SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended: June 30, 2019
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
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Pennsylvania (State or other jurisdiction of incorporation or organization) |
| 23-2222567 (I.R.S. Employer Identification No.) |
4 Brandywine Avenue - Downingtown, PA 19335
(Address of principal executive offices and Zip Code)
(610) 269-1040
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading symbol(s) | Name of each exchange on which registered | |||
Common Stock ($1.00 Par Value) | DNBF | The NASDAQ Stock Market LLC |
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
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Yes ☒ |
| No ☐ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
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Yes ☒ |
| No ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||
Emerging growth company | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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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)
| 4,334,431 (Shares Outstanding as of August 5, 2019) |
DNB FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
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| PART I - FINANCIAL INFORMATION | PAGE NO. | ||
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ITEM 1. |
| FINANCIAL STATEMENTS (Unaudited): |
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| CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION |
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| June 30, 2019 and December 31, 2018 | 3 | ||
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| CONSOLIDATED STATEMENTS OF INCOME |
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| Three and Six Months Ended June 30, 2019 and 2018 | 4 | ||
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| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
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| Three and Six Months Ended June 30, 2019 and 2018 | 5 | ||
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| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | 6 | ||
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| Three and Six Months Ended June 30, 2019 and 2018 |
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| CONSOLIDATED STATEMENTS OF CASH FLOWS |
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| Six Months Ended June 30, 2019 and 2018 | 7 | ||
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| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | 8 | ||
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ITEM 2. |
| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 30 | ||
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ITEM 3. |
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 45 | ||
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ITEM 4. |
| CONTROLS AND PROCEDURES | 45 | ||
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| PART II - OTHER INFORMATION |
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ITEM 1. |
| LEGAL PROCEEDINGS | 45 | ||
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ITEM 1A. |
| RISK FACTORS | 45 | ||
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ITEM 2. |
| UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 45 | ||
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ITEM 3. |
| DEFAULTS UPON SENIOR SECURITIES | 46 | ||
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ITEM 4. |
| MINE SAFETY DISCLOSURES | 46 | ||
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ITEM 5. |
| OTHER INFORMATION | 46 | ||
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ITEM 6. |
| EXHIBITS | 46 | ||
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SIGNATURES | 47 | ||||
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EXHIBIT INDEX | 48 | ||||
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2
PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
DNB Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition (Unaudited)
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| June 30, |
| December 31, | ||
(Dollars in thousands, except share and per share data) | 2019 |
| 2018 | ||
Assets |
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Cash and due from banks | $ | 46,398 |
| $ | 17,321 |
Cash and cash equivalents |
| 46,398 |
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| 17,321 |
Available-for-sale investment securities at fair value (amortized cost of $70,406 and $98,765) |
| 69,931 |
|
| 96,643 |
Held-to-maturity investment securities (fair value of $60,322 and $61,135) |
| 59,949 |
|
| 62,026 |
Total investment securities |
| 129,880 |
|
| 158,669 |
Loans held for sale |
| 501 |
|
| 419 |
Loans |
| 930,521 |
|
| 934,971 |
Allowance for credit losses |
| (6,672) |
|
| (6,675) |
Net loans |
| 923,849 |
|
| 928,296 |
Restricted stock |
| 5,734 |
|
| 5,616 |
Office property and equipment, net |
| 7,230 |
|
| 7,636 |
Operating lease right-of-use asset |
| 3,792 |
|
| - |
Accrued interest receivable |
| 4,297 |
|
| 4,207 |
Other real estate owned & other repossessed property |
| 2,825 |
|
| 5,051 |
Bank owned life insurance (BOLI) |
| 9,635 |
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| 9,530 |
Core deposit intangible |
| 302 |
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| 343 |
Goodwill |
| 15,525 |
|
| 15,525 |
Net deferred taxes |
| 2,416 |
|
| 2,762 |
Other assets |
| 2,025 |
|
| 2,860 |
Total assets | $ | 1,154,409 |
| $ | 1,158,235 |
Liabilities and Stockholders’ Equity |
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Liabilities |
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Non-interest-bearing deposits | $ | 178,454 |
| $ | 164,746 |
Interest-bearing deposits: |
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NOW |
| 214,806 |
|
| 236,071 |
Money market |
| 236,707 |
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| 235,023 |
Savings |
| 79,489 |
|
| 77,979 |
Time |
| 178,530 |
|
| 162,096 |
Brokered deposits |
| 87,877 |
|
| 108,651 |
Total deposits |
| 975,863 |
|
| 984,566 |
Federal Home Loan Bank of Pittsburgh (FHLBP) advances |
| 31,203 |
|
| 32,935 |
Junior subordinated debentures |
| 9,279 |
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| 9,279 |
Subordinated debt |
| 9,750 |
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| 9,750 |
Other borrowings |
| 272 |
|
| 3,305 |
Total borrowings |
| 50,504 |
|
| 55,269 |
Accrued interest payable |
| 641 |
|
| 646 |
Other liabilities |
| 5,071 |
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| 5,908 |
Operating lease liability |
| 4,174 |
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| - |
Total liabilities |
| 1,036,253 |
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| 1,046,389 |
Stockholders’ Equity |
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Common stock, $1.00 par value; |
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20,000,000 shares authorized; 4,381,872 and 4,381,872 issued, respectively; 4,331,121 and 4,321,745 outstanding, respectively |
| 4,382 |
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| 4,391 |
Treasury stock, at cost; 50,751 and 60,127 shares, respectively |
| (961) |
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| (1,130) |
Surplus |
| 69,613 |
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| 69,333 |
Retained earnings |
| 46,791 |
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| 42,223 |
Accumulated other comprehensive loss |
| (1,669) |
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| (2,971) |
Total stockholders’ equity |
| 118,156 |
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| 111,846 |
Total liabilities and stockholders’ equity | $ | 1,154,409 |
| $ | 1,158,235 |
See accompanying notes to unaudited consolidated financial statements.
3
DNB Financial Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
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| Three Months Ended |
| Six Months Ended | ||||||||
| June 30, |
| June 30, | ||||||||
(Dollars in thousands, except share and per share data) | 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Interest Income: |
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Interest and fees on loans | $ | 11,358 |
| $ | 10,164 |
| $ | 22,648 |
| $ | 20,046 |
Interest and dividends on investment securities: |
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Taxable |
| 812 |
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| 862 |
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| 1,623 |
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| 1,655 |
Exempt from federal taxes |
| 211 |
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| 218 |
|
| 427 |
|
| 435 |
Interest on cash and cash equivalents |
| 138 |
|
| 45 |
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| 181 |
|
| 66 |
Total interest and dividend income |
| 12,519 |
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| 11,289 |
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| 24,879 |
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| 22,202 |
Interest Expense: |
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Interest on NOW, money market and savings |
| 1,109 |
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| 994 |
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| 2,160 |
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| 1,824 |
Interest on time deposits |
| 916 |
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| 333 |
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| 1,744 |
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| 658 |
Interest on brokered deposits |
| 592 |
|
| 414 |
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| 1,203 |
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| 613 |
Interest on FHLB advances |
| 145 |
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| 239 |
|
| 370 |
|
| 540 |
Interest on repurchase agreements |
| - |
|
| 6 |
|
| - |
|
| 12 |
Interest on junior subordinated debentures |
| 129 |
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| 113 |
|
| 256 |
|
| 218 |
Interest on subordinated debt |
| 103 |
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| 103 |
|
| 207 |
|
| 207 |
Interest on other borrowings |
| 10 |
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| 19 |
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| 26 |
|
| 35 |
Total interest expense |
| 3,004 |
|
| 2,221 |
|
| 5,966 |
|
| 4,107 |
Net interest income |
| 9,515 |
|
| 9,068 |
|
| 18,913 |
|
| 18,095 |
Provision for credit losses |
| 100 |
|
| 375 |
|
| 300 |
|
| 750 |
Net interest income after provision for credit losses |
| 9,415 |
|
| 8,693 |
|
| 18,613 |
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| 17,345 |
Non-interest Income: |
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Service charges |
| 246 |
|
| 261 |
|
| 537 |
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| 574 |
Wealth management |
| 529 |
|
| 512 |
|
| 974 |
|
| 947 |
Mortgage banking |
| 72 |
|
| 76 |
|
| 146 |
|
| 137 |
Increase in cash surrender value of BOLI |
| 53 |
|
| 52 |
|
| 105 |
|
| 104 |
Gain on sale of investment securities, net |
| 1 |
|
| - |
|
| 4 |
|
| - |
Gain on sale of loans |
| - |
|
| 10 |
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| - |
|
| 10 |
Other fees |
| 443 |
|
| 421 |
|
| 852 |
|
| 833 |
Total non-interest income |
| 1,344 |
|
| 1,332 |
|
| 2,618 |
|
| 2,605 |
Non-interest Expense: |
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Salaries and employee benefits |
| 3,785 |
|
| 4,261 |
|
| 7,638 |
|
| 8,033 |
Furniture and equipment |
| 663 |
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| 550 |
|
| 1,204 |
|
| 1,039 |
Occupancy |
| 627 |
|
| 634 |
|
| 1,352 |
|
| 1,331 |
Professional and consulting |
| 440 |
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| 424 |
|
| 1,017 |
|
| 827 |
Advertising and marketing |
| 225 |
|
| 204 |
|
| 420 |
|
| 386 |
FDIC insurance |
| 95 |
|
| 122 |
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| 209 |
|
| 240 |
PA shares tax |
| 260 |
|
| 243 |
|
| 520 |
|
| 485 |
Telecommunications |
| 90 |
|
| 84 |
|
| 178 |
|
| 165 |
Loss on sale or write down of OREO, net |
| 37 |
|
| 140 |
|
| 150 |
|
| 140 |
Transaction costs |
| 519 |
|
| - |
|
| 519 |
|
| - |
Other expenses |
| 771 |
|
| 878 |
|
| 1,583 |
|
| 1,624 |
Total non-interest expense |
| 7,512 |
|
| 7,540 |
|
| 14,790 |
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| 14,270 |
Income before income tax expense |
| 3,247 |
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| 2,485 |
|
| 6,441 |
|
| 5,680 |
Income tax expense |
| 660 |
|
| 436 |
|
| 1,267 |
|
| 1,018 |
Net income | $ | 2,587 |
| $ | 2,049 |
| $ | 5,174 |
| $ | 4,662 |
Earnings per common share: |
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Basic | $ | 0.60 |
| $ | 0.48 |
| $ | 1.20 |
| $ | 1.09 |
Diluted | $ | 0.60 |
| $ | 0.47 |
| $ | 1.19 |
| $ | 1.08 |
Cash dividends per common share | $ | 0.07 |
| $ | 0.07 |
| $ | 0.14 |
| $ | 0.14 |
Weighted average common shares outstanding: |
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Basic | 4,331,121 |
| 4,298,409 |
| 4,329,226 |
| 4,294,758 | ||||
Diluted | 4,336,254 |
| 4,314,418 |
| 4,333,181 |
| 4,311,696 |
See accompanying notes to unaudited consolidated financial statements.
4
DNB Financial Corporation and Subsidiary
Consolidated Statements of Comprehensive Income (Unaudited)
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| Three Months Ended |
| Six Months Ended | ||||||||
| June 30, |
| June 30, | ||||||||
(Dollars in thousands) | 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Net income | $ | 2,587 |
| $ | 2,049 |
| $ | 5,174 |
| $ | 4,662 |
Other Comprehensive Income (Loss): |
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Unrealized holding gains (losses) arising during the period |
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Before tax amount |
| 838 |
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| (235) |
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| 1,647 |
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| (1,249) |
Tax effect |
| (176) |
|
| 49 |
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| (344) |
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| 262 |
Less reclassification for gains on sales of AFS investment securities included in net income |
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Before tax amount(1) |
| (1) |
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| - |
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| (1) |
|
| - |
Tax effect(2) |
| - |
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| - |
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| - |
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| - |
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| (1) |
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| - |
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| (1) |
|
| - |
Other comprehensive income - securities |
| 661 |
|
| (186) |
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| 1,302 |
|
| (987) |
Total other comprehensive income (loss) |
| 661 |
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| (186) |
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| 1,302 |
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| (987) |
Total comprehensive income | $ | 3,248 |
| $ | 1,863 |
| $ | 6,476 |
| $ | 3,675 |
(1) Amounts are included in "Gains on sale of investment securities, net" in the consolidated statements of income. | |||||||||||
(2) Amounts are included in "Income tax expense" in the consolidated statements of income. |
See accompanying notes to unaudited consolidated financial statements.
5
DNB Financial Corporation and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
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| Accumulated |
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| Other |
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| Common | Treasury |
| Retained | Comprehensive |
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(Dollars in thousands) | Stock | Stock | Surplus | Earnings | Loss | Total | ||||||
Balance at April 1, 2019 | $ | 4,382 | $ | (1,027) | $ | 69,454 | $ | 44,507 | $ | (2,330) | $ | 114,986 |
Net income for three months ended June 30, 2019 |
| - |
| - |
| - |
| 2,587 |
| - |
| 2,587 |
Other comprehensive income |
| - |
| - |
| - |
| - |
| 661 |
| 661 |
Restricted stock compensation expense (no shares vested) |
| - |
| - |
| 82 |
| - |
| - |
| 82 |
Cash dividends - common ($0.07 per share) |
| - |
| - |
| - |
| (303) |
| - |
| (303) |
Non-cash funding of 401(k) (2,335 shares) |
| - |
| 42 |
| 48 |
| - |
| - |
| 90 |
Non-cash funding of deferred comp. plan (1,371 shares) |
| - |
| 24 |
| 29 |
| - |
| - |
| 53 |
Balance at June 30, 2019 | $ | 4,382 | $ | (961) | $ | 69,613 | $ | 46,791 | $ | (1,669) | $ | 118,156 |
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| Accumulated |
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| Other |
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| Common | Treasury |
| Retained | Comprehensive |
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(Dollars in thousands) | Stock | Stock | Surplus | Earnings | Loss | Total | ||||||
Balance at January 1, 2019 | $ | 4,391 | $ | (1,130) | $ | 69,333 | $ | 42,223 | $ | (2,971) | $ | 111,846 |
Net income for six months ended June 30, 2019 |
| - |
| - |
| - |
| 5,174 |
| - |
| 5,174 |
Other comprehensive income |
| - |
| - |
| - |
| - |
| 1,302 |
| 1,302 |
Restricted stock compensation expense (no shares vested) |
| (9) |
| - |
| 152 |
| - |
| - |
| 143 |
Cash dividends - common ($0.14 per share) |
| - |
| - |
| - |
| (606) |
| - |
| (606) |
Non-cash funding of 401(k) (6,266 shares) |
| - |
| 114 |
| 83 |
| - |
| - |
| 197 |
Non-cash funding of deferred comp. plan (3,110 shares) |
| - |
| 55 |
| 45 |
| - |
| - |
| 100 |
Balance at June 30, 2019 | $ | 4,382 | $ | (961) | $ | 69,613 | $ | 46,791 | $ | (1,669) | $ | 118,156 |
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| Accumulated |
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| Other |
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| Common | Treasury |
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| Retained | Comprehensive |
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(Dollars in thousands) | Stock | Stock | Surplus | Earnings | Loss | Total | ||||||
Balance at April 1, 2018 | $ | 4,383 | $ | (1,345) | $ | 69,238 | $ | 35,056 | $ | (3,662) | $ | 103,670 |
Net income for three months ended June 30, 2018 |
| - |
| - |
| - |
| 2,049 |
| - |
| 2,049 |
Other comprehensive loss |
| - |
| - |
| - |
| - |
| (186) |
| (186) |
Restricted stock compensation expense (4,012 shares vested) |
| 4 |
| - |
| 104 |
| - |
| - |
| 108 |
Exercise of stock options (1,372 shares) |
| 1 |
| - |
| (1) |
| - |
| - |
| - |
Shares withheld for employee taxes on stock option exercise and share award vest |
| (3) |
| - |
| (140) |
| - |
| - |
| (143) |
Cash dividends - common ($0.07 per share) |
| - |
| - |
| - |
| (301) |
| - |
| (301) |
Non-cash funding of 401(k) (2,428 shares) |
| - |
| 44 |
| 42 |
| - |
| - |
| 86 |
Non-cash funding of deferred comp. plan (1,397 shares) |
| - |
| 25 |
| 25 |
| - |
| - |
| 50 |
Balance at June 30, 2018 | $ | 4,385 | $ | (1,276) | $ | 69,268 | $ | 36,804 | $ | (3,848) | $ | 105,333 |
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| Accumulated |
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| Other |
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| Common | Treasury |
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| Retained | Comprehensive |
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(Dollars in thousands) | Stock | Stock | Surplus | Earnings | Loss | Total | ||||||
Balance at January 1, 2018 | $ | 4,379 | $ | (1,429) | $ | 69,110 | $ | 32,272 | $ | (2,390) | $ | 101,942 |
Net income for six months ended June 30, 2018 |
| - |
| - |
| - |
| 4,662 |
| - |
| 4,662 |
Other comprehensive loss |
| - |
| - |
| - |
| - |
| (987) |
| (987) |
Restricted stock compensation expense (4,908 shares vested) |
| 8 |
| - |
| 196 |
| - |
| - |
| 204 |
Exercise of stock options (2,338 shares) |
| 2 |
| - |
| (2) |
| - |
| - |
| - |
Shares withheld for employee taxes on stock option exercise and share award vest |
| (4) |
| - |
| (176) |
| - |
| - |
| (180) |
Cash dividends - common ($0.14 per share) |
| - |
| - |
| - |
| (601) |
| - |
| (601) |
Non-cash funding of 401(k) (5,658 shares) |
| - |
| 102 |
| 92 |
| - |
| - |
| 194 |
Non-cash funding of deferred comp. plan (2,877 shares) |
| - |
| 51 |
| 48 |
| - |
| - |
| 99 |
Adoption impact - ASU 2018-02 |
| - |
| - |
| - |
| 471 |
| (471) |
| - |
Balance at June 30, 2018 | $ | 4,385 | $ | (1,276) | $ | 69,268 | $ | 36,804 | $ | (3,848) | $ | 105,333 |
See accompanying notes to unaudited consolidated financial statements.
