore do not include
certain information or footnotes necessary for the presentation of financial
condition, statement of operations and statement of cash flows required by
generally accepted accounting principles. However, in the opinion of management,
the consolidated financial statements reflect all adjustments (which consist of
normal recurring adjustments) necessary for a fair presentation of the results
for the unaudited periods. Prior period amounts not affecting net income are
reclassified when necessary to conform with current period classifications. The
results of operations for the six months ended June 30, 2002 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, 2001.
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, 2002, 173,824 and 175,821
stock options were not included because such options were antidilutive. For the
three and six months ended June 30, 2001, 202,677 and 197,677 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 2001. Net income and the weighted average number
of shares outstanding for basic and diluted EPS for the three and six months
ended June 30, 2002 and 2001 are reconciled as follows:
(In thousands, except per share amounts)
Three months ended Three months ended
June 30, 2002 June 30, 2001
-------------------------------- ------------------------------
Income Shares Amount Income Shares Amount
---------- ------ ---------- ----------- ------ --------
Basic EPS:
Income available to common stockholders ...... $ 738 1,736 $ 0.43 $ 608 1,776 $ 0.34
Effect of dilutive common stock equivalents-
stock options ........................... -- 49 (0.02) -- 16 --
--------- ------ ---------- ----------- ------ ---------
Diluted EPS .................................. $ 738 1,785 $ 0.41 $ 608 1,792 $ 0.34
========= ====== ========== =========== ====== ========
Six months ended Six months ended
June 30, 2002 June 30, 2001
-------------------------------- ------------------------------
Income Shares Amount Income Shares Amount
---------- ------ ---------- ----------- ------ --------
Basic EPS:
Income available to common stockholders ...... $ 1,346 1,745 $ 0.77 $ 1,213 1,776 $ 0.68
Effect of dilutive common stock equivalents-
stock options .......................... -- 47 (0.02) -- 20 --
------ ------ ---------- ----------- ------ --------
Diluted EPS .................................. $ 1,346 1,792 $ 0.75 $ 1,213 1,796 $ 0.68
========= ====== ========== =========== ====== ========
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 income (loss) relating to the change in unrealized gains
(losses) on investment securities available for sale, as shown in the following
table:
(Dollars in thousands) For three months For six months
ended June 30 ended June 30
---------------- ---------------
2002 2001 2002 2001
---- ---- ---- ----
COMPREHENSIVE INCOME:
Net Income ........................................... $ 738 $ 608 $1,346 $1,213
Other comprehensive income (loss), net of tax,
relating to unrealized gains (losses) on investments 749 66 129 895
------ ------ ------ ------
Total comprehensive income ........................... $1,487 $ 674 $1,475 $2,108
====== ====== ====== ======
NOTE 4: CAPITAL PREFERRED SECURITIES
On July 20, 2001, DNB's subsidiary DNB Capital Trust I (the "Trust"), a
Delaware business trust in which DNB owns all of the common equity, issued $5.0
million of floating rate (6 month Libor plus 3.75%) capital preferred securities
to a qualified institutional buyer. The proceeds of which were used by the
Trust, along with DNB's capital contribution, to purchase $5.2 million principal
amount of DNB's floating rate junior subordinated debentures (the "debentures").
The debentures are the sole asset of the Trust. DNB's obligations under the
debentures and related documents, taken together, constitute a full and
unconditional guarantee by DNB of the Trust's obligation under the preferred
securities. The preferred securities are redeemable by DNB on or after July 25,
2006, or earlier in the event of certain adverse tax or bank regulatory
developments. The preferred securities must be redeemed upon maturity of the
debentures on July 25, 2031.
NOTE 5: RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, Goodwill and other Intangible
Assets ("SFAS No. 142"). This Statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, Intangible Assets. It addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition. The Statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The provisions of the statement are
required to be applied starting with fiscal years beginning after December 15,
2001, except that goodwill and intangible assets acquired after June 30, 2001,
will be subject immediately to the nonamortization and amortization provisions
of the Statement. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not previously been issued. The Statement is required to be
applied at the beginning of an entity's fiscal year and to be applied to all
goodwill and other intangible assets recognized in its financial statements at
that date. SFAS 142 was adopted by DNB on January 1, 2002. There was no impact
of this statement on the DNB's financial condition, equity, results of
operations or disclosures.
