UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended: March 31, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] 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) 1,812,987
(Class) (Shares Outstanding as of
May 14, 2003)
- ---------------------------------------------------------------------------
DNB FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2003 and December 31, 2002 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2003 and 2002 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 and December 31, 2002 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 21
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 23
CERTIFICATIONS 24
DNB FINANCIAL CORPORATION
Consolidated Statements of Financial Condition (Unaudited)
(Dollars in thousands, except per share data) March 31, December 31,
2003 2002
- ----------------------------------------------------------------------------------------
Assets
Cash and due from banks ....................................... $ 12,159 $ 11,551
Federal funds sold ............................................ 3,192 10,473
--------- ---------
Total cash and cash equivalents ............................... 15,351 22,024
--------- ---------
Investment securities available for sale, at fair value ....... 171,415 137,365
Investment securities held to maturity (market value $18,056
in 2003 and $22,811 in 2002) ............................... 17,795 22,430
Loans, net of unearned income ................................. 179,465 187,585
Allowance for loan losses ..................................... (4,472) (4,546)
--------- ---------
Net loans ..................................................... 174,993 183,039
--------- ---------
Office property and equipment ................................. 7,919 8,092
Accrued interest receivable ................................... 1,831 1,890
Bank owned life insurance ..................................... 5,636 5,577
Net deferred taxes ............................................ 1,190 980
Other assets .................................................. 3,549 2,971
--------- ---------
Total assets .................................................. $ 399,679 $ 384,368
========= =========
Liabilities and Stockholders' Equity
Liabilities
Non-interest-bearing deposits ................................. $ 46,736 $ 45,117
Interest-bearing deposits:
NOW ........................................................ 49,436 50,400
Money market ............................................... 60,582 59,457
Savings .................................................... 42,152 39,569
Time ....................................................... 89,745 93,259
--------- ---------
Total deposits ................................................ 288,651 287,802
--------- ---------
Borrowings .................................................... 78,726 63,728
Junior subordinated debentures ................................ 5,000 5,000
--------- ---------
Total borrowings .............................................. 83,726 68,728
--------- ---------
Accrued interest payable ...................................... 1,048 1,164
Other liabilities ............................................. 270 466
--------- ---------
Total liabilities ............................................. 373,695 358,160
--------- ---------
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; 1,917,609 and 1,902,478
issued, respectively ....................................... 1,917 1,902
Treasury stock, at cost; 95,151 and 81,427 shares, respectively (1,988) (1,687)
Surplus ....................................................... 23,571 23,402
Retained earnings ............................................. 3,439 3,184
Accumulated other comprehensive loss, net ..................... (955) (593)
--------- ---------
Total stockholders' equity .................................... 25,984 26,208
--------- ---------
Total liabilities and stockholders' equity .................... $ 399,679 $ 384,368
========= =========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share amounts) Three Months Ended March 31
---------------------------
2003 2002
- --------------------------------------------------------------------------------
Interest Income:
Interest and fees on loans and leases ............... $ 3,299 $ 3,440
Interest and dividends on investment securities:
Taxable ............................................. 1,209 1,757
Tax-free ............................................ 52 126
Tax preferred DRD ................................... 139 164
Interest on Federal funds sold ...................... 30 28
---------- ----------
Total interest income ............................... 4,729 5,515
---------- ----------
Interest Expense:
Interest on time deposits ........................... 733 1,059
Interest on NOW, money market and savings ........... 311 466
Interest on FHLB advances ........................... 921 883
Interest on junior subordinated debentures .......... 66 79
Interest on lease obligations ....................... 25 25
---------- ----------
Total interest expense .............................. 2,056 2,512
---------- ----------
Net interest income ................................. 2,673 3,003
Provision for loan losses ........................... -- --
---------- ----------
Net interest income after provision for loan losses . 2,673 3,003
---------- ----------
Non-interest Income:
Service charges ..................................... 299 246
Wealth management ................................... 141 101
Increase in cash surrender value of BOLI ............ 59 50
Other ............................................... 175 151
---------- ----------
Total non-interest income ........................... 674 548
---------- ----------
Non-interest Expense:
Salaries and employee benefits ...................... 1,530 1,529
Furniture and equipment ............................. 353 321
Occupancy ........................................... 195 203
Professional and consulting ......................... 116 165
Printing and supplies ............................... 68 77
Marketing ........................................... 62 67
Other ............................................... 437 438
---------- ----------
