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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-22387
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DCB Financial Corp.
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(Exact name of registrant as specified in its charter)
Ohio 31-1469837
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
110 Riverbend Avenue, Lewis Center, Ohio 43035
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(Address of principal executive offices)
(740) 657-7000
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(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
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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, 2002:
4,178,200 common shares
DCB FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 2002
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Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements Page
----
Consolidated Balance Sheets................................................ 3
Consolidated Statements of Income and Comprehensive Income................. 4
Condensed Consolidated Statements of Cash Flows............................ 5
Notes to the Consolidated Financial Statements............................. 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk....... 13
PART II - OTHER INFORMATION................................................ 14
SIGNATURES................................................................. 15
DCB FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
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Item 1. Financial Statements
--------------------
(Dollars in thousands) March 31, December 31,
2002 2001
------------- --------------
ASSETS
Cash and due from financial institutions $ 16,782 $ 17,945
Federal funds sold 4,620 --
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Total cash and cash equivalents 21,402 17,945
Securities available for sale 87,937 84,021
Securities held to maturity 29,922 34,718
Loans held for sale 2,659 2,588
Loans and leases 363,053 362,556
Less allowance for loan and lease losses (3,742) (3,596)
------------- --------------
Net loans and leases 359,311 358,960
Premises and equipment, net 12,349 12,320
Investment in unconsolidated affiliates 1,951 1,951
Accrued interest receivable and other assets 6,780 6,877
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Total assets $ 522,311 $ 519,380
============= ==============
LIABILITIES
Deposits
Noninterest-bearing $ 67,893 $ 69,859
Interest-bearing 366,678 360,855
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Total deposits 434,571 430,714
Federal funds purchased and other short-term borrowings 2,047 4,174
Federal Home Loan Bank advances 33,066 33,162
Accrued interest payable and other liabilities 2,738 2,209
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Total liabilities 472,422 470,259
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,779 3,779
Retained earnings 47,840 46,720
Treasury stock, 95,000 shares, at cost (1,978) (1,978)
Accumulated other comprehensive income 248 600
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Total shareholders' equity 49,889 49,121
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Total liabilities and shareholders' equity $ 522,311 $ 519,380
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See notes to the consolidated financial statements.
3.
DCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
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Three Months Ended
March 31,
------------------
2002 2001
-------------- ---------------
Interest and dividend income
Loans, including fees $ 6,372 $ 7,461
Taxable securities 1,512 1,946
Tax-exempt securities 139 123
Federal funds sold and other 18 77
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8,041 9,607
Interest expense
Deposits 2,297 4,423
Borrowings 357 475
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2,654 4,898
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Net interest income 5,387 4,709
Provision for loan and lease losses 300 130
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Net interest income after provision for loan and lease losses 5,087 4,579
Noninterest income
Service charges on deposit accounts 557 530
Trust department income 213 168
Net gains (losses) on sales of securities 15 --
Net gains on sales of loans 201 152
Cash management fees 120 76
Data processing servicing fees 73 90
Other 238 205
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1,417 1,221
Noninterest expense
Salaries and employee benefits 2,190 1,973
Occupancy and equipment 885 704
Professional services 69 66
Advertising 98 68
Postage, freight and courier 135 103
Supplies 71 81
State franchise taxes 133 128
Other 752 578
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4,333 3,701
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Income before income taxes 2,171 2,099
Income tax expense 716 692
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Net income 1,455 1,407
Other comprehensive income (loss) (352) 709
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Comprehensive income $ 1,103 $ 2,116
============== ===============
Basic earnings per common share $ 0.35 $ 0.34
============== ===============
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See notes to the consolidated financial statements.
4.
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
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Three Months Ended
March 31,
------------------
2002 2001
---- ----
Net cash flows from operating activities $ 2,736 $ (1,099)
Cash flows from investing activities
Securities available for sale
Purchases (14,783) (10,684)
Maturities, principal payments and calls 9,440 1,184
Sales 875 22,478
Securities held to maturity
Purchases -- (3,503)
Maturities, principal payments and calls 4,737 1,562
Net change in loans (450) 77
Premises and equipment expenditures (397) (1,495)
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Net cash from investing activities (578) 9,619
Cash flows from financing activities
Net change in deposits 3,857 3,833
Net change in federal funds sold and other short-term borrowings (2,127) (1,186)
Repayment of Federal Home Loan Bank advances (96) (91)
Cash dividends paid (335) (292)
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Net cash from financing activities 1,299 2,264
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Net change in cash and cash equivalents 3,457 10,784
Cash and cash equivalents at beginning of year 17,945 18,497
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Cash and cash equivalents at end of year $ 21,402 $ 29,281
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See notes to the consolidated financial statements.
