10-Q 1 l13790ae10vq.txt DCB FINANCIAL 10-Q Page 1 of 33 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, 2005 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 [ ] No [X] 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 6, 2005, 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, 2005 Table of Contents PART I - FINANCIAL INFORMATION
Page ---- 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........................................ 14 ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk............. 18 ITEM 4 - Controls and Procedures ............................................... 19 PART II - OTHER INFORMATION..................................................... 20 SIGNATURES ................................................................... 22
DCB FINANCIAL CORP CONSOLIDATED BALANCE SHEETS (Dollars in thousands) Item 1. Financial Statements
March 31, December 31, 2005 2004 ----------- ------------ (unaudited) ASSETS Cash and due from financial institutions $ 12,648 $ 11,238 Securities available for sale 97,322 98,979 Loans held for sale 1,836 1,122 Loans and leases 507,436 483,305 Less allowance for loan and lease losses (5,115) (4,818) --------- --------- Net loans and leases 502,321 478,487 Premises and equipment, net 8,636 8,846 Bank owned life insurance 8,553 8,457 Accrued interest receivable and other assets 5,336 4,556 --------- --------- Total assets $ 636,652 $ 611,685 ========= ========= LIABILITIES Deposits Noninterest-bearing $ 65,302 $ 65,148 Interest-bearing 402,092 389,426 --------- --------- Total deposits 467,394 454,574 Federal funds purchased and other short-term borrowings 22,623 5,215 Federal Home Loan Bank advances 89,419 95,813 Accrued interest payable and other liabilities 2,222 1,822 --------- --------- Total liabilities 581,658 557,424 SHAREHOLDERS' EQUITY Common stock, no par value, 7,500,000 shares authorized, 4,273,200 shares issued at March 31, 2005 and December 31, 2004 3,780 3,780 Retained earnings 59,065 57,862 Treasury stock, 338,440 shares at March 31, 2005 and December 31, 2004 (7,616) (7,616) Accumulated other comprehensive income (loss) (235) 235 --------- --------- Total shareholders' equity 54,994 54,261 --------- --------- Total liabilities and shareholders' equity $ 636,652 $ 611,685 ========= =========
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, ------------------ 2005 2004 ------- ------- INTEREST AND DIVIDEND INCOME Loans $ 7,218 $ 5,771 Taxable securities 760 733 Tax-exempt securities 184 186 Federal funds sold and other - 6 ------- ------- Total interest income 8,162 6,696 INTEREST EXPENSE Deposits 1,818 1,238 Borrowings 850 560 ------- ------- Total interest expense 2,668 1,798 NET INTEREST INCOME 5,494 4,898 Provision for loan and lease losses 470 378 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 5,024 4,520 NONINTEREST INCOME Service charges on deposit accounts 571 564 Trust department income 165 197 Net loss on sales of securities - (3) Net loss on sales of assets (12) (22) Gains on sale of loans 49 30 Gain on sale of investment in unconsolidated affiliate 184 - Treasury management fees 101 123 Data processing servicing fees 73 62 Other 286 210 ------- ------- 1,417 1,161 NONINTEREST EXPENSE Salaries and other employee benefits 2,212 1,926 Occupancy and equipment 880 970 Professional services 182 64 Advertising 87 61 Postage, freight and courier 94 112 Supplies 61 32 State franchise taxes 108 127 Other 474 531 ------- ------- 4,098 3,823 ------- ------- INCOME BEFORE INCOME TAXES 2,343 1,858 Federal income tax expense 707 552 ------- ------- NET INCOME $ 1,636 $ 1,306 ======= ======= Basic and diluted earnings per common share $ 0.42 $ 0.33 ======= =======
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, ------------------ 2005 2004 ------- ------- Net income $ 1,636 $ 1,306 Less reclassification for realized losses on sale of securities included in operations, net of tax effects - 2 Unrealized gains (losses) on securities available for sale, net of tax effects (470) 214 ------- ------- Comprehensive income $ 1,166 $ 1,522 ======= =======
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, -------------------- 2005 2004 -------- -------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 976 $ 273 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Securities available for sale Purchases (8,033) (10,344) Maturities, principal payments and calls 4,464 3,841 Sales 5,020 17,132 Net change in loans (24,341) (10,146) Premises and equipment expenditures (77) (155) -------- -------- Net cash flows provided by (used in) investing activities (22,967) 328 CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Net change in deposits 12,820 (7,000) Net change in federal funds purchased and other short-term borrowings 17,408 (3,864) Proceeds (repayment) of Federal Home Loan Bank advances (6,394) 4,538 Cash dividends paid (433) (392) -------- -------- Net cash provided by (used in) financing activities 23,401 (6,718) -------- -------- Net change in cash and cash equivalents 1,410 (6,117) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,238 20,349 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,648 $ 14,232 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for Interest on deposits and borrowings $ 2,292 $ 1,714 Cash dividends declared but unpaid $ 433 $ 397
