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Section 1: 10-Q (10-Q)

20160930 Q3

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549

____________________



FORM 10-Q



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



For the quarterly period ended: September 30, 2016

or

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



For the transition period from ________________ to _____________



Commission File Number: 1-34242

DNB Financial Corporation

(Exact name of registrant as specified in its charter)

Pennsylvania                                       23-2222567

 

 

 

 

 



    Pennsylvania                                       23-2222567

(State or other jurisdiction of                                                                (I.R.S. Employer Identification No.)

incorporation or organization)

 

 

4 Brandywine Avenue - Downingtown, PA 19335

(Address of principal executive offices and Zip Code)



(610) 269-1040

(Registrant's telephone number, including area code)



Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days

   



 

 

Yes

 

No



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





 

 

Yes

 

No



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



 

 

 

 

 

Large accelerated filer

  

Accelerated filer

  

Non-accelerated filer    

 

Smaller reporting company

 

 

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



 

 

Yes 

 

No



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

Common Stock ($1.00 Par Value)

(Class)

 

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



1


 

 

DNB FINANCIAL CORPORATION AND SUBSIDIARY





INDEX



                                                                



 

 

 

 

 



 

PART  I - FINANCIAL INFORMATION

PAGE NO.



 

 

 

ITEM 1.      

 

FINANCIAL STATEMENTS (Unaudited):

 



 

 

 



 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 



 

September 30, 2016 and December 31, 2015



 

 

 



 

CONSOLIDATED STATEMENTS OF INCOME

 



 

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



 

 

 



 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

 

 



 

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



 

 

 



 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY



 

Nine Months Ended September 30, 2016 and 2015

 



 

 

 



 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 



 

Nine Months Ended September 30, 2016 and 2015



 

 

 



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 

 

 

ITEM 2. 

 

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

29 



 

 

 



 

 

 

ITEM 3.      

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

46 



 

 

 

ITEM 4.      

 

CONTROLS AND PROCEDURES

46 



 

 

 



 

PART II - OTHER INFORMATION

 



 

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

46 



 

 

 

ITEM 1A.

 

RISK FACTORS

46 



 

 

 

ITEM 2.      

 

UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS

46 



 

 

 

ITEM 3.      

 

DEFAULTS UPON SENIOR SECURITIES

47 



 

 

 

ITEM 4.      

 

MINE SAFETY DISCLOSURES

47 



 

 

 

ITEM 5.      

 

OTHER INFORMATION

47 



 

 

 

ITEM 6.      

 

EXHIBITS

47 



 

 

 

SIGNATURES

48 



 

 

 

EXHIBIT INDEX

 



 

 

 



 

2


 

 





PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DNB Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition (Unaudited)







 

 

 

 

 



 

 

 

 

 



September 30,

 

December 31,

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

2016

 

2015

Assets

 

 

 

 

 

Cash and due from banks

$

30,442 

 

$

21,119 

Cash and cash equivalents

 

30,442 

 

 

21,119 

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

 

121,688 

 

 

152,379 

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

 

73,789 

 

 

67,829 

Total investment securities

 

195,477 

 

 

220,208 

Loans

 

509,475 

 

 

481,758 

Allowance for credit losses

 

(5,303)

 

 

(4,935)

Net loans

 

504,172 

 

 

476,823 

Restricted stock

 

3,623 

 

 

3,447 

Office property and equipment, net

 

9,033 

 

 

6,806 

Accrued interest receivable

 

2,639 

 

 

2,410 

Other real estate owned & other repossessed property

 

2,939 

 

 

2,581 

Bank owned life insurance (BOLI)

 

9,492 

 

 

9,326 

Core deposit intangible

 

56 

 

 

66 

Net deferred taxes

 

3,592 

 

 

3,733 

Other assets

 

8,807 

 

 

2,299 

Total assets 

$

770,272 

 

$

748,818 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Non-interest-bearing deposits

$

146,731 

 

$

125,581 

Interest-bearing deposits:

 

