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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-22387
-------
DCB Financial Corp.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1469837
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
41 North Sandusky Street, Delaware, Ohio 43015
----------------------------------------------
(Address of principal executive offices)
(740) 363-1133
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
X Yes No
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common stock, no par value Outstanding at May 1, 1999:
4,178,200 common shares
2
DCB FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
- --------------------------------------------------------------------------------
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements Page
----
Consolidated Balance Sheets................................................. 3
Consolidated Statements of Income........................................... 4
Consolidated Statements of Comprehensive Income............................. 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity.................................................... 6
Condensed Consolidated Statements of Cash Flows............................. 7
Notes to the Consolidated Financial Statements.............................. 8
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 13
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk......... 19
PART II - OTHER INFORMATION................................................. 20
SIGNATURES.................................................................. 21
3
DCB FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Item 1. Financial Statements
March 31, December 31,
1999 1998
---- ----
ASSETS
Cash and due from banks $ 16,769 $ 13,942
Federal funds sold 11,600 1,550
-------- --------
Total cash and cash equivalents 28,369 15,492
Securities available for sale, at fair value 83,712 91,399
Securities held to maturity (estimated fair values
of $37,717 at March 31, 1999 and $49,697 at
December 31, 1998) 37,320 49,184
Loans and leases 258,636 255,289
Less allowance for loan and lease losses (1,992) (1,948)
-------- --------
Net loans and leases 256,644 253,341
Premises and equipment, net 4,017 3,965
Accrued interest receivable and other assets 5,596 5,759
-------- --------
Total assets $415,658 $418,540
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 61,313 $ 57,810
Interest-bearing 302,891 311,108
-------- --------
Total deposits 364,204 368,918
Short-term borrowings 6,091 5,225
Long-term borrowings 4,142 4,225
Accrued interest payable and other liabilities 2,315 1,863
-------- --------
Total liabilities 376,752 380,231
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares
authorized, 4,273,200 shares issued 3,779 3,779
Retained earnings 37,257 36,283
Treasury stock, 95,000 shares, at cost (1,978) (1,978)
Accumulated other comprehensive income (152) 225
-------- --------
Total shareholders' equity 38,906 38,309
-------- --------
Total liabilities and shareholders' equity $415,658 $418,540
======== ========
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
3.
4
DCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
1999 1998
---- ----
INTEREST INCOME
Loans, including fees $5,341 $5,077
Securities
Taxable 1,758 1,623
Tax-exempt 156 90
Federal funds sold 75 136
------ ------
Total interest income 7,330 6,926
------ ------
INTEREST EXPENSE
Deposits 3,358 3,315
Borrowings 136 90
------ ------
Total interest expense 3,494 3,405
------ ------
NET INTEREST INCOME 3,836 3,521
Provision for loan losses 224 96
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 3,612 3,425
NONINTEREST INCOME
Service charges on deposit accounts 298 302
Trust department income 95 68
Data service fees 141 94
Securities gains 20 --
Net gains from sales of loans 258 188
Other 432 383
------ ------
Total noninterest income 1,244 1,035
NONINTEREST EXPENSE
Salaries and other employee benefits 1,591 1,403
Occupancy 208 212
Equipment 353 337
State franchise taxes 130 130
Other 771 665
------ ------
Total noninterest expense 3,053 2,747
------ ------
INCOME BEFORE INCOME TAXES 1,803 1,713
Provision for income taxes 578 566
------ ------
NET INCOME $1,225 $1,147
====== ======
EARNINGS PER COMMON SHARE $ .29 $ .27
====== ======
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(Continued)
4.
5
DCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
1999 1998
---- ----
NET INCOME $1,225 $1,147
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain/(loss) on available for sale
securities arising during the period (364) 4
Reclassification adjustment for amounts
realized on securities sales included in
net income (13) --
------ ------
COMPREHENSIVE INCOME $ 848 $1,151
====== ======
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(Continued)
5.
6
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
1999 1998
---- ----
Balance at beginning of period $38,309 $36,040
Net income 1,225 1,147
Dividends declared ($.06 per share in 1999 and
$.05 per share in 1998) (251) (212)
Purchase of treasury stock (45,000 shares in 1998) -- (941)
Change in unrealized gain/loss on
securities available for sale, net of tax (377) 4
------- -------
Balance at end of period $38,906 $36,038
======= =======
- --------------------------------------------------------------------------------
(Continued)
6.
