DNB Financial Corporation Reports Second Quarter 2017 Results


DOWNINGTOWN, Pa., July 24, 2017 (GLOBE NEWSWIRE) -- DNB Financial Corporation (Nasdaq:DNBF), today reported net income in accordance with generally accepted accounting principles (“GAAP”) of $2.3 million, or $0.53 per diluted share, for the quarter ending June 30, 2017, compared with $1.1 million, or $0.39 per diluted share, for the same quarter, last year.  For the six months ending June 30, 2017, the Company reported net income of $4.7 million, or $1.10 per diluted share, compared with $2.7 million, or $0.93 per diluted share, for the same period, last year.

DNB Financial Corporation (the “Company” or “DNB”) is the parent of DNB First, National Association, one of the first nationally-chartered community banks to serve the greater Philadelphia region.  On October 1, 2016, the Company completed its acquisition of Philadelphia-based East River Bank ("East River") and its results of operations are included in the consolidated results for the periods ended December 31, 2016, March 31, 2017, and June 30, 2017, but are not included in the results of operations for any other periods. 

On a core basis, the Company reported net income of $1.8 million, or $0.42 per diluted share, for the quarter ending June 30, 2017, compared with $1.2 million, or $0.41 per diluted share, for the corresponding prior year quarter.  Core earnings, which is a non-GAAP measure of net income, excludes purchase accounting adjustments (accretion) of $468,000, merger-related expenses of $26,000, amortization of intangible assets of $23,000, gains from the sale of investment securities of $25,000, tax benefit of $153,000 for stock option exercises, and an income tax adjustment of $126,000 for the three months ending June 30, 2017. 

DNB adopted the new accounting guidance for equity-based transactions requiring that all excess tax benefits and tax deficiencies associated with equity-based compensation be recognized as an income tax benefit or expense in the income statement. Previously, tax effects resulting from changes in the Company’s share price subsequent to the grant date were recorded through stockholders’ equity at the time of vesting or exercise.   The adoption of the accounting guidance resulted in a $153,000 income tax benefit in the second quarter of 2017. Please see the Reconciliation of Non-GAAP Financial Measures on page 6 of the release.  Non-GAAP financial measures include references to the terms “core” or “operating.”

William J. Hieb, President and CEO, commented, “Second quarter results represent progress toward the accomplishment of many of our strategic goals, which include providing superior customer service, growing core deposits and wealth management, and organically building capital and tangible book value.  Although our credit costs were elevated this quarter, nonperforming assets remain at relatively low levels and asset quality remains strong.”

Highlights

  • On a sequential quarter basis, core deposits grew $15.8 million, or 2.2% (not annualized), and were 80% of total deposits as of June 30, 2017.

  • The core net interest margin, which excludes purchase accounting adjustments, was 3.39% for the quarter ending June 30, 2017, compared with 3.38% for the quarter ending March 31, 2017, and 3.08% for the quarter ending June 30, 2016.  The year-over-year improvement was primarily due to the acquisition of East River.

  • Asset quality remained strong although net charge-offs increased to 0.36% (annualized) of total average loans for the second quarter of 2017.  Non-performing loans were 0.84% of total loans at June 30, 2017.

  • Wealth management assets under care increased 8.7% (not annualized) to $232.7 million as of June 30, 2017 from $214.2 million as of December 31, 2016.

  • The Company paid a quarterly cash dividend of $0.07 per share on June 21, 2017.

Income Statement Summary

Based on core earnings of $1.8 million, the Company’s performance for the quarter ending June 30, 2017 generated a return on average assets (“ROAA”) and return on average tangible common equity (“ROTCE”) of 0.67% and 8.74%, respectively.  The core ROAA and ROTCE were 0.71% and 9.17%, respectively, for the same quarter, last year.  Please see the “Reconciliation of Non-GAAP Financial Measures” on page 6 of the release.

