1
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: JUNE 30, 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 July 31, 1998:
4,188,200 common shares
2
DCB FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
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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....... 18
PART II - OTHER INFORMATION.............................................. 19
SIGNATURES ............................................................. 20
3
DCB FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Item 1. Financial Statements
June 30, December 31,
1998 1997
---- ----
ASSETS
Cash and due from banks $ 14,520 $ 14,283
Federal funds sold 15,800 11,000
--------- ---------
Total cash and cash equivalents 30,320 25,283
Securities available for sale, at fair value 59,557 53,935
Securities held to maturity (estimated fair values $50,878 at
June 30, 1998 and $54,158 at December 31, 1997) 50,437 53,834
Loans and leases 238,390 228,634
Less allowance for loan and lease losses (1,916) (1,842)
--------- ---------
Net loans and leases 236,474 226,792
Premises and equipment, net 3,954 3,756
Accrued interest receivable and other assets 5,675 3,518
--------- ---------
Total assets $ 386,417 $ 367,118
========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 54,101 $ 50,969
Interest-bearing 286,363 271,515
--------- ---------
Total deposits 340,464 322,484
Borrowed funds 7,000 7,005
Accrued interest payable and other liabilities 2,469 1,589
--------- ---------
Total liabilities 349,933 331,078
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,779 3,779
Retained earnings 34,301 32,432
Treasury stock, 85,000 shares at June 30, 1998 and
20,000 shares at December 31, 1997, at cost (1,770) (416)
Unrealized gain on securities available for sale 174 245
--------- ---------
Total shareholders' equity 36,484 36,040
--------- ---------
Total liabilities and shareholders' equity $ 386,417 $ 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 Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 5,313 $4,872 $ 10,390 $ 9,597
Securities
Taxable 1,355 1,267 2,700 2,583
Nontaxable 90 88 180 171
Commercial paper 252 81 530 81
Other 172 99 308 266
------- ------ -------- --------
Total interest income 7,182 6,407 14,108 12,698
------- ------ -------- --------
INTEREST EXPENSE
Deposits 3,460 2,868 6,775 5,668
Other 86 88 176 175
------- ------ -------- --------
Total interest expense 3,546 2,956 6,951 5,843
------- ------ -------- --------
NET INTEREST INCOME 3,636 3,451 7,157 6,855
Provision for loan losses 129 96 225 192
------- ------ -------- --------
NET INTEREST INCOME AFTER PROVISION 3,507 3,355 6,932 6,663
OTHER INCOME
Service charges on deposit accounts 304 279 606 558
Data service fees 83 65 177 142
Other operating income 422 390 873 756
Gain on sale of securities - 1 - 9
Gain on sale of loans 176 45 364 92
------- ------ -------- --------
Total other income 985 780 2,020 1,557
OTHER EXPENSE
Salaries and other employee benefits 1,405 1,236 2,808 2,447
Occupancy expense 201 185 413 382
Equipment expense 343 201 680 383
Loan, lease and credit card expense 58 61 85 171
Stationery and supplies expense 77 80 172 169
Ohio franchise tax expense 129 134 259 257
Other operating expenses 576 507 1,119 902
------- ------ -------- --------
Total other expenses 2,789 2,404 5,536 4,711
------- ------ -------- --------
INCOME BEFORE FEDERAL INCOME TAXES 1,703 1,731 3,416 3,509
Provision for income taxes 559 552 1,125 1,136
------- ------ -------- --------
NET INCOME 1,144 1,179 2,291 2,373
------- ------ -------- --------
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain/(loss) on available for
sale securities arising during the
period (75) 115 (71) (43)
Reclassification adjustment for amounts
realized on securities sales included
in net income - 1 - 9
------- ------ -------- --------
COMPREHENSIVE INCOME $ 1,069 $1,295 $ 2,220 $ 2,339
======= ====== ======== ========
EARNINGS PER COMMON SHARE $ 0.27 $ 0.28 $ 0.54 $ 0.56
======= ====== ======== ========
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(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 Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
Balance at beginning of period $ 36,038 $ 33,124 $ 36,040 $ 32,579
Net income 1,144 1,179 2,291 2,373
Dividends declared ($.05 and $.10 per share
in 1998 and $.05 and $.1667 per share in 1997) (210) (214) (422) (713)
Purchase of 20,000 and 65,000 shares of
treasury stock in 1998 (413) - (1,354) -
Change in unrealized gain/loss on
securities available for sale, net of tax (75) 116 (71) (34)
-------- -------- -------- --------
Balance at end of period $ 36,484 $ 34,205 $ 36,484 $ 34,205
======== ======== ======== ========
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(Continued)
5.
