Attached files
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EX-31.1 - EXHIBIT 31.1 - DCB FINANCIAL CORP | c17344exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - DCB FINANCIAL CORP | c17344exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - DCB FINANCIAL CORP | c17344exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - DCB FINANCIAL CORP | c17344exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: MARCH 31, 2011
OR
o | 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)
(Address of principal executive offices)
(740) 657-7000
(Registrants telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filers o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2).
Yes o No þ
As of May 7, 2011, the latest practicable date, 3,717,385 shares of the registrants no par value
common stock were issued and outstanding.
DCB FINANCIAL CORP
FORM 10-Q
For the Three Month Periods Ended March 31, 2011 and 2010
For the Three Month Periods Ended March 31, 2011 and 2010
Table of Contents
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29 | ||||||||
34 | ||||||||
35 | ||||||||
36 | ||||||||
38 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
DCB FINANCIAL CORP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
Item 1. | Financial Statements |
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Cash and due from financial institutions |
$ | 10,461 | $ | 10,024 | ||||
Interest-bearing deposits |
64,714 | 23,497 | ||||||
Total cash and cash equivalents |
75,175 | 33,521 | ||||||
Securities available-for-sale |
67,045 | 69,597 | ||||||
Securities held-to-maturity |
1,238 | 1,313 | ||||||
Total securities |
68,283 | 70,910 | ||||||
Loans held for sale, at lower of cost or fair value |
353 | 753 | ||||||
Loans |
408,244 | 424,864 | ||||||
Less allowance for loan losses |
(10,300 | ) | (12,247 | ) | ||||
Net loans |
397,944 | 412,617 | ||||||
Real estate owned |
4,611 | 5,284 | ||||||
Investment in FHLB stock |
3,799 | 3,799 | ||||||
Premises and equipment, net |
12,898 | 13,175 | ||||||
Bank-owned life insurance |
17,240 | 17,073 | ||||||
Accrued interest receivable and other assets |
7,539 | 7,973 | ||||||
Total assets |
$ | 587,842 | $ | 565,105 | ||||
LIABILITIES |
||||||||
Deposits |
||||||||
Noninterest-bearing |
$ | 63,384 | $ | 63,695 | ||||
Interest-bearing |
425,761 | 401,381 | ||||||
Total deposits |
489,145 | 465,076 | ||||||
Federal funds purchased and other short-term borrowings |
1,161 | 1,265 | ||||||
Federal Home Loan Bank advances |
57,655 | 58,502 | ||||||
Accrued interest payable and other liabilities |
2,384 | 2,848 | ||||||
Total liabilities |
550,345 | 527,691 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, no par value, 7,500,000 shares authorized, 4,273,908 issued |
3,785 | 3,785 | ||||||
Retained earnings |
47,919 | 47,883 | ||||||
Treasury stock, at cost, 556,523 shares |
(13,494 | ) | (13,494 | ) | ||||
Accumulated other comprehensive loss |
(713 | ) | (760 | ) | ||||
Total shareholders equity |
37,497 | 37,414 | ||||||
Total liabilities and shareholders equity |
$ | 587,842 | $ | 565,105 | ||||
See Notes to condensed consolidated financial statements.
3
Table of Contents
DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Interest and dividend income |
||||||||
Loans |
$ | 5,328 | $ | 6,456 | ||||
Taxable securities |
510 | 722 | ||||||
Tax-exempt securities |
93 | 199 | ||||||
Federal funds sold and other |
21 | 18 | ||||||
Total interest income |
5,952 | 7,395 | ||||||
Interest expense |
||||||||
Deposits |
702 | 1,210 | ||||||
Borrowings |
637 | 691 | ||||||
Total interest expense |
1,339 | 1,901 | ||||||
Net interest income |
4,613 | 5,494 | ||||||
Provision for loan losses |
675 | 1,961 | ||||||
Net interest income after provision for loan losses |
3,938 | 3,533 | ||||||
Noninterest income |
||||||||
Service charges on deposit accounts |
651 | 605 | ||||||
Trust department income |
259 | 225 | ||||||
Net gain on sales of assets |
111 | 98 | ||||||
Gains on sale of loans |
18 | 29 | ||||||
Treasury management fees |
107 | 130 | ||||||
Data processing servicing fees |
141 | 132 | ||||||
Earnings on bank owned life insurance |
167 | 167 | ||||||
Total other-than-temporary impairment losses |
(75 | ) | (80 | ) | ||||
Portion of loss recognized in (reclassified from) other comprehensive loss (before taxes) |
(17 | ) | (950 | ) | ||||
Net impairment losses recognized in income |
(92 | ) | (1,030 | ) | ||||
Other |
140 | 80 | ||||||
Total noninterest income |
1,502 | 436 | ||||||
Noninterest expense |
||||||||
Salaries and other employee benefits |
2,405 | 2,624 | ||||||
Occupancy and equipment |
1,027 | 1,030 | ||||||
Professional services |
406 | 307 | ||||||
Advertising |
86 | 74 | ||||||
Postage, freight and courier |
95 | 87 | ||||||
Supplies |
38 | 30 | ||||||
State franchise taxes |
125 | 152 | ||||||
Federal deposit insurance premiums |
407 | 396 | ||||||
Other |
842 | 788 | ||||||
Total noninterest expense |
5,431 | 5,488 | ||||||
Net income (loss) before income tax credits |
9 | (1,519 | ) | |||||
Income tax credits |
(24 | ) | (631 | ) | ||||
Net income (loss) |
$ | 33 | $ | (888 | ) | |||
Basic and diluted income (loss) per common share |
$ | (0.00 | ) | $ | (0.24 | ) | ||
Dividends per share |
$ | | $ | | ||||
See Notes to the condensed consolidated financial statements.
4
Table of Contents
DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net income (loss) |
$ | 33 | $ | (888 | ) | |||
Reclassification adjustment for other-than-temporary impairment loss recognized in income, net of taxes of $0 and $323 |
| 627 | ||||||
Unrealized gains on securities available-for-sale, net of taxes of $18 and $74 for the respective periods |
35 | 144 | ||||||
Net unrealized gain (loss) on securities held-to-maturity for which a portion of an other-than-temporary
impairment has been recognized in income, net of realized losses and net of taxes of $6 and $0 |
11 | | ||||||
Comprehensive income (loss) |
$ | 79 | $ | (117 | ) | |||
See Notes to the condensed consolidated financial statements.
5
Table of Contents
DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows provided by (used in) operating activities |
$ | (1,046 | ) | $ | 2,716 | |||
Cash flows provided by investing activities |
||||||||
Securities |
||||||||
Purchases |
(3,003 | ) | (9,861 | ) | ||||
Maturities, principal payments and calls |
5,759 | 9,481 | ||||||
Net change in loans |
16,620 | 7,740 | ||||||
Proceeds from sale of real estate owned |
271 | 688 | ||||||
Investment in unconsolidated affiliate |
| 5 | ||||||
Premises and equipment expenditures |
(65 | ) | (49 | ) | ||||
Net cash flows provided by investing activities |
19,582 | 8,004 | ||||||
Cash flows provided by financing activities |
||||||||
Net change in deposits |
24,069 | 16,718 | ||||||
Net change in federal funds purchased and other short-term borrowings |
(104 | ) | (1,750 | ) | ||||
Repayment of Federal Home Loan Bank advances |
(847 | ) | (1,641 | ) | ||||
Net cash provided by financing activities |
23,118 | 13,327 | ||||||
Net change in cash and cash equivalents |
41,654 | 24,047 | ||||||
Cash and cash equivalents at beginning of period |
33,521 | 41,453 | ||||||
Cash and cash equivalents at end of period |
$ | 75,175 | $ | 65,500 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest on deposits and borrowings |
$ | 1,315 | $ | 1,996 | ||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Transfers from loans to real estate owned |
$ | 33 | $ | 16 | ||||
Cash dividends declared but unpaid |
$ | | $ | |
See Notes to the condensed consolidated financial statements.
