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Section 1: 10-Q (10-Q)

20180930 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, 2018

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

(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)



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 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). 





 

 

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.





 

 

 

 

 

Large accelerated filer

  

Accelerated filer

  

Non-accelerated filer    

 

Smaller reporting company

 

Emerging growth company

 

 

 

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).



 

 

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)

 

4,315,518 (Shares Outstanding as of November 5, 2018) 




 

 

DNB FINANCIAL CORPORATION AND SUBSIDIARY





INDEX



                                                                



 

 

 

 

 



 

PART  I - FINANCIAL INFORMATION

PAGE NO.



 

 

 

ITEM 1.      

 

FINANCIAL STATEMENTS (Unaudited):

 



 

 

 



 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 



 

September 30, 2018 and December 31, 2017



 

 

 



 

CONSOLIDATED STATEMENTS OF INCOME

 



 

Three and Nine Months Ended September 30, 2018 and 2017



 

 

 



 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 



 

Three and Nine Months Ended September 30, 2018 and 2017



 

 

 



 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY



 

Nine Months Ended September 30, 2018 and 2017

 



 

 

 



 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 



 

Nine Months Ended September 30, 2018 and 2017



 

 

 



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 

 

 

ITEM 2. 

 

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

31 



 

 

 



 

 

 

ITEM 3.      

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

48 



 

 

 

ITEM 4.      

 

CONTROLS AND PROCEDURES

48 



 

 

 



 

PART II - OTHER INFORMATION

 



 

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

48 



 

 

 

ITEM 1A.

 

RISK FACTORS

48 



 

 

 

ITEM 2.      

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

48 



 

 

 

ITEM 3.      

 

DEFAULTS UPON SENIOR SECURITIES

49 



 

 

 

ITEM 4.      

 

MINE SAFETY DISCLOSURES

49 



 

 

 

ITEM 5.      

 

OTHER INFORMATION

49 



 

 

 

ITEM 6.      

 

EXHIBITS

49 



 

 

 

SIGNATURES

50 



 

 

 

EXHIBIT INDEX

51 



 

 

 



 

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)

2018

 

2017

Assets

 

 

 

 

 

Cash and due from banks

$

10,702 

 

$

10,917 

Cash and cash equivalents

 

10,702 

 

 

10,917 

Available-for-sale investment securities at fair value (amortized cost of $102,345 and $113,555)

 

99,161 

 

 

111,783 

Held-to-maturity investment securities (fair value of $60,303 and $62,420)

 

62,069 

 

 

62,390 

Total investment securities

 

161,230 

 

 

174,173 

Loans held for sale

 

 -

 

 

651 

Loans

 

908,293 

 

 

845,897 

Allowance for credit losses

 

(6,559)

 

 

(5,843)

Net loans

 

901,734 

 

 

840,054 

Restricted stock

 

5,864 

 

 

7,641 

Office property and equipment, net

 

7,881 

 

 

8,649 

Accrued interest receivable

 

4,210 

 

 

3,822 

Other real estate owned & other repossessed property

 

5,077 

 

 

5,012 

Bank owned life insurance (BOLI)

 

9,472 

 

 

9,314 

Core deposit intangible

 

364 

 

 

435 

Goodwill

 

15,525 

 

 

15,525 

Net deferred taxes

 

3,084 

 

 

2,980 

Other assets

 

2,972 

 

 

2,742 

Total assets 

$

1,128,115 

 

$

1,081,915 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Non-interest-bearing deposits

$

168,311 

 

$

176,815 

Interest-bearing deposits:

 

 

 

 

 

NOW

 

213,707 

 

 

199,310 

Money market

 

227,797 

 

 

221,726 

Savings

 

78,996 

 

 

81,050 

Time

 

154,021 

 

 

140,490 

Brokered deposits

 

97,049 

 

 

41,812 

Total deposits 

 

939,881 

 

 

861,203 

Federal Home Loan Bank of Pittsburgh (FHLBP) advances

 

36,952 

 

 

79,013 

Repurchase agreements

 

4,089 

 

 

12,023 

Junior subordinated debentures

 

9,279 

 

 

9,279 

Subordinated debt

 

