<PAGE> 1
Exhibit Index on
page 55
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, 1999
[_] 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)
<TABLE>
OHIO 31-1469837
- ---- ----------
<S> <C>
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
</TABLE>
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 29, 2000, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, based on a share price of $13.75 per share
(such price being the average of the bid and asked prices on such date) was
$53,023,000.
At February 29, 2000, the registrant had 4,273,200 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 1999, deposits of public funds (funds of
governmental agencies and municipalities) were 1.8% 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, 1999, the Bank employed 208 employees, 184 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. Management considers its
employee relations to be good. 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.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act of 1999 that, effective March 11, 2000, permits bank holding companies to
become financial holding companies and thereby affiliate with securities firms
and insurance companies and engage in other activities that are financial in
nature. The Gramm-Leach-Bliley Act may significantly change the competitive
environment in which the Company conducts business. See "Supervision and
Regulation" for further discussion.
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.
Financial Modernization
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act which, effective March 11, 2000, permits bank holding companies to become
financial holding companies and thereby affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature.
A bank holding company may become a financial holding company if each of its
subsidiary banks is well capitalized under regulatory prompt corrective action
provisions, is well managed, and has at least a satisfactory rating under the
Community Reinvestment Act (CRA) by filing a declaration that the bank holding
company wishes to become a financial holding company. No regulatory approval
will be required for a financial holding company to acquire a company, other
than a bank or savings association, engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as determined
by the Federal Reserve Board.
The Gramm-Leach-Bliley Act defines "financial in nature" to include securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; merchant banking activities; and
activities that the Board has determined to be closely related to banking.
Subsidiary banks of a financial holding company must continue to be well
capitalized and well managed in order to continue to engage in activities that
are financial in nature without regulatory actions or
4
<PAGE> 5
restrictions, which could include divestiture of the financial in nature
subsidiary or subsidiaries. In addition, a financial holding company or a bank
may not acquire a company that is engaged in activities that are financial in
nature unless each of the subsidiary banks of the financial holding company or
the bank has CRA rating of satisfactory or better.
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, 1999.
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 22 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 1999, 1998 and 1997.
<TABLE>
<CAPTION>
(In thousands of dollars) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Securities available for sale (at fair value)
U.S. Treasury $ 2,261 $ 4,556 $ 5,568
U.S. Government agencies and corporations 53,262 50,556 33,409
States and political subdivisions 6,011 6,192 203
Mortgage-backed 28,980 28,908 13,705
---------- --------- ----------
Total debt securities 90,514 90,212 52,885
Other securities 1,395 1,187 1,050
---------- --------- ----------
Total securities available for sale $ 91,909 $ 91,399 $ 53,935
========== ========= ==========
Securities held to maturity (at amortized cost)
U.S. Government agencies and corporations $ -- $ 1,000 $ --
States and political subdivisions 6,777 7,994 6,523
Corporate 995 12,150 21,089
Mortgage-backed 27,473 28,040 26,222
---------- --------- ----------
Total securities held to maturity $ 35,245 $ 49,184 $ 53,834
========== ========= ==========
</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 1999:
<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 $ 1,234 6.48% $ 1,027 6.01% $ -- --% $ -- --%
U.S. Government
agencies and
corporations 1,470 5.52 14,895 6.31 30,727 6.15 6,170 6.74
States and political
subdivisions -- -- 469 5.55 723 6.59 4,819 6.84
Mortgage-backed 10 5.64 175 6.32 7,146 5.81 21,649 6.33
--------- ---------- --------- ---------
Total $ 2,714 5.96% $ 16,566 6.27% $ 38,596 6.10% $ 32,638 6.48%
========= ====== ========== ====== ========= ====== ========= ======
Held to maturity
States and political
subdivisions $ 637 6.98% $ 4,637 7.44% $ 1,037 7.23% $ 466 9.09%
Corporate 995 6.09 -- -- -- -- -- --
Mortgage-backed 389 6.46 4,702 6.59 8,515 6.70 13,867 6.63
--------- ---------- --------- ---------
Total $ 2,021 6.44% $ 9,339 7.01% $ 9,552 6.72% $ 14,333 6.71%
========= ====== ========== ====== ========= ====== ========= ======
</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
1999.
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) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 39,063 $ 39,864 $ 37,486 $ 36,836 $ 40,631
Commercial real estate 82,954 66,501 56,434 45,487 40,328
Residential real estate and
home equity 69,611 63,140 53,686 52,752 41,864
Real estate construction 29,723 32,382 29,104 23,489 10,235
Consumer and credit card 45,977 44,050 42,914 38,269 35,493
Lease financing, net 10,140 9,352 9,010 6,759 4,988
---------- ---------- ---------- --------- ----------
Total loans $ 277,468 $ 255,289 $ 228,634 $ 203,592 $ 173,539
========== ========== ========== ========= ==========
</TABLE>
6
<PAGE> 7
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, 1999:
<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 $ 1,089 $ 7,073 $ 1,681 $ 9,843
Commercial real estate 509 2,986 8,967 12,462
Real estate construction and land development 2,558 1,155 551 4,264
---------- ---------- --------- ----------
Total $ 4,156 $ 11,214 $ 11,199 $ 26,569
========== ========== ========= ==========
Variable rate
-------------
Commercial and industrial $ 16,124 $ 6,426 $ 6,670 $ 29,220
Commercial real estate 4,627 5,356 60,509 70,492
Real estate construction and land development 8,028 1,527 15,904 25,459
---------- ---------- --------- ----------
Total $ 28,779 $ 13,309 $ 83,083 $ 125,171
========== ========== ========= ==========
</TABLE>
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) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(a) Loans accounted for on a nonaccrual
basis $ 472 $ 753 $ 1,188 $ 501 $ 2,014
(b) Accruing loans which are
contractually past due 90 days or
more as to interest or principal
payments 156 325 238 489 65
(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 $ 628 $ 1,078 $ 1,426 $ 1,133 $ 2,229
======== ========= ========= ======== =========
</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.
7
<PAGE> 8
During 1999, $36,000 would have been recorded on nonaccruing
loans had such loans been accruing pursuant to contractual
terms.
(d) Impaired Loans - Information regarding impaired loans at
year-end 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<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
Amount of the allowance allocated -- -- 173
</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.
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 1999, 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 1999, 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 1999, there were no
other interest-bearing assets required to be disclosed under
Item III.C.1. or 2. if such assets were loans.
8
<PAGE> 9
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) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans
outstanding during
period $ 264,737 $ 238,844 $ 215,680 $ 188,679 $ 172,688
=========== =========== =========== =========== ===========
ALLOWANCE FOR LOAN
LOSSES
Balance at beginning of
period $ 1,948 $ 1,842 $ 1,923 $ 1,940 $ 1,865
Loans charged off:
Commercial (358) (112) (263) (66) (57)
Commercial real
estate -- -- (15) -- --
Residential real
estate and home
equity (27) -- -- -- --
Real estate
construction -- -- -- -- --
Consumer and credit
card (441) (443) (346) (352) (334)
Lease financing -- (13) (20) (110) (33)
----------- ----------- ----------- ----------- -----------
Total loans
charged off (826) (568) (644) (528) (424)
----------- ----------- ----------- ----------- -----------
Recoveries of loans previously
charged off:
Commercial 43 40 77 30 16
Commercial real
estate -- -- -- -- 4
Residential real
estate and home
equity 1 -- -- -- --
Real estate
construction -- -- -- -- --
Consumer and credit
card 124 141 151 114 111
Lease financing 8 24 15 1 6
----------- ----------- ----------- ----------- -----------
Total loan
recoveries 176 205 243 145 137
----------- ----------- ----------- ----------- -----------
Net loans charged off (650) (363) (401) (383) (287)
Provision charged to
operating expense 1,495 469 320 366 362
----------- ----------- ----------- ----------- -----------
Balance at end of period $ 2,793 $ 1,948 $ 1,842 $ 1,923 $ 1,940
=========== =========== =========== =========== ===========
Ratio of net charge-offs to
average loans outstanding
for period .25% .15% .19% .20% .17%
</TABLE>
9
<PAGE> 10
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.
10
<PAGE> 11
<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, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 652 14.08% $ 618 15.62% $ 516 16.40%
Commercial real estate 332 29.90 160 26.05 178 24.68
Residential real estate
and home equity 111 25.09 93 24.73 63 23.48
Real estate construction 45 10.71 49 12.68 30 12.73
Consumer and credit card 575 16.57 494 17.26 465 18.77
Lease financing 57 3.65 74 3.66 68 3.94
Unallocated 1,021 -- 460 -- 522 --
----------- ---------- ----------- ---------- ---------- -------
Total $ 2,793 100.00% $ 1,948 100.00% $ 1,842 100.00%
=========== ========= =========== ========= ========== ========
December 31, 1996 December 31, 1995
----------------- -----------------
Commercial and industrial $ 519 18.09% $ 526 23.42%
Commercial real estate 273 22.34 262 23.24
Residential real estate and
home equity 71 25.91 78 24.12
Real estate construction 17 11.54 11 5.90
Installment and credit card 533 18.80 560 20.45
Lease financing 106 3.32 142 2.87
Unallocated 404 -- 361 --
----------- ---------- ----------- ----------
Total $ 1,923 100.00% $ 1,940 100.00%
=========== ========= =========== =========
</TABLE>
11
<PAGE> 12
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
---------------------- ----------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 60,857 $ 53,500 $ 45,330 N/A N/A N/A
Interest-bearing demand
deposits 28,858 27,527 26,295 1.99% 2.41% 2.50%
Money market investment 154,736 131,105 97,603 4.97 5.26 5.28
Savings deposits 42,316 38,457 37,874 2.81 3.13 3.18
Time deposits 83,571 93,498 89,667 5.18 5.53 5.58
----------- ----------- -----------
Total deposits $ 370,338 $ 344,087 $ 296,769 3.72% 4.05% 4.05%
=========== =========== =========== ==== ==== ====
</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 1999:
<TABLE>
<S> <C>
Three months or less $ 4,728
Over three through six months 1,616
Over six through twelve months 984
Over twelve months 1,251
------------
Total $ 8,579
============
</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 15 and 16 of this document.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend pay-out ratio (dividends declared
per share divided by net income per share) 21.93% 18.58% 23.39%
</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, 1999, 1998 and 1997 were less than 30% of shareholders'
equity at such dates.
12
<PAGE> 13
ITEM 2 - PROPERTIES
The Bank owns and operates its main office at 41 North Sandusky Street,
Delaware, Ohio 43015. The Bank also operates 16 branches and 4 other properties
that are owned or leased as noted below:
<TABLE>
<S> <C>
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. Avery Road Office, 6820 Perimeter Loop Road, Dublin, Ohio 43017 (leased)
15. ATM Express Bank, W. Central Ave., Delaware, Ohio 43015 (leased)
16. ATM Express Bank, Ohio Wesleyan University, Delaware, Ohio 43015 (leased)
17. ATM Express Bank, 8208 Marysville Road West, Ostrander, Ohio 43061 (leased)
18. Operations Center, 163 N. Sandusky Street, Delaware, Ohio 43015 (leased)
19. ATM Express Bank, 1123 U.S. Route 23 South, Delaware, Ohio 43015 (leased)
20. Willowbrook Branch Office, 100 Willowbrook Way South, Delaware, Ohio 43015 (leased)
</TABLE>
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 1999.