6
DNB Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
| Six Months Ended June 30, | ||||
(Dollars in thousands) | 2019 |
| 2018 | ||
Cash Flows From Operating Activities: |
|
|
|
|
|
Net income | $ | 5,174 |
| $ | 4,662 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Depreciation, amortization and accretion |
| 694 |
|
| 761 |
Provision for credit losses |
| 300 |
|
| 750 |
Stock based compensation |
| 143 |
|
| 204 |
Non-cash funding of retirement plans |
| 297 |
|
| 293 |
Net gain on sale of securities |
| (4) |
|
| - |
Net loss on sale or write down of OREO and other repossessed property |
| 150 |
|
| 140 |
Earnings from investment in BOLI |
| (105) |
|
| (104) |
Deferred tax expense |
| - |
|
| 167 |
Proceeds from sales of mortgage loans |
| 8,113 |
|
| 8,620 |
Mortgage loans originated for sale |
| (8,049) |
|
| (8,108) |
Gain on sale of mortgage loans |
| (146) |
|
| (137) |
Proceeds from sales of loans |
| - |
|
| 188 |
Loans originated for sale |
| - |
|
| (178) |
Gain on sale of loans |
| - |
|
| (10) |
Write off of property and equipment |
| 3 |
|
| - |
Increase in accrued interest receivable |
| (90) |
|
| (89) |
Decrease in other assets |
| 1,215 |
|
| 97 |
(Decrease) increase in accrued interest payable |
| (5) |
|
| 7 |
(Decrease) increase in other liabilities |
| (837) |
|
| 241 |
Amortization of operating lease right-of-use asset |
| 372 |
|
| - |
Accretion of operating lease liability |
| (369) |
|
| - |
Net Cash Provided by Operating Activities |
| 6,856 |
|
| 7,504 |
Cash Flows From Investing Activities: |
|
|
|
|
|
Activity in available-for-sale securities: |
|
|
|
|
|
Sales |
| 13,905 |
|
| - |
Maturities, repayments and calls |
| 45,875 |
|
| 6,953 |
Purchases |
| (31,546) |
|
| - |
Activity in held-to-maturity securities: |
|
|
|
|
|
Maturities, repayments and calls |
| 2,148 |
|
| 304 |
Net (increase) decrease in restricted stock |
| (118) |
|
| 691 |
Net decrease (increase) in loans |
| 3,559 |
|
| (40,102) |
Purchases of property and equipment |
| (192) |
|
| (122) |
Purchase of third party ownership in OREO |
| (165) |
|
| - |
Proceeds from sale of OREO and other repossessed property |
| 2,829 |
|
| 33 |
Net Cash Provided By (Used In) Investing Activities |
| 36,295 |
|
| (32,243) |
Cash Flows From Financing Activities: |
|
|
|
|
|
Net (decrease) increase in deposits |
| (8,703) |
|
| 72,912 |
Repayment of FHLBP advances |
| (66,732) |
|
| (200,641) |
Funding of FHLBP advances |
| 65,000 |
|
| 184,600 |
Net decrease in repurchase agreements |
| - |
|
| (6,414) |
Decrease in other borrowings |
| (3,033) |
|
| (2,402) |
Dividends paid |
| (606) |
|
| (601) |
Payment of employee taxes on stock option exercise and share award vest |
| - |
|
| (180) |
Net Cash (Used in) Provided by Financing Activities |
| (14,074) |
|
| 47,274 |
Net Change in Cash and Cash Equivalents |
| 29,077 |
|
| 22,535 |
Cash and Cash Equivalents at Beginning of Period |
| 17,321 |
|
| 10,917 |
Cash and Cash Equivalents at End of Period | $ | 46,398 |
| $ | 33,452 |
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
Interest | $ | 5,971 |
| $ | 4,100 |
Income taxes |
| 719 |
|
| 600 |
Supplemental Disclosure of Non-cash Flow Information: |
|
|
|
|
|
Transfers from loans to real estate owned and other repossessed property |
| 588 |
|
| 274 |
See accompanying notes to unaudited consolidated financial statements.
7
The accompanying unaudited consolidated financial statements of DNB Financial Corporation (referred to herein as the "Corporation" or "DNB") and its subsidiary, DNB First, National Association (the "Bank") have been prepared in accordance with the instructions for Form 10-Q and therefore do not include certain information or footnotes necessary for the presentation of financial condition, statement of operations and statement of cash flows required by generally accepted accounting principles. However, in the opinion of management, the consolidated financial statements reflect all adjustments (which consist of normal recurring adjustments) necessary for a fair presentation of the results for the unaudited periods. Prior amounts not affecting net income are reclassified when necessary to conform to current period classifications. The results of operations for the three and six months ended June 30, 2019 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, 2018.
Subsequent Events-- Management has evaluated events and transactions occurring subsequent to June 30, 2019 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.
Merger Agreement. On June 5, 2019, S&T Bancorp, Inc. (“S&T”) and DNB entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which DNB will merge with and into S&T (the “Merger”), with S&T continuing as the surviving entity in the Merger, subject to the terms and conditions set forth therein. Immediately following the Merger, DNB’s wholly owned bank subsidiary, DNB First, National Association, will merge with and into S&T’s wholly owned bank subsidiary, S&T Bank (the “Bank Merger”), with S&T Bank continuing as the surviving entity in the Bank Merger. The Merger Agreement was unanimously approved by the Board of Directors of each of S&T and DNB.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), DNB shareholders will have the right to receive 1.22 shares of common stock, par value $2.50 per share, of S&T for each share of common stock, par value $1.00 per share, of DNB.
The merger is subject to customary closing conditions enumerated in the merger agreement, including receipt of regulatory approvals and the approval of DNB’s shareholders. It is anticipated that the transaction will close during the fourth quarter of 2019.
Recent Accounting Pronouncements-
Accounting Developments Affecting DNB
In May 2014, the FASB issued ASU No. 2014-09, ‘‘Revenue from Contracts with Customers (Topic 606).’’ The updated standard is a new comprehensive revenue recognition model that requires revenue to be recognized in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year. During 2016 and 2017, the FASB issued ASU Nos. 2016-10, 2016-12, 2016-20, and 2017-13 that provided additional guidance related to the identification of performance obligations within a contract, assessing collectability, contract costs, and other technical corrections and improvements.
DNB adopted the new standards discussed above effective January 1, 2018 using the modified retrospective approach. A significant majority of DNB’s revenues are explicitly excluded from the scope of the new guidance including interest, dividend income, BOLI, gain/loss on sale of loans and investments on the Consolidated Statements of Income. The adoption of ASU 2014-09 did not require a cumulative adjustment to the opening balance of retained earnings as of January 1, 2018 and did not have a material impact on DNB’s Consolidated Statements of Financial Condition, Comprehensive Income, Stockholders’ Equity or Cash Flows for the year ended December 31, 2018. Non-interest income components in the scope of Topic 606 continue to be recognized when DNB’s performance obligations are complete or at the time of sale after a customer’s transaction posts in the account. Disclosures required for DNB’s revenue streams in the scope of ASU 2014-09 are included in Non-Interest Income in the following table.
8
Non-interest Income Non-interest income includes revenue from contracts with customers in the scope of ASU 2014-09 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| June 30, |
| June 30, | ||||||||
(Dollars in thousands) | 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Non-interest Income: |
|
|
|
|
|
|
|
|
|
|
|
Service charges: |
|
|
|
|
|
|
|
|
|
|
|
Non-sufficient funds charges | $ | 122 |
| $ | 142 |
| $ | 255 |
| $ | 301 |
Business analysis charges |
| 46 |
|
| 44 |
|
| 92 |
|
| 85 |
Cycle charges |
| 21 |
|
| 22 |
|
| 41 |
|
| 45 |
Lockbox fees |
| 10 |
|
| 8 |
|
| 57 |
|
| 52 |
Stop payment fees |
| 5 |
|
| 3 |
|
| 9 |
|
| 7 |
Wire transfer fees |
| 22 |
|
| 22 |
|
| 44 |
|
| 43 |
Other service charges |
| 20 |
|
| 20 |
|
| 39 |
|
| 41 |
Total service charges |
| 246 |
|
| 261 |
|
| 537 |
|
| 574 |
Wealth management: |
|
|
|
|
|
|
|
|
|
|
|
DNB Investments & Insurance |
| 126 |
|
| 150 |
|
| 202 |
|
| 238 |
DNB First Investment Management & Trust |
| 403 |
|
| 362 |
|
| 772 |
|
| 709 |
Total wealth management |
| 529 |
|
| 512 |
|
| 974 |
|
| 947 |
Other fee income: |
|
|
|
|
|
|
|
|
|
|
|
Cardholder interchange fees |
| 286 |
|
| 269 |
|
| 539 |
|
| 514 |
Safe deposit box |
| 24 |
|
| 26 |
|
| 47 |
|
| 50 |
Check printing |
| 13 |
|
| 12 |
|
| 37 |
|
| 35 |
Merchant card processing |
| 45 |
|
| 42 |
|
| 87 |
|
| 90 |
ATM surcharges for non-DNB customers |
| 17 |
|
| 20 |
|
| 32 |
|
| 37 |
Other fee income |
| 12 |
|
| 13 |
|
| 26 |
|
| 27 |
Total other fee income |
| 397 |
|
| 382 |
|
| 768 |
|
| 753 |
Total Revenue from contracts with customers |
| 1,172 |
|
| 1,155 |
|
| 2,279 |
|
| 2,274 |
Total Revenue not within the scope of ASC 606 |
| 172 |
|
| 177 |
|
| 339 |
|
| 331 |
Total non-interest income | $ | 1,344 |
| $ | 1,332 |
| $ | 2,618 |
| $ | 2,605 |
Service charges on deposit accounts are recorded monthly when DNB’s performance obligations are complete. Deposit balances are disclosed in the Consolidated Statement of Condition. For transaction-based service charges such as non-sufficient funds charges, wire transfer fees, stop payment fees, ATM fees, and other transaction-based fees, revenue is recognized at the time of sale after the transaction posts in the customer’s account.
Wealth management revenue includes non-deposit products and services offered under the names “DNB Investment & Insurance” and “DNB First Investment Management & Trust”.
Through a third-party marketing agreement with Cetera Investment Services, LLC (“Cetera”), DNB Investment & Insurance offers a complete line of investment and insurance products. DNB’s performance obligation as an agent is to arrange for the sale of products by Cetera. Monthly, DNB recognizes commission fees in the amounts to which it is entitled in accordance with the terms of the marketing agreement for products sold. Shortly after a sale, the product provider remits the commission payment through Cetera to the Company, and the Company recognizes the revenue. DNB records revenue net of the cost of the services.
DNB First Investment Management & Trust offers a full line of investment and fiduciary services. DNB’s performance obligation is to manage investments, estates and trusts. Investment management and trust income is primarily comprised of fees earned from the management and administration of trusts, estates and investment agency portfolios. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized quarterly, based upon the quarter-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after quarter end through a direct charge to customers’ accounts. While managing estates and trusts, DNB contracts with a third-party tax preparation service. For tax preparation services, DNB’s obligation as an agent is to arrange for the performance of services by the third party. As tax services are rendered, DNB records revenue net of the cost of the services.
Cardholder interchange fees consist of revenue DNB is entitled per agreements with third party debit and credit card providers. DNB’s performance obligation as an agent is to arrange for cardholder services with its customers in accordance with fees and terms offered by the third-party service providers. Based on cardholder transactions reported by third party service providers, DNB recognizes fees for the amount it is contractually entitled.
DNB also contracts with third party providers for check printing, merchant card services, and ATM services. DNB’s performance obligation as an agent is to arrange for the services with its customers in accordance with fees and terms offered by the third-party service providers. Monthly, DNB recognizes fees for the amount it is contractually entitled.
9
DNB adopted ASU 2015-16, Business Combinations (Topic 805), in 2016: Simplifying the Accounting for Measurement Period Adjustments on a prospective basis. This amendment eliminates the requirement to account for adjustments to provisional amounts recognized in a business combination retrospectively. Instead, the acquirer will recognize the adjustments to provisional amounts during the period in which the adjustments are determined, including the effect on earnings of any amounts the acquirer would have recorded in previous periods if the accounting had been completed at the acquisition date. DNB evaluated the impact of this guidance and it does not have a material impact to the consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In particular, the guidance revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with fair value of financial instruments. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. As of June 30, 2019, DNB did not hold any equity investments (excluding restricted investments in bank stocks). DNB does not expect to make significant purchases of equity investments; therefore, the adoption of this ASU is not expected to be material to DNB's consolidated financial statements. Adoption of the standard on January 1, 2018 also resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets.
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 has determined that upon the adoption of ASU 2016-02 is required to recognize a right-of-use asset and a corresponding liability based on the then present value of such obligation. The adoption of ASU 2016-02 resulted in the recognition of operating lease liabilities of $4.4 million and right-of-use asset of $4.0 million. The adoption of the new standard did not have a material impact on its Consolidated Statements of Income. Update 2018-11 - Leases (topic 842): Targeted Improvements provided an additional/optional transition method to adopt the new leases standard. Prior to this ASU issuance, a modified retrospective transition approach was required. The adoption of this ASU does not materially impact our Consolidated Statement of Financial Condition and Consolidated Statements of Changes in Stockholders’ Equity. Update 2018-20 - Leases (topic 842): Narrow-Scope Improvements for Lessors was released to better clarify the treatment of sales taxes and other similar taxes related to Lessor and Lessees costs and payments. The amendments in this update permit lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs. Also, certain lessor costs require lessors to exclude from variable payments, and therefore revenue, lessor costs paid by lessees directly to third parties. DNB’s lessor income is immaterial; as such, this ASU does not materially impact our Consolidated Statement of Financial Condition or Consolidated Statements of Comprehensive Income. DNB adopted the use-of-hindsight practical expedient.
DNB recognized rent expense associated with our leases as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| June 30, |
| June 30, | ||||||||
(Dollars in thousands) | 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Operating lease cost: |
|
|
|
|
|
|
|
|
|
|
|
Fixed rent expense | $ | 251 |
| $ | 284 |
| $ | 503 |
| $ | 569 |
Net lease cost | $ | 251 |
| $ | 284 |
| $ | 503 |
| $ | 569 |
Lease costs |
|
|
|
|
|
|
|
|
|
|
|
Amortization of lease liability | $ | 186 |
| $ | - |
| $ | 372 |
| $ | - |
Interest expense |
| 65 |
|
| - |
|
| 131 |
|
| - |
Net lease cost | $ | 251 |
| $ | - |
| $ | 503 |
| $ | - |
10
DNB had the following cash and non-cash activities associated with our leases:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| June 30, |
| June 30, | ||||||||
(Dollars in thousands) | 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Cash paid for the amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases | $ | 250 |
| $ | 242 |
| $ | 500 |
| $ | 484 |
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Additions to ROU assets obtained from: |
|
|
|
|
|
|
|
|
|
|
|
New operating lease liabilities | $ | 4,174 |
| $ | - |
| $ | 4,174 |
| $ | - |
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. Although early adoption is permitted for fiscal years beginning after December 15, 2018, DNB does not plan to early adopt. DNB has established a CECL Implementation Team to assess the impact of this ASU on its consolidated financial position, results of operations, and cash flows. DNB has been preserving certain historical loan information from its core processing system in anticipation of adopting the standard and will be evaluating control and process framework, data, model, and resource requirements and areas where modifications will be required. DNB has selected a third party vendor to process and review various calculation methodologies and the approximate impact on DNB’s financial position, results of operations and cash flows. The team continues to assess the impact of the standard; however, DNB does not expect the adoption of this ASU to materially change its allowance for credit losses. The amount of the change in the allowance for credit losses upon adoption will be dependent upon the characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that date. A cumulative effect adjustment will be made to retained earnings for the impact of the standard at the beginning of the period the standard is adopted.
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. Accordingly, effective January 1, 2018, DNB adopted the pronouncement and it did not have a material impact to DNB’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. The new guidance narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs, as defined by the ASU. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, and should be applied prospectively. Early adoption is permitted. DNB will apply this guidance to applicable transactions after the adoption date.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under the amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value with its carrying amount. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount when measuring the goodwill impairment loss, if applicable. The update also eliminated the requirements for zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments are effective for public business entities for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. DNB will not early adopt this ASU for its annual goodwill impairment test, and conducted a qualitative test (step zero) as of October 1, 2018 and determined that its Goodwill has not been impaired. The adoption of this ASU is not expected to have a material impact on DNB’s consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item (e.g., Salaries and Benefits) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers
11
will present the other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, however, DNB has decided not to early adopt. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. ASU No. 2017-07 will not have a material impact on DNB Consolidated Financial Statements because the Pension plan has been frozen to new accruals since December 31, 2003, and thus, generated no service cost in any subsequent year.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting; (“ASU 2017-09”). ASU 2017-09 provides clarity by offering guidance on the scope of modification accounting for share-based payment awards and gives direction on which changes to the terms or conditions of these awards require an entity to apply modification accounting. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for all companies for annual periods beginning on or after December 15, 2017. Early adoption is permitted. DNB adopted the ASU on January 1, 2018 and the effects were immaterial.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income; (“ASU 2018-02”). This ASU allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for certain income tax effects stranded in AOCI as a result of the Tax Act. Consequently, the reclassification eliminates the stranded tax effects resulting from the Tax Act and is intended to improve the usefulness of information reported to financial statement users. However, because the ASU only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires the effect of a change in tax laws or rates to be included in income from continuing operations is not affected. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. DNB adopted this ASU on January 1, 2018. The amount of this reclassification is $471,000.