6
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly the financial
position of DCB Financial Corp (the Corporation) at March 31, 2011, and its results of operations
and cash flows for the three month periods ended March 31, 2011 and 2010. 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 the consolidated financial statements, and notes thereto, included in its
Annual Report as of December 31, 2010. Refer to the accounting policies of the Corporation
described in the Notes to Consolidated Financial Statements contained in the Corporations Annual
Report as of December 31, 2010. The Corporation has consistently followed these policies in
preparing this Form 10-Q. The results of operations for the three months ended March 31, 2011, are
not necessarily indicative of the results that may be expected for the entire year.
The accompanying consolidated financial statements include the accounts of the Corporation and its
wholly-owned subsidiaries, The Delaware County Bank and Trust Company (the Bank), DCB Title
Services LLC, Datatasx LLC and ORECO (collectively referred to herein after as the Corporation).
All significant intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Management considers the Corporation to operate within one business segment,
banking. Subsequent to the end of the first quarter 2011, Management entered into an agreement to
sell the outstanding contracts serviced through Datatasx LLC. It is estimated that those contracts
will be converted to the new provider by the end of the third quarter 2011. On a pre-tax net basis,
Datatasxs contributed approximately $48 thousand in the first quarter 2011 to the consolidated
companies. Management considers both the net contribution and Datatasxs balance sheet to be
immaterial to financial results on a consolidated basis.
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 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 full valuation allowance was taken in 2010, reducing the deferred tax assets.
Earnings per share
Earnings per common share is net income divided by the weighted-average number of shares of common
stock outstanding during the period. Diluted earnings per common share is computed including the
dilutive effect of additional potential common shares under stock options. Weighted-average shares
for basic and diluted earnings per share are presented below.
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Weighted-average common shares outstanding (basic) |
3,717,385 | 3,717,385 | ||||||
Dilutive effect of assumed
exercise of stock options |
| | ||||||
Weighted-average common
shares outstanding (diluted) |
3,717,385 | 3,717,385 | ||||||
7
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Options to purchase 277,389 shares of common stock with a weighted-average exercise price of
$11.95, were outstanding at March 31, 2011, but were excluded from the computation of common share
equivalents for the three month period then ended because the exercise price was greater than the
average fair value of the shares.
Options to purchase 200,742 shares of common stock with a weighted-average exercise price of
$19.59, were outstanding at March 31, 2010, but were excluded from the computation of common share
equivalents for the period then ended because the exercise price was greater than the average fair
value of the shares during the period.
Stock option plan
The Corporations shareholders approved an employee share option plan (the Plan) in May 2004.
This plan grants certain employees the right to purchase shares at a predetermined price. The plan
is limited to 300,000 shares. The shares granted to employees vest 20% per year over a five year
period. The options expire after ten years. No shares were granted for the period ending March
31, 2011. At March 31, 2011, 88,968 shares were exercisable and 14,194 shares were available for
grant under this plan.
The Corporation recognizes compensation cost for unvested equity-based awards based on their
grant-date fair value. The Corporation recorded $30 and $24 in compensation cost for equity-based
awards that vested during the three months ended March 31, 2011 and 2010, respectively. The
Corporation has $137 of total unrecognized compensation cost related to non-vested equity-based
awards granted under its stock option plan as of March 31, 2011, which is expected to be recognized
over a weighted-average period of 3.28 years.
8
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share data)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
A summary of the status of the Corporations stock option plan as of March 31, 2011 and December
31, 2010, and changes during the periods then ended are presented below:
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
2011 | ||||||||||||
Weighted | ||||||||||||
Average | ||||||||||||
Weighted | Remaining | |||||||||||
Average Exercise | Contractual | |||||||||||
Shares | Price | Life | ||||||||||
Outstanding at beginning of period |
285,806 | $ | 11.87 | 8.6 years | ||||||||
Forfeited |
(352 | ) | 3.50 | |||||||||
Outstanding at end of period |
285,454 | $ | 12.11 | 7.86 years | ||||||||
Options exercisable at period end |
93,330 | $ | 21.81 | |||||||||
Year Ended | ||||||||||||
December 31, | ||||||||||||
2010 | ||||||||||||
Weighted | ||||||||||||
Weighted | Average Remaining |
|||||||||||
Average Exercise | Contractual | |||||||||||
Shares | Price | Life | ||||||||||
Outstanding at beginning of year |
204,883 | $ | 24.77 | 8.6 years | ||||||||
Granted |
131,816 | 3.50 | 9.9 years | |||||||||
Forfeited |
(50,893 | ) | 21.30 | |||||||||
Outstanding at end of year |
285,806 | $ | 11.87 | 8.6 years | ||||||||
Options exercisable at year end |
81,800 | $ | 18.27 | |||||||||
Weighted-average fair value of
options granted during the year |
$ | 0.76 | ||||||||||
9
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share data)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following information applies to options outstanding at March 31, 2011:
Range of | ||
Number Outstanding | Exercise Prices | |
73,942 |
$23.00 $30.70 | |
44,299 |
$14.15 $16.90 | |
167,233 |
$3.50 $9.00 |
Application of Critical Accounting Policies
DCB Financial Corps consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America 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 procedures for assessing the adequacy of the allowance for loan losses reflect our evaluation
of credit risk after careful consideration of all information available to us. In developing this
assessment, we must rely on estimates and exercise judgment regarding matters where the ultimate
outcome is unknown, such as economic factors, developments affecting companies in specific
industries and issues with respect to single borrowers. Depending on changes in circumstances,
future assessments of credit risk may yield materially different results, which may require an
increase or a decrease in the allowance for loan losses.
The allowance is regularly reviewed by management and the Board to determine whether the amount is considered
adequate to absorb probable losses. This evaluation includes specific loss estimates on certain
individually reviewed loans, statistical loss estimates for loan pools that are based on historical
loss experience, and general loss estimates that are based upon the size, quality, and
concentration characteristics of the various loan portfolios, adverse situations that may affect a
borrowers ability to repay, and current economic and industry conditions. Also considered as part
of that judgment is a review of the Banks trends in delinquencies and loan losses, as well as
trends in delinquencies and losses for the region and nationally, and economic factors.
The allowance for loan losses is maintained at a level believed adequate by management to absorb
probable losses inherent in the loan portfolio. Managements evaluation of the adequacy of the
allowance is an estimate based on managements current judgment about the credit quality of the
loan portfolio. While the Corporation strives to reflect all known risk factors in its
evaluations, judgment errors may occur.
The valuation of other assets requires that management utilize a variety of estimates and analysis
to determine whether an asset is impaired or other-than-temporarily impaired (OTTI). After
determining the appropriate methodology for fair value measurement, management then evaluates
whether or not declines in fair value below book value are temporary or other-than-temporary
impairments. If it is determined that measured impairment is other-than-temporary the appropriate
loss recognition is recorded within the period that OTTI is recognized. Generally, management
utilizes third parties to provide appraisals, analysis or market pricing in support of OTTI
analysis.
10
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share data)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or payoff are reported at the principal balance outstanding, net of unearned interest,
unamortized deferred loan fees and costs and the allowance for loan losses.
Interest income is accrued based on the unpaid principal balance and includes amortization of net
deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans
is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in
process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier
date if collection of principal or interest is considered doubtful. All interest accrued but not
received for loans placed on nonaccrual status are reversed against interest income. Interest
received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying
for return to accrual. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable but
unconfirmed credit losses, increased by the provision for loan losses and decreased by charge-offs
net of recoveries. Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. Management estimates the required allowance balance based on past loan loss experience,
augmented by additional estimates related to the nature and volume of the portfolio, information
about specific borrower situations, estimated collateral values, economic conditions and other
factors.
The allowance consists of both specific and general components. The specific component relates to
loans that are classified as impaired. For those loans that are classified as impaired, an
allowance is established with the discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower than the carrying value of that loan. The general component
covers nonclassified loans and is based on historical charge-off experience and expected loss given
default derived from the Banks internal risk rating process. Other adjustments may be made to the
allowance for pools of loans after an assessment of internal or external influences on credit
quality that are not fully reflected in the historical loss or risking rating data.