Total non-interest expense .......................... 2,761 2,800
---------- ----------
Income before income taxes .......................... 586 751
Income tax expense .................................. 94 143
---------- ----------
Net income .......................................... $ 492 $ 608
========== ==========
Earnings Per Share:
Basic ............................................... $ 0.27 $ 0.33
Diluted ............................................. $ 0.26 $ 0.32
Cash dividends per share ............................ $ 0.13 $ 0.12
Weighted average number of common shares outstanding:
Basic ............................................... 1,822,528 1,842,223
Diluted ............................................. 1,864,228 1,878,633
See accompanying notes to consolidated financial statements
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands) Three Months Ended March 31
2003 2002
-------- --------
Cash Flows From Operating Activities:
Net income ...............................................$ 492 $ 608
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................. 910 545
Decrease in accrued interest receivable ........ 59 130
Increase in investment in BOLI ................. (59) (49)
(Increase) decrease in other assets ............ (578) 1,081
Increase in deferred taxes ..................... (26) (26)
Decrease in accrued interest payable ........... (116) (221)
Increase in current taxes payables ............. 87 62
Decrease in other liabilities .................. (283) (72)
-------- --------
Net Cash Provided By Operating Activities ................ 486 2,058
-------- --------
Cash Flows From Investing Activities:
Proceeds from maturities & paydowns of AFS securities .... 23,978 16,269
Proceeds from maturities & paydowns of HTM securities .... 5,348 10,570
Purchase of AFS securities ............................... (59,143) (3,910)
Purchase of HTM securities ............................... (794) (21,752)
Net decrease in loans .................................... 8,046 3,822
Purchase of office property and equipment ................ (87) (75)
-------- --------
Net Cash (Used) Provided By Investing Activities ......... (22,652) 4,924
-------- --------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits ...................... 849 (11,800)
Increase in FHLB advances 90 days or less ................ 15,000 --
Decrease in lease obligations ............................ (2) (1)
Purchase of treasury stock ............................... (301) (742)
Proceeds from issuance of stock under stock option plan 184 --
Dividends paid ........................................... (237) (227)
-------- --------
Net Cash Provided (Used) By Financing Activities ......... 15,493 (12,770)
-------- --------
Net Change in Cash and Cash Equivalents .................. (6,673) (5,788)
Cash and Cash Equivalents at Beginning of Period ......... 22,024 18,628
-------- --------
Cash and Cash Equivalents at End of Period ...............$ 15,351 $ 12,840
======== ========
Supplemental Disclosure Of Cash Flow Information:
Cash paid during the period for:
Interest .................................................$ 2,215 $ 2,733
Income taxes ............................................. 15 88
Supplemental Disclosure Of Non-Cash Flow Information:
Change in unrealized losses on securities-AFS ............ (546) (620)
Change in deferred taxes due to change in unrealized
losses on securities-AFS .......................... 184 323
======== ========
See accompanying notes to consolidated financial statements.
DNB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of DNB
Financial Corporation (referred to herein as the "Corporation" or "DNB") and its
subsidiaries, Downingtown National Bank (the "Bank") and DNB Capital Trust I
(the "Trust"), have been prepared in accordance with the instructions for Form
10-Q and therefore do not include certain information or footnotes necessary for
the presentation of financial condition, statement of operations and statement
of cash flows required by generally accepted accounting principles. However, in
the opinion of management, the consolidated financial statements reflect all
adjustments (which consist of normal recurring adjustments) necessary for a fair
presentation of the results for the unaudited periods. Prior period amounts not
affecting net income are reclassified when necessary to conform with current
year classifications. The results of operations for the three months ended March
31, 2003 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, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure ("SFAS 148"). This statement amends SFAS
123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The requirements of Statement No. 148 are effective for fiscal years
ending after December 15, 2002, except for financial report containing condensed
financial statements for interim periods. DNB applies APB Opinion No. 25 in
accounting for its Stock Option Plan, and accordingly, no compensation cost has
been recognized for its stock options in the financial statements. Had DNB
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, DNB's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
(Dollars in thousands, except per share data) Three Months Ended
March 31
2002 2001
-------- --------
Net income as reported ................................. $ 492 $ 608
Total stock based employee compensation expense
determined under fair value based method for
all awards, net of related tax effects .............. -- --
-------- --------
Pro forma net income ................................... $ 492 608
Earnings per share
Basic-as reported ................................... $ 0.27 $ 0.33
Basic-pro forma ..................................... $ 0.27 $ 0.33
Diluted-as reported ................................. $ 0.26 $ 0.32
Diluted-pro forma ................................... $ 0.26 $ 0.32
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 months ended March 31, 2003, 147,946 stock options were
not included in the earnings per share calculation because such options were
antidilutive. For the three months ended March 31, 2002, 168,368 stock options
were not included. 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 2002.
