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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: JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-22387
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DCB Financial Corp
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1469837
- ------------------------------------------------- ---------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
110 Riverbend Avenue, Lewis Center, Ohio 43035
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(Address of principal executive offices)
(740) 657-7000
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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 X No
--------- -----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act).
Yes No X
--------- -----------
As of August 4, 2003, the latest practicable date, 3,934,760 shares of the
registrant's no par value common stock were issued and outstanding.
DCB FINANCIAL CORP
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
- --------------------------------------------------------------------------------
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements Page
----
Consolidated Balance Sheets................................................ 3
Consolidated Statements of Income and Comprehensive Income................. 4
Condensed Consolidated Statements of Cash Flows............................ 6
Notes to the Consolidated Financial Statements............................. 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 11
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk........ 16
ITEM 4 - Controls and Procedures .......................................... 17
PART II - OTHER INFORMATION................................................ 18
SIGNATURES .............................................................. 20
DCB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Item 1. Financial Statements
--------------------
June 30, December 31,
2003 2002
------------- --------------
(unaudited)
ASSETS
Cash and due from financial institutions $ 28,026 $ 28,622
Federal funds sold 1,285 3,881
------------- --------------
Total cash and cash equivalents 29,311 32,503
Securities available for sale 90,531 96,477
Loans held for sale 3,602 6,442
Loans and leases receivable 388,042 370,581
Less allowance for loan and lease losses (4,302) (4,094)
------------- --------------
Net loans and leases receivable 383,740 366,487
Premises and equipment, net 11,776 12,615
Investment in unconsolidated affiliates 1,951 1,951
Accrued interest receivable and other assets 7,020 6,523
------------- --------------
Total assets $ 527,931 $ 522,998
============= ==============
LIABILITIES
Deposits
Noninterest-bearing $ 82,880 $ 73,531
Interest-bearing 359,530 365,092
------------- --------------
Total deposits 442,410 438,623
Federal funds purchased and other short-term borrowings 2,000 2,000
Federal Home Loan Bank advances 27,568 27,802
Accrued interest payable and other liabilities 7,192 2,045
------------- --------------
Total liabilities 479,170 470,470
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued at June 30, 2003 and December 31, 2002 3,780 3,780
Retained earnings 51,142 49,303
Treasury stock, 338,440 shares at June 30, 2003 and
104,966 shares at December 31, 2002, at cost (7,616) (2,152)
Accumulated other comprehensive income 1,455 1,597
------------- --------------
Total shareholders' equity 48,761 52,528
------------- --------------
Total liabilities and shareholders' equity $ 527,931 $ 522,998
============= ==============
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
3.
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
--------------- -------------- -------------- ---------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 5,735 $ 6,202 $ 11,529 $ 12,432
Taxable securities 729 1,490 1,562 3,002
Tax-exempt securities 163 148 313 287
Federal funds sold and other 22 12 56 30
--------------- -------------- -------------- ---------------
Total interest income 6,649 7,852 13,460 15,751
INTEREST EXPENSE
Deposits 1,635 2,263 3,478 4,560
Borrowings 224 285 433 642
--------------- -------------- -------------- ---------------
Total interest expense 1,859 2,548 3,911 5,202
NET INTEREST INCOME 4,790 5,304 9,549 10,549
Provision for loan and lease losses 355 500 688 800
--------------- -------------- -------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR
lOAN AND LEASE LOSSES 4,435 4,804 8,861 9,749
NONINTEREST INCOME
Service charges 787 757 1,476 1,456
Trust department income 152 116 307 301
Net gains on sales of securities 4 -- 17 15
Net gains on sale of real estate 293 -- 293 --
Net gains on sale of loans 391 179 877 380
Cash management fees 114 140 241 260
Data processing servicing fees 112 110 235 183
Other 178 205 387 348
--------------- -------------- -------------- ---------------
2,031 1,507 3,833 2,943
NONINTEREST EXPENSE
Salaries and other employee benefits 2,141 2,186 4,206 4,376
Occupancy and equipment 987 1,049 1,966 1,839
Professional services 339 164 410 233
Advertising 65 100 143 198
Postage, freight and courier 96 116 169 251
Supplies 63 63 100 134
State franchise taxes 121 150 241 283
Other 877 697 1,518 1,421
--------------- -------------- -------------- ---------------
4,689 4,525 8,753 8,735
--------------- -------------- -------------- ---------------
INCOME BEFORE INCOME TAXES 1,777 1,786 3,941 3,957
Income tax expense 569 618 1,235 1,334
--------------- -------------- -------------- ---------------
NET INCOME $ 1,208 $ 1,168 $ 2,706 $ 2,623
=============== ============== ============== ===============
See notes to the consolidated financial statements.
