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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, 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 November 1, 1999:
4,178,200 common shares
2
DCB FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 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........ 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,
1999 1998
---- ----
ASSETS
Cash and due from banks $ 14,346 $ 13,942
Federal funds sold 14,215 1,550
-------- --------
Total cash and cash equivalents 28,561 15,492
Securities available for sale, at fair value 87,297 91,399
Securities held to maturity (estimated fair values of
$40,752 at September 30, 1999 and $49,697 at December
31, 1998) 41,081 49,184
Loans and leases 269,692 255,289
Less allowance for loan and lease losses (2,442) (1,948)
-------- --------
Net loans and leases 267,250 253,341
Premises and equipment, net 4,063 3,965
Accrued interest receivable and other assets 7,119 5,159
-------- --------
Total assets $435,371 $418,540
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 59,327 $ 57,810
Interest-bearing 324,328 311,108
-------- --------
Total deposits 383,655 368,918
Short-term borrowings 6,990 5,225
Long-term borrowings 3,973 4,225
Accrued interest payable and other liabilities 1,085 1,863
-------- --------
Total liabilities 395,703 380,231
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 shares issued 3,779 3,779
Retained earnings 39,193 36,283
Treasury stock, 95,000 shares, at cost (1,978) (1,978)
Accumulated other comprehensive income (1,326) 225
-------- --------
Total shareholders' equity 39,668 38,309
-------- --------
Total liabilities and shareholders' equity $435,371 $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 Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $5,516 $5,330 $16,286 $15,720
Securities
Taxable 1,643 1,640 4,941 4,162
Nontaxable 156 107 468 287
Commercial paper 58 178 158 708
Other 143 87 260 573
------ ------ ------- -------
Total interest income 7,516 7,342 22,113 21,450
INTEREST EXPENSE
Deposits 3,540 3,645 10,100 10,420
Other 129 90 399 266
------ ------ ------- -------
Total interest expense 3,669 3,735 10,499 10,686
------ ------ ------- -------
NET INTEREST INCOME 3,847 3,607 11,614 10,764
Provision for loan losses 400 124 975 349
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION 3,447 3,483 10,639 10,415
OTHER INCOME
Service charges on deposit accounts 382 298 1,031 904
Trust fees 66 52 239 172
Data service fees 105 92 363 269
Other operating income 462 427 1,337 1,180
Gain (loss) on sale of securities (1) -- 24 --
Gain on sale of loans 108 171 663 535
------ ------ ------- -------
Total other income 1,122 1,040 3,657 3,060
OTHER EXPENSE
Salaries and other employee benefits 1,568 1,528 4,709 4,336
Occupancy expense 205 200 616 613
Equipment expense 360 336 1,083 1,016
Stationery and supplies expense 51 76 192 248
Ohio franchise tax expense 122 128 382 387
Other operating expenses 599 619 1,994 1,823
------ ------ ------- -------
Total other expenses 2,905 2,887 8,976 8,423
------ ------ ------- -------
INCOME BEFORE FEDERAL INCOME TAXES 1,664 1,636 5,320 5,052
Provision for income taxes 536 450 1,658 1,575
------ ------ ------- -------
NET INCOME $1,128 $1,186 $ 3,662 $ 3,477
====== ====== ======= =======
EARNINGS PER COMMON SHARE $ .27 $ .28 $ .88 $ .83
====== ====== ======= =======
- ---------------------------------------------------------------------------------------
See notes to the consolidated financial statements.
4.
5
DCB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
- ----------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
NET INCOME $1,128 $1,186 $ 3,662 $3,477
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain/(loss) on available-
for-sale securities arising during
the period (336) 214 (1,536) 144
Reclassification adjustment for
amounts realized on securities
sales included in net income 1 -- (15) --
------ ------ ------- ------
Total other comprehensive income (335) 214 (1,551) 144
------ ------ ------- ------
COMPREHENSIVE INCOME $ 793 $1,400 $ 2,111 $3,621
====== ====== ======= ======
- ----------------------------------------------------------------------------------------
See notes to the consolidated financial statements.
5.
6
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,
1999 1998 1999 1998
---- ---- ---- ----
Balance at beginning of period $39,125 $36,484 $38,309 $36,040
Net income 1,128 1,186 3,662 3,477
Dividends declared ($.06 and $.18 per share
in 1999 and $.05 and $.15 per share in 1998) (250) (209) (752) (632)
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 (335) 214 (1,551) 144
------- ------- ------- -------
Balance at end of period $39,668 $37,465 $39,668 $37,465
======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------
See notes to the consolidated financial statements.