13
<PAGE> 14
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation had 4,178,200 common shares outstanding on February 29, 2000,
held of record by approximately 1,507 shareholders. The Corporation's common
stock is not traded on any securities exchange. However, several 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
1999 1999 1999 1999
-------------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
High $ 17.75 $ 18.00 $ 16.63 $ 16.50
Low 16.00 15.00 13.88 14.13
Dividends per share .06 .06 .06 .07
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
-------------- ------------ ------------ ----------
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>
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, 1999, 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
14
<PAGE> 15
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: ---------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------- ----------- ------------ -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets $ 430,005 $ 418,540 $ 367,118 $ 319,117 $ 274,078
Cash and cash equivalents 16,838 15,492 25,283 32,359 36,179
Securities available for sale 62,929 62,491 40,230 35,694 25,536
Securities held to maturity 7,772 21,144 27,612 8,176 19,317
Mortgage-backed securities
available for sale 28,980 28,908 13,705 11,480 5,942
Mortgage-backed securities
held to maturity 27,473 28,040 26,222 23,695 10,160
Loans and leases - net 274,675 253,341 226,792 201,669 171,599
Deposits 371,799 368,918 322,484 279,091 243,856
Borrowed funds 16,889 9,450 7,005 6,546 777
Shareholders' equity 40,387 38,309 36,040 32,579 28,694
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------
Summary of earnings: 1999 1998 1997 1996 1995
------------ ------------- ----------- ------------ --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest and dividend income $ 30,001 $ 28,928 $ 26,409 $ 23,467 $ 19,972
Interest expense 14,322 14,323 12,369 10,202 8,110
------------ ------------- ------------ ------------ ------------
Net interest income 15,679 14,605 14,040 13,265 11,862
Provision for loan losses 1,495 469 320 366 362
------------ ------------- ------------ ------------ ------------
Net interest income after
provision for loan losses 14,184 14,136 13,720 12,899 11,500
Noninterest income 4,683 4,139 3,324 2,890 2,410
Noninterest expense 11,931 11,373 9,772 8,616 8,765
------------ ------------- ------------ ------------ ------------
Income before income tax 6,936 6,902 7,272 7,173 5,145
Income tax expense 2,154 2,168 2,382 2,293 1,562
------------ ------------- ------------ ------------ ------------
Net income $ 4,782 $ 4,734 $ 4,890 $ 4,880 $ 3,583
============ ============= ============ ============ ============
Per Share Data:
Earnings per share $ 1.14 $ 1.13 $ 1.14 $ 1.14 $ .84
============ ============= ============ ============ ============
Dividends declared per share $ .25 $ .21 $ .2667 $ .2234 $ .17
============ ============= ============ ============ ============
</TABLE>
- ------------------------
(1) Earnings and dividends per share for the Corporation have been restated to
reflect the internal reorganization discussed above.
15
<PAGE> 16
<TABLE>
<CAPTION>
At or for the year ended December 31,
-------------------------------------------------------------------------
Selected financial ratios: 1999 1998 1997 1996 1995
------------ ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Interest rate spread
(difference between average yield
on interest-earning assets and
average cost of interest-
bearing liabilities) 3.08% 3.01% 3.42% 3.75% 3.99%
Net interest margin (net
interest income as a
percentage of average
interest-earning assets) 3.95 3.95 4.37 4.67 4.93
Return on equity (net income
divided by average equity) 12.18 13.64 14.00 15.99 13.17
Return on assets (net income
divided by average total assets) 1.13 1.21 1.44 1.63 1.41
Equity-to-assets ratio (average equity
divided by average total assets) 9.31 8.89 10.29 10.22 10.71
Allowance for loan losses as a
percentage of nonperforming loans 444.75 180.71 129.17 194.24 87.03
</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 16 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.
16
<PAGE> 17
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 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, 1999, 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 $430,005 at year-end 1999 compared to $418,540
at year-end 1998, an increase of $11,465, or 2.7%. The growth in assets was the
result of the investment of funds provided by borrowings and deposit growth in
loans.
Federal funds sold increased $3,250, or 209.7%, from $1,550 at year-end 1998 to
$4,800 at year-end 1999, as a result of proceeds from the maturities, calls and
principal repayments of securities not being reinvested during the period.
Total securities decreased $13,429, or 9.6%, from $140,583 at year-end 1998 to
$127,154 at year-end 1999. The decrease was the result of proceeds from
maturities, calls and principal repayments being invested in higher-yielding
loans. 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
17
<PAGE> 18
classified as available for sale totaled $91,909, or 72.3% of the total
securities portfolio, at year-end 1999. Management classifies securities as
available for sale to provide the Corporation with the flexibility to move funds
into loans as demand warrants. The mortgage-backed securities portfolio,
totaling $56,453 at year-end 1999, provides the Corporation with a constant cash
flow stream from principal repayments. The Corporation held no derivative
securities or structured notes during any period presented.
Total loans increased $22,179, or 8.7%, from $255,289 at year-end 1998 to
$277,468 at year-end 1999. Growth was experienced in the majority of loan
categories; however, the largest increases were in real estate-related loans.
Commercial real estate loans increased $16,453, or 24.7%, from $66,501 at
year-end 1998 to $82,954 at year-end 1999. In addition, residential real estate
and home equity loans increased $6,471, or 10.2%, from $63,140 at year-end 1998
to $69,611 at year-end 1999 while construction loans, both residential and
commercial, decreased $2,659, or 8.2%. 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 decreased $801, or 2.0%. There
is no concentration of lending to any one industry.
Due to the strong loan growth, the gross loan to deposit ratio increased to
74.6% at year-end 1999 compared to 69.2% at year-end 1998.
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. Management intends that the revenue from the
insurance contracts be used as a funding source for the plan. Cash surrender
value of life insurance totaled $1,886 at year-end 1999 and $1,414 at year-end
1998.
Total deposits increased $2,881 or 0.8%, from $368,918 at year-end 1998 to
$371,799 at year-end 1999. Noninterest-bearing deposits decreased $777, or 1.3%,
while interest-bearing deposits increased $3,658, or 1.2%. Interest-bearing
demand and money market deposits increased from 58.1% of total interest-bearing
deposits at year-end 1998 to 60.6% of total interest-bearing deposits at
year-end 1999 as the Corporation experienced a $10,100, or 5.6%, increase in
volume of such accounts. The increase was primarily in the Corporation's
"Superior Money Market" deposit accounts which offer a variable interest rate
tied to the 3-month Treasury Bill index. The Corporation experienced a $2,438
increase in savings deposits while such accounts increased from 13.1% of total
interest-bearing deposits at year-end 1998 to 13.8% of total interest-bearing
deposits at year-end 1999. 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 $8,880, or 9.9%,
comprising 25.6% of total interest-bearing deposits at year-end 1999 compared to
28.8% at year-end 1998. The decrease in certificates of deposit was primarily
due to the loss of price-sensitive public funds, which was partially offset by
the transfer of "Prime Time" deposit accounts to certificates of deposit.
Borrowed funds totaled $16,889 at year-end 1999 compared to $9,450 at year-end
1998. The increase resulted as the Corporation borrowed an additional $6,000
from the FHLB through a 31-day advance. At year-end 1999, the Corporation also
had a mortgage-matched advance with a remaining balance of $3,889 with an
original term of 10 years and carrying a fixed interest rate of 5.10%. Principal
and interest on the advance are due monthly. During 1999, the Corporation also
renewed a $5,000 FHLB advance which came due in November 1999. The renewed
advance has a term of 180 days and carries a fixed interest rate of 5.93% with
interest due monthly. Borrowed funds also include a demand note issued to the
U.S. Treasury which totaled $2,000 at year-end 1999 and $225 at year-end 1998.
18
<PAGE> 19
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998
NET INCOME. Net income for 1999 totaled $4,782, increasing slightly compared to
net income for 1998 of $4,734. Earnings per share was $1.13 for 1998 and $1.14
for 1999. Return on average assets was 1.13% and 1.21% for 1999 and 1998, while
return on average shareholders' equity was 12.18% and 13.64% over the same two
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 $15,679 for 1999 compared to $14,605 for 1998. The
$1,074 increase in 1999 over 1998 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 7.82% in 1998 to 7.56% in 1999, while the average yield on
interest-bearing liabilities decreased from 4.81% in 1998 to 4.48% in 1999. The
decrease in the average yield earned on interest-earning assets was the result
of the decrease in the average yield earned on loans and leases from 8.82% in
1998 to 8.33% in 1999.
In spite 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, remained constant at
3.95% in 1998 and 1999.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses represents the charge to income necessary to adjust the allowance
for loan and lease losses to an amount that represents management's assessment
of the losses inherent in the Corporation's loan portfolio. All lending activity
contains associated risks of 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 regularly evaluates individual credit relationships as well
as overall loan-portfolio conditions. One of the primary objectives of this loan
review function is to make recommendations to management as to both specific
loss reserves and overall portfolio-loss reserves.
The provision for loan and lease losses totaled $1,495 in 1999 compared to $469
in 1998. The growth in the provision is due to the Corporation's belief that it
was appropriate to increase the overall allowance as a percentage of total loans
due to changes in loan mix, portfolio characteristics and regulatory
recommendations, as well as continued growth in the loan portfolio and increased
loan charge-offs in 1999. Net charge-offs for 1999 were $650, which represents
.25% of average loans, compared to net charge-offs of $363, or .15% of average
loans in 1998.
The allowance for loan losses increased from $1,948 at year-end 1998 to $2,793
at year-end 1999. As a percent of gross loans and leases, the allowance
increased from .76% to 1.01% over the same period. Nonperforming loans, defined
as loans on nonaccrual status plus accruing loans past due 90 days or more, were
$628, or .23% of gross loans, at year-end 1999 compared to $1,078, or .42% of
gross loans, at year-end 1998. Such loans have been considered in management's
analysis of the allowance for loan and lease losses. The allowance was 444.75%
of nonperforming loans at year-end 1999, compared to 180.71% at year-end 1998.
Management believes increasing the allowance for loan losses is prudent as total
loans, particularly commercial, commercial real estate, consumer and
construction loans, and leases increase.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$544, or 13.1%, in 1999 compared to 1998. The increase was due primarily to
increased fee income from deposit and cash
19
<PAGE> 20
management accounts, the Corporation's data service center and trust department
and income from bank-owned life insurance, partially offset by decreased gains
on loan sales.
