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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, 1998
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)
41 North Sandusky Street, Delaware, Ohio 43015
----------------------------------------------
(Address of principal executive offices)
(740) 363-1133
-------------------------------
(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.
X Yes No
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common stock, no par value Outstanding at May 7, 1998:
4,198,200 common shares
2
DCB FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
- --------------------------------------------------------------------------------
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements Page
----
Consolidated Balance Sheets............................................... 3
Consolidated Statements of Income......................................... 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity................................................. 5
Condensed Consolidated Statements of Cash Flows........................... 6
Notes to the Consolidated Financial Statements............................ 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 12
ITEM 3 - Quantitative and Qualitative Disclosure About Market Risk........ 17
PART II - OTHER INFORMATION............................................... 18
SIGNATURES................................................................ 19
3
DCB FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------
Item 1. Financial Statements
--------------------
March 31, December 31,
1998 1997
---- ----
ASSETS
Cash and due from banks $ 15,466 $ 14,283
Federal funds sold 10,250 11,000
-------- --------
Total cash and cash equivalents 25,716 25,283
Securities available for sale, at fair value 56,615 53,935
Securities held to maturity (estimated fair values of $53,518 at
March 31, 1998 and $54,158 at December 31, 1997) 52,979 53,834
Loans and leases 232,650 228,634
Less allowance for loan and lease losses (1,904) (1,842)
-------- --------
Net loans and leases 230,746 226,792
Premises and equipment, net 3,687 3,756
Accrued interest receivable and other assets 5,277 3,518
-------- --------
Total assets $375,020 $367,118
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 50,757 $ 50,969
Interest-bearing 279,004 271,515
-------- --------
Total deposits 329,761 322,484
Borrowed funds 7,000 7,005
Accrued interest payable and other liabilities 2,221 1,589
-------- --------
Total liabilities 338,982 331,078
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,779 3,779
Retained earnings 33,367 32,432
Treasury stock, 65,000 shares at March 31, 1998 and
20,000 shares at December 31, 1997, at cost (1,357) (416)
Unrealized gain on securities available for sale 249 245
-------- --------
Total shareholders' equity 36,038 36,040
-------- --------
Total liabilities and shareholders' equity $375,020 $367,118
======== ========
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
3.
4
DCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
- ----------------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
1998 1997
---- ----
INTEREST INCOME
Loans, including fees $5,077 $4,725
Securities
Taxable 1,623 1,316
Tax-exempt 90 83
Other 136 167
------ ------
Total interest income 6,926 6,291
------ ------
INTEREST EXPENSE
Deposits 3,315 2,800
Borrowings 90 87
------ ------
Total interest expense 3,405 2,887
------ ------
NET INTEREST INCOME 3,521 3,404
Provision for loan losses 96 96
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 3,425 3,308
NONINTEREST INCOME
Service charges on deposit accounts 302 279
Data service fees 94 77
Securities gains -- 8
Net gains from sales of loans 188 47
Other 451 366
------ ------
Total noninterest income 1,035 777
NONINTEREST EXPENSE
Salaries and other employee benefits 1,403 1,211
Occupancy 212 197
Equipment 337 182
State franchise taxes 130 123
Other 665 594
------ ------
Total noninterest expenses 2,747 2,307
------ ------
INCOME BEFORE INCOME TAXES 1,713 1,778
Provision for income taxes 566 584
------ ------
NET INCOME 1,147 1,194
------ ------
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain/(loss) on available for sale securities
arising during the period 4 (158)
Reclassification adjustment for amounts realized on
securities sales included in net income -- 8
------ ------
COMPREHENSIVE INCOME $1,151 $1,044
====== ======
EARNINGS PER COMMON SHARE $ .27 $ 0.28
====== ======
- --------------------------------------------------------------------------------
(Continued)
4.