6
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
--------
1998 1997
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 2,247 $ 2,587
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (16,903) (16,776)
Maturities and repayments 11,079 5,671
Proceeds from sales - 5,666
Securities held to maturity
Purchases (34,944) (27,941)
Maturities and repayments 38,721 16,422
Net change in banker's acceptances - (1,982)
Net change in loans (10,864) (11,705)
Premises and equipment expenditures (498) (931)
Proceeds from sale of other real estate - 201
-------- --------
Net cash from investing activities (13,409) (31,375)
Cash flows from financing activities
Net change in deposits 17,980 18,973
Net change in short-term borrowings (5) 454
Purchases of treasury stock (1,354) -
Cash dividends paid (422) (713)
-------- --------
Net cash from financing activities 16,199 18,714
-------- --------
Net change in cash and cash equivalents 5,037 (10,074)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 25,283 32,359
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 30,320 $ 22,285
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes $ 1,087 $ 1,165
Cash paid for interest 6,824 5,653
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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 June 30,
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.
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(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 4,198,090 and 4,273,200
for the three months ended June 30, 1998 and 1997 and 4,215,051 and 4,273,200
for the six months ended June 30, 1998 and 1997.
NOTE 2 - SECURITIES
The amortized cost and estimated fair values of securities were as follows:
-------------June 30, 1998----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 5,527 $ 2$ - $ 5,550
Obligations of U.S. government
agencies and corporations 36,391 198 (8) 36,581
Obligations of states and political
subdivisions 203 3 - 206
Mortgage-backed securities 16,043 65 (33) 16,075
------- ---- ---- -------
Total debt securities 58,164 289 (41) 58,412
Equity securities 1,129 16 - 1,145
------- ---- ---- -------
Total securities available for sale $59,293 $305 $(41) $59,557
======= ==== ==== =======
SECURITIES HELD TO MATURITY
Obligations of U.S. government
agencies and corporations $ 1,00$ $ - $ 1,000
Obligations of states and political
subdivisions 7,255 228 (8) 7,475
Corporate obligations 14,775 57 (3) 14,829
Mortgage-backed securities 27,407 191 (24) 27,574
------- ---- ---- -------
Total securities held to maturity $50,437 $476 $(35) $50,878
======= ==== ==== =======
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(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 June 30, 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 June 30, 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 $ 7,789 $ 7,810 $16,424 $16,481
Due from one to five years 9,623 9,676 3,587 3,630
Due from five to ten years 22,677 22,815 2,507 2,626
Due after ten years 2,032 2,036 512 567
Mortgage-backed securities 16,043 16,075 27,407 27,574
------- ------- ------- -------
$58,164 $58,412 $50,437 $50,878
======= ======= ======= =======
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(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 six months
ended June 30, 1997 were $5,666,000. Gross gains of $13,000 and gross losses of
$3,000 were realized on those sales. Losses on called securities totaled $1,000
for the six months ended June 30, 1997. There were no sales of
available-for-sale securities during the six months ended June 30, 1998.
