Attached files

file filename
EX-32.1 - EX-32.1 - DNB FINANCIAL CORP /PA/c671-20150630xex321.htm
EX-31.2 - EX-31.2 - DNB FINANCIAL CORP /PA/c671-20150630xex312.htm
EX-32.2 - EX-32.2 - DNB FINANCIAL CORP /PA/c671-20150630xex322.htm
EX-31.1 - EX-31.1 - DNB FINANCIAL CORP /PA/c671-20150630xex311.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549

____________________

 

FORM 10-Q

 

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the quarterly period ended: June 30, 2015

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: 1-34242

DNB Financial Corporation

(Exact name of registrant as specified in its charter)

Pennsylvania                                       23-2222567

 

 

 

 

 

 

    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

   

 

 

 

Yes

 

No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

 

 

 

 

Yes

 

No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer

  

Accelerated filer

  

Non-accelerated filer    

 

Smaller reporting company

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

 

Yes 

 

No

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock ($1.00 Par Value)

(Class)

 

2,806,549 (Shares Outstanding as of August 10, 2015) 

1


 

 

 

 

 

DNB FINANCIAL CORPORATION AND SUBSIDIARY

 

 

INDEX

 

                                                                

 

 

 

 

 

 

 

 

PART  I - FINANCIAL INFORMATION

PAGE NO

 

 

 

 

ITEM 1.      

 

FINANCIAL STATEMENTS (Unaudited):

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

 

 

June 30, 2015 and December 31, 2014

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three and Six-Months Ended June 30,  2015 and 2014

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

 

 

 

 

 

Three and Six-Months Ended June 30, 2015 and 2014

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

Six Months Ended June 30, 2015 and 2014

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Six Months Ended June 30, 2015 and 2014

 

 

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

ITEM 2. 

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

30 

 

 

 

 

 

 

 

 

ITEM 3.      

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

47 

 

 

 

 

ITEM 4.      

 

CONTROLS AND PROCEDURES

48 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

48 

 

 

 

 

ITEM 1A.

 

RISK FACTORS

48 

 

 

 

 

ITEM 2.      

 

UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS

48 

 

 

 

 

ITEM 3.      

 

DEFAULTS UPON SENIOR SECURITIES

48 

 

 

 

 

ITEM 4.      

 

MINE SAFETY DISCLOSURES

48 

 

 

 

 

ITEM 5.      

 

OTHER INFORMATION

48 

 

 

 

 

ITEM 6.      

 

EXHIBITS

49 

 

 

 

 

SIGNATURES

50 

 

 

 

 

EXHIBIT INDEX

 

 

 

 

 

 

 

2


 

 

 

 

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DNB Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

(Dollars in thousands, except share and per share data)

 

2015

 

2014

Assets

 

 

 

 

Cash and due from banks

$

27,493 

$

12,504 

Federal Funds Sold

 

 -

 

 -

Cash and cash equivalents

 

27,493 

 

12,504 

Available-for-sale investment securities at fair value (amortized cost of $167,267 and $172,867)

 

166,485 

 

172,202 

Held-to-maturity investment securities (fair value of $65,374 and $60,099)

 

65,227 

 

59,454 

Total investment securities

 

231,712 

 

231,656 

Loans held for sale

 

 -

 

617 

Loans and leases

 

472,335 

 

455,603 

Allowance for credit losses

 

(5,108)

 

(4,906)

Net loans and leases

 

467,227 

 

450,697 

Restricted stock

 

2,864 

 

2,587 

Office property and equipment, net

 

6,629 

 

7,668 

Accrued interest receivable

 

2,388 

 

2,253 

Other real estate owned & other repossessed property

 

2,002 

 

901 

Bank owned life insurance (BOLI)

 

9,209 

 

9,098 

Core deposit intangible

 

74 

 

82 

Net deferred taxes

 

3,909 

 

3,446 

Other assets

 

2,436 

 

1,821 

Total assets 

$

755,943 

$

723,330 

Liabilities and Stockholders’ Equity

 

 

 

 

Liabilities

 

 

 

 

Non-interest-bearing deposits

$

122,642 

$

102,107 

Interest-bearing deposits:

 

 

 

 

NOW

 

209,606 

 

205,816 

Money market

 

145,283 

 

143,483 

Savings

 

73,461 

 

66,634 

Time

 

56,729 

 

76,805 

Brokered deposits

 

18,655 

 

10,238 

Total deposits 

 

626,376 

 

605,083 

Federal Home Loan Bank of Pittsburgh (FHLBP) advances

 

20,000 

 

20,000 

Repurchase agreements

 

28,211 

 

19,221 

Junior subordinated debentures

 

9,279 

 

9,279 

Subordinated debt

 

9,750 

 

 -

Other borrowings

 

485 

 

505 

Total borrowings

 

67,725 

 

49,005 

Accrued interest payable

 

355 

 

351 

Other liabilities

 

4,863 

 

4,983 

Total liabilities 

 

699,319 

 

659,422 

Stockholders’ Equity

 

 

 

 

Preferred stock, $10.00 par value;

 

 

 

 

1,000,000 shares authorized; $1,000 liquidation preference per share; 3,250 and 13,000 issued, respectively

 

3,250 

 

13,000 

Common stock, $1.00 par value;

 

 

 

 

10,000,000 shares authorized; 2,919,126 and 2,903,610 issued, respectively; 2,802,902 and 2,778,724 outstanding, respectively

 

2,956 

 

2,931 

Treasury stock, at cost; 116,224 and 124,886 shares, respectively

 

(2,143)

 

(2,301)

Surplus

 

35,041 

 

34,745 

Retained earnings

 

19,194 

 

17,132 

Accumulated other comprehensive loss

 

(1,674)

 

(1,599)

Total stockholders’ equity 

 

56,624 

 

63,908 

Total liabilities and stockholders’ equity 

$

755,943 

$

723,330 

See accompanying notes to unaudited consolidated financial statements.

3


 

 

DNB Financial Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

Six Months Ended

 

 

June 30,

June 30,

(Dollars in thousands, except per share data)

 

2015

 

2014

 

2015

 

2014

Interest Income:

 

 

 

 

 

 

 

 

Interest and fees on loans and leases

$

5,011 

$

4,857 

$

9,923 

$

9,662 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

Taxable

 

759 

 

739 

 

1,494 

 

1,449 

Exempt from federal taxes

 

346 

 

275 

 

688 

 

551 

Interest on cash and cash equivalents

 

15 

 

 

22 

 

17 

Total interest and dividend income

 

6,131 

 

5,877 

 

12,127 

 

11,679 

Interest Expense:

 

 

 

 

 

 

 

 

Interest on NOW, money market and savings

 

153 

 

132 

 

302 

 

287 

Interest on time deposits

 

98 

 

194 

 

207 

 

417 

Interest in brokered deposits

 

26 

 

 

50 

 

Interest on FHLB advances

 

197 

 

149 

 

391 

 

295 

Interest on repurchase agreements

 

10 

 

 

19 

 

19 

Interest on junior subordinated debentures

 

73 

 

73 

 

147 

 

146 

Interest on subordinated debt

 

104 

 

 -

 

134 

 

 -

Interest on other borrowings

 

17 

 

19 

 

34 

 

37 

Total interest expense

 

678 

 

581 

 

1,284 

 

1,206 

Net interest income

 

5,453 

 

5,296 

 

10,843 

 

10,473 

Provision for credit losses

 

415 

 

255 

 

715 

 

630 

Net interest income after provision for credit losses

 

5,038 

 

5,041 

 

10,128 

 

9,843 

Non-interest Income:

 

 

 

 

 

 

 

 

Service charges

 

272 

 

302 

 

568 

 

632 

Wealth management

 

422 

 

325 

 

774 

 

636 

Mortgage banking

 

51 

 

 -

 

89 

 

 -

Increase in cash surrender value of BOLI

 

56 

 

57 

 

111 

 

115 

Gain on sale of investment securities, net

 

11 

 

102 

 

64 

 

337 

Gain on sale of loans

 

185 

 

 -

 

416 

 

 -

Other fees

 

341 

 

328 

 

651 

 

613 

Total non-interest income

 

1,338 

 

1,114 

 

2,673 

 

2,333 

Non-interest Expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

2,638 

 

2,472 

 

5,282 

 

4,975 

Furniture and equipment

 

303 

 

332 

 

605 

 

663 

Occupancy

 

466 

 

521 

 

1,069 

 

1,140 

Professional and consulting

 

261 

 

306 

 

589 

 

624 

Advertising and marketing

 

170 

 

196 

 

339 

 

351 

Printing and supplies

 

39 

 

48 

 

87 

 

87 

FDIC insurance

 

124 

 

120 

 

247 

 

232 

PA shares tax

 

151 

 

150 

 

301 

 

300 

Telecommunications

 

60 

 

63 

 

121 

 

120 

Postage

 

22 

 

22 

 

45 

 

42 

Loss on sale or write down of OREO, net

 

 -

 

 

 -

 

Other expenses

 

490 

 

443 

 

863 

 

827 

Total non-interest expense

 

4,724 

 

4,674 

 

9,548 

 

9,368 

Income before income tax expense

 

1,652 

 

1,481 

 

3,253 

 

2,808 

Income tax expense

 

417 

 

361 

 

766 

 

684 

Net income

$

1,235 

$

1,120 

$

2,487 

$

2,124 

Preferred stock dividends and accretion of discount

 

 

33 

 

34 

 

70 

Net income available to Common Shareholders

$

1,227 

$

1,087 

$

2,453 

$

2,054 

Earnings per common share:

 

 

 

 

 

 

 

 

Basic

$

0.44 

$

0.39 

$

0.88 

$

0.74 

Diluted

$

0.43 

$

0.38 

$

0.86 

$

0.73 

Cash dividends per common share

$

0.07 

$

0.07 

$

0.14 

$

0.14 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 Basic

 

2,802,292 

 

2,763,079 

 

2,794,283 

 

2,760,658 

 Diluted

 

2,847,638 

 

2,809,851 

 

2,840,380 

 

2,806,164 

See accompanying notes to unaudited consolidated financial statements

4


 

 

DNB Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(Dollars in thousands)

 

2015

 

2014

 

2015

 

2014

Net income

$

1,235 

$

1,120 

$

2,487 

$

2,124 

Other Comprehensive (Loss) Income:

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

 

 

 

 

 

 

 

Before tax amount

 

(1,140)

 

882 

 

(53)

 

2,024 

Tax effect

 

388 

 

(300)

 

18 

 

(688)

Net of tax

 

(752)

 

582 

 

(35)

 

1,336 

Accretion of discount on AFS to HTM reclassification(1)

 

 

 

 

 

 

 

 

Before tax amount

 

 

 

 

Tax effect(2)

 

 -

 

(1)

 

(1)

 

(2)

Net of tax

 

 

 

 

Less reclassification for gains included in net income

 

 

 

 

 

 

 

 

Before tax amount

 

(11)

 

(102)

 

(64)

 

(337)

Tax effect(2)

 

 

35 

 

21 

 

115 

Net of tax

 

(8)

 

(67)

 

(43)

 

(222)

Total other comprehensive (loss) income

 

(759)

 

516 

 

(75)

 

1,116 

Total comprehensive income

$

476 

$

1,636 

$

2,412 

$

3,240 

(1) Amounts are included in interest and dividends on investment securities in the consolidated statements of income.

 

 

 

 

(2) Amounts are included in income tax expense (benefit) in the consolidated statements of income.

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5


 

 

DNB Financial Corportation and Subsidiary

Consolidated Statements of Stockholders’ Equity (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

Preferred

Common

Treasury

 

Retained

Comprehensive

 

 

(Dollars in thousands)

Stock

Stock

Stock

Surplus

Earnings

Loss

Total

Balance at January 1, 2015

$

13,000 

$

2,931 

$

(2,301)

$

34,745 

$

17,132 

$

(1,599)

$

63,908 

Net income for six months ended June 30, 2015

 

 -

 

 -

 

 -

 

 -

 

2,487 

 

 -

 

2,487 

Other comprehensive loss

 

 -

 

 -

 

 -

 

 -

 

 -

 

(75)

 

(75)

Redemption of preferred stock (9,750 shares)

 

(9,750)

 

 -

 

 -

 

 -

 

 -

 

 -

 

(9,750)

Restricted stock compensation expense

 

 -

 

 

 -

 

156 

 

 -

 

 -

 

165 

Exercise of stock options (95,834 shares)

 

 -

 

16 

 

 -

 

247 

 

 -

 

 -

 

263 

Taxes on exercise of stock options

 

 -

 

 -

 

 -

 

(152)

 

 -

 

 -

 

(152)

Cash dividends - common ($0.14 per share)

 

 -

 

 -

 

 -

 

 -

 

(391)

 

 -

 

(391)

Cash dividends SBLF preferred

 

 -

 

 -

 

 -

 

 -

 

(34)

 

 -

 

(34)

Sale of treasury shares to 401(k) (5,855 shares)

 

 -

 

 -

 

107 

 

31 

 

 -

 

 -

 

138 

Sale of treasury shares to deferred comp. plan (2,807 shares)

 

 -

 

 -

 

51 

 

14 

 

 -

 

 -

 

65 

Balance at June 30, 2015

$

3,250 

$

2,956 

$

(2,143)

$

35,041 

$

19,194 

$

(1,674)

$

56,624 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

Preferred

Common

Treasury

 

 

Retained

Comprehensive

 

 

(Dollars in thousands)

Stock

Stock

Stock

Surplus

Earnings

Loss

Total

Balance at January 1, 2014

$

12,995 

$

2,910 

$

(2,629)

$

34,441 

$

13,239 

$

(2,373)

$

58,583 

Net income for six months ended June 30, 2014

 

 -

 

 -

 

 -

 

 -

 

2,124 

 

 -

 

2,124 

Other comprehensive income

 

 -

 

 -

 

 -

 

 -

 

 -

 

1,116 

 

1,116 

SBLF issuance costs accretion

 

 

 -

 

 -

 

 -

 

(5)

 

 -

 

 -

Restricted stock compensation expense

 

 -

 

 

 -

 

98 

 

 -

 

 -

 

105 

Exercise of stock options (500 shares)

 

 -

 

 -

 

 -

 

 

 -

 

 -

 

Stock option compensation expense

 

 -

 

 -

 

 -

 

30 

 

 -

 

 -

 

30 

Cash dividends - common ($0.14 per share)

 

 -

 

 -

 

 -

 

 -

 

(387)

 

 -

 

(387)

Cash dividends SBLF preferred

 

 -

 

 -

 

 -

 

 -

 

(65)

 

 -

 

(65)

Sale of treasury shares to 401(k) (6,091 shares)

 

 -

 

 -

 

112 

 

13 

 

 -

 

 -

 

125 

Sale of treasury shares to deferred comp. plan (3,077 shares)

 

 -

 

 -

 

56 

 

 

 -

 

 -

 

62 

Balance at June 30, 2014

$

13,000 

$

2,917 

$

(2,461)

$

34,592 

$

14,906 

$

(1,257)

$

61,697 

See accompanying notes to unaudited consolidated financial statements.

6


 

 

DNB Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

June 30,

(Dollars in thousands)

 

2015

 

2014

Cash Flows From Operating Activities:

 

 

 

 

Net income

$

2,487 

$

2,124 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

Depreciation, amortization and accretion

 

931 

 

916 

Provision for credit losses

 

715 

 

630 

Stock based compensation

 

165 

 

135 

Net gain on sale of securities

 

(64)

 

(337)

Net loss on sale and write down of OREO and other repossessed property

 

 -

 

Earnings from investment in BOLI

 

(111)

 

(115)

Deferred tax benefit

 

(424)

 

(87)

Proceeds from sales of loans originated for sale

 

12,049 

 

 -

Loans originated for sale

 

(10,927)

 

 -

Gain on sale of loans

 

(505)

 

 -

Write off of property and equipment

 

731 

 

 -

Taxes on exercise of stock options

 

(152)

 

 -

(Increase) decrease in accrued interest receivable

 

(135)

 

49 

(Increase) decrease in other assets

 

(614)

 

976 

Increase (decrease) in accrued interest payable

 

 

(21)

Decrease in other liabilities

 

(120)

 

(293)

Net Cash Provided By Operating Activities

 

4,030 

 

3,984 

Cash Flows From Investing Activities:

 

 

 

 

Activity in available-for-sale securities:

 

 

 

 

Sales

 

9,731 

 

26,884 

Maturities, repayments and calls

 

15,844 

 

15,690 

Purchases

 

(20,478)

 

(51,146)

Activity in held-to-maturity securities:

 

 

 

 

Sales

 

 -

 

1,228 

Maturities, repayments and calls

 

1,006 

 

1,119 

Purchases

 

(6,709)

 

 -

Net (increase) decrease in restricted stock

 

(277)

 

83 

Net increase in loans and leases

 

(18,346)

 

(24,076)

Net purchases of property and equipment, less proceeds from disposals

 

(116)

 

(212)

Proceeds from sale of OREO and other repossessed property

 

 -

 

186 

Net Cash Used in Investing Activities

 

(19,345)

 

(30,244)

Cash Flows From Financing Activities:

 

 

 

 

Net increase in deposits

 

21,293 

 

16,822 

Net increase in repurchase agreements

 

8,990 

 

4,085 

Proceeds from issuance of subordinated debt

 

9,750 

 

 -

Repayment of other borrowings

 

(20)

 

(18)

Dividends paid

 

(425)

 

(452)

Proceeds from the exercise of stock options

 

263 

 

Redemption of preferred stock

 

(9,750)

 

 -

Sale of treasury stock

 

203 

 

187 

Net Cash Provided by Financing Activities

 

30,304 

 

20,628 

Net Change in Cash and Cash Equivalents 

 

14,989 

 

(5,632)

Cash and Cash Equivalents at Beginning of Period 

 

12,504 

 

34,060 

Cash and Cash Equivalents at End of Period 

$

27,493 

$

28,428 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

1,280 

$

1,227 

Income taxes

 

1,427 

 

392 

Supplemental Disclosure of Non-cash Flow Information:

 

 

 

 

Transfers from loans and leases to real estate owned and other repossessed property

 

1,101 

 

42 

See accompanying notes to unaudited consolidated financial statements.

7


 

 

 

 

NOTE 1: BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of DNB Financial Corporation (referred to herein as the "Corporation" or "DNB") and its subsidiary, DNB First, National Association (the "Bank") have been prepared in accordance with the instructions for Form 10-Q and therefore do not include certain information or footnotes necessary for the presentation of financial condition, statement of operations and statement of cash flows required by generally accepted accounting principles. However, in the opinion of management, the consolidated financial statements reflect all adjustments (which consist of normal recurring adjustments) necessary for a fair presentation of the results for the unaudited periods. Prior amounts not affecting net income are reclassified when necessary to conform to current period classifications. The results of operations for the three and six months ended June 30, 2015 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, 2014. 

