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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, 2001
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 April 30, 2001:
4,178,200 common shares
2
DCB FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 2001
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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,
2001 2000
---- ----
ASSETS
Cash and due from banks $ 16,280 $ 17,797
Federal funds sold 13,001 700
------------- --------------
Total cash and cash equivalents 29,281 18,497
Securities available for sale, at fair value 90,149 101,955
Securities held to maturity (estimated fair values of $32,244 at
March 31, 2001 and $29,956 at December 31, 2000) 31,760 29,843
Loans and leases 333,935 331,522
Less allowance for loan and lease losses (3,415) (3,334)
------------- --------------
Net loans and leases 330,520 328,188
Premises and equipment, net 9,732 8,503
Accrued interest receivable and other assets 10,901 10,159
------------- --------------
Total assets $ 502,343 $ 497,145
============= ==============
LIABILITIES
Deposits
Noninterest-bearing $ 58,540 $ 62,710
Interest-bearing 364,238 356,235
------------- --------------
Total deposits 422,778 418,945
Borrowed funds 29,145 30,422
Accrued interest payable and other liabilities 3,697 2,879
------------- --------------
Total liabilities 455,620 452,246
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,779 3,779
Retained earnings 44,590 43,475
Treasury stock, 95,000 shares, at cost (1,978) (1,978)
Accumulated other comprehensive income 332 (377)
------------- --------------
Total shareholders' equity 46,723 44,899
------------- --------------
Total liabilities and shareholders' equity $ 502,343 $ 497,145
============= ==============
- --------------------------------------------------------------------------------
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,
2001 2000
---- ----
INTEREST INCOME
Loans, including fees $ 7,324 $ 6,094
Securities
Taxable 1,946 1,882
Tax-exempt 123 140
Federal funds sold and other 77 27
-------------- ---------------
Total interest income 9,470 8,143
INTEREST EXPENSE
Deposits 4,424 3,884
Borrowings 474 279
-------------- ---------------
Total interest expense 4,898 4,163
-------------- ---------------
NET INTEREST INCOME 4,572 3,980
Provision for loan losses 130 322
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 4,442 3,658
NONINTEREST INCOME
Service charges on deposit accounts 530 480
Trust department income 168 108
Data service fees 90 78
Securities gains (losses) - (19)
Net gains from sales of loans 143 24
Other 438 342
-------------- ---------------
Total noninterest income 1,369 1,013
NONINTEREST EXPENSE
Salaries and other employee benefits 1,920 1,631
Occupancy 285 249
Equipment 416 351
State franchise taxes 128 129
Other 963 784
-------------- ---------------
Total noninterest expense 3,712 3,144
-------------- ---------------
INCOME BEFORE INCOME TAXES 2,099 1,527
Provision for income taxes 692 465
-------------- ---------------
NET INCOME $ 1,407 $ 1,062
============== ===============
EARNINGS PER COMMON SHARE $ .34 $ .25
============== ===============
See notes to the consolidated financial statements.
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4.
5
DCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------
2001 2000
---- ----
NET INCOME $ 1,407 $ 1,062
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain/(loss) on available for sale securities
arising during the period 709 (431)
Reclassification adjustment for amounts realized on
securities sales included in net income - 13
-------------- ---------------
COMPREHENSIVE INCOME $ 2,116 $ 644
============== ===============
- --------------------------------------------------------------------------------
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,
-------------------
2001 2000
---- ----
BALANCE AT BEGINNING OF PERIOD $ 44,899 $ 40,387
Net income 1,407 1,062
Dividends declared ($.07 per share in 2001 and
$.07 per share in 2000) (292) (292)
Change in unrealized gain/loss on
securities available for sale, net of tax 709 (418)
----------- -----------
BALANCE AT END OF PERIOD $ 46,723 $ 40,739
=========== ===========
- --------------------------------------------------------------------------------
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,
---------
2001 2000
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES $ (1,099) $ 991
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (10,684) (20,855)
Maturities and repayments 1,184 2,948
Proceeds from sales and calls 22,478 18,202
Securities held to maturity
Purchases (3,503) (586)
Maturities and repayments 1,562 2,607
Net change in loans 77 (23,161)
Premises and equipment expenditures (1,495) (506)
----------- -----------
Net cash from investing activities 9,619 (21,351)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 3,833 24,397
Net change in short-term borrowings (1,186) (523)
Repayment of long-term borrowings (91) (87)
Cash dividends paid (292) (292)
----------- -----------
Net cash from financing activities 2,264 23,495
----------- -----------
Net change in cash and cash equivalents 10,784 3,135
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18,497 16,838
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29,281 $ 19,973
=========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes $ - $ -
Cash paid for interest 5,047 3,957
- --------------------------------------------------------------------------------
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,
2001, 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, 2000, included in its 2000 annual report. Refer to the
accounting policies of the Corporation described in the notes to financial
statements contained in the Corporation's 2000 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,
2001 and 2000. The Corporation had no potentially dilutive securities.
