-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VXvaAEN/q9xxiay2t8FXRO4KsHdzfUVFFq81yWUUXIGF2Y4+DpYeobmqhO2TxzOT X0gGSkRIrFY9Qc97mUJXDA== 0000950152-02-004274.txt : 20020515 0000950152-02-004274.hdr.sgml : 20020515 20020515115251 ACCESSION NUMBER: 0000950152-02-004274 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DCB FINANCIAL CORP CENTRAL INDEX KEY: 0001025877 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 311469837 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22387 FILM NUMBER: 02649436 BUSINESS ADDRESS: STREET 1: 110 RIVERBEND AVE. CITY: LEWIS CENTER STATE: OH ZIP: 43035 BUSINESS PHONE: 740-657-7000 MAIL ADDRESS: STREET 1: 110 RIVERBEND AVE. CITY: LEWIS CENTER STATE: OH ZIP: 43035 10-Q 1 l94348ae10-q.txt DCB FINANCIAL CORPORATION FORM 10-Q 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, 2002 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) 110 Riverbend Avenue, Lewis Center, Ohio 43035 ---------------------------------------------- (Address of principal executive offices) (740) 657-7000 --------------------------------- (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 April 30, 2002: 4,178,200 common shares DCB FINANCIAL CORP. FORM 10-Q QUARTER ENDED MARCH 31, 2002 - -------------------------------------------------------------------------------- Table of Contents PART I - FINANCIAL INFORMATION ITEM 1 - Financial Statements Page ---- Consolidated Balance Sheets................................................ 3 Consolidated Statements of Income and Comprehensive Income................. 4 Condensed Consolidated Statements of Cash Flows............................ 5 Notes to the Consolidated Financial Statements............................. 6 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk....... 13 PART II - OTHER INFORMATION................................................ 14 SIGNATURES................................................................. 15 DCB FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands) - -------------------------------------------------------------------------------- Item 1. Financial Statements -------------------- (Dollars in thousands) March 31, December 31, 2002 2001 ------------- -------------- ASSETS Cash and due from financial institutions $ 16,782 $ 17,945 Federal funds sold 4,620 -- ------------- -------------- Total cash and cash equivalents 21,402 17,945 Securities available for sale 87,937 84,021 Securities held to maturity 29,922 34,718 Loans held for sale 2,659 2,588 Loans and leases 363,053 362,556 Less allowance for loan and lease losses (3,742) (3,596) ------------- -------------- Net loans and leases 359,311 358,960 Premises and equipment, net 12,349 12,320 Investment in unconsolidated affiliates 1,951 1,951 Accrued interest receivable and other assets 6,780 6,877 ------------- -------------- Total assets $ 522,311 $ 519,380 ============= ============== LIABILITIES Deposits Noninterest-bearing $ 67,893 $ 69,859 Interest-bearing 366,678 360,855 ------------- -------------- Total deposits 434,571 430,714 Federal funds purchased and other short-term borrowings 2,047 4,174 Federal Home Loan Bank advances 33,066 33,162 Accrued interest payable and other liabilities 2,738 2,209 ------------- -------------- Total liabilities 472,422 470,259 SHAREHOLDERS' EQUITY Common stock, no par value, 7,500,000 shares authorized, 4,273,200 shares issued 3,779 3,779 Retained earnings 47,840 46,720 Treasury stock, 95,000 shares, at cost (1,978) (1,978) Accumulated other comprehensive income 248 600 ------------- -------------- Total shareholders' equity 49,889 49,121 ------------- -------------- Total liabilities and shareholders' equity $ 522,311 $ 519,380 ============= ==============
- -------------------------------------------------------------------------------- See notes to the consolidated financial statements. 3. DCB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) - -------------------------------------------------------------------------------- Three Months Ended March 31, ------------------ 2002 2001 -------------- --------------- Interest and dividend income Loans, including fees $ 6,372 $ 7,461 Taxable securities 1,512 1,946 Tax-exempt securities 139 123 Federal funds sold and other 18 77 -------------- --------------- 8,041 9,607 Interest expense Deposits 2,297 4,423 Borrowings 357 475 -------------- --------------- 2,654 4,898 -------------- --------------- Net interest income 5,387 4,709 Provision for loan and lease losses 300 130 -------------- --------------- Net interest income after provision for loan and lease losses 5,087 4,579 Noninterest income Service charges on deposit accounts 557 530 Trust department income 213 168 Net gains (losses) on sales of securities 15 -- Net gains on sales of loans 201 152 Cash management fees 120 76 Data processing servicing fees 73 90 Other 238 205 -------------- --------------- 1,417 1,221 Noninterest expense Salaries and employee benefits 2,190 1,973 Occupancy and equipment 885 704 Professional services 69 66 Advertising 98 68 Postage, freight and courier 135 103 Supplies 71 81 State franchise taxes 133 128 Other 752 578 -------------- --------------- 4,333 3,701 -------------- --------------- Income before income taxes 2,171 2,099 Income tax expense 716 692 -------------- --------------- Net income 1,455 1,407 Other comprehensive income (loss) (352) 709 -------------- --------------- Comprehensive income $ 1,103 $ 2,116 ============== =============== Basic earnings per common share $ 0.35 $ 0.34 ============== ===============
