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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, 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
incorporation or organization) Number)
110 Riverbend Avenue, Lewis Center, Ohio 43035
----------------------------------------------
(Address of principal executive offices)
(740) 657-7000
---------------------------
(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 8, 2001:
4,178,200 common shares
2
DCB FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
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.................................................. 13
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk..................... 19
PART II - OTHER INFORMATION............................................................. 20
SIGNATURES ............................................................................. 21
3
DCB FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Item 1. Financial Statements
June 30, December 31,
2001 2000
---- ----
ASSETS
Cash and due from banks $ 21,808 $ 17,797
Federal funds sold 12,755 700
----------- -----------
Total cash and cash equivalents 34,563 18,497
Securities available for sale, at fair value 91,808 101,955
Securities held to maturity (estimated fair values of $33,922 at
June 30, 2001 and $29,956 at December 31, 2000) 33,495 29,843
Loans and leases 338,727 331,522
Less allowance for loan and lease losses (3,497) (3,334)
----------- -----------
Net loans and leases 335,230 328,188
Premises and equipment, net 11,596 8,503
Investment in unconsolidated affiliate 1,931 1,931
Accrued interest receivable and other assets 8,537 8,228
----------- -----------
Total assets $ 517,160 $ 497,145
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 64,910 $ 62,710
Interest-bearing 365,255 356,235
----------- -----------
Total deposits 430,165 418,945
Borrowed funds 35,337 30,422
Accrued interest payable and other liabilities 3,518 2,879
----------- -----------
Total liabilities 469,020 452,246
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,779 3,779
Retained earnings 45,748 43,475
Treasury stock, 95,000 shares, at cost (1,978) (1,978)
Accumulated other comprehensive income (loss) 591 (377)
----------- -----------
Total shareholders' equity 48,140 44,899
----------- -----------
Total liabilities and shareholders' equity $ 517,160 $ 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 Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 7,037 $ 6,640 $ 14,361 $ 12,734
Securities
Taxable 1,835 1,885 3,781 3,767
Nontaxable 134 141 257 281
Other 109 58 186 85
------------ ----------- ------------ ------------
Total interest income 9,115 8,724 18,585 16,867
------------ ----------- ------------ ------------
INTEREST EXPENSE
Deposits 3,849 4,286 8,273 8,170
Other 495 308 969 587
------------ ----------- ------------ ------------
Total interest expense 4,344 4,594 9,242 8,757
------------ ----------- ------------ ------------
NET INTEREST INCOME 4,771 4,130 9,343 8,110
Provision for loan losses 200 180 330 502
------------ ----------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION 4,571 3,950 9,013 7,608
OTHER INCOME
Service charges on deposit
accounts 596 520 1,126 1,000
Trust fees 159 85 327 193
Data service fees 71 60 161 138
Securities gains (losses) -- (4) -- (23)
Net gain from sales of loans 269 53 412 77
Other operating income 212 365 650 707
------------ ----------- ------------ ------------
Total other income 1,307 1,079 2,676 2,092
OTHER EXPENSE
Salaries and other employee
benefits 1,987 1,544 3,907 3,175
Occupancy expense 389 243 674 492
Equipment expense 350 383 766 734
State franchise taxes 131 129 259 258
Other operating expenses 863 944 1,826 1,728
------------ ----------- ------------ ------------
Total other expenses 3,720 3,243 7,432 6,387
------------ ----------- ------------ ------------
INCOME BEFORE FEDERAL INCOME TAXES 2,158 1,786 4,257 3,313
Provision for income taxes 706 566 1,398 1,031
------------ ----------- ------------ ------------
NET INCOME $ 1,452 $ 1,220 $ 2,859 $ 2,282
============ =========== ============ ============
EARNINGS PER COMMON SHARE $ 0.35 $ 0.30 $ 0.68 $ 0.55
============ =========== ============ ============
- --------------------------------------------------------------------------------
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,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
NET INCOME $ 1,452 $ 1,220 $ 2,859 $ 2,282
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain/(loss) on available-
for-sale securities arising during
the period 259 (175) 968 (606)
Reclassification adjustment for
amounts realized on securities
sales included in net income -- 2 -- 15
------- ----------- ------------ ------------
Total other comprehensive income
(loss) 259 (173) 968 (591)
------- ----------- ------------ ------------
COMPREHENSIVE INCOME $ 1,711 $ 1,047 $ 3,827 $ 1,691
======= =========== ============ ============
- --------------------------------------------------------------------------------
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,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Balance at beginning of period $ 46,723 $ 40,739 $ 44,899 $ 40,387
Net income 1,452 1,220 2,859 2,282
Dividends declared ($.07 and $.14 per share
in 2001 and 2000) (292) (293) (584) (585)
Change in unrealized gain/loss on
securities available for sale, net of tax 259 (173) 968 (591)
--------- --------- --------- ---------
Balance at end of period $ 48,140 $ 41,493 $ 48,140 $ 41,493
