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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: SEPTEMBER 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 November 5, 2002:
4,168,234 common shares
DCB FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002
Table of Contents
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
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.................................. 10
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk....... 15
ITEM 4 - Controls and Procedures ......................................... 16
PART II - OTHER INFORMATION............................................... 17
SIGNATURES ............................................................. 19
DCB FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
Item 1. Financial Statements
September 30, December 31,
2002 2001
--------- ---------
ASSETS
Cash and due from financial institutions $ 19,920 $ 17,945
Federal funds sold 7,490 0
--------- ---------
Total cash and cash equivalents 27,410 17,945
Securities available for sale 108,630 84,021
Securities held to maturity 0 34,718
Loans held for sale 4,303 2,588
Loans and leases 375,866 362,556
Less allowance for loan and lease losses (3,330) (3,596)
--------- ---------
Net loans and leases 372,536 358,960
Premises and equipment, net 12,906 12,320
Investment in unconsolidated affiliates 1,951 1,951
Accrued interest receivable and other assets 6,805 6,877
--------- ---------
Total assets $ 534,541 $ 519,380
========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 73,025 $ 69,859
Interest-bearing 362,408 360,855
--------- ---------
Total deposits 435,433 430,714
Federal funds purchased and other short-term borrowings 2,001 4,174
Federal Home Loan Bank advances 42,369 33,162
Accrued interest payable and other liabilities 2,238 2,209
--------- ---------
Total liabilities 482,041 470,259
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,780 3,779
Retained earnings 49,056 46,720
Treasury stock, 104,966 shares at September 30, 2002 and
95,000 shares at December 31, 2001, at cost (2,152) (1,978)
Accumulated other comprehensive income 1,816 600
--------- ---------
Total shareholders' equity 52,500 49,121
--------- ---------
Total liabilities and shareholders' equity $ 534,541 $ 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 Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
------ ------- ------- -------
INTEREST AND DIVIDEND INCOME
Loans, including fees $6,449 $ 6,970 $19,193 $21,629
Taxable securities 1,309 1,759 4,311 5,510
Tax-exempt securities 156 138 443 395
Federal funds sold and other 11 68 41 259
------ ------- ------- -------
7,925 8,935 23,988 27,793
INTEREST EXPENSE
Deposits 2,215 3,477 6,775 11,750
Borrowings 333 542 975 1,511
------ ------- ------- -------
2,548 4,019 7,750 13,261
------ ------- ------- -------
NET INTEREST INCOME 5,377 4,916 16,238 14,532
Provision for loan and lease losses 900 242 1,700 572
------ ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
lOAN AND LEASE LOSSES 4,477 4,674 14,538 13,960
NONINTEREST INCOME
Service charges on deposit accounts 595 583 1,739 1,709
Trust department income 144 119 501 446
Net gains on sales of securities 11 -- 26 --
Net gains on sale of loans 242 110 622 545
Cash management fees 122 107 382 284
Data processing servicing fees 100 69 283 230
Other 214 260 657 657
------ ------- ------- -------
1,428 1,248 4,210 3,871
NONINTEREST EXPENSE
Salaries and other employee benefits 2,187 2,134 6,563 6,139
Occupancy and equipment 1,070 1,135 3,004 2,575
Professional services 182 68 415 250
Advertising 103 142 301 325
Postage, freight and courier 108 136 359 352
Supplies 87 102 221 266
State franchise taxes 156 130 439 389
Other 872 533 2,349 1,747
------ ------- ------- -------
4,765 4,380 13,651 12,043
------ ------- ------- -------
INCOME BEFORE INCOME TAXES 1,140 1,542 5,097 5,788
Income tax expense 383 592 1,717 1,979
------ ------- ------- -------
NET INCOME 757 950 3,380 3,809
Other comprehensive income 1,025 415 1,217 1,383
------ ------- ------- -------
Comprehensive income $1,782 $ 1,365 $ 4,597 $ 5,192
====== ======= ======= =======
Basic and diluted earnings
per common share $ 0.18 $ 0.23 $ 0.81 $ 0.91
====== ======= ======= =======
See notes to the consolidated financial statements.
4.
DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
2002 2001
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 3,825 $ 2,593
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (13,695) (37,045)
Maturities, principal payments and calls 13,793 7,461
Sales 4,169 46,921
Securities held to maturity
Purchases (1,237) (12,234)
Maturities, principal payments and calls 7,736 7,253
Sales 809 --
Net change in loans (14,654) (19,752)
Proceeds from sale of premises and equipment -- 50
Premises and equipment expenditures (1,817) (4,567)
-------- --------
Net cash from investing activities (4,896) (11,913)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 4,719 4,860
Net change in federal funds and other short-term borrowings (2,173) 118
Proceeds from Federal Home Loan Bank advances 12,000 5,000
Repayment of Federal Home Loan Bank advances (2,793) (278)
Purchase of treasury stock (201) --
Cash dividends paid (1,016) (919)
-------- --------
Net cash from financing activities 10,536 8,781
-------- --------
Net change in cash and cash equivalents 9,465 (539)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 17,945 18,497
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,410 $ 17,958
======== ========
See notes to the consolidated financial statements.
5.
DCB FINANCIAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 September
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 4,168,234 for the three and 4,172,872
for the nine months ended September 30, 2002. The weighted average number of
common shares outstanding was 4,178,200 for the three and nine months ended
September 30, 2001. The Corporation has no potentially dilutive securities.
6.
DCB FINANCIAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 2 - SECURITIES
The Corporation sold a security classified as held to maturity in August 2002.
Consequently, the Corporation now will be required to classify all securities
for the foreseeable future as available for sale. As a result, the Corporation
transferred $27,284 of securities classified as held to maturity to available
for sale. The unrealized gain at the time the securities were transferred was
$310. The after tax effect of the transfer was to increase equity by $205 and is
reflected as a cumulative effect adjustment in other comprehensive income.
The amortized cost and estimated fair values of securities were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
September 30, 2002
------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. government agencies
and corporations $ 31,147 $ 831 $ (7) $ 31,972
States and political subdivisions 14,730 601 (3) 15,328
Mortgage-backed securities 31,750 947 (3) 32,693
-------- -------- -------- --------
Total debt securities 77,627 2,379 (13) 79,993
Other securities 28,268 373 (4) 28,637
-------- -------- -------- --------
Total securities available for sale $105,895 $ 2,752 $ (17) $108,630
======== ======== ======== ========
December 31, 2001
------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. government agencies
and corporations $ 43,004 $ 804 $ (52) $ 43,756
States and political subdivisions 7,392 16 (132) 7,276
Mortgage-backed securities 30,320 350 (83) 30,587
Corporate bonds 212 -- (4) 208
-------- -------- -------- --------
Total debt securities 80,928 1,170 (271) 81,827
Other securities 2,184 10 -- 2,194
-------- -------- -------- --------
Total securities available for sale $ 83,112 $ 1,180 $ (271) $ 84,021
======== ======== ======== ========
SECURITIES HELD TO MATURITY
States and political subdivisions $ 6,004 $ 134 $ (11) $ 6,127
Mortgage-backed securities 28,584 498 (65) 29,017
Corporate bonds 130 -- -- 130
-------- -------- -------- --------
Total securities held to maturity $ 34,718 $ 632 $ (76) $ 35,274
======== ======== ======== ========
7.
DCB FINANCIAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
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 September 30, 2002, 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 September 30,
2002, 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
------------------
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 3,933 $ 3,975
Due from one to five years 8,736 9,038
Due from five to ten years 27,135 27,919
Due after ten years 40,471 41,218
Mortgage-backed securities 25,620 26,480
-------- --------
$105,895 $108,630
======== ========
8.
DCB FINANCIAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 3 - LOANS AND LEASES
Loans and leases were as follows:
September 30, December 31,
2002 2001
--------- ---------
Commercial and industrial $ 48,617 $ 52,534
Commercial real estate 141,458 124,537
Residential real estate and home equity 90,490 88,797
Real estate construction and land development 38,608 34,212
Consumer and credit card 49,082 52,993
Lease financing, net 7,378 9,520
--------- ---------
375,633 362,593
Less: Net deferred loan fees and costs 1,137 1,303
Unearned income on leases (904) (1,340)
--------- ---------
$ 375,866 $ 362,556
========= =========
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses was as follows:
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
------- ------- ------- -------
Beginning balance $ 3,793 $ 3,497 $ 3,596 $ 3,334
Provision for loan losses 900 242 1,700 572
Loans charged off (1,401) (274) (2,069) (504)
Recoveries 38 48 103 111
------- ------- ------- -------
Balance - September 30 $ 3,330 $ 3,513 $ 3,330 $ 3,513
======= ======= ======= =======
Nonperforming loans were as follows:
September 30, December 31,
2002 2001
---- ----
Loans past due 90 days or more and still accruing $ 378 $ 200
Nonaccrual loans 4,252 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 $ 160 $ 648
Period-end loans with allocated allowance for loan losses 4,629 2,915
------ ------
Total $4,789 $3,563
====== ======
Amount of the allowance for loan losses allocated $1,226 $1,110
====== ======
Average of impaired loans during the period $5,481 $2,998
====== ======
9.
