Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number0-22387
DCB FINANCIAL CORP
(Exact name of registrant as specified in its charter)
| OHIO | 31-1469837 | |
| (State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification No.) | |
| 110 Riverbend Ave., Lewis Center, Ohio | 43035 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code(740) 657-7000
| Securities registered pursuant to Section 12(b) of the Act: | None | |
| Securities registered pursuant to Section 12(g) of the Act: | Common Shares, No par value |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþ
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. Yesþ Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filerso | Accelerated filerþ | Non-accelerated filero |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yeso Noþ
Table of Contents
At June 30, 2005, the aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant, based on a common share price of $26.08 per share (such price being the average of the bid and asked prices on such date) was $102,556,444.
At March 10, 2006, the registrant had 3,814,414 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II of Form 10-K — Portions of the Annual Report to Shareholders for the year ended December 31, 2005.
Part III of Form 10-K — Portions of the definitive Proxy Statement for the 2006 Annual Meeting of Shareholders of DCB Financial Corp.
2
TABLE OF CONTENTS
Table of Contents
PART I
Item 1 Description of Business
| (a) | General Development of Business |
| DCB Financial Corp (“DCB” or the “Corporation”) is a financial services holding company headquartered in Lewis Center, Ohio. The Corporation has one wholly-owned subsidiary bank, the Delaware County Bank and Trust Company (the “Bank”). | |||
| The Corporation was incorporated under the laws of the State of Ohio in 1997, at the direction of management of the Bank for the purpose of becoming a bank holding company by acquiring all outstanding shares of the Bank. The Corporation acquired all such shares of the Bank after an interim bank merger, which transaction was consummated on March 14, 1997. The Bank is a commercial bank, chartered under the laws of the State of Ohio, and was organized in 1950. |
| (b) | Narrative Description of Business |
| The Bank provides customary retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, trust, and other wealth management services. The Bank also provides cash management, bond registrar and paying agent services. Through its own computer department, the Bank provides data processing and other bank operational services to other financial institutions; however, such services are not a significant part of operations or revenue. | |||
| 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 Corporation’s market area have been sound, including unemployment statistics, which have generally remained stable. Real estate values, especially in the Bank’s core geographic area, have been stable to rising for the last five years. | |||
| The Bank is not significantly affected by seasonal activity or large deposits of any individual depositor. At year-end 2005, deposits of public funds (funds of governmental agencies and municipalities) were 19% of total deposits. This amount can fluctuate, but generally not by a material amount. No material industry or group concentrations exist in the loan portfolio. | |||
| Certain risks are involved in granting loans, primarily related to the borrowers’ ability and willingness to repay the debt. Before the Bank extends a new loan to a customer, these risks are assessed through a review of the borrower’s repayment capacity, past and current credit history, the collateral being used to secure the transaction in case the customer does not repay the debt, the borrower’s character and other factors. Once the decision has been made to extend credit, the Bank’s independent loan review function and credit officer monitor these factors throughout the life of the loan. All credit relationships of $575,000 or more are reviewed annually, as are 30% of credit relationships from $250,000 to $575,000, 20% of credit relationships from $100,000 to $250,000 (excluding residential mortgages), and 10% of residential mortgages from $100,000 to $250,000. Loan review performs a limited scope review of a minimum of 30 percent of all new loans booked. In addition, any loan identified as a problem credit by management during loan review is assigned to the Bank’s loan “watch list,” is subject to ongoing monitoring by the Bank’s credit quality committee to ensure appropriate action is taken if deterioration occurs. | |||
| Commercial, industrial and agricultural loans are primarily variable rate and include operating lines of credit and term loans made to small businesses primarily based on their ability to repay the loan from the business’s cash flow. Such loans are typically secured by business assets such as equipment and inventory and, occasionally, by the business owner’s principal residence. |
3
Table of Contents
| When the borrower is not an individual, the Bank generally obtains the personal guarantee of the business owner. As compared to consumer lending, which includes single-family residence, personal installment loans and automobile loans, commercial lending entails significant additional risks. These loans typically involve larger loan balances and are generally dependent on the business’s cash flow and, thus, may be subject to adverse conditions in the general economy or in a specific industry. Management reviews the borrower’s cash flows when deciding whether to grant the credit to evaluate whether estimated future cash flows will be adequate to service principal and interest of the new obligation in addition to existing obligations. | |||