========= ========= ========= =========
- --------------------------------------------------------------------------------
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 30,
--------
2001 2000
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 1,621 $ 773
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (28,286) (31,507)
Maturities and repayments 3,743 4,613
Proceeds from sales 36,298 20,650
Securities held to maturity
Purchases (8,119) (1,632)
Maturities and repayments 4,416 4,285
Net change in loans (5,540) (35,141)
Premises and equipment expenditures (3,618) (1,718)
--------- ---------
Net cash from investing activities (1,106) (40,450)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 11,220 35,444
Net change in short-term borrowings 113 9,400
Proceeds from long-term borrowings 5,000 --
Repayment of long-term borrowings (198) (175)
Cash dividends paid (584) (585)
--------- ---------
Net cash from financing activities 15,551 44,084
--------- ---------
Net change in cash and cash equivalents 16,066 4,407
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18,497 16,838
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 34,563 $ 21,245
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes $ 1,696 $ 890
Cash paid for interest 9,522 8,442
- --------------------------------------------------------------------------------
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,
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 accounting principles generally accepted in the United
States of America that might otherwise be necessary in the circumstances, and
should be read in conjunction with 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 the three and six months ended June 30,
2001 and 2000. The Corporation has 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 had no 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
-------- -------- -------- --------
---------------June 30, 2001-------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 1,005 $ 11 $ -- $ 1,016
U.S. government agencies
and corporations 46,065 759 (45) 46,779
States and political subdivisions 6,934 7 (78) 6,863
Mortgage-backed securities 34,796 290 (57) 35,029
-------- -------- -------- --------
Total debt securities 88,800 1,067 (180) 89,687
Other securities 2,111 10 - 2,121
-------- -------- -------- --------
Total securities available for sale $ 90,911 $ 1,077 $ (180) $ 91,808
======== ======== ======== ========
SECURITIES HELD TO MATURITY
States and political subdivisions $ 6,639 $ 136 $ (5) $ 6,770
Mortgage-backed securities 26,726 330 (36) 27,020
Corporate bonds 130 2 -- 132
-------- -------- -------- --------
Total securities held to maturity $ 33,495 $ 468 $ (41) $ 33,922
======== ======== ========= ========
-------------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
======== ======== ======== ========
- --------------------------------------------------------------------------------
(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, 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 June 30, 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 $ 3,939 $ 4,050 $ 1,223 $ 1,235
Due from one to five years 5,975 6,109 3,354 3,445
Due from five to ten years 28,150 28,514 564 593
Due after ten years 15,940 15,985 1,627 1,629
Mortgage-backed securities 34,796 35,029 26,726 27,020
-------- -------- -------- --------
$ 88,800 $ 89,687 $ 33,495 $ 33,922
======== ======== ======== ========
Proceeds from the sales of available-for-sale securities during the six months
ended June 30, 2001 were $36,298. Gross gains of $4 and gross losses of $4 were
realized on those sales. 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
NOTE 3 - LOANS AND LEASES
Loans and leases consisted of the following:
June 30, December 31,
2001 2000
---- ----
Commercial and industrial $ 51,841 $ 48,447
Commercial real estate 108,358 101,891
Residential real estate and home equity 86,424 85,820
Real estate construction and land development 28,753 32,493
Consumer and credit card 53,513 52,149
Lease financing, net 9,838 10,722
--------- ----------
$ 338,727 $ 331,522
========= ==========
- --------------------------------------------------------------------------------
(Continued)
10.
11
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS AND LEASES (Continued)
Included in residential real estate and home equity loans are loans held for
sale of $2,937 at June 30, 2001 and $1,105 at December 31, 2000.
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, 2001 and 2000 is as follows:
Three months ended Six months ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Beginning balance $ 3,415 $ 2,988 $ 3,334 $ 2,793
Provision for loan losses 200 180 330 502
Loans charged off (144) (78) (230) (230)
Recoveries 26 41 63 66
---------- ---------- ---------- ----------
Balance - June 30 $ 3,497 $ 3,131 $ 3,497 $ 3,131
========== ========== ========== ==========
Impaired loans were as follows:
June 30, December 31,
2001 2000
---- ----
Period-end impaired loans with no allowance for loan
losses allocated $ 143 $ --
Period-end impaired loans with allowance for loan
losses allocated 787 469
Amount of the allowance allocated to impaired loans 619 200
Nonperforming loans were as follows:
Nonaccrual loans $ 2,381 $ 1,278
Loans past due 90 days or more and still accruing 120 205
-------------- --------------
Total nonperforming loans $ 2,501 $ 1,483
============== ==============
- --------------------------------------------------------------------------------
(Continued)
11.