NOTE 5: RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligation. ("SFAS No. 143"). This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. As used in this
Statement, a legal obligation is an obligation that a party is required to
settle as a result of an existing or enacted law, statute, ordinance, or written
or oral contract or by legal construction of a contract under the doctrine of
promissory estoppel. This Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. This Statement amends FASB Statement No. 19, Financial
Accounting and Reporting by Oil and Gas Producing Companies, and it applies to
all entities. It is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Earlier application is encouraged. DNB expects
that there will be no impact of this statement on its financial condition,
equity, results of operations or disclosures when adopted.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS No. 144"). This Statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. However, the Statement
retains the fundamental provisions of Statement 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used and (b)
measurement of long-lived assets to be disposed of by sale. This Statement
supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
this Statement retains the requirement of Opinion 30 to report discontinued
operations separately from continuing operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, by
abandonment, or in distribution to owners) or is classified as held for sale.
This Statement also amends ARB No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a temporarily controlled
subsidiary. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with earlier application encouraged.
SFAS 144 was adopted by DNB on January 1, 2002. There was no impact of this
statement on DNB's financial condition, equity, results of operations or
disclosures.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(SFAS No. 145). This Statement rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements, along with rescinding FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers and amending FASB Statement No. 13,
Accounting for Leases. This Statement (1) eliminates an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions, (2) eliminates the extraordinary item
treatment of reporting gains and losses from extinguishment of debt, and (3)
makes certain other technical corrections.
NOTE 5: RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
The provisions of this Statement related to the rescission of Statement 4
shall be applied in fiscal years beginning after May 15, 2002. The provisions of
this Statement related to Statement 13 shall be effective for transactions
occurring after May 15, 2002. All other provisions of this Statement shall be
effective for financial statements issued on or after May 15, 2002. Early
application of this Statement is encouraged. DNB expects that there will be no
impact of this statement on its financial condition, equity, results of
operations or disclosures when adopted.
In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities (SFAS No. 146). This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. DNB
expects that there will be no impact of this statement on its financial
condition, equity, results of operations or disclosures when adopted.
DNB FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DESCRIPTION OF DNB'S BUSINESS
DNB Financial Corporation is a bank holding company whose bank subsidiary,
Downingtown National Bank, is a nationally chartered commercial bank with trust
powers, and a member of the FDIC. DNB has nine full service offices located in
Chester County, Pennsylvania. In addition to its main office at 4 Brandywine
Avenue, they are: Little Washington Office (Intersection of Route 322 and
Culbertson Run Road, Downingtown), East End Office (701 East Lancaster Avenue,
Downingtown), Exton Office (410 Exton Square Parkway, Exton), Lionville Office
(Intersection of Route 100 and Welsh Pool Road, Exton), Ludwig's Corner Office
(Intersection of Routes 100 and 401, Uwchland), Caln Office (1835 East Lincoln
Highway, Coatesville), West Goshen Office (1115 West Chester Pike, West
Chester), Kennett Square Office (215 E. Cypress St., Kennett Square). The Bank
also has a limited service office at Tel Hai Retirement Community (Beaver Dam
Road, Honey Brook). Through its DNB Advisors division, Downingtown National Bank
provides wealth management and trust services to individuals and businesses
throughout Chester County. The Bank and its subsidiary, DNB Financial Services,
Inc., make available certain nondepositary products and services, such as
securities brokerage, mutual funds, life insurance and annuities. Customers may
also visit DNB on its website at http://www.dnb4you.com.
BUSINESS STRATEGY
DNB's defined business strategy, "Building our future," identifies as one
of its key goals the ability to deliver more consistent, higher-quality customer
service in order to become the bank of choice in Chester County, Pennsylvania.
In this connection, one of DNB's key strategic objectives is to reduce our
reliance on net interest income. In addition, DNB is committed to growing DNB's
commercial and small business lending. A third key objective is to continue
investing in and supporting business lines such as DNB Advisors (trust and
wealth management services), DNB Financial Services (securities and insurance
products and services) and DNB Leasing.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities at the date of our financial
statements. Actual results may differ from these estimates under different
assumptions or conditions.
In management's opinion, the most critical accounting policies impacting
DNB's consolidated financial statements are:
1. Evaluation of the allowance for loan losses. The loan loss
allowance policy involves significant judgments and assumptions by
management which may have a material impact on the carrying value of net
loans and, potentially, on the net income recognized by DNB from period to
period. For a description of DNB's accounting policies in connection with
its allowance for loan losses, see, "Provision for Loan Losses," below.
