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EX-32.2 - EX-32.2 - DNB FINANCIAL CORP /PA/c671-20160930xex32_2.htm
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EX-31.2 - EX-31.2 - DNB FINANCIAL CORP /PA/c671-20160930xex31_2.htm
EX-31.1 - EX-31.1 - DNB FINANCIAL CORP /PA/c671-20160930xex31_1.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: September 30, 2016

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)

 

4,229,331 (Shares Outstanding as of November 4, 2016) 



1


 

 

DNB FINANCIAL CORPORATION AND SUBSIDIARY





INDEX



                                                                



 

 

 

 

 



 

PART  I - FINANCIAL INFORMATION

PAGE NO.



 

 

 

ITEM 1.      

 

FINANCIAL STATEMENTS (Unaudited):

 



 

 

 



 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 



 

September 30, 2016 and December 31, 2015



 

 

 



 

CONSOLIDATED STATEMENTS OF INCOME

 



 

Three and Nine-Months Ended September 30, 2016 and 2015



 

 

 



 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

 

 



 

Three and Nine-Months Ended September 30, 2016 and 2015



 

 

 



 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY



 

Nine Months Ended September 30, 2016 and 2015

 



 

 

 



 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 



 

Nine Months Ended September 30, 2016 and 2015



 

 

 



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 

 

 

ITEM 2. 

 

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

29 



 

 

 



 

 

 

ITEM 3.      

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

46 



 

 

 

ITEM 4.      

 

CONTROLS AND PROCEDURES

46 



 

 

 



 

PART II - OTHER INFORMATION

 



 

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

46 



 

 

 

ITEM 1A.

 

RISK FACTORS

46 



 

 

 

ITEM 2.      

 

UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS

46 



 

 

 

ITEM 3.      

 

DEFAULTS UPON SENIOR SECURITIES

47 



 

 

 

ITEM 4.      

 

MINE SAFETY DISCLOSURES

47 



 

 

 

ITEM 5.      

 

OTHER INFORMATION

47 



 

 

 

ITEM 6.      

 

EXHIBITS

47 



 

 

 

SIGNATURES

48 



 

 

 

EXHIBIT INDEX

 



 

 

 



 

2


 

 





PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DNB Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition (Unaudited)







 

 

 

 

 



 

 

 

 

 



September 30,

 

December 31,

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

2016

 

2015

Assets

 

 

 

 

 

Cash and due from banks

$

30,442 

 

$

21,119 

Cash and cash equivalents

 

30,442 

 

 

21,119 

Available-for-sale investment securities at fair value (amortized cost of $121,492 and $153,559)

 

121,688 

 

 

152,379 

Held-to-maturity investment securities (fair value of $75,111 and $68,431)

 

73,789 

 

 

67,829 

Total investment securities

 

195,477 

 

 

220,208 

Loans

 

509,475 

 

 

481,758 

Allowance for credit losses

 

(5,303)

 

 

(4,935)

Net loans

 

504,172 

 

 

476,823 

Restricted stock

 

3,623 

 

 

3,447 

Office property and equipment, net

 

9,033 

 

 

6,806 

Accrued interest receivable

 

2,639 

 

 

2,410 

Other real estate owned & other repossessed property

 

2,939 

 

 

2,581 

Bank owned life insurance (BOLI)

 

9,492 

 

 

9,326 

Core deposit intangible

 

56 

 

 

66 

Net deferred taxes

 

3,592 

 

 

3,733 

Other assets

 

8,807 

 

 

2,299 

Total assets 

$

770,272 

 

$

748,818 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Non-interest-bearing deposits

$

146,731 

 

$

125,581 

Interest-bearing deposits:

 

 

 

 

 

NOW

 

169,400 

 

 

185,973 

Money market

 

160,312 

 

 

137,555 

Savings

 

73,867 

 

 

72,660 

Time

 

71,920 

 

 

66,018 

Brokered deposits

 

23,313 

 

 

18,488 

Total deposits 

 

645,543 

 

 

606,275 

Federal Home Loan Bank of Pittsburgh (FHLBP) advances

 

20,000 

 

 

30,000 

Repurchase agreements

 

19,483 

 

 

32,416 

Junior subordinated debentures

 

9,279 

 

 

9,279 

Subordinated debt

 

9,750 

 

 

9,750 

Other borrowings

 

431 

 

 

464 

Total borrowings

 

58,943 

 

 

81,909 

Accrued interest payable

 

329 

 

 

345 

Other liabilities

 

6,240 

 

 

4,801 

Total liabilities 

 

711,055 

 

 

693,330 

Stockholders’ Equity

 

 

 

 

 

Preferred stock, $10.00 par value;

 

 

 

 

 

1,000,000 shares authorized; $1,000 liquidation preference per share; 0 and 0 issued, respectively

 

 -

 

 

 -

Common stock, $1.00 par value;

 

 

 

 

 

10,000,000 shares authorized; 2,951,128 and 2,933,049 issued, respectively; 2,853,434 and 2,823,840 outstanding, respectively

 

2,975 

 

 

2,955 

Treasury stock, at cost; 97,694 and 109,209 shares, respectively

 

(1,805)

 

 

(2,015)

Surplus

 

35,614 

 

 

35,097 

Retained earnings

 

23,504 

 

 

21,436 

Accumulated other comprehensive loss

 

(1,071)

 

 

(1,985)

Total stockholders’ equity 

 

59,217 

 

 

55,488 

Total liabilities and stockholders’ equity 

$

770,272 

 

$

748,818 

See accompanying notes to unaudited consolidated financial statements.

3


 

 

DNB Financial Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)

 





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

(Dollars in thousands, except per share data)

2016

 

2015

 

2016

 

2015

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

$

5,218 

 

$

5,083 

 

$

15,377 

 

$

15,006 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

716 

 

 

714 

 

 

2,150 

 

 

2,208 

Exempt from federal taxes

 

316 

 

 

354 

 

 

944 

 

 

1,042 

Interest on cash and cash equivalents

 

27 

 

 

10 

 

 

91 

 

 

32 

Total interest and dividend income

 

6,277 

 

 

6,161 

 

 

18,562 

 

 

18,288 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

Interest on NOW, money market and savings

 

230 

 

 

148 

 

 

588 

 

 

450 

Interest on time deposits

 

139 

 

 

84 

 

 

396 

 

 

291 

Interest on brokered deposits

 

81 

 

 

68 

 

 

214 

 

 

118 

Interest on FHLB advances

 

92 

 

 

198 

 

 

276 

 

 

589 

Interest on repurchase agreements

 

 

 

16 

 

 

30 

 

 

35 

Interest on junior subordinated debentures

 

89 

 

 

77 

 

 

254 

 

 

224 

Interest on subordinated debt

 

104 

 

 

103 

 

 

311 

 

 

237 

Interest on other borrowings

 

16 

 

 

17 

 

 

49 

 

 

51 

Total interest expense

 

760 

 

 

711 

 

 

2,118 

 

 

1,995 

Net interest income

 

5,517 

 

 

5,450 

 

 

16,444 

 

 

16,293 

Provision for credit losses

 

100 

 

 

100 

 

 

630 

 

 

815 

Net interest income after provision for credit losses

 

5,417 

 

 

5,350 

 

 

15,814 

 

 

15,478 

Non-interest Income:

 

 

 

 

 

 

 

 

 

 

 

Service charges

 

280 

 

 

292 

 

 

827 

 

 

860 

Wealth management

 

393 

 

 

317 

 

 

1,231 

 

 

1,091 

Mortgage banking

 

76 

 

 

38 

 

 

189 

 

 

127 

Increase in cash surrender value of BOLI

 

56 

 

 

57 

 

 

166 

 

 

169 

Gain on sale of investment securities, net

 

197 

 

 

10 

 

 

431 

 

 

74 

Gain on sale of loans

 

 -

 

 

 -

 

 

39 

 

 

416 

Gains from insurance proceeds

 

30 

 

 

 -

 

 

1,180 

 

 

 -

Other fees

 

337 

 

 

323 

 

 

1,022 

 

 

973 

Total non-interest income

 

1,369 

 

 

1,037 

 

 

5,085 

 

 

3,710 

Non-interest Expense:

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

2,817 

 

 

2,615 

 

 

8,636 

 

 

7,897 

Furniture and equipment

 

422 

 

 

303 

 

 

1,093 

 

 

908 

Occupancy

 

524 

 

 

431 

 

 

1,459 

 

 

1,500 

Professional and consulting

 

306 

 

 

317 

 

 

948 

 

 

906 

Advertising and marketing

 

111 

 

 

141 

 

 

460 

 

 

480 

Printing and supplies

 

36 

 

 

35 

 

 

129 

 

 

122 

FDIC insurance

 

73 

 

 

129 

 

 

323 

 

 

376 

PA shares tax

 

157 

 

 

151 

 

 

476 

 

 

452 

Telecommunications

 

63 

 

 

63 

 

 

185 

 

 

184 

Postage

 

28 

 

 

20 

 

 

70 

 

 

65 

Loss on sale or write down of OREO, net

 

160 

 

 

154 

 

 

164 

 

 

154 

Due diligence and merger expense

 

1,498 

 

 

 -

 

 

1,961 

 

 

 -

Other expenses

 

509 

 

 

400 

 

 

1,390 

 

 

1,263 

Total non-interest expense

 

6,704 

 

 

4,759 

 

 

17,294 

 

 

14,307 

Income before income tax expense

 

82 

 

 

1,628 

 

 

3,605 

 

 

4,881 

Income tax expense

 

81 

 

 

359 

 

 

939 

 

 

1,125 

Net income

$

 

$

1,269 

 

$

2,666 

 

$

3,756 

Preferred stock dividends and accretion of discount

 

 -

 

 

 

 

 -

 

 

42 

Net income available to common shareholders

$

 

$

1,261 

 

$

2,666 

 

$

3,714 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.00 

 

$

0.45 

 

$

0.94 

 

$

1.33 

Diluted

$

0.00 

 

$

0.44 

 

$

0.93 

 

$

1.31 

Cash dividends per common share

$

0.07 

 

$

0.07 

 

$

0.21 

 

$

0.21 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 Basic

2,853,080 

 

2,806,549 

 

2,844,780 

 

2,798,360 

 Diluted

2,885,799 

 

2,852,237 

 

2,879,240 

 

2,844,319 

See accompanying notes to unaudited consolidated financial statement.s

4


 

 

DNB Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

(Dollars in thousands)

2016

 

2015

 

2016

 

2015

Net income

$

 

$

1,269 

 

$

2,666 

 

$

3,756 

Other Comprehensive (Loss) Income:

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains arising during the period

 

 

 

 

 

 

 

 

 

 

 

Before tax amount

 

(288)

 

 

767 

 

 

1,786 

 

 

714 

Tax effect

 

99 

 

 

(261)

 

 

(607)

 

 

(243)



 

(189)

 

 

506 

 

 

1,179 

 

 

471 

Accretion of discount on AFS to HTM reclassification(1)

 

 

 

 

 

 

 

 

 

 

 

Before tax amount

 

 

 

 

 

 

 

Tax effect(2)

 

(2)

 

 

(1)

 

 

(3)

 

 

(2)



 

 

 

 

 

 

 

Less reclassification for gains included in net income

 

 

 

 

 

 

 

 

 

 

 

Before tax amount

 

(176)

 

 

(10)

 

 

(410)

 

 

(74)

Tax effect(2)

 

59 

 

 

 

 

139 

 

 

25 



 

(117)

 

 

(6)

 

 

(271)

 

 

(49)

Total other comprehensive (loss) income

 

(302)

 

 

501 

 

 

914 

 

 

426 

Total comprehensive (loss) income

$

(301)

 

$

1,770 

 

$

3,580 

 

$

4,182 

(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 in the consolidated statements of (loss) income.

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.