12
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
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
amounts of these instruments are not included in the consolidated financial
statements. At June 30, 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 $71,039 and $71,885. Of these
commitments, fixed-rate commitments totaled $3,099 and $4,049 at June 30, 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.
- --------------------------------------------------------------------------------
(Continued)
12.
13
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, 2001
compared to December 31, 2000, and the consolidated results of operations for
the three and six months ended June 30, 2001 compared to the same periods 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 $517,160 at June 30, 2001, compared to $497,145
at December 31, 2000, an increase of $20,015, or 4.0%. The increase in assets
was the result of an increase in loans and cash and cash equivalents.
Federal funds sold increased $12,055 from December 31, 2000 to June 30, 2001.
This increase was the result of the Corporation decreasing its investment in
securities during the six months ended June 30, 2001 to fund anticipated future
loan growth.
- --------------------------------------------------------------------------------
13.
14
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 $6,495, or 4.9%, from $131,798 at December 31, 2000
to $125,303 at June 30, 2001. The decrease was the result of the proceeds from
sales, 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
$91,808, or 73.3% of the total securities portfolio, at June 30, 2001.
Management classifies securities as available for sale to provide the
Corporation with the flexibility to move funds into loans as demand warrants.
Securities classified as held to maturity totaled $33,495, or 26.7% of the total
securities portfolio, at June 30, 2001. The mortgage-backed securities
portfolio, totaling $61,755 at June 30, 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 $7,205, or 2.2%, from $331,522 at December 31, 2000 to
$338,727 at June 30, 2001. The majority of the growth was experienced in
commercial real estate loans and commercial and industrial loans, which
increased $6,467, or 6.3%, and $3,394, or 7.0%, respectively. The Corporation
attributes this growth to a strong local economy and the large number of
businesses moving into the market area, although this growth has slowed in the
first half of 2001 compared to the previous year. There is no significant
concentration of lending to any one industry.
The gross loan to deposit ratio slightly decreased to 78.7% at June 30, 2001,
compared to 79.1% at December 31, 2000.
Total deposits increased $11,220, or 2.7%, from $418,945 at December 31, 2000 to
$430,165 at June 30, 2001. Noninterest-bearing deposits increased $2,200, or
3.5%, while interest-bearing deposits increased $9,020, or 2.5%.
Interest-bearing demand and money market deposits comprised 55.2% of total
interest-bearing deposits at June 30, 2001 compared to 56.1% of total
interest-bearing deposits at December 31, 2000. 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. The Corporation experienced an
increase in savings deposits, which increased from 11.8% of total
interest-bearing deposits at December 31, 2000 to 12.4% of total
interest-bearing deposits at June 30, 2001. Certificates of deposit increased
$4,096, or 3.6%, and comprise 32.4% of total interest-bearing deposits at June
30, 2001 compared to 32.1% of total interest-bearing deposits at December 31,
2000.
Total borrowed funds increased $4,915, or 16.2%, from $30,422 at December 31,
2000 to $35,337 at June 30, 2001. The increase in borrowed funds was used to
fund loan growth. At June 30, 2001 borrowed funds consisted primarily of three
FHLB advances of $10,000, $15,000, $5,000 and a mortgage-matched advance from
the FHLB with a remaining balance of $3,337. 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 May 2011, the $5,000 FHLB advance had an original
term of 10 years and carries a rate of 5.5% for the first 5 years and will float
at Libor quarterly for the last 5 years. 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, 2001.
- --------------------------------------------------------------------------------
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 premises and equipment increased $3,093 or 36.4% from $8,503 at December
31, 2001 to $11,596 at June 30, 2001 primarily due to the construction of a new
corporate headquarters near Delaware, Ohio. The construction was completed
during June 2001.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JUNE 30, 2001 AND JUNE 30, 2000
NET INCOME. Net income for the three months ended June 30, 2001 totaled $1,452,
compared to net income of $1,220 for the same period in 2000. Earnings per share
was $.35 for the three months ended June 30, 2001 compared to $.30 for the three
months ended June 30, 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 $4,771 for the three months ended June 30, 2001 compared
to $4,130 for the same period in 2000. The $641 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 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 $200 for the three months ended
June 30, 2001 compared to $180 for the same period in 2000. The growth in the
provision is reflective of the overall growth in the Corporation's loan
portfolio as well as an increase in net charge-offs between the two periods. Net
charge-offs for the three months ended June 30, 2001 were $118 compared to net
charge-offs of $37 for the same period in 2000.
The allowance for loan and lease losses totaled $3,497, or 1.03% of total loans
and leases, at June 30, 2001 compared to $3,334, or 1.01% of total loans and
leases, at December 31, 2000. The allowance was 139.8% of nonperforming loans at
June 30, 2001, compared to 224.81% at December 31, 2000, resulting from
increased nonperforming loans.