 

 

 

 

NOW

 

169,400 

 

 

185,973 

Money market

 

160,312 

 

 

137,555 

Savings

 

73,867 

 

 

72,660 

Time

 

71,920 

 

 

66,018 

Brokered deposits

 

23,313 

 

 

18,488 

Total deposits 

 

645,543 

 

 

606,275 

Federal Home Loan Bank of Pittsburgh (FHLBP) advances

 

20,000 

 

 

30,000 

Repurchase agreements

 

19,483 

 

 

32,416 

Junior subordinated debentures

 

9,279 

 

 

9,279 

Subordinated debt

 

9,750 

 

 

9,750 

Other borrowings

 

431 

 

 

464 

Total borrowings

 

58,943 

 

 

81,909 

Accrued interest payable

 

329 

 

 

345 

Other liabilities

 

6,240 

 

 

4,801 

Total liabilities 

 

711,055 

 

 

693,330 

Stockholders’ Equity

 

 

 

 

 

Preferred stock, $10.00 par value;

 

 

 

 

 

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

 

 -

 

 

 -

Common stock, $1.00 par value;

 

 

 

 

 

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

 

2,975 

 

 

2,955 

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

 

(1,805)

 

 

(2,015)

Surplus

 

35,614 

 

 

35,097 

Retained earnings

 

23,504 

 

 

21,436 

Accumulated other comprehensive loss

 

(1,071)

 

 

(1,985)

Total stockholders’ equity 

 

59,217 

 

 

55,488 

Total liabilities and stockholders’ equity 

$

770,272 

 

$

748,818 

See accompanying notes to unaudited consolidated financial statements.

3


 

 

DNB Financial Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)

 





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

(Dollars in thousands, except per share data)

2016

 

2015

 

2016

 

2015

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

$

5,218 

 

$

5,083 

 

$

15,377 

 

$

15,006 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

716 

 

 

714 

 

 

2,150 

 

 

2,208 

Exempt from federal taxes

 

316 

 

 

354 

 

 

944 

 

 

1,042 

Interest on cash and cash equivalents

 

27 

 

 

10 

 

 

91 

 

 

32 

Total interest and dividend income

 

6,277 

 

 

6,161 

 

 

18,562 

 

 

18,288 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

Interest on NOW, money market and savings

 

230 

 

 

148 

 

 

588 

 

 

450 

Interest on time deposits

 

139 

 

 

84 

 

 

396 

 

 

291 

Interest on brokered deposits

 

81 

 

 

68 

 

 

214 

 

 

118 

Interest on FHLB advances

 

92 

 

 

198 

 

 

276 

 

 

589 

Interest on repurchase agreements

 

 

 

16 

 

 

30 

 

 

35 

Interest on junior subordinated debentures

 

89 

 

 

77 

 

 

254 

 

 

224 

Interest on subordinated debt

 

104 

 

 

103 

 

 

311 

 

 

237 

Interest on other borrowings

 

16 

 

 

17 

 

 

49 

 

 

51 

Total interest expense

 

760 

 

 

711 

 

 

2,118 

 

 

1,995 

Net interest income

 

5,517 

 

 

5,450 

 

 

16,444 

 

 

16,293 

Provision for credit losses

 

100 

 

 

100 

 

 

630 

 

 

815 

Net interest income after provision for credit losses

 

5,417 

 

 

5,350 

 

 

15,814 

 

 

15,478 

Non-interest Income:

 

 

 

 

 

 

 

 

 

 

 

Service charges

 

280 

 

 

292 

 

 

827 

 

 

860 

Wealth management

 

393 

 

 

317 

 

 

1,231 

 

 

1,091 

Mortgage banking

 

76 

 

 

38 

 

 

189 

 

 

127 

Increase in cash surrender value of BOLI

 

56 

 

 

57 

 

 

166 

 

 

169 

Gain on sale of investment securities, net

 

197 

 

 

10 

 

 

431 

 

 

74 

Gain on sale of loans

 