Net income and the weighted average number of shares outstanding for basic and
diluted EPS for the three months ended March 31, 2003 and 2002 are reconciled as
follows:
(Dollars in thousands, except per share data) Three months ended Three months ended
March 31, 2003 March 31, 2002
------------------------- -------------------------
Income Shares Amount Income Shares Amount
------ ------ ------- ------ ------ -------
Basic EPS
Income available to common stockholders .......... $ 492 1,823 $ 0.27 $ 608 1,842 $ 0.33
Effect of dilutive common stock equivalents-
stock options ............................... -- 41 (0.01) -- 37 (0. 01)
------ ------ ------- ------ ------ -------
Diluted EPS
Income available to common stockholders
after assumed conversions .................. $ 492 1,864 $ 0.26 $ 608 1,879 $ 0.32
====== ====== ======= ====== ====== =======
NOTE 3: OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes all changes in stockholders' equity
during the period, except those resulting from investments by owners and
distributions to owners. Comprehensive income (loss) for all periods consisted
of net income and other comprehensive loss relating to the change in unrealized
losses on investment securities available for sale, as shown in the following
table:
(Dollars in thousands) For three months ended March 31
-------------------------------
2003 2002
----- -----
COMPREHENSIVE INCOME:
Net Income ........................................ $ 492 $ 608
Other comprehensive (loss), net of tax,
relating to unrealized losses on investments (362) (620)
----- -----
Total comprehensive income (loss) ................. $ 130 $ (12)
===== =====
NOTE 4: JUNIOR SUBORDINATED DEBENTURES
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% to a cap of 12%) capital
preferred securities ("TruPS") to a qualified institutional buyer. The proceeds
of these securities 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 TruPS 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 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 145"). This Statement rescinds SFAS 4, Reporting Gains and Losses from
Extinguishments of Debt, and an amendment of that Statement, SFAS 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, along with
rescinding SFAS 44, Accounting for Intangible Assets of Motor Carriers and
amending SFAS 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 extinguishments
of debt, and (3) makes certain other technical corrections. 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. The effective portions of this statement had no impact
and DNB expects that there will be no impact from the remaining provisions 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 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. There
was no impact of this statement on DNB's financial condition, equity, results of
operations or disclosures.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions ("SFAS 147"), which amends SFAS 72, Accounting for
Certain Acquisitions of Banking or Thrift Institutions, SFAS 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both Statement
No. 72 and Interpretation No. 9 and requires that those transactions be
accounted for in accordance with SFAS 141, Business Combinations, paragraph 5 of
SFAS 72 to recognize any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible acquisitions within the
scope of this Statement. In addition, this Statement amends SAFS 144 to include
in its scope long-term customer-relationship intangible assets of financial
institutions such as depositor-and borrower-relationship intangible assets and
credit cardholder intangible assets. Consequently, those intangible assets are
subject to the same undiscounted cash flow recoverability test and impairment
loss recognition and measurement provisions that SFAS 144 requires for other
long-lived assets that are held and used. With some exceptions, the requirements
of SFAS 147 were effective October 1, 2002. SFAS 147 was adopted by DNB on
October 1, 2002. There was no impact of this statement on DNB's financial
condition, equity, results of operations or disclosures.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure ("SFAS 148"). This statement amends SFAS
123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. The Statement also amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
This statement is effective for fiscal years ending after December 15, 2002. The
disclosures required by this statement have been included in this filing. This
Statement announces that "in the near future, the Board plans to consider
whether it should propose changes to the U.S. standards on accounting for
stock-based compensation". There was no impact of this statement on DNB's
financial condition, equity, results of operations. The disclosure requirements
of this statement have been complied with.
