-----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, UWseY+kJJnN+Fb55cG7sn9cTqEpbFzzjzMUWPJXYUX4G621+x4fsYijmz3fn54bf sY7cqFkao8IL/ecdTWvpSQ== 0000950152-04-003782.txt : 20040510 0000950152-04-003782.hdr.sgml : 20040510 20040510093240 ACCESSION NUMBER: 0000950152-04-003782 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040510 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: 04791112 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 l07417ae10vq.txt DCB FINANCIAL CORPORATION 10-Q Page 1 of 24 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, 2004 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. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act). Yes [X] No [ ] As of May 7, 2004, the latest practicable date, 3,934,760 shares of the registrant's no par value common stock were issued and outstanding. DCB FINANCIAL CORP FORM 10-Q QUARTER ENDED MARCH 31, 2004 Table of Contents
Page ---- PART I - FINANCIAL INFORMATION ITEM 1 - Financial Statements Consolidated Balance Sheets................................................... 3 Consolidated Statements of Income ............................................ 4 Consolidated Statements of Comprehensive Income............................... 5 Condensed Consolidated Statements of Cash Flows............................... 6 Notes to the Condensed Consolidated Financial Statements...................... 7 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 11 ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk........... 15 ITEM 4 - Controls and Procedures ............................................. 16 PART II - OTHER INFORMATION................................................... 17 SIGNATURES.................................................................... 19
DCB FINANCIAL CORP CONSOLIDATED BALANCE SHEETS (Dollars in thousands) Item 1. Financial Statements
March 31, December 31, 2004 2003 ----------- ------------ (unaudited) ASSETS Cash and due from financial institutions $ 14,232 $ 20,349 Federal funds sold - - ----------- ------------ Total cash and cash equivalents 14,232 20,349 Securities available for sale 97,976 108,547 Loans held for sale 1,279 - Loans and leases 414,803 404,947 Less allowance for loan and lease losses (4,411) (4,331) ----------- ------------ Net loans and leases 410,392 400,616 Premises and equipment, net 9,682 9,947 Investment in unconsolidated affiliates 1,951 1,951 Accrued interest receivable and other assets 12,437 11,887 ----------- ------------ Total assets $ 547,949 $ 553,297 =========== ============ LIABILITIES Deposits Noninterest-bearing $ 75,860 $ 78,477 Interest-bearing 359,492 363,875 ----------- ------------ Total deposits 435,352 442,352 Federal funds purchased and other short-term borrowings 755 4,619 Federal Home Loan Bank advances 54,231 49,693 Accrued interest payable and other liabilities 6,797 6,944 ----------- ------------ Total liabilities 497,135 503,608 SHAREHOLDERS' EQUITY Common stock, no par value, 7,500,000 shares authorized, 4,273,200 shares issued 3,780 3,780 Retained earnings 53,684 52,775 Treasury stock, 338,440 shares at March 31, 2004 and December 31, 2003 (7,616) (7,616) Accumulated other comprehensive income 966 750 ----------- ------------ Total shareholders' equity 50,814 49,689 ----------- ------------ Total liabilities and shareholders' equity $ 547,949 $ 553,297 =========== ============
See notes to the consolidated financial statements. 3. DCB FINANCIAL CORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data)
Three Months Ended March 31, -------------------- 2004 2003 -------- -------- INTEREST AND DIVIDEND INCOME Loans $ 5,771 $ 5,752 Taxable securities 733 832 Tax-exempt securities 186 150 Federal funds sold and other 6 35 -------- -------- Total interest income 6,696 6,769 INTEREST EXPENSE Deposits 1,238 1,843 Borrowings 560 209 -------- -------- Total interest expense 1,798 2,052 NET INTEREST INCOME 4,898 4,717 Provision for loan and lease losses 378 333 -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 4,520 4,384 NONINTEREST INCOME Service charges on deposit accounts 564 600 Trust department income 197 155 Net gains (losses) on sales of securities (3) 13 Net gains (losses) on sale of leases (22) 4 Net gains on sale of loans 30 507 Cash management fees 123 149 Data processing servicing fees 62 123 Other 210 150 -------- -------- 1,161 1,701 NONINTEREST EXPENSE Salaries and other employee benefits 1,926 2,080 Occupancy and equipment 970 994 Professional services 64 70 Advertising 61 79 Postage, freight and courier 112 73 Supplies 32 36 State franchise taxes 127 121 Other 531 466 -------- -------- 3,823 3,919 -------- -------- INCOME BEFORE INCOME TAXES 1,858 2,166 Income tax expense 552 667 -------- -------- NET INCOME $ 1,306 $ 1,499 ======== ======== Basic and diluted earnings per common share $ 0.33 $ 0.36 ======== ========