A loan is impaired when full payment of interest and principal under the original contractual loan
terms is not expected. Commercial and industrial loans, commercial and multi-family real estate,
and land development loans are individually evaluated for impairment. If a loan is impaired, the
loan amount exceeding fair value, based on the most current information available is reserved.
Large groups of smaller balance homogeneous loans, such as consumer and residential real estate
loans are collectively evaluated for impairment, and accordingly, such loans are not separately
identified for impairment disclosures.
11
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share data)
NOTE 2 SECURITIES
The amortized cost and estimated fair values of securities available-for-sale were as follows:
March 31, 2011
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Costs | Gains | Losses | Value | |||||||||||||
U.S. Government and agency obligations |
$ | 30,484 | $ | 617 | $ | (82 | ) | $ | 31,019 | |||||||
State and municipal obligations |
11,998 | 203 | (61 | ) | 12,140 | |||||||||||
Mortgage-backed securities |
22,866 | 1,020 | | 23,886 | ||||||||||||
Total |
$ | 65,348 | $ | 1,840 | $ | (143 | ) | $ | 67,045 | |||||||
The amortized cost and estimated fair values of securities held-to-maturity were as follows:
Adjusted | Gross | Estimated | ||||||||||
Amortized | Unrealized | Fair | ||||||||||
Cost | Gains | Value | ||||||||||
Collateralized Debt Obligations |
$ | 1,238 | $ | 542 | $ | 1,780 | ||||||
December 31, 2010
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Costs | Gains | Losses | Value | |||||||||||||
U.S. Government and agency obligations |
$ | 29,510 | $ | 599 | $ | (123 | ) | $ | 29,986 | |||||||
State and municipal obligations |
12,153 | 193 | (84 | ) | 12,262 | |||||||||||
Mortgage-backed securities |
29,290 | 1,059 | | 27,349 | ||||||||||||
Total |
$ | 67,953 | $ | 1,851 | $ | (207 | ) | $ | 69,597 | |||||||
The amortized cost and estimated fair values of securities held-to-maturity were as follows:
Adjusted | Gross | Estimated | ||||||||||
Amortized | Unrealized | Fair | ||||||||||
Cost | Gains | Value | ||||||||||
Collateralized Debt Obligations |
$ | 1,313 | $ | 367 | $ | 1,680 | ||||||
12
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 2 SECURITIES (continued)
Credit Losses Recognized on Investments
The following table provides information about debt securities for which only a credit loss was
recognized in income and other losses are recorded in other comprehensive income for the three
month periods ended March 31, 2011 and 2010.
Accumulated Credit Losses:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Credit losses on debt securities held |
||||||||
Beginning of period |
$ | 3,924 | $ | 2,621 | ||||
Additions related to other-than-temporary losses not
previously recognized |
92 | 1,030 | ||||||
Reductions due to sales |
| | ||||||
Reductions due to change in intent or likelihood of sale |
| | ||||||
Additions related to increases in previously recognized
other-than-temporary losses |
| | ||||||
Reductions due to increases in expected cash flows |
| | ||||||
End of period |
$ | 4,016 | $ | 3,651 | ||||
13
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 2 SECURITIES (continued)
The table below indicates the length of time individual securities have been in a continuous
unrealized loss position at March 31, 2011 and December 31, 2010:
March 31, 2011
(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 | |||||||||||||||||||||||||||
U.S. Government and
agency obligations |
8 | $ | 7,925 | $ | (82 | ) | | $ | | $ | | 8 | $ | 7,925 | $ | (82 | ) | |||||||||||||||||||
State and municipal
obligations |
5 | 2,034 | (61 | ) | | | | 5 | 2,034 | (61 | ) | |||||||||||||||||||||||||
Total securities |
13 | $ | 9,959 | $ | (143 | ) | | $ | | $ | | 13 | $ | 9,959 | $ | (143 | ) | |||||||||||||||||||
December 31, 2010
|
||||||||||||||||||||||||||||||||||||
(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 | |||||||||||||||||||||||||||
U.S. Government and
agency obligations |
10 | $ | 9,904 | $ | (123 | ) | | $ | | $ | | 10 | $ | 9,904 | $ | (123 | ) | |||||||||||||||||||
State and municipal
obligations |
9 | 3,575 | (84 | ) | | | | 9 | 3,575 | (84 | ) | |||||||||||||||||||||||||
Total securities |
19 | $ | 13,479 | $ | (207 | ) | | $ | | $ | | 19 | $ | 13,429 | $ | (207 | ) | |||||||||||||||||||
The unrealized losses on the Corporations investments in U.S. Government and agency obligations,
state and political subdivision obligations and mortgage-backed securities were caused primarily by
changes in interest rates. The contractual terms of those investments do not permit the issuer to
settle the securities at a price less than the amortized cost bases of the investments. Because
the Corporation does not intend to sell the investments and it is not more likely than not the
Corporation will be required to sell the investments before recovery of their amortized cost bases,
which may be maturity, the Corporation does not consider those investments to be
other-than-temporarily impaired at March 31, 2011.
The Corporations unrealized loss on investments in collateralized debt obligations relates to an
original investment of $8,000 in pooled trust securities. The company evaluates those investments
on a quarterly basis for other-than-temporary impairment and other unrealized losses due to
temporary market factors. The unrealized losses were primarily attributed to: declines in the
performance of the underlying collateral due to weakness in the economy, and a lower than
investment grade rating by industry analysts.
14
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 2 SECURITIES (continued)
Credit losses on these securities are calculated by comparing expected discounted cash flows based
on performance indicators of the underlying assets in the security to the carrying value of the
investment. Because the Corporation does not intend to sell the investment and it is not more
likely than not the Corporation will be required to sell the investment before recovery of its new,
lower amortized cost basis, which may be maturity, it does not consider the remainder of the
investment in the securities to be other-than-temporarily impaired at March 31, 2011.
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 March 31, 2011, 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 other than the
pooled trust securities as noted above.
The amortized cost and estimated fair value of all debt securities at March 31, 2011, 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 | Held-to-maturity | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Due in one year or less |
$ | 300 | $ | 300 | $ | | $ | | ||||||||
Due from one to five years |
19,757 | 19,945 | | | ||||||||||||
Due from five to ten years |
14,693 | 15,127 | | | ||||||||||||
Due after ten years |
7,732 | 7,787 | 1,238 | 1,780 | ||||||||||||
Mortgage-backed and
related securities |
22,866 | 23,886 | | | ||||||||||||
Total |
$ | 65,348 | $ | 67,045 | $ | 1,238 | $ | 1,780 | ||||||||
Securities with a fair value of $64,043 at March 31, 2011 were pledged to secure public deposits
and other obligations.
15
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 3 LOANS
Loans at March 31, 2011 and December 31, 2010, were as follows:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Commercial and industrial |
$ | 143,584 | $ | 155,410 | ||||
Commercial real estate |
133,628 | 135,035 | ||||||
Residential real estate and home equity |
91,553 | 93,646 | ||||||
Real estate construction and land development |
17,517 | 17,339 | ||||||
Consumer and credit card |
21,940 | 23,411 | ||||||
408,222 | 424,841 | |||||||
Add: Net deferred loan origination costs |
22 | 23 | ||||||
Total loans receivable |
$ | 408,244 | $ | 424,864 | ||||
16
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 4 CREDIT QUALITY
Allowance for Credit Losses
The table below presents allowance for credit losses by loan portfolio. As presented within this
note, commercial real estate includes real estate construction and land development loans.