| Commercial real estate and farmland loans are primarily secured by borrower-occupied business real estate and are dependent on the ability of the related business to generate adequate cash flow to service the debt. Such loans primarily carry adjustable interest rates. Commercial real estate loans are generally originated with a loan-to-value ratio of 80% or less. Management performs much of the same analysis whether deciding to grant a commercial real estate loan or a commercial loan. | |||
| Residential real estate loans and home equity lines of credit can either be fixed rate, or carry an adjustable rate. These loans are secured by the borrower’s residence. Such loans are made based on the borrower’s ability to repay the debt from employment and other income. Management assesses the borrower’s ability to repay the debt through a review of credit history and ratings, verification of employment and other income, review of debt-to-income ratios and other measures of repayment ability. The Bank generally makes these loans in amounts of 80% or less of the value of collateral. An appraisal is obtained from a qualified real estate appraiser for substantially all loans secured by real estate. | |||
| Due to the high level of growth in the Corporation’s market area, construction lending has become a significant part of the Corporation’s overall lending strategy. Construction loans are secured by residential and business real estate, generally occupied by the borrower on completion. The Bank’s construction lending program is established in a manner to minimize risk of this type of lending by not making a significant amount of loans on speculative projects. While not contractually required to do so, the Bank usually makes the permanent loan at the end of the construction phase. Construction loans also are generally made in amounts of 80% or less of the value of collateral. | |||
| Consumer installment loans to individuals include loans secured by automobiles and other consumer assets, including second mortgages on personal residences. Consumer loans for the purchase of new automobiles generally do not exceed 85% of the purchase price of the car. Loans for used cars generally do not exceed average wholesale or trade-in value as stipulated in a recent auto industry used car price guide. Credit card and overdraft protection loans are unsecured personal lines of credit to individuals of demonstrated good credit character with reasonably assured sources of income and satisfactory credit histories. Consumer loans generally involve more risk than residential mortgage loans because of the type and nature of collateral and, in certain types of consumer loans, the absence of collateral. Since these loans are generally repaid from ordinary income of an individual or family unit, repayment may be adversely affected by job loss, divorce, ill health or by general decline in economic conditions. The Bank assesses the borrower’s ability to make repayment through a review of credit history, credit ratings, debt-to-income ratios and other measures of repayment ability. |
4
Table of Contents
| (b) | Narrative Description of Business (Continued) |
| Employees | |||
| At December 31, 2005, the Bank employed 207 employees, 174 of whom were full-time. The Bank offers a number of employee benefits such as health, dental and life insurance, as well as education assistance for qualified employees. A 401(k) retirement plan is also available for eligible employees. No employee is represented by a union or collective bargaining group. Management considers its employee relations to be good. All of the Corporation’s employees are also employed by the Bank. | |||
| Competition | |||
| The Bank operates in a highly competitive industry due to statewide and interstate branching by banks, savings and loan associations and credit unions. In its primary market area of Delaware County, Ohio and surrounding counties, the Bank competes for new deposit dollars and loans with several financial service companies, including large regional and smaller community banks, as well as savings and loan associations, credit unions, finance companies, insurance companies, brokerage firms and investment companies. According to the most recent market data, there are approximately fifteen other deposit-taking and lending institutions competing in the Bank’s primary market. In addition, according to the market data, the Bank currently ranks first in market share with approximately 34.1% of the deposits in the primary market. 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 Bank’s investment portfolio, and which rates are used as indices on various loan products. The Bank is competitive with interest rates and loan fees that it charges, and in pricing and the variety of accounts it offers to the depositor. The dominant pricing mechanism on loans is the Prime interest rate as published in theWall Street Journal. The interest spread over Prime depends on the overall account relationship and the creditworthiness of the borrower. Deposit rates are reviewed weekly by management and are normally discussed by the Asset/Liability Committee on a monthly basis. The Bank’s primary objective in setting deposit rates is to remain competitive in the market area, while developing funding opportunities that earn an adequate interest rate margin. | |||
| Supervision and Regulation | |||
