Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT 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, PENNSYLVANIA 19335
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(610) 269-1040
Securities registered pursuant to Section 12 (b) of the Act
NOT APPLICABLE
Securities registered pursuant to Section 12 (g) of the Act
Common stock, par value $1.00 per share
(Title of class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ X ] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[ X ] Yes [ ] No
Aggregate market value of common stock held by non-affiliates of the
registrant, computed by reference to the average bid and asked price as of close
of business on June 28, 2002, the last business day of the registrant's most
recently completed second fiscal quarter, was $35.7 million.
As of March 20, 2003 there were issued and outstanding, exclusive of
treasury shares, 1,822,458 shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
Parts I, III and IV - Proxy Statement for the Annual Meeting of Stockholders to
be held April 22, 2003.
Parts II and IV - Annual Report to Stockholders for the Year Ended December 31,
2002.
DNB FINANCIAL CORPORATION
Table of Contents
Page
_______________________________________________________________________________________________________________
Part I
------
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
-------
Item 5. Market for Registrant's Common Equity and Related 11
Stockholder Matters
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 7a.Quantitative and Qualitative Disclosures About Market Risk 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants 11
on Accounting and Financial Disclosure
Part III
--------
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 11
Item 12. Security Ownership of Certain Beneficial Owners 12
and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions 12
Item 14. Controls and procedures 12
Part IV
-------
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 13
Signatures 15
Certifications 16
2
DNB FINANCIAL CORPORATION
FORM 10-K
Part I
Item 1. Business
General
-------
DNB Financial Corporation (the "Registrant"), a Pennsylvania business
corporation, is a bank holding company registered with and supervised by the
Board of Governors of the Federal Reserve System (Federal Reserve Board).
Registrant was incorporated on October 28, 1982 and commenced operations on July
1, 1983 upon consummation of the acquisition of all of the outstanding stock of
Downingtown National Bank (the "Bank"). Since commencing operations,
Registrant's business has consisted primarily of managing and supervising the
Bank, and its principal source of income has been dividends paid by the Bank.
Registrant has two wholly-owned subsidiaries, the Bank and DNB Capital Trust I
("the Trust"). At December 31, 2002, Registrant had total consolidated assets,
total liabilities and stockholders' equity of $384.4 million, $358.2 million,
and $26.2 million, respectively.
The Bank was organized in 1861. The Bank is a national banking association
that is a member of the Federal Reserve System, the deposits of which are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a
full service commercial bank providing a wide range of services to individuals
and small to medium sized businesses in its southeastern Pennsylvania market
area, including accepting time, demand, and savings deposits and making secured
and unsecured commercial, real estate and consumer loans. In addition, the Bank
has one limited service branch and a full-service Wealth Management Group - DNB
Advisors. The Bank's subsidiary, Downco, Inc. was incorporated in December, 1995
for the purpose of acquiring and holding other real estate owned acquired
through foreclosure or deed in lieu of foreclosure and now owns certain
Bank-occupied real estate. The Bank's financial subsidiary, DNB Financial
Services, Inc., is a Pennsylvania licensed insurance agency.
In July 2001, DNB issued $5 million of floating rate (6 month Libor plus
3.75%) junior subordinated debentures (the "debentures") to DNB Capital Trust I
(the "Trust"), a Delaware business trust, in which DNB owns all of the common
equity. The debentures are the sole asset of the Trust. The Trust issued $5
million preferred securities to investors. 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.
The Bank's legal headquarters are located at 4 Brandywine Avenue,
Downingtown, Pennsylvania. As of December 31, 2002, the Bank had total assets of
$381.4 million, total deposits of $287.8 million and total stockholders' equity
of $28.4 million. The Bank's business is not seasonal in nature. The FDIC, to
the extent provided by law, insures its deposits. At December 31, 2002, the Bank
had 110 full-time employees and 7 part-time employees.
The Bank derives its income principally from interest charged on loans and,
to a lesser extent, interest earned on investments and fees received in
connection with the origination of loans and for other services. The Bank's
principal expenses are interest expense on deposits and borrowings and operating
expenses. Funds for activities are provided principally by operating revenues,
deposit growth and the repayment of outstanding loans.
3
Competition - Bank
------------------
The Bank encounters vigorous competition from a number of sources,
including other commercial banks, thrift institutions, other financial
institutions and financial intermediaries. In addition to commercial banks,
Federal and state savings and loan associations, savings banks, credit unions
and industrial savings banks actively compete in the Bank's market area to
provide a wide variety of banking services. Mortgage banking firms, real estate
investment trusts, finance companies, insurance companies, leasing companies and
brokerage companies, financial affiliates of industrial companies and certain
government agencies provide additional competition for loans and for certain
financial services. The Bank also competes for interest-bearing funds with a
number of other financial intermediaries which offer a diverse range of
investment alternatives, including brokerage firms and mutual fund companies.