See notes to the consolidated financial statements. 4. DCB FINANCIAL CORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands, except per share data)
Three Months Ended March 31, ------------------- 2004 2003 -------- -------- Net income $ 1,306 $ 1,499 Less reclassification for realized gains (losses) on sale of securities included in operations, net of tax effects 2 (9) Unrealized gains (losses) on securities available for sale, net of tax effects 214 (51) -------- -------- Comprehensive income $ 1,522 $ 1,439 ======== ========
See notes to the consolidated financial statements. 5. DCB FINANCIAL CORP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
Three Months Ended March 31, -------------------- 2004 2003 -------- -------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 273 $ 1,570 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Securities available for sale Purchases (10,344) (14,644) Maturities, principal payments and calls 3,841 13,329 Sales 17,132 6,365 Net change in loans (10,146) (137) Premises and equipment expenditures (155) (74) -------- -------- Net cash flows provided by investing activities 328 4,839 CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Net change in deposits (7,000) (1,665) Net change in federal funds and other short-term borrowings (3,864) (1,189) Proceed (repayment) of Federal Home Loan Bank advances 4,538 (7,101) Sale of treasury stock - 72 Cash dividends paid (392) (375) -------- -------- Net cash used in financing activities (6,718) (10,258) -------- -------- Decrease in cash and cash equivalents (6,117) (3,849) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,349 32,503 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,232 $ 28,654 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for Interest on deposits and borrowings $ 1,714 $ 2,109 Cash dividends declared but unpaid $ 397 $ 375
See notes to the consolidated financial statements. 6. DCB FINANCIAL CORP NOTES TO CONDENSED 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 March 31, 2004, and its results of operations and cash flows for the three month periods ended March 31, 2004 and 2003. 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, 2003, included in its 2003 Annual Report. Refer to the accounting policies of the Corporation described in the Notes to Consolidated Financial Statements contained in the Corporation's 2003 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"). All significant intercompany accounts and transactions have been eliminated in consolidation. Management considers the Corporation to operate within one business segment, banking. 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 disclosures provided, and future results could differ. The allowance for loan and lease losses, fair values of financial instruments and 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. 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 3,934,760 and 4,170,919 for the three months ended March 31, 2004 and 2003. The Corporation has no potentially dilutive securities. APPLICATION OF CRITICAL ACCOUNTING POLICIES DCB's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the financial services industry. The application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. The most significant accounting policies followed by the Corporation are presented in Note 1 of Notes to Consolidated Financial Statements contained in the Corporation's 2003 Annual Report. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. 7. DCB FINANCIAL CORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands) NOTE 2 - SECURITIES The amortized cost and estimated fair values of securities available for sale were as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- -----------------March 31, 2004--------------- U.S. government agencies $ 25,466 $ 234 $ (10) $ 25,690 States and political subdivisions 20,151 782 (22) 20,911 Corporate bonds 8,248 9 (37) 8,220 Mortgage-backed and related securities 40,193 597 (113) 40,677 -------- -------- ------- -------- Total debt securities 94,058 1,622 (182) 95,498 Equity securities 2,453 25 - 2,478 -------- -------- ------- -------- Total securities available for sale $ 96,511 $ 1,647 $ (182) $ 97,976 ======== ======== ======= ========
The table below indicates the length of time individual securities have been in a continuous unrealized loss position at March 31, 2004:
(Less than 12 months) (12 months or longer) Total Description of Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized Securities investments value losses investments value losses investments value losses -------------- ----------- -------- ---------- ----------- ----- ---------- ----------- -------- ---------- (Dollars in thousands) U.S. Government and agency obligations 3 $ 2,527 $ (10) - $ - $ - 3 $ 2,527 $ (10) State and municipal obligations 3 1,690 (18) - - - 3 1,690 (18) Corporate bonds 1 2,978 (36) - - - 1 2,978 (36) Mortgage-backed securities 22 12,804 (118) - - - 22 12,804 (118) -- -------- ------ ------ ----- ---- -- -------- ------ Total temporarily impaired securities 29 $ 19,999 $ (182) - $ - $ - 29 $ 19,999 $ (182) == ======== ====== ====== ===== ==== == ======== ======