Three Months Ended March 31, 2011
Residential | ||||||||||||||||||||
Real Estate | ||||||||||||||||||||
Consumer and | Commercial and | Commercial | and Home | |||||||||||||||||
Credit Card | Industrial | Real Estate | Equity | Total | ||||||||||||||||
Beginning Balance |
$ | 796 | $ | 4,174 | $ | 6,786 | $ | 491 | $ | 12,247 | ||||||||||
Charge Offs |
(117 | ) | (1,419 | ) | (1,159 | ) | (35 | ) | (2,730 | ) | ||||||||||
Recoveries |
70 | 35 | | 3 | 108 | |||||||||||||||
Provision |
6 | (877 | ) | 1,515 | 31 | 675 | ||||||||||||||
Ending Balance |
$ | 755 | $ | 1,913 | $ | 7,142 | $ | 490 | $ | 10,300 | ||||||||||
Individually
evaluated for
impairment |
$ | | $ | 651 | $ | 5,612 | $ | | $ | 6,263 | ||||||||||
Collectively
evaluated for
impairment |
755 | 1,262 | 1,530 | 490 | 4,037 | |||||||||||||||
Ending Balance |
$ | 755 | $ | 1,913 | $ | 7,142 | $ | 490 | $ | 10,300 | ||||||||||
Financing Receivables |
||||||||||||||||||||
Individually
evaluated for
impairment |
$ | | $ | 15,425 | $ | 36,003 | $ | | $ | 51,428 | ||||||||||
Collectively
evaluated for
impairment |
21,940 | 128,159 | 115,142 | 91,553 | 356,794 | |||||||||||||||
Total |
$ | 21,940 | $ | 143,584 | $ | 151,145 | $ | 91,553 | $ | 408,222 | ||||||||||
17
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
Year Ended December 31, 2010
Residential | ||||||||||||||||||||
Real Estate | ||||||||||||||||||||
Consumer and | Commercial and | Commercial | and Home | |||||||||||||||||
Credit Card | Industrial | Real Estate | Equity | Total | ||||||||||||||||
Beginning Balance |
$ | 874 | $ | 2,476 | $ | 6,817 | $ | 312 | $ | 10,479 | ||||||||||
Charge Offs |
(824 | ) | (2,261 | ) | (6,175 | ) | (498 | ) | (9,758 | ) | ||||||||||
Recoveries |
200 | 270 | 4 | 12 | 486 | |||||||||||||||
Provision |
546 | 3,689 | 6,140 | 665 | 11,040 | |||||||||||||||
Ending Balance |
$ | 796 | $ | 4,174 | $ | 6,786 | $ | 491 | $ | 12,247 | ||||||||||
Individually
evaluated for
impairment |
$ | | $ | 2,812 | $ | 5,158 | $ | | $ | 7,970 | ||||||||||
Collectively
evaluated for
impairment |
796 | 1,362 | 1,628 | 491 | 4,277 | |||||||||||||||
Ending Balance |
$ | 796 | $ | 4,174 | $ | 6,786 | $ | 491 | $ | 12,247 | ||||||||||
Financing Receivables |
||||||||||||||||||||
Individually
evaluated for
impairment |
$ | | $ | 18,967 | $ | 42,104 | $ | | $ | 61,071 | ||||||||||
Collectively
evaluated for
impairment |
23,411 | 136,144 | 110,270 | 93,646 | 363,770 | |||||||||||||||
Total |
$ | 23,411 | $ | 155,410 | $ | 152,374 | $ | 93,646 | $ | 424,841 | ||||||||||
18
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
Impaired Loans
A loan is considered impaired when based on current information and events; it is probable the Bank
will be unable to collect all amounts due from the borrower in accordance with the contractual
terms of the loan. Impaired loans include nonperforming commercial loans but also include loans
modified in troubled debt restructurings where concessions have been granted to borrowers
experiencing financial difficulties. These concessions could include a reduction in the interest
rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions
intended to maximize collection. Generally, commercial and commercial real estate loans with risk
grades Substandard, Vulnerable, Doubtful, or Loss, with aggregate relationships greater than $250
are evaluated for impairment.
The following table indicates impaired loans with and without an allocated allowance:
At March 31, 2011
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
With No
Related Allowance Recorded |
||||||||||||||||||||
Consumer and Credit Card |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Commercial and Industrial |
4,542 | 5,245 | | 5,170 | 63 | |||||||||||||||
Commercial Real Estate |
12,713 | 13,415 | | 16,009 | 178 | |||||||||||||||
Residential RE and Home
Equity |
| | | | | |||||||||||||||
With Allowance Recorded |
||||||||||||||||||||
Consumer and Credit Card |
| | | | | |||||||||||||||
Commercial and Industrial |
10,883 | 12,435 | 651 | 12,280 | 195 | |||||||||||||||
Commercial Real Estate |
23,290 | 28,200 | 5,612 | 23,958 | 186 | |||||||||||||||
Residential RE and Home
Equity |
| | | | | |||||||||||||||
Total |
||||||||||||||||||||
Consumer and Credit Card |
| | | | | |||||||||||||||
Commercial and Industrial |
15,425 | 17,680 | 651 | 17,450 | 258 | |||||||||||||||
Commercial Real Estate |
36,003 | 41,615 | 5,612 | 39,967 | 364 | |||||||||||||||
Residential RE and Home
Equity |
| | | | | |||||||||||||||
Total |
$ | 51,428 | $ | 59,295 | $ | 6,263 | $ | 57,417 | $ | 622 | ||||||||||
19
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
At December 31, 2010
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
With No
Related Allowance Recorded |
||||||||||||||||||||
Consumer and Credit Card |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Commercial and Industrial |
5,615 | 5,757 | | 4,196 | 295 | |||||||||||||||
Commercial Real Estate |
17,529 | 20,855 | | 14,597 | 993 | |||||||||||||||
Residential RE and Home
Equity |
| | | | | |||||||||||||||
With Allowance Recorded |
||||||||||||||||||||
Consumer and Credit Card |
| | | | | |||||||||||||||
Commercial and Industrial |
13,352 | 15,238 | 2,812 | 13,651 | 741 | |||||||||||||||
Commercial Real Estate |
24,575 | 28,823 | 5,158 | 25,209 | 821 | |||||||||||||||
Residential RE and Home
Equity |
| | | | | |||||||||||||||
Total |
||||||||||||||||||||
Consumer and Credit Card |
| | | | | |||||||||||||||
Commercial and Industrial |
18,967 | 20,995 | 2,812 | 17,847 | 1,036 | |||||||||||||||
Commercial Real Estate |
42,104 | 49,678 | 5,158 | 39,806 | 1,814 | |||||||||||||||
Residential RE and Home
Equity |
| | | | | |||||||||||||||
Total |
$ | 61,071 | $ | 70,673 | $ | 7,970 | $ | 57,653 | $ | 2,850 | ||||||||||
The allowance for impaired loans is included in the Corporations overall allowance for loan
losses. The provision necessary to increase this allowance is included in the Corporations
overall provision for losses on loans.
Financing receivables on nonaccrual status at March 31, 2011 and December 31, 2010 are as follows:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Consumer and credit card |
$ | 102 | $ | 33 | ||||
Commercial and industrial |
3,952 | 6,043 | ||||||
Commercial real estate |
12,235 | 10,102 | ||||||
Residential real estate and home equity |
869 | 389 | ||||||
Total |
$ | 17,158 | $ | 16,567 | ||||
20
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
Credit Quality Indicators
Corporate risk exposure by risk profile was as follows at March 31, 2011:
Commercial and | Commercial Real | |||||||
Category | Industrial | Estate | ||||||
Prime-1 |
$ | 8,312 | $ | 561 | ||||
Good-2 |
19,746 | 18,675 | ||||||
Fair-3 |
55,852 | 29,177 | ||||||
Compromised-4 |
30,414 | 32,653 | ||||||
Vulnerable-5 |
20,032 | 6,144 | ||||||
Substandard-6 |
9,228 | 63,935 | ||||||
Doubtful-7 |
| | ||||||
Loss-8 |
| | ||||||
Total |
$ | 143,584 | $ | 151,145 | ||||
Corporate risk exposure by risk profile was as follows at December 31, 2010:
Commercial and | Commercial Real | |||||||
Category | Industrial | Estate | ||||||
Prime-1 |
$ | 8,459 | $ | 561 | ||||
Good-2 |
22,355 | 20,404 | ||||||
Fair-3 |
45,853 | 39,067 | ||||||
Compromised-4 |
31,628 | 27,692 | ||||||
Vulnerable-5 |
22,154 | 11,785 | ||||||
Substandard-6 |
24,959 | 52,865 | ||||||
Doubtful-7 |
2 | | ||||||
Loss-8 |
| | ||||||
Total |
$ | 155,410 | $ | 152,374 | ||||
Risk Category Descriptions
Prime 1
Prime loans based on liquid collateral, with adequate margin or supported by a strong financial
statement audited with an unqualified opinion from a CPA firm. The character and repayment ability
of the borrowers are excellent and without question. High liquidity, minimum risk, strong ratios,
and low handling costs are common to these loans. This classification will also include all loans
secured by CDs or cash equivalents.