 

Subsequent Events-- Management has evaluated events and transactions occurring subsequent to June 30, 2015 for items that should potentially be recognized or disclosed in these Consolidated Financial Statements. The evaluation was conducted through the date these financial statements were issued.

 

Recent Accounting Pronouncements-  

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contract with Customers (Topic 606). The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following five steps: 1) identify the contracts(s) with the customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer. For a public entity, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. DNB is still evaluating the effect of this amendment on DNB's consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2015, and is to be applied retrospectively. Early adoption is permitted. DNB is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the DNB's consolidated financial statements.

 

In June 2014, ASU No. 2014-11 amended ASC Topic 860, “Transfers and Servicing” to address concerns that current accounting guidance distinguishes between repurchase agreements that settle at the same time as the maturity of the transferred financial asset and those that settle any time before maturity. The update changed the accounting for repurchase-to-maturity transactions to secured borrowing accounting and, for repurchase financing arrangements, separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which resulted in secured borrowing accounting for the repurchase agreement. The adoption of this ASU did not have a material effect on the Company’s operating results or financial conditionsignificant impact on our operations or financial statement disclosures.

8


 

 

NOTE 2: INVESTMENT SECURITIES

 

The amortized cost and fair values of investment securities, as of the dates indicated, are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

Held To Maturity

 

 

 

 

 

 

 

 

US Government agency obligations

$

7,851 

$

347 

$

 -

$

8,198 

Government Sponsored Entities (GSE) mortgage-backed securities

 

3,142 

 

115 

 

 -

 

3,257 

Corporate bonds

 

10,587 

 

320 

 

(15)

 

10,892 

Collateralized mortgage obligations GSE

 

3,070 

 

18 

 

(12)

 

3,076 

State and municipal tax-exempt

 

40,577 

 

314 

 

(940)

 

39,951 

Total

$

65,227 

$

1,114 

$

(967)

$

65,374 

    

 

 

 

 

 

 

 

 

Available For Sale

 

 

 

 

 

 

 

 

US Government agency obligations

$

60,891 

$

95 

$

(48)

$

60,938 

GSE mortgage-backed securities

 

54,249 

 

77 

 

(185)

 

54,141 

Collateralized mortgage obligations GSE

 

18,162 

 

18 

 

(421)

 

17,759 

Corporate bonds

 

20,426 

 

 

(213)

 

20,222 

State and municipal tax-exempt

 

13,512 

 

 -

 

(105)

 

13,407 

Equity securities

 

27 

 

 

(11)

 

18 

Total

$

167,267 

$

201 

$

(983)

$

166,485 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

Held To Maturity

 

 

 

 

 

 

 

 

US Government agency obligations

$

7,730 

$

343 

$

 -

$

8,073 

Government Sponsored Entities (GSE) mortgage-backed securities

 

3,579 

 

133 

 

 -

 

3,712 

Corporate bonds

 

3,951 

 

324 

 

 -

 

4,275 

Collateralized mortgage obligations GSE

 

3,605 

 

 

(29)

 

3,579 

State and municipal tax-exempt

 

40,589 

 

418 

 

(547)

 

40,460 

Total

$

59,454 

$

1,221 

$

(576)

$

60,099 

    

 

 

 

 

 

 

 

 

Available For Sale

 

 

 

 

 

 

 

 

US Government agency obligations

$

61,547 

$

$

(197)

$

61,354 

GSE mortgage-backed securities

 

66,669 

 

189 

 

(135)

 

66,723 

Collateralized mortgage obligations GSE

 

20,499 

 

 

(496)

 

20,011 

Corporate bonds

 

13,208 

 

 -

 

(106)

 

13,102 

State and municipal tax-exempt

 

10,917 

 

87 

 

(10)

 

10,994 

Equity securities

 

27 

 

 

(11)

 

18 

Total

$

172,867 

$

290 

$

(955)

$

172,202 

 

 

Included in unrealized losses are market losses on securities that have been in a continuous unrealized loss position for twelve months or more and those securities that have been in a continuous unrealized loss position for less than twelve months. The following table details the aggregate unrealized losses and aggregate fair value of the underlying securities whose fair values are below their amortized cost at June 30, 2015 and December 31, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9


 

 

 

 

June 30, 2015

 

 

 

 

 

 

Fair Value

 

Unrealized

 

Fair Value

 

Unrealized

 

 

 

 

Total

 

Impaired

 

Loss

 

Impaired

 

Loss

 

 

Total

 

Unrealized

 

Less Than

 

Less Than

 

More Than

 

More Than

(Dollars in thousands)

 

Fair Value

 

Loss

 

12 Months

 

12 Months

 

12 Months

 

12 Months

Held To Maturity

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

4,191 

$

(15)

$

4,191 

$

(15)

$

 -

$

 -

Collateralized mortgage obligations GSE

 

1,752 

 

(12)

 

464 

 

(1)

 

1,288 

 

(11)

State and Municipal tax-exempt

 

20,804 

 

(940)

 

10,899 

 

(254)

 

9,905 

 

(686)

Total

$

26,747 

$

(967)

$

15,554 

$

(270)

$

11,193 

$

(697)

Available For Sale

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

9,361 

$

(48)

$

9,361 

$

(48)

$

 -

$

 -

GSE mortgage-backed securities

 

42,382 

 

(185)

 

37,721 

 

(104)

 

4,661 

 

(81)

Collateralized mortgage obligations GSE

 

13,979 

 

(421)

 

1,766 

 

(18)

 

12,213 

 

(403)

Corporate bonds

 

16,191 

 

(213)

 

10,264 

 

(141)

 

5,927 

 

(72)

State and Municipal tax-exempt

 

13,407 

 

(105)

 

13,407 

 

(105)

 

 -

 

 -

Equity securities

 

12 

 

(11)

 

 -

 

 -

 

12 

 

(11)

Total

$

95,332 

$

(983)

$

72,519 

$

(416)

$

22,813 

$

(567)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

Fair Value

 

Unrealized

 

Fair Value

 

Unrealized

 

 

 

 

Total

 

Impaired

 

Loss

 

Impaired

 

Loss

 

 

Total

 

Unrealized

 

Less Than

 

Less Than

 

More Than

 

More Than

(Dollars in thousands)

 

Fair Value

 

Loss

 

12 Months

 

12 Months

 

12 Months

 

12 Months

Held To Maturity

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations GSE

$

3,043 

$

(29)

$

3,043 

$

(29)

$

 -

$

 -

State and municipal tax-exempt

 

19,054 

 

(547)

 

2,138 

 

(7)

 

16,916 

 

(540)

Total

$

22,097 

$

(576)

$

5,181 

$

(36)

$

16,916 

$

(540)

Available For Sale

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

56,342 

$

(197)

$

49,222 

$

(97)

$

7,120 

$

(100)

GSE mortgage-backed securities

 

22,157 

 

(135)

 

14,996 

 

(38)

 

7,161 

 

(97)

Collateralized mortgage obligations GSE

 

18,133 

 

(496)

 

3,669 

 

(5)

 

14,464 

 

(491)

Corporate bonds

 

13,102 

 

(106)

 

9,531 

 

(31)

 

3,571 

 

(75)

State and municipal tax-exempt

 

2,967 

 

(10)

 

2,360 

 

(9)

 

607 

 

(1)

Equity securities

 

12 

 

(11)

 

 -

 

 -

 

12 

 

(11)

Total

$

112,713 

$

(955)

$

79,778 

$

(180)

$

32,935 

$

(775)

 

As of June 30, 2015, there were nineteen mortgage-backed securities, twelve corporate bonds, four U.S. agency obligations, sixteen collateralized mortgage obligations, fourty-two tax-exempt municipalities, and five equity securities which were in an unrealized loss position. DNB does not intend to sell these securities and management of DNB does not expect to be required to sell any of these securities prior to a recovery of its cost basis. Management has reviewed all of these securities and believes that DNB will collect all principal and interest that is due on debt securities on a timely basis.  Management does not believe any individual unrealized loss as of June 30, 2015 represents an other-than-temporary impairment (OTTI). DNB reviews its investment portfolio on a quarterly basis judging each investment for OTTI. The OTTI analysis focuses on condition of the issuers as well as duration and severity of impairment in determining OTTI. As of June 30, 2015, the following securities were reviewed:

Collateralized mortgage obligations GSE  There are sixteen impaired securities classified as collateralized mortgage obligations, fourteen of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 5.16% of its book value. All of these securities were issued and insured by FNMA, FHLMC or GNMA. DNB receives monthly principal and interest payments on all of these securities on a timely basis and none of these agencies has ever defaulted on mortgage-backed principal or interest. DNB anticipates a recovery in the market value as the securities approach their maturity dates or if interest rates decline from June 30, 2015 levels. Management concluded that these securities were not other-than-temporarily impaired at June 30, 2015.

State and municipal tax-exempt There are fourty-two impaired securities in this category, which are comprised of intermediate to long-term municipal bonds, fourteen of which have been impaired for more than 12 months. The largest unrealized

10


 

 

loss of a security in this group is 9.55% of its book value. All of the issues carry an “A+” or better underlying credit rating and/or have strong underlying fundamentals; included but not limited to annual financial reports, geographic location, population and debt ratios. In certain cases, options for calls reduce the effective duration and in turn, future market value fluctuations. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. There have not been disruptions of any payments, associated with any of these municipal securities. These bonds are investment grade and the value decline is related to the changes in interest rates. Of the fourty-two municipal securities, there are twenty-four insured school districts, thirteen uninsured school districts, two insured townships and three uninsured townships, all of which have strong underlying ratings. Management concluded that these securities were not other-than-temporarily impaired at June 30, 2015.

US Government agency obligations  There are four impaired securities classified as agencies, none of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 0.74% of its book value. All of these securities were issued and insured by FHLB, FNMA, or FHLMC. DNB has received timely interest payments on all of these securities and none of these agencies has ever defaulted on their bonds. DNB anticipates a recovery in the market value as the securities approach their maturity dates. Management concluded that these securities were not other-than-temporarily impaired at June 30, 2015.

GSE mortgage-backed securities  There are nineteen impaired bonds classified as GSE mortgage-backed securities, three of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 1.84% of its book value. All of these securities were issued and insured by FNMA, FHLMC, or GNMA. DNB receives monthly principal and interest payments on all of these securities on a timely basis and none of these agencies has ever defaulted on principal or interest. DNB anticipates a recovery in the market value as the securities approach their maturity dates or if interest rates decline from June 30, 2015 levels. Management concluded that these securities were not other-than-temporarily impaired at June 30, 2015.

Corporate Securities There were twelve impaired bonds classified as corporate bonds, three of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 2.24% of its book value. The bonds are investment grade and the value decline is related to the changes in interest rates that occurred since the time of purchase and subsequent changes in spreads affecting the market prices. All of the issues carry an "BBB" or better underlying credit support and were evaluated on the basis on their underlying fundamentals; included but not limited to annual financial reports, rating agency reports, capital strength and debt ratios. DNB anticipates a recovery in the market value as the securities approach their maturity dates or if interest rates decline from June 30, 2105 levels. Management concluded that these securities were not other-than-temporarily impaired at June 30, 2015.

Equity securities.  DNB’s investment in five marketable equity securities consists primarily of securities in common stock of community banks in Pennsylvania, all of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 79.96%. The severity and duration of the impairment are driven by higher collateral losses, wider credit spreads, and changes in interest rates within the financial services sector. DNB evaluated the prospects of all issuers in relation to the severity and duration of the impairment. These securities have been adversely impacted by the effects of the current economic environment on the financial services industry. We evaluated each of the underlying banks for credit impairment based on its financial condition and performance. Based on our evaluation and expectation that these investments will recover within a reasonable period of time, management does not consider these investments to be other-than-temporarily impaired at June 30, 2015.

The amortized cost and fair value of investment securities as of June 30, 2015, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid without penalties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

Available for Sale

 

 

Amortized

 

 

 

Amortized

 

 

(Dollars in thousands)

 

Cost

 

Fair Value

 

Cost

 

Fair Value

Due in one year or less

$

 -

$

 -

$

4,102 

$

4,102 

Due after one year through five years

 

13,482 

 

13,830 

 

77,725 

 

77,608 

Due after five years through ten years

 

29,327 

 

29,432 

 

51,307 

 

51,241 

Due after ten years

 

22,418 

 

22,112 

 

34,106 

 

33,516 

No stated maturity

 

 -

 

 -

 

27 

 

18 

Total investment securities

$

65,227 

$

65,374 

$

167,267 

$

166,485 

 

11


 

 

The gross principal value of investments securites sold as of the dates indicated are shown below. The HTM securities that were sold during the six months ended June 30, 2014 were permissible because DNB collected greater than 85% of the original recorded investment on the HTM securities prior to the sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(Dollars in thousands)

 

2015

 

2014

 

2015

 

2014

Available for sale securities sold

$

5,805 

$

11,653 

$

9,731 

$

26,884 

Held to maturity securities sold

 

 -

 

 -

 

 -

 

1,228 

Total sold securities

$

5,805 

$

11,653 

$

9,731 

$

28,112 

 

Gains and losses resulting from investment sales, redemptions or calls were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(Dollars in thousands)

 

2015

 

2014

 

2015

 

2014

Gross realized gains-AFS

$

11 

$

102 

$

64 

$

294 

Gross realized gains-HTM

 

 -

 

 -

 

 -

 

68 

Gross realized losses-AFS

 

 -

 

 -

 

 -

 

(25)

Net realized gain

$

11 

$

102 

$

64 

$

337 

 

At June 30, 2015 and December 31, 2014, investment securities with a carrying value of approximately $169.6 million and $174.9 million, respectively, were pledged to secure public funds, repurchase agreements and for other purposes as required by law.

12


 

 

NOTE 3: LOANS

 

The following table sets forth information concerning the composition of total loans and leases outstanding, as of the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

June 30, 2015

 

December 31, 2014

Residential mortgage

$

26,293 

$

25,993 

Commercial mortgage

 

287,983 

 

257,310 

Commercial:

 

 

 

 

Commercial term

 

79,563 

 

80,819 

Commercial construction

 

22,599 

 

35,534 

Consumer:

 

 

 

 

Home equity

 

50,389 

 

50,192 

Other

 

5,508 

 

5,755 

Total loans and leases

$

472,335 

$

455,603 

Less allowance for credit losses

 

(5,108)

 

(4,906)

Net loans and leases

$

467,227 

$

450,697 

 

Information concerning non-accrual loans are shown in the following tables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2015

Six Months Ended June 30, 2015

(Dollars in thousands)

December 31, 2014

June 30, 2015

Interest income that would have been recorded under original terms

Interest income recorded during the period

Net impact on interest income

Interest income that would have been recorded under original terms

Interest income recorded during the period

Net impact on interest income

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

$

2,458 

$

1,671 

$

24 

$

 -

$

24 

$

40 

$

 -

$

40 

Commercial mortgage

 

1,294 

 

1,251 

 

22 

 

 -

 

22 

 

43 

 

 -

 

43 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

198 

 

193 

 

 

 -

 

 

 

 -

 

Commercial construction

 

2,043 

 

749 

 

86 

 

 -

 

86 

 

170 

 

 -

 

170 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

432 

 

431 

 

 

 -

 

 

12 

 

 -

 

12 

Other

 

94 

 

169 

 

 

 -

 

 

 

 -

 

Total non-accrual loans

$

6,519 

$

4,464 

$

143 

$

 -

$

143 

$

278 

$

 -

$

278 

Loans 90 days past due and accruing

 

334 

 

168 

 

 -

 

 -

 

 -

 

 

 

 -

Total non-performing loans

$

6,853 

$

4,632 

$

143 

$

 -

$

143 

$

283 

$

$

278 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2014

Six Months Ended June 30, 2014

(Dollars in thousands)

 

 

June 30, 2014

Interest income that would have been recorded under original terms

Interest income recorded during the period

Net impact on interest income

Interest income that would have been recorded under original terms

Interest income recorded during the period

Net impact on interest income

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

$

1,734 

$

$

 -

$

$

24 

$

 -

$

24 

Commercial mortgage

 

 

 

192 

 

 

 -

 

 

 

 -

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

Commercial construction

 

 

 

2,293 

 

86 

 

 -

 

86 

 

180 

 

 -

 

180 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

346 

 

 

 

 

14 

 

 

11 

Other

 

 

 

99 

 

 

 -

 

 

 

 -

 

Total non-accrual loans

 

 

$

4,664 

$

107 

$

$

105 

$

232 

$

$

229 

Loans 90 days past due and accruing

 

 

 

501 

 

 

 

 -

 

 

 

 -

Total non-performing loans

 

 

$

5,165 

$

111 

$

$

105 

$

239 

$

10 

$

229 

 

 

 

13


 

 

NOTE 4: ALLOWANCE FOR CREDIT LOSSES

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a scheduled payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of June 30, 2015 and December 31, 2014. 

 

Age Analysis of Past Due Loans Receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivable

 

 

30-59

 

60-89

 

Greater

 

 

 

 

 

Total

 

> 90

 

 

Days Past

 

Days Past

 

than

 

Total

 

 

 

Loans

 

Days and

(Dollars in thousands)

 

Due

 

Due

 

90 Days

 

Past Due

 

Current

 

Receivable

 

Accruing

Residential mortgage

$

1,248 

$

615 

$

1,763 

$

3,626 

$

22,667 

$

26,293 

$

168 

Commercial mortgage

 

182 

 

 -

 

339 

 

521 

 

287,462 

 

287,983 

 

 -

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 -

 

 -

 

 -

 

 -

 

79,563 

 

79,563 

 

 -

Commercial construction

 

 -

 

 -

 

749 

 

749 

 

21,850 

 

22,599 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

39 

 

 -

 

322 

 

361 

 

50,028 

 

50,389 

 

 -

Other

 

40 

 

 -

 

169 

 

209 

 

5,299 

 

5,508 

 

 -

Total

$

1,509 

$

615 

$

3,342 

$

5,466 

$

466,869 

$

472,335 

$

168 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivable

 

 

30-59

 

60-89

 

Greater

 

 

 

 

 

Total

 

> 90

 

 

Days Past

 

Days Past

 

than

 

Total

 

 

 

Loans

 

Days and

(Dollars in thousands)

 

Due

 

Due

 

90 Days

 

Past Due

 

Current

 

Receivable

 

Accruing

Residential mortgage

$

1,005 

$

302 

$

2,648 

$

3,955 

$

22,038 

$

25,993 

$

191 

Commercial mortgage

 

48 

 

187 

 

236 

 

471 

 

256,839 

 

257,310 

 

 -

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 -

 

 -

 

 -

 

 -

 

80,819 

 

80,819 

 

 -

Commercial construction

 

 -

 

 -

 

2,043 

 

2,043 

 

33,491 

 

35,534 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

58 

 

214 

 

386 

 

658 

 

49,534 

 

50,192 

 

119 

Other

 

71 

 

70 

 

119 

 

260 

 

5,495 

 

5,755 

 

24 

Total

$

1,182 

$

773 

$

5,432 

$

7,387 

$

448,216 

$

455,603 

$

334 

14


 

 

The following tables summarize information in regards to impaired loans by loan portfolio class as of and for the three and six months ended June 30, 2015 and 2014 and as of December 31, 2014.