NOTE 3 - LOANS AND LEASES
Loans and leases consisted of the following:
June 30, December 31,
1998 1997
---- ----
Loans secured by real estate
Real estate construction $ 30,707 $ 29,104
Residential 45,886 47,509
Commercial and farmland 61,874 56,434
Commercial and industrial 31,787 29,720
Agricultural 5,501 5,872
State and political subdivisions 1,799 1,894
Consumer and credit card 45,090 42,914
Lease financing, net 8,772 9,010
Home equity lines of credit 6,974 6,177
----------- ------------
$ 238,390 $ 228,634
=========== ============
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses for the three and six months
ended June 30, 1998 and 1997 is as follows:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Beginning balance $ 1,904 $ 1,921 $ 1,842 $ 1,923
Provision for loan losses 129 96 225 192
Recoveries 45 56 110 85
Charge-offs (162) (111) (261) (238)
------- ------- ------- -------
Ending balance $ 1,916 $ 1,962 $ 1,916 $ 1,962
======= ======= ======= =======
Impaired loans at June 30, 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
Amount of the allowance allocated - 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 six months ended June
30, 1998 and 1997:
1998 1997
---- ----
Average impaired loans during the period $ - $145
Interest income recognized during period - -
Cash basis interest income recognized - -
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 June 30, 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 $62,945 and $60,270. Of these
commitments, fixed-rate commitments totaled $2,767 and $2,468 at June 30, 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 June 30, 1998 compared to December 31,
1997, and the consolidated results of operations for the three and six months
ended June 30, 1998 compared to the same periods 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 $386,417 at June 30, 1998 compared to $367,118
at December 31, 1997, an increase of $19,299, or 5.3%. The growth in assets was
the result of the investment of funds provided by deposit growth in loans,
securities and federal funds sold.
Federal funds sold increased $4,800, or 43.6%, from $11,000 at December 31, 1997
to $15,800 at June 30, 1998 as a result of the investment of excess funds
provided from increased deposits. Management maintains excess liquidity in such
short-term investments to provide sufficient funding for future loan growth.
Total securities increased $2,225, or 2.1%, from $107,769 at December 31, 1997
to $109,994 at June 30, 1998. The increase was the result of the reinvestment of
proceeds from maturities, calls and principal repayments, as well as the
investment of 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. Management classifies a portion of the securities
portfolio as available for sale to provide the Corporation with the flexibility
to move funds into loans as demand warrants. Securities classified as available
for sale totaled $59,557, or 54.1%, of the total securities portfolio at June
30, 1998. The mortgage-backed securities portfolio, totaling $43,482 at June 30,
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 $9,756, or 4.1%, from $228,634 at December 31, 1997 to
$238,390 at June 30, 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 $5,440, or 9.6%, from $56,434 at
December 31, 1997 to $61,874 at June 30, 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. There is no concentration of lending to any one
industry. Strong population growth in the Corporation's market also contributed
to the overall loan growth, particularly consumer and credit card loans, which
increased $2,176, or 5.1%, from $42,914 at December 31, 1997 to $45,090 at June
30, 1998.
Despite the loan growth, the gross loan to deposit ratio dropped slightly to
70.0% at June 30, 1998 compared to 70.9% at December 31, 1997.
Total deposits increased $17,980, or 5.6%, from $322,484 at December 31, 1997 to
$340,464 at June 30, 1998. Noninterest-bearing deposits increased $3,132, or
6.1%, while interest-bearing deposits increased $14,848, or 5.5%. The growth in
interest-bearing deposits was due to an increase in interest-bearing demand and
money market deposits which increased in volume by $26,312, or 19.9%.
Interest-bearing demand and money market deposits comprised 55.3% of total
interest-bearing deposits at June 30, 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 13.3% of total
interest-bearing deposits at June 30, 1998. Certificates of deposit decreased
$10,864, or 4.0%, comprising 31.66% of total interest-bearing deposits at June
30, 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 period.
At June 30, 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 June
30, 1998 and $2,005 at December 31, 1997.
COMPARISON OF RESULTS OF OPERATIONS
NET INCOME. Net income for the six months ended June 30, 1998 totaled $2,291, or
$.54 per share, compared to net income of $2,373, or $.56 per share, for the
same period in 1997. Net income for the quarter ended June 30, 1998 was $1,144,
or $.27 per share, compared to $1,179, or $0.28 per share, for the same quarter
in 1997.
- --------------------------------------------------------------------------------
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. 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.
Net interest income was $3,636 and $7,157 for the three and six months ended
June 30, 1998 compared to $3,451 and $6,855 for the same periods in 1997. Such
increases are 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 $129 and $225 for the three six
months ended June 30, 1998 and $96 and $192 for the three and six months ended
June 30, 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 six months ended June 30, 1998 were $151 compared to net charge-offs of
$153 for the same period in 1997.