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4.
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Net income $ 1,208 $ 1,168 $ 2,706 $ 2,623
Less reclassification for realized gains
on sale of securities included in
operations, net of tax (3) - (11) (10)
Unrealized gains (losses) on securities
available for sale, net of tax (79) 544 (131) 202
---------------- -------------- --------------- ---------------
Comprehensive income $ 1,126 $ 1,712 $ 2,564 $ 2,815
=============== ============== ============== ===============
Basic and diluted earnings
per common share $ 0.31 $ 0.28 $ 0.67 $ 0.63
=============== ============== ============== ===============
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
5.
DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
---------------------------
2003 2002
------------ -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 11,188 $ 3,404
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Securities available for sale
Purchases (34,055) (24,560)
Maturities, principal payments and calls 25,056 19,832
Sales 14,158 1,081
Securities held to maturity
Purchases - (1,321)
Maturities, principal payments and calls - 7,902
Net change in loans (17,064) (9,175)
Proceeds from sale of real estate 340 -
Premises and equipment expenditures (127) (645)
------------ -----------
Net cash flows used in investing activities (11,692) (6,886)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net change in deposits 3,787 6,464
Net change in federal funds and other short-term borrowings - (2,174)
Proceeds from Federal Home Loan Bank advances 7,031 7,000
Repayment of Federal Home Loan Bank advances (7,265) (2,694)
Purchase of treasury stock (5,540) (201)
Sale of treasury stock 67 27
Cash dividends paid (768) (668)
------------ ---------
Net cash provided by (used in) financing activities (2,688) 7,754
------------ -----------
Increase (decrease) in cash and cash equivalents (3,192) 4,272
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 32,503 17,945
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,311 $ 22,217
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest on deposits and borrowings $ 3,972 $ 5,241
Income taxes $ 356 $ 2,583
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
6.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of DCB Financial Corp. (the "Corporation") at June 30,
2003, and its results of operations and cash flows for the three and six month
periods ended June 30, 2003 and 2002. All such adjustments are normal and
recurring in nature. The accompanying consolidated financial statements have
been prepared in accordance with the instructions of Form 10-Q and, therefore,
do not purport to contain all necessary financial disclosures required by
accounting principles generally accepted in the United States of America that
might otherwise be necessary in the circumstances, and should be read in
conjunction with consolidated financial statements, and notes thereto, of the
Corporation for the year ended December 31, 2002, included in its 2002 Annual
Report. Refer to the accounting policies of the Corporation described in the
notes to consolidated financial statements contained in the Corporation's 2002
Annual Report. The Corporation has consistently followed these policies in
preparing this Form 10-Q.
The accompanying consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiary, The Delaware County Bank and Trust
Company (the "Bank"). The financial statements of the Bank include accounts of
its wholly-owned subsidiaries, DCB Corporation and 362 Corp. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Management considers the Corporation to operate in one segment, banking.
To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions based on available information. These estimates and assumptions
affect amounts reported in the financial statements and disclosures provided,
and future results could differ. The allowance for loan and lease losses, fair
values of financial instruments and status of contingencies are particularly
subject to change.
Income tax expense is based on the effective tax rate expected to be applicable
for the entire year. Deferred tax assets and liabilities are the expected future
tax amounts for the temporary differences between carrying amounts and tax bases
of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
Earnings per common share is net income divided by the weighted average number
of shares of common stock outstanding during the period. The weighted average
number of common shares outstanding was 3,966,049 and 4,066,646 for the three
and six months ended June 30, 2003. The weighted average number of common shares
outstanding was 4,172,294 and 4,175,231 for the three and six months ended June
30, 2002. The Corporation had no potentially dilutive securities during the
three and six month periods ending June 30, 2003 and 2002.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
DCB's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow general
practices within the financial services industry. The application of these
principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying
notes. These estimates, assumptions, and judgments are based on information
available as of the date of the financial statements; as this information
changes, the financial statements could reflect different estimates,
assumptions, and judgments.