12
NOTE 2: INVESTMENT SECURITIES
The amortized cost and fair values of investment securities, as of the dates indicated, are summarized as follows:
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| June 30, 2019 | ||||||||||||||
| Amortized |
| Unrealized |
| Unrealized |
|
| ||||||||
(Dollars in thousands) | Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
Held To Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agency obligations | $ | 8,886 |
|
| $ | 33 |
|
| $ | - |
|
| $ | 8,919 |
|
Government Sponsored Entities (GSE) mortgage-backed securities |
| 341 |
|
|
| 7 |
|
|
| - |
|
|
| 348 |
|
Corporate bonds |
| 13,728 |
|
|
| 245 |
|
|
| - |
|
|
| 13,973 |
|
Collateralized mortgage obligations GSE |
| 1,044 |
|
|
| 2 |
|
|
| (4) |
|
|
| 1,042 |
|
State and municipal taxable |
| 362 |
|
|
| 5 |
|
|
| - |
|
|
| 367 |
|
State and municipal tax-exempt |
| 35,588 |
|
|
| 117 |
|
|
| (32) |
|
|
| 35,673 |
|
Total | $ | 59,949 |
|
| $ | 409 |
|
| $ | (36) |
|
| $ | 60,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available For Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agency obligations | $ | 24,189 |
|
| $ | 15 |
|
| $ | (24) |
|
| $ | 24,180 |
|
GSE mortgage-backed securities |
| 26,256 |
|
|
| 23 |
|
|
| (306) |
|
|
| 25,973 |
|
Collateralized mortgage obligations GSE |
| 9,464 |
|
|
| 8 |
|
|
| (177) |
|
|
| 9,295 |
|
Corporate bonds |
| 8,796 |
|
|
| 13 |
|
|
| (7) |
|
|
| 8,802 |
|
State and municipal tax-exempt |
| 1,701 |
|
|
| - |
|
|
| (20) |
|
|
| 1,681 |
|
Total | $ | 70,406 |
|
| $ | 59 |
|
| $ | (534) |
|
| $ | 69,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 | ||||||||||||||
| Amortized |
| Unrealized |
| Unrealized |
|
| ||||||||
(Dollars in thousands) | Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
Held To Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agency obligations | $ | 8,749 |
|
| $ | 41 |
|
| $ | - |
|
| $ | 8,790 |
|
Government Sponsored Entities (GSE) mortgage-backed securities |
| 389 |
|
|
| - |
|
|
| - |
|
|
| 389 |
|
Corporate bonds |
| 13,851 |
|
|
| 124 |
|
|
| (47) |
|
|
| 13,928 |
|
Collateralized mortgage obligations GSE |
| 1,159 |
|
|
| - |
|
|
| (27) |
|
|
| 1,132 |
|
State and municipal taxable |
| 362 |
|
|
| - |
|
|
| (3) |
|
|
| 359 |
|
State and municipal tax-exempt |
| 37,516 |
|
|
| 19 |
|
|
| (998) |
|
|
| 36,537 |
|
Total | $ | 62,026 |
|
| $ | 184 |
|
| $ | (1,075) |
|
| $ | 61,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available For Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agency obligations | $ | 48,082 |
|
| $ | - |
|
| $ | (359) |
|
| $ | 47,723 |
|
GSE mortgage-backed securities |
| 27,563 |
|
|
| - |
|
|
| (1,005) |
|
|
| 26,558 |
|
Collateralized mortgage obligations GSE |
| 10,249 |
|
|
| - |
|
|
| (441) |
|
|
| 9,808 |
|
Corporate bonds |
| 10,890 |
|
|
| - |
|
|
| (186) |
|
|
| 10,704 |
|
State and municipal tax-exempt |
| 1,981 |
|
|
| - |
|
|
| (131) |
|
|
| 1,850 |
|
Total | $ | 98,765 |
|
| $ | - |
|
| $ | (2,122) |
|
| $ | 96,643 |
|
Included in unrealized losses are market losses on securities that have been in a continuous unrealized loss position for twelve months or more and those securities that have been in a continuous unrealized loss position for less than twelve months. The following table details the aggregate unrealized losses and aggregate fair value of the underlying securities whose fair values are below their amortized cost at June 30, 2019 and December 31, 2018.
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 | ||||||||||||||||||||||
|
|
|
|
| Fair Value |
| Unrealized |
| Fair Value |
| Unrealized | ||||||||||||
|
|
| Total |
| Impaired |
| Loss |
| Impaired |
| Loss | ||||||||||||
| Total |
| Unrealized |
| Less Than |
| Less Than |
| More Than |
| More Than | ||||||||||||
(Dollars in thousands) | Fair Value |
| Loss |
| 12 Months |
| 12 Months |
| 12 Months |
| 12 Months | ||||||||||||
Held To Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations GSE | $ | 171 |
|
| $ | (4) |
|
| $ | - |
|
| $ | - |
|
| $ | 171 |
|
| $ | (4) |
|
State and municipal tax-exempt |
| 5,537 |
|
|
| (32) |
|
|
| - |
|
|
| - |
|
|
| 5,537 |
|
|
| (32) |
|
Total | $ | 5,708 |
|
| $ | (36) |
|
| $ | - |
|
| $ | - |
|
| $ | 5,708 |
|
| $ | (36) |
|
Available For Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agency obligations | $ | 13,965 |
|
| $ | (24) |
|
| $ | - |
|
| $ | - |
|
| $ | 13,965 |
|
| $ | (24) |
|
GSE mortgage-backed securities |
| 22,599 |
|
|
| (306) |
|
|
| - |
|
|
| - |
|
|
| 22,599 |
|
|
| (306) |
|
Collateralized mortgage obligations GSE |
| 6,980 |
|
|
| (177) |
|
|
| - |
|
|
| - |
|
|
| 6,980 |
|
|
| (177) |
|
Corporate bonds |
| 5,028 |
|
|
| (7) |
|
|
| - |
|
|
| - |
|
|
| 5,028 |
|
|
| (7) |
|
State and municipal tax-exempt |
| 1,681 |
|
|
| (20) |
|
|
| - |
|
|
| - |
|
|
| 1,681 |
|
|
| (20) |
|
Total | $ | 50,253 |
|
| $ | (534) |
|
| $ | - |
|
| $ | - |
|
| $ | 50,253 |
|
| $ | (534) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 | ||||||||||||||||||||||
|
|
|
|
| Fair Value |
| Unrealized |
| Fair Value |
| Unrealized | ||||||||||||
|
|
| Total |
| Impaired |
| Loss |
| Impaired |
| Loss | ||||||||||||
| Total |
| Unrealized |
| Less Than |
| Less Than |
| More Than |
| More Than | ||||||||||||
(Dollars in thousands) | Fair Value |
| Loss |
| 12 Months |
| 12 Months |
| 12 Months |
| 12 Months | ||||||||||||
Held To Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 4,157 |
|
| $ | (47) |
|
| $ | 1,887 |
|
| $ | (15) |
|
| $ | 2,270 |
|
| $ | (32) |
|
Collateralized mortgage obligations GSE |
| 1,132 |
|
|
| (27) |
|
|
| - |
|
|
| - |
|
|
| 1,132 |
|
|
| (27) |
|
State and municipal taxable |
| 359 |
|
|
| (3) |
|
|
| - |
|
|
| - |
|
|
| 359 |
|
|
| (3) |
|
State and municipal tax-exempt |
| 26,466 |
|
|
| (998) |
|
|
| 2,045 |
|
|
| (31) |
|
|
| 24,421 |
|
|
| (967) |
|
Total | $ | 32,114 |
|
| $ | (1,075) |
|
| $ | 3,932 |
|
| $ | (46) |
|
| $ | 28,182 |
|
| $ | (1,029) |
|
Available For Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agency obligations | $ | 37,723 |
|
| $ | (359) |
|
| $ | - |
|
| $ | - |
|
| $ | 37,723 |
|
| $ | (359) |
|
GSE mortgage-backed securities |
| 26,558 |
|
|
| (1,005) |
|
|
| - |
|
|
| - |
|
|
| 26,558 |
|
|
| (1,005) |
|
Collateralized mortgage obligations GSE |
| 9,808 |
|
|
| (441) |
|
|
| - |
|
|
| - |
|
|
| 9,808 |
|
|
| (441) |
|
Corporate bonds |
| 10,704 |
|
|
| (186) |
|
|
| 2,035 |
|
|
| (7) |
|
|
| 8,669 |
|
|
| (179) |
|
State and municipal tax-exempt |
| 1,850 |
|
|
| (131) |
|
|
| - |
|
|
| - |
|
|
| 1,850 |
|
|
| (131) |
|
Total | $ | 86,643 |
|
| $ | (2,122) |
|
| $ | 2,035 |
|
| $ | (7) |
|
| $ | 84,608 |
|
| $ | (2,115) |
|
As of June 30, 2019, there were fourteen collateralized mortgage obligations GSE, eighteen GSE mortgage-backed securities, three U.S. agency obligations, nine tax-exempt municipalities, and three 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 their cost basis. Management has reviewed all of these securities and believes that DNB will collect all principal and interest that is due on debt securities on a timely basis. Management does not believe any individual unrealized loss as of June 30, 2019 represents an other-than-temporary impairment (OTTI). DNB reviews its investment portfolio on a quarterly basis, reviewing each investment for OTTI. The OTTI analysis focuses on condition of the issuers as well as duration and severity of impairment in determining OTTI. As of June 30, 2019, the following securities were reviewed:
Collateralized mortgage obligations GSE There are fourteen impaired securities classified as collateralized mortgage obligations GSE, all of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 6.34% of its carrying 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 have ever defaulted on mortgage-backed principal or interest. DNB anticipates a recovery in the market value as the securities approach their maturity dates or if interest rates decline from June 30, 2019 levels. Management concluded that these securities were not other-than-temporarily impaired at June 30, 2019.
GSE mortgage-backed securities There are eighteen impaired securities classified as GSE mortgage-backed securities, all of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 1.86% of its carrying value. These securities were issued and insured by FNMA, FHLMC or GNMA. DNB receives monthly principal and interest payments on these securities on a timely basis and none of these have ever defaulted on mortgage-backed principal or interest. DNB anticipates a recovery in the market value as the securities approach their maturity dates or if interest rates decline from June 30, 2019 levels. Management concluded that these securities were not other-than-temporarily impaired at June 30, 2019.
14
US Government agency obligations There are three impaired securities classified as agencies, all of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 0.41% of its carrying value. All of these securities were issued and insured by FHLB, FNMA or FHLMC. DNB has received timely interest payments on all of these securities and none of these agencies 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 June 30, 2019.
State and municipal tax-exempt There are nine impaired securities in this category, which are comprised of intermediate to long-term municipal bonds, all of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 2.10% of its carrying value. All of the issues carry an “AA” 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 nine municipal securities, four are school districts that have state school district credit enhancement programs and one of those has additional insurance. The remaining five are one uninsured school district, one insured township, and three uninsured townships, all of which have strong underlying ratings. Management concluded that these securities were not other-than-temporarily impaired at June 30, 2019.
Corporate bonds There are three impaired bonds classified as corporate bonds, all of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 0.46% of its carrying 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 June 30, 2019 levels. Management concluded that these securities were not other-than-temporarily impaired at June 30, 2019.
The amortized cost and fair value of investment securities as of June 30, 2019, 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 | ||||||||||
(Dollars in thousands) | Amortized Cost | Fair Value |
| Amortized Cost | Fair Value | ||||||||
Due in one year or less | $ | 11,735 |
| $ | 11,770 |
|
| $ | 14,989 |
| $ | 14,968 |
|
Due after one year through five years |
| 14,149 |
|
| 14,245 |
|
|
| 18,448 |
|
| 18,455 |
|
Due after five years through ten years |
| 27,454 |
|
| 27,697 |
|
|
| 14,329 |
|
| 14,214 |
|
Due after ten years |
| 6,611 |
|
| 6,610 |
|
|
| 22,640 |
|
| 22,294 |
|
Total investment securities | $ | 59,949 |
| $ | 60,322 |
|
| $ | 70,406 |
| $ | 69,931 |
|
The HTM securities called during the six months ended June 30, 2019 resulted in a gain on call of $3,000. Gains and losses resulting from investment sales, redemptions or calls were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||||
| June 30, |
| June 30, | ||||||||||
(Dollars in thousands) | 2019 | 2018 |
| 2019 | 2018 | ||||||||
Gross realized gains-AFS | $ | 10 |
| $ | - |
|
| $ | 10 |
| $ | - |
|
Gross realized gains-HTM |
| - |
|
| - |
|
|
| 3 |
|
| - |
|
Gross realized losses-AFS |
| (9) |
|
| - |
|
|
| (9) |
|
| - |
|
Net realized gain | $ | 1 |
| $ | - |
|
| $ | 4 |
| $ | - |
|
At June 30, 2019 and December 31, 2018, investment securities with a carrying value of approximately $69.7 million and $95.8 million, respectively, were pledged to secure public funds and for other purposes as required by law.
15
NOTE 3: LOANS
The following table sets forth information concerning the composition of total loans outstanding, as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) | June 30, 2019 |
| December 31, 2018 | ||||
Residential mortgage | $ | 98,802 |
|
| $ | 99,932 |
|
Commercial mortgage |
| 521,060 |
|
|
| 535,735 |
|
Commercial: |
|
|
|
|
|
|
|
Commercial term |
| 179,294 |
|
|
| 166,335 |
|
Commercial construction |
| 77,060 |
|
|
| 76,302 |
|
Consumer: |
|
|
|
|
|
|
|
Home equity |
| 49,492 |
|
|
| 51,536 |
|
Other |
| 4,813 |
|
|
| 5,131 |
|
Total loans | $ | 930,521 |
|
| $ | 934,971 |
|
Less allowance for credit losses |
| (6,672) |
|
|
| (6,675) |
|
Net loans | $ | 923,849 |
|
| $ | 928,296 |
|
Information concerning non-accrual loans is shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | ||||||||||||||
(Dollars in thousands) | June 30, 2019 | December 31, 2018 | 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 | $ | 779 | $ | 905 | $ | 11 |
| $ | - |
| $ | 11 | $ | 23 | $ | - | $ | 23 |
Commercial mortgage |
| 563 |
| 1,307 |
| 1 |
|
| - |
|
| 1 |
| 27 |
| - |
| 27 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term |
| 2,026 |
| 2,300 |
| 22 |
|
| - |
|
| 22 |
| 65 |
| - |
| 65 |
Commercial construction |
| 2,274 |
| 476 |
| 13 |
|
| - |
|
| 13 |
| 13 |
| - |
| 13 |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| 143 |
| 391 |
| (1) |
|
| - |
|
| (1) |
| 6 |
| - |
| 6 |
Other |
| 138 |
| 167 |
| 3 |
|
| - |
|
| 3 |
| 6 |
| - |
| 6 |
Total non-accrual loans | $ | 5,923 | $ | 5,546 | $ | 49 |
| $ | - |
| $ | 49 | $ | 140 | $ | - | $ | 140 |
Loans 90 days past due and accruing |
| 205 |
| 233 |
| 3 |
|
| 3 |
|
| - |
| 3 |
| 3 |
| - |
Total non-performing loans | $ | 6,128 | $ | 5,779 | $ | 52 |
| $ | 3 |
| $ | 49 | $ | 143 | $ | 3 | $ | 140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 | |||||||||||||
(Dollars in thousands) |
|
| June 30, 2018 | 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 |
|
| $ | 1,344 | $ | 18 |
| $ | - |
| $ | 18 | $ | 43 | $ | - | $ | 43 |
Commercial mortgage |
|
|
| 1,593 |
| 28 |
|
| - |
|
| 28 |
| 58 |
| - |
| 58 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term |
|
|
| 2,583 |
| 46 |
|
| - |
|
| 46 |
| 90 |
| - |
| 90 |
Commercial construction |
|
|
| 488 |
| 9 |
|
| - |
|
| 9 |
| 20 |
| - |
| 20 |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
|
| 498 |
| 3 |
|
| - |
|
| 3 |
| 8 |
| - |
| 8 |
Other |
|
|
| 215 |
| 3 |
|
| - |
|
| 3 |
| 11 |
| - |
| 11 |
Total non-accrual loans |
|
| $ | 6,721 | $ | 107 |
| $ | - |
| $ | 107 | $ | 230 | $ | - | $ | 230 |
Loans 90 days past due and accruing |
|
|
| 23 |
| 1 |
|
| 1 |
|
| - |
| 1 |
| 1 |
| - |
Total non-performing loans |
|
| $ | 6,744 | $ | 108 |
| $ | 1 |
| $ | 107 | $ | 231 | $ | 1 | $ | 230 |
16
NOTE 4: ALLOWANCE FOR CREDIT LOSSES
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a scheduled payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of June 30, 2019 and December 31, 2018.