5


 

 

DNB Financial Corporation 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, 2016

$

 -

$

2,955 

$

(2,015)

$

35,097 

$

21,436 

$

(1,985)

$

55,488 

Net income for nine months ended September 30, 2016

 

 -

 

 -

 

 -

 

 -

 

2,666 

 

 -

 

2,666 

Other comprehensive income

 

 -

 

 -

 

 -

 

 -

 

 -

 

914 

 

914 

Restricted stock compensation expense (18,079 shares vested)

 

 -

 

36 

 

 -

 

765 

 

 -

 

 -

 

801 

Taxes on share award vest

 

 -

 

(16)

 

 -

 

(421)

 

 -

 

 -

 

(437)

Tax benefit for restricted stock vest

 

 -

 

 -

 

 -

 

64 

 

 -

 

 -

 

64 

Cash dividends - common ($0.21 per share)

 

 -

 

 -

 

 -

 

 -

 

(598)

 

 -

 

(598)

Sale of treasury shares to 401(k) (7,111 shares)

 

 -

 

 -

 

130 

 

68 

 

 -

 

 -

 

198 

Sale of treasury shares to deferred comp. plan (4,404 shares)

 

 -

 

 -

 

80 

 

41 

 

 -

 

 -

 

121 

Balance at September 30, 2016

$

 -

$

2,975 

$

(1,805)

$

35,614 

$

23,504 

$

(1,071)

$

59,217 







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

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 nine months ended September 30, 2015

 

 -

 

 -

 

 -

 

 -

 

3,756 

 

 -

 

3,756 

Other comprehensive income

 

 -

 

 -

 

 -

 

 -

 

 -

 

426 

 

426 

Redemption of preferred stock (9,750 shares)

 

(9,750)

 

 -

 

 -

 

 -

 

 -

 

 -

 

(9,750)

Restricted stock compensation expense

 

 -

 

14 

 

 -

 

236 

 

 -

 

 -

 

250 

Exercise of stock options (95,834 shares)

 

 -

 

16 

 

 -

 

247 

 

 -

 

 -

 

263 

Taxes on stock option exercise and share award vest

 

 -

 

 -

 

 -

 

(153)

 

 -

 

 -

 

(153)

Cash dividends - common ($0.21 per share)

 

 -

 

 -

 

 -

 

 -

 

(587)

 

 -

 

(587)

Cash dividends SBLF preferred

 

 -

 

 -

 

 -

 

 -

 

(42)

 

 -

 

(42)

Sale of treasury shares to 401(k) (8,280 shares)

 

 -

 

 -

 

151 

 

49 

 

 -

 

 -

 

200 

Sale of treasury shares to deferred comp. plan (4,029 shares)

 

 -

 

 -

 

74 

 

23 

 

 -

 

 -

 

97 

Balance at September 30, 2015

$

3,250 

$

2,961 

$

(2,076)

$

35,147 

$

20,259 

$

(1,173)

$

58,368 

See accompanying notes to unaudited consolidated financial statements.

6


 

 

DNB Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)







 

 

 

 



 

 

 

 



Nine Months Ended



September 30,

(Dollars in thousands)

2016

2015

Cash Flows From Operating Activities:

 

 

 

 

Net income

$

2,666 

$

3,756 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

Depreciation, amortization and accretion

 

1,178 

 

1,385 

Provision for credit losses

 

630 

 

815 

Stock based compensation

 

801 

 

250 

Net gain on sale of securities

 

(431)

 

(74)

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

 

164 

 

154 

Earnings from investment in BOLI

 

(166)

 

(169)

Deferred tax benefit

 

(330)

 

(285)

Proceeds from sales of loans

 

8,725 

 

14,332 

Loans originated for sale

 

(8,497)

 

(13,172)

Gain on sale of loans and mortgage banking income

 

(228)

 

(543)

Write-off of property and equipment

 

 -

 

690 

Increase in accrued interest receivable

 

(229)

 

(289)

Increase in other assets

 

(6,505)

 

(859)

Decrease in accrued interest payable

 

(16)

 

(29)

Increase (decrease) in other liabilities

 

1,439 

 

(245)

Net Cash (Used in) Provided By Operating Activities

 

(799)

 

5,717 

Cash Flows From Investing Activities:

 

 

 

 

Activity in available-for-sale securities:

 

 

 

 

Sales

 

43,913 

 

17,969 

Maturities, repayments and calls

 

50,660 

 

39,982 

Purchases

 

(62,646)

 

(47,929)

Activity in held-to-maturity securities:

 

 

 

 

Sales

 

757 

 

 -

Maturities, repayments and calls

 

6,864 

 

1,452 

Purchases

 

(13,507)

 

(7,209)

Net increase in restricted stock

 

(176)

 

(377)

Net increase in loans

 

(27,979)

 

(17,273)

Purchases of property and equipment

 

(2,892)

 

(280)

Costs capitalized in OREO and other repossessed property

 

(954)

 

 -

Proceeds from sale of OREO and other repossessed property

 

432 

 

 -

Net Cash Used in Investing Activities

 

(5,528)

 

(13,665)

Cash Flows From Financing Activities:

 

 

 

 

Net increase in deposits

 

39,268 

 

3,375 

Repayment of FHLBP advances

 

(10,000)

 

 -

Net (decrease) increase in repurchase agreements

 

(12,933)

 

11,280 

Proceeds from issuance of subordinated debt

 

 -

 

9,750 

Repayment of other borrowings

 

(33)

 

(30)

Dividends paid

 

(598)

 

(629)

Proceeds from the exercise of stock options

 

 -

 

263 

Taxes on exercise of stock options

 

(437)

 

(153)

Tax benefit for restricted stock vest

 

64 

 

 -

Redemption of preferred stock

 

 -

 

(9,750)

Sale of treasury stock

 

319 

 

297 

Net Cash Provided by Financing Activities

 

15,650 

 

14,403 

Net Change in Cash and Cash Equivalents 

 

9,323 

 

6,455 

Cash and Cash Equivalents at Beginning of Period 

 

21,119 

 

12,504 

Cash and Cash Equivalents at End of Period 

$

30,442 

$

18,959 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

2,134 

$

2,024 

Income taxes

 

875 

 

1,702 

Supplemental Disclosure of Non-cash Flow Information:

 

 

 

 

Transfers from loans to real estate owned and other repossessed property

 

 -

 

1,488 

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 nine months ended September 30, 2016 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, 2015. 



Subsequent Events-- Management has evaluated events and transactions occurring subsequent to September 30, 2016 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.



East River Bank Acquisition



Effective October 1, 2016, DNB completed its previously announced merger (the "Merger") with East River Bank (“ERB”). Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of April 4, 2016, at the effective time of the Merger, ERB merged with and into DNB First, N.A., a wholly owned subsidiary of DNB.



ERB was a locally-managed institution, headquartered in Philadelphia, Pennsylvania with three locations in Philadelphia. With this acquisition, DNB will have 15 locations in Chester, Delaware and Philadelphia Counties, Pennsylvania. As of June 30, 2016, ERB had approximately $306.8 million in loans, $229.0 million in deposits and $320.4 million in total assets. In accordance with the terms of the Merger Agreement, holders of East River Bank common shares received, in aggregate, $6.7 million in cash and 1,368,611 shares or approximately 32% of DNB’s outstanding common stock. The transaction was valued at $47.5 million based on DNB’s September 30, 2016 closing share price of $28.42 as quoted on NASDAQ. The results of the combined entity’s operations will be included in DNB’s Consolidated Financial Statements from the date of acquisition.



The acquisition of ERB will be accounted for as a business combination using the acquisition method of accounting, which includes estimating the fair value of assets acquired, liabilities assumed and consideration paid as of the acquisition date. These preliminary estimates will be completed during the fourth quarter of 2016 and will be subject to adjustments during the up to one year measurement period after the acquisition.



Recent Accounting Pronouncements-  

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. DNB is currently evaluating the impact of the pending adoption of the ASU on its consolidated financial statements.



In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, this ASU is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods therein. DNB is currently evaluating the impact of this ASU on its consolidated financial statements and disclosures.



In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," (ASU 2016-13), which addresses concerns regarding the perceived delay in recognition of credit losses under the existing incurred loss model. The amendment introduces a new, single model for recognizing credit losses on all financial instruments presented on cost basis. Under the new model, entities must estimate current expected credit losses by considering all available relevant information, including historical and current information, as well as reasonable and supportable forecasts of future events. The update also requires additional qualitative and quantitative information to allow users to better understand the credit risk within the portfolio and the methodologies for determining allowance. ASU 2016-13 is effective for DNB on January 1, 2020 and must be applied using the modified retrospective approach with limited exceptions. Early adoption is permitted. DNB is currently evaluating the impact of this ASU on its consolidated financial statements and disclosures.



8


 

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). The amendments in this update provide guidance for eight specific cash flow classification issues for which current guidance is unclear or does not exist, thereby reducing diversity in practice. For public companies, the update is effective for annual periods beginning after December 15, 2017. 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 DNB's consolidated financial statements.



NOTE 2: INVESTMENT SECURITIES



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







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

September 30, 2016



Amortized

Unrealized

Unrealized

 

(Dollars in thousands)

Cost

Gains

Losses

Fair Value

Held To Maturity

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

8,161 

 

$

480 

 

$

 -

 

$

8,641 

 

Government Sponsored Entities (GSE) mortgage-backed securities

 

1,545 

 

 

65 

 

 

 -

 

 

1,610 

 

Corporate bonds

 

12,854 

 

 

414 

 

 

(6)

 

 

13,262 

 

Collateralized mortgage obligations GSE

 

2,148 

 

 

30 

 

 

 -

 

 

2,178 

 

State and municipal taxable

 

1,009 

 

 

40 

 

 

 -

 

 

1,049 

 

State and municipal tax-exempt

 

48,072 

 

 

313 

 

 

(14)

 

 

48,371 

 

Total

$

73,789 

 

$

1,342 

 

$

(20)

 

$

75,111 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

Available For Sale

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

52,436 

 

$

121 

 

$

(15)

 

$

52,542 

 

GSE mortgage-backed securities

 

32,605 

 

 

236 

 

 

 -

 

 

32,841 

 

Collateralized mortgage obligations GSE

 

13,834 

 

 

28 

 

 

(107)

 

 

13,755 

 

Corporate bonds

 

17,522 

 

 

69 

 

 

(140)

 

 

17,451 

 

State and municipal tax-exempt

 

5,095 

 

 

 

 

(4)

 

 

5,099 

 

Total

$

121,492 

 

$

462 

 

$

(266)

 

$

121,688 

 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

December 31, 2015



Amortized

Unrealized

Unrealized

 

(Dollars in thousands)

Cost

Gains

Losses

Fair Value

Held To Maturity

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

7,973 

 

$

320 

 

$

 -

 

$

8,293 

 

Government Sponsored Entities (GSE) mortgage-backed securities

 

2,759 

 

 

83 

 

 

 -

 

 

2,842 

 

Corporate bonds

 

11,518 

 

 

234 

 

 

(42)

 

 

11,710 

 

Collateralized mortgage obligations GSE

 

2,623 

 

 

 

 

(26)

 

 

2,606 

 

State and municipal tax-exempt

 

42,956 

 

 

300 

 

 

(276)

 

 

42,980 

 

Total

$

67,829 

 

$

946 

 

$

(344)

 

$

68,431 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

Available For Sale

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

58,460 

 

$

 -

 

$

(252)

 

$

58,208 

 

GSE mortgage-backed securities

 

40,663 

 

 

13 

 

 

(325)

 

 

40,351 

 

Collateralized mortgage obligations GSE

 

16,241 

 

 

 

 

(438)

 

 

15,806 

 

Corporate bonds

 

20,921 

 

 

 -

 

 

(350)

 

 

20,571 

 

State and municipal tax-exempt

 

17,274 

 

 

180 

 

 

(11)

 

 

17,443 

 

Total

$

153,559 

 

$

196 

 

$

(1,376)

 

$

152,379 

 



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 September 30, 2016 and December 31, 2015.

