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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 2004
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act).
Yes [X] No [ ]
As of May 7, 2004, the latest practicable date, 3,934,760 shares of the
registrant's no par value common stock were issued and outstanding.
DCB FINANCIAL CORP
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
Table of Contents
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets................................................... 3
Consolidated Statements of Income ............................................ 4
Consolidated Statements of Comprehensive Income............................... 5
Condensed Consolidated Statements of Cash Flows............................... 6
Notes to the Condensed Consolidated Financial Statements...................... 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 11
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
(Dollars in thousands)
Item 1. Financial Statements
March 31, December 31,
2004 2003
----------- ------------
(unaudited)
ASSETS
Cash and due from financial institutions $ 14,232 $ 20,349
Federal funds sold - -
----------- ------------
Total cash and cash equivalents 14,232 20,349
Securities available for sale 97,976 108,547
Loans held for sale 1,279 -
Loans and leases 414,803 404,947
Less allowance for loan and lease losses (4,411) (4,331)
----------- ------------
Net loans and leases 410,392 400,616
Premises and equipment, net 9,682 9,947
Investment in unconsolidated affiliates 1,951 1,951
Accrued interest receivable and other assets 12,437 11,887
----------- ------------
Total assets $ 547,949 $ 553,297
=========== ============
LIABILITIES
Deposits
Noninterest-bearing $ 75,860 $ 78,477
Interest-bearing 359,492 363,875
----------- ------------
Total deposits 435,352 442,352
Federal funds purchased and other short-term borrowings 755 4,619
Federal Home Loan Bank advances 54,231 49,693
Accrued interest payable and other liabilities 6,797 6,944
----------- ------------
Total liabilities 497,135 503,608
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,780 3,780
Retained earnings 53,684 52,775
Treasury stock, 338,440 shares at March 31, 2004 and
December 31, 2003 (7,616) (7,616)
Accumulated other comprehensive income 966 750
----------- ------------
Total shareholders' equity 50,814 49,689
----------- ------------
Total liabilities and shareholders' equity $ 547,949 $ 553,297
=========== ============
See notes to the consolidated financial statements.
3.
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
--------------------
2004 2003
-------- --------
INTEREST AND DIVIDEND INCOME
Loans $ 5,771 $ 5,752
Taxable securities 733 832
Tax-exempt securities 186 150
Federal funds sold and other 6 35
-------- --------
Total interest income 6,696 6,769
INTEREST EXPENSE
Deposits 1,238 1,843
Borrowings 560 209
-------- --------
Total interest expense 1,798 2,052
NET INTEREST INCOME 4,898 4,717
Provision for loan and lease losses 378 333
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 4,520 4,384
NONINTEREST INCOME
Service charges on deposit accounts 564 600
Trust department income 197 155
Net gains (losses) on sales of securities (3) 13
Net gains (losses) on sale of leases (22) 4
Net gains on sale of loans 30 507
Cash management fees 123 149
Data processing servicing fees 62 123
Other 210 150
-------- --------
1,161 1,701
NONINTEREST EXPENSE
Salaries and other employee benefits 1,926 2,080
Occupancy and equipment 970 994
Professional services 64 70
Advertising 61 79
Postage, freight and courier 112 73
Supplies 32 36
State franchise taxes 127 121
Other 531 466
-------- --------
3,823 3,919
-------- --------
INCOME BEFORE INCOME TAXES 1,858 2,166
Income tax expense 552 667
-------- --------
NET INCOME $ 1,306 $ 1,499
======== ========
Basic and diluted earnings per common share $ 0.33 $ 0.36
======== ========
See notes to the consolidated financial statements.
4.
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
-------------------
2004 2003
-------- --------
Net income $ 1,306 $ 1,499
Less reclassification for realized gains (losses)
on sale of securities included in operations,
net of tax effects 2 (9)
Unrealized gains (losses) on securities
available for sale, net of tax effects 214 (51)
-------- --------
Comprehensive income $ 1,522 $ 1,439
======== ========
See notes to the consolidated financial statements.
5.
DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
--------------------
2004 2003
-------- --------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 273 $ 1,570
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Securities available for sale
Purchases (10,344) (14,644)
Maturities, principal payments and calls 3,841 13,329
Sales 17,132 6,365
Net change in loans (10,146) (137)
Premises and equipment expenditures (155) (74)
-------- --------
Net cash flows provided by investing activities 328 4,839
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net change in deposits (7,000) (1,665)
Net change in federal funds and other short-term borrowings (3,864) (1,189)
Proceed (repayment) of Federal Home Loan Bank advances 4,538 (7,101)
Sale of treasury stock - 72
Cash dividends paid (392) (375)
-------- --------
Net cash used in financing activities (6,718) (10,258)
-------- --------
Decrease in cash and cash equivalents (6,117) (3,849)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,349 32,503
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,232 $ 28,654
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest on deposits and borrowings $ 1,714 $ 2,109
Cash dividends declared but unpaid $ 397 $ 375
See notes to the consolidated financial statements.