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 September 30,
2002 compared to December 31, 2001, and the consolidated results of operations
for the three and nine months ended September 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
Certain statements in this report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, such as
statements relating to the financial condition and prospects, lending risks,
plans for future business development and marketing activities, capital spending
and financing sources, capital structure, the effects of regulation and
competition, and the prospective business of both the Corporation and its
wholly-owned subsidiary The Delaware County Bank & Trust Company (the "Bank").
Where used in this report, the word "anticipate," "believe," "estimate,"
"expect," "intend," and similar words and expressions, as they relate to the
Corporation or the Bank or their respective management, identify forward-looking
statements. Such forward-looking statements reflect the current views of the
Corporation and are based on information currently available to the management
of the Corporation and the Bank and upon current expectations, estimates, and
projections about the Corporation and its industry, management's belief with
respect thereto, and certain assumptions made by management. These
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to: (i) significant increases in competitive pressure in the banking
and financial services industries; (ii) changes in the interest rate environment
which could reduce anticipated or actual margins; (iii) changes in political
conditions or the legislative or regulatory environment; (iv) general economic
conditions, either nationally or regionally (especially in central Ohio),
becoming less favorable than expected resulting in, among other things, a
deterioration in credit quality of assets; (v) changes occurring in business
conditions and inflation; (vi) changes in technology; (vii) changes in monetary
and tax policies; (viii) changes in the securities markets; and (ix) other risks
and uncertainties detailed from time to time in the filings of the Corporation
with the Commission.
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 $534,541 at September 30, 2002, compared to
$519,380 at December 31, 2001, an increase of $15,161, or 2.92%. 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 $9,465 from December 31, 2001 to September
30, 2002. This increase was the result of the Corporation decreasing its
investment in securities during the nine months ended September 30, 2002 to fund
anticipated future loan growth, and to ensure sufficient liquidity needed to
meet the needs of its growing deposit base.
10.
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 $10,109, or 8.51%, from $118,739 at December 31, 2001
to $108,630 at September 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. 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
$108,630, or 100% of the total securities portfolio, at September 30, 2002.
During the third quarter 2002, the company reclassified its held-to-maturity
securities to available for sale. The change was initiated, as required by FASB
Statement No. 115, after the Corporation sold a security that was designated as
held-to-maturity in order to adjust the portfolio as was deemed appropriate by
management. The resulting increase in the available-for-sale securities will
help ensure that sufficient liquidity remains available to the institution for
future funding needs. Management classifies securities as available for sale to
provide the Corporation with the flexibility to move funds into loans as demand
warrants. The mortgage-backed securities portfolio, totaling $31,750 at
September 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 $13,310, or 3.67%, from $362,556 at December 31, 2001 to
$375,866 at September 30, 2002. The majority of this growth is attributed to the
change in commercial real estate lending which increased by $16,921 from
year-end 2001 to the end of this quarter. Other loan categories in which the
Corporation participates, commercial, residential and consumer financing,
remained relatively stable or experienced small declines in volume. The Bank's
local market continues to experience increases in the amount of commercial real
estate development activity. There is no significant concentration of lending to
any one industry.
Total deposits increased $4,719, or 1.10%, from $430,714 at December 31, 2001 to
$435,433 at September 30, 2002. Noninterest-bearing deposits increased $3,166,
or 4.53%, while interest-bearing deposits increased $1,553, or .4%. 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. Additionally,
the organization has increased its borrowing in FHLB loans to augment the
deposit base in order to fund continued loan growth.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2002 AND SEPTEMBER 30, 2001
NET INCOME. Net income for the three months ended September 30, 2002 totaled
$757, compared to net income of $950 for the same period in 2001. Earnings per
share was $.18 for the three months ended September 30, 2002 compared to $.23
for the three months ended September 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 $5,377 for the three months ended September 30, 2002
compared to $4,916 for the same period in 2001. The $461 increase in 2002 over
2001 was the result of a continued increase in the balances of interest earning
assets combined with lower cost of funds resulting from the continued low
interest rates during the third quarter of 2002. The Asset/Liability Management
Committee, which is responsible for determining deposit rates, continues to
closely monitor the banks cost of funds to take advantage of pricing and cash
flow opportunities.