Good 2
Good loans of above average quality. Borrowers have a modest degree of risk. The margin of
protection is good. Elements of strength are present in areas such as liquidity, stability of
margins and cash flows, diversity of assets, and lack of dependence on one type of business or
customer. Reasonable access to alternative bank financing is present and borrowers can obtain
favorable rates and terms. These are well established regional firms and excellent local companies
operating in a reasonably stable industry that may be moderately affected by the business cycle.
Management and owners have unquestioned character, as demonstrated by repeated performance.
21
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
Fair 3
Satisfactory loans of average or slightly above average risk having some deficiency or
vulnerability to changing economic conditions, but still fully collectible. Projects should
clearly demonstrate at least break-even debt service coverage. May be some weakness but with
offsetting features of other support readily available. These loans are meeting the terms of
repayment, but which may be susceptible to deterioration if adverse factors are encountered.
Compromised 4
This risk grade may be established for a loan considered satisfactory but which is of below average
credit risk due to financial weaknesses or uncertainty. The loans warrant a higher than average
level of monitoring to ensure that weaknesses do not advance. The level of risk in Compromised
classification is considered acceptable and within normal underwriting guidelines, so long as the
loan is given the proper level of management supervision. Loans are considered Compromised when the
following conditions apply:
| At inception, the loan was properly underwritten and did not possess an unwarranted level of credit risk; also the loan met the above criteria for a risk grade of 1 (Prime), 2 (Good), 3 (Fair) or 4 (Compromised). |
| At inception, the loan was secured with collateral possessing a loan-to-value adequate to protect the Bank from loss. |
| The loan exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance. |
| During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the business is in an industry which is known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted. |
Vulnerable (Special Mention) 5
Loans which possess some credit deficiency or potential weakness which deserves close attention,
but which do not yet warrant substandard classification. Such loans pose unwarranted financial
risk that, if not corrected, could weaken the loan and increase risk in the future. The key
distinctions of a 5 (Special Mention) classification are that (1) it is indicative of an
unwarranted level of risk, and (2) weaknesses are considered potential, versus
well-defined, impairments to the primary source of loan repayment.
Substandard 6
Loans that are inadequately protected by the current sound worth and paying capacity of the obligor
or of the collateral pledged, if any. Loans so classified must have well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the bank will sustain some loss if the deficiencies are not corrected. One or
more of the following characteristics may be exhibited in loans classified Substandard:
| Loans, which possess a defined credit weakness and the likelihood that a loan will be paid from the primary source, is uncertain. Financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss. |
| Loans are inadequately protected by the current net worth and paying capacity of the obligor. |
| The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees. |
| Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected. |
| Unusual courses of action are needed to maintain a high probability of repayment. |
| The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments. |
| The lender is forced into a subordinated or unsecured position due to flaws in documentation. |
| Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms. |
| The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan. |
| There is a significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions. |
22
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
Doubtful 7
One or more of the following characteristics may be exhibited in loans classified Doubtful:
| Loans have all of the weaknesses of those classified as Substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable. |
| The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment. |
| The possibility of loss is high, but, because of certain important pending factors, which may strengthen the loan, loss classification is deferred until its exact status is known. A Doubtful classification is established during this period of deferring the realization of the loss. |
Loss 8
Loans are considered uncollectible and of such little value that continuing to carry them as assets
on the institutions financial statements is not feasible. Loans will be classified Loss when it
is neither practical nor desirable to defer writing off or reserving all or a portion of a
basically worthless asset, even though partial recovery may be possible at some time in the future.
Consumer Risk
Consumer risk based on payment activity at March 31, 2011 is as follows.
Residential Real | ||||||||
Consumer and | Estate and Home | |||||||
Payment Category | Credit Card | Equity | ||||||
Performing |
$ | 21,425 | $ | 90,587 | ||||
Non-Performing |
515 | 966 | ||||||
Total |
$ | 21,940 | $ | 91,553 | ||||
Consumer risk based on payment activity at December 31, 2010 is as follows.
Residential Real | ||||||||
Consumer and | Estate and Home | |||||||
Payment Category | Credit Card | Equity | ||||||
Performing |
$ | 22,970 | $ | 92,832 | ||||
Non-Performing |
441 | 814 | ||||||
Total |
$ | 23,411 | $ | 93,646 | ||||
23
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
Age Analysis of Past Due Loans
The following table presents past due loans aged as of March 31, 2011.
Recorded | ||||||||||||||||||||||||||||
60-89 | Greater | Investment | ||||||||||||||||||||||||||
Days | than 90 | Total | > 90 days | |||||||||||||||||||||||||
30-59 Days | Past | Days Past | Total | Financing | and | |||||||||||||||||||||||
Category | Past Due | Due | Due | Past Due | Current | Receivables | Accruing | |||||||||||||||||||||
Consumer and Credit
Card |
$ | 189 | $ | 130 | $ | 575 | $ | 894 | $ | 21,046 | $ | 21,940 | $ | 413 | ||||||||||||||
Commercial and
Industrial |
179 | 348 | 1,359 | 1,886 | 141,698 | 143,584 | 990 | |||||||||||||||||||||
Commercial Real
Estate |
171 | 574 | 9,889 | 10,634 | 140,511 | 151,145 | 35 | |||||||||||||||||||||
Residential Real
Estate and Home
Equity |
1,415 | 14 | 746 | 2,175 | 89,378 | 91,553 | 98 | |||||||||||||||||||||
Total |
$ | 1,954 | $ | 1,066 | $ | 12,569 | $ | 15,589 | $ | 392,633 | $ | 408,222 | $ | 1,536 | ||||||||||||||
The following table presents past due loans aged as of December 31, 2010.
Recorded | ||||||||||||||||||||||||||||
60-89 | Greater | Investment | ||||||||||||||||||||||||||
Days | than 90 | Total | > 90 days | |||||||||||||||||||||||||
30-59 Days | Past | Days Past | Total | Financing | and | |||||||||||||||||||||||
Category | Past Due | Due | Due | Past Due | Current | Receivables | Accruing | |||||||||||||||||||||
Consumer and Credit
Card |
$ | 300 | $ | 104 | $ | 441 | $ | 845 | $ | 22,566 | $ | 23,411 | $ | 407 | ||||||||||||||
Commercial and
Industrial |
359 | 3 | 1,373 | 1,735 | 153,675 | 155,410 | 991 | |||||||||||||||||||||
Commercial Real
Estate |
885 | 2,050 | 10,118 | 13,053 | 139,321 | 152,374 | 35 | |||||||||||||||||||||
Residential Real
Estate and Home
Equity |
472 | 123 | 814 | 1,409 | 92,237 | 93,646 | 425 | |||||||||||||||||||||
Total |
$ | 2,016 | $ | 2,280 | $ | 12,746 | $ | 17,042 | $ | 407,799 | $ | 424,841 | $ | 1,858 | ||||||||||||||
24
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 5 FAIR VALUE MEASUREMENTS
The Corporation accounts for fair value measurements in accordance with FASB ASC 820, which defines
fair value, establishes a framework for measuring fair value and expands disclosures about fair
value measurements.
FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
Level 1 | Quoted prices in active markets for identical assets or liabilities | ||
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities | ||
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities |
Following is a description of the valuation methodologies used for instruments measured at fair
value on a recurring basis and recognized in the accompanying balance sheets, as well as the
general classification of such instruments pursuant to the valuation hierarchy.
Securities
Where quoted market prices are available in an active market, securities are classified within
Level 1 of the valuation hierarchy. Level 1 securities include certain equity securities and
U.S. Government and agency obligations. If quoted market prices are not available, then fair
values are estimated by using pricing models, quoted prices of securities with similar
characteristics or discounted cash flows. Level 2 securities include U.S. Government and agency
obligations, state and municipal obligations, corporate bonds and mortgage-backed securities.
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified
within Level 3 of the hierarchy.
The following table presents the fair value measurements of assets recognized in the
accompanying balance sheets measured at fair value on a recurring basis and the level within the
fair value hierarchy in which the fair value measurements fall at March 31, 2011 and December
31, 2010:
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
March 31, 2011 | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
U.S. Government and agency
obligations |
$ | 31,019 | $ | 3,003 | $ | 28,016 | $ | | ||||||||
State and municipal
obligations |
12,140 | | 12,140 | | ||||||||||||
Mortgage-backed |
23,886 | | 23,886 | | ||||||||||||
Total |
$ | 67,045 | $ | 3,003 | $ | 64,042 | $ | | ||||||||
25
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 5 FAIR VALUE MEASUREMENTS (continued)
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
December 31, 2010 | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
U.S. Government and agency
obligations |
$ | 29,986 | $ | | $ | 29,986 | $ | | ||||||||
State and municipal
obligations |
12,262 | | 12,262 | | ||||||||||||
Mortgage-backed and
other securities |
27,349 | | 27,349 | | ||||||||||||
Total |
$ | 69,597 | $ | | $ | 69,597 | $ | | ||||||||
Following is a description of the valuation methodologies used for instruments measured at
fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as
the general classification of such instruments pursuant to the valuation hierarchy.
Securities
Certain collateralized debt obligations are classified as held to maturity. The Corporation
recognized other-than-temporary impairment on the securities as of March 31, 2011, based upon a
Level 3 estimate of fair value, including a discounted cash flows calculation and a fair value
estimate from an independent evaluation of the securities.
Impaired loans
At March 31, 2011 and December 31, 2010, impaired loans consisted primarily of loans secured by
nonresidential and commercial real estate. Management has determined fair value measurements on
impaired loans primarily through evaluations of appraisals performed.
Real Estate Owned
Real estate acquired through, or in lieu of, loan foreclosure is held for sale and initially
recorded at fair value (based on current appraised value) at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed
by management and the assets are carried at the lower of carrying amount or fair value less
estimated costs to sell. Management has determined fair value measurements on real estate owned
primarily through evaluations of appraisals performed.
26
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 5 FAIR VALUE MEASUREMENTS (continued)
The following table presents the fair value measurements of assets measured at fair value
on a nonrecurring basis and the level within the fair value hierarchy in which the fair
value measurements fall at March 31, 2011 and December 31, 2010.
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
March 31, 2011 | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Collateralized debt obligations |
$ | 1,780 | $ | | $ | | $ | 1,780 | ||||||||
Impaired loans |
29,270 | | | 29,270 | ||||||||||||
Real estate owned |
1,468 | | | 1,468 |
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
December 31, 2010 | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Collateralized debt obligations |
$ | 1,313 | $ | | $ | | $ | 1,313 | ||||||||
Impaired loans |
24,187 | | | 24,187 | ||||||||||||
Real estate owned |
449 | | | 449 |
27
Table of Contents
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 5 FAIR VALUE MEASUREMENTS (continued)
Carrying amount and estimated fair values of financial instruments were as follows:
March 31, | December 31, | |||||||||||||||
2011 | 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents |
$ | 75,175 | $ | 75,175 | $ | 33,521 | $ | 33,521 | ||||||||
Securities available-for-sale |
67,045 | 67,045 | 69,597 | 69,597 | ||||||||||||
Securities held-to-maturity |
1,238 | 1,780 | 1,313 | 1,680 | ||||||||||||
Loans held for sale |
353 | 353 | 753 | 753 | ||||||||||||
Loans |
397,944 | 387,748 | 412,617 | 401,967 | ||||||||||||
FHLB stock |
3,799 | 3,799 | 3,799 | 3,799 | ||||||||||||
Accrued interest receivable |
1,556 | 1,556 | 1,673 | 1,673 |
March 31, | December 31, | |||||||||||||||
2011 | 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial liabilities |
||||||||||||||||
Noninterest-bearing deposits |
$ | 63,384 | $ | 63,384 | $ | 63,695 | $ | 63,695 | ||||||||
Interest-bearing deposits |
425,761 | 425,992 | 401,381 | 402,131 | ||||||||||||
Federal funds purchased and
other short-term borrowings |
1,161 | 1,161 | 1,265 | 1,265 | ||||||||||||
FHLB advances |
57,655 | 58,875 | 58,502 | 60,581 | ||||||||||||
Accrued interest payable |
360 | 360 | 336 | 336 |
The estimated fair value of cash and cash equivalents, FHLB stock, accrued interest receivable,
noninterest bearing deposits, federal funds purchased and other short-term borrowings and accrued
interest payable approximates the related carrying amounts.
For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing
or repricing limits, fair value is based on discounted cash flows using current market rates
applied to the estimated life and credit risk. Fair value of loans held for sale is based on
market quotes. Fair values of long-term FHLB advances are based on current rates for similar
financing. Fair values of off-balance-sheet items are based on the current fee or cost that would
be charged to enter into or terminate such agreements, which are not material.
Item 1A. | Risk Factors |
There has been no material change in the nature of the risk factors set forth in the Companys Form
10-K for the year ended December 31, 2010.
28
Table of Contents
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
INTRODUCTION
In the following pages, management presents an analysis of the consolidated financial condition of
DCB Financial Corp (the Corporation) at March 31, 2011, compared to December 31, 2010, and the
consolidated results of operations for the three months ended March 31, 2011, compared to the same
period in 2010. 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,
managements 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 Securities and
Exchange 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.
Overview of the first quarter of 2011
The Corporation, through the Bank provides customary retail banking services to its customers,
including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal
loans, real estate mortgage loans and installment loans. The Bank also provides trust and wealth
management products and services through its own trust department and its Raymond James
affiliation. It also offers a variety of commercial and commercial real estate loans along with
treasury management services to various commercial businesses.
29
Table of Contents
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
The Corporation, through the Bank, grants residential real estate, commercial real estate, consumer
and commercial loans to customers located primarily in Delaware, Franklin, Licking, Morrow, Marion
and Union Counties, Ohio. General economic conditions in the Corporations market area have been
under some pressures mainly attributable to an overall
slow down in economic activity and related increases in unemployment levels, loan foreclosure
volume and a decline in real estate values. The Corporations business has been under pressure due
primarily to market interest rate conditions, competition and a slow down in the economy. Real
estate values, especially in the Banks core geographic area, have declined during the past several
years and the lower values have continued into the first three months of 2011.