Beginning January 1, 2001 a new accounting standard required 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 did not have a material effect on the
Corporation's financial condition or results of operations.
- --------------------------------------------------------------------------------
(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, 2001-----------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 1,009 $ 11 $ - $ 1,020
U.S. government agencies
and corporations 44,954 592 (228) 45,318
States and political subdivisions 6,680 14 (53) 6,641
Mortgage-backed securities 34,924 295 (134) 35,085
---------- ---------- ---------- ----------
Total debt securities 87,567 912 (415) 88,064
Other securities 2,075 10 - 2,085
---------- ---------- ---------- ----------
Total securities available for sale $ 89,642 $ 922 $ (415) $ 90,149
========== ========== ========== ==========
SECURITIES HELD TO MATURITY
States and political subdivisions $ 5,637 $ 183 $ (5) $ 5,815
Mortgage-backed securities 26,123 333 (27) 26,429
---------- ---------- ---------- ----------
Total securities held to maturity $ 31,760 $ 516 $ (32) $ 32,244
========== ========== ========== ==========
------------------December 31, 2000---------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 1,012 $ 4 $ - $ 1,016
U.S. government agencies
and corporations 60,958 205 (480) 60,683
States and political subdivisions 6,175 2 (106) 6,071
Mortgage-backed securities 32,339 128 (326) 32,141
---------- ---------- ---------- ----------
Total debt securities 100,484 339 (912) 99,911
Other securities 2,038 6 - 2,044
---------- ---------- ---------- ----------
Total securities available for sale $ 102,522 $ 345 $ (912) $ 101,955
========== ========== ========== ==========
SECURITIES HELD TO MATURITY
States and political subdivisions $ 5,727 $ 103 $ (36) $ 5,794
Mortgage-backed securities 24,116 138 (92) 24,162
---------- ---------- ---------- ----------
Total securities held to maturity $ 29,843 $ 241 $ (128) $ 29,956
========== ========== ========== ==========
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(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, 2001, 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,
2001, 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 $ 4,075 $ 4,107 $ 1,316 $ 1,326
Due from one to five years 12,860 13,039 3,343 3,428
Due from five to ten years 23,422 23,786 564 591
Due after ten years 12,286 12,047 414 470
Mortgage-backed securities 34,924 35,085 26,123 26,429
---------- ---------- --------- ----------
$ 87,567 $ 88,064 $ 31,760 $ 32,244
========== ========== ========= ==========
Proceeds from the sales and calls of available-for-sale securities during the
three months ended March 31, 2001 and 2000 were $22,478 and $18,202. Gross gains
of $3 and $2 and gross losses of $3 and $21 were realized on those sales.
NOTE 3 - LOANS AND LEASES
Loans and leases consisted of the following:
March 31, December 31,
2001 2000
---- ----
Commercial and industrial $ 49,220 $ 48,447
Commercial real estate 102,290 101,891
Residential real estate and home equity 86,929 85,820
Real estate construction and land development 33,222 32,493
Consumer and credit card 52,177 52,149
Lease financing, net 10,097 10,722
----------- ------------
$ 333,935 $ 331,522
=========== ============
Included in residential real estate and home equity loans are loans held for
sale of $3,385 at March 31, 2001 and $1,105 at December 31, 2000.
- --------------------------------------------------------------------------------
(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, 2001 and 2000 is as follows:
2001 2000
---- ----
Balance - January 1 $ 3,334 $ 2,793
Provision for loan losses 130 322
Loans charged off (86) (152)
Recoveries 37 25
--------- ---------
Balance - March 31 $ 3,415 $ 2,988
========= =========
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, 2001 and December 31, 2000, the contract amount of
these instruments, which primarily include commitments to extend credit and
standby letters of credit, totaled approximately $61,536 and $71,885. Of these
commitments, fixed-rate commitments totaled $5,437 and $4,049 at March 31, 2001
and December 31, 2000. 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, 2001
compared to December 31, 2000, and the consolidated results of operations for
the three months ended March 31, 2001 compared to the same period in 2000. 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 $502,343 at March 31, 2001 compared to $497,145
at December 31, 2000, an increase of $5,198, or 1.0%. The increase in assets was
the result of an increase in loans and federal funds sold partially offset by a
decrease in securities.
Federal funds sold increased $12,301, from $700 at December 31, 2000 to $13,001
at March 31, 2001. This increase was the result of the Corporation decreasing
its investment in securities to fund anticipated future loan growth during the
three months ended March 31, 2001.
- --------------------------------------------------------------------------------
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 $9,889, or 7.5%, from $131,798 at December 31, 2000
to $121,909 at March 31, 2001. The decrease was the result of the proceeds from
maturities, calls and principal repayments not being reinvested due to an
anticipated future increase in loan demand during 2001. 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
$90,149, or 73.9% of the total securities portfolio, at March 31, 2001.
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 $61,208 at March 31, 2001,
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 $2,413, or .7%, from $331,522 at December 31, 2000 to
$333,935 at March 31, 2001. The majority of the growth was experienced in
residential real estate and home equity loans and commercial and industrial
loans which increased $1,109, or 1.3%, and $774, or 1.6%, 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 real
estate construction and land development loans of $729, or 2.2%, commercial real
estate loans of $399, or .4%, and consumer and credit card loans of $28, or .1%.
