<PAGE> 1
Page 1 of 72 pages
Exhibit Index on
page 57
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
----------------- -----------------
Commission File No. 0-22387
DCB FINANCIAL CORP
------------------
(Name of registrant in its charter)
OHIO 31-1469837
- ---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
41 North Sandusky Street
Delaware, Ohio 43015
-------------------------------------------------
(Address of principal executive offices) (Zip code)
(740) 363-1133
--------------
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None
- ----
Securities registered under Section 12(g) of the Exchange Act:
Common Shares, No par value
- ---------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 if disclosure of delinquent filers in response to item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At February 28, 1999, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, based on a share price of $17.00 per share
(such price being the average of the bid and asked prices on such date) was
$71,029,400.
At February 28, 1999, the registrant 4,253,200 common shares issued and
4,178,200 common shares outstanding.
<PAGE> 2
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL
- -------
DCB Financial Corp (the "Corporation") was incorporated under the laws of the
State of Ohio in 1997, at the direction of management of The Delaware County
Bank and Trust Company (the "Bank") for the purpose of becoming a bank holding
company by acquiring all outstanding shares of the Bank. The Corporation
acquired all such shares of the Bank after an interim bank merger, which
transaction was consummated on March 14, 1997. The Bank is a commercial bank,
chartered under the laws of the State of Ohio, and was organized in 1950. The
Bank is the wholly-owned subsidiary of the Corporation and its only significant
asset.
The Bank provides customary retail and commercial banking services to its
customers, including checking and savings accounts, time deposits, IRAs, safe
deposit facilities, personal loans, commercial loans, real estate mortgage
loans, installment loans, night depository facilities and trust services. The
Bank also provides cash management, bond registrar and paying services. Through
its own computer department, the Bank provides data processing services to other
financial institutions; however, such services are not a significant part of
operations or revenue.
The Corporation, through the Bank, grants residential real estate, commercial
real estate, consumer and commercial loans to customers located primarily in
Delaware, Franklin, Licking, Morrow, Marion and Union Counties, Ohio. General
economic conditions in the Corporation's market area have been sound.
Unemployment statistics have generally been among the lowest in the state of
Ohio and real estate values have been stable to rising.
The Bank is not significantly affected by seasonal activity or large deposits of
any individual depositor. At year-end 1998, deposits of public funds (funds of
governmental agencies and municipalities) were 7.3% of total deposits. This
amount can fluctuate, but generally not by a material amount. No material
industry or group concentrations exist in the loan portfolio.
Certain risks are involved in granting loans, primarily related to the
borrowers' ability and willingness to repay the debt. Before the Bank extends a
new loan to a customer, these risks are assessed through a review of the
borrower's past and current credit history, the collateral being used to secure
the transaction in case the customer does not repay the debt, the borrower's
character and other factors. Once the decision has been made to extend credit,
the Bank's independent loan review function and responsible credit officer
monitors these factors throughout the life of the loan. All credit relationships
of $575,000 or more are reviewed annually, as are 30% of credit relationships
from $250,000 to $575,000, 20% of credit relationships from $100,000 to $250,000
(excluding residential mortgages), and 10% of residential mortgages from
$100,000 to $250,000. In addition, any loan identified as a problem credit by
management or during the loan review is assigned to the Bank's "watch loan
list," and is subject to ongoing monitoring by the loan review function to
ensure appropriate action is taken when deterioration has occurred.
Commercial, industrial and agricultural loans are primarily variable rate and
include operating lines of credit and term loans made to small businesses
primarily based on their ability to repay the loan from the business's cash
flow. Such loans are typically secured by business assets such as equipment and
inventory and, occasionally, by the business owner's principal residence. When
the borrower is not an individual, the Bank generally obtains the personal
guarantee of the business owner. As compared to consumer lending, which includes
single-family residence, personal installment loans and automobile loans,
commercial lending entails significant additional risks. These loans typically
involve larger loan balances and are generally dependent on the business's cash
flow and, thus, may be subject to adverse conditions in the general economy or
in a specific industry. Management reviews the borrower's cash flows when
deciding whether to grant the credit to evaluate whether estimated future cash
flows will be adequate to service principal and interest of the new obligation
in addition to existing obligations.
2
<PAGE> 3
Commercial real estate and farmland loans are primarily secured by
borrower-occupied business real estate and are dependent on the ability of the
related business to generate adequate cash flow to service the debt. Such loans
primarily carry adjustable interest rates. Commercial real estate loans are
generally originated with a loan-to-value ratio of 80% or less. Management
performs much the same analysis when deciding whether to grant a commercial real
estate loan as a commercial loan.
Residential real estate loans and home equity lines of credit carry primarily
adjustable rates, although fixed-rate loans are originated and are secured by
the borrower's residence. Such loans are made based on the borrower's ability to
make repayment from employment and other income. Management assesses the
borrower's ability to repay the debt through review of credit history and
ratings, verification of employment and other income, review of debt-to-income
ratios and other measures of repayment ability. The Bank generally makes these
loans in amounts of 80% or less of the value of collateral. An appraisal is
obtained from a qualified real estate appraiser for substantially all loans
secured by real estate.
Due to the high level of growth in the Corporation's market area, construction
lending has become a significant part of the Corporation's overall lending
strategy. Construction loans are secured by residential and business real
estate, generally occupied by the borrower on completion. The Bank's
construction lending program is established in a manner to minimize risk of this
type of lending by not making a significant amount of loans on speculative
projects. While not contractually required to do so, the Bank usually makes the
permanent loan at the end of the construction phase. Construction loans also are
generally made in amounts of 80% or less of the value of collateral.
Consumer installment loans to individuals include loans secured by automobiles
and other consumer assets, including second mortgages on personal residences.
Consumer loans for the purchase of new automobiles generally do not exceed 85%
of the purchase price of the car. Loans for used cars generally do not exceed
average wholesale or trade-in value as stipulated in a recent auto industry used
car price guide. Credit card and overdraft protection loans are unsecured
personal lines of credit to individuals of demonstrated good credit character
with reasonably assured sources of income and satisfactory credit histories.
Consumer loans generally involve more risk than residential mortgage loans
because of the type and nature of collateral and, in certain types of consumer
loans, the absence of collateral. Since these loans are generally repaid from
ordinary income of an individual or family unit, repayment may be adversely
affected by job loss, divorce, ill health or by general decline in economic
conditions. The Bank assesses the borrower's ability to make repayment through a
review of credit history, credit ratings, debt-to-income ratios and other
measures of repayment ability.
Another way the Bank meets the needs of its customers is through its
lease-financing program. The Bank's leasing program involves leasing vehicles to
individuals and businesses. The vehicle lease program includes new and late
model automobiles and light trucks with terms from 12 to 60 months. The Bank
also provides lease financing to businesses for commercial equipment. The Bank's
comprehensive program includes leasing new and used equipment with flexible
terms, though generally the term of a given lease is limited to some extent by
the type of equipment and its useful life. Average lease terms for commercial
equipment leases generally range from 3 to 8 years. The Bank sets aside a
reserve to cover potential deficiencies in the residual value of the leased
vehicle or equipment upon the termination of the lease.
EMPLOYEES
- ---------
At December 31, 1998, the Bank employed 203 employees, 182 of whom were
full-time. The Bank provides a number of benefits such as health, dental and
life insurance for all, as well as education assistance for qualified employees.
A 401(k) retirement plan is in place for eligible employees. No employee is
represented by a union or collective bargaining group. The Corporation has no
employees not also employed by the Bank.
3
<PAGE> 4
COMPETITION
- -----------
The Bank operates in a highly-competitive industry due to statewide and
interstate branching by banks, savings and loan associations and credit unions.
In its primary market area of Delaware and surrounding counties, the Bank
competes for new deposit dollars and loans with several other commercial banks,
both large regional banks and smaller community banks, as well as savings and
loan associations, credit unions, finance companies, insurance companies,
brokerage firms and investment companies. The ability to generate earnings is
impacted in part by competitive pricing on loans and deposits, and by changes in
the rates on various U.S. Treasury, U. S. Government Agency and State and
political subdivision issues which comprise a significant portion of the Bank's
investment portfolio, and which rates are used as indices on various loan
products. The Bank is competitive with interest rates and loan fees that it
charges, in pricing and variety of accounts it offers to the depositor. The
dominant pricing mechanism on loans is the Prime interest rate as published in
the Wall Street Journal. The interest spread more than Prime depends on the
overall account relationship and the creditworthiness of the borrower. Deposit
rates are set weekly by the Asset/Liability Committee. The Bank's primary
objective in setting deposit rates is to remain competitive in the market area
while maintaining an adequate interest spread to meet overhead costs.
SUPERVISION AND REGULATION
- --------------------------
The Bank is subject to supervision, regulation and periodic examination by the
State of Ohio Superintendent of Financial Institutions and the Federal Deposit
Insurance Corporation. Earnings of the Bank are affected by state and federal
laws and regulations, and by policies of various regulatory authorities. These
policies include, for example, statutory maximum lending rates, requirements on
maintenance of reserves against deposits, domestic monetary policies of the
Board of Governors of the Federal Reserve System, United States fiscal policy,
international currency regulations and monetary policies, certain restrictions
on banks' relationships with many phases of the securities business and capital
adequacy and liquidity restraints. As a bank holding company, the Corporation is
subject to supervision, regulation and periodic examination by the Federal
Reserve Board.
4
<PAGE> 5
STATISTICAL DISCLOSURES
- -----------------------
The following schedules present, for the periods indicated, certain financial
and statistical information of the Corporation as required under the Securities
and Exchange Commission's Industry Guide 3, or a specific reference as to the
location of required disclosures included as a part of this Form 10-K as of and
for the year ended December 31, 1998.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A&B. Average Balance Sheet and Related Analysis of Net
-------------------------------------------------
Interest Earnings
-----------------
This information is included under the heading "Yields Earned
and Rates Paid" on pages 21 through 24 of this document.
C. Interest Differential
---------------------
This information is included under the heading "Yields Earned
and Rates Paid" on page 24 of this document.
II. SECURITIES PORTFOLIO
A. The following is a schedule of the carrying value of
securities at year-end 1998, 1997 and 1996.
<TABLE>
<CAPTION>
(In thousands of dollars) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Securities available for sale (at fair value)
U.S. Treasury $ 4,556 $ 5,568 $ 5,518
U.S. Government agencies and corporations 50,556 33,409 28,366
States and political subdivisions 6,192 203 193
Mortgage-backed 28,908 13,705 11,480
------- ------- -------
Total debt securities 90,212 52,885 45,557
Other securities 1,187 1,050 1,617
------- ------- -------
Total securities available for sale $91,399 $53,935 $47,174
======= ======= =======
Securities held to maturity (at amortized cost)
U.S. Government agencies and corporations $ 1,000 $ -- $ --
States and political subdivisions 7,994 6,523 5,946
Corporate 12,150 21,089 2,230
Mortgage-backed 28,040 26,222 23,695
------- ------- -------
Total securities held to maturity $49,184 $53,834 $31,871
======= ======= =======
</TABLE>
5
<PAGE> 6
B. The following is a schedule of maturities for each category
of debt securities and the related weighted-average yield
of such securities as of year-end 1998:
<TABLE>
<CAPTION>
(In thousands of dollars)
--------------------------------------Maturing-------------------------------------
After One After Five
One Year Year Through Years Through After
or Less Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 4,300 5.96% $ 256 5.98% $ -- --% $ -- --%
U.S. Government
agencies and
corporations 7,065 5.63 9,942 5.93 29,918 6.28 3,631 6.28
States and political
subdivisions -- -- 129 5.30 629 4.41 5,434 4.40
Mortgage-backed -- -- 394 6.38 7,051 5.80 21,463 5.87
------- ------- ------- -------
Total $11,365 5.76% $10,721 5.94% $37,598 6.15% $30,528 5.66%
======= ==== ======= ==== ======= ==== ======= ====
Held to maturity
U.S. Government
agencies and
corporations $ 1,000 5.62% $ -- --% $ -- --% $ -- --%
States and political
subdivisions 822 5.51 4,147 5.06 2,478 5.53 547 5.85
Corporate 12,150 5.26 -- -- -- -- -- --
Mortgage-backed 1,322 5.80 5,189 6.14 8,344 5.83 13,185 5.47
------- ------- ------- -------
Total $15,294 5.34% $ 9,336 5.66% $10,822 5.76% $13,732 5.49%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
The weighted-average yields are calculated using amortized
cost of investments and are based on coupon rates for
securities purchased at par value and on effective interest
rates considering amortization or accretion if the
securities were purchased at a premium or discount. The
weighted-average yield on tax-exempt obligations is
presented on a taxable equivalent basis based on the
Corporation's marginal federal income tax rate of 34%.
Equity securities consist of Federal Home Loan Bank stock
and stock of other financial institutions that bear no
stated maturity or yield and are not included in this
analysis.
C. Excluding holdings of U.S. Treasury securities and other
agencies and corporations of the U.S. Government, there
were no investments in securities of any one issuer
exceeding 10% of the Corporation's consolidated
shareholders' equity at year-end 1998.
6
<PAGE> 7
III. LOAN PORTFOLIO
A. Types of Loans - Total loans on the balance sheet are
comprised of the following classifications at December 31:
<TABLE>
<CAPTION>
(In thousands of dollars) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial and industrial $l39,864 $ 37,486 $ 36,836 $ 40,631 $ 39,381
Commercial real estate 66,501 56,434 45,487 40,328 42,137
Residential real estate and
home equity 63,140 53,686 52,752 41,864 33,416
Real estate construction 32,382 29,104 23,489 10,235 10,002
Consumer and credit card 44,050 42,914 38,269 35,493 35,721
Lease financing, net 9,352 9,010 6,759 4,988 2,817
-------- -------- -------- -------- --------
Total loans $255,289 $228,634 $203,592 $173,539 $163,474
======== ======== ======== ======== ========
</TABLE>
B. Maturities and Sensitivities of Loans to Changes in
Interest Rates - The following is a schedule of maturities
of loans based on contractual terms and assuming no
amortization or prepayments, excluding residential real
estate and home equity loans, consumer and credit card
loans and leases, as of December 31, 1998:
<TABLE>
<CAPTION>
-------------------Maturing ---------------
One Year One Through After Five
(In thousands of dollars) or Less Five Years Years Total
------- ---------- ----- -----
<S> <C> <C> <C> <C>
Fixed rate
----------
Commercial and industrial $ 3,050 $ 5,552 $ 5,623 $ 14,225
Commercial real estate 511 2,049 9,035 11,595
Real estate construction and land development 3,985 210 166 4,361
------- ------- -------- --------
Total $ 7,546 $ 7,811 $ 14,824 $ 30,181
======= ======= ======== ========
Variable rate
-------------
Commercial and industrial $14,683 $ 2,263 $ 8,693 $ 25,639
Commercial real estate 4,247 3,180 47,479 54,906
Real estate construction and land development 7,082 6,150 14,789 28,021
------- ------- -------- --------
Total $26,012 $11,593 $ 70,961 $108,566
======= ======= ======== ========
</TABLE>
7
<PAGE> 8
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans - The
following schedule summarizes nonaccrual, past due and
restructured loans.
<TABLE>
<CAPTION>
December 31,
------------
(In thousands of dollars) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(a) Loans accounted for on a nonaccrual
basis $ 753 $1,188 $ 501 $2,014 $1,567
(b) Accruing loans which are
contractually past due 90 days or
more as to interest or principal
payments 325 238 489 65 58
(c) Loans which are "troubled debt
restructurings" as defined in
Statement of Financial
Accounting Standards No. 15
(exclusive of loans in
(a) or (b) above): -- -- 143 150 --
------ ------ ------ ------ ------
Totals $1,078 $1,426 $1,133 $2,229 $1,625
====== ====== ====== ====== ======
</TABLE>
The policy for placing loans on nonaccrual status is to cease
accruing interest on loans when management believes that
collection of interest is doubtful, when loans are past due as to
principal and interest 90 days or more, except that in certain
circumstances interest accruals are continued on loans deemed by
management to be fully collectible. In such cases, loans are
individually evaluated in order to determine whether to continue
income recognition after 90 days beyond the due dates. When loans
are placed on nonaccrual, any accrued interest is charged against
interest income.
During 1998, $27,000 would have been recorded on nonaccruing
loans had such loans been accruing pursuant to contractual terms.
During such period, no interest income was recorded on such
loans.