- -------------------------------------------------------------------------------- See notes to the consolidated financial statements. 4. DCB FINANCIAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) - -------------------------------------------------------------------------------- Three Months Ended March 31, ------------------ 2002 2001 ---- ---- Net cash flows from operating activities $ 2,736 $ (1,099) Cash flows from investing activities Securities available for sale Purchases (14,783) (10,684) Maturities, principal payments and calls 9,440 1,184 Sales 875 22,478 Securities held to maturity Purchases -- (3,503) Maturities, principal payments and calls 4,737 1,562 Net change in loans (450) 77 Premises and equipment expenditures (397) (1,495) ----------- ----------- Net cash from investing activities (578) 9,619 Cash flows from financing activities Net change in deposits 3,857 3,833 Net change in federal funds sold and other short-term borrowings (2,127) (1,186) Repayment of Federal Home Loan Bank advances (96) (91) Cash dividends paid (335) (292) ----------- ----------- Net cash from financing activities 1,299 2,264 ----------- ----------- Net change in cash and cash equivalents 3,457 10,784 Cash and cash equivalents at beginning of year 17,945 18,497 ----------- ----------- Cash and cash equivalents at end of year $ 21,402 $ 29,281 =========== ===========
- -------------------------------------------------------------------------------- See notes to the consolidated financial statements. 5. 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, 2002, and its results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying consolidated 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 accounting principles generally accepted in the United States of America 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, 2001, included in its 2001 annual report. Refer to the accounting policies of the Corporation described in the notes to financial statements contained in the Corporation's 2001 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. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments and the status of contingencies are particularly subject to change. Income tax expense is based on the effective tax rate expected to be applicable for the entire year. 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 amounts for the 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 common share is net income divided by the weighted average number of shares of common stock outstanding during the period. The weighted average number of common shares outstanding was 4,178,200 for the three months ended March 31, 2002 and 2001. The Corporation does not have any shares that could potentially dilute its earnings per share computation. A new accounting standard dealing with asset retirement obligations will apply for 2003. The Corporation does not believe this standard will have a material affect on its financial condition or results of operations. Effective January 1, 2002, the Corporation adopted a new accounting standard issued by the Financial Accounting Standards Board on impairment and disposal of long-lived assets. The effect of this standard on the financial position and results of operations of the Corporation was not material. - -------------------------------------------------------------------------------- (Continued) 6. DCB FINANCIAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) - -------------------------------------------------------------------------------- NOTE 2 - LOANS AND LEASES Loans and leases were as follows: March 31, December 31, 2002 2001 ------------ ------------ Commercial and industrial $ 52,082 $ 52,534 Commercial real estate 133,819 124,537 Residential real estate and home equity 87,254 88,797 Real estate construction and land development 29,777 34,212 Consumer and credit card 51,081 52,993 Lease financing, net 8,968 9,520 ------------ ------------ 362,981 362,593 Less: Net deferred loan fees and costs 1,253 1,303 Unearned income on leases (1,181) (1,340) ------------ ------------ $ 363,053 $ 362,556 ============ ============ NOTE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES Activity in the allowance for loan and lease losses was as follows: 2002 2001 ------------ ------------ Balance - January $ 3,596 $ 3,334 Provision for loan losses 300 130 Loans charged off (192) (86) Recoveries 38 37 ------------ ------------ Balance - March 31 $ 3,742 $ 3,415 ============ ============ Nonperforming loans were as follows: March 31, December 31, 2002 2001 ------------ ------------ Loans past due over 90 days still accruing interst $ 45 $ 200 Nonaccrual loans 4,928 3,390 Impaired loans (most of which are included in nonperforming loans above) were as follows: Period-end loans with no allocated allowance for loan losses $ 640 $ 648 Period-end loans with allocated allowance for loan losses 4,903 2,915 ------------ ------------ Total $ 5,543 $ 3,563 ============ ============ Amount of the allowance for loan losses allocated $ 1,711 $ 1,110 ============ ============ Average of impaired loans during the period $ 5,398 $ 2,998 ============ ============