The most significant accounting policies followed by the Corporation are
presented in Note 1 to the consolidated financial statements contained in the
Corporation's 2002 Annual Report. These policies, along with the disclosures
presented in the other financial statement notes and in this financial review,
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.
- --------------------------------------------------------------------------------
7.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and estimated fair values of securities available for sale
were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
--------------------June 30, 2003-----------------
U.S. government agencies $ 27,677 $ 578 $ - $ 28,255
Corporate bonds 235 23 - 258
States and political subdivisions 18,472 831 (23) 19,280
Mortgage-backed and related securities 39,560 812 (34) 40,338
---------- ---------- ----------- ----------
Total debt securities 85,944 2,244 (57) 88,131
Other securities 2,383 17 - 2,400
---------- ---------- ---------- ----------
Total securities available for sale $ 88,327 $ 2,261 $ (57) $ 90,531
========== ========== =========== ==========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
------------------December 31, 2002---------------
U.S. government agencies $ 29,263 $ 735 $ (3) $ 29,995
States and political subdivisions 14,041 390 (6) 14,425
Corporate bonds 236 11 - 247
Mortgage-backed and related securities 48,177 1,291 (20) 49,448
---------- ---------- ----------- ----------
Total debt securities 91,717 2,427 (29) 94,115
Other securities 2,341 31 (10) 2,362
---------- ---------- ----------- ----------
Total securities available for sale $ 94,058 $ 2,458 $ (39) $ 96,477
========== ========== =========== ==========
- --------------------------------------------------------------------------------
8.
DCB FINANICIAL CORP
NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Substantially all mortgage-backed securities are backed by pools of mortgages
that are insured or guaranteed by the Federal National Mortgage Association
("FNMA"), the Government National Mortgage Association ("GNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC").
At June 30, 2003, there were no holdings of securities of any one issuer, other
than the U.S. government and its agencies, in an amount greater than 10% of
shareholders' equity.
The amortized cost and estimated fair value of debt securities at June 30, 2003,
by contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations. Mortgage-backed securities are shown separately since they are not
due at a single maturity date.
Available for sale
-----------------------
Amortized Fair
Cost Value
---------- ----------
Due in one year or less $ 2,349 $ 2,395
Due from one to five years 3,334 3,508
Due from five to ten years 23,227 23,700
Due after ten years 17,474 18,190
Mortgage-backed and related securities 39,560 40,338
---------- ----------
$ 85,944 $ 88,131
========== ==========
- --------------------------------------------------------------------------------
9.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- -------------------------------------------------------------------------------
NOTE 3 - LOANS AND LEASES RECEIVABLE
Loans and leases receivable were as follows:
June 30, December 31,
2003 2002
----------- ------------
Commercial and industrial $ 52,170 $ 45,543
Commercial real estate 145,515 144,646
Residential real estate and home equity 97,369 87,548
Real estate construction and land development 38,293 37,603
Consumer and credit card 48,773 48,409
Lease financing, net 5,219 6,412
----------- ------------
387,339 370,161
Add (deduct): Net deferred loan origination costs 1,221 1,132
Unearned income on leases (518) (712)
------------ ------------
Total loans and leases receivable $ 388,042 $ 370,581
============ ============
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses was as follows:
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Beginning balance $ 4,226 $ 3,742 $ 4,094 $ 3,596
Provision for loan losses 355 500 688 800
Loans charged off (297) (476) (554) (668)
Recoveries 18 27 74 65
------------ ------------ ------------ ------------
Balance - June 30 $ 4,302 $ 3,793 $ 4,302 $ 3,793
============ ============ ============ ============
Nonperforming loans were as follows:
June 30, December 31,
2003 2002
---------------- -----------------
Loans past due 90 days or more and still accruing $ 1,426 $ 187
Nonaccrual loans 2,850 3,387
Impaired loans (most of which are included in nonperforming loans above) were as
follows:
Period-end loans with no allocated allowance for loan losses $ - $ 464
Period-end loans with allocated allowance for loan losses 2,413 3,735
---------------- -----------------
Total $ 2,413 $ 4,199
================ =================
Amount of the allowance for loan losses allocated $ 930 $ 1,088
================ =================
Average of impaired loans during the period $ 3,551 $ 5,204
================ =================
- --------------------------------------------------------------------------------
10.