 -

 

 

 -

 

 

39 

 

 

416 

Gains from insurance proceeds

 

30 

 

 

 -

 

 

1,180 

 

 

 -

Other fees

 

337 

 

 

323 

 

 

1,022 

 

 

973 

Total non-interest income

 

1,369 

 

 

1,037 

 

 

5,085 

 

 

3,710 

Non-interest Expense:

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

2,817 

 

 

2,615 

 

 

8,636 

 

 

7,897 

Furniture and equipment

 

422 

 

 

303 

 

 

1,093 

 

 

908 

Occupancy

 

524 

 

 

431 

 

 

1,459 

 

 

1,500 

Professional and consulting

 

306 

 

 

317 

 

 

948 

 

 

906 

Advertising and marketing

 

111 

 

 

141 

 

 

460 

 

 

480 

Printing and supplies

 

36 

 

 

35 

 

 

129 

 

 

122 

FDIC insurance

 

73 

 

 

129 

 

 

323 

 

 

376 

PA shares tax

 

157 

 

 

151 

 

 

476 

 

 

452 

Telecommunications

 

63 

 

 

63 

 

 

185 

 

 

184 

Postage

 

28 

 

 

20 

 

 

70 

 

 

65 

Loss on sale or write down of OREO, net

 

160 

 

 

154 

 

 

164 

 

 

154 

Due diligence and merger expense

 

1,498 

 

 

 -

 

 

1,961 

 

 

 -

Other expenses

 

509 

 

 

400 

 

 

1,390 

 

 

1,263 

Total non-interest expense

 

6,704 

 

 

4,759 

 

 

17,294 

 

 

14,307 

Income before income tax expense

 

82 

 

 

1,628 

 

 

3,605 

 

 

4,881 

Income tax expense

 

81 

 

 

359 

 

 

939 

 

 

1,125 

Net income

$

 

$

1,269 

 

$

2,666 

 

$

3,756 

Preferred stock dividends and accretion of discount

 

 -

 

 

 

 

 -

 

 

42 

Net income available to common shareholders

$

 

$

1,261 

 

$

2,666 

 

$

3,714 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.00 

 

$

0.45 

 

$

0.94 

 

$

1.33 

Diluted

$

0.00 

 

$

0.44 

 

$

0.93 

 

$

1.31 

Cash dividends per common share

$

0.07 

 

$

0.07 

 

$

0.21 

 

$

0.21 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 Basic

2,853,080 

 

2,806,549 

 

2,844,780 

 

2,798,360 

 Diluted

2,885,799 

 

2,852,237 

 

2,879,240 

 

2,844,319 

See accompanying notes to unaudited consolidated financial statement.s

4


 

 

DNB Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

(Dollars in thousands)

2016

 

2015

 

2016

 

2015

Net income

$

 

$

1,269 

 

$

2,666 

 

$

3,756 

Other Comprehensive (Loss) Income:

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains arising during the period

 

 

 

 

 

 

 

 

 

 

 

Before tax amount

 

(288)

 

 

767 

 

 

1,786 

 

 

714 

Tax effect

 

99 

 

 

(261)

 

 

(607)

 

 

(243)



 

(189)

 

 

506 

 

 

1,179 

 

 

471 

Accretion of discount on AFS to HTM reclassification(1)

 

 

 

 

 

 

 

 

 

 

 

Before tax amount

 

 

 

 

 

 

 

Tax effect(2)

 

(2)

 

 

(1)

 

 

(3)

 

 

(2)



 

 

 

 

 

 

 

Less reclassification for gains included in net income

 

 

 

 

 

 

 

 

 

 

 

Before tax amount

 

(176)

 

 

(10)

 

 

(410)

 

 

(74)

Tax effect(2)

 

59 

 

 

 

 

139 

 

 

25 



 

(117)

 

 

(6)

 

 

(271)

 

 

(49)

Total other comprehensive (loss) income

 

(302)

 

 

501 

 

 

914 

 

 

426 

Total comprehensive (loss) income

$

(301)

 

$

1,770 

 

$

3,580 

 

$

4,182 

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

 

 

 

 

 

 

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

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.