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, 2005, and its results of operations and cash flows for the three month periods ended March 31, 2005 and 2004. All such adjustments are normal and recurring in nature. The accompanying consolidated financial statements have been prepared in accordance with the instructions for 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 the consolidated financial statements, and notes thereto, included in its 2004 Annual Report. Refer to the accounting policies of the Corporation described in the Notes to Consolidated Financial Statements contained in the Corporation's 2004 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 basic weighted average number of common shares outstanding was 3,934,760 and 3,934,760 for the three months ended March 31, 2005 and 2004. Diluted earnings per common share is computed including the dilutive effect of additional potential common shares under stock options. The diluted weighted average number of common shares outstanding was 3,935,922 and 3,934,760 for the three months ended March 31, 2005 and 2004. The Company's shareholders approved an employee share option plan in May 2004. This plan grants certain employees the right to purchase shares at a pre-determined price. The plan is limited to 300,000 shares. The shares granted to employees vest 20% per year over a five year period. The options expire after ten years. During 2004, 15,105 shares were issued to employees under the plan, at a price of $23.40. Additionally, during the three month period ended March 31, 2005, 3,091 shares were issued under the plan at a price of $27.50. Approximately 3,000 share options will become exercisable during 2005. The Corporation accounts for its stock option plan in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a fair-value based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue to account for stock options and similar equity instruments under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net earnings per share, as if the fair-value based method of accounting defined is SFAS No. 123 had been applied. 7. DCB FINANCIAL CORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands) The Corporation utilizes APB Opinion No. 25 and related Interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the Corporation's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the accounting method utilized in SFAS No. 123, the Corporation's net earnings and earnings per share would have been reported as the pro forma amounts indicated below: Stock Option Plan (continued)
Three Months Ended March 31, 2005 (In thousands, except per share data) NET EARNINGS As reported $ 1,636 Stock-based compensation, net of tax (2) ------- Pro-forma $ 1,634 ======= EARNINGS PER SHARE BASIC As reported $ 0.42 Stock-based compensation, net of tax - ------- Pro-forma $ 0.42 ======= DILUTED As reported $ 0.42 Stock-based compensation, net of tax - ------- Pro-forma $ 0.42 =======
A summary of the status of the Corporation's stock option plan as of March 31, 2005 and December 31, 2004 and changes during the periods then ended are presented below:
Three Months Ended March 31, 2005 WEIGHTED AVERAGE EXERCISE SHARES PRICE Outstanding at beginning of year 15,105 $ 23.40 Granted 3,091 27.50 Exercised - - Forfeited (154) 23.40 ------ ------- Outstanding at end of period 18,042 $ 24.10 ====== ======= Options exercisable at period end 639 23.40 Weighted-average fair value of options $ 3.44 ======= granted during the period
8. DCB FINANCIAL CORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands) Stock Option Plan (continued)
Year Ended December 31, 2004 WEIGHTED AVERAGE EXERCISE SHARES PRICE Outstanding at beginning of year - - Granted 15,105 $23.40 Exercised - - Forfeited - - ------ ------ Outstanding at end of year 15,105 $23.40 ====== ====== Options exercisable at year-end - - Weighted-average fair value of options $ 3.44 ====== granted during the year
The following information applies to options outstanding at March 31, 2005:
NUMBER OUTSTANDING RANGE OF EXERCISE PRICES 18,042 $23.40 - $27.50
Newly issued Accounting Standards: In December 2004, the Financial Accounting Standards Board (the "FASB") issued a revision to Statement of Financial Accounting Standards ("SFAS") No. 123 which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily on accounting for transactions in which an entity obtains employee services in share-based transactions. This Statement, SFAS No. 123 (R), requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, with limited exceptions. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award - the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Employee share purchase plans will not result in recognition of compensation cost if certain conditions are met. 9. DCB FINANCIAL CORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands) Initially, the cost of employee services received in exchange for an award of equity instruments will be measured based on current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. Excess tax benefits, as defined by SFAS No. 123(R) will be recognized as an addition to additional paid in capital. Cash retained as a result of those excess tax benefits will be presented in the statement of cash flows as financing cash inflows. The write-off of deferred tax assets relating to unrealized tax benefits associated with recognized compensation cost will be recognized as income tax expense unless there are excess tax benefits from previous awards remaining in additional paid in capital to which it can be offset. Compensation cost is required to be recognized in the beginning of the first annual period that begins after June 15, 2005, or January 1, 2006 as to the Corporation. Management believes the effect on operations will approximate the economic effects set forth in the pro-forma stock option disclosure set forth above. APPLICATION OF CRITICAL ACCOUNTING POLICIES DCB's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America 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 2004 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. 10. 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, 2005---------------- U.S. government agencies $ 25,825 $ 27 $ (333) $ 25,519 States and political subdivisions 21,288 269 (157) 21,400 Corporate bonds 8,140 1 (77) 8,064 Mortgage-backed securities 39,490 250 (360) 39,380 -------- -------- -------- -------- Total debt securities 94,743 547 (927) 94,363 Other securities 2,934 25 - 2,959 -------- -------- -------- -------- Total $ 97,677 $ 572 $ (927) $ 97,322 ======== ======== ======== ========
The table below indicates the length of time individual securities have been in a continuous unrealized loss position at March 31, 2005:
(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 23 $20,891 $ (238) 6 $ 3,685 $ (95) 29 $24,576 $ (333) State and municipal obligations 13 6,371 (89) 8 3,353 (68) 21 9,724 (157) Corporate bonds - - - 2 7,933 (77) 2 7,933 (77) Mortgage-backed securities 57 18,613 (174) 18 7,859 (186) 75 26,472 (360) -- ------- ------- ------- ------- ------- ------- ------- ------- Total temporarily impaired securities 93 $45,875 $ (501) 34 $22,830 $ (426) 127 $68,705 $ (927) == ======= ======= ======= ======= ======= ======= ======= =======
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 the securities approach maturity dates. 11. 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, 2005, 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, 2005, 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 $ 4,282 $ 4,260 Due from one to five years 14,548 14,385 Due from five to ten years 12,741 12,664 Due after ten years 23,682 23,674 Mortgage-backed and related securities 39,490 39,380 ---------- ---------- Total debt securities 94,743 94,363 Other securities 2,934 2,959 ---------- ---------- Total $ 97,677 $ 97,322 ========== ==========
NOTE 3 - LOANS AND LEASES Loans and leases were as follows:
March 31, 2005 ---------- Commercial and industrial $ 50,521 Commercial real estate 183,579 Residential real estate and home equity 176,602 Real estate construction and land development 38,926 Consumer and credit card 55,674 Lease financing, net 1,205 ---------- 506,507 Add (deduct): Net deferred loan origination costs 1,000 Unearned income on leases (71) ---------- Total loans receivable $ 507,436 ==========
12. DCB FINANCIAL CORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands) 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, -------------------- 2005 2004 -------- -------- Balance at beginning of period $ 4,818 $ 4,331 Provision for loan losses 470 378 Loans charged off (194) (356) Recoveries 21 58 -------- -------- Balance at end of period $ 5,115 $ 4,411 ======== ========
Nonperforming loans were as follows:
March 31, December 31, 2005 2004 --------- ------------ Loans past due 90 days or more and still accruing $ 1,112 $ 1,544 Nonaccrual loans 1,939 1,879 -------- -------- Total $ 3,051 $ 3,423 ======== ======== 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 1,655 601 -------- -------- Total $ 1,655 $ 601 ======== ======== Amount of the allowance for loan losses allocated $ 759 $ 360 ======== ======== Average of impaired loans during the period $ 1,116 $ 709 ======== ========
13. DCB FINANCIAL CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION In the following pages, management presents an analysis of the consolidated financial condition of DCB Financial Corp (the "Corporation") at March 31, 2005, compared to December 31, 2004, and the consolidated results of operations for the three months ended March 31, 2005, compared to the same period in 2004. 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 $636,652 at March 31, 2005, compared to $611,685 at December 31, 2004, an increase of $24,967, or 4.08%. The increase in assets was mainly attributed to the loan growth the Corporation experienced within its markets, particularly in commercial and residential real estate. Cash and cash equivalents increased $1,410 from December 31, 2004 to March 31, 2005. Total securities decreased $1,657, or 1.67%, from $98,979 at December 31, 2004 to $97,322 at March 31, 2005. The decrease was the result of the proceeds from sales, maturities, calls and principal repayments not being reinvested in order to fund loan growth and to repay borrowings primarily, in the form of Federal Home Loan Bank advances. The Corporation invests primarily in U.S. Treasury notes, U.S. government agencies, municipal bonds, corporate obligations and mortgage-backed securities. 