Age Analysis of Past Due Loans Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Loans | |
| 30-59 | 60-89 |
|
|
|
|
|
|
|
| Receivable | |||
| Days | Days | Greater |
|
|
|
| Total | > 90 | |||||
| Past | Past | than | Total |
|
| Loans | Days and | ||||||
(Dollars in thousands) | Due | Due | 90 Days | Past Due | Current | Receivable | Accruing | |||||||
Residential mortgage | $ | 972 | $ | 378 | $ | 610 | $ | 1,960 | $ | 96,842 | $ | 98,802 | $ | 142 |
Commercial mortgage (less acquired with credit deterioration) |
| 47 |
| - |
| 625 |
| 672 |
| 519,867 |
| 520,539 |
| 63 |
Acquired commercial mortgage with credit deterioration |
| - |
| - |
| - |
| - |
| 521 |
| 521 |
| - |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term |
| 920 |
| - |
| 296 |
| 1,216 |
| 178,078 |
| 179,294 |
| - |
Commercial construction |
| - |
| - |
| - |
| - |
| 77,060 |
| 77,060 |
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| 168 |
| 120 |
| 143 |
| 431 |
| 49,061 |
| 49,492 |
| - |
Other |
| 85 |
| 2 |
| 88 |
| 175 |
| 4,638 |
| 4,813 |
| - |
Total | $ | 2,192 | $ | 500 | $ | 1,762 | $ | 4,454 | $ | 926,067 | $ | 930,521 | $ | 205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Loans | |
| 30-59 | 60-89 |
|
|
|
|
|
|
|
| Receivable | |||
| Days | Days | Greater |
|
|
|
| Total | > 90 | |||||
| Past | Past | than | Total |
| Loans | Days and | |||||||
(Dollars in thousands) | Due | Due | 90 Days | Past Due | Current | Receivable | Accruing | |||||||
Residential mortgage | $ | 666 | $ | 1,742 | $ | 845 | $ | 3,253 | $ | 96,679 | $ | 99,932 | $ | 130 |
Commercial mortgage (less acquired with credit deterioration) |
| - |
| - |
| 840 |
| 840 |
| 534,739 |
| 535,579 |
| 103 |
Acquired commercial mortgage with credit deterioration |
| - |
| - |
| - |
| - |
| 156 |
| 156 |
| - |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term |
| 20 |
| 37 |
| 957 |
| 1,014 |
| 165,321 |
| 166,335 |
| - |
Commercial construction |
| - |
| - |
| - |
| - |
| 76,302 |
| 76,302 |
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| 398 |
| 144 |
| 247 |
| 789 |
| 50,747 |
| 51,536 |
| - |
Other |
| 26 |
| - |
| 108 |
| 134 |
| 4,997 |
| 5,131 |
| - |
Total | $ | 1,110 | $ | 1,923 | $ | 2,997 | $ | 6,030 | $ | 928,941 | $ | 934,971 | $ | 233 |
DNB had $353,000 of residential mortgage loans in the process of foreclosure and $97,000 in residential real estate in other real estate owned as of June 30, 2019. DNB had no residential mortgage loans in the process of foreclosure and $97,000 of residential real estate in other real estate owned as of December 31, 2018.
17
The following tables summarize information in regards to impaired loans by loan portfolio class as of June 30, 2019 and December 31, 2018, and for the three and six months ended June 30, 2019 and 2018.
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 |
|
| December 31, 2018 | ||||||||||||
| Recorded |
| Unpaid |
| Related |
| Recorded |
| Unpaid |
| Related | ||||||
| Investment |
| Principal |
| Allowance |
| Investment |
| Principal |
| Allowance | ||||||
(Dollars in thousands) |
|
|
| Balance |
|
|
|
|
|
|
| Balance |
|
|
| ||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage | $ | 2,759 |
| $ | 3,110 |
| $ | - |
| $ | 1,462 |
| $ | 1,804 |
| $ | - |
Commercial mortgage |
| 1,513 |
|
| 1,766 |
|
| - |
|
| 1,532 |
|
| 1,780 |
|
| - |
Acquired commercial mortgage with credit deterioration |
| 521 |
|
| 535 |
|
| - |
|
| 514 |
|
| 527 |
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term |
| 1,309 |
|
| 1,841 |
|
| - |
|
| 1,343 |
|
| 1,845 |
|
| - |
Commercial construction |
| 2,274 |
|
| 2,321 |
|
| - |
|
| 476 |
|
| 514 |
|
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| 279 |
|
| 284 |
|
| - |
|
| 531 |
|
| 535 |
|
| - |
Other |
| 168 |
|
| 242 |
|
| - |
|
| 156 |
|
| 205 |
|
| - |
Total | $ | 8,823 |
| $ | 10,099 |
| $ | - |
| $ | 6,014 |
| $ | 7,210 |
| $ | - |
With allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
| - |
|
| - |
|
| - |
|
| 73 |
|
| 73 |
|
| 1 |
Commercial mortgage |
| - |
|
| - |
|
| - |
|
| 737 |
|
| 802 |
|
| 78 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term |
| 717 |
|
| 744 |
|
| 161 |
|
| 957 |
|
| 1,015 |
|
| 203 |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
| - |
|
| - |
|
| - |
|
| 41 |
|
| 42 |
|
| 3 |
Total | $ | 717 |
| $ | 744 |
| $ | 161 |
| $ | 1,808 |
| $ | 1,932 |
| $ | 285 |
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
| 2,759 |
|
| 3,110 |
|
| - |
|
| 1,535 |
|
| 1,877 |
|
| 1 |
Commercial mortgage |
| 1,513 |
|
| 1,766 |
|
| - |
|
| 2,269 |
|
| 2,582 |
|
| 78 |
Acquired commercial mortgage with credit deterioration |
| 521 |
|
| 535 |
|
| - |
|
| 514 |
|
| 527 |
|
| - |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term |
| 2,026 |
|
| 2,585 |
|
| 161 |
|
| 2,300 |
|
| 2,860 |
|
| 203 |
Commercial construction |
| 2,274 |
|
| 2,321 |
|
| - |
|
| 476 |
|
| 514 |
|
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| 279 |
|
| 284 |
|
| - |
|
| 531 |
|
| 535 |
|
| - |
Other |
| 168 |
|
| 242 |
|
| - |
|
| 197 |
|
| 247 |
|
| 3 |
Total | $ | 9,540 |
| $ | 10,843 |
| $ | 161 |
| $ | 7,822 |
| $ | 9,142 |
| $ | 285 |
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended |
| Six Months Ended |
| Six Months Ended | ||||||||
| June 30, 2019 |
| June 30, 2018 |
| June 30, 2019 |
| June 30, 2018 | ||||||||
| 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 | $ 2,770 |
| $ 16 |
| $ 2,109 |
| $ 5 |
| $ 2,358 |
| $ 18 |
| $ 2,042 |
| $ 6 |
Commercial mortgage | 1,845 |
| 12 |
| 2,597 |
| 12 |
| 1,986 |
| 24 |
| 2,668 |
| 24 |
Acquired commercial mortgage with credit deterioration | 521 |
| 9 |
| 654 |
| 8 |
| 519 |
| 18 |
| 748 |
| 15 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term | 1,318 |
| - |
| 2,024 |
| - |
| 1,326 |
| - |
| 1,931 |
| - |
Commercial construction | 1,137 |
| - |
| 493 |
| - |
| 758 |
| - |
| 500 |
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity | 404 |
| 3 |
| 624 |
| 2 |
| 447 |
| 4 |
| 620 |
| 4 |
Other | 172 |
| - |
| 207 |
| - |
| 180 |
| 1 |
| 177 |
| - |
Total | $ 8,167 |
| $ 40 |
| $ 8,708 |
| $ 27 |
| $ 7,574 |
| $ 65 |
| $ 8,686 |
| $ 49 |
With allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage | - |
| - |
| 37 |
| - |
| - |
| - |
| 25 |
| - |
Acquired residential mortgage with credit deterioration | - |
| - |
| - |
| - |
| - |
| - |
| 2 |
| - |
Commercial mortgage | - |
| - |
| 81 |
| - |
| - |
| - |
| 60 |
| - |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term | 717 |
| - |
| 774 |
| - |
| 797 |
| - |
| 628 |
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | - |
| - |
| 71 |
| - |
| - |
| - |
| 90 |
| - |
Total | $ 717 |
| $ - |
| $ 963 |
| $ - |
| $ 797 |
| $ - |
| $ 805 |
| $ - |
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage | 2,770 |
| 16 |
| 2,146 |
| 5 |
| 2,358 |
| 18 |
| 2,067 |
| 6 |
Acquired residential mortgage with credit deterioration | - |
| - |
| - |
| - |
| - |
| - |
| 2 |
| - |
Commercial mortgage | 1,845 |
| 12 |
| 2,678 |
| 12 |
| 1,986 |
| 24 |
| 2,728 |
| 24 |
Acquired commercial mortgage with credit deterioration | 521 |
| 9 |
| 654 |
| 8 |
| 519 |
| 18 |
| 748 |
| 15 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term | 2,035 |
| - |
| 2,798 |
| - |
| 2,123 |
| - |
| 2,559 |
| - |
Commercial construction | 1,137 |
| - |
| 493 |
| - |
| 758 |
| - |
| 500 |
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity | 404 |
| 3 |
| 624 |
| 2 |
| 447 |
| 4 |
| 620 |
| 4 |
Other | 172 |
| - |
| 278 |
| - |
| 180 |
| 1 |
| 267 |
| - |
Total | $ 8,884 |
| $ 40 |
| $ 9,671 |
| $ 27 |
| $ 8,371 |
| $ 65 |
| $ 9,491 |
| $ 49 |
19
The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within DNB’s internal risk rating system as of June 30, 2019 and December 31, 2018.
Credit Quality Indicators
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 | ||||||||||||||
|
|
|
| Special |
|
|
|
|
|
|
|
|
| ||
(Dollars in thousands) | Pass | Mention | Substandard | Doubtful | Total | ||||||||||
Residential mortgage | $ | 96,078 |
| $ | 142 |
| $ | 2,582 |
| $ | - |
| $ | 98,802 |
|
Commercial mortgage |
| 504,508 |
|
| 13,387 |
|
| 3,165 |
|
| - |
|
| 521,060 |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term |
| 174,507 |
|
| 695 |
|
| 4,092 |
|
| - |
|
| 179,294 |
|
Commercial construction |
| 73,325 |
|
| 935 |
|
| 2,800 |
|
| - |
|
| 77,060 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| 49,198 |
|
| 151 |
|
| 143 |
|
| - |
|
| 49,492 |
|
Other |
| 4,674 |
|
| - |
|
| 139 |
|
| - |
|
| 4,813 |
|
Total | $ | 902,290 |
| $ | 15,310 |
| $ | 12,921 |
| $ | - |
| $ | 930,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 | ||||||||||||||
|
|
|
| Special |
|
|
|
|
|
|
|
|
| ||
(Dollars in thousands) | Pass | Mention | Substandard | Doubtful | Total | ||||||||||
Residential mortgage | $ | 97,577 |
| $ | - |
| $ | 2,355 |
| $ | - |
| $ | 99,932 |
|
Commercial mortgage |
| 528,692 |
|
| 2,367 |
|
| 4,676 |
|
| - |
|
| 535,735 |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term |
| 161,051 |
|
| 1,178 |
|
| 4,106 |
|
| - |
|
| 166,335 |
|
Commercial construction |
| 72,077 |
|
| 3,603 |
|
| 622 |
|
| - |
|
| 76,302 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| 50,988 |
|
| 143 |
|
| 405 |
|
| - |
|
| 51,536 |
|
Other |
| 4,924 |
|
| - |
|
| 207 |
|
| - |
|
| 5,131 |
|
Total | $ | 915,309 |
| $ | 7,291 |
| $ | 12,371 |
| $ | - |
| $ | 934,971 |
|
Troubled Debt Restructurings Loans whose terms are modified are classified as troubled debt restructurings (“TDR”) if DNB grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. During the six month period ended June 30, 2019, DNB classified two residential mortgage loans totaling $1.5 million and four commercial term loans totaling $421,000 as TDR. One residential mortgage loan’s rate was changed but the term was not extended, and the other residential mortgage loan and the four commercial term loans had their terms extended. During the six month period ended June 30, 2018, DNB classified one residential mortgage loan totaling $73,000 as TDR. The loan’s rate was changed but the term was not extended. Loans classified as troubled debt restructurings are designated as impaired. The recorded investments in troubled debt restructured loans at June 30, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 | ||||||||||
| Pre-Modification |
| Post-Modification |
|
| ||||||
(Dollars in thousands) | Outstanding Recorded Investment |
| Outstanding Recorded Investment |
| Recorded Investment | ||||||
Residential mortgage | $ | 2,155 |
|
| $ | 2,308 |
|
| $ | 2,110 |
|
Commercial mortgage |
| 992 |
|
|
| 992 |
|
|
| 950 |
|
Commercial term |
| 421 |
|
|
| 421 |
|
|
| 421 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| 148 |
|
|
| 148 |
|
|
| 136 |
|
Other |
| 40 |
|
|
| 42 |
|
|
| 30 |
|
Total | $ | 3,756 |
|
| $ | 3,911 |
|
| $ | 3,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 | ||||||||||
| Pre-Modification |
| Post-Modification |
|
| ||||||
(Dollars in thousands) | Outstanding Recorded Investment |
| Outstanding Recorded Investment |
| Recorded Investment | ||||||
Residential mortgage | $ | 676 |
|
| $ | 805 |
|
| $ | 630 |
|
Commercial mortgage |
| 992 |
|
|
| 992 |
|
|
| 962 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| 148 |
|
|
| 148 |
|
|
| 140 |
|
Other |
| 40 |
|
|
| 42 |
|
|
| 30 |
|
Total | $ | 1,856 |
|
| $ | 1,987 |
|
| $ | 1,762 |
|
20
At June 30, 2019, DNB had fifteen TDRs with recorded investment totaling $3,647,000, ten of which are accruing loans in compliance with the terms of the modifications and five of which are non-accrual loans. As a result of collateral evaluations, specific reserves and charge-offs have been taken where appropriate. DNB recognized partial charge-offs totaling $151,000 on two residential loans prior to their restructuring and $2,000 on one consumer installment loan after its restructuring. As of June 30, 2019, there were no defaulted TDRs as all TDRs were current with respect to their associated forbearance agreements. There were no defaults on TDRs during the six months ended June 30, 2019.
At December 31, 2018, DNB had nine TDRs with recorded investment totaling $1,762,000, all of which were accruing loans in compliance with the terms of the modifications. As a result of collateral evaluations, specific reserves and charge-offs have been taken where appropriate. As of December 31, 2018, DNB recognized partial charge-offs totaling $151,000 on two residential loans prior to their restructuring and $2,000 on one consumer installment loan after its restructuring. As of December 31, 2018, there were no defaulted TDRs as all TDRs were current with respect to their associated forbearance agreements. There were no defaults on TDRs within twelve months of restructure during 2018. DNB classified one residential mortgage loan totaling $73,000 as TDR during the year ended December 31, 2018.
The following tables set forth the composition of DNB’s allowance for credit losses as of June 30, 2019 and December 31, 2018, the activity for the three and six months ended June 30, 2019 and 2018 and as of and for the year ended December 31, 2018.