5
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
1998 1997
---- ----
Balance at beginning of period $36,040 $32,579
Net income 1,147 1,194
Dividends declared ($.05 per share in 1998 and
$.1167 per share in 1997) (212) (499)
Purchase of 45,000 shares of treasury stock (941) --
Change in unrealized gain/loss on
securities available for sale, net of tax 4 (150)
------- -------
Balance at end of period $36,038 $33,124
======= =======
- --------------------------------------------------------------------------------
(Continued)
5.
6
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- -------------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
1998 1997
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES $ (1,431) $ 1,518
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (7,080) (10,618)
Maturities and repayments 4,363 3,630
Proceeds from sales -- 3,557
Securities held to maturity
Purchases (15,813) (14,920)
Maturities and repayments 16,880 13,595
Net change in banker's acceptances -- (4,956)
Net change in loans (2,522) (8,417)
Premises and equipment expenditures (83) (192)
Proceeds from sale of other real estate -- 201
-------- --------
Net cash from investing activities (4,255) (18,120)
Cash flows from financing activities
Net change in deposits 7,277 7,747
Net change in short-term borrowings (5) 569
Purchases of treasury stock (941) --
Cash dividends paid (212) (499)
-------- --------
Net cash from financing activities 6,119 7,817
-------- --------
Net change in cash and cash equivalents 433 (8,785)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 25,283 32,359
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,716 $ 23,574
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes $ -- $ --
Cash paid for interest 3,133 2,792
- --------------------------------------------------------------------------------
6.
7
DCB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
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,
1998, and its results of operations and cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
financial statements have been prepared in accordance with the instructions of
Form 10-Q and, therefore, do not purport to contain all necessary financial
disclosures required by generally accepted accounting principles that might
otherwise be necessary in the circumstances, and should be read in conjunction
with financial statements, and notes thereto, of the Corporation for the year
ended December 31, 1997, included in its 1997 annual report. Refer to the
accounting policies of the Corporation described in the notes to financial
statements contained in the Corporation's 1997 annual report. The Corporation
has consistently followed these policies in preparing this Form 10-Q.
The accompanying consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiary, The Delaware County Bank and Trust
Company (the "Bank"). The financial statements of the Bank include accounts of
its wholly-owned subsidiaries, D.C.B. Corporation and 362 Corp. All significant
intercompany accounts and transactions have been eliminated in consolidation.
On March 14, 1997, a holding company was formed through an internal
reorganization whereby each shareholder of the Bank received three shares of the
Corporation's no par value common stock for each share of Bank $1.00 par value
common stock owned. This internal reorganization was accounted for similar to a
pooling of interests, where the historical carrying values of the Bank's assets
and liabilities were carried forward to the consolidated financial statements,
without change. The Corporation transferred $2,355 from paid-in capital to
common stock due to the elimination of par value.
The Corporation's revenues, operating income and assets are primarily from the
banking industry. The Corporation operates 15 offices in Delaware and Union
Counties, Ohio. Loan customers include a wide range of individuals, businesses
and other organizations. Major portions of loans are secured by various forms of
collateral including real estate, business assets, consumer property and other
items. The Corporation's primary funding source is deposits from customers in
its market area. The Corporation also purchases investments, operates a trust
department and engages in mortgage banking operations.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect amounts reported in the
financial statements and disclosures provided; future results could differ. The
collectibility of loans, fair value of financial instruments and status of
contingencies are particularly subject to change.
Income tax expense is the sum of current-year income tax due or refundable and
change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of 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.
- --------------------------------------------------------------------------------
(Continued)
7.
8
DCB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Under a new accounting standard adopted on January 1, 1998, Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," comprehensive income is reported for all periods. Comprehensive income
includes both net income and other comprehensive income. Other comprehensive
income includes the change in unrealized gains and losses on securities
available for sale.
Earnings per common share is computed under the provisions of SFAS No. 128,
"Earnings Per Share," which was adopted retroactively by the Corporation on
December 31, 1997. Adoption of SFAS 128 did not change the earnings per share
amounts previously reported by the Corporation. Earnings per share computations
are based on the weighted average number of shares of common stock outstanding
during the year. All prior per-share data has been restated to reflect the
shares issued in the internal reorganization discussed above.