| The business in which the Corporation and its subsidiaries are engaged is subject to extensive supervision, regulation and examination by various bank regulatory authorities and other governmental agencies. The Bank is subject to supervision, regulation and periodic examination by the State of Ohio Superintendent of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”). The supervision, regulation and examination to which the Corporation and its subsidiaries are subject are intended primarily for the protection of depositors and the deposit insurance funds that insure the deposits of banks, rather than for the protection of security holders. | |||
| Earnings of the Bank are affected by state and federal laws and regulations, and by policies of various regulatory authorities. These policies include, for example, statutory maximum lending rates, requirements on maintenance of reserves against deposits, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States fiscal policy, international currency regulations and monetary policies, certain restrictions on banks’ relationships with many phases of the securities business and capital adequacy and liquidity restraints. As a |
5
Table of Contents
| financial holding company, the Corporation is subject to supervision, regulation and periodic examination by the Federal Reserve Board, and is subject to the rules of the SEC. |
| Liability for Banking Subsidiaries | |||
| Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength for each of its subsidiary banks and to commit resources to their support. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (1) the “default” of a commonly controlled FDIC-insured depository institution; or (2) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution “in danger of default.” | |||
| FDICIA | |||
| The Federal Deposit Insurance Corporation Act of 1991 (FDICIA), and the regulations promulgated under FDICIA, among other things, established five capital categories for insured depository institutions-well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, and requires federal bank regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements based on these categories. Unless a bank is well capitalized, it is subject to restrictions on its ability to offer brokered deposits and on certain other aspects of its operations. As of December 31, 2005, the Corporation and the Bank were both considered well-capitalized based on the guidelines implemented by the Federal Reserve and FDIC. | |||
| Financial Modernization | |||
| The Gramm-Leach-Bliley Act (“GLBA”) was signed into law in 1999, and became effective in 2000. It permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under regulatory prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act (CRA) by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. | |||
| The GLBA defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Board has determined to be closely related to banking. Subsidiary banks of a financial holding company must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has CRA rating of satisfactory or better. |
6
Table of Contents
| (c) | Available Information |
| The Company maintains an Internet web-site at the following web-site address: http://www.dcbfinancialcorp.com. The Company makes available, free of charge through its internet address, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports as soon as reasonably practicable after such materials have been filed with or furnished to the SEC. Copies of these documents may also be obtained, either in electronic or paper form, by contacting Jay D. Wolf, Vice President of Marketing and Customer Relations at 740-657-7000. |
Item 1A Risk Factors
| The following discussion focuses on the major business risks encountered in the Corporation’s operating environment. | |||
| The interest rate environment has compressed our margins and affected our net interest income | |||
| The rising interest rate environment has increased the Bank’s funding costs at a rate slightly higher than the increase in the yield on loans and investments. This margin compression has affected our net interest income, which is the largest component of our earnings. In addition, our deposits costs have increased and our short-term borrowings have increased at the same time. If these trends continue, we expect that net interest income will continue to be negatively affected. | |||
| The rising interest rate environment may also negatively affect the volume of loan originations. If interest rates continue to rise, we expect that the residential market mortgage will decline during 2006. If this occurs, loan mortgage originations may be negatively affected. In addition, an increase in interest rates can have a negative effect on loan delinquencies for loans with adjustable rates. | |||
| Competition from other financial institutions in our markets | |||
| We face significant competition in attracting and retaining deposits in all of our markets. Our most direct competition for deposits has historically come from other financial institutions doing business in our primary market areas of Ohio. The number of competitors’ branches has increased in our primary geographic service area. | |||
| The ability to extend credit and assessing the allowance for loan losses | |||
| Certain risks are involved in granting loans, primarily related to the borrowers’ ability and willingness to repay the debt. Before the Bank extends a new loan to a customer, these risks are assessed through a review of the borrower’s repayment capacity, past and current credit history, the collateral being used to secure the transaction in case the customer does not repay the debt, the borrower’s character and other factors. Once the decision has been made to extend credit, the Bank’s independent loan review function and credit officer monitor these factors throughout the life of the loan. |
