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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-22387
DCB Financial Corp
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1469837
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
110 Riverbend Avenue, Lewis Center, Ohio 43035
----------------------------------------------
(Address of principal executive offices)
(740) 657-7000
------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act).
Yes [X] No [ ]
As of May 6, 2005, the latest practicable date, 3,934,760 shares of the
registrant's no par value common stock were issued and outstanding.
DCB FINANCIAL CORP
FORM 10-Q
QUARTER ENDED MARCH 31, 2005
Table of Contents
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1 - Financial Statements
Consolidated Balance Sheets..................................................... 3
Consolidated Statements of Income .............................................. 4
Consolidated Statements of Comprehensive Income ................................ 5
Condensed Consolidated Statements of Cash Flows................................. 6
Notes to the Condensed Consolidated Financial Statements........................ 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 14
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk............. 18
ITEM 4 - Controls and Procedures ............................................... 19
PART II - OTHER INFORMATION..................................................... 20
SIGNATURES ................................................................... 22
DCB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Item 1. Financial Statements
March 31, December 31,
2005 2004
----------- ------------
(unaudited)
ASSETS
Cash and due from financial institutions $ 12,648 $ 11,238
Securities available for sale 97,322 98,979
Loans held for sale 1,836 1,122
Loans and leases 507,436 483,305
Less allowance for loan and lease losses (5,115) (4,818)
--------- ---------
Net loans and leases 502,321 478,487
Premises and equipment, net 8,636 8,846
Bank owned life insurance 8,553 8,457
Accrued interest receivable and other assets 5,336 4,556
--------- ---------
Total assets $ 636,652 $ 611,685
========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 65,302 $ 65,148
Interest-bearing 402,092 389,426
--------- ---------
Total deposits 467,394 454,574
Federal funds purchased and other short-term borrowings 22,623 5,215
Federal Home Loan Bank advances 89,419 95,813
Accrued interest payable and other liabilities 2,222 1,822
--------- ---------
Total liabilities 581,658 557,424
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued at March 31, 2005 and December 31, 2004 3,780 3,780
Retained earnings 59,065 57,862
Treasury stock, 338,440 shares at March 31, 2005 and
December 31, 2004 (7,616) (7,616)
Accumulated other comprehensive income (loss) (235) 235
--------- ---------
Total shareholders' equity 54,994 54,261
--------- ---------
Total liabilities and shareholders' equity $ 636,652 $ 611,685
========= =========
See notes to the consolidated financial statements.
3.
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
------------------
2005 2004
------- -------
INTEREST AND DIVIDEND INCOME
Loans $ 7,218 $ 5,771
Taxable securities 760 733
Tax-exempt securities 184 186
Federal funds sold and other - 6
------- -------
Total interest income 8,162 6,696
INTEREST EXPENSE
Deposits 1,818 1,238
Borrowings 850 560
------- -------
Total interest expense 2,668 1,798
NET INTEREST INCOME 5,494 4,898
Provision for loan and lease losses 470 378
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 5,024 4,520
NONINTEREST INCOME
Service charges on deposit accounts 571 564
Trust department income 165 197
Net loss on sales of securities - (3)
Net loss on sales of assets (12) (22)
Gains on sale of loans 49 30
Gain on sale of investment in unconsolidated affiliate 184 -
Treasury management fees 101 123
Data processing servicing fees 73 62
Other 286 210
------- -------
1,417 1,161
NONINTEREST EXPENSE
Salaries and other employee benefits 2,212 1,926
Occupancy and equipment 880 970
Professional services 182 64
Advertising 87 61
Postage, freight and courier 94 112
Supplies 61 32
State franchise taxes 108 127
Other 474 531
------- -------
4,098 3,823
------- -------
INCOME BEFORE INCOME TAXES 2,343 1,858
Federal income tax expense 707 552
------- -------
NET INCOME $ 1,636 $ 1,306
======= =======
Basic and diluted earnings per common share $ 0.42 $ 0.33
======= =======
See notes to the consolidated financial statements.
4.
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
------------------
2005 2004
------- -------
Net income $ 1,636 $ 1,306
Less reclassification for realized losses on sale
of securities included in operations,
net of tax effects - 2
Unrealized gains (losses) on securities
available for sale, net of tax effects (470) 214
------- -------
Comprehensive income $ 1,166 $ 1,522
======= =======
See notes to the consolidated financial statements.
5.
DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
--------------------
2005 2004
-------- --------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 976 $ 273
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Securities available for sale
Purchases (8,033) (10,344)
Maturities, principal payments and calls 4,464 3,841
Sales 5,020 17,132
Net change in loans (24,341) (10,146)
Premises and equipment expenditures (77) (155)
-------- --------
Net cash flows provided by (used in) investing activities (22,967) 328
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net change in deposits 12,820 (7,000)
Net change in federal funds purchased and other short-term borrowings 17,408 (3,864)
Proceeds (repayment) of Federal Home Loan Bank advances (6,394) 4,538
Cash dividends paid (433) (392)
-------- --------
Net cash provided by (used in) financing activities 23,401 (6,718)
-------- --------
Net change in cash and cash equivalents 1,410 (6,117)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,238 20,349
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,648 $ 14,232
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest on deposits and borrowings $ 2,292 $ 1,714
Cash dividends declared but unpaid $ 433 $ 397
See notes to the consolidated financial statements.
6.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of DCB Financial Corp (the "Corporation") at March 31,
2005, and its results of operations and cash flows for the three month periods
ended March 31, 2005 and 2004. All such adjustments are normal and recurring in
nature. The accompanying consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q and, therefore, do not purport to
contain all necessary financial disclosures required by accounting principles
generally accepted in the United States of America that might otherwise be
necessary in the circumstances, and should be read in conjunction with the
consolidated financial statements, and notes thereto, included in its 2004
Annual Report. Refer to the accounting policies of the Corporation described in
the Notes to Consolidated Financial Statements contained in the Corporation's
2004 Annual Report. The Corporation has consistently followed these policies in
preparing this Form 10-Q.
The accompanying consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiary, The Delaware County Bank and Trust
Company (the "Bank"). All significant intercompany accounts and transactions
have been eliminated in consolidation. Management considers the Corporation to
operate within one business segment, banking.
To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions based on available information. These estimates and assumptions
affect amounts reported in the financial statements and disclosures provided,
and future results could differ. The allowance for loan and lease losses, fair
values of financial instruments and status of contingencies are particularly
subject to change.
Income tax expense is based on the effective tax rate expected to be applicable
for the entire year. Deferred tax assets and liabilities are the expected future
tax amounts for the temporary differences between carrying amounts and tax bases
of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
Earnings per common share is net income divided by the weighted average number
of shares of common stock outstanding during the period. The basic weighted
average number of common shares outstanding was 3,934,760 and 3,934,760 for the
three months ended March 31, 2005 and 2004. Diluted earnings per common share is
computed including the dilutive effect of additional potential common shares
under stock options. The diluted weighted average number of common shares
outstanding was 3,935,922 and 3,934,760 for the three months ended March 31,
2005 and 2004.
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 employees 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. Additionally, during the three month period ended March
31, 2005, 3,091 shares were issued under the plan at a price of $27.50.
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.
7.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
The Corporation utilizes APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized for the plan. Had compensation cost for the Corporation's stock
option plan been determined based on the fair value at the grant dates for
awards under the plan 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:
Stock Option Plan (continued)
Three Months Ended
March 31,
2005
(In thousands, except per share
data)
NET EARNINGS As reported $ 1,636
Stock-based compensation, net of tax (2)
-------
Pro-forma $ 1,634
=======
EARNINGS PER SHARE
BASIC As reported $ 0.42
Stock-based compensation, net of tax -
-------
Pro-forma $ 0.42
=======
DILUTED As reported $ 0.42
Stock-based compensation, net of tax -
-------
Pro-forma $ 0.42
=======
A summary of the status of the Corporation's stock option plan as of March 31,
2005 and December 31, 2004 and changes during the periods then ended are
presented below:
Three Months Ended
March 31,
2005
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Outstanding at beginning of year 15,105 $ 23.40
Granted 3,091 27.50
Exercised - -
Forfeited (154) 23.40
------ -------
Outstanding at end of period 18,042 $ 24.10
====== =======
Options exercisable at period end 639 23.40
Weighted-average fair value of options $ 3.44
=======
granted during the period
8.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
Stock Option Plan (continued)
Year Ended
December 31,
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 $ 3.44
======
granted during the year
The following information applies to options outstanding at March 31, 2005:
NUMBER OUTSTANDING RANGE OF EXERCISE PRICES
18,042 $23.40 - $27.50
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.
