EXHIBIT 13
BUSINESS OF DCB FINANCIAL CORP
DCB Financial Corp ("DCB" or the "Corporation") was incorporated under the laws
of the State of Ohio on March 14, 1997, at the direction of management and
approval of the shareholders of The Delaware County Bank and Trust Company (the
"Bank") for the purpose of becoming a bank holding company by acquiring all
outstanding shares of the Bank. The Bank is a commercial bank, chartered under
the laws of the State of Ohio, and was organized in 1950. The Bank is a
wholly-owned subsidiary of DCB.
The Bank conducts business from its main office at 110 Riverbend Avenue in Lewis
Center, Ohio and from its 15 branch offices located in Delaware, Ohio and
surrounding communities. The Bank provides customary retail and commercial
banking services to its customers, including checking and savings accounts, time
deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real
estate mortgage loans, installment loans, night depository facilities and wealth
management services. The Bank also provides treasury management, bond registrar
and payment agent services. Through its information systems department, the Bank
provides data processing, disaster recovery, and check processing services to
other financial institutions; however, such services are not a significant part
of operations or revenue.
DCB, through the Bank, grants residential real estate, commercial real estate,
consumer and commercial loans to customers located primarily in Delaware,
Franklin, and Union Counties, Ohio. Unemployment statistics in these counties
have historically been among the lowest in the State of Ohio, and real estate
values have been stable to rising. DCB also invests in U.S. Government and
agency obligations, obligations of states and political subdivisions, corporate
obligations, mortgage-backed securities, commercial paper and other investments
permitted by applicable law. Funds for lending and other investment activities
come primarily from customer deposits, borrowed funds, and loan and security
sales and principal repayments.
As a financial holding company, DCB is subject to regulation, supervision and
examination by the Federal Reserve Board. As a commercial bank chartered under
the laws of the State of Ohio, the Bank is subject to regulation, supervision
and examination by the State of Ohio Division of Financial Institutions and the
Federal Deposit Insurance Corporation (the "FDIC"). The FDIC insures deposits in
the Bank up to applicable limits. The Bank is also a member of the Federal Home
Loan Bank (the "FHLB") of Cincinnati.
COMMON STOCK AND SHAREHOLDER MATTERS
DCB had 3,934,760 common shares outstanding on February 22, 2005, held of record
by approximately 1,600 shareholders. There is no established public trading
market for DCB's common shares. DCB's common shares are traded on a limited
basis on the Over-The-Counter Electronic Bulletin Board. At times however,
various brokerage firms maintain daily bid and ask prices for DCB's common
stock. The range of high and low transactions as reported by Sweney, Cartwright
& Co. is reported below. These transactions are without retail mark-up,
mark-down or commissions.
Management does not have knowledge of the prices in all transactions and has not
verified the accuracy of those prices that have been reported. Because of the
lack of an established market for DCB's stock, these prices may not reflect the
prices at which the stock would trade in a more active market. DCB sold no
securities during 2004 and 2003 that were not registered under the Securities
Acts.
1
Quarter ended
---------------------------------------------------
March 31, June 30, September 30, December 31,
2004 2004 2004 2004
--------- -------- ------------- ------------
High $23.50 $24.15 $26.00 $29.00
Low 20.00 23.25 23.45 23.60
Dividends per share 0.10 0.16 0.11 0.11
March 31, June 30, September 30, December 31,
2003 2003 2003 2003
--------- -------- ------------- ------------
High $19.00 $19.00 $18.40 $20.40
Low 17.75 16.60 16.10 17.40
Dividends per share 0.09 0.10 0.10 0.10
Income of DCB primarily consists of dividends, which are periodically declared
and paid by the Board of Directors of the Bank on common shares of the Bank held
by DCB. While management of DCB expects to maintain the Corporation's policy of
paying regular cash dividends in the future, no assurances can be given that any
dividends will be declared or, if declared, what the amount of any such
dividends will be. See Note 11 to the Consolidated Financial Statements for a
description of dividend restrictions.
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the consolidated
financial condition, earnings and other data regarding DCB at the dates and for
the periods indicated.
At December 31,
----------------------------------------------------
(In thousands) 2004 2003 2002 2001 2000
- -------------- -------- -------- -------- -------- --------
Selected consolidated financial
condition data:
Total assets $611,685 $553,297 $522,998 $519,380 $497,250
Cash and cash equivalents 11,238 20,349 32,503 17,945 18,496
Securities available for sale 98,979 108,547 96,477 84,021 101,955
Securities held to maturity -- -- -- 34,718 29,843
Net loans and leases 478,487 400,616 366,487 358,960 327,184
Deposits 454,574 442,352 438,623 430,714 418,946
Borrowed funds 101,028 54,312 29,802 37,336 30,422
Shareholders' equity 54,261 49,689 52,528 49,121 44,899
2
Year ended December 31,
-----------------------------------------------
(In thousands, except per share data) 2004 2003 2002 2001 2000
- ------------------------------------- ------- ------- ------- ------- -------
Selected Operating Data:
Interest and dividend income $27,813 $26,591 $30,882 $35,736 $36,717
Interest expense 7,802 7,973 10,142 16,369 19,607
------- ------- ------- ------- -------
Net interest income 20,011 18,618 20,740 19,367 17,110
Provision for loan and lease losses 1,696 1,418 2,950 872 908
------- ------- ------- ------- -------
Net interest income after
provision for loan and lease losses 18,315 17,200 17,790 18,495 16,202
Noninterest income 7,618 6,624 6,259 5,625 4,030
Noninterest expense 15,985 16,508 18,010 17,377 13,134
------- ------- ------- ------- -------
Income before income tax 9,948 7,316 6,039 6,743 6,831
Income tax expense 2,973 2,287 2,036 2,245 2,206
------- ------- ------- ------- -------
Net income $ 6,975 $ 5,029 $ 4,003 $ 4,498 $ 4,625
======= ======= ======= ======= =======
Per Share Data:
Basic earnings per share $ 1.77 $ 1.26 $ .96 $ 1.08 $ 1.11
======= ======= ======= ======= =======
Diluted earnings per share $ 1.77 $ 1.26 $ .96 $ 1.08 $ 1.11
======= ======= ======= ======= =======
Dividends declared per share $ 0.48 $ 0.39 $ 0.34 $ 0.30 $ 0.28
======= ======= ======= ======= =======
At or for the year ended December 31,
------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Selected Financial Ratios:
Interest rate spread 3.55% 3.48% 3.79% 3.42% 2.92%
Net interest margin 3.72 3.75 4.24 4.10 3.83
Return on average equity 13.14 10.11 7.82 9.40 11.12
Return on average assets 1.13 0.91 0.76 0.89 0.97
Average equity to average assets 8.60 8.96 9.78 9.43 8.74
Dividend payout ratio 27.12 30.95 35.42 27.78 25.23
Allowance for loan and lease losses as
a percentage of loans past due over
90 days still accruing interest and
nonaccrual loans 140.75 151.18 114.55 100.17 224.81
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands, except per share amounts)
INTRODUCTION
In the following pages, management presents an analysis of DCB's consolidated
financial condition and results of operations as of and for the year ended
December 31, 2004, compared to prior years. 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, the related footnotes and the selected financial data
included elsewhere in this report.
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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.
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 procedures for assessing the adequacy of the allowance for loan losses
reflect our evaluation of credit risk after careful consideration of all
information available to us. In developing this assessment, we must rely on
estimates and exercise judgment regarding matters where the ultimate outcome is
unknown such as economic factors, developments affecting companies in specific
industries and issues with respect to single borrowers. Depending on changes in
circumstances, future assessments of credit risk may yield materially different
results, which may require an increase or a decrease in the allowance for loan
losses.
The allowance is regularly reviewed by management to determine whether the
amount is considered adequate to absorb probable losses. This evaluation
includes specific loss estimates on certain individually reviewed loans,
statistical loss estimates for loan pools that are based on historical loss
experience, and general loss estimates that are based upon the size, quality,
and concentration characteristics of the various loan portfolios, adverse
situations that may affect a borrower's ability to repay, and current economic
and industry conditions. Also considered as part of that judgment is a
4
review of the Bank's trends in delinquencies and loan losses, as well as trends
in delinquencies and losses for the region and nationally, and economic factors.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb probable losses inherent in the loan portfolio.
Management's evaluation of the adequacy of the allowance is an estimate based on
management's current judgment about the credit quality of the loan portfolio.
While the Corporation strives to reflect all known risk factors in its
evaluations, judgment errors may occur.
OVERVIEW OF 2004
The Bank provides customary retail and commercial banking services to its
customers, including checking and savings accounts, time deposits, IRAs, safe
deposit facilities, personal loans, commercial loans, real estate mortgage
loans, installment loans, trust, and other wealth management services. The Bank
also provides treasury management, bond registrar and paying agent services.
The Corporation, through the Bank, grants residential real estate, commercial
real estate, consumer and commercial loans to customers located primarily in
Delaware, Franklin, Licking, Morrow, Marion and Union Counties, Ohio. General
economic conditions in the Corporation's market area have been sound, including
unemployment statistics, which have generally remained stable. Real estate
values, especially in the Bank's core geographic area, have been stable to
rising for the last five years.
Due to the high level of growth in the Corporation's market area, construction
lending has become a significant part of the Corporation's overall lending
strategy. Construction loans are secured by residential and business real
estate, generally occupied by the borrower on completion. The Bank's
construction lending program is established in a manner to minimize risk of this
type of lending by not making a significant amount of loans on speculative
projects. Construction loans also are generally made in amounts of 80% or less
of the value of collateral.
DCB's assets totaled $611,685 at year-end 2004 compared to $553,297 at year-end
2003, an increase of $58,388, or 10.6%. The growth in assets was mainly
attributed to the loan growth the Corporation experienced within its normal
markets, particularly in commercial and residential real estate.
Shareholders' equity increased by $4,572 during 2004, as dividends declared of
$1,888, and a $515 after tax reduction in the fair value of securities
designated as available for sale offset period earnings of $6,975. Also during
2004, in addition to its regular quarterly dividend the Corporation paid a
special dividend of $0.05 per share. This special dividend was paid as the
result of the gain on the sale of the stock from ProCentury IPO in the second
quarter 2004.