5.
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
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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,
2002, and its results of operations and cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
consolidated 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, 2001,
included in its 2001 annual report. Refer to the accounting policies of the
Corporation described in the notes to financial statements contained in the
Corporation's 2001 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.
To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions based on available information. These estimates and assumptions
affect amounts reported in the financial statements and the disclosures
provided, and future results could differ. The allowance for loan losses, fair
values of financial instruments and the status of contingencies are particularly
subject to change.
Income tax expense is based on the effective tax rate expected to be applicable
for the entire year. 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 amounts for the 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 common share is net income divided by the weighted average number
of shares of common stock outstanding during the period. The weighted average
number of common shares outstanding was 4,178,200 for the three months ended
March 31, 2002 and 2001. The Corporation does not have any shares that could
potentially dilute its earnings per share computation.
A new accounting standard dealing with asset retirement obligations will apply
for 2003. The Corporation does not believe this standard will have a material
affect on its financial condition or results of operations.
Effective January 1, 2002, the Corporation adopted a new accounting standard
issued by the Financial Accounting Standards Board on impairment and disposal of
long-lived assets. The effect of this standard on the financial position and
results of operations of the Corporation was not material.
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(Continued)
6.
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
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NOTE 2 - LOANS AND LEASES
Loans and leases were as follows:
March 31, December 31,
2002 2001
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Commercial and industrial $ 52,082 $ 52,534
Commercial real estate 133,819 124,537
Residential real estate and home equity 87,254 88,797
Real estate construction and land development 29,777 34,212
Consumer and credit card 51,081 52,993
Lease financing, net 8,968 9,520
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362,981 362,593
Less: Net deferred loan fees and costs 1,253 1,303
Unearned income on leases (1,181) (1,340)
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$ 363,053 $ 362,556
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NOTE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses was as follows:
2002 2001
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Balance - January $ 3,596 $ 3,334
Provision for loan losses 300 130
Loans charged off (192) (86)
Recoveries 38 37
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Balance - March 31 $ 3,742 $ 3,415
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Nonperforming loans were as follows:
March 31, December 31,
2002 2001
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Loans past due over 90 days still accruing interst $ 45 $ 200
Nonaccrual loans 4,928 3,390
Impaired loans (most of which are included in nonperforming loans above) were as
follows:
Period-end loans with no allocated allowance for loan losses $ 640 $ 648
Period-end loans with allocated allowance for loan losses 4,903 2,915
------------ ------------
Total $ 5,543 $ 3,563
============ ============
Amount of the allowance for loan losses allocated $ 1,711 $ 1,110
============ ============
Average of impaired loans during the period $ 5,398 $ 2,998
============ ============
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7.
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 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, 2002
compared to December 31, 2001, and the consolidated results of operations for
the three months ended March 31, 2002 compared to the same period in 2001. 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 $522,311 at March 31, 2002 compared to $519,380
at December 31, 2001, an increase of $2,931, or .56%. The Bank experienced lower
loan growth during the first quarter, and utilized this opportunity to increase
liquidity within the balance sheet through an increase in cash and cash
equivalents. Federal funds sold totaled $4,620 at March 31, 2002, but totaled $0
at December 31, 2001. The increase in fed funds is attributed to management's
decision to invest short-term versus investing in long-term securities.
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8.
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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Total securities decreased $880, or .7%, from $118,739 at December 31, 2001 to
$117,859, at March 31, 2002. The slight decrease was the result of the majority
of the proceeds from maturities, calls and principal payments being reinvested
in short-term securities to increase liquidity for future balance sheet funding
purposes. 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 $87,937, or 74.6% of the
total securities portfolio, at March 31, 2002. Management classifies securities
as available for sale to provide the Corporation with the flexibility to create
liquidity. The mortgage-backed securities portfolio, totaling $60,341 at March
31, 2002, 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 $497, or .1%, from $362,556 at December 31, 2001 to
$363,053 at March 31, 2002. The major area of growth was in commercial real
estate, which increased $9,282, or 7.5%. The Corporation attributes this growth
to a strong local economy and the large number of businesses moving into the
market area. The growth in commercial real estate was offset by declines in most
other loan types, but primarily by a $4,435 decrease in real estate construction
and land development. There is no significant concentration of lending to any
one industry.