9.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
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
annual period that begins after June 15, 2005, or January 1, 2006 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.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
DCB's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
follow general practices within the financial services industry. The application
of these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions, and judgments are based on
information available as of the date of the financial statements; as this
information changes, the financial statements could reflect different estimates,
assumptions, and judgments.
The most significant accounting policies followed by the Corporation are
presented in Note 1 of Notes to Consolidated Financial Statements contained in
the Corporation's 2004 Annual Report. These policies, along with the disclosures
presented in the other financial statement notes and in this financial review,
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.
10.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 2 - SECURITIES
The amortized cost and estimated fair values of securities available for sale
were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
-----------------March 31, 2005----------------
U.S. government agencies $ 25,825 $ 27 $ (333) $ 25,519
States and political subdivisions 21,288 269 (157) 21,400
Corporate bonds 8,140 1 (77) 8,064
Mortgage-backed securities 39,490 250 (360) 39,380
-------- -------- -------- --------
Total debt securities 94,743 547 (927) 94,363
Other securities 2,934 25 - 2,959
-------- -------- -------- --------
Total $ 97,677 $ 572 $ (927) $ 97,322
======== ======== ======== ========
The table below indicates the length of time individual securities have been in
a continuous unrealized loss position at March 31, 2005:
(Less than 12 months) (12 months or longer) Total
Description of Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized
Securities investments value losses investments value losses investments value losses
- -------------- ----------- ------- ---------- ----------- ------- ---------- ----------- ------- ----------
(Dollars in thousands)
U.S. Government and
agency obligations 23 $20,891 $ (238) 6 $ 3,685 $ (95) 29 $24,576 $ (333)
State and municipal
obligations 13 6,371 (89) 8 3,353 (68) 21 9,724 (157)
Corporate bonds - - - 2 7,933 (77) 2 7,933 (77)
Mortgage-backed
securities 57 18,613 (174) 18 7,859 (186) 75 26,472 (360)
-- ------- ------- ------- ------- ------- ------- ------- -------
Total temporarily
impaired securities 93 $45,875 $ (501) 34 $22,830 $ (426) 127 $68,705 $ (927)
== ======= ======= ======= ======= ======= ======= ======= =======
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
the securities approach maturity dates.
11.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
Substantially all mortgage-backed securities are backed by pools of mortgages
that are insured or guaranteed by the Federal National Mortgage Association
("FNMA"), the Government National Mortgage Association ("GNMA") or the Federal
Home Loan Mortgage Corporation ("FHLMC").
At March 31, 2005, there were no holdings of securities of any one issuer, other
than the U.S. government and its agencies, in an amount greater than 10% of
shareholders' equity.
The amortized cost and estimated fair value of debt securities at March 31,
2005, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because issuers may have the right to call or prepay
obligations. Mortgage-backed securities are shown separately since they are not
due at a single maturity date.
Available for sale
-----------------------
Amortized Fair
Cost Value
---------- ----------
Due in one year or less $ 4,282 $ 4,260
Due from one to five years 14,548 14,385
Due from five to ten years 12,741 12,664
Due after ten years 23,682 23,674
Mortgage-backed and related securities 39,490 39,380
---------- ----------
Total debt securities 94,743 94,363
Other securities 2,934 2,959
---------- ----------
Total $ 97,677 $ 97,322
========== ==========
NOTE 3 - LOANS AND LEASES
Loans and leases were as follows:
March 31,
2005
----------
Commercial and industrial $ 50,521
Commercial real estate 183,579
Residential real estate and home equity 176,602
Real estate construction and land development 38,926
Consumer and credit card 55,674
Lease financing, net 1,205
----------
506,507
Add (deduct): Net deferred loan origination costs 1,000
Unearned income on leases (71)
----------
Total loans receivable $ 507,436
==========
12.
DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses was as follows:
Three months ended
March 31,
--------------------
2005 2004
-------- --------
Balance at beginning of period $ 4,818 $ 4,331
Provision for loan losses 470 378
Loans charged off (194) (356)
Recoveries 21 58
-------- --------
Balance at end of period $ 5,115 $ 4,411
======== ========
Nonperforming loans were as follows:
March 31, December 31,
2005 2004
--------- ------------
Loans past due 90 days or more and still accruing $ 1,112 $ 1,544
Nonaccrual loans 1,939 1,879
-------- --------
Total $ 3,051 $ 3,423
======== ========
Impaired loans (most of which are included in nonperforming
loans above) were as follows:
Period-end loans with no allocated allowance for loan losses $ - $ -
Period-end loans with allocated allowance for loan losses 1,655 601
-------- --------
Total $ 1,655 $ 601
======== ========
Amount of the allowance for loan losses allocated $ 759 $ 360
======== ========
Average of impaired loans during the period $ 1,116 $ 709
======== ========
13.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
In the following pages, management presents an analysis of the consolidated
financial condition of DCB Financial Corp (the "Corporation") at March 31, 2005,
compared to December 31, 2004, and the consolidated results of operations for
the three months ended March 31, 2005, compared to the same period in 2004. This
discussion is designed to provide shareholders with a more comprehensive review
of the operating results and financial position than could be obtained from
reading the consolidated financial statements alone. This analysis should be
read in conjunction with the consolidated financial statements and related
footnotes and the selected financial data included elsewhere in this report.
FORWARD-LOOKING STATEMENTS
Certain statements in this report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, such as
statements relating to the financial condition and prospects, lending risks,
plans for future business development and marketing activities, capital spending
and financing sources, capital structure, the effects of regulation and
competition, and the prospective business of both the Corporation and its
wholly-owned subsidiary The Delaware County Bank & Trust Company (the "Bank").
Where used in this report, the word "anticipate," "believe," "estimate,"
"expect," "intend," and similar words and expressions, related to the
Corporation or the Bank or their respective management, identify forward-looking
statements. Such forward-looking statements reflect the current views of the
Corporation and are based on information currently available to the management
of the Corporation and the Bank and upon current expectations, estimates, and
projections about the Corporation and its industry, management's belief with
respect thereto, and certain assumptions made by management. These
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to: (i) significant increases in competitive pressure in the banking
and financial services industries; (ii) changes in the interest rate environment
which could reduce anticipated or actual margins; (iii) changes in political
conditions or the legislative or regulatory environment; (iv) general economic
conditions, either nationally or regionally (especially in central Ohio),
becoming less favorable than expected resulting in, among other things, a
deterioration in credit quality of assets; (v) changes occurring in business
conditions and inflation; (vi) changes in technology; (vii) changes in monetary
and tax policies; (viii) changes in the securities markets; and (ix) other risks
and uncertainties detailed from time to time in the filings of the Corporation
with the Commission.
The Corporation does not undertake, and specifically disclaims any obligation,
to publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $636,652 at March 31, 2005, compared to
$611,685 at December 31, 2004, an increase of $24,967, or 4.08%. The increase in
assets was mainly attributed to the loan growth the Corporation experienced
within its markets, particularly in commercial and residential real estate.
Cash and cash equivalents increased $1,410 from December 31, 2004 to March 31,
2005. Total securities decreased $1,657, or 1.67%, from $98,979 at December 31,
2004 to $97,322 at March 31, 2005. The decrease was the result of the proceeds
from sales, maturities, calls and principal repayments not being reinvested in
order to fund loan growth and to repay borrowings primarily, in the form of
Federal Home Loan Bank advances. The Corporation invests primarily in U.S.
Treasury notes, U.S. government agencies, municipal bonds, corporate obligations
and mortgage-backed securities.
14.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Mortgage-backed securities include Federal Home Loan Mortgage Corporation
("FHLMC"), Government National Mortgage Association ("GNMA") and Federal
National Mortgage Association ("FNMA") participation certificates. Securities
and investment securities classified as available for sale at March 31, 2005
totaled $97,322, or 100% of the total securities portfolio. Management
classifies securities as available for sale to provide the Corporation with the
flexibility to move funds into loans as demand warrants. The mortgage-backed
securities portfolio, totaling $39,380 at March 31, 2005, provides the
Corporation with a constant cash flow stream from principal repayments and
interest payments. The Corporation held no structured notes during any period
presented.
Total loans and leases increased $24,131, or 4.99%, from $483,305 at December
31, 2004 to $507,436 at March 31, 2005. The increase is attributed mainly to the
continued growth of residential real estate and home equity, real estate
construction and land development, and commercial real estate loans. Other loan
categories in which the Corporation participates, commercial, industrial, and
consumer financing, remained relatively stable or experienced small increases in
loans outstanding. The Bank's local market continues to experience increases in
the amount of commercial real estate development activity. The Bank has no
significant loan concentration in any one industry.