Net income for 2004 was $6,975, or $1.77 per share, up $1,946 from $5,029, or
$1.26 per share, in 2003. The increase in net income during 2004 was primarily
the result of strong loan growth, improved credit quality, improved net interest
margin and continued emphasis on cost control programs, and a $1.6 million
after-tax gain on the sale of the Corporation's unconsolidated affiliate,
ProCentury. The increase in net interest income is attributable to the growth in
interest earning assets and increased yields on loans and investments, while
maintaining deposit and borrowing costs.
Total non-interest expense for 2004 declined $523, or 3.2% to $15,985, from
$16,508 in 2003. The overall expense reduction was primarily the result of a
decrease in occupancy and equipment expense, reduced professional and legal
fees, and a slight reduction in salaries and benefits expense.
5
The change in income tax expense is primarily attributable to the increase in
tax exempt earnings offset by the growth in income before income taxes. The
provision for income taxes totaled $2,973 in 2004 and $2,287 in 2003 resulting
in effective tax rates of 29.9% and 31.3%.
The Bank operates in a highly competitive industry due to statewide and
interstate branching by banks, savings and loan associations and credit unions.
In its primary market area of Delaware County, Ohio and surrounding counties,
the Bank competes for new deposit dollars and loans with several financial
service companies, including large regional and smaller community banks, as well
as savings and loan associations, credit unions, finance companies, insurance
companies, brokerage firms and investment companies. According to the most
recent market data, there are approximately fifteen other deposit taking and
lending institutions competing in the Bank's market. In addition, according to
the market data, the Bank currently ranks first in market share with
approximately 36% of the market. The ability to generate earnings is impacted in
part by competitive pricing on loans and deposits, and by changes in the rates
on various U.S. Treasury, U. S. Government Agency and State and political
subdivision issues which comprise a significant portion of the Bank's investment
portfolio, and which rates are used as indices on various loan products. The
Bank is competitive with interest rates and loan fees that it charges, in
pricing and variety of accounts it offers to the depositor. The dominant pricing
mechanism on loans is the Prime interest rate as published in the Wall Street
Journal. The interest spread over Prime depends on the overall account
relationship and the creditworthiness of the borrower. Deposit rates are
reviewed weekly by management and are normally discussed by the Asset/Liability
Committee on a monthly basis. The Bank's primary objective in setting deposit
rates is to remain competitive in the market area, develop funding opportunities
while earning an adequate interest rate margin.
ANALYSIS OF FINANCIAL CONDITION
DCB's assets totaled $611,685 at year-end 2004 compared to $553,297 at year-end
2003, an increase of $58,388, or 10.6%. The growth in assets was mainly
attributed to the loan growth the Corporation experienced within its normal
markets, particularly in commercial and residential real estate. Additionally
during 2004, management realigned its balance sheet by reducing the
Corporation's liquidity in order to fund loan and investment growth. Additional
financing was supplied through increased borrowings, consisting mainly of
Federal Home Loan Bank advances. The liquidity risk associated with reduced cash
and cash equivalent balances were offset by increased borrowing capability
through correspondent bank relationships.
Total securities decreased to $98,979 at year-end 2004, compared to $108,547 at
year-end 2003. The decrease in securities was the result of applying proceeds
from maturities, calls and principal repayments to fund growth in the
Corporation's loan portfolio. DCB invests primarily in U.S. Treasury notes,
obligations of 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"), Federal National Mortgage Association ("FNMA") participation
certificates and collateralized mortgage obligations ("CMOs"). The
mortgage-backed securities portfolio, totaling $41,470 at year-end 2004,
provides DCB with a constant cash flow stream from principal repayments, which
is utilized to fund other areas of the balance sheet. Management classifies
securities as available for sale to provide DCB with the flexibility to redeploy
funds into loans as demand warrants. DCB held no derivative securities or
structured notes during any period presented.
Total loans, including loans held for sale increased $79,480, or 19.6%, from
$404,947 at year-end 2003 to $484,427 at year-end 2004. The growth in the
overall loan portfolio was attributed to large increases in residential real
estate and home equity, commercial real estate loans, real estate construction
and land development, offset by declines in commercial and industrial, and
direct lease financing. Commercial real estate loans increased $18,960, or
12.1%, from $156,836 at year-end 2003 to $175,796 at year-end 2004. Residential
real estate and home equity loans increased $52,912, or 45.2%, from $117,098 at
year-end 2003
6
to $170,010 at year-end 2004. The increase in residential real estate loans is
attributed to the advantageous refinancing market that existed during 2004,
coupled with the strong economic growth in Delaware County.
Premises and equipment decreased $1,101 in 2004 from $9,947 at year-end 2003 to
$8,846 at year-end 2004. The decrease is mainly attributable to the sale of real
estate and to a lesser extent, the retiring of various pieces of furniture and
equipment. During 2004, the Corporation sold developed real estate utilized as a
retail branch location, that management deemed unnecessary due to the geographic
proximity of other area branches.
Total deposits increased $12,222 or 2.8%, from $442,352 at year-end 2003 to
$454,574 at December 31, 2004. Noninterest-bearing deposits decreased $13,329,
or 17.0%, while interest-bearing deposits increased $25,551, or 7.0%.
Interest-bearing demand and money market deposits increased from 43.9% of total
interest-bearing deposits at year-end 2003 to 49.3% of total interest-bearing
deposits at year-end 2004, as DCB experienced a $32,044, or 20.0%, increase in
volume of such accounts. The increase in such deposits has been primarily due to
economic trends resulting in the shift of customer funds from other investment
alternatives to liquid savings products. This increase is mainly attributed to
the creation of new products for the Bank's public fund customers. These
products are considered more competitive within the Bank's market area. DCB
experienced a decrease of $2,099 in savings deposits while such accounts
decreased from 16.7% of total interest-bearing deposits at December 31, 2003 to
15.0% of total interest-bearing deposits at year-end 2004. Time deposits
decreased $4,394, or 3.1%, comprising 35.7% of total interest-bearing deposits
at year-end 2004 compared to 39.4% at year-end 2003. The Bank utilized a variety
of new funding sources to compensate for the stagnant deposit growth experienced
with in its markets. Therefore, during 2004, the Bank began utilizing brokered
certificates of deposits to provide additional funding for the Company's loan
portfolios. At year end the Bank had approximately $9,616 in brokered
certificates outstanding. The slow growth of core deposits is attributed to the
competition in the Bank's geographic area, where the growth of competitors'
branch locations has made it increasingly difficult to obtain deposits.
Management intends to continue to develop new products, and to monitor the rate
structure of its deposit products to encourage the growth within its deposit
liabilities.
Borrowed funds totaled $101,028 at year-end 2004 compared to $54,312 at year-end
2003. During 2004, management utilized long-term FHLB advances to fund the
aforementioned loan growth to take advantage of low borrowing costs due to the
current economic environment. Typically, the Company utilized a matched funding
methodology for its borrowing. This was done by matching the rates, terms and
expected cash flows of its loans to the various products offered by the FHLB.
This matching principle was used to not only provide funding, but also as a
means of mitigating interest rate risk associated with originating longer-term
fixed rate loans.
Shareholders' equity increased by $4,572 during 2004, as dividends declared of
$1,888, and a $515 after tax reduction in the fair value of securities
designated as available for sale were more than offset by period earnings of
$6,975. Also during 2004, in addition to its regular quarterly dividend the
Corporation paid a special dividend of $0.05 per share. This special dividend
was paid as the result of the gain on the sale of the stock from ProCentury IPO
in the second quarter of 2004.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND
DECEMBER 31, 2003
NET INCOME. Net income for 2004 totaled $6,975, an increase of $1,946 or 38.7%
over net income for 2003 of $5,029. Basic earnings per share totaled $1.77 for
2004 and $1.26 for 2003, while diluted earnings per share totaled $1.77 for 2004
and $1.26 for 2003. Return on average assets was 1.13% and 0.91% for 2004 and
2003, while return on average equity was 13.14% and 10.11% over the same two
years. Net income and fee income both increased during 2004 in comparison to
2003. The increase in net income was related
7
principally to growth in earning assets, the allocation of funds from lower
yielding to higher yielding asset categories, increased emphasis on operating
expense cost control, and the result of a $1.6 million in after-tax gain on sale
of the Corporation's unconsolidated affiliate, ProCentury.
Also, the Corporation developed new products during 2004 to increase revenues
associated with noninterest income. In order to provide comprehensive services
in the wealth management area, the Corporation partnered with Raymond James
financial services to offer a variety of investment and retirement services to
complement the trust services currently offered. The Corporation developed a new
overdraft assurance program that created additional non-interest revenue when
compared to 2003. This program allows the Bank to pay overdraft items for its
most creditworthy customers in return for a nominal service charge.
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 DCB'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 $20,011 for 2004 compared to $18,618 for 2003. The
increase of $1,393 is mainly attributed to the overall increase in average loan
balances. Though DCB was able to reduce its overall cost of funds through
strategic initiatives developed through its Asset/Liability Committee (ALCO), a
significant portion of the Corporation's loan portfolio is variable rate. As a
result of the these shifts in the components of interest-earning assets and
interest-bearing liabilities, as well as movements in market interest rates,
DCB's net interest margin, which is calculated by dividing net interest income
by average interest-earning assets, decreased from 3.75% in 2003 to 3.72% in
2004. Additionally, because of the increased competition in the Bank's primary
marketplace, management has recognized the importance of offering special rates
on certain deposit products. These special deposit rates tend to negatively
effect the Corporation's net interest margin. It is likely that these offerings
will continue to be offered to secure liquidity while maintaining market share.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses represents the charge to income necessary to adjust the allowance
for loan and lease losses to an amount that represents management's assessment
of the losses known and inherent in the Bank's loan portfolio. All lending
activity contains associated risks of loan losses and the Bank recognizes these
credit risks as a necessary element of its business activity. To assist in
identifying and managing potential loan losses, the Bank maintains a credit
administration function that regularly evaluates lending relationships as well
as overall loan portfolio conditions. One of the primary objectives of this
credit administration function is to make recommendations to management as to
both specific loss reserves and overall portfolio loss reserves. Management
further evaluates these reserve levels through an ongoing credit quality
process, which in addition to evaluating the current credit quality of the
lending portfolios, examines other economic indicators and trends, which could
affect the overall loss rates associated with the lending process.