5


 

 

DNB Financial Corporation and Subsidiary

Consolidated Statements of Stockholders’ Equity (Unaudited)



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Accumulated

 

 



 

 

 

 

 

 

 

 

 

 

Other

 

 



Preferred

Common

Treasury

 

Retained

Comprehensive

 

 

(Dollars in thousands)

Stock

Stock

Stock

Surplus

Earnings

Loss

Total

Balance at January 1, 2016

$

 -

$

2,955 

$

(2,015)

$

35,097 

$

21,436 

$

(1,985)

$

55,488 

Net income for nine months ended September 30, 2016

 

 -

 

 -

 

 -

 

 -

 

2,666 

 

 -

 

2,666 

Other comprehensive income

 

 -

 

 -

 

 -

 

 -

 

 -

 

914 

 

914 

Restricted stock compensation expense (18,079 shares vested)

 

 -

 

36 

 

 -

 

765 

 

 -

 

 -

 

801 

Taxes on share award vest

 

 -

 

(16)

 

 -

 

(421)

 

 -

 

 -

 

(437)

Tax benefit for restricted stock vest

 

 -

 

 -

 

 -

 

64 

 

 -

 

 -

 

64 

Cash dividends - common ($0.21 per share)

 

 -

 

 -

 

 -

 

 -

 

(598)

 

 -

 

(598)

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

 

 -

 

 -

 

130 

 

68 

 

 -

 

 -

 

198 

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

 

 -

 

 -

 

80 

 

41 

 

 -

 

 -

 

121 

Balance at September 30, 2016

$

 -

$

2,975 

$

(1,805)

$

35,614 

$

23,504 

$

(1,071)

$

59,217 







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Accumulated

 

 



 

 

 

 

 

 

 

 

 

 

Other

 

 



Preferred

Common

Treasury

 

 

Retained

Comprehensive

 

 

(Dollars in thousands)

Stock

Stock

Stock

Surplus

Earnings

Loss

Total

Balance at January 1, 2015

$

13,000 

$

2,931 

$

(2,301)

$

34,745 

$

17,132 

$

(1,599)

$

63,908 

Net income for nine months ended September 30, 2015

 

 -

 

 -

 

 -

 

 -

 

3,756 

 

 -

 

3,756 

Other comprehensive income

 

 -

 

 -

 

 -

 

 -

 

 -

 

426 

 

426 

Redemption of preferred stock (9,750 shares)

 

(9,750)

 

 -

 

 -

 

 -

 

 -

 

 -

 

(9,750)

Restricted stock compensation expense

 

 -

 

14 

 

 -

 

236 

 

 -

 

 -

 

250 

Exercise of stock options (95,834 shares)

 

 -

 

16 

 

 -

 

247 

 

 -

 

 -

 

263 

Taxes on stock option exercise and share award vest

 

 -

 

 -

 

 -

 

(153)

 

 -

 

 -

 

(153)

Cash dividends - common ($0.21 per share)

 

 -

 

 -

 

 -

 

 -

 

(587)

 

 -

 

(587)

Cash dividends SBLF preferred

 

 -

 

 -

 

 -

 

 -

 

(42)

 

 -

 

(42)

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

 

 -

 

 -

 

151 

 

49 

 

 -

 

 -

 

200 

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

 

 -

 

 -

 

74 

 

23 

 

 -

 

 -

 

97 

Balance at September 30, 2015

$

3,250 

$

2,961 

$

(2,076)

$

35,147 

$

20,259 

$

(1,173)

$

58,368 

See accompanying notes to unaudited consolidated financial statements.

