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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 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 August 1, 2000:
4,178,200 common shares
2
DCB FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED JUNE 30, 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...... 18
PART II - OTHER INFORMATION.............................................. 19
SIGNATURES............................................................... 20
3
DCB FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
- -------------------------------------------------------------------------------------
Item 1. Financial Statements
--------------------
June 30, December 31,
2000 1999
---- ----
ASSETS
Cash and due from banks $ 21,245 $ 12,038
Federal funds sold -- 4,800
-------- --------
Total cash and cash equivalents 21,245 16,838
Securities available for sale, at fair value 97,377 91,909
Securities held to maturity (estimated fair values
of $32,042 at June 30, 2000 and $34,837 at
December 31, 1999) 32,557 35,245
Loans and leases 313,781 277,468
Less allowance for loan and lease losses (3,131) (2,793)
-------- --------
Net loans and leases 310,650 274,675
Premises and equipment, net 5,793 4,384
Accrued interest receivable and other assets 8,024 6,954
-------- --------
Total assets $475,646 $430,005
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 59,995 $ 57,033
Interest-bearing 347,248 314,766
-------- --------
Total deposits 407,243 371,799
Borrowed funds 26,114 16,889
Accrued interest payable and other liabilities 796 930
-------- --------
Total liabilities 434,153 389,618
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,779 3,779
Retained earnings 41,717 40,020
Treasury stock, 95,000 shares, at cost (1,978) (1,978)
Accumulated other comprehensive income (2,025) (1,434)
-------- --------
Total shareholders' equity 41,493 40,387
-------- --------
Total liabilities and shareholders' equity $475,646 $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 Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $6,640 $5,429 $12,734 $10,770
Securities
Taxable 1,885 1,640 3,767 3,398
Nontaxable 141 156 281 312
Other 58 42 85 117
------ ------ ------- -------
Total interest income 8,724 7,267 16,867 14,597
------ ------ ------- -------
INTEREST EXPENSE
Deposits 4,286 3,202 8,170 6,560
Other 308 134 587 270
------ ------ ------- -------
Total interest expense 4,594 3,336 8,757 6,830
------ ------ ------- -------
NET INTEREST INCOME 4,130 3,931 8,110 7,767
Provision for loan losses 180 351 502 575
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION 3,950 3,580 7,608 7,192
OTHER INCOME
Service charges on deposit accounts 520 351 1,000 869
Trust fees 85 78 193 173
Data service fees 60 117 138 258
Securities gains (losses) (4) 5 (23) 25
Net gain from sales of loans 53 156 77 414
Other operating income 365 584 707 796
------ ------ ------- -------
Total other income 1,079 1,291 2,092 2,535
OTHER EXPENSE
Salaries and other employee benefits 1,544 1,550 3,175 3,141
Occupancy expense 243 203 492 411
Equipment expense 383 370 734 723
State franchise taxes 129 130 258 260
Other operating expenses 944 765 1,728 1,536
------ ------ ------- -------
Total other expenses 3,243 3,018 6,387 6,071
------ ------ ------- -------
INCOME BEFORE FEDERAL INCOME TAXES 1,786 1,853 3,313 3,656
Provision for income taxes 566 544 1,031 1,122
------ ------ ------- -------
NET INCOME $1,220 $1,309 $ 2,282 $ 2,534
====== ====== ======= =======
EARNINGS PER COMMON SHARE $ 0.30 $ 0.32 $ 0.55 $ 0.61
====== ====== ======= =======
- -------------------------------------------------------------------------------------------
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 Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
NET INCOME $1,220 $1,309 $2,282 $ 2,534
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain/(loss) on available-
for-sale securities arising during
the period (175) (836) (606) (1,200)
Reclassification adjustment for
amounts realized on securities
sales included in net income 2 (3) 15 (16)
------ ------ ------ -------
Total other comprehensive income (173) (839) (591) (1,216)
------ ------ ------ -------
COMPREHENSIVE INCOME $1,047 $ 470 $1,691 $ 1,318
====== ====== ====== =======
- ------------------------------------------------------------------------------------------
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 Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Balance at beginning of period $40,739 $38,906 $40,387 $38,309
Net income 1,220 1,309 2,282 2,534
Dividends declared ($.07 and $.14 per share
in 2000 and $.06 and $.12 per share in 1999) (293) (251) (585) (502)
Change in unrealized gain/loss on
securities available for sale, net of tax (173) (839) (591) (1,216)
------- ------- ------- -------
Balance at end of period $41,493 $39,125 $41,493 $39,125
======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------
See notes to the consolidated financial statements.