Allowance for Credit Losses and Recorded Investment in Loans Receivables
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| Residential | Commercial | Commercial | Commercial | Consumer | Consumer |
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| ||||||
(Dollars in thousands) | Mortgage | Mortgage | Term | Construction | Home Equity | Other | Unallocated | Total | ||||||||
Allowance for credit losses: |
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Beginning balance - April 1, 2019 | $ | 156 | $ | 3,493 | $ | 1,189 | $ | 1,080 | $ | 183 | $ | 43 | $ | 575 | $ | 6,719 |
Charge-offs |
| - |
| (23) |
| (22) |
| - |
| (128) |
| - |
| - |
| (173) |
Recoveries |
| - |
| 7 |
| 19 |
| - |
| - |
| - |
| - |
| 26 |
Provisions |
| (23) |
| 102 |
| (42) |
| (48) |
| 154 |
| (4) |
| (39) |
| 100 |
Ending balance - June 30, 2019 | $ | 133 | $ | 3,579 | $ | 1,144 | $ | 1,032 | $ | 209 | $ | 39 | $ | 536 | $ | 6,672 |
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| Residential | Commercial | Commercial | Commercial | Consumer | Consumer |
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| ||||||
(Dollars in thousands) | Mortgage | Mortgage | Term | Construction | Home Equity | Other | Unallocated | Total | ||||||||
Allowance for credit losses: |
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Beginning balance - January 1, 2019 | $ | 161 | $ | 3,647 | $ | 1,062 | $ | 1,032 | $ | 190 | $ | 46 | $ | 537 | $ | 6,675 |
Charge-offs |
| - |
| (105) |
| (91) |
| - |
| (128) |
| (17) |
| - |
| (341) |
Recoveries |
| 4 |
| 7 |
| 27 |
| - |
| - |
| - |
| - |
| 38 |
Provisions |
| (32) |
| 30 |
| 146 |
| - |
| 147 |
| 10 |
| (1) |
| 300 |
Ending balance - June 30, 2019 | $ | 133 | $ | 3,579 | $ | 1,144 | $ | 1,032 | $ | 209 | $ | 39 | $ | 536 | $ | 6,672 |
Ending balance: individually evaluated for impairment | $ | - | $ | - | $ | 161 | $ | - | $ | - | $ | - | $ | - | $ | 161 |
Ending balance: collectively evaluated for impairment | $ | 133 | $ | 3,579 | $ | 983 | $ | 1,032 | $ | 209 | $ | 39 | $ | 536 | $ | 6,511 |
Loans receivables: |
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|
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Ending balance | $ | 98,802 | $ | 521,060 | $ | 179,294 | $ | 77,060 | $ | 49,492 | $ | 4,813 |
|
| $ | 930,521 |
Ending balance: individually evaluated for impairment | $ | 2,759 | $ | 1,513 | $ | 2,026 | $ | 2,274 | $ | 279 | $ | 168 |
|
| $ | 9,019 |
Ending balance: acquired with credit deterioration | $ | - | $ | 521 | $ | - | $ | - | $ | - | $ | - |
|
| $ | 521 |
Ending balance: collectively evaluated for impairment | $ | 96,043 | $ | 519,026 | $ | 177,268 | $ | 74,786 | $ | 49,213 | $ | 4,645 |
|
| $ | 920,981 |
Reserve for unfunded loan commitments included in other liabilities | $ | - | $ | 2 | $ | 189 | $ | 209 | $ | 20 | $ | - |
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| $ | 420 |
21
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| Residential | Commercial | Commercial | Commercial | Consumer | Consumer |
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| ||||||
(Dollars in thousands) | Mortgage | Mortgage | Term | Construction | Home Equity | Other | Unallocated | Total | ||||||||
Allowance for credit losses: |
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Beginning balance - April 1, 2018 | $ | 226 | $ | 2,987 | $ | 904 | $ | 1,219 | $ | 176 | $ | 55 | $ | 578 | $ | 6,145 |
Charge-offs |
| (103) |
| (171) |
| (47) |
| - |
| - |
| (37) |
| - |
| (358) |
Recoveries |
| 25 |
| - |
| - |
| - |
| - |
| 1 |
| - |
| 26 |
Provisions |
| 59 |
| 260 |
| 32 |
| 136 |
| 20 |
| 30 |
| (162) |
| 375 |
Ending balance - June 30, 2018 | $ | 207 | $ | 3,076 | $ | 889 | $ | 1,355 | $ | 196 | $ | 49 | $ | 416 | $ | 6,188 |
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| Residential | Commercial | Commercial | Commercial | Consumer | Consumer |
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| ||||||
(Dollars in thousands) | Mortgage | Mortgage | Term | Construction | Home Equity | Other | Unallocated | Total | ||||||||
Allowance for credit losses: |
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Beginning balance - January 1, 2018 | $ | 221 | $ | 2,856 | $ | 845 | $ | 1,128 | $ | 183 | $ | 63 | $ | 547 | $ | 5,843 |
Charge-offs |
| (137) |
| (184) |
| (64) |
| - |
| - |
| (49) |
| - |
| (434) |
Recoveries |
| 26 |
| - |
| 2 |
| - |
| - |
| 1 |
| - |
| 29 |
Provisions |
| 97 |
| 404 |
| 106 |
| 227 |
| 13 |
| 34 |
| (131) |
| 750 |
Ending balance - June 30, 2018 | $ | 207 | $ | 3,076 | $ | 889 | $ | 1,355 | $ | 196 | $ | 49 | $ | 416 | $ | 6,188 |
Reserve for unfunded loan commitments included in other liabilities | $ | - | $ | 3 | $ | 183 | $ | 201 | $ | 21 | $ | - |
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| $ | 408 |
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| Residential | Commercial | Commercial | Commercial | Consumer | Consumer |
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| ||||||
(Dollars in thousands) | Mortgage | Mortgage | Term | Construction | Home Equity | Other | Unallocated | Total | ||||||||
Allowance for credit losses: |
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Ending balance - December 31, 2018 | $ | 161 | $ | 3,647 | $ | 1,062 | $ | 1,032 | $ | 190 | $ | 46 | $ | 537 | $ | 6,675 |
Ending balance: individually evaluated for impairment | $ | 1 | $ | 78 | $ | 203 | $ | - | $ | - | $ | 3 | $ | - | $ | 285 |
Ending balance: collectively evaluated for impairment | $ | 160 | $ | 3,569 | $ | 859 | $ | 1,032 | $ | 190 | $ | 43 | $ | 537 | $ | 6,390 |
Loans receivables: |
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Ending balance | $ | 99,932 | $ | 535,735 | $ | 166,335 | $ | 76,302 | $ | 51,536 | $ | 5,131 |
|
| $ | 934,971 |
Ending balance: individually evaluated for impairment | $ | 1,535 | $ | 2,269 | $ | 2,300 | $ | 476 | $ | 531 | $ | 197 |
|
| $ | 7,308 |
Ending balance: acquired with credit deterioration | $ | - | $ | 514 | $ | - | $ | - | $ | - | $ | - |
|
| $ | 514 |
Ending balance: collectively evaluated for impairment | $ | 98,397 | $ | 532,952 | $ | 164,035 | $ | 75,826 | $ | 51,005 | $ | 4,934 |
|
| $ | 927,149 |
Reserve for unfunded loan commitments included in other liabilities | $ | - | $ | 4 | $ | 167 | $ | 206 | $ | 21 | $ | - |
|
| $ | 398 |
22
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, and no anti-dilutive stock awards outstanding at June 30, 2019 and June 30, 2018. The following table sets forth the computation of basic and diluted earnings per share:
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| Three Months Ended |
| Six Months Ended | ||||||||||||||||
| June 30, 2019 |
| June 30, 2019 | ||||||||||||||||
(In thousands, except per-share data) | Income |
| Shares |
| Amount |
| Income |
| Shares |
| Amount | ||||||||
Basic EPS |
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|
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Income available to common stockholders | $ | 2,587 |
|
| 4,331 |
| $ | 0.60 |
|
| $ | 5,174 |
|
| 4,329 |
| $ | 1.20 |
|
Effect of potential dilutive common stock equivalents – stock options and restricted shares |
| - |
|
| 5 |
|
| - |
|
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| - |
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| 4 |
|
| (0.01) |
|
Diluted EPS |
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Income available to common stockholders after assumed conversions | $ | 2,587 |
|
| 4,336 |
| $ | 0.60 |
|
| $ | 5,174 |
|
| 4,333 |
| $ | 1.19 |
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| Three Months Ended |
| Six Months Ended | ||||||||||||||||
| June 30, 2018 |
| June 30, 2018 | ||||||||||||||||
(In thousands, except per-share data) | Income |
| Shares |
| Amount |
| Income |
| Shares |
| Amount | ||||||||
Basic EPS |
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Income available to common stockholders | $ | 2,049 |
|
| 4,298 |
| $ | 0.48 |
|
| $ | 4,662 |
|
| 4,295 |
| $ | 1.09 |
|
Effect of potential dilutive common stock equivalents – stock options and restricted shares |
| - |
|
| 16 |
|
| (0.01) |
|
|
| - |
|
| 17 |
|
| (0.01) |
|
Diluted EPS |
|
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Income available to common stockholders after assumed conversions | $ | 2,049 |
|
| 4,314 |
| $ | 0.47 |
|
| $ | 4,662 |
|
| 4,312 |
| $ | 1.08 |
|
NOTE 6: ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders' equity are as follows:
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Accumulated Other Comprehensive Loss | Before-Tax | Tax | Net-of-Tax | ||||||
(Dollars in thousands) | Amount | Effect | Amount | ||||||
June 30, 2019 |
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|
|
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|
|
|
Net unrealized loss on AFS securities | $ | (475) |
| $ | 100 |
| $ | (375) |
|
Unrealized actuarial losses-pension |
| (1,637) |
|
| 343 |
|
| (1,294) |
|
| $ | (2,112) |
| $ | 443 |
| $ | (1,669) |
|
December 31, 2018 |
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Net unrealized loss on AFS securities | $ | (2,122) |
| $ | 445 |
| $ | (1,677) |
|
Unrealized actuarial losses-pension |
| (1,637) |
|
| 343 |
|
| (1,294) |
|
| $ | (3,759) |
| $ | 788 |
| $ | (2,971) |
|
23
NOTE 7: SUBORDINATED DEBENTURES AND NOTES
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.
24
NOTE 8: STOCK-BASED COMPENSATION
Stock Option Plan
DNB has a Stock Option Plan for employees and directors. Under the plan, options (both qualified and non-qualified) to purchase a maximum of 793,368 (as adjusted for subsequent stock dividends) shares of DNB’s common stock could be issued to employees and directors. Under the plan, option exercise prices must equal the fair market value of the shares on the date of option grant and the option exercise period may not exceed ten years. Vesting of options under the plan is determined by the Plan Committee. There were 354,090 shares available for grant at June 30, 2019. All options are immediately exercisable. During the six months ended June 30, 2019 and 2018, DNB had no expenses related to the plan. Under the Stock Option Plan, no shares were exercised during the six months ended June 30, 2019. Under the Stock Option Plan, 5,300 shares were exercised during the six months ended June 30, 2018. The shares awarded from the non-qualified cashless exercises resulted in an increase in shares outstanding of 2,338 shares. There was a cash equivalent of 2,962 shares used to pay all applicable taxes on the transactions. DNB had no stock option activity during the six months ended June 30, 2019 and had no stock options outstanding at June 30, 2019 or December 31, 2018. Stock option activity is indicated below.
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| Number | Weighted Average | ||||
| Outstanding | Exercise Price | ||||
Outstanding January 1, 2018 |
| 16,450 |
| $ | 10.31 |
|
Issued |
| - |
|
| - |
|
Exercised |
| 5,300 |
|
| 10.31 |
|
Forfeited |
| - |
|
| - |
|
Expired |
| - |
|
| - |
|
Outstanding June 30, 2018 |
| 11,150 |
| $ | 10.31 |
|
Other Stock-Based Compensation
DNB maintains an Incentive Equity and Deferred Compensation Plan (the "Plan"). The Plan provides that up to 493,101 (as adjusted for subsequent stock dividends) shares of common stock may be granted, at the discretion of the Board, to individuals of the Corporation. Shares already granted are issuable on the earlier of three or four years (cliff vesting period) after the date of the grant or a change in control of DNB if the recipients are then employed by DNB (“Vest Date”). Upon issuance of the shares, resale of the shares is restricted for an additional one year, during which the shares may not be sold, pledged or otherwise disposed of. Prior to the Vest Date and in the event the recipient terminates association with DNB for reasons other than death, disability or change in control, the recipient forfeits all rights to the shares that would otherwise be issued under the grant.
Share awards granted by the Plan were recorded at the date of award based on the market value of shares. Awards are being amortized to expense over a three or four year cliff-vesting period. DNB records compensation expense equal to the value of the shares being amortized. For the three and six month periods ended June 30, 2019, $82,000 and $143,000 was amortized to expense. For the three and six month periods ended June 30, 2018, $108,000 and $204,000 was amortized to expense.
As of June 30, 2019, there was approximately $568,000 in additional compensation that will be recognized over the weighted average life of 1.60 years. At June 30, 2019, 482,501 shares were reserved for future grants under the Plan.
There were 8,500 restricted shares that vested during the six months ended June 30, 2018. The shares awarded from the cashless exercises resulted in an increase in shares outstanding of 4,908 shares. There was a cash equivalent of 3,492 shares used to pay all applicable taxes on the transactions. There were no such transactions during the six months ended June 30, 2019. Stock grant activity is indicated below:
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| |
|
|
|
|
|
|
| Weighted Average | ||
| Shares | Stock Price | ||
Non-vested stock awards—January 1, 2019 | 18,590 | $ | 30.90 |
|
Granted | 10,600 |
| 39.36 |
|
Forfeited | - |
| - |
|
Vested | - |
| - |
|
Non-vested stock awards—June 30, 2019 | 29,190 | $ | 33.98 |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average | ||
| Shares | Stock Price | ||
Non-vested stock awards—January 1, 2018 | 31,130 | $ | 26.53 |
|
Granted | 10,750 |
| 33.98 |
|
Forfeited | 4,345 |
| 28.92 |
|
Vested | 8,500 |
| 26.69 |
|
Non-vested stock awards—June 30, 2018 | 29,035 | $ | 28.88 |
|
25
NOTE 9: INCOME TAXES
As of June 30, 2019, 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 2016 through 2018 were open for examination as of June 30, 2019.
NOTE 10: FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. 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. When recorded at fair value, these assets are included as Level 3 fair values.
26
The following tables present assets measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018:
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| June 30, 2019 | ||||||
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|
|
(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 | $ | - | $ | 24,180 | $ | - | $ | 24,180 |
GSE mortgage-backed securities |
| - |
| 25,973 |
| - |
| 25,973 |
Collateralized mortgage obligations GSE |
| - |
| 9,295 |
| - |
| 9,295 |
Corporate bonds |
| - |
| 8,802 |
| - |
| 8,802 |
State and municipal tax-exempt |
| - |
| 1,681 |
| - |
| 1,681 |
Total | $ | - | $ | 69,931 | $ | - | $ | 69,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured at Fair Value on a Nonrecurring Basis |
|
|
|
|
|
|
|
|
Impaired loans | $ | - | $ | - | $ | 691 | $ | 691 |
OREO and other repossessed property |
| - |
| - |
| 1,430 |
| 1,430 |
Total | $ | - | $ | - | $ | 2,121 | $ | 2,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 | ||||||
|
|
|
|
|
|
|
|
|
(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 | $ | - | $ | 47,723 | $ | - | $ | 47,723 |
GSE mortgage-backed securities |
| - |
| 26,558 |
| - |
| 26,558 |
Collateralized mortgage obligations GSE |
| - |
| 9,808 |
| - |
| 9,808 |
Corporate bonds |
| - |
| 10,704 |
| - |
| 10,704 |
State and municipal tax-exempt |
| - |
| 1,850 |
| - |
| 1,850 |
Total | $ | - | $ | 96,643 | $ | - | $ | 96,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured at Fair Value on a Nonrecurring Basis |
|
|
|
|
|
|
|
|
Impaired loans | $ | - | $ | - | $ | 1,523 | $ | 1,523 |
OREO and other repossessed property |
| - |
| - |
| 1,247 |
| 1,247 |
Total | $ | - | $ | - | $ | 2,770 | $ | 2,770 |
27
The following table presents additional information about assets measured at fair value on a nonrecurring basis and for which DNB has utilized Level 3 inputs to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019 | ||||||||
Quantitative Information about Level 3 Fair Value Measurement | ||||||||
|
|
|
|
|
|
|
|
|
|
| Fair Value | Valuation |
| Range | |||
(Dollars in thousands) |
| Estimate | Techniques | Unobservable Input | (Weighted Average) | |||
Impaired loans - Commercial term | $ | 556 | Appraisal of collateral (1) | Disposal costs (2) | 0% | to | -8% | (-4%) |
Impaired loans - Consumer other |
| 135 | Appraisal of collateral (1) | Disposal costs (2) | -7% | to | -8% | (-8%) |
Impaired loan total | $ | 691 |
|
|
|
|
|
|
Other real estate owned | $ | 1,430 |
| Disposal costs (2) | -8% | to | -8% | (-8%) |
(1) | |
(2) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 | ||||||||
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 | $ | 72 | Appraisal of collateral (1) | Disposal costs (2) | -8% | to | -8% | (-8%) |
Impaired loans - Commercial mortgage |
| 659 | Appraisal of collateral (1) | Disposal costs (2) | -14% | to | -14% | (-14%) |
Impaired loans - Commercial term |
| 754 | Appraisal of collateral (1) | Disposal costs (2) | 0% | to | -16% | (-11%) |
Impaired loans - Consumer other |
| 38 | Appraisal of collateral (1) | Disposal costs (2) | -8% | to | -8% | (-8%) |
Impaired loan total | $ | 1,523 |
|
|
|
|
|
|
Other real estate owned | $ | 1,247 |
| 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 $9.5 million at June 30, 2019. Of this, $717,000 had specific valuation allowances of $161,000, leaving a fair value of $556,000 as of June 30, 2019. In addition, DNB had $152,000 in impaired loans that were partially charged down by $17,000, leaving $135,000 at fair value as of June 30, 2019. The total fair value of impaired loans at June 30, 2019 was $691,000.
Impaired loans had a carrying amount of $7.8 million at December 31, 2018. Of this, $1.8 million had specific valuation allowances of $285,000, leaving a fair value of $1.5 million at December 31, 2018. DNB did not have any impaired loans that were partially charged down that didn’t already have a specific reserve during the year ended December 31, 2018. The total fair value of impaired loans at December 31, 2018 was $1.5 million.
Other Real Estate Owned & other repossessed property. Other real estate owned (“OREO”) consists of properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets are classified as OREO and other repossessed property are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying value or fair value, less estimated costs to sell. Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged to expense. DNB had $2.8 million of such assets at June 30, 2019, $2.7 million of which was OREO and $106,000 was in other repossessed property. DNB had $5.1 million of such assets at December 31, 2018, which consisted of $4.9 million in OREO and $142,000 in other repossessed property. DNB wrote down the carrying values of certain assets totaling $1.5 million by $105,000 to $1.4 million during the six month period ended June 30, 2019. DNB wrote down the carrying values of certain assets totaling $1.6 million by $355,000 to $1.2 million during the year ended December 31, 2018.
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 six months ended June 30, 2019.
