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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: MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-22387
-----------
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
----------------------------------------------
(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 the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common stock, no par value Outstanding at May 12, 2003
4,172,034 common shares
DCB FINANCIAL CORP
FORM 10-Q
QUARTER ENDED MARCH 31, 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............................................................. 5
Notes to the Consolidated Financial Statements.............................................................. 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................... 10
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk......................................... 14
ITEM 4 - Controls and Procedures ........................................................................... 15
PART II - OTHER INFORMATION................................................................................. 16
SIGNATURES ................................................................................................. 18
DCB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
- -------------------------------------------------------------------------------
Item 1. Financial Statements
March 31, December 31,
2003 2002
---- ----
(unaudited)
ASSETS
Cash and due from financial institutions $ 19,972 $ 28,622
Federal funds sold 8,682 3,881
------------- --------------
Total cash and cash equivalents 28,654 32,503
Securities available for sale 91,084 96,477
Loans held for sale 6,758 6,442
Loans and leases 371,003 370,581
Less allowance for loan and lease losses (4,226) (4,094)
------------- --------------
Net loans and leases 366,777 366,487
Premises and equipment, net 12,230 12,615
Investment in unconsolidated affiliates 1,951 1,951
Accrued interest receivable and other assets 6,933 6,523
------------- --------------
Total assets $ 514,387 $ 522,998
============= ==============
LIABILITIES
Deposits
Noninterest-bearing $ 72,172 $ 73,531
Interest-bearing 364,786 365,092
------------- --------------
Total deposits 436,958 438,623
Federal funds purchased and other short-term borrowings 811 2,000
Federal Home Loan Bank advances 20,671 27,802
Accrued interest payable and other liabilities 2,284 2,045
------------- --------------
Total liabilities 460,724 470,470
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,780 3,780
Retained earnings 50,426 49,303
Treasury stock, 101,166 shares at March 31, 2003 and
104,966 shares at December 31, 2002, at cost (2,080) (2,152)
Accumulated other comprehensive income 1,537 1,597
------------- --------------
Total shareholders' equity 53,663 52,528
------------- --------------
Total liabilities and shareholders' equity $ 514,387 $ 522,998
============= ==============
- -------------------------------------------------------------------------------
See notes to the consolidated financial statements.
3.
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
Three Months Ended
March 31,
---------------------------------
2003 2002
-------------- ---------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 5,945 $ 6,372
Taxable securities 832 1,512
Tax-exempt securities 150 139
Federal funds sold and other 35 18
-------------- ---------------
Total interest income 6,962 8,041
INTEREST EXPENSE
Deposits 1,843 2,297
Borrowings 209 357
-------------- ---------------
Total interest expense 2,052 2,654
NET INTEREST INCOME 4,910 5,387
Provision for loan and lease losses 333 300
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 4,577 5,087
NONINTEREST INCOME
Service charges on deposit accounts 538 557
Trust department income 155 185
Net gains on sales of securities 13 15
Net gains on sale of loans 486 201
Cash management fees 127 120
Data processing servicing fees 123 73
Other 209 184
-------------- ---------------
1,651 1,335
NONINTEREST EXPENSE
Salaries and other employee benefits 2,065 2,190
Occupancy and equipment 979 831
Professional services 70 54
Advertising 79 103
Postage, freight and courier 73 135
Supplies 36 71
State franchise taxes 121 133
Other 639 734
-------------- ---------------
4,062 4,251
-------------- ---------------
INCOME BEFORE INCOME TAXES 2,166 2,171
Income tax expense 667 716
-------------- ---------------
NET INCOME 1,499 1,455
Other comprehensive loss (60) (352)
--------------- ----------------
Comprehensive income $ 1,439 $ 1,103
============== ===============
Basic and diluted earnings per common share $ 0.36 $ 0.35
============== ===============
- -------------------------------------------------------------------------------
See notes to the consolidated financial statements.
4.
DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- -------------------------------------------------------------------------------
Three Months Ended
March 31,
---------------------------
2003 2002
------------ -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 1,570 $ 2,736
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Securities available for sale
Purchases (14,644) (14,783)
Maturities, principal payments and calls 13,329 9,440
Sales 6,365 875
Securities held to maturity
Maturities, principal payments and calls - 4,737
Net change in loans (137) (450)
Premises and equipment expenditures (74) (397)
------------ -----------
Net cash flows provided by (used in) investing activities 4,839 (578)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net change in deposits (1,665) 3,857
Net change in federal funds and other short-term borrowings (1,189) (2,127)
Repayment of Federal Home Loan Bank advances (7,101) (96)
Sale of treasury stock 72 -
Cash dividends paid (375) (335)
------------ ---------
Net cash provided by (used in) financing activities (10,258) 1,299
------------ -----------
Increase (decrease) in cash and cash equivalents (3,849) 3,457
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 32,503 17,945
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,654 $ 21,402
=========== ===========
- -------------------------------------------------------------------------------
See notes to the consolidated financial statements.
