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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 2002
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)
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.
Yes X 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 3, 2002:
4,168,256 common shares
DCB FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED JUNE 30, 2002
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......................................... 14
PART II - OTHER INFORMATION................................................................................. 15
SIGNATURES ............................................................................................... 17
DCB FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
Item 1. Financial Statements
June 30, December 31,
2002 2001
------------- --------------
ASSETS
Cash and due from financial institutions $ 21,177 $ 17,945
------------- --------------
Federal funds sold 1,040 0
Total cash and cash equivalents 22,217 17,945
Securities available for sale 87,879 84,021
Securities held to maturity 28,029 34,718
Loans held for sale 2,105 2,588
Loans and leases 371,508 362,556
Less allowance for loan and lease losses (3,793) (3,596)
------------- --------------
Net loans and leases 367,715 358,960
Premises and equipment, net 12,168 12,320
Investment in unconsolidated affiliates 1,951 1,951
Accrued interest receivable and other assets 6,922 6,877
------------- --------------
Total assets $ 528,986 $ 519,380
============= ==============
LIABILITIES
Deposits
Noninterest-bearing $ 72,462 $ 69,859
Interest-bearing 364,716 360,855
------------- --------------
Total deposits 437,178 430,714
Federal funds purchased and other short-term borrowings 2,000 4,174
Federal Home Loan Bank advances 37,468 33,162
Accrued interest payable and other liabilities 1,245 2,209
------------- --------------
Total liabilities 477,891 470,259
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,780 3,779
Retained earnings 48,675 46,720
Treasury stock, 104,944 shares at June 30, 2002 and
95,000 shares at December 31, 2001, at cost (2,152) (1,978)
Accumulated other comprehensive income 792 600
------------- --------------
Total shareholders' equity 51,095 49,121
------------- --------------
Total liabilities and shareholders' equity $ 528,986 $ 519,380
============= ==============
See notes to the consolidated financial statements.
3.
DCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------- -------------- -------------- ---------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 6,372 $ 7,198 $ 12,744 $ 14,659
Taxable securities 1,490 1,805 3,002 3,751
Tax-exempt securities 148 134 287 257
Federal funds sold and other 12 114 30 191
--------------- -------------- -------------- ---------------
8,022 9,251 16,063 18,858
INTEREST EXPENSE
Deposits 2,263 3,850 4,560 8,273
Borrowings 285 494 642 969
--------------- -------------- -------------- ---------------
2,548 4,344 5,202 9,242
--------------- -------------- -------------- ---------------
NET INTEREST INCOME 5,474 4,907 10,861 9,616
Provision for loan and lease losses 500 200 800 330
--------------- -------------- -------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR 4,974 4,707 10,061 9,286
lOAN AND LEASE LOSSES
NONINTEREST INCOME
Service charges on deposit accounts 587 596 1,144 1,126
Trust department income 144 159 357 327
Net gains on sales of securities -- -- 15 --
Net gains on sale of loans 179 283 380 435
Cash management fees 140 101 260 177
Data processing servicing fees 110 71 183 161
Other 205 192 443 397
--------------- -------------- -------------- ---------------
1,365 1,402 2,782 2,623
NONINTEREST EXPENSE
Salaries and other employee benefits 2,186 2,032 4,376 4,005
Occupancy and equipment 1,049 736 1,934 1,440
Professional services 164 116 233 182
Advertising 100 115 198 183
Postage, freight and courier 116 113 251 216
Supplies 63 83 134 164
State franchise taxes 150 131 283 259
Other 725 636 1,477 1,214
--------------- -------------- -------------- ---------------
4,553 3,962 8,886 7,663
--------------- -------------- -------------- ---------------
INCOME BEFORE INCOME TAXES 1,786 2,147 3,957 4,246
Income tax expense 618 695 1,334 1,387
--------------- -------------- -------------- ---------------
NET INCOME 1,168 1,452 2,623 2,859
Other comprehensive income 544 259 192 968
--------------- -------------- -------------- ---------------
Comprehensive income $ 1,712 $ 1,711 $ 2,815 $ 3,827
=============== ============== ============== ===============
Basic and diluted earnings $ 0.28 $ 0.35 $ 0.63 $ 0.68
=============== ============== ============== ===============
per common share
4.