9


 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2016



 

 

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

$

1,988 

 

$

(6)

 

$

 -

 

$

 -

 

$

1,988 

 

$

(6)

 

Collateralized mortgage obligations GSE

 

325 

 

 

 -

 

 

325 

 

 

 -

 

 

 -

 

 

 -

 

State and municipal tax-exempt

 

6,202 

 

 

(14)

 

 

6,202 

 

 

(14)

 

 

 -

 

 

 -

 

Total

$

8,515 

 

$

(20)

 

$

6,527 

 

$

(14)

 

$

1,988 

 

$

(6)

 

Available For Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

20,185 

 

$

(15)

 

$

20,185 

 

$

(15)

 

$

 -

 

$

 -

 

Collateralized mortgage obligations GSE

 

9,078 

 

 

(107)

 

 

1,734 

 

 

(14)

 

 

7,344 

 

 

(93)

 

Corporate bonds

 

10,752 

 

 

(140)

 

 

5,315 

 

 

(56)

 

 

5,437 

 

 

(84)

 

State and municipal tax-exempt

 

3,087 

 

 

(4)

 

 

3,087 

 

 

(4)

 

 

 -

 

 

 -

 

Total

$

43,102 

 

$

(266)

 

$

30,321 

 

$

(89)

 

$

12,781 

 

$

(177)

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 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

$

7,597 

 

$

(42)

 

$

7,597 

 

$

(42)

 

$

 -

 

$

 -

 

Collateralized mortgage obligations GSE

 

1,482 

 

 

(26)

 

 

388 

 

 

(10)

 

 

1,094 

 

 

(16)

 

State and municipal tax-exempt

 

13,161 

 

 

(276)

 

 

4,380 

 

 

(34)

 

 

8,781 

 

 

(242)

 

Total

$

22,240 

 

$

(344)

 

$

12,365 

 

$

(86)

 

$

9,875 

 

$

(258)

 

Available For Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

58,208 

 

$

(252)

 

$

58,208 

 

$

(252)

 

$

 -

 

$

 -

 

GSE mortgage-backed securities

 

38,307 

 

 

(325)

 

 

33,984 

 

 

(238)

 

 

4,323 

 

 

(87)

 

Collateralized mortgage obligations GSE

 

15,231 

 

 

(438)

 

 

4,187 

 

 

(41)

 

 

11,044 

 

 

(397)

 

Corporate bonds

 

20,571 

 

 

(350)

 

 

16,157 

 

 

(264)

 

 

4,414 

 

 

(86)

 

State and municipal tax-exempt

 

6,660 

 

 

(11)

 

 

6,660 

 

 

(11)

 

 

 -

 

 

 -

 

Total

$

138,977 

 

$

(1,376)

 

$

119,196 

 

$

(806)

 

$

19,781 

 

$

(570)

 



As of September 30, 2016, there were twelve collateralized mortgage obligations GSE, two U.S. agency obligations, seven tax-exempt municipalities, and seven corporate bonds 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 September 30, 2016 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 September 30, 2016, the following securities were reviewed:

Collateralized mortgage obligations GSE  There are twelve impaired securities classified as collateralized mortgage obligations, eight 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 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 September 30, 2016 levels. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2016.

US Government agency obligations  There are two 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 0.11% 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

10


 

 

and none of these agencies have 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 September 30, 2016.

State and municipal tax-exempt There are seven impaired securities in this category, which are comprised of intermediate to long-term municipal bonds, all of which have been impaired for less than 12 months. The largest unrealized loss of a security in this group is 0.47% 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 seven municipal securities, there are three uninsured school districts, two insured townships, and two uninsured townships, all of which have strong underlying ratings. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2016.

Corporate bonds There are seven impaired bonds classified as corporate bonds, four of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 2.98% 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 a "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 September 30, 2016 levels. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2016.

The amortized cost and fair value of investment securities as of September 30, 2016, by final 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

$

 -

 

$

 -

 

 

$

12,751 

 

$

12,732 

 

Due after one year through five years

 

22,695 

 

 

23,572 

 

 

 

58,429 

 

 

58,504 

 

Due after five years through ten years

 

30,108 

 

 

30,460 

 

 

 

7,295 

 

 

7,336 

 

Due after ten years

 

20,986 

 

 

21,079 

 

 

 

43,017 

 

 

43,116 

 

Total investment securities

$

73,789 

 

$

75,111 

 

 

$

121,492 

 

$

121,688 

 



The HTM security that was sold during the nine months ended September 30, 2016 was permissible because DNB collected greater than 85% of the original recorded investment on the HTM security prior to the sale. Gains and losses resulting from investment sales, redemptions or calls were as follows:







 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

(Dollars in thousands)

2016

2015

 

2016

2015

Gross realized gains-AFS

$

176 

 

$

13 

 

 

$

440 

 

$

77 

 

Gross realized gains-HTM

 

21 

 

 

 -

 

 

 

21 

 

 

 -

 

Gross realized losses-AFS

 

 -

 

 

(3)

 

 

 

(30)

 

 

(3)

 

Net realized gain

$

197 

 

$

10 

 

 

$

431 

 

$

74 

 



At September 30, 2016 and December 31, 2015, investment securities with a carrying value of approximately $111.3 million and $147.9 million, respectively, were pledged to secure public funds, repurchase agreements and for other purposes as required by law.

11


 

 

NOTE 3: LOANS



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





 

 

 

 

 

 

 



 

 

 

 

 

 

 

(Dollars in thousands)

September 30, 2016

 

December 31, 2015

Residential mortgage

$

28,379 

 

 

$

28,651 

 

Commercial mortgage

 

287,638 

 

 

 

274,132 

 

Commercial:

 

 

 

 

 

 

 

Commercial term

 

104,755 

 

 

 

102,178 

 

Commercial construction

 

29,677 

 

 

 

20,364 

 

Consumer:

 

 

 

 

 

 

 

Home equity

 

53,175 

 

 

 

51,270 

 

Other

 

5,851 

 

 

 

5,163 

 

Total loans

$

509,475 

 

 

$

481,758 

 

Less allowance for credit losses

 

(5,303)

 

 

 

(4,935)

 

Net loans

$

504,172 

 

 

$

476,823 

 



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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended September 30, 2016

Nine Months Ended September 30, 2016

(Dollars in thousands)

December 31, 2015

September 30, 2016

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

$

1,619 

$

1,759 

$

15 

$

 -

$

15 

$

51 

$

 -

$

51 

Commercial mortgage

 

1,048 

 

3,061 

 

74 

 

 -

 

74 

 

139 

 

 -

 

139 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

188 

 

202 

 

 

 -

 

 

 

 -

 

Commercial construction

 

1,028 

 

1,217 

 

46 

 

 -

 

46 

 

134 

 

 -

 

134 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

563 

 

492 

 

 

 -

 

 

23 

 

 -

 

23 

Other

 

189 

 

221 

 

 

 -

 

 

14 

 

 -

 

14 

Total non-accrual loans

$

4,635 

$

6,952 

$

150 

$

 -

$

150 

$

370 

$

 -

$

370 

Loans 90 days past due and accruing

 

457 

 

 -

 

 -

 

 -

 

 -

 

 

 

 -

Total non-performing loans

$

5,092 

$

6,952 

$

150 

$

 -

$

150 

$

372 

$

$

370 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Three Months Ended September 30, 2015

Nine Months Ended September 30, 2015

(Dollars in thousands)

 

 

September 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

 

 

$

1,600 

$

10 

$

 -

$

10 

$

50 

$

 -

$

50 

Commercial mortgage

 

 

 

1,075 

 

21 

 

 -

 

21 

 

64 

 

 -

 

64 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 

 

191 

 

 

 -

 

 

 

 -

 

Commercial construction

 

 

 

451 

 

56 

 

 -

 

56 

 

226 

 

 -

 

226 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

313 

 

 

 -

 

 

19 

 

 -

 

19 

Other

 

 

 

120 

 

 

 -

 

 

14 

 

 -

 

14 

Total non-accrual loans

 

 

$

3,750 

$

102 

$

 -

$

102 

$

380 

$

 -

$

380 

Loans 90 days past due and accruing

 

 

 

498 

 

 -

 

 -

 

 -

 

 

 

 -

Total non-performing loans

 

 

$

4,248 

$

102 

$

 -

$

102 

$

385 

$

$

380 

 





12


 

 

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 September 30, 2016 and December 31, 2015. 



Age Analysis of Past Due Loans Receivable







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

135 

$

377 

$

1,686 

$

2,198 

$

26,181 

$

28,379 

$

 -

Commercial mortgage

 

 -

 

 -

 

2,294 

 

2,294 

 

285,344 

 

287,638 

 

 -

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 -

 

 -

 

23 

 

23 

 

104,732 

 

104,755 

 

 -

Commercial construction

 

 -

 

 -

 

1,217 

 

1,217 

 

28,461 

 

29,677 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 -

 

 -

 

344 

 

344 

 

52,831 

 

53,175 

 

 -

Other

 

123 

 

 

181 

 

310 

 

5,541 

 

5,851 

 

 -

Total

$

258 

$

383 

$

5,745 

$

6,386 

$

503,090 

$

509,475 

$

 -









 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 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

$

502 

$

552 

$

2,076 

$

3,130 

$

25,521 

$

28,651 

$

457 

Commercial mortgage

 

36 

 

86 

 

96 

 

218 

 

273,914 

 

274,132 

 

 -

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 -

 

 -

 

 -

 

 -

 

102,178 

 

102,178 

 

 -

Commercial construction

 

 -

 

581 

 

447 

 

1,028 

 

19,336 

 

20,364 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

310 

 

153 

 

470 

 

50,800 

 

51,270 

 

 -

Other

 

100 

 

 -

 

148 

 

248 

 

4,915 

 

5,163 

 

 -

Total

$

645 

$

1,529 

$

2,920 

$

5,094 

$

476,664 

$

481,758 

$

457 

13


 

 

The following tables summarize information in regards to impaired loans by loan portfolio class as of and for the three and nine months ended September 30, 2016 and 2015 and as of December 31, 2015.

Impaired Loans







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2016

 

 

December 31, 2015



Recorded

 

Unpaid

 

Related

 

Recorded

 

Unpaid

 

Related



Investment

 

Principal

 

Allowance

 

Investment

 

Principal

 

Allowance

(Dollars in thousands)

 

 

 

Balance

 

 

 

 

 

 

 

Balance

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

$

829 

 

$

867 

 

$

 -

 

$

1,620 

 

$

1,919 

 

$

 -

Commercial mortgage

 

3,061 

 

 

3,433 

 

 

 -

 

 

1,181 

 

 

1,461 

 

 

 -

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

23 

 

 

25 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial construction

 

770 

 

 

770 

 

 

 -

 

 

1,140 

 

 

3,526 

 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

595 

 

 

647 

 

 

 -

 

 

691 

 

 

716 

 

 

 -

Other

 

115 

 

 

123 

 

 

 -

 

 

82 

 

 

90 

 

 

 -

Total

$

5,393 

 

$

5,865 

 

$

 -

 

$

4,714 

 

$

7,712 

 

$

 -

With allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

930 

 

 

1,191 

 

 

194 

 

 

 -

 

 

 -

 

 

 -

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

179 

 

 

197 

 

 

100 

 

 

200 

 

 

211 

 

 

110 

Commercial construction

 

447 

 

 

2,833 

 

 

89 

 

 

 -

 

 

 -

 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

106 

 

 

106 

 

 

 

 

107 

 

 

107 

 

 

Total

$

1,662 

 

$

4,327 

 

$

386 

 

$

307 

 

$

318 

 

$

114 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

1,759 

 

 

2,058 

 

 

194 

 

 

1,620 

 

 

1,919 

 

 

 -

Commercial mortgage

 

3,061 

 

 

3,433 

 

 

 -

 

 

1,181 

 

 

1,461 

 

 

 -

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

202 

 

 

222 

 

 

100 

 

 

200 

 

 

211 

 

 

110 

Commercial construction

 

1,217 

 

 

3,603 

 

 

89 

 

 

1,140 

 

 

3,526 

 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

595 

 

 

647 

 

 

 -

 

 

691 

 

 

716 

 

 

 -

Other

 

221 

 

 

229 

 

 

 

 

189 

 

 

197 

 

 

Total

$

7,055 

 

$

10,192 

 

$

386 

 

$

5,021 

 

$

8,030 

 

$

114 



14


 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended



 

September 30, 2016

 

 

September 30, 2015

 

 

September 30, 2016

 

 

September 30, 2015



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

$

880 

 

$

 -

 

$

1,577 

 

$

 -

 

$

1,254 

 

$

 -

 

$

1,948 

 

$

 -

Commercial mortgage

 

3,101 

 

 

 -

 

 

2,277 

 

 

28 

 

 

2,102 

 

 

 -

 

 

2,831 

 

 

85 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

24 

 

 

 -

 

 

 -

 

 