DCB's provision is determined based upon management's estimate of the overall
collectibility of loans within the portfolio as determined by ongoing credit
reviews. The provision for the allowance for loan and lease losses totaled
$1,696 in 2004, compared to $1,418 in 2003. Net charge-offs for 2004 were
$1,209, which represents 0.28% of average loans, compared to net charge-offs of
$1,181, or 0.30% of average loans in 2003.
The allowance for loan and lease losses increased by $487 to $4,818 at year-end
2004 from $4,331 at year-end 2003. As a percent of gross loans and leases, the
allowance decreased to 1.00% at year-end 2004 from 1.07% at year-end 2003. DCB
maintains an allowance for loan and lease losses at a level to absorb
management's estimate of probable incurred credit losses in its portfolio.
Improved exposure to credit losses in the commercial loan portfolio required a
more normalized provision compared to the prior year. The stable level of
charge-offs during 2004 was mainly attributed to the improved economic
conditions
8
that affected the commercial loan portfolio in the current year, and to
management's increased activities related to monitoring, collection, and workout
of delinquent loans. Management continues to monitor exposure to industry
segments, and believes that the loan portfolio remains adequately diversified.
During 2004, the Corporation's loan charge-offs largely consisted of commercial
loans in a variety of sectors. Five small commercial loans accounted for
approximately 30% of the net charge-offs recorded in 2004. These loans were
concentrated in production, retail and service sectors.
To assist in identifying and managing potential loan and lease losses,
management maintains a methodology for establishing appropriate loan and lease
loss values. The Board of Directors has approved a policy that directs
management to "develop and maintain an appropriate, systematic, and consistently
applied process to determine the amounts of the Allowance for Loan and Lease
Losses (ALLL)." The methodology that management adopted involves identifying
both specific and non-specific components. The specific allowance allocation is
determined from information provided through the Bank's watch list, loan review
function and loan grade status applied to specific credits. The allocated
allowance is developed by utilizing historical net loss components for each
identified segment of the loan portfolio. Additionally, current economic
condition factors are used to adjust the historical net loss components.
Management performs analysis of the loan portfolio on a monthly basis, and
evaluates economic conditions as they relate to potential credit risk within its
portfolios on a quarterly basis.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$994, or 15.0% to $7,618 in 2004 compared to $6,624 in 2003. The increase was
mainly the result of a $2.6 million gain on the sale of the Corporation's
investment in the unconsolidated affiliate, ProCentury Corporation. The gain
recognized on the sale of ProCentury investment was partially offset by a
decrease 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 the
previous year's levels. The Corporation developed a new overdraft assurance
program that created additional non-interest revenue when compared to 2003. This
program allows the Bank to pay overdraft items for its most creditworthy
customers or return for a nominal service charge. Additionally, the Corporation
experienced increases on account service charges, and trust activities. These
increases are generally attributed to a higher number of accounts and customers
served by the Corporation.
Total noninterest expense decreased $523, or 3.2%, in 2004 compared to 2003. The
decrease was primarily the result of decreases in salaries and employee
benefits, outside professional services, and various operating costs due to
management's expense control initiatives. The decrease in outside professional
services is attributed to decreased consulting and legal fees. The decrease in
compensation and employee benefits were planned decreases relating to
management's human resource efficiency initiatives implemented during 2004.
INCOME TAXES. The change in income tax expense is primarily attributable to the
increase in tax exempt earnings offset by the growth in income before income
taxes. See Note 9 to the Consolidated Financial Statements for additional
information regarding income taxes. The provision for income taxes totaled
$2,973 in 2004 and $2,287 in 2003 resulting in effective tax rates of 29.9% and
31.3%.
9
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
DECEMBER 31, 2002
NET INCOME. Net income for 2003 totaled $5,029, compared to net income for 2002
of $4,003. Basic and diluted earnings per share totaled $1.26 for 2003 and $.96
for 2002. Return on average assets was 0.91% and 0.76% for 2003 and 2002, while
return on average equity was 10.11% and 7.82% over the same two years. Net
income and fee income both increased during 2003 in comparison to 2002. The
increase in net income was related principally to growth in earning assets, the
allocation of funds from lower yielding to higher yielding asset categories,
reduced loan charge-offs and increased emphasis on operating expense cost
control.
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 DCB'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 $18,618 for 2003 compared to $20,740 for 2002. The
decrease of $2,122 is attributed to reduced margins due to the overall decline
in interest rates experienced in 2003. Though DCB was able to reduce its overall
cost of funds through strategic initiatives developed through its
Asset/Liability Committee (ALCO), a significant portion of the Corporation's
loan portfolio is variable rate. This has caused assets to reprice downward at a
faster pace than liabilities. As a result of the these shifts in the components
of interest-earning assets and interest-bearing liabilities, as well as
movements in market interest rates, DCB's net interest margin, which is
calculated by dividing net interest income by average interest-earning assets,
decreased from 4.24% in 2002 to 3.75% in 2003. Additionally, because of the
increased competition in the Bank's primary marketplace, management has
recognized the importance of offering special rates on certain deposit products.
These special deposit rates tend to negatively effect the Corporation's net
interest margin. It is likely that these offerings will continue to be offered
to gain a market share.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. As stated previously, the
provision for loan and lease losses represents the charge to income necessary to
adjust the allowance for loan and lease losses to an amount that represents
management's assessment of the losses known and inherent in the Bank's loan
portfolio. All lending activity contains associated risks of loan losses and the
Bank recognizes these credit risks as a necessary element of its business
activity. To assist in identifying and managing potential loan losses, the Bank
maintains a credit administration function that regularly evaluates lending
relationships as well as overall loan portfolio conditions. One of the primary
objectives of this credit administration function is to make recommendations to
management as to both specific loss reserves and overall portfolio loss
reserves. Management further evaluates these reserve levels through an ongoing
credit quality process, which in addition to evaluating the current credit
quality of the lending portfolios, examines other economic indicators and
trends, which could affect the overall loss rates associated with the lending
process.
DCB's provision is determined based upon management's estimate of the overall
collectibility of loans within the portfolio as determined by ongoing credit
reviews. The provision for the allowance for loan and lease losses totaled
$1,418 in 2003, compared to $2,950 in 2002. Net charge-offs for 2003 were
$1,181, which represents 0.30% of average loans, compared to net charge-offs of
$2,452, or 0.66% of average loans in 2002.
The allowance for loan and lease losses increased by $237 to $4,331 at year-end
2003 from $4,094 at year-end 2002. As a percent of gross loans and leases, the
allowance decreased to 1.07% at year-end 2003 from 1.10% at year-end 2002. DCB
maintains an allowance for loan and lease losses at a level to absorb
management's estimate of probable incurred credit losses in its portfolio.
Improved exposure to credit losses in the commercial loan portfolio required a
more normalized provision compared to the prior year. This decrease in
charge-offs during 2003 was mainly attributed to the improved economic
conditions that affected the commercial loan portfolio in the current year, and
to management's increased activities related to monitoring, collection, and
workout of delinquent loans. Management continues to monitor exposure to
industry segments, and believes that the loan portfolio remains adequately
diversified.
10
To assist in identifying and managing potential loan and lease losses,
management maintains a methodology for establishing appropriate loan and lease
loss values. The Board of Directors has approved a policy that directs
management to "develop and maintain an appropriate, systematic, and consistently
applied process to determine the amounts of the Allowance for Loan and Lease
Losses (ALLL)." The methodology that management adopted involves identifying
both specific and non-specific components. The specific allowance allocation is
determined from information provided through the Bank's watch list, loan review
function and loan grade status applied to specific credits. The allocated
allowance is developed by utilizing historical net loss components for each
identified segment of the loan portfolio. Additionally, current economic
condition factors are used to adjust the historical net loss components.
Management performs analysis of the loan portfolio on a monthly basis, and
evaluates economic conditions as they relate to potential credit risk within its
portfolios on a quarterly basis.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$365, or 5.8% to $6,624 in 2003 compared to $6,259 in 2002. The increase was
primarily attributed to the increased revenue generated by selling residential
mortgages in the secondary market and the sale of a branch location. During
2003, favorable economic interest rates created a large increase in mortgage
refinancing. Additionally, the Corporation experienced increases on account
service charges, trust activities and treasury management service fees. These
increases are generally attributed to a high number of accounts and customers
served by the Corporation.
Total noninterest expense decreased $1,502, or 8.3%, in 2003 compared to 2002.
The decrease was primarily the result of decreases in salaries and employee
benefits, outside professional services, and various operating costs due to
management's expense control initiatives. The decrease in outside professional
services is attributed to decreased consulting and legal fees. The decrease in
compensation and employee benefits were planned decreases relating to
management's human resource efficiency initiatives implemented during 2003.
INCOME TAXES. The change in income tax expense is primarily attributable to the
increase in tax exempt earnings offset by the growth in income before income
taxes. See Note 9 to the Consolidated Financial Statements for additional
information regarding income taxes. The provision for income taxes totaled
$2,287 in 2003 and $2,036 in 2002 resulting in effective tax rates of 31.3% and
33.7%.