Net interest income for the three months ending June 30, 2017 was $9.3 million, which represented a $47,000 increase from the quarter ending March 31, 2017, and a $3.8 million increase from the three months ending June 30, 2016.  The year-over-year increase was primarily due to a 67.3% rise in total average loans and 51 basis point increase in the net interest margin to 3.59% for the quarter ending June 30, 2017.  The main driver for the increase in both volume and rate was the East River acquisition.  For the second quarter of 2017, the weighted average yield on total interest-earning assets was 4.12%, which included purchase accounting adjustments.  On a core basis, which excludes the purchase accounting fair value marks, the core net interest margin was 3.39% for the second quarter of 2017 compared with 3.38% for the three months ending March 31, 2017. 

Total interest expense was $1.4 million for the three months ending June 30, 2017, compared with $1.3 million for the first quarter of 2017, and $708,000 for the second quarter of 2016.  The year-over-year increase was primarily due to a higher amount of interest-bearing liabilities, largely due to the East River acquisition.  The weighted average rate paid for interest-bearing liabilities was 0.56% and 0.53% for the quarters ending June 30, 2017 and March 31, 2017, respectively.

The provision for credit losses was $585,000 for the most recent quarter compared with $325,000 for the three months ended March 31, 2017 and $200,000 for the second quarter of 2016.  As of June 30, 2017, the allowance for credit losses was $5.3 million and represented 0.65% of total loans.  Loans acquired in connection with the purchase of East River were recorded at fair value based on an initial estimate of expected cash flows, including a reduction for estimated credit losses, and without carryover of the respective portfolio's historical allowance for credit losses.  At June 30, 2017, the allowance for credit losses as a percentage of originated loans, which represents all loans other than those acquired, was 0.98%.

Total non-interest income for the second quarter of 2017 was $1.3 million, compared with $1.2 million for the same quarter, last year.  On a core basis, non-interest income was approximately 12.1% of total revenue for the quarter ending June 30, 2017.  Gains from the sale of securities realized in the second quarter of 2017 totaled $25,000 compared with $203,000 for the quarter ending June 30, 2016.  Wealth management fees were $471,000 for the second quarter of 2017, compared with $440,000 for the second quarter of 2016.  Wealth management fees represented 36.2% of total core fee income. 

Non-interest expense was $6.9 million for the second quarter of 2017, compared with $6.7 million for the first quarter of 2017, and $4.9 million for the quarter ending June 30, 2016.  Compared with the first quarter of 2017, increases were largely due to additional expenses related to recruiting, offices and equipment and professional services.

Balance Sheet Summary

As of June 30, 2017, total assets were $1.1 billion.  On a sequential quarter basis, assets were relatively stable across all major categories.  Total deposits decreased $12.7 million, or 1.4% (not annualized), on a sequential quarter basis as strong core deposit growth was more than offset by a planned decrease in time deposits.  As of June 30, 2017, total shareholders’ equity was $99.4 million, compared with $94.8 million as of December 31, 2016.  Tangible book value per share was $19.59 as of June 30, 2017, compared with $18.56 as of December 31, 2016.

On a sequential quarter basis, total loans increased $162,000 to $816.5 million as of June 30, 2017 and were 75.5% of total assets.  Total average loans, however, increased $2.1 million, or 0.26% (not annualized), on a sequential quarter basis as period-end balances were affected by loan payoffs in the latter part of the quarter.  Since December 31, 2016, the Company’s commercial construction lending portfolio increased $19.4 million, or 26.7% (not annualized), whereas other loan categories have experienced slight declines.  Loan originations have been prudent and conservative underwriting standards have been maintained. The Company remains challenged to grow commercial-oriented loans in a competitive market characterized by an uneven economic recovery and cautious borrower demand.