9,750 

 

 

9,750 

Other borrowings

 

13,554 

 

 

2,738 

Total borrowings

 

73,624 

 

 

112,803 

Accrued interest payable

 

557 

 

 

554 

Other liabilities

 

5,994 

 

 

5,413 

Total liabilities 

 

1,020,056 

 

 

979,973 

Stockholders’ Equity

 

 

 

 

 

Common stock, $1.00 par value;

 

 

 

 

 

20,000,000 shares authorized; 4,375,645 and 4,362,939 issued, respectively; 4,311,860 and 4,286,117 outstanding, respectively

 

4,393 

 

 

4,379 

Treasury stock, at cost; 63,785 and 76,822 shares, respectively

 

(1,196)

 

 

(1,429)

Surplus

 

69,316 

 

 

69,110 

Retained earnings

 

39,523 

 

 

32,272 

Accumulated other comprehensive loss

 

(3,977)

 

 

(2,390)

Total stockholders’ equity 

 

108,059 

 

 

101,942 

Total liabilities and stockholders’ equity 

$

1,128,115 

 

$

1,081,915 

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 share and per share data)

2018

 

2017

 

2018

 

2017

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

$

10,588 

 

$

9,994 

 

$

30,634 

 

$

29,089 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

754 

 

 

721 

 

 

2,409 

 

 

2,175 

Exempt from federal taxes

 

219 

 

 

236 

 

 

654 

 

 

714 

Interest on cash and cash equivalents

 

74 

 

 

38 

 

 

140 

 

 

166 

Total interest and dividend income

 

11,635 

 

 

10,989 

 

 

33,837 

 

 

32,144 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

Interest on NOW, money market and savings

 

998 

 

 

606 

 

 

2,822 

 

 

1,678 

Interest on time deposits

 

579 

 

 

307 

 

 

1,237 

 

 

921 

Interest on brokered deposits

 

457 

 

 

160 

 

 

1,070 

 

 

346 

Interest on FHLB advances

 

199 

 

 

185 

 

 

739 

 

 

522 

Interest on repurchase agreements

 

 

 

 

 

14 

 

 

21 

Interest on junior subordinated debentures

 

122 

 

 

99 

 

 

340 

 

 

286 

Interest on subordinated debt

 

104 

 

 

104 

 

 

311 

 

 

311 

Interest on other borrowings

 

23 

 

 

14 

 

 

58 

 

 

42 

Total interest expense

 

2,484 

 

 

1,483 

 

 

6,591 

 

 

4,127 

Net interest income

 

9,151 

 

 

9,506 

 

 

27,246 

 

 

28,017 

Provision for credit losses

 

100 

 

 

375 

 

 

850 

 

 

1,285 

Net interest income after provision for credit losses

 

9,051 

 

 

9,131 

 

 

26,396 

 

 

26,732 

Non-interest Income:

 

 

 

 

 

 

 

 

 

 

 

Service charges

 

274 

 

 

282 

 

 

848 

 

 

936 

Wealth management

 

542 

 

 

411 

 

 

1,489 

 

 

1,256 

Mortgage banking

 

56 

 

 

62 

 

 

193 

 

 

112 

Increase in cash surrender value of BOLI

 

54 

 

 

55 

 

 

158 

 

 

165 

Gain on sale of investment securities, net

 

 -

 

 

 -

 

 

 -

 

 

25 

Gain on sale of loans

 

27 

 

 

35 

 

 

37 

 

 

132 

Gains from insurance proceeds

 

 

 

 -

 

 

 

 

80 

Other fees

 

410 

 

 

426 

 

 

1,243 

 

 

1,293 

Total non-interest income

 

1,371 

 

 

1,271 

 

 

3,976 

 

 

3,999 

Non-interest Expense:

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

3,709 

 

 

3,926 

 

 

11,742 

 

 

11,291 

Furniture and equipment

 

564 

 

 

525 

 

 

1,603 

 

 

1,526 

Occupancy

 

656 

 

 

631 

 

 

1,987 

 

 

2,006 

Professional and consulting

 

484 

 

 

485 

 

 

1,311 

 

 

1,334 

Advertising and marketing

 