Total deposits increased $12,820, or 2.82%, from $454,574 at December 31, 2004
to $467,394 at March 31, 2005. This growth is mainly attributed to the increase
in public fund interest bearing deposit account balances which management
initiated during the quarter ending September 30, 2004. Noninterest-bearing
deposits increased $154, or 0.24%, while interest-bearing deposits increased
$12,666, or 3.25%. The Corporation continues to use borrowings to fund a
majority of its loan growth. Total borrowings increased to $112,042 from
$101,028 in order to fund the loan growth during the three months ended March
31, 2005. Typically, the Company utilizes 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. This matching principle is used to not only
provide funding, but also as a means of mitigating interest rate risk associated
with originating longer-term fixed rate loans. Continued reliance on borrowings
outside of normal deposit growth could increase the Corporation's overall cost
of funds.
COMPARISON OF RESULTS OF OPERATIONS
NET INCOME. Net income for the three months ended March 31, 2005 totaled $1,636,
compared to net income of $1,306 for the same period in 2004. Earnings per share
was $.42 for the three months ended March 31, 2005 compared to $.33 for the
three months ended March 31, 2004. The increase in earnings is mainly attributed
to the increase in net interest income due to the growth in earning assets.
NET INTEREST INCOME. Net interest income represents the amount by which interest
income on interest-earning assets exceeds interest paid or accrued on
interest-bearing liabilities. Net interest income is the largest component of
the Corporation's income, and is affected by the interest rate environment, the
volume, and the composition of interest-earning assets and interest-bearing
liabilities.
Net interest income was $5,494 for the three months ended March 31, 2005,
compared to $4,898 for the same period in 2004. The $596 increase in the first
quarter 2004 compared to 2003 was mainly attributed to an increase in earning
assets coupled with the rising rate of environment during the first quarter,
which allowed interest earning assets to reprice higher than interest bearing
liabilities. The Asset/Liability Management Committee, which is responsible for
determining deposit rates, continues to closely monitor the Bank's cost of funds
to take advantage of pricing and cash flow opportunities. Additionally, because
of the increased competition in the Bank's primary marketplace, management has
continued to recognize the importance of offering special rates on certain
deposit products. These special deposit rates tend to negatively affect the
Corporation's net interest margin. It is likely that these offerings will
continue to be offered to secure liquidity while maintaining market share.
15.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses represents the charge to income necessary to adjust the allowance
for loan and lease losses to an amount that represents management's assessment
of the losses 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.
The provision for loan and lease losses totaled $470 for the three months ended
March 31, 2005, compared to $378 for the same period in 2004. The growth in the
provision is reflective of the overall growth in the Corporation's loan
portfolio, and to a lesser extent, the increase in non-accrual loans between the
two periods. Non-accrual loans for the three months ended March 31, 2005 were
$1,939 compared to non-accrual loans of $1,487 for the same period in 2004. Net
charge-offs for the three months ended March 31, 2005 improved to $173, as
compared to $298 for the three months ended March 31, 2004. Annualized net
charge-offs for the three months ended March 31, 2005 were 0.14% compared to
0.29% at March 31, 2004. Delinquent loans over thirty days also improved from
period to period, decreasing to 1.53% at March 31, 2005 from 1.92% at March 31,
2004. Management will continue to monitor the credit quality of the lending
portfolio and will recognize additional provisions in the future to maintain the
allowance for loan and lease losses at an appropriate level. The allowance for
loan and lease losses increased to $5,115, or 1.01% of total loans and leases at
March 31, 2005, compared to $4,818, or 1.00% of total loans and leases at
December 31, 2004.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$256, or 22.05%, for the three months ended March 31, 2005, compared to the same
period in 2004. The change in non-interest revenues from period to period is
mainly attributed to an increase in NSF and overdraft charges, increases in
gains on loans originated for sale in the secondary market, and to a gain
recognized on the sale of an investment in an unconsolidated affiliate. In 2004,
the Company sold its investment in ProCentury Corporation and in return received
cash and shares of ProAlliance Corp., a specialty lines insurance company as
part of the proceeds. During the first quarter 2005, the Corporation received a
final accounting for the consideration received in the transaction and recorded
a $184 gain as a result thereof.
Total noninterest expense increased $275, or 7.19%, for the three months ended
March 31, 2005, compared to the same period in 2004. The increase was primarily
the result of increases in salaries and employee benefits attributable to an
increase in incentive compensation. Additionally, there was a substantial
increase in professional services due to expenses incurred related to Section
404 of the Sarbanes-Oxley Act of 2002 and related consulting. These increases in
operating expense were offset by a decrease in managed occupancy, postage,
freight and courier related, and state franchise tax expenses.