The weighted average number of shares outstanding was 4,232,201 and 4,273,200
for the three months ended March 31, 1997 and 1998.
NOTE 2 - SECURITIES
The amortized cost and estimated fair values of securities were as follows:
-------------------March 31, 1998----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 5,535 $ 43 $ -- $ 5,578
Obligations of U.S. government
agencies and corporations 34,094 292 (10) 34,376
Obligations of states and political
subdivisions 203 -- -- 203
Mortgage-backed securities 15,367 80 (41) 15,406
------- ---- ---- -------
Total debt securities 55,199 415 (51) 55,563
Equity securities 1,038 14 -- 1,052
------- ---- ---- -------
Total securities available for sale $56,237 $429 $(51) $56,615
======= ==== ==== =======
SECURITIES HELD TO MATURITY
Obligations of states and political
subdivisions $ 7,215 $225 $(13) $ 7,427
Corporate obligations 18,703 127 (10) 18,820
Mortgage-backed securities 27,061 238 (28) 27,271
------- ---- ---- -------
Total securities held to maturity $52,979 $590 $(51) $53,518
======= ==== ==== =======
- --------------------------------------------------------------------------------
(Continued)
8.
9
DCB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
------------------December 31, 1997--------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 5,538 $ 30 $ -- $ 5,568
Obligations of U.S. government
agencies and corporations 33,176 234 (1) 33,409
Obligations of states and
political subdivisions 203 -- -- 203
Mortgage-backed securities 13,608 107 (10) 13,705
------- ---- ---- -------
Total debt securities 52,525 371 (11) 52,885
Equity securities 1,038 12 -- 1,050
------- ---- ---- -------
Total securities available for sale $53,563 $383 $(11) $53,935
======= ==== ==== =======
SECURITIES HELD TO MATURITY
Obligations of states and
political subdivisions $ 6,523 $215 $(15) $ 6,723
Corporate obligations 21,089 6 (46) 21,049
Mortgage-backed securities 26,222 190 (26) 26,386
------- ---- ---- -------
Total securities held to maturity $53,834 $411 $(87) $54,158
======= ==== ==== =======
Substantially all mortgage-backed securities are backed by pools of mortgages
that are insured or guaranteed by the Federal National Mortgage Association
("FNMA"), the Government National Mortgage Association ("GNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC").
At March 31, 1998, 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,
1998, 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 Held to maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 6,773 $ 6,796 $19,048 $19,167
Due from one to five years 12,363 12,452 3,816 3,863
Due from five to ten years 18,695 18,905 2,542 2,657
Due after ten years 2,001 2,004 512 560
Mortgage-backed securities 15,367 15,406 27,061 27,271
------- ------- ------- -------
$55,199 $55,563 $52,979 $53,518
======= ======= ======= =======
- --------------------------------------------------------------------------------
(Continued)
9.
10
DCB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Proceeds from the sales of available-for-sale securities during the three months
ended March 31, 1997 were $3,557,000. Gross gains of $9,000 and gross losses of
$1,000 were realized on those sales. There were no sales of available-for-sale
securities during the three months ended March 31, 1998.
NOTE 3 - LOANS AND LEASES
Loans and leases consisted of the following:
March 31, December 31,
1998 1997
---- ----
Loans secured by real estate
Real estate construction $ 27,120 $ 29,104
Residential 47,162 47,509
Commercial and farmland 61,123 56,434
Commercial and industrial 30,735 29,720
Agricultural 5,458 5,872
State and political subdivisions 1,838 1,894
Consumer and credit card 43,972 42,914
Lease financing, net 8,652 9,010
Home equity lines of credit 6,590 6,177
-------- --------
$232,650 $228,634
======== ========
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses for the three months ended
March 31, 1998 and 1997 is as follows:
1998 1997
---- ----
Balance - January 1 $1,842 $1,923
Provision for loan losses 96 96
Loans charged off (99) (127)
Recoveries 65 29
------ ------
Balance - March 31 $1,904 $1,921
====== ======
Impaired loans at March 31, 1998 and December 31, 1997 were as follows:
1998 1997
---- ----
Balance of impaired loans with no allowance
for loan losses allocated $ -- $ --
Balance of impaired loans with allowance
for loan losses allocated 265 265
Amount of the allowance allocated 173 173
- --------------------------------------------------------------------------------
(Continued)
10.