The allowance for loan and lease losses totaled $1,916, or .80% of gross loans
and leases, at June 30, 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
$205, or 26.3%, and $463, or 29.7%, for the three and six months ended June 30,
1998 compared to the same periods in 1997. Such increases are 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 $385, or 16.0%, and $825, or 17.5%, for the
three and six months ended June 30, 1998 compared to the same periods in 1997.
The increases were primarily the result of increases in salaries and employee
benefits, occupancy expense and equipment expense. 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.
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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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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.
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
$559 and $1,125, or an effective rate of 32.8% and 32.9%, for the three and six
months ended June 30, 1998 compared to $552 and $1,136, or an effective rate of
31.9% and 32.4%, for the three and six months ended June 30, 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 increased $5,037 from $25,283 at December 31, 1997 to
$30,320 at June 30, 1998. Cash and equivalents represented 7.8% and 6.9% of
total assets at June 30, 1998 and December 31, 1997. The Corporation has the
ability to borrow up to approximately $22,032 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 Condensed 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 half of 1998 were the net
increase in loans of $10,864; the receipt of proceeds from maturities and
repayments of securities of $49,800; securities purchases of $51,847 and the net
increase in deposits of $17,980.
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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)
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
Total shareholders' equity increased $444 between December 31, 1997 and June 30,
1998, primarily due to earnings retained in excess of purchases of treasury
stock. During the six months ended June 30, 1998, the Corporation purchased
65,000 shares of treasury stock, which reduced shareholders' equity by $1,354,
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.
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 14.0% at June 30, 1998,
while the Tier 1 risk-based capital ratio was 13.3%. 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 9.5% at June 30, 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.
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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)
- --------------------------------------------------------------------------------
IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" - SFAS 131 significantly changes the way that public business
enterprises report information about operating segments in annual financial
statements and requires that 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
that 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. In
addition, SFAS 131 requires significantly more information to be disclosed for
each reportable segment than is presently being reported in annual financial
statements. SFAS 131 also requires selected information to be reported in
interim financial statements. SFAS 131 will be effective for the Corporation's
1998 financial statements and is not expected to have a significant impact.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" - SFAS 132 amends the disclosure requirements of previous pension and
other postretirement benefit accounting standards by requiring additional
disclosures about such plans as well as eliminating some disclosures no longer
considered useful. SFAS 132 also allows greater aggregation of disclosures for
employers with multiple defined benefit plans. Non-public companies are subject
to reduced disclosure requirements, however, such entities may elect to follow
the full disclosure requirements of SFAS 132. SFAS 132 will be effective for the
Corporation's 1998 financial statements and is not expected to have a
significant impact.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" -
SFAS 133 requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving off-setting changes in fair value or cash flows. SFAS 133
does not allow hedging of a security which is classified as held to maturity,
accordingly, upon adoption of SFAS 133, companies may reclassify any security
from held to maturity to available for sale if they wish to be able to hedge the
security in the future. SFAS 133 is effective for fiscal years beginning after
June 15, 1999 with early adoption encouraged for any fiscal quarter beginning
July 1, 1998 or later, with no retroactive application. Management does not
expect the adoption SFAS 133 to have a significant impact on the Corporation's
financial statements.
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17.
18
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. 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 66.1%, 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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18.
19
DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended June 30, 1998
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
On May 20, 1998, the Annual Meeting of the Shareholders of the
Corporation was held. The following members of the Board of
Directors of the Corporation were reelected by the votes set
forth below for terms expiring in 2001:
C. William Bonner FOR: 2,644,357 WITHHELD: 6,192
Merrill L. Kaufman FOR: 2,641,049 WITHHELD: 9,500
Terry M. Kramer FOR: 2,650,549 WITHHELD: -
Thomas T. Porter FOR: 2,650,549 WITHHELD: -
Edward Powers FOR: 2,650,549 WITHHELD: -
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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19.
20
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: August 7, 1998 /s/ LARRY D. COBURN
---------------------------- -------------------------------------
(Signature)
Larry D. Coburn
President and Chief Executive Officer
Date: August 7, 1998 /s/ DOUGLAS A. LOCKWOOD
---------------------------- -------------------------------------
(Signature)
Douglas A. Lockwood
Interim Controller
(Principal Accounting Officer)
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20.
21
DCB FINANCIAL CORP.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
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 22
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21.