Supervision and Regulation - Registrant
Federal Banking Laws
--------------------
The Registrant is subject to a number of complex Federal banking laws ---
most notably the provisions of the Bank Holding Company Act of 1956, as amended
("Bank Holding Company Act") and the Change in Bank Control Act of 1978 ("Change
in Control Act"), and to supervision by the Federal Reserve Board.
Bank Holding Company Act - Financial Holding Companies
------------------------------------------------------
The Bank Holding Company Act requires a "company" (including the
Registrant) to secure the prior approval of the Federal Reserve Board before it
owns or controls, directly or indirectly, more than five percent (5%) of the
voting shares or substantially all of the assets of any bank. It also prohibits
acquisition by any "company" (including the Registrant) of more than five
percent (5%) of the voting shares of, or interest in, or all or substantially
all of the assets of, any bank located outside of the state in which a current
bank subsidiary is located unless such acquisition is specifically authorized by
laws of the state in which such bank is located. A "bank holding company"
(including the Registrant) is prohibited from engaging in or acquiring direct or
indirect control of more than five percent (5%) of the voting shares of any
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
making this determination, the Federal Reserve Board considers whether the
performance of these activities by a bank holding company would offer benefits
to the public that outweigh possible adverse effects. Applications under the
Bank Holding Company Act and the Change in Control Act are subject to review,
based upon the record of compliance of the applicant with the Community
Reinvestment Act of 1977 ("CRA"). See further discussion below.
The Registrant is required to file an annual report with the Federal
Reserve Board and any additional information that the Federal Reserve Board may
require pursuant to the Bank Holding Company Act. The Federal Reserve Board may
also make examinations of the Registrant and any or all of its subsidiaries.
Further, under Section 106 of the 1970 amendments to the Bank Holding Company
Act and the Federal Reserve Board's regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or provision of credit or provision of
any property or services. The so-called "anti-tie-in" provisions state generally
that a bank may not extend credit, lease, sell property or furnish any service
to a customer on the condition that the customer provide additional credit or
service to the bank, to its bank holding company or to any other subsidiary of
its bank holding company or on the condition that the customer not obtain other
credit or service from a competitor of the bank, its bank holding company or any
subsidiary of its bank holding company.
Permitted Non-Banking Activities. The Federal Reserve Board permits bank
holding companies to engage in non-banking activities so closely related to
banking or managing or controlling banks as to be a proper incident thereto. A
number of activities are authorized by Federal Reserve Board regulation, while
other activities require prior Federal Reserve Board approval. The
4
types of permissible activities are subject to change by the Federal Reserve
Board. Recent revisions to the Bank Holding Company Act contained in the Federal
Gramm-Leach Bliley Act of 1999 permit certain eligible bank holding companies to
qualify as "financial holding companies" and thereupon engage in a wider variety
of financial services such as securities and insurance activities.
Gramm-Leach Bliley Act of 1999 ("GLB"). This law repeals certain
restrictions on bank and securities firm affiliations, and allows bank holding
companies to elect to be treated as a "financial holding company" that can
engage in approved "financial activities," including insurance, securities
underwriting and merchant banking. Banks without holding companies can engage in
many of these new financial activities through a "financial subsidiary." The law
also mandates functional regulation of bank securities activities. Banks'
exemption from broker-dealer regulation would be limited to, for example, trust,
safekeeping, custodian, shareholder and employee benefit plans, sweep accounts,
private placements (under certain conditions), self-directed IRAs, third party
networking arrangements to offer brokerage services to bank customers, and the
like. It also requires banks that advise mutual funds to register as investment
advisers. The legislation provides for state regulation of insurance, subject to
certain specified state preemption standards. It establishes which insurance
products banks and bank subsidiaries may provide as principal or underwriter,
and prohibits bank underwriting of title insurance, but also preempts state laws
interfering with affiliations. GLB prohibits approval of new de novo thrift
charter applications by commercial entities and limits sales of existing
so-called "unitary" thrifts to commercial entities. The law bars banks, savings
and loans, credit unions, securities firms and insurance companies, as well as
other "financial institutions," from disclosing customer account numbers or
access codes to unaffiliated third parties for telemarketing or other direct
marketing purposes, and enables customers of financial institutions to "opt out"
of having their personal financial information shared with unaffiliated third
parties, subject to exceptions related to the processing of customer
transactions and joint financial services marketing arrangements with third
parties, as long as the institution discloses the activity to its customers and
requires the third party to keep the information confidential. It requires
policies on privacy and disclosure of information to be disclosed annually,
requires federal regulators to adopt comprehensive regulations for ensuring the
security and confidentiality of consumers' personal information, and allows
state laws to five consumers greater privacy protections. The GLB is likely to
increase the competition the Bank faces, and this increased competition is
likely to come from a wider variety of non-banking competitors as well as banks.