- -------------------------------------------------------------------------------- 7. 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, 2002 compared to December 31, 2001, and the consolidated results of operations for the three months ended March 31, 2002 compared to the same period in 2001. 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 $522,311 at March 31, 2002 compared to $519,380 at December 31, 2001, an increase of $2,931, or .56%. The Bank experienced lower loan growth during the first quarter, and utilized this opportunity to increase liquidity within the balance sheet through an increase in cash and cash equivalents. Federal funds sold totaled $4,620 at March 31, 2002, but totaled $0 at December 31, 2001. The increase in fed funds is attributed to management's decision to invest short-term versus investing in long-term securities. - -------------------------------------------------------------------------------- 8. DCB FINANCIAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- Total securities decreased $880, or .7%, from $118,739 at December 31, 2001 to $117,859, at March 31, 2002. The slight decrease was the result of the majority of the proceeds from maturities, calls and principal payments being reinvested in short-term securities to increase liquidity for future balance sheet funding purposes. The Corporation invests primarily in U.S. Treasury notes, U.S. government agencies, municipal bonds, corporate obligations and mortgage-backed securities. Mortgage-backed securities include Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage Association ("GNMA") and Federal National Mortgage Association ("FNMA") participation certificates. Securities classified as available for sale totaled $87,937, or 74.6% of the total securities portfolio, at March 31, 2002. Management classifies securities as available for sale to provide the Corporation with the flexibility to create liquidity. The mortgage-backed securities portfolio, totaling $60,341 at March 31, 2002, 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 $497, or .1%, from $362,556 at December 31, 2001 to $363,053 at March 31, 2002. The major area of growth was in commercial real estate, which increased $9,282, or 7.5%. The Corporation attributes this growth to a strong local economy and the large number of businesses moving into the market area. The growth in commercial real estate was offset by declines in most other loan types, but primarily by a $4,435 decrease in real estate construction and land development. There is no significant concentration of lending to any one industry. Total deposits increased $3,857, or .9%, from $430,714 at December 31, 2001 to $434,571 at March 31, 2002. Noninterest-bearing deposits decreased $1,966, or 2.8%, while interest-bearing deposits increased $5,823, or 1.6%. Interest-bearing demand and money market deposits comprised 40.6% of total interest-bearing deposits at March 31, 2002, compared to 49.7% of total interest-bearing deposits at December 31, 2001, while the Corporation experienced a $7,835, or 28.9%, increase in volume in such accounts. The increase was primarily in the Corporation's "Bank Investment" deposit accounts, which offer a variable interest rate tied to the 3 Month Treasury Bill. Savings deposits represented 14% of total interest-bearing deposits at both December 31, 2001 and March 31, 2002. Certificates of deposit increased $3,097, or 2.35%, comprising 36.4% of total interest-bearing deposits at March 31, 2002, compared to 36.3% of total interest-bearing deposits at December 31, 2001. The increase in certificates of deposit was primarily due to the increase of public fund certificates of deposit. COMPARISON OF RESULTS OF OPERATIONS NET INCOME. Net income for the three months ended March 31, 2002 totaled $1,455, compared to net income of $1,407 for the same period in 2001. Earnings per share was $0.35 for the three months ended March 31, 2002 compared to $.34 for the three months ended March 31, 2001. 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. - -------------------------------------------------------------------------------- 9. DCB FINANCIAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- Net interest income was $5,387 for the three months ended March 31, 2002 compared to $4,709 for the same period in 2001. The $678 increase in 2002 over 2001 was primarily the result of a sharp decline in rates paid on interest-bearing liabilities. 