2. Accrual and recognition of interest on loans. These policies
involve significant judgments and assumptions by management, which may have
a material impact on the interest income recognized by DNB from period to
period. For a description of DNB's accounting policies in connection with
accrual and recognition of interest on loans, see, "Asset Quality," below.
3. Realization of Deferred income tax items. Various deferred tax
assets and deferred tax liabilities make up the asset category titled,
"deferred income taxes." These amounts involve significant judgments and
assumptions by management concerning DNB's ability to realize certain
items, which may have a material impact on the carrying value of net
deferred tax assets for financial reporting purposes. For a more detailed
description of these items and estimates, see Note 11 (Federal Income
Taxes) to DNB's audited consolidated financial statements for the fiscal
year ended December 31, 2001 (the "Annual Financial Statements"),
incorporated in DNB's 10-K for the year ended December 31, 2001.
The Notes to DNB's consolidated financial statements set forth herein and
in DNB's Annual Financial Statements identify other significant accounting
policies used in the development and presentation of its financial statements.
This discussion and analysis, the significant accounting policies, and other
financial statement disclosures identify and address key variables and other
qualitative and quantitative factors that are necessary for an understanding and
evaluation of DNB and its results of operations.
FINANCIAL CONDITION
DNB's total assets were $378.5 million at June 30, 2002 compared to $389.4
million at December 31, 2001. Investment securities (AFS and HTM) decreased $5.7
million or 3.4% to $163.0 million at June 30, 2002. Significant decreases in US
Agency mortgage backed securities and CMO's resulted as lowered interest rates
spurred paydowns of approximately $30.6 million. In addition, investment
maturities and sales totaled $15.0 million. Cashflows from these transactions
were used to purchase $36.2 million in US Agency MBS's & CMO's and $5.0 million
in trust preferred securities as well as fund net loan growth of $6.0 million or
3.3%. Net loans were $187.3 million, compared to $181.2 million at December 31,
2001. There were no Federal funds sold at June 30, 2002, compared to $7.2
million at December 31, 2001.
Deposits and other borrowings at June 30, 2002 totaled $351.4 million, down
$10.7 million or 3.0% from $362.1 million at December 31, 2001. Time deposits
were down $18.8 million and money market accounts decreased $3.5 million.
Savings, non-interest-bearing and NOW accounts increased $4.8 million, $2.7
million and $2.2 million, respectively, reflecting customer preferences for
short-term deposits in this low interest rate environment. Federal funds
purchased were $2.0 million at June 30, 2002.
At June 30, 2002, stockholders' equity was $25.4 million or $14.65 per
share, compared to $25.3 million or $14.04 per share at December 31, 2001. The
modest increase in stockholders' equity was the result of net income of $1.3
million for the six months ended June 30, 2002, offset by the purchase of 46,000
shares of treasury stock ($973,000) as well as dividends paid of approximately
$452,000 or $.26 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, 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 increased $476,000 or 16.6%
to $3.3 million for the three month period ended June 30, 2002, compared to the
same period in 2001. As shown in the following tables, the increase in net
interest income was largely attributable to volume changes, as average
interest-earning assets rose $15.7 million, compared to average interest-bearing
liabilities which rose $8.3 million. The net effect added approximately $409,000
to net interest income. In addition, rate changes caused by deposit yields
dropping more quickly than the yields on earning assets added approximately
$67,000 to net interest income for the period.
On a tax-equivalent basis, net interest income increased $758,000 or 13.4%
to $6.4 million for the six month period ending June 30, 2002 compared to the
same period in 2001. The increase was attributable to the effects of rate
changes as interest-bearing deposits repriced more quickly than interest-earning
assets. The effects of these rate changes added approximately $636,000 to net
interest income for the period. Volume changes resulted in a $122,000 benefit to
net interest income as average interest-earning assets rose $19.5 million
compared to average interest-bearing liabilities which rose $14.0 million.
The following tables set forth, among other things, the extent to which
changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have affected interest
income and expense during the three and six months ended June 30, 2002 compared
to the same periods in 2001 (tax-exempt yields and yields on agency-preferred
stock that have a 70% dividend received deduction 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.