 -

 

 

18 

 

 

 -

 

 

 -

 

 

 -

Commercial construction

 

924 

 

 

 -

 

 

125 

 

 

 -

 

 

944 

 

 

 -

 

 

763 

 

 

 -

Lease financing

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Home equity

 

631 

 

 

 

 

489 

 

 

 

 

657 

 

 

 

 

497 

 

 

Other

 

116 

 

 

 -

 

 

125 

 

 

 -

 

 

101 

 

 

 -

 

 

134 

 

 

 -

Total

$

5,676 

 

$

 

$

4,593 

 

$

29 

 

$

5,076 

 

$

 

$

6,173 

 

$

88 

With allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

886 

 

 

 -

 

 

59 

 

 

 -

 

 

479 

 

 

 -

 

 

131 

 

 

 -

Commercial mortgage

 

 -

 

 

 -

 

 

101 

 

 

 -

 

 

 -

 

 

 -

 

 

151 

 

 

 -

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

181 

 

 

 -

 

 

200 

 

 

 -

 

 

187 

 

 

 -

 

 

200 

 

 

 -

Commercial construction

 

447 

 

 

 -

 

 

588 

 

 

 -

 

 

335 

 

 

 -

 

 

672 

 

 

 -

Lease financing

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Home equity

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

22 

 

 

 -

Other

 

106 

 

 

 -

 

 

20 

 

 

 -

 

 

107 

 

 

 -

 

 

10 

 

 

 -

Total

$

1,620 

 

$

 -

 

$

968 

 

$

 -

 

$

1,108 

 

$

 -

 

$

1,186 

 

$

 -

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

1,766 

 

 

 -

 

 

1,636 

 

 

 -

 

 

1,733 

 

 

 -

 

 

2,079 

 

 

 -

Commercial mortgage

 

3,101 

 

 

 -

 

 

2,378 

 

 

28 

 

 

2,102 

 

 

 -

 

 

2,982 

 

 

85 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

205 

 

 

 -

 

 

200 

 

 

 -

 

 

205 

 

 

 -

 

 

200 

 

 

 -

Commercial construction

 

1,371 

 

 

 -

 

 

713 

 

 

 -

 

 

1,279 

 

 

 -

 

 

1,435 

 

 

 -

Lease financing

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Home equity

 

631 

 

 

 

 

489 

 

 

 

 

657 

 

 

 

 

519 

 

 

Other

 

222 

 

 

 -

 

 

145 

 

 

 -

 

 

208 

 

 

 -

 

 

144 

 

 

 -

Total

$

7,296 

 

$

 

$

5,561 

 

$

29 

 

$

6,184 

 

$

 

$

7,359 

 

$

88 



15


 

 

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 September 30, 2016 and December 31, 2015.

Credit Quality Indicators







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



September 30, 2016



 

 

 

Special

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Pass

Mention

Substandard

Doubtful

Total

Residential mortgage

$

26,357 

 

$

 -

 

$

2,022 

 

$

 -

 

$

28,379 

 

Commercial mortgage

 

272,094 

 

 

4,771 

 

 

10,773 

 

 

 -

 

 

287,638 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

96,873 

 

 

592 

 

 

7,290 

 

 

 -

 

 

104,755 

 

Commercial construction

 

26,945 

 

 

 -

 

 

2,732 

 

 

 -

 

 

29,677 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

52,522 

 

 

 -

 

 

653 

 

 

 -

 

 

53,175 

 

Other

 

5,630 

 

 

 -

 

 

221 

 

 

 -

 

 

5,851 

 

Total

$

480,421 

 

$

5,363 

 

$

23,691 

 

$

 -

 

$

509,475 

 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



December 31, 2015



 

 

 

Special

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Pass

Mention

Substandard

Doubtful

Total

Residential mortgage

$

26,762 

 

$

 -

 

$

1,889 

 

$

 -

 

$

28,651 

 

Commercial mortgage

 

262,036 

 

 

4,802 

 

 

7,294 

 

 

 -

 

 

274,132 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

93,025 

 

 

2,555 

 

 

6,598 

 

 

 -

 

 

102,178 

 

Commercial construction

 

17,521 

 

 

 -

 

 

2,843 

 

 

 -

 

 

20,364 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

50,551 

 

 

 -

 

 

719 

 

 

 -

 

 

51,270 

 

Other

 

4,974 

 

 

 -

 

 

189 

 

 

 -

 

 

5,163 

 

Total

$

454,869 

 

$

7,357 

 

$

19,532 

 

$

 -

 

$

481,758 

 



Loans classified as troubled debt restructurings (“TDR”) are considered impaired. As of September 30, 2016, 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, 2015, and one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at September 30, 2015. 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 nine months ended September 30, 2016 and 2015, there were no defaults on any terms of this loan.

 

As of September 30, 2016, DNB had one consumer installment loan classified as a TDR totaling $40,000 compared to one consumer installment loan classified as a TDR totaling $40,000 (the same loan) at December 31, 2015, and no such loans at September 30, 2015. The interest rate on the loan was reduced. The loan was extended and there was no reduction of principal. This loan was classified as a TDR in December of 2015. The balance of the loan prior to modification was $42,000 and the balance after the modification was $42,000. DNB recognized a partial charge-off on the loan in the amount of $2,000. During the nine months ended September 30, 2016 and 2015, 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 September 30, 2016 and December 31, 2015, the activity for the three and nine months ended September 30, 2016 and 2015 and as of and for the year ended December 31, 2015.

16


 

 

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 - July 1, 2016

$

314 

$

2,370 

$

891 

$

866 

$

 -

$

191 

$

64 

$

551 

$

5,247 

Charge-offs

 

 -

 

(39)

 

(8)

 

 -

 

 -

 

 -

 

 -

 

 -

 

(47)

Recoveries

 

 

 -

 

 -

 

 -

 

 

 -

 

 -

 

 -

 

Provisions

 

87 

 

141 

 

(90)

 

 

(1)

 

11 

 

(2)

 

(53)

 

100 

Ending balance - September 30, 2016

$

403 

$

2,472 

$

793 

$

873 

$

 -

$

202 

$

62 

$

498 

$

5,303 











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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, 2016

$

216 

$

2,375 

$

989 

$

569 

$

 -

$

195 

$

64 

$

527 

$

4,935 

Charge-offs

 

(206)

 

(39)

 

(32)

 

 -

 

 -

 

 -

 

 -

 

 -

 

(277)

Recoveries

 

10 

 

 -

 

 

 

 

 -

 

 

 -

 

15 

Provisions

 

383 

 

136 

 

(165)

 

303 

 

(2)

 

 

(3)

 

(29)

 

630 

Ending balance - September 30, 2016

$

403 

$

2,472 

$

793 

$

873 

$

 -

$

202 

$

62 

$

498 

$

5,303 

Ending balance: individually evaluated for impairment

$

194 

$

 -

$

100 

$

89 

$

 -

$

 -

$

$

 -

$

386 

Ending balance: collectively evaluated for impairment

$

209 

$

2,472 

$

693 

$

784 

$

 -

$

202 

$

59 

$

498 

$

4,917 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

28,379 

$

287,638 

$

104,755 

$

29,677 

$

 -

$

53,175 

$

5,851 

 

 

$

509,475 

Ending balance: individually evaluated for impairment

$

1,759 

$

3,061 

$

202 

$

1,217 

$

 -

$

595 

$

221 

 

 

$

7,055 

Ending balance: collectively evaluated for impairment

$

26,620 

$

284,577 

$

104,553 

$

28,460 

$

 -

$

52,580 

$

5,630 

 

 

$

502,420 

Reserve for unfunded loan commitments included in other liabilities

$

 -

$

$

119 

$

64 

$

 -

$

13 

$

 -

 

 

$

199 

















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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 - July 1, 2015

$

265 

$

2,562 

$

721 

$

774 

$

 -

$

190 

$

65 

$

531 

$

5,108 

Charge-offs

 

(34)

 

(105)

 

(16)

 

(299)

 

 -

 

(10)

 

(30)

 

 -

 

(494)

Recoveries

 

 

 -

 

 

 

 -

 

 -

 

 -

 

 -

 

15 

Provisions

 

(39)

 

34 

 

 

198 

 

 -

 

20 

 

31 

 

(150)

 

100 

Ending balance - September 30, 2015

$

194 

$

2,491 

$

719 

$

678 

$

 -

$

200 

$

66 

$

381 

$

4,729 

17


 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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

 

(69)

 

(105)

 

(190)

 

(577)

 

 -

 

(11)

 

(60)

 

 -

 

(1,012)

Recoveries

 

 

 -

 

10 

 

 

 

 -

 

 

 -

 

20 

Provisions

 

(8)

 

296 

 

190 

 

369 

 

(2)

 

22 

 

55 

 

(107)

 

815 

Ending balance - September 30, 2015

$

194 

$

2,491 

$

719 

$

678 

$

 -

$

200 

$

66 

$

381 

$

4,729 

Reserve for unfunded loan commitments included in other liabilities

$

 -

$

$

105 

$

57 

$

 -

$

12 

$

 -

 

 

$

178 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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, 2015

$

216 

$

2,375 

$

989 

$

569 

$

 -

$

195 

$

64 

$

527 

$

4,935 

Ending balance: individually evaluated for impairment

$

 -

$

 -

$

110 

$

 -

$

 -

$

 -

$

$

 -

$

114 

Ending balance: collectively evaluated for impairment

$

216 

$

2,375 

$

879 

$

569 

$

 -

$

195 

$

60 

$

527 

$

4,821 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

28,651 

$

274,132 

$

102,178 

$

20,364 

$

 -

$

51,270 

$

5,163 

 

 

$

481,758 

Ending balance: individually evaluated for impairment

$

1,620 

$

1,181 

$

200 

$

1,140 

$

 -

$

691 

$

189 

 

 

$

5,021 

Ending balance: collectively evaluated for impairment

$

27,031 

$

272,951 

$

101,978 

$

19,224 

$

 -

$

50,579 

$

4,974 

 

 

$

476,737 

Reserve for unfunded loan commitments included in other liabilities

$

 -

$

$

115 

$

58 

$

 -

$

13 

$

 -

 

 

$

188 



18


 

 







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 16,595 anti-dilutive stock awards outstanding at September 30, 2016. There were no anti-dilutive stock warrants outstanding, no anti-dilutive stock options outstanding, and no anti-dilutive stock awards outstanding at September 30, 2015. The following table sets forth the computation of basic and diluted earnings per share:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30, 2016

 

September 30, 2016

(In thousands, except per-share data)

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders

$

 

 

2,853 

 

$

0.00 

 

 

$

2,666 

 

 

2,845 

 

$

0.94 

 

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

 

 -

 

 

33 

 

 

(0.00)

 

 

 

 -

 

 

34 

 

 

(0.01)

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders after assumed conversions

$

 

 

2,886 

 

$

0.00 

 

 

$

2,666 

 

 

2,879 

 

$

0.93 

 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30, 2015

 

September 30, 2015

(In thousands, except per-share data)

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders

$

1,261 

 

 

2,807 

 

$

0.45 

 

 

$

3,714 

 

 

2,798 

 

$

1.33 

 

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

 

 -

 

 

45 

 

 

(0.01)

 

 

 

 -

 

 

46 

 

 

(0.02)

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders after assumed conversions

$

1,261 

 

 

2,852 

 

$

0.44 

 

 

$

3,714 

 

 

2,844 

 

$

1.31 

 



















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

September 30, 2016

 

 

 

 

 

 

 

 

 

Net unrealized gain on AFS securities

$

196 

 

$

(66)

 

$

130 

 

Discount on AFS to HTM reclassification

 

(8)

 

 

 

 

(5)

 

Unrealized actuarial losses-pension

 

(1,812)

 

 

616 

 

 

(1,196)

 



$

(1,624)

 

$

553 

 

$

(1,071)

 

December 31, 2015

 

 

 

 

 

 

 

 

 

Net unrealized loss on AFS securities

$

(1,180)

 

$

402 

 

$

(778)

 

Discount on AFS to HTM reclassification

 

(17)

 

 

 

 

(11)

 

Unrealized actuarial losses-pension

 

(1,812)

 

 

616 

 

 

(1,196)

 



$

(3,009)

 

$

1,024 

 

$

(1,985)

 







19


 

 

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 DNB 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.