7
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
1999 1998
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 5,147 $ (1,431)
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (10,520) (7,080)
Maturities and repayments 9,388 4,363
Proceeds from sales 8,248 --
Securities held to maturity
Purchases (3,716) (15,813)
Maturities and repayments 15,616 16,880
Net change in loans (6,879) (2,522)
Premises and equipment expenditures (225) (83)
-------- --------
Net cash from investing activities 11,912 (4,255)
Cash flows from financing activities
Net change in deposits (4,714) 7,277
Net change in short-term borrowings 866 (5)
Repayment of long-term borrowings (83) --
Purchases of treasury stock -- (941)
Cash dividends paid (251) (212)
-------- --------
Net cash from financing activities (4,182) 6,119
-------- --------
Net change in cash and cash equivalents 12,877 433
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,492 25,283
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,369 $ 25,716
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes $ -- $ --
Cash paid for interest 3,261 3,133
- --------------------------------------------------------------------------------
7.
8
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of DCB Financial Corp. (the "Corporation") at March 31,
1999, 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, 1998, included in its 1998 annual report. Refer to the
accounting policies of the Corporation described in the notes to financial
statements contained in the Corporation's 1998 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.
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.
- --------------------------------------------------------------------------------
8.
9
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per share computations are based on the weighted average number of
shares of common stock outstanding during the year. The weighted average number
of shares outstanding was 4,178,200 and 4,272,201 for the three months ended
March 31, 1999 and 1998.
NOTE 2 - SECURITIES
The amortized cost and estimated fair values of securities were as follows:
------------------March 31, 1999------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 3,263 $ 21 $ -- $ 3,284
U.S. government agencies
and corporations 46,612 131 (127) 46,616
States and political subdivisions 6,867 13 (119) 6,761
Mortgage-backed securities 25,965 47 (218) 25,794
------- ---- ----- -------
Total debt securities 82,707 212 (464) 82,455
Other securities 1,234 23 -- 1,257
------- ---- ----- -------
Total securities available for sale $83,941 $235 $(464) $83,712
======= ==== ===== =======
SECURITIES HELD TO MATURITY
U.S. government agencies
and corporations $ 1,000 $ 1 $ -- $ 1,001
States and political subdivisions 7,662 272 (12) 7,922
Corporate obligations 248 2 -- 250
Mortgage-backed securities 28,410 199 (65) 28,544
------- ---- ----- -------
Total securities held to maturity $37,320 $474 $ (77) $37,717
======= ==== ===== =======
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9.
10
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
-----------------December 31, 1998----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 4,518 $ 38 $ -- $ 4,556
U.S. government agencies
and corporations 50,194 395 (33) 50,556
States and political subdivisions 6,167 55 (30) 6,192
Mortgage-backed securities 29,009 59 (160) 28,908
------- ---- ----- -------
Total debt securities 89,888 547 (223) 90,212
Other securities 1,169 18 -- 1,187
------- ---- ----- -------
Total securities available for sale $91,057 $565 $(223) $91,399
======= ==== ===== =======
SECURITIES HELD TO MATURITY
U.S. government agencies
and corporations $ 1,000 $ 2 $ -- $ 1,002
States and political subdivisions 7,994 330 (7) 8,317
Corporate obligations 12,150 -- (35) 12,115
Mortgage-backed securities 28,040 230 (7) 28,263
------- ---- ----- -------
Total securities held to maturity $49,184 $562 $ (49) $49,697
======= ==== ===== =======
Substantially all mortgage-backed securities are backed by pools of mortgages
that are insured or guaranteed by the Federal National Mortgage Association
("FNMA"), the Government National Mortgage Association ("GNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC").
At March 31, 1999, there were no holdings of securities of any one issuer, other
than the U.S. government and its agencies, in an amount greater than 10% of
shareholders' equity.
The amortized cost and estimated fair value of debt securities at March 31,
1999, 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 $ 4,849 $ 4,873 $ 1,960 $ 1,969
Due from one to five years 4,463 4,461 4,061 4,154
Due from five to ten years 38,331 38,353 2,343 2,447
Due after ten years 9,099 8,974 546 603
Mortgage-backed securities 25,965 25,794 28,410 28,544
------- ------- ------- -------
$82,707 $82,455 $37,320 $37,717
======= ======= ======= =======
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10.
11
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Proceeds from the sales of available-for-sale securities during the three months
ended March 31, 1999 were $8,248. Gross gains of $26 and gross losses of $6 were
realized on those sales. There were no sales of available-for-sale securities
during the three months ended March 31, 1998.