ITEM 2 - 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 has defined a business strategy we call, "Building our future," one of
the key goals of which is 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. Another is to grow our commercial and small
business lending. A third key objective is to continue investing in and growing
newer 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 AND ESTIMATES
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 principals generally accepted
in the United States of America. Generally accepted accounting principles are
complex and require management to apply significant judgment to various
accounting, reporting and disclosure matters. Management must use assumptions
and estimates to apply these principles where actual measurement is not possible
or practical. Actual results may differ from these estimates under different
assumptions or conditions.
In management's opinion, the most critical accounting policies and
estimates impacting DNB's consolidated financial statements are listed below.
These policies are critical because they are highly dependent upon subjective or
complex judgments, assumptions and estimates. Changes in such estimates may have
a significant impact on the financial statements. For a complete discussion of
DNB's significant accounting policies, see the Footnotes to the Consolidated
Financial Statements and discussion in the Annual Report for the year ended
December 31, 2002.
1. Determination of the allowance for loan losses. Loan loss allowance
policies involve 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 "Allowance for Loan Losses" in Management's Discussion
and Analysis.
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" in
Management's Discussion and Analysis.
3. Realization of deferred income tax items. Estimates of deferred tax assets
and deferred tax liabilities make up the asset category titled "net
deferred taxes." These estimates involve significant judgments and
assumptions by management, 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 Footnote 11
(Federal Income Taxes) to DNB's audited consolidated financial statements
for the fiscal year ended December 31, 2002.
The Footnotes 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 $399.7 million at March 31, 2003 compared to $384.4
million at December 31, 2002. Investment securities (AFS and HTM) increased
$29.4 million or 18.4% to $189.2 million at March 31, 2003. Total loans were
$175.0 million, down $8.0 million or 4.4% from $183.0 million at December 31,
2002. Federal funds sold were $3.2 million at March 31, 2003, down $7.3 million
from December 31, 2002.
Deposits and other borrowings at March 31, 2003 totaled $372.4 million,
compared to $356.5 million at December 31, 2002, an increase of $15.8 million.
Since December 31, 2002, there have been increases of $2.5 million in Savings,
$1.6 million in non-interest bearing checking and $1.1 million in Money market
accounts, largely offset by decreases of $3.5 million in time deposits.
Borrowings increased $15.0 million during the quarter to $83.7 million at March
31, 2003.
At March 31, 2003, stockholders' equity was $26.0 million or $14.27 per
share, compared to $26.2 million or $14.33 per share at December 31, 2002. The
decrease in stockholders' equity was the result of a $362,000 decrease in the
fair market value of available-for-sale securities, net of taxes, purchases of
$301,000 of treasury stock, dividends paid of approximately $237,000 or $.13 per
share, partially offset by net income of $492,000 for the three months ended
March 31, 2003 and proceeds from the issuance of stock options of $184,000.
RESULTS OF OPERATIONS
NET INTEREST INCOME
DNB's earnings performance is primarily dependent upon its level of net
interest income, which is the excess of interest revenue over interest expense.
Interest revenue includes interest earned on loans (net of interest reversals on
non-performing loans), investments, Federal funds sold and interest-earning
cash, as well as net loan fee amortization and dividend income. Interest expense
includes the interest cost for deposits, FHLB advances, Federal funds purchased
and other borrowings.
Net interest income on a taxable equivalent basis, decreased $374,000 or
12.0% to $2.7 million for the three month period ended March 31, 2003, as
compared to the three month period ended March 31, 2002. Net interest income for
the quarter were severely impacted by historically high prepayment speeds on
mortgage-backed securities, which accelerated during the last two quarters. As
shown in the following Rate/Volume Analysis, the decrease in net interest income
during 2003 was largely attributable to rate changes, as both interest-bearing
assets and deposits repriced in the low rate environment. The negative impact
from changes in rates was primarily attributable to investments and loans,
partially offset by favorable changes in rates on time, NOW, money market, and
savings deposits. The effects of these rate changes reduced net interest income
by $380,000. This decrease was only slightly offset by the positive changes in
volume.
The following table sets forth, among other things, the extent to which
changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have affected interest
income and expense during the three months ended March 31, 2003 compared to the
same period in 2002 (tax-exempt yields and yields on agency-preferred stock that
have a 70% dividend received deduction ("DRD") 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.
