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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: SEPTEMBER 30, 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 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 November 7, 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 SEPTEMBER 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
Consolidated Statements of Comprehensive Income............................. 5
Condensed Consolidated Statements of Cash Flows............................. 6
Notes to the Condensed 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................................................ 19
SIGNATURES.................................................................. 22
DCB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
Item 1. Financial Statements
September 30, December 31,
2003 2002
----------- -----------
(unaudited)
ASSETS
Cash and due from financial institutions $ 17,243 $ 28,622
Federal funds sold 27,967 3,881
----------- -----------
Total cash and cash equivalents 45,210 32,503
Securities available for sale 90,380 96,477
Loans held for sale 239 6,442
Loans and leases receivable 395,066 370,581
Less allowance for loan and lease losses (4,255) (4,094)
----------- -----------
Net loans and leases receivable 390,811 366,487
Premises and equipment, net 11,427 12,615
Investment in unconsolidated affiliates 1,951 1,951
Accrued interest receivable and other assets 6,229 6,523
----------- -----------
Total assets $ 546,247 $ 522,998
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 73,712 $ 73,531
Interest-bearing 370,960 365,092
----------- -----------
Total deposits 444,672 438,623
Federal funds purchased and other short-term borrowings 680 2,000
Federal Home Loan Bank advances 45,240 27,802
Accrued interest payable and other liabilities 6,815 2,045
----------- -----------
Total liabilities 497,407 470,470
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued at September 30, 2003 and December 31, 2002 3,780 3,780
Retained earnings 51,862 49,303
Treasury stock, 338,440 shares at September 30, 2003 and
104,966 shares at December 31, 2002, at cost (7,621) (2,152)
Accumulated other comprehensive income 819 1,597
----------- -----------
Total shareholders' equity 48,840 52,528
----------- -----------
Total liabilities and shareholders' equity $ 546,247 $ 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 Nine Months Ended
September 30, September 30,
------------------ -------------------
2003 2002 2003 2002
------ ------- ------- -------
INTEREST AND DIVIDEND INCOME
Loans, including fees $5,735 $ 6,263 $17,264 $18,695
Taxable securities 640 1,309 2,202 4,311
Tax-exempt securities 180 156 493 443
Federal funds sold and other 47 11 102 41
------ ------- ------- -------
Total interest income 6,602 7,739 20,061 23,490
INTEREST EXPENSE
Deposits 1,731 2,215 5,210 6,775
Borrowings 372 333 832 975
------ ------- ------- -------
Total interest expense 2,103 2,548 6,042 7,750
NET INTEREST INCOME 4,499 5,191 14,019 15,740
Provision for loan and lease losses 375 900 1,063 1,700
------ ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES 4,124 4,291 12,956 14,040
NONINTEREST INCOME
Service charges 825 782 2,301 2,238
Trust department income 163 118 470 419
Net gains on sales of securities 29 11 46 26
Net gains on sale of real estate -- -- 293 --
Net gains on sale of loans 103 242 980 622
Cash management fees 156 122 397 382
Data processing servicing fees 75 100 311 283
Other 203 170 591 517
------ ------- ------- -------
1,554 1,545 5,389 4,487
NONINTEREST EXPENSE
Salaries and other employee benefits 1,936 2,187 6,142 6,563
Occupancy and equipment 1,052 1,026 2,997 2,865
Professional services 114 182 515 415
Advertising 92 103 236 301
Postage, freight and courier 94 108 263 359
Supplies 62 87 162 221
State franchise taxes 121 156 363 439
Other 726 847 2,245 2,267
------ ------- ------- -------
4,197 4,696 12,923 13,430
------ ------- ------- -------
INCOME BEFORE INCOME TAXES 1,481 1,140 5,422 5,097
Income tax expense 469 383 1,704 1,717
------ ------- ------- -------
NET INCOME $1,012 $ 757 $ 3,718 $ 3,380
====== ======= ======= =======
Basic and diluted earnings $ 0.26 $ 0.18 $ 0.93 $ 0.81
per common share ====== ======= ======= =======
See notes to the consolidated financial statements.
4
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income $ 1,012 $ 757 $ 3,718 $ 3,380
Less reclassification for realized gains on
sale of securities included in operations,
net of tax (19) (7) (30) (17)
Unrealized gains (losses) on securities
available for sale, net of tax (617) 1,032 (748) 1,234
------- ------- ------- -------
Comprehensive income $ 376 $ 1,782 $ 2,940 $ 4,597
======= ======= ======= =======
See notes to the consolidated financial statements.