On a sequential quarter basis, total core deposits grew $15.8 million, or 2.2% (not annualized), and were 80.2% of total deposits as of June 30, 2017.  As of the same date, non-interest bearing deposits, which increased $5.3 million in the second quarter were 20.3% of total deposits.  Core deposit growth in the second quarter of 2017 was primarily attributable to an increase in money market accounts and the aforementioned rise in demand accounts.  Time deposits decreased $30.2 million, which was part of the Company’s asset/liability strategy.  As of June 30, 2017, the loan-to-deposit ratio was 91.4%.

Capital ratios continue to exceed regulatory standards for well capitalized institutions.  At June 30, 2017, the tier 1 leverage ratio was 8.80%, the tier 1 risk-based capital was 11.32%, the common equity tier 1 risk-based capital ratio was 10.24% and the total risk based capital ratio was 13.15%. As of the same date, the tangible common equity-to-tangible assets ratio was 7.83%.  Intangible assets were $16.0 million as of June 30, 2017. 

Asset Quality Summary

Asset quality remained good, although net charge-offs increased to 0.36% of total average loans for the quarter ending June 30, 2017, compared with 0.01% for the quarter ending December 31, 2016, and 0.10% for the quarter ending June 30, 2016.  The rise in net charge-offs was primarily due to two credits. Total non-performing assets, including loans and other real estate property, was $12.2 million as of June 30, 2017, compared with $12.7 million as of March 31, 2017, and $11.3 million as of December 31, 2016.  The ratio of non-performing loans to total loans was 0.84% as of June 30, 2017, versus 1.04% as of December 31, 2016.   

Interest Rate Risk Management

DNB's strategy has been to seek shorter duration over yield in its lending and investing activities and lengthen duration over rate in its financing activities to minimize interest rate risk.  The Company also strives to offer products and services that develop strong relationships to retain core deposits. The Bank has an Asset Liability Management Committee that actively monitors and manages the bank's interest rate exposure using simulation models and gap analysis. The Committee's primary objective is to minimize the adverse impact of changes in interest rates on net interest income, while maximizing earnings. Simulation model results show moderate liability sensitivity to rising rates in 100, 200, 300 and 400 basis point shock scenarios. Rate changes ramped in over 24 months also show moderate liability sensitivity.

General Information

DNB Financial Corporation is a bank holding company whose bank subsidiary, DNB First, National Association, is a community bank headquartered in Downingtown, Pennsylvania with 15 locations. DNB First, which was founded in 1860, provides a broad array of consumer and business banking products, and offers brokerage and insurance services through DNB Investments & Insurance, and investment management services through DNB Investment Management & Trust. DNB Financial Corporation's shares are traded on NASDAQ’s Capital Market under the symbol: DNBF. We invite our customers and shareholders to visit our website at https://www.dnbfirst.com. DNB's Investor Relations site can be found at http://investors.dnbfirst.com/.

Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, expectations or predictions of future financial or business performance, conditions relating to DNB and East River Bank (“East River”) or other effects of the merger of DNB and East River. These forward-looking statements include statements with respect to DNB’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 DNB’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.

In addition to factors previously disclosed in the reports filed by DNB with the Securities and Exchange Commission (the “SEC”) and those identified elsewhere in this document, the following factors, among others, could cause actual results to differ materially from forward looking statements or historical performance: difficulties and delays in integrating the East River business or fully realizing anticipated cost savings and other benefits of the merger; business disruptions following the merger; the strength of the United States economy in general and the strength of the local economies in which DNB conducts its 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 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 DNB’s products and services; the success of DNB 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; additional acquisitions; changes in consumer spending and saving habits; the nature, extent, and timing of governmental actions and reforms; and the success of DNB at managing the risks involved in the foregoing. Annualized, pro forma, projected and estimated numbers presented herein are presented for illustrative purpose only, are not forecasts and may not reflect actual results.

DNB 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 press release, even if subsequently made available by DNB on its website or otherwise. DNB 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 DNB to reflect events or circumstances occurring after the date of this press release.

For a complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review our filings with the SEC, including our most recent annual report on Form 10-K, as supplemented by our quarterly or other reports subsequently filed with the SEC.