Management has the intent and ability to hold these securities for the foreseeable future and the decline in the fair value is primarily due to an increase in market interest rates. The fair values are expected to recover as securities approach maturity dates. 8. DCB FINANCIAL CORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands) 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") or the Federal Home Loan Mortgage Corporation ("FHLMC"). At March 31, 2004, 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, 2004, 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 ------------------ Amortized Fair Cost Value --------- -------- Due in one year or less $ 1,459 $ 1,481 Due from one to five years 4,907 5,026 Due from five to ten years 21,164 21,363 Due after ten years 26,335 26,951 Mortgage-backed and related securities 40,193 40,677 --------- -------- $ 94,058 $ 95,498 ========= ========
9. DCB FINANCIAL CORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands) NOTE 3 - LOANS AND LEASES Loans and leases were as follows:
March 31, 2004 --------- Commercial and industrial $ 53,948 Commercial real estate 155,938 Residential real estate and home equity 125,369 Real estate construction and land development 32,640 Consumer and credit card 42,738 Lease financing, net 3,318 --------- 413,951 Add (deduct): Net deferred loan origination costs 1,116 Unearned income on lease s (264) --------- Total loans receivable $ 414,803 =========
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES Activity in the allowance for loan and lease losses was as follows:
Three months ended March 31, ------------------ 2004 2003 ------- ------- Balance at beginning of period $ 4,331 $ 4,094 Provision for loan losses 378 333 Loans charged off (356) (257) Recoveries 58 56 ------- ------- Balance at end of period $ 4,411 $ 4,226 ======= =======
Nonperforming loans were as follows:
March 31, December 31, 2004 2003 --------- ------------ Loans past due 90 days or more and still accruing $ 970 $ 1,252 Nonaccrual loans 1,487 1,614 Impaired loans (most of which are included in nonperforming loans above) were as follows: Period-end loans with no allocated allowance for loan losses $ - $ - Period-end loans with allocated allowance for loan losses 686 1,813 --------- ---------- Total $ 686 $ 1,813 ========= ========== Amount of the allowance for loan losses allocated $ 280 $ 580 ========= ========== Average of impaired loans during the period $ 1,019 $ 2,731 ========= ==========
10. DCB FINANCIAL CORP MANAGEMENTS 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, 2004, compared to December 31, 2003, and the consolidated results of operations for the three months ended March 31, 2004, compared to the same period in 2003. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from reading the consolidated financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report. FORWARD-LOOKING STATEMENTS Certain statements in this report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to the financial condition and prospects, lending risks, plans for future business development and marketing activities, capital spending and financing sources, capital structure, the effects of regulation and competition, and the prospective business of both the Corporation and its wholly-owned subsidiary The Delaware County Bank & Trust Company (the "Bank"). Where used in this report, the word "anticipate," "believe," "estimate," "expect," "intend," and similar words and expressions, related to the Corporation or the Bank or their respective management, identify forward-looking statements. Such forward-looking statements reflect the current views of the Corporation and are based on information currently available to the management of the Corporation and the Bank and upon current expectations, estimates, and projections about the Corporation and its industry, management's belief with respect thereto, and certain assumptions made by management. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to: (i) significant increases in competitive pressure in the banking and financial services industries; (ii) changes in the interest rate environment which could reduce anticipated or actual margins; (iii) changes in political conditions or the legislative or regulatory environment; (iv) general economic conditions, either nationally or regionally (especially in central Ohio), becoming less favorable than expected resulting in, among other things, a deterioration in credit quality of assets; (v) changes occurring in business conditions and inflation; (vi) changes in technology; (vii) changes in monetary and tax policies; (viii) changes in the securities markets; and (ix) other risks and uncertainties detailed from time to time in the filings of the Corporation with the Commission. 