Impaired Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

Recorded

 

Unpaid

 

Related

 

 

Recorded

 

Unpaid

 

Related

 

 

Investment

 

Principal

 

Allowance

 

 

Investment

 

Principal

 

Allowance

(Dollars in thousands)

 

 

 

Balance

 

 

 

 

 

 

Balance

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

$

1,671 

$

2,403 

$

 -

 

$

2,457 

$

3,270 

$

 -

Commercial mortgage

 

3,362 

 

3,495 

 

 -

 

 

3,400 

 

3,501 

 

 -

Commercial construction

 

250 

 

2,031 

 

 -

 

 

1,706 

 

4,822 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

547 

 

561 

 

 -

 

 

549 

 

564 

 

 -

Other

 

169 

 

177 

 

 -

 

 

94 

 

102 

 

 -

Total

$

5,999 

$

8,667 

$

 -

 

$

8,206 

$

12,259 

$

 -

With allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage

 

202 

 

202 

 

106 

 

 

200 

 

200 

 

104 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

200 

 

207 

 

114 

 

 

200 

 

202 

 

119 

Commercial construction

 

612 

 

2,945 

 

97 

 

 

450 

 

2,031 

 

50 

Total

$

1,014 

$

3,354 

$

317 

 

$

850 

$

2,433 

$

273 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

1,671 

 

2,403 

 

 -

 

 

2,457 

 

3,270 

 

 -

Commercial mortgage

 

3,564 

 

3,697 

 

106 

 

 

3,600 

 

3,701 

 

104 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

200 

 

207 

 

114 

 

 

200 

 

202 

 

119 

Commercial construction

 

862 

 

4,976 

 

97 

 

 

2,156 

 

6,853 

 

50 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

547 

 

561 

 

 -

 

 

549 

 

564 

 

 -

Other

 

169 

 

177 

 

 -

 

 

94 

 

102 

 

 -

Total

$

7,013 

$

12,021 

$

317 

 

$

9,056 

$

14,692 

$

273 

 

15


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

June 30, 2015

 

 

June 30, 2014

 

 

June 30, 2015

 

 

June 30, 2014

 

 

Average

 

Interest

 

 

Average

 

Interest

 

 

Average

 

Interest

 

 

Average

 

Interest

 

 

Recorded

 

Income

 

 

Recorded

 

Income

 

 

Recorded

 

Income

 

 

Recorded

 

Income

(Dollars in thousands)

 

Investment

 

Recognized

 

 

Investment

 

Recognized

 

 

Investment

 

Recognized

 

 

Investment

 

Recognized

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

$

1,927 

$

 -

 

$

1,614 

$

 -

 

$

2,103 

$

 -

 

$

1,826 

$

 -

Commercial mortgage

 

3,367 

 

29 

 

 

2,508 

 

 -

 

 

3,378 

 

57 

 

 

2,506 

 

 -

Commercial construction

 

672 

 

 -

 

 

1,094 

 

 -

 

 

1,017 

 

 -

 

 

896 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

503 

 

 

 

428 

 

 

 

518 

 

 

 

430 

 

Other

 

182 

 

 -

 

 

22 

 

 -

 

 

152 

 

 -

 

 

40 

 

 -

Total

$

6,651 

$

30 

 

$

5,666 

$

 

$

7,168 

$

59 

 

$

5,698 

$

With allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

204 

 

 -

 

 

377 

 

 -

 

 

136 

 

 -

 

 

251 

 

 -

Commercial mortgage

 

202 

 

 -

 

 

18 

 

 -

 

 

201 

 

 -

 

 

24 

 

 -

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

200 

 

 -

 

 

 -

 

 -

 

 

200 

 

 -

 

 

 -

 

 -

Commercial construction

 

837 

 

 -

 

 

1,312 

 

 -

 

 

708 

 

 -

 

 

1,560 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

44 

 

 -

 

 

 -

 

 -

 

 

29 

 

 -

 

 

 -

 

 -

Other

 

 -

 

 -

 

 

105 

 

 -

 

 

 -

 

 -

 

 

71 

 

 -

Total

$

1,487 

$

 -

 

$

1,812 

$

 -

 

$

1,274 

$

 -

 

$

1,906 

$

 -

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

2,131 

 

 -

 

 

1,991 

 

 -

 

 

2,239 

 

 -

 

 

2,077 

 

 -

Commercial mortgage

 

3,569 

 

29 

 

 

2,526 

 

 -

 

 

3,579 

 

57 

 

 

2,530 

 

 -

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

200 

 

 -

 

 

 -

 

 -

 

 

200 

 

 -

 

 

 -

 

 -

Commercial construction

 

1,509 

 

 -

 

 

2,406 

 

 -

 

 

1,725 

 

 -

 

 

2,456 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

547 

 

 

 

428 

 

 

 

547 

 

 

 

430 

 

Other

 

182 

 

 -

 

 

127 

 

 -

 

 

152 

 

 -

 

 

111 

 

 -

Total

$

8,138 

$

30 

 

$

7,478 

$

 

$

8,442 

$

59 

 

$

7,604 

$

 

16


 

 

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within DNB’s internal risk rating system as of June 30, 2015 and December 31, 2014.

Credit Quality Indicators

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

Special

 

 

 

 

 

 

(Dollars in thousands)

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total

Residential mortgage

$

24,349 

$

 -

$

1,944 

$

 -

$

26,293 

Commercial mortgage

 

276,065 

 

2,577 

 

9,341 

 

 -

 

287,983 

Commercial:

 

 

 

 

 

 

 

 

 

 

Commercial term

 

73,460 

 

72 

 

6,031 

 

 -

 

79,563 

Commercial construction

 

18,851 

 

 -

 

3,748 

 

 -

 

22,599 

Consumer:

 

 

 

 

 

 

 

 

 

 

Home equity

 

49,812 

 

 -

 

577 

 

 -

 

50,389 

Other

 

5,339 

 

 -

 

169 

 

 -

 

5,508 

Total

$

447,876 

$

2,649 

$

21,810 

$

 -

$

472,335 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

Special

 

 

 

 

 

 

(Dollars in thousands)

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total

Residential mortgage

$

23,259 

$

 -

$

2,734 

$

 -

$

25,993 

Commercial mortgage

 

245,307 

 

2,610 

 

9,393 

 

 -

 

257,310 

Commercial:

 

 

 

 

 

 

 

 

 

 

Commercial term

 

75,303 

 

72 

 

5,444 

 

 -

 

80,819 

Commercial construction

 

31,057 

 

 -

 

4,477 

 

 -

 

35,534 

Consumer:

 

 

 

 

 

 

 

 

 

 

Home equity

 

49,611 

 

 -

 

581 

 

 -

 

50,192 

Other

 

5,661 

 

 -

 

94 

 

 -

 

5,755 

Total

$

430,198 

$

2,682 

$

22,723 

$

 -

$

455,603 

 

Loans classified as troubled debt restructurings (“TDR”) are considered impaired. As of June 30, 2015, DNB had one commercial mortgage classified as a TDR totaling $2,222,000, compared to one commercial mortgage classified as a TDR totaling $2,246,000 (the same loan) at December 31, 2014, and one commercial mortgage classified as a TDR totaling $2,269,000 (the same loan) at June 30, 2014. The rate on this loan was modified and the terms of the loans were changed to interest only while the project was being built out. The loan commenced normal principal and interest payments in June 2014.  The loan was extended and there was no reduction of principal. The balance of the loan prior to modification was $2,272,000 and the balance after the modification was $2,272,000. During the three and six months ended June 30, 2015 and 2014, there were no defaults on any terms of this loan.

 

As of June 30, 2015, DNB had one consumer home equity loan classified as a TDR totaling $102,000, compared to one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at December 31, 2014, and one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at June 30, 2014. The monthly payment on this loan was reduced for 36 months and the borrower will resume making contractual payments at the end of this period. The loan was extended and there was no reduction of principal. This loan was classified a TDR in June of 2014. The balance of the loan prior to modification was $102,000 and the balance after the modification was $102,000. During the three and six months ended June 30, 2015 and 2014, there were no defaults on any terms of this loan.

 

The following tables set forth the composition of DNB’s allowance for credit losses as of June 30, 2015 and December 31, 2014, the activity for the three and six months ended June 30, 2015 and 2014 and as of and for the year ended December 31, 2014.

17


 

 

Allowance for Credit Losses and Recorded Investment in Loans Receivables

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Commercial

Commercial

Commercial

Lease

Consumer

Consumer

 

 

 

 

(Dollars in thousands)

mortgage

mortgage

term

construction

financing

home equity

Other

Unallocated

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - April 1, 2015

$

269 

$

2,398 

$

705 

$

922 

$

 -

$

224 

$

66 

$

606 

$

5,190 

Charge-offs

 

(35)

 

 -

 

(163)

 

(278)

 

 -

 

(1)

 

(24)

 

 -

 

(501)

Recoveries

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Provisions

 

31 

 

164 

 

177 

 

130 

 

(1)

 

(33)

 

22 

 

(75)

 

415 

Ending balance - June 30, 2015

$

265 

$

2,562 

$

721 

$

774 

$

 -

$

190 

$

65 

$

531 

$

5,108 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Commercial

Commercial

Commercial

Lease

Consumer

Consumer

 

 

 

 

(Dollars in thousands)

mortgage

mortgage

term

construction

financing

home equity

Other

Unallocated

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - January 1, 2015

$

269 

$

2,300 

$

709 

$

881 

$

 -

$

189 

$

70 

$

488 

$

4,906 

Charge-offs

 

(35)

 

 -

 

(174)

 

(278)

 

 -

 

(1)

 

(30)

 

 -

 

(518)

Recoveries

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Provisions

 

31 

 

262 

 

184 

 

171 

 

(2)

 

 

24 

 

43 

 

715 

Ending balance - June 30, 2015

$

265 

$

2,562 

$

721 

$

774 

$

 -

$

190 

$

65 

$

531 

$

5,108 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$

 -

$

106 

$

114 

$

97 

$

 -

$

 -

$

 -

$

 -

$

317 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$

265 

$

2,456 

$

607 

$

677 

$

 -

$

190 

$

65 

$

531 

$

4,791 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

26,293 

$

287,983 

$

79,563 

$

22,599 

$

 -

$

50,389 

$

5,508 

 

 

$

472,335 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$

1,671 

$

3,564 

$

200 

$

862 

$

 -

$

547 

$

169 

 

 

$

7,013 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$

24,622 

$

284,419 

$

79,363 

$

21,737 

$

 -

$

49,842 

$

5,339 

 

 

$

465,322 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for unfunded loan commitments included in other liabilities

$

 -

$

$

107 

$

56 

$

 -

$

13 

$

 -

 

 

$

180 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Commercial

Commercial

Commercial

Lease

Consumer

Consumer

 

 

 

 

(Dollars in thousands)

mortgage

mortgage

term

construction

financing

home equity

Other

Unallocated

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - April 1, 2014

$

347 

$

2,146 

$

652 

$

806 

$

 -

$

167 

$

125 

$

507 

$

4,750 

Charge-offs

 

(100)

 

(8)

 

(11)

 

 -

 

 -

 

 -

 

(11)

 

 -

 

(130)

Recoveries

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

12 

Provisions

 

66 

 

(7)

 

(2)

 

213 

 

(5)

 

 

(19)

 

 -

 

255 

Ending balance - June 30, 2014

$

315 

$

2,131 

$

641 

$

1,019 

$

 -

$

176 

$

98 

$

507 

$

4,887 

 

 

18


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Commercial

Commercial

Commercial

Lease

Consumer

Consumer

 

 

 

 

(Dollars in thousands)

mortgage

mortgage

term

construction

financing

home equity

Other

Unallocated

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - January 1, 2014

$

285 

$

2,010 

$

621 

$

1,033 

$

 -

$

156 

$

78 

$

440 

$

4,623 

Charge-offs

 

(100)

 

(8)

 

(18)

 

(261)

 

 -

 

 -

 

(11)

 

 -

 

(398)

Recoveries

 

 

 -

 

 

10 

 

 

 -

 

 

 -

 

32 

Provisions

 

125 

 

129 

 

36 

 

237 

 

(6)

 

20 

 

22 

 

67 

 

630 

Ending balance - June 30, 2014

$

315 

$

2,131 

$

641 

$

1,019 

$

 -

$

176 

$

98 

$

507 

$

4,887 

Reserve for unfunded loan commitments included in other liabilities

$

 -

$

10 

$

79 

$

60 

$

 -

$

11 

$

 -

 

 

$

160 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Commercial

Commercial

Commercial

Lease

Consumer

Consumer

 

 

 

 

(Dollars in thousands)

mortgage

mortgage

term

construction

financing

home equity

Other

Unallocated

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance - December 31, 2014

$

269 

$

2,300 

$

709 

$

881 

$

 -

$

189 

$

70 

$

488 

$

4,906 

Ending balance: individually evaluated for impairment

$

 -

$

104 

$

119 

$

50 

$

 -

$

 -

$

 -

$

 -

$

273 

Ending balance: collectively evaluated for impairment

$

269 

$

2,196 

$

590 

$

831 

$

 -

$

189 

$

70 

$

488 

$

4,633 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

25,993 

$

257,310 

$

80,819 

$

35,534 

$

 -

$

50,192 

$

5,755 

 

 

$

455,603 

Ending balance: individually evaluated for impairment

$

2,457 

$

3,600 

$

200 

$

2,156 

$

 -

$

549 

$

94 

 

 

$

9,056 

Ending balance: collectively evaluated for impairment

$

23,536 

$

253,710 

$

80,619 

$

33,378 

$

 -

$

49,643 

$

5,661 

 

 

$

446,547 

Reserve for unfunded loan commitments included in other liabilities

$

 -

$

10 

$

89 

$

55 

$

 -

$

12 

$

 -

 

 

$

166 

 

19


 

 

 

 

 

NOTE 5: EARNINGS PER SHARE 

 

Basic earnings per share (“EPS”) is computed based on the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the treasury stock method and reflects the potential dilution that could occur from the exercise of stock options, and warrants and the amortized portion of unvested stock awards. Stock options and unvested stock awards for which the exercise or the grant price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. Treasury shares are not deemed outstanding for calculations. There were no outstanding stock warrants, no anti-dilutive stock options outstanding, and no anti-dilutive stock awards outstanding at June 30, 2015. There were no anti-dilutive stock warrants outstanding, 66,853 anti-dilutive stock options outstanding, and no anti-dilutive stock awards outstanding at June 30, 2014. The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 2015

 

June 30, 2015

(In thousands, except per-share data)

 

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders

$

1,227 

 

2,802 

$

0.44 

$

2,453 

 

2,794 

$

0.88 

Effect of potential dilutive common stock equivalents – stock options and  restricted shares

 

 -

 

46 

 

(0.01)

 

 -

 

46 

 

(0.02)

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders after assumed conversions

$

1,227 

 

2,848 

$

0.43 

$

2,453 

 

2,840 

$

0.86 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 2014

 

June 30, 2014

(In thousands, except per-share data)

 

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders

$

1,087 

 

2,763 

$

0.39 

$

2,054 

 

2,761 

$

0.74 

Effect of potential dilutive common stock equivalents – stock options and  restricted shares

 

 -

 

47 

 

(0.01)

 

 -

 

45 

 

(0.01)

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders after assumed conversions

$

1,087 

 

2,810 

$

0.38 

$

2,054 

 

2,806 

$

0.73 

 

 

 

 

 

20


 

 

 

 

 

NOTE 6: ACCUMULATED OTHER COMPREHENSIVE LOSS 

 

The components of accumulated other comprehensive loss included in stockholders' equity are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Loss

 

Before-Tax

 

Tax

 

Net-of-Tax

(Dollars in thousands)

 

Amount

 

Effect

 

Amount

June 30, 2015

 

 

 

 

 

 

Net unrealized loss on AFS securities

$

(782)

$

266 

$

(516)

Discount on AFS to HTM reclassification

 

(20)

 

 

(13)

Unrealized actuarial losses-pension

 

(1,734)

 

589 

 

(1,145)

 

$

(2,536)

$

862 

$

(1,674)

December 31, 2014

 

 

 

 

 

 

Net unrealized loss on AFS securities

$

(665)

$

227 

$

(438)

Discount on AFS to HTM reclassification

 

(24)

 

 

(16)

Unrealized actuarial losses-pension

 

(1,734)

 

589 

 

(1,145)

 

$

(2,423)

$

824 

$

(1,599)

 

 

NOTE 7: SUBORDINATED DEBENTURES, NOTES, AND OTHER BORROWINGS

 

DNB has two issuances of junior subordinated debentures (the “debentures”) as follows. The majority of the proceeds of each issuance were invested in DNB’s subsidiary, DNB First, National Association, to increase the Bank’s capital levels. The junior subordinated debentures issued in each case qualify as a component of capital for regulatory purposes. DNB Capital Trust I and II are special purpose Delaware business trusts, which are not consolidated.

DNB Capital Trust I

DNB’s first issuance of junior subordinated debentures was on July 20, 2001. These debentures are floating rate and were issued to DNB Capital Trust I, a Delaware business trust in which DNB owns all of the common equity. DNB Capital Trust I issued $5.0 million of floating rate (6 month Libor plus 3.75%, with a cap of 12%) capital preferred securities 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 preferred securities have been redeemable since July 25, 2006 and must be redeemed upon maturity of the debentures on July 25, 2031.

DNB Capital Trust II

DNB’s second issuance of junior subordinated debentures was on March 30, 2005. These are floating rate and were issued to DNB Capital Trust II, a Delaware business trust in which DNB owns all of the common equity. DNB Capital Trust II issued $4.0 million of floating rate (the rate was fixed at 6.56% for the first 5 years and is now adjusting at a rate of 3-month LIBOR plus 1.77%) capital preferred securities. The proceeds of these securities were used by the Trust, along with DNB’s capital contribution, to purchase $4.1 million principal amount of DNB’s floating rate junior subordinated debentures. The preferred securities have been redeemable since May 23, 2010. The preferred securities must be redeemed upon maturity of the debentures on May 23, 2035.