5
DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
----------------------
2003 2002
-------- --------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 17,447 $ 3,825
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Securities available for sale
Purchases (57,866) (13,695)
Maturities, principal payments and calls 38,730 13,793
Sales 23,163 4,169
Securities held to maturity
Purchases -- (1,237)
Maturities, principal payments and calls -- 7,736
Sales -- 809
Net change in loans (24,407) (14,654)
Proceeds from sale of real estate 340 --
Premises and equipment expenditures (229) (1,817)
-------- --------
Net cash flows used in investing activities (20,269) (4,896)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net change in deposits 6,049 4,719
Net change in federal funds and other short-term borrowings (1,320) (2,173)
Proceeds from Federal Home Loan Bank advances 32,657 12,000
Repayment of Federal Home Loan Bank advances (15,219) (2,793)
Purchase of treasury stock, net (5,473) (201)
Cash dividends paid (1,165) (1,016)
-------- --------
Net cash provided by financing activities 15,529 10,536
-------- --------
Increase in cash and cash equivalents 12,707 9,465
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 32,503 17,945
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,210 $ 27,410
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest on deposits and borrowings $ 5,986 $ 7,780
Income taxes $ 712 $ 2,583
See notes to the consolidated financial statements.
6
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 September
30, 2003, and its results of operations and cash flows for the three and nine
month periods ended September 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 for 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"). All significant intercompany accounts and transactions
have been eliminated in consolidation. Management considers the Corporation to
operate within one business 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 3,934,760 and 4,022,201 for the three
and nine months ended September 30, 2003. The weighted average number of common
shares outstanding was 4,168,234 and 4,172,872 for the three and nine months
ended September 30, 2002. The Corporation had no potentially dilutive securities
during the three and nine month periods ending September 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 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
--------- ---------- ---------- ---------
September 30, 2003
U.S. government agencies $27,781 $ 330 $ (60) $28,051
Corporate bonds 235 11 (1) 245
States and political subdivisions 20,417 566 (132) 20,851
Mortgage-backed and related securities 38,301 723 (215) 38,809
------- ------ ----- -------
Total debt securities 86,734 1,630 (408) 87,956
Other securities 2,406 18 -- 2,424
------- ------ ----- -------
Total securities available for sale $89,140 $1,648 $(408) $90,380
======= ====== ===== =======
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 FINANCIAL CORP
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 September 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 September 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 $ 2,405 $ 2,450
Due from one to five years 4,010 4,124
Due from five to ten years 21,727 21,913
Due after ten years 20,291 20,660
Mortgage-backed and related securities 38,301 38,809
------- -------
$86,734 $87,956
======= =======
9
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 3 - LOANS AND LEASES RECEIVABLE
Loans and leases receivable were as follows:
September 30, December 31,
2003 2002
------------ -----------
Commercial and industrial $ 56,100 $ 45,543
Commercial real estate 141,553 144,646
Residential real estate and home equity 112,678 87,548
Real estate construction and land development 32,630 37,603
Consumer and credit card 46,830 48,409
Lease financing, net 4,493 6,412
------------ -----------
394,284 370,161
Add (deduct): Net deferred loan origination costs 1,176 1,132
Unearned income on leases (394) (712)
------------ -----------
Total loans and leases receivable $ 395,066 $ 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 Nine months ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- -------
Beginning balance $ 4,302 $ 3,793 $ 4,094 $ 3,596
Provision for loan losses 375 900 1,063 1,700
Loans charged off (482) (1,401) (1,035) (2,069)
Recoveries 60 38 133 103
------- ------- ------- -------
Balance -- September 30 $ 4,255 $ 3,330 $ 4,255 $ 3,330
======= ======= ======= =======
Nonperforming loans were as follows:
September 30, December 31,
2003 2002
------------ -----------
Loans past due 90 days or more and still accruing $ 980 $ 187
Nonaccrual loans 2,480 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 2,193 3,735
------ ------
Total $2,193 $4,199
====== ======
Amount of the allowance for loan losses allocated $ 797 $1,088
====== ======
Average of impaired loans during the period $3,134 $5,204
====== ======
10
DCB FINANCIAL 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 September 30,
2003 compared to December 31, 2002, and the consolidated results of operations
for the three and nine months ended September 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 $546,247 at September 30, 2003, compared to
$522,998 at December 31, 2002, an increase of $23,249, or 4.45%. The increase in
assets was primarily the results of an increase in loans and leases receivable
and the Corporation's cash and cash equivalents position during the period,
partially offset by a decrease in investment securities. Cash and cash
equivalents increased $12,707 from December 31, 2002 to September 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 $6,097, or 6.32%, from $96,477 at December 31, 2002
to $90,380 at September 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 September 30, 2003
totaled $90,380, 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 $38,809 at September 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 $24,485, or 6.61%, from $370,581
at December 31, 2002 to $395,066 at September 30, 2003. The increase is
attributed mainly to the growth of residential real estate loans. During the
quarter management began sustaining a higher percentage of originated loans in
its portfolio, instead of selling in the secondary market. 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 $6,049, or 1.38%, from $438,623 at December 31, 2002 to
$444,672 at September 30, 2003. The increase in deposits is primarily attributed
to noninterest-bearing deposits increasing $181, or .25%, and by
interest-bearing deposits increasing $5,868, or 1.61%. The increase in
interest-bearing deposits was primarily in the Corporation's new platinum
savings plus money market account. This account was to offer a stronger line up
of corporate products, and as an alternative to the prime time account.