(Dollars in thousands)
Three Months Ended June 30, 2002
Compared to 2001
-----------------------------------
Increase (Decrease) Due to Rate Volume Total
-------- ---------- ----------
Interest-earning assets:
Loans .................................... $ (217) $ (124) $ (341)
Investment securities
Taxable ............................. (474) 357 (117)
Tax-exempt .......................... (1) 7 6
Tax-preferred equity securities ..... (10) 16 6
Federal funds sold ....................... (360) 227 (133)
-------- ---------- ----------
Total ............................... $(1,062) $ 483 $ (579)
-------- ---------- ----------
Interest-bearing liabilities:
Federal funds purchased .................. $ -- $ 3 $ 3
Savings, NOW and money market deposits ... (655) 85 (570)
Time deposits ............................ (448) (270) (718)
FHLB advances ............................ (26) 183 157
Junior subordinated debentures ........... -- 73 73
-------- ---------- -----------
Total .................................... (1,129) 74 (1,055)
-------- ---------- -----------
Net Interest Income ...................... $ 67 $ 409 $ 476
======== ========== ===========
Six Months Ended June 30, 2002
Compared to 2001
-----------------------------------
Increase (Decrease) Due to Rate Volume Total
-------- ---------- ----------
Interest-earning assets:
Loans .......................................$ (501) $ (306) $ (807)
Investment securities
Taxable ................................ (1,035) 791 (244)
Tax-exempt ............................. (17) 16 (1)
Tax-preferred equity securities ........ (80) 70 (10)
Federal funds sold .......................... (152) (146) (298)
-------- ---------- ----------
Total ..................................$(1,785) $ 425 $ (1,360)
-------- ---------- ----------
Interest-bearing liabilities:
Federal funds purchased .....................$ -- $ 3 $ 3
Savings, NOW and money market deposits ...... (1,456) 204 (1,252)
Time deposits ............................... (913) (456) (1,369)
FHLB advances ............................... (52) 400 348
Junior subordinated debentures .............. -- 152 152
-------- -------- ===========
Total .................................. (2,421) 303 (2,118)
-------- -------- ===========
Net Interest Income .........................$ 636 $ 122 $ 758
======== ========== ===========
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").
In determining the allowance, DNB utilizes a methodology which includes an
analysis of historical loss experience for the commercial real estate,
commercial, residential real estate, home equity and consumer installment loan
pools to determine a historical loss factor. The historical loss factors are
then applied to the current portfolio balances to determine the required reserve
percentage for each loan pool based on risk rating. In addition, specific
allocations are established for loans where loss is probable and reasonably
identifiable, based on management's judgment and an evaluation of the individual
credit, which includes various factors mentioned above. The allocated portion of
the reserve is then determined as a result of an analysis of the loan pools and
specific allocations.
In establishing and reviewing the allowance for adequacy, emphasis has been
placed on utilizing the methodology prescribed in the OCC's Handbook (which
utilizes BC 201 qualitative risk factors). As a result, management has taken
into consideration factors and variables which may influence the risk of loss
within the loan portfolio, including: (i) trends in delinquency and nonaccrual
loans; (ii) changes in the nature and volume of the loan portfolio; (iii)
effects of any changes in lending policies; (iv) experience, ability, and depth
of management/quality of loan review; (v) national and local economic trends and
conditions; (vi) concentrations of credit; and (vii) effect of external factors
on estimated credit losses. The unallocated portion of the allowance is intended
to provide for probable losses that are not otherwise identifiable using the
BC201 risk factors such as (i) the effect of expansion into new markets or lines
of business that are not as familiar as DNB's current market or business lines;
(ii) the risk that the information we receive from our borrowers is inaccurate
or misleading and (iii) the non-qualifiable impact that a terrorist action or
threat of action may have on a particular industry.
There were no provisions made during the three and six months ended June
30, 2002, 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 $15,000 for the six months ended
June 30, 2002, compared to $108,000 for the year ended December 31, 2001 and
$51,000 for the six months ended June 30, 2001. The percentage of net
charge-offs to total average loans was .01%, .06% and .03% 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 167.7% at
June 30, 2002, compared to 149.8% at December 31, 2001. 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 was 1.49% at June 30, 2002, compared to 1.72% at December 31, 2001.
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.