6.
7
DCB FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------------
1999 1998
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 6,953 $ 3,424
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (30,812) (30,128)
Maturities and repayments 22,548 19,092
Proceeds from sales 9,985 --
Securities held to maturity
Purchases (16,492) (61,153)
Maturities and repayments 24,600 64,705
Net change in loans (18,570) (11,361)
Premises and equipment expenditures (641) (899)
-------- --------
Net cash from investing activities (9,382) (19,744)
Cash flows from financing activities
Net change in deposits 14,737 34,356
Net change in short-term borrowings 1,765 (1,225)
Proceeds from long-term debt -- 5,000
Repayment of long-term debt (252) (5,000)
Purchases of treasury stock -- (1,564)
Cash dividends paid (752) (632)
-------- --------
Net cash from financing activities 15,498 30,935
-------- --------
Net change in cash and cash equivalents 13,069 14,615
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,492 25,283
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,561 $ 39,898
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes $ 1,760 $ 1,472
Cash paid for interest 10,144 10,600
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
7.
8
DCB FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of DCB Financial Corp. (the "Corporation") at September
30, 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 the 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.
While the Corporation monitors the revenue streams of its various products and
services, operations are managed and financial performance is evaluated on a
Corporate-wide basis. Accordingly, all of the Corporation's banking operations
are considered by management to be aggregated in one reportable operating
segment.
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.
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 4,180,591 for the three months ended
September 30, 1999 and 1998 and 4,178,200 and 4,203,438 for the nine months
ended September 30, 1999 and 1998.
- --------------------------------------------------------------------------------
(Continued)
8.
9
DCB FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and estimated fair values of securities were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------September 30, 1999--------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 2,238 $ 4 $ (1) $ 2,241
U.S. government agencies
and corporations 50,994 12 (1,185) 49,821
States and political subdivisions 6,858 3 (436) 6,425
Mortgage-backed securities 27,867 29 (460) 27,436
------- ---- ------- -------
Total debt securities 87,957 48 (2,082) 85,923
Other securities 1,350 24 -- 1,374
------- ---- ------- -------
Total securities available for sale $89,307 $ 72 $(2,082) $87,297
======= ==== ======= =======
SECURITIES HELD TO MATURITY
States and political subdivisions $ 7,518 $ 91 $ (86) $ 7,523
Corporate obligations 7,949 23 (6) 7,966
Mortgage-backed securities 25,614 30 (381) 25,263
------- ---- ------- -------
Total securities held to maturity $41,081 $144 $ (473) $40,752
======= ==== ======= =======
--------------December 31, 1998--------------
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
======= ==== ======= =======
- --------------------------------------------------------------------------------
(Continued)
9.
10
DCB FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
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, 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 September 30,
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 $ 2,619 $ 2,611 $ 8,707 $ 8,726
Due from one to five years 13,846 13,678 4,215 4,250
Due from five to ten years 31,094 30,304 2,014 2,014
Due after ten years 12,531 11,894 531 499
Mortgage-backed securities 27,867 27,436 25,614 25,263
------- ------- ------- -------
$87,957 $85,923 $41,081 $40,752
======= ======= ======= =======
Proceeds from the sales of available-for-sale securities during the nine months
ended September 30, 1999 were $9,985. Gross gains of $31 and gross losses of $7
were realized on those sales. 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,
1999 1998
---- ----
Commercial and industrial $ 46,220 $ 39,864
Commercial real estate 75,239 66,501
Residential real estate and home equity 65,405 63,140
Real estate construction and land development 28,370 32,382
Consumer and credit card 44,570 44,050
Lease financing, net 9,888 9,352
-------- --------
$269,692 $255,289
======== ========
- --------------------------------------------------------------------------------
(Continued)
10.
11
DCB FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS AND LEASES (Continued)
Included in residential real estate and home equity loans are loans held for
sale of $618 at September 30, 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 and nine
months ended September 30, 1999 and 1998 is as follows:
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Beginning balance $2,211 $1,916 $1,948 $1,842
Provision for loan losses 400 124 975 349
Charge-offs (206) (184) (622) (446)
Recoveries 37 48 141 158
------ ------ ------ ------
Balance - September 30 $2,442 $1,904 $2,442 $1,904
====== ====== ====== ======
Impaired loans are not material in any period presented.
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 is not included in the consolidated financial
statements. At September 30, 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 $65,580 and $61,245. Of these
commitments, fixed-rate commitments totaled $4,670 and $4,080 at September 30,
1999 and December 31, 1998. Since many commitments to make loans expire without
being used, the amount does not represent future cash commitments.