6.
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 March 31,
2004, and its results of operations and cash flows for the three month periods
ended March 31, 2004 and 2003. 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, 2003, included in its 2003 Annual Report. Refer to the accounting policies
of the Corporation described in the Notes to Consolidated Financial Statements
contained in the Corporation's 2003 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"). All significant intercompany accounts and transactions
have been eliminated in consolidation. Management considers the Corporation to
operate within one business 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 3,934,760 and 4,170,919 for the three
months ended March 31, 2004 and 2003. The Corporation has no potentially
dilutive securities.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
DCB's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow general
practices within the financial services industry. The application of these
principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying
notes. These estimates, assumptions, and judgments are based on information
available as of the date of the financial statements; as this information
changes, the financial statements could reflect different estimates,
assumptions, and judgments.
The most significant accounting policies followed by the Corporation are
presented in Note 1 of Notes to Consolidated Financial Statements contained in
the Corporation's 2003 Annual Report. These policies, along with the disclosures
presented in the other financial statement notes and in this financial review,
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.
7.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 2 - SECURITIES
The amortized cost and estimated fair values of securities available for sale
were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
-----------------March 31, 2004---------------
U.S. government agencies $ 25,466 $ 234 $ (10) $ 25,690
States and political subdivisions 20,151 782 (22) 20,911
Corporate bonds 8,248 9 (37) 8,220
Mortgage-backed and related securities 40,193 597 (113) 40,677
-------- -------- ------- --------
Total debt securities 94,058 1,622 (182) 95,498
Equity securities 2,453 25 - 2,478
-------- -------- ------- --------
Total securities available for sale $ 96,511 $ 1,647 $ (182) $ 97,976
======== ======== ======= ========
The table below indicates the length of time individual securities have been in
a continuous unrealized loss position at March 31, 2004:
(Less than 12 months) (12 months or longer) Total
Description of Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized
Securities investments value losses investments value losses investments value losses
-------------- ----------- -------- ---------- ----------- ----- ---------- ----------- -------- ----------
(Dollars in thousands)
U.S. Government and
agency obligations 3 $ 2,527 $ (10) - $ - $ - 3 $ 2,527 $ (10)
State and municipal
obligations 3 1,690 (18) - - - 3 1,690 (18)
Corporate bonds 1 2,978 (36) - - - 1 2,978 (36)
Mortgage-backed
securities 22 12,804 (118) - - - 22 12,804 (118)
-- -------- ------ ------ ----- ---- -- -------- ------
Total temporarily
impaired securities 29 $ 19,999 $ (182) - $ - $ - 29 $ 19,999 $ (182)
== ======== ====== ====== ===== ==== == ======== ======
Management has the intent and ability to hold these securities for the
foreseeable future and the decline in the fair value is primarily due to an
increase in market interest rates. The fair values are expected to recover as
securities approach maturity dates.
8.
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") or the Federal
Home Loan Mortgage Corporation ("FHLMC").
At March 31, 2004, there were no holdings of securities of any one issuer, other
than the U.S. government and its agencies, in an amount greater than 10% of
shareholders' equity.
The amortized cost and estimated fair value of debt securities at March 31,
2004, 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 $ 1,459 $ 1,481
Due from one to five years 4,907 5,026
Due from five to ten years 21,164 21,363
Due after ten years 26,335 26,951
Mortgage-backed and related securities 40,193 40,677
--------- --------
$ 94,058 $ 95,498
========= ========
9.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 3 - LOANS AND LEASES
Loans and leases were as follows:
March 31,
2004
---------
Commercial and industrial $ 53,948
Commercial real estate 155,938
Residential real estate and home equity 125,369
Real estate construction and land development 32,640
Consumer and credit card 42,738
Lease financing, net 3,318
---------
413,951
Add (deduct): Net deferred loan origination costs 1,116
Unearned income on lease s (264)
---------
Total loans receivable $ 414,803
=========
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses was as follows:
Three months ended
March 31,
------------------
2004 2003
------- -------
Balance at beginning of period $ 4,331 $ 4,094
Provision for loan losses 378 333
Loans charged off (356) (257)
Recoveries 58 56
------- -------
Balance at end of period $ 4,411 $ 4,226
======= =======
Nonperforming loans were as follows:
March 31, December 31,
2004 2003
--------- ------------
Loans past due 90 days or more and still accruing $ 970 $ 1,252
Nonaccrual loans 1,487 1,614
Impaired loans (most of which are included in nonperforming loans above)
were as follows:
Period-end loans with no allocated allowance for loan losses $ - $ -
Period-end loans with allocated allowance for loan losses 686 1,813
--------- ----------
Total $ 686 $ 1,813
========= ==========
Amount of the allowance for loan losses allocated $ 280 $ 580
========= ==========
Average of impaired loans during the period $ 1,019 $ 2,731
========= ==========
10.