28
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 statement of financial condition. The carrying amounts and fair values of financial instruments at June 30, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Carrying |
| Fair |
|
|
|
|
|
|
(Dollars in thousands) |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
Financial assets |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 46,398 | $ | 46,398 | $ | 46,398 | $ | - | $ | - |
AFS investment securities |
| 69,931 |
| 69,931 |
| - |
| 69,931 |
| - |
HTM investment securities |
| 59,949 |
| 60,322 |
| - |
| 58,322 |
| 2,000 |
Restricted stock |
| 5,734 |
| 5,734 |
| - |
| 5,734 |
| - |
Loans held-for-sale |
| 501 |
| 515 |
| - |
| - |
| 515 |
Loans, net of allowance, including impaired |
| 923,849 |
| 921,497 |
| - |
| - |
| 921,497 |
Accrued interest receivable |
| 4,297 |
| 4,297 |
| - |
| 4,297 |
| - |
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing |
| 178,454 |
| 178,454 |
| - |
| 178,454 |
| - |
NOW, Money market, and Savings |
| 531,002 |
| 531,002 |
| - |
| 531,002 |
| - |
Time |
| 178,530 |
| 178,808 |
| - |
| 178,808 |
| - |
Brokered |
| 87,877 |
| 87,369 |
| - |
| 87,369 |
| - |
FHLBP advances |
| 31,203 |
| 31,112 |
| - |
| 31,112 |
| - |
Junior subordinated debentures and other borrowings |
| 9,279 |
| 9,990 |
| - |
| 9,990 |
| - |
Subordinated debt |
| 9,750 |
| 9,271 |
| - |
| 9,271 |
| - |
Accrued interest payable |
| 641 |
| 641 |
| - |
| 641 |
| - |
Off-balance sheet instruments |
| - |
| - |
| - |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Carrying |
| Fair |
|
|
|
|
|
|
(Dollars in thousands) |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
Financial assets |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 17,321 | $ | 17,321 | $ | 17,321 | $ | - | $ | - |
AFS investment securities |
| 96,643 |
| 96,643 |
| - |
| 96,643 |
| - |
HTM investment securities |
| 62,026 |
| 61,135 |
| - |
| 59,135 |
| 2,000 |
Restricted stock |
| 5,616 |
| 5,616 |
| - |
| 5,616 |
| - |
Loans held-for-sale |
| 419 |
| 429 |
| - |
| - |
| 429 |
Loans, net of allowance, including impaired |
| 928,296 |
| 914,822 |
| - |
| - |
| 914,822 |
Accrued interest receivable |
| 4,207 |
| 4,207 |
| - |
| 4,207 |
| - |
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing |
| 164,746 |
| 164,746 |
| - |
| 164,746 |
| - |
NOW, Money market, and Savings |
| 549,073 |
| 549,073 |
| - |
| 549,073 |
| - |
Time |
| 162,096 |
| 160,944 |
| - |
| 160,944 |
| - |
Brokered |
| 108,651 |
| 97,250 |
| - |
| 97,250 |
| - |
FHLBP advances |
| 32,935 |
| 32,347 |
| - |
| 32,347 |
| - |
Junior subordinated debentures and other borrowings |
| 9,279 |
| 10,285 |
| - |
| 10,285 |
| - |
Subordinated debt |
| 9,750 |
| 9,505 |
| - |
| 9,505 |
| - |
Accrued interest payable |
| 646 |
| 646 |
| - |
| 646 |
| - |
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.
29
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
DNB Financial Corporation (the “Registrant”, “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; the ability to complete the previously announced business combination with S&T; the ability to achieve the expected benefits of the merger with S&T in the time frames expected or at all, or may be more costly to achieve; that prior to completion of the merger transaction or thereafter, the parties’ respective businesses may not perform as expected due to transaction-related uncertainties or other factors; the parties’ ability to implement successful integration strategies; the ability to obtain the required regulatory approvals, shareholder approvals, or other closing conditions in a timely manner, or at all; reputational risks and the reaction of the parties’ customers to the merger transaction; diversion of management time to merger-related issues; 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 Financial Corporation, a Pennsylvania business corporation, is a bank holding company registered with and supervised by the Board of Governors of the Federal Reserve System (Federal Reserve Board). The Registrant was incorporated on October 28, 1982 and commenced operations on July 1, 1983 upon consummation of the acquisition of all of the outstanding stock of Downingtown National Bank, now known as DNB First, National Association (the “Bank”). Since commencing operations, DNB’s business has consisted primarily of managing and supervising the Bank, and its principal source of income has been derived from the Bank.
The Bank was organized in 1860. The Bank is a national banking association that is a member of the Federal Reserve System, the deposits of which are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is a full service commercial bank providing a wide range of services to individuals and small to medium sized businesses in the southeastern Pennsylvania market area, including accepting time, demand, and savings deposits and making secured and unsecured commercial, real estate and consumer loans. In addition, the Bank has fourteen (14) full service branches and a full-service wealth management group known as “DNB First Wealth Management.” The Bank’s financial subsidiary, DNB Financial Services, Inc., (also known as “DNB Investments & Insurance”) is a Pennsylvania licensed insurance agency, which, through a third party marketing agreement with Cetera Investment Services, LLC, sells a broad variety of insurance and investment products. The Bank’s other subsidiaries are Downco, Inc. and DN Acquisition
30
Company, Inc. which were incorporated in December 1995 and December 2008, respectively, for the purpose of acquiring and holding Other Real Estate Owned acquired through foreclosure or deed in-lieu-of foreclosure, as well as Bank-occupied real estate.
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. To that end, DNB continues to make appropriate investments in all areas of our business, including people, technology, facilities and marketing.
Merger Agreement. On June 5, 2019, S&T Bancorp, Inc. (“S&T”) and DNB entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which DNB will merge with and into S&T (the “Merger”), with S&T continuing as the surviving entity in the Merger, subject to the terms and conditions set forth therein. Immediately following the Merger, DNB’s wholly owned bank subsidiary, DNB First, National Association, will merge with and into S&T’s wholly owned bank subsidiary, S&T Bank (the “Bank Merger”), with S&T Bank continuing as the surviving entity in the Bank Merger. The Merger Agreement was unanimously approved by the Board of Directors of each of S&T and DNB.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), DNB shareholders will have the right to receive 1.22 shares of common stock, par value $2.50 per share, of S&T for each share of common stock, par value $1.00 per share, of DNB.
The merger is subject to customary closing conditions enumerated in the merger agreement, including receipt of regulatory approvals and the approval of DNB’s shareholders. It is anticipated that the transaction will close during the fourth quarter of 2019.
MATERIAL CHALLENGES, RISKS AND OPPORTUNITIES
The following is a summary of material challenges, risks and opportunities DNB has faced during the six month period ended June 30, 2019:
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 quarterly 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. Simulation model results continue to show moderate liability sensitivity to rising rates in 100, 200, 300 and 400 basis point shock scenarios over a 12 month period. Rate changes ramped in over 24 months also show moderate liability sensitivity.
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 (including brokered deposits), principal and interest payments on loans, proceeds from loan sales, sales and maturities of mortgage-backed and investment securities, and FHLBP advances. 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
31
flows, mortgage prepayments, loan and security sales and the exercise of call features are greatly influenced by general interest rates, economic conditions and competition.
The objective of DNB’s asset/liability management function is to maintain consistent growth in net interest income within DNB’s policy limits. This objective is accomplished through the management of liquidity and interest rate risk, as well as customer offerings of various loan and deposit products. DNB maintains adequate liquidity to meet daily funding requirements, anticipated deposit withdrawals, or asset opportunities in a timely manner. Liquidity is also necessary to meet obligations during unusual, extraordinary or adverse operating circumstances, while avoiding a significant loss or cost. DNB’s foundation for liquidity is a stable deposit base as well as a marketable investment portfolio that provides cash flow through regular maturities or that can be used for collateral to secure funding in an emergency. As part of its liquidity management, DNB maintains assets, which comprise its liquidity (Federal funds sold, investments and interest‑bearing cash balances, 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 experiencing credit quality deterioration. DNB’s loan review procedures provide objective 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. As the U.S. economy moves through a period of recession, it is possible that delinquencies and non-performing assets may rise as the value of homes decline and DNB’s borrowers experience financial difficulty due to corporate downsizing, reduced sales and income levels, or other negative events which will impact their ability to meet their contractual loan payments. To minimize the impact on DNB’s earnings and maintain sound credit quality, management continues to aggressively monitor credit and credit relationships that may be impacted by such adverse factors.
Competition. In addition to the challenges related to the interest rate environment, community banks in Chester, Philadelphia 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 has negatively affected DNB’s net interest margin. To compensate for the increased competition, DNB, along with other area community banks, has aggressively sought and marketed customers who have been disenfranchised by these mergers.
To attract these customers, DNB offers deposit products and services, such as Choice Checking relationship products, and Online Banking with bill payment, external transfer and account aggregation functionality. DNB also offers a complete package of cash management services including automated clearing house services, remote deposit, payroll services, merchant services, and account payment solutions. Our broad range of Business Checking products provides solutions to meet the needs of a variety of businesses and non-profit organizations.
FDIC Insurance and Assessments. The Bank’s deposits are insured to applicable limits by the FDIC. Under 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 FDIC may take action to increase insurance premiums if the deposit insurance fund is not funded to its regulatory mandated Designated Reserve Ratio (DRR). Currently, the FDIC is required to achieve a DRR of 1.35% by September 30, 2020, and has established a target DRR of 2.0%. Under the Dodd-Frank Act, the FDIC assesses premiums from each institution based on its average consolidated total assets minus its average tangible equity, while utilizing a scorecard method to determine each institution’s risk to the deposit insurance fund. The Dodd-Frank Act also requires the FDIC, in setting assessments, to offset the effect of increasing its reserve for the deposit insurance fund on institutions with consolidated total assets of less than $10 billion. To achieve the mandated DRR consistent with these provisions of the Dodd-Frank Act, the FDIC implemented a rule in 2016 imposing a surcharge of 4.5 basis points on all insured depository institutions with consolidated total assets of $10 billion or more in addition to their regular assessments. Under the rule, the surcharge would cease once a DRR of 1.35% had been achieved or on December 31, 2018, whichever came first. On September 30, 2018, the DRR reached 1.36%, and the surcharge was eliminated.
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, respectively. An institution’s assessment rate will be reduced based
32
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.
Material Trends and Uncertainties.
DNB reported net income of $2.6 million, or $0.60 per diluted share, for the quarter ending June 30, 2019, compared with $2.0 million, or $0.47 per diluted share, for the same quarter, last year. For the six months ended June 30, 2019, net income was $5.2 million, or $1.19 per diluted share, compared with $4.7 million, or $1.08 per diluted share, for the same period, last year. Results for the three and six months ending June 30, 2019, included $519,000 of transaction expenses for the recently announced merger with S&T.
There are many aspects of the economy and the Federal Reserve’s monetary policy that influence DNB’s ability to grow revenues and net income. In general, the U.S. economy is growing at a moderate pace. The Federal Open Market Committee (FOMC) decided at their June 19, 2019 meeting to maintain the current target range for the federal funds rate at 2.25%-2.50%. The FOMC removed the word “patient” from its statement and noted that “uncertainties” have increased in the economic outlook. The Federal Reserve (Fed) will continue reducing its balance sheet through redemptions of Treasury securities of $15 billion per month—while continuing to redeem mortgage-backed security purchases by up to $20 billion per month. The committee intends to conclude its balance sheet runoff at the end of September 2019. Labor market activity remains strong, and economic activity is rising at a moderate rate. Job gains have been solid, while the unemployment rate has remained low. Indicators suggest that growth of household spending has picked up from earlier this year, while business fixed investment remains soft. Both overall inflation—and core inflation, excluding food and energy—have declined. Currently, both are below the Fed’s long-term target of 2%. Looking forward, the committee expects inflation to run near its 2% target over the medium term. Current global economic and financial uncertainties, along with muted inflation pressures, imply that incoming economic data will impact the outlook for any future adjustments to the target range for the federal funds rate. Timing of future federal funds rate changes will reflect labor market conditions; indicators of inflation pressures and expectations; and financial and international developments. The Fed will act appropriately to sustain the expansion.
Although the national and international economies influence DNB’s results, economic conditions in southeastern Pennsylvania are more germane, as the majority of DNB’s loan and deposits relationships are with businesses and individuals within the Third Federal Reserve District. The Federal Reserve’s June 5, 2019 Beige Book summarizes the economic climate which impacts DNB’s operating environment.
The June 5, 2019 Beige Book indicated that, on balance, aggregate business activity in the Third District strengthened further to a modest pace of growth. Growth was characterized as slight in the April 17, 2019 Beige Book Period. Growth of manufacturing, non-auto retail sales, and tourism picked up to a modest pace, while homebuilding held steady and auto sales appeared to have fallen slightly. The Federal Reserve Bank’s contacts noted that tariffs continued to prompt concerns, induce uncertainty, and delay business investment. The labor market tightened further and continued to constrain employment growth and spur moderate wage increases. Overall, price pressures remained modest. The firms' outlook for growth over the next six months remained positive and edged higher overall, with more than half of all firms anticipating increases in general activity and less than a third expecting no change.
Overall, Third District homebuilders reported no change in contract signings for early spring on a year-over-year basis after growing slightly last period. However, better weather this spring has been good for construction activity. Existing home sales continued to decline moderately across most local markets. The spring sales season brought no relief to the falling inventory of new listings.
The Federal Reserve’s non-residential real estate contacts reported that, on balance, commercial real estate construction and leasing activity continued to edge back from relatively high levels, but the Federal Reserve Bank’s contacts describe markets as healthy with room to grow for the remainder of 2019. Office and industrial markets were characterized with positive net absorption, stable vacancy rates, rent growth, and incremental new construction.
Third District financial firms reported a continuation of moderate growth in overall loan volumes (excluding credit cards) on a year-over-year basis and a continuation of modest growth in credit card lending. During the June 5, 2019 period (reported without seasonal adjustments), volumes appeared to grow robustly in home mortgages and auto lending. Loans grew slightly for commercial and industrial lending. Commercial real estate loans, home equity lines, and other consumer loans (not elsewhere classified) were flat to down slightly. The Federal Reserve Bank’s contacts continued to note looser lending standards and aggressive pricing but few problems with credit quality. The Federal Reserve Bank’s contacts in and out of the banking sector have noted that firms are now taking longer to pay (but without becoming delinquent); some suggest this may represent the relative value of money now that deposit interest rates are higher. Bankers and their customers continued to be bullish for the remainder of 2019.
During the June 5, 2019 Beige Book Period, Third District manufacturing firms reported a modest growth in activity after noting a slight increase in the April 17, 2019 Beige Book Period. Shipments and unfilled orders are running a bit above long-term non-recession averages; however, new orders are at typical levels. The makers of lumber products, chemicals, fabricated metal products, and industrial machinery tended to note gains in new orders and shipments, while primary metal producers reported little change. Tariffs remained a key concern for many manufacturers. The Federal Reserve Bank’s contacts noted that much of the impact from the initial 10 percent tariffs was absorbed along the supply chain before reaching the consumer. However, they expect much more of the impact from the 25 percent tariffs to be passed through to the consumer. Manufacturers' expectations of activity and of new orders over the next
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six months have changed little since the April 17, 2019 Beige Book Period and have generally remained below long-term non-recession averages. Expectations for future shipments did rise somewhat, as did expectations of future employment and planned capital spending. The latter two indicators were above their historical non-recession averages.
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, compared to other areas of the country. DNB’s franchise spans Chester, Philadelphia and Delaware counties in southeastern Pennsylvania and the majority of loans and deposits relationships are with businesses and individuals within the Third Federal Reserve District.
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 Reform and Legislation. From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of DNB in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. DNB cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on its financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable to DNB or our subsidiaries could have a material effect on our business, financial condition and results of operations.
Capital Rules. On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Corporation and the Bank. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
The rules include new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Corporation and the Bank under the final rules effective as of January 1, 2015: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer was 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 implemented 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 no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provided that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Corporation) were 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 contained 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 be utilized 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
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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 principles. 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 preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Statements of Financial Condition, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Amounts subject to significant estimates are items such as the allowance for credit losses and lending related commitments, the fair value of repossessed assets, pension and post-retirement obligations, the fair value of financial instruments, other-than-temporary impairments of investment securities, the valuation of assets acquired and liabilities assumed in business combinations, and the valuations of goodwill for impairment. Among other effects, such changes could result in future impairments of investment securities, and establishment of allowances for credit losses and lending related commitments as well as increased benefit plans’ expenses.
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 $1.15 billion at June 30, 2019, compared to $1.16 billion at December 31, 2018. The $3.8 million decrease in total assets was primarily attributable to a $28.8 million decrease in investment securities and a $4.4 million decrease in net loans, offset by a $29.1 million increase in cash and cash equivalents.
Investment Securities. Investment securities at June 30, 2019 were $129.9 million, compared to $158.7 million at December 31, 2018. The $28.8 million decrease in investment securities was primarily due to $61.9 million in sales, principal pay-downs, calls and maturities, offset by $31.5 million in purchases of investment securities, and a $1.6 million decrease in unrealized loss of the AFS portfolio.
Gross Loans. DNB’s loans held for investment decreased $4.5 million to $930.5 million at June 30, 2019, compared to $935.0 million at December 31, 2018. Total commercial loans decreased $958,000, residential loans decreased $1.1 million, and consumer loans decreased $2.4 million.
Deposits. Deposits were $975.9 million at June 30, 2019, compared to $984.6 million at December 31, 2018. Deposits decreased $8.7 million or 0.88% during the six month period ended June 30, 2019. Core deposits, which are comprised of demand, NOW, money markets and savings accounts, decreased by $4.4 million, time deposits increased by $16.4 and brokered deposits decreased by $20.8 million.