6


 

 

DNB Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)







 

 

 

 



 

 

 

 



Nine Months Ended



September 30,

(Dollars in thousands)

2016

2015

Cash Flows From Operating Activities:

 

 

 

 

Net income

$

2,666 

$

3,756 

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

 

 

 

 

Depreciation, amortization and accretion

 

1,178 

 

1,385 

Provision for credit losses

 

630 

 

815 

Stock based compensation

 

801 

 

250 

Net gain on sale of securities

 

(431)

 

(74)

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

 

164 

 

154 

Earnings from investment in BOLI

 

(166)

 

(169)

Deferred tax benefit

 

(330)

 

(285)

Proceeds from sales of loans

 

8,725 

 

14,332 

Loans originated for sale

 

(8,497)

 

(13,172)

Gain on sale of loans and mortgage banking income

 

(228)

 

(543)

Write-off of property and equipment

 

 -

 

690 

Increase in accrued interest receivable

 

(229)

 

(289)

Increase in other assets

 

(6,505)

 

(859)

Decrease in accrued interest payable

 

(16)

 

(29)

Increase (decrease) in other liabilities

 

1,439 

 

(245)

Net Cash (Used in) Provided By Operating Activities

 

(799)

 

5,717 

Cash Flows From Investing Activities:

 

 

 

 

Activity in available-for-sale securities:

 

 

 

 

Sales

 

43,913 

 

17,969 

Maturities, repayments and calls

 

50,660 

 

39,982 

Purchases

 

(62,646)

 

(47,929)

Activity in held-to-maturity securities:

 

 

 

 

Sales

 

757 

 

 -

Maturities, repayments and calls

 

6,864 

 

1,452 

Purchases

 

(13,507)

 

(7,209)

Net increase in restricted stock

 

(176)

 

(377)

Net increase in loans

 

(27,979)

 

(17,273)

Purchases of property and equipment

 

(2,892)

 

(280)

Costs capitalized in OREO and other repossessed property

 

(954)

 

 -

Proceeds from sale of OREO and other repossessed property

 

432 

 

 -

Net Cash Used in Investing Activities

 

(5,528)

 

(13,665)

Cash Flows From Financing Activities:

 

 

 

 

Net increase in deposits

 

39,268 

 

3,375 

Repayment of FHLBP advances

 

(10,000)

 

 -

Net (decrease) increase in repurchase agreements

 

(12,933)

 

11,280 

Proceeds from issuance of subordinated debt

 

 -

 

9,750 

Repayment of other borrowings

 

(33)

 

(30)

Dividends paid

 

(598)

 

(629)

Proceeds from the exercise of stock options

 

 -

 

263 

Taxes on exercise of stock options

 

(437)

 

(153)

Tax benefit for restricted stock vest

 

64 

 

 -

Redemption of preferred stock

 

 -

 

(9,750)

Sale of treasury stock

 

319 

 

297 

Net Cash Provided by Financing Activities

 

15,650 

 

14,403 

Net Change in Cash and Cash Equivalents 

 

9,323 

 

6,455 

Cash and Cash Equivalents at Beginning of Period 

 

21,119 

 

12,504 

Cash and Cash Equivalents at End of Period 

$

30,442 

$

18,959 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

2,134 

$

2,024 

Income taxes

 

875 

 

1,702 

Supplemental Disclosure of Non-cash Flow Information:

 

 

 

 

Transfers from loans to real estate owned and other repossessed property

 

 -

 

1,488 

See accompanying notes to unaudited consolidated financial statements.

7


 

 



 

NOTE 1: BASIS OF PRESENTATION



The accompanying unaudited consolidated financial statements of DNB Financial Corporation (referred to herein as the "Corporation" or "DNB") and its subsidiary, DNB First, National Association (the "Bank") have been prepared in accordance with the instructions for Form 10-Q and therefore do not include certain information or footnotes necessary for the presentation of financial condition, statement of operations and statement of cash flows required by generally accepted accounting principles. However, in the opinion of management, the consolidated financial statements reflect all adjustments (which consist of normal recurring adjustments) necessary for a fair presentation of the results for the unaudited periods. Prior amounts not affecting net income are reclassified when necessary to conform to current period classifications. The results of operations for the nine months ended September 30, 2016 are not necessarily indicative of the results which may be expected for the entire year.  The consolidated financial statements should be read in conjunction with the Annual Report and report on Form 10-K for the year ended December 31, 2015. 