11
DCB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
Information regarding impaired loans is as follows for the three months ended
March 31, 1998 and 1997:
1998 1997
---- ----
Average impaired loans during the period $265 $207
Interest income recognized during period -- 20
Cash basis interest income recognized -- 17
NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material effect
on financial condition or results of operations.
The Bank grants residential, consumer, and commercial loans to customers located
primarily in Delaware, Union and surrounding counties in Ohio. Most loans are
secured by specific items of collateral including business assets, consumer
assets and residences.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet financing needs of its customers. The contract
amount of these instruments are not included in the consolidated financial
statements. At March 31, 1998 and December 31, 1997, the contract amount of
these instruments, which primarily include commitments to extend credit and
standby letters of credit, totaled approximately $60,918 and $60,270. Of these
commitments, fixed-rate commitments totaled $2,745 and $2,468 at March 31, 1998
and December 31, 1997. Since many commitments to make loans expire without being
used, the amount does not represent future cash commitments.
The exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to make loans and lines and letters of
credit is represented by the contractual amount of those instruments. DCB
follows the same credit policy to make such commitments as is followed for those
loans recorded in the financial statements. In management's opinion, these
commitments represent normal banking transactions and no material losses are
expected to result therefrom. Collateral obtained upon exercise of the
commitments is determined using management's credit evaluations of the borrower
and may include real estate, business or consumer assets.
- --------------------------------------------------------------------------------
11.
12
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
The following discussion focuses on the consolidated financial condition of DCB
Financial Corp. (the "Corporation") at March 31, 1998 compared to December 31,
1997, and the consolidated results of operations for the three months ended
March 31, 1998 compared to the same period in 1997. The purpose of this
discussion is to provide the reader with a more thorough understanding of the
consolidated financial statements. This discussion should be read in conjunction
with the consolidated financial statements and related footnotes.
The registrant is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material affect on the liquidity,
capital resources or operations except as discussed herein. In addition, the
registrant is not aware of any current recommendations by regulatory authorities
that would have such effect if implemented. The Corporation cautions that any
forward-looking statements contained in this report, in a report incorporated by
reference to this report or made by management of the Corporation involves risks
and uncertainties and are subject to change based on various important factors.
Actual results could differ materially from those expressed or implied.
Additionally, the Corporation claims no notification responsibilities should
their opinions change from those expressed herein.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $375,020 at March 31, 1998 compared to $367,118
at December 31, 1997, an increase of $7,902, or 2.2%. The growth in assets was
the result of the investment of funds provided by deposit growth in loans and
securities.
Total securities increased $1,825, or 1.7%, from $107,769 at December 31, 1997
to $109,594 at March 31, 1998. The increase was the result of the reinvestment
of proceeds from maturities, calls and principal repayments, as well as the
investment of excess liquidity and funds provided from increased deposits. The
Corporation invests primarily in U.S. Treasury notes, U.S. government agencies,
municipal bonds, corporate obligations and mortgage-backed securities.
Mortgage-backed securities include Federal Home Loan Mortgage Corporation
("FHLMC"), Government National Mortgage Association ("GNMA") and Federal
National Mortgage Association ("FNMA") participation certificates. Securities
classified as available for sale totaled $56,615, or 51.7% of the total
securities portfolio, at March 31, 1998. Management classifies a securities
portfolio to provide the Corporation with the flexibility to move funds into
loans as demand warrants. The mortgage-backed securities portfolio, totaling
$42,467 at March 31, 1998, provides the Corporation with a constant cash flow
stream from principal repayments. The Corporation held no derivative securities
or structured notes during any period presented.