(d) Impaired Loans - Information regarding impaired loans at year-end
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(In thousands of dollars)
Year-end impaired loans with no allowance for loan
losses allocated $-- $ -- $--
Year-end impaired loans with allowance for loan
losses allocated -- 265 41
Amount of the allowance allocated -- 173 14
</TABLE>
Impaired loans are comprised of commercial and commercial real
estate loans, and are carried at present value of expected cash
flows, discounted at the loan's effective interest rate or at
fair value of collateral, if the loan is collateral dependent. A
portion of the allowance for loan losses is allocated to impaired
loans.
8
<PAGE> 9
Smaller-balance homogeneous loans are evaluated for impairment in
total. Such loans include residential first mortgage and
construction loans secured by one- to four-family residences,
consumer, credit card and home equity loans. Such loans are
included in nonaccrual and past due disclosures in (a) and (b)
above, but not in impaired loan totals. Commercial loans and
mortgage loans secured by other properties are evaluated
individually for impairment. In addition, loans held for sale and
leases are excluded from consideration of impairment. When
analysis of borrower operating results and financial condition
indicates that borrower's underlying cash flows are not adequate
to meet its debt service requirements, the loan is evaluated for
impairment. Impaired loans, or portions thereof, are charged off
when deemed uncollectible.
2. Potential Problem Loans - At year-end 1998, no loans were
identified which management has serious doubts about the
borrowers' ability to comply with present loan repayment terms
and which are not included in item III.C.1. above.
3. Foreign Outstandings - There were no foreign outstandings during
any period presented.
4. Loan Concentrations - At year-end 1998, there were no
concentrations of loans greater than 10% of total loans which are
not otherwise disclosed as a category of loans in Item III.A.
above.
D. Other Interest-Bearing Assets - At year-end, 1998, there were no
other interest-bearing assets required to be disclosed under Item
III.C.1. or 2. if such assets were loans.
9
<PAGE> 10
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following schedule presents an analysis of the allowance for
loan losses, average loan data and related ratios for the years
ended December 31:
<TABLE>
<CAPTION>
(In thousands of dollars) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans
outstanding during
period $238,844 $215,680 $188,679 $172,688 $145,433
======== ======== ======== ======== ========
ALLOWANCE FOR LOAN
LOSSES
Balance at beginning of
period $ 1,842 $ 1,923 $ 1,940 $ 1,865 $ 2,455
Loans charged off:
Commercial (112) (263) (66) (57) (758)
Commercial real
estate -- (15) -- -- (33)
Residential real
estate and home
equity -- -- -- -- --
Real estate
construction -- -- -- -- --
Consumer and credit
card (443) (346) (352) (334) (169)
Lease financing (13) (20) (110) (33) (23)
-------- -------- -------- -------- --------
Total loans
charged off (568) (644) (528) (424) (983)
-------- -------- -------- -------- --------
Recoveries of loans
previously charged off:
Commercial 40 77 30 16 58
Commercial real
estate -- -- -- 4 5
Residential real
estate and home
equity -- -- -- -- --
Real estate
construction -- -- -- -- --
Consumer and credit
card 141 151 114 111 144
Lease financing 24 15 1 6 41
-------- -------- -------- -------- --------
Total loan
recoveries 205 243 145 137 248
-------- -------- -------- -------- --------
Net loans charged off (363) (401) (383) (287) (735)
Provision charged to
operating expense 469 320 366 362 145
-------- -------- -------- -------- --------
Balance at end of period $ 1,948 $ 1,842 $ 1,923 $ 1,940 $ 1,865
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding
for period .15% .19% .20% .17% .51%
</TABLE>
10
<PAGE> 11
The allowance for loan losses balance and provision charged to
expense are determined by management based on periodic reviews of
the loan portfolio, past loan loss experience, economic conditions
and various other circumstances which are subject to change over
time. In making this judgment, management reviews selected large
loans as well as impaired loans, other delinquent, nonaccrual and
problem loans and loans to industries experiencing economic
difficulties. The collectibility of these loans is evaluated after
considering current operating results and financial position of the
borrower, estimated market value of collateral, guarantees and the
Corporation's collateral position versus other creditors. Judgments,
which are necessarily subjective, as to probability of loss and
amount of such loss are formed on these loans, as well as other
loans taken together.
B. The following schedule is a breakdown of the allowance for loan
losses allocated by type of loan and related ratios.
While management's periodic analysis of the adequacy of allowance
for loan losses may allocate portions of the allowance for specific
problem-loan situations, the entire allowance is available for any
loan charge-offs that occur.
11
<PAGE> 12
<TABLE>
<CAPTION>
-----------------------Allocation of the Allowance for Loan Losses -----------------------
(In thousands of dollars) Percentage of Percentage of Percentage of
Loans in Each Loans in Each Loans in Each
Allowance Category to Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 618 15.62% $ 516 16.40% $ 519 18.09%
Commercial real estate 160 26.05 178 24.68 273 22.34
Residential real estate
and home equity 93 24.73 63 23.48 71 25.91
Real estate construction 49 12.68 30 12.73 17 11.54
Consumer and credit card 494 17.26 465 18.77 533 18.80
Lease financing 74 3.66 68 3.94 106 3.32
Unallocated 460 -- 522 -- 404 --
------ ------ ------ ------ ------ ------
Total $1,948 100.00% $1,842 100.00% $1,923 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C> <C> <C>
Commercial and industrial $ 526 23.42% $ 552 24.09%
Commercial real estate 262 23.24 189 25.78
Residential real estate and
home equity 78 24.12 76 20.44
Real estate construction 11 5.90 6.12
Installment and credit card 560 20.45 602 21.85
Lease financing 142 2.87 138 1.72
Unallocated 361 -- 308 --
------ ------ ------ ------
Total $1,940 100.00% $1,865 100.00%
====== ====== ====== ======
</TABLE>
12
<PAGE> 13
V. DEPOSITS
A. The following is a schedule of average deposit amounts and average
rates paid on each category for the periods indicated:
<TABLE>
<CAPTION>
Average Average
Amounts Outstanding Rate Paid
Year ended December 31 Year ended December 31
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Noninterest-bearing demand $ 53,500 $ 45,330 $ 41,661 N/A N/A N/A
Interest-bearing demand
deposits 27,527 26,295 29,612 2.41% 2.50% 2.55%
Money market investment 131,105 97,603 85,036 5.26 5.28 5.04
Savings deposits 38,457 37,874 38,781 3.13 3.18 3.20
Time deposits 93,498 89,667 69,968 5.53 5.58 5.38
-------- -------- --------
Total deposits $344,087 $296,769 $265,058 4.05% 4.05% 3.79%
======== ======== ======== ==== ==== ====
</TABLE>
B. Other categories - not applicable.
C. Foreign deposits - not applicable.
D. The following is a schedule of maturities of time certificates of
deposit in amounts of $100,000 or more as of year-end 1998:
<TABLE>
<S> <C>
Three months or less $15,859
Over three through six months 6,304
Over six through twelve months 2,755
Over twelve months 2,323
-------
Total $27,241
=======
</TABLE>
E. Time deposits greater than $100,000 issued by foreign offices - not
applicable.
VI. RETURN ON EQUITY AND ASSETS
This information is included under the heading "ITEM 6 - Selected
Financial Data" on pages 16 and 17 of this document.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend pay-out ratio (dividends declared
per share divided by net income per share) 18.58% 23.39% 19.60%
</TABLE>
VII. SHORT-TERM BORROWINGS
This item is not required for the Corporation because average
outstanding balances of short-term borrowings for the years ending
December 31, 1998, 1997 and 1996 were less than 30% of shareholders'
equity at such dates.
13
<PAGE> 14
ITEM 2 - PROPERTIES
The Bank owns and operates its main office at 41 North Sandusky Street,
Delaware, Ohio 43015. The Bank also operates 15 branches and 4 other properties
that are owned or leased as noted below:
1. Drive-in Office, 33 W. William St., Delaware, Ohio 43015 (owned)
2. Delaware Center Branch Office, 199 S. Sandusky Street, Delaware, Ohio 43015
(owned)
3. Galena Branch Office, 10 Park Street, Galena, Ohio 43021 (owned)
4. Ostrander Branch Office, 10 West North Street, Ostrander, Ohio 43061 (owned)
5. Green Meadows Branch Office, 9191 Columbus Pike, Lewis Center, Ohio 43035
(leased)
6. Ashley Branch Office, 1 West High Street, Ashley, Ohio 43003 (owned)
7. Buehlers Central Office, 800 West Central Avenue, Delaware, Ohio 43015
(leased)
8. Marysville Banking Center, 108 South Main Street, Marysville, Ohio 43040
(leased)
9. Marysville Banking Center II, 11069 West Fifth Street, Marysville, Ohio 43040
(leased)
10. Powell Office, 22 South Liberty Street, Powell, Ohio 43065 (owned)
11. Sunbury Office, 492 West Cherry Street, Sunbury, Ohio 43074 (leased)
12. Highland Lakes Office, 6156 Highland Lakes Avenue, Westerville, Ohio 43085
(leased)
13. Sawmill Parkway Office, 10149 Brewster Lane, Powell, Ohio, 43065, (leased)
14. ATM Express Bank, W. Central Ave., Delaware, Ohio 43015 (leased)
15. ATM Express Bank, Ohio Wesleyan University, Delaware, Ohio 43015 (leased)
16. ATM Express Bank, 8208 Marysville Road West, Ostrander, Ohio 43061 (leased)
17. Operations Center, 163 N. Sandusky Street, Delaware, Ohio 43015 (leased)
18. ATM Express Bank, 1123 U.S. Route 23 South, Delaware, Ohio 43015 (leased)
19. Willowbrook Branch Office, 100 Willowbrook Way South, Delaware, Ohio 43015
(leased)
The Bank considers its physical properties to be in good operating condition and
suitable for the purposes for which they are being used. All the properties
owned by the Bank are unencumbered by any mortgage or security interest and are,
in management's opinion, adequately insured. A portion of the building that
houses the main office is leased to two tenants.
ITEM 3 - LEGAL PROCEEDINGS
There is no pending litigation, other than routine litigation incidental to the
business of the Corporation and Bank, or of a material nature involving or
naming the Corporation or Bank as a defendant. Further, there are no material
legal proceedings in which any director, executive officer, principal
shareholder or affiliate of the Corporation is a party or has a material
interest, which is adverse to the Corporation or Bank. No routine litigation in
which the Corporation or Bank is involved is expected to have a material adverse
impact on the financial position or results of operations of the Corporation or
Bank.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders in the fourth quarter
of 1998.
14
<PAGE> 15
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation had 4,178,200 common shares outstanding on February 28, 1999,
held of record by approximately 1,432 shareholders. The Corporation's common
stock is not traded on any securities exchange. However, many central Ohio
brokerage firms maintain daily bid and ask prices for the Corporation's common
stock. The range of the average known price per common share by quarter provided
in the chart below is based on information received from such market maker.
Dividends are also shown.
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31
1998 1998 1998 1998
--------- -------- ------------- -----------
<S> <C> <C> <C> <C>
High $21.00 $21.00 $20.75 $18.00
Low 20.13 20.00 17.25 14.50
Dividends per share .05 .05 .05 .06
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- -----------
<S> <C> <C> <C> <C>
High $16.67 $21.50 $20.88 $20.88
Low 14.17 16.00 19.50 20.00
Dividends per share .1167 .05 .05 .05
</TABLE>
Income of the Corporation primarily consists of dividends, which were
periodically declared and paid by the Board of Directors of the Bank on common
shares of the Bank held by the Corporation. While management expects to maintain
its policy of paying regular cash dividends in the future, no assurances can be
given that any dividends will be declared or, if declared, what the amount of
any such dividends will be. See Note 13 to the consolidated financial statements
for a description of dividend restrictions.
TRANSFER AGENT
DCB Financial Corp acts as transfer agent for the Corporation's common stock.
ANNUAL AND OTHER REPORTS, SHAREHOLDER AND GENERAL INQUIRIES
DCB Financial Corp is required to file an annual report on Form 10-K, for its
fiscal year ended December 31, 1998, with the Securities and Exchange
Commission. Copies of the Form 10-K annual report and the Corporation's
quarterly reports may be obtained without charge by contacting:
Mr. Donald R. Blackburn
DCB Financial Corp
41 N. Sandusky Street
Delaware, Ohio 43015
(740) 363-1133
15
<PAGE> 16
ITEM 6 - SELECTED FINANCIAL DATA
The following tables set forth certain information concerning the consolidated
financial condition, earnings and other data regarding the Corporation at the
dates and for the periods indicated. As the Corporation was formed on March 14,
1997, information before the year ended December 31, 1997 is for the Bank.
<TABLE>
<CAPTION>
Selected financial condition At December 31,
and other data: ------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets $418,540 $367,118 $319,117 $274,078 $257,693
Cash and cash equivalents 15,492 25,283 32,359 36,179 17,774
Bankers' acceptances -- -- -- -- 12,763
Securities available for sale 62,491 40,230 35,694 25,536 --
Securities held to maturity 21,144 27,612 8,176 19,317 55,802
Mortgage-backed securities
available for sale 28,908 13,705 11,480 5,942 --
Mortgage-backed securities
held to maturity 28,040 26,222 23,695 10,160 4,456
Loans and leases - net 253,341 226,792 201,669 171,599 161,609
Deposits 368,918 322,484 279,091 243,856 229,752
Borrowed funds 9,450 7,005 6,546 777 1,604
Shareholders' equity 38,309 36,040 32,579 28,694 25,674
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
Summary of earnings: 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest and dividend income $ 28,928 $ 26,409 $ 23,467 $ 19,972 $ 16,274
Interest expense 14,323 12,369 10,202 8,110 6,168
-------- -------- -------- -------- --------
Net interest income 14,605 14,040 13,265 11,862 10,106
Provision for loan losses 469 320 366 362 145
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 14,136 13,720 12,899 11,500 9,961
Noninterest income 4,139 3,324 2,890 2,410 2,339
Noninterest expense 11,373 9,772 8,616 8,765 8,980
-------- -------- -------- -------- --------
Income before income tax 6,902 7,272 7,173 5,145 3,320
Income tax expense 2,168 2,382 2,293 1,562 921
-------- -------- -------- -------- --------
Net income $ 4,734 $ 4,890 $ 4,880 $ 3,583 $ 2,399
======== ======== ======== ======== ========
Per Share Data: (1)
Earnings per share $ 1.13 $ 1.14 $ 1.14 $ .84 $ .56
======== ======== ======== ======== ========
Dividends declared per share $ .21 $ .2667 $ .2234 $ .17 $ .1633
======== ======== ======== ======== ========
</TABLE>
- ------------------------
(1) Earnings and dividends per share for the Corporation have been restated
to reflect the internal reorganization discussed above and the 3-for-1
stock split on June 14, 1995.
16
<PAGE> 17
<TABLE>
<CAPTION>
At or for the year ended December 31,
-----------------------------------------------------
Selected financial ratios: 1998 1997 1996 1995 1994
------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
Interest rate spread
(difference between average yield
on interest-earning assets and
average cost of interest-
bearing liabilities) 3.01% 3.42% 3.75% 3.99% 3.62%
Net interest margin (net
interest income as a
percentage of average
interest-earning assets) 3.95 4.37 4.67 4.93 4.26
Return on equity (net income
divided by average equity) 13.64 14.00 15.99 13.17 9.73
Return on assets (net income
divided by average total assets) 1.21 1.44 1.63 1.41 .96
Equity-to-assets ratio (average equity
divided by average total assets) 8.89 10.29 10.22 10.71 9.84
Allowance for loan losses as a
percentage of nonperforming loans 180.71 129.17 194.24 87.03 114.77
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Dollars in thousands, except per share amounts)
BUSINESS OF DCB FINANCIAL CORP
DCB Financial Corp (the "Corporation") was incorporated under the laws of the
State of Ohio on March 14, 1997, at the direction of management and approval of
the shareholders of The Delaware County Bank and Trust Company (the "Bank") for
the purpose of becoming a bank holding company by acquiring all outstanding
shares of the Bank. The Bank is a commercial bank, chartered under the laws of
the State of Ohio, and was organized in 1950. The Bank is the wholly-owned
subsidiary of the Corporation and its only significant asset.