 

Subordinated Note

On March 5, 2015, DNB Financial Corporation entered into a Subordinated Note Purchase Agreement (the “Agreement”) with an accredited investor under which the Company issued a $9.75 million subordinated note (the “Note”) to the investor. The Note has a maturity date of March 6, 2025, and bears interest at a fixed rate of 4.25% per annum for the first 5 years and then will float at the Wall Street Journal Prime rate  plus 1.00%, provided that the interest rate applicable to the outstanding principal balance will at no time be less than 3.0% and more than 5.75% per annum.

 

DNB may, at its option, beginning with the first interest payment date after March 6, 2019, and on any interest payment date thereafter, redeem the Note, in whole or in part, at par plus accrued and unpaid interest to the date of redemption. The Note is not subject to repayment at the option of the noteholder.

 

The Note is unsecured and ranks junior in right of payment to DNB’s senior indebtedness and to DNB’s obligations to its general creditors and qualifies as Tier 2 capital for regulatory purposes.

 

 

 

 

 

21


 

 

Repurchase Agreements Accounted for as Secured Borrowings

 

Repurchase agreements accounted for as secured borrowings are shown in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Overnight and Continuous

 

Up to 30 days

 

30 - 90 days

 

Greater than 90 days

 

Total

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements and repurchase-to-maturity transactions

$

28,211 

 

$

 -

 

$

 -

 

$

 -

 

$

28,211 

Gross amount of recognized liabilities for repurchase agreements in Statement of Condition

 

 

 

$

28,211 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements and repurchase-to-maturity transactions

$

19,221 

 

$

 -

 

$

 -

 

$

 -

 

$

19,221 

Gross amount of recognized liabilities for repurchase agreements in Statement of Condition

 

 

 

$

19,221 

 

As of June 30, 2015 and December 31, 2014, DNB had $28.2 million and $19.2 million of repurchase agreements, respectively.  In conjunction with these repurchase agreements,  $28.8 million and $19.6 million of state and municipal securities were sold on an overnight basis as of June 30, 2015 and December 31, 2014,  respectively, which represents 102% of the repurchase agreement amount.

 

NOTE 8: STOCK-BASED COMPENSATION

 

Stock Option Plan

 

DNB has a Stock Option Plan for employees and directors. Under the plan, options (both qualified and non-qualified) to purchase a maximum of 793,368 (as adjusted for subsequent stock dividends) shares of DNB’s common stock could be issued to employees and directors. Under the plan, option exercise prices must equal the fair market value of the shares on the date of option grant and the option exercise period may not exceed ten years. Vesting of options under the plan is determined by the Plan Committee. There were 354,090 shares available for grant at June 30, 2015. All options are immediately exercisable. DNB had no expenses during the three and six months ended June 30, 2015 compared to $13,000 and $30,000 during the three and six months ended June 30, 2014. DNB has no anticipated additional expense. Stock option activity is indicated below.

 

 

 

 

 

 

 

 

 

 

 

Number

 

Weighted Average

 

Outstanding

 

Exercise Price

Outstanding January 1, 2015

163,586 

$

15.13 

Issued

 -

 

-

Exercised

95,834 

 

19.40 

Forfeited

 -

 

-

Expired

 -

 

-

Outstanding June 30, 2015

67,752 

$

9.09 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

Weighted Average

 

Outstanding

 

Exercise Price

Outstanding January 1, 2014

207,303 

$

15.92 

Issued

 -

 

 -

Exercised

500 

 

6.93 

Forfeited

 -

 

 -

Expired

 -

 

 -

Outstanding June 30, 2014

206,803 

$

15.94 

 

The weighted-average price and weighted average remaining contractual life for the outstanding options are listed in the following table for the dates indicated. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

Range of

 

 

 

Weighted Average

 

 

 

Exercise

Number

Number

 

Exercise

Remaining

 

Intrinsic

 

Prices

Outstanding

Exercisable

 

Price

Contractual Life

 

Value

$

6.93-10.99

64,500 
64,500 

$

8.67 

2.66 years

$

1,108,000 

 

14.00-19.99

3,252 
3,252 

 

17.51 

0.48 years

 

27,000 

 

Total

67,752 
67,752 

$

9.09 

2.56 years

$

1,135,000 

22


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Range of

 

 

 

Weighted Average

 

 

 

Exercise

Number

Number

 

Exercise

Remaining

 

Intrinsic

 

Prices

Outstanding

Exercisable

 

Price

Contractual Life

 

Value

$

6.93-10.99

80,650 
80,650 

$

8.66 

3.15 years

$

1,044,000 

 

14.00-19.99

34,895 
34,895 

 

17.51 

0.97 years

 

143,000 

 

23.00-24.27

48,041 
48,041 

 

24.27 

0.29 years

 

 -

 

Total

163,586 
163,586 

$

15.13 

1.85 years

$

1,187,000 

 

 

 

 

 

 

 

 

 

 

 

 

Other Stock-Based Compensation

 

DNB maintains an Incentive Equity and Deferred Compensation Plan (the "Plan"). The Plan provides that up to 243,101 (as adjusted for subsequent stock dividends) shares of common stock may be granted, at the discretion of the Board, to individuals of the Corporation. Shares already granted are issuable on the earlier of three or four years (cliff vesting period) after the date of the grant or a change in control of DNB if the recipients are then employed by DNB (“Vest Date”).  Upon issuance of the shares, resale of the shares is restricted for an additional one year, during which the shares may not be sold, pledged or otherwise disposed of. Prior to the Vest Date and in the event the recipient terminates association with DNB for reasons other than death, disability or change in control, the recipient forfeits all rights to the shares that would otherwise be issued under the grant.

 

Share awards granted by the Plan were recorded at the date of award based on the market value of shares.  Awards are being amortized to expense over a three or four year cliff-vesting period. DNB records compensation expense equal to the value of the shares being amortized.  For the three and six month periods ended June 30, 2015, $78,000 and $165,000 was amortized to expense, respectively. For the three and six month periods ended June 30, 2014, $52,000 and $105,000 was amortized to expense, respectively. As of June 30, 2015, there was approximately $766,000 in additional compensation that will be recognized over the remaining service period of approximately 2.04 years.  At June 30, 2015, 117,714 shares were reserved for future grants under the Plan.  

 

Stock grant activity is indicated below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

Shares

 

Stock Price

Non-vested stock awards—January 1, 2015

75,930 

$

17.66 

Granted

 -

 

 -

Forfeited

1,220 

 

19.36 

Vested

 -

 

 -

Non-vested stock awards—June 30, 2015

74,710 

$

17.35 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

Shares

 

Stock Price

Non-vested stock awards—January 1, 2014

50,795 

$

15.65 

Granted

 -

 

 -

Forfeited

 -

 

 -

Vested

 -

 

 -

Non-vested stock awards—June 30, 2014

50,795 

$

15.65 

 

 

NOTE 9:  INCOME TAXES    

 

As of June 30, 2015, the Corporation had no material unrecognized tax benefits or accrued interest and penalties. It is the Corporation’s policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense.  Federal and state tax years 2011 through 2014 were open for examination as of June 30, 2015.

 

 

23


 

 

NOTE 10:  FAIR VALUE OF FINANCIAL INSTRUMENTS 

 

FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy based on the nature of data inputs for fair value determinations, under which DNB is required to value each asset within its scope using assumptions that market participations would utilize to value that asset. When DNB uses its own assumptions, it is required to disclose additional information about the assumptions used and the effect of the measurement on earnings or the net change in assets for the period.

The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:

Level 1—Quoted prices in active markets for identical securities.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3—Instruments whose significant value drivers are unobservable.

A description of the valuation methodologies used for assets measured at fair value is set forth below:

DNB’s available-for-sale investment securities, which generally include U.S. government agencies and mortgage backed securities, collateralized mortgage obligations, corporate bonds and equity securities are reported at fair value. These securities are valued by an independent third party (“preparer”). The preparer’s evaluations are based on market data. They utilize evaluated pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, their evaluated pricing applications apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data. For certain securities additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions.

U.S. Government agencies are evaluated and priced using multi‑dimensional relational models and option adjusted spreads. State and municipal securities are evaluated on a series of matrices including reported trades and material event notices. Mortgage backed securities are evaluated using matrix correlation to treasury or floating index benchmarks, prepayment speeds, monthly payment information and other benchmarks. Other securities are evaluated using a broker-quote based application, including quotes from issuers.

Impaired loans are those loans that the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

OREO assets are adjusted to fair value less estimated selling costs upon transfer of the loans to OREO establishing a new cost basis. Subsequently, OREO assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. There assets are included as Level 3 fair values.

The following table summarizes the assets at June 30, 2015 and December 31, 2014 that are recognized on DNB’s statement of financial condition using fair value measurement determined based on the differing levels of input:

24


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Fair Value

Assets Measured at Fair Value on a Recurring Basis

 

 

 

 

 

 

 

 

AFS Investment Securities:

 

 

 

 

 

 

 

 

US Government agency obligations

$

 -

$

60,938 

$

 -

$

60,938 

GSE mortgage-backed securities

 

 -

 

54,141 

 

 -

 

54,141 

Collateralized mortgage obligations GSE

 

 -

 

17,759 

 

 -

 

17,759 

Corporate bonds

 

 -

 

20,222 

 

 -

 

20,222 

State and municipal tax-exempt

 

 -

 

13,407 

 

 -

 

13,407 

Equity securities

 

18 

 

 -

 

 -

 

18 

Total assets measured at fair value on a recurring basis

$

18 

$

166,467 

$

 -

$

166,485 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

 

 

 

 

 

 

 

Impaired loans

$

 -

$

 -

$

993 

$

993 

Total assets measured at fair value on a nonrecurring basis

$

 -

$

 -

$

993 

$

993 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Fair Value

Assets Measured at Fair Value on a Recurring Basis

 

 

 

 

 

 

 

 

AFS Investment Securities:

 

 

 

 

 

 

 

 

US Government agency obligations

$

 -

$

61,354 

$

 -

$

61,354 

GSE mortgage-backed securities

 

 -

 

66,723 

 

 -

 

66,723 

Collateralized mortgage obligations GSE

 

 -

 

20,011 

 

 -

 

20,011 

Corporate bonds

 

 -

 

13,102 

 

 -

 

13,102 

State and municipal tax-exempt

 

 -

 

10,994 

 

 -

 

10,994 

Equity securities

 

18 

 

 -

 

 -

 

18 

Total assets measured at fair value on a recurring basis

$

18 

$

172,184 

$

 -

$

172,202 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

 

 

 

 

 

 

 

Impaired loans

$

 -

$

 -

$

2,916 

$

2,916 

OREO and other repossessed property

 

 -

 

 -

 

100 

 

100 

Total assets measured at fair value on a nonrecurring basis

$

 -

$

 -

$

3,016 

$

3,016 

 

25


 

 

The following table presents additional information about assets measured at fair value on a nonrecurring basis and for which DNB has utilized Level 3 inputs to determine fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

Quantitative Information about Level 3 Fair Value Measurement

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

Valuation

 

Range

(Dollars in thousands)

 

Estimate

Techniques

Unobservable Input

(Weighted Average)

Impaired loans - Commercial mortgage

 

96 

Appraisal of

Appraisal adj. (2)

0% 

to

0% 
(0%)

 

 

 

collateral (1)

Disposal costs (2)

-13%

to

-13%

(-13%)

Impaired loans - Commercial term

 

86 

Appraisal of

Appraisal adj. (2)

-72%

to

-72%

(-72%)

 

 

 

collateral (1)

Disposal costs (2)

-11%

to

-11%

(-11%)

Impaired loans - Commercial construction

 

765 

Appraisal of

Appraisal adj. (2)

0% 

to

-10%

(-9%)

 

 

 

collateral (1)

Disposal costs (2)

-8%

to

-17%

(-12%)

Impaired loans - Consumer other

 

46 

Appraisal of

Appraisal adj. (2)

0% 

to

0% 
(0%)

 

 

 

collateral (1)

Disposal costs (2)

0% 

to

0% 
(0%)

Impaired loan total

$

993 

 

 

 

 

 

 

(1)

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

Quantitative Information about Level 3 Fair Value Measurement

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

Valuation

 

Range

(Dollars in thousands)

 

Estimate

Techniques

Unobservable Input

(Weighted Average)

Impaired loans - Residential mortgage

$

1,244 

Appraisal of

Appraisal adj. (2)

0% 

to

0% 
(0%)

 

 

 

collateral (1)

Disposal costs (2)

-8%

to

-8%

(-8%)

Impaired loans - Commercial mortgage

 

97 

Appraisal of

Appraisal adj. (2)

0% 

to

0% 
(0%)

 

 

 

collateral (1)

Disposal costs (2)

-13%

to

-13%

(-13%)

Impaired loans - Commercial term

 

81 

Appraisal of

Appraisal adj. (2)

0% 

to

0% 
(0%)

 

 

 

collateral (1)

Disposal costs (2)

-11%

to

-11%

(-11%)

Impaired loans - Commercial construction

 

1,494 

Appraisal of

Appraisal adj. (2)

0% 

to

-47%

(-19%)

 

 

 

collateral (1)

Disposal costs (2)

-11%

to

-11%

(-11%)

Impaired loan total

$

2,916 

 

 

 

 

 

 

Other real estate owned

$

100 

 

Disposal costs (2)

-8%

to

-16%

(-12%)

(1)

Fair value is generally determined through independent appraisals or sales contracts of the underlying collateral, which generally include various level 3 inputs which are not identifiable.

(2)

Appraisals are adjusted by management for qualitative factors and disposal costs.

Impaired loans.  Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $7.0 million at June 30, 2015. Of this, $1.0 million had a specific valuation allowance of $317,000, leaving a fair value of $697,000 as of June 30, 2015. DNB had $570,000 in impaired loans that were partially charged down by $274,000, leaving $296,000 at fair value as of June 30, 2015. The total fair value of impaired loans at June 30, 2015 was $993,000.

Impaired loans had a carrying amount of $9.1 million at December 31, 2014. Of this, $850,000 had a specific valuation allowance of $273,000, leaving a fair value of $577,000 at December 31, 2014. In addition, DNB had $2.9 million in impaired loans that were partially charged down by $526,000, leaving $2.3 million at fair value as of December 31, 2014. The total fair value of impaired loans at December 31, 2014 was $2.9 million.

Other Real Estate Owned & other repossessed property.  Other real estate owned (“OREO”) consists of properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets are classified as OREO and other repossessed property are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying value or fair value, less estimated costs to sell. Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged

26


 

 

to expense. DNB had $2.0 million of such assets at June 30, 2015, $1.9 million of which was OREO and $71,000 was in other repossessed property. DNB had $901,000 of such assets at December 31, 2014, which consisted of $837,000 in OREO and $64,000 in other repossessed property. Subsequent to the repossession of these assets, DNB did not write down the carrying values during the six month period ending June 30, 2015 or the six month period ending June 30, 2014.

DNB's policy is to recognize transfer between levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between Level 1 and 2 for the three and six months ended June 30, 2015.

Below is management’s estimate of the fair value of all financial instruments, whether carried at cost or fair value on the Company’s consolidated balance sheet. The carrying amounts and fair values of financial instruments at June 30, 2015 and December 31, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Fair

 

 

 

 

 

 

(Dollars in thousands)

 

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3

Financial assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

27,493 

$

27,493 

$

27,493 

$

 -

$

 -

AFS investment securities

 

166,485 

 

166,485 

 

18 

 

166,467 

 

 -

HTM investment securities

 

65,227 

 

65,374 

 

 -

 

65,374 

 

 -

Restricted stock

 

2,864 

 

2,864 

 

 -

 

2,864 

 

 -

Loans and leases, net of allowance, including impaired

 

467,227 

 

456,933 

 

 -

 

 -

 

456,933 

Accrued interest receivable

 

2,388 

 

2,388 

 

 -

 

2,388 

 

 -

Financial liabilities

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing deposits

 

122,642 

 

122,642 

 

 -

 

122,642 

 

 -

Interest-bearing deposits:

 

428,350 

 

428,350 

 

 -

 

428,350 

 

 -

Time

 

56,729 

 

56,378 

 

 -

 

56,378 

 

 -

Brokered deposits

 

18,655 

 

18,662 

 

 -

 

18,662 

 

 -

Repurchase agreements

 

28,211 

 

28,211 

 

 -

 

28,211 

 

 -

FHLBP advances

 

20,000 

 

20,380 

 

 -

 

20,380 

 

 -

Junior subordinated debentures and other borrowings

 

9,279 

 

7,505 

 

 -

 

7,505 

 

 -

Subordinated debt

 

9,750 

 

9,532 

 

 -

 

9,532 

 

 -

Accrued interest payable

 

355 

 

355 

 

 -

 

355 

 

 -

Off-balance sheet instruments

 

 -

 

 -

 

 -

 

 -

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Fair

 

 

 

 

 

 

(Dollars in thousands)

 

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3

Financial assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

12,504 

$

12,504 

$

12,504 

$

 -

$

 -

AFS investment securities

 

172,202 

 

172,202 

 

18 

 

172,184 

 

 -

HTM investment securities

 

59,454 

 

60,099 

 

 -

 

60,099 

 

 -

Restricted stock

 

2,587 

 

2,587 

 

 -

 

2,587 

 

 -

Loans held-for-sale

 

617 

 

640 

 

 -

 

 -

 

 -

Loans and leases, net of allowance, including impaired

 

450,697 

 

436,499 

 

 -

 

 -

 

436,499 

Accrued interest receivable

 

2,253 

 

2,253 

 

 -

 

2,253 

 

 -

Financial liabilities

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing deposits

 

102,107 

 

102,107 

 

 -

 

102,107 

 

 -

Interest-bearing deposits:

 

415,933 

 

415,933 

 

 -

 

415,933 

 

 -

Time

 

76,805 

 

76,519 

 

 -

 

76,519 

 

 -

Brokered deposits

 

10,238 

 

10,204 

 

 -

 

10,204 

 

 -

Repurchase agreements

 

19,221 

 

19,221 

 

 -

 

19,221 

 

 -

FHLBP advances

 

20,000 

 

20,616 

 

 -

 

20,616 

 

 -

Junior subordinated debentures and other borrowings

 

9,279 

 

7,546 

 

 -

 

7,546 

 

 -

Accrued interest payable

 

351 

 

351 

 

 -

 

351 

 

 -

Off-balance sheet instruments

 

 -

 

 -

 

 -

 

 -

 

 -

The specific estimation methods and assumptions used can have a substantial impact on the resulting fair values of financial instruments. Following is a brief summary of the significant assumptions, methods, and estimates used in estimating fair value.