See notes to the consolidated financial statements.
DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30,
2002 2001
----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 3,404 $ 1,621
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (24,560) (28,286)
Maturities, principal payments and calls 19,832 3,743
Sales 1,081 36,298
Securities held to maturity
Purchases (1,321) (8,119)
Maturities, principal payments and calls 7,902 4,416
Net change in loans (9,175) (5,540)
Premises and equipment expenditures (645) (3,618)
----------- -----------
Net cash from investing activities (6,886) (1,106)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 6,464 11,220
Net change in federal funds and other short-term borrowings (2,174) 113
Proceeds from Federal Home Loan Bank advances 7,000 5,000
Repayment of Federal Home Loan Bank advances (2,694) (198)
Purchase of treasury stock (201) --
Sale of treasury stock 27 --
Cash dividends paid (668) (584)
----------- -----------
Net cash from financing activities 7,754 15,551
----------- -----------
Net change in cash and cash equivalents 4,272 16,066
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 17,945 18,497
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 22,217 $ 34,563
=========== ===========
See notes to the consolidated financial statements.
5.
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,
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.
Management considers the Corporation to operate in one segment, banking.
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 disclosures provided,
and future results could differ. The allowance for loan and lease losses, fair
values of financial instruments and 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. 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 4,172,294 and 4,175,231 for the three
and six months ended June 30, 2002. The weighted average number of common shares
outstanding was 4,178,200 for the three and six months ended June 30, 2001. The
Corporation has no potentially dilutive securities.
6.
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
NOTE 2 - LOANS AND LEASES
Loans and leases were as follows:
June 30, December 31,
2002 2001
----------- ------------
Commercial and industrial $ 51,026 $ 52,534
Commercial real estate 141,113 124,537
Residential real estate and home equity 89,441 88,797
Real estate construction and land development 31,531 34,212
Consumer and credit card 49,962 52,993
Lease financing, net 8,260 9,520
----------- ------------
371,333 362,593
Less: Net deferred loan fees and costs 1,198 1,303
Unearned income on leases (1,023) (1,340)
----------- ------------
$ 371,508 $ 362,556
=========== ============
NOTE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses was as follows:
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Beginning balance $ 3,742 $ 3,415 $ 3,596 $ 3,334
Provision for loan losses 500 200 800 330
Loans charged off (476) (144) (668) (230)
Recoveries 27 26 65 63
------------ ------------ ------------ ------------
Balance - June 30 $ 3,793 $ 3,497 $ 3,793 $ 3,497
============ ============ ============ ============
Nonperforming loans were as follows:
June 30, December 31,
2002 2001
---------------- -----------------
Loans past due 90 days or more and still accruing $ 477 $ 200
Nonaccrual loans 4,781 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 $ 522 $ 648
Period-end loans with allocated allowance for loan losses 4,898 2,915
---------------- -----------------
Total $ 5,420 $ 3,563
================ =================
Amount of the allowance for loan losses allocated $ 1,736 $ 1,110
================ =================
Average of impaired loans during the period $ 5,495 $ 2,998
================ =================
7.
DCB FINANCIAL CORP.
MANAGEMENTS 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, 2002
compared to December 31, 2001, and the consolidated results of operations for
the three and six months ended June 30, 2002 compared to the same periods 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 $528,986 at June 30, 2002, compared to $519,380
at December 31, 2001, an increase of $9,606, or 1.85%. The increase in assets
was primarily the result of an increase in loans, leases, and cash and cash
equivalents during the period, partially offset by a decrease in investment
securities.
Cash and cash equivalents increased $4,272 from December 31, 2001 to June 30,
2002. This increase was the result of the Corporation decreasing its investment
in securities during the six months ended June 30, 2002 to fund anticipated
future loan growth, and to ensure sufficient liquidity needed to meet the needs
of its growing deposit base.
8.
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Total securities decreased $2,831, or 2.3%, from $118,739 at December 31, 2001
to $115,918 at June 30, 2002. 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 2002. 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
$87,879, or 75.8% of the total securities portfolio, at June 30, 2002.
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 $28,029, or 24.2% of the total
securities portfolio, at June 30, 2002. The mortgage-backed securities
portfolio, totaling $40,601 at June 30, 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 $8,952, or 2.5%, from $362,556 at December 31, 2001 to
$371,508 at June 30, 2002. The majority of the growth was experienced in
commercial real estate loans, which increased $16,576, or 13.3%. 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.