The Bank conducts business from its main office at 41 North Sandusky Street in
Delaware, and from its 15 full-service branch offices located in Delaware and
surrounding communities. The Bank provides customary retail and commercial
banking services to its customers, including checking and savings accounts, time
deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real
estate mortgage loans, installment loans, night depository facilities and trust
services. The Bank also provides cash management, bond registrar and paying
services. Through its information systems department, the Bank provides data
processing services to other financial institutions; however, such services are
not a significant part of operations or revenue.
The Corporation, through the Bank, grants residential real estate, commercial
real estate, consumer and commercial loans to customers located primarily in
Delaware, Franklin, Licking, Morrow, Marion and Union Counties, Ohio. General
economic conditions in the Corporation's market area have been very sound.
Unemployment statistics have generally been among the lowest in the State of
Ohio, and real estate values have been stable to rising. The Corporation also
invests in U.S. Government and agency obligations, obligations of states and
political subdivisions, corporate obligations, mortgage-backed securities,
commercial paper and other investments permitted by applicable law. Funds for
lending and other investment activities come primarily from customer deposits,
borrowed funds, loan and security sales and principal repayments.
17
<PAGE> 18
As a bank holding company, the Corporation is subject to regulation, supervision
and examination by the Federal Reserve Board. As a commercial bank chartered
under the laws of the State of Ohio, the Bank is subject to regulation,
supervision and examination by the State of Ohio Superintendent of Financial
Institutions and the Federal Deposit Insurance Corporation (the "FDIC"). The
FDIC insures deposits in the Bank up to applicable limits. The Bank is also a
member of the Federal Reserve System and the Federal Home Loan Bank (the "FHLB")
of Cincinnati.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
In the following pages, management presents an analysis of the Corporation's
financial condition and results of operations as of and for the year ended
December 31, 1998, compared to prior years. This discussion is designed to
provide shareholders with a more comprehensive review of the operating results
and financial position than could be obtained from an examination of the
financial statements alone. This analysis should be read in conjunction with the
financial statements and related footnotes and the selected financial data
included elsewhere in this report.
FORWARD-LOOKING STATEMENTS
When used in this document, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimated," "projected," or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Corporation's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Corporation's market area and competition, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. Factors listed above could affect the Corporation's financial
performance and could cause the Corporation's actual results for future periods
to differ materially from any statements expressed with respect to future
periods.
The Corporation does not undertake, and specifically disclaims any obligation,
to publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $418,540 at year-end 1998 compared to $367,118
at year-end 1997, an increase of $51,422, or 14.0%. The growth in assets was the
result of the investment of funds provided by strong deposit growth in loans and
securities.
Federal funds sold decreased $9,450, or 85.9%, from $11,000 at year-end 1997 to
$1,550 at year-end 1998, as a result of the reinvestment of such funds in
higher-yielding loans and securities.
Total securities increased $32,814, or 30.4%, from $107,769 at year-end 1997 to
$140,583 at year-end 1998. The increase was the result of the reinvestment of
proceeds from maturities, calls and principal repayments, as well as the
investment of excess liquidity and funds provided from increased deposits. The
Corporation invests primarily in U.S. Treasury notes, Obligations of U.S.
government agencies and corporations, municipal bonds, corporate obligations and
mortgage-backed securities. Mortgage-backed securities include Federal Home Loan
Mortgage Corporation ("FHLMC"), Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") participation
certificates and Collateralized Mortgage Obligations ("CMOs"). Securities
classified as available for sale totaled $91,399, or
18
<PAGE> 19
65.0% of the total securities portfolio, at year-end 1998. 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 $56,948 at year-end 1998, provides the Corporation with a
constant cash flow stream from principal repayments. The Corporation held no
derivative securities or structured notes during any period presented.
Total loans increased $26,655, or 11.7%, from $228,634 at year-end 1997 to
$255,289 at year-end 1998. Growth was experienced in the majority of loan
categories; however, the largest increases were in real estate-related loans.
Commercial real estate loans increased $10,067, or 17.8%, from $56,434 at
year-end 1997 to $66,501 at year-end 1998. In addition, residential real estate
and home equity loans increased $9,454, or 17.6%, from $53,686 at year-end 1997
to $63,140 at year-end 1998 while construction loans, both residential and
commercial, increased $3,278, or 11.3%. The continued growth in total real
estate loans is related to growth in the Corporation's market area as the
Corporation has not changed its philosophy regarding pricing or underwriting
standards during the year. Strong population growth in the Corporation's market
contributed to the increase. In addition, the Corporation has been able to take
advantage of a strong local economy and the large number of businesses moving
into the market. Commercial and industrial loans increased $2,378, or 6.3%.
There is no concentration of lending to any one industry.
Despite the strong loan growth, the gross loan to deposit ratio decreased
slightly to 69.2% at year-end 1998 compared to 70.9% at year-end 1997.
During 1998, the Corporation purchased insurance contracts on the lives of the
participants in a new supplemental post-retirement benefit plan and named the
Corporation as the beneficiary. It is management's current intent that the
revenue from the insurance contracts be used as a funding source for the plan.
Cash surrender value of life insurance totaled $1,414 at year-end 1998.
Total deposits increased $46,434, or 14.4%, from $322,484 at year-end 1997 to
$368,918 at year-end 1998. Noninterest-bearing deposits increased $6,841, or
13.4%, while interest-bearing deposits increased $39,593, or 14.6%.
Interest-bearing demand and money market deposits increased from 48.7% of total
interest-bearing deposits at year-end 1997 to 58.1% of total interest-bearing
deposits at year-end 1998 as the Corporation experienced a $48,437, or 36.6%,
increase in volume of such accounts. The increase was primarily in the
Corporation's "Prime Time" deposit accounts which offer a variable interest rate
tied to prime. The Corporation experienced a $3,102 increase in savings
deposits, however, such accounts decreased from 13.9% of total interest-bearing
deposits at year-end 1997 to 13.1% of total interest-bearing deposits at
year-end 1998. Growth in such deposits has been primarily due to growth in the
Corporation's market area as the Corporation has not used special promotions to
attract the increased volume. Management believes the funds received from this
deposit growth are fairly stable based on the growth in the Corporation's market
area. Certificates of deposit decreased $11,946, or 11.8%, comprising 28.8% of
total interest-bearing deposits at year-end 1998 compared to 37.4% at year-end
1997. The decrease resulted as a large, public-fund certificate of deposit was
not renewed upon maturing during the year.
Borrowed funds totaled $9,450 at year-end 1998 compared to $7,005 at year-end
1997. The increase resulted as the Corporation borrowed an additional $4,252
from the FHLB through a mortgage-matched advance. The advance has a term of 10
years and carries a fixed interest rate of 5.10%. Principal and interest on the
advance are due monthly. The Corporation also renewed a $5,000 FHLB advance
which came due in August 1998. The renewed advance has a term of 270 days and
carries a fixed interest rate of 5.70% with interest due monthly. Borrowed funds
also include a demand note issued to the U.S. Treasury which totaled $225 at
year-end 1998 and $2,005 at year-end 1997.
19
<PAGE> 20
COMPARISON OF RESULTS OF OPERATIONS
NET INCOME. Net income for 1998 totaled $4,734, decreasing slightly compared net
income for 1997 of $4,890 and net income for 1996 totaled $4,880. Earnings per
share, adjusted to reflect the three-for-one stock exchange related to the
holding Corporation formation, was $1.14 per share for both 1996 and 1997, and
$1.13 per share for 1998. Return on average assets was 1.21%, 1.44% and 1.63%
for 1998, 1997 and 1996, while return on average shareholders' equity was
13.64%, 14.00% and 15.99% over the same three years.
NET INTEREST INCOME. Net interest income represents the amount by which interest
income on interest-earning assets exceeds interest paid on interest-bearing
liabilities. Net interest income is the largest component of the Corporation's
income and is affected by the interest rate environment and the volume and
composition of interest-earning assets and interest-bearing liabilities.
Net interest income was $14,605 for 1998 compared to $14,040 for 1997 and
$13,265 for 1996. The $565 increase in 1998 over 1997 was the result of an
increase in the average level of interest-earning assets partially offset by an
increase in the average level interest-bearing liabilities. Growth in net
interest income was also partly constrained by a decrease in the average yield
earned on interest-earning assets from 8.22% in 1997 to 7.82% in 1998 while the
average yield on interest-bearing liabilities remained constant over the same
periods. The average yield earned on interest-earning assets decreased as a
larger proportion of average earning assets were invested in lower yielding
securities and federal funds sold rather than loans as was the case in the prior
year. Also contributing to the decrease was a general decrease in market
interest rates for loans in 1998 which resulted from increased competition and a
50 basis point reduction in the discount rate by the Board of Governors of the
Federal Reserve System during the fourth quarter.
The $775 increase in net interest income in 1997 over 1996 was due to an
increase in the average level of interest-earning assets partially offset by an
increase in the average level of interest-bearing liabilities which carried a
higher average yield. The average yield earned on interest-earning assets
remained constant over the comparable periods while the average rate paid on
interest-bearing liabilities increased. The increase in the cost of funds was
the result of the shift of funds from lower yielding demand deposit and savings
accounts to high yielding money market deposits and certificates of deposit.
As a result of the aforementioned shifts in the components of interest-earning
assets and interest-bearing liabilities, as well as movements in market interest
rates, the Corporation's net interest margin, which is calculated by dividing
net interest income by average interest-earning assets, decreased from 4.67% in
1996 to 4.37% in 1997 and 3.95% in 1998.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
leases losses represents the charge to income necessary to adjust the allowance
for loan and lease losses to an amount that represents management's assessment
of the losses inherent in the Corporation's loan portfolio. All lending activity
contains associated risks of loan losses and the Corporation recognizes these
credit risks as a necessary element of its business activity. To assist in
identifying and managing potential loan losses, the Corporation maintains a loan
review function that continuously evaluates individual credit relationships as
well as overall loan-portfolio conditions. One of the primary objectives of this
loan review function is to make recommendations to management as to both
specific loss reserves and overall portfolio-loss reserves.
The provision for loan and lease losses totaled $469 in 1998 compared to $320 in
1997 and $366 in 1996. The growth in the provision is reflective of the overall
growth in the loan portfolio rather than of concerns about credit quality.
Management believes that despite the significant growth in loans, the quality of
the loan portfolio has improved over the comparable years as a result of sound
underwriting policies and procedures. Net charge-offs for 1998 were $363, which
represents .15% of average loans, compared to net charge-offs of $401 and $383,
or .19% and .20% of average loans, in 1997 and 1996.
20
<PAGE> 21
The allowance for loan losses increased from $1,842 at year-end 1997 to $1,948
at year-end 1998. As a percent of gross loans and leases, however, the allowance
decreased from .81% to .76% over the same period. Nonperforming loans, defined
as loans on nonaccrual status plus accruing loans past due 90 days or more, were
$1,078, or .42% of gross loans, at year-end 1998 compared to $1,426, or .62% of
gross loans, at year-end 1997. Such loans have been considered in management's
analysis of the allowance for loan and lease losses. The allowance was 180.71%
of nonperforming loans at year-end 1998 compared to 129.2% at year-end 1997.
Management believes increasing the allowance for loan losses is prudent as total
loans, particularly commercial, consumer and construction loans, and leases
increase. Accordingly, management anticipates that it will increase its
provision to the allowance for loan and lease losses for the near future.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$815, or 24.5%, in 1998 compared to 1997. Similarly, total noninterest income
increased $434, or 15.0%, in 1997 compared to 1996. The increases are due to
increased fee income from the Corporation's data service center and trust
department, increased gains on loan sales (both servicing-released and
service-retained) and increased fee income on deposit and cash management
accounts.
Total noninterest expense increased $1,601, or 16.4%, in 1998 compared to 1997
and $1,156, or 13.4%, in 1997 compared to 1996. The increases were primarily the
result of increases in salaries and employee benefits, occupancy expense and
equipment expense, where increases made up $1,421 of the total increase in 1998
and $797 of the total increase in 1997. These were planned increases relating to
increased staffing and the addition of three new facilities in 1997. During the
first quarter of 1997, the Corporation moved most of its information systems and
operations to a leased facility. Other departmental moves to the new facility
were made in 1998 and additional space in the facility was leased. Expansion of
the Corporation's operations facilities was necessary to support growth. The
Corporation also leased additional computer equipment in 1998 to support its
internal and external data processing service operations. Additionally, the
Corporation opened two new branch facilities in the latter part of 1997, both of
which were leased under 20-year fixed-cost leases. The two new branches are
strategically located in areas of Delaware County currently experiencing strong
population growth rates. With its broad line of products and services, the
Corporation expects to be able to meet the needs of the market and obtain the
business needed to sustain the new branches and contribute to overall
profitability.
INCOME TAXES. The change of income tax expense is primarily attributable to the
change in income before income taxes. See Note 11 to the Consolidated Financial
Statements. The provision for income taxes totaled $2,168 in 1998, $2,382 in
1997 and $2,293 in 1996 resulting in effective tax rates of 31.4%, 32.8% and
32.0%.
YIELDS EARNED AND RATES PAID. The following table sets forth certain information
relating to the Corporation's average balance sheet information and reflects the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities for the periods indicated. Such yields and costs
are derived by dividing income or expense by the average monthly balance of
interest-earning assets or interest-bearing liabilities, for the periods
presented. Average balances are derived from daily balances, which include
nonaccruing loans in the loan portfolio.
21
<PAGE> 22
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ---- ------- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 14,987 $ 802 5.35% $ 9,774 $ 541 5.54% $ 14,429 $ 774 5.36%
Bankers acceptances -- -- -- 1,619 126 7.78 3,750 203 5.41
Securities (1)
Taxable 65,968 4,046 6.15 50,780 3,304 6.48 41,255 2,536 6.15
Tax-exempt (2) 8,416 434 5.17 6,601 356 5.39 6,977 360 5.16
Mortgage-backed securities (1) 41,887 2,586 6.19 37,202 2,308 6.22 28,686 1,838 6.41
Loans and leases (3) 238,844 21,060 8.82 215,680 19,774 9.17 188,679 17,756 9.41
-------- ------- -------- ------- -------- -------
Total interest-earning assets 370,102 28,928 7.82 321,656 26,409 8.22 283,776 23,467 8.27
------- ------- -------
Noninterest-earning assets:
Cash and amounts due from banks 13,575 12,848 11,558
Premises and equipment, net 3,781 3,240 2,617
Other nonearning assets 4,580 3,598 2,625
Allowance for loan losses (1,903) (1,942) (1,924)
-------- -------- --------
Total assets $390,135 $339,400 $298,652
======== ======== ========
Interest-bearing liabilities:
Demand deposits $158,632 $ 7,560 4.77% $123,898 $ 5,810 4.69% $114,648 $ 5,041 4.40%
Savings deposits 38,457 1,203 3.13 37,874 1,204 3.18 38,781 1,241 3.20
Certificates of deposit 93,498 5,173 5.53 89,667 5,000 5.58 69,968 3,766 5.38
-------- ------- -------- ------- -------- -------
Total deposits 290,587 13,936 4.80 251,439 12,014 4.78 223,397 10,048 4.50
Borrowed funds 7,061 387 5.48 6,106 355 5.81 2,384 154 6.46
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 297,648 14,323 4.81 257,545 12,369 4.80 225,781 10,202 4.52
------- ------- -------
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ---- ------- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Continued)
Noninterest-bearing liabilities:
Demand deposits $ 53,500 $ 45,330 $ 41,661
Other liabilities 4,291 1,588 708
-------- -------- --------
Total liabilities 355,439 304,463 268,150
Shareholders' equity 34,696 34,937 30,502
-------- -------- --------
Total liabilities & shareholders'
equity $390,135 $339,400 $298,652
======== ======== ========
Net interest income; interest rate
spread $14,605 3.01% $14,040 3.42% $13,265 3.75%
======= ====== ======= ====== ======= ======
Net interest margin (net interest
income as a percent of average
interest-earning assets) 3.95% 4.37% 4.67%
====== ====== ======
Average interest-earning assets to average
interest-bearing liabilities 124.34% 124.89% 125.69%
====== ====== ======
</TABLE>
- -------------------
(1) Average balance includes unrealized gains and losses while yield is
based on amortized cost.
(2) Interest on tax-exempt securities is reported on a historical basis
without tax-equivalent adjustment. Interest on tax-exempt securities on
a tax equivalent basis was $658 in 1998, $539 in 1997 and $545 in 1996.
(3) Calculated net of deferred loan fees, loan discounts, unearned interest
and loans in process.