DCB FINANICIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
INTRODUCTION
In the following pages, management presents an analysis of the consolidated
financial condition of DCB Financial Corp. (the "Corporation") at June 30, 2003
compared to December 31, 2002, and the consolidated results of operations for
the three and six months ended June 30, 2003 compared to the same periods in
2002. This discussion is designed to provide shareholders with a more
comprehensive review of the operating results and financial position than could
be obtained from an examination of the financial statements alone. This analysis
should be read in conjunction with the consolidated financial statements and
related footnotes and the selected financial data included elsewhere in this
report.
FORWARD-LOOKING STATEMENTS
Certain statements in this report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, such as
statements relating to the financial condition and prospects, lending risks,
plans for future business development and marketing activities, capital spending
and financing sources, capital structure, the effects of regulation and
competition, and the prospective business of both the Corporation and its
wholly-owned subsidiary The Delaware County Bank & Trust Company (the "Bank").
Where used in this report, the word "anticipate," "believe," "estimate,"
"expect," "intend," and similar words and expressions, related to the
Corporation or the Bank or their respective management, identify forward-looking
statements. Such forward-looking statements reflect the current views of the
Corporation and are based on information currently available to the management
of the Corporation and the Bank and upon current expectations, estimates, and
projections about the Corporation and its industry, management's belief with
respect thereto, and certain assumptions made by management. These
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to: (i) significant increases in competitive pressure in the banking
and financial services industries; (ii) changes in the interest rate environment
which could reduce anticipated or actual margins; (iii) changes in political
conditions or the legislative or regulatory environment; (iv) general economic
conditions, either nationally or regionally (especially in central Ohio),
becoming less favorable than expected resulting in, among other things, a
deterioration in credit quality of assets; (v) changes occurring in business
conditions and inflation; (vi) changes in technology; (vii) changes in monetary
and tax policies; (viii) changes in the securities markets; and (ix) other risks
and uncertainties detailed from time to time in the filings of the Corporation
with the Commission.
The Corporation does not undertake, and specifically disclaims any obligation,
to publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $527,931 at June 30, 2003, compared to $522,998
at December 31, 2002, an increase of $4,933, or .94%. The increase in assets was
primarily the result of an increase in loans and leases receivable during the
period, partially offset by a decrease in investment securities. Cash and cash
equivalents decreased $3,192 from December 31, 2002 to June 30, 2003.
- --------------------------------------------------------------------------------
11.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Total securities decreased $5,946, or 6.16%, from $96,477 at December 31, 2002
to $90,531 at June 30, 2003. The decrease was the result of the proceeds from
sales, maturities, calls and principal repayments not being reinvested in order
to fund loan growth. The Corporation invests primarily in U.S. Treasury notes,
U.S. government agencies, municipal bonds, corporate obligations and
mortgage-backed securities. Mortgage-backed securities include Federal Home Loan
Mortgage Corporation ("FHLMC"), Government National Mortgage Association
("GNMA") and Federal National Mortgage Association ("FNMA") participation
certificates. Securities classified as available for sale at June 30, 2003
totaled $90,531, or 100% of the total securities portfolio. Management
classifies securities as available for sale to provide the Corporation with the
flexibility to move funds into loans as demand warrants. The mortgage-backed and
related securities portfolio, at fair value totaling $40,338 at June 30, 2003,
provides the Corporation with a constant cash flow stream from principal
repayments and interest payments. The Corporation held no derivative securities
or structured notes during any period presented.
Total loan and lease receivables increased by $17,461, or 4.71%, from $370,581
at December 31, 2002 to $388,042 at June 30, 2003. The increase is attributed
mainly to the continued growth of commercial and residential real estate loans.
Other loan categories in which the Corporation participates, commercial,
industrial, and consumer financing, remained relatively stable or experienced
small declines in loans outstanding. The Bank's local market continues to
experience increases in the amount of commercial real estate development
activity. The Bank has no significant loan concentration in any one industry.