7
Table of Contents
| 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. | |||
| Asset and Liability Management and Market Risk | |||
| The Corporation’s ALCO committee utilizes a variety of tools to measure and monitor interest rate risk. This is defined as the risk that the Corporation’s financial condition will be adversely affected due to movements in interest rates. To a lesser extent, the Corporation is also exposed to liquidity risk, or the risk that changes in cash flows could adversely affect its ability to honor its financial obligations. The ALCO committee monitors changes in the interest rate environment and changes to its lending and deposit rates based on liquidity and profitability analysis. |
Item 1B Unresolved Staff Comments
| The Corporation has no unresolved staff comments |
8
Table of Contents
| I Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential |
| The information required by this item is set forth in the Company’s Annual Report to Shareholders. Such information is incorporated herein by reference. |
| II Investment Portfolio |
| The following table sets forth the carrying amount of securities at December 31, 2005, 2004 and 2003. |
| (In thousands) | 2005 | 2004 | 2003 | |||||||||
Available for sale | ||||||||||||
| U.S. government and agency obligations | $ | 24,732 | $ | 26,787 | $ | 38,597 | ||||||
| States and municipal obligations | 25,723 | 19,710 | 21,076 | |||||||||
| Corporate bonds | 8,025 | 8,073 | 8,215 | |||||||||
| Mortgage-backed securities | 38,016 | 41,470 | 38,201 | |||||||||
| Total debt securities | 96,496 | 96,040 | 106,089 | |||||||||
| Other securities | 84 | 83 | 99 | |||||||||
| Total | $ | 96,580 | $ | 96,123 | $ | 106,188 | ||||||
| The following table sets forth information regarding scheduled maturities, fair value and weighted average yields of the Corporation’s debt securities at December 31, 2005. The weighted average yield has been computed using the historical amortized cost for securities available for sale. The weighted average yield on tax-exempt obligations is computed on a taxable equivalent basis based on the statutory federal income tax rate of 34%. |
| One | Five | |||||||||||||||||||
| One | Through | Through | After | |||||||||||||||||
| Year | Five | Ten | Ten | Fair Value | ||||||||||||||||
| (In thousands) | or Less | Years | Years | Years | Total | |||||||||||||||
Available for sale | ||||||||||||||||||||
| U.S. government and agency obligations | $ | 5,994 | $ | 12,480 | $ | 5,755 | $ | 503 | $ | 24,732 | ||||||||||
| States and municipal obligations | 739 | 1,702 | 9,624 | 13,658 | 25,723 | |||||||||||||||
| Corporate bonds | — | — | — | 8,025 | 8,025 | |||||||||||||||
| Mortgage-backed securities (1) | 34 | 6,176 | 2,535 | 29,271 | 38,016 | |||||||||||||||
| $ | 6,767 | $ | 20,358 | $ | 17,914 | $ | 51,457 | $ | 96,496 | |||||||||||
| Weighted average yield | 3.617 | % | 4.491 | % | 3.862 | % | 5.109 | % | 4.219 | % | ||||||||||
| (1) | Based on contractual terms to maturity. Mortgage-backed securities are subject to prepayment without penalty. |
9
Table of Contents
| III Loan Portfolio |
| Types of Loans | |||
| The amounts of gross loans outstanding at December 31, 2005, 2004, 2003, 2002, and 2001 are shown in the following table. |
| (In thousands) | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||
| Commercial and industrial | $ | 47,498 | $ | 49,184 | $ | 51,709 | $ | 45,543 | $ | 52,534 | ||||||||||
| Commercial real estate | 202,649 | 175,796 | 156,836 | 144,646 | 124,537 | |||||||||||||||
| Residential real estate and home equity | 193,787 | 170,010 | 117,098 | 87,548 | 88,797 | |||||||||||||||
| Real estate construction and land development | 49,553 | 34,199 | 30,120 | 37,603 | 34,212 | |||||||||||||||
| Consumer and credit card | 58,653 | 53,156 | 48,399 | 54,821 | 62,513 | |||||||||||||||
| $ | 552,140 | $ | 482,345 | $ | 404,162 | $ | 370,161 | $ | 362,593 | |||||||||||
| Risk Elements |
| Nonaccrual and Past Due Loans |
| The following table summarizes nonaccrual loans and accruing loans past due greater than 90 days or more at December 31, 2005, 2004, 2003, 2002, and 2001. |
| (In thousands) | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||
| Nonaccrual loans | $ | 2,185 | $ | 1,879 | $ | 1,813 | $ | 3,387 | $ | 3,390 | ||||||||||
| Accruing loans past due 90 days or more | $ | 2,648 | $ | 1,544 | $ | 1,252 | $ | 187 | $ | 200 | ||||||||||
| The policy for placing loans on nonaccrual status is to cease accruing interest on loans when management believes that collection of interest is doubtful, when loans are past due as to principal and interest 90 days or more, except that in certain circumstances interest accruals are continued on loans deemed by management to be fully collectible. In such cases, loans are individually evaluated in order to determine whether to continue income recognition after 90 days beyond the due dates. When loans are placed on nonaccrual, any accrued interest is charged against interest income. | |||
| The additional amount of interest income that would have been recorded on nonaccrual loans, had they been current, totaled $127,000, $128,000, and $163,000 for the years ended December 31, 2005, 2004, and 2003, respectively. | |||
| Potential Problem Loans | |||
| A business loan is classified as impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller balance loans or loans of a similar nature such as residential mortgage, consumer and credit card loans, and on an individual basis for commercial and commercial real estate loans. |