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 probable 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 regularly 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 $300 for the three months ended March 31, 2002 compared to $130 for the same period in 2001. This growth is reflective of an increase in net charge-offs along with an increase nonperforming and impaired loans during the first three months of 2002. Net charge-offs for the three months ended March 31, 2002 were $154 compared to net charge-offs of $49 for the same period in 2001. The allowance for loan and lease losses totaled $3,742, or 1.0% of total loans and leases at March 31, 2002. The allowance at December 31, 2001 was $3,596, or 0.99% of total loans and leases. The allowance was 75% of nonperforming loans at March 31, 2002, compared to 95% at December 31, 2001. Management believes that the allowance for loan losses is sufficient to cover probable incurred credit losses as of March 31, 2002. NON-INTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased $196, or 16.1%, for the three months ended March 31, 2002 compared to the same period in 2001. The increase was the result of an increase in fee income from the Corporation's trust department and from earnings on corporate banking products. Additionally, the Corporation experienced increased gains on loan sales (both servicing-released and service-retained) due to management's decision to increase origination volume, taking advantage of the current low interest rate environment. Total non-interest expense increased $632, or 17.1%, for the three months ended March 31, 2002 compared to the same period in 2001. The increase was primarily the result of increases in salaries and employee benefits and occupancy and equipment expense, where such increases made up $398 of the total increase. These were planned increases necessary to support the continued growth of the Corporation. Other changes in noninterest expense were not significant. INCOME TAXES. The increase in the provision for federal income tax expense is primarily attributable to the change in pre-tax income. The provision for income taxes totaled $716, for an effective tax rate of 33.0%, for the three months ended March 31, 2002 and $692, for an effective tax rate of 33.0%, for the three months ended March 31, 2001. - -------------------------------------------------------------------------------- 10. DCB FINANCIAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- LIQUIDITY Liquidity is the ability of the Corporation to fund customers' needs for borrowing and deposit withdrawals. The purpose of liquidity management is to assure sufficient cash flow to meet all of the financial commitments and to capitalize on opportunities for business expansion. This ability depends on the institution's financial strength, asset quality and types of deposit and investment instruments offered by the Corporation to its customers. The Corporation's principal sources of funds are deposits, loan and securities repayments, maturities of securities, sales of securities available for sale and other funds provided by operations. The Bank also has the ability to borrow from the FHLB. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan and mortgage-backed security prepayments are more influenced by interest rates, general economic conditions and competition. The Corporation maintains investments in liquid assets based upon management's assessment of (1) need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets and (4) objectives of the asset/liability management program. Cash and cash equivalents increased $3,457, or 19.3%, to $21,402 at March 31, 2002 compared to $17,945 at December 31, 2001. Cash and cash equivalents represented 4.1% of total assets at March 31, 2002 and 3.5% of total assets at December 31, 2001. The Bank 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 2002 were purchases of securities of $14,783, security sales, maturities, principal payments and calls of $15,052; net increase in deposits of $3,857; and the repayment of borrowed funds totaling $2,223. CAPITAL RESOURCES Total shareholders' equity increased $768 between December 31, 2001 and March 31, 2002. The increase was primarily due to earnings retained net of a $352 after-tax decrease in accumulated other comprehensive income and $334 of dividends declared. Tier 1 capital is shareholders' equity excluding accumulated other comprehensive income and intangible assets. Total capital includes Tier 1 capital plus the allowance for loan and lease 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. - -------------------------------------------------------------------------------- 11. 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 Corporation's ratio of total capital to risk-weighted assets was 13.0% at March 31, 2002, while the Tier 1 risk-based capital ratio was 12.0%. 