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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 2004
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 X No
--------- ----------
As of August 6, 2004, the latest practicable date, 3,934,760 shares of the
registrant's no par value common stock were issued and outstanding.
DCB FINANCIAL CORP
FORM 10-Q
QUARTER ENDED JUNE 30, 2004
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements Page
----
Consolidated Balance Sheets................................................................................. 3
Consolidated Statements of 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................................................................................. 18
SIGNATURES ............................................................................................... 20
DCB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Item 1. Financial Statements
--------------------
June 30, December 31,
2004 2003
--------- ------------
(unaudited)
ASSETS
Cash and due from financial institutions $ 19,839 $ 20,349
Securities available for sale 98,466 108,547
Loans held for sale 995 --
Loans and leases 438,394 404,947
Less allowance for loan and lease losses (4,575) (4,331)
--------- ---------
Net loans and leases 433,819 400,616
Premises and equipment, net 9,358 9,947
Investment in unconsolidated affiliates 195 1,951
Accrued interest receivable and other assets 12,637 11,887
--------- ---------
Total assets $ 575,309 $ 553,297
========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 79,123 $ 78,477
Interest-bearing 358,455 363,875
--------- ---------
Total deposits 437,578 442,352
Federal funds purchased and other short-term borrowings 10,848 4,619
Federal Home Loan Bank advances 72,846 49,693
Accrued interest payable and other liabilities 2,460 6,944
--------- ---------
Total liabilities 523,732 503,608
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,780 3,780
Retained earnings 55,616 52,775
Treasury stock, 338,440 shares at June 30, 2004 and
December 31, 2003 (7,616) (7,616)
Accumulated other comprehensive income (loss) (203) 750
--------- ---------
Total shareholders' equity 51,577 49,689
--------- ---------
Total liabilities and shareholders' equity $ 575,309 $ 553,297
========= =========
See notes to the consolidated financial statements.
3.
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
-------- -------- -------- --------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 5,540 $ 5,706 $ 11,311 $ 11,459
Taxable securities 668 730 1,401 1,562
Tax-exempt securities 176 163 363 313
Federal funds sold and other 1 22 7 56
-------- -------- -------- --------
Total interest income 6,385 6,621 13,082 13,390
INTEREST EXPENSE
Deposits 1,150 1,635 2,389 3,478
Borrowings 649 224 1,209 433
-------- -------- -------- --------
Total interest expense 1,799 1,859 3,598 3,911
NET INTEREST INCOME 4,586 4,762 9,484 9,479
Provision for loan and lease losses 443 355 821 688
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES 4,143 4,407 8,663 8,791
NONINTEREST INCOME
Service charges 654 654 1,219 1,254
Trust department income 140 152 337 307
Net gains (losses) on sale of securities -- 4 (3) 17
Net gains (losses) on sale of assets (40) 293 (63) 297
Net gains on sale of loans 39 391 68 873
Net gain on sale of unconsolidated affiliate 2,638 -- 2,638 --
Cash management fees 131 114 255 264
Data processing servicing fees 68 112 131 235
Other 244 167 453 340
-------- -------- -------- --------
3,874 1,887 5,035 3,587
NONINTEREST EXPENSE
Salaries and other employee benefits 2,078 2,155 4,004 4,235
Occupancy and equipment 1,018 993 1,988 1,986
Professional services 74 340 139 410
Advertising 100 69 164 147
Postage, freight and courier 91 96 203 169
Supplies 88 83 123 119
State franchise taxes 137 121 264 241
Other 742 660 1,266 1,130
-------- -------- -------- --------
4,328 4,517 8,151 8,437
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 3,689 1,777 5,547 3,941
Federal Income tax expense 1,131 569 1,683 1,235
-------- -------- -------- --------
NET INCOME $ 2,558 $ 1,208 $ 3,864 $ 2,706
======== ======== ======== ========
Basic and diluted earnings $ 0.65 $ 0.31 $ 0.98 $ 0.67
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 Six Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
------- ------- ------- -------
Net income $ 2,558 $ 1,208 $ 3,864 $ 2,706
Less reclassification for realized (gains) losses
on sale of securities included in operations,
net of tax -- (3) 2 (11)
Unrealized losses on securities
available for sale, net of tax (1,169) (79) (955) (131)
------- ------- ------- -------
Comprehensive income $ 1,389 $ 1,126 $ 2,911 $ 2,564
======= ======= ======= =======
See notes to the consolidated financial statements.