10
Table of Contents
| Loan Concentrations | |||
| At year-end 2005, there were no concentrations of loans greater than 10% of total loans that are not otherwise disclosed as a category of loans in Item III above. |
| Other Interest-Bearing Assets | |||
| At year-end 2005, there were no other interest-bearing assets required to be disclosed under Item III if such assets were loans. | |||
11
Table of Contents
| IV | Summary of Loan Loss Experience |
| Analysis of the Allowance for Loan Losses |
| The following table sets forth the activity in the Corporation’s allowance for loan and lease losses for the years ended December 31, 2005, 2004, 2003, 2002, and 2001. |
| (In thousands) | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||
| Balance at beginning of year | $ | 4,818 | $ | 4,331 | $ | 4,094 | $ | 3,596 | $ | 3,334 | ||||||||||
| Loans charged off: | ||||||||||||||||||||
| Commercial | (193 | ) | (628 | ) | (654 | ) | (1,989 | ) | (278 | ) | ||||||||||
| Commercial real estate | (61 | ) | (102 | ) | (60 | ) | (73 | ) | — | |||||||||||
| Residential real estate and home equity | (48 | ) | (60 | ) | — | (1 | ) | — | ||||||||||||
| Real estate construction | — | — | — | — | — | |||||||||||||||
| Consumer and credit card | (1,135 | ) | (524 | ) | (631 | ) | (513 | ) | (487 | ) | ||||||||||
| Lease financing | (20 | ) | (71 | ) | — | (74 | ) | — | ||||||||||||
| Total loans charged off | (1,457 | ) | (1,385 | ) | (1,345 | ) | (2,650 | ) | (765 | ) | ||||||||||
| Loan recoveries: | ||||||||||||||||||||
| Commercial | 14 | 21 | 50 | 91 | 28 | |||||||||||||||
| Commercial real estate | — | — | — | — | — | |||||||||||||||
| Residential real estate and home equity | — | — | — | — | — | |||||||||||||||
| Consumer and credit card | 142 | 154 | 114 | 102 | 126 | |||||||||||||||
| Lease financing | 18 | 1 | — | 5 | 1 | |||||||||||||||
| Total loan recoveries | 174 | 176 | 164 | 198 | 155 | |||||||||||||||
| Net loans charged off | (1,283 | ) | (1,209 | ) | (1,181 | ) | (2,452 | ) | (610 | ) | ||||||||||
| Provision for loan losses | 2,000 | 1,696 | 1,418 | 2,950 | 872 | |||||||||||||||
| Balance at end of year | $ | 5,535 | $ | 4,818 | $ | 4,331 | $ | 4,094 | $ | 3,596 | ||||||||||
| Ratio of net charge-offs to average loans outstanding | 0.24 | % | 0.28 | % | 0.31 | % | 0.66 | % | 0.18 | % | ||||||||||
| Allocation of the Allowance for Loan Losses |
| The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios. While management’s periodic analysis of the adequacy of allowance for loan losses may allocate portions of the allowance for specific problem-loan situations, the entire allowance is available for any loan charge-off that occurs. |
12
Table of Contents
| Percentage of | Percentage of | Percentage of | ||||||||||||||||||||||
| Loans in Each | Loans in Each | Loans in Each | ||||||||||||||||||||||
| Allowance | Category to | Allowance | Category to | Allowance | Category to | |||||||||||||||||||
| Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | |||||||||||||||||||
| (In thousands) | December 31, 2005 | December 31, 2004 | December 31, 2003 | |||||||||||||||||||||
| Commercial and industrial | $ | 2,411 | 8.59 | % | $ | 3,240 | 10.18 | % | $ | 2,345 | 12.77 | % | ||||||||||||
| Commercial real estate | 887 | 36.64 | 225 | 36.37 | 698 | 38.92 | ||||||||||||||||||
| Residential real estate and home equity | 529 | 35.20 | 245 | 35.37 | 318 | 28.92 | ||||||||||||||||||
| Real estate construction | 98 | 8.96 | — | 7.08 | — | 7.44 | ||||||||||||||||||
| Consumer and credit card | 1,610 | 10.49 | 1,074 | 10.73 | 970 | 10.98 | ||||||||||||||||||
| Lease financing | — | .12 | 34 | .27 | — | .97 | ||||||||||||||||||
| Total | $ | 5,535 | 100.00 | % | $ | 4,818 | 100.00 | % | $ | 4,331 | 100.00 | % | ||||||||||||
| December 31, 2002 | December 31, 2001 | |||||||||||||||
| Commercial and industrial | $ | 2,120 | 12.30 | % | $ | 1,765 | 14.49 | % | ||||||||
| Commercial real estate | 891 | 39.08 | 94 | 34.35 | ||||||||||||
| Residential real estate and home equity | 66 | 23.65 | 116 | 24.49 | ||||||||||||
| Real estate construction | 20 | 10.16 | 57 | 9.44 | ||||||||||||
| Installment and credit card | 706 | 13.08 | 799 | 14.62 | ||||||||||||
| Lease financing | 55 | 1.73 | 68 | 2.61 | ||||||||||||
| Unallocated | 236 | — | 697 | — | ||||||||||||
| Total | $ | 4,094 | 100.00 | % | $ | 3,596 | 100.00 | % | ||||||||
13
Table of Contents
| V | Deposits |
| Schedule of Average Deposit Amounts and Rates |
| Average balance of noninterest-bearing demand deposits totaled $67.5 million, $64.8 million, and $76.4 million, for the years ended December 31, 2005, 2004 and 2003. Additional detail regarding the make-up of the Corporation’s average deposit balances and related interest expense can be found on the Corporation’s attached Annual Report to Shareholders. |
| Maturity Analysis of Time Deposits Greater than $100,000 |
| The following is a schedule of maturities of time certificates of deposit in amounts of $100,000 or more as of December 31, 2005. |
| (In thousands) | ||||
| Three months or less | $ | 42,210 | ||
| Over three through six months | 21,745 | |||
| Over six through twelve months | 12,949 | |||
| Over twelve months | 21,270 | |||
| Total | $ | 98,174 | ||
| VI | Return on Equity and Assets |
| The information required by this item is set forth in the Company’s Annual Report to Shareholders. |
| VII | Short-Term Borrowings |
| Average outstanding balances of short-term borrowings were 31% of shareholder’s equity for the year ending December 31, 2005 and less than 30% for the years ended December 31, 2004 and December 31, 2003. |