Limitations  Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time DNB’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of DNB’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable  The carrying amounts for short-term investments (cash and cash equivalents) and accrued interest receivable and payable approximate fair value.

Loans Held-for-Sale  The fair value of loans held-for-sale is determined, when possible, using quoted secondary-market prices. If no such quotes prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.

Investment Securities  The fair value of investment securities are determined by an independent third party (“preparer”). The preparer’s evaluations are based on market data. They utilize evaluated pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, their evaluated pricing applications apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data. For certain securities additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions.

U.S. Government agencies are evaluated and priced using multi‑dimensional relational models and option adjusted spreads. State and municipal securities are evaluated on a series of matrices including reported trades and material event notices. Mortgage backed securities are evaluated using matrix correlation to treasury or floating index benchmarks, prepayment speeds, monthly payment information and other benchmarks. Other investments are evaluated using a broker‑ quote based application, including quotes from issuers. The carrying amount of non-readily marketable equity securities approximates liquidation value.

Restricted Stock  The carrying amount of restricted investment in Federal Home Loan Bank stock, Federal Reserve stock and ACBB stock approximates fair value, and considers the limited marketability of such securities.

28


 

 

Loans  Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial mortgages, residential mortgages, consumer and non-accrual loans. The fair value of performing loans is calculated by discounting expected cash flows using an estimated market discount rate. Expected cash flows include both contractual cash flows and prepayments of loan balances. Prepayments on consumer loans were determined using the median of estimates of securities dealers for mortgage-backed investment pools.

The estimated discount rate considers credit and interest rate risk inherent in the loan portfolios and other factors such as liquidity premiums and incremental servicing costs to an investor. Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented would be indicative of the value negotiated in an actual sale.

The fair value for non-accrual loans not based on fair value of collateral is derived through a discounted cash flow analysis, which includes the opportunity costs of carrying a non-performing asset. An estimated discount rate was used for these non-accrual loans, based on the probability of loss and the expected time to recovery.

Deposits The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money market accounts, savings accounts, and interest checking accounts approximate their fair values at the reporting date. Fair values for fixed-rate CDs and brokered deposits (all of which are CDs) are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Of the $18.7 million in brokered deposits, $4.0 million matures in 2016, $6.2 million matures in 2017, $3.2 million matures in 2018, and $5.2 million matures in 2019.

Federal Home Loan Bank of Pittsburgh advances  The fair value of the FHLBP advances is obtained from the FHLB and is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available for debt of similar remaining maturities and collateral terms.

Repurchase agreements  Fair value approximates the carrying value of such liabilities due to their short-term nature.

Junior subordinated debentures  The fair value for subordinated debentures is calculated using discounted cash flows based upon current market spreads to LIBOR for debt of similar remaining maturities and collateral terms.

Subordinated debt  The fair value of the subordinated debt was estimated using either a discounted cash flow analysis based on current market interest rates for debt with similar maturities and credit quality or estimated using market quotes.    

Off-balance-sheet Instruments (Disclosed at Cost)  Off-balance-sheet instruments are primarily comprised of loan commitments, which are generally priced at market at the time of funding. Fees on commitments to extend credit and stand-by letters of credit are deemed to be immaterial and these instruments are expected to be settled at face value or expire unused. It is impractical to assign any fair value to these instruments. At June 30, 2015, un-funded loan commitments totaled $113.8 million and stand-by letters of credit totaled $2.5 million. At December 31, 2014, un-funded loan commitments totaled $101.7 million and stand-by letters of credit totaled $2.2 million.

 

NOTE 11:  STOCKHOLDERS’ EQUITY

 

In July 2013, the Board of Directors of the FRB approved the Basel III intereim final rule (Basel III), which is intended to strengthen the quality and increase the required level of regulatory capital for a more stable and resilient banking system. The changes include (1) a new regulatory capital measure, Common Equity Tier 1 (CET1), which is limited to capital elements of the highest quality, (2) a new definition and increase of tier 1 capital which is now comprised of CET1 and Additional Tier 1, (3) changes in calculation of some risk-weighted assets and off-balance sheet exposure, and (4) a capital conservation buffer that will limit capital distributions, stock redemptions, and certain discretionary bonus payments if the institution does not maintain capital in excess of the minimum capital requirements. These new capital rules took effect for our Bank on January 1, 2015 and reporting began with the March 31, 2015 call report.

On August 4, 2011, DNB entered into a Securities Purchase Agreement with the Secretary of the Treasury, pursuant to which the Corporation issued and sold to the Treasury 13,000 shares of its Non-Cumulative Perpetual Preferred Stock, Series 2011A (“Series 2011A Preferred Stock”), having a liquidation preference of $1,000 per share for aggregate proceeds of $13,000,000.   The Securities Purchase Agreement was entered into, and the Series 2011A Preferred Stock was issued, pursuant to the Treasury’s Small Business Lending Fund program (“SBLF”), a $30 billion fund established under the Small Business Jobs Act of 2010, that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. Of the $13.0 million in aggregate proceeds, $11,879,000 was used to repurchase the outstanding cumulative perpetual preferred stock. The securities sold in

29


 

 

this transaction were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction by DNB not involving a public offering.

The Series 2011A Preferred Stock is entitled to receive non-cumulative dividends payable quarterly, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011.  The dividend rate, which is calculated on the aggregate Liquidation Amount, was initially set at 3.874% per annum, and  was based upon the level of “Qualified Small Business Lending”, or “QSBL” (as defined in the Securities Purchase Agreement) originated by the Corporation’s wholly owned national bank subsidiary DNB First, N.A. (the “Bank”).  The dividend rate for dividends beyond the initial period are  based upon the “Percentage Change in Qualified Lending” (as defined in the Securities Purchase Agreement) between each dividend period and the “Baseline” QSBL level.  Such dividend rate may vary from 1% per annum to 5% per annum for the second through tenth dividend periods depending on the volume of Qualified Small Business Lending the Bank will originate in future periods, and will be fixed at a rate between 1% per annum to 7% per annum and remain unchanged up to four and one-half years following the funding date (the eleventh through the first half of the nineteenth dividend periods).  Because it is not feasible to predict the volume of Qualified Small Business Lending in future periods, it is not feasible to estimate specific future dividend rates under this formula.  If the Series 2011A Preferred Stock remains outstanding for more than four-and-one-half years, the dividend rate will be fixed at 9%.  Prior to that time, in general, the dividend rate decreases as the level of the Bank’s Qualified Small Business Lending increases.  Such dividends are not cumulative, but the Corporation may only declare and pay dividends on its common stock (or any other equity securities junior to the Series 2011A Preferred Stock) if it has declared and paid dividends for the current dividend period on the Series 2011A Preferred Stock, and will be subject to other restrictions on its ability to repurchase or redeem common stock and other securities.  In addition, if (i) the Corporation has not timely declared and paid dividends on the Series 2011A Preferred Stock for six dividend periods or more, whether or not consecutive, and (ii) shares of Series 2011A Preferred Stock with an aggregate liquidation preference of at least $13,000,000 are still outstanding, the Treasury (or any successor holder of Series 2011A Preferred Stock) may designate two additional directors to be elected to the Corporation’s Board of Directors. DNB paid an annual rate on the $13.0 million of Series 2011A Preferred Stock of 1.00% for the year ended December 31, 2014 and the annual rate remained at 1.00% as of June 30, 2015. 

As more completely described in the Certificate of Designation, holders of the Series 2011A Preferred Stock have the right to vote as a separate class on certain matters relating to the rights of holders of Series 2011A Preferred Stock and on certain corporate transactions.  Except with respect to such matters and, if applicable, the election of the additional directors described above, the Series 2011A Preferred Stock does not have voting rights.

The Corporation may redeem the shares of Series 2011A Preferred Stock, in whole or in part, at any time at a redemption price equal to the sum of the Liquidation Amount per share and the per-share amount of any unpaid dividends for the then-current period, subject to any required prior approval by the Corporation’s primary federal banking regulator.

On March 6, 2015, DNB  redeemed  9,750 of the 13,000 shares of the Corporation’s Series 2011A Preferred Stock that had been issued to the United States Department of the Treasury in connection with the Corporation’s participation in the SBLF program. The shares were redeemed at their liquidation value of $1,000 per share plus accrued dividends for a total redemption price of $9,767,604. Following the consummation of this partial redemption, the Corporation continues to have outstanding 3,250 shares of its Series 2011A Preferred Stock. 

 

 

 

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

DNB Financial Corporation (the “Corporation” or "DNB"), may from time to time make written or oral “forward-looking statements,” including statements contained in the Corporation’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to stockholders and in other communications by the Corporation, which are made in good faith by the Corporation pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.

 

These forward-looking statements include statements with respect to the Corporation’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Corporation’s control).  The words “may,” “could,” “should,” “would,”"will," “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.  The following factors, among others, could cause the Corporation’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Corporation conducts operations; the effects of, and

30


 

 

changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; the recent downgrade, and any future downgrades, in the credit rating of the U.S. Government and federal agencies; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Corporation and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Corporation’s products and services; the success of the Corporation in gaining regulatory approval of its products and services, when required; the impact of changes in laws and regulations applicable to financial institutions (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; the nature, extent, and timing of governmental actions and reforms, including the rules of participation for the Small Business Lending Fund, the implementation of Basel III, which may be changed unilaterally and retroactively by legislative or regulatory actions; and the success of the Corporation at managing the risks involved in the foregoing.

 

The Corporation cautions that the foregoing list of important factors is not exclusive.  Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this report, even if subsequently made available by the Corporation on its website or otherwise.  The Corporation does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Corporation to reflect events or circumstances occurring after the date of this report.

 

For a complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review our filings with the Securities and Exchange Commission, including this Form 10-Q, as well as any changes in risk factors or other risks that we may identify in our quarterly or other reports subsequently filed with the SEC.

 

DESCRIPTION OF DNB'S BUSINESS AND BUSINESS STRATEGY

 

DNB is a bank holding company whose bank subsidiary, DNB First, National Association (the “Bank”) is a nationally chartered commercial bank with trust powers, and a member of the FDIC. DNB provides a broad range of banking services to individual and corporate customers through its thirteen community offices located throughout Chester and Delaware Counties, Pennsylvania. DNB is a community banking organization that focuses its lending and other services on businesses and consumers in the local market area. DNB funds all these activities with retail and business deposits and borrowings. Through its DNB First Investment Management & Trust division, the Bank provides investment management and trust administration services to individuals and non-profit organizations. The Bank and its subsidiary, DNB Investments & Insurance,  provide brokerage, retirement and insurance services.

DNB earns revenues and generates cash flows by lending funds to commercial and consumer customers in its marketplace. DNB generates its largest source of interest income through its lending function. A secondary source of interest income is DNB’s investment portfolio, which provides liquidity and cash flows for future lending needs.

In addition to interest earned on loans and investments, DNB earns revenues from fees it charges customers for non-lending services. These services include wealth management investment and trust services; brokerage, annuitiy and insurance services; cash management services; banking and ATM services; as well as safekeeping and other depository services.

To ensure we remain well positioned to meet the growing needs of our customers and communities and to meet the challenges of the 21st century, we’ve worked to build awareness of our full-service capabilities and ability to meet the needs of a wide range of customers. This served to not only retain our existing, customer base, but to position ourselves as an attractive financial institution on which younger individuals and families can build their dreams.  To that end, DNB continues to make appropriate investments in all areas of our business, including people, technology, facilities and marketing.

Comprehensive 5-Year Plan.  During the second quarter of 2014, management updated the 5-year strategic plan that was designed to reposition its balance sheet and improve core earnings. Through the plan, management will endeavor to expand its loan portfolio through new originations, increased loan participations, as well as strategic loan and lease receivable purchases. Management also plans to reduce the absolute level of borrowings with cash flows from existing loans and investments as well as from new deposit growth. A discussion on DNB’s Key Strategies follows below:

Focus on penetrating existing markets to maximize profitability;

Grow loans and diversify the mix;

Improve asset quality;

Focus on profitable customer segments;

31


 

 

Grow and diversify non-interest income, primarily wealth management and mortgage banking; 

Focus on reducing DNB’s cost of funds by changing DNB’s mix of deposits; and

Focus on cost containment and improving operational efficiencies.

Strategic Plan Update.   DNB's second quarter year-over-year earnings comparisons for 2014 and 2015, in part, reflect the investments DNB made in new hires to drive revenue in future quarters, technology to enhance DNB’s capabilities, and branch upgrades to accommodate increased business and provide a welcoming environment for customers. The second quarter of 2015 was a strong quarter in which we met many of our financial performance targets and delivered strong year-over-year net income growth driven by increased earning assets. Initiatives in place to expand banking relationships with clients played a key role in driving strong growth in core deposits.

The net interest margin for the second quarter of 2015 was 3.11%, compared with 3.36% for the second quarter of 2014 and 3.14% for the first quarter of 2015.  On a consecutive quarter basis, DNB's net interest margin has been relatively stable in 2015, despite continuing pressure due to the low-interest rate environment and intense pricing competition for quality lending business. As in past quarters, DNB partially offset this pressure by growing lower-cost core deposits while trimming time deposits, and through the opportunistic use of wholesale borrowings at attractive rates.  As of June 30, 2015, the loan-to-deposit ratio was 76.1%, which indicates that DNB is largely core-funded.

Total loans grew $33.3 million, or 7.6%, to $472.3 million as of June 30, 2015, from $439.0 million as of June 30, 2014.  On a sequential quarter basis, total loans increased 1.9% (not annualized) from $464.1 million as of March 31, 2015.  As of June 30, 2015, total loans were 62.6% of total assets compared with 64.1% as of June 30, 2014, reflecting strong asset growth fueled by core deposit growth that has outpaced loan growth.  

Asset quality remained strong although net charge-offs increased to 0.43% of average loans for the quarter ending June 30, 2015, compared with lower levels for the previous few quarters.  The increase was primarily due to the write down of three non-performing loans based on recent valuations.  Total non-performing assets, including loans and other real estate property, were $6.6 million as of June 30, 2015 compared with $7.7 million as of March 31, 2015 and $6.1 million as of June 30, 2014.  The ratio of non-performing assets to total assets was 0.88% and non-performing loans were 0.98% of total loans as of June 30, 3015.  As of the same date, the allowance for loan losses to total loans ratio was 1.08%. DNB’s allowance for credit losses as a percentage of non-performing loans increased to 110.3% on June 30, 2015, from 76.24% at March 31, 2015.

Total core deposits continued to grow during the second quarter of 2015 and were 88.0% of total deposits as of June 30, 2015.  The increase in core deposits was primarily due to a $9.2 million rise in demand deposits, which was partially offset by a $6.2 million decrease in NOW accounts.  Time deposits declined $16.1 million, which were partially offset by an $8.4 million increase in brokered deposits in the second quarter.  Total deposits were $626.4 million as of June 30, 2015, compared with $575.6 million as of June 30, 2014 and $627.3 million at March 31, 2015.

Total non-interest income for the second quarter of 2015 was $1.3 million, which was a $224,000, or 20.1% increase, from the second quarter of 2014.  On a sequential quarter basis, total non-interest income was relatively unchanged.  The primary driver of the year-over-year increase was a strong 30.0% growth from DNB’s wealth management business and a $185,000 gain on Small Business Administration (SBA) loan sales.  Wealth management fees were $422,000 for the quarter ending June 30, 2015, which represented nearly one-third of total fee income. 

Management has made a concerted effort to improve the measurement and tracking of business lines and overall corporate performance levels. Improved information systems have increased DNB's ability to track key indicators and enhance corporate performance levels. Better measurement against goals and objectives and increased accountability will be integral in attaining desired loan, deposit and fee income production.

MATERIAL CHALLENGES, RISKS AND OPPORTUNITIES

 

The following is a summary of material challenges, risks and opportunities DNB has faced during the six month period ended June 30, 2015:  

 

32


 

 

Interest Rate Risk Management. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. DNB considers interest rate risk the predominant risk in terms of its potential impact on earnings.  Interest rate risk can occur for any one or more of the following reasons: (a) assets and liabilities may mature or re-price at different times; (b) short-term or long-term market rates may change by different amounts; or (c) the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change.  

 

The principal objective of the Bank’s interest rate risk management is to evaluate the interest rate risk included in certain on and off-balance sheet accounts, determine the level of risk appropriate given the Bank’s business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with management’s approved guidelines. Through such management, DNB seeks to reduce the vulnerability of its operations to changes in interest rates. The Bank’s Asset Liability Committee (the “ALCO”) is responsible for reviewing the Bank’s asset/liability policies and interest rate risk position and making decisions involving asset liability considerations. The ALCO meets on a monthly basis and reports trends and the Bank’s interest rate risk position to the Board of Directors.  The extent of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of the Bank.

 

The largest component of DNB’s total income is net interest income, and the majority of DNB’s financial instruments are comprised of interest rate-sensitive assets and liabilities with various terms and maturities.  The primary objective of management is to maximize net interest income while minimizing interest rate risk.  Interest rate risk is derived from timing differences in the re-pricing of assets and liabilities, loan prepayments, deposit withdrawals, and differences in lending and funding rates.  The ALCO actively seeks to monitor and control the mix of interest rate-sensitive assets and interest rate-sensitive liabilities. One measure of interest rate risk is net interest income simulation analysis.  The ALCO utilizes simulation analysis, whereby the model estimates the variance in net interest income with a change in interest rates of plus or minus 200 and 300 basis points in addition to four yield curve twists over a twelve-month period.

 

Liquidity and Market Risk Management Liquidity is the ability to meet current and future financial obligations. The Bank further defines liquidity as the ability to respond to deposit outflows as well as maintain flexibility to take advantage of lending and investment opportunities. The Bank’s primary sources of funds are operating earnings, deposits, repurchase agreements, principal and interest payments on loans, proceeds from loan sales, principal and interest payments on mortgage backed securities, sales of investment securities, and advances from the FHLB. The Bank uses the funds generated to support its lending and investment activities as well as any other demands for liquidity such as deposit outflows. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, mortgage prepayments, loan and security sales and the exercise of call features are greatly influenced by general interest rates, economic conditions and competition.

 

The objective of DNB’s asset/liability management function is to maintain consistent growth in net interest income within DNB’s policy limits. This objective is accomplished through the management of liquidity and interest rate risk, as well as customer offerings of various loan and deposit products. DNB maintains adequate liquidity to meet daily funding requirements, anticipated deposit withdrawals, or asset opportunities in a timely manner. Liquidity is also necessary to meet obligations during unusual, extraordinary or adverse operating circumstances, while avoiding a significant loss or cost. DNB’s foundation for liquidity is a stable deposit base as well as a marketable investment portfolio that provides cash flow through regular maturities or that can be used for collateral to secure funding in an emergency. As part of its liquidity management, DNB maintains assets, which comprise its primary liquidity (Federal funds sold, investments and cash and due from banks, less pledged securities).