Total deposits increased $3,787, or .86%, from $438,623 at December 31, 2002 to
$442,410 at June 30, 2003. Noninterest-bearing deposits increased $9,349, or
12.71%, partially offset by interest-bearing deposits decreasing $5,562, or
1.52%. During the second quarter of 2003, the Corporation began offering free
checking accounts to its customers which do not pay interest, which accounts for
the change in the makeup of the deposit accounts. Lastly, the decrease in
interest-bearing deposits was primarily in the Corporation's "Bank Investment"
deposit accounts, which offers a variable interest rate tied to the 3 Month
Treasury Bill. The Corporation replaced this product with other deposit account
options.
During 2003, the Board entered into an agreement with certain shareholders (the
"shareholder group") whereby the Corporation acquired 237,274 of its common
shares at an approximate total cost of $6,135 including approximately $427 of
legal and other pre-tax period costs charged to operations. Pursuant to the
agreement, the shareholder group also withdrew from a proxy contest and agreed
to withdraw now and in the future from offering various proposals to change
control of the Corporation through sale or otherwise. The Corporation recorded
the acquired treasury shares at fair value.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JUNE 30, 2003 AND JUNE 30, 2002
NET INCOME. Net income for the three months ended June 30, 2003 totaled $1,208,
compared to net income of $1,168 for the same period in 2002. Earnings per share
was $.31 for the three months ended June 30, 2003 compared to $.28 for the three
months ended June 30, 2002. This increase in net income is mainly attributed to
increased non-interest income and a decline in the provision for loan losses,
partially offset by a decline in net interest margin.
NET INTEREST INCOME. Net interest income represents the amount by which interest
income on interest-earning assets exceeds interest paid or accrued on
interest-bearing liabilities. Net interest income is the largest component of
the Corporation's income, and is affected by the interest rate environment, the
volume, and the composition of interest-earning assets and interest-bearing
liabilities.
- --------------------------------------------------------------------------------
12.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Net interest income was $4,790 for the three months ended June 30, 2003,
compared to $5,304 for the same period in 2002. The $514 decrease in the second
quarter 2003 compared to 2002 was mainly attributed to a declining interest rate
environment which caused the yields on the loan and investment portfolios to
decline more than funding costs. The Asset/Liability Management Committee, which
is responsible for determining deposit rates, continues to closely monitor the
Bank's cost of funds to take advantage of pricing and cash flow opportunities.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses represents the charge to income necessary to adjust the allowance
for loan and lease losses to an amount that represents management's assessment
of the losses inherent in the Corporation's loan portfolio. All lending activity
contains associated risks of loss which the Corporation recognizes as a
necessary element of its business activity.
To assist in identifying and managing potential loan losses, the Corporation
maintains a loan review function that regularly evaluates individual credit
relationships as well as overall loan-portfolio conditions. One of the primary
objectives of this loan review function is to make recommendations to management
as to the appropriate level of the loss allowance based on a methodology
developed by management and approved by the board of directors. On a monthly
basis credit reporting is made through a board level committee.
The provision for loan and lease losses totaled $355 for the three months ended
June 30, 2003, compared to $500 for the same period in 2002. The decrease in the
provision was due to a decrease in net charge-offs partially offset by continued
growth in the loan portfolio. Net charge-offs for the three months ended June
30, 2003 were $279 compared to net charge-offs of $449 for the same quarter in
2002. The charge offs in the second quarter mainly consisted of personal loans,
and four commercial loans. Management will continue to monitor the credit
quality of the lending portfolio and will recognize additional provisions in the
future as necessary, in the opinion of management, to maintain the provisions
for loan and lease losses at an appropriate level. At June 30, 2003, management
believes that all known and inherent losses in the loan and lease portfolio have
been provided.
The allowance for loan and lease losses totaled $4,302, or 1.11% of total loans
and leases, at June 30, 2003 compared to $4,094, or 1.10% of total loans and
leases, at December 31, 2002. The allowance was 101% of nonperforming loans at
June 30, 2003, a decline from 115% at December 31, 2002, resulting from a
decline in non-accrual loans offset by an increase in loans greater than 90 days
delinquent and still accruing.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$524, or 34.77%, for the three months ended June 30, 2003, compared to the same
period in 2002. The increase was the result of an increase in transactional
volume from the Bank's retail products, gain on the sale of property, and due to
a large increase in the volume of loans sold in the secondary market. During the
quarter the Corporation sold land, originally purchased for branch expansion,
since the site no longer met the Bank's geographic requirements of its long-term
strategy.
