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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-22387
-------
DCB Financial Corp.
-------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1469837
- ------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
41 North Sandusky Street, Delaware, Ohio 43015
----------------------------------------------
(Address of principal executive offices)
(740) 363-1133
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
X Yes No
----------- -----------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common stock, no par value Outstanding at May 1, 2000:
4,178,200 common shares
2
DCB FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
- --------------------------------------------------------------------------------
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements Page
----
Consolidated Balance Sheets................................................. 3
Consolidated Statements of Income........................................... 4
Consolidated Statements of Comprehensive Income............................. 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity................................................... 6
Condensed Consolidated Statements of Cash Flows............................. 7
Notes to the Consolidated Financial Statements.............................. 8
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 12
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk......... 17
PART II - OTHER INFORMATION................................................. 18
SIGNATURES ............................................................... 19
3
DCB FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Item 1. Financial Statements
March 31, December 31,
2000 1999
--------- ---------
ASSETS
Cash and due from banks $ 15,823 $ 12,038
Federal funds sold 4,150 4,800
--------- ---------
Total cash and cash equivalents 19,973 16,838
Securities available for sale, at fair value 91,043 91,909
Securities held to maturity (estimated fair values of $32,594 at
March 31, 2000 and $34,837 at December 31, 1999) 33,207 35,245
Loans and leases 301,067 277,468
Less allowance for loan and lease losses (2,988) (2,793)
--------- ---------
Net loans and leases 298,079 274,675
Premises and equipment, net 4,678 4,384
Cash surrender value of life insurance 1,902 1,886
Accrued interest receivable and other assets 5,680 5,068
--------- ---------
Total assets $ 454,562 $ 430,005
========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 59,634 $ 57,033
Interest-bearing 336,562 314,766
--------- ---------
Total deposits 396,196 371,799
Borrowed funds 16,279 16,889
Accrued interest payable and other liabilities 1,348 930
--------- ---------
Total liabilities 413,823 389,618
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,779 3,779
Retained earnings 40,790 40,020
Treasury stock, 95,000 shares, at cost (1,978) (1,978)
Accumulated other comprehensive income (1,852) (1,434)
--------- ---------
Total shareholders' equity 40,739 40,387
--------- ---------
Total liabilities and shareholders' equity $ 454,562 $ 430,005
========= =========
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
3.
4
DCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
2000 1999
------- -------
INTEREST INCOME
Loans, including fees $ 6,094 $ 5,341
Securities
Taxable 1,882 1,758
Tax-exempt 140 156
Federal funds sold and other 27 75
------- -------
Total interest income 8,143 7,330
INTEREST EXPENSE
Deposits 3,884 3,358
Borrowings 279 136
------- -------
Total interest expense 4,163 3,494
------- -------
NET INTEREST INCOME 3,980 3,836
Provision for loan losses 322 224
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 3,658 3,612
NONINTEREST INCOME
Service charges on deposit accounts 480 404
Trust department income 108 95
Data service fees 78 141
Securities gains (losses) (19) 20
Net gains from sales of loans 24 258
Other 342 326
------- -------
Total noninterest income 1,013 1,244
NONINTEREST EXPENSE
Salaries and other employee benefits 1,631 1,591
Occupancy 249 208
Equipment 351 353
State franchise taxes 129 130
Other 784 771
------- -------
Total noninterest expense 3,144 3,053
------- -------
INCOME BEFORE INCOME TAXES 1,527 1,803
Provision for income taxes 465 578
------- -------
NET INCOME $ 1,062 $ 1,225
======= =======
EARNINGS PER COMMON SHARE $ .25 $ .29
======= =======
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
4.
5
DCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
2000 1999
------- -------
NET INCOME $ 1,062 $ 1,225
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain/(loss) on available for sale securities
arising during the period (431) (364)
Reclassification adjustment for amounts realized on
securities sales included in net income 13 (13)
------- -------
COMPREHENSIVE INCOME $ 644 $ 848
======= =======
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
5.