 

Credit Risk Management. DNB defines credit risk as the risk of default by a customer or counter-party.  The objective of DNB’s credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis as well as to limit the risk of loss resulting from an individual customer default.  Credit risk is managed through a combination of underwriting, documentation and collection standards.  DNB’s credit risk management strategy calls for regular credit examinations and quarterly management reviews of large credit exposures and credits that are experiencing credit quality deterioration.  DNB’s loan review procedures provide assessments of the quality of underwriting, documentation, risk grading and charge-off procedures, as well as an assessment of the allowance for credit loss reserve analysis process.

 

Competition. In addition to the challenges related to the interest rate environment, community banks in Chester and Delaware Counties have been experiencing increased competition from large regional and international banks entering DNB’s marketplace through mergers and acquisitions. Competition for loans and deposits may negatively affect DNB’s net interest margin. To compensate for the increased competition, DNB has targeted customers who have been disenfranchised by these mergers. To attract these customers, DNB has introduced new products and services, such as Mobile Money and Mobile Deposit, Popmoney and instant issue debit cards.

Deposit Insurance Assessments.  The deposits of the Bank are insured by the FDIC up to the limits set forth under applicable law and are subject to deposit insurance premium assessments. The FDIC imposes a risk based deposit premium assessment system, under which the amount of FDIC assessments paid by an individual insured depository institution, such as the Bank, is based on the level of risk incurred in its activities. The FDIC places a depository institution in one of four risk categories

33


 

 

determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rates based on certain specified financial ratios. Pursuant to the Federal Deposit Insurance Act, the FDIC has authority and the responsibility to establish deposit insurance assessments at rates sufficient to maintain the designated reserve ratio of the Deposit Insurance Fund at a level between 1.15% and 1.5% of estimated insured deposits, and to take action to restore the designated reserve ratio to at least 1.15% of estimated insured deposits when it falls below that level. Effective as of April 1, 2011, the FDIC adopted changes to its base and risk-based deposit insurance rates. Pursuant to the new rules, a bank’s annual assessment base rates were as follows, depending on the bank’s risk category:

Initial and Total Base Assessment Rates*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Category

 

Risk Category I

Risk Category II

Risk Category III

Risk Category IV

Large and Highly Complex Institutions

Initial base assessment rate

5-9

14

23

35

5-35

Unsecured debt adjustment**

(4.5)-0

(5)-0

(5)-0

(5)-0

(5)-0

Brokered deposit adjustment

0-10

0-10

0-10

0-10

TOTAL BASE ASSESSMENT RATE

2.5-9

9-24

18-33

30-45

2.5-45

 

*Total base assessment rates do not include the depository institution debt adjustment.

**The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base assessment rate; thus for example, an insured depository institution with an initial base assessment rate of 5 basis points will have a maximum unsecured debt adjustment of 2.5 basis points and cannot have a total base assessment rate lower than 2.5 basis points.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, that was enacted by Congress on July 15, 2010, and was signed into law by President Obama on July 21, 2010, enacted a number of changes to the federal deposit insurance regime that affected the deposit insurance assessments the Bank is obligated to pay.  For example:

-The law permanently raised the federal deposit insurance limit to $250,000 per account ownership.  This change may have the effect of increasing losses to the FDIC insurance fund on failures of other insured depository institutions.

 

-The new law made deposit insurance coverage unlimited in amount for non-interest bearing transaction accounts until December 31, 2012.  This change may also have the effect of increasing losses to the FDIC insurance fund on future failures of other insured depository institutions. Effective January 31, 2013, non-interest bearing transaction accounts fell under the existing FDIC insurance limit of $250,000 per account ownership.

 

-The law increased the insurance fund’s minimum designated reserve ratio from 1.15 to 1.35, and removed the 1.50 cap on the reserve ratio. The law gave the FDIC discretion to suspend or limit the declaration or payment of dividends even when the reserve ratio exceeded the minimum designated reserve ratio.

 

The Dodd-Frank Act expanded the base for FDIC insurance assessments, requiring that assessments be based on the average consolidated total assets less tangible equity capital of a financial institution. On February 7, 2011, the FDIC approved a final rule to implement the foregoing provision of the Dodd-Frank Act and to make other changes to the deposit insurance assessment system applicable to insured depository institutions with over $10 billion in assets. Among other things, the final rule eliminated risk categories and the use of long-term debt issuer ratings in calculating risk-based assessments, and instead implemented a scorecard method, combining CAMELS ratings and certain forward-looking financial measures to assess the risk an institution poses to the Deposit Insurance Fund. The final rule also revised the assessment rate schedule for large institutions and highly complex institutions to provide assessments ranging from 2.5 to 45 basis points.

Each of these changes may increase the rate of FDIC insurance assessments to maintain or replenish the FDIC’s deposit insurance fund.  This could, in turn, raise the Bank’s future deposit insurance assessment costs.  On the other hand, the law changes the deposit insurance assessment base so that it will generally be equal to consolidated assets less tangible equity.  This change of the assessment base from an emphasis on deposits to an emphasis on assets is generally considered likely to cause larger banking organizations to pay a disproportionately higher portion of future deposit insurance assessments, which may, correspondingly, lower the level of deposit insurance assessments that smaller community banks such as the Bank may otherwise have to pay in the future. On December 14, 2010, the FDIC issued a final rule setting the insurance fund’s designated reserve ratio at 2, which is in excess of the 1.35 minimum designated reserve ratio established by the Dodd-Frank Act. While it is likely that the law will increase the Bank’s future deposit insurance assessment costs, the specific amount by which the law’s combined changes will affect the Bank’s deposit insurance assessment costs is hard to predict, particularly because the law gives the FDIC enhanced discretion to set assessment rate levels.

34


 

 

 

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 current annual Financing Corporation assessment rate is 58 basis points on the deposit insurance assessment base, as defined above, which we anticipate will result in an aggregate estimated FICO assessment payment by the Bank of $38,000 in 2015.

Material Trends and Uncertainties.

For the quarter ended June 30, 2015, DNB reported net income of $1.24 million versus $1.12 million for the same period in 2014. Per share earnings on a fully diluted basis were $0.43, up from $0.38 the prior year. Even though DNB’s quarterly earnings have increased, there are many aspects of the economy and the Federal Reserve’s monetary policy that hinder DNB’s ability to grow revenues and net income. One of the most significant factors is that the global and U.S. economies have experienced reduced business activity as a result of disruptions in the financial system during the past seven years. The United States, Europe, China and many other countries across the globe are struggling with too much debt and weaker streams of revenues as a result of recessionary pressures and high unemployment. Overall economic growth continues to be slow at a time when national and regional unemployment rates have improved, however participation rates remain at historically low levels. The risks associated with our business remain acute in periods of slow wage and economic growth. Moreover, financial institutions continue to be affected by a sluggish real estate market. While we are continuing to take steps to decrease and limit our exposure to problem loans, we nonetheless retain direct exposure to the residential and commercial real estate markets, and we are affected by these events.

 

The July 15, 2015 Beige Book indicated that aggregate business activity in the Third Federal Reserve District (the "Third District"), the region DNB Financial is located, continued to grow at a modest pace during this July 15, 2015 Beige Book period.  The Federal Reserve’s contacts continued to report modest growth in hiring and only slight increases in wages; price increases also remained relatively slight, with most contacts reporting little change. Moderate growth of economic activity is anticipated over the next six months.

Third District homebuilders have reported little or no change in activity since the June 3, 2015 Beige Book. The Federal Reserve’s contacts reported that economic and financial conditions remained challenging for contract signings on new homes. Activity remained inconsistent through the current time period. However, surviving smaller builders are generally meeting their plans and expect this year to be as good as, if not better than last year. Brokers in the Philadelphia and Harrisburg areas reported continued year-over-year gains in home sales; however, the prior spring had been relatively weak.

The Federal Reserve’s nonresidential real estate contacts reported little change to the modest pace of construction and leasing activity seen earlier. Downtown Allentown and Philadelphia remain the focus of significant new construction for office and mixed-use developments. While most of the new office demand stems from firms moving around the region, the Federal Reserve’s contacts suggest that some demand is being driven by employment growth from existing firms and from new locations by out-of-market firms. Overall, commercial rents continued to increase slightly. The Federal Reserve’s contacts generally remained optimistic for the ongoing growth of both new construction and leasing activity in 2015.

Third District financial firms have continued to report modest overall increases in total loan volume since the June 3, 2015 Beige Book. Strong growth was reported for commercial and industrial lending and auto loans, while most real estate lending and other loans were relatively flat. Generally, the Federal Reserve’s banking contacts described a slow, steady pick-up in activity and remained optimistic for the remainder of the year.

Third District manufacturers reported that overall activity picked up to a modest pace of growth during the July 15, 2015 Beige Book period. Contacts reported similar improvements in new orders and in shipments. Gains in activity appeared to be stronger among the makers of paper products, chemical products, rubber and plastic products, industrial machinery, and fabricated metal products; activity appeared weaker among the makers of food products, primary metal products, and electronics. Slightly more than half of the Federal Reserve’s contacts indicated that underlying demand for their products had increased over the past three months, while one-fifth reported no change. Expectations of business activity growth during the next six months, particularly for new orders and shipments, have improved somewhat since the June 3, 2015 Beige Book report. However, firms indicated little change in their expectations of future employment while softening plans for future capital expenditures.

Although DNB’s earnings have been impacted by the general economic conditions, the impact has not been as severe as it has been in many parts of the nation, largely due to a relatively healthier economic climate in the Third Federal Reserve District and specifically Chester County. DNB’s franchise spans both Chester and Delaware counties in southeastern Pennsylvania. The majority of loans have been made to businesses and individuals in Chester County and the majority of deposits are from businesses and individuals within the County. According to census data, Chester County’s population has grown at approximately 15%, compared to 13% for the nation and 3% for the Commonwealth of Pennsylvania. The median household income in Chester County is $86,184 and

35


 

 

the County ranks 14th nationally in disposable income. The unemployment rate for Chester County stood at 3.8% as of March 2015, compared to a Pennsylvania unemployment rate of 5.3% and a national unemployment rate of 5.6%. Traditionally, the unemployment rate has been the lowest in the surrounding five-county area and it ranks among the lowest unemployment rates in the Commonwealth. Chester County has a civilian labor force of 266,900, with manufacturing jobs representing 23.1% of the workforce and retail shopping comprising 13.8% of the total employment. During the last few years, the County has been able to keep most of its major employers; however some of them have downsized in order to remain competitive. Chester County is home to several Fortune 500 companies. Thirteen Chester County employers have 1,000 employees or more. Of these 13 companies, two companies have more than 5,000 employees. 

These and other factors have impacted our operations. We continue to focus on the consistency and stability of core earnings and balance sheet strength which are critical success factors in today’s challenging economic environment.

Regulatory Initiatives Related to Our Industry.    The federal government continues to consider a variety of reforms related to banking and the financial industry including, without limitation, the Dodd-Frank Act.  The Dodd-Frank Act is intended to promote financial stability in the U.S., reduce the risk of bailouts and protect against abusive financial services practices by improving accountability and transparency in the financial system and ending “too big to fail” institutions.  It is the broadest overhaul of the U.S. financial system since the Great Depression, and although enacted more than five years ago, much of its impact will be determined by the scope and substance of many regulations that still need to be adopted by various regulatory agencies to implement its provisions.  For these reasons, the overall impact on DNB and its subsidiaries remains unknown at this time. 

 

The Dodd-Frank Act delegates to various federal agencies, including the Consumer Financial Protection Bureau, the task of implementing its many provisions through regulation. While some regulations have been adopted, hundreds of new federal regulations, studies and reports addressing all of the major areas of the new law, including the regulation of banks and their holding companies, will be required, ensuring that federal rules and policies in this area will be further developing for months and years to come. Based on the provisions of the Dodd-Frank Act and adopted and anticipated implementing regulations, it is highly likely that banks and thrifts as well as their holding companies will be subject to significantly increased regulation and compliance obligations.

 

The Dodd-Frank Act could require us to make material expenditures, in particular personnel training costs and additional compliance expenses, or otherwise adversely affect our business or financial results.  It could also require us to change certain of our business practices, adversely affect our ability to pursue business opportunities we might otherwise consider engaging in, cause business disruptions and/or have other impacts that are as-of-yet unknown to DNB and the Bank.  Failure to comply with these laws or regulations, even if inadvertent, could result in negative publicity, fines or additional licensing expenses, any of which could have an adverse effect on our cash flow and results of operations.  For example, a provision of the Dodd-Frank Act precludes bank holding companies from treating future trust preferred securities issuances as Tier 1 capital for regulatory capital adequacy purposes.  This provision may narrow the number of possible capital raising opportunities DNB and other bank holding companies might have in the future.  Further, the new rules issued by the Consumer Financial Protection Bureau may materially affect the methods and costs of compliance by the Bank in connection with future consumer-related transactions.

 

New Capital Rules. On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Corporation and the Bank. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

 

The rules include new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Corporation and the Bank under the final rules effective as of January 1, 2015: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

 

The final rules implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1

36


 

 

capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Corporation) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

 

The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions took effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

 

The final rules set forth certain changes for the calculation of risk-weighted assets, which have been required to utilize since January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets. Based on our current capital composition and levels, we believe that we are in compliance with the requirements as set forth in the final rules presently in effect.

 

Other Material Challenges, Risks and Opportunities. As a financial institution, DNB's earnings are significantly affected by general business and economic conditions.  These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States economy and local economies in which we operate.  As mentioned above in Material Trends and Uncertainties, the economic downturn, increased unemployment, and other events negatively impact household and/or corporate incomes and could decrease the demand for DNB's loan and non-loan products and services and increase the number of customers who fail to pay interest or principal on their loans.  Geopolitical conditions can also affect DNB's earnings.  Acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and our military conflicts, could impact business conditions in the United States.

 

CRITICAL ACCOUNTING POLICIES

 

The following discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principals. 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 notes to the Consolidated Financial Statements included in DNB's 10-K for the year ended December 31, 2014.  

 

Determination of the allowance for credit losses. Credit loss allowance policies involve significant judgments, estimates and assumptions by management which may have a material impact on the carrying value of net loans and leases and, potentially, on the net income recognized by DNB from period to period.  The allowance for credit losses is based on management’s ongoing evaluation of the loan and lease portfolio and reflects an amount considered by management to be its best estimate of the amount necessary to absorb known and inherent losses in the portfolio.  Management considers a variety of factors when establishing the allowance, such as the impact of current economic conditions, diversification of the portfolios, delinquency statistics, results of loan review and related classifications, and historic loss rates.  In addition, certain individual loans which management has identified as problematic are specifically provided for, based upon an evaluation of the borrower’s perceived ability to pay, the estimated adequacy of the underlying collateral and other relevant factors.  In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for credit losses.  They may require additions to the allowance based upon their judgments about information available to them at the time of examination.  Although provisions have been established and segmented by type of loan, based upon management’s assessment of their differing inherent loss characteristics, the entire allowance for credit losses is available to absorb further losses in any category.

 

Management uses significant estimates to determine the allowance for credit losses.  Because the allowance for credit losses is dependent, to a great extent, on conditions that may be beyond DNB’s control, management’s estimate of the amount necessary to

37


 

 

absorb credit losses and actual credit losses could differ.  DNB’s current judgment is that the allowance for credit losses remains appropriate at June 30, 2015.  For a description of DNB’s accounting policies in connection with its allowance for credit losses, see, “Allowance for Credit Losses”, in Management’s Discussion and Analysis.

 

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 the net deferred tax assets for financial reporting purposes.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss carry forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance would be established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become available.  For a more detailed description of these items, refer to Note 11 (Federal Income Taxes) to DNB’s consolidated financial statements for the year ended December 31, 2014

 

The notes to DNB's most recent Consolidated Financial Statements as set forth in DNB's Annual Report 10-K 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 $755.9 million at June 30, 2015, compared to $723.3 million at December 31, 2014.  The $32.6 million increase in total assets was primarily attributable to a $16.7 million increase in loans and leases before allowance for credit losses, a $15.0 million increase in cash and cash equivalents, a $56,000 increase in investment securities, and a $1.6 million increase in all other assets, offset by a $617,000 decrease in loans held for sale and a $202,000 increase in the allowance for credit losses. 

 

Investment Securities. Investment securities, including restricted stock, at June 30,  2015 were $234.6 million, compared to $234.2 million at December 31, 2014. The $333,000 increase in investment securities and restricted stock was primarily due to $27.2 million in purchases of investment securities, offset by $26.6 million in sales, principal pay-downs, calls and maturities. 

 

Gross Loans and Leases.  DNB’s loans and leases increased  $16.7 million to $472.3 million at June 30, 2015, compared to $455.6 million at December 31, 2014. Total commercial loans and residential loans increased $16.5 million and $300,000, respectively, while consumer loans decreased $50,000.

 

Deposits.  Deposits were $626.4 million at June 30, 2015, compared to $605.1 million at December 31, 2014.  Deposits increased $21.3 million or 3.52% during the six-month period ended June 30, 2015.  Core deposits, which are comprised of demand, NOW, money markets and savings accounts, increased by $33.0 million and brokered deposits increased by $8.4 million while time deposits decreased by $20.1 million.    

 

Borrowings. Borrowings were $67.7 million at June 30, 2015, compared to $49.0 million at December 31, 2014.  The increase of $18.7 million or 38.2% was primarily due to a $9.8  million increase in subordinated debt and a $9.0 million increase in repurchase agreements. (See Note 7 regarding issuance of $9.8 million subordinated debt.)

 

Stockholders’ Equity. Stockholders' equity was $56.6 million at June 30, 2015, compared to $63.9 million at December 31, 2014. The decrease in stockholders’ equity was primarily a result of the partial redemption of the SBLF Series 2011A Preferred Stock by $9.8 million, $391,000 of dividends paid on DNB’s common stock,  $34,000 of dividends paid on SBLF Series 2011A Preferred Stock, and $75,000 of other comprehensive loss. These subtractions to stockholders equity were partially offset by year-to-date earnings of $2.5 million. (See Note 11 in this form 10-Q regarding DNB's participation in the Treasury’s SBLF, a $30 billion fund established under the Small Business Jobs Act of 2010.)

