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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: SEPTEMBER 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 October 31, 1998:
4,178,200 common shares
2
DCB FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Page
----
Consolidated Balance Sheets.................................................. 3
Consolidated Statements of Income and Comprehensive 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..................................... 13
ITEM 3 - Quantitative and Qualitative Disclosure About Market Risk........... 20
PART II - OTHER INFORMATION.................................................. 21
SIGNATURES ................................................................ 22
3
DCB FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
- -------------------------------------------------------------------------------------------
Item 1. Financial Statements
--------------------
September 30, December 31,
1998 1997
---- ----
ASSETS
Cash and due from banks $ 16,798 $ 14,283
Federal funds sold 23,100 11,000
-------- --------
Total cash and cash equivalents 39,898 25,283
Securities available for sale, at fair value 65,086 53,935
Securities held to maturity (estimated fair values $51,286 at
September 30, 1998 and $54,158 at December 31, 1997) 50,773 53,834
Loans and leases 238,974 228,634
Less allowance for loan and lease losses (1,904) (1,842)
-------- --------
Net loans and leases 237,070 226,792
Premises and equipment, net 4,205 3,756
Accrued interest receivable and other assets 5,576 3,518
-------- --------
Total assets $402,608 $367,118
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 56,282 $ 50,969
Interest-bearing 300,558 271,515
-------- --------
Total deposits 356,840 322,484
Borrowed funds 5,780 7,005
Accrued interest payable and other liabilities 2,523 1,589
-------- --------
Total liabilities 365,143 331,078
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,779 3,779
Retained earnings 35,274 32,432
Treasury stock, 95,000 shares at September 30, 1998 and
20,000 shares at December 31, 1997, at cost (1,977) (416)
Unrealized gain on securities available for sale 389 245
-------- --------
Total shareholders' equity 37,465 36,040
-------- --------
Total liabilities and shareholders' equity $402,608 $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 Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $5,330 $5,167 $15,720 $14,764
Securities
Taxable 1,640 1,446 4,870 4,110
Nontaxable 107 92 287 263
Other 265 92 573 358
------ ------ ------- -------
Total interest income 7,342 6,797 21,450 19,495
------ ------ ------- -------
INTEREST EXPENSE
Deposits 3,645 3,105 10,420 8,773
Other 90 89 266 264
------ ------ ------- -------
Total interest expense 3,735 3,194 10,686 9,037
------ ------ ------- -------
NET INTEREST INCOME 3,607 3,603 10,764 10,458
Provision for loan losses 124 96 349 288
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION 3,483 3,507 10,415 10,170
OTHER INCOME
Service charges on deposit accounts 298 303 904 861
Data service fees 92 68 269 210
Other operating income 479 427 1,352 1,183
Gain on sale of securities -- 27 -- 36
Gain on sale of loans 171 87 535 179
------ ------ ------- -------
Total other income 1,040 912 3,060 2,469
OTHER EXPENSE
Salaries and other employee benefits 1,528 1,273 4,336 3,720
Occupancy expense 200 214 613 596
Equipment expense 336 199 1,016 582
Loan, lease and credit card expense 12 93 97 264
Stationery and supplies expense 76 67 248 236
Ohio franchise tax expense 128 122 387 379
Other operating expenses 607 511 1,726 1,413
------ ------ ------- -------
Total other expenses 2,887 2,479 8,423 7,190
------ ------ ------- -------
INCOME BEFORE FEDERAL INCOME TAXES 1,636 1,940 5,052 5,449
Provision for income taxes 450 647 1,575 1,783
------ ------ ------- -------
NET INCOME 1,186 1,293 3,477 3,666
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain on available for sale
securities arising during the period 214 122 144 81
Reclassification adjustment for amounts
realized on securities sales included
in net income -- 18 -- 24
------ ------ ------- -------
Total other comprehensive income 214 140 144 105
------ ------ ------- -------
COMPREHENSIVE INCOME $1,400 $1,433 $ 3,621 $ 3,771
====== ====== ======= =======
EARNINGS PER COMMON SHARE $ .28 $ .30 $ .83 $ .86
====== ====== ======= =======
- ------------------------------------------------------------------------------------------
See notes to the consolidated financial statements.