Change in Bank Control Act
--------------------------
Under the Change in Control Act, no person, acting directly or indirectly
or through or in concert with one or more other persons, may acquire "control"
of any Federally insured depository institution unless the appropriate Federal
banking agency has been given 60 days prior written notice of the proposed
acquisition and within that period has not issued a notice disapproving of the
proposed acquisition or has issued written notice of its intent not to
disapprove the action. The period for the agency's disapproval may be extended
by the agency. Upon receiving such notice, the Federal agency is required to
provide a copy to the appropriate state regulatory agency, if the institution of
which control is to be acquired is state chartered, and the Federal agency is
obligated to give due consideration to the views and recommendations of the
state agency. Upon receiving a notice, the Federal agency is also required to
conduct an investigation of each person involved in the proposed acquisition.
Notice of such proposal is to be published and public comment solicited thereon.
A proposal may be disapproved by the Federal agency if the proposal would have
anticompetitive effects, if the proposal would jeopardize the financial
stability of the institution to be acquired or prejudice the interests of its
depositors, if the competence, experience or integrity of any acquiring person
or proposed management personnel indicates that it would not be in the interest
of depositors or the public to permit such person to control the institution, if
any acquiring person fails to furnish the Federal agency with all information
required by the agency, or if the Federal agency determines that the proposed
transaction would result in an adverse effect on a deposit insurance fund. In
addition, the Change in Control Act requires that, whenever any Federally
insured depository institution makes a loan or loans secured, or to be secured,
by 25% or more of the outstanding voting stock of a Federally insured depository
institution, the president or chief executive officer of the lending bank must
promptly report such fact to the appropriate Federal banking agency regulating
the institution whose stock secures the loan or loans.
5
Pennsylvania Banking Laws
-------------------------
Under the Pennsylvania Banking Code of 1965, as amended ("PA Code"), the
Registrant is permitted to control an unlimited number of banks, subject to
prior approval of the Federal Reserve Board as more fully described above. The
PA Code authorizes reciprocal interstate banking without any geographic
limitation. Reciprocity between states exists when a foreign state's law
authorizes Pennsylvania bank holding companies to acquire banks or bank holding
companies located in that state on terms and conditions substantially no more
restrictive than those applicable to such an acquisition by a bank holding
company located in that state. Interstate ownership of banks in Pennsylvania
with banks in Delaware, Maryland, New Jersey, Ohio, New York and other states,
is currently authorized. However, state laws still restrict de novo formations
of branches in other states. Pennsylvania law also provides Pennsylvania state
chartered institutions elective parity with the power of national banks, federal
thrifts, and state-chartered institutions in other states as authorized by the
Federal Deposit Insurance Corporation ("Competing Institutions"). In some cases,
this may give state chartered institutions broader powers than national banks
such as the Bank, and may increase competition the Bank faces from other banking
institutions.
Environmental Laws
------------------
The Registrant, the Bank and the Bank's customers are subject in the course
of their activities to a growing number of Federal, state and local
environmental laws and regulations. Neither the Registrant nor the Bank
anticipates that compliance with environmental laws and regulations will have
any material effect on capital expenditures, earnings, or on its competitive
positions.
Supervision and Regulation - Bank
The operations of the Bank are subject to Federal and State statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits are insured by
the FDIC. Bank operations are also subject to regulations of the Office of the
Comptroller of the Currency ("OCC"), the Federal Reserve Board and the FDIC.
The primary supervisory authority of the Bank is the OCC, who regularly
examines the Bank. The OCC has the authority to prevent a national bank from
engaging in an unsafe or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among other things,
the scope of a bank's business, the investments a bank may make, the reserves
against deposits a bank must maintain, loans a bank makes and collateral it
takes, the activities of a bank with respect to mergers and consolidations and
the establishment of branches. All nationally and state-chartered banks in
Pennsylvania are permitted to maintain branch offices in any county of the
state. National bank branches may be established only after approval by the OCC.