Total noninterest expense increased $558, or 4.9%, in 1999 compared to 1998. The
increase was primarily the result of increases in salaries and employee benefits
and equipment expense, which comprised $474 of the total increase. These were
planned increases relating to increased staffing and the addition of a new
branch facility in 1999. The new branch is strategically located in an area of
Franklin 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 branch
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 $2,154 in 1999 and $2,168 in
1998 resulting in effective tax rates of 31.1% and 31.4%.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
NET INCOME. Net income for 1998 totaled $4,734, decreasing slightly compared to
net income for 1997 of $4,890. Earnings per share was $1.14 for 1997 and $1.13
for 1998. Return on average assets was 1.21% and 1.44% in 1998 and 1997, while
return on average shareholders' equity was 13.64% and 14.00% over the same two
years.
NET INTEREST INCOME. Net interest income was $14,605 for 1998 compared to
$14,040 for 1997. 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.
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, declined from 4.37% in
1997 to 3.95% in 1998.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses totaled $469 in 1998 compared to $320 in 1997. The growth in the
provision is reflective of the overall growth in the loan portfolio rather than
of concerns about credit quality. Net charge-offs for 1998 were $363, which
represents .15% of average loans, compared to net charge-offs of $401, or .19%
of average loans, in 1997.
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.
NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$815, or 24.5%, in 1998 compared to 1997. The increase was due to increased fee
income from the Corporation's data service center
20
<PAGE> 21
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.
The increase was 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. These were planned increases relating to
increased staffing and the addition of 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.
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 and $2,382 in
1997 resulting in effective tax rates of 31.4% and 32.8%.
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,
--------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
------- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 6,443 $ 348 5.40% $ 14,987 $ 802 5.35%
Bankers acceptances -- -- -- -- -- --
Securities (1)
Taxable 59,146 3,661 6.19 65,968 4,046 6.15
Tax-exempt (2) 12,936 621 4.80 8,416 434 5.17
Mortgage-backed securities (1) 53,572 3,327 6.21 41,887 2,586 6.19
Loans and leases (3) 264,737 22,044 8.33 238,844 21,060 8.82
----------- -------- ----------- ----------
Total interest-earning assets 396,834 30,001 7.56 370,102 28,928 7.82
-------- ----------
Noninterest-earning assets:
Cash and amounts due from banks 15,324 13,575
Premises and equipment, net 3,849 3,781
Other nonearning assets 8,113 4,580
Allowance for loan losses (2,266) (1,903)
----------- -----------
Total assets $ 421,854 $ 390,135
=========== ===========
Interest-bearing liabilities:
Demand deposits $ 183,594 $ 8,262 4.50% $ 158,632 $ 7,560 4.77%
Savings deposits 42,316 1,190 2.81 38,457 1,203 3.13
Certificates of deposit 83,571 4,331 5.18 93,498 5,173 5.53
----------- -------- ----------- ----------
Total deposits 309,481 13,783 4.45 290,587 13,936 4.80
Borrowed funds 10,330 539 5.22 7,061 387 5.48
----------- -------- ----------- ----------
Total interest-bearing liabilities 319,811 14,322 4.48 297,648 14,323 4.81
-------- ----------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1997
------------------------------------
Average Interest
outstanding earned/ Yield/
balance paid rate
------- ---- ----
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 9,774 $ 541 5.54%
Bankers acceptances 1,619 126 7.78
Securities (1)
Taxable 50,780 3,304 6.48
Tax-exempt (2) 6,601 356 5.39
Mortgage-backed securities (1) 37,202 2,308 6.22
Loans and leases (3) 215,680 19,774 9.17
----------- ----------
Total interest-earning assets 321,656 26,409 8.22
----------
Noninterest-earning assets:
Cash and amounts due from banks 12,848
Premises and equipment, net 3,240
Other nonearning assets 3,598
Allowance for loan losses (1,942)
-----------
Total assets $ 339,400
===========
Interest-bearing liabilities:
Demand deposits $ 123,898
$ 5,810 4.69%
Savings deposits 37,874 1,204 3.18
Certificates of deposit 89,667 5,000 5.58
----------- ----------
Total deposits 251,439 12,014 4.78
Borrowed funds 6,106 355 5.81
----------- ----------
Total interest-bearing liabilities 257,545 12,369 4.80
----------
</TABLE>
(Continued on next page )
22
<PAGE> 23
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
------- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(Continued)
Noninterest-bearing liabilities:
Demand deposits $ 60,857 $ 53,500
Other liabilities 1,912 4,291
----------- -----------
Total liabilities 382,580 355,439
Shareholders' equity 39,274 34,696
----------- -----------
Total liabilities & shareholders'
equity $ 421,854 $ 390,135
=========== ===========
Net interest income; interest rate spread $ 15,679 3.08% $ 14,605 3.01%
======== ======= ========== ========
Net interest margin (net interest income
as a percent of average interest-earning
assets) 3.95% 3.95%
======= ========
Average interest-earning assets to average
interest-bearing liabilities 124.08% 124.34%
======= ========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997
-------------------------------------
Average Interest
outstanding earned/ Yield/
balance paid rate
------- ---- ----
<S> <C> <C> <C>
(Continued)
Noninterest-bearing liabilities:
Demand deposits $ 45,330
Other liabilities 1,588
-----------
Total liabilities 304,463
Shareholders' equity 34,937
-----------
Total liabilities & shareholders'
equity $ 339,400
===========
Net interest income; interest rate spread $ 14,040 3.42%
======== =======
Net interest margin (net interest income
as a percent of average interest-earning
assets) 4.37%
=======
Average interest-earning assets to average
interest-bearing liabilities 124.89%
=======
</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 $941 in 1999, $658 in 1998, and $539 in 1997.
(3) Calculated net of deferred loan fees, loan discounts, unearned interest and
loans in process. Includes nonaccrual loans.
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,
------------------------------------------------------------------
1999 vs.1998 1998 vs. 1997
------------------------------- --------------------------------
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 $ (461) $ 7 $ (454) $ 280 $ (19) $ 261
Bankers acceptances -- -- -- (126) -- (126)
Securities:
Taxable (422) 37 (385) 941 (199) 742
Tax-exempt 219 (32) 187 94 (16) 78
Mortgage-backed securities 726 15 741 290 (12) 278
Loans and leases 2,199 (1,215) 984 2,064 (778) 1,286
--------- -------- --------- ------- -------- -------
Total interest income 2,261 (1,188) 1,073 3,543 (1,024) 2,519
--------- -------- --------- ------- -------- -------
Interest expense attributable to:
Demand deposits 1,141 (439) 702 1,654 96 1,750
Savings deposits 115 (128) (13) 18 (19) (1)
Certificates of deposit (527) (315) (842) 212 (39) 173
Borrowings 171 (19) 152 53 (21) 32
--------- -------- --------- ------- -------- -------
Total interest expense 900 (901) (1) 1,937 17 1,954
--------- -------- --------- ------- -------- -------
Increase (decrease) in net
interest income $ 1,361 $ (287) $ 1,074 $ 1,606 $ (1,041) $ 565
========= ======== ========= ======= ======== =======
</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, $196,332, or 70.8%, of the Corporation's loan portfolio reprices on a
regular basis. The Corporation also invests excess funds in liquid federal funds
that mature and reprice on a daily basis. The Corporation also maintains most of
its securities in the available for sale portfolio to take advantage of interest
rate swings and to maintain liquidity for loan funding and deposit withdrawals.
The following table provides information about the Corporation's financial
instruments that are sensitive to changes in interest rates as of December 31,
1999, 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>
Estimated
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Fixed-rate loans (1) $ 17,577 $ 10,235 $ 12,752 $ 13,014 $ 16,201 $ 11,357 $ 81,136 $ 81,835
Average interest rate 8.90% 9.39% 9.49% 9.10% 8.39% 8.75% 8.94%
Variable-rate loans (1) (2) 40,991 5,361 7,771 5,487 7,010 129,712 196,332 197,362
Average interest rate 9.33 9.17 9.23 8.92 8.76 8.52 8.71
Fixed-rate debt securities -
available for sale (1) 2,704 2,875 3,424 6,295 3,797 42,439 61,534 61,534
Average interest rate 5.54 5.82 6.11 6.09 6.41 6.13 6.10
Fixed-rate debt securities -
held to maturity (1) 1,632 1,329 757 1,251 1,300 1,503 7,772 7,741
Average interest rate 5.51 4.79 5.28 5.33 5.40 5.48 5.34
Fixed-rate mortgage-backed
securities - available for
sale (3) 2,192 1,854 1,165 934 841 7,569 14,555 14,555
Average interest rate 5.64 6.50 6.32 6.50 6.50 6.50 6.50
Variable-rate mortgage-
backed securities -
available for sale (4) 745 708 672 639 607 11,531 14,902 14,902
Average interest rate 5.92 5.92 5.92 5.92 5.92 5.92 5.92
Fixed-rate mortgage-backed
securities - held to
maturity (3) 4,452 3,869 2,553 2,349 2,463 11,787 27,473 27,096
Average interest rate 6.46 6.43 6.69 6.49 6.64 6.64 6.63
Federal funds sold (5) 4,800 -- -- -- -- -- 4,800 4,800
Average interest rate 4.50 -- -- -- -- -- 4.50
Total rate-sensitive assets 75,110 26,257 29,131 30,022 32,257 217,443 410,220 409,595
Average interest rate 8.39 7.98 8.46 7.92 7.89 7.72 7.92
</TABLE>
(Continued on next page)
25
<PAGE> 26
<TABLE>
<CAPTION>
(Continued)
Estimated
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive liabilities:
Noninterest-bearing
deposits (6) $ 14,258 $ 11,407 $ 8,555 $ 7,129 $ 7,129 $ 8,555 $ 57,033 $ 57,033
Average interest rate
Interest-bearing demand
deposits (7) 46,810 46,810 35,108 35,108 23,405 46,810 234,051 234,051
Average interest rate 4.46% 4.46% 4.46% 4.46% 4.46% 4.46% 4.46%
Time deposits (8) 43,853 35,412 1,450 -- -- -- 80,715 81,444
Average interest rate 4.93 5.53 5.08 -- -- -- 5.20
Fixed-rate borrowings (8) 13,354 372 391 412 433 1,927 16,889 16,219
Average interest rate 5.99 5.10 5.10 5.10 5.10 5.10 5.78
Total rate-sensitive
liabilities 118,275 94,001 45,504 42,649 30,967 57,292 388,688 388,747
Average interest rate 4.27 4.32 3.65 3.72 3.44 3.82 4.02
- ----------------------------
</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 1999 did not
significantly change from year-end 1998. The following table provides summary
information about the Corporation's financial instruments that were sensitive to
changes in interest rates as of year-end 1998 and was prepared using assumptions
similar to that of the above table.
<TABLE>
<CAPTION>
Estimated
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
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>
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 increased $1,346, or 8.7%, from $15,492 at year-end
1998 to $16,838 at year-end 1999. Cash and cash equivalents at year-end 1999
represented 3.9% of total assets compared to 3.7% of total assets at year-end
1998. The Corporation has the ability to borrow funds from the Federal Home Loan
Bank and has various federal fund sources from correspondent banks, should the
Corporation need to supplement its future liquidity needs in order to meet loan
demand or to fund investment opportunities. Management believes the
Corporation's liquidity position is strong based on its 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 1999 were the net increase in loans
of $29,240; the receipt of proceeds from maturities and repayments of securities
of $63,211; securities purchases of $128,802 and securities sales of $13,342.