4.
5
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Balance at beginning of period $36,484 $34,205 $36,040 $32,579
Net income 1,186 1,293 3,477 3,666
Dividends declared ($.05 and $.15 per share
in 1998 and $.05 and $.2167 per share in 1997) (209) (214) (632) (926)
Purchase of 10,000 and 75,000 shares of
treasury stock in 1998, at cost (210) -- (1,564) --
Change in unrealized gain/loss on
securities available for sale, net of tax 214 140 144 105
------- ------- ------- -------
Balance at end of period $37,465 $35,424 $37,465 $35,424
======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------
See notes to the consolidated financial statements.
5.
6
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- -------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 3,424 $ 4,618
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (30,128) (22,813)
Maturities and repayments 19,092 9,667
Proceeds from sales -- 8,083
Securities held to maturity
Purchases (61,153) (33,118)
Maturities and repayments 64,705 18,517
Net change in banker's acceptances -- (1,974)
Net change in loans (11,361) (17,953)
Premises and equipment expenditures (899) (1,357)
Proceeds from sale of other real estate -- 201
-------- --------
Net cash from investing activities (19,744) (40,747)
Cash flows from financing activities
Net change in deposits 34,356 30,376
Net change in short-term borrowings (1,225) 473
Proceeds from long-term debt 5,000 5,000
Repayment of loan term debt (5,000) (5,002)
Purchases of treasury stock (1,564) --
Cash dividends paid (632) (926)
-------- --------
Net cash from financing activities 30,935 29,921
-------- --------
Net change in cash and cash equivalents 14,615 (6,208)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 25,283 32,359
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 39,898 $ 26,151
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes $ 1,472 $ 1,575
Cash paid for interest 10,600 8,608
- -------------------------------------------------------------------------
See notes to the consolidated financial statements.
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 September
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.
- --------------------------------------------------------------------------------
(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 are 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 4,180,591 and 4,273,200
for the three months ended September 30, 1998 and 1997, and 4,203,438 and
4,273,200 for the nine months ended September 30, 1998 and 1997.
NOTE 2 - SECURITIES
The amortized cost and estimated fair values of securities were as follows:
--------------September 30, 1998-------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 4,523 $ 40 $ -- $ 4,563
Obligations of U.S. government
agencies and corporations 39,624 450 (2) 40,072
Obligations of states and political
subdivisions 3,780 49 -- 3,829
Mortgage-backed securities 15,423 60 (27) 15,456
------- ---- ---- -------
Total debt securities 63,350 599 (29) 63,920
Equity securities 1,149 17 -- 1,166
------- ---- ---- -------
Total securities available for sale $64,499 $616 $(29) $65,086
======= ==== ==== =======
SECURITIES HELD TO MATURITY
Obligations of U.S. government
agencies and corporations $ 1,000 $ 1 $ -- $ 1,001
Obligations of states and political
subdivisions 7,851 306 (1) 8,156
Corporate obligations 12,735 17 (31) 12,721
Mortgage-backed securities 29,187 233 (12) 29,408
------- ---- ---- -------
Total securities held to maturity $50,773 $557 $(44) $51,286
======= ==== ==== =======
- --------------------------------------------------------------------------------
(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
======= ==== ==== =======
----------------December 31, 1997-------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
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 September 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 September 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.
- --------------------------------------------------------------------------------
(Continued)
9.
10
DCB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Available for sale Held to maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 6,608 $ 6,644 $14,275 $14,264
Due from one to five years 11,208 11,301 3,850 3,934
Due from five to ten years 23,741 24,079 2,949 3,102
Due after ten years 6,370 6,440 512 578
Mortgage-backed securities 15,423 15,456 29,187 29,408
------- ------- ------- -------
$63,350 $63,920 $50,773 $51,286
======= ======= ======= =======
Proceeds from the sales of available-for-sale securities during the nine months
ended September 30, 1997 were $8,083,000. Gross gains of $53,000 and gross
losses of $16,000 were realized on those sales. Losses on called securities
totaled $1,000 for the nine months ended September 30, 1997. There were no sales
of available-for-sale securities during the nine months ended September 30,
1998.