It is the general policy of the OCC to approve applications to establish and
operate domestic branches, including ATMs and other automated devices that take
deposits, provided that approval would not violate applicable Federal or state
laws regarding the establishment of such branches. The OCC reserves the right to
deny an application or grant approval subject to conditions if (1) there are
significant supervisory concerns with respect to the applicant or affiliated
organizations, (2) in accordance with CRA, the applicant's record of helping
meet the credit needs of its entire community, including low and moderate income
neighborhoods, consistent with safe and sound operation, is less than
satisfactory, or (3) any financial or other business arrangement, direct or
indirect, involving the proposed branch or device and bank "insiders"
(directors, officers, employees and 10%-or-greater shareholders) involves terms
and conditions more favorable to the insiders than would be available in a
comparable transaction with unrelated parties.
The Bank, as a subsidiary of a bank holding company, is subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or its
6
subsidiaries, on investments in the stock or other securities of the bank
holding company or its subsidiaries and on taking such stock or securities as
collateral for loans. The Federal Reserve Act and Federal Reserve Board
regulations also place certain limitations and reporting requirements on
extensions of credit by a bank to principal shareholders of its parent holding
company, among others, and to related interests of such principal shareholders.
In addition, such legislation and regulations may affect the terms upon which
any person becoming a principal shareholder of a holding company may obtain
credit from banks with which the subsidiary bank maintains a correspondent
relationship.
Prompt Corrective Action - Federal banking law mandates certain "prompt
corrective actions" which Federal banking agencies are required to take, and
certain actions which they have discretion to take, based upon the capital
category into which a Federally regulated depository institution falls.
Regulations have been adopted by the Federal bank regulatory agencies setting
forth detailed procedures and criteria for implementing prompt corrective action
in the case of any institution which is not adequately capitalized. Under the
rules, an institution will be deemed to be "adequately capitalized" or better if
it exceeds the minimum Federal regulatory capital requirements. However, it will
be deemed "undercapitalized" if it fails to meet the minimum capital
requirements, "significantly undercapitalized" if it has a total risk-based
capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is
less than 3.0%, or a leverage ratio that is less than 3.0%, and "critically
undercapitalized" if the institution has a ratio of tangible equity to total
assets that is equal to or less than 2.0%. The rules require an undercapitalized
institution to file a written capital restoration plan, along with a performance
guaranty by its holding company or a third party. In addition, an
undercapitalized institution becomes subject to certain automatic restrictions
including a prohibition on the payment of dividends, a limitation on asset
growth and expansion, and in certain cases, a limitation on the payment of
bonuses or raises to senior executive officers, and a prohibition on the payment
of certain "management fees" to any "controlling person". Institutions that are
classified as undercapitalized are also subject to certain additional
supervisory actions, including increased reporting burdens and regulatory
monitoring, a limitation on the institution's ability to make acquisitions, open
new branch offices, or engage in new lines of business, obligations to raise
additional capital, restrictions on transactions with affiliates, and
restrictions on interest rates paid by the institution on deposits. In certain
cases, bank regulatory agencies may require replacement of senior executive
officers or directors, or sale of the institution to a willing purchaser. If an
institution is deemed to be "critically undercapitalized" and continues in that
category for four quarters, the statute requires, with certain narrowly limited
exceptions, that the institution be placed in receivership.
Under the Federal Deposit Insurance Act, the OCC possesses the power to
prohibit institutions regulated by it, such as the Bank, from engaging in any
activity that would be an unsafe and unsound banking practice and in violation
of the law. Moreover, Federal law enactments have expanded the circumstances
under which officers or directors of a bank may be removed by the institution's
Federal supervisory agency; restricted and further regulated lending by a bank
to its executive officers, directors, principal shareholders or related
interests thereof; and restricted management personnel of a bank from serving as
directors or in other management positions with certain depository institutions
whose assets exceed a specified amount or which have an office within a
specified geographic area; and restricted management personnel from borrowing
from another institution that has a correspondent relationship with their bank.
Capital Rules. Pursuant to The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the laws it amended, the Federal banking
agencies have issued certain "risk-based capital" guidelines, which supplemented
existing capital requirements. In addition, the OCC imposes certain "leverage"
requirements on national banks such as the Bank. Banking regulators have
authority to require higher minimum capital ratios for an individual bank or
bank holding company in view of its circumstances.
The risk-based guidelines require all banks and bank holding companies to
maintain two "risk-weighted assets" ratios. The first is a minimum ratio of
total capital ("Tier 1" and "Tier 2" capital) to risk-weighted assets equal to
8.00%; the second is a minimum ratio of "Tier 1" capital to risk-weighted assets
equal to 4.00%. Assets are assigned to five risk categories, with higher levels
of
7
capital being required for the categories perceived as representing greater
risk. In making the calculation, certain intangible assets must be deducted from
the capital base. The risk-based capital rules are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks
and bank holding companies and to minimize disincentives for holding liquid
assets.
The risk-based capital rules also account for interest rate risk.