NOTE 3 - LOANS AND LEASES
Loans and leases consisted of the following:
March 31, December 31,
1999 1998
---- ----
Commercial and industrial $ 44,483 $ 39,864
Commercial real estate 67,517 66,501
Residential real estate and home equity 61,561 63,140
Real estate construction and land development 31,185 32,382
Consumer and credit card 44,429 44,050
Lease financing, net 9,461 9,352
-------- --------
$258,636 $255,289
======== ========
Included in residential real estate and home equity loans are loans held for
sale of $2,454 at March 31, 1999 and $6,897 at December 31, 1998.
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses for the three months ended
March 31, 1999 and 1998 is as follows:
1999 1998
---- ----
Balance - January 1 $1,948 $1,842
Provision for loan losses 224 96
Loans charged off (228) (99)
Recoveries 48 65
------ ------
Balance - March 31 $1,992 $1,904
====== ======
Impaired loans are not material in any period presented.
- --------------------------------------------------------------------------------
11.
12
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
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 Corporation grants residential, consumer, and commercial loans to customers
located primarily in Delaware, Union and surrounding counties in Ohio. Most
loans are secured by specific items of collateral including business assets,
consumer assets and residences.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet financing needs of its customers. The contract
amount of these instruments are not included in the consolidated financial
statements. At March 31, 1999 and December 31, 1998, the contract amount of
these instruments, which primarily include commitments to extend credit and
standby letters of credit, totaled approximately $58,324 and $61,245. Of these
commitments, fixed-rate commitments totaled $3,587 and $4,080 at March 31, 1999
and December 31, 1998. 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. The
Corporation 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
In the following pages, management presents an analysis of the consolidated
financial condition of DCB Financial Corp. (the "Corporation") at March 31, 1999
compared to December 31, 1998, and the consolidated results of operations for
the three months ended March 31, 1999 compared to the same period in 1998. This
discussion is designed to provide shareholders with a more comprehensive review
of the operating results and financial position than could be obtained from an
examination of the financial statements alone. This analysis should be read in
conjunction with the financial statements and related footnotes and the selected
financial data included elsewhere in this report.
FORWARD-LOOKING STATEMENTS
When used in this document, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimated," "projected," or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Corporation's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Corporation's market area and competition, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. Factors listed above could affect the Corporation's financial
performance and could cause the Corporation's actual results for future periods
to differ materially from any statements expressed with respect to future
periods.
The Corporation does not undertake, and specifically disclaims any obligation,
to publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $415,658 at March 31, 1999 compared to $418,540
at December 31, 1998, a decrease of $2,882, or 0.7%. The decline in assets was
the result of a decrease in securities partially offset by an increase in
federal funds sold and loans.
Federal funds sold increased $10,050, from $1,550 at December 31, 1998 to
$11,600 at March 31, 1999. This increase was the result of the Corporation
decreasing its investment in federal funds sold to purchase securities near the
end of 1998 and subsequently using the proceeds from the maturity of securities
to reinvest in federal funds sold during the three months ended March 31, 1999.
Total securities decreased $19,551, or 13.9%, from $140,583 at December 31, 1998
to $121,032 at March 31, 1999. The decrease was the result of the proceeds from
maturities, calls and principal repayments not being reinvested due to a
decrease in deposits or being invested in federal funds sold. 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
- --------------------------------------------------------------------------------
13.
14
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Mortgage Corporation ("FHLMC"), Government National Mortgage Association
("GNMA") and Federal National Mortgage Association ("FNMA") participation
certificates. Securities classified as available for sale totaled $83,712, or
69.2% of the total securities portfolio, at March 31, 1999. Management
classifies securities as available for sale to provide the Corporation with the
flexibility to move funds into loans as demand warrants. The mortgage-backed
securities portfolio, totaling $54,204 at March 31, 1999, 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.
Total loans increased $3,347, or 1.3%, from $255,289 at December 31, 1998 to
$258,636 at March 31, 1999. The majority of the growth was experienced in
commercial and industrial loans and commercial real estate loans, which
increased $4,619, or 11.6%, and $1,016, or 1.5%, respectively. The Corporation
attributes this growth to a strong local economy and the large number of
businesses moving into the market area. There is no concentration of lending to
any one industry. The growth in commercial and industrial loans and commercial
real estate loans was partially offset by a decrease in residential real estate
and home equity loans of $1,579, or 2.5%, and construction loans, both
residential and commercial, of $1,197, or 3.7%.