NOTE 3 - LOANS AND LEASES
Loans and leases consisted of the following:
September 30, December 31,
1998 1997
---- ----
Loans secured by real estate
Real estate construction $ 28,179 $ 29,104
Residential 48,354 47,509
Commercial and farmland 63,271 56,434
Commercial and industrial 31,921 29,720
Agricultural 5,547 5,872
State and political subdivisions 1,624 1,894
Consumer and credit card 43,533 42,914
Lease financing, net 8,878 9,010
Home equity lines of credit 7,667 6,177
-------- --------
$238,974 $228,634
======== ========
- --------------------------------------------------------------------------------
(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
Activity in the allowance for loan and lease losses for the three and nine
months ended September 30, 1998 and 1997 is as follows:
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Beginning balance $1,916 $1,962 $1,842 $1,923
Provision for loan losses 124 96 349 288
Recoveries 48 79 158 164
Charge-offs (184) (113) (445) (351)
------ ------ ------ ------
Ending balance $1,904 $2,024 $1,904 $2,024
====== ====== ====== ======
Impaired loans at September 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
Information regarding impaired loans is as follows for the nine months ended
September 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.
- --------------------------------------------------------------------------------
(Continued)
11.
12
DCB FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK (Continued)
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 is not included in the consolidated financial
statements. At September 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 $61,684 and $60,270. Of these
commitments, fixed-rate commitments totaled $7,302 and $2,468 at September 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 case 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.
- --------------------------------------------------------------------------------
12.
13
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
INTRODUCTION
The following discussion focuses on the consolidated financial condition of DCB
Financial Corp. (the "Corporation") at September 30, 1998 compared to December
31, 1997, and the consolidated results of operations for the three and nine
months ended September 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 or implied herein.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $402,608 at September 30, 1998 compared to
$367,118 at December 31, 1997, an increase of $35,490, or 9.7%. 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 $12,100, or 110.0%, from $11,000 at December 31,
1997 to $23,100 at September 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 $8,090, or 7.5%, from $107,769 at December 31, 1997
to $115,859 at September 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 and
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs"). 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 $65,086, or 56.2%, of the total securities portfolio at September 30,
1998. The mortgage-backed securities portfolio, totaling $44,643 at September
30, 1998, provides the Corporation with a constant cash flow stream from
principal repayments.
- --------------------------------------------------------------------------------
13.
14
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 $10,340, or 4.5%, from $228,634 at December 31, 1997 to
$238,974 at September 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 $6,837, or 12.1%, from
$56,434 at December 31, 1997 to $63,271 at September 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. Strong growth in the Corporation's
market also contributed to the overall loan growth, particularly commercial and
industrial loans, which increased $2,201, or 7.4%, from $29,720 at December 31,
1997 to $31,921 at September 30, 1998. There is no concentration of lending to
any one industry.
Despite the loan growth, the gross loan to deposit ratio dropped slightly to
70.0% at September 30, 1998 compared to 70.9% at December 31, 1997.
Total deposits increased $34,356, or 10.6%, from $322,484 at December 31, 1997
to $356,840 at September 30, 1998. Noninterest-bearing deposits increased
$5,313, or 10.4%, while interest-bearing deposits increased $29,043, or 10.7%.