182 

 

 

135 

 

 

568 

 

 

575 

FDIC insurance

 

123 

 

 

161 

 

 

363 

 

 

506 

PA shares tax

 

242 

 

 

219 

 

 

727 

 

 

677 

Telecommunications

 

89 

 

 

87 

 

 

254 

 

 

265 

Loss on sale or write down of OREO, net

 

11 

 

 

 

 

151 

 

 

121 

Due diligence and merger expense

 

 -

 

 

 -

 

 

 -

 

 

77 

Other expenses

 

713 

 

 

814 

 

 

2,337 

 

 

2,441 

Total non-interest expense

 

6,773 

 

 

6,990 

 

 

21,043 

 

 

20,819 

Income before income tax expense

 

3,649 

 

 

3,412 

 

 

9,329 

 

 

9,912 

Income tax expense

 

629 

 

 

1,001 

 

 

1,647 

 

 

2,774 

Net income

$

3,020 

 

$

2,411 

 

$

7,682 

 

$

7,138 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.70 

 

$

0.57 

 

$

1.79 

 

$

1.68 

Diluted

$

0.70 

 

$

0.56 

 

$

1.78 

 

$

1.66 

Cash dividends per common share

$

0.07 

 

$

0.07 

 

$

0.21 

 

$

0.21 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 Basic

4,307,402 

 

4,262,165 

 

4,298,987 

 

4,255,520 

 Diluted

4,317,553 

 

4,296,371 

 

4,313,638 

 

4,287,745 

See accompanying notes to unaudited consolidated financial statements.

4

 


 

 

DNB Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,

(Dollars in thousands)

2018

 

2017

 

2018

 

2017

Net income

$

3,020 

 

$

2,411 

 

$

7,682 

 

$

7,138 

Other Comprehensive (Loss) Income:

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

 

 

 

 

 

 

 

 

 

 

Before tax amount

 

(163)

 

 

165 

 

 

(1,412)

 

 

401 

Tax effect

 

34 

 

 

(56)

 

 

296 

 

 

(136)



 

(129)

 

 

109 

 

 

(1,116)

 

 

265 

Accretion of discount on AFS to HTM reclassification

 

 

 

 

 

 

 

 

 

 

 

Before tax amount(1)

 

 -

 

 

 

 

 -

 

 

Tax effect(2)

 

 -

 

 

 -

 

 

 -

 

 

(3)



 

 -

 

 

 

 

 -

 

 

Less reclassification for gains on sales of AFS investment securities included in net income

 

 

 

 

 

 

 

 

 

 

 

Before tax amount(3)

 

 -

 

 

 -

 

 

 -

 

 

(9)

Tax effect(2)

 

 -

 

 

 -

 

 

 -

 

 



 

 -

 

 

 -

 

 

 -

 

 

(6)

Total other comprehensive (loss) income

 

(129)

 

 

110 

 

 

(1,116)

 

 

264 

Total comprehensive income

$

2,891 

 

$

2,521 

 

$

6,566 

 

$

7,402 

(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 income.

(3) Amounts are included in "Gains on sale of investment securities, net" 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)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Accumulated

 

 



 

 

 

 

 

 

 

 

Other

 

 



Common

Treasury

 

Retained

Comprehensive

 

 

(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 nine months ended September 30, 2018

 

 -

 

 -

 

 -

 

7,682 

 

 -

 

7,682 

Other comprehensive loss

 

 -

 

 -

 

 -

 

 -

 

(1,116)

 

(1,116)

Restricted stock compensation expense (4,908 shares vested)

 

10 

 

 -

 

260 

 

 -

 

 -

 

270 

Exercise of stock options (7,798 shares)

 

 

 -

 

(8)

 

 -

 

 -

 

 -

Taxes on exercise of stock options

 

(4)

 

 -

 

(262)

 

 -

 

 -

 

(266)

Cash dividends - common ($0.21 per share)

 

 -

 

 -

 

 -

 

(902)

 

 -

 

(902)

Sale of treasury shares to 401(k) (8,828 shares)

 

 -

 

159 

 

145 

 

 -

 

 -

 

304 

Sale of treasury shares to deferred comp. plan (4,209 shares)