Borrowings. Borrowings were $50.5 million at June 30, 2019, compared to $55.3 million at December 31, 2018. The decrease of $4.8 million or 8.62% was primarily due to a $1.7 million decrease in FHLBP advances and a $3.0 million decrease in other borrowings.
Stockholders’ Equity. Stockholders' equity was $118.2 million at June 30, 2019, compared to $111.8 million at December 31, 2018. The increase in stockholders’ equity was primarily a result of year-to-date earnings of $5.2 million, other comprehensive income of $1.3 million, non-cash funding of treasury shares totaling $297,000, and restricted stock compensation expense of $143,000. These additions to stockholders’ equity were partially offset by $606,000 of dividends paid on DNB’s common stock.
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RESULTS OF OPERATIONS
SUMMARY
Net income for the three and six month periods ended June 30, 2019 was $2.6 million and $5.2 million, or $0.60 and $1.20 per diluted share, respectively, compared to $2.0 million and $4.7 million, or $0.47 and $1.08 per diluted share, for the same period in 2018. The $538,000 increase in net income in the second quarter of 2019 compared to the second quarter of 2018 was primarily attributable to a $447,000 increase in net interest income before provision (primarily due to increased interest income on loans), a $275,000 decrease in provision for credit losses, a $28,000 decrease in non-interest expense (primarily due to decreased salaries and employee benefits expenses), and a $12,000 increase in non-interest income, offset by a $224,000 increase in income tax expense. The $512,000 increase in net income during the six month period ended June 30, 2019 compared to the six month period ended June 30, 2018 was primarily attributable to an $818,000 increase in net interest income before provision (primarily due to increased interest income on loans), a $450,000 decrease in provision for credit loss, and a $13,000 increase in non-interest income, offset by a $520,000 increase in non-interest expense (primarily due to $519,000 of transaction costs related to the pending merger with S&T) and a $249,000 increase in income tax expense.
NET INTEREST INCOME
DNB's earnings performance is primarily dependent upon its level of net interest income, which is the excess of interest income over interest expense. Interest income includes interest earned on loans, investments and federal funds sold and interest-earning cash, as well as loan fees and dividend income earned on investment securities. Interest expense includes interest on deposits, Federal Home Loan Bank of Pittsburgh ("FHLBP") advances, Federal funds purchased, subordinated debentures and notes, and other borrowings.
Net interest income for the three and six month periods ended June 30, 2019 was $9.5 million and $18.9 million, respectively, compared to $9.1 million and $18.1 million for the same periods in 2018. Interest income for the three and six month periods ended June 30, 2019 was $12.5 million and $24.9 million, respectively, compared to $11.3 million and $22.2 million for the same periods in 2018. The $1.2 million increase in interest income in the second quarter of 2019, compared to the second quarter of 2018, was primarily due to increases of $1.2 million in interest and fees on loans and $93,000 in interest on cash and cash equivalents, offset by a decrease of $57,000 in interest and dividends on investment securities. The $2.7 million increase in interest income during the six months ended June 30, 2019 compared to the six month period ended June 30, 2018 was primarily due to increases of $2.6 million in interest and fees on loans and $115,000 in interest on cash and cash equivalents, offset by a decrease of $40,000 in interest and dividends on investment securities. The weighted average yield on total interest-earning assets was 4.53% and 4.52% for the three and six month periods ended June 30, 2019, respectively, compared to 4.28% and 4.26% for the same periods in 2018. Interest expense for the three and six month periods ended June 30, 2019 was $3.0 million and $6.0 million, respectively, compared to $2.2 million and $4.1 million for the same periods in 2018. The $783,000 increase in interest expense in the second quarter of 2019, compared to the second quarter of 2018, was primarily due to an increase of $876,000 in interest on deposits offset by a decrease of $93,000 in interest on borrowings. The $1.9 million increase in interest expense during the six month period ended June 30, 2019, compared to the six month period ended June 30, 2018, was primarily due to an increase of $2.0 million in interest on deposits offset by a decrease of $153,000 in interest on borrowings. The composite cost of funds for the three and six month periods ended June 30, 2019 was 1.17% and 1.16%, respectively, compared to 0.90% and 0.84% for the same periods in 2018.
Interest on loans was $11.4 million and $22.6 million for the three and six month periods ended June 30, 2019, respectively, compared to $10.2 million and $20.0 million for the same periods in 2018. The average balance of loans was $934.2 million, with a tax equivalent average yield of 4.89% (a non-GAAP measure) for the second quarter of 2019, compared to $869.2 million, with a tax equivalent average yield of 4.70% (a non-GAAP measure) for the same period in 2018. The average balance of loans was $934.7 million, with a tax equivalent average yield of 4.89% (a non-GAAP measure) for the six month period ended June 30, 2019, compared to $860.4 million, with a tax equivalent average yield of 4.71% (a non-GAAP measure) for the same period in 2018. See the following table for a reconciliation of the non-GAAP measure “tax equivalent average yield on loans.”
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|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent average yield on loans (Non-GAAP) |
|
|
|
|
|
| ||||||
| Three Months Ended | Six Months Ended | ||||||||||
| June 30, | June 30, | ||||||||||
(Dollars in thousands) | 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Interest and fees on loans (GAAP) | $ | 11,358 |
| $ | 10,164 |
| $ | 22,648 |
| $ | 20,046 |
|
Tax adjustment |
| 24 |
|
| 27 |
|
| 51 |
|
| 57 |
|
Tax equivalent interest and fees on loans (Non-GAAP) | $ | 11,382 |
| $ | 10,191 |
| $ | 22,699 |
| $ | 20,103 |
|
Average balance of loans | $ | 934,156 |
| $ | 869,166 |
| $ | 934,660 |
| $ | 860,443 |
|
Tax equivalent average yield on loans (Non-GAAP) |
| 4.89 | % |
| 4.70 | % |
| 4.89 | % |
| 4.71 | % |
Interest and dividends on investment securities was $1.0 million and $2.1 million for the three and six month periods ended June 30, 2019, respectively, compared to $1.1 million and $2.1 million for the same periods in 2018. The average balance of investment
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securities was $149.3 million with a tax equivalent average yield of 2.87% (a non-GAAP measure) for the second quarter of 2019, compared to $178.6 million with a tax equivalent average yield of 2.53% (a non-GAAP measure) for the same period in 2018. The average balance of securities was $157.4 million with a tax equivalent average yield of 2.75% (a non-GAAP measure) for the six month period ended June 30, 2019, compared to $180.6 million with a tax equivalent average yield of 2.44% (a non-GAAP measure) for the same period in 2018. See the following table for a reconciliation of the non-GAAP measure “tax equivalent average yield on investment securities.”
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|
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|
|
|
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|
Tax equivalent average yield on investment securities (Non-GAAP) |
|
|
|
|
|
| ||||||
| Three Months Ended | Six Months Ended | ||||||||||
| June 30, | June 30, | ||||||||||
(Dollars in thousands) | 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Interest on tax exempt investment securities (GAAP) | $ | 1,023 |
| $ | 1,080 |
| $ | 2,050 |
| $ | 2,090 |
|
Tax adjustment |
| 48 |
|
| 52 |
|
| 106 |
|
| 110 |
|
Tax equivalent interest on tax-exempt investment securities (Non-GAAP) | $ | 1,071 |
| $ | 1,132 |
| $ | 2,156 |
| $ | 2,200 |
|
Average balance of investment securities | $ | 149,315 |
| $ | 178,644 |
| $ | 157,371 |
| $ | 180,638 |
|
Tax equivalent average yield on investment securities (Non-GAAP) |
| 2.87 | % |
| 2.53 | % |
| 2.75 | % |
| 2.44 | % |
Interest on deposits was $2.6 million and $5.1 million for the three and six month periods ended June 30, 2019, respectively, compared to $1.7 million and $3.1 million for the same periods in 2018. The average balance of deposits was $978.6 million, with an average rate of 1.07% for the second quarter of 2019, compared to $907.8 million, with an average rate of 0.77% for the same period in 2018. The average balance of deposits was $975.3 million, with an average rate of 1.06% for the six month period ended June 30, 2019, compared to $890.4 million, with an average rate of 0.70% for the same period in 2018.
Interest on borrowings was $387,000 and $859,000 for the three and six month periods ended June 30, 2019, respectively, compared to $480,000 and $1.0 million for the same periods in 2018. The average balance of borrowings was $52.3 million, with an average rate of 2.97% for the second quarter of 2019, compared to $87.7 million, with an average rate of 2.20% for the same period in 2018. The average balance of borrowings was $59.3 million, with an average rate of 2.91% for the six month period ended June 30, 2019, compared to $97.8 million, with an average rate of 2.08% for the same period in 2018.
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”). Based on reviews and analyses by regulators, additional allowances may be required in the future.
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
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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 DNB’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. New appraisal values we have obtained for existing loans have generally been consistent with trends indicated by Case-Schiller and other indices.
DNB closely monitors the loan to value ratios of all classified assets and requires periodic current appraisals to monitor underlying collateral values. Management also reviews borrower, sponsorship and guarantor’s financial strength along with their ability and willingness to provide financial support of their obligations on an immediate and continuing basis.
There was a $100,000 and $300,000 provision made during the three and six month periods ended June 30, 2019, respectively, compared to $375,000 and $750,000 for the same periods in 2018. DNB’s percentage of allowance for credit losses to total loans was 0.72% at June 30, 2019 compared to 0.71% and 0.70% at December 31, 2018 and June 30, 2018, respectively. Net charge-offs were $303,000, $368,000, and $405,000 during the six months ended June 30, 2019, year ended December 31, 2018, and six months ended June 30, 2018, respectively. The percentage of net charge-offs to total average loans were 0.03%, 0.04%, and 0.05% 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 June 30, 2019, 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 $349,000 during the six month period ended June 30, 2019. 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.
We typically establish a general valuation allowance on classified loans which are not individually impaired. In establishing the general valuation allowance, we segregate these loans by category. The categories used by DNB include “doubtful,” “substandard,” “special mention,” “watch list” and “pass.” For commercial mortgage, commercial and construction loans, the determination of the category for each loan is based on periodic reviews of each loan by our lending and credit officers as well as an independent, third-party consultant. The reviews include a consideration of such factors as recent payment history, current financial data, cash flow, financial projections, collateral evaluations, guarantor or sponsorship financial strength and current economic and business conditions. Categories for residential mortgage and consumer loans are determined through a similar review. Classification of a loan within a category is based on identified weaknesses that increase the credit risk of loss on the loan. Each category carries a loss factor for the allowance percentage to be assigned to the loans within that category. The allowance percentage, is determined based on inherent losses associated with each type of lending as determined through consideration of our loss history with each type of loan, trends in credit quality and collateral values, and an evaluation of current economic and business conditions.
We establish a general allowance on non-classified loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages to each category. An evaluation of each category is made to determine the need to further segregate the loans within each category by type. For our residential mortgage and consumer loan portfolios, we identify similar characteristics throughout the portfolio including credit scores, loan-to-value ratios and collateral. For our commercial mortgage and construction loan portfolios, a further analysis is made in which we segregated the loans by type based on the purpose of the loan and the collateral properties securing the loan. Various risk factors for each type of loan are considered, including the impact of general economic and business conditions, collateral value trends, credit quality trends and historical loss experience.
As of June 30, 2019, DNB had $9.0 million of non-performing assets, which included $6.1 million of non-performing loans and $2.8 million of OREO and other repossessed assets. This compares to $10.8 million of non-performing assets at December 31, 2018
38
which included $5.8 million of non-performing loans and $5.1 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. 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 cashflow shortfalls, including estimated costs to sell in comparison to the carrying value of the loan. Of the $9.5 million of impaired loans ($5.9 million of non-performing loans, $3.1 million of performing TDRs, and a $521,000 performing ASC 310-30 loan) at June 30, 2019, $717,000 had valuation allowances of $161,000 and $8.8 million had no specific allowance. Of the $7.8 million of impaired loans ($5.5 million of non-performing loans, $1.8 million of performing TDRs, and a $514,000 performing ASC 310-30 loan) at December 31, 2018, $1.8 million had valuation allowances of $285,000 and $6.0 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 no valuation was necessary. During the quarter ended June 30, 2019, DNB recognized $174,000 in total charge-offs, $151,000 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 OREO. This is done within two weeks of a loan becoming impaired or a loan moving to OREO. It generally takes two to eight weeks to receive the appraisals, depending on the type of property being appraised. We recognize any provision or related charge-off within two weeks of receiving the appraisal, after the appraisal has been reviewed by DNB. We generally order a new appraisal for all impaired real estate loans having a balance of $250,000 or higher, every twelve to twenty-four months, dependent upon management’s assessment of trends in relevant markets and property types. 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 our expected costs to sell the asset.
39
Analysis of Allowance for Credit Losses
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
| Six Months Ended | Year Ended | Six Months Ended | ||||||
| June 30, 2019 | December 31, 2018 | June 30, 2018 | ||||||
Beginning balance | $ | 6,675 |
| $ | 5,843 |
| $ | 5,843 |
|
Provisions |
| 300 |
|
| 1,200 |
|
| 750 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
Residential mortgage |
| - |
|
| (178) |
|
| (137) |
|
Commercial mortgage |
| (105) |
|
| (249) |
|
| (184) |
|
Commercial: |
|
|
|
|
|
|
|
|
|
Commercial term |
| (91) |
|
| (243) |
|
| (64) |
|
Commercial construction |
| - |
|
| - |
|
| - |
|
Consumer: |
|
|
|
|
|
|
|
|
|
Home equity |
| (128) |
|
| - |
|
| - |
|
Other |
| (17) |
|
| (72) |
|
| (49) |
|
Total charged off |
| (341) |
|
| (742) |
|
| (434) |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
Residential mortgage |
| 4 |
|
| 341 |
|
| 26 |
|
Commercial mortgage |
| 7 |
|
| 22 |
|
| - |
|
Commercial: |
|
|
|
|
|
|
|
|
|
Commercial term |
| 27 |
|
| 4 |
|
| 2 |
|
Commercial construction |
| - |
|
| 5 |
|
| - |
|
Consumer: |
|
|
|
|
|
|
|
|
|
Home Equity |
| - |
|
| - |
|
| - |
|
Other |
| - |
|
| 2 |
|
| 1 |
|
Total recoveries |
| 38 |
|
| 374 |
|
| 29 |
|
Ending balance | $ | 6,672 |
| $ | 6,675 |
| $ | 6,188 |
|
The following table sets forth the composition of DNB’s allowance for credit losses for the dates indicated.
Composition of Allowance for Credit Losses
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 |
|
| December 31, 2018 |
|
| June 30, 2018 |
| |||
|
|
| 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 | $ | 133 | 11 | % | $ | 161 | 11 | % | $ | 207 | 11 | % |
Commercial mortgage |
| 3,579 | 56 |
|
| 3,647 | 57 |
|
| 3,076 | 58 |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term |
| 1,144 | 19 |
|
| 1,062 | 18 |
|
| 889 | 15 |
|
Commercial construction |
| 1,032 | 8 |
|
| 1,032 | 8 |
|
| 1,355 | 9 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| 209 | 5 |
|
| 190 | 5 |
|
| 196 | 6 |
|
Other |
| 39 | 1 |
|
| 46 | 1 |
|
| 49 | 1 |
|
Unallocated |
| 536 | - |
|
| 537 | - |
|
| 416 | - |
|
Total | $ | 6,672 | 100 | % | $ | 6,675 | 100 | % | $ | 6,188 | 100 | % |
Reserve for unfunded loan commitments | $ | 420 |
|
| $ | 398 |
|
| $ | 408 |
|
|
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, mortgage loans, 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 six month periods ended June 30, 2019 was $1.3 million and $2.6 million, respectively, compared to $1.3 million and $2.6 million for the same periods in 2018. The $12,000 increase during the three month period ended June
40
30, 2019 was primarily due to increases of $22,000 in other fees (mostly Visa interchange fees) and $17,000 in wealth management, offset by decreases of $15,000 in service charges (mostly NSF fees), $10,000 in gain on sales of loans, and $4,000 in mortgage banking. The $13,000 increase during the six months ended June 30, 2019 was primarily attributable to increases of $27,000 in wealth management, $19,000 in other fees (mostly Visa interchange fees), $9,000 in mortgage banking, and $4,000 in gain on sale of investment securities, offset by decreases of $37,000 in service charges (mostly NSF fees) and $10,000 in gain on sales of loans.
NON-INTEREST EXPENSE
Non-interest expense for the three and six month periods ended June 30, 2019 was $7.5 million and $14.8 million, respectively, compared to $7.5 million and $14.3 million for the same periods in 2018. During the three month period ended June 30, 2019, total non-interest expense decreased by $28,000 compared to the same period in 2018. The $28,000 decrease was mainly attributable to decreases of $476,000 in salaries and employee expenses (compensation expense for the second quarter of 2018 included a one-time severance payment of $434,000 and other related costs of $79,000 associated with an internal restructuring), $107,000 in other expenses (mostly decreased charge-off expense), $103,000 in loss on sale or write down of OREO, $27,000 in FDIC insurance, and $7,000 in occupancy. These decreases were partially offset by increases of $519,000 in transaction costs related to the pending merger with S&T, $113,000 in furniture and equipment (mostly maintenance agreements), $21,000 in advertising and marketing, $17,000 in PA shares tax, $16,000 in professional and consulting (mostly legal expenses), and $6,000 in telecommunications. During the six month period ended June 30, 2019, total non-interest expense increased $520,000 compared to the same period in 2018. The increase was primarily due to increases of $519,000 in transaction costs relating to the pending merger with S&T, $190,000 in professional and consulting (mostly legal expenses), $165,000 in furniture and equipment (mostly maintenance agreements), $35,000 in PA shares tax, $34,000 in advertising and marketing, $21,000 in occupancy (mostly operating lease expense), $13,000 in telecommunications, and $10,000 in loss on sale or write down of OREO. These increases were partially offset by decreases of $395,000 in salaries and employee benefits (internal restructuring costs for 2018 noted above), $41,000 in other expenses, and $31,000 in FDIC insurance.