- --------------------------------------------------------------------------------
12.
13
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Total loans increased $4,016, or 1.8%, from $228,634 at December 31, 1997 to
$232,650 at March 31, 1998. Other than commercial real estate and farmland
loans, significant growth was not experienced in the any of loan categories.
Commercial real estate and farmland loans increased $4,689, or 8.3%, from
$56,434 at December 31, 1997 to $61,123 at March 31, 1998. The Corporation has
been able to take advantage of a strong local economy and the large number of
businesses moving into the market. The continued growth in commercial real
estate and farmland loans, as well as the growth trend of the various other
types of real estate loans, is related to growth in the Corporation's market
area as the Corporation has not changed its philosophy regarding pricing or
underwriting standards during the year. Strong population growth in the
Corporation's market also contributed to the overall loan growth. Real estate
construction loans decreased $1,984, or 6.8%, as many construction loans
outstanding at December 31, 1997 have now been converted to permanent mortgages.
There is no concentration of lending to any one industry.
Despite the loan growth, the gross loan to deposit ratio dropped slightly to
70.6% at March 31, 1998 compared to 70.9% at December 31, 1997.
Total deposits increased $7,277, or 2.3%, from $322,484 at December 31, 1997 to
$329,761 at March 31, 1998. Noninterest-bearing deposits remained relatively
unchanged while interest-bearing deposits increased $7,489, or 2.8%. The growth
in interest-bearing deposits was due to an increase in interest-bearing demand
and money market deposits which increased in volume by $14,425, or 10.9%.
Interest-bearing demand and money market deposits comprised 52.5% of total
interest-bearing deposits at March 31, 1998 compared to 48.7% of total
interest-bearing deposits at December 31, 1997. The increase was primarily in
the Corporation's "Prime Time" deposit accounts which offer a variable interest
rate tied to prime. The growth in such deposits has been primarily due to growth
in the Corporation's market area as the Corporation has not used special
promotions to attract the increased volume. The Corporation experienced a slight
decrease in savings deposits which decreased from 13.9% of total
interest-bearing deposits at December 31, 1997 to 13.4% of total
interest-bearing deposits at March 31, 1998. Certificates of deposit decreased
$6,599, or 6.5%, comprising 34.0% of total interest-bearing deposits at March
31, 1998 compared to 37.4% of total interest-bearing deposits at December 31,
1997. The decrease resulted as a large, public-fund certificate of deposit was
not renewed upon maturing during the quarter.
At March 31, 1998 and December 31, 1997, borrowed funds consisted primarily of a
$5,000 advance from the Federal Home Loan Bank. Due in August 1998, the advance
had an original term of 270 days and carries a fixed interest rate of 5.91%.
Repayment or renewal terms will be evaluated maturity. Borrowed funds also
includes a demand note issued to the U.S. Treasury which totaled $2,000 at March
31, 1998 and $2,005 at December 31, 1997.
COMPARISON OF RESULTS OF OPERATIONS
NET INCOME. Net income for the three months ended March 31, 1998 totaled $1,147,
compared net income of $1,194 for the same period in 1997. Earnings per share
was $.27 per share for the three months ended March 31, 1998 compared to $.28
for the three months ended March 31, 1997.
NET INTEREST INCOME. Net interest income represents the amount by which interest
income on interest-earning assets exceeds interest paid on interest-bearing
liabilities. Net interest income is the largest component of the Corporation's
income and is affected by the interest rate environment and the volume and
composition of interest-earning assets and interest-bearing liabilities.
- --------------------------------------------------------------------------------
13.