 

RESULTS OF OPERATIONS

SUMMARY  

 

Net income for the three and six-month periods ended June 30,  2015 was $1.2 million and $2.5 million compared to $1.1 million and $2.1 million for the same periods in 2014.  Diluted earnings per share for the three and six-month periods ended June 30, 2015 were $0.43 and $0.86 compared to $0.38 and $0.73 for the same periods in 2014.  The $115,000 increase in net income during the most recent three-month period was primarily attributable to a $224,000 increase in non-interest income and a  $157,000 increase in net interest income, offset by a $160,000 increase in the provision for credit losses, a $56,000 increase in income tax expense, and a $50,000 increase in non-interest expense. The $363,000 increase in net income during the six-month period was primarily attributable

38


 

 

to a $370,000 increase in net interest income and a $340,000 increase in non-interest income, offset by a $180,000 increase in non-interest expense, an  $85,000 increase in the provision for credit losses, and an  $82,000 increase in income tax expense.

 

NET INTEREST INCOME

 

DNB's earnings performance is primarily dependent upon its level of net interest income, which is the excess of interest income over interest expense.  Interest income includes interest earned on loans, investments and federal funds sold and interest-earning cash, as well as loan fees and dividend income earned on investment securities.  Interest expense includes interest on deposits, Federal Home Loan Bank of Pittsburgh ("FHLBP") advances, repurchase agreements, Federal funds purchased, subordinated notes, and other borrowings.

 

Net interest income for the three and six-month periods ended June 30, 2015 was $5.5 million and $10.8 million, compared to $5.3 million and $10.5 million for the same periods in 2014. Interest income for the three and six-month periods ended June 30, 2015 was $6.1 million and $12.1 million, compared to $5.9 million and $11.7 million for the same periods in 2014. Interest expense for the three and six-month periods ended June 30, 2015 was $678,000 and $1.3 million, compared to $581,000 and $1.2 million for the same periods in 2014. The composite cost of funds for the three and six-month periods ended June 30, 2015 was 0.40% and 0.38%, compared to 0.38% and 0.40% for the same periods in 2014. The net interest margin for the three and six-month periods ended June 30, 2015 was 3.11% and 3.13%, compared to 3.36% and 3.36% for the same periods in 2014.  

 

Interest on loans and leases was $5.0 million and $9.9 million for the three and six-month periods ended June 30, 2015, compared to $4.9 million and $9.7 million for the same periods in 2014. The average balance of loans and leases was $459.5 million with an average yield of 4.36% for the second quarter of 2015, compared to $431.8 million with an average yield of 4.49% for the same period in 2014. The average balance of loans and leases was $460.0 million with an average yield of 4.34% for the six months ended June 30, 2015, compared to $426.7 million with an average yield of 4.54% for the same period in 2014. 

 

Interest and dividends on investment securities was $1.1 million and $2.2 million for the three and six-month periods ended June 30, 2015, compared to $1.0 million and $2.0 million for the same periods in 2014. The average balance of investment securities was $234.27 million with a tax equivalent average yield of 2.10% for the second quarter of 2015, compared to $192.5 million with a tax equivalent average yield of 2.29% for the same period in 2014.  The average balance of investment securities was $233.5 million with a tax equivalent average yield of 2.08% for the six months ended June 30, 2015, compared to $191.2 million with a tax equivalent average yield of 2.32% for the same period in 2014.

 

Interest on deposits was $277,000 and $559,000 for the three and six-month periods ended June 30, 2015, compared to $331,000 and $709,000 for the same periods in 2014. The average balance of deposits was $623.5 million with an average rate of 0.18% for the second quarter of 2015, compared to $562.2 million with an average rate of 0.23% for the same period in 2014.  The average balance of deposits was $620.4 million with an average rate of 0.18% for the six months ended June 30, 2015, compared to $558.5 million with an average rate of 0.25% for the same period in 2014.

 

Interest on borrowings was $401,000 and $725,000 for the three and six-month period ended June 30, 2015, compared to $250,000 and $497,000 for the same periods in 2014. The average balance of borrowings was $60.2 million with an average rate of 2.67% for the second quarter of 2015, compared to $39.2 million with an average rate of 2.55% for the same period in 2014.  The average balance of borrowings was $55.6 million with an average rate of 2.62% for the six months ended June 30, 2015, compared to $39.4 million with an average rate of 2.54% for the same period in 2014.  The increase in borrowings in both current periods is primarily due to issuance of $9.75 million in subordinated debt and higher levels of outstanding repurchase agreements.    

 

 

PROVISION FOR CREDIT LOSSES

 

To provide for known and inherent losses in the loan and lease portfolios, DNB maintains an allowance for credit losses. Provisions for credit losses are charged against income to increase the allowance when necessary. Loan and lease losses are charged directly against the allowance and recoveries on previously charged-off loans and leases are added to the allowance. In establishing its allowance for credit losses, management considers the size and risk exposure of each segment of the loan and lease portfolio, past loss experience, present indicators of risk such as delinquency rates, levels of non-accruals, the potential for losses in future periods, and other relevant factors. Management’s evaluation of criticized and classified loans generally includes reviews of 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”).

Management reviews and establishes the adequacy of the allowance for credit losses in accordance with U.S. generally accepted accounting principles, guidance provided by the Securities and Exchange Commission and as prescribed in OCC Bulletin 2006-47. Its methodology for assessing the appropriateness of the allowance consists of several key elements which include: specific allowances for identified impaired loans; and allowances by loan type for pooled homogenous loans. In considering national and local

39


 

 

economic trends, we review a variety of information including Federal Reserve publications, general economic statistics, foreclosure rates and housing statistics published by third parties. We believe this improves the measure of inherent loss over a complete economic cycle and reduces the impact for qualitative adjustments. The unallocated portion of the allowance is intended to provide for probable losses not otherwise accounted for in management’s other elements of its overall estimate. An unallocated component is maintained to cover uncertainties such as changes in the national and local economy, concentrations of credit, expansion into new markets and other factors that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

In addition, DNB reviews historical loss experience for the residential mortgage, commercial mortgage, commercial term,  commercial construction, home equity and consumer installment loan pools to determine a historical loss factor. The historical loss factors are then applied to the current portfolio balances to determine the required reserve percentage for each loan pool.  A historical loss ratio is determined for each group over a five year period. The five year average loss ratio by type is then used to calculate the estimated loss based on the current balance of each group. This five year time period is appropriate given DNB’s historical level of losses and, more importantly, represents the current economic environment.

This analysis is intended to assess the potential for loss within the loan portfolio and to substantiate the adequacy of the allowance. Should the analysis indicate that the allowance is not adequate, management will recommend a provision expense be made in an amount equal to the shortfall derived. In establishing and reviewing the allowance for adequacy, emphasis has been placed on utilizing the methodology prescribed in OCC Bulletin 2006-47. Management believes that the following factors create a comprehensive system of controls in which management can monitor the quality of the loan portfolio. Consideration has been given to the following factors and variables which may influence the risk of loss within the loan portfolio:

Changes in the nature and volume of the portfolio and in the terms of loans;

Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;

The existence and effect of any concentrations of credit, and changes in the level of such concentrations;

Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

Changes in the experience, ability, and depth of lending management and other relevant staff;

Changes in the quality of the institution’s loan review system;

Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio; and

Changes in the value of underlying collateral for collateral‑dependent loans.

Portfolio risk includes the levels and trends in delinquencies, impaired loans, changes in the loan rating matrix and trends in volume and terms of loans. Management is satisfied with the stability of the past due and non-performing loans and believes there has been no further decline in the quality of the loan portfolio due to any trend in delinquent or adversely classified loans. In determining the adequacy of the allowance, management considered the deterioration of asset quality in DNB’s commercial mortgage and residential first mortgage portfolios, which were factors contributing to the increase in the level of allowance during 2012 and 2011. In addition to ordering new appraisals and creating specific reserves on impaired loans, the allowance allocation rates were increased, reflective of delinquency trends which have been caused by continued weakness in the housing markets, falling home equity values, and rising unemployment. New appraisal values we have obtained for existing loans have generally been consistent with trends indicated by Case-Schiller and other indices.

Given the contraction in real estate values, DNB closely monitors the loan to value ratios of all classified assets and requires periodic current appraisals to monitor underlying collateral values. Management also reviews borrower, sponsorship and guarantor’s financial strength along with their ability and willingness to provide financial support of their obligations on an immediate and continuing basis.

40


 

 

There was a $415,000 and a $715,000 provision made during the three and six months ended June 30, 2015, compared to $255,000 and $630,000 for the same periods in 2014. DNB’s percentage of allowance for credit losses to total loans and leases was 1.08%  at June 30, 2015 compared to 1.08% and 1.11% at December 31, 2014 and June 30, 2014, respectively. Net charge-offs were $513,000, $847,000, and  $366,000 during the six months ended June 30, 2015, year ended December 31, 2014,  and six months ended June 30, 2014,  respectively. The percentage of net charge-offs to total average loans and leases were 0.11%, 0.19%, and 0.09% for those same respective periods. Management believes that the allowance for credit losses is adequate, but continues to monitor it along with other performance metrics including those ratios related to non-performing loans and leases. Management is not aware of any potential problem loans, which were accruing and current at June 30, 2015, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms and that would result in a significant loss to DNB. Non-performing loans decreased  $2.2 million during the six month period ended June 30,  2015The ratio of the allowance for credit losses as a percentage of loans and leases was 1.08% at June 30, 2015 and 1.08% at December 31, 2014 and reflects management’s estimate of the level of inherent losses in the portfolio, which has been impacted by a recessionary economy, continued high unemployment, a weakened housing market and deterioration in income-producing properties.

We typically establish a general valuation allowance on classified loans which are not individually impaired. In establishing the general valuation allowance, we segregate these loans by category. The categories used by DNB include “doubtful,” “substandard,” “special mention,” “watch list” and “pass.” For commercial mortgage, commercial and construction loans, the determination of the category for each loan is based on periodic reviews of each loan by our lending and credit officers as well as an independent, third-party consultant. The reviews include a consideration of such factors as recent payment history, current financial data, cash flow, financial projections, collateral evaluations, guarantor or sponsorship financial strength and current economic and business conditions. Categories for residential mortgage and consumer loans are determined through a similar review. Classification of a loan within a category is based on identified weaknesses that increase the credit risk of loss on the loan. Each category carries a loss factor for the allowance percentage to be assigned to the loans within that category. The allowance percentage, is determined based on inherent losses associated with each type of lending as determined through consideration of our loss history with each type of loan, trends in credit quality and collateral values, and an evaluation of current economic and business conditions.

We establish a general allowance on non-classified loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages to each category. An evaluation of each category is made to determine the need to further segregate the loans within each category by type. For our residential mortgage and consumer loan portfolios, we identify similar characteristics throughout the portfolio including credit scores, loan-to-value ratios and collateral. For our commercial mortgage and construction loan portfolios, a further analysis is made in which we segregated the loans by type based on the purpose of the loan and the collateral properties securing the loan. Various risk factors for each type of loan are considered, including the impact of general economic and business conditions, collateral value trends, credit quality trends and historical loss experience.

As of June 30,  2015, DNB had $6.6 million of non-performing assets, which included $4.6 million of non-performing loans and $2.0 million of OREO and other repossessed assets.  This compares to $7.8 million of non-performing assets at December 31, 2014 which included $6.9 million of non-performing or impaired loans and $901,000 of OREO and other repossessed assets. Loans are reviewed for impairment in accordance with FASB ASC 310-10-35. Impaired loans can either be secured or unsecured, not including large groups of smaller balance loans that are collectively evaluated. Impairment is measured by the difference between the loan amount and the present value of the future cash flow discounted at the loan’s effective interest rate. Management measures loans for impairment by using the fair value of collateral for collateral dependent loans. In general, management reduces the amount of the appraisal by the estimated cost of acquisition and disposition of the underlying collateral and compares that adjusted value with DNB’s carrying value. DNB establishes a specific valuation allowance on impaired loans that have a collateral shortfall and/or statement cashflow shortfalls, including estimated costs to sell in comparison to the carrying value of the loan. Of the $7.0 million of impaired loans at June 30, 2015,  $1.0 million had a valuation allowance of $317,000 and $6.0 million had no specific allowance. Of the $9.1 million of impaired loans at December 31, 2014, $850,000 had a valuation allowance of $273,000 and $8.2 million had no specific allowance. For those impaired loans that management determined that no specific valuation allowance was necessary, management has reviewed the present value of the future cash flows or the appraisal for each loan and determined that there is no shortfall in the collateral. During the quarter ended June 30, 2015,  DNB recognized $501,000 in total charge-offs, $338,000 of which related to impaired loans.  An impaired loan may not represent an expected loss. 

We typically order new third-party appraisals or collateral valuations when a loan becomes impaired or is transferred to Other Real Estate Owned ("OREO"). This is done within two weeks of a loan becoming impaired or a loan moving to OREO. It generally takes two to eight weeks to receive the appraisals, depending on the type of property being appraised. We recognize any provision or related charge-off within two weeks of receiving the appraisal after the appraisal has been reviewed by DNB. We generally order a new appraisal for all impaired real estate loans having a balance of $100,000 or higher, every twelve months, unless management determines more frequent appraisals are necessary. We use updated valuations when time constraints do not permit a full appraisal process, to reflect rapidly changing market conditions. Because appraisals and updated valuations utilize historical data in reaching

41


 

 

valuation conclusions, the appraised or updated value may or may not reflect the actual sales price that we will receive at the time of sale. Management uses the qualitative factor “Changes in the value of underlying collateral for collateral-dependent loans” to calculate any required reserve to mitigate this risk.

Real estate appraisals typically include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Not all appraisals utilize all three approaches to value. Depending on the nature of the collateral and market conditions, the appraiser may emphasize one approach over another in determining the fair value of collateral.

Appraisals may also contain different estimates of value based on the level of occupancy or future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the collateral’s use or condition. “As-stabilized” or “as-completed” valuations assume that the collateral is improved to a stated standard or achieves its highest and best use in terms of occupancy. “As-stabilized” valuations may be subject to a present value adjustment for market conditions or the schedule for improvements.

In connection with the valuation process, we will typically develop an exit strategy for the collateral by assessing overall market conditions, the current condition and use of the asset and its highest and best use. For most income-producing real estate, investors value most highly a stable income stream from the asset; consequently, we conduct a comparative evaluation to determine whether conducting a sale on an “as-is” basis or on an “as-stabilized” basis is most likely to produce the highest net realizable value and compare these values with the costs incurred and the holding period necessary to achieve the “as stabilized” value.

Our estimates of the net realizable value of collateral include a deduction for the expected costs to sell the collateral or such other deductions as deemed appropriate. For most real estate collateral, we apply a seven to ten percent deduction to the value of real estate collateral to determine its expected costs to sell the asset.

42


 

 

Analysis of Allowance for Credit Losses

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

Year Ended December 31, 2014

 

Six Months Ended June 30, 2014

Beginning balance

$

4,906 

$

4,623 

$

4,623 

Provisions

 

715 

 

1,130 

 

630 

Loans charged off:

 

 

 

 

 

 

Residential mortgage

 

(35)

 

(326)

 

(100)

Commercial mortgage

 

 -

 

(8)

 

(8)

Commercial:

 

 

 

 

 

 

Commercial term

 

(174)

 

(47)

 

(18)

Commercial construction

 

(278)

 

(511)

 

(261)

Lease financing

 

 -

 

(1)

 

 -

Consumer:

 

 

 

 

 

 

Home equity

 

(1)

 

 -

 

 -

Other

 

(30)

 

(82)

 

(11)

Total charged off

 

(518)

 

(975)

 

(398)

Recoveries:

 

 

 

 

 

 

Residential mortgage

 

 -

 

 

Commercial mortgage

 

 -

 

 -

 

 -

Commercial:

 

 

 

 

 

 

Commercial term

 

 

 

Commercial construction

 

 -

 

103 

 

10 

Lease financing

 

 

 

Consumer:

 

 

 

 

 

 

Home Equity

 

 -

 

 -

 

 -

Other

 

 

 

Total recoveries

 

 

128 

 

32 

Ending balance

 

5,108 

 

4,906 

 

4,887 

Reserve for unfunded loan commitments

$

180 

$

166 

$

160 

 

The following table sets forth the composition of DNB’s allowance for credit losses for the dates indicated.

Composition of Allowance for Credit Losses

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

June 30, 2014

 

 

 

 

Percent of

 

 

 

Percent of

 

 

 

Percent of

 

 

 

 

Loan Type

 

 

 

Loan Type

 

 

 

Loan Type

 

 

 

 

to Total

 

 

 

to Total

 

 

 

to Total

 

 

 

Amount

Loans

 

 

Amount

Loans

 

 

Amount

Loans

 

Residential mortgage

$

265 

%

$

269 

%

$

315 

%

Commercial mortgage

 

2,562 
61 

 

 

2,300 
56 

 

 

2,131 
57 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

721 
17 

 

 

709 
18 

 

 

641 
20 

 

Commercial construction

 

774 

 

 

881 

 

 

1,019 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

190 
11 

 

 

189 
11 

 

 

176 
10 

 

Other

 

65 

 

 

70 

 

 

98 

 

Unallocated

 

531 

 -

 

 

488 

 -

 

 

507 

 -

 

Total

$

5,108 
100 

%

$

4,906 
100 

%

$

4,887 
100 

%

    

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for unfunded loan commitments

$

180 

 -

 

$

166 

 -

 

$

160 

 -

 

 

 

43


 

 

NON-INTEREST INCOME

 

Non-interest income includes service charges on deposit products; fees received in connection with the sale of non-depository products and services, including fiduciary and investment advisory services offered through DNB First Investment Management and Trust; securities brokerage products and services and insurance products and services offered through DNB Investments & Insurance; and other sources of income such as increases in the cash surrender value of Bank Owned Life Insurance (“BOLI”), net gains on sales of investment securities, SBA loans and OREO properties. In addition, DNB receives fees for cash management, remote capture, merchant services, debit cards, safe deposit box rentals and similar activities.

Non-interest income for the three and six-month period ended June 30, 2015 was $1.3 million and $2.7 million, compared to $1.1 million and $2.3 million for the same periods in 2014. The $224,000 increase during the three months ended June 30, 2015 was mainly attributable to increases of $185,000 in gains on sales of loans, $97,000 in wealth management, $51,000 in mortgage banking, and $13,000 in other fees. These increases were offset by decreases of $91,000 in gains on sale of investments and $30,000 in service charges on deposits (primarily NSF fees). The $340,000 increase during the six months ended June 30, 2015 was mainly attributable to increases of $416,000 in gains on sales of loans, $138,000 in wealth management, $89,000 in mortgage banking, and $38,000 in other fees. These increases were offset by decreases of $273,000 in gains on sale of investments and $64,000 in service charges on deposits (primarily NSF fees).