14. DCB FINANCIAL CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Mortgage-backed securities include Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage Association ("GNMA") and Federal National Mortgage Association ("FNMA") participation certificates. Securities and investment securities classified as available for sale at March 31, 2005 totaled $97,322, 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 $39,380 at March 31, 2005, 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 $24,131, or 4.99%, from $483,305 at December 31, 2004 to $507,436 at March 31, 2005. The increase is attributed mainly to the continued growth of residential real estate and home equity, real estate construction and land development, and commercial real estate loans. Other loan categories in which the Corporation participates, commercial, industrial, and consumer financing, remained relatively stable or experienced small increases 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 increased $12,820, or 2.82%, from $454,574 at December 31, 2004 to $467,394 at March 31, 2005. This growth is mainly attributed to the increase in public fund interest bearing deposit account balances which management initiated during the quarter ending September 30, 2004. Noninterest-bearing deposits increased $154, or 0.24%, while interest-bearing deposits increased $12,666, or 3.25%. The Corporation continues to use borrowings to fund a majority of its loan growth. Total borrowings increased to $112,042 from $101,028 in order to fund the loan growth during the three months ended March 31, 2005. Typically, the Company utilizes a matched funding methodology for its borrowing. This was done by matching the rates, terms and expected cash flows of its loans to the various products. This matching principle is used to not only provide funding, but also as a means of mitigating interest rate risk associated with originating longer-term fixed rate loans. Continued reliance on borrowings outside of normal deposit growth could increase the Corporation's overall cost of funds. COMPARISON OF RESULTS OF OPERATIONS NET INCOME. Net income for the three months ended March 31, 2005 totaled $1,636, compared to net income of $1,306 for the same period in 2004. Earnings per share was $.42 for the three months ended March 31, 2005 compared to $.33 for the three months ended March 31, 2004. The increase in earnings is mainly attributed to the increase in net interest income due to the growth in earning assets. 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 $5,494 for the three months ended March 31, 2005, compared to $4,898 for the same period in 2004. The $596 increase in the first quarter 2004 compared to 2003 was mainly attributed to an increase in earning assets coupled with the rising rate of environment during the first quarter, which allowed interest earning assets to reprice higher than interest bearing liabilities. 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. Additionally, because of the increased competition in the Bank's primary marketplace, management has continued to recognize the importance of offering special rates on certain deposit products. These special deposit rates tend to negatively affect the Corporation's net interest margin. It is likely that these offerings will continue to be offered to secure liquidity while maintaining market share. 15. DCB FINANCIAL CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) 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 known and inherent in the Bank's loan portfolio. All lending activity contains associated risks of loan losses and the Bank recognizes these credit risks as a necessary element of its business activity. The provision for loan and lease losses totaled $470 for the three months ended March 31, 2005, compared to $378 for the same period in 2004. 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 non-accrual loans between the two periods. Non-accrual loans for the three months ended March 31, 2005 were $1,939 compared to non-accrual loans of $1,487 for the same period in 2004. Net charge-offs for the three months ended March 31, 2005 improved to $173, as compared to $298 for the three months ended March 31, 2004. Annualized net charge-offs for the three months ended March 31, 2005 were 0.14% compared to 0.29% at March 31, 2004. Delinquent loans over thirty days also improved from period to period, decreasing to 1.53% at March 31, 2005 from 1.92% at March 31, 2004. 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 increased to $5,115, or 1.01% of total loans and leases at March 31, 2005, compared to $4,818, or 1.00% of total loans and leases at December 31, 2004. NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased $256, or 22.05%, for the three months ended March 31, 2005, compared to the same period in 2004. The change in non-interest revenues from period to period is mainly attributed to an increase in NSF and overdraft charges, increases in gains on loans originated for sale in the secondary market, and to a gain recognized on the sale of an investment in an unconsolidated affiliate. In 2004, the Company sold its investment in ProCentury Corporation and in return received cash and shares of ProAlliance Corp., a specialty lines insurance company as part of the proceeds. During the first quarter 2005, the Corporation received a final accounting for the