6
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
2000 1999
-------- --------
BALANCE AT BEGINNING OF PERIOD $ 40,387 $ 38,309
Net income 1,062 1,225
Dividends declared ($.07 per share in 2000 and
$.06 per share in 1999) (292) (251)
Change in unrealized gain/loss on
securities available for sale, net of tax (418) (377)
-------- --------
BALANCE AT END OF PERIOD $ 40,739 $ 38,906
======== ========
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
6.
7
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
2000 1999
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 991 $ 5,147
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (20,855) (10,520)
Maturities and repayments 2,948 9,388
Proceeds from sales 18,202 8,248
Securities held to maturity
Purchases (586) (3,716)
Maturities and repayments 2,607 15,616
Net change in loans (23,161) (6,879)
Premises and equipment expenditures (506) (225)
-------- --------
Net cash from investing activities (21,351) 11,912
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 24,397 (4,714)
Net change in short-term borrowings (523) 866
Repayment of long-term borrowings (87) (83)
Cash dividends paid (292) (251)
-------- --------
Net cash from financing activities 23,495 (4,182)
-------- --------
Net change in cash and cash equivalents 3,135 12,877
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 16,838 15,492
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 19,973 $ 28,369
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes $ -- $ --
Cash paid for interest 3,957 3,261
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
7.
8
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of DCB Financial Corp. (the "Corporation") at March 31,
2000, and its results of operations and cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
financial statements have been prepared in accordance with the instructions of
Form 10-Q and, therefore, do not purport to contain all necessary financial
disclosures required by generally accepted accounting principles that might
otherwise be necessary in the circumstances, and should be read in conjunction
with financial statements, and notes thereto, of the Corporation for the year
ended December 31, 1999, included in its 1999 annual report. Refer to the
accounting policies of the Corporation described in the notes to financial
statements contained in the Corporation's 1999 annual report. The Corporation
has consistently followed these policies in preparing this Form 10-Q.
The accompanying consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiary, The Delaware County Bank and Trust
Company (the "Bank"). The financial statements of the Bank include accounts of
its wholly-owned subsidiaries, D.C.B. Corporation and 362 Corp. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Corporation's revenues, operating income and assets are primarily from the
banking industry. The Corporation operates 16 offices in Delaware, Franklin and
Union Counties, Ohio. Loan customers include a wide range of individuals,
businesses and other organizations. Major portions of loans are secured by
various forms of collateral including real estate, business assets, consumer
property and other items. The Corporation's primary funding source is deposits
from customers in its market area. The Corporation also purchases investments,
operates a trust department and engages in mortgage banking operations.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect amounts reported in the
financial statements and disclosures provided; future results could differ. The
collectibility of loans, fair value of financial instruments and status of
contingencies are particularly subject to change.
Income tax expense is the sum of current-year income tax due or refundable and
change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary differences
between carrying amounts and tax bases of assets and liabilities computed using
enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized.
Earnings per share computations are based on the weighted average number of
shares of common stock outstanding during the year. The weighted average number
of shares outstanding was 4,178,200 for both the three months ended March 31,
2000 and 1999.
- --------------------------------------------------------------------------------
(Continued)
8.