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 $547,949 at March 31, 2004, compared to $553,297 at December 31, 2003, a decrease of $5,348, or 0.97%. The decrease in assets was primarily the result of a decrease in securities. These funds were utilized to reduce federal funds purchased and other short-term borrowings. Cash and cash equivalents decreased $6,117 from December 31, 2003 to March 31, 2004. This decline is mainly due to managements intended reduction of cash in order to reduce non-interest earning assets. Total securities decreased $10,571, or 9.74%, from $108,547 at December 31, 2003 to $97,976 at March 31, 2004. The decrease was the result of the proceeds from sales, maturities, calls and principal repayments not being reinvested in order to repay borrowings primarily, in the form of fed funds purchased. 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. 11. DCB FINANCIAL CORP MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Securities and investment securities classified as available for sale at March 31, 2004 totaled $97,976, or 100% of the total securities portfolio. 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 $40,677 at March 31, 2004, provides the Corporation with a constant cash flow stream from principal repayments and interest payments. The Corporation held no structured notes during any period presented. Total loans and leases increased $9,856, or 2.43%, from $404,947 at December 31, 2003 to $414,803 at March 31, 2004. The increase is attributed mainly to the continued growth of residential real estate and home equity, real estate construction and land development, and commercial and industrial loans, which were partially off set by a general decline in various consumer lending categories. Other loan categories in which the Corporation participates, commercial, industrial, and consumer financing, remained relatively stable or experienced small declines in loans outstanding. The Bank's local market continues to experience increases in the amount of commercial real estate development activity. The Bank has no significant loan concentration in any one industry. Total deposits decreased $7,000, or 1.58%, from $442,352 at December 31, 2003 to $435,352 at March 31, 2004. This is mainly due to the reduction of money market deposit account balances which management believes is due to the competitive pricing on deposits in the Bank's market place. Noninterest-bearing deposits decreased $2,617, or 3.3%, in addition to interest-bearing deposits decreasing $4,383, or 1.21%. The decrease in interest-bearing deposits was primarily in the Corporation's "Bank Investment" deposit accounts, which offer a variable interest rate tied to the 3 Month Treasury Bill. COMPARISON OF RESULTS OF OPERATIONS NET INCOME. Net income for the three months ended March 31, 2004 totaled $1,306, compared to net income of $1,499 for the same period in 2003. Earnings per share was $.33 for the three months ended March 31, 2004 compared to $.36 for the three months ended March 31, 2003. NET INTEREST INCOME. Net interest income represents the amount by which interest income on interest-earning assets exceeds interest paid or accrued on interest-bearing liabilities. Net interest income is the largest component of the Corporation's income, and is affected by the interest rate environment, the volume, and the composition of interest-earning assets and interest-bearing liabilities. Net interest income was $4,898 for the three months ended March 31, 2004, compared to $4,717 for the same period in 2003. The $181 increase in the first quarter 2004 compared to 2003 was mainly attributed to an increase in earning assets and a reduction in overall deposit and borrowing expenses which has caused the net spreads to increase. The Asset/Liability Management Committee, which is responsible for determining deposit rates, continues to closely monitor the Bank's cost of funds to take advantage of pricing and cash flow opportunities. PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and lease losses totaled $378 for the three months ended March 31, 2004, compared to $333 for the same period in 2003. The growth in the provision is reflective of the overall growth in the Corporation's loan portfolio, and to a lesser extent, the increase in net-charge offs between the two periods. Net charge-offs for the three months ended March 31, 2004 were $298 compared to net charge-offs of $201 for the same period in 2003. Management will continue to monitor the credit quality of the lending portfolio and will recognize additional provisions in the future to maintain the allowance for loan and lease losses at an appropriate level. The allowance for loan and lease losses totaled $4,411, or 1.06% of total loans and leases at March 31, 2004, compared to $4,331, or 1.07% of total loans and leases at December 31, 2003. 