The gross loan to deposit ratio remained stable at 79.0% at March 31, 2001,
compared to 79.1% at December 31, 2000.
Total deposits increased $3,833, or .9%, from $418,945 at December 31, 2000 to
$422,778 at March 31, 2001. Noninterest-bearing deposits decreased $4,170, or
6.6%, while interest-bearing deposits increased $8,003, or 2.2%.
Interest-bearing demand and money market deposits comprised 56.3% of total
interest-bearing deposits at March 31, 2001 compared to 56.1% of total
interest-bearing deposits at December 31, 2000, while the Corporation
experienced a $5,482, or 2.7%, increase in volume in such accounts. The increase
was primarily in the Corporation's "Bank Investment" deposit accounts, which
offer a variable interest rate tied to the 3 Month Treasury Bill. Savings
deposits represented 11.8% of total interest-bearing deposits at both December
31, 2000 and March 31, 2001. Certificates of deposit increased $1,521, or 1.3%,
comprising 31.8% of total interest-bearing deposits at March 31, 2001 compared
to 32.1% of total interest-bearing deposits at December 31, 2000. The increase
in certificates of deposit was primarily due to the increase of public fund
certificates of deposit.
At March 31, 2001 and December 31, 2000, borrowed funds consisted primarily of
FHLB advances of $10,000 and $15,000 and a mortgage-matched advance from the
FHLB with a remaining balance of $3,444 at March 31, 2001 and $3,535 at December
31, 2000. Due in December 2001, the $10,000 FHLB advance had an original term of
12 months and carries a fixed interest rate of 6.72% with interest due monthly.
Due in February 2002, the $15,000 FHLB advance had an original term of 15 months
and carries a rate of 6.67% 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 $701 at March 31, 2001 and $1,887 at December 31, 2000.
- --------------------------------------------------------------------------------
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, 2001 totaled $1,407,
compared to net income of $1,062 for the same period in 2000. Earnings per share
was $.34 for the three months ended March 31, 2001 compared to $.25 for the
three months ended March 31, 2000.
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 $4,572 for the three months ended March 31, 2001
compared to $3,980 for the same period in 2000. The $592 increase in 2001 over
2000 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 probable 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 $130 for the three months ended
March 31, 2001 compared to $322 for the same period in 2000. The growth in the
provision is reflective of the decrease in overall growth in the Corporation's
loan portfolio between the two periods. Net charge-offs for the three months
ended March 31, 2001 were $49 compared to net charge-offs of $127 for the same
period in 2000. 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 $3,415, or 1.02% of total loans
and leases, at March 31, 2001 compared to $3,334, or 1.01% of total loans and
leases, at December 31, 2000. The allowance was 200.76% of nonperforming loans
at March 31, 2001, compared to 224.81% at December 31, 2000. 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 increased
$356, or 35.1%, for the three months ended March 31, 2001 compared to the same
period in 2000. The increase was the result of a increase in fee income from the
Corporation's trust department and increased gains on loan sales (both
servicing-released and service-retained) due to management's decision to sell a
larger portion of those loans in the secondary market.
- --------------------------------------------------------------------------------
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 $568, or 18.1%, for the three months ended
March 31, 2001 compared to the same period in 2000. The increase was primarily
the result of increases in salaries and employee benefits and occupancy expense,
where such increases made up $289 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
$692, for an effective tax rate of 33.0%, for the three months ended March 31,
2001 and $465, for an effective tax rate of 30.5%, for the three months ended
March 31, 2000.
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 $10,784, or 58.3%, to $29,281 at March 31,
2001 compared to $18,497 at December 31, 2000. Cash and equivalents represented
5.8% of total assets at March 31, 2001 and 3.7% of total assets at December 31,
2000. 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 $1,824 between December 31, 2000 and March
31, 2001. The increase was primarily due to earnings retained and an increase in
accumulated other comprehensive income. The Corporation purchased no shares of
treasury stock during the three months ended March 31, 2001; 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.
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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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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 March 31, 2001,
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 9.4% at March 31, 2001 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. As of March 31, 2001, the Corporation had paid
costs of $3,834 related to the new corporate headquarters.
IMPACT OF NEW ACCOUNTING STANDARDS
Beginning January 1, 2001 a new accounting standard required 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 did not have a material effect on the
Corporation's financial condition or results of operations.
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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
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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, 2001, $133,656, or 40.02%, 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 2000 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, 2000. 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, 2000 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, 2001
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.)
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
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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, 2001 /s/ Larry D. Coburn
--------------------------- -------------------
(Signature)
Larry D. Coburn
President and Chief Executive Officer
Date: May 11, 2001 /s/ John Ustaszewski
--------------------------- --------------------
(Signature)
John Ustaszewski
Chief Financial Officer
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DCB FINANCIAL CORPORATION
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.
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20.