Three Months Ended March 31, 2003
(Dollars in thousands) Compared to 2002
Increase (Decrease) Due to Rate Volume Total
------ ------ ------
Interest-earning assets:
Loans .................................. $(153) $ 12 $(141)
Investment securities
Taxable ........................... (661) 114 (547)
Tax exempt ........................ (24) (85) (109)
Tax preferred-DRD ................. (50) 16 (34)
Federal funds sold ..................... (11) 12 1
------ ------ ------
Total ............................. (899) 69 (830)
------ ------ ------
Interest-bearing liabilities:
Time deposits .......................... (234) (92) (326)
Savings, NOW and money market deposits . (164) 9 (155)
FHLB advances .......................... (107) 146 39
Junior subordinated debentures ......... (14) -- (14)
------ ------ ------
Total ............................. (519) 63 (456)
------ ------ ------
Net interest income/interest rate spread $(380) $ 6 $(374)
====== ====== ======
PROVISION FOR LOAN LOSSES
To provide for known and inherent losses in the loan portfolio, DNB
maintains an allowance for loan losses. 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, 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 evaluations
are also based on management's review of the economy, interest rates, general
market conditions, estimates of the fair value of collateral, financial strength
and ability of the borrowers and guarantors to pay, and considerations regarding
the current and anticipated operating or sales environment. These estimates are
particularly susceptible to change and may result in a material adjustment to
the allowance. While management uses the latest information available to make
its evaluation of the adequacy of the allowance, future adjustments may be
necessary if conditions differ substantially from the assumptions used in making
the evaluations.
There were no provisions made during the three months ended March 31, 2003,
and 2002 since management determined the allowance for loan losses was
appropriate based on its analysis and the level of net charge-offs/recoveries
compared to the total allowance. Net loan charge-offs were $74,000 for the three
months ended March 31, 2003, compared to $263,000 for the year ended December
31, 2002 and $11,000 for the three months ended March 31, 2002. The percentage
of net charge-offs to total average loans was .04%, .014% and .006% for the same
respective periods. Another measure of the adequacy of the allowance is the
coverage ratio, which was 172.3% at March 31, 2003. This ratio measures the
allowance as a percentage of non-performing loans. In addition, the ratio of
non-performing loans to total loans has steadily declined and was 1.44% at March
31, 2003.
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.
3 Months Year 3 Months
Ended Ended Ended
(Dollars in thousands) 3/31/03 12/31/02 3/31/02
------- -------- --------
Beginning Balance .......... $ 4,546 $ 4,809 $ 4,809
Provisions: ................ -- -- --
Loans charged off:
Real estate ......... (1) -- --
Commercial .......... (204) (221) --
Consumer ............ (45) (89) (24)
-------- -------- --------
Total charged off (250) (310) (24)
Recoveries:
Real estate ......... 92 18 6
Commercial .......... 78 18 3
Consumer ............ 6 11 4
-------- -------- --------
Total recoveries ........... 176 47 13
-------- -------- --------
Net charge-offs ............ (74) (263) (11)
-------- -------- --------
Ending Balance ............. $ 4,472 $ 4,546 $ 4,798
======== ======== ========
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 month period ended March 31, 2003, non-interest income was
$674,000 compared to $548,000 for the same period in 2002. Service charges
increased $53,000 to $299,000 for the three month period ended March 31, 2003,
compared with the same period in 2002. The increase in service charge income is
due, in general, to increased overdraft fees and minimum account balance
charges. Non-interest income also increased due to a net increase of $40,000 in
commissions on products sold by DNB's Wealth Management Group. Other
non-interest income rose $24,000, due mainly to higher levels of cash
management, debit card and safe deposit box fees.
NON-INTEREST EXPENSE
Non-interest expense includes salaries & employee benefits, furniture &
equipment, occupancy, professional & consulting fees as well as marketing,
printing & supplies and other less significant expense items.
Non-interest expenses remained relatively flat at $2.8 million for the
three month period ended March 31, 2003 compared to the same period in 2002. The
largest decrease was seen in professional & consulting, partially offset by an
increase in furniture & equipment.
Professional & consulting expense decreased $49,000 or 30% to $116,000 for
the three month period ended March 31, 2003, compared to $165,000 for the same
period in 2002. The decrease was due to a one-time recovery of $22,000 of legal
fees on a delinquent loan, as well as expenses incurred for Bank-wide training
and consulting services for various areas of the Bank during 2002 that were not
incurred in 2003.