 

 -

 

74 

 

71 

 

 -

 

 -

 

145 

Adoption impact - ASU 2018-02

 

 -

 

 -

 

 -

 

471 

 

(471)

 

 -

Balance at September 30, 2018

$

4,393 

$

(1,196)

$

69,316 

$

39,523 

$

(3,977)

$

108,059 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Accumulated

 

 



 

 

 

 

 

 

 

 

Other

 

 



Common

Treasury

 

 

Retained

Comprehensive

 

 

(Dollars in thousands)

Stock

Stock

Surplus

Earnings

Loss

Total

Balance at January 1, 2017

$

4,351 

$

(1,730)

$

68,973 

$

25,520 

$

(2,274)

$

94,840 

Net income for nine months ended September 30, 2017

 

 -

 

 -

 

 -

 

7,138 

 

 -

 

7,138 

Other comprehensive income

 

 -

 

 -

 

 -

 

 -

 

264 

 

264 

Restricted stock compensation expense

 

13 

 

 -

 

308 

 

 -

 

 -

 

321 

Exercise of stock options (9,264 shares)

 

 

 -

 

(9)

 

 -

 

 -

 

 -

Taxes on exercise of stock options

 

 -

 

 -

 

(189)

 

 -

 

 -

 

(189)

Cash dividends - common ($0.21 per share)

 

 -

 

 -

 

 -

 

(895)

 

 -

 

(895)

Sale of treasury shares to 401(k) (8,366 shares)

 

 -

 

151 

 

62 

 

 -

 

 -

 

213 

Sale of treasury shares to deferred comp. plan (4,313 shares)

 

 -

 

77 

 

115 

 

 -

 

 -

 

192 

Balance at September 30, 2017

$

4,373 

$

(1,502)

$

69,260 

$

31,763 

$

(2,010)

$

101,884 

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)

2018

 

2017

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

$

7,682 

 

$

7,138 

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

 

 

 

 

 

Depreciation, amortization and accretion

 

1,144 

 

 

1,253 

Provision for credit losses

 

850 

 

 

1,285 

Stock based compensation

 

270 

 

 

321 

Net gain on sale of securities

 

 -

 

 

(25)

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

 

151 

 

 

121 

Gain on insurance proceeds

 

(8)

 

 

(80)

Earnings from investment in BOLI

 

(158)

 

 

(165)

Deferred tax expense

 

193 

 

 

260 

Proceeds from sales of mortgage loans

 

11,088 

 

 

3,698 

Mortgage loans originated for sale

 

(10,244)

 

 

(3,936)

Gain on sale of mortgage loans

 

(193)

 

 

(112)

Proceeds from sales of loans

 

805 

 

 

2,142 

Loans originated for sale

 

(768)

 

 

(2,010)

Gain on sale of loans

 

(37)

 

 

(132)

Increase in accrued interest receivable

 

(388)

 

 

(224)

(Increase) decrease in other assets

 

(230)

 

 

101 

Increase (decrease) in accrued interest payable

 

 

 

(73)

Increase in other liabilities

 

581 

 

 

2,716 

Net Cash Provided by Operating Activities

 

10,741 

 

 

12,278 

Cash Flows From Investing Activities:

 

 

 

 

 

Activity in available-for-sale securities:

 

 

 

 

 

Sales

 

 -

 

 

3,030 

Maturities, repayments and calls

 

10,976 

 

 

19,318 

Purchases

 

 -

 

 

(15,093)

Activity in held-to-maturity securities:

 

 

 

 

 

Sales

 

 -

 

 

737 

Maturities, repayments and calls

 

413 

 

 

641 

Purchases

 

 -

 

 

(1,407)

Net decrease (increase) in restricted stock

 

1,777 

 

 

(990)

Net increase in loans

 

(62,848)

 

 

(6,074)

Death benefit proceeds

 

 

 

310 

Purchases of property and equipment

 

(164)

 

 

(576)

Expenses capitalized in OREO

 

 -

 

 

(15)

Proceeds from sale of OREO and other repossessed property

 

102 

 

 

596 

Net Cash (Used in) Provided by Investing Activities

 

(49,736)