(Dollars in thousands)
6 Months Year 6 Months
Ended Ended Ended
6/30/02 12/31/01 6/30/01
-------- -------- --------
Beginning balance ............................... $ 4,809 $ 4,917 $ 4,917
Provisions ...................................... -- -- --
Loans charged off:
Real estate .............................. -- (209) (108)
Commercial ............................... -- (66) (10)
Consumer ................................. (42) (9) (31)
------- ------- -------
Total charged off .................... (42) (284) (149)
Recoveries:
Real estate .............................. 10 132 77
Commercial ............................... 11 36 9
Consumer ................................. 6 8 12
------- ------- -------
Total recoveries ..................... 27 176 98
------- ------- -------
Net charge-offs ................................. (15) (108) (51)
------- ------- -------
Ending balance .................................. $ 4,794 $ 4,809 $ 4,866
======= ======= =======
NON-INTEREST INCOME
Total non-interest income includes service charges on deposit products;
fees received in connection with the sale of nondepository products and
services, including fiduciary and investment advisory services offered through
DNB Advisors; securities brokerage products and services and insurance brokerage
products and services offered through DNB Financial Services; and other sources
of income such as increases in the cash surrender value of bank owned life
insurance, net gains on sales of investment securities and other real estate
owned ("OREO") properties. In addition, DNB receives fees for cash management,
merchant services, debit cards, safe deposit box rentals, check cashing, lockbox
services and similar activities.
For the three and six month periods ended June 30, 2002, non-interest
income was $625,000 and $1.2 million, respectively, compared to $526,000 and
$984,000 for the same periods in 2001. Income from DNB Advisors rose $15,000 to
$97,000 and $36,000 to $198,000 for the three and six month periods,
respectively. Income from the cash surrender value of the bank owned life
insurance rose $11,000 to $49,000 and $40,000 to $98,000 for the three and six
month periods, respectively. In addition, increased gains from sales of
investments of $43,000 were reflected in the three and six months periods ending
June 30, 2002.
Other non-interest income increased $27,000 and $72,000 to $157,000 and
$327,000 for the three and six month periods ended June 30, 2002, respectively.
The increase in other income for the three and six month periods reflected
higher cash management fees, safe deposit box fees, and commissions on MAC/Visa
debit card products.
NON-INTEREST EXPENSE
Non-interest expense includes salaries & employee benefits, furniture &
equipment, occupancy, professional & consulting fees as well as printing &
supplies, marketing and other less significant expense items.
Non-interest expenses increased $460,000 to $2.9 million and $1.0 million
to $5.7 million for the three and six month periods ended June 30, 2002,
compared to the same periods ended June 30, 2001. The increase during the three
and six month periods was due to increases in a majority of the expense
categories, as discussed below.
Salaries & employee benefits increased $237,000 or 17.7% to $1.6 million
and $456,000 or 17.2% to $3.1 million for the three and six months ended June
30, 2002, compared to $1.3 million and $2.6 million for the same periods in
2001. The increase in this category reflects an increase in full-time equivalent
employees, merit increases as well as the creation of new positions associated
with staffing of a new full service branch in Exton, PA in the third quarter of
2001, the establishment of a Leasing department during the second half of 2001,
as well as expansion of the Commercial lending department and DNB Advisors.
Furniture & equipment and occupancy expense increased $71,000 or 28.2% to
$323,000 and $155,000 or 31.6% to $645,000, respectively, for the three and six
months ended June 30, 2002, compared to $252,000 and $490,000 for the same
periods in 2001. The increase for the three and six month periods in these
categories reflects the added costs incurred for the new office as well as
higher costs for repairs and maintenance of all facilities.
Occupancy expense increased approximately $35,000 or 21.7% to $196,000 and
$75,000 or 23.2% to $398,000 for the three and six months ended June 30, 2002,
compared to $161,000 and $323,000 for the same periods in 2001. The increase was
due to higher levels of depreciation, rental and utility expenses due to the
added costs incurred for the new office.
Marketing expense increased $53,000 or 73.6% to $125,000 and $63,000 or
48.8% to $192,000 for the three and six months ended June 30, 2002,
respectively, compared to $72,000 and $129,000 for the same periods in 2001.
This increase was primarily the result of a marketing initiative to promote
DNB's commercial loan products and services.
Professional & consulting expense decreased $40,000 or 21.5% to $146,000
for the three month period ended June 30, 2002, compared to $186,000 for the
same period in 2001. The decrease was due to large one-time legal fees incurred
in 2001. Professional & consulting expense increased $40,000 or 14.7% to
$312,000 for the six month period ended June 30, 2002, compared to $272,000 for
the same period in 2001. The increase was due to expenses incurred for Bank-wide
training, as well as consulting services for various areas of the Bank.