9
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and estimated fair values of securities were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
------------------March 31, 2000---------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 2,268 $ -- $ (10) $ 2,258
U.S. government agencies
and corporations 52,993 1 (1,583) 51,411
States and political subdivisions 6,532 1 (528) 6,005
Mortgage-backed securities 30,660 19 (720) 29,959
------- ------- ------- -------
Total debt securities 92,453 21 (2,841) 89,633
Other securities 1,396 14 -- 1,410
------- ------- ------- -------
Total securities available for sale $93,849 $ 35 $(2,841) $91,043
======= ======= ======= =======
SECURITIES HELD TO MATURITY
States and political subdivisions $ 6,686 $ 83 $ (87) $ 6,682
Mortgage-backed securities 26,521 5 (614) 25,912
------- ------- ------- -------
Total securities held to maturity $33,207 $ 88 $ (701) $32,594
======= ======= ======= =======
----------------December 31, 1999--------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 2,264 $ 1 $ (4) $ 2,261
U.S. government agencies
and corporations 54,451 7 (1,196) 53,262
States and political subdivisions 6,535 2 (526) 6,011
Mortgage-backed securities 29,457 26 (503) 28,980
------- ------- ------- -------
Total debt securities 92,707 36 (2,229) 90,514
Other securities 1,374 21 -- 1,395
------- ------- ------- -------
Total securities available for sale $94,081 $ 57 $(2,229) $91,909
======= ======= ======= =======
SECURITIES HELD TO MATURITY
States and political subdivisions $ 6,777 $ 68 $ (104) $ 6,741
Corporate obligations 995 5 -- 1,000
Mortgage-backed securities 27,473 24 (401) 27,096
------- ------- ------- -------
Total securities held to maturity $35,245 $ 97 $ (505) $34,837
======= ======= ======= =======
- --------------------------------------------------------------------------------
(Continued)
9.
10
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Substantially all mortgage-backed securities are backed by pools of mortgages
that are insured or guaranteed by the Federal National Mortgage Association
("FNMA"), the Government National Mortgage Association ("GNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC").
At March 31, 2000, there were no holdings of securities of any one issuer, other
than the U.S. government and its agencies, in an amount greater than 10% of
shareholders' equity.
The amortized cost and estimated fair value of debt securities at March 31,
2000, 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 $ 2,767 $ 2,751 $ 637 $ 637
Due from one to five years 17,489 17,183 4,563 4,555
Due from five to ten years 31,239 30,190 1,021 1,004
Due after ten years 10,298 9,550 465 486
Mortgage-backed securities 30,660 29,959 26,521 25,912
---------- ---------- --------- ----------
$ 92,453 $ 89,633 $ 33,207 $ 32,594
========== ========== ========= ==========
Proceeds from the sales of available-for-sale securities during the three months
ended March 31, 2000 and 1999 were $18,202 and $8,248. Gross gains of $2 and $26
and gross losses of $21 and $6 were realized on those sales.
NOTE 3 - LOANS AND LEASES
Loans and leases consisted of the following:
March 31, December 31,
2000 1999
---- ----
Commercial and industrial $ 41,344 $ 39,063
Commercial real estate 90,989 82,954
Residential real estate and home equity 74,356 69,611
Real estate construction and land development 32,188 29,723
Consumer and credit card 51,429 45,977
Lease financing, net 10,761 10,140
----------- ------------
$ 301,067 $ 277,468
=========== ============
Included in residential real estate and home equity loans are loans held for
sale of $408 at March 31, 2000 and $486 at December 31, 1999.
- --------------------------------------------------------------------------------
(Continued)
10.
11
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses for the three months ended
March 31, 2000 and 1999 is as follows:
2000 1999
---- ----
Balance - January 1 $ 2,793 $ 1,948
Provision for loan losses 322 224
Loans charged off (152) (228)
Recoveries 25 48
--------- ---------
Balance - March 31 $ 2,988 $ 1,992
========= =========
Impaired loans are not material in any period presented.
NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material effect
on financial condition or results of operations.
The Corporation grants residential, consumer, and commercial loans to customers
located primarily in Delaware, Franklin, Union and surrounding counties in Ohio.
Most loans are secured by specific items of collateral including business
assets, consumer assets and residences.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet financing needs of its customers. The contract
amount of these instruments are not included in the consolidated financial
statements. At March 31, 2000 and December 31, 1999, the contract amount of
these instruments, which primarily include commitments to extend credit and
standby letters of credit, totaled approximately $23,119 and $24,932. Of these
commitments, fixed-rate commitments totaled $6,505 and $6,589 at March 31, 2000
and December 31, 1999. Since many commitments to make loans expire without being
used, the amount does not represent future cash commitments.
The exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to make loans and lines and letters of
credit is represented by the contractual amount of those instruments. The
Corporation follows the same credit policy to make such commitments as is
followed for those loans recorded in the financial statements. In management's
opinion, these commitments represent normal banking transactions and no material
losses are expected to result therefrom. Collateral obtained upon exercise of
the commitments is determined using management's credit evaluations of the
borrower and may include real estate, business or consumer assets.
- --------------------------------------------------------------------------------
11.
12
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTRODUCTION
In the following pages, management presents an analysis of the consolidated
financial condition of DCB Financial Corp. (the "Corporation") at March 31, 2000
compared to December 31, 1999, and the consolidated results of operations for
the three months ended March 31, 2000 compared to the same period in 1999. This
discussion is designed to provide shareholders with a more comprehensive review
of the operating results and financial position than could be obtained from an
examination of the financial statements alone. This analysis should be read in
conjunction with the financial statements and related footnotes and the selected
financial data included elsewhere in this report.
FORWARD-LOOKING STATEMENTS
When used in this document, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimated," "projected," or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Corporation's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Corporation's market area and competition, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. Factors listed above could affect the Corporation's financial
performance and could cause the Corporation's actual results for future periods
to differ materially from any statements expressed with respect to future
periods.
The Corporation does not undertake, and specifically disclaims any obligation,
to publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $454,562 at March 31, 2000 compared to $430,005
at December 31, 1999, an increase of $24,557, or 5.7%. The increase in assets
was the result of an increase in loans partially offset by a decrease in federal
funds sold and securities.
Federal funds sold decreased $650, from $4,800 at December 31, 1999 to $4,150 at
March 31, 2000. This decrease was the result of the Corporation decreasing its
investment in federal funds sold to fund loan growth during the three months
ended March 31, 2000.
- --------------------------------------------------------------------------------
12.
13
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Total securities decreased $2,904, or 2.3%, from $127,154 at December 31, 1999
to $124,250 at March 31, 2000. The decrease was the result of the proceeds from
maturities, calls and principal repayments not being reinvested due to an
increase in loan demand during the three months ended March 31, 2000. The
Corporation invests primarily in U.S. Treasury notes, U.S. government agencies,
municipal bonds, corporate obligations and mortgage-backed securities.
Mortgage-backed securities include Federal Home Loan Mortgage Corporation
("FHLMC"), Government National Mortgage Association ("GNMA") and Federal
National Mortgage Association ("FNMA") participation certificates. Securities
classified as available for sale totaled $91,043, or 73.3% of the total
securities portfolio, at March 31, 2000. Management classifies securities as
available for sale to provide the Corporation with the flexibility to move funds
into loans as demand warrants. The mortgage-backed securities portfolio,
totaling $56,480 at March 31, 2000, provides the Corporation with a constant
cash flow stream from principal repayments. The Corporation held no derivative
securities or structured notes during any period presented.
Total loans increased $23,599, or 8.5%, from $277,468 at December 31, 1999 to
$301,067 at March 31, 2000. The majority of the growth was experienced in
commercial and industrial loans and commercial real estate loans which increased
$2,281, or 5.8%, and $8,035, or 9.7%, respectively. The Corporation attributes
this growth to a strong local economy and the large number of businesses moving
into the market area. There is no significant concentration of lending to any
one industry. There was also growth in residential real estate and home equity
loans of $4,745, or 6.8%, construction loans, both residential and commercial,
of $2,465, or 8.3%, and consumer and credit card loans of $5,452, or 11.9%.
Due to the loan growth, the gross loan to deposit ratio increased to 76.0% at
March 31, 2000, compared to 74.7% at December 31, 1999.
Total deposits increased $24,397, or 6.6%, from $371,799 at December 31, 1999 to
$396,196 at March 31, 2000. Noninterest-bearing deposits increased $2,601, or
4.6%, while interest-bearing deposits increased $21,796, or 6.9%.