14
Table of Contents
Item 2 Properties
The Bank owns and operates its main office at 110 Riverbend Avenue, Lewis Center, Ohio 43035. The Bank also operates 16 branches and utilizes 9 other properties that are owned or leased as noted below:
| 1. | Corporate Office, 110 Riverbend Avenue, Lewis Center, Ohio 43015 (owned) | |
| 2. | Downtown Delaware Branch Office, 41 N. Sandusky St., Delaware, Ohio 43015 (leased) | |
| 3. | William Street Drive–Thru Office, 33 W. William St., Delaware, Ohio 43015 (leased) | |
| 4. | Delaware Center Branch Office, 199 S. Sandusky Street, Delaware, Ohio 43015 (owned) | |
| 5. | Galena Branch Office, 10 Park Street, Galena, Ohio 43021 (owned) | |
| 6. | Ostrander Branch Office, 10 West North Street, Ostrander, Ohio 43061 (owned) | |
| 7. | Green Meadows Branch Office, 9201 Columbus Pike, Lewis Center, Ohio 43035 (own bldg., lease land) | |
| 8. | Ashley Branch Office, 2 West High Street, Ashley, Ohio 43003 (owned) | |
| 9. | Buehler’s Central Office, 800 West Central Avenue, Delaware, Ohio 43015 (leased) | |
| 10. | Marysville Downtown Office, 108 South Main Street, Marysville, Ohio 43040 (leased) | |
| 11. | Marysville Plaza Office, 1169 West Fifth Street, Marysville, Ohio 43040 (leased) | |
| 12. | Sunbury Office, 75 S. Miller Dr., Sunbury, Ohio 43074 (owned) | |
| 13. | Highland Lakes Office, 6156 Highland Lakes Avenue, Westerville, Ohio 43085 (leased) | |
| 14. | Sawmill Parkway Office, 10149 Brewster Lane, Powell, Ohio 43065 (leased) | |
| 15. | Avery Road Office, 6820 Perimeter Loop Road, Dublin, Ohio 43017 (leased) | |
| 16. | Willowbrook Branch Office, 100 Willowbrook Way South, Delaware, Ohio 43015 (leased) | |
| 17. | Corporate Center Drive-Thru Property, Corner of Evergreen & US 23, S., Lewis Center, OH 43035 (owned) | |
| 18. | ATM Express Bank, 554 W. Central Ave., Delaware, Ohio 43015 (leased) | |
| 19. | ATM Express Bank, Ohio Wesleyan University, Delaware, Ohio 43015 (leased) | |
| 20. | ATM Express Bank, 8208 Marysville Road West, Ostrander, Ohio 43061 (leased) | |
| 21. | ATM Express Bank, 1123 Columbus Pike, Delaware, Ohio 43015 (leased) | |
| 22. | ATM Express Bank, American Showa, 707 West Cherry Street, Sunbury, Ohio 43074 (leased) | |
| 23. | ATM Express Bank, Bureau of Motor Vehicles, 8625 Columbus Pike, Lewis Center, Ohio 43035 (leased) | |
| 24. | ATM Express Bank, Dextars IGA, 153 West Water Street, Prospect, Ohio 43342 (leased) | |
| 25. | ATM Express Bank, 240 North Liberty Street, Powell, Ohio 43065 (leased) |
Management considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. All the properties owned by the Bank are unencumbered by any mortgage or security interest and are, in management’s opinion, adequately insured.
Item 3 Legal Proceedings
There is no pending litigation of a material nature, other than routine litigation incidental to the business of the Corporation and Bank, to which the Corporation or any of its affiliates is a party or of which any of their property is the subject. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest, which is adverse to the Corporation or Bank. There is no routine litigation in which the Corporation or Bank is involved, which is expected to have a material adverse impact on the financial position or results of operations of the Corporation or Bank.
Item 4 Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders in the fourth quarter of 2005.
15
Table of Contents
PART II
Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The information required by this item is set forth in the Company’s Annual Report to Shareholders under the sections captioned “Common Stock and Shareholder Matters” and “Stock Option Plan.” Such information is incorporated herein by reference. The Corporation purchased 14,715 of its common shares in the fourth quarter of 2005.
The Bank acts as transfer agent for the Corporation’s common stock.
Item 6 Selected Financial Data
The information required by this item is set forth in the Company’s Annual Report to Shareholders under the section captioned “Selected Consolidated Financial Information and Other Data.” Such information is incorporated herein by reference.
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information required by this item is set forth in the Company’s Annual Report to Shareholders under the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Such information is incorporated herein by reference.
Item 7a Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is set forth in the Company’s Annual Report to Shareholders under the section captioned “Asset and Liability Management and Market Risk.” Such information is incorporated herein by reference.
Item 8 Financial Statements and Supplementary Data
The information required by this item is set forth in the Company’s Annual Report to Shareholders. Such information is incorporated herein by reference.
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
16
Table of Contents
Management’s Report on Internal Control Over Financial Reporting
Management of DCB Financial Corp (the “Corporation”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934. The Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting at December 31, 2005, as required by Section 404 of the Sarbanes Oxley Act of 2002. Management’s assessment is based on criteria established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that the Corporation maintained effective internal control over financial reporting as of December 31, 2005. Based on this assessment, management believes that the Corporation maintained effective control over financial reporting as of December 31, 2005.