| The Corporations consolidated assets totaled $587,842 at March 31, 2011, compared to $565,105 at December 31, 2010, an increase of $22,737, or 4.0%. The increase in assets was mainly attributed to an increase in cash and cash equivalents due to an increase in overall deposits. |
| Net income for the first three months of 2011 totaled $33, an improvement over the net loss of $888 for the same period in 2010. This is mainly attributed to the decline in the provision for loan losses period to period. |
| The provision for loan losses totaled $675 for the three months ended March 31, 2011 compared to $1,961 in the first three months of 2010. DCB maintains an allowance for loan losses at a level to absorb managements estimate of probable inherent credit losses in its portfolio. |
| The Corporation recognized a $92 other-than-temporary impairment charge on its investment in collateralized debt obligations during the first quarter 2011. |
| The Corporations net interest income declined from the same period in 2010. Net interest income decreased to $4,613 for the three months ended March 31, 2011 compared to $5,494 for the same period in 2010. The lower net interest income is mainly attributed to the overall decline in interest earning assets within the loan and investment portfolios. |
| The ability to generate earnings is impacted in part by competitive pricing on loans and deposits, and by changes in the rates on various U.S. Treasury, U. S. Government Agency and State and political subdivision issues which comprise a significant portion of the Banks investment portfolio. The Bank is competitive with interest rates and loan fees that it charges, in pricing and variety of accounts it offers to the depositor. The Corporation confirms this by completing regular rate shops and comparisons versus competing financial services companies. The dominant pricing mechanism on loans is the prime interest rate as published in the Wall Street Journal, on a fixed rate plus spread over the index. The interest spread depends on the overall account relationship and the creditworthiness of the borrower. |
| Deposit rates are reviewed weekly by management and are generally discussed by the Asset/Liability Committee on a monthly basis. The Banks primary objective in setting deposit rates is to remain competitive in the market area, and develop funding opportunities while earning an adequate interest rate margin. |
| Total borrowings decreased to $57,655 at March 31, 2011 from $58,502 at December 31, 2010. This is mainly due to a reduced reliance on borrowed funds because of the improved ability to raise deposits from its core customer base. |
ANALYSIS OF FINANCIAL CONDITION
The Corporations consolidated assets totaled $587,842 at March 31, 2011, compared to $565,105 at December 31,
2010, an increase of $22,737, or 4.0%. Cash and cash equivalents increased by $41,654 to $75,175
at March 31, 2011 as a result of increased deposits and run-off in the loan portfolios. Total
securities decreased slightly from $70,910 at December 31, 2010 to $68,283 at March 31, 2011.
Management utilizes investment securities to provide the Bank with the flexibility to move funds into loans as demand warrants, and as collateral for
various borrowing opportunities.
30
Table of Contents
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Total loans, including loans held for sale, decreased $16,620, from $424,864 at December 31, 2010
to $408,244 at March 31, 2011. The decline in outstanding loan balances is mainly due to the lower
volume of new originations due to the current economy and the charge-off of non-performing loans.
The Corporations loan originations have remained lower, as the availability of quality lending
opportunities within The Banks marketplace remain low.
Total deposits increased $24,069, from $465,076 at December 31, 2010 to $489,145 at March 31, 2011.
Deposit growth stems primarily from increased deposits from local public customers. The Bank had
$89,268 in CDARS deposits outstanding at March 31, 2011, a significant decline from one-year
earlier. Noninterest-bearing deposits were stable from year-end.
On an as needed basis, The Corporation utilizes a variety of alternative funding sources due to
competitive challenges within its primary market. Total borrowings decreased $847 during the three
months ended March 31, 2011. The decline in long-term borrowings was mainly attributed to normal
pay downs based on pre-determined amortization schedules. Typically, the Company utilizes a
matched funding methodology for its borrowing and deposit activities. This is done by matching the
rates, terms and expected cash flows of its loans to the various liability products. This matching
principle is used to not only provide funding, but also as a means of mitigating interest rate risk
associated with originating longer-term fixed-rate loans. Additional reliance on borrowings
outside of normal deposit growth may increase the Corporations overall cost of funds.
COMPARISON OF RESULTS OF OPERATIONS
Net Income (Loss). The Corporation reported net income of $33 for the three months ended March 31,
2011, compared to a loss of $888 in 2010. The improvement in profitability was mainly attributed
to reduced provision expense and reduced recognition of other-than-temporary impairment.
Additionally, a decline in salary and benefit expense contributed to the positive change. These
increases were partially offset by reduced net interest income and increased expenses associated
with workout loans and OREO property.
Net Interest Income. Net interest income represents the amount by which interest income on
interest-earning assets exceeds interest expense on interest-bearing liabilities. Net interest
income is the largest component of the Corporations income, and is affected by the interest rate
environment and the volume and the composition of interest-earning assets and interest-bearing
liabilities.
Net interest income was $4,613 for the three months ended March 31, 2011 and $5,494 for the same
period in 2010. This decline is mainly attributed to lower interest earning assets, including the
fact that loan originations are not keeping pace with loan amortization. Due to the current
economic environment, quality loan originations remained sluggish during the first quarter and The
Bank continued to experience run off in its loan portfolios. Additionally, The Bank has increased
on-balance sheet cash from year-end 2010, which provides nominal interest yield.
As noted, The Corporation has been able to reduce its overall borrowings, mainly through the FHLB,
by replacing them with customer deposits that have grown significantly. Deposits normally are less
expensive and less volatile than borrowing which contributes to the stable net interest margin The Bank has
experienced. Net interest margin for the first quarter remained stable in the first quarter 2011 at
3.52%, which is comparable to both the first quarter 2010 and the fourth quarter 2010.
Additionally, the cost of deposits has remained controlled, which has also contributed to the
stable margin.
The Asset/Liability Management Committee, which is responsible for determining deposit rates,
continues to closely monitor the Banks cost of funds to take advantage of pricing and cash flow
opportunities. Additionally, because of the
increased competition in the Banks primary marketplace, management has continued to recognize the
importance of offering special rates on certain deposit products. These special deposit rates tend
to negatively affect the Corporations
net interest margin. It is likely that these rates will continue to be offered to secure liquidity
while maintaining market share.
31
Table of Contents
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Provision and Allowance for Loan Losses. The provision for loan losses represents the charge to
income necessary to adjust the allowance for loan losses to an amount that represents managements
assessment of the losses known and inherent in the Banks loan portfolio. All lending activity
contains associated risks of loan losses and the Bank recognizes these credit risks as a necessary
element of its business activity.
The provision for loan losses totaled $675 for the three months ended March 31, 2011, compared to
$1,961 for the same period in 2010. This decline from the previous years quarter is mainly
attributed to the overall improvement in credit quality within The Banks loan portfolios. Other
contributing factors include improvement in delinquencies, improved workout results and some
improvements in economic conditions within The Banks market area. Management maintains an
allowance for loan losses at a level to absorb managements estimate of probable inherent credit
losses in its portfolio.
Non-accrual loans at March 31, 2011 were $17,158, an increase of only $591 over the December 31,
2010 balance of $16,657, as problems loans have stabilized in response to workout activities. The
majority of non-accrual balances are attributed to loans in the investment real estate sector that
were not generating sufficient cash flow to service the debt. Delinquent loans over thirty days
decreased to 3.80% of total loans at March 31, 2011 from 4.01% at December 31, 2010. Delinquent
loans are mainly attributed to the real estate investment and commercial portfolios.
The allowance for loan losses was $10,300, or 2.52% of total loans at March 31, 2011, compared to
$12,247, or 2.88% of total loans at December 31, 2010. Net charge-offs for the first quarter were
$2,623, which were mainly attributed to commercial real estate loans. The net charge-offs were the
main reason for the decline in both the dollar and percentage of reserves to total loans at March
31, 2011. Management will continue to monitor the credit quality of the loan portfolio and may
recognize additional provisions in the future if needed to maintain the allowance for loan losses
at an appropriate level.
Noninterest Income. Total noninterest income increased $1,066 for the three months ended March 31,
2011, compared to the same period in 2010. The increase was primarily attributable to the decline
in losses attributed to the Corporations CDO portfolio. In the first quarter 2010 the
other-than-temporary impairment recognized was $1,030 versus $92 in the first quarter 2011. Other
revenue categories such as service charges and trust fees increased slightly, but were offset by
gains on loan sales and data processing fees.