Interest-bearing demand and money market deposits comprised 58.8% of total
interest-bearing deposits at March 31, 2000 compared to 60.6% of total
interest-bearing deposits at December 31, 1999. The Corporation did however
experience a $7,046, or 3.7%, increase in volume in such accounts. The increase
was primarily in the Corporation's "Superior Money Market" deposit accounts,
which offer a variable interest rate tied to the 3 Month Treasury Bill. The
Corporation experienced a slight decrease in savings deposits, which decreased
from 13.1% of total interest-bearing deposits at December 31, 1999 to 12.8% of
total interest-bearing deposits at March 31, 2000. Certificates of deposit
increased $15,137, or 18.8%, comprising 28.5% of total interest-bearing deposits
at March 31, 2000 compared to 25.6% of total interest-bearing deposits at
December 31, 1999. The increase in certificates of deposit was primarily due to
the increase of public fund certificates of deposit.
At March 31, 2000 and December 31, 1999, borrowed funds consisted primarily of
FHLB advances of $5,000 and $6,000 and a mortgage-matched advance from the FHLB
with a remaining balance of $3,802 at March 31, 2000 and $3,889 at December 31,
1999. Due in May 2000, the $5,000 FHLB advance had an original term of 180 days
and carries a fixed interest rate of 5.70% with interest due monthly. Due in
June 2000, the $6,000 FHLB advance had an original term of 150 days and carries
a rate of 6.24% with interest due monthly. Due in October 2008, the
mortgage-matched advance had an original term of 10 years and carries a fixed
interest rate of 5.10%. Principal and interest on the mortgage-matched advance
are due monthly. Borrowed funds also include a demand note issued to the U.S.
Treasury, which totaled $1,477 at March 31, 2000 and $2,000 at December 31,
1999.
- --------------------------------------------------------------------------------
13.
14
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
COMPARISON OF RESULTS OF OPERATIONS
NET INCOME. Net income for the three months ended March 31, 2000 totaled $1,062,
compared to net income of $1,225 for the same period in 1999. Earnings per share
was $.25 for the three months ended March 31, 2000 compared to $.29 for the
three months ended March 31, 1999.
NET INTEREST INCOME. Net interest income represents the amount by which interest
income on interest-earning assets exceeds interest paid on interest-bearing
liabilities. Net interest income is the largest component of the Corporation's
income and is affected by the interest rate environment and the volume and
composition of interest-earning assets and interest-bearing liabilities.
Net interest income was $3,980 for the three months ended March 31, 2000
compared to $3,836 for the same period in 1999. The $144 increase in 2000 over
1999 was the result of an increased volume of interest-earning assets partially
offset by an increase in interest-bearing liabilities that carried a higher
average yield. Management has elected to offer attractive, competitive rates to
retain deposits, provided the funds can be invested in income-earning assets
with adequate yields.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses represents the charge to income necessary to adjust the allowance
for loan and lease losses to an amount that represents management's assessment
of the losses inherent in the Corporation's loan portfolio. All lending activity
contains associated risks of losses and the Corporation recognizes these credit
risks as a necessary element of its business activity. To assist in identifying
and managing potential loan losses, the Corporation maintains a loan review
function that regularly evaluates individual credit relationships as well as
overall loan-portfolio conditions. One of the primary objectives of this loan
review function is to make recommendations to management as to both specific
loss reserves and overall portfolio-loss reserves.
The provision for loan and lease losses totaled $322 for the three months ended
March 31, 2000 compared to $224 for the same period in 1999. The growth in the
provision is reflective of the overall growth in the Corporation's loan
portfolio. Net charge-offs for the three months ended March 31, 2000 were $127
compared to net charge-offs of $180 for the same period in 1999. Management
believes that the quality of the loan portfolio has remained relatively stable
over the comparable year.