23
<PAGE> 24
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Corporation's interest income and expense during the years
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (1) changes in
volume (multiplied by prior year rate); (2) changes in rate (multiplied by prior
year volume); and, (3) total changes in rate and volume. The combined effects of
changes in both volume and rate, that are not separately identified, have been
allocated proportionately to the change due to volume and change due to rate:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1998 vs. 1997 1997 vs. 1996
----------------------- -----------------------
Increase Increase
(decrease) (decrease)
due to due to
--------------- --------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Federal funds sold $ 280 $ (19) $ 261 $ (257) $ 24 $ (233)
Bankers acceptances (126) (126) (144) 67 (77)
Securities:
Taxable 941 (199) 742 623 145 768
Tax-exempt 94 (16) 78 (20) 16 (4)
Mortgage-backed securities 290 (12) 278 530 (60) 470
Loans and leases 2,064 (778) 1,286 2,485 (467) 2,018
------ ------ ------ ------ ----- ------
Total interest income 3,543 (1,024) 2,519 3,217 (275) 2,942
------ ------ ------ ------ ----- ------
Interest expense attributable to:
Demand deposits 1,654 96 1,750 422 347 769
Savings deposits 18 (19) (1) (29) (8) (37)
Certificates of deposit 212 (39) 173 1,094 139 1,233
Borrowings 53 (21) 32 217 (15) 202
------ ------ ------ ------ ----- ------
Total interest expense 1,937 17 1,954 1,704 463 2,167
------ ------ ------ ------ ----- ------
Increase (decrease) in net
interest income $1,606 $(1,041) $ 565 $1,513 $(738) $ 775
====== ======= ====== ====== ===== ======
</TABLE>
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risks. Interest rate risk is the risk that the
Corporation's financial condition will be adversely affected due to movements in
interest rates. The income of financial institutions is primarily derived from
the excess of interest earned on interest-earning assets over the interest paid
on interest-bearing liabilities. Accordingly, the Corporation places great
importance on monitoring and controlling interest rate risk.
There are several methods employed by the Corporation to monitor and control
interest rate risk. One such method is using a gap analysis. The gap is defined
as the repricing variance between rate sensitive assets and rate sensitive
liabilities within certain periods. The repricing can occur due to changes in
rates on variable rate products as well as maturities of interest-earning assets
and interest-bearing liabilities. A high ratio of interest sensitive
liabilities, generally referred to as a negative gap, tends to benefit net
interest income during periods of falling interest rates as the average rate
paid on interest-bearing liabilities declines faster than the average rate
earned on interest-earning assets. The opposite holds true during periods of
rising interest rates. The Corporation attempts to minimize the interest rate
risk
24
<PAGE> 25
through management of the gap in order to achieve consistent shareholder return.
The Corporation's asset and liability management policy is to maintain a
laddered gap position. One strategy used by the Corporation is to originate
variable rate loans tied to market indices. Such loans reprice on an annual,
quarterly, monthly or daily basis as the underlying market indices change.
Currently, $172,696, or 67.6%, of the Corporation's loan portfolio reprices on
regular basis. The Corporation also invests excess funds in liquid federal funds
that mature and reprice on a daily basis. The Corporation also maintains most of
its securities in the available for sale portfolio to take advantage of interest
rate swings and to maintain liquidity for loan funding and deposit withdrawals.
The following table provides information about the Corporation's financial
instruments that are sensitive to changes in interest rates as of December 31,
1998, based on information and assumptions set forth in the Notes. The
Corporation believes the assumptions utilized are reasonable. For loans,
securities and liabilities with contractual maturities, the table represents
principal cash flows and the weighted average interest rate. For variable-rate
loans the contractual maturity and weighted-average interest rate was used with
an explanatory footnote as to repricing periods. For liabilities without
contractual maturities such as demand and savings deposit accounts, a decay rate
was utilized to match their most likely withdrawal behavior.
<TABLE>
<CAPTION>
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Fixed-rate loans (1) $ 17,158 $ 6,094 $12,576 $14,200 $15,098 $ 17,467 $ 82,593 $ 83,525
Average interest rate 9.03% 10.09% 9.40% 9.35% 9.06% 9.06% 9.23%
Variable-rate loans (1) (2) 37,211 10,295 6,614 4,763 7,957 105,856 172,696 173,198
Average interest rate 8.99 9.48 9.10 9.22 8.80 8.71 8.85
Fixed-rate debt securities -
available for sale (1) 11,365 1,266 3,282 2,017 3,762 39,612 61,304 61,304
Average interest rate 5.76 5.67 6.12 5.98 5.92 5.85 5.85
Fixed-rate debt securities -
held to maturity (1) 13,972 641 1,339 753 1,414 3,025 21,144 21,434
Average interest rate 5.30 4.70 4.93 5.21 5.43 5.59 5.30
Fixed-rate mortgage-backed
securities - available for
sale (3) 1,340 1,240 635 721 500 4,496 8,932 8,932
Average interest rate 5.90 5.93 5.90 6.01 5.88 5.88 5.90
Variable-rate mortgage-
backed securities -
available for sale (4) 999 949 901 856 814 15,457 19,976 19,976
Average interest rate 5.85 5.85 5.85 5.85 5.85 5.85 5.85
Fixed-rate mortgage-backed
securities - held to
maturity (3) 5,329 4,099 2,540 2,635 2,098 11,339 28,040 28,263
Average interest rate 6.43 5.80 5.77 5.83 5.88 5.61 5.72
Federal funds sold (5) 1,550 -- -- -- -- -- 1,550 1,550
Average interest rate 5.44 -- -- -- -- -- 5.44
Total rate-sensitive assets 88,924 24,584 27,887 25,945 31,643 197,252 396,235 398,182
Average interest rate 7.71 8.38 8.20 8.38 8.12 7.65 7.82
</TABLE>
(Continued on next page)
25
<PAGE> 26
(Continued)
<TABLE>
<CAPTION>
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive liabilities:
Noninterest-bearing
deposits (6) $ 14,452 $11,562 $ 8,672 $ 7,226 $ 7,226 $ 8,672 $ 57,810 $ 57,810
Average interest rate -- -- -- -- -- -- --
Interest-bearing demand
deposits (7) 44,303 44,303 33,227 33,227 22,150 44,303 221,513 221,513
Average interest rate 4.08% 4.08% 4.08% 4.08% 4.08% 4.08% 4.08%
Time deposits (8) 78,765 8,791 2,039 -- -- -- 89,595 90,270
Average interest rate 5.01 5.20 5.09 -- -- -- 5.03
Fixed-rate borrowings (8) 5,590 355 374 393 413 2,325 9,450 9,356
Average interest rate 5.65 5.10 5.10 5.10 5.10 5.10 5.43
Total rate-sensitive liabilities 143,110 65,011 44,312 40,846 29,789 55,300 378,368 378,949
Average interest rate 4.24 3.51 3.34 3.37 3.10 3.48 3.72
</TABLE>
- -------------------
(1) Assumes normal amortization based on contractual maturity and
repayment.
(2) Variable-rate commercial and home-equity loans are based on the prime
rate of interest as stated in the Wall Street Journal and are subject
to repricing when the prime rate is adjusted. Variable-rate mortgage
loans are based on a constant-maturity treasury index and are subject
to repricing on a 1-, 3- and 5-year basis.
(3) In addition to amounts contractually due in the periods indicated,
fixed-rate mortgage-backed securities assume a prepayment rate on the
remaining balances of 15% for the first two years and 10% for years 3,
4 and 5 with the remaining 40% being more than 5 years.
(4) In addition to amounts contractually due in the periods indicated,
variable-rate mortgage-backed securities assume a prepayment rate on
the remaining balances of 5% for each year with the remaining 75% being
more than 5 years.
(5) The interest rate on federal funds is subject to daily repricing and is
that which is currently offered by the correspondent banks buying these
short-term, overnight funds.
(6) Noninterest-bearing checking accounts assume a decay rate of 25% for
year 1, 20% for year 2, 15% for year 3 and 12.5% for each of years 4
and 5 with the remaining 15% being more than 5 years.
(7) Savings, NOW and money market accounts assume a decay rate of 20% for
each of years 1 and 2, 15% for each of years 3 and 4 and 10% for year 5
with the remaining 20% being more than 5 years.
(8) Based on contractual maturity as management believes expected maturity
is not significantly different from contractual maturity.
The principal cash flows and the weighted-average interest rates of
rate-sensitive assets and liabilities expected at year-end 1998 did not
significantly change from year-end 1997. The following table provides summary
information about the Corporation's financial instruments that were sensitive to
changes in interest rates as of year-end 1997 and was prepared using assumptions
similar to that of the above table.
<TABLE>
<CAPTION>
Fair
1998 1999 2000 2001 2002 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total rate-sensitive assets $ 98,569 $25,275 $20,615 $27,003 $26,912 $147,979 $346,353 $348,153
Average interest rate 7.88% 7.90% 8.90% 8.42% 8.83% 8.52% 8.33%
Total rate-sensitive liabilities $137,116 67,724 36,258 27,632 27,618 33,141 329,489 330,204
Average interest rate 4.36 4.20 3.43 3.19 3.19 3.19 3.91
</TABLE>
26
<PAGE> 27
LIQUIDITY
Liquidity is the ability of the Corporation to fund customers' needs for
borrowing and deposit withdrawals. The purpose of liquidity management is to
assure sufficient cash flow to meet all of the financial commitments and to
capitalize on opportunities for business expansion. This ability depends on the
institution's financial strength, asset quality and types of deposit and
investment instruments offered by the Corporation to its customers. The
Corporation's principal sources of funds are deposits, loan and securities
repayments, maturities of securities, sales of securities available for sale and
other funds provided by operations. The Bank also has the ability to borrow from
the FHLB. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan and mortgage-backed
security prepayments are more influenced by interest rates, general economic
conditions and competition. The Corporation maintains investments in liquid
assets based upon management's assessment of (1) need for funds, (2) expected
deposit flows, (3) yields available on short-term liquid assets and (4)
objectives of the asset/liability management program.
Cash and cash equivalents decreased $9,791, or 38.7%, from $25,283 at year-end
1997 to $15,492 at year-end 1998. The decrease is the result of a shift of
investments in federal funds sold to higher yielding loans and securities. Cash
and cash equivalents at year-end 1998 represented 3.7% of total assets compared
to 6.9% of total assets at year-end 1997. The Corporation has the ability to
borrow funds from the Federal Home Loan Bank and has various federal fund
sources from correspondent banks, should the Corporation need to supplement its
future liquidity needs in order to meet loan demand or to fund investment
opportunities. Management believes the Corporation's liquidity position is
strong based on its high level of cash, cash equivalents, core deposits, the
stability of its other funding sources and the support provided by its capital
base.
As summarized in the Consolidated Statements of Cash Flows, the most significant
transactions which affected the Corporation's level of cash and cash
equivalents, cash flows and liquidity during 1998 were the net increase in loans
of $22,537; the receipt of proceeds from maturities and repayments of securities
of $106,255; securities purchases of $138,613 and the net increase in deposits
of $46,434.
CAPITAL RESOURCES
Total shareholders' equity increased $2,269 primarily due to earnings retained.
The increase is net of cash dividends paid of $883. Additionally, the
Corporation purchased 75,000 shares of treasury stock, which reduced
shareholders' equity by $1,562, or the cost of the shares purchased. The shares
were purchased in the over-the-counter market as a means to reduce the
Corporation's excess capital. Management may purchase additional shares in the
future, as opportunities arise. The number of shares to be purchased and the
price to be paid will depend upon the availability of shares, the prevailing
market prices and any other considerations which may, in the opinion of the
Corporation's Board of Directors or management, affect the advisability of
purchasing shares.
The components of shareholders' equity changed during the first quarter of 1997
with the formation of the holding company. Shareholders of the Bank received
three shares of Corporation stock, no par value, for each share of Bank $1.00
par value stock owned. This exchange resulted in the reclassification of
additional paid-in capital to common stock. The holding Corporation was formed
to allow management to pursue other forms of financial services or acquisitions
of full-service banking operations or branches of other organizations.
Tier 1 capital is shareholders' equity excluding the unrealized gain or loss
securities classified as available for sale and intangible assets. Tier 2
capital, or total capital, includes Tier 1 capital plus the allowance for loan
losses not to exceed 1.25% of risk weighted assets. Risk weighted assets are the
Corporation's total assets after such assets are assessed for risk and assigned
a weighting factor based on their inherent risk.
27
<PAGE> 28
The Corporation and its subsidiaries meet all regulatory capital requirements.
The ratio of total capital to risk weighted assets was 13.8% at year-end 1998,
while the Tier 1 risk-based capital ratio was 13.2%. Regulatory minimums call
for a total risk-based capital ratio of 8%, at least half of which must be Tier
1 capital. The Corporation's leverage ratio, defined as Tier 1 capital divided
by average assets, of 9.2% at year-end 1998 exceeded the regulatory minimum for
capital adequacy purposes of 4.0%.
YEAR 2000 ISSUE
The Corporation operates an in-house data processing center which also provides
data processing services to other financial institutions. The Corporation's
lending and deposit activities are almost entirely dependent upon computer
systems which process and record transactions, although the Corporation can
effectively operate with manual systems for brief periods when its electronic
systems malfunction or cannot be accessed. In addition to its basic operating
activities, the Corporation's facilities and infrastructure, such as security
systems and communications equipment, are dependent, to varying degrees, upon
computer systems.
The Corporation is aware of the potential Year 2000 related problems that may
affect the computers which control or operate Corporation's operating systems,
facilities and infrastructure. In 1997, the Corporation began a process of
identifying any Year 2000 related problems that may be experienced by its
computer-operated or computer-dependent systems. Each application has been
identified as "Mission Critical" or "Non-Mission Critical." The Corporation has
contacted the companies that supply or service the Corporation's
computer-operated or computer-dependent systems to obtain confirmation that each
system that is material to the operations of the Corporation is either currently
Year 2000 compliant or is expected to be Year 2000 compliant. With respect to
systems that cannot presently be confirmed as Year 2000 compliant, the
Corporation will continue to work with the appropriate supplier or servicer to
ensure all such systems will be rendered compliant in a timely manner, with
minimal expense to the Corporation or disruption of the Corporation's
operations. All of the identified computer systems affected by the Year 2000
issue are currently in the renovation, validation or implementation phase of the
process of becoming Year 2000 compliant. The Corporation has examined its
computer hardware and software and determined it will cost approximately
$160,000 to make such systems Year 2000 compliant. Of that amount, the
Corporation has already spent $39,000. At this time, however, any additional
expense that may be incurred by the Bank in connection with Year 2000 issues
cannot be determined.
As a contingency plan, however, the Corporation has determined that if the
Corporation's systems fail, the Corporation would implement manual systems until
such systems could be re-established. The Corporation does not anticipate that
such short-term manual systems would have a material adverse effect on the
Corporation's operations. At this time, however, the expense that may be
incurred by the Corporation in connection with system failure related to the
Year 2000 issue cannot be determined.
In addition to the possible expense related to its own systems, the Corporation
could incur losses if loan payments are delayed due to Year 2000 problems
affecting any of the Corporation's significant borrowers or impairing the
payroll systems of large employers in the Corporation's primary market area.
Because the Corporation's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and the Corporation's primary
market area is not significantly dependent on one employer or industry, the
Corporation does not expect any significant or prolonged Year 2000 related
difficulties will affect net earnings or cash flow.
28
<PAGE> 29
IMPACT OF NEW ACCOUNTING STANDARDS
Beginning January 1, 2000 a new accounting standard will require all derivatives
to be recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and losses on the hedge
and on the hedged item, even if the fair value of the hedged item is not
otherwise recorded. This is not expected to have a material effect but the
effect will depend on derivative holdings when this standard applies.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes included herein have been
prepared in accordance with generally accepted accounting principles ("GAAP").
Presently, GAAP requires the Corporation to measure financial position and
operating results primarily in terms of historic dollars. Changes in the
relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are greatly influenced by changes in the
inflation rate, they do not change at the same rate or in the same magnitude as
the inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is included under the heading "Asset and Liability Management
and Market Risk" in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," on pages 24 through 26 of this document.