Total noninterest expense increased $164, or 3.62%, for the three months ended
June 30, 2003, compared to the same period in 2002. The increase was primarily
the result of an increase in professional and legal fees related to shareholder
matters offset by decreases in various noninterest expenses. During the period,
the Corporation expressed a slight decline in salary and benefits expense as it
introduced efficiency standards within the organization.
INCOME TAXES. The provision for income taxes totaled $569, for an effective tax
rate of 32.02%, for the three months ended June 30, 2003 and $618, for an
effective tax rate of 34.60%, for the three months ended June 30, 2002. The
decline in the effective tax rate is attributed to an increase in tax exempt
revenue derived from tax-exempt securities and the earnings on bank-owned life
insurance.
- --------------------------------------------------------------------------------
13.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 2003 AND JUNE 30, 2002
NET INCOME. Net income for the six months ended June 30, 2003 totaled $2,706,
compared to net income of $2,623 for the same period in 2002. Earnings per share
was $.67 for the six months ended June 30, 2003 compared to $.63 for the six
months ended June 30, 2002. The increase in earnings per share is a result of
increased income coupled with a decrease in outstanding shares.
NET INTEREST INCOME. Net interest income was $9,549 for the six months ended
June 30, 2003, compared to $10,549 for the same period in 2002. The $1,000
decrease for the six months ended June 30, 2003, compared to the same period in
2002 was mainly attributed to a declining interest rate environment that has
caused the spreads earned on the loan and investment portfolios to decline.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses totaled $688 for the six months ended June 30, 2003, compared to
$800 for the same period in 2002. The decrease in the provision was due to a
decrease in net charge-offs and a decline in nonaccrual loans, partially offset
by continued growth in the loan portfolio. Nonaccrual loans decreased from
$3,387 at December 31, 2002 to $2,850 at June 30, 2003. Net charge-offs for the
six months ended June 30, 2003 were $480 compared to net charge-offs of $603 for
the same period in 2002. Management will continue to monitor the credit quality
of the lending portfolio and will recognize additional provisions in the future,
as necessary, in the opinion of management, to maintain the provisions for loan
and lease losses at an appropriate level. The charge offs for 2003 mainly
consisted of personal loans and the many charges from commercial loans that
defaulted in 2002 but have now completed workout activities.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$890, or 30.24%, for the six months ended June 30, 2003, compared to the same
period in 2002. The increase was the result of an increase in transactional
volume from the Bank's retail products, gain on the sale of real estate, and a
large increase in the volume of secondary market loan sales. The increase in
secondary market activity generally reflects management's preference to avoid
fixed-interest rate risk in the current loan rate environment.
Total noninterest expense increased $18, or .21%, for the six months ended June
30, 2003, compared to the same period in 2002. The increase was primarily the
result of an increase in professional and legal fees related to shareholder
matters offset by declines salaries and benefits.
INCOME TAXES. The provision for income taxes totaled $1,235, for an effective
tax rate of 31.34%, for the six months ended June 30, 2003 and $1,334, for an
effective tax rate of 33.71%, for the six months ended June 30, 2002. The
decline in the effective tax rate is attributed to an increase in tax-exempt
revenue derived from tax exempt securities and the earnings on bank owned life
insurance.
LIQUIDITY
Liquidity is the ability of the Corporation to fund customers' needs for
borrowing and deposit withdrawals. The purpose of liquidity management is to
assure sufficient cash flow to meet all of the financial commitments and to
capitalize on opportunities for business expansion. This ability depends on the
financial strength, asset quality and
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14.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
types of deposit and investment instruments offered by the Corporation to its
customers. The Corporation's principal sources of funds are deposits, loan and
security repayments, maturities of securities, sales of securities available for
sale and other funds provided by operations. The Bank also has the ability to
borrow from the FHLB. While scheduled loan repayments and maturing investments
are relatively predictable, deposit flows and early loan and mortgage-backed
security prepayments are more influenced by interest rates, general economic
conditions, and competition. The Corporation maintains investments in liquid
assets based upon management's assessment of (1) need for funds, (2) expected
deposit flows, (3) yields available on short-term liquid assets and (4)
objectives of the asset/liability management program. The Corporation's
liquidity requirements are reported to and closely monitored by the ALCO
Committee, which ensures the strategic liquidity plan is being closely followed.