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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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NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$228, or 21.1%, for the three months ended June 30, 2001 compared to the same
period in 2000. The increase was the result of an increase in fee income from
the Corporation's trust department resulting from an increase in trust assets
and increased gains on loan sales resulting from changes in the interest rate
environment
Total noninterest expense increased $477, or 14.7%, for the three months ended
June 30, 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 totaled $589. These were planned increases necessary to
support the continued growth of the Corporation and will continue to be at these
higher levels in the future. 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
$706, for an effective tax rate of 32.7%, for the three months ended June 30,
2001 and $566, for an effective tax rate of 31.7%, for the three months ended
June 30, 2000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 2001 AND JUNE 30, 2000
NET INCOME. Net income for the six months ended June 30, 2001 totaled $2,859,
compared to net income of $2,282 for the same period in 2000. Earnings per share
was $.68 for the six months ended June 30, 2001 compared to $.55 for the six
months ended June 30, 2000.
NET INTEREST INCOME. Net interest income was $9,343 for the six months ended
June 30, 2001 compared to $8,110 for the same period in 2000. The $1,233
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 totaled $330 for the six months ended June 30, 2001 compared to
$502 for the same period in 2000. 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, 2001 were $167 compared to net
charge-offs of $164 for the same period in 2000.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$584, or 27.9%, for the six months ended June 30, 2001 compared to the same
period in 2000. The increase was the result of an increase in fee income from
the Corporation's trust department, increased gains on loan sales and an
increase in service charges on deposit accounts.
Total noninterest expense increased $1,045, or 16.4%, for the six months ended
June 30, 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 $914 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.
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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)
- --------------------------------------------------------------------------------
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
$1,398, for an effective tax rate of 32.8%, for the six months ended June 30,
2001 and $1,031, for an effective tax rate of 31.1%, for the six months ended
June 30, 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 $16,066, or 86.9%, to $34,563 at June 30,
2001 compared to $18,497 at December 31, 2000. Cash and equivalents represented
6.7% of total assets at June 30, 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 $3,241 between December 31, 2000 and June
30, 2001. The increase was due to earnings retained and an increase in
accumulated other comprehensive income. The Corporation purchased no shares of
treasury stock during the six months ended June 30, 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.
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.
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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)
- --------------------------------------------------------------------------------
The Corporation and its subsidiaries meet all regulatory capital requirements.
The ratio of total capital to risk-weighted assets was 13.0% at June 30, 2001,
while the Tier 1 risk-based capital ratio was 12.0%. 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 8.7% at June 30, 2001 exceeded the regulatory
minimum for capital adequacy purposes of 4.0%.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141. "Business Combinations." SFAS
No. 141 requires all business combinations within its scope to be accounted for
using the purchase method, rather than the pooling-of-interests method. The
provisions of this Statement apply to all business combinations initiated after
June 30, 2001. The adoption of this Statement will only impact the Corporation's
financial statements if it enters into a business combination.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses the accounting for such assets arising from prior and
future business combinations and acquisitions. Upon the adoption of this
Statement, goodwill arising from business combinations will no longer be
amortized, but rather will be assessed regularly for impairment, with any such
impairment recognized as a reduction to earnings in the period identified. Other
identified intangible assets, such as core deposit intangible assets, will
continue to be amortized over their estimated useful lives. The Corporation is
required to adopt this Statement on January 1, 2002 and early adoption is not
permitted. The adoption of this Statement will not impact the Corporation's
financial statements, as it has no intangible assets.
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18.
19
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, 2001, $119,109, or 35.2%, 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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19.
20
DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended June 30, 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:
On May 23, 2001, 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
------- --------- -------------
C. William Bonner 2,786,688 98,961
Merrill L. Kaufman 2,836,725 49,924
Terry M. Kramer 2,855,243 30,406
Thomas T. Porter 2,853,443 22,206
Edward A. Powers 2,855,243 30,406
The following are directors who were not up for election at the
meeting and whose terms of office continued after the meeting:
Larry D. Coburn Gary M. Skinner
Vickie J. Lewis Jerome J. Harmeyer
William R. Oberfield Adam Stevenson
G. William Parker
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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20.
21
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 13, 2001 /s/ Larry D. Coburn
-------------------------------------------- -------------------
(Signature)
Larry D. Coburn
President and Chief Executive Officer
Date: August 13, 2001 /s/ John A. Ustaszewski
-------------------------------------------- ------------------------------
(Signature)
John A. Ustaszewski
Vice President and Chief Financial Officer
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21.
22
DCB FINANCIAL CORPORATION
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
11 Statement re: computation of per share Reference is hereby made to
earnings Consolidated Statements of Income
on page 4 and Note 1 of Notes to
Consolidated Financial Statements
on page 8, hereof.
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22.