Total deposits increased $3,857, or .9%, from $430,714 at December 31, 2001 to
$434,571 at March 31, 2002. Noninterest-bearing deposits decreased $1,966, or
2.8%, while interest-bearing deposits increased $5,823, or 1.6%.
Interest-bearing demand and money market deposits comprised 40.6% of total
interest-bearing deposits at March 31, 2002, compared to 49.7% of total
interest-bearing deposits at December 31, 2001, while the Corporation
experienced a $7,835, or 28.9%, 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 14% of total interest-bearing deposits at both December 31,
2001 and March 31, 2002. Certificates of deposit increased $3,097, or 2.35%,
comprising 36.4% of total interest-bearing deposits at March 31, 2002, compared
to 36.3% of total interest-bearing deposits at December 31, 2001. The increase
in certificates of deposit was primarily due to the increase of public fund
certificates of deposit.
COMPARISON OF RESULTS OF OPERATIONS
NET INCOME. Net income for the three months ended March 31, 2002 totaled $1,455,
compared to net income of $1,407 for the same period in 2001. Earnings per share
was $0.35 for the three months ended March 31, 2002 compared to $.34 for the
three months ended March 31, 2001.
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.
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9.
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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Net interest income was $5,387 for the three months ended March 31, 2002
compared to $4,709 for the same period in 2001. The $678 increase in 2002 over
2001 was primarily the result of a sharp decline in rates paid on
interest-bearing liabilities. 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 $300 for the three months ended
March 31, 2002 compared to $130 for the same period in 2001. This growth is
reflective of an increase in net charge-offs along with an increase
nonperforming and impaired loans during the first three months of 2002. Net
charge-offs for the three months ended March 31, 2002 were $154 compared to net
charge-offs of $49 for the same period in 2001.
The allowance for loan and lease losses totaled $3,742, or 1.0% of total loans
and leases at March 31, 2002. The allowance at December 31, 2001 was $3,596, or
0.99% of total loans and leases. The allowance was 75% of nonperforming loans at
March 31, 2002, compared to 95% at December 31, 2001. Management believes that
the allowance for loan losses is sufficient to cover probable incurred credit
losses as of March 31, 2002.
NON-INTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$196, or 16.1%, for the three months ended March 31, 2002 compared to the same
period in 2001. The increase was the result of an increase in fee income from
the Corporation's trust department and from earnings on corporate banking
products. Additionally, the Corporation experienced increased gains on loan
sales (both servicing-released and service-retained) due to management's
decision to increase origination volume, taking advantage of the current low
interest rate environment.
Total non-interest expense increased $632, or 17.1%, for the three months ended
March 31, 2002 compared to the same period in 2001. The increase was primarily
the result of increases in salaries and employee benefits and occupancy and
equipment expense, where such increases made up $398 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 increase in the provision for federal income tax expense is
primarily attributable to the change in pre-tax income. The provision for income
taxes totaled $716, for an effective tax rate of 33.0%, for the three months
ended March 31, 2002 and $692, for an effective tax rate of 33.0%, for the three
months ended March 31, 2001.
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10.
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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LIQUIDITY
Liquidity is the ability of the Corporation to fund customers' needs for
borrowing and deposit withdrawals. The purpose of liquidity management is to
assure sufficient cash flow to meet all of the financial commitments and to
capitalize on opportunities for business expansion. This ability depends on the
institution's financial strength, asset quality and types of deposit and
investment instruments offered by the Corporation to its customers. The
Corporation's principal sources of funds are deposits, loan and securities
repayments, maturities of securities, sales of securities available for sale and
other funds provided by operations. The Bank also has the ability to borrow from
the FHLB. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan and mortgage-backed
security prepayments are more influenced by interest rates, general economic
conditions and competition. The Corporation maintains investments in liquid
assets based upon management's assessment of (1) need for funds, (2) expected
deposit flows, (3) yields available on short-term liquid assets and (4)
objectives of the asset/liability management program.
Cash and cash equivalents increased $3,457, or 19.3%, to $21,402 at March 31,
2002 compared to $17,945 at December 31, 2001. Cash and cash equivalents
represented 4.1% of total assets at March 31, 2002 and 3.5% of total assets at
December 31, 2001. The Bank 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.
As summarized in the Consolidated Statements of Cash Flows, the most significant
transactions which affected the Corporation's level of cash and cash
equivalents, cash flows and liquidity during the first quarter of 2002 were
purchases of securities of $14,783, security sales, maturities, principal
payments and calls of $15,052; net increase in deposits of $3,857; and the
repayment of borrowed funds totaling $2,223.