Institutions with interest rate risk exposure above a normal level, would be
required to hold extra capital in proportion to that risk. A bank's exposure to
declines in the economic value of its capital due to changes in interest rates
is a factor that the banking agencies will consider in evaluating a bank's
capital adequacy. The rule does not codify an explicit minimum capital charge
for interest rate risk. The Bank currently monitors and manages its assets and
liabilities for interest rate risk, and management believes that the interest
rate risk rules which have been implemented and proposed will not materially
adversely affect the Bank's operations.
The OCC's "leverage" ratio rules require national banks which are rated the
highest by the OCC in the composite areas of capital, asset quality, management,
earnings and liquidity to maintain a ratio of "Tier 1" capital to "adjusted
total assets" (equal to the bank's average total assets as stated in its most
recent quarterly Call Report filed with the OCC, minus end-of-quarter intangible
assets that are deducted from Tier 1 capital) of not less than 3.00%. For banks
which are not the most highly rated, the minimum "leverage" ratio will range
from 4.00% to 5.00%, or higher at the discretion of the OCC, and is required to
be at a level commensurate with the nature of the riskiness of the bank's
condition and activities.
For purposes of the capital requirements, "Tier 1" or "core" capital is
defined to include common stockholders' equity and certain noncumulative
perpetual preferred stock and related surplus. "Tier 2" or "qualifying
supplementary" capital is defined to include a bank's allowance for loan and
lease losses up to 1.25% of risk-weighted assets, plus certain types of
preferred stock and related surplus, certain "hybrid capital instruments" and
certain term subordinated debt instruments.
On the basis of an analysis of the rules and the projected composition of
the Registrant's consolidated assets and the risks presented by the Bank's
activities, it is not expected that the foregoing capital rules will have a
material effect on the Registrant's business and capital plans.
Deposit Insurance Assessments. All Federally insured depository
institutions pay special assessments toward the funding of interest payments on
FICO bonds which were issued in 1989 to fund the savings and loan bailout. The
special assessments are calculated on a deposit-by-deposit basis and differs
depending upon whether a deposit is insured by SAIF or BIF. Currently, the
special assessment rates are 6.1 basis points on all SAIF-assessable deposits,
and 20% of that rate, or approximately 1.2 basis points, on all BIF-assessable
deposits, regardless of whether an institution is a "bank", a "savings
association". All assessable deposits at all institutions are assessed at the
same rates in order to pay FICO bond interest.
The FDIC sets deposit insurance assessment rates on a semiannual basis. The
FDIC has authority to reduce the assessment rates whenever the ratio of its
reserves to insured deposits is equal to or greater than 1.25%, and to increase
deposit insurance assessments whenever that ratio is less than 1.25%.
An institution's semiannual deposit insurance assessment is computed
primarily by multiplying its "average assessment base" (generally, total
insurable domestic deposits) for the prior semiannual period by one-half the
annual assessment rate applicable to that institution depending upon its risk
category, which is based principally on two measures of risk. These measures
involve capital and supervisory factors.
For the capital measure, institutions are assigned semiannually to one of
three capital groups according to their levels of supervisory capital as
reported on their Call Reports: "well capitalized" (group 1), "adequately
capitalized" (group 2) and "undercapitalized" (group 3). The capital ratio
standards for classifying an institution in one of these three groups are total
risk-based capital ratio
8
(10 percent or greater for group 1, and between 8 and 10 percent for group 2),
the Tier 1 risk-based capital ratio (6 percent or greater for group 1, and
between 4 and 6 percent for group 2), and the leverage capital ratio (5 percent
or greater for group 1, between 4 and 5 percent for group 2). Management
believes that the Bank has met the definition of "well capitalized" for
regulatory purposes on December 31, 1999 and thereafter.
Within each capital group, institutions are assigned to one of three
supervisory risk subgroups --subgroup A, B, or C, depending upon an assessment
of the institution's perceived risk based upon the results of its most recent
examination and other information available to regulators. Subgroup A will
consist of financially sound institutions with only a few minor weaknesses.
Subgroup B will consist of institutions that demonstrate weaknesses, which, if
not corrected, could result in significant deterioration of the institution and
increased risk of loss to the BIF. Subgroup C will consist of institutions that
pose a substantial probability of loss to the deposit insurance fund unless
effective corrective action is taken. Thus, there are nine possible
classifications to which varying assessment rates are applicable. The regulation
generally prohibits institutions from disclosing their subgroup assignments or
assessment risk classifications without FDIC authorization.