5.
DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30,
--------
2004 2003
-------- --------
Gain on sale of unconsolidated affiliate $ (2,638) $ --
Increase (decrease) in accrued interest payable and
other liabilities (4,484) 5,147
Other operating activities 4,876 6,041
-------- --------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,246) 11,188
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Securities available for sale
Purchases (23,437) (34,055)
Maturities, principal payments and calls 10,378 25,056
Sales 21,091 14,158
Net change in loans (34,020) (17,064)
Proceeds from sale of real estate -- 340
Proceeds from sale of unconsolidated affiliate 4,394 --
Premises and equipment expenditures (255) (127)
-------- --------
Net cash flows used in investing activities (21,849) (11,692)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net change in deposits (4,774) 3,787
Net change in federal funds and other short-term borrowings 6,229 --
Proceed (repayment) of Federal Home Loan Bank advances 23,153 (234)
Purchase of treasury stock -- (5,540)
Sale of treasury stock -- 67
Cash dividends paid (1,023) (768)
-------- --------
Net cash provided by (used in) financing activities 23,585 (2,688)
-------- --------
Decrease in cash and cash equivalents (510) (3,192)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,349 32,503
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,839 $ 29,311
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest on deposits and borrowings $ 3,610 $ 3,963
Cash dividends declared but unpaid $ 626 $ 393
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 June 30,
2004, and its results of operations and cash flows for the three and six month
periods ended June 30, 2004 and 2003. 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, 2003, included in its 2003 Annual Report. Refer to
the accounting policies of the Corporation described in the Notes to
Consolidated Financial Statements contained in the Corporation's 2003 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 for the three and six months
ended June 30, 2004. The weighted average number of common shares outstanding
was 3,966,049 and 4,066,646 for the three and six months ended June 30, 2003.
The Corporation has recently introduced and adopted a long-term stock option
plan, which calls for the issuance of up to 300,000 shares. As of June 30, 2004,
14,917 shares have been granted, subject to the five year vesting schedule. Fair
value of granted options are not disclosed due to materiality. There is no pro
forma effect on earnings and earnings per share.
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 of Notes to Consolidated Financial Statements contained in
the Corporation's 2003 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
---- ----- ------ -----
--------------------June 30, 2004-----------------
U.S. government agencies $ 27,638 $ 81 $ (311) $ 27,408
States and political subdivisions 19,742 296 (187) 19,851
Corporate bonds 8,143 5 (93) 8,055
Mortgage-backed and related securities 40,751 366 (496) 40,621
---------- ---------- ----------- ----------
Total debt securities 96,274 748 (1,087) 95,935
Equity securities 2,499 32 -- 2,531
---------- ---------- ---------- ----------
Total securities available for sale $ 98,773 $ 780 $ (1,087) $ 98,466
========== ========== =========== ==========
The table below indicates the length of time individual securities have been in
a continuous unrealized loss position at June 30, 2004:
(Less than 12 months) (12 months or longer) Total
Description of Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized
Securities investments value losses investments value losses investments value losses
- ---------- ----------- ----- ---------- ----------- ----- ---------- ----------- ----- ----------
(Dollars in thousands)
U.S. Government and
agency obligations 21 $ 18,700 $ (259) 2 $1,483 $(51) 23 $ 20,183 $ (311)
State and municipal
obligations 15 6,305 (165) 1 501 (23) 16 6,806 (187)
Corporate bonds 2 7,920 (93) -- -- -- 2 7,920 (93)
Mortgage-backed
securities 70 22,470 (445) 4 2,053 (51) 74 24,523 (496)
-- ------ ----- ---- ------- ------ -- ------ -----
Total temporarily
impaired securities 108 $55,395 $(962) 7 $ 4,037 $ (125) 115 $59,432 $(1,087)
=== ======= ====== ==== ======= ======= === ======= ========
Management has the intent and ability to hold these securities for the
foreseeable future and the decline in the fair value is primarily due to
recent increases in market interest rates. The fair values are expected to
recover as securities approach maturity dates.