CAPITAL RESOURCES
Total shareholders' equity increased $768 between December 31, 2001 and March
31, 2002. The increase was primarily due to earnings retained net of a $352
after-tax decrease in accumulated other comprehensive income and $334 of
dividends declared.
Tier 1 capital is shareholders' equity excluding accumulated other comprehensive
income and intangible assets. Total capital includes Tier 1 capital plus the
allowance for loan and lease 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 based on their
inherent risk.
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11.
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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The Corporation and its subsidiaries meet all regulatory capital requirements.
The Corporation's ratio of total capital to risk-weighted assets was 13.0% at
March 31, 2002, 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 8.8% at March 31, 2002 exceeded the
regulatory minimum for capital adequacy purposes of 4.0%.
On April 24, 2002, the Corporation announced a stock repurchase program whereby
the Board of Directors authorized management to repurchase up to 400,000 shares,
or approximately 10% of the Corporation's outstanding common stock. The number
of shares purchased and the price to be paid will depend upon the availability
of shares, the prevailing market prices and any other considerations that may,
in the opinion of the Board of Directors or management, affect the advisability
of purchasing shares.
IMPACT OF NEW ACCOUNTING STANDARDS
A new accounting standard requires identified intangible assets to be separated
from goodwill. Identifiable intangible assets with finite useful lives will be
amortized under a new standard, whereas, goodwill, both amounts previously
recorded and future amounts purchased, will cease being amortized. Annual
impairment testing is required for goodwill with impairment being recorded if
the carrying amount of goodwill exceeds its implied fair value. Adoption of this
standard on January 1, 2002 did not materially impact the Corporation's
financial statements as no intangible assets are currently held.
A new accounting standard dealing with asset retirement obligations will apply
for 2003. The Corporation does not believe this standard will have a material
affect on its financial condition or results of operations.
Effective January 1, 2002, the Corporation adopted a new accounting standard
issued by the Financial Accounting Standards Board on impairment and disposal of
long-lived assets. The effect of this standard on the financial position and
results of operations of the Corporation was not material.
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12.
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
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. The measurement and
analysis of thee exposure of the Corporation's primary operating subsidiary, The
Delaware County Bank and Trust Company, to changes in the interest rate
environment are referred to as asset/liability management. One method used to
analyze the Corporation's sensitivity to changes in interest rates is the "net
portfolio value" ("NPV") methodology.
NPV is generally considered to be the present value of the difference between
expected incoming cash flows on interest-earning and other assets and expected
outgoing cash flows on interest-bearing and other liabilities. For example, the
asset/liability model that the Corportion currently employs attempts to measure
the change in NPV for a variety of interest rate scenarios, typically for
parallel shifts of 100 to 300 basis points in market rates.
The Corporation's 2001 annual report includes a table depicting the changes in
the Corporation's interest rate risk as of December 31, 2001, and December 31,
2000, as measured by changes in NPV for instantaneous and sustained parallel
shifts of 100 to 300 basis points in market interest rates. Management believes
that no events have occurred since December 31, 2001 that would significantly
change their ratio of rate sensitive assets to rate sensitive liabilities.
As illustrated in the tables, the Corporation's NPV is more sensitive to rising
rates than declining rates. From an overall perspective, such difference in
sensitivity occurs principally because, as rates rise, borrowers do not prepay
fixed-rate loans as quickly as they do when interest rates are declining. Thus,
in a rising interest rate environment, because the Corporation has many
fixed-rate loans in its loan portfolio, the amount of interest the Corporation
would receive on its loans would increase relatively slowly as loans are slowly
prepaid and new loans at higher rates are made. Moreover, the interest the
Corporation would pay on its deposits would increase rapidly because the
Corporation's deposits generally have shorter periods to repricing. Additional
consideration should also be given to today's current interest rate levels.
Several deposit products are within 200 basis points of zero percent and other
products within 300 basis points. Should rates continue to decline, fewer
liabilities could be repriced down to offset potentially lower yields on loans.
Thus decreases could also impact future earnings and the Corporation's NPV.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making risk calculations.
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13.
DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended March 31, 2002
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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14.
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 15, 2002 /s/ Larry D. Coburn
--------------- -------------------------------------
(Signature)
Larry D. Coburn
President and Chief Executive Officer
Date: May 15, 2002 /s/ John Ustaszewski
--------------- -------------------------------------
(Signature)
John Ustaszewski
Chief Financial Officer
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15.
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 6, hereof.
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16.