The following table sets forth the current BIF assessment rates by capital
group and supervisory risk subgroup (with no minimum assessment amount):
Supervisory subgroup
Capital Group A B C
------------- --------------------------
1 0 3 17
2 3 10 24
3 10 24 27
In addition to deposit insurance assessments, banks are subject to
assessments to pay the interest on Financing Corporation bonds. The Financing
Corporation was created by Congress to issue bonds to finance the resolution of
failed thrift institutions. The FDIC sets the Financing Corporation assessment
rate every quarter. The Financing Corporation assessment for us (and all other
banks) for the first quarter of 2003 was an annual rate of $.0168 for each $100
of deposits.
Interstate Banking - Federal law permits interstate bank mergers and
acquisitions. Limited branch purchases are still subject to state laws.
Pennsylvania law permits out-of-state banking institutions to establish branches
in Pennsylvania with the approval of the Pennsylvania Banking Department,
provided the law of the state where the banking institution is located would
permit a Pennsylvania banking institution to establish and maintain a branch in
that state on substantially similar terms and conditions. It also permits
Pennsylvania banking institutions to maintain branches in other states. Bank
management anticipates that interstate banking will continue to increase
competitive pressures in the Bank's market by permitting entry of additional
competitors, but management is of the opinion that this will not have a material
impact upon the anticipated results of operations of the Bank.
Bank Secrecy Act - Under the Bank Secrecy Act ("BSA"), the Bank is required
to report to the Internal Revenue Service, currency transactions of more than
$10,000 or multiple transactions of which the Bank is aware in any one day that
aggregate in excess of $10,000. Civil and criminal penalties are provided under
the BSA for failure to file a required report, for failure to supply information
required by the BSA or for filing a false or fraudulent report.
Community Reinvestment Act - Under the Community Reinvestment Act of 1977
("CRA"), the record of a bank holding company and its subsidiary banks must be
considered by the appropriate Federal banking agencies, including the Federal
Reserve and the OCC, in reviewing and approving or disapproving a variety of
regulatory applications including approval of a branch or other deposit
facility, office relocation, a merger and certain acquisitions of bank shares.
Federal banking agencies have recently demonstrated an increased readiness to
deny applications based on unsatisfactory CRA performance. The OCC is required
to assess the record of the Bank to determine
9
if it is meeting the credit needs of the community (including low and moderate
neighborhoods) which it serves. FIRREA amended the CRA to require, among other
things, that the OCC make publicly available an evaluation of the Bank's record
of meeting the credit needs of its entire community including low- and
moderate-income neighborhoods. This evaluation includes a descriptive rating
(outstanding, satisfactory, needs to improve, or substantial noncompliance) and
a statement describing the basis for the rating.
Other Laws and Regulations - The Bank is subject to a variety of consumer
protection laws, including the Truth in Lending Act, the Truth in Savings Act
adopted as part of the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the Equal Credit Opportunity Act, the Home Mortgage Disclosure
Act, the Electronic Funds Transfer Act, the Real Estate Settlement Procedures
Act and the regulations adopted thereunder. In the aggregate, compliance with
these consumer protection laws and regulations involves substantial expense and
administrative time on the part of the Bank and the Registrant.
Legislation and Regulatory Changes - From time to time, legislation is
enacted which has the effect of increasing the cost of doing business, limiting
or expanding permissible activities and/or affecting the competitive balance
between banks and other financial institutions. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently made in Congress, and
before various bank regulatory agencies. No prediction can be made as to the
likelihood of any major changes or the impact such changes might have on the
Registrant and its subsidiary Bank.
Effect of Government Monetary Policies - The earnings of the Registrant are
and will be affected by domestic economic conditions and the monetary and fiscal
policies of the United States Government and its agencies (particularly the
Federal Reserve Board). The monetary policies of the Federal Reserve Board have
had and will likely continue to have, an important impact on the operating
results of commercial banks through its power to implement national monetary
policy in order, among other things, to curb inflation or combat a recession.
The Federal Reserve Board has a major effect upon the levels of bank loans,
investments and deposits through its open market operations in United States
Government securities and through its regulation of, among other things, the
discount rate on borrowing of member banks and the reserve requirements against
member bank deposits. It is not possible to predict the nature and impact of
future changes in monetary and fiscal policies.
Item 2. Properties
The main office of the Bank is located at 4 Brandywine Avenue, Downingtown,
Pennsylvania 19335. The Registrant's registered office is also at this location.
The Registrant pays no rent or other form of consideration for the use of the
Bank's main office as its principal executive office. The Bank also has an
operations center located at 104-106 Brandywine Avenue, Downingtown. With the
exception of the West Goshen office, Exton office and a limited service office
at Tel Hai Retirement Community, all of which are leased, the Bank owns all of
its existing branches as described below which had a net book value of $5.4
million including leasehold improvements at December 31, 2002.