5.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 March 31,
2003, and its results of operations and cash flows for the three month periods
ended March 31, 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 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 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, D.C.B. 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 4,170,919 and 4,178,200 for the three
months ended March 31, 2003 and 2002. The Corporation has no potentially
dilutive securities.
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 contained in the Corporation's 2002 annual report to the
consolidated financial statements. 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.
- -------------------------------------------------------------------------------
6.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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
---- ----- ------ -----
-------------------March 31, 2003-----------------
U.S. government agencies $ 29,290 $ 584 $ - $ 29,874
States and political subdivisions 14,569 718 (2) 15,285
Mortgage-backed and related securities 42,534 1,036 (23) 43,547
---------- ---------- ----------- ----------
Total debt securities 86,393 2,338 (25) 88,706
Other securities 2,362 16 - 2,378
---------- ---------- ---------- ----------
Total securities available for sale $ 88,755 $ 2,354 $ (25) $ 91,084
========== ========== =========== ==========
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
========== ========== =========== ==========
- -------------------------------------------------------------------------------
7.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 March 31, 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 March 31,
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 $ 2,326 $ 2,379
Due from one to five years 8,410 8,634
Due from five to ten years 23,045 23,591
Due after ten years 27,478 28,150
Mortgage-backed and related securities 25,134 25,952
---------- ----------
$ 86,393 $ 88,706
========== ==========
- -------------------------------------------------------------------------------
8.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
- -------------------------------------------------------------------------------
NOTE 3 - LOANS AND LEASES
Loans and leases were as follows:
March 31, December 31,
2003 2002
---- ----
Commercial and industrial $ 46,833 $ 45,543
Commercial real estate 146,737 144,646
Residential real estate and home equity 84,485 87,548
Real estate construction and land development 37,430 37,603
Consumer and credit card 49,134 48,409
Lease financing, net 5,727 6,412
----------- ------------
370,346 370,161
Less (deduct): Net deferred loan origination costs 1,212 1,132
Unearned income on leases (555) (712)
------------ ------------
Total loans receivable $ 371,003 $ 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
March 31,
2003 2002
---- ----
Balance at beginning of period $ 4,094 $ 3,596
Provision for loan losses 333 300
Loans charged off (257) (192)
Recoveries 56 38
------------ ------------
Balance at end of period $ 4,226 $ 3,742
============ ============
Nonperforming loans were as follows:
March 31, December 31,
2003 2002
---- ----
Loans past due 90 days or more and still accruing $ 1,237 $ 187
Nonaccrual loans 2,877 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 $ 370 $ 464
Period-end loans with allocated allowance for loan losses 3,659 3,735
---------------- -----------------
Total $ 4,029 $ 4,199
================ =================
Amount of the allowance for loan losses allocated $ 1,177 $ 1,088
================ =================
Average of impaired loans during the period $ 4,058 $ 5,204
================ =================
- -------------------------------------------------------------------------------
9.
DCB FINANCIAL CORP
MANAGEMENTS 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 March 31, 2003,
compared to December 31, 2002, and the consolidated results of operations for
the three months ended March 31, 2003, compared to the same period 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
reading the consolidated 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 $514,387 at March 31, 2003, compared to
$522,998 at December 31, 2002, a decrease of $8,611, or 1.65%. The decrease in
assets was primarily the result of a decrease in securities. These funds were
utilized to reduce FHLB advances.
Cash and cash equivalents decreased $3,849 from December 31, 2002 to March 31,
2003. This decline is mainly attributed to the large amount of due from
transactions present because of year end timing issues. Fed Funds balances
increased $4,801 million as management intended to increase liquidity to fund
other balance sheet initiatives.
- -------------------------------------------------------------------------------
10.
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 $5,393, or 5.59%, from $96,477 at December 31, 2002
to $91,084 at March 31, 2003. The decrease was the result of the proceeds from
sales, maturities, calls and principal repayments not being reinvested in order
to repay borrowings, in the form of fed funds purchased and FHLB advances. 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 March 31, 2003 totaled $91,084, 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 securities portfolio, totaling
$25,134 at March 31, 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 loans increased $422, or .11%, from $370,581 at December 31, 2002 to
$371,003 at March 31, 2003. The slight increase is attributed mainly to the
continued growth of commercial real estate loans, which was partially off set by
a general decline in various consumer lending categories. 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 decreased $1,665, or .38%, from $438,623 at December 31, 2002 to
$436,958 at March 31, 2003. Noninterest-bearing deposits decreased $1,359, or
1.85%, in addition to interest-bearing deposits decreasing $306, or .08%. The
decrease in interest-bearing deposits was primarily in the Corporation's "Bank
Investment" deposit accounts, which offer a variable interest rate tied to the 3
Month Treasury Bill.