            
FINANCIAL TABLES FOLLOW
            
            
DNB Financial Corporation
Condensed Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
            
 Three Months Ended Six Months Ended
 June 30, June 30,
  2017   2016   2017   2016 
EARNINGS:             
Interest income$10,661  $6,180  21,155  $12,285 
Interest expense 1,382   708   2,644   1,358 
Net interest income 9,279   5,472   18,511   10,927 
Provision for credit losses 585   200   910   530 
Non-interest income 1,300   1,184   2,526   2,293 
Gain from insurance proceeds -   -   80   1,150 
Gain on sale of investment securities 25   203   25   234 
Gain on sale of SBA loans 97   -   97   39 
(Gain) loss on sale / write-down of OREO and ORA 115   4   114   4 
Due diligence & merger expense 26   275   77   751 
Non-interest expense 6,943   4,893   13,638   9,835 
Income before income taxes 3,032   1,487   6,500   3,523 
Income tax expense 746   378   1,773   858 
Net income$2,286  $1,109  $4,727  $2,665 
Net income per common share, diluted$0.53  $0.39  $1.10  $0.93 
            
Reconciliation of Non-GAAP Financial Measures (Unaudited)
(Dollars in thousands, except per share data)
            
 Three Months Ended Six Months Ended
 June 30, June 30,
  2017   2016   2017   2016 
            
GAAP net income$2,286  $1,109  $4,727  $2,665 
Net gains on sale of securities* (25)  (203)  (25)  (234)
Gains from insurance proceeds -   -   (80)  (1,150)
Salary expense related to restricted stock and SERP -   -   -   446 
Due diligence & merger expense 26   275   77   463 
Accretion of purchase accounting fair value marks (468)  -   (1,129)  - 
Amortization of intangible assets 23   -   46   - 
Tax benefit for stock option exercises (153)  -   (153)  - 
Income tax adjustment 126   8   294   137 
Non-GAAP net income (Core earnings)$1,815  $1,189  $3,757  $2,327 
            
Core earnings per common share:           
Basic$0.43  $0.42  $0.88  $0.82 
Diluted$0.42  $0.41  $0.88  $0.81 
            
Weighted average common shares outstanding:           
Basic 4,258   2,849   4,252   2,841 
Diluted 4,292   2,883   4,283   2,876 
            
*Starting with the quarter ended December 31, 2016, DNB excluded net gains on the sale of securities from core earnings.  The second quarter of 2016 and six-months ended June 30, 2016 has been restated for comparative purposes. 


               
DNB Financial Corporation
Selected Financial Data (Unaudited)
(Dollars in thousands, except per share data)
               
 Quarterly
 2017
   2017
   2016
   2016
   2016
 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
Earnings and Per Share Data              
Net income$    2,286  $    2,441  $    2,313  $    1  $    1,109 
Basic earnings per common share$0.54  $0.57  $0.55  $0.00  $0.39 
Diluted earnings per common share$0.53  $0.57  $0.55  $0.00  $0.39 
Core diluted earnings per common share (non-GAAP)    $0.42  $0.45  $0.48  $0.42  $0.41 
Dividends per common share$0.07  $0.07  $0.07  $0.07  $0.07 
Book value per common share$23.35  $22.88  $22.36  $20.76  $20.90 
Tangible book value per common share$19.59  $19.11  $18.56  $20.73  $20.88 
Average common shares outstanding 4,258   4,247   4,203   2,853   2,849 
Average diluted common shares outstanding 4,292   4,274   4,230   2,886   2,883 
               