The allowance for loan and lease losses totaled $2,988, or .99% of total loans
and leases, at March 31, 2000 compared to $2,793, or 1.01% of total loans and
leases, at December 31, 1999. The allowance was 414.42% of nonperforming loans
at March 31, 2000, compared to 444.75% at December 31, 1999. Management believes
increasing the allowance for loan and lease losses is prudent as total loans,
particularly commercial, consumer and construction loans, and leases increase.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income decreased
$232, or 18.6%, for the three months ended March 31, 2000 compared to the same
period in 1999. The decrease was the result of a decrease in fee income from the
Corporation's data service center due to a reduction in the number of customers
served and decreased gains on loan sales (both servicing-released and
service-retained) due to management's decision to keep a larger portion of those
loans in the portfolio. These decreases were partially offset by increases in
service charges on deposit accounts and trust department income.
Total noninterest expense increased $91, or 3.0%, for the three months ended
March 31, 2000 compared to the same period in 1999. The increase was primarily
the result of increases in salaries and employee benefits and occupancy expense,
where such increases made up $81 of the total increase. These were planned
increases necessary to support the continued growth of the Corporation. Other
changes in noninterest expense were not significant.
- --------------------------------------------------------------------------------
14.
15
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
INCOME TAXES. The volatility of income tax expense is primarily attributable to
the change in income before income taxes. The provision for income taxes totaled
$465, for an effective tax rate of 30.5%, for the three months ended March 31,
2000 and $578, for an effective tax rate of 32.1%, for the three months ended
March 31, 1999.
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
institution's financial strength, asset quality and types of deposit and
investment instruments offered by the Corporation to its customers. The
Corporation's principal sources of funds are deposits, loan and security
repayments, maturities of securities, sales of securities available for sale and
other funds provided by operations. The Bank also has the ability to borrow from
the FHLB. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan and mortgage-backed
security prepayments are more influenced by interest rates, general economic
conditions, and competition. The Corporation maintains investments in liquid
assets based upon management's assessment of (1) need for funds, (2) expected
deposit flows, (3) yields available on short-term liquid assets and (4)
objectives of the asset/liability management program.
Cash and cash equivalents increased $3,135, or 18.6%, to $19,973 at March 31,
2000 compared to $16,838 at December 31, 1999. Cash and equivalents represented
4.4% of total assets at March 31, 2000 and 3.9% of total assets at December 31,
1999. The Corporation has the ability to borrow funds from the Federal Home Loan
Bank and has various federal fund sources from correspondent banks, should the
Corporation need to supplement its future liquidity needs in order to meet loan
demand or to fund investment opportunities. Management believes the
Corporation's liquidity position is strong based on its high 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 $352 between December 31, 1999 and March
31, 2000. The increase was primarily due to earnings retained partially offset
by a decrease in accumulated other comprehensive income. The Corporation
purchased no shares of treasury stock during the three months ended March 31,
2000; however, management may purchase additional shares in the future, as
opportunities arise. The number of shares to be purchased and the price to be
paid will depend upon the availability of shares, the prevailing market prices
and any other considerations, which may, in the opinion of the Corporation's
Board of Directors or management, affect the advisability of purchasing shares.
Tier 1 capital is shareholders' equity excluding the unrealized gain or loss on
securities classified as available for sale and intangible assets. Total capital
includes Tier 1 capital plus the allowance for loan losses, not to exceed 1.25%
of risk weighted assets. Risk weighted assets are the Corporation's total assets
after such assets are assessed for risk and assigned a weighting factor defined
by regulation based on their inherent risk.
The Corporation and its subsidiaries meet all regulatory capital requirements.
The ratio of total capital to risk-weighted assets was 14.1% at March 31, 2000,
while the Tier 1 risk-based capital ratio was 13.2%. Regulatory minimums call
for a total risk-based capital ratio of 8.0%, at least half of which must be
Tier 1 capital. The Corporation's leverage ratio, defined as Tier 1 capital
divided by average assets, of 9.6% at March 31, 2000 exceeded the regulatory
minimum for capital adequacy purposes of 4.0%.