COMPARISON OF RESULTS OF OPERATIONS
NET INCOME. Net income for the three months ended March 31, 2003 totaled $1,499,
compared to net income of $1,455 for the same period in 2002. Earnings per share
was $.36 for the three months ended March 31, 2003 compared to $.35 for the
three months ended March 31, 2002.
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.
Net interest income was $4,910 for the three months ended March 31, 2003,
compared to $5,387 for the same period in 2002. The $477 decrease in the first
quarter 2003 compared to 2002 was mainly attributed to a declining interest rate
environment that has caused the spreads earned on the loan and investment
portfolios to also decline. 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 losses and the Corporation recognizes these credit
risks 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.
- -------------------------------------------------------------------------------
11.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
The provision for loan and lease losses totaled $333 for the three months ended
March 31, 2003, compared to $300 for the same period in 2002. The growth in the
provision is reflective of the overall growth in the Corporation's loan
portfolio, as well as an increase in net-charge offs between the two periods.
These factors were partially offset by a decline in nonperforming loans from
$3,387 at December 31, 2002 to $2,877 at March 31, 2003. Net charge-offs for the
three months ended March 31, 2003 were $201 compared to net charge-offs of $154
for the same quarter in 2002. Management will continue to monitor the credit
quality of the lending portfolio and will recognize additional provision in the
future as necessary, in the opinion of management, to maintain the provisions
for loan and lease losses at an appropriate level.
The allowance for loan and lease losses totaled $4,226, or 1.14% of total loans
and leases, at March 31, 2003 compared to $4,094, or 1.10% of total loans and
leases, at December 31, 2002. The allowance was 103% of nonperforming loans at
March 31, 2003, compared to 115% at December 31, 2002, resulting from the
aforementioned decline in nonperforming loans, as well as the effects of
charge-offs during the 2003 quarter.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$316, or 23.67%, for the three months ended March 31, 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, and due to a large increase in the
volume of sales of loans in the secondary market.
Total noninterest expense decreased $189, or 4.45%, for the three months ended
March 31, 2003, compared to the same period in 2002. The decrease was primarily
the result of decrease in salaries and employee benefits, offset by an increase
in professional and legal fees related to shareholder matters.
INCOME TAXES. The change of income tax expense is primarily attributable to the
growth in income before income taxes. The provision for income taxes totaled
$667, for an effective tax rate of 30.79%, for the three months ended March 31,
2003 and $716, for an effective tax rate of 32.98%, for the three months ended
March 31, 2002.
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 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.
Cash and cash equivalents decreased $3,849, or 11.84%, to $28,654 at March 31,
2003 compared to $32,503 at December 31, 2002. Cash and equivalents represented
5.57% of total assets at March 31, 2003 and 6.22% of total assets at December
31, 2002. The Corporation has the ability to borrow funds from the Federal Home
Loan Bank and has various correspondent banking partners to purchase overnight
federal funds should the Corporation need 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.
- -------------------------------------------------------------------------------
12.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
CAPITAL RESOURCES
Total shareholders' equity increased $1,135 between December 31, 2002 and March
31, 2003. The increase was primarily due to period earnings of $1,499 net of a
$60 after-tax reduction in accumulated other comprehensive income and the
declaration of $375 in dividends.
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 13.48% at March 31, 2003,
while the Tier 1 risk-based capital ratio was 12.47%. 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 10.05% at March 31, 2003.
IMPACT OF NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendments of FASB Statement No. 13, and
Technical Corrections". This Statement eliminates inconsistency between the
required accounting for certain lease modifications that have economic effects
similar to sale-leaseback transactions and sale-leaseback transactions. The
Corporation does not believe this statement has had or will have a material
effect on its financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement addresses the timing of
recognition of a liability for exit and disposal cost at the time a liability is
incurred, rather than at a plan commitment date, as previously required. Exit or
disposal costs will be measured at fair value, and the recorded liability will
be subsequently adjusted for changes in estimated cash flows. This Statement is
required to be effective for exit or disposal activities entered after December
31, 2002, and early adoption is encouraged. The Corporation does not believe
this statement will have a material effect on its financial position or results
of operations.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions". This standard requires any unidentifiable intangible
asset previously recorded as a result of a business combination to be
reclassified as goodwill and the amortization of this asset will cease. The
effect of this standard on the financial position and results of operations of
the Corporation was not material, as the Corporation does not have any
unidentified intangible assets.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The expanded annual disclosure requirements and the transition provisions
are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. SFAS No. 148
is not expected to have a material effect on the Corporation's financial
position or results of operations, as the Corporation has no securities that are
potentially dilutive.