The independent registered public accounting firm that audited DCB Financial Corp’s consolidated financial statements included in its Annual Report for the year ended December 31, 2005, has issued an attestation report on the effectiveness of internal control over financial reporting as of December 31, 2005 and management’s assessment of internal control over financial reporting.
17
Table of Contents
Item 9B Other Information
None
PART III
Item 10 Directors and Executive Officers of the Registrant
The information required by this item is set forth in the Company’s Proxy Statement to Shareholders in connection with its 2006 Annual Meeting, under the sections captioned “Election of Directors and Information with Respect to Directors and Officers,” and “Section 16(A) Beneficial Ownership Reporting Compliance.” Such information is incorporated herein by reference.
The Company’s Board of Directors has adopted a Code of Ethics and Business Conduct that applies to all of its directors, officers, and employees, including its principal executive, principal financial, and principal accounting officers. A copy of the code of ethics will be provided, at no cost, upon written request to the attention of Mr. Jay D. Wolf, Vice President Marketing and Customer Relations, at the Company’s main office, 110 Riverbend Avenue Lewis Center, Ohio. In addition, a copy of the Code of Ethics and Business Conduct is posted on our website at http: //www.dcbfinancialcorp.com. In the event we make any amendment to, or grant any waiver of, a provision of the Code of Ethics and Business Conduct that applies to the principal executive officer, a principal financial officer, principal accounting officer, or controller, or persons performing similar functions that require disclosure under applicable SEC rules, we intend to disclose such amendment or waiver, the reasons for it, and the nature of any waiver, the name of the person to whom it was granted, and the date, on our internet website.
Item 11 Executive Compensation
The information required by this item is set forth in the Company’s Proxy Statement to Shareholders in connection with its 2006 Annual Meeting, under the section captioned “Executive Compensation and Other Information” and “Committees and Compensation of the Board of Directors.” Such information is incorporated herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information about beneficial ownership of DCB common shares required by this item is set forth in the Company’s Proxy Statement to Shareholders in connection with its 2006 annual meeting, under the section captioned “Security Ownership of Certain Beneficial Owners and Management.” Such information is incorporated herein by reference.
Equity Compensation Plan Information
| Number of securities | ||||||||||||
| remaining available for future | ||||||||||||
| Number of securities to be | issuance under equity | |||||||||||
| issued upon exercise of | Weighted-average exercise | compensation plans | ||||||||||
| outstanding options, warrants | price of outstanding options, | (excluding securities reflected | ||||||||||
| and rights | warrants and rights | in column (a)) | ||||||||||
| (a | ) | (b | ) | (c | ) | |||||||
| Equity compensation plans approved by security holders | 40,687 | $ | 25.31 | 259,313 | ||||||||
| Equity compensation plan not approved by security holders | 0 | 0 | 0 | |||||||||
| Total | 40,687 | $ | 25.31 | 259,313 | ||||||||
18
Table of Contents
On May 20, 2004 the Company’s shareholders approved the DCB Financial Corp 2004 Long-Term Stock Incentive Plan. This plan authorizes the issuance of up to 300,000 DCB common shares upon exercise of stock options awarded under the plan and in the form of restricted stock and stock awards. Beginning in January 2006, the Company intends to expense these options under the methodology set forth in FAS 123. Options are granted for a maximum of ten years. The options vest at an annual rate of 20% over five years, assuming credited service by the designated employee.
Item 13 Certain Relationships and Related Transactions
Information required by this item is set forth in the Company’s Proxy Statement to Shareholders in connection with its 2006 Annual Meeting, under the section captioned “Certain Relationships and Related Transactions.” Such information is incorporated herein by reference.
Item 14 Principal Accountant Fees and Services
Information required by this item is set forth in the Company’s Proxy Statement to Shareholders in connection with its 2006 Annual Meeting under the section captioned “Information Concerning Independent Registered Public Accountants”, and such information is incorporated herein by reference.