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

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements and repurchase-to-maturity transactions

$

19,483 

 

 

$

 -

 

 

$

 -

 

 

$

 -

 

 

$

19,483 

 

Gross amount of recognized liabilities for repurchase agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in statement of condition

$

19,483 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

19,483 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements and repurchase-to-maturity transactions

$

32,416 

 

 

$

 -

 

 

$

 -

 

 

$

 -

 

 

$

32,416 

 

Gross amount of recognized liabilities for repurchase agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in statement of condition

$

32,416 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

32,416 

 



As of September 30, 2016 and December 31, 2015, DNB had $19.5 million and $32.4 million of repurchase agreements, respectively. In conjunction with these repurchase agreements, $19.9 million and $33.1 million of state and municipal securities were sold on an overnight basis as of September 30, 2016 and December 31, 2015, respectively, which represents 102% of the repurchase agreement amounts.



20


 

 

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 September 30, 2016. All options are immediately exercisable. During the three and nine months ended September 30, 2016 and 2015, DNB had no expenses related to the plan. DNB has no anticipated additional expense related to the plan. Stock option activity is indicated below.







 

 

 

 

 

 



 

 

 

 

 

 



Number

Weighted Average



Outstanding

Exercise Price

Outstanding January 1, 2016

 

64,500 

 

$

8.67 

 

Issued

 

 -

 

 

 -

 

Exercised

 

 -

 

 

 -

 

Forfeited

 

 -

 

 

 -

 

Expired

 

 -

 

 

 -

 

Outstanding September 30, 2016

 

64,500 

 

$

8.67 

 







 

 

 

 

 

 



 

 

 

 

 

 



Number

Weighted Average



Outstanding

Exercise Price

Outstanding January 1, 2015

 

163,586 

 

$

15.13 

 

Issued

 

 -

 

 

 -

 

Exercised

 

95,834 

 

 

19.40 

 

Forfeited

 

 -

 

 

 -

 

Expired

 

 -

 

 

 -

 

Outstanding September 30, 2015

 

67,752 

 

$

9.09 

 



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









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

September 30, 2016

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 

1.40 years

$

1,077,000 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

December 31, 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 

2.15 years

$

1,344,000 





 

 

 

 

 

 

 

 

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 nine month periods ended September 30, 2016, $71,000 and $801,000 was amortized to expense, respectively. For the three and nine month periods ended September 30, 2015, $85,000 and $250,000 was amortized to expense, respectively. As of September 30, 2016, there was approximately $523,000 in additional compensation that will be

21


 

 

recognized over the remaining service period of approximately 1.66 years. At September 30, 2016, 87,629 shares were reserved for future grants under the Plan. 



The shares awarded from the vesting resulted in an increase in shares outstanding of 18,079. There was a cash equivalent of 15,621 shares used to pay all applicable taxes on the transaction. Stock grant activity is indicated below:







 

 

 

 



 

 

 

 



 

Weighted Average



Shares

Stock Price

Non-vested stock awards—January 1, 2016

77,255 

$

22.71 

 

Granted

3,540 

 

28.33 

 

Forfeited

 -

 

 -

 

Vested

33,700 

 

23.66 

 

Non-vested stock awards—September 30, 2016

47,095 

$

22.46 

 









 

 

 

 



 

 

 

 



 

Weighted Average



Shares

Stock Price

Non-vested stock awards—January 1, 2015

75,930 

$

17.66 

 

Granted

 -

 

 -

 

Forfeited

1,270 

 

19.21 

 

Vested

 -

 

 -

 

Non-vested stock awards—September 30, 2015

74,660 

$

17.63 

 





NOTE 9:  INCOME TAXES    



As of September 30, 2016, DNB had no material unrecognized tax benefits or accrued interest and penalties. It is DNB’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 2012 through 2015 were open for examination as of September 30, 2016.





22


 

 

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 September 30, 2016 and December 31, 2015 that are recognized on DNB’s statement of financial condition using fair value measurement determined based on the differing levels of input:

23


 

 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

September 30, 2016



 

 

 

 

 

 

 

 

(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

$

 -

$

52,542 

$

 -

$

52,542 

GSE mortgage-backed securities

 

 -

 

32,841 

 

 -

 

32,841 

Collateralized mortgage obligations GSE

 

 -

 

13,755 

 

 -

 

13,755 

Corporate bonds

 

 -

 

17,451 

 

 -

 

17,451 

State and municipal tax-exempt

 

 -

 

5,099 

 

 -

 

5,099 

Total

$

 -

$

121,688 

$

 -

$

121,688 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

 

 

 

 

 

 

 

Impaired loans

$

 -

$

 -

$

1,333 

$

1,333 

Total

$

 -

$

 -

$

1,333 

$

1,333 









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

December 31, 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

$

 -

$

58,208 

$

 -

$

58,208 

GSE mortgage-backed securities

 

 -

 

40,351 

 

 -

 

40,351 

Collateralized mortgage obligations GSE

 

 -

 

15,806 

 

 -

 

15,806 

Corporate bonds

 

 -

 

20,571 

 

 -

 

20,571 

State and municipal tax-exempt

 

 -

 

17,443 

 

 -

 

17,443 

Total

$

 -

$

152,379 

$

 -

$

152,379 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

 

 

 

 

 

 

 

Impaired loans

$

 -

$

 -

$

964 

$

964 

OREO and other repossessed property

 

 -

 

 -

 

682 

 

682 

Total

$

 -

$

 -

$

1,646 

$

1,646 



24


 

 

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:







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

September 30, 2016

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

$

736 

Appraisal of

Appraisal adj. (2)

-25%

to

-25%

(-25%)



 

 

collateral (1)

Disposal costs (2)

-8%

to

-8%

(-8%)

Impaired loans - Commercial mortgage

 

57 

Appraisal of

Appraisal adj. (2)

0% 

to

0%  (0%)



 

 

collateral (1)

Disposal costs (2)

-13%

to

-13%

(-13%)

Impaired loans - Commercial term

 

79 

Appraisal of

Appraisal adj. (2)

-72%

to

-72%

(-72%)



 

 

collateral (1)

Disposal costs (2)

-11%

to

-11%

(-11%)

Impaired loans - Commercial construction

 

358 

Appraisal of

Appraisal adj. (2)

-20%

to

-20%

(-20%)



 

 

collateral (1)

Disposal costs (2)

-8%

to

-8%

(-8%)

Impaired loans - Consumer other

 

103 

Appraisal of

Appraisal adj. (2)

0% 

to

0%  (0%)



 

 

collateral (1)

Disposal costs (2)

-8%

to

-8%

(-8%)

Impaired loan total

$

1,333 

 

 

 

 

 

 

(1)



(2)





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

December 31, 2015

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

$

115 

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

 

90 

Appraisal of

Appraisal adj. (2)

-72%

to

-72%

(-72%)



 

 

collateral (1)

Disposal costs (2)

-11%

to

-11%

(-11%)

Impaired loans - Commercial construction

 

559 

Appraisal of

Appraisal adj. (2)

0% 

to

0%  (0%)



 

 

collateral (1)

Disposal costs (2)

-8%

to

-8%

(-8%)

Impaired loans - Consumer other

 

103 

Appraisal of

Appraisal adj. (2)

0% 

to

0%  (0%)



 

 

collateral (1)

Disposal costs (2)

-8%

to

-8%

(-8%)

Impaired loan total

$

964 

 

 

 

 

 

 

Other real estate owned

$

682 

 

Disposal costs (2)

-8%

to

-8%

(-8%)

(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 $7.1 million at September 30, 2016. Of this, $1.7 million had specific valuation allowances of $386,000, leaving a fair value of $1.3 million as of September, 2016. In addition, DNB had $96,000 in impaired loans that were partially charged down by $39,000, leaving $57,000 at fair value as of September 30, 2016. Impaired loans had a carrying amount of $5.0 million at December 31, 2015. Of this, $307,000 had specific valuation allowances of $114,000, leaving a fair value of $193,000 at December 31, 2015. In addition, DNB had $931,000 in impaired loans that were partially charged down by $160,000, leaving $771,000 at fair value as of December 31, 2015.

25


 

 

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 to expense. DNB had $2.9 million of such assets at September 30, 2016, $2.8 million of which was OREO and $165,000 was in other repossessed property. DNB had $2.6 million of such assets at December 31, 2015, which consisted of $2.4 million in OREO and $165,000 in other repossessed property. Subsequent to the repossession of these assets, DNB did not write down the carrying values of OREO during the nine month period ended September 30, 2016. DNB wrote down the carrying value of one OREO property by $154,000 to $453,000 during the nine months period ended September 30, 2015.  

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 nine months ended September 30, 2016.

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 September 30, 2016 and December 31, 2015 are as follows:







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

September 30, 2016



 

 

 

 

 

 

 

 

 

 



 

Carrying

 

Fair

 

 

 

 

 

 

(Dollars in thousands)

 

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3

Financial assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

30,442 

$

30,442 

$

30,442 

$

 -

$

 -

AFS investment securities

 

121,688 

 

121,688 

 

 -

 

121,688 

 

 -

HTM investment securities

 

73,789 

 

75,111 

 

 -

 

73,111 

 

2,000 

Restricted stock

 

3,623 

 

3,623 

 

 -

 

3,623 

 

 -

Loans, net of allowance, including impaired

 

504,172 

 

492,616 

 

 -

 

 -

 

492,616 

Accrued interest receivable

 

2,639 

 

2,639 

 

 -

 

2,639 

 

 -

Financial liabilities

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing deposits

 

146,731 

 

146,731 

 

 -

 

146,731 

 

 -

Interest-bearing deposits

 

403,579 

 

403,579 

 

 -

 

403,579 

 

 -

Time deposits

 

71,920 

 

71,751 

 

 -

 

71,751 

 

 -

Brokered deposits

 

23,313 

 

23,235 

 

 -

 

23,235 

 

 -

Repurchase agreements

 

19,483 

 

19,483 

 

 -

 

19,483 

 

 -

FHLBP advances

 

20,000 

 

20,222 

 

 -

 

20,222 

 

 -

Junior subordinated debentures and other borrowings

 

9,279 

 

8,431 

 

 -

 

8,431 

 

 -

Subordinated debt

 

9,750 

 

9,472 

 

 -

 

9,472 

 

 -

Accrued interest payable

 

329 

 

329 

 

 -

 

329 

 

 -

Off-balance sheet instruments

 

 -

 

 -

 

 -

 

 -

 

 -







 

 

 

 

 

 

 

 

 

 



26


 

 







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

December 31, 2015



 

 

 

 

 

 

 

 

 

 



 

Carrying

 

Fair

 

 

 

 

 

 

(Dollars in thousands)

 

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3

Financial assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

21,119 

$

21,119 

$

21,119 

$

 -

$

 -

AFS investment securities

 

152,379 

 

152,379 

 

 -

 

152,379 

 

 -

HTM investment securities

 

67,829 

 

68,431 

 

 -

 

66,431 

 

2,000 

Restricted stock

 

3,447 

 

3,447 

 

 -

 

3,447 

 

 -

Loans, net of allowance, including impaired

 

476,823 

 

461,925 

 

 -

 

 -

 

461,925 

Accrued interest receivable

 

2,410 

 

2,410 

 

 -

 

2,410 

 

 -

Financial liabilities

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing deposits

 

125,581 

 

125,581 

 

 -

 

125,581 

 

 -

Interest-bearing deposits

 

396,188 

 

396,188 

 

 -

 

396,188 

 

 -

Time deposits

 

66,018 

 

65,697 

 

 -

 

65,697 

 

 -

Brokered deposits

 

18,488 

 

18,327 

 

 -

 

18,327 

 

 -

Repurchase agreements

 

32,416 

 

32,416 

 

 -

 

32,416 

 

 -

FHLBP advances

 

30,000 

 

30,210 

 

 -

 

30,210 

 

 -

Junior subordinated debentures and other borrowings

 

9,279 

 

7,889 

 

 -

 

7,889 

 

 -

Subordinated debt

 

9,750 

 

9,999 

 

 -

 

9,999 

 

 -

Accrued interest payable

 

345 

 

345 

 

 -

 

345 

 

 -

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.