CAPITAL RESOURCES
Total shareholders' equity increased $2,078 primarily due to earnings retained.
The increase is net of cash dividends paid of $1,045 and the $1,659 after-tax
reduction in the fair value of securities available for sale. The Corporation
did not purchase any shares of treasury stock during 1999. However, management
may purchase 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's $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 on
securities classified as available for sale and intangible assets. Tier 2
capital, or total capital, includes Tier 1 capital plus the allowance for loan
losses not to exceed 1.25% of risk weighted assets. Risk weighted assets are the
Corporation's total assets after such assets are assessed for risk and assigned
a weighting factor 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 14.7% at year-end 1999,
while the Tier 1 risk-based capital ratio was 13.8%. 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 9.7% at year-end 1999 exceeded the regulatory minimum for
capital adequacy purposes of 4.0%.
In 1999, the Bank announced plans to construct a new corporate headquarters in
Delaware, Ohio. As of December 31, 1999, the Bank had not paid any costs related
to the new corporate headquarters.
YEAR 2000 ISSUE
The Corporation did not experience any Year 2000-related computer system
problems, nor was the Corporation aware of any Year 2000-related problems with
any of its loan customers which would impact their ability to meet their debt
service requirements. The Corporation did not experience any significant unusual
deposit activity from its customers.
IMPACT OF NEW ACCOUNTING STANDARDS
Beginning January 1, 2001 a new accounting standard will require all derivatives
to be recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and losses on the hedge
and on the hedged item, even if the fair value of the hedged item is not
otherwise recorded. 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.
28
<PAGE> 29
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, 1999 and 1998, and related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ CROWE, CHIZEK AND COMPANY LLP
---------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
February 4, 2000
29
<PAGE> 30
DCB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,038 $ 13,942
Federal funds sold 4,800 1,550
----------- -----------
Total cash and cash equivalents 16,838 15,492
Securities available for sale, at fair value 91,909 91,399
Securities held to maturity (estimated fair value of $34,837 in 1999
and $49,697 in 1998) 35,245 49,184
Loans and leases 277,468 255,289
Less allowance for loan and lease losses (2,793) (1,948)
----------- -----------
Net loans and leases 274,675 253,341
Premises and equipment, net 4,384 3,965
Cash surrender value of life insurance 1,886 1,414
Accrued interest receivable and other assets 5,068 3,745
----------- -----------
Total assets $ 430,005 $ 418,540
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 57,033 $ 57,810
Interest-bearing 314,766 311,108
----------- -----------
Total deposits 371,799 368,918
Borrowed funds 16,889 9,450
Accrued interest payable and other liabilities 930 1,863
----------- -----------
Total liabilities 389,618 380,231
SHAREHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized,
4,273,200 issued 3,779 3,779
Retained earnings 40,020 36,283
Treasury stock, 95,000 shares, at cost (1,978) (1,978)
Accumulated other comprehensive income (1,434) 225
----------- -----------
Total shareholders' equity 40,387 38,309
----------- -----------
Total liabilities and shareholders' equity $ 430,005 $ 418,540
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 22,044 $ 21,060 $ 19,774
Securities
Taxable 6,988 6,632 5,612
Tax-exempt 621 434 356
Federal funds sold and other 348 802 667
---------- --------- ----------
Total interest income 30,001 28,928 26,409
INTEREST EXPENSE
Deposits 13,783 13,936 12,014
Borrowings 539 387 355
---------- --------- ----------
Total interest expense 14,322 14,323 12,369
---------- --------- ----------
NET INTEREST INCOME 15,679 14,605 14,040
Provision for loan and leases losses 1,495 469 320
---------- --------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,184 14,136 13,720
NONINTEREST INCOME
Service charges on deposit accounts 1,887 1,487 1,389
Trust department income 306 231 166
Securities gains 21 - 36
Net gains from sales of loans 535 752 268
Data service fees 443 367 276
Increase in cash surrender value of life insurance 195 - -
Other 1,296 1,302 1,189
---------- --------- ----------
Total noninterest income 4,683 4,139 3,324
NONINTEREST EXPENSE
Salaries and other employee benefits 6,274 5,866 5,070
Equipment 1,318 1,252 813
Occupancy 965 991 805
State franchise taxes 510 516 503
Other 2,864 2,748 2,581
---------- --------- ----------
Total noninterest expense 11,931 11,373 9,772
---------- --------- ----------
INCOME BEFORE INCOME TAXES 6,936 6,902 7,272
Provision for income taxes 2,154 2,168 2,382
---------- --------- ----------
NET INCOME $ 4,782 $ 4,734 $ 4,890
========== ========= =========
EARNINGS PER COMMON SHARE $ 1.14 $ 1.13 $ 1.14
========== ========= =========
</TABLE>
(Continued)
31
<PAGE> 32
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY For the years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
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,
1997 $ 1,424 $ 2,355 $ 28,682 $ - $ 118 $ 32,579
Comprehensive income:
Net income - - 4,890 - - 4,890
Other comprehensive
income (loss), net of tax - - - - 127 127
---------
Total comprehensive
Income 5,017
Cash dividends
($.2667 per share) - - (1,140) - - (1,140)
Formation of holding
company 2,355 (2,355) - - - -
Purchase of 20,000
treasury shares - - - (416) - (416)
---------- ---------- ---------- ---------- ---------- ---------
BALANCE, DECEMBER 31,
1997 3,779 - 32,432 (416) 245 36,040
Comprehensive income:
Net income - - 4,734 - - 4,734
Other comprehensive
income (loss), net of tax - - - - (20) (20)
---------
Total comprehensive
Income 4,714
Cash dividends
($.21 per share) - - (883) - - (883)
Purchase of 75,000
treasury shares - - - (1,562) - (1,562)
---------- ---------- ---------- ---------- ---------- ---------
BALANCE, DECEMBER 31,
1998 $ 3,779 $ - $ 36,283 $ (1,978) $ 225 $ 38,309
========== ========== ========== ========== ========== =========
</TABLE>
(Continued)
32
<PAGE> 33
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
For the years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
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,
1999 $ 3,779 $ - $ 36,283 $ (1,978) $ 225 $ 38,309
Comprehensive income:
Net income - - 4,782 - - 4,782
Other comprehensive
income (loss), net of tax - - - - (1,659) (1,659)
---------
Total comprehensive
Income 3,123
Cash dividends
($.25 per share) - - (1,045) - - (1,045)
---------- ---------- ---------- ---------- ---------- ---------
BALANCE, DECEMBER 31,
1999 $ 3,779 $ - $ 40,020 $ (1,978) $ (1,434) $ 40,387
========== ========== ========== ========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 34
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,782 $ 4,734 $ 4,890
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 741 677 520
Provision for loan losses 1,495 469 320
Deferred tax expense (benefit) (106) 339 612
Securities gains (21) - (36)
Net amortization (accretion) 59 (428) 194
Federal Home Loan Bank stock dividends (85) (58) (67)
Change in loans held for sale 6,411 (4,481) (1,637)
Changes in other assets and other liabilities, net (1,767) (282) (369)
---------- --------- ----------
Net cash from operating activities 11,509 970 4,427
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (44,335) (62,406) (29,048)
Maturities and repayments 27,977 24,821 14,247
Proceeds from sales 13,342 - 8,084
Securities held to maturity
Purchases (21,256) (76,207) (58,955)
Maturities and repayments 35,234 81,434 37,050
Net change in loans (29,240) (22,537) (23,806)
Premises and equipment expenditures (1,160) (886) (1,572)
Purchase life insurance policies - (1,414) -
Proceeds from sale of other real estate - - 201
---------- --------- ----------
Net cash from investing activities (19,438) (57,195) (53,799)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 2,881 46,434 43,393
Net change in short-term borrowings 7,775 (1,780) 461
Proceeds from long-term debt - 9,252 5,000
Repayment of long-term debt (336) (5,027) (5,002)
Purchases of treasury stock - (1,562) (416)
Cash dividends paid (1,045) (883) (1,140)
---------- --------- ----------
Net cash from financing activities 9,275 46,434 42,296
---------- --------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,346 (9,791) (7,076)
Cash and cash equivalents at beginning of year 15,492 25,283 32,359
---------- --------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,838 $ 15,492 $ 25,283
========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 35
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(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 16 offices in
Delaware, Franklin 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.
BUSINESS SEGMENTS: While the Corporation's chief decision-makers monitor the
revenue streams of the various Corporation products and services, operations are
managed and financial performance is evaluated on a company-wide basis.
Accordingly, all of the Corporation's operations are considered by management to
be aggregated in one reportable operating segment.
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 $14,312 ,$14,220, and $12,213 for 1999, 1998,
and 1997. Cash paid for income taxes was $2,295, $2,072, and $2,190 for 1999,
1998, and 1997. Noncash transactions in 1997 included a transfer of $2,355 from
additional paid-in capital to common stock due to the elimination of the par
value of common stock upon formation of the holding company. There were no
significant noncash transactions in 1999 or 1998.
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.
(Continued)
35
<PAGE> 36
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 $486 and $6,897 at year-end
1999 and 1998.
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. 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.
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 41% of loans. Loans for commercial purposes comprise 14% of
loans, and include loans secured by business assets and agricultural loans.
Loans for residential real estate purposes aggregate 22% of loans. Loans and
leases for consumer purposes, including home equity loans, are primarily secured
by consumer assets and represent 23% of total loans. The borrowers' ability to
honor their contracts is not dependent on the economic status of any single
industry.
(Continued)
36
<PAGE> 37
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 income.
LOAN SERVICING: The Corporation has sold various mortgage 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 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 $224 and
$217 at year-end 1999 and 1998.
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 Corporation or by the
Corporation to shareholders.
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 4,178,200 for 1999,
4,197,077 for 1998 and 4,270,789 for 1997.
COMPREHENSIVE INCOME: 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.
(Continued)
37
<PAGE> 38
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Year-end securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
------------------------1999----------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 2,264 $ 1 $ (4) $ 2,261
U.S. government agencies and corporations 54,451 7 (1,196) 53,262
States and political subdivisions 6,535 2 (526) 6,011
Mortgage-backed 29,457 26 (503) 28,980
---------- ---------- ---------- ----------
Total debt securities 92,707 36 (2,229) 90,514
Other securities 1,374 21 - 1,395
---------- ---------- ---------- ----------
Total securities available for sale $ 94,081 $ 57 $ (2,229) $ 91,909
========== ========== ========== ==========
SECURITIES HELD TO MATURITY
States and political subdivisions $ 6,777 $ 68 $ (104) $ 6,741
Corporate 995 5 - 1,000
Mortgage-backed 27,473 24 (401) 27,096
---------- ---------- ---------- ----------
Total securities held to maturity $ 35,245 $ 97 $ (505) $ 34,837
========== ========== ======== ==========
------------------------1998----------------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 4,518 $ 38 $ - $ 4,556
U.S. government agencies and corporations 50,194 395 (33) 50,556
States and political subdivisions 6,167 55 (30) 6,192
Mortgage-backed 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)
38
<PAGE> 39
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Substantially all mortgage-backed securities are backed by pools of mortgages
that are insured or guaranteed by the Federal National Mortgage Association
("FNMA"), the Government National Mortgage Association ("GNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC").