Printing & supplies expense increased $47,000 or 85.5% to $102,000 and
$76,000 or 73.8% to $179,000 for the three and six month periods ended June 30,
2002, respectively, compared to $55,000 and $103,000 for the same periods in
2001. The increased cost is primarily due to higher printing costs for DNB's
annual report as well as expenditures to improve DNB's central filing system.
Other expenses include such items as postage, PA shares tax, insurance, ATM
charges, OREO expense, satisfaction fees, appraisal fees, telephone & fax, and
other miscellaneous expenses. Other expenses increased $57,000 or 14.8% to
$441,000 and $151,000 or 20.8% to $878,000 for the three and six months ended
June 30, 2002 compared to $384,000 and $727,000 for the same periods in 2001.
This was due to miscellaneous costs associated with the new branch in addition
to higher postage costs due to higher volumes of accounts.
INCOME TAXES
Income tax expense was $215,000 and $358,000 for the three and six months
ended June 30, 2002, respectively, compared to $233,000 and $495,000 for the
same periods in 2001. The effective tax rate was 23% for the three month period
and 21% for the six month period ending June 30, 2002 compared to 28% and 29%
for the same respective periods ending June 30, 2001. The rates used for income
taxes for both periods were less than the statutory rate primarily due to the
effect of increasing amounts of tax exempt interest & dividend income, tax
credits recognized on a low-income housing limited partnership and DNB's
ownership of bank-owned life insurance investments.
ASSET QUALITY
Non-performing assets are comprised of nonaccrual loans, loans delinquent
over ninety days and still accruing, troubled debt restructurings ("TDR's") 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 market area.
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.
(Dollars in thousands) June 30 Dec. 31 June 30
2002 2001 2001
------ ------ -------
Nonaccrual Loans:
Residential mortgage ...................... $ 214 $ 224 $ 130
Commercial mortgage ....................... 193 567 158
Commercial ................................ 1,655 1,964 615
Consumer .................................. 248 301 290
------ ------ ------
Total nonaccrual loans ......................... 2,310 3,056 1,193
Loans 90 days past due and still accruing ...... 549 155 594
Troubled debt restructurings ................... -- -- 40
------ ------ ------
Total non-performing loans ..................... 2,859 3,211 1,827
Other real estate owned ........................ -- -- 83
------ ------ ------
Total non-performing assets .................... $2,859 $3,211 $1,910
====== ====== ======
The following table sets forth the DNB's asset quality and allowance
coverage ratios at the dates indicated:
June 30 Dec. 31 June 30
2002 2001 2001
------- ------- ------
Non-performing Loans/Total Loans ................. 1.5% 1.7% 1.0%
Non-performing Assets/Total Assets ............... 0.8 0.8 0.5
Allowance for Loan Losses/Total Loans ............ 2.5 2.6 2.6
Allowance for Loan Losses/Total Loans and OREO ... 2.5 2.6 2.6
Allowance for Loan Losses/Non-performing Assets .. 167.7 149.8 254.8
Allowance for Loan Losses/Non-performing Loans ... 167.7 149.8 266.3
If interest income had been recorded on nonaccrual loans and trouble debt
restructurings, interest would have been increased as shown in the following
table:
6 Months Year 6 Months
Ended Ended Ended
(Dollars in thousands) 6/30/02 12/31/01 6/30/01
-------- -------- -------
Interest income which would have been recorded
under original terms ..................... $ 82 $ 220 $ 47
Interest income recorded during the period ...... (46) (111) (1)
-------- -------- --------
Net impact on interest income ................... $ 36 $ 109 $ 46
======== ======== ========
At June 30, 2002 and December 31, 2001, DNB had impaired loans with a total
recorded investment of $932,000 and $1,194,000, respectively, and an average
recorded investment of $1,251,000 for the six month period ended June 30, 2002
and $1,121,000 for the year ended December 31, 2001. As of June 30, 2002 and
December 31, 2001, 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 $20,518 for the six months
ended June 30, 2002 and $2,929 for the year ended December 31, 2001. No interest
income was recorded on such loans.
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, 2002 DNB has $17.3 million in commitments to fund commercial
real estate, construction and land development. In addition, DNB had commitments
to fund $4.6 million in home equity lines of credit and $13.4 million in other
unused commitments. Management anticipates the majority of these commitments
will be funded by means of normal cash flows. In addition, $42.4 million of time
deposits at DNB are scheduled to mature during the six months ending December
31, 2002. 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.