19
Table of Contents
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K
| (a) | Documents filed as part of Form 10-K |
| 1 | The following consolidated financial statements appear in the Corporation’s 2005 Annual Report, Exhibit 13 to Shareholders and are incorporated herein by reference. |
| Report of Independent Registered Public Accounting Firm | Page | 74 | ||||
| Consolidated Balance Sheets | Page | 42 | ||||
| Consolidated Statements of Income | Page | 43 | ||||
| Consolidated Statement of Comprehensive Income | Page | 44 | ||||
| Consolidated Statements of Changes in Shareholders’ Equity | Page | 45 | ||||
| Consolidated Statements of Cash Flows | Page | 46 | ||||
| Notes to Consolidated Financial Statements | Pages | 48 |
| 2 | Exhibits | ||
| 3.1 | Articles of Incorporation of DCB Financial Corp (incorporated by reference to Registrant’s Form S-4, File No. 333-15579, effective January 10, 1997) | ||
| 3.2 | Code of Regulations of DCB Financial Corp (incorporated by reference to Registrant’s Form S-4, File No. 333-15579, effective January 10, 1997) | ||
| 10.1 | Resignation, Release, and Post-Employment Covenants Agreement by and between DCB Financial Corp., its wholly-owned subsidiary The Delaware County Bank and Trust Company, and Larry D. Coburn (incorporated by reference to Registrant’s report on Form 8-K, filed with the Commission on November 21, 2002) | ||
| 10.2 | Employment agreement with Mr. Whitney (incorporated by reference to Registrant’s Form 10-K, File No. 0-22387, effective March 25, 1998) | ||
| 10.3 | Employment agreement with Mr. Bernon (incorporated by reference to Registrant’s Form 10-K, File No. 0-22387, effective March 27, 2000) | ||
| 10.4 | Employment agreement by and between DCB Financial Corp, its wholly-owned subsidiary The Delaware County Bank and Trust Company, and Jeffrey Benton (incorporated by reference to Registrant’s Form 8-K, File No. 0-22387, effective March 7, 2005). | ||
| 10.5 | DCB Financial Corp 2004 Long-Term Stock Incentive Plan (incorporated by reference to Appendix D to our Proxy Statement, as filed with the SEC on Schedule 14A on April 14, 2004) | ||
| 11 | Statement Regarding Computation of Per Share Earnings | ||
| 13 | Annual Report to Shareholders | ||
| 21 | Subsidiaries of DCB Financial Corp | ||
| 23.1 | Consent of Independent Registered Public Accounting Firm | ||
| 31.1 | Rule 13a-14 (a) Certifications | ||
| 31.2 | Rule 13a-14 (a) Certifications | ||
| 32.1 | Section 1350 Certifications | ||
| 32.2 | Section 1350 Certifications |
20
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| Dated: March 10, 2006 | DCB FINANCIAL CORP | |||
| By: | /s/ JEFFREY BENTON | |||
| Jeffrey Benton, President & CEO | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Dated:March 10, 2006
| Signatures | Title | |
| /s/ JEFFREY BENTON | President (Principal Executive Officer), | |
| Jeffrey Benton | CEO and Director | |
| /s/ JOHN A. USTASZEWSKI | Senior Vice President and Chief Financial | |
| John A. Ustaszewski | Officer (Principal Financial Officer) | |
| /s/ JEROME J. HARMEYER | Director | |
| Jerome J. Harmeyer | ||
| /s/ WILLIAM R. OBERFIELD | Director | |
| William R. Oberfield | ||
| /s/ EDWARD A. POWERS | Director | |
| Edward A. Powers | ||
| /s/ GARY M. SKINNER | Director | |
| Gary M. Skinner |
21
Table of Contents
| Signatures | Title | |
| /s/ TERRY M. KRAMER | Director, Chairman of the Board | |
| Terry M. Kramer | ||
| /s/ VICKI J. LEWIS | Director | |
| Vicki J. Lewis | ||
| /s/ ADAM STEVENSON | Director | |
| Adam Stevenson | ||
| /s/ DONALD J. WOLF | Director | |
| Donald J. Wolf |
22
Table of Contents
INDEX TO EXHIBITS
| Exhibit | ||
| Number | Description of Document | |
| 3.1 | Amended Articles of Incorporation of DCB Financial Corp (incorporated by reference to Registrant’s Form S-4, File No. 333-15579, effective January 10, 1997) | |
| 3.2 | Code of Regulations of DCB Financial Corp (incorporated by reference to Registrant’s Form S-4, File No. 333-15579, effective January 10, 1997) | |
| 10.1 | Resignation, Release, and Post-Employment Covenants Agreement by and between DCB Financial Corp, its wholly-owned subsidiary The Delaware County Bank and Trust Company, and Larry D. Coburn (incorporated by reference to Registrant’s report on Form 8-K, filed with the Commission on November 21, 2002) | |
| 10.2 | Employment agreement with Mr. Whitney (incorporated by reference to Registrant’s 1997 Form 10-K, File No. 0-22387, effective March 25, 1998) | |
| 10.3 | Employment agreement with Mr. Bernon (incorporated by reference to Registrant’s 1997 Form 10-K, File No. 0-22387, effective March 27, 2000) | |
| 10.4 | Employment agreement by and between DCB Financial Corp, its wholly-owned subsidiary The Delaware County Bank and Trust Company, and Jeffrey Benton (incorporated by reference to Registrant’s Form 8-K, File No. 0-22387, effective March 7, 2005). | |
| 10.5 | DCB Financial Corp 2004 Long-Term Stock Incentive Plan (incorporated by reference to Appendix D to our Proxy Statement, as filed with the SEC on Schedule 14A on April 14, 2004) | |
| 11 | Statement Regarding Computation of Per Share Earnings | |
| 13 | Annual Report to Shareholders | |
| 21 | Subsidiaries of DCB Financial Corp | |
| 23.1 | Consent of Independent Registered Public Accounting Firm | |
| 31.1 | Rule 13a-14 (a) Certifications | |
| 31.2 | Rule 13a-14 (a) Certifications | |
| 32.1 | Section 1350 Certifications | |
| 32.2 | Section 1350 Certifications |
23