29
<PAGE> 30
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
DCB Financial Corp
Delaware, Ohio
We have audited the accompanying consolidated balance sheets of DCB Financial
Corp (the "Corporation") as of December 31, 1998 and 1997, and related
consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of DCB
Financial Corp as of December 31, 1998 and 1997, and consolidated results of
operations and cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
February 5, 1999
30
<PAGE> 31
<TABLE>
DCB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
- ------------------------------------------------------------------------------------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,942 $ 14,283
Federal funds sold 1,550 11,000
-------- --------
Total cash and cash equivalents 15,492 25,283
Securities available for sale, at fair value 91,399 53,935
Securities held to maturity (estimated fair value of
$49,697 in 1998 and $54,158 in 1997) 49,184 53,834
Loans and leases 255,289 228,634
Less allowance for loan and lease losses (1,948) (1,842)
-------- --------
Net loans and leases 253,341 226,792
Premises and equipment, net 3,965 3,756
Cash surrender value of life insurance 1,414 --
Accrued interest receivable and other assets 3,745 3,518
-------- --------
Total assets $418,540 $367,118
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 57,810 $ 50,969
Interest-bearing 311,108 271,515
-------- --------
Total deposits 368,918 322,484
Borrowed funds 9,450 7,005
Accrued interest payable and other liabilities 1,863 1,589
-------- --------
Total liabilities 380,231 331,078
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 issued 3,779 3,779
Retained earnings 36,283 32,432
Treasury stock, 95,000 and 20,000 shares, at cost (1,978) (416)
Accumulated other comprehensive income 225 245
-------- --------
Total shareholders' equity 38,309 36,040
-------- --------
Total liabilities and shareholders' equity $418,540 $367,118
======== ========
- ------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
<TABLE>
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $21,060 $19,774 $17,756
Securities
Taxable 6,632 5,612 4,374
Tax-exempt 434 356 360
Federal funds sold 802 541 774
Other -- 126 203
------- ------- -------
Total interest income 28,928 26,409 23,467
INTEREST EXPENSE
Deposits 13,936 12,014 10,048
Borrowings 387 355 154
------- ------- -------
Total interest expense 14,323 12,369 10,202
------- ------- -------
NET INTEREST INCOME 14,605 14,040 13,265
Provision for loan and leases losses 469 320 366
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,136 13,720 12,899
NONINTEREST INCOME
Service charges on deposit accounts 1,487 1,389 1,235
Trust department income 231 166 123
Securities gains (losses) -- 36 (6)
Net gains from sales of loans 752 268 181
Data service fees 367 276 218
Other 1,302 1,189 1,139
------- ------- -------
Total noninterest income 4,139 3,324 2,890
NONINTEREST EXPENSE
Salaries and other employee benefits 5,866 5,070 4,602
Equipment 1,252 813 635
Occupancy 991 805 654
State franchise taxes 516 503 414
Other 2,748 2,581 2,311
------- ------- -------
Total noninterest expense 11,373 9,772 8,616
------- ------- -------
INCOME BEFORE INCOME TAXES 6,902 7,272 7,173
Provision for income taxes 2,168 2,382 2,293
------- ------- -------
NET INCOME $ 4,734 $ 4,890 $ 4,880
======= ======= =======
EARNINGS PER COMMON SHARE $ 1.13 $ 1.14 $ 1.14
======= ======= =======
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 33
<TABLE>
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME $4,734 $4,890 $4,880
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain (loss) on available for sale securities
arising during the period (20) 151 (44)
Reclassification adjustment for amounts realized on
securities sales included in net income -- (24) 4
------ ------ ------
Total other comprehensive income (20) 127 (40)
------ ------ ------
COMPREHENSIVE INCOME $4,714 $5,017 $4,840
====== ====== ======
- ------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 34
<TABLE>
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Retained Treasury Comprehensive Shareholders'
Stock Capital Earnings Stock Income Equity
----- ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $1,424 $ 2,355 $24,757 $ -- $158 $28,694
Net income -- -- 4,880 -- -- 4,880
Cash dividends
($.2234 per share) -- -- (955) -- -- (955)
Change in fair value of
securities available
for sale -- -- -- -- (40) (40)
------ ------- ------- ------- ---- -------
BALANCE, DECEMBER 31, 1996 1,424 2,355 28,682 -- 118 32,579
Net income -- -- 4,890 -- -- 4,890
Cash dividends
($.2667 per share) -- -- (1,140) -- -- (1,140)
Formation of holding
company 2,355 (2,355)
Purchase of 20,000
treasury shares -- -- -- (416) -- (416)
Change in fair value of
securities available
for sale -- -- -- -- 127 127
------ ------- ------- ------- ---- -------
BALANCE, DECEMBER 31, 1997 3,779 -- 32,432 (416) 245 36,040
Net income -- -- 4,734 -- -- 4,734
Cash dividends
($.21 per share) -- -- (883) -- -- (883)
Purchase of 75,000
treasury shares -- -- -- (1,562) -- (1,562)
Change in fair value of
securities available
for sale -- -- -- -- (20) (20)
------ ------- ------- ------- ---- -------
BALANCE, DECEMBER 31, 1998 $3,779 $ -- $36,283 $(1,978) $225 $38,309
====== ======= ======= ======= ==== =======
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 35
<TABLE>
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,734 $ 4,890 $ 4,880
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 677 520 428
Provision for loan losses 469 320 366
Deferred tax expense 339 612 277
Securities losses (gains) -- (36) 6
Net amortization (accretion) (428) 194 275
Federal Home Loan Bank stock dividends (58) (67) (41)
Change in loans held for sale (4,481) (1,637) (496)
Changes in other assets and other liabilities, net (282) (369) (720)
-------- -------- --------
Net cash from operating activities 970 4,427 4,975
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (62,406) (29,048) (31,595)
Maturities and repayments 24,821 14,247 9,894
Proceeds from sales -- 8,084 5,740
Securities held to maturity
Purchases (76,207) (58,955) (84,208)
Maturities and repayments 81,434 37,050 81,778
Net change in loans (22,537) (23,806) (29,940)
Premises and equipment expenditures (886) (1,572) (599)
Proceeds from sale of premises and equipment -- -- 56
Purchase life insurance policies (1,414) -- --
Proceeds from sale of other real estate -- 201 30
-------- -------- --------
Net cash from investing activities (57,195) (53,799) (48,844)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 46,434 43,393 35,235
Net change in short-term borrowings (1,780) 461 792
Proceeds from long-term debt 9,252 5,000 5,000
Repayment of long-term debt (5,027) (5,002) (23)
Purchases of treasury stock (1,562) (416) --
Cash dividends paid (883) (1,140) (955)
-------- -------- --------
Net cash from financing activities 46,434 42,296 40,049
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (9,791) (7,076) (3,820)
Cash and cash equivalents at beginning of year 25,283 32,359 36,179
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,492 $ 25,283 $ 32,359
======== ======== ========
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 36
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of DCB Financial Corp (the "Corporation") and its
wholly-owned subsidiary, The Delaware County Bank and Trust Company (the
"Bank"). The financial statements of the Bank include accounts of its
wholly-owned subsidiaries, D.C.B. Corporation and 362 Corp. All significant
intercompany accounts and transactions have been eliminated in consolidation.
On March 14, 1997, a holding company was formed through an internal
reorganization whereby each shareholder of the Bank received three shares of the
Corporation's no par value common stock for each share of Bank $1.00 par value
common stock owned. This internal reorganization was accounted for similar to a
pooling of interests, where the historical carrying values of the Bank's assets
and liabilities were carried forward to the consolidated financial statements,
without change. The Corporation transferred $2,355 from paid-in capital to
common stock due to the elimination of par value.
Nature of Operations: The Corporation's revenues, operating income and assets
are primarily from the banking industry. The Corporation operates 15 offices in
Delaware and Union Counties, Ohio. Loan customers include a wide range of
individuals, businesses and other organizations. Major portions of loans are
secured by various forms of collateral including real estate, business assets,
consumer property and other items. The Corporation's primary funding source is
deposits from customers in its market area. The Corporation also purchases
investments, operates a trust department and engages in mortgage banking
operations.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect amounts
reported in the financial statements and disclosures provided; future results
could differ. The collectibility of loans, fair value of financial instruments
and status of contingencies are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents include cash and due from banks
and federal funds sold. Cash flows are reported net for customer loan and
deposit transactions, short-term bankers' acceptances and short-term borrowings.
The Corporation paid interest of $14,220, $12,213, and $10,077 for 1998, 1997
and 1996. Cash paid for income taxes was $2,072, $2,190, and $2,200 for 1998,
1997 and 1996.
Noncash transactions in 1997 included a transfer of $2,355 from additional
paid-in capital to common stock due to the elimination the par value of common
stock upon formation of the holding company. There were no significant noncash
transactions in 1998 or 1996.
Bankers' Acceptances: Bankers' acceptances represent short-term financing
arrangements the issuing party has agreed to pay at maturity. Interest income on
these instruments is accrued over the contract period.
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE> 37
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has positive intent and ability to hold them to
maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are classified as trading when held for
short-term periods in anticipation of market gains, and are carried at fair
value. Securities are written down to fair value when a decline in fair value is
not temporary. The Corporation held no trading securities during any period
presented.
Realized gains and losses on sales are determined using the amortized cost of
the specific security sold. Interest income includes amortization of purchase
premiums and discounts.
Loans Held for Sale: Certain residential mortgage loans are originated for sale
in the secondary mortgage-loan market. These loans are included in real estate
mortgage loans and are carried at the lower of cost or estimated fair value
taken together. Net unrealized losses are recognized through a valuation
allowance by charges to income. To mitigate the interest rate risk, fixed
commitments may be obtained at the time loans are originated or identified for
sale. Loans originated and held for sale totaled $6,897 and $2,416 at year-end
1998 and 1997.
Loans Receivable: Loans are reported at the principal balance outstanding, net
of deferred loan fees and costs. Interest income is reported on the interest
method and includes amortization of net deferred loan fees and costs over the
loan term.
Interest income is not recognized when management believes the collection of
interest is doubtful, typically when payments are past due over 90 days.
Payments received on such loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer and credit card loans and on an
individual loan basis for other loans. In addition, loans held for sale and
leases are excluded from consideration of impairment. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing rate or
at the fair value of collateral if repayment is expected solely from the
collateral. Loans are evaluated for impairment when payments are delayed,
typically 90 days or more, or when it is probable that not all principal and
interest amounts will be collected according to the original terms of the loan.
- --------------------------------------------------------------------------------
(Continued)
37
<PAGE> 38
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations of Credit Risk: The Corporation grants commercial, real estate
and consumer loans primarily in Delaware County, Ohio, and surrounding areas.
Loans for commercial real estate, farmland, construction and land development
purposes comprise 38.8% of loans. Loans for commercial purposes comprise 15.6%
of loans, and include loans secured by business assets and agricultural loans.
Loans for residential real estate purposes aggregate 21.7% of loans. Loans and
leases for consumer purposes, including home equity loans, are primarily secured
by consumer assets and represent 23.9% of total loans. The borrowers' ability to
honor their contracts is not dependent on the economic status of any single
industry.
Premises and Equipment: Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated using the straight-line method based on the
estimated useful lives of assets. These assets are reviewed for impairment when
events indicate the carrying amount may not be recoverable.
Other Real Estate Owned: Real estate acquired in settlement of loans is
initially reported at estimated fair value at acquisition. After acquisition, a
valuation allowance reduces the reported amount to the lower of initial amount
or fair value less costs to sell. Expenses are charged to operations as
incurred. Gains and losses on disposition and changes in the valuation allowance
are reported in other expense.
Loan Servicing: The Corporation has sold various loans to the Federal Home Loan
Mortgage Corporation ("FHLMC") while retaining servicing rights. Gains and
losses on loan sales are recorded at the time of the cash sale. Mortgage
servicing rights are recorded as assets when the related loan is sold. These
assets are amortized in proportion to, and over the period of, estimated net
servicing income and are evaluated periodically for impairment. Impairment is
evaluated based on the fair value of the rights using groupings of underlying
loans with similar characteristics.
Mortgage servicing rights totaled $217 and $176 at year-end 1998 and 1997.
Income Taxes: Income tax expense is the sum of the current-year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between carrying amounts and tax bases of assets and liabilities
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance-sheet
financial instruments do not include the value of anticipated future business or
the value of assets and liabilities not considered financial instruments.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the bank to the holding company or by
the holding company to shareholders.
Industry Segment: Internal financial information is primarily reported and
aggregated solely in the line of business of banking.
- --------------------------------------------------------------------------------
(Continued)
38
<PAGE> 39
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share: Earnings per share computations are based on the
weighted average number of shares of common stock outstanding during the year.
The weighted average number of shares outstanding was 4,197,077 for 1998 and
4,270,789 for 1997 and 4,273,200 for 1996.
Comprehensive Income: Under a new accounting standard adopted on January 1,
1998, comprehensive income is reported for all periods. Comprehensive income
includes both net income and other comprehensive income, which includes the
change in unrealized gains and losses on securities available for sale.
Financial Statement Presentation: Some items in prior financial statements have
been reclassified to conform to the current presentation.
NOTE 2 - SECURITIES
Year-end securities were as follows:
<TABLE>
<CAPTION>
----------------------1998----------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 4,518 $ 38 $ -- $ 4,556
U.S. government agencies and
corporations 50,194 395 (33) 50,556
States and political subdivisions 6,167 55 (30) 6,192
Mortgage-backed 29,009 59 (160) 28,908
------- ---- ----- -------
Total debt securities 89,888 547 (223) 90,212
Other securities 1,169 18 -- 1,187
------- ---- ----- -------
Total securities available for sale $91,057 $565 $(223) $91,399
======= ==== ===== =======
SECURITIES HELD TO MATURITY
U.S. government agencies and
corporations $ 1,000 $ 2 $ -- $ 1,002
States and political subdivisions 7,994 330 (7) 8,317
Corporate 12,150 -- (35) 12,115
Mortgage-backed 28,040 230 (7) 28,263
------- ---- ----- -------
Total securities held to maturity $49,184 $562 $ (49) $49,697
======= ==== ===== =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
39
<PAGE> 40
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
----------------------1997----------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 5,538 $ 30 $ -- $ 5,568
U.S. government agencies and
corporations 33,176 234 (1) 33,409
States and political subdivisions 203 -- -- 203
Mortgage-backed 13,608 107 (10) 13,705
------- ---- ---- -------
Total debt securities 52,525 371 (11) 52,885
Other securities 1,038 12 -- 1,050
------- ---- ---- -------
Total securities available for sale $53,563 $383 $(11) $53,935
======= ==== ==== =======
SECURITIES HELD TO MATURITY
States and political subdivisions $ 6,523 $215 $(15) $ 6,723
Corporate 21,089 6 (46) 21,049
Mortgage-backed 26,222 190 (26) 26,386
------- ---- ---- -------
Total securities held to maturity $53,834 $411 $(87) $54,158
======= ==== ==== =======
</TABLE>
Substantially all mortgage-backed securities are backed by pools of mortgages
that are insured or guaranteed by the Federal National Mortgage Association
("FNMA"), the Government National Mortgage Association ("GNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC").
The amortized cost and estimated fair value of debt securities at year-end 1998,
by contractual maturity, are shown below. Expected 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.
<TABLE>
<CAPTION>
Available for sale Held to maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $11,322 $11,365 $13,972 $13,948
Due from one to five years 10,258 10,327 4,147 4,270
Due from five to ten years 30,237 30,547 2,478 2,609
Due after ten years 9,062 9,065 547 607
Mortgage-backed securities 29,009 28,908 28,040 28,263
------- ------- ------- -------
$89,888 $90,212 $49,184 $49,697
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
40
<PAGE> 41
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
There were no sales of securities available for sale in 1998. Proceeds from
sales of securities available for sale totaled $8,084 and $5,740 for 1997 and
1996. Gross gains of $53 and $4 and gross losses of $17 and $10 were realized on
those sales.
At year-end 1998, 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.
Investments with a carrying value of approximately $35,520 and $42,689 as of
year-end 1998 and 1997, were pledged to secure public funds and other
obligations.