The bank has nine full service offices located in Chester County,
Pennsylvania. In addition to the Main Office discussed above, 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.
10
Item 3. Legal Proceedings
DNB is a party to a number of lawsuits arising in the ordinary course of
business. While any litigation causes an element of uncertainty, management is
of the opinion that the liability, if any, resulting from the actions, will not
have a material effect on the accompanying financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required herein is incorporated by reference in the
Registrant's Annual Report to Stockholders ("Annual Report") for the fiscal year
ended December 31, 2002 at page 18 filed as Exhibit 13.
Item 6. Selected Financial Data
The information required herein is incorporated by reference in the
Registrant's Annual Report (Financial Section) for the year ended December 31,
2002 at page 1 filed as Exhibit 13.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required herein is incorporated by reference in the
Registrant's Annual Report (Financial Section) for the year ended December 31,
2002 from pages 2 to 18 filed as Exhibit 13.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated herein by reference
from pages 13 to 15 of Registrant's 2002 Annual Report to Shareholders
(Financial Section) attached to this filing as Exhibit 13.
Item 8. Financial Statements and Supplementary Data
The information required herein is incorporated by reference in the
Registrant's Annual Report (Financial Section) for the year ended December 31,
2002 from pages 19 to 39 filed as Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference in the
Registrant's Proxy Statement from pages 3 to 6 filed as Exhibit 22.
Item 11. Executive Compensation
The information required herein is incorporated by reference in the
Registrant's Proxy Statement from pages 7 to 11 filed as Exhibit 22.
11
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein is incorporated by reference in the
Registrant's Proxy Statement at page 2 and 9, filed as Exhibit 22.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference in the
Registrant's Proxy Statement at page 12, filed as Exhibit 22.
Item 14. Controls and Procedures
The principal executive officer and principal financial officer of Registrant
have submitted the following report dated March 21, 2003 to the Registrant's
Audit Committee:
"Management of DNB Financial Corporation and its subsidiaries ("DNB") is
responsible for the preparation, integrity and fair presentation of its
published financial reports. These reports include consolidated financial
statements that have been prepared in accordance with generally accepted
accounting principles in the United States of America, using management's best
judgment and all information available.
"The consolidated financial statements of DNB have been audited by KPMG LLP,
independent public accountants. Their accompanying report is based upon an audit
conducted in accordance with standards established by the American Institute of
Certified Public Accountants, including the related review of internal
accounting controls and financial reporting matters. The Audit Committee of
DNB's Board of Directors, which consists solely of outside directors, meets at
least quarterly with the independent auditors, DNB's internal auditor and
representatives of management to discuss, among other things, accounting and
financial reporting matters.
"Management of DNB is responsible for establishing and maintaining disclosure
controls and procedures to ensure that information required to be disclosed in
reports filed or submitted under Securities Exchange Act of 1934 (the "Exchange
Act") is recorded, processed, summarized and reported, within the time periods
specified in the Commission's rules and forms. In addition to disclosure
controls and procedures, management of DNB is responsible for establishing and
maintaining an effective internal control structure, which provides reasonable,
but not absolute, assurance of the safeguarding of assets against unauthorized
acquisition, use or disposition. DNB maintains systems of controls that its
management believes are reasonably designed to provide management with timely
and accurate information about the operations of the DNB. This process is
supported by DNB's internal auditors along with the ongoing appraisal of
controls by the Audit Committee. Both DNB's independent auditors and its
internal auditors directly provide reports on significant matters to the Audit
Committee. DNB's independent auditors, its internal auditors and the Audit
Management Committee have free access to each other. Disclosure controls and
procedures, internal controls, systems and corporate-wide processes and
procedures are continually evaluated and enhanced.
"Management of DNB evaluated its disclosure controls and procedures as of
December 31, 2002. Based on this evaluation, the Principal Executive Officer and
Principal Financial Officer each concludes that as of December 31, 2002, DNB
maintained effective disclosure controls and procedures in all material
respects, including those to ensure that information required to be disclosed in
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms, and is accumulated and communicated to management, including
the Principal Executive Officer and the Principal Financial Officer, as
appropriate to allow for timely disclosure. There have been no significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to our most recent evaluation."
12
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) Documents filed as part of this report
(1.) The Annual Report (including the Financial Section) to
Stockholders of the Registrant for the year ended December 31,
2002 attached hereto as Exhibit 13 and incorporated herein by
reference.
(2.) All schedules normally required by Form 10-K are omitted because
they are not applicable or the required information is shown in
the financial statements or notes thereto contained in the Annual
Report filed as part of this report.
(3.) Exhibits, pursuant to Item 601 of Regulation S-K.