The growth in interest-bearing deposits was due to an increase in
interest-bearing demand and money market deposits, which increased in volume by
$38,515, or 29.1%. Interest-bearing demand and money market deposits comprised
56.8% of total interest-bearing deposits at September 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 that 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. Although the
Corporation experienced a $1,886 increase in savings deposits, such accounts
decreased from 13.9% of total interest-bearing deposits at December 31, 1997 to
13.2% of total interest-bearing deposits at September 30, 1998. Certificates of
deposit decreased $11,358, or 11.1%, comprising 30.0% of total interest-bearing
deposits at September 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 September 30, 1998 and December 31, 1997, borrowed funds consisted primarily
of a $5,000 advance from the Federal Home Loan Bank. The advance was renewed in
August 1998 and is due in May 1999. The renewed advance has a term of 270 days
and carries a fixed interest rate of 5.70%. Repayment or renewal terms will be
evaluated maturity. Borrowed funds also include a demand note issued to the U.S.
Treasury, which totaled $780 at September 30, 1998, and $2,005 at December 31,
1997.
COMPARISON OF RESULTS OF OPERATIONS
NET INCOME. Net income for the nine months ended September 30, 1998 totaled
$3,477, or $.83 per share, compared to net income of $3,666, or $.86 per share,
for the same period in 1997. Net income for the quarter ended September 30, 1998
was $1,186, or $.28 per share, compared to $1,293, or $.30 per share, for the
same quarter in 1997.
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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)
- --------------------------------------------------------------------------------
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 $3,607 and $10,764 for the three and nine months ended
September 30, 1998 compared to $3,603 and $10,458 for the same periods in 1997.
Such increases are the result of an increased volume of interest-earning assets
partially offset by a decrease in the average yield on such assets and an
increase in interest-bearing liabilities that carried a higher average yield.
The average yield on interest-earning assets has decreased as federal funds sold
and securities, as opposed to higher-yielding loans, have made up a larger
proportion of average interest-earning assets in 1998 compared to the prior
year. The average cost of funds has increased as management has elected to offer
attractive, competitive rates to retain deposits. Management expects to continue
its competitive pricing to support growth 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 $124 and $349 for the three and
nine months ended September 30, 1998 and $96 and $288 for the three and nine
months ended September 30, 1997. The growth in the provision is reflective of
the overall growth in the loan portfolio rather than of concerns about credit
quality. Management believes that despite the significant growth in loans, the
quality of the loan portfolio has remained stable over the comparable years as a
result of sound underwriting policies and procedures. Additionally, management
believes increasing the allowance for loan and lease losses is prudent as total
loans, particularly commercial, consumer and construction loans increase.
Accordingly, management anticipates 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. The allowance for loan
and lease losses totaled $1,904, or .80% of gross loans and leases, at September
30, 1998 compared to $1,842, or .81% of gross loans and leases, at December 31,
1997. Net charge-offs for the nine months ended September 30, 1998 were $287
compared to net charge-offs of $187 for the same period in 1997.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$128, or 14.0%, and $591, or 23.9%, for the three and nine months ended
September 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 $408, or 16.5%, and $1,233, or 17.1%, for
the three and nine months ended September 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
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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)
- --------------------------------------------------------------------------------
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.
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
$450 and $1,575, or an effective rate of 27.5% and 31.2%, for the three and nine
months ended September 30, 1998 compared to $647 and $1,783, or an effective
rate of 33.4% and 32.7%, for the three and nine months ended September 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 $14,615 from $25,283 at December 31, 1997 to
$39,898 at September 30, 1998. Cash and equivalents represented 9.9% and 6.9% of
total assets at September 30, 1998 and December 31, 1997. The Corporation has
the ability to borrow up to approximately $22,424 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 nine months ended September 30,
1998 were the net increase in loans of $11,361; the receipt of proceeds from
maturities and repayments of securities of $83,797; securities purchases of
$91,281 and the net increase in deposits of $34,356.
- --------------------------------------------------------------------------------
16.
17
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 $1,425 between December 31, 1997 and
September 30, 1998, primarily due to earnings retained more than purchases of
treasury stock. During the nine months ended September 30, 1998, the Corporation
purchased 75,000 shares of treasury stock, which reduced shareholders' equity by
$1,564, 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 14.3% at September 30,
1998, while the Tier 1 risk-based capital ratio was 13.6%. 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 9.7% at September 30, 1998 exceeded the regulatory
minimum for capital adequacy purposes of 4.0%.