Subsequent Events-- Management has evaluated events and transactions occurring subsequent to September 30, 2016 for items that should potentially be recognized or disclosed in these Consolidated Financial Statements. The evaluation was conducted through the date these financial statements were issued.



East River Bank Acquisition



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



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



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



Recent Accounting Pronouncements-  

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



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



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



8


 

 

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



NOTE 2: INVESTMENT SECURITIES



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







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

September 30, 2016



Amortized

Unrealized

Unrealized

 

(Dollars in thousands)

Cost

Gains

Losses

Fair Value

Held To Maturity

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

8,161 

 

$

480 

 

$

 -

 

$

8,641 

 

Government Sponsored Entities (GSE) mortgage-backed securities

 

1,545 

 

 

65 

 

 

 -

 

 

1,610 

 

Corporate bonds

 

12,854 

 

 

414 

 

 

(6)

 

 

13,262 

 

Collateralized mortgage obligations GSE

 

2,148 

 

 

30 

 

 

 -

 

 

2,178 

 

State and municipal taxable

 

1,009 

 

 

40 

 

 

 -

 

 

1,049 

 

State and municipal tax-exempt

 

48,072 

 

 

313 

 

 

(14)

 

 

48,371 

 

Total

$

73,789 

 

$

1,342 

 

$

(20)

 

$

75,111 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

Available For Sale

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

52,436 

 

$

121 

 

$

(15)

 

$

52,542 

 

GSE mortgage-backed securities

 

32,605 

 

 

236 

 

 

 -

 

 

32,841 

 

Collateralized mortgage obligations GSE

 

13,834 

 

 

28 

 

 

(107)

 

 

13,755 

 

Corporate bonds

 

17,522 

 

 

69 

 

 

(140)

 

 

17,451 

 

State and municipal tax-exempt

 

5,095 

 

 

 

 

(4)

 

 

5,099 

 

Total

$

121,492 

 

$

462 

 

$

(266)

 

$

121,688 

 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

December 31, 2015



Amortized

Unrealized

Unrealized

 

(Dollars in thousands)

Cost

Gains

Losses

Fair Value

Held To Maturity

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

7,973 

 

$

320 

 

$

 -

 

$

8,293 

 

Government Sponsored Entities (GSE) mortgage-backed securities

 

2,759 

 

 

83 

 

 

 -

 

 

2,842 

 

Corporate bonds

 

11,518 

 

 

234 

 

 

(42)

 

 

11,710 

 

Collateralized mortgage obligations GSE

 

2,623 

 

 

 

 

(26)

 

 

2,606 

 

State and municipal tax-exempt

 

42,956 

 

 

300 

 

 

(276)

 

 

42,980 

 

Total

$

67,829 

 

$

946 

 

$

(344)

 

$

68,431 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

Available For Sale

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

58,460 

 

$

 -

 

$

(252)

 

$

58,208 

 

GSE mortgage-backed securities

 

40,663 

 

 

13 

 

 

(325)

 

 

40,351 

 

Collateralized mortgage obligations GSE

 

16,241 

 

 

 

 

(438)

 

 

15,806 

 

Corporate bonds

 

20,921 

 

 

 -

 

 

(350)

 

 

20,571 

 

State and municipal tax-exempt

 

17,274 

 

 

180 

 

 

(11)

 

 

17,443 

 

Total

$

153,559 

 

$

196 

 

$

(1,376)

 

$

152,379 

 



Included in unrealized losses are market losses on securities that have been in a continuous unrealized loss position for twelve months or more and those securities that have been in a continuous unrealized loss position for less than twelve months. The following table details the aggregate unrealized losses and aggregate fair value of the underlying securities whose fair values are below their amortized cost at September 30, 2016 and December 31, 2015.

9