Total deposits increased $6,464, or 1.5%, from $430,714 at December 31, 2001 to
$437,178 at June 30, 2002. Noninterest-bearing deposits increased $2,603, or
3.73%, while interest-bearing deposits increased $3,861, or 1.1%. 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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JUNE 30, 2002 AND JUNE 30, 2001
NET INCOME. Net income for the three months ended June 30, 2002 totaled $1,168,
compared to net income of $1,452 for the same period in 2001. Earnings per share
was $.28 for the three months ended June 30, 2002 compared to $.34 for the three
months ended June 30, 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, the volume, and the
composition of interest-earning assets and interest-bearing liabilities.
Net interest income was $5,474 for the three months ended June 30, 2002 compared
to $4,907 for the same period in 2001. The $567 increase in 2002 over 2001 was
the result of an increase in the balances of interest earning assets combined
with lower cost of funds resulting from the continued low interest rates during
the second quarter of 2002.
9.
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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 $500 for the three months ended
June 30, 2002 compared to $200 for the same period in 2001. The growth in the
provision is reflective of the overall growth in the Corporation's loan
portfolio. The Corporation has also experienced an increase in nonperforming
loans since prior year from $3,590 at December 31, 2001 to $5,258 at June 30,
2002. Net charge-offs for the three months ended June 30, 2002 were $449
compared to net charge-offs of $118 for the same period in 2001.
The allowance for loan and lease losses totaled $3,793, or 1.02% of total loans
and leases, at June 30, 2002 compared to $3,596, or .99% of total loans and
leases, at December 31, 2001. The allowance was 79.33% of nonperforming loans at
June 30, 2002, compared to 106.1% at December 31, 2001, resulting from increased
nonperforming loans.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income decreased
$37, or 2.6%, for the three months ended June 30, 2002 compared to the same
period in 2001. The decrease was the result of a decline in gains on sales of
loans, partially offset by an increase in fee income from data processing fees
and corporate cash management revenues.
Total noninterest expense increased $591, or 14.9%, for the three months ended
June 30, 2002 compared to the same period in 2001. The increase was primarily
the result of increases in salaries and employee benefits and occupancy expense.
These were planned increases necessary to support the continued growth of the
Corporation and are expected to remain 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
$618, for an effective tax rate of 34.6%, for the three months ended June 30,
2002 and $695, for an effective tax rate of 32.4%, for the three months ended
June 30, 2001.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 2002 AND JUNE 30, 2001
NET INCOME. Net income for the six months ended June 30, 2002 totaled $2,623,
compared to net income of $2,859 for the same period in 2001. Earnings per share
was $.63 for the six months ended June 30, 2002 compared to $.68 for the six
months ended June 30, 2001. This decline is attributed to an increase in the
provision for loan and lease losses, made in anticipation of possible credit
losses due to the unstable economic environment. The decline in net income is
also attributed to the additional administrative cost of salary and benefits
needed to support the growth of the organization, and costs of equipment and
other fixed assets associated with the development of the new of corporate
headquarters in Lewis Center, Ohio.
10.
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
NET INTEREST INCOME. Net interest income was $10,861 for the six months ended
June 30, 2002 compared to $9,616 for the same period in 2001. The $1,245
increase in 2002 over 2001 was the result of an increased volume of
interest-earning assets partially offset by an increase in interest-bearing
liabilities carried at an overall lower cost. To remain competitive, 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 $800 for the six months ended June 30, 2002 compared to
$330 for the same period in 2001. Exposure to credit losses in the commercial
loan portfolio required the recognition of additional provision compared to the
prior year. Net charge-offs for the six months ended June 30, 2002 were $668
compared to net charge-offs of $230 for the same period in 2001.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$159, or 6.1%, for the six months ended June 30, 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, cash management fees and data processing
fees.
Total noninterest expense increased $1,223, or 16.0%, for the six months ended
June 30, 2002 compared to the same period in 2001. The increase was primarily
the result of increases in salaries and employee benefits and occupancy expense,
where such increases made up $805 of the total increase. These were planned
increases necessary to support the continued growth of the Corporation. Other
changes in noninterest expense were not significant.