Additionally, the organization has increased its borrowing in FHLB loans to
augment the deposit base in order to fund continued loan growth.
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 SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
NET INCOME. Net income for the three months ended September 30, 2003 totaled
$1,012, compared to net income of $757 for the same period in 2002. Earnings per
share was $.26 for the three months ended September 30, 2003 compared to $.18
for the three months ended September 30, 2002. This increase in net income is
mainly attributed to increased non-interest income coupled with declines in
noninterest expense and the provision for loan losses, partially offset by a
decline in net interest income.
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 $4,499 for the three months ended September 30, 2003,
compared to $5,191 for the same period in 2002. The $692 decrease in the third
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 $375 for the three months ended
September 30, 2003, compared to $900 for the same period in 2002. The decrease
in the provision was mainly due to a decrease in net charge-offs compared to the
prior year quarter. Net charge-offs for the three months ended September 30,
2003 were $422 compared to net charge-offs of $1,363 for the same quarter in
2002. The charge offs in the third quarter 2003 consisted of a normalized flow
of uncollectiable credits. 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 September 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 $4,255, or 1.08% of total loans
and leases, at September 30, 2003 compared to $4,094, or 1.10% of total loans
and leases, at December 31, 2002. The allowance was 123% of nonperforming loans
at September 30, 2003, an increase 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
$9, or .58%, for the three months ended September 30, 2003, compared to the same
period in 2002. The slight increase was the result of an increase in
transactional volume from the Bank's retail products, offset by a decline in the
volume of loans sold in the secondary market, which is mainly attributed to the
loans sustained in the portfolio. A continued decline in mortgage activities
reduced opportunities in the secondary market.
Total noninterest expense decreased $499, or 10.63%, for the three months ended
September 30, 2003, compared to the same period in 2002. The decrease was
primarily the result of a decrease in professional and legal fees related to
shareholder matters and a decreases in various noninterest expenses. During
2003, the Corporation also began introducing various salary and benefit expense
reductions. The results of these initiatives was the reduction of overall
organization headcount reflected in a reduction of $251 thousand in salaries and
other employment benefits for the three months ended September 30, 2003.
INCOME TAXES. The provision for income taxes totaled $469, for an effective tax
rate of 31.67%, for the three months ended September 30, 2003 and $383, for an
effective tax rate of 33.60%, for the three months ended September 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 NINE MONTHS
ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
NET INCOME. Net income for the nine months ended September 30, 2003 totaled
$3,718, compared to net income of $3,380 for the same period in 2002. Earnings
per share was $.93 for the nine months ended September 30, 2003 compared to $.81
for the nine months ended September 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 $14,019 for the nine months ended
September 30, 2003, compared to $15,740 for the same period in 2002. The $1,721
decrease for the nine months ended September 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. Also, during the third quarter, the Corporation introduced a new
platinum savings plus money market account. During the introductory period,
which encompassed the entire third quarter, a higher introductory rate was
offered as a means of attracting additional deposits. This further reduced net
interest income. This introductory period will end during the fourth quarter
2003.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses totaled $1,063 for the nine months ended September 30, 2003,
compared to $1,700 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 $2,480 at September 30, 2003. Net
charge-offs for the nine months ended September 30, 2003 were $902 compared to
net charge-offs of $1,966 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, but also included
charges from defaulted commercial loans that have now completed workout
activities.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$902, or 20.10%, for the nine months ended September 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 compared to the
prior year. 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 decreased $507, or 3.78%, for the nine months ended
September 30, 2003, compared to the same period in 2002. The decrease was
primarily the result of a decrease in professional and legal fees related to
shareholder matters and a decline in planned salaries and benefits. During 2003,
the Corporation also began introducing various salary and benefit expense
reductions. The results of these initiatives was the reduction of overall
organization headcount reflected in a reduction of $251 thousand in salaries and
other employment benefits for the three months ended September 30, 2003.
INCOME TAXES. The provision for income taxes totaled $1,704, for an effective
tax rate of 31.43%, for the nine months ended September 30, 2003 and $1,717, for
an effective tax rate of 33.69%, for the nine months ended September 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.
14
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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,
and has borrowing availability from a number of regional correspondent banks.