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.

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

27


 

 

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 $23.3 million in brokered deposits, $10.0 million matures in 2017, $3.2 million matures in 2018, $5.2 million matures in 2020, and $5.0 million matures in 2021.

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.    

Accrued Interest Receivable and Payable   The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.



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 September 30, 2016, un-funded loan commitments totaled $122.1 million and stand-by letters of credit totaled $2.7 million. At December 31, 2015, un-funded loan commitments totaled $116.4 million and stand-by letters of credit totaled $3.2 million.



NOTE 11:  STOCKHOLDERS’ EQUITY



In July 2013, the Board of Governors of the Federal Reserve approved the Basel III interim 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 for the period ended March 31, 2015.

On August 4, 2011, DNB entered into a Securities Purchase Agreement with the Secretary of the Treasury, pursuant to which DNB 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 $13.0 million. 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. The securities sold in 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. Of the $13.0 million in aggregate proceeds, $11,879,000 was used on August 4, 2011 to repurchase all

28


 

 

shares issued and sold in 2009 to the United States Department of the Treasury in connection with the U. S. Treasury Capital Purchase Program (“CPP Shares”) ($11,750,000 was paid in principal and $128,900 in dividends related to the CPP Shares) held by the Treasury as described above. As of December 31, 2015, DNB had redeemed all of the Series 2011A Preferred Stock issued to the U.S. Treasury.

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 changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; the 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 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 twelve 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.

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In addition to interest earned on loans and investments, DNB earns revenues from fees it charges customers for non-lending services. These products and services include trust administration, estate settlement, investment management, annuities, insurance and brokerage; 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 third quarter of 2015, 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 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;

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

Continue to grow core deposits to maintain low funding costs;

Focus on cost containment and improving operational efficiencies; and

Continue to engage employees to help them become more effective and successful.

Strategic Plan Update.  DNB reported net income available to common stockholders of $1,000, or less than a penny per diluted share, for the quarter ending September 30, 2016, compared with $1.3 million, or $0.44 per diluted share, for the same quarter, last year. Results for the three months ended September 30, 2016 included merger-related costs of $1.5 million associated with East River Bank and gains from insurance proceeds of $30,000. There was an associated income tax adjustment of $259,000 for these two items. See DNB’s 8-K filed on October 20, 2016.

On both a year-over-year and sequential quarter basis, the net interest margin remained relatively stable despite continuing pressure from ultra-low interest rates and the flattening yield curve.  The net interest margin was 3.06% for the third quarter of 2016, compared with 3.13% for the same quarter, last year.  On a sequential quarter basis, the net interest margin slipped only two basis points from 3.08% for the three months ending June 30, 2016. 

On a sequential quarter basis, total loans increased $15.1 million, or 3.0% (not annualized), to $509.2 million as of September 30, 2016.  As of the same date, total loans were 66.1% of total assets.  The loan growth occurred primarily in the commercial real estate and consumer loan categories.  The Company remains disciplined and intends to maintain conservative underwriting standards while growing commercial-oriented loans in a competitive market.

Asset quality remained solid as net charge-offs were only 0.03% of total average loans for the quarter ending September 30, 2016, compared with 0.10% for the quarter ending June 30, 2016, and 0.40% for the quarter ending September 30, 2015.  Total non-performing assets, including loans and other real estate property, were $9.9 million as of September 30, 2016, compared with $10.5 million as of June 30, 2016 and $7.7 million as of December 31, 2015.  The ratio of non-performing loans to total loans was 1.36% as of September 30, 2016, compared with 1.54% as of June 30, 2016. As of September 30, 2016, the allowance for loan losses to total loans ratio was 1.04%.

On a sequential quarter basis, total core deposits increased $5.5 million to $550.3 million and were 85.3% of total deposits as of September 30, 2016.  Total deposits were $645.5 million as of September 30, 2016, compared with $606.3 million as of December 31, 2015.

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Total non-interest income for the third quarter of 2016 was $1.4 million, compared with $1.4 million for the prior quarter and $1.0 million for the quarter ended September 30, 2015.  Total non-interest income for the third quarter of 2016 included a $30,000 gain from the insurance proceeds associated with the fire at our West Chester location.  Wealth management fees were $393,000 for the third quarter of 2016 compared with $441,000 for the second quarter of 2016, and $317,000 for the quarter ending September 30, 2015.  Wealth management fees represented approximately one-third of total fee income.  Net gains from the sale of investment securities were $197,000 for the three months ending September 30, 2016, compared with $203,000 for the quarter ending June 30, 2016, and $10,000 for the same quarter, last year.

Non-interest expense was $6.7  million for the third quarter of 2016, compared with $5.2 million for the second quarter of 2016, and $4.8 million for the quarter ending September 30, 2015.  Non-interest expense for the quarter ending September 30, 2016 included merger-related costs of $1.5 million associated with East River Bank.  Excluding these items, non-interest expense was $5.2  million for the quarter ending September 30, 2016.  On a sequential quarter basis, salary and employee benefits expense increased $124,000, or 4.6% (not annualized), primarily due to new hires and incentives. Occupancy and equipment increased $137,000, or 16.9% (not annualized), largely due to the West Chester branch office being reopened in the second quarter of 2016 following a fire, which occurred in the second quarter of 2015.  Rent and depreciation expense had been suspended since that time. 

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 nine month period ended September 30, 2016:



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.



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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.

FDIC Insurance and Assessments. The Bank’s deposits are insured to applicable limits by the FDIC. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the maximum deposit insurance amount was permanently increased from $100,000 to $250,000.



The FDIC has adopted a risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based on their examination ratings and capital ratios. Within its risk category, an institution is assigned an initial base assessment which is then adjusted to determine its final assessment rate based on its level of brokered deposits, secured liabilities and unsecured debt.



The Dodd-Frank Act required the FDIC to take such steps as necessary to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020. In setting the assessments, the FDIC is required to offset the effect of the higher reserve ratio against insured depository institutions with total consolidated assets of less than $10 billion. The Dodd-Frank Act also broadened the base for FDIC insurance assessments so that assessments will be based on the average consolidated total assets less average tangible equity capital of a financial institution rather than on its insured deposits. The FDIC has adopted a restoration plan to increase the reserve ratio to 1.15% by September 30, 2020 with additional rulemaking scheduled regarding the method to be used to achieve a 1.35% reserve ratio by that date and offset the effect on institutions with less than $10 billion in assets.



Pursuant to these requirements, the FDIC adopted new assessment regulations effective April 1, 2011 that redefined the assessment base as average consolidated assets less average tangible equity. Insured banks with more than $1.0 billion in assets must calculate quarterly average assets based on daily balances while smaller banks and newly chartered banks may use weekly averages. Average assets would be reduced by goodwill and other intangibles. Average tangible equity equals Tier 1 capital. For institutions with more than $1.0 billion in assets, average tangible equity is calculated on a weekly basis while smaller institutions may use the quarter-end balance. The base assessment rate for insured institutions in Risk Category I will range between 5 to 9 basis points and for institutions in Risk Categories II, III, and IV will be 14, 23 and 35 basis points. An institution’s assessment rate will be reduced based on the amount of its outstanding unsecured long-term debt and for institutions in Risk Categories II, III and IV may be increased based on their brokered deposits.



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 56 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 2016.

Completion of Acquisition.    On October 1, 2016, DNB completed its previously announced merger (the "Merger") with East River Bank (“ERB”).  Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of April 4, 2016, at the effective time of the Merger, ERB merged with and into DNB First, N.A., a wholly owned subsidiary of DNB.

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Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of ERB common stock was converted into the right to receive, at the election of the ERB shareholder (subject to certain conditions, including conditions relating to pro-ration):  (i) 0.6562 shares of DNB common stock or (ii) $18.65 in cash.  The Merger Agreement provides that election of shares of DNB stock or cash is subject to pro-ration such that 2,085,662 ERB shares of common stock, or approximately 85.3% of the current outstanding ERB shares, will be exchanged for DNB common stock with the remaining ERB shares to be exchanged for cash and that the aggregate cash consideration payable to ERB shareholders will be $6.7 million (subject to adjustment for outstanding options exercised prior to closing).  The Merger Agreement also provides that options to purchase ERB common stock outstanding at the effective time of the Merger will be exchanged for a cash payment equal to the difference between the per share cash consideration under the Merger Agreement and the corresponding exercise price of such option.  Options to acquire an aggregate of 248,000 shares of ERB common stock were exchanged for such cash payment.  DNB is also required under the Merger Agreement to make a cash payment to ERB shareholders who would otherwise be entitled to a fractional share of DNB common stock. The aggregate payment made by DNB for these fractional shares is approximately $2,080.Material Trends and Uncertainties.

DNB reported net income available to common stockholders of $1,000, or less than a penny per diluted share, for the quarter ending September 30, 2016, compared with $1.3 million, or $0.44 per diluted share, for the same quarter, last year. Results for the three months ended September 30, 2016 included merger-related costs of $1.5 million associated with East River Bank and $30,000 of gains from insurance proceeds (There was an associated income tax adjustment of $259,000 for these two items).  Even though DNB’s quarterly earnings have increased compared to the same quarter last year (absent merger costs and insurance proceeds, net of taxes), 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 September 7, 2016 Beige Book indicated that aggregate business activity in the Third District grew slightly during the period--a bit slower than the modest pace reported during the July 13, 2016 Beige Book period. Similarly, overall hiring slowed to a slight pace of growth. Staffing firms reported a modest increase in activity, while manufacturers continued to report job cuts, and other sectors noted mixed trends. On balance, firms reported that prices continued to rise slightly over the September 7, 2016 Beige Book period, as did home prices. Other than health-care costs and wages for certain skilled positions, the Federal Reserve’s banking and staffing contacts reported that wages continued to rise modestly. Overall, firms expect moderate growth over the next six months--a little higher than they reported during the July 13, 2016 Beige Book period.

Overall, Third District homebuilders reported that activity continued to rise slightly, although prospective traffic slowed more than expected for the late summer season. Builders noted few cost pressures, other than for some subcontractors with skilled labor positions; material costs pressures remained subdued. Brokers in the major Third District housing markets noted that existing home sales activity had leveled off since the July 13, 2016 Beige Book period. A major Philadelphia-area broker as well as bankers throughout the Third District noted that sales continued to be weak because of the lack of inventory for mid-priced housing and a lack of demand for high-priced homes. Overall, home prices are still rising slightly, although this varies across markets and price categories.

The Federal Reserve’s nonresidential real estate contacts, predominately in the Greater Philadelphia area, reported that construction activity remained steady at healthy levels, while leasing activity was flat to up slightly. The Federal Reserve’s contacts reported that activity in both segments was growing at a somewhat softer pace compared with July 13, 2016 Beige Book period's modest growth. Contacts noted that more projects are in the pipeline for future groundbreaking, which should keep the level of new construction relatively high. The Federal Reserve’s contacts noted a critical mass of deals from a variety of sectors, including health and finance, which are creating demand beyond Center City Philadelphia to include the inner-ring transit suburbs.

Third District financial firms continued to report moderate growth of total loan volumes over the July 13, 2016 Beige Book period. Volumes within all lending categories have grown since the July 13, 2016 Beige Book period except for home equity loans and commercial and industrial (C&I) loans, which tailed off in August. All categories except C&I loans and automobile loans grew at a faster pace than during the same period one year ago. The strongest growth during the September 7, 2016 Beige Book period was for credit card debt, commercial real estate, automobile loans, and other consumer lending. Mortgage lending was up slightly during the period, while home equity loans were down slightly; both have declined since last year. On balance, banking contacts continued to describe their loan portfolios as healthy and their customers' financials as improving. Most of the Federal Reserve’s contacts state they have left their loan standards unchanged for most loan categories, and few expressed concerns about riskier loans by their competitors. Many continued to characterize the lending environment as competitive. Most bankers described the confidence of their business and

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consumer customers as low; some said that confidence was steady, if not rising, but that customers remained cautious of borrowing and investing. Bankers remained cautiously optimistic that slow, steady growth would continue.