- --------------------------------------------------------------------------------
(Continued)
11.
12
DCB FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
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 September 30,
1999 compared to December 31, 1998, and the consolidated results of operations
for the three and nine months ended September 30, 1999 compared to the same
periods 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 the financial statements alone. This analysis should be read in
conjunction with the financial statements and related footnotes.
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 $435,371 at September 30, 1999 compared to
$418,540 at December 31, 1998, an increase of $16,831, or 4.0%. The increase in
assets was the result of an increase in cash and cash equivalents and loans
offset by a decrease in securities.
Cash and cash equivalents increased $13,069, from $15,492 at December 31, 1998
to $28,561 at September 30, 1999. This increase was the result of proceeds from
the maturities, calls and principal repayments of securities not being
reinvested during the period.
Total securities decreased $12,205, or 8.7%, from $140,583 at December 31, 1998
to $128,378 at September 30, 1999. The decrease was the result of the proceeds
from maturities, calls and principal repayments not being reinvested. 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.
- --------------------------------------------------------------------------------
13.
14
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Securities classified as available for sale totaled $87,297, or 67.9% of the
total securities portfolio, at September 30, 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 $53,050 at September 30, 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 $14,403, or 5.6%, from $255,289 at December 31, 1998 to
$269,692 at September 30, 1999. The majority of the growth was experienced in
commercial real estate loans and commercial and industrial loans, which
increased $8,738, or 13.1%, and $6,356 or 15.9%, 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 real estate loans and commercial and
industrial loans was partially offset by a decrease in construction loans, both
residential and commercial, of $4,012, or 12.4%.
Due to the loan growth combined with a slightly smaller increase in deposits,
the gross loan to deposit ratio increased to 70.3% at September 30, 1999
compared to 69.2% at December 31, 1998.
Total deposits increased $14,737, or 4.0%, from $368,918 at December 31, 1998 to
$383,655 at September 30, 1999. Noninterest-bearing deposits increased $1,517,
or 2.6%, while interest-bearing deposits increased $13,220, or 4.2%.
Interest-bearing demand and money market deposits comprised 59.4% of total
interest-bearing deposits at September 30, 1999 compared to 58.1% of total
interest-bearing deposits at December 31, 1998 as the Corporation experienced a
$12,130, or 6.7%, increase in volume in such accounts. The increase was
primarily in the Corporation's "Superior Money Market" deposit accounts that
offer a variable interest rate tied to the 3-month Treasury Bill index. The
Corporation experienced a slight increase in savings deposits, which increased
from 13.1% of total interest-bearing deposits at December 31, 1998 to 13.3% of
total interest-bearing deposits at September 30, 1999. Certificates of deposit
decreased $1,220, or 1.4%, comprising 27.2% of total interest-bearing deposits
at September 30, 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 September 30, 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 $3,973 at September 30, 1999 and $4,225 at December 31,
1998. Due in November 1999, the $5,000 FHLB advance had an original term of 180
days and carries a fixed interest rate of 5.03% 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 $1,990 at September 30, 1999,
and $225 at December 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)
- --------------------------------------------------------------------------------
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1999 AND SEPTEMBER 30, 1998
NET INCOME. Net income for the quarter ended September 30, 1999 was $1,128 or
$.27 per share, compared to net income of $1,186 or $.28 per share for the same
quarter in 1998.
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 $3,847 for the three months ended September 30, 1999
compared to $3,607 for the same period in 1998. The $240 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 rate. 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 $400 for the three months ended
September 30, 1999 compared to $124 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.
The allowance for loan and lease losses totaled $2,442, or .91% of total loans
and leases, at September 30, 1999 compared to $1,948, or 0.76% of total loans
and leases, at December 31, 1998. The allowance was 169% of nonperforming loans
which totaled $1,445 at September 30, 1999, compared to 181% of nonperforming
loans which totaled $1,078 at December 31, 1998. Management believes increasing
the allowance for loan and lease losses is necessary as total loans,
particularly commercial, consumer and construction loans, and leases increase.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$82, or 7.9%, for the three months ended September 30, 1999 compared to the same
period in 1998. The increase is due to increased fee income from the
Corporation's data service center, increased fees collected on deposit accounts
and increased trust department income.