14
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Net interest income was $3,521 for the three months ended March 31, 1998
compared to $3,404 for the same period in 1997. The $117 increase in 1998 over
1997 was the result of an increased volume of interest-earning assets partially
offset by an increase in interest-bearing liabilities that carried a higher
average yield. Management has elected to offer attractive, competitive rates to
retain deposits, provided the funds can be invested in income-earning assets
with adequate yields.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses represents the charge to income necessary to adjust the allowance
for loan and lease losses to an amount that represents management's assessment
of the losses inherent in the Corporation's loan and lease portfolio. All
lending activity contains associated risks of losses and the Corporation
recognizes these credit risks as a necessary element of its business activity.
To assist in identifying and managing potential loan and lease losses, the
Corporation maintains a loan review function that continuously evaluates
individual credit relationships as well as overall loan-portfolio conditions.
One of the primary objectives of this loan review function is to make
recommendations to management as to both specific loss reserves and overall
portfolio-loss reserves.
The provision for loan and lease losses totaled $96 for the both the three
months ended March 31, 1998 and 1997. The level of the provision was made
possible by the quality of the loan portfolio remaining stable over the
comparable years. Net charge-offs for the three months ended March 31, 1998 were
$34 compared to net charge-offs of $98 for the same period in 1997.
The allowance for loan and lease losses totaled $1,904, or .82% of gross loans
and leases, at March 31, 1998 compared to $1,842, or .81% of gross loans and
leases, at December 31, 1997. Management believes increasing the allowance for
loan and lease losses is prudent as total loans, particularly commercial,
consumer and construction loans, and leases increase. Accordingly, management
anticipates that it will continue its provision to the allowance for loan and
lease losses at current levels for the near future, provided the level of
nonperforming loans remains low.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$258, or 33.2%, for the three months ended March 31, 1998 compared to the same
period in 1997. The increase is due to increased fee income from the
Corporation's data service center, increased gains on loan sales (both
servicing-released and service-retained) and increased fee income on deposit and
cash management accounts.
Total noninterest expense increased $440, or 19.1%, for the three months ended
March 31, 1998 compared to the same period in 1997. The increases were primarily
the result of increases in salaries and employee benefits, occupancy expense and
equipment expense, where such increases made up $362 of the total increase.
These were planned increases relating increased staffing and the addition of
three new facilities. During the first quarter 1997, the Corporation moved most
of its information systems and operations to a leased facility. Other
departmental moves to the new facility are planned as space becomes available.
Expansion of the Corporation's operations facilities was necessary to support
growth. In subsequent quarters in 1997, the Corporation opened two new branch
facilities, both of which were leased under 20-year fixed-cost leases. The two
new branches are strategically located in areas of Delaware County currently
experiencing strong population growth rates. With its broad line of products and
services, the Corporation can meet the needs of the market and obtain the
business needed to sustain the new branches and contribute to overall
profitability. Other changes in noninterest expense were not significant.
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14.
15
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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INCOME TAXES. The volatility of income tax expense is primarily attributable to
the change in income before income taxes. The provision for income taxes totaled
$566, for an effective tax rate of 33.0%, for the three months ended March 31,
1998 and $584, for an effective tax rate of 32.8%, for the three months ended
March 31, 1997
LIQUIDITY
Liquidity is the ability of the Corporation to fund customers' needs for
borrowing and deposit withdrawals. The purpose of liquidity management is to
assure sufficient cash flow to meet all of the financial commitments and to
capitalize on opportunities for business expansion. This ability depends on the
institution's financial strength, asset quality and types of deposit and
investment instruments offered by the Corporation to its customers. The
Corporation's principal sources of funds are deposits, loan and securities
repayments, maturities of securities, sales of securities available for sale and
other funds provided by operations. The Bank also has the ability to borrow from
the FHLB. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan and mortgage-backed
security prepayments are more influenced by interest rates, general economic
conditions, and competition. The Corporation maintains investments in liquid
assets based upon management's assessment of (1) need for funds, (2) expected
deposit flows, (3) yields available on short-term liquid assets and (4)
objectives of the asset/liability management program.