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") or the Federal
Home Loan Mortgage Corporation ("FHLMC").
At June 30, 2004, there were no holdings of securities of any one issuer, other
than the U.S. government and its agencies, in an amount greater than 10% of
shareholders' equity.
The amortized cost and estimated fair value of debt securities at June 30, 2004,
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 $ 1,238 $ 1,249
Due from one to five years 10,961 10,916
Due from five to ten years 17,645 17,508
Due after ten years 25,679 25,641
Mortgage-backed and related securities 40,751 40,621
---------- ----------
$ 96,274 $ 95,935
========== ==========
9.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 3 - LOANS AND LEASES
Loans and leases were as follows:
June 30,
2004
-----------
Commercial and industrial $ 49,722
Commercial real estate 160,821
Residential real estate and home equity 148,659
Real estate construction and land development 31,489
Consumer and credit card 44,649
Lease financing, net 2,489
-----------
437,829
Add (deduct): Net deferred loan origination costs 747
Unearned income on leases (182)
-----------
Total loans receivable $ 438,394
===========
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses was as follows:
Three months ended Six months ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Beginning balance of period $ 4,411 $ 4,226 $ 4,331 $ 4,094
Provision for loan losses 443 355 821 688
Loans charged off (332) (297) (688) (554)
Recoveries 53 18 111 74
------------ ------------ ------------ ------------
Balance at end of period $ 4,575 $ 4,302 $ 4,575 $ 4,302
============ ============ ============ ============
Nonperforming loans were as follows:
June 30, December 31,
2004 2003
---- ----
Loans past due 90 days or more and still accruing $ 1,392 $ 1,252
Nonaccrual loans 1,859 1,614
Impaired loans (most of which are included in nonperforming loans above) were as
follows:
Period-end loans with no allocated allowance for loan losses $ -- $ --
Period-end loans with allocated allowance for loan losses 442 1,813
---------------- -----------------
Total $ 442 $ 1,813
================ =================
Amount of the allowance for loan losses allocated $ 207 $ 580
================ =================
Average of impaired loans during the period $ 547 $ 2,731
================ =================
10.
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 June 30, 2004,
compared to December 31, 2003, and the consolidated results of operations for
the three and six months ended June 30, 2004, compared to the same periods in
2003. 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 $575,309 at June 30, 2004, compared to $553,297
at December 31, 2003, an increase of $22,012, or 3.98%. The increase is
attributed to the Corporation's ability to continue to capture a growing share
of the economic development activity with it's geographic region. This growth is
mainly attributable to the increases in commercial and commercial real estate,
in addition to residential real estate growth.
Cash and cash equivalents decreased $510 from December 31, 2003 to June 30,
2004. This decline is mainly due to the use of cash and cash equivalents to fund
loan growth. Total securities decreased $10,081, or 9.29%, from $108,547 at
December 31, 2003 to $98,466 at June 30, 2004. 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.
11.
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Mortgage-backed securities include Federal Home Loan Mortgage Corporation
("FHLMC"), Government National Mortgage Association ("GNMA") and Federal
National Mortgage Association ("FNMA") participation certificates.
At June 30, 2004, all securities were designated as available for sale.
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 $40,621 at June 30, 2004,
provides the Corporation with a constant cash flow stream from principal
repayments and interest payments. The Corporation held no structured notes
during any period presented.
Total loans and leases increased $33,447, or 8.26%, to $438,394 at June 30, 2004
from $404,947 at December 31, 2003. The increase is attributed mainly to the
continued growth of commercial and residential real estate and land development,
which were partially off set by a general decline in various industrial and
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 $4,774, or 1.08%, to $437,578 at June 30, 2004 from
$442,352 at December 31, 2003. This is mainly due to the reduction of money
market deposit account balances which management believes is due to the
competitive pricing on deposits in the Bank's marketplace. Noninterest-bearing
deposits increased $646, or .82%, while interest-bearing deposits decreased
$5,420, or 1.49%. Because of the decline in overall deposits, the Corporation
has used other borrowings, generally FHLB borrowings, to fund its loan growth.