Cash and cash equivalents decreased $3,192, or 9.82%, to $29,311 at June 30,
2003 compared to $32,503 at December 31, 2002. Cash and equivalents represented
5.55% of total assets at June 30, 2003 and 6.22% of total assets at December 31,
2002. The Corporation has the ability to borrow funds at the holding company and
through its banking subsidiary. DCB Financial has a $7.5 million revolving line
of credit through a local institution priced at competitive market rates. The
Bank has the ability to borrow through the Federal Home Loan Bank and has
various correspondent banking partners to purchase overnight federal funds
should the need arise to supplement its future liquidity needs. Management
believes the Corporation's liquidity position is adequate based on its current
level of cash, cash equivalents, core deposits, the stability of its other
funding sources and the support provided by its capital base.
CAPITAL RESOURCES
Total shareholders' equity decreased $3,767 between December 31, 2002 and June
30, 2003. The reduction was primarily due to the Corporation's purchase of
treasury shares at a recorded fair value of $5,540, a $142 after-tax reduction
in accumulated other comprehensive income and the declaration of $868 in
dividends, all of which were partially offset by period earnings of $2,706.
Tier 1 capital is shareholders' equity excluding the unrealized gain or loss on
securities classified as available for sale and intangible assets. Total capital
includes Tier 1 capital plus the allowance for loan losses, not to exceed 1.25%
of risk weighted assets. Risk weighted assets are the Corporation's total assets
after such assets are assessed for risk and assigned a weighting factor defined
by regulation based on their inherent risk.
The Corporation and its subsidiaries meet all regulatory capital requirements.
The ratio of total capital to risk-weighted assets was 11.87% at June 30, 2003,
while the Tier 1 risk-based capital ratio was 10.88%. Regulatory minimums call
for a total risk-based capital ratio of 8.0%, at least half of which must be
Tier 1 capital. The Corporation's leverage ratio, defined as Tier 1 capital
divided by average assets, was 9.09% at June 30, 2003.
IMPACT OF NEW ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board (the FASB) issued
FASB Interpretation ("FIN No. 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others." FIN No. 45 requires a guarantor entity, at the inception of a guarantee
covered by the measurement provisions of the interpretation, to record a
liability for the fair value of the obligation undertaken in issuing guarantee.
The Corporation has financial letters of credit. Financial letters of credit
require the Corporation to make payment in the customer's financial condition
deteriorates, as defined in the agreements. FIN No. 45 requires the Corporation
to record an initial liability generally equal to the fees received for these
letters of credit, when guaranteeing obligations unless it becomes probable that
the Corporation would have to perform under the
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15.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
guarantee. FIN No. 45 applies prospectively to letters of credit the Corporation
issues or modifies subsequent to December 31, 2002. The Corporation adopted FIN
No. 45 on January 1, 2003, without material effect on its financial statements.
The Corporation defines the initial fair value of these letters of credit as the
fee received from the customer. The maximum potential undiscounted amount of
future payments of these letters of credit as of June 30, 2003 are $2.4 million
which expire through March 18, 2004. Amounts due under these letters of credit
would be reduced by any proceeds that the Corporation would be able to obtain in
liquidating the collateral for the loans, which varies depending on the
customer.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns, or both. FIN 46 also requires disclosures about
variable interest entities that a company is not required to consolidate, but in
which it has a significant variable interest. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when variable interest entity was established. The
Corporation is currently evaluating the impact of FIN 46 and expects no material
effect on its financial statements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- ------------------------------------------------------------------
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. Interest rate risk is the possibility that the
Corporation's financial condition will be adversely affected due to movements in
interest rates. The income of financial institutions is primarily derived from
the excess of interest earned on interest-earning assets over the interest paid
on interest-bearing liabilities. Accordingly, the Corporation places great
importance on monitoring and controlling interest rate risk. The measurement and
analysis of the exposure of the Corporation's primary operating subsidiary, The
Delaware County Bank and Trust Company, to changes in the interest rate
environment are referred to as asset/liability management. One method used to
analyze the Corporation's sensitivity to changes in interest rates is the "net
portfolio value" ("NPV") methodology.