INCOME TAXES. The change of income tax expense is primarily attributable to the
increase in tax exempt earnings primarily offset by municipal securities and
increase in bank owned life insurance in income before income taxes. The
provision for income taxes totaled $707, for an effective tax rate of 30.18%,
for the three months ended March 31, 2005 and $552, for an effective tax rate of
29.71%, for the three months ended March 31, 2004.
LIQUIDITY
Liquidity is the ability of the Corporation to fund customers' needs for
borrowing and deposit withdrawals. The purpose of liquidity management is to
assure sufficient cash flow to meet all of the financial commitments and to
capitalize on opportunities for business expansion. This ability depends on the
financial strength, asset quality and types of deposit and investment
instruments offered by the Corporation to its customers. The Corporation's
principal sources of funds are deposits, loan and security repayments,
maturities of securities, sales of securities available for sale and other funds
provided by operations. The Bank also has the ability to borrow from the FHLB.
While scheduled loan repayments and
16.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
maturing investments are relatively predictable, deposit flows and early loan
and mortgage-backed security prepayments are more influenced by interest rates,
general economic conditions, and competition. The Corporation maintains
investments in liquid assets based upon management's assessment of (1) need for
funds, (2) expected deposit flows, (3) yields available on short-term liquid
assets and (4) objectives of the asset/liability management program.
Cash and cash equivalents increased $1,410, or 12.55%, to $12,648 at March 31,
2005 compared to $11,238 at December 31, 2004. Cash and equivalents represented
1.99% of total assets at March 31, 2005 and 1.84% of total assets at December
31, 2004. The Corporation has the ability to borrow funds from the Federal Home
Loan Bank and has various correspondent banking partners to purchase overnight
federal funds should the Corporation need to supplement its future liquidity
needs. Management believes the Corporation's liquidity position is adequate
based on its current level of cash, cash equivalents, core deposits, the
stability of its other funding sources, and the support provided by its capital
base.
CAPITAL RESOURCES
Total shareholders' equity increased $733 between December 31, 2004 and March
31, 2005. The increase was primarily due to period earnings of $1,636, partially
offset by the declaration of $433 in dividends and loss on securities designated
as available for sale totaling $470, net of tax.
Tier 1 capital is shareholders' equity excluding the unrealized gain or loss on
securities classified as available for sale and intangible assets. Total capital
includes Tier 1 capital plus the allowance for loan losses, not to exceed 1.25%
of risk weighted assets. Risk weighted assets are the Corporation's total assets
after such assets are assessed for risk and assigned a weighting factor defined
by regulation based on their inherent risk.
The Corporation and its subsidiaries meet all regulatory capital requirements.
The ratio of total capital to risk-weighted assets was 11.33% at March 31, 2005,
while the Tier 1 risk-based capital ratio was 10.37%. Regulatory minimums call
for a total risk-based capital ratio of 8.0%, at least half of which must be
Tier 1 capital. The Corporation's leverage ratio, defined as Tier 1 capital
divided by average assets, was 8.74% at March 31, 2005.
The following table sets forth the Corporation's obligations and commitments to
make future payments under contract as of March 31, 2005.
PAYMENT DUE BY YEAR
LESS THAN 1 MORE THAN 5
CONCTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
FHLB advances $ 89,419 $ 14,985 $ 9,490 $ 1,099 $ 63,845
Federal funds purchased and other
short-term borrowings 22,623 22,623
Operating Lease Obligations 5,563 530 1,216 692 3,125
Loan and Line of Credit Commitments 122,824 122,824 - - -
Other Long-Term Liabilities
Reflected on the Corporation's
Balance Sheet under GAAP - - - - -
-------- -------- -------- -------- --------
Total Contractual Obligations $240,429 $160,962 $ 10,706 $ 1,791 $ 66,970
======== ======== ======== ======== ========
In the opinion of management, all loan commitments equal or exceed market rates
of interest.
17.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 3. Quantitative and Qualitative Disclosure About Market Risk
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. Interest rate risk is the possibility that the
Corporation's financial condition will be adversely affected due to movements in
interest rates. The income of financial institutions is primarily derived from
the excess of interest earned on interest-earning assets over the interest paid
on interest-bearing liabilities. Accordingly, the Corporation places great
importance on monitoring and controlling interest rate risk. The measurement and
analysis of the exposure of the Corporation's primary operating subsidiary, The
Delaware County Bank and Trust Company, to changes in the interest rate
environment are referred to as asset/liability management. One method used to
analyze the Corporation's sensitivity to changes in interest rates is the "net
portfolio value" ("NPV") methodology.