11
Year ended December 31,
--------------------------------------------------------------------------------------
2004 2003 2002
--------------------------- --------------------------- ----------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
----------- -------- ------ ----------- -------- ------ ----------- -------- -------
Interest-earning assets:
Federal funds sold $ 451 $ 8 1.77% $ 14,082 $ 144 1.02% $ 4,974 $ 74 1.49%
Taxable securities 78,875 2,855 3.62 77,882 2,876 3.69 99,746 5,378 5.39
Tax-exempt securities (1) 19,380 709 3.66 17,049 702 4.12 12,950 596 4.60
Loans and leases (2) 438,861 24,241 5.52 387,627 22,869 5.90 371,507 24,834 6.68
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets 537,567 27,813 5.17 496,640 26,591 5.35 489,177 30,882 6.31
Noninterest-earning assets 79,696 58,209 34,685
-------- -------- --------
Total assets $617,263 $554,849 $523,862
======== ======== ========
Interest-bearing liabilities:
Demand and money market deposits $168,880 $ 1,441 0.85% $171,045 $ 2,149 1.26% $161,950 $ 2,635 1.63%
Savings deposits 61,320 303 0.49 62,792 420 0.67 57,131 905 1.58
Certificates of deposit 143,359 3,334 2.33 141,650 4,099 2.89 145,647 5,331 3.66
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total deposits 373,559 5,078 1.36 375,486 6,668 1.78 364,728 8,871 2.43
Borrowed funds 107,826 2,724 2.53 51,146 1,305 2.55 38,375 1,271 3.31
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing liabilities 481,385 7,802 1.62 426,633 7,973 1.87 403,103 10,142 2.52
Noninterest-bearing liabilities 82,800 ------- 78,480 ------- 69,547 -------
-------- -------- --------
Total liabilities 564,185 505,113 472,650
Shareholders' equity 53,078 49,736 51,212
-------- -------- --------
Total liabilities & shareholders'
equity $617,263 $554,849 $523,862
======== ======== ========
Net interest income; interest rate spread $20,011 3.55% $18,618 3.48% $20,740 3.79%
======= ====== ======= ====== ======= ======
Net interest margin (net interest income
as a percent of average interest-earning
assets) 3.72% 3.75% 4.24%
====== ====== ======
Average interest-earning assets to average
interest-bearing liabilities 111.67% 116.41% 121.35%
====== ====== ======
- ----------
(1) Interest on tax-exempt securities is reported on a historical basis without
tax-equivalent adjustment. Interest on tax-exempt securities on a tax
equivalent basis was $1,076 in 2004, $1,064 in 2003, and $903 in 2002.
(2) Includes nonaccrual loans.
12
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected DCB's interest income and expense during the years indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume
(multiplied by prior year rate); (2) changes in rate (multiplied by prior year
volume); and, (3) total changes in rate and volume. The combined effects of
changes in both volume and rate, that are not separately identified, have been
allocated proportionately to the change due to volume and change due to rate:
Year ended December 31,
------------------------------------------------------
2004 vs. 2003 2003 vs. 2002
------------------------- --------------------------
Increase Increase
(decrease) (decrease)
due to due to
---------------- ----------------
Volume Rate Total Volume Rate Total
------ ------- ------ ------- ------- -------
Interest income attributable to:
Federal funds sold $ (138) $ 2 $ (136) $ 137 $ (67) $ 70
Taxable securities 36 (57) (21) (1,177) (1,325) (2,502)
Tax-exempt securities 97 (90) 7 189 (83) 106
Loans and leases 3,015 (1,643) 1,372 1,038 (3,003) (1,965)
------ ------- ------ ------- ------- -------
Total interest income 3,010 (1,788) 1,222 187 (4,478) (4,291)
------ ------- ------ ------- ------- -------
Interest expense attributable to:
Demand and money market deposits (27) (681) (708) 148 (634) (486)
Savings deposits (10) (107) (117) 90 (575) (485)
Certificates of deposit 49 (814) (765) (146) (1,086) (1,232)
Borrowed funds 1,445 (26) 1,419 366 (332) 34
------ ------- ------ ------- ------- -------
Total interest expense 1,457 (1,628) (171) 458 (2,627) (2,169)
------ ------- ------ ------- ------- -------
Increase (decrease) in net
interest income $1,553 $ (160) $1,393 $ (271) $(1,851) $(2,122)
====== ======= ====== ======= ======= =======
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The ALCO of DCB Financial Corp utilizes a variety of tools to measure and
monitor interest rate risk. This is defined as the risk that DCB's financial
condition will be adversely affected due to movements in interest rates. To a
lesser extent, DCB is also exposed to liquidity risk, or the risk that changes
in cash flows could adversely affect its ability to honor its financial
obligations. The ALCO monitors changes in the interest rate environment and
changes to its lending and deposit rates based on liquidity and profitability
analysis. During 2004 several new programs were introduced to mitigate interest
rate risk in the balance sheet.
First, the Company developed a matched funding program through the FHLB to match
off longer term commercial and real estate loans with liabilities of similar
term and rate structures. Secondly, the company offered special deposit programs
correlated to prevailing asset maturities. 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
ALCO Committee places great importance on monitoring and controlling interest
rate risk. The measurement and analysis of the exposure of DCB's primary
operating subsidiary, The Delaware County Bank and Trust Company, to changes in
the interest rate environment are referred to as asset/liability modeling. One
method used to analyze DCB's sensitivity to changes in interest rates is the
"net portfolio value" ("NPV") methodology.
13
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 DCB 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. Presented below is an analysis
depicting the changes in DCB's interest rate risk as of December 31, 2004, and
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. These
parallel shifts were used to more accurately represent the current interest rate
environment in which DCB Financial operates.
As illustrated in the tables, the institution's NPV is more sensitive to rising
rates than declining rates. From an overall perspective, such difference in
sensitivity occurs principally because the balance sheet of the bank is
liability sensitive. The liability sensitivity of the balance sheet is due to
the generally short-term nature of the banks liabilities, (checking, savings and
money market accounts) versus the longer-term nature of fixed rate installment
loans and commercial loans. Though the institution does employ variable loan
structures, these structures generally adjust based on annual time frames.
Additionally, as rates rise borrowers are less likely to refinance or payoff
loans prior to contractual maturities, increasing the risk that the institution
may hold below market rate loans in a rising rate environment.
The interest rate environment in which DCB currently operates also affects the
interest rate risk position. As mentioned above, the current interest rate
environment has allowed DCB to price a large portion of its deposit liabilities
under 1.0%, with the majority priced under 2.0%. This results in substantially
all deposits priced at or near 0% in downward shifts of interest rates. The
following table depicts the ALCO's five most likely interest rate scenarios and
their affect on NPV. The analysis presented in the table indicates that the
benefit in a declining rate environment is due to reduced funding costs or
liability sensitive balance sheet accompanied by fixed rate loans and
investments that continue to earn interest at their present levels. In a rising
rate environment, the same liability sensitive balance sheet results in a
decline in NPV.
The dollar and percentage change from 2004 to 2003 are mainly attributed to
three factors. First, there was a substantial decline in floating rate
liabilities coupled with an increase in fixed rate time deposits. Second,
throughout 2004, the Bank reduced its fixed rate investment portfolio and
increased its cash and cash equivalent balances. These two factors reduced the
overall liability-sensitive nature of the balance sheet, and reduced the
potential impairment of NPV in a +300 increasing interest rate environment.
These favorable trends were more than offset by the effect of a reduction in the
Corporation's capital during 2004.
December 31, 2004 December 31, 2003
Change in --------------------------- ---------------------------
Interest Rate $ Change % Change NPV $ Change % Change NPV
(Basis Points) In NPV In NPV Ratio In NPV In NPV Ratio
- -------------- -------- -------- ----- -------- -------- -----
+300 $(17,258) (40)% 3.75% $(15,668) (42)% 4.14%
+200 (11,614) (27) 4.54 (10,709) (29) 4.99
+100 (6,087) (14) 6.27 (5,489) (15) 5.85
Base -- -- 7.15 -- -- 6.71
-100 6,561 15 8.09 4,163 11 7.31
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
14
withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making risk calculations.
In a rising interest rate environment, DCB's net interest income could be
negatively affected. Moreover, rising interest rates could negatively affect
DCB's earnings due to diminished loan demand. As part of its interest rate risk
strategy, DCB has attempted to utilize adjustable-rate and short-term-duration
loans and investments. DCB intends to limit the addition of unhedged fixed-rate
long-duration loans and securities to its portfolio.
LIQUIDITY
Liquidity is the ability of DCB 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 DCB to its customers. DCB's principal sources of funds
are deposits, loan and securities repayments, maturities of securities, sales of
securities available for sale and other funds provided by operations. The Bank
also has the ability to obtain funding from other sources including the FHLB,
Federal Reserve, and through its correspondent bank relationships. 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. DCB
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 $9,111, or 44.8%, from $20,349 at year-end
2003 to $11,238 at year-end 2004. Cash and cash equivalents at year-end 2004
represented 1.8% of total assets compared to 3.7% of total assets at year-end
2003. During 2004, management implemented a number of processes to reduce the
overall balances of cash on the balance sheet. The Bank has the ability to
borrow funds from the Federal Home Loan Bank and has various federal fund
sources from correspondent banks, should DCB need to supplement its future
liquidity needs in order to meet loan demand or to fund investment
opportunities. The Bank also has the ability to issue term brokered certificate
of deposits in the secondary market to provide additional funding outside of its
normal geographical boundaries. In addition to funding maturing deposits and
other deposit liabilities, DCB Financial also has off-balance sheet commitments
in the form of lines of credit and letters of credit utilized by customers in
the normal course of business. Financial instruments include off-balance credit
instruments, such as commitments to make loans and standby letters of credit,
issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
These off-balance sheet commitments are not considered to have a major effect on
the liquidity position of the Corporation. Further, management believes the
DCB's liquidity position is strong based on its stable level of cash, cash
equivalents, core deposits, the stability of its other funding sources and the
support provided by its capital base.
As summarized in the Consolidated Statements of Cash Flows, the most significant
transactions which affected the DCB's level of cash and cash equivalents, cash
flows and liquidity during 2004 were securities purchases of $48,051; the net
increase in loans of $79,528; the net increase in deposits of $12,222;
securities sales of $37,039; net proceeds from FHLB advances and other
short-term borrowings totaling $46,716; and the receipt of proceeds from
maturities and repayments of securities of $18,670.
CAPITAL RESOURCES
As previously stated, total shareholders' equity increased $4,572, primarily due
to $6,975 of period earnings, partially offset by the $515 after tax reduction
in the fair value of securities designated as
15
available for sale, and cash dividends declared of $1,888. DCB did not purchase
any shares of treasury stock during 2004. However, management may purchase
shares in the future, as opportunities arise. The number of shares to be
purchased and the price to be paid will depend upon the availability of shares,
the prevailing market prices and any other considerations that may, in the
opinion of DCB's Board of Directors or management, affect the advisability of
purchasing shares.
Tier 1 capital is shareholders' equity excluding the net 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 and lease losses,
not to exceed 1.25% of risk weighted assets. Risk weighted assets are DCB's
total assets after such assets are assessed for risk and assigned a weighting
factor based on their inherent risk.
DCB and its subsidiaries meet all regulatory capital requirements. DCB's
consolidated ratio of total capital to risk-weighted assets was 11.6% at
year-end 2004, while the Tier 1 risk-based consolidated capital ratio was 10.6%.