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15.
16
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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In 2000, the Corporation announced plans to construct a new corporate
headquarters near Delaware, Ohio. As of March 31, 2000, the Corporation had paid
costs of $25,000 related to the new corporate headquarters.
IMPACT OF NEW ACCOUNTING STANDARDS
Beginning January 1, 2001 a new accounting standard requires all derivatives to
be recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and losses on the hedge
and on the hedged item, even if the fair value of the hedged item is not
otherwise recorded. This standard is not expected to have a material effect on
the Corporation's financial condition or results of operations.
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16.
17
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risks. Interest rate risk is the risk that the
Corporation's financial condition will be adversely affected due to movements in
interest rates. The income of financial institutions is primarily derived from
the excess of interest earned on interest-earning assets over the interest paid
on interest-bearing liabilities. Accordingly, the Corporation places great
importance on monitoring and controlling interest rate risk.
There are several methods employed by the Corporation to monitor and control
interest rate risk. One such method is using a gap analysis. The gap is defined
as the repricing variance between rate sensitive assets and rate sensitive
liabilities within certain periods. The repricing can occur due to changes in
rates on variable rate products as well as maturities of interest-earning assets
and interest-bearing liabilities. A high ratio of interest sensitive
liabilities, generally referred to as a negative gap, tends to benefit net
interest income during periods of falling interest rates as the average rate
paid on interest-bearing liabilities declines faster than the average rate
earned on interest-earning assets. The opposite holds true during periods of
rising interest rates. The Corporation attempts to minimize the interest rate
risk through management of the gap in order to achieve consistent shareholder
return. The Corporation's asset and liability management policy is to maintain a
laddered gap position. One strategy used by the Corporation is to originate
variable rate loans tied to market indices. Such loans reprice on an annual,
quarterly, monthly or daily basis as the underlying market indices change. As of
March 31, 2000, $115,755, or 38.5%, of the Corporation's loan portfolio reprices
on regular basis. The Corporation also invests excess funds in liquid federal
funds that mature and reprice on a daily basis. The Corporation also maintains
most of its securities in the available for sale portfolio to take advantage of
interest rate swings and to maintain liquidity for loan funding and deposit
withdrawals.
The Corporation's 1999 annual report details a table, which provides information
about the Company's financial instruments that are sensitive to changes in
interest rates as of December 31, 1999. The table is based on information and
assumptions set forth in the notes. For loans, securities and liabilities with
contractual maturities, the table represents principal cash flows and the
weighted average interest rate. For variable rate loans the contractual maturity
and weighted-average interest rate was used with an explanatory footnote as to
repricing periods. For liabilities without contractual maturities such as demand
and savings deposit accounts, a decay rate was utilized to match their most
likely withdrawal behavior. Management believes that no events have occurred
since December 31, 1999 which would significantly change the ratio of rate
sensitive assets to rate sensitive liabilities for the given time horizons.
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DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended March 31, 2000
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders: 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 and Reports on Form 8-K:
(a) Exhibit 11, Statement re: computation of per share earnings.
(Reference is hereby made to Consolidated Statements of
Income on page 4, hereof.)
Exhibit 27, Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
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18.
19
DCB FINANCIAL CORP.
SIGNATURES
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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 11, 2000 /s/ Larry D. Coburn
-------------------------- -------------------------------
(Signature)
Larry D. Coburn
President and Chief Executive Officer
Date: May 11, 2000 /s/ Douglas A. Lockwood
-------------------------- --------------------------------
(Signature)
Douglas A. Lockwood
Controller
(Principal Accounting Officer)
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DCB FINANCIAL CORP.
INDEX TO EXHIBITS
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EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
11 Statement re: computation of per share earnings Reference is hereby made to Consolidated
Statements of Income on page 4 and Note 1
of Notes to Consolidated Financial
Statements on page 8, hereof.
27 Financial Data Schedule 21
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20.