Furniture & equipment expense increased $32,000 or 10.0% to $353,000 for
the three months ended March 31, 2003, compared to $321,000 for the same period
in 2002. The increase was due to higher levels of equipment depreciation
relating to a new bank-wide voice-mail and other equipment/software upgrades.
INCOME TAXES
Income tax expense was $94,000 for the three months ended March 31, 2003
compared with $143,000 for the three months ended March 31, 2002. The effective
tax rates were 16%, and 19% for the three month periods ending March 31, 2003
and 2002, respectively. The effective tax rates were less than the statutory
rate due to the effect of tax exempt income, tax credits recognized on a
low-income housing limited partnership and DNB's ownership of BOLI policies.
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 non-performing assets is dependent, to a large extent, on the economic
climate within DNB's market area.
The following table sets forth DNB's assets that are: (i) on nonaccrual
status, (ii) contractually delinquent by 90 days or more and still accruing,
(iii) troubled debt restructurings and (iv) other real estate owned as a result
of foreclosure or voluntary transfer to DNB.
(Dollars in Thousands) 3/31/03 12/31/02 3/31/02
------- -------- -------
Nonaccrual Loans:
Residential mortgage ........................ $ 328 $ 285 $ 219
Commercial mortgage ......................... 1,049 1,057 531
Commercial .................................. 468 1,758 1,836
Consumer .................................... 248 254 291
------- -------- -------
Total nonaccrual loans ........................... 2,093 3,354 2,877
Loans 90 days past due and still accruing 502 514 134
Troubled debt restructurings ..................... -- -- --
------- -------- -------
Total non-performing loans ....................... 2,595 3,868 3,011
Other real estate owned .......................... -- -- --
------- -------- -------
Total non-performing assets ...................... $ 2,595 $ 3,868 $ 3,011
======= ======== =======
The following table sets forth the DNB's asset quality and allowance
coverage ratios at the dates indicated:
3/31/03 12/31/02 3/31/02
------- -------- -------
Non-performing Loans/Total Loans ................. 1.4% 2.1% 1.7%
Non-performing Assets/Total Assets ............... 0.6 1.0 0.8
Allowance for Loan Losses/Total Loans ............ 2.5 2.4 2.6
Allowance for Loan Losses/Total Loans and OREO ... 2.5 2.4 2.6
Allowance for Loan Losses/Non-performing Assets .. 172.3 117.5 159.3
Allowance for Loan Losses/Non-performing Loans ... 172.3 117.5 159.3
If interest income had been recorded on nonaccrual loans, interest
would have increased as shown in the following table:
3 Months Year 3 Months
Ended Ended Ended
(Dollars in thousands) 3/31/03 12/31/02 3/31/02
------- -------- -------
Interest income which would have been recorded
under original terms ...................... $ 34 $ 230 $ 50
Interest income recorded during the period ....... (14) (159) (10)
------- -------- -------
Net impact on interest income .................... $ 20 $ 71 $ 40
======= ======== =======
Information regarding impaired loans is as follows:
3 Months Year 3 Months
Ended Ended Ended
(Dollars in thousands) 3/31/03 12/31/02 3/31/02
------- -------- -------
Total recorded investment ........................ $ 1,353 $ 2,400 $ 1,087
Average recorded investment ...................... 1,897 2,000 1,220
Specific ALLL allocation ......................... -- -- --
Total cash collected ............................. 7 47 10
Interest income recorded ......................... -- 21 --
======= ======== =======
LIQUIDITY AND CAPITAL RESOURCES
For a financial institution, liquidity is a measure of the ability to fund
customers' needs for loans and deposit withdrawals. Management regularly
evaluates economic conditions in order to maintain a strong liquidity position.
One of the most significant factors considered by management when evaluating
liquidity requirements is the stability of DNB's core deposit base. In addition
to cash, DNB maintains a portfolio of short term investments to meet its
liquidity requirements. DNB has historically relied on cash flow from operations
and other financing activities. Liquidity is provided by investing activities,
including the repayment and maturing of loans and investment securities.
At March 31, 2003 DNB has $13.9 million in commitments to fund commercial
real estate, construction and land development. In addition, DNB had commitments
to fund $6.7 million in home equity lines of credit and $12.6 million in other
unused commitments. Management anticipates the majority of these commitments
will be funded by means of normal cash flows. In addition, $65.7 million of time
deposits at DNB are scheduled to mature during the nine months ending December
31, 2003. Management believes that the majority of such deposits will be
reinvested with DNB and that certificates that are not renewed will be funded by
a reduction in Federal funds sold or by paydowns and maturities of loans and
investments.