12. DCB FINANCIAL CORP MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income decreased $540, or 31.75%, for the three months ended March 31, 2004, compared to the same period in 2003. The decrease was mainly a result of a decline in the volume of loans sold in the secondary market, which is mainly attributed to retaining these loans within the retail portfolios. In addition transactional volume from the Bank's retail products remained at or below previous years levels. Total noninterest expense decreased $96, or 2.45%, for the three months ended March 31, 2004, compared to the same period in 2003. The decrease was primarily the result of decreases in salaries and employee benefits, offset by an increase in postage, freight and courier related to year end reporting matters. Management has reduced staff through attrition, realignment and early retirement opportunities in order to reduce overall salary and benefit costs. INCOME TAXES. The change of income tax expense is primarily attributable to the increase in tax exempt earnings offset by the decline in income before income taxes. The provision for income taxes totaled $552, for an effective tax rate of 29.71%, for the three months ended March 31, 2004 and $667, for an effective tax rate of 30.79%, for the three months ended March 31, 2003. This decline in effective tax rate is primarily attributable to the increase in tax-exempt municipal security holdings and an increase in bank-owned life insurance contracts which are tax-free. 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 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 decreased $6,117, or 30.06%, to $14,232 at March 31, 2004 compared to $20,349 at December 31, 2003. Cash and equivalents represented 2.60% of total assets at March 31, 2004 and 3.68% of total assets at December 31, 2003. The Corporation has the ability to borrow funds from the Federal Home Loan Bank and has various correspondent banking partners to purchase overnight federal funds should the Corporation need to supplement its future liquidity needs. Management believes the Corporation's liquidity position is adequate based on its current level of cash, cash equivalents, core deposits, the stability of its other funding sources and the support provided by its capital base. 13. DCB FINANCIAL CORP MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) CAPITAL RESOURCES Total shareholders' equity increased $1,125 between December 31, 2003 and March 31, 2004. The increase was primarily due to period earnings of $1,306, a $216 after-tax increase in accumulated other comprehensive income, partially offset by the declaration of $397 in dividends. Tier 1 capital is shareholders' equity excluding the unrealized gain or loss on securities classified as available for sale and intangible assets. 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 defined by regulation 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 11.52% at March 31, 2004, while the Tier 1 risk-based capital ratio was 10.58%. 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, was 8.96% at March 31, 2004. SUBSEQUENT EVENT DCB Financial Corp announced on April 26, 2004 that it has sold its entire investment (450,000 shares) in ProCentury Corporation (NASDAQ:PROS), a specialty property and casualty insurance holding company based in Westerville, Ohio, as a part of ProCentury's initial public offering (IPO) on April 20, 2004. DCB Financial Corp will recognize an after tax gain of approximately $1.6 million on the sale after transaction and other related expenses. This transaction is expected to provide an approximate $0.40 per share increase in DCBF's second quarter 2004 earnings. DCB Financial Corp intends to use the proceeds for general corporate purposes and to reduce corporate debt. DCBF will retain an investment in ProAlliance, a specialty line insurance company spun-off from ProCentury. 14. DCB FINANCIAL CORP MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Item 3. Quantitative and Qualitative Disclosure About Market Risk ASSET AND LIABILITY MANAGEMENT AND MARKET RISK The Corporation's primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. Interest rate risk is the possibility 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 the 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 Corporation 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 2003 Annual Report includes a table depicting the changes in the Corporation's interest rate risk as of December 31, 2003, 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, 2003 that would significantly change their ratio of rate sensitive assets to rate sensitive liabilities. 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 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 for repricing. The Corporation can utilize various tools to reduce exposure to changes in interest rates including offering floating versus fixed rate products, or utilizing interest rate swaps. 