Regulatory minimums call for a total risk-based capital ratio of 8.0%, at least
half of which must be Tier 1 capital. DCB's consolidated leverage ratio, defined
as Tier 1 capital divided by average assets, of 8.8% at year-end 2004 exceeded
the regulatory minimum for capital adequacy purposes of 4.0%.
The following table sets forth the Corporation's obligations and commitments to
make future payments under contract as of December 31, 2004.
PAYMENT DUE BY YEAR
------------------------------------------------------------
LESS THAN 1 MORE THAN 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
----------------------- -------- ----------- --------- --------- -----------
Long-Term Debt Obligations $ 95,813 $ 25,775 $3,000 $4,107 $62,931
Operating Lease Obligations 5,740 707 1,216 692 3,125
Loan and Line of Credit
Commitments 114,557 114,557 -- -- --
Other Long-Term Liabilities
Reflected on the Corporation's
Balance Sheet under GAAP -- -- -- -- --
-------- -------- ------ ------ -------
Total Contractual Obligations $216,110 $141,039 $4,216 $4,799 $66,056
======== ======== ====== ====== =======
16
DCB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(Dollars in thousands, except share amounts)
2004 2003
-------- --------
ASSETS
Cash and due from financial institutions $ 11,238 $ 20,349
Securities available for sale 98,979 108,547
Loans held for sale 1,122 --
Loans and leases 483,305 404,947
Less allowance for loan and lease losses (4,818) (4,331)
-------- --------
Net loans and leases 478,487 400,616
Premises and equipment, net 8,846 9,947
Investment in unconsolidated affiliate 295 1,951
Bank owned life insurance 8,457 8,006
Accrued interest receivable and other assets 4,261 3,881
-------- --------
Total assets $611,685 $553,297
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 65,148 $ 78,477
Interest-bearing 389,426 363,875
-------- --------
Total deposits 454,574 442,352
Federal funds purchased and other short-term borrowings 5,215 4,619
Federal Home Loan Bank advances 95,813 49,693
Accrued interest payable and other liabilities 1,822 6,944
-------- --------
Total liabilities 557,424 503,608
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 issued 3,780 3,780
Retained earnings 57,862 52,775
Treasury stock, at cost, 338,440 and 338,440
shares at December 31, 2004 and 2003 (7,616) (7,616)
Accumulated other comprehensive income 235 750
-------- --------
Total shareholders' equity 54,261 49,689
-------- --------
Total liabilities and shareholders' equity $611,685 $553,297
======== ========
See accompanying notes to consolidated financial statements.
17
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except per share amounts)
2004 2003 2002
------- ------- -------
Interest and dividend income
Loans, including fees $24,241 $22,869 $24,834
Taxable securities 2,855 2,876 5,378
Tax-exempt securities 709 702 596
Federal funds sold and other 8 144 74
------- ------- -------
Total 27,813 26,591 30,882
Interest expense
Deposits 5,078 6,668 8,871
Borrowings 2,724 1,305 1,271
------- ------- -------
Total 7,802 7,973 10,142
------- ------- -------
Net interest income 20,011 18,618 20,740
Provision for loan and lease losses 1,696 1,418 2,950
------- ------- -------
Net interest income after provision for loan and lease losses 18,315 17,200 17,790
Noninterest income
Service charges 2,543 2,634 2,996
Trust department income 646 609 538
Net gains (losses) on sales of securities (4) 51 26
Gains (losses) on sale of assets (140) 649 --
Gains on sales of loans 179 979 1,019
Gain on sale of unconsolidated affiliate 2,638 -- --
Treasury management fees 512 547 519
Data processing service fees 288 366 391
Other 956 789 770
------- ------- -------
7,618 6,624 6,259
Noninterest expense
Salaries and employee benefits 7,941 8,226 8,517
Occupancy and equipment 3,802 4,030 3,877
Professional services 274 578 624
Advertising 337 321 386
Postage, freight and courier 376 347 485
Supplies 243 257 316
State franchise taxes 544 484 590
Other 2,468 2,265 3,215
------- ------- -------
15,985 16,508 18,010
------- ------- -------
Income before income taxes 9,948 7,316 6,039
Income tax expense 2,973 2,287 2,036
------- ------- -------
Net income $ 6,975 $ 5,029 $ 4,003
======= ======= =======
Basic earnings per common share $ 1.77 $ 1.26 $ .96
======= ======= =======
Diluted earnings per common share $ 1.77 $ 1.26 $ .96
======= ======= =======
See accompanying notes to consolidated financial statements.
18
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31, 2004, 2003, and 2002
(Dollars in thousands, except per share data)
2004 2003 2002
------ ------ ------
Net income $6,975 $5,029 $4,003
Less reclassification for realized (gains) losses
on sale of securities included in operations,
net of tax 3 (34) (17)
Unrealized gains (losses) on securities
available for sale, net of tax effects (518) (813) 1,014
------ ------ ------
Comprehensive income $6,460 $4,182 $5,000
====== ====== ======
Accumulated comprehensive income $ 235 $ 750 $1,597
====== ====== ======
See accompanying notes to consolidated financial statements.
19
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except per share amounts)
Accumulated
Other Total
Common Retained Treasury Comprehensive Shareholders'
Stock Earnings Stock Income Equity
------ -------- -------- ------------- -------------
Balance at January 1, 2002 $3,779 $46,720 $(1,978) $ 600 $49,121
Comprehensive income:
Net income -- 4,003 -- -- 4,003
Other comprehensive income,
net of tax -- -- -- 997 997
-------
Total comprehensive income 5,000
Purchase of treasury stock-
11,510 shares at cost -- -- (201) -- (201)
Shares issued through Dividend
Reinvestment Plan - 1,544 shares 1 -- 27 -- 28
Dividends ($0.34 per share) -- (1,420) -- -- (1,420)
------ ------- ------- ------ -------
Balance at December 31, 2002 3,780 49,303 (2,152) 1,597 52,528
Comprehensive income:
Net income -- 5,029 -- -- 5,029
Other comprehensive loss,
net of tax -- -- -- (847) (847)
-------
Total comprehensive income 4,182
Purchase of treasury stock -
237,274 shares at cost -- -- (5,536) -- (5,536)
Sale of 3,800 shares of treasury stock -- -- 72 -- 72
Dividends ($0.39 per share) -- (1,557) -- -- (1,557)
------ ------- ------- ------ -------
Balance at December 31, 2003 3,780 52,775 (7,616) 750 49,689
Comprehensive income:
Net income -- 6,975 -- -- 6,975
Other comprehensive loss,
net of tax -- -- -- (515) (515)
-------
Total comprehensive income 6,460
Dividends ($0.48 per share) -- (1,888) -- -- (1,888)
------ ------- ------- ------ -------
Balance at December 31, 2004 $3,780 $57,862 $(7,616) $ 235 $54,261
====== ======= ======= ====== =======
See accompanying notes to consolidated financial statements.
20
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,975 $ 5,029 $ 4,003
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 1,508 1,815 1,682
Provision for loan and lease losses 1,696 1,418 2,950
Deferred income taxes (80) 209 (93)
Net (gains) losses on sales of securities 4 (51) (26)
Net gains on sales of loans (179) (979) (1,019)
Net (gains) losses on sale of assets 140 (649) --
Gain on sale of unconsolidated affiliate (2,638) -- --
Net securities amortization 1,201 1,356 705
FHLB stock dividends (106) (92) (102)
Net change in loans held for sale (1,122) 6,442 (3,854)
Net changes in other assets and other liabilities (5,616) (257) (32)
--------- -------- --------
Net cash provided by operating activities 1,783 14,241 4,214
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Securities available for sale
Purchases (48,051) (87,391) (44,059)
Maturities, principal payments, and calls 18,670 44,961 55,002
Sales 37,039 27,866 4,169
Securities held to maturity
Purchases -- -- (1,321)
Maturities, principal payment, and calls -- -- 8,622
Sales -- -- 806
Purchase of Federal Home Loan Bank stock -- -- (24)
Net change in loans (79,528) (33,360) (9,458)
Premises and equipment expenditures (499) (281) (2,175)
Proceeds from sale of unconsolidated affiliate 4,394 -- --
Proceeds from sale of premises and equipment 91 575 --
Investment in unconsolidated affiliate (100) -- --
--------- -------- --------
Net cash provided by (used in) investing activities (67,984) (47,630) 11,562
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net change in deposits 12,222 3,729 7,909
Net change in federal funds purchased
and other short-term borrowings 596 2,619 (2,174)
Proceeds from Federal Home Loan Bank advances 154,459 37,746 17,000
Repayment of Federal Home Loan Bank advances (108,339) (15,855) (22,360)
Purchase of treasury stock, net -- (5,464) (201)
Cash dividends paid (1,848) (1,540) (1,392)
--------- -------- --------
Net cash provided by (used in) financing activities 57,090 21,235 (1,218)
--------- -------- --------
Net change in cash and cash equivalents (9,111) (12,154) 14,558
Cash and cash equivalents at beginning of year 20,349 32,503 17,945
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,238 $ 20,349 $ 32,503
========= ======== ========
See accompanying notes to consolidated financial statements.
21
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
------ ------ -------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $7,086 $7,821 $10,482
====== ====== =======
Income taxes paid 3,625 1,137 2,583
====== ====== =======
SUPPLEMENTAL NON CASH DISCLOSURES
Non-cash transfer of securities from held to maturity
to available for sale -- -- 26,490
====== ====== =======
Unrealized gains (losses) on securities designated as
available for sale, net of tax $ (515) $ (847) $ 997
====== ====== =======
Loan to finance sale of premises and equipment $ -- $1,208 $ --
====== ====== =======
See accompanying notes to consolidated financial statements.
22
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of DCB Financial Corp (DCB) and its wholly-owned subsidiary, The
Delaware County Bank and Trust Company (Bank), collectively referred to
hereinafter as the Corporation. All intercompany transactions and balances have
been eliminated in the consolidated financial statements.
During 2000, DCB purchased a 9% interest in ProCentury Corporation, the holding
company for Century Surety Company, a specialty property and casualty insurance
company. During 2004, the Corporation sold the investment in ProCentury
Corporation, as part of ProCentury's initial public offering (IPO) on April 20,
2004. The Corporation originally bought into ProCentury as a passive investment
to monitor and review the revenue stream and various products and services.