 

NON-INTEREST EXPENSE

 

Non-interest expense for the three and six-month periods ended June 30, 2015 was $4.7 million and $9.5 million, compared to $4.7 million and $9.4 million for the same periods in 2014.  During the three months ended June 30, 2015, total non-interest expense increased by $50,000.  The increase was primarily due to increases of $166,000 in salary and employee benefits (normal merit increases, higher incentives paid to revenue generators, and increased restricted stock expense), $47,000 in other expenses, and $4,000 in FDIC insurance. The increases were partially offset by decreases of $55,000 in occupancy, $45,000 in professional and consulting, $29,000 in furniture and equipment, $26,000 in advertising and marketing, and $9,000 in printing and supplies. During the six months ended June 30, 2015, total non-interest expense increased by $180,000. The increase was primarily due to increases of $307,000 in salary and employee benefits (normal merit increases, higher incentives paid to revenue generators, and increased restricted stock expense), $36,000 in other expenses, and $15,000 in FDIC insurance. These increases were partially offset by decreases of $71,000 in occupancy, $58,000 in furniture and equipment, $35,000 in professional and consulting, $12,000 in advertising and marketing, and $7,000 in loss on sale or write down of OREO. 

 

INCOME TAXES

 

Income tax expense for the three and six-month periods ended June 30, 2015 was $417,000 and $766,000, compared to $361,000 and $684,000 for the same periods in 2014. The effective tax rate for the three and six-month periods ended June 30, 2015 was 25.2% and 24.4%  compared to 24.4%  and 24.4% for the same periods in 2014.  Income tax expense for each period differs from the amount determined at the statutory rate of 34.0% due to tax-exempt income on loans and investment securities, DNB's ownership of BOLI policies, and tax credits recognized on a low-income housing limited partnership.

 

ASSET QUALITY

 

DNB continues to work diligently to improve asset quality by adhering to strict underwriting standards and improving lending policies and procedures. Non-performing assets totaled $6.6 million at June 30,  2015 compared to $7.8 million at December 31, 2014 and $6.1 million at June 30, 2014. The non-performing loans to total loans ratio was 0.98% at June 30, 2015,  1.50% at December 31, 2014 and 1.18% at June 30, 2014. The non-performing assets to total assets ratio was 0.88% at June 30, 2015, 1.07% at December 31, 2014, and 0.89% at June 30, 2014. The allowance to non-performing loans and leases ratio was 110.3% at June 30, 2015, 71.6% at December 31, 2014 and 94.6% at June 30, 2014. Non-performing assets have, and will continue to have, an impact on earnings; therefore management intends to continue working aggressively to reduce the level of such assets.

Non-performing assets are comprised of non-accrual loans and leases, loans and leases delinquent over ninety days and still accruing, as well as OREO and other repossessed assets. Non-accrual loans and leases are loans and leases 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 non-accrual loan or lease 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. Other repossessed assets are primarily assets from DNB’s commercial lease portfolio that were repossessed. OREO and other repossessed assets are carried at the lower of

44


 

 

carrying value 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.

DNB’s Credit Policy Committee monitors the performance of the loan and lease portfolio to identify potential problem assets on a timely basis. Committee members meet to design, implement and review asset recovery strategies, which serve to maximize the recovery of each troubled asset. As of June 30, 2015,  DNB had $21.8 million of substandard loans. Of the $21.8 million, $17.1 million are performing and are believed to require increased supervision and review; and may, depending on the economic environment and other factors, become non-performing assets in future periods. The amount of performing substandard loans at December 31, 2014 was $16.0 million. The majority of the loans are secured by commercial real estate, with lesser amounts being secured by residential real estate, inventory and receivables. 

The following table sets forth those assets that are: (i) placed on non-accrual status, (ii) contractually delinquent by 90 days or more and still accruing, and (iii) OREO as a result of foreclosure or voluntary transfer to DNB as well as other repossessed assets. In addition, the table sets forth DNB's asset quality and allowance coverage ratios at the dates indicated:

Non-Performing Assets

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

June 30, 2014

 

Non-accrual loans:

 

 

 

 

 

 

 

Residential mortgage

$

1,671 

$

2,458 

$

1,734 

 

Commercial mortgage

 

1,251 

 

1,294 

 

192 

 

Commercial:

 

 

 

 

 

 

 

Commercial term

 

193 

 

198 

 

 -

 

Commercial construction

 

749 

 

2,043 

 

2,293 

 

Consumer:

 

 

 

 

 

 

 

Home equity

 

431 

 

432 

 

346 

 

Other

 

169 

 

94 

 

99 

 

Total non-accrual loans

 

4,464 

 

6,519 

 

4,664 

 

Loans 90 days past due and still accruing

 

168 

 

334 

 

501 

 

Total non-performing loans

 

4,632 

 

6,853 

 

5,165 

 

Other real estate owned & other repossessed property

 

2,002 

 

901 

 

945 

 

Total non-performing assets

$

6,634 

$

7,754 

$

6,110 

 

Asset quality ratios:

 

 

 

 

 

 

 

Non-performing loans to total loans

 

0.98 

%

1.50 

%

1.18 

%

Non-performing assets to total assets

 

0.88 

 

1.07 

 

0.89 

 

Allowance for credit losses to:

 

 

 

 

 

 

 

Total loans and leases

 

1.08 

 

1.08 

 

1.11 

 

Non-performing loans and leases

 

110.3 

 

71.6 

 

94.6 

 

 

Included in the loan and lease portfolio are loans for which DNB has ceased the accrual of interest.  If contractual interest income had been recorded on non-accrual loans, interest would have been increased as shown in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Year Ended

 

Six Months Ended

 

 

June 30,

 

December 31,

 

June 30,

(Dollars in thousands)

 

2015

 

2014

 

2014

Interest income which would have been

 

 

 

 

 

 

recorded under original terms

$

278 

$

499 

$

232 

Interest income recorded during the period

 

 -

 

97 

 

Net impact on interest income

$

278 

$

402 

$

229 

 

As of June 30, 2015, DNB had one commercial mortgage classified as a TDR totaling $2,222,000, compared to one commercial mortgage classified as a TDR totaling $2,246,000 (the same loan) at December 31, 2014, and one commercial mortgage classified as a TDR totaling $2,269,000 (the same loan) at June 30, 2014. The rate on this loan was modified and the terms of the loans were changed to interest only while the project was being built out. The loan commenced normal principal and interest payments in June 2014.  The loan was extended and there was no reduction of principal. The balance of the loan prior to modification was $2,272,000 and the balance after the modification was $2,272,000. During the three and six months ended June 30, 2015, there were no defaults on any terms of this loan.

45


 

 

 

As of June 30, 2015, DNB had one consumer home equity loan classified as a TDR totaling $102,000, compared to one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at December 31, 2014, and one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at June 30, 2014. The monthly payment on this loan was reduced for 36 months and the borrower will resume making contractual payments at the end of this period. The loan was extended and there was no reduction of principal. This loan was classified a TDR in June of 2014. The balance of the loan prior to modification was $102,000 and the balance after the modification was $102,000. During the three and six months ended June 30, 2015, there were no defaults on any terms of this loan.

 

Impaired loans are measured for impairment using the fair value of the collateral for collateral dependent loans.  Information regarding impaired loans is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At and For the

 

At and For the

 

At and For the

 

 

Six Months Ended

 

Year Ended

 

Six Months Ended

 

 

June 30,

 

December 31,

 

June 30,

(Dollars in thousands)

 

2015

 

2014

 

2014

Total recorded investment

$

7,013 

$

9,056 

$

7,198 

Impaired loans with a specific allowance

 

1,014 

 

850 

 

1,384 

Impaired loans without a specific allowance

 

5,999 

 

8,206 

 

5,814 

Average recorded investment

 

8,442 

 

8,064 

 

7,604 

Specific allowance allocation

 

317 

 

273 

 

300 

Total principal and interest collected

 

473 

 

478 

 

272 

Interest income recorded

 

 -

 

97 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes.  DNB’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization, or that can be used as collateral to secure funding.  As part of its liquidity management, DNB maintains assets that comprise its primary liquidity, which totaled $92.5 million at June 30, 2015 compared to $71.9 million at December 31, 2014.  Primary liquidity includes investments, Federal funds sold and cash and due from banks, less pledged securities.  DNB also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios. 

 

 In addition, DNB maintains borrowing arrangements with various correspondent banks, the Federal Home Loan Bank of Pittsburgh and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs.  Through these relationships, DNB had available credit of approximately $299.8 million at June 30, 2015.  As a member of the FHLB, we are eligible to borrow up to a specific credit limit which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of June 30, 2015, our Maximum Borrowing Capacity with the FHLB was $253.8 million. At June 30, 2015, DNB had borrowed $20.0 million and the FHLB had issued letters of credit, on DNB's behalf, totaling $30.0 million against its available credit lines. At June 30, 2015, we also had available $46.0 million of unsecured federal funds lines of credit with other financial institutions as well as $19.7 million of available short or long term funding through the Certificate of Deposit Account Registry Service (CDARS) program and $113.1 million of available short or long term funding through Raymond James’ brokered CDs agreement. Management believes that DNB has adequate resources to meet its short-term and long-term funding requirements.

 

On August 5, 2011, Standard & Poor's downgraded the credit rating of the U.S. Government and federal agencies, including the FHLB, from AAA to AA+, with a negative outlook.  Any future downgrades in the credit ratings of the U.S. Government and the FHLB could likely increase the borrowing costs of the FHLB and possibly have a negative impact on its operations and long-term performance.  It is possible this could have an adverse effect on the value of the Corporation's investment in FHLB stock. 

 

At June 30, 2015, DNB had $113.8 million in un-funded loan commitments. Management anticipates these commitments will be funded by means of normal cash flows. Certificates of deposit greater than or equal to $100,000 scheduled to mature in one year or less from June 30, 2015 totaled $23.1 million.  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 cash and cash equivalents or by pay-downs and maturities of loans and investments.

 

The Corporation and the Bank have each met the definition of “well capitalized” for regulatory purposes on June 30, 2015.  The Bank’s capital category is determined for the purposes of applying the bank regulators’ “prompt corrective action” regulations and for determining levels of deposit insurance assessments and may not constitute an accurate representation of the Corporation’s or

46


 

 

the Bank’s overall financial condition or prospects. The Corporation’s capital exceeds the FRB’s minimum leverage ratio requirements for bank holding companies (see additional discussion included in Note 16 of DNB’s December 31, 2014 Form 10-K).

 

Under federal banking laws and regulations, DNB and the Bank are required to maintain minimum capital as determined by certain regulatory ratios. Capital adequacy for regulatory purposes, and the capital category assigned to an institution by its regulators, may be determinative of an institution’s overall financial condition.

 

The following table summarizes data and ratios pertaining to the Corporation and the Bank's capital structure.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

For Capital

 

 

Capitalized Under

 

 

 

 

 

 

 

Adequacy

 

 

Prompt Corrective

 

 

 

Actual

 

 

Purposes

 

 

Action Provisions

 

(Dollars in thousands)

 

Amount

Ratio

 

 

Amount

Ratio

 

 

Amount

Ratio

 

DNB Financial Corporation

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

$

82,301 
15.2 

%

$

43,282 
8.0 

%

 

N/A

N/A

 

Tier 1 risk-based capital

 

67,263 
12.4 

 

 

32,462 
6.0 

 

 

N/A

N/A

 

Tier 1 (leverage) capital

 

67,263 
9.0 

 

 

29,816 
4.0 

 

 

N/A

N/A

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

$

79,491 
15.9 

%

$

39,951 
8.0 

%

 

N/A

N/A

 

Tier 1 risk-based capital

 

74,419 
14.9 

 

 

19,975 
4.0 

 

 

N/A

N/A

 

Tier 1 (leverage) capital

 

74,419 
10.6 

 

 

28,215 
4.0 

 

 

N/A

N/A

 

DNB First, N.A.

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

$

81,423 
15.1 

%

$

43,189 
8.0 

%

$

53,987 
10.0 

%

Tier 1 risk-based capital

 

76,135 
14.1 

 

 

32,392 
6.0 

 

 

43,189 
8.0 

 

Tier 1 (leverage) capital

 

76,135 
10.2 

 

 

29,775 
4.0 

 

 

37,219 
5.0 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

$

79,510 
15.9 

%

$

39,919 
8.0 

%

$

49,898 
10.0 

%

Tier 1 risk-based capital

 

74,438 
14.9 

 

 

19,959 
4.0 

 

 

29,939 
6.0 

 

Tier 1 (leverage) capital

 

74,438 
10.6 

 

 

28,198 
4.0 

 

 

35,247 
5.0 

 

 

In addition, the Federal Reserve Bank (the "FRB") leverage ratio rules require bank holding companies to maintain a minimum level of "primary capital" to total assets of 5.5% and a minimum level of "total capital" to total assets of 6%.  For this purpose, (i) "primary capital" includes, among other items, common stock, certain perpetual debt instruments such as eligible Trust preferred securities, contingency and other capital reserves, and the allowance for loan losses, (ii) "total capital" includes, among other things, certain subordinated debt, and "total assets" is increased by the allowance for loan losses.  DNB's primary capital ratio and its total capital ratio are both 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.

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

To measure the impacts of longer-term asset and liability mismatches beyond two years, DNB utilizes an Economic Value of Equity ("EVE") model.  The EVE model measures the potential price risk of equity to changes in interest rates and factors in the optionality included on the balance sheet.  EVE analysis is used to dynamically model the present value of asset and liability cash flows, with rates ranging up or down 200 basis points.  The EVE is likely to be different if rates change.  Results falling outside prescribed ranges may require action by management.  At June 30, 2015 and December 31, 2014, DNB's variance in the EVE as a percentage of assets with an instantaneous and sustained parallel shift of 200 basis points was within its negative 3% guideline, as shown in the following table. The change as a percentage of the present value of equity with a 200 basis point increase was within DNB's negative 25% guideline at June 30, 2015 and December 31, 2014. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47


 

 

(Dollars in thousands)

 

June 30, 2015

 

December 31, 2014

 

Change in rates

 

Flat

 

-200bp

 

+200bp

 

Flat

 

-200bp

 

+200bp

 

EVE

$

73,100 

$

67,592 

$

62,214 

$

72,548 

$

68,218 

$

58,656 

 

Change

 

 

 

(5,508)

 

(10,886)

 

 

 

(4,330)

 

(13,892)

 

Change as % of assets

 

 

 

(0.7%)

 

(1.4%)

 

 

 

(0.6%)

 

(1.9%)

 

Change as % of PV equity

 

 

 

(7.5%)

 

(14.9%)

 

 

 

(6.0%)

 

(19.1%)

 

 

ITEM 4- CONTROLS AND PROCEDURES

 

DNB’s Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of June 30, 2015, the end of the period covered by this report, in accordance with the requirements of Exchange Act Rule 240.13a-15(b). Based on that evaluation, Management has concluded that DNB’s current disclosure controls and procedures are effective. 

 

Management of DNB is responsible for establishing and maintaining adequate internal control over financial reporting for DNB, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.  There was no change in DNB’s “internal control over financial reporting” (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2015, that has materially affected, or is reasonably likely to materially affect, DNB’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Neither DNB nor any of its subsidiaries is a party to, nor is any of their property the subject of, any material legal proceedings other than ordinary routine litigation incident to their businesses.

 

ITEM 1A. RISK FACTORS

 

Not applicable

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

There were no unregistered sales of equity securities during the quarter ended June 30, 2015. The following table provides information on repurchases by DNB of its common stock in each month of the quarter ended June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

Maximum Number

 

 

 

 

 

 

Shares Purchased

 

of Shares that May

 

 

Total Number

 

Average

 

as Part of Publicly

 

Yet Be Purchased

 

 

Of Shares

 

Price Paid

 

Announced Plans

 

Under the Plans or

Period

 

Purchased

 

Per Share

 

or Programs

 

Programs (a)

 

 

 

 

 

 

 

 

 

April 1, 2015 – April 30, 2015

 

 -

$

 -

 

 -

$

63,016 

 

 

 

 

 

 

 

 

 

May 1, 2015 – May 31, 2015

 

 -

 

 -

 

 -

$

63,016 

 

 

 

 

 

 

 

 

 

June 1, 2015 – June 30, 2015

 

 -

 

 -

 

 -

$

63,016 

 

 

 

 

 

 

 

 

 

Total

 

 -

$

 -

 

 -

$

63,016 

 

On July 25, 2001, DNB authorized the buyback of up to 175,000 shares of its common stock over an indefinite period. On August 27, 2004, DNB increased the buyback from 175,000 to 325,000 shares of its common stock over an indefinite period.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None. 

48


 

 

 

ITEM 6. EXHIBITS

 

a) The following exhibits are filed or furnished herewith:

 

 

 

Exhibit Number

Description

 

 

 

3.1

 

Amended and Restated Articles of Incorporation, as amended effective December 8, 2008, filed March 31, 2009 as item 3(i) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.

3.2

 

Bylaws of the Registrant as amended December 8, 2008, filed March 31, 2009 as item 3(ii) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.

3.3

 

Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series 2008A of DNB Financial Corporation, filed as Exhibit 4.3 to Form 8-K (No. 1-34242) on January 26, 2009 and incorporated herein by reference.

31.1

 

Rule 13a-14(a)/15d-14 (a) Certification of Chief Executive Officer

31.2

 

Rule 13a-14(a)/15d-14 (a) Certification of Chief Financial Officer

32.1

 

Section 1350 Certification of Chief Executive Officer

32.2

 

Section 1350 Certification of Chief Financial Officer

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

49


 

 

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.

 

 

 

 

overmber

 

 

 

 

DNB FINANCIAL CORPORATION

 

 

 

August 10, 2015

BY:

/s/ William S. Latoff

 

 

William S. Latoff, Chairman of the

Board and Chief Executive Officer

 

 

 

 

 

 

 

 

 

August 10, 2015

BY:

/s/ Gerald F. Sopp

 

 

Gerald F. Sopp, Chief Financial Officer and Executive Vice President

 

 

 

 

 

 

 

50


 

 

 

 

 

 

 

 

Exhibit Number

 

Exhibit Index

 

 

Description

3.1

 

Amended and Restated Articles of Incorporation, as amended effective December 8, 2008, filed March 31, 2009 as item 3(i) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.

3.2

 

Bylaws of the Registrant as amended December 8, 2008, filed March 31, 2009 as item 3(ii) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.

3.3

 

Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series 2008A of DNB Financial Corporation, filed as Exhibit 4.3 to Form 8-K (No. 1-34242) on January 26, 2009 and incorporated herein by reference.

31.1

 

Rule 13a-14(a)/15d-14 (a) Certification of Chief Executive Officer

31.2

 

Rule 13a-14(a)/15d-14 (a) Certification of Chief Financial Officer

32.1

 

Section 1350 Certification of Chief Executive Officer

32.2

 

Section 1350 Certification of Chief Financial Officer

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

51