Due to the loan growth combined with a decline in deposits, the gross loan to
deposit ratio increased to 71.0% at March 31, 1999 compared to 69.2% at December
31, 1998.
Total deposits decreased $4,714, or 1.3%, from $368,918 at December 31, 1998 to
$364,204 at March 31, 1998. Noninterest-bearing deposits increased $3,503, or
6.1%, while interest-bearing deposits decreased $8,217, or 2.6%.
Interest-bearing demand and money market deposits comprised 58.4% of total
interest-bearing deposits at March 31, 1998 compared to 58.1% of total
interest-bearing deposits at December 31, 1998 as the Corporation experienced a
$3,648, or 2.0%, decrease in volume in such accounts. The decrease was primarily
in the Corporation's "Prime Time" deposit accounts which offer a variable
interest rate tied to prime. The Corporation experienced a slight increase in
savings deposits which increased from 13.1% of total interest-bearing deposits
at December 31, 1998 to 13.8% of total interest-bearing deposits at March 31,
1999. Certificates of deposit decreased $5,441, or 6.1%, comprising 27.8% of
total interest-bearing deposits at March 31, 1999 compared to 28.8% of total
interest-bearing deposits at December 31, 1998. The decrease in certificates of
deposit was primarily due to the loss of public funds which was partially offset
by the transfer of "Prime Time" deposit accounts to certificates of deposit.
At March 31, 1999 and December 31, 1998, borrowed funds consisted primarily of a
$5,000 FHLB advance and a mortgage-matched advance from the FHLB with a
remaining balance of $4,142 at March 31, 1999 and $4,225 at December 31, 1998.
Due in May 1999, the $5,000 FHLB advance had an original term of 270 days and
carries a fixed interest rate of 5.70% with interest due monthly. Due in October
2008, the mortgage-matched advance had an original term of 10 years and carries
a fixed interest rate of 5.10%. Principal and interest on the mortgage-matched
advance are due monthly. Borrowed funds also include a demand note issued to the
U.S. Treasury which totaled $1,091 at March 31, 1999 and $225 at December 31,
1998.
COMPARISON OF RESULTS OF OPERATIONS
NET INCOME. Net income for the three months ended March 31, 1999 totaled $1,225,
compared to net income of $1,147 for the same period in 1998. Earnings per share
was $.29 per share for the three months ended March 31, 1999 compared to $.27
for the three months ended March 31, 1998.
- --------------------------------------------------------------------------------
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 $3,836 for the three months ended March 31, 1999
compared to $3,521 for the same period in 1998. The $315 increase in 1999 over
1998 was the result of an increased volume of interest-earning assets partially
offset by an increase in interest-bearing liabilities that carried a higher
average yield. Management has elected to offer attractive, competitive rates to
retain deposits, provided the funds can be invested in income-earning assets
with adequate yields.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses represents the charge to income necessary to adjust the allowance
for loan and lease losses to an amount that represents management's assessment
of the losses inherent in the Corporation's loan 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 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 $224 for the three months ended
March 31, 1999 compared to $96 for the same period in 1998. The growth in the
provision is reflective of the overall growth in the commercial loan portfolio
and an increase in net charge-offs compared to 1998. Net charge-offs for the
three months ended March 31, 1999 were $179 compared to net charge-offs of $34
for the same period in 1998. Management believes that the quality of the loan
portfolio has remained relatively stable over the comparable year.
The allowance for loan and lease losses totaled $1,992, or 0.77% of total loans
and leases, at March 31, 1998 compared to $1,948, or 0.76% of total loans and
leases, at December 31, 1998. The allowance was 202% of nonperforming loans at
March 31, 1999, compared to 181% at December 31, 1998. Management believes
increasing the allowance for loan and lease losses is prudent as total loans,
particularly commercial, consumer and construction loans, and leases increase.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$209, or 20.2%, for the three months ended March 31, 1999 compared to the same
period in 1998. The increase is due to increased fee income from the
Corporation's data service center, increased gains on loan sales (both
servicing-released and service-retained) and increased trust department income.
Total noninterest expense increased $306, or 11.1%, for the three months ended
March 31, 1999 compared to the same period in 1998. The increase were primarily
the result of increases in salaries and employee benefits and other expense,
where such increases made up $294 of the total increase. These were planned
increases relating to increased staffing and the moving of departments to the
new operations facility leased in 1997. Expansion of the Corporation's
operations facilities was necessary to support growth. Other changes in
noninterest expense were not significant.