INCOME TAXES. The volatility of income tax expense is primarily attributable to
the change in income before income taxes. The provision for income taxes totaled
$1,334, for an effective tax rate of 33.7%, for the six months ended June 30,
2002 and $1,387, for an effective tax rate of 32.7%, for the six months ended
June 30, 2001.
LIQUIDITY
Liquidity is the ability of the Corporation to fund customers' needs for
borrowing and deposit withdrawals. The purpose of liquidity management is to
assure sufficient cash flow to meet all of the financial commitments and to
capitalize on opportunities for business expansion. This ability depends on the
institution's financial strength, asset quality and types of deposit and
investment instruments offered by the Corporation to its customers. The
Corporation's principal sources of funds are deposits, loan and security
repayments, maturities of securities, sales of securities available for sale and
other funds provided by operations. The Bank also has the ability to borrow from
the FHLB. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan and mortgage-backed
security prepayments are more influenced by interest rates, general economic
conditions, and competition. The Corporation maintains investments in liquid
assets based upon management's assessment of (1) need for funds, (2) expected
deposit flows, (3) yields available on short-term liquid assets and (4)
objectives of the asset/liability management program.
Cash and cash equivalents increased $4,272, or 23.8%, to $22,217 at June 30,
2002 compared to $17,945 at December 31, 2001. Cash and equivalents represented
4.2% of total assets at June 30, 2002 and 3.46% of total assets at December 31,
2001. The Corporation has the ability to borrow funds from the Federal Home Loan
Bank and has various correspondent banking partners to trade overnight federal
funds, should the Corporation need to
11.
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 $1,974 between December 31, 2001 and June
30, 2002. The increase was due to earnings retained and an increase in
accumulated other comprehensive income. The Corporation purchased 9,944 shares
of treasury stock during the six months ended June 30, 2002 and may purchase
additional shares in the future, as opportunities arise. The number of shares to
be purchased and the price to be paid will depend upon the availability of
shares, the prevailing market prices and any other considerations, which may, in
the opinion of the Corporation's Board of Directors or management, affect the
advisability of purchasing shares.
Tier 1 capital is shareholders' equity excluding the unrealized gain or loss on
securities classified as available for sale and intangible assets. Total capital
includes Tier 1 capital plus the allowance for loan losses, not to exceed 1.25%
of risk weighted assets. Risk weighted assets are the Corporation's total assets
after such assets are assessed for risk and assigned a weighting factor defined
by regulation based on their inherent risk.
The Corporation and its subsidiaries meet all regulatory capital requirements.
The ratio of total capital to risk-weighted assets was 13.9% at June 30, 2002,
while the Tier 1 risk-based capital ratio was 12.9%. Regulatory minimums call
for a total risk-based capital ratio of 8.0%, at least half of which must be
Tier 1 capital. The Corporation's leverage ratio, defined as Tier 1 capital
divided by average assets, of 9.6% at June 30, 2002 exceeded the regulatory
minimum for capital adequacy purposes of 4.9%.
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 the 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. During the second quarter 2002, the
Corporation elected to purchase additional shares under the plan, increasing
total treasury shares to 104,944.
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
12.
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.
The FASB also issued SFAS No. 143, "Asset Retirement Obligations." The
provisions of this standard apply to asset retirements beginning in 2003. The
Corporation does not believe this standard will have a material affect on its
financial position or results of operations.
Effective January 1, 2002, the Corporation adopted Statement of Financial
Accounting Standard (SFAS) No. 144, "Impairment or Disposal of Long-Lived
Assets." The effect of this standard on the financial position and results of
operations of the Corporation was not material.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendments of FASB Statement No. 13, and Technical Corrections".
This Statement eliminates inconsistency between the required accounting for
certain lease modifications that have economic effects similar to sale-leaseback
transactions and sale-leaseback transactions. The Corporation does not believe
this statement will have a material effect on its financial position or results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement addresses the timing of
recognition of a liability for exit and disposal cost at the time a liability is
incurred, rather than at a plan commitment date, as previously required. Exit or
disposal costs will be measured at fair value, and the recorded liability will
be subsequently adjusted for changes in estimated cash flows. This Statement is
required to be effective for exit or disposal activities entered after December
31, 2002, and early adoption is encouraged. The Corporation does not believe
this statement will have a material effect on its financial position or results
of operations.