Performance Ratios              
Return on average assets 0.84%   0.92%   0.84%   0.00%   0.59% 
Core return on average assets (non-GAAP) 0.67%   0.74%   0.74%   0.63%   0.71% 
Return on average equity 9.23%   10.28%   9.78%   0.01%   7.56% 
Core return on average equity (non-GAAP) 7.33%   8.18%   8.56%   8.23%   8.54% 
Return on average tangible equity 11.00%   12.34%   12.04%   0.01%   7.57% 
Core return on average tangible equity (non-GAAP) 8.74%   9.82%   10.34%   8.75%   9.17% 
Net interest margin 3.59%   3.67%   3.63%   3.06%   3.08% 
Core net interest margin (non-GAAP) 3.39%   3.38%   3.33%   3.06%   3.08% 
Efficiency ratio 63.80%   63.14%   62.47%   94.43%   74.38% 
Core efficiency ratio (non-GAAP) 66.66%   67.59%   64.41%   72.73%   70.39% 
Wtd average yield on earning assets 4.12%   4.16%   4.10%   3.47%   3.46% 
Core wtd average yield on earning assets (non-GAAP) 4.01%   3.99%   3.91%   3.47%   3.46% 
               
Asset Quality Ratios              
Net charge-offs to average loans 0.36%   0.14%   0.01%   0.03%   0.10% 
Non-performing loans/Total loans 0.84%   0.94%   1.04%   1.36%   1.54% 
Non-performing assets/Total assets 1.13%   1.16%   1.05%   1.28%   1.38% 
Allowance for credit loss/Total loans 0.65%   0.66%   0.66%   1.04%   1.06% 
Allowance for credit loss/Non-performing loans 76.76%   70.56%   63.20%   76.28%   69.12% 
               
Capital Ratios              
Total equity/Total assets 9.19%   8.93%   8.86%   7.69%   7.79% 
Tangible equity/Tangible assets 7.83%   7.57%   7.46%   7.68%   7.78% 
Tier 1 leverage ratio 8.80%   8.75%   8.42%   9.06%   9.11% 
Common equity tier 1 risk-based capital ratio 10.24%   9.71%   9.59%   10.50%   10.82% 
Tier 1 risk based capital ratio 11.32%   10.75%   10.65%   12.06%   12.43% 
Total risk based capital ratio 13.15%   12.56%   12.48%   14.72%   15.16% 
               
Wealth Management Assets under care*$232,707  $224,490  $214,170  $210,800  $200,586 
               
*Wealth Management Assets under care includes assets under management, administration, supervision and brokerage.


                
DNB Financial Corporation 
Condensed Consolidated Statements of Income (Unaudited) 
(Dollars in thousands, except per share data) 
                
 Three Months Ended 
 June 30, Mar 31, Dec 31, Sept 30, June 30, 
 2017 2017 2016 2016 2016 
EARNINGS:               
Interest income$  10,661    $  10,494    $  10,617    $  6,277    $  6,180  
Interest expense 1,382   1,262   1,206   760   708  
Net interest income 9,279   9,232   9,411   5,517   5,472  
Provision for credit losses 585   325   100   100   200  
Non-interest income 1,300   1,226   1,279   1,142   1,184  
Gain from insurance proceeds -   80   -   30   -  
Gain on sale of investment securities 25   -   -   197   203  
Gain on sale of SBA loans 97   -   -   -   -  
(Gain) loss on sale / write-down of OREO and ORA   115   (1)  480   160   4  
Due diligence & merger expense 26   51   280   1,498   275  
Non-interest expense 6,943   6,695   6,587   5,046   4,893  
Income before income taxes 3,032   3,468   3,243   82   1,487  
Income tax expense 746   1,027   930   81   378  
Net income$2,286  $2,441  $2,313  $1  $1,109  
Net income per common share, diluted$0.53  $0.57  $0.55  $0.00  $0.39  
                
  
Condensed Consolidated Statements of Financial Condition (Unaudited) 
(Dollars in thousands) 
                