On July 25, 2001, DNB authorized the buyback of up to 175,000 shares of its
Common Stock over an indefinite period. The buyback, if fully completed, would
reduce the number of outstanding shares by approximately 10%. The repurchases
are to be conducted through open market or privately negotiated transactions.
Shares purchased in the program are held as treasury stock. During the period
ending June 30, 2002, DNB repurchased 46,141 shares of its Common Stock pursuant
to the program at a total cost of $973,000.
Stockholders' equity increased to $25.4 million at June 30, 2002 as a
result of year-to-date profit reported for the six months then ended ($1.3
million), an increase in market value of available for sale investments, net of
tax ($129,000), partially offset by the purchase of treasury stock ($973,000)
and dividends paid ($452,000). The Bank's common equity position at June 30,
2002 exceeds the regulatory required minimums. The following table summarizes
data and ratios pertaining to the Bank's capital structure.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------ -------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------ -----
DNB Financial Corporation As of June 30, 2002:
Total risk-based capital .................. $33,467 13.27% $20,179 8.00% $25,223 10.00%
Tier 1 capital ............................ 30,294 12.01 10,089 4.00 15,134 6.00
Tier 1 (leverage) capital ................. 30,294 8.04 15,074 4.00 18,842 5.00
Downingtown National Bank
As of June 30, 2002:
Total risk-based capital .................. $29,940 11.88% 20,166 8.00% $25,208 10.00%
Tier 1 capital ............................ 26,769 10.62 10,083 4.00 15,125 6.00
Tier 1 (leverage) capital ................. 26,769 7.15 14,972 4.00 18,715 5.00
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, certain "perpetual debt instruments" such as eligible trust
preferred securities, 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 8.4%,
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 June 30, 2002 and December 31, 2001,
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.
(Dollars in thousands)
June 30, 2002 December 31, 2001
-------------------------------- -----------------------------
Change in rates Flat -200bp +200bp Flat -200bp +200bp
------- ------- -------- ------- ------- --------
Economic Value of
Portfolio Equity .......... 29,540 22,583 26,922 29,379 $25,078 $24,237
Change ................ (6,957) (2,618) (4,301) (5,142)
Change as a % of assets (1.84%) (0.69%) (1.10%) (1.32%)
OPERATING ENVIRONMENT AND CERTAIN TRENDS
DNB operates its franchise throughout Chester County, PA. Chester County
has extremely attractive demographics, which makes it one of the fastest growing
counties in Pennsylvania. Due to these factors, the operating environment is
very competitive as Chester County hosts over 40 banks, thrifts and credit
unions. In addition, brokerage firms, mutual fund companies and boutique
investment firms dot the landscape. This intense competition continually puts
pressures on DNB's margins and operating results as competitors offer a full
range of loan, deposit and investment products and services. In addition, many
of these competitors are much larger than DNB and consistently outspend the Bank
in marketing to attract new customers. We anticipate these pressures will
continue to adversely affect our margins.
RECENT DEVELOPMENTS
During the latter part of 2001, the US economy slipped into a recession
which continues to affect Pennsylvania's and the Chester County's economy. Many
economists anticipate a gradual improvement in the economy during the second
half of 2002. The slow economy has affected DNB's ability to generate new loans
as potential borrowers are waiting for clearer signs that the economy has
rebounded.
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;
and (5) 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
At the Corporation's Annual Meeting held April 30, 2002, the
stockholders voted as follows:
A. Election of Class "C" Directors: Thomas R. Greenleaf
For: 1,290,681 Withheld: 40,394
Louis N. Teti
For: 1,290,564 Withheld: 40,511
James H. Thornton
For: 1,290,564 Withheld: 40,511
B. The motion to ratify the appointment of KPMG LLP as the independent
auditors for the fiscal year ending December 31, 2002 was voted on
as follows:
For: 1,302,744 Against: 22,933 Abstain: 5,398
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6.
(a) EXHIBITS:
Not Applicable
(b) REPORTS ON FORM 8-K
Not Applicable
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, 2002 /S/ Henry F. Thorne
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Henry F. Thorne, President
and Chief Executive Officer
DATE: August 14, 2002 /S/ Bruce E. Moroney
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Bruce E. Moroney
Chief Financial Officer