 

 

477 

Cash Flows From Financing Activities:

 

 

 

 

 

Net increase (decrease) in deposits

 

78,678 

 

 

(13,859)

Repayment of FHLBP advances

 

(226,661)

 

 

(24,133)

Funding of FHLBP advances

 

184,600 

 

 

19,848 

Net (decrease) increase in repurchase agreements

 

(7,934)

 

 

3,494 

Proceeds from (repayment of) other borrowings

 

10,816 

 

 

(39)

Dividends paid

 

(902)

 

 

(895)

Payment of employee taxes on stock option exercise and share award vest

 

(266)

 

 

(189)

Tax benefit for restricted stock vesting

 

 -

 

 

 -

Sale of treasury stock

 

449 

 

 

405 

Net Cash Provided By (Used In) Financing Activities

 

38,780 

 

 

(15,368)

Net Change in Cash and Cash Equivalents 

 

(215)

 

 

(2,613)

Cash and Cash Equivalents at Beginning of Period 

 

10,917 

 

 

22,103 

Cash and Cash Equivalents at End of Period 

$

10,702 

 

$

19,490 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

$

6,588 

 

$

4,200 

Income taxes

 

975 

 

 

2,536 

Supplemental Disclosure of Non-cash Flow Information:

 

 

 

 

 

Net decrease in goodwill

 

 -

 

 

65 

Transfers from loans to real estate owned and other repossessed property

 

318 

 

 

2,851 

See accompanying notes to unaudited consolidated financial statements.

7

 


 

 

NOTE 1: BASIS OF PRESENTATION



The accompanying unaudited consolidated financial statements of DNB Financial Corporation (referred to herein as the "Corporation" or "DNB") and its subsidiary, DNB First, National Association (the "Bank") have been prepared in accordance with the instructions for Form 10-Q and therefore do not include certain information or footnotes necessary for the presentation of financial condition, statement of operations and statement of cash flows required by generally accepted accounting principles. However, in the opinion of management, the consolidated financial statements reflect all adjustments (which consist of normal recurring adjustments) necessary for a fair presentation of the results for the unaudited periods. Prior amounts not affecting net income are reclassified when necessary to conform to current period classifications. The results of operations for the three and nine months ended September 30, 2018 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, 2017



Subsequent Events-- Management has evaluated events and transactions occurring subsequent to September 30, 2018 for items that should potentially be recognized or disclosed in these Consolidated Financial Statements. The evaluation was conducted through the date these financial statements were issued.



Recent Accounting Pronouncements-  

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 is not expected to 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

 

Nine Months Ended



September 30,

 

September 30,

(Dollars in thousands)

2018

 

2017

 

2018

 

2017

Non-interest Income:

 

 

 

 

 

 

 

 

 

 

 

Service charges:

 

 

 

 

 

 

 

 

 

 

 

Non-sufficient funds charges

$

157 

 

$

173 

 

$

458 

 

$

538 

Business analysis charges

 

42 

 

 

39 

 

 

127 

 

 

120 

Cycle charges

 

24 

 

 

23 

 

 

69 

 

 

69 

Lockbox fees

 

 

 

 

 

54 

 

 

57 

Stop payment fees

 

 

 

 

 

12 

 

 

14 

Wire transfer fees

 

23 

 

 

20 

 

 

66 

 

 

64 

Other service charges

 

21 

 

 

21 

 

 

62 

 

 

74 

Total service charges

 

274 

 

 

282 

 

 

848 

 

 

936 

Wealth management:

 

 

 

 

 

 

 

 

 

 

 

DNB Investments & Insurance

 

185 

 

 

115 

 

 

423 

 

 

361 

DNB First Investment Management & Trust

 

357 

 

 

296 

 

 

1,066 

 

 

895 

Total wealth management

 

542 

 

 

411 

 

 

1,489 

 

 

1,256 

Other fee income:

 

 

 

 

 

 

 

 

 

 

 

Cardholder interchange fees

 

257 

 

 

245 

 

 

771 

 

 

733 

Safe deposit box

 

24 

 

 

27 

 

 

74 

 

 

77 

Check printing

 

14 

 

 

15 

 

 