13.
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 the 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 Corporation 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, 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.
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.
14.
DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended June 30, 2002
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
A shareholder, S. Robert Davis ("Plaintiff"), is attempting to
bring an action (the "Suit") as a shareholder derivative action
in United States District Court for the Southern District of
Ohio, naming the Company, its Board of Directors, the members of
the Board of Directors, and the Company's Chief Executive Officer
as defendants. He alleges to have sent correspondence
constituting a demand under Ohio law for inspection of the books
and records of account of the Company and its subsidiary, The
Delaware County Bank and Trust Company, and that defendants did
not respond to this correspondence prior to the deadline set
forth therein. He alleges that his correspondence is due to
inconsistencies in the explanation of what comprises a certain
reduction in earnings announced by the Company in a press release
issued December 12, 2001. Plaintiff claims material
misrepresentation, breach by the Company's directors of fiduciary
duty, and failure to follow proper accounting procedures.
Plaintiff seeks among other remedies an accounting and inspection
of books and records of account. Plaintiff further filed a motion
for preliminary injunction on July 2, 2002, to which defendants
filed a response and a motion to dismiss the Suit. If defendants'
motion to dismiss is denied, defendants intend to vigorously
oppose the Suit denying liability.
In the opinion of management, based upon consultation with legal
counsel, although legal proceedings cannot be predicted with
certainty, the ultimate outcome of this Suit is not expected to
have a material impact on the Company's financial position or
results of operation.
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:
At the annual meeting of shareholders held on May 22, 2002, there
were 2,816,376 voting shares present in person or by proxy, which
represented 68% of the Corporation's outstanding shares of
4,178,200 as of the record date for the meeting. Shareholders of
the Corporation were asked to consider the Corporation's nominees
for directors and to elect four (4) directors, to serve for a
term of three (3) years. The Corporation's nominees for director
were: Jerome J. Harmeyer, Vicki J. Lewis, William R. Oberfield
and Adam Stevenson, each of whom were elected. The results of
shareholder voting are as follows:
Director Votes for Votes against
Jerome J. Harmeyer 2,765,692 50,684
Vicki J. Lewis 2,761,533 54,843
William R. Oberfield 2,760,988 55,388
Adam Stevenson 2,756,133 60,243
Directors continuing in office are: C. William Bonner, Larry D.
Coburn, Merrill L. Kaufman, Terry M. Kramer, G. William Parker,
Thomas T. Porter, Edward A. Powers and Gary M. Skinner.
Item 5- Other information:
There are no matters required to be reported under this item.
DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended June 30, 2002
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits - The following exhibits are filed as a part of
this report:
Exhibit No. Exhibit
3.1 Amended and Restated Articles of Incorporation of DCB
Financial Corp. (Incorporated by reference to the
Registrant's filing on Form S-4 on November 5, 1996.
File No. 333-15579.)
3.2 Code of Regulations of DCB Financial Corp.
(Incorporated by reference to the Registrant's filing on
Form S-4 on November 5, 1996. File No. 333-15579.)
4. Instruments Defining the Rights of Security Holders.
(See Exhibits 3.1 and 3.2.)
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
DCB FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DCB FINANCIAL CORP.
----------------------------------------
(Registrant)
Date: August 14, 2002 /s/ Larry D. Coburn
----------------- ----------------------------------------
(Signature)
Larry D. Coburn
President and Chief Executive Officer
Date: August 14, 2002 /s/ John A. Ustaszewski
----------------- ----------------------------------------
(Signature)
John A. Ustaszewski
Vice President and Chief Financial
Officer
17.
DCB FINANCIAL CORPORATION
INDEX TO EXHIBITS
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.
3.1 Amended and Restated Articles of Incorporation of NA
DCB Financial Corp. (Incorporated by reference to
the Registrant's filing on Form s-4 on November
5, 1996. File No. 333-15579.)
3.2 Code of Regulations of DCB Financial Corp. NA
(Incorporated by reference Registrant's filing Form
S-4 on November 6, 1996. File No. 333-15579).
4 Instruments Defining the Rights of Security NA
Holders. (See Exhibits 3.1 and 3.2.)