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
11.
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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. During
the quarter ended September 30, 2002, the Corporation commenced a review of its
methodology for determining potential loan and lease losses and establishing
appropriate allowance for loan and lease losses. As of the end of this period,
the Corporation was still continuing such review and no conclusions had been
reached concerning such methodology.
The provision for loan and lease losses totaled $900 for the three months ended
September 30, 2002 compared to $242 for the same period in 2001. 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.
During the third quarter management elected to charge-off a substantial portion
of a number of commercial loans that were determined to be uncollectible. The
Corporation has also experienced an increase in nonperforming loans from $3,590
at December 31, 2001 to $4,630 at September 30, 2002. Net charge-offs for the
three months ended September 30, 2002 were $1,363 compared to net charge-offs of
$226 for the same period in 2001. Management will continue to monitor the credit
quality of the lending portfolio and will recognize additional provision in the
future as necessary, in the opinion of management, to maintain the provisions
for loan and lease losses at an appropriate level.
The allowance for loan and lease losses totaled $3,330, or .89% of total loans
and leases, at September 30, 2002 compared to $3,596, or .99% of total loans and
leases, at December 31, 2001. The allowance was 71.92% of nonperforming loans at
September 30, 2002, compared to 100.17% at December 31, 2001, resulting from
increased nonperforming loans.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$180, or 14.42%, for the three months ended September 30, 2002 compared to the
same period in 2001. The increase was the result of an increase in transactional
volume from the banks' retail products, and due to a large increase on the
volume of sales of secondary market loans.
Total noninterest expense increased $385, or 8.79%, for the three months ended
September 30, 2002 compared to the same period in 2001. The increase was
primarily the result of increases in salaries and employee benefits and
professional fees. Additionally, the organization experienced an increase in
professional fees to address legal matters related to shareholder activities,
and an increase in audit fees. The increase in salaries and benefits were
planned increases necessary to support the continued growth of the Corporation
and are expected to remain at these higher levels in the future.
INCOME TAXES. The change of income tax expense is primarily attributable to the
change in income before income taxes. The provision for income taxes totaled
$383, for an effective tax rate of 33.5%, for the three months ended September
30, 2002 and $592, for an effective tax rate of 38.4%, for the three months
ended September 30, 2001.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
AND SEPTEMBER 30, 2001
NET INCOME. Net income for the nine months ended September 30, 2002 totaled
$3,380, compared to net income of $3,809 for the same period in 2001. Earnings
per share was $.81 for the nine months ended September 30, 2002 compared to $.91
for the nine months ended September 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
12.
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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 corporate headquarters in Lewis Center, Ohio.
NET INTEREST INCOME. Net interest income was $16,238 for the nine months ended
September 30, 2002 compared to $14,532 for the same period in 2001. The $1,706
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 $1,700 for the nine months ended September 30, 2002
compared to $572 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 nine months ended September
30, 2002 were $1,966 compared to net charge-offs of $393 for the same period in
2001. As previously mentioned, the Corporation elected to charge off significant
portions of a number of large commercial loans that were determined to be
uncollectable. This increase in charge-offs was due to a number of factors
including--deteriorating economic conditions that affected the commercial loan
portfolio, and management's decision to accelerate its workout strategies for
certain borrowers. Management will continue to monitor the credit quality of the
lending portfolio and will recognize additional provision in the future as
necessary, in the opinion of management, to maintain the provision for loan and
lease losses at an appropriate level.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$339, or 8.76%, for the nine months ended September 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 $1,608, or 13.35%, for the nine months ended
September 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 $854 of the total increase.
These were planned increases necessary to support the continued growth of the
Corporation. Additionally, the organization experienced an increase in
professional fees to address legal matters related to shareholder activities and
an increase in audit fees.
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
$1,717, for an effective tax rate of 33.7%, for the nine months ended September
30, 2002 and $1,979, for an effective tax rate of 34.2%, for the nine months
ended September 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.
13.