The amortized cost and estimated fair value of debt securities at year-end 1999,
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 $ 2,721 $ 2,704 $ 1,632 $ 1,638
Due from one to five years 16,545 16,391 4,637 4,636
Due from five to ten years 32,216 31,450 1,037 1,029
Due after ten years 11,768 10,989 466 438
Mortgage-backed securities 29,457 28,980 27,473 27,096
---------- ---------- ---------- ----------
$ 92,707 $ 90,514 $ 35,245 $ 34,837
========== ========== ========== ==========
</TABLE>
Proceeds from the sales of securities available for sale totaled $13,342 for
1999 and $8,084 for 1997. Gross gains of $32 and $53 and gross losses of $11 and
$17 were realized on those sales in 1999 and 1997, respectively. There were no
sales of securities in 1998.
At year-end 1999, there were no holdings of securities of any one issuer, other
than the U.S. government and its agencies and corporations, in an amount greater
than 10% of shareholders' equity.
Investments with a carrying value of approximately $21,032 and $35,520 as of
year-end 1999 and 1998, were pledged to secure public funds and other
obligations.
NOTE 3 - LOANS AND LEASES
Year-end loans and leases were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commercial and industrial $ 39,063 $ 39,864
Commercial real estate 82,954 66,501
Residential real estate and home equity 69,611 63,140
Real estate construction and land development 29,723 32,382
Consumer and credit card 45,977 44,050
Lease financing, net 10,140 9,352
----------- -----------
$ 277,468 $ 255,289
=========== ===========
</TABLE>
(Continued)
39
<PAGE> 40
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS AND LEASES (Continued)
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 1999. A summary of activity on
these borrower relationships with aggregate debt greater than $60,000 is as
follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Beginning balance $ 4,789
New loans and advances 5,514
Payments (2,292)
---------
Ending balance $ 8,011
=========
</TABLE>
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>
1999 1998
---- ----
<S> <C> <C>
Minimum lease payments receivable $ 6,160 $ 5,377
Lease residuals (unguaranteed) 5,892 5,694
--------- ---------
12,052 11,071
Unearned income 1,912 1,719
--------- ---------
$ 10,140 $ 9,352
========= =========
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity in the allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 1,948 $ 1,842 $ 1,923
Provision for loan and lease losses 1,495 469 320
Loans charged off (826) (568) (644)
Recoveries 176 205 243
--------- --------- ---------
Balance at end of year $ 2,793 $ 1,948 $ 1,842
========= ========= =========
</TABLE>
Nonaccrual loans totaled approximately $472 and $753 at December 31, 1999 and
1998. Interest not recognized on nonaccrual loans totaled approximately $36 and
$27 for the years ended December 31, 1999 and 1998. Loans past due 90 days or
more and still accruing interest totaled approximately $156 and $325 at December
31, 1999 and 1998. The Corporation had no impaired loans at December 31, 1999 or
1998 or during the years then ended.
(Continued)
40
<PAGE> 41
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 552 $ 550
Buildings 2,805 2,768
Furniture and equipment 4,711 3,662
--------- ---------
8,068 6,980
Accumulated depreciation and amortization 3,684 3,015
--------- ---------
$ 4,384 $ 3,965
========= =========
</TABLE>
NOTE 6 - LEASE COMMITMENTS
The Corporation has long-term operating leases for branch offices and equipment,
which expire at various dates through 2019. Rental expense on lease commitments
for 1999, 1998, and 1997 amounted to $678, $686, and $362. The Corporation
entered into two leases in 1997 and one lease in 1999 for branch facilities with
a partnership in which a director of the Corporation holds a controlling
interest. The leases commenced on April 1, 1997, September 1, 1997 and May 24,
1999 and have a term of 20 years each with annual rental payments of $84, $71
and $94, respectively. The following is a summary of the future minimum-lease
payments on the Corporation's lease obligations:
<TABLE>
<S> <C>
2000 $ 667
2001 585
2002 469
2003 335
2004 335
Thereafter 3,445
--------
$ 5,836
========
</TABLE>
NOTE 7 - INTEREST-BEARING DEPOSITS
Year-end interest-bearing deposits were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest-bearing demand and money market deposits $ 190,704 $ 180,604
Savings deposits 43,347 40,909
Certificates of deposit
In denominations under $100,000 72,136 62,354
In denominations of $100,000 or more 8,579 27,241
----------- -----------
$ 314,766 $ 311,108
=========== ===========
</TABLE>
<PAGE> 42
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 7 - INTEREST-BEARING DEPOSITS (Continued)
At year-end 1999, the scheduled maturities of certificates of deposit were as
follows:
<TABLE>
<S> <C>
2000 $ 43,853
2001 35,412
2002 1,450
-----------
$ 80,715
===========
</TABLE>
NOTE 8 - BORROWED FUNDS
The following table is a summary of year-end borrowings:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Fixed-rate FHLB advance, 5.70%, due May, 1999 $ - $ 5,000
Fixed-rate FHLB advance, 6.10%, due January 2000 6,000 -
Fixed-rate FHLB advance, 5.93%, due May 2000 5,000 -
Fixed-rate FHLB advance, 5.10%, due October, 2008 3,889 4,225
Demand note issued to the U.S. Treasury 2,000 225
--------- ---------
$ 16,889 $ 9,450
========= =========
</TABLE>
As a member of the Federal Home Loan Bank of Cincinnati ("FHLB"), 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 were collateralized by $25,334 and $14,175 of first mortgage loans
under a blanket lien arrangement at year-end 1999 and 1998.
At year-end 1999, required annual principal payments on borrowed funds were as
follows:
<TABLE>
<S> <C>
2000 $ 13,354
2001 372
2002 391
2003 412
2004 433
Thereafter 1,927
-----------
$ 16,889
===========
</TABLE>
(Continued)
42
<PAGE> 43
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 9 - RETIREMENT PLANS
The Corporation 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 Corporation matches 50% of those contributions up
to a maximum match of 3% of the participant's compensation. The Corporation may
also provide an additional discretionary contribution. Employee voluntary
contributions are vested at all times and Corporation contributions are fully
vested after three years. The 1999, 1998, and 1997 expense related to this plan
was $192, $175, and $170.
In 1998, the Corporation implemented a supplemental post-retirement benefit plan
for the benefit of certain officers. 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 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 $100 in
1999 and immaterial in 1998.
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 connection 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Advertising and marketing $ 344 $ 285 $ 327
Postage, freight and courier 326 292 301
Office supplies 264 324 319
Other expenses 1,930 1,847 1,634
--------- --------- ---------
$ 2,864 $ 2,748 $ 2,581
========= ========= =========
</TABLE>
NOTE 11 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current tax expense $ 2,260 $ 1,829 $ 1,770
Deferred tax expense (benefit) (106) 339 612
--------- --------- ---------
$ 2,154 $ 2,168 $ 2,382
========= ========= =========
</TABLE>
(Continued)
43
<PAGE> 44
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
Year-end deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses in excess of tax reserve $ 764 $ 477
Unrealized loss on securities available for sale 739 -
Other 45 3
---------- --------
1,548 480
Deferred tax liabilities:
Unrealized gain on securities available for sale - (116)
Investment accretion (15) (96)
Federal Home Loan Bank stock dividends (94) (64)
Deferred loan fees and costs (97) (55)
Leases (1,106) (905)
Depreciation (123) (94)
Mortgage servicing rights (76) (74)
--------- ---------
(1,511) (1,404)
--------- ---------
Net deferred tax asset (liability) $ 37 $ (924)
========= =========
</TABLE>
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at the statutory federal tax rate
on pre-tax income $ 2,358 $ 2,347 $ 2,472
Tax effect of
Tax exempt income (210) (168) (157)
Other 6 (11) 67
--------- --------- -------
$ 2,154 $ 2,168 $ 2,382
========= ========= =========
Effective tax rate 31.1% 31.4% 32.8%
========= ========= =========
</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 $6,185 and $5,416 of
cash on hand or on deposit with the Federal Reserve to meet regulatory reserve
requirements at year-end 1999 and 1998. These balances do not earn interest.
(Continued)
44
<PAGE> 45
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK (Continued)
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.
Financial instruments with off-balance-sheet risk at year-end were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commitments to extend credit $ 76,918 $ 60,277
Standby letters of credit 809 968
</TABLE>
At year-end 1999 and 1998, and included above, commitments to make fixed-rate
loans at current market rates totaled $10,094 and $4,080. There were no
fixed-rate standby letters of credit at year-end 1999 and 1998. The interest
rates on fixed-rate commitments ranged from 6.88% to 10.50% for 1999 and from
5.63% to 11.00% for 1998.
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.
(Continued)
45
<PAGE> 46
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY MATTERS (Continued)
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>
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>
1999
- ----
Total capital (to risk-weighted assets)
Corporation $ 44,602 14.7% $ 24,211 8.0% $ 30,264 10.0%
Bank 42,562 14.1 24,218 8.0 30,272 10.0
Tier 1 capital (to risk-weighted assets)
Corporation 41,800 13.8 12,106 4.0 18,158 6.0
Bank 39,760 13.1 12,109 4.0 18,163 6.0
Tier 1 capital (to average assets)
Corporation 41,800 9.7 17,232 4.0 21,540 5.0
Bank 39,760 9.2 17,232 4.0 21,540 5.0
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
</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.
(Continued)
46
<PAGE> 47
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY MATTERS (Continued)
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 $7,820 at December 31, 1999.
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, 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.