NOTE 3 - LOANS AND LEASES
Year-end loans and leases were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial and industrial $ 39,864 $ 37,486
Commercial real estate 66,501 56,434
Residential real estate and home equity 63,140 53,686
Real estate construction and land development 32,382 29,104
Consumer and credit card 44,050 42,914
Lease financing, net 9,352 9,010
-------- --------
$255,289 $228,634
======== ========
</TABLE>
Certain directors, executive officers and principal shareholders of the
Corporation, including their immediate families and companies in which they are
principal owners, were loan customers during 1998 and 1997. A summary of
activity on these borrower relationships with aggregate debt greater than
$60,000 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 3,493 $2,734
New loans and advances 2,344 1,313
Payments (1,048) (554)
------- ------
Ending balance $ 4,789 $3,493
======= ======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
41
<PAGE> 42
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS AND LEASES (Continued)
The following is a summary of the components of the Corporation's net investment
in direct financing equipment and vehicle leases at year-end:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Minimum lease payments receivable $ 5,377 $ 4,880
Lease residuals (unguaranteed) 5,694 5,668
------- -------
11,071 10,548
Unearned income 1,719 1,538
------- -------
$ 9,352 $ 9,010
======= =======
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 1,842 $ 1,923 $ 1,940
Provision for loan and lease losses 469 320 366
Loans charged off (568) (644) (528)
Recoveries 205 243 145
------- ------- -------
Balance at end of year $ 1,948 $ 1,842 $ 1,923
======= ======= =======
</TABLE>
Impaired loans were not material during any period presented.
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 550 $ 286
Buildings 2,768 3,173
Furniture and equipment 3,662 2,941
------- -------
6,980 6,400
Accumulated depreciation and amortization 3,015 2,644
------- -------
$ 3,965 $ 3,756
======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
42
<PAGE> 43
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 6 - LEASE COMMITMENTS
The Corporation has long-term operating leases for branch offices and equipment,
which expire at various dates through 2017. Rental expense on lease commitments
for 1998, 1997 and 1996 amounted to $686, $362 and $210. In 1997, the
Corporation entered two leases for branch facilities with a partnership in which
a director of the Corporation holds an interest. One lease commenced on April 1,
1997 for a term of 20 years with annual rental payments of $84. The other lease
commenced on September 1, 1997 for a term of 20 years with annual rental
payments of $71. The following is a summary of the future minimum-lease payments
on the Corporation's lease obligations:
<TABLE>
<S> <C>
1999 $ 634
2000 630
2001 580
2002 296
2003 257
Thereafter 2,334
------
$4,731
======
</TABLE>
NOTE 7 - INTEREST-BEARING DEPOSITS
Year-end interest-bearing deposits were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest-bearing demand and money market deposits $180,604 $132,167
Savings deposits 40,909 37,807
Certificates of deposit
In denominations under $100,000 62,354 66,016
In denominations of $100,000 or more 27,241 35,525
-------- --------
$311,108 $271,515
======== ========
</TABLE>
At year-end 1998, the scheduled maturities of certificates of deposit were as
follows:
<TABLE>
<S> <C>
1999 $78,765
2000 8,791
2001 2,039
-------
$89,595
=======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
43
<PAGE> 44
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 8 - BORROWED FUNDS
The following table is a summary of year-end borrowings:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Fixed-rate FHLB advance, 5.91%, due August 1998 $ - $5,000
Fixed-rate FHLB advance, 5.70%, due May, 1999 5,000 -
Fixed-rate FHLB advance, 5.10%, due October, 2008 4,225 -
Demand note issued to the U.S. Treasury 225 2,005
------ ------
$9,450 $7,005
====== ======
</TABLE>
As a member of the FHLB system, the Bank has the ability to obtain additional
borrowings up to a maximum total of 50% of Bank assets subject to the level of
qualified 1-4 family residential real estate loans to pledge and FHLB stock
owned. The advances are collateralized by a blanket pledge of the Bank's
residential mortgage loan portfolio and FHLB stock.
At year-end 1998, required annual principal payments on borrowed funds were as
follows:
<TABLE>
<S> <C>
1999 $5,590
2000 355
2001 374
2002 393
2003 413
Thereafter 2,325
------
$9,450
======
</TABLE>
NOTE 9 - RETIREMENT PLANS
The Bank provides a 401(k) savings plan for all eligible employees. To be
eligible, an individual must have at least 1,000 hours of service during a
12-consecutive-month period and must be 20 or more years of age. Participants
are permitted to make voluntary contributions to the Plan of up to 10% of
individual compensation. The Bank matches 50% of those contributions up to a
maximum match of 3% of the participant's compensation. The Bank may also provide
an additional discretionary percentage. Employee voluntary contributions are
vested at all times and Bank contributions are fully vested after three years.
The 1998, 1997 and 1996 expense related to this plan was $175, $170 and $168.
In 1998, the Corporation implemented a supplemental post-retirement benefit plan
for the benefit of certain officers of the Bank. The plan is designed to provide
post-retirement benefits to supplement other sources of retirement income such
as social security and 401(k) benefits. The benefits will be paid for a period
of 15 years after retirement. The amount of each officer's benefit will depend
on their salary at retirement as well as the their other sources of retirement
income. The Corporation accrues the cost of these post-retirement benefits
during the working careers of the officers. Expense under this plan was not
material in 1998.
- --------------------------------------------------------------------------------
(Continued)
44
<PAGE> 45
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 9 - RETIREMENT PLANS (Continued)
The Corporation has purchased insurance contracts on the lives of the
participants in the supplemental post-retirement benefit plan and has named the
Corporation as the beneficiary. While no direct contract exists between the
supplemental post-retirement benefit plan and the life insurance contracts, it
is management's current intent that the revenue from the insurance contracts be
used as a funding source for the plan.
NOTE 10 - OTHER NONINTEREST EXPENSE
Other noninterest expense consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Advertising and marketing $ 285 $ 327 $ 245
Postage, freight and courier 292 301 270
Office supplies 324 319 281
Other expenses 1,847 1,634 1,515
------- ------- -------
$ 2,748 $ 2,581 $ 2,311
======= ======= =======
</TABLE>
NOTE 11 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current tax expense $ 1,829 $ 1,770 $ 2,016
Deferred tax expense 339 612 277
------- ------- -------
$ 2,168 $ 2,382 $ 2,293
======= ======= =======
</TABLE>
Year-end deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses in excess of tax reserve $ 477 $ 437
Other 3 12
------ -------
480 449
Deferred tax liabilities:
Unrealized gain on securities available for sale $ (116) $ (126)
Investment accretion (96) (93)
Federal Home Loan Bank stock dividends (64) (37)
Deferred loan fees and costs (55) (37)
Leases (905) (685)
Depreciation (94) (6)
Mortgage servicing rights (74) (60)
------- -------
(1,404) (1,044)
------- -------
Net deferred tax liability $ (924) $ (595)
======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
45
<PAGE> 46
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
The difference between financial statement tax provision and amounts computed by
applying the statutory federal income tax rate of 34.0% to income before income
taxes was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at the statutory federal tax rate
on pre-tax income $2,347 $2,472 $2,439
Tax effect of
Tax exempt income (168) (157) (155)
Other (11) 67 9
------ ------ ------
$2,168 $2,382 $2,293
====== ====== ======
Effective tax rate 31.4% 32.8% 32.0%
====== ====== ======
</TABLE>
NOTE 12 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK
Litigation: Various contingent liabilities are not reflected in the financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on financial condition or results of operations.
Reserve Requirements: The Corporation was required to have $5,416 and $4,192 of
cash on hand or on deposit with the Federal Reserve to meet regulatory reserve
requirements at year-end 1998 and 1997. These balances do not earn interest.
Financial Instruments with Off-Balance-Sheet Risk: Some financial instruments
are used in the normal course of business to meet financing needs of customers.
These financial instruments include commitments to extend credit, standby
letters of credit and other financial guarantees. These involve, to varying
degrees, credit and interest-rate risk more than the amount reported in the
financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. Each customer's creditworthiness is
evaluated on a case-by-case basis. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on extension of credit is based on
management's credit evaluation. Collateral varies, but may include accounts
receivable, inventory, property, equipment, income-producing commercial
properties, residential real estate and consumer assets.
Commitments to extend credit are agreements to lend to a customer, as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many commitments are expected to expire
without being used, total commitments do not necessarily represent future cash
requirements. Standby letters of credit and financial guarantees written are
conditional commitments to guarantee a customer's performance to a third party.
- --------------------------------------------------------------------------------
(Continued)
46
<PAGE> 47
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK (Continued)
A summary of the notional or contractual amounts of financial instruments with
off-balance-sheet risk at year-end follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commitments to extend credit $60,277 $58,464
Standby letters of credit 968 1,806
</TABLE>
At year-end 1998 and 1997, and included above, commitments to make fixed-rate
loans at current market rates totaled $4,080 and $2,468. There were no
fixed-rate standby letters of credit at year-end 1998 while such commitments
totaled $1,806 as of year-end 1997. The interest rates on fixed-rate commitments
ranged from 5.63% to 11.00% for 1998 and from 6.38% to 10.50% for 1997.
Employment Agreements: The Bank has employment agreements with certain officers
of the Bank. The agreements provide for terms of one year which renew
automatically unless prior written notice is provided to the officer.
NOTE 13 - REGULATORY MATTERS
The Corporation and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective-action regulations involve quantitative measures of assets,
liabilities and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings and other
factors, and regulators can lower classifications in certain cases. Failure to
meet various capital requirements can initiate regulatory action having a direct
material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
The minimum capital requirements are as follows:
<TABLE>
<CAPTION>
Capital to risk
weighted assets
--------------- Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized 6 3 3
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
47
<PAGE> 48
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY MATTERS (Continued)
At year-end, actual capital levels and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1998
- ----
Total capital (to risk weighted assets)
Corporation $40,011 13.8% $23,156 8.0% $28,945 10.0%
Bank 37,888 13.1 23,197 8.0 28,996 10.0
Tier 1 capital (to risk weighted assets)
Corporation 38,063 13.2 11,578 4.0 17,367 6.0
Bank 35,932 12.4 11,598 4.0 17,397 6.0
Tier 1 capital (to average assets)
Corporation 38,063 9.2 16,634 4.0 20,793 5.0
Bank 35,932 8.6 16,634 4.0 20,793 5.0
1997
- ----
Total capital (to risk weighted assets)
Corporation $37,637 14.1% $21,315 8.0% $26,644 10.0%
Bank 35,447 13.4 $21,230 8.0 $26,537 10.0
Tier 1 capital (to risk weighted assets)
Corporation 35,795 13.4 10,657 4.0 15,986 6.0
Bank 33,605 12.7 10,615 4.0 15,922 6.0
Tier 1 capital (to average assets)
Corporation 35,795 10.0 14,309 4.0 17,886 5.0
Bank 33,605 9.4 14,309 4.0 17,886 5.0
</TABLE>
As of the latest regulatory examinations, the Corporation and the Bank were
categorized as well capitalized. Management is not aware of any matters
subsequent to these examinations that would cause the Corporation's or the
Bank's regulatory capital category to change.
Dividends are paid by the Corporation from its assets, which are mainly provided
by dividends from the Bank. Restrictions by banking regulations limit the amount
of funds the Bank can transfer to the Corporation in the form of dividends. The
most restrictive provision requires approval by regulatory authorities if
dividends declared in any year exceed the year's net income, as defined, plus
retained net profits of the two preceding years. The amount of the Bank's
retained earnings available for dividends without approval from its supervising
regulator was $7,917 at December 31, 1998.
- --------------------------------------------------------------------------------
(Continued)
48
<PAGE> 49
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value approximates carrying value for financial instruments
except those described below:
Securities: For debt and marketable equity securities held for investment
purposes, fair values are based on quoted market prices or dealer quotes. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar instruments.
Loans: The fair value of most types of loans is estimated by discounting future
cash flows using current rates at which similar loans would be made to
borrowers. Leases are not considered financial instruments under generally
accepted accounting principles and are therefore not included in the following
schedule.
Deposits: The fair value of deposit liabilities with defined maturities is
estimated by discounting future cash flows using the rates currently offered for
deposits of similar remaining maturities.
Long-term Debt: The fair value of long-term debt is estimated by discounting
future cash flows using currently available rates for similar financing.
Commitments to Extend Credit and Standby Letters of Credit: The fair values of
these items are not material and are therefore not included on the following
schedule.
The estimated year-end fair values of financial instruments were as follows:
<TABLE>
<CAPTION>
--------1998------- ---------1997-------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 15,492 $ 15,492 $ 25,283 $ 25,283
Securities available for sale 91,399 91,399 53,935 53,935
Securities held to maturity 49,184 49,697 53,834 54,158
Loans (excluding leases) 245,937 247,371 219,624 221,100
Cash surrender value of life
insurance 1,414 1,414 - -
Accrued interest receivable 2,662 2,662 2,390 2,390
Financial liabilities:
Noninterest-bearing deposits (57,810) (57,810) (50,969) (50,969)
Interest-bearing deposits (311,108) (311,783) (271,515) (272,230)
Borrowings (9,450) (9,356) (7,005) (7,005)
Accrued interest payable (1,032) (1,032) (929) (929)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
49
<PAGE> 50
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of DCB Financial Corp as of December 31, 1998
and 1997, and for the year ended December 31, 1998 and the period beginning
March 14, 1997, the effective date of the internal reorganization, through
December 31, 1997, is as follows:
<TABLE>
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,035 $ 92
Investment in subsidiary 36,179 33,850
Advance to Bank -- 2,000
Other assets 57 272
------- -------
Total assets $38,271 $36,214
======= =======
LIABILITIES
Other liabilities $ (38) 174
SHAREHOLDERS' EQUITY 38,309 36,040
------- -------
Total liabilities and shareholders' equity $38,271 $36,214
======= =======
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
Year ended December 31, 1998 and Period from
March 14, 1997 to December 31, 1997
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Dividends from subsidiary $2,416 $3,297
Other 6 --
------ ------
Total interest and dividend income 2,422 3,297
Operating expenses 53 73
------ ------
Income before income taxes and equity in undistributed earnings
of subsidiary 2,369 3,224
Income tax benefit (16) (23)
------ ------
Income before equity in undistributed earnings of subsidiary 2,385 3,247
Equity in undistributed earnings of subsidiary 2,349 421
------ ------
NET INCOME $4,734 $3,668
====== ======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
50
<PAGE> 51
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
<TABLE>
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31, 1998 and Period from
March 14, 1997 to December 31, 1997
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
NET INCOME $ 4,734 $ 3,668
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain (loss) on available for sale securities
arising during the period (20) 127
Reclassification adjustment for amounts realized on
securities sales included in net income -- --
------- -------
Total other comprehensive income (20) 127
------- -------
COMPREHENSIVE INCOME $ 4,714 $ 3,795
======= =======
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 and Period from
March 14, 1997 to December 31, 1997
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,734 $ 3,668
Adjustments to reconcile net income
to cash provided by operations:
Equity in undistributed income of subsidiary (2,349) (421)
Net change in other assets/other liabilities 3 (98)
------- -------
Net cash from operating activities 2,388 3,149
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to subsidiary -- (2,000)
Principal payments received on loan to subsidiary 2,000 --
------- -------
Net cash from investing activities 2,000 (2,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchases of treasury stock (1,562) (416)
Cash dividends paid (883) (641)
------- -------
Net cash from financing activities (2,445) (1,057)
Net change in cash and cash equivalents 1,943 92
Cash and cash equivalents at beginning of period 92 --
------- -------
CASH AT END OF YEAR $ 2,035 $ 92
======= =======
</TABLE>
- --------------------------------------------------------------------------------
51
<PAGE> 52
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with the independent accountants on accounting
and financial disclosure have occurred.
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
This information is included in the definitive Proxy Statement for the 1998
Annual Meeting of Shareholders of DCB Financial Corp (the "Proxy Statement")
under the captions "Election of Directors and Information with Respect to
Directors and Officers", "Security Ownership of Certain Beneficial Owners and
Management" and "Compliance with Section 16(A) of the Securities Exchange Act of
1934" on pages 62 through 70 of this document.
Principal officers of the Corporation and the Bank are as follows:
<TABLE>
<CAPTION>
TERM OF
NAME AGE OFFICE EXPERIENCE
<S> <C> <C> <C>
Larry D. Coburn 51 Since August, 1995 President/CEO at
President & CEO community bank in Northwest,
Ohio prior 3 years and same
position in a community
bank in Kansas 10 years
previous.
Larry E. Westbrook 59 Since 1986 Chief Operations Officer
Senior Vice President and Cashier
Cashier
David G. Bernon 54 Since 1991 Chief Financial Officer at
Senior Vice President SBF Services Inc., Vice
Loan Division Manager President of the Delaware
County Bank & Trust Co.