INCOME TAXES
Income tax expense for the three and six month periods ended June 30, 2019 was $660,000 and $1.3 million, respectively, compared to $436,000 and $1.0 million for the same periods in 2018. The effective tax rate for the three and six month periods ended June 30, 2019 was 20.3% and 19.7%, respectively, compared to 17.5% and 17.9% for the same periods in 2018. The effective tax rate increased during 2019 due to certain transaction costs, which are non-deductible for federal tax purposes. Income tax expense for each period differs from the amount determined at the statutory rate, due to tax-exempt income on loans and investment securities and DNB's ownership of BOLI policies.
ASSET QUALITY
DNB works diligently to improve asset quality by adhering to strict underwriting standards and improving lending policies and procedures. Non-performing assets totaled $9.0 million at June 30, 2019 compared to $10.8 million at December 31, 2018 and $11.9 million at June 30, 2018. Loans acquired in connection with the purchase of ERB have been recorded at fair value, in accordance with GAAP, and are based on an initial estimate of the expected cash flows, including a reduction for estimated credit losses, and without carryover of the respective portfolio’s historical allowance for credit losses. DNB will continually evaluate the loans acquired from ERB for additional impairment as part of our normal allowance review process. 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 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 June 30, 2019, DNB had $12.9 million of substandard loans. Of the $12.9 million, $7.0 million are performing and are believed to require supervision and review greater than loans rated pass or special mention; 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, 2018 was $6.3 million. DNB had $15.3 million of special mention loans at June 30, 2019 compared to $7.3 million at December 31, 2018. The increase in special mention loans during the six months ended June 30, 2019 was primarily due to rating
41
downgrades in the portfolio, specifically $11.0 million of commercial mortgage loans, $142,000 of residential mortgages, and $8,000 in home equity loans, offset by upgrades/downgrades of $483,000 in commercial term loans and $2.7 million in commercial construction loans. The majority of the loans are secured by commercial real estate, with lesser amounts being secured by residential real estate, inventory and receivables.
The following table sets forth those assets that are: (i) placed on non-accrual status, (ii) contractually delinquent by 90 days or more and still accruing, and (iii) OREO as a result of foreclosure or voluntary transfer to DNB as well as other repossessed assets. In addition, the table sets forth DNB's asset quality and allowance coverage ratios at the dates indicated:
Non-Performing Assets
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 | December 31, 2018 | June 30, 2018 |
| ||||||
Non-accrual loans: |
|
|
|
|
|
|
|
|
|
|
Residential mortgage | $ | 779 |
| $ | 905 |
| $ | 1,344 |
|
|
Commercial mortgage |
| 563 |
|
| 1,307 |
|
| 1,593 |
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
Commercial term |
| 2,026 |
|
| 2,300 |
|
| 2,583 |
|
|
Commercial construction |
| 2,274 |
|
| 476 |
|
| 488 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
Home equity |
| 143 |
|
| 391 |
|
| 498 |
|
|
Other |
| 138 |
|
| 167 |
|
| 215 |
|
|
Total non-accrual loans |
| 5,923 |
|
| 5,546 |
|
| 6,721 |
|
|
Loans 90 days past due and still accruing |
| 205 |
|
| 233 |
|
| 23 |
|
|
Total non-performing loans |
| 6,128 |
|
| 5,779 |
|
| 6,744 |
|
|
Other real estate owned & other repossessed property |
| 2,825 |
|
| 5,051 |
|
| 5,113 |
|
|
Total non-performing assets | $ | 8,953 |
| $ | 10,830 |
| $ | 11,857 |
|
|
Asset quality ratios: |
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans |
| 0.66 | % |
| 0.62 | % |
| 0.76 | % |
|
Non-performing assets to total assets |
| 0.78 |
|
| 0.94 |
|
| 1.05 |
|
|
Allowance for credit losses to: |
|
|
|
|
|
|
|
|
|
|
Total loans |
| 0.72 |
|
| 0.71 |
|
| 0.70 |
|
|
Non-performing loans |
| 108.9 |
|
| 115.5 |
|
| 91.8 |
|
|
Troubled Debt Restructurings Loans whose terms are modified are classified as troubled debt restructurings (“TDR”) if DNB grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired. The recorded investments in troubled debt restructured loans at June 30, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2019 | ||||||||||
| Pre-Modification |
| Post-Modification |
|
| ||||||
(Dollars in thousands) | Outstanding Recorded Investment |
| Outstanding Recorded Investment |
| Recorded Investment | ||||||
Residential mortgage | $ | 2,155 |
|
| $ | 2,308 |
|
| $ | 2,110 |
|
Commercial mortgage |
| 992 |
|
|
| 992 |
|
|
| 950 |
|
Commercial term |
| 421 |
|
|
| 421 |
|
|
| 421 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| 148 |
|
|
| 148 |
|
|
| 136 |
|
Other |
| 40 |
|
|
| 42 |
|
|
| 30 |
|
Total | $ | 3,756 |
|
| $ | 3,911 |
|
| $ | 3,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 | ||||||||||
| Pre-Modification |
| Post-Modification |
|
| ||||||
(Dollars in thousands) | Outstanding Recorded Investment |
| Outstanding Recorded Investment |
| Recorded Investment | ||||||
Residential mortgage | $ | 676 |
|
| $ | 805 |
|
| $ | 630 |
|
Commercial mortgage |
| 992 |
|
|
| 992 |
|
|
| 962 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| 148 |
|
|
| 148 |
|
|
| 140 |
|
Other |
| 40 |
|
|
| 42 |
|
|
| 30 |
|
Total | $ | 1,856 |
|
| $ | 1,987 |
|
| $ | 1,762 |
|
42
At June 30, 2019, DNB had fifteen TDRs with recorded investment totaling $3,647,000, ten of which are accruing loans in compliance with the terms of the modifications and five of which are non-accrual loans. As a result of collateral evaluations, specific reserves and charge-offs have been taken where appropriate. DNB recognized partial charge-offs totaling $151,000 on two residential loans prior to their restructuring and $2,000 on one consumer installment loan after its restructuring. As of June 30, 2019, there were no defaulted TDRs as all TDRs were current with respect to their associated forbearance agreements. There were no defaults on TDRs during the six months ended June 30, 2019.
At December 31, 2018, DNB had nine TDRs with recorded investment totaling $1,762,000, all of which were accruing loans in compliance with the terms of the modifications. As a result of collateral evaluations, specific reserves and charge-offs have been taken where appropriate. As of December 31, 2018, DNB recognized partial charge-offs totaling $151,000 on two residential loans prior to their restructuring and $2,000 on one consumer installment loan after its restructuring. As of December 31, 2018, there were no defaulted TDRs as all TDRs were current with respect to their associated forbearance agreements. There were no defaults on TDRs within twelve months of restructure during 2018. DNB classified one residential mortgage loan totaling $73,000 as TDR during the year ended December 31, 2018.
Impaired loans are measured for impairment using the fair value of the collateral for collateral dependent loans. Information regarding impaired loans is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At and For the | At and For the | At and For the | ||||||
| Six Months Ended | Year Ended | Six Months Ended | ||||||
(Dollars in thousands) | June 30, 2019 | December 31, 2018 | June 30, 2018 | ||||||
Total recorded investment | $ | 9,540 |
| $ | 7,822 |
| $ | 9,041 |
|
Impaired loans with a specific allowance |
| 717 |
|
| 1,808 |
|
| 821 |
|
Impaired loans without a specific allowance |
| 8,823 |
|
| 6,014 |
|
| 8,220 |
|
Average recorded investment |
| 8,371 |
|
| 9,312 |
|
| 9,491 |
|
Specific allowance allocation |
| 161 |
|
| 285 |
|
| 194 |
|
Total principal and interest collected |
| 250 |
|
| 204 |
|
| 318 |
|
Interest income recorded |
| 65 |
|
| 80 |
|
| 49 |
|
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 liquidity, which totaled $121.7 million at June 30, 2019 compared to $97.4 million at December 31, 2018. Liquidity includes investments and restricted stock, Federal funds sold and cash and due from banks, less the amount of securities required to be pledged for certain liabilities. 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 $557.4 million at June 30, 2019. As a member of the FHLB, we are eligible to borrow up to a specific credit limit which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of June 30, 2019, DNB’s Maximum Borrowing Capacity with the FHLBP was $462.3 million. At June 30, 2019, DNB had borrowed $31.2 million and the FHLB had issued letters of credit on DNB's behalf, totaling $50.0 million against its available credit lines. At June 30, 2019, DNB also had available $60.0 million of unsecured federal funds lines of credit with other financial institutions as well as $508.4 million of available short or long term funding through several agreements and programs with brokers. Management believes that DNB has adequate resources to meet its short-term and long-term funding requirements.
At June 30, 2019, DNB had $198.0 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 June 30, 2019 totaled $51.3 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 Bank has met the definition of “well capitalized” for regulatory purposes on June 30, 2019. 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 Federal Reserve Bank’s (“FRB”) minimum leverage ratio requirements for bank holding companies and meets other requirements to be considered “well capitalized” (see additional discussion included in Note 17 of DNB’s December 31, 2018 Form 10-K).
43
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 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% to 2.50% by 2019. The capital conservation buffer is 2.50% and 1.875% for 2019 and 2018, respectively.
The following table summarizes data and ratios pertaining to the Corporation and the Bank's capital structure.
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| For Capital |
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| Adequacy |
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| Actual |
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(Dollars in thousands) |
| Amount | Ratio |
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| Amount | Ratio |
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| Amount | Ratio |
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DNB Financial Corporation |
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June 30, 2019 |
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Total risk-based capital | $ | 129,840 | 14.15 | % | $ | 73,427 | 8.00 | % |
| N/A | N/A |
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Common Equity Tier 1 capital |
| 103,998 | 11.33 |
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| 41,303 | 4.50 |
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| N/A | N/A |
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Tier 1 risk-based capital |
| 112,998 | 12.31 |
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| 55,070 | 6.00 |
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| N/A | N/A |
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Tier 1 (leverage) capital |
| 112,998 | 9.89 |
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| 45,700 | 4.00 |
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| N/A | N/A |
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December 31, 2018 |
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Total risk-based capital | $ | 124,769 | 13.61 | % | $ | 73,538 | 8.00 | % |
| N/A | N/A |
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Common equity tier 1 capital |
| 98,949 | 10.79 |
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| 41,365 | 4.50 |
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| N/A | N/A |
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Tier 1 risk-based capital |
| 107,949 | 11.77 |
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| 55,153 | 6.00 |
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| N/A | N/A |
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Tier 1 (leverage) capital |
| 107,949 | 9.48 |
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| 45,557 | 4.00 |
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| N/A | N/A |
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DNB First, N.A. |
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June 30, 2019 |
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Total risk-based capital | $ | 128,208 | 13.99 | % | $ | 73,288 | 8.00 | % | $ | 91,610 | 10.00 | % |
Common Equity Tier 1 capital |
| 121,116 | 13.22 |
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| 41,224 | 4.50 |
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| 59,546 | 6.50 |
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Tier 1 risk-based capital |
| 121,116 | 13.22 |
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| 54,966 | 6.00 |
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| 73,288 | 8.00 |
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Tier 1 (leverage) capital |
| 121,116 | 10.61 |
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| 45,646 | 4.00 |
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| 57,058 | 5.00 |
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December 31, 2018 |
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Total risk-based capital | $ | 123,239 | 13.46 | % | $ | 73,399 | 8.00 | % | $ | 91,748 | 10.00 | % |
Common equity tier 1 capital |
| 116,169 | 12.69 |
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| 41,287 | 4.50 |
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| 59,636 | 6.50 |
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Tier 1 risk-based capital |
| 116,169 | 12.69 |
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| 55,049 | 6.00 |
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| 73,399 | 8.00 |
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Tier 1 (leverage) capital |
| 116,169 | 10.21 |
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| 45,503 | 4.00 |
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| 56,879 | 5.00 |
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*Does not include capital conservation buffer of 2.5% and 1.875% for June 30, 2019 and December 31, 2018, respectively. |
In addition, 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.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To measure the impacts of longer-term asset and liability mismatches beyond two years, DNB utilizes an Economic Value of Equity ("EVE") model. The EVE model measures the potential price risk of equity to changes in interest rates and factors in the optionality included on the balance sheet. EVE analysis is used to dynamically model the present value of asset and liability cash flows, with rates ranging up or down 200 basis points. The EVE is likely to be different if rates change. Results falling outside prescribed ranges may require action by management. At June 30, 2019 and December 31, 2018, DNB's variance in the EVE as a percentage of assets with an instantaneous and sustained parallel shift of 200 basis points was within its negative 3% guideline, as shown in the following table. The change as a percentage of the present value of equity with a 200 basis point increase was within DNB's negative 25% guideline at June 30, 2019 and December 31, 2018.
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(Dollars in thousands) |
| June 30, 2019 |
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| December 31, 2018 |
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Change in rates |
| Flat |
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| -200bp |
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| +200bp |
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| Flat |
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| -200bp |
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EVE | $ | 148,474 |
| $ | 138,915 |
| $ | 147,575 |
| $ | 153,190 |
| $ | 148,270 |
| $ | 145,420 |
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Change |
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| (9,559) |
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| (899) |
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| (4,920) |
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| (7,770) |
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Change as % of assets |
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| (0.8%) |
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| (0.1%) |
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| (0.4%) |
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| (0.7%) |
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Change as % of PV equity |
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| (6.4%) |
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| (0.6%) |
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| (3.2%) |
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| (5.1%) |
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ITEM 4 - CONTROLS AND PROCEDURES
DNB’s Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of June 30, 2019, the end of the period covered by this report, in accordance with the requirements of Exchange Act Rule 240.13a-15(b). Based on that evaluation, Management has concluded that DNB’s current disclosure controls and procedures are effective.
Management of DNB is responsible for establishing and maintaining adequate internal control over financial reporting for DNB, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. There was no change in DNB’s “internal control over financial reporting” (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2019, that has materially affected, or is reasonably likely to materially affect, DNB’s internal control over financial reporting.
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
In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in “Risk Factors” included within the 2018 Form 10-K. The risks described therein are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the quarter ended June 30, 2019. The following table provides information on repurchases by DNB of its common stock in each month of the quarter ended June 30, 2019:
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| Total Number of |
| Maximum Number |
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| Shares Purchased |
| of Shares that May |
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| Total Number |
| Average |
| as Part of Publicly |
| Yet Be Purchased |
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| Of Shares |
| Price Paid |
| Announced Plans |
| Under the Plans or |
Period |
| Purchased |
| Per Share |
| or Programs |
| Programs (a) |
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April 1, 2019 – April 30, 2019 |
| - | $ | - |
| - | $ | 63,016 |
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May 1, 2019 – May 31, 2019 |
| - |
| - |
| - | $ | 63,016 |
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June 1, 2019 – June 30, 2019 |
| - |
| - |
| - | $ | 63,016 |
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Total |
| - | $ | - |
| - | $ | 63,016 |
On July 25, 2001, DNB authorized the buyback of up to 175,000 shares of its common stock over an indefinite period. On August 27, 2004, DNB increased the buyback from 175,000 to 325,000 shares of its common stock over an indefinite period.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
None.
ITEM 6. EXHIBITS
a) The following exhibits are filed or furnished herewith:
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Exhibit Number | Description |
2.1 | |
2.2 | |
3.1 | |
3.2 | Bylaws of the Registrant as amended January 27, 2016, filed herewith. |
3.3 | Amendment to Bylaws of DNB Financial Corporation, dated June 5, 2019, filed herewith. |
31.1 | Rule 13a-14(a)/15d-14 (a) Certification of Chief Executive Officer, filed herewith. |
31.2 | Rule 13a-14(a)/15d-14 (a) Certification of Chief Financial Officer, filed herewith. |
32.1 | Section 1350 Certification of Chief Executive Officer, filed herewith. |
32.2 | Section 1350 Certification of Chief Financial Officer, filed herewith. |
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 |
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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.
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| DNB FINANCIAL CORPORATION | ||
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August 5, 2019 | BY: | /s/ William J. Hieb | ||
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| William J. Hieb, Chief Executive Officer, President and Director | ||
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August 5, 2019 | BY: | /s/ Gerald F. Sopp | ||
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| Gerald F. Sopp, Chief Financial Officer and Executive Vice President | ||
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Exhibit Index
Exhibit Number | Description |
2.1 | |
2.2 | |
3.1 | |
3.2 | Bylaws of the Registrant as amended January 27, 2016, filed herewith. |
3.3 | Amendment to Bylaws of DNB Financial Corporation, dated June 5, 2019, filed herewith. |
31.1 | Rule 13a-14(a)/15d-14 (a) Certification of Chief Executive Officer, filed herewith. |
31.2 | Rule 13a-14(a)/15d-14 (a) Certification of Chief Financial Officer, filed herewith. |
32.1 | Section 1350 Certification of Chief Executive Officer, filed herewith. |
32.2 | Section 1350 Certification of Chief Financial Officer, filed herewith. |
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 |
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48