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15.
16
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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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
$578, for an effective tax rate of 32.1%, for the three months ended March 31,
1999 and $566, for an effective tax rate of 33.0%, for the three months ended
March 31, 1998.
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 security
repayments, maturities of securities, sales of securities available for sale and
other funds provided by operations. The Bank also has the ability to borrow from
the FHLB. While scheduled loan repayments and 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 $12,877, of 83.1%, to $28,369 at March 31,
1999 compared to $15,492 at December 31, 1998. Cash and equivalents represented
6.8% of total assets at March 31, 1999 and 3.7% of total assets at December 31,
1998. The Corporation has the ability to borrow funds from the Federal Home Loan
Bank and has various federal fund sources from correspondent banks, should the
Corporation need to supplement its future liquidity needs in order to meet loan
demand or to fund investment opportunities. Management believes the
Corporation's liquidity position is strong based on its high level of cash, cash
equivalents, core deposits, the stability of its other funding sources and the
support provided by its capital base.
As summarized in the Consolidated Statements of Cash Flows, the most significant
transactions which affected the Corporation's level of cash and cash
equivalents, cash flows and liquidity during the first quarter of 1999 were the
net increase in loans of $6,879; the receipt of proceeds from maturities and
repayments of securities of $25,004; securities purchases of $14,236; proceeds
from sales of securities of $8,248; and the net decrease in deposits of $4,714.
CAPITAL RESOURCES
Total shareholders' equity increased $597 between December 31, 1998 and March
31, 1999, primarily due to earnings retained. No shares of treasury stock were
purchased by the Corporation during the three months ended March 31, 1999;
however, management may purchase additional shares in the future, as
opportunities arise. The number of shares to be purchased and the price to be
paid will depend upon the availability of shares, the prevailing market prices
and any other considerations which may, in the opinion of the Corporation's
Board of Directors or management, affect the advisability of purchasing shares.
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16.
17
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Tier 1 capital is shareholders' equity excluding the unrealized gain or loss on
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 14.4% at March 31, 1999,
while the Tier 1 risk-based capital ratio was 13.7%. 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 9.4% at March 31, 1999 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 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. The Corporation has examined its
computer hardware and software and determined it will cost approximately
$160,000 to make such systems Year 2000 compliant. Of that amount, the
Corporation has already spent $43,198. At this time, however, any additional
expense that may be incurred by the Corporation in connection with Year 2000
issues cannot be determined.
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
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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)
- --------------------------------------------------------------------------------
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.
IMPACT OF NEW ACCOUNTING STANDARDS
Beginning January 1, 2000 a new accounting standard will require all derivatives
to be recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and losses on the hedge
and on the hedged item, even if the fair value of the hedged item is not
otherwise recorded. This is not expected to have a material effect but the
effect will depend on derivative holdings when this standard applies.
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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)
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risks. Interest rate risk is the risk that the
Corporation's financial condition will be adversely affected due to movements in
interest rates. The income of financial institutions is primarily derived from
the excess of interest earned on interest-earning assets over the interest paid
on interest-bearing liabilities. Accordingly, the Corporation places great
importance on monitoring and controlling interest rate risk.
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 indices change. As of
March 31, 1999, $93,633, or 36.2%, of the Corporation's loan portfolio reprices
on regular 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 1998 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, 1998. 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, 1998 which would significantly change the ratio of rate
sensitive assets to rate sensitive liabilities for the given time horizons.
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19.
20
DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended March 31, 1999
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders: There are no
matters required to be reported under this item.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibit 11, Statement re: computation of per share earnings.
(Reference is hereby made to Consolidated Statements of Income
on page 4, hereof.)
Exhibit 27, Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
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20.
21
DCB FINANCIAL CORP.
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DCB FINANCIAL CORP.
-----------------------------------------
(Registrant)
Date: May 14, 1999 /s/ Larry D. Coburn
---------------------- -----------------------------------------
(Signature)
Larry D. Coburn
President and Chief Executive Officer
Date: May 14, 1999 /s/ Douglas A. Lockwood
---------------------- -----------------------------------------
(Signature)
Douglas A. Lockwood
Interim Controller
(Principal Accounting Officer)
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21.
22
DCB FINANCIAL CORP.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
11 Statement re: computation of per Reference is hereby made to
share earnings Consolidated Statements of
Income on page 4 and Note 1 of
Notes to Consolidated Financial
Statements on page 8, hereof.
27 Financial Data Schedule 21
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22.