YEAR 2000 ISSUE
The Corporation operates an in-house data processing center which also provides
data processing services to other financial institutions. The Corporation's
lending and deposit activities are almost entirely dependent upon computer
systems which process and record transactions, although the Corporation can
effectively operate with manual systems for brief periods when its electronic
systems malfunction or cannot be accessed. In addition to its basic operating
activities, the Corporation's facilities and infrastructure, such as security
systems and communications equipment, are dependent, to varying degrees, upon
computer systems.
The Corporation is aware of the potential Year 2000 related problems that may
affect the computers which control or operate Corporation's operating systems,
facilities and infrastructure. In 1997, the Corporation began a process of
identifying any Year 2000 related problems that may be experienced by its
computer-operated or computer-dependent systems. Each application has been
identified as "Mission Critical" or "Non-Mission Critical." The Corporation has
contacted the companies that supply or service the Corporation's
computer-operated or computer-dependent systems to obtain confirmation that each
system that is material to the operations of the Corporation is either currently
Year 2000 compliant or is
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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)
- --------------------------------------------------------------------------------
expected to be Year 2000 compliant. With respect to systems that cannot
presently be confirmed as Year 2000 compliant, the Corporation will continue to
work with the appropriate supplier or servicer to ensure all such systems will
be rendered compliant in a timely manner, with minimal expense to the
Corporation or disruption of the Corporation's operations. All of the identified
computer systems affected by the Year 2000 issue are currently in the
renovation, validation or implementation phase of the process of becoming Year
2000 compliant. As a contingency plan, however, the Corporation has determined
that if the Corporation's systems fail, the Corporation would implement manual
systems until such systems could be re-established. The Corporation does not
anticipate that such short-term manual systems would have a material adverse
effect on the Corporation's operations. At this time, however, the expense that
may be incurred by the Corporation in connection with system failure related to
the Year 2000 issue cannot be determined.
In addition to the possible expense related to its own systems, the Corporation
could incur losses if loan payments are delayed due to Year 2000 problems
affecting any of the Corporation's significant borrowers or impairing the
payroll systems of large employers in the Corporation's primary market area.
Because the Corporation's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and the Corporation's primary
market area is not significantly dependent on one employer or industry, the
Corporation does not expect any significant or prolonged Year 2000 related
difficulties will affect net earnings or cash flow. At this time, however, the
expense that may be incurred by the Corporation in connection with Year 2000
issues cannot be determined.
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.
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18.
19
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
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 offsetting 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.
SFAS No. 134 "Accounting for Mortgage-backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
- - SFAS 134 amends SFAS No. 65 "Accounting for Certain Mortgage Banking
Activities" by changing the way companies involved in mortgage banking account
for certain securities and other interests they retain after securitizing
mortgage loans that were held for sale. SFAS 134 allows any retained
mortgage-backed securities after a securitization of mortgage loans held for
sale to be classified based on holding intent in accordance with SFAS 115 except
in cases where the retained mortgage-backed security is committed to be sold
before or during the securitization process in which case it must be classified
as trading. Previously, under SFAS 65, all retained mortgage-backed securities
were required to be classified as trading. SFAS 134 will be effective on January
1, 1999 and is not expected to have a significant impact on the Corporation's
financial statements.
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19.
20
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 59.7%, 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 that 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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20.
21
DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended September 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: 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 and Comprehensive Income on page 4 and
Note 1 to the Consolidated Financial Statements on page 8,
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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21.
22
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: November 5, 1998 /s/ Larry D. Coburn
--------------------------- -----------------------------
(Signature)
Larry D. Coburn
President and Chief Executive
Officer
Date: November 5, 1998 /s/ Douglas A. Lockwood
--------------------------- ------------------------------
(Signature)
Douglas A. Lockwood
Interim Controller
(Principal Accounting Officer)
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22.
23
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 24
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23.