 June 30, Mar 31, Dec 31, Sept 30, June 30, 
 2017 2017 2016 2016 2016 
FINANCIAL POSITION:               
Cash and cash equivalents$36,189  $44,068  $22,103  $30,442  $20,146  
Investment securities 177,149   178,422   182,206   195,477   223,140  
Loans held for sale -   200   -   -   -  
Loans and leases 816,525   816,363   817,529   509,475   494,417  
Allowance for credit losses (5,267)  (5,418)  (5,373)  (5,303)  (5,247) 
Net loans and leases 811,258   810,945   812,156   504,172   489,170  
Premises and equipment, net 9,099   9,203   9,243   9,033   8,557  
Goodwill 15,525   15,525   15,590   -   -  
Other assets 32,240   31,576   29,387   31,148   23,159  
Total assets$1,081,460  $1,089,939  $1,070,685  $770,272  $764,172  
                
Demand$181,529  $176,199  $173,467  $146,731  $135,212  
NOW 209,355   218,133   224,219   169,400   185,279  
Money market 240,434   221,356   184,783   160,312   149,108  
Savings 84,820   84,700   86,176   73,867   75,236  
Core deposits 716,138   700,388   668,645   550,310   544,835  
Time deposits 147,110   177,335   187,256   71,920   73,560  
Brokered deposits 29,811   28,045   29,286   23,313   23,449  
Total deposits 893,059   905,768   885,187   645,543   641,844  
FHLB advances 49,869   50,972   55,332   20,000   20,000  
Repurchase agreements 15,700   11,474   11,889   19,483   17,748  
Subordinated debt 9,750   9,750   9,750   9,750   9,750  
Other borrowings 9,672   9,685   9,697   9,710   9,721  
Other liabilities 4,005   5,002   3,990   6,569   5,572  
Stockholders' equity 99,405   97,288   94,840   59,217   59,537  
Total liabilities and stockholders' equity$1,081,460  $1,089,939  $1,070,685  $770,272  $764,172  


                
DNB Financial Corporation
Condensed Consolidated Statements of Financial Condition - Quarterly Average Balances (Unaudited)
(Dollars in thousands)
                
  June 30,
  Mar 31,
  Dec 31,
  Sept 30,
  June 30,
 
  2017
  2017
  2016
  2016
  2016
 
FINANCIAL POSITION:               
Cash and cash equivalents$46,629  $  27,406    $  37,239    $  25,208    $  36,113  
Investment securities 182,124   185,676   192,359   217,593   213,235  
Loans held for sale 10   41   137   87   147  
Loans and leases 817,148   815,028   815,470   498,627   488,396  
Allowance for credit losses (5,557)    (5,432)  (5,512)  (5,344)  (5,265) 
Net loans and leases 811,591   809,596   809,958   493,283   483,131  
Premises and equipment, net 9,188   9,267   9,218   8,844   8,332  
Goodwill 15,525   15,589   15,590   -   -  
Other assets 24,785   24,046   22,457   19,829   19,222  
Total assets$1,089,852  $1,071,621  $1,086,958  $764,844  $760,180  
                
Demand$183,329  $172,984  $181,415  $137,437  $131,134  
NOW 209,433   218,357   224,101   176,704   192,339  
Money market 232,662   197,615   177,885   156,412   142,768  
Savings 84,946   85,348   87,096   74,652   75,254  
Core deposits 710,370   674,304   670,497   545,205   541,495  
Time deposits 166,459   180,819   186,287   72,324   75,541  
Brokered deposits 26,709   28,326   27,406   23,307   20,754  
Total deposits 903,538   883,449   884,190   640,836   637,790  
FHLB advances 50,634   55,420   64,846   20,000   20,003  
Repurchase agreements 12,551   12,858   18,972   18,381   19,103  
Subordinated debt 9,750   9,750   9,750   9,750   9,750  
Other borrowings 9,684   9,748   9,799   10,383   9,728  
Other liabilities 4,353   4,070   5,592   5,367   4,939  
Stockholders' equity 99,342   96,326   93,809   60,127   58,867  
Total liabilities and stockholders' equity    $  1,089,852  $1,071,621  $1,086,958  $764,844  $760,180  
                     

            

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