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 March 31, 2004,
compared to December 31, 2003, and the consolidated results of operations for
the three months ended March 31, 2004, compared to the same period in 2003. This
discussion is designed to provide shareholders with a more comprehensive review
of the operating results and financial position than could be obtained from
reading the consolidated financial statements alone. This analysis should be
read in conjunction with the consolidated 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, related 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 $547,949 at March 31, 2004, compared to
$553,297 at December 31, 2003, a decrease of $5,348, or 0.97%. The decrease in
assets was primarily the result of a decrease in securities. These funds were
utilized to reduce federal funds purchased and other short-term borrowings.
Cash and cash equivalents decreased $6,117 from December 31, 2003 to March 31,
2004. This decline is mainly due to managements intended reduction of cash in
order to reduce non-interest earning assets. Total securities decreased $10,571,
or 9.74%, from $108,547 at December 31, 2003 to $97,976 at March 31, 2004. The
decrease was the result of the proceeds from sales, maturities, calls and
principal repayments not being reinvested in order to repay borrowings
primarily, in the form of fed funds purchased. 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.
11.
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Securities and investment securities classified as available for sale at March
31, 2004 totaled $97,976, or 100% of the total securities portfolio. 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 $40,677 at March 31, 2004, provides the
Corporation with a constant cash flow stream from principal repayments and
interest payments. The Corporation held no structured notes during any period
presented.
Total loans and leases increased $9,856, or 2.43%, from $404,947 at December 31,
2003 to $414,803 at March 31, 2004. The increase is attributed mainly to the
continued growth of residential real estate and home equity, real estate
construction and land development, and commercial and industrial loans, which
were partially off set by a general decline in various consumer lending
categories. Other loan categories in which the Corporation participates,
commercial, industrial, and consumer financing, remained relatively stable or
experienced small declines in loans outstanding. The Bank's local market
continues to experience increases in the amount of commercial real estate
development activity. The Bank has no significant loan concentration in any one
industry.
Total deposits decreased $7,000, or 1.58%, from $442,352 at December 31, 2003 to
$435,352 at March 31, 2004. This is mainly due to the reduction of money market
deposit account balances which management believes is due to the competitive
pricing on deposits in the Bank's market place. Noninterest-bearing deposits
decreased $2,617, or 3.3%, in addition to interest-bearing deposits decreasing
$4,383, or 1.21%. The decrease in interest-bearing deposits 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
NET INCOME. Net income for the three months ended March 31, 2004 totaled $1,306,
compared to net income of $1,499 for the same period in 2003. Earnings per share
was $.33 for the three months ended March 31, 2004 compared to $.36 for the
three months ended March 31, 2003.
NET INTEREST INCOME. Net interest income represents the amount by which interest
income on interest-earning assets exceeds interest paid or accrued 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 $4,898 for the three months ended March 31, 2004,
compared to $4,717 for the same period in 2003. The $181 increase in the first
quarter 2004 compared to 2003 was mainly attributed to an increase in earning
assets and a reduction in overall deposit and borrowing expenses which has
caused the net spreads to increase. The Asset/Liability Management Committee,
which is responsible for determining deposit rates, continues to closely monitor
the Bank's 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 totaled $378 for the three months ended March 31, 2004, compared to
$333 for the same period in 2003. The growth in the provision is reflective of
the overall growth in the Corporation's loan portfolio, and to a lesser extent,
the increase in net-charge offs between the two periods. Net charge-offs for the
three months ended March 31, 2004 were $298 compared to net charge-offs of $201
for the same period in 2003. Management will continue to monitor the credit
quality of the lending portfolio and will recognize additional provisions in the
future to maintain the allowance for loan and lease losses at an appropriate
level.
The allowance for loan and lease losses totaled $4,411, or 1.06% of total loans
and leases at March 31, 2004, compared to $4,331, or 1.07% of total loans and
leases at December 31, 2003.
12.
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income decreased
$540, or 31.75%, for the three months ended March 31, 2004, compared to the same
period in 2003. The decrease was mainly a result of a decline in the volume of
loans sold in the secondary market, which is mainly attributed to retaining
these loans within the retail portfolios. In addition transactional volume from
the Bank's retail products remained at or below previous years levels.
Total noninterest expense decreased $96, or 2.45%, for the three months ended
March 31, 2004, compared to the same period in 2003. The decrease was primarily
the result of decreases in salaries and employee benefits, offset by an increase
in postage, freight and courier related to year end reporting matters.