Continued reliance on outside funding could increase the Corporation's overall
cost of funds.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JUNE 30, 2004 AND JUNE 30, 2003
NET INCOME. Net income for the three months ended June 30, 2004 totaled $2,558,
compared to net income of $1,208 for the same period in 2003. Earnings per share
was $.65 for the three months ended June 30, 2004 compared to $.31 for the three
months ended June 30, 2003. The increase in earnings is mainly attributed to the
sale of the Corporation's investment in ProCentury, which resulted in a pre-tax
gain of $2.6 million.
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 $4,586 for the three months ended June 30, 2004,
compared to $4,762 for the same period in 2003. The $176 decrease in the second
quarter 2004 compared to 2003 was mainly attributed to a depressed interest rate
environment that has caused the spreads earned on the loan and investment
portfolios to 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 totaled $443 for the three months ended June 30, 2004, compared to
$355 for the same period in 2003. The growth in the provision is reflective of
the overall growth in the Corporation's loan portfolio. Despite the strong loan
growth, credit quality showed improvement. Non-accrual loans declined to $1.86
million at June 30, 2004 from $2.85 million at the end of the second quarter
2003. Net charge-offs for the three months ended June 30, 2004 and 2003 were
$279. Annualized net charge-offs
12.
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
for the three months ended June 30, 2004 were 26 basis points compared to 30
basis points for the same period in 2003. Delinquent loans over thirty days
remained stable period to period, increasing slightly to 2.0% at June 30, 2004
from 1.92% at June 30, 2003. Management will continue to monitor the credit
quality of the lending portfolio and will recognize additional provisions in the
future to maintain the allowance for loan and lease losses at an appropriate
level. The allowance for loan and lease losses totaled $4,575, or 1.04% of total
loans and leases at June 30, 2004, compared to $4,331, or 1.07% of total loans
and leases at December 31, 2003.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$1,987, or 105.30%, for the three months ended June 30, 2004, compared to the
same period in 2003. The increase was mainly a result of the sale of the
organization's entire investment in ProCentury Corporation, a specialty property
and casualty insurance holding company based in Westerville, Ohio, as part of
ProCentury's initial public offering (IPO) on April 20, 2004. The Corporation
originally bought into ProCentury as a passive investment to monitor and review
the revenue stream and various products and services. The gain recognized on the
sale of ProCentury investment was partially offset by a decrease in the volume
of loans sold in the secondary market, which is mainly attributed to retaining
these loans within the retail portfolios. In addition, transactional volume from
the Bank's retail products remained at or below the previous year's levels.
Total noninterest expense decreased $189, or 4.18%, for the three months ended
June 30, 2004, compared to the same period in 2003. The decrease was primarily
the result of decreases in salaries and employee benefits and professional and
legal fees. Management has reduced staff through attrition, realignment and
early retirement opportunities in order to reduce overall salary and benefit
costs. The reduction in professional and legal fees is mainly attributed to
non-recurring legal costs associated with shareholder matters in the second
quarter 2003.
INCOME TAXES. The provision for income taxes totaled $1,131, for an effective
tax rate of 30.66%, for the three months ended June 30, 2004 and $569, for an
effective tax rate of 32.02%, for the three months ended June 30, 2003. As
stated previously, this decline in effective tax rate is primarily attributable
to the increase in tax-exempt municipal security holdings and an increase in
bank-owned life insurance contracts, whose earnings stream is tax-exempt.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 2004 AND JUNE 30, 2003
NET INCOME. Net income for the six months ended June 30, 2004 totaled $3,864,
compared to net income of $2,706 for the same period in 2003. Earnings per share
was $.98 for the six months ended June 30, 2004 compared to $.67 for the six
months ended June 30, 2003. The increase in earnings is mainly attributed to the
sale of the Corporation's investment in ProCentury.
NET INTEREST INCOME. Net interest income was $9,484 for the six months ended
June 30, 2004, compared to $9,479 for the same period in 2003. The nominal $5
increase for the six months ended June 30, 2004, compared to the same period in
2003 was mainly attributed to a sluggish interest rate environment. The
Corporation's interest bearing assets have increased year-to-year, but declining
margins have reduced overall net interest income. This margin reduction is
generally attributed to the current interest rate environment where loans have
been repricing downward at a faster pace than deposit costs.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses totaled $821 for the six months ended June 30, 2004, compared to
$688 for the same period in 2003. The growth in the provision is reflective of
the overall growth in the Corporation's loan portfolio, and to a lesser extent,
the increase in net-charge offs between the two periods. Net charge-offs for the
six months ended June 30, 2004 were $577 compared to net charge-offs
13.