consideration received in the transaction and recorded a $184 gain as a result thereof. Total noninterest expense increased $275, or 7.19%, for the three months ended March 31, 2005, compared to the same period in 2004. The increase was primarily the result of increases in salaries and employee benefits attributable to an increase in incentive compensation. Additionally, there was a substantial increase in professional services due to expenses incurred related to Section 404 of the Sarbanes-Oxley Act of 2002 and related consulting. These increases in operating expense were offset by a decrease in managed occupancy, postage, freight and courier related, and state franchise tax expenses. INCOME TAXES. The change of income tax expense is primarily attributable to the increase in tax exempt earnings primarily offset by municipal securities and increase in bank owned life insurance in income before income taxes. The provision for income taxes totaled $707, for an effective tax rate of 30.18%, for the three months ended March 31, 2005 and $552, for an effective tax rate of 29.71%, for the three months ended March 31, 2004. 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 16. DCB FINANCIAL CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) 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 $1,410, or 12.55%, to $12,648 at March 31, 2005 compared to $11,238 at December 31, 2004. Cash and equivalents represented 1.99% of total assets at March 31, 2005 and 1.84% of total assets at December 31, 2004. 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. CAPITAL RESOURCES Total shareholders' equity increased $733 between December 31, 2004 and March 31, 2005. The increase was primarily due to period earnings of $1,636, partially offset by the declaration of $433 in dividends and loss on securities designated as available for sale totaling $470, net of tax. 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 11.33% at March 31, 2005, while the Tier 1 risk-based capital ratio was 10.37%. 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 8.74% at March 31, 2005. The following table sets forth the Corporation's obligations and commitments to make future payments under contract as of March 31, 2005.
PAYMENT DUE BY YEAR LESS THAN 1 MORE THAN 5 CONCTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS FHLB advances $ 89,419 $ 14,985 $ 9,490 $ 1,099 $ 63,845 Federal funds purchased and other short-term borrowings 22,623 22,623 Operating Lease Obligations 5,563 530 1,216 692 3,125 Loan and Line of Credit Commitments 122,824 122,824 - - - Other Long-Term Liabilities Reflected on the Corporation's Balance Sheet under GAAP - - - - - -------- -------- -------- -------- -------- Total Contractual Obligations $240,429 $160,962 $ 10,706 $ 1,791 $ 66,970 ======== ======== ======== ======== ========
In the opinion of management, all loan commitments equal or exceed market rates of interest. 17. DCB FINANCIAL CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Item 3. Quantitative and Qualitative Disclosure About Market Risk ASSET AND LIABILITY MANAGEMENT AND MARKET RISK The Corporation's primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. 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 2004 Annual Report includes a table depicting the changes in the Corporation's interest rate risk as of December 31, 2004, 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, 2004 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. 18. DCB FINANCIAL CORP MANAGEMENT'S 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, 2005, 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, 2005, 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, 2005, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 19. DCB FINANCIAL CORP FORM 10-Q Quarter ended March 31, 2005 PART II - OTHER INFORMATION Item 1 - Legal Proceedings: There are no matters required to be reported under this item. Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds: 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. 20. DCB FINANCIAL CORP FORM 10-Q Quarter ended March 31, 2005 PART II - OTHER INFORMATION Item 5 - Other Information: There are no matters required to be reported under this item. Item 6 - Exhibits. 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.) 10 Employment agreement by and between DCB Financial Corp, its wholly-owned subsidiary The Delaware County Bank and Trust Company, and Jeffrey Benton 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
21 DCB FINANCIAL CORP SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DCB FINANCIAL CORP ------------------- (Registrant) Date: May 6, 2005 /s/ Jeffrey Benton ------------------- (Signature) Jeffrey Benton President and Chief Executive Officer Date: May 6, 2005 /s/ John A. Ustaszewski ----------------------- (Signature) John A. Ustaszewski Vice President and Chief Financial Officer 22 DCB FINANCIAL CORP INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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.) 10 Employment agreement by and between DCB Financial Corp, its wholly-owned subsidiary The Delaware County Bank and Trust Company, and Jeffrey Benton. 31.1 Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer 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.
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