Donald Blackburn 55 Since 1993 Assistant Vice President
Vice President Main Office Manager, Sr.
Shareholder & Customer Relations Banking Center Officer
Thomas E. Whitney 50 Since 1996 Attorney - Private Practice
Vice President and Sr.
Trust Officer
Donna R. Warbel 34 Since 1995 Human Resources
Human Resources Director Assistant, DCB
</TABLE>
All officers serve at the pleasure of the Bank's Board of Directors. There are
no arrangements or understandings, other than certain employment agreements
discussed on pages 66 through 67 in this document, between the Bank and any
person above which such person was selected as an officer.
52
<PAGE> 53
ITEM 11 - EXECUTIVE COMPENSATION
This information is included in the section captioned "Executive Compensation
and Other Information" on page 66 of this document.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is included in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" on pages 64 and 65 of this document.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information is included in the section captioned "Certain Relationships and
Related Transactions" on page 69 of this document.
53
<PAGE> 54
PART IV
ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
Number Description of Document
- ------ -----------------------
3.1 Articles of Incorporation of DCB Financial Corp (incorporated by
reference to Registrant's Form S-4, File No. 333-15579, effective
January 10, 1997)
3.2 Code of Regulations of DCB Financial Corp (incorporated by
reference to Registrant's Form S-4, File No. 333-15579, effective
January 10, 1997)
10.1 Employment agreement with Mr. Coburn (incorporated by reference to
Registrant's Form 8-B, File No. 000-22387, effective April 15, 1997)
10.2 Employment agreement with Mr. Westbrook (incorporated by reference
to Registrant's Form 8-B, File No. 000-22387, effective April 15,
1997)
10.3 Employment agreement with Mr. Whitney (incorporated by reference to
Registrant's Form 10-K, File No. 0-22387, effective March 25, 1998)
11 Statement Regarding Computation of Per Share Earnings
21 Subsidiaries of DCB Financial Corp
27 Financial Data Schedule
99 Proxy Statement
No reports on Form 8-K were filed during the last quarter of the period covered
by this report.
54
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ LARRY D. COBURN
---------------------------------
Larry D. Coburn, President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on March 24, 1999.
Signatures Title
---------- -----
/s/ LARRY D. COBURN President (Principal Executive
- ----------------------------- Officer), CEO and Director
Larry D. Coburn
/s/ JEROME J. HARMEYER Director, Chairman of the Board
- -----------------------------
Jerome J. Harmeyer
/s/ CHARLES W. BONNER Director
- -----------------------------
Charles W. Bonner
/s/ WILLIAM R. OBERFIELD Director
- -----------------------------
William R. Oberfield
/s/ RODNEY B. HURL, M.D. Director
- -----------------------------
Rodney B. Hurl, M.D.
/s/ G. WILLIAM PARKER, M.D. Director
- -----------------------------
G. William Parker, M.D.
/s/ THOMAS T. PORTER Director
- -----------------------------
Thomas T. Porter
/s/ EDWARD A. POWERS Director
- -----------------------------
Edward A. Powers
/s/ MERRILL KAUFMAN Director
- -----------------------------
Merrill Kaufman
55
<PAGE> 56
/s/ GARY M. SKINNER Director
- -----------------------------
Gary M. Skinner
/s/ TERRY M. KRAMER Director
- -----------------------------
Terry M. Kramer
/s/ G. EDWIN JOHNSON Director
- -----------------------------
G. Edwin Johnson
/s/ VICKIE J. LEWIS Director
- -----------------------------
Vickie J. Lewis
/s/ RICHARD L. BUMP Director
- -----------------------------
Richard L. Bump
56
<PAGE> 57
INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------ ----------------------- ----
3.1 Amended Articles of Incorporation of DCB Financial Corp
(incorporated by reference to Registrant's Form S-4,
File No. 333-15579, effective January 10, 1997) N/A
3.2 Code of Regulations of DCB Financial Corp (incorporated
by reference to Registrant's Form S-4, File No.
333-15579, effective January 10, 1997) N/A
10.1 Employment agreement with Mr. Coburn (incorporated by
reference to Registrant's Form 8-B, File No. 000-22387,
effective April 15, 1997) N/A
10.2 Employment agreement with Mr. Westbrook (incorporated
by reference to Registrant's Form 8-B, File No.
000-22387, effective April 15, 1997) N/A
10.3 Employment agreement with Mr. Whitney (incorporated by
reference to Registrant's 1997 Form 10-K, File No.
0-22387, effective March 25, 1998) N/A
11 Statement Regarding Computation of Per Share Earnings 58
21 Subsidiaries of DCB Financial Corp 59
27 Financial Data Schedule 60
99 Proxy Statement 62
57
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Years ended December 31,
------------------------
1998 1997 1996(1)
---- ---- ----
Average shares outstanding 4,197,077 4,270,789 4,273,200
========== ========== ==========
Net income $4,734,000 $4,890,000 $4,880,000
========== ========== ==========
Earnings per common share $ 1.13 $ 1.14 $ 1.14
========== ========== ==========
(1) Restated to reflect the formation of a holding company through an
internal reorganization whereby each share holder of the Bank received
three shares of the Corporation's no par value common stock for each
share of Bank $1.00 par value stock owned.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF DCB FINANCIAL CORP
The Delaware County Bank and Trust Company, Delaware, Ohio, an
Ohio-charter commercial bank.
<PAGE> 1
EXHIBIT 99
PROXY STATEMENT
DCB FINANCIAL CORP
41 North Sandusky Street
Delaware, Ohio 43015
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
May 19, 1999
TO THE SHAREHOLDERS OF DCB FINANCIAL CORP:
You are hereby notified that the annual meeting of the shareholders of DCB
Financial Corp (the "Company") will be held on May 19, 1999 at 7:30 P.M. (Dinner
at 6:30 P.M.) at Branch Rickey Arena (South Sandusky Street), Ohio Wesleyan
University, Delaware, Ohio, for the purpose of considering and acting upon the
following:
1. To elect Class III directors to hold office until the expiration of
their terms (3 years) expiring is at the Annual Meeting in 2002 or
until their successors shall be duly elected and qualified, and
2. To transact such other business as may properly come before the meeting
or any adjournment thereof.
This is the third Annual Meeting for the Company which acquired The Delaware
County Bank and Trust Company (the "Bank") effective as of the conclusion of
business on March 14, 1997. The Board of Directors has fixed April 1, 1999 as
the record date for the determination of shareholders entitled to notice of and
to vote at the annual meeting. As of the record date there were 4,178,200 shares
of the Company's no par value common stock outstanding. The stock transfer books
of the Company will not be closed prior to the meeting.
A copy of the Bank's Annual Report, which includes the Bank's audited Balance
Sheets as of December 31, 1998 and 1997, the related audited statements of
Income, Statements of Changes in Shareholders' Equity, and Statements of Cash
Flows for each of the two years ended December 31, 1998 and 1997, is enclosed.
By the order of the Board of Directors
Larry D. Coburn, President
April 19, 1999
YOUR VOTE IS IMPORTANT. EVEN IF YOU PLAN TO ATTEND THE MEETING, PLEASE DATE AND
SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOU MAY
REVOKE YOUR EXECUTED PROXY AT ANY TIME BEFORE IT IS EXERCISED AT THE ANNUAL
MEETING OF SHAREHOLDERS BY NOTIFYING THE CHAIRMAN OF THE MEETING OR THE
SECRETARY OF THE COMPANY AT, OR PRIOR TO THE MEETING, OF YOUR INTENTION. IF YOUR
STOCK IS HELD IN MORE THAN ONE (1) NAME, ALL PARTIES MUST SIGN THE PROXY FORM.
<PAGE> 2
GENERAL INFORMATION
This Proxy Statement and the accompanying form of proxy is furnished in
connection with the solicitation, by the Board of Directors of DCB Financial
Corp, 41 North Sandusky Street, Delaware, Ohio 43015, (740) 363-1133, of proxies
to be voted at the annual meeting of the shareholders of DCB Financial Corp to
be held on May 19, 1999 at 7:30 P.M. (Dinner at 6:30 P.M.) at Branch Rickey
Arena (South Sandusky Street), Ohio Wesleyan University, Delaware, Ohio, in
accordance with the foregoing notice.
DCB Financial Corp is a registered bank holding company of which The Delaware
County Bank and Trust Company (the "Bank") is its only subsidiary. The Company
and the Bank are at times hereinafter collectively referred to as the "Company".
This is the third Annual Meeting for the Company which acquired the Bank
effective as of the conclusion of business on March 14, 1997.
The solicitation of proxies on the enclosed form is made on behalf of the Board
of Directors of the Company. All costs associated with the solicitation will be
borne by the Company. The Company does not intend to solicit proxies other than
by use of the mails, but certain officers and regular employees of the Company
or its subsidiaries, without additional compensation, may use their personal
efforts, by telephone or otherwise, to obtain proxies. The proxy materials are
first being mailed to shareholders on April 19, 1999.
Any shareholder executing a proxy has the right to revoke it by the execution of
a subsequently dated proxy, by written notice delivered to the Secretary of the
Company prior to the exercise of the proxy in person by voting at the meeting.
The shares will be voted in accordance with the direction of the shareholder as
specified on the proxy. In the absence of instruction, the proxy will be voted
"FOR" the election of the nominees listed in this proxy statement.
VOTING SECURITIES
Only shareholders of record at the close of business on April 1, 1999 will be
eligible to vote at the Annual Meeting or any adjournment thereof. As of April
1, 1999, the Company had outstanding 4,178,200 shares of no par value common
stock. Shareholders are entitled to one vote for each share of common stock
owned as of the record date, and shall have the right to cumulate votes in the
election of Directors in accordance with Ohio law. Cumulative voting permits a
shareholder to multiply the number of shares held by the number of directors to
be elected, and cast those votes for one candidate or spread those votes among
several candidates as he or she deems appropriate.
All Directors and Executive Officers of the Company as a group (comprised of 20
individuals), beneficially held 347,788 shares of the Company's common stock as
of February 28, 1999, representing 8.32156 percent of the outstanding common
stock of the company.
PROPOSAL #1 ELECTION OF DIRECTORS AND INFORMATION
WITH RESPECT TO DIRECTORS AND OFFICERS
At the meeting May 19, 1999, Class III Directors are to be elected to hold
office until the expiration of their term (3 years) which will be at the Annual
Meeting 2002 or until their successor shall be duly elected and qualified.
The Code of Regulations for the Company provides that the Directors shall be
divided into three Classes, as nearly equal in number as possible. The number of
members and year of term expiration for each Class is as follows:
Class I 5 Members Term Expiration 2000
Class II 5 Members Term Expiration 2001
Class III 3 Members Term Expiration 2002
<PAGE> 3
The Board is designating the following individuals to serve as nominees for
election as Class III Directors for terms expiring at the Annual Meeting in
2002. In the event any of the nominees should be unable to serve, the persons
named in the proxy will vote for such substitute nominees as shall have been
designated by the Board. Information regarding these nominees is set forth as
follows:
<TABLE>
<CAPTION>
Director
Name Age Since * Occupation During Past Five Years
- ---- --- ----- ---------------------------------
<S> <C> <C> <C>
Jerome J. Harmeyer 60 1990 President, Fisher Cast Steel Products
Rodney B. Hurl 69 1990 Retired Physician
G. Edwin Johnson 66 1993 President, AgriCommunicators
</TABLE>
* Service includes the time served as a Director of The Delaware County
Bank and Trust Company
The election of each nominee will require the affirmative vote of the majority
of the outstanding shares of the common stock of the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth the number and percentage of shares of common stock
owned by the Directors and Executive Officers of the Company. As of the date of
this Proxy Statement, management is not aware of any person who beneficially
owns five percent or more of the Company's common stock.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Ownership
Name February 28, 1999 Percentage
- ---- ----------------- ----------
<S> <C> <C> <C>
Larry D. Coburn, Director & CEO (1) 10,057 0.24%
William R. Oberfield, Director (2) 12,000 0.28%
G. William Parker, Director (3) 26,502 0.62%
Gary M. Skinner, Director (4) 9,564 0.23%
C. William Bonner, Director (5) 12,600 0.29%
Merrill L. Kaufman, Director (6) 20,940 0.50%
Terry M. Kramer, Director (7) 49,190 1.18%
Thomas T. Porter, Director (8) 28,350 0.68%
Edward Powers, Director 20,040 0.48%
Jerome J. Harmeyer, Director (9) 46,998 1.11%
Rodney B. Hurl (10) 44,250 1.06%
G. Edwin Johnson, Director (11) 5,336 0.13%
Vickie J. Lewis, Director (12) 16,200 0.39%
Richard L. Bump, Secretary to the Board 5,809 0.14%
David G. Bernon, Executive Officer 4,288 0.10%
Donald R. Blackburn, Executive Officer 5,268 0.13%
Douglas A. Lockwood, Executive Officer 274 0.01%
Donna R. Warbel, Executive Officer 963 0.02%
Larry E. Westbrook, Executive Officer 19,392 0.46%
Thomas R. Whitney, Executive Officer 9,767 0.23%
</TABLE>
(1) 8,600 shares owned by CEDE & Co., Custodian and 1,457 shares held by
Larry Coburn 401(k) Plan.
(2) 8,008 shares owned by William Oberfield individually, 1,600 shares
owned by Janet Oberfield, 1,482 shares owned by William Oberfield IRA,
910 shares owned by Janet Oberfield IRA.
(3) 24,843 shares owned by G. William Parker individually and 1,659 shares
owned by G. William Parker IRA.
(4) 3,636 shares owned by Gary or Carolyn Skinner jointly, 72 shares owned
by Carolyn Skinner individually and 5,856 shares owned by Gary Skinner
IRA.
<PAGE> 4
(5) 1,800 shares owned by Charles W. Bonner individually, 1,800 shares
owned by Charles W. or Barbara Bonner jointly and 9,000 shares owned by
Cede and Co., Custodian.
(6) 1,800 shares owned by Merrill Kaufman individually, 8,640 shares owned
by Merrill or Charlotte Kaufman jointly, 5,250 shares owned by Merrill
Kaufman IRA and 5,250 shares owned by Ann Kaufman IRA.
(7) 25,770 shares owned by Terry Kramer individually and 23,420 shares
owned by Sandra Kramer individually.
(8) 1,800 shares owned by Thomas Porter individually, 450 shares owned by
Carolyn Porter individually, 25,050 shares owned by Garth's Auctions,
Inc., 600 shares owned by Thomas T. Porter 401(k) Plan and 450 shares
owned by Carolyn B. Porter 401(k) plan.
(9) 1,800 shares owned by Jerome Harmeyer individually, 1,944 shares owned
by Jerome or Madelyn Harmeyer jointly and 43,254 shares owned by
Madelyn Harmeyer individually.
(10) 10,250 shares owned by Rodney B. Hurl Revocable Trust, 32,650 shares
owned by Rodney B. Hurl IRA and 1,350 shares owned by Judith Hurl
individually.
(11) 2,476 shares owned by G. Edwin and Marilyn Johnson and 2,860 shares
owned by G. Edwin Johnson individually.
(12) 500 shares owned by Vickie J. Lewis individually and 15,700 shares
owned by Jonathan Lewis individually.
COMMITTEES AND COMPENSATION OF THE BOARD OF DIRECTORS
The Board of Directors conducts its business through meetings of the Board and
through its committees. The Board of Directors of the Company and the Bank has
appointed and maintains an Audit Committee, Salary Committee, Nominating
Committee and Trust Committee.
The Audit Committee reviews with the Company's independent auditors, the audit
plan, the scope and results of their audit engagement and the accompanying
management letter, if any; reviews the scope and results of the Company's
internal auditing procedures; consults with the independent auditors and
management with regard to the Company's accounting methods and the adequacy of
its internal accounting controls; approves professional services provided by the
independent auditors; reviews the independence of the independent auditors; and
reviews the range of the independent auditors' audit and nonaudit fees. The
Audit Committee is comprised of Harmeyer, Kramer, Parker, Porter and Powers. The
Audit Committee met nine (9) times during 1998.
The Salary Committee is responsible for administering the Company's employee
benefit plans; setting the compensation of officers; reviewing the criteria that
forms the basis for management's officer and employee compensation
recommendations and reviewing management's recommendations in this regard. The
Salary Committee is composed of Coburn, Johnson, Kramer, Parker and Porter. The
Salary Committee met five (5) times during 1998.