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
of $480 for the same period in 2003. Management will continue to monitor the
credit quality of the lending portfolio and will recognize additional provisions
in the future to maintain the allowance for loan and lease losses at an
appropriate level. The allowance for loan and lease losses totaled $4,575, or
1.04% of total loans and leases at June 30, 2004, compared to $4,331, or 1.07%
of total loans and leases at December 31, 2003.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$1,448, or 40.38%, for the six months ended June 30, 2004, compared to the same
period in 2003. The increase was mainly a result of the sale of the
organization's entire investment in ProCentury Corporation, a specialty property
and casualty insurance holding company based in Westerville, Ohio, as part of
ProCentury's initial public offering (IPO) on April 20, 2004. The gain totaling
$2.6 million recognized on the sale of ProCentury investment was offset by a
decrease in the volume of loans sold in the secondary market, which is mainly
attributed to retaining these loans within the retail portfolios. In addition,
transactional volume from the Bank's retail products remained at or below the
previous year's levels.
Total noninterest expense decreased $286, or 3.39%, for the six months ended
June 30, 2004, compared to the same period in 2003. The decrease was primarily
the result of decreases in salaries and employee benefits, professional services
and shareholder matters. Management has reduced staff through attrition,
realignment and early retirement opportunities in order to reduce overall salary
and benefit costs.
INCOME TAXES. The provision for income taxes totaled $1,683, for an effective
tax rate of 30.34%, for the six months ended June 30, 2004 and $1,235, for an
effective tax rate of 31.34%, for the six months ended June 30, 2003. The
decline in the effective tax rate is attributed to an increase in tax-exempt
revenue derived from tax exempt securities and the earnings on bank-owned life
insurance.
LIQUIDITY
Liquidity is the ability of the Corporation to fund customers' needs for
borrowing and deposit withdrawals. The purpose of liquidity management is to
assure sufficient cash flow to meet all of the financial commitments and to
capitalize on opportunities for business expansion. This ability depends on the
financial strength, asset quality and 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 $510, or 2.51%, to $19,839 at June 30, 2004
compared to $20,349 at December 31, 2003. Cash and equivalents represented 3.45%
of total assets at June 30, 2004 and 3.68% of total assets at December 31, 2003.
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. The
Corporation also has the ability to issue brokered time deposits to supplement
deposits raised from its customer base. 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.
14.
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
CAPITAL RESOURCES
Total shareholders' equity increased $1,888 between December 31, 2003 and June
30, 2004. The increase was primarily due to period earnings of $3,864, partially
offset by $953 after-tax decrease in accumulated other comprehensive income and
the declaration of $1,023 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 11.86% at June 30, 2004,
while the Tier 1 risk-based capital ratio was 10.90%. 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 8.98% at June 30, 2004.
The following table sets forth the Corporation's obligations and commitments to
make future payments under contract as of June 30, 2003.
PAYMENT DUE BY YEAR
CONTRACTUAL OBLIGATIONS
LESS THAN 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
Long-Term Debt Obligations $72,846 $ 8,000 $-- $ 5,947 $ 58,899
Capital Lease Obligations -- -- -- -- --
Operating Lease Obligations 5,278 372 817 652 3,437
Loan and Line of Credit
Commitments 87,407 87,407 -- -- --
Other Long-Term Liabilities
Reflected on the Corporation's
Balance Sheet under GAAP -- -- -- -- --
--------- -------- ----- ------- --------
Total Contractual Obligations $ 165,531 $ 95,779 $ 817 $ 6,599 $ 62,336
========= ======== ===== ======= ========
In the opinion of management, all loan commitments equal or exceed market rates
of interest.
15.
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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 2003 Annual Report includes a table depicting the changes in
the Corporation's interest rate risk as of December 31, 2003, 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, 2003 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. The Corporation can utilize various tools to reduce
exposure to changes in interest rates including offering floating versus fixed
rate products, or utilizing interest rate swaps. 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.