Nature of Operations: DCB provides financial services through its fifteen
banking locations in Delaware, Franklin and Union Counties, Ohio. Its primary
deposit products are checking, savings, and term certificate accounts and its
primary lending products are residential mortgage, commercial and installment
loans. Substantially all loans are secured by specific items of collateral
including business assets, consumer assets, and real estate. Commercial loans
are expected to be repaid from cash flow operations of businesses. Real estate
loans are secured by both residential and commercial real estate. DCB also
operates a trust department, engages in mortgage banking operations, and
supplies data processing and business recovery services to other financial
institutions.
Business Segments: While DCB's management monitors the revenue streams of the
various products and services, operations are managed and financial performance
is evaluated on a corporation-wide basis. Accordingly, all of DCB's operations
are considered by management to be aggregated in one reportable operating
segment.
Use of Estimates: To prepare consolidated 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 value of financial instruments and status of
contingencies are particularly subject to change.
Cash Flows: Cash and cash equivalents include cash on hand and deposits with
other financial institutions. Net cash flows are reported for customer loan and
deposit transactions, federal funds purchased and other short-term borrowings.
Securities: Securities may be classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities may be classified as available for sale as such
securities might be sold before maturity. Securities available for sale are
carried at fair value, with unrealized holding gains and losses reported as a
component of other comprehensive income. Other securities such as Federal Home
Loan Bank stock are carried at cost. The Corporation does not operate a
securities trading account.
(Continued)
23
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income includes premium amortization and accretion of discounts on
securities. Gains and losses on sales are based on the net carrying value of the
security sold, using the specific identification method. Securities are written
down to fair value when a decline in fair value is other than temporary.
Loans and Leases: Loans and leases that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are reported at the
principal balance outstanding, net of unearned interest, deferred loan fees and
costs and the allowance for loan and lease losses. Loans held for sale are
reported at the lower of cost or market, determined in the aggregate.
Interest income is reported using the interest method and includes amortization
of net deferred loan fees and costs over the loan term. Interest income on
mortgage and commercial loans is discontinued at the time the loan is 90 days
delinquent unless the credit is well secured and in process of collection. In
all cases, loans are placed on nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amount
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan and Lease Losses: The allowance for loan and lease losses is
a valuation allowance for probable incurred credit losses, increased by the
provision for loan and lease losses and decreased by charge-offs net of
recoveries. Management estimates the required allowance balance based on past
loan loss experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions and other factors. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and industrial, commercial real estate, and land development are
individually evaluated for impairment. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future value cash flows using the loan's existing rate or at the
fair value of collateral if repayment is expected solely from the collateral.
Large groups of smaller balance homogeneous loans, such as consumer and
residential real estate loans, are collectively evaluated for impairment, and
accordingly, such loans are not separately identified for impairment
disclosures.
Concentrations of Credit Risk: The Bank grants commercial, real estate and
consumer loans primarily in Delaware, and the surrounding counties. Loans for
commercial real estate, farmland, construction and land development purposes
comprise 44% of loans at year end 2004. Loans for commercial purposes comprise
10% of loans, and include loans secured by business assets and agricultural
loans. Loans for residential real estate purposes, including home equity loans,
aggregate 35% of loans. Loans and leases for consumer purposes are primarily
secured by consumer assets and represent 11% of total loans.
(Continued)
24
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Depreciation is computed over the
assets' useful lives using the straight line method. An accelerated depreciation
method is used for tax purposes. These assets are reviewed for impairment when
events indicate the carrying amount may not be recoverable. Maintenance and
repairs are expensed and major improvements are capitalized.
Foreclosed Assets: Assets acquired through loan foreclosure are initially
recorded at the lower of cost or market when acquired, establishing a new cost
basis. If fair value declines below such amount, a valuation allowance is
recorded through expense. Holding costs after acquisition are expensed as
incurred.
Servicing Assets: Servicing assets represent the allocated value of retained
servicing on loans sold. Servicing assets are expensed in proportion to, and
over the period of, estimated net servicing revenues. Impairment is evaluated
based on the fair value of the assets, using groupings of the underlying loans
as to interest rates, and then secondarily as to geographic and prepayment
characteristics. Fair value is determined using prices for similar assets with
similar characteristics, when available, or based upon discounted cash flows
using market-based assumptions. Any impairment of a grouping is reported as a
valuation allowance. The Corporation had net servicing assets of $100 and $147
at December 31, 2004 and 2003.
Bank Owned Life Insurance: The Company has purchased life insurance policies on
certain key executives. Company owned life insurance is recorded at its cash
surrender value, or its net realizable value.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts of temporary
differences between carrying amounts and the 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.
Financial Instruments: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and standby letters of credit,
issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
Diluted earnings per common share is computed including the dilutive effect of
additional potential common shares issuable under stock options.
(Continued)
25
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The computation were as follows for the years ended December 31:
2004 2003 2002
--------- --------- ---------
Weighted-average common shares
outstanding (basic) 3,934,760 4,000,161 4,171,703
Dilutive effect of assumed exercise
of stock options -- -- --
--------- --------- ---------
Weighted-average common shares
outstanding (diluted) 3,934,760 4,000,161 4,171,703
========= ========= =========
Stock Options Plan: The Company's shareholders approved an employee share option
plan in May 2004. This plan grants certain employees the right to purchase
shares at a pre-determined price. The plan is limited to 300,000 shares. The
shares granted to employee's vest 20% per year over a five year period. The
options expire after ten years. During 2004 15,105 shares were issued to
employees under the plan, at a price of $23.40. Approximately 3,000 share
options will become exercisable during 2005.
The Corporation accounts for its stock option plan in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation, " which contains a fair-value
based method for valuing stock-based compensation that entities may use, which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits entities to continue to
account for stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings per
share, as if the fair-value based method of accounting defined is SFAS No. 123
had been applied.
The Corporation utilizes APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for the plan. Had compensation cost the for the Corporation's
stock option plans been determined based on the fair value at the grant dates
for awards under the plans consistent with the accounting method utilized in
SFAS No. 123, the Corporation's net earnings and earnings per share would have
been reported as the pro forma amounts indicated below:
(Continued)
26
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
Stock Options Plan (continued)
2004 2003 2002
------ ------ ------
(In thousands, except
per share data)
NET EARNINGS As reported $6,975 $5,029 $4,033
Stock-based compensation, net of tax (6) -- --
------ ------ ------
Pro-forma $6,969 $5,029 $4,033
====== ====== ======
EARNINGS PER SHARE
BASIC As reported $ 1.77 $ 1.26 $ 0.96
Stock-based compensation, net of tax -- -- --
------ ------ ------
Pro-forma $ 1.77 $ 1.26 $ 0.96
====== ====== ======
DILUTED As reported $ 1.77 $ 1.26 $ 0.96
Stock-based compensation, net of tax -- -- --
------ ------ ------
Pro-forma $ 1.77 $ 1.26 $ 0.96
====== ====== ======
A summary of the status of the Corporation's stock option plan as of December
31, 2004, and changes during the year is presented below:
2004
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ --------
Outstanding at beginning of year -- --
Granted 15,105 $ 23.40
Exercised -- --
Forfeited -- --
------ -------
Outstanding at end of year 15,105 $ 23.40
====== =======
Options exercisable at year-end -- --
Weighted-average fair value of options
granted during the year $ 3.44
(Continued)
27
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
Stock Options Plan (continued)
The following information applies to options outstanding at December 31, 2004:
NUMBER OUTSTANDING RANGE OF EXERCISE PRICES
- ------------------ ------------------------
15,105 $23.40
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income consists solely of net
unrealized gains (losses) on securities available for sale, which is recognized
as a separate component of shareholders' equity.
Newly issued Accounting Standards: In December 2004, the Financial Accounting
Standards Board (the "FASB") issued a revision to Statement of Financial
Accounting Standards ("SFAS") No. 123 which establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services, primarily on accounting for transactions in which an
entity obtains employee services in share-based transactions. This Statement,
SFAS No. 123 (R), requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with limited exceptions. That cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award - the requisite service period. No
compensation cost is recognized for equity instruments for which employees do
not render the requisite service. Employee share purchase plans will not result
in recognition of compensation cost if certain conditions are met.
Initially, the cost of employee services received in exchange for an award of
equity instruments will be measured based on current fair value; the fair value
of that award will be remeasured subsequently at each reporting date through the
settlement date. Changes in fair value during the requisite service period will
be recognized as compensation cost over that period. The grant-date fair value
of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those
instruments (unless observable market prices for the same or similar instruments
are available). If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification.
Excess tax benefits, as defined by SFAS No. 123(R) will be recognized as an
addition to additional paid in capital. Cash retained as a result of those
excess tax benefits will be presented in the statement of cash flows as
financing cash inflows. The write-off of deferred tax assets relating to
unrealized tax benefits associated with recognized compensation cost will be
recognized as income tax expense unless there are excess tax benefits from
previous awards remaining in additional paid in capital to which it can be
offset.
Compensation cost is required to be recognized in the beginning of the first
interim or annual period that begins after June 15, 2005, or July 1, 2005 as to
the Corporation. Management believes the effect on operations will approximate
the economic effects set forth in the pro-forma stock option disclosure set
forth above.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank
of $2,717 and $9,649 was required to meet regulatory reserve and clearing
balance requirements at year-end 2004 and 2003. These balances do not earn
interest.
(Continued)
28
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
Dividend Restrictions: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the Bank to DCB or by DCB to
shareholders. These restrictions pose no practical limit on the ability of the
Bank or DCB to pay dividends at historical levels.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or market conditions could
significantly affect the estimates.
Reclassification: Certain amounts in the prior consolidated financial statements
have been reclassified to conform to the current year presentation.
NOTE 2 - SECURITIES
The fair value of securities available for sale and the related gains and losses
recognized in accumulated other comprehensive income were as follows.