Third District manufacturers reported that overall activity had changed little since the July 13, 2016 Beige Book period. Reports indicated that general activity fell and then rose during the September 7, 2016 Beige Book period, orders rose and then fell, and shipments increased throughout. Along with these offsetting trends, firms reported to the Federal Reserve that the number of employees and the average employee work hours continued to fall. The makers of paper products, fabricated metal products, and electronic equipment noted overall gains in activity from the July 13, 2016 Beige Book, while the makers of lumber, chemicals, and primary metals noted weaker activity. The Federal Reserve’s contacts expressed higher expectations of growth over the next six months than they did during the July 13, 2016 Beige Book period. Expectations of future capital expenditures also rose; however, those for future employment did not.



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 $85,373 and the County ranks 14th nationally in disposable income. The unemployment rate for Chester County stood at 3.8% as of March 2016, compared to a Pennsylvania unemployment rate of 5.3% and a national unemployment rate of 5.1%. 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 285,486, 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.



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

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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 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

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for the year ended December 31, 2015.



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, 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 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 absorb credit losses and actual credit losses could differ.  DNB’s current judgment is that the allowance for credit losses remains appropriate at September 30, 2016.  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.



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 $770.3 million at September 30, 2016, compared to $748.8 million at December 31, 2015.  The $21.5 million increase in total assets was primarily attributable to a $27.7 million increase in loans before allowance for credit losses, a $9.3 million increase in cash and cash equivalents, a $6.5 million increase in other assets (primarily related to the future cash consideration payable to ERB shareholders per the merger agreement), and a $2.2 million increase in office property and equipment, offset by a decrease of $24.7 million in investment securities (excluding restricted stock) and a $368,000 increase in allowance for credit losses.



Investment Securities. Investment securities, including restricted stock, at September 30, 2016 were $199.1 million, compared to $223.7 million at December 31, 2015. The $24.6 million decrease in investment securities and restricted stock was primarily due to $76.2 million in purchases of investment securities and a $1.4 million change in fair value, and a $176,000 net increase in restricted stock, offset by $102.2 million in sales, principal pay-downs, calls and maturities.



Gross Loans. DNB’s loans increased $27.7 million to $509.5 million at September 30, 2016, compared to $481.8 million at December 31, 2015. Total commercial loans increased $25.4 million and consumer loans increased $2.6 million while residential loans decreased $272,000.



Deposits. Deposits were $645.5 million at September 30, 2016, compared to $606.3 million at December 31, 2015.  Deposits increased $39.3 million or 6.48% during the nine-month period ended September 30, 2016. Core deposits, which are comprised of demand, NOW, money markets and savings accounts, increased by $28.5 million, time deposits increased by $5.9 million and brokered deposits increased by $4.8 million. 



Borrowings. Borrowings were $58.9 million at September 30, 2016, compared to $81.9 million at December 31, 2015.  The decrease of $23.0 million or 28.0% was primarily due to a $12.9 million decrease in repurchase agreements and a $10.0 million decrease in FHLBP advances.



Stockholders’ Equity. Stockholders' equity was $59.2 million at September 30, 2016, compared to $55.5 million at December 31, 2015. The increase in stockholders’ equity was primarily a result of year-to-date earnings of $2.7 million and $914,000 of other comprehensive (loss) income, and restricted stock compensation expense of $801,000. These additions to stockholders’ equity were partially offset by taxes on share award vesting of $437,000 and $598,000 of dividends paid on DNB’s common stock.



RESULTS OF OPERATIONS

SUMMARY  



Net income for the three and nine-month periods ended September 30, 2016 was $1,000 and $2.7  million compared to $1.3

36


 

 

million and $3.7 million for the same periods in 2015. Diluted earnings per share for the three and nine-month periods ended September 30, 2016 were $0.00 and $0.93 compared to $0.44 and $1.31 for the same periods in 2015. The $1.3 million decrease in net income in the third quarter of 2016 compared to the third quarter of 2015 was primarily attributable to a $1.9 million increase in non-interest expense (primarily due diligence and merger expenses) , offset by a $332,000 increase in non-interest income a $278,000 decrease in income tax expense, and a $67,000 increase in net interest income. The $1.1 million decrease in net income during the nine-month period was primarily attributable to a $3.0 million increase in non-interest expense (primarily due diligence and merger expenses) offset by a $1.4 million increase in non-interest income (primarily gains from insurance proceeds),  a $186,000 decrease in income tax expense, a $185,000 decrease in the provision for credit losses, and a $151,000 increase in net interest income.



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 debentures and notes, and other borrowings.



Net interest income for the three and nine-month periods ended September 30, 2016 was $5.5 million and $16.4 million, compared to $5.5 million and $16.3 million for the same periods in 2015. Interest income for the three and nine-month periods ended September 30, 2016 was $6.3 million and $18.6 million, compared to $6.2 million and $18.3 million for the same periods in 2015. Interest expense for the three and nine-month periods ended September 30, 2016 was $760,000 and $2.1 million, compared to $711,000 and $2.0 million for the same periods in 2015. The composite cost of funds for the three and nine-month periods ended September 30, 2016 was 0.43% and 0.41%, compared to 0.42% and 0.39% for the same periods in 2015. The net interest margin for the three and nine-month periods ended September 30, 2016 was 3.06% and 3.10%, compared to 3.13% and 3.13% for the same periods in 2015.



Interest on loans was $5.2 million and $15.4 million for the three and nine-month periods ended September 30, 2016, compared to $5.1 million and $15.0 million for the same periods in 2015. The average balance of loans was $498.6 million with an average yield of 4.18% for the third quarter of 2016, compared to $469.9 million with an average yield of 4.32% for the same period in 2015. The average balance of loans was $490.1 million with an average yield of 4.21% for the nine months ended September 30, 2016, compared to $463.3 million with an average yield of 4.33% for the same period in 2015.



Interest and dividends on investment securities was $1.0 million and $3.1 million for the three and nine-month periods ended September 30, 2016, compared to $1.1 million and $3.3 million for the same periods in 2015. The average balance of investment securities was $215.0 million with a tax equivalent average yield of 2.19% for the third quarter of 2016, compared to $225.8 million with a tax equivalent average yield of 2.17% for the same period in 2015. The average balance of investment securities was $213.3 million with a tax equivalent average yield 2.24% for the nine months ended September 30, 2016, compared to $230.9 million with a tax equivalent average yield of 2.11% for the same period in 2015.



Interest on deposits was $450,000 and $1.2 million for the three and nine-month periods ended September 30, 2016, compared to $300,000 and $859,000 for the same periods in 2015. The average balance of deposits was $640.8 million with an average rate of 0.28% for the third quarter of 2016, compared to $607.3 million with an average rate of 0.20% for the same period in 2015. The average balance of deposits was $631.3 million with an average rate of 0.25% for the nine months ended September 30, 2016, compared to $616.0 million with an average rate of 0.19% for the same period in 2015.



Interest on borrowings was $310,000 and $920,000 for the three and nine-month periods ended September 30, 2016, compared to $411,000 and $1.1 million for the same periods in 2015. The average balance of borrowings was $58.5 million with an average rate of 2.10% for the third quarter of 2016, compared to $71.5 million with an average rate of 2.29% for the same period in 2015. The average balance of borrowings was $61.2 million with an average rate of 2.00% for the nine months ended September 30, 2016, compared to $60.9 million with an average rate of 2.49% for the same period in 2015.



PROVISION FOR CREDIT LOSSES



To provide for known and inherent losses in the loan portfolios, DNB maintains an allowance for credit losses. Provisions for credit losses are charged against income to increase the allowance when necessary. Loan losses are charged directly against the allowance and recoveries on previously charged-off loans are added to the allowance. In establishing its allowance for credit losses, management considers the size and risk exposure of each segment of the loan portfolio, past loss experience, present indicators of risk such as delinquency rates, levels of 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”).

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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 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 Loan Review Methodology and Degree of Oversight by Bank’s Board of Directors;

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 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

38


 

 

financial strength along with their ability and willingness to provide financial support of their obligations on an immediate and continuing basis.

There was a $100,000 and $630,000 provision made during the three and nine months ended September 30, 2016, compared to $100,000 and $815,000 for the same periods in 2015. DNB’s percentage of allowance for credit losses to total loans was 1.04%  at September 30, 2016 compared to 1.02% and 1.01% at December 31, 2015 and September 30, 2015, respectively. Net charge-offs were $262,000, $1.1 million, and $992,000 during the nine months ended September 30, 2016, year ended December 31, 2015, and nine months ended September 30, 2015, respectively. The percentage of net charge-offs to total average loans were 0.05%, 0.23%, and 0.21% 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. Management is not aware of any potential problem loans, which were accruing and current at September 30, 2016, 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 increased $1.9 million during the nine month period ended September 30, 2016.  The ratio of the allowance for credit losses as a percentage of loans reflects management’s estimate of the level of inherent losses in the portfolio, which has been impacted by a slow economy, 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 September 30, 2016, DNB had $9.9 million of non-performing assets, which included $7.0 million of non-performing loans and $2.9 million of OREO and other repossessed assets. This compares to $7.7 million of non-performing assets at December 31, 2015 which included $5.1 million of non-performing or impaired loans and $2.6 million 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 $7.1 million of impaired loans ($7.0 million of non-performing loans and $104,000 of performing TDRs) at September 30, 2016, $1.7 million had valuation allowances of $386,000 and $5.4 million had no specific allowance. Of the $5.0 million of impaired loans at December 31, 2015, $307,000 had valuation allowances of $114,000 and $4.7 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 September 30, 2016, DNB recognized $47,000 in total charge-offs, $39,000 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

39


 

 

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 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.

Analysis of Allowance for Credit Losses

(Dollars in thousands)





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Nine Months Ended

Year Ended

Nine Months Ended



September 30, 2016

December 31, 2015

September 30, 2015

Beginning balance

$

4,935 

 

$

4,906 

 

$

4,906 

 

Provisions:

 

630 

 

 

1,105 

 

 

815 

 

Loans charged off:

 

 

 

 

 

 

 

 

 

Residential mortgage

 

(206)

 

 

(194)

 

 

(69)

 

Commercial mortgage

 

(39)

 

 

(105)

 

 

(105)

 

Commercial:

 

 

 

 

 

 

 

 

 

Commercial term

 

(32)

 

 

(200)

 

 

(190)

 

Commercial construction

 

 -

 

 

(581)

 

 

(577)

 

Lease financing

 

 -

 

 

 -

 

 

 -

 

Consumer:

 

 

 

 

 

 

 

 

 

Home equity

 

 -

 

 

(11)

 

 

(11)

 

Other

 

 -

 

 

(63)

 

 

(60)

 

Total charged off

 

(277)

 

 

(1,154)

 

 

(1,012)

 

Recoveries:

 

 

 

 

 

 

 

 

 

Residential mortgage

 

10 

 

 

 

 

 

Commercial mortgage

 

 -

 

 

 -

 

 

 -

 

Commercial:

 

 

 

 

 

 

 

 

 

Commercial term

 

 

 

13 

 

 

10 

 

Commercial construction

 

 

 

10 

 

 

 

Lease financing

 

 

 

49 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

Home Equity

 

 -

 

 

 -

 

 

 -

 

Other

 

 

 

 

 

 

Total recoveries

 

15 

 

 

78 

 

 

20 

 

Ending balance

$

5,303 

 

$

4,935 

 

$

4,729 

 

Reserve for unfunded loan commitments

$

199 

 

$

188 

 

$

178 

 



40


 

 

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)





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2016

 

 

December 31, 2015

 

 

September 30, 2015

 



 

 

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

$

403 

%

$

216 

%

$

194 

%

Commercial mortgage

 

2,472  56 

 

 

2,375  57 

 

 

2,491  61 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

793  21 

 

 

989  21 

 

 

719  16 

 

Commercial construction

 

873 

 

 

569 

 

 

678 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

202  10 

 

 

195  11 

 

 

200  11 

 

Other

 

62 

 

 

64 

 

 

66 

 

Unallocated

 

498 

 -

 

 

527 

 -

 

 

381 

 -

 

Total

$

5,303  100 

%

$

4,935  100 

%

$

4,729  100 

%

Reserve for unfunded loan commitments

$

199 

 

 

$

188 

 

 

$

178 

 

 



41


 

 

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, mortgage banking, remote capture, merchant services, debit cards, safe deposit box rentals and similar activities.