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 increased $12,707, or 39.09%, to $45,210 at September
30, 2003 compared to $32,503 at December 31, 2002. Cash and equivalents
represented 8.28% of total assets at September 30, 2003 and 6.21% 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 $3,688 between December 31, 2002 and
September 30, 2003. The reduction was primarily due to the Corporation's
purchase of treasury shares at a recorded fair value of $5,473, a $778 after-tax
reduction in accumulated other comprehensive income and the declaration of
$1,165 in dividends, all of which were partially offset by period earnings of
$3,718.
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 11.79% at September 30,
2003, while the Tier 1 risk-based capital ratio was 10.83%. 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 9.03% at September 30, 2003.
IMPACT OF NEW ACCOUNTING STANDARDS
15
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 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 if 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 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 September 30, 2003 are $2.7
million, which expire through September 10, 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
16
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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.
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
September 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
September 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 September 30, 2003, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
17
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended September 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:
On July 8, 2003, the Company's shareholders amended the Company's
Articles of Incorporation to eliminate a shareholder's right to
vote his or her common shares cumulatively in the election of the
Company's directors.
Other amendments to the Company's Articles of Incorporation and
Code of Regulations that were also adopted at that time are
discussed under Item 4.
Copies of the Company's Amended and Restated Articles of
Incorporation and Amended and Restated Code of Regulations are
attached as Exhibits 3.1 and 3.2, respectively.
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:
At the Annual Meeting of Shareholders held on July 8, 2003, there
were 2,814,549 voting shares present in person or by proxy, which
represented 71% of the Corporation's outstanding shares of
3,934,760 as of the record date for the meeting. At the Annual
Meeting, six proposals were submitted to the shareholders for a
vote. First, the shareholders of the Corporation were asked to
consider the Corporation's nominees for directors and to elect
three (3) directors to serve for a term of three (3) years. The
Corporation's nominees for director were: Jeffrey Benton,
G.William Parker, and Gary M. Skinner, each of whom were elected.
The results of shareholder voting are as follows on all these
matters:
Issue 1 - Election of Directors:
Director Votes for Votes against
Jeffrey T. Benton 2,759,082 14,350
G.William Parker 2,728,021 45,411
Gary M. Skinner 2,728,436 44,996
Directors continuing in office are: C. William Bonner, Merrill
L. Kaufman, Terry M. Kramer, Edward A. Powers, Jerome J.
Harmeyer, Vicki Lewis, and Adam Stevenson.
Issue 2 - Authorization of Preferred Shares: To approve amending
and restating the Company's Articles of Incorporation to provide
for 2,000,000 authorized preferred shares.
Votes for 2,040,268 Votes against 318,073
Issue 3 - Elimination of Cumulative Voting: To approve amending
and restating the Company's Articles of Incorporation to
eliminate the right of cumulative voting in the election of
directors.
Votes for 2,214,955 Votes against 187,480
18
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended September 30, 2003
PART II - OTHER INFORMATION
Issue 4 - Opting out of the Control Share Acquisition Statue: To
approve amending the Articles of Incorporation of the Company to
choose that the provisions of Section 1701.831 of the Ohio
Revised Code, the control share acquisition statute not be
applicable to the Company.
Votes for 2,190,853 Votes against 183,982
Issue 5 -- Technical Revisions to the Articles of Incorporation:
To approve amending and restating the Company's Articles of
Incorporation, to make certain technical changes and corrections.
Votes for 2,569,640 Votes against 179,544
Issue 6 -- Amendment and Restatement of the Code of Regulations:
To approve amending and restating the Corporation's Code of
Regulations, including (a) to permit shareholders to remove a
director only for cause, (b) to require shareholders to provide
notice of proposals in advance of shareholder meetings, (c) to
increase the number of shareholders required to call a special
meeting to those holding fifty percent of the outstanding shares,
and (d) to modify the manner for amendment of the Code of
Regulations.
Votes for 2,190,311 Votes against 167,266
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.
3.2 Amended and Restated Code of Regulations of DCB Financial
Corp.
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
19
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended September 30, 2003
PART II - OTHER INFORMATION
Exhibit No. Exhibit
----------- -------
32.2 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 July
22, 2003 (report date: 7/22/03) - second quarter 2003 earnings
release.
20
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: November 7, 2003 /s/ Jeffrey Benton
----------------- ------------------
(Signature)
Jeffrey T. Benton
President and Chief Executive Officer
Date: November 7, 2003 /s/ John A. Ustaszewski
---------------- ------------------------------------------
(Signature)
John A. Ustaszewski
Vice President and Chief Financial Officer
21
DCB FINANCIAL CORP
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
3.1 Amended and Restated Articles of Incorporation of Page 24
DCB Financial Corp.
3.2 Amended and Restated Code of Regulations of Page 32
DCB Financial Corp.
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 34
to section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Page 35
section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, as enacted Page 36
Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification pursuant to 18 U.S.C. 1350, as enacted Page 37
Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
22