Cash and cash equivalents remained relatively unchanged totaling $25,716 at
March 31, 1998 compared to $25,283 at December 31, 1997. Cash and equivalents
represented 6.9% of total assets at March 31, 1998 and December 31, 1997. The
Corporation has the ability to borrow up to approximately $20,210 from the
Federal Home Loan Bank and has various federal fund sources from correspondent
banks, should the Corporation need to supplement its future liquidity needs in
order to meet loan demand or to fund investment opportunities. Management
believes the Corporation's liquidity position is strong based on its high level
of cash, cash equivalents, core deposits, the stability of its other funding
sources and the support provided by its capital base.
As summarized in the Consolidated Statements of Cash Flows, the most significant
transactions which affected the Corporation's level of cash and cash
equivalents, cash flows and liquidity during the first quarter of 1998 were the
net increase in loans of $2,522; the receipt of proceeds from maturities and
repayments of securities of $21,243; securities purchases of $22,893 and the net
increase in deposits of $7,277.
CAPITAL RESOURCES
Total shareholders' equity decreased $2 between December 31, 1997 and March 31,
1998, primarily due to purchases of treasury stock in excess of earnings
retained. The Corporation purchased 45,000 shares of treasury stock, which
reduced shareholders' equity by $941, or the cost of the shares purchased. The
shares were purchased in the over-the-counter market as a means to reduce the
Corporation's excess capital. Management may purchase additional shares in the
future, as opportunities arise. The number of shares to be purchased and the
price to be paid will depend upon the availability of shares, the prevailing
market prices and any other considerations which may, in the opinion of the
Corporation's Board of Directors or management, affect the advisability of
purchasing shares.
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15.
16
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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The components of shareholders' equity changed during the first quarter of 1997
with the formation of the holding company. Shareholders of the Bank received
three shares of Corporation stock, no par value, for each share of Bank $1.00
par value stock owned. This exchange resulted in the reclassification of
additional paid in capital to common stock. The holding Corporation was formed
to allow management to pursue other forms of financial services or acquisitions
of full-service banking operations or branches of other organizations.
Tier 1 capital is shareholders' equity excluding the unrealized gain or loss
securities classified as available for sale and intangible assets. Tier 2
capital, or 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 based on their inherent risk.
The Corporation and its subsidiaries meet all regulatory capital requirements.
The ratio of total capital to risk-weighted assets was 13.2% at March 31, 1998,
while the Tier 1 risk-based capital ratio was 12.5%. Regulatory minimums call
for a total risk-based capital ratio of 8.0%, at least half of which must be
Tier 1 capital. The Corporation's leverage ratio, defined as Tier 1 capital
divided by average assets, of 9.2% at March 31, 1998 exceeded the regulatory
minimum for capital adequacy purposes of 4.0%.
YEAR 2000 ISSUE
Many computer programs that are in use today use only two digits to indicate
which year is represented. If such computer applications are not changed to
allow the data field to reflect the change in the century, the application may
fail or create erroneous results at the Year 2000 due to the improper sequence
of the year changing from "99" to "00".
Management of the Corporation has conducted an evaluation of all significant
computer systems used in the business of the Corporation to determine whether
such systems will function at the change of the century. Management determined
that most programs are or will be capable of identifying the turn of the
century. In order to prevent potential credit quality issues, management is also
assessing the Year 2000 compliance status of major loan customers to determine
whether or not such entities are taking steps to ensure their systems will
function properly in the Year 2000. Management closely monitors the issue and
full compliance is expected by the end of 1998. Management does not anticipate
any material costs to be incurred to update its systems to be Year 2000
compliant.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 significantly changes the way public business enterprises report
information about operating segments in annual financial statements, and
requires those enterprises report selected information about reportable segments
in interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS No. 131 uses a "management approach" to disclose
financial and descriptive information about an enterprise's reportable operating
segments which is based on reporting information the way management organizes
the segments within the enterprise for making operating decisions and assessing
performance. For many enterprises, the management approach will likely result in
more segments being reported. SFAS No. 131 will be effective for the
Corporations 1998 financial statements.