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. 15. DCB FINANCIAL CORP MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Item 4. Controls and Procedures The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2004, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2004, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There was no change in the Company's internal control over financial reporting that occurred during the Company's fiscal quarter ended March 31, 2004, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 16. DCB FINANCIAL CORP FORM 10-Q Quarter ended March 31, 2004 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. 17. DCB FINANCIAL CORP FORM 10-Q Quarter ended March 31, 2004 PART II - OTHER INFORMATION 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) Exhibits - The following exhibits are filed as a part of this report:
Exhibit No. Exhibit - ----------- ------- 3.1 Amended and Restated Articles of Incorporation of DCB Financial Corp, incorporated by reference to the Company's Report on Form 10-Q filed with the Commission on November 14, 2003. 3.2 Amended and Restated Articles of Incorporation of DCB Financial Corp, incorporated by reference to the Company's Report on Form 10-Q filed with the Commission on November 14, 2003. 4. Instruments Defining the Rights of Security Holders. (See Exhibits 3.1 and 3.2.) 31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(a) Reports on Form 8-K - A report on Form 8-K was filed on January 22, 2004 (report date: 1/22/04) - fourth quarter 2004 earnings release. (b) Reports on Form 8-K - A report on Form 8-K was filed on April 26, 2004 (report date: 4/26/04) - Corporation's sale of its investment in ProCentury Corporation. 18. 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 7, 2004 /s/ Jeffrey Benton -------------------------------------------- (Signature) Jeffrey Benton President and Chief Executive Officer Date: May 7, 2004 /s/ John A. Ustaszewski -------------------------------------------- (Signature) John A. Ustaszewski Vice President and Chief Financial Officer 19. DCB FINANCIAL CORP INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER - ------- ----------- ----------- 3.1 Amended and Restated Articles of Incorporation of NA DCB Financial Corp, incorporated by reference to the Company's Report on Form 10-Q filed with the Commission on November 14, 2003. 3.2 Amended and Restated Articles of Incorporation of NA DCB Financial Corp, incorporated by reference to the Company's Report on Form 10-Q filed with the Commission on November 14, 2003. 4 Instruments Defining the Rights of Security NA Holders. (See Exhibits 3.1 and 3.2.) 31.1 Certification of Chief Executive Officer pursuant Page 21 to section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Page 22 section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. 1350, as enacted Page 23 Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification pursuant to 18 U.S.C. 1350, as enacted Page 24 Pursuant to section 906 of the Sarbanes-Oxley Act of 2002
20. EX-31.1 2 l07417aexv31w1.txt EXHIBIT 31.1 DCB FINANCIAL CORP EXHIBIT 31.1 CERTIFICATIONS I, Jeffrey Benton, President and Chief Executive Officer of DCB Financial Corp, certify that: 1. I have reviewed this quarterly report on Form 10-Q of DCB Financial Corp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [THIS PARAGRAPH INTENTIONALLY LEFT BLANK.] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ Jeffrey Benton -------------------------------------------- (Signature) Jeffrey Benton Title: President and Chief Executive Officer 21. EX-31.2 3 l07417aexv31w2.txt EXHIBIT 31.2 DCB FINANCIAL CORP EXHIBIT 31.2 CERTIFICATIONS I, John A. Ustaszewski Vice President and Chief Financial Officer of DCB Financial Corp, certify that: 1. I have reviewed this quarterly report on Form 10-Q of DCB Financial Corp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [THIS PARAGRAPH INTENTIONALLY LEFT BLANK.] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ John A. Ustaszewski -------------------------------------------------- (Signature) John A. Ustaszewski Title: Vice President and Chief Financial Officer 22. EX-32.1 4 l07417aexv32w1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of DCB Financial Corp (the "Company") on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey Benton, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jeffrey Benton Jeffrey Benton President and Chief Executive Officer May 7, 2004 23. EX-32.2 5 l07417aexv32w2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of DCB Financial Corp (the "Company") on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John A. Ustaszewski, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John A. Ustaszewski John A. Ustaszewski Vice-President and Chief Financial Officer May 7, 2004 24. -----END PRIVACY-ENHANCED MESSAGE-----