6.
7
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Six Months Ended
June 31,
--------
2000 1999
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 773 $ 5,199
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (31,507) (21,517)
Maturities and repayments 4,613 18,198
Proceeds from sales 20,650 9,738
Securities held to maturity
Purchases (1,632) (5,184)
Maturities and repayments 4,285 20,034
Net change in loans (35,141) (12,469)
Premises and equipment expenditures (1,718) (409)
-------- --------
Net cash from investing activities (40,450) 8,391
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 35,444 (3,902)
Net change in short-term borrowings 9,400 1,778
Repayment of long-term borrowings (175) (166)
Cash dividends paid (585) (502)
-------- --------
Net cash from financing activities 44,084 (2,792)
-------- --------
Net change in cash and cash equivalents 4,407 10,798
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 16,838 15,492
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 21,245 $ 26,290
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes $ 890 $ 980
Cash paid for interest 8,442 6,719
- --------------------------------------------------------------------------------
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 June 30,
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 the three and six months ended June 30,
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
---- ----- ------ -----
----------------June 30, 2000---------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 1,269 $-- $ (6) $ 1,263
U.S. government agencies
and corporations 59,361 3 (1,739) 57,625
States and political subdivisions 6,326 -- (520) 5,806
Mortgage-backed securities 32,068 32 (844) 31,256
-------- --- ------- -------
Total debt securities 99,024 35 (3,109) 95,950
Other securities 1,419 8 -- 1,427
-------- --- ------- -------
Total securities available for sale $100,443 $43 $(3,109) $97,377
======== === ======= =======
SECURITIES HELD TO MATURITY
States and political subdivisions $ 6,655 $81 $ (89) $ 6,647
Mortgage-backed securities 25,902 9 (516) 25,395
-------- --- ------- -------
Total securities held to maturity $ 32,557 $90 $ (605) $32,042
======== === ======= =======
--------------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 June 30, 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 June 30, 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 $ 6,659 $ 6,652 $ 847 $ 846
Due from one to five years 19,238 18,957 4,431 4,411
Due from five to ten years 31,782 30,747 937 925
Due after ten years 9,277 8,338 440 465
Mortgage-backed securities 32,068 31,256 25,902 25,395
------- ------- ------- -------
$99,024 $95,950 $32,557 $32,042
======= ======= ======= =======
Proceeds from the sales of available-for-sale securities during the six months
ended June 30, 2000 were $20,650. Gross gains of $6 and gross losses of $29 were
realized on those sales. Proceeds from the sales of available-for-sale
securities during the six months ended June 30, 1999 were $9,738. Gross gains of
$31 and gross losses of $6 were realized on those sales
NOTE 3 - LOANS AND LEASES
Loans and leases consisted of the following:
June 30, December 31,
2000 1999
---- ----
Commercial and industrial $ 41,576 $ 39,063
Commercial real estate 97,629 82,954
Residential real estate and home equity 79,316 69,611
Real estate construction and land development 29,418 29,723
Consumer and credit card 55,072 45,977
Lease financing, net 10,770 10,140
-------- --------
$313,781 $277,468
======== ========
Included in residential real estate and home equity loans are loans held for
sale of $819 at June 30, 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 and six months
ended June 30, 2000 and 1999 is as follows:
Three months ended Six months ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Beginning balance $2,988 $1,992 $2,793 $1,948
Provision for loan losses 180 351 502 575
Loans charged off (78) (188) (230) (416)
Recoveries 41 56 66 104
------ ------ ------ ------
Balance - June 30 $3,131 $2,211 $3,131 $2,211
====== ====== ====== ======
Impaired loans are not material in any period presented.
- --------------------------------------------------------------------------------
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 June 30, 2000
compared to December 31, 1999, and the consolidated results of operations for
the three and six months ended June 30, 2000 compared to the same periods 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 $475,646 at June 30, 2000, compared to $430,005
at December 31, 1999, an increase of $45,641, or 10.6%. The increase in assets
was the result of an increase in loans and cash and cash equivalents.