49 

 

 

54 

Merchant card processing

 

44 

 

 

48 

 

 

134 

 

 

145 

ATM surcharges for non-DNB customers

 

19 

 

 

22 

 

 

56 

 

 

62 

Other fee income

 

13 

 

 

28 

 

 

40 

 

 

85 

Total other fee income

 

371 

 

 

385 

 

 

1,124 

 

 

1,156 

Total Revenue from contracts with customers

 

1,187 

 

 

1,078 

 

 

3,461 

 

 

3,348 

Total Revenue not within the scope of ASC 606

 

184 

 

 

193 

 

 

515 

 

 

651 

Total non-interest income

$

1,371 

 

$

1,271 

 

$

3,976 

 

$

3,999 



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 provided remits the commission payment through Cetera to the Company, and the Company recognizes the revenue.

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 September 30, 2018, 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 we will be required to recognize a right-of-use asset and a corresponding liability based on the then present value of such obligation. DNB is preparing an inventory of its leases and evaluating the impact of this ASU on these leases. Upon adoption of the guidance, DNB expects to report increased assets and increased liabilities as a result of recognizing right-of-use assets and lease liabilities on its consolidated statement of condition. DNB is currently evaluating the extent of the impact that the adoption of this ASU will have on our 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. Accordingly, effective January of 2017, DNB adopted the pronouncement. During the three and nine month periods ended September 30, 2018, DNB had $51,000 and $93,000 of tax benefits for stock option exercises and restricted stock vesting, respectively. In accordance with ASU 2016-09, forfeitures are recognized as they occur instead of applying an estimated forfeiture rate to each grant. For purposes of the determination of stock-based compensation expense for the three and nine month periods ended September 30, 2018, we recognized actual forfeitures of 0 and 4,345 shares of restricted stock awards that were granted to officers and other employees.

  

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. The team continues to assess the impact of the standard; however, DNB expects adopting this ASU will result in an increase in its allowance for credit losses. The amount of the increase 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.

10

 


 

 

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, 2017 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 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 March of 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities  (ASU 2017-08). This guidance shortens the amortization period for premiums on certain callable debt securities to the earliest call date (with an explicit, non-contingent call feature that is callable at a fixed price and on a preset dates), rather than contractual maturity date as currently required under GAAP. The ASU does not impact instruments without preset call dates such as mortgage-backed securities.  For instruments with contingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of the ASU.  ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption is permitted. Accordingly, effective January of 2017, DNB early adopted the pronouncement. The adoption of the ASU did not have a material impact to the consolidated financial statements.



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. 

11

 


 

 



NOTE 2: INVESTMENT SECURITIES



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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



September 30, 2018



Amortized

 

Unrealized

 

Unrealized

 

 

(Dollars in thousands)

Cost

 

Gains

 

Losses

 

Fair Value

Held To Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

8,682 

 

 

$

34 

 

 

$

 -

 

 

$

8,716 

 

Government Sponsored Entities (GSE) mortgage-backed securities

 

413 

 

 

 

 -

 

 

 

(4)

 

 

 

409 

 

Corporate bonds

 

13,882 

 

 

 

84 

 

 

 

(95)

 

 

 

13,871 

 

Collateralized mortgage obligations GSE

 

1,211 

 

 

 

 -

 

 

 

(55)

 

 

 

1,156 

 

State and municipal taxable

 

362 

 

 

 

 -

 

 

 

(10)

 

 

 

352 

 

State and municipal tax-exempt

 

37,519 

 

 

 

 

 

 

(1,722)

 

 

 

35,799 

 

Total

$

62,069 

 

 

$

120 

 

 

$

(1,886)

 

 

$

60,303 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available For Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Government agency obligations

$

50,077 

 

 

$

 -

 

 

$

(622)

 

 

$

49,455 

 

GSE mortgage-backed securities

 

28,762 

 

 

 

 -

 

 

 

(1,431)

 

 

 

27,331 

 

Collateralized mortgage obligations GSE

 

10,610 

 

 

 

 -

 

 

 

(669)

 

 

 

9,941 

 

Corporate bonds

 

10,913 

 

 

 

 -

 

 

 

(275)