(Continued)
47
<PAGE> 48
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated year-end fair values of financial instruments were as follows:
<TABLE>
<CAPTION>
------------1999---------- ------------1998----------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 16,838 $ 16,838 $ 15,492 $ 15,492
Securities available for sale 91,909 91,909 91,399 91,399
Securities held to maturity 35,245 34,837 49,184 49,697
Loans (excluding leases) 264,535 266,159 243,989 245,423
Cash surrender value of life
insurance 1,886 1,886 1,414 1,414
Accrued interest receivable 2,816 2,816 2,662 2,662
Financial liabilities:
Noninterest-bearing deposits (57,033) (57,033) (57,810) (57,810)
Interest-bearing deposits (314,766) (315,495) (311,108) (311,783)
Borrowings (16,889) (16,219) (9,450) (9,356)
Accrued interest payable (1,042) (1,042) (1,032) (1,032)
</TABLE>
NOTE 15 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains and losses on
available-for-sale securities $ (2,493) $ (30) $ 228
Reclassification adjustments for gains and losses
later recognized in income (21) - (36)
-------------- --------------- ----------------
Net unrealized gains and losses (2,514) (30) 192
Tax effect 855 10 (65)
-------------- --------------- ----------------
Other comprehensive income $ (1,659) $ (20) $ 127
============== =============== ================
</TABLE>
(Continued)
48
<PAGE> 49
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of DCB Financial Corp as of December 31, 1999
and 1998, for the years ended December 31, 1999 and 1998 and the period
beginning March 14, 1997, the effective date of the internal reorganization,
through December 31, 1997, is as follows:
CONDENSED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,955 $ 2,035
Investment in subsidiary 38,348 36,179
Other assets - 57
------------ -----------
Total assets $ 40,303 $ 38,271
============ ===========
LIABILITIES
Other liabilities $ (84) $ (38)
SHAREHOLDERS' EQUITY 40,387 38,309
------------ -----------
Total liabilities and shareholders' equity $ 40,303 $ 38,271
============ ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1999 and 1998 and the period
From March 14, 1997 to December 31, 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Dividends from subsidiary $ 1,045 $ 2,416 $ 3,297
Other - 6 -
----------- ----------- -----------
Total interest and dividend income 1,045 2,422 3,297
Operating expenses 136 53 73
----------- ----------- -----------
Income before income taxes and equity in
undistributed earnings of subsidiary 909 2,369 3,224
Income tax benefit (45) (16) (23)
----------- ----------- -----------
Income before equity in undistributed
earnings of subsidiary 954 2,385 3,247
Equity in undistributed earnings of subsidiary 3,828 2,349 421
----------- ----------- -----------
NET INCOME $ 4,782 $ 4,734 $ 3,668
=========== =========== ===========
</TABLE>
(Continued)
49
<PAGE> 50
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998 and the period
From March 14, 1997 to December 31, 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,782 $ 4,734 $ 3,668
Adjustments to reconcile net income
to cash provided by operations:
Equity in undistributed income of subsidiary (3,828) (2,349) (421)
Net change in other assets/other liabilities 11 3 (98)
----------- ----------- -----------
Net cash from operating activities 965 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 (1,045) (883) (641)
----------- ----------- -----------
Net cash from financing activities (1,045) (2,445) (1,057)
Net change in cash and cash equivalents (80) 1,943 92
Cash and cash equivalents at beginning of period 2,035 92 -
----------- ----------- -----------
CASH AT END OF YEAR $ 1,955 $ 2,035 $ 92
=========== =========== ===========
</TABLE>
50
<PAGE> 51
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 1999
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 68 through 75 of this document.
ITEM 11 - EXECUTIVE COMPENSATION
This information is included in the section captioned "Executive Compensation
and Other Information" on pages 70 and 71 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 69 and 70 of this document.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information is included in the section captioned "Certain Relationships and
Related Transactions" on pages 74 and 75 of this document.
51
<PAGE> 52
PART IV
ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
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)
10.4 Employment agreement with Mr. Bernon
11 Statement Regarding Computation of Per Share Earnings
21 Subsidiaries of DCB Financial Corp
23 Consent of Independent Auditors
27 Financial Data Schedule
99 Proxy Statement
</TABLE>
No reports on Form 8-K were filed during the last quarter of the period covered
by this report.
52
<PAGE> 53
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 27, 2000.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
/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
</TABLE>
53
<PAGE> 54
/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
54
<PAGE> 55
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT PAGE
------ ----------------------- ----
<S> <C> <C>
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
10.4 Employment agreement with Mr. Bernon 56
11 Statement Regarding Computation of Per Share Earnings 61
21 Subsidiaries of DCB Financial Corp 62
23 Consent of Independent Auditors 63
27 Financial Data Schedule 64
99 Proxy Statement 66
</TABLE>
55
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT WITH MR. BERNON
EMPLOYMENT AGREEMENT
--------------------
This agreement is made and entered into this 1st day of June, 1999, by and
between The Delaware County Bank and Trust Company (hereinafter the "Bank"), an
Ohio-chartered, FDIC-insured nonmember bank with its main office at 41 North
Sandusky Street, Delaware, Ohio and David G. Bernon (hereinafter the
"Employee"), an individual residing at 1919 Glenn Avenue, Columbus, Ohio 43212.
Any references to "Superintendent" herein shall mean the Ohio Superintendent of
Banks.
RECITALS
--------
A. The Employee is being hired as Sr. Vice President of the bank.
B. The Board of Directors of the Bank wants to assure the Bank of the
continued services of the Employee with a written employment agreement.
C. The parties agree that this Employment Agreement shall supersede all prior
understandings between the parties, whether oral or written.
D. In consideration of the mutual promises of the Bank and the Employee
contained in this Employment Agreement, the Bank and the Employee enter
into this Employment Agreement with the terms and conditions set forth
herein.
AGREEMENT
---------
1. EMPLOYMENT
The Bank agrees to employ and the Employee agrees to serve as Sr. Vice President
of Lending and Branch Administration.
2. TERM OF EMPLOYMENT
The Employee is hereby employed as Sr. Vice President of the Bank for an initial
term commencing on June 1, 1999, and ending on the 31st day of May, 2000. At the
end of this initial term, this Agreement may be extended for successive one-year
periods upon the written consent of the Employee and the Bank as set forth
herein.
3. STANDARDS OF PERFORMANCE
Excluding periods of vacation and sick leave to which the Employee is entitled,
the Employee agrees to devote his best efforts and full time to the business and
affairs of the Bank and to discharge the duties appropriately assigned to the
Employee.
4. BASE SALARY
The Bank agrees to pay the Employee for the term of this Agreement a salary of
Ninety-Seven Thousand twenty eight and 00/100 ($97,028.00) per annum
(hereinafter referred to as the "Base Salary"). The Base Salary provided for
herein shall be payable no less frequently than monthly and not later than the
10th day following the expiration of the month.
56
<PAGE> 2
5. INCENTIVE BONUS TO THE EMPLOYEE
Employee shall be entitled to participate in any bonus policy provided by
Employer at Employer's sole discretion.
6. PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS AND ADDITIONAL
BENEFITS
The Employee shall be entitled to participate in any plan of the Bank relating
to pension, thrift, deferred compensation, profit sharing, group life insurance,
medical insurance, education reimbursement or other retirement or employee
benefits that the Bank may then have in force for the benefit of its executive
employees.
7. VACATIONS
The Employee shall be entitled, without loss of pay, to the number of vacation
days in each calendar year determined by the Board of Directors from time to
time provided that:
a. The Employee shall be entitled to an annual vacation of not less than
three (3) weeks per year.
b. The timing of vacations shall be scheduled in a reasonable manner by
the Employee. The Employee shall not be entitled to receive any
additional compensation from the Bank for his unearned vacation time
consistent with bank policy.
8. DISABILITY
If the Employee's employment terminates by reason of the Employee's disability,
the Employee shall be paid in accordance with the standard disability policy of
the Bank in existence for the Employee at that time and the Employee shall not
be entitled to any additional salary benefits from the Bank and, specifically,
shall not be entitled to any additional compensation under Paragraphs 4 and 5 of
this Agreement.
9. TERMINATION OF EMPLOYMENT
In addition to the Bank's right to terminate the Employee at the end of the
initial term, or any one-year extension, the Bank may terminate the employment
of the Employee at any other time during the employment term. ("Employment Term"
is defined as the initial term or any additional one-year extension.)
a. In the event the Bank or its successor terminates the employment of
the Employee during the Employment Term because of the Employee's
personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure or
refusal to perform the duties and responsibilities assigned in this
Agreement, willful violation of any law, rule or regulation (other
than traffic violations or similar offenses) or final cease-and-desist
order, conviction of a felony or for fraud or embezzlement, or
material breach of any provision of this Agreement (hereinafter
collectively referred to termination for "Just Cause"), the Employee
shall have no right to receive any compensation or other benefits for
any period after such termination.
b. In the event that the Bank or its successor terminates the employment
of the Employee during the Employment Term for any reason other than
(i) for Just Cause, (ii) the Employee's retirement at or after the
normal retirement age under a qualified pension plan maintained by the
Bank (hereinafter referred to as "Retirement"), or (iii) the Bank
decides not to extend the employment Agreement pursuant to Sections 1
and 2 of this Agreement at the end of the initial one-year term or any
one-year extension thereafter; then the Employee shall be entitled to
receive severance pay as follows:
57
<PAGE> 3
Bank shall pay the Employee the base monthly salary for each month the
Employee is unemployed for a maximum of twelve (12) months. In the
event the Employee obtains employment within the twelve-month period,
then the Employee's monthly benefit shall cease. It is the intent of
this Agreement that the severance pay set forth herein is to defray the
Employee's costs while searching for other employment and that said
payment shall be in lieu of any unemployment benefits to which the
Employee would be entitled.
If during the term of this Agreement, the Bank merges or consolidates
with another entity (other than a holding company formed by the Bank)
and the successor, without the Employee's written consent during a
period of one (1) year following the merger or consolidation does any
of the following: i) reduces the Employee's base salary which was in
effect on the date of the merger or consolidation; ii) substantially
reduces benefits to be provided to the Employee under this Agreement;
or iii) requires the Employee to relocate his office to a location in
excess of a thirty- (30) mile radius of Delaware, Ohio, then the
Employee shall have the right to voluntarily terminate his employment
as a result of any of these events. In the event the Employee
voluntarily terminates his employment as a result of the above events,
then the Employee shall be entitled to receive severance pay in an
amount equal to the average annual salary paid to the Employee by the
Bank during the five (5) previous years immediately preceding the
Employee's voluntary termination of employment for the above reasons.
c. Death of Employee. The employment term automatically terminates upon
the death of the employee. In the event of such death, the Employee's
estate shall be entitled to receive the compensation due the Employee
through the last day of the calendar month in which the Employee's
death occurred.
d. Special Regulatory Events. Notwithstanding Section 9(a) of this
Agreement, the obligation of the Bank and of the Employee shall be as
follows in the event of any of the following circumstances:
i) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice
served under Section 8 of the Federal Deposit Insurance Act, 12
U.S.C. Section 1818, the Bank's obligations under this agreement
shall be suspended as of the date of service of such notice,
unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Bank may, in its sole discretion, pay
the Employee all or part of the compensation withheld while the
obligations of this Agreement were suspended and reinstate in
whole or in part any of the obligations which were suspended.
ii) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's
affairs by an order issued under Section 8 of the Federal Deposit
Insurance Act, 12 U.S.C. Section 1818(e) or Section 1127.06 of
the Ohio Revised Code, 11 O.R.C. Section 1127.06, all obligations
of the Bank under this Agreement shall terminate, as of the
effective date of the order, but vested rights of the contracting
parties shall not be affected.
iii) If the Bank is in default, as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act 12 U.S.C., Section 1813(x)(1), or
declared insolvent by the Superintendent of Banks (Section
1103.04 of the Ohio Revised Code) all obligations under this
Agreement shall terminate as of the date of default or
insolvency, but this provision shall not affect any vested rights
of the parties.
iv) All obligations under this Agreement may be terminated by the
FDIC at the time the FDIC enters into an agreement to provide
assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act,
12 U.S.C. Section
58
<PAGE> 4
1823(c). Any rights of the parties that have already vested,
however, shall not be affected by such action.