Management has reduced staff through attrition, realignment and early retirement
opportunities in order to reduce overall salary and benefit costs.
INCOME TAXES. The change of income tax expense is primarily attributable to the
increase in tax exempt earnings offset by the decline in income before income
taxes. The provision for income taxes totaled $552, for an effective tax rate of
29.71%, for the three months ended March 31, 2004 and $667, for an effective tax
rate of 30.79%, for the three months ended March 31, 2003. This decline in
effective tax rate is primarily attributable to the increase in tax-exempt
municipal security holdings and an increase in bank-owned life insurance
contracts which are tax-free.
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
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 decreased $6,117, or 30.06%, to $14,232 at March 31,
2004 compared to $20,349 at December 31, 2003. Cash and equivalents represented
2.60% of total assets at March 31, 2004 and 3.68% of total assets at December
31, 2003. The Corporation has the ability to borrow funds from the Federal Home
Loan Bank and has various correspondent banking partners to purchase overnight
federal funds should the Corporation need to supplement its future liquidity
needs. Management believes the Corporation's liquidity position is adequate
based on its current level of cash, cash equivalents, core deposits, the
stability of its other funding sources and the support provided by its capital
base.
13.
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
CAPITAL RESOURCES
Total shareholders' equity increased $1,125 between December 31, 2003 and March
31, 2004. The increase was primarily due to period earnings of $1,306, a $216
after-tax increase in accumulated other comprehensive income, partially offset
by the declaration of $397 in dividends.
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 11.52% at March 31, 2004,
while the Tier 1 risk-based capital ratio was 10.58%. 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, was 8.96% at March 31, 2004.
SUBSEQUENT EVENT
DCB Financial Corp announced on April 26, 2004 that it has sold its entire
investment (450,000 shares) in ProCentury Corporation (NASDAQ:PROS), a specialty
property and casualty insurance holding company based in Westerville, Ohio, as a
part of ProCentury's initial public offering (IPO) on April 20, 2004. DCB
Financial Corp will recognize an after tax gain of approximately $1.6 million on
the sale after transaction and other related expenses. This transaction is
expected to provide an approximate $0.40 per share increase in DCBF's second
quarter 2004 earnings.
DCB Financial Corp intends to use the proceeds for general corporate purposes
and to reduce corporate debt. DCBF will retain an investment in ProAlliance, a
specialty line insurance company spun-off from ProCentury.
14.
DCB FINANCIAL CORP
MANAGEMENTS 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 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.
The Corporation's 2003 Annual Report includes a table depicting the changes in
the Corporation's interest rate risk as of December 31, 2003, 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, 2003 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. The Corporation can utilize various tools to reduce
exposure to changes in interest rates including offering floating versus fixed
rate products, or utilizing interest rate swaps. 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.
15.
DCB FINANCIAL CORP
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
March 31, 2004, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of March
31, 2004, in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended March 31, 2004, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
16.
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended March 31, 2004
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 March 31, 2004
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 Company's
Report on Form 10-Q filed with the Commission on November 14,
2003.
3.2 Amended and Restated Articles of Incorporation of DCB
Financial Corp, incorporated by reference to the Company's
Report on Form 10-Q filed with the Commission on November 14,
2003.
4. Instruments Defining the Rights of Security Holders. (See
Exhibits 3.1 and 3.2.)
31.1 Certification pursuant to section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification pursuant to section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, as enacted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. 1350, as enacted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002
(a) Reports on Form 8-K - A report on Form 8-K was filed on January
22, 2004 (report date: 1/22/04) - fourth quarter 2004 earnings
release.
(b) Reports on Form 8-K - A report on Form 8-K was filed on April
26, 2004 (report date: 4/26/04) - Corporation's sale of its
investment in ProCentury Corporation.
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: May 7, 2004 /s/ Jeffrey Benton
--------------------------------------------
(Signature)
Jeffrey Benton
President and Chief Executive Officer
Date: May 7, 2004 /s/ John A. Ustaszewski
--------------------------------------------
(Signature)
John A. Ustaszewski
Vice President and Chief Financial Officer
19.
DCB FINANCIAL CORP
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
3.1 Amended and Restated Articles of Incorporation of NA
DCB Financial Corp, incorporated by reference to the
Company's Report on Form 10-Q filed with the
Commission on November 14, 2003.
3.2 Amended and Restated Articles of Incorporation of NA
DCB Financial Corp, incorporated by reference to the
Company's Report on Form 10-Q filed with the
Commission on November 14, 2003.
4 Instruments Defining the Rights of Security NA
Holders. (See Exhibits 3.1 and 3.2.)
31.1 Certification of Chief Executive Officer pursuant Page 21
to section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Page 22
section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, as enacted Page 23
Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification pursuant to 18 U.S.C. 1350, as enacted Page 24
Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
20.