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------- ---------- ----------
2004
U.S. Government agencies $26,787 $ 50 $(143)
States and political subdivisions 19,710 380 (80)
Corporate bonds 8,073 3 (72)
Mortgage-backed and related securities 41,470 374 (187)
------- ---- -----
Total debt securities 96,040 807 (482)
Other securities 2,939 30 --
------- ---- -----
Total $98,979 $837 $(482)
======= ==== =====
(Continued)
29
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 2 - SECURITIES (Continued)
The table below indicates the length of time individual securities have been in
a continuous unrealized loss position at December 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
agencies obligations 23 $19,299 $(134) 1 $ 491 $ (9) 24 $19,790 $(143)
State and political
subdivisions 13 5,452 (44) 3 1,654 (36) 16 7,106 (80)
Corporate bonds 1 4,962 (37) 1 2,978 (35) 2 7,940 (72)
Mortgage-backed
securities and related 46 12,896 (78) 13 5,492 (109) 59 18,388 (187)
-- ------- ----- -- ------- ----- --- ------- -----
Total temporarily
impaired securities 83 $42,609 $(293) 18 $10,615 $(189) 101 $53,224 $(482)
== ======= ===== == ======= ===== === ======= =====
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.
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
-------- ---------- ----------
2003
U.S. government agencies $ 38,597 $ 251 $ (47)
States and political subdivisions 21,076 580 (93)
Corporate bonds 8,215 11 (45)
Mortgage-backed and related securities 38,201 621 (170)
-------- ------ -----
Total debt securities 106,089 1,463 (355)
Other securities 2,458 28 --
-------- ------ -----
Total $108,547 $1,491 $(355)
======== ====== =====
(Continued)
30
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 2 - SECURITIES (Continued)
The fair value of debt securities, at year-end 2004 by contractual maturity were
as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
Fair
Value
-------
Due in one year or less $ 2,290
Due from one to five years 14,046
Due from five to ten years 13,055
Due after ten years 25,179
Mortgage-backed securities 41,470
-------
$96,040
=======
Sales of securities were as follows.
2004 2003 2002
------- ------- ------
Proceeds $37,039 $27,866 $4,975
Gross gains -- 53 30
Gross losses (4) (2) (4)
At year-end 2004 and 2003, there were no holdings of securities of any one
issuer, other than the U.S. government and agencies thereof, in an amount
greater than 10% of shareholders' equity.
Securities with a carrying amount of $86,204 and $55,945 at year-end 2004 and
2003 were pledged to secure public deposits and other obligations.
(Continued)
31
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 3 - LOANS AND LEASES
Year-end loans and leases were as follows:
2004 2003
-------- --------
Commercial and industrial $ 49,184 $ 51,709
Commercial real estate 175,796 156,836
Residential real estate and home equity 170,010 117,098
Real estate construction and land development 34,199 30,120
Consumer and credit card 51,844 44,467
Direct lease financing 1,405 3,932
-------- --------
482,438 404,162
Add (deduct): Net deferred loan origination costs 960 1,114
Unearned income on leases (93) (329)
-------- --------
Total loans receivable $483,305 $404,947
======== ========
Loans to principal officers, directors, and their related affiliates in 2004
were as follows.
Beginning balance $ 14,548
New loans 629
Repayments (2,771)
--------
Ending balance $ 12,406
========
(Continued)
32
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses was as follows.
2004 2003 2002
------- ------- -------
Beginning balance of period $ 4,331 $ 4,094 $ 3,596
Provision for loan and lease losses 1,696 1,418 2,950
Loans charged off (1,385) (1,345) (2,650)
Recoveries 176 164 198
------- ------- -------
Balance at end of period $ 4,818 $ 4,331 $ 4,094
======= ======= =======
Impaired loans were as follows at year-end.
2004 2003
---- ------
Year-end loans with no allocated allowance for loan losses $ -- $ --
Year-end loans with allocated allowance for loan losses 601 1,813
---- ------
Total $601 $1,813
==== ======
Amount of the allowance for loan losses allocated $360 $ 580
==== ======
2004 2003 2002
---- ------ ------
Average of impaired loans during the year $709 $2,731 $5,204
Interest income recognized during impairment -- -- 259
Cash basis interest income recognized -- -- 234
Nonperforming loans were as follows at year-end.
2004 2003
------ ------
Loans past due over 90 days still accruing interest $1,544 $1,252
Nonaccrual loans 1,879 1,614
------ ------
Total $3,423 $2,866
====== ======
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans. Interest income that would have been recognized had nonperforming loans
performed in accordance with contractual terms totaled $128,000, $163,000 and
$259,000 for years ended December 31, 2004, 2003 and 2002, respectively.
(Continued)
33
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2004 2003
------- -------
Land $ 667 $ 667
Buildings 8,427 8,504
Furniture and equipment 8,118 7,680
------- -------
17,212 16,851
Accumulated depreciation (8,366) (6,904)
------- -------
$ 8,846 $ 9,947
======= =======
DCB has entered into operating leases agreements for branch offices and
equipment, which expire at various dates through 2023, and provide options for
renewals. Rental expense on lease commitments for 2004, 2003 and 2002 amounted
to $914, $834 and $784. At December 31, 2004, the total future minimum lease
commitments under these leases are summarized as follows.
2005 $ 707
2006 637
2007 579
2008 380
2009 312
Thereafter 3,125
------
$5,740
======
NOTE 6 - INTEREST-BEARING DEPOSITS
Year-end interest-bearing deposits were as follows.
2004 2003
-------- --------
Interest-bearing demand $105,635 $ 38,987
Money market 86,248 120,852
Savings deposits 58,527 60,626
Time deposits
In denominations under $100,000 71,198 79,142
In denominations of $100,000 or more 67,818 64,268
-------- --------
$389,426 $363,875
======== ========
(Continued)
34
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 6 - INTEREST-BEARING DEPOSITS (Continued)
Scheduled maturities of time deposits for the next five years were as follows:
2005 $ 76,406
2006 48,079
2007 8,421
2008 2,874
2009 3,236
--------
$139,016
========
NOTE 7 - BORROWED FUNDS
Federal funds purchased and other short-term borrowings at December 31, 2004
were comprised of a demand note to the U.S. Treasury totaling $1,515 and federal
funds purchased totaling $3,700. At December 31, 2003, short-term borrowings
were comprised of a demand note to the U.S. Treasury totaling $1,419 and federal
funds purchased totaling $3,200.
Advances from the Federal Home Loan Bank ("FHLB") at year-end were as follows.
Interest Maturing year
rate range ending December 31, 2004 2003
---------- ------------------- ---------- ---------
(Dollars in Thousands)
1.57% - 2.73% 2004 $ -- $ 4,000
2.38% 2005 25,775 4,000
2.76% 2006 3,000 3,000
2.79% - 4.21% 2008 4,107 --
2.59% - 5.44% Thereafter 62,931 38,693
------- -------
$95,813 $49,693
======= =======
Weighted average
interest rate 3.56% 3.71%
======= =======
As a member of the FHLB of Cincinnati, the Bank has the ability to obtain
additional borrowings based on DCB Financial's investment in FHLB stock and
other qualified collateral. FHLB advances are collateralized by a blanket pledge
of the Bank's residential mortgage loan portfolio and all shares of FHLB stock
totaling $139,963 and $2,856, respectively, at December 31, 2004 and $67,385 and
$2,359, respectively, at December 31, 2003.
(Continued)
35
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 7 - BORROWED FUNDS (Continued)
At year-end 2004, required annual principal payments on FHLB advances were as
follows:
2005 $25,775
2006 3,000
2008 4,107
2009 2,500
Thereafter 60,431
-------
$95,813
=======
NOTE 8 - RETIREMENT PLANS
The Corporation provides a 401(k) savings plan for all eligible employees. To be
eligible, an individual must have at least 1,000 hours of service during a one
year period and must be 20 or more years of age. Participants are permitted to
make voluntary contributions to the Plan of up to 10% of the individual's
compensation. The Corporation matches 50% of those contributions up to a maximum
match of 3% of the participant's compensation. The Corporation may also provide
additional discretionary contributions. Employee voluntary contributions are
vested at all times and Corporation contributions are fully vested after three
years. The 2004, 2003 and 2002 expense related to this plan was $128, $118 and
$184.
The Corporation maintains a deferred compensation plan for the benefit of
certain officers. The plan is designed to provide post-retirement benefits to
supplement other sources of retirement income such as social security and 401(k)
benefits. The amount of each officer's benefit will generally depend on their
salary, and their length of employment. The Corporation accrues the cost of
these deferred compensation plan during the working careers of the officers.
Expense under this plan totaled $90 in 2004. In 2003 and 2002, a number of
covered participants withdrew from the plan, resulting in recovery of prior
accrued costs totaling $136 and $30, respectively. Total accrued liability under
this plan was $366 and $269 at year end 2004 and 2003, respectively.
The Corporation has purchased insurance contracts on the lives of the
participants in the supplemental post-retirement benefit plan and has named the
Corporation as the beneficiary. While no direct connection exists between the
supplemental post-retirement benefit plan and the life insurance contracts, it
is management's current intent that the earnings on the insurance contracts be
used as a funding source for the plan.
(Continued)
36
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 9 - INCOME TAXES
Income tax expense was as follows.
2004 2003 2002
------ ------ ------
Current $3,053 $2,078 $2,129
Deferred (80) 209 (93)
------ ------ ------
$2,973 $2,287 $2,036
====== ====== ======
The difference between financial statement tax provision and amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes was as follows.
2004 2003 2002
------ ------ ------
Income taxes computed at the statutory federal
income tax rate $3,382 $2,487 $2,053
Tax exempt income (468) (195) (180)
Other 59 (5) 163
------ ------ ------
$2,973 $2,287 $2,036
====== ====== ======
Effective tax rate 29.9% 31.3% 33.7%
====== ====== ======
Year-end deferred tax assets and liabilities were due to the following.
2004 2003
------- -------
Deferred tax assets
Allowance for loan and lease losses $ 1,638 $ 1,472
Deferred compensation 74 95
------- -------
1,712 1,567
Deferred tax liabilities
FHLB stock dividends (282) (246)
Unrealized gain on securities available for sale (121) (387)
Deferred loan origination fees and costs (102) (38)
Leases (935) (1,020)
Accumulated depreciation (1,208) (876)
Mortgage servicing rights (34) (50)
Other (10) (10)
------- -------
(2,692) (2,627)
------- -------
Net deferred tax liability $ (980) $(1,060)
======= =======
(Continued)
37
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 10 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
Some financial instruments such as loan commitments, credit lines, letters of
credit and overdraft protection are issued to meet customer financing needs.