10. CONFIDENTIAL INFORMATION
It is understood between the parties hereto that during the term of this
employment agreement Employee will be dealing with confidential information
regarding loans, litigation, depositor lists, information relating to the
Employer's future plans for development. Employee will have access to and be
dealing with such confidential matters in connection with his employment and
agrees that he will not disclose to anyone, either directly or indirectly
(except those persons involved in such matters, or the Board of Directors, or
other entities already having knowledge of such information), any of such
confidential matters or use this information other than in the course of his
employment with the Bank. All documents that the Employee prepares or
confidential information that has been given to the Employee in the course of
his employment are the exclusive property of the Bank and shall remain in the
Bank's possession on the termination of Employee's employment. Under no such
circumstances shall any information of this nature be removed from the Bank upon
the termination of employment. Furthermore, neither during the course of
employment nor after termination of his employment shall the Employee disclose
any knowledge of the Bank's past, present, or planned business activities to any
third person, firms, or entities for a period of two (2) years following the
termination of his employment. In the event of such a breach or a threatened
breach by the Employee of this covenant, the Bank shall be entitled to proceed
with an immediate injunction restraining the Employee from disclosing said
information in whole or in part. Nothing herein shall be construed to prohibit
the Bank from pursuing any other remedies available to the Bank for the breach
of such covenant. For the purposes of this paragraph, files generated by the
Employee as a result of his employment by the Bank shall be considered the
property of the Bank and not the property of the Employee. Litigation files,
customer files, customer lists, information relating to regulators,
correspondence with regulators, and all other working files produced by the
Employee shall be the sole property of the Bank.
11. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon the Bank, its successors and assigns. This
Agreement is personal as to the Employee and may not be assigned by the Employee
except that the personal representative of the Employee, his heirs, or guardian,
as the case may be, shall have the right to enforce the provisions of this
Agreement relating to any compensation due to the Employee.
12. NOTICES
All notices, requests demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by and or
mailed, certified or registered mail, return receipt requested, with postage
prepaid, to the following addresses or to such other address as either party may
designate by like notice.
A. If to the Bank, to:
The Delaware County Bank and Trust Company
41 North Sandusky Street
Delaware, Ohio 43015
Attention: Secretary, Board of Directors
B. If to the Employee, to:
David G. Bernon
1919 Glenn Avenue
Columbus, OH 43212
59
<PAGE> 5
and to such other additional person or persons as either party shall have
designated to the other party in writing by like notices.
13. AMENDMENTS
No amendments or additions to this Agreement shall be binding unless in writing
and signed by both parties, except as herein otherwise provided.
14. PARAGRAPH HEADINGS
The paragraph headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. SEVERABILITY
The provisions of this Agreement shall be deemed severable and the invalidity or
unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
16. GOVERNING LAW
This Agreement shall, except to the extent that Federal law (including any law,
rule, or regulation of the FDIC) shall be deemed to apply, be governed by and
construed and enforced in accordance with the laws of the State of Ohio.
17. ARBITRATION
Any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in accordance with the rules of the
American Arbitration Association then in effect provided that the party which
does not prevail in its claim pays for the entire cost of the arbitration and
that any and all claims existing under federal or state law can be presented in
the arbitration. Judgement may be entered on the arbitrator's award in any court
having jurisdiction.
IN WITNESS WHEREOF, the parties have entered this Agreement on the day and year
first herein above written.
THE DELAWARE COUNTY BANK
AND TRUST COMPANY
By:
------------------------------------
Its:
------------------------------------
And:
------------------------------------
Its:
------------------------------------
-----------------------------------------
David G. Bernon (the "Employee")
60
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Average shares outstanding 4,178,200 4,197,077 4,270,789
============= ============= =============
Net income $ 4,782,000 $ 4,734,000 $ 4,890,000
============= ============= =============
Earnings per common share $ 1.14 $ 1.13 $ 1.14
============= ============= =============
</TABLE>
61
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF DCB FINANCIAL CORP
The Delaware County Bank and Trust Company, Delaware, Ohio, an
Ohio-chartered commercial bank.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference on Form S-8 (No. 333-91165)
of our report dated February 4, 2000 on the consolidated balance sheets of DCB
Financial Corp. (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999,
which report appears in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
/s/ CROWE, CHIZEK AND COMPANY LLP
---------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
March 24, 2000
63
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,038
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 91,909
<INVESTMENTS-CARRYING> 35,245
<INVESTMENTS-MARKET> 34,837
<LOANS> 277,468
<ALLOWANCE> 2,793
<TOTAL-ASSETS> 430,005
<DEPOSITS> 371,799
<SHORT-TERM> 13,000
<LIABILITIES-OTHER> 930
<LONG-TERM> 3,889
0
0
<COMMON> 3,779
<OTHER-SE> 36,608
<TOTAL-LIABILITIES-AND-EQUITY> 430,005
<INTEREST-LOAN> 22,044
<INTEREST-INVEST> 7,609
<INTEREST-OTHER> 348
<INTEREST-TOTAL> 30,001
<INTEREST-DEPOSIT> 13,783
<INTEREST-EXPENSE> 14,322
<INTEREST-INCOME-NET> 15,679
<LOAN-LOSSES> 1,495
<SECURITIES-GAINS> 21
<EXPENSE-OTHER> 11,931
<INCOME-PRETAX> 6,936
<INCOME-PRE-EXTRAORDINARY> 4,782
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,782
<EPS-BASIC> 1.14
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 3.95
<LOANS-NON> 472
<LOANS-PAST> 156
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,948
<CHARGE-OFFS> 826
<RECOVERIES> 176
<ALLOWANCE-CLOSE> 2,793
<ALLOWANCE-DOMESTIC> 1,772
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,021
</TABLE>
<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 24, 2000
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 24, 2000, 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 I directors to hold office until the expiration of
their terms (3 years) expiring at the Annual Meeting in 2003, 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.
The Board of Directors has fixed March 31, 2000, 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 Company's Annual Report, which includes the Company's audited
Balance Sheets as of December 31, 1999, and 1998, the related audited statements
of Income, Statements of Changes in Shareholders' Equity, and Statements of Cash
Flows for each of the three years in the period ended December 31, 1999, is
enclosed.
By the order of the Board of Directors
Larry D. Coburn, President
April 7, 2000
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.
66
<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 24, 2000, 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 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".
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 7, 2000.
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 or 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 AND PROCEDURES
Only shareholders of record at the close of business on March 31, 2000, will be
eligible to vote at the Annual Meeting or any adjournment thereof. As of March
31, 2000, 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.
A quorum consists of a majority of the outstanding common stock of the Company
represented at the meeting in person or by proxy. Abstentions and broker
non-votes are counted for purposes of determining the presence or absence of a
quorum for the transaction of business at the meeting.
The five nominees for director who receive the largest number of votes cast
"For" will be elected as directors. Shares represented at the annual meeting in
person or by proxy but withheld or otherwise not cast for the election of
directors, including abstentions and broker non-votes, will have no impact on
the outcome of the election.
Shareholders have cumulative voting rights with respect to the election of
directors. Cumulative voting rights allow shareholders to vote the number of
shares owned by them times the number of directors to be elected and to cast
such votes for one director or to allocate such votes among directors as they
deem appropriate. Shareholders may exercise cumulative voting rights at the
annual meeting if any shareholder gives at least 48 hours prior written notice
to the President, a Vice President or Secretary of the Company that cumulative
voting is desired and an announcement of that notice is made at the beginning of
the meeting. The Company is soliciting the discretionary authority to cumulate
votes represented by proxy, if such cumulative voting rights are exercised.
All Directors and Executive Officers of the Company as a group (comprised of 18
individuals), beneficially held 321,955 shares of the Company's common stock as
of February 21, 2000, representing 7.71 percent of the outstanding common stock
of the Company.
67
<PAGE> 3
PROPOSAL #1 ELECTION OF DIRECTORS AND INFORMATION
WITH RESPECT TO DIRECTORS AND OFFICERS
At the annual meeting five Directors will be elected to a three-year term
expiring at the annual meeting in 2003.
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
Directors and year of term expiration for each Class is as follows:
Class I 5 Directors Term Expiration 2003
Class II 5 Directors Term Expiration 2001
Class III 3 Directors Term Expiration 2002
The Board has nominated the following individuals to serve as nominees for
election as Class I Directors for terms expiring at the Annual Meeting in 2003.
Information regarding these nominees is set forth as follows:
<TABLE>
<CAPTION>
Director
Name Age Since* Occupation During Past Five Years
- ---- --- ----- ---------------------------------
<S> <C> <C> <C>
Larry D. Coburn 52 1995 President & CEO, Delaware County Bank & Trust
Vicki J. Lewis 45 1997 Vice President, Grady Memorial Hospital
William R. Oberfield 45 1993 President, Oberfield's Concrete Products
G. William Parker 65 1976 Retired Surgeon
Gary M. Skinner 56 1996 President, Hardscrabble Farm
</TABLE>
The Board of Directors recommends a vote "For" the election of the nominees
named herein.
The following table sets forth certain information with respect to the Class II
and III Directors of DCB Financial Corp:
<TABLE>
<CAPTION>
Director
Name Age Since* Occupation During Past Five Years
- ---- --- ----- ---------------------------------
<S> <C> <C> <C>
C. William Bonner 65 1988 Real Estate Developer
Jerome J. Harmeyer 60 1990 President, Fisher Cast Steel
Rodney B. Hurl 70 1990 Retired Physician
G. Edwin Johnson 63 1993 President, AgriCommunicators
Merrill L. Kaufman 65 1988 President, Peoples Store, Inc.
Terry M. Kramer 53 1992 President, Kramer Exploration
Thomas T. Porter 66 1990 President, Garth's Auctions
Edward Powers 54 1984 President, R. B. Powers and Company
</TABLE>
The following table sets forth certain information with respect to the executive
officers of DCB Financial Corp:
<TABLE>
<CAPTION>
Officer Positions and Offices Held With Company
Name Age Since* & Occupation Held Past Five Years
- ---- --- ----- ---------------------------------
<S> <C> <C> <C>
Larry D. Coburn 52 1995 President and Chief Executive Officer; President of
Hicksville Banking Co. prior to 1995
David G. Bernon 55 1991 Senior Vice President, Lending & Branch Divisions; Vice
President Lending
Donald R. Blackburn 56 1993 Vice President, Customer Relations; Vice President,
Branch Administration
Brian E. Stanfill 41 1998 Vice President, Operations; Delaware County
Administrator prior to 1998
</TABLE>
68
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
Thomas R. Whitney 51 1996 Vice President, Trust Department; Attorney, Private
Practice prior to 1996
Donna R. Warbel 35 1995 Vice President, Human Resources; Human Resources Officer
</TABLE>
* Service includes the time served as a Director or Officer of The Delaware
County Bank and Trust 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. Each of the
persons named in the following table possesses sole voting and investment power,
except as otherwise shown in the footnotes to the following table. 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 21, 2000 Percentage
- ---- ----------------- ----------
<S> <C> <C>
Larry D. Coburn, Director & CEO (1) 10,132 *
William R. Oberfield, Director (2) 16,699 *
G. William Parker, Director (3) 26,610 *
Gary M. Skinner, Director (4) 13,641 *
C. William Bonner, Director (5) 12,600 *
Merrill L. Kaufman, Director (6) 21,570 *
Terry M. Kramer, Director (7) 49,190 1.18%
Thomas T. Porter, Director (8) 14,153 *
Edward Powers, Director 20,040 *
Jerome J. Harmeyer, Director (9) 46,998 1.11%
Rodney B. Hurl (10) 44,400 1.07%
G. Edwin Johnson, Director (11) 5,356 *
Vicki J. Lewis, Director (12) 16,200 *
David G. Bernon, Executive Officer 4,717 *
Thomas R. Whitney, Executive Officer (13) 10,342 *
All directors, nominees and executive officers
as a group (18 in number) 321,955 7.71%
*Ownership is less than 1%
</TABLE>
(1) Includes beneficial ownership of 8,600 shares at CEDE & Co. and 1,532
shares held in director's 401(k) Plan.