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Cash and cash equivalents increased $9,465, or 52.7%, to $27,410 at September
30, 2002 compared to $17,945 at December 31, 2001. Cash and equivalents
represented 5.13% of total assets at September 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 supplement its
future liquidity needs in order to meet loan demand or to fund investment
opportunities. During the quarter, the entire held-to-maturity securities
portfolio was re-classed to available for sale. This will allow those securities
to be used for liquidity purposes as necessary. 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 $3,379 between December 31, 2001 and
September 30, 2002. The increase was due to earnings retained and an increase in
accumulated other comprehensive income. The Corporation purchased 11,310 shares
of treasury stock during the nine months ended September 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, 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. 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. Total treasury shares were 104,966 as of
September 30, 2002 compared to 95,000 as of December 31, 2001.
Tier 1 capital is shareholders' equity excluding the unrealized gain or loss on
securities classified as available for sale and intangible assets. Total capital
includes Tier 1 capital plus the allowance for loan losses, not to exceed 1.25%
of risk weighted assets. Risk weighted assets are the Corporation's total assets
after such assets are assessed for risk and assigned a weighting factor defined
by regulation based on their inherent risk.
The Corporation and its subsidiaries meet all regulatory capital requirements.
The ratio of total capital to risk-weighted assets was 13.7% at September 30,
2002, while the Tier 1 risk-based capital ratio was 12.8%. Regulatory minimums
call for a total risk-based capital ratio of 8.0%, at least half of which must
be Tier 1 capital. The Corporation's leverage ratio, defined as Tier 1 capital
divided by average assets, of 9.8% at September 30, 2002.
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
14.
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
identified intangible assets, such as core deposit intangible assets, will
continue to be amortized over their estimated useful lives. The Corporation was
required to and did adopt this Statement on January 1, 2002. The adoption of
this Statement has not impacted 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 has had or 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.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions". This standard requires any unidentifiable intangible
asset previously recorded as a result of a business combination to be
reclassified as goodwill and the amortization of this asset will cease. The
effect of this standard on the financial position and results of operations of
the Corporation was not material, as the Corporation does not have any
unidentified intangible assets.
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 risk. Interest rate risk is the possibility 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.
15.
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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 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 for 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.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including the Interim Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 (c) under the Securities
Exchange Act of 1934). Based on their evaluation, the Company's Interim Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are, to the best of their knowledge,
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. There were no significant changes made in
the Corporation's internal controls or in other factors that could significantly
affect these internal controls subsequent to the date of the evaluation
performed by the Company's Interim Chief Executive Officer and Chief Financial
Officer.
16.
DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended September 30, 2002
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders: There
are no matters required to be reported under this item.
17.
DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended September 30, 2002
PART II - OTHER INFORMATION
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) 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.)
99.1 Certification pursuant to 18 U.S.C. 1350, as
enacted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. 1350, as
enacted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002
(b) Reports on Form 8-K A report on Form 8-K was filed on
August 14, 2002 in conjunction with the filing of the
Company's report on Form 10-Q for the period ended June 30,
2002. The report on 8-K contained the certifications required
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
18.
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: November 14, 2002 /s/ Donald R. Blackburn
------------------------
(Signature)
Donald R. Blackburn
Interim President and Principal
Executive Officer
Date: November 14, 2002 /s/ John A. Ustaszewski
-----------------------
(Signature)
John A. Ustaszewski
Vice President and Chief Financial
Officer
19.
DCB FINANCIAL CORP.
CERTIFICATIONS
I, Donald R. Blackburn, Interim President and Principal Executive Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of DCB Financial Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employee who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ Donald R. Blackburn
------------------------
(Signature)
Donald R. Blackburn
Title: Interim President and
Principal Executive Officer
20.
DCB FINANCIAL CORP.
I, John A. Ustaszewski, Vice President and Chief Financial Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of DCB Financial Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
d) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management
or other employee who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ John A. Ustaszewski
----------------- -------------------------
(Signature)
John A. Ustaszewski
Title: Vice President and Chief
Financial Officer
21.
DCB FINANCIAL CORPORATION
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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 Registrant's filing Form
S-4 on November 6, 1996. File No. 333-15579).
4 Instruments Defining the Rights of Security
Holders. (See Exhibits 3.1 and 3.2.)
99.1 Certification pursuant to 18 U.S.C. 1350, as enacted
Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
99.2 Certification pursuant to 18 U.S.C. 1350, as enacted
Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
22.