These financing arrangements to provide credit typically have pre-determined
expiration dates, but can be withdrawn if certain conditions are not met. The
commitments may expire without ever having been drawn on by the customer.
Off-balance-sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies are used for loans, including obtaining collateral at exercise of the
commitment.
The contractual amount of financing instruments with off-balance-sheet risk was
as follows at year-end.
2004 2003
----------------- -----------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
------ -------- ------ --------
Commitments to extend credit $4,978 $51,787 $2,501 $36,503
Unused lines of credit and letters of credit -- 57,792 -- 42,380
Commitments to make loans are generally made for periods of 30 days or less. The
fixed rate loan commitments have interest rates ranging from 4.75% to 7.00% for
2004 and 1.75% to 8.13% in 2003. Maturities for these fixed rate commitments
range from up to 1 to 30 years for both years.
LEGAL PROCEEDINGS
There is no pending litigation, other than routine litigation incidental to the
business of the Corporation and Bank. Further, there are no material legal
proceedings in which any director, executive officer, principal shareholder or
affiliate of the Corporation is a party or has a material interest, which is
adverse to the Corporation or Bank. Finally, there is no litigation in which the
Corporation or Bank is involved which is expected to have a material adverse
impact on the financial position or results of operations of the Corporation or
Bank.
NOTE 11 - REGULATORY CAPITAL
Banks and bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, prompt corrective-action regulations involve
quantitative measures of assets, liabilities and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure
to meet various capital requirements can initiate regulatory action.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized,
(Continued)
38
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
although these terms are not used to represent overall financial condition. If
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is asset
growth and expansion, and plans for capital restoration are required.
The Corporation and the Bank met the well-capitalized requirements, as
previously defined, at December 31, 2004. The classification as well capitalized
is made periodically by regulators and is subject to change over time.
Management does not believe any condition or events have occurred since the
latest notification by regulators that would have changed the classification.
(Continued)
39
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 11 - REGULATORY CAPITAL (Continued)
Actual and required capital ratios are presented below at year-end.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
2004
Total capital to risk-weighted assets
Consolidated $58,834 11.6% $40,760 8.0% $50,950 10.0%
Bank 55,563 10.9 40,727 8.0 50,909 10.0
Tier 1 (core) capital to risk
weighted assets
Consolidated 54,016 10.6 20,380 4.0 30,570 6.0
Bank 35,745 7.0 20,364 4.0 30,545 6.0
Tier 1 (core) capital to average assets
Consolidated 54,016 8.8 24,690 4.0 30,863 5.0
Bank 35,745 5.8 24,690 4.0 30,863 5.0
2003
Total capital to risk-weighted assets
Consolidated $53,260 11.5% $37,047 8.0% $46,309 10.0%
Bank 53,565 11.6 36,879 8.0 46,099 10.0
Tier 1 (core) capital to risk
weighted assets
Consolidated 48,921 10.6 18,524 4.0 27,786 6.0
Bank 36,226 7.9 18,440 4.0 27,659 6.0
Tier 1 (core) capital to average assets
Consolidated 48,921 8.8 22,194 4.0 27,742 5.0
Bank 36,226 6.8 22,260 4.0 26,575 5.0
Banking regulations limit capital distributions by the Bank. Generally, capital
distributions are limited to undistributed net income for the current and prior
two years. In addition, dividends may not reduce capital levels below the
minimum regulatory requirements disclosed above. Currently, the Bank has
exceeded the requirements discussed above and must obtain prior regulatory
approval before declaring any proposed dividend distributions.
(Continued)
40
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 12 - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year-end.
2004 2003
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Financial assets
Cash and cash equivalents $ 11,238 $ 11,238 $ 20,349 $ 20,349
Securities available for sale 98,979 98,979 108,547 108,547
Loans held for sale 1,122 1,122 -- --
Loans (excluding leases) 481,992 480,637 401,344 400,989
Accrued interest receivable 2,364 2,364 2,131 2,131
Financial liabilities
Noninterest-bearing deposits $ (65,148) $ (65,148) $ (78,477) $ (78,477)
Interest-bearing deposits (389,426) (391,490) (363,875) (365,804)
Federal funds purchased and
other short-term borrowings (5,215) (5,215) (4,619) (4,619)
FHLB advances (95,813) (98,908) (49,693) (51,298)
Accrued interest payable (548) (548) (552) (552)
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for individual securities or for equivalent securities. For fixed rate
loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. Fair
values for impaired loans are estimated using discounted cash flow analysis or
underlying collateral values. Fair value of loans held for sale is based on
market quotes. Fair values of long-term FHLB advances are based on current rates
for similar financing. Fair values of off-balance-sheet items are based on the
current fee or cost that would be charged to enter into or terminate such
agreements, which are not material.
(Continued)
41
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 13 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of DCB Financial Corp was as follows.
CONDENSED BALANCE SHEETS
December 31, 2004 and 2003
2004 2003
------- -------
ASSETS
Cash and cash equivalents $ 67 $ 570
Investment in Bank subsidiary 35,970 36,977
Investment in unconsolidated affiliate 295 1,951
Subordinated note from Bank subsidiary 16,152 13,500
Other assets 1,972 1,693
------- -------
Total assets $54,456 $54,691
======= =======
LIABILITIES
Other liabilities $ 195 $ 5,002
SHAREHOLDERS' EQUITY 54,261 49,689
------- -------
Total liabilities and shareholders' equity $54,456 $54,691
======= =======
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
------ ------ ------
Income
Equity in earnings of Bank subsidiary $5,411 $5,586 $4,216
Gain on sale of ProCentury Corporation 2,638 -- --
Other 46 68 80
------ ------ ------
Total income 8,095 5,654 4,296
Operating expenses 323 625 293
------ ------ ------
Income before income taxes 7,772 5,029 4,003
Federal Income tax expense 797 -- --
------ ------ ------
NET INCOME $6,975 $5,029 $4,003
====== ====== ======
(Continued)
42
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 14 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,975 $ 5,029 $ 4,003
Adjustments to reconcile net income
to cash provided by operations:
Excess distributions from Bank subsidiary 452 1,102 7,203
Net change in other assets and liabilities (3,330) 4,885 (47)
------- ------- --------
Net cash from operating activities 4,097 11,016 11,159
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in unconsolidated affiliate (100) -- --
Issuance of subordinated note receivable (2,652) (3,500) (10,000)
------- ------- --------
Net cash from investing activities (2,752) (3,500) (10,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (1,848) (1,540) (1,392)
Purchase of treasury stock, net -- (5,464) (201)
------- ------- --------
Net cash from financing activities (1,848) (7,004) (1,593)
------- ------- --------
Net change in cash and cash equivalents (503) 512 (434)
Cash and cash equivalents at beginning of year 570 58 492
------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 67 $ 570 $ 58
======= ======= ========
The Corporation sold its investment of 450,000 shares in ProCentury Corporation,
a specialty property and casualty insurance holding company based in
Westerville, OH, as a part of ProCentury's initial public offering (IPO) on
April 20, 2004. DCB Financial Corp recognized a pre-tax gain of approximately
$2.6 million on the sale. DCBF retained a $295,000 investment in ProAlliance, a
specialty line insurance company, which was spun-off from ProCentury in the IPO.
(Continued)
43
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables summarizes the Corporation's quarterly results for the
years ended December 31, 2004 and 2003.
THREE MONTHS ENDED
---------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
2004: (In thousands, except per share data)
- -----
Total interest income $7,660 $7,071 $6,385 $6,697
Total interest expense 2,258 1,946 1,799 1,799
------ ------ ------ ------
Net interest income $5,402 $5,125 $4,586 $4,898
Provision for losses on loans 378 497 443 378
Noninterest income 1,267 1,316 3,874 1,161
Noninterest expense 4,007 3,828 4,328 3,822
------ ------ ------ ------
Income before income taxes $2,284 $2,116 $3,689 $1,859
Federal income tax expense 680 609 1,131 553
Net income $1,604 $1,507 $2,558 $1,306
====== ====== ====== ======
Earnings per share:
Basic $ 0.41 $ 0.38 $ 0.65 $ 0.33
Diluted $ 0.41 $ 0.38 $ 0.65 $ 0.33
(Continued)
44
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
(Dollars in thousands)
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
THREE MONTHS ENDED
---------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
2003: (In thousands, except per share data)
- -----
Total interest income $6,643 $6,558 $6,621 $6,769
Total interest expense 1,958 2,103 1,859 2,053
------ ------ ------ ------
Net interest income $4,685 $4,455 $4,762 $4,716
Provision for losses on loans 355 375 355 333
Noninterest income 1,596 1,440 1,887 1,701
Noninterest expense 4,033 4,039 4,517 3,919
------ ------ ------ ------
Income before income taxes $1,893 $1,481 $1,777 $2,165
Federal income tax expense 582 469 569 667
Net income $1,311 $1,012 $1,208 $1,498
====== ====== ====== ======
Earnings per share:
Basic $ 0.33 $ 0.26 $ 0.31 $ 0.36
Diluted $ 0.33 $ 0.26 $ 0.31 $ 0.36
(Continued)
45
REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
DCB Financial Corp
Lewis Center, Ohio
We have audited the accompanying consolidated balance sheets of DCB Financial
Corp as of December 31, 2004, and 2003, and the related consolidated statements
of income, changes in shareholders' equity, comprehensive income, and cash flows
for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financials of DCB Financial Corp as of December 31,
2002 and the year then ended were audited by other auditors who expressed an
unqualified opinion on those financial statements in their report dated
February 21, 2003.
We conducted our audit in accordance with the standards of the Public Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DCB Financial Corp
as of December 31, 2004, and 2003, and the results of its operations and its
cash flows for each of the then years ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ GRANT THORNTON, LLP
- ----------------------------------------
Grant Thornton, LLP
Cincinnati, Ohio
March 11, 2005
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
DCB Financial Corp
Delaware, Ohio
We have audited the accompanying consolidated statements of income,
comprehensive income, changes in shareholders' equity and cash flows of DCB
Financial Corp for the year ended December 31, 2002. These financial statements
are the responsibility of DCB Financial Corp's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, DCB Financial Corp's results of operations and
cash flows for the year ended December 31, 2002, in conformity with U.S.
generally accepted accounting principles.
Crowe Chizek and Company LLC
Columbus, Ohio
February 21, 2003
47