Federal funds sold decreased $4,800 from December 31, 1999 to June 30, 2000. The
Corporation decreased its investment in federal funds sold to fund loan and
securities growth during the six months ended June 30, 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 increased $2,780, or 2.2%, from $127,154 at December 31, 1999
to $129,934 at June 30, 2000. The increase was the result of the proceeds from
maturities, calls and principal repayments in excess of those used to fund loan
growth being reinvested in securities as well as additional purchases of
securities as a result of more attractive interest rates. 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 $97,377, or 74.9% of the total securities portfolio, at June 30, 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 $57,158 at June 30, 2000,
provides the Corporation with a constant cash flow stream from principal
repayments. The Corporation held no material derivative securities or structured
notes during any period presented.
Total loans increased $36,313, or 13.1%, from $277,468 at December 31, 1999 to
$313,781 at June 30, 2000. The majority of the growth was experienced in
commercial real estate loans, residential real estate loans and consumer and
credit card loans which increased $14,675, or 17.7%, $9,705, or 13.9%, and
$9,095, or 19.8%, 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 commercial and industrial loans of $2,513, or 6.4%.
Due to the loan growth, the gross loan to deposit ratio increased to 77.1% at
June 30, 2000, compared to 74.6% at December 31, 1999.
Total deposits increased $35,444, or 9.5%, from $371,799 at December 31, 1999 to
$407,243 at June 30, 2000. Noninterest-bearing deposits increased $2,962, or
5.2%, while interest-bearing deposits increased $32,482, or 10.3%.
Interest-bearing demand and money market deposits comprised 55.3% of total
interest-bearing deposits at June 30, 2000 compared to 60.6% of total
interest-bearing deposits at December 31, 1999. The Corporation did however
experience a modest increase in such accounts during the period. 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 12.5% of
total interest-bearing deposits at June 30, 2000. Certificates of deposit
increased $30,995, or 38.4%, comprising 32.2% of total interest-bearing deposits
at June 30, 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 June 30, 2000 and December 31, 1999, borrowed funds consisted primarily of an
FHLB advance of $10,000 and a mortgage-matched advance from the FHLB with a
remaining balance of $3,714 at June 30, 2000 and $3,889 at December 31, 1999.
Additionally, the Corporation had purchased $14,000 of federal funds as of June
30, 2000. Due in November 2000, the $10,000 FHLB advance had an original term of
180 days and carries a fixed interest rate of 6.84% 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 $2,000 at June 30, 2000 and 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 FOR THE THREE MONTHS
ENDED JUNE 30, 2000 AND JUNE 30, 1999
NET INCOME. Net income for the three months ended June 30, 2000 totaled $1,220,
compared to net income of $1,309 for the same period in 1999. Earnings per share
was $.30 for the three months ended June 30, 2000 compared to $.32 for the three
months ended June 30, 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 $4,130 for the three months ended June 30, 2000 compared
to $3,931 for the same period in 1999. The $199 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 $180 for the three months ended
June 30, 2000 compared to $351 for the same period in 1999. The decrease in the
provision is reflective of management's belief that the overall quality of the
loan portfolio increased over the comparable period, partially offset by growth
in the loan portfolio. Net charge-offs for the three months ended June 30, 2000
were $37 compared to net charge-offs of $132 for the same period in 1999.
The allowance for loan and lease losses totaled $3,131, or 1.00% of total loans
and leases, at June 30, 2000 compared to $2,793, or 1.01% of total loans and
leases, at December 31, 1999. The allowance was 278.6% of nonperforming loans at
June 30, 2000, compared to 444.75% at December 31, 1999, resulting from
decreased nonperforming loans.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income decreased
$212, or 16.4%, for the three months ended June 30, 2000 compared to the same
period in 1999. The decrease was the result of a decrease in bank owned life
insurance income, 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.
- --------------------------------------------------------------------------------
14.
15
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Total noninterest expense increased $225, or 7.5%, for the three months ended
June 30, 2000 compared to the same period in 1999. The increase was primarily
the result of increases in other operating expense and occupancy expense, where
such increases made up $219 of the total increase. Included in the increase in
other operating expense was an increase of $58 related to the Corporation
switching credit card processors in April, 2000. This along with the other
increases were planned increases necessary to support the continued growth of
the Corporation. Other changes in noninterest expense were not significant.