NPV is generally considered to be the present value of the difference between
expected incoming cash flows on interest-earning and other assets and expected
outgoing cash flows on interest-bearing and other liabilities. For example, the
asset/liability model that the Corporation currently employs attempts to measure
the change in NPV for a variety of interest rate scenarios, typically for
parallel shifts of 100 to 300 basis points in market rates.
The Corporation's 2004 Annual Report includes a table depicting the changes in
the Corporation's interest rate risk as of December 31, 2004, as measured by
changes in NPV for instantaneous and sustained parallel shifts of -100 to +300
basis points in market interest rates. Management believes that no events have
occurred since December 31, 2004 that would significantly change their ratio of
rate sensitive assets to rate sensitive liabilities.
The Corporation's NPV is more sensitive to rising rates than declining rates.
From an overall perspective, such difference in sensitivity occurs principally
because, as rates rise, borrowers do not prepay fixed-rate loans as quickly as
they do when interest rates are declining. Thus, in a rising interest rate
environment, because the Corporation has fixed-rate loans in its loan portfolio,
the amount of interest the Corporation would receive on its loans would increase
relatively slowly as loans are slowly prepaid and new loans at higher rates are
made. Moreover, the interest the Corporation would pay on its deposits would
increase rapidly because the Corporation's deposits generally have shorter
periods for repricing. The Corporation can utilize various tools to reduce
exposure to changes in interest rates including offering floating versus fixed
rate products, or utilizing interest rate swaps. Additional consideration should
also be given to today's current interest rate levels. Several deposit products
are within 200 basis points of zero percent and other products within 300 basis
points. Should rates continue to decline, fewer liabilities could be repriced
down to offset potentially lower yields on loans. Thus decreases could also
impact future earnings and the Corporation's NPV.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making risk calculations.
18.
DCB FINANCIAL CORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
March 31, 2005, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of March
31, 2005, in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended March 31, 2005, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
19.
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended March 31, 2005
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
There are no matters required to be reported under this item.
20.
DCB FINANCIAL CORP
FORM 10-Q
Quarter ended March 31, 2005
PART II - OTHER INFORMATION
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits.
Exhibits - The following exhibits are filed as a part of this
report:
Exhibit No. Exhibit
- ----------- -------
3.1 Amended and Restated Articles of Incorporation of DCB Financial
Corp, incorporated by reference to the Company's Report on Form 10-Q
filed with the Commission on November 14, 2003.
3.2 Amended and Restated Articles of Incorporation of DCB Financial
Corp, incorporated by reference to the Company's Report on Form 10-Q
filed with the Commission on November 14, 2003.
4. Instruments Defining the Rights of Security Holders. (See Exhibits
3.1 and 3.2.)
10 Employment agreement by and between DCB Financial Corp, its
wholly-owned subsidiary The Delaware County Bank and Trust Company,
and Jeffrey Benton
31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
21
DCB FINANCIAL CORP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DCB FINANCIAL CORP
-------------------
(Registrant)
Date: May 6, 2005 /s/ Jeffrey Benton
-------------------
(Signature)
Jeffrey Benton
President and Chief Executive Officer
Date: May 6, 2005 /s/ John A. Ustaszewski
-----------------------
(Signature)
John A. Ustaszewski
Vice President and Chief Financial Officer
22
DCB FINANCIAL CORP
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Articles of Incorporation of DCB Financial
Corp, incorporated by reference to the Company's Report on Form
10-Q filed with the Commission on November 14, 2003.
3.2 Amended and Restated Articles of Incorporation of DCB Financial
Corp, incorporated by reference to the Company's Report on Form
10-Q filed with the Commission on November 14, 2003.
4 Instruments Defining the Rights of Security Holders.
(See Exhibits 3.1 and 3.2.)
10 Employment agreement by and between DCB Financial Corp, its
wholly-owned subsidiary The Delaware County Bank and Trust
Company, and Jeffrey Benton.
31.1 Certification of Chief Executive Officer pursuant to section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. 1350, as enacted Pursuant to section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. 1350, as enacted Pursuant to section 906
of the Sarbanes-Oxley Act of 2002.
23