16.
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 4. Controls and Procedures
- --------------------------------
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
June 30, 2004, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of June 30, 2004,
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended June 30, 2004, 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 June 30, 2004
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
At the Annual Meeting of Shareholders held on May 20, 2004, there
were 2,778,965 voting shares present in person or by proxy, which
represented 70% of the Corporation's outstanding shares of
3,934,760 as of the record date for the meeting. At the Annual
Meeting, two 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
four (4 ) directors to serve for a term of three (3) years. The
Corporation's nominees for director were: Merrill L. Kaufman,
Terry M. Kramer, Edward Powers, and Donald J. Wolf, 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 withheld
Merril L. Kaufman 2,756,605 22,359
Terry M. Kramer 2,768,669 10,295
Edward Powers 2,760,272 18,692
Donald J. Wolf 2,766,089 12,875
Directors continuing in office are: Jeffrey T. Benton, Jerome J.
Harmeyer, Vicki Lewis, G. William Parker, William R. Oberfield,
Gary M. Skinner, and Adam Stevenson.
Issue 2 - Long-Term Stock Incentive Plan: Adoption of the
Company's long term stock incentive plan.
Votes for Votes against
2,115,887 154,223
18.
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended June 30, 2004
PART II - OTHER INFORMATION
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits - The following exhibits are filed as a part of this
report:
Exhibit No. Exhibit
----------- -------
3.1 Amended and Restated Articles of Incorporation of DCB
Financial Corp, incorporated by reference to the
Company's Report on Form 10-Q filed with the
Commission on November 14, 2003.
3.2 Amended and Restated Articles of Incorporation of DCB
Financial Corp, incorporated by reference to the
Company's Report on Form 10-Q filed with the
Commission on November 14, 2003.
4. Instruments Defining the Rights of Security Holders.
(See Exhibits 3.1 and 3.2.)
10 DCB Financial Corp 2004 Long Term Stock Incentive
Plan, incorporated by reference to Appendix D of the
Company's Definitive Proxy Statement filed with the
Commission on April 14, 2004.
31.1 Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification pursuant to 18 U.S.C. 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of
2002
(a) Reports on Form 8-K - A report on Form 8-K was filed on April 22, 2004
(report date: 4/22/04) - first quarter 2004 earnings release.
(b) Reports on Form 8-K - A report on Form 8-K was filed on April 26, 2004
(report date: 4/26/04) - Corporation's sale of its investment in ProCentury
Corporation.
(c) Reports on Form 8-K- A report on Form 8-K was filed on May 20, 2004 (report
date: 5/20/04) - Corporation's special dividend to shareholders.
(d) Reports on Form 8-K- A report on Form 8-K was filed on June 18, 2004
(report date: 6/18/04) - Corporations long term incentive plan.
19.
DCB FINANCIAL CORP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DCB FINANCIAL CORP.
-------------------
(Registrant)
Date: August 6, 2004 /s/ Jeffrey Benton
-------------- --------------------
(Signature)
Jeffrey Benton
President and Chief Executive Officer
Date: August 6, 2004 /s/ John A. Ustaszewski
-------------- -----------------------
(Signature)
John A. Ustaszewski
Vice President and Chief Financial Officer
20.
DCB FINANCIAL CORP
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
3.1 Amended and Restated Articles of Incorporation of DCB NA
Financial Corp, incorporated by reference to the Company's Report
on Form 10-Q filed with the Commission on November 14, 2003.
3.2 Amended and Restated Articles of Incorporation of DCB NA
Financial Corp, incorporated by reference to the Company's Report
on Form 10-Q filed with the Commission on November 14, 2003.
4 Instruments Defining the Rights of Security NA
Holders. (See Exhibits 3.1 and 3.2.)
10 DCB Financial Corp 2004 Long Term Stock Incentive NA
Plan, incorporated by reference to Appendix D of
the Company's Definitive Proxy Statement filed with
the Commission on April 14, 2004.
31.1 Certification of Chief Executive Officer pursuant Page 22
to section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Page 23
section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, as enacted Page 24
Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification pursuant to 18 U.S.C. 1350, as enacted Page 25
Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
21.