NPV is generally considered to be the present value of the difference between
expected incoming cash flows on interest-earning and other assets and expected
outgoing cash flows on interest-bearing and other liabilities. For example, the
asset/liability model that the Corporation currently employs attempts to measure
the change in NPV for a variety of interest rate scenarios, typically for
parallel shifts of 100 to 300 basis points in market rates.
The Corporation's 2002 Annual Report includes a table depicting the changes in
the Corporation's interest rate risk as of December 31, 2002, as measured by
changes in NPV for instantaneous and sustained parallel shifts of -100 to +300
basis points in market interest rates. Management believes that no events have
occurred since December 31, 2002 that would significantly change their ratio of
rate sensitive assets to rate sensitive liabilities.
- --------------------------------------------------------------------------------
16.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
The Corporation's NPV is more sensitive to rising rates than declining rates.
From an overall perspective, such difference in sensitivity occurs principally
because, as rates rise, borrowers do not prepay fixed-rate loans as quickly as
they do when interest rates are declining. Thus, in a rising interest rate
environment, because the Corporation has fixed-rate loans in its loan portfolio,
the amount of interest the Corporation would receive on its loans would increase
relatively slowly as loans are slowly repaid and new loans at higher rates are
made. Moreover, the interest the Corporation would pay on its deposits would
increase rapidly because the Corporation's deposits generally have shorter
periods for repricing. Additional consideration should also be given to today's
current interest rate levels. Most deposit products are within 100 basis points
of zero percent and other products within 200 basis points. Should rates
continue to decline, fewer liabilities could be repriced down to offset
potentially lower yields on loans. Thus decreases could also impact future
earnings and the Corporation's NPV.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making risk calculations.
Item 4. Controls and Procedures
- --------------------------------
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
June 30, 2003, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of June 30, 2003,
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended June 30, 2003, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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17.
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended June 30, 2003
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
There were no matters submitted to a vote of the security holders
during the period covered by this report.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits - The following exhibits are filed as a part of
this report:
Exhibit No. Exhibit
----------- -------
3.1 Amended and Restated Articles of Incorporation of DCB Financial Corp.
(Incorporated by reference to the Registrant's filing on Form S-4
on November 5, 1996. File No. 333-15579.)
3.2 Code of Regulations of DCB Financial Corp. (Incorporated by reference
to the Registrant's filing on Form S-4 on November 5, 1996.
File No. 333-15579.)
4. Instruments Defining the Rights of Security Holders. (See Exhibits 3.1
and 3.2.)
31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
18.
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended June 30, 2003
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
(a) Reports on Form 8-K - A report on Form 8-K/A was filed on April 4,
2003 (report date: 3/13/03) - amend current report, items 4 and 7,
change in the Corporation's certifying accountant.
(b) Reports on Form 8-K - A report on Form 8-K was filed on April 21, 2003
(report date: 4/18/03) - purchase and standstill agreement.
(c) Reports on Form 8-K - A report on Form 8-K was filed on April 28, 2003
(report date: 4/28/03) - first quarter 2003 earnings release.
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19.
DCB FINANCIAL CORP
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DCB FINANCIAL CORP.
-----------------------------------------------
(Registrant)
Date: August 4, 2003 /s/ Jeffrey Benton
--------------- -----------------------------------------------
(Signature)
Jeffrey T. Benton
President and Chief Executive Officer
Date: August 4, 2003 /s/ John A. Ustaszewski
-------------- -----------------------------------------------
(Signature)
John A. Ustaszewski
Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
20.
DCB FINANCIAL CORP
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
3.1 Amended and Restated Articles of Incorporation of NA
DCB Financial Corp. (Incorporated by reference to
the Registrant's filing on Form S-3 on November
5, 1996. File No. 333-15579.)
3.2 Code of Regulations of DCB Financial Corp. NA
(Incorporated by reference Registrant's filing Form
S-4 on November 6, 1996. File No. 333-15579).
4 Instruments Defining the Rights of Security NA
Holders. (See Exhibits 3.1 and 3.2.)
11 Statement re: computation of per share earnings Reference is hereby made to Consolidated
Statements of Income on page 4 and Note 1
of Notes to Consolidated Financial
Statements on page 6, hereof.
31.1 Certification of Chief Executive Officer pursuant Page 22
to section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Page 23
section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, as enacted Page 24
Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification pursuant to 18 U.S.C. 1350, as enacted Page 25
Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
- --------------------------------------------------------------------------------
21.