(2) Includes beneficial ownership of 4,030 shares owned by spouse and spouse's
IRA.
(3) Includes beneficial ownership of 1,659 shares held in director's IRA.
(4) Includes beneficial ownership of 6,636 shares owned jointly with spouse,
72 shares owned by spouse and 6,933 shares held in director's IRA.
(5) Includes beneficial ownership of 12,100 shares in ABL Group, Ltd.
(6) Includes beneficial ownership of 8,640 shares owned jointly with spouse,
5,250 shares owned by director's IRA and 5,250 shares held in spouse's
IRA.
(7) Includes beneficial ownership of 23,420 shares owned by his spouse.
(8) Includes beneficial ownership of 600 shares held in director's 401(k)
Plan, 450 shares owned by spouse and held in spouse's 401(k) plan, and
13,103 shares owned by director's company, Garth's Auctions, Inc.
(9) Includes beneficial ownership of 1,944 shares owned jointly with spouse and
43,254 shares owned by spouse.
69
<PAGE> 5
(10) Includes beneficial ownership of 42,900 shares held in director's Trust and
IRA , and 1,500 shares owned by spouse.
(11) Includes beneficial ownership of 2,496 shares owned jointly with spouse.
(12) Includes beneficial ownership of 15,700 shares owned by spouse.
(13) Includes beneficial ownership of 540 shares which are subject to shared
voting and investment power with his spouse.
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 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 Messrs. Harmeyer, Kramer, Skinner, Porter and
Powers. The Audit Committee met six (6) times during 1999.
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 Messrs. Coburn, Johnson, Kramer, Parker and
Porter. The Salary Committee met two (2) times during 1999.
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 1999, the Committee met one time to
consider and act upon the nomination of Directors. The Nomination Committee is
composed of Messrs. Coburn, Kaufman and Porter.
The Trust Committee is a committee of the Bank's Board of Directors and oversees
all activities of the Trust Division of the Bank to assure that all fiduciary
obligations are fulfilled ethically, professionally and prudently. Messrs.
Coburn, Hurl, Oberfield, Parker and Ms. Lewis served on the committee in 1999
meeting twelve (12) times.
The Board of Directors of the Company meets monthly for its regular meetings and
upon call for special meetings. During 1999, the Board of Directors of the
Company met thirteen (13) times. All Directors of the Company attended at least
75 percent of the Board and Committee Meetings that they were scheduled to
attend during 1999.
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
Company's Chief Executive Officer and two of its other executive officers who
earned more than $100,000 in salary and bonus for the fiscal year ended
70
<PAGE> 6
December 31, 1999. No other executive officer earned more than $100,000 in
salary and bonus for the fiscal year ended December 31, 1999.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
<TABLE>
<CAPTION>
All Other
Name and Principal Position Year Salary Bonus Compensation(A)
- --------------------------- ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Larry D. Coburn 1999 $159,999 $51,837 $33,488
President and Chief Executive Officer 1998 $154,000 $46,813 $32,082
1997 $140,000 $48,000 $9,475
David G. Bernon 1999 $97,027 $12,577 $24,733
Senior Vice President, 1998 $92,850 $11,058 $23,136
Lending and Branch Division 1997 $86,645 $10,947 N/A
Thomas R. Whitney 1999 $94,640 $12,267 $14,619
Vice President, 1998 $91,000 $10,837 $14,501
Trust Department 1997 $86,912 $10,981 N/A
</TABLE>
(A) The amounts shown in this column for the most recent fiscal year were
derived from the following figures: (1) contributions by the Company to the
Company 401(k) plan: Mr. Coburn, $4,682.88; Mr. Bernon, $2,825.41; and Mr.
Whitney, $2,767.16; and (2) Supplemental Executive Retirement Plan accrual:
Mr. Coburn, $28,806; Mr. Bernon, $21,948; and Mr. Whitney, $11,852.
EMPLOYMENT CONTRACTS
The Company 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, David G. Bernon, Senior Vice President 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 Company 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.
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
71
<PAGE> 7
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 with Mr. Bernon was entered for the period from June 1, 1999,
through May 31, 2000. The contract is renewed for successive one year terms upon
the written consent of the Bank and Mr. Bernon. 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.
Bernon for other than: (i) "Just Cause" (as defined in the contract); (ii) Mr.
Bernon 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. Bernon 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. Bernon does not consent, and his position with the Bank is changed
significantly, Mr. Bernon 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 gives 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.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective January 1, 1998, the Company's wholly-owned subsidiary, The Delaware
County Bank and Trust Company, adopted an unfunded, non-qualified supplemental
executive retirement plan (the "Supplemental Retirement Plan"), due to
limitations imposed by federal law on the amount of retirement income that may
be paid through the Company's 401(k) Plan. Under the Supplemental Retirement
Plan , only executive officers named in the Supplemental Retirement Plan or
otherwise designated for participation in the Supplemental Retirement Plan by
the Board of Directors are eligible to participate. As of the date of this proxy
statement, each of Messrs. Coburn, Bernon, Whitney and one other executive
officer participated in the Supplemental Retirement Plan.
Each participant in the Supplemental Retirement Plan is entitled to receive
under the Supplemental Retirement Plan at age 62 or upon later retirement, an
amount equal to 70% of the participant's total compensation from January 1, 1998
to age 62, less the participant's 401(k) plan benefits and social security
benefits. Amounts to be paid under the Supplemental Retirement Plan will be paid
monthly over an eighteen year period. Each participant's compensation for
purposes of determining benefits under the Supplemental Retirement Plan will be
his or her 1998 base salary, increased by 4.5% for each subsequent year of
employment. The rate of annual appreciation on each participant's 401(k) plan
assets, for purposes of determining the amount to subtract in determining
Supplemental Retirement Plan benefits, is assumed to be 8%, and each
participant's annual contribution to his or her 401(k) plan account is assumed
to be 6% of eligible compensation. Because the final benefit to be paid a
participant under the Supplemental Retirement Plan at retirement will vary based
on the level of the Company's contributions to the 401(k) plan, with greater
Company contributions to the 401(k) plan resulting in lesser Supplemental
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Retirement Plan benefits, it is not possible to estimate an executive officer's
Supplemental Retirement Plan benefit at retirement.
Prorated benefits will be paid in accordance with the terms of the Supplemental
Retirement Plan in the event of the death or disability of a participant or the
acquisition or other change in control of the Company and subsequent termination
of employment of the participant or other diminishment of a participant's
compensation or responsibilities following a change in control of the Company.
In such an event the proration will be based upon the ratio of the number of
years of the participant's employment from January 1, 1998, to the date of the
triggering event to the number of whole years from January 1, 1998, to the date
the participant reaches age 62. Supplemental Retirement Plan benefits accrued
during 1999 for Messrs. Coburn, Bernon and Whitney are as follows: Mr. Coburn,
$28,806; Mr. Bernon, $21,948; and Mr. Whitney, $11,852.
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 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.
DCB Financial Corp has no direct employees. All disclosures contained in this
Proxy Statement regarding executive compensation reflect compensation paid by
the Bank. The Salary Committee of the 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 executives who are critical to the
Company's long-term success.
The Salary Committee approved compensation increases for all Executive Officers
of the Company during 1999. 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.
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<PAGE> 9
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, the 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 the 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 - FIVE YEAR SHAREHOLDER RETURN COMPARISON
The SEC requires that the Company include in this Proxy Statement a line-graph
presentation comparing cumulative five 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 purpose of this performance comparison. The chart below compares the
value of $100 invested on December 31, 1994, in the Bank's stock, S&P 500 Market
Index and the S&P Regional Bank Index. The performance reflected is that of the
Company or its predecessor, the Bank.
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, 1998
and 1999.
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
DCB Financial Corp. $100.00 $119.02 $201.57 $299.21 $245.05 $205.20
S&P 500 Index $100.00 $137.58 $169.18 $225.61 $290.16 $351.24
S&P Major Regional Bank Index $100.00 $157.45 $215.16 $321.79 $354.81 $304.99
</TABLE>
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 three
office complexes located at 6156 Highland Lakes Avenue, Westerville, 10149
Brewster Lane, Powell and 6820 Perimeter Loop Rd, Dublin. The Bank entered into
a lease for these office complexes with initial terms of 20 years at a rent of
$83,840, $71,000 and $94,200 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
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<PAGE> 10
persons of similar creditworthiness and did not involve more than a normal risk
of collectablility or present other unfavorable features.
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 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
SEC regulations 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 1999 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
Crowe, Chizek and Company LLP ("Crowe Chizek") has served the Company or its
predecessor, the Bank, as its independent auditors since 1992. Selection of
auditors for the current year will be made at the meeting of the Board of
Directors of the Company scheduled for June 20, 2000. The Company anticipates
that Crowe Chizek will be selected. Representatives of Crowe Chizek are expected
to be present at the annual meeting of shareholders with the opportunity to make
statements if they so desire and to be available to respond to appropriate
questions raised at the meeting.
SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
If any shareholder of the Company wishes to submit a proposal to be included in
next year's Proxy Statement and acted upon at the annual meeting of the Company
to be held in 2001, the proposal must be received by the Secretary of the
Company at the principal executive offices of the Company, 41 North Sandusky
Street, Delaware, Ohio 43015, prior to the close of business on December 8,
2000. On any other proposal raised by a shareholder for next year's annual
meeting, the Company intends that proxies received by it will be voted in the
interest of the Company in accordance with the judgement of the Board of
Directors and the proposal will be considered untimely, unless notice of the
proposal is received by the Company not later than February 21, 2001.
The Company Code of Regualtions establish advance notice procedures as to the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as directors. In order to make a director nomination at
a shareholder meeting it is necessary that you notify the Company in writing not
less than 90 days in advance of the meeting. In addition, the notice must meet
all other requirements contained in our Code of Regulations. Any shareholder who
wishes to take such action should obtain a copy of our Code of Regulations and
may do so by written request addressed to the Secretary of the Company at the
principal executive offices of the Company.
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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 the time of printing and which may properly come before the meeting. A copy
of the Company's 1999 report filed with the Securities 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
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