Noninterest Expense. Total noninterest expense decreased $57, or 1.0%, for the three months ended
March 31, 2011 compared to the same period in 2010. The decrease was the result of a decline in
salary and benefits of $219 from the first quarter 2010, offset by increases in professional
services of $99. The Company has reduced staffing levels through attrition in order to better match
FTE employee count to the overall size of operations. The Corporation also continues to experience
larger than normal costs associated with legal and consulting as a result of the credit issues
within its loan portfolios. As workout results improve the expectations are that professional and
legal fees will decline accordingly in future periods.
Income Taxes. The Corporation recorded a tax credit totaling $24 for the three months ended
March 31, 2011, compared to tax credit of $631 in the first quarter 2010. In 2010, The Corporation
was booking federal income tax credits in order to recognize the deferred tax benefit associated
with its quarterly losses. In 2011, Management elected to recognize a full allowance on its
deferred tax position.
32
Table of Contents
DCB FINANCIAL CORP
MANAGEMENTS 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 Bank to its customers. The Banks 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
Federal Home Loan Bank (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 managements
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 increased $41,654 to $75,175 at March 31, 2011 as compared to December
31, 2010. The increase in cash equivalents is mainly due to increased deposit activity related to
public fund deposit activity. The Bank is offering a number of retail deposit programs to increase
core deposits while reducing reliance on large depositors and CDARS deposits. Cash and equivalents
represented 12.8% of total assets at March 31, 2011 and 5.9% of total assets at December 31, 2010.
The Corporation has the ability to borrow funds from the FHLB and the Federal
Reserve should the Corporation need to supplement its future liquidity needs. Management believes
the Corporations 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 increased $83 between December 31, 2010 and March 31, 2011. The
increase was primarily due to period net income of $33, and a decrease in accumulated other
comprehensive loss.
Tier 1 capital is shareholders equity excluding the unrealized gain or loss on securities 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 Corporations 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 published regulatory capital requirements. The ratio
of total capital to risk-weighted assets was 10.59% at March 31, 2011, while the Tier 1 risk-based
capital ratio was 6.55%. Regulatory minimums call for a total risk-based capital ratio of 8.0%, at
least half of which must be Tier 1 capital. The Corporations leverage ratio, defined as Tier 1
capital divided by average assets, was 6.6% at March 31, 2010. The Corporations wholly-owned bank
reported total capital to risk-weighted assets of 10.6% at March 31, 2010.
As previously reported in the notes to the 10-K
filing for December 31, 2010, the Corporations wholly owned subsidiary bank is required to
reach a Tier-1 capital level of 9% per formal agreements entered into with the FDIC and ODFI. Management
has been partnering with the appropriate regulatory bodies in addressing the issues presented in the
agreements. However, at March 31, 2011, the Bank had not increased its Tier-1 capital ratio to that level.
For additional details regarding the content of the agreement, see Notes to the Consolidated Statements
of the 10-K.
33
Table of Contents
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
The following table sets forth the Corporations obligations and commitments to make future
payments under contract as of March 31, 2011.
Payment Due by Year | ||||||||||||||||||||
Less than 1 | More than 5 | |||||||||||||||||||
Contractual Obligations | Total | year | 1-3 years | 3-5 years | years | |||||||||||||||
FHLB advances |
$ | 57,655 | $ | 15,000 | $ | 31,877 | $ | 7,617 | $ | 3,161 | ||||||||||
Federal funds purchased and
other
short-term borrowings |
1,161 | 1,161 | | | | |||||||||||||||
Operating lease obligations |
3,712 | 705 | 1,059 | 944 | 1,004 | |||||||||||||||
Loan and line of credit
commitments |
69,616 | 34,364 | | | 35,252 | |||||||||||||||
Total Contractual Obligations |
$ | 132,144 | $ | 51,230 | $ | 32,936 | $ | 8,561 | $ | 39,417 | ||||||||||
Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The Corporations primary market risk exposure is interest rate risk and, to a lesser extent,
liquidity risk. Interest rate risk is the possibility that the Corporations 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 Corporations 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 Corporations 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 up and down parallel shifts of 100 to 400 basis points in market rates.
The Corporations Annual Report includes a table depicting the changes in the Corporations
interest rate risk as of December 31, 2010, as measured by changes in NPV for instantaneous and
sustained parallel shifts of -100 to +400 basis points in market interest rates. Management
believes that no events have occurred since December 31, 2010 that would significantly change their
ratio of rate sensitive assets to rate sensitive liabilities.
The Corporations 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 Corporations
deposits generally have shorter periods for repricing.
34
Table of Contents
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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 todays current interest rate levels. Several deposit
products are within 200 basis points of zero percent and other products within 300 basis points.
Should rates decline, fewer liabilities could be repriced down to offset potentially lower yields
on loans. Thus decreases could also impact future earnings and the Corporations 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 Corporation carried out an evaluation, under the supervision and with the participation of
the Corporations management, including the Corporations Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Corporations disclosure controls and
procedures as of March 31, 2011, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the Corporations disclosure
controls and procedures were effective as of March 31, 2011, in timely alerting them to material
information relating to the Corporation (including its consolidated subsidiaries) required to be
included in the Corporations periodic SEC filings.
There was no change in the Corporations internal control over financial reporting that occurred during
the Corporations fiscal quarter ended March 31, 2011, that has materially affected, or is reasonably
likely to materially affect, the Corporations internal control over financial reporting, except with
respect to controls related to determination of fair value and evaluation of other-than-temporary
impairment of collateralized debt obligations.
35
Table of Contents
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended March 31, 2011
PART II OTHER INFORMATION
Item 1 | Legal Proceedings: |
There are no matters required to be reported under this item.
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds: |
ISSUER PURCHASES OF EQUITY SECURITIES
(d) | ||||||||||||||||
(c) | Maximum Number | |||||||||||||||
Total Number of | (or Approximate | |||||||||||||||
(a) | Shares (or Units) | Dollar Value) of | ||||||||||||||
Total Number | (b) | Purchased as Part | Shares (or Units) that | |||||||||||||
of Shares | Average Price | of Publicly | May Yet Be | |||||||||||||
(or Units) | Paid per Share | Announced Plans | Purchased Under the | |||||||||||||
Period | Purchased | (or Unit) | or Programs(1) | Plans or Programs | ||||||||||||
Beginning Balance |
| | | 184,907 | ||||||||||||
Month #l
1/1/2011 to
1/31/2011 |
| | | | ||||||||||||
Month #2
2/1/2011 to
2/28/2011 |
| | | | ||||||||||||
Month #3
3/1/2011 to
3/31/2011 |
| | | | ||||||||||||
Ending Balance |
| | | 184,907 | ||||||||||||
(1) | On August 16, 2007, the Company announced a repurchase program which authorizes the repurchase of up to 200,000 of its common shares over a two year period commencing August 15, 2007. |
36
Table of Contents
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended March 31, 2011
PART II OTHER INFORMATION
Item 3 | Defaults Upon Senior Securities: |
There are no matters required to be reported under this item. |
Item 4 | Submission of Matters to a Vote of Security Holders: |
There are no matters required to be reported under this item. |
Item 5 | Other Information: |
There are no matters required to be reported under this item. |
Item 6 | Exhibits: |
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 Companys 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 Companys Report on Form 10-Q filed with the
Commission on November 14, 2003. |
|||
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 |
37
Table of Contents
DCB FINANCIAL CORP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DCB FINANCIAL CORP (Registrant) |
||||
Date: May 16, 2011 | /s/ David J. Folkwein | |||
David J. Folkwein | ||||
President and Chief Executive Officer | ||||
Date: May 16, 2011 | /s/ John A. Ustaszewski | |||
John A. Ustaszewski | ||||
Senior Vice President and Chief Financial Officer |
38
Table of Contents
DCB FINANCIAL CORP
INDEX TO EXHIBITS
EXHIBIT | ||||
NUMBER | DESCRIPTION | |||
3.1 | Amended and Restated Articles of Incorporation of DCB Financial Corp, incorporated by reference
to the
Companys 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
Companys Report on Form 10-Q filed with the Commission on November 14, 2003. |
|||
31.1 | Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Chief Financial Officer 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. |
39