Non-interest income for the three and nine-month periods ended September 30, 2016 was $1.4 million and $5.1 million, compared to $1.0 million and $3.7 million for the same periods in 2015. The $332,000 increase during the three months ended September 30, 2016 was mainly attributable to increases of $187,000 in net gains on sale of investments, $76,000 in wealth management, $38,000 in mortgage banking, $30,000 in gains on insurance proceeds, and $14,000 in other fees (mostly servicing fee income). These increases were offset by a  decrease of $12,000 in service charges (mostly NSF fees and business analysis charges). The $1.4 million increase during the nine months ended September 30, 2016 was mainly attributable to increases of $1.2 million in gains from insurance proceeds related to the fire in the West Chester office, $357,000 in net gain on sale of investments, $140,000 in wealth management, $62,000 in mortgage banking, and $48,000 in other fees (mostly servicing fee income, Visa debit interchange, and merchant card processing).



NON-INTEREST EXPENSE



Non-interest expense for the three and nine-month periods ended September 30, 2016 was $6.7 million and $17.3 million, compared to $4.8 million and $14.3 million for the same periods in 2015. During the three months ended September 30, 2016, total non-interest expense increased by $1.9 million. The increase was primarily due to increases of $1.5 million in due diligence and merger expense, $202,000 in salary and employee benefits, $119,000 in furniture and equipment, $109,000 in other expenses (mostly charge-off expense, director’s fees, and miscellaneous expense), and $93,000 in occupancy. These increases were partially offset by decreases of $56,000 in FDIC insurance, $30,000 in advertising and marketing, and $11,000 in professional and consulting. During the nine months ended September 30, 2016, total non-interest expense increased $3.0 million. The increase was primarily due to increases of $2.0 million in due diligence and merger expenses, $739,000 in salary and employee benefits (restricted stock vestings, normal merit increases, and higher commissions), $185,000 in furniture and equipment, $127,000 in other expenses (mostly charge-off expenses and director’s fees), and $42,000 in professional and consulting.  



INCOME TAXES



Income tax expense for the three and nine-month periods ended September 30, 2016 was $81,000 and $939,000, compared to $359,000 and $1.1 million for the same periods in 2015. The effective tax rate for the three and nine-month periods ended September 30, 2016 was 99.1% and 26.0% compared to 22.1% and 23.0% for the same periods in 2015. The effective tax rate increased to 99.1% primarily due to an increased taxable adjustment in the quarter for non-deductible due diligence and merger expense of $313,000. 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 $9.9 million at September 30, 2016 compared to $7.7 million at December 31, 2015 and $6.5 million at September 30, 2015. The non-performing loans to total loans ratio was 1.36% at September 30, 2016, 1.06% at December 31, 2015 and 0.90% at September 30, 2015. The non-performing assets to total assets ratio was 1.28% at September 30, 2016, 1.02% at December 31, 2015, and 0.87% at September 30, 2015. The allowance to non-performing loans ratio was 76.3% at September 30, 2016, 96.9% at December 31, 2015 and 111.3% at September 30, 2015. 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, loans delinquent over ninety days and still accruing, as well as OREO and other repossessed assets. Non-accrual loans are loans for which the accrual of interest ceases when the collection of principal or interest payments is determined to be doubtful by management. It is the policy of DNB to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more (unless the loan principal and interest are determined by management to be fully secured and in the process of collection), or earlier if considered prudent. Interest received on such loans is applied to the principal balance, or may, in some instances, be recognized as income on a cash basis. A non-accrual loan may be restored to accrual status when management expects to collect all contractual principal and interest due and the borrower has

42


 

 

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 consumer purchased chattel portfolio that were repossessed. OREO and other repossessed assets are carried at the lower of 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 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 September 30, 2016, DNB had $23.7 million of substandard loans. Of the $23.7 million, $16.4 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, 2015 was $14.6 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)







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



September 30, 2016

December 31, 2015

September 30, 2015

 

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

Residential mortgage

$

1,759 

 

$

1,619 

 

$

1,600 

 

 

Commercial mortgage

 

3,061 

 

 

1,048 

 

 

1,075 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

Commercial term

 

202 

 

 

188 

 

 

191 

 

 

Commercial construction

 

1,217 

 

 

1,028 

 

 

451 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

Home equity

 

492 

 

 

563 

 

 

313 

 

 

Other

 

221 

 

 

189 

 

 

120 

 

 

Total non-accrual loans

 

6,952 

 

 

4,635 

 

 

3,750 

 

 

Loans 90 days past due and still accruing

 

 -

 

 

457 

 

 

498 

 

 

Total non-performing loans

 

6,952 

 

 

5,092 

 

 

4,248 

 

 

Other real estate owned & other repossessed property

 

2,939 

 

 

2,581 

 

 

2,235 

 

 

Total non-performing assets

$

9,891 

 

$

7,673 

 

$

6,483 

 

 

Asset quality ratios:

 

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans

 

1.36 

%

 

1.06 

%

 

0.90 

%

 

Non-performing assets to total assets

 

1.28 

 

 

1.02 

 

 

0.87 

 

 

Allowance for credit losses to:

 

 

 

 

 

 

 

 

 

 

Total loans

 

1.04 

 

 

1.02 

 

 

1.01 

 

 

Non-performing loans

 

76.3 

 

 

96.9 

 

 

111.3 

 

 





As of September 30, 2016, 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, 2015, and one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at September 30, 2015. 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 nine months ended September 30, 2016 and 2015, there were no defaults on any terms of this loan.

 

As of September 30, 2016, DNB had one consumer installment loan classified as a TDR totaling $40,000 compared to one consumer installment loan classified as a TDR totaling $40,000 (the same loan) at December 31, 2015, and no such loans at September 30, 2015. The interest rate on the loan was reduced. The loan was extended and there was no reduction of principal. This loan was classified as a TDR in December of 2015. The balance of the loan prior to modification was $42,000 and the balance after the modification was $42,000. DNB recognized a partial charge-off on the loan in the amount of $2,000. During the nine months ended September 30, 2016 and 2015, there were no defaults on any terms of this loan.



43


 

 



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



Nine Months Ended

Year Ended

Nine Months Ended

(Dollars in thousands)

September 30, 2016

December 31, 2015

September 30, 2015

Total recorded investment

$

7,055 

 

$

5,021 

 

$

4,105 

 

Impaired loans with a specific allowance

 

1,662 

 

 

307 

 

 

920 

 

Impaired loans without a specific allowance

 

5,393 

 

 

4,714 

 

 

3,185 

 

Average recorded investment

 

6,184 

 

 

6,891 

 

 

7,359 

 

Specific allowance allocation

 

386 

 

 

114 

 

 

120 

 

Total principal and interest collected

 

772 

 

 

2,878 

 

 

2,830 

 

Interest income recorded

 

 

 

96 

 

 

88 

 



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 $118.2 million at September 30, 2016 compared to $96.8 million at December 31, 2015.  Primary liquidity includes investments and restricted stock, Federal funds sold and cash and due from banks, less pledged securities of $111.3 million.  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 $312.9 million at September 30, 2016.  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 September 30, 2016, our Maximum Borrowing Capacity with the FHLB was $266.9 million. At September 30, 2016, DNB had borrowed $20.0 million and the FHLB had issued letters of credit, on DNB's behalf, totaling $70.0 million against its available credit lines. At September 30, 2016, we also had available $46.0 million of unsecured federal funds lines of credit with other financial institutions as well as $104.0 million of available short or long term funding through the Certificate of Deposit Account Registry Service (CDARS) program and $129.1 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 or 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 September 30, 2016, DNB had $122.1 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 $250,000 scheduled to mature in one year or less from September 30, 2016 totaled $40.2 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 September 30, 2016.  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 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, 2015 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. Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will

44


 

 

become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016. DNB must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2016 is 0.625%.



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

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

$

84,509  14.7 

%

$

49,511  8.625 

%

 

N/A

N/A

 

Common Equity Tier 1 capital

 

60,257  10.5 

 

 

29,420  5.125 

 

 

N/A

N/A

 

Tier 1 risk-based capital

 

69,257  12.1 

 

 

38,030  6.625 

 

 

N/A

N/A

 

Tier 1 (leverage) capital

 

69,257  9.1 

 

 

30,574  4.000 

 

 

N/A

N/A

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

$

81,321  14.8 

%

$

44,003  8.0 

%

 

N/A

N/A

 

Common equity tier 1 capital

 

57,448  10.4 

 

 

24,752  4.5 

 

 

N/A

N/A

 

Tier 1 risk-based capital

 

66,448  12.1 

 

 

33,002  6.0 

 

 

N/A

N/A

 

Tier 1 (leverage) capital

 

66,448  8.9 

 

 

29,717  4.0 

 

 

N/A

N/A

 

DNB First, N.A.

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

$

74,870  13.2 

%

$

48,806  8.625 

%

$

56,587  10.0 

%

Common Equity Tier 1 capital

 

69,368  12.3 

 

 

29,001  5.125 

 

 

36,782  6.5 

 

Tier 1 risk-based capital

 

69,368  12.3 

 

 

37,489  6.625 

 

 

45,270  8.0 

 

Tier 1 (leverage) capital

 

69,368  9.1 

 

 

30,519  4.000 

 

 

38,148  5.0 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

$

80,286  14.6 

%

$

43,904  8.0 

%

$

54,880  10.0 

%

Common equity tier 1 capital

 

75,163  13.7 

 

 

24,696  4.5 

 

 

35,672  6.5 

 

Tier 1 risk-based capital

 

75,163  13.7 

 

 

32,928  6.0 

 

 

43,904  8.0 

 

Tier 1 (leverage) capital

 

75,163  10.1 

 

 

29,670  4.0 

 

 

37,087  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.

45


 

 

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 September 30, 2016 and December 31, 2015, 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 September 30, 2016 and December 31, 2015. 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

September 30, 2016

 

 

December 31, 2015

 

Change in rates

 

Flat

 

 

-200bp

 

 

+200bp

 

 

Flat

 

 

-200bp

 

 

+200bp

 

EVE

$

70,092 

 

$

73,738 

 

$

70,205 

 

$

68,118 

 

$

58,298 

 

$

58,936 

 

Change

 

 

 

 

3,646 

 

 

113 

 

 

 

 

 

(9,820)

 

 

(9,182)

 

Change as % of assets

 

 

 

 

0.5% 

 

 

0.0% 

 

 

 

 

 

(1.3%)

 

 

(1.2%)

 

Change as % of PV equity

 

 

 

 

5.2% 

 

 

0.2% 

 

 

 

 

 

(14.4%)

 

 

(13.5%)

 



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 September 30, 2016, 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 September 30, 2016, 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 September 30, 2016. The following table provides information on repurchases by DNB of its common stock in each month of the quarter ended September 30, 2016:







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

 

 

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)



 

 

 

 

 

 

 

 

July 1, 2016 – July 31, 2016

 

 -

$

 -

 

 -

$

63,016 



 

 

 

 

 

 

 

 

August 1, 2016 – August 31, 2016

 

 -

 

 -

 

 -

$

63,016 



 

 

 

 

 

 

 

 

September 1, 2016 – September 30, 2016

 

 -

 

 -

 

 -

$

63,016 



 

 

 

 

 

 

 

 

Total

 

 -

$

 -

 

 -

$

63,016 



46


 

 

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.



ITEM 6. EXHIBITS



a) The following exhibits are filed or furnished herewith:



 

 

Exhibit Number

Description



 

 

2.1

 

Agreement and Plan of Merger by and between DNB Financial Corporation and East River Bank, dated as of April 4, 2016, filed as Exhibit 2.1 to Form 8-K (No. 1-34242) on April 5, 2016 and incorporated herein by reference.

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



47


 

 

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



 

 

November  7, 2016

BY:

/s/ William J. Hieb



 

William J. Hieb, Chief Executive Officer, President and Director



 

 



 

 



 

 

November  7, 2016

BY:

/s/ Gerald F. Sopp



 

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



 

 



 

 



48


 

 





 

 



 

Exhibit Number

 

Exhibit Index

 

 

Description

2.1

 

Agreement and Plan of Merger by and between DNB Financial Corporation and East River Bank, dated as of April 4, 2016, filed as Exhibit 2.1 to Form 8-K (No. 1-34242) on April 5, 2016 and incorporated herein by reference.

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