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16.
17
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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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. The Bank does not maintain a trading account for
any class of financial instrument and the Corporation is not affected by foreign
currency exchange rate risk or commodity price risk. Because the Corporation
does not hold any equity securities other than stock in the FHLB of Cincinnati
and an insignificant investment in other equity securities, the Corporation is
not subject to equity price risk.
Interest rate risk is the risk that the Corporation's financial condition will
be adversely affected due to movements in interest rates. The Corporation, like
other financial institutions, is subject to interest rate risk to the extent
that its interest-earning assets reprice differently than its interest-bearing
liabilities. 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. One of the Corporation's principal financial
objectives is to achieve long-term profitability while reducing its exposure to
fluctuations in interest rates. Accordingly, the Corporation places great
importance on monitoring and controlling interest rate risk.
There are several methods employed by the Corporation to monitor and control
interest rate risk. One such method is using a gap analysis. The gap is defined
as the repricing variance between rate sensitive assets and rate sensitive
liabilities within certain periods. The repricing can occur due to changes in
rates on variable rate products as well as maturities of interest-earning assets
and interest-bearing liabilities. A high ratio of interest sensitive
liabilities, generally referred to as a negative gap, tends to benefit net
interest income during periods of falling interest rates as the average rate
paid on interest-bearing liabilities declines faster than the average rate
earned on interest-earning assets. The opposite holds true during periods of
rising interest rates. The Corporation attempts to minimize the interest rate
risk through management of the gap in order to achieve consistent shareholder
return. The Corporation's Asset and Liability Management Policy is to maintain a
laddered gap position. One strategy used by the Corporation is to originate
variable rate loans tied to market indices. Such loans reprice on an annual,
quarterly, monthly or daily basis as the underlying market index change.
Currently, approximately 65.2%, of the Corporation's loan portfolio reprices on
at least an annual basis. The Corporation also invests excess funds in liquid
federal funds that mature and reprice on a daily basis. The Corporation also
maintains most of its securities in the available for sale portfolio to take
advantage of interest rate swings and to maintain liquidity for loan funding and
deposit withdrawals.
The Corporation's 1997 annual report details a table which provides information
about the Company's financial instruments that are sensitive to changes in
interest rates as of December 31, 1997. The table is based on information and
assumptions set forth in the notes. The Corporation believes the assumptions
utilized are reasonable. For loans, securities and liabilities with contractual
maturities, the table represents principal cash flows and the weighted average
interest rate. For variable rate loans the contractual maturity and
weighted-average interest rate was used with an explanatory footnote as to
repricing periods. For liabilities without contractual maturities such as demand
and savings deposit accounts, a decay rate was utilized to match their most
likely withdrawal behavior. Management believes that no events have occurred
since December 31, 1997 which would significantly change the ratio of rate
sensitive assets to rate sensitive liabilities for the given time horizons.
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17
18
DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended March 31, 1998
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
There are no matters required to be reported under this item.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibit 11, Statement re: computation of per share
earnings. (Reference is hereby made to Consolidated
Statements of Income on page 4, hereof.)
Exhibit 27, Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
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18.
19
DCB FINANCIAL CORP.
SIGNATURES
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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 8, 1998 /s/ Larry D. Coburn
--------------- -------------------------------------
(Signature)
Larry D. Coburn
President and Chief Executive Officer
Date: May 8, 1998 /s/ Douglas A. Lockwood
--------------- -------------------------------------
(Signature)
Douglas A. Lockwood
Interim Controller
(Principal Accounting Officer)
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19.
20
DCB FINANCIAL CORP.
INDEX TO EXHIBITS
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EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
11 Statement re: computation of per share earnings Reference is hereby made to Consolidated
Statements of Income on page 4 and Note 1
of Notes to Consolidated Financial
Statements on page 8, hereof.
27 Financial Data Schedule 21
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20.