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
-------------------------- ----------------------
3 (a) Amended and Restated Articles of Incorporation, as amended
effective June 15, 2001, filed on August 14, 2001, as Item
6(a) to Form 10Q (No. 0-16667) and hereby incorporated by
reference.
(b) By-laws of the Registrant as amended December 19, 2001 incor-
porated by reference.
10 (a) Employment Agreement between Downingtown National Bank and
Henry F. Thorne dated December 31, 1996, filed on March
26, 1999 at Item 10.1 to Form 10-K for the fiscal year
ended December 31, 1999, and hereby incorporated by
reference.
(b) Form of Change of Control Agreements (i) dated May 5, 1998
between DNB Financial Corporation and Downingtown National
Bank and the following executive officers: Richard L.
Bergey; Ronald K. Dankanich; Eileen M. Knott; Bruce E.
Moroney and Joseph M. Stauffer, and (ii) dated July 18,
2000 and February 19, 2002 between DNB Financial
Corporation and Downingtown National Bank and Charles E.
Bradford and Kristen LaDow, respectively, each in the form
filed on March 26, 1999 at Item 10.2 to Form 10-K for the
fiscal year ended December 31, 1999, and hereby
incorporated by reference.
(c) Stock Option Plan of DNB Financial Corporation (as amended
and restated, effective as of April 27, 1999), filed on May
20, 1999 as Exhibit 4 to Registration Statement No.
33-93272, and incorporated herein by reference.
13
(d) Death Benefit Agreement between Downingtown National Bank
and Henry F. Thorne dated November 24, 1999 incorporated by
reference.
11 Statement of Computation of earnings per share, see
footnote #1 in Annual Report (Financial Section) of the
Registrant for the year ended December 31, 2002, attached
hereto as Exhibit 13 and incorporated herein by reference.
13 Annual Report to Stockholders for the year ended December
31, 2002, incorporated herein.
21 List of Subsidiaries
22 Proxy Statement for the Annual Meeting of Stockholders to
be held April 22, 2003, incorporated herein by reference.
23 Consent of KPMG LLP.
(B) Reports on Form 8-K
The Registrant filed the following Current Reports on Form 8-K during the
quarter ended December 31, 2002:
Date Item Reported
---- -------------
October 24, 2002 Item 7 - Third quarter earning release with summary financial information.
Item 9 - Regulation FD Disclosure - Sarbanes-Oxley Section 906 Certifications
November 14, 2002 Item 9 - Regulation FD Disclosure - Sarbanes-Oxley Section 906 Certifications
November 26, 2002 Item 7 - Announcement of cash dividend and stock dividend.
Item 9 - Regulation FD Disclosure - Sarbanes-Oxley Section 906 Certifications
(C) The exhibits required to be filed pursuant to this item are listed
above under Item 14(a)(3).
(D) Not Applicable
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 24, 2003
BY: /s/ Henry F. Thorne
------------------------------
Henry F. Thorne, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons and on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Henry F. Thorne March 24, 2003
- -----------------------------------------
Henry F. Thorne, President,
Chief Executive Officer and Director
/s/ Bruce E. Moroney March 24, 2003
- -----------------------------------------
Bruce E. Moroney
Chief Financial Officer
(Principal Accounting Officer)
/s/ Robert J. Charles March 24, 2003
- -----------------------------------------
Robert J. Charles
Chairman of the Board
/s/ Vernon J. Jameson March 24, 2003
- -----------------------------------------
Vernon J. Jameson
Vice-Chairman of the Board
/s/ Thomas R. Greenleaf March 24, 2003
- -----------------------------------------
Thomas R. Greenleaf
Director
/s/ William S. Latoff March 24, 2003
- -----------------------------------------
William S. Latoff
Director
/s/ Joseph G. Riper March 24, 2003
- -----------------------------------------
Joseph G. Riper
Director
/s/Louis N. Teti March 24, 2003
- -----------------------------------------
Louis N. Teti
Director
/s/James H. Thornton March 24, 2003
- -----------------------------------------
James H. Thornton
Director
15
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 annual report on Form 10-K of DNB Financial
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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 15-d14) for the registrant, and
we have:
o 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 annual report
is being prepared;
o 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 annual report (the "Evaluation Date"); and
o presented in this annual 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 the registrant's board of directors (or persons performing
the equivalent function):
o 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
o 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
annual 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
March 24, 2003
16
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 annual report on Form 10-K of DNB Financial
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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 15-d14) for the registrant, and
we have:
o 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 annual report
is being prepared;
o 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 annual report (the "Evaluation Date"); and
o presented in this annual 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 the registrant's board of directors (or persons performing
the equivalent function):
o 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
o 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
annual 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
March 24, 2003
17