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
$566, for an effective tax rate of 31.7%, for the three months ended June 30,
2000 and $544, for an effective tax rate of 29.4%, for the three months ended
June 30, 1999.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND JUNE 30, 1999
NET INCOME. Net income for the six months ended June 30, 2000 totaled $2,282,
compared to net income of $2,534 for the same period in 1999. Earnings per share
was $.55 for the six months ended June 30, 2000 compared to $.61 for the six
months ended June 30, 1999.
NET INTEREST INCOME. Net interest income was $8,110 for the six months ended
June 30, 2000 compared to $7,767 for the same period in 1999. The $343 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 totaled $502 for the six months ended June 30, 2000 compared to
$575 for the same period in 1999. The decrease in the provision is reflective of
management's belief that the overall quality of the loan portfolio increased
over the comparable period, partially offset by growth in the loan portfolio.
Net charge-offs for the six months ended June 30, 2000 were $164 compared to net
charge-offs of $312 for the same period in 1999.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income decreased
$443, or 17.5%, for the six months ended June 30, 2000 compared to the same
period in 1999. The decrease was the result of a decrease in bank owned life
insurance income, 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 $316, or 5.2%, for the six months ended June
30, 2000 compared to the same period in 1999. The increase was primarily the
result of increases in other operating expense and occupancy expense, where such
increases made up $273 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.
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
$1,031, for an effective tax rate of 31.1%, for the six months ended June 30,
2000 and $1,122, for an effective tax rate of 30.7%, for the six months ended
June 30, 1999.
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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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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 $4,407, or 26.2%, to $21,245 at June 30,
2000 compared to $16,838 at December 31, 1999. Cash and equivalents represented
4.5% of total assets at June 30, 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 $1,106 between December 31, 1999 and June
30, 2000. The increase was due to earnings retained partially offset by a
decrease in accumulated other comprehensive income. The Corporation purchased no
shares of treasury stock during the six months ended June 30, 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 13.7% at June 30, 2000,
while the Tier 1 risk-based capital ratio was 12.8%. 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 June 30, 2000 exceeded the regulatory
minimum for capital adequacy purposes of 4.0%.
In 2000, the Corporation announced plans to construct a new corporate
headquarters near Delaware, Ohio. The expected costs of the project are
estimated to be approximately $5 million. As of June 30, 2000, the Corporation
had paid costs of $1,036 related to the new corporate headquarters.
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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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Also in 2000, the Corporation entered into an agreement to acquire a 9%
ownership interest in Century Surety Company and Evergreen National Corporation.
The Corporation's investment along with that of four other community banks will
comprise a 50% ownership interest. The remaining 50% of the companies is being
acquired by Avalon National Corporation and Stonehenge Partners, Inc., a venture
capital firm based in Columbus, Ohio.
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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17.
18
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
June 30, 2000, $121,565, or 38.7%, 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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18.
19
DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended June 30, 2000
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
On May 24, 2000, the Corporation held the Annual Meeting of
Shareholders at which the following was voted on:
Shareholders voted upon the election of five (5) directors for
Class I Nominees for three-year terms expiring in 2003. The
results of the voting on these matters were as follows:
Nominee Votes for Votes against
------- --------- -------------
Larry D. Coburn 2,800,098 148,615
Vickie J. Lewis 2,800,098 148,615
William R. Oberfield 2,800,098 148,615
G. William Parker 2,800,098 148,615
Gary M. Skinner 2,800,098 148,615
The following are directors who were not up for election at the
meeting and whose terms of office continued after the meeting:
C. William Bonner Edward Powers
Merrill L. Kaufman Jerome J. Harmeyer
Terry M. Kramer G. Edwin Johnson
Thomas T. Porter
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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19.
20
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: August 14, 2000 /s/ Larry D. Coburn
----------------- -------------------------------------
(Signature)
Larry D. Coburn
President and Chief Executive Officer
Date: August 14, 2000 /s/ Douglas A. Lockwood
----------------- -------------------------------------
(Signature)
Douglas A. Lockwood
Controller
(Principal Accounting Officer)
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20.
21
DCB FINANCIAL CORP.
INDEX TO EXHIBITS
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EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
11 Statement re: computation of per Reference is hereby made
share earnings 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 22
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21.