Stockholders' equity decreased $224,000 to $26.0 million at March 31, 2003
as a result of a decrease in market value of available for sale investments, net
of tax ($362,000), the purchase of treasury stock ($301,000), and dividends paid
($237,000), partially offset by year-to-date profit reported for the three
months then ended ($492,000) and proceeds from the issuance of stock options
($184,000). The Bank's common equity position at March 31, 2003 exceeds the
regulatory required minimums. The following table summarizes data and ratios
pertaining to the DNB'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 March 31, 2003:
Total risk-based capital .... $34,388 13.56% $20,287 8.00% $25,359 10.00%
Tier 1 capital .............. 31,202 12.30 10,144 4.00 15,215 6.00
Tier 1 (leverage) capital ... 31,202 8.00 15,605 4.00 19,507 5.00
Downingtown National Bank
As of March 31, 2003:
Total risk-based capital .... $31,922 12.60% $20,276 8.00% $25,344 10.00%
Tier 1 capital .............. 28,738 11.34 10,138 4.00 15,207 6.00
Tier 1 (leverage) capital ... 28,738 7.39 15,563 4.00 19,454 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, 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% at March 31,
2003, 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.
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 effect Pennsylvania's and the Chester County's economy. Many
economists anticipate a gradual improvement in the economy during the second
half of 2003. The slow economy has effected DNB's ability to generate new loans
as potential borrowers are waiting for cleaner 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 March 31, 2003 and December 31, 2002, 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. At March 31, 2003 and December 31,
2002, 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
the DNB's negative 3% policy guideline, however the change as a percentage of
the present value of equity was a negative 28.8% and 35.1%, respectively, which
is outside of DNB's negative 25% policy. This occurred as the duration of DNB's
assets shortened more quickly than the duration of its liabilities. Subsequent
to March 31, 2003, management has taken the necessary steps to move this ratio
within policy guidelines, including but not limited to reducing the level of
Federal funds sold, purchasing municipal securities with positive convexity,
promoting five year fixed rate lending and attempting to shorten the overall
duration of deposits through pricing.
(Dollars in thousands)
March 31, 2003 December 31, 2002
--------------------------------- -------------------------------
Change in rates Flat -200bp +200bp Flat -200bp +200 bp
--------- --------- --------- --------- -------- ---------
Economic Value of
Portfolio Equity ....... $ 27,199 $ 19,377 $ 25,461 $ 27,381 $ 17,760 $ 28,553
Change ...................... (7,821) (1,738) (9,621) 1,172
Change as a % of assets ..... (2.0%) (0.4%) (2.5%) 0.3%
Change as a % of PV equity .. (28.8%) (6.4%) (35.1%) 4.3%
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
reviewed and evaluated the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 240.13a-14(c) and 240.15d-14(c) as
of a date within 90 days before the filing date of this quarterly report. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
have concluded that the Company's current disclosure controls and procedures are
effective and timely, providing them with material information relating to the
Company required to be disclosed in the report we file or submit under the
Exchange Act.
CHANGES IN INTERNAL CONTROLS
There have not been any significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation. We are not aware of any significant deficiencies or
material weaknesses, therefore no corrective actions were taken.
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:
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of Sarbanes-Oxley Act of
2002.
(b) REPORTS ON FORM 8-K
Current report on Form 8-K dated and filed January 31, 2003,
Items 7 and 9.
Current report on Form 8-K dated and filed February 27, 2003,
Item 7.
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DNB FINANCIAL CORPORATION
(Registrant)
DATE: May 14, 2003 /S/ Henry F. Thorne
---------------------------
Henry F. Thorne, President
and Chief Executive Officer
DATE: May 14, 2003 /S/ Bruce E. Moroney
---------------------------
Bruce E. Moroney
Chief Financial Officer
Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
for the Chief Executive Officer
I, Henry F. Thorne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DNB Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Henry F. Thorne
- -------------------
Henry F. Thorne
Chief Executive Officer
May 14, 2003
Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
for the Chief Financial Officer
I, Bruce E. Moroney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DNB Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Bruce E. Moroney
- ---------------------
Bruce E. Moroney
Chief Financial Officer
May 14, 2003