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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)
- --------------------------------------------------------------------------------
Total noninterest expense increased $18, or .6% for the three months ended
September 30, 1999 compared to the same periods in 1998. The increase is
primarily the result of increases in salaries and other employee benefits,
equipment expense and loan, lease and credit card expense, partially offset by
decreases in other operating expenses and stationary and supplies expense. Other
changes in noninterest expense are 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
$536, or an effective tax rate of 32.2%, for the three months ended September
30, 1999 compared to $450, or an effective rate of 27.5% for the three months
ended September 30, 1998.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 AND SEPTEMBER 30, 1998
NET INCOME. Net income for the nine months ended September 30, 1999 totaled
$3,662, or $.88 per share, compared to net income of $3,477, or $.83 per share,
for the same period in 1998.
NET INTEREST INCOME. Net interest income was $11,614 for the nine months ended
September 30, 1999 compared to $10,764 for the same periods in 1998. The $850
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 rate. 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 totaled $975 for the nine months ended September 30, 1999 compared
to $349 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 nine months ended
September 30, 1999 were $481 compared to net charge-offs of $287 for the same
period in 1998. The increase in net charge-offs for the nine months ended
September 30, 1999 is primarily due to an increase in net charge-offs of
commercial and industrial loans compared to the same period in 1998.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$597, or 19.5%, for the nine months ended September 30, 1999 compared to the
same period in 1998. The increase is due to increased fee income from the
Corporation's data service center, increased fees collected on deposit accounts
and increased trust department income.
Total noninterest expense increased $553, or 6.6% for the nine months ended
September 30, 1999 compared to the same period in 1998. The increase is
primarily the result of increases in salaries and other employee benefits and
other operating expenses, where such increases made up $506 of the total
increase. Other changes in noninterest expense are 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
$1,658, or an effective tax rate of 31.2%, for the nine months ended September
30, 1999 compared to $1,575, or an effective rate of 31.2%, for the nine months
ended September 30, 1998.
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16.
17
DCB FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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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 $13,069, or 84.4%, to $28,561 at September
30, 1999 compared to $15,492 at December 31, 1998. Cash and equivalents
represented 6.6% of total assets at September 30, 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 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 nine months ended September 30,
1999 were the receipt of proceeds from maturities and repayments of securities
of $47,148, securities purchases of $47,304; the net increase in loans of
$18,570; the net increase in deposits of $14,737; and proceeds from sales of
securities of $9,985.
CAPITAL RESOURCES
Total shareholders' equity increased $1,359 between December 31, 1998 and
September 30, 1999, primarily due to earnings retained. No shares of treasury
stock were purchased by the Corporation during the nine months ended September
30, 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.
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 prescribed by regulation based on their inherent risk.
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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 and its subsidiaries meet all regulatory capital requirements.
The ratio of total capital to risk-weighted assets was 14.3% at September 30,
1999, while the Tier 1 risk-based capital ratio was 13.5%. Regulatory minimums
call for a total risk-based capital ratio of 8.0%, at least half of which must
be Tier 1 capital. The Corporation's leverage ratio, defined as Tier 1 capital
divided by average assets, of 9.7% at September 30, 1999 exceeded the regulatory
minimum for capital adequacy purposes of 4.0%.
Accumulated other comprehensive income decreased from $225 at December 31, 1998
to $(1,326) at September 30, 1999. The decrease in accumulated other
comprehensive income was attributable to increases in interest rates during the
nine months ended September 30, 1999.
YEAR 2000 ISSUE
The Corporation operates an in-house data processing center that 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 that 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. All of the
identified mission critical computer systems affected by the Year 2000 issue
have completed the renovation, validation and implementation phase of the
process of becoming Year 2000 compliant. The Corporation has examined its
computer hardware and software and estimated it would cost approximately $160 to
make such systems Year 2000 compliant. Of that amount, the Corporation has
already spent $31. 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.
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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)
- --------------------------------------------------------------------------------
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.
IMPACT OF NEW ACCOUNTING STANDARDS
Beginning January 1, 2001, 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. The new standard does not allow hedging of a
security which is classified as held to maturity. Upon adoption of this
standard, companies will be allowed to transfer securities from held to maturity
to available for sale if they wish to be able to hedge the securities in the
future. This standard is not expected to have a material effect but the effect
will depend on derivative holdings when this standard applies.
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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)
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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
September 30, 1999, $111,235, or 41.2%, of the Corporation's loan portfolio
reprices on a 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 that 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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20.
21
DCB FINANCIAL CORP.
FORM 10-Q
Quarter ended September 30, 1999
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
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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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 1, 1999 /s/ Larry D. Coburn
---------------------------- -------------------
(Signature)
Larry D. Coburn
President and Chief Executive Officer
Date: November 1, 1999 /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 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 24
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23.