The Company's Nominating Committee is responsible for making annual nominations
for Directors to fill vacancies created by expiring terms of Directors and from
time to time, making appointments to fill vacancies created prior to the
expiration of a Director's term. During 1998 the Committee met one (1) time to
consider and act upon the nomination of Directors. The Nomination Committee is
composed of Coburn, Kaufman and Porter.
The Trust Committee is a committee of the Bank and oversees all activities of
the Trust Division of the Bank to assure that all fiduciary obligations are
fulfilled ethically, professionally and prudently. Coburn, Harmeyer, Hurl,
Oberfield and Lewis served on the committee in 1998 meeting twelve (12) times.
The Board of Directors of the Company meets monthly for its regular meetings and
upon call for special meetings. During 1997, the Board of Directors of the
Company met thirteen (13) times. All Directors of the
<PAGE> 5
Company attended at least 75 percent of the Board and Committee Meetings that
they were scheduled to attend during 1998.
Directors are paid a monthly retainer of $175 for serving on the Board, except
for the Chairman of the Board who receives a retainer of $500 per month. In
addition, the Directors receive $250 per board meeting attended and $150 for
each committee meeting attended. Committee Chairs receive $200 for each
committee meeting.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table provides certain summary information concerning compensation
paid or accrued by the Company and/or its subsidiaries, to or on behalf of the
Bank's Chief Executive Officer for the fiscal years ended December 31, 1998 and
1997, and to all executive officers as a group during 1998:
<TABLE>
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
<CAPTION>
All Other
Name and Principal Position Year Salary Bonus Compensation(1)
- --------------------------- ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Larry D. Coburn 1998 $154,000 $46,813 $15,632
President - The Delaware County
Bank & Trust 1997 $140,000 $48,000 $9,475
All Executive Officers (2) as a
Group [Seven (7) in number] 1998 $641,832
</TABLE>
(1) The Bank pays no "fringe benefits" for its Executive Officers except
for use of an automobile by the President, the total value of which is
less than $5,000. Includes compensation for attendance at Board
meetings while serving as a Director and the Bank's contribution to the
401(k) plan.
(2) Includes Mr. Coburn; David G. Bernon, Senior Vice President - Loans;
Donald R. Blackburn, Vice President - Retail Banking and Customer
Relations; Douglas A. Lockwood, Acting Controller; Donna R. Warbel,
Vice President - Human Resources; Larry E. Westbrook - Senior Vice
President & Cashier; and Thomas R. Whitney - Vice President & Senior
Trust Officer.
EMPLOYMENT CONTRACTS
The Bank has employment contracts currently in place with Larry D. Coburn,
President and CEO of the Company and the Bank, Thomas R. Whitney, Vice President
and Senior Trust Officer of the Bank and Larry E. Westbrook, Senior Vice
President and Cashier of the Bank and Treasurer of the Company.
The contract with Mr. Coburn was entered for the period from August 14, 1995,
the effective date of his employment with the Bank, until December 31, 1995. The
contract is renewed for successive one year terms after a performance evaluation
upon the written consent of the Bank and Mr. Coburn. The contract provides for a
base salary of $140,000, subject to the adjustment upward at the discretion of
the Board of Directors. Fringe benefits are provided that are comparable to
other executive employees except that Mr. Coburn is granted the use of an
automobile unlike any other employee. The contract also provides for a severance
payment in the event that the Bank terminates Mr. Coburn for other than: (i)
"Just Cause" (as defined in the contract); (ii) Mr. Coburn reaching retirement
age: or (iii) the Bank's decision not to renew the contract. In such a
termination, the Bank is obligated under the contract to pay Mr. Coburn an
amount equal to his monthly salary for up to 12 months or until he accepts other
employment. In the event the Bank is the subject of an acquisition to which Mr.
Coburn does not consent, and his position with the Bank is changed
significantly, Mr. Coburn may voluntarily terminate the contract and receive as
severance an amount equal to the average annual salary he has received from the
Bank for the past five years.
<PAGE> 6
The contract with Mr. Whitney was entered for the period from August 1, 1996
through December 31, 1996. The contract is renewed for successive one year terms
upon the written consent of the Bank and Mr. Whitney. The contract provides for
a base salary to be set by the Board's Salary Committee and the employee is
entitled to participate in any bonus and other employee benefit plans. The
contract also provides for a severance payment in the event that the Bank
terminates Mr. Whitney for other than: (i) "Just Cause" (as defined in the
contract); (ii) Mr. Whitney reaching retirement age: or (iii) the Bank's
decision not to renew the contract. In such a termination, the Bank is obligated
under the contract to pay Mr. Whitney an amount equal to his monthly salary for
up to 12 months or until he accepts other employment. In the event the Bank is
the subject of an acquisition to which Mr. Whitney does not consent, and his
position with the Bank is changed significantly, Mr. Whitney may voluntarily
terminate the contract and receive as severance an amount equal to the average
annual salary he has received from the Bank for the past five years.
The contract for Mr. Westbrook was entered into on April 12, 1990 with an
initial term ending December 31, 1990. The contract automatically renews for
annual periods unless the Bank does not less than 10 nor more than 20 days
notice that the Bank chooses not to renew the contract. The contract also
provides for termination "for cause" (as defined in the contract). The contract
can be terminated by Mr. Westbrook at any time, upon 90 days written notice. Mr.
Westbrook's contract also contains a "change in control" provision providing for
payment to the employee if, in connection with any acquisition of the Bank or
for one year thereafter, the employee is terminated or exercises his right to
terminate the agreement for "Good Reason" (as defined in the contracts) because
his position with the Bank is changed significantly. In the event of such
termination, the employee is entitled to receive as severance an amount equal to
the average annual salary he has received from the Bank for the past 5 years.
The contract for Mr. Westbrook is silent as to compensation and such amounts are
set by the Board of Directors on an annual basis.
REPORT OF THE SALARY COMMITTEE OF DCB FINANCIAL CORP ON COMPENSATION
Under rules established by the Securities and Exchange Commission (the "SEC"),
the Company is required to provide certain data and information in regard to the
compensation and benefits provided to the Company's President and Chief
Executive Officer and, if applicable, the four other most highly compensated
Executive Officers, whose compensation exceeded $100,000 during the Company's
fiscal year. The disclosure requirements, as applied to the Company, include
only the Company's President and Chief Executive Officer, Larry D. Coburn. The
disclosure includes the use of tables and a report explaining the rationale and
considerations that led to fundamental executive compensation decisions
affecting such officers. The Company is a bank holding company and owns a single
operating subsidiary, The Delaware County Bank and Trust Company. The Company
has no direct employees. All disclosures contained in this Proxy Statement
regarding executive compensation reflect compensation paid by the Bank. The
Salary Committee of this company has the responsibility of determining the
compensation policy and practices with respect to all Executive Officers. At the
direction of the Board of Directors, the Salary Committee of the Company has
prepared the following report for inclusion in the Proxy Statement.
Compensation Policy. The report reflects the Company's compensation philosophy
as endorsed by the Salary Committee. The Salary Committee makes the
recommendation regarding the level of compensation for all Executive Officers
including Mr. Coburn and Mr. Coburn has input into the compensation levels for
all Executive Officers, except himself.
The executive compensation program of the Company has been designed to:
o Support a pay-for-performance policy that awards Executive Officers for
corporate performance.
o Motivate key Executive Officers to achieve strategic business goals.
o Provide compensation opportunities which are comparable to those
offered by other peer group companies, thus allowing the Company to
compete for and retain talented executive's who are critical to the
Company's long-term success.
<PAGE> 7
The Salary Committee approved compensation increases for all Executive Officers
of the Company during 1997. Executive Officer salary increase determinations are
based upon an evaluation of such executives performance against goals set in the
prior year.
The Bank maintains a cash bonus plan (the "Bonus Plan") which allocates a
portion of the Bank's pre-tax income for the purpose of employee cash bonuses on
an annual basis. The Bonus Plan is administered by the Salary Committee. The
award of a bonus to any employee under the terms of the Bonus Plan is
discretionary and is determined by the Board of Directors upon the
recommendation of the Salary Committee.
The Salary Committee has determined that a significant portion of executive
compensation should be payable in an annual bonus which shall be based
principally upon the financial performance of the Company and that of the
individual in attaining his or her established goals.
This Report of Compensation is submitted by the Salary Committee Members: Larry
D. Coburn, G. Edwin Johnson, Terry M. Kramer, G. William Parker and Thomas T.
Porter.
SALARY COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Larry D. Coburn, Company's President and Chief Executive Officer served on the
Salary Committee of the Company, which is responsible for compensation matters
(see "Report of the Salary Committee" in this Proxy Statement).
Although Mr. Coburn served on the Salary Committee, he did not participate in
any decisions regarding his own compensation as an Executive Officer. Each year,
the Salary Committee recommends that amount of the bonus award for Mr. Coburn
(pursuant to the Bonus Plan described above) and salary for the ensuing year.
Mr. Coburn did not participate in discussions nor decision-making relative to
his own compensation.
PERFORMANCE GRAPH - SIX YEAR SHAREHOLDER RETURN COMPARISON
The SEC requires that the Company include in this Proxy Statement a line-graph
presentation comparing cumulative five or more year shareholder returns on an
indexed basis with a broad equity market index and either a nationally
recognized industry standard or an index of peer companies selected by the
Company. The Company has selected the S&P 500 Market Index and the S&P Regional
Bank Index for the purposes of this performance comparison. The chart below
compares the value of $100 invested on December 31, 1992, in the Bank's stock,
S&P 500 Market Index and the S&P Regional Bank Index. The Company has used the
Bank's performance because the Company was not an operating company during this
time.
The Delaware County Bank and Trust Company Common Stock performance was used
through March 17, 1997 when the holding company, DCB Financial Corp, was formed.
The performance of DCB Financial Corp then was used for the rest of 1997.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
DCB Financial Corp. $100.00 $119.99 $131.57 $145.66 $268.67 $443.60 $365.08
S&P 500 Index $100.00 $110.08 $111.54 $153.47 $188.71 $251.17 $323.03
S&P Major Regional Bank Index $100.00 $106.03 $100.35 $158.00 $215.91 $322.92 $356.05
</TABLE>
<PAGE> 8
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no existing or proposed material transactions between the Company and
any of the Company's officers, directors or the immediate family or associates
of any of the foregoing persons, except as indicated below:
Mr. C. William Bonner, a Director of the Company, purchased land and built two
office complexes located at 6156 Highland Lakes Avenue, Westerville and 10149
Brewster Lane, Powell. The Bank entered into a lease for these office complexes
with initial terms of 20 years at a rent of $83,840 and $71,000 per year,
respectively. The Board of Directors approved the lease transactions with Mr.
Bonner abstaining from consideration of the matter. The Board believes that the
rent to be paid to Mr. Bonner and the other terms and conditions of the lease
transactions are comparable to those which would be available from an unrelated
party.
Some of the directors of the Company, as well as the companies with which such
directors are associated, are customers of, and have had banking transactions
with the Bank in the ordinary course of the Bank's business and the Bank expects
to have such ordinary banking transactions with such persons in the future. In
the opinion of management of the Company and the Bank, all loans and commitments
to lend included in such transactions were made in compliance with applicable
laws on substantially the same terms, including interest rates and collateral,
as those prevailing for comparable transactions with other persons of similar
creditworthiness and did not involve more than a normal risk of collectablility
or present other unfavorable features. During 1998 none of the Bank's Directors
or principal officers had outstanding indebtedness that exceeded ten percent
(10%) of the Bank's equity capital accounts.
The Bank expects to have in the future, banking transactions, in the ordinary
course of its business with directors, officers and principal shareholders, and
their associates of the Bank and the Company, on substantially the same terms,
including interest rates and collateral on loans, as those prevailing at the
same time for comparable transactions with others and which do not involve more
than the normal risk of collectability or present other unfavorable features.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and Directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, Directors and greater than ten percent shareholders are required by
the SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. Prior to the acquisition of the Bank by the Company, such reports
were filed with the Federal Deposit Insurance Company as the Bank was a "public
bank."
Based solely on review of the copies of such forms furnished to the Company or
written representations that no such forms were required, the Company believes
that during 1998 all Section 16(a) filing requirements applicable to its
officers and Directors were complied with. The Company has no shareholders who
are ten percent beneficial owners.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
The Board of Directors engaged the accounting firm of Crowe Chizek & Company LLP
to perform the certified audit of the Bank's books as of year-end 1998. Their
certification is included in the Annual Report which accompanies this proxy
material. In addition to the audit report, the Bank relies on Crowe Chizek &
Company LLP for consultation on other accounting, investment and tax-related
matters as needed by management. The Bank's Board has determined that the
performance of non-audit services for the Bank by Crowe Chizek & Company LLP
will not have an adverse effect on the independence of that firm with
<PAGE> 9
respect to its certified audit report. The independent accountants, Crowe Chizek
& Company LLP, will be in attendance at the annual meeting. The Board of
Directors will determine who shall perform the 1999 annual certified audit at a
later date.
SHAREHOLDER PROPOSALS
Any proposals to be considered for inclusion in the proxy material to be
provided to shareholders of the Company for its next annual meeting, to be held
in 2000, must be made by a qualified shareholder and must be received by the
Company no later than February 18, 2000.
OTHER MATTERS
The Board of Directors of the Company is not aware of any other matters that may
come before the meeting. However, the enclosed Proxy will confer discretionary
authority with respect to matters which are not known to the Board of Directors
at this time of printing and which may properly come before the meeting. A copy
of the Company's 1998 report filed with the Security and Exchange Commission, on
Form 10-K, will be available without charge to shareholders on request. Address
all requests, in writing, for this document to Donald R. Blackburn, Vice
President, The Delaware County Bank and Trust Company, 41 North Sandusky Street,
Delaware, Ohio 43015.
By Order of the Board of Directors of
DCB Financial Corp
Larry D. Coburn, President
<PAGE> 10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By:
------------------------------
Larry D. Coburn, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signatures Title
---------- -----
- -------------------------- President CEO and Director (Principal
Larry D. Coburn Executive Officer)
- --------------------------
Date
- -------------------------- Director, Chairman of the Board
Jerome J. Harmeyer
- --------------------------
Date
- -------------------------- Director
Charles W. Bonner
- --------------------------
Date
- -------------------------- Director
William R. Oberfield
- --------------------------
Date
- -------------------------- Director
Rodney B. Hurl, M.D.
- --------------------------
Date
- -------------------------- Director
G. William Parker, M.D.
- --------------------------
Date
<PAGE> 11
- -------------------------- Director
Thomas T. Porter
- --------------------------
Date
- -------------------------- Director
Edward A. Powers
- -------------------------- Director
Merrill Kaufman
- --------------------------
Date
- -------------------------- Director
Gary M. Skinner
- --------------------------
Date
- -------------------------- Director
Terry M. Kramer
- --------------------------
Date
- -------------------------- Director
G. Edwin Johnson
- --------------------------
Date
- -------------------------- Director
Vickie J. Lewis
- --------------------------
Date
- -------------------------- Director
Richard L. Bump
- --------------------------
Date
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,492
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,550
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 91,399
<INVESTMENTS-CARRYING> 49,184
<INVESTMENTS-MARKET> 49,697
<LOANS> 255,289
<ALLOWANCE> 1,948
<TOTAL-ASSETS> 418,540
<DEPOSITS> 368,918
<SHORT-TERM> 225
<LIABILITIES-OTHER> 1,863
<LONG-TERM> 9,225
0
0
<COMMON> 3,779
<OTHER-SE> 34,530
<TOTAL-LIABILITIES-AND-EQUITY> 418,540
<INTEREST-LOAN> 21,060
<INTEREST-INVEST> 7,066
<INTEREST-OTHER> 802
<INTEREST-TOTAL> 28,928
<INTEREST-DEPOSIT> 13,936
<INTEREST-EXPENSE> 14,323
<INTEREST-INCOME-NET> 14,605
<LOAN-LOSSES> 469
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,373
<INCOME-PRETAX> 6,902
<INCOME-PRE-EXTRAORDINARY> 4,734
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,734
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.13
<YIELD-ACTUAL> 3.95
<LOANS-NON> 753
<LOANS-PAST> 325
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,842
<CHARGE-OFFS> 568
<RECOVERIES> 205
<ALLOWANCE-CLOSE> 1,948
<ALLOWANCE-DOMESTIC> 1,488
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 460
</TABLE>