- -------------------------------------------------------------------------------
13.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
In November 2002, the FASB issued 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 became probable that the Corporation would have to perform
under the 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 March 31, 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 FASB Interpretation No. 46 ("FIN 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 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
- -------------------------------------------------------------------------------
14.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
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.
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 prepaid 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. Several deposit products are within 200 basis
points of zero percent and other products within 300 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
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 (c) under the Securities
Exchange Act of 1934). Based on their evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are, to the best of their knowledge, effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. There were no significant changes made in the Corporation's
internal controls or in other factors that could significantly affect these
internal controls subsequent to the date of the evaluation performed by the
Company's Chief Executive Officer and Chief Financial Officer.
- -------------------------------------------------------------------------------
15.
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended March 31, 2003
PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 1 - Legal Proceedings:
On March 31, 2003, the United States District Court for the
Southern District of Ohio (the "Court") entered judgment in favor
of the Company and all other defendants in an action (the "Suit")
brought by S. Robert Davis ("Davis"). Mr. Davis brought the Suit
allegedly as a shareholder derivative action naming the Company,
its Board of Directors, the members of the Board of Directors,
and the Company's former Chief Executive Officer as defendants.
Mr. Davis alleged to have sent correspondence constituting a
demand under Ohio law for inspection of the books and records of
account of the Company and its subsidiary, The Delaware County
Bank and Trust Company, and that defendants did not respond to
this correspondence prior to the deadline set forth therein. He
alleged that his correspondence was due to inconsistencies in the
explanation of what comprises a certain reduction in earnings
announced by the Company in a press release issued December 12,
2001. The Court found that Mr. Davis' allegations did not state a
cause of action for which the Court has subject matter
jurisdiction, and the Suit was dismissed at Mr. Davis' costs in
favor of DCB and the other defendants.
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 are no matters required to be reported under this item.
- -------------------------------------------------------------------------------
16.
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended March 31, 2003
PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 5 - Other Information:
In connection with events disclosed by the Company in a Report on
Form 8-K filed with the SEC on April 21, 2003, the Company has
rescheduled its annual meeting of shareholders for June 25, 2003
at 4:00 p.m. The record date for shareholders entitled to vote at
the meeting has also been changed to May 15, 2003. No change has
been made to the location for the annual meeting of shareholders.
The Company expects to distribute revised proxy materials for use
in connection with the rescheduled annual meeting of shareholders
on or around May 23, 2003.
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.)
99.1 Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
(a) Reports on Form 8-K - A report on Form 8-K was filed on February 14, 2003 (report date:
2/14/03) - shareholder letter regarding dividend announcement and year-end earnings.
(b) Reports on Form 8-K - A report on Form 8-K was filed on February 18, 2003 (report date:
2/14/03) - year end earnings release.
(c) Reports on Form 8-K - A report on Form 8-K was filed on March
20, 2003 (report date: 3/13/03) - change in Company's
certifying accountant.
(d) Reports on Form 8-K - A report on Form 8-K was filed on March 31, 2003 (report date:
3/13/03) - amendment to the 8-K filed 3/20/03 regarding the change in the Company's certifying accountant.
- -------------------------------------------------------------------------------
17.
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: May 12, 2003 /s/ Jeffrey Benton
------------ --------------------------------------
(Signature)
Jeffrey Benton
President and Chief Executive Officer
Date: May 12, 2003 /s/ John A. Ustaszewski
------------ -------------------------------------
(Signature)
John A. Ustaszewski
Vice President and Chief Financial Officer
- -------------------------------------------------------------------------------
18.
DCB FINANCIAL CORP
CERTIFICATION
I, Jeffrey Benton, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DCB Financial Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employee who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 /s/ Jeffrey Benton
------------ ------------------
(Signature)
Jeffrey Benton
Title: President and Chief Executive Officer
- -------------------------------------------------------------------------------
19.
DCB FINANCIAL CORP
CERTIFICATION
I, John A. Ustaszewski, Vice President and Chief Financial Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of DCB Financial Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
d) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management
or other employee who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 /s/ John A. Ustaszewski
------------------ -------------------------
(Signature)
John A. Ustaszewski
Title: 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.
99.1 Certification pursuant to 18 U.S.C. 1350, as enacted Reference is hereby made on page 23.
Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
99.2 Certification pursuant to 18 U.S.C. 1350, as enacted Reference is hereby made on page 24.
Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
- -------------------------------------------------------------------------------
21.