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 8.8% at March 31, 2002 exceeded the regulatory minimum for capital adequacy purposes of 4.0%. On April 24, 2002, the Corporation announced a stock repurchase program whereby the Board of Directors authorized management to repurchase up to 400,000 shares, or approximately 10% of the Corporation's outstanding common stock. The number of shares purchased and the price to be paid will depend upon the availability of shares, the prevailing market prices and any other considerations that may, in the opinion of the Board of Directors or management, affect the advisability of purchasing shares. IMPACT OF NEW ACCOUNTING STANDARDS A new accounting standard requires identified intangible assets to be separated from goodwill. Identifiable intangible assets with finite useful lives will be amortized under a new standard, whereas, goodwill, both amounts previously recorded and future amounts purchased, will cease being amortized. Annual impairment testing is required for goodwill with impairment being recorded if the carrying amount of goodwill exceeds its implied fair value. Adoption of this standard on January 1, 2002 did not materially impact the Corporation's financial statements as no intangible assets are currently held. A new accounting standard dealing with asset retirement obligations will apply for 2003. The Corporation does not believe this standard will have a material affect on its financial condition or results of operations. Effective January 1, 2002, the Corporation adopted a new accounting standard issued by the Financial Accounting Standards Board on impairment and disposal of long-lived assets. The effect of this standard on the financial position and results of operations of the Corporation was not material. - -------------------------------------------------------------------------------- 12. DCB FINANCIAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ASSET AND LIABILITY MANAGEMENT AND MARKET RISK The Corporation's primary market risk exposure is interest rate risk and, to a lesser extent, liquidity 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. The measurement and analysis of thee exposure of the Corporation's primary operating subsidiary, The Delaware County Bank and Trust Company, to changes in the interest rate environment are referred to as asset/liability management. One method used to analyze the Corporation's sensitivity to changes in interest rates is the "net portfolio value" ("NPV") methodology. NPV is generally considered to be the present value of the difference between expected incoming cash flows on interest-earning and other assets and expected outgoing cash flows on interest-bearing and other liabilities. For example, the asset/liability model that the Corportion currently employs attempts to measure the change in NPV for a variety of interest rate scenarios, typically for parallel shifts of 100 to 300 basis points in market rates. The Corporation's 2001 annual report includes a table depicting the changes in the Corporation's interest rate risk as of December 31, 2001, and December 31, 2000, as measured by changes in NPV for instantaneous and sustained parallel shifts of 100 to 300 basis points in market interest rates. Management believes that no events have occurred since December 31, 2001 that would significantly change their ratio of rate sensitive assets to rate sensitive liabilities. As illustrated in the tables, the Corporation's NPV is more sensitive to rising rates than declining rates. From an overall perspective, such difference in sensitivity occurs principally because, as rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when interest rates are declining. Thus, in a rising interest rate environment, because the Corporation has many fixed-rate loans in its loan portfolio, the amount of interest the Corporation would receive on its loans would increase relatively slowly as loans are slowly prepaid and new loans at higher rates are made. Moreover, the interest the Corporation would pay on its deposits would increase rapidly because the Corporation's deposits generally have shorter periods to repricing. Additional consideration should also be given to today's current interest rate levels. Several deposit products are within 200 basis points of zero percent and other products within 300 basis points. Should rates continue to decline, fewer liabilities could be repriced down to offset potentially lower yields on loans. Thus decreases could also impact future earnings and the Corporation's NPV. As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in making risk calculations. - -------------------------------------------------------------------------------- 13. DCB FINANCIAL CORP. FORM 10-Q Quarter ended March 31, 2002 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.) (b) No reports on Form 8-K were filed during the quarter for which this report is filed. - -------------------------------------------------------------------------------- 14. 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 15, 2002 /s/ Larry D. Coburn --------------- ------------------------------------- (Signature) Larry D. Coburn President and Chief Executive Officer Date: May 15, 2002 /s/ John Ustaszewski --------------- ------------------------------------- (Signature) John Ustaszewski Chief Financial Officer - -------------------------------------------------------------------------------- 15. DCB FINANCIAL CORPORATION INDEX TO EXHIBITS - -------------------------------------------------------------------------------- EXHIBIT NUMBER DESCRIPTION PAGE NUMBER - ------ ----------- ----------- 11 Statement re: computation of per share earnings Reference is hereby made to Consolidated Statements of Income on page 4 and Note 1 of Notes to Consolidated Financial Statements on page 6, hereof.
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